Once two parties have negotiated and signed a contract, that document’s terms and specifications are supposed to be unalterable, except by further mutual agreement. Interpretation problems arise when one party to the contract claims there were promises made, before the contract was signed, that were inadvertently not included in the written document.
The norm in the law for addressing these kinds of problems is the “parol evidence rule.” Simply stated, a party may not present an interpretation of a contract or allege that representations were made that add to or vary unambiguous terms in the written agreements.
As an example, an electrical contractor wants some assurances that shop drawing approvals will not be a problem. During contract negotiations, the general contractor tells him that the turnaround time for shop drawing review will be 10 days or less, but this assurance does not make its way into the contract’s terms and conditions. Does this precontract representation survive? Using the parol evidence rule, it probably does not.
The rationale for the parol evidence rule is obvious. The courts want to foster an objective basis for contract interpretation. The legal assumption is that the parties meant what they said in their written agreement, and they included all the agreed terms. Without the parol evidence rule, a party could never be sure of what the other party might later allege had been promised, and the boundaries of the written agreement would become plastic.
In the formal atmosphere of a courtroom, it seems logical to say that the parties had full opportunity to detail this agreement. A party saying that it meant to include something or that it did not fully understand the terms is not making a very compelling argument. On the other hand, the courts recognize the realities of contracting and, in limited circumstances, allow fundamental fairness to make exceptions to the parol evidence rule. One of these exceptions is “course of dealing.”
Course of dealing
Course of dealing is based on past contracts of similar nature between two identical parties. Through consistent past practices, the parties may have established an “understanding” of how the contract is to be read, even if that understanding varies from or supplements the written agreement. It is important to note that evidence of a prior course of dealing may not be used to contradict language of the written contract. The Uniform Commercial Code (UCC), Section 2-202, applicable to the sale of goods, is a good example of how this concept is framed: “[A] record 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 supplemented by evidence of: (a) course of performance, course of dealing, or usage of trade ... ” (emphasis added).
This quasi-rule of contract interpretation is more likely to arise with repetitive construction projects, such as motels or fast-food chain stores. In those situations, the parties are the same, the contracts are very similar if not identical, and there is a commonality of questions and problems over a period of time. There are other circumstances where the owner requires contractors to acknowledge that the same specifications and terms and conditions will apply to all future contracts, even though the individual contracts differ. A course of dealing may arise as to how those terms are used over a succession of projects.
A word of caution: The question of course of dealing arises in court because one party to the contract contends that there was no such course. From an evidence perspective, it helps to think in terms of proving someone’s habit. That is, he always does this, or he never does that. For example, the owner has always let us use the parking lot for storage, or always let us use the material hoist for a man lift, or never closed the main gate before dark.
Course of performance
Where course of dealing rests on proof of actions in past contracts, “course of performance” applies only to how the parties interpret the one existing contract. The element in common is repetition. One variation in how a term of the agreement is applied does not rewrite the contract. According to Aristotle, “one swallow does not a spring make.”
Under the UCC, the formulation is as follows: “1-303(a) A course of performance is a sequence of conduct between the parties to a particular transaction that exists if:
1. “the agreement of the parties with respect to the transaction involves repeated occasions for performance by a party; and
2. “the other party, with knowledge of the nature of the performance and opportunity for objection to it, accepts the performance or acquiesces in it without objection”(emphasis added).
The enigma of the courses
In both course of dealing and course of performance, there is an implied requirement of reliance. The contractor needs to show that, in reliance on past practices, it took actions, which caused it harm when the other side decided to do things in strict accordance with the written agreement.
With this proof, the courts may permit evidence, which adds to or varies the express terms of the agreement, evidence that would otherwise not be admissible. This evidence may be admissible even in the face of a contract clause, which provides that no terms can be modified without a written agreement.
In both, the added “interpretation” based on past practices is not supposed to be used to contradict a term of the contract. To accomplish that feat of contradiction, a contractor would need to prove “waiver” of the term, and a different order of proof is required for that contention. Note that it is not uncommon for a contract to state that a waiver in one instance shall not be deemed a general waiver.
The second important element is proof of the other party’s knowledge of the contract variation employed by the contractor. The built-in assumption is that, if the other party was aware of what you were doing and had an opportunity to object but tacitly approved, then a course of dealing or performance has been established.
How the concept is applied
Even well-drafted contracts contain vague expressions (e.g., “sufficient documentation”) and gaps of information (e.g., location of laydown areas or site access). In these instances, the contracting parties may develop, over time, a method for handling common, daily problems. Where these methods become commonplace or regular, the parties may have supplemented the written agreement by the course of dealing.
In one of my cases, the owner made demands at trial that my contractor client prove its claims with detailed records, which did not exist. The owner’s demands did not appear unreasonable. However, the contractor was able to prove that, throughout construction, changes were negotiated on the basis of estimates only. That being the case, the contractor never felt compelled to keep more complete documentation (reliance), and the owner never requested more (acquiescence). That proof was accepted as a course of performance and was considered adequate for establishing the damages claimed.
Course of dealing/performance cannot change specifications or express terms and conditions of a contract. If that is the goal, the contractor will need to prove a term was waived (the owner voluntarily gave up a right).
Course of dealing/performance arguments, however, can be useful where the other contracting party attempts to change the way he has been doing business during the job. For this reason, it is another valuable concept to keep in your lexicon.