Ermolieff v. R. K. O. Radio Pictures, Inc.
122 P.2d 3, 19 Cal. 2d 543, 1942 Cal. LEXIS 388 (1942)
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Rule of Law:
Parol evidence of trade usage is admissible to clarify the meaning of a term within a contract, even if the term has an unambiguous ordinary meaning, provided both parties are members of the trade in which the usage exists.
Facts:
- Plaintiff Ermolieff, a motion picture producer, owned a foreign language film titled 'Michael Strogoff.'
- On July 6, 1936, Ermolieff entered into a contract with defendant R.K.O. Radio Pictures, Inc., granting R.K.O. the exclusive right to produce and distribute an English version of the film.
- The contract listed the territories where R.K.O. was granted distribution rights, which included 'The United Kingdom.'
- Ermolieff reserved all distribution rights in territories not listed in the contract.
- R.K.O. proceeded to distribute the film in Eire (the Irish Free State).
- A dispute arose between the parties as to whether the contractual term 'The United Kingdom' included Eire.
- The parties agreed that from a political and legal standpoint, Eire was not part of The United Kingdom.
Procedural Posture:
- Ermolieff (plaintiff) filed an action for declaratory relief against R.K.O. (defendant) in a California trial court to determine the parties' rights under the contract.
- At trial, the court granted Ermolieff's motion to strike all of R.K.O.'s evidence regarding the motion picture industry's custom of including Eire within the term 'The United Kingdom.'
- The trial court entered a judgment in favor of Ermolieff, determining that he possessed the distribution rights for the picture in Eire.
- R.K.O. (appellant) appealed the judgment to the Supreme Court of California.
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Issue:
Does the parol evidence rule prohibit the admission of evidence showing a specific trade usage or custom to define a term in a contract, when that term has an otherwise plain and unambiguous ordinary or legal meaning?
Opinions:
Majority - Carter, J.
No. The parol evidence rule does not bar the admission of trade usage evidence to define a contract term, even one that is facially unambiguous. The court reasoned that the primary goal of contract interpretation is to ascertain the true intent of the parties. If particular expressions have acquired a different meaning by trade usage, and both parties are engaged in that trade, they are deemed to have used the terms in that specialized sense. Such evidence does not alter the contract but rather gives effect to the words as the parties intended them, becoming an interpretive part of the contract itself. The court found this rule applicable because both parties were in the motion picture industry, and the contract did not contain an express provision precluding the application of trade usage.
Analysis:
This decision reinforces a significant exception to the parol evidence rule, clarifying that the rule's bar on extrinsic evidence does not apply to trade usage that defines or explains the meaning of contract terms. It establishes that the interpretation of a contract should occur within its commercial context, especially when both parties are sophisticated members of a particular industry. This precedent allows courts to look beyond the 'four corners' of a document to discern the parties' true intent, preventing a literal but commercially unreasonable interpretation of an agreement and making it easier for industry-specific understandings to be enforced.
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