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Comment:
a. Scope of special rules. The rules in this Section are applicable to all manifestations of intention and all transactions.
The rules are general in character, and serve merely as guides in the process of interpretation. They do not depend
upon any determination that there is an ambiguity, but are used in determining what meanings are reasonably possible
as well as in choosing among possible meanings.
writing in the light of the circumstances. See §§ 209, 212. The circumstances for this purpose include the entire
Illustrations:
1. A contracts with B to do concrete work on a bridge, to be paid for according to “the number of square yards of
2. In a written agreement between A and B it is stated that B owns half of the stock of C Company, that “A has
rendered valuable services to C Company for which B desires to compensate A in the sum of $25,000 payable in the
manner hereinafter set forth,” and that B will pay A “one-half of all money received from C Company, such as
dividends, or profits until A has been paid the said amount of $25,000.” It is shown that the written agreement was
Illustrations:
3. A promises B as follows: “In consideration of your supplying my nephew C with china and earthenware during the
coming year, I guarantee the payment of any bills you may draw on him on account thereof to the amount of $200.” C
4. A agrees with his divorced wife B and C, trustee, to pay to C $1,200 each year for the benefit of D, the 10-year-old
son of A and B, until D enters college, and to pay $2,200 each year for the period of D’s higher education but not more
than four years. At age 19 D completes high school and is inducted into the army. Upon a finding that the main
purpose of the agreement is to provide for D’s maintenance and education, the agreement is to be interpreted as not
Illustrations:
5. A written agreement between A and B for the exchange of real estate provides that A and B will each pay a $200
commission to C, a broker, “upon the signing of this agreement by both parties hereto.” The last sentence of the
6. A agrees to appoint B exclusive distributor in a specified area for a new product to be manufactured by A, and B
agrees to use his best efforts to promote sale of the product. The written agreement includes an initial retail price list
7. A contracts in writing to build a house for B according to specifications, and C, a surety company, guarantees A’s
performance. After completion and acceptance the house and its contents are damaged by hot water because of
defective work by the plumbing and heating subcontractor. In determining the responsibility of A and C, the contract,
8. A issues to B a fire insurance policy covering lumber stored in “sheds.” In the absence of contrary indication, lumber
9. A leases restaurant premises to B. The lease provides that A will pay for electricity and that B will “pay for gas or fuel
CHAPTER 10: NATURE AND TERMINOLOGY 255
used in the preparation of food.” In the absence of contrary indication, “fuel” should be read not to include electricity.
a variety of technical and other meanings. “Mules” may mean animals, shoes or machines; a “ram” may mean an
10. The facts being otherwise as stated in Illustration 9, there is a local usage in the restaurant trade that “fuel”
11. A contract for the sale of horsemeat scraps calls for “minimum 50% protein.” As both parties know, by a usage of
the business in which they are engaged, 49.5 per cent is treated as the equivalent of 50 per cent. The contract is to be
interpreted in accordance with the usage.
12. A discloses to B a secret formula for an antiseptic liquid and B agrees to pay monthly royalties based on amounts
13. Several railroads agree in writing to share working expenses and taxes of X, another railroad, on a “wheelage basis.”
