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Contracts II
University of Mississippi School of Law
Bradley, John R.

Contracts II
Fuller & Eisenberg, Basic Contract Law, 7th Ed.
Spring 2005
Professor Bradley

I. PAROL EVIDENCE RULE

–          General Principle:
o       A writing intended by the parties to be a final embodiment of their agreement cannot be modified by evidence that adds to, varies, or contradicts an integrated writing
o       It is a substantive part of Contract law; not a rule of evidence
§         Policy:
·         The law favors written agreements over oral agreements
o       Written agreements less susceptible to fraud, etc…
§         Issue of credibility of evidence/proof
o       Usually, later written agreement clearer expression of parties intent than an earlier oral agreements
–          Williston view:
o       Formal approach
o       Keep evidence out
o       Gives a lot of weight to the written document
o       Proper interpretation of a written agreement is that it explicitly states there is nothing else; it wipes out all previous agreements
–          Corbin view:
o       Individualized approach
o       Let evidence in
o       View of Restatement & UCC
–          First, always look to see if there was an oral agreement, then if there was a subsequent written agreement
o       If the “integrated” contract (#2) is oral, any previous or contemporaneous evidence (oral or written) can be introduced to explain it
o       Must make sure the 2nd agreement was in writing before doing Parol Evidence Rule analysis

–          Agreements are divided into two parts:
o       1) Integrated
§         Final, complete expression of one or more terms
§         End of negotiations on certain topics
§         Parol Evidence Rule applies
o       2) Partially integrated
§         Cannot be contradicted by parol evidence, but may be supplemented by evidence of consistent additional terms
o       3) Not integrated
§         Not final; still under negotiations
§         Parol evidence rule is not applicable, evidence allowed in
–          If there is a binding agreement that is either completely or partially integrated, evidence of prior agreements or negotiations is not admissible to contradict a term of the writing.



Process:
o       1) Did the parties intend for agreement #2 to be binding?
§         If not a binding agreement, PER not applicable (evidence let in)
·         Can put on evidence proving K not binding; show there was fraud, duress, etc…
§         Generally, always yes; this step probably won’t be a problem
o       2) Did parties intend #2 to be integrated?
§         RS 209
·         This issue shall be determined by the judge
o       The K must be integrated for PER to apply
·         Integrated agreement is a writing constituting a final, complete expression of one or more terms
§         Can put on evidence proving not an integrated agreement; otherwise PER applies
o       3) Is #1 agreement inconsistent, or contradicts, with #2?
§         Usually most difficult question of analysis
§         Must determine/interpret #2
§         Judge hears the evidence to determine if #1 is inconsistent with #2
·         Usually excuses jury, if one, to determine this issue
§         If the judge determines the evidence is inconsistent or contradicts an integrated agreement or term, then PER applies and evidence is kept out
·          if consistent, proceed in analysis
§        UCC 2-202 is modern trend of PER
·        To restrict or limit the #2 is not the same things as canceling it; may not be inconsistent
§        A term/agreement is inconsistent when there is an absence of a reasonable harmony in terms of the language and respective obligations of the parties
o       4) Is # 2 a completely integrated agreement?
§         RS 210
·         If the whole agreement is integrated, clear, and unambiguous, then there is a total integration:
o       If the term (of issue) is integrated, clear, and unambiguous, then no evidence admitted relating to that term (partial integration)
§         Term is deemed totally integrated; evidence may be let in regarding other ambiguous, unclear terms
§         Essentially, if, agreement or term at issue, is totally integrated, continue to step 5 (at this stage, evidence kept out)
·         If agreement, or term at issue, is not totally integrated, let evidence in
o       Judge should probably follow modern trend and look to all relevant evidence to determine if parties intended to have a completely integrated agreement
o       5) Is #1 within the scope of #2?
§         RS 213
·         If all previous 4 steps are met, wipes out all prior or contemporaneous agreements within its scope
o       Evidence not within the scope of #2 is allowed
§         Judge could use as a loophole to allow evidence in
o       Even if parol evidence let is determined to be admissible; it does not decide the merits of the case
§         Jury still has to decide the credibility; determine if agree with evidence or not

