Daily Development for
Monday, December 28, 1998

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

CONTRACTS; INTERPRETATION; PRESUMPTIONS: Where external evidence suggests how the parties intended that a contract should be interpreted, the court will rely upon that evidence rather than the doctrine that vagueness in contract language should be interpreted against the grantor, even where the contract has "integration" language indicated that the contract embodies the entire agreement of the parties.

Sun Company, Inc. v. Pennsylvania Turnpike Commission, 708 A.2d 875 (Pa. Comwlth. 1998)

This case involves an appeal from an arbitrator's decision interpreting a lease for a service plaza along the route of a turnpike. The lease specifically addressed the question of the respective responsibilities of the parties concerning the maintenance of the sewage treatment facilities at the site. The lease stated that tenant was to pay for the costs of "operating and maintaining" the sewage treatment facilities, and for maintenance of the sewer itself in the event of misuse by its restaurant operators. On the other hand, the landlord was to pay for the conversion of sewage service and capital replacement costs for these facilities.

The parties fell into dispute about two items: (1) Which of them was actually to operate the sewage treatment facility (note the agreement said only that tenant would pay the cost of operation; and (2) which of them was to pay the operating permit fee required by the state Department of Environmental Resources.

The tenant invoked the rule that ambiguity in contracts is to be construed against the drafter of the contract, set forth in the Restatement (Second) of Contracts, Section 206, if the interpretation offered by the other party is reasonable.. The court acknowledged the existence of the rule, but noted "the courts are still required to inquire into the circumstances surrounding the execution of the contract." It quoted from another Pennsylvania Supreme Court decision indicating that the rule is limited in application. The quote is useful and is set forth here:

"[I]t is equally clear that the rule is not intended as a talismanic solution to the construction of ambiguous language. Rules of construction serve the legitimate purpose of aiding courts in their quest to ascertain and give effect to the intention of parties to an instrument. They are not meant to be applied as a substitute for that quest. Where a document is found to be ambiguous, inquiry should always be made into the circumstances surrounding the execution of the document in an effort to clarify the meaning that the parties sought to express in the language which they chose . . . It is only when such an inquiry fails to clarify the ambiguity that the rule of construction . . . should be used to conclude the matter against that party responsible for the ambiguity, the drafter of the document." Burns Mftg. Co. v. Boehm, 356 A.2d 763, 766 n.3 (Pa. 1976).

The court looked to the prior behavior of other tenants on the property, behaviour of which the present tenant was aware, and the specific language of prior bid proposals, in which tenant had participated, and a negotiation between tenant and a prior tenant for an earlier assignment of the lease. In each case information was provided to tenant that the landlord expected the tenants at this site to provide personnel to operate the sewage facility and that tenants had done so. In fact, the earlier assignment had been completed and for a time tenant had in fact provided personnel to operate the facility.

Of course, tenant could argue, and undoubtedly did argue, that all of this simply underscored the fact that landlord should have had in mind the issue of who was to operate the facility and would have been expected to include that issue in the lease if the landlord expected the tenant to so operate. But the court simply viewed all of the evidence as "course of conduct" evidence tending to supply a provision in the lease not otherwise covered, and thus admissible notwithstanding the parole evidence rule and the integration clause.

As to the permit issue, the arbitrator ruled, and the court affirmed, that the permit responsibilities followed the operation responsibilities. Thus the tenant was stuck again.

Comment 1: The editor is uncomfortable with application to commercial real estate contracts of the rule that ambiguities in contracts should be interpreted against the drafter. Unlike form agreements in other consumer and commercial contexts, commercial real estate agreements are almost always studied and negotiated by the parties. Even if one party supplies language, the other party has the opportunity to study the language and suggest alternatives. In this environment, the language of any agreement should be viewed as the product of a negotiation and drafting process conducted by both parties, and the original drafter should bear no special responsbility to make it clear.

In this case, for instance, the ambiguity in the end may have worked against the tenant (and in fact it did). Why would we not expect the tenant to have equal responsibility with the landlord to identify and clarify the ambiguity?

Comment 2: The above having been stated, the author is less comfortable permitting the court to leap over an integration clause as quickly as it did in this case. The contract did address, to a degree, the question of operation of the sewage treatment facility. It stated that tenant would pay for the cost of operation. Typically, such language is used where the landlord would have the responsibility actually to operate the facility. Furhter, it is typical that the state environmental laws would require that anyone leasing a property that required such sewage facilities would have the initial responsbility to the state to operate them properly. In short, if operation of the facility was a duty imposed upon landlords unless they delegated it to tenants, the editor would have read this lease to state that landlord had not delegated operational responsibility, but only the cost of it.

The editor would have respected the integration clause and would not have gone beyond the four corners of the document to reach that conclusion here.

The editor hastens to add that he has not researched the Pennsylvania environmental law and his analysis depends upon the landlord having a statutory duty to see to it that such facilities are operated properly.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1-6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. The same is true of all commentary provided by contributors to the DIRT list. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.