C&J FERTILIZER, INC. V. ALLIED MUTUAL (P. 369) Someone breaks into P’s plant but only damage is to the interior door. Insurance policy specifically excludes burglary that does not leave visible marks on exterior. D refuses to cover it. P sues. For P. Court throws out part of K

• Ambiguity Doctrine: Ambiguous terms should be construed against insurer
• Note: This case could have come out same way under different analysis:
• K was formed orally earlier
• Terms were ambiguous and construed against Allied Mutual
• Well-locked interior of premises counted as “exterior”

PAROL EVIDENCE

The parol evidence rule presumes that a written contract embodies the complete agreement between the parties involved. The rule therefore generally forbids the introduction of extrinsic evidence (i.e., evidence of communications between the parties which is not contained in the language of the contract itself) which would change the terms of a later written contract.

Four Corners Doctrine – Classical View

 

Total Integration: Document is intended by parties to include all details of their agreement.

THOMPSON V. LIBBY (P. 384)Written contract for logs. Additional oral warranty of quality. P seeks refund. For D. Parol evidence inadmissible.

• Writing is complete based on self-sufficiency of the K – “the four corners.”
• Despite lack of merger clause (which states that the K is complete – totally integrated)
• If writing is complete, this bars evidence that would vary its terms (even if consistent with the K)
• Four exceptions to parol evidence rule in Minnesota:
• Fraud
• Writing incomplete on its face
• Terms unclear
• Evidence “collateral” to subject matter, meaning a distinct transaction

Parol Evidence May be used to determine Meaning the Parties Intended for K Terms – Modern Approach

TAYLOR V. STATE FARM MUTUAL AUTOMOBILE INSURANCE CO. (P. 392) P was sued for car accident for $2.5M in liability over and above his insurance coverage. P then sues D for bad faith. D claims defense of signed release. Parol evidence admissible.

• Judge determines whether term is ambiguous by looking at parol evidence (Corbin and Restatement approach)
• Judge must hear extrinsic evidence to see if writing is “reasonably susceptible” to different interpretations
• If so, must weigh parol evidence to see if relevant.
• Excluding evidence which varies or contradicts writing
• Evidence that P’s interpretation was “reasonable” and, thus, admissible.
• Substantial bad faith claim
• Release drafted in vague language
• Release classified as “uninsured motorist coverage”
• Size of claim suggests he would not trade for $15,000 release

The Zipper Clause

• Aka Merger Clause/ Four Corners Clause: designed to show that the document represents the total extent of the agreement (designed to keep out parol evidence)

UCC: Course of Performance/Trade Usage can Supplement Terms

NANAKULI PAVING 7 ROCK CO. V. SHELL OIL CO. (P. 414) P enters long-term K for asphalt. No express term regarding price protection. P claims entitlement due to course of dealing, course of performance, trade usage and good faith. Parol evidence admissible.

• This is a requirements K with an open price term, which requires good faith (UCC §2-305(2))
• Can supplement or explain express terms (but not contradict) (UCC §2-202, Rules p. 118)
• Price term left open
• P cites course of performance and trade usage to suggest price protection is not extraordinary (Point is to show that your term is not extraordinary, but is the way things are usually done.)
• Sufficient evidence for jury
• Price protection did not contradict express terms

implied terms

RATIONALE FOR IMPLIED TERMS

Implied in Fact Terms: Terms not listed in agreement that encapsulate the deal the parties actually made

WOOD V. LUCY, LADY DUFF-GORDON (P. 432) D contracts with P for exclusive right to sell and market her designs for one year, with no stipulation as to profits. D sells products to Sears. P sues for breach. D argues no K, b/c no consideration. K is enforceable b/c there was intent to form K.

• Consideration: Exclusive Agency—Creates power on one side and dependence on the other.
• Any grant of exclusive agency carries with it an obligation to do something with that agency to exploit it for the joint benefit of the parties
• Cardozo looks at the agreement itself—it’s long at has lots of terms. If it isn’t a K, what is it?

Implied in Law: Terms added by law regardless of the parties’ intentions. They can be in opposition to express terms

UCC Gap-Fillers

• 2-308: Place of delivery

• 2-309: Duration Provisions
• 2-310: Time of Payment
• 2-509: Risk of Loss
• 2-513: Buyer’s Right to Inspection
• UCC 2-715, 719: consequential damages
• Consequential damages may be recovered unless contractually limited

UCC §2-309(3), Absence of Specific Time Provisions; Notice of Termination

Termination, except upon happening of agreed upon event, requires reasonable notification…

Comment 8: Reasonable notice requires giving reasonable time to seek a new relationship with another party.

Gap-Filler. LEIBEL V. RAYNOR MANUFACTURING CO. (P. 435) Parties had exclusive dealer-distributor relationship for garage doors. Raymor terminates without notice after a period of declining sales. Remanded.

• Goods predominate, so UCC applies: common law says distributorships apply under UCC
• Termination only Upon Reasonable Notice (UCC §2-309)
• For jury to decide what is “reasonable”
• Nature of distributorship/Franchise Ks
• Manufacturer is interested in the reputation of the brand and needs to impose strict requirements on the brand
• Distributor needs help training and advertising, and generally wants to exploit support system manufacturer maintains
• Both sides want relationship to last forever, so Ks don’t specify time period
• Long term uncertainty exists but can be moderated by
• Inclusion of dispute resolution process
• Inclusion of objective standards of performance measurement
• Gap-Fillers/Off the Rack Terms
• Shift bargaining relationship b/w parties. One party has a term that favors its position.
• If modification of term is too extreme, or if term is mandatory (2-309(3), 2-719(3)), it may be found unconscionable
• Efficiency: If these are terms that would likely be bargained anyway it lowers transaction cost of doing deal
• Fairness: external arbitration of ambiguous terms

Implied Obligation of Good Faith

UCC §1-203, Obligations of Good Faith (Rules, p. 12)

Every K imposes an obligation of good faith in its performance or enforcement.

• Good Faith Means
• Honest in Fact, AND
• Observance of Reasonable Commercial Standards of Fair Dealing (UCC §2-103)

 

R2 § 205: Duty of good faith and fair dealing in every K

Common Law Application

LOCKE V. WARNER BROS., INC. (P. 444) Clint Eastwood secured “pay or play” deal for his ex, P, where she got paid to submit her work to Warner, but D never developed any of her projects. P sues for breach and fraud. Lower court’s ruling for D was in error.

• Her exclusivity with respect to D implies an return obligation of good faith
• Implied obligation to at least consider her projects
• Fraudulent intent: D didn’t even attempt performance
• Payment alone doesn’t satisfy K. There is value in having WB consider her work. This is part of K.

UCC Application

UCC §2-306, Output, Requirements and Exclusive Dealings (Rules, p. 37)

Requirements of buyer may be flexible but shall be in good faith, and can’t tender or demand a quantity unreasonably disproportionate to the estimate.

• According to Empire Gas:
• Proviso about disproportionality refers to increase in amt requested b/c we cant place buyer in competition with seller (who could make a profit buying stuff at such a cheap price and sell it later)
• Reductions in amount bought to 0 must have good faith justification.

• Requirements Contract:

• Buyer agrees to buy ALL its requirements from a single seller at given price
• Exclusivity = consideration
• Variation on estimate must be in good faith

• Output Contract:

• Seller agrees to sell all goods to single buyer

EMPIRE GAS CORP. V. AMERICAN BAKERIES CO. (P. 455) D planned to convert fleet to propane and entered into requirements contract with P. Then never bought anything. P sues for breach. For P.

• The reason for the reduction, not the amount, is pivotal in assessing compliance. Good faith obligation requires D to cite reasons beyond their control. None was given.
• You can’t just drop out b/c its no longer a good deal.
• Good excuses: business demand changes, ABC went out of business, technology updated, etc. (Casebook, Note 4, p 464 for more examples)
• K may not have been breached if ABC had not bought anything and there was a good reason.

IMPLIED WARRANTIES

Promise that the good sold will perform in some manner or will be replaced/repaired within some period of time. 

Warranty desirable when:

• Product wanted for particular purpose
• Concerned about contingencies
• Product is important or valuable
• Search costs prohibitive

 

Why is it better to sue under warranty than misrepresentation?

• Misrepresentation: requires breach of warranty AND reliance
• Warranty: all you have to prove is that the product wasn’t what the warranty guaranteed

UCC §2-313, Express Warranties (Rules, p. 42) Warranty made expressly either through writing or orally.

1. Affirmation of fact
2. Promise
3. Description of the product
4. Sample
5. NOT Seller’s opinion, or “mere puffery”
1. We don’t enforce these b/c it isn’t a provable fact, and b/c we expect buyer to understand that if someone is trying to sell you something, they’ll try to make it seem as attractive as possible

UCC §2-314, Implied Warranty: Merchantability; Usage of Trade (Rules, p. 45)

1. Pass without objection in the trade
2. Fair average quality
3. Fit for ordinary purpose for which such goods are used.

[This warranty is implied whenever the seller is a merchant of goods of that kind.]

UCC §2-315, Implied Warranty: Fitness for Particular Purpose (Rules, p. 48)

1. Seller has reason to know of P’s particular purpose.
2. P relies on seller’s skill or judgment.

UCC §2-316, Exclusion or Modification of Warranties (Rules, p. 49)

1. Disclaimer of the warranty of merchantability must use word “merchantability.”
2. Disclaimer of warranty of fitness for particular purpose must be in writing and conspicuous.
3. All implied warranties can be disclaimed by an “as is” clause.

Defenses to Warranties

1. Disclaimers, UCC § 2-316
1. Disclaimer can’t be inconsistent with warranty
2. Disclaimer must be conspicuous
3. “As is” clauses serve as disclaimers, no implied warranty here.
2. Timing
1. Statute of Limitations, UCC § 2-725
1. Can’t bring breach of warranty claims past 4 years
2. Reasonable Time to Complain, UCC § 2-607(3)(a)
1. Buyer who has accepted goods must notify seller of breach of warranty within “reasonable time” of discovery
3. Scope of Warranty, Existence of Breach, Proximate Cause
1. If any of these are missing, no breach of warranty claim

BAYLINER MARINE CORP. V. CROW (P. 485) Crow buys boat but it isn’t fast enough to go off-shore fishing. Claims breach of express and implied warranties. No breach of warranties.

• No Express Warranties
• Prop matrixes: Did not pertain to actual boat he purchased and referenced different specs.
• Sales brochure: “Delivers kind of performance you need” is an opinion.
• Implied Warranty of Merchantability
• Boat would pass without objection
• Crow used for offshore fishing, so must be fit for it
• Implied Warranty of Fitness for Particular Purpose
• Neither manufacturer nor Seller knew of P’s specific purpose

contract defenses

DURESS

Abuse of bargaining process that undercuts the voluntariness of assent

Unlawful confinement of person, place, or property that causes acceptance of K through fear.

Restatement § 174

Duress by physical compulsion prevents formation of K

Restatement §175(1), When Duress by Threat Makes a Contract Voidable

1. Assent is Induced..
2. by an Improper Threat [wrongful act]
3. That leaves No Reasonable Alternative

Restatement §176, When a Threat is Improper (Rules, p. 192)

Threat is improper when it is:

1. Crime or Tort
2. Criminal Prosecution
3. Use of Civil Process in bad faith
4. Breach of Duty of Good Faith

Some jurisdictions require the threat to be “unlawful.”

Economic Duress

TOTEM MARINE TUG & BARGE, INC. V. ALYESKA PIPELINE SERVICE CO. (1978) (P. 526) Shipping went bad, Alyeska terminated K w/o reason, owed Totem $ from termination agreement. Alyeska refuses to pay w/ knowledge that Totem was near bankruptcy. D gets P to sign settlement agreement. Totem presents valid defense.

• Totem must show (§ 175):
• Involuntary acceptance of another’s terms
• That were the result of coercive acts
• No reasonable alternative (probably through exigency)
• P had no money, no other source of money, and debts – Financial Straits alone Not Sufficient. You must prove that there is no alternative b/c of the wrongful acts of D.
• Ability to bring suit would otherwise be a reasonable alternative
• Improper Threat/Wrongful Act – Breach of Good Faith (Restatement §176)
• Must show D deliberately withheld payment of an acknowledged debt.
• Intended to exacerbate P’s problem
• Must show D knew of P’s impending bankruptcy
• Ks made under economic distress are voidable, while Ks made under physical duress are void

 

• Totem will have a hard time proving there was no reasonable alternative
• Company was in debt b/c owners chose to put their money into it. This company was created to take on this K, created by someone who is shareholder and officer of company. You can’t claim financial distress of company if you’re the one who can turn around and forgive that very debt.
• Unless you can show that it would cost you so much that you’d be forced into bankruptsy, youll be expected to pay these expenses.
• People must recognize losses some of the time.

UNDUE INFLUENCE

Undue susceptibility coupled with unfair or excessive persuasion.

Restatement §177, When Undue Influence Makes a Contract Voidable (Rules, p. 192)