247 N. Y. 377
CATHERINE C. MITCHILL, Respondent,
v.
CHARLES LATH et al., Appellants.

[378] 

Mitchell v Lath, 220 App. Div. 776, reversed.

(Argued January 10, 1928; decided February 14, 1928.)

APPEAL, by permission, from a judgment of the Appellate Division of the Supreme Court in the second judicial department, entered May 27, 1927, unanimously affirming a judgment in favor of plaintiff entered upon a decision of the court on trial at Special Term in an action to compel specific performance of an alleged contract to remove an ice house.

James G. Meyer, John T. Kelly and Daniel A. Dugan for appellants. The court erred in destroying the contract by receiving evidence of prior negotiations. (Newburger v. Am. Surety Co., 242 N. Y. 134; Filkins v. Whyland, 24 N. Y. 338; Eighmie v. Taylor, 98 N. Y. 288; Emmett v. Penoyer, 151 N. Y. 564; Sturmdorf v. Saunders, 117 App. Div. 762; Marsh v. McNair, 99 N. Y. 174; Lossing v. Cushman, 123 App. Div. 693; 195 N. Y. 386.) The case at bar is not within the exceptions to the general rule that evidence of parol agreements may not be received to contradict or vary the terms of an instrument in writing. (Thomas v. Scutt, 127 N. Y. 133; House v. Walch, 144 N. Y. 418; Mead v. Dunleavy, 174 N. Y. 108; Studwell v. Bush Co., 206 N. Y. 416; Newburger v. American Surety Co., 242 N. Y. 134.)

Arthur H. Haaren for respondent. Specific performance of defendants' oral contract was properly granted below. (Rintelen v. Schaefer, 158 App. Div. 477.) The parol evidence rule has not been violated and no other ground for reversal has been shown. (Newburger v. [379] Am. Surety Co., 242 N. Y. 134; Indelli v. Lesster, 130 App. Div. 548; Finkle v. Lasher, 178 App. Div. 471; Brown v. De Graff, 183 App. Div. 177; Amer. Aniline Products Co. v. Mitsui & Co., 190 App. Div. 485; Taylor v. Hopper, 62 N. Y. 649; Lobel v. Van Hoose, 141 N. Y. Supp. 490; M'Crea v. Purmort, 16 Wend. 460; Hocking Valley Ry. Co. v. Barbour, 192 App. Div. 654; Post v. Thomas, 180 App. Div. 627.) The injunction prayed for was properly granted. (Musgrave v. Sherwood, 23 Hun, 669.)

ANDREWS, J. In the fall of 1923 the Laths owned a farm. This they wished to sell. Across the road, on land belonging to Lieutenant-Governor Lunn, they had an ice house which they might remove. Mrs. Mitchill looked over the land with a view to its purchase. She found the ice house objectionable. Thereupon "the defendants orally promised and agreed, for and in consideration of the purchase of their farm by the plaintiff, to remove the said ice house in the spring of 1924." Relying upon this promise, she made a written contract to buy the property for $8,400, for cash and a mortgage and containing various provisions usual in such papers. Later receiving a deed, she entered into possession and has spent considerable sums in improving the property for use as a summer residence. The defendants have not fulfilled their promise as to the ice house and do not intend to do so. We are not dealing, however, with their moral delinquencies. The question before us is whether their oral agreement may be enforced in a court of equity.

This requires a discussion of the parol evidence rule — a rule of law which defines the limits of the contract to be construed. (Glackin v. Bennett, 226 Mass. 316.) It is more than a rule of evidence and oral testimony even if admitted will not control the written contract (O'Malley v. Grady, 222 Mass. 202), unless admitted without objection. (Brady v. Nolly, 151 N. Y. 258.) It applies, however, to attempts to modify such a contract by parol. It does not [380] affect a parol collateral contract distinct from and independent of the written agreement. It is, at times, troublesome to draw the line. Williston, in his work on Contracts (sec. 637) points out the difficulty. "Two entirely distinct contracts," he says, 

“each for a separate consideration may be made at the same time and will be distinct legally. Where, however, one agreement is entered into wholly or partly in consideration of the simultaneous agreement to enter into another, the transactions are necessarily bound together. . . . Then if one of the agreements is oral and the other is written, the problem arises whether the bond is sufficiently close to prevent proof of the oral agreement."

That is the situation here. It is claimed that the defendants are called upon to do more than is required by their written contract in connection with the sale as to which it deals.

The principle may be clear, but it can be given effect by no mechanical rule. As so often happens, it is a matter of degree, for as Professor Williston also says where a contract contains several promises on each side it is not difficult to put any one of them in the form of a collateral agreement. If this were enough written contracts might always be modified by parol. Not form, but substance is the test.

In applying this test the policy of our courts is to be considered. We have believed that the purpose behind the rule was a wise one not easily to be abandoned. Notwithstanding injustice here and there, on the whole it works for good. Old precedents and principles are not to be lightly cast aside unless it is certain that they are an obstruction under present conditions. New York has been less open to arguments that would modify this particular rule, than some jurisdictions elsewhere. Thus in Eighmie v. Taylor (98 N. Y. 288) it was held that a parol warranty might not be shown although no warranties were contained in the writing.

Under our decisions before such an oral agreement [381] as the present is received to vary the written contract at least three conditions must exist, (1) the agreement must in form be a collateral one; (2) it must not contradict express or implied provisions of the written contract; (3) it must be one that parties would not ordinarily be expected to embody in the writing; or put in another way, an inspection of the written contract, read in the light of surrounding circumstances must not indicate that the writing appears "to contain the engagements of the parties, and to define the object and measure the extent of such engagement." Or again, it must not be so clearly connected with the principal transaction as to be part and parcel of it.

The respondent does not satisfy the third of these requirements. It may be, not the second. We have a written contract for the purchase and sale of land. The buyer is to pay $8,400 in the way described. She is also to pay her portion of any rents, interest on mortgages, insurance premiums and water meter charges. She may have a survey made of the premises. On their part the sellers are to give a full covenant deed of the premises as described, or as they may be described by the surveyor if the survey is had, executed and acknowledged at their own expense; they sell the personal property on the farm and represent they own it; they agree that all amounts paid them on the contract and the expense of examining the title shall be a lien on the property; they assume the risk of loss or damage by fire until the deed is delivered; and they agree to pay the broker his commissions. Are they to do more? Or is such a claim inconsistent with these precise provisions? It could not be shown that the plaintiff was to pay $500 additional. Is it also implied that the defendants are not to do anything unexpressed in the writing?

That we need not decide. At least, however, an inspection of this contract shows a full and complete agreement, setting forth in detail the obligations of each [382] party. On reading it one would conclude that the reciprocal obligations of the parties were fully detailed. Nor would his opinion alter if he knew the surrounding circumstances. The presence of the ice house, even the knowledge that Mrs. Mitchill thought it objectionable would not lead to the belief that a separate agreement existed with regard to it. Were such an agreement made it would seem most natural that the inquirer should find it in the contract. Collateral in form it is found to be, but it is closely related to the subject dealt with in the written agreement — so closely that we hold it may not be proved.

Where the line between the competent and the incompetent is narrow the citation of authorities is of slight use. Each represents the judgment of the court on the precise facts before it. How closely bound to the contract is the supposed collateral agreement is the decisive factor in each case. But reference may be made to Johnson v. Oppenheim (55 N. Y. 280, 292); Thomas v. Scutt (127 N. Y. 133); Eighmie v. Taylor (98 N. Y. 288); Stowell v. Greenwich Ins. Co. (163 N. Y. 298); Newburger v. American Surety Co. (242 N. Y. 134); Love v. Hamel (59 App. Div. 360); Daly v. Piza (105 App. Div. 496) ; Seitz v. Brewers Refrigerating Co. (141 U.S. 510); American Locomotive Co. v. Nat. Grocery Co. (226 Mass. 314); Doyle v. Dixon (12 Allen, 576). Of these citations, Johnson v. Oppenheim and the two in the Appellate Division relate to collateral contracts said to have been the inducing cause of the main contract. They refer to leases. A similar case is Wilson v. Deen (74 N. Y. 531). All hold that an oral stipulation, said to have been the inducing cause for the subsequent execution of the lease itself, concerning some act to be done by the landlord, or some condition as to the leased premises, might not be shown. In principle they are not unlike the case before us. Attention should be called also to Taylor v. Hopper (62 N. Y. 649), where it is assumed that evidence [383] of a parol agreement to remove a barn, which was an inducement to the sale of lots, was improper.

We do not ignore the fact that authorities may be found that would seem to support the contention of the appellant. Such are Erskine v. Adeane (L. R. 8 Ch. App. 756) and Morgan v. Griffith (L. R. 6 Exch. 70), where although there was a written lease a collateral agreement of the landlord to reduce the game was admitted. In this State Wilson v. Deen might lead to the contrary result. Neither are they approved in New Jersey (Naumberg v. Young, 15 Vroom, 331). Nor in view of later cases in this court can Batterman v. Pierce (3 Hill, 171) be considered an authority. A line of cases in Massachusetts, of which Durkin v. Cobleigh (156 Mass. 108) is an example, have to do with collateral contracts made before a deed is given. But the fixed form of a deed makes it inappropriate to insert collateral agreements, however closely connected with the sale. This may be cause for an exception. Here we deal with the contract on the basis of which the deed to Mrs. Mitchill was given subsequently, and we confine ourselves to the question whether its terms may be modified.

Finally there is the case of Chapin v. Dobson (78 N. Y. 74, 76). This is acknowledged to be on the border line and is rarely cited except to be distinguished. Assuming the premises, however, the court was clearly right. There was nothing on the face of the written contract, it said, to show that it intended to express the entire agreement. And there was a finding, sustained by evidence, that there was an entire contract, only part of which was reduced to writing. This being so, the contract as made might be proved.

It is argued that what we have said is not applicable to the case as presented. The collateral agreement was made with the plaintiff. The contract of sale was with her husband and no assignment of it from him appears. Yet the deed was given to her. It is evident that here [384] was a transaction in which she was the principal from beginning to end. We must treat the contract as if in form, as it was in fact, made by her.

Our conclusion is that the judgment of the Appellate Division and that of the Special Term should be reversed and the complaint dismissed, with costs in all courts.

LEHMAN, J. (dissenting). I accept the general rule as formulated by Judge ANDREWS. I differ with him only as to its application to the facts shown in the record. The plaintiff contracted to purchase land from the defendants for an agreed price. A formal written agreement was made between the sellers and the plaintiff's husband. It is on its face a complete contract for the conveyance of the land. It describes the property to be conveyed. It sets forth the purchase price to be paid. All the conditions and terms of the conveyance to be made are clearly stated. I concede at the outset that parol evidence to show additional conditions and terms of the conveyance would be inadmissible. There is a conclusive presumption that the parties intended to integrate in that written contract every agreement relating to the nature or extent of the property to be conveyed, the contents of the deed to be delivered, the consideration to be paid as a condition precedent to the delivery of the deeds, and indeed all the rights of the parties in connection with the land. The conveyance of that land was the subject-matter of the written contract and the contract completely covers that subject.

The parol agreement which the court below found the parties had made was collateral to, yet connected with, the agreement of purchase and sale. It has been found that the defendants induced the plaintiff to agree to purchase the land by a promise to remove an ice house from land not covered by the agreement of purchase and sale. No independent consideration passed to the defendants for the parol promise. To that extent the written [385] contract and the alleged oral contract are bound together. The same bond usually exists wherever attempt is made to prove a parol agreement which is collateral to a written agreement. Hence "the problem arises whether the bond is sufficiently close to prevent proof of the oral agreement." See Judge ANDREWS’ citation from Williston on Contracts, section 637.

Judge ANDREWS has formulated a standard to measure the closeness of the bond. Three conditions, at least, must exist before an oral agreement may be proven to increase the obligation imposed by the written agreement. I think we agree that the first condition that the agreement "must in form be a collateral one" is met by the evidence. I concede that this condition is met in most cases where the courts have nevertheless excluded evidence of the collateral oral agreement. The difficulty here, as in most cases, arises in connection with the two other conditions. The second condition is that the "parol agreement must not contradict express or implied provisions of the written contract." Judge ANDREWS voices doubt whether this condition is satisfied. The written contract has been carried out. The purchase price has been paid; conveyance has been made, title has passed in accordance with the terms of the written contract. The mutual obligations expressed in the written contract are left unchanged by the alleged oral contract. When performance was required of the written contract, the obligations of the parties were measured solely by its terms. By the oral agreement the plaintiff seeks to hold the defendants to other obligations to be performed by them thereafter upon land which was not conveyed to the plaintiff. The assertion of such further obligation is not inconsistent with the written contract unless the written contract contains a provision, express or implied, that the defendants are not to do anything not expressed in the writing. Concededly there is no such express provision in the [386] contract, and such a provision may be implied, if at all, only if the asserted additional obligation is "so clearly connected with the principal transaction as to be part and parcel of it," and is not "one that the parties would not ordinarily be expected to embody in the writing." The hypothesis so formulated for a conclusion that the asserted additional obligation is inconsistent with an implied term of the contract is that the alleged oral agreement does not comply with the third condition as formulated by Judge ANDREWS. In this case, therefore, the problem reduces itself to the one question whether or not the oral agreement meets the third condition.

