PACIFIC GAS E. CO. v. G.W. THOMAS DRAYAGE ETC. CO

TRAYNOR, C.J.

Defendant appeals from a judgment for plaintiff in an action for damages for injury to property under an indemnity clause of a contract.

In 1960 defendant entered into a contract with plaintiff to furnish the labor and equipment necessary to remove and replace the upper metal cover of plaintiff's steam turbine. Defendant agreed to perform the work "at [its] own risk and expense" and to "indemnify" plaintiff "against all loss, damage, expense and liability resulting from . . . injury to property, arising out of or in any way connected with the performance of this 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 and injured the exposed rotor of the turbine. Plaintiff brought this action to recover $25,144.51, the amount it subsequently spent on repairs. During the trial it dismissed a count based on negligence and thereafter secured judgment on the theory that the indemnity provision covered injury to all property regardless of ownership.

Defendant offered to prove by admissions of plaintiff's agents, by defendant's conduct under similar contracts entered into with plaintiff, and by other proof that in the indemnity clause the parties meant to cover injury to property of third parties only and not to plaintiff's property. Although the trial court observed that the language used was "the classic language for a third party indemnity provision" and that "one could very easily conclude that . . . its whole intendment is to indemnify third parties," it nevertheless held that the "plain language" of the agreement also required defendant to indemnify plaintiff for injuries to plaintiff's property. Having determined that the contract had a plain meaning, the court refused to admit any extrinsic evidence that would contradict its interpretation.

When the court interprets a contract on this basis, it determines the meaning of the instrument in accordance with the ". . . extrinsic evidence of the judge's own linguistic education and experience." (3 Corbin on Contracts (1960 ed.) [1964 Supp. § 579, p. 225, fn. 56].) The exclusion of testimony that might contradict the linguistic background of the judge reflects a judicial belief in the possibility of perfect verbal expression. (9 Wigmore on Evidence (3d ed. 1940) § 2461, p. 187.) This belief is a remnant of a primitive faith in the inherent potency and inherent meaning of words. [1] The test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not whether it appears to the court to be plain and unambiguous on its face, but whether the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible. ( Continental Baking Co. v. Katz (1968) 68 Cal.2d 512, 520-521 [ 67 Cal.Rptr. 761, 439 P.2d 889]; Parsons v. Bristol Development Co. (1965) 62 Cal.2d 861, 865 [ 44 Cal.Rptr. 767, 402 P.2d 839]; Hulse v. Juillard Fancy Foods Co. (1964) 61 Cal.2d 571, 573 [ 39 Cal.Rptr. 529, 394 P.2d 65]; Nofziger v. Holman (1964) 61 Cal.2d 526, 528 [ 39 Cal.Rptr. 384, 393 P.2d 696]; Coast Bank v. Minderhout (1964) 61 Cal.2d 311, 315 [ 38 Cal.Rptr. 505, 392 P.2d 265]; Imbach v. Schultz (1962) 58 Cal.2d 858, 860 [ 27 Cal.Rptr. 160, 377 P.2d 272]; Reid v. Overland Machined Products (1961) 55 Cal.2d 203, 210 [ 10 Cal.Rptr. 819, 359 P.2d 251].)

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.

Some courts have expressed the opinion that contractual obligations are created by the mere use of certain words, whether or not there was any intention to incur such obligations. Under this view, contractual obligations flow, not from the intention of the parties but from the fact that they used certain magic words. Evidence of the parties' intention therefore becomes irrelevant.

[2] In this state, however, the intention of the parties as expressed in the contract is the source of contractual rights and duties. A court must ascertain and give effect to this intention by determining what the parties meant by the words they used. Accordingly, 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.

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. [3] "A word is a symbol of thought but has no arbitrary and fixed meaning like a symbol of algebra or chemistry, . . ." ( Pearson v. State Social Welfare Board (1960) 54 Cal.2d 184, 195 [ 5 Cal.Rptr. 553, 353 P.2d 33].) The meaning of particular words or groups of words varies with the ". . . verbal context and surrounding circumstances and purposes in view of the linguistic education and experience of their users and their hearers or readers (not excluding judges). . . . A word has no meaning apart from these factors; much less does it have an objective meaning, one true meaning." (Corbin, The Interpretation of Words and the Parol Evidence Rule (1965) 50 Cornell L.Q. 161, 187.) [4] Accordingly, the meaning of a writing ". . . can only be found by interpretation in the light of all the circumstances that reveal the sense in which the writer used the words. The exclusion of parol evidence regarding such circumstances merely because the words do not appear ambiguous to the reader can easily lead to the attribution to a written instrument of a meaning that was never intended. [Citations omitted.]" ( Universal Sales Corp. v. California Press Mfg. Co., supra, 20 Cal.2d 751, 776 (concurring opinion); see also, e.g., Garden State Plaza Corp. v. S.S. Kresge Co. (1963) 78 N.J. Super. 485 [ 189 A.2d 448, 454]; Hurst v. W.J. Lake Co. (1932) 141 Or. 306, 310 [ 16 P.2d 627, 629, 89 A.L.R. 1222]; 3 Corbin on Contracts (1960 ed.) § 579, pp. 412-431; Ogden and Richards, The Meaning of Meaning, op.cit supra 15; Ullmann, The Principles of Semantics, supra, 61; McBaine, The Rule Against Disturbing Plain Meaning of Writings (1943) 31 Cal.L.Rev. 145.)

[5] 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. The fact that the terms of an instrument appear clear to a judge does not preclude the possibility that the parties chose the language of the instrument to express different terms. That possibility is not limited to contracts whose terms have acquired a particular meaning by trade usage, but exists whenever the parties' understanding of the words used may have differed from the judge's understanding.

Accordingly, rational interpretation requires at least a preliminary consideration of all credible evidence offered to prove the intention of the parties. (Civ. Code, § 1647; Code Civ. Proc., § 1860; see also 9 Wigmore on Evidence, op. cit. supra, § 2470, fn. 11, p. 227.) Such evidence includes testimony as to the "circumstances surrounding the making of the agreement . . . including the object, nature and subject matter of the writing . . ." so that the court can "place itself in the same situation in which the parties found themselves at the time of contracting." ( Universal Sales Corp. v. California Press Mfg. Co., supra, 20 Cal.2d 751, 761; Lemm v. Stillwater Land Cattle Co., supra, 217 Cal. 474, 480-481.) [6] If the court decides, after considering this evidence, that the language of a contract, in the light of all the circumstances, "is fairly susceptible of either one of the two interpretations contended for . . ." ( Balfour v. Fresno C. I. Co. (1895) 109 Cal. 221, 225 [41 P. 876]; see also, Hulse v. Juillard Fancy Foods Co., supra, 61 Cal.2d 571, 573; Nofziger v. Holman, supra, 61 Cal.2d 526, 528; Reid v. Overland Machined Products, supra, 55 Cal.2d 203, 210; Barham v. Barham (1949) 33 Cal.2d 416, 422-423 [ 202 P.2d 289]; Kenney v. Los Feliz Investment Co. (1932) 121 Cal.App. 378, 386-387 [ 9 P.2d 225]), extrinsic evidence relevant to prove either of such meanings is admissible. [7] In the present case the court erroneously refused to consider extrinsic evidence offered to show that the indemnity clause in the contract was not intended to cover injuries to plaintiff's property. Although that evidence was not necessary to show that the indemnity clause was reasonably susceptible of the meaning contended for by defendant, it was nevertheless relevant and admissible on that issue. Moreover, since that clause was reasonably susceptible of that meaning, the offered evidence was also admissible to prove that the clause had that meaning and did not cover injuries to plaintiff's property. Accordingly, the judgment must be reversed.

[8] Two questions remain that may arise on retrial. On the theory that the indemnity clause covered plaintiff's property, the trial court instructed the jury that plaintiff was entitled to recover unless all of ". . . the following conditions [were found] to exist:

"1. That Pacific Gas and Electric Company continued to maintain independent operation on the premises whereon the installation of the cover was in progress;

"2. That the damage to the turbine was unrelated to the Defendant G.W. Thomas Drayage Rigging Company, Inc.'s performance;

"3. That the plaintiff was guilty of active, affirmative negligence; and

"4. That such active negligence related to a matter over which the plaintiff exercised exclusive control."

The instruction was based on certain guidelines discussed in Goldman v. Ecco-Phoenix Elec. Corp. (1964) 62 Cal.2d 40, 45-46 [ 41 Cal.Rptr. 73, 396 P.2d 377]; Harvey Machine Co. v. Hatzel Buehler, Inc. (1960) 54 Cal.2d 445, 448 [ 6 Cal.Rptr. 284, 353 P.2d 924]; and Safeway Stores, Inc. v. Massachusetts Bonding Ins. Co. (1962) 202 Cal.App.2d 99, 112-113 [ 20 Cal.Rptr. 820]. Those cases do not hold, however, that all four conditions specified in the instruction must exist for the indemnitor to be relieved of liability. It is sufficient if the indemnitee's own active negligence is a cause of the harm. As stated in Markley v. Beagle (1967) 66 Cal.2d 951, 952 [ 59 Cal.Rptr. 809, 429 P.2d 129], "An indemnity clause phrased in general terms will not be interpreted . . . to provide indemnity for consequences resulting from the indemnitee's own actively negligent acts."

