Restatement (Second) of Contracts – 201 – Whose Meaning Prevails

(1) Where the parties have attached the same meaning to a promise or agreement or a term thereof, it is interpreted in accordance with that meaning.

(2) Where the parties have attached different meanings to a promise or agreement or a term thereof, it is interpreted in accordance with the meaning attached by one of them if at the time the agreement was made

(a) that party did not know of any different meaning attached by the other, and the other knew the meaning attached by the first party; or

(b) that party had no reason to know of any different meaning attached by the other, and the other had reason to know the meaning attached by the first party.

(3) Except as stated in this Section, neither party is bound by the meaning attached by the other, even though the result may be a failure of mutual assent.

20 Common Canons of Contract Construction

1. Give words their plain and ordinary meaning
2. Give words their dictionary meanings
3. Give trade usages meanings used in the trade
4. Give technical words their technical meanings
5. Assume a word or phrase means the same thing throughout contract
6. Construe words in the context of the entire contract
7. Noscitur A Sociis : construe in light of local context
8. Interpret to carry out contract purpose (as shown by contract, recitals)
9. Give all terms a meaning (construe against redundancy and conflict)
10. Construe for validity (construe against illegality or voidness)
11. Overlook / reform obvious mistakes
12. Let specific control the general
13. Ejusdem generis : in a list, construe general consistent with specific
14. Expressio unius est exclusio alterius : including one excludes others
15. Construe for balance (construe against forfeitures or one-way options)
16. Construe against eccentricity, impossibility, absurdity
17. Construe ambiguities against drafter
18. Favor handwriting over typewriting, and that over printing
19. Favor specifically negotiated terms over boilerplate
20. Favor later drafted terms over earlier drafted terms 

Restatement (Second) of Contracts – Effects of Writings

209 – Integrated Agreements

(1) An integrated agreement is a writing or writings constituting a final expression of one or more terms of an agreement.

(2) Whether there is an integrated agreement is to be determined by the court as a question preliminary to determination of a question of interpretation or to application of the parol evidence rule.

(3) Where the parties reduce an agreement to a writing which in view of its completeness and specificity reasonably appears to be a complete agreement, it is taken to be an integrated agreement unless it is established by other evidence that the writing did not constitute a final expression.

212 – Interpretation of Integrated Agreement

(1) The interpretation of an integrated agreement is directed to the meaning of the terms of the writing or writings in the light of the circumstances, in accordance with the rules stated in this Chapter.

(2) A question of interpretation of an integrated agreement is to be determined by the trier of fact if it depends on the credibility of extrinsic evidence or on a choice among reasonable inferences to be drawn from extrinsic evidence. Otherwise a question of interpretation of an integrated agreement is to be determined as a question of law.

213 Effect of Integrated Agreement on Prior Agreements (Parol Evidence Rule)

(1) A binding integrated agreement discharges prior agreements to the extent that it is inconsistent with them.

(2) A binding completely integrated agreement discharges prior agreements to the extent that they are within its scope.

(3) An integrated agreement that is not binding or that is voidable and avoided does not discharge a prior agreement. But an integrated agreement, even though not binding, may be effective to render inoperative a term which would have been part of the agreement if it had not been integrated.

214 Evidence of Prior or Contemporaneous Agreements and Negotiations

Agreements and negotiations prior to or contemporaneous with the adoption of a writing are admissible in evidence to establish:

(a) that the writing is or is not an integrated agreement;

(b) that the integrated agreement, if any, is completely or partially integrated;

(c) the meaning of the writing, whether or not integrated;

(d) illegality, fraud, duress, mistake, lack of consideration, or other invalidating cause;

(e) ground for granting or denying rescission, reformation, specific performance, or other remedy.

Flores v. Earnshaw

209 P.3d 428 (Ut. Ct. App. 2009)

Opinion:  Greenwood

David G. Earnshaw appeals the trial court’s interpretation of a real estate purchase contract (the REPC) through which Earnshaw purported to sell a yet-to-be-built condominium unit to Seadhna J. Flores.[1] In particular, Earnshaw alleges that the trial court erred in determining that the REPC was ambiguous with respect to whether the parties intended for the unit to be sold as fully built out. We reverse and remand.

BACKGROUND

In anticipation of approval for “the construction of the Earnshaw Building, a six-story building, consisting of offices on the main floor and residential condominium units on the remaining floors,” Earnshaw advertised the sale of the residential condominium units online and at the prospective building site. Flores expressed interest in purchasing a condominium unit in December 2005. Following negotiations, Earnshaw offered to sell a condominium unit to Flores.

. . . In early April 2006, Earnshaw sent Flores the REPC at issue, which Flores and Earnshaw both subsequently signed. Under this REPC, Flores was to purchase unit no. 402 for “$144,950, less the $10,000 previously paid when Flores had exercised the earlier Option Agreement.”

Despite the fact that the REPC was “a fully integrated and binding agreement,” Earnshaw called Flores in early May to express concern over the selling price of unit no. 402. [Earnshaw stated that there was an error that the price was $40,000 too low and tried to correct it.  Flores declined the new price.]

Subsequently, Flores initiated the present action for specific performance and breach of contract. A bench trial was conducted on September 21, 2007. At trial, Flores contended that he and Earnshaw negotiated the price for the unit and that Earnshaw was well aware of Flores’s price constraints. Flores also referred to the REPC and argued that it obligated Earnshaw to provide a fully built-out unit to Flores for the purchase price of $144,950. Earnshaw, on the contrary, testified that he always intended to sell Flores a fully built-out unit but that he had intended to do it for the price of $184,950. Earnshaw further testified that the parties had always intended for the purchase price to be $184,950 but that either he had mistakenly written $144,950 or, alternatively, that his secretary had transferred the purchase price inaccurately from Earnshaw’s notes to the option agreement. In addition, Earnshaw presented evidence that all similarly sized units had been sold at the higher price and that he would be unable to realize a profit if he were to sell unit no. 402 for only $144,950. Finally, Earnshaw referred to the language of clause 1.1 of the REPC and argued that it explicitly provides for the sale of a “shell” unit, not for a fully built-out unit. Clause 1.1 states, in its entirety:

Included Items. Unless excluded herein, this sale includes the following items if presently owned and attached to the Property: plumbing, heating, air conditioning fixtures and equipment; ceiling fans; water heater; built-in appliances; light fixtures and bulbs; bathroom fixtures; curtains, draperies and rods; window and door screens; storm doors and windows; window blinds; awnings; installed television antenna; satellite dishes and system; permanently affixed carpets; automatic garage door opener and accompanying transmitter(s); fencing; and trees and shrubs.

(Second emphasis added.)

