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.

26 A.D.2d 41 (1966)

Hunt Foods and Industries, Inc., Respondent, v. George M. Doliner et al., Appellants

Appellate Division of the Supreme Court of the State of New York, First Department.

June 9, 1966.

Ben Herzberg and Frederick F. Greenman, Jr., of counsel (Hays, Sklar & Herzberg, attorneys), for appellants.

Milton Pollack for respondent.

BREITEL, P. J., RABIN, STEVENS and CAPOZZOLI, JJ., concur.

STEUER, J.

In February, 1965 plaintiff corporation undertook negotiations to acquire the assets of Eastern Can Company. The stock of the latter is owned by defendant George M. Doliner and his family to the extent of 73%. The balance is owned by independent interests. At a fairly early stage of the negotiations agreement was reached as to the price to be paid by plaintiff ($5,922,500 if in cash, or $5,730,000 in Hunt stock, but several important items, including the form of the acquisition, were not agreed upon. At this point it was found necessary to recess the negotiations for several weeks. The Hunt negotiators expressed concern over any adjournment and stated that they feared that Doliner would use their offer as a basis for soliciting a higher bid from a third party. To protect themselves they demanded an option to purchase the Doliner stock. Such an option was prepared and signed by George Doliner and the members of his family and at least one other person associated with him who were stockholders. It provides that Hunt has the option to buy all of the Doliner stock at $5.50 per share. The option is to be exercised by giving notice on or before June 1, 1965, and if notice is not given the option is void. If given, Hunt is to pay the price and the Doliners to deliver their stock within seven days thereafter. The agreement calls for Hunt to pay $1,000 for the option, which was paid. To this point there is substantial accord as to what took place.

Defendant claims that when his counsel called attention to the fact that the option was unconditional in its terms, he obtained an understanding that it was only to be used in the event that he solicited an outside offer; and that plaintiff insisted that unless the option was signed in unconditional form negotiations would terminate. Plaintiff contends there was no condition. Concededly, on resumption of negotiations the parties failed to reach agreement and the option was exercised. Defendants declined the tender and refused to deliver the stock.

Plaintiff moved for summary judgment for specific performance. We do not believe that summary judgment lies. Plaintiff's position is that the condition claimed could not be proved under the parol evidence rule and, eliminating that, there is no defense to the action.

The parol evidence rule, at least as that term refers to contracts of sale,^* is now contained in section 2-202 of the Uniform Commercial Code, which reads:

Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented * * *(b) by evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement.

The term (that the option was not to be exercised unless Doliner sought outside bids), admittedly discussed but whose operative effect is disputed, not being set out in the writing, is clearly "additional" to what is in the writing. So the first question presented is whether that term is "consistent" with the instrument. 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 (Hicks v. Bush, 10 N.Y.2d 488, 491). 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.

The Official Comment prepared by the drafters of the code contains this statement: "If the additional terms are such that, if agreed upon, they would certainly have been included in the document in the view of the court, then evidence of their alleged making must be kept from the trier of fact." (McKinney's Uniform Commercial Code, Part 1, p. 158.)

Special Term interpreted this language as not only calling for an adjudication by the court in all instances where proof of an "additional oral term" is offered, but making that determination exclusively the function of the court. We believe the proffered evidence to be inadmissible only where the writing contradicts the existence of the claimed additional term (Meadow Brook Nat. Bank v. Bzura, 20 A.D.2d 287, 290). The conversations in this case, some of which are not disputed, and the expectation of all the parties for further negotiations, suggest that the alleged oral condition precedent cannot be precluded as a matter of law or as factually impossible. It is not sufficient that the existence of the condition is implausible. It must be impossible (cf. Millerton Agway Co-op. v. Briarcliff Farms, 17 N.Y.2d 57, 63-64).

The order should be reversed on the law and the motion for summary judgment denied, with costs and disbursements to abide the event.

Order and judgment (one paper) unanimously reversed, on the law, with $50 costs and disbursements to abide the event, and plaintiff's motion for summary judgment denied.

FootNotes 

* While article 2 of the Uniform Commercial Code which contains this section does not deal with the sale of securities, this section applies to article 8, dealing with securities. (Cf. Agar v. Orda, 264 N.Y. 248; Official Comment, McKinney's Cons. Laws of N. Y., Book 62½, Part 1, Uniform Commercial Code, pp. 96-97; Note, 65 Col. L. Rev. 880, 890-891.) All parties and Special Term so regarded it.

MacDonald Flinn, New York City (E. Miles Prentice, III, Robert W. Mannix and White & Case, New York City, of counsel), for defendant-appellant.

Malcolm A. Hoffmann, New York City (Edward A. Woolley, Robert W. Biggar, Robert C. Agee, Bernard Zucker, Andrew N. Singer and Law Firm of Malcolm A. Hoffmann, New York City, of counsel), for plaintiffs-appellees.

Before MEDINA, OAKES and GURFEIN, Circuit Judges.

GURFEIN, Circuit Judge:

This is an appeal by defendant Joseph E. Seagram & Sons, Inc. ("Seagram") from a judgment entered by the District Court, Hon. Charles H. Tenney, upon the verdict of a jury in the amount of $407,850 in favor of the plaintiffs on a claim asserting common law breach of an oral contract. The court also denied Seagram's motion under Rule 50(b), Fed.R.Civ.P., for judgment notwithstanding the verdict. Harold S. Lee, et al. v. Joseph E. Seagram and Sons, 413 F.Supp. 693 (S.D.N.Y.1976). It had earlier denied Seagram's motion for summary judgment. The plaintiffs are Harold S. Lee (now deceased) and his two sons, Lester and Eric ("the Lees"). Jurisdiction is based on diversity of citizenship.^[1] We affirm.

The jury could have found the following. The Lees owned a 50% interest in Capitol City Liquor Company, Inc. ("Capitol City"), a wholesale liquor distributorship located in Washington, D.C. The other 50% was owned by Harold's brother, Henry D. Lee, and his nephew, Arthur Lee. Seagram is a distiller of alcoholic beverages. Capitol City carried numerous Seagram brands and a large portion of its sales were generated by Seagram lines.

The Lees and the other owners of Capitol City wanted to sell their respective interests in the business and, in May 1970, Harold Lee, the father, discussed the possible sale of Capitol City with Jack Yogman ("Yogman"), then Executive Vice President of Seagram (and now President), whom he had known for many years. Lee offered to sell Capitol City to Seagram but conditioned the offer on Seagram's agreement to relocate Harold and his sons, the 50% owners of Capitol City, in a new distributorship of their own in a different city.

About a month later, another officer of Seagram, John Barth, an assistant to Yogman, visited the Lees and their co-owners in Washington and began negotiations for the purchase of the assets of Capitol City by Seagram on behalf of a new distributor, one Carter, who would take it over after the purchase. The purchase of the assets of Capitol City was consummated on September 30, 1970 pursuant to a written agreement. The promise to relocate the father and sons thereafter was not reduced to writing.

Harold Lee had served the Seagram organization for thirty-six years in positions of responsibility before he acquired the half interest in the Capitol City distributorship. From 1958 to 1962, he was chief executive officer of Calvert Distillers Company, a wholly-owned subsidiary. During this long period he enjoyed the friendship and confidence of the principals of Seagram.

In 1958, Harold Lee had purchased from Seagram its holdings of Capitol City stock in order to introduce his sons into the liquor distribution business, and also to satisfy Seagram's desire to have a strong and friendly distributor for Seagram products in Washington, D.C. Harold Lee and Yogman had known each other for 13 years.

The plaintiffs claimed a breach of the oral agreement to relocate Harold Lee's sons, alleging that Seagram had had opportunities to procure another distributorship for the Lees but had refused to do so. The Lees brought this action on January 18, 1972, fifteen months after the sale of the Capitol City distributorship to Seagram. They contended that they had performed their obligation by agreeing to the sale by Capitol City of its assets to Seagram, but that Seagram had failed to perform its obligation under the separate oral contract between the Lees and Seagram. The agreement which the trial court permitted the jury to find was "an oral agreement with defendant which provided that if they agreed to sell their interest in Capitol City, defendant in return, within a reasonable time, would provide the plaintiffs a Seagram distributorship whose price would require roughly an amount equal to the capital obtained by the plaintiffs for the sale of their interest in Capitol City, and which distributorship would be in a location acceptable to plaintiffs." No specific exception was taken to this portion of the charge. By its verdict for the plaintiffs, we must assume — as Seagram notes in its brief — that this is the agreement which the jury found was made before the sale of Capitol City was agreed upon.^[2]

Appellant urges several grounds for reversal. It contends that, as a matter of law, (1) plaintiffs' proof of the alleged oral agreement is barred by the parol evidence rule; and (2) the oral agreement is too vague and indefinite to be enforceable. Appellant also contends that plaintiffs' proof of damages is speculative and incompetent.

I.

Judge Tenney, in a careful analysis of the application of the parol evidence rule, decided that the rule did not bar proof of the oral agreement. We agree.

The District Court, in its denial of the defendant's motion for summary judgment, treated the issue as whether the written agreement for the sale of assets was an "integrated" agreement not only of all the mutual agreements concerning the sale of Capitol City assets, but also of all the mutual agreements of the parties. Finding the language of the sales agreement "somewhat ambiguous," the court decided that the determination of whether the parol evidence rule applies must await the taking of evidence on the issue of whether the sales agreement was intended to be a complete and accurate integration of all of the mutual promises of the parties.

Seagram did not avail itself of this invitation. It failed to call as witnesses any of the three persons who negotiated the sales agreement on behalf of Seagram regarding the intention of the parties to integrate all mutual promises or regarding the failure of the written agreement to contain an integration clause.

Appellant contends that, as a matter of law, the oral agreement was "part and parcel" of the subject-matter of the sales contract and that failure to include it in the written contract barred proof of its existence. Mitchill v. Lath, 247 N.Y. 377, 380, 160 N.E. 646 (1928). The position of appellant, fairly stated, is that the oral agreement was either an inducing cause for the sale or was a part of the consideration for the sale, and in either case, should have been contained in the written contract. In either case, it argues that the parol evidence rule bars its admission.

Appellees maintain, on the other hand, that the oral agreement was a collateral agreement and that, since it is not contradictory of any of the terms of the sales agreement, proof of it is not barred by the parol evidence rule. Because the case comes to us after a jury verdict we must assume that there actually was an oral contract, such as the court instructed the jury it could find. The question is whether the strong policy for avoiding fraudulent claims through application of the parol evidence rule nevertheless mandates reversal on the ground that the jury should not have been permitted to hear the evidence. See Fogelson v. Rackfay Constr. Co., 300 N.Y. 334 at 337-38, 90 N.E.2d 881 (1950).

The District Court stated the cardinal issue to be whether the parties "intended" the written agreement for the sale of assets to be the complete and accurate integration of all the mutual promises of the parties. If the written contract was not a complete integration, the court held, then the parol evidence rule has no application.^[3] We assume that the District Court determined intention by objective standards. See 3 Corbin on Contracts §§ 573-574. The parol evidence rule is a rule of substantive law. Fogelson v. Rackfay Constr. Co., supra; Higgs v. De Maziroff, 263 N.Y. 473, 477, 189 N.E. 555 (1934); Smith v. Bear, 237 F.2d 79, 83 (2d Cir. 1956).

The law of New York is not rigid or categorical, but is in harmony with this approach. As Judge Fuld said in Fogelson:

"Decision in each case must, of course, turn upon the type of transaction involved, the scope of the written contract and the content of the oral agreement asserted."

300 N.Y. at 338, 90 N.E.2d at 883. And the Court of Appeals wrote in Ball v. Grady,267 N.Y. 470, 472, 196 N.E. 402, 403 (1935):

"In the end, the court must find the limits of the integration as best it may by reading the writing in the light of surrounding circumstances."

Accord, Fogelson, supra, 300 N.Y. at 338, 90 N.E.2d 881. Thus, certain oral collateral agreements, even though made contemporaneously, are not within the prohibition of the parol evidence rule "because [if] they are separate, independent, and complete contracts, although relating to the same subject. . . . [t]hey are allowed to be proved by parol, because they were made by parol, and no part thereof committed to writing." Thomas v. Scutt, 127 N.Y. 133, 140-41, 27 N.E. 961, 963 (1891).

