Contracts Class Notes 1/27/04

Here we have a lease for growing wheat from a landlord to a tenant. It’s written down. It’s brief and fully written down. Stafford agrees to rent to Hatley a certain number of acres at a certain price per acre. Stafford has a buy out option.

Stafford seeks to exercise the buy out at the terms in the written agreement, and Hatley doesn’t like that at all. His wheat crop is going to be worth a lot more than the price agreed to in the written agreement. Hatley claims that it was agreed orally at the time of the agreement that the buy out option would terminate 60 days at most after the beginning of the lease. Thus, Hatley claims the buy out option was dead and Stafford is trespassing. Hatley claims that he should be paid the market value of his wheat.

The problem is whether Hatley is able to prove the oral agreement that the buy out option was to end in the middle of December. The position taken by the defendant is that the parol evidence rule prevents such proof, and therefore only the writing is effective. That would mean Stafford can buy out Hatley at $70 per acre. The trial court lets Hatley introduce evidence of the oral agreement.

But we might object: Why didn’t the parties just put it in writing? If not using the buy out option after 60 days is important to Hatley, why did he sign a writing without that provision in it?

Even when both parties to a contract have lawyers and sign elaborate agreements, there will always be things that aren’t expressed in the writing.

It doesn’t seem to make commercial sense to let someone buy a crop worth $400 an acre for $70 an acre. That suggests that there really was an oral agreement. Also, consider the payment terms for the rent. The rent is $50 per acre and there are 52 acres. The total rent will be $2600. $1800 was to be paid on January 20, with the remaining $800 to be paid on September 20. If the buy out happens, that’s $3640. If you exercise the option in June, then the landlord already has $1800 in his pocket, and then pays the option. It seems highly unlikely that the buy out option would have made any commercial sense unless it would terminate at some point between January 20.

It is highly unlikely, in other words, that the parties would have agreed to something that just doesn’t make any sense. The tenant could get bought out whether or not he had already paid most of the rent. Also, the writing seems to be pretty incomplete. The parties must have thought there was some relationship between the payments and the buy out provision. The writing seems only to cover some terms of the agreement; others are merely oral.

Should Mr. Hatley be held accountable for failing to include his intention in the writing? Should he be punished? These are two unsophisticated guys. They wrote down some things, but not everything. What are we trying to do? We’re trying to protect the justifiable expectations of the parties. According to Clovis, it was not justifiable for Stafford to expect that he could do the buy out in the way he did, but it was justifiable for Hatley to expect he could grow and sell his wheat.

The Oregon court tends to take the Corbin-type liberal position. The writing is not given a “magic”, unique and compelling force. Instead, the Oregon court concentrates on the intent of the parties. That’s the intent of the Restatement, Second and UCC § 2-202. The former is more recent than the latter and takes some of its ideas from it.

Restatment Second §§ 209, 213, 214 and 216

Let’s apply these sections to both Mitchill and Hatley. These two cases are more or less couched in old-fashioned Restatement First language.

The first question to ask, per § 209, is: Do we have integration (an integrated agreement)? An integration is a writing which finally expresses at least one term of an agreement. Parties negotiate, make offers and counteroffers, talk on the phone, write back and forth, but after the agreement is reached, it is reduced to writing in many situations. When you have a writing that gives a final shape to at least one term of the agreement, we call it an integration.

Also check out § 213 and the parol evidence rule itself: A binding integrated agreement discharges prior agreements that are inconsistent with it, because they have been abandoned. Those prior agreements are integrated into the writing, and are therefore irrelevant. This is a fundamental idea to the parol evidence rule, but it can be difficult to apply.

But how do you know if you have an integrated agreement? § 209 (2) says this is a question for the court, that is, the judge and not the jury. The judge does this before interpreting the writing (see § 212). Generally, interpretation is also a task for the judge and not the jury.

The judge decides if we have an integration, decides what the written words mean, and then the judge applies the parol evidence rule.

If the agreement is integrated, it discharges prior inconsistent agreements. If the agreement is completely integrated, prior agreements within its scope are discharged.

The parol evidence rule allows evidence to come to the judge. The judge is able to hear evidence out of the earshot of the jury. Then the judge can decide whether the testimony ought to be admitted or not. The judge first decides if there’s an integration, then interprets it, then decides whether we have parol evidence inconsistent with the integration or within the scope of that agreement.

So if you were applying the Restatement to the cases we’ve gone over, we would first ask the question: Do we have integrations? Clovis says the answer in both of the last two cases, the answer was clearly yes. Both writings apparently had a final expression of price, for example.

What about negotiations in regard to removing the ice house in Mitchill? Check out § 216. Evidence of a consistent additional term is admissible to supplement an integrated agreement unless the court finds that the agreement was completely integrated.

Two kinds of integrations

There seem to be two kinds of integrations: a partial integration and a complete integration.

A parial integration is a final expression of some of the terms of the agreement, but not all of them. A complete integration is a final expression of all of the terms of the agreement.

If, in either of these cases, we have a partial integration, the additional terms will be allowed to come in because they are not inconsistent.

This doctrine is very complicated! A smart and artful judge can manipulate the parol evidence rule as an instrumentality to screen out testimony the judge doesn’t believe or to speed a case through the system.

Whether an integration is complete is a matter of the intention of the parties.

One thing that might make an agreement completely integrated is a clause that repeatedly appears in form agreements: “It is understood that this contract contains all of the terms and conditions agreed upon between the parties and that there are no outside agreements.” This is called an integration or merger agreement. It’s designed to make something a complete integration. It will sometimes work, but sometimes it won’t.

Do we have a partial or a complete integration in Mitchill? The court doesn’t say, but usually a Board of Realtors form would be used that would have an integration agreement included. In Mitchill, the court quotes some language that has sounds like standard boilerplate. The writing probably wasn’t carefully done to deal with this particular deal. Instead, this was a standard form that’s usually more or less fair. However, forms like this don’t necessarily indicate much thought about the particular deal in question. A standard form wouldn’t consider the possibility that there would be some question about an ice house on Lt. Governor Lunn’s land. So was the integration complete or partial?

Check out the Restatement § 214. Prior agreements and negotiations are admissible (to the judge) to show whether or not a writing is an integration and whether or not it’s complete. This is a pretty Corbiny approach with a big interest in protecting the justifiable expectations of the parties. Clovis admits that he is pretty Corbiny.

In practice, you hear the phrase “the writing speaks for itself” very often. This is sort of a Willistonly phrase. But what does that mean? You could translate this into Restatement Second/Corbin terms: you could say that the contract was a complete integration, that the oral term is inconsistent with the written agreement, the oral term is within the scope of the written agreement, the oral term doesn’t bear on the interpretation of the written agreement, and the oral term would not naturally be omitted from the writing. You can get this from Restatement §§ 209-210 and 213-216.

Usually, though, a contract includes a writing and some stuff that’s outside the writing. If you believe the stuff outside the writing, you’ll tend to consider it part of the contract.

Hayden v. Hoadley

The defendants promised in a writing to make certain repairs on a house and barn. The plaintiffs weren’t satisfied and sued. The defendants wanted to prove some oral agreements that supposedly went along with the writing. They wanted to show that they would have until October 1^st to finish and they would only have to spend a maximum of $60.

Was there anything in the writing about when they must be finished or how much is to be spent? Nope. What is contradicted if the parol evidence is permitted? Under the written agreement, when were the defendants to finish the job? One answer is: “We don’t know.” That might make the contract unenforceable for being too vague, but that’s not going to happen. People often forget to put stuff in agreements, and to fix that we have gap-filling provisions in the common law and Article 2. For example, we might read in the requirement to finish within a “reasonable time”, or the requirement to do the work in a “workmanlike manner”. These gap-fillers help turn non-contracts into contracts. But on the other hand, these gap-fillers are usually only effective when there hasn’t been an agreement to the contrary. In this case, there is an agreement to the contrary.

This court uses gap-fillers to destroy the agreement that actually seemed to be made!

What does the Restatement Second have to say? Comment (b) for § 216 says that you have to consider the consistency of additional oral terms in light of all the circumstances. The meaning of the writing includes not only express terms, but also terms implied by the bargain of the parties in fact. But we don’t include gap-filling rules that the parties didn’t agree to. This directly contradicts Hayden v. Hoadley.

We’ll think about UCC § 2-202 in terms of the problem that was handed out yesterday. § 2-202 is the source of much of what is in the Restatement Second. It states the parol evidence rule in a succinct way in one long, complicated sentence. It was very carefully drafted.

The UCC says that the parol evidence rule will exclude any agreement prior to the integrated agreement.

It is clear that the parol evidence rule nowhere bars an agreement subsequent to the writing. It would be a fundamental error to exclude from evidence a subsequent agreement. It may have other problems, like failing the statute of frauds or lacking consideration, but the parol evidence rule won’t kill it.

The parol evidence rule in the UCC does not bar evidence of an agreement subsequent to the writing.

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