I have conceded that upon inspection the contract is complete. "It appears to contain the engagements of the parties, and to define the object and measure the extent of such engagement;" it constitutes the contract between them and is presumed to contain the whole of that contract. (Eighmie v. Taylor, 98 X. Y. 288.) That engagement was on the one side to convey land; on the other to pay the price. The plaintiff asserts further agreement based on the same consideration to be performed by the defendants after the conveyance was complete, and directly affecting only other land. It is true, as Judge ANDREWS points out, that "the presence of the ice house, even the knowledge that Mrs. Mitchill thought it objectionable, would not lead to the belief that a separate agreement existed with regard to it;" but the question we must decide is whether or not, assuming an agreement was made for the removal of an unsightly ice house from one parcel of land as an inducement for the purchase of another parcel, the parties would ordinarily or naturally be expected to embody the agreement for the removal of the ice house from one parcel in the written agreement to convey the other parcel. Exclusion of proof of the oral agreement on the ground that it varies the contract embodied in the [387] writing may be based only upon a finding or presumption that the written contract was intended to cover the oral negotiations for the removal of the ice house which lead up to the contract of purchase and sale. To determine what the writing was intended to cover

"the document alone will not suffice. What it was intended to cover cannot be known till we know what there was to cover. The question being whether certain subjects of negotiation were intended to be covered, we must compare the writing and the negotiations before we can determine whether they were in fact covered."

(Wigmore on Evidence [2d ed.], section 2430.)

The subject-matter of the written contract was the conveyance of land. The contract was so complete on its face that the conclusion is inevitable that the parties intended to embody in the writing all the negotiations covering at least the conveyance. The promise by the defendants to remove the ice house from other land was not connected with their obligation to convey, except that one agreement would not have been made unless the other was also made. The plaintiff's assertion of a parol agreement by the defendants to remove the ice house was completely established by the great weight of evidence. It must prevail unless that agreement was part of the agreement to convey and the entire agreement was embodied in the writing.

The fact that in this case the parol agreement is established by the overwhelming weight of evidence is, of course, not a factor which may be considered in determining the competency or legal effect of the evidence. Hardship in the particular case would not justify the court in disregarding or emasculating the general rule. It merely accentuates the outlines of our problem. The assumption that the parol agreement was made is no longer obscured by any doubts. The problem then is clearly whether the parties are presumed to have intended to render that parol agreement legally ineffective [388] and non-existent by failure to embody it in the writing. Though we are driven to say that nothing in the written contract which fixed the terms and conditions of the stipulated conveyance suggests the existence of any further parol agreement, an inspection of the contract, though it is complete on its face in regard to the subject of the conveyance, does not, I think, show that it was intended to embody negotiations or agreements, if any, in regard to a matter so loosely bound to the conveyance as the removal of an ice house from land not conveyed.

The rule of integration undoubtedly frequently prevents the assertion of fraudulent claims. Parties who take the precaution of embodying their oral agreements in a wilting should be protected against the assertion that other terms of the same agreement were not integrated in the writing. The limits of the integration are determined by the writing, read in the light of the surrounding circumstances. A written contract, however complete, yet covers only a limited field. I do not think that in the written contract for the conveyance of land here under consideration we can find an intention to cover a field so broad as to include prior agreements, if any such were made, to do other acts on other property after the stipulated conveyance was made.

In each case where such a problem is presented, varying factors enter into its solution. Citation of authority in this or other jurisdictions is useless, at least without minute analysis of the facts. The analysis I have made of the decisions in this State leads me to the view that the decision of the courts below is in accordance with our own authorities and should be affirmed.

CARDOZO, Ch. J., POUND, KELLOGG and O'BRIEN, JJ., concur with ANDREWS, J.; LEHMAN, J., dissents in opinion in which CRANE, J., concurs.

Judgment accordingly.

[604] Donald A. Gallagher, Jr., Eugene, argued the cause for appellants. On the briefs were Roy E. Adkins, and Jaqua & Wheatley, P.C., Eugene.

Stuart M. Brown of Young, Horn, Cass & Scott, Eugene, argued the cause and filed a brief for respondent.

HOWELL, Justice.

Plaintiff, lessee, filed this action for trespass against defendants, lessors. The property involved is a 52-acre farm in Lane County. The defendants contended they were entitled under the lease agreement to terminate the lease and recover possession.

The following is the entire written agreement of the parties relating to the lease:

"Oct. 16, 1974

"Stafford Farm agrees to rent to Mike Hatley Rt. 1 Box 83, Halsey, Ore. approximately 52 acres till Sept. 1st 1975 for the purpose of growing wheat with the follow [sic] condition: — Stafford Farm shall have the right to buy out Mr. Mike Hatley at a figure of his cost per acre but not to exceed 70.00 per acre. This buy out is for the express purpose of developing a Mobile Home Park.

"Terms shall be $1800.00 paid on or before Jan. 20th 1975 balance due Sept. 20, 1975. The Rent figure shall be $50.00 per acre.

"Stafford Farm "By /s/ Robert R. Stafford Mgr. /s/ Mike Hatley"

Plaintiff Hatley alleged that between June 8 and June 11, 1975, defendants trespassed on the property by taking possession of the farm and cutting the immature wheat crop. The defendants alleged in their answer that they exercised their right to terminate the lease in order to build a mobile home park and that they offered to pay plaintiff his cost per acre but not to exceed $70 per acre. Plaintiff demanded $400 per acre, the fair market value of the wheat crop.

In plaintiff's reply, he alleged that the written agreement was not the entire integrated agreement of the parties, and that the parties orally agreed the buy out provision of the lease would apply only for a period of 30 to 60 days after the execution of the lease.

The trial court allowed plaintiff to introduce evidence concerning the alleged oral agreement limiting the time in which the buy out provision could be exercised. The jury returned a verdict for plaintiff, and defendants appeal. The only error asserted on appeal is that the trial court erred in allowing admission of the parol evidence [605] relating to the time limit on the buy out agreement.

The parol evidence rule^[1] applies only to those aspects of a bargain that the parties intend to memorialize in the writing. Caldwell et ux. v. Wells, 228 Or. 389, 395, 365 P.2d 505 (1961). The fact that a writing exists does not bring the rule into play if the parties do not intend the writing to embody their final agreement. National Cash Register Co. v. IMC, Inc., 260 Or. 504, 491 P.2d 211 (1971); Sternes v. Tucker, 239 Or. 105, 395 P.2d 881 (1964); Bouchet v. Oregon Motor Car Co., 78 Or. 230, 152 P. 888 (1915). Neither does the rule apply when the parties intended the writing to contain only part of their agreement. Stevens v. Good Samaritan Hosp., 264 Or. 200, 504 P.2d 749 (1972); Hirsch v. Salem Mills Co., 40 Or. 601, 67 P. 949, reh. denied 68 P. 733 (1902); Contract Co. v. Bridge Co., 29 Or. 549, 46 P. 138 (1896). See also 3A Corbin on Contracts § 581 (1960).

In the present case, plaintiff sought to show that the written lease was a "partial integration," i.e., that the written contract included some, but not all, of the terms of the actual agreement. Defendants contend that such a showing could be made only if the oral agreement was "not inconsistent" with the writing and was "an agreement as might naturally be made as a separate agreement * * *." Caldwell et ux. v. Wells, supra, 228 Or. at 395, 365 P.2d at 508. Plaintiff argues that these limitations apply only after it has been demonstrated that the writing is a complete integration, that whether a writing was intended to be a complete integration is a question of fact, and that the jury may consider any relevant evidence in deciding this question of fact. Both parties find support for their positions in past opinions by this court. Compare [606] Stevens v. Good Samaritan Hosp., supra, and Land Reclamation v. Riverside Corp., 261 Or. 180, 492 P.2d 263 (1972) (both supporting plaintiff's position) with Caldwell et ux. v. Wells, supra, and DeVore v. Weyerhaeuser Co., 265 Or. 388, 508 P.2d 220 (1973), cert. denied 415 U.S. 913, 94 S.Ct. 1408, 39 L.Ed.2d 467 (1974) (both supporting defendants' position). A brief review of these cases will illustrate the difficulty of the problem.

In Caldwell, defendant agreed to sell plaintiff a house and a lot and also promised that a well would be drilled on the lot. The parties executed a one-page "Earnest Money Receipt" that made no mention of the promise to drill the well. This court held that the parol evidence rule applied only to those aspects of the bargain that the parties intended to memorialize in the writing, and that whether or not the "Earnest Money Receipt" was intended to embody the entire agreement was a question of fact. Having done this, we then adopted the Restatement of Contracts position, which states:

"(1) An oral agreement is not superseded or invalidated by a subsequent or contemporaneous integration, nor a written agreement by a subsequent integration relating to the same subject-matter, if the agreement is not inconsistent with the integrated contract, and

"(a) is made for separate consideration, or

"(b) is such an agreement as might naturally be made as a separate agreement by parties situated as were the parties to the written contract." 1 Restatement of Contracts 335, § 240 (1932).

Because the promise to have the well drilled might naturally be made as an agreement separate from the promise to convey the land, we held that parol evidence was admissible to prove the former promise.

In Stevens v. Good Samaritan Hosp., supra, defendant contended that evidence of an oral agreement should have been excluded under the parol evidence rule. We said:

"The complaint alleged that certain terms of the employment contract were memorialized in a collective bargaining agreement, but other terms were orally agreed upon between the parties to this proceeding. This is an allegation of an unintegrated agreement; therefore, the parol evidence rule does not apply." 264 Or. at 202, 504 P.2d at 750.

No mention was made of the Restatement test.

Land Reclamation v. Riverside Corporation, supra, involved a deed purporting to transfer real property without restriction and a prior land sale contract restricting the property to use as a sanitary landfill. We held that the land sale contract was an agreement that might naturally be made separately from the deed, and that parol evidence was therefore admissible to prove the restriction. In dicta, however, we stated that "§ 240 [of the Restatement] assumes that the adoption of the writing has been proved. * * * [I]f the previous agreement is not of the type which might naturally be made as a separate agreement, it will nevertheless control if it is shown that the parties intended that agreement, rather than the subsequent writing should control." 261 Or. at 183, n. 4, 492 P.2d at 264.

The dicta in Land Reclamation subsequently was contradicted by dicta in DeVore v. Weyerhaeuser Co., supra, although DeVore did not cite Land Reclamation by name. DeVore involved an industry-wide collective bargaining agreement that defendant employer sought to show was inapplicable to plaintiff employees. The employer alleged an oral agreement to exclude the employees from certain provisions of the collective bargaining agreement and the employees claimed that proof of the oral agreement was barred by the parol evidence rule. We stated the general rule that, "Whether the parties intended to integrate their agreement in the writing is a question of fact in each case," but then went on to note:

"If this were the correct rule, without any further limitations, evidence could always be offered of any prior or contemporaneous oral agreement and in all cases [607] the question whether the parties intended to supersede such an oral agreement by the integration of their entire agreement into the terms of the written contract would be a question of fact which must always be submitted to the trier of the facts, whether court or jury. It may be said, however, with some justification, that the adoption of such a rule, without any limitations, would emasculate, if not `repeal,' the parol evidence rule, which is a rule adopted by statute in Oregon, as in many other states." 265 Or. at 400-01, 508 P.2d at 225-226 (footnote omitted).

We then stated that the Restatement criteria imposed "limitations" on the evidence that can be considered in determining the intent of the parties. Nevertheless, we held the parol evidence admissible because representatives of the employees had admitted that the writing was not intended to be a complete integration.

The inconsistency in our prior decisions reflects a long-standing disagreement among courts and commentators generally as to the applicability of the parol evidence rule. Before examining the merits of the conflicting views, it is useful to consider the background and theory of the rule. The rule apparently was an outgrowth of the law governing contracts under seal. Because the King's word was indisputable, the King's seal on a document made the document uncontestable. 9 J. Wigmore, Evidence 83, § 2426 (3d ed. 1940). The status of writings was further enhanced by the enactment of the Statute of Wills and the Statute of Frauds, both of which made certain transactions legally unenforceable unless they were in writing. This theory was gradually applied to contracts generally, until finally the writing came to be regarded as the agreement itself, rather than merely as evidence of the agreement. Id. at 91.

