Anglo-AmericanContract and Torts

Prof. Mark P. Gergen

Class 11

Interpretation: parol evidence and plain meaning

After an agreement is made, during the course of performance, a dispute arises between the parties regarding their rights and obligations under the agreement.

The parties reduced their agreement to a written contract (the writing).

The dispute is on a point that is not implicitly or explicitly addressed in the written contract.

A court will look at all the evidence—testimonial, records of negotiations between the parties, course of performance, course of dealing, and custom—to determine if there was an apparent agreement on the disputed point.

Sometimes (not often) a court will find that the parties made the agreement based on different understandings on the point and neither view was more reasonable. If the point is material, then the contract will fail on the ground of mutual misunderstanding. Raffles (yesterday) illustrates. So does Frigaliment (tomorrow).

More often the court will find either

1) The parties did not consider the point important until it arose.

2) The parties understood the point was important but chose to leave it to be addressed later.

Such cases are not really problems of mutual misunderstanding.

In a case like 2) a court may find the parties’ agreement was a mere “agreement to agree,” which under the common law generally entails no legal obligation. There generally is no implied duty of good faith in negotiations.

The court finds either

1) The parties did not consider the point important until it arose.

2) The parties understood the point was important but chose to leave it to be addressed later.

In a case like 1) a court may fill in the term to give effect to the parties’ agreement. Or a court may find the contract fails based on uncertainty or indefiniteness. See p. 123 (discussing requirement in context of offers).

The traditional common law took a strict approach. The UCC encourages courts to take a more liberal approach. See 2-204(3), cited at p. 123 (“Even though one or more terms are left open, a contract . . . does not fail for indefiniteness . . .” ).

The dispute is on a point that appears to be resolved by the written contract implicitly or explicitly.

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 results will be 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.

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 42 (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 47 (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

One form of the parol evidence rule as stated in Mitchill v. Lath (NY 1928), Supp. P. 42, at 43 (top).

“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. So it was in Mitchill v. Lath.

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) and the Corbin approach (Lehman). These 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 42, 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.” (bottom)

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.” (p. 43, top)

This lead to the following analysis in the 3rd paragraph of p. 43.

“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. 46 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. 46 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.(p. 46 3rd paragraph)

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 and Lehman 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 47, 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 p. 34.

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. Footnote a p. 48 gives you a taste:

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. See p. 49 middle.

“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. 48 bottom).

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. 49 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. 50 middle)

This position is untenable. Recall the question yesterday where to parties sign a contract for wine when they mean water. Often words take unusual meanings in a trade.

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. 49 top (hypothetical brings to mind Raffles).

• Maybe evidence of trade usage is admissible. See p. 50 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