Contract content and meaning - Omitted and implied terms

Learning Outcomes

This article explores how courts determine the terms of a contract when disputes arise, focusing on the Parol Evidence Rule and implied terms. After reading this article, you will understand how courts assess whether a writing is finalized, when extrinsic evidence is admissible to explain or supplement a contract, and how terms like good faith, UCC warranties (merchantability, fitness, title), and UCC gap fillers are incorporated into agreements, enhancing your ability to answer related MBE questions.

MBE Syllabus

For the MBE, you are required to understand the rules governing the content and interpretation of contracts. This includes knowing when extrinsic evidence is admissible and what terms may be implied into an agreement. You should be prepared to:

  • Analyze the Parol Evidence Rule (PER) and its effect based on the level of consolidation (complete or partial).
  • Identify situations where PER does not apply (e.g., interpreting ambiguity, showing defenses, conditions precedent).
  • Recognize the role of course of performance, course of dealing, and usage of trade in interpreting contracts, especially under the UCC.
  • Apply the implied duty of good faith and fair dealing.
  • Understand the creation, scope, and disclaimer of UCC implied warranties (merchantability, fitness for a particular purpose, title).
  • Identify how UCC gap-filler provisions supply omitted terms (e.g., price, delivery).

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

  1. Buyer and Seller sign a detailed written agreement for the purchase of 1,000 widgets, which includes a merger clause. Buyer now claims that prior to signing, Seller orally promised a 10% discount for prompt payment, a term not in the writing. Evidence of this oral promise is likely:
    1. Admissible because it is an additional consistent term.
    2. Admissible to show the true consideration for the contract.
    3. Inadmissible under the Parol Evidence Rule because the writing is completely finalized.
    4. Inadmissible unless the promise constituted fraud in the inducement.
  2. Which term will the UCC generally supply if a contract for the sale of goods fails to specify it?
    1. Quantity.
    2. Subject matter.
    3. A reasonable price.
    4. Names of the parties.
  3. Buyer, needing durable boots for mountain climbing, tells Seller, a shoe store owner, "I need the toughest boots you have for climbing Mt. Colossus next month." Seller recommends "Ironclad Boots." Buyer relies on this recommendation, purchases the boots, and they fall apart on the climb. Which warranty has Seller most clearly breached?
    1. Express warranty.
    2. Implied warranty of title.
    3. Implied warranty of merchantability.
    4. Implied warranty of fitness for a particular purpose.

Introduction

Disagreements often arise not over whether a contract exists, but over what its terms require. Parties may have different recollections of oral agreements, or a written contract might be ambiguous or silent on a key issue. This article examines two primary areas courts use to resolve these disputes: the Parol Evidence Rule (PER), which limits the use of extrinsic evidence to alter a written contract, and the doctrine of implied terms, where courts read terms into contracts either by law (like the duty of good faith or UCC warranties) or to fill gaps left by the parties (UCC gap fillers).

The Parol Evidence Rule (PER)

The Parol Evidence Rule limits the admissibility of extrinsic evidence of prior or contemporaneous oral or written negotiations and agreements when offered to contradict, vary, or add to the terms of a written contract intended by the parties to be the complete and final representation of their agreement.

Key Term: Parol Evidence Rule (PER) A rule that restricts the use of prior or contemporaneous extrinsic evidence to contradict, modify, or supplement the terms of a written agreement intended to be the final consolidation of the parties' deal.

The PER applies only when the parties have adopted a writing as a finalized agreement. The degree of finalization determines the rule's effect.

Key Term: Finalization The degree to which a writing represents the parties' final agreement. A complete finalization is intended as the final and exclusive statement of all terms. A partial finalization is final as to the terms included but might not cover all aspects of the agreement.

  • Complete Finalization: If a writing is intended as the complete and exclusive statement of the parties' agreement, the PER bars extrinsic evidence of prior or contemporaneous expressions that contradicts, varies, or adds to the terms in the writing. A merger clause (stating the writing is the entire agreement) is strong evidence of complete finalization.
  • Partial Finalization: If a writing is intended to be final only as to the terms it contains, it is partially finalized. Extrinsic evidence is admissible to supplement the writing with consistent additional terms, but evidence that contradicts the written terms is barred.

