The rule that oral evidence cannot be used to vary the terms of an unambiguous written contract prevents a client from contradicting the terms of an hourly-rate engagement letter with testimonial evidence that the lawyer agreed to an unwritten, maximum flat fee. Although an exception to the parol evidence rule permits evidence to show collateral, contemporaneous agreements that are consistent with the underlying agreement, the exception did not apply here because such a maximum flat fee “changes a basic premise of the [hourly rate] fee agreement” and “differs materially from an agreement to pay fees billed on an hourly basis with no stated maximum and is, therefore, not consistent with [an hourly rate] fee agreement.”

In Haden v. Sacks, No. 01-01-00200-CV, 2006 Tex. App. Lexis 8008 (Tex. App.–Houston [1st Dist.] September 7, 2006), Haden hired Sacks to brief an appeal of an adverse judgment in the Fifth Circuit. Haden signed an engagement letter setting forth an hourly fee basis for calculating the fee and sent a $5,000 retainer. The parties began their working relationship through a written engagement letter sent from the law firm and dated August 4, 1997. The letter, in its entirety, states as follows:

I am honored to represent you with regard to the above-referenced matter. At this point, you have requested that I assist with the writing of the Appellant’s Brief and any reply. If oral arguments are granted by the Fifth Circuit, a decision will have to be made on who should argue the case.

My normal rate is $300.00 per hour, but my rate for this particular matter will be $200.00 per hour. The other lawyers in my firm range from $150.00 to $200.00 per hour, and paralegals range from $50.00 to $100.00 per hour. You are responsible for all costs and expenses in the case as incurred. These expenses include, but are not limited to, copies; binding; fax transmissions; travel; lodging; parking; etc.

Please submit a $10,000 retainer to be applied to fees and expenses.

Please sign in the space provided below and return the original to my office as soon as possible.

Thank you for your cooperation and attention.

Sacks’s signature appears at the close of the letter. Below Sacks’s signature is the statement, “Your signature below indicates acceptance of the terms of this fee agreement.” The face of this letter shows that, on endorsing it, individually and as president of the company and returning it to the law firm, Haden had altered the original $10,000 amount proposed by striking through that amount, superscripting the amount of $5,000 over the original typewritten numerals in handwriting, and adding his initials beside that change.

Sacks did the brief. The law firm finalized its invoice for work on the brief at a total due of $37,259.71. The invoice reflected 28 hours’ work by Sacks, 161.75 hours’ work by an associate, and 37 hours’ work by a paralegal, as well as expenses and disbursements.

After the appellees’ brief was filed, Sacks prepared a reply brief. The law firm then sent an invoice reflecting an outstanding debt of $32,259.71 for the initial brief. The total was the amount due after the $5,000 retainer was credited against the original debt of $37,259.71. That invoice also included an additional $3,045 fee for work done by the law firm to prepare the reply brief. The total outstanding balance shown due on that invoice was $35,304.71. The company paid $5,000 to the law firm and made no further payments. The appeal was unsuccessful.

Sacks sued to recover the fee. Haden argued that summary judgment was improper because Sacks, according to Haden, had agreed to a “maximum flat fee” of $10,000.

The law firm moved for summary judgment based on its August 4, 1997 engagement letter and on Haden’s and the company’s having endorsed the letter and supplied the $5,000 retainer required by that letter. The law firm argued that these documents established that Haden and the company had agreed to pay the law firm on an hourly basis for services rendered in connection with the Fifth Circuit appeal and that (1) the law firm had a valid contract with the company, (2) the law firm had performed under the contract, and (3) the company breached the contract, which resulted in damages. The law firm provided documentary evidence showing that the firm was paid an agreed $5,000 retainer, completed the work, sent an invoice, filed a reply brief, sent another invoice, received another $5,000 toward the unpaid balance, formally demanded the outstanding balance of $30,314.38, and filed suit when the balance remained unpaid.

Haden and the company challenged the law firm’s right to summary judgment based in part on an affidavit by Haden. In the affidavit, Haden stated that, in entering into the agreement by endorsing the law firm’s engagement letter and paying the $5,000 retainer fee, he relied on Sacks’ “representation that the work would cost as much as $10,000.” The law firm rejected that assertion as untenable, in part by emphasizing that Haden and the company had already received the firm’s initial invoice for $37,259.71 before authorizing the law firm to file a reply brief in the Fifth Circuit case.

