Opinion
No. 02-19-00195-CV
06-25-2020
RPC, INC. d/b/a Delaware-RPC, Inc., Cudd Pressure Control, Inc., Cudd Pumping Services, Inc., and Thru Tubing Services, Inc., Appellants v. CTMI, LLC, Appellee
ATTORNEYS FOR APPELLANTS: JERRY D. BULLARD, SCOTT A. CUMMINGS, ADAMS, LYNCH & LOFTIN, P.C., GRAPEVINE, TEXAS. ATTORNEYS FOR APPELLEE: SCOTT C. FACIANE, THE FACIANE LAW FIRM, L.P., FORT WORTH, TEXAS, SCOTTY MACLEAN, MACLEAN LAW FIRM, FORT WORTH, TEXAS, DAVID E. KELTNER, JODY S. SANDERS, KELLY HART & HALLMAN LLP, FORT WORTH, TEXAS.
ATTORNEYS FOR APPELLANTS: JERRY D. BULLARD, SCOTT A. CUMMINGS, ADAMS, LYNCH & LOFTIN, P.C., GRAPEVINE, TEXAS.
ATTORNEYS FOR APPELLEE: SCOTT C. FACIANE, THE FACIANE LAW FIRM, L.P., FORT WORTH, TEXAS, SCOTTY MACLEAN, MACLEAN LAW FIRM, FORT WORTH, TEXAS, DAVID E. KELTNER, JODY S. SANDERS, KELLY HART & HALLMAN LLP, FORT WORTH, TEXAS.
Before Gabriel, Bassel, and Womack, JJ.
MEMORANDUM OPINION
Memorandum Opinion by Justice Bassel
I. Introduction
This is an appeal of a claim for breach of contract that resulted in a multi-million-dollar judgment in favor of Appellee CTMI, LLC. CTMI, who had been Appellant RPC, Inc.'s tax consultant, claimed that RPC and the companies for which RPC was the parent breached an agreement to pay CTMI a contingency fee calculated on tax savings realized during managed tax audits conducted by the Texas Comptroller.
RPC argued in a pretrial proceeding that a certain term of the agreement carried a technical meaning. The trial court concluded during the pretrial proceeding that the agreement was not ambiguous, but it permitted each party to testify in detail as to its interpretation of the term at issue. Nonetheless, the trial court refused RPC's request to instruct the jury that its role was to determine the parties' intent and denied RPC's request to offer additional testimony defining the disputed contract terms.
RPC argues in its first issue on appeal that the term contained a latent ambiguity, which was revealed only when CTMI sent an invoice showing how CTMI had calculated its fee. Based on this record, we conclude that the term that is the primary basis for CTMI's fee claim is subject to two reasonable interpretations; the trial court erred by concluding otherwise. Accordingly, we reverse and remand this case for further proceedings governed by our conclusion that the agreement is ambiguous.
RPC raises eight issues, but based on our disposition of RPC's first issue challenging the agreement as ambiguous, we do not reach RPC's remaining seven issues. See Tex. R. App. P. 47.1.
II. Factual and Procedural Background
"RPC is the parent company of a variety of legal entities that all do different service work for oil fields." CTMI is a property-tax consulting firm that works to "save people money on property tax and sales tax." Sales taxes are transaction taxes that operate roughly as follows: when something is sold, the tax is remitted to the Comptroller; when an item is purchased, tax is paid, and the vendor remits the tax to the Comptroller.
In 2008, CTMI made a sales call to RPC's headquarters during which CTMI pitched that it could save RPC a substantial amount in sales and property taxes. The parties subsequently executed a Consulting Agreement. That agreement envisioned an "overpayment review" that was to "identify and recover duplicate payments, credits, discounts, and any tax overpayments/credits that [had] not been taken by RPC/Cudd Pressure or related entities." RPC's representative described the review process as follows: "[A]ny time [CTMI] find[s] documents that we can apply for a refund or ask for a reduction, we -- on sales taxes we were currently paying, they would apply for the refund." The Consulting Agreement also provided a 35% contingency fee calculated on certain types of savings that was specified in its consideration provision—that provision is a central focus of this appeal. The Consulting Agreement specified that it would "terminate upon resolution of all identified tax savings and credits through 2008."
CTMI initially examined RPC's records to determine where it had spent money and then ascertained whether RPC should take a credit for bad debts that would free it from paying sales tax. CTMI invoiced RPC for its initial work, with the invoices ranging between $3,000 and $20,000, generally reflecting the work as "Accounts Payable Audit" and "Sales and Use Tax Overpayment Review—Bad Debt Credits." These invoices were paid by RPC.
As this initial work progressed, an event occurred in 2010 that expanded the scope of the services that CTMI was to perform. RPC's tax manager mentioned to CTMI's owner that the Comptroller was going to conduct sales tax audits of entities owned by RPC. RPC had used its own personnel to deal with prior audits conducted by the Comptroller, but CTMI's representative mentioned the option of using a managed audit procedure that offered RPC protection from the assessment of penalties and interest on taxes that the audit might find were due. RPC asked CTMI to assist with the managed audits.
The parties executed two addendums to the original Consulting Agreement to govern CTMI's new role in assisting with the managed audits. The addendums specified that their purpose was "to increase the scope of services" described in the original Consulting Agreement. The addendums increased the time period of the work to be done pursuant to the Consulting Agreement through a provision stating that "[t]his addendum will allow CTMI to complete the overpayment review currently being performed for RPC through [a certain date in] 2010."
The addendums also generally referenced the increased scope of the work by noting in the first addendum that "CTMI will assist in working the Texas Sales Tax Audit/Managed Audit being conducted by the Texas Comptroller's Office." The first addendum continued, "This addendum will also allow CTMI to provide additional consulting services for the following specific areas" and then described audits of entities owned by RPC that were being conducted by the Comptroller. The second addendum contained roughly similar terms as the first and was executed because RPC had received notice that more of the entities that it owned would be audited by the Comptroller.
The parties exchanged emails about how the addendums addressed the compensation that CTMI would receive for its expanded role. RPC asserted that these emails expressed a view that CTMI's fee would be calculated based on interest savings obtained through the managed audit process and a belief that CTMI would be compensated based on those interest savings and refunds obtained by CTMI. CTMI disagreed that it had contracted for such a limitation or that it had ever suggested that it would. The email exchange did not cause the parties to revise the Consulting Agreement's consideration provision. Instead, the addendums carried forward the terms of the Consulting Agreement.
According to CTMI's representative, after the managed audit process began, the work arising from the audits caused it to "greatly expand" the number of staff assigned to the project. One aspect of the managed audit process involved a sampling process, which will be described in detail below. The sampling process required CTMI's personnel to compile and review documents and then to negotiate with the Comptroller for the removal of transactions from the sample.
CTMI's work on the initial two audits proceeded without controversy about the fee charged, but the parties later disagreed over whether the fee that CTMI had billed for the initial audits was consistent with its billing practices for the later audits. CTMI did not send a bill for its work on one of the initial audits, and RPC paid an invoice for work done on the second audit of approximately $19,000.
Work progressed on the other audits referenced in the addendums and was nearing completion when CTMI sent an invoice that was described as a game changer in the parties' relationship. Initial and revised invoices sent for the remaining audits that CTMI worked on increased; the later invoices billed fees between $150,000 and $3.4 million.
RPC refused to pay the later invoices; the parties disputed whether CTMI was entitled to receive a fee for transactions removed from the sample utilized by the Comptroller in conducting the managed audits. After not being paid for what it claimed was due, CTMI filed suit, seeking approximately $2.3 million for a contingency fee based on the work it had performed during the audits. During the course of the litigation, CTMI hired a forensic accountant as an expert witness. This expert concluded that CTMI's original invoices had failed to account for many transactions that should have been used to calculate the fee owed by RPC. To capture the expert's calculations, CTMI filed an amended petition that increased its fee claim to more than $6.8 million. During the litigation, RPC's position was that it would have never agreed to a fee calculated using CTMI's method because the managed audit process had the potential of saving it only $850,000 in interest charges "on [its] worst day." RPC's view was that CTMI was entitled to a fee of only about $400,000.