The trial court agreed largely with Flores, concluding that the REPC was clear and unambiguous as to the price of $144,950. However, the trial court ruled that the REPC was ambiguous as to whether the parties intended convey a fully built-out unit or just a shell of a unit. More specifically, the trial court determined that because the REPC was a form contract generally used for the sale of existing residences, clause 1.1 of the REPC “creates an uncertain meaning of the parties’ intent, a facial deficiency, and an impression that terms are missing” as it relates to the sale of then-unbuilt unit no. 402. The trial court accordingly allowed presentation of parol evidence to determine the parties’ intent regarding this issue. After noting that both Flores and Earnshaw agreed that they intended for the sale to be for a fully built-out unit, the trial court ruled that such was the parties’ intent at the time of contracting. Thus, the trial court ordered Earnshaw to sell a fully built-out unit no. 402 to Flores for the purchase price of $144,950. This appeal followed.

ISSUE AND STANDARD OF REVIEW

The sole issue on appeal is whether the trial court erred in determining that the REPC is ambiguous and in allowing parol evidence to interpret clause 1.1. Whether a contractual term or provision is ambiguous on its face is a question of law. See Daines v. Vincent, 2008 UT 51, ¶ 25, 190 P.3d 1269. Once the court determines that the term or provision is facially ambiguous, it may determine the parties’ intent through examination of parol evidence, the determination of which presents a question of fact. See id. ¶ ¶ 25–26. “In reviewing a trial court’s contract interpretation, we defer to the trial court on questions of fact but not on questions of law.” Peterson v. Sunrider Corp., 2002 UT 43, ¶ 14, 48 P.3d 918.

ANALYSIS

We begin our analysis by determining whether the trial court was correct in concluding that clause 1.1 of the REPC is ambiguous. The Utah Supreme Court most recently addressed this subject in Café Rio, Inc. v. Larkin–Gifford–Overton, LLC, 2009 UT 6, 622 Utah Adv. Rep. 31. . . .  On appeal, the supreme court set forth the guiding principles for contract interpretation, including how to determine if ambiguity exists in a contract and when parol evidence of intent may be considered. See id. ¶ 25. The court stated:

Under well-accepted rules of contract interpretation, we look to the language of the contract to determine its meaning and the intent of the contracting parties. We also consider each contract provision ... in relation to all of the others, with a view toward giving effect to all and ignoring none. Where the language within the four corners of the contract is unambiguous, the parties’ intentions are determined from the plain meaning of the contractual language, and the contract may be interpreted as a matter of law. Only if the language of the contract is ambiguous will we consider extrinsic evidence of the parties’ intent. We have explained that ambiguity exists in a contract term or provision if it is capable of more than one reasonable interpretation because of uncertain meanings of terms, missing terms, or other facial deficiencies.

Id. (omission in original) (citations and internal quotation marks omitted). . . .

Café Rio was preceded by Daines v. Vincent, 2008 UT 51, 190 P.3d 1269, where the supreme court addressed the meaning of a release agreement, releasing a limited liability company “or any of its members” from liability in exchange for payment of $50,000. See id. ¶¶ 12–15. The Daines court stated that it wanted to address misunderstandings that may have resulted from its opinion in Ward v. Intermountain Farmers Association, 907 P.2d 264 (Utah 1995). See id. ¶ 24. The court identified two contexts in which contractual ambiguity may occur: “(1) facial ambiguity with regard to the language of the contract and (2) ambiguity with regard to the intent of the contracting parties.”[2] Id. ¶ 25 (citing Ward, 907 P.2d at 268). Clarifying, the supreme court stated: “The first context presents a question of law to be determined by the judge. The second context presents a question of fact where, if the judge determines that the contract is facially ambiguous, parol evidence of the parties’ intentions should be admitted.” Id. (citations and internal quotation marks omitted). The court further explained that “before permitting recourse to parol evidence, a court must make a determination of facial ambiguity.” Id.

In addressing facial ambiguity, the Daines court noted that in Ward, it “did not intend that a judge allow surrounding circumstances to create ambiguity where the language of a contract would not otherwise permit.” Id. ¶ 27. In other words, extrinsic evidence proffered to show the existence of ambiguity would not trump “the language of the contract.” Id. Thus, a finding of facial ambiguity sufficient to justify consideration of extrinsic evidence of the parties’ intentions is appropriate only when the alleged facial ambiguity is “ ‘reasonably supported by the language of the contract.’ ” Id. (quoting Ward, 907 P.2d at 268). Applying these principles, the Daines court concluded the contract before them was, as a matter of law, unambiguous. See id. ¶ 37. Thus, there was no “need to resort to the admission of parol evidence on the question of intent, because absent a finding of facial ambiguity, the parties’ intentions must be determined solely from the language of the contract.” Id. (internal quotation marks omitted); see also Peterson, 2002 UT 43, ¶ 19, 48 P.3d 918.

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The message of these cases seems clear: A trial court may not consider parol evidence of intent without first finding ambiguity in the language of a contract. And, while relevant evidence proffered to demonstrate the alleged facial ambiguity must be considered, our analysis of such evidence is strictly limited to the determination of the existence of facial ambiguity and is “ultimately circumscribed by the language of the agreement.” See Daines, 2008 UT 51, ¶ 28, 190 P.3d 1269. This rule applies even where the contract in question is poorly drafted. See McEwan v. Mountain Land Support Corp., 2005 UT App 240, ¶ 25, 116 P.3d 955 (applying the above analysis even where the contract at issue “is not a model of clarity,” further stating that such contractual confusion “do[es] not make [the contract] ambiguous”). The arguments in the case before us are limited to the meaning of the contractual language and, accordingly, we limit our analysis to those arguments.

In the present case, the trial court determined that clause 1.1 of the REPC is ambiguous. Clause 1.1 addresses items included in the condominium unit to be sold and states, “Unless excluded herein, this sale includes the following items if presently owned and attached to the Property: plumbing, heating, air conditioning fixtures and equipment; [etc.]” (Emphasis added.) The trial court admitted uncontroverted parol evidence that at the time the REPC was executed by the parties there was no existing building; it was yet to be constructed. The trial court then used this evidence to determine the parties’ intentions, without first addressing whether the evidence itself demonstrated a facial ambiguity “ ‘reasonably supported by the language of the contract.’ ” Daines, 2008 UT 51, ¶ 27, 190 P.3d 1269 (quoting Ward, 907 P.2d at 268). We believe the trial court’s approach is contrary to the supreme court’s direction in Café Rio, Daines, Ward, and other cases. Rather, the first step should be to determine if the REPC is facially ambiguous, i.e., whether the contract language is “susceptible to contrary, tenable interpretations.” Id. ¶ 30 (internal quotation marks omitted). Instead, the trial court here first admitted extrinsic evidence demonstrating the alleged ambiguity—notably, that the building was not yet constructed—and then, based on that evidence, determined the parties’ intentions regarding clause 1.1. Although many Utah cases have stated that the parties’ intent is paramount, admission of parol evidence to determine intent is allowed only if there is a “finding of facial ambiguity”; otherwise, “the parties’ intentions must be determined solely from the language of the contract.” Id. ¶ 37 (internal quotation marks omitted).

