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Contracts II
South Texas College of Law Houston
Powers, Jean Fleming

Contracts 2 Outline – Powers, Spring 2012

· Statutes

o UCC Article 2 – Sales of Goods.

o DTPA – deceptive trade practices act. Goods and services.

Which law governs?

· If the item is movable, then UCC. (pencils, mobile homes, and custom manufacturing.)

· Real estate and services – use the Common Law

· Mixed goods and service (carpet & installation) UCC will govern – look at essence of the transaction. UCC applies to sales of goods period NOT just sales between merchants.

1) Parol means “oral.”

2) Parol Evidence Rule is designed to preserve the integrity of written documents against disputes arising from faulty claims and recollections

3) PER Definition – when two parties have made a written contract, and both parties consider the writing to be a complete and accurate integration of their agreement, then evidence of earlier understandings and negotiations will not be admitted if it changes or contradicts the writing.

a) This applies both to prior oral and written evidence.

Contract Time Line


Before Contract is created


Contract is Created




Oral OR written evidence = Parol Evidence

* Supplement

* Interpret

* Contradict


If yes, is it completely or just partially?

Must be written.

Must be final contract, not just negotiations.

Oral or written evidence = Modifications, NOT parol evidence

Course of performance

Course of dealing

Trade custom or usage

Can always be used, unless it conflicts with writing



Parol Evidence Rule does NOT Apply

· Integrated Agreement = the WRITING, not the contract. It is the final agreement, not preliminary negotiations. Fully Integrated = Completely Integrated. It tells you everything (R209)

· A final written agreement CANNOT be contradicted. All parol evidence that contradicts it will never be admitted.

· If the terms of a contract are ambiguous, then extrinsic evidence WILL be admitted to aid in their interpretation.

Restatement 213: Effect of Integrated Agreement on Prior Agreements (PER)

· An integrated agreement discharges prior agreements, to the extent that it is inconsistent with them.

· A completely integrated agreement discharges prior agreements to the extent that they are within its scope.

Restatement 214: Evidence of Prior of Contemporaneous Agreements & Negotiations

(a, b, c, and e) Evidence is admissible to show

that the Writing is not integrated, is partially integrated, or is completely integrated.

the Meaning of writing (interpretation)

ground for remedies: Rescission, reformation, specific performance, other.

(d) If there was fraud in the formation of your contract – it allows you to void your contract. Whenever there is question as to whether not there is a contract because of the following possible problems, then all prior evidence is admissible — the PER does not apply:

· Illegality, FRAUD, Duress, MISTAKE, Lack of consideration, Other invalidating caus

How Do you determine if it is an integration?

This is a JUDGE decision, not jury.

Three methods:

1) Face of the Document Test

a) Look at the “4 corners”

b) Look only at the writing itself, without considering the extrinsic evidence that a party is offering

c) Weakness: this approach assumes that the judge knows the intended content by only looking at at the writing. Therefore it almost never really answers the question.

2) Restatement (R209) Fully Integrated Test

a) Look at the document AND hear the extrinsic evidence, and the circumstances surrounding the creation of the document.

b) Answer the question: under the circumstances that existed, is it natural for the parties to have omitted these extrinsic terms from their final document, even if they intended them to be part of their agreement, OR did the parties intent the writing alone to be the terms of their deal?

c) The judge is not deciding whether the prior agreement was in fact made, he assumes this.

d) If the judge decides that any of the extrinsic evidence was intended to be included in the agreement, then the agreement is only partially integrated.

e) This is the most popular test – “Naturally”

3) UCC 2-202 Test

a) Same as the Restatement test, except for “naturally” is changed to “certainly.”

b) If the additional terms would certainly have been included in the document, then they will not be allowed into evidence.

c) The terms in a final writing can not be contradicted by a prior OR contemporaneous agreement, but they can be explained or supplemented:

i) By course of performance, course of dealing, or usage of trade

1. usually used for interpretation / explaining

2. Trade Usage

a. How has the term been used in this particular trade?

b. Both parties must be in the same trade.

3. Course of Dealing

a. Prior relations between these two parties.

4. Course of Performance

a. How have you performed this very contract? There must be at least 2 times.

b. If the contract says delivery by mid-month and you have accepted on the 19th every month and never complained, then it is some evidence that the contract may mean that delivery can be up the 19th of the month. Must be 2+ times with no objection.

ii) OR, if the writing is not completely integrated, by evidence of consistent additional terms.

1. usually used for supplementing information

Inconsistencies in Express Terms: You can’t change an express term, but you can explain it.

The hierarchy – from particular to general:

1. Express terms of the contract

2. Course of performance under this contract

3. Course of dealing – how have we been dealing with each other?

4. Usage of trade – even though it is last, it seems to show up most often

Restatement 217: Condition Precedent, Fraud and the Parol Evidence Rule

If parties agree orally that

· Performance of the contract is subject to a preceding condition,

· Then the contract is not integrated with respect to this condition.

This would be particularly applicable when the agreement is challenged on grounds of fraud.

Warranty Exclusions

If your contract includes a warranty, but the salesperson orally says that you have no warranty – PER keeps out the disclaimer – you have a warranty.

If your contract includes a warranty disclaimer, but the salesperson orally says that you do have a warranty – the PER will keep the oral statement out – you do not have a warranty. BUT – this does not cut off other avenues – for a fraud claim, misrepresentation, other consumer protection statutes.

Truant v. Nebraska Public Power District (1977)

· Plaintiffs sold an easement across their land to Defendant. Plaintiff alleges that as part of the negotiations, Defendant said that if any other land owners get more money than they did, then they would get the additional money. This promise was not put in writing.

