1. society
2. work
3. contracts

5
Contract Interpretation
and the Parol Evidence Rule
Richard J. Sankovitz
I.
[§ 5.1]
II.
[§ 5.2]
Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
What Law Governs Contract Interpretation?:
Choice-of-Law Considerations . . . . . . . . . . . . . . . . .
A. [§ 5.3] When Is Choice of Law an Issue? . . . . . . . . . . . . .
B. [§ 5.4] Law Governing Dispute . . . . . . . . . . . . . . . . . . . . .
1. [§ 5.5] When Choice-of-Law Clauses Exist . . . . . . . .
a. [§ 5.6] In General . . . . . . . . . . . . . . . . . . . . . . . . . .
b. [§ 5.7] Contracts Subject to UCC . . . . . . . . . . . . . .
2. [§ 5.8] When Choice-of-Law Provisions
Conflict . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3. [§ 5.9] When Contract Is Government Contract . . . . .
4. [§ 5.10] When Contract Is Silent as to Choice of
Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
a. [§ 5.11] In General . . . . . . . . . . . . . . . . . . . . . . . . . .
b. [§ 5.12] Contracts Subject to UCC . . . . . . . . . . . . . .
4
4
5
5
5
6
6
8
8
8
9
III.
[§ 5.13] Who Decides What the Contract Means? . . . . . . . . . 9
A. [§ 5.14] In General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
B. [§ 5.15] Issues Decided as Matter of Law . . . . . . . . . . . . . . 9
C. [§ 5.16] Issues Decided as Matter of Fact . . . . . . . . . . . . . 10
1. [§ 5.17] In General . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2. [§ 5.18] Contracts Subject to UCC . . . . . . . . . . . . . . . 11
D. [§ 5.19] Standards of Review on Appeal . . . . . . . . . . . . . . 11
IV.
[§ 5.20] What Does the Contract Mean?: Rules for
Interpreting Contracts . . . . . . . . . . . . . . . . . . . . . . . 13
A. [§ 5.21] Purpose of Interpretation Is Determining and
Enforcing Parties’ Intent . . . . . . . . . . . . . . . . . . . 13
B. [§ 5.22] Best Evidence of Parties’ Intent Is Contract
Itself . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
© April 2000, State Bar of Wisconsin CLE Books
Ch. 5 Pg. 1
CHAPTER 5
C. [§ 5.23] “Plain and Ordinary” Meaning Precedes
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
D. [§ 5.24] Parties’ Knowledge at Time of Contracting Is
Considered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
E. [§ 5.25] Maxims That Guide Construction of Disputed
Contractual Terms . . . . . . . . . . . . . . . . . . . . . . . .
1. [§ 5.26] Read Contract as a Whole . . . . . . . . . . . . . . .
2. [§ 5.27] Give Meaning and Effect to All Terms . . . . .
3. [§ 5.28] Avoid Leaving Any Term Unreasonable
or Unconscionable . . . . . . . . . . . . . . . . . . . . .
4. [§ 5.29] Avoid Unlawful Performance . . . . . . . . . . . .
5. [§ 5.30] Give Greater Weight to Specific Than to
General Language . . . . . . . . . . . . . . . . . . . . .
6. [§ 5.31] Construe Ambiguities Against Drafter . . . . . .
F. [§ 5.32] Consulting Extrinsic Evidence . . . . . . . . . . . . . . .
1. [§ 5.33] Requirement That Contract Be
Ambiguous . . . . . . . . . . . . . . . . . . . . . . . . . . .
a. [§ 5.34] In General . . . . . . . . . . . . . . . . . . . . . . . . .
b. [§ 5.35] What Constitutes Ambiguity? . . . . . . . . . .
2. [§ 5.36] Types of Extrinsic Evidence Courts
Recognize . . . . . . . . . . . . . . . . . . . . . . . . . . .
a. [§ 5.37] Circumstances of Contracting . . . . . . . . . .
b. [§ 5.38] Construction by Parties . . . . . . . . . . . . . . .
c. [§ 5.39] Other Contracts Between Parties . . . . . . .
d. [§ 5.40] Custom and Usage . . . . . . . . . . . . . . . . . .
(1) [§ 5.41] In General . . . . . . . . . . . . . . . . . . . . .
(2) [§ 5.42] Contracts Subject to UCC . . . . . . . . .
e. [§ 5.43] Course of Dealing . . . . . . . . . . . . . . . . . . .
G. [§ 5.44] Canons of Construction Specific to
Insurance Contracts . . . . . . . . . . . . . . . . . . . . . . .
H. [§ 5.45] Canons of Construction Specific to
Government Contracts . . . . . . . . . . . . . . . . . . . . .
V.
What Is in Contract and What Is Not: Parol
Evidence Rule, Battle of the Forms, and
Supplying Omitted Terms . . . . . . . . . . . . . . . . . . .
A. [§ 5.47] Parol Evidence Rule . . . . . . . . . . . . . . . . . . . . . . .
1. [§ 5.48] Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2. [§ 5.49] Debilitation of Parol Evidence Rule . . . . . . . .
3. [§ 5.50] Elements . . . . . . . . . . . . . . . . . . . . . . . . . . . .
a. [§ 5.51] Summary of Elements . . . . . . . . . . . . . . .
b. [§ 5.52] Is Agreement in Writing? . . . . . . . . . . . . .
c. [§ 5.53] Is Agreement Integrated? . . . . . . . . . . . . .
16
17
18
18
18
19
20
21
21
22
22
22
23
26
26
26
27
27
27
28
28
28
30
[§ 5.46]
Ch. 5 Pg. 2
30
30
30
31
32
32
33
33
© April 2000, State Bar of Wisconsin CLE Books
CONTRACT INTERPRETATION; PAROL EVIDENCE RULE
(1) [§ 5.54] Integration Defined . . . . . . . . . . . . . .
(2) [§ 5.55] Fully vs. Partially Integrated
Agreements . . . . . . . . . . . . . . . . . . .
(3) [§ 5.56] Value and Use of Merger and
Integration Clauses . . . . . . . . . . . . . .
4. [§ 5.57] Effect on Agreements and Expressions of
Intent “Outside” Contract . . . . . . . . . . . . . . . .
a. [§ 5.58] Contradictory or Substitute
Agreements or Intentions . . . . . . . . . . . . .
b. [§ 5.59] Consistent Additional, Supplemental,
or Side Agreements . . . . . . . . . . . . . . . . .
5. [§ 5.60] Effect on Negotiations Relating to
Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6. [§ 5.61] Exceptions to Applicability . . . . . . . . . . . . . .
a. [§ 5.62] To Establish Integration and Intent . . . . . .
b. [§ 5.63] To Resolve Ambiguity . . . . . . . . . . . . . . .
c. [§ 5.64] To Show Contract Invalid . . . . . . . . . . . . .
d. [§ 5.65] When Contract Is Subject to UCC . . . . . .
7. [§ 5.66] Tactical Use . . . . . . . . . . . . . . . . . . . . . . . . . .
B. [§ 5.67] Battle of the Forms . . . . . . . . . . . . . . . . . . . . . . . .
1. [§ 5.68] The Problem . . . . . . . . . . . . . . . . . . . . . . . . . .
2. [§ 5.69] A Partial Solution: Contracts Subject to
UCC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3. [§ 5.70] Counseling Clients on Use of Form
Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C. [§ 5.71] Supplying Omitted or “Implied” Terms . . . . . . . .
1. [§ 5.72] In General . . . . . . . . . . . . . . . . . . . . . . . . . . .
2. [§ 5.73] Duration of Contract . . . . . . . . . . . . . . . . . . .
3. [§ 5.74] Time and Other Details of Performance . . . . .
4. [§ 5.75] Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
33
34
35
36
36
37
37
38
38
38
38
40
40
41
41
42
45
45
45
46
47
48
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
5A Checklist of Rules of Contract Construction . . . . . . . . . . . . 49
I. [§ 5.1] Scope
This chapter examines issues of contract interpretation, including choiceof-law considerations and the question of who will serve as interpreter (the
judge or jury and the trial or appellate court). In particular, the chapter
examines doctrines, practices, and rules of thumb governing the evidence a
© April 2000, State Bar of Wisconsin CLE Books
Ch. 5 Pg. 3
§ 5.1
CHAPTER 5
court considers in determining the meaning of a contract when its meaning
is disputed. Some of these rules serve an interpretive function; they tell the
court what clues to contractual intent to look for within as well as without
the document. Other rules serve a supplementary function; they tell the
court what terms to enforce when the parties have failed to agree on a given
subject. Still other rules, such as the parol evidence rule, serve a gatekeeping function; they tell a court whether it may consider any evidence
outside the four corners of the document.
Taken as a whole, this chapter follows the basic methodology courts
should follow in construing contracts: Start by identifying the documents
or recollections that reflect what the parties intended to be their final,
complete agreement. Then, look to the provision in dispute and see whether
an unambiguous meaning can be derived from that provision alone. If it
cannot, look to the rest of the contract, but not beyond its four corners, for
its meaning. If that is insufficient, look to evidence outside the contract to
resolve the ambiguity and learn the parties’ intent.
Like a contract, this chapter should be construed as a whole. Contract
interpretation rules should not be applied in isolation or without regard for
the central purpose of contract interpretation—determining what the parties
intended their contract to be.
II. [§ 5.2] What Law Governs Contract Interpretation?:
Choice-of-Law Considerations
A. [§ 5.3] When Is Choice of Law an Issue?
Typically, when a contract is the subject of a dispute in Wisconsin,
Wisconsin law should resolve the dispute. However, it is not unusual for the
law of a state other than Wisconsin to govern the dispute.
When is it necessary to determine whether the dispute is governed by the
law of a state other than Wisconsin? It is not necessary unless the other
state’s pertinent law is materially different from Wisconsin’s. In other
words, if the outcome of the dispute will be the same regardless of which
state’s law is applied, then it is not necessary to conduct a choice-of-law
analysis.1
1
See Wood v. Mid-Valley, Inc., 942 F.2d 425, 427 (7th Cir. 1991) (“Courts
do not worry about conflict of laws unless the parties disagree on which state’s
law applies. We are busy enough without creating issues that are unlikely to
affect the outcome of the case . . . .”); A.O. Smith Corp. v. Allstate Ins. Co., 222
Ch. 5 Pg. 4
© April 2000, State Bar of Wisconsin CLE Books
CONTRACT INTERPRETATION; PAROL EVIDENCE RULE
§ 5.6
A conflict of laws might appear to exist in a dispute in which the
component documents of a contract (for example, one party’s purchase order
and the other party’s acceptance) specify the application of the law of
different states. However, even in that case a choice-of-law analysis is
unnecessary unless the pertinent law of the two states is different and
outcome-determinative.
B. [§ 5.4] Law Governing Dispute
1. [§ 5.5] When Choice-of-Law Clauses Exist
a. [§ 5.6]
In General
It is common for a contract to provide explicitly what law will govern2
the interpretation of the contract and disputes arising under it. Indeed,
contracting parties are to be encouraged to specify the law they agree to be
bound by, to promote certainty and predictability in their contract relations.
Wisconsin generally enforces such provisions unless doing so would be
unconscionable3 or would contravene an important public policy that would
otherwise be applied.4 Examples of public policies Wisconsin considers
Wis. 2d 475, 495, 588 N.W.2d 285 (1998).
2
Courts in other jurisdictions have drawn a distinction between contracts
using the operative term govern and contracts using the terms interpret and
construe. Wisconsin courts do not recognize such a distinction. See Hammel
v. Ziegler Fin. Corp., 113 Wis. 2d 73, 77, 334 N.W.2d 913, 915–16 (Ct. App.
1983).
3
See First Fed. Fin. Service, Inc. v. Derrington’s Chevron, Inc., 230 Wis.
2d 553, 558–59, 602 N.W.2d 144 (Ct. App. 1999).
4
Generac Corp. v. Caterpillar, Inc., 172 F.3d 971 (7th Cir. 1999); CSSWisconsin Office v. Houston Satellite Sys., Inc., 779 F. Supp. 979, 983 (E.D.
Wis. 1991); Bush v. National Sch. Studios, Inc., 139 Wis. 2d 635, 642–43, 407
N.W.2d 883, 886–87 (1987); General Med. Corp. v. Kobs, 179 Wis. 2d 422,
428, 507 N.W.2d 381 (Ct. App. 1993); see Wis. Stat. § 135.025(3) (providing
that provisions of Wisconsin Fair Dealership Law may not be varied by
contract or agreement). For information on contracts governed by the
Wisconsin Fair Dealership Law, Wis. Stat. ch. 135, see Michael A. Bowen &
Brian E. Butler, The Wisconsin Fair Dealership Law (State Bar of Wisconsin
CLE Books 2d ed. 1995 & Supp.).
Unless otherwise indicated, all references in this chapter to the Wisconsin
© April 2000, State Bar of Wisconsin CLE Books
Ch. 5 Pg. 5
CHAPTER 5
§ 5.7
important are embodied in its laws prohibiting certain covenants not to
compete5 or laws protecting dealerships.6
b. [§ 5.7]
Contracts Subject to UCC
The Wisconsin UCC also makes choice-of-law provisions enforceable,
as long as the “transaction bears a reasonable relation” to the state.7
2. [§ 5.8] When Choice-of-Law Provisions Conflict
Because choice-of-law provisions are so commonplace, it is not unusual
to find parties with dueling choice-of-law provisions. For example, a
purchase order issued by a buyer located in Wisconsin may provide that the
contract is governed by Wisconsin law, whereas the order acknowledgment
issued by the seller from its headquarters across the state line may provide
that the contract is governed by the neighboring state’s law.