For several years they pay shares in proportion to their stock ownership in the other railroad. Then all but one agree
that they have been mistaken and that future payments will be made on a basis of use of X’s physical properties. Stock
ownership is so plainly unrelated to any possible meaning of “wheelage” that the course of performance does not
h. Preference for consistency. Subsection (5) states a rule fairly implied in Subsections (1) and (2); words and conduct
§ 203. Standards of Preference in Interpretation
In the interpretation of a promise or agreement or a term thereof, the following standards of performance are
generally applicable:
(a) an interpretation which gives a reasonable, lawful, and effective meaning to all the terms is preferred to an
interpretation which leaves a part unreasonable, unlawful, or of no effect;
(c) specific terms and exact terms are given greater weight than general language;
(d) separately negotiated or added terms are given greater weight than standardized terms or other terms not
Comment:
in choosing among reasonable interpretations. They do not override evidence of the meaning of the parties, but aid in
b. Superfluous terms. Since an agreement is interpreted as a whole, it is assumed in the first instance that no part of it
is superfluous. The parties may of course agree to supersede prior manifestations of intention; indeed, this is the
normal effect of an integrated agreement. See § 213. But, particularly in cases of integrated agreements, terms are
rarely agreed to without reason. Where an integrated agreement has been negotiated with care and in detail and has
been expertly drafted for the particular transaction, an interpretation is very strongly negated if it would render some
agreement has a reasonable rather than an unreasonable meaning, and that the agreement is intended to be lawful
rather than unconscionable, fraudulent or otherwise illegal. But parties are free to make agreements which seem
unreasonable to others, and circumstances may show that even an agreement innocent on its face has an illegal
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purpose. The search is for the manifested intention of the parties. If a term or a contract is unconscionable or
Illustration:
1. A licenses B to manufacture pipes under A’s patents, and B agrees to pay “a royalty of 50 cents per 1,000 feet for an
output of 5,000,000 or less feet per year, and for an output of over 5,000,000 feet per year at the rate of 30 cents per
thousand feet.” The 60 cent rate is payable on the first 5,000,000 feet, the 30 cent rate only on the excess. The more
literal reading is unreasonable, since it would involve a smaller payment for 6,000,000 feet than for 4,000,000 feet.
d. Priority of express terms. Just as parties to agreements often depart from general usage as to the meaning of words
or other conduct, so they may depart from a usage of trade. Similarly, they may change a pattern established by their
own prior course of dealing. Their meaning in such cases is ordinarily to be ascertained as a fact; no penalty is attached
by the law of contracts to their failure to conform to the usages of others or to their own prior usage. Course of
performance may establish meaning, or it may show mistake or oversight or modification or waiver. See § 202. The
priorities stated in Subsection (b) are those stated in Uniform Commercial Code §§1-205 and 2-208, rephrased to fit the
different context of the Restatement.
Subsection (a). Compare Uniform Commercial Code § 2-317. But the rule yields to manifestation of a contrary
intention.
f. Superseded standard terms. The rule stated in Subsection (d) has frequent application in cases of standardized
documents. Printed forms are often misused, and there may be a question whether the parties manifested assent to a
printed term on a writing. A printed provision that is clearly part of an integrated contract is normally to be interpreted
as consistent with other terms, but in cases of inconsistency a handwritten or typewritten term inserted in connection
with the particular transaction ordinarily prevails. Similarly, a typewritten term may be superseded by drawing a line
through it, modified by interlineations, or controlled by an inconsistent handwritten insertion in another part of the
agreement. It is sometimes said generally that handwritten terms control typewritten and printed terms, and
typewritten control printed. See Uniform Commercial Code § 3-118(b); compare § 2-316(1) (disclaimer of express
warranty), § 3-110(3) (instrument payable both to order and to bearer). But the rule yields to manifestation of a
contrary intention.
Illustrations:
2. A, an agent of C, authorized to make contracts for C, writes a letter to B beginning “We offer,” and stating a proposal
in detailed and clear language, signed “C by A, Agent.” At the bottom of the office stationery which A uses for the offer
3. A charter party contains the printed provision “vessel to have turn in loading.” There is written below this, “vessel to
4. A’s agent B draws checks on the C bank, imprinting the amounts with perforations made by a checkwriting machine.
§ 206. Interpretation Against the Draftsman
In choosing among the reasonable meanings of a promise or agreement or a term thereof, that meaning is generally
preferred which operates against the party who supplies the words or from whom a writing otherwise proceeds.