B. Exceptions to the Parol Evidence Rule:
o       Separate consideration: parol agreement admitted if supported by separate consideration
o       Binding: Evidence usually allowed to show illegality, fraud, duress, mistake, lack of consideration
o       Evidence usually allowed to show #1 was a separate agreement
§         Collateral Contract Doctrine
·         Restatement & UCC view to generally let evidence in of a collateral contract unless it will mislead the judge or jury
·         Let evidence in as long as it is credible
o       Jury still has to decide merits; may not agree with evidence
·         Should permit proof of a collateral agreement if it is such an agreement that might naturally be made as a separate agreement by the parties
o       Condition Precedent: Evidence usually allowed to show the parties orally agreed to a condition precedent to the written agreement; the agreement not integrated in respect to the oral condition
§         RS 217 – integrated agreement subject to oral condition precedent
o       Modification: A subsequent agreement is not subject to the Parol Evidence Rule; but is a modification; evidence of modification is usually allowed; check for N.O.M. & possible waiver
o       Remedy: Evidence of grounds for granting or denying rescission, reformation, specific performance, or any other remedy
o       Interpretation: Evidence will be admitted to help clarify the meaning/intention of an ambiguous term
§         Have to make sure evidence won’t contradict #2, will only clarify
·         A good way around the PER
§         Court must think #2 or term in #2 susceptible to multiple, reasonable meanings
§         Explored further below (C.)
–          Did the parties intend for #2 written agreement to wipe out all prior and contemporaneous agreements?
o       Look at surrounding circumstances to determine intent
o       If the parties intended for both agreements to exists, then OK

–          Merger Clauses
o       A provision in the agreement that states the written agreement contains the only agreements between the parties
§         The written contract is the entire expression of the agreement
o       Merger clauses are not completely controlling, but do create a presumption that the written agreement was intended to be a complete integration
§         Generally, most courts are undecided as to the weight given to a merger clause
o       If merger clause is a boilerplate provision then courts may find the clause does not represent the intent of the parties; it was not negotiated for
o       Merger clause may be unconscionable; it may be shocking and “sprung” on the other party
o       The more specific & tailored the merger clause is to the situation, the more credibility the court may give a merger clause




–          No Oral Modification Clause (N.O.M.)
o       Many contracts contain a provision that the written contract cannot be modified orally; can only be modified in writing
§         Modification concerns subsequent agreements to written agreement
o       Common law stated that an oral modification was binding despite a NOM
o       UCC 2-209
§         (1) Modification of a contract for the sale of good needs no consideration to be binding
§         (2) If contract contains a NOM, than modification must be in writing
§         (4) An attempt at modification that does not satisfy (1) or (2) can operate as a waiver
·         Affect of disregarding NOM
§         (5) Waiver can be rejected with reasonable notification

–          CISG – international sale of goods
o       There is NO PER!
o       A court interpreting a contract is allowed to consider all relevant evidence, and may even consider prior negotiations

C. Intent (Interpretation)
o       If a term or intent of parties is reasonably susceptible to different meanings, should extrinsic evidence be admitted to determine meaning of term/intent of parties?
o       Plain Meaning Rule: (Four Corners Doctrine)
§         Traditional/minority rule
·         If a writing appears to be plain and unambiguous on its face, its meaning must be determined from within the “four corners” of the instrument without resorting to extrinsic evidence of any nature
·         Seeks to exclude all evidence, even circumstances surrounding the formation of the K
o       Differs from PER because PER only seeks to exclude evidence or promises not embodied in the written K
·         Rule rejected by the Restatement & UCC
o       Context Rule:
§         A court may consider surrounding circumstances leading to the execution of the agreement, including the subject matter of the contract as well as subsequent conduct of the parties
·         Generally, only exclude evidence that is not credible
§         Admit evidence to clarify any ambiguity; not to contradict
§         Main goal is to determine the parties intent
§         Corbin like reasoning
·         Can not tell from the writing what the parties meant, must look to all relevant evidence on the meaning of the term
§         A sort of way around PER
·         Try to prove agreement or term ambiguous and offer evidence showing the proper interpretation to help your view
o       May be able to get your interpretation to have the same affect as a prior agreement that failed to get in because of PER
o       Modern trend:
§         As long as the term is reasonably susceptible to alternative meanings, extrinsic evidence should be admitted
–          Way to persuade Judge who uses Plain Meaning Rule to allow extrinsic evidence:
o       The Court should ask whether the provision is reasonably susceptible to different meanings
§         List possible alternate interpretations
o       If the Contract is reasonably susceptible to one of those interpretations; the court should not try to determine its meaning/parties intent from the four corners of the document
§         List extrinsic evidence that would help clarify meaning
·         Look at market
·         Parties evidence
·         Other potential evidence
o       Proving the K could have a broader meaning would mean the court or jury should take into account the evidence and determine the meaning of the K