· Issue: Is the alleged oral agreement barred by the parol evidence rule? YES

· The writing states a “total payment of $1000” which appears to exclude any additional future payment. The oral promise is a contradiction of the written document.

· No matter which test is used, the writing is complete in regards to the price to be paid. Therefore, since it is complete, it does not matter if it contradicts or not.

Mitchell v. Lath

The Laths sell real estate to Ms. Mitchell for $8,400 and verbally promised to remove the icehouse across the street from that land. The icehouse removal was not part of the contract. Ms. Mitchell is suing for specific performance for its removal. The defendant raises the PER. The court uses a three prong test:

1. Is the extrinsic agreement a stand-alone contract with its own consideration? No.

2. Does the oral agreement contradict something in the contract? If yes, then it is not admissible. In this case, the court can’t decide one way or the other.

3. Would you expect this term to be put it in writing? YES, the court says that it does not make sense for the parties to not to have included it in contract if it was that important/significant and therefore the court does not allow the icehouse evidence to be admitted.

Masterson v. Sine

The Mastersons sell the family ranch to the Sines (Mrs. Sine is P’s sister) with an option to re-purchase within 10 years, to keep the ranch in the family. Masterson goes bankrupt. Bankruptcy trustee wants to buy back the property, but can’t because the Sines say that the purchase option was personal to Mr. Masterson – but this was not part of the writing.

· Is the writing complete, integrated?

· FOUR CORNERS APPROACH: you can sometimes tell from the document itself that the document is not complete.

· If they had made this agreement would it have seemed natural to leave this term out, or would reasonable parties normally have put it in the writings?

· The document was a DEED. Deeds are always final agreements. They are formal, and do not always include all of the details of the sale. For example, many deeds to not include sale price.

· The new term is a “new limitation” which may or may not be decided to be contradictory, but it is not a head-on contradiction.

· Both the Mitchell and Masterson cases use the Traditional/Objective Approach (reasonable person).

· The Modern/Subjective Approach only looks at the intent of these particular parties, doesn’t care about what reasonable persons would have done.

Ralph’s Distributing v AMF (1981) – Trade Usage, Prior Dealings

Ralph’s has a franchise agreement with AMF to distribute Ski-Daddler snow mobiles. This agreement does not state that Ralph’s will be the sole distributor within the regi

uld it prevent the evidence of oral condition precedent? No – because if there is not a contract in place then a merger clause is not in effect.

Pym v Campbell

· Pym has an invention. Campbell wants to purchase shares of the invention if he gets approval from his 2 engineers. Engineer 1 approves it, but #2 is unavailable. They sign the contract with a Condition Precedent: must have approval of a second engineer before closing the deal. Engineer #2 then rejects the design. Pym sues for performance.

· The court allows the evidence of the condition precedent, because the parol evidence rule does not bar evidence of a condition precedent to the formation of the contract. Evidence of fraud or mistake is also admissible. A merger clause does not preclude the admission of such evidence.

· D has the duty to find engineer #2 and get his report.

· Another example – you sign a car sales contract with a condition precedent to you getting a loan. You have a duty to earnestly try to get the loan.

· What if you sign a sales agreement for a house that has a clause that says that you have a loan in place, then you go to court and say that there was an oral agreement that the sale was dependent on you getting a loan approved – would this oral evidence be admittable? No – because it conflicts with what the writing says.

Interpretation involves something that is in the contract and we don’t know what it means. It is unclear. In many cases interpretation will intersect with Parol Evidence

· I contract with someone to mow the lawn all summer. What does summer mean? You may be intentionally vague for flexibility, or you don’t want to make it be a deal breaker so agree to vague term and hope the issue never arises. There is also just the inadvertent ambiguity. So there a lot of interpretation in contracts and it does overlap with Parol Evidence.

o Patent Ambiguity – on its face it is obviously unclear

o Latent Ambiguity – the ones that you don’t know about until you start to hear the evidence, you must go outside to the contract to determine that there is an ambiguity

· If a contract is ambiguous, then parol evidence can be admitted to determine the meaning.

· Columbia Nitrogen Case – defendant used trade usage evidence to explain contract terms, but this violated the rule that you can’t contradict express terms in a contract.

Interpretation Rules/Guidelines

· Consider the circumstances

· What was the purpose of the parties when they created the contract – what were they trying to accomplish?

· The transaction must be viewed / interpret as a whole. Each part of the contract should be interpreted in light of the rest of the contract, not as a stand alone.

· Consider intent, course of performance, course of dealing, usage of trade

· Hierarchy or priority: express terms, course of performance, course of dealing, usage of trade

o Reasonable meanings are preferred over literal meanings.

o Specific terms over general

o Separately negotiated or added terms over standardized terms

· Interpretation favoring public policy

· Interpret against the draftsman

o Particularly when the draftsman is the person with contract experience. Example: insurance companies, and form contracts.

Restatement 20 – Misunderstanding

There is NO mutual agreement if the parties have different meanings for a part of the agreement, and

· Neither party knows (or has reason to know) the meaning that the other party has

· OR both parties know the other party’s meaning

BUT, if B knows (or has reason to know) A’s meaning, but A does not know (and had no reason to know) B’s meaning, then the agreement is done according to A’s meaning.

Restatement 201 – Whose meaning prevails?

· If both had same meaning – that’s the contract meaning

· If different meanings, then use A’s meaning if:

o A did not know of B’s meaning, but B knew of A’s meaning

o A had no reason to know B’s meaning, and B had reason to know A’s meaning

· If none of above, neither party is bound by the other’s meaning, even if this means no contract.