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Contracts
Wayne State University Law School
Findlater, Janet

CONTRACTS B Prof. Findlater

CHAP 6: Finding the Law of the Contract

The Parol Evidence Rule comes into play when parties have reduced their agreement to writing and something from preliminary negotiations (prior oral or written or contemporaneous oral agreement) is argued to be part of the agreement. (Contemporaneous written are part of writing).

1.      Is the writing integrated ?

·        If the parties intended the document to represent the “final expression of one or more terms of an agreement”, it is said to be an integrated. Formal => more likely to be integ.

2.      Is the integration partial or complete? Is it a “complete & exclusive statement of the terms of the agreement.”

PARTIAL = > document intended by parties to include all the details of their agreement.
CAN’T CONTRADICT BUT CAN ADD. Can still persuade jury.

Complete => document intended by parties to include all the details of their agreement.
CAN’T ADD OR CONTRADICT. End of story.


The crucial issue in determining whether the writing is integrated is whether the parties intended their writing to serve as the exclusive embodiment of their agreement.

·        Under Corbin/RST broad view, Ct is willing to look at everything (even P/N) for proof of intent.
·        Under Williston/Gianni Narrow Approach the intent of the parties must be shown from the writing itself. The Ct is not willing to look at P/N.
·        UCC Approach excludes evidence “if the additional terms are such that, if agreed upon, they would certainly have been included in the document.”

The RST standard permits proof of a collateral agreement if it “is such an agreement as might naturally be made as a separate agreement by the parties.”
Both q’s are Q of Law for judge (don’t trust juries since sympathetic to economic underdogs).


§214: Agreements & negotiations prior to or contemporaneous w/ the adoption of a writing are admissible in evidence to establish or Parol Evidence Rule does not bar:

Whether writing is or isn’t integrated & if it is, whether complete or partial.
Interpretation or meaning of writing, whether or not integrated.
Illegality of K – not enforceable b/c of policing devices or violates public policy.
Any evidence to show K is invalid: Fraud, duress, undue influence, misrep, forgery, no offer, mutual mistake, lack of consideration b/c of PXD Rule, joke, sham.
Evidence of subsequent agreement, modification.
Ground for granting or denying rescission, reformation, specific perf or other remedy.


Parol Evidence Rule Problems

Gianni: Written lease says use premises for selling fruit, candy & soda water & that no tobacco may be sold. P tries to bring evidence from P/N that it was agreed he would have exclusive rights to sell soft drinks in the bldg in consideration for not selling tobacco. No such stipulation in lease.

Held, when an oral agreement is alleged, the ct must look to see if the oral & written ag covers the same subject matter & are so interrelated that both wd be executed at the same time & in the same K. Since it wd have been “natural & normal” for consideration to be part of writing, ct excludes P/N evidence.

Masterson v Sine: Mr & Mrs Masterson own ranch as tenants in common & convey it to Sines (P) by grant deed reserving an option to re-purchase for same consideration. Mr. M goes bankrupt. Mrs M & trustee (D) seek to enforce option. S seeks to introduce evidence from P/N to show this option is personal to grantors& not assignable & therefore trustee cannot exercise it.

Is deed integrated? It’s very formal, therefore yes. Is it partial/complete? That’s the issue.

Ct adopts liberal Corbin approach & allows P/N evidence stating
Option clause did not explicitly provide that it contains the complete agreement.
Nothing showed that parties had any warnings as to the disadvantages of failing to put the whole agreement in the deed.

MCC Marble: Std K form in Italian gives D right to cancel K for any default in payment & has provision that “buyer states he is aware of sales condition & approves of it.” MCC argues that it had no subjective intent to be bound & that D was aware of that.

Held, under the CISG Article 8(1) a court must consider evidence of a party’s subjective intent when signing a K if the other party to the K was aware of the intent at the time. Parties can derogate from Conventions effect by incl merger clause that extinguishes any & all prior agreements & understandings not expressed in the writing.

Bollinger: Ct held P sustained burden b/c D had been fulfilling the oral agreement at first & that it acted similarly w/ P’s neighbor. Ct concludes that D wd not have done so, if it had not so agreed.

A court of equity has the power to reform a writing make it correspond to the understanding of the parties on the ground of mistake so long as that mistake is mutual to both parties.
The fact that one party denies that a mistake was made does not prevent a finding of mistake.

Once a person enters into a written agreement, he cannot escape from it by merely asserting that he had not understood what he was signing.

NO ORAL MODIFICATION CLAUSES (NOM).