Having determined that the trial court erred by admitting parol evidence before addressing ambiguity in the language of clause 1.1, we turn to the issue of facial ambiguity. We hold that clause 1.1 is not ambiguous. Indeed, the parties did not offer differing versions of the language at issue. It is not seriously disputed that under clause 1.1 the enumerated items are included in the sale only if they were “presently owned and attached to the Property.” There also does not appear to be a dispute that “presently” refers to the date of execution of the REPC. Finally, both parties agree that none of the items listed in clause 1.1 were “owned and attached to the Property” at the time the REPC was executed because the building was not yet constructed. Thus, paragraph 1.1 is not ambiguous and, as a matter of law, reflects the parties’ intentions. In order to enforce the contract the trial court should not have relied on parol evidence to determine the parties’ intent. Because there was no building existing at that time, none of the listed items were then “owned and attached to the Property” and none of them were included in the sale. We thus determine that, based on the plain language of the REPC, the parties intended for the sale to convey only a “shell” of unit no. 402 for the purchase price stated in the REPC.

CONCLUSION

In sum, we reverse the trial court’s ultimate decision because we conclude that the trial court erred in determining that clause 1.1 of the REPC is facially ambiguous and, accordingly, in considering parol evidence to ascertain the parties’ intent. We therefore remand this case to the trial court for further proceedings consistent with this opinion.

Hall v. Mullen

678 P.2d 169 (Kan. 1984)

Opinion:  Schroeder

This is an action by Edith Hall (plaintiff-appellant) to quiet title to oil, gas and mineral interests, including royalty interests, in a quarter section of land located in Ellis County, Kansas.  The defendant-appellees claim an interest in royalties derived from oil and gas production on this quarter section under a royalty pooling agreement entered into by the parties or their predecessors in title on May 6, 1942.  The appellant contends the appellees' interests under the pooling agreement have expired, or, in the alternative, that the appellees' interests were terminated by the execution of a prior quitclaim deed. The trial court rejected the appellant's arguments and denied her request to quiet title.  The appellant challenges the construction given various written instruments by the trial court.  She also contends the court erred in considering parol evidence to interpret these instruments.

The case was submitted to the trial court on facts stipulated by the parties.  The North Half (N/2) of Section Two (2), Township Twelve (12) South, Range Seventeen (17) West of the 6th P.M., Ellis County, Kansas (hereinafter referred to as the N/2 of Section Two), was owned in fee simple by John Hall who died testate on December 8, 1927.  At the time of John Hall's death he owned approximately 4,320 acres of real estate in Ellis County.  He was survived by his wife, Sarah, and six children.  The will of John Hall provided that the N/2 of Section Two, along with his other land, be left to his wife for her lifetime, with the remainder in fee to the executors of the estate, in trust, with directions that the real estate be sold at its appraised value for the benefit of the children.  The will also directed that two of the decedent's sons, Robert Hall and Frank Hall, be given the privilege of buying a quarter section each of the N/2 of Section Two at the appraised value.

The widow and six children entered into three successive agreements for the pooling of oil and gas royalties received from the production of oil and gas on the tracts of land covered by the agreements, which included the N/2 of Section Two.  The first agreement was of limited duration and was expressly cancelled and rescinded by the second agreement.  The second agreement was also limited in duration, but insofar as it was perpetuated by production of oil, its provisions were incorporated into the third pooling agreement.  The last of these agreements was entered into on May 6, 1942.  At that time oil was being produced on the Northwest Quarter (NW/4) of Section Two under a base lease with Cities Service Oil Company entered into in 1937 which covered the entire N/2 of Section Two.  Production on the NW/4 has been continous to the present date.  Although many dry holes were drilled on the NE/4 of Section Two, no production of oil or gas was obtained until November 1980.  The oil and gas lease of April 29, 1937, covering the NE/4 was released by Cities Service on December 3, 1958.  The oil discovered in 1980 on the NE/4 of Section Two was under an entirely new oil and gas lease.

The 1942 pooling agreement provided that royalties received or payable from the land covered by the agreement would be divided in seven equal parts during the lifetime of Sarah Hall, and after her death divided in six equal parts among the children.  The agreement provided it was to remain in effect for a period of ten years for all the land covered by the agreement, and thereafter would continue to be in force as to each quarter section of land from which oil or gas is being produced.  These provisions were modified by the last paragraph of the agreement, which reads:

"It is further agreed and understood by and between the parties hereto that should more than one quarter section of any of the real estate hereinbefore described be included in and held by a single basic oil or gas lease thereon, then production of oil or gas from any one of such quarters shall be deemed production from all of the real estate from said basic oil and gas lease." (Emphasis added.)

The agreement stated it was the express intent of the parties to make an equal division of oil and gas royalties derived from production on the property covered thereby, and to abide by the terms and conditions of the will of John Hall, modified only by the pooling of the oil and gas interests.  In reference to the specific provisions of the will the agreement provided:

"In the event that during the life of this contract, Robert Lee Hall and Frank Hall, or either of them, exercises the option of purchase of any of the land hereinbefore described as provided for in the will of said John Hall, deceased, and in accordance with the terms of said will, at the appraised value of said lands, it is expressly understood and agreed by and between the parties hereto, that the appraisal of said lands shall be on the basis of the agricultural and grazing value only thereof, and that the value of said lands as fixed by said appraisal shall not be enhanced or increased to any degree or extent by reason of any value of said lands for royalty or leases for oil or gas purposes and that in such appraisal no oil or gas rights in said land shall be taken into consideration."

Following the death of Sarah Hall the Probate Court of Ellis County on August 18, 1950, approved the purchase of the NE/4 of Section Two by Robert Hall and the purchase of the NW/4 by Frank Hall.  These purchases were made pursuant to a family agreement entered into by the remaining six children of John Hall, after the death of Sarah Hall, wherein they consented to the exercise of the options to purchase the real estate by Frank and Robert Hall as provided for in the will of John Hall. The amounts paid by Robert Hall and Frank Hall for the purchase of the two quarter sections were acknowledged by this family agreement as being the value of the surface rights.  This family agreement also provided that in further consideration for the right to purchase the property Robert Hall and Frank Hall would each convey to the other five children by mineral deed a five-sixths (5/6) interest in the oil, gas and other minerals in and under his respective quarter section for a period of fifteen years and as long thereafter as oil, gas or other minerals are being produced.  This provision was adopted by the probate court in its decree which directed that upon delivery of "a good and sufficient deed" conveying the quarter sections, and its approval by the court, Robert Hall and Frank Hall were required to execute and deliver the mineral deeds as agreed upon in the family agreement.

