68 Cal.2d 222

REBECCA D. MASTERSON et al., Plaintiffs and Respondents, v. LU E. SINE et al., Defendants and Appellants.

Supreme Court of California

February 6, 1968

Rawlins Coffman and Noel Watkins for Defendants and Appellants. [68 Cal.2d 224]

Glicksberg, Kushner & Goldberg, Lawrence Goldberg, Truce & Veal, Harlan Veal and Duard F. Geis for Plaintiffs and Respondents.

TRAYNOR, C. J.

Dallas Masterson and his wife Rebecca owned a ranch as tenants in common. On February 25, 1958, they conveyed it to Medora and Lu Sine by a grant deed "Reserving unto the Grantors herein an option to purchase the above described property on or before February 25, 1968" for the "same consideration as being paid heretofore plus their depreciation value of any improvements Grantees may add to the property from and after two and a half years from this date." Medora is Dallas' sister and Lu's wife. Since the conveyance Dallas has been adjudged bankrupt. His trustee in bankruptcy and Rebecca brought this declaratory relief action to establish their right to enforce the option.

The case was tried without a jury. Over defendants' objection the trial court admitted extrinsic evidence that by "the same consideration as being paid heretofore" both the grantors and the grantees meant the sum of $50,000 and by "depreciation value of any improvements" they meant the depreciation value of improvements to be computed by deducting from the total amount of any capital expenditures made by defendants grantees the amount of depreciation allowable to them under United States income tax regulations as of the time of the exercise of the option.

The court also determined that the parol evidence rule precluded admission of extrinsic evidence offered by defendants to show that the parties wanted the property kept in the Masterson family and that the option was therefore personal to the grantors and could not be exercised by the trustee in bankruptcy.

The court entered judgment for plaintiffs, declaring their right to exercise the option, specifying in some detail how it could be exercised, and reserving jurisdiction to supervise the manner of its exercise and to determine the amount that plaintiffs will be required to pay defendants for their capital expenditures if plaintiffs decide to exercise the option.

[1] Defendants appeal. They contend that the option provision is too uncertain to be enforced and that extrinsic evidence as to its meaning should not have been admitted. The trial court properly refused to frustrate the obviously declared intention of the grantors to reserve an option to repurchase by an overly meticulous insistence on completeness and [68 Cal.2d 225] clarity of written expression. (See California Lettuce Growers, Inc. v. Union Sugar Co. (1955) 45 Cal.2d 474, 481 [289 P.2d 785, 49 A.L.R.2d 496]; Rivers v. Beadle (1960) 183 Cal.App.2d 691, 695-697 [7 Cal.Rptr. 170].) It properly admitted extrinsic evidence to explain the language of the deed (Nofziger v. Holman (1964) 61 Cal.2d 526, 528 [39 Cal.Rptr. 384, 393 P.2d 696]; Barham v. Barham (1949) 33 Cal.2d 416, 422- 423 [202 P.2d 289]; Union Oil Co. v. Union Sugar Co. (1948) 31 Cal.2d 300, 306 [188 P.2d 470]; Schmidt v. Macco Constr. Co. (1953) 119 Cal.App.2d 717, 730 [260 P.2d 230]; see Farnsworth, "Meaning" in the Law of Contracts (1967) 76 Yale L.J. 939, 959-965; Corbin, The Interpretation of Words and the Parol Evidence Rule (1965) 50 Cornell L.Q. 161) to the end that the consideration for the option would appear with sufficient certainty to permit specific enforcement (see McKeon v. Santa Claus of Cal., Inc. (1964) 230 Cal.App.2d 359, 364 [41 Cal.Rptr. 43]; Vurrow v. Timmsen (1963) 223 Cal.App.2d 283, 288 [35 Cal.Rptr. 668, 100 A.L.R.2d 544]). The trial court erred, however, in excluding the extrinsic evidence that the option was personal to the grantors and therefore non-assignable.

[2] When the parties to a written contract have agreed to it as an "integration"--a complete and final embodiment of the terms of an agreement--parol evidence cannot be used to add to or vary its terms. (Pollyanna Homes, Inc. v. Berney (1961) 56 Cal.2d 676, 679-680 [16 Cal.Rptr. 345, 365 P.2d 401]; Hale v. Bohannon (1952) 38 Cal.2d 458, 465 [241 P.2d 4]; see 3 Corbin, Contracts (1960) § 573, p. 357; Rest., Contracts (1932) §§ 228 (and com. a), 237; Code Civ. Proc., § 1856; Civ. Code, § 1625.) [3] When only part of the agreement is integrated, the same rule applies to that part, but parol evidence may be used to prove elements of the agreement not reduced to writing. (Hulse v. Juillard Fancy Foods Co. (1964) 61 Cal.2d 571, 573 [39 Cal.Rptr. 529, 394 P.2d 65]; Schwartz v. Shapiro (1964) 229 Cal.App.2d 238, 250 [40 Cal.Rptr. 189]; Mangini v. Wolfschmidt, Ltd. (1958) 165 Cal.App.2d 192, 200-201 [331 P.2d 728]; Rest., Contracts (1932) § 239.)

[4] The crucial issue in determining whether there has been an integration is whether the parties intended their writing to serve as the exclusive embodiment of their agreement. [5] The instrument itself may help to resolve that issue. It may state, for example, that "there are no previous understandings or agreements not contained in the writing," and [68 Cal.2d 226] thus express the parties' "intention to nullify antecedent understandings or agreements." (See 3 Corbin, Contracts (1960) § 578, p. 411.) Any such collateral agreement itself must be examined, however, to determine whether the parties intended the subjects of negotiation it deals with to be included in, excluded from, or otherwise affected by the writing. Circumstances at the time of the writing may also aid in the determination of such integration. (See 3 Corbin, Contracts (1960) §§ 582-584; McCormick, Evidence (1954) § 216, p. 441; 9 Wigmore Evidence (3d ed. 1940) § 2430, p. 98, § 2431, pp. 102-103; Witkin, Cal. Evidence (2d ed. 1966) § 721; Schwartz v. Shapiro, supra, 229 Cal.App.2d 238, 251, fn. 8; contra, 4 Williston, Contracts (3d ed. 1961) § 633, pp. 1014-1016.)

