UNITED STATES COURT OF APPEALS
For the Fifth Circuit
No. 96-21156
TARRANT DISTRIBUTORS INCORPORATED,
Plaintiff-Appellee,
VERSUS
HEUBLEIN INCORPORATED,
Defendant-Appellant.
Appeal from the United States District Court
for the Southern District of Texas
October 27, 1997
Before DeMOSS and DENNIS, Circuit Judges, and LEE,* District Judge.
DeMOSS, Circuit Judge:
This appeal involves the interpretation of a settlement
agreement. Two issues are presented. First, we must review the
district court’s interpretation of the parties’ agreements
requiring confidential treatment of information given by each of
them to an accounting firm. Second, we must inquire as to whether
the district court properly refused to imply a condition precedent
in the parties’ settlement agreement. We affirm the district court
on both issues.
*
District Judge of the Southern District of Mississippi,
sitting by designation.
I. Background
Heublein, Inc. (“Heublein”) is a nationwide manufacturer,
importer, seller, and distributor of well-known brands of wines and
distilled spirits. Tarrant Distributors, Inc. (“Tarrant”) is a
wholesale distributor of wines and distilled spirits. The two
companies agreed that Tarrant would distribute certain Heublein
brands. However, problems arose and as a result Tarrant filed a
lawsuit against Heublein in Harris County, Texas. Heublein removed
the case to federal court, and the case was subsequently sent to
mediation. The mediation resulted in a settlement agreement
between Tarrant and Heublein.
Under the terms of the settlement agreement, Tarrant was to
pay a fixed sum to Heublein, and Heublein would pay to Tarrant the
amount of Tarrant’s net loss. The parties agreed to a definition
of “net loss,” and they agreed to engage one of several specified
certified public accounting firms to collect information from the
two companies and make a determination of the net loss based on the
agreed-upon formula. The settlement agreement provided that the
“CPA Firm shall execute a Confidentiality Agreement with respect to
all such information, data or documentation in form and content
reasonably acceptable to the parties.” The settlement agreement
further specified that the CPA firm’s determination was to be
“final and binding upon the parties.”
Coopers & Lybrand (“Coopers”) was hired by Tarrant and
Heublein to make the determination of Tarrant’s net loss. The
engagement letter provided to the parties by Coopers stated:
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Our personnel understand that they are subject to
and will abide by any reasonable confidentiality
restrictions and protective orders. In addition,
we always treat as confidential any documents or
other information made available to us in
connection with these kinds of engagements and will
take appropriate steps to segregate all materials
related to our work in this engagement from other
files in our offices. Unless required by law, we
will not disclose or divulge documents or
information not already available in the public
domain, which are provided to us by you or your
clients except as necessary to explain our
conclusion(s), if requested to the mediator or a
trier of fact.
The record contains no evidence of any other agreements regarding
the confidential treatment of information and documents provided by
the parties.
After Coopers rendered its finding that Tarrant’s loss
amounted to $860,800, Heublein challenged the validity of the
figure. Heublein claimed that the calculation was in error and
asked for satisfaction that the calculation was performed in
accordance with the formula specified by the settlement agreement.
Tarrant protested that the determination was “final and binding.”
Coopers subsequently affirmed that it had applied the proper
formula and offered to discuss the issue in a forum mutually agreed
upon by Tarrant and Heublein.
Both Tarrant and Heublein sought to enforce the settlement
agreement in the federal district court. Heublein requested access
to the working papers Cooper used in making its determination of
Tarrant’s net loss. The motion was denied. Tarrant sought payment
under the terms of the settlement agreement, and its motion was
granted. Subsequent motions by Heublein to correct the district
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court’s judgment and to obtain a new trial were also denied.
Heublein now appeals and seeks a reversal of the judgment of the
district court and remand to the district court with instructions
to review Coopers’ working papers to determine whether Coopers
failed to comply with the terms of the settlement agreement or made
a material miscalculation.
II. Standard of Review
The construction of an unambiguous contract is reviewed de
novo, but while “interpretation of an unambiguous contract is a
question of law, clear error is the standard of review when a
district court uses extrinsic evidence to interpret an ambiguous
contract.” In re Raymark Indus., Inc., 831 F.2d 550, 553 (5th Cir.
1987).
III. Confidentiality Provisions of the Settlement Agreement
In both the district court’s March 27, 1996 “Memorandum and
Order” and its November 8, 1996 “Memorandum and Opinion,” the
district court stated that the settlement agreement between
Heublein and Tarrant required the CPA firm to adhere to
confidentiality restrictions which prohibited disclosure of
“documents or information of one party to the other party.”
