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

South Texas College of Law Houston
Performance of the K
Determining the Scope and Content of Obligation: Interpretation Issues
Table on Contract Construction
(I) Table on Interpretation of the Parties agreement; PLUS (II) Implied-in-Law Terms
Table on Interpretation of the Parties Agreement
When presented with such questions of ambiguity, first apply the plain meaning test—see if the document in which the alleged ambiguity exists has any contradictions or contrary uses of the term in question.
If soà can use PE rule.
If not à then you cannot use evidence external to the K to create the ambiguity.
After this analysis, examine the alleged ambiguity through the lens of the context or the “extrinsic evidence” test—inquire whether a reasonable person w/ the knowledge and experience of the parties would think the alleged ambiguity was genuine or spurious.
If so à then the ct. would allow extrinsic evidence to clarify the term.
If not à then you exclude the proffered parol evidence.
Terms of the Agreement
Four Corners of the Agreement: Intrinsic Evidence
Basic View
Literal meaning of express terms.
Verbal maxims
§§ 202(2), (3); 203(c),(d); noscitur a sociis, ejusdem generis (generic terms will take the meaning of their context); expressio unius exclusio alterius.
Shared understandings
§ 201(1)—but only as revealed by 4 corners of the agreement or logical implications thereof.
Background context of the agreement
which may help to reveal latent ambiguities.
Example à K language stating that “the green house on the 100 block of Main St. is to be painted” may have a latent ambiguity if the background context reveals that there are 2 green houses on the 100 block of Main St.
Slight Liberalization
Narrow use of well-established policy maxims (§ 203(a); 206; 211)
Narrow use of purpose
§ 202(1): but only as gleaned from the document itself and only if literal interpretation appears to lead to bizarre results.
“Plain Meaning Rule”
If interpretation @ this point yields a plain meaning, TRAD cts. will not look any further.
Unless ambiguity can be shown from within the document itself (the four corners)—and without resort to external sources—then the parties cannot introduce evidence tending to show ambiguity
If interpretation @ this point is not plain (i.e., is ambiguous/absurd), or if in a MOD court, continue on with interpretationà look to extrinsic evidence.  
Broad Liberalization
Broad use of purpose
§ 201(1)—but only as gleaned from document itself.
Broad use of policy maxims
 §§ 204; 205; 207; 208
Use of special situation-specific policy maxims
e.g., rule that ambiguities in insurance Ks should be interpreted in favor of the insured.
Context of the Agreement: Extrinsic Evidence
parties may bring in evidence that is external or “extrinsic” to the k in order to show ambiguity in more cases than under the “plain meaning rule.”
Purpose: as gleaned from extrinsic evidence—§ 202(1).
Other Elements of Context
Shared understandings (§ 201(1)—as revealed by extrinsic evidence, including PE of parties' negotiations.
Reasonableness of Interpretation: given context of market prices, typical terms of K, etc.; § 203(a)—in light of extrinsic evidence.
Course of Performance
Performance arises within one K (after K formed).
Rest. 2d. §§ 202(4); 203(b).
Course of Dealing
W/ respect to earlier similar Ks between the parties.
Rest. 2d. § 203(b).
Usage of Trade
Rest. 2d § 203(b).
Must be well-established.
Other party knows, or has reason to know, of usage.
Implied-in-Law Terms
Even when a ct. can determine what the parties said or wrote, and what it means, that may not be the end of the analysis. Cts. have long woven into existing Ks terms that the parties did not discuss or dicker over. Falls into two broad categories— (1) terms implied by the ct. to achieve the parties' intent, and (2) terms implied to further some public policy.
Courts will thus provide missing terms when they are convinced that the partied intended to contract but overlooked or omitted an essential term that can be inferred from the circumstances à imply the terms whether or not the parties' actual statements & behavior suggest the parties intended term or not.
Often, IIL terms cannot be disclaimed.
UCC à refers to the “agreement” + IIL provisions as the “K”, and speaks about “construction” if the K.
