Daddy’s Contracts II Finals Outline
Three main issues in determining what is required under a K:
1)what are the terms? (parole evidence rule)
2)what do the terms mean? (rules of interpretation)
3)what if the parties omit a term? (rules for omitted terms)
Parole Evidence Rule Analysis:
If there is a writing that reflects the final agreement, then we begin this analysis:
1)Did parties intend the writing to be an integrated expression of an agreement? (final)?
- If YES, go to 2
- If NO, the parole evidence rule is non-applicable
2)Is the writing completely or partially integrated?
- If it is complete, then no parole evidence is admitted
- If partial, then go to 3
3)If partial integration, is the proffered term consistent or inconsistent with terms of writing?
- If consistent, then parole evidence is admissable.
- If inconsistent, then parole evidence is inadmissable.
How do we determine if the writing is final?
Analyze the character:
Does the writing appear to be a final agreement or is it marked “draft” or referred
to as a letter of intent or a memo of understanding?
Would this document normally be considered a final written agreement?
Receipt/bill of sale – limited purpose (so usually considered partial integration)
(If the parties acted like a document like this was their contract, even though its a draft it is adopted by the parties as their contract by their conduct)
Complete or partial integration?
Traditional view – four corners test – look within the writing itself to determine if it is a complete integration or partial integration.
Willeston’s view – ask the question “would the terms that you’re trying to prove with parole evidence have naturally been included in the agreement?”
(problems – not a lot of guidance)
Restatement/Modern view – 5 factors based on the context:
1 – character of writing
2 – extrinsic evidence
3 – does the agreement contain a merger clause?
4 – might the term naturally have been omitted (i.e. is there a legitimate reason
why the term was not in the document?)
5 – was the agreement on separate consideration?
merger clause – boilerplate that says that the writing reflects the final agreement. These create the presumption that the writing is a complete agreement (you have to rebut this presumption with evidence).
Gianni case – Gianni rented store and agreed not to sell tobacco. He assumed that he would be the only seller of sodas. They used the tradition rule – i.e. would the terms have been naturally included in the K? Once we had complete integration it doesn’t matter if the terms are consistent or inconsistent – the parole evidence was barred.
If you have a writing that embodies a contract, and someone is claiming a side agreement that wasn’t included – the law will be skeptical as to why the term wasn’t written in.
UCC Special Quirks: UCC 2-202:
1 – harder test for determining complete integration – would the term certainly have been included?
2 – even if complete integration – trade usage or course of dealing evidence IS admissable to prove consistent implied terms. (effect of a merger clause?)
Exceptions to Parole Evidence Rule:
When offering parole evidence to:
1)show agreement invalid, voidable, or unenforceable (misrep, duress, etc)
2)show mutual mistake in written expression of agreement (you will be allowed to admit prior agreements and the court will reform the K and fix it.)
3)interpret meaning of written K terms
If an extraneous agreement is contemporaneous, the parole evidence rule will still bar the evidence. If the agreement was made after the writing, then it might be ok. Subsequent agreements don’t matter for the parole evidence rule. The parole evidence rule says nothing about subsequent agreements.
If there is separate consideration then it is a partial integration – but the term will still have to be consistent with the writing before it will be admissable.
UCC Special quirks – purpose is to make sale of goods easier to engage in and make between businessmen. The UCC has a general presumption in favor of partial integrations, which means that you can show evidence of other terms. The test is would they certainly have included the term.
Also under the UCC, even if you have complete integration, if you are trying to prove that the parties agreed on certain implied terms – meaning implied by trade usage or course of dealing.
Trade usage evidence – generally or commonly prevailing trade practices within an industry, profession/trade or locality.
Course of dealing – refers to parties past dealings. Historical dealings before the K at issue – what did the parties do when they did business with each other prior to the particular contract. UCC – sequence of previous conduct between the parties which is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions/conduct.