Comment:
a. Rationale. Where one party chooses the terms of a contract, he is likely to provide more carefully for the protection
of his own interests than for those of the other party. He is also more likely than the other party to have reason to
know of uncertainties of meaning. Indeed, he may leave meaning deliberately obscure, intending to decide at a later
date what meaning to assert. In cases of doubt, therefore, so long as other factors are not decisive, there is substantial
reason for preferring the meaning of the other party. The rule is often invoked in cases of standardized contracts and
bills of lading and other standardized documents. In some cases, however, the statute or regulation adopts language
intention to change the established meaning. Moreover, insurers are more likely than insureds to participate in
TEACHING SUGGESTIONS
1. In introducing the subject of contracts, ask students under what circumstances they believe the law should enforce
a promise that the promisor does not wish to keep. Begin the discussion by asking students to recognize contracts that
they recently entered into—buying a textbook, buying a cheeseburger, buying a compact disc. Under what
circumstances do they think that they should be held to these contracts? Under what circumstances do they think that
they might be excused? Concepts that can be woven into the discussion include:
2. Divide students into small groups (four to five persons) and require each group to think of a contract for each of
the following combinations:
a. Bilateral, informal, executed contract.
Have each group share their ideas with the entire class.
3. Discuss the circumstances under which the failure to make good on a social contract—such as attending the
prom—can give rise to civil liability.
4. Students often confuse implied-in-fact and implied-in-law contracts. They might find it easier to distinguish
between the two types of contracts by viewing implied-in-fact contracts as looking at actions leading up to what
occurred and implied-in-law contacts as looking at the results.
Cyberlaw Link
Are contracts entered into over the Internet enforceable? If so, are they express or implied contracts? Formal or
informal? What other issues discussed in this chapter must be considered for online contracting?
DISCUSSION QUESTIONS
1. What is the objective theory of contracts? Intent to enter into a contract is important in the contract’s formation.
2. What distinguishes a bilateral contract from a unilateral contract? Every contract has an offeror and an offeree. The
3. What is the difference between express and implied contracts? An express contract is one in which the terms are
4. How does a quasi contract differ from an express or an implied-in-fact contract? A quasi contract is not based on an
5. What is the difference between a formal contract and an informal contract? Formal contracts are enforceable because
6. How does a party distinguish between an executed and an executory contract? This is a contract classification based
7. What are the differences among valid, void, voidable, and unenforceable contracts? A valid contract results when all
8. What is the plain meaning rule? When the law attempts to enforce a contract, it attempts to enforce the contract that
9. What are some of the other rules regarding the interpretation of contracts? (1) When a writing is ambiguous, a court
CHAPTER 10: NATURE AND TERMINOLOGY 261
made it.) (2) A reasonable, lawful, and effective meaning will be given to all of a contract’s terms. (3) A contract will be
interpreted as a whole; individual clauses will be considered subordinate to the contract’s general intent. (4) All writings that
are part of the same transaction will be interpreted together, although terms that were negotiated separately will be given
ACTIVITY AND RESEARCH ASSIGNMENTS
1. Have each student keep track of all contracts entered into within a given three-day period. At the end of the three
days, discuss the contracts made by the students with the class.
2. Ask students to bring to class copies of written contracts into which they have entered. In discussing these contracts,
have students classify them according to the types of contracts outlined in the text. As students study subsequent chapters and
EXPLANATIONS OF SELECTED FOOTNOTES IN THE TEXT
Footnote 6: The City of Providence, Rhode Island, decided to begin hiring police officers to fill vacancies in its police
department. Because only individuals who graduated from the Providence Police Academy were eligible, the city also decided to
conduct two training sessions, the “60th and 61st Police Academies.” The applicants deemed most qualified were sent a letter
informing them that they had been selected to attend if they successfully completed a medical examination and a psychological
examination. The letter to the applicants to the 61st Academy, dated October 15, stated that it was “a conditional offer of
employment.” Meanwhile, a new Chief of Police, Dean Esserman, decided to revise the selection process, which caused some of
those who had received the letter to be rejected. Derek Ardito and thirteen other newly rejected applicants filed a suit in a
federal district court against the city, alleging in part that the city was in breach of contract. In Ardito v. City of Providence, the
262 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
As part of the application process, the applicants had been sent a booklet, and had been asked to acknowledge in their
applications, that they understood successful completion of each step in the evaluation process did not necessarily guarantee
acceptance into the Academy. The city pointed this out to the court. What was the court’s response? The city’s argument that
“the plaintiffs did not even have a contractual right to be admitted into the Academy because . . . they acknowledged un-
derstanding” that acceptance was not guaranteed “overlooks the fact that the October 15 letter was more than a mere
notification that the plaintiffs had successfully completed another step in the evaluation process. As already noted, it was a
conditional offer of admission to the 61st Academy, which the plaintiffs accepted by performing the specified conditions.”