California cases have stated that whether there was an integration is to be determined solely from the face of the instrument (e.g., Thoroman v. David (1926) 199 Cal. 386, 389-390 [249 P. 513]; Heffner v. Gross (1919) 179 Cal. 738, 742- 743 [178 P. 860]; Gardiner v. McDonogh (1905) 147 Cal. 313, 318-321 [81 P. 964]; Harrison v. McCormick (1891) 89 Cal. 327, 330 [26 P. 830, 23 Am.St.Rep. 469]), and that the question for the court is whether it "appears to be a complete ... agreement. ..." (See Ferguson v. Koch (1928) 204 Cal. 342, 346 [268 P. 342, 58 A.L.R. 1176]; Harrison v. McCormick, supra, 89 Cal. 327, 330.) Neither of these strict formulations of the rule, however, has been consistently applied. The requirement that the writing must appear incomplete on its face has been repudiated in many cases where parol evidence was admitted "to prove the existence of a separate oral agreement as to any matter on which the document is silent and which is not inconsistent with its terms"--even though the instrument appeared to state a complete agreement. (E.g., American Industrial Sales Corp. v. Airscope, Inc. (1955) 44 Cal.2d 393, 397 [282 P.2d 504, 49 A.L.R.2d 1344]; Stockburger v. Dolan (1939) 14 Cal.2d 313, 317 [94 P.2d 33, 128 A.L.R. 83]; Crawford v. France (1933) 219 Cal. 439, 443 [27 P.2d 645]; Buckner v. A. Leon & Co. (1928) 204 Cal. 225, 227 [267 P. 693]; Sivers v. Sivers (1893) 97 Cal. 518, 521 [32 P. 571]; cf. Simmons v. California Institute of Technology (1949) 34 Cal.2d 264, 274 [209 P.2d 581].) Even under the rule that the writing alone is to be consulted, it was found necessary to examine the alleged collateral agreement before concluding that proof of it was precluded by the writing alone. (See 3 Corbin, Contracts (1960) § 582, pp. 444-446.) It is therefore evident that "The conception of a writing as wholly and intrinsically self- determinative of the parties' intent to make it a sole memorial [68 Cal.2d 227] of one or seven or twenty-seven subjects of negotiation is an impossible one." (9 Wigmore, Evidence (3d ed. 1940) § 2431, p. 103.) For example, a promissory note given by a debtor to his creditor may integrate all their present contractual rights and obligations, or it may be only a minor part of an underlying executory contract that would never be discovered by examining the face of the note.

In formulating the rule governing parol evidence, several policies must be accommodated. One policy is based on the assumption that written evidence is more accurate than human memory. (Germain Fruit Co. v. J. K. Armsby Co. (1908) 153 Cal. 585, 595 [96 P. 319].) This policy, however, can be adequately served by excluding parol evidence of agreements that directly contradict the writing. Another policy is based on the fear that fraud or unintentional invention by witnesses interested in the outcome of the litigation will mislead the finder of facts. (German Fruit Co. v. J. K. Armsby Co., supra, 153 Cal. 585, 596; Mitchill v. Lath (1928) 247 N.Y. 377, 388 [160 N.E. 646, 68 A.L.R. 239] [dissenting opinion by Lehman, J.]; see 9 Wigmore, Evidence (3d ed. 1940) § 2431, p. 102; Murray, The Parol Evidence Rule: A Clarification (1966) 4 Duquesne L.Rev. 337, 338- 339.) McCormick has suggested that the party urging the spoken as against the written word is most often the economic underdog, threatened by severe hardship if the writing is enforced. In his view the parol evidence rule arose to allow the court to control the tendency of the jury to find through sympathy and without a dispassionate assessment of the probability of fraud or faulty memory that the parties made an oral agreement collateral to the written contract, or that preliminary tentative agreements were not abandoned when omitted from the writing. (See McCormick, Evidence (1954) § 210.) He recognizes, however, that if this theory were adopted in disregard of all other considerations, it would lead to the exclusion of testimony concerning oral agreements whenever there is a writing and thereby often defeat the true intent of the parties. (See McCormick, op. cit. supra, § 216, p. 441.)

[6] Evidence of oral collateral agreements should be excluded only when the fact finder is likely to be misled. The rule must therefore be based on the credibility of the evidence. One such standard, adopted by section 240(1)(b) of the Restatement of Contracts, permits proof of a collateral agreement if it "is such an agreement as might naturally be made as a separate agreement by parties situated as were the parties [68 Cal.2d 228] to the written contract." (Italics added; see McCormick, Evidence (1954) § 216, p. 441; see also 3 Corbin, Contracts (1960) § 583, p. 475, § 594, pp. 568-569; 4 Williston, Contracts (3d ed. 1961) § 638, pp. 1039-1045.) The draftsmen of the Uniform Commercial Code would exclude the evidence in still fewer instances: "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." (Com. 3, § 2-202, italics added.) fn. 1

[7a] The option clause in the deed in the present case does not explicitly provide that it contains the complete agreement, and the deed is silent on the question of assignability. Moreover, the difficulty of accommodating the formalized structure of a deed to the insertion of collateral agreements makes it less likely that all the terms of such an agreement were included. fn. 2 (See 3 Corbin, Contracts (1960) § 587; 4 Williston, Contracts (3d ed. 1961) § 645; 70 A.L.R. 752, 759 (1931); 68 A.L.R. 245 (1930).) The statement of the reservation of the option might well have been placed in the recorded deed solely to preserve the grantors' rights against any possible future purchasers, and this function could well be served without any mention of the parties' agreement that the option was personal. There is nothing in the record to indicate that the parties to this family transaction, through experience in land transactions or otherwise, had any warning of the disadvantages of failing to put the whole agreement in the deed. This case is one, therefore, in which it can be said that a collateral agreement such as that alleged "might naturally be made as a separate agreement." A fortiori, the case is not one [68 Cal.2d 229] in which the parties "would certainly" have included the collateral agreement in the deed.

