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ADVOCATE SUMMER 2007
PAROL EVIDENCE IN BREACH OF CONTRACT CASES
BY HON. RANDY WILSON
T
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,
ADVOCATE SUMMER 2007
£
when interpreting an integrated writing, the parol
evidence rule circumscribes the use of extrinsic
evidence.16
The law of what evidence a court may consider in
determining ambiguity will continue to evolve.
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
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
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
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
46
ADVOCATE SUMMER 2007
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).
9
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
10
ADVOCATE SUMMER 2007
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).