Modernly, the parol evidence rule has often been justified on grounds of commercial certainty. If parol evidence were allowed to be offered in contradiction of writings, it has been feared that the likelihood of perjury would increase. Calamari & Perillo, The Law of Contracts 109 (2d ed. 1977). It is also believed that the rule is needed to ensure that juries will not decide cases on the "equities," the theory being that the economic underdog will most often be the party seeking to vary the terms of the writing by parol evidence. McCormick, The Parol Evidence Rule as a Procedural Device for Control of the Jury, 41 Yale L.J. 365 (1932).

On the other hand, it has been observed that in a modern society where much of business is transacted over the telephone, contracts that are partly oral and partly written have become increasingly common. Note, The Parol Evidence Rule: Is It Necessary?, 44 N.Y.U.L.Rev. 972, 983 (1969). Moreover, in an era of adhesion contracts and unequal bargaining power, the extent to which many writings actually embody the agreement of the parties is debatable. Sweet, Contract Making and Parol Evidence: Diagnosis and Treatment of a Sick Rule, 53 Cornell L.Rev. 1036, 1056 (1968). Finally, it is doubtful that the rule discourages perjury, since the rule can be avoided by fabricating an oral agreement subsequent to the execution of the writing. Cf., Allen v. Allen, 275 Or. 471, 551 P.2d 459 (1976).

The rule does, however, serve an important function. If the parties in fact have assented to the writing as the embodiment of their entire agreement, each should be able to rely on the terms of the writing as conclusive evidence of what they have agreed to. As Professor Corbin observes:

"No contract whether oral or written can be varied, contradicted or discharged by an antecedent agreement. Today may control the effect of what happened yesterday; but what happened yesterday cannot change the effect of what happens today." 3A Corbin on Contracts 371-72, § 574 (1960); see also Farnsworth, "Meaning" in the Law of Contracts, 76 Yale L.J. 939 (1967).

The difficulty arises when one of the parties asserts, as does the plaintiff in the present case, that the writing does not contain all the terms of the actual agreement. [608] Because the parol evidence rule applies only to complete and final integrations, and because the existence of an integration depends on the intent of the parties, it has been argued that any relevant evidence of the parties' intent should be admissible and that the actual intent of the parties should be a factual question for the jury. As we observed in DeVore v. Weyerhaeuser Co., supra, however, a rule allowing the jury to consider any relevant evidence in deciding whether the writing was intended to be a complete integration "without any limitations, would emasculate, if not `repeal,' the parol evidence rule, which is a rule adopted by statute in Oregon * * *." 265 Or. at 401, 508 P.2d at 226. Consequently, we have recognized the criteria of § 240 of the Restatement of Contracts as imposing limitations on the admissibility of evidence in cases involving the partial integration doctrine. We believe these limitations remain appropriate, despite our occasional statements to the contrary.

On the other hand, the Restatement criteria are not to be applied mechanically or formalistically. As noted above, the purpose of the parol evidence rule is to give special effect to writings only in those cases where the parties intended the writing to be a final and complete statement of their agreement. Insofar as possible, the Restatement criteria should be applied in a manner consistent with that purpose.

Before applying these principles to the facts of the present case, mention should be made of the functions of court and jury in cases involving the parol evidence rule. Both plaintiff and defendants appear to have assumed that the jury decides whether or not the parties intended their writing to be a final and complete integration. Such is not the law. As McCormick notes, "The question [of whether the parties intended the writing to be a complete integration] is one for the court, for it relates to the admission or rejection of evidence." McCormick, Handbook of the Law of Evidence 437, § 215 (1954), quoting Naumberg v. Young, 44 N.J.L. 331, 338 (1882). In deciding that the parties did not intend the writing to be an integration, however, the court does not decide that the alleged oral terms actually were agreed upon. That determination is left to the jury. The court's decision is one of admissibility, not probity.^[2]

In the present case, the trial court decided that the written agreement of the parties was not a complete integration of their actual agreement, and permitted plaintiff to introduce evidence that the buy out provision in the written lease was subject to an oral time limitation. No contention is made that the oral agreement was supported by separate consideration, so the trial court's ruling can be upheld only if the agreement: (1) was "not inconsistent" with the written lease and (2) was "such an agreement as might naturally be made as a separate agreement by parties situated as were parties to the written contract." DeVore v. Weyerhaeuser Co., supra; Caldwell et ux. v. Wells, supra (emphasis added).

Defendant argues that the oral time limitation is "clearly inconsistent" with the terms of the written lease, reasoning that a buy out provision with no time limitation on a lease for a fixed term must be read to run for the entire term of the lease. We do not define the term "inconsistent" so broadly. To be "inconsistent" within the meaning of the partial integration doctrine, the oral term must contradict an express provision [609] in the writing. As the court observed in Hunt Foods and Industries, Inc. v. Doliner, 26 App.Div.2d 41, 270 N.Y.S.2d 937 (1966):

"In a sense any oral provision which would prevent the ripening of the obligations of a writing is inconsistent with the writing. But that obviously is not the sense in which the word is used * * *. To be inconsistent the term must contradict or negate a term of the writing. A term or condition which has a lesser effect is provable." 270 N.Y.S.2d at 940 (emphasis added).

See also, Braund, Inc. v. White, 486 P.2d 50 (Alaska 1971), and Whirlpool Corp. v. Regis Leasing Corp., 29 App.Div.2d 395, 288 N.Y.S.2d 337, 340 (1968), both following the Hunt court's definition of "inconsistent."

In the instant case, nothing is contained in the writing with respect to the duration of the buy out provision. Therefore, the oral time limitation is "not inconsistent" with the terms of the writing.

Defendants argue that even if the oral term is not inconsistent with the terms of the writing, the parol evidence should have been excluded because the oral term "naturally" would have been included in the writing. We disagree.

In determining whether or not an oral term is one that "naturally" would have been included in the writing, the trial court is not limited to a consideration of the face of the document. This court has recognized that "* * * the surrounding circumstances, as well as the written contract, may be considered." Blehm v. Ringering, 260 Or. 46, 50, 488 P.2d 798, 800 (1971). When considering the surrounding circumstances, the trial court should be aware of the fact that parties with business experience are more likely to reduce their entire agreement to writing than parties without such experience, TSS Sportswear, Ltd. v. Swank Shop, Inc., 380 F.2d 512 (9th Cir.1967), and that this is especially true when the parties are represented by counsel on both sides. Scott-Douglas Corp. v. Greyhound Corp., 304 A.2d 309 (Del.Super. 1973). The relative bargaining strength of the parties also should be considered, since a transaction not negotiated at arm's length may result in a writing that omits essential terms. Cf., Bussard v. College of Saint Thomas, Inc., 294 Minn. 215, 200 N.W.2d 155 (1972). And, of course, the apparent completeness and detail of the writing itself may lead the court to conclude the parties intended the writing to be a complete integration of their agreement. Unique Watch Crystal Co. v. Kotler, 344 Ill. App. 54, 99 N.E.2d 728 (1951). See also, Sweet, supra at 1064-67.

This is not to say, however, that the trial court should readily admit parol evidence whenever one of the parties claims a writing does not include all the terms of an agreement. The court should presume that the writing was intended to be a complete integration, at least when the writing is complete on its face, and should admit evidence of consistent additional terms only if there is substantial evidence that the parties did not intend the writing to embody the entire agreement. Hale, The Parol Evidence Rule, 4 Or.L.Rev. 91 (1925).

In the present case, there are a number of facts that could have led the trial court to conclude that it was natural for the parties "situated as were parties to the written contract" to have omitted the time limitation on the buy out provision from the written lease. First, this was not a sophisticated business transaction in which the parties could be expected to include all the terms of their agreement in the writing. Cf., Deering v. Alexander, 281 Or. 607, 576 P.2d 8 (1978). The lease agreement was a handwritten document that hardly shows the kind of careful preparation that accompanies a formal integration. See Calamari and Perillo, The Law of Contracts 102 (2d ed. 1977). Moreover, the agreement was concluded by the parties themselves, without counsel to advise them of the consequences of the writing. This case is therefore analogous to the leading case of Masterson v. Sine, 68 Cal.2d 222, 65 Cal. Rptr. 545, 436 P.2d 561 (1968), where the court, per Chief Justice Traynor, stated:

"* * * There is nothing in the record to indicate that the parties to this [610] family transaction, through experience in land transactions or otherwise, had any warning of the disadvantages of failing to put the whole agreement in the deed. This case is one, therefore, in which it can be said that a collateral agreement such as that alleged `might naturally be made as a separate agreement.'" 65 Cal. Rptr. at 549, 436 P.2d at 565.

Finally, the trial court was entitled to consider the fact that a literal reading of the written contract would have led to an unreasonable result. Plaintiff was contending the wheat crop he had planted would be worth $400 per acre at harvest. The written agreement, standing alone, would have allowed the defendants to exercise the buy out provision the day before harvest and pay plaintiff $70 per acre for wheat worth $400 per acre. While the mere fact that a contract is one-sided does not by itself justify a conclusion that the writing does not embody the entire agreement of the parties, the trial court may consider that fact in deciding whether the parties intended additional provisions to be included in the agreement. TSS Sportswear, Ltd. v. Swank Shop, Inc., supra at 519.

For these reasons, we hold that there was sufficient evidence to justify the trial court's decision to admit the parol evidence. The trial court was entitled to consider "the surrounding circumstances, as well as the written contract * * *." Blehm v. Ringering, supra. Under the circumstances of the present case, the parol evidence was properly admitted, and the question of whether the parties actually agreed to the time limitation was properly left to the jury.

Affirmed.

LENT, Justice, dissenting.

I must respectfully dissent. The majority opinion and the result thereby achieved in this case make the statute meaningless. The statute is clear:

"When the terms of an agreement have been reduced to writing by the parties, it is to be considered as containing all those terms, and therefore there can be, between the parties and their representatives or successors in interest, no evidence of the terms of the agreement, other than the contents of the writing, * * *." ORS 41.740

It excludes any evidence of the terms of an agreement reduced to writing other than the agreement itself. The statute would have to read differently to permit legislatively what this court permits by "interpreting" or "construing" the statute. The effect of this court's decisions has been to revise the statutory language to provide somewhat as follows:

"When the terms of an agreement have been reduced to writing by the parties, it is not to be considered as containing all those terms if there is oral testimony or evidence other than the contents of the writing that the agreement is incomplete."

If that is what the legislature meant to say, it is surprising that they chose the language now found in ORS 41.740 (which is unchanged from Sec. 682 of the Act of October 11, 1862).

The majority says that the statute is a codification of the parol evidence rule known to the common law, and therefore, the exceptions to the common law rule are an existing but unwritten list of exceptions to the statute. Not only that, but the majority seems to say further that whenever a common law court constructs another exception, this court may, if it finds the exception seemly, adopt it as an implied amendment to the 1862 Act. Would the majority apply the statute as written if the next legislative assembly were to reenact the Act of October 11, 1862, and add: "And this time we mean it"?

Were the statute applied as written, those who take the trouble to reduce their agreement to writing should be reasonably certain as to their rights and obligations. Trials would be simpler and cheaper. If it be said that the statute is harsh, I know of no better way to demonstrate its harshness or unfairness than to apply it strictly. The legislature could then actually enact a statute which would read as the majority's version of the present statute.

[611] As to the case at bar the majority says that what the plaintiff contends was an unwritten part and parcel of the written agreement is not "inconsistent" with the part actually written. This will surely surprise the defendant who finds that by the opinion in this case "not to exceed 70 [dollars] per acre" is consistent with $400 per acre. Although he had no lawyer to advise him at the time of making his writing, this plaintiff farmer cannot be so lacking in sophistication as to know or realize that it's just as easy to write "400.00" as it is to write "70.00" if that is truly what the parties intended and agreed.

The majority says generally:

"This is not to say, however, that the trial court should readily admit parol evidence whenever one of the parties claims a writing does not include all the terms of an agreement. The court should presume that the writing was intended to be a complete integration, at least when the writing is complete on its face, and should admit evidence of consistent additional terms only if there is substantial evidence that the parties did not intend the writing to embody the entire agreement."

Whatever the majority may mean by "substantial evidence" the rule just set forth should defeat this plaintiff's claim, not vindicate it. The writing is complete on its face, the additional terms are not consistent, and the "substantial evidence" is the plaintiff's testimony.

I respectfully dissent.

[1]ORS 41.740 states, in pertinent part:

"When the terms of an agreement have been reduced to writing by the parties, it is to be considered as containing all those terms, and therefore there can be, between the parties and their representatives or successors in interest, no evidence of the terms of the agreement, other than the contents of the writing, * * *."

