Anglo-American Contract and Torts

Prof. Mark P. Gergen

21. Interpretation: parol evidence and plain meaning (Sessions 9 and 10)

Contract: a promise the law will enforce. Restatement Contracts § 1

In the late 19th and early 20th centuries classical theorists of contract conceived of contract as private legislation. People enter into a contract to put themselves under an obligation the other may go to court to enforce.

This leads to the assumption that an incomplete agreement is not a contract. See the doctrine on indefiniteness.

And it leads to the assumption that when parties reduce their obligation to writing they intend for a court to look to that writing to determine their obligation.

When a court looks at a writing it may find nothing to resolve the parties dispute because the writing does not address the matter or because the terms are ambiguous.

Frigaliment, Text 164, illustrates. Contract for “chicken.” Buyer intends young broilers. Seller intends old stewing chicken (fowl).

The court considered all relevant evidence to determine each parties’ subjective intent and whether one party’s understanding was more reasonable in the circumstances.

The buyer’s claim for breach of contract failed because the court concluded its understanding was not more reasonable. Had the seller brought a counterclaim for breach, it also would have failed. The contract fails for mutual misunderstanding.

If the writing does not resolve the issue because the parties intended to resolve it later, then the court may find there was merely an “agreement to agree” or that the contract fails for indefiniteness. See Academy Chicago Publishers v. Cheever, Supp 38.

What if the writing appears to resolve the dispute?

J. Evans & Son (Portsmouth ) Ltd. v. Andrea Merzario Ltd., p. 135 (contract for carriage of goods, in prior dealings goods were always shipped below deck and carrier gave oral assurances containers would be stored below deck).

City and Westminster Properties v. Mudd, p. 137 (commercial lease forbids residential use, tenant always had used property as residence and was orally assured by landlord’s representative when lease was renewed there was no objection to him continuing to do so).

In both cases courts enforce the agreement in fact even though this conflicts with the written contract.

In neither case does the court use the technique of interpretation. Instead the court finds an enforceable side agreement. See p. 136 bottom for an explanation of the technique.

Terminology • Agreement • Written expression of contract (“Integrated

agreement”) • Contract

Evidence that may be considered in addition to writing • Surrounding circumstances • Course of performance • Course of dealing • Trade usage/custom • Recorded communications between parties • Testimony regarding communications • Testimony regarding party’s own belief

Convention for the International Sale of Goods, Article 8. (1) For the purposes of this Convention statements made by and other conduct of a party are to be interpreted according to his intent where the other party knew or could not have been unaware what that intent was. (2) If the preceding paragraph is not applicable, statements made by and conduct of a party are to be interpreted according to the understanding a reasonable person of the same kind as the other party would have had in the same circumstances. (3) In determining the intent of a party or the understanding a reasonable person would have had, due consideration is to be given to all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties.

The approach is the same in some US states. These states reject the “plain meaning rule.” And they apply a permissive form of the “parol evidence rule.” The sales provisions of the UCC encourage courts to take these approaches. See California materials, Supp 53-55

In these states, the parol evidence rule allows the court to make a preliminary determination of the credibility of evidence of an alleged side agreement. Normally credibility is a question for the jury.

In many states the interpretation of a written contract is treated as a question of law for the court even if the writing is ambiguous.

If the court cannot resolve the dispute based on the written contract, and the outcome turns on the credibility of witnesses, then the issue goes to the jury in all US states.

But the results in the two English cases might well have been different in some states.

Mitchill v. Lath (NY 1928), Supp 43 (contract for sale of house and land for residence, oral side agreement by vendor to remove ugly ice house on adjacent land he owed).

National Union Fire Ins. Co. v. CBI Industries (TX 1995), Supp 49 (scope of “absolute pollution exclusion” in commercial general liability insurance policies).

Mitchill v. Lath applies the parol evidence rule. CBI applies the plain meaning rule.

The parol evidence rule excludes evidence of prior or contemporary oral or written agreements and contemporary oral agreements. Sometimes it is said the writing “discharges” any such side agreements.

