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University of California, Hastings School of Law
Dodge, Bill

Contracts –
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 int

odifies Wood by requiring best or reasonable efforts in any exclusive dealing Ks. Cardozo justifies this on the grounds of intent – that parties intended such terms to be a part of K.
iii.      Case illustration: Wood (Marketer & licensor of designs/п) v. Lucy, Lady Duff-Gordon (Designer/∆)
(A)    Facts: Wood-п received exclusive right for 1 yr, renewable on year-to-year basis if not terminated by 90 days’ notice, to endorse designs with Lucy’s, Lady Duff Gordon-∆’s name and to market all her fashion designs for which ∆ would receive one-half the profits derived. ∆ broke K by placing her endorsement on designs without Wood-п’s knowledge.
(B)    Rule: While an express promise may be lacking, the whole writing may be instinct with an obligation – an implied promise – imperfectly expressed so as to form a valid K.
(C)    Class comments: What if it was Duff-Gordon who claimed that Wood breached the K but not putting enough efforts?
(1)     UCC 2-206: Best efforts do not mean superhuman exertions, just reasonable exertions. But how does one tell if Duff-Gordon’s claim is true, that the efforts were not good enough?
(a)     Industry standard
(b)     UCC has applied implied obligation on people who has exclusive rights to do something for or on behalf of a/o party.
b.       Leibel: Court applies another implied term.
i.         UCC 2-309(3) provision on notice of termination requires reasonable notification. What notification is reasonable depends on the facts but it may be a period sufficient for the other party to find a substitute arrangement OR recoup its investment. 
(A)    §2-309(3) allows these parties to specify whether K would be terminable without notice upon the happening of an agreed event so one party could have specified that distributor K would be terminated in 2 years and no notice would be required.
(B)    §2-309(3) also allows the parties to dispense with this in its entirety – to state in K that no notice is required, but only if doing so would not be unconscionable. This limitation on the parties’ freewill indicates that UCC implied terms is not just based on intent but also on notions of fairness.
ii.        Case illustration: Leibel (Area distributor/п) v. Raynor Manufacturing Co. (Product manufacturer/∆)
(A)    Facts: Raynor-∆, without notice, abrogated an exclusive distribution agreement with Leibel-п.
(B)    Rule: Reasonable notification is required to terminate an ongoing oral agreement creating a manufacturer-distributor relationship.
c.        Economic efficiency rationale of UCC implied terms: If UCC sets the default terms to what most parties would want most of the time, then the parties would have to deal with particular issues in the agreement only if they want something unusual and this should speed the process of bargaining.  
d.       Summary of justifications for implied terms:
i.         Intentè Parties intended them.
ii.        Fairnessè Implied terms are fair.
iii.      Efficiencyè They generate gap-filling terms that make it easier for parties to negotiate.
2.       Implied Obligation of Good Faith
a.       UCC & R2d: Every K includes an obligation of good faith in the performance of K (but not in the negotiation of K):
i.         2 basic standards of requirement
(A)    Objective: Honesty & fact, & observance of reasonable commercial standards of fair dealing in the trade.
(B)    Subjective: Honesty & fact.
Locke: Court was unwilling to apply an objective standard to second guess Warner Brothers’ decision about what movie to make but it holds Warner to a subjective standard requiring that their judgment be honestly made. Here, there was evidence that Warner Brothers breached that subjective standard by refusing to work with Locke in