TOWN BANK v. CITY REAL ESTATE DEV

(1987); Kuhl Motor Co. v. Ford Motor Co., 270 Wis. 488, 493, 71 N.W.2d 420 (1955). When construing contracts that were freely entered into, our goal is "is to ascertain the true intentions of the parties as expressed by the contractual language." State ex rel. Journal/Sentinel, Inc. v. Pleva, 155 Wis. 2d 704, 711, 456 N.W.2d 359 (1990); see also Solowicz, 323 Wis. 2d 556, ¶ 34. Stated another way, the best indication of the parties' intent is the language of the contract itself, Levy v. Levy, 130 Wis. 2d 523, 535, 388 N.W.2d 170 (1986), for that is the language the parties "saw fit to use," Journal/Sentinel, 155 Wis. 2d at 711. We construe the contract language according to its plain or ordinary meaning. Huml v. Vlazny, 2006 WI 87, ¶ 52, 293 Wis. 2d 169, 716 N.W.2d 807. "If the contract is unambiguous, our attempt to determine the parties' intent ends with the four corners of the contract, without consideration of extrinsic evidence." Id. Only when the contract is ambiguous, meaning it is susceptible to more than one reasonable interpretation, may the court look beyond the face of the contract and consider extrinsic evidence to resolve the parties' intent. Capital Invs., Inc. v. Whitehall Packing Co., 91 Wis. 2d 178, 190, 280 N.W.2d 254 (1979).

¶ 34. In this case, City Real Estate argues that the TCA is ambiguous, and as such, the circuit court properly denied summary judgment and directed the case to trial. In particular, according to City Real Estate, it is not clear whether the parties intended the TCA to be the final expression of only the $2,500,000 acquisition financing with which the TCA dealt (and the first of two financing phases), or whether the parties intended the TCA to be the final expression of the parties' financing agreement altogether. As evidence of the former, City Real Estate points to the commitment letter and various credit memoranda prepared by Town Bank, all of which reference a two-phase financing arrangement.

¶ 35. In response, Town Bank argues that the TCA is an unambiguous stand-alone agreement with which it fully complied when it funded $2,500,000 to City Real Estate. Town Bank relies on section 14 of the TCA, contending that it constitutes an unambiguous merger clause which should have precluded City Real Estate from introducing evidence of any prior understandings or agreements that may have existed between the parties, including the commitment letter.

¶ 36. The parties' arguments implicate the parol evidence rule. Despite its name, the parol evidence rule is not a rule of evidence; it is a rule of substantive contract law. Dairyland Equip. Leasing, Inc. v. Bohen, 94 Wis. 2d 600, 607, 288 N.W.2d 852 (1980); Fed. Deposit Ins. Corp. v. First Mortg. Investors, 76 Wis. 2d 151, 156, 250 N.W.2d 362 (1977); Conrad Milwaukee Corp. v. Wasilewski, 30 Wis. 2d 481, 488, 141 N.W.2d 240 (1966); 6 Arthur Linton Corbin, Corbin on Contracts § 573, at 72-73 (interim ed. 2002). This court has stated the parol evidence rule as follows:

When the parties to a contract embody their agreement in writing and intend the writing to be the final expression of their agreement, the terms of the writing may not be varied or contradicted by evidence of any prior written or oral agreement in the absence of fraud, duress, or mutual mistake.

Dairyland Equip. Leasing, 94 Wis. 2d at 607 (quoting Fed. Deposit Ins. Corp., 76 Wis. 2d at 156). Despite the rule's complexity and criticisms, see, e.g., Fed. Deposit Ins. Corp., 76 Wis. 2d at 156, its purpose remains sound: to promote the integrity, reliability, and predict-ability of written contracts and to reduce the threat of juries being misled or confused by statements or negotiations that may have taken place before a contract was entered into.

¶ 37. As our definition makes apparent, "[t]he real question when a party invokes the parol evidence rule" is whether the parties intended the written contract to be the final and complete expression of their agreement. Id. at 157. A contract that represents the final and complete expression of the parties' agreement is considered fully "integrated." If the contract is integrated, absent the existence of fraud, duress, or mutual mistake, the court construing the contract may not consider evidence of any prior or contemporaneous oral or written agreement between the parties. If the contract is not integrated, then the parol evidence rule is inapplicable.