To prove the amount of damages sustained, plaintiff presented invoices received from Ingersoll-Rand, the manufacturer and repairer of the turbine, the drafts by which plaintiff had remitted payment, and testimony that payment had been made. Defendant objected to the introduction of the invoices on the ground that they were hearsay. Subsequently, plaintiff called a mechanical engineer who qualified as an expert witness on the repair of turbines. On the basis of photographs of the damage after the accident, he testified that to repair the turbine it was reasonable and necessary to dismantle it completely, magnaflux all parts, replace all blades in wheels that had been damaged, reassemble the rotor, balance it, "indicate" it and centrifugate it. Similar repairs were listed in the invoices, and over objection the witness was allowed to testify that the amounts charged therefor were reasonable.

[9] Since invoices, bills, and receipts for repairs are hearsay, they are inadmissible independently to prove that liability for the repairs was incurred, that payment was made, or that the charges were reasonable. ( Plonley v. Reser (1960) 178 Cal.App.2d Supp. 935, 937-939 [3 Cal.Rptr. 551, 80 A.L.R 2d 911]; Menefee v. Raisch Improvement Co. (1926) 78 Cal.App. 785, 789 [ 248 P. 1031].) If, however, a party testifies that he incurred or discharged a liability for repairs, any of these documents may be admitted for the limited purpose of corroborating his testimony ( Bushnell v. Bushnell (1925) 103 Conn. 583 [ 131 A. 432, 436, 44 A.L.R. 788]; Cain v. Mead (1896) 66 Minn. 195 [68 N.W. 840, 841]), and if the charges were paid, the testimony and documents are evidence that the charges were reasonable. ( Dewhirst v. Leopold (1924) 194 Cal. 424, 433 [ 229 P. 30]; Smith v. Hill (1965) 237 Cal.App.2d 374, 388 [ 47 Cal.Rptr. 49]; Meier v. Paul X. Smith Corp. (1962) 205 Cal.App.2d 207, 222 [ 22 Cal.Rptr. 758]; Malinson v. Black (1948) 83 Cal.App.2d 375, 379 [ 188 P.2d 788]; Laubscher v. Blake (1935) 7 Cal.App.2d 376, 383 [ 46 P.2d 836]. See also Gimbel v. Laramie (1960) 181 Cal.App.2d 77, 81 [ 5 Cal.Rptr. 88].) Since there was testimony in the present case that the invoices had been paid, the trial court did not err in admitting them.

[10] The individual items on the invoices, however, were read, not to corroborate payment or the reasonableness of the charges, but to prove that these specific repairs had actually been made. No qualified witness was called to testify that the invoices accurately recorded the work done by Ingersoll-Rand, and there was no other evidence as to what repairs were made. This use of the invoices was error. ( California Steel Buildings, Inc. v. Transport Indemnity Co. (1966) 242 Cal.App.2d 749, 759 [ 51 Cal.Rptr. 797]. Accord, Bushnell v. Bushnell, supra, 103 Conn. 583 [ 131 A. 432, 436]; Ferraro v. Public Service Ry. Co. (1928) 6 N.J. Misc. 463 [141 A. 590]; Nock v. Lloyd (1911) 32 R.I. 313 [ 79 A. 832, 833].) An invoice submitted by a third party is not admissible evidence on this issue unless it can be admitted under some recognized exception to the hearsay rule. [11] Since plaintiff's expert's testimony as to the reasonableness of the charges was based on hearsay evidence inadmissible to prove that the repairs had been made, defendant's objections to it should have been sustained. "[A]n expert must base his opinion either on facts personally observed or on hypotheses that find support in the evidence." ( George v. Bekins Van Storage Co. (1949) 33 Cal.2d 834, 844 [ 205 P.2d 1037]. See also Kastner v. Los Angeles Metropolitan Transit Authority (1965) 63 Cal.2d 52, 58 [ 45 Cal.Rptr. 129, 403 P.2d 385]; Commercial Union Assur. Co. v. Pacific Gas Electric Co. (1934) 220 Cal. 515, 524 [ 31 P.2d 793]; Behr v. County of Santa Cruz (1959) 172 Cal.App.2d 697, 709 [ 342 P.2d 987]; 2 Jones on Evidence (5th ed. 1958) § 416, pp. 782-783.)

The judgment is reversed.

Peters, J., Mosk, J., Burke, J., Sullivan, J., and Peek, J., concurred.

McComb, J., dissented.