978-1285427003 Chapter 14 Lecture Note Part 2

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Case: Seton, Co. v. Lear Corp.1

Facts: General Motors hired Lear to supply all of the leather seats for its trucks and SUVs. In October,

1998, Lear and Seton agreed that Seton would provide Lear with cut-to-pattern leather, which Lear

would then assemble. Seton agreed to give Lear rebates based on the size of the orders.

Both parties performed the contract for about on year, at which time they agreed to modify the

rebates. In the Fall of 1999, Lear asked Seton to send a written summary of the agreement. In

November, 1999, Seton sent a one-page memorandum summarizing the agreement to Lear, stating:

“Lear is to award Seton the entire [truck and SUV program] cut-to-pattern business for the life of the

program.” The letter ended with a request that Lear “kindly return with acknowledgement signature.”

Lear did not do so.

The parties worked together for two more years, but Seton became anxious that Lear would take

its business elsewhere. In January, 2002 Seton sent a letter requesting that Lear affirm its exclusive

commitment to Seton for the life of the GMC program. Lear responded that there had never been any

such agreement and Seton sued.

At trial, Lear claimed that no contract had ever been signed. Seton claimed that its memo

summarizing the agreement created a valid contract under the “merchant exception” rule. The jury

found for Seton and awarded $34 million. Lear appealed.

Issue: Did Seton’s memorandum create a contract under the merchant exception?

Decision: Yes, the confirming memo between merchants created a contract under the UCC. Affirmed.

Reasoning: Lear argued that the November letter was not a written confirmation of an existing

contract, but rather an offer of a new contract. The company emphasized that the phrase “kindly return

with acknowledgement signature” was evidence that there was no final agreement. But the jury

disagreed. It was clearly influenced by Seton’s argument that the letter referred to a prior agreement

between Lear and Seton executives. Also, although the letter asked for a signature, it did not require

one. For these reasons, the letter amounted to more than a mere offer.

The UCC does require, however, that merchants send any confirmatory memo within a reasonable

length of time. Lear contended that the letter could not count as a written confirmation because it

arrived 13 months after the first discussion of the deal with Seton, but the jury disagreed, probably

because the relationship between the companies had been casual and friendly for a long time.

Question: What is the merchants’ exception to the Statute of Frauds?

Answer: The merchants’ exception applies only when both parties are merchants and

Within a reasonable time of making an oral contract,

Question: What parts of the merchants’ exception did Lear argue was not present on the facts?

Answer: The requirement that one merchant send a written confirmation to the other, and whether

Question: How long after the oral agreement did Seton mail the letter?

Question: What caused the delay?

Answer: Both parties were working well under the agreement, and presumably neither had any

Question: Does it make sense that 13 months is a reasonable time?

Answer: In this case, the court thought it did. Both parties had been operating under the agreement

1 198 Fed.Appx.496, 2006 WL 2860774, Sixth Circuit Court of Appeals, 2006.

court, this evidence indicates that Lear knew it had an agreement with Seton. Both parties operated

UCC §2-201(3)—SPECIAL CIRCUMSTANCES

An oral contract may be enforceable, even without a written memorandum, if:

• The seller is specially manufacturing the goods for the buyer, or

• The defendant admits in court proceedings that there was a contract, or

• The goods have been delivered or they have been paid for.

Parol Evidence

When two parties make an integrated contract (a writing that the parties intend as the final, complete

expression of their agreement), neither one may use parol evidence to contradict, vary, or add to its

terms. Parol evidence refers to anything (apart from the written contract itself) that was said, done, or

written before the parties signed the agreement or as they signed it.

If a court determines that a written contract is incomplete or ambiguous, it will permit parol evidence.

A court will permit parol evidence of fraud, misrepresentation, or duress.

Case: Mayo v North Carolina State University,2

Facts: Dr. Robert Mayo was a tenured faculty member of the engineering department at North Carolina

State University (NCSU) and director of the school’s nuclear engineering program. In July, he informed

his department chair, Dr. Paul Turinsky, that he was leaving NCSU effective September 1. In October,

after Mayo had departed, the University’s payroll coordinator informed him that he had been overpaid

because the salary checks for July and August were prepayments for the period beginning that

September. Because Mayo had not worked that September he was not entitled to the money. Mayo

refused to refund the money.

