Daily Development for Monday, August 17, 2009
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri

Here are two contract interpretation cases from Utah which demonstrate the importance of good drafting (good lawyering.)  Might make good examples for clients who may wonder why we spend so much time making sure everything is right when the parties clearly understand what they’re doing.  You don’t always get what you want . . .

CONTRACTS; PAROL EVIDENCE: When a contract term is specifically defined, all contract provisions related to the term will be interpreted according to the stated definition, and where the contract language is unambiguous, parol evidence will not be allowed and the contract will be interpreted as a matter of law.

Café Rio, Inc. v. Larkin-Gifford-Overton, LLC., 207 P.3d 1235 (UT 2009)

Defendant, a landowner in a development in Southern Utah, had executed a cross easement agreement providing common parking and access with its five neighbors.

The Agreement established common areas of open space in the center of the six parcels. These common areas were defined as, in part, "all of the areas of the Parcels ... designed for use as approaches, exits, entrances, and all parking lots, . . . however expressly excluding all buildings (and any building(s) constructed on Parcels 5 and 6 in the future)."

The Agreement also granted each parcel owner the right to an "unobstructed view of any of the Parcels," and it provides a "nonexclusive easement for the parking of motor vehicles . . . for the customers, invitees and employees of all business and occupants of the buildings constructed on. . . any of the Parcels.”

In addition to the express provision of an easement of access and parking, the Agreement also provided that "none of such Common Areas shall be changed in any material respect … without the prior written consent of all Owners of the Parcels." Additionally, the Agreement included a provision entitled "Prohibition of Barriers," which prohibited any parcel owner from constructing or erecting within any of the Parcels, any "fence, wall, barricade, or obstruction, whether temporary or permanent in nature, which materially limits or impairs the free and unimpeded flow of vehicular or pedestrian traffic between and among the Parcels or the ability to have an unobstructed view of any of the Parcels."

Defendant began constructing a building on its parcel (Parcel 5). In response, an adjoining landowner and its tenant brought action, claiming that Defendant's building construction violated terms of the Agreement described abover.

Based upon the Agreement language regarding the need for prior consent of all owners prior to changes in the Common Areas and the prohibition of erecting obstructions, the trial court granted summary judgment in favor of the adjoining landowner and tenant.

On appeal, the trial court's decision was reversed and the case was remanded. The Supreme Court of Utah held that the Agreement definition of "Common Areas" was "clear and unambiguous" since it precisely stated that future buildings on Parcels 5 and 6 were not part of the common areas. As such, the parties placed no limitation on the location of future buildings on those Parcels and implicitly agreed that buildings on Parcels 5 and 6 would not be subject to the restrictions placed on the defined common areas, including the requirement for prior written consent before making material changes and the parking easement.

The court also found that the term "obstruction" did not include buildings. First, the Court reasoned that when provisions of the Agreement were read together, it was clear that the parties contemplated the construction of buildings on Parcels 5 and 6, and made specific provisions in the Agreement in accordance with such intentions. As such, the Court stated that it was plain that the parties did not intend the term "obstruction" to include buildings. Second, the Court reasoned that interpreting "obstruction" to include buildings would eliminate Defendant's ability to construct a building on Parcel 5, which the Court believed was a right explicitly bargained and provided for in the Agreement. Thus, consistent with prior case law, the Court would not interpret the term "obstruction" in a manner that rendered an explicit right meaningless.

Last, using the principle of ejusdem generis, the Court construed "obstruction" according to the specific Agreement enumerations of "fence, wall, [and] barricade," that preceded "obstruction." Consequently, the Court found that a building is not similar in character or purpose to the other listed obstructions.

Comment: What was the intent of the parties at the time of drafting?  Clearly the trial court read that intent differently from the appeals court.  The problem seems to have arisen from a haphazard use of the term “common areas,” which at some places defines the rights of the parties and at other places does not.  The misunderstandings that led to this litigation could have been avoided by better lawyering.  An object lesson for as all.  We can’t always bury our mistakes. 

CONTRACTS; PAROL EVIDENCE: Where a contract is facially unambiguous, parol evidence will not be allowed, even where the contract fails to reflect the true intentions of the parties. Flores v. Earnshaw, 209 P.3d 428 (UT App. 2009)

In 2005, Defendant and Plaintiff entered into an option agreement, followed by a Real Estate Purchase Contract ("REPC"), for a residential condominium unit in a prospective building site. Both agreements listed a purchase price of $144,950. The form of REPC used, intended for use in the purchase and sale of existing real estate, contained a provision regarding "Included Items." The provision specified that items such as plumbing, heating, air conditioning equipment, appliances, and light fixtures, were included in the sale "if presently owned and attached to the Property."

Approximately one month after the binding REPC was executed, Defendant contacted Plaintiff and conveyed that the purchase price of $144,950 had been an error. Defendant subsequently sent an addendum to the REPC to Plaintiff, with an increased purchase price. Plaintiff then filed action for specific performance and breach of contract.

During a bench trial, the trial court found that the REPC was clear and unambiguous as to the price of $144,950, but that the REPC was ambiguous as to whether the parties intended to convey a fully built-out unit or just a shell of a unit. As such, the court allowed the presentation of parol evidence to determine the parties' intent regarding this issue. Both Plaintiff and Defendant testified that their intent was to contract for a fully built-out unit. However, the Defendant testified that he intended to do so for a price of $184,950, but that either he or his secretary had mistakenly written a price of $144,950. Based upon such testimony, the trial court ordered Defendant to sell a fully built-out unit to Plaintiff for the purchase price of $144,950. Defendant appealed.

The Utah Court of Appeals reversed the trial court's holding. The court found that the trial court erred when it allowed parol evidence to determine the intent of the parties. The court explained that admission of parol evidence to determine intent is allowed only if there is a finding of facial ambiguity. Otherwise, "the parties' intentions must be determined solely from the language of the contract." Furthermore, the court stated that this rule applies even where poor drafting exists and that "contractual confusion" does not necessarily equate to a finding of ambiguity.

Based upon the language of the REPC, the court found that the "Included Items" clause of the REPC was not ambiguous. The court noted that neither party offered different versions of the language used in the clause and that there did not appear to be a dispute over the fact that the term "presently" referred to the date of execution of the REPC. As such, because the unit had not yet been constructed on the date of execution of the REPC, there was no ambiguity that the listed "Included Items" were not then "owned and attached to the Property." Thus, based upon the plain language of the REPC, the court concluded that the parties intended for the sale of only a "shell" of a unit for the purchase price of $144,950.

Comment 1: In this case, both parties agreed that it was their intention at the time of executing the REPC, to convey a fully built-out condominium unit. However, the standard REPC form that the parties used included language that was not appropriate for a transaction involving yet-to-be-built property. Since the REPC language was unambiguous, even though it may not have been appropriate to the transaction, the court was forced to rely on the sole language of the REPC.

Comment 2: The editor suspects that in this case neither side was represented by counsel.  It is often the case that brokers are permitted to supply form agreements in common use in residential transactions, even though they are not permitted (by rules governing practicing law without a license) to draft documents.  The editor has seen problems arising from the selection of an inappropriate form document many times.  It is an interesting question whether the broker should held to the standard of the ordinary skill of a lawyers in the selection of form documents.  If so, and if there were brokers involved here, someone has a malpractice claim.  In fact, both parties might. 

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