Memo

To: Justice Elia

From: Derek Palmer
Re: Parol Evidence and Ambiguity

Parol Evidence Overview

Source of the Rule:

The parol evidence rule in California is determined by Civil Procedure Code

section 1856. The first section of this statute reads:

(a) 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 Civ. Proc., § 1856

Determining Integration:

The court determines if a writing is intended to be a final expression of the

agreement with respect to its terms. (Civ. Proc. Code, § 1856 subd.(d).) To determine if

an agreement is fully integrated, a court must ask if the parties “intended their writing to

serve as the exclusive embodiment of their agreement.” (Masterson v. Sine (1968) 68

Cal.2d 222, 225.) The court may look at the document itself, specifically for any

language that would show that the parties had an “intention to nullify antecedent

understandings or agreements.” (Id.) However, these understandings or agreements

themselves must be examined to determine if the parties intended that they be “included

in, excluded from, or otherwise affected by the writing.” (Id.) Finally, the court may look

at the circumstances at the time of the writing to help determine integration. (Id.)

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 The court is also responsible for determining if a writing is intended to be a

complete and exclusive statement of the terms. (Code Civ. Proc., § 1856 subd.(d).) An

integrated writing “may be explained or supplemented by evidence of consistent

additional terms unless the writing is intended also as a complete and exclusive statement

of the terms of the agreement.” (Code Civ. Proc., § 1856 subd.(b).) Where a writing is

integrated, evidence such as a “prior or contemporaneous collateral oral agreement”

concerning the same subject matter may sometimes be admitted in evidence, but only so

long as it “is not inconsistent with the terms of the integration.” (Alling v. Universal Mfg.

Corp. (1992) 5 Cal. App. 4th 1412, 1435).

Finally, the parol evidence rule in California does not exclude any evidence of the

circumstances under which the agreement was made or to which it pertains, so long as

that evidence is used “to explain an extrinsic ambiguity or otherwise interpret the terms

of the agreement.” (Code Civ. Proc., § 1856 subd.(g).)

Ambiguity

Two-Step Process:

For establishing and interpreting ambiguity in a contract, there is a two step

process in California. In the first step, “the trial court must provisionally receive any

proffered extrinsic evidence which is relevant to show whether the contract is reasonably

susceptible of a particular meaning,” using this evidence to determine the presence or

absence of ambiguity. (Wolf v. Superior Court (2004) 114 Cal. App. 4th 1343, 1350.)

Then, if the court determines that the language is “‘reasonably susceptible’ to the

interpretation urged, the extrinsic evidence is then admitted to aid in the second step—

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interpreting the contract.” (Id. at 1351.) However, while a court can admit parol evidence

to explain an extrinsic ambiguity, courts should not “strain to create an ambiguity where

none exists.” (Waller v. Truck Ins. Exch., Inc. (1995) 11 Cal. 4th 1, 19). To summarize,

the following has repeatedly been held as the appropriate test for determining if parol

evidence should be admitted.

The test of admissibility of extrinsic evidence to explain the meaning of a

written instrument is not whether it appears to the court to be plain and
unambiguous on its face, but whether the offered evidence is relevant to
prove a meaning to which the language of the instrument is reasonably
susceptible.
(Pacific Gas & Elec. Co. v. G. W. Thomas Drayage & Rigging Co. (1968)
69 Cal.2d 33, 37 (emphasis added).)

Therefore, under California law, extrinsic evidence is always relevant to help

explain what a contract means, but not to vary the written terms. (Id at 40). While

extrinsic evidence cannot be used to supply an essential term, it can be used to explain

essential terms that were understood by the parties at the time of the writing but were not

expressly stated. (Consolidated Theatres, Inc. v. Theatrical Stage Emp. Union, Local 16

(1968) 69 Cal.2d 713, 725.)

Ambiguity Defined:

To determine ambiguity, California courts must attempt to apply the language

being disputed, specifically, “[a]n ambiguity arises when language is reasonably

susceptible of more than one application to material facts.” (Dore v. Arnold Worldwide,

Inc. (2006) 39 Cal.4th 384, 391.) Ambiguity can be either patent or latent, depending on

the source of the ambiguity.

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 Patent ambiguity is an ambiguity that is apparent in contractual language.

(Alameda County Flood Control v. Department of Water Resources (2013) 213

Cal.App.4th 1163, 1180.) Patent ambiguity is not present when the “language [of a

writing] is clear and explicit, and does not involve an absurdity.” (Id.) Finally, in

determining the presence of a patent ambiguity, the court must not “adopt a strained or

absurd interpretation in order to create an ambiguity where none exists.” (Id.)

Alternatively, a document is possesses a latent ambiguity when “it appears clear

on its face, but parol evidence shows it is reasonably susceptible to two or more

interpretations.” (Bill Signs Trucking, LLC v. Signs Family Ltd. Partnership (2007) 157

Cal.App.4th 1515, 1521.) For example, a latent ambiguity arises when considering a

document and “there are two or more persons or things exactly measuring up to the

description and conditions” to which a term could apply. (In re Estate of Russell (1968)

69 Cal.2d 200, 207.) Likewise, if a document contains terms that do not exactly match

any one person or thing, but two or more persons or things partially match the terms,

there is a latent ambiguity. (Id.)

Determining Admissibility of Evidence to Resolve Ambiguity:

The court in Drayage required the “preliminary consideration of all credible

evidence…so that the court can place itself in the same situation in which the parties

found themselves at the time of contracting.” (Drayage, supra, 69 Cal.2d at 39.) As

stated earlier, if a court decides, after considering this evidence, that the language is

“susceptible of either one of the two interpretations contended for,” then extrinsic

evidence is admissible to prove either of those meanings. (Id at 40.)

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 Once the extrinsic evidence has been admitted, the ambiguity must be resolved

using this evidence. When determining which proffered meaning should be accepted, if

the interpretation turns on “the credibility of conflict extrinsic evidence,” the trier of fact

must determine the meaning of the ambiguous language. (Benach v. County of Los

Angeles (2007) 149 Cal.App.4th 836, 847.)

Role of the Jury

Traditionally, the interpretation of a contract is “a judicial function to be exercised

according to the generally accepted canons of interpretation.” (Parsons v. Bristol

Development Co. (1965) 62 Cal.2d 861, 865.) However, juries are not prohibited from

interpreting contracts. (City of Hope Nat. Medical Center v. Genentech, Inc. (2008) 43

Cal.4th 375, 395.) Interpretation should be left solely to the judge “when there is no

conflict in the extrinsic evidence.” (Id.) Conflict in the extrinsic evidence includes

conflicting testimony concerning interpretation, as this gives rise to a question of

credibility. (Warner Constr. Corp. v. City of Los Angeles (1970) 2 Cal.3d 285, 291.)

Therefore, when “ascertaining the intent of the parties at the time the contract was

executed depends on the credibility of extrinsic evidence,” it may properly be the role of

the jury to determine credibility and the final interpretation of the contract. (City of Hope,

supra, 43 Cal 4th at 156.)

Standard of Review

It is “solely a judicial function to interpret a written instrument unless the

interpretation turns upon the credibility of extrinsic evidence.” (Parsons, supra, 62

Cal.2d at 865.) Therefore, when “the existence of liability depends upon the

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interpretation of written instruments in the light of uncontradicted extrinsic evidence, the

question is properly one of law for [the courts] determination.” (U. S. Leasing Corp. v.

duPont (1968) 69 Cal.2d 275, 290.) Additionally, when a contract provision is interpreted

without the aid of extrinsic evidence, an appellate court is “not bound by such

construction [of the trial court] and the interpretation of the clause is a question of law for

[the reviewing] court.” (Price v. Shell Oil Co. (1970) 2 Cal.3d 245, 256.)

In contrast, “if the construction of a document turns on the resolution of

conflicting extrinsic evidence, the trial court's [or the jury’s] interpretation will be

followed if supported by substantial evidence. (Glendale City Employees' Assn., Inc. v.

City of Glendale (1975) 15 Cal.3d 328, 340; see City of Hope, supra, 43 Cal 4th at 156.)

To overturn the interpretation of a trial court, at least one of the following two situations

must occur: extrinsic evidence must conflict “with any interpretation to which the

instrument is reasonably susceptible,” or the extrinsic evidence must not provide

“substantial support” for the trial court’s interpretation. (Id.)