At an internal hearing on the University’s claim for the money, Turinsky and the University’s payroll

director explained that the “pre-payment” rule was a basic part of every employee’s contract. This rule

was not stated in any of the documents that formed Mayo’s contract and these officials used other

evidence to establish the pre-payment policy. Based on the additional evidence, the hearing ruled that

NCSU was entitled to its money. Mayo appealed the agency’s decision to court and the trial judge

declared that he owed nothing because the University was not permitted to rely on parol evidence to

establish its policy. The University appealed.

Issue: May NCSU rely on parol evidence to establish its pre-payment rule?

Decision: No, neither party may use parol evidence to explain the terms of the agreement.

Reasoning: When the parties intend a written document to be the final, integrated expression of their

agreement, neither side may introduce parol evidence that changes, adds to, or contradicts any of the

written terms. However, if the writing is not intended as a full integration of the agreement, or if the

writing is ambiguous, then parol evidence is allowed.

2 2005 WL 350567 North Carolina Court of Appeals, 2005.

Brian Simet, the University’s payroll director, argued that the pre-payment rule was a basic part of

every employee’s contract. However, during the agency hearing, he acknowledged that the rule was

“not stated anywhere specifically.”

The department chair, Dr. Turinsky, testified that Professor Mayo’s employment agreement consisted

only of his appointment letter, his annual salary letter, and the policies adopted and amended by the

school’s Board of Governors and its Board of Trustees. The language in each of these documents is

unambiguous and says nothing about the supposed “pre-payment rule.” Dr. Turinsky also stated that he

had never heard of the pre-payment rule until September, after Professor Mayo left the school.

It appears that the parties intended these documents to be the final, integrated expression of Professor

Mayo’s employment agreement. Because the documents are complete and unambiguous, parol evidence

must be excluded.

Professor Mayo owes the University nothing based on the alleged overpayment. Affirmed.

Question: What does the parol evidence state?

Question: What is an integrated contract?

Question: What is the source of this dispute?

Answer: Mayo voluntarily left his tenured position at the University effective September 1. After

Question: Why?

Answer: The University relied on its “pre-payment” rule, under which salary received in July and

Question: Was this rule part of Mayo’s employment agreement with the University?

Answer: That was the University’s problem. This rule was not stated in writing anywhere in any of

Question: How does the parol evidence rule arise in this case?

Question: Did the court agree?

Note: The court affirmed in part, ruling that Mayo owed the University nothing, and reversed in part,

declaring that Mayo was also entitled to his tax refund.

Multiple Choice Questions

1. CPA QUESTION: Two individuals signed a contract that was intended to be their entire

agreement. The parol evidence rule will prevent the admission of evidence offered to:

(a) Explain the meaning of an ambiguity in the written contract

(b) Establish that fraud had been committed in the formation of the contract

(d) Prove the existence of a subsequent oral agreement modifying the contract

2. Raul wants to plant a garden, and he agrees to buy a small piece of land for $300. Later, he agrees

to buy a table for $300. Neither agreement is put in writing. The agreement to buy the land

____________ enforceable and the agreement to buy the table ____________ enforceable.

(a) is; is

(b) is; is not

(d) is not; is not

3. The common law Statute of Frauds requires that to be “in writing” an agreement must be signed by

(a) the plaintiff

(b) the defendant

(d) none of the above.

4. Mandy verbally tells a motorcycle dealer that she will make her son’s motorcycle payments if he

falls behind on them. Will Mandy be legally required to live up to this agreement?

(a) Yes, absolutely.

(b) Yes, if her son is under 18.

(d) Yes, if the motorcycle is worth less than $500.

(e) No, absolutely not.