Merger clause – in order for a merger clause to apply (in a UCC setting) – you have to carefully negate the admissability of trade usage / course of dealings – meaning expressly state that – can’t just be boilerplate.
No Oral Modification Clauses –
Traditional common law – NOM clauses are ineffective. (rationale: inhibit freedom of contract)
Modern trend and UCC – NOM clauses are generally enforceable unless there was reasonable and substantial reliance on the agreed oral modification. (rationale: allow parties more contractual flexibility. Influenced by the UCC philosophy)
(these are attempts to prevent parties claiming side agreements – saying that any oral agreements after the K formation must be in writing, signed by both parties before they will be effective)
So we’ve done PER and NOM – what if there is a dispute about the meaning?
Words can be susceptible to different meanings. Typical disputes are based on vagueness and ambiguity.
Vagueness – general imprecision in terms of describing what we mean. (like a blue car – what is blue? Million different shades of blue) – can be used to the client’s benefits, with respect to arguing/determing later.
Ambiguity – more narrow
Rules of Interpretation – Restatement 201: whose meaning prevails
(1)Where parties attach same meaning at K formation – that meaning prevails.
(2)Where parties attach different meanings at K formation
- If one party knew/should have known that the other party was attaching a different meaning, use the other party’s meaning.
- If not (a) and the term is material, then the K likely fails for mutual assent.
General Rules of Interpretation:
Restatement 202(1) – K terms are to be interpreted in the context of the entire K and surrounding circumstances. If ascertainable, the principal purpose of the K is given great weight.
In determining the principal purpose of the K, look to see if there are any recitals. Recitals start with ‘whereas’ and try to describe the purpose of the contract (from the drafter’s perspective)
Intrinsic Aids of Interpretation
Presumption regards generally prevailing meaning unless there is an agreement or special meaning of word.
Latin maxims:
Of the same kind
It is known from its associates
Expression of one thing excludes others
K to be interpreted holistically where all terms given effect and same meaning thoughout the K. If they cannot be:
1) specific terms over general terms
2) negotiated terms over standard terms
3) handwritten > typewritten > printed
Frigaliment – chickens –
When doing interpretation:
1)start with intrinsic evidence (words of K) – holds the most presumptive weight
trade usage – when one party is charged with trade usage knowledge and trying to prove it against a new entrant – there is a higher bar --- that a particular meaning was so notorious as to be universal – the presumption is violent that the parties contracted with reference to it.
Raffles case – Peerless ship –
Start first with the words of the K then go to extrinsic evidence and meaning.
Rules regarding whose meaning prevails:
Shared – if evidence shows shared meaning then use it (usually in this situation one party is acting in bad faith and saying they didn’t share the same meaning)
Fault – if there is dispute --- is there enough objective reasonable evidence to say that one party should have known better what meaning the other party was attaching? Is there enough evidence to say that one meaning should prevail?
No-fault – if there’s not enough objective information to assign a meaning (relatively rare situation)
Analysis:
Which rule of decision most reasonable in light of all circumstances/context and principle purpose of contract?
-K language given greatest weight
-Extrinsic evidence is still important
Tools to limit asserted interpretations considered by the court:
-K language: intrinsic aids of interpretation
-Extrinsic evidence limitation: extrinsic aids of interpretation
- Plain meaning rule
- Trade usage, course of dealing, course of performance
Plain Meaning Rule: If K language is clear and unambiguous on its face, then evidence of prior negotiations is generally inadmissable to interpret it.
How do we determine clear and unambiguous?
-majority: consider all evidence except evidence of prior negotiations
-minority: consider all evidence including evidence of prior negotiations
Intrinsic Aids of Interpretation –
Basic principle: Unless parties have indicated otherwise, where a word has a generally prevailing meaning there is a strong presumption that the parties have used that word in accordance with that meaning.
Exception – if a word has a technical or special meaning in a given trade or locality, the presumption is that the word is being used in this sense.
Also parties can agree on certain meanings in either oral/written definitions or “incorporate by reference”
Latin maxims useful to K interpretation:
“expression of one thing is exlusion of another” – if a contract lists specific items, then the parties intended to exclude similar unlisted items (cats and dogs – argue gerbil is not included)
“of the same kind” – if list specific items, followed by more general terms, then general term only includes items similar to specific ones (sheep, cows, pigs, and other animals – argue NOT tiger).
“is is known from its associates” – the meaning of a word may be gathered from its accompanying words (farm can have sheep, cows, pigs – argue not a wild boar, even though it says pigs)
Other rules of K interpretation – holistic terms:
-an interpretation is favored that gives effect to all the terms of an agreement
-corollary – words have the same meaning thoughout a contract
-BUT if all K terms cannot reasonably be given full effect due to a conflict in meaning:
- Specific terms trump general terms
- Negotiated terms trump standardized ones
- Handwritten terms trump typewritten terms trump preprinted terms
General rules of K construction based on considerations of fairness and public policy:
General tools – NOT dispositive:
-interpretations resulting in ‘fair bargains’ are favored
-interpretations more consistent with public policy are favored
-interpretations against drafter is favored, especially for standardized contracts – this is a principle of last resort – simply resolve against the drafter
Plain meaning rule: Plain meaning rule only applies to attempts to introduce prior negotiations.
-if facially ambiguous, then prior negotiations go to the factfinder
-if seems clear and unambiguous on its face
- majority – ambiguous after considering all evidence except PN?
- If yes, PN to factfinder
- If no, PN not to factfinder
Minority – if ambiguous after considering all evidence including PN?
Trade Usage, Course of Dealing, Course of Performance evidence
-for UCC and C/L Ks – factfinder may generally consider in resolving interpretation disputes
-COP evidence given great weight where both parties knowingly acquiesce to it.
-BUT, if K terms/COP/COD/TU cannot reasonably be interpreted as being “consistent” then K terms>COP>COD>TU
Course of performance – dealings under existing contract at issue
Course of dealing – course of the parties’ prior dealings under prior contracts
Trade usage – surrounding commercial industry practices or practices under a certain locality.
Course of Performance – buying Widgets “free of defects” – say there is a 2% defect rate – after you have accepted a number of shipments before and knew about defect rate – “knowing acquiesced in a certain course of performance” – conduct suggests that “free of defects” means 98% defect-free rate. COP evidence is only useful if both parties have knowingly acquiesced. (if they have never opened then the COP would probably not be held against the buyer)
When there is a true irreconcilable conflict, and its impossible because the terms are susceptible to a plain meaning that conflicts with the evidence. So then express K terms > COP > COD > TU.
What is the interpretation issue here?
What kind of evidence are the parties offering?
Apply Intrinsic Aids of Interpretation
Words of K
Extrinsic Evidence – Prior negotiations, commercial usages, general circumstances.
PN – Plain meaning rule
Commercial usages – COP/COD/TU
Which party’s interpretation is the most reasonable under the totality?
1 – ID issue
2 – what type of evidence
3 – extrinsic: prior negotiations, commercial usage, circumstances
4 – apply rules
5 – what is the most reasonable paradigm – shared meaning, fault, no-fault
6 – whose meaning do I pick?
Supplying Omitted Terms
Restatement 204 - when parties to a sufficiently defined bargain (K) – have not agreed on a term essential to resolving K disputes, a term reasonable in the circumstances will be supplied by the court.
“reasonableness” – 1st – mutual expectations of parties (purpose of K) – is there a purpose we can discern from a recital or whatever – pick a term that is most consistent with their expectations.
2nd – justice and fairness
Why do parties omit terms?
Tough to foresee every contigency
Impractical to address every conceivable iteration of possible occurrences
Questions:
1 – can I interpret the express terms in some way to reasonably solve this?
