* District Judge of the Southern District of Mississippi,

sitting by designation. UNITED STATES COURT OF APPEALS

For the Fifth Circuit

No. 96-21156

TARRANT DISTRIBUTORS INCORPORATED,

Plaintiff-Appellee,

VERSUS

HEUBLEIN INCORPORATED,

Defendant-Appellant.

Appeal from the United States District Court

for the Southern District of Texas

October 27, 1997

Before DeMOSS and DENNIS, Circuit Judges, and LEE, * District Judge.

DeMOSS, Circuit Judge:

This appeal in volves the interpretation of a settlement

agreement. Two issues are presented. First, we must review the

district court’s interpretation of the parties’ agreements

requiring confidential treatment of information given b y each of

them to an accounting firm. Second, we must inquire as to whether

the district court properly refused to imply a condition precedent

in the parties’ settlement agreement. We affirm the district court

on both issues.-2-

I. Background

Heublein, Inc. (“Heublein”) is a nationwide manufacturer,

importer, seller, and distributor of well-known brands of wines and

distilled spirits. Tarrant Distributors, Inc. (“Tarrant”) is a

wholesale distributor of wines and distilled spirits. The two

companies agreed that Tarrant would distribute certain Heublein

brands. However, problems arose and as a result Tarrant filed a

lawsuit against Heublein in Harris County, Texas. Heublein removed

the case to federal court , and the case was subsequently sent to

mediation. The mediation resulted in a settlement agreement

between Tarrant and Heublein.

Under the terms of the settlement agreement, Tarrant was to

pay a fixed sum to Heublein, and Heublein would pay to Tarrant the

amount of Tarrant’s net loss. The parties agreed to a definition

of “net loss,” and they agreed to engage one of several specified

certified public accounting firms to collect information from the

two companies and make a determination of the net loss based on the

agreed-upon formula. The settlement agreement provided that the

“CPA Firm shall execute a Confidentiality Agreement with respect to

all such info rmation, data or documentation in form and content

reasonabl y acceptable to the parties.” The settlement agreement

further specified that the CPA firm’s determinati on was to be

“final and binding upon the parties.”

Coopers & Lybrand (“Coopers”) was hired by Tarrant and

Heublein to make the determination of Tarrant’s net loss. The

engagement letter provided to the parties by Coopers stated:-3- Our personnel understand that they are subjec t to

and will abide by any reasonable confidentiality

restrictions and protective orders. In addition,

we always treat as confiden tial any documents or

other information made available to us in

connection with these kinds of engagements and will

take appropriate steps to segregate all materials

related t o our work in this engagement from other

files in o ur offices. Unless required by law, we

will not disclose or divulge documents or

information not already available in the public

domain, which are provided to us by you or your

clients except as necessary to explain our conclusion(s), if requested to the mediator or a

trier of fact.

The record contains no evidence of any other agreements regarding

the confidential treatment of information and documents provided by

the parties.

After Coopers rendered its finding that Tarrant’s loss

amounted to $860,800, Heublein challenged the validity of the

figure. Heublein claimed that the calculation was in error and

asked for satisfaction that the calculation was perfo rmed in

accordance with the formula specified by the settlement agreement.

Tarrant protested that the determination was “final and binding.”

Coopers subsequently affirmed that it had applied the proper

formula and offered to discuss the issue in a forum mutually agreed

upon by Tarrant and Heublein.

Both Tarrant and Heuble in sought to enforce the settlement

agreement in the federal district court. Heublein requested access

to the working papers Cooper used in making its determination of

Tarrant’s net loss. The motion was denied. Tarrant sought payment

under the terms of the settlement agreement, and its motion was

g ranted. Subsequent motions by Heublein to correct the district-4-

court’s judgment and to obtain a new trial were also denied.

Heublein now appeals and seek s a reversal of the judgment of the

district court and remand to the district court with instructions

to review Coopers’ working papers to determine whether Coopers

failed to comply with the terms of the settlement agreement or made

a material miscalculation.

II. Standard of Review

The construction of an unambiguous contra ct is reviewed de

novo, but while “inte rpretation of an unambiguous contract is a

question of law, clear error is the standard of review when a

distr ict court uses extrinsic evidence to interpret an ambiguous

contract.” I n re Raymark Indus., Inc.

, 831 F.2d 550, 553 (5th Cir.

1987).

III. Confidentiality Provisions of the Settlement Agreement

In both the district court’s March 27, 1996 “Memor andum and

Order” and its November 8, 1996 “Memorandum and Opinion,” the

district court stated that the settlement agreement between

Heu blein and Tarrant required the CPA firm to adhere to

confidentiality restrictions which prohibited disclosure of

“documents or information of one party to the other party.”