Concededly, a literal reading of this statute would exclude any parol evidence of the terms of an agreement once that agreement had been reduced to writing by the parties. This court, however, has never read the statute in such a manner, but instead has treated the statute as a codification of the common law parol evidence rule. See, e.g., Blehm v. Ringering, 260 Or. 46, 488 P.2d 798 (1971) ("* * * ORS 41.740 is the parol evidence rule"). Consequently, we have recognized the various common law "exceptions" to the parol evidence rule in applying the statute, even though such exceptions do not appear in the statute. DeVore v. Weyerhaeuser Co., 265 Or. 388, 508 P.2d 220 (1973), cert. denied 415 U.S. 913, 94 S.Ct. 1408, 39 L.Ed.2d 467 (1974) (holding the rule inapplicable when the party objecting to the parol evidence admits the oral term was agreed to); Stevens v. Good Samaritan Hosp., 264 Or. 200, 504 P.2d 749 (1972) (recognizing the "partial integration" exception to the rule); National Cash Register Co. v. IMC, Inc., 260 Or. 504, 491 P.2d 211 (1971) (recognizing that the rule does not apply when the parties do not intend the writing to be a "final" statement of their agreement); Sternes v. Tucker, 239 Or. 105, 395 P.2d 881 (1964) (holding that the rule does not bar proof that the parties intended the writing to be subject to an oral condition).

Although these decisions may be inconsistent with a literal reading of the statute, which has been in effect since 1862, they can be justified under the general rule that statutes codifying the common law are to be construed in a manner consistent with the common law. See 2A Sutherland on Statutory Construction § 50.02 (Sands ed. 1973). Without undertaking a comprehensive study of the application of the parol evidence rule at common law, it is sufficient to note for purposes of this opinion that at the time ORS 41.740's original predecessor was enacted (see General Laws of Oregon § 682 (1874)), the "partial integration" doctrine discussed herein was recognized by both courts and commentators. See Batterman v. Pierce, 3 Hill 171 (N.Y. 1842) (note given for wood on plaintiff's land did not bar proof of oral agreement that plaintiff would bear risk of loss of fire); Jefferey v. Walton, 1 Starkie 267 (1816) (written contract to hire horse did not bar proof of oral agreement that hirer took risks of accidents from his shying); 1 G. Greenleaf, A Treatise of the Law of Evidence 331 (13th ed. 1876); T. Starkie, A Practical Treatise on the Law of Evidence 724 (10th ed. 1876).

We note also that the Supreme Court of California, which operates under a statute identical to ORS 41.740, treats its statute as a codification of the common law and has recognized the partial integration doctrine as well. Cal. Code Civ.Pro. § 1856 (West 1955); Masterson v. Sine, 68 Cal.2d 222, 65 Cal. Rptr. 545, 436 P.2d 561 (1968).

[2]Wigmore explains the procedure thusly:

"* * * There is a preliminary question for the judge to decide as to the intent of the parties, and upon this he hears evidence on both sides; his decision here, pro or con, concerns merely this question preliminary to the ruling of law. If he decides that the transaction was covered by the writing, he does not decide that the excluded negotiations did not take place, but merely that if they did take place they are nevertheless legally immaterial. If he decides that the transaction was not intended to be covered by the writing, he does not decide that the negotiations did take place, but merely that if they did, they are legally effective, and he then leaves to the jury the determination of fact whether they did take place." 9 J. Wigmore, Evidence 98, § 2430 (3d ed. 1940) (footnotes omitted).

Present: TAURO, C.J., REARDON, QUIRICO, BRAUCHER, & KAPLAN, JJ.

Robert F. Sylvia for William J. Spence & others.

Leo Sontag (Raymond W. Rawlings with him) for Robert Industries, Inc.

BRAUCHER, J.

The plaintiff filed two bills in the Superior Court. The first sought an accounting for the interference by the defendant Spence, through the defendant corporations controlled by him, with a right granted to the plaintiff by the Metropolitan District Commission (MDC). The second sought a declaration that a lease from the MDC to the plaintiff gave the plaintiff an exclusive right to serve food for money on George's Island in Boston Harbor and also sought an [752] injunction against such activity on the part of Spence and his corporations. One of the defendant corporations in the first suit, Massachusetts Bay Lines, Inc., by counterclaim sought damages for unfair competition.

The judge made findings, rulings and an order for decree in each case, ruled that the plaintiff has the exclusive right it claims, and granted the declaratory relief and injunction prayed for in the second suit. In the first suit he found that the defendants acted in the honest belief, in accordance with an opinion of MDC counsel, that the lease did not grant the exclusive right claimed, and dismissed the bill. In view of his findings in the companion case he found no damage on the counterclaim. The defendants appeal from the final decrees in both suits. The evidence is reported.

We summarize the judge's findings. Before 1967 Spence or his corporation had a lease from the MDC as a concessionaire on George's Island, and ran clambakes. During 1967 and 1968 there was no concessionaire on the island, and the facilities fell into disrepair. During this period Spence or his corporations continued to run clambakes on the island, using some of the same facilities. On May 14, 1969, the MDC leased to the plaintiff for five years portions of three buildings and certain adjoining areas on the island for the purpose of running a food and beverage concession. The lease refers to use of one of the buildings as an "indoor picnic area," and the plaintiff serves clambakes there in inclement weather. The lease also refers to a "Regular Concession Stand," which it also calls a "Regular Snack Bar," and to the use of an adjacent area "for lobster and fish handling." The lease requires the plaintiff to renovate and repair the leased areas, and provides that the MDC shall receive ten per cent of the plaintiff's gross receipts.

The critical provision of the lease is paragraph 8: "The Commission agrees that during the time this concession lease is in force, it shall not grant a lease to any other person or company which shall in any way [753] compete with the concession herein granted. The Commission, however, reserves the right to permit patrons to bring their own food and beverages for their own personal use into and upon the Island." The judge found that provision ambiguous and that the MDC and the plaintiff intended that no other food be served on the island for money except that purchased through the plaintiff. The second sentence of paragraph 8 was intended to permit individuals or small groups of individuals to bring their own picnic lunches or food to the island for preparation in outdoor grills provided by the MDC and to consume it there. It was not the intent of the MDC or the plaintiff to permit the preparation and service of food on the island for profit by any individual or company other than the plaintiff.

Spence, through a corporation whose principal business is the operation of harbor boats on scheduled runs and sightseeing trips, has been advertising and running clambakes on the island during 1969, 1970 and 1971. It solicits the business of groups of individuals and charges a price which includes transportation to and from the island and a price for the clambake. The food is in part prepared on the mainland, taken to the island on small boats, and further prepared, cooked and served on the island in areas not covered by the plaintiff's lease. There is no lease to Spence or his corporations, and they pay no fee to the MDC.

1. Contrary to the defendants' contention, there was no error in the admission of evidence of the facts and circumstances of the transaction, including the situation and relations of the parties, for the purpose of applying the terms of the written contract to the subject matter and removing and explaining any uncertainty or ambiguity which arose from such application. Stoops v. Smith, 100 Mass. 63, 66. A lease is to be read in the light of the circumstances of its execution, which may enable the court to see that its words are really ambiguous. Sheff v. Candy Box Inc. 274 Mass. 402, 406. When the written agreement, as applied to the [754] subject matter, is in any respect uncertain or equivocal in meaning, all the circumstances of the parties leading to its execution may be shown for the purpose of elucidating, but not of contradicting or changing its terms. Smith v. Vose & Sons Piano Co. 194 Mass. 193, 200. Goldenberg v. Taglino, 218 Mass. 357, 359. See Restatement 2d: Contracts (Tent. draft No. 5, March 31, 1970), §§ 235, 236, (Tent. draft No. 6, March 31, 1971), §§ 240, 241. Compare Uniform Commercial Code, G.L.c. 106, § 2-202, inserted by St. 1957, c. 765, § 1. Expressions in our cases to the effect that evidence of circumstances can be admitted only after an ambiguity has been found on the face of the written instrument have reference to evidence offered to contradict the written terms. See Violette v. Rice, 173 Mass. 82, 84; Snider v. Deban, 249 Mass. 59, 61.

2. In view of its completeness and specificity, the lease reasonably appears to be a complete agreement, and it is therefore taken to be a complete agreement in the absence of contrary evidence. Compare Welch v. Bombardieri, 252 Mass. 84, 87; Caputo v. Continental Constr. Corp. 340 Mass. 15, 18; Carlo Bianchi & Co. Inc. v. Builders' Equip. & Supplies Co. 347 Mass. 636, 643-644; Restatement 2d: Contracts (Tent. draft No. 5, March 31, 1970), § 235 (3). In fact, the evidence confirmed the normal inference. The treasurer of the plaintiff, who runs its business, testified that after consulting with counsel he signed the lease at the MDC office. Before signing, he read the lease and told an MDC attorney that he was concerned about a typographical error as to the size of a room. He "was told that where the Commission had signed the lease, that they'd have to redo the whole thing." He also said that he wanted to "make darn sure there's no question that I have any competition.... I don't want any other commercial caterer." The MDC attorney said, "That is all taken care of in the lease," and the plaintiff's treasurer then signed the lease. This testimony shows quite clearly [755] that the parties thought their rights and duties with respect to competing caterers were to be governed by the terms of the written lease.

The interpretation of an integrated agreement is a matter of law on which we are not bound by the trial judge's conclusions unless the problem of interpretation is affected by findings of fact. Quintin Vespa Co. Inc. v. Construction Serv. Co. 343 Mass. 547, 551. Seward v. Weeks, 360 Mass. 410, 413. See Restatement 2d: Contracts (Tent. draft No. 5, March 31, 1970), § 238. Interpretation is directed to the meaning of the terms of the writing in the light of the circumstances, not to the meaning of the conversations of the parties in the course of their negotiations. Wentworth v. Manhattan Mkt. Co. 216 Mass. 374, 376-377. The plaintiff was not "precluded from showing forth the transaction in all its length and breadth." Saltzman v. Barson, 239 N.Y. 332, 336. "After interpretation has called to its help all those facts which make up the setting in which the words are used," however, "the words themselves remain the most important evidence of intention; to put them altogether aside may at times be necessary but it always somewhat savors of usurpation...." National City Bank v. Goess, 130 F.2d 376, 380.

The critical provision of the lease here in issue forbids the MDC to grant a competing "lease"; it also reserves to the MDC "the right to permit" certain activities by "patrons" not described as lessees. If the first part of the provision is limited to leases, the plaintiff argues, the second part has no effect, except perhaps as an unnecessary partial description of what is not a lease. Reading the provision as a whole and seeking to give meaning to each part, the argument continues, we must hold that all that is not permitted is forbidden and that "lease" includes any commercial competition with the plaintiff. But the lease nowhere says that activities not expressly permitted are forbidden. It simply does not deal with competition other [756] than competition by lessees. The plaintiff's reading places a strain on the word "lease" greater than it can bear.

The testimony of the plaintiff's treasurer does not help the plaintiff. That testimony strongly indicates that the witness understood, at the time he signed the lease, that the MDC attorney had no authority to vary the lease terms unless the Commissioners signed the lease again. The witness had consulted with counsel and had read the lease, and there is nothing to indicate that he thought the MDC attorney was giving or was authorized to give an official interpretation of the lease. If he had been authorized to vary or interpret the lease, parol evidence that before the lease was executed the parties had agreed to forbid competition by commercial caterers other than lessees could not be permitted to control the interpretation of the lease as finally drawn up and executed. Burns v. Great Atl. & Pac. Tea Co. 312 Mass. 551, 553.

3. The counterclaim filed by one of the corporate defendants was dismissed solely on the ground that the plaintiff had an exclusive right to put on clambakes on George's Island, and that hence the defendant suffered no damage. Since the plaintiff, under a proper interpretation of the lease, had no such exclusive right, the counterclaim was improperly dismissed.

4. The final decree in each of the two cases is reserved. In the suit for declaratory relief a decree is to enter declaring that the conduct of clambakes on George's Island on premises not covered by the lease between the MDC and the plaintiff does not violate paragraph 8 of that lease. The suit for an accounting is remanded to the Superior Court for trial on the counterclaim of the defendant Massachusetts Bay Lines, Inc. The defendants are to have costs of appeal.

So ordered.

[615] [616] Denis McInerney, Cahill Gordon & Reindel, Charles A. Gilman, New York City, W. Donald McSweeney, Schiff Hardin & Waite, Allan Horwich, Chicago, Ill., for defendants-appellants.

William E. Rattner, Hopkins & Sutter, Paul K. Vickrey, Thomas M. Dethlefs, Chicago, Ill., for plaintiff-appellee.

Before BAUER, Chief Judge, and POSNER and RIPPLE, Circuit Judges.

Rehearing and Rehearing En Banc Denied September 11, 1989.

POSNER, Circuit Judge.

