Contract Finals Prep: Contract Interpretation

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Three steps of contract interpretation

1. Is the K ambiguous
Option 1: strict, four corners approach
option 2: Traynor's approach in pacific gas (S. Rest 212)
2. If the K is ambiguous under the approach you choose, then extrinsic evidence is admissible to resolve the ambiguity.
3. Analyze the extrinsic evidence with the interpretive hierarchy.

Traynor's Test for ambiguity

Extrinsic evidence must always be considered in order to determine if a K's terms are ambiguous. This is bc words always derive their meanings from context.

Four corners approach

if the language of the K is unambiguous on its face, then no extrinsic evidence is allowed.
Rationale: Failure to follow the four corner's approach limits parties ability to define K's in writing; lengthens the litigation process; threatens the rule of law by undermining the fundamental premise that words have a fixed meaning.

Interpretive hierarchy of extrinsic evidence

UCC 1-303
1. Contract language
2. course of performance
3. Course of dealing
4. trade usage
5. rules of construction
6. gap filling with defaults

Parole evidence rule

S rest 213
NOTE: this decides what the TERMS of a K are. The rules of K interpretation then decide what those terms mean (and that usually means it is interpreted in light of extrinsic circumstances like trade usage and course of dealing)!.
Interpretive process:
1. is the K an integrated agreement?
2. If the K is completely integrated, then no additional terms are provided by oral agreements.
If, however, an agreement is only partially integrated, orally agreements can still provide consistent additional terms if
1) the oral agreement was agreed to for separate consideration, or
2) it is such a term as in the circumstances might naturally be omitted from the writing.
when applicable the rule renders unenforceable oral agreements entered into prior to the adoption of a written contract.
Rationale: the formal writing reflects the parties' minds at the point of maximum resolution, hence the provisions that do not appear in the document were not intended to survive; protects from outright fraud.

Whose interpretation of the terms prevails?

1) when parties have attached different meanings to a promise, if there is one party that knew or had reason to know of a different interpretation attached by the other party, the meaning of the party with inferior information prevails.

Contract interpretation

The common usage meaning of words prevails unless parties specify otherwise.
the course of dealing and course of performance and usage of trade are all considered.

defaults in interpretation

An interpretation that gives effect to all terms is preferred
Interpretive hierarchy prevails
specific terms are given greater weight than general terms.
separately negotiated terms are given greater weight than standardized terms.
K's have an implied duty of good faith
K's are interpreted against the draftsman.

missing terms

when parties have failed to supply an essential term--price, quantity--courts will supply it for them based on the circumstance.
Ex. Wood v. Lucy

Course of performance

A sequence of conduct after or under a particular agreement
If X performs in a particular way and Y acquiesces, it suggest that X was conforming to the agreement with Y

Course of dealing

Sequence of conduct between parties previous to the agreement AND the pre-K negotiations.

Trade Usage

Usage of a word that is common, though not necessarily unanimous

rules of construction

consistency of the document; interpret against surplus terms; interpret against drafter.

Gap filling with defaults

(specific > general); good faith, reasonableness, public interest.

Is a writing integrated

a) A merger clause will say if it is integrated or not?
b) The writing looks complete or not on its face?
c) What do the totality of the circumstances suggest?

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