#12254 - Interpretation - Contracts

Part Two: Interpretation

If there was a contract, how do you interpret it?

Interpreting the Elements

Interpreting Contract Terms | Interpreting Contracts Under the UCC

1. Interpreting Contract Terms

1. Rule

1. How to @interpret a contract (Frigaliment):

1. step 1: look at the contract’s wording;

   1. if it is ambiguous: step 2.

2. step 2: interpret contract against its own terms;

1. (majority) if still ambiguous, step 3 (W.W.W. Assocs.).

2. (minority) even if not ambiguous, step 3 (Pac. Gas)(Traynor).

3. step 3: check parol evidence for evidence of a “reasonably susceptible” interpretation (Pac. Gas);

1. if still ambiguous, step 4.

2. (under the UCC), even if not ambiguous, step 4 (UCC § 2-202).

4. step 4 (UCC only): check usage/dealings/performance;

1. this is controlling if both parties had reason to know usage or it was generally understood (Frigaliment).

2. if still ambiguous, step 5.

5. step 5: whichever definition is narrower bears the burden of proof (Frigaliment).

2. Analysis

2. What is a “reasonably susceptible” interpretation?

   1. should read contract so that provisions do not conflict as much as possible (Trident);

   2. should give meaning to all terms (Brinderson);

   3. should emphasize specific provisions over general provisions (Brinderson);

   4. should emphasize unique provisions over boilerplate provisions (Brinderson);

3. Cases

   1. @Pac. Gas and Electric Co. v. G.W. Thomas Drayage & Rigging Co. (Cal. 1968, 386)(Traynor):

      1. Δ bought insurance that was common third-party indemnity insurance, but written as indemnifying Π for any of Δ’s damages to Π. Any external evidence that is relevant to prove a “reasonably susceptible” meaning, regardless of ambiguity, is admissible.

   2. @W.W.W. Assocs., Inc. v. Giancontieri (N.Y. 1990, 389):

      1. Written contract said either party could cancel, but Π intended clause just for itself. Since the contract was unambiguous as a matter of law, parol evidence cannot be introduced to create ambiguity.

   3. @Brinderson-Newberg Joint Venture v. Pac. Erectors, Inc. (9th Cir. 1992, 393):

      1. Written K said Δ would “erect complete” equipment. Δ interpreted this to mean aspect of equipment. Since Δ’s parol evidence would lead to interpretation that is not “reasonably susceptible,” it is not allowed.

   4. @Trident Ctr. v. Conn. Gen. Life Ins. Co. (9th Cir. 1988, WL):

      1. Π got loan from Δ that said it could not prepay for 12 years. Π sued to prepay. Even though the contract is not reasonably susceptible to Π’s interpretation on its face, Pac. Gas requires courts to check parol evidence.

   5. @Frigaliment Importing Co. v. B.N.S. Int’l Sales Corp. (S.D.N.Y. 1960, 399):

      1. Δ contracted to sell Π “chicken.” Two types: broilers and fowl. Following five-step program, since the narrower definer has a burden of proof, Π has burden of proving “chicken” meant just “broilers,” which Π did not satisfy.

2. Interpreting Contracts Under the UCC

   1. Rule

      1. The commercial context

1. including,

1. performance;

2. dealings;

3. AND usage (UCC § 1-303);

2. is always admissible as evidence (Nanakuli)(UCC § 2-202),

3. should be interpreted as reasonably consistent with each other as possible (UCC § 1-303),

4. AND is binding when not completely inconsistent with each other (UCC § 2-202).

   1. When they are inconsistent:

      1. express terms > performance > dealings > usage (UCC § 1-303).

   1. @Performance:

      1. how the contract is performed without objection after the contract was signed (UCC § 1-303).

   2. @Dealings:

      1. previous contracts between parties, or performance before the contract was signed (UCC § 1-303).

   3. @Usage:

      1. the regular method of dealing in a place, vocation, or trade a party is justified in expecting other party to know (UCC § 1-303).

   1. Analysis

      1. External evidence under the UCC?

         1. Unlike under the common law, the majority rule under the UCC is external evidence of performance/dealings/usage is always valid, and should be interpreted as consistently as possible with express terms, even if express terms are unambiguous.

   2. Cases

      1. @Nanakuli Paving & Rock Co. v. Shell Oil Co. (9th Cir. 1981, 404):

         1. In Hawaii, asphalt sellers always had price protection. In performance and past dealings, Δ used price protection, even though written K said price was set by Δ. Since usage, dealings, and performance all are compatible with Π’s interpretation of contract and do not contradict it, they qualify what the written K means.

      2. @Corenswet, Inc. v. Amana Refrigeration, Inc. (5th Cir. 1979, 411):

         1. Δ cancelled distribution to Π. Π: this was arbitrary and capricious. Since dealings/usage would contradict express terms, and since obligation of good faith is only an implied requirement, express term (Δ can cancel for “any reason”) is controlling.

Elements of a Contract

Promises & Conditions | Parol Evidence | Expressed & Implied Contract Terms | Warranties

1. Promises & Conditions

   1. Rule

      1. A @condition

         1. is a term in a contract that specifies when a promise is due.

         2. is a prerequisite for a promise to be enforced (Jungman).

            1. The performance of a consideration is always deemed a condition (Petterson).

         3. within one party’s exclusive control

            1. turns the condition into a good faith promise to fulfill the condition.

               1. This is an objective duty of good faith

                  1. in commercial contexts (Fry).

               2. This is a subjective duty of good faith

                  1. in contexts in which party’s fancy or taste is determinative.

                  2. when contract expressly says so (Pannone).

            2. is void if the other party prevents the controlling party from fulfilling it by taking wrongful action in excess of legal rights (Godburn).

      2. A @timeframe

         1. is a term in a contract that specifies when a promise is due, but is NOT a prerequisite for a promise to be enforced (Peacock).

   2. Analysis

      1. Promise or condition?

         1. Courts will generally interpret a provision as a condition if it does not want the party to get away with a breach (Jungmann).

         2. If the term is a promise and A breaches promise, B still needs to perform but may collect damages.

         3. If the term is a condition and A breaches, if B’s performance is conditioned on the term, B does not have to perform.

      2. Condition or timeframe?

         1. The standard for this is whether in common usage or as a matter of public policy a type of provision should be interpreted as putting the risk on one party or another. In contracting in Florida, the time of payment is a timeframe, not a condition (Peacock).

   3. Cases

      1. @Jungmann & Co. v. Atterbury Bros., Inc. (N.Y. 1928, 448):

         1. Π agreed to sell goods to Δ with cable notice. Did not provide notice, but sent goods on time. Δ did not accept. Since providing notice was a condition precedent, Π did not satisfy all conditions for Δ to have to accept.

      2. @Peacock Constr. Co. v. Modern Air Conditioning, Inc. (Fla. 1977, 450):

         1. Π, a subcontractor, contracted with Δ that Δ would pay after the completion of a building and payment by owner. The owner never paid, so Δ did not either. Since the common usage of contracting contracts entails this term is a timeframe rather than a condition, Δ has to pay Π.

      3. @Fry v. George Elkins Co. (Cal. App. Ct. 1958, 463):

         1. Π offered to buy home conditioned on refinancing a mortgage. Went to two banks and could not refinance, even though mortgage company offered good terms with a provision Π did not like. Since Π had an objective duty to fulfill the contract, an ancillary term is not enough to prevent Π from accepting the mortgage company’s terms.

      4. @Pannone v. Grandmaison (Conn. Super. Ct. 1990, 465):

         1. Π had radon phobia, and contracted to buy house on condition that Π approve of radon test. The test came back extremely low, but high enough to scare Π. Since Π had a subjective duty of good faith to decide whether to approve the test, Π had discretion to reject.

      5. @Godburn v. Meserve (Conn. 1944, 468):

         1. Π promised to take care of Δ in exchange for property in her will. Δ was disagreeable, so Π moved out early and sued to recover for breach. Since Δ could be reasonably expected to do things she was expressly or impliedly permitted to do, she did not prevent Π from performing.

      6. @Petterson v. Pattberg (N.Y. 1928, 43):

         1. Δ offered to cancel Π’s debt if Π repaid some of it immediately. Π came by Δ’s house to repay; Δ revoked before Π tendered cash. Since tendering cash was performance necessary to complete acceptance, Δ revoked in time.

2. Parol Evidence

   1. Rule

      1. @Parol evidence:

         1. if a written contract is integrated, no parol evidence.

            1. (majority): any ambiguity means the contract is not integrated (Interform).

            2. (minority): if a reasonable person would interpret the contract as integrated (e.g. it has an integration/merger clause) it is (Nelson).

         2. if written contract is NOT integrated, parol evidence may supplement the contract, but not contradict it:

            1. Parol evidence may:

               1. rebut default presumptions (Masterson).

               2. clarify an ambiguous term (Interform).

               3. provide a “reasonably susceptible” interpretation (Brinderson).

         3. parol evidence about a completely separate agreement is almost always admissible (Lee),

            1. unless it is so interrelated that the written contract would naturally include the parol agreement (Gianni).

      2. @Parol evidence under the UCC:

         1. if a written contract is

            1. subjectively integrated, no contradictory parol evidence (UCC § 2-202).

            2. if the contract is silent on a normally expressed term like integration, that term is assumed to have been purposefully excluded (Lee).

         2. all written contracts are allowed supplementary performance/dealing/usage evidence (UCC § 2-202).

   1. Analysis

      1. Was the contract integrated?

         1. The majority (Corbin/subjective) view is that if written a contract is...