This case began as a diversity suit (governed, the parties agree, by Illinois law) for fraud. The plaintiff was Continental Illinois National Bank, the defendants W.R. Grace & Co. and its wholly owned subsidiary, Grace Petroleum Corporation. The parties treat the two Graces as interchangeable; so shall we. The appeal presents questions of contract law and damages.

Continental had made a $75 million nonrecourse production payment loan to Grace to enable it to develop some natural-gas fields in Mississippi, and when one of the fields turned out to be worthless Continental contended that Grace had induced the loan by fraud. Shortly after filing the suit [617] Continental assigned the loan to the Federal Deposit Insurance Corporation, which had bailed out the failing Continental. The FDIC substituted itself for Continental as the plaintiff and switched the statutory basis of federal jurisdiction from 28 U.S.C. § 1332 (diversity) to 28 U.S.C. § 1345 (suits "commenced by" the United States), 12 U.S.C. § 1819 (the Federal Deposit Insurance Corporation Act), and 28 U.S.C. § 1331 (federal-question jurisdiction). After a four-week trial a jury awarded the FDIC $25 million in compensatory damages and $75 million in punitive damages. The district judge cut the award of punitive damages to $25 million.

Grace appeals, raising a variety of grounds of which the first and least is that there is no federal jurisdiction. The jurisdiction of suits by and against the FDIC is specified in section 1819 Fourth of the Banking Code, which provides that all suits to which the FDIC is a party shall be deemed to arise under the laws of the United States (thus bringing section 1331, the federal-question statute, into play), unless the FDIC is a party "in its capacity as receiver of a State bank." Since Continental is a national bank rather than a state bank, this exception to federal jurisdiction would not apply even if the FDIC had been suing as a receiver, which it was not; an assignee is not a receiver. See, e.g., FDIC v. Braemoor Associates, 686 F.2d 550, 552-53 (7th Cir.1982); FDIC v. Elefant, 790 F.2d 661, 665 (7th Cir.1986) (dictum). Elefant hints that substituting the FDIC for a state bank in a diversity suit that had already been filed would not destroy diversity jurisdiction, see id. at 666, unless the assignment was for the purpose of conferring federal jurisdiction where it would not otherwise exist. See 28 U.S.C. § 1359; Hartford Accident & Indemnity Co. v. Sullivan, 846 F.2d 377, 382 (7th Cir.1988). Jurisdiction normally depends on the facts when the case was brought rather than on what happens later. But no more than in Elefant need we resolve the issue in order to confirm the district court's jurisdiction; Continental was not a state bank.

Grace has not shown any error in the district judge's jury instructions or evidentiary rulings, so we take the facts to be as favorable to the FDIC as a reasonable jury could have found them to be. In 1980 Grace decided to bid for a 50 percent interest in three natural-gas fields owned by a subsidiary of Centex Corporation — the Thomasville, East Thomasville, and Southwest Piney Woods fields, all in the same part of Mississippi. Four wells had already been drilled in the first two fields and three were planned for Southwest Piney Woods, of which one had been drilled but was not yet producing. To finance the purchase, Grace went to its long-time banker, Continental, for a $75 million "nonrecourse production payments loan" — a loan repayable only out of the revenues from the gas fields and not out of Grace's other assets. If the fields proved to be nonproductive, the loan would not be repaid and Continental would have no remedy for the default.

Officers of Grace showed Continental a reserve report prepared by an independent engineering firm. The report showed Southwest Piney Woods with 42 percent of the total gas reserves in the fields, although none of the proven reserves because no producing wells had been drilled yet in that field. A petroleum engineer employed by Continental reviewed the reserve report and concluded that the proven reserves in the other two fields — all he considered — had a loan value of $75 million. This was exactly equal to the loan that Grace was seeking and so left no margin for error. Next to the Southwest Piney Woods estimates the engineer wrote, "all assumed Dry!" Apparently this was his way of saying that in order to be ultraconservative in his evaluation he had ignored Southwest Piney Woods because it had no producing wells as yet. (In other words, the emphasis falls on the word "assumed.") Despite his evaluation of the Thomasville and East Thomasville fields, he told his boss that he was uncomfortable about the loan, but his boss reassured him by pointing out that the Southwest Piney Woods field could be pledged to repay the loan too, and this would provide insurance in case the Thomasville fields turned out to be less [618] productive than expected or the price of gas fell. Consistent with this assurance, when Grace asked Continental to exclude Southwest Piney Woods from the properties dedicated to the repayment of the loan Continental refused.

On March 14, 1980, Continental wrote Grace that it was "pleased to commit to provide $75,000,000 in a production payment loan for the benefit of W.R. Grace & Co. The terms of the loan are summarized below." Provisions follow regarding interest rate (prime plus one percent), balances, maturity (December 31, 1987), security, etc., followed by the statement, "This commitment is, of course, subject to satisfactory documentation." Continental followed up with another letter to Grace on April 1, setting forth in five single-spaced pages "the principal terms and conditions of the financing" and stating at the end that "the above discussion does not constitute an exhaustive list of all the terms and conditions of the financing, but does cover those items of major importance." A virtually identical letter, differing only in being slightly longer, was sent on April 7. The final loan agreement, in which satisfactory final loan documentation is made a condition precedent to Continental's duty to perform, was signed on July 1, and disbursal of the $75 million to Grace followed shortly.

Centex had accepted Grace's $87 million bid for the Mississippi properties early in April, and the parties to that deal had agreed to close on May 23. On May 8, Grace, which pursuant to its still-executory contract with Centex was receiving frequent reports on the progress of the gas-exploration activities in the properties, learned that "Pursue Ridgeway," the well that had been drilled in the Southwest Piney Woods field, had struck water instead of gas. This was bad enough; but by May 18 Grace had discovered that the field would produce no gas, from any well. Grace was horrified. It had valued Pursue Ridgeway at $15.5 million even though the well had not yet started producing any gas. This was 17.1 percent of the entire deal. The well, along with the rest of the field, was now revealed to be worthless. Grace tried to back out of the deal with Centex, but when Centex threatened to sue, Grace decided to go ahead with the deal, which closed on May 27 with a covenant allowing Grace to sue Centex.

The next day Centex issued a press release announcing the sale to Grace and mentioning in passing that Pursue Ridgeway was "non-commercial." A news service to which Continental subscribed carried the release, but no one at Continental concerned with the Grace loan noticed it. Although Grace had issued its own press release on April 22 announcing the signing of the contract with Centex to buy the Mississippi properties, it issued no press release announcing the actual purchase. And it did not tell Continental about the problem with the Southwest Piney Woods field until, three years after the loan was closed, it sent Continental a copy of the complaint it had filed against Centex, alleging that Centex had defrauded Grace by failing to disclose the water problem in Southwest Piney Woods. That suit was later settled for $13 million. The present suit was filed in 1984 and came to trial in 1987, at which time the balance of the $75 million loan, consisting both of principal and of unpaid interest, exceeded $76 million, even though the loan was due to be repaid in only three months. The Thomasville fields were and are productive, but gas prices had tumbled, and the volume of production was not high enough to generate revenues sufficient to repay the loan — which to this day has not been repaid.

Several points raised by Grace are shallow:

1. The fact that Continental may have been deficient in alertness in failing to notice the item in the press release about Pursue Ridgeway might be relevant if this were a suit for negligence, but it is a suit for deliberate fraud, and contributory negligence is not a defense to an intentional tort. See, e.g., Tan v. Boyke, 156 Ill.App.3d 49, 57, 108 Ill.Dec. 229, 234, 508 N.E.2d 390, 395 (1987); Carter v. Mueller, 120 Ill.App.3d 314, 319-20, 75 Ill.Dec. 776, 781, 457 N.E.2d 1335, 1340 (1983); [619] Mother Earth, Ltd. v. Strawberry Camel, Ltd., 72 Ill.App.3d 37, 51-52, 28 Ill.Dec. 226, 328-29, 390 N.E.2d 393, 405-06 (1979); General Motors Acceptance Corp. v. Central National Bank, 773 F.2d 771, 782 (7th Cir.1985) (construing Illinois law); Cenco, Inc. v. Seidman & Seidman, 686 F.2d 449, 454 (7th Cir.1982) (same); Teamsters Local 282 Pension Trust Fund v. Angelos, 762 F.2d 522, 527-28 (7th Cir.1985); Prosser and Keeton on the Law of Torts 462 (5th ed. 1984).

2. That Continental's petroleum engineer, in assessing the loan value of the three fields, assumed the Southwest Piney Woods field to be nonproducing does not prove that the fraud was immaterial. Continental regarded the Southwest Piney Woods field as an important back-up to the Thomasville fields. The fact that this was a nonrecourse loan made Grace's failure to disclose the fate of that field particularly significant. Continental could not look to Grace for repayment of the loan but only to the revenues generated by the gas fields themselves, revenues dependent on production as well as on the price of gas. Any diminution in that revenue potential was ominous. Grace's own reaction when it heard that the Southwest Piney Woods field was worthless bears eloquent witness to the perceived value of that field.

3. Grace's complaints about the jury instructions, the admission of certain evidence, and the sufficiency of the evidence to demonstrate its intention to conceal material information from Continental have no merit.

The difficult question on liability is whether Grace was required to volunteer to Continental, before the loan closed, the bad news about the Southwest Piney Woods field. An omission can of course be actionable as a fraud. See, e.g., Tan v. Boyke, supra, 156 Ill.App.3d at 54, 108 Ill.Dec. at 232, 508 N.E.2d at 393; Chapman v. Hosek, 131 Ill.App.3d 180, 186-88, 86 Ill.Dec. 379, 384-85, 475 N.E.2d 593, 598-99 (1985); Central States Joint Board v. Continental Assurance Co., 117 Ill.App.3d 600, 604, 73 Ill.Dec. 107, 110, 453 N.E.2d 932, 935 (1983); Allensworth v. Ben Franklin Savings & Loan Ass'n, 71 Ill.App.3d 1041, 27 Ill.Dec. 620, 389 N.E.2d 684 (1979). But not every failure by a seller (or borrower, or employee, etc.) to disclose information to the buyer (or lender, or employer, etc.) that would cause the latter to reassess the deal is actionable. A general duty of disclosure would turn every bargaining relationship into a fiduciary one. There would no longer be such a thing as arm's-length bargaining, and enterprise and commerce would be impeded. The seller who deals at arm's length is entitled to "take advantage" of the buyer at least to the extent of exploiting information and expertise that the seller expended substantial resources of time or money on obtaining — otherwise what incentive would there be to incur such costs? See Teamsters Local 282 Pension Trust Fund v. Angelos, supra, 762 F.2d at 528; United States v. Dial, 757 F.2d 163, 168 (7th Cir.1985); Kronman, Mistake, Disclosure, Information, and the Law of Contracts, 7 J.Legal Stud. 1 (1978). But when the seller has without substantial investment on his part come upon material information which the buyer would find either impossible or very costly to discover himself, then the seller must disclose it — for example, must disclose that the house he is trying to sell is infested with termites. See, e.g., Posner v. Davis, 76 Ill.App.3d 638, 32 Ill.Dec. 186, 395 N.E.2d 133 (1979) (basement flooding). The distinction between the two classes of case is illustrated by Lenzi v. Morkin, 103 Ill.2d 290, 82 Ill.Dec. 644, 469 N.E.2d 178 (1984), where the failure to disclose an assessor's valuation was held not to be actionable, since the valuation was a matter of public record and therefore ascertainable by the buyer at reasonable cost. See also Illinois Central Gulf R.R. v. Department of Local Government Affairs, 169 Ill.App.3d 683, 120 Ill.Dec. 137, 523 N.E.2d 1048 (1988).

The situation of the would-be lender who discovers that his collateral (or a major part of it) is worthless because of circumstances that the borrower learned without effort or expertise but that the lender could not have learned without a substantial investment of time or effort seems [620] assimilable to that of the seller of the termite-infested house. But this we need not decide for certain, since we do not understand Grace to be contesting the issue of duty but only to be arguing that Continental had made a firm commitment by April 7 (if not earlier) — a commitment that it could not have backed out of even if Grace had come to it on May 8 and told it that the Loch Ness monster had swallowed the entire State of Mississippi so that Continental would not recoup a penny of the $75 million loan that it had not yet made but was committed to make. If the commitment was that firm, the fraud was immaterial. See Jordan v. Duff & Phelps, Inc., 815 F.2d 429, 447 (7th Cir.1987) (dissenting opinion), and cases cited there. If not, then we do not (to repeat) understand Grace to be arguing that it was entitled to stand mute when the time came to make the final agreement. If you go to a bank for a loan on your house, and the bank tentatively agrees to make it, and on the day before the loan papers are to be signed the house is destroyed by a flood and you don't disclose the fact at the signing, then we suppose — and, more to the point, Grace appears to concede — that you are guilty of fraud even if you made no representation that the house was still in existence. This case is less dramatic inasmuch as the security for the loan was not rendered completely worthless by the Pursue Ridgeway disaster — but more dramatic in that the lender here, unlike the lender in the house example, could not sue the borrower if the assets pledged to repay the loan proved insufficient, because it was a nonrecourse loan.

