ADVANCED CONTRACTS

Table of Contents

Parol evidence rule / Contract interpretation

Integration (finalizing the contract)

Determining if a writing is an integration: 2nd step of analysis (interpretation)

Merger clauses

Approaches to Contract Interpretation

Course of Performance, Course of Dealing, and Trade Usage

Rules of Interpretation

Standards of Preference

Certainty of Terms

Different Meanings Intended by the Parties

Adhesion Contracts

CASES

Presumptions inherent in contracts / Implied terms

CASES

Conditions

Example

Time as a condition

Strict vs. Substantial Fulfillment

Excuse of conditions

Approval as a Condition

Implied/constructive conditions

CASES

Mistake, frustration, impracticability / means of escaping contracts

Mistake

Impossibility and Impracticability

Impossibility

Frustration

Temporary Impracticability and Frustration

CASES

MUTUAL MISTAKE

IMPRACTICABILITY

FRUSTRATION OF PURPOSE

HALF MEASURES

COMPLEX CONTRACTS

Third-party beneficiary contracts

From Whom Third Party May Seek Enforcement

Vesting of Third Party's Rights

Defenses against the Third Party Beneficiary

CASES

Assignment of rights / delegation of duties

Assignment

Unassignables

Assignment of Future Rights

Rights Embodied in a Tangible Item

Revocation of Gratuitous Assignments

Modification of Contract Following Assignment

Anti-Assignment Clauses

Multiple Assignments of the Same Right

Difference between common law and UCC Art. 9:

Defenses by the Obligor against the Assignee

CASES

Delegation

Right to Delegate

Liability of Delegator

Liability of Delegatee

Delegation Clauses

Interpretation of Assignment Clauses

Novation

Law of agency

Other random useful stuff

Drafting a contract:

Enforcement in Equity:

Contract: rules governing behavior of private conduct.

Two questions to answer in order to understand what a contract means:

  • (1) What is the boundary of the rules?
  • (2) What does what’s inside the boundaries mean?

Parol evidence rule / Contract interpretation

Parol Evidence Rule: Where the agreement is integrated, evidence of earlier written or oral agreements is not admissible to contradict or add to the terms of the integrated writing. Gives integrity/reliability to written Ks and prevents dissatisfied party from fabricating new meanings/terms.

acts as a substantive rule, helping to interpret what constitutes the agreement

acts as an evidentiary rule to determine the admissibility of extrinsic evidence at trial

does not apply to subsequent agreements

Requirements to apply parol evidence rule:

  • there must be a written K
  • the parties must intend it to be the full expression/embodiment of their agreement
  • if it is fully integrated, previous oral or written terms may not come in to contradict or supplement it
  • if it is partially integrated, previous oral or written terms may not come in to contradict it

The rule governs whether parties may introduce evidence of extrinsic agreements to prove the existence of additional or modified terms.

Integration (finalizing the contract)

The agreement must be a final integration: the more formal and complete a writing is, the more likely it is that it represents the final embodiment of the agreement. Nevertheless, the writing need not be signed or complete in order to be deemed final.

evidence of integration:

  1. integration or merger clause may evidence intention to be fully integrated
  2. K may indicate through its completeness that is intended to be fully integrated
  3. existence of other written agreements may indicate writing was not intended to be fully integrated
  4. parties may give testimony/evidence of prior agreements and/or their intent re. integration

**(#s 3&4 seem to contradict the rule. Basic distinction: parol evidence can always come in to show whether the parties intended integration.)

