I. The Parol Evidence Rule; Further Problems of Interpretation
The Parol Evidence Rule- a rule that provides that the parol evidence will not be admitted to vary, add to, or contradict a written contract that constitutes an integration. The parole evidence rule does not determine whether an oral agreement actually existed, rather, it determines if it should be applied. If the oral argument is applicable, the jury decides if in fact the agreement exists.
1. An oral agreement is permitted to vary a written contract only if (1) it is collateral in form, (2) does not contradict express or implied conditions of the written contract, and (3) consists of terms which the parties could not reasonably have been expected to include in the written contract.
Mitchill v. Lath: ∏, through a contract executed by her husband, bought some property from the ∆. The written contract of sale was completely integrated. The ∆ then made an oral agreement with the ∏ that in consideration of her purchase of the property, he would remove an ice house which he maintained on neighboring property and which the ∏ found objectionable. Here, the parol agreement does not meet these requirements since it is closely related to the subject of the written contract. It could also be said to contradict the conditions of the written contract.
Collateral Agreement- an agreement that is made prior to or contemporaneous with a written agreement, which is admissible in evidence as long as it is consistent with the written document
2. Calamari & Perillo, A Plea For A Uniform Parole Evidence Rule and Principles Of Interpretation
Corbin: The Actual Intent Test (Majority Approach)- A writing is deemed to be an integration only if the parties actually intended it to be an integration. The intention of the parties’ cannot be discerned completely from the writing. The court will consider any relevant evidence to determine the parties’ intent. This is an individualized test that requires the judge to determine the legal relations of the parties in accordance with their actual intentions, even when the forms—i.e., writings—they employed suggest otherwise. This leads to a narrower application of the parol evidence rule, and consequently leads to the more frequent admission of parol evidence.
Williston: The Formal Intent Test- a writing will be treated as an integration if taken as a whole and on its face the writing appears to be an instrument the completely expresses the parties’ agreement. “Intent” under this test is essentially a matter of form—i.e., the question is whether the writing has the form of a complete instrument. This is a standardized and objective test based on the terms of the written contractual documents as understood by a reasonably intelligent person. By looking at the agreement, you should be able to tell exactly what the parties intended without the inclusion of outside evidence. This leads to a broad application of the parol evidence rule, and consequently leads to the frequent exclusion of parol evidence.
3. Restatement, First, Contracts §§ 228, 237, 239, 240
a. § 228. What is Integration
An agreement is integrated where the parties thereto adopt a writing or writings as the final and complete expression of the agreement. An integration is the writing or writings so adopted.
b. § 237. Parol Evidence Rule; Effect of Integration on Prior or Contemporaneous Agreements
Except as stated in [§ 240] the integration of an agreement makes inoperative to add to or vary the agreement all contemporaneous oral agreements relating to the same subject-matter; and…all prior oral or written agreements relating thereto…
c. § 239. Effect of Partial Integration
Where there is integration of part of the terms of a contract prior written agreements and contemporaneous oral agreements are operative to vary these terms only to the same extent as if the whole contract had been integrated.
d. § 240. In What Cases Integration Does Not Effect rior or Contemporaneous Agreements
(1) An oral agreement is not superseded or invalidated by a subsequent or contemporaneous integration, nor a written agreement by a subsequent integration relating to the same subject-matter, if the agreement is not inconsistent with the integrated contract, and
(a) is made for separate consideration, or
(b) is such an agreement as might naturally be made as a separate agreement by parties situated as were the parties to the written contract…
4. Restatement, Second, Contracts §§ 209, 210, 213, 215, 216
a. § 209. Integrated Agreements
(1) An integrated agreement is a writing or writings constituting a final expression of one or more terms of an agreement.
(2) Whether there is an integrated agreement is to be determined by the court as a question preliminary to determination of a question of interpretation or to application of the parole evidence rule.
(3) Where the parties reduce an agreement to a writing which in view of its completeness and specificity reasonably appears to be a complete agreement, it is taken to be an integrated agreement unless it is established by other evidence that the writing did not constitute a final expression.
b. § 210. Completely and Partially Integrated Agreements
(1) A completely integrated agreement is an integrated agreement adopted by the parties as a complete and exclusive statement of the terms of the agreement.
(2) A partially integrated agreement is an integrated agreement other than a completely integrated agreement.
(3) Whether an agreement is completely or partially integrated is to be determined by the court as a question preliminary to determination of a question of interpretation or to application of the parol evidence rule.
c. § 213. Effect of Integrated Agreement on Prior Agreements (Parol Evidence Rule)
(1) A binding integrated agreement discharges prior agreements to the extent that it is inconsistent with them.
(2) A binding completely integrated agreement discharges prior agreements to the extent that they are within its scope.