So it is crucial to determine whether there was a commitment before May 8. The March and April letters were preliminary to a final agreement, but not necessarily on that account unenforceable. The question when a preliminary agreement is enforceable is a vexed one, as we noted recently in Empro Mfg. Co. v. Ball-Co Mfg., Inc., 870 F.2d 423 (7th Cir.1989); see also Farnsworth, Precontractual Liability and Preliminary Agreements: Fair Dealing and Failed Negotiations, 87 Colum.L.Rev. 217, 249-63 (1987). But Illinois law is reasonably clear in making the issue one of the parties' intentions as gleaned from the agreement itself if the agreement is unambiguous and, if it is ambiguous, from all pertinent evidence. See Anand v. Marple, 167 Ill.App.3d 918, 118 Ill.Dec. 826, 522 N.E.2d 281 (1988); Ebert v. Dr. Scholl's Foot Comfort Shops, Inc., 137 Ill.App.3d 550, 559, 92 Ill.Dec. 323, 330, 484 N.E.2d 1178, 1185 (1985); Inland Real Estate Corp. v. Christoph, 107 Ill.App.3d 183, 185-86, 63 Ill.Dec. 9, 11, 437 N.E.2d 658, 660 (1981); Interway, Inc. v. Alagna, 85 Ill.App.3d 1094, 41 Ill.Dec. 117, 407 N.E.2d 615 (1980). In cases where a preliminary agreement has been superseded by a final one, the parol evidence rule forbids the use in evidence of the preliminary agreement to alter the terms in the final one. See Fidelity & Deposit Co. v. City of Sheboygan Falls, 713 F.2d 1261, 1271 (7th Cir.1983); Patton v. Mid-Continent Systems, Inc., 841 F.2d 742, 745 (7th Cir.1988); Farnsworth, Contracts 451 (1982). But here we have no final integrated agreement — no agreement into which any preliminary agreements would merge and disappear — so the rule is inapplicable.

With the parol evidence rule out of the way, two types of ambiguity can usefully be distinguished. One is internal ("intrinsic"), and is present when the agreement itself is unclear. The other is external ("extrinsic") and is present when, although the agreement itself is a perfectly lucid and apparently complete specimen of English prose, anyone familiar with the real-world context of the agreement would wonder what it meant with reference to the particular question that has arisen. See, e.g., Patton v. Mid-Continent Systems, Inc., supra, 841 F.2d at 745; Amoco Oil Co. v. Ashcraft, 791 F.2d 519, 521 (7th Cir.1986). So parol and other extrinsic evidence is admissible, even in a case involving a contract with an integration clause, to demonstrate that the contract is ambiguous. See, e.g., Stamatakis Industries, Inc. v. King, 165 Ill.App.3d 879, 887, 117 Ill.Dec. 419, 424, 520 N.E.2d 770, 775 (1987); [621] Zale Construction Co. v. Hoffman, 145 Ill.App.3d 235, 241, 98 Ill.Dec. 708, 712, 494 N.E.2d 830, 834 (1986); UIDC Management, Inc. v. Sears Roebuck & Co., 141 Ill.App.3d 227, 230, 95 Ill.Dec. 691, 693, 490 N.E.2d 164, 166 (1986); Sunstream Jet Express, Inc. v. International Air Service Co., 734 F.2d 1258, 1268 (7th Cir.1984) (construing Illinois law); Marmon Group, Inc. v. Rexnord, Inc., 822 F.2d 31, 34 (7th Cir.1987) (per curiam). Admissible, that is to say, even if the contract has no intrinsic ambiguity — even if it would seem perfectly clear to a normal reader of English, although to persons knowledgeable about the circumstances in which the contract had been intended to apply the "normal" reading might be nonsense. See Lucie v. Kleen-Leen, Inc., 499 F.2d 220 (7th Cir.1974) (per curiam); Isbrandtsen v. North Branch Corp., 556 A.2d 81, 83-85 (Vt.1988); Farnsworth, supra, at 501. That is what it means to say that extrinsic evidence is admissible to demonstrate an ambiguity. There is no ambiguity on the surface of the document; the ambiguity appears only when extrinsic evidence is considered.

The Illinois cases provide firmer support for allowing extrinsic evidence when the contract is patently ambiguous than for allowing such evidence to establish that an otherwise clear contract is (to those in the know) ambiguous. See, e.g., LaSalle National Bank v. General Mills Restaurant Group, Inc., 854 F.2d 1050, 1052 (7th Cir.1988) (applying Illinois law). The Illinois Appellate Court is, as we noted in Metalex Corp. v. Uniden Corp., 863 F.2d 1331, 1335-36 (7th Cir.1988), divided on the latter question. Compare, for example, URS Corp. v. Ash, 101 Ill.App.3d 229, 233-35, 56 Ill.Dec. 749, 753-54, 427 N.E.2d 1295, 1299-1300 (1981), with United Equitable Ins. Co. v. Reinsurance Co., 157 Ill.App.3d 724, 730-31, 109 Ill.Dec. 846, 810-11, 510 N.E.2d 914, 918-19 (1987). The Supreme Court of Illinois has not resolved the conflict. Although United Equitable opines that the supreme court did resolve it, against allowing extrinsic evidence to demonstrate an ambiguity, in Rakowski v. Lucente, 104 Ill.2d 317, 323, 84 Ill.Dec. 654, 657, 472 N.E.2d 791, 794 (1984), many of the cases that allow the admission of extrinsic evidence for such purpose were decided after Rakowski and find that decision distinguishable.

The older view, sometimes called the "four corners" rule, which excludes extrinsic evidence if the contract is clear "on its face," is not ridiculous. (There is ancient wisdom as well as ancient prejudice.) The rule tends to cut down on the amount of litigation, in part by reducing the role of the jury; for it is the jury that interprets contracts when interpretation requires consideration of extrinsic evidence. Parties to contracts may prefer, ex ante (that is, when negotiating the contract, and therefore before an interpretive dispute has arisen), to avoid the expense and uncertainty of having a jury resolve a dispute between them, even at the cost of some inflexibility in interpretation.

We suspect that the alleged conflict within the Illinois Appellate Court is a pseudo-conflict; one straw in the wind is that the author of United Equitable also wrote Zale. Most of the modern cases in the "four corners" line stand for the unexceptionable proposition that "language in a contract is not rendered ambiguous simply because the parties do not agree upon its meaning." Reynolds v. Coleman, 173 Ill.App.3d 585, 593, 123 Ill.Dec. 259, 265, 527 N.E.2d 897, 903 (1988). In Rakowski itself the extrinsic evidence that Lucente sought to introduce was an affidavit that "contains only his unsubstantiated assertion that he did not intend to include his right to seek contribution in the matters released." 104 Ill.2d at 324, 84 Ill.Dec. at 657, 472 N.E.2d at 794; see also Forty-Eight Insulations, Inc. v. Acevedo, 140 Ill.App.3d 107, 113-14, 94 Ill.Dec. 329, 333, 487 N.E.2d 1206, 1210 (1986). The fact that parties to a contract disagree about its meaning does not show that it is ambiguous, for if it did, then putting contracts into writing would provide parties with little or no protection. Several of the cases in the "four corners" line involve releases, and the courts stress the importance of encouraging settlements by enforcing releases according to their tenor. Rakowski was such a case; also [622] Kolar v. Ray, 142 Ill.App.3d 912, 97 Ill.Dec. 240, 492 N.E.2d 899 (1986). These cases stand for the proposition that the words of the contract are not lightly to be ignored. The nature of the offer of proof to show an ambiguity is therefore critical. Although a self-serving statement, a la Lucente, that a party did not understand the contract to mean what it says (or appears to say) will not suffice, an offer to show that anyone who understood the context of the contract would realize it couldn't mean what an untutored reader would suppose it meant will.

Both forms of ambiguity, the intrinsic (or internal) and the extrinsic (or external), are present here and made the meaning of the contract a question for the jury, whose answer we can disturb only if it is unreasonable. First, the term "subject to satisfactory documentation," which was implicit in the April 1 and April 7 letters even though not recited in them, is ambiguous. It could mean just proof of the assumptions underlying the terms and conditions set forth in the letters, assumptions such as that Grace would own the Mississippi properties by the time the loan was closed. Or it could entitle Continental to insist that Grace document any material assumptions on which Continental's willingness to commit $75 million to Grace was based. On this reading, if Continental had discovered before the closing that the reserve report on which it had relied in evaluating the loan was inaccurate, it could have required Grace to demonstrate that the loan was nevertheless as secure as Continental had originally believed. Cf. UCC § 2-609.

The external ambiguity lies in the fact that, to anyone cognizant of the commercial setting, the agreement was incomplete. It did not address a range of possible risks that might materialize between the commitment and the closing. Cf. Fidelity & Deposit Co. v. City of Sheboygan Falls, supra, 713 F.2d at 1271. For example, it would have been odd if by virtue of making a loan commitment Continental had become in effect the fire insurer of the Mississippi properties on the theory that it would have owed Grace $75 million even if the properties had been destroyed by fire between April 7 and the July closing and, given the nonrecourse feature of the loan, could not have gotten the money back. It may be that the commitment was implicitly conditioned on the circumstances of the loan remaining materially unchanged between the commitment date and the closing. This is a possible, not a necessary, interpretation. Grace may have wanted a firmer commitment before agreeing to lay out $87 million to buy the properties from Centex. The only question for us is whether the agreement was so plainly a commitment by Continental to make a nonrecourse loan of $75 million to Grace come what may that the jury would have had to be irrational to find that Grace's failure to inform Continental about the disaster that befell the Southwest Piney Woods field was material. This we cannot say. The jury was entitled to conclude that the commitment fee (a modest one-half of one percent per annum on the unused portion of the loan, i.e., on any part of the $75 million that Grace decided not to take up) was to compensate Continental for agreeing to make the loan at the agreed interest rate, and other terms and conditions, provided nothing new and material came to light between the commitment and the closing. Perhaps the most telling piece of extrinsic evidence is Grace's own conduct in trying to conceal the bad news from Continental; it would have had no reason to do so under the interpretation of the contract that it is now pressing.

We turn to the issue of damages. Grace focuses most of its attack on the award of punitive damages, which it contends violates the excessive-fines clause of the Eighth Amendment and other provisions of the Constitution. Twenty-five million dollars is of course a large amount, but its reasonableness must be assessed in relation to the amount of injury done by the tortfeasor. The concern in recent cases dealing with the constitutionality of punitive-damages awards has centered on awards that are huge multiples of the compensatory damages, as in Kelco Disposal, Inc. v. Browning-Ferris Industries, Inc., 845 F.2d 404, 410 (2d Cir.), cert. granted, [623] 488 U.S. 980, 109 S.Ct. 527, 102 L.Ed.2d 559 (1988) (argued before the Supreme Court on April 18), where the punitive damages awarded were more than 100 times greater than the compensatory damages. Treble damages are a common form of punitive damages, and we do not understand their constitutionality to be in question. The FDIC received only double damages.

The most straightforward rationale for punitive damages, as for fines and other criminal punishments that exceed the actual injury done by (or profit obtained by) the tortfeasor or criminal, is that they are necessary to deter torts or crimes that are concealable. Suppose the average defrauder is brought to book only half the time. To confront him with a sanction that will make fraud worthless to him and thus deter him, it is necessary that when he is caught he be made to pay twice as much as his profits. In such a case double damages would certainly not be problematic. Fraud is a concealable tort, and indeed concealment was the essence of Grace's fraud. Only after Grace thought it was home free — in fact three years after it thought it was home free — did it reveal the fraud by sending Continental a copy of the complaint it had filed charging Centex with fraud.

Concealment is not the only rationale for punitive damages, although no other one is necessary to establish the propriety of an award of punitive damages in this case. Another rationale is that punitive damages provide surer deterrence than actual damages of conduct that we very much want to deter because it is highly anti-social. Fraud, a form of intentional wrongdoing, is in that category. Under this rationale, too, the ratio of punitive to actual damages is highly pertinent. A $100 fraud might be securely deterred by a $500 penalty on top of compensatory damages, making a total of $600; a $25 million fraud would not be securely deterred by a $500 penalty, making a total of $25,000,500. The common law of Illinois authorizes substantial awards of punitive damages in cases of fraud. See West v. Western Casualty & Surety Co., 846 F.2d 387, 398-401 (7th Cir.1988). The award here was excessive neither by Illinois nor by federal constitutional standards.

