Parol evidence rule



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Contracts

Professor Helen Scott

Spring 1999
PAROL EVIDENCE RULE

Rest 210-217

UCC 2-202


  • Like S/F, evidentiary rule, rule of exclusion: cannot make K enforceable, but can make K unenforceable.

  • Rule that bars admission of evidence that otherwise would be admissible.

  • Rule limits the extent to which a party may establish that discussions or writings prior to the signed written K should be taken as part of the agr’nt.

  • Rule applies to oral agreements and discussions that occur prior to signing of an integration, and also to writings created prior to integration (draft agr’nts that were not intended to be final expressions of agr’nt)


Thompson v. Libby common law position: if K is completely integrated, then nothing is allowed in - no oral evidence is admissible

P/seller of logs is suing for purchase price

D/buyer of logs says that breach of warranty excuses payment

But: warranty is not contained in writing



Issue: whether parol evidence rule excludes oral evidence

Whether K is completely or partially integrated:

if completely integrated writing - no oral evidence is admissible

Held, the evidence of oral warranty is barred.



Court says: for the parol evidence rule to apply (i.e., to bar the introduction of extrinsic evidence), the parties must have intended to have their complete agreement embraced in writing.
Integration - a writing that is intended to be a final and complete expression of the agreement of the parties (Rest 210).

Partial integration - a writing that is intended to be final but not complete because it deals with some but not all aspects of a transaction between the parties.


Complete Integration (document that is not only a final expression of agr’nt, but that is also intended to included all details of the agr’nt)

Partial Integration (document that is intended to be final, but that is not intended to include all details of the agr’nt)

writing may not be contradicted,

may not be supplemented/added to



writing may not be contradicted by extrinsic evidence;

but writing may be supplemented by additional consistent terms



Rest 213, UCC 2-202(b)

Rest 213, UCC 2-202

Partial, complete, not at all integrated written agreement may always be explained by extrinsic evidence (Rest 214(c)).


Ks can be complete w/o being comprehensive
Even in 1885 there were 4 exceptions to parol evidence rule (court didn’t find in Thompson v. Libby):

  1. fraud (recognized exception to any K obligation and parol evidence rule, because there is ineffective mutual assent)

  2. a writing that is incomplete on its face: question of law - court decides first in a parol evidence case

  3. parol evidence to explain the K (court won’t take evidence to explain meaning of K unless it’s ambiguous); whether there is any ambiguity

  4. collateral on subject matter of the writing (if agreement covers more than one transaction, parol evidence rule doesn’t apply to ancillary, collateral transactions)


Exceptions to parol evidence rule (reasons why extrinsic evidence may be admitted):

explanation of the agreement



  • parol evidence rule does not apply to agreements, whether oral or written, made after the execution of the writing

  • does not apply to evidence offered to show that effectiveness of the agreement was subject to an oral condition precedent (Rest 217)

  • does not apply to evidence offered to show that agreement is invalid for any reason, such as fraud, duress, undue influence, incapacity, mistake, or illegality (Rest 214(d))

  • to evidence that is offered to establish a right to an equitable remedy such as “reformation” of K (Rest 214(e))

  • to evidence introduced to establish a “collateral” agr’nt between the parties (Rest 216(2))


Rest 214 Exceptions: can admit evidence to establish

  1. that the writing is or is not an integrated agreement

  2. that the integrated agr’nt, if any, is completely or partially integrated

  3. the meaning of the writing, whether or not integrated

  4. illegality, fraud, duress, mistake, lack of consideration, or other invalidating cause

  5. ground for granting or denying rescission, reformation, specific performance or other remedy


Policy

  • Lord Coke: “the uncertain testimony of slippery memory”: spoken words months/years later can be very unreliable - oral testimony is viewed with scepticism

  • mistrust of juries (juries are likely to favor the disadvantaged party that comes with oral evidence that contradicts written documents)

  • parol evidence rule favors status quo

Applicability of parol evidence rule is a matter of law

  • 1st question - question of law - whether document is complete


Merger clause (zipper clause) - supposed to constitute evidence that writing is entire agreement - statement that K is fully integrated

  • to prevent oral variations

  • to make sure that parties understand and there is no dispute afterwards

  • to invoke parol evidence rule: states that the writing is intended to be final and complete; designed specifically to result in the application of the parol evidence rule if extrinsic evidence is offered


Hershon v. Gibraltar

Majority and Dissent represent 2 major views on parol evidence rule:



  • Majority: extrinsic evidence not allowed: public interest in certainty and finality (if you negotiated the K, you should be held to it); majority concedes that the result is harsh, but still

  • Dissent: purpose of parol evidence rule is to further intent of the parties; here - parties probably didn’t intend the release of all claims - lawyers’ mistake.

