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Contracts II
University of South Carolina School of Law
Adams, Gregory B.

CONTRACTS II
 
VIII. The Meaning of the Agreement
A. Principles of Interpretation: the process by which a court gives meaning to contractual language when the parties attach materially different meanings to that language. (Includes construction: the judicial role in determining the legal effect of that language.)
1. Approaches to Interpretation
a. Subjective: if the parties attributed materially different meanings to contractual language, no contract was formed because there was no “meeting of the minds.” (Raffles v. Wichelhaus.)
b. Holmes’ External Approach: a speaker should always expect his words to be understood in accordance with normal usage.
c. Williston’s Objective Theory: words and conduct should be interpreted in accordance with the standard of a reasonable person familiar with the circumstances; contractual language can be given a meaning that neither party intended.
d. Corbin’s Modified Objective Approach
i. questions for the court: (1) whose meaning controls the interpretation? (2) what was that party’s meaning?
ii. to answer (1), ask whether either party knew or had reason to know of the meaning attached by the other to the contract. The party having knowledge or reason to know is bound by the meaning of the other.
iii. the mutual understanding of the parties will control, even if it is different from the interpretation that would be given to the contract by a reasonable person.
iv. adopted in Rest. 2d.:
§200: Interpretation of a promise or agreement or a term thereof is the ascertainment of its meaning.
§201 (1): where the parties attach the same meaning to a promise or agreement or a term thereof, it is interpreted in accordance with that meaning.
§201 (2): where the parties attach different meanings to a promise or agreement or a term thereof, it is interpreted in accordance with the meaning of one party if (at the time the agreement was made) the other party knew or had reason to know of the first party’s meaning, while the first party did not know or have reason to know of the other’s meaning.
§201 (3): if neither party had reason to know of the other’s meaning, no contract exists because of the absence of mutual assent. 
2. Cases
a. Joyner v. Adams: contract term was ambiguous and there was no meeting of the minds; remanded to determine if either party knew of the other’s meaning (following Rest. 2d §201).
i. P. must prove that his meaning is the correct one: D. knew of P’s meaning, but P. did not know of D’s meaning
ii. Maxim of Contra Proferentem (Rest. §206): ambiguity in contract terms must be construed most strongly against the party which drafted the contract (usually applied for adhesion Ks and where one party had a definite bargaining advantage)
iii. Rest. §203 (a): court should prefer an interpretation that makes an agreement reasonable, lawful, and effective.
b. Frigaliment Importing Co. v. BNS International Sales Corp.: P. has not met burden of proof that his interpretation of the contract should be binding on the other.
i. Test for P’s burden:
(1) parties had different meanings
(2) D. knew or should have known of P’s meaning
(3) P. did not know or have reason to know D’s meaning.
ii. Interpreting ambiguity:
(1) Old Plain Meaning, “Four Corner’s” Rule: if meaning of a K is clear, no extrinsic evidence can be admitted to prove otherwise; court must conclude that K is ambiguous before accepting extrinsic evidence.
(2) Posner’s threshold issue is ambiguity; Objective evidence should be admitted to demonstrate that apparently clear language is ambiguous; only objective evidence (from disinterested 3d parties) can alter the meaning of a clear K.
(3) Rest. §202: court should admit all relevant evidence to determine parties’ intent (consider all circumstances, including negotiations, all communications, trade usages; writing interpreted as a whole) (statutory definitions are not determinative of K’s meaning)
c. C&J Fertilizer v. Allied Mutual Insurance: Customers are not bound to unknown terms that are beyond the range of reasonable expectations.
i. Rest. 211: where the other party has reason to believe that the party manifesting assent would not do so if he knew that the writing contained a particular term, that term is not part of the agreement.
ii. ambiguous policies almost always construed against insurer. 
iii. “reasonable expectations” generally applies only to adhesion contracts
iv. Dissent disagrees b/c court did not first find that the term was ambiguous before interfering with its meaning.
B. The Parol Evidence Rule: a substantive rule of law, it operates to exclude extrinsic evidence of matters not contained in the written agreement between the parties where that evidence is offered to supplement or contradict the written agreement.
1. Integration: a document is an integration of the parties’ agreement if it is intended as the final expression of the agreement; the parol evidence rule only applies to integrations.
a. partial integration: a document

such as reformation of the contract.
f. does not apply to evidence introduced to establish a collateral agreement between the parties. ??
i. Rest. 216 (2): an agreement will not be considered fully integrated if the parties have made a consistent additional agreement which is either agreed to for separate consideration or would naturally be excluded from the writing.
8. the Four Corners Approach to Parol Evidence Rule:
a. to determine if document is an integration, look only at the document, without resort to other evidence of the parties’ intent.
b. evidence of prior negotiations may be used for interpretation only upon a finding that K’s language is ambiguous, vague, unclear. 
c. the meaning of the K. must be determined only from the four corners of the document.
9. Cases
a. Thompson v. Libby:
i. parol evidence can be admissible to apply the K to its subject matter, to clarify its language, and enforce it as it stands, or if it relates to collateral agreement. Parol evidence cannot contradict or vary the writing.
ii. to justify the admission of a parol promise by one of the parties to a written K, on the ground that it is collateral, the promise must relate to a subject distinct from that to which the writing relates.  
iii. collateral agreement: not ordinarily included in the contract; would be a separate agreement (supplementary to what is in writing)
iv. court used Williston’s “four corners” test: complete vs. partial integration determined by looking only at the writing.
b. Taylor v. State Farm Insurance Co.:
i. where there is a total integration of an agreement, evidence of antecedent understandings and negotiations cannot be admitted to vary or contradict the writing, but can be admitted to interpret the agreement
ii. judge first considers the offered evidence, and if the K language is reasonably susceptible to the interpretation asserted by its proponent and the evidence tends to prove that interpretation (a question of law), then the evidence