Reading the words: plain meaning, context, and the Kozinski objection

California, nineteen sixty. A rigging contractor agrees with Pacific Gas and Electric to remove and replace the upper metal cover of a steam turbine. The contract says the contractor will do the work at its own risk and expense, and will indemnify the utility against all loss, damage, expense and liability resulting from injury to property, arising out of or in any way connected with the performance of this contract.
During the work the cover falls and damages the turbine's rotor. The utility spends twenty five thousand dollars on repairs and sues the contractor under the indemnity clause.
The contractor offers evidence. Admissions by the utility's own agents, its conduct under similar contracts, and other proof that the indemnity clause was meant to cover injury to third parties' property only, not the utility's own turbine.
The trial judge remarks that the language is the classic language for a third party indemnity provision, and that one could very easily conclude that its whole intendment is to indemnify third parties. Then he refuses to hear the evidence, because the words are plain, and gives judgment for the utility.
So here is the question. When a contract's words look clear to the judge, may a party prove they meant something else? Think about it before I go on, and notice that this is not last lecture's question. Nobody is trying to add a term or contradict one. The contractor wants to explain what the words that are there were meant to mean.
And now the question I keep asking. What exactly did these people promise each other? The contractor promised to indemnify against injury to property. Whose property? The words do not say, and the whole case lives in that gap. A gap the judge fills from his own reading of English, or a gap the parties fill with evidence of what they meant.
Here is the first line for the board, and it is two lines because the states divide. The plain meaning approach. If the writing is clear and complete on its face, it is enforced according to its terms, and extrinsic evidence is not admitted to create an ambiguity.
New York follows it. The contextual approach. Extrinsic evidence is admitted to show that the words are reasonably susceptible of the meaning a party urges, even if they look plain, and if they are, to prove that meaning. California follows it.
Second line. Under either approach, extrinsic evidence cannot contradict the writing. The contextual approach only lets a party prove a meaning the words can bear. If the words cannot bear it, the evidence goes out, as it did in the Trident case we will come to.
Third line, for goods. The Code sets a hierarchy. Express terms control course of performance, course of performance controls course of dealing, and course of dealing controls usage of trade. But all of them are read together wherever reasonable, and usage of trade can give a particular meaning to a term that looks plain, and can supplement a written term, when the parties are or should be aware of the usage.
Now the case. Pacific Gas and Electric against G. W. Thomas Drayage, Supreme Court of California, nineteen sixty eight, Chief Justice Traynor. He went straight at the trial judge's method. When the court interprets a contract on this basis, it determines the meaning of the instrument in accordance with the extrinsic evidence of the judge's own linguistic education and experience.
The exclusion of testimony that might contradict the linguistic background of the judge reflects a judicial belief in the possibility of perfect verbal expression. This belief is a remnant of a primitive faith in the inherent potency and inherent meaning of words.
Then the test. 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.
And the reason. If words had absolute and constant referents, it might be possible to discover contractual intention in the words themselves and in the manner in which they were arranged. Words, however, do not have absolute and constant referents.
Two steps, then. Rational interpretation requires at least a preliminary consideration of all credible evidence offered to prove the intention of the parties. If the court decides, after considering this evidence, that the language of a contract, in the light of all the circumstances, is fairly susceptible of either one of the two interpretations contended for, extrinsic evidence relevant to prove either of such meanings is admissible. The indemnity clause could bear the contractor's meaning. The evidence should have been heard. Reversed.
Now the objection, from a federal judge who had to apply that rule and did not like it. Trident Center against Connecticut General, Ninth Circuit, nineteen eighty eight, Judge Kozinski.
An insurance company and two of the largest law firms in Los Angeles borrowed fifty six and a half million dollars to build an office complex, at twelve and a quarter per cent for fifteen years. The note said the maker shall not have the right to prepay the principal amount hereof in whole or in part for the first twelve years.
Interest rates fell. The borrower wanted to refinance and argued that another clause, setting a ten per cent fee on a prepayment resulting from a default, gave it the option to default deliberately, pay the fee, and prepay.
The district court dismissed the complaint and sanctioned the borrower for a frivolous lawsuit. Kozinski agreed that the words were as clear as words get. It is difficult to imagine language that more clearly or unambiguously expresses the idea that Trident may not unilaterally prepay the loan during its first twelve years.
And then he reversed, because California law required him to. 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. The borrower had to be allowed to offer its evidence that the parties really meant to permit prepayment with a fee.
His criticism is the part every student remembers. Pacific Gas casts a long shadow of uncertainty over all transactions negotiated and executed under the law of California.
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. It may not be a wise rule we are applying, but it is a rule that binds us.
Now the other camp, so you can hear it in its own words. New York, nineteen ninety, W.W.W. Associates against Giancontieri, Judge Kaye. A contract to sell two acres in Suffolk County for seven hundred and fifty thousand dollars, with a clause that if litigation over the property was not concluded by the first of June nineteen eighty seven, either party could cancel.
The buyer swore the clause had been added for the buyer's benefit alone, so that only the buyer could use it. The seller cancelled on the second of June.