Evidence that may be considered in addition to writing • Surrounding circumstances • Course of performance • Course of dealing (?) • Trade usage/custom (?) • Recorded communications between parties • Testimony regarding communications • Testimony regarding party’s own belief

Mitchill v. Lath (NY 1928), Supp 43, at 44-45, applies the parol evidence rule (PER), which is stated as follows:

“Under our decisions before such an oral agreement as the present is received to vary the written contract, at least three conditions must exist: (1) The agreement must in form be a collateral one; (2) it must not contradict express or implied provisions of the written contract; (3) it must be one that parties would not ordinarily be expected to embody in the writing . . . .”

Evidence of an agreement may be precluded because it contradicts a term in the writing (on the basis of inconsistency).

Evidence of an agreement may be precluded because it is a term the court would have expected to be in the written agreement. Mitchill v. Lath applies this strand of the rule.

Mitchill v. Lath is a 5-2 decision. The majority opinion by Andrews and the dissenting opinion by Lehman illustrate two different approaches US courts take in applying the rule. The contrasting approaches often are described as the Williston approach (Andrews/majority) and the Corbin approach (Lehman/dissent). Williston and Corbin are the authors of the two leading US Contract treatises in the mid 20th century.

The majority does not question the alleged agreement was part of the bargain.

“The defendants have not fulfilled their promise as to the icehouse, and do not intend to do so. We are not dealing, however, with their moral delinquencies. The question before us is whether their oral agreement may be enforced in a court of equity.” (Supp 44, top)

“In applying this test, the policy of our courts is to be considered. We have believed that the purpose behind the rule was a wise one, not easily to be abandoned. Notwithstanding injustice here and there, on the whole it works for good.” (Supp 44, 4th ¶)

Under Andrews’ approach the court disregards the strength of the evidence of the side agreement in applying the rule.

Instead the court makes “an inspection of the written contract, read in the light of surrounding circumstances.” This lead to the following analysis in the 2nd paragraph Supp 45.

“an inspection of this contract shows a full and complete agreement, setting forth in detail the obligations of each party. On reading it, one would conclude that the reciprocal obligations of the parties were fully detailed. Nor would his opinion alter if he knew the surrounding circumstances. The presence of the icehouse, even the knowledge that Mrs. Mitchill thought it objectionable, would not lead to the belief that a separate agreement existed with regard to it. Were such an agreement made it would seem most natural that the inquirer should find it in the contract. Collateral in form it is found to be, but it is closely related to the subject dealt with in the written agreement—so closely that we hold it may not be proved.”

Lehman comes at the problem very differently. He would have the court consider evidence of the side agreement. “Exclusion of proof of the oral agreement on the ground that it varies the contract embodied in the writing may be based only upon a finding or presumption that the written contract was intended to cover the oral negotiations for the removal of the icehouse which lead up to the contract of purchase and sale. To determine what the writing was intended to cover, ‘the document alone will not suffice. What it was intended to cover cannot be known till we know what there was to cover. The question being whether certain subjects of negotiation were intended to be covered, we must compare the writing and the negotiations before we can determine whether they were in fact covered.’” (p. 48 top)

This leads Lehman to pose the issue thusly: “The problem, then, is clearly whether the parties are presumed to have intended to render that parol agreement legally ineffective and nonexistent by failure to embody it in the writing.” (p. 48 3rd paragraph)

Yielding this conclusion: “an inspection of the contract, though it is complete on its face in regard to the subject of the conveyance, does not, I think, show that it was intended to embody negotiations or agreements, if any, in regard to a matter so loosely bound to the conveyance as the removal of an icehouse from land not conveyed.

The weight, if any, to be assigned to the strength of the evidence of the purported agreement.

The degree to which the inquiry is objective/normalized or subjective/contextualized.

Andrews/majority/Williston and Lehman/dissent/Corbin disagree on . . .

Ultimately they disagree on the purpose of the rule. Andrews thinks the rule serves a formal purpose—the encourages people to put agreements in writing. Lehman thinks the rule serves an evidentiary purpose.