To resolve such a conflict, Wisconsin courts will apply the general
“grouping of contacts” conflict-of-law analysis.8 The gist of that approach
Statutes are to the 1997–98 Wisconsin Statutes, as affected by acts through
1999 Wisconsin Act 25.
5
See Wis. Stat. § 103.465; Gary Van Zeeland Talent, Inc. v. Sandas, 84 Wis.
2d 202, 216–17, 267 N.W.2d 242 (1978).
6
See Bush, 139 Wis. 2d at 642–44, 407 N.W.2d at 886–87.
7
Wis. Stat. § 401.105(1) (“when a transaction bears a reasonable relation
to this state and also to another state or nation the parties may agree that the
law either of this state or of such other state or nation shall govern their rights
and duties”); see also Ford Motor Co. v. Lyons, 137 Wis. 2d 397, 453–55, 405
N.W.2d 354, 377 (Ct. App. 1987); supra § 1.7 (UCC and its adoption in
Wisconsin).
8
Diesel Serv. Co., 961 F.2d at 640; Select Creations, Inc. v. Paliafito Am.,
Inc., 828 F. Supp. 1301, 1354 (E.D. Wis. 1992); CSS-Wisconsin Office, 779 F.
Supp. at 984; Dresser Indus., Inc. v. Gradall Co., 702 F. Supp. 726, 731 (E.D.
Wis. 1988), aff’d, 965 F.2d 1442 (7th Cir. 1992) (where purchaser’s form
specified Ohio law would govern and seller’s form designated Wisconsin law,
court applied Wisconsin law on grounds that the seller’s principal place of
business was located in Wisconsin and contract was performed in Wisconsin);
Handal v. American Farmers Mut. Cas. Co., 79 Wis. 2d 67, 73, 255 N.W.2d
903, 906 (1977); Urhammer v. Olson, 39 Wis. 2d 447, 450, 159 N.W.2d 688,
Ch. 5 Pg. 6
© April 2000, State Bar of Wisconsin CLE Books
CONTRACT INTERPRETATION; PAROL EVIDENCE RULE
§ 5.8
is to determine which state has the most significant relationship with the
contract. To determine which state has the most significant relationship,
Wisconsin courts consider the following factors, which are derived from
section 188 of the Restatement (Second) of the Conflict of Laws:9
1. The place of contracting
2. The place of negotiation of the contract
3. The place of performance
4. The place of the subject matter of the contract
5. The domicile, residence, nationality, place of incorporation, and place of
business of the parties
These factors should be weighed with a view towards enforcing the law
under which the contract will be the most effective in accomplishing its
apparent objectives and with due respect for each state’s relevant public
policies.10 The factors are meant to be weighed, not merely counted, giving
due consideration to those factors that are the most significant in a given
case.11
It is not easy to predict how these factors will mesh in any given case,
but generally if both negotiations and performance take place in the same
state, the law of that state will govern.12
689 (1968); Utica Mut. Ins. Co. v. Klein & Son, 157 Wis. 2d 552, 556, 460
N.W.2d 763, 765 (Ct. App. 1990).
9
The Wisconsin Supreme Court endorsed the Restatement test in Haines v.
Mid-Century Ins. Co., 47 Wis. 2d 442, 446–47, 177 N.W.2d 328, 330–31
(1970).
10
Id. at 447.
11
Id.
12
CSS-Wisconsin Office, 779 F. Supp. at 984; Restatement (Second) of
Conflict of Laws § 188(3) (1969).
© April 2000, State Bar of Wisconsin CLE Books
Ch. 5 Pg. 7
CHAPTER 5
§ 5.9
3. [§ 5.9] When Contract Is Government Contract
When the federal government is a party to a contract in dispute, the
substantive body of law known as federal common law may govern the
interpretation of the contract. However, the scope of federal common law
and the implications of the Erie doctrine13 are beyond the scope of this
chapter. Whether federal common law governs the interpretation of the
contract must be explored when analyzing a contract dispute to which the
federal government is a party, particularly if the outcome of the dispute will
directly affect substantial financial obligations of the United States.14
4. [§ 5.10] When Contract Is Silent as to Choice of
Law
a. [§ 5.11] In General
Most sophisticated contracts explicitly address the issue of what law will
govern disputes arising out of the contract,15 but there are many contracts
that do not settle the question of what law governs. In such a case, a choiceof-law analysis may be necessary.16
b. [§ 5.12] Contracts Subject to UCC
With regard to contracts governed by the Wisconsin Uniform Commercial Code (Wisconsin UCC), the test to be applied is similar to the groupingof-contacts approach (discussed in section 5.8, supra). The provisions of the
Wisconsin UCC will apply to transactions “bearing an appropriate relation”
13
Erie R.R. v. Tompkins, 304 U.S. 64 (1938).
14
See 19 Charles A. Wright, Arthur R. Miller & Edward H. Cooper, Federal
Practice & Procedure 2d § 4514 (2d ed. 1996); see also, e.g., United States v.
Kimbell Foods, Inc., 440 U.S. 715, 726–27 (1979); Eastern Illinois Trust &
Sav. Bank v. Sanders, 826 F.2d 615, 616 (7th Cir. 1987); Holbrook v. Pitt, 643
F.2d 1261, 1270 n.16 (7th Cir. 1981).
15
See infra § 15.68, .69 (standard clauses).
16
See supra § 5.8 (grouping-of-contacts analysis).
Ch. 5 Pg. 8
© April 2000, State Bar of Wisconsin CLE Books
CONTRACT INTERPRETATION; PAROL EVIDENCE RULE
§ 5.15
to Wisconsin.17 In applying this rule, the court looks to “a transaction’s
significant contacts” with the forum.18
III. [§ 5.13] Who Decides What the Contract Means?
A. [§ 5.14] In General
In litigating a contract dispute, it may be of strategic importance to know
whether the meaning of the contract will be decided by the jury or the judge.
Likewise, if the case is on appeal, it may be important to determine whether
the court of appeals will defer to the findings made by the trial court or will
review the matter de novo. The following discussion states the applicable
rules.
B. [§ 5.15] Issues Decided as Matter of Law
When the contract at issue is unambiguous, and there is no dispute that
the contract is the final and complete expression of the parties’ intent,
determining its meaning is a question of law solely for the judge to decide,
not the jury.19 The same holds when an ambiguity does exist but there is no
extrinsic evidence or other circumstance for the court to consider.20 Even
the issue of whether an ambiguity exists is a question of law for the court.21
17
Wis. Stat. § 401.105(1); see supra § 1.7 (UCC and its adoption in
Wisconsin).
18
Wilcox v. Wilcox, 26 Wis. 2d 617, 630, 133 N.W.2d 408, 415 (1965);Ford
Motor Co., 137 Wis. 2d at 454.
19
Jos. P. Jansen Co. v. Milwaukee Area Dist. Bd., 105 Wis. 2d 1, 13, 16, 312
N.W.2d 813, 818, 820 (1981); Eder v. Lake Geneva Raceway, Inc., 187 Wis. 2d
596, 607–12, 523 N.W.2d 429 (Ct. App. 1994); Kellar v. Lloyd, 180 Wis. 2d
162, 176, 509 N.W.2d 87 (Ct. App. 1993).
20
Kuehn v. Safeco Ins. Co. of Am., 140 Wis. 2d 620, 624, 626–27, 412
N.W.2d 126, 127, 128 (Ct. App. 1987).
21
Energy Complexes, Inc. v. County of Eau Claire, 152 Wis. 2d 453, 467,
449 N.W.2d 35 (1989); Management Computer Servs., Inc. v. Hawkins, Ash,
Baptie & Co., 196 Wis. 2d 578, 594, 539 N.W.2d 111 (Ct. App. 1995), rev’d on
other grounds, 206 Wis. 2d 158, 557 N.W.2d 67 (1996).
© April 2000, State Bar of Wisconsin CLE Books
Ch. 5 Pg. 9
CHAPTER 5
§ 5.16
The construction of the words and clauses of an insurance policy is
generally held to be a question of law for the court.22 An exception arises
when an insurance policy is not complete—for example, when an endorsement defining a term in the policy is not provided to the insured—and the
court must resort to extrinsic evidence.23
C. [§ 5.16] Issues Decided as Matter of Fact
1. [§ 5.17] In General
When the meaning of a contractual term is ambiguous, or when
reasonable persons could disagree as to what is contained in the contract, the
parties’ intent is a factual issue and the question is properly submitted to the
trier of fact.24 The interpretation of writings is traditionally the responsibility of the judge rather than the jury. A matter is for the jury when it is
necessary to resort to extrinsic evidence and the evidence consists of a series
of mutually inconsistent writings that must be combined with
nondocumentary evidence to determine whether or when a contract was
made.25 When a court decides it must look beyond the four corners of the
document to find evidence of the parties’ intent, the issue involves a
question of fact.26
22
Katze v. Randolph & Scott Mut. Fire Ins. Co., 116 Wis. 2d 206, 212, 341
N.W.2d 689, 691 (1984).
23
Kuehn, 140 Wis. 2d at 627 (because court was required to consult
extrinsic evidence, the question was one of fact).
24
Walgreen Co. v. Sara Creek Property Co., 775 F. Supp. 1192, 1195 (E.D.
Wis. 1991), aff’d, 966 F.2d 273 (7th Cir. 1992); Jones v. Jenkins, 88 Wis. 2d
712, 722, 277 N.W.2d 815, 819 (1979); Grosskopf Oil, Inc. v. Winter, 156 Wis.
2d 575, 585, 457 N.W.2d 514, 519 (Ct. App. 1990); Wausau Underwriters Ins.
Co. v. Dane County, 142 Wis. 2d 315, 323, 417 N.W.2d 914 (Ct. App. 1987);
Jensen v. Janesville Sand & Gravel Co., 141 Wis. 2d 521, 530–31, 415 N.W.2d
559 (Ct. App. 1987).
25
Western Indus., Inc. v. Newcor Canada, Ltd., 739 F.2d 1198, 1205 (7th
Cir. 1984).
26
Wis. Stat. § 401.205(2); Frandsen v. Jensen-Sundquist Agency, Inc., 802
F.2d 941, 943–44 (7th Cir. 1986).
Ch. 5 Pg. 10
© April 2000, State Bar of Wisconsin CLE Books
CONTRACT INTERPRETATION; PAROL EVIDENCE RULE
§ 5.19
2. [§ 5.18] Contracts Subject to UCC
The Wisconsin UCC creates an exception to the principle that consideration of extrinsic evidence requires submission of the question to the trier of
fact. Under the Wisconsin UCC provisions, if the extrinsic evidence
consists only of trade usage and the usage “is embodied in a written trade
code or similar writing, the interpretation of the writing is for the court.”27
D. [§ 5.19] Standards of Review on Appeal
The de novo standard of review applies when the issue on appeal is the
meaning of the contract and any of the following applies:
1. The contract is unambiguous.28
2. The contract is ambiguous, but the evidence consists only of
documents.29
27
Wis. Stat. § 401.205(2); see supra § 1.7 (UCC and its adoption in
Wisconsin).
28
For cases on appeal from state courts, see Estate of Thompson v. Jump
River Elec. Corp., 225 Wis. 2d 588, 598, 593 N.W.2d 901 (Ct. App. 1999);
Nauga, Inc. v. Westel Milwaukee Co., 216 Wis. 2d 306, 313, 576 N.W.2d 573
(Ct. App. 1998); Yee v. Giuffre, 176 Wis. 2d 189, 192, 499 N.W.2d 926, 927
(Ct. App. 1993). For cases on appeal from federal courts, see Elkhart Lake’s
Road America, Inc. v. Chicago Historic Races, Ltd., 158 F.3d 970, 972 (7th Cir.
1998); LaSalle Nat’l Bank v. Service Merchandise Co., 827 F.2d 74, 78 (7th
Cir. 1987).
29
Levy v. Levy, 130 Wis. 2d 523, 529, 388 N.W.2d 170, 173 (1986) (“‘The
meaning of a word in a legal document is a matter within the expertise of the
supreme court, and is not dependent upon the fact finder’s appraisal of the
demeanor of witnesses . . . . [E]ven were we to disagree with the finding of the
trial court, we would be free to reach our own conclusion with respect to the
meaning of a word.’”) (quoting American Mut. Liab. Ins. Co. v. Fisher, 58 Wis.
2d 299, 303–04, 206 N.W.2d 152 (1973)). Note that the federal court of
appeals may take a different approach. See Ginsu Prods., Inc. v. Dart Indus.,
Inc., 786 F.2d 260, 262–63 (7th Cir. 1986) (clearly erroneous standard applies
“‘even when the district court’s findings do not rest on credibility determinations, but are based instead on physical or documentary evidence or inferences
from other facts’”) (quoting Anderson v. Bessemer City, 470 U.S. 564, 573
(1985)).
© April 2000, State Bar of Wisconsin CLE Books
Ch. 5 Pg. 11
§ 5.19
CHAPTER 5
3. The contract is ambiguous, but neither party offers evidence as to the
parties’ intent.30
Courts of appeals (both state and federal) usually apply the de novo standard
in cases involving the construction of an insurance contract.31
On the other hand, the clearly erroneous standard applies when a contract
is ambiguous and the trial court resorted to extrinsic, nondocumentary
evidence of the parties’ intentions.32 It is important to note, however, that
the threshold question of whether the contract is ambiguous is a matter of
law that the appellate court may review de novo.33
Because it is sometimes difficult to sort out which matters the trial court
resolved as a matter of law and which it decided as a matter of fact,34 the
Wisconsin Supreme Court has encouraged trial courts to make separate
findings of fact in cases in which determinations of fact and law are mixed.35
30
Reserve Life Ins. Co. v. La Follette, 108 Wis. 2d 637, 646, 323 N.W.2d
173, 177 (Ct. App. 1982).
