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11 George Mason School of Law Contracts II Interpretation Not to be shared F.H. Buckley fbuckley@gmu.edu

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Terms and Interpretation Terms: May we look outside a writing to supplement it with additional terms? Interpretation: May we look outside a writing to interpret the meaning of the words of the writing? 2

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Terms and Interpretation Terms Interpretation Which was Masterson at 550? an option to purchase 3

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4 Sometimes theres no common meaningand no contract Raffles v. Wickelhaus at 572 The Peerless

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5 Sometimes theres no common meaningand no contract 125 bales of Surat cotton, ex Peerless from Bombay: Raffles v. Wickelhaus The Peerless

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6 Sometimes theres no common meaningand no contract Whats a court to do, in that case?

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Interpretive Theories Literary Interpretation Subjective Objective 7

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Literary Interpretation Subjective: Authorial Intention There is a meaning, and it is the authors meaning To be derived by seeking evidence about his motivation from a knowledge of his background and influences 8

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Literary Interpretation Objective Privileges the reader: There is a meaning but the authors intention is irrelevant. Only the words of the text matter. 9

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Two kinds of Originalism in Constitutional Law Subjective: Original Intent Originalism The Records of the Philadelphia Convention Objective: Original Meaning Originalism What would an ordinary reader in 1787 have made of the words of the Constitution 10

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At Contract Law Subjective: Contextualism Find out what the parties might have meant by looking at all background evidence Objective: Textualism Dont look outside the words of the contract: Plain Meaning 11

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Terms and Interpretation Writing onlyOral Evidence TermsParol Evidence Rule: Burke in Masterson Unintegrated Agreements: Traynor in Masterson 12

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Terms and Interpretation Writing onlyOral Evidence TermsParol Evidence Rule: Burke in Masterson Unintegrated Agreements: Traynor in Masterson InterpretationTextualismContextualism 13

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14 Textualism in New York WWW v. Giancontieri at 569 What did clause 31 provide? 14

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15 Textualism in New York WWW v. Giancontieri at 569 What was the reason for clause 31? Why might the buyer want to exercise the cancellation right? 15

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16 Textualism in New York WWW v. Giancontieri at 569 What was the reason for clause 31? Why might the seller want to exercise the cancellation right? 16

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17 Textualism in New York WWW v. Giancontieri at 569 What was the reason for clause 31? Why might the seller want to exercise the cancellation right? Does that matter? 17

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18 The Limits of Textualism: In re Soper 573 18

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19 In re Soper 573: to my wife On objective or plain meaning standards, who is the wife? 19

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20 In re Soper: to my wife On objective or plain meaning standards, who is the wife? On subjective or contextualist standards, who is the wife? 20

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21 In re Soper: to my wife On objective or plain meaning standards, who is the wife? On subjective or contextualist standards, who is the wife? To hold otherwise would give the word a fixed symbol 21

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22 In re Soper How might Soper have cured the problem? 22

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23 In re Soper How might Soper have cured the problem? to my wife, Gertrude Whitby Young So why didnt he? 23

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24 In re Soper: to my wife Did the insurer know about Adeline? And what if it had simply paid out to Gertrude? 24

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25 Pacific Gas 574 25 Roger Traynor

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26 Pacific Gas 574 Why did Pacific Gas sue in Contract? 26

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27 Pacific Gas 574 What did the indemnity clause state? 27

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28 Pacific Gas What did the indemnity clause state? What does A indemnifies B mean? 28

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29 Pacific Gas What did the indemnity clause state? What does A indemnifies B mean? A compensates B for claims asserted by C against B and caused by A? 29

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30 Pacific Gas What did the indemnity clause state? What does A indemnifies B mean? A compensates B for claims asserted by C against B Qu. A compensates B for losses incurred by B and caused by A? 30

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31 Pacific Gas What did the indemnity clause state? What does A indemnifies B mean? A compensates B for claims asserted by C against B Qu. A compensates B for losses caused by A Just how would you expect damage to arise in any way connected with the performance of this contract? 31