On August 19, 1950, three of John Hall's children, Belle Bellman, Grace Lightner and Lizzie Johnson, executed a quitclaim deed conveying the NE/4 of Section Two to Robert Hall.  On August 22, 1950, John Hall's remaining three children, Robert Hall, Frank Hall and William Hall, acting as executors of the estate of John Hall, executed a warranty deed conveying the NE/4 to Robert Hall. On September 27, 1950, Robert Hall and his wife Edith, the appellant, executed and delivered an instrument entitled "Sale of Oil and Gas Royalty" to the other five children of John Hall, conveying an undivided five-sixths (5/6) interest in the NE/4 of Section Two "in and to all oil, gas and other minerals in and under and that may be produced" during the term of the instrument.  The term of the instrument was limited to a period of fifteen years and as long thereafter as oil or gas or other minerals were produced from the property.  It is conceded by all the parties that the interests created by this instrument have expired, as no oil, gas or other minerals were produced on the NE/4 during the primary term of fifteen years as set forth in the mineral deed.

The appellant is the widow of Robert Hall.  The defendants are successors in title to the estate of John Hall and to the remaining five children of John Hall. The appellant contends the 1942 pooling agreement, insofar as it covered the NE/4 of Section Two, expired by its own terms in 1958 when Cities Service Oil Company released the NE/4 from the gas lease covering the N/2 of Section Two.  The appellant further contends that if the appellees' interests in the royalties derived from this quarter section have not expired under the pooling agreement, to the extent the appellees' claims are based on the interests of Belle Bellman, Grace Lightner and Lizzie Johnson, they were terminated by the quitclaim deed executed August 19, 1950.  The appellees, on the other hand, claim their interest in the oil and gas royalties under the 1942 pooling agreement have not expired and were not extinguished by the warranty deed executed by the executors of the estate to Robert Hall or the quitclaim deed, which were intended to convey surface rights only.

. . . Regardless of the construction of a written instrument made by the trial court, on appeal the instrument may be construed and its legal effect determined by the appellate court.  Stanfield v. Osborne Industries, Inc., 232 Kan. 197, Syl. para. 1, 654 P.2d 917 (1982).

In briefing this case on appeal the parties and their counsel seem to be preoccupied by ambiguity stemming from the provisions of the pooling agreement executed in 1942.  They place little emphasis on the series of agreements entered into and deeds executed by the parties' predecessors in title in 1950 resulting in the conveyance of the NE/4 to Robert Hall.  However, we find this series of transactions terminated the rights of the parties under the pooling agreement in and to the NE/4, and therefore is dispositive of the issues raised.  While the language "held by a single basic oil and gas lease thereon" contained in the 1942 pooling agreement may be construed in two different ways, depending upon the time the instrument is to be construed, this ambiguity is immaterial to a resolution of the dispute between the parties.

The trial court held the quitclaim deed executed by the three children conveyed only their interests in the real property, and did not purport to terminate their personal property interests in the oil and gas royalties created by the pooling agreement.  The court found there was no intent on the part of these three children to relinquish any rights under the pooling agreement. . . .

****

The instant case involves several written instruments which were signed and executed by the parties as a part of the same transaction intending to convey the NW/4 to Frank Hall and the NE/4 to Robert Hall from the estate of John Hall. These include the family agreement entered into by the six children of John Hall approving the conveyance of the N/2 to Robert and Frank Hall, the quitclaim deed executed by three of the children, the warranty deed executed by the other three children as executors of the estate of John Hall, and the mineral deed conveying a five-sixths (5/6) interest in the minerals in place executed by Robert Hall and the appellant back to the other five children.  This transaction was approved by the Probate Court of Ellis County in its decree entered August 18, 1950, pursuant to the petition filed by Frank and Robert Hall seeking final disposition of the trust estate of John Hall.

In actions founded upon written instruments, where the rights of parties relative to the terms thereof are in controversy, certain fundamental legal concepts permeate the law, and with minor variations it matters not whether the instrument be a contract, a deed or a will.  The doctrine has been well established and frequently applied that where parties have carried on negotiations, and have subsequently entered into an agreement in writing with respect to the subject matter covered by such negotiations, the written agreement constitutes the contract between them and determines their rights.  Custom Built Homes Co. v. State Comm. of Rev. and Taxation, 184 Kan. 31, 37, 334 P.2d 808 (1959); Weiner v. Wilshire Oil Co., 192 Kan. 490, 495, 389 P.2d 803 (1964). The interpretation of a written contract which is free from ambiguity is a judicial function and does not require oral testimony to determine its meaning.  Craig v. Hamilton, 213 Kan. 665, 667, 518 P.2d 539 (1974); Schnug v. Schnug, 203 Kan. 380, 382, 454 P.2d 474 (1969). Ambiguity in a written instrument does not appear until the application of pertinent rules of interpretation to the face of the instrument leaves it genuinely uncertain which one of two or more meanings is the proper meaning.  Robertson v. McCune, 205 Kan. 696, 700, 472 P.2d 215 (1970). If a written contract is actually ambiguous concerning a specific matter in the agreement, facts and circumstances existing prior to and contemporaneously with its execution are competent to clarify the intent and purpose of the contract in that regard but not for the purpose of varying and nullifying its clear and positive provisions.  Crestview Bowl, Inc. v. Womer Constr. Co., 225 Kan. at 340; First Nat'l Bank of Olathe v. Clark, 226 Kan. 619, 624, 602 P.2d 1299 (1979); Amortibanc Investment Co. v. Jehan, 220 Kan. 33, 43, 551 P.2d 918 (1976); Custom Built Homes Co. v. State Comm. of Rev. and Taxation, 184 Kan. at 37. Furthermore, where two or more instruments are executed by the same parties at or near the same time in the course of the same transaction and concern the same subject matter, they will be read and construed together to determine the intent of the parties.  Amortibanc Investment Co. v. Jehan, 220 Kan. at 43; Cline v. Angle, 216 Kan. 328, Syl. para. 7, 532 P.2d 1093 (1975).

In Brewer v. Schammerhorn, 183 Kan. 739, 745, 332 P.d 526 (1958), this court was confronted with the construction of deeds affecting title to real estate, and said:

"In general, the intention of the parties as duly ascertained will determine the question as to the quantity of land conveyed by a deed. So, where an intent to convey the entire interest of the grantor is clear from the whole deed, the instrument should be so construed as to effectuate such intent.  Again in such cases the rules apply that, where the description is of doubtful character, the instrument shall be construed against the grantor and in favor of the grantee.  There is a presumption that a grantor intends to convey his entire interest, and a deed will be taken to convey the entire property and interest of the grantor in the premises unless something appears to limit it to a lesser interest.

"Where the description of the land in a deed is uncertain or ambiguous as to the quantity conveyed, which is latent in character as here, it is proper for courts to resort to parol evidence, not to contradict the instrument but to explain the ambiguity or uncertainty, in order to show the situation and condition existing upon the property conveyed, the circumstances under which the conveyance was made and the practical construction put upon the conveyance by the parties for the purpose of ascertaining their intention.  This inquiry should be confined to the time of the execution of the deed without reference to subsequent circumstances."

The provision contained in the 1942 pooling agreement which modified the will of John Hall by establishing that the appraisal of the NW/4 and NE/4 for purchase by Robert and Frank Hall would be based only upon the agricultural and grazing value of the land, and the subsequent family agreement entered into in 1950 acknowledging the purchase of these two quarter sections by Robert and Frank Hall at the value of the surface rights, rendered these documents ambiguous as to the quantity of land conveyed. Did the conveyances of the two quarters include the mineral rights or only the surface rights?  Further ambiguity exists in the construction of these instruments because none of them refer to the pooling agreement in effect when the property was conveyed or indicate the effect of the conveyance of the N/2 on the terms of the agreement.  Therefore, facts and circumstances existing prior to and contemporaneously with the execution of these instruments are admissible to clarify the intention of the parties.  In addition, the instruments executed in 1950 were all part of the same transaction intending to convey the property in question to the two brothers and therefore must be construed together to determine the intent of the parties to the transaction.  Just as the meaning of a written contract should not be ascertained by a critical analysis of a single or isolated provision, but by a consideration of all the pertinent provisions, the quitclaim deed involved here may not be singled out and held to be dispositive of the issue of the parties' intent.  Rather, the provisions of these instruments must be considered equally and construed in harmony with each other.

[The court then considered the timing and content of the agreements, the rights retained by the three female children and the estate executed by the three male children, and the Kansas law that provides an assumption about what is presumed included in conveyances of real estate.  The court also considered whether one interpretation would be unreasonable because it would render execution of one document, the mineral deed, to a meaningless act.  Unreasonable interpretations “should be avoided where a more practical and equitable construction can be adopted.”]

The judgment of the lower court is reversed with directions to quiet title in the appellant. 

Structural Polymer Group, Ltd. v. Zoltek Corp.

2006 WL 416013 (E.D. Mo. Feb. 21, 2006)

Opinion:  Jackson

This matter is before the Court on defendant’s motion for summary judgment on Count I of plaintiff’s second amended complaint. Plaintiff opposes the motion and the issues are fully briefed.

Plaintiffs Structural Polymer Group, Limited (SPG) and Structural Polymer Systems, Limited (SP Systems) bring this action against defendant Zoltek Corporation, asserting two claims of breach of contract, based upon defendant’s alleged failure to supply two carbon fiber products-PANEX 33 and PANEX 35-in compliance with an exclusive requirements contract. In Count I, plaintiffs claim that defendant breached the parties’ agreement in 2004 by refusing to provide PANEX 35; in Count II, they allege that defendant refused to provide PANEX 33 in 2005. Defendant has filed a counterclaim for breach of contract, alleging, inter alia, that plaintiffs breached the Supply Agreement by purchasing carbon fibers from other sellers without good reason. In the instant motion, defendant moves for summary judgment on plaintiffs’ PANEX 35 claim, contending that the parties’ agreement obligated it to supply only PANEX 33.

****

1. Background

Defendant Zoltek manufactures large filament count carbon fibers, including the PANEX 33 and PANEX 35 products. Zoltek manufactures PANEX 33 using a precursor obtained from a third party. In 2002, defendant introduced PANEX 35, which is made with defendant’s own precursor material. Plaintiffs use large filament count carbon fibers to produce prepregs[3] and fiber-reinforced composites which they in turn sell to manufacturers of wind turbine blades. PANEX 35 is more suitable than PANEX 33 for use in the wind energy industry.

On November 6, 2000, the parties signed an exclusive requirements contract (“the Supply Agreement”), pursuant to which defendant (referred to as “Seller” in the Supply Agreement) agreed to supply 100% of plaintiffs’ (the “Buyer”) needs for carbon fibers, through December 31, 2010. Because the dispute centers on the meaning of the term “Carbon Fibers,” some of the provisions in which the term appears will be set forth here.

The second paragraph of the Supply Agreement states:

CARBON FIBERS: Large Filament Count Carbon Fibers (the “Carbon Fibers”) as defined by Zoltek PANEX 33 specifications 

The fourth paragraph states:

QUANTITY: Pursuant to this Agreement for Carbon Fibers, Seller agrees to manufacture for and sell and supply 100% of the requirements of Carbon Fibers of Buyer and Buyer’s subsidiaries. Buyer expressly agrees that Buyer and its subsidiaries will obtain their total requirements for suitable quality, in the reasonable opinion of the Buyer, Carbon Fibers from Seller and from no other source ... except as otherwise permitted herein (subject only to such Carbon Fibers being, in the reasonable opinion of the Buyer, of suitable quality). Notwithstanding the foregoing, if a customer requires that Buyer use Carbon Fibers produced by a manufacturer other than Seller (“Third Party Fibers”), Buyer may purchase such Third Party Fibers so long as: (1) Buyer uses commercially reasonable efforts to promote Seller’s Carbon Fibers to such customer; and (2) Buyer keeps Seller informed regarding the amount and pricing of Buyer’s purchases and sales of Third Party Fibers. The maximum quantity Seller will be obligated to supply in a given Contract Year will be equal to the amount actually purchased by Buyer in the preceeding [sic] Contract Year plus one million (1,000,000) pounds.

 The fifth paragraph provides that defendant will set the price “for Carbon Fibers for any given year at the then-current market price for Seller’s Carbon Fibers in accordance with price protection clauses included in this Agreement”.

The eighth paragraph states:

PRICE PROTECTION: If another producer of Carbon Fibers offers Buyer Carbon Fibers of like quality in a quantity then equal to or greater than that remaining for delivery hereunder during the remainder of this Agreement, at a lower cost ... but otherwise on substantially similar terms and conditions as herein provided, and Buyer furnishes Seller with written notice, then Seller shall within ten (10) days ... (a) meet such lower price, or (b) permit Buyer to purchase from such other producer ... If Buyer purchases Carbon Fibers under (b) ..., this Agreement shall remain otherwise unaffected.

  The ninth paragraph provides:

TERMINATION: [T]his Agreement may be terminated ... by the Buyer if Seller fails to maintain its position of a satisfactory long term supplier of Carbon Fibers to the Buyer by not remaining competitive in quality, delivery, or manufacture of Carbon Fibers of advanced design or processing or on other terms with other third party producers of Carbon Fibers of comparable quality ... [If Seller fails to cure] and the Buyer purchases Carbon Fibers from other manufacturers, the quantities so purchased shall be deleted from the annual purchase requirement....

The parties entered the Supply Agreement in conjunction with defendant’s sale of SP Systems. Defendant had purchased SP Systems in 1999, in anticipation of growth in the wind energy business. When that growth did not materialize as quickly as hoped, defendant resold SP Systems to its former shareholders, plaintiff SPG. On November 6, 2000, the parties executed both the Supply Agreement and a Stock Purchase Agreement. The Stock Purchase Agreement included a provision stating the parties would “cause to be entered into the Supply Agreement ... in the form of Exhibit G attached hereto, to provide for the Seller or its subsidiaries to supply SP Systems with all of its supply requirements pertaining to commercial carbon fibers.” The Stock Purchase Agreement also contained an integration clause, providing that “[t]his Agreement, including any ... exhibit ..., constitutes the entire agreement between the parties. There are no verbal agreements, representations, warranties, undertakings or agreements between the parties, and this Agreement may not be amended or modified in any respect, except by a written instrument signed by the parties to this Agreement.” § 15.5. Both the Supply Agreement and the Stock Purchase Agreement provided that the substantive laws of Missouri, and not its choice of law rules, would govern any disputes.

