Contracts II
I. Finding the Law of the Contract: Finding the Intent of the Parties
A. Interpretation: Use to find the meaning of a term. (§201- §204) A court ascertains the meaning that it will give to the language used by parties in determining the legal effect of the contract. The concern is on the expectations that the language aroused in the parties. We look at interpretation first because we cannot tell if a term (wanting to be introduced) contradicts the terms in the contract until we know their meanings.
1. First: is the term ambiguous (includes syntax)? It is if it can have more than one meaning: How you can tell:
2. Plain meaning: (PA) read the word, if you can tell the meaning then go no further. The minority of jurisdictions apply this rule. It has two consequences for contract interpretation:
a. Disputes can be disposed of more expeditiously: summary judgment, limited pre-trial discovery
b. Issues of contract interpretation will more often be left to judges as issues of law rather than fact.
3. All circumstances: (CA) (Restatement §202) (Corbin) Majority rule: you can never know the meaning unless you look at all the facts; there are no plain meanings. Looks to Trade Usage, Course of Performance and Course of dealing as well as other factors.
Once a term is deemed ambiguous, go to whether the parties attached the same meaning.
Peerless Rule: If the parties do not attach the same meaning, there is no contract unless:
1. There was actual knowledge
2. Should have known (CoP, CoD, TU)
All comes down to determining whether or not there is a breach.
Raffles v. Wichelhaus: The Peerless case. The court ruled that there was not assent in this case as to the terms of the contract, so therefore no contract.
Rule: When neither party can sustain its burden of proof (usually required of the plaintiff) of showing that its meaning should prevail or was understood, then there is no proof of assent.
Frigaliment Importing v. B.N.S.: The chicken case that applies the Peerless rule as both parties claim their meaning was understood. The court looked to the contract and its references (Department of Agriculture Regulations), Parol Evidence (negotiations), Trade Usage and the Course of Performance of the contract, but could not determine what chicken meant. Plaintiff loss because it did not sustain its burden of proof that chicken was used in the contract in the narrower sense.
W.W.W. Associates, Inc. v. Giancontieri: Reciprocal cancellation provision. It exemplifies the four corners or plain meaning rule in interpretation. The court will only look to the provisions in the contract to determine if the disputed term has more than one meaning. Here the court looked at the Merger Clause and the Cancellation Clause (that only allowed the buyer to cancel) to determine the meaning; reciprocal must mean just that.
P. G. & E. v. Thomas: Indemnity clause. CA case of great influence in terms of going as far as it did by allowing extrinsic evidence to ascertain the intent of the parties even when the writing appeared on its face clear and unambiguous.
Delta Dynamics, Inc. v. Arioto: Termination clause. There was nothing in the contract that would lead to the same conclusion as the extrinsic evidence would; sole remedy was to terminate the contract. CA use of all circumstances.
Hurst v. W.J. Lake: 50% protein horsemeat. Under the plain meaning or common meaning the term is unambiguous; however, due to industry standards, the term means something else and evidence was used to apply the trade meaning here.
Rule: In an all circumstances jurisdiction, the meaning applied to a term by the parties that they knew or should have known may be different from the common meaning based on trade or industry standard.
B. Parol Evidence Rule: Use when you want to add a term. (§209- §216) It is based on the principle that a writing intended by the parties to be a final embodiment of their agreement cannot be modified by evidence that adds to, varies, or contradicts the writing. The rule governs whether parties may introduce evidence of extrinsic agreements to prove the existence of additional or modified terms.
For the parol evidence rule to apply, it must be a written agreement and you must ask:
1. Is it Integrated: is the agreement a final expression of one or more terms?
a. There is a presumption that it is integrated when in writing, unless evidence establishes otherwise. See Restatement §209
2. If integrated, is the integration Total/Complete or Partial
a. A totally integrated agreement is one adopted by the parties as a complete statement of the terms. There are three tests:
i. 4 corners: Traditional test used in a minority of jurisdictions- here you must look at the document itself to determine if it appears complete
ii. Naturally: Restatement (§216) (Corbin) test adopted in the majority of jurisdictions- looks to the intent of the parties and the circumstances; the agreement is found complete if a term/condition would have naturally been included in the contract. Leans toward partial
iii. Certainly: U.C.C. §202 test used for the sale of goods
spite the denial of a mistake by one of the parties.
C. Filling the Gaps: Used by the court when the contract does not cover a term.
Omission: the court makes the decision if the parties had thought about it, would they have put it in the contract: implication by the court; the court looks to two factors:
1. Expectation of the parties (shared)
– Good faith and fair dealing is usually always implied
If there is no shared expectation, use an objective or subjective test to determine if one party should have known of the others expectation
2. Justice: Fairness; Reasonable Concerns
Implied in Law: the parties did not even think about it; no parol evidence rule
Implied in Fact: the parties did discuss it; parol evidence rule comes in
Dalton v. Educational Testing Service: SAT score denial case. The court implied good faith and made the testing service consider the rebuttal information the student submitted because it made an omission as to what it would do after an option was taken. It was difficult here because the contract called for discretion; the student would have to prove arbitrary or irrational; very difficult.
Rule: Even when the court implies a term such as good faith, it cannot interfere with the express contract provisions.
Burger King Corp. v. Weaver: Franchisee upset over a new BK at the local base. Here the franchisee was trying to show a breach of good faith; however, no express contractual provision was shown breached and the duty of good faith is not by itself breachable. He was attempting to add exclusive franchise in the contract but
1. Expectations; BK had performed all expressed contractual provisions and
2. Justice: The added provision would change the terms
Eastern Air Lines v. Gulf Oil Corp.: Here it is a requirements contract governed by the U.C.C., so you do not have to go through the “omission” analysis as good faith is implied in all such contracts. The court looked to CoP, CoD and TU (as well as express terms of the contract) to determine the true intent of the parties and that there was no breach based on fuel freighting.
