| Berg v. Hudesman |
| 115 Wn. 2d 657 (1990) |
| Instructors note: Footnotes and some citations omitted. |
Brachtenbach, Justice.
This suit concerns a 99-year ground lease. The main issue is the meaning of the rent payment clause. The trial court granted summary judgment to the landlord, held that the lease was not ambiguous, determined the meaning of the rental clause, and awarded back rent to the landlord based upon the trial courts interpretation of the rental clause. By unpublished opinion, the Court of Appeals affirmed in the main but remanded for determination of certain facts which existed at the inception of the lease. We reverse the trial court, modify the Court of Appeals opinion, and remand for trial.
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In broad terms, the question posed is the interpretation of the subject lease. Inherent in resolution of that issue are the matters of integration, ambiguity, plain meaning and parol evidence.
Before examining the specific issues raised herein an overview of the problems of interpretation of contracts is necessary. We use the word interpretation in the sense described by Corbin and the Restatement and distinguish it from construction. Corbin states: Interpretation is the process whereby one person gives a meaning to the symbols of expression used by another person. 3 A. Corbin, Contracts § 532, at 2 (1960). The Restatement definition is: Interpretation of a promise or agreement or a term thereof is the ascertainment of its meaning. Restatement (Second) of Contracts § 200 (1981).
Construction of a contract determines its legal effect. Construction ... is a process by which legal consequences are made to follow from the terms of the contract and its more or less immediate context, and from a legal policy or policies that are applicable to the situation. Patterson, The Interpretation and Construction of Contracts, 64 Colum. L. Rev. 833, 835 (1964). See Corbin § 534.
It is deceptively simple to state the purpose of a court in interpreting a contract. The cardinal rule with which all interpretation begins is that its purpose is to ascertain the intention of the parties. Corbin, The Interpretation of Words and the Parol Evidence Rule, 50 Cornell L. Quar. 161, 162 (1965). 4 S. Williston, Contracts § 601, at 306 (3d ed. 1961).
As would be expected, problems of contract interpretation have long been a source of judicial opinion. The subject has produced thousands of cases, numerous texts and countless commentaries. A study of these materials, including Washington cases, leads us to concur with the observation: [T]he rules produced by accumulated decisions as to how such discovery [of the parties intention] shall be conducted often overlap and sometimes produce hindrance rather than help, while reconciliation of all cases is a task neither possible nor worth the effort.... Nicoll v. Pittsvein Coal Co., 269 F. 968, 971 (2d Cir. 1920).
In approaching contract interpretation every court should heed the strong words of Corbin:
[I]t can hardly be insisted on too often or too vigorously that language at its best is always a defective and uncertain instrument, that words do not define themselves, that terms and sentences in a contract, a deed, or a will do not apply themselves to external objects and performances, that the meaning of such terms and sentences consists of the ideas that they induce in the mind of some individual person who uses or hears or reads them, and that seldom in a litigated case do the words of a contract convey one identical meaning to the two contracting parties or to third persons.
Corbin § 536. Holmes was more poetic: A word is not a crystal, transparent and unchanged; it is the skin of a living thought and may vary greatly in color and content according to the circumstances and the time in which it is used. Williston § 609, at 402 (quoting Towne v. Eisner, 245 U.S. 418, 425, 62 L. Ed. 372, 38 S. Ct. 158 (1918)).
A second major point applicable to contract interpretation is that the various principles of interpretation should not be applied as absolutes. They are to be taken as suggestive working rules only.... They will be harmful if they are taken as dogmatic directions that must be followed, or if they mislead us into thinking that language has only one meaning, the one absolutely correct. Corbin § 535.
Various efforts have been made to compile a set of rules of contract interpretation. E.g., Patterson at 852 (listing 10 standard maxims of contract interpretation); see Restatement § 202 (listing rules in aid of interpretation). Each set of rules is subject to Corbins caution. There is some doubt whether they [maxims of interpretation] have reliable guidance value for judges, or are merely justifications for decisions arrived at on other grounds, which may or may not be revealed in the opinion. Patterson at 852.
With the above observations in mind we turn to the central issue of contract interpretation in this case.
There remains to be discussed the interpretation issue which presents the greatest difficulty. If the disputed language is written, will the proponent of one meaning be permitted to aid his cause by verbal testimony? If so, what is the permissible range such testimony can take? On these important details the Washington cases are in confusion.
There are cases in which the court examined the circumstances surrounding the execution of a writing as an aid to its interpretation and sustained the admissibility of the pertinent evidence even though the writing might on its face be unambiguous. The position taken in these cases is the one endorsed by Professors Corbin and Williston and by the Restatement of Contracts. It is the only approach which can consistently yield interpretations likely to coincide with the meanings the parties contemplated.
There are other cases in which the court indicated that it will not look beyond the four corners of a contract writing unless what appears within those four corners is ambiguous. The reason is variously stated as an interpretation principle, or as an application of the parol evidence rule. Neither reason is persuasive.