Although there is New York authority which in general terms supports defendant's thesis that an oral contract inducing a written one or varying the consideration may be barred, see, e.g., Fogelson v. Rackfay Constr. Co., supra, 300 N.Y. at 340, 90 N.E.2d 881, the overarching question is whether, in the context of the particular setting, the oral agreement was one which the parties would ordinarily be expected to embody in the writing. Ball v. Grady, supra, 267 N.Y. at 470, 196 N.E. 402; accord, Fogelson v. Rackfay Constr. Co., supra, 300 N.Y. at 338, 90 N.E.2d 881. See Restatement on Contracts § 240. For example, integration is most easily inferred in the case of real estate contracts for the sale of land, e. g., Mitchill v. Lath, supra, 247 N.Y. 377, 160 N.E. 646, or leases, Fogelson, supra; Plum Tree, Inc. v. N.K. Winston Corp., 351 F.Supp. 80, 83 (S.D.N.Y.1972). In more complex situations, in which customary business practice may be more varied, an oral agreement can be treated as separate and independent of the written agreement even though the written contract contains a strong integration clause. See Gem Corrugated Box Corp. v. National Kraft Container Corp., 427 F.2d 499, 503 (2d Cir. 1970).

Thus, as we see it, the issue is whether the oral promise to the plaintiffs, as individuals, would be an expectable term of the contract for the sale of assets by a corporation in which plaintiffs have only a 50% interest, considering as well the history of their relationship to Seagram.

Here, there are several reasons why it would not be expected that the oral agreement to give Harold Lee's sons another distributorship would be integrated into the sales contract. In the usual case, there is an identity of parties in both the claimed integrated instrument and in the oral agreement asserted. Here, although it would have been physically possible to insert a provision dealing with only the shareholders of a 50% interest, the transaction itself was a corporate sale of assets. Collateral agreements which survive the closing of a corporate deal, such as employment agreements for particular shareholders of the seller or consulting agreements, are often set forth in separate agreements. See Gem Corrugated Box Corp. v. National Kraft Container Corp., supra, 427 F.2d at 503 ("it is . . . plain that the parties ordinarily would not embody the stock purchase agreement in a writing concerned only with box materials purchase terms"). It was expectable that such an agreement as one to obtain a new distributorship for certain persons, some of whom were not even parties to the contract, would not necessarily be integrated into an instrument for the sale of corporate assets. As with an oral condition precedent to the legal effectiveness of an otherwise integrated written contract, which is not barred by the parol evidence rule if it is not directly contradictory of its terms, Hicks v. Bush, 10 N.Y.2d 488, 225 N.Y.S.2d 34, 180 N.E.2d 425 (1962); cf.3 Corbin on Contracts § 589, "it is certainly not improbable that parties contracting in these circumstances would make the asserted oral agreement . . . ." 10 N.Y.2d at 493, 225 N.Y.S.2d at 39, 180 N.E.2d at 428.

Similarly, it is significant that there was a close relationship of confidence and friendship over many years between two old men, Harold Lee and Yogman, whose authority to bind Seagram has not been questioned. It would not be surprising that a handshake for the benefit of Harold's sons would have been thought sufficient. In point, as well, is the circumstance that the negotiations concerning the provisions of the sales agreement were not conducted by Yogman but by three other Seagram representatives, headed by John Barth. The two transactions may not have been integrated in their minds when the contract was drafted.^[4]

Finally, the written agreement does not contain the customary integration clause, even though a good part of it (relating to warranties and negative covenants) is boilerplate. The omission may, of course, have been caused by mutual trust and confidence, but in any event, there is no such strong presumption of exclusion because of the existence of a detailed integration clause, as was relied upon by the Court of Appeals in Fogelson, supra, 300 N.Y. at 340, 90 N.E. 881.

Nor do we see any contradiction of the terms of the sales agreement. Mitchill v. Lath, supra, 247 N.Y. at 381, 160 N.E. 646; 3 Corbin on Contracts § 573, at 357. The written agreement dealt with the sale of corporate assets, the oral agreement with the relocation of the Lees. Thus, the oral agreement does not vary or contradict the money consideration recited in the contract as flowing to the selling corporation. That is the only consideration recited, and it is still the only consideration to the corporation.^[5]

We affirm Judge Tenney's reception in evidence of the oral agreement and his denial of the motion under Rule 50(b) with respect to the parol evidence rule.

II.

Appellant contends, however, that the jury verdict cannot stand because the oral agreement was so vague and indefinite as to be unenforceable. First, appellant argues that the failure to specify purchase price, profitability or sales volume of the distributorship to be provided, is fatal to the contract's validity. The contention is that, because the oral agreement lacks essential terms, the courts cannot determine the rights and obligations of the parties. See 1 Corbin on Contracts § 95, at 394. Second, appellant contends that the agreement is unenforceable because there were no specific limits to plaintiffs' discretion in deciding whether to accept or reject a particular distributorship; and hence the agreement was illusory.^[6]

The alleged agreement, as the jury was permitted to find, was to provide the Lees with a liquor distributorship of approximately half the value and profit potential of Capitol City, within a reasonable time. The distributorship would be "in a location acceptable to plaintiffs," and the price would require roughly an amount equal to the plaintiffs' previous investment in Capitol City. The performance by plaintiffs in agreeing to the sale of Capitol City caused the counter-performance of the oral promise to mature.

Once the nature of the agreement found by the jury is recognized, it becomes clear that appellant's contentions are without merit. As for the alleged lack of essential terms, there was evidence credited by the jury, which did establish the purchase price, profitability and sales volume of the distributorship with reasonable specificity. In addition to the direct testimony of the Lees, there was evidence that distributorships were valued, as a rule of thumb, at book value plus three times the previous year's net profit after taxes. Between this industry standard and the reference to the Capitol City transaction, there was extrinsic evidence to render the parties' obligations reasonably definite. Professor Corbin has observed that a court should be slow to deny enforcement "if it is convinced that the parties themselves meant to make a `contract' and to bind themselves to render a future performance. Many a gap in terms can be filled, and should be, with a result that is consistent with what the parties said and that is more just to both of them than would be a refusal of enforcement." Corbin on Contracts § 97, at 425-26. New York courts are in accord in hesitating to find that a contract is too indefinite for enforcement. See Borden v. Chesterfield Farms, Inc., 27 A.D.2d 165, 277 N.Y.S.2d 494 (1st Dep't 1967); Valley Nat'l Bank v. Babylon Chrysler-Plymouth, 53 Misc.2d 1029, 280 N.Y.S.2d 786, aff'd, 28 A.D.2d 1092, 284 N.Y.S.2d 849 (2d Dep't 1967); Silverman v. Alport, 282 App.Div. 631, 125 N.Y.S.2d 602, 605 (3d Dep't 1953); Castelli v. Tolibia, 83 N.Y.S.2d 554 (S.Ct.1948), aff'd, 276 App.Div. 1066, 96 N.Y.S.2d 488 (1st Dep't 1950). The requirement that the alleged oral agreement be performed within a reasonable time is particularly unobjectionable, see Valley Nat'l Bank, supra, especially in light of the fact, which Seagram knew, that plaintiffs would have to reinvest the proceeds from the sale of Capitol City within one year or suffer adverse tax consequences.^[7]

As for the alleged unbridled discretion which the oral agreement conferred on the plaintiffs, we similarly conclude that there is no fatal defect. We note at the outset that the requirement that the new distributorship be "acceptable" to the Lees did not render the agreement illusory in the sense that it is not supported by consideration; the Lee's part of the bargain was to join in the sale of Capitol City's assets and assignment of its franchise, which they had already performed. More importantly, we do not agree that the Lees had "unbridled" discretion. New York courts would in all events impose an obligation of good faith on the Lees' exercise of discretion, see. e. g., Wood v. Lucy, Lady Duff-Gordon, 222 N.Y. 88, 118 N.E. 214 (1917), and there was also extrinsic evidence of what would constitute an "acceptable distributorship," and hence constitute reasonable performance by Seagram. Seagram appears to contend that if it had tendered reasonable performance, by offering an acceptable distributorship to the Lees, that the Lees nevertheless could have found it not "acceptable." This is not correct. It is true that Seagram could not have forced the Lees to take a distributorship, because they had not promised to do so. But Seagram's tender of reasonable performance would discharge its obligations under the oral agreement, whether or not the Lees "accepted." See 15 Williston on Contracts §§ 1808-10 (3d ed. 1972). The Lees could not prevent Seagram from fulfilling its obligations by unreasonably refusing an acceptable distributorship. Since the obligations of the parties under the contract therefore were ascertainable, it was not void for indefiniteness. Cf. Mason v. Rose, 176 F.2d 486, 489 (2d Cir. 1949).

III.

The jury awarded the two sons and the estate of the father damages in the amount of $407,850. The essence of the court's charge on the subject was that in a contract action the basic principle of damages "is to indemnify a plaintiff for the gains prevented and the losses sustained by a defendant's breach, to leave him no worse but in no better position than he would have been had the breach not occurred." The court charged that the jury was to determine the reasonable value of the injury, if any. It charged further that "from the sum thus arrived at, you will then deduct such amount, if any, as from the evidence you find fairly measures the benefit to plaintiffs resulting from the fact that plaintiffs were freed to engage their services and capital in other situations during the time they would otherwise have been engaged in the management of an investment in the alleged promised distributorship."

Plaintiffs introduced testimony by Ernest L. Sommers, a certified public accountant, whom the District Court found to be qualified as an expert. Sommers compared one-half of the profits of Capitol City in its last fiscal year ending June 1, 1970 on the theory that profits for the past five years showed an upward trend, with the amount earned on investments in bonds by the plaintiffs in the year succeeding the sale. He found that one-half of the Capitol City pre-tax profits, based on one-half the sales price, amounted to 14.508%. The return on the bond investment was 7.977%. He then subtracted the percentage return on the investment bonds from the percentage return of the Capitol City operation, which gave him a percentage figure for the loss occasioned by the breach, of 6.531%. This figure, applied to one-half the sales price, came to $83,800 per annum before taxes. Multiplying this figure by only ten years — an assumed minimum measure for the life of the "new" distributorship — would make an $838,000 total loss. Discounting to present value, the witness reduced the figure to $549,000. The jury returned a verdict, as we have seen, for a lesser amount, $407,850. There is, therefore, no element of damage in the verdict amount for which no evidence was submitted to the jury. See Locke v. United States, 283 F.2d 521, 151 Ct.Cl. 262 (1960). Appellant contends, however, that plaintiffs' proof of damages was speculative and incompetent.

Appellant's position is based in large measure on some confusion about the precise nature of the agreement found by the jury, see notes 2 and 7 supra.Plaintiffs' evidence bore directly on the damages sustained by breach of a contract to provide a distributorship of one-half the cost and worth of Capitol City, and on the "fair measure" of the sums properly deducted. Appellant's contention that plaintiffs should have been required to prove, as a sine qua non to any damage award, that there was a Seagram distributor actually willing to sell his distributorship to them, is without merit. The oral agreement, as the jury was permitted to find, was for Seagram to provide a distributorship for the Lees. The jury was permitted to find that Seagram could have fulfilled this obligation by steering a voluntary sale of a distributorship to the plaintiffs or could have financed an intermediate transaction, warehousing the acquired distributorship for the plaintiffs, see note 2 supra.

Seagram contends that lost profits are not the proper measure of damages for breach of contract, and that cases allowing damages for destruction of injury to an ongoing business are not controlling. Lost profits can, however, be a proper measure of damages for breach of contract. As the Court of Appeals for the First Circuit said in Standard Machinery Co. v. Duncan Shaw Corp., 208 F.2d 61, 64:

"Certainly no authority need be cited for the broad proposition that prospective profits, if proved, are an element of a plaintiff's damages for breach of contract, or for the further proposition that evidence of past profits from an established business provides a reasonable basis for estimating future profits from the business."

See Perma Research & Devel. Co. v. Singer Co., 402 F.Supp. 881, 898 (S.D.N.Y.1975), aff'd, 542 F.2d 111 (2d Cir. 1976); For Children, Inc. v. Graphics Int'l, Inc., 352 F.Supp. 1280, 1284 (S.D.N.Y.1972). This is so even if the prospective business has not yet begun operation. See For Children, Inc., supra,352 F.Supp. at 1284; William Goldman Theatres v. Loew's, Inc., 69 F.Supp. 103, 105-06 (E.D.Pa.1946), aff'd, 164 F.2d 1021 (3d Cir.), cert. denied, 334 U.S. 811, 68 S.Ct. 1016, 92 L.Ed. 1742 (1948).