The problem is with the award of compensatory damages. We have railed repeatedly against the extraordinary casualness that otherwise proficient trial lawyers display at the remedy stage in commercial litigation. See Patton v. Mid-Continent Systems, Inc., supra, 841 F.2d at 748 (collecting cases). All their energies seem to be used up in proving (or disproving) liability. This case is no exception despite the huge stakes. It would have been easy to estimate the present value of the loan to Grace at the time of trial, to add the interest that Continental had already received on the loan, and to subtract the sum from the principal and interest that Continental would have obtained from an alternative use of the $75 million that it disbursed on the loan. For that is the measure of what Continental lost as a result of the fraud. One alternative, of course, is that Continental would have made a smaller loan to Grace, and placed the difference elsewhere; then the experience of the sum of these hypothetical loans, compared to the experience of the actual loan, would provide the measure of Continental's loss.

Suppose hypothetically that at the time of trial, the present value of the $75 million loan that Continental made to Grace was $30 million (representing a heavy discount from the face amount of the loan, in recognition of the unlikelihood that it will actually be repaid), and Continental had already received $65 million in interest. Then the total benefit to Continental from the loan (ignoring as we shall throughout this example, for simplicity's sake, adjustments necessary to reflect changes in the value of the dollar due to inflation) would be $95 million. Suppose further that if Grace had disclosed the Pursue Ridgeway disaster to Continental, then, instead of making the $75 million nonrecourse loan to Grace, Continental would have placed the $75 million in a loan or loans (perhaps including a smaller loan to Grace) that would have yielded Continental a benefit to the date of [624] trial of $130 million. Then its damages would be $35 million ($130 million minus $95 million).

No evidence enabling such a computation to be made was presented. The jury was allowed to pick a figure out of the air after hearing testimony that Grace's own projections of price and production from the producing fields showed that the loan would probably never be repaid. The underlying figures were not placed in evidence. Although Grace can be faulted for having failed to offer its own evidence of damages — a fault we have noted in recent cases, see, e.g., Lancaster v. Norfolk & Western Ry., 773 F.2d 807, 823 (7th Cir.1985); see also Wallace Motor Sales, Inc. v. American Motor Sales Corp., 780 F.2d 1049, 1062 (1st Cir.1985), and cases cited there — the FDIC had the burden of proving what it lost, and it failed to carry the burden, resulting in a multi-million-dollar damages verdict that is pure guesswork. This is not a case where the defendant's wrongful conduct made it difficult to establish the plaintiff's damages, a situation where lenity in proof of damages is traditionally allowed. See, e.g., Bigelow v. RKO Radio Pictures, Inc., 327 U.S. 251, 266, 66 S.Ct. 574, 580, 90 L.Ed. 652 (1946); Bob Willow Motors, Inc. v. General Motors Corp., 872 F.2d 788, 799 (7th Cir.1989); Jay Edwards, Inc. v. New England Toyota Distributor, Inc., 708 F.2d 814, 821 (1st Cir.1983).

Grace is entitled to a new trial, though one limited to damages. The amount of punitive damages, related as they are to compensatory damages, will have to be redetermined as well in the new trial that we are ordering. We could take the position that the first trial fixed the ratio of punitive to compensatory damages as one to one, so that whatever the next award of compensatory damages is it will just have to be doubled to yield the final judgment (before interest). But proportionality to actual damages is not the only consideration in determining how large the award of punitive damages should be, so the ratio will have to be redetermined in the new trial that we are ordering on damages.

The judgment is affirmed in part and reversed in part, and the case remanded for a new trial limited to damages. There shall be no award of costs in this court.

AFFIRMED IN PART, REVERSED IN PART, AND REMANDED WITH DIRECTIONS.

Miller, Van Dorn, Hughes & O'Connor, Richard H. McConnell and Daniel C. Miller for Defendant and Appellant.

Richard H. Peterson, Gilbert L. Harrick and Donald Mitchell for Plaintiff and Respondent.

TRAYNOR, C. J.

Defendant appeals from a judgment for plaintiff in an action for damages for injury to property under an indemnity clause of a contract. [36]

In 1960 defendant entered into a contract with plaintiff to furnish the labor and equipment necessary to remove and replace the upper metal cover of plaintiff's steam turbine. Defendant agreed to perform the work "at [its] own risk and expense" and to "indemnify" plaintiff "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." Defendant also agreed to procure not less than $50,000 insurance to cover liability for injury to property.plaintiff was to be an additional named insured, but the policy was to contain a cross-liability clause extending the coverage to plaintiff's property.

During the work the cover fell and injured the exposed rotor of the turbine.plaintiff brought this action to recover $25,144.51, the amount it subsequently spent on repairs. During the trial it dismissed a count based on negligence and thereafter secured judgment on the theory that the indemnity provision covered injury to all property regardless of ownership.

Defendant offered to prove by admissions of plaintiff's agents, by defendant's conduct under similar contracts entered into with plaintiff, and by other proof that in the indemnity clause the parties meant to cover injury to property of third parties only and not to plaintiff's property. ^[402] Although the trial court observed that the language used was "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," it nevertheless held that the "plain language" of the agreement also required defendant to indemnify plaintiff for injuries to plaintiff's property. Having determined that the contract had a plain meaning, the court refused to admit any extrinsic evidence that would contradict its interpretation.

When the court interprets a contract on this basis, it determines [37] the meaning of the instrument in accordance with the "... extrinsic evidence of the judge's own linguistic education and experience." (3 Corbin on Contracts (1960 ed.) [1964 Supp. 579, p. 225, fn. 56].) The exclusion of testimony that might contradict the linguistic background of the judge reflects a judicial belief in the possibility of perfect verbal expression. (9 Wigmore on Evidence (3d ed. 1940) 2461, p. 187.) This belief is a remnant of a primitive faith in the inherent potency ^[403] and inherent meaning of words. ^[404]

[1] 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. (Continental Baking Co. v. Katz (1968) 68 Cal.2d 512, 520-521 [67 Cal.Rptr. 761, 439 P.2d 889]; Parsons v. Bristol Development Co. (1965) 62 Cal.2d 861, 865 [44 Cal.Rptr. 767, 402 P.2d 839]; Hulse v. Juillard Fancy Foods Co. (1964) 61 Cal.2d 571, 573 [39 Cal.Rptr. 529, 394 P.2d 65]; Nofziger v. Holman (1964) 61 Cal.2d 526, 528 [39 Cal.Rptr. 384, 393 P.2d 696]; Coast Bank v. Minderhout (1964) 61 Cal.2d 311, 315 [38 Cal.Rptr. 505, 392 P.2d 265]; Imbach v. Schultz (1962) 58 Cal.2d 858, 860 [27 Cal.Rptr. 160, 377 P.2d 272]; Reid v. Overland Machined Products (1961) 55 Cal.2d 203, 210 [10 Cal.Rptr. 819, 359 P.2d 251].)

A rule that would limit the determination of the meaning of a written instrument to its four-corners merely because it seems to the court to be clear and unambiguous, would either deny the relevance of the intention of the parties or presuppose a degree of verbal precision and stability our language has not attained. [38]

Some courts have expressed the opinion that contractual obligations are created by the mere use of certain words, whether or not there was any intention to incur such obligations. ^[405] Under this view, contractual obligations flow, not from the intention of the parties but from the fact that they used certain magic words. Evidence of the parties' intention therefore becomes irrelevant.

[2] In this state, however, the intention of the parties as expressed in the contract is the source of contractual rights and duties. ^[406] A court must ascertain and give effect to this intention by determining what the parties meant by the words they used. Accordingly, the exclusion of relevant, extrinsic, evidence to explain the meaning of a written instrument could be justified only if it were feasible to determine the meaning the parties gave to the words from the instrument alone.

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. [3] "A word is a symbol of thought but has no arbitrary and fixed meaning like a symbol of algebra or chemistry, ..." (Pearson v. State Social Welfare Board (1960) 54 Cal.2d 184, 195 [5 Cal.Rptr. 553, 353 P.2d 33].) The meaning of particular words or groups of words varies with the "... verbal context and surrounding circumstances and purposes in view of the linguistic education and experience of their users and their hearers or readers (not excluding judges). ... A word has no meaning apart from these factors; much less does it have an objective meaning, one true meaning." (Corbin, The Interpretation of Words and the Parol Evidence Rule (1965) 50 Cornell L.Q. 161, 187.) [4] Accordingly, the meaning of a writing "... can only be found by interpretation [39] in the light of all the circumstances that reveal the sense in which the writer used the words. The exclusion of parol evidence regarding such circumstances merely because the words do not appear ambiguous to the reader can easily lead to the attribution to a written instrument of a meaning that was never intended. [Citations omitted.]" (Universal Sales Corp. v. California Press Mfg. Co., supra, 20 Cal.2d 751, 776 (concurring opinion); see also, e.g., Garden State Plaza Corp. v. S. S. Kresge Co. (1963) 78 N.J. Super. 485 [189 A.2d 448, 454]; Hurst v. W. J. Lake & Co. (1932) 141 Ore. 306, 310 [16 P.2d 627, 629, 89 A.L.R. 1222]; 3 Corbin on Contracts (1960 ed.) 579, pp. 412-431; Ogden and Richards, The Meaning of Meaning, op.cit supra 15; Ullmann, The Principles of Semantics, supra, 61; McBaine, The Rule Against Disturbing Plain Meaning of Writings (1943) 31 Cal.L.Rev. 145.)

[5] Although extrinsic evidence is not admissible to add to, detract from, or vary the terms of a written contract, these terms must first be determined before it can be decided whether or not extrinsic evidence is being offered for a prohibited purpose. The fact that the terms of an instrument appear clear to a judge does not preclude the possibility that the parties chose the language of the instrument to express different terms. That possibility is not limited to contracts whose terms have acquired a particular meaning by trade usage, ^[407] but exists whenever the parties' understanding of the words used may have differed from the judge's understanding.

Accordingly, rational interpretation requires at least a preliminary consideration of all credible evidence offered to [40] prove the intention of the parties. ^[408] (Civ. Code, 1647; Code Civ. Proc., 1860; see also 9 Wigmore on Evidence, op. cit. supra, 2470, fn. 11, p. 227.) Such evidence includes testimony as to the "circumstances surrounding the making of the agreement ... including the object, nature and subject matter of the writing ..." so that the court can "place itself in the same situation in which the parties found themselves at the time of contracting." (Universal Sales Corp. v. California Press Mfg. Co., supra, 20 Cal.2d 751, 761; Lemm v. Stillwater Land & Cattle Co., supra, 217 Cal. 474, 480-481.) [6] 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 ..." (Balfour v. Fresno C. & I. Co. (1895) 109 Cal. 221, 225 [41 P. 876]; see also, Hulse v. Juillard Fancy Foods Co., supra, 61 Cal.2d 571, 573; Nofziger v. Holman, supra, 61 Cal.2d 526, 528; Reid v. Overland Machined Products, supra, 55 Cal.2d 203, 210; Barham v. Barham (1949) 33 Cal.2d 416, 422-423 [202 P.2d 289]; Kenney v. Los Feliz Investment Co. (1932) 121 Cal.App. 378, 386-387 [9 P.2d 225]), extrinsic evidence relevant to prove either of such meanings is admissible. ^[409]

[7] In the present case the court erroneously refused to consider extrinsic evidence offered to show that the indemnity clause in the contract was not intended to cover injuries to plaintiff's property. Although that evidence was not necessary to show that the indemnity clause was reasonably susceptible of the meaning contended for by defendant, it was nevertheless relevant and admissible on that issue. Moreover, since that clause was reasonably susceptible of that meaning, [41] the offered evidence was also admissible to prove that the clause had that meaning and did not cover injuries to plaintiff's property. ^[410] Accordingly, the judgment must be reversed.

[8] Two questions remain that may arise on retrial. On the theory that the indemnity clause covered plaintiff's property, the trial court instructed the jury that plaintiff was entitled to recover unless all of "... the following conditions [were found] to exist:"

"1. That Pacific Gas and Electric Company continued to [42] maintain independent operation on the premises whereon the installation of the cover was in progress;"

"2. That the damage to the turbine was unrelated to the Defendant G. W. Thomas Drayage & Rigging Company, Inc.'s performance;"

"3. That the plaintiff was guilty of active, affirmative negligence; and"

"4. That such active negligence related to a matter over which the plaintiff exercised exclusive control."