Suppose that the October 15 letter had used the phrase “potential offer of employment” instead of using the word
“conditional.” Would the court in this case still have considered the letter to be a unilateral contract? Why or why not? This
might have been acceptable, depending on each party’s interpretation of the word “potential,” but it might have required
splitting hairs because of the words “offer of employment.” The city would have done better to phrase its October 15 letter in
the same terms as its other letters to the applicants to avoid the letters being considered a contract. Specifically, the city should
not have used the phrase “conditional offer of employment.”
Why did the court order the city to stop the 61st Police Academy unless the plaintiffs were included? The court
reasoned that the letter to the rejected applicants was a unilateral offer that the plaintiffs had accepted by passing the required
medical and psychological examinations. The letter expressly stated that it was a “conditional offer of employment” and “the
message that it conveyed was that the recipient would be admitted into the 61st Academy if he or she successfully completed
Footnote 8: The Hopkinses hired Uhrhahn Construction & Design, Inc., to work on their home. Each project’s proposal
stated that any changes would be only “upon written orders.” During the work, the Hopkinses orally asked for changes, which
Uhrhahn implemented and the Hopkinses paid for. At one point, the Hopkinses asked Uhrhahn to use Durisol blocks instead of
cinder blocks, as specified in the written contract, asserting that the cost would be the same. Uhrhahn orally agreed, but
discovered that using Durisol blocks was more costly. The Hopkinses refused to pay more. Uhrhahn sued. The court ruled in
Uhrhahn’s favor. The Hopkinses appealed. In Uhrhahn Construction & Design, Inc. v. Hopkins, a state intermediate appellate
court affirmed, finding a valid implied-in-fact contract between the parties. The contract stated that any changes would be in
writing, but both parties waived that term when they agreed to changes in the work, as often happens in construction. The
builder did the work, and the buyer accepted it and paid for it.
CHAPTER 10: NATURE AND TERMINOLOGY 263
than cinder block. Perhaps Uhrhahn should have investigated the matter more before doing the work and discussed it with the
Hopkinses, but he was not trying to run up a larger bill.
If Uhrhahn had not done the orally agreed-to work, could the Hopkinses have recovered for breach of contract? Yes,
presumably, although the parties would then have been arguing opposite sides of the question of the existence of the contract.
If Uhrhahn had done the work but had not done it well, could the Hopkinses have maintained a claim for breach of contract?
Yes. In a contract for work, there is an implied duty to do the work skillfully, carefully, and in a workmanlike manner. It would
constitute a clear breach off contract to fail to perform the work in a skillful and workmanlike manner.
Suppose that Hopkins and Uhrhahn had not agreed to deviate from the contract on previous occasions and that
Hopkins had not paid for any additional work performed by Uhrhahn. How might this have changed the court’s ruling in this
case? The outcome would probably not have been different. The dispute, and the court’s decision and reasoning, would still
have centered on the cinder blocks and their cost, and whether there were an implied contract between the parties on that
point. The question would still have been whether the parties waived the requirement of a writing for a change to their written
contract, and the court would most likely still have concluded that they did, based on the parties’ agreement and conduct, and
the custom in the construction trade.
Would the outcome of this case have been different if the parties had communicated by e-mail for all details regarding
changes in the work performed? Why or why not? E-mail would most likely have constituted “written orders” within the term of
264 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
ANSWERS TO ESSAY QUESTIONS IN
STUDY GUIDE TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
BY HOLLOWELL & MILLER
1. What are the basic elements of a contract? The elements of a contract are: Agreement. Agreement includes an offer
2. What is the function of contract law? Contract law can ensure compliance with a promise or, when a contract is
breached, entitle a nonbreaching party to relief. Most contractual promises are kept because it is in the mutual self-interest of
the promisor and the promisee to keep them.
