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Focus Column
Business Law
By Daniel Lee Jacobson
"A page of history is worth a volume of logic." New York
Trust Co. v. Eisner, 256 U.S. 345 (1921). With these words, Justice
Oliver Wendell Holmes explained why some rules of law do not seem to
comport to the dictates of logic. Contract interpretation is an area
where history seems sometimes to have trumped logic. Yet whether brought
to us by the pages of history or by the dictates of logic, the contract
interpretation rules are vital.
Who decides the meaning of a written contract, the judge or the
jury? Factual decisions are within the province of the jury, while legal
decisions are left for the judge. Evidence Code Sections 310, 312. A
matter of fact matures into a matter of law where only one reasonable
conclusion can be reached. Dahl-Beck Electric Co. v. Rogge, 275
Cal.App.2d 893 (1969).
Some distinguish fact from law by stating that fact involves the
specific while law involves the general. Antilles Steamship Ltd. v.
Members of the Am. Hull Ins., 733 F.2d 195 (2d Cir. 1984) (Newman,
J., concurring).
Professors Arthur L. Corbin and Samuel Williston said that
interpretation of a contract is always a question of fact. 3 "Corbin on
Contracts" Section 554 (1960); 4 "Williston on Contracts" Section 616
(W. Jaeger 3d ed. 1961).
Yet the general rule, followed by California, is that decisions
regarding the intent of the parties and other matters of interpretation
of a written contract are assigned to the judge rather than to the jury.
Evidence Code Section 310; Parsons v. Bristol Dev't Co.,
62 Cal.2d 861 (1965).
While some court decisions and Section 310 state that this rule
is based on the proposition that such an interpretation is a matter of
law (see, for example, Markley v. Beagle, 66 Cal.2d 951 (1967)),
at least one state court has admitted that the rule exists in spite of
the fact that contractual interpretation "involves what might properly
be called questions of fact." Kusmark v. Montgomery Ward & Co.,
249 Cal.App.2d 585 (Cal. App. 2nd Dist. 1967).
So what is the issue of what particular words mean doing in the
hands of judges instead of the juries? Holmes' comment on the
explanatory usefulness of history is instructive.
Various scholars have concluded that, in what many would argue
is not a proud history for democratic principles, "fear of the jury has
helped shape the law in the area of interpretation [of contracts], with
the result that the law often seems confused and inconsistent with some
basic contract values." William Whitford, "The Role of the Jury (and the
Fact/Law Distinction) in the Interpretation of Written Contracts," 2001
Wisc. L. Rev. 931 (2001).
Professor Charles T. McCormick believed that common-law judges
were uneasy with the conscious thought of taking the interpretation of
contracts from juries because doing so tended to insult "the jury as a
symbol of political liberty." So, McCormick contended, the judges
disguised this taking in doctrinal rhetoric that has survived the
centuries. Charles T. McCormick, "The Parol Evidence Rule as a
Procedural Device for Control of the Jury," 41 Yale L. J. 365 (1932).
Thus, history seems to have triumphed over the simple axiomatic logic
that matters such as intent are matters of fact.
However, the development of the rule requiring that judges
interpret written contracts has brought with it an exception - juries
will decide matters of contractual interpretation when there is an
ambiguity in the contract. Loree v. Robert F. Driver Co. Inc., 87
Cal.App.3d 1032 (Cal. App. 4th Dist. 1978); Walsh v. Walsh, 18
Cal.2d 439 (1941).
Many of the things that the court (or the jury) must consider in
interpreting a contract are based on logic. For example, "[a] contract
must be so interpreted as to give effect to the mutual intention of the
parties as it existed at the time of contracting." Civil Code Section
1636. A court should look to the actual language of the contract to
derive the intention of the parties. Healy Tibbits Constr. Co. v.
Employers' Surplus Lines Ins. Co., 72 Cal.App.3d 741 (Cal. App. 1st
Dist. 1977); Hensler v. City of Los Angeles, 124 Cal.App.2d 71
(Cal. App. 2nd Dist. 1954).
In construing the meaning of the words, unless parties use those
words in a technical or other special manner, the court should use the
ordinary meaning of the words. Civil Code Section 1644; Berman v.
Dean Witter & Co. Inc., 44 Cal.App.3d 999 (Cal. App. 2nd Dist.
1975).
The ordinary sense of a word is to be found in a general
dictionary. Scott v. Continental Ins. Co., 44 Cal.App.4th 24
(Cal. App. 4th Dist. 1996).
"The language of a contract is to govern its interpretation, if
the language is clear and explicit, and does not involve an absurdity."
Civil Code Section 1638.
What if the language of a contract is not clear and explicit? Or
what if that language does involve an ambiguity? Several rules speak to
this issue.
"A contract may be explained by reference to the circumstances
under which it was made, and the matter to which it relates." Civil Code
Section 1647. "However broad may be the terms of a contract, it
extends only to those things concerning which it appears that the
parties intended to contract." Civil Code Section 1648.
"If the terms of a promise are in any respect ambiguous or
uncertain, it must be interpreted in the sense in which the promisor
believed, at the time of making it, that the promisee understood it."
Civil Code Section 1649.
However, "[t]he [civil] code provision[s] permitting the
showing of surrounding circumstances ... is applicable only where the
language used in the contract is doubtful, uncertain, or ambiguous."
Pope v. Allen, 225 Cal.App.2d 358 (Cal. App. 4th Dist. 1964).
California's liberal general parol evidence rule is noteworthy
not because of the extrinsic evidence that it keeps from admission but
because of the circumstances in which it allows such evidence to be
admitted.
"Terms set forth in a writing intended by the parties as a final
expression of their agreement with respect to such terms as are included
therein may not be contradicted by evidence of any prior agreement or of
a contemporaneous oral agreement." Code of Civil Procedure Section 1856
(a). But consistent additional terms are allowed unless the writing is
intended to be "complete and exclusive." Section 1856 (b).
Contrary to what many learned in law school, in California, a
written contract "may be explained or supplemented by course of dealing
or usage of trade or by course of performance" (Section 1856(c)),
without there being any ambiguity in the contract. Law Revision
Commission Official Comment to Code of Civil Procedure Section 1856.
Also, to the extent that the words of a contract are "explained
or supplemented by course of dealing or usage of trade or by course of
performance," the definitions resulting from such explanation or
supplementation rule over the definitions that such words might
otherwise have. Law Revision Commission Official Comment to Code of
Civil Procedure Section 1856.
The parol evidence rule contained in Commercial Code Section
2202 is similar in its liberality.
To the surprise of many attorneys who have tried to find the
best evidence rule lately, the Legislature abolished the rule in 1998.
Law Revision Commission Comments to Evidence Code Section 1521. The
Legislature replaced the best evidence rule with what is current
Evidence Code 1521, known as the "Secondary Evidence Rule."
Under the secondary evidence rule, "[t]he content of a writing
may be proved by otherwise admissible secondary evidence." Section
1521(a).
However, the court must exclude such evidence if "[a] genuine
dispute exists concerning material terms of the writing and justice
requires the exclusion[; or] [a]dmission of the secondary evidence would
be unfair." Sections 1521(a)(1), (a)(2).
The general statute of frauds is codified at Civil Code Section
1624. That section requires contracts covering certain subjects, such as
the sale of land, to be evidenced by a writing. The combination of the
statute of frauds and the parol evidence rule is powerful when applied
to material terms of a contract. When the statute of frauds is invoked,
recovery may not be based on parol proof of material terms omitted from
the written memorandum. Lombardo v. Santa Monica Young Men's
Christian Ass'n, 169 Cal.App.3d 529 (Cal. App. 2nd Dist. 1985);
Ontario Downs v. Lauppe, 192 Cal.App.2d 697 (Cal. App. 3rd Dist.
1961); and Burge v. Krug, 160 Cal.App.2d 201 (Cal. App. 2nd Dist.
1958).
The "[p]urpose of the statue of frauds is to prevent fraud and
perjury with respect to certain agreements by requiring for enforcement
the more reliable evidence of some writing signed by the party to be
charged." Sousa v. First Cal. Co., 101 Cal.App.2d 533 (Cal. App.
1st Dist. 1950).
But one wonders whether this logical explanation should be
tempered by the history documented by McCormick and others. If a goal of
the framers of the statute of frauds was to keep the interpretation of
certain types of contracts from juries, then those framers have been
successful.
In order to be enforced, the types of contracts listed in the
statute of frauds must be in writing. Unless a written contract is
ambiguous, the court, rather than the jury, will interpret it.
Therefore, unless there is an ambiguity, the court, not the jury, will
interpret a contract covering a subject listed in the statute of frauds.
These rules of interpretation must work together in a given
case. Recall that Whitford said that the historical basis for some of
the rules of interpretation has resulted in the law of contracts often
seeming "confused and inconsistent with some basic contract values."
But knowledge of the uneven origins of those rules is
empowering. It allows for a deeper understanding of those rules and
greater adeptness in their implementation.
Daniel Lee Jacobson is an attorney with Veatch, Carlson, Grogan & Nelson
in Los Angeles and an adjunct professor at Pacific West College of Law. |