Contracts II Outline
Prof Fox, Spring 2009
A. Subjectivist approach
i. Looks to what the parties say; what is the subjective, personal view of the parties
ii. Older approach; not used in modern
iii. See Peerless example, p 351
iv. Essentially, parties can lie to get out of the K
B. Objective (external) approach
i. Holmes’ theory; What a reasonable person would interpret the K as meaning
ii. Leads to the possibility that K language is given meaning that neither party intended
C. Modified Objective approach (realist view)
i. Is the dominant approach to interpretation
ii. The court makes the determination of what it thought the parties really meant
iii. Restatement 2d adopts this view
§ 201(1) – if both parties do attach the same meaning to a provision, that meaning will govern (even if the meaning seems bizarre)
§ 201 (2) – if the parties attach different meanings, the agreement will be interpreted in accordance with the meaning of one party, if the other party knew or had reason to know of the meaning attached by the former
iv. Looks at agreement through objective evidence
D. Joyner v. Adams p 352
i. Contractual ambiguity generally resolved against the drafter – contra proferentum
ii. See principles of interpretation, p 358-9
iii. A party is bound by the other party’s meaning if the 1st party either knew or had reason to know of the 2nd party’s meaning while the 2nd party did not know or have reason to know of the 1st party’s interpretation
E. Frigaliment v. B.N.S. p 361
i. B/c ∏ brought the suit, they had the burden of showing that their interpretation is correct; if both interpretations are reasonable and the evidence is conflicting, the burden is on ∏ to prove its case.
ii. Can look to trade usage for interpretation
iii. “plain meaning” of the K language should govern; extrinsic evidence admissible only if K is ambiguous
II. Interpretation: Reasonable Expectations Doctrine
A. C&J Fertilizer v. Allied Mutual Insurance p 370
i. Re: form K, insurance policy. An ambiguous policy should be construed against the insurer and in favor of the insured
ii. The objectively reasonable expectations of applicants and intended beneficiaries re: the terms of an insurance K will be honored, even though painstaking study of the policy provisions (boilerplate fine print) would have negated those expectations
iii. Where the other party has reason to believe that the party manifesting assent would not do so if he knew that the writing contained a particular term, the term is not part of the agreement
III. Parol Evidence Rule (PER)
Applies to any evidence outside of the agreement itself, pertaining to the agreement (extrinsic evidence to the K document) – it is inadmissible.
Facts needed for PER – (1) written terms, (2) extrinsic evidence (usually of terms or negotiations)
A. Traditional/Classical approach: Thompson v. Libby p385 (logs case)
i. PER applies to WRITTEN agreements, b/w all parties involved; Classical (Williston) approach looks to the doc itself (“4 corners of the doc”) to determine if it is an integrated agreement.
ii. Writing needs to purport to show everything being agreed upon (integrated)
– Has details of transaction, common essential terms
– PER applies to terms prior to or contemporaneous to the execution of the writing (doesn’t apply to future terms/modifications)
– “merger clause” – see p388 – invokes PER; states that the writing is the entire agreement, if there is a dispute, look only to this doc
iii. Threshold question – is this a final & complete written K?
– Courts will not look to extrinsic evidence in answering threshold q. – only doc itself. “working in a circle” p386
B. Exceptions to PER
i. Evidence that is relevant to understanding the language of the agreement (interpretation).
– In the case of ambiguity, explaining what the meaning of the agreement is
ii. Evidence to show K was invalid – due to fraud, duress, mistake, etc.
iii. Reformation of K; due to error
iv. Collateral agreements – “side
t as what the agreement really is.
· Trade usage/course of dealing are admissible to explain/supplement terms of agreement unless carefully negated.
· UCC/realist approach – trying to get to the parties’ true understanding of the K
– UCC 2-202b –
· Evidence of consistent additional terms is admissible, only if the K is partially integrated
ii. No Oral Modification (NOM) clause
– Expressly states that any future changes must be in writing and signed by both parties
– PER doesn’t apply to future terms
iii. Waiver clause
– States that any deviation from the K (i.e. price protection once or twice) is a mere waiver, not a promise to keep doing so
– The more deviation there is, the harder it is to maintain that it is a mere waiver
– Applies specifically to course of performance (dealing w/ a party’s actions that are inconsistent w/ K terms)
iv. CISG = no PER
– Trade usage is trickier in international trade due to different local trade customs
IV. Implied Terms
i. Wood v. Lucy, Lady Duff-Gordon p438
– Exclusivity K; agent had exclusive right to use ∆s name to endorse designs of others. ∆ goes outside the exclusive K and sells her designs on her own to Sears.
– ∆ argues that ∏ did not make an express promise to do anything; essentially he can market her designs but doesn’t have to. However, she is bound to him not to go elsewhere; in essence there is no consideration, so no K.
– ∏ has “reasonable efforts” standard; UCC §2-306(2):
· Exclusivity K imposes an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale.