Is Summary Judgment Still a Good Investment in a Contract Interpretation Case?

No matter how complex the underlying facts, business disputes often turn on the meaning and intent of a few words in a written document.

Inevitably, your attorney is as convinced as you are that those words are absolutely clear, and that their clarity supports your position. A motion for summary judgment may seem like an ideal vehicle to end the case.

But such motions, particularly in complex cases, can be expensive, and their prospects for success, at least in Massachusetts courts, appear to be diminishing rapidly, principally due to one seemingly obvious case.

In President and Fellows of Harvard College v. PECO Energy Company, 57 Mass.App.Ct. 888 (2003), the Massachusetts Appeals Court reversed a summary judgment decision that had been based upon the trial court’s view that a contract for the purchase of electricity was unambiguous.

The case had been filed in the Massachusetts Superior Court’s business litigation session, a specialized state court often used by commercial litigants hoping for swift resolutions to complex disputes.

At issue in PECO was a contract for the sale of electricity during the early years of deregulation in Massachusetts. The contract required PECO to sell electricity to members of an energy purchasing consortium made up of municipal, educational, and other nonprofit organizations who agreed, at least six months before the expiration of existing contracts, to enter into “a bilateral agreement” on the terms and conditions set forth in two separate attachments. One form of agreement was for a five-year term, and the other was for a two-year term.

Each of the plaintiffs initially selected the two-year form of agreement and then exercised an option to extend the agreement by an additional year. At the end of the option year, each sought to enter into the remainder of the term of the five-year agreement and thereby purchase electricity at a rate that was lower than the then-current market rate.

PECO refused, claiming that members were limited to a single choice between the five-year agreement and the two-year agreement. The trial judge agreed, concluding that the phrase “a bilateral agreement” was intended to limit eligible members to a single participant agreement each.

Depends On What You Mean By ‘A’

The judge decided that the parties’ use of the word “a” before the words “bilateral agreement” meant that they intended only one agreement per member because use of the word “a” in this context denoted “one” or “single.”

The Appeals Court reversed, finding a latent ambiguity in the term “a.” The Court observed that “the particle ‘a’ is not necessarily a singular term; it is often used in the sense of ‘any,’ and is then applied to more than one individual object.”

That conclusion may have had little impact, were it not for the Appeals Court’s declaration respecting the propriety of entering summary judgment in circumstances where the parties disagree on the proper interpretation of a contract: “Neither party’s interpretation of the contracts commends itself to us to the exclusion of the other. We therefore conclude that the agreements by themselves do not reveal an answer to the question at issue, if indeed there is one. This is the essence of ambiguity.”

This definition of “ambiguity” dramatically limits the possibility of a dispositive summary judgment ruling where two parties agree that a contract is unambiguous, but disagree as to which of them it favors. In such disputes, Massachusetts courts are increasingly expanding the kind of extrinsic evidence that can illuminate the intended meaning and intent of the provision.

The Appeals Court has (ironically) regularly cited PECO in cases where it determined that the agreement at issue was not ambiguous. The trial courts have treated the case very differently, frequently determining that whenever the parties disagree on the proper interpretation of a contract, PECO renders that contract ambiguous.

Changed Landscape

More importantly, PECO has apparently changed the landscape about what is and is not admissible when the meaning of a contract is in dispute.

Perhaps the best example of this shift arose in an unrelated dispute coincidentally concerning Harvard and the interpretation of a utilities contract negotiated and executed in the midst of electricity deregulation. At the time it negotiated the contract, Harvard owned a small utility plant that serves many of the medical institutions in Boston. Immediately after executing the agreement at issue, Harvard sold the plant and, as the owner of two such institutions, became a “user” of its utilities.

Almost immediately, a dispute arose between the users and the purchaser of the plant, MATEP, concerning the interpretation of the agreement as it related to one pricing component. The same trial judge as heard PECO presided over that dispute. Harvard, though a principal witness as a party to the negotiations, was not a party.

After an initial summary judgment order in favor of the users was reversed by the Appeals Court, the trial judge suggested that the PECO decision had significantly broadened the scope of admissible evidence in the MATEP/users dispute.

During pre-trial proceedings, the court determined that in circumstances where the parties disagree about the proper construction of a contract, the “teachings in the PECO opinion, if nothing else, suggest that almost anything reasonable may be considered by a trial judge in attempting to discern the meaning of an ambiguous contractual term or phrase.” Beth Israel Deaconess Medical Center, Inc. v. MATEP, LLC, 2005 WL 1009638, *2 (Mass. Super. March 10, 2005).

Even though the court eventually concluded that “Harvard’s position or intention on the [ambiguous term] remains in the shadows,” it received extensive evidence respecting what the parties negotiating the agreement thought it meant.

Among other things, the court heard the testimony of the users’ attorney about a conversation that Harvard’s attorney did not recall having in most respects, and expressly denied in others. The court even held that PECO compelled it to receive evidence of a conversation between Harvard (then a user) and the president of the users’ group months after the agreement was signed about what they then thought it meant, irrespective of their understanding when they executed it. See Beth Israel Deaconess Medical Center, Inc. v. MATEP, LLC, 2005 WL 1684081 (Mass. Super. June 16, 2005).

Absent the influence of the PECO decision, much of this evidence would almost certainly have been excluded as hearsay or simply as irrelevant to the interpretation of the contract.

This treatment of PECO suggests that in-house counsel need to be much more explicit about their understanding of even the simplest terms during contract negotiations, and probably ought to reduce their understanding to contemporaneous notes or even shared memoranda as the negotiations proceed.

Although such practices may prolong negotiations, they are unquestionably the ounce of prevention that may save the company a pound of cure if a dispute arises. Comprehensive extrinsic evidence about the intended meaning of a contract can mean the difference between a full-blown trial and a truncated evidentiary hearing.

Christopher M. Morrison is an associate at Hanify
& King P.C. in Boston. Morrison specializes in business litigation. He can be reached at [email protected] or (617) 423-0400.