Parties can always modify a K (written/oral K) expressly (oral/written modification) or implicitly (from conduct). However, they might have a S/Frauds or consideration problem.
Parties can stipulate a NOM clause – At Common law oral modification is binding despite NOM clause esp. if there’s reliance – NOM was useless at CL.

UCC 2-209(2) changes CL, NOM clauses have effect but must be separately signed by consumers if using form supplied by merchant. No separate signature needed b/w merchants.

A failed modification (no writing) can still operate as a waiver 2-209(4).

NOM
No NOM
Waiver
Modification must be in writing


Modification can be oral or written


Oral or implied thru conduct



S/F must be satisfied 2-209(3)
S/F must be satisfied 2-209(3)
Can be retracted unilaterally if:
·        Reasonable notice given
·        UNLESS party relies on it.
2-209(5)

When will attempt to modify operate as a waiver?
Some cts say w/ agreement to modify + Reliance on that agreement [Superfluous 2-209(5)] Other cts say w/ agreement to modify + Absence of bad faith or coercion

NOM + Merger clause = Zipper Clause2. Interpreting Contract Language


The Plain Meaning Rule: is a 2 stage process concerning the admissibility of extrinsic evidence particularly of P/N in the process of K interpretation.

Is there “ambiguity” in the meaning of the K language? Language is ambiguous if it is fairly susceptible to two reasonable meanings. Looking at all credible & relevant evidence, is the language of the K reasonably susceptible to the meaning proposed? For Judge to decide.

In the first stage there are 3 possible approaches. 
Court may confine itself to the document’s “four corners” in order to determine ambiguity.
Ct may consider ambiguity w/in the context of agreement & consider TU, C/P, C/D, dictionary.
Ct may consider evidence from P/N in addition to context to determine if the language is reasonably susceptible to a diff meaning.

If the language is “ambiguous”, extrinsic evidence as to its meaning (from P/N) will be admissible in the second stage & the question of interpretation may go to a jury.


Vagueness= problem when some words can be interpreted broadly & narrowly.
Ambiguity= problem b/c words & sometimes phrases can have different meanings.
Term ambiguity – word itself has 2 meanings “light.”
Syntax ambiguity – phrases w/ bad punctuation can be read differently.

Frigaliment (Chicken): P says C is Broilers & Fryers. D says C means B, F & Stewers. Both parties used same word w/ diff meanings.

P can win only if he can prove that D knew or should have known that P was giving X meaning.
Actual knowledge (e.g. from P/N)
Shd have known (e.g. trade usage, c/p, market prices)

Held: P did not meet his burden of showing that “chicken” was used in the narrower rather than broader sense. D’s meaning coincides w/ D of A regulations, had some trade usage basis & market price arguments.

Raffles: K to sell cotton. There were 2 ships named “Peerless” sailing w/ cotton. P intended Dec ship & D intended Oct ship. Payment was to be made w/in an agreed upon time after delivery.

While K did not show which particular “Peerless” was intended, the moment it appeared two ships with that name were sailing from B to L w/ a load of cotton, a latent ambiguity arose & evidence from P/N was admissible to determine whether both parties intended a different “Peerless.”
Since diff meanings were intended & the ambiguity relates to a material term, there is no meeting of the minds & K.




WHEN DO WE DECIDE THERE IS NO K

Under the Holmes analysis, there is no K when parties use different words, not just different meanings (proper names: John Smith is not the same as John Smith).

Under the Young approach, there is no K with any term ambiguity (different meaning).

Under the RST Test, which is the broadest, there is no K w/ vagueness or term ambiguity.


Oswald: D thought “Swiss coins” in deal referred to her “Swiss coin” collection, D thought it meant all her Swiss coins – incl from other collections.
Held: This case is w/in the small group of exceptional cases where there is “no sensible basis for choosing b/w conflicting understandings.”  NO K in this case.

RULE: When any of the terms used to express an agreement is ambivalent, & the parties understand it in diff ways, there cannot be a K unless one of them should have been aware of the other’s understanding.

Pacific G & E: D promises to indemnify P for “injuries to property” connected to performance of the K. D argues that parties meant fro D to pay only for damage to property of 3rd persons & not for damage to P’s own property. Trial ct held that K had a plain meaning & refused to admit extrinsic evidence that would contradict its interpretation.

The test of admissibility of extrinsic evidence to explain meaning of written K shd be whether the offered evidence is relevant to prove a meaning to which the language is reasonably susceptible.

A rule that wd limit the determination of the meaning of a written instrument to its four corners merely b/c it seems to the ct to be clear & unambiguous wd either deny the relevance of the intention of the parties or presuppose a degree of verbal precision & stability our language has not attained. (4 Corner Test is bad, use Context Test.)

