Contract Formation and Enforcement Rules

Contracts II
Module 01
© 2021 Seth C. Oranburg

Overview
http://bit.ly/3cl3TMW

Commonly
Missed Issues
in Contract
Formation
Consideration and Its
Alternatives
Applicability of the UCC
How Are Offers Made
Irrevocable?
What is the effect of differing
terms in the acceptance?

Key Rules
Regarding
Consid-
eration and
its Alternat-
ives
R2d § 71.
Consideration
R2d § 90. Promissory
Estoppel
R2d § 86. Promissory
Restitution

Consideration as Bargained-
For Exchange
• To constitute consideration, a performance or a
return promise must be bargained for.
R2d § 71(1)

Consideration Illustrated
Promisee's
Promise or
Performance
Promisor’s
Promise

Promissory Estoppel
(Detrimental Reliance)
• A promise
• which the promisor should reasonably expect to induce
action or forbearance on the part of the promisee or a third
person and
• which does induce such action or forbearance
• is binding if injustice can be avoided only by enforcement of
the promise.
• The remedy granted for breach may be limited as justice
requires.
R2d § 90(1)

Promissory Estoppel
(a.k.a.) Detrimental Reliance Illustrated
Promise
Reliance
Detriment

Promissory Restitution
• A promise
• made in recognition of a
• benefit previously received
• by the promisor from the promisee
• is binding to the extent necessary to prevent
injustice.
R2d § 86(1)

Promissory Restitution Illustrated
Benefit
Promise
Injustice

Key Rules
Regarding
the UCC
and
Contract
Formation
UCC § 2-102.
Scope [of the UCC].
UCC § 2-105.
“Goods” Defined
UCC § 2-204.
“Merchant” Defined

UCC Applies Only to Sales of
Goods
• Unless the context otherwise requires, this Article
applies to transactions in goods;
• it does not apply to any transaction which although in
the form of an unconditional contract to sell or present
sale is intended to operate only as a security transaction
nor does this Article impair or repeal any statute
regulating sales to consumers, farmers or other
specified classes of buyers.
UCC § 2-102

“Goods” Defined
• “Goods” means all things (including specially
manufactured goods) which are movable at the time of
identification to the contract for sale
• other than the money in which the price is to be paid,
investment securities (Article 8) and things in action.
• “Goods” also includes the unborn young of animals
and growing crops and other identified things attached
to realty as described in the section on goods to be
severed from realty (Section 2-107).
UCC § 2-105(1)

Predominant Purpose Test
• In a transaction involving both goods and services, the
UCC apply only if the transaction is predominately for
the sale of goods

“Merchant” Defined
• “Merchant” means a person who deals in goods of the
kind or otherwise by his occupation holds himself out
as having knowledge or skill peculiar to the practices or
goods involved in the transaction
• or to whom such knowledge or skill may be attributed
by his employment of an agent or broker or other
intermediary who by his occupation holds himself out
as having such knowledge or skill.
UCC § 2-104

Special Rules Apply to
“Merchants”
• Many UCC rules only apply to sales by or between
merchants
• Merchants can form contracts with acceptances that
would be considered counter-offers under common law

The Firm Offers Rule
(Goods + Merchants Only)
• An offer | by a merchant | to buy or sell goods | in a
signed writing | which by its terms gives assurance that
it will be held open | is not revocable, for lack of
consideration, | during the time stated or if no time is
stated for a reasonable time, but in no event may such
period of irrevocability exceed three months;
• but any such term of assurance on a form supplied by
the offeree must be separately signed by the offeror.
UCC § 2-205

Key Rules
Regarding
Irrevocable
Offers
R2d § 87. Option Contracts
R2d § 45. Part
Performance of Unilateral
Offers
UCC § 2-205. Merchant’s
Firm Offer

Option Contracts with
Consideration
• An offer is binding as an option contract if it
a. is in writing and signed by the offeror, recites a
purported consideration for the making of the
offer, and proposes an exchange on fair terms
within a reasonable time; or
b. is made irrevocable by statute. [e.g., the UCC]
R2d § 87(1)

Option Contracts without
Consideration
• An offer which the offeror should reasonably
expect to induce action or forbearance of a
substantial character on the part of the offeree
before acceptance and which does induce such
action or forbearance is binding as an option
contract to the extent necessary to avoid injustice.
R2d § 87(2)

Formation of Equitable Option
Contract from Part Performance
of Unilateral Offer
• Where an offer invites an offeree to accept by
rendering a performance and does not invite a
promissory acceptance, an option contract is
created when the offeree tenders or begins the
invited performance or tenders a beginning of it.
R2d § 45(1)

Conditions of Equitable Option
Contract from Part Performance
of Unilateral Offer
• The offeror's duty of performance under any
option contract so created is conditional on
completion or tender of the invited performance
in accordance with the terms of the offer.
R2d § 45(2)

R2d § 45 Explained
• When an offer limits acceptance to performance only—such offers of
rewards and prizes—that is a called an “offer for a unilateral contract.”
• When a prospective offeree begins performance of such an offer, with
knowledge of that offer, that creates a quasi-option contract such that
the offer is irrevocable for a limited time, so the offeree has time to
complete performance and thus accept
• But when the offeree merely prepares to perform (e.g., purchasing
materials to do the work), that is not sufficient to create a quasi-option
contract

Merchant’s Firm Offers
• An offer | by a merchant | to buy or sell goods | in a
signed writing | which by its terms gives assurance that
it will be held open | is not revocable, for lack of
consideration, | during the time stated or if no time is
stated for a reasonable time, but in no event may such
period of irrevocability exceed three months;
• but any such term of assurance on a form supplied by
the offeree must be separately signed by the offeror.
UCC § 2-205

Key Rules
Regarding
Acceptance
of Offers
R2d § 39. Mirror
Image Rule
UCC § 2-207.
Battle of the
Forms Rule

Mirror Image Rule: Proposing
Different Terms is Counter-Offer
• A counter-offer is an offer made by an offeree to
his offeror relating to the same matter as the
original offer and proposing a substituted bargain
differing from that proposed by the original offer.
R2d § 39(1)

Mirror Image Rule: Counter-
Offer Terminates the Offer
• An offeree's power of acceptance is terminated by
his making of a counter-offer, unless the offeror
has manifested a contrary intention or unless the
counter-offer manifests a contrary intention of the
offeree.
R2d § 39(2)

Battle of the Forms: Proposing
Different Terms Is Acceptance
• A definite and seasonable expression of
acceptance or a written confirmation which is sent
within a reasonable time operates as an acceptance
even though it states terms additional to or
different from those offered or agreed upon,
unless acceptance is expressly made conditional on
assent to the additional or different terms.
UCC § 2-207(1)

Battle of the Forms: Addition
Terms are Proposals to Modify
• The additional terms are to be construed as proposals
for addition to the contract. Between merchants such
terms become part of the contract unless:
a. the offer expressly limits acceptance to the terms of
the offer;
b. they materially alter it; or
c. notification of objection to them has already been
given or is given within a reasonable time after notice
of them is received.
UCC § 2-207(2)

Battle of the Forms: Conduct
Can Establish an Agreement
• Conduct by both parties which recognizes the existence
of a contract is sufficient to establish a contract for sale
although the writings of the parties do not otherwise
establish a contract. In such case the terms of the
particular contract consist of those terms on which the
writings of the parties agree, together with any
supplementary terms incorporated under any other
provisions of this Act.
UCC § 2-207(3)

Miscellaneous Notes
• When a promosor promises to perform a previously voidable contract, that promise is binding
without consideration. This relates to minors who reaffirm their promises after the age of
minority. That promise of reaffirmation is binding without new consideration.
• Distinguishing between beginning performance and preparing to perform is tricky. In most
jurisdictions, purchasing materials is merely preparing to perform, not beginning performance.
• You should always prefer a legal remedy to an equitable one. Whenever a legal remedy is a
valid choice on an MQC, select that in favor of an equable answer.
• An implied-in-fact contract occurs under unusual circumstance where parties have a long-term
pre-existing relationship. The elements of an implied-in-fact contract are: an unambiguous
offer, unambiguous acceptance, mutual intent to be bound, and consideration.
• The usual test for consideration is bargained-for exchange. Even if there was no
benefit/detriment, the vast majority of jurisdiction will find a contract where there was
bargained-for exchange.
• Fraud requires intent. You should not presume fraud where that intent is not described in the
question.

Conclusion on Review of Contract
Formation
• Good work on your review and diagnostic:
• You recalled and updated your understanding of contract formation
• You developed strategies to take long multiple-choice tests
• You learned how to access course materials online and offline
• Next we will discuss Contract Interpretation
• Please read Module 02 for class next week
• For further reading, consider: Richard A. Posner, The Law and
Economics of Contract Interpretation, 83 Tex. L. Rev. 1581
(2004)
https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?articl
e=2893&context=journal_articles

Contracts II
Module 02

Overview

Interpretation of Promise or
Agreement
• Interpretation of a promise or agreement or a
term thereof is the ascertainment of its meaning.
• R2d § 200

Frigaliment: A Case Study in Contractual Ambiguity

Judge Henry Jacob
Friendly
• The first Harvard Law graduate
to receive summa cum laude
• Clerked for Justice Louis
Brandeis, who was nominated
by Woodrow Wilson, a
Democrat
• Appointed to 2d Cir. by Dwight
D. Eisenhower (a former
Democrat who switched to the
Republican party for the 1952
Presidential election)

The issue is, what is chicken?
Two parties entered into a
written contract to buy a
sell “chicken”
They disputed whether that
meant “broiler chicken” or
“steamer chicken”

Why is the word “chicken,” standing
alone, ambiguous?
• Evidence of the word’s ambiguity:
• Plaintiff and defendant assert different meanings
• Dictionaries give both those meanings, plus others not relevant here

To what evidence does the judge FIRST
turn in order to resolve the ambiguity?
• First, Judge Friendly turns to the contract itself to see whether it
offers any aid to its interpretation
• The contract itself is the primary source of “intrinsic” evidence

What does the Judge mean when he says the
Dep. of Ag. regulations are “incorporated by
reference?”
incorporation by reference (1886) 1. A method of making a secondary
document part of a primary document by including in the primary document a
statement that the secondary document should be treated as if it were contained
within the primary one.
With a contract, the document to be incorporated must be referred to and
described in the contract in such a way that the document's identity is clear
beyond doubt.
— Often shortened to incorporation.
— Also termed adoption by reference.
INCORPORATION BY REFERENCE, Black's Law Dictionary (11th ed.
2019)

What is the point of Defendant’s argument
that it was impossible to obtain broilers and
fryers at the $0.33 price offered by Plaintiffs?
• Defendant’s argument is an appeal to Judge Friendly’s
common sense.
• Commercial parties should not be expected to enter into a
contract expecting a loss:
• “Plaintiff must have expected defendant to make some profit—certainly
it could not have expected defendant to deliberately incur a loss.”

What happened when the first shipment of
chicken arrived, and why does this matter?
• Defendant immediately protested when the first shipment
arrived and contained stewing chickens
• The fact that the relationship went badly from the start means
there was no “course of performance” that could be used to
interpret the meaning of the parties’ agreement

Did the parties trade with each other prior
to this shipment of chicken?
• No. The parties had no prior dealings.
• The fact the this was a new relationship means there is no
“course of dealing” that could be used to interpret the meaning
of the parties’ agreement.

What testimonial evidence does Plaintiff
present to prove “chicken” excludes fowl?
Chicken means
broiler
Strasser
Chicken means
broiler; fowl
means stewing
Niesielowski
Separate
market report
on chicken and
fowl
Dates

What testimonial evidence does Defendant
present to prove “chicken” includes fowl?
“everything is a
chicken”
Weininger
Chicken includes
all classes
Fox
any bird
Sadina

Should the judge ascribe the trade usage of
the term “chicken” to Defendant’s intent?
• No. Defendant was only beginning in the poultry trade in 1957.
• The principle is that when one of the parties is not a member of
the trade, his acceptance of trade usage should not be
presumed.
• Rather, Defendant’s intentions in using the word “chicken”
should be based on:
• Proof of Defendant’s actual knowledge of the meaning of the term, or
• Usage of that term is so established, notorious and universal that the
presumption applies to everyone, regardless of membership in a trade

Did the parties discuss “broilers” or
“stewing” chicken during negotiations?
• No. The Swiss buyer, plaintiff Frigaliment, spoke German, and
negotiations were conducted mainly in German.
• The German word “Huhn” includes both “Brathuhn” (broilers)
and “Suppenhuhn” (stewing chicken).
• The parties deliberately used the English word “Chicken.”
• Plaintiff (buyer Frigaliment) claims this word was used deliberately to
mean young chicken (broilers).
• But when Plaintiff responded to the question what kind of chickens they
wanted, they responded “any kind” and clarified they meant “huhn.”

Did the court find “chicken” to be ambiguous
or not? What is the holding of this case?
• Yes. The court found that “chicken” could be understood by
Defendant to include stewing chicken.
• Moreover, Defendant presented testimony that tends to show it
actually (subjectively) believed this meaning.
• This subjective understanding coincided with the most compelling
objective meaning, as defined by the Dept. of Ag.
• Plaintiff had a different subjective intent, but there was less
convincing evidence that ”chicken” objectively means only broilers
• Plaintiff had the burden of persuading the court as to its meaning,
and it failed to meet this burden. Verdict for Defendant.

Review of
the Rules
R2d § 201. Whose
Meaning Prevails
UCC § 1-303. Course
of Performance,
Course of Dealing,
and Usage of Trade

Where Parties Have a
Shared Meaning
• Where the parties have attached the same meaning
to a promise or agreement or a term thereof, it is
interpreted in accordance with that meaning.
R2d § 201(1)

Where One Party KOSHK
the Other’s Different Meaning
• Where the parties have attached different meanings to a promise or
agreement or a term thereof, it is interpreted in accordance with the
meaning attached by one of them if
a. that party did not know of any different meaning attached by the
other, and the other knew the meaning attached by the first party;
OR
b. that party had no reason to know of any different meaning
attached by the other, and the other had reason to know the
meaning attached by the first party
R2d § 201(2)

Where There Is a Failure of
Mutual Assent
• Except as stated in this Section, neither
party is bound by the meaning attached by
the other, even though the result may be a
failure of mutual assent.
R2d § 201(3)

Standards of Preference in
Interpretation
• The express terms of an agreement and any applicable
course of performance, course of dealing, or usage of trade
must be construed whenever reasonable as consistent with
each other. If such a construction is unreasonable:
1. express terms prevail over course of performance, course
of dealing, and usage of trade;
2. course of performance prevails over course of dealing
and usage of trade; and
3. course of dealing prevails over usage of trade
UCC § 1-303

What happens when
defined or common
contractual terms
conflict?
Apply the Canons of
Construction to
disambiguate such
terms

The Semantic Canons
1. Plain
Meaning
2. Technical
Meaning
3. General
Terms
4. Negative
Implication
5. Whole
Agreement
6. Avoid
Surplusage
7. Consistent
Usage
8. Negotiated
Terms
9. Same Kind,
Class, or
Nature
10. Recognition
by Association
11. Apply
Grammar
12. Legal
Meaning

The Policy Canons
• In addition to the semantic canons, there are policy canons, which
do not address semantic meaning but rather seek to make
contractual interpretation more efficient and/or fair.
• The most significant of these policy canons is the duty of good faith
and fair dealing, which we will study along with other implied term
in a later module.
• In addition, the policy of interpretation against the draftsman
(“omnia praesumuntur contra proferentem”) can be used to favor
meaning held by the party with less negotiating and drafting power

Construction Against
the Drafter
• When all else fails, judge may “waive
their magic wand” and construe
ambiguities against the drafter, as
justice requires
• This policy favors the party with less
bargaining power
• When parties have equal bargaining
power, or when third party rights are
involved, contra proferentem may not
be employed

Omnia
praesumuntur
contra
proferentem
A last resort to policy, should all
semantic canons fail.

Problem 02.1:
Matching
Exercises
Match the canons of construction to
case applications

A. Compound Combination
• Whether Mylanta is a “compound
combination” within the meaning and
intentions of the contracting parties in a
patent license agreement is interpreted
according to the meaning attributed by
experts in the field.

B. Real Estate Commission
• An agreement for sale of real estate provided
that the broker would be paid a commission
“upon the signing of this agreement” by both
buyer and seller. In the last paragraph, the seller
added: “The commission being due and payable
upon the transfer of the property.” The property
was never transferred because the buyer was
unable to go forward with the sale.
• The court ruled that the commission was not
owed, because the former statement must be
read with the final clause, which shows the
commission was owed not upon signing but
upon transfer.

C. Loading Vessel
• A printed term in a charter contract said, “vessel
to have turn in loading.” Handwritten below that
was the phrase “vessel to be loaded promptly.”
One party argued that the second phrase took
precedence over the first, so that the vessel did
not have to wait its turn for loading when it
arrived.
• The court concluded that, read together, the
terms meant the vessel would wait its turn, but
when it reached the front of the line it would be
loaded expeditiously.

D. The “Insured”
• An insurance contract identified the “insured” as
the named company and “any executive officer,
director or stockholder thereof while acting within
the scope of his duties.” The court interpreted an
exclusion of coverage for injury to or destruction
of property “in the care, custody or control of the
insured” to exclude coverage for damage to a
piece of equipment operated by a company
employee.
• Employees were not mentioned in the definition,
and the average person would consider the word
“insured” to mean the same thing throughout the
document.

E. “Flood”
• In an insurance contract, “flood” meant
inundation from natural water sources, not
damage from a broken water main, because
the contract referred to loss from “flood,
surface water, waves, tidal water or tidal
wave, overflow of streams or other bodies of
water or spray from any of the foregoing, all
whether driven by wind or not.”

F. Sublease Prohibition
• A lease contract that prohibited the lessee from subletting
the property “for use as a pool parlor, beer parlor, or other
business which would be undesirable and objectionable to
the tenants in other parts of the building” did not prevent
lessee from subletting for use as a restaurant, even though
a tenant who already operated a restaurant in the same
property objected.
• The court reasoned, “Under the language ‘or other
businesses which would be undesirable and objectionable
to tenants’, the words ‘or other businesses’ must in all
reason embrace a business that is of a similar type to that
of ‘pool parlors or beer parlors’, or ‘such as from its nature
or extent or the manner of conducting it would amount to a
nuisance.’”

G. Typed vs Handwritten
• Invoice from contractor contained a
smaller typewritten amount and a
larger handwritten number. Although
normally the handwritten amount
would control, testimony showed they
were written to record a disputed
amount claimed, not to record the
amount agreed to.

H. Franchise Contract
• A franchise contract mentioned
approval of two specific locations but
did not mention a third location, so the
logical implication was that the third
site was not approved

I. Usurious Interest
• An ambiguous installment contract
clause was interpreted to mean the
company could not collect unearned
interest, because the alternative
construction would violate usury laws.

J. Guaranty Agreement
• A guaranty agreement contains the
following phrase: “All amounts due,
debts, liabilities and payment obligations
described in clauses (i) and (ii), above,
are referred to herein as ‘Indebtedness.’”
The court concluded that “described in
clauses (i) and (ii)” applies only to the
“payment obligations,” not to “amounts
due, debts, liabilities.”

K. “Controlled By”
• An insurance contract extended coverage to all
companies “controlled by” the holding company
that bought the insurance.
• Two subsidiaries argued that the interpretation of
“controlled by” that would have excluded them
from coverage should be rejected, since the
insurance company had drafted the language.
• The court rejected that argument, because the
insured company and its subsidiaries “are
sophisticated commercial entities that procured
insurance through regional and national brokers”
who negotiated with the insurance company.

Problem 02.2. What Damages Are Covered
by Homeowner’s Insurance?
• Guardian Casualty provides its customers with homeowners insurance
that protects against “accidental direct physical loss.” The policy
contains a clause excluding coverage for “loss resulting directly or
indirectly from: … discharge, release, escape, seepage, migration or
dispersal of pollutants.” The policy defines “pollutants” as “any solid,
liquid, gaseous or thermal irritant or contaminant, including smoke,
vapor, soot, fumes, acids, alkalis, chemicals, liquids, gases and waste.
Waste includes materials to be recycled, reconditioned or reclaimed.”
• Three customers of Guardian filed claims for insurance coverage based
on different conditions hat caused some loss or harm. Guardian has
denied all the claims, asserting they were all covered by the pollutant
exclusions clause...

Problem 02.2(1). What Damages Are
Covered by Homeowner’s Insurance?
• Guardian Casualty provides its customers with homeowners
insurance that protects against “accidental direct physical loss.”
The policy contains a clause excluding coverage for “loss resulting
directly or indirectly from: … discharge, release, escape, seepage,
migration or dispersal of pollutants.” The policy defines
“pollutants” as “any solid, liquid, gaseous or thermal irritant or
contaminant, including smoke, vapor, soot, fumes, acids, alkalis,
chemicals, liquids, gases and waste. Waste includes materials to
be recycled, reconditioned or reclaimed.”
• Donaldson filed a claim for inadequate ventilation of carbon
dioxide.

• Peace filed a claim for lead-based paint chips, flakes, and dust.

• Hirschhorn filed a claim for bats and bat guano between the
structure’s siding and walls.

Problem 02.3. A Prohibited “Cartoon?”
• In November 1998, the attorneys general of 46 states entered a settlement agreement
with major manufacturers of cigarettes, including R.J. Reynolds, as part of litigation over
medical expenses from tobacco-related diseases. The settlement agreement barred
Reynolds and the other manufacturers from “using or causing to be used … any Cartoon
in the advertising, promoting, packaging or labeling of tobacco products.”
• The agreement defined “Cartoon” as:
Any drawing or other depiction of an object, person, animal, creature or other similar
caricature that satisfies any of the following criteria:
(1) The use of comically exaggerated features;
(2) The attribution of human characteristics to animals, plants or the similar use of
anthropormorphic technique; or
(3) The attribution of unnatural or extra-human abilities, such as imperviousness to
pain or injury, X-ray vision, tunneling at very high speeds or transformation
• While operating under the settlement agreement, Reynolds placed the following
advertisement in Rolling Stone magazine, promoting independent rock music and record
labels in connection with its Camel cigarette brand.

Problem 02.3.
A Prohibited “Cartoon?”

Conclusion
• In this module, we introduced why and how courts interpret
contracts.
• We applied twelve semantic canons of construction to disambiguate
contracts.
• These canons of constructions are used to interpret not only
contracts but also statutes, regulations and even the Constitution.
• Contract courts may apply policy canons when the semantic canons
fail to disambiguate contracts.
• Construction against the drafter is a “canon of last resort”—when all
other methods fail, contra proferentem is like a magic wand that
supplies meaning to the contract in favor of the less powerful party.

Contracts II
Module 03

Contracts Timeline
Preliminary
Negotiations
• “Parol Evidence”
Contract Formation
• Occurs at the Moment of
Acceptance
Contract Modification
• Pre-Existing Duty Rule
• Accord & Satisfaction
• Novation
• Etc.
The Parol Evidence Rule ONLY deals with
admission of evidence of negotiations that
occurred PRIOR to formation
Compare the final written
contract to the preliminary
negotiations to see if the
parol evidence is within
the scope of the contract
Subsequent (later) modification are
irrelevant to the Parol Evidence
Rule. Contract modification is
governed by other rules.

PER:
A Two-Step
Process
Determine the
nature of the written
contract
Determine the
nature of the parol
evidence introduced

Determine the Nature
of the Written Contract
UNINTEGRATED PARTIALLY
INTEGRATED
FULLY/COMPLETELY
INTEGRATED

DRAFT FINAL COMPLETE
AND FINAL

Draft /
Unintegrated
Not yet a contract;
does not evidence
mutual assent
Partially Integrated /
Final
Written
memorialization of
an agreement
Often (but not
always) evidenced
by a signature
Fully Integrated /
Complete and Final
Contains all the
term pertained to an
agreement
Usually evidenced
by a merger clause

of the Parol Evidence
UNRELATED TO
TERMS
ADDS A TERM MODIFIES A TERM

Exceptions to the
Parol Evidence Rule
Evidence of
defective
formation
Evidence of
subsequent
modification
Explanation of
ambiguous
term
Evidence of
collateral or
unrelated
agreements

The Parol Evidence Rule in PA

What did the written contract say?
• Lessee should use the premises only for the sale of fruit,
candy, soda water,’ etc.
• It is expressly understood that the tenant is not allowed to
sell tobacco in any form, under penalty of instant forfeiture
of this lease.

What canon applies to these terms?
• Negative implication rule
• List of permitted activities implied that activities not listed are prohibited

Is this contract ambiguous?
• No. The contract is clear. It can easily be disambiguated by
intrinsic evidence alone.

What is the nature of this contract?
• The contract is at least final or partially integrated.
• Signing is evidence of finality.
• Both parties seem to agree that the signed written lease was valid and
binding.
• It is not clear whether the contract is also complete or fully
integrated.
• There is no discussion about a merger clause.
• Does it matter whether the contract was partially or fully
integrated?

What evidence does plaintiff want to
admit?
• Plaintiff seeks to introduce evidence that Defendant gave
Plaintiff an exclusive right to sell soda in Defendant’s building in
return for Plaintiff’s agreement not to sell tobacco.
• The evidence would tend to show what was discussed during
preliminary negotiations.

If admitted, what would be the effect of
this evidence of the agreement?
• This evidence tends to add a term to the agreement
• The additional term is Defendant’s promise to give Plaintiff an exclusive
right to sell soda.

How should a court decide whether parol
evidence comes within the scope of a written
agreement?
• By comparing the two, and determining whether the parties,
situated as were the ones to the contract, would naturally and
normally include the one in the other if it were made
• If they relate to the same subject-matter and are so interrelated
that both would be executed at the same time and in the same
contract, the scope of the subsidiary agreement must be
covered by the writing.

What are some exceptions to the PER
that the Gianni court mentions?
• Evidence of fraud, accident, or mistake.
• Plaintiff would be allowed to show the contract was not properly
formed, but he does not do so here.

Was the evidence Plaintiff seeks to admit
within the scope of this agreement?
• Yes. A promise to give an exclusive right to sell soda would
naturally be in the same agreement providing the rights to sell
soda.

What is the result of this case?
• Plaintiff’s evidence is barred by the Parol Evidence Rule.
• Plaintiff cannot argue that Defendant made an oral promise to
give Plaintiff the exclusive right to sell soda.
• Judgement for Defendant.
• The court here takes a strict “objectivist” approach.

Determining
the Nature of
the Writing
• Should extrinsic evidence be
used to determine whether
the writing is completely
integrated?
• Should we take a subjectivist
or objectivist approach when
interpreting a merger clause?

Impact of a Merger Clause

What is the disputed agreement about?
• The contract regards use of a resort for a convention.

• It appears to be fully integrated (complete and exclusive):
• It contains a merger clause
• This agreement is “a merger of all proposals, negotiations and
representations with reference to the subject matter and
provisions.”

What evidence does Plaintiff seek to
introduce?
• Plaintiff wants to introduce evidence that during preliminary
negotiations, CMC and UAW-GW discussed that the hotel
employees must be union represented.

Did the agreement discuss the nature of
the resort hotel’s staff?
• No. The agreement was completely silent as to whether the
staff shall be union-represented or otherwise.

Is the nature of hotel staff within the scope of
a contract to use a hotel for a convention?
• Yes. Both the majority and the dissent seem to agree that the
nature of the staff is within the scope of a this agreement.

What are the exceptions to the PER
discussed by this court?
• Extrinsic evidence is admissible to show
1. that the writing was a sham, not intended to create legal relations,
2. that the contract has no efficacy or effect because of fraud, illegality,
or mistake,
3. that the parties did not integrate their agreement or assent to it as the
final embodiment of their understanding,
4. that the agreement was only partially integrated because essential
elements were not reduced to writing.
• But these exceptions involved contracts that did not have
an explicit merger clause.

According to UAW-GW, is parol evidence
admissible to show a contract that has a valid
merger clause is not fully integrated?
• No. This court finds that an explicit merger clause is
conclusions
• Parol evidence is not admissible to determine whether a
contract is integrated when a written contract contains a valid
merger clause.

Do the majority and the dissent agree
that the merger clause appears valid?
• Yes. Both the majority and the dissent find the merger clause to
be unambiguous.

How does the dissent argue for a
different approach?
• The dissent cites to Corbin’s position that a writing cannot prove
itself.
• It cites Int’l Milling Co., another PA case, where extrinsic
evidence of preliminary negations was admissible, even where
it had an express merger clause.
• In that case, Corbin thought it would be ”a travesty on justice” to
keep evidence that the merger agreement was untrue from the
jury.
• Likewise, here, the merger clause appears to be untrue.

POLL (if time permits):
Which approach makes more sense?

What is the majority’s holding?
• An integration clause in a written contract is conclusive.
• Where such a clause is found, parol evidence is not admissible
to show that the contract is not integrated.
• This is an objectivist approach.

What is the disputed agreement about?
• The contract regards the purchase of a Burroughs B-80
computer.

Was there a written agreement and, if so,
did it have a merger clause?
• Yes. There was a written contract with a valid merger clause.

• The contract was made using pre-printed forms that were
written by the seller.
• There were at least four separate writings:
• Contract for the sale of computer hardware
• Contract for the sale of computer software
• Contract to finance the transaction (or was it a lease?)
• Contract for service and maintenance
• No one writing stands alone; each much be read with reference
to another document.

How does the nature of the contract impact
the court’s willingness to apply the Four
Corners Rule?
• Since it was not possible to read any of the contracts without
reference to the others, it was understandable and justifiable
that the buyer would have also believed that seller’s letters
were part of this agreement.
• The financing agreement was styled as a lease, showing that
contract cannot be understood by its written words alone.
• The court finds this is intrinsic evidence of a lack of complete
integration.

What is the nature of the parties?
• Burroughs is a very large multi-national corporation that makes
computers and has retail stores in many cites and states.
• Burroughs drafted the rather complex set of forms that comprised the
parties’ agreement.
• Mr. Cathey is a diesel engine repair mechanic.
• His highest level of formal education was a high school degree.
• He is not knowledgeable about computers.
• He relied on his 19-year-old daughter-in-law to purchase a complex
computer from Burroughs.
• Note: This is “extrinsic evidence,” although not parol evidence.

What is the nature of the evidence that
buyer seeks to admit?
• Buyer (Cathey) seeks to admit letters from Seller (Burroughs)
that said the B-80 “can put your inventory, receivables, and
invoicing under complete control.”
• This evidence from preliminary negotiations tends to show that Sellers
is warrantying that the goods will perform according to Buyer’s needs.
• Buyer also seeks to admit evidence that Seller’s agent actually
knew Buyer’s needs and verbally promised the computer would
meet those needs.

Is the proposed evidence within the
scope of the written contract?
• Yes. Not only would one reasonably expect warranties
regarding a good to be in the contract for the sale of that good,
but in this case the written contract expressly discusses
warranties.
• The subject matter is clearly within the scope because it was in
fact addressed by the written contract itself.

Does the proposed evidence seek to add
or change a term in the written contract?
• This evidence would change a term.
• The written contract expressly disclaims any warranties.
• The parol evidence seems to indicate that the Seller promised
(warrantied) that the computer would perform Buyer’s
accounting functions.
• This directly implicates the Parol Evidence Rule.

What is the holding and reasoning in this
case?
• The Appellate Court affirms the Trial Court’s decision to admit
the parol evidence.
• First, the court finds that the merger clause in ineffective
because both intrinsic and extrinsic evidence shows the parties
did not actually intend the sales contract to be the complete and
exclusive statement of the parties’ intentions with regards to this
agreement.
• Second, the court admits parol evidence of preliminary
negotiations which show that Seller promised to the computer
would put Buyer’s accounting under complete control.
• Judgement for Buyer (Cathey).

Extrinsic
Evidence
of
Contract
Integration
PARTIES ARE
SOPHIST-
ICATED
SIMILAR
BARGAINING
STRENGTH
WARRANTIES
ARE
REASONABLE
WRITING IS
SIGNED AND
DATED
WRITING IS
ACKNOW-
LEDGED
REVIEWED BY
COUNSEL

Review of
Key Rules
R2d § 209. Integrated
Agreements
R2d § 210. Completely and
Partially Integrated
Agreements
R2d § 213. Effect of
Integrated Agreement on
Prior Agreements

“Integrated Agreement”
Defined
• An integrated agreement is a writing or writings
constituting a final expression of one or more
terms of an agreement.
R2d § 209(1)

R2d’s Subjective Approach
to Determining Integration
• Whether there is an integrated agreement is to be
determined by the court as a question preliminary
to determination of a question of interpretation or
to application of the parol evidence rule.
R2d § 209(2)

R2d’s Presumption of
Integration
• Where the parties reduce an agreement to a writing
which in view of its completeness and specificity
reasonably appears to be a complete agreement, it
is taken to be an integrated agreement unless it is
established by other evidence that the writing did
not constitute a final expression.
R2d § 209(3)

“Completely Integrated
Agreement” Defined
• A completely integrated agreement is an integrated
agreement adopted by the parties as a complete
and exclusive statement of the terms of the
agreement.
R2d § 210(1)

“Partially Integrated
Agreement” Defined
• A partially integrated agreement is an integrated
agreement other than a completely integrated
agreement.
R2d § 210(2)

Extrinsic Evidence Is Admissible
to Show Whether an Agreement
Is Integrated
• Whether an agreement is completely or partially
integrated is to be determined by the court as a
question preliminary to determination of a
question of interpretation or to application of the
parol evidence rule.
R2d § 210(3)

Effect of Integrated Agreement
on Prior Inconsistent Terms
• A binding integrated agreement discharges prior
agreements to the extent that it is inconsistent with
them.
R2d § 213(1)

Effect of Completely Integrated
Agreement on Prior Terms
within Its Scope
• A binding completely integrated agreement
discharges prior agreements to the extent that they
are within its scope.
R2d § 213(2)

Problem Sets
Parol Evidence Rule

Compare R2d and UCC
R2d § 216. Consistent Additional
Terms.
(1) Evidence of a consistent additional term is
admissible to supplement an integrated
agreement unless the court finds that the
agreement was completely integrated.
(2) An agreement is not completely integrated if
the writing omits a consistent additional agreed
term which is
(a) agreed to for separate consideration, or
(b) such a term as in the circumstances might
naturally be omitted from the writing.
UCC § 2-202. Final Written
Expression: Parol or Extrinsic
Evidence.
Terms with respect to which the confirmatory
memoranda of the parties agree or which are
otherwise set forth in a writing intended by the
parties as a final expression of their agreement
with respect to such terms as are included
therein may not be contradicted by evidence of
any prior agreement or of a contemporaneous
oral agreement but may be explained or
supplemented
(a) by course of dealing or usage of trade
(Section 1-205) or by course of performance
(Section 2-208); and
(b) by evidence of consistent additional terms
unless the court finds the writing to have been
intended also as a complete and exclusive
statement of the terms of the agreement.

Capitol City Liquor Company

Final?
• Is the Merger Agreement final? What evidence of finality are in these facts?
• For each piece of evidence, classify it as intrinsic or extrinsic

Effect of No Merger Clause?
• What is the effect of the Merger Agreement lacking an integration clause?

Scope
• Is the promise to relocate the Lees within the scope of the Merger Agreement?

Oral Agreement
• What do you think the parties to the oral agreement—Harold S. Lee and Jack Yogman—
actually agreed?

Objective vs. Subjective
• If the Lees attempt to introduce evidence that Jack and Harold met and what they
discussed, should a court take an objective or a subjective approach?
• Under that approach, how should a court rule?

Remedies at Law
• What do you think in a fair remedy (if any) for the Lees?

Middletown Concrete Products

Conclusion
• The module introduced the Parol Evidence Rule, which excludes evidence of
prior agreements that are within the scope of a completely integrated agreement
or that would change a term in a partially integrated agreement.
• Courts take different approaches to admission of extrinsic evidence to prove
whether an agreement is integrated.
• Gianni showed a clear objectivist approach.
• UAW-GW set up a clear objectivist vs. subjectivist distinction in approach with the contrast
between how the majority and dissent would privilege the merger clause.
• Sierra Diesel showed the subjectivist approach.
• Seagram illustrated the challenges in defining what is withing the “scope” an an
agreement
• You should now be able to understand and apply the PER in both “objective” and
“subjective” jurisdictions.
• R2d and the UCC take the subjectivist approach to the PER.
• PA generally takes the objectivist approach.

Contracts II
Module 04

War of the Words
• Contracts is a field at war with itself
• Objectivists argue that the plain meaning
of written terms (intrinsic evidence) should
prevail because this provides certainty
about enforceable obligations and
encourages careful drafting
• Subjectivists argue that the meaning of
words is derived from their context, which
must be understood through extrinsic
evidence, if courts are to understand the
intentions of contractual parties
• Both theories can lead to seemingly unfair
and absurd results…

Exhibit A: When
“White” Means “Black”
• Trial Judge Jessel refused to admit
evidence of trade usage to interpret
a contract for “white selvage” fabric,
reasoning the the term was patently
unambiguous.
• The Chancery Division reversed,
admitting evidence of trade usage
that tended to show “white may
sometimes mean black.”

Exhibit B: When “UK”
Includes Ireland
• From 1919 to 1921, the Irish fought
a bloody war for their independence
from the UK. It was granted in 1922.
• In the 1940s, a producer purchased
rights to market a movie in “UK.”
• The trial court refused to admit
extrinsic evidence because the plain
meaning of UK excludes Ireland.
• The appellate court reversed,
admitting evidence of trade usage
that the movie industry used “UK” to
include Ireland.

Exhibit C: Where “Price at
Time of Delivery” means “Price
at Time of Bid”
• An agreement for sale of asphalt
says the price is to be “Shell’s
Posted Price at time of delivery.”
• The buyer wants to introduce
evidence that this term really means
“Shell’s Posted Price at the time
Nanauki bid to use the asphalt for a
paving job.”

“Price Protection” for Asphalt Delivery

What is the subject matter and nature of
the parties’ agreement?
• Shell Oil agreed to supply Nānākuli Paving with asphalt
• This negotiated agreement between sophisticated parties had a merger
clause that said there were no oral agreements.

What was the parties dispute
about?
• Whether Shell agreed to “price protect” Nanakuli
• Whether extrinsic evidence should be admitted to show same

When did this case occur, and what was
happening in the world at that time?
‫הכיפורים‬ ‫יום‬ ‫מלחמת‬ ‫ایران‬ ‫انقالب‬

Why Oil Prices Spiked During the 1970s
Energy Crisis
• 1973: Coalition of Arab
states attached Israel on
Yom Kippor, resulting in
destruction of oil facilities
and global oil supply
disruptions
• 1979: Revolution against the
secular Pahlavi dynasty to
install Islamic leader
Ayatollah Khomeini includes
strikes of oil refinery works
and other major disruptions

Where did the trial take place?
• US District of Hawaii
• Might that have given Nānākuli a “home court” advantage?

What did the Hawaiian jury decide?
• The jury found for Nānākuli, the Hawaiin company
• This does not prove there was a home court advantage, but it does
suggest at least theoretically the Hawaiian jury may have been
sympathetic to a local company as opposed to a foreign corporation.

Who is the trial judge and what did the
trial judge do in this case?
• Dick Yin Wong, J., was the 1st Chinese American
appointed as a federal judge
• Born in Honolulu, Hawaii
• BA, University of Hawaii
• JD, Northwestern University
• US Army Staff Sergeant
• Practiced as an accounting before practicing
law and becoming a judge
• Appointed by Gerald Ford, a Republican, who
also appointed:
• Anthony Kennedy
• John Paul Stevens
• Set aside the jury verdict
• Granted Shell’s motion for “judgement n.o.v.”

Judgement N.O.V.
• N.O.V. = non obstante veredicto (not withstanding the verdict)
• FRCP 50(a)(1)
• JNOV may be granted if the judge finds that the jury did not have a
sufficient legal evidentiary basis for its decisions
• Here, Judge Wong determined that the jury should not have considered
the parol evidence that contradicted the plain meaning of written terms
• This reflects Judge Wong’s an objectivist/formalist approach

What happens on appeal? Why?
• The 9th Cir. reversed the JNOV
• The appellate court finds that the UCC requires courts to inquire into the
circumstances of the contract, which include:
• Course of Performance
• Trade Usage
• Given this inquiry, it is reasonable for a jury to find that Nānākuli and
Shell both thought that “Posted Price at the time of delivery” actually
meant “Posted Price at the time of bid.”

The UCC Mandates a Subjective
Approach
• Perhaps one of the most fundamental departures of the Code from prior contract law is found in the
parol evidence rule and the definition of an agreement between two parties.
• Under the U.C.C., an agreement goes beyond the written words on a piece of paper.
• ‘Agreement’ means the bargain of the parties in fact as found in their language or by implication
from other circumstances including course of dealing or usage of trade or course of performance
• Express terms, then, do not constitute the entire agreement, which must be sought also in evidence
of usages, dealings, and performance of the contract itself.
• The purpose of evidence of usages, which are defined in the previous section, is to help to
understand the entire agreement.

Under the UCC, what kinds of extrinsic
evidence are most important?
• Course of dealings is more important than usages of the trade, being
specific usages between the two parties to the contract.
• “Course of dealing controls usage of trade.”

What is the course of performance
evidence?
• The two prior occasions on which Shell price protected Nānākuli.

What is the trade usage evidence?
• Price protection was routinely practiced by all suppliers in the small
Oahu market of the asphaltic paving trade and therefore was known to
Shell.
• It was a realistic necessity to operate in that market and thus vital to
Nānākuli's ability to get large government contracts and to Shell's
continued business growth on Oahu.

What is the Nānākuli court’s conclusions
based on the trade usage evidence?
• [Trade usage] is therefore constituted an intended part of the
agreement, as that term is broadly defined by the Code, between Shell
and Nānākuli.

What is the cumulative impact of these
“circumstances?”
• the smallness of the marketplace on Oahu;
• the existence of only two suppliers on the island;
• the long and intimate connection between the two companies on Oahu, including the background of how the development of Shell's
asphalt sales on Oahu was inextricably linked to Nānākuli's own expansion on the island;
• the knowledge of the aggregate business on the part of Shell's Hawaiian representative, Bohner;
• his awareness of the economics of Nānākuli's bid estimates, which included only two major materials, asphalt and aggregate;
• his familiarity with realities of the Hawaiian marketplace in which all government agencies refused to include escalation clauses in
contract awards and thus pavers would face tremenduous losses on price increases if all their material suppliers did not routinely
offer them price protection;
• and Shell's determination to build Nānākuli up to compete for those lucrative government contracts with the largest paver on the
island, Hawaiian Bitumuls (H.B.), which was supplied by the only other asphalt company on the islands, Chevron, and which was
routinely price protected on materials.

What is the Nānākuli court’s holdings?
• The judge did not abuse his discretion in defining the applicable trade, for purposes of
trade usages, as the asphaltic paving trade in Hawaii, rather than the purchase and
sale of asphalt alone.
• A jury could reasonably have found that Shell's acts on two occasions to price protect
Nānākuli were not ambiguous and therefore indicated Shell's understanding of the
terms of the agreement with Nānākuli rather than being a waiver by Shell of those
terms.
• Although the express price terms of Shell's posted price of delivery may seem, at first
glance, inconsistent with a trade usage of price protection at time of increases in price,
a closer reading shows that the jury could have reasonably construed price protection
as consistent with the express term.

Conceptual problems with the
Nānākuli court’s holdings
• The 9th Cir. claimed to follow the UCC by finding that the extrinsic evidence was consistent with the
intrinsic evidence; therefore, the trade usage supplemented, rather than trumped, the price
protection clause.
• But is this really true?
• Does the inclusion of “price protection” really explain “price at the time of delivery,” or does it
actually change this term to mean something different, namely, “price at the time of bid”?
• Even if this court followed the UCC, there is still an underlying conceptual problem with the binary
analysis of explains/supplements versus changes/trumps
• Profs. Goetz and Scott suggest a third possibility: that the contract represents no real
agreement regarding what happens if the price changes dramatically between bid and delivery
• Perhaps the written contract is best understood as indeterminate or incomplete

It is unlikely that Shell and Nanakuli contracted with mutual
intentions about how war and revolution will impact their
agreement
‫הכיפורים‬ ‫יום‬ ‫מלחמת‬ ‫ایران‬ ‫انقالب‬

An Alternative Outcome for
Nānākuli
• Instead of agreeing with either Shell or Nanakuli, the Court could have recognized that the parties
did not anticipate or at least did not reach an accord regarding what would happen if oil prices
skyrocketed due to war and revolution in the Middle East
• If the formulations in Nānākuli were indeterminate rather than apparently inconsistent, then neither
the outcome endorsed by the court nor the result urged by Shell would represent the optimal
interpretive solution.
• Instead, an equitable adjustment of price would have been more consistent with the contractual
instructions of the parties.

Review of
Key Rules
R2d § 219. Usage
R2d § 221. Usage Supplementing
an Agreement
R2d § 222. Usage of Trade
UCC § 1-303. Course of
Performance, of Dealing and Usage
of Trade.

“Usage” Defined
• Usage is habitual or customary practice.
R2d § 219

When Usage Applies
• An agreement is supplemented or qualified by a
reasonable usage with respect to agreements of the
same type if each party knows or has reason to
know of the usage and neither party knows or has
reason to know that the other party has an
intention inconsistent with the usage..
R2d § 221

“Usage of Trade” Defined
(R2d)
1. A usage of trade is a usage having such regularity of observance in a
place, vocation, or trade as to justify an expectation that it will be
observed with respect to a particular agreement. It may include a
system of rules regularly observed even though particular rules are
changed from time to time.
2. The existence and scope of a usage of trade are to be determined as
questions of fact. If a usage is embodied in a written trade code or
similar writing the interpretation of the writing is to be determined
by the court as a question of law.
3. Unless otherwise agreed, a usage of trade in the vocation or trade in
which the parties are engaged or a usage of trade of which they
know or have reason to know gives meaning to or supplements or
qualifies their agreement.
R2d § 222

“Course of Performance”
Defined (UCC)
• A course of dealing is a sequence of previous
conduct between the parties to a particular
transaction which is fairly to be regarded as
establishing a common basis of understanding for
interpreting their expressions and other conduct.
UCC § 1-303(a)

“Course of Dealing” Defined
(UCC)
• A course of dealing is a sequence of previous
conduct between the parties to a particular
transaction which is fairly to be regarded as
establishing a common basis of understanding for
interpreting their expressions and other conduct.
UCC § 1-303(b)

(UCC)
• A "usage of trade" is any practice or method of dealing
having such regularity of observance in a place,
vocation, or trade as to justify an expectation that it will
be observed with respect to the transaction in question.
• The existence and scope of such a usage must be
proved as facts.
• If it is established that such a usage is embodied in a
trade code or similar record, the interpretation of the
record is a question of law.
UCC § 1-303(c)

(UCC)
• A course of performance or course of dealing between
the parties or usage of trade in the vocation or trade in
which they are engaged or of which they are or should
be aware is relevant in ascertaining the meaning of the
parties' agreement, may give particular meaning to
specific terms of the agreement, and may supplement
or qualify the terms of the agreement.
• A usage of trade applicable in the place in which part
of the performance under the agreement is to occur
may be so utilized as to that part of the performance.
UCC § 1-303(d)

(UCC)
• Except as otherwise provided in subsection (f), the express
terms of an agreement and any applicable course of
performance, course of dealing, or usage of trade must be
construed whenever reasonable as consistent with each
other. If such a construction is unreasonable:
1. express terms prevail over course of performance, course
of dealing, and usage of trade;
2. course of performance prevails over course of dealing and
usage of trade; and
3. course of dealing prevails over usage of trade.
UCC § 1-303(e)

Problem 04.1: Vesting Retirement Pension
“Retirement is understood
to be disengagement from
the insurance industry.
Vestment for retirement is
age 65 or 10 years of
service whichever is later.”
Years of Service % Renewals Vested
…
6 90%
7 100%
8 110%
9 120%
10 130%
…

Problem 04.2: Corn Delivery

Problem 04.3: Injury and
Indemnity

Conclusion
• This module analyzed how courts use trade usage to “explain”
terms
• Sometimes it seems very hard to distinguish between trade usage
“explaining/clarifying” and “changing/trumping” a term
• Courts who take a subjectivist approach risk overstepping this “line”
• Do you think courts should ignore the plain meaning of
contracts when “justice so requires?” If so, what is your rule for
“when justice requires?”

Contracts II
Module 05

Sources of Implied Terms
FACTS COMMON
LAW
STATUTORY
LAW
GOOD
FAITH

Terms Implied in Fact
• Agreed to by the parties
implicitly rather than
explicitly
• Fact finder assesses
intent of parties to include
terms that were not
stated or written down

Terms Implied in
Common Law
• It is often impossible to
include terms for every
possible contingency in a
contract
• Courts sometimes
consider certain terms to
be implied

Terms Implied in
Statute (UCC)
• If nothing is said as to price, the contract price
is a reasonable price (usually fair market value)
at the time of delivery. (§ 2-305)
• Goods will be delivered in a single lot (not
multiple lots) if no selection is made in the
contract. (§ 2-307)
• If no place of delivery is specified, goods will be
delivered to the seller’s place of business, or, if
none exists, to seller’s residence. But if the
parties know at the time of contract formation
that the goods are elsewhere, the place of
delivery is where the goods are. (§ 2-308)
• The time for delivery, shipment, or other
contractual actions is “a reasonable time” if no
time is specified. (§ 2-309)
• The goods are covered by Article 2’s implied
warranties, unless the seller disclaims the
warranties effectively. (§§ 2-314, 2-315)

Terms Implied in Good
Faith
• Every contract imposes upon
each party a duty of good
faith and fair dealing in its
performance and its
enforcement.
• R.205 Duty of Good Faith
and Fair Dealing

Terms Implied in Fact

• Rabbi Herman Fisher agreed to officiate six High Holiday services at
Congregation B’Nai Yitzhok in 1950

What is the subject of the
parties’ dispute?
• Whether the contract to officiate Jewish services included a provision
that the synagogue would seat men and women separately
• Why Rabbi Fisher might have reasonably believed this term was
implied requires a little background…

Traditional Jewish
Prayer

Egalitarian Jewish
Prayer
• Men and women pray together
• Women are ordained as rabbis
and may officiate services

Orthodox
Synagogues

Conservative
Synagogues
• No distinction between genders
• Families usually sit together
• Theme: “Tradition with Change”

What was happening
around 1950?
• 1939. Of about 16.6 M Jews worldwide, some 9.5 M
(60%) live in Europe, and about (25%) 4 M in US.
• 1941-1945. Nazis murder six million Jews in ghettos
and death camps. Caught in the Russian Front
between the Nazis and the USSR, the Jewish
population of the Baltic states drops to nearly zero.
• 1950. Due to war deaths, mass murder, and post-war
emigration, the Jewish population of Europe (including
the USSR and Turkey) falls to 3,463,500.
• 1951. America emerges as the largest Jewish
population center in the world, with 5 M Jews.

The Holocaust Deeply Impacted
Judaism in America
• Poet, Nobel laureate, and Jewish Holocaust Survivor
Elie Wiesel explains how Judaism took on a theology
of protest
• Survivors experienced God Himself put on trial in Auschwitz
• Millions of Jews prayed for life in America and
because increasingly devoted to contemporary
American values
• Some worked on the Sabbath in order to survive
• Others desired the American life more than the religious like
• Religious sects even more strict in their practices and
adopted customs specifically designed to resist
change
• The Haredi movement adopted dress and norms from 19th century
Central Europe (e.g, Łódź, Poland)
• Others emigrated to and fought for a Jewish State in
Israel.
• David Ben-Gurion ( ‫ן‬ֶּ‫ב‬ ‫ִד‬‫ו‬ ָּ
‫ד‬
-
‫ּיֹון‬ ִ
‫ּגּור‬ ) proclaimed the Israeli Declaration of
Independence on May 14, 1948
• The Israeli War of Independence was a horrible ‫النكبة‬ (“Nakba”
meaning catastrophe) for indigenous Palestinians and Bedouin tribes
• Congregation B’Nai Yitzhok was one of many
congregation to radically change its religious
practices to better align with American life. Not
everyone agreed with these changes, especially
established rabbis. © 2021 Seth C. Oranburg

Gender, War, and Religion
• When the men went to fight in the European and Asian
theatres, women stepped up to “man” (pun intended)
domestic factories
• Women who were finally allowed to gain industrial
skills were understandably reluctant to be relegated to
domestic, second-class roles when the men came
back home
• This further required Judaism to review the inequity of
the meẖitzah (separation) between men and women

What is the nature of the contract?
• The contract is written and is undisputedly at least final
• Moreover, this PA court has determined as a matter of law
that the contract contains all the terms, and so it is completely
integrated.
• It does not seem to specifically address whether there is an
integration clause
• But, as we saw in Gianni, a PA court can determine as a matter of
law that a contract is completely integrated even where it lacks a
merger clause.

What the contract say about a
meẖitza?
• Nothing. The contract was silent as to a meẖitza.
• In fact, the contract was entirely silent is to the nature of the defendant
congregation.

What evidence does the Rabbi
seek to admit?
• Testimony of three rabbis, learned in Hebrew law, to the effect that:
• Orthodox Judaism required a definite and physical separation of the sexes in the
synagogue.
• An orthodox rabbi-cantor ‘could not conscientiously officiate in a ‘trefah’
synagogue, that is, one that violates Jewish law’
• The old building, which the congregation left, had separation in
accordance with Jewish orthodoxy.”

Is this evidence barred by the
parol evidence rule?
• It would be, if the evidence was extrinsic evidence of the parties’ mutual
intent.
• The contract is completely integrated
• The evidence is within the scope of the agreement
• The evidence would add a term
• But this is not evidence of preliminary negotiations. The rabbi does not
claim the parties ever discussed this term.
• Rather, another principle controls the interpretation of this contract

What is the basis for the admission
of the rabbi’s evidence?
• It would be, if the evidence was extrinsic evidence of the parties’ mutual
intent.
• The contract is completely integrated
• The evidence is within the scope of the agreement
• The evidence would add a term
• But this is not evidence of preliminary negotiations. The rabbi does not
claim the parties ever discussed this term.
• Rather, another principle controls the interpretation of this contract

Why isn’t Rabbi Ebert’s
declaration inadmissible?
• Rabbi Ebert was the main rabbi at B’Nai Yitzhok
• He said there is going to be strict separation between men and women
• But a rabbi cannot bind the congregation
• This would be like a professor saying to a prospective student, “if you apply,
I’m sure you will be admitted.”
• Professors are not authorized to make unilateral admissions decisions like that
• In both cases, what the professor or rabbi says is not evidence of preliminary
negotiations, because neither of us are authorized to negotiate on behalf of
the institution
• Instead, the evidence shows Rabbi Fisher’s state of mind.

Challenges to the Court’s
Approach
• Why did Rabbi Fisher feel compelled to ask, “Will services be
conducted as in the old Congregation”?
• Doesn’t this evidence some doubt in his mind as to whether the
congregation was modernizing, as so many were post Holocaust?
• Shouldn’t Rabbi Fisher know that Rabbi Ebert and Rabbi Lipschitz were
not authorized to speak for or bind the congregation?

A Brief Note on Time Immemorial
• It has been said that: “When a custom or usage is once established, in
absence of express provision to the contrary it is considered a part of
a contract and binding on the parties though not mentioned therein,
the presumption being that they knew of and contracted with reference
to it.”
• But when 75 million died in World War II, when 6 million Jews were
murdered in the Holocaust, and when the Jewish state reemerges
after over 2,000 years, might presumptions of custom be rebutted?

Terms Implied in Law

• The Methodist Home for the Aged and Bertha C. Ellsworth agreed she
would give $10,779.60 in exchange for lifetime tenancy and care at the
Methodist Home.
• In 2021 money, this would be about $108,000
• Both parties have a probationary membership for a short trial period of
two (2) months, during which time either party can cancel and refund
Bertha most of her money

What is the subject of the
parties’ dispute?
• Whether Bertha’s death during the probationary period results in a
refund of her balance to heir estate, or whether the Methodist Home
keeps the money

• The contract is written and is undisputedly at least final
• It’s not clear whether the contract is fully integrated, but that
is not the issue, because neither party seeks to introduce
parol evidence
• The court describes the agreement as “fully executed” but this does
not seem to map on to R2d or UCC concepts of integration
• Query: how could a contract be “partially executed”??

What does the contract say about death
during the probation period?
• Nothing. The contract was silent as to what happens in the
tenant dies during the probation period.
• Why wasn’t this discussed?
• People might not like talking about their imminent death.
• Discussing death within two months might chill lifetime business.
• One of the parties must have thought about it, right??

What evidence do the parties
seek to admit?
• Neither party has any evidence of the parties’ discussion on this topic.
Apparently, they never talked about what would happen in this
eventuality.

Why doesn’t the court inquire
into the parties’ actual intent?
• The Methodist Home clearly has an interest in showing Bertha intended
to give all her money to them, but this self-serving testimony won’t
advance justice.
• Bertha is dead, so they cannot call her to testify.
• Try searching for “Ouija /p evidence!” in Westlaw or Lexis and you will see that
despite efforts of parties to channel spirits of the dead into admissible testimony,
this project mainly fails in courts of law.

Can the dead testify in
court?
• If the inquirer takes ouiji board pronouncements as authoritative
(relevant, strongly probative) there's no law (or a priori rule) against
it.
• If, on the other hand, the individual wishes to persuade others of any
conclusion reached, the individual would be well-advised to take into
account the epistemic investments of the target audience, because
what the individual regards as providing a strong warrant for the
conclusion may not be so taken by others. In that case, when the
individual sets out to persuade, or to provide a warrant seen as
acceptable to the audience, the audience may in practical terms
impose a rule of exclusion on the one seeking to persuade: no
reference to ouiji board results should be given, tendered, proffered,
presented or suggested.
• D. Michael Risinger, Inquiry, Relevance, Rules of Exclusion, and
Evidentiary Reform, 75 Brook. L. Rev. 1349, 1352 (2010)

Given no factual evidence,
where does the court turn?
• The court in this case seeks to make a decision as a matter of law.
• It reviews case law to understand how the law generally decided.
• This seems like an empirical project, requiring a social science skill set.
• Does this court seem to take a rigorous empirical-scientific approach?

Discussion Question 1
• Are you comfortable with the court’s approach in
Methodist Home?
• Does this empirical approach approximate what a
“reasonable” decedent and old-age home would
intend?
• If the actual intention of the parties is the polestar of
contract interpretation, has the court reasonably
approximated that with its reasonable-person
approach?

• Consider your answer to the previous question in light
of the reflections on Fisher. If Rabbi Fisher were
unavailable for testimony, could the could have
determined his reasonable intentions by looking at
other contracts for rabbinical services?

• One issue with looking at precedent is that by its very
nature it looks backwards at what has been done in the
past. At times of great social, technological, industrial,
or political change, does looking at precedent to
determine the intentions of a reasonable person still
come close enough to the actual intentions of the
parties to be a valid means of determining whether to
add terms to an agreement?

• Another issue to consider is fairness. Do you think the
court arrived at the correct result by refunding the
decedent’s money to the estate?

Terms Implied in Good Faith

What was the parties’ agreement?
• The agreement regard’s Duff-Gordon’s promise to create
exclusive fashions for Wood, for him to market them, and for
each to split the profits.

What was the parties’ dispute?
• Oddly, Duff-Gordon argues that Wood doesn’t owe her any
obligations
• Therefore, she doesn’t owe him any counter-obligations, because
her promises are not supported by his consideration
• Justice Cardozo is having none of Duff-Gordon’s
shenanigans,
• He finds that Duff-Gordon’s obligations are supported by Wood’s
consideration: his implied promise to make good faith efforts

• Signed by both parties
• Has a wealth of recitals
• But it does not recite consideration

How does Cardozo handle the contract’s
lack of stipulated consideration?
• The law has outgrown its primitive stage of formalism when
the precise word was the sovereign talisman, and every slip
was fatal.
• It takes a broader view to-day.
• A Promise may be lacking, and yet the whole writing may be
“instinct with an obligation,” imperfectly expressed.
• If so, there is a contract.

Judgely robes.
Judgely thoughts.
Justice Cardozo.

Posner on Good
Faith
• The particular confusion to which the
vaguely moralistic overtones of “good faith”
give rise is the belief that every contract
establishes a fiduciary relationship.
• A fiduciary is required to treat his principal
as if the principal were he, and therefore
he may not take advantage of the
principal’s incapacity, ignorance,
inexperience, or even naiveté́.
• We do not hold contract parties to such a
high standard.

Goldstick v.
ICM Realty,
788 F.2d
456 (7th Cir.
1985)
“Something will be
worked out” does not a
contract make.

Review of
Key Rules
R2d § 205. Duty of Good
Faith and Fair Dealing.
UCC § 1-304. Obligation of
Good Faith.
UCC § 2-306. Output,
Requirements, and
Exclusive Dealings.

“Integrated Agreement”
Defined
• Every contract imposes upon each party a duty of
good faith and fair dealing in its performance and
its enforcement.
R2d § 205

Obligation of Good Faith
• Every contract or duty within [the UCC] imposes
an obligation of good faith in its performance and
enforcement.
UCC § 1-304

Output and Requirements
• A term which measures the quantity by the output
of the seller or the requirements of the buyer
means such actual output or requirements as may
occur in good faith, except that no quantity
unreasonably disproportionate to any stated
estimate or in the absence of a stated estimate to
any normal or otherwise comparable prior output
or requirements may be tendered or demanded.
UCC § 2-306(1)

Exclusive Dealing Contracts
• A lawful agreement by either the seller or the buyer
for exclusive dealing in the kind of goods
concerned imposes unless otherwise agreed an
obligation by the seller to use best efforts to supply
the goods and by the buyer to use best efforts to
promote their sale.
UCC § 2-306(2)

Problem Sets
Implied Terms

Problem 5.01. Output of
Breadcrumbs

Problem 5.02. Requirements
for Paper Boxes.

Conclusion
• This module discussed implied terms.
• Courts are free to imply terms as a matter of fact even when parol
evidence might otherwise preclude extrinsic evidence.
• Courts may imply terms as a matter of common law where precedence
suggests a clear result for similar cases.
• Courts are required to imply terms as a matter of statutory law.
• Courts shall presume that parties are mutually obligated to act in good
faith and to make reasonable efforts to bring forth the fruits of their
mutual obligations
• The implication of implied terms is incredibly fact specific
• Courts must consider what terms reasonably apply to the instant case

Contract Formation and Enforcement Rules

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