Tag Archives: Contracts

Obligation

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Obligation in California

Modification, Substitution, or Termination of Obligation

Welcome to the California legal encyclopedia's introductory part covering the modification, substitution, or termination of obligation laws of California, with explanations of the various implications of modification, substitution, or termination of obligation in California and the statutes enforced in California in connexion with modification, substitution, or termination of obligation. This introductory section covers case law related to modification, substitution, or termination of obligation in California, the legal approach on modification, substitution, or termination of obligation in the United States and related topics. The information below provides an California-specific general overview of the legal regime of modification, substitution, or termination of obligation in California.

Modification, Substitution, or Termination of Obligation in relation to Commercial Law

This section analizes the legal issue of modification, substitution, or termination of obligation in this context, and provides information on its relation with Contracts.

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Settlement

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Settlement in California

Good Faith Settlements

All litigators need to know the statutory rules governing good faith settlements.

By Gilda R. Turitz. She is a partner and litigation practice group leader at Sideman & Bancroft in San Francisco.

When one defendant in a multiparty case settles for a low amount, an issue often arises as to whether the settlement has been entered in “good faith.” The issue is important because a key California statute enables a party who settles in good faith to leave the litigation and exempts them from certain cross-claims asserted by the other defendants.

Statutory Procedure

Settlements are supposed to bring warring litigants peace and finality, but that goal may be jeopardized when non-settling defendants challenge a pre-verdict or pre-judgment settlement between the plaintiff and some – but not all – joint tortfeasor or co-obligor defendants. The challenge usually comes in the form of an objection that the settlement lacks the requisite good faith to qualify for the protective statutory cloak that would shield the settling party from the cross-claims asserted by other defendants for equitable comparative contribution or indemnity based on comparative negligence or comparative fault. Moreover, a good faith settlement will reduce the plaintiff’s claims against the non-settlors by the amount stipulated in the release, dismissal, or covenant not to sue or enforce judgment, or by the amount of consideration paid to the plaintiff, whichever is greater. (See Cal. Civ. Proc. Code §§ 877 and 877.6.)

Any party can apply to the superior court for a good faith determination under alternative procedures of section 877.6(a) by a formal motion or a simple notice served by certified mail. A party asserting the lack of good faith (which is a question of fact) bears the burden of proof. (§ 877.6(d).) The battle regarding a disputed good faith claim usually focuses on the factors explained in Tech-Bilt, Inc. v. Woodward-Clyde & Associates (38 Cal. 3d 488 (1985)) and its progeny. The issue is whether the settlement is so far “out of the ballpark” that it is inconsistent with the statute’s dual goals of encouraging settlements and equitably allocating costs among multiple tortfeasors.

Proportionate Liability

The predominant factor under Tech-Bilt is that the settlement amount cannot be “grossly disproportionate to what a reasonable person, at the time of the settlement, would estimate the settling defendant’s liability to be.” (38 Cal. 3d at 499.) Although a monetary sum is easily quantified, total settlement value must factor in any nonmonetary considerations. Admissible evidence is required to prove value and the settlor’s proportionate liability, and expert affidavits in support may be necessary on both issues.

Financial Reality

Courts recognize that a settlor may pay less in settlement than it would be found liable for at trial, especially if its financial resources are limited. The good faith determination requires adequate and admissible evidence of the settling defendant’s net worth and any insurance or claimed noncoverage. An objecting party may properly seek a continuance of the good faith hearing to marshal evidence, including taking discovery, to support its burden of proof on the financial issues. If discovery is sought, the settlor may seek a protective order to limit financial disclosures.

Although courts are quite flexible in applying the good faith analysis, a settlement will not qualify as valid under section 877.6 if the evidence demonstrates that the settling parties engaged in conduct aimed at injuring the non-settlors’ interests. A collusion finding may be supported by a disproportionately low settlement figure entered into solely to immunize the settlors from a cross-complaint. (See Mattco Forge, Inc. v. Arthur Young & Co., 38 Cal. App. 4th 1337 (1995).) However, if the settlement resulted from a mediation or judicially hosted settlement conference, there is a much better chance that it will meet the good faith standard.

Make It Conditional

If settling parties anticipate a challenge, they should consider conditioning the settlement upon the court’s approval. Otherwise, if the court finds lack of good faith, the settling defendants will still be bound to pay, and they will face continuing potential exposure to indemnify non-settlors.

