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

Contracts II Outline

Professor Powers

Spring 2013

1) ­­Interpretation & Construction

a) Interpretation

i) “What is the meaning in respect to the parties’ intentions?”

ii) Deals with the meeting of the minds. Trying to figure out what terms meant according to the understanding and intentions of parties

iii) Examples of why interpretation is sometimes necessary:

(1) Lack of precision when drafting

(2) Lack of care when drafting

(3) Different understandings between parties

(4) Sometimes vagueness is intended for flexibility or indecision

iv) Examples for needing interpretation

(1) What does “Summer mean?”

(2) “Middle of the month”

v) Guides for interpretation

(1) Consider circumstances/parties’ purpose

(2) Interpret writing as a whole

(3) Use general and technical language based on circumstances

(4) Consider manifestations of intent

(5) Remember that expression of one necessarily excludes others

(6) Gen. language followed by specific limits to things similar to class

a. “Including, but not limited to cows, pigs, chickens…”

vi) Interpretation Standards

(1) Prefer the reasonable, lawful effective meaning of terms

(2) Order of preference for terms:

a. Express terms

b. Course of performance

i. History of accepted performance for this K

ii. Once instance does not show “course” of performance

c. Course of dealing

i. History of accepted performance for previous Ks

d. Usage of trade

i. Can use if:

1. Both parties member of trade; OR

2. Usage universal in popular culture so can assume parties knew; OR

3. Parties had actual knowledge

(3) Prefer specific over general terms

(4) Prefer negotiated or added terms over standardized terms

(5) Interpret favoring public policy

(6) Interpret against draftsmen

a. Don’t overuse. Only for close cases. Policy b/c they had their chance. Also greater power.

vii) Restatement 201 – whose meaning to use?

(1) If both parties had same meaning – that’s the K’s meaning

(2) If different meaning, then A’s meaning used if:

a. A didn’t know of B’s meaning, but B knew of A’s

b. A had no reason to know B’s meaning, but B had reason to know A’s meaning

(3) If neither of above then no meaning and no contract – no meeting of the minds

viii) Ambiguities

(1) Patent ambiguity

a. Apparent of the face of the document

i. “A making pmt on behalf of B. Notice sent to his address”

b. This is the ambiguity looked for w/ plain meaning approach

(2) Latent ambiguity

a. Not apparent until you look at extrinsic evidence

b. This is only apparent w/ liberal approach

ix) Interpretation approaches:

(1) Plain Meaning Approach

a. Steps:

i. Is the contract ambiguous on its face? Use interpretation guides & standards

1. No à No extrinsic evidence admitted

2. Yes à Admit extrinsic evidence.

(a) Court must still rule on meaning

b. A.K.A. “Four corners” approach

(2) Liberal/Contextual Approach

a. Steps:

i. Admit all evidence provisionally

1. Decide if language in K is reasonably susceptible to the suggested interpretation

(a) No à Do not admit evidence

(b) Yes à Admit evidence

ii. Interpret K in light of evidence

(3) “Modified Plain Meaning” Approach

a. Instead of admitting all evidence, just listen to the proffered evidence and decide

x) The UCC allows trade usage unless the contract “carefully negates” it.

xi) Don’t forget to consider things like unconscionability/surprise terms

xii) Don’t forget to consider “reasonable expectations” of parties

2) Parol Evidence Rule

a) Generally

i) Rule of substance, not rule of evidence

ii) Parol Evidence Rule always excludes:

(1) Contradictory terms (whether K final or not)

(2) Supplemental terms when K is final

a. If K not final – terms can supplement

iii) Application

(1) Only applies to written contracts

(2) Only applies to written contracts

a. “Final.” Integrated means final

(3) Applies only to prior (or contemporaneous) agreements

(4) Applies to complete agreements

iv) Rule of Substantive law

b) Common law Test:

i) Is contract in writing?

(1) Yesà Continue

(2) No à Stop. Inapplicable

ii) Is contract final?

(1) Yesà Continue

(2) No à Stop. Inapplicable

iii) Is offered evidence of prior agreement?

(1) Yesà Continue

(2) No à Stop. Inapplicable

iv) Does evidence contradict writing?

(1) First consider:

a. Objective or subjective based on philosophies of court

b. Interpretation step…what does contradict mean?

(2) Yes à Evidence is barred

(3) No à Continue

v) Is the writing c

ng of writing

x) Ground for remedy

(1) i.e. rescission, reformation, specific performance, etc.

f) Oral agreements with respect to conditions in a contract:

i) Restatement 217:

(1) “Where the parties to a written agreement agree orally that performance of the agreement is subject to the occurrence of a stated condition, the agreement is not integrated with respect to the oral condition.”

a. Comment a.: “Relation to other rules… [I]f performance of the written agreement is subject to an oral requirement of a condition not within the control of either party, there may be a binding contract creating immediate conditional rights. In such a case the precise legal consequences may turn on inquiry into what the parties in fact agreed to. The writing, if so intended, may be a partially integrated agreement and may automatically become a completely integrated agreement on the occurrence of the oral requirement of the condition.”

b. Illustrations:

i. A and B agree that A will sell a patent to B for $10,000 if C, an engineer advising B, approves. A and B sign a written agreement covering all of the agreement except C’s approval, and agree orally that it will take effect only if C approves. There is an immediate contract, but B’s duty is conditional on C’s approval.

ii. A and B sign a written agreement for an exchange of real property and leave it with C, an attorney, on the oral understanding that it is not to take effect until each has consulted his wife and notified C that he still wishes to close the exchange. There is no contract until each has notified C.

c. Comment b.: “. . . If the parties orally agreed that performance of the written agreement was subject to a condition, either the writing is not an integrated agreement of the agreement is only partially integrated until the condition occurs. Even a ‘merger’ clause in the writing, explicitly negating oral terms, does not control the question whether there is an integrated agreement or the scope of the writing.