Plaintiffs assert that the parties always intended that defendant would supply its new formulation under the 2000 Supply Agreement. Daniel Greenwell was formerly employed as defendant’s Chief Financial Officer during the relevant period, and he negotiated and signed the Supply Agreement on defendant’s behalf. He states that when the parties negotiated the Supply Agreement, defendant produced only the PANEX 33 product. In an affidavit, Greenwell states that the end users of the composite materials set the specifications for the type of carbon fibers needed. Thus, a contract limited to PANEX 33 would not have been beneficial to either party. According to Greenwell, the term “Large Filament Count Carbon Fibers (the ‘Carbon Fibers’) as defined by Zoltek PANEX 33 qualifications” means “any large tow carbon fiber that has certain specifications desirable to the end customer.” Greenwell further states that the parties understood that defendant planned to develop its own precursor material; indeed, defendant had stated this in its SEC filings. Greenwell states that it would have been contrary to defendant’s intentions of developing its own precursor to enter a long-term supply agreement that restricted it to providing a product made with third-party precursor.

Paul Lyon of SP Systems reiterates much of what Greenwell states. He adds that the parties anticipated that defendant would continue to make improvements in the products. Lyon also states in his affidavit that plaintiffs’ needs for carbon fibers increased during 2004; during the parties’ discussions regarding the orders for 2004, defendant never suggested that plaintiffs accept PANEX 33. Lyon states that defendant struggled to supply plaintiffs’ orders throughout 2004; defendant subsequently announced that it entered into long-term supply contracts with two customers in the wind energy market, Gamesa and Vestas, which are both major long-standing clients of plaintiffs’. Plaintiffs have been unable to obtain their needs for large filament carbon fibers from other manufacturers.

Adrian Williams of SP Systems states in his affidavit that defendant stopped marketing PANEX 33 once it developed PANEX 35 because PANEX 35 is a superior product. And, unlike PANEX 33, PANEX 35 was tested and certified for design and production of wind blades.

Plaintiffs contend that the parties’ course of dealing establishes that the parties intended the 2000 Supply Agreement to apply to PANEX 35. The record indicates that plaintiffs did not order significant amounts of carbon fibers from defendant in 2002 and 2003. Even with the limited supply plaintiffs rejected a shipment of PANEX 33 in 2002, based upon concerns over its quality. Defendant suggested that the rejected shipment be replaced with PANEX 35.

Beginning in 2004, plaintiffs’ customers requested product made with PANEX 35. In April 2004, the parties executed a document entitled “PANEX 35 Supply/Purchase Agreement,” pursuant to which defendant agreed to provide and plaintiff agreed to order a minimum of 160 metric tons during 2004. In July 2004, plaintiffs again increased their orders of PANEX 35 in response to customer demand. The record contains reprints of e-mails between Lyon and Tim McCarthy of Zoltek, indicating that defendant struggled to meet plaintiffs’ order for PANEX 35 and that defendant’s delay in doing so caused significant disruptions in plaintiffs’ manufacturing.

During 2004, the parties discussed a supply contract for PANEX 35. On July 26, 2004, McCarthy noted in an e-mail to Lyon that plaintiffs’ 2005 orders increased the importance of the parties’ planned “discussion ... as we are now clearly in a situation where we have to add new capacity in order to meet your demands.” On August 11, 2004, Lyon agreed “we need to press to ratify the 2005 agreement and volume commitment.” The record contains a draft agreement pursuant to which defendant agreed to supply 500 metric tons of PANEX 35 in 2005. That document was never signed by either party.

Plaintiffs contend that PANEX 35 is a “large filament carbon fiber” within the specifications of PANEX 33. They submit the affidavit of Jon DeVault, whose resume indicates he is an expert in the advanced material industry. DeVault states that both PANEX 33 and PANEX 35 are “standard modulus” carbon fibers (i.e., carbon fibers with a tensile modulus between 32 and 35 million pounds per square inch) of the type required by the parties’ wind energy customers. DeVault states that the two products are identical on five out of six specifications. With regard to the sixth specification-tensile modulus-DeVault states that PANEX 33 and PANEX 35 are interchangeable for the uses of the wind-energy business.

1. Discussion

The parties propose two different meanings for the term “Large Filament Count Carbon Fibers (the ‘Carbon Fibers’) as defined by Zoltek PANEX 33 specifications.” The complete term appears only in the second paragraph of the Agreement; thereafter, the phrase “Carbon Fibers” is used. Plaintiffs assert that the term means “large filament count carbon fibers having the same material specifications as PANEX 33,” while defendant asserts that it means “PANEX 33.”

The cardinal principle of contract interpretation is to ascertain the intention of the parties and to give effect to that intent. Dunn Indus. Group, Inc. v. City of Sugar Creek, 112 S.W.3d 421, 428 (Mo.2003) (en banc ). The terms of a contract are read as a whole to determine the intention of the parties and are given their plain, ordinary, and usual meaning. Id. Additionally, each term of a contract is construed to avoid rendering other terms meaningless. Id. A construction that attributes a reasonable meaning to all the provisions of the agreement is preferred to one that leaves some of the provisions without function or sense. Id.

Whether a contract is ambiguous is a question of law. Klonoski v. Cardiovascular Consultants of Cape Girardeau, Inc., 171 S.W.3d 70, 72 (Mo.Ct.App.2005). To determine whether a contract is ambiguous, courts consider the whole instrument and give the words in the contract their natural and ordinary meaning. PlaNet Productions, Inc. v. Shank, 119 F.3d 729, 732 (8th Cir.1997) (quoting Angoff v. Mersman, 917 S.W.2d 207, 211 (Mo.Ct.App.1996)). A contract is ambiguous only if its terms are susceptible to fair and honest differences. Dunn, 112 S.W.3d at 428; see also Union Elec. Co. v. Consolidation Coal Co., 188 F.3d 998, 1002 (8th Cir.1999) (under Missouri law, contract terms are ambiguous only if they are reasonably susceptible to more than one interpretation so that reasonable persons may honestly disagree over the terms’ meaning). Parol evidence may not used to modify or contradict the unambiguous terms of a written contract purporting to incorporate the whole agreement between the parties. PlaNet Productions, 119 F.3d at 732 (quoting South Side Plumbing Co. v. Tigges, 525 S.W.2d 583, 588 (Mo.Ct.App.1975)). Where a contract is ambiguous, use of extrinsic evidence for interpretation is proper. Klonoski, 171 S.W.3d at 73 (quoting Thomas v. B.K.S. Dev. Corp., 77 S.W.3d 53, 59 (Mo.Ct.App.2002)). Missouri law recognizes that ambiguities in written instruments may be of two kinds: (1) patent, arising upon the face of the documents, and (2) latent. Royal Banks of Missouri v. Fridkin, 819 S.W.2d 359, 362 (Mo.1991) (en banc ). A latent ambiguity arises where a writing on its face appears clear and unambiguous but some collateral matter makes the meaning uncertain. Id. A latent ambiguity is not apparent on the face of the writing and therefore, must be developed by extrinsic evidence. Id.; see also Federal Deposit Ins. Corp. v. W.R. Grace & Co., 877 F.2d 614, 620-22 (7th Cir.1989) (discussing Illinois law on “intrinsic” and “extrinsic” ambiguity and stating that, “parol and other extrinsic evidence is admissible, even in a case involving an integration clause, to demonstrate that the contract is ambiguous.”). Resolution of an ambiguity is a question of fact. Klonoski, 171 S.W.3d at 73; see also AGFA-Gevaert, A.G. v. A.B. Dick Co., 879 F.2d 1518, 1522 (7th Cir.1989) (district court erred in directing verdict on liability issues where the “term ‘A-1 Copier Machines’ may have been a maladroit shorthand for ‘low-volume plain-paper copier machines.” ’) (emphasis in original).

