Thursday, December 31, 2015

Ferdinand de Saussure v. The Super-Duper Integration Clause

Hot Rods, Inc. v. Northrup Grumman Sys. Corp., No. G049956 (D4d3 Dec. 7, 2105)

This is an appeal of a real estate dispute decided by reference under the so-called rent-a-judge procedure in Code of Civil Procedure § 638, et seq. Not much to see here procedurally. There is an interesting parol evidence issue, however. Although that’s technically an issue of substantive contract law, it’s procedural enough for me today.

In my limited experience drafting contracts, I mostly avoid choosing California law. Why? Because our parol evidence rule is crazy. See, e.g., Buehler v. Or.-Wa. Plywood Corp., 17 Cal. 3d 520, 530 (1976) (Mosk, J., dissenting) (noting that the parol evidence rule has “been reduced to a shambles in this state”); Wilson Arlington Co. v. Prudential Ins. Co. of Am., 912 F.2d 366, 370 (9th Cir. 1990) (suggesting that the California Supreme Court “cut the life out of” the parol evidence rule).

It all starts back in summer of ’68, when Justice Traynor wrote a 6-1 majority opinion in a case called PG&E v. Thomas Drayage. To set the scene, I imagine Justice Traynor’s law clerks at the time—they had law clerks back then—reading a galley draft of Plato’s Pharmacy and discussing the indeterminacy of meaning as the vapors of the summer of love wafted down the hill into the TL from the Haight. 

So in Thomas Drayage, Justice Traynor reckons that, because words lack “absolute and constant referents,”* a California court can never decide that a contract is unambiguous based on its language alone. Instead, a court needs to at least to provisionally consider parol evidence to ascertain whether it exposes some ambiguity that might be lurking underneath from the surface of the document. The procedural upshot of this rule is that it is impossible to resolve a contract dispute under California law on a demurrer, and almost impossible to do so on summary judgment. So every contract case goes to trial, where you get a bunch of lawyers talking about what they meant. While Justice Traynor might have been right as a matter of linguistics or philosophy, and (maybe) even law, the result is not efficient at all.

The Thomas Drayage rule applies even when the contract contains a standard integration clause. See, e.g., Rosenfeld v. Abraham Joshua Heschel Day Sch., Inc., 226 Cal. App. 4th 886, 897 (2014). In this case, however, the parties went beyond the typical “this agreement supersedes all prior negotiations and agreements” stuff. They specifically stated their intent that “no extrinsic evidence whatsoever may be introduced in any judicial proceedings involving this Agreement.” Notwithstanding that provision, however, the referee in this case considered extrinsic evidence. And somewhat surprisingly, the court here reverses it for doing so. According the the Court of Appeal, the referee permitted Plaintiff to “do an end run around the integration clause itself.” The court goes on to find that the consideration of parol evidence is not a matter that would be unwaivable as required by California public policy.

It’s not all that clear to me why the Thomas Drayage rule doesn’t give rise to the same problem the court here raises—ignoring the integration clause. Cf. Trident Ctr. v. Conn. Gen. Life Ins. Co., 847 F.2d 564, 569 (9th Cir. 1988) (Under Pacific Gas, it matters not how clearly a contract is written, nor how completely it is integrated, nor how carefully it is negotiated, nor how squarely it addresses the issue before the court: the contract cannot be rendered impervious to attack by parol evidence.”). But the court here doesn’t address that. So for now there’s at least some authority that would permit the parties to select California law but contract around the parol evidence rule by adding a super-duper integration clause.

Further unclear is whether this new rule should apply only in cases decided by reference. There’s prior precedent permitting this kind of thing in arbitration, although a hallmark of arbitration is the ability to makeup whatever rules you want, so that’s not too surprising. Reference cases, in contrast, are generally conducted just like bench trials under the Codes of Civil Procedure and Evidence, like the rented judge were the real deal. See Treo @ Kettner Homeowners Ass’n v. Superior Court, 166 Cal. App. 4th 1055, 1061 (2008). So there’s no practical reason why the logic of this case wouldn’t also apply to a regular contract dispute in Superior Court.

That all said, this is a pretty big deal for three-and-a-half pages worth of discussion that is rather parsimonious in discussing the relevant law. The case was originally unpublished, but ordered published under Rule of Court 8.1105(c) upon request of a law firm on December 7. Time to petition for review (or depublication) runs through mid-January. We’ll see.

Affirmed.

*Check out footnote 2.

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