Texas Contract Law Informs Second Circuit Decision

A well-written contract can not only solve most problems, it can prevent most problems from becoming problems in the first place. For a contract to have its maximum problem eliminating effect, however, all parties to the contract must agree as to what it mean. Contract law is filled with cases that could have been avoided if the entities involved had simply expressed their terms more clearly or asked the right questions before, during and after the drafting of the contract. While this ambiguity may be intentional by one side or both in the event they think a benefit can be attained, the truth is the best contract is often the one where both parties are simply looking to achieve the main goal fairly. Those instances where ambiguity dominates, however, cause problems. The case of Mendoza v. Grey Wolf Drilling Co., discussed in an earlier post, is one such case.

The Mendoza case was two-fold. It involved questions as to whether and when one company assumed liability for another company. Several contract law principles were implicated in this dispute from which this opinion resulted. Contracts get drafted under the assumption that the parties have reached an agreement. This alleged agreement is nowhere to be found when there is a dispute over the meaning of a contract. When adverse parties give contradictory interpretations of the same contract language a suit often ensues. It is because of the relative frequency of this occurrence that the courts have come up with various rules for interpreting contracts when the parties themselves cannot.

The Court of Appeal for the Second Circuit of Louisiana applied Texas contract law in this case. This was due to an agreement between the parties which was most likely part of the contract itself; there was no dispute over this portion of the contract. For guidance, Texas law contains several well-established principles for evaluating disputed contracts:

First and foremost when interpreting the true meaning of a contract comes the intent of the parties. The parties to the contract presumably know best about what the contract was intended to accomplish and how. This cannot be the only factor in the analysis because when there is a dispute about the meaning of the contract, the parties likely had different intentions in entering into said contract.

The language of the contract is also important. Words can have a myriad of meanings in various different contexts. Courts seek to give the words in a contract one meaning that best suits the occasion. Texas courts seek to “harmonize and effectuate” all of the provisions of a contract. This aim towards harmony is shared in many jurisdictions. Disjointed and unwieldy interpretations of contracts serve none well and only exacerbate disagreements between contracting parties. Courts must seek to interpret the contract as a cohesive document in order to best achieve the ends of the parties. The signatories signed the entire contract so it follows that no portion of the contract was meant to be meaningless.

Theoretically, and in common practice, a court should not edit a contract under Texas law but must seek to enforce the contract as it is written. If a court was free to delete or add provisions to a contract it would be exponentially easier for that court to come to a conclusion as to what the contract was supposed to mean. Despite this added ease, the parties to that contract would be robbed of the contract that they intended. They agreed to the words on the pages of the contract, regardless of their current dispute, at one time. A court must come to a conclusion based on the language that was actually included within a contract, not the language that a court thinks, feels or believes should be included.

It might seem like it would not have to be expressed that a court should seek to avoid a construction for a contract that is “unreasonable, oppressive, inequitable or absurd” but the Texas Court of Appeals made it official. The law of contracts is, at its core, a law of fairness and equity. All language in a contract is supposed to be given its normal grammatical meaning unless otherwise stated in the contract. This too may seem like a meaningless pleasantry that should not bear expressing but in a world where jargon and technical terms are becoming increasingly common, words do not always mean the same thing. One particularly amusing contract dispute once arose out of the meaning of the word “chicken” for purposes of a contract for the sale of certain poultry products.

Our next entry will conclude coverage on this Mendoza principle as well as fleshing out the need for close review of contract provisions and stipulations.

A good contract can solve almost any problem but a bad contract is more trouble than it is worth. If you have failed to come to terms with a contract that you have signed, contact the Berniard Law Firm, toll-free at 1-866-574-8005.