We granted permission to appeal in this breach-of-contract case to address the use of extrinsic evidence in the interpretation of contracts. Tennessee judges have long used extrinsic evidence of the context and circumstances at the time the parties entered into the contract to facilitate interpretation of contractual terms in accord with the parties' intent. However, the written words are the lodestar of contract interpretation, and Tennessee courts have rejected firmly any notion that courts may disregard the written text and make a new contract for parties under the guise of interpretation. Tennessee has consistently enforced the parol evidence rule to prohibit the use of evidence of pre-contract negotiations in order to vary, contradict, or supplement the contractual terms of a fully integrated agreement. Thus, in interpreting a fully integrated contract, extrinsic evidence may be used to put the written terms of the contract into context, but it may not be used to vary, contradict, or supplement the contractual terms in violation of the parol evidence rule. As applied to this case, we hold that the defendant insurance company did not breach the parties' agreement by modifying renewal commission rates on existing policies, but it did breach the agreement by refusing to pay commissions to the plaintiff agency after their agreement was terminated. In addition, because the indemnity provision in the parties' agreement does not specifically authorize fee shifting in a suit between the two contracting parties, we hold that the plaintiff agency is not entitled to an award of attorney fees. We further conclude that the alleged systemic commission underpayments in this case were not inherently undiscoverable under any definition of that term. Consequently, even if we were to conclude that the discovery rule applies when the contractual breach is "inherently undiscoverable," the plaintiff agency's claim for any underpayments would not qualify under the facts of this case. The case is remanded for further proceedings consistent with this opinion.
FACTUAL AND PROCEDURAL BACKGROUND
Overview
Plaintiff/Appellee Individual HealthCare Specialists, Inc., (IHS) is an insurance agency based in Brentwood, Davidson County, Tennessee. From 1999 to 2012, IHS sold insurance policies for Defendant/Appellant BlueCross BlueShield of Tennessee, Inc. ("BlueCross"), and BlueCross paid IHS commissions on the sales. 1 The parties' commission arrangement was governed by a General Agency Agreement. This lawsuit stems from IHS's claim that BlueCross breached the Agency Agreement and owes IHS substantial damages resulting from that breach.
General Agency Agreement
In 1999, IHS and BlueCross executed their first General Agency Agreement ("1999 Agency Agreement"). In 2009, almost ten years later, the parties renewed their contract by executing a superseding General Agency Agreement ("2009 Agency Agreement"). The two agreements (collectively, the "Agency Agreements") were substantially similar to one another.
Generally, the Agency Agreements authorized IHS to solicit applications for BlueCross's individual hospital, surgical, medical, and supplemental insurance policies.
They contemplated that IHS would use both in-house agents and outside brokers, known as "producing agents" or "subagents," to solicit applications for BlueCross policies. Under the Agency Agreements, IHS was responsible for hiring, supervising, and terminating the subagents. It was also responsible for ensuring that the subagents were in compliance with Tennessee laws and regulations as well as BlueCross's policies and procedures. The Agency Agreements stated expressly that IHS and its subagents were considered independent contractors of BlueCross, not employees.
BlueCross paid IHS two types of commissions: (1) first-year commissions and (2) renewal commissions. First-year commissions were based on the premiums paid on insurance policies in the year they were sold; renewal commissions were based on the premiums paid for the renewal of existing policies. The specific commission rates payable by BlueCross were set forth in commission schedules attached as addenda to each of the Agency Agreements and incorporated into the agreements by reference. The attached commission schedules stated separate rates for first-year and renewal commissions for specified BlueCross insurance products. 2 In the event of a conflict between the commission schedule and the Agency Agreement to which it was attached, the terms of the Agency Agreement would control.
In this lawsuit, IHS claims that BlueCross breached several provisions in the Agency Agreements and also breached a modified commission schedule dated May 1, 2011. The relevant Agency Agreement provisions will be set forth later in this opinion, with the legal analysis related to that provision. Suffice it to say at this juncture that IHS sought damages under Article XII ("the Compensation provision") and attorney fees under Article VI ("the Indemnity provision"). Those claims also implicate Article XIV ("the Termination provision") and Article X ("the Integration clause"). The controversy surrounding BlueCross's alleged breach of the May 1, 2011 commission schedule requires some preliminary explanation.
Commission Schedules and the May 2011 Schedule
As we have stated, each Agency Agreement had an attached commission schedule containing the applicable commission rates for policies sold. Each commission schedule included bolded language at the bottom of the document indicating that the commission schedules were subject to unilateral change by BlueCross with appropriate notification to IHS: "[BlueCross] reserves the right to modify or change the commission and payment schedules with appropriate notification."
On several occasions, BlueCross exercised its right to modify the commission schedules under both Agency Agreements. 3 Each modified commission schedule included the same language reserving to BlueCross "the right to modify or change the commission and payment schedules with appropriate notification." They also included the same provision stating that, in the event of a conflict between the commission schedule and the Agency Agreement, "then the terms of the Agency Agreement will control." With the notable exception of the last commission schedule, effective on May 1, 2011 (which is at issue in this lawsuit), each modified commission schedule included the following language: "This Commission Schedule supplements any previous Commission Schedule you may have received; commissions for products previously sold are governed by the Commission Schedule in place at the time the sale was made. " (Emphasis added).
In February 2011, BlueCross notified IHS of a new commission schedule that would become effective on May 1, 2011 (the "May 2011 Schedule"). BlueCross said that the new commission schedule was necessitated by the Affordable Care Act, enacted the previous year in March 2010. 4
The May 2011 Schedule significantly reduced commission rates for IHS and its subagents. 5 It also omitted the provision in previous schedules stating it would "supplement[ ] any previous Commission Schedule" and instead said it would "replace any previous Commission Schedule." The new schedule also omitted the language in previous schedules stating that "commissions for products previously sold are governed by the Commission Schedule in place at the time the sale was made" and instead said: "Commissions on sold or renewed [BlueCross] products that have effective dates on or after May 1, 2011[,] shall be paid in accordance with the terms and conditions set forth" in the new schedule. In other words, the May 2011 Schedule said its reduced commission rates applied not only to first-year policies but also to renewals of policies sold prior to May 1, 2011.
In roughly the same time frame, BlueCross and IHS discussed the possibility of BlueCross purchasing IHS based on a yet-to-be-determined multiple of IHS's projected annual commission revenue. These discussions prompted the President of IHS, James Walker, to undertake to project IHS's annual revenue. In the course of designing a computer model to project the revenue, Mr. Walker began to suspect that IHS was being underpaid by BlueCross. After an internal analysis of IHS records, Mr. Walker concluded that BlueCross had been systemically underpaying commissions owed to IHS since the inception of their contractual relationship in 1999.
Lawsuit and Termination of Agency Agreement
Complaint
On July 29, 2011, IHS filed the instant lawsuit against BlueCross. The complaint asserted that BlueCross breached the Agency Agreements by systemically underpaying IHS's commissions since 1999. Over the course of the parties' contractual relationship, IHS said, these systemic underpayments totaled over $15 million. IHS
further claimed BlueCross had "wrongfully concealed the true amounts of First Year Commissions and Renewal Commissions from it, thereby tolling any applicable statute of limitations which might otherwise have been applicable" to the systemic-underpayment claims. Alternatively, IHS asserted claims for unjust enrichment and conversion based on the systemic underpayments. It asked the trial court to order an accounting so that it could determine the amount of commissions BlueCross should have paid IHS over the years. In addition, IHS claimed BlueCross breached the 2009 Agency Agreement by issuing the May 2011 Commission Schedule and including a provision that unilaterally reduced the rates paid on renewal commissions for existing policies. Finally, IHS sought attorney fees incurred in the lawsuit pursuant to the indemnity provision in the 2009 Agency Agreement.
Termination
In November 2011, BlueCross told IHS it was terminating the 2009 Agency Agreement "without cause" effective February 23, 2012. BlueCross advised IHS that, after February 23, 2012, IHS would "no longer be entitled to receive commission payments." In doing so, BlueCross effectively "cut out the middleman" and paid all commissions after the termination date directly to the subagent associated with each policy. Based on this turn of events, IHS amended its complaint to include an allegation that BlueCross breached the 2009 Agency Agreement by refusing to pay post-termination commissions to IHS.
IHS's Motion for Partial Summary Judgment
In November 2012, IHS filed a motion for partial summary judgment. The motion asserted that, based on the plain language of the parties' agreements and the undisputed facts, BlueCross breached the 2009 Agency Agreement by unilaterally reducing the renewal commission rates on existing policies in the May 2011 Schedule and by refusing to pay commissions to IHS after BlueCross terminated the 2009 Agency Agreement. In addition, IHS claimed it was entitled to judgment as a matter of law for its expenses, attorney fees, and costs incurred in bringing the action, pursuant to the indemnity provision in the 2009 Agency Agreement.
In January 2013, the trial court entered an order denying IHS's motion for partial summary judgment. The order stated at the outset that, because "these claims are a matter of contract construction and, therefore, a matter of law, they are appropriate for summary judgment analysis." The trial court held that, although "there are no genuine issues of material fact and no ambiguities in the parties' contract documents [that] preclude a summary judgment determination on the issues presented, nevertheless the Court concludes summary judgment cannot be granted. [IHS] has not demonstrated that its contract construction should prevail." Interpreting the contractual language, the trial court determined that: (1) BlueCross's unilateral reduction of commission rates for first-year commissions and renewal commissions did not constitute a breach of the 2009 Agency Agreement because the May 2011 Schedule permitted BlueCross to make such unilateral modifications; (2) BlueCross's payment of commissions directly to subagents did not constitute a breach of the 2009 Agency Agreement because, once the 2009 Agency Agreement was terminated, IHS was no longer "entitled" to receive the commissions; and (3) BlueCross was not obligated to pay IHS's attorney fees under the indemnity provision in the 2009 Agency Agreement. In addition, the trial court granted IHS's motion to access BlueCross's records and ordered an accounting "to enable [IHS] to determine whether [BlueCross] has correctly calculated and paid commissions."
In April 2013, the trial court entered an order denying IHS's motion to revise the January 2013 order and reaffirmed its ruling. After this decision, the parties engaged in extensive additional discovery.
BlueCross's Motion for Partial Summary Judgment
Almost two years later, in December 2014, BlueCross filed its own motion for partial summary judgment. In its motion, BlueCross contended it was entitled to judgment as a matter of law on the same claims that were the subject of IHS's motion for partial summary judgment. In addition, BlueCross claimed it was entitled to judgment as a matter of law on the breach-of-contract/systemic-underpayment claims that accrued prior to July 29, 2005, as well as the unjust enrichment and conversion claims that accrued prior to July 29, 2008, based on the applicable statute of limitations. 6 BlueCross argued that IHS could not prove a fraudulent-concealment exception to the statute-of-limitations defense because all along IHS had had the information necessary to be on notice of its right to recover based on those theories. In support of its motion, BlueCross attached a statement of undisputed material facts as well as excerpts and exhibits from several depositions and other documents obtained through discovery.
In response to BlueCross's motion, IHS submitted extrinsic evidence to support its interpretation of the contract. Specifically, IHS submitted the testimony of three former BlueCross employees who had been involved in the making of the parties' contracts-John Gage Gray, Jr., John Sellers, and Don Lawhorn. These witnesses testified about the circumstances surrounding the contract and expressed their general understanding on behalf of BlueCross that (1) the 1999 Agency Agreement prohibited BlueCross from modifying renewal commission rates on existing BlueCross policies, and (2) the indemnification clause in the 2009 Agency Agreement requires indemnification for attorney fees in contractual disputes between IHS and BlueCross.
In February 2015, the trial court entered an order denying BlueCross's motion for partial summary judgment. The trial court acknowledged that, in its ruling on the IHS motion, it had characterized the contractual provisions at issue as unambiguous. However, it pointed out that, at that time, the declarations of the three BlueCross former employees had not yet been filed. As to BlueCross's motion, the trial court held, the witnesses' declarations created a genuine issue of fact as to the parties' intent behind their agreements: "[IHS] has provided the Court declarations of three former employees of Defendant. The employees were intimately involved with the negotiation and drafting of the General Agency agreements and addenda, whose construction is at issue here on summary judgment." This evidence, the trial court reasoned, was relevant and supported the argument that "the parties
mutually
intended and agreed to the contract language to having the meaning asserted by [IHS]." In support of this rationale, the trial court relied in part on the reasoning in
Pacific Gas and Electric Co. v. G.W. Thomas Drayage & Rigging Co.
,
Trial
A bench trial commenced on April 27, 2015. The trial court heard the testimony of numerous witnesses.
One of IHS's first witnesses was James Walker, the President of IHS. During his testimony, BlueCross repeatedly objected to questions and documents relating to Mr. Walker's understanding of the terms and provisions of the parties' agreements. BlueCross argued that this testimony was inadmissible in light of the integration clause in the parties' 2009 Agency Agreement and the parol evidence rule, which generally prohibits the use of extrinsic evidence of pre-contract negotiations in order to vary or contradict the terms of a fully integrated contract.
On April 29, 2015, two days into the trial, the trial court issued an order overruling BlueCross's objections and admitting the evidence regarding Mr. Walker's understanding of the parties' agreements. As it had in the order denying BlueCross's motion for partial summary judgment, the trial court cited the reasoning in Pacific Gas . The trial court also cited 17A Am. Jur. 2d Contracts § 394 (Feb. 2015) for the proposition that, to determine "the meaning of an ambiguous or uncertain contract," the court "may have recourse, not only to the wording of and context of the agreement, but also to the circumstances under which it was made, and to the conferences and correspondence between the parties pending the negotiation of the final agreement." (Quoting 17A Am. Jur. 2d Contracts § 394 ). The trial court considered these authorities to be well reasoned and consistent with Tennessee law.
The trial proceeded on intermittent non-consecutive days over the ensuing months, concluding on June 30, 2015. The trial court then took the case under advisement.
On September 3, 2015, the trial court issued a Memorandum and Order of Trial Findings of Fact and Conclusions of Law. Relying on the text of the 2009 Agency Agreement and the testimony offered by IHS, the trial court held that BlueCross breached the agreement by: (1) applying the May 2011 reduced commission rates to policies that were already in effect; (2) paying post-termination commissions directly to subagents rather than IHS, and (3) systemically underpaying IHS commissions during the entirety of the parties' 13-year relationship by virtue of BlueCross's flawed commission accounting system. The trial court rejected BlueCross's statute-of-limitations defense to the pre-July 29, 2005 systemic commission underpayments. Although BlueCross "did not commit fraudulent concealment," the trial court held that the underpayments were "inherently undiscoverable," so it applied the discovery rule to toll the statute of limitations on IHS's claims.
See
Goot v. Metro. Gov't of Nashville & Davidson Cnty.
, No. M2003-02013-COA-R3-CV,
The trial court awarded IHS $1,968,765 in damages for BlueCross's systemic commission underpayments. The court also awarded IHS $142,735 in prejudgment interest, for a total judgment of $2,111,500. 7 The trial court denied IHS's claim for damages based on the reduction of the renewal commission rate on existing policies, citing insufficient evidence. It held, however, that "on an ongoing basis [BlueCross] must pay the going rate at the time the policy became effective ... and must pay the commissions to [IHS] who pays the subagents directly." The trial court rejected IHS's claim for attorney fees arising out of the indemnity provision in the parties' 2009 Agency Agreement; it concluded that the indemnity provision does "not apply to a contract dispute between the contracting parties; it applies to third-party claims." The court also dismissed IHS's claims for conversion and unjust enrichment.
Motions to Alter or Amend
Both parties moved to alter or amend the court's order. BlueCross argued that it was error for the trial court to award IHS substantial damages without reducing the damage award by the amount of the commissions BlueCross had already paid IHS's subagents. For its part, IHS asked the court to reconsider its holding that IHS was not entitled to attorney fees under the indemnity provision.
On December 22, 2015, the trial court entered an order denying BlueCross's motion in its entirety. However, the court granted IHS's motion and reversed its denial of the request for attorney fees. Based on the extrinsic evidence on the parties' intent when they entered into the contract, along with legal authorities cited by IHS in support of its interpretation of the indemnity provision, the trial court held IHS was entitled to recover its attorney fees in this lawsuit. It decided to hold in abeyance its decision on the amount of fees to be awarded pending an appeal. Thereafter, the trial court certified its order as a final judgment pursuant to Rule 54.02 of the Tennessee Rules of Civil Procedure. BlueCross appealed.
Court of Appeals
The Court of Appeals affirmed all of the trial court's rulings except its ultimate decision regarding attorney fees.
Individual Healthcare Specialists, Inc. v. BlueCross BlueShield of Tenn., Inc.
, No. M2015-02524-COA-R3-CV,
Regarding attorney fees, however, the appellate court reversed. It held that "the trial court erred by considering extrinsic evidence, and by going beyond the 'four corners' of an integrated contract, to ascertain whether the right to recover attorney's fees under the indemnification provision applied to a dispute between the contracting parties." Id. at *22. Based on the plain language of the indemnity provision, the intermediate appellate court reversed the award of attorney fees. Id. at *28.
We granted both parties' applications for permission to appeal.
ISSUES ON APPEAL
On appeal, BlueCross asserts that the trial court erred in holding that the 2009 Agency Agreement (1) precluded BlueCross from applying new renewal commission rates to existing insurance policies, (2) precluded BlueCross from paying commissions directly to IHS's subagents after termination of the agreement, and (3) provided for an award of attorney fees for suits between the contracting parties. BlueCross further argues that the lower courts erred in applying the discovery rule in a breach-of-contract action. Even if the discovery rule were applicable, BlueCross contends, the lower courts erred in holding that the systemic commission underpayments alleged by IHS were inherently undiscoverable.
IHS argues in this appeal that the trial court was correct in holding that BlueCross breached the 2009 Agency Agreement by retroactively reducing renewal commission rates on existing policies and by paying commissions directly to IHS subagents after the termination of the parties' agreement. IHS also asserts that the Court of Appeals erred in reversing the trial court's award of attorney fees under the indemnity provision in the 2009 Agency Agreement. Finally, IHS contends that the lower courts were correct in applying the discovery rule and in holding that IHS is entitled to recover for BlueCross's underpayments over the entire course the parties' contractual relationship.
We consider first the arguments relating to the breach-of-contract claims, focusing initially on the use of extrinsic evidence to interpret contracts. We will then consider whether the discovery rule may be applied to toll the six-year statute of limitations in this breach-of-contract action.
ANALYSIS
Contract Interpretation and Extrinsic Evidence
In this appeal, BlueCross asserts globally that the trial court erred in admitting extrinsic evidence to construe the parties' agreements. It maintains that all of the contractual provisions at issue were clear and unambiguous on the face of the document, noting that the trial court said as much in its order denying IHS's motion for partial summary judgment, in which it found "no ambiguities in the parties' contract documents." Having made that threshold determination, BlueCross insists, the trial court was thereafter obliged to reject IHS's request to admit extrinsic evidence on the proper interpretation of the agreements and instead look only to the written agreements themselves. From a policy standpoint, BlueCross argues that, for contracts that include an integration clause, this Court should require trial courts to interpret contracts based on their written language only, without resort to extrinsic evidence. 8
IHS argues the inverse. It maintains that the testimony on the parties' intent and their course of dealing over the years was key to proper interpretation of the agreements. IHS maintains that the Court of Appeals erred in holding that the trial court should have excluded extrinsic evidence on the question of whether IHS was entitled to an award of attorney fees under the indemnification provision. A strict "plain meaning" rule that precludes the use of extrinsic evidence, it contends, is at odds with the courts' obligation to interpret contracts in a way that comports with the parties' intent. 9
As explained in more detail below, in so framing their arguments, it can be said that BlueCross urges us to adopt a "textual" approach to contract interpretation while IHS advocates for a "contextual" approach. As the name suggests, the textual approach is text-centered; under it, the court interprets a contract by focusing on the plain meaning of the text, ascertained from the written agreement only, to the exclusion of any evidence extrinsic to it. In contrast, under the contextual approach, the court interprets a contract based on a broad understanding of the context of the agreement and the parties' intent, taken from evidence of extrinsic matters such as the circumstances of their negotiation.
See generally
Lawrence A. Cunningham,
Contract Interpretation 2.0: Not Winner-Take-All but Best-Tool-for-the-Job
,
We first offer some background on how these two competing approaches to contract interpretation and extrinsic evidence evolved. Next we review how Tennessee courts have used them, with particular focus on the parol evidence rule. Finally, we apply the appropriate law to the facts in this case.
Historical Overview
"Historically, the English common law applied two different sets of doctrines to interpret a disputed contract." Gilson et al.,
In contrast, the English chancery courts, courts of equity, interpreted contracts by applying broad equitable principles that were "administered loosely and [ ] designed to provide exceptions to the common law interpretive rules." Id. The equitable principles "were generally cast in subjective terms and therefore required judges to exercise such judgment by evaluating the context of the particular transaction." Id.
Over time, the chancery courts and the common law courts began to exercise overlapping jurisdiction in contractual disputes; however, each tribunal continued to view cases from its own perspective. Id. (quoting J.H. Baker, An Introduction to English Legal History 12-14 (4th ed. 2002) ). The two competing systems often had "incompatible procedural and substantive doctrines." Id. at 48-49. Eventually, courts of law and courts of equity were merged in England and in the United States. "The result was an uncomfortable combination of legal and equitable doctrines; and it was this awkward amalgam that formed the matrix of American contract law." Id. at 49.
Roughly up to the middle of the twentieth century, most American courts predominantly applied the textual approach to contract interpretation, rejecting all evidence extrinsic to the written document. Cunningham,
A widely-cited New York case provides an example of the strict textualist approach. In
Hotchkiss v. National City Bank of New York
,
In the mid-twentieth century, jurists and scholars began to question strict adherence to the textual rules. Professor Arthur Corbin, a well-known scholar and author of a popular contracts treatise, wondered, "How could any writing prove its own completeness and how can any word or document prove its own meaning[?]" Cunningham,
In response, a number of jurists moved toward what came to be known as a contextual approach. In a widely-cited example, the California Supreme Court in
Pacific Gas
, cited by the trial court below, embraced broad use of interpretive extrinsic evidence.
The influence of contextualism found its way into the Restatement (Second) of Contracts. Cunningham,
Thus, many elements of contextualism gained wide acceptance. "By the 1990s, ... contextualism, [had] softened the parol evidence rule, loosened the four corners doctrine, and diluted the plain meaning rule." Cunningham,
However, as had happened at times with an overly rigid textualist approach, contextualism was also taken to extremes. Some courts took it as a license to disregard the written words of the contract. Under an extreme contextualist approach, if extrinsic evidence indicates that the contractual language does not comport with the intent of the parties, the court may "override" the text if "doing so is necessary to substantially
'correct' or complete the parties' written contract by realigning it with its 'true' meaning." Gilson et al.,
Any attempt to discern where the modern majority of jurisdictions falls on the question of "textual versus contextual" approach to contract interpretation gives way to frustration because of "the reality that different settings warrant different approaches." Cunningham,
As we explain below, Tennessee law took a somewhat different path than did most other states. Nevertheless, it has ended up in a similar place as much of the nation, with cases that include language reflecting both contextualist and textualist principles.
Tennessee Law on Textual and Contextual Principles
After a thorough review of Tennessee contracts caselaw, at least one commentator has characterized Tennessee contracts jurisprudence as "in deep conflict" on whether contract interpretation "should be content oriented, i.e., focused predominantly, with limited exceptions, on the four corners of the document, or context oriented, i.e., focused more leniently on the contract terms as well as the subject matter, the situation of the parties, the surrounding circumstances, and the parties' course of performance." Steven W. Feldman, 21 Tenn. Practice: Contract Law and Practice § 8:3 (June 2018) (hereinafter "Feldman, 21 Tenn. Practice § ___"). While this description may overstate a bit, we acknowledge that Tennessee's jurisprudence on contract interpretation cannot be neatly categorized as wholly textualist or wholly contextualist.
Tennessee's path to this point appears to be somewhat the converse of the path taken in much of the nation. As discussed below, looking at the broad sweep of cases, early Tennessee caselaw includes much language stressing context-based contract interpretation, with elements of textualism as well. Over time, many came to feature textualist principles more prominently, while others continued to recite context-based analysis.
A number of cases included both. This led to the current "untidiness." Cunningham,
We first recognize the foundational principles in all of Tennessee contract law. The common thread in all Tennessee contract cases-the cardinal rule upon which all other rules hinge-is that courts must interpret contracts so as to ascertain and give effect to the intent of the contracting parties consistent with legal principles.
Wallis v. Brainerd Baptist Church
,
Also foundational to our jurisprudence is the principle that the rules used for contract interpretation "have for their sole object 'to do justice between the parties, by enforcing a performance of their agreement according to the sense in which they mutually understood it at the time it was made.' "
McNairy v. Thompson
,
In the late 1800s, when the textual approach was in its heyday in the rest of the United States, the Tennessee Supreme Court often used broad language favoring the consideration of evidence of context-in connection with the contract's text-in order to determine the parties' intent. For example, in 1895, this Court stated that "[t]he intention is the governing principle of construction. In ascertaining the intention, the situation of the parties, the motives that led to the agreement, and the objects designed to be effected by it, may all be looked to by the court."
Nunnelly
,
Some early cases directed courts to ascertain whether contractual language was "plain and unambiguous" for the purpose of determining whether the question of the contract's interpretation should be submitted to the jury. 17 For example, in Barker v. Freeland , the Court explained:
It is an indisputable proposition that when a contract is in writing, and its meaning is plain and unambiguous, its interpretation is matter of law for the court; but when the writing is not plain and unambiguous, but is such as requires the aid of evidence, either to identify the subject-matter, or in order to ascertain the situation and surrounding circumstances, or the nature and quality of the subject-matter, and the evidence be conflicting, or such as admits of more than one conclusion, it is not error to submit the interpretation of the doubtful parts of the instrument, under proper instructions, to the jury.
Barker v. Freeland
,
Some early Tennessee cases not involving a jury recite textual principles and the threshold ambiguity determination, and at the same time note the importance of context evidence to interpretation. In
Perkins Oil Co. v. Eberhart
, the Court stated that " '[i]t is an indisputable proposition that when a contract is in writing, and its meaning is plain and unambiguous, its interpretation is a matter of law for the court.' But when the writing is not plain, and unambiguous, parol evidence is admissible to ascertain the situation and surrounding circumstances, the nature and quality of the subject-matter, etc."
Into the 1900s, the Tennessee Supreme Court continued to use language that emphasized the importance of context evidence to contract interpretation, even where the contract's terms initially appeared clear on the face of the document. In
Staub v. Hampton
,
for the purpose of placing the court in the same situation, and giving it the same advantages, for construing the paper which were possessed by the actors themselves."
"[C]ourts, in the construction of contracts, look to the language employed, the subject-matter, and the surrounding circumstances. They are never shut out from the same light which the parties enjoyed when the contract was executed, and in that view they are entitled to place themselves in the same situation as the parties who made the contract, so as to view the circumstances as they viewed them, and so as to judge of the meaning of the words and of the correct application of the language to the things described."
During this same time period, however, Tennessee courts also cited textualist principles in strong terms. For example, in
McKay v. Louisville & Nashville Railroad Co.,
It is ... the contention of the appellants that if a contract is plain and unambiguous it is a question of law and it is the function of the court to interpret the contract as written-according to its plain terms. It was their contention also that the intention of the parties is expressed by the language of the contract when used in an unambiguous instrument and must be given effect though it was not actually the intention entertained by one or more of the parties to the contract. These contentions are well supported by numerous authorities in this State.
Over time, Tennessee contract cases more often relied on textualist principles,
emphasizing the importance of grounding contract interpretation in the written words of the agreement. For example, many indicate that a court should seek to ascertain the intent of the parties from "the usual, natural, and ordinary meaning of the contractual language," and if the contractual language is initially deemed unambiguous,
18
its "plain meaning" should be used, without recourse to matters extraneous to the text of the agreement.
See, e.g.
,
Planters Gin Co. v. Fed. Compress & Warehouse Co.
,
As contract cases came less often to be tried before a jury, later Tennessee cases continued to recite the threshold ambiguity determination without reference to questions suitable to be considered by a jury.
See, e.g.,
Dick Broad.
,
Tennessee courts' increased emphasis on textual principles represents a clear rejection of the extreme contextual approach referenced in the California case of
Pacific Gas
. Under the
Pacific Gas
approach, if extrinsic evidence shows that the contractual language does not comport with the parties' "actual" intent, the court may override the written words if doing so is necessary to "correct" the written agreement.
See
Gilson et al.,
Tennessee cases have also eschewed an extreme textual approach. Instead, they reflect balance; they demonstrate a definite focus on the written words in the parties' contract, but they also consider evidence related to the situation of the parties and the circumstances of the transaction in interpreting those words. For example, in
Penske Truck Leasing Co. v. Huddleston
, the Court said: "The intention of the parties is to be determined by a fair construction of the terms and provisions of the contract, by the subject matter to which it has reference, by the circumstances of the particular transaction giving rise to the question, and by the construction placed on the agreement by the parties in carrying out its terms."
In
Hamblen County v. City of Morristown
, this Court considered extrinsic evidence in the form of the parties' post-contract behavior, i.e., the rule of practical construction.
21
The court in interpreting words or other acts of the parties puts itself in the position which they occupied at the time the contract was made. In applying the appropriate standard of interpretation even to an agreement that on its face is free from ambiguity it is permissible to consider the situation of the parties and the accompanying circumstances at the time it was entered into-not for the purpose of modifying or enlarging or curtailing its terms, but to aid in determining the meaning to be given to the agreement.
Hamblen Cnty.
,
Some of the cases with the strongest language on contextual principles also use textual principles as well, and vice-versa. In
Hughes
, the Court used language approving the use of evidence on "the circumstances in which the contract was made, and the parties' actions in carrying out the contract,"
Looking at the broad range of Tennessee contracts cases, it is clear that Tennessee courts have sought, albeit imperfectly, to achieve balance in contract interpretation. The central principle endures, to interpret contracts so as to ascertain and give effect to the intent of the contracting parties.
See, e.g.,
Wallis
,
However, the strong strain of textualism in Tennessee caselaw demonstrates resolve to keep the written words as the lodestar of contract interpretation.
See, e.g.
,
Planters Gin Co.
,
In short, Tennessee cases cite both textualist and contextualist principles; consideration of context evidence does not eclipse other canons of contract interpretation but rather cooperates with them. Thus, as in other states, Tennessee's jurisprudence on contract interpretation "evades tidy classification as textualist or contextualist." Cunningham,
Important to this appeal, however, despite the sometimes uneven quality of Tennessee contracts jurisprudence on textualist versus contextualist principles, consistent enforcement of an important textual principle-the parol evidence rule-represents a straight line through Tennessee contract caselaw. We discuss this below.
Tennessee Law on the Parol Evidence Rule
In general, the parol evidence rule provides that "a writing intended by
the parties to be a final embodiment of their agreement cannot be modified by evidence of earlier or contemporaneous agreements that might add to, vary, or contradict the writing." Black's Law Dictionary 1292 (10th ed. 2014). "The general rule is that parol evidence is not admissible to contradict a written agreement...."
23
Hines v. Wilcox
,
Early Tennessee cases, even those that include language favoring the use of context evidence for interpretation, consistently held the line, forbidding the use of such evidence in a way that would violate the parol evidence rule. In
Staub
, for example, the Court stressed the importance of contextual evidence of the circumstances when the contract was executed, but also cautioned: "The object and effect of such evidence are
not to contradict or vary the terms of the instrument
, but to enable the court to arrive at the proper conclusion as to its meaning, and the understanding and intention of the parties."
Staub
,
In
McGannon v. Farrell
, this Court disallowed the use of extrinsic evidence "to ingraft upon the defendant's title a restriction or incumbrance, which is not only not expressed in the deed, but is repugnant to its terms."
McGannon v. Farrell
,
A strict enforcement of [the parol evidence] rule tends to greater security and safety in business transactions, and leaves less opportunity for dishonesty and false swearing, induced, perhaps, by a change of purpose or a failure to obtain the result that was anticipated when the transaction was originally consummated and reduced to writing.
The parol evidence rule is unfortunately named in several respects. First, it encompasses more than simply parol (i.e., oral) evidence of pre-contract negotiations.
24
Second, even though it is sometimes expressed as a rule of evidence
relating to the "admissibility" of parol evidence, the parol evidence rule is more accurately characterized as a rule of substantive law.
See
Deaver
,
By the same token, evidence of pre-contract negotiations that
does not
contradict the written contract
is not
prohibited by the parol evidence rule.
See, e.g.
,
Hines
,
Noteworthy under the facts of this case, the parol evidence rule is most restrictive when the contract at issue is fully or completely integrated-that is, when it is intended to be the complete and exclusive statement of the parties' agreement.
25
Schaeffer v. Am. Honda Motor Co.
,
The contracts at issue in the instant case contained an integration clause, which indicates the parties' intent that the contracts embody their complete and exclusive agreement. 27 IHS does not dispute the fact that the parties' agreements are fully integrated. Consequently, the parol evidence rule is applicable. See 11 Williston on Contracts § 33:23 (4th ed. May 2018 Update) ("By stipulating the fact of integration, these clauses purport by the very terms of the parties' agreement to require application of the parol evidence rule."); 3 Corbin on Contracts § 573 ("When two parties have made a contract and have expressed it in a writing to which they have both assented as the complete and accurate integration of that contract, evidence, whether parol or otherwise, of antecedent understandings and negotiations will not be admitted for the purpose of varying or contradicting the writing."); Restatement (Second) of Contracts § 213 & cmt. a (1981) (commenting that this section describes "what is commonly known as the parol evidence rule").
When the parties' contracts are fully integrated, general extrinsic evidence of context may be used to interpret the contractual language in line with the parties' intent, but the parol evidence rule prohibits the use of evidence of pre-contract negotiations in order to vary, contradict, or supplement the contractual terms of a fully integrated agreement. As explained by the Texas Supreme Court:
The parol evidence rule does not ... prohibit courts from considering extrinsic evidence of the facts and circumstances surrounding the contract's execution as an aid in the construction of the contract's language, but the evidence may only give the words of a contract a meaning consistent with that to which they are reasonably susceptible, i.e., to interpret contractual terms. This is true even if doing so reveals a latent ambiguity in a contract's terms. But whether a court is considering if an ambiguity exists or construing the terms of an unambiguous contract, surrounding facts and circumstances can only provide context that elucidates the meaning of the words employed, and nothing else. As we have often stated in one way or another, understanding the context in which an agreement was made is essential in determining the parties' intent as expressed in the agreement, but it is the parties' expressed intent that the court must determine.
URI, Inc. v. Kleberg Cnty.
,
Thus, in interpreting a fully integrated contract, extrinsic evidence may be used to put the written terms of the contract into context, but it may not be used to vary, contradict, or supplement the contractual terms in violation of the parol evidence rule. We now apply the above principles to our analysis of the parties' arguments in this appeal.
Application
A. Changes in Renewal Rates on Existing Policies
We first address BlueCross's argument that the lower courts erred in concluding that it breached the 2009 Agency Agreement because the agreement did not permit BlueCross to unilaterally reduce commission rates on renewals of existing insurance policies in the May 2011 Schedule.
To recap, when the trial court denied IHS's motion for partial summary judgment, it found that the language in the parties' agreements unambiguously authorized BlueCross to reduce the renewal commission rates on existing policies. Later, when the trial court denied BlueCross's motion for partial summary judgment on this issue, it held that the extrinsic evidence submitted by IHS created a genuine issue of material fact on the meaning of the disputed contractual language. At trial, over BlueCross's objections, the trial court allowed the testimony of former BlueCross and IHS representatives regarding the parties' mutual intent that the renewal rates "vested" at the time the policies were sold and were not subject to modification by BlueCross. 28 The trial court ultimately relied on that evidence to hold that the contract was ambiguous, find that the parties mutually intended for the renewal rates in effect at the time each policy was sold to be a "vested" right not subject to modification by BlueCross, and construed the contract in accordance with that mutual intent. The trial court explained that this interpretation was supported by the rule of practical construction, i.e., the post-contractual behavior of the parties. The appellate court affirmed the trial court's interpretation of these provisions, based on the rule of practical construction and the conduct of the parties during the course of the contractual relationship.
In this appeal, BlueCross argues that the trial court erred in admitting evidence of the parties' pre-contract negotiations after initially concluding that the contractual language was unambiguous. IHS, on the other hand, argues that the trial court rightly admitted the testimony of BlueCross and IHS representatives to put the parties' agreement into context and demonstrate their mutual intent when the contracts were executed. It maintains that the trial court correctly interpreted the contract to align with the parties' mutual intent.
We agree with BlueCross that the testimony on which IHS relies includes the type of evidence that implicates the parol evidence rule. Some of the testimony submitted into evidence by IHS relates to oral pre-contract negotiations on the subject matter of the written agreements, so we must consider how the parol evidence rule applies to the issues at bar.
Under the facts of this case, our focus is less on the admissibility of the testimony and more on its ultimate use. This is for two reasons. First, the evidence to which Blue Cross objects included testimony about context, i.e., the situation of the parties and the circumstances and motivations behind the agreements. This part of the evidence was potentially relevant for an acceptable purpose. "The parol evidence rule does not ... prohibit courts from considering extrinsic evidence of the facts and circumstances surrounding the contract's execution as an aid in the construction of the contract's language."
URI
,
Second, as noted above, the parol evidence rule is not actually an evidentiary rule; it is more accurately characterized as a rule of substantive law.
See
Deaver
,
The commissions due to IHS were governed by the commission schedules, which were attached to and incorporated into the Agency Agreements. Both the initial commission schedules and all subsequent commission schedules set forth the applicable commission rates along with other "terms and conditions." One of the "terms and conditions" listed in the commission schedules addresses the specific topic at issue here-the application of the new commission rates to existing policies. Each schedule issued (except the May 2011 Schedule) contained a provision we refer to as the "renewal-rate provision": "This Commission Schedule supplements any previous Commission Schedule you may have received; commissions for products previously sold are governed by the Commission Schedule in place at the time the sale was made." In addition, at the bottom of each modified commission schedule, there was a bolded provision we refer to as the "modification provision": "[BlueCross] reserves the right to modify or change the commission and payment schedules with appropriate notification."
The testimony on the parties' alleged mutual intent to prohibit BlueCross from removing the renewal-rate provision from the May 2011 Schedule certainly falls the scope of the parties' overall written agreements. As we have explained, when a contract is fully integrated, as these contracts are, the parol evidence rule prohibits the use of pre-contract negotiations within the scope of the agreement in a way that would supplement, limit, or contradict the
contractual terms.
Schaeffer
,
Under IHS's alternate interpretation, the agreements should be construed in a way that aligns with the parties' mutual intent to limit BlueCross's authority to modify or change renewal commission rates. This interpretation, however, directly contradicts the carte blanche authority granted to Blue Cross by the modification provision. Because the testimony on the parties' mutual intent relates to a subject matter within the scope of the parties' agreement, relying on that evidence in order to directly contradict the plain terms of the agreement contravenes the parol evidence rule. Under the parol evidence rule, the evidence was ineffective to alter, vary, or supplement the clear written terms of the contract.
The intermediate appellate court below identified the fallacy in the trial court's use of what the parties "thought or believed" in interpreting the agreements. It nevertheless affirmed the trial court's interpretation based on the rule of practical construction, i.e., the post-contract conduct of the parties.
IHS
,
We do not disagree that the post-contract conduct of the parties can, in some circumstances, elucidate the parties' own interpretation of their agreement.
See
Hamblen Cnty.
,
This interpretation of the modification provision may be harsh in that it gives Blue Cross very broad authority to modify the terms of the commission schedules. However, as we have noted, Tennessee cases have stressed that courts cannot make a new contract for parties under the guise of interpretation, even where a contract contains terms that appear harsh or unjust. "A court is not at liberty to make a new contract for parties who have spoken for themselves."
Smithart
,
Our conclusion on this issue is consistent with cases from other jurisdictions addressing similar provisions.
30
See, e.g.
,
CoMa Ins. Agency, Inc. v. Safeco Ins. Co.
,
For these reasons, we hold that the trial court violated the parol evidence rule by using evidence of the parties' pre-contract mutual intent to contradict the text of the parties' agreement. Under the plain language of the modification provision, BlueCross had the right to unilaterally change or modify the entire commission schedule, including the renewal-rate provision. Therefore, we reverse the lower court decisions and conclude that BlueCross did not breach the 2009 Agency Agreement by changing the renewal-rate provision and making its May 2011 renewal rates applicable to existing insurance policies.
B. Post-termination Payments Directly to Subagents
BlueCross next argues that the lower courts erred in holding that it breached the 2009 Agency Agreement by refusing to pay post-termination commissions to IHS and instead paying those commissions directly to the subagents associated with the policies.
To briefly review, the trial court initially held that the unambiguous language of the parties' agreements plainly allowed BlueCross to make post-termination commission payments directly to the producing agents. Later, the trial court denied BlueCross's motion for partial summary judgment on this issue.
At trial, the court allowed IHS to introduce testimony of the parties' pre-contract negotiations on this issue as well. BlueCross and IHS representatives testified that the parties bargained for IHS to take on administrative functions regarding the subagents in exchange for BlueCross's agreement to pay commissions directly to IHS. According to the testimony, in order to offset its administrative costs, IHS retained a portion of the commissions before paying the subagents.
After the trial, the trial court held that BlueCross breached the contract by making post-contract commission payments directly to IHS's producing agents. Viewing the contractual language in context, the trial court held that BlueCross was not entitled to make post-termination commission payments directly to the subagents because IHS was "still conducting business and, therefore, [was] 'able' and 'available' [to receive the payments]" under the agreement. The Court of Appeals affirmed.
BlueCross argues first that the trial court erred in admitting extrinsic evidence regarding the parties' negotiations on this contractual provision. It points out that, once again, the trial court initially viewed the contract language as plain and unambiguous in favor of BlueCross's interpretation, but it nevertheless admitted extrinsic evidence from IHS and then used that evidence to construe the contractual language in favor of IHS. IHS responds that the testimony was properly considered because it does not alter or vary the terms of terms of the contract.
Given that the parol evidence rule is most accurately characterized as a rule of substantive law, we focus on whether the trial court's use of the evidence on the parties' pre-contract negotiations ran afoul of the parol evidence rule.
Two provisions in the 2009 Agency Agreement are applicable to this issue. The first is a provision titled "Article XII-Compensation" ("Compensation Provision"). The Compensation Provision states that "[a]ll compensation due to [IHS] or [the subagents] will be paid directly [by BlueCross] to [IHS]" and that "[IHS] is solely responsible for any compensation owed to [subagents]." That same paragraph provides that, "in the event [IHS] is no longer able, entitled or available to receive Commissions, [BlueCross] shall use its best efforts to contract individually with the [subagents] pursuant to an Individual Products Agency Agreement in use by [BlueCross] at that time." (Emphasis added).
The other relevant provision is titled "Article XIV-Termination" ("Termination Provision"). According to the Termination Provision, once the contract has been terminated without cause, neither the parties nor the subagents "shall have any claim against the other for any alleged loss of prospective profits or commissions," except "that renewal commissions for policies with effective dates prior to termination will continue to be paid by [BlueCross]. " (Emphasis added). Stated in the active voice, even after termination of the agreement, BlueCross remains obligated to continue paying renewal commissions.
IHS argues that, when the Compensation Provision and the Termination Provision are read together, they require BlueCross to continue paying post-termination commissions to IHS and to prohibit BlueCross from making those payments directly to the subagents unless IHS "is no longer able, entitled or available" to receive commissions. Because the testimony of the parties' mutual intent is consistent with this language, IHS insists, it was admissible and was probative of the parties' intent.
In response, BlueCross concedes that IHS was "able" and "available" to receive commissions after the contract was terminated. However, it claims that, once the contract was terminated, IHS was no longer "entitled" to be paid commissions because "[t]he Agreement is the only grounds on which IHS can claim a right to commission payments from [BlueCross]. After [BlueCross] exercised its right to terminate the Agreement, [BlueCross's] relationship with IHS as a general agent ended, and IHS retained no right to receive commission payments on policies sold by other producing agents." Therefore, BlueCross argues, after termination of the agreement, IHS was no longer "entitled" to any commissions, so evidence that the parties mutually intended otherwise is contrary to the contractual language and should have been excluded under the parol evidence rule.
We agree with IHS and the lower courts on this issue. The
Compensation
Provision provides that all commissions must be paid directly to IHS unless IHS "is no longer able, entitled or available" to receive commissions. IHS's "entitlement" comes from the
Termination
Provision, which requires BlueCross to "continue to" pay renewal commissions after the contract is terminated. By requiring BlueCross to "continue to" pay renewal commissions, the Termination Provision clearly contemplates "continuation" of the same practice of paying commissions to IHS. While the testimony regarding the parties' mutual intent fell within the scope of the agreement, it did not purport to vary, supplement, or limit the contractual language. Rather, the extrinsic evidence illuminates the parties' intent and is consistent with the plain language of the contract.
See
Hines
,
Thus, BlueCross's claim that IHS is not "entitled" to receive commissions after termination of the contract ignores its specific post-termination obligation to "continue to" pay "renewal commissions for policies with effective dates prior to termination." Accordingly, we affirm the decisions of the lower courts on this issue and conclude that BlueCross breached the 2009 Agency Agreement by refusing to pay post-termination commissions to IHS and instead paying post-termination commissions directly to the producing agents.
See
IHS
,
C. Indemnity Provision/Attorney Fees
IHS argues next that it was entitled to an award of attorney fees under the indemnity provision in the parties' contract.
To review, the trial court first denied IHS's claim for attorney fees, but it later reversed its position based on trial testimony that the parties specifically bargained for a fee-shifting provision. The Court of Appeals then reversed the trial court's ultimate decision and rejected IHS's claim for attorney fees, holding that the indemnification provision "does not apply to disputes between the contracting parties, BlueCross and IHS."
IHS
,
IHS argues on appeal that the language in the indemnity provision may fairly be construed to allow it to recover attorney fees in this lawsuit and that the evidence of the parties' mutual intent supports this interpretation of the parties' agreement. The testimony submitted by IHS at trial regarding the formation of the contract showed that, when the 1999 Agency Agreement was executed, the parties were "fierce competitors," that BlueCross had overwhelming financial superiority, that BlueCross had a history of anti-competitive behavior, that IHS mistrusted BlueCross, and that IHS was specifically concerned about litigation between it and BlueCross. Based on these circumstances, IHS argues, inter-party indemnity was a "key issue" during the negotiations, perhaps the "biggest issue" for IHS, to make certain it would be able to recover its attorney fees from BlueCross in the event of litigation. This evidence of the parties' mutual intent, IHS argues, supports the trial court's interpretation of the indemnity provision.
IHS cites several cases from other jurisdictions indicating that "there is nothing in the word 'indemnity' that limits it to third parties."
Caldwell Tanks, Inc. v. Haley & Ward, Inc.
,
As with the other issues, BlueCross argues preliminarily that the trial court erred in admitting testimony on the parties' intent that the indemnity provision would cover indemnity of attorney fees in a suit brought by the contracting parties. BlueCross points out that both parties are sophisticated business entities that are presumably cognizant of Tennessee law regarding the requirements for fee-shifting contract provisions. Because the indemnity provision does not specifically provide that the parties are required to indemnify one another for attorney fees on litigation between the contracting parties, BlueCross maintains, the Court of Appeals correctly reversed the trial court's award of attorney fees. 31
We begin our analysis by looking at the contractual language. The applicable provision in both the 1999 and 2009 Agency Agreements is titled "Article VI-Indemnity," and it provides mutual indemnity provisions:
A. [IHS] and the [subagents] agree to indemnify and hold [BlueCross] ... harmless from any and all claims, lawsuits, settlements, judgments, costs, interest and penalties, expenses and taxes, including but not limited to attorney's fees and court costs, resulting from, or arising directly or indirectly out of or in connection with, any action or lack of action by [IHS] or any [subagent] associated with this General Agency Agreement and/or [IHS] and [subagents].
B. [BlueCross] agrees to indemnify and hold [IHS] ... harmless from any and all claims, lawsuits, settlements, judgments, costs, interest[ ] and penalties, expenses and taxes, including but not limited to attorney's fees and court costs, resulting from or arising directly or indirectly out of or in connection[ ] with, any action or lack of action by [BlueCross] associated with this Agreement.
As we have indicated, all contracts must be interpreted in a manner that is consistent with general legal principles. Among them is the well-established
legal principle that Tennessee "adheres to the 'American rule' for an award of attorney fees."
Id.
at *22 (quoting
Cracker Barrel Old Country Store, Inc. v. Epperson
,
This precept forms the backdrop for our consideration of the indemnity provision in the instant case. The question becomes whether the language in the indemnity provision is sufficiently specific to apply to the recovery of attorney fees in this interparty lawsuit. 32 We hold that it is not.
The indemnity provision at issue has fairly typical language. Several Tennessee cases have addressed the question of whether an indemnity provision is specific enough to serve as a fee-shifting provision. Most have held that, even if boilerplate indemnity provisions provide for the recovery of attorney fees in third-party claims, they do not constitute a fee-shifting provision that would allow for the recovery of attorney fees in lawsuits between the contracting parties.
For example, in
Holcomb v. Cagle
, a landlord sued a tenant based on the tenant's failure failing to pay real estate taxes on the leased property, and the landlord prevailed.
Holcomb
,
Similarly, in
Eatherly Constr. Co. v. HTI Memorial Hosp.
, a construction company sued a hospital for payment under the parties' contract. No. M2003-02313-COA-R3-CV,
The
Eatherly
court held that the indemnity provision did not apply to litigation between the contracting parties because it used the words "indemnification" and "indemnitee," so applying the provision to litigation between the contracting parties would lead to the "absurd result" of requiring the contractor to provide a defense for the hospital in a lawsuit against itself.
Id.
at *10-11. For those reasons, and in light of the American rule, the court declined to award attorney fees to the hospital under the indemnity agreement.
See
Colonial Pipeline Co. v. Nashville & E. R.R. Corp.
,
The only contrary Tennessee case appears to be a decision by our Court of Appeals in
Linden v. Am. Storage Park
, on which the trial court relied in the instant case.
The basis of the holding in
Linden
appears questionable. In support of its conclusion, the intermediate appellate court cited
Pullman Standard v. Abex Corp.
,
As argued forcefully by IHS, cases from other jurisdictions have held that indemnity provisions similar to the subject provision in this case were sufficiently broad to cover an award of attorney fees between the contracting parties. In Tennessee, however, if the parties wish to contract in a manner contrary to the American Rule and provide for fee shifting in lawsuits arising out of their contract, the provision must specifically describe a fee-shifting agreement. 34
In arguing that the trial court's interpretation of the indemnity provision is correct, IHS also relies on extrinsic evidence, i.e., testimony of the parties' mutual intent that the indemnity provision be used as a fee-shifting provision. The trial court held that the witness testimony presented by IHS constituted "clear and weighty testimony ... that the indemnity provision was intended to permit recovery of attorney's fees in interparty disputes." Assuming
arguendo
that the parties intended to include a fee-shifting provision in the Agreement, we must agree with the Court of Appeals that the written words in the indemnity provision did not accomplish that objective.
See
IHS
,
Accordingly, we affirm the Court of Appeals' holding that IHS is not entitled to attorney fees under the indemnity provision.
Discovery Rule and Statute of Limitations
After the bench trial in this case, the trial court held that BlueCross had systemically underpaid commissions throughout its 13-year contractual relationship with IHS. BlueCross contended that the damages for which it was liable should be limited by the six-year statute of limitations applicable to breach-of-contract actions. The trial court rejected that argument. It held that, because BlueCross's underpayments were "inherently undiscoverable," the discovery rule tolled the six-year statute of limitations until the breach should have been discovered. Accordingly, it held BlueCross liable for underpaid commissions for the entire duration of the parties' contractual relationship. The Court of Appeals affirmed.
On appeal to this Court, BlueCross argues that the lower courts erred in rejecting its statute-of-limitations defense based on the discovery rule and the alleged "inherently undiscoverable" nature of the breach. It contends that, absent fraudulent concealment, the discovery rule should not apply in breach-of-contract actions, particularly those involving commercial contracts. It argues that application of the discovery rule in breach-of-contract actions: (1) is contrary to the statutory language creating the six-year limitation; (2) is improper in cases involving latent injuries; (3) is inappropriate because contract cases are fundamentally different from tort cases; (4) leads to open-ended contractual liability; (5) requires courts and parties to litigate stale claims; and (6) is unfair because other exceptions to the statute of limitations adequately protect innocent plaintiffs in contract actions.
35
In the alternative, if the Court were inclined to apply the discovery rule to breach-of-contract cases, BlueCross argues, it should apply only in a very narrow set of circumstances where the breach is inherently undiscoverable on a categorical basis, rather than on a case-by-case basis.
36
See, e.g.
,
Wagner & Brown, Ltd. v. Horwood
,
In response, IHS notes that several Tennessee intermediate appellate court decisions have followed the rationale in
Goot
in applying the discovery rule to toll the breach-of-contract statute of limitations in situations where the alleged breach was inherently undiscoverable.
37
See
Goot v. Metro. Gov't of Nashville & Davidson Cnty.
, No. M2003-02013-COA-R3-CV,
This Court has not addressed either the
Goot
holding or the underlying question of whether, under any circumstances, the discovery rule could apply to toll the six-year statute of limitations in breach-of-contract actions. To determine whether the discovery rule should apply to a certain type of case, this Court considers the specific statute of limitations at issue and then "balances the policies furthered by application of the discovery rule against the legitimate policies upon which" the statute of limitations is based.
Pero's Steak & Spaghetti House v. Lee
,
The applicable statute of limitations in this case is Tennessee Code Annotated section 28-3-109(a)(3), which provides that a general breach-of-contract action "shall be commenced within six (6) years after the cause of action accrued." The statute does not specify when "the cause of action accrue[s]." Our courts have held that a breach-of-contract cause of action accrues "as of the date of the breach" or, in the case of anticipatory breach, "when the acts and conduct of one party shows [sic] an intention to no longer be bound by the contract."
38
Greene v. THGC, Inc.
,
Next, we look at "the policies furthered by application of the discovery rule against the legitimate policies upon which statutes of limitations are based."
Pero's
,
Balanced against these policy goals are the equitable considerations that led to adoption of the discovery rule. "In 1974, this Court recognized and adopted the discovery rule in response to the 'harsh and oppressive' results of the traditional accrual rule in circumstances in which the injured party was unaware of the injury."
Redwing
,
Since
Teeters
, "the discovery rule has been applied to various tort actions including products liability, legal malpractice, and dental malpractice actions."
Redwing
,
In
Goot
, upon which the lower courts relied in the instant case, the intermediate appellate court held that the discovery rule applies only if the breach alleged by the plaintiff is "inherently undiscoverable."
Goot
,
Because the alleged breach occurred in 1987 and the lawsuit was filed in 2001, the wife argued that the six-year statute of limitations should be tolled because the defendant's failure to inform the husband of a benefit he knew nothing about was "inherently undiscoverable." Id. at *9. The Court of Appeals in Goot agreed. It observed that the discovery rule "alleviates the intolerable result of barring a cause of action by holding that it 'accrued' before the plaintiff discovered the injury or the wrong." Id. While there is no need for the discovery rule in most contract cases, it commented, it was also "not difficult to envision circumstances in which a party to a contract would not be aware that the other party has breached the contract."
Id. at *11 (footnote omitted). Goot noted that courts in other states had applied the discovery rule in breach-of-contract cases "where the breach of contract is inherently [undiscoverable]." Id. (citation omitted). The Goot court added: "The inherently undiscoverable requirement is met when the injured party is unlikely to discover the wrong during the limitations period despite due diligence. To be inherently undiscoverable, the wrong and injury must be unknown to the plaintiff because of their very nature and not because of any fault of the plaintiff." 40 Id. at *11 n.31.
The intermediate appellate court in Goot observed that "it would have been difficult for [the plaintiff and her husband] to be aware of or discover that [Metro] breached its contract in 1987" by failing to inform them of the benefit, because they did not even know that the benefit existed. Id. at *12. The court pointed out that Metro "was in a far superior position when compared to [the plaintiff and her husband]," indicating that Metro was at fault for the couple's lack of knowledge about the benefit. Id. For these reasons, the court concluded that the breach was inherently undiscoverable, so it applied the discovery rule to toll the six-year statute of limitations. Id.
Tennessee intermediate appellate courts, as well as some federal courts, have cited
Goot
for the general proposition that Tennessee uses the "inherently undiscoverable" test to determine whether the discovery rule would apply in a breach-of-contract case.
See, e.g.
,
McGhee v. Shelby Cnty. Gov't
, No. W2012-00185-COA-R3-CV,
Courts in other jurisdictions are split on whether the discovery rule can apply in breach-of-contract actions. Some decline to apply the discovery rule to breach-of-contract actions under any circumstances. 41
Others take the opposite approach, applying the general discovery rule in breach-of-contract cases in the same way it is applied in torts and other types of actions. 42 Still other courts take a third path; they apply the discovery rule in breach-of-contract cases only in situations where the breach is "inherently undiscoverable," "inherently unknowable," or "difficult to detect." Even in those cases, there is no uniform description of the terms. 43
In this case, IHS does not argue that we should apply the general discovery rule as it is applied in tort cases for example. Instead, IHS asks us to adopt the "inherently undiscoverable" standard in Goot and affirm the trial court's holding that the facts in this case meet that standard.
We refrain from doing so. The facts of this case do not compel us to either reject or adopt the holding in Goot , because the breach in this case does not qualify as "inherently undiscoverable" under any definition. Here, the trial court found that BlueCross's breach (the systemic commission underpayments) was inherently undiscoverable based on the following facts:
[IHS] proved in several ways that prior to 2011, when [IHS analyzed its internal records], [BlueCross's] underpayment of commissions was inherently undiscoverable.
First, there was a disparity of knowledge, and it was [BlueCross] who had superior knowledge and control. The proof established that [BlueCross], in the first instance, determined the information reported to [IHS] on the monthly commission statements. Additionally, [IHS's] information in SLIM [IHS's internal database] was dependent upon the reliability of [BlueCross's] information which was shown by [IHS] to be unreliable. Further, the Court accredits the testimony of Mr. Conroy who designed the SLIM system that it could not detect underpayments of commissions, and such underpayments were inherently undiscoverable by [IHS].
Additionally, [IHS] did not have access to the following information which the proof established was necessary to determine underpayments:
-[BlueCross's] Facets system [its commission reporting and payment system]
-[BlueCross's] cross reference table with Broker Ids
-Applicants' social security numbers
-All termination notices
-All renewal notices
The proof further established that [IHS] was diligent in attempting to detect errors by reviewing the monthly commission statements from [BlueCross], preparing reports for subagents, taking and responding to subagents' underpayment or nonpayment inquiries and continuously contacting [BlueCross] to track these down, and finalizing and transmitting a report and commission check to each subagent. The proof revealed, however, that [IHS's] ad hoc inquires [sic] about commission issues over the years of the General Agency Agreement could not uncover the systemic underpayments because of the variety and non-routine occurrence of the issues, and insufficient information to perform checks.
In addition, there was proof that [BlueCross] knew about the faultiness of Facets [its commission reporting and payment system] and the likelihood of significant amounts of commission payment errors which knowledge was not shared with [IHS]. There was abundant proof, contained in the above findings, that over the life of the [General Agency Agreement] [BlueCross] knew the deficiencies and faultiness of Facets, the likelihood and ongoing occurrence of errors in commission credit due to human error in manual adjustments, and that two Ernst & Young audits had flagged payment of incorrect commission rates due to internal controls. Yet the proof was clear that [IHS] was not told this. [BlueCross] created a sense of security that there were no problems with Facets other than the ad hoc questions by IHS.
[BlueCross] also inhibited inquiry by [IHS] with promises of a new system "Callidus." The Court accredits the testimony of [IHS's] witnesses that at a dinner with [BlueCross] in March of 2010 ... the [BlueCross] representatives assured [IHS] that Callidus would be implemented soon and would improve the commission reporting and payment system. Ultimately Callidus was not implemented by [BlueCross]. The Court finds that beginning in 2008, [BlueCross] studied Callidus to upgrade Facets to address the recurring errors. By December of 2009 [BlueCross] was implementing Callidus but had to abandon that because it was unable to exchange data with Facets. [IHS], however, was not told any of this. 44
Based upon all of the above evidence, the Court concludes that continuous, ongoing underpayments were inherently undiscoverable by [IHS], and the statute of limitations is tolled.
IHS
,
From our review of the record, the basic facts as found by the trial court are well supported by the evidence. These facts demonstrate numerous obstacles that presented particular challenges to IHS's efforts to detect errors in BlueCross's commission payments.
The larger question, however, is whether those facts support the trial court's conclusion that Blue Cross's systematic underpayment of commissions was "inherently undiscoverable." We think not. Although the facts as found by the trial court indicate that the discovery of the breach in this case was not easy, they also establish that, in the early years, IHS had the same access to information-and the same ability to request information from BlueCross-that it had in 2012.
The breach at issue arises from a commercial contract between two sophisticated business entities, each expected to use due diligence to protect its own interests. "Due diligence may include asking a contract partner for information needed to verify contractual performance."
Via Net v. TIG Ins. Co.
,
As found by the trial court, BlueCross's faulty Facets system resulted in BlueCross making errors in tracking policies and other things that adversely affected the amount of commissions paid to IHS. IHS, however, had its own methods of tracking applicant and policy information.
46
IHS was well aware that its own tracking was based on the quality of the information provided by BlueCross. In the early years of the parties' contractual relationship, Mr. Walker could have verified the accuracy of commission payments in the same way he did in later years, but he did not do so. Instead, Mr. Walker and IHS only made monthly, "ad hoc" inquiries; those inquiries stopped short of requesting a full accounting and verifying that IHS was being paid its due commissions and instead chose to rely to a great degree on the information received from BlueCross.
See
Kardell v. Union Bankers Ins. Co.
, No. 05-01-00662-CV,
To be sure, verifying BlueCross's information would have been a difficult task, especially when the Facets system was faulty. However, had an accurate accounting of commissions earned been demanded and verified from the beginning, the years of underpayments would never have occurred. Even after BlueCross failed to implement the promised new accounting system, IHS continued to rely on BlueCross to provide accurate information. It did so at its own peril.
In short, the fact that Blue Cross's underpayments were based on complicated mathematical equations does not make them "inherently undiscoverable" as we understand that term in this context. Therefore, even if we were to adopt the Goot "inherently undiscoverable" discovery rule in breach-of-contract cases, these facts do not meet that standard.
For this reason, we reverse the lower courts on this issue and hold that IHS's claim for damages resulting from systemic underpayments before July 29, 2005 (six years prior to filing suit) must be dismissed as untimely.
CONCLUSION
In sum, we hold that BlueCross did not breach the 2009 Agency Agreement by modifying renewal commission rates for existing policies in the May 2011 Schedule. BlueCross did, however, breach the parties' agreement by refusing to pay post-termination commissions to IHS and instead making commission payments directly to the producing agents. In addition, because the indemnity provision in the 2009 Agency Agreement does not specifically authorize fee shifting in a suit between the two contracting parties, we hold that IHS is not entitled to an award of attorney fees. Finally, we hold that the discovery rule does not apply to this breach-of-contract action, because the alleged breach of systemic underpayments was not "inherently undiscoverable" under any definition of that term. Therefore, we dismiss as untimely IHS's claim to any systemic commission underpayments that accrued before July 29, 2005.
The decision of the Court of Appeals is affirmed in part and reversed in part as set forth above. The case is remanded to the trial court for further proceedings consistent with this opinion. Costs on appeal are to be taxed equally to Defendant/Appellant BlueCross BlueShield of Tennessee, Inc., and Plaintiff/Appellee Individual Healthcare Specialists, Inc., and their sureties, for which execution may issue, if necessary.
In the late 1990s, BlueCross began to sell individual (as opposed to group) insurance products in Tennessee. Rather than hiring employees and taking on the administrative tasks involved in such a venture, it contracted with general agents to sell the individual insurance products either directly or through a network of subagent brokers. IHS was one such general agent.
BlueCross paid IHS different rates according to the type of policy issued, and the rate was a percentage of the policy's first-year annualized premium.
The record indicates that BlueCross modified the Commission Schedule attached to the 1999 Agency Agreement in April 2004, June 2005, October 2005, January 2006, December 2006, June 2008, and November 2008. The record further indicates that BlueCross modified the Commission Schedule attached to the 2009 Agency Agreement in February 2010 and May 2011.
According to Amicus Curiae America's Health Insurance Plans, "[t]he ACA provision that most directly affects arrangements between health insurance providers and agents or brokers is called the medical loss ratio, which took effect in 2011. See 42 U.S.C. [§] 300gg-18(b) ; 45 C.F.R. Part 158." The medical loss ratio (MLR) under the ACA was an 80% to 20% split; carriers could spend no more that 20% of insurance premiums on administrative costs, including commission payments.
The May 2011 Schedule also included a provision that addressed the division of commissions between IHS and its subagents for renewal premiums. It first stated that IHS would receive 7% commission on renewal premiums collected from May 1, 2011, to April 30, 2012. It then directed IHS to pay its subagents 5% of that commission and to retain 2% of the commission as its "override." On May 1, 2012, it provided, the commission on renewal premiums would fall to 5%.
The statute of limitations for breach-of-contract actions is six years,
see
The trial court denied damages for many of IHS's claims based on lack of sufficient proof. These holdings are not at issue in this appeal.
Amici Curiae Tennessee Chamber of Commerce & Industry, The Nashville Chamber of Commerce, the Greater Memphis Chamber, and the Chattanooga Chamber support this policy position as conducive to predictable outcomes in business disputes and an overall favorable business climate.
See
IHS
,
Amicus Curiae Professor George Kuney is in general alignment with this position, arguing that a court's consideration of the context of an agreement as well as its language is more likely to result in interpretation that reflects the intentions of the parties.
In general, under the plain meaning rule, if language in a contract is initially deemed unambiguous, its "plain meaning" should be used, without recourse to matters extraneous to the text of the agreement. See Black's Law Dictionary 1336 (10th ed. 2014).
As discussed below, the four corners rule appears to be stated in two ways; first, that a contract's meaning is gathered from the entire document rather than its isolated parts, and second, that extraneous evidence is not used to interpret a contract that is deemed unambiguous. See Black's Law Dictionary 772 (10th ed. 2014).
Formulations of the so-called "parol evidence rule" vary, but in general it provides that "a writing intended by the parties to be a final embodiment of their agreement cannot be modified by evidence of earlier or contemporaneous agreements that might add to, vary, or contradict the writing." Black's Law Dictionary 1292 (10th ed. 2014).
The term "extrinsic evidence" includes any "[e]vidence relating to a contract but not appearing on the face of the contract because it comes from other sources, such as statements between the parties or the circumstances surrounding the agreement." Black's Law Dictionary 675 (10th ed. 2014). Unless a particular type of extrinsic evidence is at issue, courts often refer to all extra-contractual evidence as "extrinsic evidence."
The sometimes harsh results resulting from the textual rules engendered numerous exceptions to rigid enforcement.
See, e.g.
,
Hines v. Wilcox
,
In addition, some judges and commentators came to criticize the "ambiguous versus unambiguous" dichotomy used in textualism an arbitrary barrier to the use of important tools for interpreting contracts and statutes.
See
Lawrence M. Solan,
Pernicious Ambiguity in Contracts and Statutes
,
See
,
e.g.
,
Trident Ctr. v. Conn. Gen. Life Ins. Co.
,
Deciding the legal effect of the words in a contract is a question of law, but where interpretation of the contract involves extrinsic evidence that "is conflicting or may lead to more than one conclusion, the doubtful parts may be submitted to the fact-finder for resolution."
Bratton v. Bratton
,
Ambiguous in this sense is typically defined as "susceptible to more than one reasonable interpretation."
Planters Gin
,
The "four corners" rule has been recited in various ways in Tennessee, sometimes as a rule of construction requiring the court to consider all parts of a contract, and other times as a variant of the "plain and unambiguous" principle described above; at times both have appeared in the course of the same opinion. For example in
Kiser v. Wolfe
, the Court stated: "When construing an insurance contract, 'the paramount rule ... is to ascertain the intent of the parties ... [which] is to be derived from the four corners of the policy giving effect to all parts.' 'An elementary precept of contract law' is that when the language is clear, courts must not look beyond the four corners of the instrument."
Kiser v. Wolfe
,
See, e.g.,
City of Bristol v. Bostwick
,
The rule of practical construction, "long recognized and applied in this jurisdiction, is that the interpretation placed upon a contract by the parties thereto, as shown by their acts, will be adopted by the court and that to this end not only the acts but the declarations of the parties may be considered."
Hamblen Cnty.
,
One commentator describes Hamblen County as "the best approach to [Tennessee's] conflicting case law on extrinsic evidence." See Feldman, 21 Tenn. Practice § 8:18.
There are several exceptions to the parol evidence rule. Feldman, 21 Tenn. Practice § 8:52. We need not examine those exceptions under the facts of this case.
Although the term "parol" means "oral," the "parol evidence rule" is generally understood to apply to both oral and written extrinsic evidence of pre-contract negotiations between the parties.
See
Feldman, 21 Tenn. Practice § 8:41;
see also
David G. Epstein et al.,
Extrinsic Evidence, Parol Evidence, & the Parol Evidence Rule: A Call for Courts to Use the Reasoning of the Restatements Rather than the Rhetoric of Common Law
,
This common-law rule is statutorily embodied in the Uniform Commercial Code, which governs cases involving the sale of goods.
See
If a contract does not contain an integration clause, the appropriate application of the parol evidence rule depends on the preliminary factual question of whether the contract at issue was a final integration of the parties' entire agreement. See Feldman, 21 Tenn. Practice § 8:48; see also Restatement (Second) Contracts § 210(3).
The integration clause in the 2009 Agency Agreement is entitled "Article X-Entire Contract." Like a typical integration clause (also known as a "merger clause"), this provision states specifically that the contract constitutes the final and entire agreement between the parties and that "[a]ny prior agreements, promises, negotiations[,] or representations, either verbal or written, relating to the subject matter of this Agreement and not expressly set forth in this Agreement are of no force or effect."
See
Ralph James Mooney,
A Friendly Letter to the Oregon Supreme Court: Let's Try Again on the Parol Evidence Rule
,
The lengthy testimony on which IHS relies included testimony from both BlueCross and IHS representatives who were involved in negotiating the Agency Agreements. The testimony fully supported a finding that it was the mutual intent of the contracting parties that modified renewal rates would apply only to new policies. The trial court credited this testimony, and we give appropriate deference to the trial court's credibility determinations.
Wells v. Tenn. Bd. of Regents
,
See
Feldman, 21 Tenn. Practice § 8:18 (quoting
Metric Constructors, Inc.
,
IHS distinguishes the cases from other jurisdictions based on the fact that the contracts being interpreted did not include a "vesting" provision, referring to the applicable renewal-rate provision. As we have noted, however, this so-called "vesting" provision was not guaranteed by the parties' Agency Agreements; rather, it was a term included in the commission schedules, which were entirely modifiable by BlueCross. Therefore, the reasoning in these cases is consistent with our reasoning in the instant case.
Amicus Curiae Tennessee Chamber of Commerce & Industry supports this argument.
For an in-depth summary of the arguments of the parties and the positions taken by the amici curiae on this topic, see
IHS
,
We note that the Court of Appeals in
Colonial Pipeline
concluded that, under the facts of that case, applying the indemnity provision to a suit between the contracting parties would have led to an "absurd result,"
Colonial Pipeline Co.
,
Other states also require specific fee-shifting language for an indemnity provision to apply to a dispute between the contracting parties.
See, e.g.
,
Nevadacare, Inc. v. Dep't of Human Servs.
,
The Amici Curiae Nashville Area Chamber of Commerce, the Greater Memphis Chamber, the Chattanooga Area Chamber of Commerce, the Tennessee Chamber of Commerce & Industry, Tennessee Defense Lawyers Association, and DRI-The Voice of the Defense Bar make similar arguments against applying the discovery rule in breach-of-contract cases. They argue, among other things, that strictly enforcing the statute of limitations in such cases protects commercial certainty and avoids open-ended contract liability.
Amicus Curiae Tennessee Chamber of Commerce & Industry takes a similar alternative position.
Amicus Curiae Professor Kuney filed a brief in support of IHS's position. He asserts that a majority of jurisdictions now apply the discovery rule in breach-of-contract actions to some extent, and argues that, "[f]rom a policy perspective, it makes good sense to apply the discovery rule to the limited class of breach of contract claims identified in Goot ."
Some jurisdictions have a statute that expressly incorporates the discovery rule into the statute of limitations applicable to breach-of-contract claims.
See
,
e.g.
,
Although
Goot
was actually a consolidation of several cases with a total of five plaintiff spouses, the claims all involved slightly different facts and different outcomes. For simplicity, we refer in this opinion only to the claim of a single plaintiff, Wanda Faye Jackson.
See Goot
,
The Goot court noted two exceptions to the "inherently undiscoverable" application of the discovery rule: (1) when invoking the rule is inconsistent with the terms of the applicable statute of limitations and (2) the rule cannot supercede a contractually agreed-upon limitations period so long as the contract affords a reasonable time in which to file suit. Id. at *12.
See, e.g.
,
Utils. Bd. of City of Opp v. Shuler Bros., Inc.
,
See, e.g.
,
Bauman v. Day
,
See, e.g.
,
Gust, Rosenfeld & Henderson v. Prudential Ins. Co. of Am.
,
Despite its finding that BlueCross intentionally withheld information, the trial court denied IHS's request for sanctions against BlueCross for delaying or impeding its investigation. It found that the extended time of discovery was due to "factors outside the parties' control" such as the "age of some of the data" and "the volume of information requested by IHS."
After determining that BlueCross's ongoing underpayments were inherently undiscoverable, the trial court did not actually determine the date on which IHS knew or should have known of sufficient facts to put it on notice of the breach.
IHS began using SLIM in 2003 to house information on policy applicants.