CONTRACTS – HULL (SPRING) 2004

  • Function: the rule limits the extent to which parties may establish that discussions or writings prior to the signed written contract should be taken as part of the agreement – in some circumstances, the rule bars the fact-finder from considering any evidence of certain preliminary agreements that are not contained in the final writing

Shows a distrust of the jury b/c under this rule the judge excludes the evidence from the jury

  • Parol Evidence Analysis:

(1)Does it apply – is this a written contract?

(2)Evidence of prior agreement or contemporaneous agreement? (Doesn’t apply to subsequent agreements)

(3)Did parties intend writing to be final expression of terms of contract (complete integration)?

(4)Any applicable exceptions?

  • Integration: a document is said to be an integration of the parties’ agreement if it is intended as a final expression of the agreement (parole evidence rule ONLY applies to final expressions of agreements)
  • Complete/Total Integration?: a document that is not only a final expression of agreement, but it is also intended to include all details of the agreement

If yes – exclude everything

  • If whole agreement is integrated, unambiguous, and clear, judge will NOT allow P.E.
  • Partial Integration?: a document that is intended to be final, but that is NOT intended to include all details of the parties’ agreement

If yes – exclude inconsistent terms

  • Look at the term at issue: if it is integrated, unambiguous and clear, judge will not allow P.E. relating to the term
  • Factors in determining whether there is a complete integration or partial look at:
  • 1) Detail of Contract

Extremely detailed v. skeletal (ie: deeds/promissory notes = not very complete)

  • 2) Sophistication of the parties

If parties sophisticated (rep’d by counsel) would expect them to put things in writing

If not sophisticated and do things informally then wouldn’t expect they use a writing

  • 3) Merger clause (clause that says this K includes all negotiations)

Some courts view this as conclusive if included

Merger Clause: a clause stating that the writing constitutes the sole agreement b/t the parties – the presence of clause makes it more likely that the court will find the writing to have been intended as a complete integration

  • 4) Trade Usage (Do parties in these circs frequently leave things out of the written K?)
  • 5) Form contract

Pre-printed form where not a lot of negotiation – then more likely that there might be some side deals that aren’t reflected in the form written contract (party on other side will often not be that sophisticated)

  • 6) Formal Negotiations

If parties negotiate for a long time, it is more likely that everything will be included

  • 7) UCC 2-202 (essentially follows the common law rule)
  • Prior writings and oral agreements: parol evidence rule applies to oral agreements and discussions that occur prior to a signing of an integration – it also applies to writings created prior to an integration
  • Contemporaneous writing: if an ancillary writing is signed at the same time a formal document is signed, the ancillary document is treated as part of the writing, and will NOT be subject to the parol evidence rule
  • Subsequent agreements: the parol evidence rule NEVER bars consideration of subsequent oral agreements – a written contract may always be modified after its execution, by an oral agreement

EXCEPTIONS TO PAROL EVIDENCE RULE

When Evidence of Prior Agreements or Contemporaneous Oral Agreements is Admissible:

1) Condition Precedent to Contract Enforcement

  • If what trying to introduce is evidence of a condition precedent to the actual written K, the may be admitted
  • Not trying to change the terms, instead trying to show whether the written K has any validity at all

Like S/F this doesn’t mean there was condition precedent – just whether evidence should be admitted

  • Note: UCC 2-202 evidence re: term that would have been included had parties agreed will not be admitted

2) Writing Not Partially Integrated

  • When the parties don’t intend for the writing to be final - parol evidence will be allowed if term is consistent

If term is missing or not fully set out in writing and parol term fills the gap w/o changing what is in the writing – strong likelihood of consistency and admission

  • If writing has a gap, but the parol term would change the effect or meaning of the provisions in the writing – very likely to be held inconsistent and excluded

3) Ambiguity

  • If the term is dealt w/ in the writing but is unclear/ambiguous then if the writing is susceptible to the meaning supported by the parole evidence – then strong likelihood of consistency + admission
  • If meaning is implausible, given the purpose and effect of writing, very likely it is inconsistent and will be excluded

Determination of Ambiguity:

  • “Four corners” rule:

Most stringent, determination of whether term is ambiguous involves no extrinsic evidence whatsoever

Determined solely by looking w/in the four corners of contract itself

No evidence of negotiations or context surrounding making of agreement

  • “Plain meaning” rule:

Middle approach, in determination the court will not hear evidence about parties’ preliminary negotiations

Ct WILL hear evidence about circs or “context” surrounding making of agreement

  • “Liberal” rule:

Evidence of statements during pre-contract negotiations allowed

4) Trade Usage, Course of Dealing, Course of Performance

  • Where it is common for parties to leave out terms from the K, evidence of this practice may be admitted
  • Only to supplement when consistent w/ the K, can only contradict the K if carefully negated (UCC 1-204(4))

Note: trade usage receives specially favorable treatment b/c they are more credible and objective and less vulnerable to self-serving perjury

  • UCC Hierarchy of terms:

Express terms

Course of performance (how parties dealt w/ one another in this K)

Course of dealings (how parties dealt w/ one another in the past)

Trade usage (note: newcomer exception – ie: chicken broilers v. fryers case)

5) Misrepresentation

  • Evidence of fraudulent misrepresentation is admissible to void the entire K. Parol evidence rule NEVER prevents the introduction of evidence that would show that no valid contract exists or that the K is voidable

Fraud in the inducement:

  • Fraudulent or material misrepresentation
  • Assent is induced by this
  • Justifiable reliance
  • Buyer of goods can circumvent K by suing in tort – can bring in misrepresentation evidence
  • Restatement §164: can get out of K if there is a material misrepresentation and a fraudulent misrep

Cts split re: admission of evidence of negligent misrepresentation (ok if intentional)

  • Restatement §195 & 196 – Terms Exempting From Consequence of Misrepresentation

When people try to limit their liability in tort there are public policy concerns

Under restatement K’s that limit liability violate public policy

6) Mistake – “scrivener’s error”

  • Mistake in actual written representation of agreement
  • Subject to Reformation and evidence of prior agreement is admissible to demonstrate mistake

Requirements of Reformation b/c of Mistake (3):

  • 1) Instrument representing an antecedent agreement
  • 2) Mutual mistake; OR mistake by one party and inequitable conduct on the part of the other, which results in an instrument that doesn’t reflect what the parties intended
  • 3) There must be clear + convincing evidence that shows mistake (higher standard of proof)
  • WWW Associates v. Giancontieri (p207)
  • Scott v. Wall (p210)
  • Masterson v. Sine (p212)
  • Columbia Nitrogen Corp. v. Royster Co. (p218)
  • Keller v. A.O. Smith Harvestore Products (AOSHPI) (p)
  • Thompson v. Estate of Coffield (p226)
  • General Rule: if the parties have a misunderstanding about what they are agreeing to, this may prevent them from having the required “meeting of the minds” and thus prevent the contract from existing.

No Contract Formed if:

  • 1) Parties each have a different subjective belief about a term of the contract
  • 2) That term is a material one
  • 3) Neither party knows or had reason to know of the misunderstanding

Parol Evidence may be admitted to decipher the parties’ intent/ambiguous terms

  • Restatement §20 – Effect of Misunderstanding

(1) No manifestation of mutual assent to exchange if parties attach materially different meanings to manifestation …..and…

  • (a) Neither party knows or has reason to know the meaning attached by the other; OR
  • (b) Each party knows or has reason to know the meaning attached by the other

(2) The manifestations of parties are operative in accordance w/ the meaning attached to them by one of parties if:

  • (a) 1st party doesn’t know of different meaning attached by 2nd , and 2nd knows the meaning attached 1st party; OR
  • (b) 1st party has no reason to know of any diff meaning attached by 2nd party, and 2nd has reason to know meaning attached by 1st party

Fault: this means that if one party knows or should know that he has a different understanding as to the meaning of an ambiguous term than the other, a contract will be formed on the term as understood by the other (innocent) party

  • Offeree doesn’t understand offer: where offeree fails to understand or read the offer, a similar “fault” system applies:
  • Offeree is negligent: if failure to read or understand is due to negligence then bound by terms as stated in K
  • Misrepresentation: if misunderstanding due to misrepresentation and offer knows this, then K on terms understood by offeree