Seagram objects to the fact that plaintiffs' proof concerned the profit experience of Capitol City. It suggests that the best way of determining profits would be to consider the profits of an existing distributorship. But it came forward with no such proof, presumably for tactical reasons. We hold that the method of proof used by the plaintiffs was adequate in the circumstances. Since Seagram's breach has made difficult a more precise proof of damages, it must bear the risk of uncertainty created by its conduct. Bigelow v. RKO Radio Pictures, 327 U.S. 251, 264-65, 66 S.Ct. 574, 90 L.Ed. 652 (1946); Story Parchment Co. v. Paterson Parchment Paper Co., 282 U.S. 555, 563, 51 S.Ct. 248, 75 L.Ed. 544 (1931); Eastman Kodak Co. v. Southern Photo Co., 273 U.S. 359, 379, 47 S.Ct. 400, 71 L.Ed. 684 (1929); Perma Research & Devel. Co. v. Singer Co., 542 F.2d 111, 116 (2d Cir. 1976); Autowest, Inc. v. Peugeot, Inc., 434 F.2d 556, 565 (2d Cir. 1970); For Children, Inc. v. Graphics Int'l, Inc., 352 F.Supp. 1280, 1284 (S.D.N.Y.1972). New York law is in accord. Spitz v. Lesser, 302 N.Y. 490, 99 N.E.2d 540 (1951). As the court said in Wakeman v. Wheeler Mfg. Co., 101 N.Y. 205, 209, 4 N.E. 264, 266 (1886):

"When it is certain that damages have been caused by a breach of contract, and the only uncertainty is as to their amount, there can rarely be good reason for refusing, on account of such uncertainty, any damages whatever for the breach. A person violating his contract should not be permitted entirely to escape liability because the amount of damages which he has caused is uncertain."

Accord, Randall-Smith v. 43rd Street Estates Corp., 17 N.Y.2d 99, 105-06, 268 N.Y.S.2d 306, 215 N.E.2d 494 (1976); cf. Herman Schwabe, Inc. v. United Shoe Machinery Co., 297 F.2d 906 (2d Cir. 1962).

Mere dispute on the validity of some of the figures cannot wipe out the evidence but merely emphasizes that the jury was presented with a factual question whose determination we should not change. See Washington State Bowling Proprietors Ass'n v. Pacific Lanes, Inc., 356 F.2d 371, 379 (9th Cir. 1966). "The trial court has a large amount of discretion in determining whether to submit the question of profits to the jury; and when it is so submitted, the jury will also have a large amount of discretion in determining the amount of its verdict." 5 Corbin on Contracts § 1022, at 145-46. Cf. Herman Schwabe, supra, 297 F.2d at 912.

Affirmed.

[1] Judge Tenney granted Seagram's motion for a directed verdict dismissing certain antitrust claims, which are not the subject of appeal.

[2] The complaint alleged that Seagram agreed to "obtain" or "secure" or "provide" a "similar" distributorship within a reasonable time, and plaintiffs introduced some testimony to that effect. Although other testimony suggested that Seagram agreed merely to provide an opportunity for the Lees to negotiate with third parties, and Judge Tenney indicated in his denial of judgment n. o. v. that Seagram merely agreed "to notify plaintiffs as they learned of distributors who were considering the sale of their businesses," 413 F.Supp. at 698-99, the jury was permitted to find that the agreement was in the nature of a commitment to provide a distributorship. There was evidence to support such a finding, and the jury so found.

[3] Though the parties have not urged the particular choice of law applicable, both parties appear to assume that New York law governs. We note that in cases of this type, which depend so much on their particular facts and for which direct precedent is therefore so sparse, virtually all jurisdictions would be expected to follow general common law principles.

[4] Barth in a confidential memorandum dated June 12, 1970 to Yogman and Edgar Bronfman stated that "he [Harold Lee] would very much like to have another distributorship in another area for his two sons." Apparently Barth, who was not present at Harold Lee's meeting with Yogman, assumed that this was a desire on the part of Lee rather than a promise made by Yogman for Seagram.

[5] Cf. Mitchill v. Lath, 247 N.Y. 377, 380-81, 160 N.E. 646, 647 (1928) (to escape the parol evidence rule, the oral agreement "must not contradict express or implied provisions of the written contract."). The parties do not contend, and we would be unwilling to hold, that the oral agreement was not "in form a collateral one." Id.

[6] Appellant makes two other contentions in this regard, which may be disposed of summarily. It argues that the evidence introduced by plaintiffs was so contradictory and confusing that the jury could not ascertain Seagram's obligations with any definiteness. Although plaintiffs apparently did not try their case on a single coherent theory, see note 2 supra, the short answer is that, by its verdict, the jury gave credence to some of the evidence, discounted the remainder, and drew its inferences accordingly. Id.Second, appellant suggests that the evidence demonstrates at best Seagram's friendly willingness to help the Lees in their efforts to relocate, but no commitment to undertake any legal obligation. The short answer again is that there was contrary testimony which the jury chose to believe.

[7] Seagram also appears to contend that a promise to "relocate" is insufficiently specific. We disagree. Aside from the ordinary meaning of the word, the jury could rely on evidence, which was introduced, of other efforts by Seagram to "provide" a distributorship for other distributors — including Seagram's successful effort to provide Chet Carter with the Capitol City distributorship by purchasing it on his behalf, cf. Borden v. Chesterfield Farms, Inc., 27 A.D.2d 165, 277 N.Y.S.2d 494 (1st Dep't 1967), and Harold Lee's own experience in his original purchase of the 50% interest in Capitol City directly from Seagram.

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.

Bradley S. Phillips, Munger, Tolles & Olson, Los Angeles, Cal., for plaintiff-appellant.

Robert W. Fischer, Jr., Dewey, Ballantine, Bushby, Palmer & Wood, Los Angeles, Cal., for defendant-appellee.

Before HUG, ALARCON and KOZINSKI, Circuit Judges.

KOZINSKI, Circuit Judge:

The parties to this transaction are, by any standard, highly sophisticated business people: Plaintiff is a partnership consisting of an insurance company and two of Los Angeles' largest and most prestigious law firms; defendant is another insurance company. Dealing at arm's length and from positions of roughly equal bargaining strength, they negotiated a commercial loan amounting to more than $56 million. The contract documents are lengthy and detailed; they squarely address the precise issue that is the subject of this dispute; to all who read English, they appear to resolve the issue fully and conclusively.

Plaintiff nevertheless argues here, as it did below, that it is entitled to introduce extrinsic evidence that the contract means something other than what it says. This case therefore presents the question whether parties in California can ever draft a contract that is proof to parol evidence. Somewhat surprisingly, the answer is no.

Facts

The facts are rather simple. Sometime in 1983 Security First Life Insurance Company and the law firms of Mitchell, Silberberg & Knupp and Manatt, Phelps, Rothenberg & Tunney formed a limited partnership for the purpose of constructing an office building complex on Olympic Boulevard in West Los Angeles. The partnership, Trident Center, the plaintiff herein, sought and obtained financing for the project from defendant, Connecticut General Life Insurance Company. The loan documents provide for a loan of $56,500,000 at 12 1/4 percent interest for a term of 15 years, secured by a deed of trust on the project. The promissory note provides that "[m]aker shall not have the right to prepay the principal amount hereof in whole or in part" for the first 12 years. Note at 6. In years 13-15, the loan may be prepaid, subject to a sliding prepayment fee. The note also provides that in case of a default during years 1-12, Connecticut General has the option of accelerating the note and adding a 10 percent prepayment fee.

Everything was copacetic for a few years until interest rates began to drop. The 12 1/4 percent rate that had seemed reasonable in 1983 compared unfavorably with 1987 market rates and Trident started looking for ways of refinancing the loan to take advantage of the lower rates. Connecticut General was unwilling to oblige, insisting that the loan could not be prepaid for the first 12 years of its life, that is, until January 1996.

Trident then brought suit in state court seeking a declaration that it was entitled to prepay the loan now, subject only to a 10 percent prepayment fee. Connecticut General promptly removed to federal court and brought a motion to dismiss, claiming that the loan documents clearly and unambiguously precluded prepayment during the first 12 years. The district court agreed and dismissed Trident's complaint. The court also "sua sponte, sanction[ed] the plaintiff for the filing of a frivolous lawsuit." Order of Dismissal, No. CV 87-2712 JMI (Kx), at 3 (C.D. Cal. June 8, 1987). Trident appeals both aspects of the district court's ruling.

Discussion

I

Trident makes two arguments as to why the district court's ruling is wrong. First, it contends that the language of the contract is ambiguous and proffers a construction that it believes supports its position. Second, Trident argues that, under California law, even seemingly unambiguous contracts are subject to modification by parol or extrinsic evidence. Trident faults the district court for denying it the opportunity to present evidence that the contract language did not accurately reflect the parties' intentions.

A. The Contract

As noted earlier, the promissory note provides that Trident "shall not have the right to prepay the principal amount hereof in whole or in part before January 1996." Note at 6. It is difficult to imagine language that more clearly or unambiguously expresses the idea that Trident may not unilaterally prepay the loan during its first 12 years. Trident, however, argues that there is an ambiguity because another clause of the note provides that "[i]n the event of a prepayment resulting from a default hereunder or the Deed of Trust prior to January 10, 1996 the prepayment fee will be ten percent (10%)." Note at 6-7. Trident interprets this clause as giving it the option of prepaying the loan if only it is willing to incur the prepayment fee.

We reject Trident's argument out of hand. In the first place, its proffered interpretation would result in a contradiction between two clauses of the contract; the default clause would swallow up the clause prohibiting Trident from prepaying during the first 12 years of the contract. The normal rule of construction, of course, is that courts must interpret contracts, if possible, so as to avoid internal conflict. See Brobeck, Phleger & Harrison v. Telex Corp., 602 F.2d 866, 872 (9th Cir.), cert. denied, 444 U.S. 981, 100 S.Ct. 483, 62 L.Ed.2d 407 (1979) (California law); Cal.Civ.Proc.Code § 1858 (West 1983); 4 S. Williston, A Treatise on the Law of Contracts § 618, at 714-15 (3d ed. 1961); id. § 624, at 825.

In any event, the clause on which Trident relies is not on its face reasonably susceptible to Trident's proffered interpretation. Whether to accelerate repayment of the loan in the event of default is entirely Connecticut General's decision. The contract makes this clear at several points. See Note at 4 ("in each such event [of default], the entire principal indebtedness, or so much thereof as may remain unpaid at the time, shall, at the option of Holder, become due and payable immediately" (emphasis added)); id. at 7 ("[i]n the event Holder exercises its option to accelerate the maturity hereof ..." (emphasis added)); Deed of Trust ¶ 2.01, at 25 ("in each such event [of default], Beneficiary may declare all sums secured hereby immediately due and payable ..." (emphasis added)). Even if Connecticut General decides to declare a default and accelerate, it "may rescind any notice of breach or default." Id. ¶ 2.02, at 26. Finally, Connecticut General has the option of doing nothing at all: "Beneficiary reserves the right at its sole option to waive noncompliance by Trustor with any of the conditions or covenants to be performed by Trustor hereunder." Id. ¶ 3.02, at 29.

Once again, it is difficult to imagine language that could more clearly assign to Connecticut General the exclusive right to decide whether to declare a default, whether and when to accelerate, and whether, having chosen to take advantage of any of its remedies, to rescind the process before its completion.

Trident nevertheless argues that it is entitled to precipitate a default and insist on acceleration by tendering the balance due on the note plus the 10 percent prepayment fee.^[1] The contract language, cited above, leaves no room for this construction. It is true, of course, that Trident is free to stop making payments, which may then cause Connecticut General to declare a default and accelerate. But that is not to say that Connecticut General would be required to so respond.^[2]The contract quite clearly gives Connecticut General other options: It may choose to waive the default, or to take advantage of some other remedy such as the right to collect "all the income, rents, royalties, revenue, issues, profits, and proceeds of the Property." Deed of Trust ¶ 1.18, at 22.^[3] By interpreting the contract as Trident suggests, we would ignore those provisions giving Connecticut General, not Trident, the exclusive right to decide how, when and whether the contract will be terminated upon default during the first 12 years.

In effect, Trident is attempting to obtain judicial sterilization of its intended default. But defaults are messy things; they are supposed to be. Once the maker of a note secured by a deed of trust defaults, its credit rating may deteriorate; attempts at favorable refinancing may be thwarted by the need to meet the trustee's sale schedule; its cash flow may be impaired if the beneficiary takes advantage of the assignment of rents remedy; default provisions in its loan agreements with other lenders may be triggered. Fear of these repercussions is strong medicine that keeps debtors from shirking their obligations when interest rates go down and they become disenchanted with their loans.^[4] That Trident is willing to suffer the cost and delay of a lawsuit, rather than simply defaulting, shows far better than anything we might say that these provisions are having their intended effect. We decline Trident's invitation to truncate the lender's remedies and deprive Connecticut General of its bargained-for protection.

B. Extrinsic Evidence

Trident argues in the alternative that, even if the language of the contract appears to be unambiguous, the deal the parties actually struck is in fact quite different. It wishes to offer extrinsic evidence that the parties had agreed Trident could prepay at any time within the first 12 years by tendering the full amount plus a 10 percent prepayment fee. As discussed above, this is an interpretation to which the contract, as written, is not reasonably susceptible. Under traditional contract principles, extrinsic evidence is inadmissible to interpret, vary or add to the terms of an unambiguous integrated written instrument. See 4 S. Williston, supra p. 5, § 631, at 948-49; 2 B. Witkin, California Evidence § 981, at 926 (3d ed. 1986).

