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

Question of FACT for the COURT (deference is given to the lower court)
·         Tells what other things you can look at to interpret when you have a written K; decides what evidence can go to the jury
·         Applies to anything that was done before the signed writing
o   Oral testimony
o   Earlier writings
o   Earlier conduct that someone wants to testify about
·         The parol evidence rule does NOT apply to anything after the writing
·         This is a substantive rule (not procedural), so whichever states’ law governs the K will also govern the parol evidence
·         TRAD/TX courts favor the parol evidence rule – think people ought to put things in writing
·         MOD courts are more flexible & understanding – parties may not put collateral terms in if they’re using a standard form document
Must show all 3 of these things to admit parol evidence:
1.       Complete integration (merger clause) OR
1.       Partial or collateral agreements (legal consequences are the same) AND
2.    Parol contradicts writing OR
2.       Parol does not contradict the writing (must only supplement or compliment it) AND
       3.    Parol would normally be in writing
3.    Parol would not normally be in the writing
        I.            Is the written K completely integrated?
a.      MOD courts let you look at parol evidence (not just the face of the writing) to decide if the writing is a complete integration
b.      TRAD courts say look only to the writing to see if it’s a complete integration
c.       Merger Clauses
                                                              i.      States that the writing if a complete integration of K terms (an attempt to prevent PE)
                                                            ii.      NOT conclusive of complete integration (just presumptive evidence)
1.      It IS powerful evidence though – especially in business contexts (b/c the parties are supposed to read the K and understand its meaning)
                                                          iii.      Parties may look for ways around the merger clause, particularly in consumer transactions (under the argument of unconscionability)
                                                           iv.      TRAD courts say the clause = really good evidence of complete integration
                                                             v.      MOD courts say it could possibly just be boiler plate language
      II.            Does the PE contradict or supplement the writing?
a.      The parol evidence will always somewhat change the meaning of the writing (otherwise it wouldn’t be in litigation) so you must ask if the change actually contradicts or merely supplements the writing
b.      MOD courts use the Hunt standard: term must contradict or negate a term of the writing
c.       TRAD courts use the Snyder standard: contradiction is determined by looking to see whether there’s “reasonable harmony” in general b/t the writing and the parol evidence (Restatement §215)
    III.            Is the PE something that would normally be included in the writing?
a.      One tip: look to see if the clause is already personalized in other ways
   IV.            Exceptions to applying the parol evidence rule
a.      If the parol evidence represents a totally separate / collateral contract
                                                              i.      Reasoning: the parol evidence is supposed to be interpreting the original contract
b.      (K is voidable) Parol evidence shows the contract was produced by fraud, duress, mistake, illegality
                                                              i.      TRAD/TX: only fraud in the inducement of the K is sufficient
1.      Merger clause stating parties are not relying on prior representations would prevent PE
                                                            ii.      MOD: fraud concerned w/misrepresenting promises in the K itself is sufficient
c.       (K is void from beginning) Parol evidence shows there was a lack of consideration or no offer/acceptance
                                                              i.      Some courts include illegality here
d.      The writing is ambiguous
                                                              i.      The parol evidence is to help interpret what the writing means
     V.            UCC 2-202
a.      More MOD approach: different from the Restatement’s parol evidence rule in that the third element asks whether the parol evidence would “certainly” be in the writing (versus “normally/naturally”) à higher standard to meet
   VI.            Warranties, Disclaimers, and Parol Evidence        
a.      The parol evidence rule analysis applies equally to warranty clauses
b.      Common cases: oral statements made by a salesperson implying warranty of fitness, etc. but the actual signed K disclaims those warranties
                                                              i.      Parol evidence still applies – if the writing is clear/specific, previous oral statements will be excluded
                                                            ii.      Question as to whether the limited warranty was pointed out to the consumer & whether he understood (unfair surprise argument)
                                                          iii.      Ways to avoid this:
1.      Type in caps to meet the requirement that it must be conspicuous
2.      Consumers are usually made to initial the disclaimer as well
·         PLAINTIFF has the burden of proof
·         PE can be used to clarify ambiguity in the K terms
o   TRAD/TX: look to the “4 corners” of the writing to determine ambiguity. If the writing is clear, then it’s not necessary to consider the PE (court is more likely to say there’s no ambiguity under this approach)
o   MOD/MAJ: look to the writing AND the PE to determine if there’s an ambiguity
·         Ambiguity is a question of FACT for the COURT to determine
·         Note that restrictive covenants in leases are interpreted narrowly in order to promote competition
·         Insurance Ks: there is a strong policy maxim that ambiguities are resolved in light of the reasonable meaning in the insured’s mind (TRAD and MOD courts)
·         Even if the language of the K looks clear, a MOD court will still look at everything to determine its meaning. Some TRAD courts will say that, if the intrinsic evidence alone presents a clear meaning, then you cannot look to other sources of evidence.