Summary:

  • If both parties are acting in good faith but are not aware of the ambiguity = no contract
  • If both parties are aware of the ambiguity = no contract
  • If on party is aware of ambiguity = enforceable contract (against that party)
  • Frigailment Importing Co. v. B.N.S. International (p240)
  • K’s that are undoable based on unfairness even though they meet the formal K formation requirements
  1. MISTAKE

[Fact Pattern – analyze it as both unilateral and mutual mistake, most cases can be argued both ways]

** Usually hinges on whether the party assumed the risk

(a)Mutual Mistake – Restatement §152

Analysis:

(1) Mutual mistake re: a basic assumption

Must show that both parties made a mistake about some basic assumption underlying the K

Must be an existing fact – not an erroneous belief about what will happen in the future

(2) Material mistake

Not just some minor matter, but one that leads to an unfair bargain in some way

(3) Risk assumption – Restatement §154

Look at whether or not the party trying to get out assumed the risk

  • R2d-§154: A party assumes the risk when:

1) Risk is allocated to him by agreement of parties; or

2) Though he only has limited knowledge re: facts related to mistake at time of K, but treats that limited knowledge as sufficient; or

3) Risk is allocated to him by court on grounds that reasonable to do so under circs

  • Must be No Doubt: if the party seeking relief had any doubt about the basic assumption, he would assume the risk

Courts in general will not say something was a basic assumption if the parties were in doubt about the fact at the time of contracting (ie: fertile bull example – where doubt about whether fertile or not)

Rationale: if parties are aware at the time of K that there is doubt that would cause the K to be unfavorable to one party – the thought is if they intended to allow for rescission they are going to put something in the K that says that

  • (Also relevant to know how ppl do biz in the particular industry at issue)
  • Negligent failure of party: negligent failure of a party to know or discover the facts as to which both parties are under mistake does not prevent rescission
  • Restatement §157 – Effect of Fault of Party Seeking Relief

Doesn’t care if negligent just as long as not acting in bad faith (easier rule)

  • A mistaken party’s fault in failing to know or discover the facts before making the contract does not bar him from avoidance or reformation under the rules, UNLESS his fault amounts to a failure to act in good faith in accordance w/ reasonable standards of fair dealing
  • Mistake of Value: does NOT allow rescission – making a bad deal is not kind of mistake that would allow rescission
  • Market Conditions: mistakes as to market conditions will generally NOT give rise to avoidance of K b/c of mistake
  • Existence of Subject Matter: the existence of the subject matter of the contract is usually a “basic” assumption on which the contract can be avoided
  • Quality of Subject Matter: a major mistake as to the quality of the contract’s subject matter is often a “basic” assumption , so the disadvantaged party can avoid the contract
  • Mistake of genuineness: an extreme mistake might pt to a mistake as to what was being sold. But, when you sell something you are taking the risk that it may be worth more than what you sold it for
  • If the seller explicitly warranties that the item is genuine then the buyer can rescind under breach of warranty
  • Implicit warranty – b/t merchants, the goods are expected to be what they seem to be
  • Reliance Interest: if the seller relies on the transact and sells the proceeds, the court can protect the party’s reliance interest to the extent that justice requires
  • Other equitable factors considered by the court:

Distinction b/t mistake by seller/buyer

  • Minerals in land: basic assumption that when selling land that seller is taking the risk that they are selling away mineral rights if found on property

Generally seller is expected to be aware of what it is selling

Expectation of parties

  • Consider whether the parties are gambling or not

Is this actually a unilateral mistake instead of a mutual mistake

Fairness

  • Reilley v. Richards (p254)
  • Woyma v. Ciolek (p257)

(b) Unilateral Mistake – Restatement §153

  • Where only one party is mistaken about the facts the mistake will not prevent formation of the contract

However, if the non-mistaken party had reason to know of the mistake, the K can be voided

  • Generally K is voidable if:

(1) Unilateral mistake re: a basic assumption on which the mistaken party contracted