Trident points out, however, that California does not follow the traditional rule. Two decades ago the California Supreme Court in Pacific Gas & Electric Co. v. G.W. Thomas Drayage & Rigging Co., 69 Cal.2d 33, 442 P.2d 641, 69 Cal.Rptr. 561 (1968), turned its back on the notion that a contract can ever have a plain meaning discernible by a court without resort to extrinsic evidence. The court reasoned that contractual obligations flow not from the words of the contract, but from the intention of the parties. "Accordingly," the court stated, "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." 69 Cal.2d at 38, 442 P.2d 641, 69 Cal.Rptr. 561. This, the California Supreme Court concluded, is impossible: "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." Id. In the same vein, the court noted that "[t]he exclusion of testimony that might contradict the linguistic background of the judge reflects a judicial belief in the possibility of perfect verbal expression. This belief is a remnant of a primitive faith in the inherent potency and inherent meaning of words." Id. at 37, 442 P.2d 641, 69 Cal.Rptr. 561 (citation and footnotes omitted).^[5]

Under Pacific Gas, it matters not how clearly a contract is written, nor how completely it is integrated, nor how carefully it is negotiated, nor how squarely it addresses the issue before the court: the contract cannot be rendered impervious to attack by parol evidence. If one side is willing to claim that the parties intended one thing but the agreement provides for another, the court must consider extrinsic evidence of possible ambiguity. If that evidence raises the specter of ambiguity where there was none before, the contract language is displaced and the intention of the parties must be divined from self-serving testimony offered by partisan witnesses whose recollection is hazy from passage of time and colored by their conflicting interests. See Delta Dynamics, Inc. v. Arioto, 69 Cal.2d 525, 532, 446 P.2d 785, 72 Cal.Rptr. 785 (1968) (Mosk, J., dissenting). We question whether this approach is more likely to divulge the original intention of the parties than reliance on the seemingly clear words they agreed upon at the time. See generally Morta v. Korea Ins. Co., 840 F.2d 1452, 1460 (9th Cir.1988).

Pacific Gas casts a long shadow of uncertainty over all transactions negotiated and executed under the law of California. As this case illustrates, even when the transaction is very sizeable, even if it involves only sophisticated parties, even if it was negotiated with the aid of counsel, even if it results in contract language that is devoid of ambiguity, costly and protracted litigation cannot be avoided if one party has a strong enough motive for challenging the contract. While this rule creates much business for lawyers and an occasional windfall to some clients, it leads only to frustration and delay for most litigants and clogs already overburdened courts.

It also chips away at the foundation of our legal system. By giving credence to the idea that words are inadequate to express concepts, Pacific Gas undermines the basic principle that language provides a meaningful constraint on public and private conduct. If we are unwilling to say that parties, dealing face to face, can come up with language that binds them, how can we send anyone to jail for violating statutes consisting of mere words lacking "absolute and constant referents"? How can courts ever enforce decrees, not written in language understandable to all, but encoded in a dialect reflecting only the "linguistic background of the judge"? Can lower courts ever be faulted for failing to carry out the mandate of higher courts when "perfect verbal expression" is impossible? Are all attempts to develop the law in a reasoned and principled fashion doomed to failure as "remnant[s] of a primitive faith in the inherent potency and inherent meaning of words"?

Be that as it may. While we have our doubts about the wisdom of Pacific Gas, we have no difficulty understanding its meaning, even without extrinsic evidence to guide us. As we read the rule in California, we must reverse and remand to the district court in order to give plaintiff an opportunity to present extrinsic evidence as to the intention of the parties in drafting the contract.^[6] It may not be a wise rule we are applying, but it is a rule that binds us. Erie R.R. Co. v. Tompkins,304 U.S. 64, 78, 58 S.Ct. 817, 822, 82 L.Ed. 1188 (1938).^[7]

II

In imposing sanctions on plaintiff, the district court stated:

Pursuant to Fed.R.Civ.P. 11, the Court, sua sponte, sanctions the plaintiff for the filing of a frivolous lawsuit. The Court concludes that the language in the note and deed of trust is plain and clear. No reasonable person, much less firms of able attorneys, could possibly misunderstand this crystal-clear language. Therefore, this action was brought in bad faith.

Order of Dismissal at 3. Having reversed the district court on its substantive ruling, we must, of course, also reverse it as to the award of sanctions.^[8] While we share the district judge's impatience with this litigation, we would suggest that his irritation may have been misdirected. It is difficult to blame plaintiff and its lawyers for bringing this lawsuit. With this much money at stake, they would have been foolish not to pursue all remedies available to them under the applicable law. At fault, it seems to us, are not the parties and their lawyers but the legal system that encourages this kind of lawsuit. By holding that language has no objective meaning, and that contracts mean only what courts ultimately say they do, Pacific Gas invites precisely this type of lawsuit.^[9] With the benefit of 20 years of hindsight, the California Supreme Court may wish to revisit the issue. If it does so, we commend to it the facts of this case as a paradigmatic example of why the traditional rule, based on centuries of experience, reflects the far wiser approach.

Conclusion

The judgment of the district court is REVERSED. The case is REMANDED for reinstatement of the complaint and further proceedings in accordance with this opinion. The parties shall bear their own costs on appeal.

[1] Trident's position is that the prepayment fee must either be a fee imposed as part of an "alternative method of performance" or "a liquidated damages provision specifying the amount of damages payable by Trident in the event that it defaults by prepaying the ... loan." Appellant's Reply Brief at 12-13. Trident contends that if the prepayment fee is instead read as a provision for liquidated damages triggered by any default whatsoever, it would be invalid as a penalty because it would not be a reasonable estimate of the likely injury to Connecticut General resulting from most types of default: "[I]f, for example, Trident were to default on the payment of a single installment, a fee of 10% of the outstanding balance of the loan would not qualify as a valid liquidated damages payment." Id. at 8.

California law is unsettled on this point and it may be that Connecticut General could not enforce the 10 percent fee in the event of certain defaults by Trident. See generally 1 H. Miller & M. Starr, Current Law of California Real Estate § 3:71 n. 12 (Supp.1987). But the contract assigns to Connecticut General alone the right to decide whether and under what circumstances to seek the prepayment fee. Connecticut General may well attempt to enforce the fee only in circumstances where it is valid. What the contract clearly does not provide is what Trident suggests. If the parties had wanted to give Trident the option of prepaying with a 10 percent fee, they certainly could have done so expressly.

[2] See 1 H. Miller & M. Starr, supra note 1, § 3:62, at 428 ("[w]hen there is a default, acceleration does not occur automatically. It is merely a contractual option given to beneficiary for his benefit, and acceleration only occurs when the beneficiary affirmatively elects to declare the balance of the principal and interest due" (emphasis original)); id. § 3:69, at 449.

[3] Trident contends that acceleration must follow a default because, under California's one-form-of-action rule, Cal.Civ.Proc.Code § 726 (West Supp.1988), Connecticut General has but one remedy in the event of default, namely, to accelerate the loan and foreclose. Even if Trident's premise were accurate, its conclusion would not follow. Connecticut General need not seek any remedy at all for an event of default; it could simply wait and see. Connecticut General would thereby retain the valuable right of choosing when to declare a default: It could, for example, choose to wait until interest rates rise and Trident's refinancing prospects are no longer attractive.

In any event, Trident's premise is wrong. Section 726 does not prevent Connecticut General from exercising certain of its non-foreclosure remedies under the deed of trust. "By its own terms section 726 applies only where the creditor-beneficiary has brought an action against the debtor-trustor to recover a debt or to enforce some right secured by a deed of trust. It does not apply in other situations." Passanisi v. Merit McBride Realtors, Inc., 236 Cal.Rptr. 59, 65, 190 Cal.App.3d 1496 (1987) (citation omitted) (emphasis added). Thus, for example, "a private sale under the power contained in the trust deed is not a judicial foreclosure within section 726." Walker v. Community Bank, 10 Cal.3d 729, 736, 518 P.2d 329, 111 Cal.Rptr. 897 (1974) (emphasis original). Similarly, Connecticut General could enforce the assignment of rents provision in the deed of trust by demanding that all of Trident's tenants make rental payments to Connecticut General. See Johns v. Moore, 168 Cal.App.2d 709, 712, 336 P.2d 579 (1959); 1 H. Miller & M. Starr, supra note 1, §§ 3:35 at 376-77, 3:69 at 449. This would not implicate section 726 because it would not be an action to enforce any right under the deed of trust. Since the deed of trust contains an absolute assignment of rents — "Trustor hereby absolutely and unconditionally assigns and transfers to Beneficiary all the income, rents ... and proceeds of the Property ...," Deed of Trust at 22, ¶ 1.18 — Connecticut General has a perfected right to require that tenants pay it directly once it has given them notice of a default by Trident. See 1 H. Miller & M. Starr, § 3:35, at 377; In re Charles D. Stapp of Nevada, Inc., 641 F.2d 737, 739 (9th Cir.1981); Great West Life Assurance Co. v. Rothman, 490 F.2d 1141, 1143-45 (9th Cir.1974).

[4] This provides a symmetry with the situation where interest rates go up and it is the lender who is stuck with a loan it would prefer to turn over at market rates. In an economy where interest rates fluctuate, it is all but certain that one side or the other will be dissatisfied with a long-term loan at some time. Mutuality calls for enforcing the contract as written no matter whose ox is being gored.

[5] In an unusual footnote, the court compared the belief in the immutable meaning of words with "`[t]he elaborate system of taboo and verbal prohibitions in primitive groups ... [such as] 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....'" Id. n. 2 (quoting Ullman, The Principles of Semantics 43 (1963)).

[6] Nothing we say should be construed as foreclosing Connecticut General from moving for summary judgment after completion of discovery; given the unambiguous language of the contract itself, such a motion would succeed unless Trident were to come forward with extrinsic evidence sufficient to render the contract reasonably susceptible to Trident's alternate interpretation, thereby creating a genuine issue of fact resolvable only at trial.

[7] Trident also claims, in the alternative, that it is entitled to rescind the loan agreement because it entered into the contract based on a unilateral mistake of law of which Connecticut General was aware but failed to correct. Implausible though this allegation may be, it nevertheless states a claim for unilateral mistake under California law. Cal.Civ.Code §§ 1578, 1689 (West 1982, 1985). This cause of action therefore must also be reinstated by the district court for later resolution on summary judgment or at trial.

[8] The district court apparently awarded attorney's fees under both Rule 11 and the terms of the promissory note. Trident contends that the note's attorney's fees provision is inapplicable to this case. In light of our resolution of the merits, we express no view on this issue.

[9] This is not to say, of course, that all lawsuits seeking to challenge the interpretation of facially unambiguous contracts are necessarily immune from imposition of sanctions. Even under Pacific Gas,a party urging an interpretation lacking any objectively reasonable basis in fact might well be subject to sanctions for bringing a frivolous lawsuit.

2 Hurl. & C. 906, 159 Eng. Rep. 375 (Ex. 1864)

Raffles
v.
Wichelhaus.

To a declaration for not accepting Surat cotton which the defendant bought of the plaintiff " to arrive ex Peerless from Bombay," the defendant pleaded that he meant a ship called the "Peerless" which sailed from Bombay, in October, and the plaintiff was not ready to deliver any cotton which arrived by that ship, but only cotton which arrived by another ship called the " Peerless," which sailed from Bombay in December. -Held, on demurrer, that the plea was a good answer.

DECLARATION. -For that it was agreed between the plaintiff and the defendants, to wit, at Liverpool, that the plaintiff should sell to the defendants, and the defendants buy of the plaintiff, certain goods, to wit, 125 bales of Surat cotton, guaranteed middling fair merchant's Dhollorah, to arrive ex "Peerless" from Bombay; and that the cotton should be taken from the quay, and that the defendants would pay the plaintiff for the same at a certain rate, to wit, at the rate of 17¼ d. per pound, within a certain time then agreed upon after the arrival of the said goods in England. -Averments: that the said goods did arrive by the said ship from Bombay in England, to wit, at Liverpool, and the plaintiff was then and there ready, and willing and offered to deliver the said goods to the defendants, &c. Breach: that the defendants refused to accept the said goods or pay the plaintiff for them.

Plea. -That the said ship mentioned in the said agreement was meant and intended by the defendants to be the ship called the "Peerless," which sailed from Bombay, to wit, in October; and that the plaintiff was not ready and willing and did not offer to deliver to the defendants any bales of cotton which arrived by the last mentioned ship, but instead thereof was only ready and willing and offered to deliver to the defendants 125 bales of Surat cotton which arrived by another and different ship, which was also called the "Peerless," and which sailed from Bombay, to wit, in December.

Demurrer, and joinder therein.