Exceptions to the PER

The PER does not bar extrinsic evidence offered for purposes other than contradicting or adding to the finalized writing. Key exceptions include:

  1. Interpretation: Evidence is admissible to resolve ambiguities in the writing. If a term is reasonably susceptible to multiple interpretations, extrinsic evidence (negotiations, trade usage, etc.) can clarify the intended meaning.
  2. Subsequent Agreements: The PER applies only to prior or contemporaneous expressions. Evidence of modifications made after the execution of the writing is not barred by the PER (but may need to satisfy other requirements like consideration or the Statute of Frauds).
  3. Collateral Agreements: Evidence of a related agreement between the parties is admissible if it does not contradict the main writing and concerns a subject that might naturally be omitted from it.
  4. Defenses to Formation/Enforcement: Evidence showing that the agreement is invalid or unenforceable (e.g., fraud, duress, mistake, illegality, lack of consideration) is admissible. The PER assumes a valid written agreement exists; it doesn't prevent proof that it doesn't.
  5. Conditions Precedent to Effectiveness: Evidence of an oral condition precedent to the entire contract becoming effective is admissible, provided it does not contradict the writing's express terms.
  6. Reformation: Evidence offered to show that the writing, due to mistake (e.g., a typo), does not reflect the parties' actual prior agreement can be admitted in an action for reformation.

The UCC and the PER (UCC § 2-202)

UCC § 2-202 adopts the PER for sales of goods but with a more liberal approach to extrinsic evidence:

  • Presumption of Partial Finalization: Writings are generally presumed only partially finalized unless clear evidence indicates otherwise.
  • Explanatory Evidence: Terms in a writing may always be explained or supplemented (though not contradicted) by:
    • Course of Performance: How parties acted under this contract.
    • Course of Dealing: How parties acted in prior contracts.
    • Usage of Trade: Practices common in the relevant industry. These are admissible even if the writing appears unambiguous.
  • Consistent Additional Terms: Evidence of consistent additional terms is admissible unless the court finds the writing was intended as a complete and exclusive statement of the terms.

Omitted and Implied Terms

Even with a written contract, parties might omit terms, or terms might be implied by law based on the nature of the agreement or the parties' conduct.

UCC Gap Fillers

Where parties intended to contract for the sale of goods but omitted essential terms, the UCC provides "gap fillers":

  • Price (UCC § 2-305): If the price is not settled, it is a reasonable price at the time for delivery.
  • Place of Delivery (UCC § 2-308): If not specified, it is the seller's place of business (or residence if none). If goods are known to be elsewhere, that location is the place of delivery.
  • Time for Shipment/Delivery (UCC § 2-309): If not specified, delivery is due within a reasonable time.
  • Time for Payment (UCC § 2-310): If not specified, payment is due at the time and place buyer receives the goods.

Implied Duty of Good Faith and Fair Dealing

Recognized under both common law and the UCC (§ 1-304), this duty requires parties to act honestly and observe reasonable commercial standards of fair dealing in performing and enforcing the contract. It cannot be disclaimed.

Key Term: Implied Duty of Good Faith and Fair Dealing A non-disclaimable duty imposed on each party to a contract requiring honesty in fact and the observance of reasonable commercial standards of fair dealing.

UCC Implied Warranties

Article 2 implies several warranties concerning the quality and title of goods sold, unless effectively disclaimed.

  1. Implied Warranty of Merchantability (UCC § 2-314):
    • Arises automatically in sales contracts if the seller is a merchant dealing in goods of the kind sold.
    • Warrants that the goods are fit for their ordinary purposes and meet other standards like adequate packaging and conformity to promises on the label.

Key Term: Implied Warranty of Merchantability A warranty, implied if the seller is a merchant dealing in goods of the kind sold, that the goods are fit for the ordinary purposes for which such goods are used.

  1. Implied Warranty of Fitness for a Particular Purpose (UCC § 2-315):
    • Arises when any seller (merchant or not) has reason to know the particular purpose for which the buyer requires the goods, AND
    • The buyer is relying on the seller's skill or judgment to select or furnish suitable goods.
    • Warrants that the goods are fit for the buyer's specific purpose.

Key Term: Implied Warranty of Fitness for a Particular Purpose A warranty, implied when any seller knows the buyer's particular purpose for the goods and that the buyer is relying on the seller's skill or judgment, that the goods are fit for that specific purpose.

