ARB inc v e-systems inc and parol evidence rule

I assigned excerpts from this case for class today because it illustrates the proper way a court should analyze the parol evidence rule ("PER"). I write here, however, because the excerpted case seems to me to gloss over too quickly the relationship of the PER to "cover" and not to explain very well why the court remanded the case for calcuation of "cover" damages. Thus, this essay should help clairify the ARB case.

A Fuller Factual Description

ARB, which originally stood for American Research Bureau, was one of the first (along with A.C. Neilson Co.) sellers of television audience reports. That is, it surveyed which TV programs viewers watched and sold that data to advertisers. It was, and is, a very lucrative business.

Before the late 1960s the audience reports were gathered by ARB or Neilson calling targeted households, which were supposed to keep a record of which programs they watched, and then write reports based on this self-reporting. But, as you can easily see, this method left a lot to be desired. Consumers might be hard to reach or they might not recall what they had watched. Thus, the pressure was on in the late 1960s to come up with a different and more accurate method to measure what people watched. Neilson began replacing the written diaries kept by consumers with electronic equipment hooked up to the TV so that the errors of the earlier system could be avoided. ARB was late in getting into the "game" of electronic monitoring, but decided it had to do so also. This case is about the electronic system that ARB (now it is called "Arbitron") tried to purchase in order to "catch up" with Neilson.

In short, ARB entered into a complex contract (53 pages) with E-Systems to provide the requisite electronic monitoring system. Well, as you might imagine, deliveries were late, equipment didn't work, a new request-for-proposal process had to be pursued, ARB suffered both direct and consequential damages, and ARB was hamstrung in its attempt to be competitive with Neilson. The case is a long and complex one, but for our purposes the important issue is how the lower court dealt with the parol evidence problem. In fact, when I say "lower court" I mean a "Special Master," who was appointed by the District Court to sort out all of the claims of ARB and E-Systems against each other.

The Issue

In an early stage of the contracting process, ARB wanted the following provision inserted in the contract:

"If, as a result of default of performance by the Seller, this contract is terminated in whole or in part and if it is necessary to procure any of the specified products or services elsewhere, then Seller will be liable for any reprocurement charges which exceed the amount which would have been due the Seller if he had satisfactorily completed this order," 663 F2d at 193.

In other words, ARB wanted Seller to agree expressly, by contract, that it would be responsible for what the UCC calls "cover" damages. "Cover" is also statorily defined at 2-712(1). Let's turn to that, even though we haven't officially gotten there yet in this course.

"If the seller wrongfully fails to deliver or repudiates or the buyer rightfully rejects or justifiably revokes acceptance, the buyer may 'cover' by making in good faith and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from the seller" (2-712(1)).

By trying to get its choice sentence in the contract, then, ARB would have double protection--i.e., by contract and by statute.

But, as it turned out, E-Systems didn't want the contractual provision, and so the final form of the contract deleted it. At trial, however, the Special Master looked at earlier versions of the contract and concluded as follows: Since the early version had a provision allowing for contractual "cover" damages, and since the final version of the contract deleted these "cover" damages, then ARB had, as it were "bargained away" any right they might conceivably have to "cover" damages. This was the conclusion of the Special mater. Thus, ARB would get no cover damages. This was a significant blow to ARB because it cost them quite a bit more to get a system which finally would make them competitive with Neilson.

On Appeal

On appeal ARB argued that the Special Master had inappropriately considered evidence of the earlier contract. Its argument was that the MD parol evidence rule would have prohibited introduction of the earlier contract negotiations at trial. It is this argument that the appellate court considers, then, in the excerpted portion of the case. Here is ARB's thinking: 'If evidence of earlier negotiations is admissible, we are in a difficult situation, because it surely looks like we have, in order to secure the contract, given up our right to "cover" damages. Thus, we need to argue that the evidence is inadmissible. If we successfully do that, we then have a contract that is silent on issues relating to "cover." A contract silent with respect to issues of cover would allow the statutory damage provision then to be invoked.'

Now with this background, we can easily see how the court ruled. The court asked the question of whether the earlier negotiations should be admissible under the MD Parol Evidence Rule. The court's analysis, as I have pointed out elsewhere, first asked the question of whether the contract was a "complete and exclusive statement" of the parties' intent. It held that there were enough indicia in the contract to conclude that this was the case. Thus, the earlier version of the contract, with ARB apparently waiving its "cover" remedy, would be excluded. Then, for good measure, the court also concluded that even if the contract between ARB and E-Systems, upon which they both acted, was not a "complete and exclusive" statement of the terms of the agreement, the earlier version would not be admissible.

Conclusion

Thus, the court reversed the lower court and remanded the case for the calculation of "cover" damages. Cover damages now were available because nothing excluded them and ARB had brought a claim for "cover" damages under 2-712.

I hope this summary provided some helpful supplementary information to appreciate the exerpted case.

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