6. CONTRACTS: Determining the Terms of the Contract -- Parole Evidence Rule

-- construed as a whole

-- ordinary meaning of words

-- if provisions appear to be inconsistent, written or typed provisions will prevail over printed provisions

-- courts will generally look to see what custom and usage is in the particular business and in the particular locale where the contract is either made or to be performed

-- preference is to construe contract as valid and enforceable -- ambiguities construed against party preparing contract

Where the parties to a contract express their agreement in a writing with the intent that it embody the full and final expression of their bargain, any other expressions -- written or oral -- made prior to the writing, as well as any oral expressions contemporaneous with the writing, are inadmissible to vary the terms of the writing.

Writings that evidence a purported contract are not necessarily the final expression of that contract -- it might be a preliminary draft. If so, the parol evidence rule will not bar introduction of further evidence. The more complete the agreement appears to be on its face, the more likely it is that it was intended as an integration.

After establishing that the writing was final, one should determine if the integration was comple or only parial. If partial, it cannot be contradicted by parol evidence, but may be supplemented to prove additional consistent terms.

If the judge decides that the writing was an integration of all agreements between the parties, he will exclude evidence of prior written or oral terms, or contemporaneous written terms, that seek to vary the terms of the integrated writing. Otherwise he may admit offered extrinsic evidence. Then, if there is a jury, it will make its own determination as to whether this extrinsic evidence is part of the agreement.

There are two competing tests for determining whether the parties intended the writing to be a complete and final integration:

CORBIN TEST (used by majority): takes into account the specific circumstances of the transaction involved and asks wether the parties like these situated as they are would naturally and normally include in their writing the extrinsic matter that is sought to be introduced. If people like these under circumstances like this would normally include the extrinsic matter in their writing, it will be excluded under the parol evidence rule. Otherwise, it will be admissible.

WILLISTON TEST: does not take into account the particular circumstances of the transaction; instead they look only at the face of the written agreement and decide whether contracting parties would include the term sought to be proved. If so, it will be excluded.

The rule prohibits only extrinsic evidence that seeks to vary, contradict, or add to an integration. Other types of extrinsic evidence may be admitted where they do not bring about this result.

A party to a written contract can attack the validity of the agreement. The party acknowledges that the writing reflects the agreement but asserts, most frequently, that the agreement never came into being because of any of the following:

(1) formation defects such as fraud, duress, mistake, illegality;

(2) conditions precedent -- where a party asserts that there was an oral agreement that the contract would not become effective until a condition occured, all evidence of the understanding may be offered and received. Parole evidence of such a condition precedent will not be admitted if it contradicts the express language of the written contract.

If there is uncertainty or ambiguity in the written agreement's terms or a dispute as to the meaning of those terms, parol evidence can be received to aid the fact-finder. If the meaning of the agreement is plain, parol evidence is inadmissible.

The parole evidence rule will not bar extrinsic evidence showing the true consideration paid.

• Parol evidence is often said to be admissible if the alleged parol agreement is collateral to the written obligation and does not conflict with it. This collateral agreement doctrine is hard to apply because it is conclusory. The restatement of contracts approach is the naturally omitted terms doctine, which allows evidence of terms that would naturally be omitted from the written agreement. A term would naturally be omitted if:
• (1) it does not conflict with the written integration; and
• (2) it concerns a subject that similarly situated parties would not ordinarily be expected to include in the written instrument.

Parol evidence can be used to show subsequent modifications of a written contract, because the parol evidence rule applies only to prior or contemporaneous negotiations.

If a party to a written agreement alleges facts (mistake) entitling him to reformation of the agreement, the parol evidence rule is inapplicable. The plaintiff is asserting as a cause of action that despite the apparently unambiguous terms of the written agreement, those terms do not in fact constitute the agreement between the parties. For the plaintiff to obtain reformation, he must show:

(1) there was an antecedent valid agreement that

(2) is incorrectly reflected in the writing.

The variance must be established by clear and convincing evidence rather than by merely a preponderance of the evidence.

Article 2 generally follows the usual rules including the Corbin Test, providing that a party cannot contradict a written contract but he may add consistent additional terms unless: (1) there is a merger clause; or (2) the courts find from all of the circumstances that the writing was intended as a complete and exclusive statement of the terms of the agreement.

Art2 also provides that a written contract's terms may be explained or supplemented by the following whether or not the writing appears to be ambiguous:

-- course of dealing may be used to explain a contract;

-- usage of trade to explain a contract; and

-- course of performance.

