Alert - Contracting Parties Wishing to Avoid the Introduction of Parol Evidence Need Only Say So

May 10, 2016
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Simply put, the parol evidence rule (“PER”) states that the terms of a written agreement may not be contradicted by extrinsic evidence of a prior agreement or of a contemporaneous oral agreement.  However, the rule does allow the introduction of evidence of consistent or additional terms in order to explain the meaning of the terms of a written agreement.  
Thus the PER can be a double-edged sword: on the one hand, allowing poorly drafted agreements to attain the meaning that was intended by the parties; but on the other, potentially hurting contracting parties who draft specific contractual language intending that it only mean what is set forth in the four corners of the document. 
A recent lawsuit, however, Hot Rods, LLC v. Northrup Grumman Systems Corporation(2013) 242 Cal.App.4th 1166, has clarified that parties seeking to avoid the PER entirely can do so if that is explicitly set forth in the agreement. 
Hot Rods involved the sale of real property owned by Northrup in Anaheim, California, on which Northrup maintained a facility that manufactured aircraft components.  The parties entered into a written purchase and sale agreement (the “Agreement”), which contained detailed provisions regarding the environmental condition of the property and Northrop’s related indemnification of plaintiff.  The Agreement also contained an integration clause which stated as follows: 
This Agreement contains the entire understanding between the Parties and supersedes any prior understanding between the Parties and supersedes any prior understandings or written or oral agreements between them regarding representations, agreements, arrangements or understandings, oral or written, between the Parties hereto relating to the subject matter of this Agreement which are not fully expressed in this Agreement.  The Parties further intend that this Agreement constitutes the complete and exclusive statement of its terms and that no extrinsic evidence whatsoever may be introduced in any judicial proceedings involving this Agreement.” (Emphasis added.) 
Following the sale of the property, numerous disputes arose between the parties surrounding environmental contamination at the property and the remediation efforts to remove it.  This continued for years and culminated in Hot Rods’ filing of the complaint against Northrop for breach of contract, fraud and other causes of action.  Rather than submit the matter to the court, the parties stipulated to have the matter heard by a referee. 
Prior to the trial, Northrup filed a motion in limine to exclude extrinsic evidence regarding the meaning of the Agreement.  However, the referee denied the motion and allowed Hot Rods to introduce substantial evidence regarding the preliminary negotiations between the parties, draft provisions, and evidence of the parties’ conduct after the agreement was executed.  At the conclusion of trial, the referee awarded Hot Rods approximately $3.3 million dollars in damages and the subject appeal followed. 
The Court of Appeal noted that although extrinsic evidence can be admitted to explain the meaning of the contractual language at issue, it cannot be used to contradict it or offer an inconsistent meaning.  The court found that the language, “no extrinsic evidence whatsoever may be introduced in any judicial proceedings involving this Agreement” as set forth in the integration clause of the Agreement, “permit[ted] no other interpretation.”  
Accordingly, the Appellate Court reversed the referee’s findings (which were based on the admission and review of extrinsic evidence) and ruled based solely on its interpretation of the Agreement itself.  The court affirmed the referee’s order in other respects. 
Conclusion
So what is the take-away from the court’s ruling in Hot Rods?  Well, the goal of drafting an agreement is to specifically and accurately set forth the terms on which the parties agree. However, the decision whether to explicitly preclude the application of the PER is a complicated one and could depend on the circumstances surrounding the agreement in question.  On the one hand, if sophisticated contracting parties include language in their agreements which explicitly precludes the introduction of extrinsic evidence, such as in Hot Rods, it reduces or eliminates the risk that extrinsic evidence could result in unintended meaning imputed to carefully drafted contract terms.  
On the other hand, the PER allows extrinsic evidence in order to clarify the terms of an agreement if it is not carefully drafted.  If the language excluding all extrinsic evidence is included in an agreement, the parties thereto run the risk that the court is unable to interpret ambiguous terms, or interprets them in unanticipated and unintended ways.

Authored by:
Neil T. Medeiros, Esq.
T: (925) 944-9700
nmedeiros@bpbsllp.com
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