Milward, in support of the demurrer. -The contract was for the sale of a number of bales of cotton of a particular description, which the plaintiff was ready to deliver. It is immaterial by what ship the cotton was to arrive, so that it was a ship called the "Peerless." The words " to arrive ex 'Peerless,'" only mean that if the vessel is lost on the voyage, the contract is to be at an end. [Pollock, C. B. -It would be a question for the jury whether both parties meant the same ship called the "Peerless."] That would be so if the contract was for the sale of a ship called the "Peerless;" but it is for the sale of cotton on board a ship of that name. [Pollock, C. B. -The defendant only bought that cotton which was to arrive by a particular ship. It may as well be said, that if there is a contract for the purchase of certain goods in warehouse A, that is satisfied by the delivery of goods of the same description in warehouse B.] In that case there would be goods in both warehouses; here it does not appear that the plaintiff had any goods on board the other "Peerless." [Martin, B. -It is imposing on the defendant a contract different from that which he entered into. Pollock, C. B. -It is like a contract for the purchase of wine coming from a particular estate in France or Spain, where there are two estates of that name.] The defendant has no right to contradict by parol evidence a written contract good upon the face of it. He does not impute misrepresentation or fraud, but only says that he fancied the ship was a different one. Intention is of no avail, unless stated at the time of the contract. [Pollock, C. B. -One vessel sailed in October and the other in December.] The time of sailing is no part of the contract.

Mellish (Cohen with him), in support of the plea. -There is nothing on the face of the contract to shew that any particular ship called the "Peerless" was meant; but the moment it appears that two ships called the "Peerless" were about to sail from Bombay there is a latent ambiguity, and parol evidence may be given for the purpose shewing that the defendant meant one "Peerless" and the plaintiff another. That being so, there was no consensus ad idem, and therefore no binding contract. -He was then stopped by the Court.

Per CURIAM. There must be judgment for the defendants.

Judgment for the defendants. Pollock, C. B., Martin, B., and Pigott, B. Jan. 27.

222 N. Y. 88
OTIS F. WOOD, Appellant,
v.
LUCY, LADY DUFF-GORDON, Respondent.
Appellate Division of the Supreme Court of the State of New York, First Department 

[88] 

Wood v. Duff-Gordon, 177 App. Div. 624, reversed.

(Argued November 14, 1917; decided December 4, 1917.)

APPEAL from a judgment entered April 24, 1917 upon an order of the Appellate Division of the Supreme Court in the first judicial department, which reversed an order of Special Term denying a motion by defendant for judgment in her favor upon the pleadings and granted said motion.

The nature of the action and the facts, so far as material, are stated in the opinion.

[89] John Jerome Rooney for appellant. Assuming that the contract does not contain an express covenant and agreement on the part of the plaintiff to use his best endeavors and efforts to place indorsements, make sales or grant licenses to manufacture, nevertheless such a covenant must necessarily be implied from the terms of the contract itself and all the circumstances. (Booth v. Cleveland Mill Co., 74 N. Y. 15; Wells v. Alexandre, 130 N. Y. 642; Jacquin v. Boutard, 89 Hun, 437; 157 N. Y. 686; Wil- son v. Mechanical Orguinette Co., 170 N. Y. 542; Horton v. Hall & Clarke Mfg. Co., 94 App. Div. 404; Hearn v. Stevens & Bros., Ill App. Div. 101; Baker Transfer Co. v. Merchants' R. I. Mfg. Co., 1 App. Div. 507; Wildman Mfg. Co. v. Adams T. C. M. Co., 149 Fed. Rep. 201.)

Edward E. Hoenig and William M. Sullivan for respondent. The motion for judgment on the pleadings was properly granted and the demurrer properly sustained by the appellate court, as the agreement upon which the action is based is nudum pactum and not binding upon this defendant for lack of mutuality and consideration. (Elliott on Cont. § 231; Grossman v. Schenker, 206 N. Y. 468; Levin v. Dietz, 194 N. Y. 376; Commercial W. & C. Co. v. Northampton P. C. Co., 115 App. Div. 393; 190 N. Y. 1; Wood v. G. F. Ins. Co., 174 App. Div. 834; White v. K. M. C. Co., 69 Misc. Rep. 628; Cook v. Cosier, 87 App. Div. 8; Vogel v. Pekoe, 30 L. R. A. 491; Moran v. Standard Oil Co., 211 N. Y. 189; City of New York v. Poali, 202 N. Y. 18; Barrel S. S. Co. v. Mexican R. R. Co., 134 N. Y. 15; First Presbyterian Church v. Cooper, 112 N. Y. 517; Acker v. Hotchkiss, 97 N. Y. 395; Marie v. Garrison, 43 N. Y. 14; Chicago & G. E. R. Co. v. Dane, 43 N. Y. 240; Jermyn v. Searing, 170 App. Div. 720; Rafolovitz v. Amer. Tobacco Co., 73 Hun, 87; Pollock v. Shubert, 146 App. Div. 628.) The order of the Appellate Division should be affirmed, for under the [90] contract the appellant assumes no obligation and there is no provision therein enforceable as against him. (Commercial W. & C. Co. v. Northampton P. C. Co., 115 App. Div. 393; 190 N. Y. 1; Pollock v. Shubert Theatrical Co., 146 App. Div. 629; Arnot v. P. & E. Coal Co., 68 N. Y. 565; Booth v. Milliken, 127 App. Div. 525; Vogel v. Pekoe, 30 L. R. A. 491.)

CARDOZO, J. The defendant styles herself "a creator of fashions." Her favor helps a sale. Manufacturers of dresses, millinery and like articles are glad to pay for a certificate of her approval. The things which she designs, fabrics, parasols and what not, have a new value in the public mind when issued in her name. She employed the plaintiff to help her to turn this vogue into money. He was to have the exclusive right, subject always to her approval, to place her indorsements on the designs of others. He was also to have the exclusive right to place her own designs on sale, or to license others to market them. In return, she was to have one-half of "all profits and revenues" derived from any contracts he might make. The exclusive right was to last at least one year from April 1, 1915, and thereafter from year to year unless terminated by notice of ninety days. The plaintiff says that he kept the contract on his part, and that the defendant broke it. She placed her indorsement on fabrics, dresses and millinery without his knowledge, and withheld the profits. He sues her for the damages, and the case comes here on demurrer.

The agreement of employment is signed by both parties. It has a wealth of recitals. The defendant insists, however, that it lacks the elements of a contract. She says that the plaintiff does not bind himself to anything. It is true that he does not promise in so many words that he will use reasonable efforts to place the defendant's indorsements and market her designs. [91] We think, however, that such a promise is fairly to be implied. The law has outgrown its primitive stage of formalism when the precise word was the sovereign talisman, and every slip was fatal. It takes a broader view to-day. A promise may be lacking, and yet the whole writing may be "instinct with an obligation," imperfectly expressed (SCOTT, J., in McCall Co. v. Wright, 133 App. Div. 62; Moran v. Standard Oil Co., 211 N. Y. 187, 198). If that is so, there is a contract.

The implication of a promise here finds support in many circumstances. The defendant gave an exclusive privilege. She was to have no right for at least a year to place her own indorsements or market her own designs except through the agency of the plaintiff. The acceptance of the exclusive agency was an assumption of its duties (Phoenix Hermetic Co. v. Filtrine Mfg. Co., 164 App. Div. 424; W. G. Taylor Co. v. Bannerman, 120 Wis. 189; Mueller v. Bethesda Mineral Spring Co., 88 Mich. 390). We are not to suppose that one party was to be placed at the mercy of the other (Hearn v. Stevens & Bro., Ill App. Div. 101, 106; Russell v. Allerton, 108 N. Y. 288). Many other terms of the agreement point the same way. We are told at the outset by way of recital that:

"The said Otis F. Wood possesses a business organization adapted to the placing of such indorsements as the said Lucy, Lady Duff-Gordon has approved."

The implication is that the plaintiff's business organization will be used for the purpose for which it is adapted. But the terms of the defendant's compensation are even more significant. Her sole compensation for the grant of an exclusive agency is to be one-half of all the profits resulting from the plaintiff's efforts. Unless he gave his efforts, she could never get anything. Without an implied promise, the transaction cannot have such business "efficacy, as both parties must have intended that at all events it should have." (BOWEN, L. J., in The Moorcock, 14 P. D. 64, [92] 68). But the contract does not stop there. The plaintiff goes on to promise that he will account monthly for all moneys received by him, and that he will take out all such patents and copyrights and trademarks as may in his judgment be necessary to protect the rights and articles affected by the agreement. It is true, of course, as the Appellate Division has said, that if he was under no duty to try to market designs or to place certificates of indorsement, his promise to account for profits or take out copyrights would be valueless. But in determining the intention of the parties, the promise has a value. It helps to enforce the conclusion that the plaintiff had some duties. His promise to pay the defendant one-half of the profits and revenues resulting from the exclusive agency and to render accounts monthly, was a promise to use reasonable efforts to bring profits and revenues into existence. For this conclusion, the authorities are ample (Wilson v. Mechanical Orguinette Co., 170 N. Y. 542; Phoenix Hermetic Co. v. Filtrine Mfg. Co., supra; Jacquin v. Boutard, 89 Hun, 437; 157 N. Y. 686; Moran v. Standard Oil Co., supra; City of N. Y. v. Paoli, 202 N. Y. 18; McIntyre v. Belcher, 14 C. B. [N. S.] 654; Devonald v. Rosser & Sons, 1906, 2 K. B. 728; W. G. Taylor Co. v. Bannerman, supra; Mueller v. Bethesda Mineral Spring Co., supra; Baker Transfer Co. v. Merchants R. & I. Mfg. Co., 1 App. Div. 507).

The judgment of the Appellate Division should be reversed, and the order of the Special Term affirmed, with costs in the Appellate Division and in this court.

CUDDEBACK, MCLAUGHLIN and ANDREWS, JJ., concur; HISCOCK, Ch. J., CHASE and CRANE, JJ., dissent.

Judgment reversed, etc.

235 N.Y. 338, 139 N.E. 470 (1923)

THE SUN PRINTING AND PUBLISHING ASSOCIATION, Respondent,
v.
REMINGTON PAPER AND POWER COMPANY, INC., Appellant

Court of Appeals of New York.

Sun Printing & Publishing Assn. v. Remington Paper & Power Co., 201 App. Div. 3, reversed.

(Argued March 1, 1923; decided April 17, 1923.)

APPEAL, by permission, from an order of the Appellate Division of the Supreme Court in the first judicial department, entered April 24, 1922, which reversed an order of Special Term denying a motion by plaintiff for judgment on the pleadings and granted said motion.

The following question was certified: "Does the complaint state facts sufficient to constitute a cause of action?"

Nathan L. Miller for appellant. No exclusive option was given to respondent under the agreement. (2 Williston on Cont. § 601.) The language used in the agreement set forth in the complaint does not sufficiently define the price to create an enforcible obligation. (1 Williston on Cont. § 45; United Press v. N. Y. Press Co., 164 N. Y. 406; Varney v. Ditmars, 217 N. Y. 234; Harper v. Hassard, 113 Mass. 187; Peacock v. Cummings, 46 Penn. St. 434; Mayer v. McCreery, 119 N. Y. 434.) In the absence of prices and terms agreed upon by the parties as provided for in the agreement, the court will not determine prices and terms for them. (1 Williston on Cont. § 92; Miles v. Gery, 14 Ves. 408.) The case at bar shows a contract with express contemplation of a further agreement to fix the price and the term and until such further agreement was made there could be no breach of obligation and no damages assessable. (Mayer v. McCreery, 119 N. Y. 434; Penn Lubricating Co. v. Wilhelm, 255 Penn. St. 390; Petze v. Morse D. D. & R. Co., 125 App. Div. 267; 195 N. Y. 584; Todd v. Gamble, 148 N. Y. 382.)