  1. Implied Warranty of Title (UCC § 2-312):
    • Implied in every contract for the sale of goods (unless disclaimed).
    • Warrants that the title conveyed is good, the transfer is rightful, and the goods are delivered free from any security interest or lien of which the buyer has no knowledge at the time of contracting.

Key Term: Implied Warranty of Title A warranty, implied in sale contracts unless disclaimed, that the seller has good title, the right to transfer it, and that the goods are free from undisclosed encumbrances.

Disclaiming Implied Warranties (UCC § 2-316)

  • Implied warranties can be disclaimed.
  • To disclaim merchantability, the language must mention "merchantability." If the disclaimer is written, it must be conspicuous.
  • To disclaim fitness for a particular purpose, the disclaimer must be by a writing and be conspicuous. General language (e.g., "There are no warranties extending beyond the description...") is sufficient.
  • General language like "as is," "with all faults," or similar phrases can disclaim both implied warranties if conspicuous.
  • If the buyer examines (or refuses to examine) the goods before contracting, implied warranties do not cover defects a reasonable examination would have revealed.
  • Implied warranties may also be modified or excluded by course of dealing, course of performance, or usage of trade.

Worked Example 1.1

A written contract for the sale of a used car states the make, model, year, VIN, price, and delivery date. It contains a merger clause: "This agreement constitutes the entire understanding between the parties." The buyer claims the seller orally promised, prior to signing, that the car had a brand-new transmission. The car's transmission fails shortly after purchase. Can the buyer introduce evidence of the oral promise?

Answer: Likely no. The written contract with the merger clause suggests a complete finalization. The promise about the transmission relates directly to the car's condition and would normally be included in the agreement. Since the writing appears completely finalized, the PER likely bars evidence of the prior oral promise which adds a specific warranty term to the written contract. (Note: If the buyer could show fraud, the evidence might be admissible under that PER exception).

Worked Example 1.2

Farmer asks SeedCo, a seed supplier (merchant), for corn seed suitable for growing in Farmer's unusually clay-heavy soil in a short growing season. SeedCo recommends "ClayPro 5000" seed. Farmer relies on this recommendation, buys the seed, plants it, but the crop fails due to poor adaptation to the clay soil and short season. What warranty might SeedCo have breached?

Answer: SeedCo likely breached the implied warranty of fitness for a particular purpose. SeedCo (seller) knew Farmer's particular purpose (growing corn in specific adverse conditions) and that Farmer was relying on SeedCo's knowledge and judgment to select suitable seed. By recommending ClayPro 5000, SeedCo impliedly warranted its fitness for that purpose. SeedCo, as a merchant, also breached the implied warranty of merchantability if ClayPro 5000 was not fit for the ordinary purpose of growing corn in typical conditions, but the fitness warranty is clearer here.

Exam Warning

The PER only bars evidence of prior or contemporaneous agreements. It does not bar evidence of agreements made after the written contract was executed (subsequent modifications). Subsequent modifications have their own requirements (e.g., consideration under common law, potentially Statute of Frauds).

Key Point Checklist

This article has covered the following key knowledge points:

  • The Parol Evidence Rule restricts extrinsic evidence (prior/contemporaneous) offered to alter integrated written contracts.
  • Consolidation level (complete/partial) dictates whether evidence supplementing written terms is allowed. Merger clauses indicate complete consolidation.
  • PER does not bar evidence for interpretation, showing defenses (fraud, mistake), conditions precedent, collateral agreements, or reformation.
  • UCC § 2-202 generally permits explanation/supplementation by course of dealing, usage of trade, or course of performance, even for seemingly complete writings.
  • All contracts include an implied duty of good faith and fair dealing.
  • UCC implies warranties of merchantability (from merchants), fitness for a particular purpose (if seller knows purpose/reliance), and title unless properly disclaimed.
  • UCC provides gap fillers for missing terms like price, delivery place/time, and payment time if parties intended a contract.
  • Specific rules under UCC § 2-316 govern warranty disclaimers (e.g., conspicuousness, mentioning "merchantability").

Key Terms and Concepts

  • Parol Evidence Rule (PER)
  • Finalization
  • Implied Duty of Good Faith and Fair Dealing
  • Implied Warranty of Merchantability
  • Implied Warranty of Fitness for a Particular Purpose
  • Implied Warranty of Title
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