31
See, e.g., Continental Corp. v. Aetna Cas. & Surety Co., 892 F.2d 540, 543
(7th Cir. 1989); General Cas. Co. v. Hills, 209 Wis. 2d 167, 175, 561 N.W.2d
718 (1997); Maas v. Ziegler, 172 Wis. 2d 70, 79, 492 N.W.2d 621 (1992);
Employers Health Ins. v. General Cas. Co., 161 Wis. 2d 937, 945–46, 469
N.W.2d 172, 175 (1991) (where no extrinsic evidence is introduced to interpret
words in insurance contract, supreme court may redetermine interpretation as
issue of law, with no deference to circuit court or court of appeals); Kraemer
Bros., Inc. v. United States Fire Ins. Co., 89 Wis. 2d 555, 561, 278 N.W.2d 857,
860 (1979); Reed v. General Cas. Co., 216 Wis. 2d 204, 208, 576 N.W.2d 73
(Ct. App. 1998).
32
Wis. Stat. § 805.17(2); LaSalle Nat’l Bank, 827 F.2d at 78; Kuehn, 140
Wis. 2d at 627; Badger Produce Co. v. Prelude Foods Int’l, Inc., 130 Wis. 2d
230, 238, 387 N.W.2d 98, 102 (Ct. App. 1986).
33
Borchardt v. Wilk, 156 Wis. 2d 420, 427, 456 N.W.2d 653, 656 (Ct. App.
1990); Jensen, 141 Wis. 2d at 530.
34
See, e.g., Badger Produce Co., 130 Wis. 2d at 238, 240 (acceptance of
goods under Wisconsin UCC and “reasonableness” are issues that present
mixed questions of fact and law); Spensley Feeds, Inc. v. Livingston Feed &
Lumber, Inc., 128 Wis. 2d 279, 286, 381 N.W.2d 601, 604 (Ct. App. 1985)
(whether contract is divisible is question of mixed fact and law).
35
See, e.g., Wassenaar v. Panos, 111 Wis. 2d 518, 525–26, 331 N.W.2d 357,
361 (1983).
Ch. 5 Pg. 12
© April 2000, State Bar of Wisconsin CLE Books
CONTRACT INTERPRETATION; PAROL EVIDENCE RULE
§ 5.21
Although the court of appeals is not bound to defer completely to the trial
court’s conclusions of law contained in a mixed fact-law determination,
those conclusions are entitled to some weight.36
IV. [§ 5.20] What Does the Contract Mean?: Rules for
Interpreting Contracts
A. [§ 5.21] Purpose of Interpretation Is Determining
and Enforcing Parties’ Intent
“[T]he cornerstone of contract construction is to ascertain the true
intentions of the parties.”37 The canons, maxims, rules of grammar, rules
of thumb, and other incantations that courts have developed over time have
strategic implications. For example, the party that drafted the disputed term
always seems to fight an uphill battle if the term is declared ambiguous.38
However, the rules are meant to serve only one valid purpose: to reveal the
parties’ intent.39
Indeed, not every case calls for contract interpretation. When the parties
to a validly formed contract make an agreement “‘which does not contravene
a principle of public policy, and which contains no element of ambiguity,
the court has no right, by a process of interpretation, to relieve one of them
36
Koenings v. Joseph Schlitz Brewing Co., 126 Wis. 2d 349, 358, 377
N.W.2d 593, 598 (1985).
37
State ex rel. Journal/Sentinel, Inc. v. Pleva, 155 Wis. 2d 704, 711, 456
N.W.2d 359, 362 (1990); see also Elkhart Lake’s Road America, 158 F.3d at
972; Gorton v. Hostak, Henzl, & Bichler, S.C., 217 Wis. 2d 493, 506, 576
N.W.2d 46 (1998); Sampson Invs. v. Jondex Corp., 176 Wis. 2d 55, 62, 499
N.W.2d 177, 180 (1993); Levy, 130 Wis. 2d at 533–34; Patti v. Western Mach.
Co., 72 Wis. 2d 348, 351, 241 N.W.2d 158, 162 (1976).
38
See infra § 5.31 (maxim dictating that ambiguity is to be construed
against drafter).
39
Courts are wary of applying canons of construction in such a way that
they distort, rather than clarify, the parties’ intentions. See, e.g., O’Leary v.
Sterling Extruder Corp., 533 F. Supp. 1205, 1208 (E.D. Wis. 1982) (rejecting
“static—albeit sometimes useful—canon” that ambiguity be construed against
drafter).
© April 2000, State Bar of Wisconsin CLE Books
Ch. 5 Pg. 13
§ 5.21
CHAPTER 5
from any disadvantageous terms’” that have been made.40 In other words,
“[i]n the guise of construing a contract, courts cannot insert what has been
omitted or rewrite a contract made by the parties.”41 Courts are tempted to
reform agreements when one party is treated unfavorably. However, it is a
“time-honored axiom . . . that if parties are allowed to convince courts to
reform plainly worded contracts, ‘contracts would not be worth the paper on
which they are written.’”42
A court should depart from these cardinal principles only when the
parties have omitted an essential term43 or when a party can demonstrate
grounds for reformation.44
Finally, the art of contract construction does not consist of merely
defining words and terms in the abstract. The goal, instead, is to ascertain
what the parties meant by the use of the word or the term in the context of
their own agreement. For example, presenting a court with another court’s
published decision in which the same word or term is in issue may not be
decisive. As the Wisconsin Supreme Court wrote: “Obviously, decisions
from other jurisdictions determining the intention of other parties are not
controlling when the issue is the intention of [these parties] at the time they
entered into this particular [contract].”45
40
Dykstra v. Arthur G. McKee & Co., 92 Wis. 2d 17, 38, 284 N.W.2d 692
(Ct. App. 1979), aff’d, 100 Wis. 2d 120, 301 N.W.2d 201 (1981) (quoting
Algrem v. Nowlan, 37 Wis. 2d 70, 79, 154 N.W.2d 217 (1967)); see also Old
Tuckaway Assocs. Ltd. Partnership v. City of Greenfield, 180 Wis. 2d 254,
280–81, 509 N.W.2d 323 (Ct. App. 1993); Continental Cas. Co. v. Patients
Compensation Fund, 164 Wis. 2d 110, 116–17, 473 N.W.2d 584 (Ct. App.
1991).
41
Levy, 130 Wis. 2d at 533; see Westowne Shoes, Inc. v. Brown Group, Inc.,
104 F.3d 994, 996 (7th Cir. 1997); Huntoon v. Capozza, 57 Wis. 2d 447, 461,
204 N.W.2d 649 (1973) (“important contractual provisions are not ordinarily
left to implication”); Goff v. Massachusetts Protective Ass’n., Inc., 46 Wis. 2d
712, 715–16, 176 N.W.2d 576 (1970) (court will not “read into the silence of
the contract” a significant and important term).
42
Pincus v. Pabst Brewing Co., 893 F.2d 1544, 1552 (7th Cir. 1990)
(quoting Upton v. Tribilock, 91 U.S. (1 Otto) 45, 50 (1875)).
43
See infra §§ 5.71–.75 (supplying omitted terms).
44
See infra §§ 13.80–.84 (grounds for reformation).
45
Patti, 72 Wis. 2d at 355–56.
Ch. 5 Pg. 14
© April 2000, State Bar of Wisconsin CLE Books
CONTRACT INTERPRETATION; PAROL EVIDENCE RULE
§ 5.22
B. [§ 5.22] Best Evidence of Parties’ Intent Is Contract
Itself
Wisconsin courts espouse the view that the best indication of the parties’
intent is the language of the contract itself; courts must avoid the temptation
to allow into the record extrinsic evidence of the parties’ intentions, for this
often leads to interpretations that are contradictory and confusing.46
Accordingly, when the terms of a contract are plain and unambiguous, a
court will construe the contract as it is written,47 even though the parties
have placed a different construction on it.48
This being the case, courts are apt to place heavy reliance on explicit
statements of intent contained in the contract itself—for example, in the
recitals of the contract (sometimes known as the WHEREAS clauses).49
C. [§ 5.23] “Plain and Ordinary” Meaning Precedes
Others
Courts repeatedly emphasize that they will not depart from the plain
meaning of a contract.50 In determining the plain meaning of a word, a
46
Pleva, 155 Wis. 2d at 711 (“the purpose of judicial construction is to
determine what the parties contracted to do as evidenced by the language they
saw fit to use”); Levy, 130 Wis. 2d at 535.
47
United States v. Ettrick Wood Prods., Inc., 916 F.2d 1211, 1219 (7th Cir.
1990); Amplicon Inc. v. Marshfield Clinic, 786 F. Supp. 1469, 1478 (W.D. Wis.
1992); Koenings, 126 Wis. 2d at 366; Teacher Retirement Sys. v. Badger XVI
Ltd. Partnership, 205 Wis. 2d 532, 555, 556 N.W.2d 415 (Ct. App. 1996); Yee,
176 Wis. 2d at 192–93.
48
Kinn v. Coast Catamaran Corp., 582 F. Supp. 682, 686 (E.D. Wis. 1984);
Campion v. Montgomery Elevator Co., 172 Wis. 2d 405, 416, 493 N.W.2d 244
(Ct. App. 1992); Schmitz v. Grudzinski, 141 Wis. 2d 867, 871, 416 N.W.2d 639,
641 (Ct. App. 1987); Dykstra, 92 Wis. 2d at 38.
49
See, e.g., Levy, 130 Wis. 2d at 534. For more information on the
usefulness of recitals in contracts, see sections 15.47–.48, infra.
50
See, e.g., Keeler v. Keeler, 214 Wis. 2d 32, 37, 571 N.W.2d 182 (Ct. App.
1997); Lah v. Century 21 Bales-Salzburg, 204 Wis. 2d 483, 489–90, 555
N.W.2d 149 (Ct. App. 1996); Erickson v. Gundersen, 183 Wis. 2d 106, 117,
515 N.W.2d 293 (Ct. App. 1994); Continental Cas. Co. v. Wisconsin Patients
Compensation Fund, 164 Wis. 2d 110, 116–17, 473 N.W.2d 584 (Ct. App.
© April 2000, State Bar of Wisconsin CLE Books
Ch. 5 Pg. 15
§ 5.23
CHAPTER 5
court may look to the definition of the word given in a recognized dictionary.51 Of course, consulting a dictionary may not produce an unambiguous
plain meaning, since dictionaries do not have the last word on the meaning
to be ascribed to a given word. For example, the Wisconsin Supreme Court
held that the term theft did not have a plain meaning, because it was
susceptible to a variety of definitions, of which the dictionary definition was
only one.52
D. [§ 5.24] Parties’ Knowledge at Time of Contracting Is
Considered
Courts presume that parties reach their agreement with an awareness of
the law in effect at the time of their agreement, including both statutory and
case law.53 Courts also presume that parties have read and understood their
agreements. Courts are understandably reluctant to excuse or relieve a party
of its fundamental duty to read and understand before signing a document.54
1991).
51
Arkwright-Boston Mars. Mut. Ins. Co. v. Wausau Paper Mills Co., 818
F.2d 591, 594 (7th Cir. 1987); Gorton, 217 Wis. 2d at 507; Just v. Land
Reclamation, Ltd., 155 Wis. 2d 737, 745, 456 N.W.2d 570, 573 (1990); Ennuis
v. Western Nat. Mut. Ins. Co., 225 Wis. 2d 824, 832, 593 N.W.2d 890 (Ct. App.
1999); Leask v. Magazine Marketplace, Inc., 168 Wis. 2d 668, 673–74, 484
N.W.2d 364 (Ct. App. 1992); Stauffacher v. Preside Properties, Inc., 150 Wis.
2d 242, 246, 441 N.W.2d 328, 330 (Ct. App. 1989); In re Liquidation of AllStar Ins. Corp., 112 Wis. 2d 329, 334, 332 N.W.2d 828, 830–31 (Ct. App.
1983).
52
Kate, 116 Wis. 2d at 211, 213, 341 N.W.2d at 691.
53
Krause v. Massachusetts Bay Ins. Co., 161 Wis. 2d 711, 718, 468 N.W.2d
755, 758 (Ct. App. 1991).
54
See, e.g., Paper Express, Ltd. v. Pfankuch Machine GmbH, 972 F.2d 753,
757 (7th Cir. 1992); Northwestern Nat’l Ins. Co. v. Donovan, 916 F.2d 372, 378
(7th Cir. 1990); United States v. Stump Home Specialties Mfg., Inc., 905 F.2d
1117, 1120 (7th Cir. 1990) (parties who agree to terms in writing without
understanding or investigating them do so at their own peril); Richards v.
Richards, 181 Wis. 2d 1007, 1017, 513 N.W.2d 118 (1994); Hennaing v.
Hearn, 230 Wis. 2d 149, 169–72, 601 N.W.2d 14 (Ct. App. 1999); Rent-ACenter, Inc. v. Hall, 181 Wis. 2d 243, 249 n.5, 510 N.W.2d 789 (Ct. App.
1993); Ritchie v. Campier, 109 Wis. 2d 399, 405–06, 326 N.W.2d 131, 134 (Ct.
App. 1982); supra § 3.10 (whether reliance was justified (misrepresentation
Ch. 5 Pg. 16
© April 2000, State Bar of Wisconsin CLE Books
CONTRACT INTERPRETATION; PAROL EVIDENCE RULE
§ 5.24
However, courts will take into consideration the intelligence and experience
of an individual who claims to have been misled at the time of signing.55
Courts have explicitly rejected the argument that because a contract is
written in a foreign language, it is not enforceable against a party unfamiliar
with that language. Such excuses are considered particularly lame in an
arms-length transaction between sophisticated businesses.56
E. [§ 5.25] Maxims That Guide Construction of
Disputed Contractual Terms
1. [§ 5.26] Read Contract as a Whole
A contract must be construed as a whole, so as to give each of its
provisions the meaning intended by the parties.57 By reading each provision
of the contract in the context of the whole, ambiguity can be avoided.58
Thus, “[when an expression of intent is apparent as to one portion of the
agreement, this rule may be extremely useful in determining the intent of the
parties as to a related portion.”59 If two clauses of a contract are apparently
element)).
55
Bank of Sun Prairie v. Easer, 155 Wis. 2d 724, 733–34, 456 N.W.2d 585,
589 (1990) (citing Ritchie v. Campier, 109 Wis. 2d at 405–06).
56
Although Wisconsin courts have not addressed this issue in published
opinions, it has been addressed numerous times elsewhere. See, e.g., Paper
Express, Ltd., 972 F.2d at 757 (collecting cases); Envirolite Enters., Inc. v.
Glastechnische Industria Peter Lisec Gesellschaft M.B.H., 53 BR. 1007
(S.D.N.Y. 1985), aff’d without opinion, 788 F.2d 5 (2d Cir. 1986).
57
Shanks v. Blue Cross & Blue Shield United, 777 F. Supp. 1444, 1449 (E.D.
Wis. 1991) (quoting Kramer Bros., Inc. v. United States Fire Ins. Co., 89 Wis.
2d 555, 562, 278 N.W.2d 857 (1979)), aff’d, 979 F.2d 1232 (7th Cir. 1992);
Campion, 172 Wis. 2d at 416; Hartman v. Otis Erecting Co., 108 Wis. 2d 456,
461, 322 N.W.2d 482, 485 (Ct. App. 1982).
58
Wausau Joint Venture v. Redevelopment Auth., 118 Wis. 2d 50, 58, 347
N.W.2d 604 (Ct. App. 1984).
59
Anderson v. American Family Mut. Ins. Co., 178 Wis. 2d 835, 840, 505
N.W.2d 433 (Ct. App. 1993); see also Lambert v. Heine, 218 Wis. 2d 712, 729,
582 N.W.2d 84 (Ct. App. 1998) (“as is” clause of real estate contract construed
in conjunction with inspection and disapproval provisions of same contract).
© April 2000, State Bar of Wisconsin CLE Books
Ch. 5 Pg. 17
CHAPTER 5
§ 5.25
repugnant, it is the court’s duty to harmonize them if possible.60 Courts are
especially loathe to “put a trick interpretation or twist on one word” of the
contract.61
2. [§ 5.27] Give Meaning and Effect to All Terms
In construing a contract, the court will select the construction that gives
meaning to each of the provisions of the contract, so that no part of the
contract is rendered surplusage or meaningless.62
3. [§ 5.28] Avoid Leaving Any Term Unreasonable
or Unconscionable
In construing a contract, the court must adopt the construction that will
result in a reasonable, fair, and just contract as opposed to one that is
unusual or extraordinary or produces unfair or unreasonable results.63 In
Eden Stone Co. v. Exfoliate Stone Co., for example, the Wisconsin Court of
Appeals rejected the interpretation that a quarrying contract’s failure to
mention a specific kind of stone barred the right to quarry that stone. The
60
In re Rude, 122 BR. 533, 537 (Bkrtcy. E.D. Wis. 1990); Jones, 88 Wis.
2d at 723.
61
Hammel, 113 Wis. 2d at 76.
62
Paper Express Ltd., 972 F.2d at 755; In re Rude, 122 BR. at 537;
American Motorists Ins. Co. v. Trade Co., 544 F. Supp. 669, 678 (W.D. Wis.
1982), aff’d, 718 F.2d 842 (7th Cir. 1983); Mass, 172 Wis. 2d at 79; Pleva, 155
Wis. 2d at 711; Jones, 88 Wis. 2d at 722; Lehman v. State Farm Mut. Auto. Ins.
Co., 230 Wis. 2d 56, 62, 601 N.W.2d 312 (Ct. App. 1999); Estate of Thompson,
225 Wis. 2d at 600; Refiner v. State Farm Fire & Cas. Co., 221 Wis. 2d 500,
508, 585 N.W.2d 696 (Ct. App. 1998); Banner v. ABC Mfg. Co., 217 Wis. 2d
143, 146, 152, 579 N.W.2d 742 (Ct. App. 1998); Kohler Co. v. Waxen, 204 Wis.
2d 327, 335, 338, 555 N.W.2d 640 (Ct. App. 1996).
63
United Farm Agency, Inc. v. Clausen, 112 Wis. 2d 634, 641, 334 N.W.2d
110, 113 (1983); State v. Elmer J.K., 224 Wis. 2d 372, 380, 591 N.W.2d 176
(Ct. App. 1999); Bernhardt, 156 Wis. 2d at 428; Germain v. United States Fire
Ins. Co., 119 Wis. 2d 367, 375, 350 N.W.2d 730, 735 (Ct. App. 1984). But see
supra § 5.21 (purpose of interpretation is determining and enforcing parties’
intent).
Ch. 5 Pg. 18
© April 2000, State Bar of Wisconsin CLE Books
CONTRACT INTERPRETATION; PAROL EVIDENCE RULE
§ 5.28
contract did not specifically mention any kind of stone, so the proffered
interpretation would preclude any quarrying at all, an unreasonable result.64
A court will construe the contract “[so] far as reasonably practicable . . .
[to] make it a rational business instrument.”65 For example, in Bernhardt v.
Will, the court rejected a construction of an attorney fee provision in a
mortgage note that would have entitled the mortgagee to recover all of the
fees it had incurred attempting to enforce the mortgage, even though much
of the fees were incurred defending a counterclaim upon which the
mortgagor recovered an amount almost equal to what the mortgagee
recovered. The court construed the contract to allow only for fees in an
amount proportional to the amount recovered on the note less the amount
recovered on the counterclaim.66
4. [§ 5.29] Avoid Unlawful Performance
Courts construe contracts so as to avoid an interpretation that would
require the parties to perform in an unlawful manner or that would bring
about a result that would contravene public policy.67 Contracts that flirt with
unlawfulness or tend to violate public policy are strictly construed to avoid
such a result in all cases possible. For example, a stipulation absolutely and
unconditionally preventing modification of a child support agreement
violates public policy, and therefore a court may consider modifying child
support obligations without regard to the limitation set forth in the stipulation.68
Likewise, exculpatory contracts (certain releases, for instance) are not
favored by the law and are to be construed strictly against the parties seeking
to enforce them.69 Courts strictly construe indemnity contracts so as to
64
Eden Stone Co. v. Exfoliate Stone Co., 166 Wis. 2d 105, 115, 479 N.W.2d
557 (Ct. App. 1991).
65
Bernhardt, 156 Wis. 2d at 427.
66
Id. at 428.
67
See supra §§ 3.21–.37 (illegal and unconscionable contracts).
68
See Crewman v. Goldberg, 214 Wis. 2d 163, 178, 571 N.W.2d 425 (Ct.
App. 1997).
69
Auger v. Skiing Enters., Inc., 206 Wis. 2d 76, 557 N.W.2d 60 (1996)
(discussing process for analyzing validity of exculpatory contracts in light of
public policy issues); Richards v. Richards, 181 Wis. 2d 1007, 1015, 513
© April 2000, State Bar of Wisconsin CLE Books
Ch. 5 Pg. 19
CHAPTER 5
§ 5.29
avoid the result that a party to the contract will be indemnified against the
party’s own negligence.70 Mortgage clauses providing that future advances
will be secured by the mortgage (the so-called dragnet clause) also are
strictly construed.71
5. [§ 5.30] Give Greater Weight to Specific Than to
General Language
Contract language that is more specific in nature is likely to make a
greater difference in contract interpretation than contract language that is
more general in nature. A number of interpretative rules of thumb flow
from this observation—for instance, that “where there is an apparent conflict
between a general and a specific provision, the latter controls.”72 A related
rule is the Latin maxim “expression units est exclusion Aletris,” or, as has
been stated by the court of appeals, that “specific mention of one or more
matters is considered to exclude other matters of the same nature not
expressly mentioned.”73
These rules find expression in cases where part of the contract is written
or typed and the rest consists of a preprinted form. In such a contract, if the
N.W.2d 118 (1994); Debris v. Thomson, 161 Wis. 2d 502, 514, 468 N.W.2d
654, 660–61 (1991); Marten v. Nathan, 108 Wis. 2d 205, 210–11, 321 N.W.2d
173, 176–77 (1982); Werdehoff v. General Star Index. Co., 229 Wis. 2d 489,
498–99, 600 N.W.2d 214 (Ct. App. 1999); Hmpf v. City of Appleton, 165 Wis.
2d 215, 224, 477 N.W.2d 69, 73 (Ct. App. 1991); see also Wis. Stat.
§ 704.07(1) (“An agreement to waive the requirements of this section
[regarding repairs and untenantability in a lease agreement] in a residential
tenancy is void”); Restatement (Second) of Contracts § 195 (1979); supra
§§ 3.28–.34 (exculpatory contracts).
70
Hartman, 108 Wis. 2d at 463; Dykstra, 100 Wis. 2d at 125.
71
In re Rude, 122 BR. at 536–37.
72
Goldband Trust v. Goldband, 26 Wis. 2d 141, 148, 131 N.W.2d 902
(1965); see also Isermann v. M.L. Life Assurance Corp., 231 Wis. 2d 136 (Ct.
App. 1999); Hull v. Heritage Mut. Ins. Co., 203 Wis. 2d 547, 554, 553 N.W.2d
295 (Ct. App. 1996).
73
Anderson, 178 Wis. 2d at 840; see also Gabble v. First Fed. Sat. & Loan
Ass’n, 83 Wis. 2d 668, 673, 266 N.W.2d 352 (1978); Hunzinger Constr. Co. v.
Granite Resources Corp., 196 Wis. 2d 327, 340, 538 N.W.2d 804 (Ct. App.
1995).
Ch. 5 Pg. 20
© April 2000, State Bar of Wisconsin CLE Books
CONTRACT INTERPRETATION; PAROL EVIDENCE RULE
§ 5.31
parts are apparently inconsistent or leave reasonable doubt as to the meaning
of the whole, the written or typed part controls.74
6. [§ 5.31] Construe Ambiguities Against Drafter
It is a well-worn rule that ambiguous contractual terms are to be
construed against the maker or drafter.75 This is a general rule, however, and
is followed only when doing so would be consistent with the language of the
whole contract and the parties’ intent.76 This rule is given particular
consideration “where a substantial disparity of bargaining power exists
between the parties or a standard form is supplied by the drafting party,”77
particularly when the drafting party is an attorney.78
F. [§ 5.32] Consulting Extrinsic Evidence
1. [§ 5.33] Requirement That Contract Be
Ambiguous
a. [§ 5.34] In General
If intent can be determined with reasonable certainty from the face of the
contract itself, a court should not resort to extrinsic evidence.79 Only when
74
See In re Rude, 122 BR. at 537.
75
In re Rude, 122 BR. at 537; In re Spring Valley Meats, Inc., 94 Wis. 2d
600, 609, 288 N.W.2d 852, 856 (1980); Garriguenc v. Love, 67 Wis. 2d 130,
135, 226 N.W.2d 414, 417 (1975); Carpocapsa v. First Nat’l Bank, 36 Wis. 2d
714, 720, 154 N.W.2d 271 (1967); Hunzinger Constr. Co. v. Granite Resources
Corp., 196 Wis. 2d 327, 339, 538 N.W.2d 804 (Ct. App. 1995).
76
Wilde v. First Fed. Sat. & Loan Ass’n, 108 Wis. 2d 650, 655, 323 N.W.2d
179 (Ct. App. 1982); see also supra note 39.
77
Gorton, 217 Wis. 2d at 506 (citing to Goebel, 83 Wis. 2d at 675).
78
See id. at 508 (citing to Dairyland Equip. Leasing, Inc. v. Bohen, 94 Wis.
2d 600, 609, 288 N.W.2d 852 (1980)).
79
Erickson, 183 Wis. 2d at 117, 118 n.3; Eden Stone, 166 Wis. 2d at 116.
It should be noted, however, that a court may consider extrinsic evidence to
determine whether a contract that does not address the issue of merger or
integration is intended to be final, thereby barring consideration of supplemental agreements. See infra § 5.62. Extrinsic evidence is also admissible, even
© April 2000, State Bar of Wisconsin CLE Books
Ch. 5 Pg. 21
CHAPTER 5
§ 5.32
the contract is ambiguous or when the evidence permits more than one
reasonable inference concerning the parties’ intent, may the court look
beyond the face of the contract and consider extrinsic evidence.80
In Wisconsin Real Estate Investment Trust v. Weinstein,81 the court
rejected a construction that would have necessitated the consideration of
extrinsic evidence. One of the parties invoked the maxim that courts should
give the construction of the contract that the parties themselves adopt. The
court explained that this maxim applies only when the contract is ambiguous
and pointed out that the contract at issue was held to be unambiguous.82
b. [§ 5.35] What Constitutes Ambiguity?
A term in a contract is ambiguous if it might mean different things to
different reasonable persons.83 For example, in Patti v. Western Machine
Co., the parties disputed the meaning of the term retirement in an employment agreement providing for deferred compensation upon “death, disability
or retirement”; the court held that the term was “patently ambiguous”
in the case of an unambiguous contract, for purposes of challenging the
validity of the contract. See infra § 5.64.
80
Energy Complexes, Inc. v. Eau Claire County, 152 Wis. 2d 453, 468, 449
N.W.2d 35 (1989); Capital Inv., Inc. v. Whitehall Packing Co., 91 Wis. 2d 178,
190, 280 N.W.2d 254, 259 (1979); Spencer v. Spencer, 140 Wis. 2d 447, 450,
410 N.W.2d 629, 630 (Ct. App. 1987).
81
712 F.2d 1095 (7th Cir. 1983).
82
Id. at 1099 n.11; see also Elkhart Lake’s Road America, 158 F.3d at 972;
Amcast Indus. Corp. v. Affiliated FM Ins. Co., 221 Wis. 2d 145, 164, 584
N.W.2d 218 (Ct. App. 1998).
83
Borchardt, 156 Wis. 2d at 427. The test has been formulated in a number
of different ways. See, e.g., Katze, 116 Wis. 2d at 213 (words are ambiguous
“when they are reasonably or fairly susceptible to more than one construction”); Security Sav. & Loan Ass’n v. Wauwatosa Colony, Inc., 71 Wis. 2d 174,
179, 237 N.W.2d 729, 732 (1976) (ambiguity exists when contract “is capable
of being understood by reasonably well-informed persons in either of two or
more senses”); Conrad Milwaukee Corp. v. Wasilewski, 30 Wis. 2d 481, 487,
141 N.W.2d 240, 244 (1966) (the word “must have some stretch in it—some
capacity to connote more than one meaning”); Jensen, 141 Wis. 2d at 530
(ambiguous “if a reasonable person could understand it differently”). The
Seventh Circuit Court of Appeals has employed the same formulation
articulated in Katze. See Elkhart Lake’s Road America, 158 F.3d at 972.
Ch. 5 Pg. 22
© April 2000, State Bar of Wisconsin CLE Books
CONTRACT INTERPRETATION; PAROL EVIDENCE RULE
§ 5.35
because it was not defined in the agreement and might mean “anything from
voluntary, unilateral termination to involuntary, forced termination.”84 As
another example, in Duhame v. Duhame, the court found a divorce stipulation ambiguous because it was uncertain whether the term insurance
“available to [the husband] at his place of employment” included insurance
that is retained and carried over into retirement.85 In Katze v. Randolph &
Scott Mutual Fire Insurance Co., the Wisconsin Supreme Court held that the
term theft was susceptible to more than one meaning (including larceny,
fraud, and stealing) and therefore ambiguous.86 In Hunzinger Construction
Co. v. Granite Resources Corp.,87 a party contended that language requiring
a party to pay “for any loss, cost or expense incurred including special
damages as a result of delay in or failure to make delivery” required the
defaulting party to pay attorneys’ fees as well. The court held that the
language was ambiguous and could not be construed to require the payment
of attorneys’ fees.88
A common source of ambiguity is a contract containing inconsistent
provisions. For example, in Spencer v. Spencer, the divorce stipulation was
found to be ambiguous because it referred to maintenance but also to a
property settlement in lieu of alimony.89
Ambiguity can also be the result of not foreseeing circumstances in
which the contract will be applied. For example, in Borchardt v. Wilk, the
parties agreed that a mortgagee would be entitled to attorney fees upon a
default by the mortgagor. However, the contract was silent as to a
circumstance that actually came to pass—that is, as to whether the full
amount of the mortgagee’s attorney fees would be recoverable were the
mortgagor to assert a counterclaim arising out of the transaction and recover
nearly as much as the mortgagee on the main claim.90
84
Patti, 72 Wis. 2d at 352.
85
Duhame v. Duhame, 154 Wis. 2d 258, 266, 453 N.W.2d 149 (Ct. App.
1989).
86
Katze, 116 Wis. 2d at 211–13.
87
196 Wis. 2d 327, 538 N.W.2d 804 (Ct. App. 1995).
88
Hunzinger, 196 Wis. 2d at 339. See also Laho, 204 Wis. 2d at 489
(insurance contract found ambiguous).
89
Spencer, 140 Wis. 2d at 451.
90
Borchardt, 156 Wis. 2d at 427–28.
© April 2000, State Bar of Wisconsin CLE Books
Ch. 5 Pg. 23
§ 5.35
CHAPTER 5
A contract is not necessarily ambiguous, however, just because one of its
terms is broad enough to encompass more than one option. “Broad terms
may be used to permit flexibility in the choice of methods available [to one
party to perform the contract] without creating an ambiguity.”91 In Shanks
v. Blue Cross & Blue Shield United,92 an insured disputed whether a visit to
his doctor for a back exam within 12 months before his health insurance
policy became effective triggered a waiting period under the policy and
excluded coverage for later back surgery. The question presented was
whether the operative term treatment covered the back exam. The court
held that, although there are many different kinds of treatment, the term is
not ambiguous. “[A]n insurer does not create an ambiguous contract
provision simply by employing terms of ‘broad, general and comprehensive
scope’”; “the term ‘treatment,’ although broad and general, is not reasonably
and fairly susceptible to more than one construction.” Furthermore, that a
party is able to “‘conjure up a remotely possible second interpretation is not
sufficient to invoke the ambiguity rule.’”93
Poor choice of words in contract drafting raises the possibility that a
contract will be considered ambiguous, but poor wording alone will not
necessarily lead to a finding of ambiguity. In Rufener v. State Farm Fire
Ins. Co.,94 the court considered an exclusion from coverage for “business
pursuits” and an exception to the exclusion for “activities which are
ordinarily incident to non-business pursuits.” Although the court considered
the provision “awkwardly worded and its meaning . . . not obvious,”95 the
court held that the language was not ambiguous. The court was swayed by
a long line of cases interpreting the policy language that consistently held
that its meaning is clear and unambiguous.
91
Wilke, 108 Wis. 2d at 654 (ruling that fact that there was more than one
way for a savings and loan to make a “corresponding adjustment in [a]
required monthly payment” did not render promissory note ambiguous).
92
777 F. Supp. at 1449.
93
Quevillon v. State Farm Fire & Cas. Co., 177 Wis. 2d 160, 164, 165, 501
N.W.2d 855 (Ct. App. 1993) (quoting United States Fire Ins. Co. v. Ace Baking
Co., 164 Wis. 2d 499, 503, 476 N.W.2d 280, 282 (Ct. App. 1991)) (further
quotation omitted); see also Yauger v. Skiing Enters., Inc., 196 Wis. 2d 485,
499, 538 N.W.2d 834, rev’d on other grounds, 206 Wis. 2d 76, 557 N.W.2d 60
(1996);Wilke, 108 Wis. 2d at 654.
94
221 Wis. 2d 500, 585 N.W.2d 696 (Ct. App. 1998).
95
Id. at 507.
Ch. 5 Pg. 24
© April 2000, State Bar of Wisconsin CLE Books
CONTRACT INTERPRETATION; PAROL EVIDENCE RULE
§ 5.35
Mere silence on a point does not necessarily constitute ambiguity,96 and
a contract “is not ambiguous…purely because its language is general or
broad,”97 but the lack of specificity on a point may leave other terms
ambiguous.98 Consequently, in drafting contracts, attention should be given
to providing precise definitions of key terms that might otherwise be viewed
as ambiguous.
2. [§ 5.36] Types of Extrinsic Evidence Courts
Recognize
a. [§ 5.37] Circumstances of Contracting
Intent may be inferred from the circumstances in which the parties agreed
to enter the contract, such as the parties’ purposes for entering the contract,
as well as from the words used in the contract.99 For example, in Patti v.
Western Machine Co., the Wisconsin Supreme Court took a detailed look at
the circumstances surrounding the creation of a deferred compensation
agreement containing the ambiguous term retirement and from those
circumstances drew inferences as to whether the company agreed to give
deferred compensation to a key executive who retired before age 65.100
b. [§ 5.38] Construction by Parties
Evidence of the parties’ practical construction of an ambiguous contract
is “highly probative” of the intended meaning of the contract, and the court
will normally adopt that interpretation of the contract that the parties
themselves have adopted.101 Evidence of the parties’ construction of the
96
Kuehn, 140 Wis. 2d at 626.
97
Yauger, 196 Wis. 2d at 499, rev’d on other grounds, 206 Wis. 2d 76, 557
N.W.2d 60 (1996).
98
Borchardt, 156 Wis. 2d at 427.
99
Employers Health Ins., 161 Wis. 2d at 946; Spencer, 140 Wis. 2d at 450
(purpose of maintenance stipulation considered in light of statutory authority
for terminating maintenance upon remarriage).
100
Patti, 72 Wis. 2d at 354–55.
101
William B. Tanner Co. v. Sparta-Tomah Broadcasting Co., 716 F.2d
1155, 1158–59 (7th Cir. 1983); Shanks, 777 F. Supp. at 1448; Zweck v. DP Way
Corp., 70 Wis. 2d 426, 435, 234 N.W.2d 921 (1975); Wisconsin Natural Gas
© April 2000, State Bar of Wisconsin CLE Books
Ch. 5 Pg. 25
CHAPTER 5
§ 5.36
contract is so persuasive that a court with such evidence will normally
disregard other rules of interpretation. For example, in Kuehn v. Safeco
Insurance Co. of America, the court wrote that “when doubt as to the
meaning of a contract has been removed by the construction placed upon the
contract by the parties, as evidenced by acts or conduct, indicating a mutual
intent, the rule that [an insurance] policy must be construed against the
insurer is not to be applied.”102
c. [§ 5.39] Other Contracts Between Parties
As a general rule, contracts that are executed at the same time, by the
same contracting parties, for the same purpose, and in the course of the same
transaction, will be construed together as if one contract, even when one
does not refer to the other.103 However, the agreements will not be read
together when there is no evidence that the parties intended the agreements
to be construed together and there is no express, internal connection or
reference of incorporation between the agreements, even if signed contemporaneously.104
d. [§ 5.40] Custom and Usage
(1) [§ 5.41] In General
Courts may resort to industry knowledge to construe ambiguous technical
terms in a contract. Such terms are to be interpreted as they are usually
understood by persons in the profession or business to which they relate.105
Co., v. Gabe’s Constr. Co., 220 Wis. 2d 14, 23–24, 582 N.W.2d 118 (Ct. App.
1998); Bank of Barron v. Gieseke, 169 Wis. 2d 437, 456, 485 N.W.2d 426 (Ct.
App. 1992); R&M Mkts., Inc. v. Spatz Ctrs., Inc., No. 96-0788, 1997 WL
163619 (Ct. App. Apr. 9, 1997) (unpublished opinion not to be cited as
precedent or authority per section 809.23(3)).
102
Kuehn, 140 Wis. 2d at 626 (citation omitted).
103
O’Leary v. Sterling Extruder Corp., 533 F. Supp. 1205, 1207 (E.D. Wis.
1982); Harris v. Metropolitan Mall, 112 Wis. 2d 487, 496, 334 N.W.2d 519
(1983).
104
Conrad Milwaukee, 30 Wis. 2d at 487.
105
In re Liquidation of All-Star Ins. Corp., 112 Wis. 2d at 333.
Ch. 5 Pg. 26
© April 2000, State Bar of Wisconsin CLE Books
CONTRACT INTERPRETATION; PAROL EVIDENCE RULE
§ 5.41
Custom and usage may supply significant terms of a contract, even when
express terms addressing the subject are missing.106
(2) [§ 5.42] Contracts Subject to UCC
The Wisconsin UCC provisions explicitly recognize that custom and
usage may be consulted to determine the meaning of a sales contract.107
They define usage of trade as “any practice or method of dealing having
such regularity of observance in a place, vocation or trade as to justify an
expectation that it will be observed with respect to the transaction in
question.”108
A party need not know of the custom; if the party should have known of
it, the custom is binding.109
e. [§ 5.43] Course of Dealing
Inferences about the meaning of a disputed term may be drawn from the
way the parties have used the same contractual terms in prior dealings with
each other.110 Parties dealing for the first time may not make a claim to a
“course of dealing,” however.111
106
See Columbus Milk Producers Coop. v. Department of Agric., 48 Wis. 2d
451, 459–63, 180 N.W.2d 617 (1970).
107
See Wis. Stat. § 401.205(4). For the UCC and its adoption in Wisconsin,
see section 1.7, supra.
108
Wis. Stat. § 401.205(2).
109
Western Indus., Inc., 739 F.2d at 1202.
110
See Wis. Stat. § 402.208(1) (Wisconsin UCC); Novelly Oil Co. v. Mathy
Constr. Co., 147 Wis. 2d 613, 618 n.*, 433 N.W.2d 628 (Ct. App. 1988).
111
Ft. Howard Paper Co. v. Standard Havens, Inc., 901 F.2d 1373, 1381
(7th Cir. 1990).
© April 2000, State Bar of Wisconsin CLE Books
Ch. 5 Pg. 27
§ 5.42
CHAPTER 5
G. [§ 5.44] Canons of Construction Specific to
Insurance Contracts
Although the construction of the language of an insurance contract is
generally controlled by the same rules of construction applied to all
contracts,112 some more refined rules have evolved regarding insurance
contracts.
When the terms of a policy are plain on their face, the policy should not
be construed to bind the insurer to a risk it was unwilling to cover and for
which it was not paid.113 When the terms of a policy are, on the other hand,
ambiguous, the words are to be construed to accord with the insured’s
reasonable expectations as to what the contract meant. The “test is not what
the insurer intended the words to mean, but what a reasonable person in the
position of an insured would have understood the words to mean. Whatever
ambiguity exists in a contract of insurance is resolved in favor of the
insured.”114 The maxim that ambiguities are construed in favor of the
112
Arkwright-Boston Mfrs. Mut. Ins. Co., 818 F.2d at 593; Peace v.
Northwestern Nat. Ins. Co., 228 Wis. 2d 106, 120, 596 N.W.2d 429 (1999);
Donaldson v. Urban Land Interests, Inc., 211 Wis. 2d 224, 230, 564 N.W.2d
728 (1997); Hills, 209 Wis. 2d at 175.
