Under traditional contract principles, extrinsic evidence is inadmissible to interpret, vary or add to the terms of an unambiguous integrated written instrument. But the California Supreme Court has held that contractual obligations flow not from the words of the contract, but from the intention of the parties. The inclusion of relevant, extrinsic, evidence to explain the meaning of a written instrument may be justified only if it were required and helpful to determine the meaning the parties gave to the words from the instrument alone.
Plaintiff and defendant entered into a commercial loan agreement. Plaintiff contended that the language of the contract was ambiguous and, thus, that plaintiff had an option of prepaying a loan if only it was willing to incur the prepayment fee. Plaintiff also argued that under California law, even seemingly unambiguous contracts were subject to modification by parol or extrinsic evidence. The US District Court dismissed plaintiff's complaint. On appeal, plaintiff argued that the lower court should have granted it an opportunity to prove that the contract language did not accurately reflect the parties' intentions. The court reversed the district court's judgment and remanded the case for reinstatement of the complaint.
Can parol evidence be admitted to prove the contract?
The court rejected the argument that the contract was ambiguous. The proffered interpretation would have resulted in a contradiction between two clauses of the contract; the default clause would have swallowed the clause prohibiting plaintiff from prepaying. Whether to accelerate repayment of the loan in the event of default was entirely defendant's decision. Moreover, California did not follow the traditional rule that barred extrinsic evidence in the case of unambiguous integrated contracts.