Where acceptance contains different or additional terms:

Contracts involving non-merchant -- terms of offer govern -- if any party to a contract is not a merchant, the additional or different terms are considered to be mere proposals to modify the contract that do not become part of th econtract unless the offeror expressly agrees.

If both parties are merchants -- additional terms in acceptance are usually included in the contract unless:

(1) they materially alter the original terms of the offer;

(2) the offer expressly limits acceptance to the terms of the offer; or

(3) the offeror has already objected to the particular terms, or objects within a reaonable time after notice of them is received.

If both parties are merchants -- different terms in acceptance may or may not be included -- some courts treat different terms like additional terms; other courts follow the knockout rule, which states that conflicting terms in the offer and acceptance are knocked out of the contract because each party is assumed to object to the inclusion of such terms. Gaps left by knocked out terms are filled by the UCC.

There must be a quantity term to have a contract but art2 will fill in the following if there are gaps:

-- price -- a reasonable price at the time for delivery

-- place of delivery -- seller's place of business, if he has one, otherwise, seller's home; however if the goods have been identified as the ones to satisfy the contract and the parties know that they are in some other place, then that is the place of delivery

-- time for shipment or delivery -- in a reasonable time

-- time for payment -- due at the time and place at which they buyer is to receive the goods

-- assortment -- if a contract provides that an assortment of goods is to be delivered and does not specify which party is to choose, the assortment is to be at the buyer's option; if the party who is supposed to choose does not do so seasonably, the other party is excused from any resulting delay and may either proceed in any reasonable manner or treat the failure as a breach.

The parties do not intend for the goods to be moved by common carrier.

If the seller is a merchant, risk of loss passes to the buyer only when she actually takes physical possession of the goods.

If seller is not a merchant, risk of loss passes to buyer upon tender of delivery -- when goods are ready for pick-up and time for agreed upon pick-up has passed.

The parties intend for the goods to be moved by a carrier.

SHIPMENT CONTRACTS: If the contract authorizes or requires the seller to ship the goods by carrier but does not require him to deliver them at a particular destination, it is a shipment contract and risk passes to the buyer when the goods are delivered to the carrier.

DESTINATION CONTRACTS: If the contract requires the seller to deliver the goods at a particular destination, the risk of loss passes to the buyer when the goods are tendered to the buyer at the destination.

If the contract contemplates delivery by a carrier and no delivery term is used, the contract is a shipment contract.

C.I.F. and C.&F. stand for "cost, insurance, and freight," or "cost and freight". These terms mean that the price in the contract includes the price of the goods, the cost of shipping them to buyer, and, in CIF, the cost of purchasing insurance for the benefit of the buyer in case the goods are destroyed in transit. These contracts are always shipment contracts (ie, risk passes to buyer as soon as the goods are turned over to the carrier).

F.A.S. stands for "free alongside". The term is generally used only when goods are to be shipped by boat. It is a type of destination contract -- risk of loss passes to buyer once goods are delivered to the dock.

F.O.B. stands for "free on board" and is always followed by a location, with risk of loss passing at that location. The seller bears the risk and expense of getting goods to the location. These contracts can either be shipment or destination contracts depending on the location named.

DEFECTIVE GOODS: If goods are so defective that the buyer has a right to reject them, the risk of loss does not pass to the buyer until the defects are cured or she accepts the goods in spite of their defects. Buyer generally has the right to reject for any defect.

REVOCATION OF ACCEPTANCE: If the buyer rightfully revokes acceptance, the risk of loss is treated as having rested on the seller from the beginning to the extent of any deficiency in the buyer's insurance coverage, the risk of loss at issue being that between the time of acceptance and the time of revocation of acceptance. However, revocation of acceptance is rightful only if it occurs before any substantial change in condition of the goods which is not caused by their own defects. Thus, there can be no revocation of acceptance after a casualty loss to the goods.

For the purpose of determining the risk of loss, a sale or return contract (buyer takes goods for resale, but may return them if they don't sell) is treated as an ordinary sale. If the goods are returned, the risk remains on the buyer while the goods are in transit.

In a sale on approval (buyer takes good for use but may return them even if they conform to the contract) the risk of loss does not pass to the buyer until she accepts. Acceptance may take place by failure to return or to notify the seller of an intention to return within the required time. If the buyer decides not to take the goods, return is at seller's risk.

Art 2 gives buyers a special property interest in goods as soon as they are identified as the ones that will be used to satisfy the contract (as soon as seller sets them aside for buyer). This property interest is insurable, so that the buyer may obtain insurance for goods while they are being shipped.