It is contended, however, that an option agreement is ordinarily presumed to be assignable if it contains no provisions forbidding its transfer or indicating that its performance involves elements personal to the parties. (Mott v. Cline (1927) 200 Cal. 434, 450 [253 P. 718]; Altman v. Blewett (1928) 93 Cal.App. 516, 525 [269 P. 751].) The fact that there is a written memorandum, however, does not necessarily preclude parol evidence rebutting a term that the law would otherwise presume. In American Industrial Sales Corp. v. Airscope, Inc., supra, 44 Cal.2d 393, 397-398, we held it proper to admit parol evidence of a contemporaneous collateral agreement as to the place of payment of a note, even though it contradicted the presumption that a note, silent as to the place of payment, is payable where the creditor resides. (For other examples of this approach, see Richter v. Union Land etc. Co. (1900) 129 Cal. 367, 375 [62 P. 39] [presumption of time of delivery rebutted by parol evidence]; Wolters v. King (1897) 119 Cal. 172, 175-176 [51 P. 35] [presumption of time of payment rebutted by parol evidence]; Mangini v. Wolfschmidt, Ltd., supra, 165 Cal.App.2d 192, 198-201 [presumption of duration of an agency contract rebutted by parol evidence]; Zinn v. Ex-Cell-O Corp. (1957) 148 Cal.App.2d 56, 73-74 [306 P.2d 1017]; see also Rest., Contracts, § 240, com. c.) fn. 3 Of course a statute may preclude parol evidence to rebut a statutory presumption. (E. G. Neff v. Ernst (1957) 48 Cal.2d 628, 635 [311 P.2d 489] [commenting on Civ. Code, § 1112]; Kilfoy v. Fritz (1954) 125 Cal.App.2d 291, 293-294 [270 P.2d [68 Cal.2d 230] 579] [applying Deering's Gen. Laws, 1937, Act. 652, § 15(a)]; see also Com. Code, § 9-318, subd. (4).) Here, however, there is no such statute. [8] In the absence of a controlling statute the parties may provide that a contract right or duty is nontransferable. (La Rue v. Groezinger (1890) 84 Cal. 281, 283 [24 P. 42, 18 Am.St.Rep. 179]; Benton v. Hofmann Plastering Co. (1962) 207 Cal.App.2d 61, 68 [24 Cal.Rptr. 268]; Parkinson v. Caldwell (1954) 126 Cal.App.2d 548, 552-553 [272 P.2d 934]; see 4 Corbin, Contracts (1951) §§ 872-873.) [9] Moreover, even when there is no explicit agreement--written or oral--that contractual duties shall be personal, courts will effectuate a presumed intent to that effect if the circumstances indicate that performance by a substituted person would be different from that contracted for. (Farmland Irr. Co. v. Dopplmaier (1957) 48 Cal.2d 208, 222 [308 P.2d 732, 66 A.L.R.2d 590]; Prichard v. Kimball (1923) 190 Cal. 757, 764-765 [214 P. 863]; Simmons v. Zimmerman (1904) 144 Cal. 256, 260-261 [79 P. 451, 1 Ann.Cas. 850]; La Rue v. Groezinger, supra, 84 Cal. 281, 285; Coykendall v. Jackson [68 Cal.2d 231] (1936) 17 Cal.App.2d 729, 731 [62 P.2d 746]; see 4 Corbin, Contracts (1951) § 865; 3 Williston, Contracts (3d ed. 1960) § 412, pp. 32-33; Rest., Contracts (Tent. Draft No. 3, 1967) § 150(2).)

[7b] In the present case defendants offered evidence that the parties agreed that the option was not assignable in order to keep the property in the Masterson family. The trial court erred in excluding that evidence.

The judgment is reversed.

Peters, J., Tobriner, J., Mosk, J., and Sullivan, J., concurred.

BURKE, J.

I dissent. The majority opinion:

(1) Undermines the parol evidence rule as we have known it in this state since at least 1872 fn. 1 by declaring that parol evidence should have been admitted by the trial court to show that a written option, absolute and unrestricted in form, was intended to be limited and nonassignable;

(2) Renders suspect instruments of conveyance absolute on their face;

(3) Materially lessens the reliance which may be placed upon written instruments affecting the title to real estate; and

(4) Opens the door, albeit unintentionally, to a new technique for the defrauding of creditors.

The opinion permits defendants to establish by parol testimony that their grant fn. 2 to their brother (and brother-in-law) of a written option, absolute in terms, was nevertheless agreed to be nonassignable by the grantee (now a bankrupt), and that therefore the right to exercise it did not pass, by operation of the bankruptcy laws, to the trustee for the benefit of the grantee's creditors.

And how was this to be shown? By the proffered testimony of the bankrupt optionee himself! Thereby one of his assets (the option to purchase defendants' California ranch) would be withheld from the trustee in bankruptcy and from the bankrupt's creditors. Understandably the trial court, as required by the parol evidence rule, did not allow the bankrupt by parol to so contradict the unqualified language of the written option. [68 Cal.2d 232]

The court properly admitted parol evidence to explain the intended meaning of the "same consideration" and "depreciation value" phases of the written option to purchase defendants' land, as the intended meaning of those phrases was not clear. However, there was nothing ambiguous about the granting language of the option and not the slightest suggestion in the document that the option was to be nonassignable. Thus, to permit such words of limitation to be added by parol is to contradict the absolute nature of the grant, and to directly violate the parol evidence rule.

