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PA R O EV I D E N IC EBR E A COHF CO N T R ACA TS E S L N C

BY HON. RANDY WILSON

HE TWO COMPANIES NEGOTIATED their contract over several months and believed they had resolved all difficulties. Now, years later, the once harmonious relationship has cooled and each is accusing the other of breach. The problem, however, is they have diametrically opposite interpretations of the key provision of the contract. Both sides have filed cross motions for summary judgment, both claiming that the contract is clear and unambiguous. Unfortunately, the two sides' clear and unambiguous interpretations are radically different. Additionally, both sides have submitted affidavits in support of their positions that include:

Definitions of terms using evidence of industry custom

and practice; Copies of drafts of the contracts that circulated' back and forth during negotiations; Testimony of what was said during negotiations; and Testimony of negotiators of their intent and meaning to terms in the contract. This article will address when parol evidence can be used in a contract dispute and what evidence is admissible. Contract Ambiguity. The threshold question in any contract dispute is whether the contract is ambiguous or unambiguous. Ambiguity is a question of law for the court to decide. 1 Because ambiguity is a legal question, a court may hold that an agreement is ambiguous even though both parties contend the contract is unambiguous.2 Just as the parties may not stipulate to an erroneous proposition of law, an agreement by the parties of ambiguity is not binding on the court. Courts generally determine a contract's ambiguity through analysis of the writing alone ("the four corners approach").3 When analyzing a writing to determine ambiguity, courts must apply established rules of interpretation.4 In interpreting a written agreement, the court's primary purpose is to determine the true intentions of the parties as expressed in the contract or agreement.5 In determining the intent of the parties, courts look only within the four

corners of the agreement to see what was actually stated, and not what was allegedly meant.6 "Courts should examine and consider the entire writing in an effort to harmonize and give effect to all the provisions of the contract so that none will be rendered meaningless."7 No single provision, sentence, or clause taken alone will be given controlling effect.8 "Courts must be particularly wary of isolating from its surroundings or considering apart from other provisions a single phrase, sentence, or section of a contract."9 Contract terms are "to be given their plain, ordinary, and generally accepted meaning" unless the contract shows them "to have been used in a technical or different sense."10 Plain, ordinary, and generally accepted meaning may be determined by use of external references such as a dictionary.11 Courts may "consider thecommercial context of the transaction" to aid in interpretation. 12 This commercial context, however, is limited to the "ordinary terms, customs and usages then in effect" in the industry.13 May Evidence Outside the Contract Be Considered to Determine Ambiguity? As a general rule, most decisions state emphatically that parol evidence may not be considered until the court first determines that the contract is ambiguous. "Only where a contract is first determined to be ambiguous may the courts consider the parties' interpretation, and admit extraneous evidence to determine the true meaning of the instrument."14 This seeming bright line has been blurred by some decisions, however. In Sun Oil Co. v. Madeley,15 the Texas Supreme Court surveyed the past decisions and concluded that the surrounding circumstances of contract formation may be considered in determining contract ambiguity: Evidence of surrounding circumstances may be consulted. If, in the light of surrounding circumstances, the language of the contract appears to be capable of only a single meaning, the court can then confine itself to the writing. Consideration of the facts and circumstances surrounding the execution of a contract, however, is simply an aid in the construction of the contract's language. There are limits. For example,

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when interpreting an integrated writing, the parol evidence rule circumscribes the use of extrinsic evidence.16 Thus, some courts consider "how a reasonable person would have used and understood the language, by pondering the circumstances surrounding the contract's negotiation, and by considering the purposes which the parties intended to accomplish by entering into the contract." 17 As a result, those courts will examine prior negotiations and "all other relevant incidents bearing on the intent of the parties." 18 However, under no circumstances may the parties contradict or vary the terms of the agreement by oral statements of their intentions. 19 At best, this seems circular. In order to determine ambiguity, courts are permitted to consider the circumstances surrounding contract formation, including negotiations. However, the parties may not vary the terms of the agreement by oral statements of their intentions. Yet, the court hasn't yet determined the meaning of the contract. How can a court know if testimony varies the terms of the agreement before the court determines if the contract is unambiguous? Unquestionably, evidence of industry custom and practice is admissible. Similarly, definitions and technical usage are permitted to assist the court to determine whether an ambiguity exists. On the other hand, it is equally clear that testimony of the parties^ interpretation and intent is inadmissible. The gray area concerns evidence concerning the goals and circumstances surrounding contract formation, and the drafts that circulated before the contract was finalized. While the Supreme Court says that in some cases the contract may be read in light of the surrounding circumstances to determine whether an ambiguity exists, 20 in other cases the Court refuses to consider evidence surrounding contract formation. 21 Two cases demonstrate the confusion in this area. In National Union Fire Ins. v. CB1 Industries,22 the Court held that extrinsic evidence (such as trade usage, prior dealings, and prior negotiations) "may, indeed, be admissible to give the words of a contract a meaning consistent with that to which they are reasonably susceptible, i.e., to 'interpret' contractual terms."23 However, in Friendswood Develop. Co. v. McDade & Co.2* the Court refused to admit evidence of one party's regular course of conduct. The Court held that this was inadmissible parol evidence that "cannot be admitted for the purpose of creating an ambiguity"25