When referring to IIL conditions, courts typically speak of “constructive conditions.”
Terms Implied to Achieve the Parties Intent
Obviously Omitted Terms (Wood v. Lucy, Lady Duff-Gordon)
in cases like Wood, cts. can see that the parties intended a binding K, and can specify with some precision the terms of the omitted provision.
Usage of Trade
w/ such repetitive and common Ks, certain terms become refined and “old hat.” When that happens, cts. may imply them into Ks of trade usage—that is, even though the parties may not have even thought about it, trade usage may insert terms into their Ks.
examples: parties entering into a K similar to Ks which lots of people have entered into—broker buying farm produce, a person buying a home, an employer hiring workers (see below pg. 5).
Terms Implied to Achieve Public Policy Goals
Implied covenant of GF & Fair Dealing
Many cases present conflicts between the express language of the K and the implied covenant of GF. In such cases, the express language will usually prevail.
UCC Supplied Terms
The UCC will actually supply “default” terms—gap filler provisions—various terms thought to be necessary to form a definite K.
For example:  Place of delivery (UCC 2-308: seller's residence or place of business) and time for performance (UCC 2-309: a reasonable time).
Price (UCC 2-305: a reasonable price, assuming the parties otherwise agreed to conclude their deal without agreeing to a piece, which would occur if the object of the sale had a well-established market price)
Warranties (express or implied) à see pg. 13.
UCC 2-312 implied warranty of title: promise that the seller owns the goods sold; UCC 2-314 implied warranty of merchantability: goods sold by the merchant will, among other things, be recognized in the trade as matching the K description, be at least of fair avg. quality, & will be fit for the ordinary purpose for which the goods are used.
NOTEà these defaults terms can be, and often are changed by the terms the parties use (this is usually indicated in the language that says something like “unless otherwise agreed”)
More important, implied warranties are often excluded by e

s to grammatical interpretation (e.g., ejusdem generis or expresso unis).
Rest. 2d §202: Rules in Aid of Interpretation
Words and other conduct are interpreted in light of all the circumstances, and if the principal purpose of the parties is ascertainable it is given great weight.
A writing is interpreted as a whole, and all writing that are part of the same transaction as interpreted together,
Unless a different intention is manifested,
Where language has a generally prevailing meaning, it is interpreted in accordance with that meaning;
Technical terms and words of art are given their technical meaning when used in a transaction within their technical field.
Where an agreement involves repeated occasion for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other, any course if performance accepted or acquiesced in without objection is given great weight in the interpretation of the agreement.
Wherever reasonable, the manifestations of intention of the parties to a promise or agreement are interpreted as consistent with each other.
If applicable use interpretive tools:
Noscitur a sociis: The meaning of a word in a series is affected by others in the same series. More generally, a word may be affected by its immediate context.
Ejusdem generis: A term joined with a specific one will be deemed to include only things that are like (of the same genus as) the specific one. This one if applied usually leads to a restrictive interpretation. E.g., S contracts to sell B his farm together with the “cattle, hogs, and other animals”. This would probably not include S’s favorite house dog, since that is a domestic pet, not a farm animal like cattle or hogs, but might include a few sheep that S was raising for the market.
Expressio unis est exclusio alterius: If one of more specific items are listed, without any more general or inclusive terms, other items although similar in kind are excluded. E.g. S contracts to sell B his farm together with “the cattle and hogs on the farm”. This language would be interpreted to exclude the sheep and S’s favorite house dog.
Purpose/Policy Maxims à MOD
Purposive: words must be interpreted in light of the purpose for which they were uttered.
Unlike statutes, where both traditional and modern courts use purposive interpretation, with regard to Ks usually only modern courts are purposive.
TRAD court will likely use purposive interpretation if literal interpretation is ambiguous or leads to an absurd result.
Policy Maxims: guides to interpretation based upon public policy considerations, e.g., construe K against drafter, construe narrowly if offends some public policy, as covenants not to compete offend policy favoring competition.