Ramco v. H-K Contractors, Inc. , 118 Idaho 108 ( 1990 )

BISTLINE, Justice,

dissenting.

As an appellate court, we are charged with the task of reviewing all questions of law, unencumbered by what the court below determined. This free review of pure issues of law is an important function of all appellate courts, because our answers to questions of law set the tone for similar litigation in the future. Civil disputes over commercial contracts are not rare, and should therefore be handled with one eye on the future. The majority has failed to consider the future, and has instead confused a basic issue of contract law. This dissent sets out what, as a matter of law, is the consequence of applying the correct rule of law concerning the use of extrinsic evidence and prior agreements to construe a contract to the facts of this case.

Citing no authority, the majority proclaims that “[t]he issue of [contract] ambiguity must be determined by the court as a threshold matter of law; the jury’s role is limited to determining the intent of the parties based on the evidence presented at trial.” Maj. Op. at 111, 794 P.2d at 1384. As will be discussed, that proclamation is a correct statement of the law. However, the majority did not apply that proclamation to this case. The majority states that:

H-K presented evidence of a prior draft of the agreement, which it argued had been independently agreed to in May, reducing only Ramco’s share of the NOL. H-K presented evidence that the language of that draft was subsequently changed on the advice of Ranstrom’s accountant, intentionally making it vague in order to avoid later tax problems, without intending a change in the actual terms of the agreement. Thus, it argues that the terms of the [July] document, being vague may be supplemented by other evidence of the intent of the parties.

Maj. Op. at 110, 794 P.2d at 1383. In other words, H-K argued that the latest agreement between the parties was vague because some vague language had been inserted, but that neither party intended to change the terms of the agreement. H-K was allowed to present extrinsic evidence at trial to the jury without first obtaining a ruling from the judge that the July agreement was indeed so vague that extrinsic evidence was required in order for the agreement to be interpreted.

The majority notes that the judge punted the issue of contract ambiguity to the jury, while at the same time admitting evidence of at least one prior agreement entered into by the parties for distribution of the NOL. The majority determines that this error is “harmless” because the jury instructions “guided the jury to evidence beyond the four corners of the document, as was the appropriate scope of the inquiry for the trier of fact once the judge had determined that the contract was ambiguous.” Maj. Op. at 111, 794 P.2d at 1384. What the majority does not tell you is that the judge never made this threshold determination! The judge simply allowed extrinsic evidence in during trial and placed on the jury’s shoulders the determination of a question of law; i.e., whether the July contract was ambiguous. If the trial court had in fact determined that the contract was ambiguous, then there would have been no need for the court to alter the words of the jury instruction.² See Maj. Op. at 111, 794 P.2d at 1384 (jury instruction that normally reads “[t]he Court has determined that the terms of the Agreement are unclear” was changed by the court to read that “[t]he Court has determined that the terms of the Agreement could be unclear”).

The majority characterizes the error made by the court as simply one of instructing the jury. The majority is concerned that the jury instruction was altered. However, this error is neither harmless, as the majority insists, nor is it simply a question of incorrectly instructing the jury. A ruling by the judge, prior to the presentation to the trier of fact of extrinsic evidence that the contract was ambiguous, would have appropriately focused the attention of the trial court and trier of fact. If the contract was found by the trial court to be ambiguous, then the jury would understand that the extrinsic evidence was important to an understanding of the terms of the contract. If the judge ruled that the contract was not ambiguous, then no evidence of prior agreements or other extrinsic evidence would have properly been presented to the jury, and the jury would then focus upon the four corners of the document. Instead, the jury was incorrectly left to its own devices to determine for itself whether the contract was ambiguous, and to what extent.

Compounding error upon error, the majority remands “the issue of reformation to the trial court for further findings consistent with this opinion.” Maj. Op. at 112, 794 P.2d at 1385. Reformation was the relief requested by H-K Contractors. HK’s request for this form of relief must rest on the notion of unilateral mistake, because Rameo insists that no mistake was made and that the July agreement represents the contract between the parties. The majority neither blesses the court below with a list of the elements that H-K must show to gain reformation on the ground of unilateral mistake, nor does the majority consider the impact of its remand. I will consider each in turn.

To gain reformation because of unilateral mistake, H-K has a difficult task before it. If equity readily allowed avoidance of an agreement and reformation in all such cases, there would be no stability in contracts. H-K must show, to avoid the consequences of the July agreement and to gain reformation, that the vagueness or mistake in the July agreement went to a basic assumption on which the contract was made. This mistake must have a material effect on the performance of the contract for each party. H-K must also show that the July agreement as it stands is unduly burdensome to it, but that Rameo has in no way relied on the agreement to its detriment. See Farnsworth, Contracts § 9.4 at 663 (1982).