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32 Pacific Gas What did the indemnity clause state? What does A indemnifies B mean? A compensates B for claims asserted by C against B Qu. A compensates B for losses caused by A. What did the trial court hold? A plain language standard 32

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33 Pacific Gas What did the indemnity clause state? What does A indemnifies B mean? A compensates B for claims asserted by C against B Qu. A compensates B for losses caused by A. And Traynor? You can see this coming, cant you? 33

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34 Pacific Gas Traynor rejects textualism Primitive faith in magic words 34

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35 Pacific Gas: Footnote 2 "The elaborate system of taboo and verbal prohibitions in primitive groups; the ancient Egyptian myth of Khern, the apotheosis of the words, and of Thoth, the Scribe of Truth, the Giver of Words and Script, the Master of Incantations; the avoidance of the name of God in Brahmanism, Judaism and Islam; totemistic and protective names in mediaeval Turkish and Finno-Ugrian languages; the misplaced verbal scruples of the 'Precieuses'; the Swedish peasant custom of curing sick cattle smitten by witchcraft, by making them swallow a page torn out of the psalter and put in dough....' from Ullman, The Principles of Semantics (1963 ed.) 43. (See also Ogden and Richards, The Meaning of Meaning (rev. ed. 1956) pp. 24- 47.) 35

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36 Thoth Rules! 36 The Giver of Words

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37 Pacific Gas Traynor rejects textualism Primitive faith in magic words Can one draft ones way around this? 37

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38 Pacific Gas Traynor as a deconstructionist Primitive faith in magic words Can one draft ones way around this? Really? 38

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39 Pacific Gas What do you think Traynor would have done had the trial judge ruled that the plain meaning of the contract was just the opposite? that the indemnity clause didnt apply? 39

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40 Alex Kozinski and New Textualism

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41 Trident Center at 577 The Trident Center, West LA 41

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42 Kozinski and New Textualism The Trident Center 42 Completed in 1983, Trident Center consists of two, steel-framed, 10-story office towers containing approximately 383,000 square feet and connected by a five-level parking structure. Trident Center is situated on approximately 3.6 acres of beautifully landscaped common areas rich with tenant amenities.

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43 Yeah, right 43

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44 Trident Center Maker shall not have the right to prepay for the first 12 years. 44

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45 Trident Center Maker shall not have the right to prepay for the first 12 years. So: Does maker have the right to prepay after four years? 45

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46 What happened to interest rates 46

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47 Trident Center In the event of prepayment resulting from a default the prepayment fee will be 10 percent. But whose option? 47

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48 Trident Center Which is dispositive and why? What if Trident stopped making payments to trigger a default? Does Connecticut have an option? 48

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49 Trident Center Was this between sophisticated parties? 49

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50 Trident Center Mitchell Silberberg & Knupp web site: CORE SERVICES: Commercial Properties Represent purchasers and sellers of commercial property as well as owners, developers, investors and contractors in planning, zoning, entitling, financing, development, construction of commercial, industrial, retail, residential and hotel projects. 50

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51 Trident Center Manat Phelps Law Firm: Manatt's attorneys have a broad background in all areas of real estate, land use and hospitality. Our professionals are among the premier real estate and development advisors in the nation 51

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52 Trident Center Was this between sophisticated parties Were they really much less so in Pacific Gas? Hunt Foods? 52

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Going outside the writing Writing onlyOral Evidence Terms Interpretation 53

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Going outside the writing Writing onlyOral Evidence TermsParol Evidence Rule: Burke in Masterman The Four Corners Rule Complete Integration Effective Merger Clauses Interpretation 54

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What has been promised? Writing onlyOral Evidence TermsParol Evidence Rule: Burke in Masterman Unintegrated Agreements Partial Integration Traynor on the need to refer to oral evidence to prove intergration The fraud exception Interpretation 55

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What has been promised? Writing onlyOral Evidence TermsParol Evidence Rule: Burke in Masterman Unintegrated Agreements InterpretationTextualism: WWW v. Giancontieri 56

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What has been promised? Writing onlyOral Evidence TermsParol Evidence Rule: Burke in Masterman Unintegrated Agreements InterpretationTextualismContextualism Traynor in Pacific Gas 57

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58 When does it make least sense to admit oral evidence?