The party trying to exclude the evidence advances the writing as integrating the understanding of the parties into a final document. Two types of integrations:

  • Total integration: integrates the complete understanding of the parties. It can’t be contradicted or supplemented by any prior agreement, written or oral.
  • However, evidence of course of dealing, course of performance or trade usage that supplies a consistent additional term is permitted. UCC § 2-202(1).
  • Partial integration: writing the parties intended to be final, but it doesn’t comprehend all of the understandings of the parties. It may not be contradicted, but may be supplemented by additional terms or agreements. Courts view most contracts as partial integrations.
  • Excluded
  • prior agreements (whether written or oral) that contradict a term in the contract
  • contemporaneous oral agreements
  • Not excluded
  • contemporaneous writing(s)
  • course of dealing, course of performance or trade usage

Depending on the chosen method of interpretation, see below, the parol evidence rule does not bar extrinsic evidence offered for the following purposes:

  • to aid in the interpretation of existing terms
  • to show that a writing is or is not an integration
  • to establish that an integration is complete or partial
  • to establish subsequent agreements or modifications between the parties
  • to show that terms were the product of illegality, fraud, duress, mistake, lack of consideration or other invalidating cause

Determining if a writing is an integration: 2nd step of analysis (interpretation)

1)"four corners" or "plain meaning" rule – if the writing appears complete and final on its face, the writing is conclusively presumed to be a complete integration.

  • can only look at what’s in the K itself to interpret it and decide what terms are included

2)"collateral contract" concept – all final writings are deemed to be partial integrations

  • the issue is whether the term offered is related to a concept that is dealt with in the K
  • If it’s covered in the writing, it’s treated as totally integrated on that concept
  • If it’s not covered, it’s a partial integration on that concept
  • if the agreement is completely distinct from the written agreement, the parol rule does not apply

**parol evidence is admissible to show collateral agreement only if:

  1. the terms do not conflict with the written agreement (express or implied provisions)
  2. “extrinsic evidence won’t be allowed if it varies the written agreement, even implied terms
  3. the collateral agreement concerns a subject the parties wouldn’t normally put in the written/integrated agreement
  • U.C.C. §2-202: parol evidence of a separate agreement is admissible unless the subject would “certainly” have been included in the integrated agreement

3)"reasonable person" approach (Williston) -- this is the majority approach

  • if a writing appears to be a complete expression of the parties' agreement, it is a complete integration unless the additional terms are such that it would be natural to enter a separate agreement as to those terms, in which case the writing is a partial integration
  • No extrinsic evidence is permissible to define meanings of words in an integration (partial or total).

BUT:

  • Usage of trade, course of dealings, interpretation of “reasonable person” etc. can be used. (Pretty much follows plain meaning rule, but allows for reasonable person.)
  • Prior agreement can be introduced to supplement K, so long as it’s not contradictory, if reasonable people wouldn’t have included it in the integration.
  • If reasonable people would have included the disputed term into the K, it should have been included in the K at issue if the parties really had an agreement on it. If reasonable people wouldn’t have included it, the agreement is a separate, collateral agreement on which parol evidence can be heard.
  • Look at the two Ks (the prior and current) and decide whether reasonable people would include this concept from the prior agreement into the 2nd writing. If so, these reasonable people would have included it
  • What we’re really trying to decide is what rule the parties to the K were trying to create. What was their intent?
  • Presumptions: the parties are sane, reasonable; they are untrustworthy as witnesses.

4)"intention of the parties" approach (Corbin) – this approach allowsall relevant evidence on the issue of intent, including evidence of prior negotiations.

  • Most modern principal – there is increasing acceptance of this approach, as it has been incorporated into the UCC and the RST 2d.
  • there is nothing sacrosanct about the writing – it just memorializes the intent of the parties. If there was a meeting of the minds, the intent of both is in the K. Interpretation of terms is based on what the parties intended them to mean.
  • We will look at any evidence to determine if the parties intended to include the disputed term (the parol evidence) in the K. Have to look at all evidence, possibly including the parol evidence, to determine if there was a total integration.

5)UCC -

  • UCC is similar to Corbin, but introduces add’l concepts: (1) meaning of word may be dictated by its usage in trade preliminary to the agreement, (2) course of dealing – not a parol evidence problem b/c it takes place subsequent to the agreement
  • Parol evidence is always admissible to show special meanings which derive from trade usage or parties’ dealings.
  • When one of the parties isn’t part of the trade (or is new – Frigilament chicken case), you must show actual knowledge of the usage or that it’s so generally known in the community that knowledge can be inferred, OR that the usage is so well-established and universal that it can be assumed that the parties intended reference to it in the K.