The parties also disagree about how active CTMI remained in the audit process after their dispute arose, and RPC claimed that it had to become more active in handling the audit process, including having to hire another firm to aid it with the audits.
The case was tried to a jury. A primary dispute at trial was whether a term in the Consulting Agreement's consideration provision permitted CTMI to charge the contingency fee it claimed. RPC challenged the fee claim by asserting that this particular provision created an ambiguity and, under RPC's interpretation of that term, did not support CTMI's multi-million-dollar-fee claim.
The parties presented the question of ambiguity to the trial court by means of a pretrial proceeding under Texas Rule of Civil Procedure 166(g). The trial court ruled that the Consulting Agreement was not ambiguous but permitted the parties to offer testimony about their understandings of the meaning of the terms used in the Consulting Agreement.
After the close of testimony at trial, RPC asked the trial court to change its ruling that the Consulting Agreement was not ambiguous. RPC also made an offer of proof of additional deposition testimony to demonstrate the ambiguity that it claimed existed in the Consulting Agreement. The trial court stood by its prior ruling.
The trial court also refused RPC's request to instruct the jury that it was their duty to interpret the operative provision of the Consulting Agreement and refused to permit RPC to file a trial amendment to amend its answer to assert the affirmative defense of modification. Instead, the trial court directed a verdict that RPC had breached the Consulting Agreement and instructed the jury that RPC had breached the Consulting Agreement.
In response to the single charge question regarding "[w]hat sum of money, if any, if paid now in cash, would fairly and reasonably compensate [CTMI] for its damages, if any, that resulted from [RPC's] failure to comply," the jury awarded CTMI damages of $6,860,905.83. The jury also awarded CTMI attorneys' fees. The trial court denied RPC's motion for judgment notwithstanding the verdict and entered judgment in accordance with the jury's verdict. RPC filed a motion for new trial that was overruled by operation of law. This appeal ensued.
III. The Ambiguity Controversy
A. We focus on the term "audit assessment reductions" contained in the Consulting Agreement's consideration provision in determining whether the agreement was ambiguous.
Before becoming mired in detail, we briefly explain why the focus of this appeal is one provision of the Consulting Agreement and specifically, as we see the issue, three words in that agreement. The three words on which we focus because they make the Consulting Agreement ambiguous are contained in the term "audit assessment reductions."
Throughout this opinion, we use the term "audit assessment reductions" and its singular form—"audit assessment reduction"—interchangeably even though only the plural form is used in the consideration provision.
We focus on the Consulting Agreement even though the relationship between CTMI and RPC was governed by three documents—the Consulting Agreement and the two addendums—because both addendums carried forward the terms of the Consulting Agreement, including the provision that governed the calculation of CTMI's fee. When the parties presented the question of ambiguity to the trial court during a pretrial proceeding, they agreed that the consideration provision of the underlying Consulting Agreement was the focus of their differing views on ambiguity, and the meaning of the term "audit assessment reductions" was the primary focus of the trial. That theme carried forward into the briefing on appeal.
The parties disagreed about when the Comptroller had "assessed" taxes in the managed audit process such that an assessment had occurred creating a savings that triggered CTMI's right to charge its 35% contingency fee. That question is pivotal because the lion's share of the damages in this case were invoiced by CTMI as its fee for obtaining assessment reductions.
B. The consideration provision of the Consulting Agreement made "audit assessment reductions" a particular category of savings for which CTMI earned a contingency fee, and CTMI's fee claim primarily sought damages based on that category.
The Consulting Agreement makes "audit assessment reductions" a specific category of savings for which CTMI could recover a fee. The agreement does this through the structure of its consideration provision that speaks to a fee calculated on "savings realized" but then itemizes specific things that will produce a savings realized, including "audit assessment reductions." Specifically, the consideration provision provides that
[a]s consideration for services, "RPC" agrees to pay CTMI 35% of savings realized from the review. Savings include credit memos, checks, or deductions from vendors, any tax refunds or credits approved by taxing authorities, interest, penalties, and audit assessment reductions or any savings identified by CTMI that offset against past, current[,] or future tax liabilities or other liabilities. [Emphases added.]
The Consulting Agreement provides no further definition of the term "audit assessment reductions" or its component words.
CTMI based most of its damage claim on savings that fit into this category. Again, CTMI's damages claim is predicated on a contingency fee of 35% of the savings realized for RPC. To support its fee claim totaling $6.8 million, CTMI introduced a summary of its damages in which it claimed that its actions produced a total savings of $19.6 million. The summary demonstrates that assessment reductions preponderate in CTMI's damages claim because the summary attributed $17.8 million of the savings used as a predicate for the fee to "Assessment Reductions/Credits." The fee claim's focus on assessment reductions carried through to the specific invoices that CTMI introduced at trial to prove its damages. Specifically, invoices 6127 and 6128 total more than $4.6 million, and all the charges on those invoices are categorized as an "assessment reduction" or "assessment reductions." Indeed, CTMI's corporate representative stated that there is an explicit link between invoice 6128 for $1.2 million and the term "audit assessment reduction" found in the consideration paragraph of the Consulting Agreement:
Q. And, again, on the first page of the exhibit, this invoice is for sales assessment reductions and purchase assessment reductions; is that correct?
A. That is correct.
Q. And assessment reductions are clearly contemplated in the consideration and payment section of the original contract; is that correct?
A. They are clearly stated in the contract.
The other invoices that CTMI relied on contain entries, such as "audit reductions," that did not explicitly reference an assessment but instead included schedules showing that CTMI had categorized most of these audit reductions as resulting from "assessment reductions."
Because CTMI's damage claim turned primarily on a contingency fee based on savings resulting from "audit assessment reductions," we focus on whether that term introduced an ambiguity into the Consulting Agreement.
C. The parties clashed over when an assessment occurred for the purpose of determining the existence of an "audit assessment reduction."
1. Determining when an assessment occurred matters.
To determine whether an audit assessment reduction occurred requires determining when an assessment occurred that triggered CTMI's right to claim a fee for realizing that type of savings. When that trigger occurred in the audit process was the central dispute in the trial testimony. It was CTMI's position that an assessment had occurred continuously throughout the audit process, and when it was able to remove any potential tax liability during the process, that reduction became an "audit assessment reduction" for which it was entitled to a fee.
RPC had a differing view. In RPC's view, an assessment occurred only after it had gone through a sampling process during which RPC could demonstrate to the Comptroller that certain transactions were not taxable and after the Comptroller had sent a final bill for the amount of tax due.
2. The parties' clashing views on when an assessment occurred requires an explanation of managed audits and how these audits generated a sample of transactions termed a "pull list."
CTMI's corporate representative generally described audits as a process conducted by the Comptroller during which it "come[s] in and look[s] at their books and records ... to try to make sure that RPC is collecting the right amount of tax on the sales and ... to make sure that they are paying the right amount of tax on their purchases." The differing views outlined above regarding when an audit assessment occurred stemmed from the nature of specialized audits, termed "managed audits," that were conducted by the Comptroller.
To understand the parties' different views requires a discussion of how a managed audit is conducted. In a managed audit, the Comptroller allows the taxpayer to hire an outside party to conduct the audit. The advantage of the managed audit process is that if a party agrees to conduct a managed audit, the Comptroller will waive penalties due for unpaid taxes and also potentially waive interest.
A witness for RPC described the process as follows: "So in a managed audit, the [Comptroller] will allow you to have a consultant or a contractor involved. And what they say is, ‘Okay. We're going to let’ -- ‘since this company is involved, the [Comptroller] is going to be able to apply the resources to get this audit done.’ "
An RPC witness described the process as follows:
And so the [Comptroller] says, "Okay. If you will do this, we will forgive the interest on" -- "the interest and penalties." But historically we don't really pay penalties on our audits as -- just have not over time. But in this case, the interest was the piece that we really liked.
Part of the managed audit process involves the Comptroller's generating a sample of transactions and then projecting the tax amount due. CTMI's expert generally described the projection mechanism as follows:
And then based on the amount of the items sampled, if they find an error with one particular transaction, then they will extrapolate that figure to the entire population of sales tax transactions of -- of invoice transactions.
So if you look here, it's an $85.00 question that if CTMI did not do the work to defend against this item, then the company would have been owed -- would have owed $231,819[ ] because the [Comptroller] is using a sampling methodology for these particular transactions.
For the five managed audits that were the focus of CTMI's fee claim, there were millions of transactions potentially at issue, totaling $2 billion in purchases and sales. The sampling process winnowed this universe down to 8,000 or 9,000 transactions "that they actually selected to review to see if any additional taxes were due." The list of sample transactions was referred to as a "pull list" during the trial.
CTMI's corporate representative elaborated on the pull list's function in extrapolating the amount of tax due:
When the Texas Comptroller's Office comes in to perform an audit, they take a sample population[,] and what they do is they select certain transactions out of that population to sample to project over the entire population. So there is a list of transactions the [C]omptroller is going to review to come up with what additional taxes will be due.
An RPC witness gave roughly the same description of a pull list, describing it as "the [Comptroller's] listing which invoices they want backup on to prove why tax wasn't charged."
Both sides gave the same basic description of how a consultant such as CTMI is involved in the pull-list process. The distillation of the millions of transactions into the 8,000 or 9,000 transactions in the pull list generated approximately 25,000 documents that impacted the sample. CTMI assigned as many as sixteen employees to review those underlying documents. Generally, CTMI described its role as obtaining documents from RPC with respect to the sample items on the pull list, providing those items to the Comptroller, and negotiating the removal of the items from the pull list.
A party negotiates to have items removed from the pull list by establishing why the sample transaction had initially been given proper tax treatment. Though there was disagreement regarding whether CTMI had performed a role throughout each of the managed audits, CTMI summarized how it had negotiated with the Comptroller for the removal of items from the pull list:
There's work papers back and forth between us and the [Comptroller] that say, "Hey, once the initial sample is run, these are the transactions that we're trying to assess more tax on," and we'll respond via e-mail or set a meeting with them. We tend to get more done face to face than via e-mail, but we argue those transactions back and forth throughout the audit.
An RPC witness described the process in roughly the same terms:
So what happens in the audits is the [Comptroller] will come in and look at all of the transactions that happened during the time period being audited. They will pick samples that you guys have heard many times here in a couple of days. And then they ask: "Okay. Prove to us why tax was not due on these."
And so we have to provide our backup and our defense of why tax was not due on anything that the [Comptroller] has on the list. And so we provide backup, [we] get things removed[,] and we come up to an ending where the [Comptroller] says, "Okay. This is where your audit is going to end[,] and here's an assessment."
The RPC witness described how items might be removed from the pull list, such as by providing documentation to the Comptroller showing that tax was paid on the transaction, that the customer was exempt from paying tax, or that a customer had paid the sales tax directly to the Comptroller. The specific testimony describing the process was as follows:
Some things will come off automatic[ally] because, remember, the [Comptroller] is pulling the sample from all transactions. So there will be many items on it [for which] that tax was [already] paid. And the [Comptroller] says, "Okay. Take those off right away."
Then there's going to be other times where you did not charge a customer tax and you have to tell them why, and that may be -- you may have an exemption certificate from that customer saying, "You don't have to charge them tax." So you provide that to the [Comptroller,] and they remove that line.
You may have direct pays, certain companies like Conoco, direct pays to the [Comptroller], so you never charge them tax. They work with the [Comptroller] directly to pay their tax[ for] various reasons.
3. The pull-list process impacted the differing views of when an assessment occurred.
The essence of the controversy between the parties was whether placing an item on the pull list constituted an assessment of tax and thus whether obtaining removal of that item from the pull list constituted an "audit assessment reduction." CTMI's interpretation conformed to this view, while RPC did not view an assessment as having occurred until the pull-list process was completed and the Comptroller had sent a final bill. An associated controversy was whether CTMI had ever communicated to RPC its view that taxes were assessed by the inclusion of an item on the pull list and that CTMI was entitled to a fee because an item was removed from the pull list.
CTMI's view that taxes were assessed by the inclusion of items on the pull list turned on the proposition that if items were not removed from the pull list, then taxes would be owed with respect to those transactions:
Q. So is it your sworn testimony that all of these numbers we see on [an executive
summary provided to RPC] for each month is a final assessment from the [Comptroller]?
A. These numbers on this chart [are] the net tax amount of additional tax that would be due if CTMI was not going to argue some of these transactions should be removed from the assessment or additional credits approved.
CTMI also noted communications from the Comptroller that stated estimated taxes for one of the audits totaled almost $30 million.
RPC's witnesses agreed that if nothing were done to remove items from the pull list, then taxes would be calculated based on the transactions not removed. But there was disagreement on the part of RPC regarding whether a final assessment had occurred from the fact that tax would have to be paid if no effort were made to remove the items from the pull list.
RPC's contrary view turned on the meaning of the word "assessment." In RPC's view, removing transactions from the pull list was not an "assessment reduction" because an assessment did not occur until the pull-list process had been resolved and the Comptroller had sent a final bill for the taxes due. RPC detailed the reason for its view as follows,
The audit assessment is once you have fought through the audit and defended your stance, the items that you end up -- you know, the [Comptroller] proves that you didn't have enough defense on, they will assess you a final number on the ending result of what you did not remove from the list.
Another RPC witness was permitted to offer similar testimony:
Q. And are any of these numbers until the very end an assessment?
A. No.
Q. Why not?
A. Because there's no taxes due yet. The assessment comes in when the tax is actually due and the [Comptroller] gives you the invoice for the tax that is due.
RPC's expert also articulated the view that removing items from the pull list was not an audit assessment:
Q. When the initial pull list comes out, is that an audit assessment?
A. No.
Q. When is the audit assessment or tax assessment?
A. The tax assessment is at the end. Once you've provided all your defenses and the [Comptroller] has said, "Okay. You can no longer provide us something to prove why tax isn't due[;] we're going to assess the tax[,] and now you get a bill for the tax."
RPC's response to CTMI's position—that an assessment had occurred because RPC would have to pay tax on items that were not removed from the pull list—was that RPC would never have allowed that situation to occur. RPC's corporate representative articulated this position as follows:
Q. All right. Now, I think [CTMI's corporate representative] was asked: If the audit stopped right there, would that be the final tax?
A. If no one defended the items still on it.
Q. But you certainly did not consider that the final assessment?
A. Definitely not. We would never stop there.
RPC's representative also testified that a final assessment occurred only at the end of the audit process because it was only at that point that RPC was required to report to the Securities and Exchange Commission the liability for the amount of taxes due. 4. The parties dispute whether CTMI ever communicated to RPC its view of how the pull-list process created an assessment that permitted CTMI to charge its fee.
The parties also clashed over whether CTMI had ever communicated its view that removal of an item from the pull list entitled it to a fee based on the occurrence of an "audit assessment reduction." CTMI claimed that it had notified RPC that the starting point for the calculation of audit assessment reductions was the removal of items from the pull lists through the updates that it had provided as the managed audit process had progressed. Under CTMI's view, "[t]hese numbers on [the update are] the net tax amount of additional tax that would be due if CTMI was not going to argue some of these transactions should be removed from the assessment or additional credits approved."
RPC disputed that it was ever provided with CTMI's starting point and claimed that the failure to provide this information was the source of the parties' misunderstanding:
Q. And, again, is it RPC's position that -- [opposing counsel] asked you a number of times: Is it fair to start from this point right here when there's an assessment. Is it fair to start from the assessment?
A. That was our understanding.
Q. That's where you get the assessment reductions, right?
A. Yes.
Q. And if you were going to start from any of these other numbers, would you, as the assistant controller, have liked to have been told by CTMI, "Hey, Mike, we're going to start with this number. So when we give you this bill at the end, at least you'll know where we started from"?
Would you have liked that?
A. A clearer understanding would have alleviated a lot of problems here.
Q. Well, were you ever provided with that starting point?
A. No.
D. We set forth the controversy over the question of ambiguity that was presented pretrial and after the conclusion of the testimony at trial.
1. CTMI filed a motion requesting a pretrial ruling under Texas Rule of Civil Procedure 166(g), and the trial court ruled that the Consulting Agreement is not ambiguous.
As noted in the background section, at a pretrial hearing, the parties presented their conflicting views on the ambiguity or the lack of ambiguity in the meaning of the term "audit assessment reduction." CTMI filed a motion pursuant to Texas Rule of Civil Procedure 166(g) requesting that the trial court make a pretrial "ruling interpreting the contract at issue in this suit." See Tex. R. Civ. P. 166(g) (providing that trial court may conduct a pretrial conference to consider "[t]he identification of legal matters to be ruled on or decided by the court"). CTMI's motion is one paragraph in length, and the record does not contain the brief that it apparently filed in support of its motion.
RPC pleaded in its Third Amended Original Answer that "[CTMI's] claims are barred, in whole or in part, because the ‘Consideration and Payment’ section of the Agreement is vague and ambiguous[ ] and subject to varying interpretation."
RPC filed a lengthy response that focused on the meaning of "audit assessment reduction" and how that term had become the central focus of the parties' dispute on the interpretation of the Consulting Agreement. RPC crystalized the issue as follows:
Rather, the issue focuses on the parties' differing interpretation of the [ ] undefined terms set forth in the "Consideration and Payment" section of the Consulting Agreement. How the parties' interpret "audit assessment reductions" affects [CTMI's] fee calculated from "savings realized." The large disparity in the parties' damages models ( [CTMI's] believing a fee of approximately $6.8M is owed and [RPC's] contending $544K is owed) show that the contractual provisions are subject to more than one reasonable interpretation, and therefore, [are] ambiguous as a matter of law. [Footnote omitted.]
RPC quoted the consideration provision of the Consulting Agreement and then offered theories by which the trial court could find that the term "audit assessment reduction" was ambiguous because it was a technical term that required examining the circumstances surrounding the document's execution:
The parties disagree as to the meaning of "audit assessment reductions[,]" which is not defined in the Cons[ul]ting Agreement or addendums thereto. Contract terms are given their plain, ordinary, and generally accepted meanings unless the contract i[t]self shows them to be used in a technical or different sense. The difference in the parties' interpretation and understanding of the technical term is aided by testimony taken in this matter. The contract may be read in light of the surrounding circumstances to determine whether an ambiguity exists. [Citations omitted.]
RPC attached deposition testimony that followed the same theme that we have highlighted from the trial testimony: the removal of items from the pull list was not an "audit assessment reduction." RPC's response noted that CTMI "interprets audit assessment reductions to occur from the initial number the [Comptroller] provides as tax liability reduced to the final number." Finally, the response contended that CTMI had billed the first two managed audits that it had handled in accordance with RPC's interpretation of "audit assessment reduction."
At the pretrial hearing, the parties presented their conflicting view on the ambiguity or the lack of ambiguity in the meaning of the term "audit assessment reduction." CTMI introduced deposition excerpts in which various RPC witnesses had said that they believed that the terms of the Consulting Agreement were not vague or ambiguous, though apparently nothing in the excerpts dealt with whether removal of items from the pull list constituted an assessment. And RPC reiterated the argument outlined above about the clashing interpretations of the term "audit assessment reduction."
At the Rule 166(g) hearing, CTMI primarily relied on the testimony of the RPC employee who had signed the Consulting Agreement but had left RPC before the execution of the addendums dealing with the managed audits. The record does not contain the deposition excerpt that was presented to the trial court during the pretrial hearing, but the former employee's deposition was read to the jury during the trial. This testimony, though its speaks to an "audit reduction," does not specifically deal with what constitutes an "audit assessment reduction" or the question of whether the removal of items from the pull list constitutes an "audit assessment reduction":
Q. What is an audit reduction?
A. Similar to how you just explained. The [Comptroller] will come in and audit your receivables and payables. They'll come up with an amount that they feel was the amount underpaid[,] and they'll assess that as an amount owed by the company.
And a reduction would be if you go back to the [Comptroller] and ask them to reduce for whatever reason, whether legitimate or not, you know, if they would reduce it, I would say that's a reduction.
Q. All right. As it relates to audit assessment reductions, what form did they send the schedules, the auditors?
A. They'll send it by paper mailing.
Q. And what is contained on those schedules?
A. Amounts owed or -- well, I mean, they'll sometimes -- they'll have a detailed list of invoices that they reviewed. Typically, I guess, it will show, you know, the amount of the invoice and the amount of sales tax that was charged and the amount of sales tax that they believe should have been charged and a difference.
Q. Will the schedules be sent electronically in the form of Excel spreadsheets from time to time?
A. Yes.
Q. That's a standard way that the [Comptroller] conducts business?
A. Yes.
At the conclusion of the 166(g) hearing, the trial court ruled that the Consulting Agreement was not ambiguous.
2. RPC made an offer of proof after the close of evidence and requested that the trial court revisit its ruling that the Consulting Agreement was not ambiguous.
After each party offered its interpretation of the Consulting Agreement, RPC made offers of proof of deposition testimony. RPC re-urged its position that there were ambiguities in the Consulting Agreement and asked "the [c]ourt to reconsider its ruling with regard to the ambiguity question and [to] reconsider its ruling that the contract is not ambiguous in light of all of the deposition testimony that the [c]ourt ha[d] read and that [was] now a part of [RPC's] offer of proof." The trial court stood by its prior ruling.
RPC's offers of proof were extensive but, in its briefing, RPC highlights a small portion of the testimony that reiterates the same conflict established by the trial testimony—a description of the pull-list process and the witnesses' conclusions that the removal of items from the pull list did not constitute an "audit assessment reduction." The specific offers of proof highlighted in RPC's brief are as follows:
Q. Well, I -- what's -- what's your knowledge of the process? What's your knowledge of specific items analyzed?
A. Well, it starts off with RPC['s] providing a listing of the population expenditures and billings to customers. And from that point, the controller's office, the auditor, state auditor, designs a sampling process. And from the sampling process, they create what they call a pull list. And the pull list is just anything where no taxes [were] paid. But that doesn't mean tax [was] owed. It's just no taxes paid. It's a pull list. It's the beginning of a process to come up with an assessment at the end where they send a bill for the taxes, penalties, and interest.
....
Q. In the pull documents, do you recall ever seeing -- or when they're -- when they pull the documents, is there anything like this that says, hey, here's our initial estimation, assessment, anything like that where the [Comptroller] gives the taxpayer, or in this case CTMI, an estimate of what they think the taxes ought to be?
A. I don't believe they call the document any type of assessment. I think that it's a working document to lead to an assessment in the end.
....
Q. But during this process, the [Comptroller] came to RPC and [said], "Your potential tax liability is," and they gave
you a number, is that correct: Is that how these audits start?
A. No. They start with the data mining. They pull data and they present invoices that basically have no tax on them and say, "Why did these have no tax on them?" And there's no -- there's no -- there's no liability as -- as accountants, if there was a liability at that point, we would have to book it. No company ever books a liability on the first pull.
