Lead Opinion
OPINION
Memorandum Decision of the Court of Appeals, Division One, filed September 17, 1991, vacated and remanded
Bobby Sid Taylor petitions us to review a decision reversing a jury verdict in his fa
FACTS AND PROCEDURAL HISTORY
This insurance bad faith action arises out of an accident that occurred approximately sixteen years ago. Many of the facts are undisputed. The accident involved three vehiclеs — one occupied by Anne Ring and passenger James Rivers, the second by Douglas Wistrom, and the third by Bobby Sid Taylor. Ring, Rivers, and Taylor all were injured. The facts surrounding the accident are set forth in Ring v. Taylor,
The Rings eventually settled with State Farm. Taylor, however, sued State Farm for bad faith seeking damages for the excess Rivers judgment, claiming, among other things, that State Farm improperly failed to settle the Rivers matter within policy limits. State Farm moved for summary judgment, asserting that Taylor relinquished his bad faith claim when, in 1981, he signed a release drafted by attorney Randall in exchange for State Farm’s payment of $15,000 in uninsured motorist benefits.
The court of appeals reversed, holding that the release agreement was not ambiguous and therefore the judge erred by admitting parol evidence to vary its terms. Taylor v. State Farm Mut. Auto. Ins. Co., No. 1 CA-CV 9908 (Sep. 17, 1991) (mem. dec.). Based on the agreement’s “four corners,” the court held that “it сlearly release[d] all policy contract rights, claims, and causes of action that Taylor has or may have against State Farm.” Id. at 20. According to the court, because the release should have been strictly enforced, there was no basis for Taylor’s bad faith claim. Id. We believe the court’s decision both incorrectly applies settled legal principles and raises unsettled issues of contract interpretation.
DISCUSSION
Much of the dispute in this case centers on the events that surround the drafting of the release and the inferences that can be drawn from those events. As noted, the trial court found that the release was am
A. Legal principles
The application of the parol evidence rule has been the subject of much controversy and scholarly debate. See generally Darner Motor Sales, Inc. v. Universal Underwriters Ins. Co.,
Interpretation is the process by which we determine the meaning of words in a contract. See Restatement § 200. Generally, and in Arizona, a court will attempt to enforce a contract according to the parties’ intent. See Darner,
1. Restrictive view
Under the restrictive "plain meaning” view of the parol evidence rule, evidence of prior negotiations may be used for interpretation only upon a finding that some language in the contract is unclear, ambiguous, or vague. E. Allan Farnsworth, Fаrnsworth on Contracts § 7.12, at 270 (1990) (“Farnsworth”). Under this approach, “if a writing, or the term in question, appears to be plain and unambiguous on its face, its meaning must be determined from the four corners of the instrument without resort to extrinsic evidence of any nature.” Calamari & Perillo, supra § 3-10, at 166-67; cf. Gottsfield, supra, at 388-89. Thus, if the judge finds from the face of a document that it conveys only one meaning, parol evidence is neither considered nor admitted for any purpose. The danger here, of course, is that what appears plain and clear to one judge may not be so plain to another (as in this case), and the judge’s decision, uninformed by context, may not reflect the intent of the parties.
2. Corbin view
Under the view embraced by Professor Corbin and the Second Restatement, there is no nеed to make a preliminary finding of ambiguity before the judge considers extrinsic evidence. 3 Corbin § 542, at 100-05 (1992 Supp.); Restatement § 212 cmt. b; Farnsworth § 7.12, at 272; Gottsfield, supra, at 384. Instead, the
3. Arizona view
Writing for a unanimous court in Smith v. Melson, Inc.,
According to Corbin, the proper analysis has two steps. First, the court considers the evidence that is alleged to determine the extent of integration, illuminate the meaning of the contract language, or demonstrate the parties’ intent. See 3 Corbin § 542, at 100-01 (1992 Supp.). The court’s function at this stage is to eliminate the evidence that has no probative value in determining the parties’ intent. Id. The second step involves “finalizing” the court’s understanding of the contrаct. Id. at 100. Here, the parol evidence rule applies and precludes admission of the extrinsic evidence that would vary or contradict the meaning of the written words. Id.
Even during the first step, the judge may properly decide not to consider certain offered evidence because it does not aid in interpretation but, instead, varies or contradicts the written words. See id. at 101. This might occur when the court decides that the asserted meaning of the contract language is so unreasonable or extraordinary that it is improbable that the parties actually subscribed to the interpretation asserted by the proponent of the extrinsic evidence. See id. “The more bizarre and unusual an asserted interpretation is, the more convincing must be the testimony that supports it.” 3 Corbin § 579, at 420. At what point a judge stops “listening to testimony that white is black and that a dollar is fifty cents is a matter for sound judicial discretion and common sense.” Id.
When interpreting a contract, nevertheless, it is fundamental that a court attempt to “ascertain and give effect to the intention of the parties at the time the contract was made if at all possible.” Polk,
Recognizing these problems, we are hesitant to endorse, without explanation, the often repeated and usually oversimplified construct that ambiguity must exist before parol evidence is admissible. We have previously criticized the ambiguity prerequisite in the context of non-negotiated agreements. See State Farm Mut. Auto. Ins. Co. v. Wilson,
The better rule is that the judge first considers the offered evidence and, if he or she finds that the contract language is “reasonably susceptible” to the interpretation asserted by its proponent, the evidence is admissible to determine the meaning intended by the parties. See Restatement § 215 cmt. b; see also Pacific Gas & Elec. Co. v. G. W. Thomas Dray. & Rigging Co.,
A judge may not always be in a position to rule on a parol evidence objection at first blush, having not yet heard enough relevant evidence on the issue. If this occurs, the judge might, for example, admit the extrinsic evidence conditionally, reserve ruling on the issue until enough relevant evidence is presented, or, if the case is being tried to a jury, consider the evidence outside the jury’s presence. See, e.g., Ariz.R.Evid. 103(c), 104(b), 104(c), 105. Because the judge is in the best position to decide how to proceed, we leave this decision to his or her sound discretion. As noted also, the judge need not waste much time if the asserted interpretation is unreasonable or the offered evidence is not persuasive. A proffered interpretation that is highly improbable would neсessarily require very convincing evidence. In such a case, the judge might quickly decide that the contract language is not reasonably susceptible to the asserted meaning, stop listening to evidence supporting it, and rule that its admission would violate the parol evidence rule. See 3 Corbin § 542, at 112; § 579, at 420.
We now apply these principles to the facts of this case.
B. Was the release so clear that the trial judge erred in admitting extrinsic evidence to interpret it?
Taylor released “all contractual rights, claims, and causes of action he ha[d] or may have against STATE FARM under the policy of insurance ... in connection with the collision ... and all subsequent matters.” See Appendix (emphasis added). Taylor argued that the bad faith claim sounds in tort and was therefore neither covered nor intended to be covered by the language releasing “all contractual” claims. The trial cоurt found that
[pjarts of the document suggest that the parties contemplated the question of the insurer’s settlement of claims within policy limits. Yet on page 2 of the document, the release satisfies “all contractual rights, claims, and causes of action.” As a matter of statutory or contract construction, the word “contractual” modifies the words “rights,” “claims,” and the words “causes of action.” Although the breach of the duty of good faith and fair dealing arises out of contract, the action itself is a tort claim. Thus, there is ambiguity here. Where there is an ambiguity, parol evidence will be admitted on this issue.
Minute Entry, Jan. 12, 1987 at 1-2 (citations omitted). The court of appeals held that Taylor’s bad faith action was purely contractual and therefоre, unlike the trial judge, found no ambiguity in the release language. Taylor, mem. dec. at 16.
1. Was the release language reasonably susceptible to differing interpretations, including that the bad faith claim was not released despite the contractual quality of such a claim?
First, we address the court of appeals’ holding that Taylor’s bad faith claim was
The court of appeals held that to assert a bad faith claim, Taylor first had to establish a “breach of contract”; that is, he must have been able to show that State Farm “denied, failed to pay, or failed to process a valid claim.” Id. at 16. The court held that at the time Taylor made the release agreement, his bad faith claim was contractual in nature. The release therefore unambiguously included bad faith, and parol evidence supporting the contrary was inadmissible. Id. at 23.
It is true that bad faith has its genesis in contract. See Rawlings v. Apodaca,
Because the legal character of bad faith was and is not universally established, the release reasonably could be interpreted as Taylor asserts. The trial court, therefore, did not err in concluding that the text of the release did not necessarily cover claims for bad faith.
2. Was there extrinsic evidence to support the conclusion that the release language was reasonablg susceptible to Taglor’s interpretation?
At the time the parties made the agreement, it was obvious that Taylor had a sizable potential claim for bad faith. The release was agreed to months after the jury returned verdicts against Taylor and less than six months after this court recognized the tort of bad faith in Noble. Most of the alleged conduct that is the basis for Taylor’s bad faith claim had already occurred. In fact, although occurring later, the Rings garnished State Farm seeking to satisfy their entire judgment, including the excess above the policy limits, based on State Farm’s liability to Taylor for alleged bad faith. Ring v. State Farm Mut. Auto. Ins.,
Also, State Farm internally designated the $15,000 payment to Taylor as being for uninsured motorist (“UM”) coverage. Although State Farm denies its importance, its ultimate significance was for the fact finder to determine. State Farm’s subsequent conduct may shed light on its understanding of what was covered by the agreement. See Darner,
The potential size of the bad faith claim also cannot be ignored. At the time the parties enterеd into the release agreement, a jury had already rendered verdicts against Taylor far exceeding his insurance policy limits. Thus, the potential size of Taylor’s bad faith claim was obvious. We recognize that, with few exceptions, parties are free to structure a deal in any way they wish. Nevertheless, it is arguably reasonable to conclude that Taylor and his counsel would seek something more than just the payment of a potentially bona fide $15,-
Finally, and perhaps most telling, is the fact that the parties used limiting language in the release. It is reasonable to believe that if the parties had agreed to release the bad faith claim, they would not havе drawn the release so narrowly — confining it to “contractual” and “subsequent” matters, with no mention of tort claims or bad faith. Surely, State Farm knew what language would effectively release it from Taylor’s potential bad faith claim. It can be inferred that sophisticated parties in the business of settling insurance claims, faced with the task of releasing a claim as large as Taylor’s, would have used more specific or at least broader
This is not to say, however, that the release language excluded bad faith as a matter of law. Substantial evidence supports State Farm’s interpretation as well. The release language is broad enough to release something more than just the contractual UM claim.
C. Was the parol evidence for the jury?
Whether contract language is reasonably susceptible to more than one
... [State Farm] has alleged the affirmative defense of release. In this regard, [State Farm] contends that the agreement ... was intended by the parties thereto to, among other things, release [State Farm] from all bad faith claims.
... Whether the parties intended the bad faith claims to be released is for you to determine. If you find that the parties to said agreement intended thereby that [State Farm] be released from bad faith claims, then your verdict must be for [State Farm].
A release is to be construed according to the intent of the parties to it. This intention is to be determined by what was within the contemplation of the parties when the release was executed, which, in turn, is to be resolved in the light of all of the surrounding facts and circumstances under which the parties acted.
Reporter’s Transcript, Mar. 12, 1987, at 184-85.
CONCLUSION
The trial court properly considered and then admitted extrinsic evidence to interpret the release and determine whether it included Taylor’s bad faith claim. That question, in this case, was appropriately left to the trier of fact. There remain other issues not resolved by the court of appeals. We are aware of the frustration that additional delay imposеs on all involved, especially in a case as old as this. Nevertheless, because the other issues were initially and fully presented to the court of appeals, prudence dictates that the court of appeals complete its review of this case as expeditiously as possible. The decision of the court of appeals pertaining to the release is vacated and the matter is remanded to the court of appeals for resolution of the remaining issues.
Notes
. Because Wistrom was uninsured, Randall believed that Taylor might be entitled to recover for his injuries under the uninsured motorist provisions of Taylor’s policy. State Farm, however, disputes Taylor’s entitlement to these benefits. In any event, Randall prepared a release as part of the transaction. It is this release that is at issue. The extent of State Farm’s participation in its drafting is disputed.
. We recognize that Pacific Gas has its critics. See, e.g., Wilson Arlington Co. v. Prudential Ins. Co.,
We nevertheless believe that the rule correctly embodies the Corbin view adopted in Melson. See 3 Corbin § 542, at 102 (1992 Supp.) (citing Pacific Gas as an "excellent example of correct analytical thinking”). We believe that these cases read much more in Pacific Gas than is there. We too would recoil if Pacific Gas meant that mere complexity required a finding of ambiguity or that courts must listen to wholly unpersuasive extrinsic evidence to create ambiguity where words are сlear beyond dispute. See Wilson Arlington Co.,
. These conflicting rulings illustrate the problems inherent in finding ambiguity. Two trial judges found the agreement ambiguous, that is, "doubtful or uncertain ... [or] capable of being understood in two or more possible senses or ways.” Webster’s Ninth New Collegiate Dictionary 77 (1989). Three court of appeals judges, reading the same agreement, found the meaning clear heyond all question. At one time, this court held that if one court found a contract ambiguous and another found it clear, it must be ambiguous. See Federal Ins. Co. v. P.A.T. Homes, Inc.,
. In light of our holding, we need not comment on whether the court of appeals correctly interpreted "the law extant at the time.” Taylor, mem. dec. at 16. We nоte, however, that this court recently reaffirmed prior precedent, holding that a “breach of an express covenant is not a necessary prerequisite to an action for bad faith, ... [and the plaintiff] need not prevail on the contract claim in order to prevail on the bad faith claim, provided [the] plaintiff proves a breach of the implied covenant of good faith and fair dealing.” Deese v. State Farm Mut. Auto. Ins. Co.,
. This illustrates another problem inherent in the traditional parol evidence rule applied by the court of appeals. That court believed that a bad faith claim was clearly contractual or one with a contractual interest. Taylor, mem. dec. at 16, 19-20. This author agrees. In the author’s view, as a matter of doctrinаl purity, a bad faith claim is a cause of action for breach of contract to which, for various policy reasons, a tort rather than a contract measure of damages is applied. See Rawlings,
. The admissibility of the evidence supporting this was objected to at trial on hearsay grounds. The trial court overruled the objection and State Farm appealed. We affirm the trial court’s ruling even though its reasoning differs from ours. See Sparks,
. State Farm apparently did not insist that the release contain the broad language usually found in insurance company forms — releasing all claims of whatever nature, known or unknown.
. There was evidence that Randall believed that at least one claim other than UM and bad faith remained — a medical payment claim — that was released by the agreement. At oral argument, it was conceded that any medical payment claim would have been releasеd by the agreement. Whether or not that claim was valid, Randall’s belief dispels the notion that bad faith was the only claim other than UM that could have been contemplated by the breadth of the release language.
. We recognize, as did the court of appeals, that a contract should be interpreted, if at all possible, in a way that does not render parts of it superfluous. Taylor, mem. dec. at 18. State Farm, however, strenuously argued this very point to the jury, which nevertheless remained unconvinced — a permissible result. Cf. Restatement § 203 cmts. a & b. Also, State Farm argues that any uncertainty in the language should be construed against the drafter. This rule, however, is subordinate to the rule that the intent of the parties should govern. Polk,
. There are two trial transcripts dated March 12, 1987. Although one may have been misdat-ed, we use the date that actually appears on the transcript.
. Contrary to the misgivings expressed in the concurring opinion, the Melson rule does not relegate more responsibility in contract disputes to the court. Even prior to Melson, the determination of whether contract language was ambiguous (a claim often raised) was a question of law for the court to determine. See, e.g., Associated Students of the Univ. of Arizona v. Arizona Board of Regents,
. We also granted review of the triаl court’s summary dismissal of Taylor’s punitive damage claim. In light of our decision to remand, we leave resolution of this issue to the court of appeals.
Concurrence Opinion
specially concurring:
I concur with the opinion — but without enthusiasm. It is certainly true that wavering and overlapping lines of interpretation, rather than bright straight borders prevail in this area of contract interpreta
The canon of interpretation which we propound today is amorphous. The problem with an amorphous rule is that in the end, only this court can make a final determination in construing any contract. Our interpretation will be based upon which parol evidence impresses us the most. That ultimately means that this court must decide every contract dispute subject to this analysis. As the history of this case shows, the trial court may go оne way and the court of appeals another and this court yet another.
I fear that this opinion makes this court the supreme court of arguments “that white is black and that a dollar is fifty cents” — to use the colorful words of Professor Corbin.
APPENDIX
Full Text of Release:
AGREEMENT
This Agreement made and entered into this 4tii day of August, 1981, by and between BOBBY SID TAYLOR and the STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, (hereinafter referred to as STATE FARM), by and through its agent undersigned.
WHEREAS, BOBBY SID TAYLOR was covered by an automobile insurance policy issued by STATE FARM, which was in effect on the 9th day of April, 1977, providing liability and uninsured motorist coverage to him, and
WHEREAS, an automobile collision occurred on April 9, 1977 between vehicles operated by BOBBY SID TAYLOR, DOUGLAS ALAN WISTROM and ANNE L. RING, and
WHEREAS, a trial took place in the Superior Court of Maricopa County, State of Arizona in consolidated causes C-382960 and G-383090, resulting in a jury verdict against BOBBY SID TAYLOR in the total amount of $2,621,000, and judgments having been entered against BOBBY SID TAYLOR in accordance with said jury verdicts, and
WHEREAS, having been fully apprised of all settlement offers made by the plaintiffs in the consolidated cases referred to above, during the discovery process, prior to trial, during the trial, and subsequently, BOBBY SID TAYLOR maintained and does now maintain that the operation of his motor vehicle on April 9, 1977 did not contribute to the injuries sustained by the plaintiffs, and at no time has he insisted, demanded, or even encouraged his insurer to settle the plaintiffs’ claims within his policy limits, and
WHEREAS, one of the drivers of an automobile involved in the collision on April 9, 1977, to wit: DOUGLAS ALAN WIS-TROM, was uninsured on the date of said collision, and BOBBY SID TAYLOR having a bona fide belief that the negligence of DOUGLAS ALAN WISTROM contributed to his bodily injuries sustained in that collision, and
WHEREAS, BOBBY SID TAYLOR has demanded compensation from STATE FARM under the uninsured motorist coverage afforded to him, and
WHEREAS, BOBBY SID TAYLOR desires to settle the uninsured motorist claim, and to relieve STATE FARM of any and all other contractual claims, interests, or causes of action he has or may have against STATE FARM, and
WHEREAS, STATE FARM has agreed that uninsured motorist coverage is available to BOBBY SID TAYLOR and appropriate under the facts surrounding the collision on April 9, 1977, and STATE FARM having been fully apprised in the premises,
THEREFORE, in consideration of the mutual [covenants contained herein, STATE FARM agrees to pay the sum of $15,000 to BOBBY SID TAYLOR in full satisfaction of all contractual rights, claims, and causes of action he has or may have against STATE FARM under the policy of insurance referred to herein, in connection with the collision on April 9, 1977, and all subsequent matters, and BOBBY SID TAYLOR hereby accepts that sum pursuant to the recitals contained herein.
[SIGNATURES]