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University of California, Hastings School of Law
Dodge, Bill

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 ∆.
(D)    Analysis:
(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 in this case was not aware of the K provision.  Under RED, п is justified in assuming that the policy is faithfully prepared by ∆ provide the protection against the right which he asked for.
2.       The Parol Evidence Rule
a.       The Common Law Rule:
i.         Step 1: Determine level of integration
(A)    Definition of integration: Writing constituting a final expression of the parties’ agreement. [R2d§209] (B)    Three different levels of integration:
(1)     Complete integration: Final statement of all of the terms of K.
(2)     Partial integration: Final statement of some of the terms of K, but not all.
(3)     Not integrated at all.
(C)    Case illustration: Thomson (Seller of logs/п) v. Libby(Purchaser/∆) [Level of integration used to determine whether ∆ could supplement the agreement with parol evidence regarding warranty of quality of logs.] (1)     Facts: Thomson brought action to enforce written K for sale of logs. Libby defended on oral warranty.
(2)     Rule: Four corners approachè Where K is complete on its face, parol evidence is inadmissible to vary its terms.
(3)     Holding: Judgment for п.
(4)     R2d approach endorsed by Corbin: Parol evidence may be used to determine the level of integration. Even if the agreement looks complete, it may not be complete if parol evidence indicates that it is not. (“An agreement on its face cannot be said to be complete.)
(a)     Under R2d, merger clause is not conclusive but merely evidence that it may be completely integrated.  
ii.        Step 2: Use parol evidence, depending on the levels of integration, to contradict, supplement or explain.
PE can ALWAYS be used to
The agreement is not integrated at allè Parol evidence may be used for any purpose (contradict, supplement or explain the agreement)
(B)    The agreement is partially integratedè Parol evidence may be used to supplement or explain the agreement, but not to contradict the agreement. [R2d§215, 216(1)] (C)    The agreement is completely integratedè Parol evidence may be used to explain, but may not be used to supplement or contradict. [R2d§214(c), 215, 216] iii.      Step 3: Exception to parol evidence rule that would allow parol evidence to establish something else.
(A)    Illegality, fraud, duress, lack of consideration or other invalidating grounds.
(1)     R2d §214(d) allows use of parol evidence to establish fraud.
(a)     Fraud in the inducement: Libby can claim that he only agreed to enter the agreement because he was induced to believe that trees would be of a certain quality.
(b)     Fraud in the execution: Libby can say that he did not know he was signing a K.
(B)    R2d§214(e): Reaffirmation is available to allow one party to show that the agreement is erroneously written. This requires clear and convincing standard.
(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.
(A)    Similarities with the common law:
(1)     Notion of allowing add’l consistent terms unless the writing is complete is same as R2d §216(2)(b): An agreement is NOT completely integrated if the writing omits a consistent add’l agreed term which is such a term as in the circumstances might naturally be omitted from the writing.  
(2)     R2d §214(c): Parol evidence may be used to explain.
(3)     R2d §215: Parol evidence may not be used to contradict unless it deems that K is not integrated at all.
(B)    Differences with the common law: UCC refers specifically to 3 kinds of parol evidence, which relate to any evidence of prior or contemporaneous negotiations
(1)     Course of performance: These parties’ actual performance of this K.
(2)     Course of dealing: Past conduct between these parties but not related to this K.
(3)     Trade usage: Practice regularly observed by others in the same trade.
ii.        Whenever it is reasonable to do so, one should interpret the express language of K, course of performance, course of dealing & trade usage to be consistent with each other.
(A)    When it is unreasonable to do so, the following hierarchy prevails:
(1)     Express language
(2)     Course of performance
(3)     Course of dealing
(4)     Trade usage
iii.      UCC PER is similar to R2d, perhaps identical. If anything, UCC is more permissive in allowing parol evidence (course of performance, course of dealing & trade usage) to explain the meaning of the agreement.
(A)    Like the R2d, it gives the highest priority to the express language of the agreement followed by course of performance, course of dealing & trade usage.