Plaintiffs first argue that if the parties intended to limit the Supply Agreement to PANEX 33, the term would have stated: “Large Filament Count Carbon Fibers as defined by Zoltek PANEX 33 specifications (the ‘Carbon Fibers’).” It is not readily apparent that changing the location of the parenthetical clarifies the construction of the term. Plaintiffs’ argument highlights another point, however: the parties did not describe the product as PANEX 33, which would have removed all possible ambiguity. Defendant’s construction of the term arguably leaves the phrases “Large Filament Count Carbon Fibers,” “as defined by,” and “specifications” without function or sense, in clear violation of a principle of construction. Dunn, 112 S.W.3d at 428.

The term at issue-“Large Filament Count Carbon Fibers ... as defined by Zoltek PANEX 33 specifications”-follows the phrase, CARBON FIBERS, thus indicating that the phrase CARBON FIBERS is defined as “Large Filament Count Carbon Fibers (the “Carbon Fibers”) as defined by Zoltek PANEX 33 specifications;” this definitional function is reinforced by the parenthetical. “Carbon Fibers” means “Large Filament Count Carbon Fibers ... as defined by Zoltek PANEX 33 specifications.”

The Agreement uses the term “Carbon Fibers” in three forms: “Carbon Fibers,” “Third Party Fibers,” and “Seller’s Carbon Fibers.” The unmodified term “Carbon Fibers” sometimes refers to defendant’s product and at other times to a competitor’s product. For example, the termination provision refers to defendant’s position as “a satisfactory long term supplier of Carbon Fibers,” and to plaintiffs’ purchases of “Carbon Fibers from other manufacturers.” The Quantity and Price Protection provisions contain additional examples. Plaintiffs argue that the term “Carbon Fibers” is not synonymous with “PANEX 33” because, by definition, third party providers of “Carbon Fibers” cannot supply PANEX 33. Thus, plaintiffs assert, “Carbon Fibers” must refer to the broader category of carbon fibers having the same material specifications as PANEX 33; according to plaintiffs, this category includes PANEX 35.

The Court concludes that the Supply Agreement is ambiguous, in that the terms are reasonably susceptible to more than one interpretation so that reasonable persons may disagree over their meaning. Union Electric Co., 188 F.3d at 1002. The Court has reached this conclusion based upon the language of the Agreement itself. Extrinsic evidence strengthens the conclusion: At the time the Supply Agreement was signed, defendant’s sole product was PANEX 33; the parties anticipated that defendant would continue to improve its product to better meet the needs of their mutual customers. It is possible that the parties intended the agreement to extend to new products having the identical critical specifications. It is also possible that the parties intended to renegotiate a new contract once a new product was developed. This interpretation finds some support in the fact that the parties signed a PANEX 35 Supply Agreement in 2004. These questions and others cannot be decided at the summary judgment stage and defendant’s motion must be denied.

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IT IS HEREBY ORDERED that defendant’s motion for summary judgment [# 23] is denied.

Pacific Gas & Electric Co. v. G.W. Thomas Drayage & Rigging Co.

442 P.2d 641 (Cal. 1968)

Judge:  Traynor

Defendant appeals from a judgment for plaintiff in an action for damages for injury to property under an indemnity clause of a contract.

In 1960 defendant entered into a contract with plaintiff to furnish the labor and equipment necessary to remove and replace the upper metal cover of plaintiff’s steam turbine. Defendant agreed to perform the work ‘at [its] own risk and expense‘ and to ‘indemnify‘ plaintiff ‘against all loss, damage, expense and liability resulting from ... injury to property, arising out of or in any way connected with the performance of this contract.‘ Defendant also agreed to procure not less than $50,000 insurance to cover liability for injury to property. Plaintiff was to be an additional named insured, but the policy was to contain a cross-liability clause extending the coverage to plaintiff’s property.

During the work the cover fell and injured the exposed rotor of the turbine. Plaintiff brought this action to recover $25,144.51, the amount it subsequently spent on repairs. During the trial it dismissed a count based on negligence and thereafter secured judgment on the theory that the indemnity provision covered injury to all property regardless of ownership.

Defendant offered to prove by admissions of plaintiff’s agents, by defendant’s conduct under similar contracts entered into with plaintiff, and by other proof that in the indemnity clause the parties meant to cover injury to property of third parties only and not to plaintiff’s property. Although the trial court observed that the language used was ‘the classic language for a third party indemnity provision‘ and that ‘one could very easily conclude that ... its whole intendment is to indemnify third parties,‘ it nevertheless held that the ‘plain language‘ of the agreement also required defendant to indemnify plaintiff for injuries to plaintiff’s property. Having determined that the contract had a plain meaning, the court refused to admit any extrinsic evidence that would contradict its interpretation.

When the court interprets a contract on this basis, it determines the meaning of the instrument in accordance with the ‘... extrinsic evidence of the judge’s own linguistic education and experience.‘ (3 Corbin on Contracts (1960 ed.) [1964 Supp. § 579, p. 225, fn. 56].) The exclusion of testimony that might contradict the linguistic background of the judge reflects a judicial belief in the possibility of perfect verbal expression. (9 Wigmore on Evidence (3d ed. 1940) § 2461, p. 187.) This belief is a remnant of a primitive faith in the inherent potency and inherent meaning of words.

The test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not whether it appears to the court to be plain and unambiguous on its face, but whether the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible. (Continental Baking Co. v. Katz (1968) 68 Cal.2d 512, 520-521 [67 Cal.Rptr. 761, 439 P.2d 889]; Parsons v. Bristol Development Co. (1965) 62 Cal.2d 861, 865 [44 Cal.Rptr. 767, 402 P.2d 839]; Hulse v. Juillard Fancy Foods Co. (1964) 61 Cal.2d 571, 573 [39 Cal.Rptr. 529, 394 P.2d 65]; Nofziger v. Holman (1964) 61 Cal.2d 526, 528 [39 Cal.Rptr. 384, 393 P.2d 696]; Coast Bank v. Minderhout (1964) 61 Cal.2d 311, 315 [38 Cal.Rptr. 505, 392 P.2d 265]; Imbach v. Schultz (1962) 58 Cal.2d 858, 860 [27 Cal.Rptr. 160, 377 P.2d 272]; Reid v. Overland Machined Products (1961) 55 Cal.2d 203, 210 [10 Cal.Rptr. 819, 359 P.2d 251].)

