Now retired California Court of Appeal Justice John Racanelli once complained that the parol evidence rule was in “a shambles in this state,” and blamed the California Supreme Court’s opinion in Pacific Gas & Electric Co. v. G.W. Thomas Drayage & Rigging Co., 69 Cal.2d 33 (1968). So did 9th U.S. Circuit Court of Appeals Judge Alex Kozinski, who accused PG&E and its progeny of casting “a long shadow of uncertainty over all transactions negotiated and executed under the law” of California. Trident Center v. Connecticut General Life Ins. Co., 847 F.2d 564, 569 (9th Cir. 1988).
In a series of more recent cases, however, several intermediate appellate courts have begun to clarify the rule. In the most recent, Roddenberry v. Roddenberry, 44 Cal.App.4th 634 (1996), the Court of Appeal reaffirmed a two-step analysis that actually makes the rule workable.
Before 1968, the parol evidence rule was easy to apply because California followed the traditional plain-meaning rule and held that if no ambiguity or uncertainty was asserted and a writing was clear on its face, parol evidence was inadmissible to interpret contract language. But courts later found that a rote invocation of the plain-meaning rule would sometimes yield undesirable results, and that even the plainest language was not immutable. A series of exceptions to the plain-meaning rule thus developed, and it became more and more difficult to determine when the general rule barring the introduction of parol evidence might apply. See 2 Witkin, California Evidence, Sections 982–983.
The first significant inroad appeared in Masterson v. Sine, 68 Cal.2d 222 (1968), where the court observed that it is “impossible” for a writing to be “wholly and intrinsically self-determinative of the parties’ intent.” The court considered the policies underlying the parol evidence rule — that written evidence is more accurate than human memory, and the potential for fraud by interested witnesses — but found that “[e]vidence of oral collateral agreements should be excluded only when the fact finder is likely to be misled.” Thus, the court held that an oral collateral agreement may be proven if the parties might naturally have made it as a separate agreement.
Later that same year, the bottom dropped out when the Supreme Court issued PG&E. Because contractual obligations flow not from words, but from intentions, courts must consider any extrinsic evidence that assists in determining the parties’ intentions — as long as the language is “reasonably susceptible” to an interpretation other than its plain meaning.
PG&E was followed by Delta Dynamics Inc. v. Arioto, 69 Cal.2d 525 (1968), where the issue was whether the parties intended termination to be the only remedy for breach of contract. The contract provided: “Should Pixey fail to distribute … the minimum number of devices … [the] agreement shall be subject to termination … In the event of breach the party prevailing in any action for damages … shall be entitled to reasonable attorney fees.”
When Pixey failed to meet its minimum, the other party sued. Although the contract specifically mentioned an action for damages, Pixey offered extrinsic evidence that the exclusive remedy was termination. The trial court rejected the evidence. Citing PG&E, the Supreme Court reversed because the contract was “fairly susceptible” to Pixey’s interpretation.
This ruling provoked a dissent from Justice Stanley Mosk warning that the “trend” started by Masterson and PG&E was “ominous.” Given two experienced businessmen dealing at arm’s length, both represented by competent counsel, it had become virtually impossible to draft a written contract that would produce predictable results in court. The written word, heretofore deemed immutable, was now subject to alteration by self-serving recitals based upon fading memories of antecedent events.
The more restrained and deliberate approach Influenced the 'Roddenberry' court.
This warning has not been ignored, and cases from the past few years suggest that the more extreme consequences of PG&E may be a dead letter. One of the most significant is Banco do Brasil S.A. v. Latian Inc., 234 Cal.App.3d 973 (1991), where borrowers claimed that in addition to their written loan agreement, the bank had orally promised to extend a credit line. Even though the agreement contained an express integration clause, the trial judge allowed parol evidence of this alleged oral agreement.
But the Court of Appeal reversed, holding that where the claimed oral agreement directly contradicts the written agreement, the parol evidence rule bars the proffered evidence. In reaching this result, the court listed four questions, all of which must be answered affirmatively before admitting parol evidence: Does the written agreement appear complete on its face, or is there an integration clause? Does the alleged oral agreement directly contradict the written instrument? Would the oral agreement naturally have been included in the written instrument? Would evidence of the oral agreement be likely to mislead the trier of fact?
In the year following Banco do Brasil, two other appellate decisions broke with PG&E by dividing the parol evidence question into two steps. First, the extrinsic evidence is examined to determine whether the contract’s language is reasonably susceptible to the interpretation a party urges. Then evidence is considered to determine what the parties intended.
The two courts had slightly different views of the first step. One said that “the court provisionally receives” the extrinsic evidence, allowing it to be admitted in the second step only if the proposed interpretation is reasonable. Winet v. Price, 4 Cal.App.4th 1159 (1992). The other held that the evidence can be admitted in the first step, but only to show that the written language is reasonably susceptible to the proposed interpretation. Casa Herrera Inc. v. Beydoun, 9 Cal.App.4th 373 (1992). Whether provisionally received or admitted for a limited purpose, however, the evidence could not be used to create an ambiguity.
This more restrained and deliberate approach influenced the Roddenberry court. The case involved a dispute between two former wives of the late Gene Roddenberry, creator of the science-fiction show Star Trek. As part of a 1969 divorce settlement agreement, Roddenberry’s first wife was allocated a “one-half interest in all future profit participation income from ‘Star Trek.’” The question was, what exactly is “Star Trek”?
When the profit-sharing provision was written, “Star Trek” was a television series that had aired from 1966 to 1969. Later, it became incredibly profitable, and the first Mrs. Roddenberry contended that “Star Trek” included subsequent motion pictures, later television series and other merchandise. Because the term “Star Trek” was undefined, the trial court allowed extrinsic evidence. But then the court entered what the Court of Appeal called “a split and inconsistent decision” by finding on the one hand that she was not entitled to film and merchandise profits, and on the other that she was entitled to profits from television spin-offs.
The Court of Appeal followed the two-step parol evidence analysis. Finding the term “Star Trek” reasonably susceptible to different meanings, it held parol evidence was properly received. Then the court emphasized that determining contractual intent depends on evidence bearing directly on what the parties actually intended, not merely theoretical possibilities.
When the 1969 contract terms were being negotiated, the only “Star Trek” property then in existence was the original television series and a debt of $3 million. There was no evidence that the parties ever discussed future projects.
Roddenberry is thus an example of the middle ground between the stringency of the plain-meaning rule and PG&E’s free-for-all. Parol evidence is admitted only after a finding that the contract language is ambiguous — not to create an alternative meaning or contradict the written word. But Roddenberry was not a complete return to the earlier rule.
From Roddenberry and other recent cases comes a clearer picture. Where there is a need to interpret a word or term of a written instrument, courts should follow the two-step approach and admit evidence only if the term is reasonably susceptible to the proposed meaning. Where there is a separate understanding about terms not embodied in the written contract itself, courts should apply the four-part test from Banco do Brasil and admit the evidence only if all four questions are answered in the affirmative.
Reprinted with permission from Daily Journal.