Heublein challenges this characterization of its agreement

with Tarrant, arguing that there was no such agreemen t governing

confidentiality between Heublein and Tarrant, and that this

fundamental error undermines the district court’s entire1 Heublein’s response to this argument is that the portion of

the settlement agreement prohibiting ex parte communications

pertains only to the period of time during whic h the CPA firm is

-5- disposition of the case. Heublein notes that the settlement

agreement provides only that the “CPA Firm shall execute a

Confidentiality Agreement,” without specifying the contemplated

nature or scope of any such confident iality agreement. Heublein

then reasons that the focus of the settlement agreement language is

on the CPA firm, not the parties themselves, and that the purpose

of the provision is to prevent the CPA firm from divulging

informatio n received from Heublein and Tarrant to the public or

other third parties. Finally, Heublein notes that there is no

evidence in the record that any confidentiality agreement ever was

executed othe r than that contained in the Coopers engagement

letter.

Tarrant relies upon the text of the settlement agreement and

the engagemen t letter, the relevant portions of which are quoted

above. Tarrant claims in its brief that “Tarrant and Heublein

intended for Coopers to be and Coopers acknowledged that it is

subject to confidentiality r estrictions which precluded it from

disclosing or divulging docum ents or information provided by the

parties to Coopers without their mutual consent.” Tarrant further

notes that be cause the settlement agreement disallowed ex parte

communications from the parties to the CPA firm, any ex parte

communication requesting the disclosure of documents or information

provided by the other party would run afoul of the settlement

agreement, and thus be invalid. 1conducting its investigation and making its determination.

H eublein contends that the provision was not intended to prev ent

subsequent review of the CPA firm’s determination.

-6- Heuble in’s point with regard to the nonspecificity of the

language in the settlement agreement is well taken. The district

court’s conclusion that the settlement agreement dictated that the

CPA firm could not disclose one party’s information to the other is

not unambiguously supported by the settlement agreement. However,

neither the parties nor the district court su fficiently analyzed

the provision i n the Coopers engagement letter -- the only

confidentiality provision at play in this case

-- which states that

“unless required by law, [Coopers] will not dis close or divulge

documents or information not alre ady available in the public

domain,” which were provided to Coopers by Heublein and Tarrant, or

their clients, “except as necessary to explain our conclusion(s),

if requested to the mediator or a trier of fact.” Heublein and

Tarrant agreed to this provision, and it is the only agreement

between them rega rding confidentiality of materials provided to

Coopers. Both Heublein and Tarrant contend that this language

unambiguously supports their positions.

Heublein’s position is that the engagement letter expressly

states that Co opers would not keep documents or information

provided to it by Heublein and Tarrant confidential “if necessary

to explain [its] conclusion(s), if requested to the mediator or a

trier of fact.” Heublein insists that this language covers the2 Heublein’s interpretation would have been unambiguously

conveyed b y the letter if there were a comma after the word

“requested,” such that the letter read: “if necessary to explain

our conclusion(s), if requested, to the mediator or a trier of

fact.”

3 Tarrant’s interpretation would be more clearly supported by

the letter if the word “by” were used instead of the word “to,”

such that the letter read: “if necessary to explain our

conclusion(s), if requested by the mediator or a trier of fact.”

-7- present scenario. 2 Tarrant, on the other hand, contends that the

engagement letter language is evidence of the parties’ intent that

the CPA firm not disclose information to the parties without their

mutual consent, and that there is no exception written into the

agreement to allow for the kind of review proposed by Heublein. 3

If the language in the letter is unambiguous, then its

interpretation is subject to de novo review. I n re Raymark

, 831

F.2d at 553. The key language here is the meaning of “if requested

to the mediator or a trier of fact.” The presence of the word “to”

makes the sentence nonsensical, and as a result, both parties have

offered interpretations of the text of the agreements that appear,

at first blush, to be plausible.

We find that the engagement letter unambiguously supports one

interpretation because the other is unreasonable. S ee Columbia Gas

Transmission Corp. v. New Ulm Gas, Ltd.

, 940 S.W.2d 587, 591 (Tex.

1996) (“The failure to include more express language of the

parties’ intent does not crea te an ambiguity when only one

reasonable interpretation exists.”). This seems to have been the

u narticu-lated thrust behind the district court’s endorsement of

Tarrant’s view. The settlement agreement’s contemplation of a-8-

future confidentiality agreement and the parties’ agreeme nt that

the CPA firm’s determination would be final and binding support the

district court’s view that the parties sought “to avoid continued

litigation and to ensure continued confidentiality,” and therefore

agreed unconditionally to rely upon the CPA firm’s determination of

Tarrant’s net loss. In this context, it makes little sense to read

the agreement in the manner proposed by Heublein.

