Opinion ID: 2286049
Heading Depth: 2
Heading Rank: 1

Heading: The Heilwood Doctrine of Severability

Text: Appellants argue to this Court that the provisions of this particular lease dealing with oil and gas production are severable from the provisions dealing with gas storage because, although the intent of the parties as to severability is not stated in the contract, under rules of contract construction, the fact that the consideration to be paid for oil and gas production is separate and distinct from that to be paid for storage indicates that the provisions are severable. Appellee counters by arguing that, under Pennsylvania law, before a court may reach the issue of whether a contract is severable, the court must first find that the parties' intent is ambiguous. The Third Circuit frames this precise question by asking this Court to determine if a finding of ambiguity is a prerequisite to the application of the doctrine of severability under our decision in Heilwood Fuel Co. v. Manor Real Estate Co., 405 Pa. 319, 175 A.2d 880 (1961). Heilwood was a specific performance action involving the construction and interpretation of a January 31, 1956, letter of intent that defendant Manor Real Estate Company wrote to Pine Township Coal Company, Inc. The letter of intent, if accepted by Pine Township Coal, was to become an interim understanding and agreement between Manor Real Estate and Pine Township Coal. The letter was divided into two parts, one entitled Exchange and the other entitled Lease. The Exchange section provided that Manor Real Estate would convey to Pine Township Coal and Pine Township Coal would convey to Manor Real Estate ownership of certain real estate while reserving the respective gas and oil rights in the properties and that, if Manor Real Estate did not so convey its property to Pine Township Coal, the property would be included in the Lease portion of the agreement. The Lease section then stated that Manor Real Estate agreed to lease to Pine Township Coal certain coal seams under an additional 1650 acre tract of land not included in the Exchange provision, set forth the terms of the contemplated lease, and provided that any coal mined and shipped on the property should be routed over Pennsylvania Railroad lines. On February 5, 1956, Pine Township Coal accepted the proposal outlined in the letter of intent and informed Manor Real Estate that Heilwood Fuel Company, an allied company of Pine Township Coal, owned the properties Pine Township Coal was to convey to Manor Real Estate, and that Pine Township Coal was in a position to guarantee performance of that portion of the contract. Soon thereafter, Manor Real Estate and Heilwood took physical possession of each other's property, and each removed timber from the other's property. In addition, in February of 1956, Manor Real Estate leased to a coal company part of a seam of coal under Heilwood's property. The actual exchange of deeds, however, was delayed because Pine Township Coal declared bankruptcy. Three years later, in February of 1959, Manor Real Estate and Heilwood learned that the subject properties could be exchanged despite the bankruptcy, and in November of that year, Manor Real Estate forwarded to Heilwood proposed deeds for approval. Heilwood returned the proposed deeds with some modifications. The deeds were apparently never executed and the properties never conveyed because further negotiations in that regard broke down. Ultimately, Heilwood filed an equity action in May of 1960 seeking specific performance of the exchange provision of the contract. Manor Real Estate filed preliminary objections, which the trial court granted, finding that the exchange and leasing provisions of the agreement were interdependent and therefore not severable. Accordingly, in the trial court's view, Heilwood was not entitled to specific performance of one part of the agreement the exchange provisionswhile completely overlooking the lease provisions. Thus was joined the question of severability. In considering the matter on appeal, this Court began by setting forth the general rule regarding the severability/entirety of contracts: It is often most difficult to determine whether a contract is entire or severable. The primary inquiry in resolving this question is whether the language employed in the contract clearly indicates the intention of the parties that the contract be considered entire or severable ( Easton v. Jones, 193 Pa. 147, 44 A. 264 [(1899)]); only in the absence of a clear indication of the parties' intention from the language of the contract may resort be had to rules of construction ( Producers Coke v. Hillman, 243 Pa. 313, 90 A. 144 [(1914)]). Heilwood, 405 Pa. at 327, 175 A.2d at 884. The Court then looked to the language of the agreement between Manor Real Estate and Pine Township Coal and found, in contrast to the trial court, that it did not reveal a clear intent that the contract was to be entire rather than severable. The Court found: The agreement makes a sharp division between the Exchange provisions and the Lease provisions; the consideration for the property exchange lies in the mutuality of the trading, while the consideration for the lease is the payment of the state royalty; while Manor clearly seeks the early development of the coal lands to be leased or traded it is to be noted that, as to the lands to be traded, nothing is stated as to the requirement of mining the coal under said lands, while, as to the lands to be leased, lessee is under an obligation to strip and mine 12,000 tons per month; while concededly the principal purpose of the agreement was to enhance coal traffic on the Pennsylvania Railroad it is only the lease which provides for the shipment of coal over Pennsylvania Railroad lines. Unlike the court below we find nothing in the language of this agreement which clearly reveals the intention of the parties that the agreement was entire, not severable; in fact, the language of the agreement is ambiguous in this respect. Id. at 327-28, 175 A.2d at 884. Having found that the agreement was ambiguous as to the parties' intent regarding entirety/severability, the Heilwood Court was obliged to seek other aids in construing the parties' intent. Id. at 328, 175 A.2d at 884. Specifically, the Court looked to the conduct of the