Drafting Your Contracts: You or a Court?

A recent Illinois court decision again brings attention to the seemingly perpetual debate over the adequacy of written contracts. Any public utility system lives by its contracts, whether with customers, developers, employees, suppliers, contractors, regulators, governments or other utilities. The very last thing any party to a contract should want is a court determining what the parties to the contract intended because the agreement is asserted to be incomplete or ambiguous.

In Eichengreen v. Rollins, Inc., 757 N.E. 2d 952 (Ill. App. 1st Dist. 2001), a homeowner sued a security alarm service provider for alleged breach of contract after a fire damaged a bath house area of the premises.  In 1988, the parties had entered into a letter “agreement” for the installation of certain enumerated fire and smoke detection and alarm equipment. No heat sensors or smoke detectors were installed by the contractor in the bath house.

The homeowner asserted that the intent of the parties was for the installation of a new security system that would protect the entire premises.  He said that he told the contractor that he wanted the entire home protected.  He asked the court to consider extrinsic evidence of the parties’ prior negotiations to determine their intent.

The Appellate Court rejected the attempt to show intent of the parties by presenting evidence in addition to the contract itself.  The Court cited the “four corners” rule stated by the Illinois Supreme Court in Air Safety, Inc. v. Teachers Realty Corp., 706 N.E. 2d 882, 884 (1999):  “an agreement, when reduced to writing, must be presumed to speak the intention of the parties who signed it.  It speaks for itself, and the intention with which it was executed must be determined from the language used.  It is not to be changed by extrinsic evidence.”

The Court also cited the related “parol evidence” rule that generally precludes evidence of understandings, not reflected in a writing, reached before or at the time of its execution, which would vary or modify its terms.  Such extrinsic evidence could be allowed only if the contract was not a fully integrated writing, being incomplete or ambiguous.  J & B Steel Contractors, Inc. v. C. Iber & Sons, Inc., 642 N.E. 2d 1215, 1217 (1994); Geoquest Productions, Ltd. v. Embassy Home Entertainment, 593 N.E. 2d 727, 730 (1992).

The Court concluded that a determination whether a written contract was intended to be a complete integration of the parties’ agreement must be based only upon the agreement itself.  The Court quoted Armstrong Point & Varnish Works v. Continental Can Co., 133 N.E. 711, 713 (1921):  “When parties sign a memorandum expressing all the terms essential to a complete agreement, they are to be protected against the doubtful veracity of the interested witnesses and the uncertain memory of disinterested witnesses concerning the terms of their agreement, and the only way in which they can be so protected is by holding each of them conclusively bound by the terms of the agreement as expressed in the writing.  All conversations and parol agreements between the parties prior to the written agreement are so merged therein that they cannot be given in evidence for the purpose of changing the contract or showing an intention or understanding different from that expressed in the written agreement. . . . [T]he contentions of the parties to the contract are not the criteri[a] which should guide the court in determining whether the written contract is a full expression of the agreement of the parties.  The court must determine this from the writing itself.  If it imports on its face to be a complete expression of the whole agreement—that is, contains such language as imports a complete legal obligation—it is to be presumed that the parties introduced into it every material item and term, and parol evidence cannot be admitted to add another term to the agreement, although the writing contains nothing on the particular term to which the parol evidence is directed.”

The Court stated that its assessment whether the parol evidence rule applies to exclude any extrinsic evidence depends on its determination whether the 1988 letter was a complete integration of the parties’ agreement.  It found that the terms of the letter indicate that the parties intended that the defendant provide the specified services for the stated price.  It also found that the letter contained no provision for heat sensors or smoke detectors in the bath house or for security for the entire premises.

Thus, the Court stated that “The contract contains no reference at all to the provision of protection of plaintiff’s entire premises.  We conclude that the written contract here, on its face, constituted a final and complete integration of the parties’ agreement.  Thus, the August 16, 1988 letter is the only and entire agreement between the parties.  Any particular interpretation that only the plaintiff may have envisioned at the time a contract is executed is immaterial. . . . This court will not add another term about which an agreement is silent.”  757 N.E. 2d at 958.  Accordingly, the Court held that there was no breach of contract.

What conclusions can be reached from this court decision and the many similar decisions across the country?

 

•           Whenever possible, agreements should be in writing and signed by all parties through representatives having authority to sign.

•           The agreements should contain accurately all of the terms and conditions intended by the parties.

•           The agreements should contain an “integration clause.”

•           At least the more complex agreements should be crafted or reviewed by counsel.

 

Otherwise, a contract simply may be a ticket to a courthouse.

These recent decisions may reflect a growing judicial distaste for the potential burdens of multiple enforcement actions for the same alleged violations. They also should serve as a caution to utilities to attempt to structure settlements, variances and consent orders with one agency so as to be preclusive as to the other. The res judicata path in environmental litigation can wander through many obstacles.

Dan Kucera is a partner in the law firm of Chapman and Cutler, 111 W. Monroe St., Chicago, Illinois 60603–4080, (312) 845–3000.

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