INTERPRETATION – HOW DO/SHOULD COURTS INTERPRET CONTRACTS
I. Interpreting Terms: Ambiguity and Vagueness
a. Ambiguity: when a word has two entirely different connotations so that it may be applied to an object and be both clearly appropriate and inappropriate.
i. Light feathers, cool drinks, Peerless.
b. Vague: A word that may or may not be applicable to marginal objects when the meaning deviates away from the central norm of the word.
i. Is crimson red? Is 55 years old age? Is burrito a sandwich?
c. Raffles v. Wichelhaus (2 ships, both named Peerless, confuse a K)
i. Rule: When there exists a latent ambiguity in the K, the ambiguity is given the meaning that each party intended it to have, and if those meanings are materially different, then there is no binding K.
1. There cannot be mutual assent if the terms are so ambiguous that the parties think they are assenting to something different.
2. In this case, the court allowed parol evidence to be introduced to establish the intent of the parties because the term in controversy was ambiguous.
3. When ambiguous term is a material part of the K, some courts will hold no K exists (no meeting of the minds)
d. Perfect Tender Rule (For sale of goods): The UCC recognizes that if a K calls for delivery of goods from warehouse A, but the seller ships the same widgets from warehouse B, that WOULD be considered a breach of K.
e. Frigalment v. BNS (Chicken case…meaning of chicken is vague, courts still find a K)
i. The making of a contract depends not on the agreement of the two minds in one intention, but on the agreement of two sets of external signs — not on the parties having meant the same thing but on their having said the same thing.
ii. Hierarchy of interpretation for vague terms:
1. Express terms of the K
2. The course of negotiations
3. The course of performance
4. The course of dealing
5. The usage of trade
f. Interpretation and Parole Evidence (Farnsworth)
i. All courts will allow parole evidence to resolve ambiguity.
ii. Some courts will allow parole evidence to resolve vagueness.
iii. 2 views whether parole evidence should apply
1. 4 Corners Approach – Older and more restrictive view
a. Parole evidence may only be used for interpreting ambiguous language
b. If not ambiguous, the word in controversy will be held to mean what a reasonably intelligent person would think
i. Parties don’t have the freedom to attach special meaning to ordinary words
ii. The court must determine what constitutes ambiguous language
2. Corbin Wigmore – New and more Liberal view
a. Look beyond the document itself and accept extrinsic evidence where it is reasonably susceptible to the meaning of the written agreement. Must consider Parole Evidence and compare it to the writing to know whether the writing intended to exclude parole evidence
b. Parole evidence admissible for purposes of interpretation
c. Courts don’t have to determine whether language is plain, ambiguous, or vague
II. Parole Evidence Rule
a. Parole Evidence Rule: Where you have a written K that is final, exclusive, and complete (completely integrated), then no other evidence can be introduced in court contradicts varies or adds to the terms of the K.
b. Definition: Parol contemporaneous evidence is inadmissible to contradict, vary, or add to the terms of a valid instrument.
c. Purpose: Designed to answer the question:
i. What should the court do when the parties have memorialized their agreement in writing and then evidence is sought to be introduced from other documents/negotiations that the parties had that would vary, alter, or add to the terms of the written, memorialized K?
d. Completely Integrated Agreement: A final, complete, and exclusive
i. Final K=the last embodiment of the agreement between the parties
ii. Complete agreement: Contains all terms agreed to btwn the parties
iii. Exclusive Agreement: The only agreement between the parties
e. How does the PE Rule work?
i. Is it final?
1. If NO, then the doc is not integrated—may admit inconsistent extrinsic evidence
2. If YES, it is an integrated doc—cannot admit inconsistent evidence, but may admit consistent evidence
a. Is it Completely Integrated/Complete and Exclusive? To determine this, the court must ascertain the intent of the parties. How the court determines the intent of the parties depends on whether the court is a 4-corners court or a Corbin Wigmore Court. If a 4-corners court it will only look to the document to determine the intent and whether document is complete and exclusive. If Corbin Wigmore then the court will look to extrinsic evidence to determine if the document is complete and exclusive.
i. If NO, then it is partially integrated—consistent evidence may be admitted.
ii. If YES, then it is completely integrated—no parole evidence may be admitted.
f. Thomson v. Libbey (D refuses to pay P for logs, claiming there was an oral warranty as to the log’s quality)
i. Uses the 4 corners approach: The document is the window to mutual assent, and to determine intent
1. Presumes the entire agreement is contained w/in the doc
2. Parole evidence not permissible (due to 4 corners approach)
ii. Why do we have the parole evidence rule?
1. The court cares about the intent of the parties, and believes a written document is the best way of ascertaining that intent.
2. When the court explores alternate methods of determining intent, it’s getting into deep water.
g. Brown v. Oliver (P wanted to recover possession of hotel furniture located inside hotel on land bought from D, D said furniture was not stated in the K and thus it did not sell it.)(Court uses Corbin view/allows PE)
i. Case would have come out different in Thomson v. Libby Court b/c the furniture was not included in written K.
ii. Rule: If the written K, by itself, does not conclusively establish whether the parties intended to include or exclude a particular provision, then parole evidence may be received.
h. Pacific Gas v. GW Thomas Drayage (Steam turbine repair–D to perform work at own risk and indemnify P against all loss and damage. Turbine damaged…D says K only covers injury to 3rd persons
. UCC §2-204 – Formation of Contract In General
(Sun Printing would come out differently if decided under UCC)
i. Even though one or more terms are left open a K for sale does not fail for indefiniteness if the parties have intended to make a K and there is a reasonably certain basis for giving an appropriate remedy.
c. Restatement (2d) §33 – Certainty: (Supports Sun Printing)
i. The terms of a K are reasonably certain if they provide a basis for determining the existence of a breach and for giving an appropriate remedy.
ii. The fact that one or more terms of a proposed bargain are left open and uncertain may show that a manifestation of intention is not intended to be understood as an offer or as an acceptance.
d. Restatement (2d) §34 – Certainty and Choice of Terms:
i. (1) terms of a contract may be reasonably certain even though it empowers one or both parties to make a selection of terms in the course of performance
ii. (2) part performance under an agreement may remove uncertainty and establish that a contract enforceable as a bargain has been formed
iii. (3) action in reliance on an agreement may make a contractual remedy appropriate even though uncertainty is not removed.
e. Restatement (2d) §204 – Supplying an Omitted Essential Term:
i. When parties to a bargain sufficiently defined to be a contract have not agreed with respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court.
IV. Illusory Promises
a. Illusory Promise: a promise that leaves complete discretion to perform or not perform in the hands of the promisor and on its face would be unenforceable for lack of mutual assent. The courts may fill in this gap in the manifestation of assent by supplying an obligation to exercise this discretion in “good faith”.
b. Requirement K: Focus on buyer – seller agrees to sell amnt needed by buyer
c. Output K: Focuses seller – buyer agrees to buy all output of a seller.
d. Two types of judicially supplied gap fillers:
i. Default Rules -Legal rules that the parties can avoid or vary by means of an express clause that differs from the term a court will otherwise supply by default.
ii. Immutable Rules – May not be varied by consent and will override any express clause to the contrary. (duty of good faith)
e. New York Central Iron Works Co. v. United States Radiator Co. (P K w/D for D to supply all of P’s radiator needs for year, then P’s needs more than doubled than previous year. D refuses to fill P’s order. K held enforceable)