CHAPTERCHAPTER McGraw-Hill/Irwin©2008 The McGraw-Hill Companies, All Rights Reserved Rules of Construction NINENINE

9-2 Objectives Chapter Objectives: Use vocabulary regarding the rules of construction properly Discuss the “four corners” doctrine regarding the interpretation of the contract Determine if the interpretation of the contract requires the application of business custom and usage of the trade Differentiate among the three types of customary or trade usage actions that affect the construction of the contract

9-3 Objectives Chapter Objectives: Explain the parol evidence rule and identify the types of evidence permitted or excluded by the parol evidence rule Differentiate between a partial and complete integration Evaluate whether a court would permit parol evidence in a variety of circumstances

9-4 This chapter will examine HOW courts interpret an agreement once its validity has been challenged Knowing these rules will allow the paralegal to understand WHY contracts are drafted in a certain way In order to avoid pitfalls after a problem has arisen, it is important to understand how contracts are read and understood by not only the parties, but the court Objectives

9-5 The guiding principle of contract law is certainty –The ability to rely on objective assurances to make a determination without doubt Guiding Principle

9-6 Freedom Of Contract –The doctrine that permits parties to make agreements on whatever terms they wish with few exceptions Guiding Principle

9-7 Four Corners Doctrine –A principle of contract law that directs the court to interpret a contract by the terms contained within the pages of the document Four Corners Doctrine

9-8 Four Corners Doctrine Courts follow certain general rules when reviewing a contract; these are arranged hierarchically The hierarchy is based on the idea that the most certain evidence of the agreement is considered first and the least reliable last

9-9 Four Corners Doctrine The four corners doctrine examines: −the writing as a whole, −then any modifications to the contract itself, −then any oral explanations of the terms (parol evidence)

9-10 Four Corners Doctrine There are problems associated with this kind of enforcement. It assumes that the contracting parties used precise language and that both parties subjectively understood the language in the same way

9-11 Plain Meaning Rule –Courts will use the traditional definition of terms used in a contract if those terms are not otherwise defined in the agreement –Every word in the contract is given its ordinary meaning and counts toward the interpretation of the contract Four Corners Doctrine

9-12 “Last in time = first in right” –A principle in law that favors the most current activity or change with respect to the transaction as it is most likely the most reflective of the intent of the parties Four Corners Doctrine

9-13 The cliché “ actions speak louder than words ” applies in contract interpretation –Where parties may express one intention in words and another in the way they act in carrying out their required performance under the contract (or in previous transactions), their actions will influence a court’s interpretation of the contract more than the actual words (or lack thereof ) Business Custom & Trade Usage

9-14 The cliché “ actions speak louder than words ” applies in contract interpretation –This rule applies to dealings between merchants —persons or businesses who “ hold [themselves] out as having expertise peculiar to the goods in which [they] deal and [are] therefore held by the law to a higher standard of expertise than that of a nonmerchant. ” BLACK’S LAW DICTIONARY (8th ed. 2004). Business Custom & Trade Usage

9-15 There are three distinct actions that will bind parties to a commercial contract: 1.Course of performance 2.Course of dealing 3.Usage of the trade They are listed in the order of preference as well. Courts like to look to how the parties have acted on the contract in question prior to the dispute Business Custom & Trade Usage

9-16 Course of Performance –The parties’ actions taken in reliance on the particular transaction in question Course of Dealing –The parties’ actions taken in similar previous transactions Usage of the Trade –Actions generally taken by similarly situated parties in similar transactions in the same business field Business Custom & Trade Usage

9-17 Parol Evidence –There are instances where the contract cannot speak for itself due to inconsistencies, illogical interpretations, or omissions –Where the contract’s voice is uncertain, another voice must tell the court what the language of the contract means. This “outside voice” is parol evidence Parol Evidence

9-18 Parol Evidence Rule –A court evidentiary doctrine that excludes certain types of outside oral testimony offered as proof of the terms of the contract Parol Evidence

9-19 Explanatory Evidence –Oral testimony is permitted to clarify the terms of the contract Contradictory Evidence –Evidence which is in conflict with the terms of the contract and inadmissible under the parol evidence rule Parol Evidence

9-20 Partial Integration –A document that contains the essential terms of the contract but not all the terms that the parties may have or need to agree upon Complete integration –A document that contains all the terms of the agreement and the parties have agreed that there are no other terms outside the contract Parol Evidence

9-21 Supplemental evidence which adds to, but does not contradict, the original agreement is admissible under the parol evidence rule Parol Evidence

9-22 Parol evidence is allowed to explain: –Defects in formation Errors or omissions made during the negotiations that function as a bar to creating a valid contract Parol Evidence

9-23 Parol evidence is allowed to explain: –Consideration to show that the subject matter of the contract as received was not as it was bargained for Parol Evidence

9-24 Parol evidence is allowed to explain: –Technical terms, specifications, or trade/business custom to explain the meaning of special language in the contract as the parties understood it if the plain ordinary meaning of the language was not intended or was ambiguous Parol Evidence

9-25 Merger Clause –The parties may choose to include an integration or merger clause that says the parties agree that the written document is all there is and it incorporates every part of the parties’ agreement –Everything that they have negotiated for has been merged into the contract. The parties by their own terms have excluded parol evidence Parol Evidence

9-26 Summary When a contractual dispute arises, the court can look to rules of construction for guidance to assure that determinations are consistent and parties have a measure of certainty with regard to the outcome of the cases

9-27 Summary First, courts look within the four corners of the document Second, merchants may rely on business customs and trade usage as an aid to interpretation Lastly, the rather difficult-to-apply parol evidence rule excludes certain outside material from bearing on the interpretation of the contract

9-28 Summary Parol evidence rule excludes certain outside material 1.Excludes all contradictory evidence 2.Permits all explanatory evidence where there is an ambiguity as to the terms in the contract 3.Sometimes permits supplemental evidence depending on the nature of integration. Supplemental evidence is permitted where there is a partial integration and excluded where there is a complete integration

9-29 Summary Parol evidence rule excludes certain outside material: 4.Permits evidence of the formative defect — the failure of the meeting of the minds 5.Permits evidence of failure of consideration 6.Permits explanatory evidence relating to an unambiguous yet particular technical term, specification, or trade/business custom