Extrinsic Evidence Must Be Considered To Determine If Ambiguity Exists In Contract
In Los Angeles Unified School District v. Great American Insurance Company (2008) __ Cal.App.4th __ (08 CDOS 6885), the Second District (Los Angeles) appellate court reiterated California law that in order to determine whether a contract is ambiguous, the court must consider on a provisional basis extrinsic evidence to determine if there is more than one reasonable interpretation of the contract. Although this case was in the context of a construction contract, these same rules apply to interpretation of insurance contracts.
The dispute between the LA Unified School District (the “District”) and general contractor Hayward Construction Company and Hayward’s bonding company Great American was over the scope of an emergency contract Hayward entered to finish construction of an elementary school. Most of the appellate court’s opinion addresses whether Hayward plead enough to pursue claims against the District for rescission and breach of contract for misrepresentation or nondisclosure of material facts, and the impact of the trial court’s rulings on Great American. The trial court’s rulings dismissing Hayward’s claims were reversed in all respects.
On the issue of interpretation of the “completion contract” between Hayward and the District, the trial court had ruled the contract was not ambiguous. Hayward submitted extrinsic evidence for the court to consider on a provisional basis, including documents to which the contract referred and the parties’ discussions about the scope of the work contemplated by the contract, to show the contract was ambiguous and could be interpreted as Hayward advocated. The trial court ruled the parole evidence rule precluded such evidence because the evidence was being offered to alter, vary or add to the terms of an integrated contract.
The appellate court disagreed, finding the record did not indicate the court had considered the extrinsic evidence. Plus, “the contract itself is not so clear and explicit that it is unambiguous on its face.” The court reviewed the two step process the trial court should have employed:
- First, the court should have provisionally received the evidence of the parties’ intentions to determine if the contract could be reasonably susceptible to an interpretation urged by that party.
- Second, if the contract was reasonably susceptible to that interpretation, then the evidence should be admitted.
The case was reversed and remanded for such a determination.
