Anglo-American


Contract and Torts




Prof. Mark P. Gergen


21. Interpretation: parol evidence

and plain meaning (Sessions 9 and
10)
Contract: a promise the law will enforce.
Restatement Contracts § 1

In the late 19th and early 20th centuries classical theorists of

contract conceived of contract as private legislation. People
enter into a contract to put themselves under an obligation
the other may go to court to enforce.

This leads to the assumption that an incomplete agreement

is not a contract. See the doctrine on indefiniteness.

And it leads to the assumption that when parties reduce

their obligation to writing they intend for a court to look to
that writing to determine their obligation.
When a court looks at a writing it may find nothing to resolve
the parties dispute because the writing does not address the
matter or because the terms are ambiguous.

Frigaliment, Text 164, illustrates. Contract for “chicken.”

Buyer intends young broilers. Seller intends old stewing
chicken (fowl).
The court considered all relevant evidence to determine
each parties’ subjective intent and whether one party’s
understanding was more reasonable in the circumstances.

The buyer’s claim for breach of contract failed because the

court concluded its understanding was not more reasonable.
Had the seller brought a counterclaim for breach, it also
would have failed. The contract fails for mutual
misunderstanding.
If the writing does not resolve the issue because the parties
intended to resolve it later, then the court may find there
was merely an “agreement to agree” or that the contract
fails for indefiniteness. See Academy Chicago Publishers v.
Cheever, Supp 38.
What if the writing appears to resolve
the dispute?

J. Evans & Son (Portsmouth ) Ltd. v. Andrea Merzario Ltd.,

p. 135 (contract for carriage of goods, in prior dealings goods
were always shipped below deck and carrier gave oral
assurances containers would be stored below deck).

City and Westminster Properties v. Mudd, p. 137

(commercial lease forbids residential use, tenant always had
used property as residence and was orally assured by
landlord’s representative when lease was renewed there
was no objection to him continuing to do so).
In both cases courts enforce the agreement in fact even
though this conflicts with the written contract.

In neither case does the court use the technique of

interpretation. Instead the court finds an enforceable side
agreement. See p. 136 bottom for an explanation of the
technique.
Terminology
• Agreement
• Written expression of contract (“Integrated
agreement”)
• Contract

Evidence that may be considered in addition to writing

• Surrounding circumstances
• Course of performance
• Course of dealing
• Trade usage/custom
• Recorded communications between parties
• Testimony regarding communications
• Testimony regarding party’s own belief
Convention for the International Sale of Goods, Article 8.

(1) For the purposes of this Convention statements made by and other
conduct of a party are to be interpreted according to his intent where
the other party knew or could not have been unaware what that intent
was.


(2) If the preceding paragraph is not applicable, statements made by
and conduct of a party are to be interpreted according to the
understanding a reasonable person of the same kind as the other party
would have had in the same circumstances.


(3) In determining the intent of a party or the understanding a
reasonable person would have had, due consideration is to
be
given to all relevant circumstances of the case including the
negotiations, any practices which the parties have
established between themselves, usages and any subsequent
conduct of the parties.
The approach is the same in some US states. These states
reject the “plain meaning rule.” And they apply a permissive
form of the “parol evidence rule.” The sales provisions of
the UCC encourage courts to take these approaches. See
California materials, Supp 53-55

In these states, the parol evidence rule allows the court to

make a preliminary determination of the credibility of
evidence of an alleged side agreement. Normally credibility
is a question for the jury.

In many states the interpretation of a written contract is

treated as a question of law for the court even if the writing
is ambiguous.

If the court cannot resolve the dispute based on the written

contract, and the outcome turns on the credibility of
witnesses, then the issue goes to the jury in all US states.
But the results in the two English cases might well have been
different in some states.

Mitchill v. Lath (NY 1928), Supp 43 (contract for sale of

house and land for residence, oral side agreement by vendor
to remove ugly ice house on adjacent land he owed).

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

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

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

Evidence that may be considered in addition to writing

• Surrounding circumstances
• Course of performance
• Course of dealing (?)
• Trade usage/custom (?)
• Recorded communications between parties
• Testimony regarding communications
• Testimony regarding party’s own belief
Mitchill v. Lath (NY 1928), Supp 43, at 44-45, applies the
parol evidence rule (PER), which is stated as follows:

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

Evidence of an agreement may be precluded because it

contradicts a term in the writing (on the basis of
inconsistency).

Evidence of an agreement may be precluded because it is a

term the court would have expected to be in the written
agreement. Mitchill v. Lath applies this strand of the rule.
Mitchill v. Lath is a 5-2 decision. The majority opinion by
Andrews and the dissenting opinion by Lehman illustrate two
different approaches US courts take in applying the rule.


The contrasting approaches often are described as the
Williston approach (Andrews/majority) and the Corbin
approach (Lehman/dissent).

Williston and Corbin are the authors of the two leading US
Contract treatises in the mid 20th century.
The majority does not question the alleged agreement was
part of the bargain.

“The defendants have not fulfilled their promise as to the

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

“In applying this test, the policy of our courts is to be

considered. We have believed that the purpose behind
the rule was a wise one, not easily to be abandoned.
Notwithstanding injustice here and there, on the whole
it works for good.” (Supp 44, 4th ¶)
Under Andrews’ approach the court disregards the strength
of the evidence of the side agreement in applying the rule.

Instead the court makes “an inspection of the written

contract, read in the light of surrounding circumstances.”