Merger clauses

A merger clause establishes that the writing is intended to be the complete expression of the agreement between the parties. Explains that all prior understandings are merged into the K.

  • Generally conclusive on the issue of integration and will be enforced absent proof of fraud, mistake or other defense.
  • A merger clause contained in a contract of adhesion, however, may be given less weight than such clauses in non-adhesion contracts.

Spectrum of written agreements – as you go down the list, more courts will let in extrinsic evidence, and it’s more likely that the court will allow subjective evidence of the meaning of terms:

  1. unambiguous integration
  2. ambiguous integration
  3. unambiguous non-integration
  4. ambiguous non-integration

Two approaches to vagueness: (1) is this a Peerless type of issue, where the K is ambiguous to enforce? or (2) is this a case of a vague term that the court can interpret?

**Courts sometimes interpret vagueness against the drafting party.

Approaches to Contract Interpretation

The approaches used to determine whether a writing is an integration are also employed to determine what evidence may be referred in the interpretation of a contract as a whole or its individual terms.

1)"Plain meaning" rule – If a writing or term appears to be unambiguous on its face, it must be interpreted solely on the basis of such writing. The majority of jurisdictions apply this rule, despite growing criticism.

2)Williston's rules ("reasonable person" approach) – If a writing is an integration, the meaning given to it as a whole or any individual terms therein is that of a reasonably intelligent person in the circumstances that surrounded the making of the contract. If the writing is not an integration and is unambiguous, the terms are to be interpreted by an objective test – the interpretations that a reasonable person would give them. If the writing is not an integration and is ambiguous, subjective intent of the parties is relevant.

3)"Reasonable expectations of the parties" approach – This approach, espoused by Corbin and incorporated by the Restatement and UCC, allows all relevant extrinsic evidence to assist in interpretation, including the subjective intent of the parties.

Course of Performance, Course of Dealing, and Trade Usage

May supply both additional terms and aid in construction of existing terms.

"Course of performance" represents a pattern in the performance of the contract. If a contract involves repeated occasions for performance by either party, and the other party knows of the nature of the performance and has an opportunity to object to such performance, any course of performance accepted or acquiesced to without objection is relevant to the meaning of the agreement. [UCC § 2-208(1)]

"Course of dealing" represents a sequence of previous conduct between the parties to a particular transaction which establishes a common basis of understanding for interpreting their expressions and conduct. [Restatement § 223; UCC § 1-205(1)]

an established course of dealing or industry practice becomes part of the terms of the K when not objected to. (Eastern Airlines – fuel freighting)

"Usage of trade" represents a practice that is employed with regularity in a place, vocation or trade, justifying an expectation that the practice will be observed with respect to the agreement in question. [UCC § 1-205(2)]

Rules of Interpretation

1)Words and conduct of the parties are to be interpreted in light of all circumstances, giving weight to the principal purpose of the parties in making the contract, if such purpose is ascertainable.

2)A writing is to be interpreted as a whole, and if multiple writings pertain to the same transaction, all are to be interpreted together.

3)Language is to be interpreted in accordance with its general prevailing meaning, if any.

4)Technical terms and terms of art are to be given effect when used in relevant transactions.

5)Wherever possible, the manifestations of the parties' intentions are to be interpreted as consistent with each other and with any relevant course of performance, course of dealing or trade usage.

Standards of Preference

1)separately negotiated terms are given greater weight than standardized terms and standardized terms may be given no weight at all – boilerplate language might not be enforceable

  • Sample merger clause that’s not boilerplate: The parties agree that this is a final agreement and is the entire agreement between the parties, and the parties agree that this agreement supercedes all prior agreements whether oral or written

2)if there is an inconsistency between typed and printed terms, a typed term prevails over a printed term, and a handwritten term prevails over a printed term

3)An interpretation which gives a reasonable, lawful and effective meaning to terms is preferred to an interpretation which imparts an unreasonable, unlawful or null effect.

  • courts prefer to construe contracts so they are lawful and operative

4)In order of their significance and the weight to be given each are: express terms, course of performance, course of dealing and trade usage.

5)Specific terms are to be given greater weight than general terms.

