Select Page

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

I.                    The Parol Evidence Rule
Restatement §209. Integrated Agreements
(1) 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 parol 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
 
§ 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 PER
(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.
 
§ 214. Evidence Of Prior Or Contemporaneous Agreements And Negotiations
Agreements and negotiations prior to or contemporaneous with the adoption of a writing are admissible in evidence to establish:
(a) that the writing is or is not an integrated agreement;
(b) that the integrated agreement, if any, is completely or partially integrated;
(c) the meaning of the writing, whether or not integrated;
(d) illegality, fraud, duress, mistake, lack of consideration, or other invalidating cause;
(e) ground for granting or denying rescission, reformation, specific performance, or other remedy.
 
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 dealing or usage of trade (Section 1–205) or by course of performance (Section 2–208); 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. (collateral agreements)
 
§ 1–205. Course of Dealing and Usage of Trade.
                A course of dealing is a sequence of previous conduct between the parties to a particular transaction which is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.
                A usage of trade is any practice or method of dealing having such regularity of observance in a place, vocation or trade as to justify an expectation that it will be observed with respect to the transaction in question. The existence and scope of such a usage are to be proved as facts. If it is established that such a usage is embodied in a written trade code or similar writing the interpretation of the writing is for the court.
                A course of dealing between parties and any usage of trade in the vocation or trade in which they are engaged or of which they are or should be aware give particular meaning to and supplement or qualify terms of an agreement.
                The express terms of an agreement and an applicable course of dealing or usage of trade shall be construed wherever reasonable as consistent with each other; but when such construction is unreasonable express terms control both course of dealing and usage of trade and course of dealing controls usage of trade.
                An 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.
                Evidence of a relevant usage of trade offered by one party is not admissible unless and until he has given the other party such notice as the court finds sufficient to prevent unfair surprise to the latter.
§ 2–208. Course of Performance or Practical Construction.
·         Where the contract for sale involves repeated occasions for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance accepted or acquiesced in without objection shall be relevant to determine the meaning of the agreement.
·         The express terms of the agreement and any such course of performance, as well as any course of dealing and usage of trade, shall be construed whenever reasonable as consistent with each other; but when such construction is unreasonable, express terms shall control course of performance and course of performance shall control both course of dealing and usage of trade (Section 1–205).
·         Subject to the provisions of the next section on modification and waiver, such course of performance shall be relevant to show a waiver or modification of any term inconsistent with such course of performance.
Thompson v. Libby (Π and Δ had written contract for sale of and purchase of logs; Δ sued Π over breach of warranty allegedly made concerning the quality of the logs; At trial Δ offered oral testimony to prove warranty, and it was admitted over objection of Π that evidence was incompetent to prove verbal warranty)
§         Issue: Supplementation of Written Agreement— Whether the parol evidence rule excludes oral testimony of matters/agreements collateral to the subject of but not expressly stated within the written agreement?
§         Holding: To justify the admission of a parol promise by one of the parties to a written contract, on the ground that it is collateral, the promise must relate to a subject distinct from that to which the writing relates
§         Parol Evidence Rule: forbids to add by parol where the writing is silent, as well as to vary where it speaks
·         where the parties to the agreement have put their engagement into writing without any uncertainty as to the object or extent of their arrangement, it is presumed that what is there in writing is the whole engagement of the parties; therefore the rule keeps out extrinsic evidence to protect from the injustice that would occur from the admissibility of such evidence to contradict the contract
·         Rule does not apply where the writing is incomplete on its face and doesn’t purport to contain the whole agreement
§         Merger Clause: states that the writing is intended to be final and complete; all prior understandings have been “merged” into the document
§         To determine whether to apply parol evidence rule, court must consider whether:
1.             the writing is final expression of parties agreement, and then whether
2.             it is a complete or partial statement of the contracts’ terms:
·         Complete integration: writing that is intended to be a final and exclusive expression of the agreement of the parties
·         Partial integration: a writing that is intended to be final but not complete because it deals with some but not all aspects of a transaction between the parties
·         Willistonàquestion of integration must be determined from the “four corners” of the writing without resort to extrinsic evidence
·         Merger Clause: states that the writing is intended to be final and complete; all prior understandings have been merged into writing
§         Corbinà Restatement §210: “a writing cannot of itself prove its own completeness, and wide latitude must be allowed for inquiry into circumstances bearing on the intention of the parties”
·         Contends that one cannot know the intent of the parties by simply by looking at the document
Collateral Agreements: integration that party is trying to introduce parol evidence—saying that the evidence simply “supplements” the writing—need to ask if the written contract is total or partial integration
If parties really meant to incorporated in the writing, then look to terms to see if this is consistent
 