(3) An integrated agreement that is not binding or that is voidable and avoided does not discharge a prior agreement. But an integrated agreement, even though not binding, may be effective to render inoperative a term which would have been part of the agreement if it had not been integrated.
d. § 215. Contradiction of Integrated Terms
Except as stated in the preceding Section, where there is a binding agreement, either completely or partially integrated, evidence or prior or contemporaneous agreements or negotiations is not admissible in evidence to contradict a term of the writing.
e. § 216. Consistent Additional Terms
(1) Evidence of a consistent additional term is admissible to supplement an integrated agreement unless the court finds that the agreement was completely integrated.
(2) An agreement is not completely integrated if the writing omits a consistent additional agreed term which is
(a) agreed to for separate consideration, or
(b) such a term as in the circumstances might naturally be omitted from the writing.
5. Hatley v. Stafford: Naturally Omitted Terms
In Hatley, the court discusses “naturally omitted” terms. A widely accepted modern rule is that parol evidence is admissible if it concerns a term that would naturally be omitted from the written agreement. Under the Restatement, a term will be treated as naturally omitted if: (i) the term does not conflict with the written integration; and (ii) the term concerns a subject that similarly situated parties would not ordinarily be expected to include in the written agreement.
The same approaches that are used to determine whether a writing is an integration are used to determine whether a parol agreement concerns a subject that would be naturally omitted from the writing.
(1) Williston: Formal Approach- the court does not give much weight to the individual circumstances of each particular case, but instead treats cases generically to determine whether an abstract reasonable person would naturally have omitted the term in question from the writing.
(2) Corbin: Individualized Approach- the court takes into account all of the circumstances of the individual case in determining whether the actual parties might naturally have omitted the parol agreement from the writing. The Hatley court looks at: (1) whether the parties have business experience (as these individuals are more likely to reduce their entire agreement to writing than parties without such experience, especially if the parties are represented by counsel on both sides); (2) the relative bargaining strength of the parties (since a transaction not negotiated at arm’s length ma result in a writing that omits essential terms); (3) the apparent completeness and detail of the writing itself
6. Evidence of oral collateral agreements should be excluded only when the fact finder (the court) is likely to be misled.
Masterson v. Sine: Dallas Masterson and his wife, the ∆, owned a ranch as tenants in common. On February 25, 1958, they conveyed by grant deed the ranch to his sister and her husband, Medora and Lu Sine, the ∏s, reserving an option to repurchase the ranch within 10 years from the date of conveyance for the consideration paid by the ∏s plus depreciation value of any improvements as allowed under U.S. income tax regulations. Dallas Masterson went bankrupt. ∆ and Dallas’ trustee in bankruptcy (also a ∆) sought to establish their right to enforce the option. Parol evidence was admitted to clarify the meaning of the option.
When a written contract is a complete and full embodiment of the agreement’s terms, parol evidence cannot be used to add or to very terms. When only part of the agreement is complete, the same rules apply to that part, but parol evidence can be shown to prove elements as to the remainder not reduced to writing. It must be determined whether the parties intended the written agreement to be the complete and full embodiment of the terms. However, this rule has not been applied consistently. A parol evidence rule must take into consideration the problems of human memory being less accurate than a writing and the possibility of fraud.
7. UCC § 2-202. Final Written Expression: Parol or Extrinsic Evidence
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
(a) by course of performance, course of dealing, or usage of trade (Section 1-303); and
(b) 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.
8. The parol evidence rule bars the introduction of evidence of a prior or contemporaneous oral agreement that contradicts a written memoranda intended as the final agreement between the parties.
Hunt Foods and Industries, Inc. v. Doliner: ∏ negotiated with ∆ to buy certain assets, and when negotiations recessed because of failure to agree to certain terms, ∏ demanded and obtained an unconditional written option to purchase at a fixed price. ∆ claimed he obtained an oral understanding that the option was to be used only in the event that he solicited an outside offer for a higher price. When negotiations broke down for failure to reach an agreement, the written option was exercised. ∆ refused tender. ∏ sued for specific performance.
Definition of “inconsistent”- to be inconsistent, the term must negate or contradict a term of the writing. Anything that is not contradictory is consistent.
9. Alaska Northern Development, Inc. v. Alyeska Pipeline Service Co.: This case defines “inconsistent” as the absence of reasonable harmony in terms of the language and respective obligation of the parties.
10. Note on Merger Clauses
Many written contracts contain provisions stating that the written contract is the entire contract between the parties, or is the final, complete, and exclusive statement of all the terms the parties have agreed upon, or the like. These kinds of provisions are known as “merger” clauses, or “integration” clauses, because they say, in effect, that all agreements between the parties have been merged into the writing. These clauses usually appear at the end of the contract.
