Contracts Flashcards
Is Buyer bound by his oral agreement to use the label with Seller’s picture, even though that agreement did not appear in the subsequent written agreement between the parties?
The signed agreement to sell the winery did not contain Buyer’s oral agreement to continue the use of the label containing the picture of Seller. Under the parol evidence rule, if the signed agreement, which appears to be integrated, is inconsistent with the prior oral agreement, the prior agreement is discharged and, therefore, evidence about that prior agreement would not be admissible. But the signed agreement to sell the winery does not appear to be inconsistent with the oral agreement to continue to use the label. Accordingly, the oral agreement is not discharged (and evidence of it is admissible to supplement the written agreement) unless the writing is completely integrated (adopted as a complete and exclusive statement of the terms of the agreement). Here, while it is a close call, the writing does not appear to be completely integrated.
Parol Evidence Rule
Generally, under the common law parol evidence rule, a “binding integrated agreement discharges prior agreements to the extent that it is inconsistent with them.” Restatement (Second) of Contracts § 213. An integrated agreement is a writing constituting a final expression of one or more of the agreed terms of a contract. See id. § 209(1). The parol evidence rule is a rule of substantive contract law (and not evidence law) to determine the impact of a written agreement on prior and contemporaneous related agreements. See id. § 213, cmt. a. The rule nonetheless has evidentiary effects. One such effect is that “evidence of prior or contemporaneous agreements or negotiations is not admissible in evidence to contradict a term of the writing” that is a binding integrated agreement. Id. § 215. If, however, the integrated agreement is consistent with the prior agreement, evidence of the prior agreement may be admitted unless the integrated agreement is also “completely integrated.” Id. § 216(1). A written agreement is considered to be integrated if it constitutes a final expression of one or more terms of an agreement and is considered to be completely integrated if the parties adopted the writing as a complete and exclusive statement of their agreement. See id. §§ 209(1), 210(1).
May Seller introduce evidence of the discussion and negotiations with Buyer about what would constitute a “fair share” of the winery’s first-year profits to help explain the meaning of that term?
The signed agreement also included the vague phrase that Buyer would pay Seller a “fair share” of his first year’s profits, a term susceptible to a spectrum of meanings. The parol evidence rule does not apply to issues of contract interpretation, and evidence as to the meaning of vague or ambiguous terms can be introduced even if the contract is integrated. Thus, the common understanding of Buyer and Seller that a “fair share” of the winery’s first-year profits would be in the 20–25% range can be admitted to explain the intended meaning of that term.
Extrinsic evidence
Generally, extrinsic evidence may be proffered for the purpose of clarifying a vague or ambiguous term in a written contract. “[A]greements and negotiations prior to or contemporaneous with the adoption of a writing are admissible in evidence to establish . . . the meaning of the writing, whether or not integrated.” Restatement (Second) of Contracts § 214(c).
Here, the meaning of “fair share of the winery’s profits” in the parties’ written agreement is indefinite and vague, susceptible to a spectrum of meanings. Evidence about the parties’ negotiations showing the parties had a common understanding that a “fair share” of the first-year profits would be more than 5% of those profits and instead would be in the 20–25% range will help resolve the vagueness of “fair share” and establish that a payment of only 5% of those profits is inconsistent with the meaning given to that term by the parties. The ambiguity in this case is obvious (patent), and there is no need for examinees to discuss the “plain meaning” or “four corners” rule, which is applied by courts in some states to exclude extrinsic evidence of the parties’ intended meaning unless the agreement is ambiguous on its face. See Greenfield v. Philles Records, Inc., 780 N.E.2d 166 (N.Y. 2002).
Is Seller’s promise not to open another winery for 10 years anywhere in the United States an unreasonable restraint on trade that is unenforceable as a matter of public policy?
Seller’s covenant not to compete, which was national in scope and had a 10-year duration, is likely an unreasonable restraint of trade. The covenant is broader than was necessary to protect Buyer’s legitimate business interest in establishing his winery in the regional market, and thus it does not appear to be narrowly tailored to protect this interest. Thus, it is likely that the covenant will be stricken as against public policy.
Restraint on trade
A promise that unreasonably restrains trade may be unenforceable on grounds of public policy. See Restatement (Second) of Contracts § 186(1). Whether a restrictive covenant, including a covenant not to compete, is unreasonable requires a balancing of interests. If the restraint is greater than what is needed to protect a party’s legitimate business interest, it violates public policy. Id. § 188(1)(a). In deciding whether to enforce a covenant not to compete, the courts generally consider the reasonableness of the covenant’s duration and geographic scope. See, e.g., BDO Seidman v. Hirshberg, 712 N.E.2d 1220 (N.Y. 1999) (noncompete must be reasonable as to duration and geographic reach, and its restrictions may be no greater than necessary to protect legitimate interests). Generally, covenants not to compete are disfavored, though less so when enforced by the buyer against the seller of a business. See Cal. Bus. & Prof. Code §§ 16600, 16601 (invalidating all covenants not to compete, except against equity owners in the sale of a business).
What’s reasonable?
Although a more precisely tailored covenant not to compete might be viewed as reasonable, such as one limited to less than five years and to the regional market to which the winery catered traditionally courts will not rewrite covenants that are unreasonably broad to make them reasonable. See generally Ferrofluidics Corp. v. Advanced Vacuum Components, Inc., 968 F.2d 1463 (1st Cir. 1992) (noting that while some courts take an “all or nothing” approach to noncompete covenants and void the entire covenant if any part is unenforceable, other courts are willing to (1) enforce the reasonable terms of such a clause if the covenant “remains grammatically coherent once its unreasonable provisions are excised” or (2) reform the clause and enforce the covenant to the extent it is reasonable unless the “circumstances indicate bad faith or deliberate overreaching on the part of the [party who would benefit from the covenant]”). And even if the noncompete covenant here were rewritten, it would not prevent Seller from starting another winery in a state far away from the original winery.
