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Contract Construction and Interpretation: from the “Four Corners” to Parol Evidence (And Everything in Between)

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Scholarly Commons @ UNLV Boyd Law Scholarly Works Faculty Scholarship 1999 Contract Construction and Interpretation: From the “Four Corners” to Parol Evidence (and Everything in Between) Keith A. Rowley University of Nevada, Las Vegas -- William S. Boyd School of Law Follow this and additional works at: https://scholars.law.unlv.edu/facpub Recommended Citation Rowley, Keith A., "Contract Construction and Interpretation: From the “Four Corners” to Parol Evidence (and Everything in Between)" (1999). Scholarly Works. 554. https://scholars.law.unlv.edu/facpub/554 This Article is brought to you by the Scholarly Commons @ UNLV Boyd Law, an institutional repository administered by the Wiener-Rogers Law Library at the William S. Boyd School of Law. For more information, please contact [email protected]. CONTRACT CONSTRUCTION AND INTERPRETATION: FROM THE "FOUR CORNERS" TO PAROL EVIDENCE (AND EVERYTHING IN BETWEEN) Keith A. Rowley* TABLE OF CONTENTS I. The Goal of Construction and Interpretation ........ 79 II. The Process of Construction and Interpretation ..... 82 A. Key Concept: Ambiguity ................... 90 1. "Patent" vs. "Latent" Ambiguity ........... 91 2. Who Decides Whether an Instrument Is Ambiguous? . 94 3. Who Decides What the Ambiguous Terms M ean? . .. .. .. .. .. .. .. 96 4. How Does the Issue Arise? . 98 5. The Consequences of Ambiguity .......... 99 B. Key Concept: Integration ................... 100 1. Full vs. Partial Integration .............. 101 a. Mississippi Common Law Presumes That a Written Contract Is Fully Integrated... 103 Visiting Assistant Professor of Law, Mississippi College School of Law; B.A., Baylor University; M.P.P., Harvard University, John F. Kennedy School of Gov- ernment; J.D., University of Texas School of Law; Law Clerk to the Honorable Thomas M. Reavley, United States Court of Appeals for the Fifth Circuit; Intern to the Honorable Lloyd A. Doggett, Supreme Court of Texas. The author wishes to thank Mississippi College School of Law for providing a summer research sti- pend, Mr. Donald Campbell and Ms. Tana Vollendorf for their assistance, and his wife, Katherine, and their son, James, for their inspiration and understanding. MISSISSIPPI LAW JOURNAL [Vol. 69 b. The Significance of "Merger" or "Integration" Clauses .............. 105 c. Finding Partial Integration ........... 107 1). Patent (Facial) Incompleteness .... 108 2). Contextual (Latent) Incompleteness 110 2. Who Decides Whether and to What Extent an Instrument Is Integrated? . 112 3. The Consequences of Integration or the Lack Thereof ........................ 112 C. Primary Rules of Construction and Interpretation 113 1. Afford Words and Phrases Their "Plain M eaning" ........................... 114 2. Construe the Contract as a Whole ......... 118 3. Afford Each Provision Meaning and Purpose 121 4. Require a Fair and Reasonable Construction 126 5. Avoid Illegality ....................... 132 6. Avoid Implied Terms ................... 133 7. Account for Surrounding Circumstances .... 140 8. Consider the Parties' Own "Practical Construction" ........................ 147 D. Secondary Rules of Construction and Interpretation ........................... 150 1. Contra Proferentem (Construe Against the Drafting Party) ...................... 151 2. Noscitur a Sociis (Take Words in Their Immediate Context) ................... 151 3. Ejusdem Generis (Limit Generalities to Things of the Same Genre as Those Specified)153 4. Expressio Unius est Exclusio Alterius (Exclude Similar Things Not Specified) .... 155 5. Favor Specific Terms Over General Terms... 156 6. Favor Handwriting to Typing and Typing to Printing ............................ 159 7. Favor Terms Stated Earlier in the Agreement Over Terms Stated Later ............... 162 E. Rules Applicable to Specific Types of Agreem ents ............................ 164 1. Guaranty Agreements .................. 164 19991 CONTRACT CONSTRUCTION & INTERPRETATION 75 2. Surety Agreements .................... 166 3. Indemnity Agreements ................. 168 4. Insurance Policies ..................... 171 5. Settlement Agreements ................. 184 6. Releases ............................ 186 7. Arbitration Agreements ................. 189 8. Choice of Law Agreements ............... 191 9. Liquidated Damages/Penalty Provisions .... 192 10. Grants of Real Property or Other Property Rights ............................. 193 a. Deeds and Related Documents ........ 193 b. Deed vs. Mortgage ................. 198 c. Deed vs. W ill ...................... 200 d. Reservations of Rights .............. 202 e. Restrictive Covenants ............... 204 f. Easements vs. Fees ................. 207 g. Leases .. ......................... 