TRAD/TX: party must show the K is ambiguous on its face (patent ambiguity) or as applied (latent ambiguity) before PE can be used to aid interpretation.
MOD: parties can always introduce PE to aid interpretation
In hierarchical order, consider:
·         Note: most of the time, MOD courts will end up looking at all kinds of evidence and just give more weight to those at the top of the hierarchy
        I.            Contract Itself
a.      Intrinsic:
                                                              i.      Literal: TRAD/TX courts focus on literal meaning and verbal maxims – some are willing to look at policy maxims; MOD /MAJ courts will look at everything
1.      Verbal maxims: read in light of the industry/circumstances
a.      Noscitur a sociis à a word may be affected by its immediate context (meaning of a word in a series may be affected by others in the same series)
b.      Ejusdem generic à a term joined w/a specific one will be deemed to include only things which are alike (of the same genus as the specific one)
                                                                                                                                      i.      Ex: S Ks with B to sell his farm w/the cattle, hogs, and other animals (house dog would not be included but sheep might)
c.       Expressio unius est exclusion alterius à if one or more specific items are listed, w/out any more general or inclusive terms, other items although similar in kind are excluded
                                                                                                                                      i.      Ex: S Ks to sell B his farm w/the cattle and hogs (exclude sheep and dog)
d.      Technical words are given technical meanings
2.      Policy maxims
a.      § 206: ambiguity is construed against the drafter
b.      § 201: or the party who caused the ambiguity
c.       § 207: a meaning that serves the public is generally preferred;

a.      Even TRAD cts. will acknowledge a duty not to hinder the other party’s performance & a duty to cooperate (even though they don’t recognize an implied duty of good faith)
b.      Making K performance more difficult by engaging in behavior for your own economic reasons is NOT hindrance; you must actively, not indirectly, hinder it
c.       Percentage leases & exclusivity Ks: TRAD and MOD courts will imply a “best efforts” standard
                                                              i.      This is b/c one party is put at the mercy of the other
                                                            ii.      This is a higher standard than good faith
   IV.            Satisfaction Clauses
a.      Even TRAD cts. will imply an obligation of good faith in exercising satisfaction clauses
b.      Must ask what kind of satisfaction clause is in the K to determine whether or not it was in good faith:
                                                              i.      Subjective vs. objective
1.      Subjective good faith: fancy, taste or judgment – are you really dissatisfied or just making it up to back out of the deal?
2.      Objective “reasonable person” test: operative fitness, mechanical quality, merchantability of goods
c.       Lender liability cases:
                                                              i.      “Species of satisfaction clauses” à may not be a literal clause saying they will continue financing, but even TRAD cts. will say there’s an implied good faith promise that the bank will not pull the rug out from under the person it financed
                                                            ii.      Involves a multiplicity of factors à will be tested under the subjective good faith standard
                                                          iii.      Banks will likely win these cases
     V.            UCC 2-306 Output/Requirement Ks
a.      Amount that occurs in the good faith operation of the business
b.      No unreasonably disproportionate amount can be requested (MAJ/TX cts. read this to mean larger)
                                                              i.      i.e., if your business is going better than anticipated, you can’t require “a whole lot more” than was originally agreed upon
                                                            ii.      Reductions are evaluated by determining whether there was a good faith business reason to do so
1.      Making  less money than anticipated or even losing a little is NOT a good faith reason to reduce output (think of breadcrumb case)
2.      Losses must be more than merely trivial (? of FACT) or imperil the business (i.e., bankruptcy)
                                                          iii.      Increases must be both in good faith and not unreasonably disproportionate
   VI.            Exclusivity Ks – UCC 2-306 “best efforts” are implied and imposed
a.      Higher standard than good faith – there is more of a requirement to look out for the other party and promote the overall success of the endeavor
b.      This obligation is also implied with percentage leases
                                                              i.      However, leases that have a fixed minimum in addition to the percentage of business is a closer call b/c the party is not entirely dependent
1.      TRAD cts. will probably not imply best efforts
2.      MOD cts. will probably imply best efforts anyway