CONTRACTS II – PROFESSOR CAMERO
SPRING 2013
OVERVIEW OF CONCEPTS
· KEY SEMESTER LEARNING OBJECTIVES / SEGMENTS:
o (1) What are the terms of the contract; and what do those terms mean?
§ Parole evidence, ambiguity; implied terms – implied warranty, good faith; etc.
o (2) What are the ways we can get out of the contract if there’s no breach?
§ Unconscionability, duress, minor, legal incapacitation, fraudulent misrepresentation, etc.
o (3) What is the breach; does non-breaching party need to perform; and what are the damages?
§ Anticipatory repudiation, total breach = total discharge; partial breach = not discharged, but temporarily hold performance until prove total breach or defect cured;
(1) TERMS OF THE CONTRACT & THEIR MEANING
PRINCIPLES OF CONTRACT FORMATION
· Contract interpretation: key is to determine the intent of the parties at the time the contract was made
· Three approaches:
o Subjective approach: focuses on the thoughts of the parties; if parties attribute materially different meanings to contractual language, no contract formed—i.e., no mutual assent exists
§ Policy: needed to be “meeting of the minds” present to form a contract
o Objective approach: words / conduct should be interpreted with standard of a reasonable person familiar with circumstances rather than in accordance with the subjective intention of either parties
§ Negative: Court could give meaning not attributable to either party’s intention
o Modified objective approach (RS 201): (modern courts) so long as it’s a reasonable interpretation and the parties are in agreement on the meaning of a term, the courts are going to go with it
§ RS 201-1: where both parties have same meaning attached to a term, it is interpreted according to that meaning; the mutual understanding of words in contract between both parties controls even if it’s different from interpretation that would be given to contract by reasonable person
· Policy: ensures contract weren’t given meaning both parties didn’t intend
§ RS 201-2: where parties have different meaning attached to a term, it is interpreted according to the party who (a) did not know of any different meaning attached by the other, and the other knew the meaning attached by the party, OR (b) according to the party who had no reason to know of any different meaning attached by the other party and the other had reason to know the meaning attached by the first party.
· i.e., the innocent party’s meaning prevails (party that has no reason to know)
§ RS 201-3: if not under subsection 1 or 2, neither party is bound to the meaning of the other party, even if it would result in a failure of mutual assent
· i.e., there’s no agreement
· Failure by parties to agree on a material term (RS 204):
o When parties to a bargain sufficiently defined to be a contract have not agreed with respect to a term essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court
§ Generally, if there’s enough to show intent to be legally bound, but meaning of a term is differently interpreted by parties, the court will invoke reasonable test to supply term
· Ambiguity means that contract terms are susceptible to more than one meaning
o Four major steps used by court to analyze interpretation of ambiguous non-essential terms:
*** Decide whether term is ambiguous—if not, use plain meaning rule (i.e., give words plain and ordinary meaning), and if yes, courts will come up with reasonable interpretation ***
§ (1) Look within the “four corners of the contract”
· i.e., words of the contract; text itself
§ (2) Look to the trade usage
· i.e., what the industry says via expert witnesses testimony
§ (3) Look to the definition in statutes or regulations
· i.e., federal agency’s interpretation; legal standards
§ (4) Look to the conduct of the parties
· i.e., preliminary negotiations; course of performance
PAROL EVIDENCE RULE
· In general, the Parol Evidence Rule only applies to written agreements that are “integrated”—either partially or wholly; only works to exclude certain evidence from being admitted that occurred at or before time that contract was made;
o It has the effect of preventing one party from admitting evidence into court if it pertains to matters not contained in the written agreement between the parties
· Parol Evidence Rule (RS 210) answers 2 questions:
o (1) what evidence can party admit in court when parties have written agreement; and
o (2) when can parties admit other evidence outside of written contract to help interpret written agreement
§ i.e., partial = admit evidence outside; complete = can’t admit evidence outside
o Definition: a substantive rule of contract law (not a rule of evidence); it is a rule of exclusion—keeps stuff out contradicting statements (oral statements regarding parties agreements and written documents prior to the final agreement)
· Basic analysis for Parol Evidence Rule:
o (1) Is the agreement in writing?
§ If it is not in writing, the parol evidence rule doesn’t apply; but
o (2) If it is in writing, is the agreement wholly integrated – i.e., parties intended the agreement to be complete and final?