Heublein challenges this characterization of its agreement
with Tarrant, arguing that there was no such agreement governing
confidentiality between Heublein and Tarrant, and that this
fundamental error undermines the district court’s entire
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disposition of the case. Heublein notes that the settlement
agreement provides only that the “CPA Firm shall execute a
Confidentiality Agreement,” without specifying the contemplated
nature or scope of any such confidentiality agreement. Heublein
then reasons that the focus of the settlement agreement language is
on the CPA firm, not the parties themselves, and that the purpose
of the provision is to prevent the CPA firm from divulging
information received from Heublein and Tarrant to the public or
other third parties. Finally, Heublein notes that there is no
evidence in the record that any confidentiality agreement ever was
executed other than that contained in the Coopers engagement
letter.
Tarrant relies upon the text of the settlement agreement and
the engagement letter, the relevant portions of which are quoted
above. Tarrant claims in its brief that “Tarrant and Heublein
intended for Coopers to be and Coopers acknowledged that it is
subject to confidentiality restrictions which precluded it from
disclosing or divulging documents or information provided by the
parties to Coopers without their mutual consent.” Tarrant further
notes that because the settlement agreement disallowed ex parte
communications from the parties to the CPA firm, any ex parte
communication requesting the disclosure of documents or information
provided by the other party would run afoul of the settlement
agreement, and thus be invalid.1
1
Heublein’s response to this argument is that the portion of
the settlement agreement prohibiting ex parte communications
pertains only to the period of time during which the CPA firm is
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Heublein’s point with regard to the nonspecificity of the
language in the settlement agreement is well taken. The district
court’s conclusion that the settlement agreement dictated that the
CPA firm could not disclose one party’s information to the other is
not unambiguously supported by the settlement agreement. However,
neither the parties nor the district court sufficiently analyzed
the provision in the Coopers engagement letter -- the only
confidentiality provision at play in this case -- which states that
“unless required by law, [Coopers] will not disclose or divulge
documents or information not already available in the public
domain,” which were provided to Coopers by Heublein and Tarrant, or
their clients, “except as necessary to explain our conclusion(s),
if requested to the mediator or a trier of fact.” Heublein and
Tarrant agreed to this provision, and it is the only agreement
between them regarding confidentiality of materials provided to
Coopers. Both Heublein and Tarrant contend that this language
unambiguously supports their positions.
Heublein’s position is that the engagement letter expressly
states that Coopers would not keep documents or information
provided to it by Heublein and Tarrant confidential “if necessary
to explain [its] conclusion(s), if requested to the mediator or a
trier of fact.” Heublein insists that this language covers the
conducting its investigation and making its determination.
Heublein contends that the provision was not intended to prevent
subsequent review of the CPA firm’s determination.
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present scenario.2 Tarrant, on the other hand, contends that the
engagement letter language is evidence of the parties’ intent that
the CPA firm not disclose information to the parties without their
mutual consent, and that there is no exception written into the
agreement to allow for the kind of review proposed by Heublein.3
If the language in the letter is unambiguous, then its
interpretation is subject to de novo review. In re Raymark, 831
F.2d at 553. The key language here is the meaning of “if requested
to the mediator or a trier of fact.” The presence of the word “to”
makes the sentence nonsensical, and as a result, both parties have
offered interpretations of the text of the agreements that appear,
at first blush, to be plausible.
We find that the engagement letter unambiguously supports one
interpretation because the other is unreasonable. See Columbia Gas
Transmission Corp. v. New Ulm Gas, Ltd., 940 S.W.2d 587, 591 (Tex.
1996) (“The failure to include more express language of the
parties’ intent does not create an ambiguity when only one
reasonable interpretation exists.”). This seems to have been the
unarticu-lated thrust behind the district court’s endorsement of
Tarrant’s view. The settlement agreement’s contemplation of a
2
Heublein’s interpretation would have been unambiguously
conveyed by the letter if there were a comma after the word
“requested,” such that the letter read: “if necessary to explain
our conclusion(s), if requested, to the mediator or a trier of
fact.”
3
Tarrant’s interpretation would be more clearly supported by
the letter if the word “by” were used instead of the word “to,”
such that the letter read: “if necessary to explain our
conclusion(s), if requested by the mediator or a trier of fact.”
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future confidentiality agreement and the parties’ agreement that
the CPA firm’s determination would be final and binding support the
district court’s view that the parties sought “to avoid continued
litigation and to ensure continued confidentiality,” and therefore
agreed unconditionally to rely upon the CPA firm’s determination of
Tarrant’s net loss. In this context, it makes little sense to read
the agreement in the manner proposed by Heublein.
Heublein’s interpretation is an unreasonable interpretation of
the engagement letter, and therefore the letter unambiguously
provides that the materials submitted to Coopers by each party were
intended to be kept confidential, that is, not shared with the
other party.
IV. Implied Condition Precedent
Heublein claims that because Coopers incorrectly applied the
net loss formula, its obligation to pay under the settlement
agreement never arose. Heublein argues that a condition precedent
should be implied from the terms of the settlement agreement
because the language and the nature of the agreement reflect the
parties’ intent for a condition to occur (that is, that the CPA
firm would correctly apply the net loss formula) before the
obligations to pay under the agreement arose, and that the parties
would have inserted such an express condition had they known what
the future held. Heublein claims that the most basic goal of
contract law is to protect the justified expectations of the
parties, and that an implied condition is appropriate in this case,
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where circumstances changed unforeseeably and the contract terms
are insufficient to govern the parties’ relationship. See Market
Street Assocs. Ltd. Partnership v. Frey, 941 F.2d 588, 595-96 (7th
Cir. 1991). Were it otherwise, Heublein reasons, neither party
would have any recourse to contest a mistaken application of the
formula. Thus, Heublein posits that a faithful application of the
net loss formula was a “basic assumption” of the settlement
agreement. See McCulley Fine Arts Gallery, Inc. v. “X” Partners,
860 S.W.2d 473, 478 (Tex. App.—El Paso 1993, no writ) (finding
authenticity to be “understood to be a term” of a contract to sell
a Van Gogh painting).
Heublein contends that because the settlement agreement
contained this implied condition precedent, the district court
abused its discretion in refusing to allow Heublein to gain access
to Coopers’ working papers. Rule 26(b) of the Federal Rules of
Civil Procedure permits discovery of relevant nonprivileged
matters, and Coopers’ working papers would be relevant to
determining whether the settlement agreement formula had been
correctly applied. See Whalen v. Carter, 954 F.2d 1087, 1098 n.11
(5th Cir. 1992).
Tarrant, on the other hand, argues that no condition precedent
should be implied. According to this argument, Tarrant’s promise
to pay a fixed sum to Heublein and Heublein’s promise to pay
Tarrant’s net loss as determined by a CPA firm were unconditional.
The parties agreed that the CPA firm’s determination would be final
and binding, regardless of the outcome. Further, as was noted by
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the district court, the agreement was not made conditional upon the
“proper” application of the net loss formula. The very fact that
Heublein and Tarrant had widely varying claims as to the amount of
Tarrant’s net loss meant that there was a possibility that one or
both of the parties would be dissatisfied with the CPA firm’s
determination. Thus, an unfavorable outcome could not have been
unforeseeable, and therefore a condition precedent cannot be
implied in the settlement agreement.
The district court held that the settlement agreement’s use of
the terms “final and binding” meant that both parties “gave up the
right to probe the correctness of Coopers & Lybrand’s
determination” unless Heublein presented evidence of “fraud,
misconduct, or such gross mistake as would imply bad faith or
failure to exercise an honest judgment,” Westech Eng’g, Inc. v.
Clearwater Constructors, Inc., 835 S.W.2d 190, 203 (Tex.
App.—Austin 1992, no writ), or evidence that there was an
undisputed mistake of fact in the determination. The district
court reasoned that the parties “provided for a binding decision by
a neutral party of a certain reputation and caliber because the
parties could not agree on the net loss number, to avoid continued
litigation and to ensure continued confidentiality.”
The district court correctly refused to imply a condition
precedent in the settlement agreement. An error in the process of
computing the net loss under the formula specified in the
settlement agreement was certainly a foreseeable event, and the
settlement agreement between Heublein and Tarrant did not provide
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any review procedure. Rather, it explicitly stated that the CPA
firm’s determination would be “final and binding upon the parties.”
Because there is no implied condition precedent, and because
Heublein has not proven that it is entitled to discovery of the
working papers on any other ground, the district court was correct
to refuse Heublein’s request for access to Coopers’s working
papers.
V. Conclusion
The difficulties in this case arise from the failure of the
parties to follow through on their intention to execute a separate
confidentiality agreement and the awkward phrasing of the
confidentiality provision of the engagement letter from Coopers &
Lybrand. However, we have determined that there was no ambiguity
in the engagement letter that might create a fact issue as to the
intent of the parties regarding the resolution of potential
disputes over the CPA firm’s determination of the amount of
Tarrant’s net loss. Because the parties agreed generally that the
information would be kept confidential and because the settlement
agreement states that the CPA firm’s determination will be “final
and binding,” Heublein is without recourse to challenge Coopers’
determination of Heublein’s liability to Tarrant.
The judgment of the district court is AFFIRMED.
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