Delta Dynamics: K says if Pixey fails to meet minimum, agreement is “subject to termination.” It also says, in case of breach by either party, “party prevailing entitled to atty fees.”
Pixey says termination in case of failure to meet min was Delta’s exclusive remedy.

Held: Ct allows Pixey to bring extrinsic evidence to prove this b/c “clause is reasonably susceptible to Pixey’s meaning & nothing in rest of K to preclude that interpretation. It does not rend

may impair employer’s ability to hire & retain e’ees.

Balla v Gambro: In-house counsel fired when he told Co. prez to reject shipment b/c they did not comply w/ FDA regulations.
The tort of retaliatory discharge is a limited & narrow exception to the general rule of at-will employment. The ct held that the public policy of protecting lives & property of citizens can be adequately safeguarded w/out extending the tort of retaliatory discharge to the L b/c
·        Employers wd be less forthcoming in advice on potentially questionable corporate conduct if L can use that info in a retaliatory discharge suit.
·        It wd be inappropriate for employer to bear economic burden of in-house counsel adhering to ethical obligations under Rules of Professional Conduct (L had duty to report employer’s intention to sell adulterated shipment.)

USAGE TO SUPPLEMENT OR QUALIFY
1-205(3) A course of dealing or usage of trade (of which parties are aware or SHOULD be aware) gives particular meaning to & supplement or qualify terms of an agreement.

C/Performance leads to Modification or Waiver (which can be retracted w/ notice & no reliance)

2-202 draws a distinction b/w supplementing a written K by consistent additional terms v supplementing w/ C/D or TU.

Evidence of additional terms must be excluded when “ct finds the writing to have been intended as a complete & exclusive stmt of terms of agreement.” No such limitation on TU supplementation.
Comment says “C/D or TU, unless carefully negated, are admissible to supplement the terms of any writing & that K are to be read on the assumption that these elements were taken for granted when the document was phrased.”

Nanakuli Paving v Shell Oil (CODE)
1969 K express term says price will be “Shell’s posted price at delivery.” There was evidence price protection was TU & that Shell price protected in 1971 & 1970 (2 occasions are sufficient to constitute C/Performance). Ct says we can find for N under either theory 1 or 2.

1. 1-205(4) Express terms of agreement & applicable course of dealing or usage of trade shall be construed wherever reasonable as consistent w/ each other.
When such construction is unreasonable follow: Express terms, C/performance, C/dealing & TU.
Ct says usage is consistent as long as it is “less than a complete negation.”
“A total negation of express term would be that the buyer was to set price. It is less than a complete negation of the term that an unstated exception exists at times of price increases at which time the old price is to be charged.”

2. Even if price protection was not part of agreement, advance notice was a universal practice in the trade. Shell gave no notice of price increase, which does not conform to “observance of commercially reasonable stds of fair dealing in the trade” & therefore breaches merchants implied duty of GF 2-103(1b).
2-305(2) A price to be fixed by S or B means a price to be fixed in GF.

Shell says:
a. N defines trade too broadly – 1-205(3) TU is binding only on members of the trade involved or persons who know or should know about it. Persons who shd be aware incl members of 2nd trade or those who deal w/ members of 1st trade,
b. Not enough of a TU (ct says that’s for jury to decide).
c. Price protection was a waiver & not C/performance. 2-208 Comment 3 says: where the acts are ambiguous (Waiver v C/P), PREFERENCE IS FOR WAIVER, to preserve the flexible character of commercial K’s & to prevent surprise or hardship. Ct says there was room for jury to decide it was not ambiguous.

Columbia Nitrogen v Royster (CODE)
K to sell to C a minimum of 31,000 tons of phosphate per yr for 3 yrs. C bought 1/10 of qty in 1st yr & tries to argue that TU min qty are mere projections that can be adjusted in low markets.

Rule: the test of admissibility of TU/CP is not whether the K appears on its face to be complete in every detail, but whether the proffered evidence of C/dealing & TU reasonably can be construed as consistent w/ the express terms of the agreement.
In this case TU/CP is consistent w/ express terms b/c
The K does not expressly state that TU cannot be used to explain or supplement written K.
K is silent about adjusting prices & quantities to reflect declining market – its neutrality provides a fitting occasion for recourse to Tu/CP to supplement the K & explain its terms.

IMPLIED DUTY OF BEST EFFORTS 2-306(2)

Cts are not quick to imply B/E unless parties agree to it.