5. In December 2012, Eric hires a band to play at a huge graduation party he is planning to hold in

May, 2014. The deal is never put into writing. In January 2014, if he wanted to cancel the job, Eric

_____________ be able to do so. If he does not cancel, and if the band shows up and plays at the

party in May, 2014. Eric ______________ have to pay them.

(a) will; will

(b) will; will not

(d) will not; will not

Essay Questions

1. Richard Griffin and three other men owned a grain company called Bearhouse, Inc., which needed to

borrow money. First National Bank was willing to loan $490,000, but insisted that the four men

sign personal guaranties on the loan, committing themselves to repaying up to 25 percent of the

loan each if Bearhouse defaulted. Bearhouse went bankrupt. The bank was able to collect some of

its money from Bearhouse’s assets, but it sued Griffin for the balance. At trial, Griffin wanted to

testify that before he signed his guaranty, a bank officer assured him that he would only owe 25

percent of whatever balance was unpaid, not 25 percent of the total loan. How will the court decide

whether Griffin is entitled to testify about the conversation?

Answer: Under the parol evidence rule, if the parties intended the guaranty to be integrated, which

2. When Deana Byers married Steven Byers, she was pregnant with another man’s child. Shortly after

the marriage, Deana gave birth. The marriage lasted only two months and the couple separated. In

divorce proceedings, Deana sought child support. She claimed that Steven had orally promised to

support the child if Deana would marry him. Steven claims he never made the promise. Comment

on the outcome.

Answer: It makes no difference whether he said it or not. An oral promise in consideration of

3. Lonnie Hippen moved to Long Island, Kansas, to work in an insurance company owned by Griffiths.

After he moved there, Griffiths offered to sell Hippen a house he owned, and Hippen agreed in

writing to buy it. He bought the house and moved in, but two years later Hippen left the insurance

company. He then claimed that at the time of the sale, Griffiths had orally promised to buy back his

house at the selling price if Hippen should happen to leave the company. Griffiths defended based

on the Statute of Frauds. Hippen argued that the Statute of Frauds did not apply because the

repurchase of the house was essentially part of his employment with Griffiths.

Answer: Hippen’s claim fails. The purchase–or repurchase–of a house is the classic interest in land,

4. Landlord owned a clothing store and agreed in writing to lease the store’s basement to another

retailer. The written lease, which both parties signed, (1) described the premises exactly, (2)

identified the parties, and (3) stated the monthly rent clearly. But an appeals court held that the

lease did not satisfy the Statute of Frauds. Why not?

Answer: The writing must contain all essential terms. This lease said nothing about duration, an

You Be the Judge: WRITING PROBLEM Harrison Epperly operated United Brake

Systems in Indianapolis, Indiana, and wanted to open a similar store in Nashville. He offered Kenneth

Jarrett a job as manager, promising six months’ severance pay if the store was not profitable in six

months, and 49 percent ownership if he managed the new store for 10 years. Jarrett agreed, but the two

men never put the deal in writing. Under Jarrett’s management, the Nashville branch grew dramatically.

After four years of renting space, the company purchased the land and buildings it used. Epperly

periodically acknowledged his promise to make Jarrett 49 percent owner of the Nashville branch, and

from time to time he mentioned the arrangement to other workers. But after 10 years, Epperly sold

United Brake, which had grown to 23 branches, to another company for $11 million. Jarrett sued

Epperly for 49 percent of the Nashville branch. The trial court awarded Jarrett $812,000. Epperly

appealed. Is Jarrett’s contract with Epperly barred by the Statute of Frauds? Argument for Epperly:

This alleged contract is unenforceable for two reasons. First, the agreement includes real estate,

namely, the valuable land and buildings the company uses. A contract for the sale of any interest in land

is unenforceable unless written. Second, the contract could not have been performed within one year. If

there was a deal, then by Jarrett’s own words the parties intended it to last 10 years. Ten years’ work

cannot be performed in one year. Argument for Jarrett: The agreement had nothing to do with land.

