Opinion ID: 6108334
Heading Depth: 2
Heading Rank: 2

Heading: Surrounding Circumstances Only Inform Contract Language

Text: The central issue here is the role evidence of surrounding circumstances plays in the construction of section 11.1 of the Settlement Agreement. Consideration of surrounding circumstances is limited by the parol evidence rule, 30 which prohibits a party to an integrated written contract from presenting extrinsic evidence for the purpose of creating an ambiguity or to give the contract a meaning different from that which its language imports. 31 Only where a contract is ambiguous may a court consider the parties' interpretation and 'admit extraneous evidence to determine  the true meaning of the instrument.'  32 [N]o issue regarding the parties' intentions is raised unless the [contract] is ambiguous-and evidence of those intentions cannot be used to create an ambiguity. 33 The parol evidence rule does not, however, prohibit courts from considering extrinsic evidence of the facts and circumstances surrounding the contract's execution as an aid in the construction of the contract's language, 34 but the evidence may only give the words of a contract a meaning consistent with that to which they are reasonably susceptible, i.e. , to 'interpret' contractual terms. 35 This is true even if doing so reveals a latent ambiguity in a contract's terms. But whether a court is considering if an ambiguity exists or construing the terms of an unambiguous contract, surrounding facts and circumstances can only provide context that elucidates the meaning of the words employed, and nothing else. As we have often stated in one way or another, [u]nderstanding the context in which an agreement was made is essential in determining the parties' intent as expressed in the agreement , but it is the parties' expressed intent that the court must determine. 36 If a written contract is so worded that it can be given a definite or certain legal meaning when so considered and as applied to the matter in dispute, then it is not ambiguous. 37 But if contract language is susceptible to more than one reasonable interpretation when so viewed, an ambiguity exists. 38 Contract ambiguity comes in two flavors: patent or latent. 39 A patent ambiguity is evident on the face of the contract while a latent ambiguity arises when a contract which is unambiguous on its face is applied to the subject matter with which it deals and an ambiguity appears by reason of some collateral matter, such as the circumstances present when the contract was entered. 40 Allowing that surrounding circumstances may reveal a latent ambiguity seems conceptually at odds with the proscription against employing extrinsic evidence to create an ambiguity. But to say extrinsic evidence may not create an ambiguity but may reveal one means only that [t]he ambiguity must become evident when the contract is read in context of the surrounding circumstances, not after parol evidence of intent is admitted to create an ambiguity. 41 A classic example of a latent ambiguity is when a contract requires goods to be delivered to the green house on Pecan Street, but there were, in fact, two green houses on Pecan Street. 42 When surrounding circumstances reveal an ambiguity about the intent embodied in the contract's language, as in the green house example,  extrinsic evidence of the parties' true intent will then-and only then-be admissible to settle the matter. 43 But, when the contextual evidence discloses no ambiguity, extrinsic evidence that the parties actually intended for the goods to be delivered to the blue house on Pecan Street would not be admissible to alter unambiguous contract language requiring delivery to the green house. 44 Nor would the contract's meaning be informed by extrinsic evidence that the parties intended additional requirements or constraints that were not expressed in the agreement-such as delivery by 5:00 p.m. or only on Sundays. Two cases illustrate the interplay between latent-ambiguity analysis and a contract's surrounding circumstances. In Gallagher Headquarters Ranch Development, Ltd. v. City of San Antonio , 45 we held a latent ambiguity existed as to the matter in controversy. In that case, we considered the City of San Antonio's motion to dismiss the petition for review, which asserted a settlement agreement had mooted the controversy. The settlement agreement clearly settled two separate condemnation cases-one between Petitioner Gallagher and the City and another between Petitioner Chris Hill and the City. 46 In the settlement agreement, Gallagher and Hill also purportedly agreed to release all claims arising from or related to the events and transactions which are the subject matter of this cause. 47 But the settlement agreement did not expressly identify the case before the Court, which involved both Gallagher and Hill along with a third-party (Petitioner Hooper) who was neither named in nor a signatory to the settlement agreement. 48 Based on these circumstances, the Petitioners argued the settlement agreement did not encompass the appeal. Considering the release language and the existence of the pending appeal at the time the settlement agreement was executed, we held that a latent ambiguity appear[ed] to exist as it was unclear whether the case [on appeal] ... is covered by the Agreement and release. 49 We thus abated the petition and remanded the case to the trial court to prepare findings of fact on the issue. 50 The extent to which parties may resort to surrounding circumstances to reveal a latent ambiguity is, however, limited, as demonstrated by National Union Fire Insurance Co. of Pittsburgh v. CBI Industries, Inc. 51 In National Union , CBI Industries sought discovery in order to show a latent ambiguity in absolute pollution exclusion clauses used in their insurance policies and identical provisions throughout the industry. 52 We held that discovery was unnecessary to interpret the policies' unequivocal language, because such discovery could only lead to improper parol evidence of subjective intentions. 53 After an accidental explosion, CBI sought insurance relief from multiple insurers. 54 The insurance companies moved for summary judgment on the ground that  absolute pollution exclusions barred coverage. 55 Two of the policies had nearly identical language excluding coverage for claims caused by seepage or pollution or contamination of air ... however caused and whenever occurring. 56 The trial court granted summary judgment, but the court of appeals held CBI was entitled to conduct discovery to raise a fact issue on latent ambiguity. 57 We reversed the court of appeals, noting that the ambiguity issue is a question of law for the court and that the facts relating to the accident and the surrounding circumstances of the contract's execution were amply established. 58 Applying the policies' language to the context of the claim here does not produce an uncertain or ambiguous result, but leads to only one reasonable conclusion: ... coverage is precluded. 59 Contrary evidence of industry intent was impermissible, we said, because extrinsic evidence is inadmissible to contradict or vary the meaning of the [agreement's] explicit language. 60 As Gallagher and National Union establish, the parol evidence rule prohibits extrinsic evidence of subjective intent that alters a contract's terms but does not prohibit consideration of surrounding circumstances that inform, rather than vary from or contradict, the contract text. 61 Thus, extrinsic evidence may be consulted to give meaning to the phrase the green house on Pecan Street, but cannot be used to show the parties' motives or intentions apart from the language employed in the contract. 62 Mindful of our responsibility to honor the parties' agreement without altering it, 63 we have thus made a clear distinction between extrinsic evidence that illuminates contract language and extrinsic evidence that adds to, alters, or contradicts the contract's text. We recently added lucidity on this topic in First Bank v. Brumitt . 64 Analogizing to the statutory-construction context, we explained what it means to consult  'evidence' of 'attending circumstances'  to aid in the construction of [a] contract's language without running afoul of the parol evidence rule: In the same way that dictionary definitions, other statutes, and court decisions may inform the common, ordinary meaning of a statute's unambiguous language, circumstances surrounding the formation of a contract may inform the meaning of a contract's unambiguous language. But courts may not rely on evidence of surrounding circumstances to make the language say what it unambiguously does not say. 65