The law of what evidence a court may consider in determining ambiguity will continue to evolve. Latent vs. Patent Ambiguity. Some courts describe ambiguity in a contract as either patent or latent. A patent ambiguity is evident on the face of the contract. A latent ambiguity arises when a contract which is unambiguous on its face is applied to the subject matter with which it deals and an ambiguity arises by virtue of a collateral matter. 26 In National Union, the Court gave the classic example of a latent ambiguity: "If contract called for goods to be delivered to the green house on Pecan Street, and there were in fact two green houses on the street, it would be latently ambiguous."27 Although the difference in the two types of ambiguity seems clever, there is no real difference in the way either ambiguity is treated or considered.28 What Determines Ambiguity? If the determination of ambiguity is a legal question for the court, then how is that question determined? Invariably, both sides argue for opposite interpretations of the same contract. A contract is no ambiguous if it can be given a definite or certain meaning as a matter of law. 29 However, if the contract is subject to two or more reasonable interpretations after applying the pertinent rules of construction, the contract is ambiguous.30 An ambiguity does not arise simply because the parties advance different interpretations of the contract. "Neither conflicting expectations nor disputation is sufficient to create an ambiguity."31 For an ambiguity to exist, both interpretations must be reasonable. 32 What Evidence is Admissible With an Unambiguous Contract? Once the court determines that the contract is unambiguous, the parol evidence rule bars admission of extrinsic evidence regarding prior or contemporaneous: agreements. 33 Moreover, the court may not consider parol evidence as to the parties' intent. 34 Some evidence, of course, is still admissible, even with an unambiguous contract. Parol evidence may be admissible to give the words of a contract a meaning consistent with that to which they are reasonably susceptible, i.e., to "interpret contractual terms.35 Trade usages and customs are also admissible to explain the contract's meaning as long as such explanations do not contradict the written agreement. 3' Additionally, extrinsic evidence is admissible to show the non existence of a contract or an oral condition precedent. 37

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The parol evidence rule also does not exclude evidence offered to show that the agreement is invalid for fraud, accident, duress, undue influence, illegality, or mistake.38 Parol evidence is also admissible to establish a right to an equitable remedy such as reformation of the contract.39 And finally, parol evidence may be admissible to show collateral agreements that "are not inconsistent with and do not vary or contradict the express or implied terms or obligations thereof."40 Of course, the parol evidence may not vary or contradict either the express or implied terms of the written agreement.41 What Evidence is Admissible With an Ambiguous Contract? Once the court determines that a contract contains an ambiguity, the interpretation of the instrument is a question of fact for the jury.42 To assist the jury in making this interpretation, the parties' interpretations, intent, prior negotiations and other extraneous evidence is admissible.43 Conclusion. The admission of parol evidence is wholly dependent on the determination of ambiguity. Unfortunately, the cases in Texas are not consistent on what evidence is admissible in order to make that finding. Judge Randy Wilson is judge of the 157th District Court in Harris County, Texas and frequently speaks on various topics in civil litigation. The author gratefully acknowledges the assistance of James Garrett, a student at University of Houston Law Center, in preparing this article.
1

R&P Enter, v. LaGuarta, Gavrel & Kirk, Inc., 596 S.W.2d 517, 518 (Tex. 1980). 2 JM. Davidson, Inc. v. Webster, 128 S.W.3d 223, 231 (Tex. 2003); Hewlett-Packard Co. v. Benchmark Elecs., Inc., 142 S.W.3d 554, 561 (Tex. App.Houston [14th Dist.] 2004, pet. denied). 3 Sun Oil Co. v. Madeley, 626 S.W.2d 726, 728 (Tex. 1981); Cook Composites, Inc. v. Westlake Styrene Corp., 15 S.W.3d 124, 131-32 (Tex. App.Houston [14th Dist.] 2000, pet dism'd). 4 Universal C.I.T. Credit Corp. v. Daniel, 243 S.W.2d 154, 157 (Tex. 1951). 5 Balandran v. Safco Ins. Co., 972 S.W.2d 738, 741TTex. 1998); Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983). 6 Cook Composites, Inc. v. Westlake Styrene, 15 S.W.3d 124, 131 (Tex. App.Houston [14th Dist.] 2000); Esquivel v. Murray Guard, Inc. 992 S.W.2d 536, 544 (Tex. App.Houston [14th Dist.] 1999, pet. denied). 7 Universal C.I.T. Credit Corp., 243 S.W.2d at 157-58. i Coker, 650 S.W.2d at 393; Myers v. Gulf Coast Minerals Mgmt. Corp., 361 S.W.2d 193, 196 (Tex. 1962).