Just as it is unnecessary to state in a deed to "lot X" that the house located thereon goes with the land, it is likewise unnecessary to add to "I grant an option to Jones" the words "and his assigns" for the option to be assignable. As hereinafter emphasized in more detail, California statutes expressly declare that it is assignable, and only if I add language in writing showing my intent to withhold or restrict the right of assignment may the grant be so limited. Thus, to seek to restrict the grant by parol is to contradict the written document in violation of the parol evidence rule.

The majority opinion arrives at its holding via a series of false premises which are not supported either in the record of this case or in such California authorities as are offered.

The parol evidence rule is set forth in clear and definite language in the statutes of this state. (Civ. Code, § 1625; Code Civ. Proc., § 1856.) It "is not a rule of evidence but is one of substantive law. ... The rule as applied to contracts is simply that as a matter of substantive law, a certain act, the act of embodying the complete terms of an agreement in a writing (the 'integration'), becomes the contract of the parties." (Hale v. Bohannon (1952) 38 Cal.2d 458, 465 [1, 2] [241 P.2d 4], quoting from Estate of Gaines (1940) 15 Cal.2d 255, 264-265 [100 P.2d 1055].) The rule is based upon the sound principle that the parties to a written instrument, after committing their agreement to or evidencing it by the writing, are not permitted to add to, vary or contradict the terms of the writing by parol evidence. As aptly expressed by the author of the present majority opinion, speaking for the court in Parsons v. Bristol Dev. Co. (1965) 62 Cal.2d 861, 865 [2] [44 Cal.Rptr. 767, 402 P.2d 839], and in Coast Bank v. Minderhout (1964) 61 Cal.2d 311, 315 [38 Cal.Rptr. 505, 392 P.2d 265], such evidence is "admissible to interpret the instrument, but not to give it a meaning to which it is not reasonably susceptible." (Italics added.) Or, as stated by the same author, concurring [68 Cal.2d 233] in Laux v. Freed (1960) 53 Cal.2d 512, 527 [2 Cal.Rptr. 265, 348 P.2d 873], "extrinsic evidence is not admissible to 'add to, detract from, or vary its terms.' " (Italics added.)

At the outset the majority in the present case reiterate fn. 3 that the rule against contradicting or varying the terms of a writing remains applicable when only part of the agreement is contained in the writing, and parol evidence is used to prove elements of the agreement not reduced to writing. But having restated this established rule, the majority opinion inexplicably proceeds to subvert it.

Each of the three cases cited by the majority (fn. 3, ante) holds that although parol evidence is admissible to prove the parts of the contract not put in writing, it is not admissible to vary or contradict the writing or prove collateral agreements which are inconsistent therewith. The meaning of this rule (and the application of it found in the cases) is that if the asserted unwritten elements of the agreement would contradict, add to, detract from, vary or be inconsistent with the written agreement, then such elements may not be shown by parol evidence.

The contract of sale and purchase of the ranch property here involved was carried out through a title company upon written escrow instructions executed by the respective parties after various preliminary negotiations. The deed to defendant grantees, in which the grantors expressly reserved an option to repurchase the property within a ten-year period and upon a specified consideration, was issued and delivered in consummation of the contract. In neither the written escrow instructions nor the deed containing the option is there any language even suggesting that the option was agreed or intended by the parties to be personal to the grantors, and so nonassignable. The trial judge, on at least three separate occasions, correctly sustained objections to efforts of defendant optionors to get into evidence the testimony of Dallas Masterson (the bankrupt holder of the option) that a part of the agreement of sale of the parties was that the option to repurchase the property was personal to him, and therefore unassignable for benefit of creditors. But the majority hold that that testimony should have been admitted, thereby permitting defendant optionors [68 Cal.2d 234] to limit, detract from and contradict the plain and unrestricted terms of the written option in clear violation of the parol evidence rule and to open the door to the perpetration of fraud.

Options are property, and are widely used in the sale and purchase of real and personal property. One of the basic incidents of property ownership is the right of the owner to sell or transfer it. The author of the present majority opinion, speaking for the court in Farmland Irr. Co. v. Dopplmaier (1957) 48 Cal.2d 208, 222 [308 P.2d 732, 66 A.L.R.2d 590], put it this way: "The statutes in this state clearly manifest a policy in favor of the free transferability of all types of property, including rights under contracts." fn. 4(Citing Civ. Code, §§ 954, 1044, 1458 fn. 5; see also 40 Cal.Jur.2d 289-291, and cases there cited.) These rights of the owner of property to transfer it, confirmed by the cited code sections, are elementary rules of substantive law and not the mere disputable presumptions which the majority opinion in the present case would make of them. Moreover, the right of transferability applies to an option to purchase, unless there are words of limitation in the option forbidding its assignment or showing that it was given because of a peculiar trust or confidence reposed in the optionee. (Mott v. Cline (1927) 200 Cal. 434, 450 [11] [253 P. 718]; Prichard v. Kimball (1923) 190 Cal. 757, 764-765 [4, 5] [214 P. 863]; Altman v. Blewett (1928) 93 Cal.App. 516, 525 [3] [269 P. 751]; see also 5 Cal.Jur.2d 393, 395-396, and cases there cited.) Thus, in Prichard the language of the document itself (a written, expressly nonassignable lease, with option to buy) was held to establish the trust or confidence reposed in the optionee and so to negate assignability of the option.

The right of an optionee to transfer his option to purchase property is accordingly one of the basic rights which accompanies the option unless limited under the language of the option itself. To allow an optionor to resort to parol evidence to support his assertion that the written option is not transferable [68 Cal.2d 235] is to authorize him to limit the option by attempting to restrict and reclaim rights with which he has already parted. A clearer violation of two substantive and basic rules of law--the parol evidence rule and the right of free transferability of property--would be difficult to conceive.

