State Supreme Court Holds That Evidence Cannot Be Used To Contradict Written Words In Contract

Friday, January 18, 2019

In a case closely watched by Tennessee’s business community, the Tennessee Supreme Court has held that trial courts cannot use evidence outside of the written agreement—called “extrinsic” evidence—to interpret a contract if that evidence is used to contradict the contract’s written terms.

Beginning in 1999, BlueCross BlueShield of Tennessee, Inc., signed agency agreements with insurance agency Individual HealthCare Specialists, Inc., to allow Individual HealthCare to solicit applications for BlueCross insurance policies.  Their business relationship lasted over ten years, with new contracts each year that spelled out the commission rates for sales of new insurance policies and renewals of existing insurance policies.

For years, BlueCross paid Individual HealthCare commissions on renewal policies at the renewal rate in effect when the policy was first issued.  In 2011, however, BlueCross began paying commissions on renewal policies based on the rate in effect when the policy was renewed, which was substantially less.  Individual HealthCare objected, claiming that this was a retroactive change in renewal commission rates and that BlueCross could not change those rates without Individual HealthCare’s permission.  Ultimately, the parties’ business relationship ended.

Individual HealthCare sued BlueCross in Davidson County Chancery Court for breach of contract. The parties disputed, among other things, whether BlueCross had the authority to unilaterally change commission rates on renewal policies.      

At the trial level, in addition to reviewing the written language of the contract, the trial court also considered the oral testimony of former BlueCross executives who participated in negotiating the agency contract.  The executives testified that during the pre-contract negotiations neither party intended for BlueCross to have the authority to unilaterally change the commission rate for renewal policies retroactively. This oral testimony contradicted the written contract.

Interpreting the contract, the trial court ruled in line with the testimony of the former BlueCross executives, finding that BlueCross did not have authority to change commission rates retroactively. The Court of Appeals affirmed, and the Tennessee Supreme Court granted BlueCross permission to appeal. 

The Supreme Court commented that Tennessee judges have long used extrinsic evidence of the circumstances when parties entered into a contract to interpret what they intended the written words to mean.  However, the Court said, “the written words are the lodestar of contract interpretation.” Tennessee law does not allow the use of extrinsic evidence of pre-contract negotiations to justify an interpretation of the contract that contradicts the contract’s written words.

The Supreme Court found that the language in the contract between BlueCross and Individual HealthCare clearly gave BlueCross the right to unilaterally change all of the commission rates, including the renewal rates.  The Court concluded that the trial court erred by using evidence of the parties’ pre-contract negotiations to contradict the written words in their agreement.  Consequently, it reversed the trial court’s decision and held that BlueCross did not breach the contract by changing the applicable commission rate for renewal policies.

To read the unanimous opinion in Individual HealthCare Specialists, Inc. v. BlueCross BlueShield of Tennessee, Inc., authored by Justice Holly Kirby, go to the opinions section of TNCourts.gov.

 


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