K II

Contract Law

PER 1

Terms

PER 2

Context (to explain exception)

2 questions we are asking in K II

If there was a K, was it breached

If there was a breach, is there a legal remedy

Every breach presupposes what

There was a non-performance

Is every non-performance a breach

No

Breach

Any non-performance when performance is due

When is a performance not due?

When there is a legal justification for the non-performance

If non-performance is justified, is there a breach?

No

When performance is due what constitutes a breach?

Anything short of full performance, even if there is no intention to breach

What the PER is not

Not a rule of evidence

Not a rule of interpretation

What is parol evidence

Anything outside of the final writing

What does PER get you?

Exclusion of PE

What types of PE are being excluded with the PER

Terms not included in the final writing

Context

Context (PE)

How did the parties understand their agreements

2 types of non-performance

Obvious and non-obvious

What type of writings does PER apply to

Integrated writings

If a writing is not integrated, what happens?

PER cannot be used to exclude evidence

Integrated agreement

A writing or writings constituting a final expression of one or more terms of an agreement

If a writing is integrated, what can’t happen?

It can not be contradicted by PE

2 levels of integration

Completely integrated

Partially integrated

Completely integrated

Parties intended for that writing to be complete and exclusive

All terms of their agreement made it into the writing

Partially integrated

The writing sets forth an agreement about some of the terms, but not all of them

If an agreement is completely integrated, what happens?

It cannot be contradicted by PE

It cannot be supplemented with consistent additional terms

If the agreement is partially integrated, what happens?

It cannot be contradicted by PE

It can be supplemented with consistent additional terms

If someone is not trying to supplement the writing with consistent additional terms, what happens?

The issue of complete or partial integration is not an issue. Do not discuss it.

Length of a writing and lack of merger clause suggest that the writing is what?

Partially integrated

Does PER apply to subsequent agreements made after the signing of the writing?

No

Integration rule

Integration turns on the parties’ intent

Classical approach to integration

4 corners test; only look at the writing itself

Classical approach to integration - merger clause effect

Conclusively establishes that the writing is completely integrated

What is a merger clause

A clause in the writing that mentions the document being complete

Modern approach to integration

Facts and circumstances test

Facts and circumstances test factors

(modern integration)

Is the writing a product of negotiations?

Multiple drafts?

Third-party advisor?

How formal is the writing?

Where was the writing signed?

Modern approach to integration - merger clause effect

The merger clause is a factor to consider but is not conclusive. It does suggest the writing is completely integrated

Which party will argue for a PER exception?

Party B

PER exceptions

To explain

Subsequent agreements

Parole express condition

Invalidating causes

Collateral agreements

PER - Classical approach to CAE

PER does not exclude evidence of matters collateral to the subject of the writing, but the subject matter of the PE must be distinct from the subject matter of the writing

PER - modern approach to CAE

PE is allowed to come in if the consistent additional term is agreed to with separate KSN or the term would naturally be omitted

PER - modern approach to CAE - how to know if the term would naturally be omitted?

Does the term fundamentally change the bargained for expectation or risks under the K? If yes, it is not naturally omitted

PER - Subsequent agreements exception

PER does not apply to oral or written agreements made after the execution of the writing

PER - parole express condition exception

PER does not apply to evidence offered to show that effectiveness of the agreement was subject to an parol condition precedent

Steps for a PER - Supp/CAE analysis

Party A will argue the writing is completely integrated

Four corners test

The PE contradicts the writing

Party B will argue the agreement is partially integrated

Facts and circumstances test

Modern approach CAE (R216(2))

Party A will argue classical approach CAE (thompson)

When can an invalidating cause exception come up?

In any PER scenario

Who will argue an invalidating cause exception to PER?

Party B

Which jx allow an invalidating causes exception to PER

Both, but classical may or may not allow evidence in re invalidating causes if the agreement has a merger clause

Invalidating causes argument

Party B will argue that the K is not valid because it is the product of duress, lack of KSN, mistake, etc. and therefore the PER should not and does not apply to the writing at all so the PE about the invalidating cause should come in

If an invalidating causes argument works, does party B prevail on the case?

No, the PE re the invalidating cause is just admitted into evidence

PER to explain exception

PER does not apply to evidence being offered to explain the agreement

What does not need to be analyzed in a to explain exception

Integration

Patent ambiguity

Ambiguity that appears on the face of the writing

Latent ambiguity

An ambiguity that is not obvious on the face of the writing but can be shown anyway

Reasonably susceptible test

(interpretation analysis)

Is the disputed language reasonably susceptible to more than one meaning?

