LAW 506-002 – Contracts II

Interpretation


Restatement Second of Contracts § 202

Rules in Aid of Interpretation

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  1. Words and other conduct are interpreted in the light of all the circumstances, and if the principal purpose of the parties is ascertainable it is given great weight.
  2. A writing is interpreted as a whole, and all writings that are part of the same transaction are interpreted together.
  3. Unless a different intention is manifested,
    1. where language has a generally prevailing meaning, it is interpreted in accordance with that meaning;
    2. technical terms and words of art are given their technical meaning when used in a transaction within their technical field.
  4. Where an agreement involves repeated occasions for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance accepted or acquiesced in without objection is given great weight in the interpretation of the agreement.
  5. Wherever reasonable, the manifestations of intention of the parties to a promise or agreement are interpreted as consistent with each other and with any relevant course of performance, course of dealing, or usage of trade.
Restatement Second of Contracts § 203

Standards of Preference in Interpretation

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In the interpretation of a promise or agreement or a term thereof, the following standards of preference are generally applicable:

  1. an interpretation which gives a reasonable, lawful, and effective meaning to all the terms is preferred to an interpretation which leaves a part unreasonable, unlawful, or of no effect;
  2. express terms are given greater weight than course of performance, course of dealing, and usage of trade, course of performance is given greater weight than course of dealing or usage of trade, and course of dealing is given greater weight than usage of trade;
  3. specific terms and exact terms are given greater weight than general language;
  4. separately negotiated or added terms are given greater weight than standardized terms or other terms not separately negotiated.
Restatement Second of Contracts § 206

Interpretation Against the Draftsman

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In choosing among the reasonable meanings of a promise or agreement or a term thereof, that meaning is generally preferred which operates against the party who supplies the words or from whom a writing otherwise proceeds.

UCC § 1-303

Course of Performance, Course of Dealing, and Usage of Trade

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  1. A "course of performance" is a sequence of conduct between the parties to a particular transaction that exists if:
    1. the agreement of the parties with respect to the transaction involves repeated occasions for performance by a party; and
    2. the other party, with knowledge of the nature of the performance and opportunity for objection to it, accepts the performance or acquiesces in it without objection.
  2. A "course of dealing" is a sequence of conduct concerning previous transactions between the parties to a particular transaction that is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.
  3. 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.
  4. 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.
  5. 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.
  6. Subject to [UCC § 2-209], a course of performance is relevant to show a waiver or modification of any term inconsistent with the course of performance.
  7. Evidence of a relevant usage of trade offered by one party is not admissible unless that party has given the other party notice that the court finds sufficient to prevent unfair surprise to the other party.
Course of Performance

Course of performance is how the parties in this contract have interpreted the term in the current contract.

Course of Dealing

Course of dealing is how the parties in this contract have interpreted the term in different contracts.

Use of Trade

Use of trade is how the industry usually interprets the term.

Ambiguity

A term is ambiguous when there are two reasonable interpretations of it.

There are two approaches to determining whether or not a contract is ambiguous:

  1. Four Corners Test

    The older four corners test says an ambiguity only exists if an ambiguity exists in within the four corners of the document.

  2. Corbin Approach

    The Corbin approach, followed by the Restatement, says that a court should admit all evidence to determine the intent of the parties and whether or not the agreement is ambiguous.

[A] usage should be allowed to modify the apparent agreement, as seen in the written terms, as long as it does not totally negate it.
Implied Terms

See page 790.

Warranty
Express Warranty
UCC § 2-313

Express Warranties by Affirmation, Promise, Description, Sample.

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  1. Express warranties by the seller are created as follows:
    1. Any affirmation of fact or promise made by the seller to the buyer 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.
    2. Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description.
    3. Any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model.
  2. It is not necessary to the creation of an express warranty that the seller use formal words such as "warrant" or "guarantee" or that he have a specific intention to make a warranty, 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.
Implied Warranty
Implied Warranty of Merchantability
UCC § 2-314

Implied Warranty: Merchantability; Usage of Trade.

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  1. Unless excluded or modified ([UCC § 2-316]), 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. Under this section the serving for value of food or drink to be consumed either on the premises or elsewhere is a sale.
  2. Goods to be merchantable must be at least such as
    1. pass without objection in the trade under the contract description; and
    2. in the case of fungible goods, are of fair average quality within the description; and
    3. are fit for the ordinary purposes for which such goods are used; and
    4. run, within the variations permitted by the agreement, of even kind, quality and quantity
    5. within each unit and among all units involved; and
    6. are adequately contained, packaged, and labeled as the agreement may require; and
    7. conform to the promise or affirmations of fact made on the container or label if any.
  3. Unless excluded or modified ([UCC § 2-316]) other implied warranties may arise from course of dealing or usage of trade.

Koken.

Implied Warranty of Fitness for a Particular Purpose
UCC § 2-315

Implied Warranty: Fitness for Particular Purpose.

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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 or judgment 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.

Lewis.

Exclusions:

There are two ways to exclude warranties:

UCC § 2-316

Exclusion or Modification of Warranties.

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  1. Words or conduct relevant to the creation of an express warranty and words or conduct tending to negate or limit warranty shall be construed wherever reasonable as consistent with each other; but subject to the provisions of this Article on parol or extrinsic evidence ([UCC § 2-202]) negation or limitation is inoperative to the extent that such construction is unreasonable.
  2. Subject to subsection (3), to exclude or modify the implied warranty of merchantability or any part of it the language must mention merchantability and in case of a writing must be conspicuous, and to exclude or modify any implied warranty of fitness the exclusion must be by a writing and conspicuous. Language to exclude all implied warranties of fitness is sufficient if it states, for example, that "There are no warranties which extend beyond the description on the face hereof."
  3. Notwithstanding subsection (2)
    1. unless the circumstances indicate otherwise, all implied warranties are excluded by expressions like "as is", "with all faults" or other language which in common understanding calls the buyer's attention to the exclusion of warranties and makes plain that there is no implied warranty; and
    2. when the buyer before entering into the contract has examined the goods or the sample or model as fully as he desired or has refused to examine the goods there is no implied warranty with regard to defects which an examination ought in the circumstances to have revealed to him; and
    3. an implied warranty can also be excluded or modified by course of dealing or course of performance or usage of trade.
  4. Remedies for breach of warranty can be limited in accordance with the provisions of this Article on liquidation or limitation of damages and on contractual modification of remedy ([UCC § 2-718] and [UCC § 2-719]).
UCC § 2-719

Contractual Modification or Limitation of Remedy.

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  1. Subject to the provisions of subsections (2) and (3) of this section and of the preceding section on liquidation and limitation of damages,
    1. the agreement may provide for remedies in addition to or in substitution for those provided in this Article and may limit or alter the measure of damages recoverable under this Article, as by limiting the buyer's remedies to return of the goods and repayment of the price or to repair and replacement of non-conforming goods or parts; and
    2. resort to a remedy as provided is optional unless the remedy is expressly agreed to be exclusive, in which case it is the sole remedy.
  2. Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this Act.
  3. Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not.
Limit Remedy
Good Faith

Every contract carries an implied covenant of good faith and fair dealing.

Restatement Second of Contracts § 205

Duty of Good Faith and Fair Dealing

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Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.

UCC § 1-304

Obligation of Good Faith.

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Every contract or duty within the Uniform Commercial Code imposes an obligation of good faith in its performance and enforcement.

UCC § 1-201(b)(20)

General Definitions.

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  1. "Good faith," except as otherwise provided in Article 5, means honesty in fact and the observance of reasonable commercial standards of fair dealing.
UCC § 2-306(2)

Output, Requirements and Exclusive Dealings.

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  1. 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.
"'[U]nder the covenant of good faith and fair dealing, a party [exercising discretion must] refrain from doing anything that will have the effect of frustrating the right of the other party to receive the fruits of the contract between them.'" This means that each party must "do nothing to destroy the rights of the other party to enjoy the fruits of the contract and [] do everything that the contract presupposes they will do to accomplish its purpose." In addition, the obligation to act in good faith and deal fairly prohibits a party from terminating its contract (or otherwise exercising its discretion) to "recapture" an opportunity that it lost upon entering the contract. . . . [T]he obligation of good faith and fair dealing requires a party exercising discretion to do so in accordance with the "reasonable expectations" of the other party.

Questar.