The traditional approach to merger clauses was that the presence of such a clause was determinative on the question of whether a writing was an integration—unless the clause was itself the result of fraud, mistake, or some comparable defense. This is probably still the majority rule, but modern courts sometimes say that a merger clause is only one factor in determining whether a writing was an integration.
11. ARB, Inc. v. E-Systems, Inc.: Integration clauses will only be accepted if they in fact represent the intentions of both parties.
12. Seibel v. Layne & Bowler, Inc.: The more detailed and conspicuous a merger or integration clause is, the more likely it is to be enforced.
13. Note on the Fraud Exception to the Parole Evidence Rule
Promissory Fraud- evidence of a promise that would otherwise be barred under the parol evidence rule may be admissible if the promise was made with a present intent not to perform. Such an intent must normally be established through circumstantial evidence. In most jurisdictions, damages are based on what the defrauded party would have received had the promise been performed.
Merger Clauses- merger clauses may not be invoked to keep out proof of fraud in the contract.
14. Note on the Condition-to-Legal-Effectiveness Exception to the Parole Evidence Rule
If the parties characterize their parol agreement as a condition to performance of a written agreement, the agreement will be inadmissible under the parol evidence rule. However, if the parties characterize their oral agreement as a condition to the legal effectiveness of the writing, the parol agreement is not subject to the parol evidence rule.
The legal effectiveness exception is very tenuous because there is only a narrow and unclear line between (i) evidence of an agreement that a written instrument will not become legally effective unless a certain condition is fulfilled (which falls within the exception and is admissible) and (ii) evidence of an agreement that performance under an admittedly effective contract is subject to a condition (which does not fall within the exception and is not admissible).
15. UCC § 2-209(2), (4), (5). Modification, Rescission and Waiver.
(2) A signed agreement which excludes modification or rescission except by a signed writing cannot be otherwise modified or rescinded, but except as between merchants such a requirement on a form supplied by the merchant must be separately signed by the other party.
(4) Although an attempt at modification or rescission does not satisfy the requirements of subsection (2) or (3) it can operate as a wavier.
(5) A party who has made a waiver affecting an executory portion of the contract may retract the waiver by reasonable notification received by the other party that strict performance will be required of any term waived, unless the retraction would be unjust in view of a material change of position in reliance on the waiver.
16. Note on No-Oral-Modification Clauses
A NOM clause is a provision in a contract saying that the contract cannot be modified except by writing.
At common law, an oral modification was enforceable notwithstanding an NOM clause, assuming there was no legal duty rule or true statute of fraud problems. The theory was that parties can, by later contracts, change their earlier contracts and that an oral modification is a later contract.
UCC § 2-209 makes two changes to the common law: (1) a modification needs no consideration to be enforceable so that the legal duty rule does not apply and (2) if a contract for the sale of goods contains a NOM clause then modifications of the contract must be in writing.
The Use Of Extrinsic Evidence to aid in the Interpretation of a Written Text
1. The Plain Meaning Rule: If the words of a contract are clear and unambiguous, the intent is to be discovered only from the express language of the agreement.
Steuart v. McChesney: ∆ owned a parcel of real property. ∆ and ∏ executed an agreement which granted ∏ a right of first refusal over ∆’s property. The right of first refusal stated that: “the…∏s may exercise the right to purchase said premises at a value equivalent to market value of the premises according to the assessment rolls as maintained by the county…the date of valuation shall be that the…∆s notify…∏s, in writing of the existence of a Bona Fide Purchaser.” Nine years after execution of the agreement, ∆ received offers of 30,000 and 35,000 to purchase their property. ∆ notified ∏ of the offers, and ∏ exercised their right of first refusal by tendering $7,820, the assessed value of the property, to ∆. After ∆ refused to tender the property, ∏ sued ∆ for specific performance. The trial court held that the assessed value was intended merely to serve as a mutual protective minimum price for the premises rather than the controlling price and granted the ∏ a right to purchase the property for $35,000, the third party offer. On appeal, the superior court reversed, holding that the plain language of the agreement required that assessed market value, alone, should determine the exercise price. ∆ appealed. Here, the language of the Right of First Refusal, viewed in context, is express and clear and is therefore not in need of interpretation by reference to extrinsic evidence. The plain meaning is that if during ∆’s lifetime, a bona fide purchaser for value makes an offer, ∏ may purchase the property at a price equivalent to the assessed value on the c
mance in accord with the parties’ intentions at the time the agreement was reached; or (3) where the party injured by the mistake can be fully compensated.
When a change occurs after the contract has been made, the buyer bears the risk. But if the parties agree to the contract under incorrect facts, a change that had occurred before but was unknown to the parties makes the seller bear the risk.