We recognize a limited exception to the parol evidence rule for contemporaneous or prior agreements that supplement, but do not conflict with, the contract. See Dairyland Equip. Leasing, Inc. v. Bohen, 94 Wis. 2d 600, 607-08, 288 N.W.2d 852 (1980). In such cases, the contract is considered "partially integrated." Id. at 607. If the contract is shown to be only a partial integration of the parties' overall agreement, the court may properly consider parol evidence to establish the parties' full agreement, so long as the parol evidence does not conflict with the part of the contract that has been integrated. Id. at 607-08.

¶ 38. Relevant to this case, the parol evidence rule does not preclude the court from considering evidence of any prior or contemporaneous understandings or agreements between the parties for the purpose of determining whether the parties intended the contract to be integrated. Our courts often refer to this rule by stating that" `[p]arol evidence is always admissible with respect to the issue of integration.'" See, e.g., Dairyland Equip. Leasing, 94 Wis. 2d at 608 (quoting Fed. Deposit Ins. Corp., 76 Wis. 2d at 158). However, to be precise, such evidence is not "parol evidence" at all. Rather, we are merely invoking an already recognized and well-defined rule of contract law: when a contract is ambiguous, a court may consider extrinsic evidence to resolve the parties' intent. See Stevens Constr. Corp. v. Carolina Corp., 63 Wis. 2d 342, 354, 217 N.W.2d 291 (1974) ("While `parol evidence' — the circumstances surrounding the execution of the contract and the practical construction of the parties — may not be introduced to vary the terms of a written contract, it may be introduced to explain ambiguous terms of the written instrument."); Chmill v. Friendly Ford-Mercury of Janesville, Inc., 154 Wis. 2d 407, 416, 453 N.W.2d 197 (Ct. App. 1990) ("A court may look to extrinsic evidence to determine whether a document was intended to incorporate the entire understanding between the parties to it. . . ."). If and once it is determined that the parties intended the contract to be integrated, only then does the parol evidence rule go into effect. See Dairyland Equip. Leasing, 94 Wis. 2d at 607 ("[E]ven if, without objection, parol evidence of the intention of the parties to a written contract, which conflicts with the express provisions of such contract, gets into the record, the court must disregard it." (quoting Morn v. Schalk, 14 Wis. 2d 307, 315, 111 N.W.2d 80 (1961))).

See 6 Arthur Linton Corbin, Corbin on Contracts § 573, at 73-75 (interim ed. 2002):

The use of such a name for this [parol evidence] rule has had unfortunate consequences, principally by distracting the attention from the real issues that are involved. These issues may be any one or more of the following: (1) Have the parties made a contract? (2) Is that contract void or voidable because of illegality, fraud, mistake, or any other reason? (3) Did the parties assent to a particular writing as the complete and accurate `integration' of that contract?

In determining these issues, or any one of them, there is no `parol evidence rule' to be applied. On these issues, no relevant evidence, whether parol or otherwise, is excluded.

(Footnotes omitted.)

¶ 39. However, as Town Bank accurately points out, when the contract contains an unambiguous merger or integration clause, the court is barred from considering evidence of any prior or contemporaneous understandings or agreements between the parties, even as to the issue of integration. See Dairyland Equip. Leasing, 94 Wis. 2d at 608; Matthew, 54 Wis. 2d at 341-42. Again, this principle stems from basic contract law: if the contract is unambiguous, the court's attempt to determine the parties' intent ends with the language of the contract, without resort to extrinsic evidence. See Huml, 293 Wis. 2d 169, ¶ 52. In Dairy-land Equip. Leasing, this court defined a merger clause as a "written provision which expressly negatives collateral or antecedent understandings." 94 Wis. 2d at 608. Thus, by definition, an unambiguous merger or integration clause demonstrates that the parties intended the contract to be a final and complete expression of their agreement. See id.; Matthew, 54 Wis. 2d at 341-42. The contract is therefore fully integrated, and the parol evidence rule goes into effect.

¶ 40. We now turn to the facts of this case. We conclude that the TCA is an unambiguous, fully integrated agreement with which Town Bank fully complied. Accordingly, Town Bank should have been granted summary judgment, and the case should not have proceeded to a jury trial.

¶ 41. We agree with Town Bank that section 14 of the TCA constitutes an unambiguous merger clause which should have precluded City Real Estate from introducing any evidence of prior understandings or agreements that may have existed between the parties, including the commitment letter.

¶ 42. Section 14 provides:

This Agreement, including the Exhibits attached or referring to it, the Note and the Security Documents, are intended by Customer and Lender as a final expression of their agreement and as a complete and exclusive statement of its terms, there being no conditions to the full effectiveness of their agreement except as set forth in this Agreement, the Note and the Security Documents.

¶ 43. We conclude that section 14 unambiguously demonstrates the parties' intent to exclude additional understandings or agreements not contained in the TCA. See Dairyland Equip. Leasing, 94 Wis. 2d at 608. Section 14 "expressly negatives collateral or antecedent understandings," see id., by delineating an exhaustive list of the documents that are included in the parties' agreement: "This Agreement" (meaning the TCA), "the Exhibits" to the TCA, "the Note," and "the Security Documents." Pursuant to the plain language of section 14, Town Bank and City Real Estate intended that list of documents to comprise the "final expression of their agreement" and the "complete and exclusive statement of its terms." Hence, the parties intended to exclude from their final agreement any understanding or agreement not contained within the TCA, the exhibits, the Business Note, and the security documents.

¶ 44. Significantly, the language of section 14 exhibits different capitalization to denote "this Agreement," meaning the TCA itself, and "their agreement," meaning the parties' agreement altogether. (Emphasis added.) When referring to the parties' "final expression of their agreement and [] a complete and exclusive statement of its terms," the parties carefully utilized a lowercase "a" so as not to confuse their overall agreement with the TCA itself. (Emphasis added.) We therefore disagree with City Real Estate that it is not clear whether the parties intended the TCA to be the final expression of only the TCA itself, or whether the parties intended the TCA to be the final expression of the parties' financing agreement altogether.

¶ 45. Neither the TCA, nor the exhibits to the TCA, nor the Business Note, nor the security documents mention the commitment letter or reference financing in two phases. To the contrary, the Business Note provides for a single sum of $2,500,000, the very amount that Town Bank loaned to City Real Estate on July 15, 2004. If City Real Estate wanted the terms of the commitment letter, or a second phase of financing, to be included in the TCA, City Real Estate was free to so negotiate.

¶ 46. Citing our decision in Dairyland Equip. Leasing, City Real Estate argues that in order for the TCA to have unambiguously excluded the terms of the commitment letter, the TCA had to "expressly negative[]" the commitment letter or the two-phase nature of the financing. See 94 Wis. 2d at 608. City Real Estate's interpretation of our case law necessarily implies that hereinafter, lenders — or all contract drafters, for that matter — would be obligated to expressly identify and exclude in their contracts any prior oral or written communication between the parties that may rise to the level of an agreement, lest risk its inclusion within the contract. We refuse to impose such an unnecessary and cumbersome burden on contract drafters.

¶ 47. We further reject City Real Estate's arguments that the TCA is otherwise ambiguous. First, City Real Estate argues that an ambiguity arises out of the fact that the parties checked the box for "Multiple Notes; Multiple Advances." The argument is difficult to follow. According to City Real Estate, the checking of that box created an obligation for multiple notes. Because the section on "Multiple Notes; Multiple Advances" also states that the TCA "does not constitute a commitment by Lender to make such extensions of credit," City Real Estate contends that the TCA implies that some other document created the obligation for multiple notes. Therefore, City Real Estate argues, a genuine issue of material fact existed as to whether the commitment letter created the obligation for multiple notes.

¶ 48. We disagree. The section on "Multiple Notes; Multiple Advances" is clear. It plainly recognizes that Town Bank may make additional extensions of credit to City Real Estate "from time to time," and if such loans occur, the parties "agree that sections 4 through 19 of [the TCA] shall apply to each such extension of credit." Significantly, the provision then expressly states that the TCA "does not constitute a commitment by [Town Bank] to make such extensions of credit to [City Real Estate]." Hence, while Town Bank has the option, the TCA does not obligate Town Bank to make any additional extensions of credit to City Real Estate.

¶ 49. Second, relying on Stevens Constr. Corp., City Real Estate argues that the TCA is latently ambiguous, and therefore, the circuit court properly considered parol evidence to clarify the ambiguity. See 63 Wis. 2d at 354-55. A contract, though clear on its face, may be considered latently ambiguous if its application produces absurd or unreasonable results that the parties could not have intended. See id. at 354. City Real Estate contends that the TCA is latently ambiguous when applied to the context of the Wisconsin Tower project. According to City Real Estate, while an "uninformed observer" could view the TCA as a final expression of the parties' universal agreement, a latent ambiguity arises "as soon as the observer learns that the parties had in place a [c]ommitment [letter] providing for two phases of financing necessary for the project, and that the TCA only provides for one of those phases. . . ."

¶ 50. City Real Estate's argument ignores the presence of the TCA's unambiguous merger clause. As previously explained, because section 14 of the TCA constitutes an unambiguous merger clause, the court is precluded from considering any prior understanding or agreement that may have existed between Town Bank and City Real Estate, including the commitment letter. Thus, by its very nature, the unambiguous merger clause bars the court from considering the TCA within the context of the commitment letter.

¶ 51. Because we conclude that the TCA constitutes an unambiguous, fully integrated agreement, our attempt to determine the parties' intent ends with the four corners of the TCA, without resort to extrinsic evidence. See Huml, 293 Wis. 2d 169, ¶ 52. Such extrinsic evidence includes, but is not limited to, the commitment letter and various credit memoranda prepared by Town Bank that referenced a two-phase financing arrangement. Pursuant to the TCA, Town Bank was obligated to loan $2,500,000 to City Real Estate. Town Bank fully complied. Therefore, Town Bank should have been granted summary judgment, and the case should not have proceeded to a jury trial.

¶ 52. Even assuming, without deciding, that the commitment letter constitutes a separate and enforceable contract for financing, Town Bank was within its rights to terminate the agreement and therefore was still entitled to summary judgment. It is undisputed that City Real Estate did not fulfill at least two of the conditions set forth in the commitment letter: the requirement that a credit agreement be executed by June 25, 2004, and the obligation to contribute $900,000 in up-front equity.

Deciding that the commitment letter constitutes an enforceable contract could result in unforeseen consequences. Assuming that the commitment letter constitutes an enforceable contract, the contract binds and is enforceable against both parties: the lender and the borrower. See Levin v. Perkins, 12 Wis. 2d 398, 403, 107 N.W.2d 492 (1961). Suppose that after a commitment letter has been executed, the borrower secures a better financing arrangement with a different lender. If the commitment letter constitutes an enforceable contract, the original lender could enforce the commitment letter against the borrower and seek damages for, inter alia, lost interest.

¶ 53. First, it is undisputed that a credit agreement between Town Bank and City Real Estate was not executed by June 25, 2004, as required by the commitment letter. The commitment letter expressly provides that "[t]his commitment may be terminated at the sole option of Town Bank if the credit agreement is not executed by June 25, 2004." There is no question that the TCA, the only credit agreement between Town Bank and City Real Estate, was not executed until July 15, 2004. Because the credit agreement was not timely executed, Town Bank was well within its rights to terminate the commitment letter.

¶ 54. Second, it is undisputed that City Real Estate did not fulfill its obligation to contribute $900,000 in up-front equity. The commitment letter provides that the "[c]losing of [the] loan is contingent upon but not limited to the following: . . . B. Borrower agrees to contribute $900,000 in up front equity capital prior to closing." City Real Estate does not dispute that it never infused $900,000 of equity into the Wisconsin Tower project. Instead, City Real Estate complains that Town Bank never demanded the money: "[City Real Estate] w[as] ready, willing, and able to [satisfy the up-front equity condition] upon demand once the project progressed to the point of requiring draws upon the Phase II construction financing to build pre-sold condominiums." City Real Estate's defense falls short in two respects. First, Town Bank did not have to demand the $900,000 from City Real Estate; the contingency out-lined in the commitment letter functioned as the demand. Second, the commitment letter required City Real Estate to contribute $900,000 in equity "prior to closing," well before the project progressed to the construction phase.

¶ 55. Because it is undisputed that City Real Estate failed to comply with at least two of the conditions set forth in the commitment letter, Town Bank was under no obligation to provide financing thereunder.

V. CONCLUSION

¶ 56. We conclude that the TCA is an unambiguous, fully integrated agreement with which Town Bank fully complied. Accordingly, Town Bank should have been granted summary judgment, and the case should not have proceeded to a jury trial. We agree with Town Bank that the TCA contains an unambiguous merger clause which precluded City Real Estate from introducing any evidence of prior understandings or agreements that may have existed between the parties, including the commitment letter. Even assuming, without deciding, that the commitment letter constitutes a separate and enforceable contract for financing, we conclude that Town Bank was within its rights to terminate the agreement. It is undisputed that City Real Estate did not fulfill at least two of the conditions set forth in the commitment letter.

By the Court. — The decision of the court of appeals is affirmed.