113
Bradley Bank v. Hartford Accident & Indem. Co., 737 F.2d 657, 660 (7th
Cir. 1984); Shanks, 777 F. Supp. at 1447; Peace, 228 Wis. 2d at 121 (“[T]his
principle does not allow a court to eviscerate an exclusion that is clear from
the face of the insurance policy.”); Smith v. Katz, 226 Wis. 2d 798, 807, 595
N.W.2d 345 (1999); Maas, 172 Wis. 2d at 79, 82; Garriguenc, 67 Wis. 2d at
135; Meyer v. United States Fire Ins. Co., 218 Wis. 2d 499, 503, 582 N.W.2d
40 (Ct. App. 1998); Davis v. Allied Processors, Inc., 214 Wis. 2d 294, 300–01,
571 N.W.2d 692 (Ct. App. 1997).
114
Hull v. State Farm Mut. Automobile Ins. Co., 222 Wis. 2d 627, 637–39,
586 N.W.2d 863 (1998); Katze, 116 Wis. 2d at 213 (quoting Garriguenc v.
Love, 67 Wis. 2d at 134–35); see also Arkwright-Boston Mfrs. Mut. Ins. Co.,
818 F.2d at 594 (quoting Kremers-Urban Co. v. American Employers Ins. Co.,
119 Wis. 2d 722, 735, 351 N.W.2d 156 (1984)); C&S Mfg. Corp. v. United
States Fire Ins. Co., 822 F. Supp. 1330, 1332 (E.D. Wis. 1992), aff’d, 993 F.2d
1304 (7th Cir. 1993); Nelson v. McLaughlin, 211 Wis. 2d 487, 509, 565 N.W.2d
123 (1997); Hills, 209 Wis. 2d at 175; Handal, 79 Wis. 2d at 77 (“Contracts of
insurance should not be construed through the magnifying eye of a technical
lawyer, but rather from the standpoint of what an ordinary man would believe
the contract to mean.”) Milbrandt v. Huber, 149 Wis. 2d 275, 291, 440 N.W.2d
807 (Ct. App. 1989) (test is an objective one).
Ch. 5 Pg. 28
© April 2000, State Bar of Wisconsin CLE Books
CONTRACT INTERPRETATION; PAROL EVIDENCE RULE
§ 5.44
insured and against the insurer has particular force when ambiguity lies in
an exclusionary clause.115
H. [§ 5.45] Canons of Construction Specific to
Government Contracts
When construing a contract between the State of Wisconsin and another
party, additional canons of construction may come into play. First, the
contracting state agency is authorized to contract only insofar as it is
empowered, expressly or as necessarily implied.116 Second, all parties
contracting with the state are presumed to know state law.117 For example,
in Brown v. State, the winning state lottery ticket issued to the plaintiff did
not expressly state that her winnings would be paid out over 25 years; it
simply called for payments in 25 “installments.” The state refused the
plaintiff’s demand for payment in monthly installments. The court sided
with the state, explaining that the contract on which the plaintiff made her
demand was to be construed in light of state laws and regulations that
unambiguously provide for lottery payments over twenty-five years.
V. [§ 5.46] What Is in Contract and What Is Not: Parol
Evidence Rule, Battle of the Forms, and
Supplying Omitted Terms
A. [§ 5.47] Parol Evidence Rule
1. [§ 5.48] Purpose
The parol evidence rule is not a rule of evidence118 but a rule of contract
law. Its purpose is to lend integrity, certainty, and predictability to contracts
that have been sufficiently formalized. It accomplishes this purpose by
115
Donaldson, 211 Wis. 2d at 230; Just, 155 Wis. 2d at 746; Ennis, 225 Wis.
2d at 833–34; Hull, 203 Wis. 2d at 553.
116
Brown v. State, 230 Wis. 2d 355, 377–78, 602 N.W.2d 79 (Ct. App.
1999).
117
Id.
118
Spring Valley, 94 Wis. 2d at 607; Cobb State Bank v. Nelson, 141 Wis.
2d 1, 6, 413 N.W.2d 644 (Ct. App. 1987). In fact, a court is required to
disregard parol evidence even if no party objects on that ground. Schmitz, 141
Wis. 2d at 872.
© April 2000, State Bar of Wisconsin CLE Books
Ch. 5 Pg. 29
CHAPTER 5
§ 5.45
barring a court from considering other agreements that the parties may have
made during their negotiations leading up to the contract or evidence that the
parties might offer to “explain” their purposes in agreeing to the contract.
The contract is thereby kept safe from variance, contradiction, or doubt
arising out of things that were said or beliefs that were tentatively held prior
to the contract.
2. [§ 5.49] Debilitation of Parol Evidence Rule
In a previous time, agreements were sealed with one’s word. In the
modern era, however, we have come to place our faith in documents. The
parol evidence rule was once a stalwart protector of that faith, protecting the
righteousness, finality, and clarity of documents from the infiltration and
insidiousness of unwritten understandings.
As time has progressed, however, we have fallen away from the faith.
Courts and litigants alike pay less respect to the parol evidence rule and give
much more consideration to evidence beyond the four corners of the
document than they did before. In its basic operation the rule requires a
court to turn a blind eye towards such evidence. As the rule is applied
presently, however, courts use a variety of means (including exceptions,
excuses, and provisos) that they have created to sneak a peak at the evidence
lying outside the four corners of the contract. As the Wisconsin Supreme
Court explained:
Although the parol evidence rule thus stated appears simple and makes
good sense—the final agreement of the parties supersedes earlier
negotiations—it “is in fact a maze of conflicting tests, subrules and
exceptions adversely affecting both the counseling of clients and the
litigation process.” . . . Several writers have commented that there are few
subjects in the law seemingly as indefinite and uncertain of application as
the so-called rule of integration or merger of prior or contemporaneous
negotiations.119
Commentators are unified in the view that the modern trend in applying the
parol evidence rule is toward increasing liberality in the admission of parol
agreements.120
119
Federal Deposit Ins. Corp. v. First Mortgage Investors, 76 Wis. 2d 151,
156, 250 N.W.2d 362, 365 (1977) (footnotes omitted).
120
See, e.g., 11 Lord, Williston on Contracts § 33.4 at 576 (4th ed. 1999).
Ch. 5 Pg. 30
© April 2000, State Bar of Wisconsin CLE Books
CONTRACT INTERPRETATION; PAROL EVIDENCE RULE
§ 5.49
Ultimately, it seems, courts and litigants have lost faith in the wisdom of
the rule and would prefer that a court look over all of the evidence before
deciding whether to rely just on the contract in determining the parties’
intent. In so doing, the courts have drastically altered the rule. The rule
once rigorously excluded extrinsic evidence from consideration, streamlined
proceedings, and left no doubt as to the validity of a formal written
agreement; it now acts hardly as a barrier at all. For a once vital, respected
doctrine, it is hard to imagine a more unflattering comparison than that
recently bestowed by the court of appeals: “The parol evidence rule, like the
dead man’s statute, is an exclusionary rule not favored by the law. Its
application is limited and its use narrow.”121
3. [§ 5.50] Elements
a. [§ 5.51] Summary of Elements122
In construing an
1. unambiguous,
2. written,
3. integrated
contract, a court may not consider evidence of
4. prior or contemporaneous
5. agreements among the parties, or
6. evidence of their intentions regarding the contract.123
The rule applies to a narrow set of integrated, or partially integrated,
contracts. An integrated contract is one that the parties intend to be the
final, complete expression of their agreement.
The rule does not bar all evidence of extrinsic agreement or intent—only
agreements made or intentions expressed prior to the execution of an
unambiguous contract. The rule does not bar the admission of evidence of
121
Cobb State Bank, 141 Wis. 2d at 7.
122
Each of these elements is discussed in greater detail in the following
sections, and authority for each of these elements is cited there.
123
Spring Valley, 94 Wis. 2d at 607; Schmitz, 141 Wis. 2d at 872 n.4 (“[T]he
parol evidence rule prohibits a trial court from inquiring into the intent of
parties to an unambiguous written agreement.”).
© April 2000, State Bar of Wisconsin CLE Books
Ch. 5 Pg. 31
CHAPTER 5
§ 5.50
alleged oral agreements that are formed subsequent to the original contract
(such as modifications).124 Further, the rule does not preclude the consideration of evidence adduced to (1) determine whether the contract is
integrated125 in the first place or (2) show that the contract is invalid.126
b. [§ 5.52] Is Agreement in Writing?
The rule applies only to agreements that are reduced to writing,127
although the entire agreement need not be written.128
c. [§ 5.53] Is Agreement Integrated?
(1) [§ 5.54] Integration Defined
An integrated agreement is an agreement that addresses all that has been
agreed upon, showing that the negotiations are final and resolute. The party
seeking to invoke the parol evidence rule must show that the document
proffered as the integrated agreement was intended to be the final definition
of all rights and obligations. For example, in Lakeside Bridge & Steel Co.,
the executives of two parties to a dispute executed a handwritten settlement
agreement. Later, an issue arose as to whether the agreement covered all of
the claims between them. The court declined to enter summary judgment
because there was a dispute as to whether the document was intended to be
the final, complete agreement between the parties.129 In Kramer v. Alpine
Valley Resort, as another example, the contract at issue, a lease agreement,
was “one minor aspect of a larger business relationship.” Consequently, the
court found that the parol evidence rule was inapplicable.130
124
See infra §§ 7.14, .16.
125
See infra § 5.62.
126
See infra § 5.64.
127
See, e.g., Federal Deposit Ins. Corp., 76 Wis. 2d at 156.
128
For further discussion, see section 5.55, infra (partially integrated
agreements).
129
Lakeside Bridge & Steel Co. v. Mountain State Constr. Co., 400 F. Supp.
273, 278 (E.D. Wis. 1975).
130
Kramer v. Alpine Valley Resort, Inc., 108 Wis. 2d 417, 424, 426, 321
N.W.2d 293, 297, 298 (1982).
Ch. 5 Pg. 32
© April 2000, State Bar of Wisconsin CLE Books
CONTRACT INTERPRETATION; PAROL EVIDENCE RULE
§ 5.54
There may be circumstances in which two separate-but-contemporaneously-signed contracts exist. If neither contract contains an unambiguous
integration clause, the court may construe the two contracts as one.131 Even
if one of the two separate contracts does contain an unambiguous merger
clause, a court would be free to consider the other contract at least to the
degree necessary to determine whether the parties truly believed the mergercontaining contract was their final, complete agreement.132
(2) [§ 5.55] Fully vs. Partially Integrated
Agreements
There is an exception to the parol evidence rule for agreements that
supplement but do not contradict an agreement. Such an agreement is called
partially integrated. The insurance policy in Kuehn v. Safeco Insurance Co.
of America is an example of a partially integrated contract. That policy was
missing an endorsement containing a critical definition. The court of
appeals held that parol evidence was properly admitted as to the parties’
intent regarding the missing definition. However, the court was careful to
point out that “it is proper to consider parol evidence which establishes the
full agreement as long as the parol evidence does not conflict with the part
that has been integrated in writing.”133
Partial integration is the norm under the Wisconsin UCC provisions
governing contracts for the sale of goods.134 A court will bar evidence of
consistent additional terms only when it finds the writing to have been
intended also as a complete and exclusive statement of the terms of the
agreement.135
131
See supra § 5.39.
132
See infra § 5.62 (parol evidence is always admissible to show whether
the parties intended their agreement to be the final one).
133
Kuehn, 140 Wis. 2d at 624; see also Conrad Milwaukee, 30 Wis. 2d at
488 (oral part of agreement cannot contradict written part).
134
Wis. Stat. ch. 402; see Wis. Stat. §§ 402.102, .105(1)(c) (defining goods);
supra § 1.7 (UCC and its adoption in Wisconsin).
135
See Wis. Stat § 402.202(2).
© April 2000, State Bar of Wisconsin CLE Books
Ch. 5 Pg. 33
CHAPTER 5
§ 5.55
(3) [§ 5.56] Value and Use of Merger and
Integration Clauses
Use of an unambiguous integration clause136 is the only sure way to
exclude the risk that agreements or statements made during negotiation will
come back to haunt the parties. Such a clause should be drafted to
“exclud[e] additional understandings or agreements not contained in the
writing,” and “expressly negative[ ] collateral or antecedent understandings.”137
A well-drafted integration clause may not only cancel all prior agreements and nullify use of prior oral representations in construing a present
contract, but also preclude an opponent from upending the contract on a
theory of promissory estoppel.138 Promissory estoppel is a doctrine that
provides for the enforcement of specific promises that have induced
substantial reliance by the promisee.139 For example, in Kinn v. Coast
Catamaran Corp.,140 a would-be dealer attempted to assert that the
defendant was bound by promissory estoppel to an oral dealership agreement, the terms of which were broader and more protective of the dealer
than the written contract the parties had entered. The Kinn court rejected the
promissory estoppel theory because it hinged on recognizing an oral
agreement that was explicitly addressed in the integration clause contained
in the parties’ written contract.
136
Such clauses are also known as merger or merger and integration
clauses.
137
Spring Valley, 94 Wis. 2d at 608.
138
Durkee v. Goodyear Tire & Rubber Co., 676 F. Supp. 189, 191–92 (W.D.
Wis. 1987) (“To entertain a theory of recovery that makes a prior, inconsistent
promise enforceable is to write the rule out of existence.”).
139
See Hoffman v. Red Owl Stores, Inc., 26 Wis. 2d 683, 698, 133 N.W.2d
267, 275 (1965); see also supra §§ 2.73–.79 (promissory estoppel in context
of formation essentials).