The majority opinion attempts to buttress its approach by asserting (ante, p. 226) that "California cases have stated that whether there was an integration is to be determined solely from the face of the instrument [citations], and that the question for the court is whether it 'appears to be a complete ... agreement. ... [citations]," but that "Neither of these strict formulations of the rule ... has been consistently applied."

The majority's claim of inconsistent application of the parol evidence rule by the California courts fails to find support in the examples offered. First, the majority opinion asserts (ante, p. 226) that "The requirement that the writing must appear incomplete on its face has been repudiated in many cases where parol evidence was admitted 'to prove the existence of a separate oral agreement as to any matter on which the document is silent and which is not inconsistent with its terms'--even though the instrument appeared to state a complete agreement. [Citations.]" But an examination of the cases cited in support of the quoted statement discloses that on the contrary in every case which is pertinent here (with a single exception) the writing was obviously incomplete on its face. fn. 6In the one exception (Stockburger v. Dolan (1939) 14 Cal.2d 313, 317 [94 P.2d 33, 128 A.L.R. 83]) it was held that lessors under a lease to drill for oil in an area zoned against such drilling should be permitted to show by parol that the lessee had contemporaneously agreed orally to seek a variance--an agreement which, as the opinion points out, did not contradict the written contract. But what is additionally noteworthy in Stockburger, and controlling here, is [68 Cal.2d 236] the further holding that lessors could not show by parol that lessee had orally agreed that a lease provision suspending payment of rental under certain circumstances would not apply during certain periods of time--as "evidence to that effect would vary the terms of the contract in that particular ...." (P. 317 [5] of 14 Cal.2d.)

In further pursuit of what would appear to be nonexistent support for its assertions of inconsistency in California cases, the majority opinion next declares (ante, p. 226) that "Even under the rule that the writing alone is to be consulted, it was found necessary to examine the alleged collateral agreement before concluding that proof of it was precluded by the writing alone. (See 3 Corbin, Contracts (1960) § 582, pp. 444-446.)" Not only are no California cases cited by the majority in supposed support for the quoted declaration (offered by the majority as an example of inconsistent applications of the parol evidence rule by California courts), but 3 Corbin, Contracts, which the majority do cite, likewise refers to no California cases, and makes but scanty citation to any cases whatever. In any event, in what manner other than by "examining" an alleged collateral agreement is it possible for a court to rule upon the admissibility of testimony or upon an offer of proof with respect to such agreement?

The majority opinion has thus demonstrably failed to substantiate its next utterance (ante, pp. 226-227) that " 'The conception of a writing as wholly and intrinsically self-determinative of the parties' intent to make it a sole memorial of one or seven or twenty-seven subjects of negotiation is an impossible one,' " citing 9 Wigmore, Evidence (3d ed. 1940) section 2431, page 103, whose views on the subject were rejected by this court as early as 1908 in Germain Fruit Co. v. J. K. Armsby Co., 153 Cal. 585, 595 [96 P. 319], which, indeed, is also cited by the majority in the present case. And the example given, that of a promissory note, is obviously specious. Rarely, if ever, does a promissory note given by a debtor to his creditor integrate all their agreements (that is not the purpose it serves); it may or it may not integrate all their present contractual rights and obligations; but relevant to the parol evidence rule, at least until the advent of the majority opinion in this case, alleged collateral agreements which would vary or contradict the terms and conditions of a promissory note may not be shown by parol. (Bank of America etc. Assn. v. Pendergrass (1935) 4 Cal.2d 258, 263-264 [6] [48 P.2d 659].)

Upon this structure of incorrect premises and unfounded [68 Cal.2d 237] assertions the majority opinion arrives at its climax: The pronouncement of "several policies [to] be accommodated ... [i]n formulating the rule governing parol evidence." (Italics added.) fn. 7Two of the "policies" as declared by the majority are: Written evidence is more accurate than human memory fn. 8; fraud or unintentional invention by interested witnesses may well occur.

I submit that these purported "policies" are in reality two of the basic and obvious reasons for adoption by the Legislature of the parol evidence rule as the policy in this state. Thus the speculation of the majority (ante, pp. 227-228) concerning the views of various writers on the subject and the advisability of following them in this state is not only superfluous but flies flatly in the face of established California law and policy. It serves only to introduce uncertainty and confusion in a field of substantive law which was codified and made certain in this state a century ago.

However, despite the law which until the advent of the present majority opinion has been firmly and clearly established in California and relied upon by attorneys and courts alike, that parol evidence may not be employed to vary or contradict the terms of a written instrument, the majority now announce (ante, p. 227) that such evidence "should be excluded only when the fact finder is likely to be misled," and that "The rule must therefore be based on the credibility of the evidence." (Italics added.) But was it not, inter alia, to avoid misleading the fact finder, and to further the introduction of only the evidence which is most likely to be credible (the written document), that the Legislature adopted the parol evidence rule as a part of the substantive law of this state?

Next, in an effort to implement this newly promulgated "credibility" test, the majority opinion offers a choice of two "standards": one, a "certainty" standard, quoted from the Uniform Commercial Code fn. 9 (ante, p. 228), and the other a [68 Cal.2d 238] "natural" standard found in the Restatement of Contracts fn. 10 (ante, p. 227), and concludes (ante, p. 228) that at least for purposes of the present case the "natural" viewpoint should prevail.

This new rule, not hitherto recognized in California, provides that proof of a claimed collateral oral agreement is admissible if it is such an agreement as might naturally have been made a separate agreement by the parties under the particular circumstances. I submit that this approach opens the door to uncertainty and confusion. Who can know what its limits are? Certainly I do not. For example, in its application to this case who could be expected to divine as "natural" a separate oral agreement between the parties that the assignment, absolute and unrestricted on its face, was intended by the parties to be limited to the Masterson family?