3. Wood v. Boynton:
4. Firestone & Parson, Inc. v. Union League of Philadelphia:
5. West Coast Airlines, Inc. v. Miner’s Aircraft & Engine Service:
6. Everett v. Estate of Sumstad:
7. Restatement, Second, Contracts §§ 152, 154
a. § 152. When Mistake of Both Parties Makes a Contract Voidable
(1) Where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake under the rule stated in § 154.
(2) In determining whether the mistake has a material effect in the agreed exchange of performances, account is taken of any relief by way of reformation, restitution, or otherwise.
b. § 154. When a Party Bears the Risk of a Mistake
A party bears the risk of mistake when
(a) the risk is allocated to him by agreement of the parties, or
(b) he is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, or
(c) the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so.
8. A court need not grant rescission in every case in which there is a mutual mistake that relates to a basic assumption of the parties upon which the contract was made and which materially affects the agreed performance of the parties.
Lenawee County Board of Health v. Messerly: When Mr. Bloom owned the property on which there was a three-unit apartment building, he installed a septic tank without a permit and in violation of the applicable health code. This was not known to the ∆s when they subsequently bought it, nor to Barnes when he purchased it on a land contract from the ∆s. After Barnes defaulted on the land contract, an arrangement was made whereby the land was quit-claimed back to the ∆s, and they sold it on a new land contract to the Pickles. About six days later, the Pickles discovered raw sewage seeping out of the ground. The County Board of Health (∏) condemned the property and sought an injunction against human habitation until it was brought into compliance with the sanitation code. In resulting cross-actions, the Pickles sought rescission of the contract on grounds of mutual mistake. Focusing on the “as is” clause in their land contract, the trial court denied rescission and awarded the ∆s a judgment against the Pickles on the land contract. The court of appeals reversed. It cannot be ordered to relieve a party who has assumed the risk of loss in connection with the mistake. Furthermore, where both parties are innocent, as in this case, the court exercises its equitable powers to determine which blameless party should assume the loss. Here, the “as is” clause suggests it should be the Pickles. Reversed.
Rescission cannot be ordered to relieve a party who has assumed the risk of loss in connection with the mistake.
9. Garb-Ko, Inc. v. Lansing-Lewis Services, Inc.: applies § 152
10. Gartner v. Eikill:
11. Beachcomber Coins, Inc. v. Boskett: Negligent failure of a party to know or to discover the facts as to which both parties are under a mistake does not preclude rescission or reformation on account thereof.
12. UCC §§ 2-313, 2-314, 2-315
a. § 2-313. Express Warranties by Affirmation, Promise, Description, Sample
(1) Express warranties by the seller are created as follows:
(a) Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise.
(b) Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description.
(c) Any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model.
(2) It is not necessary to the creation of an express warranty that the seller use formal words such as “warrant” or “guarantee” or that he have a specific intention to make a warranty, but an affirmation merely of the value of the goods or a statement purporting to be merely the seller’s opinion or commendation of the goods does not create a warranty.
b. § 2-314. Implied Warranty: Merchantability; Usage of Trade
(1) Unless excluded or modified (Section 2-316), a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind. Under this section the serving for value of food or drink to be consumed either on the premises or elsewhere is a sale.
(2) Goods to be merchantable must be at least such as
(a) pass without objection in the trade under the contract description; and
(b) in the case of fungible goods, are of fair average quality within the description; and
(c) are fit for the ordinary purposes for which such goods are used; and
(d) run, within the variations permitted by the agreement, of even kind, quality and quantity within each unit and among all units involved; and
(e) are adequately contained, packaged, and labeled as the agreement may require; and
(f) conform to the promise or affirmations of fact made on the container or label if any.
(3) Unless excluded or modified (Section 2-316) other implied warranties may arise from course of dealing or usage of trade.
c. § 2-315. Implied Warranty: Fitness for Particular Purpose
Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller’s skill or judgment to select or furnish suitable goods, there is unless excluded or modified under the next section an implied warranty that the goods shall be fit for such purpose.
13. Note on Warranties: § 315 Fitness for a Particular Purpose
Unilateral Mistake- a mechanical error of computation, perception, etc., concerning a basic assumption on which the contract was made, that is made by only one of the parties to a contract.
1. Relief from mistaken bids is allowed where one party knows or has reason to know of the other’s error, the mistake is material to the contract, was not the result of neglect of a legal duty, enforcement would be unconscionable, and the other party can equitably be placed in status quo.
Elsinore Union Elementary School Dist. V. Kastorff: ∆, a contractor, submitted a bid of $89,994 to do construction work for the ∏. When the ∏ received the bid, it asked