Archibald R. Watson, John M. Harrington and Ralph O. Willguss for respondent. By virtue of the agreement in suit, the plaintiff acquired, for a valuable consideration, an option to purchase from the defendant 1,000 tons of newsprint paper per month during the year 1920 at a readily ascertainable price, namely, the co tract price for newsprint paper charged by the Canadian Export Paper Company to the large consumers. (Cohen & Sons v. Lurie Woolen Co., 232 N. Y. 112; Staples v. O' Neal, 64 Minn. 27; Carney v. Pendleton, 139 App. Div. 152; Bullock v. Cutting, 155 App. Div. 825; Lewis v. Bollinger, 115 Misc. Rep. 221; Matter of Hunter, 1 Edw. Ch. 1; Hawralty v. Warren, 18 N. J. Eq. 124; Heyward v. Willmarth, 87 App. Div. 125.) The agreement in suit prescribes the criterion whereby the maximum price for paper deliverable during each month of the year 1920 was definitely ascertainable; and thereby the defendant irrevocably agreed upon a price to the extent of fixing the maximum price at which it would make deliveries during 1920. (Ehrnworth v. Stuhmer & Co., 229 N. Y. 210; Mis v. Miller, 164 N. Y. 434; G. N. Paper Co. v. N. Y. Times Co., 184 App. Div. 26; McConnell v. Hughes, 29 Wis. 537; Vinton Petroleum Co. v. Sun Co., 230 Fed. Rep. 105; Luetkemeyer Co. v. Murdoch, 267 Fed. Rep. 158.) Courts favor a construction that " renders contracts operative rather than that which nullifies them; and in order to justify disregarding a promise on the ground of uncertainty, indefiniteness must reach the point where construction becomes futile. (Cohen & Sons v. Lurie Woolen Co., 232 N. Y. 112; Ellis v. Miller, 164 N. Y. 434; Foley v. New York Mutual Benevolent Society, 141 App. Div. 180, 186; Ward v. Whitney, 8 N. Y. 442, 446; Bank of Montreal v. Recknagel, 109 N. Y. 482; United States Fidelity & G. Co. v. Board of Commissioners, 145 Fed. Rep. 144; Archibald v. Thomas, 3 Cow. 284; Minnesota Lumber Co. v. Coal Co., 160 111. 85, 94.) The agreement in suit, when construed in accordance with its legal meaning, conferred upon the plaintiff the right, at its election, to demand of the defendant the delivery of 1,000 tons of newsprint paper per month during the year 1920 at a definitely ascertainable price, namely, the maximum price provided for in the agreement. (Cohen & Sons v. Lurie Woolen Co., 232 N. Y. 112; Luetkemeyer Co. v. Murdock, 267 Fed. Rep. 158; Vinton Petroleum Co. v. Sun Co., 230 Fed. Rep. 105; St. Regis Paper Co. v. H. & H. Paper Co., 201 App. Div. 402; Wood Co. Grocery Co. v. Frazer, 204 Fed. Rep. 601; Highlands C. & M. Co. v. Matthews, 76 N. Y. 145; De Grasse Paper Co. v. Northern N. Y. Coal Co., 190 App. Div. 227; Southern Pub. Assn. v. Clements Paper Co., 139 Tenn. 429; Farquhar Co. v. N. R. Mineral Co., 87 App. Div. 329.) The plaintiff having, in the exercise of its option, duly demanded the delivery of the paper, the parties thereupon became mutually bound, the defendant to deliver, and the plaintiff to pay for, the paper at the maximum price provided for in the agreement. (Conlcy Camera Co. v. Multiscope & Film Co., 216 Fed. Rep. 892; Hoogendorn v. Daniel, 178 Fed. Rep. 765; Grossman v. Schenker, 206 N. Y. 466; O'Brien v. Bolan, 166 Mass. 481; Hey ward v. Willmarth, 87 App. Div. 125; Wood County Grocer Co. v. Frazer, 284 Fed. Rep. 691.)

CARDOZO, J. Plaintiff agreed to buy and defendant to sell 1,000 tons of paper per month during the months of September, 1919, to December, 1920, inclusive, 16,000 tons in all. Sizes and quality were adequately described. Payment was to be made on the 20th of each month for all paper shipped the previous month. The price for shipments in September, 1919, was to be $3.73% per 100 pounds, and for shipments in October, November and December, 1919, $4 per 100 pounds. " For the balance of the period of this agreement the price of the paper and length of terms for which such price shall apply shall be agreed upon by and between the parties hereto fifteen days prior to the expiration of each period for which the price and length of term thereof have been previously agreed upon, said price in no event to be higher than the contract price for newsprint charged by the Canadian Export Paper Company to the large consumers, the seller to receive the benefit of any differentials in freight rates."

Between September, 1919, and December of that year, inclusive, shipments were made and paid for as required by the contract. The time then arrived when there was to be an agreement upon a new price and upon the term of its duration. The defendant in advance of that time gave notice that the contract was imperfect, and disclaimed for the future an obligation to deliver. Upon this, the plaintiff took the ground that the price was to be ascertained by resort to an established standard. It made demand that during each month of 1920 the defendant deliver 1,000 tons of paper at the contract price for newsprint charged by the Canadian Export Paper Company to the large consumers, the defendant to receive the benefit of any differentials in freight rates. The demand was renewed month by month till the expiration of the year. This action has been brought to recover the ensuing damage.

Seller and buyer left two subjects to be settled in the middle of December and at unstated intervals thereafter. One was the price to be paid. The other was the length of time during which such price was to govern. Agreement as to the one was insufficient without agreement as to the other. If price and nothing more had been left open for adjustment, there might be force in the contention that the buyer would be viewed, in the light of later provisions, as the holder of an option {Cohen & Sons v. Lurie Woolen Co., 232 N. Y. 112). This would mean that in default of an agreement for a lower price, the plaintiff would have the privilege of calling for delivery in accordance with a price established as a maximum. The price to be agreed upon might be less, but could not be more than " the contract price for newsprint charged by the Canadian Export Paper Company to the large consumers." The difficulty is, however, that ascertainment of this price does not dispense with the necessity for agreement in respect of the term during which the price is to apply. Agreement upon a maximum payable this month or to-day is not the same as an agreement that it shall continue to be payable next month or to-morrow. Seller and buyer understood that the price to be fixed in December for a term to be agreed upon, would not be more than the price then charged by the Canadian Export Paper Company to the large consumers. They did not understand that if during the term so established the price charged by the Canadian Export Paper Company was changed, the price payable to the seller would fluctuate accordingly. This was conceded by plaintiff's counsel on the argument before us. The seller was to receive no more during the running of the prescribed term, though the Canadian maximum was raised. The buyer was to pay no less during that term, though the maximum was lowered. In brief, the standard was to be applied at the beginning of the successive terms, but once applied was to be maintained until the term should have expired. While the term was unknown, the contract was inchoate.

The argument is made that there was no need of an agreement as to time unless the price to be paid was lower than the maximum. We find no evidence of this intention in the language of the contract. The result would then be that the defendant would never know where it stood. The plaintiff was under no duty to accept the Canadian standard. It does not assert that it was. What it asserts is that the contract amounted to the concession of an option. Without an agreement as to time, however, there would be not one option, but a dozen. The Canadian price to-day might be less than the Canadian price to-morrow. Election by the buyer to proceed with performance at the price prevailing in one month would not bind it to proceed at the price prevailing in another. Successive options to be exercised every month would thus be read into the contract. Nothing in the wording discloses the intention of the seller to place itself to that extent at the mercy of the buyer. Even if, however, we were to interpolate the restriction that the option, if exercised at all, must be exercised only once, and for the entire quantity permitted, the difficulty would not be ended. Market prices in 1920 happened to rise. The importance of the time element becomes apparent when we ask ourselves what the seller's position would be if they had happened to fall. Without an agreement as to time, the maximum would be lowered from one shipment to another with every reduction of the standard. With such an agreement, on the other hand, there would be stability and certainty. The parties attempted to guard against the contingency of failing to come together as to price. They did not guard against the contingency of failing to come together as to time. Very likely they thought the latter contingency so remote that it could safely be disregarded. In any event, whether through design or through inadvertence, they left the gap unfilled. The result was nothing more than "an agreement to agree" (St. Regis Paper Co. v. Hubbs & Hastings Paper Co., 235 N. Y. 30, 36). Defendant "exercised its legal right" when it insisted that there was need of something more (St. Regis Paper Co. v. Hubbs & Hastings Paper Co., supra; 1 Williston Contracts, § 45). The right is not affected by our appraisal of the motive (Mayer v. McCreery, 119 N. Y. 434, 440).

We are told that the defendant was under a duty, in default of an agreement, to accept a term that would be reasonable in view of the nature of the transaction and the practice of the business. To hold it to such a standard is to make the contract over. The defendant reserved the privilege of doing its business in its own way, and did not undertake to conform to the practice and beliefs of others (United Press v. N. Y. Press Co., 164 N. Y. 406, 413). We are told again that there was a duty, in default of other agreement, to act as if the successive terms were to expire every month. The contract says they are to expire at such intervals as the agreement may prescribe. There is need, it is true, of no high degree of ingenuity to show how the parties, with little change of language, could have framed a form of contract to which obligation would attach. The difficulty is that they framed another. We are not at liberty to revise while professing to construe.

We do not ignore the allegation of the complaint that the contract price charged by the Canadian Export Paper Company to the large consumers "constituted a definite and well defined standard of price that was readily ascertainable." The suggestion is made by members of the court that the price so charged may have been known to be one established for the year, so that fluctuation would be impossible. If that was its character, the complaint should so allege. The writing signed by the parties calls for an agreement as to time. The complaint concedes that no such agreement has been made. The result, prima facie, is the failure of the contract. In that situation, the pleader has the burden of setting forth the extrinsic circumstances, if there are any, that make agreement unimportant. There is significance, moreover, in the attitude of counsel. No point is made in brief or in argument that the Canadian price, when once established, is constant through the year. On the contrary, there is at least a tacit assumption that it varies with the market. The buyer acted on the same assumption when it renewed the demand from month to month, making tender of performance at the prices then prevailing. If we misconceive the course of dealing, the plaintiff by amendment of its pleading can correct our misconception. The complaint as it comes before us leaves no escape from the conclusion that agreement in respect of time is as essential to a completed contract as agreement in respect of price. The agreement was not reached, and the defendant is not bound.

The question is not here whether the defendant would have failed in the fulfillment of its duty by an arbitrary refusal to reach any agreement as to time after notice from the plaintiff that it might make division of the terms in any way it pleased. No such notice was given so far as the complaint discloses. The action is not based upon a refusal to treat with the defendant and attempt to arrive at an agreement. Whether any such theory of liability would be tenable we need not now inquire. Even if the plaintiff might have stood upon the defendant's denial of obligation as amounting to such a refusal, it did not elect to do so. Instead, it gave its own construction to the contract, fixed for itself the length of the successive terms, and thereby coupled its demand with a condition which there was no duty to accept (Rubber Trading Co. v. Manhattan R. Mfg. Co., 221 N. Y. 120; 3 Williston Contracts, § 1334). We find no allegation of readiness and offer to proceed on any other basis. The condition being untenable, the failure to comply with it cannot give a cause of action.

The order of the Appellate Division should be reversed and that of the Special Term affirmed, with costs in the Appellate Division and in this court, and the question certified answered in the negative.

CRANE, J. (dissenting). I cannot take the view of this contract that has been adopted by the majority. The parties to this transaction beyond question thought they were making a contract for the purchase and sale of 16,000 tons rolls news print. The contract was upon a form used by the defendant in its business, and we must suppose that it was intended to be what it states to be, and not a trick or device to defraud merchants. It begins by saying that in consideration of the mutual covenants and agreements herein set forth the Remington Paper and Power Company, Incorporated, of Watertown, state of New York, hereinafter called the seller, agrees to sell and hereby does sell and the Sun Printing and Publishing Association of New York city, state of New York, hereinafter called the purchaser, agrees to buy and pay for and hereby does buy the following paper, 16,000 tons rolls news print. The sizes are then given. Shipment is to be at the rate of 1,000 tons per month to December, 1920, inclusive. There are details under the headings consignee, specifications, price and delivery, terms, miscellaneous, cores, claims, contingencies, cancellations.

Under the head of miscellaneous comes the following:

"The price agreed upon between the parties hereto, for all papers shipped during the month of September, 1919, shall be $3.73 and 3/4 per hundred pounds gross weight of rolls on board cars at mills.

"The price agreed upon between the parties hereto for all shipments made during the months of October, November and December, 1919, shall be $4.00 per hundred pounds gross weight of rolls on board cars at mills.

"For the balance of the period of this agreement the price of the paper and length of terms for which such price shall apply shall be agreed upon by and between the parties hereto fifteen days prior to the expiration of each period for which the price and length of term thereof has been previously agreed upon, said price in no event to be higher than the contract price for newsprint charged by the Canadian Export Paper Company to the large consumers, the seller to receive the benefit of any differentials in freight rates.

"It is understood and agreed by the parties hereto that the tonnage specified herein is for use in the printing and publication of the various editions of the Daily and Sunday New York Sun, and any variation from this will be considered a breach of contract."

After the deliveries for September, October, November and December, 1919, the defendant refused to fix any price for the deliveries during the subsequent months, and refused to deliver any more paper. It has taken the position that this document was no contract, that it meant nothing, that it was formally executed for the purpose of permitting the defendant to furnish paper or not, as it pleased.