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59 When does it make least sense to admit oral evidence? Idiosyncratic bargains and the courts information problem

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60 When does it make least sense to admit oral evidence? Idiosyncratic bargains The alleged oral terms would be harsh and unusual (e.g. cancellation rights in Snyder at 565)

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61 When does it make least sense to admit oral evidence? Idiosyncratic bargains Harsh terms Sophisticated parties (e.g. Pacific Gas)

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62 When does it make least sense to admit oral evidence? Idiosyncratic bargains Harsh terms Sophisticated parties Non-standard terms

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63 When does it make least sense to admit oral evidence? Idiosyncratic bargains Harsh terms Sophisticated parties Non-standard terms Merger clauses

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64 When does it make Most sense to admit oral evidence?

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65 When does it make most sense to admit oral evidence? The transaction costs of inclusion? When these are high, courts might be more likely to admit parol evidence

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66 When does it make most sense to admit oral evidence? The transaction costs of inclusion? Unsophisticated parties

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67 Now: Canons of interpretation Express Terms Course of performance Course of dealing Trade Usage 67

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68 Express Terms Restatement 203(d) Give greater weight to specifically negotiated over standard terms 68

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69 Express Terms Restatement 203(c) Prefer specific terms over general terms Inclusio unius est exclusio alterius 69

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70 Canons of interpretation Restatement 203(b) Express terms > course of performance, course of dealing, trade usage Course of performance > course of dealing, trade usage Course of dealing > trade usage 70

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71 Canons of interpretation Restatement 203(b) Express terms > course of performance, course of dealing, trade usage Course of performance > course of dealing, trade usage Course of dealing > trade usage Snyder p. 565: what was the course of dealing? 71

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72 Trade customs Frigalment p. 585 What were the express terms? 72

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73 Trade customs Frigalment p. 585 What were the express terms? fresh frozen chicken, Grade A Which might have meant? 73

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74 Trade customs Frigalment p. 585 What were the express terms? fresh frozen chicken, Grade A Which might have meant? fowl or stewing chicken, or Broiler chicken 74

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75 Trade customs Frigalment p. 585 What was the trade usage? 75

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76 Trade customs Frigalment p. 585 What was the trade usage? Higher grade broiler chicken 76

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77 Trade customs Why was the trade usage rejected? 77

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78 Trade customs Why was the trade usage rejected? Seller was new to the trade 78

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79 Trade customs Frigalment p. 585 Who was best able to fix this? 79

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80 Sunshine Biscuits at 606 Why a different result? 80

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81 Interpretation under UCC 2-202 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 a course of dealing or usage of trade (Section 1- 205) or by course of performance (Section 2-208); and

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82 Interpretation under UCC 2-202 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 a course of dealing or usage of trade (Section 1- 205) or by course of performance (Section 2-208); and Is this more liberal than the Restatement?

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83 UCC 2-208. Course of Performance (1) Where the contract for sale involves repeated occasions for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance accepted or acquiesced in without objection shall be relevant to determine the meaning of the agreement. (2) The express terms of the agreement and any such course of performance, as well as any course of dealing and usage of trade, shall be construed whenever reasonable as consistent with each other; but when such construction is unreasonable, express terms shall control course of performance and course of performance shall control both course of dealing and usage of trade

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84 UCC 1-205. Course of Dealing and Usage of Trade (1) A course of dealing is a sequence of previous conduct between the parties to a particular transaction which is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct. (2) A usage of trade is any practice or method of dealing having such regularity of observance in a place, vocation or trade as to justify an expectation that it will be observed with respect to the transaction in question. The existence and scope of such a usage are to be proved as facts. If it is established that such a usage is embodied in a written trade code or similar writing the interpretation of the writing is for the court.