Classical approach to the to explain PER exception

Requires patent ambiguity

Applies the reasonably susceptible test using the K only

If the language of the K is patently ambiguous, the PE is admitted for the trier of fact

If the language of the K is not patently ambiguous, the PE is excluded

Modern approach to the to explain PER exception

Requires latent ambiguity

Applies reasonably susceptible test using the K and PE

If the disputed language is latently ambiguous then the PE is admitted for the trier of fact

If the disputed language is not latently ambiguous then the PE is for the judge only

If the language of the K is patently ambiguous, what happens?

The PE is admitted in both classical and modern approaches

When should PER be discussed on a fact pattern?

If PE exists on the fact pattern

How does PER fit into the big picture?

It helps us determine what the obligations of the parties are

Steps of an interpretation analysis

Will the court admit PE to determine whose meaning prevails?

Whose meaning prevails?

Step 1 of an interpretation analysis and test

Will the court admit PE to determine whose meaning prevails?

Test - PER 2 analysis (to explain exception analysis)

Whether the evidence is in or out turns on if the language is ambiguous

Step 2 of an interpretation analysis

Whose meaning prevails

Test for step 2 of an interpretation analysis

R 201

R 201 elements

(step 2 of an interpretation analysis if ambiguous)

1. If both parties attach the same meaning to the term, that meaning controls.

2. If the parties attach different meanings, the innocent parties meaning will prevail if they have a lower level of knowledge than the other party

3. If the parties have the same level of knowledge, neither meaning prevails

Who is the innocent party in R201 analysis?

The party who has the lower level of knowledge

R201 - if the parties have the same level of knowledge, what are the court’s options?

1. If the term is not material, the court will add a term that is reasonable under the circumstances

2. If the term is material and no performance has been done or the performance that has been done can be undone, the K will be nullified

3. If the term is material and performance has been done and it is too late to undo, the court will add a term that is reasonable under the circumstances

   **It is rare for the parties to be found to have the same level of knowledge

Types of evidence to look for in an interpretation analysis

Preliminary negotiations (PE)

Trade usage (PE)

Course of performance (PE)

Applicable legal standards (PE)

Rules of construction (not PE)

Dictionaries (not PE)

Trade usage

Members of a trade are bound by the terms that are common in that trade. Expert testimony is used to establish trade usage

Course of performance

How the parties themselves are performing this specific K.

although this is PE, it is not barred by the PER because it occurs after the execution of the K

Rules of construction

A reasonable interpretation is preferable over an unreasonable one

Justifications for non-performance

Changed circumstances doctrines

Express conditions

Changed circumstances general rule

Most of the changed circumstances that matter are circumstances not in the control of either party

3 ways to accomplish risk allocation

Parties allocate the risk themselves in the K (fixed prices, express conditions)

Conscious ignorance

Courts allocate the risk

Who bears the risk with a fixed price clause?

If market prices go up, the seller bears the risk

if market prices go down, the buyer bears the risk

Mutual mistake elements

A mistake

By both parties

At the time the K was made

The mistake goes to a basic assumption on which the K was made

The mistake has a material affect on the agreed exchange of performances

The adversely affected party does not bear the risk of mistake under R154

If all elements of mutual mistake are met, what happens?

There is a rescission of the K, which justifies the non-performance

Who is the adversely affected party

(mutual mistake)

The person trying to get out of the K

Mistake rule

Belief that is not in accord with the facts

Basic assumption rule

(mutual mistake)

the fundamental nature of the assumptions

What is the test for basic assumption?

(mutual mistake)

Would or could the parties have entered into the K on its present terms had they known the truth?

Tests for if the mistake materially alters the agreed exchanges of performance

(mutual mistake - step 4)

Imbalance test

Other relief test

Imbalance test

(mutual mistake)

(material alteration)

Ordinarily, the mistake materially alters the agreed exchange by making it both:

less advantageous for the adversely affected party

more advantageous for the other party

the disparity between them needs to be significant

Other relief test

(mutual mistake)

(material alteration)

Is other relief, such as reformation available?

If yes, it does not materially alter and the K cannot be voidable since it will be reformed

When is reformation available

(mutual mistake)

Only when the mutual mistake consists of the failure of the written K to state accurately the agreement of the parties (word processing error)

R 154 - when does a party bear the risk of the K?