In response, Haden averred that he had never agreed to pay more than $10,000 for the law firm’s work. In addition, Haden and the company offered evidentiary exhibits that included the correspondence by which the law firm forwarded its initial, $37,259.71 invoice for the work on Haden’s and the predecessor company’s principal brief. In that correspondence, Sacks acknowledged that the work on the brief was “a little more expensive than anticipated” because “putting together winning arguments took considerable [sic] more time than I anticipated after giving the cursory review of the initial documents.” In the same letter, Sacks offered to reduce the outstanding balance by approximately $5,000 if the invoice were paid in full within 30 days.

The law firm responded by contending that Haden’s and the company’s summary judgment evidence, in particular, Haden’s affidavit, contravened the parol evidence rule and was therefore inadmissible to vary the terms of the written contract, which had been accepted in full, on payment of the $5,000 retainer fee.

The trial court entered summary judgment in favor of Sacks. Haden appealed.

Whether the Parties’ Minds Met

Parties form a binding contract when the following elements are present: (1) an offer, (2) an acceptance in strict compliance with the terms of the offer, (3) a meeting of the minds, (4) each party’s consent to the terms, and (5) execution and delivery of the contract with the intent that it be mutual and binding. Am. Nat’l Ins. Co. v. Warnock, 114 S.W.2d 1161, 1164 (Tex. 1938); Prime Prods., Inc. v. S.S.I. Plastics, Inc., 97 S.W.3d 631, 636 (Tex. App.–Houston [1st Dist.] 2002, pet. denied).

To be enforceable, the contract must be sufficiently certain to enable a court to determine the rights and responsibilities of the respective parties. T.O. Stanley Boot Co. v. Bank of El Paso, 847 S.W.2d 218, 221 (Tex. 1992); America’s Favorite Chicken v. Samaras, 929 S.W.2d 617, 622 (Tex. App.–San Antonio 1996, writ denied). Under settled principles of contract interpretation, a court construes a contract as a matter of law to determine whether it can be enforced as written without resorting to parol evidence. J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 229 (Tex. 2003). The court’s primary concern is to ascertain the intent of the parties, as expressed in the contract instrument. Id. (citing R.P. Enters. v. LaGuarta, Gavrel & Kirk, Inc., 596 S.W.2d 517, 518 (Tex. 1980)).

The Law of Parol Evidence

The law firm contended that Haden and the company could not assert their flat, or maximum $10,000 fee theory because that theory altered the acknowledged terms of the law firm’s engagement-letter contract, in violation of the parol evidence rule.

The parol evidence rule is a rule of substantive law. Hubacek v. Ennis State Bank, 159 Tex. 166, 317 S.W.2d 30, 31 (Tex. 1958); Gonzalez v. United Bd. of Carpenters & Joiners, 93 S.W.3d 208, 211 (Tex. App.–Houston [14th Dist.] 2002, no pet.); Piper, Stiles & Ladd v. Fid. & Dep. Co., 435 S.W.2d 934, 940 (Tex. Civ. App.–Houston [1st Dist.] 1968, writ ref’d n.r.e.). When parties reduce an agreement to writing, the law of parol evidence presumes, in the absence of fraud, accident, or mistake, that any prior or contemporaneous oral or written agreements merged into the written agreement and, therefore, that any provisions not set out in the writing were either abandoned before execution of the agreement or, alternatively, were never made and are thus excluded from consideration in interpreting the written agreement. See Hubacek, 817 S.W.2d at 31; Smith v. Smith, 794 S.W.2d 823, 827 (Tex. App.–Dallas 1990, no writ); Muhm v. Davis, 580 S.W.2d 98, 101 (Tex. Civ. App.–Houston [1st Dist.] 1979, writ ref’d n.r.e.).

Evidence that violates the parol evidence rule has no legal effect and “merely constitutes proof of facts that are immaterial and inoperative.” Piper, Stiles & Ladd, 435 S.W.2d at 940. Because all prior negotiations and agreements are presumed merged into the final agreement, parol evidence is not admissible to vary, alter, or supplement the terms of an otherwise unambiguous contract except to show (1) that the contract was induced by fraud, accident, or mistake, (2) that an agreement was to become effective only upon certain contingencies, or (3) in the case of ambiguity, that the parties’ true intentions differ from those expressed in the agreement. See Messer v. Johnson, 422 S.W.2d 908, 912 (Tex. 1968); Gonzalez, 93 S.W.3d at 211; Litton v. Hanley, 823 S.W.2d 428, 430 (Tex. App.–Houston [1st Dist.] 1993, no writ).

Parol evidence may also be admissible, under an additional exception, to show collateral, contemporaneous agreements that are consistent with the underlying agreement to be construed. See Hubacek, 317 S.W.2d at 31; see also Transit Enter., Inc. v. Addicks Tire & Auto Supply, Inc., 725 S.W.2d 459, 461 (Tex. App.–Houston [1st Dist.] 1987, no writ) (applying exception for collateral, consistent, contemporaneous agreements); Sherrod v. Bailey, 580 S.W.2d 24, 29 (Tex. Civ. App.–Houston [1st Dist.] 1979, writ ref’d n.r.e.) (same).

