Contracts – Neustader – Spring ‘08

Contract terms: What are the sources, meaning, nature, and effect of terms in a contract?

Source of Terms

  1. Express Terms
  2. parties used oral or written terms to express the terms of a contract
  3. Implied Terms
  4. by the circumstances, by variety of other things, i.e. past, how they've performed so far "course of performance", or industry practices
  5. Default Terms
  6. terms that the court will supply as a matter of law

PAROL EVIDENCE RULE

R.2d 209 – Integrated Agreements

R.2d 210 – Completely and Partially Integrated Agreements

R.2d 212 – Interpretation of Integrated Agreement

R.2d 213 – Effect of Integrated Agreement on Prior Agreements (Parol Evidence Rule)

R.2d 214 – Evidence of Prior or Contemporaneous Agreements and Negotiations

R.2d 215 – Contradiction of Integrated Terms

R.2d 216 – Consistent Additional Terms

R.2d 217 – Integrated Agreement Subject to Oral Requirement of a Condition

U.C.C. – 2-202

VOCABULARY:

A "record" is "information that is inscribed on a tangible medium or which is stored in an electronic or other medium and is retrievable in perceivable form"

"Parol evidence" is evidence (e.g. testimony) of the parties' oral agreement, prior to or contemporaneous with execution of a record, to a term or terms that are not included in the record, and evidence (e.g. a document) of the parties' written agreement, prior to execution of a record, to a term or terms that are not included in the record.

A “final record” (in contrast to a draft) is "a partially integrated agreement:" meaning that it is the final draft.

“Extrinsic Evidence” includes usage of trade, course of dealing, and course of performance

“Integrated Agreement” If one concludes in addition that the record contains all of the terms to which the parties agreed, it is an integrated agreement (sometimes referred to as an "integration" or a "complete integration").

A "merger clause" (sometimes referred to as an "integration clause") is a term in a record by which the parties purport to express their intention regarding the finality or completeness, or both, of the record.

The parol evidence rules tell us that a trier of fact may not hear parol evidence that adds to or contradicts a complete integration and may not hear parol evidence that contradicts a partial integration(can add).

When does this rule apply?

  1. When an agreement is recorded in writing and one of the parties proffers evidence to prove a term that is
  2. not contained in the writing or
  3. to explain or expand on a term in the writing
  4. Purpose is to permit the exclusion of evidence that is probably unreliable or dishonest
  5. Covers both
  6. oral and written terms allegedly agreed to prior to, and
  7. oral terms during the execution of the written contract, but not incorporated into the final written contract.

**You may not alter or add to a completely integrated agreement: and you may not alter, but you may add to a partial integration**

Process:

  1. What is the parol evidence being offered to accomplish?
  2. To explain?
  3. To alter?
  4. To add?
  5. Might naturally been omitted?  R.2d 216(2)(b)
  6. Certainly been included?  UCC2-202, comment 3
  7. After identifying purpose, is the record a partial or complete integration? QUESTION OF LAW
  8. If the writing is not a complete integration, is the alleged parol term regarding a subject that it fully and unambiguously dealt with in the agreement?
  9. Is the offered evidence consistent with what has previously been recorded
  10. May explain, fill a gap, but can’t contradict
  11. What is the intent of the parities? Do they intend it to be complete and final? QUESTION OF FACT
  12. Was the term agreed to?
  13. Merger Clause
  14. Just because something has a merger clause in it, it's not conclusive to decide whether or not it's complete
  15. Look at the Document

The Question of Integration

1)Look at intent  did the parties intend for the writing to be a full and final expression of their agreement?

a)Consider

i)Language of the writing

ii)Extrinsic evidence

(1)R.2d 214

2)Context  courts evaluate extrinsic evidence to see whether the apparently integrated writing was intended as such

a)Whether the circumstances offer an explanation of why the terms may not have been included in the writing.

R.2d 216 – Consistent Additional Terms ** naturally be omitted**?

(1) Evidence of a consistent addition term is admissible to supplement an integrated agreement unless the court finds that the agreement was completely integrated.

Was the agreement fully or partially integrated?

(2) An agreement is not completely integrated if the writing omits a consistent additional agreed term which is

(a) agreed to for separate consideration, or

(b) such a term as in the circumstances might naturally be omitted from writing.

