Can the document be interpreted?
I. When some terms are in writing and some are not, and one of the parties tries to establish that prior negotiations or agreements should be included in the contract, the court applies the Parol Evidence Rule to determine what evidence it should consider to interpret the relevant terms of the K.
A. Parol evidence is any evidence, extrinsic to the written memorandum, showing the existence of prior negotiations or contemporaneous oral agreements of terms other than what the written document shows..
1. Parol evidence is an element of substantive law, not procedural or evidentiary.
a) it can be raised on appeal even if party fails to object to it at trial
B. General Rules:
1. Parol evidence is never allowed to contradict the writing. RS 215
2. The writing supersedes earlier negotiations.
3. Evidence of terms made after the K was executed is NOT parol evidence.
4. Contemporaneous writings are usually admissible because the K could be contained in more than one document.
a) Writings made before the K are not admissible.
b) Oral agreements made at the time of the K, or leading up to the K, are not admissible.
5. Parol evidence may
a) add to a partially integrated writing
b) be used to interpret ambiguous terms in a partially integrated writing under the modern rule
c) Reform the writing—narrowly allowed (Bollinger)
d) Establish an invalidating clause (RS 214)
C. Analysis Step 1: RS209- is there a writing that the parties intended as a final expression of one or more terms of the agreement?
1. The judge determines this as a matter of law by looking at the circumstances and facts to determine what the parties intended.
2. A writing can be integrated without the signatures of both parties. Rather, it only needs to be agreed to by both parties.
a) if a letter is sent by one party and accepted by the other party, that writing is subject to the rule.
D. Analysis Step 2: RS 210- if the writing is integrated, is the integrated agreement complete or partial?
1. Complete integration is document that unambiguously, thoroughly and clearly expresses every term in the agreement and is intended to be a final exclusive record of agreement.
a) informal memos, handwritten notes, and causal letters are usually not considered as final expressions
b) Lengthy, detailed, elaborate, formal and signed documents lend themselves towards being complete integrations
c) judge may consider the fact that some terms were left out as evidence that is was not completed integrated
d) Ambiguous terms indicate the document is not fully integrated
2. RS §216(2)(b): agreement is not completely integrated if it omits a consistent additional term that might naturally be agreed upon but inadvertently excluded because
a) The parties were inexperienced
b) Parties didn’t think it was needed because it was implied(i.e. family members)
(1) Masterson (p560) where brother deeded property to sister and they implied in their K that the property was to be kept in the family, although the K didn’t say that the court allowed that term to be read into the K via parol evidence. The trust born out of the familial relationship led the parties to feel comfortable omitting the personal aspects of the contract and signing the K more as a legal formality than a mutual promise.
c) terms were in a separate deed/agreement
3. Partial integration: intended to be final, but not intended to include all details of the agreement
a) At least one term must be fully, finally and clearly expressed in the writing to be considered a partial integration
b) Evidence that is inconsistent with the K will not be allowed.
c) Evidence that supplements or explains the K will be allowed.
E. Methods to determine whether writing is complete or partial integration
1. Modern rule: Look at all available evidence to determine parties actual intention including trade usage and course of dealing.
a) aka CA Rule, usually lets evidence in. Judge considers the context in which the K was formed, including prior negotiations, to determine parties intent.
b) Logic is that the writing itself cannot prove its own completeness
c) If the term is “reasonably susceptible” to interpretation, evidence is allowed to prove the meaning of that term
(1) PG&E (p.592), CA Sup Ct. articulates this rule
2. Four Corners Rule
(1) Gianni, p557-Court disallowed parol evidence from plaintiff that the written K gave him “exclusive right” to sell soda because he was trying to add a term to a completely integrated K)
b) Look solely at the document
c) Does it look like a formal K and complete on its face? If yes, no parol evidence is allowed.
d) Document will prove the parties intent
e) If there are no gaps or inadequacies, it is a complete integration.
f) 2-202 prohibits using this logic
3. Plain meaning Rule (p590)
a) Are the terms clear and complete? If yes, no parol evidence is allowed to make them open to interpretation.
b) A.ka. the NY Rule, usually prevents evidence from coming in
(1) WWW Associates (p586) K gave either party the option to cancel. When D rescinded, P sued claiming that the K really only gave P the right to rescind and not D. Court disallowed parol evidence because other section of the contract specified terms just for the P and just for the D, so if they meant the recission to be available only to P they would have included that.
F. Analysis Step 3: what parol evidence is allowed?
1. If the document is partially integrated:
a) Evidence is allowed to supplement the meaning of the terms.
(1) Masterson (p560), CA Sup Ct said unless the parol term contradicts any express term, it is consistent.
(2) If the written agreement is silent as to the term at issue, then it does not contradict the writing.
(a) Articulated in UCC 2-202
2. If the document is completely integrated:
a) No evidence of prior negotiations or contemporaneous agreements may be admitted.
G. Merger clauses
1. K uses language like: “this K constitutes the entire agreement” or “there are no promises, verbal understandings, or agreements of any kind, pertaining to this contract other than specified herein”
a) Using the Modern Rule: merger clauses usually will be honored. Given less deference when it is boilerplate language or tucked away in small print.
b) Using the Four Corners Rule: merger clauses almost always honored
c) When used in an Adhesion K: merger clause will not be honored
d) Using the UNIDROIT principles: merger clause can not be contradicted or supplemented by evidence of prior statements or agreements.
