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Contracts
University of California, Hastings School of Law
Knapp, Charles Lincoln

Knapp Contracts Fall 2012 Outline.

I. Principles of interpretation

A. Modified objective approach

i. 2 questions the court should ask: Whose meaning controls the interpretation of the contract? And what was the party’s meaning?

ii. The agreement is to 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.

iii. Way to deal with terms:

a. Did the parties attach the same meaning to the term

1. If YES? No problem

2. NO? then….

b. Did one of the parties know or have reason to know of the different meaning attached to the term by the other party?

1. YES? Then the other “innocent” party’s meaning prevails

2. NO? then that term falls away. And if it is a material term so does the contract.

B. Ambiguity

i. Latent ambiguity à extrinsic facts make more than one interpretation possible. Not visible from the words alone but seen in reference to the surrounding circumstances.

ii. Patent ambiguity à arises when the uncertainty is obvious from the words used.

C. Joyner v. Adams

i. Issue: where there is no meeting of the minds regarding a contract provision, must a court determine whether either party knew or had reason to know of the other’s meaning of the disputed language? Yes

ii. When there is no meeting of the minds, but on party knows or has reason to know what the other party means and the other party does not know or have reason to know, the court enforces the contract in accordance with the innocent party’s meaning.

iii. “Completed development” is the ambiguous term. Court looks at different sources and reaches a conclusion that the 2 parties actually reached different conclusions.

D. Frigaliment Importing v. BNS International Sales Corp

i. Issue: what is chicken? To enforce a particular meaning of a common term used in a contract, must P prove either D’s actual knowledge of the particular meaning or a widespread, universal usage in the particular manner asserted? Yes

ii. D believed it could send fowl. P believed it would receive broilers, but P failed to meet its burden of proving that the term chicken was to be used in the narrower rather than in the broader sense

iii. Chicken is patently ambiguous – arises when the uncertainty is obvious from the words used. Latent ambiguity is not apparent from the words alone, but visible in the light of surrounding circumstances.

iv. Court looks at the following to determine the meaning of chicken:

a. First, the contract and the terms used.

b. Then, Extrinsic evidence i.e. trade usage

E. Analytic structure for interpretation:

Goals

Principles

Gives effect to the intent of the parties

Assess whether each party knew or had reason to know of other’s meaning.

Serves public interest

Interpret K consistently with public interest.

Promote fairness or judicial economy

Apply contra preferentum (if a word has 2 reasonably meanings, the one that will be chose is the one that is less favorable to the one by whom the contract was drafted)

Promote commerce

Apply the contract valid is preferred to one that makes it invalid.

F. C& J fertilizer v. Allied Mutual Insurance Co

i. Will the terms of adhesion contract be strictly enforced if the result would be forfeiture? No

ii. Reasonable expectation doctrine à objectively reasonable expectations of applicants and intended beneficiaries regarding the terms of insurance contracts will be honored even though painstaking study of the policy provisions would have negated those expectations. (different in different states)

iii. Adhesion contract à a standardized contract which imposed and drafted by the party of superior bargaining power, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.

a. Printed form

b. Drafted by or on behalf of one party to the transaction

c. Adhering party does not enter into many transaction

d. Obligation is payment of money

e. Take it or leave it basis.

iv. When construing an adhesion contract, courts should look beyond unfair provisions that were never truly assented to and enforce the reasonable expectations of the parties.

G. What kinds of evidence do we consult?

i. Course of performance à same parties and same contract

ii. Course of dealing à same parties and different contract

iii. Trade usageà different parties and different contract.

iv. Sources:

a. Plain meaning à if not ambiguous do not consult extrinsic evidence. Also known as 4 corners.

b. Contextualist à interpret contract by taking everything into account.

II. Parol Evidence Rule

A. Restatements section 209-218 and UCC 2-202

i. When the parties to a contract have mutually agreed to incorporate a final version of their entire agreement in writing, neither party will be permitted to contradict or supplement that written agreement with extrinsic evidence of prior agreements or negotiations between them.

ii. When the writing is intended to be final only with respect to a part of the agreement, the writing may not be contradicted but it may be supplemented by such extrinsic evidence.

