AM Intern., Inc. v. Graphic Management Associates, Inc.

• Decision Date: 06 January 1995
• Docket Number: No. 94-2397,94-2397
• Citation: 44 F.3d 572
• Parties: AM INTERNATIONAL, INCORPORATED, Plaintiff-Appellant, v. GRAPHIC MANAGEMENT ASSOCIATES, INCORPORATED, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 572

44 F.3d 572

AM INTERNATIONAL, INCORPORATED, Plaintiff-Appellant, v. GRAPHIC MANAGEMENT ASSOCIATES, INCORPORATED, Defendant-Appellee.

No. 94-2397.

United States Court of Appeals,

Seventh Circuit.

Argued Oct. 27, 1994.

Decided Jan. 6, 1995.

Michael T. Hannafan (argued), William E. Blais, Cory A. Johnson, Hannafan & Associates, Chicago, IL, for plaintiff-appellant.

Thomas F. Ging, Thomas Crisham, Hinshaw & Culbertson, Chicago, IL, Stephen J. Springer (argued), Joseph L. Turchi, Labrum & Doak, Philadelphia, PA, for defendant-appellee.

Before POSNER, Chief Judge, and ESCHBACH and RIPPLE, Circuit Judges.

POSNER, Chief Judge.

This diversity breach of contract suit, governed by Illinois law, was brought by AM International ("AM" for short) against Graphic Management Associates (GMA). The district judge entered judgment on the pleadings for GMA. Fed.R.Civ.P. 12(c); 836 F.Supp. 487 (N.D.Ill.1993). The appeal raises surprisingly fundamental questions of contract law.

Both parties are manufacturers of printing machines used in the newspaper business. One of these machines is called a "newspaper inserting machine," and it comes equipped with what is called a Missed Insert Repair System (MIRS). These are complicated and expensive machines, which must be customized to the purchaser's specifications. AM brought a suit against GMA, charging that GMA's newspaper inserting machines with MIRS infringed a patent of AM's. The case was settled on December 27, 1988. The settlement included a license agreement, effective the same day, which entitled AM to a royalty of $200,000 on each MIRS-equipped newspaper inserting machine made by GMA and "shipped after ... [Dec. 27, 1988] and before the expiration of" the patent, which was to expire on July 23, 1991. But there was an exception: "beginning on January 1, 1991 and continuing to July 23, 1991 [the date of the expiration of the patent] royalty shall accrue on the receipt by GMA of a bona fide purchase order for a product, provided that product is shipped prior to December 31, 1991."

In January 1990, the owner of the Philadelphia Inquirer ordered nine MIRS-equipped machines from GMA. Four were not shipped until after December 31, 1991, and AM concedes that no royalty is due on any of those machines. The other five machines were shipped between September and November of 1991, and thus before December 31, and as to those AM contends that royalty is due. The district judge disagreed, thinking the contract too clear against AM's contention to allow the taking of parol evidence to determine the parties' true intentions. The judge did, however, mention some of that evidence, which had been obtained in discovery before GMA moved for judgment on the pleadings, en route to his conclusion that the evidence was inadmissible to alter the apparent meaning of the contract.

When judges say that a contract is "clear on its face," they mean simply that an ordinary reader of English, reading the contract, would think its application to the dispute at hand certain. That describes this case to a T. AM is entitled to royalties on machines shipped by GMA before July 23, 1991, unless the purchase order was received between January 1 and July 23, in which event AM is entitled to royalties on machines shipped by GMA until December 31. The purchase order for the five machines in issue was received before January 1, so the exception did not come into play, and therefore AM would have been entitled to royalties on the machines only if they had been shipped before July 23, which they were not.

The text contains no clue that the contract might mean something different from what it says. GMA says that that is the end of the case; and there is plenty of judicial language, from Illinois cases as from cases from other states, that if the language of a contract appears to admit of only one interpretation, the case is indeed over. E.g., Omnitrus Merging Corp. v. Illinois Tool Works, Inc., 256 Ill.App.3d 31, 195 Ill.Dec. 701, 704, 628 N.E.2d 1165, 1168 (1993); In re Marriage of Osborn, 206 Ill.App.3d 588, 151 Ill.Dec. 663, 668, 564 N.E.2d 1325, 1330 (1990). This is the "four corners" rule. AM ripostes that the doctrine of "extrinsic ambiguity" entitled it to present evidence that although the contract appears to be clear, anyone who understood the real-world context would know that it does not mean what it seems to mean. And there are many cases which say this, too. E.g., USG Corp. v. Sterling Plumbing Group, Inc., 247 Ill.App.3d 316, 186 Ill.Dec. 830, 832, 617 N.E.2d 69, 71 (1993); Economy Preferred Ins. Co. v. Jersey County Construction, Inc., 246 Ill.App.3d 387, 186 Ill.Dec. 233, 235, 615 N.E.2d 1290, 1292 (1993). Can these lines of cases be reconciled? If so, how? If not, how are we to decide this case?

Rules of law are rarely as clean and strict as statements of them make them seem. So varied and unpredictable are the circumstances in which they are applied that more often than not the summary statement of a rule--the terse formula that judges employ as a necessary shorthand to prevent judicial opinions from turning into treatises--is better regarded as a generalization than as the premise of a syllogism. Take the rule that if a contract is clear on its face, the court will not permit the taking of evidence to contradict that "clear" meaning. The famous contract in Raffles v. Wichelhaus, 2 H. & C. 906, 159 Eng.Rep. 375 (Ex.1864), which we have revisited twice in recent cases, Miller v. Taylor Insulation Co., 39 F.3d 755, 760 (7th Cir.1994); Colfax Envelope Corp. v. Local No. 458-3M, 20 F.3d 750, 752-53 (7th Cir.1994), was clear on its face. It called for the shipment of a specified amount of cotton from one port to another on the ship Peerless. Clear as a bell. Only there were two (if not more) ships Peerless, and it was impossible to tell which one the contract referred to. The contract was unclear because clarity in a contract is a property of the correspondence between the contract and the things or activities that it regulates, and not just of the semantic surface.

Take another example. Suppose the parties to the contract in Raffles had been members of a trade in which the term "cotton" was used to refer to guncotton rather than to the cotton used in textiles. The ordinary reader of English would not know about this special trade usage, and so would suppose the contract unambiguous. Again, the ambiguity is in the reference, that is, the connection between the word and the object that it denotes.

There has to be a means by which the law allows these surfaces to be penetrated, but without depriving contracting parties of the protection from the vagaries of judges and juries that they sought by reducing their contract to writing. A review of the doctrines that allow this penetration of semantic surfaces suggests that the key is the distinction between what might be called "objective" and "subjective" evidence of ambiguity. We use these terms informally, rather than with any approach to philosophical precision. By "objective" evidence we mean evidence of ambiguity that can be supplied by disinterested third parties: evidence that there was more than one ship called Peerless, or that a particular trade uses "cotton" in a nonstandard sense. The ability of one of the contracting parties to "fake" such evidence, and fool a judge or jury, is limited. By "subjective" evidence we mean the testimony of the parties themselves as to what they believe the contract means. Such testimony is invariably self-serving, being made by a party to the lawsuit, and is inherently difficult to verify. "Objective" evidence is admissible to demonstrate that apparently clear contract language means something different from what it seems to mean; "subjective" evidence is inadmissible for this purpose. AM relies on our decision in FDIC v. W.R. Grace & Co., 877 F.2d 614 (7th Cir.1989), the principal case in this court dealing with extrinsic ambiguity and a case in which we were, as here, interpreting Illinois law, but overlooks our observation that "the nature of the offer of proof to show an [extrinsic] ambiguity is ... critical." Id. at 622. We said that "a self-serving statement ... that a party did not understand the contract to mean what it says (or appears to say) will not suffice"; only "an offer to show that anyone who understood the context of the contract would realize it couldn't mean what an untutored reader would suppose it meant will [suffice]." Id. at 622.

There is a further screen to protect the parties from the uncertainties of trial. Objective evidence claimed to show that an apparently clear contract is in fact ambiguous must be presented first to the judge, and only if he concludes that it establishes a genuine ambiguity is the question of interpretation handed to the jury. Riney v. Weiss & Neuman Shoe Co., 217 Ill.App.3d 435, 160 Ill.Dec. 375, 379-80, 577 N.E.2d 505, 509-10 (1991); Design Studio Int'l, Inc. v. Chicago Title & Trust Co., 185 Ill.App.3d 797, 133 Ill.Dec. 728, 731, 541 N.E.2d 1166, 1169 (1989).

There are exceptions to the rule that only objective evidence can be used to alter the meaning of a clear contract, but they are consistent with the underlying principle. If the parties agree to an idiosyncratic meaning, the court will honor their agreement. Skycom Corp. v. Telstar Corp., 813 F.2d 810, 814-16 (7th Cir.1987). (There is an analogy to the doctrine that an admission can take a case out of the Statute of Frauds. DF Activities Corp. v. Brown, 851 F.2d 920, 923 (7th Cir.1988).) Or if one party charges fraud, the court will go behind the face of the contract--but it will require the party to prove fraud by clear and convincing evidence, Hofmann v. Hofmann, 94 Ill.2d 205, 68 Ill.Dec. 593, 600, 446 N.E.2d 499, 506 (1983), thus imposing a heightened standard of proof, a device analogous to requiring objective evidence. Similarly, a party claiming an oral modification or waiver may be...