Pacific Gas & Electric Co. v. G.W. Thomas Drayage & Rigging Co.
69 Cal. 2d 33 (1968)
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Rule of Law:
Extrinsic evidence is admissible to interpret the terms of a written contract, even if the language appears unambiguous on its face, as long as the evidence is relevant to prove a meaning to which the contractual language is reasonably susceptible.
Facts:
- In 1960, Pacific Gas and Electric Co. (PG&E) contracted with G. W. Thomas Drayage & Rigging Co. (Thomas) for Thomas to remove and replace the metal cover of PG&E's steam turbine.
- The contract contained a clause stating that Thomas would perform the work at its own risk and expense and would indemnify PG&E against 'all loss, damage, expense and liability resulting from... injury to property.'
- Thomas also agreed to procure an insurance policy for at least $50,000 to cover liability for injury to property.
- During the performance of the contract, the turbine cover fell and caused damage to the exposed rotor of the turbine, which was PG&E's property.
- PG&E subsequently spent $25,144.51 to repair the damaged turbine.
Procedural Posture:
- Pacific Gas and Electric Co. sued G. W. Thomas Drayage & Rigging Co. in a trial court for damages.
- During the trial, Thomas offered extrinsic evidence to prove the indemnity clause was intended to cover only property belonging to third parties, not PG&E's own property.
- The trial court, finding the contract language had a 'plain meaning,' refused to admit any extrinsic evidence that would contradict its interpretation.
- The trial court entered a judgment in favor of PG&E.
- Thomas (defendant) appealed the judgment to the Supreme Court of California.
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Issue:
Does the parol evidence rule prohibit the admission of extrinsic evidence to interpret the terms of a contract if the contract's language appears plain and unambiguous to the court?
Opinions:
Majority - Traynor, C. J.
No. The parol evidence rule does not prohibit the admission of extrinsic evidence to explain the meaning of a written agreement if the agreement is reasonably susceptible to the meaning contended for by the party offering the evidence. The court rejected the 'plain meaning' rule, which limits interpretation to the four corners of the document, as a relic of a primitive faith in the inherent meaning of words. The court reasoned that words do not have absolute and constant referents; their meaning varies with context and the linguistic experience of the parties. Therefore, a rational interpretation requires a preliminary consideration of all credible evidence offered to prove the parties' intention. If the court determines, after considering this evidence, that the contract's language is reasonably susceptible of a particular interpretation, the extrinsic evidence is admissible to prove that was the parties' intended meaning.
Dissenting - McComb, J.
This justice dissented without providing a written opinion.
Analysis:
This landmark decision fundamentally altered contract interpretation in California by rejecting the traditional 'plain meaning' or 'four corners' rule. By allowing courts to provisionally consider extrinsic evidence to ascertain the parties' intent even for seemingly unambiguous contracts, the ruling prioritizes subjective intent over objective textualism. This approach, while aiming to prevent courts from imposing a meaning the parties never intended, has been criticized for potentially increasing the cost and uncertainty of contract litigation. The case established a more contextual approach to contract law that has been highly influential in other jurisdictions.
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