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85 Canons of interpretation UCC 2-208(2) Express terms > course of performance, course of dealing, trade usage Course of performance > course of dealing, trade usage Course of dealing > trade usage 85

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86 UCC 2-208. Course of Performance and Waivers (3) Subject to the provisions of the next section on modification and waiver, such course of performance shall be relevant to show a waiver or modification of any term inconsistent with such course of performance..

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87 UCC 2-202(a) and waivers Do several waivers of contractual rights amount to a course of dealing? Would you expect that waivers are frequent amongst relational parties?

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88 Columbia Nitrogen 595 88

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89 Columbia Nitrogen 595 89 Columbia Royster

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90 Columbia Nitrogen 595 Buyer agrees to purchase and seller agrees to furnish quantities on the following terms Products Supplied Under Contract Minimum Tonnage per year 90

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91 Columbia Nitrogen 595 91 Columbia Royster Minimum 31,000 tons yr/3 yrs

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92 Columbia Nitrogen Who took the risk of price fluctuations? 92

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93 Columbia Nitrogen Who took the risk of price fluctuations? What did the escalation clause cover? 93

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94 Columbia Nitrogen Who took the risk of price fluctuations? How was the merger clause drafted? 94

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95 Columbia Nitrogen Who took the risk of price fluctuations? What did the default clause specify? 95

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96 Columbia Nitrogen Who took the risk of price fluctuations? What was the course of dealing where Royster was the buyer? Trade Usage? 96

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97 Columbia Nitrogen Who took the risk of price fluctuations? What was the course of dealing where Royster was the buyer? Trade Usage? Was the express language inconsistent with this? 97

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98 Columbia Nitrogen Who took the risk of price fluctuations? What was the course of dealing where Royster was the buyer? Trade Usage? As between the parties, who was in the best position to predict price fluctuations? 98

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99 Columbia Nitrogen Who took the risk of price fluctuations? What was the course of dealing where Royster was the buyer? Trade Usage? Do you agree with Vic Goldberg at 604? 99

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100 Southern Concrete 600 100 Power Plant, Carrolton GA

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101 Southern Concrete 600 101 Southern Concrete concrete Mableton

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102 Southern Concrete 600 How to distinguish from Columbia Nitrogen? 102

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103 Southern Concrete How to distinguish from Columbia Nitrogen? The equities? No prior dealing here. Contract default clause? Escalation clause? 103

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104 Southern Concrete How to distinguish from Columbia Nitrogen? The risk was not a change of price but a change in the quantity buyer would need 104

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105 Southern Concrete How to distinguish from Columbia Nitrogen? The risk was not a change of price but a change in the quantity buyer would need Who is in the best position to determine that? 105

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106 Southern Concrete Evenfield on contractual enforcement Why might a course of dealing not tell us much When is a waiver just a one-shot waiver? 106

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107 Southern Concrete Evenfield on contractual enforcement Why not put the parties to the election of negativing customs and usages? Cf. merger clause at 605 107

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108 Doppelt, p. 608 Dealer 1 Dealer 2 Consumer 108 Title not to pass to consumer unless Dealer 1 consents

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109 The UCC on passing of title The nemo dat rule of UCC 2-403(1) A purchaser of goods acquires all title which his transferor had or had power to transfer [and in principle nothing more] Nemo dat quod non habet 109

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110 The UCC on passing of title The exception for entrustment A purchaser of goods acquires all title which his transferor had or had power to transfer 110

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111 The UCC on passing of title The entrustment exception of UCC 2-403(2) (2) Any entrusting of possession of goods to a merchant who deals in goods of that kind gives him power to transfer all rights of the entruster to a buyer in ordinary course of business. 111

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112 Doppelt, p. 608 Dealer 1 Dealer 2 Consumer 112 Dealer 2 can pass good title to consumer buyer in the ordinary course notwithstanding a secret reservation of title by Dealer 1