140
582 F. Supp. at 687.
Ch. 5 Pg. 34
© April 2000, State Bar of Wisconsin CLE Books
CONTRACT INTERPRETATION; PAROL EVIDENCE RULE
§ 5.56
4. [§ 5.57] Effect on Agreements and Expressions of
Intent “Outside” Contract
a. [§ 5.58] Contradictory or Substitute
Agreements or Intentions
If it is shown that an unambiguous written contract was intended to be
final and complete, no evidence may be considered that would vary or
contradict any of the terms of the contract,141 although courts do not appear
rigorous in their analysis of these factors.
For example, in Schmitz v. Grudzinski, the trial court admitted evidence
about the intended scope of a security agreement. The court of appeals
reversed, holding that the language of the security agreement was unambiguous (the court did not address the question of finality, perhaps because the
parties may not have made it an issue), and the evidence the trial court relied
upon varied the terms of the security agreement.142 Likewise, in Milwaukee
Valve Co. v. Mishawaka Brass Manufacturing, Inc., the court found delivery
terms in a contract for the supply of copper ingot to be unambiguous. The
trial court refused to consider parol evidence of a telephone conversation
that preceded the issuance of the purchase order and concerned the delivery
of the ingot: “The record indicates that the rejected evidence was offered
solely to contradict the delivery terms specified in the purchase order . . .
The evidence can in no way be construed as explanatory or supplemental,
and goes to the accuracy of the contract, not its finality.”143
141
Kramer, 108 Wis. 2d at 426; see also United States v. Arrowood, 717 F.
Supp. 1405, 1408 (E.D. Wis. 1989).
142
Schmitz, 141 Wis. 2d at 872.
143
107 Wis. 2d 164, 170, 319 N.W.2d 885, 888 (Ct. App. 1982); see also
Durkee, 676 F. Supp at 191 (barring parol evidence, and explaining that “[t]he
issue to which plaintiffs wish to offer parol evidence . . . is one which is
directly addressed by the written contract”); Conrad Milwaukee, 30 Wis. 2d at
488 (oral testimony must “clarify an existing ambiguity” and may not establish
an understanding in variance with terms of written document).
© April 2000, State Bar of Wisconsin CLE Books
Ch. 5 Pg. 35
CHAPTER 5
§ 5.57
b. [§ 5.59] Consistent Additional, Supplemental,
or Side Agreements
The parol evidence rule does not bar the enforcement of collateral or
supplemental agreements, or evidence that explains the parties’ agreement,
if the agreements or other evidence do not vary or contradict the terms of the
parties’ contract.144 An example of such an agreement is a side letter, a
common device used in complex negotiations.145
With regard to insurance contracts, it should be noted that correspondence about the contract can become an enforceable supplemental agreement. Correspondence about the contract can become part of the contract
when the parties have plainly manifested their intent to make subsequent
correspondence part of the contract.146
Assessing whether a side agreement is truly consistent requires taking
into account all facts that might make a side agreement inconsistent, such as
oral modifications, parol agreements to the side agreement, and so forth.
5. [§ 5.60] Effect on Negotiations Relating to
Contract
When the parol evidence rule applies, it excludes extrinsic evidence of
the parties’ intentions regarding the contract. In Schmitz v. Grudzinski, for
example, the court of appeals barred the admission of evidence of a bank
officer’s statement of intent regarding the scope of the unambiguous security
agreement. The court wrote that “[p]arol evidence is inadmissible to vary
or explain unambiguous written terms . . . The trial court was required to
disregard the parol evidence of [the parties’] intent.”147
144
See Ft. Howard Paper Co., 901 F.2d at 1381.
145
See Reports Corp. v. Technical Publishing Co., 411 F.2d 168, 173 (7th
Cir. 1969); Restatement (Second) of Contracts, §§ 210 cmt. a, 216 (1979).
Note that such additional supplemental and side agreements are not barred by
partially integrated agreements, except to the extent the provisions of the
partially integrated agreement specifically bar reference to the particular side
agreement in question.
146
Handal, 79 Wis. 2d at 76.
147
Schmitz, 141 Wis. 2d at 872.
Ch. 5 Pg. 36
© April 2000, State Bar of Wisconsin CLE Books
CONTRACT INTERPRETATION; PAROL EVIDENCE RULE
§ 5.60
6. [§ 5.61] Exceptions to Applicability
a. [§ 5.62] To Establish Integration and Intent
Parol evidence is always “admissible to show whether the parties
intended to assent to the writing as the final and complete (or partial)
statement of their agreement.”148 The court need not limit itself to the text
of the document itself in making this determination; it has wide latitude to
inquire into the circumstances surrounding the contract.149 Thus, when the
written terms of the parties’ agreement do not unambiguously show whether
they intended the document to be the final expression of their agreement, the
court may consider “facts and circumstances surrounding the execution of
the writing” to determine whether the parties intended an integrated
document.150
b. [§ 5.63] To Resolve Ambiguity
The rule does not bar a court from considering extrinsic evidence to
determine the meaning of an ambiguous contract.151
c. [§ 5.64] To Show Contract Invalid
The existence of a fully integrated agreement does not bar a party from
showing that the agreement was without consideration and is therefore
unenforceable.152
Parol evidence is admissible when a party makes a sufficient showing
that the agreement sought to be enforced was a product of fraud or abuse of
bargaining power.153 In Bank of Sun Prairie v. Esser, for example, a party
148
Spring Valley, 94 Wis. 2d at 608; Cobb State Bank, 141 Wis. 2d at 7.
149
Spring Valley, 94 Wis. 2d at 608; Cobb State Bank, 141 Wis. 2d at 7;
Restatement (Second) of Contracts § 210 cmt. b (1979).
150
Lakeside Bridge & Steel Co., 400 F. Supp. at 277–78.
151
See supra §§ 5.33–.35 (what constitutes ambiguity and use of extrinsic
evidence to resolve).
152
See Restatement (Second) of Contracts § 214(d) & cmt. c (1979); see
supra §§ 2.51–.72 (requirement of consideration).
153
Bank of Sun Prairie, 155 Wis. 2d at 731.
© April 2000, State Bar of Wisconsin CLE Books
Ch. 5 Pg. 37
CHAPTER 5
§ 5.65
accused a bank of fraudulently inducing the party to sign a personal
guaranty. The bank argued that evidence of the alleged misrepresentation
was barred by the parol evidence rule because it would contradict the
express language of the guaranty. The court held that the rule does not bar
consideration of parol evidence to show fraud, misrepresentation, or other
grounds that void a contract.154
Similarly, in H&M Italian Food Corp. v. General Growth Development
Corp., the court of appeals held in an unpublished opinion that parol
evidence was admissible in the case of an alleged intentional deceit even
though the evidence was in direct conflict with a formal written real estate
lease governed by the statute of frauds.155 The court explained that “equity
will not permit the statute designed to prevent fraud to be used as an
instrument of fraud.”156
There are other grounds besides fraud upon which a court may void an
otherwise enforceable contract, such as illegality, unconscionability, duress,
and mutual mistake.157 The parol evidence rule does not bar a court from
considering evidence outside the contract that would establish those grounds
for avoiding a contract.158
d. [§ 5.65] When Contract Is Subject to UCC
The Wisconsin UCC, which governs most contracts for the sale of
goods,159 codifies the parol evidence rule in terms similar in all respects to
the foregoing but permits the admission of certain evidence that is otherwise
154
Id. at 730–31; see supra §§ 3.3–.10 (misrepresentation).
155
No. 88-1257, 1989 WL 53664 (Wis. App. Mar. 21, 1989) (unpublished
opinion not to be cited as precedent or authority per section 809.23(3)). For
discussion of statutes of frauds, see Chapter 4, supra.
156
Id. at *2.
157
See generally supra §§ 3.21–.37 (illegal and unconscionable contracts),
3.38–.46 (contracts made under duress), 3.17–.19 (contracts made as a result
of mutual mistake).
158
Spring Valley, 94 Wis. 2d at 608; Federal Deposit Ins. Corp., 76 Wis. 2d
at 156; Erickson, 183 Wis. 2d at 118 n.3; Restatement (Second) of Contracts
§ 214(d) (1979).
159
See Wis. Stat. §§ 402.102, .105(1)(c) (defining goods); see also supra
§ 1.7 (UCC and its adoption in Wisconsin).
Ch. 5 Pg. 38
© April 2000, State Bar of Wisconsin CLE Books
CONTRACT INTERPRETATION; PAROL EVIDENCE RULE
§ 5.64
barred by the rule. The Wisconsin UCC provisions explicitly provide that
integrated agreements “may be explained or supplemented” but not
contradicted160 by any of the following:
1. Course of dealing or usage of trade (see section 401.205 of the Wisconsin Statutes161)
2. Course of performance (see section 402.208)
3. Consistent additional terms (see section 402.202)
7. [§ 5.66] Tactical Use
Although it has been the experience of many that courts will bend the
parol evidence rule and naturally look beyond the four corners of the
agreement, one commentator suggests that a court’s willingness to do so
may depend on the sophistication of the parties to the contract.162 As an
example, in Bank of Sun Prairie v. Esser, the court held that an unsophisticated party who had not read the fine print of a guaranty agreement was
entitled to introduce parol evidence on whether the party justifiably relied
on representations. The court implied that the party’s status was a
consideration in its decision, stating that all the circumstances must be
considered, including the contracting party’s intelligence and experience.163
Thus, how one characterizes the contract, the circumstances of its
negotiation, and the nature of the extrinsic evidence may make a difference
as to whether parol evidence will be admitted. It will be easier to persuade
a court to admit parol evidence if it is characterized as anything but an
alleged prior understanding that is being substituted for the unambiguous
meaning of the terms of the written agreement. Instead, the contract should
be depicted as an informal agreement, a side agreement, or an ambiguous
agreement, to the extent the evidence will support such a theory. Courts are
160
See 1 James J. White & Robert S. Summers, Uniform Commercial Code
§ 2-10, at 89 (4th ed. 1995).
161
Textual references to the Wisconsin Statutes are hereinafter indicated as
“chapter xxx” or “section xxx.xx,” without the designation “of the Wisconsin
Statutes.”
162
Michael A. Lawrence, The Parol Evidence Rule in Wisconsin: “Status
in the Law of Contract,” Revisited, 1991 Wis. L. Rev. 1071.
163
155 Wis. 2d at 732–34.
© April 2000, State Bar of Wisconsin CLE Books
Ch. 5 Pg. 39
CHAPTER 5
§ 5.65
more likely to admit parol evidence, even if the contract is formal, if the
contract can be characterized as an ambiguous agreement or if the parol
evidence can be characterized as a side agreement as opposed to a substitution of new terms into a clear written agreement.164
B. [§ 5.67] Battle of the Forms
1. [§ 5.68] The Problem
The forms that contracting parties customarily use to express their
agreements are a fertile source of dispute. Parties rely upon forms because
it is expedient to do so and because it is inefficient and costly to negotiate
anew every term of every contract in a series of transactions involving the
same goods or services.
Expediency and efficiency notwithstanding, however, reliance upon
forms often and quite predictably leads to confusion, ambiguity, and
uncertainty. Sellers and buyers alike use form contracts, and for the same
reasons, but it is doubtful that any one seller’s form will be the mirror image
of any one buyer’s form. Indeed, the contrary is probable. Sellers draft
their forms to give them an advantage over buyers, and buyers draft their
forms to defeat any advantage the seller might seek or to give the buyers
their own advantages.165 When form contracts are used, it is thus predictable that the terms of the forms will diverge and that disputes will arise as
to whether a contract was formed and which terms govern the performance
of the contract.
The common law’s solution to this problem was simple. At common
law, if the forms were not mirror images of one another, no contract would
be deemed to have been formed; the second form would be deemed a
counteroffer, not an acceptance.166 The problem with this solution is that it
gave parties who had the intent to form a contract, and who even may have
begun performing the contract, a technical ground to declare the contract
invalid and back out.
164
See Lawrence, supra n.162, at 1073 & n.17.
165
See generally U.C.C. § 2-207 cmt. 1; White & Summers, supra n.160, at
6–7.
166
See Air Prods. & Chems., Inc. v. Fairbanks Morse, Inc., 58 Wis. 2d 193,
211, 206 N.W.2d 414 (1973); supra § 2.32 (“acceptance” on terms varying
from offer).
Ch. 5 Pg. 40
© April 2000, State Bar of Wisconsin CLE Books
CONTRACT INTERPRETATION; PAROL EVIDENCE RULE
§ 5.69
2. [§ 5.69] A Partial Solution: Contracts Subject to
UCC
The battle of the forms is abated somewhat by a provision of the
Wisconsin UCC—section 402.207. Thus, at least in contract disputes
involving contracts for the sale of goods,167 form contract disputes do not
necessarily lead to the invalidation of the contract.
Section 402.207 (corresponding to section 2-207 of the Uniform
Commercial Code (UCC)) attacks the battle-of-the-forms problem in three
distinct ways. First, conflicting forms are treated not as counteroffers but
as acceptances unless the acceptance is expressly made conditional on assent
to its additional or different terms.168 This tends to check the uncertainty as
to whether a contract was formed in the first place and prevents parties from
using technical grounds to back out of bad deals.
Second, section 402.207 sets forth criteria for determining whether and
when additional terms have been added to the contract through acceptance
or confirmation. Under section 402.207(2), it is presumed that the
additional terms set forth in a confirmation or acceptance are effective
unless (1) the offer expressly limits acceptance to the terms of the offer,
(2) the additional terms materially alter the offer, or (3) the offeror objects
to the terms within a reasonable time after notice of them is received.169
The first and third of these criteria are fairly self-explanatory. With
regard to the second criteria—that is, whether an additional term “materially
alters” the offer—the test is whether the additional term would surprise or
work an unreasonable hardship on the offeror.170 Wisconsin courts have
addressed the second criteria in terms of whether form contracts containing
form damage disclaimers or form indemnification provisions are enforceable. In Wisconsin, when a party seeks to add such terms to a contract by
acceptance or confirmation, such terms are considered to “materially alter”
the offer and therefore are not enforceable unless the other party expressly
167
See Wis. Stat. §§ 402.102, .105(1)(c) (defining goods); see also supra
§ 1.7 (UCC and its adoption in Wisconsin).