partiesa factor outside the language of the contractand the character of the considerationa factor within the four corners of the agreement. The Court ultimately determined that the two provisions in the agreement were severable because: Manor Real Estate and Heilwood took physical control of each other's properties under the exchange provision and exercised powers of ownership such as removing timber from the properties; these actions under the exchange provision were taken without any corresponding action pursuant to the lease provision; and the consideration for the exchange provision was distinct from that for the lease provision. Id. at 328-29, 175 A.2d at 884-85. With respect to the last point, the Court referred to a rule of construction recognizing that the character of the consideration may determine the severability of the contract. [I]f the consideration is single, the contract is entire... whatever the number or variety of items embraced ... but, if the consideration is apportioned, either expressly or by necessary implication ... the contract will generally be held to be severable.... Id. (citations omitted). Appellee argues, based upon the Heilwood holding, that there is a hard and fast rule in Pennsylvania that a court must first find that a contract is ambiguous as to entirety/severability before the court may apply rules of contract construction to ascertain the parties' intent. As this Court understands it, the law is not so rigid. In point of fact, although state courts (including this Court) and federal courts citing Heilwood uniformly have assumed, with no discussion of the issue, that ambiguity is a prerequisite to the application of any rules of contract construction, the courts in practice have often utilized those same rules of interpretation to determine if the intent of the parties is clear from the four corners of the agreement. For example, in Heilwood itself, the Court noted the distinct nature of the Exchange and Lease consideration before it concluded that the contract was ambiguous as to entirety/severability. At that point, the distinct nature of the considerationa fact apparent on the face of the contract was relied upon by the Court in finding, this time as a matter of construction, that the provisions were severable. Three years after the Heilwood decision, this Court cited Heilwood for the proposition that a court is bound by the clear language of a contract as to severability. Shields v. Hoffman, 416 Pa. 48, 204 A.2d 436 (1964). In Shields, partners in a painting business entered into a partnership liquidation agreement containing provisions regarding the sale of assets by one partner to the other as well as a restrictive covenant, which bound the selling partner in exchange for periodic monetary payments. The partner bound by the covenant breached it by engaging in the prohibited business during the relevant time period, and the other partner filed suit to enforce the covenant. This Court found that there was a total failure of consideration as to the covenant when the selling partner breached the restrictive covenant: The failure of consideration was total because by the very language of the liquidation agreement, its provisions were severable. The provision of the purchase of the assets was separate and distinct from the obligation to refrain from engaging in business. The clear language of the contract binds the court in this regard. Heilwood Fuel Co. v. Manor Real Estate Co., 405 Pa. 319, 175 A.2d 880 (1961). Shields, 416 Pa. at 52-53, 204 A.2d at 438. Thus, the Shields Court looked not only to the express statement in the contract that its provisions were severable, but also to the separate and distinct aspects of the agreement to determine that the intent of the parties as to severability was clear. The Court did so even though there was no ambiguity. Moreover, the Court noted that it would have found that the contract was severable even if the contract had not specified that the provisions were severable: even if the contract did not so specify, we would conclude that the provisions of the contract are severable because the parties apportioned the consideration both as to subject matter and payment. Id. at 53, 204 A.2d at 438 (citing Keenan v. Larkin, 194 Pa.Super. 436, 168 A.2d 640 (1961) (allocatur denied)). This analysis has been repeated by other courts and supported by citations to Heilwood. See, e.g., Continental Supermarket Food Service, Inc. v. Soboski, 210 Pa.Super. 304, 232 A.2d 216 (1967) (parties' intent that contract was not severable determined by looking to singular nature of consideration to be paid); Lampe v. Xouth, Inc., 1991 WL 29072 (E.D.Pa. Feb.27, 1991) (contract held to be severable where it was divided into two sections, Consulting and Employment, and consideration to be paid under two sections was separate). These decisions demonstrate that there is no bright line rule requiring that a court first find that the intent of the parties is unclear as to entirety/severability before it may look to factors such as the conduct of the parties and the character of the consideration to determine whether an agreement is entire or severable. The central task is to ascertain the intent of the parties. That intent may be apparent from the explicit language of the contract, as it was in Shields, or it may be obvious from a construction of the agreement, including the nature of the consideration, as was the case in Heilwood, and as reflected in the dicta in Shields. In short, principles of construction may reveal the intent of the parties no less than the actual language addressing entirety/severability. Thus, in specific response to the first certified question, this Court holds that, absent express language that a contract is entire, a court may look to the contract as a whole, including the character of the consideration, to determine the intent of the parties as to severability and may also consider the circumstances surrounding the execution of the contract, the conduct of the parties, and any other factor pertinent to ascertaining the parties' intent. The court need not make a specific predicate finding of ambiguity before undertaking the inquiryindeed, if the contract were crystal clear as to the parties' intent, severability likely would not be a contested issue.