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

 I. PERFORMANCE
 
A.    Determining Scope and Content of Obligation
 
PAROL EVIDENCE (PE) – *Questions of fact for the court; appellate courts give deference to lower court findings
 
ROL:     If there is writing where you have a contract, you will look to the writing to determine what that contract means (terms, parties, price, etc.). The written contract takes precedence over previous oral and written negotiations.   
–          Unlike evidentiary rules, the parol evidence rule must be followed even if counsel fails to make proper objection at trial.
 
1.       THE PAROL EVIDENCE RULE:
 
                                Excluded if ANY are satisfied (TRAD/TX):
1.       The agreement is complete,
2.       The PE contradicts express or implied provisions of the written contract; “NO reasonable harmony”
3.       The parties would normally/naturally be expected to embody the PE in the writing. (Mitchell v. Lath) 
–          Exam tip: Discuss all three of these factors, although only one is needed to exclude.
 
                                Included if ALL are satisfied (MOD):
1.       The agreement is partial in form (the parole evidence is collateral),
                Determining Complete v. Partial Integration***Question of fact/jury
–          MOD: look to the writing and the PE to determine whether or not the agreement is complete. (Rest. 2d sec. 209(3); UCC 2-202)
–          TRAD/TX: look only to the writing, NOT the PE (tip: when writing, argue that the PE is collateral by slipping it into your brief [back door])
2.       The PE supplements express or implied provisions of the written contract; “reasonable harmony”
3.       The parties would NOT normally/naturally be expected to embody the PE in the writing. 
 
Does the PE contradict or supplement the writing (argue both sides) (#2 above)
a.       That it contradicts (inevitably different in some respects)
b.       That it complements (because new, not directly contradictory)
 
–          TRAD/TXàLook to the writing itself. Normally contradicts and will typically exclude and stick w/ the writing
–          Extreme MODàBasically if there is not a direct contradiction the ct will look to the PE to determine there is a collateral agreement along w/ the writing.
–          MASTERSONà“ Not directly contradictory” 
–          Moderate MODERNàInconsistency in the terms, in the absence of reasonable harmony may contradict
–          Dealing w/ business entities the cts will not go out of there way as much to find a reasonable harmony (as opposed to dealing w/ a weaker party)
–          ALASKA NORTHERNàContradiction: inconsistency found in PE limiting owners committee right of approval
                          
Merger/Integration Clause – states that the writing is a complete integration of the contract terms. An attempt to prevent PE. Courts today use the merger clause as evidence of complete integration (not conclusive evidence). 
–          TRAD– really good evidence of complete integration
–          MOD– could possibly just be boiler plate language (because topic is not in the writing it is easier to get in)
 
                Exceptions to PE: – Do not have to worry about PE rule because it automatically comes in:
 
2.       CONTRACT INTERPRETATION
(objective) – in hierarchical order, Plaintiff has the burden of proof
 
patent ambiguity – on its face
latent ambiguity – as applied
 
1.       Ambiguity – PE used to clarify ambiguity in the contract terms (previous negotiations discussed the meaning of terms, but was left out of the writing).
–          Can be “term ambiguity” or “syntactical ambiguity”
–          TRAD/TX: look to the writing to determine ambiguity. If the writing is clear, then they do not even consider PE.
–          MOD/MAJ: look to the writing and the PE to determine if there is an ambiguity.
–          Note: Frigaliment(chicken case)– Modern courts more concerned with fairness. May look at price (i.e., 33 cents p/lb) to see if interpretation alternative makes sense.
 
Interpreting Terms of Agreement:
a)       Literal Terms– plain meaning rule. Formalistic approach.
b)       Verbal Maxims § 202(2,3) – read in light of its industry/circumstances. Ex: rules of grammar (i.e., construe technical words technically)
1.       Noscitur a sociisà 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)
2.       Ejusdem genericà a term joined w/ a specific one will deemed to include only things which are alike (of the same genus as the specific one)
Ex: S contracts w/ to sell B his farm together w/ the cattle, hogs and other animals (house dog will not be included but a sheep might)
3.       Expressio unius est exclusion alteriusà If one or more specific items are listed, w/o any more general or inclusive terms, other items although similar in kind are excluded
Ex: S contracts to sell B his farm altogether w/ the cattle and hogs (exclude sheep and dog)
4.       Technical words are given technical meanings
c)       Policy Maxims –
                                                                                                               i.      Ambiguity is construed against the drafter (§ 206)
                                                                                                              ii.      Or the party who caused the ambiguity (§ 201)
                                                                                                            iii.      Interpretation favoring the Public (a meaning that serves the public is generally preferred/construe narrowly if it offends PP) à ex: CNTC; ambiguities in insurance ks are construed in favor of insured (§207)
                                                                                                            iv.      Reasonable expectations test (§ 211(3)), interpret agreements in light of the party’s reasonable expectations. The court will not let a buried term in the contract frustrate the party’s expectations. (This is typically used between a institution and a consumer… If one party can not be expected to know technical meaning, use generally prevailing meaning)
d)       Purpose § 202(1) – party intentions. Look at the context the PE was given in. (See In re Soper’s Estate – clear that decedent’s purpose in using “wife” was to refer to bigamous spouse with whom decedent was living before death).
 
                TRAD/TX courts focus on literal meaning and verbal maxims. Some                   are willing to look at policy maxims.
MOD/MAJ courts are willing to look at purposive meaning, all maxims and context.
 
2.       Course of Performance – The PE rule does not apply to subsequent writings or oral communications (Exam tip).
 
3.       Course of Dealing – prior or past dealing that shows a history of collateral agreements; suggests what the contract at hand is about (party intentions). PE does not apply.
 
4.       Usage of Trade – helps explain how certain words are used in an industry. PE does not apply.
                                                                                       i.      Well-Established – everyone has a reason to know it. Anyone would be presumed to know.
                                                                                     ii.      Knew or had reason to know – this particular party had reason to know.
 
3.       ADDITIONAL TESTS
 
Restatement Approach to Interpretation: Objective
Cts are more willing to strive to reach an interpretation once performance under a k has begun (prior to that it is easier to assume it means a lack of mutual assent and conclude that no k has been formed) The Rest s

ent. These doctrines require “good faith actions.” This is a “nice guy” approach and is more favorable to the moving party. However, theses cases are tried before an experienced judge who is less likely to be influenced by any distressed pleas.
 
1.       GOOD/BAD FAITH ANALYSIS: Prevention, Hindrance and Duty of Cooperation
 
1.       Direct prevention and/or hindrance – must be clear and direct(Patterson, Iron Trade) (objective only) TRAD/TX
2.       Duty to cooperate-courts accept a general notion of “cooperation” and are more likely to infer “bad faith” if one party failed to cooperate. “duty to cooperate” (both objective and subjective) MOD/MAJ
 
A)      Standards of Review:
a)       Objective: observance of reasonable commercial standards
b)       Subjective: Honesty in fact / No bad motives
c)       Merchant standard (UCC 2-103): must do both the objective and subjective analysis of good faith. Objective approach normally prevails. Subjective may apply if one has turned the products down no matter what the objective analysis said. (Good faith applies to performance and enforcement, not negotiations)
d)       Non-Merchants – only subjective analysis
 
H: The Case of the Opportunistic Tenant: A landlord leased a premises to a tenant in the form of a “percentage-leasing contract” to a tenant for the use property and the gas station on that property. The landlord was paid a rental rate of 5cents per gallon. The tenant acquired the property next to the old gas station, and opened a new gas station. This caused the old gas station to lose money and therefore, the landlord also lost money (since he was paid by percentage).
 
There is no direct prevention or hindrance. A traditional court would say that there have been no direct “bad faith” actions.
 
However, a modern court would say that you are not cooperating to ensure the success of the old gas station. Therefore, you are undermining the “percentage-leasing contract” between you and the landlord.
 
B)      Satisfaction Clauses
(Omni Group case) – objective or subjective standard?
1.       Commercial value/utility – if there are objective measures that can be used to determine whether or not the good is up to par, then a pure objective analysis is done. (OBJ)
2.       Fancy, Taste, Judgment – there are no clear objective standards. There are either a multiplicity of standards or personal satisfaction standard. This type of clause will be viewed subjectively. (SUB)
3.       Third Party Makes Satisfaction Decision – test for 3rd party is always the good or bad faith standard. Since the party is presumed neutral, no need to apply reasonableness standard.
 
C)      Output/Requirement Contracts (UCC 2-306)
“A term which measures the quantity [of] output…means such actual output or requirements that may occur in good faith, except that no quantity unreasonably disproportionate [to an estimate or commercial norm] may be demanded.”
1.       Output – the good faith of the seller is the focus of the analysis
2.       Requirement – the good faith of the buyer is the focus of the analysis