Background
After a burst pipe flooded a student dormitory at St. Edward’s University, the university retained Blackmon Mooring of Austin to mitigate the damage and rebuild portions of the dorm. The parties entered into a Reconstruction Contract providing that the university would pay Blackmon Mooring on a cost-plus basis with no guaranteed maximum price. The contract’s Scope of Work established an “estimated budgetary price” that Blackmon Mooring could “exceed” with “notice” to the university and its casualty insurer, Federal Insurance Company.
As work progressed, Blackmon Mooring notified the university and Federal that it would exceed the estimated budget, though it did not specify by how much. Neither the university nor Federal objected—both emphasized the importance of completing the work as quickly as possible. When Blackmon Mooring sought final payment in an amount far exceeding the estimated budget, St. Edward’s refused to pay the full amount invoiced.
Blackmon Mooring sued for breach of contract. The university moved for summary judgment, arguing that pre-contract negotiations and communications established that the “estimated budgetary price” was actually a “not-to-exceed” cap on its payment obligation. The trial court granted summary judgment for the university.
The Court’s Holding
The Third Court of Appeals reversed and remanded. Justice Ellis held that the trial court erred by considering parol evidence—specifically the parties’ pre-contract negotiations—to reinterpret the contract’s “estimated budgetary price” as a hard price ceiling. The written contract unambiguously characterized the number as an estimate that could be exceeded with notice, and the parol evidence rule prohibits using extrinsic evidence to contradict that plain meaning.
The court emphasized that under Texas law, the parol evidence rule is a rule of substantive law, not merely a rule of evidence. Evidence violating the rule “has no legal effect” and “cannot be considered by the court when it construes the contract, even if the evidence is admitted without objection.” Because the university’s entire summary-judgment theory depended on parol evidence transforming an estimate into a cap, the judgment could not stand.
Key Takeaways
- An “estimated budgetary price” in a cost-plus construction contract is not a price cap absent unambiguous language making it one—and pre-contract negotiations cannot transform an estimate into a maximum through parol evidence.
- The parol evidence rule is a rule of substantive contract law in Texas, not an evidentiary rule. It does not require an objection to preserve, and evidence violating it has no legal effect regardless of whether it was admitted without objection.
- Owners who want a guaranteed maximum price in cost-plus contracts must expressly state it in the written agreement—not rely on course-of-dealing or negotiation history.
- Contractors who provide notice of cost overruns as contractually required should document that notice carefully, as compliance with the notice provision may be critical to recovery.
Why It Matters
This decision is immediately relevant to Texas construction contractors and project owners negotiating cost-plus agreements. The opinion draws a bright line: if a contract labels a number as an “estimate,” Texas courts will not allow the other party to use pre-contract communications to retroactively convert that estimate into a hard cap. Owners who need a guaranteed maximum price must say so in the four corners of the written agreement.
For Texas practitioners generally, the opinion provides a forceful restatement of the parol evidence rule’s substantive-law status, including the important holding that waiver by failure to object is inapplicable. This distinction between substantive contract law and evidentiary rules of admissibility has broad implications beyond construction disputes.