The Court of Appeals held for the seller and would not look at the buyer's evidence. A familiar and eminently sensible proposition of law is that, when parties set down their agreement in a clear, complete document, their writing should as a rule be enforced according to its terms.
Evidence outside the four corners of the document as to what was really intended but unstated or misstated is generally inadmissible to add to or vary the writing. And the rule that Traynor rejected, stated as settled law. Extrinsic and parol evidence is not admissible to create an ambiguity in a written agreement which is complete and clear and unambiguous upon its face.
Judge Kaye put the objection to Traynor's method in one sentence. An analysis that begins with consideration of extrinsic evidence of what the parties meant, instead of looking first to what they said and reaching extrinsic evidence only when required to do so because of some identified ambiguity, unnecessarily denigrates the contract and unsettles the law. Either party, said the words. Either party, said the court.
The last case is about goods, and about a usage of trade that read a written price term in a way the words never mentioned. Nanakuli Paving against Shell Oil, Ninth Circuit, nineteen eighty one. Nanakuli, the second largest paving contractor in Hawaii, bought all its asphalt from Shell from nineteen sixty three to nineteen seventy four under long term contracts. The nineteen sixty nine contract set the price as Shell's posted price at time of delivery.
Paving contractors bid on public jobs months ahead at fixed prices. Every asphalt and aggregate supplier in Hawaii, Nanakuli proved, price protected its customers, holding the old price on tonnage already committed to bids when a price rose. Shell itself had done exactly that for Nanakuli in nineteen seventy and nineteen seventy one.
In January nineteen seventy four Shell raised the price from forty four dollars to seventy six a ton and gave no protection on seven thousand two hundred tons Nanakuli had already committed. The jury awarded two hundred and twenty thousand eight hundred dollars. The trial judge took it away, and the Ninth Circuit gave it back.
The court read the Code's definition. Usage of trade is any practice or method of dealing having such regularity of observance in a place, vocation or trade as to justify an expectation that it will be observed with respect to the transaction in question.
It upheld the judge's decision to define the trade as the asphaltic paving trade in Hawaii, not the sale of asphalt alone, and it held that a jury could find price protection reasonably consistent with the express term of posted price at delivery, as a qualification the trade attached to it, rather than a contradiction of it. Shell's own two earlier price protections were a course of performance pointing the same way.
That is the Code's hierarchy in motion. The express term said posted price at delivery. The usage said, and everyone in the trade knew it said, posted price at delivery, except on tonnage already committed. The court let the usage explain the term, because the parties were chargeable with knowledge of the usage and the two could be read together. Had they been flatly inconsistent, the express term would have controlled.
Now let's change one fact. The Pacific Gas indemnity clause had read, injury to property, including the property of Pacific Gas and Electric. Does the contractor's evidence come in? Choose an answer before I go on.
Most people say Traynor lets everything in, so yes. But look at his test. The evidence must be relevant to prove a meaning to which the language is reasonably susceptible. Language that names the utility's property is not reasonably susceptible of excluding the utility's property.
The evidence would contradict, not explain. Even in California it stays out. That was Kozinski's own first holding in Trident, before he reached the parol evidence point. The default clause was not reasonably susceptible of the borrower's reading, and he rejected that argument out of hand.
Change one fact again. The Trident loan documents chose New York law. Choose.
Then the borrower loses at the door, and the sanctions might even have stood. Under Giancontieri, extrinsic evidence is not admissible to create an ambiguity in a writing that is complete and clear on its face, and no writing was ever clearer than a note that says the maker shall not have the right to prepay for twelve years.
The choice of law clause in a contract decides which of today's two lines applies to it, and sophisticated lenders write that clause with this very case in mind.
Change one fact a third time. Shell's nineteen sixty nine contract had said, in words, that Shell will not price protect any tonnage for any reason. Choose.
Now the usage cannot help Nanakuli. The Code's hierarchy is express terms first. Usage can explain a term and can supplement a silent one. It cannot override a term that speaks directly against it, because the parties who wrote that sentence have told the trade they are opting out of its custom. Course of performance might still matter if Shell went on protecting anyway, but the usage alone is finished.
Here is what people get wrong here, and why it is tempting. The first mistake is thinking plain meaning is the only rule. Two lines exist, and your state's choice decides real cases, as Trident shows. The second mistake is thinking Traynor's rule lets a party contradict a writing. It lets a party prove a meaning the words can carry, and no more.
The third mistake is forgetting the Code hierarchy. Express terms, then course of performance, then course of dealing, then usage of trade, each read with the others wherever reasonable. Put them in that order on the exam and you will not go wrong.
Here is the rule, in one breath. A written term is read in New York by its plain meaning, with outside evidence admitted only when the words are ambiguous on their face, and in California by its context, with outside evidence admitted to show any meaning the words are reasonably susceptible of but never to contradict them.
And for goods, the express terms control, but they are explained and supplemented by course of performance, course of dealing and usage of trade, in that order, read together wherever they reasonably can be. Now, five questions.