Let us consider what may happen on remand. There are two possibilities of interest here. H-K may carry its burden and prove that it is entitled to reformation. In that case, the July agreement would be re-written, and the NOL would be distributed according to this reformed agreement. In effect, the jury’s verdict would be pushed aside because the jury was improperly allowed to consider the July agreement before reformation. On the other hand, on remand H-K may not be able to carry the burden of proving up its entitlement to reformation. Therefore, the court would rule as a matter of law that the July agreement is the agreement, and evidence of other agreements would be inadmissible. No matter what happens on remand, the jury’s verdict is undermined. For reasons I will now explain, the better approach dictates that this cause be re-tried, because the issue of contract ambiguity is a threshold matter of law, to be determined long before a jury is privy to evidence beyond the contract.

There are currently two views on the admittance of extrinsic evidence to assist in the interpretation of a contract. Both views nevertheless require a threshold showing that the contract cannot stand alone before extrinsic evidence will be admitted. The older more restrictive view states that evidence of prior negotiations may be used for the purpose of interpretation only if the language in the writing is unclear, in the sense of being ambiguous or vague. As Supreme Court Justice Holmes once wrote, parties must be prevented from showing “that when they wrote five hundred feet it should mean one hundred inches, or that Bunker Hill Monument should signify Old South Church.” Holmes, The Theory of Legal Interpretation, 12 Harv.L.Rev. 417, 420 (1899). The second and more liberal view, championed by Corbin and the Restatement Second, states that extrinsic evidence of prior negotiations is always admissible for the purposes of contract interpretation. But, as Farnsworth points out, “even under the liberal view, extrinsic evidence is admissible only where the question is one of ambiguity or vagueness.” Farnsworth, Contracts § 7.12 at 503 (1982) (emphasis in original).

Accordingly, under either view the trial court should have made a threshold determination whether the July agreement was ambiguous. The process which the trial court should have followed to determine if the contract was ambiguous is straightforward. See Eskimo Pie Corp. v. Whitelawn Dairies, Inc., 284 F.Supp. 987 (S.D.N.Y.1968). The first step is to determine whether any of the material terms of the contract are ambiguous:

An “ambiguous” word or phrase is one capable of more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business.

Eskimo Pie, 284 F.Supp. at 994. This first step is generally determined upon a motion in limine,³ because the step determines the admissibility of the bulk of the evidence in any contract dispute.

The second and final step concerns the issue of objective and subjective meaning:

Unless the language is meaningless on its face (e.g. “abracadabra”) or ambiguous, however, the test for admission of [extrinsic] evidence is not a secret code meaning given to it by the parties but whether it might objectively be recognized by a reasonably intelligent person acquainted with applicable customs, usages and the surrounding circumstances as having such a special meaning.

Eskimo Pie, 284 F.Supp. at 994. That is, during the hearing upon a motion in limine, or upon the court’s request, a party may not simply rely upon its subjective interpretation of a contract term in order to prove that the term is ambiguous or vague. Instead, extrinsic evidence is placed before the trial court for it to determine whether the contract and its terms are subject to various and divergent but objective interpretations.

Needless to say, the procedure that has just been outlined never took place in this case. Instead, the trial judge improperly left the issue of ambiguity to the jury. The majority ignores the consequences of this and finds that the erroneous jury instruction stating that “[t]he Court has determined that the terms of the Agreement could be unclear” was at most a harmless error, but nevertheless remands the case so that the judge may determine whether the contract should be reformed. As noted above, the showing required by H-K for reformation basically amounts to a determination by the court, post trial, whether the contract standing alone is ambiguous.

So, while the correct principle was announced in one sentence (without supporting authority) by the majority, its application was not carried out. In the future, both trial courts and litigants before those courts should press for the disposition of all preliminary issues.

2 . I have been urged to consider this statement by the trial court as an affirmative ruling on contract ambiguity:

With regard to the parol evidence, I'm going to start out with the position of allowing parol evidence. It’s my determination that it’s disputed evidence as to whether it’s all there, whether it isn’t. Under those circumstances, seems to me the parol evidence should be used by the jury, heard. Transcript of Proceedings before District Judge May, June 7, 1988, p. 47 (emphasis added). This statement, in conjunction with the altered jury instruction, convinces me that the trial court did not shoulder the burden of determining as a matter of law whether the contract was ambiguous.

3 . "In limine” means on or at the threshold; at the very beginning; preliminarily. A motion in limine may nevertheless be brought before or after the beginning of a jury trial.