Disagreement over a poorly-drafted release agreement. Court finds that the agreement unambiguously released and discharged all claims between the parties, including mortgages. The court did not allow extrinsic evidence that contradicted the agreement’s clear language (releasing “all claims, whether known or unknown”) and plain meaning.


  • Hershon probably did not intend for the release to cover the mortgages, because even after the agreement, they kept making payments, and actually attempted to refinance. But the court did not allow this evidence, and so Hershon was able to take advantage of the agreement and get out of its obligations.

  • The release, although releasing “any and all claims forever” is probably limited to the subject matter of the substance of the release; Hershon can’t go and punch out Goldstein.

  • If the parties got together 3 years later, the clause would not govern.

  • The release does not cover every event that will happen in the future.

  • Dissent: if the parties did not actually intend for the release to govern what they say it did, then there is an ambiguity (or even w/o the extrinsic evidence, the release is ambiguous), and extrinsic evidence should be allowed. So, the dissent works to advance what the parties actually intended, while the majority is concerned with certainty and finality.

  • Here parties were of equal bargaining power, so both had counsel to look over the K, and are sophisticated enough to be held to its terms.


Nanakuli v. Shell Parol Evidence Rule under UCC

Long-term supply K; Asphalt co/Nanakuli gets a price protection clause from Shell.

Supplier/Shell/D failed to price protect Nanakuli/P - raised the price

P claims that he was entitled to get old K price - price posted at the time of K, not time of delivery. P says that acc to trade usage and course of performance, a price protection clause was incorporated into their agreement. Trial court finds for D, saying that trade usage and course of performance are not admissible. Appellate court found for P: parol evidence was consistent with the terms of the K.


UCC 2-202: Terms in a writing intended by the parties as final expression of their agreement may not be contradicted by extrinsic evidence, but may be supplemented

  1. by course of dealing or usage of trade (1-205) or

by course of performance (2-208); and

  1. by evidence of consistent additional terms unless the court finds completely integrated agreement.


Supplier is concerned about rice moving down - wants to protect itself against downward move of the market

Buyer - good for planning (knows what his costs are gonna be), wants fixed requirements K to protect itself if market price rises

Both want to strike a deal

Here - fluctuating price requirements K
How did P establish trade usage and course of performance to make evidence admissible?

Trade usage:


  • what’s the trade

  • prove usage

  • Court: under UCC 1-205(2), parties can be bound by a usage common to the place they are in business, even if not the usage of their particular trade

  • UCC 1-205: P must prove regularity of observance of the practice or method - has to be sufficient regularity of trade usage; preponderance, has to be vast majority

  • Shell would be bound not only by usages of sellers of asphalt but by more general usages on Oahu, as long as those usages were so regular in their observance that Shell should have been aware of them

  • Shell had extensive prior dealings with members of the trade

  • Shell price protected twice before -

Shell then either knew or should have known about trade practice

Hierarchy of evidence (esp. in sales Ks under UCC)

  1. express terms of K

  2. course of performance (2-208) (the best evidence is what parties actually did under this very K) prevails over

  3. course of dealing (1-205(1)) (what happened between these parties in other transactions, in past Ks) prevails over

  4. usage of trade (1-205(2)) (such regularity of observance in a place, vocation or trade as to justify an expectation that it will be observed w/r/t the transaction in q’n))

But all this evidence of course of performance, course of dealing, and usage of trade is inadmissible to contradict express language of K under Parol Evidence Rule (UCC 2-202); it may be introduced to help interpret and explain the meaning of a writing even if the writing is completely integrated.


What did the court think was really going on here? -2 things happened to Shell:



  1. management change - new management

  2. Arab oil embargo - price of oil rose

Unforeseen circumstances - suddenly smth occurs which nobody could foresee - who is going to bear the risk

In this case the court felt that Shell took the risk


IMPLIED TERMS
Implied in fact

  • Term becomes part of obligation of the parties, as if it is written

  • The court’s view of what parties agreed to; intention of the parties entering into K

  • Furthering intention of the parties

Implied in law

  • Regardless of the parties’ intentions

  • Can be imposed by the courts contrary to parties’ intentions, for public policy reasons

  • Most important such implied term - obligation of good faith

  • Other implied terms: requirement of reasonable notice prior to termination


Wood v. Lucy, Lady Duff-Gordon implied in fact: implied obligation

to use reasonable efforts

P is fired by D/Lady Duff from their agency agreement. P sues for breach. D argues that K was illusory bec it was not supported by consideration. That is, there is no mutual obligation on its face, bec P did not bind himself to anything, P did not have any duties. Cardozo read an obligation of “reasonable efforts” into K, to find mutual obligation and bind D. Held, for P.

P’s obligations under K:


  • to account on monthly payments for fees

  • to secure intellectual property protection

  • to split the profits with her on the 50-50 basis

Obligation that’s missing

  • to get any product placement at all

  • P has exclusive right to account for her - he has rights, but no obligations

  • D says - K fails for lack of consideration, mutuality of obligation

  • In classical K, this K would have been thrown out

  • Cardozo implied reciprocal obligation

Parties should have made this K to work - therefore, there must have been this implied term - business efficacy

It makes no sense for someone as successful as Lucy to place so much on this guy w/o his obligation - it couldn’t be what parties meant.



  • “it is true that he does not promise in so many words that he will use reasonable efforts to place D ‘s indorsements and market her designs. We think, however, that such a promise is fairly to be implied”

  • we are not to suppose that one party was to be placed at the mercy of the other

  • “without an implied promise, the transaction cannot have such business “efficacy as both parties must have intended that at all events it should have’”


Leibel v. Raynor Manufacturing Co. UCC 2-309(3) reasonable notification

requirement

Garage door dealer-distributorship agreement: K of indefinite duration, terminable at will by either party. The court holds that reasonable notification is required in order to terminate an on-going oral agreement for the sale of goods in a relationship of manufacturer-supplier and dealer-distributor or franchise.

P says: I’m entitled to reasonable notice before termination


*Is the K for services or the sale of goods? (like asphalt v. paving)

Court finds that distributorship agreement was for the sale of goods



  • This is a relationship K with the potential to be long-term, indefinite in duration, but no one knows what might happen. So it is in the interests of both parties to keep the duration open-ended.

  • What are the interests of manufacturer in entering into franchise agreement? -

hopes to increase sales

  • it’s a way of sharing risk - it’s cheaper for manufacturer

  • can have more outlets

  • distributor may have reputation in the community - it will increase sales

  • quality control, protection of the mark

  • protecting the name, the brand (good will)

  • expertise

  • community knowledge

  • research on the site

  • What are the dealer’s or franchisee’s interests?

  • they get smth to sell

  • brand name/they want the brand - important to advertise as a brand name

  • support from the parent company

  • get a lot of services: all service and technical support

  • get combined purchasing power

  • get discount price

  • get tremendous advertising support, benefit of nationwide advertising program

  • get loans sometimes

  • maybe they share liability

  • To deal with indefiniteness problem - make the agreement terminable at will

  • What’s the problem with termination at will?

  • bad faith; opportunistic behavior by either party; possibility that one party will seek appropriating all benefits of the relationship to the detriment of the other party

  • dealer or franchisee is worried about: that he’ll have no business left; he sank a lot of human capital, cash, time - and now it’s taken by the manufacturer

  • manufacturer is worried about: distributor can shop around for a better deal, man’rer poured in much support or dist’ror to build a thriving business

  • There is risk on both sides



UCC 2-306 Output, Requirements and Exclusive dealings

UCC 2-309 Absence of Specific Time Provisions; Notice of Termination

  • 2-309(3) reasonable notification requirement

  • agreement can dispense with notification and will be invalid only if it is unconscionable

Rest 205 Duty of Good Faith and Fair Dealing


In Leibel,

court finds an obligation of good faith and fair dealing - reasonable notice of termination (2-309(3)): reasonable notice constitutes fair dealing and is implied as a matter of law - doesn’t matter if parties intended it

Factors


  • amount of money dealer has to invest

  • no formal written agreement

  • termination at will - has to be made after a period of reasonable notice

“If the distributorship is terminated without allowing the dealer sufficient time to sell his remaining inventory, substantial damages may result, even if the manufacturer agrees to repurchase the inventory. Reasonable notification should be the minimum amount of protection afforded to either party upon the termination of an ongoing sales agreement.”
Default rule - either party can terminate at will

Court shifts the burden to the party seeking termination w/o notice


Comment 8 to 2-309: you must give the other party some time to minimize its loss from termination at will, to find another deal

Comment 9 to 2-309: if it’s material breach by the other party, you don’t have to give notice, you are relieved from any legal obligations
THE IMPLIED OBLIGATION OF GOOD FAITH
1. Honesty in fact

UCC 1-201 (19): Good faith means honesty in fact in the conduct or transaction concerned.

UCC 1-203 Obligation of Good Faith: Every K or duty within this Act imposes an obligation of good faith in its performance or enforcement.

Rest 205 Duty of Good Faith and Fair Dealing: Every K imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.

  • Polices opportunistic behavior

  • Protects the reasonable expectation of the parties in light of the background practices and customs in which the agreement arose

  • Protects the benefit of the bargain

Efficiency rationale - lowering transaction costs

  • Reduces transaction costs: information costs (you don’t have to do due diligence, engage in investigation)

  • Otherwise you’d have to interact only w/parties that you know

  • Or you’d have to take insurance (insure against the other party’s dishonesty)

Moral and ethical value

  • K law is an enforcement system - enforcement mechanism for private arrangements; can demand certain standards of behavior (we don’t allow people to come to court to enforce illegal Ks, dishonesty)


2. For merchants honesty in fact

2-103(b): Good faith in the case of a merchant means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.
Eastern Air Lines v. Gulf Oil Corp. no breach of obligation of good faith

Requirements K: Gulf would sell the fuel that Eastern needs in certain cities, for a fixed price. Due to the Arab oil embargo, prices went up, provision in K didn’t cover this price increase (K’s escalation clause was about domestic crude oil), so Gulf demanded a price increase from Eastern, or they would shut off supply. Gulf argues that the requirements K is unenforceable do to lack of mutuality of obligation (because Eastern is not obligated to but any fuel), and even if K is found, Eastern breached its good faith obligation by “fuel freighting”.


Requirements K (here) - a K in which seller promises to supply all the goods or services that a buyer needs during a specific period and at a set price, and in which buyer promises (explicitly or implicitly) to obtain those goods or services exclusively from seller.

  • buyer is not free to deal with other sellers, seller can deal with other buyers (as long as it supplies buyer)

  • there must be some element of exclusivity: if there is no exclusivity, it’s not K at all, because there is no mutuality of obligation, no consideration - there is no obligation on the buyer (as in Shoney’s)

  • it need not be complete exclusivity: K can define the scope of the exclusivity obligation

  • minimum/maximum

  • locality (as in this case)


Output K - a K in which buyer promises to buy all the goods or services that seller can supply during a specified period and at a set price.

  • buyer agrees to buy all of the seller’s output; buyer can go to another supplier for excess of his needs

Very useful Ks for both parties: certainty, allocation of risks
Here, due to unforeseen events, K not only lost its usefulness to one of the parties, it’s onerous to one of the parties, it’s a burden; commercial impracticability for Gulf.

Should we let Gulf out? What does Gulf have to show to prove impracticability?

Force Majeur clauses - essentially govern impracticability

(Gulf is a big company, it can stand to lose some money)


Gulf is accusing Eastern of bad faith - fuel freighting: Eastern wasn’t purchasing its good faith requirements

Eastern is accusing Gulf of bad faith - breach of K


UCC 2-306 Output, Requirements and Exclusive Dealings

Good faith requirement makes this requirements K an enforceable K


Courts looks to

  • course of performance

  • course of dealing

  • trade usage

to establish commercial standards in the industry.

Court finds that fuel freighting is a very common practice + it happened between these parties, and Gulf never complained




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