Was the term one that might naturally be omitted from the writing?

UCC 2.202  Final Written Expression: Parol or Extrinsic Evidence ** certainly been included?**

Look at intent, as a final expression? May not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement, but may be explained or supplemented

(a)By course of performance, course of dealing, or usage of trade

(b)By evidence of consistent additional terms, unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement.

  • Just because a writing is final on some matters, doesn’t mean that it’s final on all matters.
  • Evidence of course of dealing, usage of trade and course of performance
  • Course of actual performance by the parties is considered the best indication of what they intended the writing to mean.
  • Look at the terms, if it’s certain that they would have been put in the document and not there, then can’t add them.

Factors to Consider

  1. Hand written changes – parties attempted to make agreement complete?
  2. Experienced attorneys? Business men? Would they have known to how to make a complete agreement?
  3. Length?

Merger Clause

1)Signifies that all of the terms of the agreement have been merged into the writing.

2)Not always conclusive, where under all the circumstances of the transaction, one of the parties makes a plausible argument that despite the appearances, the writing is not really integrated, and the alleged parol term can be reconciled with it.

Cases

Masterson v. Sine

1)The agreement might naturally be made outside of the writing in a family transaction.

a)"When the parties to a written contract have agreed to it as an "integration" -- a complete and final embodiment of the terms of an agreement -- parol evidence cannot be used to add to or vary its terms. When only part of the agreement is integrated, the same rule applies to that part, but parol evidence may be used to prove elements of the agreement not reduced to writing. "

2)Fed. Deposit Insur. Corp. v. Hadid

a)Whether an agreement is integrated depends on (1) the intent of the parties, as revealed by the writing itself, (2) the conduct and language of the parties, and (3) the surrounding circumstances.

b)Court considers the four corners rule, then states the (1) intent, (2) conduct and language of the parties, (3) and surrounding circumstances (The rule from Masterson).

Ambiguity or Indefiniteness in an Integrated Writing

  1. If a term of the writing is unclear or ambiguous, the writing can’t be treated as an integration of that term.
  2. Look at R.2d 214 Prior Dealings
  3. If extrinsic evidence is available to clarify the indefiniteness that is the best means of ascertaining the parties’ intended meaning.
  4. Parol evidence is therefore admissible to clarify the uncertainty or ambiguity.

Collateral Agreement Rule

1)Where a contract is integrated, if the parol agreement is sufficiently distinct from the scope of the writing, it can be seen as a different contract, related to but separate from the integrated written agreement.

a)If so, evidence of this collateral agreement is not barred by the parol evidence rule.

b)The parties may not have intended it to be covered by the integrated writing.

c)R.2d  216 might naturally be omitted?

d)UCC 2-202  certainly have been included?

Implied-in-fact terms

** There is a contract established expressly. The court is implying one of the terms from the factual situation.**

Court finds what the parties probably would have agreed upon:

Limiting principles:

  1. Course of performance
  2. Course of dealing
  3. Trade usage
  4. public policy
  5. express or implied terms
  6. implied in law covenant of good faith and fair dealing inherent.
  7. "just cause," and "good cause:" a fair and honest cause or reason regulated by good faith on the part of the party exercising the power.

Terms Implied by Default Rules

  1. Rules of contract law supply terms of a contract that have not been supplied through the express or implied agreement of the parties
  2. Default terms cover the occasional case in which dissatisfaction and dispute emerge
  3. Some terms are simply not worth the time and expense required for negotiation and drafting

How do you decide what is an express warrant y and what isn't?

  • Puffing v. express warranty
  • General v. Specific
  • Description or affirmation of fact…. No promise to future performance…..
  • Depends on sophistication of the buyer
  • Expertise of the seller
  • Price/age of product
  • Complexity of product
  • Inherent plausibility of the statement
  • Customary expectation

R.2d 204 Power of a Court to Create and Employ a Default Term Tailored to the Circumstances of a Particular Case.

R.2d 205 Default Term Applicable to all Contracts, Every Contract Imposes Upon Each Party a Duty of Good Faith and Fair Dealing in its Performance and its Enforcement

U.C.C. 2-207(3) expressly refers to default terms on matters as to which the writings of the parties do not agree.