–          UCC 2-202
o       A final expression may not be contradicted by evidence of a prior agreement, but may be explained or supplemented by:
§         Course of performance, course of dealing, usage of trade
§         Evidence of consistent additional terms

–          Trade usage, course of performance, course of dealing
o       Habit or customary practice
§         Generally:
·         will normally govern in an agreement unless the parties made it expressly clear that different rules would govern
·         The contract should be interpreted by the parties actions, and in light of commercial practices and other surrounding circumstances
·         Performance, usage, and dealings are usually always admitted into evidence, even against a complete and final agreement, unless they contradict the express terms of the K
o       An agreement is interpreted in accordance with relevant trade usage if:
§         Each party knew or had reason to know of the trade usage; AND
§         Neither party knew or had reason to know that the meaning attached by the other party was not consistent with this usage
o       A trade usage is a regular observance in a trade or course of dealing that justifies an expectation that it will be observed in regards to the particular agreement
§         Whether there was a trade usage, or if it was a justifiable expectation, is a question of fact
–          A question of interpretation is a question of fact for the fact-finder (jury or judge); must determine the credibility of the evidence or chose among reasonable inferences that can be drawn from the evidence
o       However, if the evidence can only mean one thing, it is a question of law








II. FORM CONTRACTS

–          Traditional Common Law:
o       Mirror Image Rule:
§         If the two forms are not a “mirror image” (identical) to each other, then it is not an acceptance; but is only a counter-offer
·         The counter-offer could be accepted by silence, conduct, etc…
§         UCC 2-201(2) retains a version of the common law mirror image rule:
·         Between merchants
·         If there is evidence the party received the counter-offer, did not sign it, not give notice of rejection within 10 days of receipt, it is an indication of acceptance
§          Battle of Forms
·         Result of the Mirror Image Rule
o       Party would create K with favorable terms for their client and send it to other party; other party would respond with differing terms; the party with the “last shot” prevailed
–          UCC 1-201 (37)
o       Definition of “signed”
§         A broad definition; essentially, any form of authentication
§         Doesn’t have to be a signature; can be a symbol

–          UCC 2-207
o        (1) A definite and seasonable expression of acceptance or a written confirmation operates as an acceptance to an offer…
·         Forms a contract; offeror’s terms accepted
§         Even if it states terms additional to or different from those offered or agreed upon
§         Unless, acceptance is expressly made conditional on assent to the additional or different terms
·         Expressly conditional clause must clearly indicate the intent that the offeree does not wish to proceed with transaction unless he is assured of offeror’s assent to the additional or different terms
o       If that is the case, the acceptance does not constitute an acceptance, AND does NOT constitute a counter-offer
o       Can look to (3) to see if conduct created K
o       (2) The additional terms of the offeree’s response are to be construed as proposals for addition to the K
§         Between merchants, the terms become part of the contract UNLESS:
·         The offeror expressly limits acceptance to the terms of the offer
o       Very rarely will a buyer limit acceptance; re-creates the mirror image rule
·         The additional terms materially alter the K
o       Creates a surprise or hardship
·         Notification of objection to the terms is given within a reasonable time after they are received
o       (3) Conduct by both

is material to the K
§         A fact is material if it is one to which a reasonable person would attach importance in determining his choice of action in the transaction
·         If the misrepresentation would likely induce a reasonable person to agree to the K
o       If a party’s assent is induced by a fraudulent or material misrepresentation upon which a party is justified in relying upon, the K is voidable
o       If the misrepresentation is made by a 3rd party, K is still voidable UNLESS other party in good faith, not knowing of misrepresentation, materially relied upon the K

