Parol Evidence and Article 2

 We have discussed the basic drafting of Article 2 insofar as it relates to the general formation of a contract, noting that the Code has removed many formal restrictions for contract formation which existed in pre Code law.  This is consistent with the overall drafting of Article 2 which reflects the reality of the business world.  Often, there is no finalized contract, but instead a series of writings followed by conduct which recognizes the existence of a contract.  If there is an acceptance in ‘confirmation of an offer’ the rules of Section 2-207 will apply.

In that situation, and even in situations where you have a finalized contract, parties may wish to introduce evidence which assist the court in interpreting the writings in a manner favorable to the proponent of the evidence.  In that situation, Section 2-202 comes into play.  That section reads as follows:

Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented

(a) by course of dealing or usage of trade (Section 1-205) or by course of performance (Section 2-208); and

(b) by evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement .

            Section 2-202 once again, underscores the importance of the individual elements of agreement in the ultimate interpretation of the meaning of the contract.  Thus, course of performance, course of dealing, and usage of trade not only create avenues whereby conduct and trade can supply terms of a contract, but also create an avenue by which evidence can be introduced to ‘explain or supplement’ the terms contained in any writings between the parties.  The manner in which this evidence is presented to the court is critical.  If the evidence of course of performance, course of dealing and trade usage is presented to ‘contradict’ the writing, it is not acceptable. If however, such evidence is introduced to ‘explain or supplement the writings’ the evidence is proper.  This is true regardless of whether or not the writings are intended as a ‘final expression’ of the parties’ agreement.

            Section 2-202 was discussed by the Arkansas Court of Appeals in L.F. Brands v Dillard’s 314 SW 3d 736, 2009 and, like most cases which have disc used Section 2-202, reached a decision that was consistent with the statute.  The case involved a breach of contract action brought by L.F. Brands against Dillard’s.  Brands was a supplier of Dillard’s with whom Dillard’s had a long standing relationship.  All transactions between the parties were governed by a document entitled ‘Dillard’s Inc. Purchase Order Terms, Conditions, and Instructions’.  In addition to the terms contained in the purchase orders, undisputed testimony from Brands and Dillard’s employees established that the parties would meet at the beginning of each fashion season to discuss profit margins.  Sales were monitored throughout the course of the season, and allowances would be processed at various times during the year to make adjustments to the margins.  At the end of the year, parties would determine if gross margins had been met.  If not, the parties would negotiate on further allowances to achieve an acceptable resolution.

            Among the provisions contained in the Purchase Order agreement was the following provision:

[L.F. Brands] acknowledges by acceptance and shipment against any Dillard Purchase Order that the terms, conditions and instructions stated herein, in the Purchase Order, [and in two other Dillard's documents] (collectively, the “Agreement”) shall bind [L .F. Brands] and shall constitute the entire agreement between Dillard and [L.F. Brands], which cannot be modified by either party except in a writing executed by both parties, or [another method]; provided, however, that this provision shall not apply to markdown allowance and other credits authorized by [L.F. Brands]․

L.F. Brands went out of business in December of 2003.  In February 2004, Dillard’s deducted markdown allowances and chargeback’s from its account balance.   These markdowns and chargebacks were the basis of Brands’ appeal. 

The trial court denied both parties’ motion for summary judgment determining that the entirety of the parties’ agreement must be determined by looking at both the written documents, as supplemented by the parties’ oral agreements.  The case was submitted to a jury with instructions with the definition of course of dealing, and that course of dealing evidence may be used to give particular meaning to and supplement the terms of the agreement.  The jury found for Dillard’s on the complaint, and further found for Dillard’s on its counterclaim in the amount of $1,265,938.98

            In discussing Brand’s argument that the merger clause in the Purchase Order superceded the prior oral agreements concerning merchandise allowances the Court stated:

This argument sweeps too broadly in this case for the sale of goods governed by Article 2 of the Uniform Commercial Code(UCC) which has a specific provision allowing parol evidence to be introduced even in situations involving fully integrated written agreements.  Under the UCC’s parol evidence rule, a writing intended to the parties’ final expression of their agreement may not be contradicted by evidence of any prior agreement or contemporaneous oral agreement, but it may be supplemented by evidence of the parties’ course of dealing or course of performance. [citing Section 2-202(a).]

The court went on to state:

In such instances, the evidence of a course of dealing that explains or supplements a contract is competent evidence of the parties’ intent and can become a part of a contract.

In affirming the trial court, the court of appeals also noted that, per comment one to Section 2-202, there is no requirement that the contract be ambiguous in order for such evidence to be introduced.

This case underscores a point that has been made repeatedly in previous posts—course of dealing and course of performance, if they exist, are always relevant.  If however, the parties choose to do so, they can include a provision in their contract which excludes evidence of course of dealing, course of performance or usage of trade.  If you are drafting a contract, it is a good practice to examine each of these concepts in the context of your situation, so that any desired adjustments can be made.