Surely these parties must have had in mind that some binding agreement was made for the sale and delivery of 16,000 tons rolls of paper, and that the instrument contained all the elements necessary to make a binding contract. It is a strain upon reason to imagine the paper house, the Remington Paper and Power Company, Incorporated, and the Sun Printing and Publishing Association, formally executing a contract drawn up upon the defendant's prepared form which was useless and amounted to nothing. We must, at least, start the examination of this agreement by believing that these intelligent parties intended to make a binding contract. If this be so, the court should spell out a binding contract, if it be possible. I not only think it possible, but think the paper itself clearly states a contract recognized under all the rules at law. It is said that the one essential element of price is lacking; that the provision above quoted is an agreement to agree to a price, and that the defendant had the privilege of agreeing or not, as it pleased; that if it failed to agree to a price there was no standard by which to measure the amount the plaintiff would have to pay. The contract does state, however, just this very thing. Fifteen days before the first of January, 1920, the parties were to agree upon the price of the paper to be delivered thereafter, and the length of the period for which such price should apply. However, the price to be fixed was not "to be higher than the contract price for newsprint charged by the Canadian Export Paper Company to large consumers." Here surely was something definite. The 15th day of December arrived. The defendant refused to deliver. At that time there was a price for newsprint charged by the Canadian Export Paper Company. If the plaintiff offered to pay this price, which was the highest price the defendant could demand, the defendant was bound to deliver. This seems to be very clear.

But while all agree that the price on the 15th day of December could be fixed, the further objection is made that the period during which that price should continue was not agreed upon. There are many answers to this.

We have reason to believe that the parties supposed they were making a binding contract; that they had fixed the terms by which one was required to take and the other to deliver; that the Canadian Export Paper Company price was to be the highest that could be charged in any event. These things being so, the court should be very reluctant to permit a defendant to avoid its contract. (Wakeman v. Wheeler & Wilson Mfg. Co., 101 N. Y. 205.)

On the 15th of the fourth month, the time when the price was to be fixed for subsequent deliveries, there was a price charged by the Canadian Export Paper Company to large consumers. As the defendant failed to agree upon a price, made no attempt to agree upon a price and deliberately broke its contract, it could readily be held to deliver the rest of the paper, a thousand rolls a month, at this Canadian price. There is nothing in the complaint which indicates that this is a fluctuating price, or that the price of paper as it was on December 15th was not the same for the remaining twelve months. Or we can deal with this contract, month by month. The deliveries were to be made 1,000 tons per month. On December 15th 1,000 tons could have been demanded. The price charged by the Canadian Export Paper Company on the 15th of each month on and after December 15th, 1919, would be the price for the thousand ton delivery for that month.

Or again, the word as used in the miscellaneous provision quoted is not "price," but "contract price" — "in no event to be higher than the contract price." Contract implies a term or period and if the evidence should show that the Canadian contract price was for a certain period of weeks or months, then this period could be applied to the contract in question.

Failing any other alternative, the law should do here what it has done in so many other cases, apply the rule of reason and compel parties to contract in the light of fair dealing. It could hold this defendant to deliver its paper as it agreed to do, and take for a price the Canadian Export Paper Company contract price for a period which is reasonable under all the circumstances and conditions as applied in the paper trade.

To let this defendant escape from its formal obligations when any one of these rulings as applied to this contract would give a practical and just result is to give the sanction of law to a deliberate breach. (Wood v. Duff-Gordon, 222 N. Y. 88; Moran v. Standard Oil Co., 211 N. Y. 187; United States Rubber Co. v. Silverstein, 229 N. Y. 168.)

For these reasons I am for the affirmance of the courts below.

HISCOCK, Ch. J., POUND, MCLAUGHLIN and ANDREWS, JJ., concur with CARDOZO, J.; CRANE, J., reads dissenting opinion with which HOGAN, J., concurs.

Order reversed, etc. 

Vito J. Cassan, New York City, John D. Calamari, Joseph M. Perillo, New York City, of counsel), for plaintiffs-appellants.

Robert Mazur, New York City (Wachtell, Lipton, Rosen & Katz, New York City, Donald N. Cohen, of counsel), for defendants-appellees.

Before KAUFMAN, MESKILL and MAHONEY, Circuit Judges.

MAHONEY, Circuit Judge:

This diversity case, acknowledged by all parties to be governed by New York law, arises out of the City of Yonkers' ("Yonkers") attempt to prevent a major employer within its borders, Otis Elevator Company ("Otis"), from moving out of the city. After Yonkers and the Yonkers Community Development Agency (the "Agency") granted Otis various benefits, Otis stayed in the city for a number of years. However, the Otis facility was rendered uneconomical due to technological changes in the manufacture of elevators, Otis' main product. Otis then left the city, ultimately selling the facility to the Port Authority of New York and New Jersey. Yonkers and the Agency then brought suit in the United States District Court for the Southern District of New York seeking damages from Otis and United Technologies Corporation ("United"), Otis' parent. After discovery, the district court, John E. Sprizzo, Judge, granted defendants' motion for summary judgment, and imposed a sanction of five thousand dollars upon plaintiffs and their counsel, Vito J. Cassan, for filing an unjustified fraud claim.

We affirm.

Background

Otis was founded in Yonkers in 1853, and continued in business there until 1976. In 1968, Otis' Yonkers plant required modernization and expansion to remain commercially viable. However, expansion appeared impossible due to limited land space, and Otis therefore considered alternatives, some of which involved closing the Yonkers plant.

The president of Otis, Ralph Weller, authorized Otis representatives to meet with Yonkers officials to try to solve Otis' space problems. A plan drafted by the Charles T. Main Company was rejected by Otis, but negotiations continued. Otis then formulated its own plan internally, tailored to meet Otis' land and space requirements in Yonkers. This plan recommended the use of urban renewal (with its accompanying provision for condemnation)^[1] to allow Otis to expand to the east of the plant. Accordingly, Otis notified Yonkers that if an adjoining parcel of land could be made available, Otis would be willing to expand and modernize its plant. After further negotiation, Otis, Yonkers and the Yonkers Urban Renewal Agency entered into a letter of intent dated June 5, 1972 which provided in relevant part:

1) The purpose of this letter and of the commitments set forth herein is the realization of the following goals:

a) the retention by Otis of its existing usable manufacturing facilities in Yonkers;

b) the improvement and expansion of those facilities with the cooperation and assistance of federal, state and local agencies;

c) the improvement in the aesthetic appearance of the older section of Yonkers in which these facilities are located; and

d) the continuation of existing opportunities for employment and training of the unemployed and the underemployed, such as are now provided by Otis.

The Yonkers City Council adopted an urban renewal plan on September 26, 1972 which included the land in question and set forth a number of goals and conditions, including obligations of Otis. At this point, Yonkers and the Agency began purchasing and clearing the property adjacent to the Otis factory, using funding received from the federal and state government as well as Yonkers' own resources. Otis also invested substantial funds renovating its Yonkers physical plant.

On September 13, 1974, the Agency and Otis entered into a land disposition agreement, and the Agency executed an indenture conveying the property adjacent to the Otis factory, which Yonkers had acquired, to Otis. Because most of the obligations between the parties relating to the details of the land transfer and renovation had been completed, on December 29, 1976, the parties entered into a termination agreement, which released the parties from further liability with respect to these obligations. Moreover, the actual redevelopment and construction were substantially completed; on November 3, 1976, the Agency accordingly issued a certificate of completion.

By 1982, however, the technology of elevator manufacture had undergone substantial change. The Yonkers plant was used to manufacture three mechanical components. In the early 1980's, two of those three were replaced by electronic components. Accordingly, operation of the Yonkers plant became economically unfeasible, and Otis closed it down in 1982.

Yonkers then commenced this action in the United States District Court for the Southern District of New York. None of the agreements or other documents pertaining to this situation includes any specific commitment by Otis to continue production at its Yonkers facility, and obviously there was therefore no specific commitment to do so for any designated period of time. Yonkers contends, however, that under various theories,^[2] Otis was obliged to continue in operation in Yonkers "for a reasonable time to be set by law, ... alleged to be at least sixty years." Otis denies any such obligation, and further contends that the New York statute of frauds, N.Y.Gen.Oblig.Law § 5-701 subd. a(1) (McKinney 1978), precludes any relief for Yonkers because the asserted contract between the parties was not to be performed within one year from its making, and the crucial asserted term as to duration was not memorialized in a writing subscribed by Otis.

After discovery, the district court issued an opinion, 649 F.Supp. 716 (S.D.N.Y.1986), which determined that the New York statute of frauds applied to the contract alleged in Yonkers' complaint, there was no writing sufficient to satisfy the statute of frauds, and even assuming arguendo that the statute of frauds did not bar plaintiffs' claim, defendants had demonstrated that no rational finder of fact could find for plaintiffs on the facts of this case on either a theory of contract (express or implied), equitable estoppel or unjust enrichment. See id. at 726. Defendants' motion for summary judgment was accordingly granted.^[3]

The district court also imposed a Rule 11 sanction of five thousand dollars upon plaintiffs and their attorney, Vito J. Cassan, for filing fraud claims that "lacked any colorable factual basis," id. at 735, reaffirming an earlier opinion, 106 F.R.D. 524 (S.D.N.Y.1985), which imposed the sanction upon finding "that the plaintiffs' allegations of fraud had no basis in fact, ... that ... plaintiffs were afforded an ample opportunity to withdraw those allegations and unjustifiably refused to do so," and that "[i]t was only after defendants' motion [for summary judgment] was brought that plaintiffs finally consented to withdraw the fraud claim." Id. at 525. The amount of the sanction was apparently premised upon the cost to defendants of moving to dismiss plaintiffs' fraud claims.

This appeal followed.

Discussion

A. Summary Judgment.

Our role in reviewing the district court's grant of summary judgment is to determine whether a material issue of fact exists and whether the law was applied correctly below. 10 C. Wright, A. Miller & M. Kane, Federal Practice and Procedure § 2716, at 654 (2d ed. 1983). Our function in doing so is plenary, in the sense that we apply the same standard as that employed by the trial court pursuant to Fed.R.Civ.P. 56(c). Id. § 2716 (2d ed. Supp.1987); Burtnieks v. City of New York,716 F.2d 982, 985 (2d Cir.1983). Further, the record must be read in the light most favorable to the party against whom summary judgment was granted. Id. at 985-86. Finally, plaintiffs may not defeat a motion for summary judgment merely by pointing to a potential issue of fact; there must be a genuine issue of material fact. Fed.R.Civ.P. 56(c); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986); Matsushita Electric Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 584, 106 S.Ct. 1348, 1355, 89 L.Ed.2d 538 (1986).

Plaintiffs contend that Otis was obligated to remain in the city for "a reasonable time," that in 1982 a reasonable time had not yet passed, and therefore that Otis' withdrawal in that year constituted a breach of contract. Yonkers argues in the alternative that if no contractual liability is found to exist, relief should be provided on the basis of quasi-contract or equitable estoppel.

Plaintiffs concede that no express promise to remain for a reasonable time was made by Otis.^[4] They argue instead for a promise implied either in fact or in law.

Implied terms have been divided into three categories: (1) terms that the parties intended, (2) terms that the parties would have intended had they thought about it and (3) terms that are fair. The first involves a search for the parties' intention, the second involves a search for the parties' hypothetical intention, the third has nothing to do with the parties' intention, except that the court will generally not imply a term in the face of the parties' expressed intent to the contrary.... "Implied in law" or "constructive" terms ... include the second and third categories.

Hadjiyannakis, The Parol Evidence Rule and Implied Terms: The Sounds of Silence, 54 Fordham L. Rev. 35, 38 n. 22 (1985) (citations omitted); see Barco Urban Renewal Corp. v. Housing Authority, 674 F.2d 1001, 1007 (3d Cir.1982); Haines v. City of New York, 41 N.Y.2d 769, 772-73, 396 N.Y.S.2d 155, 157-58, 364 N.E.2d 820, 822-23 (1976); Wood v. Lucy, Lady Duff-Gordon, 222 N.Y. 88, 91, 118 N.E. 214, 214 (1917); Restatement (Second) of Contracts § 204 comment d (1981).

We next apply these criteria to the question presented for our decision. The record shows that the parties bargained to retain Otis' presence, but that the only limit on its subsequent right to leave was economic reality. The deposition testimony of several of the witnesses establishes that Otis would not have agreed to a term requiring Otis to operate its Yonkers facility for a period of time or even for a reasonable time. As Eugene Hull, a vice president of Otis, testified at his deposition:

Q: (by the defense) If in the course of negotiations with respect to the letter of intent Yonkers or the Community Development Agency ever requested the inclusion of a provision of a letter of intent which would have provided that Otis could not close or relocate its Yonkers production facilities for more than ten years from the date of the letter of intent, would you have agreed to such a provision?

. . . . .

A: No, I would have been reluctant to commit ourselves to any specific period, you know. Whatever it might be, without, you know, a lot of serious consideration.

Q: Why is that?

A: Well, simply because, you know, there are and would be alternatives to providing production facilities with our other plants in the country, whether to make or buy the equipment that we manufactured there [sic] could have been provided by General Dynamics or General Electric, and we're continually making studies whether we should manufacture or buy.

So with the changes in technology going on at the time in the industry, it would be pretty hard to commit yourself.

Ralph Weller, Otis' president, and William Granville, an Otis vice president, testified to the same effect.