(2) Mistake resulted in materially different exchange

(3) Non-mistaken party had reason to know of mistake OR enforcement of K would lead to unconscionable result

AND…

(4) No assumption of risk by mistaken party

  • Factors that indicate mistake by the releaser (where release signed):

How much bargaining power going on/absence of bargaining

Whether represented by an attorney

Amt of consideration

Haste by releasee in securing the release

Contentions that injuries were in fact unknown at time of release

Terms of the release exclude injuries alleged

  • **Releases are viewed w/ suspicion by the court
  • Excuse of unilateral mistake generally allowed if:

1) Enforcing the K against the mistaken party would be grossly unfair

Look at what is the loss to the party if we allow one party to get out; and

Look at what is the harm to the party if we don’t allow them to get out

  • Remember unjust enrichment for one party

2) Avoidance would impose no substantial hardship on the other party (this normally means that the K has not yet been executed or party hasn’t relied on it yet)

If avoidance would impose an unfair hardship on the non-mistaken party, excuse may not be granted

3) Avoidance of a release allowed if party can show it was executed by mistake – ie: no consideration given

  • Contractor bids: most common type of unilateral mistake occurs where a contractor or sub-contractor makes an error on a bid for a construction job
  • Unconscionability – must show that will be severely harmed if forced to perform, and that other party hasn’t relied on the bid
  • “Snapping up” of offer: mistaken contractor may also try to show that the other party knew or had reason to know of error – if mistaken bid was significantly lower than other bids submitted may be notice
  • Donovan v. RRL Corporation (p260)
  • REMEDIES: 1) Avoidance (= rescission & restitution); or 2) Reliance (one suffered losses other got no benefit)
  1. IMPRACTICABILITY/ IMPOSSIBILITY (Seller’s Excuse)
  • Generally: Parties entered into a K, but b/c of changing conditions, performance would cause an extreme and unreasonable difficulty, hardship, and/or expense - making it impracticable for the parties to perform

4 Requirements before excused on basis of impracticability:

  • 1) Impracticable Performance

Must show that it CAN’T be performed OR it would be extraordinarily burdensome for the party to actually perform

  • 2) Caused by event – the non-occurrence of which was a basic assumption upon which the K was made

Ct focuses on the foreseeability of the event in determining relief

  • If the event was w/in everyone’s contemplation when contracted then the assumption is that they agreed they would still perform if that happened
  • 3) Event not caused by fault of party seeking excuse
  • 4) Party seeking excuse did not assume the risk
  • Modern law/UCC - §2-615: standard for excusability is unduly burdensome or onerous as opposed to impossibility

Parties should include foreseeable events in the K

Circumstances to concentrate on:

  • Did the event exist at the time the parties contracted or did it take place in the future
  • Did the parties expect the event

Unexpected circumstances (ex: labor disputes have never happened before)

Common situations (ex: labor disputes happen all the time)

  • Money spent in reliance (ex: long-term supply contract)
  • Loss the party will incur if forced to perform
  • Language of guarantee (may indicate that the risk was allocated)
  • Impracticability v. Mistake: the elements of the two are very similar – difference is that impracticability refers to an unforeseeable even that happens in the future – mistake refers to a pre-existing situation which the mistaken party had no knowledge of.
  • Mistake  used to undo a K (sword)
  • Impracticability  used to block from K (shield)

Practically speaking – impracticability is a much higher standard to meet…. w/ mistake all the party needs to show is that it resulted in “materially” disadvantageous exchange – different from saying that something is impracticable which seems more difficult or onerous

  • Cts may be more like to say that parties assumed the risk under mistake than impracticability
  • Remedy: b/c the K is rescinded, parties get restitution if the other was unjustly enriched

Courts are reluctant to grant relief on this basis b/c it undermines contracts

  • Mishara Construction v. Transit-Mixed Concrete Corp (p541)
  • Sunflower Electric Co-op v. Tomlinson Oil Co. (p546)
  1. FRUSTRATION OF PURPOSE (Buyer’s Excuse)
  • Generally: where a party’s purpose entering into the K is destroyed by supervening events, most courts will discharge him from performing (**this is an unusual excuse)

Requirements for Frustration: