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Contracts II
South Texas College of Law Houston
Kelso, R. Randall






No extrinsic evidence is allowed if parties intended the contract to be a complete agreement.

A. Decision is made by Judge before trial

a. Traditional (TX) – looks to writing

b. Modern – hears PE to decide if it is admissible

B. Pacific Gas

a. Complete Integration: no PE

b. Partial Integration: final K not complete; only some terms; PE allowed

c. Collateral Agreement: different but related agreements; PE allowed

d. Separate Contract: two separate agreements; PE allowed

C. Parol Evidence Rule (If a. & b. are met, c. is almost always met as well)

a. General Rule

1. Evidence of a prior agreement may never be admitted to contradict any final writing (integration), and may not even supplement a final writing that was intended to constitute the complete agreement (total integration).

2. Note: the PE rule does not bar consideration of subsequent oral or written evidence.

b. Questions to Ask

1. Is the writing a complete integration?

1. Writing must be a collateral agreement, partial integration, or separate K (discuss which one it is).

a. Modern: Would the PE “naturally be included in the integrated writing”?

i. Yes – then the absence of it makes the writing incomplete

ii. No –

iii. Looks at the PE itself to make the determination

b. Traditional: Was the written K just a part of the whole K?

i. Yes – then PE is allowed

ii. No – then PE is not allowed

iii. Looks only at the written K to make the determination

2. Does PE Contradict Writing?

1. Must not contradict express or implied provisions of the written K; and

2. Cannot create an “absence of reasonable harmony”

3. Normally Included in the Writing?

1. Must be one that parties would not ordinarily be expected to embody in the writing.

a. If it would normally be included – can’t hear PE (Mitchhill v. Lath)

b. Restatement: would it “normally be included or not”

c. UCC 2-202: “certainly be included”

Exceptions to PE Rule


1) Condition Precedent to K being formed (Restatement § 217)

A. If either the contract itself or the performance of the contract is conditional, almost all courts allow proof of this condition, despite the PE rule.

2) Defense: fraud, mistake, misrepresentation, duress, lack of consideration (recitals not enough).

A. Even if the writing is a complete integration, a party may always introduce evidence of earlier oral agreements to show the above.

3) Unconscionability (Restatement § 211(3))

4) Ambiguous Terms (modern courts will use PE to resolve ambiguity) (e.200)

A. Evidence of prior or contemporaneous negotiations is admissible to properly define an ambiguous term, even one contained in a total integration.

i. The extrinsic evidence can not be offered to add or change the meaning of an unambiguous term.

Integration (2 Types)


1) Partial Integration

a. The document is not intended by the parties to include all details of their agreement.

b. PE Application

i. No evidence of prior or contemporaneous agreements or negotiations may be admitted if it would contradict a term of the writing.

2) Complete (Total) Integration

a. The document is intended by the parties to include all the details of their agreement.

b. PE Application

i. No evidence of prior or contemporaneous agreements or negotiations may be admitted which would either contradict or even add to the writing.


Merger / Integration Clause: merely evidence of a complete integration


1) General

a. A merger clause will conclusively establish that the document is a total integration;

b. Unless the document is obviously incomplete, or the merger clause was included as the result of fraud, mistake, or some other reason.

2) Still use PE to determine intent of parties; must prove clause was their actual intent.

3) Commercial K: clause is very good evidence of integration

4) Consumer K: not as good evidence of integration (Luther Williams)

5) Restatement § 211(3)


e.187 k.6


In interpreting a contract, there are four sources courts use. These are outside the PE Rule and are for interpretation by the judge.