Or, assume that one gives to his relative a promissory note and that the payee of the note goes bankrupt. By operation of law the note becomes an asset of the bankruptcy. The trustee attempts to enforce it. Would the relatives be permitted to testify that by a separate oral agreement made at the time of the execution of the note it was understood that should the payee fail in his business the maker would be excused from payment of the note, or that, as here, it was intended that the benefits of the note would be personal to the payee? I doubt that trial judges should be burdened with the task of conjuring whether it would have been "natural" under those circumstances for such a separate agreement to have been made by the parties. Yet, under the application of the proposed rule, this is the task the trial judge would have, and in essence the situation presented in the instant case is no different.

Under the application of the codes and the present case law, proof of the existence of such an agreement would not be permitted, "natural" or "unnatural." But conceivably, as loose as the new rule is one judge might deem it natural and another judge unnatural. fn. 11 And in each instance the ultimate decision [68 Cal.2d 239] would have to be made ("naturally") on a case-by-case basis by the appellate courts.

In an effort to provide justification for applying the newly pronounced "natural" rule to the circumstances of the present case, the majority opinion next (ante, p. 228) attempts to account for the silence of the writing in this case concerning assignability of the option, by asserting that "the difficulty of accommodating the formalized structure of a deed to the insertion of collateral agreements makes it less likely that all the terms of such an agreement were included." What difficulty would have been involved here, to add the words "this option is nonassignable"? The asserted "formalized structure of a deed" is no formidable barrier. The Legislature has set forth the requirements in simple language in section 1092 of the Civil Code. It is this: "I, A B, grant to C D all that real property situated in [naming county], State of California, ... described as follows: [describing it]." To this the grantor desiring to reserve an option to repurchase need only so state, as was done here. It is a matter of common knowledge that collateral agreements (such as the option clause here involved, or such as deed restrictions) are frequently included in deeds, without difficulty of any nature.

To support further speculation (ante, p. 228) that "the reservation of the option might well have been placed in the recorded deed solely to preserve the grantors' rights against any possible future purchasers, and this function could well be served without any mention of the parties' agreement that the option was personal," the majority assert that "There is nothing in the record to indicate that the parties to this family transaction, through experience in land transactions or otherwise, had any warning of the disadvantages of failing to put the whole agreement in the deed." (Italics added.) The facts of this case, however, do not support such claim of naivete. The grantor husband (the bankrupt businessman) testified that as none of the parties were attorneys "we wanted to contact my attorney ... which we did. ... The wording in the option was obtained from [the attorney]. ... I told him what my discussion was with the Sines [defendant grantees] and he wanted ... a little time to compose it .... And, then this [the wording provided by the attorney] was taken to the title company at the time Mr. and Mrs. Sine and I went in to complete the transaction." (Italics added.) The witness was an experienced businessman who thus demonstrated awareness of the wisdom of seeking legal guidance and advice in this business [68 Cal.2d 240] transaction, and who did so. Wherein lies the naive family transaction postulated by the majority?

The majority opinion (ante, p. 229) then proceeds on the fallacious assertion that the right to transfer or to assign an option, if it contains no provisions forbidding transfer or indicating that performance involves elements personal to the parties, is a mere disputable presumption, and in purported support cites cases not one of which involves an option and in each of which the presumption which was invoked served to supply a missing but essential element of a complete agreement. fn. 12 As already emphasized hereinabove, the right of free transferability of property, including options, is one of the most fundamental tenets of substantive law, and the crucial distinction would appear self-evident between such a basic right on the one hand, and on the other hand the disputable evidentiary presumptions which the law has developed to supply terms lacking from a written instrument but essential to making it whole and complete. There is no such lack in the deed and the option reservation now at issue.

The statement of the majority opinion (ante, p. 230) that in the absence of a controlling statute the parties may provide that a contract right or duty is nontransferable, is of course true. Equally true is the next assertion (ante, p. 230) that "even when there is no explicit agreement--written or oral--that contractual duties shall be personal, courts will effectuate a presumed intent to that effect if the circumstances indicate that performance by a substituted person would be different from that contracted for." But to apply the law of contracts for the rendering of personal services to the reservation of an option in a deed of real estate calls for a misdirected use of the rule, particularly in an instrument containing not one word from which such "a presumed intent to that effect" could be gleaned.particularly is the holding objectionable when the result is to upset established statutory and case law in this state that "circumstances" shown by parol may not be employed to contradict, add to or detract from, the agreement of the parties as expressed by them in writing. And once again the quoted pronouncement of the majority concerning the showing [68 Cal.2d 241] of "circumstances" by parol fails to find support in the cases they cite, fn. 13 which relate to a patent license agreement, held to be assignable absent terms indicating a contrary intent; a contract to sell grapes also held assignable; a contract which included language showing the intent that it be nonassignable; a contract to buy land held to be assignable because approval of title by the buyer was held not to be a personal privilege attaching only to the assignor; and to contracts for personal services.

Neither personal skill nor personal qualities can be conjured as a requirement for the exercise of the option reserved in the deed here, regardless of how ardent may be the desire of the parties (the bankrupt husband-optionee and his sister), "to keep the property in the ... family."particularly is this true when a contrary holding would permit the property to be acquired by plaintiff referee in bankruptcy for the benefit of the creditors of the bankrupt husband.