(mutual mistake)

If the risk is allocated to him by the agreement of the parties

Or if there is conscious ignorance

Or the risk is allocated by the court

Conscious ignorance

(risk allocation)

(mutual mistake)

Party makes a K with knowledge of a limited knowledge but treats it as sufficient.

Look for lack of due diligence or party being put on notice

Factors courts use to allocate risk

(mutual mistake)

Which party was better able to foresee the risk and take steps to protect? (expertise, possession of property)

Which party had insurance / could have gotten?

Which party drafted the K?

Which party had 3rd third-party advisor?

If the other relief clause is not satisfied (there is other relief available) what happens?

(mutual mistake)

The mistake does not have a material affect on the agreed exchange of performances

Changed circumstances doctrines

Mutual mistake

Impracticability

Frustration of purpose

Modifications

If the relief seeking party had control of the changed circumstances, what happens?

(changed circumstances doctrines)

They cannot use a changed circumstances doctrine to justify their non-performance

Objective impossibility

This cannot be done by anyone

Argument for impracticability

Something has happened that is preventing me from performing my obligations to you under the K

How do you do an impossibility analysis

Do an impracticability analysis but say its not just impracticable, it is impossible

Argument for FoP

Something has happened that made your performance under the K less valuable to me, so I no longer what the K because the primary purpose is frustrated

Who will bring an FoP argument?

The paying party

Who will bring an impracticability argument?

The performing party

Will a party raise both an impracticability and FoP argument?

Not in our class.

Whose issue is it to justify the non-performance of a K?

The party who did not perform needs to justify their non-performance.

If an alternative performance is available, is the performance impracticable?

No

If an alternative performance is more expensive or if the K becomes unprofitable, is the performance impracticable?

No

Steps for FoP

1. The party’s principle purpose is substantially frustrated

   1. Principle purpose

      1. the object must be so completely the basis of the K that as both parties understand, the transaction would not make sense without it.

         1. requires a shared understanding of the principle purpose

      2. if no shared understanding - the courts generally view the principle purpose very broadly.

   2. Substantially frustrated

      1. courts have insisted the frustration be nearly total

      2. The other party’s performance must be virtually worthless

      3. if the party can turn the bargain to its advantage in any way, the principle purpose is not substantially frustrated

      4. less profit or a loss is not enough for substantial frustration

2. was the non-occurrence of the event a basic assumption on which the K was made?

   1. What is the event?

   2. Would or could the parties have made the K on the present terms had they known the event would occur?

   3. NOT basic assumptions:

      1. death / incapacity of a person important to the K

      2. Destruction of a necessary thing

      3. Gov. regulations

      4. Market shifts

         1. fixed price Ks allocate the risk

      5. Party’s finances

         1. each party is responsible for their own finances

3. Without fault of the relief seeking party

4. The party seeking to be excused does not bear the risk under the language of the K or the surrounding circumstances

   1. Courts look at all circumstances to try to figure out who is in a better position to protect themselves

      1. Who drafted the K?

      2. Standard form?

      3. Who supplied the term?

      4. Trade usage

      5. Ability to obtain insurance

      6. Expertise

      7. Third party advisors

   2. Foreseeability (2 approaches)

      1. if foreseeable - precludes relief

      2. foreseeability is one factor to consider

Elements of impracticability

1. Performance is made impracticable

   1. What is the agreed performance?

   2. Performance does not need to be impossible, but there must be a showing of impracticability because of extreme and unreasonable difficulty, expense, injury, or loss

      1. K being unprofitable is generally insufficient

   3. Is an alternative performance available?

2. was the non-occurrence of the event a basic assumption on which the K was made?

   1. What is the event?

   2. Would or could the parties have made the K on the present terms had they known the event would occur?

   3. NOT basic assumptions:

      1. death / incapacity of a person important to the K

      2. Destruction of a necessary thing

      3. Gov. regulations

      4. Market shifts

         1. fixed price Ks allocate the risk

      5. Party’s finances

         1. each party is responsible for their own finances

3. Without fault of the relief seeking party

4. The party seeking to be excused does not bear the risk under the language of the K or the surrounding circumstances

   1. Courts look at all circumstances to try to figure out who is in a better position to protect themselves

      1. Who drafted the K?

      2. Standard form?

      3. Who supplied the term?

      4. Trade usage

      5. Ability to obtain insurance

      6. Expertise

      7. Third party advisors

   2. Foreseeability (2 approaches)

      1. if foreseeable - precludes relief

      2. foreseeability is one factor to consider