Four Sources for Interpretation (in precedential order)

1) Terms of Agreement

2) Course of Performance

3) Course of Dealing

4) Usage of Trade

Terms of Agreement (TX is traditional)


Terms of Agreement Themselves – either written or oral

A. Intrinsic – sources within the writing or oral statement.

i. Literal Terms

1. Traditional (TX) – favors technical/ordinary meaning

2. Modern – looks at purpose

ii. Verbal Maxims (favored by traditional)

1. Basic guides to grammatical interpretation

a. Noscitur a Sociis – look at the surrounding words to determine context.

b. Ejusdem Generis – specific terms include only things like the specific one.

c. Expressio Unious est Exlusio Alterius – if one or more specific items are listed, without any more general or inclusive terms, other items although similar in kind are excluded.

iii. Policy Maxims (favored by modern)

1. Construe against drafter

2. Construe against party that knew or had reason to know of the ambiguity

3. Interpretation favoring the public

4. Reasonable Expectations Test

d. In insurance contracts – protect the individual who signed the policy

B. Extrinsic – sources outside the writing

i. PE Rule applies to let PE in

1. Events leading up to the agreement

2. Background context

3. Anything after K is permissible

Course of Performance

UCC 2-208/9

How the parties have actually been performing the current K

Any after K evidence in

Course of Dealing

UCC 1-205

Party’s behavior in previous, separate K’s

No PE problem about separate K’s

Usage of Trade

UCC 1-205

A. Standard Commercial Usage in the Industry

a. Typically applies to business K’s, not to consumers. No PE problem.

b. Two (2) Ways it Applies

i. There is a usage and parties had knowledge of that usage, or they had reason to know of the usage of trade.

ii. There is a long-established trade usage that justifies expectation that it will be observed.

Interpretation by Courts Today


A. Traditional: only look at K; if ambiguous, then look to other sources

B. Modern: look to all sources to see if K is ambiguous

C. Ultramodern: look to all sources regardless of ambiguity

Resolution: If there is still ambiguity after these four (4) steps, ask who has the burden of proof. (Normally the plaintiff)


e.206 k.12 Both can be Express or Implied


A. Promise (warranty) – if promise fails, there is a breach. Non-breaching party can recover.

B. Condition – if con

it would be unfair and un-equitable for one party to raise the failure of condition that would forfeit performance, so the court will excuse performance of the condition.

1. This is typical estoppel. If one party’s actions lead the other to justifiably rely on the appearance that the condition has been waived, then to avoid unjust enrichment, the court will deem the condition duly waived.



A. Impracticability – when a task can only be done at an excessive and unreasonable cost – impossible when not practicable.

a. Restatement § 225 – circumstances have changed that make it impracticable

b. Restatement § 261 – the occurrence of an unexpected event has made the party’s obligation impracticable.

c. Performance will not be found impracticable just because the expected profit margin is reduced by unforeseen obstacles.

B. Non-Occurrence (of the event which caused the performance to be impracticable) must have been a basic assumption.

a. Foreseeability is evidence of the basic assumption, but is not 100% determinative that the event was a basic assumption.

C. Force Majeure Clause – may buffer against Act-of-God, but not against normal risks of K (i.e., market fluctuation)

D. Types of Impracticability

a. Existing Impracticability – problem existed at the time parties entered K

i. Mutual Mistake (k.24) – to recover, the mistake must:

1. have been made by both parties

2. been a basic assumption of the K

3. have a material effect on the agreed exchange; and

4. not be a mistake whose risk is borne by the party seeking relief

ii. Unilateral Mistake (k.24) – to recover, the party must satisfy 2, 3, & 4 (above), and:

1. the injury must be unconscionable; or

2. other party knew or had reason to know of the mistake, or his fault caused the mistake.

iii. Determining Risk Allocation – ask whether:

1. K has an explicit or implicit risk allocation;

2. mistake concerns a fact which the party knew he had limited knowledge at the time of K; or

3. Risk Allocation by the Courts

a. Known risk

b. One party better able to procure insurance

c. One party a repeat player, better able to spread risk

d. Other things being equal, buyer beware (caveat emptor)

iv. Mineral Park Land v. Howard – existing latent defect; risk allocation would be different today

b. Supervening Impracticability – event occurred after K that made it impracticable

i. Destruction of Property – likely to prevail on impracticability defense (Taylor v. Caldwell)

ii. Death or Incapacity – likely to prevail on impracticability defense

iii. Middleman Law

iv. Government Regulations – likely to prevail on impracticability defense

1. When gov’t makes a thing illegal, there is likely an impracticability defense (Dalton)

v. Market Shift in Prices

vi. UCC 2-613 & 2-615