  • clearest manifestation of intent; K interpretation is designed to elicit the intent from within

6)Negotiated terms are to be given greater weight than standard terms.

7)In some cases, such as adhesion contracts, ambiguous language may be construed against the drafter.

  • in choosing among reasonable meanings, the term should be interpreted against the party who drafted it

** A K can include language that expressly modifies or negates these presumptions. **

Certainty of Terms

Contract terms must be reasonably certain; terms are deemed reasonably certain if they provide a basis for determining the occurrence of a breach and an appropriate remedy.

[1] Open Terms

In goods contracts, even if terms are left open, e.g., regarding price, time and place delivery, the contract does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy. [UCC § 2-204(3)] Unspecified terms can be supplied by course of performance, course of dealing, trade usage, and "gap fillers," provided in UCC § 2-305 through § 2-311.

[2] Omitted Terms

Where a contract is sufficiently defined but omits an essential term, the court may supply a term which is reasonable under the circumstances. [Restatement § 204]

[3] Terms Set by One Party

A contract may provide that one of the parties is to specify a term of performance. Both the common law and the UCC provide that such a term may be enforced as long as the discretion is exercised in good faith and "within limits set by commercial reasonableness." [UCC § 2-311(1)]

Different Meanings Intended by the Parties

Where the parties attach different meanings to a term, the interpretation that prevails is that of the party that did not know (or had no reason to know) of any different meaning attached by the other, and the other knew (or had reason to know) the meaning attached by the first party. [Restatement § 201]

Adhesion Contracts

An adhesion contract is a contract drafted by one party and reduced to a form agreement that generally presents no opportunity for negotiation. While not per se objectionable, adhesion contracts are subject to greater scrutiny than contracts that result from negotiation between the parties. To protect the non-drafter, who is often in an inferior position, the Restatement provides that only those contractual provisions that a reasonable person would anticipate and agree to should be considered part of the contract. [Restatement § 211(3)]

CASES

Mastersone v. Sine

Facts. Ps (husband and wife) conveyed ranch to Ds by a grant deed, and reserved option to purchase ranch before a date for same amount plus depreciation value of Ds’ improvements to property. After husband went bankrupt, trustee and wife brought DJ action to establish right to enforce the option.

Rule. Evidence of oral collateral agreements is excluded only when the finder of fact is likely to be misled.

Held. The record contains no evidence that the parties knew of the disadvantages of failing to put the whole agreement in the deed. Therefore, the collateral agreement is one that might naturally be made as a separate agreement. Parol evidence admitted.

Gianni v. R. Russel & Co.

Facts. P leased room in building owned D for the purposes of running a store selling fruit, candy, soda water, etc. In negotiating the lease, P agreed not to sell tobacco, and he claims that this promise was made in the exchange for the exclusive right to sell soft drinks in the building. No such provision was incorporated in the written lease, and D leased space to a drug company that also sold soft drinks.

Rule. In the absence of fraud or mistake, a written agreement is the only evidence of the agreement between two parties.

Held. Since P’s promise not to sell tobacco was included in the writing, it would natural to include the promise of the exclusive rights to sell soft drinks, too. Parol evidence barred.

Frigaliment Importing (chicken case)

Facts. Parties entered into two Ks for the sale of chickens, but didn’t specify what types of chickens. After P rec’d "stewing chickens," he initiated suit.

Rule. Where a party to a contract is not a member of the trade and the usage of a term, common to the trade, is challenged, the party that is in the trade has the burden of proving that the party not in the trade had actual knowledge of the usage or that the usage is "so generally known in the community that his actual individual knowledge of it may be inferred."

Held. P couldn’t show that narrower meaning was intended.

Class Notes. “Chicken” is ambiguous, so court first tried to see if the K itself aided in its interpretation. Then considered usage in trade, but D was new to the business. Finally, court looked at course of dealing.

Pacific Gas & Electric

Facts. D contracted with P to fix P’s steam turbine, and agreed to indemnify P for injuries to property. After turbine was injured, P sued to recover damages, and D tried to offer evidence that indemnity clause was only to cover damages to 3d parties.