REVIEWING—
NATURE AND CLASSIFICATION
Mitsui Bank hired Ross Duncan as a branch manager in one of its Southern California locations. At that time,
Duncan received an employee handbook informing him that Mitsui would review his performance and salary level
annually. In 2008, Mitsui decided to create a new lending program to help financially troubled businesses stay afloat.
Duncan was appointed to be the credit development officer (CDO) for the new program and was given a written
compensation plan. According to the plan, his compensation plan would be based on the program’s success and
involved a bonus and commissions based on the volume of new loans and sales. The written plan also stated, “This
1. What are the four requirements of a valid contract? The four requirements for any contract to be valid are
2. Did Duncan have a valid contract with Mitsui for employment as CDO? If so, was it a bilateral or unilateral
contract? Yes, Duncan had a valid contract with Mitsui for employment as credit development officer. The contract was
3. What are the requirements of an implied contract? Implied contracts are contracts formed by the parties’ conduct
to the defendant expecting to be paid, the defendant must know or should know that the plaintiff expects to be paid,
and the defendant must have a chance to reject the property or service and does not.
4. Can Duncan establish an implied contract based on the employment manual or the written compensation plan?
Why or why not? To establish an implied-in-fact contract in these circumstances, the plaintiff must have furnished a
service to the defendant expecting to be paid, the defendant must have known that the plaintiff expected to be paid,
and the defendant must have had a chance to reject the service. Here, Duncan provided service as a credit
DEBATE THIS:
Companies should be able to make or break employment contracts whenever and however they wish.
Companies, especially large corporations, hold all of the cards with respect to their actual and future employees.
Absent statutes and case law that limits their abilities to break employment contracts on a whim, employees would
have no protections. Employees would face increased uncertainty about the longevity of their jobs, which ultimately
would reduce their productivity. There would be more turnover in jobs, and more unemployment. Contracts are not
made to be broken, but rather upheld—and that is where the courts come in. The courts must be there to protect the
rights of aggrieved former employees.
266 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
ANSWERS TO QUESTIONS—
SPECIAL CASE ANALYSIS
Case No. 10.2
Wagner v. Columbia Pictures Industries, Inc.
California Court of Appeal,
Second District, Division 7, 2007.
146 Cal.App.4th 586,
52 Cal.Rptr.3d 898.
(a) Issue: The dispute between the parties centered on which contract and asked what question? The issue in this case
focused on the language of the Wagner contract with Spelling-Goldberg Productions (SGP): Was Columbia entitled to
all of the profits from the two “Charlie’s Angels” films or was Wagner entitled to share in those profits?
(b) Rule of Law: What rule concerning the interpretation of a contract and the admission of evidence did the court
(c) Applying the Rule of Law: How did the intent of the contracting parties and the language in their contract affect
the application of the rule of law? The court pointed out here that even if the parties intended Wagner to share in the
profits from all sources, “they did not say so in their contract.” In other words, it was what the parties said in their
contracts, not what they may have intended, that determined the outcome in this case. Under the language of the
contract between Wagner and SGP, Wagner was entitled to share in the profits from the exercise of the movie rights to
“Charlie’s Angels” if those rights were exploited as “ancillary” or “subsidiary” to the primary “right to exhibit photoplays
of the series” but not if those rights were acquired separately. SGP’s contract with Goff and Roberts was subject to the
Writers Guild of America Minimum Basic Agreement, under which the writers kept the movie rights, which the
producer could buy if the writers opted to sell them within five years. SGP did not acquire the movie rights to “Charlie’s
Angels” by exercising this right within the five-year period. Columbia obtained those rights independently more than
five years later.
(d) Conclusion: Did the court resolve the dispute in the plaintiff’s favor? Why or why not? Wagner had filed a suit in a