Comment hardly seems necessary on the convenience to a bankrupt of such a device to defeat his creditors. He need only produce parol testimony that any options (or other property, for that matter) which he holds are subject to an oral "collateral agreement" with family members (or with friends) that the property is nontransferable "in order to keep the property in the family" or in the friendly group. In the present case the value of the ranch which the bankrupt and his wife held an option to purchase has doubtless increased substantially during the years since they acquired the option. The initiation of this litigation by the trustee in bankruptcy to establish his right to enforce the option indicates his [68 Cal.2d 242] belief that there is substantial value to be gained for the creditors from this asset of the bankrupt. Yet the majority opinion permits defeat of the trustee and of the creditors through the device of an asserted collateral oral agreement that the option was "personal" to the bankrupt and nonassignable "in order to keep the property in the family"! fn. 14

It also seems appropriate to inquire as to the rights of plaintiff wife in the option which she holds with her bankrupt husband. Is her interest therein also subject to being shown to be personal and not salable or assignable? And, what are her rights and those of her husband in the ranch land itself, if they exercise their option to purchase it? Will they be free to then sell the land? Or, if they prefer, may they hold it beyond the reach of creditors? Or can other members of "the family" claim some sort of restriction on it in perpetuity, established by parol evidence?

And if defendants sell the land subject to the option, will the new owners be heard to assert that the option is "personal" to the optionees, "in order to keep the property in the Masterson family"? Or is that claim "personal" to defendants only?

These are only a few of the confusions and inconsistencies which will arise to plague property owners and, incidentally, attorneys and title companies, who seek to counsel and protect them.

I would hold that the trial court ruled correctly on the proffered parol evidence, and would affirm the judgment.

McComb, J., concurred.

FN 1. Corbin suggests that, even in situations where the court concludes that it would not have been natural for the parties to make the alleged collateral oral agreement, parol evidence of such an agreement should nevertheless be permitted if the court is convinced that the unnatural actually happened in the case being adjudicated. (3 Corbin, Contracts, § 485, pp. 478, 480; cf. Murray, The Parol Evidence Rule: A Clarification (1966) 4 Duquesne L. Rev. 337, 341-342.) This suggestion may be based on a belief that judges are not likely to be misled by their sympathies. If the court believes that the parties intended a collateral agreement to be effective, there is no reason to keep the evidence from the jury.

FN 2. See Goble v. Dotson (1962) 203 Cal.App.2d 272 [21 Cal.Rptr. 769], where the deed given by a real estate developer to the plaintiffs contained a condition that grantees would not build a pier or boathouse. Despite this reference in the deed to the subject of berthing for boats, the court allowed plaintiffs to prove by parol evidence that the condition was agreed to in return for the developer's oral promise that plaintiffs were to have the use of two boat spaces nearby.

FN 3. Counsel for plaintiffs direct our attention to numerous cases that they contend establish that parol evidence may never be used to show a collateral agreement contrary to a term that the law presumes in the absence of an agreement. In each of these cases, however, the decision turned upon the court's belief that the writing was a complete integration and was no more than an application of the rule that parol evidence cannot be used to vary the terms of a completely integrated agreement. (Cf. discussion in Mangini v. Wolfschmidt, Ltd., supra, 165 Cal.App.2d 192, 203.) In Gardiner v. McDonogh, supra, 147 Cal. 313, 319, defendants sought to prove a collateral agreement that beans sold them were to conform to a sample earlier given. The court purportedly looked only to the face of the writing to decide whether parol evidence was admissible, and such evidence would be excluded if the writing was "clear and complete." Defendants argued that the written order was not complete because it did not fix a time and place of delivery, but the court answered that the failure to state those terms did not result in incompleteness because the law would supply them by implication. This decision was based on the belief that the question of admissibility had to be decided from the face of the instrument alone. Virtually every writing leaves some terms to be implied and almost none would qualify as integrations without implying some terms. The decision was therefore a product of an outmoded approach to the parol evidence rule, not of any compulsion to give conclusive effect to presumptions of implied terms.

In Standard Box Co. v. Mutual Biscuit Co. (1909) 10 Cal.App. 746, 750 [103 P. 938], the rationale of Gardiner v. McDonogh was extended to exclude evidence of an agreement for a time of performance other than the "reasonable time" implied by law in a situation where the writing, although stating no time of performance, was "clear and complete when aided by that which is imported into it by legal implication." This decision was simply an application of the then-current theory regarding integration. The court regarded the instrument as a complete integration, and it therefore precluded proof of collateral agreements. Since it is now clear that integration cannot be determined from the writing alone, the decision is not authoritative insofar as it finds a complete integration. There is no reason to believe that the court gave any independent significance to implied terms. Had the court found from the writing alone that there was no integration, there is nothing to indicate that it would have excluded proof contrary to terms it would have otherwise presumed.

In Buffalo Arms, Inc. v. Remler Co. (1960) 179 Cal.App.2d 700, 710 [4 Cal.Rptr. 103], the court refused to admit parol evidence showing a collateral oral agreement that a buyer would have more than the "reasonable time" presumed by law to refuse goods, but the decision is based on a conclusion that the writing on its face was a complete expression of the agreement. In La France v. Kashishian (1928) 204 Cal. 643, 645 [269 P. 655], and Fogler v. Purkiser (1932) 127 Cal.App. 554, 559-560 [16 P.2d 305], there are no clear findings concerning the completeness of the writings; but the argument in each case is borrowed from the Standard Box Co. decision and thus implies a finding of a complete integration. Calpetro Producers Syndicate v. C. M. Woods Co. (1929) 206 Cal. 246, 247-248, 252 [274 P. 65], relies on Standard Box Co. and expressly finds a complete integration.

FN 1. In that year the Legislature set forth the rule in sections 1625 of the Civil Code and 1856 of the Code of Civil Procedure.

FN 2. The option was in the form of a reservation in a deed; however, in legal effect it is the same as if it had been contained in a separate document.