Jarrett and Epperly agreed that Mr. Jarrett would obtain a 49 percent ownership of the Nashville

branch. At the time they made that agreement, the Nashville branch had no real estate. There is no rule

saying that a valid contract becomes invalid because a corporation acquires some land. The “not in one

year” argument also misses the point. The primary obligation was to open the branch and manage it for

six months. If it was not profitable, Mr. Jarrett would immediately receive six months’ severance pay

and the contract would be fully performed by both parties in less than a year. Finally, Epperly made a

binding commitment and Mr. Jarrett relied. Promissory estoppel prohibits Mr. Epperly from using

deceit to profit.

Answer: The Sixth Circuit affirmed the judgment for Jarrett. Land was irrelevant because the

Nashville branch owned none when the parties contracted. Jarrett was seeking 49 percent of a

Discussion Questions

1. ETHICS Jacob Deutsch owned commercial property. He orally agreed to rent it for six years to

Budget Rent-A-Car. Budget took possession, began paying monthly rent, and over a period of

several months expended about $6,000 in upgrading the property. Deutsch was aware of the

repairs. After a year, Deutsch attempted to evict Budget. Budget claimed it had a six-year oral

lease, but Deutsch claimed that such a lease was worthless. Please rule. Is it ethical for Deutsch to

use the Statute of Frauds in attempting to defeat the lease? Assume that, as landlord, you had orally

agreed to rent premises to a tenant, but then for business reasons preferred not to carry out the

deal. Would you evict a tenant if you thought the Statute of Frauds would enable you to do so?

How should you analyze the problem? What values are most important to you?

Answer: Normally, a long-term oral lease is worthless, but here the tenant took possession and

made expensive improvements to the landlord’s knowledge. This part performance is considered

2. Mast Industries and Bazak International were two textile firms. Mast orally offered to sell certain

textiles to Bazak for $103,000. Mast promised to send documents confirming the agreement, but

never did. Finally, Bazak sent a memorandum to Mast confirming the agreement, describing the

goods, and specifying their quantity and the price. Bazak’s officer signed the memo. Mast received

the memo but never agreed to it in writing. When Mast failed to deliver the goods, Bazak sued.

Who will win? Why?

Answer: Bazak. This contract is for the sale of goods and thus is governed by UCC §2-201. Both

parties are merchants. Under the merchants’ exception, UCC §2-201 (2), when Bazak sent a signed

3. Is the Statute of Frauds reasonable or does it unacceptably allow people to escape their obligations

on a mere technicality?

4. Does the coverage of the Statute of Frauds make sense as it currently stands? Would it be better to

expand the law and require that all contracts be in writing? Or should the law be done away with

altogether?

5. Compare the common law Statute of Frauds to the UCC version. What are the specific differences?

Which is more reasonable? Why?

Bonus Exam Strategy:

Question: Lenny owns an art gallery. Lenny allows artists to show their work in his gallery and he

(Lenny) takes a percentage of the sale price of the works. This set up is very profitable for Lenny,

especially since he just agreed to show the works of Matilda, a popular rising young artist. One

day, Lenny finds out that Matilda is behind on her loan to the art supply store. Fearing Matilda

would not have any paintings to display if the supply store cut off her credit, Lenny orally agreed

to pay Matilda’s debt to the store. Is Lenny’s promise enforceable?

Strategy: For this question, we have to work backwards. Start with: “Lenny orally agreed to pay

Matilda’s debt to the store. Is Lenny’s promise enforceable?” We know that this is a contract

question; whether Lenny’s oral contract is enforceable. The Statute of Frauds lists several types

of promises that must be in writing in order to be enforceable. One such promise is the promise

to pay the debt of another. However, there is an exception to that rule: when the leading object of

the oral promise to pay the debt of another is some benefit to the promisor himself.

Result: According to the Statute of Frauds, Lenny’s oral promise to pay Matilda’s debt is the type

of promise that must be in writing. However, in the beginning of the question we see that the

only reason Lenny has made such a promise is because he is afraid Matilda will not be able to

show her art in his gallery, and as a result Lenny will lose money from sales. Because the leading

object of Lenny’s oral promise to pay Matilda’s debt is a benefit to himself (increased sales) his

promise does not have to be in writing to be enforceable.