In any event, as stated earlier, there is no contention that the parties specifically agreed that Otis would remain in Yonkers, much less remain for a fixed period of time. Both sides believed, however, that the size of Otis' reinvestment in its Yonkers facility would guarantee the long term presence of Otis in Yonkers. Mr. Weller so testified, as did Alphons Yost, executive director of the Agency, and Alfred DelBello, then Mayor of Yonkers. Yost nonetheless testified that this was a "hope," and "that the length of time that Otis would operate in Yonkers could have been unilaterally determined by Otis."

The letter of intent, quoted above, similarly supports this view. That letter contains a clear distinction between "goals" and "commitments." Otis' continuing presence was only a goal, not a commitment. Yonkers argues that this is mere semanticism, and if only one or the other term had appeared, that argument might have some merit. Both were employed, however, and there is a clear difference between them.

This distinction and its implications were noted by Brett Auerbahn, the project director of the Agency, who noted in a memorandum analyzing the letter of intent:

Has Otis gone any further than stating that it is their goal to remain in Yonkers? There appear to be a great number of sanctions against the City should it fail to meet up to its part of the obligation but no similar sanctions against the Otis Elevator Company.

We further note that although Otis drafted the letter of intent, Seymour Scher, then city manager of Yonkers, wrote a letter to Granville in anticipation of the letter of intent which also referred to the retention of Otis as a goal of the project. Moreover, the legal counsel of the Yonkers Department of Development wrote Yost a memorandum analyzing the letter of intent with respect to Otis' obligation to provide employment, which stated that "[f]ailure to meet these goals does not give a legal right to the other parties."

Whether one views the resulting situation as negating any limit on Otis' mobility or as creating an implied promise to stay only as long as the plant remained economically feasible, the result is the same. Yonkers does not dispute Otis' professed reason for closing the plant: technological changes in the product and a corresponding change in the manufacturing capability needed to produce that product. In its Rule 3(g) statement^[5] of material facts as to which it contended there was no genuine issue to be tried, Otis asserted that two of the three components manufactured at its Yonkers facility were replaced by electronic components and rendered obsolete, Otis was able to satisfy its requirements for the third component from its other plants, and Yonkers production was accordingly terminated because there was no business justification for its continuance. In its responding Rule 3(g) statement, Yonkers stated that Otis' Yonkers facility operated at a profit until it was closed, and that Yonkers "never assumed the risk of Otis's making a poor business judgment with reference to its need or use of its expanded and modernized Yonkers facility," effectively conceding the factual premise for closure of the Yonkers plant asserted by Otis.^[6]

We conclude that this is not an appropriate case for the imposition of the implied promise for which plaintiffs contend, and that no genuine issue of material fact concerning that question is presented by this record. We refer again to the implied promise which Yonkers must establish to prevail in this litigation: that Otis promised to continue operation of its Yonkers facility for a period which exceeded the duration of its actual continuance; i.e., for a period which extended beyond the time when Otis made an unchallenged determination that there was no business justification, in the light of subsequent technological developments, for continued use of the Yonkers facility.

No rational trier of fact could conclude that this was the intention of the parties, which they inadvertently failed to express; or that the parties never considered the duration of Otis' commitment to Yonkers, but would have agreed upon the promise for which Yonkers contends had they done so. Cf. Barco Urban Renewal Corp. v. Housing Authority, 674 F.2d 1001, 1007 (3d Cir.1982) (right of first refusal deemed to continue for a commercially reasonable time where no time explicitly set by contract). Nor can we conclude that this promise must be implied as a matter of fairness, akin to the implication of a covenant of fair dealing. See, e.g., Roli-Blue, Inc. v. 69/70th St. Assoc., 119 A.D.2d 173, 176-78, 506 N.Y.S.2d 159, 161-62 (1st Dep't 1986); E. Farnsworth, Contracts § 7.16, at 524-25 (1982).

The implied promise for which Yonkers contends is not only outside the contemplation of the parties, but indeed extraordinary.^[7] The fair reading of this situation, it seems to us, is that Yonkers was relying upon, and Otis was deterred from departing by, the very considerable investment Otis made in renovating its Yonkers plant. When compelling business developments overcame that incentive to stay, Yonkers was left with a modernized manufacturing facility which was sold by Otis to another entity and continues to produce at least some jobs and income for Yonkers. However understandable Yonkers' disappointment at Otis' departure may be, it would be an imposition by the court to add an obligation to the contract between the parties which appears manifestly unreasonable on the record before us, rather than an obvious requirement of justice and fair dealing.

Our disposition of the contract claim also disposes of the quasi-contractual cause of action, because such relief is unavailable where an express contract covers the subject matter. Stissi v. Interstate & Ocean Transport Co., 814 F.2d 848, 851 (2d Cir.1987); Clark-Fitzpatrick, Inc. v. Long Island R.R. Co., 70 N.Y.2d 382, 388, 521 N.Y.S.2d 653, 656, 516 N.E.2d 190, 193 (1987); Nixon Gear & Machine Co. v. Nixon Gear, Inc., 86 A.D.2d 746, 746, 447 N.Y.S.2d 779, 781 (4th Dep't 1982); Restatement of Restitution § 107(1) (1937). Because we believe that Otis performed its obligations under the contract, see Restatement of Restitution § 107(1) (1937), no quasi-contractual relief is appropriate.

Yonkers' final argument on the merits is that relief based upon equitable estoppel should be provided. It asserts that such relief is available where there is a misrepresentation of fact, reasonable reliance upon that misrepresentation, and injury caused by the reliance. See Triple Cities Construction Co. v. Maryland Casualty Co., 4 N.Y.2d 443, 448, 176 N.Y.S.2d 292, 295, 151 N.E.2d 856, 858 (1958); Rothschild v. Title Guarantee & Trust Co., 204 N.Y. 458, 461-64, 97 N.E. 879, 880-81 (1912); J. Calamari & J. Perillo, Contracts § 11-29(b) (3d ed. 1987). Otis argues that Rothschild and the theory of equitable estoppel have been overruled sub silentio by Huggins v. Castle Estates, Inc., 36 N.Y.2d 427, 369 N.Y.S.2d 80, 330 N.E.2d 48 (1975), and that Yonkers must proceed under a theory of promissory estoppel. That theory requires "a clear and unambiguous promise; a reasonable and foreseeable reliance by the party to whom the promise is made; and an injury sustained by the party asserting the estoppel by reason of his reliance." Ripple's of Clearview, Inc. v. Le Havre Associates, 88 A.D.2d 120, 121-23, 452 N.Y.S.2d 447, 449 (2d Dep't 1982) (citation omitted); see R.G. Group, Inc. v. Horn & Hardart Co., 751 F.2d 69, 78 (2d Cir.1984) (quoting Ripple's of Clearview as stating the New York rule).

We need not decide that question, however, because here there was neither a misrepresentation nor a clear promise, so neither theory is satisfied. Moreover, Yonkers officials were aware of the weakness of their position at the time they contracted, rendering reliance unreasonable. Insofar as Yonkers seeks to imply a restriction on the use of property through equitable estoppel, furthermore, the New York Court of Appeals has admonished courts to apply that doctrine to realty with great caution. Huggins v. Castle Estates, Inc., 36 N.Y.2d 427, 433, 369 N.Y.S.2d 80, 87, 330 N.E.2d 48, 53 (1975).

B. Sanctions

Yonkers originally asserted two causes of action for fraud against Otis. It swiftly became clear that the claims were completely without merit. Though requested to withdraw the claims by Otis, Yonkers waited to withdraw the causes of action until after defendants' summary judgment papers were filed. The district court, upon motion, assessed sanctions pursuant to Fed.R.Civ.P. 11 in the amount of $5,000 for the "needless expense [incurred by defendants] in moving to dismiss plaintiffs' fraud claim." City of Yonkers v. Otis Elevator Co., 106 F.R.D. 524, 525 (S.D.N.Y.1985).

Appellate review of Rule 11 sanctions is de novo with respect to whether sanctions should be imposed for groundless pleadings. See Norris v. Grosvenor Marketing Ltd., 803 F.2d 1281, 1288 n. 6 (2d Cir.1986); Eastway Constr. Corp. v. City of New York, 762 F.2d 243, 254 n. 7 (2d Cir.1985). Yonkers asserts that any sanctions are inappropriate, because at the time the fraud claims were initially asserted a reasonable inquiry was made, and it was only after discovery was completed that it became clear that the fraud claims had no basis in fact. See Lane v. Sotheby Park Bernet, Inc., 758 F.2d 71 (2d Cir.1985) (per curiam) (attorneys' fees may be assessed for period of time after the frivolous nature of the claim became apparent).

Rule 11 states in part:

The signature of an attorney or party constitutes a certificate by the signer that the signer has read the pleading, motion, or other paper; that to the best of the signer's knowledge, information, and belief formed after reasonable inquiry it is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law, and that it is not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation.

Fed.R.Civ.P. 11. Thus, if at the time of their filing the fraud causes of action had no proper basis in fact or law, and under the circumstances, the attorney who signed the complaint should have known that, sanctions are mandatory. Fed.R.Civ.P. 11 advisory committee's note to the 1983 amendment.

Yonkers contends that it only became clear that its fraud claims were groundless after discovery. Otis responds that even conceding this point arguendo, Yonkers should not have continued to press the fraud claims at that juncture, thus requiring Otis to move for summary judgment with respect to them. See Lane v. Sotheby Parke Bernet, Inc., 758 F.2d 71 (2d Cir.1985) (per curiam). Yonkers argues in reply that the district judge, by outlining at a pre-trial conference what he expected Yonkers to establish in response to the summary judgment motion on the fraud claims, in effect requested that Yonkers continue to assert those claims to and including the summary judgment stage of the lawsuit.

We do not accept this view of the record, which we read as reflecting what Judge Sprizzo wanted to see from Yonkers on the assumption that Yonkers was determined to press its fraud claims, as to which Judge Sprizzo expressed considerable skepticism at the pre-trial conference to which Yonkers directs our attention. Sanctions ordered for the expense of moving to dismiss were therefore appropriate. The sanction imposed by the district court, thus limited, was well within its discretion. We note in this connection that the district court rejected Otis' request for broader sanctions. See City of Yonkers v. Otis Elevator Co., 649 F.Supp. 716, 735-36 (S.D.N.Y.1986).

Conclusion

The judgment of the district court is affirmed.

[1] Adjoining landowners unsuccessfully challenged the resulting condemnations on the basis that they were not for a sufficiently public purpose. See Yonkers Community Development Agency v. Morris, 37 N.Y.2d 478, 373 N.Y.S.2d 112, 335 N.E.2d 327, appeal dismissed, 423 U.S. 1010, 96 S.Ct. 440, 46 L.Ed.2d 381 (1975).

[2] Yonkers' complaint stated claims of implied contract, quasi contract, breach of contract, "bad faith acceptance" by Otis, "fraudulent retention" by Otis and United, and estoppel.

[3] An earlier motion for summary judgment was also granted, but with leave to replead. See 607 F.Supp. 1416 (S.D.N.Y.1985).

[4] We do not rely upon the New York statute of frauds as a ground for our affirmance. Defendants never pleaded the statute of frauds, even by amendment, despite the requirement of Fed.R.Civ.P. 8(c) that a responsive pleading "shall set forth" the defense. Even if the district court correctly concluded that the defense was not thereby waived, see 649 F.Supp. at 726 n. 14; but see 5 C. Wright & A. Miller, Federal Practice and Procedure § 1278, at 341 n. 38 (1969 & Supp.1987), and cases there cited, it is not clear that the New York statute of frauds bars recovery here. See, e.g., Morris Cohon & Co. v. Russell, 23 N.Y.2d 569, 575-76, 297 N.Y.S.2d 947, 953, 245 N.E.2d 712, 715 (1969) (implied term as to rate of compensation need not be memorialized in writing); Blye v. Colonial Corp. of America, 102 A.D.2d 297, 298-301, 476 N.Y.S.2d 874, 875-76 (1st Dep't 1984) (same). Accordingly, since there is an adequate alternative ground for affirmance, we do not reach the issue. See Alfaro Motors, Inc. v. Ward,814 F.2d 883, 887 (2d Cir.1987).

[5] Rule 3(g) of the Civil Rules of the United States District Courts for the Southern and Eastern Districts of New York requires any motion for summary judgment pursuant to Fed.R.Civ.P. 56 to be accompanied by "a separate, short and concise statement of the material facts as to which the moving party contends there is no issue to be tried," and requires the opposing party to provide a similar statement "of the material facts as to which it is contended that there exists a genuine issue to be tried." Further, "[a]ll material facts set forth in the statement required to be served by the moving party will be deemed to be admitted unless controverted by the statement required to be served by the opposing party." Id.

[6] See supra note 5.

[7] Yonkers highlights the implausibility of its position by asserting in its complaint that Otis was obliged to remain in Yonkers "for a reasonable time to be set by law, ... alleged to be at least sixty years."