§ If it is wholly integrated, parol evidence may NOT be admitted to prove terms are omitted from the written agreement;
o (3) If it is not wholly integrated, parol evidence may be admitted to prove terms omitted from the written agreement
o Whole integration (RS 210-1): terms in written agreement are complete and final; the parties intended this written agreement to be the final agreed-upon version
§ Whole integration = parol evidence may not be admitted
§ Usually a merger clause signifies the contract is wholly integrated
o Partial integration (RS 210-2): most of the terms in written agreement are meant to be final, but the written agreement is not meant to be the final agreement; so parol evidence permitted so long as it’s not contradictory to what’s already in the written agreement; parol evidence permitted to help explain the agreement so long as it’s consistent with terms in written agreement
· Restricted (Classical) view: courts only look to the text of the written agreement (“four corners” test) to determine whether it’s wholly integrated; if text is ambiguous, extrinsic evidence admitted
o “Four Corners” Test: to help determine completeness of written agreement, look at (1) length / complexity; (2) details / material terms; and (3) merger clause
· Modern (Corbin) view: “four corners” are helpful, but also allow all other evidence (i.e., any other evidence including prior oral agreement) to help determine intent / integration of written agreement so long as evidence is consistent with terms of written agreement; courts exclude evidence that is contradictory or unreasonable
o RS 214: agreements and negotiations prior to or contemporaneous with the adoption of a writing are admissible in evidence to establish (a) that the writing is or is not an integrated agreement; and (b) that the integrated agreement, if any, is wholly or partially integrated
· Parol Evidence Rule (RS 213): when parties have written agreement, parol evidence (i.e., new terms, conflicting conversations, etc
st prove reliance on that representation—must be “basis of the bargain”
· Three court approaches to determine if reliance existed:
o (a) reliance = claimed warranty reflects reasonable expectations of buyer
o (b) reliance = plaintiff must prove reliance as element in cause of action
o (c) reliance = rebuttable presumption that seller’s statements are part of “basis of the bargain”—must be overcome by buyer
o Exclusion of express warranty / disclaimer: (ways for seller to get out of express warranty)
§ Seller keeps quiet—i.e., doesn’t make promises or affirmations of fact
o Caceci v. Di Canio Construction Corp. (1988)
§ Majority: implied warranty exists in the written contract between the builder-vendor and purchasers that the house to be constructed would be done in a skillful manner free from material defects
· “Implied Warranty of Merchantability” (UCC 2-314)—merchant impliedly warrants to buyer that goods are good quality and fit for ordinary purposes for which they are used
o *** If seller is a merchant, the warranty is implied by law ***
o Elements:
§ (1) seller must be merchant
§ (2) goods will pass “without objection in that trade” and
§ (3) goods are “fit for the ordinary purposes for which such goods are used”
§ (4) goods are adequately packaged in accordance to agreement
o Exclusion of implied warranty: (ways for seller to get out of implied warranty of merchantability)
§ (1) seller uses the right language
· i.e., “I am disclaiming the implied warranty of merchantability” or goods sold “as is” / “with all faults”
§ (2) language is not “conspicuous”
· i.e., language pops out to ordinary person (bold, italics, caps, underlined, etc.)
· “Implied Warranty of Fitness for a Particular Purpose” (UCC 2-315)—warranty created when buyer relies on seller’s knowledge / skill of select suitable goods; buyer only need to show breach by demonstrating goods aren’t fit for particular purpose (i.e., not that goods were damaged)
o Elements:
§ (1) buyer has particular or ordinary use / need in mind for the good
§ (2) seller must know, or have reason to know, of particular or ordinary use
§ (3) buyer must rely on seller’s expertise / knowledge
o Exclusion of implied warranty:
§ (1) seller uses the right language
· i.e., “I am disclaiming the implied warranty of fitness for particular purpose” or “as is” / “with all faults”
§ (2) language is not “conspicuous”
· i.e., language pops out to ordinary person (bold, italics, caps, underlined, etc.)
o Bayliner v. Marine Corp. v. Crow (1999)
§ Majority: express warranty—statements in brochure weren’t for D’s purchased boat and salesmen’s comments were “puffery”; implied warranty of merchantability—the boat fits its ordinary purpose of getting to fishing waters; implied warranty of fitness for particular purpose—D never made seller aware of his particular use (i.e., speed)
