The Surrounding Circumstances Doctrine for Contract Construction

May 2017
Robert B. Gilbreath, Ryan Hale

A Half Century of Inconsistency

Oliver Wendell Holmes once wrote that “A word is not a crystal, transparent and unchanged, it is the skin of a living thought and may vary greatly in color and content according to the circumstances and the time in which it is used."1 In contract law, this notion is embodied in the “surrounding circumstances” doctrine. The Texas Supreme Court gave an apt summary of this principle in City of Pinehurst v. Spooner Addition Water Co., writing that “Where a question relating to the construction of a contract is presented, as here, we are to take the wording of the instrument, consider the same in the light of the surrounding circumstances, and apply the pertinent rules of construction thereto and thus settle the meaning of the contract.”2

Both Allan Farnsworth and Arthur Corbin—giants in the world of contract law—have recognized the validity and necessity of this doctrine. Professor Farnsworth wrote that “[t]he overarching principle of contract interpretation is that the court is free to look at all the relevant circumstances surrounding the transaction.”3 And Professor Corbin wrote that “it is invariably necessary, before a court can give any meaning to the words of a contract and can select one meaning rather than other possible ones as the basis for the determination of the rights and other legal effects, that extrinsic evidence shall be heard to make the court aware of the ‘surrounding circumstances.’”4

But the proper use of the surrounding circumstances doctrine is often muddied by inconsistent precedent. As noted by Professor Samuel Williston, another giant in the world of contract law, “Not only do various jurisdictions disagree as to how and when extrinsic evidence of the circumstances surrounding the execution of a contract becomes admissible, but the decisions within a given jurisdiction are often difficult, and sometimes impossible, to reconcile on this point.”5

Unfortunately, Texas is one of those jurisdictions lacking a coherent doctrine. Over the last half century, Texas courts have handed down divergent opinions that are difficult to reconcile. In some cases, the court will consider surrounding circumstances to determine whether a term is ambiguous.6 But in others, the Supreme Court has suggested that surrounding circumstances are extrinsic evidence that can be considered only to interpret an ambiguous writing.7 In still others, the Court says that even with an unambiguous contract, the parol evidence rule “does not prohibit consideration of surrounding circumstances that inform, rather than vary from or contradict, the contract text.”8 Recently, the Austin Court of Appeals stated that “we may consider surrounding circumstances and extrinsic evidence only if we find the agreement to be ambiguous. . . .”9

These divergent pronouncements leave many lawyers and judges scratching their heads. Here’s what one commentator had to say about these inconsistencies: “The Supreme Court of Texas needs to answer these questions definitively and thus clarify the post-Sun Oil common law rules of contract interpretation for use in the twenty-first century.”10 Another commented, “While the Supreme Court says that in some cases the contract may be read in light of the surrounding circumstances to determine whether an ambiguity exists, in other cases the Court refuses to consider evidence surrounding contract formation.”11

Thus, it is apparent that the Supreme Court should resolve the confusion created by these divergent views once and for all. But what approach should the Court take? Should surrounding circumstances be considered to determine the meaning of a term even when it appears to be unambiguous on its face? The answer is yes.

A Word is the Skin of a Living Thought

Some might push back against the suggestion that surrounding circumstances should be considered to determine the meaning of an “unambiguous” term. To define a word such as “recreation,” so the argument goes, one need only reference a trusted dictionary. To look to the surrounding circumstances would invite the court to consider the subjective beliefs of the speakers, and even worse, would encourage the court to cast aside the parties’ intention to make their contract a complete and final expression of their agreement. But this sort of reasoning is intellectually rigid. Words in everyday life, even in contracts, are defined by their context. Once again, we turn to Justice Holmes:

How is it when you admit evidence of circumstances and read the document in the light of them? Is this trying to discover the particular intent of the individual, to get into his mind and to bend what he said to what he wanted? No one would contend that such a process should be carried very far, but, as it seems to me, we do not take a step in that direction. It is not a question of tact in drawing a line. We are after a different thing. What happens is this. Even the whole document is found to have a certain play in the joints when its words are translated into things by parol evidence, as they have to be. It does not disclose one meaning conclusively according to the laws of language. Thereupon we ask, not what this man meant, but what those words would mean in the mouth of a normal speaker of English, using them in the circumstances in which they were used, and it is to the end of answering this last question that we let in evidence as to what the circumstances were. But the normal speaker of English is merely a special variety, a literary form, so to speak, of our old friend the prudent man. He is external to the particular writer, and a reference to him as the criterion is simply another instance of the externality of the law.12

Justice Holmes makes it clear that a reasonable and objective understanding of language is not derived solely from the pages of Merriam-Webster. It is derived from our everyday experience and from the context in which we use the words that bind us. Perhaps our courts have been misguided by the myth that looking to surrounding circumstances would require an inquiry into “what this man meant.”13 But this is not the question they are asked to answer. The question is “what those words would mean in the mouth of a normal speaker of English, using them in the circumstances in which they were used….”14 The Supreme Court should reaffirm its approval of Justice Holmes’ approach and relieve us of the inconsistency found in the last half-century of Texas jurisprudence. 


End Notes

1 Towne v. Eisner, 245 U.S. 418, 425, 38 S. Ct. 158, 159, 62 L. Ed. 372 (1918).

2 City of Pinehurst v. Spooner Addition Water Co., 432 S.W.2d 515, 519 (Tex. 1968).

3 E. Allan Farnsworth, Contracts 492-93 (1982).

4 Arthur L. Corbin, Corbin on Contracts § 536 (1952).

5 11 Williston on Contracts § 33:42 (4th Ed.).

6 See, e.g., Nat’l Union Fire Ins. Co. v. CBI Indus., Inc., 907 S.W.2d 517, 521 (Tex. 1995) (per curiam); see also City of Pinehurst v. Spooner Addition Water Co., 432 S.W.2d 515, 519 (Tex. 1968).

7 See, e.g., Kachina Pipeline Co., Inc. v. Lillis, 471 S.W.3d 445, 450 (Tex. 2015).

8 See, e.g., Houston Exploration Co. v. Wellington Underwriting Agencies, Ltd., 352 S.W.3d 462, 469 (Tex. 2011).

9 Newman v. Firstmark Credit Union, 2015 WL 4998326, at *4 (Tex. App.—Austin 2015, no pet.).

10 Kelly J. Kirkland, You Say You Want a Revolution: The Troubled Legacy of Sun Oil Co. (Delaware) v. Madeley, 40 Tex. Tech. L. Rev. 277, 293 (2008) (“Sun Oil and its progeny raise as many questions as they answer, and many unresolved issues remain.”)

11 see also Hon. Randy Wilson, Parol Evidence in Breach of Contract Cases, 39 The Advoc. (Texas) 44, 45 (2007)

12 Oliver Wendell Holmes, The Theory of Legal Interpretation, 12 Harv. L. Rev. 417, –418 (1899).

13 Oliver Wendell Holmes, The Theory of Legal Interpretation, 12 Harv. L. Rev. 417, –418 (1899).

14 Oliver Wendell Holmes, The Theory of Legal Interpretation, 12 Harv. L. Rev. 417, –418 (1899).

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