2 – if there is no reasonable interpretation of the express terms? Ask the court to supply a term.
When a court supplies a term – these terms are implied by law (meaning not based on the parties’ conduct, just the courts assessment in light of the K)
3 commonly implied terms:
good faith
best efforts
termination provision
good faith and fair dealing – common law/SOG contracts
restatement 205/UCC 1-203 – basically every K requires good faith and fair dealing in performance and enforcement of K.
what does it mean to act in good faith and fair dealings?
Minimums: honest dealings – cannot act pretextually/deceitfully – subjective honesty
Merchants/commercial parties – observance of reasonably communicated standards
You cannot engage in unreasonable or unfair conduct that impairs the other party’s right to their benefit of the bargain.
2 recurring situations:
sharp dealing – behave opportunistically to take advantage of another party’s vulnerabilities – usually happens when one party has performed and then the other has to perform. (lots of sunk costs)
or one party refuses to cooperate – won’t specify, etc.
Best efforts – make reasonable efforts to render a performance in light on one’s means and abilities and expectations of parties.
3 most common terms that are implied BY LAW (by law is similar to restitution – means its not on the contract)
good faith and fair dealing – general definition: honesty (if merchants – then act fairly, reasonably, cooperatively, honestly – always defined in context)
best efforts
notice provisions regarding termination
3 points with regard to good faith –
1 – court uses terms that may be laid out by legislation (particularly UCC gapfillers)
2 – duty is a mandatory implied term – meaning that parties cannot generally disclaim a duty of good faith by express agreement.
3 – 2 main situations:
1 – party looks to express terms and argues that in performing the express term the other party violated the duty of good faith by not performing in a certain way.
2 – say the contract contained an additional term above and beyond
1-102 – UCC says that although parties cannot disclaim the duty of good faith and fair dealing, they can define the standards by which it shall be assessed (as long as the standards aren’t unreasonable).
Merchants must comport with commercially reasonable standards. (look at TU, COP, COD)
If an independent term you’re trying to imply is inconsistent or in tension with the terms then you have a heavy presumption against you in attempting to convince a court.
Best efforts – NOT mandatory – general definition: a party generally has a duty to make reasonable efforts to render a performance in light of that party’s means and abilities to do so. And also inlight of the parties’ purpose and expectations under the contract.
Generally arises in:
1)lease agreements that base the rent on a percentage of sales (may have to operate unprofitably because of best efforts – if you have a substantial minimum rent then the court assumes that was to protect against changes in business – Dalton car wash case) – if you imply a duty of best efforts – you have to work even if you are going to lose money, up to the point where you incur substantial losses and perhaps drive the company into insolvency. Duty of best efforts to sell another company’s products – you must incur substantial (more than trivial) losses – but probably not bankruptcy.
2)contract for exclusive dealing arrangements
Best efforts – Courts are likely to find that someone has assumed a higher duty to perform than good faith –
With books – doesn’t imply a duty of exclusivity (like in marketing), but it does give you a duty to push the product fairly well.
Terminating contracts – 2 arrangements where requirements are implied:
Distribution and franchise K
Employment K
Traditional rule – when a K was silent on its duration and how it can be terminated, it was considered to be at will – any party could cancel at any time.
The opposite would be perpetual duration.
Franchise Distributorship Ks – traditionally courts would reject the argument that these were perpetual and imply at will. Modernly – courts imply a requirement of reasonable notice to end a K.
UCC – 2-309(3) – unless the parties specified otherwise, they can only be terminated on reasonable notice by a party.
Termination provisions are not default / not mandatory – parties can alter/contract out of them. However 2-309(3) builds in – the termination provision Can NOT be unconscionable (philosophy – prevent powerful parties from using their power unconscionably)
Genl rule for franchise/distributor – if a K is silent – courts imply reasonable notice – how much notice is reasonable? In Backalack (7 months) – questioned 1) how much time to make substitute arrangements, 2) time to recoup their investment.