RUCC 1-304 " same as above, re good faith and fair dealing

§UCC 2-305 Open Price Term

§UCC 2-306 Terms in Output and Requirements Contracts

§UCC 2-307 Delivery in Single Lot of Several Lots

§UCC 2-308 Place for Delivery

§UCC 2-309 Time for Delivery or other Actions

§UCC 2-310 Time for Payment

§ 2–313. Express Warranties by Affirmation, Promise, Description, Sample.

§UCC 2-314 Implied Warranty of Merchantability

§ 2–315. Implied Warranty: Fitness for Particular Purpose.

§ 2–316. Exclusion or Modification of Warranties.

§UCC 2-711 Remedies for a Store's Breach of an Implied Warranty

§UCC 2-311 Options and Cooperation Respecting Performance

§UCC 2-503 Manner of Seller's Tender of Delivery

§UCC 2-504 Shipment by Seller

Vocab

Course of Dealing UCC§ 1-205: sequence of previous conduct between the parties to a particular transaction which is fairly to be regarded as a common basis of understanding for interpreting their expressions and other conduct

Conspicuous UCC § 2-201: a reasonable person ought to have noticed it. Larger or other contrasting type or clor.

Usage of Trade UCC § 1-205 (2): practice or method of dealing having such a regularity of observance in a place, vocation or trade as to justify an expectation that it will be observed with respect to the transaction in question.

Merchants UCC § 2-104 (1): a person who deals in goods of a kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction or to whom such knowledge or skill may be attributed by his employment of an agent or broker or other intermediary who by his occupation holds himself out as having such knowledge or skill.

  • May be based up on specialized knowledge as to the goods as to the business practice
  • As to Section 2-314 – Warranty of Merchantability
  • Merchant only if the seller is a merchant with respect to those goods
  • As to Section 2-103 (1) (b) merchant “good faith”  reasonable commercial standards of fair dealing in the trade

§ UCC 2-314 Implied Warranty of Merchantability

Warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind

1)Must pass description

2)Fair and average quality

3)Fit for the ordinary purposes for which such goods are used

4)Run with variations permitted within the agreement

5)Are adequately packaged

6)Conform to affirmations made by the container

7)Goods that are second hand only need to be as appropriately good as their contract description

8)A person making a one time only sale is not a merchant within the meaning of the UCC.

9)However, a person who is not a merchant is obligated to disclose all he knows about the product, especially if there are undisclosed defects in it.

a)Did he guarantee the goods? Because if so, then the one time only seller is held to a higher standard.

10)Fitness for the ordinary purposes for which goods of the type are used

a)Must be honestly resalable in the normal course of business because they are what they purport to be.

UCC § 2–315 Implied Warranty: Fitness for a Particular Purpose

Usually applies to merchants; can apply to non-merchants.

Did the seller have reason to know of the purpose for which the goods are being purchased verses general purpose?

Look at comment two

1)Did the seller at the time of contracting

2)Know any particular purpose for which the goods are to be required

3)Is the buyer relying on the seller’s skill or judgment to select the goods?

4)Then there is an implied warranty that the goods will be fit for a particular purpose

5)Are the circumstances such that the seller has reason to realize the purpose intended or that the reliance exists?

6)Particular purpose is different than ordinary purpose that goods are used

a)Specific use by the buyer which is particular to the nature of his business

b)Ordinary purposes are those envisaged in the concept of merchantability

i)Uses which are customarily made of the goods in question.

UCC § 2316 – Exclusion or Modification of Warranties

1)Negation or limitation of warranties is inoperative where such construction is unreasonable

2)Where it’s going to exclude or modify an implied warranty, the language of the express warranty must mention “merchantability” and must be “conspicuous” if in writing.

a)To exclude or modify any implied warranty of fitness the exclusion must be by a writing AND conspicuous.

3)Words like “as is” or “with all faults” or any other phrase which conveys the same meaning and call the buyer’s attention to such express warranty is valid.

4)Where the buyer fails to inspect the whole goods, there is no implied warranty where the express warranty was found to be good

5)Implied warranties may also be excluded or modified by course of dealing or course of performance or usage of trade.

