Contracts II Outline
The meaning of the Agreement: Principles of Interpretation and the Parol Evidence Rule
1) Principles of Interpretation: General Principles (3 approaches)
i) Rule: when there is a dispute over terms look at what the parties thought at the time the contract was written
ii) Policy: contract obligations should be based on the exercise of individual will.
iii) Result: no “meeting of the minds” = no contract
i) Rule: contract obligations are a function of what a reasonable person would have understood the words and conduct to mean.
ii) Policy: fairness and efficiency
iii) Result: a contract may be enforced w/ terms neither party wanted
c) Modern – Objectivism :
i) Rule: Res 201: Whose meaning Prevails:
(1) Where the parties have attached the same meaning to a promise or agreement or a term thereof, it is interpreted in accordance with that meaning.
(2) Where the parties have attached different meanings to a promise or agreement or a term thereof, it is interpreted in accordance with the meaning attached by one of them if at the time the agreement was made
(a) that party did not know of any different meaning attached by the other, and the other knew the meaning attached by the first; or
(b) that party has no reason to know of any different meaning attached by the other, and the other had reason to know the meaning attached by the first party
(3) Except as stated in this section, neither party is bound by the meaning attached by the other, even though the result may be a failure of mutual assent.
ii) Rational: (1) gives effect to the parties shared meaning; (2) one party is at fault b/c he knows or has reason to know the other party means something different while the other party is not @ fault b/c he d/n know or have reason to know what the first party means. (3)Where there is a misunderstanding and neither party is @ fault, there is no reason to prefer one party over the other, so there is no contract.
d) Maxims: (not golden law: used as tools to promote your view)
i) Nosciture a Sociis: the meaning of a word in a series is affected by others in the same series; or, a word may be affected by its immediate context.
ii) Ejusdem generis: a general term joined with a specific one will be deemed to include only things that are like the specific one.
iii) Expressio unius exclusion alterius: if one or more specific items are listed, w/o any more general or inclusive terms, other terms although similar in kind are excluded.
iv) Ut magis valeat quam perat: an interpretation that makes a contract valid is preferred to one that makes it invalid.
v) Omina Praesumuntur contra proferentem: if a written contract contains a word or phrase which is capable of two reasonable meanings, one of which favors one party and the other which favors the other, that interpretation will be preferred which is less favorable to the one by whom the contract was drafted.
vi) Interpre t the contract as a whole: A writing or writings that form part of the same transaction should be interpreted together as a whole, that is, every term should be interpreted as a part of the whole and not as if isolated from it.
vii) Purpose of the Parties: the principal apparent purpose of the parties is given great weight in determining the meaning to be given to manifestations of intention or to any part thereof.
viii)Specific provision is exception to a general one: If two provisions of a contract are inconsistent with each other and if one is “general” enough to include the specific situation to which the other is confined, the specific provision will be deemed to qualify the more general one, that is, to state an exception to it.
ix) Handwritten or typed provisions control printed provisions: Where a written contract contains both printed provisions and handwritten or typed provisions, and the two are inconsistent, the handwritten or typed provisions are preferred.
x) Public Interest preferred: If a public interest is affected by a contract, that interpretation or construction is preferred which favors the public interest.
e) Plain Meaning Rule: (dispute – how much extrinsic edv is allowed to show an ambiguity?)
i) First the court makes a preliminary determination of whether the language in dispute is ambiguous (has more than one meaning) or unclear. (no ambiguity = no extrinsic edv.)
(1) Patent Ambiguity – obvious from the face of the document that there is an ambiguity
(a) Ie- Prostituted appeal to Pope
(2) Latent Ambiguity – not apparent from the face of the document; emerges only in context of some extrinsic evidence.
