Contractual Interpretation

In California, extrinsic evidence is admissible to determine the meaning of an ambiguous contract. However, what if the contract seems to be clear & unambiguous?

In 1968, in Pacific Gas & Electric Co. v. GW Thomas Drayage, 69 Cal.2d 33, the Supreme Court of California held that even if a contract appears clear & unambiguous on its face, extrinsic evidence must still be admitted to answer the threshold question of whether the contract indeed is unambiguous.

The facts: defendant Thomas Drayage & Rigging Co. contracted with plaintiff PG&E to remove & replace the cover of PG&E’s steam turbine & to indemnify PG&E “against all loss, damage, expense & liability resulting from…injury to property, arising out of or in any way connected with the performance of [the] contract.” The turbine cover fell on an exposed rotor, leading to PG&E’s suit for the cost of repair.

The trial court ruled that the plain language of the agreement — injury to property — mean the indemnity covered damage to property only. It denied admission of evidence which defendant sought to admit that the indemnity clause was only to cover damages to third parties.

In a decision by Chief Justice Roger Traynor, the California Supreme Court overruled the trial court, holding that at least for the limited question of whether the instrument was unambiguous, extrinsic evidence should have been 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 & 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.”

The Court explained that as far as the same is lawful & ascertainable, giving effect to the “mutual intention” of the parties as it existed at the time of contracting is the goal when interpreting a contract or other written instrument. Cal. Civil Code § 1636.