Determining the Terms of the Contract

Determining the Terms of the Contract

1. Parol Evidence Rule: When parties to a contract express their agreement in writing with
the intent that it embody the final expression of their bargain, the writing is an
integration
a. Any other expressions, written or oral, made prior to the writing, as well as any
oral expressions contemporaneous with the writing are inadmissible to vary the
terms of the writing
b. Is the Writing an Integration: There are 2 components: (1) whether the writing
was intended as the final expression of the agreement and (2) whether the
integration was intended to be complete or partial. Evidence is admissible to show
the parties intent
i. Partial Integration - Additional Terms Permitted: If an integration is
complete, the writing cannot be contradicted or supplemented. If,
however, the integration is partial, the writing may not be contradicted but
may be supplemented by proving consistent additional terms. The
UCC presumes all writings are partial integrations
ii. Effect of Merger Clause: A merger clause recites that the agreement is
the complete agreement between the parties. The presence of a merger
clause is usually determinative in large commercial contracts. For most
contracts, however, the modern trend is to consider it as one factor in
determining integration
iii. Exam Tip: A memo prepared by one party and not shown to the other can
never be integration because the parties could not have intended it to be
the final complete expression of their agreement when one party has not
even seen it. The writing is merely evidence of the agreement. Note that a
confirmatory memo may be a partial integration under the UCC because it
was sent to the other party and that party was aware of its contents
c. Evidence Outside Scope of Rule: Because the rule prohibits admissibility only
of extrinsic evidence that seeks to vary, contradict, or add to an integration. Other
forms of extrinsic evidence may be admitted if they won’t bring about this result,
they will fall outside the scope of the parole evidence rule
i. Validity Issues: A party to a written contract can attack the agreement’s
validity. The party acknowledges (concedes) that the writing reflects the
agreement but asserts, most frequently, that the agreement never came into
being because of any of the following:
1. Formation Defects: Formation defects (i.e., fraud, duress,
mistake, illegality) may be shown by extrinsic evidence
2. Conditions Precedent to Effectiveness: If a party asserts that
there was an oral agreement that the written contract would not
 become effective until a condition occurred, all evidence of the
understanding may be offered and received
ii. Collateral Agreements and Naturally Omitted Terms: Parol evidence
is often said to be admissible if the alleged parol agreement is collateral to
the written obligation (related to the subject matter but not part of the
primary purpose) and does not conflict with it
1. Naturally Omitted Terms Doctrine (Res of Contracts): This
doctrine allows evidence of terms that would naturally be omitted
from the written agreement. A term would naturally be omitted if:
a. It does not conflict with the written integration
b. It concerns a subject that similarly situated parties would
not ordinary be expected to include in the written
instrument
iii. Interpretation: If there is uncertainty or ambiguity in the written
agreement’s terms or a dispute as to the meaning of those terms, parol
evidence can be received to aid the fact finder in reaching a correct
interpretation of the agreement
1. However, if the meaning of the agreement is plain, parol
evidence is inadmissible
iv. Showing of True Consideration: The parol evidence rule will not bar
extrinsic evidence showing the true consideration paid (such as evidence
that the consideration stated in the contract was never paid)
v. Reformation: If a party to a written agreement alleges facts entitling him
to reformation of the agreement, the parol evidence rule in inapplicable
vi. Subsequent Modification: Parol evidence can be offered to show
subsequent modifications of a written contract
vii. Additional Terms under UCC: The UCC generally follows the rules
discussed above, providing that a party cannot contradict a written
contract but may add consistent additional terms unless:
1. There is a merger clause, or
2. The courts find from all of the circumstances that the writing was
intended as a complete and exclusive statement of the terms of the
agreement
3. UCC also provides that a written contract’s terms may be
explained or supplemented by evidence of course of
performance, course of dealing, and usage of trade, regardless of
whether or not the writing appears to be ambiguous
2. General Rules of Contract Construction: There are a number of general rules of