The instruction was based on certain guidelines discussed in Goldman v. Ecco-Phoenix Elec. Corp. (1964) 62 Cal.2d 40, 45-46 [41 Cal.Rptr. 73, 396 P.2d 377]; Harvey Machine Co. v. Hatzel & Buehler, Inc. (1960) 54 Cal.2d 445, 448 [6 Cal.Rptr. 284, 353 P.2d 924]; and Safeway Stores, Inc. v. Massachusetts Bonding & Ins. Co. (1962) 202 Cal.App.2d 99, 112-113 [20 Cal.Rptr. 820]. Those cases do not hold, however, that all four conditions specified in the instruction must exist for the indemnitor to be relieved of liability. It is sufficient if the indemnitee's own active negligence is a cause of the harm. As stated in Markley v. Beagle (1967) 66 Cal.2d 951, 952 [59 Cal.Rptr. 809, 429 P.2d 129], "An indemnity clause phrased in general terms will not be interpreted ... to provide indemnity for consequences resulting from the indemnitee's own actively negligent acts."

To prove the amount of damages sustained, plaintiff presented invoices received from Ingersoll-Rand, the manufacturer and repairer of the turbine, the drafts by which plaintiff had remitted payment, and testimony that payment had been made. Defendant objected to the introduction of the invoices on the ground that they were hearsay. Subsequently, plaintiff called a mechanical engineer who qualified as an expert witness on the repair of turbines. On the basis of photographs of the damage after the accident, he testified that to repair the turbine it was reasonable and necessary to dismantle it completely, magnaflux all parts, replace all blades in wheels that had been damaged, reassemble the rotor, balance it, "indicate" it and centrifugate it. Similar repairs were listed in the invoices, and over objection the witness was allowed to testify that the amounts charged therefor were reasonable.

[9] Since invoices, bills, and receipts for repairs are hearsay, they are inadmissible independently to prove that liability for the repairs was incurred, that payment was made, or [43] that the charges were reasonable. (Plonley v. Reser (1960) 178 Cal.App.2d Supp. 935, 937-939 [3 Cal.Rptr. 551, 80 A.L.R.2d 911]; Menefee v. Raisch Improvement Co. (1926) 78 Cal.App. 785, 789 [248 P. 1031].) If, however, a party testifies that he incurred or discharged a liability for repairs, any of these documents may be admitted for the limited purpose of corroborating his testimony (Bushnell v. Bushnell (1925) 103 Conn. 583 [131 A. 432, 436, 44 A.L.R. 788]; Cain v. Mead (1896) 66 Minn. 195 [68 N.W. 840, 841]), and if the charges were paid, the testimony and documents are evidence that the charges were reasonable. (Dewhirst v. Leopold (1924) 194 Cal. 424, 433 [229 P. 30]; Smith v. Hill (1965) 237 Cal.App.2d 374, 388 [47 Cal.Rptr. 49]; Meier v. Paul X. Smith Corp. (1962) 205 Cal.App.2d 207, 222 [22 Cal.Rptr. 758]; Malinson v. Black (1948) 83 Cal.App.2d 375, 379 [188 P.2d 788]; Laubscher v. Blake (1935) 7 Cal.App.2d 376, 383 [46 P.2d 836]. See also Gimbel v. Laramie (1960) 181 Cal.App.2d 77, 81 [5 Cal.Rptr. 88].) Since there was testimony in the present case that the invoices had been paid, the trial court did not err in admitting them.

[10] The individual items on the invoices, however, were read, not to corroborate payment or the reasonableness of the charges, but to prove that these specific repairs had actually been made. No qualified witness was called to testify that the invoices accurately recorded the work done by Ingersoll-Rand, and there was no other evidence as to what repairs were made. This use of the invoices was error. (California Steel Buildings, Inc. v. Transport Indemnity Co. (1966) 242 Cal.App.2d 749, 759 [51 Cal.Rptr. 797]. Accord, Bushnell v. Bushnell, supra, 103 Conn. 583 [131 A. 432, 436]; Ferraro v. Public Service Ry. Co. (1928) 6 N.J. Misc. 463 [141 A. 590]; Nock v. Lloyd (1911) 32 R.I. 313 [79 A. 832, 833].) An invoice submitted by a third party is not admissible evidence on this issue unless it can be admitted under some recognized exception to the hearsay rule. ^[411]

[11] Since plaintiff's expert's testimony as to the reasonableness of the charges was based on hearsay evidence inadmissible to prove that the repairs had been made, defendant's [44] objections to it should have been sustained. "[A]n expert must base his opinion either on facts personally observed or on hypotheses that find support in the evidence." (George v. Bekins Van & Storage Co. (1949) 33 Cal.2d 834, 844 [205 P.2d 1037]. See also Kastner v. Los Angeles Metropolitan Transit Authority (1965) 63 Cal.2d 52, 58 [45 Cal.Rptr. 129, 403 P.2d 385]; Commercial Union Assur. Co. v. Pacific Gas & Electric Co. (1934) 220 Cal. 515, 524 [31 P.2d 793]; Behr v. County of Santa Cruz (1959) 172 Cal.App.2d 697, 709 [342 P.2d 987]; 2 Jones on Evidence (5th ed. 1958) 416, pp. 782-783.)

The judgment is reversed.

Peters, J., Mosk, J., Burke, J., Sullivan, J., and Peek, J., ^[412] concurred.

McComb, J., dissented.

Plaintiff's assertion that the use of the word "all" to modify "loss, damage, expense and liability" dictates an all inclusive interpretation is not persuasive. If the word "indemnify" encompasses only third-party claims, the word "all" simply refers to all such claims. The use of the words "loss," "damage," and "expense" in addition to the word "liability" is likewise inconclusive. These words do not imply an agreement to reimburse for injury to an indemnitee's property since they are commonly inserted in third-party indemnity clauses, to enable an indemnitee who settles a claim to recover from his indemnitor without proving his liability. (Carpenter Paper Co. v. Kellogg (1952) 114 Cal.App.2d 640, 651 [251 P.2d 40]. Civ. Code, 2778, provides: "1. Upon an indemnity against liability ... the person indemnified is entitled to recover upon becoming liable; 2. Upon an indemnity against claims, or demands, or damages, or costs ... the person indemnified is not entitled to recover without payment thereof; ...")

The provision that defendant perform the work "at his own risk and expense" and the provisions relating to insurance are equally inconclusive. By agreeing to work at its own risk defendant may have released plaintiff from liability for any injuries to defendant's property arising out of the contract's performance, but this provision did not necessarily make defendant an insurer against injuries to plaintiff's property. Defendant's agreement to procure liability insurance to cover damages to plaintiff's property does not indicate whether the insurance was to cover all injuries or only injuries caused by defendant's negligence.

[402] 1. Although this offer of proof might ordinarily be regarded as too general to provide a ground for appeal (Evid. Code, 354, subd. (a); Beneficial etc. Ins. Co. v. Kurt Hitke & Co. (1956) 46 Cal.2d 517, 522 [297 P.2d 428]; Stickel v. San Diego Elec. Ry. Co. (1948) 32 Cal.2d 157, 162-164 [195 P.2d 416]; Douillard v. Woodd (1942) 20 Cal.2d 665, 670 [128 P.2d 6]), since the court repeatedly ruled that it would not admit extrinsic evidence to interpret the contract and sustained objections to all questions seeking to elicit such evidence, no formal offer of proof was required. (Evid. Code, 354, subd. (b); Beneficial etc. Ins. Co. v. Kurt Hitke & Co., supra, 46 Cal.2d 517, 522; Estate of Kearns (1950) 36 Cal.2d 531, 537 [225 P.2d 218].)

[403] 2. E.g., "The elaborate system of taboo and verbal prohibitions in primitive groups; the ancient Egyptian myth of Khern, the apotheosis of the words, and of Thoth, the Scribe of Truth, the Giver of Words and Script, the Master of Incantations; the avoidance of the name of God in Brahmanism, Judaism and Islam; totemistic and protective names in mediaeval Turkish and Finno-Ugrian languages; the misplaced verbal scruples of the 'Precieuses'; the Swedish peasant custom of curing sick cattle smitten by witchcraft, by making them swallow a page torn out of the psalter and put in dough. ...' from Ullman, The Principles of Semantics (1963 ed.) 43. (See also Ogden and Richards, The Meaning of Meaning (rev. ed. 1956) pp. 24- 47.)

[404] 3. " 'Rerum enim vocabula immutabilia sunt, homines mutabilia,' " (Words are unchangeable, men changeable) from Dig. XXXIII, 10, 7, 2, de sup. leg. as quoted in 9 Wigmore on Evidence, op. cit. supra, 2461, p. 187.

[405] 4. "A contract has, strictly speaking, nothing to do with the personal, or individual, intent of the parties. A contract is an obligation attached by the mere force of law to certain acts of the parties, usually words, which ordinarily accompany and represent a known intent." (Hotchkiss v. National City Bank of New York (S.D.N.Y. 1911) 200 F. 287, 293. See also C. H. Pope & Co. v. Bibb Mfg. Co. (2d Cir. 1923) 290 F. 586, 587; see 4 Williston on Contracts (3d ed. 1961) 612, pp. 577-578, 613, p. 583.)

[406] 5. "A contract must be so interpreted as to give effect to the mutual intention of the parties as it existed at the time of contracting, so far as the same is ascertainable and lawful." (Civ. Code, 1636; see also Code Civ. Proc., 1859; Universal Sales Corp. v. California Press Mfg. Co. (1942) 20 Cal.2d 751, 760 [128 P.2d 665]; Lemm v. Stillwater Land & Cattle Co. (1933) 217 Cal. 474, 480 [19 P.2d 785].)

[407] 6. Extrinsic evidence of trade usage or custom has been admitted to show that the term "United Kingdom" in a motion picture distribution contract included Ireland (Ermolieff v. R.K.O. Radio Pictures, Inc. (1942) 19 Cal.2d 543, 549-552 [122 P.2d 3]); that the word "ton" in a lease meant a long ton or 2,240 pounds and not the statutory ton of 2,000 pounds (Higgins v. California Petroleum etc. Co. (1898) 120 Cal. 629, 630-632 [52 P. 1080]); that the word "stubble" in a lease included not only stumps left in the ground but everything "left on the ground after the harvest time" (Callahan v. Stanley (1881) 57 Cal. 476, 477-479); that the term "north" in a contract dividing mining claims indicated a boundary line running along the "magnetic and not the true meridian" (Jenny Lind Co. v. Bower (1858) 11 Cal. 194, 197-199) and that a form contract for purchase and sale was actually an agency contract. (Body-Steffner Co. v. Flotill Products (1944) 63 Cal.App.2d 555, 558-562 [147 P.2d 84]). See also Code Civ. Proc., 1861; Annot., 89 A.L.R. 1228; Note (1942) 30 Cal.L.Rev. 679.)

[408] 7. When objection is made to any particular item of evidence offered to prove the intention of the parties, the trial court may not yet be in a position to determine whether in the light of all of the offered evidence, the item objected to will turn out to be admissible as tending to prove a meaning of which the language of the instrument is reasonably susceptible or inadmissible as tending to prove a meaning of which the language is not reasonably susceptible. In such case the court may admit the evidence conditionally by either reserving its ruling on the objection or by admitting the evidence subject to a motion to strike. (See Evid. Code, 403.)

[409] 8. Extrinsic evidence has often been admitted in such cases on the stated ground that the contract was ambiguous (e.g., Universal Sales Corp. v. California Press Mfg. Co., supra, 20 Cal.2d 751, 761). This statement of the rule is harmless if it is kept in mind that the ambiguity may be exposed by extrinsic evidence that reveals more than one possible meaning.

[410] 9. The court's exclusion of extrinsic evidence in this case would be error even under a rule that excluded such evidence when the instrument appeared to the court to be clear and unambiguous on its face. The controversy centers on the meaning of the word "indemnify" and the phrase "all loss, damage, expense and liability." The trial court's recognition of the language as typical of a third party indemnity clause and the double sense in which the word "indemnify" is used in statutes and defined in dictionaries demonstrate the existence of an ambiguity. (Compare Civ. Code, 2772, "Indemnity is a contract by which one engages to save another from a legal consequence of the conduct of one of the parties, or of some other person," with Civ. Code, 2527, "Insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability, arising from an unknown or contingent event." Black's Law Dictionary (4th ed. 1951) defines "indemnity" as "A collateral contract or assurance, by which one person engages to secure another against an anticipated loss or to prevent him from being damnified by the legal consequences of an act or forbearance on the part of one of the parties or of some third person." Stroud's Judicial Dictionary (2d ed. 1903) defines it as a "Contract ... to indemnify against a liability. ..." One of the definitions given to "indemnify" by Webster's Third New International Dict. (1961 ed.) is "to exempt from incurred liabilities.")

[411] 10. It might come in under the business records exception (Evid. Code, 1271) if "... supported by the testimony of a witness qualified to testify as to its identity and the mode of its preparation." (California Steel Buildings, Inc. v. Transport Indemnity Co., supra, 242 Cal.App.2d 749, 759.)

[412] *. Retired Associate Justice of the Supreme Court sitting under assignment by the Chairman of the Judicial Council.