H. EXCEPTIONS to the parol evidence rule in RS 214
1. evidence is allowed to show the document is or is not integrated
2. evidence is allowed to show the integrated agreement is either complete or partial
3. evidence of the meaning of the writing
4. evidence of illegality, fraud, duress, mistake, or other invalidating clauses.
a) Rationale- this evidence shows there is no K, so the court doesn’t even get to the parol evidence step to evaluate the meaning of the K (because there is no K).
5. evidence is allowed to show grounds for the court to grant or deny rescission, reformation, specific performance or other remedies.
(1) Bollinger (p567), Ds performance under the K allowed as parol evidence to show that D-trash company agreed to sandwich the trash and the dirt when it was dumping on P-landowner’s land, even tho that term was not written in the K.. P allowed to show D performance as evidence that K needed to be reformed.
6. Evidence is allowed to show a fact recited in the writing is in reality false.
I. EXCEPTIONS to the rule – RS 216-
1. evidence is allowed to show collateral agreements exist that are supported by separate consideration if the collateral agreement is distinct enough from the K that it was not integrated into it
a) Ex. K for the sale of a car and as part of transaction, oral agreement to keep car in garage for $15/mo. Allowed to prove prior agreement even though integrated K does not include the agreement.
2. Oral agreement must be distinct from the written agreement AND have severable consideration.
3. How plausible is it that parties would make the other agreement, so that it would naturally be contained in a separate agreement.
J. EXCEPTIONS to the rule - RS 217
1. Evidence is allowed to show the K was subject to a condition.
2. If a condition exists, the writing was not integrated.
K. Subsequent Terms
1. Common law: a K can always be modified. Parol evidence does not exclude evidence of subsequent modifications.
2. UCC 2-209: allows a clause to be written into the K that prevents future modification.
3. UCC 2-202: if a writing is complete integration, you can not add terms to it via oral modification. If writing is final expression, you can not contradict it.
4. Be careful to make sure the agreement really was after the fact…if it was made just after the signing it was contemporaneous and will not be allowed.
(1) Kehr Packages, in the process of signing a business loan the plaintiff-borrowers realized they would need more money than they originally thought. Before the signing was complete they asked for more money and the bank agreed, orally. But the change was never put on paper. When the bank refused to loan at the higher amount, borrowed sued. Court did not allow extrinsic evidence because it was contemporaneous, not after the fact.. Lawyers were still present and should have made the change in the final K.
What does the ambiguous language mean?
I. Contra proferentem
1. Maxim that Ks should be interpreted against their drafters, who likely drafted the K to his own benefit
II. RS 201(1)- where the parties have attached the same meaning to a promise, it is interpreted in accordance with that meaning.
III. Good faith requirement always exists, can not be excluded by agreement.
A. Good faith is defined as honesty in fact and observance of reasonable commercial standards of fair dealing.
1. Should protect parties’ reasonable expectations
(1) Dalton (p605), Court ruled SAT test adminstrators were not using bad faith. They promised to “look at the evidence” and they did. As long as they weren’t acting irrationally or arbitrarily, they were acting in good faith. \
(2) Burger King v. Weaver, 1999 (p609), Court rejected Defendant’s defense that Burger King was acting in bad faith, because the Court only held Burger King to the express terms which did not include a non-compete clause.
(a) However, the 9th Circuit held otherwise in a similar case and ruled Burger King to the implied term of a non-compete clause.
2. Sharp dealing is bad faith. Where one party is taking advantage of the other party, he is acting in bad faith.
(1) Market Street Association v. Frey, 1991 (p613), Bad faith exists where one party knew the other party was unaware of an express term. If the buyer conjured up his request for a $4M loan, knowing it would be rejected and thus triggering a clause in the K to repurchase the land at a rate lower than market value. IF this was proved at trial, it would be sufficient for bad faith.
IV. A higher duty of “best efforts” may be implied.
a) Best effort is an implied term that requires a party to make such efforts as are reasonable in light of that party’s ability and the means at its disposal and of the other party’s expectations.
b)
B. Best efforts are required in exclusive dealings under 2-306.
(1) Bloor v. Falstaff Brewing Corp, 1979 (p619), Falstaff had exclusive right to distribute Ballantine beer. Express terms required Falstaff to use best efforts to maintain high volume. Falstaff did not act in bad faith, but they failed to use best efforts. Once Bloor showed Falstaff did nothing to promote Ballantine sales, burden shifted to Falstaff to show it did something (anything!) to promote Ballantine sales.
C. In a requirements contract, where the quantity is “all that the buyer needs,” and the buyer’s needs drop to zero – it is not necessarily a breach of bad faith.
(1) Eastern Air v. Gulf Oil, 1975 (p610),K terms used a price index to set the price. The energy crises cuase the price to drop so Gulf wanted out of the K. They accused Eastern of bad faith. Eastern showed it’s conduct was consistent with implied terms, showed it was consistent with course of dealing, course of performance and trade usage. Court ruled Eastern was not acting in bad faith.
D. In an output contract
E. In a percentage lease (where rent= some percentage of profits,) the tenant has an obligation to use best effort, a higher obligation than good faith.
a) If the business/tenant deliberately lowers profits, ex: by moving entire business to another location, that is bad faith and breach of contract.
b) If the business/tenant has a legitimate reason for reducing or changing business and gross receipts fall as a result, then there is no bad faith.
c) If the landlord is guaranteed a minimum amount of rent, the tenant is probably not required to use best efforts because the landlord is protected.
V. Maybe no K exists
1. RS 201(3)- If the parties both meant different things and understood them in different ways, and neither party had reason to know of the other’s understanding, then no K exists.
a) If one party had reason to know of the other party’s understanding, the unknowing party’s understanding prevails.