Under art 2, the contract includes all of the terms on which the writings of both parties agree and any necessary missing terms are filled in by the supplemental terms provided for in art 2.

This is different than the common law last shot rule by which the contract will include the terms of the last communication sent to the party who performed.

WARRANTY OF TITLE: Any seller of goods warrants that the title transfer is good, that the transfer is rightful, and that there are no liens or encumbrances against the title of which the buyer is unaware at the time of contracting. This warranty arises automatically and need not be mentioned in the contract.

WARRANTY AGAINST INFRINGEMENT: A merchant seller regularly dealing in goods of the kind sold also automatically warrants that the goods are delivered free of any patent, trademark, copyright, or similar claims. But a buyer who furnishes specifications for the goods to the seller must hold the seller harmless against such claims.

Implied in every contract for sale by a merchant who deals in goods of the kind sold, there is a warranty that the goods are merchantable. The serving of food/drink for consumption on premises is subject to the warranty of merchantability.

• To be merchantable, goods must at least:
• -- pass without objection in the trade under the contract description;
• -- in the case of fungible goods, be of fair average quality within the description;
• -- be fit for the ordinary purposes for which such goods are used;
• -- be, within the variations permitted by the agreement, of even kind, quality, and quantity within each unit and among all units involved;
• -- be adequately contained, packaged, or labeled according to contract; and
• -- conform to any promises or affirmations of fact made on the label.

The most important test is "fit for the ordinary purposes for which such goods are used," and failure to live up to this test is the usual claim in a merchantability suit.

As in all implied warranty cases, it makes no difference that the seller himself did not know of the defect or that he could not have discovered it. Implied warranties are based on absolute liability.

A warranty will also be implied in a contract for the sale of goods whenever (1) any seller, merchant or not, has reason to know the particular purpose for which the goods are to be used and that the buyer is relying on the seller's skill and judgement to select suitable goods; and (2) the buyer in fact relies on the seller's skill or judgement.

Any affirmation of fact or promise made by seller to buyer, any description of the goods, and any sample or model creates an express warranty if it becomes part of the basis of the bargain. It need only come at such a time that the buyer could have relied on it when she entered into the contract. The buyer does not need to prove that she actually relied, but the seller may negate the warranty by proving that she did not.

A statement relating merely to the value of the goods, or a statement purporting to be only the seller's opinion or commendation of the goods, does not create an express warranty.

The title warranty can be disclaimed or modified only by specific language or by circumstances which give the buyer notice that the seller does not claim title or that he is selling only such rights as he or a third party may have.

The implied warranties of merchantability and fitness for a particular purpose can be disclaimed by either specific disclaimers or general methods of disclaimer.

Article 2 provides the following methods of disclaimer:

-- to disclaim the warranty of merchantability, must mention merchantability and, if contract is in writing, must be conspicuous

-- to disclaim warranty of fitness for a particular purpose, must be written and conspicuous, may say "there are no warranties which extend beyond the description on the face hereof."

Conspicuous is when it is so written, displayed, or presented that a reasonable person against whom it is to operate ought to have noticed it. Language in the body of a contract is conspicuous if it: (1) is in contrasting type, font, or color; or (2) it is larger than the surrounding text; or (3) it is set off from the text by marks that call attention to it. The court and not the jury decides any fact question as to conspicuousness.

The UCC also provides for general methods of disclaiming implied warranties:

-- by expressions such as "as is," "with all faults," or other expressions that in common understanding call the buyer's attention to the fact that there are no implied warranties

-- by inspection or refusal to inspect -- no warranties as to defects that a reasonable examination would have revealed to her

-- by course of dealing, etc -- course of performance, or usage of trade

The parole evidence rule might be an obstacle to a buyer to whom an express warranty was made when the contract contains a broad disclaimer of warranties. But the buyer can often avoid the rule by a showing that he did not intend that the writing be the complete and exclusive expression of the parties' agreement or that the disclaimer is unconsionable under the circumstances.

Parties may include a clause limiting the damages available in the case of a breach (ie, remedy for breach of warranty is limited to repair or replacement of the defective goods). Such a limitation generally will be upheld unless the limitation is unconscionable.

To be effective, a disclaimer or limitation must be agreed to during the bargaining process. Thus, disclaimer or limitation is not valid if contained inside the box.

In most states, the seller's warranty extends to any natural person who is in the family or household of the buyer or who is a guest in the buyer's home if it is reasonable to expect that the person may use or consume or be affected by the goods and that person suffers personal injury.

The seller may not exclude or limit the operation of the section with respect to personal injury.