City and Westminster Properties v. Mudd, Text p. 137. Commercial lease clearly forbids residential use. Tenant always had used property as residence and was orally assured by landlord’s representative when lease was renewed there was no objection to him continuing to do so. Is the oral agreement enforceable if a court takes Andrews’ approach in applying the parol evidence rule?

The parol evidence rule does not preclude use of evidence to establish mutual misunderstanding, mistake, fraud or other grounds for vitiating consent.

Nor does it preclude use of evidence for purposes of interpretation.

Nor does it preclude evidence of an agreement or conduct subsequent to the execution of the writing modifying the contract. A “no oral modification” may preserve a written contract from being challenged on this basis.

While the PER will not exclude evidence used for purposes of interpretation, a rule of interpretation may demand that a court disregard or discount evidence* and arguments that contradict the written terms contract.

* This applies to more than parol evidence narrowly defined—i.e., prior oral or written agreements and contemporaneous oral agreements. It applies to evidence of custom and usage, course of performance, etc . . . .

National Union v. CBI (Tex. 1995), Supp 49, applies what sometimes is called the “four corners” and “plain meaning” rules . These rules bar looking at any extrinsic evidence if there is not a facial ambiguity in a writing.

Rules of interpretation

Plain meaning/ four corners rules: extrinsic evidence may be considered in interpreting a written contract only if there is a patent or latent ambiguity in the writing.

PG&E (California) approach: judge examines extrinsic evidence and admits it if she find “the language of the contract is fairly [or reasonably] susceptible” of the “interpretations contended for.” Text 34; Supp 54-55.

CBI is a contractor working at a Marathon facility in Texas. One of its crane drops its load onto a pipe connecting to a tank containing a highly toxic acid. A toxic cloud engulfs Texas City, causing mass evacuations, some bodily harm, and significant property damage.

Lawsuits are filed against CBI, which asks its liability insurer to defend the claim. The insurer denied coverage on the basis of the so-called absolute pollution exclusion. CBI filed a lawsuit against the insurer challenging this determination.

This policy does not apply to ... any Personal Injury or Property Damage arising out of the actual or threatened discharge, dispersal, release or escape of pollutants, anywhere in the world; ... "Pollutants" means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste material. Waste materials include materials which are intended to be or have been recycled, reconditioned or reclaimed.

Is the coverage excluded under this provision?

CBI sought to introduce evidence that the policy did not mean what it literally said. See Footnote a, Supp 50:

During testimony at a 1985 hearing conducted by the Texas State Board of Insurance, Ward Harrel, a representative of Liberty Mutual Insurance Company, indicated that the pollution exclusion could be read literally to exclude coverage in situations where "no one would read it that way," noting that "our insureds would be at the State Board ... quicker than a New York minute if, in fact, everytime [sic] a bottle of Clorox fell off a shelf at a grocery store and we denied the claim because it's a pollution loss."

The Texas Supreme Court holds the evidence to be inadmissible and that CBI’s lawsuit against the insurer can be dismissed on a motion for summary judgment without giving CBI a chance to do discovery or to present evidence.

“If a written contract is so worded that it can be given a definite or certain legal meaning, then it is not ambiguous. Parol evidence is not admissible for the purpose of creating an ambiguity.” (p. 51 top). 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. (p. 51 top)

CBI argues that extrinsic evidence concerning industry‑ wide discussions of the exclusion at issue here shows that the parties shared a mutual, yet unstated, intent that the exclusions would not encompass "accidental" releases of pollutants. * * * If the contract language is not fairly susceptible of more than one legal meaning or construction, however, extrinsic evidence is inadmissible to contradict or vary the meaning of the explicit language of the parties' written agreement. (p. 53)

The Texas Supreme Court did acknowledge several qualifications:

• Evidence of “surrounding circumstances” may be considered.

• Evidence may be used to establish a “latent ambiguity.” See p. 51 (hypothetical brings to mind Raffles).

• Maybe evidence of trade usage is admissible. See p. 53 esp. note d.

Evidence that may be considered in addition to writing • Surrounding circumstances • Course of performance • Course of dealing • Trade usage/custom ? • Recorded communications between parties • Testimony regarding communications • Testimony regarding party’s own belief