Wednesday, December 9, 2015
C.A. Strictly Interprets ‘No Extrinsic Evidence’ Clause
By KENNETH OFGANG, Staff Writer
A contract provision barring the admission of extrinsic evidence to interpret a contract creates a valid exception to the provision of the parol evidence rule that would permit such evidence to be considered, the Fourth District Court of Appeal has ruled.
Div. Three Monday ordered publication of its Nov. 6 opinion in a suit arising from an environmental cleanup in Orange County. The panel upheld the trial court’s determination that Hot Rods, LLC—buyer of the compromised property—was entitled to recover from seller Northrop Grumman, but reduced the damage award by $1 million, to $117,050, and sent the case back to the trial court for reconsideration of an attorney fees issue.
The property is located on Orangethorpe Ave. in Anaheim, and was for many years the site of a factory where Northrop manufactured floor beams for the Boeing 747. In the mid-1990s, the company closed the facility and retained environmental consultants, who determined that there was no contamination of groundwater as a result of chemicals found in the soil.
That conclusion became the source of controversy between the company and the Regional Water Quality Control Board. Discussions between Northrop and the board were ongoing when the company sold the property to Dan and Kathy Welden and their company, Hot Rods.
The sale agreement included a number of provisions that became pertinent to the litigation, which Justice Eileen Moore described as “a complicated case with a long history.” Among them were an environmental indemnity clause requiring the seller to hold the buyer “harmless from and against any claims, demands, penalties, fees, fines, liability, damages, costs, losses, or other expenses…arising out of…any Environmental Action(s) and/or Remediation.”
There was also an integration clause saying the written contract embodied the parties’ entire agreement and that “no extrinsic evidence whatsoever may be introduced in any judicial proceedings involving this Agreement.”
Following the sale, an underground storage tank was found on the property. Northrop removed the tank and paid various environmental expenses related to the property between 1995 and 2008.
In 2003, the water quality board issued a cleanup order directed to Northrop. A remediation plan was implemented, and was updated after additional testing revealed soil contamination.
In 2008, Northrop began to balk at the costs it was incurring at Hot Rod’s insistence. After declaring that further payment would be made under a “reservation of rights,” the company disputed Hot Rods’ claim that it was liable for rental payments that Hot Rods lost when a tenant delayed entering into a lease due to the remediation activities.
Hot Rods sued for breach of contract, fraud, misrepresentation, nuisance, trespass, and unfair business practices. The case was sent to a referee pursuant to stipulation.
Northrop moved to exclude extrinsic evidence regarding the meaning of the agreement. After the referee denied the motion, the plaintiff presented extensive testimony about how the agreement was negotiated and how the parties conducted their business after the agreement was executed.
Statement of Decision
The referee issued a statement of decision awarding Hot Rods $1 million for impaired use of the property and more than $116,000 in additional damages. The referee later awarded more than $2 million in attorney fees and costs, plus interest, for a total of more than $3.3 million.
Superior Court Judge Franz Miller overruled Northrop’s objections and ordered entry of judgment for Hot Rods.
Moore, writing for the Court of Appeal, said the admission of extrinsic evidence violated the integration clause. She rejected the plaintiffs’ argument that the clause violated public policy.
A public-policy challenge to a contract clause faces a “high bar,” which the plaintiff could not surmount, the jurist said. “This contract only governs the relationship between Hot Rods and Northrop, and has no implications for public policy,” Moore wrote.
She cited a case that upheld a similar provision in an arbitration agreement. “While we agree with Hot Rods that the context is different, we see no reason why such a provision would be fully enforceable in an arbitration setting yet completely unenforceable as against public policy in a reference under Code of Civil Procedure section 638,” Moore wrote.
Nor can the clause be disregarded on the ground that Northrop, as a wealthy, global company, had Hot Rods at a disadvantage. The contract, she noted, described the parties as a “a sophisticated Seller and Buyer,” supporting a presumption that they acted “deliberately and meaningfully” when they agreed to exclude all extrinsic evidence.
The court went on to conclude that the environmental indemnity provision applied to both first- and third-party claims, so Hot Rods was entitled to damages based on Northrop’s failure to pay all of the remediation costs. But the loss-of-use damages, Moore said, were unsupported, because “[t]here was a dearth of testimony” regarding such losses, “probably because Hot Rods had chosen to focus its case on diminution in value.”
On remand, the trial court must determine whether Hot Rods remains the prevailing party after its damages were slashed, and whether the prevailing party should be awarded attorney fees, and if so, in what amount, the justice said.
The case is Hot Rods, LLC v. Northrop Grumman Systems Corporation, 15 S.O.S. 5875.
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