Important Recent Tennessee Case on Contract Interpretation and the Parol Evidence Rule

In early 2019, the Supreme Court of Tennessee issued an opinion that, without exaggeration, can be said to be one of the most important Tennessee cases, if not the most important Tennessee case, to contemporary commercial litigation lawyers on the subjects of contract interpretation and the parol evidence rule. The opinion was in the case of Individual Healthcare Specialists, Inc. v. BlueCross BlueShield of Tennessee, Inc.

In the case, the Court undertook the arduous task of analyzing, discussing and reconciling over a hundred years of Tennessee case law on the subjects at issue, much of which case law is inconsistent on critical points.  While the opinion, to a large extent, struck a middle ground which still leaves open the ability of parties with contravening positions to pull something from it which supports the position of each, it provides much more clarity than the case law that came before it.  It also anchored Tennessee law in a place that is closer to the middle, and not at the extreme, of the two theories of contract interpretation with which it dealt — the contextual approach and the textual approach.

As explained in the Individual Healthcare Specialists case, under the contextual approach to contract interpretation, a court may look beyond the four corners of the written contract to determine the parties’ intent, even when the language in the parties’ contract is unambiguous. The Court juxtaposed that approach to contract interpretation applying the textual approach which prohibits a court from considering evidence other than the parties’ written agreement in many circumstances and certainly in a circumstance where the parties’ writing is unambiguous.

All of the facts and rulings related to the subjects of this post, contract interpretation and the parol evidence rule, do not have to be discussed to understand the outcome and implications of the Individual Healthcare Specialists case. In the case, the plaintiff, an insurance agency which sold BlueCross BlueShield (“BCBS”) policies for a commission, sued BCBS alleging that it had been underpaid. The language of the main agreement between the Plaintiff and BCBS, which was entered into in 1999, unambiguously permitted BCBS the right to change, unilaterally, the commission rates to be paid to the Plaintiff.

After the execution of the main agreement, BCBS, over time, issued new commission schedules which provided that, if BCBS changed the commission rate, still, the commission rate in effect at the time a policy was sold by Plaintiff would continue to govern. In May of 2011, BCBS issued a commission schedule which substantially reduced commission rates and did not contain the language providing that the commission rates in effect at the time a policy was sold would govern.

The Plaintiff submitted the testimony of three former BCBS employees who had been involved with the making of the contracts between Plaintiff and BCBS. They testified that the main agreement, which was signed in 1999, was understood by the parties to prohibit BCBS from decreasing commission rates on policies that were already sold. The trial court allowed the testimony of the three former BCBS employees, relying on a California case where the California Supreme Court, following the contextual approach, allowed extrinsic evidence to aid in the interpretation of an unambiguous written contract.  BCBS appealed, arguing that the terms of the parties’ written agreement, which permitted it to change the commission rates, were unambiguous and that the trial court should not have considered the testimony of the three former BCBS employees. The Court of Appeals of Tennessee affirmed the decision of the trial court that those former employees’ testimony could be considered. The Supreme Court of Tennessee reversed this holding.

The Court observed that Tennessee case law on the subject of contract interpretation contained cases where Tennessee courts, to one degree or another, had followed either, or both, a contextual approach and/or a textual approach. The Court held that Tennessee, henceforth, will not follow a strictly textual or contextual approach, but a flexible approach which permits a court to consider both the written words of the contract and the context of the parties’ contract.  Importantly, the Court also directed that the written words of the contract “remain as the lodestar of contract interpretation.”

The Individual Healthcare Specialists opinion leaves no doubt that Tennessee lawyers can request a court to consider contextual facts other than the written words in the parties’ agreement.  If a Tennessee court finds the terms of the parties’ written agreement to express clearly their intent, the opinion also allows the court not to consider contextual facts, but to rely solely on the text of the parties’ agreement.

The Court’s explanation of the parol evidence rule and its ruling on the parol evidence rule left more of a bright line for Tennessee lawyers. The Court held that, under the circumstances, where the agreement between BCBS and the Plaintiff unambiguously provided that BCBS had the right to modify the commission rate without the consent of the Plaintiff, the testimony of the three former BCBS employees could not be considered under the parol evidence rule.  The reason that it could not be considered was because it directly contradicted the terms of the written agreement between BCBS and the Plaintiff.

The Individual Healthcare Specialists will be cited and discussed in many cases, for many years to come, by many Tennessee commercial litigation lawyers.


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