construction applied by the courts when interpreting contracts. The following are among
the more frequently invoked:
a. Contracts will be construed as a whole, specific clauses will be subordinated to
the contract’s general intent
b. The courts will construe words according to their ordinary meaning unless it
is clearly shown that they were meant to be used in a technical sense
c. If provisions appear to be inconsistent, written or typed provisions will prevail
over printed provisions
d. The courts generally will try to reach a determination that a contract is valid
and enforceable
e. Ambiguities in a contract are construed against the party preparing the
contract, absent evidence of the intention of the parties
f. Parties Course of Dealing - the sequence of conduct concerning previous
transactions between the parties to a particular transaction that may be regarded
as establishing a common basis of their understanding
g. Usage of Trade - a practice or method of dealing, regularly observed in a
particular business setting so as to justify an expectation that it will be followed in
the transaction in question
h. Parties Course of Performance - if a contract involves repeated occasions for
performed by either party and the other party has the opportunity to object to
such performance, any course of performance accepted or acquiesced to is
relevant in determining the meaning of the contract
i. When Rules Conflict: (1) express terms are given greater weight than course
of performance, course of dealing, and usage of trade, (2) course of performance
is given greater weight than course of dealing or usage of trade, and (3) course
of dealing is given greater weight than usage of trade
3. UCC Provisions on Interpreting Contracts
a. Supplemental Terms: The key to forming a contract for the sale of goods is the
quantity term. If other terms are missing from the agreement, UCC has gap filler
provisions to fill in the missing term
i. Price: If (1) nothing has been said as to price, (2) the price is left open to
be agreed upon by the parties and they fail to agree, or (3) the price is to
be fixed in terms of some standard that is set by a third person or agency
and it is not set, then the price is a reasonable price at the time of
delivery
ii. Place of Delivery: If the place of delivery isn’t specified, the place is the
seller’s place of business. If they don’t have one, it’s the seller’s home
iii. Time for Shipment or Delivery: If the time for shipment or delivery isn’t
specified, shipment/delivery is due within a reasonable time
 iv. Time for Payment: If the time for payment isn’t specified, payment is
due at the time and place at which the buyer is to receive the goods
v. Assortment: If a contract provides that an assortment of goods is to be
delivered and doesn’t specify which party is to choose, the assortment is
at the buyer’s option
1. If the party who has the right to specify the assortment doesn’t do
so seasonably, the other party is excused from any resulting
delay may either proceed in any reasonable manner or treat the
failure as a breach
b. Warranties: Contracts for the sale of goods automatically include a warranty of
title (in most cases). They may also include certain implied warranties and
express warranties
i. Express Warranties: Any affirmation of fact or promise made by the
seller to the buyer, any description of the goods, and any sample or model
creates an express warranty if the statement, description, sample, or model
is part of the basis of the bargain
1. For the statement, description, sample, or model to be part of the
basis of the bargain, it need only come at such a time that the
buyer could have relied on it when they entered into the contract
2. The buyer does not need to prove that they actually did rely,
although the seller may negate the warranty by proving that the
buyer as a matter of fact did not rely
3. If isn’t necessary that the seller intended the affirmation of fact,
description, model, or sample to create a warranty
4. Distinguish - Statements of Value or Opinion: A statement
relating merely to the value of the goods, or a statement purporting
to be only the seller’s opinion or commendation of the goods,
doesn’t create an express warranty
ii. Implied Warranty of Merchantability: Implied in every contract for
sale by a merchant who deals in goods of the kind sold, there is a
warranty that the goods are merchantable
1. To be merchantable, goods must at least be fit for the ordinary
purpose for which such goods are used
2. Seller’s Knowledge of Defect Not Relevant: As in all implied
warranty cases, it makes no difference that the seller didn’t know
of the defect or that they couldn’t have discovered it. Implied
warranties aren’t based on negligence but rather an absolute
liability that is imposed on certain sellers

iii. Implied Warranty of Fitness for a Particular Purpose: A warranty will

also be implied in a contract for the sale of goods whenever:
 1. Any seller, merchant or not, has reason to know the particular
purpose for which the goods are to be used and that the buyer is
relying on the seller’s skill and judgment to select suitable goods
2. The buyer in fact relies on the seller’s skill or judgment
iv. Warranty of Title and Against Infringement
1. Warranty of Title: Any seller of goods warrants that the title
transferred is good, that the transfer is rightful, and that there are
no liens or encumbrances against the title of which the buyer is
unaware at the time of contracting
a. This warranty arises automatically and need not be
mentioned in the contract
2. Warranty Against Infringement: A merchant seller regularly
dealing in goods of the kind sold also automatically warrants that
the goods are delivered free of any patent, trademark, copyright, or
similar claims
a. But a buyer who furnishes specifications for the goods to
the seller must hold the seller harmless against such claims
if compliance with the specifications holds seller liable
v. Disclaimer of Warranties
1. Warranty of Title: The title warranty can be disclaimed or
modified only by specific language or by circumstances that the
buyer notice that the seller does not claim title or that they are
selling only such rights as they or a third party may have
2. Implied Warranties: The implied warranties of merchantability
and fitness for a particular purpose can be disclaimed by either
specific disclaimers or general methods of disclaimer
3. Specific Disclaimers
a. Disclaimer of Warranty of Merchantability can be
specifically disclaimed or modified only by mentioning
merchantability. If the sales contract is in writing, the
disclaimer must be conspicuous
b. Disclaimer of Warranty of Fitness for a Particular
Purpose can be specifically disclaimed only by a
conspicuous writing. A written disclaimer is sufficient it is
says “there are no warranties which extend beyond the
description on the face hereof”
c. Conspicuous Defined: A term is conspicuous when it so
written, displayed, or presented that a reasonable person
against whom it is to operate ought to have noticed it
i. Language in the body of a writing is conspicuous if
(1) it is in larger type than surrounding text, (2) it is
 in a contrasting type, font, or color, or (3) it is set
off the text by marks that call attention to it
ii. The court not the jury decides any fact question as
to conspicuousness
iii. Georgia Distinction: In Georgia, a printed hearing
in capitals is conspicuous. Language in the body of
a form is conscious if it is in larger or other
contrasting type or color. Any stated term in a
telegram is conspicuous
4. Other Methods of Disclaiming Implied Warranties: The UCC
also provides several more general methods for disclaiming
implied warranties
a. By “As Is” or Similar Language: Unless the
circumstances indicate otherwise, the implied warranties of
merchantability and fitness can be disclaimed by
expressions such as “as is”, “with all fault,” or other
expressions that in common understanding call the buyer’s
attention to the fact there are no implied warranties
i. Although this type of disclaimer does not have to be
conspicuous, a hidden or fine print disclaimer of
this type is not effective
b. By Examination or Refusal to Examine: If the buyer,
before entering into the contract, has examined the goods or
a sample or model as fully as they desire or has refused
to examine, there is no warranty as to defects that a
reasonable examination would have revealed
c. By Course of Dealing, Etc: Implied warranties may also
be disclaimed by the course of dealing, course of
performance, or usage of trade
d. Exam Tip: It is better to use specific disclaimers because
general disclaimers may be limited by the circumstances.
On the MBE, an “as is” or “without all faults” disclaimer
will generally be as effective as a specific disclaimer
5. Express Warranties: The UCC provides that words or conduct
relevant to the creation of express warranties and words or conduct
tending to negate such warranties shall wherever possible be
construed as consistent with each other, but negation or limitation
is inoperative to the extent that such construction is
unreasonable. Once an express warranty is made, it is very
difficult to disclaim
 6. Limitations on Damages: Parties may include in their contract a
clause limiting the damages available in the case of breach of
warranty
a. Such a limitation won’t be upheld if it’s unconscionable
i. Warranty disclaimers that limit damages for
personal injury caused by breach of warranty on
consumer goods are prima facie unconscionable
ii. Some courts test warranty disclaimers by the
unconscionability standards
7. Timing - Disclaimers and Limitations in the Box:
a. To be effective, a disclaimer of warranty or limitation on
remedies must be agreed to during the bargaining
process
b. Although a few courts hold otherwise, most hold that a
warranty disclaimer or limitation on remedy included
inside the packaging of goods is not effective against the
buyer
8. Clickwrap: Computer software often comes with terms that
appear on the user’s computer screen during the installation
process, and the purchaser must click on agree to the terms before
installing
a. Such limitations and disclaimers typically are upheld on the
rationale that the purchaser can return the software if they
disagree with the conditions
vi. Buyer’s Damages for Breach of Warranty:
1. Difference Between Goods Tendered and as Warranted: The
measure of damages for breach of any warranty is the difference
between the value of goods accepted and the value of the goods as
as warranted, measured at the time and place of acceptance
a. If there are special circumstances, damages may be
measured differently to account for those circumstances
b. In addition the buyer can recover appropriate incidental and
consequential damages
2. Breach of Warranty Title: If the warranty of title is breached, the
goods are reclaimed by the true owner or lienholder, dispossessing
the buyer
a. The buyer may then rescind the contract, revoke acceptance
of the goods, or sue for damages
b. The value of the goods accepted is deemed to be nothing,
so the damages are the value of the goods as warranted
(often that is the same as the purchase price)
 3. Special Circumstances - Appreciation and Depreciation
a. If there are special circumstances, the value of the goods is
measured at the time of the dispossession rather at the time
of acceptance
b. A great appreciation (such as art) or depreciation (such as a
car) is the value of the goods from the time of delivery
until dispossession is usually considered a special
circumstance
vii. To Whom Do Warranties Extend: UCC Section 2-318 provides
alternative provisions for determining to whom warranty liability extends
beyond the initial buyer
1. Most states have adopted the narrowest provision, Alternative A,
which provides that the seller’s warranty liability extends to any
natural person who is in the family or household of the buyer or
who is a guest in the buyer’s home if it is reasonable to expect
that the person may use, consume, or be affected by the goods
and that person suffers personal injury because of a breach of
warranty