Q. And if you had --
A. There's no assessment. There's no liability there.
3. RPC requested a jury instruction on the issue of ambiguity and objected to the instruction that it had breached the Consulting Agreement.
RPC requested that the trial court instruct the jury that it should determine the intent of the parties. Specifically, RPC requested that the trial court include the following instruction in the charge:
It is your duty to interpret the following language of the agreement:
"RPC" agrees to pay CTMI 35% of savings realized from the review. Savings include credit memos, checks, or deductions from vendors, any tax refunds or credits approved by taxing authorities, interest, penalties, and audit assessment reductions or any savings identified by CTMI that offset against past, current[,] or future tax liabilities or other liabilities.
You must decide its meaning by determin[ing] the intent of the parties at the time of the agreement. Consider all the facts and circumstances surrounding the making of the agreement, the interpretation placed on the agreement by the parties, and the conduct of the parties.
The trial court denied RPC's request.
The trial court instead directed a verdict that RPC had breached the Consulting Agreement because RPC had not paid CTMI even the amounts that it had agreed were due. The trial court notified the jury of its directed verdict by an instruction that RPC had "breached the contract by not paying and/or tendering the amount they admit they owe pursuant to the contract." RPC objected to this instruction.
IV. Contract Principles Governing Ambiguity
Our conclusion that the Consulting Agreement is ambiguous must be prefaced with a fairly detailed discussion of the legal principles that guide us along the somewhat dimly lit path of when parol evidence may prompt a determination that a contract is ambiguous, the parameters of what evidence may be examined to determine the meaning of a contract's terms, and when we may conclude that a contract contains a latent ambiguity.
A. Several general principles govern the question of whether a contract is ambiguous.
Several overarching principles guide our determination of whether a contract is ambiguous. Whether a contract is ambiguous is a question of law. Heritage Res., Inc. v. NationsBank , 939 S.W.2d 118, 121 (Tex. 1996). We review de novo the trial court's determination of whether a contract is ambiguous. URI, Inc. v. Kleberg Cty. , 543 S.W.3d 755, 763–64 (Tex. 2018). "[T]he primary concern of the court is to ascertain the true intentions of the parties as expressed in the instrument[,]" and "courts should examine and consider the entire writing in an effort to harmonize and give effect to all the provisions of the contract so that none will be rendered meaningless." Coker v. Coker , 650 S.W.2d 391, 393 (Tex. 1983). "If the written instrument is so worded that it can be given a certain or definite legal meaning or interpretation, then it is not ambiguous and the court will construe the contract as a matter of law." Id. "A contract is not ambiguous merely because the parties disagree about its meaning and may be ambiguous even though the parties agree it is not." URI , 543 S.W.3d at 763. "A contract is ambiguous when its meaning is uncertain and doubtful or is reasonably susceptible to more than one interpretation." Heritage Res. , 939 S.W.2d at 121. "When a court determines that a contract is ambiguous, the meaning becomes a fact issue for the jury[,] and extraneous evidence may be admitted to help determine the language's meaning." Barrow-Shaver Res. Co. v. Carrizo Oil & Gas, Inc. , 590 S.W.3d 471, 480 (Tex. 2019).
B. Generally, we may look to extrinsic evidence that informs but does not alter or contradict a term's meaning.
"When a contract's meaning is disputed, our primary objective is to ascertain and give effect to the parties' intent as expressed in the instrument." URI , 543 S.W.3d at 763. We should never look to what the parties subjectively wished or hoped the contract said and instead "interpret contract language according to its ‘plain, ordinary, and generally accepted meaning’ unless the instrument directs otherwise." Id. at 764. In other words, "[e]xtrinsic evidence cannot be used to show that the parties probably meant, or could have meant, something other than what their agreement stated." First Bank v. Brumitt , 519 S.W.3d 95, 110 (Tex. 2017) (quoting Anglo–Dutch Petroleum Int'l, Inc. v. Greenberg Peden, P.C. , 352 S.W.3d 445, 451 (Tex. 2011) ).
The Texas Supreme Court listed the variations on the themes of what parol evidence should not do as follows:
Parties cannot rely on extrinsic evidence to "give the contract a meaning different from that which its language imports[";] "add to, alter, or contradict" the terms contained within the agreement itself[;] "make the language say what it unambiguously does not say[";] or "show that the parties probably meant, or could have meant, something other than what their agreement stated."
URI , 543 S.W.3d at 769 (footnotes omitted). That said, we recognize the nuances of language and the "use, adaptation and context as [words] are employed to fit various and varying situations." Id. at 764 (quoting Cal. Dep't of Mental Hygiene v. Bank of Sw. Nat'l Ass'n , 163 Tex. 314, 354 S.W.2d 576, 579 (1962) ).
It is also axiomatic that the consideration of parol evidence must be prefaced by a conclusion that an agreement is ambiguous:
"Only where a contract is ambiguous may a court consider the parties' interpretation and ‘admit extraneous evidence to determine the true meaning of the instrument.’ " "[N]o issue regarding the parties' intentions is raised unless the [contract] is ambiguous—and evidence of those intentions cannot be used to create an ambiguity."
Id. at 764–65 (citations omitted).
Requiring an ambiguity to be present before the court may consider evidence of the parties' interpretations is sometimes translated into a statement that extrinsic evidence may never be used to create (or demonstrate the existence of) an ambiguity; but as the supreme court has recently reemphasized, such a formulation overstates the rule. For example, the supreme court allows parol evidence to be considered if it informs a meaning that a term is reasonably susceptible to (even if the evidence potentially creates an ambiguity), but the court does not allow such evidence to cross into a use that permits the parties to contradict the contract's expressed intent:
The Houston Fourteenth Court of Appeals has also emphasized this. See Bailey v. Kliebert Dev., LLC , No. 14-15-00984-CV, 2017 WL 924484, at *7 (Tex. App.—Houston [14th Dist.] Mar. 7, 2017, no pet.) (mem. op.) ("We may not refer to parol evidence to prove the existence of an ambiguity.").
The parol evidence rule does not, however, prohibit courts from considering extrinsic evidence of the facts and circumstances surrounding the contract's execution as "an aid in the construction of the contract's language," but the evidence may only "give the words of a contract a meaning consistent with that to which they are reasonably susceptible, i.e., to ‘interpret’ contractual terms." This is true even if doing so reveals a latent ambiguity in a contract's terms. But whether a court is considering if an ambiguity exists or construing the terms of an unambiguous contract, surrounding facts and circumstances can only provide context that elucidates the meaning of the words employed, and nothing else. As we have often stated in one way or another, "[u]nderstanding the context in which an agreement was made is essential in determining the parties' intent as expressed in the agreement , but it is the parties' expressed intent that the court must determine."
Id. at 765 (first emphasis added) (footnotes omitted); see also Brumitt , 519 S.W.3d at 109 ("We have noted for decades that the construction of an unambiguous contract, including the determination of whether it is unambiguous , depends on the language of the contract itself, construed in light of the surrounding circumstances." (emphasis added)); Anglo–Dutch Petroleum , 352 S.W.3d at 449–50 ("Whether a contract is ambiguous is a question of law that must be decided by examining the contract as a whole in light of the circumstances present when the contract was entered.").
The line between the type of parol evidence that may be considered and that which may not follows the demarcation between evidence of what a party wished the language meant and that which "informs" the nuances of the words used. For example, the supreme court synthesized its holdings as follows: "the parol evidence rule prohibits extrinsic evidence of subjective intent that alters a contract's terms but ‘does not prohibit consideration of surrounding circumstances that inform, rather than vary from or contradict, the contract text.’ " URI , 543 S.W.3d at 767 (citing Hous. Expl. Co. v. Wellington Underwriting Agencies, Ltd. , 352 S.W.3d 462, 469 (Tex. 2011) ). Consideration of the surrounding circumstances may reinforce the conclusion that the words of a contract are unambiguous or show that they are ambiguous:
If a written contract is so worded that it can be given a definite or certain legal meaning when so considered and as applied to the matter in dispute , then it is not ambiguous. But if contract language is susceptible to more than one reasonable interpretation when so viewed, an ambiguity exists.
Id. at 765 (emphasis added) (footnote omitted).
C. Testimony establishing custom and usage or the definition of technical terms may be used to inform, but not contradict, a contract term's meaning.
Extrinsic evidence of industry custom or usage or the definition of technical terms is one type of evidence that may inform meaning. How evidence of custom and usage impacts the interpretation of terms may vary depending on whether the words have a distinct meaning in a particular industry: "[i]ndustry custom and usage may inform the meaning of words that may carry their plain meaning in some contexts but may also carry a special meaning in the context of a particular industry." Barrow-Shaver , 590 S.W.3d at 485. But evidence of industry custom and usage that is used to interpret words must fall within the same range of permissible use as any extrinsic evidence, i.e., evidence that informs rather than contradicts a term's meaning because "evidence of surrounding facts and circumstances, including evidence of industry custom and usage, cannot be used to add, alter, or change the contract's agreed-to terms." Id. If evidence of custom and usage is "appropriate," then the question of meaning becomes one for the jury. Id.
To ensure that the evidence offered does not cross the line into the zone of what a party subjectively hopes the contract says, the supreme court has emphasized that "only circumstantial evidence that is objective in nature may be consulted." URI , 543 S.W.3d at 768. The supreme court has described trade usage as meeting the requirement of objectivity since it
can illuminate the meaning of contract language because "the meaning to which a certain term or phrase is most reasonably susceptible is the one which [is] so regularly observed in place, vocation, trade[,] or industry so ‘as to justify an expectation that it will be observed with respect to a particular agreement.’ "
Id.
The demarcation at which extrinsic evidence may be looked at to supplement the meaning of a specialized or technical term is apparently bounded on one edge by terms that are so clear that any attempt to supplement their meaning with industry custom and usage would violate the prohibition against altering or contradicting a clearly expressed meaning. For example, the supreme court recently held that a provision requiring "express written consent" may not be read to mean that consent cannot be unreasonably withheld simply because that standard conforms to industry custom; in that circumstance, the custom would alter the clear meaning of the words. Barrow-Shaver , 590 S.W.3d at 486–87. Thus, the supreme court would not allow extrinsic "evidence of industry custom to import an obligation that does not exist in the contract." Id. at 486.
Nor does finding the most bizarre circumstance of a term's application make a clear meaning ambiguous. As a general proposition, "[a] word or phrase is ambiguous when the question is which of two or more meanings applies; it is vague when its unquestionable meaning has uncertain application to various factual situations." Tarr v. Timberwood Park Owners Ass'n , 556 S.W.3d 274, 290 (Tex. 2018) (quoting Antonin Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts 31–32 (2012)). But "[i]f a court can assign a meaning to the phrase at issue, the term is not rendered ambiguous solely because the application of ‘its unquestionable meaning’ to a certain factual situation is uncertain or vague." BCH Dev., LLC v. Lakeview Heights Addition Prop. Owners' Ass'n , No. 05-17-01096-CV, 2019 WL 2211479, at *7 (Tex. App.—Dallas May 21, 2019, pets. denied) (mem. op.).
D. Expert testimony and industry dictionaries are sources that we may examine to define specialized or technical terms.
For words potentially having a technical meaning, the default rule of construction is that "we afford contract language its plain, ordinary meaning, unless the instrument indicates terms have been used in a technical or specialized sense." Exxon Mobil Corp. v. Ins. Co. of State of Penn. , 568 S.W.3d 650, 657 (Tex. 2019). But just as there are words that are so clear in meaning that they may never be altered by technical definitions or custom and usage, there may be words that simply do not have a nontechnical meaning. The beginning point for such words is that "technical words are to be interpreted as usually understood by persons in the business to which they relate, unless there is evidence that the words were used in a different sense." Exxon Corp. v. Emerald Oil & Gas Co. , 348 S.W.3d 194, 211 (Tex. 2011) (op. on reh'g).
Once it has been determined that extrinsic evidence is permitted to give meaning to a specialized or technical term, courts may look to different sources for a definition. Though courts may look to sources such as dictionaries to find a term's plain, ordinary, and generally accepted meaning, "a specialized industry or trade term may require extrinsic evidence of the commonly understood meaning of the term within a particular industry." Mescalero Energy, Inc. v. Underwriters Indem. Gen. Agency, Inc. , 56 S.W.3d 313, 320 (Tex. App.—Houston [1st Dist.] 2001, pets. denied) (op. on reh'g) (emphasis added); see also Nat'l Union Fire Ins. Co. of Pittsburgh, PA v. CBI Indus., Inc. , 907 S.W.2d 517, 521 n.6 (Tex. 1995) (op. on reh'g) (holding that extrinsic evidence may be considered when interpreting the meaning of terms used in a particular "place, vocation, trade, or industry"); Cadence Bank v. Elizondo , No. 01-17-00886-CV, ––– S.W.3d ––––, ––––, 2020 WL 1150126, at *10 (Tex. App.—Houston [1st Dist.] Mar. 10, 2020, no pet. h.) (op. on reh'g) ("Here, both sides agree that the term ‘collected balance’ is an industry term. To determine the meaning of an industry term, a court may refer to extrinsic evidence, such as industry dictionaries, statutory definitions, or expert testimony."); Coterill-Jenkins v. Tex. Med. Ass'n Health Care Liab. Claim Tr. , 383 S.W.3d 581, 588 (Tex. App.—Houston [14th Dist.] 2012, pet. denied) (stating that "[a]lthough extrinsic evidence is generally not admissible to vary the terms of an unambiguous agreement, it may be admissible ‘to give the words of a contract a meaning consistent with that to which they are reasonably susceptible’ " and that "a specialized industry or trade term may require extrinsic evidence of the commonly understood meaning of the term within a particular industry" (citations omitted)); Va. Power Energy Mktg., Inc. v. Apache Corp. , 297 S.W.3d 397, 405 (Tex. App.—Houston [14th Dist.] 2009, pet. denied) (stating that "[i]n determining the parties' intent, we must assign terms their plain, ordinary, and generally accepted meaning unless the contract indicates that the parties used them in a technical or different sense" and that "we may consider extrinsic evidence, such as expert testimony or reference material, to determine whether a contract term enjoys a commonly understood meaning in the industry"); Royal Maccabees Life Ins. Co. v. James , 146 S.W.3d 340, 345–46 (Tex. App.—Dallas 2004, pet. denied) (op. on reh'g) ("A specialized industry term may require extrinsic evidence of the commonly understood meaning of that term within the specialized industry."). See generally Restatement (Second) of Contracts § 202(3)(b) (1981) ("Unless a different intention is manifested, ... technical terms and words of art are given their technical meaning when used in a transaction within their technical field.").
As another illustration,
[T]he trial court could have received testimony on the meaning of "carried interest." It is a technical term adopted from the oil industry and was used in a contract concerning a speculative real estate venture. The evidence offered was not parol evidence which tended to vary the terms of the written contract[ ] but was explanatory of a technical term used in the assignment. This type of testimony has been consistently permitted.
Byrd v. Smyth , 590 S.W.2d 772, 774–75 (Tex. App.—El Paso 1979, no writ).
E. The presence of technical terms in a contract may create a latent ambiguity.
As noted in our quote from the supreme court's opinion in URI , once a court considers the types of evidence that may be used to interpret a term's meaning, a latent ambiguity becomes apparent in the term. 543 S.W.3d at 765. Unlike a patent ambiguity that involves an ambiguity "evident on the face of the contract," as a general proposition, "[a] latent ambiguity arises when a contract which is unambiguous on its face is applied to the subject matter with which it deals and an ambiguity appears by reason of some collateral matter." Nat'l Union Fire Ins. , 907 S.W.2d at 520.
The supreme court illustrated a latent ambiguity with the classic example of a contract that required the delivery of a package to the green house on a particular street, with the later discovery that there were two green houses on the street. URI , 543 S.W.3d at 766–67. Using this example, the supreme court made the point once again regarding when extrinsic evidence may be looked at to inform rather than to contradict a term:
[T]he parol evidence rule prohibits extrinsic evidence of subjective intent that alters a contract's terms but "does not prohibit consideration of surrounding circumstances that inform, rather than vary from or contradict, the contract text." Thus, extrinsic evidence may be consulted to give meaning to the phrase "the green house on [a particular street]" but "cannot be used to show the parties' motives or intentions apart from" the language employed in the contract.
Id. at 767 (citations omitted).
Technical or specialized terms are especially prone to create latent ambiguities. An opinion from a federal court outside Texas noted that "[a] latent ambiguity will often arise when a term is being used within a technical or specialized field." See Sault Ste. Marie Tribe of Chippewa Indians v. Granholm , 475 F.3d 805, 812 (6th Cir. 2007). "Thus, a word may have a meaning that is different from its ordinary meaning within a particular field[,] and the ambiguity will only be revealed when that word is applied in context." Id.
Though not crystalizing the concept as succinctly as the language just quoted, several Texas cases illustrate how technical terms may introduce a latent ambiguity. For example, while on the First Court of Appeals, Justice Bland construed a contract in which an insurance company had contracted for a company to provide home health services to its subscribers. See Quality Infusion Care, Inc. v. Health Care Serv. Corp. , 224 S.W.3d 369, 378 (Tex. App.—Houston [1st Dist.] 2006, no pet.). One of the breach-of-contract claims turned on the interpretation of the word "provider." Id. at 379–80. The question was whether the party asserting the claim was a "provider" or a "network provider," but the contract used only the term "provider" without guidance on which meaning applied. Id. at 380. This produced a latent ambiguity:
Thus, after carefully reviewing the contract, we conclude that the term "Provider" is latently ambiguous. Though the
term does not appear ambiguous on its face, "[a]pplying the [‘Provider’] language to the context of the claim[s] here ... produce[s] an uncertain or ambiguous result[ ]" because the term is "fairly susceptible of more than one construction." "Provider" could mean "in-network provider," as [appellant] contends, or it could mean simply "provider," without bestowing on [appellant] the additional status of "network provider," as appellees contend. Based on the language employed, neither [appellant's] interpretation of the contract nor that of appellees is any less reasonable.
Id. (citations omitted); see also Peregrine Oil & Gas, LP v. HRB Oil & Gas, Ltd. , No. 01-17-00180-CV, 2018 WL 4137026, at *7 (Tex. App.—Houston [1st Dist.] Aug. 30, 2018, pet. denied) (mem. op.) (holding that conflicting interpretations of the word "charge" produced ambiguity); Tyco Valves & Controls, L.P. v. Colorado , 365 S.W.3d 750, 767 (Tex. App.—Houston [1st Dist.] 2012) ("Here, we conclude that the [contracts] contained a latent ambiguity. The ambiguous meaning of ‘standard [s]everance’ became apparent only once the parties attempted to determine what severance, if any, was owed to the ... employees." (citation omitted)), aff'd , 432 S.W.3d 885 (Tex. 2014) ; Healthcare Cable Sys., Inc. v. Good Shepherd Hosp., Inc. , 180 S.W.3d 787, 791 (Tex. App.—Tyler 2005, no pet.) (holding that the term "operational date" created an ambiguity in the contract); Niemeyer v. Tana Oil & Gas Corp. , 39 S.W.3d 380, 386–87 (Tex. App.—Austin 2001, pet. denied) (op. on reh'g) (holding that conflicting testimony on the meaning of the term "net proceeds" made that term ambiguous).
V. Application
It is our duty under the de novo standard of review to determine whether the Consulting Agreement is subject to two reasonable interpretations and thus is ambiguous. In our view, the term "audit assessment reduction" is a specialized or technical term for which the parties offered definitions showing that it is reasonably susceptible to differing but reasonable interpretations. Here, the term harbored a latent ambiguity in the Consulting Agreement that became apparent when applied in the context of the managed audits and specifically when CTMI began billing a fee based on the removal of items from the pull list as the managed audits progressed. With an ambiguity present, the question of the agreement's meaning became a fact question for the jury. The jury should have been instructed that it was within its purview to determine the meaning of the terms in the Consulting Agreement. Further, the trial court should have the opportunity to revisit its evidentiary rulings about what evidence is admissible in view of our conclusion that the Consulting Agreement is ambiguous.
We begin by noting the limitation on the use of parol evidence that CTMI highlights in its brief and views as a shield to the contention that the consideration provision of the Consulting Agreement is ambiguous—that rule being that parol evidence may not be used to alter or contradict the terms of an agreement. But as we have noted, the supreme court recently went on at length in URI to explain that the rule is not an absolute. 543 S.W.3d at 763. Words are ridden with nuance, and parol evidence may be used to inform the meaning of a term to which it is reasonably susceptible.
Here, CTMI's argument—that RPC's witnesses' testimony regarding the meaning of "audit assessment reduction" varied or contradicted the Consulting Agreement—is actually an argument that the testimony varied or contradicted CTMI's view of the term's meaning. The specialized circumstances of a managed audit and the apparent technical meaning of the use of the word "assessment" in that context do not support an argument that RPC's evidence about the term's meaning varied or contradicted it. To the contrary, the raw words on the page of the Consulting Agreement have little meaning unless there is context for how an audit is conducted and there is a context-based technical explanation of when an assessment in that audit process occurs.
And from the way this case was tried, the question about whether the parties would be able to testify about their interpretations of the Consulting Agreement is a horse that has already left the barn. Though the trial court ruled that the Consulting Agreement was unambiguous, much of the trial testimony involved the parties offering their interpretations of the meaning of terms in the Consulting Agreement. In other words, though the trial court ruled that the Consulting Agreement was unambiguous, the case was tried with a view that the terms of the Consulting Agreement could only be given meaning when placed in the specialized circumstances of the sampling process in a managed audit; thus, the term "assessment" should be defined in that specialized context.
Nor is allowing testimony that informed the meaning of the words in the Consulting Agreement a violation of the limitations placed on the use of parol evidence to determine the meaning of specialized terms. The rule we glean from our discussion of the law is that there may be terms that are so clear—such as "express written consent" that was used in Barrow-Shaver —that allowing the use of industry customs and definitions would not inform but rather would vary the term's meaning. See 590 S.W.3d at 486–87. The term "audit assessment reduction," when used in the context of a managed audit, does not carry such a clear and common meaning. Thus, we are not dealing with such a clear statement of terms that allowing parol evidence would have the inevitable effect of altering or varying the terms.
We also acknowledge that the default for determining the meaning of specialized terms is that "we afford contract language its plain, ordinary meaning, unless the instrument indicates [that] terms have been used in a technical or specialized sense." See Ins. Co. of State of Penn. , 568 S.W.3d at 657. CTMI relies on this rule to argue against an ambiguity in the use of the term "audit assessment reduction" in the Consulting Agreement. Here, the Consulting Agreement does not explicitly state that the words are used in a specialized sense. But it also does not define the words, and the parties' testimony demonstrated that they were attempting to apply the words in the specialized context of the pull list created during the managed audit. In that circumstance, the parties themselves invoked another cannon of construction that we cited above—"technical words are to be interpreted as usually understood by persons in the business to which they relate." See Emerald Oil & Gas Co. , 348 S.W.3d at 211. At bottom, the term "audit assessment reduction" is not a term that lends itself to a plain-meaning definition: without guidance, it is simply a guess as to how the term should apply in the context of a managed audit.
CTMI argues for dictionary definitions of the component words of the term "audit assessment reduction" as follows:
Similarly, the allegedly ambiguous terms also have readily ascertainable meanings. An "audit" is a "formal examination of an individual's or organization's accounting records, financial situation, or compliance with some other set of standards." Audit , Black's Law Dictionary (11th ed. 2019). And "assessment" means the "[d]etermination of the rate or amount of something, such as a tax or damages" or "[i]mposition of something, such as a tax or fine, according to an established rate; the tax or fine so imposed." Assessment , Black's Law Dictionary (11th ed. 2019). Finally, "reduction" is "the act or process of reducing," "something made by reducing[,]" or "the amount that something is reduced." Reduction , Merriam-Webster's Collegiate Dictionary (11th ed. 2003). Thus, an "assessment reduction" necessarily means any amounts taken from the taxing authority's determination of amounts owed—an understanding that both [CTMI's representative] and [RPC's tax manager] echoed in their testimony.
As part of this argument, CTMI argues that "RPC also offered no evidence of trade usage or custom that would inform a different analysis." We disagree for the reason set out above.
Other than offering dictionary definitions of the component words of the term "audit assessment reduction," CTMI does not reference or apply any other rule of construction that would warrant a conclusion that the Consulting Agreement is unambiguous. For example, CTMI makes no argument that reading the document as whole would give the document a certain and definite meaning. See Coker , 650 S.W.2d at 393 (stating that if document read as whole produces a certain and definite legal meaning, it is not ambiguous).
Viewing the term "audit assessment reduction" as a specialized term means that we may not simply open the dictionary to discern its meaning, and the testimony offered by RPC (and CTMI) does not violate the limitations on the types of evidence that may be looked at to establish that meaning. The parties offered their differing views of when an assessment occurred during a managed audit that used a pull list. Indeed, both parties offered expert testimony about the term's meaning. Based on the cases examined in our discussion of the types of evidence that may define a specialized or technical term, the expert testimony offered by the parties is a type of evidence that is objective and is of the proper type to inform the term's meaning rather than being an attempt to alter or contradict the term.
Thus, we are at a point in the analysis where we have concluded that the term "audit assessment reduction" is a specialized term and that the testimony offered by the parties did not run afoul of the limitation that testimony cannot vary or contradict an agreement. Though it seems contrary to its pretrial ruling that the Consulting Agreement was unambiguous, the trial court followed a similar course and allowed the parties to offer their interpretations of (1) the term's meaning and (2) how applying that term in the context of the sampling process of the managed audits produced differing interpretations of the manner by which CTMI should have calculated its fee.
And placing the conflicting interpretations into the context of the audits revealed a latent ambiguity. In other words, when the term was applied to the subject matter with which it deals—the trigger to CTMI's right to a contingency fee applied to a collateral matter of when an assessment occurred in the course of a managed audit—differing but reasonable interpretations became apparent. See Nat'l Union Fire Ins. , 907 S.W.2d at 520.
Neither party alleged a cause of action claiming that the other had misrepresented its position, and we operate under the assumption that each held its views in good faith, but it is apparent that the Consulting Agreement contained an ambiguity showing the relationship was riding for a fall. The fall did not manifest itself in a way to suggest that RPC had raised the issue of ambiguity as an eleventh-hour bid to avoid liability on the contract. Here, the precise moment of the fall in the parties' relationship is known because it was the moment that CTMI invoiced its fee based on the view that removal of items from the pull list had triggered an audit assessment reduction and thus entitled it to the 35% contingency fee.
Indeed, the parties' relationship appears to be one sown with misapprehensions. The parties entered into the addendums with their own understanding of when an assessment occurred and thus when an audit assessment reduction would occur. Each had its own view of the significance of the communications about the fee that CTMI would receive for this new venture; RPC claimed that the fee was limited to interest savings, and CTMI reiterated that the fee was calculated in accordance with the consideration provision of the Consulting Agreement that was unaltered by the addendums. The parties also disagreed with what should be gleaned from the way that CTMI had billed for the initial audits: RPC saw an inconsistency between the way these audits were billed in comparison to the later audits, and CTMI explained that its billing methods were consistent throughout. And the parties clashed regarding whether their views were communicated to the other. CTMI takes the position that the updates it provided should have informed RPC of CTMI's view of the issue. RPC counters that CTMI never explicitly informed it of the view that the removal of an item from the pull list constituted an assessment that triggered a fee and that it would never have entered into the addendums had it known of that view.
As noted, the use of technical terms often harbors a latent ambiguity that becomes apparent only when applied in context. Tribe of Chippewa Indians , 475 F.3d at 812. That appears to be what happened in this case. And this case mimics the litany of Texas cases cited above in which the courts concluded that an ambiguity existed when the parties disagreed about the meaning of a specialized or technical term and that disagreement manifested itself when the parties applied the terms to a particular circumstance.
The way the case was tried seems to have made the ambiguity manifest but left no mechanism to resolve the meaning of the specialized terms in the consideration provision of the Consulting Agreement. RPC articulated the nature of the ambiguity and the evidence that demonstrated the conflicting views of interpretation in its response to the Rule 166(g) motion that the trial court heard pretrial. After hearing that matter, the trial court concluded that the agreement was not ambiguous, but as we have outlined, the parties continued throughout the trial to press their views of what the Consulting Agreement's consideration provision meant. In essence, the trial progressed in a way that left the jury with what was tantamount to the duty to resolve an ambiguity but with confusing guidance on how to do so. And when asked for an instruction telling the jury that its role was to resolve these views and to determine the meaning of the consideration provision in the Consulting Agreement, the trial court denied the request. Instead, though phrased to state that a breach had occurred by RPC's not paying the amount that it had acknowledged was due, the trial court instructed the jury that RPC had breached the agreement.
Further, although we will not parse through the individual rulings, the evidentiary rulings that were made also seem at cross purposes. Again, the testimony focused on the parties' differing view of the meaning of the Consulting Agreement, but then the trial court refused RPC's offers of proof that carried forward the same theme. The trial court may have had reasons for this ruling that were unrelated to its determination of the ambiguity question, but the record does not reflect those reasons. Thus, the trial seems to have been driven to some extent by what we conclude is the trial court's erroneous determination on the ambiguity issue, and the case should be retried with the proper view that the jury should decide the question of the Consulting Agreement's meaning and with evidentiary rulings predicated on the fact that the Consulting Agreement is ambiguous.
In summary, we conclude that the term "audit assessment reduction" placed a latent ambiguity in the Consulting Agreement's consideration provision. This case should be resolved with that conclusion applied to both any future jury charge and to the determinations of what evidence is admissible to establish the parties' interpretation of the Consulting Agreement's consideration provision.
RPC also argues that the term "savings realized" is ambiguous. For many of the same reasons that we conclude that the term "audit savings reductions" is ambiguous, we would conclude that the "savings realized" term is ambiguous as well. Though the term on its face has a less technical flavor than that of "audit assessment reduction," the disagreement over when a savings occurred in the managed audit process and the lack of understanding when in the audit process a savings would trigger CTMI's right to a fee establishes the existence of a latent ambiguity. We focus on the term "audit assessment reduction" rather than the term "savings realized" because the former term is the specific type of savings that was the focus of the trial and the category of savings upon which CTMI predicated the lion's share of its damage claim. Thus, our conclusion that this term is ambiguous obviates the need to delve more deeply into the impact of the term "savings realized."
Accordingly, we sustain RPC's first issue.
VI. Conclusion
Having sustained RPC's first issue, which is dispositive of this appeal, we reverse the trial court's judgment and remand this case to the trial court for further proceedings in accordance with our conclusion that the term "audit assessment reduction" in the consideration provision of the Consulting Agreement is ambiguous. See Tex. R. App. P. 43.2(d).