–          Mistake in Reformation; Transcription
o       General principle:
§         A party seeking reformation must prove by clear and convincing evidence what the true terms/intent of the agreed K was
·         Ex. Insurance company used wrong form in drafting policy; didn’t notice until after agreement signed; court can reform the written agreement to reflect the true agreement
o       Caveat:
§         There is a presumption that an executed written agreement expresses the true intention of the parties and a strong evidence is required to overcome that presumption
·         But, sometimes there may be an easy case where the transcription error is obvious
o       Reformation:
§         Generally, sought because of the mistake of one party only
·         Usually, an oral agreement, then a party makes a mistake when putting it in writing
§         Because of a mistake in transcription, the K does not reflect that actual agreement between the parties
·         Equity will act to bring the erroneous writing into conformity with the true agreement
o       Usually aggrieved party will ask court to reform K to conform with original agreement
o       Remedy of reformation a way around PER

V. EFFECT OF CHANGED CIRCUMSTANCS

–          There are always risks inherent to an agreement, but there comes a certain point where there are unforeseeable occurrences that are so far outside the range of risk that it would be impossible or impracticable to render performance.
o       Must look to all relevant circumstances
–          RS 261
o       If a parties performance becomes impracticable by an unforeseen event, not his fault, then the duty of performance is discharged, unless the agreement states otherwise
§         Event = an unforeseen, supervening circumstance that changes the basic assumption on which the K was formed
·         Unforeseen = An event not contemplated by the parties
§         A party can assume the risk of an agreement
·         If not specified; then generally, the seller bears the risk UNLESS performance would be extremely burdensome, then the buyer bears the risk

–          UCC 2-615
o       Delay in delivery, or non-delivery, is NOT a breach of a K if performance has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the K was made or in good-faith compliance with a govt. regulation
–          Taylor v. Caldwell (1863)
o       Origin of the doctrine of UCC 2-615
o       K regarding rental of concert hall; destruction by fire of concert hall by neither parties’ fault excused performance
§         The concert hall was expected to be there; an implied condition

–          Examples of contingencies that render a K impracticable:
o       RS 262
§         Death or incapacitation of a person necessary for performance
o       RS 263
§         Destruction of thing necessary for performance
o       RS 264
§         Prevention of performance by governmental regulation or order
·         Domestic or foreign regulation or order
–          Increased cost of performance alone does NOT excuse performance, UNLESS the increase is due to some unforeseen contingency/event which alters the essential nature of the performance
o       Usually, neither rise nor fall of market price renders a performance impracticable, especially in oil cases (such a volatile market)
–          The doctrine of impossibility is incorporated by the doctrine of impracticability
o       A duty is legally impossible if it is impracticable
o       A duty is impracticable if it can only be done at an excessive or unreasonable cost
§         Impracticability is a broader term than impossibility and impracticability incorporated/language used by the RS & UCC
–          Steps:
o       1) Did an unexpected event or a contingency, the non-occurrence of was a basic assumption to the K, occur?
o       2) Did the event or contingency effect the party’s performance rendering it impracticable?
o       3) Is the party seeking relief at fault?
o       4) Did the party seeking relief bear the risk of an occurrence of the event or contingency in the K?

–          Side note:
o       Liquated damages provision in a contract for the government is more likely to be enforceable
§         Government does not operate at a profit
§         Without a liquidated damages clause, the govt. would be at the mercy and good-will of the other party

–          Risk of Loss of Goods
o       Common law:
§         Risk of loss falls on person who holds title
o       UCC 2-509 & UCC 2-510
§         Essentially puts the risk of loss on the party who controls the goods           
·         Assumption is that the party in control will be in the best position both to prevent loss and to insure the goods against loss


–          Builder’s Risk:
o       If a party contracted to build a new structure, builder bears the risk of destruction and damage until the work is completed; may not recover for work done
§         Other party not obligated to pay anything for the part performance that was destroyed
o       If a party contracts to make repairs or additions to an existing structure, then the owner of the structure bears the risk of destruction or damage
§         The builder’s duty is discharged and he may recover compensation for the work done before the destruction
o       Contract may state otherwise and place burden of risk on a specific party
–          Sub-contractor’s Risk: