Chapter 5: Ascertaining, Interpreting and Supplementing the Agreement, p.365

1. Chapter 5: Ascertaining, Interpreting and Supplementing the Agreement, p.365 • What was agreed to by the parties-what rights and obligations were created? Those questions are the business of interpretation and construction. However, before considering what a Kx may mean, it must first be decided what terms are included in it. That is the business of the Parole Evidence Rule: to what extent may evidence be introduced that the parties had agreed to terms that did not find their way into the agreement in its final written form?

2. Parole Evidence Rule • Gianni v. Russell, p.368 Oral promise that Gianni would have exclusive right to sell soda Russell Gianni (1) Oral promise not to sell tobacco Lease Kx (promise to pay rent for promise of possession) (2) Russell Gianni Written prom is lease not to sell tobacco

3. Parole Evidence Rule • The question, of course, is whether the term, exclusive right to sell soda, is part of the Kx, though it did not appear in the final writing (the Lease Kx) of the parties? Note, this is not an evidentiary question about whether the oral promise of the exclusive right was actually made; rather, the question is whether the oral term should be part of the Kx though it did not find its way into the written Kx.

4. (Gianni v. Russell) • Note where the Kx Analysis is effected: • Kx Formation • Enforcement • Performance and Breach • Gianni alleges breach by Defendant, Russell, “allowed others to sell soda which you had promised me the exclusive right to sell” If the exclusive selling privilege is part of the Kx, Russell has no response to breach. If the oral promise of the exclusive right is not included, Russell’s response to Plaintiff’s allegation of breach is, “No Breach, Compliance: I was under no duty to provide you the exclusive right to sell soda”

5. (Gianni v. Russell) Parole Evidence Rule • What does the Rule do? The PER excludes parole or extrinsic evidence (extrinsic to the final written agreement of the parties). Under the rule, parole (extrinsic) evidence cannot be introduced to prove a term in addition to those in the writing or that conflicts with the terms in the writing, where such term was made prior to, or contemporaneously with, the final written agreement. Effectively, the PER rules out transactional history, viz, preliminary and contemporaneous negotiations.

6. (Gianni v. Russell) Parole Evidence Rule • What is the object of the PER? To give effect to the intentions of the parties as evidenced in their final agreement, rather than negotiations Give finality to avoid endless rounds of debate over terms that were considered and negotiated away.

7. (Gianni v. Russell) • Parole Evidence Rule: 2 Steps First, Does the PER apply? • There must be a final written agreement of the parties; that is, the PER has no application to oral Kx’s • As noted above, the PER applies only to exclude evidence of events that occurred preliminary to or contemporaneous with the execution of the final written Kx. That is, Rule does not relate to evidence regarding events after the final written agreement is executed. • Does the parole evidence sought to be introduced add to or contradict the final written Kx? The rule does no apply to exclude evidence that would clarify the Kxor resolve ambiguities

8. (Gianni v. RussellParole Evidence Rule) • Parole Evidence Rule Next, is the evidence excluded by the PER? (4) Is the Kx “Entire (“Fully Integrated”) or only partially integrated? (I.e., Is the final written Kx complete as to the subject matter covered?) If the Kx is not fully integrated, the evidence is not excluded under the Rule.

9. (Gianni v. Russell) • Returning, then, to the case, does the PER apply and, if so, does it preclude Gianni’s introducing evidence of Russell’s oral promise to grant Gianni the exclusive right to sell soft drinks? Does the Rule Apply? (1)There was a final written agreement between the parties (the Lease Kx) (2)The term Plaintiff wanted to prove-up through parole evidence was ex ante of the final written Kx/Lease (Gianni alleges the oral promise occurred in the course of negotiations prior to the final written Kx of the parties) (3) The term (exclusive right to sell soda) was an additional term that did not appear in the final writing.

10. (Gianni v. Russell) The PER applies. Next, is the evidence of the term granting Gianni the exclusive right to sell soda precluded by the PER? (4) Was the Kx fully integrated/Entire, or only partially integrated? This is the crux of the matter in the case—whether the Lease Kx was entire, such that Gianni’s evidence of the oral promise of the exclusive right to sell soda was excluded and not part of the Kx

11. (Gianni v. Russell) • A Kx is entire if the subject matter of the parole evidence is covered in the writing. Of course, whether a subject is ‘covered’ depends in large part on how broadly one defines the ‘subject’. • In the case, what did the court say was the subject of the parol evidence Gianni wished to introduce? • The court said the lease covered the use of the leased space, and the sale of soda was a matter within that subject

12. (Gianni v. Russell) • What is the next part of the court’s analysis? See paragraph 5, p.369 • The next step in the analysis focuses on whether the parol agreement “comes within the field embraced by the written one” (Is the term in the writing on the same subject and the term sought to be proved by parol evidence so closely related that the parties would naturally have included the parol term in the agreement?). • What is the rationale for this test?

13. (Gianni v. Russell) Rationale: if the parol and written terms covering the same subject are so closely related that it would have been natural for the parties to include the terms in the writing, than the fact that they did not suggests they intended to exclude it. How does the test and rationale apply here? The discussion of exclusive rights within the leased area would naturally have been included in the written lease along with the discussion of limitations on use (“no tobacco”). The absence of reference to selling soda indicates the parties had negotiated the point away.

14. Masterson v. Sine, p.371 • The Mastersons conveyed his ranch to his sister and brother in law, the Sines, reserving an express option in the deed to repurchase the property at the same price as the initial sale. In the course of negotiations, the Mastersons orally indicated that the option was to be personal to Masterson and not assignable to third parties. The limitation was calculated to keep the ranch in the Masterson family. • Masterson is now in bankruptcy, such that the bankruptcy trustee wishes to exercise the option to bring the property into the bankruptcy estate to be liquidated and the funds distributed to Masterson’s creditors.

15. (Masterson v. Sine) • To keep the ranch out of the bankruptcy estate, it is argued that the option was personal to the grantor (Masterson) although the limitation did not appear in the written agreement (the deed). On its face, the option was freely alienable. What evidence do the Sines wish to introduce? Does the PER apply to that evidence?

16. (Masterson v. Sine) • The Sines wish to introduce oral (parol) evidence that the option was to be personal to Masterson and not assignable. As such, it would be out of the reach of the bankruptcy trustee. How does the analysis under the PER proceed? • Does the PER apply • There was a final writing of the parties in which an agreement was reached (i.e., not just a draft or written embodiment of negotiations), namely, the deed containing the repurchase option. • The parol evidence to be introduced—the oral limitation on assignability--regards an event arising before or at the same time the writing was executed. • The parol evidence would either add to (Majority) or contradict (Dissent) the terms of the written agreement (the deed

17. (Masterson v. Sine) • Given that the PER applies, is the evidence the Sines wish to introduce precluded by the Rule? • On its face, the agreement/deed appears to be fully integrated; that is, the subject of the repurchase option is covered. • Recall from Gianni, if the Rule applies, parol evidence is excluded where the writing is Entire (fully integrated), whether the term to be proved up is an addition to the writing or contradicts it. • Recall the test under Gianni to decide whether a writing is Entire? • Was the subject matter to which the parol evidence refers covered in the writing; and, if so, would the parties naturally have included the term in the written agreement

18. (Masterson v. Sine) • Under the Gianni expression of the test for full versus partial integration, would the deed in Masterson be fully or partially integrated? • The question would be, “Would it have been natural for the parties to include any limitations on assignment of the repurchase option in the writing containing the option?

19. (Masterson v. Sine) • It would seem the writing was fully integrated using the Gianni test. Does the Masterson court find the deed to be fully integrated? How does test expressed by the Masterson differ from the test for full integration used in Gianni? • The difference is subtle, but significant. Under Masterson, the inquiry is: “might the term naturally have been part of a separate agreement, or certainly included in the final writing?”

20. (Masterson v. Sine) • To bring the distinction between the Gianni and Masterson versions to bold relief . . . • Gianni: would it have been natural to include the term to be proved-up by parol evidence in the writing? Or, would it have been unnatural to include it in the writing? • Masterson: would the term to be proved-up have certainly been included in the final writing? Would it have been unnatural to deal with it separately? Which expression of the test for full integration would most often admit parol evidence?

21. (Masterson v. Sine) • The oral evidence of the limitation on assignability of the option in the Masterson deed would likely have been excluded under Gianni on the basis that the writing, the deed, was fully integrated. On the more liberal test in Masterson, the writing was not fully integrated. • What facts moved the Majority to find partial integration—recall the writing was in the form of a deed.

22. (Masterson v. Sine) • Because the writing in Masterson v. Sine was found to be partially integrated, the case presents another layer of analysis that does not exist in the Gianni case where it was found that the writing was Entire. Read Restatement Sections 215 and 216. Those provisions, with which Masterson v. Sine is consistent, is represented graphically in the next slide.

23. (Masterson v. Sine) • Where the final writing of the parties is partially integrated, evidence of additional or supplementary terms may be introduced. However, evidence of contradictory parol terms may NOT be introduced. Final Written Expression Partially Integrated Fully Integrated Additional terms OK Contradictory Terms Excluded Evidence of Additional or Contradictory Terms Excluded

24. (Masterson v. Sine) • The Majority concludes the writing is partially integrated regarding the assignability of the repurchase option. What is the second issue to be resolved? • The question is whether the matter of assignability of the repurchase option was an additional term that would supplement the writing or a contradictory term.

25. (Masterson v. Sine) • The Majority says the subject of limitation on assignability is separate from the subject of the existence of the repurchase option. The latter was covered in the writing, the former was not. • Since assignability was not treated in the writing the limitation on assignment was an additional term, not a contradictory one. Given that the term was additional, and given that the written agreement was partially integrated, parol evidence of the limitation was admissible.

26. (Masterson v. Sine) • The Dissent asserts that even if the written deed is partially integrated, the oral limitation on assignment of the repurchase option is not an additional term, but a contradictory term. • The writing makes no mention of assignability of the option. How, then, according to the Dissent, does the limitation on assignability contradict the writing? • Kx law presumes purchase options to be assignable unless the agreement creating them expressly states otherwise. Thus, introducing a limitation on assignment is to contradict an express option which is absolute on its face.

27. Note (3)Merger Clauses • A merger clause (e.g., “This writing represents the final agreement of the parties” or like language) is powerful evidence that the parties intended the writing to be fully integrated. The general rule is that such clauses are conclusive of the issue; however, there is a recent trend to find merger clauses are only probative, but not conclusive, of the parties’ intent. The trend is likely in response to the unconscionable use of merger clauses in form Kx’s, especially in consumer transactions.

28. Bollinger v. Central Pa. Quarry, p.377 • The Bollingers sue to reform the Kx with Central to include a paragraph obligating Central to remove topsoil placed on their property. According to the Bollingers, the clause had been agreed to orally, but, by mutual mistake, did not appear in the written agreement between the parties. • Central essentially avers it is in compliance with the Kx which, in its final written form, contained no clause regarding removal of the topsoil. On Central’s argument, the oral agreement regarding removal would be precluded by the PER.

29. (Bollinger v. Central Pa. Quarry) • Does the court conclude that the PER applies but that the evidence is not precluded by the PER? • No. The court relies on an exception to the PER, namely, the PER does not apply in the case of mutual mistake or fraud. What facts were relevant in the court’s determination that the parties had inadvertently omitted the clause in the writing? • See paragraph 3, p.378.

30. Objective Interpretation And Its Limits, §5, p.421 • Raffles v. Wichelhaus Promise to sell cotton Wichelhaus(Seller) Raffles (Buyer) Promise to buy cotton “To arrive Peerless”

31. (Raffles v. Wichelhaus) 2. Kx Formation Most of the case consists of the pleadings of the parties—only the first few lines of the per curiam opinion indicates what the court seems to be holding. Defendant, Buyer, meant the October Peerless, while Plaintiff, Seller, meant the December Peerless. The case demonstrates the subjective theory of Kx in operation. Did the court find a Kx formed? No—no “meeting of the minds”

32. (Raffles v. Wichelhaus) 2. Kx Formation With the demise of the subjective theory, would there be Kx? Recall, what is required—an Offer, ala§24, and an Acceptance, ala§50. On the modern view, then, we would find Kx. That said, there is an ambiguity in the Kx in Raffles. There are two varieties of ambiguity: latent and patent. Patent Ambiguity: where the ambiguity is apparent on the face of the writing. For example, assume a writing that states, “The attorney told his client he needs more information”. Who needs more information—the attorney or his client? Latent Ambiguity: where the ambiguity is not apparent from the face of the writing, but becomes apparent in consideration of information outside the writing (*Note-parol evidence is always admissible to prove a term in a written Kx is ambigous: i.e., the PER does not apply).

33. (Raffles v. Wichelhaus) (Example of latent ambiguity) The term, “Peerless” is an example of a latent ambiguity. On its face, there is nothing ambiguous about the term. It becomes ambiguous, however, on introduction of evidence that there are two such ships—one sailing in October, one in December.

34. (Raffles v. Wichelhaus) 2. Kx Formation: If the Kx contains an ambiguous term, latent or patent, the ambiguity must be resolved to determine the obligations of the parties under the Kx. Assuming Kx, then, where in the analysis does the matter of the ambiguity arise? 3. Enforcement (no bars to enforcement) 4. Performance and Breach

35. (Raffles v. Wichelhaus) 4. Performance and Breach Allegation of Breach: Plaintiff (Seller) alleges: “Breach by Defendant, Buyer, did not take and pay for cotton” Response: by Defendant (Buyer): No Breach, compliance. I agreed to take an pay for cotton delivered aboard the October Peerless” To determine if the Buyer is in breach or can successfully respond he was in compliance, it is necessary to resolve the ambiguity, to interpret the term, “Peerless”.

36. (Raffles v. Wichelhaus) (4. Performance and Breach) • Here, the “objective theory” resurfaces. Recall Lucy v. Zehmer: there the question was whether the Zehmers had made a serious offer to sell their farm to Lucy, or whether they were joking. The court found that, objectively viewed, the offer was serious: the undisclosed subjective intent of the parties (the Zehmers) was irrelevant. A reasonable person would have concluded, serious offer. • If we bring the objective theory, in its strong form, to bear in deciding what the term, Peerless, meant, how would the analysis proceed, and what would be the result?

37. (Raffles v. Wichelhaus) Deploying the Objective Theory to resolve ambiguity • The objective theory would assign meaning to the term with reference to what a reasonable person would conclude, matching it to the meaning assigned to the term by one of the parties. For instance, if objectively it was determined that the term, Peerless, meant the October Peerless, that determination would align with the buyer’s meaning in the case, and the buyer’s meaning would prevail (no breach, compliance). • How does the Restatement handle ambiguous terms? See §20. • We will take up the matter of Kx interpretation again later in the course in the context of Mistake.

38. Chapter 6 Limits on the Bargain and its Performance, p. 453 • With the material in this chapter, we resume part 4 of the analysis, Enforcement, with the exception of the first three cases. • Recall from the introductory materials on policing, three categories emerged: policing based on status of the parties (e.g., minority); policing based on behavior (e.g., duress); and policing based on substance. The latter suggests policing of individual transactions as to the substance of the Kx itself for fairness. The latter notion, of course, runs counter to fundamental principles of Kx law concerning substance, which is to leave the matter of what is or is not a ‘good deal’ to the parties. That principle is at work in the basic rule that courts will not inquire into the value of consideration—there is consideration for there is Kx or there is not.

39. (Chapter 6 Limits on the Bargain and its Performance) • While courts will not inquire into the relative value of consideration in determining whether a Kx has been formed. Similarly, neither will a court declare a Kx unenforceable solely on the grounds that the consideration received by one party is far more or less valuable than that received by the other. • That said, there are occasions where, using “conventional controls” (something short of evaluating consideration and declaring a Kx unenforceable where one party got too good a deal) courts may avoid a Kx which is substantively unfair. Section 1. of the materials deals with such cases.

40. Chapter 6, Section 1. Unfairness, p.454 McKinnon v. Benedict • The agreement: • McKinnon loaned $5,000 to the Benedicts (which they used to purchase the summer camp) and promised to help get business for the endeavor. In exchanged, the Benedicts agreed not to cut trees between the camp and McKinnon’s vacation property, and not to make improvements closer than extant buildings, for twenty five years.

