Citation. 847 F.2d 564 (9th Cir. 1988)
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Brief Fact Summary.
Party A and party B entered into a loan agreement. Unambiguous language in the contract specified that party B could not pay off the loan in full within the first 12 years of its existence. Party B sought to admit certain parol evidence about the pay off provision in the loan.
Synopsis of Rule of Law.
Under California state law "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."
The Plaintiff, Trident Center (the "Plaintiff"), was a partnership formulated to construct an office building. The Defendant, Connecticut General Life Insurance Co. (the "Defendant") was an insurance company that loaned the Plaintiff $56 million to build the office building. The Defendant charged 12 ¼ % interest for a period of 15 years on the loan. The loan was secured by a deed of trust on the project. The note specifically provided that within the first twelve years, until January 1996, the Plaintiff could not repay the principal amount in part or in full. Between the 13th and 15th years, the loan could be repaid pursuant to a sliding prepayment fee. If the Plaintiff defaulted, the Defendant could accelerate the payment of the note, and add a 10% prepayment fee. Interest rates began to fall in the years after the contract was signed, and the Plaintiff sought to restructure the loan to obtain a more favorable interest rate. The Defendant refused to grant the Plaintiff's request to prepay the loan. The Plaintiff sued in state court seeking a declaration that it could repay the loan subject only to the 10% repayment fee. The case was removed to federal court and the District Court dismissed the Plaintiff's claim and found that the documents were clear and unambiguous on the issue.
Is the contract ambiguous?
• Is parol evidence admissible even if the contract at issue is unambiguous?
No. The court first observes that the language in the contract not allowing the Plaintiff to prepay the loan until January 1996 was clear and unambiguous. The court refused to recognize that the clause referring to the 10% repayment fee if there was a default, granted the Plaintiff an option to prepay the loan if the 10% repayment fee was paid. This interpretation would result in a contradiction between the two provisions. Additionally, in the event of a default, only the Defendant was given the option to demand full payment of the note. The Defendant had a choice as to whether it wished to trigger the 10% fee.
• Yes. The Plaintiff argues that the parties actually agreed that the Plaintiff could pay off the full amount plus the 10% prepayment fee despite what the unambiguous language of the contract provides. The court observes that under traditional rules, extrinsic evidence is generally inadmissible "to interpret, vary or add to the terms of an unambiguous integrated written instrument." However, Plaintiff argues California does not follow the traditional rule.
• The court observed that based on the California Supreme Court's decision in [Pacific Gas & Electric Co. v. G.W. Thomas Drayage & Riggin Co.], "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." Further, "[i]f one side is willing to claim that the parties intended one thing but the agreement provides for another, the court must consider extrinsic evidence of possible ambiguity." Still further, "[i]f that evidence raises the specter of ambiguity where there was none before, the contract language is displaced and the intention of the parties must be divined from self-serving testimony offered by partisan witnesses whose recollection is hazy from passage of time and colored by their conflicting interests."
• The court harshly criticizes California's rule promulgated in [Pacific Gas] and observes "Pacific Gas casts a long shadow of uncertainty over all transactions negotiated and executed under the law of California." Additionally, it "chips away at the foundation of [the] legal system" by giving credence to the argument that "words are inadequate to express concepts." However, based on the unambiguous rule promulgated in [Pacific Gas] the court had no choice, but to overrule the District court's decision.
The court offers a harsh assessment of California's law on this issue. It observes: "As this case illustrates, even when the transaction is very sizeable, even if it involves only sophisticated parties, even if it was negotiated with the aid of counsel, even if it results in contract language that is devoid of ambiguity, costly and protracted litigation cannot be avoided if one party has a strong enough motive for challenging the contract. While this rule creates much business for lawyers and an occasional windfall to some clients, it leads only to frustration and delay for most litigants and clogs already overburdened courts".