Contracts and "Extrinsic Evidence"

It’s been two weeks since I got back from vacation, and aside from practicing law, I’m still working my way through significant appellate decisions and events of interest to businesses litigating in California.  One Supreme Court decision issued while I was gone, Sterling v. Taylor, S121676,  has been the subject of surprisingly little discussion (with the exception of May It Please The Court, discussed below), particularly since the Cal Supremes disapproved no fewer than five earlier statute of frauds decisions.  The facts of the case also win this week's "What Were They Thinking?" award.

More after the jump.

I’ve blogged before about the tension in California law when it comes to extrinsic evidence and contract interpretation.  On the one hand, Pacific Gas & E. Co. v. G. W. Thomas Drayage etc. Co. (1968) 69 C2d 33,  holds that extrinsic language is admissible to interpret just about any contract.  On the other hand, a series of cases, most recently Wagner v. Columbia Pictures (2007) 146 Cal.App.4th 586, shows the understandable reluctance of the courts to apply this rule too literally. 

So the situation in Sterling was this:  California’s statute of frauds, Civil Code section 1624 provides that certain kinds of contracts “are invalid, unless they, or some note or memorandum thereof, are in writing and subscribed by the party to be charged . . . .”  In other words, if Company A sues Company B for breach of a real estate contract (for example), Company A needs to prove that an authorized person from Company B either signed a contract, or signed a “note” or “memorandum” of the contract.

The question in Sterling was whether “extrinsic evidence” -- evidence outside the four corners of the document –- could be introduced to prove what the parties meant by the language in the “memorandum.”  The parties were experienced developers engaged in the potential sale of property worth somewhere between $14 million and $16 million.  Yet the “memorandum” of their deal was a mess, reading as follows:

“Contract for Sale of Real Property
    “Seller Larry Taylor, & Christina Development, and Buyer Donald T. Sterling, Trustee of Sterling Family Trust, agree to the following terms and conditions;
                                         D.P.                                     
“1. Fox Plaza      3 000,000 [sic]                                          
            3,000,000    (cash to loan)        Price  $31,000,000

“2. Barrington Bldg.    2,000,000 D.P.
                6 000,000 D.P.               Price  $12,700,000

“3. 808 4th St.    }         approx 10.468 X gross income
“4. 843 4th St.    }            income   
“5. 1251 14th St.}        estimated 1.600.000,   Price  $ 16,750.00
                 escrow 30 days. Brentwood scrow.  [Sic.]

    “Cash to loan.
“Contract to be completed within 30 days.

“Date 3/13/2000            Seller __________

                    “Buyer         DTS”

Nobody seemed to know what or who “Christina Development” was.  Both parties agreed that in inserting “Price $16,750.00,” they omitted a bunch of zeroes.  And the question was whether this “memorandum” established a contract for the sale of three of the properties for $16,750,000 or for 10.468 X the properties’ gross income, which turned out to be some $2.3 million less.  How do people make so much money doing goofy stuff like this?

Now, I just love those rare decisions where courts precede their holdings with the words “We hold that” and then state the holdings clearly, and that is what the Court does here: 

“We hold that if a memorandum includes the essential terms of the parties’ agreement, but the meaning of those terms is unclear, the memorandum is sufficient under the statute of frauds if extrinsic evidence clarifies the terms with reasonable certainty and the evidence as a whole demonstrates that the parties intended to be bound.”

The extrinsic evidence can’t be used “to prove an agreement at odds with the terms of the memorandum.”  Moreover, the extrinsic evidence “cannot supply” missing terms.  But even when the memorandum is, at first blush, seemingly indecipherable, evidence can be admitted to show what was meant.

Then, having gone through this exercise, the Court held that in this case, even with the extrinsic evidence, there was not enough toe establish the price with reasonable certainty, so there was no contract established.  As Craig Williams points out at May It Please The Court, it’s not such a bad idea to “[h]ire someone who went to law school to draft complicated contracts, even if you don't think they're complicated.”  But the fact that companies so often don't do that makes an awful lot of work for business litigators.