Writing

Status

Extrinsic evidence

Not integrated

Not a final agreement

Add or contradict terms

Partially integrated

Final agreement

Additional consistent terms

Completely integrated

Final and complete agreement

Cannot add terms.

B. 5 step analytic process:

i. Which body of law governs?

a. Common law

b. UCC

c. CISG

ii. Is the evidence “parol evidence”?

a. Is there a writing?

b. Focus on the extrinsic evidence (outside the 4 corners of the document)

iii. When did the communication occur?

a. What can we rule out?

1. The writings that happen after the contract is concluded are NOT barred by the rule.

2. If this information was barred it would not allow parties to modify their agreement.

b. Communications written during the signing of the contract are also NOT barred.

1. Contemporaneous oral communications may be barred depending on their function.

2. Contemporaneous written communications are not barred because they can be viewed as part of the agreement.

iv. What function does the communication serve?

a. Integration

1. Integration is the process by which we determine the meaning of words in a contract, the primary purpose is to discover that intent and to make it effective.

2. More toward interpretation is allowed

i. Classical – is the contract ambiguous?

ii. Modern – suggest looking at all the different evidence in order to assess whether or not the agreement is ambiguous. If the K is ambiguous then we can undertake to interpret the K.

1. Can admit evidence for interpretation but must stop short of contradiction.

b. Supplementation

1. Is the agreement integrated? 2 views:

i. Four corners à look at the agreement (Thompson)

ii. Contextualist à look beyond the agreement

2. Merger Clause à this contract shall be conclusively considered as containing and expressing all of the terms and conditions agreed upon by the parties. Does not automatically establish that the contract is fully integrated.

c. Contradiction

1. Does the parol evidence contradict the writing? Rarely admitted.

2. More toward contradiction is barred

3. Not admitted unless there is fraud, duress, incapacity, mistake, or illegality.

v. Does the communication for within an exception to the parol evidence rule?

C. Exceptions to parol evidence rule:

i. The parol evidence rule does not apply to evidence offered to explain the meaning of the agreement

a. Applies only to written agreements that are in some sense integrated either partially or completely

b. Restatement 210; UCC 2-202

c. Whatever the degree of integration a written agreement may always be explained by extrinsic evidence

ii. The parol evidence rule does not apply to agreements, whether oral or written, made after the execution of the writing.

iii. Oral condition precedent à The parol evidence rule does not apply to evidence offered to show that effectiveness of the agreement was subject to an oral condition precedent

a. Restatement 217

iv. Failure of assent exception à The parol evidence rule does not apply to evidence offered to show that the agreement is invalid for any reason, such as fraud, duress, undue influence, incapacity, mistake or illegality Restatement 217(d)

a. Fraud in the inducement à misrepresentations of a material fact, a fact that induces another to enter into the contract

b. Fraud in the execution à misrepresentation of fact about the writing itself.

v. The parol evidence rule does not apply to evidence that is offered to establish a right to an equitable remedy such as reformation of the contract

a. Restatement 214(e)

b. Part of the contract was inadvertently omitted from the writing due to some mistake

vi. Collateral agreement exception — The parol evidence rule does not apply to evidence introduced to establish a collateral agreement between the parties

a. Agreement about a subject distinct from that to which the writing relates.

b. Restatement 216(2)

c. Comment 3 to UCC 2-202

D. Thompson v. Libby

i. Issue: May parol evidence be admitted to prove the existence of a warranty when the sales contract was silent about any warranty? No

ii. A merger clause states that the writing is intended to be final and complete; all prior understandings are deemed to have been merged into or superseded by the final writing.

iii. Four corners approach

a. Accord conclusive or nearly conclusive weight to the presence of a merger clause.

b. Argue that to permit consideration of extrinsic evidence on the threshold question of integration is to do exactly what the parol evidence rule is designed to avoid.

iv. Contextual approach (Corbin)

a. Restatement 210 comment b

b. A writing cannot of itself prove its own completeness and wide latitude must be allowed for inquiry into circumstances bearing on the intention of the parties.

c. A finding of integration should always depend on the actual intent of the parties

E. Taylor v. State Farm Mutual

i. Issue: May extrinsic evidence be used to interpret the meaning of a release of all contractual claims when the P is suing an insurer on a bad faith theor

position of the obligor would be satisfied.

