Contracts – Dodge
Spring Semester 2006
A. Interpreting Contracts
1. Principles of Interpretation
a. General Principles
i. Plain language is always given great weight. [R2d§202(3)] (A) A word is known by the company it keeps: “cattle, hogs, and other animals” might include sheep, but not house-pets.
(1) ‘Other animals’ will be related to the first two enumerated, cattle and hogs.
(B) Expressing one excludes the others: “cattle and hogs” excludes sheep.
(1) If ‘Other animals’ is deleted, it is excluding animals such as sheep.
ii. Generally – aimed at intent.
(A) Purpose of the parties. [R2d §202(1)] (B) Interpret K as a whole. [R2d §202(2)] (C) Interpret K to make it valid. [R2d §203(a)] (D) Specific trumps the general. [R2d §203(c)] (E) Handwritten trumps the printed. [R2d §203(d)] iii. Extrinsic evidence of intent (in order of weight given).
(A) Course of performance. How parties have previously dealt this K.
(1) R2d §202(4)
(2) UCC §2-208
(B) Course of dealing. How parties have previously dealt with each other in prior Ks.
(1) R2d §223
(2) UCC §1-205
(C) Trade Usage. How other people in the trade deal a particular term in the K.
(1) R2d §222
(2) UCC §1-205
iv. Principles not related to intent
(A) Interpret ambiguities against the drafter. [R2d §206] (B) Interpret K to favor the public. [R2d §207] v. Case illustration: Frigaliment Importing Co. (Buyer/п) v. BNS International Sales Corp. (Seller/∆)
(A) Facts: Frigaliment (п) ordered a large quantity of chicken from BNS (∆), intending to buy young chicken suitable for broiling & frying, but BNS (∆) believed, in considering the weights ordered at the prices fixed by the parties, that the order could be filled with older chicken, suitable for stewing only, and termed “fowl” by п. This was the only way ∆ could make a profit out of the K.
(B) Rule: Where there is ambiguity to a term of K, that term is to be interpreted in accordance with trade usage and if trade usage does not remedy the ambiguity, it is to be interpreted by the meaning given by one party that is supported by the objective meaning of the term.
(C) Holding: Judgment for ∆.
(1) There was conflicting evidence as to the trade use of the word ‘chicken.’
(2) ∆ would not have been able to make profit from K if they had supplied broiling or frying chickens.
(3) The objective term followed by the Department of Agriculture was incorporated in the K and supported ∆’s contention that chicken encompassed stewing chickens.
(4) п implied assent by conduct: If п was sincere in thinking it was entitled to young chickens, пs would not have allowed the shipment under the second K to go forward, since ∆’s telegram must have made it clear that larger birds would not be broilers.
b. Contracts of Adhesion
i. Reasonable Expectations Doctrine (RED): Meaning of a term in a K is determined according to the reasonable expectations of a party, even if that meaning is contrary to the explicit language of the K.
ii. R2d §211-3: A court will interpret according to RED of one party only if one party had reason to know that the other party would not have agreed to the K if s/he knew.
(A) It is a substantively narrower version of RED compared to that seen in C&J Fertilizer – Store would probably not have recovered coverage under R2d 211-3.
(B) It is broader because it applies to all standard Ks.
iii. Application of RED:
(A) RED of R2d 211-3 applies to all standardized Ks.
(B) JXS that have adopted RED generally only apply it to Ks of adhesion. Ks of Adhesion are:
(1) Standard form Ks with unequal bargaining power AND
(2) Offered on “Take it or leave it” basis.
(a) One party enters it more often than the other. (This is a characteristic, NOT requirement)
(b) Insurance Ks are an example of Ks of adhesion
(C) Many courts limit its application to insurance Ks.
(1) Insurance Ks are Ks of adhesion where one party is compelled to accept the policy.
(D) Some JXS do not apply it at all.
iv. Case illustration: C&J Fertilizer Inc. (Insured/п) v. Allied Mutual Insurance Co. (Insurance company/∆)
(A) Facts: A definite burglary did not fall within an insurance policy definition thereof because there was no exterior sign of burglary/forced entry through use of tools, chemicals or explosives.
(B) Rule: Insurance K will be interpreted by the reasonable expectations of a party even if it contradicts the language of the K.
(C) Holding: Judgment for п/insured.
(D) Analysis: The insured
(C) Parol evidence rule only applies to contemporaneous or prior agreement; it does not apply to exclude evidence of subsequent agreements.
(D) Parol evidence may be used to show that effectiveness of the agreement was subject to oral, conditional precedent. (“If my wife says it’s okay.”)
(E) Case illustration: Sherrodd, Inc. (Subcontractor/п) v. Morrison-Knudsen Co. (General contractor/∆) [Exception, in this case, of fraud allowed admission of parol evidence to establish a defense against the enforcement of an agreement.] (1) Facts: Sherrodd-п, a construction subcontractor, alleged that the price provision in the written construction K should be set aside because of Morrison-Knudsen’s ∆ subcontractor’s alleged fraud and breach of covenant of good faith & fair dealing.
(2) Rule: MT Supreme Court does not allow exception to extend to fraud in the inducement when it was contradicted by a specific term in the agreement. Sherrodd cannot argue that he was induced to sign by a promise of more money when the agreement clearly indicates a specific amount.
(3) Holding: Judgment for ∆.
(4) Sherrodd is MIN view. MAJ holds that parol evidence may be used to establish fraud in the inducement. * Note: This is a large exception because one can frequently package an argument to get parol evidence in based on contention of fraud. “I bought the log because I thought it would be of particular quality.’ *
b. The UCC Rule and Trade Usagesè Analysis is identical to common-law
i. UCC §1-205: A written agreement that the parties intended to be the final expression of their agreement may not be contradicted by parol evidence – it may be used to explain or supplement by course of performance, course of dealing, trade usage, or by add’l consistent terms unless the writing was intended to be complete.
Similarities with the common law: