Ch. 5 ascertaining, interpreting, and supplementing the agreement (p.365)
parol evidence rule
Definition
- effect of a written agreement on any prior oral or written agreement between parties ;
- a writing intended by the parties to be a full and final expression of their agreement may not be supplemented or contradicted by any oral or written agreement made prior to the writing (DO- final is intended to be complete, cannot be supplemented) = bars all preliminary agreements that are not contained in the final writing
- the parol evidence rule applies only to “integration” or “merger” i.e., final and full expression of agreement
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- The parol evidence rule never prevents the introduction of evidence (of earlier oral agreement) that would show that no valid contract exists or that the contract is voidable (fraud, a lack of consideration, duress, mistake,)
Raffles v Wichelhaus (1864)
- two ships named “Peerless”, one departing in October and another in December. ..
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Oswald
- “coin collection seller and purchaser” ; one “all of the Swiss coins,” whereas the other “only Swiss coin collection”,
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- à. Same as in Raffles, additionally, neither party should have been aware of the other’s understanding (in Colfax terms, latent ambiguity, i) no sensible way to determine as to conflicting understanding of contractual language, ii) neither party can be assigned greater blame )
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- DO - do not use the term ambiguous, coz, if ambiguous, it needs gap-filling, not no meeting of minds
Colfax Envelope Corp. v. , AFL-CIO,
- Colfax signed the union’s letter (a summary of changes), including manning requirement ; Union argued Colfax was bound by the letter ; Colfax argued no agreement on essential term – manning requirement ;
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- latent ambiguity , no contract, cannot be interpreted, only can be rescinded , a matter of contract formation ,
- In latent ambiguity, like in Peerless ship case and Swiss coin collection case, no contract existed, no meeting of minds, parties can abandon the contract without liability, contract can be rescinded, where (i) no sensible way to determine as to conflicting understanding of the contractual language, (ii) neither party can be assigned the greater blame for the conflicting misunderstanding, (neither party should have known the other’s understanding,
- In patent ambiguity, like manning requirement in Colfax, any dispute over the patent ambiguity must be resolved by interpretation ; not entitles a party to rescission of contract ; patent ambiguity arises because parties did not foresee and not provide for some contingency at the time of contract formation
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Whether to arbitrate p.426
- duty to arbitrate is contractual
- If the ambiguity is over whether the parties agreed to arbitrate the dispute, the interpretation is for the court
- If the ambiguity is over the meaning of the contract, like the manning requirement here, once the parties agreed to submit their contractual dispute to arbitration, the interpretation is for the arbitration.
- Even if one party argues that the contact should be rescinded on the ground of fraud, once they agreed to submit their contractual dispute to arbitration, the contract dispute is arbitrable.
CONCUR
- Contract interpretation is the arbitrator’s responsibility whereas, contract formation is for the court. Here, Colfax tries to turn an ordinary question of interpretation into one of formation
Supplementing agreement with terms supplied by law : gap-filler, warranties, mandatory terms (431)
§ 2-314. implied warranty : merchantability; usage of trade.
- (1) …, a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind. … .
- (2) Goods to be merchantable must be at least such as:
(a) pass without objection in the trade … ; (b) ; (c) are fit for the ordinary purposes for which goods of that description are used; (d) ; (e) are adequately contained, packaged,; and (f) conform to the promise … on the container or label if any.
- (3) … other implied warranties may arise from course of dealing or usage of trade.
§ 2-315. implied warranty: fitness for particular purpose.
- Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller's skill … to select or furnish suitable goods, there is unless excluded or modified under the next section an implied warranty that the goods shall be fit for such purpose.
Koken v. Black & Veatch Const., Inc., 2005, <warranty of merchantability> p.434
- Fire blanket was used to protect the area beneath the welding but it melted down
- Cause of action – (i) breach of duty to warn (of risk) under common law negligence, (ii) breach of warranty
Implied warranty of merchantability
- "a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind” ; To be "merchantable," a good must be "fit for the ordinary purposes” for which such goods are used. - UCC
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Lewis v. Mobil Oil Corp., 1971,
- Sawmill operator bought oil from Mobil for his hydraulic system
Implied warranty of fitness for particular purpose
- “where the seller, at the time of contracting, has reason to know, any particular purpose, for which the goods are required and that, the buyer is relying on the seller's skill, … an implied warranty that the goods shall be fit for such purpose” - UCC
- two requirements for an implied warranty of fitness: (1) that the seller has "reason to know" of the (particular) use for which the goods are purchased, and (2) that the buyer relies on the seller's expertise in supplying the proper product **
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Henningsen v. Bloomfield Motors, Inc., NJ, 1960,
- Action by automobile buyer against manufacturer to recover damages … while she was driving allegedly defective automobile shortly after its purchase.
- Held, (DO- disclaimer of implied warranty of merchantability could be invalid when so inimical to public policy)
- In absence of fraud, one who does not choose to read a contract risks that the contract proves unwelcome .
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(D) express warranty p.450 (p.2)
UCC § 2-313. Express Warranties by Affirmation, Promise, Description, Sample; Remedial Promise.
- (1) “immediate buyer” … a buyer that enters into a contract with the seller.
- (2) Express warranties by the seller to the immediate buyer are created as follows:
- (a) Any affirmation of fact or promise made by the seller which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise. ; (b) Any description of the goods …. ; (c) Any sample …
- (3) … not necessary … use formal words such as “warrant” or “guarantee” …, but … an affirmation merely of the value of the goods or a statement purporting to be merely the seller's opinion or commendation of the goods does not create a warranty.
Bayliner Marine Corp. v. Crow, 257 Va. 121, 1999, p.450, p.4
Express warranty
- any affirmation or promise made by the seller to the buyer (or description or sample) which relates to the goods and becomes part of the basis of the bargain
- express warranties must relate to the actual goods you are buying or one with substantially similar characteristic
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Implied warranty of merchantability
- UCC : a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant … (i) pass without objection, (ii) fit for ordinary purpose,
- The party who argue against merchantability must establish “reasonable expectation of ordinary user” - pass without objection ,
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Implied warranty of fitness for particular purpose
- UCC – the seller has reason to know (i) a particular purpose, (ii) that the buyer relied on the seller’s expertise
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Rest § 205. Duty of Good Faith And Fair Dealing (p.451)
- Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement
Good faith (i) in negotiation, (ii) performance, (iii) enforcement
Chap. 6 limit on the bargain and its performance p.453
1., unfairness p.454
McKinnon v. Benedict,
(DO- see Campbell soup case, refuse specific performance of a contract, where contract was unconscionable ; here, in Benedict, inadequacy of consideration, unfairness of terms)
- Benedict (D) bought a property (resort) for resort biz, which was enclosed by P’s property. P gave help to Benedict in making loan of $5,000 in exchange for Benedict’s promise to cut no tree and to make no improvement for 25 yrs. Benedict’s biz went bad, and invested in bulldozing and installing utilities. P brought a suit and sought injunction
Rule
- court of equity refuses specific performance of a contract where (i) inadequacy of consideration or (ii) unfairness of terms,
- restriction and prohibition as to the use of real estate should be resolved, if any doubt, in favor of the free use of the property
Inadequacy of consideration
- Here, help Benedict in getting a loan of $5,000 in exchange for promise to cut no tree and make no improvement, the consideration is grossly inadequate
Unfairness of terms
- Benedict and P did not deal at arm’s length.
- written contract whereby plaintiff agreed to care for 73-year-old decedent who was afflicted with Parkinson's disease during her lifetime in return for decedent's $34,400 farm being devised to plaintiff
held :
- (1) fair, (2) not unconscionable and (3) adequate consideration
- so that its specific performance was correctly ordered, notwithstanding that decedent died shortly more than one month after having executed contract.
- “transaction must be viewed prospectively, not retrospectivey.” (DO- at the time of contract formation)
- Given that, P gave up her employment with which she was satisfied to undertake an obligation of unknown and uncertain duration.
Black Industries, Inc. v. Bush, 1953,
- Fact : Contract, whereby defendant was to manufacture and sell machine parts to war contractor through plaintiff for certain prices to be paid defendant by plaintiff,,, was not void as against “public policy” because plaintiff was to receive much higher prices from war contractor, who would then pass on plaintiff's high profits to the government and public in form of increased prices.
rule
- In order to declare a contract, entered by parties freely and without fraud,,, void as against public policy,,, contract must be invalid on basis of legal principles, law, and legal precedents, not from general consideration of public interest
- Alleged fact that plaintiff was to receive far greater profits under contract than defendant for a much smaller contribution did not render contract invalid.
- The relative values of consideration in a contract between business men dealing at arm's length without fraud will not affect validity of contract.
Standard form and adhesion contract p.465
O'Callaghan v. Waller & Beckwith Realty Co.,IL, 1958,
- Tenant was injured when she fell on allegedly defective pavement in the Apt. building,,, Sued landlord,,, exculpatory clause in the tenant’s rental agreement,
Issue
- The exculpatory clause in the lease now before us clearly purports to relieve the lessor … from any liability to the lessee for personal injuries or property damage caused by … neglect of the lessor. whether it is contrary to public policy, and so invalid.
held
- neither public policy nor the social relationship of the parties forbade enforcement of the exculpatory clause in the tenant's rental agreement.
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Dissent
- housing shortage was acute, no actual competition ; could not negotiate the exculpatory clause, exculpatory clause was included in all form lease, ; it is not private concern coz the clause affects thousands of tenants bound by the clause
- (DO – the clause is so prevalent, freedom of contract, congress is better-equipped to address or strike down the clause)
exam about public policy **
- for contract to be declared void against public policy, (entered into freely and without fraud), the contract must be invalid on the ground of legal principle, not general consideration of public interests (in Black industries)
- exculpatory clause can be enforced unless (i) against public policy, (ii) social relationship of the parties (in exculpatory clause in lease agreement case)
- (i) a matter of private concern, as opposed to public interest, (ii) the relationship between the parties are not monopolistic, no disparity in terms of bargaining power, coz many potential suppliers out there, (iii) any attempt to negotiate the clause at issue? (iv)
- (i) housing shortage, could not negotiate the clause, (ii) in theory, competition, in practice, no competition, coz the exculpatory clause found in all lease forms, (iii) it is public concern, thousands tenants are bound by such clause
Graham v. Scissor-Tail, Inc., CA, 1990,
- Fact - contract between promoter (Graham) and company representing a singer ; dispute as to whether loss form one concert could be off-set against profit from another concert ; mandatory arbitration clause under which a party’s labor union is a sole arbitrator
Issue
- (1) whether adhesion contract, if so, (2) whether unenforceable – (i) whether fall within reasonable expectation of the weaker party, (ii) whether unconscionable
Held
- a contract of adhesion : presented on (i) a standard form, (ii) on a “take it or leave it” basis, and give one party (iii) no ability to negotiate because of their (iv) unequal bargaining position ; competing consideration - social advantage in the light of modern conditions (lower transaction cost) v. the danger of oppression
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- “a contract of adhesion not necessarily unenforceable” ; (2) for a contract of adhesion to be unenforceable, (i) whether the contract of adhesion not fall within a reasonable expectation of the weaker party (adhering party), (ii) whether the contract of adhesion is unduly oppressive or unconscionable
- Issue – whether the mandatory arbitration clause under which a party’s labor union is designated as a sole arbitrator, is (i) or (ii)
- (i),
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Cohen v. Santoianni , Mass. 1953, p.477
- In absence of fraud, one who signs a written agreement is bound by its terms whether he reads and understands it or not, or whether he can read or not.
Carnival Cruise Lines v.,
- Resident in WA, injured in off the coast of Mexico, forum selection clause
- Issue – whether a forum selection clause contained in tickets is is enforceable
Held
- a reasonable forum selection clause, in a standard form contract may be permissible
- (i) a company has a special interest in limiting the fora – the ship carries passengers from many locales, (ii) salutary effect – sparing litigant time and expense to determine a correct forum, (iii) passenger benefit in the form of reduced fare
- Forum selection clause in standard form contract is subject to judicial scrutiny for fundamental fairness
- (i) no bad faith motive – not to discourage passengers from pursuing legitimate claims, shops depart from FL, (ii) no fraud, when obtaining passenger’s acceptance, no fraud, (iii) notice, passengers were given notice of the forum selection clause
Dissent
- (i) only the most meticulous passenger become aware of the forum selection clause, (ii) almost no chance that passenger read the clause until purchase the ticket, (iii) by the time of purchasing the ticket, other provision prohibit refunding of the ticket, (iv) passenger risk having to file in FL than cancelling,
DO
- (i) terms of a contract of adhesion, (ii) enforceable – whether fall within reasonable expectation of weaker (adhering) party, - whether unduly oppressive, unconscionable
Doe v. Great Expectations, , p.489
- service was subject to Dating Services Law ;
- client was entitled to refund of entire amounts rather than amount paid minus $25 maximum because client would not have signed contact
sec. 3. Unconscionable p.494
Williams v. Walker-Thomas Furniture Co., 1965, p.497
- the buyers (D) entered into installment contract with furniture company (P) for the sale of furniture. The terms of the contract were contained in a printed form contract. Title would remain in the company until the total of all the monthly payments made equaled the stated value of the item, the company has the right to repossess all the items if buyer on default, the buyers are on welfare, so poor, buyer argued that it was irresponsible biz dealings.
held
- the strong party’s argument - (in Henningsen, p.445, in absence of fraud, one who does not choose to read a contract before signing it cannot later relieve himself of its burdens) ; Ordinarily, one who signs agreement without full knowledge of its terms may be held to assume risk that he has entered one-sided bargain. ;;; But,
- Where unconscionable at time contract is made, contract should not be enforced.
- Elements of unconscionable 1) procedural aspect - absence of meaningful choice on the part of one party, 2) substantive choice – contract terms are unreasonably favorable to the other party
- Absence of meaningful choice - evidenced by i) a gross inequality of bargaining power, ii), e.g., one-sided bargain, iii) the manner the contract was entered into – e.g., have a reasonable opportunity to understand the contract terms, important terms hidden in a maze of fine print
- Fraud can be presumed from grossly unfair nature of terms of contract
Outcome
- Remanded the case, stating that the court can refuse to enforce a contact on the ground of unconscionable
Dissent
- The poor may well need credit, BOA will not loan them ; the biz takes long chance on the sale of the items ; the law has allowed parties such great latitude in making their own contract
REST 2d CONTR § 208 Unconscionable Contract Or Term
- If a contract or term thereof is unconscionable at the time the contract is made a court may refuse to enforce the contract, or may enforce the remainder of the contract without the unconscionable term, or may so limit the application of any unconscionable term as to avoid any unconscionable result.
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Jones v. Star Credit Corp., 1969,
- Buyer, (P) welfare recipient, purchased a freezer unit, which had retail value of $300, and paid $600 toward purchase. But still the seller company claimed a balance due of $800 due to additional charges. (DO- i) buyer, P, welfare recipient, ii) the sale of freezer set having retail value of $300 for $900)
UCC § 2-302. Unconscionable Contract or Term. <remedy for unconscionable>
- (1) If the court as a matter of law finds the contract or any term of the contract to have been unconscionable at the time it was made, the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable term, or it may so limit the application of any unconscionable term as to avoid any unconscionable result.
- (2) If it is claimed or appears to the court that the contract or any term thereof may be unconscionable, the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose, and effect to aid the court in making the determination
Competing interest
- The concern for the uneducated, often illiterate, victim of gross inequality of bargaining power, ß à. (i) free market, freedom of contract, (ii) extensions of credit (BOA will not loan them), (iii) necessity of installment sales (otherwise, how can they buy necessities), (iv) it is a financing agreement, not sales contract
The court
- Fraud is not required for unconscionable
- The sale contact was unconscionable
- (rather refusing to enforce the whole contract), limit the application of the clause, i.e., remand the price term,
Armendariz v. 2000,
- plaintiffs employee sued defendant employer alleging plaintiffs were terminated because of their perceived heterosexual orientation in violation of the CA fair employment … Act. (FEHA).
- (*) (1) whether unwaivable statutory claim is arbitrable, (2) if arbitrable, the minimum requirements, (3) whether the arbitration clause was unconscionable, (4) severability of unconscionable provision,
(1) nothing in the FEHA prohibits mandatory employment arbitration agreement
(2) minimum requirement
- a mandatory employment arbitration agreement is lawful if the arbitration permits an employee to vindicate his statutory rights. For vindication to occur, minimum requirements are: (i) provides for neutral arbitrators, (ii) provides for more than minimal discovery, (iii) requires a written award, (iv) provides for all of the types of relief that would otherwise be available in court, and (v) does not require employees to pay either unreasonable costs or any arbitrators' fees or expenses as a condition of access to the arbitration forum
- Here (i) neutral arbitrator, (ii) adequate discovery, (iii) written arbitration award and judicial review, (iv) relief, the employer excludes injunctive relief and punitive damage from remedy, this damage limitation is unlawful, (v) employees should not pay unreasonable cost and arbitration fees,
(3) whether the mandatory employment arbitration clause is unconscionable
- 1) UCC 2-302
- 2) contract of adhesion – (unconscionability analysis begins with contact of adhesion) (standard form, on a take it or leave it basis, no ability to negotiate, unequal bargaining position)
- 3) if a contract of adhesion, whether unenforceable, i) whether fall within reasonable expectation of weaker party (adhering party), ii) whether unduly oppressive, unconscionable
- 4) two elements of unconscionable i) at the time the contract was made, ii) procedural – absence of meaningful choice on the part of one party, gross inequality of bargaining power, iii) substantive – unreasonably favorable to the other party,
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- In sum, unilateral obligation to arbitrate (the lack of mutuality), limit on remedy à unconscionable
(4) severality of unconscionable provision
- “Under this section the court, in its discretion, may refuse to enforce the contract as a whole if it is permeated by the unconscionability, or it may strike any single clause … so tainted … or … limit unconscionable clauses so as to avoid unconscionable results.”
- Two reasons for severing or restricting illegal terms rather than voiding the entire contract … the first is to prevent parties from gaining undeserved benefit or suffering undeserved detriment as a result of voiding the entire agreement--particularly when there has been full or partial performance of the contract … second, … severance attempts to conserve a contractual relationship if to do so would not be condoning an illegal scheme
Scott v. Cingular Wireless, WA, 2007,
- Cingular overcharged consumer between $1 and around $45 ; the arbitration clause contained a provision prohibiting class action litigation or class arbitration - class action waiver in arbitration clause
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Reasoning
I., class action and the Washington CPA
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II., exculpation
- class action waiver à. exculpation
- whether this class action waiver is unconscionable for effectively exculpating its drafter from liability for a large class of wrongful conduct.
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- this class action, effectively exculpating the drafter from potential liability for small claims … A clause that unilaterally and severely limits the remedies of only one side is substantively unconscionable under Washington law for denying any meaningful remedy.
- < severability of unconscionable provision> … Since Cingular's class action waiver states that if it “is found to be unenforceable, then the entirety of this arbitration clause shall be null and void,”
DISSENT
- If there is to be state policy forbidding class action waivers in consumer agreements, it should come from our legislature, not this court
- the majority's new policy disfavors arbitration, contradicting the strong legislative public policy favoring arbitration of disputes embodied in the Federal Arbitration Act (FAA)
- without justification, the majority departs from the usual case-by-case analysis for determining contract unconscionability in favor of a sweeping rule that will invalidate thousands of arbitration contracts without regard to the specific terms of those agreements.
