Contract InterpretationMay 6, 2009
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Common Law of Contract
Contract Interpretation
Contract InterpretationMay 6, 2009
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Objective Theory of Contract
Applies to disputes concerning the making of an offer, the propriety of an acceptance or the performance or nonperformance of a term.
and more basically what a term means and even whether a contract exits.
Interpretation should be from the perspective of a reasonable person standing in the shoes of the parties
Contract InterpretationMay 6, 2009
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Raffles v. Wichelhausaka “The Peerless Case”
Contract InterpretationMay 6, 2009
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The Peerless CaseAt issue are the terms of the contract
Specifically whether a K exists
D claims there is K, P claims there is no K under D's interpretation
Court says parole evidence may be used when material term of K is unclear
Court finds no K existed
Contract InterpretationMay 6, 2009
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Peerless RuleThere is no binding contract unless both parties agree to the same thing.
We are really talking about material terms and material disputes here.
Court found that delivery date was material, and dispute was at the heart of alleged K.
Contract InterpretationMay 6, 2009
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When Parties Dispute TermsWhat happens when both parties claim a K exists, but they dispute what the terms of the K are?
This could be dispute of meaning of term included in written K, or
over a term not in written K that parties otherwise agreed was part of the K.
Contract InterpretationMay 6, 2009
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Plain Meaning RuleCourts traditionally looked to the “four corners” of a K to determine its meaning.
RULE = if a writing, or the term in question, appears to be plain and unambiguous on its face, its meaning must be determined from the four corners of the instrument without resort to extrinsic evidence.
Today, courts generally reject this rule.
Contract InterpretationMay 6, 2009
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Rules (Generally) Used Today
Look at language and conduct parties in forming the K.
Look at parties' conduct in performance of K.
course of performance
Look at parties' conduct in past dealings.
course of dealings
Customs and usages of the market in which they are dealing. (trade usage)
Contract InterpretationMay 6, 2009
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THE CONTRACT
Oral expressions ofassent or written
agreement.
THE CONTEXTUsage, negotiations
Subsequentconduct
Prior Relationship
Course of dealing Course of performance
Contract InterpretationMay 6, 2009
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Applying the “Rules”
Frigaliment Importing Co.v.
B.N.S. International Sales Corp.
Contract InterpretationMay 6, 2009
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How Courts Use the RulesBetter to think of these NOT as rules but as methods of inquiry.
When there is conflict, general rule is:
express terms of parties
course of performance
course of dealing
usage
Contract InterpretationMay 6, 2009
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Exception to General Rule (updated)General Rule = writing is primary source of meaning
further relevant evidence may be used to determine meaning (negotiations, course of dealing, usages, etc.)
further evidence may even be used to add to or contradict terms of the contract . . .
EXCEPT where parties intend writing to be final and full agreement.
Contract InterpretationMay 6, 2009
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Parole Evidence RuleWhere the parties have reduced their agreement to final written form, evidence of prior or contemporaneous agreements cannot be used to supplement, explain or contradict it.
The crucial issue in determining whether there has been an integration is whether the parties intended their writing to serve as the exclusive embodiment of their agreement.
Contract InterpretationMay 6, 2009
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Elements of the Rule
Writing
Intended to final expression of agreement
No parole evidence to supplement, explain or contradict K can be used.
Parole = written or oral agreement at some time before execution of fully integrated K.
Crucial Question – is K “fully integrated”
Contract InterpretationMay 6, 2009
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Purpose of the RuleShield jury from apparently unreliable or irrelevant evidence.
Save court time
saves examination and cross examination of dubious information.
Encourage more efficient transacting
because of rule, people may write K more carefully
Contract InterpretationMay 6, 2009
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How Rule Works
Parole evidence is offered
Other partyobjects
Judge decidesintegration issue
Judge rules K isNOT fully integrated Judge rule K is
fully integratedfact finder hears &evaluates evidence
Evidence not believe = parole term is not included
judges refusesparole evidence, factfinder does notconsider it.
Evidence believed =parole terms becomespart of K.
Contract InterpretationMay 6, 2009
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Exceptions to Parol Evidence RuleIntent to integrate
Existence of separate agreement
Existence of subsequent agreement (modification)
Show formation defenses
Explanation of ambiguities
Trade Usage, Past Practices, Practices Between Parties
Contract InterpretationMay 6, 2009
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Fully Integrated?
J. Evans & Sons Ltd. v. Andrea Merzario Ltd.
Contract InterpretationMay 6, 2009
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Fully Integrated?
City and Westminster Properties v. Mudd
Contract InterpretationMay 6, 2009
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Determining IntegrationTraditional Approach – look at “four corners” of the K from objective point of view.
Modern Approach – entertain extrinsic evidence
remember, this is preliminary
if judge allows evidence in, factfinder determines if it's credible.
NOTE – there is no one test to determine what “fully integrated” means.
Contract InterpretationMay 6, 2009
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Contract Formalities
Statute of Frauds: When does a contract have to be in writing
Contract InterpretationMay 6, 2009
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Statute of FraudsGenerally, the law recognizes oral Ks
Except Ks that fall within Statute of Frauds
Varies from jurisdiction to jurisdiction
In this class we will deal with Ks for land and sale of goods.
Contract InterpretationMay 6, 2009
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“Statute” Basic Rule
A contract that falls within scope of Statute:
may not be enforced unless
a memorandum of it (the K)
is written
and signed by the party to be charged against whom enforcement is sought
NOTE The entire K does NOT have to be in writing.
Contract InterpretationMay 6, 2009
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Inquiry
YESNO
YES NO
Oral K isenforceable
1. Does the K fall within the statute?
2. Is the K reflectedin a writing thatsatisfies the statute?
K is enforceable
3. Does the case fall within an exception to the statute
YESK is enforceable
NOK is unenforceable
Contract InterpretationMay 6, 2009
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Does K Fall Within Statute?Contracts for Sale of Land
Applies to sale of land
Applies to promise to transfer interest in landmortgage, easement, lease (except shortterm)
Contracts for Sale of Goods
Sale of $500 or more worth of goods (total price)
Includes value of exchanged property
Contract InterpretationMay 6, 2009
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Writing that Satisfies Statute?Written Memorandum
No formal requirements
Could be pencil note on toilet paper
Could be multiple documents
Even a lost document, if oral testimony can be given as to its existence.
Contract InterpretationMay 6, 2009
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Writing that Satisfies Statute?Common Law
identity of parties
subject matter
terms and conditions
UCC
quantity of goods
indication that K for sale has been made
NOTE – common law is becoming less rigorous
Contract InterpretationMay 6, 2009
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Writing that Satisfies Statute?
Signed by Party against whom K is to be enforced.
signature = any mark or symbol placed on paper with intention of authenticating it.
“X” could work
Initials clearly would work
No signature needed if on letterhead
If “writing” consists of multiple documents
signature need only be on one, as they all refer to same transaction.
Contract InterpretationMay 6, 2009
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Exceptions?There are several, but we will only deal with Promissory Estoppel
Promise
Reasonably expected to induce reliance
promise in fact induces justifiable reliance
enforcement needed to prevent injustice.
Contract InterpretationMay 6, 2009
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Impact of NonComplianceMajority Rule = K is voidable, but not void
a void K is not a K at all. A voidable K is a valid K that won't be enforced.
Partial Performance – party who has performed is entitled to restitution.
meaning party against whom K has been voided can still have a remedy if already performed.
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