Shattuck, Contracts in Washington, 1937-1957: Part II, 34 Wash. L. Rev. 345, 374-76 (1959). Professor Shattuck cites a number of cases as examples of the contrasting analyses.
Despite the accuracy of the conclusion that seldom will any word or phrase carry only a single meaning which is readily discernible by any reader, this court on occasion has embraced the plain meaning rule.
The Plain Meaning Rule states that if a writing, or the term in question, appears to be plain and unambiguous on its face, its meaning must be determined from the four corners of the instrument without resort to extrinsic evidence of any nature.
J. Calamari & J. Perillo, Contracts § 310, at 166-67 (3d ed. 1987). In following this rule, this court has held that only if a contract is ambiguous on its face will the court look to evidence of the parties intent as shown by the contract as a whole, its subject matter and objective, the circumstances of its making, the subsequent conduct of the parties, and the reasonableness of their interpretations. E.g., St. Yves v. Mid State Bank, 111 Wn. 2d 374, 378, 757 P.2d 1384 (1988); Boeing Airplane Co. v. Firemens Fund Indem. Co., 44 Wn. 2d 488, 496, 268 P.2d 654, 45 A.L.R.2d 984 (1954); Bellingham Sec. Syndicate, Inc. v. Bellingham Coal Mines, Inc., 13 Wn. 2d 370, 384, 125 P.2d 668 (1942).
The plain meaning rule has been criticized by leading commentators. See, e.g., Corbin § 542; 9 J. Wigmore, Evidence §§ 2461-62 (1981); Williston § 629; 2 E. Farnsworth, Contracts § 7.12, at 277-78 (1990); Calamari & Perillo § 3-10. The rule has been rejected by the Uniform Commercial Code, UCC § 2-202 comment 2, and the Restatement §§ 2002-04.
As Professor Shattuck notes, however, even while sometimes following the plain meaning rule, this court has not consistently applied it. Instead, the court has also sometimes held that a trial court may, in interpreting contract language, consider the surrounding circumstances leading to execution of the agreement, including the subject matter of the contract as well as the subsequent conduct of the parties, not for the purpose of contradicting what is in the agreement, but for the purpose of determining the parties intent. See, e.g., Stender v. Twin City Foods, Inc., 82 Wn. 2d 250, 510 P.2d 221 (1973); In re Estate of Garrity, 22 Wn. 2d 391, 156 P.2d 217 (1945); Leavenworth State Bank v. Cashmere Apple Co., 118 Wash. 356, 204 P. 5 (1922). As stated in Stender:
Determination of the intent of the contracting parties is to be accomplished by viewing the contract as a whole, the subject matter and objective of the contract, all the circumstances surrounding the making of the contract, the subsequent acts and conduct of the parties to the contract, and the reasonableness of respective interpretations advocated by the parties.
Stender at 254. This analytic framework for interpreting written contract language has been called the context rule. Eagle Ins. Co. v. Albright, 3 Wn. App. 256, 474 P.2d 920 (1970). See Pacific Gas & Elec. Co. v. G.W. Thomas Drayage & Rigging Co., 69 Cal. 2d 33, 442 P.2d 641, 69 Cal. Rptr. 561, 40 A.L.R.3d 1373 (1968) for an excellent articulation of the rationale of the context principle. Other courts have allowed evidence of the circumstances of the making of a contract for the purpose of interpreting the contract. E.g., Darner Motor Sales, Inc. v. Universal Underwriters Ins. Co., 140 Ariz. 383, 682 P.2d 388 (1984).
The instant case presents a clear opportunity for this court to resolve the long-standing confusion engendered by inconsistent holdings in this area.
We now hold that extrinsic evidence is admissible as to the entire circumstances under which the contract was made, as an aid in ascertaining the parties intent. We adopt the Restatement §§ 212, 214(c). Section 212 provides:
(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.
As explained in comment b to this section:
It is sometimes said that extrinsic evidence cannot change the plain meaning of a writing, but meaning can almost never be plain except in a context. Accordingly, the rule stated in Subsection (1) is not limited to cases where it is determined that the language used is ambiguous. Any determination of meaning or ambiguity should only be made in the light of the relevant evidence of the situation and relations of the parties, the subject matter of the transaction, preliminary negotiations and statements made therein, usages of trade, and the course of dealing between the parties.
This courts line of cases which includes Stender is in line with the Restatement and is in line with ascertaining the parties actual intent.
Restatement § 214(c) provides that
[a]greements and negotiations prior to or contemporaneous with the adoption of a writing are admissible in evidence to establish ... the meaning of the writing, whether or not integrated....
Comment b to this section explains:
Words, written or oral, cannot apply themselves to the subject matter. The expressions and general tenor of speech used in negotiations are admissible to show the conditions existing when the writing was made, the application of the words, and the meaning or meanings of the parties. Even though words seem on their face to have only a single possible meaning, other meanings often appear when the circumstances are disclosed. In cases of misunderstanding, there must be inquiry into the meaning attached to the words by each party and into what each knew or had reason to know.