210 1). Renewal Options ............... 210 2). Assignments .................. 211 11. Antenuptial Agreements ................ 211 12. Postnuptial Agreements/Property Settlement Agreements ......................... 212 13. Wills, Testamentary Trusts, and Related Documents .......................... 214 a. Charitable Gifts ................... 220 b. Mutual, Joint, or Reciprocal Wills ...... 222 c. Perpetuities Problems ............... 226 d. Other Special Rules ................ 226 1). Time of Vesting ................ 226 2). Life Estates vs. Fees ............ 227 3). Presumption in Favor of Next of Kin 227 14. "Dragnet" Clauses ..................... 227 15. "Acceleration" Clauses ................. 233 16. Bills of Lading ....................... 234 17. Covenants Not To Compete .............. 235 18. Contingent Fee Contracts ............... 236 19. Express Warranties ................... 237 MISSISSIPPI LAW JOURNAL [Vol. 69 III. The Role of Extrinsic Evidence in Construction and Interpretation .......................... 238 A. The Common Law Parol Evidence Rule ........ 239 1. The Purpose of the Rule ................ 246 2. The Scope of the Rule .................. 247 a. Explanatory Evidence ............... 248 b. Evidence of Collateral Agreements ..... 251 c. Evidence of Subsequent Agreements .... 253 3. General Application of the Rule ........... 256 a. Partially Integrated, Unambiguous Agreements ...................... 256 b. Integrated, Ambiguous Agreements .... 259 c. Unintegrated Agreements ............ 262 4. The Parol Evidence Rule Is a Rule of Substantive Law, Not a Rule of Evidence... 262 5. Invoking the Parol Evidence Rule ......... 262 6. Summary Judgment Considerations ....... 263 B. Common Law Exceptions to the Parol Evidence R ule .................................. 268 1. Fraud .............................. 269 2. Negligent Misrepresentation ............. 273 3. Duress or Undue Influence .............. 273 4. Mutual Mistake ....................... 274 5. Illegal Provisions or Agreements .......... 275 6. Non-Existent, or "Sham," Contract ........ 277 7. Evidence Pertinent to Consideration ....... 278 a. Lack of or Failure of Consideration ..... 278 b. True Consideration ................. 280 8. Scrivener's Error ...................... 283 9. Lost or Destroyed Contract .............. 285 10. Material Alteration .................... 287 11. Condition Precedent ................... 292 12. Subsequent Acts or Agreements .......... 295 a. Subsequent Conduct ................ 295 b. Abandonment of Contract ............ 299 c. Subsequent Oral Modification ......... 300 d. Rescission ........................ 301 e. Novation ......................... 303 19991 CONTRACT CONSTRUCTION & INTERPRETATION 77 C. The Common Law Parol Evidence Rule in Action: A Simplified Checklist .................... 306 D. Special Case: Contracts for the Sale or Lease of Goods .......................... 308 1. Similarities to the Common Law Parol Evidence R ule ............................... 311 2. Distinguishing Features ................ 315 a. Course of Dealing .................. 318 b. Usage of Trade .................... 324 c. Course of Performance .............. 327 d. Consistent Additional Terms .......... 331 e. Terms Implied by the U.C.C. ("Gap-Fillers") .................... 335 3. Applying the U.C.C. Parol Evidence Rules . 335 a. Questions of Integration .............. 335 b. Questions of Ambiguity .............. 338 IV. Conclusion ................................ 342 The pervasive use of computers has revolutionized both the practice of law and the conduct of business. Agreements once performed on the basis of an oral promise or a hand shake, at one end of the spectrum, or only following lengthy negotiations and exchanges of drafts of documents which had to be recreated from scratch at each stage, at the other, often are now governed by writings prepared with minimal effort, based on a computerized form used by a party to the contract, or its attorneys, in some prior deal. The ease of "block and copy" drafting of contracts and similar instruments, and the often corresponding decrease of close attention paid to any particular agreement in the drafting stage, increases the po- tential for misunderstanding among the parties to those agreements when the time comes for them to perform. When litigation results, the threshold issues for the parties, their counsel, and the court are often the same: What are the com- plete terms of the parties' agreement? What was the parties' intent in entering into the agreement? And, how can we prove MISSISSIPPI LAW JOURNAL [Vol. 69 (or challenge) said terms and intent? In Mississippi, as in every jurisdiction, a considerable body of law governs the resolution of these questions. Many separately articulated-if not always well defined-interpre- tational
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