The test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not whether it appears to the court to be plain and unambiguous on its face, but whether the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible. To determine whether offered evidence is relevant to prove such a meaning the court must consider all credible evidence offered to prove the intention of the parties. If the court decides, after considering this evidence, that the language of a contract, in the light of all the circumstances, is fairly susceptible of either one of the two interpretations contended for, extrinsic evidence to prove either of such meanings is admissible.
Plaintiff developed a trigger lock for use as a safety device on firearms. Plaintiff entered into a contract with defendants for the distribution and sale of the locks throughout the United States. The contract was to run for five years. Plaintiff agreed to manufacture or arrange for the manufacture of the locks and to supply them to defendant, which it appointed as exclusive distributor. Defendant agreed to pay for the locks at specified prices and promised to promote the locks diligently and to meet specified quotas. Should defendant fail to meet thee quotas, the agreement shall be subject to termination on 30 days' notice. The contract also provided that "In the event of breach of this agreement by either party, the party prevailing in any action for damages or enforcement of the terms of this Agreement shall be entitled to reasonable attorneys' fees." Defendant failed to purchase the first year's quota so plaintiff filed an action to recover damages. Judgment was made in favor of plaintiff. Defendant sought review contending a termination clause made plaintiff's right to terminate the contract the exclusive remedy and the trial court erred when it refused to admit extrinsic evidence of the clause's meaning. The court reversed the lower court's judgment.
Did the trial court err in excluding extrinsic evidence offered to prove the meaning of the termination clause?
The court held that the trial court committed prejudicial error when it excluded extrinsic evidence offered to prove the meaning of the termination clause contended for by distributor. The court found that the parties may have included the termination clause to spell out with specificity the condition on which distributor would be excused from further performance under the contract, or to set forth the exclusive remedy for a failure to meet the quota in any year, or for both such purposes. That clause was therefore reasonably susceptible of the meaning contended for by distributor, namely, that it expressed the parties' determination that manufacturer's sole remedy for distributor's failure to meet a quota was to terminate the contract. There was nothing in the rest of the contract to preclude that interpretation.