41. (McKinnon v. Benedict) • McKinnon is seeking an injunction equitable relief. In general, a basic presumption regarding Kx remedies is that money damages will make a Kx’ing party whole. Equitable relief, e.g., injunction, specific performance) is considered extraordinary. • Kx Formation-no problem • No bars to enforcement

42. (McKinnon v. Benedict) • Performance in Breach • McKinnon alleges: Breach by Benedicts, made improvements in violation of the covenant • Benedicts Response: no response to the allegation of breach

43. (McKinnon v. Benedict) • We know that courts will not evaluate the substance of a bargain, the relative value of consideration received on each side, in deciding whether a Kx was formed. There is consideration for Kx or there is not, and there is no additional requirement that consideration be adequate or sufficient. • Does the McKinnon court depart from that basic principle, declare that the consideration the Benedicts received was inadequate for Kx formation?

44. (McKinnon v. Benedict) • No. There is Kx. • What, then, justifies the court’s commenting on the adequacy of consideration? • Look to the remedy McKinnon seeks: specific performance and injunction. • Equitable relief, again, is extraordinary. The party seeking it must demonstrate why money damages aren’t sufficient to make the party whole. In deciding whether to grant specific performance and injunction for the Benedicts’ breach, what did the court take into account?

45. (McKinnon v. Benedict) • The court considered what the Benedicts received under the agreement: a loan of $5,000 (which they repaid), and a promise of help in getting their business going (which proved to be sporadic and largely inconsequential). The court also considered the benefit to McKinnon of specifically enforcing the Kx as against the hardship to the Benedicts.

46. (McKinnon v. Benedict) • In deciding whether to grant specific performance or injunction, the court will balance the benefits to the party seeking the remedy and the cost to the party against whom the equitable relief will be enforced, all in light of the consideration received. See second full paragraph, p.456. • If adequacy of consideration is irrelevant to the question of Kxformation, it may be relevant where the complaining party seeks extraordinary relief—gross inadequacy of consideration may, indeed, become relevant at other points (e.g., Remedy) in the Kx Analysis.

47. (McKinnon v. Benedict) • Final Note: McKinnon did, indeed, state a cause of action for breach of Kx: Kx formed, no bars to enforcement, breach with no response. All that remains is to decide on the remedy for breach. Couldn’t McKinnon have plead for money damages? Why didn’t he? What would be his recovery?

48. Tuckwiller v. Tuckwiller, p.458 • Tuckwiller promised to take care of her ill and aging aunt (Morrison) for life, in exchange for her aunt’s promise to will her farm to Tuckerwiller. Three days later, Morrison became ill and, except for four days during which Tuckwiller cared for her as agreed, was hospitalized until she died a few weeks later. Morrison had not changed her will. Tuckwiller sued Morrison’s executor for specific performance. • Kx Formation? No problems • Enforcement • Does the SF apply to this transaction? What is satisfied?

49. (Tuckwiller v. Tuckwiller) Performance and Breach Breach by defendant, Morrison, did not will the farm to Tuckwiller Response: None Remedy: Tuckwiller seeks specific performance, an equitable remedy, on the basis that money damages will not adequately compensate her. Indeed, real property is regarded to be unique, such that money damages are presumed inadequate as a remedy. That said, recall from McKinnon v. Benedict, that a plaintiff will be denied equitable relief where the Kx is unfair—as where the consideration is grossly inadequate—and where the costs of granting that relief outweigh the benefits. Mrs. Tuckwiller cared for Morrison for a few days only, while the Morrison’s farm was valued at about $34,000. Wasn’t the consideration for Morrison’s promise to convey her farm trivial in comparison, i.e., grossly inadequate, such that Tuckwiller should be denied specific performance as a remedy? What does the court hold, and what is the rule of the case?

50. Black Industries, Inc. v. Bush, p.460 • The argument that the middleman, Bush, was cheating the U.S. Government failed. Apart from that, what is Black Industries arguing? • BI seems to be arguing that the compensation for Bush—fees, essentially, for brokering the Kxwith the U.S.—was excessive.