State Farm Ins. Co. v. Beaston, 907 S.W.2d 430, 433 (Tex. 1995). Western Reserve Life Ins. Co. v. Meadows, 261 S.W.2d 554, 564 (Tex. 1953). 11 Mescalero Energy, Inc. v. Underwriters Indem. Gen. Agency, Inc., 56 S.W.3d 313, 320 (Tex. App.Houston [1st Dist.] 2001, pet. denied). 12 Intratex Gas Co. v. Puckett, 886 S.W.2d 274, 278 (Tex. App.El Paso 1994, no writ). 13 See id.;Atwood v. Rodman, 355 S.W.2d 206, 216 (Tex. Civ. App.El Paso 1962, writ ref'd n.r.e.). 14 Kelly-Coppedge, Inc. v. Highlands Ins., 980 S.W.2d 462, 465 (Tex. 1998); Nat'l Union Fire Ins. Co. v. CBI Indus., 907 S.W.2d 517, 520 (Tex. 1995); Huntonv. Guardian Life Ins. Co. of Am., 243 F. Supp. 2d 686, 708 (S.D. Tex. 2002). 15 626 S.W.2d 726 (Tex. 1982). 16 Id. at 731. 17 Cook Composites, 15 S.W.3d at 132; Manzo v. Ford, 731 S.W.2d 673, 676 (Tex. App.Houston [14th Dist.] 1987, no writ). 18 Id. 19 Id. 20 Balandran, 972 S.W.2d 738; see also Columbia Gas Transmission Corp. v. New Ulm Gas, Ltd., 940 S.W.2d 587, 589 (Tex.1996); Nat'l Union, 907 S.W.2d at 520 21 Friendswood Develop. Co. v. McDade & Co., 926 S.W.2d 280, 283 (Tex. 1996). 22 907 S.W.2d 517 (Tex. 1995). 23 Id. at 521. 24 926 S.W.2d 280, 283 (Tex. 1996). 25 Id. at 283. 26 Nat'l Union, 907 S.W.2d at 520. 27 Id. 520 n. 4. 28 Meters v. Maverick, 28 S.W. 716 (Tex.Civ.App. 1894). 29 Columbia Gas Transmission, 940 S.W.2d at 589; Nat'l Union, 907 S.W.2d at 520. 30 Universal C.I.T. Credit, 243 S.W.2d at 157. 31 Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132, 134 (Tex. 1994). 32 Columbia Gas Transmission, 940 S.W.2d at 589. 33 DRC Parts & Accessories, L.L.C. v. VM Motori, S.P.A., 112 S.W.3d 854 (Tex. App.Houston [14th Dist.] 2003); see also Nat'l Union, 907 S.W.2d at 521; Sun Oil, 626 S.W.2d at 731. 34 CU Lloyd's of Tex. v. Hatfield, 126 S'.W.3d 679, 682 (Tex. App.Houston [14th Dist.] 2004.; see also Kelly-Coppedge, 890 S.W.2d at 464. 35 Nat'l Union, 907 S.W.2d at 521 (emphasis added). 36 Miller v. Gray, 149 S.W.2d 582, 583 (Tex. 1941). 37 Baker v. Baker, 183 S.W.2d 724, 728 (Tex. 1944); Castroville Airport, Inc. v. City of Castroville, 974 S.W.2d 207, 210 (Tex. App.San Antonio 1998, no pet.) (Emphasis added). 38 Bradbury v. State, 503 S.W.2d 619, 622 (Tex. Civ. App.Tyler 1973, no writ). 39 Id. at 622. 40 Hubacek v. Ennis State Bank. 317 S.W.2d 30.31 (Tex 1958); see
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also Transit Enter., Inc. v. Addicks Tire & Auto Supply, Inc., 725 S.W.2d 459, 461 (Tex. App.Houston [1st Dist.] 1987, no writ) (applying exception for collateral, consistent, contemporaneous agreements); Sherrod v. Bailey, 580 S.W.2d 24, 29 (Tex. Civ. App.Houston [1st Dist.] 1979, writ ref'd n.r.e.) (same) 41 Hubacek, 317 S.W.2d at 31; Toe v. Murphy, 611 S.W.2d 449,451-52 (Tex. Civ. App.Dallas 1980, writ ref'd n.r.e.); NHA, Inc. v. Jones, 500 S.W.2d 940, 944-45 (Tex. Civ. App.Fort Worth 1973, writ ref'd n.r.e.) (both citing Hubacek). 42 Reilly v. Rangers Mgmt, Inc., 727 S.W.2d 527, 529 (Tex. 1987). 43 Nat'l Union, 907 S.W.2d at 520; Quality Oilfield Prod. v. Michigan Mutual Ins. Co., 971 S.W.2d 635, 637 (Tex. App.Houston [14th Dist.] 1998).