o        Exceptions to the Rule (ways to get evidence in):
§         Does not apply to evidence offered to explain the meaning of the agreement
·         If only a partial integration, the rule allows extrinsic evidence may be admitted to supplement the writing with additional consistent terms
§         Does not apply to agreements, whether oral or written, made after the execution of the writing
§         Does not apply to evidence offered to show that effectiveness of the agreement was subject to an oral condition precedent
§         Does not apply to evidence offered to show that the agreement is invalid for any reason, such as fraud, duress, undue influence, incapacity, mistake, or illegality
·        

ii, and under UCC it should be assumed parties intended to incorporate that usage
a.       Actual Performance: Shell had protected it on two prior occasions of price increases under the same ’69 contract (’70 and ’71)
2.             Price protection was reasonable standard of fair dealing in that asphalt trade in Hawaii at the time; observing fair dealing standard is part of good-faith requirement of the UCC
·         Shell Δ:
1.             by expanding definition of trade to all major suppliers of asphalt, judge allowed admission of highly prejudicial evidence of routine price protection
2.             the two prior occasions of price protection were not indicative of course of performance, simply waivers of contract’s price term
3.             price protection is not reasonably consistent with the express price term in the contract, therefore express term controls
o        Issue: Whether parol evidence of trade usage, course of dealing, and course of performance are admissible where it is not completely consistent with the express terms of the contract?
o        Holding: Evidence of trade usage, course of dealing, and course of performance are always admissible when they don’t totally negate the express term of the K, even though it may “cut down” the express terms
o        Total negation v. “cutting down”: total negation of “posted price at time of delivery” would be buyer setting the price; an exception to the term at times of price increases would merely be cutting down, not total negation
§         Course of Performance: Action under agreement is best indication of what the meaning was, and falls under exception to parol evidence for evidence of meaning of contract
§         Usage of trade issue: parties can be bound by usage common to particular place they are operating, even if it is not the usage of their vocation or trade; as long as usages were so regular in their observance that parties should have known of them (“regularity of observance”)
§         Waiver issue: preference for waiver interpretation only exist where acts of parties are ambiguous; up to jury to decide ambiguity
§         Consistency issue: performance, usages, and prior dealings are important enough to be admitted always, even for a final and complete agreement; only if they cannot be reasonably reconciled with express terms of contract are they not binding or incorporated into contract
Burden of Proof on Π:
 
II.                  Supplementing the Agreement: Implied Terms, the Obligation of Good Faith, and Warranties
 
a.       The Rationale for Implied Terms
§ 2-306. In an agreement for goods, UCC requires buyer and seller to use best efforts unless otherwise agreed.
·         Wood v. Lucy, Lady Duff-Gordon (Agreement was that Π was to have exclusive right for at least 1 year to place Δ’s endorsement on designs of others; in return Δ would get ½ of all profits and revenues off contracts he might make; however, Δ went and put her endorsement on various items without his knowledge and kept profits)
o        Rule: An implied obligation to use “reasonable efforts” will prevent a somewhat indefinite promise from being illusory
§         Bargaining for a “chance” –obligation to use “due diligence” or “best efforts”
o        Reasoning: though there were no explicit duties articulated within the contract for the Π, promise to pay Δ ½ profits implied a duty to go out and bring in profits;
o        Examples of illusory obligation: One party has power to terminate K at any time for any reason
§ 2-309. (3) Termination of a K by one party except on the happening of an agreed event requires