Court Rules That Contract Provision

Court Rules That Contract Provision In Real Estate Purchase Contract Prohibited Introduction of Evidence to Assist in Determining the Meaning of the Contract’s Terms

 In Hot Rods, LLC v. Northrop Grumman Systems Corp., a California appellate court excluded evidence to determine contract terms in real property purchase and sale agreement. In Hot Rods, the plaintiff agreed to buy certain real property in Anaheim. For many years prior to the purchase, the defendant had operated a manufacturing facility at the property, which caused concerns about environmental contamination and the need for cleanup. The purchase agreement contained several provisions addressing the environmental issues, and the parties engaged in extensive negotiations regarding these terms. The purchase agreement also contained an integration clause, which stated that the agreement contained the entire understanding between the parties and “that no extrinsic evidence whatsoever may be introduced in any judicial proceedings involving the Agreement.” Approximately fourteen (14) years after the purchase, the plaintiff filed a complaint with multiple causes of action all of which were related to the purchase of the property and the purchase agreement. As required by the agreement, the parties stipulated to have the case tried to a referee. Prior to trial, the defendant filed a motion in limine to exclude any evidence regarding the meaning of the purchase agreement. The referee denied the motion. Accordingly, at trial, the plaintiff introduced substantial testimony regarding the parties’ negotiations, drafts of the purchase agreement, and the parties’ conduct after execution of the agreement. All of this evidence was intended to assist the referee in understanding the meaning of the agreement’s provisions. The referee awarded plaintiff in excess of $3.3 million, comprised of $1.1 million in damages, $1.8 million in attorneys’ fees as the prevailing party, and a few other miscellaneous items. Defendant appealed the judgment.

 The court of appeal ruled that plaintiff should not have been allowed to introduce extrinsic evidence to assist in interpretation of the agreement’s terms. The court found that the broadly-worded integration clause demonstrated the parties’ intent “to bypass the general rule that consistent extrinsic evidence is admissible to explain the meaning of a contractual provision.” The parties intended that “completely unambiguous contractual language would be enforced” solely according to the words used.

Despite finding that the referee was mistaken in allowing plaintiff to introduce extrinsic evidence concerning interpretation of the agreement’s indemnity clause, the appellate court found that the indemnity provision was broadly worded and that the proper interpretation of the provision was that it included both first and third party claims. Thus, the court of appeal affirmed this aspect of the judgment in favor of plaintiff.

The court of appeal, however, next held that the referee’s award of damages was not reasonably related to the evidence. The court of appeal found that the evidence supported only an award to plaintiff in the amount of $117,050. With this smaller damage amount, the court also vacated the attorneys’ fees award and remanded that issue to the trial court for reconsideration of the prevailing party determination.

This case illustrates several principles. Contracting parties need to understand the effect of an integration clause. If your contract has an integration clause, then ensure the unambiguous language of the contract’s terms spell out the parties’ agreement because there might not be an  opportunity to invoke extrinsic evidence to explain the provisions. Also, parties to a civil court action, especially plaintiffs, should understand that the judgment is not final until after the court of appeal has ruled. The plaintiff here saw a judgment for over $3 million get reduced to $117,050 with the possibility of having to pay the other side’s attorneys’ fees depending upon the ruling of which side is held to be the prevailing party.

Mark V. Isola, Attorney