168
Wis. Stat. § 402.207(1).
169
Wis. Stat. § 402.207(2); see also U.C.C. § 2-207 cmt. 6 (regarding effect
of offeror’s failure to object to additional terms within reasonable time after
receiving notice of them).
170
See U.C.C. § 2-207 cmt. 4.
© April 2000, State Bar of Wisconsin CLE Books
Ch. 5 Pg. 41
CHAPTER 5
§ 5.69
agrees to them.171 Credit terms providing for the payment of interest on
overdue invoices have been held not to “materially alter” the offer.172
Professors White and Summers, authors of the leading treatise on the
UCC, identify eight distinct scenarios in which the three criteria contained
in section 402.207(2) might come into play. In one scenario, for example,
one form contains a clause of which no mention whatsoever is made in the
other form (i.e., one form calls for arbitration of all disputes, but the other
form does not address the issue of dispute resolution). In another scenario,
both forms address an issue but call for conflicting outcomes (i.e., one form
requires all disputes to be arbitrated, and the other form confers exclusive
jurisdiction in a designated federal court). Giving due consideration to each
of these scenarios is beyond the scope of this work, and the reader is
encouraged to refer directly to the discussion in White and Summers.173
The third way in which section 402.207 addresses the battle-of-the forms
problem is to recognize and enforce legitimate contractual bargains even if
the forms used by the parties would technically defeat an enforceable
contract. Not infrequently, each of the parties to a contract uses a form
reciting the boilerplate that the terms of that form are exclusive and that no
other terms will be honored. In such a circumstance, however, section
402.207(3) makes it possible for a contract to form anyway. It provides that
a contract may form by reason of the parties’ conduct, to the extent that their
conduct manifests an agreement to a contract, notwithstanding the provisions
of their form offers and confirmations. Section 402.207(3) states that
Conduct by both parties which recognizes the existence of a contract is
sufficient to establish a contract for sale although the writings of the parties
do not otherwise establish a contract. In such case the terms of the
particular contract consist of those terms on which the writings of the
parties agree, together with any supplementary terms incorporated under
any other provisions of chs. 401 to 411.
171
Air Prods. & Chems., Inc., 58 Wis. 2d at 214; Resch v. Greenlee Bros. &
Co., 128 Wis. 2d 237, 244–45, 381 N.W.2d 590 (Ct. App. 1985).
172
See Advance Concrete Forms, Inc. v. McCann Constr. Specialties Co.,
916 F.2d 412, 415–16 (7th Cir. 1990).
173
See White & Summers, supra n.160, at 6–31.
Ch. 5 Pg. 42
© April 2000, State Bar of Wisconsin CLE Books
CONTRACT INTERPRETATION; PAROL EVIDENCE RULE
§ 5.72
In a case involving a dispute over conflicting warranties,174 the court
considered whether the language referring to “supplementary terms” permits
a court to add to the contract only those “supplementary terms” expressly
provided in the UCC (such as the implied warranties spelled out in section
402.314) or whether the parties may import into their agreement other terms
that are not spelled out in the UCC but may be implied from the parties’
course of performance, course of dealing, usage of trade, and so forth. In
resolving the question, the court noted differences in the language of
Wisconsin’s version of the UCC as compared to the versions found in other
states, such as New York. The court held that under Wisconsin’s version
the language “supplementary terms” was not meant to limit the contract to
“gap-filler” contractual terms explicitly stated in the UCC.175
3. [§ 5.70] Counseling Clients on Use of Form
Contracts
In advising clients on the use of form contracts, the conventional wisdom
is that it is not possible to draft a form in such a way as to ensure a client
that the client’s contract will always govern and always on the client’s own
terms.176 Consequently, the best advice to a client is this: “If a certain term
is essential, be sure to negotiate it explicitly and obtain the adverse party’s
explicit agreement to it.”
C. [§ 5.71] Supplying Omitted or “Implied” Terms
1. [§ 5.72] In General
What parties leave out of their contracts can be as troublesome as what
they put in. Parties to a contract may entirely fail to foresee a situation in
which the performance of one or both parties will be impaired. Parties may
deliberately ignore certain subjects, out of faulty assumptions about how the
contract will operate or whether the subject makes a difference. Indeed,
174
Dresser Indus., Inc. v. Gradall Co., 965 F.2d 1442 (7th Cir. 1992); see
infra § 6.34 (discussing Dresser in context of applying course of performance,
course of dealing, usage of trade to establish implied warranties in contracts
subject to Wisconsin UCC).
175
Dresser, 965 F.2d at 1450–51 (distinguishing C. Itoh & Co. v. Jordan
Int’l Co., 552 F.2d 1228 (7th Cir. 1977) (decided under New York law)).
176
See White & Summers, supra n.160, at 31.
© April 2000, State Bar of Wisconsin CLE Books
Ch. 5 Pg. 43
CHAPTER 5
§ 5.73
certain terms may be omitted simply because the parties found them
unpleasant to discuss or likely to produce an impasse.
In such a circumstance, the fundamental pursuit of contract interpretation
—ascertaining the parties’ mutual intent—will prove fruitless because the
parties simply did not form any. The court must fill a void when no
evidence of intent exists and when, consequently, the tools of contract
interpretation are useless.
Although Wisconsin courts are wary of inserting into contracts terms that
the parties themselves failed to insert,177 the courts have endorsed178 the
principles of the Restatement (Second) of Contracts in such situations:
“When the parties to a bargain sufficiently defined to be a contract have not
agreed with respect to a term which is essential to a determination of their
rights and duties, a term which is reasonable in the circumstance is supplied
by the court.”179
In determining what is “reasonable in the circumstance,” a court might
try to reconstruct the process the parties followed in reaching their meeting
of the minds. It might ask what the parties would have agreed to if the
question had been brought to their attention. These extrapolations are highly
unreliable, however, without clear evidence of the parties’ intentions. If
such evidence exists, the fact that the parties are in dispute with one another
makes it unlikely that such intent will prove mutual.
The comment to the Restatement suggests that the court instead “supply
a term which comports with community standards of fairness and policy
rather than analyze a hypothetical model of the bargaining process.”180
Trade custom, for example, is recognized as a fruitful source of these
standards.181
177
See supra § 5.21 (purpose of interpretation is determining and enforcing
parties’ intent).
178
See Spencer, 140 Wis. 2d at 451 (remanding to permit trial court to
supply missing term to stipulation regarding maintenance payments upon
remarriage).
179
Restatement (Second) of Contracts § 204 (1979).
180
Id. cmt. d.
181
Columbus Milk Producers Coop., 48 Wis. 2d at 459–60.
Ch. 5 Pg. 44
© April 2000, State Bar of Wisconsin CLE Books
CONTRACT INTERPRETATION; PAROL EVIDENCE RULE
§ 5.74
2. [§ 5.73] Duration of Contract
Most contracts that are silent as to duration are construed to be terminable at will or are declared void for failing to comply with an applicable
statute of frauds.182 Most contracts that provide that they are to continue for
an indefinite period will be deemed to continue for a reasonable time
considering the circumstances.183
3. [§ 5.74] Time and Other Details of Performance184
When a contract is of a definite duration but fails to state a deadline for
performance, a reasonable time for performance will be implied.185 Time
is not ordinarily regarded of the essence unless the contract so states or the
circumstances indicate that the parties intended time to be of the essence.186
For example, in Employers Ins. v. Jackson,187 the court held that time was
of the essence in a contract setting deadlines for the nomination of an
arbitrator. Among the factors the court considered were the language of the
contract and the reaction of one of the parties when the other party attempted
to nominate an arbitrator after the 30-day deadline stated in the contract.188
Option agreements fall within an exception to this general rule, however.
Time is ordinarily of the essence to an option agreement whether or not the
agreement specifically so provides.189
With regard to other aspects of performance, there are only a few
examples of published decisions in which the court supplied some specific
of performance that was neglected by the parties at the time they drew up
182
Landess v. Borden, Inc., 667 F.2d 628, 632–33 (7th Cir. 1981). For
discussion of statutes of frauds, see Chapter 4, supra.
183
See Wis. J.I.—Civil 3049 (1993).
184
See infra §§ 12.8 (full performance discharges duty; best efforts);
12.10–.15 (implied aspects of performance).
185
William B. Tanner Co., 716 F.2d at 1158–59; Schneider v. Schneider, 132
Wis. 2d 171, 175, 389 N.W.2d 835, 837 (Ct. App. 1986).
186
Huntoon, 57 Wis. 2d at 452.
187
190 Wis. 2d 597, 527 N.W.2d 681 (1995).
188
190 Wis. 2d at 616–18.
189
Clear View Estates, Inc. v. Veitch, 67 Wis. 2d 372, 378, 227 N.W.2d 84,
87 (1975); see supra §§ 2.24–.27 (option contracts generally).
© April 2000, State Bar of Wisconsin CLE Books
Ch. 5 Pg. 45
CHAPTER 5
§ 5.75
their agreement. An agreement to transplant trees and landscape grounds
was held to imply that the landscaper will use a degree of diligence and skill
adequate to perform the undertaking.190 Similarly, a written contract calling
for a contractor to “furnish and install . . . precast basement beams” was
held to require the contractor to furnish and install a properly designed prestressed concrete system sufficient to support the weight that the architectural plans and specifications showed would be placed on the beams when
the building was complete.191
Plans and specifications that are not agreed upon may not be incorporated
into a contract by reference without some identification in the original
contract and some form of adoption by the person sought to be charged with
performance.192
A “best efforts” clause may be implied in an exclusive distributorship
contract.193
4. [§ 5.75] Price
In contracts governed by the Wisconsin UCC, at least, a court must
supply a reasonable price even if the parties have left the term open.194
190
Coryell v. Bluett, 251 Wis. 458, 29 N.W.2d 741 (1947).
191
Stevens Constr. Corp. v. Carolina Corp., 63 Wis. 2d 342, 217 N.W.2d
291 (1974).
192
Martinson v. Brooks Equip. Leasing, Inc., 36 Wis. 2d 209, 217, 152
N.W.2d 849 (1967).
193
General Beverage Sales Co.-Oshkosh v. East Side Winery, 396 F. Supp.
590, 593 (E.D. Wis. 1975).
194
See Wis. Stat. § 402.305; see, e.g., Schmieder v. Standard Oil Co., 69
Wis. 2d 419, 230 N.W.2d 732 (1975); see also supra § 1.7 (UCC and its
adoption in Wisconsin).
Ch. 5 Pg. 46
© April 2000, State Bar of Wisconsin CLE Books
CONTRACT INTERPRETATION; PAROL EVIDENCE RULE App. 5A
Appendix 5A
Checklist of Rules of Contract Construction
Appendix
5A Checklist of Rules of Contract Construction
I. Determine which, if any, rules regarding canons of construction,
extrinsic evidence, the parol evidence rule, and so forth will apply by
first asking the following questions:
G
Does the contract state unambiguously that the parties intended the
contract to be their final, complete agreement (i.e., does it contain
an unambiguous merger clause)?
G
Is the contract unambiguous?
II. If the answer to both questions in Part I is Yes, the only evidence the
court need consider is the contract document itself except in the
following circumstances:
G
G
When the contract is claimed to be invalid on account of any of the
following:
G
Lack or failure of consideration
G
Fraud/misrepresentation
G
Duress
G
Illegality
G
Unconscionability
When the contract is governed by the Wisconsin UCC, in which
case the court may consider evidence of trade usage and course of
dealing
III. If the answer to either of the questions in Part I is No, then proceed as
follows:
A.
If contract not unambiguously intended as parties’ final, complete
agreement, consult extrinsic evidence to determine whether the
parties intended the contract to be final:
G
If they did so intend and the contract is unambiguous, apply
the contract as written.
© April 2000, State Bar of Wisconsin CLE Books
Ch. 5 Pg. 47
CHAPTER 5
App. 5A
B.
G
If they did so intend but the contract is ambiguous, proceed
to step B.
G
If they did not intend a fully integrated contract but did
intend a partially integrated document, consider evidence of
prior and contemporaneous agreements but only as long as
such evidence does not vary or contradict the written terms of
the contract.
G
If they did not intend an integrated contract, proceed to step
C.
If ambiguity exists within contract, consider the following canons
of construction to resolve ambiguity within document:
G
Construe the contract as a whole.
G
Construe the contract so as to give meaning and effect to all
its terms.
G
Construe the contract so as to avoid leaving any term
unreasonable or unconscionable.
G
Construe the contract so as to avoid an interpretation that is
unlawful or contrary to public policy or the public interest.
G
Give greater weight to specific terms than general terms.
G
Construe ambiguities against the drafter.
G
Give technical terms their technical meaning.
C.
Consider supplying an omitted term if necessary.
D.
If the ambiguity cannot be resolved within the four corners of the
document, consider extrinsic evidence, such as the following:
G
The parties’ purposes in entering the contract
G
The circumstances in which the contract was entered
G
The construction placed on the contract by the parties
G
Other contracts between the parties
G
Custom and usage within the trade
G
The parties’ course of dealing and performance
Ch. 5 Pg. 48
© April 2000, State Bar of Wisconsin CLE Books
CONTRACT INTERPRETATION; PAROL EVIDENCE RULE App. 5A
© April 2000, State Bar of Wisconsin CLE Books
Ch. 5 Pg. 49