1. The subjective test should be used only where the agreement leaves no doubt that it is only honest dissatisfaction that is meant and no more.

iv. Locke v. Warner Brothers

a. Issue: where a contract confers on one party a discretionary power affecting the rights of the other, is there an implied duty to act in good faith in exercising that discretion? Yes.

b. The implied duty of good faith requires that D’s dissatisfaction be actual or genuine.

c. Bad faithà starts after the contract has been created;

d. Fraudà misrepresentation of material fact when creating the contract.

e. Testimony indicated that D expressed an absolute unwillingness to work with P, it would have reasonably been inferred that respondent never intended to give appellant’s proposals a good faith evaluation.

D. Warranties

i. Express warranty 2-313

a. Affirmation of fact or promise relating to goods, description of goods, sample or model.

b. Made by seller to buyer.

c. Made part of basis of bargain (burden of proof on seller to prove it was not basis of bargain)

ii. Warranty of merchantability (2-314)

a. Seller must be merchant with respect to goods of that kind.

1. Merchant à person who regularly deals with the kinds of goods or holds themselves out to have knowledge on the goods.

2. Can’t be an isolated sale.

b. Goods would pass without objection in the trade

c. Goods are fit for ordinary purposes to which such goods are used.

iii. Warranty of fitness for a particular purpose (3-315)

a. Not limited to merchant sellers

b. Seller must have reason to know of particular purpose

c. Buyer must have relied on sellers’ skill or judgment

d. Goods need not be defective.

iv. Disclaimers

a. Seller may disclaim implied warranties with specific and conspicuous language.

b. Seller can also limit the buyers remedies for breach of warranty so long as the exclusive remedy does not fail of its essential purpose or there is not personal injury.

v. Bayliner v. Crow

a. Issue: does a manufacturer make an express warranty to a purchaser about a specific boat when it provides information about the performance of its products that are configured differently from the purchaser’s boat? No.

b. Court determines that there was no express warranty because the matrix did not relate to a particular boat and the boar he bought had a smaller propeller and more equipment.

c. Pufferyà sales talk that will not serve as a basis for a binding commitment.

IV. Avoiding enforcement – DEFENSES

A. Avoiding enforcement

i. Void = contract not valid

ii. Voidable = contract is able to be voided by one of the parties

B. Minority and Mental Capacity

i. Minority

a. General rule is that a contract entered into by a minor is that if the contract is for a necessary good or service, it is enforceable

b. If it is prejudicial to the minor, it is void and if it is unclear whether it is beneficial or prejudicial the contract is voidable to the election of the minor.

c. Exceptions to the general rule:

1. Necessities – minor is liable for the reasonable value of necessaries.

2. Misconduct by the minor – i.e. misrepresentation of age

3. Deterioration – to the extent that the material is damaged than the minor should have to pay in that situation and pay for the extent of the deterioration.

4. Use – look at benefit/use to minor that the material provided (unjust enrichment?)

5. Depreciation – use may lower the value, regardless of if it was damaged.

ii. Dodson v. Shrader

a. Issue: may a minor void a contract and insist on a return of the full purchase price even if he damages the goods while they were in his possession? No

b. Traditional rule regarding minors has been modified to allow the minor to determine whether a contract is favorable or not by making the contract voidable by the minor.

c. A minor may not use this right as a means of injuring others who dealt with him in good faith. Some states have limits on the right of recession.

d. Benefit rule à upon recession of a contract by a minor, recovery of the full purchase price is subject to a deduction for the minor’s use of the goods.

1. Minor’s recovery is also subject to a deduction of depreciation or deterioration of the goods while in the minor’s possession.