Chapter 11Interpretation and Third Parties

I. Interpretation and Legislation

A. Civil Code If the parties cannot resolve their differences, it

becomes necessary for the court to interpret what the contract means

In 1872, the legislature enacted numerous Civil Code sections to assist with interpretation of contracts

B. Code of Civil Procedure The Code of Civil Procedure also contains

several helpful sections for interpreting terms

Courts now use the objective standard to determine what the intention of a “reasonable person” would be

C. Whole Contract and Divisible Contract

Courts must determine if a contract is a whole (entire) contract or is a divisible (severable) contract

If the contracts is whole, then all of the performances within that contract are required in order to accomplish full performance

A divisible contract is one which has separate performance obligations which are given in exchange for separate performance obligations

D. Incorporation By Reference

An “Incorporation by Reference” clause may appear in a contract.

“[A] copy of the Master Lease is attached hereto as Exhibit ‘C’ and incorporated herein by this reference”

II. Parol Evidence

Parol Evidence Rule “Terms set forth in a writing intended by the

parties as a final expression of their agreement…may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement” [CCP§ 1856]

A. Let’s Go To Court If a parol evidence objection with regard to

evidence gets admitted into court for consideration, the court must determine whether the previously admitted writing was intended by the parties as a final expression of their agreement

A court can make this determination using one of 3 approaches:

1. Four corner test2. Four corner-plus test3. Integration clause test

Integration Clause If the parties utilized an INTEGRATION

CLAUSE in the contract, the court knows that the parties intended the writing as the final expression of their agreement, unless evidence can be introduced that the integration clause was included by fraud, duress, or mistake

Many standard forms, such as rental agreements, vehicle purchase contracts and franchise agreements, contain an integration clause

III. Contracts and Third Parties

Sometimes a third party becomes involved

in a contract. Third party beneficiaries Assignments of rights or delegation of duties

A simplistic way to differentiate the two would be generally:

If there are three parties in the contract from the beginning, it is a third party beneficiary situation

1. If there are two parties in the contract from the beginning and a third party is added at a later date, it is an assignment situation

IV. Assignment

Assignment ASSIGNMENT OF RIGHTS is when a party to a

contract transfers his or her rights in the contract to another

DELEGATION OF DUTIES is when a party transfers his or her duties in the contract to another

The term “assignment” is generally used to cover both an assignment of rights and a delegation of duties

Assignments may either be a “partial” or “total” assignment

A. Is the Contract Assignable? Whether or not a contract is assignable will depend

upon on the nature of the contract and the terms and conditions contained therein

As a general rule, contracts are assignable without the permission of the other party, with 2 major exceptions:

1. Contract Prohibition

2. Changing Risk or Obligation

B. Assignment Issues

If a contract is assignable, then the question becomes:

What was the intention of the parties?

1. Rights of the Assignee Against the Assignor

2. Competing Assignees

3. Delegation of Duties

V. Third Party Beneficiary Contracts

In third party beneficiary contracts, there are 3

parties mentioned in or intended to be in the contract at the time of contracting

Incidental beneficiaries Intended beneficiaries

A. Incidental Beneficiaries An INCIDENTAL BENEFICIARY is a third party who

will benefit from the contract between the parties, but that benefit is so removed and remote that the beneficiary receives only an incidental benefit from the contract

The parties to the contract did not make the contract “expressly for the benefit” of the incidental beneficiary

The incidental beneficiary has no rights in the contract and cannot sue to enforce it

B. Intended Beneficiaries An INTENDED BENEFICIARY is a party that is

intended to receive a benefit in the contract

The contract was made “expressly for the benefit” of this party

“A contract made expressly for the benefit of a third person may be enforced by him at any time before the parties thereto rescind” [Civil Code § 1559]

Chapter Summary Interpretation and

Legislation Civil Code Code of Civil Procedure Whole Contract and Divisible

Contracts Incorporation by Reference

Parol Evidence Let’s Go To Court

Contracts and Third Parties

Assignment Is the Contract Assignable? Assignment Issues

Third Party Beneficiary Contracts Incidental Beneficiaries Intended Beneficiaries