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Contracts II
South Texas College of Law Houston
Page, Phillip E.

Contracts II Class Notes

Phillip Page

Summer 2013

Contracts: Cases and Doctrines -5th Edition

contract interpretation and construction

A. Questions to ask when analyzing a contract

a. Is there a contract and what are the terms?

b. Is there a breach?

i. Look at what breach is and what contract schedule is.

c. If there is a contract, what does this mean in terms of damages?

d. Does anybody else have rights under this contract?

i. Who are third party beneficiaries?

ii. What are their rights?

B. Interpretation

a. Interpretation teases out the meaning the parties intended the contract to have.

b. The process of discerning the meaning reasonably intended by the parties.

C. Construction

a. Construction looks at the term and is fairly comfortable with what they mean, but add other terms because public policy dictates this kind of additional terms.

b. It is the process of determining the legal consequences of the parties’ agreement.

c. It is very similar to interpretation but both are separate.

intepretation

A. When interpreting a contract, context is just as important as verbiage.

B. Words and other conduct are interpreted in the light of all the circumstances.

a. An “agreement” is the bargain of the parties in fact, as found in their language or inferred from other circumstances

b. A “contract” is the total legal obligation that results from the parties’ agreements.

C. For agreements to be enforceable:

a. Both parties must manifest an intent to be bound

b. Terms must be sufficiently definite

c. Agreements must be supported by consideration.

D. Circumstantial Evidence

a. If there is no agreement in writing, courts will look at the circumstantial evidence to determine the intentions of both parties.

b. There must be clear and precise evidence- prior dealings, invoices, payments, etc….

E. Restatement 202 Rules in Aid of Interpretation

a. Words and other conduct are interpreted in the light of all the circumstances, and if the principal purpose of the parties is ascertainable it is given great weight.

b. A writing is interpreted as a whole, and all writings that are part of the same transaction are interpreted together.

c. Unless a different intention is manifested,

i. Where language has a generally prevailing meaning, it is interpreted in accordance with that meaning;

1. Basically, you can define a term any way you want it to but if you don’t define a term, the prevailing meaning will be used.

a. One tool that can be used to find the prevailing meaning is the dictionary.

ii. Technical terms and words of art are given their technical meaning when used in a transaction within their technical field.

d. Where an agreement involves repeated occasions for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance accepted or acquiesced in without objection is given great weight in the interpretation of the agreement.

i. Pattern of dealings pertaining to this transaction and contract.

ii. If you acquiesce to the performance, it may be the standard for the contract and be part of the agreement.

iii. It can be weighty in determining what contract requires.

e. Wherever reasonable, the 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.

i. It is best to interpret the contract harmoniously where every part of the contract is interpreted the same instead of different interpretations in every parts where it doesn’t make sense.

ii. Course of dealings: pattern that is established by repeated contracts, not just this specific contract.

F. Example: A is going to pay B $85/lb. for all the cotton that B picks in 5 days. There is a clause that says if the seed to cotton ration is more than 1:4, then A gets a 10% rebate.

a. Part A talks about cotton and the clause talks about cotton as though it doesn’t have seed.

b. There is a single word “cotton” that mean 2 different things.

G. Restatement 203 Standards of Preference in Interpretation

a. In the interpretation of a promise or agreement or a term thereof, the following standards of preference are generally applicable.

i. An interpretation which gives a reasonable, lawful, ad effective meaning to all the terms is preferred to an interpretation which leaves no part unreasonable, unlawful, or of no effect

1. Words that are actually used.

ii. Express terms are given greater weight than course of performance, course of dealings, and usage of trade, course of performance is given greater weight than course of dealings of usage of trade, and course of dealing is given greater weight than usage of trade.

1. Hierarchy of importance

a. Course of performance

b. Course of dealings

c. Usage of trade

iii. Specific terms and exact terms are given greater weight than general language

iv. Separately negotiated or added terms are given greater weight than standardized terms or other terms are not separately negotiable.

1. Custom terms that are provided for this occasion beats standardized terms.

H. UCC 1-303 Terms and definitions

a. Course of performance: sequence of conduct between the parties to a particular transaction that exists if

i. The agreement of the parties with respect to the transaction involves repeated occasions for performance by a party

ii. The other party, with knowledge of the nature of the performance and opportunity for object to it, accepts the performance or acquiesces in it without objection.

b. A course of dealing is a sequence of conduct concerning previous transactions between the parties to a particular transaction that is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct

c. A “usage of trade” is any practice or method of dealing having such 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. The existence and scope of such a usage must be proved as facts. If it is established that such a usage is embodied in a trade code or similar record, the interpretation of the record is a question of law.

d. A course of performance or course of dealing between the parties or usage of trade in the vocation or trade in which they are engaged or of which they are or should be aware is relevant in ascertaining the meaning of the parties’ agreement, may give particular meaning to specific terms of the agreement, and may supplement or qualify the terms of the agreement. A usage of trade applicable in the plac

b. It does not remove from the party a responsibility to read the policy but does recognize that a party should be held only to a reasonable knowledge of the literal terms and conditions.

c. Ex: Atwater v. Western

d. Sometimes, the underlying purpose can trump the wording of the contract even if it is not ambiguous.

e. Insurance is different than most contracts because

i. Unlike most contracts, it is required to enter into contracts.

ii. It is highly regulated and have been submitted to an insurance board to be approved.

iii. Insurance is highly contingent on some future unlikely event so you’re not aware of a devastating result until it is too late. We get in the expectation that we will never see a nickel.

iv. That is why exclusions in insurance contracts are read narrowly.

construction

A. Standard to reflect intentions of party or what is the public policy that ought to control the contract.

B. Unaddressed terms

a. When the contract is so uncertain the court cannot craft a remedy then it is unenforceable.

i. It is fairly unusual

C. Gap fillers: If the intention to be bound is clear and most of the material terms are ascertainable, a court may seek to fill out any gaps in the parties’ agreements.

a. Party may have ignored term, did not anticipate it, or haven’t gotten around to it yet.

b. It will only be used if there is truly a gap in the parties’ expression of intent.

c. It will not be used if parties have explicitly agreed to a different contract term.

d. To fill gaps, look at usage of trade, course of dealings, course of performance, industry practices….

D. Restatement 204- Supplying an omitted essential term

a. When the parties to a bargain sufficiently defined to be a contract have not agreed with respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court.

E. UCC 2-204

a. If one or more terms are left open, a contract for the sale of goods will not fail for indefiniteness “if the parties have intended to make a contract and there is reasonably certain basis for giving an appropriate remedy.”

F. UCC-2-311 Options and cooperation respecting performance

a. An agreement for sale which is otherwise sufficiently definite to be a contract is not made invalid by the fact that it leaves particulars of performance to be specified by one of the parties. Any such specification must be made in good faith and within limits set by commercial reasonableness.

b. Unless otherwise agreed specifications relating to assortment of the goods are at the buyer’s option and specifications or arrangements relating to shipment are at the seller’s options.