Pacific Gas & Elec. Co. v. G. W. Thomas Drayage & Rigging Co. (1968)

Supreme Court of California, 1968
69 Cal.2d 33, 442 P 2d 641.

Facts: Defendant (G.W. Thomas Drayage & Rigging Co.) contracted to with plaintiff (Pacific Gas and Electric Company) to replay the upper metal cover of the plaintiff’s steam turbine. Defendant agreed to perform the work at its own risk and to indemnify the plaintiff against all loss, damages, expenses, and liabilities resulting from injury to the property, arising out of, or connected to, the contract. Defendant also agreed to procure not less than $50,000 insurance to cover liability for injury to property. Plaintiff was to be an additional named insured, but the policy was to contain a cross-liability clause extending the coverage to plaintiff’s property. During the work, the cover fell while it was being replaced and damaged a rotor of the steam turbine. Plaintiff brought action seeking to recover $25,144.51 (the cost of repairs to the rotor). Defendant offered to prove that the indemnity clause was meant to cover injury to property of third parties only, by way of admissions of the plaintiff’s agents, defendant’s conduct under similar contracts with the plaintiff, and by other proof. Despite the trial court’s observation that the contract language used was “the classic language for a third party indemnity provision,” it felt that the “plain language” of the agreement prevented the admission of any extrinsic evidence that would contradict its interpretation.

Issue: When contract language is subject to more than one interpretation, must a court allow evidence which shows the intention of the parties, even of the plain language appears to show a different meaning?

Holding: Yes.

Decision/Rationale: (Traynor, C.J.) The test for the admissibility of extrinsic evidence to explain the meaning of contract language is not whether it appears to the court to be plain and unambiguous, but whether the evidence offered is relevant to prove a meaning to which the language is reasonably susceptible. “A rule that would limit the determination of the meaning of a written instrument to its four-corners merely because it seems to the court to be clear and unambiguous, would either deny the relevance of the intention of the parties or presuppose a degree of verbal precision and stability our language has not attained.” If words had an absolute object of reference, it might be possible to discover the contractual intention of words by the manner in which they were arranged. Words, however, do not have an absolute and constant reference. The meaning of particular words, or groups of words, varies. Although extrinsic evidence is not admissible to add to, detract from, or vary the terms of a written contract, these terms must first be determined before it can be decided whether or not extrinsic evidence is being offered for a prohibited purpose. Rational interpretation requires at least a preliminary consideration of all credible evidence offered to prove the intention of the parties. In this case the court erred in refusing to consider the evidence offered to show the indemnity clause in the contract was not intended to cover injuries to the plaintiff’s property. Since the clause was reasonably susceptible to the defendant’s meaning the offered evidence was also admissible to prove that the clause had meaning and did not cover damage to the plaintiff’s property. Judgment was reversed.

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