Heublein’s interpretation is an unreasonable interpretation of

the engagement letter, and the r efore the letter unambiguously

provides that the materials submitted to Coopers by each party were

intended to be kept confidential, that is, not shared with the

other party.

IV. Implied Condition Precedent

Heublein claims that because Coopers incorrectly applied the

net loss formula, its obligation to pay under the settlement

agreement never arose. Heublein argues that a condition precedent

should be implied from the terms of the settlement ag reement

because the language and the nature of the agreement reflect the

parties’ inte nt for a condition to occur (that is, that the CPA

firm would correctly apply the net loss formula) before the

obligations to pay under the agreement arose, and that the parties

would have inserted such an express condition had they known what

the f uture held. Heublein claims that the most basic goal of

contract law is to protect the ju stified expectations of the

parties, and that an implied condition is appropriate in this case,-9-

where circumstances changed unforeseeably and the contrac t terms

are insufficient to govern the parties’ relationship. See Market

Street Assocs. Ltd. Partnership v. Frey

, 941 F.2d 588, 595-96 (7th

Cir. 1991). Were it otherwise, Heublein reasons, neither party

would have any recourse to contest a mistaken application of the

formula. Thus, Heublein posits that a faithful application of the

net loss formula was a “basic assumption” of the settlement

agreement. See McCulley Fine Arts Gallery, Inc. v. “X” Partners

,

860 S.W.2d 473, 478 (Tex. App.—El Paso 1993, no writ) (finding

authenticity to be “understood to be a term” of a contract to sell

a Van Gogh painting).

Heublein contends that because the settlement agreement

contained this implied condition pr ecedent, the district court

abused its discretion in refusing to allow Heublein to gain access

to Coopers’ worki ng papers. Rule 26(b) of the Federal Rules of

Civil Procedure permits discovery of relevant nonprivileged

matters, and Coopers’ working papers would be relevant to

determining whe t her the settlement agreement formula had been

correctly applied. S ee Whalen v. Carter

, 954 F.2d 1087, 1098 n.11

(5th Cir. 1992).

Tarrant, on the other hand, argues that no condition precedent

should be implied. According to this argument, Tarrant’s promise

to pay a fixe d sum to Heublein and Heublein’s promise to pay

Tarrant’s net loss as determined by a CPA firm were unconditional.

The parties agreed that the CPA firm’s determination would be final

and binding, regardless of the outcome. Further, as was noted by-10-

the district court, the agreement was not made conditional upon the

“proper” application of the net loss formula. The very fact that

Heublein and Tarrant had widely varying claims as to the amount of

Tarrant’s net loss meant that there was a possibility that one or

both of the parties would be dissatisfied with the CPA firm’s

determination. Thus, an unfavorable outcome could not have been

unforeseeable, and therefore a co ndition precedent cannot be

implied in the settlement agreement.

The district court held that the settlement agreement’s use of

the terms “final and binding” meant that both parties “gave up the

right to probe the correctness of Coopers & Lybrand’s

determination” unless Heublein presented evidence of “fraud,

misconduct, or such gross mistake as would imply bad faith or

failure to exercise an honest judgment,” We stech Eng’g, Inc. v.

Clearwater Constr uctors, Inc. , 835 S.W.2d 190, 203 (Tex.

App.—Austin 1992, no wri t), or evidence that there was an

undisputed mistake of fact in the determination. The district

court reasoned that the parties “provided for a binding decision by

a neutral party of a certain reputation and caliber because the

parties could not agree on the net loss number, to avoid continued

litigation and to ensure continued confidentiality.”

The district court correctly refused to imply a condit ion

precedent in the settlement agreement. An error in the process of

computing the net loss und er the formula specified in the

settlemen t agreement was certainly a foreseeable event, and the

settlement agreement between Heublein and Tarrant did not provide-11-

any review procedure. Rather, it explicitly stated that the CPA

firm’s determination would be “final and binding upon the parties.”

Because there is no implied condition precedent, and because

Heublein has not proven that it is entitled to disc overy of the

working papers on any other ground, the district court was correct

to refuse Heublein’s request for access to Coopers’s working

papers.

V. Conclusion

The difficulties in this case arise from the failure of the

parties to follow through on their intention to execute a separate

confidentiality agreeme nt and the awkward phrasing of the

confidentiality provision of the engagement letter from Coopers &

Lybrand. However, we have determined that there was no ambiguity

in the engagement letter that might create a fact issue as to the

intent of the parties regarding the resolution of potential

disputes over the CPA firm’s determination of the amount of

Tarrant’s net loss. Because the parties agreed generally that the

information would be kept confidential and because the settlement

agreement states that the CPA firm’s determination will be “final

and bindi ng,” Heublein is without recourse to challenge Coopers’

determination of Heublein’s liability to Tarrant.

The judgment of the district court is AFFIRMED.