But, this latter exception does not permit parol evidence that varies or contradicts either the express terms or the implied terms of the written agreement. Hubacek, 317 S.W.2d at 31; Loe v. Murphy, 611 S.W.2d 449, 451-52 (Tex. Civ. App.–Dallas 1980, writ ref’d n.r.e.); NHA, Inc. v. Jones, 500 S.W.2d 940, 944-45 (Tex. Civ. App.–Fort Worth 1973, writ ref’d n.r.e.) (both citing Hubacek).

The Court’s holding.

Haden and the company relied on the “collateral, consistent terms” exception to argue that Haden’s affidavit, which describes a separate, unwritten agreement with the law firm for a flat, maximum fee of $10,000, was admissible because Haden refers to “conditions . . . [that] are collateral to the terms of the engagement letter signed by the parties.” The Court of Appeals rejected this argument, stating that:

The terms of the August 4, 1997 engagement-letter, which Haden endorsed on August 21, 1997, both personally and on behalf of the company, show that the parties agreed to the following: (1) the law firm would represent Haden and the company in the appeal to the Fifth Circuit, (2) Haden, individually and for the company, acknowledged the law firm’s hourly rates, as well as responsibility for all disbursed expenses, and (3) Haden would pay a retainer fee of $5,000, rather than $10,000. The latter change was added by Haden’s striking through the $10,000 retainer fee proposed in the law firm’s letter, replacing that amount with a handwritten “5,000” directly above the stricken-through numbers, and initialing the change. Haden and the company proposed no further changes to the agreement.

These terms, as endorsed by Haden, thus contemplate payment of legal fees at specified hourly rates, depending on whether Sacks, “other lawyers,” or paralegals did the work on the Fifth Circuit brief. By expressly reciting hourly rates, the engagement letter contemplates hourly billing. The terms set no budget or maximum fee amount. Although the law firm initially proposed an initial payment of $10,000, that amount was to serve as a retainer fee (later changed, by agreement, to $5,000) and not the flat, maximum $10,000 fee to which Haden refers in his affidavit.

In endorsing the engagement letter, moreover, both individually and on behalf of the company, Haden proposed no limitations or changes except to reduce the proposed $10,000 retainer fee to $5,000. Similarly, Haden’s and the company’s August 21, 1997 correspondence forwarding the $5,000 retainer fee and endorsing the engagement letter proposed no additional limitations or terms.

On September 15, 1997, the law firm forwarded a letter and accompanying invoice in the amount of $37,259.71 for the work on the Fifth Circuit brief. In this letter, the law firm proposed a change in the fee agreement, specifically, to reduce the $37,259.71 owed for the brief, based on hourly fee calculations plus expenses, as contemplated by the initial fee agreement, to “a flat fee of $30,000” if Haden were to pay $25,000 ($30,000 reduced by the previously paid $5,000 retainer) within 30 days. Yet, the law firm’s offer to alter the hourly billing to a flat, maximum fee of $30,000 produced no response by Haden and the company. That offer having thus been rejected, the terms of the initial engagement letter, as endorsed by Haden, remained unchanged.

The summary judgment record thus reflects an undisputed showing of an unaltered fee agreement contemplating hourly-based fees, despite two failed opportunities to object to or alter the hourly-billing terms of that agreement. Haden and the company nonetheless claimed, in response to the law firm’s motion for summary judgment, and now contend on appeal, that the flat, or maximum, $10,000 fee agreement described in Haden’s affidavit was “collateral to” and “not inconsistent with” the initial fee agreement and, therefore, does “not vary or contradict” the terms of the initial agreement.

To the contrary, Haden’s affidavit testimony changes a basic premise of the fee agreement that he endorsed. An agreement to pay a maximum, flat fee of $10,000 differs materially from an agreement to pay fees billed on an hourly basis with no stated maximum and is, therefore, not consistent with the initial fee agreement. Rather, Haden’s post-agreement assertion that he and the law firm agreed to a flat, maximum fee of $10,000 is inconsistent with the initial fee agreement because the assertion adds material limitations that were not present in that agreement. Because Haden’s affidavit assertion adds material terms that vary the hourly billed fees contemplated by the fee agreement that he endorsed, we hold that his affidavit testimony is inadmissible because it violates the parol evidence rule and, therefore, did not defeat the law firm’s right to interlocutory summary judgment as a matter of law on its claim for breach of contract.