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Saturday, November 13, 2004

Cases—Interpretation—"Sole discretion" clause ambiguous

Texasflag A "sole discretion" termination clause in an employment agreement was ambiguous under Texas law, says the U.S. Court of Appeals for the Fifth Circuit, and it was error to prevent an employee from introducing parol evidence on what it means.

Sixto Rodriguez, the former managing director of Spanish operations for Dell Computer, was terminated after the company discovered a number of irregularities, including what appeared to be forged contracts granting lavish golden parachutes to friends. The parties negotiated a four page "Separation Agreement" under which Dell agreed to provide certain benefits, and which contained the following clause:

Dell may terminate these Transition Agreements with immediate effect . . . if Dell has determined, in Dell's sole discretion, that your conduct is creating, or has created, a negative impact on Dell or on Dell's reputation in the Spanish market and Dell has provided you with written notice of such negative impact.

Dell subsequently terminated the agreement and sued Rodriguez for breach of contract.  It won a $3.5 million jury verdict.  Rodriguez appealed, arguing (in part) that Dell’s action was based on actions taken while Rodriguez was still an employee. He proffered parol evidence to show that the clause was supposed to refer only to new defalcations that arose after it was signed.

The district court held that "is creating, or has created" unambiguously covered conduct before ("has created") and after ("is creating") the time the agreement was signed:

Rodriguez argues that the Separation Agreement's sole discretion clause only applies to his performance as a consultant and not his previous conduct as a Dell employee.  Unfortunately for Rodriguez, this theory contradicts the plain language of the agreement.  The Separation Agreement covers past behavior when it states that if Rodriguez' conduct "is creating, or has created, a negative impact on Dell," Dell may terminate the agreement and withhold any stock that was going to be released pursuant to the agreement.  Rodriguez attempts to overcome the plain language of the Separation Agreement by offering parol evidence including deposition testimony and email correspondence.  The Court, however, cannot look to parol evidence for the purpose of creating ambiguity. . . .  The Court, therefore, finds that the plain language of the contract allowed Dell to look to Rodriguez' past conduct as a Dell employee in determining whether he had created a negative impact on Dell.

Not so, said Judge Weiner.  The term was ambiguous, and therefore Rodriguez should have had the opportunity to introduce parol evidence.

Dell Computer Corp. v. Rodriguez, 2004 U.S. App. LEXIS 23393 (5th Cir. Nov. 8, 2004)

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