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University of California, Hastings School of Law
Dodge, William S.

Contracts – Spring 2010
3 possibilities under Parol Evidence:
                        1.            Agreement is integrated, you’re trying to explain the agreement
                        2.            Agreement is not completely integrated, because it omits a term that was agreed to
                        3.            Going to fall into one of the many excepted circumstances
II.      Interpreting the Agreement
A.      Principles of Interpretation
                        1.            General Principles
·         Intention is the key – if you can find that out, you don’t have to go any further
·         The process by which a court gives meaning to contractual language when the parties attach materially different meanings to that language
a.       Historically, American courts adopted a subjective approach
                                                                     i.            If the parties attributed different meanings to contractual language, no contract formed
                                                                   ii.            Under the idea that there was no “meeting of the minds”
b.      Objective Theory: words and conduct should be interpreted in accordance with standard of reasonable person familiar with the circumstances
                                                                     i.            Can lead to the conclusion that the contractual language could be given a meaning which neither party intended
                                                                   ii.            Almost no courts use extreme objectivist approach
c.       Now rely on the “modified objective approach”
–          Answers 2 questions:
                                                                     i.            Whose meaning controls the interpretation of the contract?
                                                                   ii.            What was that party’s meaning?
d.      If parties agree in the meaning of a provision, that meaning will govern
e.      If parties disagree, the agreement is to be interpreted in accordance with the meaning of one party if the other party either knew or had reason to know of the meaning attached by the former
                                                                     i.            R2d §201
f.        If there are different meanings attached, and neither party knew or had reason to know of the meaning of the other?
                                                                     i.            No contract exists because of lack of mutual assent
                        2.            One Order of Contract Interpretation
·         Plain language is given great weight. §202(3)
a.       A word is known by the company it keeps
                                                                     i.            “cattle, hogs, and other animals” might include sheep, but not house pets
b.      Expressing one excludes the others
                                                                     i.            “cattle and hogs” excludes sheep
·         Generally – aimed at intent.
a.       Purpose of the parties. §202(1)
b.      Interpret the K as a whole. §202(2)
c.       Interpret K to make it valid. §203(a)
d.      Specific trumps general. §203(c)
e.      Handwritten trumps printed. §203(d)
·         Extrinsic evidence of intent – even if express terms appear clear, there may be a latent ambiguity
a.       Course of Performance. §202(4); UCC §2-208
b.      Course of Dealing. §223; UCC §1-205
c.       Trade Usage. §222; UCC §1-205
·         Principles not related to intent
a.       Interpret ambiguities against the drafter. §206
b.      Interpret K to favor the public. §207
                        3.            Hierarchy of Contract Terms:
·         Express terms
a.       Best evidence is the words they actually used
·         Course of performance
a.       Deals with the transaction at hand
·         Course of dealing
a.       Deals with past transactions, so not as persuasive as course of performance
·         Usage of trade
a.       Covers what everyone normally does, so not as specific as course of dealing
b.      The way people in a trade act
c.       Leads to a reasonable expectation that those usages will govern in an agreement
                        4.            Trade usage v. course of dealing:
·         If parties have used terms or items in a different way than trade norms in previous dealings, that establishes a course of dealing
                        5.            Course of performance v. course of dealing:
·         Course of performance deals with the specific contract at hand, whereas course of dealing refers to previous agreements
·         If the contract called for multiple deliveries, the course of performance deals with how the party acted in the first part of the contract as to whether it agreed/acquiesced
B.      Contracts of Adhesion
                        1.            R2d § 211: Standardized Agreements DOCTRINE OF REASONABLE EXPECTATION
·         Where a party to an agreement signs or assents to a writing and has reason to believe that like writings are regularly used to embody terms of agreements of the same type, he adopts the writing as an integrated agreement with respect to the terms included in the writing
·         Such a writing is interpreted wherever reasonable as treating alike all those similarly situated, without regard to knowledge or understanding of the terms of the writing
                        2.            Applies to all standardized agreements
·         More general than the Reasonable Expectations Doctrine as applied to C & J Fertilizer
·         Narrower in substance
a.       Doesn’t look at the thoughts of the insured, but at the expectations of the insurance company
b.      This leads the Restatement clause to have almost no applicability to insurance contracts, because all forms are standard
C.      The Parol Evidence Rule
                        1.            The Common Law Rule
·         When parties to a contract have mutually agreed to incorporate (or “integrate”) a final version of their entire agreement in a writing, neither party will be permitted to contradict or supplement that written agreement with “extrinsic” evidence (written or oral) of prior agreements or negotiations between them
a.       When the writing is only partially integrated, the writing may not be contradicted, but it may be supplemented by such extrinsic evidence
·         Rule does not define what evidence is affirmatively admissible; it only operates to exclude evidence
·         If the parol evidence rule does not apply (either because parties have not executed such a written agreement or because offered evidence comes within some exception to that rule), then admission of the evidence will turn on the body of rules that govern evidence
a.       Just like all other evidence
                        2.            How It Operates:
·         1. Determine the level of integration
·         2. See whether parol evidence can be used to contradic

letely or partially integrated
                                                                  iii.            The meaning of the writing, whether or not integrated
                                                                 iv.            Illegality, fraud, duress, mistake, lack of consideration, or other invalidations
                                                                   v.            Ground for granting or denying rescission, reformation, specific performance
                        5.            Parol Evidence Under UCC:
·         § 2-202: Final Written Expression: Parol or Extrinsic Evidence
a.       Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented
                                                                     i.            By course of dealing or usage of trade (§ 1-205) or by course of performance (§ 2-208); and
                                                                   ii.            By evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement
·         § 1-205: Course of Dealing and Usage of Trade
a.       Course of dealing is previous conduct between parties which establishes a common basis of understanding for interpreting expressions and conduct
b.      Usage of trade is any practice/method having such regularity of observance in a place, location, or trade as to justify an expectation that it will be observed in the transaction in question. If the usage is written, the interpretation of the writing is for the court
c.       Course of dealing and usages of trade give meaning to and supplement or qualify terms of an agreement
d.      Express terms of an agreement and applicable course of dealing or usage of trade shall be construed when possible as consistent with each other; when not possible, express terms control both course of dealing and usages of trade
e.      Applicable usage of trade in the place where any part of performance is to occur shall be used in interpreting the agreement as to that part of the performance
f.        Evidence of a usage of trade by one party is not admissible until he has given the other party sufficient notice
·         § 2-208: Course of Performance or Practical Construction
a.       Where contract for sale involves repeated occasions for performance by either party, any course of performance accepted or acquiesced in without objection shall be relevant to determine the meaning of the agreement