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Contracts II
University of California, Hastings School of Law
Lefstin, Jeffrey A.

Contracts II Spring 2007 Outline

I. PAROL EVIDENCE RULE
a) Ultimate question: will a particular piece of testimony be admitted at trial…is fact-finder going to be allowed to hear/receive a particular piece of evidence. Judge-made determination. Judge decides whether to admit evidence, jury decides whether to believe. Two basic questions: 1)What question are we trying to answer? 2) What is the structure of the inquiry?

b) Application of the rule:
i) There must be a writing that purports to represent the parties’ agreement
ii) Someone tries to introduce extrinsic evidence of prior or contemporaneous discussions
(1) Evidence may either be oral or written
iii) In order to prove terms of the agreement

c) First stage of the inquiry: Level of Integration
i) Question of intent of parties – if they intended for writing to be complete, then nothing extrinsic should be considered) – is the writing a final and complete expression of the parties’ agreement/intent? 3 levels:
(1) No integration
(2) Partial integration
(3) Complete integration
ii) MINORITY APPROACH: Four Corners. Confine inquiry to the writing itself. See Thompson v. Libby.
(1) Only concerns this step…if here the court determines there is no/partial integration, then extrinsic evidence admissible.
iii) MAJORITY APPROACH: Court considers extrinsic evidence to determine the intent of the parties (to determine whether or not to admit extrinsic evidence). See Corbin on Contracts.
(1) See also Restatement §209, § 210, § 213, § 214.
(2) Merger clause – a clause that says “this is the final and complete expression of our agreement” – used to invoke the parol evidence rule to prevent extrinsic evidence from altering the terms.

d) Second stage: What extrinsic evidence to admit?
i) Depends on level of integration. Higher = less admitted

Writing

Status

What can you do?

Not an integration

Not final agreement

Add / contradict freely

Partial

Final, not complete

Add additional consistent terms

Complete

Final and complete

No additional / different terms

ii) Partial integration example: sales receipt – is a final, but not complete writing representing parties’ agreement. P may not introduce parol evidence that salesman said price would be $750, when receipt says $1000. P can introduce evidence of warranty given by salesperson, b/c the term is consistent (not inconsistent) with the writing.
iii) See Restatement § 216 (Consistent Additional Terms, p. 473)

e) UCC’s Parol Evidence Rule: UCC § 2-202
i) Section (a) privileges certain forms of extrinsic evidence. Course of dealing/ performance (§1-208) or trade usage (§1-205) may be introduced, even if complete integration.
ii) Section (b) is pretty much the same as Restatement treatment, but stated more in direction of admissibility.
(1) “Consistent additional terms” should be excluded only where in the court’s view they would if actually agreed upon “certainly have been included in the document”.
*Discharges all prior agreements not within the contract?

f) Parol Evidence Rule is not applicable (i.e. extrinsic evidence allowed):
i) To prove defense or invalidity of contract – not trying to prove terms but rather arguing that circumstances of agreement were such that court shouldn’t enforce.
(1) Some courts limit fraud exception to “fraud in the execution” (A tells B to sign a receipt when really it’s a contract)
(2) Most allow for fraud in the inducement as well (misrepresentations of fact that induce other party to enter K). However, this may be limited if the alleged fraudulent representation directly conflicts w/ a term in the writing.

(3) Sherrodd, Inc. v. Morrison-Knudsen Co. (Montana SC, 1991)
(a) P was subcontractor, D was contactor. P claimed that D told him there was 25,000 cubic yards of excavation, submitted bid based on this. P began work before a written K was completed, when it discovered that the quantity of work exceeded 25,000 cubic yards. There was a writing, with integration clause. P argued that this evidence should be admitted b/c it went to fraud by D.
(b) Court followed Montana’s strict parol evidence rule – exception for fraud only applies when it does not relate directly to the subject of the contract. This is a MINORITY view.
(c) Because the oral contention that the K price covered only 25K cubic yards of earthwork contradicted the terms of the written agreement that all “negotiations and agreements” were merged, the parol evidence rule applied.

ii) To prove existence of a second agreement
(1) Must have some sort of exchange in the second (consideration)
iii) Subsequent modification
(1) Parol evidence rule only applies to prior or contemporaneous evidence
iv) Entitlement to equitable remedy (rescission, reformation, specific performance, or other).