FN 3. Citing three California cases (ante, p. 225); Hulse v. Juillard Fancy Foods Co. (1964) 61 Cal.2d 571, 573 [39 Cal.Rptr. 529, 394 P.2d 65]; Schwartz v. Shapiro (1964) 229 Cal.App.2d 238, 250 [40 Cal.Rptr. 189]; Mangini v. Wolfschmidt, Ltd. (1958) 165 Cal.App.2d 192, 200-201 [331 P.2d 728].

FN 4. The opinion continues: "The terms and purpose of a contract may show, however, that it was intended to be nonassignable." With this qualification of the general rule I am in accord, but here it is inapplicable as language indicating any intention whatever to restrict assignability is completely nonexistent.

FN 5. Section 1044: "Property of any kind may be transferred, except as otherwise provided by this article." The only property the article provides cannot be transferred is "A mere possibility, not coupled with an interest." (§ 1045.)

Section 1458: "A right arising out of an obligation is the property of the person to whom it is due, and may be transferred as such."

FN 6. Thus in American Industrial Sales Corp. v. Airscope, Inc. (1955) 44 Cal.2d 393, 397 [282 P.2d 504, 49 A.L.R.2d 1344], the contract was silent as to the place of payment for property purchased; in Crawford v. France (1933) 219 Cal. 439, 443 [27 P.2d 645], a contract for an architect's fee based upon the cost of a building was silent as to such cost; in Buckner v. A. Leon & Co. (1928) 204 Cal. 225, 227 [267 P. 693], a contract for sale and purchase of grapes was silent as to which party was to furnish the lug boxes required for delivery; in Sivers v. Sivers (1893) 97 Cal. 518, 521 [32 P. 571], a written agreement to repay money loaned was silent as to the time for payment; and Simmons v. California Institute of Technology (1949) 34 Cal.2d 264, 274 [9] [209 P.2d 581], was a case of fraud in the inducement and not one of parol evidence to show a promise or agreement inconsistent with the written contract.

FN 7. It is the Legislature of this state which did the formulating of the rule governing parol evidence nearly a century ago when in 1872, as previously noted, sections 1625 of the Civil Code and 1856 of the Code of Civil Procedure were adopted. And as already shown herein, the rule has since been consistently applied by the courts of this state. The parol evidence rule as thus laid down by the Legislature and applied by the courts is the policy of this state.

FN 8. Although the majority declare that this first "policy" may be served by excluding parol evidence of agreements that directly contradict the writing, such contradiction is precisely the effect of the agreement sought to be shown by parol in this case.

FN 9. "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." (Comment 3, § 2- 202; italics added.)

FN 10. Viz., proof of a collateral agreement should be permitted if it "is such an agreement as might naturally be made as a separate agreement by parties situated as were the parties to the written contract." (Restatement of Contracts, § 240, subd. (1)(b); italics added.)

FN 11. Or perhaps application of the new rule will turn upon the opinion of the court (trial or appellate) that it is "natural" for one family group to agree that in case of unfriendly approach by a creditor of any of them, then the debtor's property will be transferable or assignable only to other members of the family, whereas such a scheme might be considered less than "natural" for other families to pursue.

FN 12. Thus in American Industrial Sales Corp. v. Airscope, Inc., supra (1955) 44 Cal.2d 393, 397, the missing element was the place of payment of a note; in Richter v. Union Land etc. Co. (1900) 129 Cal. 367, 375 [62 P. 39], the missing element was the time of delivery; in Wolters v. King (1897) 119 Cal. 172, 175-176 [51 P. 35], it was the time of payment; and in Mangini v. Wolfschmidt, Ltd., supra (1958) 165 Cal.App.2d 192, 200, and Zinn v. Ex- Cell-O Corp. (1957) 148 Cal.App.2d 56, 73-74 [306 P.2d 1017], it was the duration of an agency contract.

FN 13. In Farmland Irr. Co. v. Dopplmaier, supra (1957) 48 Cal.2d 208, 222, the court in holding that a patent license agreement was assignable pursuant to the policy "clearly manifested" by "the statutes in this state ... in favor of the free transferability of all types of property, including rights under contracts," stated "The terms and purpose of a contract may show however, that it was intended to be nonassignable. Thus the duties imposed upon one party may be of such a personal nature that their performance by someone else would in effect deprive the other party of that for which he bargained. The duties in such a situation cannot be delegated." (Citing La Rue v. Groezinger (1890) 84 Cal. 281, 283-285, which held (p. 286 [24 P. 42, 18 Am.St.Rep. 179]) that a contract to sell grapes from a certain vineyard was assignable to the purchaser of the vineyard, as nothing in the contract language excluded the "idea of performance by another," and (p. 287) there was "nothing in the nature or circumstances ... which shows that the skill or other personal quality of the party was a distinctive characteristic of the thing stipulated for, or a material inducement to the contract.")

In Prichard v. Kimball, supra (1923) 190 Cal. 757, 764-765, next cited by the majority, the written contract contained language showing the intent that it be nonassignable (as already pointed out hereinabove). Simmons v. Zimmerman (1904) 144 Cal. 256, 260-261 [79 P. 451, 1 Ann. Cas. 850], held that a contract to buy land was assignable, as approval of title by the buyer is not a personal privilege attaching only to the assignor (the party to whom the seller agreed to sell). La Rue v. Groezinger has already been shown not to support the majority's proposition here. And the last case which the majority cite, Coykendall v. Jackson (1936) 17 Cal.App.2d 729, 731 [62 P.2d 746], involved a contract for personal services, almost uniformly held to be nonassignable; it did not deal with a contract or an option to buy property, which ordinarily imposes no other obligation on the buyer than to make payment, as does the option now before this court.

FN 14. As noted at the outset of this dissent, it was by means of the bankrupt's own testimony that defendants (the bankrupt's sister and her husband) sought to show that the option was personal to the bankrupt and thus not transferable to the trustee in bankruptcy.

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.

[565] 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 [567] 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 [568] 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 [569] 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, [570] 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.

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."