A rule that would limit the determination of the meaning of a written instrument to its four-corners merely because it seems to the court to be clear and unambiguous, would either deny the relevance of the intention of the parties or presuppose a degree of verbal precision and stability our language has not attained.

***

In this state, however, the intention of the parties as expressed in the contract is the source of contractual rights and duties.[4] A court must ascertain and give effect to this intention by determining what the parties meant by the words they used. Accordingly, the exclusion of relevant, extrinsic, evidence to explain the meaning of a written instrument could be justified only if it were feasible to determine the meaning the parties gave to the words from the instrument alone.

If words had absolute and constant referents, it might be possible to discover contractual intention in the words themselves and in the manner in which they were arranged. Words, however, do not have absolute and constant referents. ‘A word is a symbol of thought but has no arbitrary and fixed meaning like a symbol of algebra or chemistry, ...‘ (Pearson v. State Social Welfare Board (1960) 54 Cal.2d 184, 195 [5 Cal.Rptr. 553, 353 P.2d 33].) The meaning of particular words or groups of words varies with the ‘... verbal context and surrounding circumstances and purposes in view of the linguistic education and experience of their users and their hearers or readers (not excluding judges). ... A word has no meaning apart from these factors; much less does it have an objective meaning, one true meaning.‘ (Corbin, The Interpretation of Words and the Parol Evidence Rule (1965) 50 Cornell L.Q. 161, 187.) Accordingly, the meaning of a writing ‘... can only be found by interpretation in the light of all the circumstances that reveal the sense in which the writer used the words. The exclusion of parol evidence regarding such circumstances merely because the words do not appear ambiguous to the reader can easily lead to the attribution to a written instrument of a meaning that was never intended. [Citations omitted.]’

Although extrinsic evidence is not admissible to add to, detract from, or vary the terms of a written contract, these terms must first be determined before it can be decided whether or not extrinsic evidence is being offered for a prohibited purpose. The fact that the terms of an instrument appear clear to a judge does not preclude the possibility that the parties chose the language of the instrument to express different terms. That possibility is not limited to contracts whose terms have acquired a particular meaning by trade usage,[5] but exists whenever the parties’ understanding of the words used may have differed from the judge’s understanding.

Accordingly, rational interpretation requires at least a preliminary consideration of all credible evidence offered to prove the intention of the parties. (Civ. Code, § 1647; Code Civ. Proc., § 1860; see also 9 Wigmore on Evidence, op. cit. supra, § 2470, fn. 11, p. 227.) Such evidence includes testimony as to the ‘circumstances surrounding the making of the agreement ... including the object, nature and subject matter of the writing ...‘ so that the court can ‘place itself in the same situation in which the parties found themselves at the time of contracting.‘ (Universal Sales Corp. v. California Press Mfg. Co., supra, 20 Cal.2d 751, 761; Lemm v. Stillwater Land & Cattle Co., supra, 217 Cal. 474, 480-481.) If the court decides, after considering this evidence, that the language of a contract, in the light of all the circumstances, ‘is fairly susceptible of either one of the two interpretations contended for ...‘ (Balfour v. Fresno C. & I. Co. (1895) 109 Cal. 221, 225 [41 P. 876]; see also, Hulse v. Juillard Fancy Foods Co., supra, 61 Cal.2d 571, 573; Nofziger v. Holman, supra, 61 Cal.2d 526, 528; Reid v. Overland Machined Products, supra, 55 Cal.2d 203, 210; Barham v. Barham (1949) 33 Cal.2d 416, 422-423 [202 P.2d 289]; Kenney v. Los Feliz Investment Co. (1932) 121 Cal.App. 378, 386-387 [9 P.2d 225]), extrinsic evidence relevant to prove either of such meanings is admissible.

In the present case the court erroneously refused to consider extrinsic evidence offered to show that the indemnity clause in the contract was not intended to cover injuries to plaintiff’s property. Although that evidence was not necessary to show that the indemnity clause was reasonably susceptible of the meaning contended for by defendant, it was nevertheless relevant and admissible on that issue. Moreover, since that clause was reasonably susceptible of that meaning, the offered evidence was also admissible to prove that the clause had that meaning and did not cover injuries to plaintiff’s property. Accordingly, the judgment must be reversed.

[1] We begin by noting that the difficulties in this case arise largely because, as the trial court pointed out, “Earnshaw used a REPC that is normally used in the sale and purchase of an existing piece of improved real estate,” even though he was attempting to sell a condominium unit that was not yet built at the time the contract was executed. We highlight this fact to caution against the use of standard form contracts that are not appropriate for the transaction at hand.

[2] Similarly, there may be ambiguity in a contract taken as a whole. See WebBank v. American Gen. Annuity Serv. Corp., 2002 UT 88, ¶ 28, 54 P.3d 1139 (noting that there was ambiguity “as to the nature or character of the transaction as a whole”). That particular argument has not been made here.

[3] A “prepreg” is a ready-to-mold material impregnated with resin.

[4] ‘A contract must be so interpreted as to give effect to the mutual intention of the parties as it existed at the time of contracting, so far as the same is ascertainable and lawful.‘ [Citations omitted.]

[5] Extrinsic evidence of trade usage or custom has been admitted to show that the term ‘United Kingdom‘ in a motion picture distribution contract included Ireland (Ermolieff v. R.K.O. Radio Pictures, Inc. (1942) 19 Cal.2d 543, 549-552 [122 P.2d 3]); that the word ‘ton‘ in a lease meant a long ton or 2,240 pounds and not the statutory ton of 2,000 pounds (Higgins v. California Petroleum etc. Co. (1898) 120 Cal. 629, 630-632 [52 P. 1080]); that the word ‘stubble‘ in a lease included not only stumps left in the ground but everything ‘left on the ground after the harvest time‘ (Callahan v. Stanley (1881) 57 Cal. 476, 477-479); that the term ‘north‘ in a contract dividing mining claims indicated a boundary line running along the ‘magnetic and not the true meridian‘ (Jenny Lind Co. v. Bower (1858) 11 Cal. 194, 197-199) and that a form contract for purchase and sale was actually an agency contract. (Body-Steffner Co. v. Flotill Products (1944) 63 Cal.App.2d 555, 558-562 [147 P.2d 84]). See also Code Civ. Proc., § 1861; Annot., 89 A.L.R. 1228; Note (1942) 30 Cal.L.Rev. 679.)

suggested by Professor Jasmine Abdel-khalik

Use it for practice problems