In discerning the parties intent, subsequent conduct of the contracting parties may be of aid, and the reasonableness of the parties respective interpretations may also be a factor in interpreting a written contract.
We note with approval the following general statement of the context rule, which we reaffirm, contained in J. W. Seavey Hop Corp. v. Pollock, 20 Wn. 2d 337, 348-49, 147 P.2d 310 (1944):
May we say here that we are mindful of the general rule that parol evidence is not admissible for the purpose of adding to, modifying, or contradicting the terms of a written contract, in the absence of fraud, accident, or mistake. But, as stated in Olsen v. Nichols, 86 Wash. 185, 149 P. 668 (1915), parol evidence is admissible to show the situation of the parties and the circumstances under which a written instrument was executed, for the purpose of ascertaining the intention of the parties and properly construing the writing. Such evidence, however, is admitted, not for the purpose of importing into a writing an intention not expressed therein, but with the view of elucidating the meaning of the words employed. Evidence of this character is admitted for the purpose of aiding in the interpretation of what is in the instrument, and not for the purpose of showing intention independent of the instrument. It is the duty of the court to declare the meaning of what is written, and not what was intended to be written. If the evidence goes no further than to show the situation of the parties and the circumstances under which the instrument was executed, then it is admissible.
We thus reject the theory that ambiguity in the meaning of contract language must exist before evidence of the surrounding circumstances is admissible. Cases to the contrary are overruled.
Another issue involving interpretation which may be relevant in this case concerns the possibility that language used in the lease is technical or constitutes terms of art. If so, the general rule is that such language is to be given its technical meaning when used in a transaction within its technical field. Keeton v. Department of Social & Health Servs., 34 Wn. App. 353, 361, 661 P.2d 982, review denied, 99 Wn. 2d 1022 (1983); Restatement § 202(3)(b). Additionally, it is possible that the parties have attached different meanings to certain terms used, and, if so, the rules set out in Restatement § 201 provide guidance.
Finally, before examining the written ground lease, some discussion of defendants claim that the lease is not a fully integrated instrument is in order. The first point to be made is that the question of integration, and the role of parol evidence in deciding the integration question, is not the same inquiry as the role of parol, or extrinsic, evidence in interpreting a contract. The parol evidence rule relates to the former, but not to the latter.
Under the parol evidence rule,
[P]arol or extrinsic evidence is not admissible to add to, subtract from, vary, or contradict written instruments which are contractual in nature and which are valid, complete, unambiguous, and not affected by accident, fraud, or mistake.
St. Yves at 377 (quoting Emrich v. Connell, 105 Wn. 2d 551, 555-56, 716 P.2d 863 (1986) (quoting Buyken v. Ertner, 33 Wn. 2d 334, 341, 205 P.2d 628 (1949))).
[T]he parol evidence rule only applies to a writing intended by the parties as an integration of their agreement; i.e., a writing intended as a final expression of the terms of the agreement. Emrich at 556. Where a contract is only partially integrated, i.e., the writing is a final expression of those terms which it contains but not a complete expression of all terms agreed upon, the terms not included in the writing may be proved by extrinsic evidence provided that the additional terms are not inconsistent with the written terms. Emrich at 556.
Defendant-tenant argued to the Court of Appeals that the lease contract was not fully integrated and therefore the parol evidence rule did not apply. This issue arguably was not raised before the trial court, and thus arguably should not be considered by an appellate court. ... Moreover, the tenant did not renew this argument in the answer to the petition for review.
However, we need not reach the question of integration nor do we decide whether the matter is properly subject to appellate review in this case. In light of our adoption of the context rule for interpreting written contracts in accord with the parties intent, the summary judgment in favor of the landlord must be reversed and this matter must be remanded for trial. As noted, the trial court refused to consider evidence as to the circumstances surrounding the contract under the now disapproved plain meaning rule. As explained hereafter, there are material questions of fact remaining as to the intent of the contracting parties and interpretation of the ground lease.
Upon remand, the tenant may argue the integration issue. It may be that the lease is an integrated document; if so, it remains to be interpreted. If not, additional terms may be proved insofar as they are not inconsistent with the written terms. While we do not decide the question, we note that it is a reasonable inference from the affidavit of the original tenants attorney that there were agreements and intentions not expressed in the written lease.
The lease in this case well illustrates why extrinsic evidence is necessary to assist the court in interpreting words and applying them to the actual events in order to ascertain and implement the intentions of the parties.
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In conclusion, it is apparent from our analysis of the contract language that there are certain ambiguities appearing on the face of the lease instrument. Lest there be any doubt as to our holding, we expressly state that we are not implicitly applying the plain meaning rule. Whether or not ambiguity is apparent from the face of a contract, evidence of the circumstances of the making of the contract is admissible. We reject the plain meaning rule and expressly adopt the context rule as the applicable rule for ascertaining the parties intent and interpreting written contracts.
The trial court is reversed and the matter remanded for proceedings consistent with this opinion.
Callow, C.J., and Utter, Dolliver, Dore, Anderson, Durham, Smith, and Guy, JJ., concur.
| Class | Context | Parol | Plain |