Important Recent Tennessee Case on Contract Interpretation and the Parol Evidence Rule

In early 2019, the Supreme Court of Tennessee issued an opinion that can fairly be described as one of the most important Tennessee cases—if not the most important case—for contemporary commercial litigation lawyers on contract interpretation and the parol evidence rule.

The opinion came in Individual Healthcare Specialists, Inc. v. BlueCross BlueShield of Tennessee, Inc.

In this case, the Court undertook the difficult task of analyzing and reconciling over a hundred years of Tennessee case law on these subjects, much of which was inconsistent on critical points. While the opinion largely struck a middle ground—leaving room for parties on both sides of disputes to cite language favorable to them—it provides far more clarity than what came before.

It also placed Tennessee law closer to the middle of the two competing theories of contract interpretation: the contextual approach and the textual approach.

Under the contextual approach, courts may look beyond the four corners of a written contract to determine the parties’ intent, even when the contract language is unambiguous.

By contrast, the textual approach prohibits courts from considering extrinsic evidence in many circumstances, particularly when the parties’ contract is unambiguous.

All of the facts of Individual Healthcare Specialists are not necessary to understand its significance, but here is the essence:

• The plaintiff, an insurance agency that sold BlueCross BlueShield (“BCBS”) policies for a commission, alleged that BCBS had underpaid it.

• The parties’ main agreement, entered into in 1999, unambiguously allowed BCBS to unilaterally change commission rates.

After the agreement was signed, BCBS issued new commission schedules over time. These schedules provided that if BCBS changed the commission rate, the rate in effect when a policy was sold would continue to govern.

In May 2011, BCBS issued a new commission schedule that significantly reduced rates and did not contain the language protecting the rates applicable at the time of sale.

The plaintiff offered testimony from three former BCBS employees involved in contract negotiations. They testified that the 1999 agreement was understood by both parties to prohibit BCBS from lowering commission rates on already-sold policies.

The trial court admitted this testimony, relying on a California Supreme Court decision that followed the contextual approach. The Court of Appeals affirmed. BCBS appealed.

The Tennessee Supreme Court reversed.

The Court noted that Tennessee precedent had examples of both contextual and textual approaches, sometimes mixed together. It held that Tennessee would no longer follow either approach exclusively. Instead, courts must apply a flexible approach that permits consideration of both the written words and the surrounding context.

Crucially, the Court emphasized that the written words of the contract “remain as the lodestar of contract interpretation.”

In other words, while context may be considered, the text governs when it clearly expresses the parties’ intent.

On the parol evidence rule, the Court provided a clearer, brighter line. It held that because the written agreement unambiguously allowed BCBS to change commission rates without the plaintiff’s consent, the testimony of the former employees could not be admitted. The reason that it could not be considered was because it directly contradicted the terms of the written agreement between BCBS and the Plaintiff.

The Individual Healthcare Specialists will be cited and discussed in many cases, for many years to come, by many Tennessee commercial litigation lawyers.