GOOD FAITH AND FAIR DEALING

R.2d 205 Default Term Applicable to all Contracts

Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement

** Especially where one party has discretionary power affecting the rights of the other.

UCC 1-203 Obligation of Good Faith

Sets forth basic principle running through act.

General obligation for parties to contact reasonable and in good faith

UCC 1-201(19)

Good faith – honestly in fact in the conduct or transaction

UCC 2-103 (1)(b)

Good faith for a merchant  honest in fact and the observance of reasonable commercial standards of faith dealing in the trade

What does Good faith mean?  R.2d 205

Comment A

1)Meaning varies with the context

2)Faithfulness to an agreed common purpose, consistency with expectation of other party

Cases

Bailey v. Tucker Equipment Sales, Inc.

  1. Implied warranties are excluded by expressions like 'as is,' or 'with all faults,' or by other language that in common understanding called the lessee's attention to the exclusion of warranties and makes plain that there is no implied warranty, if in writing and conspicuous.
  2. What is Conspicuous?
  3. A reasonable person against whom it is to operate ought to have noticed it.
  4. Language in the body of a form is 'conspicuous' if it is in larger or other contrasting type or color, and is a question of law for the trial court to determine.

Hicks v. Superior Court

If set forth in Conspicuous and understandable language, a disclaimer of the implied warranty of quality is enforceable

Unless  unconscionable?

  1. What is unconscionable?
  2. Two Parts
  3. Procedurally unconscionable
  4. A set of circumstances in which the weaker or adhering party is presented a contract drafted by the stronger party on a take it or leave it basis
  5. Adhesion contract
  6. Substantive Unconscionability
  7. Actual terms of the agreement and evaluates whether they create an overly harsh or one-sided results, reallocating risks in an objectively unreasonable or unexpected manner

Acree v. General Motors Acceptance Corp.

  1. Here, was GMAC's conduct objectively unreasonable?
  2. What were the express terms of the contract?
  3. What were the legitimate expectations of the parties arising from those terms?

Market Street Associates v. Frey

  1. Application of implied covenant where one party has discretionary power
  2. Must act objectively reasonable in a manner consistent with the reasonable expectations of the other party.
  1. Posner - why do we have the duty of good faith - Market Street Associates Case
  2. Reduces expense with expenditures - additional litigation, cost of additional drafting if there wasn't a basic trust in one another
  3. Posner - be consistent with economic principles to promote economic efficiency

Interpretation of terms

**language of the agreement is vague, ambiguous, or otherwise is an imperfect expression of the intention of the parties**

Vocab:

PLAIN MEANING RULE - Bond Case

when contract terms are clear and unambiguous they must be given their ordinary and natural meaning, and no parol or extrinsic evidence may be considered to vary the meaning of the terms.

Ejusdem generis maxim

A rule of interpretation that where a class of things is followed by general wording that is not itself expansive, the general wording is usually restricted things of the same typeas the listed items.

contract of adhesion - a standardized contract, which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.

§ 201 WHOSE MEANING PREVAILS

§ 202 – Rules in Aid of Interpretation see comment Four which deals with Course of Performance and Course of Dealing

§ 203 STANDARDS OF PERFERENCE IN INTERPRETATION

§ 222 USAGE OF TRADE

§ 223 COURSE OF DEALING

UCC 2-208 – Course of Performance or Practical Construction

UCC – 1.205 – Course of Dealing and Usage of Trade

R.2d 202 – Rules in Aid of Interpretation see comment Four which deals with Course of Performance

  1. Words and conduct are interpreted in light of the circumstances  what is the principle purpose of the contract?
  2. Writing interpreted as a whole, unless there are more writings to add to the bunch and then it’s interpreted together with those
  3. Is there a general prevailing meaning?
  4. Then the terms are interpreted in accordance with that meaning
  5. Technical terms are interpreted so if they are in that field
  6. Was there knowledge of the nature of the performance? Accepted or acquiesced in without objection? Then that is given greater weight for interpretation
  7. Manifestations of intention of the parties to a promise or agreement are interpreted as consistent with each other and with any relevant course of performance, course of dealing, or usage of trade.

R.2d 203 – Standards of Preference In Interpretation