4. Delivery Terms and Risk of Loss: All contracts for the sale of goods require delivery of
the goods. A contract’s delivery terms are important because they determine when risk of
loss passes from the seller to the buyer if the goods are damaged or destroyed
a. Effect of Breach on Risk of Loss
 i. Defective Goods: If the buyer has a right to reject the goods, the risk of
loss doesn’t pass to the buyer until the defects are cured or the buyer
accepts the goods in spite of their defects. Note that a buyer generally has
the right to reject for any defect
ii. Revocation of Acceptance: If the buyer rightfully revokes acceptance, the
risk of loss is treated as having rested on the seller from the beginning to
the extent of any deficiency in the buyer’s insurance coverage
iii. Exam Tip: Because of the above rules, if a seller ships nonconforming
goods, it eliminates the importance of determining whether a contract is a
shipment or destination contract. If the goods are nonconforming, the risk
of loss remains on the seller
b. Noncarrier Case is a sale in which it appears that the parties did not intend that
the goods would be moved by a common carrier
i. If the seller is a merchant, risk of loss passes to the buyer only when they
take physical possession of the goods
ii. If the seller is not a merchant, risk of loss passes to the buyer upon
tender of delivery
c. Carrier Case is sale in which it appears that the parties intended the goods to be
moved by a carrier (for example when you order a book from a website) There are
2 types of carrier cases: shipment contracts and destination contracts
i. Shipment Contract: If the contract authorizes or requires the seller to
ship the goods by carrier but does not require them to deliver the goods at
a particular destination, it is a shipment contract and risk of loss passes to
the buyer when the goods are delivered to the carrier
1. In absence of a contrary agreement, UCC presumes a contract is
shipment contract
2. Seller’s Duties under Shipment Contract: In a shipment
contract, the seller must:
a. Make a reasonable contract with the carrier on behalf of the
buyer
b. Deliver the goods to the carer
c. Promptly notify the buyer of the shipment
d. Provide the buyer with any documents needed to take
possession of the goods
ii. Destination Contracts: If the contract requires the seller to deliver the
goods at a particular destination, the risk of loss passes to the buyer
when the goods are tendered to the buyer at the destination
iii. Common Delivery Terms
1. FOB stands for free on board. The letters FOB are always
followed by a location, and the risk of loss passes to the buyer at
the named location
 a. The seller bears the risk and expense of getting the goods to
the named location
b. These contracts can be either shipment contracts or
destination contracts, depending on the location named
2. FAS stands for free alongside. The term is generally used only
when goods are to be shipped by boat. Risk of loss passes to the
buyer once the goods are delivered to the dock
3. Exam Tip: All contracts for goods require an address for delivery.
Merely indicating an address for shipment does not make a
contract a destination contract. A contract that does not contain an
FOB term or any other term explicitly allocating the risk of loss is
a shipment contract

=
d. Risk in Sale or Return and Sale on Approval Contracts
i. Sale or Return: For the purpose of determining the risk of loss, a sale or
return contract (the buyer takes goods for resale but may return them if
they are unable to resell the goods) is treated as an ordinary sale and the
above rules apply
1. If the goods are returned to the seller, the risk remains on the
buyer while the goods are in transit
 ii. Sale on Approval: In a sale on approval (the buyer takes the goods for
use but may return them even if the conform to the contract) the risk of
loss does not pass to the buyer until they accept

e. Goods Destroyed Before Risk of Loss Passes: If goods that were identified
when the contract was made are destroyed (1) without fault by either party and
(2) before the risk of loss passes to the buyer, the contract is avoided (the seller’s
performance is excused)
i. If the goods were not identified until after the contract was made, the
seller in this situation would have to prove impracticability to be
discharged
ii. This is an exam favorite particularly on the essay portion
5. Insurable Interests and Identification: A buyer often bears the risk of loss before
receiving the goods purchased. To aid buyers in this situation, UCC gives buyers a
special property interest in goods as soon as they are identified as the ones that will be
used to satisfy the contract. This special property interest is insurable
6. Bilateral Contracts Formed by Performance: A contract may be formed by the parties
performance where the mirror image rule isn’t satisfied and under certain circumstances
under UCCs battle of the forms provision
a. In such cases under the UCC, the contract includes all of the terms on which the
writings of both parties agree. Any necessary missing terms are filled in by
supplemental terms provided for in the UCC
b. Compare - Common Law Last Shot Rule: The rule is different in common law
contracts. At common law, the contract includes the terms of the last
communication sent to the party who performed