EAGLE INDUSTRIES v. DeVILBISS HEALTH CARE

VEASEY, Chief Justice:

In this appeal we focus on the correctness of the grant of summary judgment in a contract dispute over the interpretation of an indemnification provision. In granting summary judgment, the Court of Chancery found the contract provision to be unambiguous. We disagree and hold that the indemnification provision is ambiguous, thus raising factual issues requiring consideration of extrinsic evidence to determine the intended meaning of the provision in light of the expectations of the contracting parties. We reverse the judgment of the Court of Chancery and remand the case for proceedings consistent with this opinion.

Facts

Eagle Industries, Inc. ("Eagle") and Homecare Acquisition, Inc. ("Buyer") entered into a Stock Purchase Agreement (the "Agreement") on August 13, 1990. Pursuant to the Agreement, Eagle and its wholly-owned subsidiary, DeVilbiss Holding Company, Inc. ("Seller"), transferred substantially all of the stock of DeVilbiss Health Care, Inc. ("DHC") to Buyer on October 5, 1990 (the "Closing Date"). After the Closing Date, Buyer merged into DHC, and DHC succeeded to Buyer's interests and liabilities, including those set forth in the Agreement. DHC then became a wholly-owned subsidiary of Homecare Holdings, Inc. ("Holdings").

Article 10.8 of the Agreement provided that Eagle was responsible for fulfilling Seller's indemnification obligations under the Agreement. At issue in this case is the indemnification provision for product liability under Article 10.1 of the Agreement, which reads as follows:

(emphasis added). The emphasized language was added to Article 10.1 after negotiations between the parties concerning Eagle's indemnification of Buyer for product liability claims.

Buyer's initial offer dated July 9, 1990 proposed that Eagle indemnify Buyer for product liability claims involving goods manufactured or purchased by Eagle prior to the Closing Date. This proposal was reflected in the indemnification provision contained in the first draft of the Agreement. According to an affidavit submitted by Eagle's then-counsel, Bruce C. Strohm, Eagle objected to a manufacture or purchase date trigger to its indemnification obligation. At a meeting held on July 20, 1990, Strohm informed Buyer that Eagle's product liability insurance coverage was limited to suits based on alleged occurrences prior to the Closing Date. Accordingly, Eagle was not willing to indemnify Buyer for claims based on post-closing occurrences, and Buyer would have to obtain its own insurance to protect against such claims. After the July 20 meeting, the parties redrafted the indemnification provision to include the emphasized proviso.

Proceedings in the Court of Chancery

The parties disagreed concerning the proper interpretation of the final indemnification provision as it was to apply to product liability claims. DHC filed suit in the Court of Chancery seeking construction and reformation of the indemnification language in Article 10.1(b)(i) so that it provided the date on which the product was manufactured or purchased as a clear reference for determining Eagle's indemnification obligations. Eagle filed a counterclaim for reimbursement of expenditures made in connection with product liability claims, arguing that the parties had intended the date on which the product caused injury to be the triggering event for indemnification under the Agreement.

The parties then filed cross-motions for summary judgment. The Court of Chancery held that the indemnification provision unambiguously set forth the product's manufacture or purchase date as the trigger for Eagle's indemnification obligations and granted DHC's motion for summary judgment.1 We recite here excerpts from the Memorandum Opinion of the Court of Chancery:

Ambiguity in the Indemnification Provision

The key phrase in controversy is the language providing that indemnification is limited to damages "arising from such suits... or other proceedings, the alleged basis for which arose or occurred on or prior to the Closing Date." What does this phrase mean? Does it mean that Eagle is responsible for claims arising from products manufactured or purchased before the Closing Date? Or is Eagle responsible only for claims based on injuries occurring before the Closing Date?

We disagree with the Court of Chancery that the indemnification provision is unambiguous. Both parties now claim that the provision unambiguously supports their respective interpretations, but DHC stated in its initial complaint that the language in Article 10.1(b)(i) is reasonably susceptible to at least two possible meanings. We are not bound, and the trial court was not bound, by the parties' present claim that the provision is unambiguous. We determine that question de novo.

In our view, the indemnification provision can be read as creating an obligation on Eagle's part to cover damages arising from product defect claims when the allegedly defective product was manufactured or purchased before the Closing Date. Alternatively, an equally reasonable interpretation of the indemnification provision would obligate Eagle only as to claims based on personal or property injury that occurred prior to the Closing Date.

The Court of Chancery held that Eagle's interpretation did not give proper effect to other portions of the provision. Specifically, the Court of Chancery determined that Eagle's argument that indemnification obligations occur with reference to the date of the alleged injury ignored the portion of Article 10.1(b)(i) stating that such obligations may be triggered "without regard to when such product is sold," as well as the portion stating that Eagle shall indemnify Buyer with respect to any damages resulting from any action relating to any product manufactured, purchased or sold by Eagle prior to the Closing.3 Because it found that an interpretation calling for a product manufacture or purchase date trigger made better use of each portion of Article 10.1(b)(i), the Court of Chancery held that the indemnification provision was unambiguous. The Court of Chancery also rejected Eagle's interpretation because it found no clear language in the Agreement that would provide for DHC's assumption of liability for claims arising from alleged injuries occurring after the Closing Date.4

Contract terms themselves will be controlling when they establish the parties' common meaning so that a reasonable person in the position of either party would have no expectations inconsistent with the contract language.5 When the provisions in controversy are fairly susceptible of different interpretations or may have two or more different meanings, there is ambiguity. Then the interpreting court must look beyond the language of the contract to ascertain the parties' intentions.6 We find in this case that a reasonable third person reading the indemnification provision in Article 10.1(b)(i) would be uncertain whether Eagle's obligations should be determined by reference to the date on which the product caused injury or by reference to the date on which the product was manufactured or purchased. Since the indemnification language in the Agreement is ambiguous, consideration of the relevant evidence is required.

The Use of Extrinsic Evidence in Contract Interpretation

If a contract is unambiguous, extrinsic evidence may not be used to interpret the intent of the parties, to vary the terms of the contract or to create an ambiguity.7 But when there is uncertainty in the meaning and application of contract language, the reviewing court must consider the evidence offered in order to arrive at a proper interpretation of contractual terms.8 This task may be accomplished by the summary judgment procedure in certain cases where the moving party's record is not prima facie rebutted so as to create issues of material fact.9 If there are issues of material fact, the trial court must resolve those issues as the trier of fact.

In construing an ambiguous contractual provision, a court may consider evidence of prior agreements and communications of the parties as well as trade usage or course of dealing.10 In the instant case, Eagle presented the affidavit of Bruce Strohm to the effect that the parties had contracted for an occurrence date trigger to the indemnification provision in a manner consistent with its position. This affidavit, along with its attached exhibits containing correspondence between the parties, drafts of the Agreement and drafting session notes, provide insight into the type of risk allocation that the parties intended the Agreement to reflect. The Strohm affidavit relates to the circumstances that existed at the time the parties drafted the agreement and sets forth evidence that may show that the indemnification clause was designed to conform to Eagle's existing coverage as well as to the future coverage that Buyer expected to obtain.11 Understandably, Eagle's willingness to indemnify Buyer was constrained by its own insurance liability coverage.

Because of the view of the Court of Chancery that the language in question was unambiguous, this evidence was not properly analyzed and the proceeding was truncated, we believe erroneously. On remand, the Court of Chancery should consider any admissible extrinsic evidence that may shed light on the expectations of the parties at the time they entered into the Agreement.

Conclusion

In a perfect world, integrated contracts would always reflect plainly and accurately the compromises and allocation of risk that the parties intend. The reality is that the contractual language defining rights and obligations of the parties is sometimes ambiguous. It is a court's duty to preserve to the extent feasible the expectations that form the basis of a contractual relationship. When, as in the instant case, the meaning and application of contract terms are uncertain, a court fulfills this duty by considering extrinsic evidence.

Accordingly, we reverse the decision of the Court of Chancery and remand for proceedings consistent with this opinion.