(a) Ie – Perless ship example – 2 ships w/same name
2) Principles of Interpretation: Adhesion Contracts:
a) Adhesion Contracts: a standardized form, offered on a take or leave it basis. There is an unequal balance of power. (NOT all standard forms!!!)
b) Doctrine of Reasonable Expectations:
i) Res 211 (comment f)
(1) Although customers typically adhere to standardized agreements and are bound by them w/o even appearing to know the standard terms detail, they are NOT bound to unknown terms which are beyond the range of reasonable expectations. … Similarly, a party who adheres to the other party’s standard terms does not assent to a term if the other party has reason to believe that the adhering party w/n have accepted the agreement if he had known that the agreement contained that particular term. … Reason to believe may be inferred from the fact that the term is bizarre or oppressive, from the fact that it eviscerates the non-standard terms explicitly agreed to, or from the fact that it eliminates the dominate purpose of the transaction. The inference is reinforced if the adhering party never had an opportunity to read the term or if is illegible or otherwise hidden from view.
(1) The doctrine has a narrow range of viability
(2) It has NOT been adopted in TX…..it has been adopted in about 34 states and some of those states have backed away from it.
3) Parol Evidence Rule: (seek to enforce the intent of the parties.)
a) Use the parol evidence rule when there is a written agreement and one party seeks to show by evidence extrinsic (outside of) to the writing a point in the contract.
i) Complete Integration: the document is a full integration of the parties’ agreement.
(1) completely memorizes the agreement of the parties; final and complete
(2) any evidence extrinsic to the writings that adds to or contradicts the writing is inadmissible.
ii) Partial Integration: final expression of the parties agreement w/ regard to what is in the document but not the entire agreement of the parities.
(1) Extrinsic evidence admissible to add to but NOT to contradict the writing.
iii) [Res 209, 210, 215, 216(1)]
i) 1st Step: Figure out if the document is a complete or partial integration.
(1) Classical Approach :
(a) Four-corners: “The only criterion of the completeness of the written contract as a full expression of the agreement of the parties is the writing itself.” (Thompson p356).
(i) Factors: merger-clause, formality
i) Give affect to parties’ expectations
ii) Justice, fairness, sound public policy
c) Ex: Wood (p438): (common Law) Lady Duff Gordan case – d/n want to pay Mr. Wood (her agent) for the commission she brought in although the contract said he got ½ of the $. Court found an implied promise to use his ‘best efforts’ in order to uphold the contract – fairness, intention of the parties.
d) UCC: 2-309 Gap fillers
i) What we think the parties would have agreed to should we ask them.
ii) Economically efficient- less costly b/c parties have fewer terms to bargain out. Also they don’t have to bargain out terms that are not likely to occur.
(1) Ex: Leibel (p442): Leibel was a distributer of garage doors for the defendant. Defendant canceled the contract with no notice. UCC – implied obligation of reasonable notification – upheld for fairness and public policy (allows distributors to get rid of inventory or find a new supplier ect)
2) The Implied Obligation of Good Faith
a) General Idea: neither party should do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.
b) UCC 1-203: Obligation of Good Faith – Every act or duty within this act imposes an obligation of good faith in it performance or enforcement.
i) Minimum: 1-201(19) “Good Faith” means honesty in fact in the conduct or transaction.
ii) Modern: Revised 1-201 (20 “Good Faith,” except as otherwise provided in Art 5, means honesty in fact and the observance of reasonable commercial standards of fair dealing.
c) Restatement 205: Every contract imposes upon each party a duty of good faith and fair dealing in it performance and its enforcement.
d) There are pockets of resistance – TXSC – good faith not implied in Every contract.
e) Application of Good Faith- addresses 3 situations
i) When the contract does not provide a term necessary to fulfill the parties expectations
ii) When bad faith served as a pretext for the exercise of a contractual right to terminate
iii) When a contract expressly provides a party w/ digression regarding its performance
f) Parol Evidence rule: d/n affect ‘implied’ terms because they are considered to be part of the writing.
g) Ex: Seigenberg (p451): Plaintiff claims that the defendant filed to act in good faith when thee defendant fired him. The plaintiff sold his business to the decedents and was under the impression that he was going to be able to work until retirement. The court found that these claims were sufficient to overrule the summary judgment from the lower court.
h) Ex: Locke (p470): Sandra Locke and Client Eastwood broke up. Both worked for Warner Bros. Locke signed a contract with Warner for $ and for the possibility to have her movie ideas produced. Warner paid her the $ but refused to review the scripts. This was bad faith.