This lead to the following analysis in the 2nd paragraph Supp
45.
“an inspection of this contract shows a full and
complete agreement, setting forth in detail the
obligations of each party. On reading it, one would
conclude that the reciprocal obligations of the parties
were fully detailed. Nor would his opinion alter if he
knew the surrounding circumstances. The presence of
the icehouse, even the knowledge that Mrs. Mitchill
thought it objectionable, would not lead to the belief
that a separate agreement existed with regard to it.
Were such an agreement made it would seem most
natural that the inquirer should find it in the contract.
Collateral in form it is found to be, but it is closely
related to the subject dealt with in the written
agreement—so closely that we hold it may not be
proved.”
Lehman comes at the problem very differently.

He would have the court consider evidence of the side
agreement.

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

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

Yielding this conclusion:

“an inspection of the contract, though it is complete on its
face in regard to the subject of the conveyance, does not, I
think, show that it was intended to embody negotiations or
agreements, if any, in regard to a matter so loosely bound
to the conveyance as the removal of an icehouse from land
not conveyed.
 Andrews/majority/Williston and Lehman/dissent/
Corbin disagree on . . .

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.

Ultimately they disagree on the purpose of the rule. Andrews

thinks the rule serves a formal purpose—the encourages
people to put agreements in writing. Lehman thinks the rule
serves an evidentiary purpose.
City and Westminster Properties v. Mudd, Text p. 137.
Commercial lease clearly forbids residential use. Tenant
always had used property as residence and was orally assured
by landlord’s representative when lease was renewed there
was no objection to him continuing to do so.

Is the oral agreement enforceable if a court takes Andrews’
approach in applying the parol evidence rule?
The parol evidence rule does not preclude use of evidence to
establish mutual misunderstanding, mistake, fraud or other
grounds for vitiating consent.

Nor does it preclude use of evidence for purposes of

interpretation.

Nor does it preclude evidence of an agreement or conduct

subsequent to the execution of the writing modifying the
contract.

A “no oral modification” may preserve a written contract
from being challenged on this basis.
While the PER will not exclude evidence used for purposes of
interpretation, a rule of interpretation may demand that a
court disregard or discount evidence* and arguments that
contradict the written terms contract.

* This applies to more than parol evidence narrowly

defined—i.e., prior oral or written agreements and
contemporaneous oral agreements. It applies to
evidence of custom and usage, course of performance, etc
....

National Union v. CBI (Tex. 1995), Supp 49, applies what

sometimes is called the “four corners” and “plain
meaning” rules . These rules bar looking at any extrinsic
evidence if there is not a facial ambiguity in a writing.
 Rules of interpretation

Plain meaning/ four corners rules: extrinsic evidence

may be considered in interpreting a written contract
only if there is a patent or latent ambiguity in the
writing.

PG&E (California) approach: judge examines extrinsic

evidence and admits it if she find “the language of the
contract is fairly [or reasonably] susceptible” of the
“interpretations contended for.” Text 34; Supp 54-55.
CBI is a contractor working at a Marathon facility in Texas.
One of its crane drops its load onto a pipe connecting to a
tank containing a highly toxic acid. A toxic cloud engulfs
Texas City, causing mass evacuations, some bodily harm, and
significant property damage.

Lawsuits are filed against CBI, which asks its liability insurer
to defend the claim. The insurer denied coverage on the
basis of the so-called absolute pollution exclusion. CBI filed
a lawsuit against the insurer challenging this determination.
This policy does not apply to ... any Personal Injury or
Property Damage arising out of the actual or threatened
discharge, dispersal, release or escape of pollutants,
anywhere in the world; ... "Pollutants" means any solid,
liquid, gaseous or thermal irritant or contaminant, including
smoke, vapor, soot, fumes, acids, alkalis, chemicals and
waste material. Waste materials include materials which are
intended to be or have been recycled, reconditioned or
reclaimed.

Is the coverage excluded under this provision?

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

During testimony at a 1985 hearing conducted by the
Texas State Board of Insurance, Ward Harrel, a
representative of Liberty Mutual Insurance Company,
indicated that the pollution exclusion could be read
literally to exclude coverage in situations where "no one
would read it that way," noting that "our insureds would
be at the State Board ... quicker than a New York minute
if, in fact, everytime [sic] a bottle of Clorox fell off a
shelf at a grocery store and we denied the claim because
it's a pollution loss."
The Texas Supreme Court holds the evidence to be
inadmissible and that CBI’s lawsuit against the insurer can be
dismissed on a motion for summary judgment without giving
CBI a chance to do discovery or to present evidence.
“If a written contract is so worded that it can be given a
definite or certain legal meaning, then it is not ambiguous.
Parol evidence is not admissible for the purpose of creating
an ambiguity.” (p. 51 top).

Only where a contract is first determined to be ambiguous
may the courts consider the parties' interpretation, * * * and
admit extraneous evidence to determine the true meaning of
the instrument. (p. 51 top)
CBI argues that extrinsic evidence concerning industry‑
wide discussions of the exclusion at issue here shows
that the parties shared a mutual, yet unstated, intent
that the exclusions would not encompass "accidental"
releases of pollutants.

* * * If the contract language is not fairly susceptible of
more than one legal meaning or construction, however,
extrinsic evidence is inadmissible to contradict or vary
the meaning of the explicit language of the parties'
written agreement. (p. 53)
The Texas Supreme Court did acknowledge several
qualifications:
• Evidence of “surrounding circumstances” may
be considered.
• Evidence may be used to establish a “latent
ambiguity.” See p. 51 (hypothetical brings to
mind Raffles).
• Maybe evidence of trade usage is admissible.
See p. 53 esp. note d.
Evidence that may be considered in addition to writing
• Surrounding circumstances
• Course of performance
• Course of dealing
• Trade usage/custom ?
• Recorded communications between parties
• Testimony regarding communications
• Testimony regarding party’s own belief