Resolving Contractual Ambiguity in Open Source Licenses

• Introduction
• Ambiguous Contract Terms
• Does the U.C.C. or State Common Law Apply to Open Source Licenses?
• Two Pathways to Resolving Ambiguity: Extrinsic Evidence & Contra Proferentem
  • Admissibility of Extrinsic Evidence: the Parol Evidence Rule
  • Standard Form Contracts and Contra Proferentem
  • Case Law
    • Cent. Stone Co. v. Warning, 412 S.W.3d 908 (Mo. Ct. App. 2013)
• Sources of Evidence Used in Interpretation
  • 1. Express Terms of the Agreement
    • Frigaliment Imp. Co. v. B.N.S. Int’l Sales Corp., 190 F. Supp. 116 (S.D.N.Y. 1960) {#frigaliment-imp-co-v-b-n-s-int’l-sales-corp-190-f-supp-116-s-d-n-y-1960}
  • 2. Course of Performance & Waiver {#course-of-performance-&-waiver}
    • Nanakuli Paving & Rock Co. v. Shell Oil Co., 664 F.2d 772 (9th Cir. 1982) {#nanakuli-paving-&-rock-co-v-shell-oil-co-664-f-2d-772-9th-cir-1982}
  • 3. Course of Dealing
    • SNMP Research Int’l, Inc. v. Nortel Networks Inc., 573 B.R. 134 (Bankr. D. Del. 2017) {#snmp-research-int’l-inc-v-nortel-networks-inc-573-b-r-134-bankr-d-del-2017}
  • 4. Trade Usage
    • Wolf v. Superior Court of Los Angeles, 8 Cal. Rptr. 3d 649 (Cal. Ct. App. 2004)
• Notes

Introduction

When disputes arise over the exact meanings of terms in open source licenses, community members often look to the authors of the contract for additional insight into what those particular terms mean. Is that how ambiguity in these licenses should be resolved?

This chapter examines how United States contract law applies to open source licenses, and how contract law principles could be used by courts to determine the meaning of ambiguous license terms.¹ Regardless of what state or federal commercial contract laws apply, courts are certain to turn to the traditional sources of evidence to resolve the meaning of disputed ambiguous terms: the express terms of the agreement, evidence of the parties’ course of performance, evidence of the parties’ course of dealing, and trade usage of the term. These sources of evidence are assigned different weights and some prevail over others. These concepts will be discussed at in the context of open source license terms.

Ambiguous Contract Terms

A contract may have a term which is unclear or ambiguous. A term is ambiguous if it could have more than one meaning.²

If the term is nonmaterial, then the uncertainty about that term does not affect the enforceability of the contract. However, if a term is so “material” that without it a court cannot determine what the parties agreed to or even whether the parties agreed to enter into a contract, then the uncertainty about that term may negate the existence of a contract for being “indefinite.”³

The Uniform Commercial Code and the Restatement (Second) of Contracts indicate that if the language of an agreement is adequate to establish a reasonable intent to contract, a basis for finding a breach, and a means of providing a remedy, then the court should resolve the uncertainty regarding the material term.⁴ Courts also routinely resolve ambiguous nonmaterial terms if they are central to a dispute.

The rest of this chapter examines the sources of law and evidence that instruct a court in resolving uncertain terms.

Discussion

1. What would be the material terms of a software license that are necessary for a court to find adequate intent to contract, a basis for finding a breach, and means of providing a remedy? If a term in an open source license failed but a court found that the licensor and licensee manifested adequate intention to be bound by the contract, how might a court enforce specific performance of the remaining terms?

2. Under an analysis of materials terms and the intent of the parties to be bound, would the WTFPL be considered a contract?⁵ The terms of the WTFPL license are, in their entirety (redacted for obscenity):

   DO WHAT THE F*CK YOU WANT TO PUBLIC LICENSE
   
   Version 2, December 2004
   
   Copyright (C) 2004 Sam Hocevar <sam@hocevar.net>
   
   Everyone is permitted to copy and distribute verbatim or modified copies of
   this license document, and changing it is allowed as long as the name is
   changed.
   
   DO WHAT THE F*CK YOU WANT TO PUBLIC LICENSE
   
   TERMS AND CONDITIONS FOR COPYING, DISTRIBUTION AND MODIFICATION
   
   0. You just DO WHAT THE F*CK YOU WANT TO.
   

   What about the also-short MIT License? \

   Copyright <YEAR> <COPYRIGHT HOLDER>
   
   Permission is hereby granted, free of charge, to any person obtaining a
   copy of this software and associated documentation files
   (the "Software"), to deal in the Software without restriction,
   including without limitation the rights to use, copy, modify, merge,
   publish, distribute, sublicense, and/or sell copies of the Software,
   and to permit persons to whom the Software is furnished to do so,
   subject to the following conditions:
   
   The above copyright notice and this permission notice shall be included
   in all copies or substantial portions of the Software.
   
   THE SOFTWARE IS PROVIDED "AS IS", WITHOUT WARRANTY OF ANY KIND, EXPRESS
   OR IMPLIED, INCLUDING BUT NOT LIMITED TO THE WARRANTIES OF
   MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT.
   IN NO EVENT SHALL THE AUTHORS OR COPYRIGHT HOLDERS BE LIABLE FOR ANY
   CLAIM, DAMAGES OR OTHER LIABILITY, WHETHER IN AN ACTION OF CONTRACT,
   TORT OR OTHERWISE, ARISING FROM, OUT OF OR IN CONNECTION WITH THE
   SOFTWARE OR THE USE OR OTHER DEALINGS IN THE SOFTWARE.
   

3. What types of open source license terms might be nonmaterial, but possibly central to a legal dispute such that a court would need to resolve their ambiguity? Consider the term “user” in the AGPL v3.⁶ In paragraph 13, the AGPL v3 states,

   Notwithstanding any other provision of this License, if you modify the
   Program, your modified version must prominently offer all users
   interacting with it remotely through  a computer network (if your
   version supports such interaction) an opportunity to receive the
   Corresponding Source of your version by providing access to the
   Corresponding Source from a network server at no charge, through some
   standard or customary means of facilitating copying of software. The
   Corresponding Source shall include the Corresponding Source for any
   work covered by version 3 of the GNU General Public License that is
   incorporated pursuant to the following paragraph . . .
   

   Could the term “user” be considered ambiguous? If AGPL licensed software is only used internally for employee use, could employees be considered “users” who can exercise rights under the AGPL v3?

Does the U.C.C. or State Common Law Apply to Open Source Licenses?

Different contract laws apply to a contract depending on whether it is a contract for goods or for services. Service contracts are governed by state contract laws,⁷ while Article 2 of the Uniform Commercial Code (the “UCC”) governs contracts for the sale of goods. Every state has implemented the UCC and where the UCC applies, it preempts state common law.⁸ The UCC’s definition of “goods” specifically contemplates movable goods.⁹

Open source licenses are contracts for software. Currently courts are divided on whether the UCC applies to software transactions.¹⁰ Although transferred software may not be a tangible, movable good as contemplated by the UCC, many courts acknowledge that the drafters of Article 2 could not have contemplated software as we now know. However, many of these courts also value the certainty brought by applying UCC.¹¹ Numerous federal circuits and state courts have applied the UCC to software contracts.¹² Many other courts have held that the UCC does not govern contracts for software.¹³ Although many courts and practitioners often bemoan the lack of certainty about whether state contract law or Article 2 of the UCC will apply, none of the efforts to resolve this to date have been successful.¹⁴ For the time being there is no bright line guidance on whether software may be considered a “good” for the purposes of the application of the UCC.

This analysis is further complicated by factual scenarios where contracts for software may be related to a conveyance of hardware or services, although hybrid contracts for goods and services are not a new issue in contract law. If a contract concerns both goods and services, courts must determine how to apply the law of contracts to the hybrid contract. Most courts have adopted a predominant purpose test for determining whether the UCC or the common law should apply to a particular contract.¹⁵ A court evaluates whether the predominant purpose of the transaction is for the provision of goods or services. The factors used to evaluate this vary, and courts reach opposite conclusions based on similar facts.¹⁶ Recent cases suggest that software licenses that do not convey ownership rights to the software may be governed by the common law rather than the UCC because there is no “sale” of goods at issue, but this is far from being consistent guidance.¹⁷

Regardless of whether the UCC or state common law of contracts governs, courts will look to the same sources of evidence in the same order of priority when interpreting ambiguous contract terms.¹⁸ For the purposes of this chapter, we will examine both the approach of both the UCC and Second Restatement of Contracts to resolving ambiguity in contract terms.

Two Pathways to Resolving Ambiguity: Extrinsic Evidence & Contra Proferentem

Before examining how extrinsic sources of evidence may be considered in resolving ambiguity it is necessary to understand whether those sources of evidence can be considered at all. The parol evidence rule prevents the admission of extrinsic evidence in some circumstances, while the application of contra proferentem would make extrinsic evidence irrelevant. The following sections address these potential barriers before we delve further into the nuances of resolving ambiguity through the traditional sources of evidence.

Admissibility of Extrinsic Evidence: the Parol Evidence Rule

The parol evidence rule is a common law doctrine that limits how the parties to a written contract can admit extrinsic evidence to explain a written term.¹⁹ The rule restricts evidence of written or oral discussions or agreements that occurred prior to or contemporaneously with the final agreement.

This rule would be relevant if parties to an open source license wished to introduce evidence of discussions or agreements that occurred prior to the existence of a contract (the license) in order to clarify the meaning of an ambiguous term in the license. For instance, if an open source licensee believed that there were relevant discussions regarding the meaning of a particular term prior to importing code under the terms of a particular license, the evidence of those discussions would be admissible only if permitted under the parol evidence rule.

The Restatement has simplified the common law approach to applying the parol evidence rule:²⁰

Effect of Integrated Agreement on Prior Agreements (Parol Evidence Rule)
(1) A binding integrated agreement discharges prior agreements to the extent
that it is inconsistent with them. \
(2) A binding completely integrated agreement discharges prior agreements
to the extent that they are within its scope. \
(3) An integrated agreement that is not binding or that is voidable and
avoided does not discharge a prior agreement. But an integrated agreement,
even though not binding, may be effective to render inoperative a term

In plainer language, an “integrated agreement” simply means that there is a writing accepted by both parties as the final expression of the terms of the agreement.²¹ A court must first determine whether an integrated agreement exists between the parties.²² When an integrated agreement exists, evidence of prior negotiations or agreements is generally inadmissible.²³

Exceptions to the parol evidence rule exist. One of these exceptions is that parol evidence or extrinsic evidence may be evaluated in order to resolve ambiguities.²⁴ If the extrinsic evidence would be consistent with the integrated agreement (not contradictory) then the evidence may be admissible to supplement the understanding of the ambiguous term.²⁵

The UCC incorporated a parallel parol evidence rule:²⁶ * (a) by course of dealing or usage of trade (Section 1-205) or by course of performance (Section 2-208); and * (b) by evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement.

Final Written Expression: Parol or Extrinsic Evidence.

Terms with respect to which the confirmatory memoranda of the parties
agree or which are otherwise set forth in a writing intended by the
parties as a final expression of their agreement with respect to such
terms as are included therein may not be contradicted by evidence of
any prior agreement or of a contemporaneous oral agreement but may be
explained or supplemented

In many instances there will be no evidence of prior or contemporaneous discussion or agreements between an open source licensor and licensee, and so the parol evidence rule will not apply.

Standard Form Contracts and Contra Proferentem

Open source licenses are similar in some ways to pre-printed standard agreements in that the terms are not negotiated for individual parties. Standard form agreements have been a growing trend in many industries for decades.

In response to the rise of non-negotiated form agreements and the unjust appearance of bargaining power imbalances the courts developed the common law doctrine of contra proferentem, or “against the offeror.”²⁷ Under contra proferentem, where an ambiguous term exists in a contract of adhesion and is open to two possible meanings, a court will interpret the term against the author of the standard form agreement in order to make up for the unequal bargaining power of the party who was unable to negotiate the terms.²⁸

It would be a stretch to apply the doctrine of contra proferentem to the popular standard open source licenses endorsed by the Open Source Initiative.²⁹ Traditionally contra proferentem has been applied by courts in the context of individuals signing contracts drafted entirely by the legal team of a large corporation, such as insurance contracts. However, open source licenses are fundamentally different in nature: they are not drafted by and for the benefit of only one party. The popular, OSI-endorsed open source licenses are drafted in the spirit of fairness, and with consideration to both the licensor and the licensee. The intended fairness to all sides is beneficial to both promoting adoption of open source licenses by licensors and the use of open source software by licensees, thereby promoting the open source software movement. There are a variety of open source licenses from which to choose and each has differing emphasis and benefits, but open source licenses are fundamentally intended to be an ethical multilateral contract that deliver on the promise of software freedom.³⁰

Case Law

In the following case, Cent. Stone Co. v. Warning, a state court of appeals evaluates the admissibility of prior extrinsic evidence to supplement a standard form lease agreement.³¹ The court considered the renter’s argument for contra proferentum but as the lease failed to meet the “unconscionably unfair” standard, the court upheld the trial court’s consideration of parol evidence when resolving the ambiguous term.

Cent. Stone Co. v. Warning, 412 S.W.3d 908 (Mo. Ct. App. 2013)

Daniel Warning (“Tenant”) appeals from the judgment of the trial court awarding $51,100 in damages to Central Stone Company (“Landlord”) on its breach of contract claim following a bench trial. Tenant contends that the trial court improperly considered parol evidence in construing the lease executed on May 3, 2010 (“May 2010 Lease”). In the alternative, Tenant argues that if the May 2010 Lease is ambiguous, the trial court failed to construe it against the drafting party, Landlord.

[ . . . . ]

This Court reviews the language of a lease de novo in order to determine the parties’ intent. Brittany Sobery Family Ltd. P’ship v. Coinmach Corp., 392 S.W.3d 46, 50 (Mo. App. 2013). When interpreting leases, this Court applies the rules of construction governing contracts. Id. First we examine the plain and ordinary meaning of the language used in the lease to determine if it clearly addresses the disputed matter. Id. An ambiguity must come from within the four corners of the contract; it cannot be created by the use of extrinsic, or parol, evidence. ATC Co., Inc. v. Myatt, 389 S.W.3d 732, 735 (Mo. App. 2013).

The parol evidence rule is a substantive rule of law and not a rule of evidence. See Missouri Department of Transportation ex rel. PR Developers, Inc. v. Safeco Insurance Company of America, 97 S.W.3d 21, 32 (Mo. App. 2002). The parol evidence rule does not prevent the admission of relevant evidence, but rather prohibits the trier of fact from using such evidence to contradict, vary, or alter the terms of an integrated written contract. Id. (quoting State ex rel. Missouri Highway and Transportation Commission v. Maryville Land Partnership, 62 S.W.3d 485, 489 (Mo. App. 2011)). However, if the language of a lease is ambiguous, courts will look to the language in the context of the entire lease and parol evidence to ascertain the parties’ intent. Coinmach, 392 S.W.3d at 50. A contract is ambiguous or unclear if its language is reasonably susceptible to more than one interpretation giving the words their plain and ordinary meaning as understood by the average, reasonable person. Id. Once an ambiguity is determined to exist, the parties’ intent can be ascertained through the use of extrinsic evidence. ATC Co., 389 S.W.3d at 735-36. Resolution of an ambiguity through the use of extrinsic evidence is a question of fact. Id. at 736. Only where there is no evidence showing the intent of the parties will we construe an ambiguity against the party who drafted it. Id. If the contract is not an adhesion contract, this Court will construe the contract against the drafting party as a last resort, and only if there is no evidence of the parties’ intent. Id. at 737.

At first glance the May 2010 Lease would appear to be unambiguous about the date of cash rent payment. It provides that “The cash rent shall be paid each year in the following method: By April 1 of each year of the contract.” However, the opening paragraph of the May 2010 Lease states that:

This lease is entered into May 3, 2010 between CENTRAL STONE COMPANY,
Lessors at 46445 Sweetbay Lane, Hannibal, MO 63401 and DANIEL WARNING,
Lessee at 32351 280th St., LaGrange MO 63448.

It also provided that the term of the lease was from January 1, 2010 to December 31, 2012.

Tenant argues that there is no ambiguity. We disagree. Looking within the four corners of the May 2010 Lease, it is readily apparent that there is an inherent ambiguity regarding when the cash rent is to paid for the first year of the lease. The plain and ordinary language states that it is due on April 1 of each year of the May 2010 Lease, but the agreement was entered into on May 3, 2010, and it was to be effective from January 1, 2010. A payment date before the execution of the contract is an impossibility. Hence there is some ambiguity about when the cash rental for 2010 was due. The most likely payment date would be when the lease was executed, given that the payment date was April 1, 2010, as the first available date for it to be due would be May 3, 2010.³² Alternatively, it is also a reasonable interpretation that rent for 2010 was due on December 31, 2010.³³ At common law in Missouri, in the absence of any agreement between the landlord and the tenant as to when rent is due and payable, it is payable at the end of the year. See Bashor v. Turpin, 506 S.W.2d 412, 421 (Mo. 1974); Ridgley v. Stillwell, 27 Mo. 128 (1858); Ostner v. Lynn, 57 Mo. App. 187 (1894). The trial court did not err in considering evidence extrinsic to the May 2010 Lease regarding the issue of when the cash rent was due for 2010.

Testimony at trial indicated that the intent of the parties was that the cash rent payment for 2010 was due at the time of execution of the May 2010 Lease. Sivill stated that it was a management decision not to ask Tenant for the rent at the time of execution of the lease. Harsell testified that Tenant repeatedly indicated throughout 2010 that he owed Landlord the cash rent for Oyster Farm and needed to send Landlord a check. The trial court did not make a finding of fact on this issue, and it would not affect the outcome if the trial court had found that the cash rent was not due until the end of the year. Whether the rent for 2010 was due on May 3, 2010 or on December 31, 2010, Tenant had not paid it as of April 13, 2011.

Tenant argues in the alternative that the trial court erred in failing to construe the ambiguity in the May 2010 Lease against the interest of the drafter, Landlord, and interpret from the language of the May 2010 Lease that no rent was due for 2010. Assuming arguendo that the May 2010 Lease was an adhesion contract, the trial court did not err.³⁴ Even with an adhesion contract, the courts, as with all contracts,

...seek to enforce the reasonable expectations of the parties garnered
not only from the words of a standardized form imposed by its proponent,
but from the totality of the circumstances surrounding the transaction.
Only such provisions of the standardized form which fail to comport with
such reasonable expectations and which are unexpected and unconscionably
unfair are held to be unenforceable. Because standardized contracts
address the mass of users, the test for "reasonable expectations" is
objective, addressed to the average member of the public who accepts
such a contract, not the subjective expectations of an individual
adherent.

Hartland Computer Leasing Corp., Inc. v. Insurance Man, Inc., 770 S.W.2d 525, 527 (Mo. App. 1989) (internal citations omitted). In the present case, the trial court could have found, at best, that the cash rent was due at the end of the year, as it had been under the prior lease and as it would have been under common law. Such a finding would not have changed the judgment of the trial court that awarded Landlord $51,100 for nonpayment of rent under the May 2010 Lease. Point denied.

The judgment of the trial court is affirmed.

Discussion questions

1. Paragraph 7 of the GNU General Public License v3 expressly states the types of additional terms that may be added to supplement the license. Except as expressly permitted, the GPL v3 prohibits the addition of “further restrictions” and states that any other additional terms will be unenforceable: “If the Program as you received it, or any part of it, contains a notice stating that it is governed by this License along with a term that is a further restriction, you may remove that term.” The Commons Clause exists to amend open source licenses to prohibit the commercial sale of the licensed software.³⁵ If a licensor applying the GPL v3 adds a further restriction, such as the Commons Clause, how would a court determine the full text of the agreement? It is possible that the licensor and the licensee may have different understandings of whether the Commons Clause can be added to the text of the GPL v3. Would the GPL v3 and the Commons Clause be read together as a fully integrated agreement?

2. Would a court potentially consider a corporate-authored rider to an open source license a contract of adhesion? Consider the power differential between the licensor and potential licensees, the lack of negotiation of the terms, the necessity of the software (or lack thereof), and whether the terms are “unconscionably unfair.” For instance, consider the now-retired react PATENTS clause, which contained an attempt to deter patent lawsuits: “The license granted hereunder will terminate, automatically and without notice, if you (or any of your subsidiaries, corporate affiliates or agents) initiate directly or indirectly, or take a direct financial interest in, any Patent Assertion: (i) against Facebook or any of its subsidiaries or corporate affiliates, (ii) against any party if such Patent Assertion arises in whole or in part from any software, technology, product or service of Facebook or any of its subsidiaries or corporate affiliates, or (iii) against any party relating to the Software.”³⁶ What about the Crockford License, which was drafted solely by Douglas Crockford to release his JSMin software?³⁷ Crockford added the requirement that “the Software shall be used for Good, not Evil” to the open source MIT License, leaving complete ambiguity as to what the licensor or licensees may consider good or evil. Strictly speaking it is not an open source license because it discriminates by purpose and it does not appear in the list of OSI-endorsed open source licenses.³⁸

Sources of Evidence Used in Interpretation

Under both the UCC and the Restatement (Second) of Contracts, a court will look to the express terms the agreement to resolve an unclear or ambiguous term. Historically courts were reluctant to look beyond the “four corners” of the agreement.³⁹ However, contract law has evolved to admit other sources of evidence to provide additional context.

Courts give different weight to each of these sources of evidence. The greatest weight is still given to the plain meaning of the words in the agreement itself and contextual clues or definitions within the same document. Under both the UCC and the Restatement, the language of the agreement is the first source of evidence that a court will look to regardless of the existence of other contextual evidence.⁴⁰ If necessary, under both the UCC and the Restatement a court may look to sources of evidence extrinsic to the agreement. These sources include evidence of course of performance between the parties, evidence of course of dealing between the parties, and lastly, evidence of trade usage of the term. When the sources of evidence conflict, weight is assigned to each of those sources in that same order.⁴¹

1. Express Terms of the Agreement

Courts first look to the words of the parties’ written integrated agreement as the source of truth for what the parties intended. If possible, a court will view both the terms of the agreement and other sources of evidence as being consistent with each other when resolving ambiguous terms. If the plain terms of the agreement are not consistent with other sources of evidence, under both the UCC and the Restatement, the language of the agreement is the most important source of evidence.⁴² Courts examine both the ordinary, dictionary meaning of the terms as well as contextual evidence from other terms within the same document. In one famous case, Frigaliment Imp. Co. v. B.N.S. Int’l Sales Corp., a court considered multiple sources of evidence in interpreting a disputed term.⁴³ In determining the intent of the parties at the time of contracting, the court gave the most weight to the evidence from the agreement itself: the plain, dictionary meaning of the word “chicken,” along with the contextual evidence found within the rest of the agreement. Determining that the word “chicken” standing alone in this contract was ambiguous, the court found clues that the parties may have intended two different qualities of chicken were contemplated at the time of contracting, because the two prices for different amounts of chicken indicated that some of the chickens would be cheaper than the others. However, the plaintiff’s burden of proof and the consistency of the evidence with the terms of the agreement factored into whether the court considered this evidence when resolving ambiguity. The court held that since the plaintiff’s belief was not consistent with the plain language of the agreement or the dictionary definition of “chicken,” it did not meet its burden of proof in establishing that the contract was for the higher quality chicken.

Frigaliment Imp. Co. v. B.N.S. Int’l Sales Corp., 190 F. Supp. 116 (S.D.N.Y. 1960) {#frigaliment-imp-co-v-b-n-s-int’l-sales-corp-190-f-supp-116-s-d-n-y-1960}

The issue is, what is chicken? Plaintiff says “chicken” means a young chicken, suitable for broiling and frying. Defendant says “chicken” means any bird of that genus that meets contract specifications on weight and quality, including what it calls “stewing chicken” and plaintiff pejoratively terms “fowl”. Dictionaries give both meanings, as well as some others not relevant here. To support its, plaintiff sends a number of volleys over the net; defendant essays to return them and adds a few serves of its own. Assuming that both parties were acting in good faith, the case nicely illustrates Holmes’ remark “that the making of a contract depends not on the agreement of two minds in one intention, but on the agreement of two sets of external signs—not on the parties’ having meant the same thing but on their having said the same thing.” The Path of the Law, in Collected Legal Papers, p. 178. I have concluded that plaintiff has not sustained its burden of persuasion that the contract used “chicken” in the narrower sense.

The action is for breach of the warranty that goods sold shall correspond to the description, New York Personal Property Law, McKinney’s Consol. Laws, c. 41, §

1. Two contracts are in suit. In the first, dated May 2, 1957, defendant, a New York sales corporation, confirmed the sale to plaintiff, a Swiss corporation, of

   US Fresh Frozen Chicken, Grade A, Government Inspected, Eviscerated 2 1/2-3 lbs. and 1 1/2-2 lbs. each all chicken individually wrapped in cryovac, packed in secured fiber cartons or wooden boxes, suitable for export 75,000 lbs. 2 1/2-3 lbs…. §$ 33.00 25,000 lbs. 1 1/2-2 lbs….§$ 36.50 per 100 lbs. FAS New York scheduled May 10, 1957 pursuant to instructions from Penson & Co., New York.

⁴⁴

The second contract, also dated May 2, 1957, was identical save that only 50,000 lbs. of the heavier ‘chicken’ were called for, the price of the smaller birds was $ 37 per 100 lbs., and shipment was scheduled for May 30. The initial shipment under the first contract was short but the balance was shipped on May

1. When the initial shipment arrived in Switzerland, plaintiff found, on May 28, that the 2 1/2-3 lbs. birds were not young chicken suitable for broiling and frying but stewing chicken or ‘fowl’; indeed, many of the cartons and bags plainly so indicated. Protests ensued. Nevertheless, shipment under the second contract was made on May 29, the 2 1/2-3 lbs. birds again being stewing chicken. Defendant stopped the transportation of these at Rotterdam.

This action followed. Plaintiff says that, notwithstanding that its acceptance was in Switzerland, New York law controls under the principle of Rubin v. irving Trust Co., 1953, 305 N.Y. 288, 305, 113 N.E.2d 424, 431; defendant does not dispute this, and relies on New York decisions. I shall follow the apparent agreement of the parties as to the applicable law.

Since the word ‘chicken’ standing alone is ambiguous, I turn first to see whether the contract itself offers any aid to its interpretation. Plaintiff says the 1 1/2-2 lbs. birds necessarily had to be young chicken since the older birds do not come in that size, hence the 2 1/2-3 lbs. birds must likewise be young. This is unpersuasive – a contract for ‘apples’ of two different sizes could be filled with different kinds of apples even though only one species came in both sizes. Defendant notes that the contract called not simply for chicken but for ‘US Fresh Frozen Chicken, Grade A, Government Inspected.’ It says the contract thereby incorporated by reference the Department of Agriculture’s regulations, which favor its interpretation; I shall return to this after reviewing plaintiff’s other contentions.

The first hinges on an exchange of cablegrams which preceded execution of the formal contracts. The negotiations leading up to the contracts were conducted in New York between defendant’s secretary, Ernest R. Bauer, and a Mr. Stovicek, who was in New York for the Czechoslovak government at the World Trade Fair. A few days after meeting bauer at the fair, Stovicek telephoned and inquired whether defendant would be interested in exporting poultry to Switzerland. Bauer then met with Stovicek, who showed him a cable from plaintiff dated April 26, 1957, announcing that they ‘are buyer’ of 25,000 lbs. of chicken 2 1/2-3 lbs. weight, Cryovac packed, grade A Government inspected, at a price up to 33 cents per pound, for shipment on May 10, to be confirmed by the following morning, and were interested in further offerings. After testing the market for price, Bauer accepted, and Stovicek sent a confirmation that evening. Plaintiff stresses that, although these and subsequent cables between plaintiff and defendant, which laid the basis for the additional quantities under the first and for all of the second contract, were predominantly in German, they used the English word ‘chicken’; it claims this was done because it understood ‘chicken’ meant young chicken whereas the German word, ‘Huhn,’ included both ‘Brathuhn’ (broilers) and ‘Suppenhuhn’ (stewing chicken), and that defendant, whose officers were thoroughly conversant with German, should have realized this. Whatever force this argument might otherwise have is largely drained away by Bauer’s testimony that he asked Stovicek what kind of chickens were wanted, received the answer ‘any kind of chickens,’ and then, in German, asked whether the cable meant ‘Huhn’ and received an affirmative response. Plaintiff attacks this as contrary to what Bauer testified on his deposition in March, 1959, and also on the ground that Stovicek had no authority to interpret the meaning of the cable. The first contention would be persuasive if sustained by the record, since Bauer was free at the trial from the threat of contradiction by Stovicek as he was not at the time of the deposition; however, review of the deposition does not convince me of the claimed inconsistency. As to the second contention, it may well be that Stovicek lacked authority to commit plaintiff for prices or delivery dates other than those specified in the cable; but plaintiff cannot at the same time rely on its cable to Stovicek as its dictionary to the meaning of the contract and repudiate the interpretation given the dictionary by the man in whose hands it was put. See Restatement of the Law of Agency, 2d, § 145; 2 Mecham, Agency § 1781 (2d ed. 1914); Park v. Moorman Mfg. co., 1952, 121 Utah 339 241 P.2d 914, 919, 40 A.L.R.2d 273; Henderson v. Jimmerson, Tex.Civ.App.1950, 234 S.W.2d 710, 717-718. Plaintiff’s reliance on the fact that the contract forms contain the words ‘through the intermediary of: ‘, with the blank not filled, as negating agency, is wholly unpersuasive; the purpose of this clause was to permit filling in the name of an intermediary to whom a commission would be payable, not to blot out what had been the fact.

Plaintiff’s next contention is that there was a definite trade usage that ‘chicken’ meant ‘young chicken.’ Defendant showed that it was only beginning in the poultry trade in 1957, thereby bringing itself within the principle that ‘when one of the parties is not a member of the trade or other circle, his acceptance of the standard must be made to appear’ by proving either that he had actual knowledge of the usage or that the usage is ‘so generally known in the community that his actual individual knowledge of it may be inferred.’ 9 Wigmore, Evidence (3d ed. § 1940) 2464. Here there was no proof of actual knowledge of the alleged usage; indeed, it is quite plain that defendant’s belief was to the contrary. In order to meet the alternative requirement, the law of New York demands a showing that ‘the usage is of so long continuance, so well established, so notorious, so universal and so reasonable in itself, as that the presumption is violent that the parties contracted with reference to it, and made it a part of their agreement.’ Walls v. Bailey, 1872, 49 N.Y. 464, 472-473.

Plaintiff endeavored to establish such a usage by the testimony of three witnesses and certain other evidence. Strasser, resident buyer in New York for a large chain of Swiss cooperatives, testified that ‘on chicken I would definitely understand a broiler.’ However, the force of this testimony was considerably weakened by the fact that in his own transactions the witness, a careful businessman, protected himself by using ‘broiler’ when that was what he wanted and ‘fowl’ when he wished older birds. Indeed, there are some indications, dating back to a remark of Lord Mansfield, Edie v. East India Co., 2 Burr. 1216, 1222 (1761), that no credit should be given ‘witnesses to usage, who could not adduce instances in verification.’ 7 Wigmore, Evidence (3d ed. 1940), § 1954; see McDonald v. Acker, Merrall & Condit Co., 2d Dept.1920, 192 App. Div. 123, 126, 182 N.Y.S. 607. While Wigmore thinks this goes too far, a witness’ consistent failure to rely on the alleged usage deprives his opinion testimony of much of its effect. Niesielowski, an officer of one of the companies that had furnished the stewing chicken to defendant, testified that ‘chicken’ meant ‘the male species of the poultry industry. That could be a broiler, a fryer or a roaster’, but not a stewing chicken; however, he also testified that upon receiving defendant’s inquiry for ‘chickens’, he asked whether the desire was for ‘fowl or frying chickens’ and, in fact, supplied fowl, although taking the precaution of asking defendant, a day or two after plaintiff’s acceptance of the contracts in suit, to change its confirmation of its order from ‘chickens,’ as defendant had originally prepared it, to ‘stewing chickens.’ Dates, an employee of Urner-Barry Company, which publishes a daily market report on the poultry trade, gave it as his view that the trade meaning of ‘chicken’ was ‘broilers and fryers.’ In addition to this opinion testimony, plaintiff relied on the fact that the Urner-Barry service, the Journal of Commerce, and Weinberg Bros. & Co. of Chicago, a large supplier of poultry, published quotations in a manner which, in one way or another, distinguish between ‘chicken,’ comprising broilers, fryers and certain other categories, and ‘fowl,’ which, Bauer acknowledged, included stewing chickens. This material would be impressive if there were nothing to the contrary. However, there was, as will now be seen.

Defendant’s witness Weininger, who operates a chicken eviscerating plant in New Jersey, testified ‘Chicken is everything except a goose, a duck, and a turkey. Everything is a chicken, but then you have to say, you have to specify which category you want or that you are talking about.’ Its witness Fox said that in the trade ‘chicken’ would encompass all the various classifications. Sadina, who conducts a food inspection service, testified that he would consider any bird coming within the classes of ‘chicken’ in the Department of Agriculture’s regulations to be a chicken. The specifications approved by the General Services Administration include fowl as well as broilers and fryers under the classification ‘chickens.’ Statistics of the Institute of American Poultry Industries use the phrases ‘Young chickens’ and ‘Mature chickens,’ under the general heading ‘Total chickens.’ and the Department of Agriculture’s daily and weekly price reports avoid use of the word ‘chicken’ without specification.

Defendant advances several other points which it claims affirmatively support its construction. Primary among these is the regulation of the Department of Agriculture, 7 C.F.R. § 70.300-70.370, entitled, ‘Grading and Inspection of Poultry and Edible Products Thereof.’ and in particular 70.301 which recited:

Chickens. The following are the various classes of chickens:
(a) Broiler or fryer . . . (b) Roaster . . . (c) Capon . . . (d) Stag . . .
(e) Hen or stewing chicken or fowl . . . (f) Cock or old rooster . . .

Defendant argues, as previously noted, that the contract incorporated these regulations by reference. Plaintiff answers that the contract provision related simply to grade and Government inspection and did not incorporate the Government definition of ‘chicken,’ and also that the definition in the Regulations is ignored in the trade. However, the latter contention was contradicted by Weininger and Sadina; and there is force in defendant’s argument that the contract made the regulations a dictionary, particularly since the reference to Government grading was already in plaintiff’s initial cable to Stovicek.

Defendant makes a further argument based on the impossibility of its obtaining broilers and fryers at the 33 cents price offered by plaintiff for the 2 1/2-3 lbs. birds. There is no substantial dispute that, in late April, 1957, the price for 2 1/2-3 lbs. broilers was between 35 and 37 cents per pound, and that when defendant entered into the contracts, it was well aware of this and intended to fill them by supplying fowl in these weights. It claims that plaintiff must likewise have known the market since plaintiff had reserved shipping space on April 23, three days before plaintiff’s cable to Stovicek, or, at least, that Stovicek was chargeable with such knowledge. It is scarcely an answer to say, as plaintiff does in its brief, that the 33 cents price offered by the 2 1/2-3 lbs. ‘chickens’ was closer to the prevailing 35 cents price for broilers than to the 30 cents at which defendant procured fowl. Plaintiff must have expected defendant to make some profit – certainly it could not have expected defendant deliberately to incur a loss.

Finally, defendant relies on conduct by the plaintiff after the first shipment had been received. On May 28 plaintiff sent two cables complaining that the larger birds in the first shipment constituted ‘fowl.’ Defendant answered with a cable refusing to recognize plaintiff’s objection and announcing ‘We have today ready for shipment 50,000 lbs. chicken 2 1/2-3 lbs. 25,000 lbs. broilers 1 1/2-2 lbs.,’ these being the goods procured for shipment under the second contract, and asked immediate answer ‘whether we are to ship this merchandise to you and whether you will accept the merchandise.’ After several other cable exchanges, plaintiff replied on May 29 ‘Confirm again that merchandise is to be shipped since resold by us if not enough pursuant to contract chickens are shipped the missing quantity is to be shipped within ten days stop we resold to our customers pursuant to your contract chickens grade A you have to deliver us said merchandise we again state that we shall make you fully responsible for all resulting costs.’⁴⁵ Defendant argues that if plaintiff was sincere in thinking it was entitled to young chickens, plaintiff would not have allowed the shipment under the second contract to go forward, since the distinction between broilers and chickens drawn in defendant’s cablegram must have made it clear that the larger birds would not be broilers. However, plaintiff answers that the cables show plaintiff was insisting on delivery of young chickens and that defendant shipped old ones at its peril. Defendant’s point would be highly relevant on another disputed issue – whether if liability were established, the measure of damages should be the difference in market value of broilers and stewing chicken in New York or the larger difference in Europe, but I cannot give it weight on the issue of interpretation. Defendant points out also that plaintiff proceeded to deliver some of the larger birds in Europe, describing them as ‘poulets’; defendant argues that it was only when plaintiff’s customers complained about this that plaintiff developed the idea that ‘chicken’ meant ‘young chicken.’ There is little force in this in view of plaintiff’s immediate and consistent protests.

When all the evidence is reviewed, it is clear that defendant believed it could comply with the contracts by delivering stewing chicken in the 2 1/2-3 lbs. size. Defendant’s subjective intent would not be significant if this did not coincide with an objective meaning of ‘chicken.’ Here it did coincide with one of the dictionary meanings, with the definition in the Department of Agriculture Regulations to which the contract made at least oblique reference, with at least some usage in the trade, with the realities of the market, and with what plaintiff’s spokesman had said. Plaintiff asserts it to be equally plain that plaintiff’s own subjective intent was to obtain broilers and fryers; the only evidence against this is the material as to market prices and this may not have been sufficiently brought home. In any event it is unnecessary to determine that issue. For plaintiff has the burden of showing that ‘chicken’ was used in the narrower rather than in the broader sense, and this it has not sustained.

This opinion constitutes the Court’s findings of fact and conclusions of law. Judgment shall be entered dismissing the complaint with costs.

Discussion

1. Where a contract does not capture the intent of two parties bound by the agreement, is the contextual logic of Frigaliment as relevant? For instance, if a downstream licensee developer builds on GPL-licensed software, would a court still look to the plain text meaning of an agreement as the clearest indicator of the parties’ intent? How relevant is the original intent when the downstream developer did not participate in the drafting or selection of the license?

2. Course of Performance & Waiver {#course-of-performance-&-waiver}

A court may look to consistent evidence of the parties’ behavior after the formation of the agreement, also known as “course of performance” evidence, in order to supplement the understanding of the express terms of the agreement.⁴⁶ When course of performance evidence is inconsistent with the express terms of the agreement, the terms of the agreement will prevail. When course of performance evidence is inconsistent with course of dealing or trade usage evidence, course of performance evidence is given more weight.⁴⁷

Course of performance evidence is based on the assumption that the accepting behavior indicates what must have been intended by the parties’ use of a term at the time of contracting.

For instance, if Party A performs a contract according to one possible meaning of an ambiguous term, and Party B does not object, then that would be considered evidence that both parties understood the ambiguous term to have Party A’s meaning when they signed the agreement.

The concept of course of performance evidence applies awkwardly to interpreting open source licenses. Open source licensors and licensees are generally performing contracts that they had no hand in drafting. Licensees initiate the binding contract by performing under the terms of the stated license and it is unlikely that the licensor is having any discussion with the licensees about the license terms when they begin copying or using the open source software. Thus the logic of course of performance evidence is warped here, and evidence of licensees’ performance would fail to indicate any shared understanding of an ambiguous term at the time of contracting.

However, the related concepts of waiver and course of performance also come into play when examining a party’s performance of a contract. In the following case,

Nanakuli Paving & Rock Co. v. Shell Oil Co., a court applies the UCC and examines the application of the waiver and course of performance evidence to an obligation outside of the express terms of the agreement itself.⁴⁸ While course of performance evidence illuminates what was intended by the parties at the time of contracting, post-agreement conduct can also constitute a waiver or modification of the contract.⁴⁹ The Nanakuli court extensively discussed the UCC’s more lenient treatment of parol evidence to discern the intent of the parties, citing Cosmopolitan Financial Corp. v. Runnels for the proposition that “we think that expansion of the liberal approach toward the receipt of extrinsic evidence, in the face of the proliferation of standard form contracts and commercial paper, gives the courts a wider insight into the real intent of the parties.”⁵⁰ As you read the following case, consider whether this logic applies to the interpretation of ambiguous terms in open source licenses.

Nanakuli Paving & Rock Co. v. Shell Oil Co., 664 F.2d 772 (9th Cir. 1982) {#nanakuli-paving-&-rock-co-v-shell-oil-co-664-f-2d-772-9th-cir-1982}

Appeal from the United States District Court for the District of Hawaii.

Before BROWNING, Chief Judge, and KENNEDY, Circuit Judge, and HOFFMAN, District Judge.

HOFFMAN, District Judge:

Appellant Nanakuli Paving and Rock Company (Nanakuli) initially filed this breach of contract action against appellee Shell Oil Company (Shell) in Hawaiian State Court in February, 1976.⁵¹ Nanakuli, the second largest asphaltic paving contractor in Hawaii, had bought all its asphalt requirements from 1963 to 1974 from Shell under two long-term supply contracts; its suit charged Shell with breach of the later 1969 contract.⁵² The jury returned a verdict of $220,800 for Nanakuli on its first claim, which is that Shell breached the 1969 contract in January, 1974, by failing to price protect Nanakuli on 7200 tons of asphalt at the time Shell raised the price for asphalt from $44 to $76.⁵³ Nanakuli’s theory is that price-protection, as a usage of the asphaltic paving trade in Hawaii, was incorporated into the 1969 agreement between the parties, as demonstrated by the routine use of price protection by suppliers to that trade, and reinforced by the way in which Shell actually performed the 1969 contract up until 1974. Price protection, appellant claims, required that Shell hold the price on the tonnage Nanakuli had already committed because Nanakuli had incorporated that price into bids put out to or contracts awarded by general contractors and government agencies. The District Judge set aside the verdict and granted Shell’s motion for judgment n. o. v., which decision we vacate. We reinstate the jury verdict because we find that, viewing the evidence as a whole, there was substantial evidence to support a finding by reasonable jurors that Shell breached its contract by failing to provide protection for Nanakuli in 1974. Quichocho v. Kelvinator Corp., 546 F.2d 812, 813 (9th Cir. 1976). We do not believe the evidence in this case was such that, giving Nanakuli the benefit of all inferences fairly supported by the evidence and without weighing the credibility of the witnesses, only one reasonable conclusion could have been reached by the jury. Cockrum v. Whitney, 479 F.2d 84, 85-86 (9th Cir. 1973).

Nanakuli offers two theories for why Shell’s failure to offer price protection in 1974 was a breach of the 1969 contract. First, it argues, all material suppliers to the asphaltic paving trade in Hawaii followed the trade usage of price protection and thus it should be assumed, under the U.C.C., that the parties intended to incorporate price protection into their 1969 agreement. This is so, Nanakuli continues, even though the written contract provided for price to be “Shell’s Posted Price at time of delivery,” F.O.B. Honolulu. Its proof of a usage that was incorporated into the contract is reinforced by evidence of the commercial context, which under the U.C.C. should form the background for viewing a particular contract. The full agreement must be examined in light of the close, almost symbiotic relations between Shell and Nanakuli on the island of Oahu, whereby the expansion of Shell on the island was intimately connected to the business growth of Nanakuli. The U.C.C. looks to the actual performance of a contract as the best indication of what the parties intended those terms to mean. Nanakuli points out that Shell had price protected it on the two occasions of price increases under the 1969 contract other than the 1974 increase. In 1970 and 1971 Shell extended the old price for four and three months, respectively, after an announced increase. This was done, in the words of Shell’s agent in Hawaii, in order to permit Nanakuli’s to “chew up” tonnage already committed at Shell’s old price.⁵⁴

Nanakuli’s second theory for price protection is that Shell was obliged to price protect Nanakuli, even if price protection was not incorporated into their contract, because price protection was the commercially reasonable standard for fair dealing in the asphaltic paving trade in Hawaii in 1974. Observance of those standards is part of the good-faith requirement that the Code imposes on merchants in performing a sales contract. Shell was obliged to price protect Nanakuli in order to act in good faith, Nanakuli argues, because such a practice was universal in that trade in that locality.

Shell presents three arguments for upholding the judgment n. o. v. or, on cross appeal, urging that the District Judge erred in admitting certain evidence. First, it says, the District Court should not have denied Shell’s motion in limine to define trade, for purposes of trade usage evidence, as the sale and purchase of asphalt in Hawaii, rather than expanding the definition of trade to include other suppliers of materials to the asphaltic paving trade. Asphalt, its argument runs, was the subject matter of the disputed contract and the only product Shell supplied to the asphaltic paving trade.⁵⁵ Shell protests that the judge, by expanding the definition of trade to include the other major suppliers to the asphaltic paving trade, allowed the admission of highly prejudicial evidence of routine price protection by all suppliers of aggregate.⁵⁶ Asphaltic concrete paving is formed by mixing paving asphalt with crushed rock, or aggregate, in a “hot-mix” plant and then pouring the mixture onto the surface to be paved. Shell’s second complaint is that the two prior occasions on which it price protected Nanakuli, although representing the only other instances of price increases under the 1969 contract, constituted mere waivers of the contract’s price term, not a course of performance of the contract. A course of performance of the contract, in contrast to a waiver, demonstrates how the parties understand the terms of their agreement. Shell cites two U.C.C. Comments in support of that argument: (1) that, when the meaning of acts is ambiguous, the preference is for the waiver interpretation, and (2) that one act alone does not constitute a relevant course of performance. Shell’s final argument is that, even assuming its prior price protection constituted a course of performance and that the broad trade definition was correct and evidence of trade usages by aggregate suppliers was admissible, price protection could not be construed as reasonably consistent with the express price term in the contract, in which case the Code provides that the express term controls.

We hold that the judge did not abuse his discretion in defining the applicable trade, for purposes of trade usages, as the asphaltic paving trade in Hawaii, rather than the purchase and sale of asphalt alone, given the unusual, not to say unique, circumstances: the smallness of the marketplace on Oahu; the existence of only two suppliers on the island; the long and intimate connection between the two companies on Oahu, including the background of how the development of Shell’s asphalt sales on Oahu was inextricably linked to Nanakuli’s own expansion on the island; the knowledge of the aggregate business on the part of Shell’s Hawaiian representative, Bohner; his awareness of the economics of Nanakuli’s bid estimates, which included only two major materials, asphalt and aggregate; his familiarity with realities of the Hawaiian marketplace in which all government agencies refused to include escalation clauses in contract awards and thus pavers would face tremenduous losses on price increases if all their material suppliers did not routinely offer them price protection; and Shell’s determination to build Nanakuli up to compete for those lucrative government contracts with the largest paver on the island, Hawaiian Bitumuls (H.B.), which was supplied by the only other asphalt company on the islands, Chevron, and which was routinely price protected on materials. We base our holding on the reading of the Code Comments as defining trade more broadly than transaction and as binding parties not only to usages of their particular trade but also to usages of trade in general in a given locality. This latter seems an equitable application of usage evidence where the usage is almost universally practiced in a small market such as was Oahu in the 1960’s before Shell signed its 1969 contract with Nanakuli.⁵⁷ Additionally, we hold that, under the facts of this case, a jury could reasonably have found that Shell’s acts on two occasions to price protect Nanakuli were not ambiguous and therefore indicated Shell’s understanding of the terms of the agreement with Nanakuli rather than being a waiver by Shell of those terms.⁵⁸

Lastly we hold that, although the express price terms of Shell’s posted price of delivery may seem, at first glance, inconsistent with a trade usage of price protection at time of increases in price, a closer reading shows that the jury could have reasonably construed price protection as consistent with the express term. We reach this holding for several reasons. First, we are persuaded by a careful reading of the U.C.C., one of whose underlying purposes is to promote flexibility in the expansion of commercial practices and which rather drastically overhauls this particular area of the law. The Code would have us look beyond the printed pages of the contract to usages and the entire commercial context of the agreement in order to reach the “true understanding” of the parties. Second, decisions of other courts in similar situations have managed to reconcile such trade usages with seemingly contradictory express terms where the prior course of dealings between the parties, trade usages, and the actual performance of the contract by the parties showed a clear intent by the parties to incorporate those usages into the agreement or to give to the express term the particular meaning provided by those usages, even at times varying the apparent meaning of the express terms. Third, the delineation by thoughtful commentators of the degree of consistency demanded between express terms and usage is that a usage should be allowed to modify the apparent agreement, as seen in the written terms, as long as it does not totally negate it. We believe the usage here falls within the limits set forth by commentators and generally followed in the better reasoned decisions. The manner in which price protection was actually practiced in Hawaii was that it only came into play at times of price increases and only for work committed prior to those increases on non-escalating contracts. Thus, it formed an exception to, rather than a total negation of, the express price term of “Shell’s Posted Price at time of delivery.” Our decision is reinforced by the overwhelming nature of the evidence that price protection was routinely practiced by all suppliers in the small Oahu market of the asphaltic paving trade and therefore was known to Shell; that it was a realistic necessity to operate in that market and thus vital to Nanakuli’s ability to get large government contracts and to Shell’s continued business growth on Oahu; and that it therefore constituted an intended part of the agreement, as that term is broadly defined by the Code, between Shell and Nanakuli.

[ . . . . ]

III

Shell’s Course Of Performance Of The 1969 Contract

The Code considers actual performance of a contract as the most relevant evidence of how the parties interpreted the terms of that contract. In 1970 and 1971, the only points at which Shell raised prices between 1969 and 1974, it price protected Nanakuli by holding its old price for four and three months, respectively, after announcing a price increase. In the late summer of 1970, Shell had announced a price increase from $35 to $40 a ton effective September 1, 1970. When Nanakuli protested to Bohner that it should be price protected on work already committed, Blee wrote Bohner an in-house memo that, if Bohner could not “convince” Nanakuli to go along with the price increase on September 1, he should try to “bargain” to get Nanakuli to accept the price raise by at least the first of the year, which was what was finally agreed upon. During that four-month period, Nanakuli bought 3,300 tons. Shell announced a second increase in October, 1970, from $40 to $42 effective December 31st. Before that increase went into effect, on November 25 Shell increased the raise to $4, making the price $44 as of the first of the year.⁵⁹ Shell again agreed to price protect Nanakuli by holding the price at $40, which had been the official price since September 1, for three months from January to March, 1971. Shell did not actually raise prices again until January, 1974, but at several points it believed that increases would be necessary and gave several months’ advance notice of those possible increases. Those actions were in accord with Shell’s own policy, as professed by Bohner, and that of other asphalt and aggregate suppliers: to give at least several months’ advance notice of price increases. On January 14, 1971, Shell wrote its asphalt customers that the maximum 1971 increase would be to $46. On July 9, 1971, another letter promised the price would not go over $50 in 1972. In addition, Bohner volunteered on direct the information that Shell price protected Nanakuli on the only two occasions of price increases after 1974 by giving 6 months’ advance notice in 1977 and 3 or 4 months’ advance notice in 1978, a practice he described as “in effect carryover pricing,” his term for price protection. By its actions, Bohner testified, Shell allowed Nanakuli time to make arrangements to buy up tonnage committed at the old price, that is, to “chew up” tonnage bid or contracted. Shell apparently offered this testimony to impress the jury with its subsequent good faith toward Nanakuli. In fact, it also may have reinforced the impression of the universality of price protection in the asphaltic paving trade on Oahu and, by showing Shell’s adherence to that practice on every relevant occasion except 1974, have highlighted for the jury what was the commercially reasonable standard of fair dealing in effect on Oahu in 1974.

IV

Shell-Nanakuli Relations, 1973-74

Two important factors form the backdrop for the 1974 failure by Shell to price protect Nanakuli: the Arab oil embargo and a complete change of command and policy in Shell’s asphalt management. The jury was read a page or so from the World Book about the events and effect of the partial oil embargo, which shortened supplies and increased the price of petroleum, of which asphalt is a byproduct. The federal government imposed direct price controls on petroleum, but not on asphalt. Despite the international importance of those events, the jury may have viewed the second factor as of more direct significance to this case. The structural changes at Shell offered a possible explanation for why Shell in 1974 acted out of step with, not only the trade usage and commercially reasonable practices of all suppliers to the asphaltic paving trade on Oahu, but also with its previous agreement with, or at least treatment of, Nanakuli.

Bohner testified to a big organizational change at Shell in 1973 when asphalt sales were moved from the construction sales to the commercial sales department. In addition, by 1973 the top echelon of Shell’s asphalt sales had retired. Lewis and Blee, who had negotiated the 1969 contract with Nanakuli, were both gone.⁶⁰ Their duties were taken over by three men: Fuller in San Mateo, California, District Manager for Shell Sales, Lawson, and Chippendale, who was Shell’s regional asphalt manager in Houston. When the philosophy toward asphalt pricing changed, apparently no one was left who was knowledgeable about the peculiarities of the Hawaiian market or about Shell’s long-time relations with Nanakuli or its 1969 agreement, beyond the printed contract.

Shell had begun rethinking its asphalt pricing policies several years before. Swanson, who succeeded Lewis in New York in 1970, wrote an internal memorandum on April 21, 1970, in which he discussed frankly the advantages and disadvantages of price protection of its asphalt buyers. Such a practice assured Shell of captive-volume sales, he wrote. The practice of granting carry-over pricing at times of price increases, however, had the unfortunate side effect of depressing prices in the asphalt market everywhere else, the memorandum concluded. This rethinking apparently led to a November 25, 1970, letter setting out “Shell’s New Pricing Policy” at its Honolulu and Hilo terminals. The letter explained the elimination of price protection: “In other words, we will no longer guarantee asphalt prices for the duration of any particular construction projects or for the specific lengths of time. We will, of course, honor any existing prices which have been committed for specific projects for which we have firm contractual commitments.” The letter requested a supply contract be signed with Shell within 15 days of the receipt of an award by a customer.

The District Judge based his grant of judgment n. o. v.⁶¹ largely on his belief that, had Nanakuli desired price protection, it should have complied with Shell’s request in that 1970 letter, by which we assume he meant Nanakuli should have made a firm contractual commitment with Shell for each project on which its bid was successful within 15 days of award.⁶² That conclusion, however, ignores several facts. First, compliance by Nanakuli with the letter’s demand that a contract be signed within 15 days of an award would have offered Nanakuli little, if any, protection. Nanakuli still would have been stuck with only charging the government the price incorporated into its bid if Shell raised its price between bid and award. The purpose of price protection was to guarantee the price in effect when a paver made a bid because of the often lengthy time span between bid and award. Second, if price protection was a part of Nanakuli’s 1969 agreement with Shell, Shell had no right to terminate unilaterally that protection. Third, the letter was addressed to “Gentlemen” with Nanakuli’s name typed in at the top; it was apparently addressed to all Shell’s Hawaiian customers. Fourth, Nanakuli officials testified that they did not believe the letter was applicable to its unusual situation of already having a long-term contract with Shell. Smith and Lennox both testified that they did not view the letter as applicable to that supply contract but only to sales it might make to third parties under the distributorship contract. Shell characterized that argument as disingenuous, given Nanakuli’s infrequent, if not nonexistent, sales to third parties. Nevertheless, the letter does assume that a Shell customer would need to sign a contract or purchase order setting forth the terms of sale as well as the price for any asphalt they would need to buy after an award. Nanakuli, on the other hand, already had a supply contract with all the terms of sales set forth, a point its two officials made repeatedly at trial. For example, Smith testified he saw no need to notify Shell because Bohner knew of each project and because the supply contract was a firm contractual commitment with Shell.⁶³ Shell had added in the 1970 letter: “All previous contractual commitments made prior to the date of this letter will, of course, be honored.” Smith’s reading of this was that Nanakuli’s supply contract with Shell was a firm contractual commitment by Shell and that no further contract was needed. “We felt that this letter was unapplicable (sic) to our supply contract, that we already had a contractual commitment with Shell Oil Company which was not to end before 1975.” Smith said he did not discuss with Bohner that part of the letter, which also announced the increase in asphalt prices to $44 on January 1, because “(t)here was no need to. The price had been protected before. He knew it. We knew it.” There is an additional reason why Nanakuli might have felt that the letter did not apply to its particular situation. The letter announced that Shell would charge “from this date forward … the posted selling price on the date of purchase.” This was different from the express term of Nanakuli’s contract with Shell, which was the price in effect at time of delivery. Either Shell’s agreement with Nanakuli embraced price protection, in which case Shell could not unilaterally abrogate Nanakuli’s rights by this letter, or, as Shell argues, only the words on the written contract counted, in which case the price to Nanakuli was Shell’s price at delivery. In the latter case, Nanakuli could safely ignore any attempt by Shell to change the price to that at purchase. Given Nanakuli’s particular agreement, as it understood the agreement to be, the jury could have believed that Nanakuli officials reacted reasonably in believing that parts of the letter dealing with the need to notify Shell of awards won did not apply to Nanakuli.

Nanakuli’s strongest argument as to its failure to comply with the letter was that there was no need to notify Shell, as Bohner already knew of each project as it was bid and each award as it was made. Lennox testified, “The Shell Oil representative was in our office frequently and knew what jobs we had successfully bid.” At another point Lennox said, “The Shell representative was in the office and was fully aware of what we were doing and what jobs we had gotten. He was familiar and was more or less a partner in this thing; he even attended the bid openings at times. He was fully aware and congratulated us every time we got a nice big job because it was more for Shell.” Bohner kept his principals informed of Nanakuli’s projects, Lennox said. He added, “(W)e had always been protected and our understanding was that we were protected and it wasn’t necessary to keep making notices.” Smith in his deposition said that Bohner only told him that he lacked the authority to grant price protection “after the fact.” Since he knew nothing about how Shell arrived at its pricing, Smith assumed Bohner could carry out Shell’s agreement to price protect Nanakuli each time it was needed without consulting the mainland.

After Shell’s December 31, 1973, letter arrived on January 4, 1974, Smith called Bohner, as he had done before at times of price increases, to ask for price protection, this time on 7200 tons. Bohner told Smith that he would have to get in touch with the mainland, but he expected that the response would be negative. Smith wrote several letters in January and February asking for price protection. After getting no satisfaction, he finally flew to California to meet with Lawson, Fuller, and Chippendale. Chippendale, from the Houston office, was acknowledged by the other two to be the only person with authority to grant price protection.⁶⁴ All three Shell officials lacked any understanding of Nanakuli and Shell’s long, unique relationship or of the asphaltic trade in Oahu. They had never even seen Shell’s contracts with Nanakuli before the meeting. When apprised of the three and their seven-year duration, Fuller remarked on the unusual nature of Nanakuli’s relations with Shell, at least within his district. Chippendale felt it was probably unique for Shell anywhere. Smith testified that Fuller admitted to knowing nothing, beyond the printed page of Nanakuli’s agreement with Shell, of the background negotiation or Shell’s past pricing policies toward Nanakuli. Chippendale could not understand why Nanakuli even had a distributorship contract giving it a $2 commission on sales; he thought Nanakuli had been paid “illegally.” No one had ever heard about Shell giving price protection to Nanakuli before. Instead of asking Bohner directly, Chippendale told Fuller to search the files for something on paper. Fuller testified that Shell would not act without written proof of Shell’s past price protection of Nanakuli. He admitted he was unable to find anything in the files before 1972 because the departments had been reorganized in that year, about which he informed Chippendale. Chippendale accordingly decided to deny Nanakuli any price protection and wrote a draft of a letter for Fuller to send Nanakuli. He wrote a note to Fuller that he should adopt the “least said” approach with Nanakuli and check any letters with the legal department. When asked at trial if he had ever simply asked Bohner about Shell’s past pricing practices toward Nanakuli, Fuller answered, “No, I didn’t know we had it, other than the standard policy if we had one which we didn’t.”⁶⁵ Chippendale told Smith in the California meeting that, although 7200 tons represented an infinitesimal amount for Shell, it would set a bad precedent for Shell, since price protection was not Shell’s “current policy.” (emphasis supplied). Shell people told him, Smith testified from contemporaneously made notes, that “any past practice was inapplicable at the present time.”⁶⁶ Smith testified from those same notes that he had left the meeting under the impression that Shell was going out of business in Hawaii.

We conclude that the decision to deny Nanakuli price protection was made by new Houston management without a full understanding of Shell’s 1969 agreement with Nanakuli or any knowledge of its past pricing practices toward Nanakuli. If Shell did commit itself in 1969 to price protect Nanakuli, the Shell officials who made the decisions affecting Nanakuli in 1974 knew nothing about that commitment. Nor did they make any effective effort to find out. They acted instead solely in reliance on the 1969 contract’s express price term, devoid of the commercial context that the Code says is necessary to an understanding of the meaning of the written word. Whatever the legal enforceability of Nanakuli’s right, Nanakuli officials seem to have acted in good faith reliance on its right, as they understood it, to price protection and rightfully felt betrayed by Shell’s failure to act with any understanding of its past practices toward Nanakuli.

V

Scope Of Trade Usage

The validity of the jury verdict in this case depends on four legal questions. First, how broad was the trade to whose usages Shell was bound under its 1969 agreement with Nanakuli: did it extend to the Hawaiian asphaltic paving trade or was it limited merely to the purchase and sale of asphalt, which would only include evidence of practices by Shell and Chevron? Second, were the two instances of price protection of Nanakuli by Shell in 1970 and 1971 waivers of the 1969 contract as a matter of law or was the jury entitled to find that they constituted a course of performance of the contract? Third, could the jury have construed an express contract term of Shell’s posted price at delivery as reasonably consistent with a trade usage and Shell’s course of performance of the 1969 contract of price protection, which consisted of charging the old price at times of price increases, either for a period of time or for specific tonnage committed at a fixed price in non-escalating contracts? Fourth, could the jury have found that good faith obliged Shell to at least give advance notice of a $32 increase in 1974, that is, could they have found that the commercially reasonable standards of fair dealing in the trade in Hawaii in 1974 were to give some form of price protection?

[ . . . ]

VI

Waiver Or Course Of Performance

Course of performance under the Code is the action of the parties in carrying out the contract at issue, whereas course of dealing consists of relations between the parties prior to signing that contract. Evidence of the latter was excluded by the District Judge; evidence of the former consisted of Shell’s price protection of Nanakuli in 1970 and 1971. Shell protested that the jury could not have found that those two instances of price protection amounted to a course of performance of its 1969 contract, relying on two Code comments. First, one instance does not constitute a course of performance. “A single occasion of conduct does not fall within the language of this section….” Haw.Rev.Stat. § 490:2-208, Comment 4. Although the Comment rules out one instance, it does not further delineate how many acts are needed to form a course of performance. The prior occasions here were only two, but they constituted the only occasions before 1974 that would call for such conduct. In addition, the language used by a top asphalt official of Shell in connection with the first price protection of Nanakuli indicated that Shell felt that Nanakuli was entitled to some form of price protection. On that occasion in 1970 Blee, who had negotiated the contract with Nanakuli and was familiar with exactly what terms Shell was bound to by that agreement, wrote of the need to “bargain” with Nanakuli over the extent of price protection to be given, indicating that some price protection was a legal right of Nanakuli’s under the 1969 agreement.

Shell’s second defense is that the Comment expresses a preference for an interpretation of waiver.

3. Where it is difficult to determine whether a particular act merely sheds
light on the meaning of the agreement or represents a waiver of a term of
the agreement, the preference is in favor of "waiver" whenever such
construction, plus the application of the provisions on the reinstatement
of rights waived ..., is needed to preserve the flexible character of
commercial contracts and to prevent surprise or other hardship.

Id., Comment 3. The preference for waiver only applies, however, where acts are ambiguous. It was within the province of the jury to determine whether those acts were ambiguous, and if not, whether they constituted waivers or a course of performance of the contract. The jury’s interpretation of those acts as a course of performance was bolstered by evidence offered by Shell that it again price protected Nanakuli on the only two occasions of post-1974 price increases, in 1977 and 1978.⁶⁷

VII

Express Terms As Reasonably Consistent With Usage In Course

of Performance

Perhaps one of the most fundamental departures of the Code from prior contract law is found in the parol evidence rule and the definition of an agreement between two parties. Under the U.C.C., an agreement goes beyond the written words on a piece of paper. “ ‘Agreement’ means the bargain of the parties in fact as found in their language or by implication from other circumstances including course of dealing or usage of trade or course of performance as provided in this chapter (sections 490:1-205 and 490:2-208).” Id. § 490:1-201(3). Express terms, then, do not constitute the entire agreement, which must be sought also in evidence of usages, dealings, and performance of the contract itself. The purpose of evidence of usages, which are defined in the previous section, is to help to understand the entire agreement.

(Usages are) a factor in reaching the commercial meaning of the agreement which the parties have made. The language used is to be interpreted as meaning what it may fairly be expected to mean to parties involved in the particular commercial transaction in a given locality or in a given vocation or trade…. Part of the agreement of the parties … is to be sought for in the usages of trade which furnish the background and give particular meaning to the language used, and are the framework of common understanding controlling any general rules of law which hold only when there is no such understanding.

[ . . .]

Of these three, then, the most important evidence of the agreement of the parties is their actual performance of the contract. Id. The operative definition of course of performance is as follows: “Where the contract for sale involves repeated occasions for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance accepted or acquiesced in without objection shall be relevant to determine the meaning of the agreement.” Id. § 490:2-208(1). “Course of dealing … is restricted, literally, to a sequence of conduct between the parties previous to the agreement. However, the provisions of the Act on course of performance make it clear that a sequence of conduct after or under the agreement may have equivalent meaning (Section 2-208).” Id. 490:1-205, Comment 2. The importance of evidence of course of performance is explained: “The parties themselves know best what they have meant by their words of agreement and their action under that agreement is the best indication of what that meaning was. This section thus rounds out the set of factors which determines the meaning of the ‘agreement’ …” Id. § 490:2-208, Comment 1. “Under this section a course of performance is always relevant to determine the meaning of the agreement.” Id., Comment 2.⁶⁸

Our study of the Code provisions and Comments, then, form the first basis of our holding that a trade usage to price protect pavers at times of price increases for work committed on nonescalating contracts could reasonably be construed as consistent with an express term of seller’s posted price at delivery. Since the agreement of the parties is broader than the express terms and includes usages, which may even add terms to the agreement,⁶⁹ and since the commercial background provided by those usages is vital to an understanding of the agreement, we follow the Code’s mandate to proceed on the assumption that the parties have included those usages unless they cannot reasonably be construed as consistent with the express terms.

Federal courts usually have been lenient in not ruling out consistent additional terms or trade usage for apparent inconsistency with express terms. The leading case on the subject is Columbia Nitrogen Corp. v. Royster Co., 451 F.2d 3 (4th Cir. 1971). Columbia, the buyer, had in the past primarily produced and sold nitrogen to Royster. When Royster opened a new plant that produced more phosphate than it needed, the parties reversed roles and signed a sales contract for Royster to sell excess phosphate to Columbia. The contract terms set out the price that would be charged by Royster and the amount to be sold. It provided for the price to go up if certain events occurred but did not provide for price declines. When the price of nitrogen fell precipitously, Columbia refused to accept the full amount of nitrogen specified in the contract after Royster refused to renegotiate the contract price. The District Judge’s exclusion of usage of the trade and course of dealing to explain the express quantity term in the contract was reversed. Columbia had offered to prove that the quantity set out in the contract was a mere projection to be adjusted according to market forces. Ambiguity was not necessary for the admission of evidence of usage and prior dealings.⁷⁰ Even though the lengthy contract was the result of long and careful negotiations and apparently covered every contingency, the appellate court ruled that “the test of admissibility is not whether the contract appears on its face to be complete in every detail, but whether the proffered evidence of course of dealing and trade usage reasonably can be construed as consistent with the express terms of the agreement.” Id. at 9. The express quantity term could be reasonably construed as consistent with a usage that such terms would be mere projections for several reasons:⁷¹ (1) the contract did not expressly state that usage and dealings evidence would be excluded; (2) the contract was silent on the adjustment of price or quantities in a declining market; (3) the minimum tonnage was expressed in the contract as Products Supplied, not Products Purchased; (4) the default clause of the contract did not state a penalty for failure to take delivery; and (5) apparently most important in the court’s view, the parties had deviated from similar express terms in earlier contracts in times of declining market. Id. at 9-10. As here, the contract’s merger clause said that there were no oral agreements. The court explained that its ruling “reflects the reality of the marketplace and avoids the overly legalistic interpretations which the Code seeks to abolish.” Id. at 10. The Code assigns dealing and usage evidence “unique and important roles” and therefore “overly simplistic and overly legalistic interpretation of a contract should be shunned.” Id. at 11.

Usage and an oral understanding led to much the same interpretation of a quantity term specifying delivery of 500 tons of stainless-steel solids in Michael Schiavone & Sons, Inc. v. Securalloy Co., 312 F. Supp. 801 (Conn. 1970). In denying summary judgment for plaintiff-buyer, the court ruled that defendant-seller could attempt to prove that the quantity term was modified by an oral understanding, in line with a trade usage, that seller would only supply as many tons as he could, with 500 tons the upper limit. The court reasoned that an additional term with a lesser effect than total contradiction or negation of a contract term can be a consistent term and “(e)vidence that the quantity to be supplied by defendant was orally understood to be up to 500 tons cannot be said to be inconsistent with the terms of the written contract which specified the quantity as ‘500 Gross Ton.’ “ Id. at 804.⁷²

The Tenth Circuit in Amerine National Corp. v. Denver Feed Co., 493 F.2d 1275 (10th Cir. 1974), found that the warranty that Amerine, the seller, would provide turkeys was not breached by delivery of “H&N” turkeys instead of “Amerine”. In light of Amerine’s prior dealings and a trade usage that “Amerine” or any trade-name turkey simply meant any turkeys sold by that manufacturer, not a particular kind or breed of turkey, any agreement to provide turkeys did not oblige Amerine to provide only its own strain of turkeys.

The Fifth Circuit, in a carefully reasoned opinion, Chase Manhattan Bank v. First Marion Bank, 437 F.2d 1040 (5th Cir. 1971), reversed the lower court’s refusal to allow usage and dealing evidence that seemingly contradicted the express term. The standby agreement in Chase stated that none of the banks would unilaterally demand that the debtor pay up or sell the collateral stock unless all creditors agreed to the sale. The subordination agreement-signed after the standby agreement, incorporated into it, and by its terms to last a maximum of 18 months-provided that the other creditor banks were subordinated to the extent of $1 a share to Chase because of its further loan to the debtor. The usage of the trade and the course of dealing between the parties, ruled inadmissible by the lower court, were that the parties had not intended to limit the duration of the subordination agreement to 18 months.⁷³ The appellate court reversed, directing that evidence of usage and dealings be admitted because it “merely delineates a commercial backdrop for intelligent interpretation of the agreement,” without “delimit(ing) a particular party’s intent, except insofar as it reveals that some ascribed intent might be ludicrous in the commercial world.” Id. at 1046.⁷⁴ The court wrote, “In providing for the admission of such evidence, the Code manifests the law’s recognition of the fact that perception is conditioned by environment: unless a judge considers a contract in the proper commercial setting, his view is apt to be distorted or myopic, increasing the probability of error.” Id. The court added, “If, in light of banking practices in problem loan situations and Chase’s dealings with First Marion, an unsecured loan to the (debtor) would have seemed unreasonable, ambiguities arise within the subordination provision.” Id. at 1047. Usage and dealings evidence here would “permit analysis of the written agreement in the proper commercial setting. Such evidence might disclose ambiguities within the provisions of the agreement….” Id. For a court to use usage evidence to better understand express terms does not mean it is allowing the written instrument to be contradicted; the use of such evidence “simply places the court in the position of the parties when they made the contract, and enables it to appreciate the force of the words they used in reducing it to writing.” Id. at

1. “The object of rules of construction generally, and of parol evidence particularly, is to ascertain the intention of the parties.” Id.⁷⁵ It is noteworthy that in Chase, the contradiction was total, not the partial exception Nanakuli argues here.

The Fourth Circuit has been similarly liberal in admitting parol evidence to contradict express terms. After its pacesetting decision in Columbia Nitrogen, supra, it held in Brunswick Box Co. v. Coutinho, Caro & Co., 617 F.2d 355, 360-61 (4th Cir. 1980), that “the Parol Evidence Rule is not a bar to the introduction of extrinsic evidence as to the intention of the parties in the use of the term ‘F.A.S. Norfolk, Virginia’, in the written agreement,” even though “the term, on its face, is unambiguous.” The appeals court, therefore, reversed the lower court’s exclusion ruling and remanded for trial. The term “F.A.S.” is defined by the Code as meaning delivered to the buyer alongside the vessel by the seller, which was also the usage in the port. The plaintiff-seller, however, argued that the dealings between the parties leading to the contract, the actual agreement of the parties, and their course of performance of the contract were that the seller would unload on the dock area. The Code does not bar such evidence “simply because a contract appears on its face to be complete, …” and therefore plaintiff-seller should have been allowed to show that the parties agreed that the seller would unload the material on the dock area rather than alongside the vessel. Id. at 359.

The Ninth Circuit’s most recent reference to the U.C.C.’s parol evidence rule was in a similar case, Board of Trade of San Francisco v. Swiss Credit Bank, 597 F.2d 146 (9th Cir. 1979), in which this court considered the meaning of an express term in a letter of credit requiring presentment of a “full set clean on board bills of lading.” When the components for the electronic calculators were sent by air, the bank protested that ocean shipment was required by the trade usage as to the express term. Although the U.C.C.’s definition of bills of lading includes airbills, this court upheld the bank’s right to prove a trade usage that in essence contradicted the Code’s broad definition of bills of lading by showing that only ocean bills of lading were allowable. The summary judgment for plaintiff was reversed and the case remanded for trial on whether the bank’s dishonor of the documentary letter of credit was wrongful. The court cited the California Supreme Court, “The test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not whether it appears to the court to be plain and unambiguous on its face, but whether the proffered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible.” Id. at 148-49.⁷⁶

[ . . . . ]

Because the jury could have found for Nanakuli on its price protection claim under either theory, we reverse the judgment of the District Court and reinstate the jury verdict for Nanakuli in the amount of $220,800, plus interest according to law.

REVERSED AND REMANDED WITH DIRECTIONS TO ENTER FINAL JUDGMENT.

Discussion

1. For software licensors and licensees who are parties to an open source license drafted by neither party, is the course of performance relevant to interpreting ambiguity? The Nanakuli court did not place much value in the course of performance of the Shell employees who had not seen the contracts prior to the 1974 meeting with Nanakuli because their interpretations of the contract did not bear on the parties’ original intent. \ Nanakuli also noted that the UCC prefers to apply the doctrine of waiver where it is difficult to determine whether course of performance or waiver should be applied, and where the parties acts are ambiguous. \ \ In the context of open source licensing, where a party to an OSI-approved license is unlikely to have insight into the preferred meaning of an ambiguous term at the time of contracting, would a court instead be likely to look the concept of waiver?
2. In Nanakuli the court determined that the UCC governed the interpretation of an obligation to offer price protection that did not appear in the agreement at all and held that the obligation was binding. How could this be relevant in open source contexts? Could a court applying the UCC determine that licensors and licensees owe each other obligations beyond what appears in the plain text of the agreement based solely on trade usage and course of performance between the parties?

3. Course of Dealing

A court may look to evidence of the parties’ conduct prior to the formation of the agreement to supplement its understanding of the express terms of the agreement, so long as the evidence is consistent with the express terms. This is known as “course of dealing” evidence.⁷⁷

Courts consider course of dealing evidence when resolving ambiguous terms because the parties’ prior dealings may indicate what was intended by that term at the time of contracting. Recall that the parol evidence rule generally discourages evidence of discussions and agreements prior to the fully integrated written agreement.⁷⁸ For the same policy reasons encouraging parties’ to capture their final intended terms in the written agreement, courts give less weight to course of dealing evidence than to course of performance evidence.⁷⁹

Similar to the discussion of course of performance above, the nature of contracting under open source licenses makes it difficult to infer meaning from the course of dealing of the licensor and licensee. For one thing, the parties to an OSI-approved open source license will not have been the parties drafting the license. For another, it is unlikely that most open source licensors and licensees have any prior course of dealing that would bear on a shared understanding of the meaning of an ambiguous open source license term prior to contracting. However, in a very small percentage of open source contracting, there may be discussions between a licensor and licensee regarding the meaning of an ambiguous license term and shared agreement on a particular choice of open source license resulting from that discussion. In those instances, a court might consider this a relevant source of evidence to supplement the meaning of the ambiguous term.

In the following case, SNMP Research Int’l, Inc. v. Nortel Networks Inc., a court finds that extrinsic facts render ambiguous the otherwise unambiguous terms of a Schedule to a software agreement, and turned to evidence of course of dealing (referred to in order to supplement the understanding of the ambiguous terms.⁸⁰

SNMP Research Int’l, Inc. v. Nortel Networks Inc., 573 B.R. 134 (Bankr. D. Del. 2017) {#snmp-research-int’l-inc-v-nortel-networks-inc-573-b-r-134-bankr-d-del-2017}

I. INTRODUCTION⁸¹

The litigants in the adversary proceeding are plaintiffs SNMP Research International, Inc. (“SNMPRI”) and SNMP Research, Inc. (“SNMPR”) (collectively, “SNMP”) and the defendants, Nortel Networks Inc. and affiliated entities (“Nortel”). The Court held a two-day trial on May 11 and 12, 2017 (the “Trial”) to determine whether certain software was licensed for use or distribution by Nortel with respect to products after June 20, 2003. Adv. D.I. 540.

The issue which the Court is addressing is narrow but the parties presented considerable evidence at the Trial. The issue (the “Schedule 1 Issue”) is “whether the SNMP software was licensed for use or distribution under Schedule 1A of the Nortel License . . . with respect to any products after June 20, 2003.”⁸² Scheduling Order Concerning Motion to Amend Proofs of Claim and Schedule 1 Issue. D.I. 18020, Adv. D.I. 540.

The Court has subject matter jurisdiction to consider the Schedule 1 Issue and the issues tried during the May 11-12 hearing pursuant to 28 U.S.C. § 1334 and venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409. The matters addressed during the Trial are core proceedings pursuant to 28 U.S.C. § 157(b)(2).

[ . . . . ]

**NORTEL’S UNDERSTANDING OF SCHEDULE 1 IS CORRECT **

**A. Schedule 1 Is Ambiguous **

Under New York law, the first step in interpreting a contract is answering “the threshold question of whether the terms of the contract are ambiguous.” Alexander & Alexander Servs., Inc. v. These Certain Underwriters at Lloyd’s, London, 136 F.3d 82, 86 (2d Cir. 1998). “An ambiguity exists where the terms of a contract could suggest ‘more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business.’” Id. (quoting Lightfoot v. Union Carbide Corp., 110 F.3d 898, 906 (2d Cir.1997)); see also Dev. Specialists, Inc. v. Peabody Energy Corp. (In re Coudert Bros.), 487 B.R. 375, 380 (S.D.N.Y. 2013) (“[I]n analyzing contractual text, a court need not turn a blind eye to context.” (citation omitted)).

“Ambiguity with respect to the meaning of contract terms can arise either from the language itself or from inferences that can be drawn from this language. Hence, only where the language and the inferences to be drawn from it are unambiguous may a district court construe a contract as a matter of law . . . .” Alexander & Alexander Servs. Inc., 136 F.3d at 86 (quoting Cable Sci. Corp. v. Rochdale Vill., Inc., 920 F.2d 147, 151 (2d Cir.1990)) (citation omitted). To conclude that contractual language is unambiguous, a Court must find that “it has a definite and precise meaning, unattended by danger of misconception in the purport of the [contract] itself, and concerning which there is no reasonable basis for a difference of opinion.” Serdarevic v. Centex Homes, LLC, 760 F. Supp. 2d 322, 329 (S.D.N.Y. 2010) (alteration in original) (quoting Hunt Ltd. v. Lifschultz Fast Freight, Inc., 889 F.2d 1274, 1277 (2d Cir.1989)); see also Marathon Asset Mgmt., LP v. Angelo Gordon & Co, LP (In re Energy Future Holdings Corp.), 2017 WL 1170830, at *4 (D. Del. 2017).

Applying these principles, the Court concluded at a hearing on May 2, 2017 that Schedule 1 is ambiguous. Order re Motion to Exclude, May 4, 2017 (Adv. D.I. 560); May 2 Tr. 120:1-130:16. The Court is therefore free to consider both the agreement’s text and “any available extrinsic evidence to ascertain the meaning intended by the parties during the formation of the contract.” Alexander & Alexander Servs., Inc., 136 F.3d at 86. Because “the contract is ambiguous and relevant extrinsic evidence as to its meaning is available, its interpretation is a question of fact for the factfinder.” New Windsor Volunteer Ambulance Corps, Inc. v. Meyers, 442 F.3d 101, 111 (2d Cir. 2006).

The Court concludes that both the provisions of Schedule 1 and the available extrinsic evidence support Nortel’s understanding of the agreement. Any existing products and any development projects originating from Bay Networks that emerged during the three- year term of Schedule 1 would take advantage of the lifetime royalty buy out until the products aged out of the marketplace.

**B. Schedule 1’s Provisions Support Nortel **

Schedule 1 specifically refers to and incorporates the Bay Networks License. Under New York law, a document is incorporated by reference into a contract where (1) the contract identifies the document to be incorporated “beyond all reasonable doubt,” and (2) the parties clearly knew of and assented to the incorporated terms. Laureate Educ., Inc. v. Ins. Co. of Pennsylvania, 2014 WL 1345888, at *7 (S.D.N.Y. 2014) (quoting PaineWebber Inc. v. Bybyk, 81 F.3d 1193, 1201 (2d Cir.1996)).⁸³

Accordingly, interpreting the meaning of Schedule 1 requires consideration of the Bay Networks License and the rights it conferred. The Bay Networks License provided royalty buy outs for SNMPRI’s EMANATE and ARL products. Bay Networks purchased the EMANATE buy out and Nortel completed the purchase of the ARL buy out in February 2000, more than a year after it had acquired Bay Networks. Ex. D-4 at 3; Ex. D80 at 1; Ex. D-79A at 2, 8. By acquiring these buy outs, Bay Networks and later Nortel obtained the right to “distribute in perpetuity an unlimited number of binary copies” of the designated SNMPRI software. Ex. D-2 at 19; Ex. D-4 at 2; Trial Tr. 308:11-310:7.⁸⁴

Schedule 1 preserved the royalty buyouts for all products and projects originating from Bay Networks that existed when Schedule 1 was signed or that came into existence during its three-year term. The specific provisions of Schedule 1 that implemented this result are as follows:

• The “Specified Product or Project” section identifies the products and projects that would receive this benefit as follows: “[a]ll products of units and projects originating from what was Bay Networks.” Ex. D-7C at 1.
• The “Development Software” and “Run-Time Software” sections refer to the Bay Networks License to identify the specific SNMPRI software that was covered by the royalty buy out under the Bay Networks License and would likewise be covered by Schedule 1, including EMANATE. Id.
• The “Royalties” section refers to the Bay Networks License, stating: “As described in the agreements and amendments thereto between SNMPRI and Bay Networks and its predecessor entities.” As noted, the Bay Networks agreements provided for a royalty buy out as to the designated SNMPRI software, including EMANATE. Id.
• The “Additional Conditions” section states as follows: \ This Schedule supersedes all of the prior agreements between SNMPRI and Bay Networks and its predecessor entities as referenced above, and all such agreements are hereby terminated by execution of this Schedule. This Schedule and the license in regard to the Development Software and Run-Time Software shall terminate and be of no further effect after a period of three years from the last date that this Schedule is executed below. Id. at 2.

The combined effect of these provisions is that “[a]ll products of units and projects originating from what was Bay Networks” in existence during Schedule 1’s three-year term will receive a royalty buy out in accordance with the Bay Networks License so that they can use the designated SNMPRI software during the lifetime of the product line. This conclusion is consistent with the fact that Schedule 1 provides a royalty buy out for the products and projects it covers. Schedule 1 refers to the royalty provisions of the Bay Networks License, which provide for a royalty buy out for the designated SNMPRI software. It is confirmed by the November 16, 1999 email by Southwood concerning Schedule 1, which states that the parties intended Schedule 1 to provide the “lifetime royalty buy out” to the products and projects it covers. Ex. D-76C at 1.

SNMPRI contends the result of this language is that, after three years, any right to use the software covered by the Bay Networks License and Schedule 1 is stripped away from the legacy Bay Networks products and projects, such that these products’ and projects’ continued use of that software would become infringing. The Court does not accept SNMPRI’s interpretation. SNMPRI violates the fundamental tenet of New York law that a contract must be considered from the perspective of a “reasonably intelligent person who has examined the context of the entire integrated agreement.” Alexander & Alexander Servs., 136 F.3d at

1. SNMPRI asks the Court to disregard what Schedule 1 actually says and does in incorporating the royalty buy out of the Bay Networks License and to read the language in the “Additional Conditions” section without the appropriate context.

Second, SNMPRI’s proposed new interpretation would lead to the unreasonable consequence that would cause existing products and projects covered by Schedule 1 to be stripped of their right to use the SNMPRI software at the three-year mark. They would be infringing from that point onward. This would be unworkable for Nortel because it had incorporated the SNMPRI software into the core codebase of the BayStack/ES/ERS switches and to extricate this software from the core codebase would be difficult and time-consuming, just as it would be very difficult to remove thread of a particular color from a multicolor jacket. Mead Dep. 145:13-146:25, 230:13-231:12, 231:14-232:4, 233:4-12; Trial Tr. 420:14-422:8.

If the parties had intended Schedule 1 to strip existing products of their right to use SNMP software, they would have included in Schedule 1 a mechanism for extending the right to use the SNMP software in these products beyond the three-year mark, as Razgaitis testified. Trial Tr. 426:20-427:5, 429:18-430:6. For example, there would be a provision for an additional payment to be made to give these products the right to use the software until they aged out of the market, just as the Bay Networks License itself had provided. In the absence of such a provision, Nortel would be at SNMPRI’s mercy at the end of the three year term. Trial Tr. 420:23-421:5, 421:9-12. As Razgaitis explained at trial, the fact that Schedule 1 lacks any mechanism for extending Nortel’s rights beyond the end of its three-year term which indicates, based on industry custom and practice, that the parties did not intend for these rights to be stripped away at the three-year mark. Trial Tr. 429:18-430:6.

The Court agrees with Nortel that Bay Networks products and projects that were in existence during Schedule 1’s three-year term received the royalty buy out of the Bay Networks License, so that they would be able to use the software covered by Schedule 1 until they aged out of the market. Schedule 1 would not cover any new project that Nortel began to develop after the three-year mark. In that circumstance, at the beginning of such a new development project, Nortel could decide whether it was interested in using SNMPRI software in the new development. If so, it could discuss that possibility with SNMPRI and seek to agree on mutually acceptable terms. If not, it could develop its own software or choose from other vendors. Nortel’s reading of Schedule 1 means that neither party would be at the other’s mercy after Schedule 1 ended. Thus, “the context of the entire integrated agreement” from the perspective of “a reasonably intelligent person . . . who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business,” supports Nortel’s interpretation of Schedule 1. Alexander & Alexander Servs., Inc., 136 F.3d at 86 (citation omitted).

SNMPRI’s reading ignores key parts of Schedule 1, in particular the incorporation of the royalty buy out from the Bay Networks License, and would produce a result that is both inequitable and commercially unreasonable. SNMPRI’s proposed interpretation 69 of Schedule 1 would be incompatible with the goal of contract interpretation under New York law, which “must be to accord the words of the contract their ‘fair and reasonable meaning’” by taking into account “not merely literal language, but whatever may be reasonably implied therefrom.” Sutton v. E. River Sav. Bank, 435 N.E.2d 1075, 1078 (N.Y. 1982) (citations omitted). “[P]arties to an agreement are presumed to act sensibly in regard to it and an interpretation that produces an absurdly harsh result is to be avoided.” Martilet Mgmt. Servs., Inc. v. Bailey, 2013 WL 5420966, at *3 (S.D.N.Y. 2013) (alteration in original) (citations omitted); see also Williston on Contracts § 32.11 (4th ed. 2017) (“[I]nterpretations which render the contract fair and reasonable are preferred to those which render the contract harsh or unreasonable to one party.”). Therefore, “[a] court will endeavor to give the [contract] construction most equitable to both parties instead of the construction which will give one of them an unfair and unreasonable advantage over the other.” Metro. Life Ins. Co. v. Noble Lowndes Int’l, Inc., 643 N.E.2d 504, 508 (N.Y. 1994) (second alteration in original) (citation omitted). Here, the Court concludes that Nortel’s explanation of Schedule 1 is “most equitable to both parties.”

**C. The Parties’ Interactions Support Nortel **

Having concluded that Schedule 1 is ambiguous, the Court “may accept any available extrinsic evidence to ascertain the meaning intended by the parties during the formation of the contract.” Alexander & Alexander Servs., Inc., 136 F.3d at 86. This includes evidence of (1) the parties’ negotiations, Prior v. Innovative Commc’ns Corp., 207 F. App’x 158, 162 (3d Cir. 2006) (applying New York law, noting that the parties’ “course of 70 negotiations” is proper extrinsic evidence); (2) correspondence between the parties, Compagnie Financiere de CIC et de L’Union Europeenne v. Merrill Lynch, Pierce, Fenner & Smith Inc., 232 F.3d 153, 160 (2d Cir. 2000) (finding letters sent by the parties prior to the execution of an agreement to be probative extrinsic evidence); (3) the parties’ course of performance under the contract, Jobim v. Songs of Universal, Inc., 732 F. Supp. 2d 407, 416 (S.D.N.Y. 2010) (noting that proper “extrinsic evidence includes the contracting parties’ course of performance”); New Windsor Volunteer Ambulance Corps, Inc., 442 F.3d at 113 (affirming the district court’s reliance on “the parties’ course of conduct over the years in order to determine their intent”); and (4) expert evidence on custom and practice in the relevant industry, Evans v. Famous Music Corp., 807 N.E.2d 869, 871, 873 (N.Y. 2004) (interpreting an ambiguous agreement based in part on expert testimony that where music publishers intend to share the benefit of foreign tax credits with songwriters, they include an express clause to that effect); Last Time Beverage Corp. v. F & V Distrib. Co., LLC, 951 N.Y.S.2d 77, 81-82 (N.Y. App. Div. 2012) (relying on expert testimony that franchisors in the soft drink industry ordinarily give exclusive rights to distributors to distribute new soft drinks in their territory to aid in interpreting an ambiguous agreement). The extrinsic evidence in each of these categories confirms that Nortel’s position on Schedule 1 is correct.

**1. SNMPRI Confirmed Schedule 1’s Meaning And Effect Before Signing **

Southwood, SNMPRI’s point person in the negotiations, expressly explained and confirmed Schedule 1’s meaning shortly before it was signed. Southwood did so in an email to Nortel’s lead negotiator, Hyslop. Southwood made clear in his email that he understood that “everyone’s expectations are [being] fixed for all time.” Ex. D-76C at 1. Referring to Schedule 1 which he described as the “final Bay transfer to Nortel” Southwood stated the following:

I told [the lawyer preparing Schedule 1] that the royalty buy out would
expire in three years. . . . By expire I mean that new products/projects
brought on line after three years would address royalties on their own
merit. Current Bay products and development projects for the next three
years will take advantage of the lifetime royalty buy out until their
products have aged out of the marketplace.

Id.

Southwood noted in his email that he had communicated the same understanding of Schedule 1 to SNMPRI’s counsel, Rick Barnes (“Barnes”), that he was providing to Nortel. Id. Barnes was drafting the text of Schedule 1. Less than 48 hours later, Southwood sent Hyslop a draft of Schedule 1, which has exactly the same content as the final signed version. Ex. D-183.01; Ex. D-183.02. As in his November 16 email, Southwood’s November 18 email attaching the draft of Schedule 1 called it “the permanent Bay to Nortel transfer.” Ex. D-183.01; Ex. D-183.02.

Southwood’s email is important in two respects. First, it confirms that Schedule 1’s purpose is to confer the lifetime royalty buy out on the products and projects it covers. Southwood’s email refers to the “buy out” and the “lifetime royalty buy out.” Ex. D-76C at 1. Given that Schedule 1 confers a lifetime royalty buy out, it makes no sense for SNMPRI to contend that the products and projects it covers would be stripped of their right to use the designated software after three years. That is directly antithetical to the meaning and purpose of a lifetime royalty buy out, which is to confirm a right to use the software for the lifetime of the product line.

Second, Southwood’s explanation of what it means to provide that Schedule 1 will expire goes to the heart of SNMPRI’s argument. SNMPRI contends that because Schedule 1 says it will terminate and be of no further effect after three years, that means that any product or project it covers will lose its right to use the SNMPRI software after three years. SNMPRI contends that “terminate means terminate,” and so Schedule 1 must be interpreted in the way it urges. Southwood’s email, however, explicitly explains what is meant by saying that Schedule 1 will terminate—i.e., “expire”—in three years.

Southwood first says that the parties agreed “that the royalty buy out would expire in three years.” Southwood explains what that means: “By expire I mean that new products/projects brought on line after three years would address royalties on their own merit. Current Bay products and development projects for the next three years will take advantage of the lifetime royalty buy out until their products have aged out of the marketplace.” Ex. D-76C at 1.

**2. The May 2000 Email From Case To Reeves Confirms The Meaning of Schedule 1 **

Writing to Reeves in May 2000, Case referred to “Schedule 1 [as] the document that grandfathers the Bay licenses over to the new Nortel master agreement” and assured him “I was correct when I told you that the cost is $0.” Ex. D-77. Case’s description is fully consistent with Nortel’s reading of Schedule 1. It “grandfathers the Bay licenses over to the new Nortel master agreement,” so that the BayStack/ES/ERS switches can continue using the SNMPRI software. It also provides that there would be no additional cost.

Case’s email is also important for what he did not say to Reeves. There is no suggestion, as SNMPRI contends now, that Schedule 1 would serve to strip the BayStack/ES/ERS switches of the right to use the SNMPRI software after three years, and that the cost of obtaining an ongoing right to use the software would not be zero but instead would be tens of millions of dollars. Case said no such thing in this email. He did not say any such thing at any time, including during the period leading up to the end of Schedule 1’s three- year term. Nor did anyone else acting for SNMPRI or SNMPR say any such thing to anyone at Nortel at any time.

**3. SNMPRI’s Repeated Renewal of The SSA Confirms Nortel’s Continued Use **

SNMPRI’s repeated renewal of the SSA covering the Schedule 1 software for years after June 2003 further confirms Nortel’s ongoing right to use that software. SNMPRI claims that it was a “mistake.” Trial Tr. 269:22- 270:1 (Case contending that “we shouldn’t have done it. That was a mistake.”). SNMPRI’s claim of a purported mistake is not credible.

It is black letter New York law that “when resolving disputes concerning the meaning of ambiguous contract language, unexpressed subjective views have no proper bearing. Only the parties’ objective manifestations of intent are considered.” Nycal Corp. v. Inoco PLC, 988 F. Supp. 296, 302 (S.D.N.Y. 1997); see also Faulkner v. Nat’l Geographic Soc’y, 452 F. Supp. 2d 369, 377-78 (S.D.N.Y. 2006) (“[O]nly objective manifestations of intent are relevant under New York law. . . . [S]tatements of subjective intention uncommunicated to the other contracting party are immaterial in construing the terms of the contract.” (citations omitted)). Unlike the subjective intent or post hoc conclusions of contracting parties, the parties’ course of dealing throughout the life of a contract is highly relevant to determining the meaning of the terms of the agreement.” Faulkner, 452 F. Supp. 2d at 381. In fact, “[a]s the Supreme Court has explained, ‘[g]enerally speaking, the practical interpretation of a contract by the parties to it for any considerable period of time before it comes to be the subject of controversy is deemed of great, if not controlling, influence.’” Id. (second alteration in original) (quoting Old Colony Trust Co. v. Omaha, 230 U.S. 100, 118 (1913)).

SNMPRI confirmed Nortel’s right to use the software by repeatedly renewing the SSA for the Schedule 1 software for years after June 2003, under which SNMPRI provided Nortel with updated versions of the Schedule 1 software and in return collected thousands of dollars from Nortel. The Court looks to the parties’ course of conduct.

**4. SNMPRI Confirmed That The Buy Out Gave Nortel An Ongoing Right **

SNMPRI stated in August 2003, after the end of Schedule 1’s three-year term, that Nortel had an ongoing royalty buy out under Schedule 1. This confirmation came as part of an email exchange beginning in July 2003 between Tremblay, a Nortel employee who was just becoming involved in the relationship with SNMPRI, and SNMPRI employees Southwood and Hopper. Ex. D-158.01; Ex. 158.02. Tremblay was reviewing the license agreement between Nortel and SNMPRI and its various schedules and seeking to learn about their status. Trial Tr. 190:1-9; Tremblay Dep. 90:18-91:1. In that context, Hopper made the following statement about Schedule 1 in an August 2003 email to Tremblay: “According To John [Southwood], as I understood him, BAY has a Royalty-BuyOut on EMANATE Sources on WinNT, Solaris, and VxWorks as well as Asynchronous Request Libraries on Solaris, HP-UX, AIX and WinNT.” Ex. D-158.02 at 1. Given that this statement was made months after the end of Schedule 1’s three-year term, the reference to Schedule 1 as continuing to provide a royalty buy out is directly contrary to the argument SNMPRI is proposing now. At Trial, Southwood contended this was yet another “mistake,” claiming that Hopper did not “understand [him] correctly.” Trial Tr. 195:11-196:1. The claim of mistake is not credible. As a legal matter, SNMPRI’s contention that it harbored a subjective understanding that was the opposite of what it objectively manifested to Nortel is simply not relevant. See, e.g., Faulkner, 452 F. Supp. 2d at 377-78.

[ . . . . ]

CONCLUSION

The Court recognizes SNMP’s principal arguments that: (1) Schedule 1 is unambiguous and therefore extrinsic evidence is unwarranted; (2) the merger whereby Nortel acquired Bay Networks was a reverse triangular merger, and, accordingly the Bay License was not transferable to Nortel without SNMPRI’s consent; and (3) Tremblay (of Nortel) testified that Schedule 1 terminated three years after its effective date and the 86 license was thereby terminated. The Court has rejected these arguments. First, while the individual words, “terminate,” “no further effect” and “three years” are unambiguous, the record of the case establishes that Schedule 1 was the result of a more involved set of facts which render Schedule 1 ambiguous. Second, whether California law impacted Nortel’s rights in a reverse triangular merger is not the point. What matters is what SNMP and Nortel did after the merger, how they treated their respective rights. Third, Tremblay’s involvement was relatively late in the SNMPRI - Nortel relationship. Finally, it is clear to the Court that under New York law, SNMPRI’s and Nortel’s conduct establish that there was an implied-in-fact agreement which governs the relationship between Nortel and SNMPRI and, in turn, establish that Nortel had the right to use the software after June 2003. The parties’ relationship would otherwise be counterproductive. The Court therefore finds in Nortel’s favor.

Schedule 1 confers a lifetime royalty buy out on “[a]ll products of units and projects originating from what was Bay Networks” that existed during its three-year term. Competent extrinsic evidence overwhelmingly confirms this meaning and effect. The Court will therefore rule in Nortel’s favor concerning the meaning and effect of Schedule 1. In addition, if the Court had not ruled in Nortel’s favor concerning the meaning and effect of Schedule 1, the record of the parties’ conduct and statements after June 2003 would establish an implied-in-fact contract with the same effect.

The Court directs Nortel to prepare an Order giving effect to the foregoing Opinion, to share the Order with SNMP, and to submit the Order under certification.

Discussion

1. The plain terms of the agreement as well as evidence of course of dealing and course of performance each concern objective, verifiable facts about the parties’ words and conduct. Given this emphasis in the sources of evidence used in interpretation, how relevant is evidence from only one party regarding what they thought or believed an ambiguous term to mean? If a clarification is published after the contract is implemented, would that potentially be considered course of performance evidence or course of dealing evidence, depending on the timing of the contracting? Would the publisher need to be either a licensor or licensee in order for it to be considered as one of these sources of evidence?

4. Trade Usage

Trade usage is the least important source of evidence a court will look to when interpreting an ambiguous term in an an agreement.⁸⁵ Trade usage will not be considered if it is inconsistent with the express terms of the agreement, the parties’ course of performance, or the parties’ course of dealing.⁸⁶

If a court seeks to supplement its understanding of an ambiguous term in an open source license and it does not consider any course of performance or course of dealing evidence, it may look to evidence of trade usage of the term. However, the usage of trade evidence would not be considered if it contradicted the express terms of the open source license, and trade usage must meet a high bar of widespread adoption in an industry.

In the case Wolf v. Superior Court of Los Angeles the parties to the agreement had no recollection of the discussing the meaning of the disputed term, “gross receipts,” and so the court gave full weight to the evidence of trade usage of “gross receipts” in order to interpret its meaning.⁸⁷

Wolf v. Superior Court of Los Angeles, 8 Cal. Rptr. 3d 649 (Cal. Ct. App. 2004)

JOHNSON, J.

An author seeks a writ of mandate to compel the trial court to vacate its order granting summary adjudication of issues in favor of an entertainment industry conglomerate on its cross-claims for a declaration it was not required to pay royalties on the value of promotional agreements with third parties for which it received no cash. At issue is whether the term “gross receipts” as used in the royalty agreement is reasonably susceptible to an interpretation urged by the author to mean other valuable in-kind consideration as well as cash. The trial court found the term “gross receipts” clearly and unambiguously meant “cash” only, and rejected expert extrinsic evidence indicating the term in the entertainment context meant money as well as the value of other consideration received. We conclude the trial court erred in concluding the term “gross receipts” was not reasonably susceptible to the interpretation urged by the author. Accordingly, we grant the petition for writ of mandate with directions for the trial court to vacate its order granting summary adjudication and remand for further proceedings.

FACTS AND PROCEEDINGS BELOW

Gary K. Wolf and his company Cry Wolf!, Inc. (Wolf), are the petitioners in this case. Petitioner, Gary K. Wolf, is the author of an original novel entitled, Who Censored Roger Rabbit? In his novel Wolf created characters such as Roger Rabbit, Jessica Rabbit, Baby Herman and Detective Eddie Valiant. Wolf’s novel also created and introduced the concept of Toontown as the place where these cartoon characters lived.

Shortly after the book’s release in 1981, real party in interest, Walt Disney Pictures and Television (Disney), reached an agreement with Wolf to option nearly all rights to Who Censored Roger Rabbit? Disney memorialized the terms of the parties’ oral agreement in a letter dated May 1981. According to this “deal memo,” if Disney exercised its option, Wolf would be entitled to a five percent royalty on children’s story books, children’s story-telling records and on merchandise based on the characters he had developed in Who Censored Roger Rabbit? as well as other rights.

In 1983, Disney exercised its option to purchase the rights to Who Censored Roger Rabbit? The parties thereafter executed a “long form” purchase agreement. This 1983 agreement superceded the 1981 “deal memo” and expanded on the parties’ respective rights regarding motion picture rights, television series rights, and other matters. In the 1983 agreement, Wolf also assigned to Disney the right to exploit the characters he created in his novel.

Not one of the parties who played a role in, or who helped negotiate the terms of, the 1983 agreement could recall any discussion they held at the time regarding the meaning of the term “gross receipts” as used in paragraph 21 governing royalty rights to character merchandise.

Thereafter, Disney developed and co-produced the motion picture Who Framed Roger Rabbit? with Steven Spielberg’s Amblin Entertainment. Disney released the movie in June 1988. It proved to be an extraordinarily successful feature combining cartoon and live action actors.

By 1989 a dispute arose among the parties regarding use of Wolf characters at theme parks and in movie cels, auditing rights, and other matters. The parties resolved their dispute by entering into another agreement in 1989 which clarified and/or modified certain terms of the 1983 agreement. However, Wolf’s right to a five percent royalty on merchandise depicting his characters remained intact. Again, none of the negotiating parties to the 1989 agreement could recall any discussion regarding the meaning of Wolf’s right to a royalty on “gross receipts” from character merchandise.

In order to promote the theatrical and home video releases of the film (and at various times thereafter to promote and sustain the Roger Rabbit franchise), Disney entered into alliance agreements with corporate entities such as Kodak, Coca-Cola, and Burger King licensing them to use Roger Rabbit and Disney characters in their advertising and promotions. The terms of Disney’s promotional agreements with these third parties varied: sometimes Disney received money from the other company; sometimes Disney paid the other company, and in still other situations, no cash exchanged hands. An example of this latter type of agreement is a Disney/McDonald’s agreement entered into in 1988 in connection with the picture’s release. In this agreement Disney allowed McDonald’s to use Wolf as well as Disney characters in a “tie-in” promotion between its menu items and the motion picture Who Framed Roger Rabbit? Under this agreement McDonald’s agreed to: (1) conduct a promotion featuring the licensed characters on 18 million collector cups; (2) purchase $12 million worth of specified advertising themed to the motion picture; and (3) place approximately $100 worth of point-of-purchase materials at each of the McDonald’s stores throughout the United States. Disney received no cash directly from McDonald’s under this particular licensing agreement.

In 1991, Disney entered into another so-called alliance agreement with Eckerd/Kodak. The agreement called for Eckerd Drug Company to fund and produce television and radios ads, print ads, in-store advertisements and to undertake other promotional efforts. The agreement required Kodak to underwrite the cost of producing hundreds of thousands of Walt Disney World collector pins depicting Disney as well as Roger Rabbit characters. In exchange, Disney provided six grand prize travel packages to Walt Disney World. Disney received no cash directly from this arrangement.

On the other hand, Disney did receive cash under its 1995 licensing agreement with McDonald’s to promote Disneyland’s 40th anniversary. McDonald’s Disneyland 40th Anniversary Happy Meal agreement was a licensing arrangement which allowed McDonald’s to give away eight toy car “premiums” featuring various Disney characters, including one car which featured two of the Roger Rabbit characters. McDonald’s paid Disney $400,000 under the licensing agreement for the eight cars. Because the Wolf characters represented one eighth of this amount Disney reported $50,000 attributable to the Roger Rabbit characters and paid Wolf five percent of this amount, or $2,500.

Wolf claimed he was entitled to a five percent royalty every time Disney licensed Roger Rabbit characters for use in any merchandising venture by Disney or through its alliance agreements. He asserted he was entitled to this royalty based on the value of the licensing agreement to Disney from use of the Roger Rabbit characters, whether or not Disney chose to receive the benefit in cash. Disney countered it was not obligated to pay Wolf any royalty unless or until it received actual cash from a licensing agreement.

Unable to resolve the dispute, Wolf filed suit against Disney in May 2001. In March 2002, Disney filed a cross-complaint for declaratory relief, reformation, money had and received and unjust enrichment. In October 2002, Disney moved for summary adjudication on three of the causes of action in its cross-complaint which sought a declaration the parties’ 1983 contract only obligated it to pay a five percent royalty on cash it received for character merchandising, and that it had no obligation to pay a royalty on any noncash consideration it received from licensing Wolf’s characters for use in merchandise for promotional purposes.⁸⁸

In its motion Disney argued it was entitled to summary adjudication of issues because the “clear and unambiguous meaning” of “gross receipts” in the contract could only mean receipt of cash money. Disney claimed the contract language was clear and unambiguous because the contract did not obligate it to account for royalties to Wolf unless and until it had received funds in the United States. In opposition, Wolf presented extrinsic evidence in the form of expert testimony to refute Disney’s assertion. According to Wolf’s expert, the term “gross receipts” in the entertainment industry means “money or the value of other consideration received by the studio,” when not otherwise defined or limited by written agreement.

The trial court heard several hours of arguments on the motion over two court days. The trial court questioned Wolf regarding his proffered extrinsic evidence that the term “gross receipts” was interpreted in the entertainment industry to mean cash or other valuable consideration.⁸⁹ The court acknowledged Wolf’s expert’s testimony created an ambiguity regarding the meaning of the term “gross receipts.” However, the court was persuaded the contract term clearly and unambiguously meant Disney’s obligation to pay Wolf royalties only arose with actual receipt of cash in connection with the merchandising of Wolf’s characters. The trial court found the term “gross receipts” was not reasonably susceptible to the meaning urged by Wolf and rejected his proffered extrinsic evidence.

In its written order the trial court ruled Disney had met its burden of showing there were no triable issues of material fact and Wolf had failed to raise a triable issue of material fact. The court thus granted summary adjudication in favor of Disney on its first, fourth and seventh causes of action in its cross-complaint. The court reasoned: “Wolfe [sic] claims entitlement to 5% of the ‘promotional value’ of the two Alliance Agreements at issue, that is, monies not actually received by Disney. However, the plain and unambiguous language of [ ] Wolfe’s [sic] contract provides that he is entitled to 5% of the monies received by Disney. The contract at issue was negotiated at arms length between the parties. The contract is clear and unambiguous and extrinsic evidence is not received to interpret the contract. The contract does not require the addition of fictional receipts, nor does it require payment to Wolfe [sic] of 5% of monies that were never received by Disney.

“Cross-Complainants’ motion for summary adjudication of issues on the first, fourth, and seventh causes of action of Disney’s cross-complaint against Wolfe [sic], filed on March 11, 2002, is granted. Pursuant to [ ] paragraph 21 of the 1983 agreement, with regard to the July 18, 1991 Kodak agreement and the March 21, 1995 McDonald’s agreement, Disney has no obligation to pay Wolfe [sic] 5% of the gross receipts, until monies have been received by Disney. Although the court has read all papers filed in support of and opposition to the instant motion, extrinsic evidence is not admitted for the reasons stated. Only admissible, non-extrinsic evidence has been considered in deciding this motion.”⁹⁰

Wolf filed a petition for writ of mandate to compel the trial court to vacate its order for summary adjudication. We issued an order directing the trial court to either vacate its order for summary adjudication and make a new and different order denying the motion for summary adjudication, or in the alternative, to show cause why the requested relief should not be granted. Respondent Superior Court did not respond and we now consider the petition.

DISCUSSION

I. STANDARD OF REVIEW.

On review of an order summarily adjudicating issues, we review the record de novo to determine whether the prevailing party has conclusively negated necessary elements of his opponent’s case or demonstrated under no hypothesis is there a material issue of fact which requires the process of a trial.⁹¹

II. THE TERM “GROSS RECEIPTS” IN PARAGRAPH 21 OF THE 1983 AGREEMENT CAN BE REASONABLY INTERPRETED TO MEAN CASH AS WELL AS VALUABLE IN-KIND CONSIDERATION.

The dispute in this case is over the meaning of the term “gross receipts” for purposes of triggering Disney’s obligation to pay Wolf royalties on character merchandising. Wolf contends “gross receipts” as used in the royalty agreement means “cash and other valuable consideration.” Disney contends the agreement clearly and unambiguously provides its obligation to pay Wolf royalties from the exploitation of certain merchandising rights arises only upon receipt of monies. The trial court ruled the term “gross receipts” was not ambiguous — it meant only cash actually received by Disney. The court further found the term was not reasonably susceptible to the meaning Wolf urged claiming the term as used in this context included not just cash, but also other valuable consideration such as promotions undertaken by third parties employing his characters. We disagree with the trial court.

“Where the meaning of the words used in a contract is disputed, the trial court must provisionally receive any proffered extrinsic evidence which is relevant to show whether the contract is reasonably susceptible of a particular meaning. (Pacific Gas & E. Co. v. G.W. Thomas Drayage etc. Co. (1968) 69 Cal. 2d 33, 39-40, 69 Cal. Rptr. 561, 442 P.2d 641; Pacific Gas & ElectricCo. v. Zuckerman (1987) 189 Cal. App. 3d 1113, 1140-1141, 234 Cal. Rptr. 630.) Indeed, it is reversible error for a trial court to refuse to consider such extrinsic evidence on the basis of the trial court’s own conclusion that the language of the contract appears to be clear and unambiguous on its face. Even if a contract appears unambiguous on its face, a latent ambiguity may be exposed by extrinsic evidence which reveals more than one possible meaning to which the language of the contract is yet reasonably susceptible. (Pacific Gas & E. Co. v. G.W. Thomas Drayage etc. Co., supra, 69 Cal.2d at p. 40 & fn. 8, 69 Cal. Rptr. 561, 442 P.2d 641; Pacific Gas & Electric Co. v. Zuckerman, supra, 189 Cal.App.3d at pp. 1140-1141, 234 Cal. Rptr. 630.)”

⁹²

The interpretation of a contract involves “a two-step process: ‘First the court provisionally receives (without actually admitting) all credible evidence concerning the parties’ intentions to determine “ambiguity,” i.e., whether the language is “reasonably susceptible” to the interpretation urged by a party. If in light of the extrinsic evidence the court decides the language is “reasonably susceptible” to the interpretation urged, the extrinsic evidence is then admitted to aid in the second step — interpreting the contract. [Citation.]’ (Winet v. Price (1992) 4 Cal. App. 4th 1159, 1165, 6 Cal. Rptr. 2d 554.) The trial court’s determination of whether an ambiguity exists is a question of law, subject to independent review on appeal. (Ibid.) The trial court’s resolution of an ambiguity is also a question of law if no parol evidence is admitted or if the parol evidence is not in conflict. However, where the parol evidence is in conflict, the trial court’s resolution of that conflict is a question of fact and must be upheld if supported by substantial evidence. (Id. at p. 1166, 6 Cal. Rptr. 2d 554.) Furthermore, ‘[w]hen two equally plausible interpretations, of the language of a contract may be made … parol evidence is admissible to aid in interpreting the agreement, thereby presenting a question of fact which precludes summary judgment if the evidence is contradictory.’ (Walter E. Heller Western, Inc. v. Tecrim Corp. (1987) 196 Cal. App. 3d 149, 158, 241 Cal. Rptr. 677.)”⁹³

The term “gross receipts” appears several times in the parties’ agreement. In the exhibit attached to the contract discussing motion picture rights, the term appears in a separate section heading and is given a specific definition peculiar to motion picture revenue and exclusions. “Gross receipts” also appears as a separate section heading in the exhibit discussing television series rights. Again, the term is defined and given a peculiar meaning tied to revenue sources and exclusions uniquely relevant to production of a potential television series. In the section of the contract discussing Wolf’s royalty rights to character merchandising the term “gross receipts” again appears. This time, however, the term does not appear in a separate section heading, and “gross receipts” is not defined. Moreover, the term is not even capitalized to suggest it has a special or limited meaning in the merchandising context. As a result, the term “gross receipts” must be considered in light of all the circumstances and the overall context of the contract.

Paragraph two of the agreement describes the merchandising rights Disney purchased:

“(h) The sole and exclusive right to make, publish and vend, throughout the world, or to license others so to make, publish and vend, representations of the characters created by the Seller [Wolf] which are in the work (including said characters from the work appearing in any such motion pictures or other adaptations), upon, in and/or in connection with articles of merchandise, or the advertising, display or exploitation of merchandise or in connection with any commercial activities.”⁹⁴

Paragraph 21 of the 1983 agreement concerns Disney’s obligation to pay royalties for the merchandising of Wolf’s characters. This paragraph provides:

“21. In the event that Purchaser [Disney] exercises any of the rights granted to it in and by Subparagraph 2(h), (i) and (k) hereof, Purchaser agrees to pay to Seller [Wolf] a sum equal to five percent (5%) of Purchaser’s gross receipts derived from the exercise of such rights, which, in the event of Purchaser’s licensing of any such rights to others, shall be composed of Purchaser’s royalties so derived from the licensee. In the event that such licensee is a subsidiary of Purchaser, then such royalties received by Purchaser from such subsidiary shall be deemed to be not less than five percent (5%) of such subsidiary’s gross receipts derived from the exercise of such rights. Purchaser’s obligation to pay such sums to Seller shall not accrue unless and until monies with respect to which the same are to be paid shall have been received within the United States of America by, and placed at the unrestricted disposal of, Purchaser or Purchaser’s subsidiary (or if restricted from being transmitted to the United States by applicable law or regulations (‘restricted funds’) then the restricted funds shall be deemed to have been so received to the extent used by Purchaser or Purchaser’s subsidiary in such territory from which such monies would have otherwise been transmitted). So long as such monies are so received, Purchaser shall render semi-annual statements to the Seller within forty-five (45) days after the end of each half of the calendar year, showing the sums of money so received during the preceding half with respect to which the said obligation applies; and said statements shall be accompanied by payment of the amount appearing thereby to be then due from Purchaser to Seller. All such statements shall be mailed to Seller at the address specified for notices herein, unless or until Purchaser is otherwise instructed in writing. All statements and accountings furnished by Purchaser hereunder shall be conclusively deemed correct unless the same shall be objected to within ninety (90) days from Purchaser’s rendition thereof….”⁹⁵

Disney emphasizes this paragraph uses the terms “monies” and “monies so received” and discusses “statements” for monies “so received.” Based on this language in the paragraph on royalty rights Disney argues “gross receipts” clearly and unambiguously means only cash, and then only when actual cash is received.

In support of its argument “gross receipts” can only mean “cash received” Disney relies on the decision in County of Sacramento v. Pacific Gas and Electric Company.⁹⁶ There the court held the utility’s gross receipts for purposes of calculating its franchise fee did not include the value of electricity consumed by the utility itself in generating electricity for sale to consumers. The decision in County of Sacramento is of no assistance here. In the context of franchise fees on public utilities, the definition of the term “gross receipts” was dictated by statute and prior decisions interpreting the statute at issue which excluded the monetary value of electricity consumed internally and not sold for cash. Accordingly, the decision in County of Sacramento sheds no light on the issue whether the term “gross receipts” may be subject to multiple meanings in a private contract in the entertainment industry context.

Wolf offered extrinsic evidence to show the term “gross receipts” meant not just cash receipts but also other valuable consideration received. Wolf pointed out the interpretation he urged was consistent with the legal definition of “gross receipts” as defined in Black’s Law Dictionary, namely, “[t]he total amount of money or the value of other consideration received from selling property or from performing services.”⁹⁷ Wolf also referred the court to an appellate decision in which the court stated the term “gross receipts” was such a familiar and commonplace term in accounting and taxation that when used in its ordinary sense meant the “total amount of money or the value of other consideration received.”⁹⁸

Wolf argued this is the definition of “gross receipts” customarily used in the entertainment industry when the term is not otherwise limited or defined by written contract. Wolf thus urged the court to read paragraph 21 in the context of custom and practice in the entertainment industry. The extrinsic evidence Wolf offered to explain industry custom consisted of expert testimony from David Held. Mr. Held is an attorney who has worked in the motion picture industry since 1973. United Artists Corporation, Paramount Pictures Corporation and the Samuel Goldwyn Company have employed him. He initially worked as an attorney in the legal department then in such capacities as Director of Business Affairs, Vice President of Business Affairs and was ultimately promoted to the position of Executive Vice President in Charge of Business Affairs in Paramount’s Motion Picture Group. Since 1988, Held has been employed as a consultant in the entertainment industry. In his 28 years of experience Held had personally negotiated, or supervised negotiations of, thousands of agreements and also reviewed thousands of proposals involving third party participation agreements, film performance reports, and the like.

Held stated, from the start of his career until the present, the term “gross receipts” in the entertainment industry “means the total amount of money or the value of other consideration received by the studio” when not otherwise specifically defined to limit the term’s meaning.

In his declaration, Held explained the portion of paragraph 21 which uses the terms “monies” does not purport to define the term “gross receipts.” Instead, it specifies Disney’s obligation to pay royalties does not arise unless or until potential or proposed licensing of the Wolf characters became a fait accompli and the terms of such agreements carried out so as to ensure the studio did not become responsible to pay royalties on failed or aborted projects. Regarding alliance agreements in which the licensor received promotional benefits rather than cash, Held stated industry custom for purposes of paying royalties was to attribute a cash value to the benefits a studio received.

The trial court read Held’s declaration and questioned Wolf about its meaning. The court noted, “So where we are here is that personally I think gross receipts,' as the parties wrote it in paragraph 21, meansmoney.’ But if I have to consider that Held declaration, you win the summary judgment. There’s a disputed issue of fact. That’s where we are. That’s the bottom line.” Ultimately, the trial court concluded it did not need to consider Wolf’s extrinsic evidence, finding the term “gross receipts” unambiguously meant cash money.

We find the trial court erred in its treatment of the proffered extrinsic evidence on the issue whether the contract was ambiguous. At the very least, this conflicting evidence exposed an ambiguity in the term’s meaning. If Held’s definition is the industry norm, then the competing definitions were equally plausible. Disney, on the other hand, argues the parties’ contract did not use the term “gross receipts” in a technical sense and for this reason the expert’s declaration of industry custom and practice was inadmissible. However, we note, Disney did not — and does not attempt to — refute the expert’s factual assertion through independent evidence that in the entertainment industry context “gross receipts” means not only cash, but also the value of other consideration received. Accordingly, the trial court was not justified in rejecting this extrinsic evidence on the ground it did not comport with the court’s own view of the contract language as unambiguous.

This case is analogous to the situation presented in Pacific Gas and Electric Company v. G.W. Thomas Drayage & Rigging Company.⁹⁹ In Thomas Drayage, the Supreme Court considered a contract clause in which the defendant agreed to indemnify the plaintiff for injury to property arising out of or connected with the performance of the contract. The trial court agreed with the defendant the clause could be read to cover only injury to the property of third parties. The trial court nevertheless held the “plain language” of the agreement also required defendant to indemnify plaintiff for injuries to plaintiff’s property. Once the trial court concluded the contract had a plain meaning it refused to admit any extrinsic evidence contradicting its interpretation.¹⁰⁰ The Supreme Court observed, “[w]hen the court interprets a contract on this basis, it determines the meaning of the instrument in accordance with the ‘. . . extrinsic evidence of the judge’s own linguistic education and experience.’ [Citation.] The exclusion of testimony that might contradict the linguistic background of the judge reflects a judicial belief in the possibility of perfect verbal expression….”¹⁰¹

The court explained the test for admitting extrinsic evidence as an aid in interpreting contract terms as follows: “The test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not whether it appears to the court to be plain and unambiguous on its face, but whether the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible….”¹⁰²

“The fundamental goal of contractual interpretation is to give effect to the mutual intention of the parties.”¹⁰³ “The mutual intention to which the courts give effect is determined by objective manifestations of the parties’ intent, including the words used in the agreement, as well as extrinsic evidence of such objective matters as the surrounding circumstances under which the parties negotiated or entered into the contract; the object, nature and subject matter of the contract; and the subsequent conduct of the parties. (Civ.Code, §§ 1635-1656; Code Civ. Proc., §§ 1859-1861, 1864; Hernandez v. Badger Construction Equipment Co.(1994) 28 Cal. App. 4th 1791, 1814, 34 Cal. Rptr. 2d 732; 1 Witkin, Summary of Cal. Law (9th ed. 1987) Contracts, §§ 688-689, pp. 621-623.)”¹⁰⁴

Because there is no evidence in this case of objective manifestations of the parties’ intent,¹⁰⁵ and because the term at issue is undefined in the parties’ contract, the only way to construe the meaning of the term “gross receipts” is to consider the nature of the contract and the circumstances under which the parties negotiated.¹⁰⁶ In this case, both the nature of the contract and the circumstances involved the motion picture industry. The offered evidence of industry custom and usage revealed the term “gross receipts” had more than one possible meaning. Thus, the industry expert’s statements of fact were relevant and admissible to expose the latent ambiguity in the contract language regarding the industry’s customary usage of the term. Held’s declaration did not violate the parol evidence rule, as Disney suggests.¹⁰⁷ On the contrary, the proffered evidence regarding trade usage and custom was relevant to prove an interpretation to which the agreements were reasonably susceptible in the entertainment industry context.

The Supreme Court discussed the rule regarding the admission of trade usage and custom in Ermolieff v. R.K.O. Radio Pictures, Inc.¹⁰⁸ In Ermolieff the parties were producers and distributors in the motion picture industry. The plaintiff had reserved distribution rights in all countries not listed in an exhibit attached to the contract. The exhibit listed the United Kingdom as an area for which plaintiff had assigned his distribution rights. A dispute arose over the question whether Ireland, or the “Free Irish State,” was included within the global term “United Kingdom.” The plaintiff argued the plain language of the contract made clear Ireland was excluded because it was not a part of the United Kingdom. The studio countered including Ireland within the term “United Kingdom” was the custom and practice in the motion picture industry and such usage was part of the contract.¹⁰⁹ BOTH PARTIES SOUGHT declaratory relief.

At the close of the plaintiff’s case the trial court ruled the evidence of trade usage incompetent, struck the defendant’s evidence, and entered judgment in favor of the plaintiff.¹¹⁰ The Supreme Court reversed. “The correct rule with reference to the admissibility of evidence as to trade usage under the circumstances here presented is that while words in a contract are ordinarily to be construed according to their plain, ordinary, popular or legal meaning, as the case may be, yet if in reference to the subject matter of the contract, particular expressions have by trade usage acquired a different meaning, and both parties are engaged in that trade, the parties to the contract are deemed to have used them according to their different and peculiar sense as shown by such trade usage. Parol evidence is admissible to establish the trade usage, and that is true even though the words are in their ordinary or legal meaning entirely unambiguous, inasmuch as by reason of the usage the words are used by the parties in a different sense. [Citations.] The basis of this rule is that to accomplish a purpose of paramount importance in interpretation of documents, namely, to ascertain the true intent of the parties, it may well be said that the usage evidence does not alter the contract of the parties, but on the contrary gives the effect to the words there used as intended by the parties. The usage becomes a part of the contract in aid of its correct interpretation.”¹¹¹

In Ermolieff the trial court at least considered the proffered extrinsic evidence throughout the plaintiff’s entire case-in-chief. In the present case, by contrast, the trial court rejected the evidence after reading the expert’s declaration and questioning Wolf on its content. Yet, this extrinsic evidence of trade usage exposed a latent ambiguity in the contract language and presented an alternative interpretation to which the term “gross receipts” was reasonably susceptible in the circumstances. Accordingly, we conclude the trial court erred in rejecting the extrinsic evidence and in concluding the term “gross receipts” was not reasonably susceptible to the interpretation urged by Wolf that according to industry custom and usage “gross receipts” meant cash and other valuable consideration received.

III. THE CONFLICTING INTERPRETATIONS OF THE CONTRACT TERM RAISE FACTUAL ISSUES WHICH PRECLUDE A DETERMINATION AS A MATTER OF LAW.

Having determined the contract is reasonably susceptible to the meaning given it by Wolf, we address the second step in the analysis: the ultimate construction to be placed on the ambiguous language. As noted, where no extrinsic evidence is introduced or the evidence is not in conflict, an appellate court will independently construe the contract.¹¹² “Where, however, a conflict in the evidence exists, it must be resolved in the trial court, as with any question of fact, before the court can declare the meaning of the contract as a matter of law.”¹¹³

From what this court has observed earlier, it is apparent triable issues of fact remain regarding the proper meaning to be given the term “gross receipts,” thus precluding our independent interpretation of the contract as a matter of law. By way of example only, Disney claims it receives nothing from the noncash alliance agreements. In the alternative, Disney argues even if it derives some intrinsic benefit from participating in joint promotions, it is not feasible for third parties to ascribe values to these promotional activities unless Disney receives cash. Disney thus claims under Wolf’s interpretation it would be impossible to comply with its contract obligation to provide an accounting for fictional benefits allegedly derived from noncash alliance agreements.

Wolf, by contrast, asserts Disney and its vast enterprises receive benefits from the third party promotions in the form of good will, increased theme part attendance, increased merchandise sales, film attendance and the like, most of these benefits not reflected in increased royalty payments to Wolf. For these reasons, Wolf claims attribution of monetary values for in-kind promotional activities is a routine matter in the entertainment industry.

The reasonableness of the competing interpretations thus must be tested in light of these concerns.

Also as noted, neither side presented any direct or objective evidence regarding the negotiating parties’ understanding of the term “gross receipts” at the time the parties entered into the contract. Accordingly, Wolf’s and Disney’s objectively reasonable expectations regarding the scope of the term when they agreed to the contract remain additional triable issues of material fact.

DISPOSITION

Let a peremptory writ issue directing the trial court to vacate its order granting the motion for summary adjudication of the cross-complainant’s first, fourth and seventh causes of action for declaratory relief and to enter a new and different order denying said motion. Petitioners are entitled to costs in this proceeding.

We concur: PERLUSS, P.J., and WOODS, J.

Discussion

1. In light of the court’s reasoning in Wolf, if evidence of prevailing trade usage is only available from dates after a Licensee XYZ contracted under the terms of an open source license, would that evidence be considered in determining the meaning of an ambiguous term in that license with respect to Licensee XYZ? Or would such evidence only be considered for subsequent licensees likely aware of the usage of trade?
2. Would a discussion thread on StackOverflow meet the threshold of being evidence of widespread trade usage? Consider the following discussion of what the “sublicense” permission means in the Apache 2 license: https://opensource.stackexchange.com/questions/6288/can-i-change-the-copyright-license-with-this-text-in-the-cla \ If a discussion thread contained unanimous agreement on the meaning of a particular term, would that be sufficient to establish trade usage?
3. Similarly, consider what happens when one organization promotes its unilateral understanding of a license term in a blog post years after the open source license has gained widespread adoption. What standard of widespread shared understanding would this unilateral blog post need to reach in order to meet the standard of usage in trade evidence? Would it be effective retroactively, prior to the publication of the blog post?

Notes

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