Carter Baron Drilling v. Badger Oil Corp.
581 F. Supp. 592 (1984)
Rule of Law:
Under the Uniform Commercial Code's approach to contract interpretation, extrinsic evidence of course of performance and usage of trade is admissible to explain or supplement a written agreement, even if the agreement appears unambiguous, as long as the evidence is reasonably consistent with and does not completely negate the express terms.
Facts:
- Carter Baron Drilling ('Carter Baron') and Badger Oil Company ('Badger') signed a standardized contract for Carter Baron to drill an oil well.
- The contract identified Badger as the 'operator' and Carter Baron as the 'contractor,' and contained a clause stating, 'Operator shall pay contractor.'
- At the time of signing, Badger allegedly informed Carter Baron that Knee Hill Energy, Inc. ('Knee Hill') was the well's actual owner and that Badger was only acting as an operator on Knee Hill's behalf.
- During the project, Badger experienced difficulties collecting funds from Knee Hill and informed Carter Baron that this was the reason for payment delays.
- Carter Baron subsequently discussed the payment arrears directly with Knee Hill.
- After Badger resigned as the operator, Carter Baron continued to deal directly with Knee Hill and received approximately $950,000 in payments from Knee Hill and other working interest owners.
- Months after Badger's resignation, Carter Baron demanded payment of the remaining balance from Badger.
Procedural Posture:
- Carter Baron Drilling sued Badger Oil Company in the U.S. District Court for the District of Colorado, alleging breach of contract.
- Carter Baron Drilling filed a motion for partial summary judgment on the issue of Badger's liability, arguing the contract's payment term was unambiguous.
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Issue:
Does the parol evidence rule, as interpreted under the Uniform Commercial Code, permit the admission of extrinsic evidence of usage of trade and course of performance to qualify an express and otherwise unambiguous payment term in a written contract?
Opinions:
Majority - Kane, District Judge.
No. The parol evidence rule under the UCC does not bar the admission of such evidence. Extrinsic evidence of usage of trade and course of performance is admissible to qualify or explain an express contract term, provided it does not completely negate that term. The court rejects the traditional common law rule that extrinsic evidence is admissible only when a contract is ambiguous. Instead, it adopts the more liberal UCC test, which asks whether the proffered evidence is 'reasonably consistent' with the express terms of the agreement. Evidence that 'qualifies' a term by adding a condition or exception is admissible, while evidence that 'negates' or completely contradicts it is not. Here, Badger seeks to introduce evidence that the industry custom ('usage of trade') is that an operator is only obligated to pay the contractor if the operator is first paid by the well's owners. The court finds this evidence does not negate the term 'operator shall pay,' but merely qualifies it by adding a condition precedent ('...unless operator is not himself paid'). Furthermore, the parties' actions, where Carter Baron sought and received payment directly from Knee Hill, constitute a 'course of performance' supporting this interpretation. Because Badger has proffered sufficient evidence of a qualifying usage of trade and course of performance, a genuine issue of material fact exists regarding the parties' intent, making summary judgment for Carter Baron inappropriate.
Analysis:
This decision exemplifies the modern trend, heavily influenced by the Uniform Commercial Code, of moving away from a rigid, 'four-corners' application of the parol evidence rule. It establishes that courts should interpret contracts within their commercial context, allowing evidence of industry customs and the parties' own conduct to inform the meaning of seemingly unambiguous terms. This approach prioritizes discovering the parties' true intent over a strict literalism, which may lead to outcomes that better reflect commercial reality. However, it also introduces a degree of uncertainty, as it allows facially clear contractual obligations to be challenged by extrinsic evidence, potentially complicating litigation and contract enforcement.
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