(1) Traveler’s Insurance Co. v. Bailey (Vt SC, 1964)
(a) Insurance company sued for equitable remedy of reformation. Document said $500/month, though agreement was actually $500/year. Court required P to prove by clear and convincing evidence that the parties’ agreement was indeed $500/year, and the writing was a scrivener mistake. Where there has been:
(i) Established beyond a reasonable doubt contractual agreement b/n parties;
(ii) Subsequent erroneous rendition of the terms of the agreement; and
(iii) No prejudicial change of position by other party;
(iv) Then the party penalized is entitled to reformation.
(b) Why doesn’t this violate parol evidence rule?
(i) P was seeking equitable remedy of reformation.
(ii) No one was arguing about the actual agreement. Extrinsic evidence is to show that the document didn’t correspond w/ intent.
(iii) Parol evidence is pertinent where parties intended some terms that were outside of the document. Here, issue was whether document conformed to the agreement. Mistake was not as to subject matter, but the writing itself.
(c) See Restatement § 155 – Mistake as to written expression.

v) Contract interpretation
(1) i.e. Raffles v. Wichelhaus – ship called “Peerless”. Whether agreement was formed at all.

g) External Evidence and Contract Interpretation
i) Traynor’s Approach (See PG&E)
(1) Is language reasonably susceptible to interpretation of party?
(a) Even this can be answered w/ extrinsic evidence – court may admit evidence conditionally…if doesn’t go towards reasonably susceptible meaning, it will be removed.
(2) If YES: admit extrinsic evidence. Jury then decides on these admitted facts. Two stage inquiry similar to parol evidence rule.
ii) PGE Co. v. G.W. Thomas Drayage & Rigging Co. (CA SC, 1968) – J. Traynor
(1) P’s property was damaged by D while D was doing some work for P. The contract contained an indemnity clause – issue was whether this clause was applicable to PG&E’s property or only to claims levied against PG&E for damages caused to 3d party property.
(2) More of a revisit to the question of interpretation rather than a parol evidence case. NOT a case of a party trying to introduce additional or different terms, but it is a case where the dispute is over the meaning of a term already existing in the contract.
(3) Traynor said when a ct interprets meaning of term based on “plain meaning”, it is based on judge’s linguistic education –assumes humans possible of perfect verbal expression.
(4) The test of admissibility of evidence isn’t whether writing appears to be plain and unambiguous, but rather whether offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible. Rational interpretation requires at least prelim consideration of all credible evidence to prove intention of parties.

iii) Trident Center v. Conne

implicates general exception

iii) Sale of Goods Over $500
(1) Part performance à Partial enforcement; seller recovers on K
(not in restitution)
(2) Specially mfg’d à Enforcement. Part perf + reliance rationale

iv) Transfer of interest in land
(1) Reliance + Part perf à Specific performance
+ Injustice

f) What kind of writing satisfies the Statute of Frauds?
i) Called a memorandum; must be signed by party against whom performance is sought.

ii) What is a sufficient memorandum?
(1) Need not represent a final expression of the agreement. Courts have found payroll stubs, minutes of meetings, etc. sufficient.

UCC

Common Law

Signed

YES

YES

Must indicate

K made between parties

K made or offered b/n parties

Content

Quantity only

Essential terms

(2) Courts are liberal with “writing”: Most courts hold that document stored on hard drive is sufficient, some also accept tape-recordings.

(3) Courts also liberal with “signing”: Test is whether other party reasonably believed that the writer intended to authenticate the writing.
(a) Example: letter on law firm letterhead may serve as authentication.

(4) A P may link together separate writings to constitute one “memorandum”. Where one is not signed, it may be included if:
(a) Unsigned writing, on its face, must refer to the same transaction.
(b) Oral testimony may be used to establish the connection between the documents
(c) Restatement: doesn’t include requirement of (a).
(d) MINORITY:Oral evid inadmissible,must refer to same transaction on face of doc
(e) *some but not all courts will accept as a writing a tape recording of a conversation, courts in general can be pretty liberal in deciding what a writing is.

(5) Crabtree v. Elizabeth Arden Sales Corp. (NY 1953)
(a) Crabtree alleged he entered into two year employment contract with D. He had no formal written contract, but a letter from Arden did set forth the arrangement whereby he was to receive incremental pay raises over the two years.
(b) There were three writings: an unsigned memo, and two signed payroll cards. The payroll cards indicated his pay rate, but P needed the memo to fill the duration term of the agreement.
(c) Court could’ve held the memo was “signed” b/c on her letterhead, or b/c her name is at bottom. Given memo was “unsigned”, how could he piece together documents?
(i) If unsigned writing, on its face, refers to the same transaction
1. Not required by Restatement.
(ii) Oral testimony may be used to establish the connection between the two (the party to be charged’s acquiescence to the contents of unsigned document).
(d) Under these rules, the Court found a sufficient memorandum of the agreement within meaning of Statute.