(B)    Course of performance, course of dealing & trade usage may nonetheless qualify an agreement.
iv.      Case illustration: Nanakuli Paving Co. (Concrete purchaser/п) v. Shell Oil Co. (Seller/∆) [Course of performance & trade usage are used to explain that the posted price at the time of delivery does NOT mean posted price at the time of delivery, but posted price at some earlier time. The Court decides that the parol evidence is cutting down on the meaning of the term, and not negating it.] (A)    Facts: Nanakuli-п entered into K to purchase its requirements of concrete from Shell-∆. K was in effect for several years & renewed several times. п sued over 1 yr K, contending ∆ had failed to protect it from price

ercome express terms in K. So K may expressly authorize conduct that would otherwise be in bad faith if the K was silent, so long as they are reasonable.
(B)    DOGE: Warner is a merchant & a money-making industry, NOT necessarily a creative one. To make an exception for movie industries seems a stretch. Application of objective standard would be appropriate.
iii.      Case illustration: Locke (Actress/director/п) v. Warner Bros., Inc. (Studio/∆)
(A)    Facts: Locke claimed that the studio denied her benefit of her bargain, breached her K, fraudulently entered into agreement with her, and discriminated against her on basis of sex when it refused to develop any projects she presented.
(B)    Rule: Where K confers on one party a discretionary power affecting rights of the other, a duty is imposed to exercise that discretion in good faith and in accordance with fair dealing.
(C)    Holding: Judgment for Locke.
iv.      Case illustration: Empire Gas Corp. (Propane supplier/п) v. American Bakeries Co.(Baker company/∆) [Posner applies neither of these standards. He says that good faith in a requirement-K context requires a business reason to reduce amount of order. He does NOT say that the jury would not be allowed to decide whether that reason is reasonable.] (A)    Facts: American-∆ agreed to buy all of its propane converters from Empire-п under requirements K containing estimate of number of converters ∆ would buy, but ∆ later decided it did not need any converters & bought none. 
(B)    Rule: A buyer in requirements K may decide to buy less than K estimate, or even to buy nothing, so long as buyer acts in good faith but good faith requires more than mere second thoughts about terms of K.
(C)    Analysis:
(1)     Reasonable interpretation of UCC§2-306(1) requires implied distinction between situations where buyer buys quantity disproportionately less than K estimate & where it buys disproportionately more.
(2)     UCC §2-306 would not allow buyer to buy disproportionately more and resell items to make profit. Thus, where there is conflict under §2-306 between requirement that buyer by quantity in good faith & requirement that buyer not buy quantity unreasonably disproportionate to any stated estimate, good faith requirement is dominant where buyer buys less & “unreasonably disproportionate” requirement is dominant where buyer buys more.
b.       Common law:
i.         Same two standards exist but there is not this strict division between merchant & non-merchant.
(A)    Courts will apply a subjective standard even to people who are in the business if they think that the objective standard is not workable.
(B)    Locke: Court applied a subjective standard of honesty & fact to a movie studio because they believed that there was no objective standard in dealing with the standard for what movie should be made.
ii.        Case illustration: Donahue (Employee/п) v. Federal Express (Employer/∆) [Case shows limits of the implied obligation of good faith. Court has generally been unwilling to use the implied obligation of good faith to limit the rights of employers to terminate at-will employees, even though at-will doctrine itself is judicially created.] (A)    Facts: Donahue-п worked for Federal Express-∆ as an at-will employee. During his time at FedEx, п questioned company policies & practices. п appealed his termination, & FedEx management upheld termination. п then filed this employment case alleging various causes of action, including wrongful termination & that FedEx breached implied duty of good faith & fair dealing.
(B)    Rule: Employee cannot, as matter of law, maintain an action for breach of implied duty good faith & fair dealing insofar as underlying claim is for termination of an at-will employment relationship.
(C)    Analysis:
(1)     Policy for not allowing food faith basis for termination of an at-will employee:
(a)     If they could, there would be no such thing as at-will employment.
(b)     Requiring good cause for discharge raises room for excessive civil liability.
(c)     There are Title 7 protections & o/ statutory exceptions to this rule to serve as safeguards.
(d)     Requiring termination for cause unless the K expressly states that it is at-will will provide fair balance; courts are in equally good position as legislature to exercise such discretion.
(2)     Employee can defeat at-will presumption by establishing that he gave his employer add’l consideration o/ than for which he was hired.
(a)     Standard:Employer must receive substantial benefit other than the service for which employee is hired to perform OR employee must undergo substantial hardship other than services for which he is hired to perform.