Dismissing Cross-Complaints

A good faith settlement order does not by itself dismiss indemnity and contribution cross-complaints. The settling defendant must move for that relief, and the motion can be made concurrently with or immediately following the good faith hearing.

Appellate Relief

Any aggrieved party may file a petition for writ of mandate within 20 days after written notice of the good faith ruling. (Cal. Civ. Proc. Code § 877.6(e).) Because there is no right to appeal from a good faith settlement order, to contest the trial court’s ruling, a party should promptly file a writ. Waiting to pursue appellate relief until after a judgment is entered will usually be too late.

The rules governing settlement are designed to be efficient and user-friendly. And any lawyer in a multiparty case is well advised to not only be aware of them, but also to understand both their potency and their limitations.

California Settlement

This section covers California-specific basic information on settlement and related topics. Many of California's laws on settlement are similar to those of other U.S. states, with some differences (in some cases, minor differences). California settlement laws on settlement are created and revised by the actions of lawmakers and the courts. Use the cross-references and topics below to learn more about California statutes and laws on settlement, which is a basic matter in California law.

Settlement Contracts

Welcome to the California legal encyclopedia's introductory part covering the settlement contracts laws of California, with explanations of the various implications of settlement contracts in California and the statutes enforced in California in connexion with settlement contracts. This introductory section covers case law related to settlement contracts in California, the legal approach on settlement contracts in the United States and related topics. The information below provides an California-specific general overview of the legal regime of settlement contracts in California.

Settlement Contracts in relation to Commercial Law

This section analizes the legal issue of settlement contracts in this context, and provides information on its relation with Contracts.

Settlement of Small Estates

Welcome to the California legal encyclopedia's introductory part covering the settlement of small estates laws of California, with explanations of the various implications of settlement of small estates in California and the statutes enforced in California in connexion with settlement of small estates. This introductory section covers case law related to settlement of small estates in California, the legal approach on settlement of small estates in the United States and related topics. The information below provides an California-specific general overview of the legal regime of settlement of small estates in California.

Settlement of Small Estates in relation to Probate, Estates and Trusts

This section analizes the legal issue of settlement of small estates in this context, and provides information on its relation with Administration of Estates.

Settlements; Agreements on Compensation

Welcome to the California legal encyclopedia's introductory part covering the settlements; agreements on compensation laws of California, with explanations of the various implications of settlements; agreements on compensation in California and the statutes enforced in California in connexion with settlements; agreements on compensation. This introductory section covers case law related to settlements; agreements on compensation in California, the legal approach on settlements; agreements on compensation in the United States and related topics. The information below provides an California-specific general overview of the legal regime of settlements; agreements on compensation in California.

Settlements; Agreements on Compensation in relation to Workers' Compensation

This section analizes the legal issue of settlements; agreements on compensation in this context.

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Contract Law

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Contract Law in California

Nature and Requisites of Contracts

Welcome to the California legal encyclopedia's introductory part covering the nature and requisites of contracts laws of California, with explanations of the various implications of nature and requisites of contracts in California and the statutes enforced in California in connexion with nature and requisites of contracts. This introductory section covers case law related to nature and requisites of contracts in California, the legal approach on nature and requisites of contracts in the United States and related topics. The information below provides an California-specific general overview of the legal regime of nature and requisites of contracts in California.

Nature and Requisites of Contracts in relation to Commercial Law

This section analizes the legal issue of nature and requisites of contracts in this context, and provides information on its relation with Contracts.

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Breach

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Breach

California Breach

This section covers California-specific basic information on breach and related topics. Many of California's laws on breach are similar to those of other U.S. states, with some differences (in some cases, minor differences). California breach laws on breach are created and revised by the actions of lawmakers and the courts. Use the cross-references and topics below to learn more about California statutes and laws on breach, which is a basic matter in California law.

Performance or Breach

Welcome to the California legal encyclopedia's introductory part covering the performance or breach laws of California, with explanations of the various implications of performance or breach in California and the statutes enforced in California in connexion with performance or breach. This introductory section covers case law related to performance or breach in California, the legal approach on performance or breach in the United States and related topics. The information below provides an California-specific general overview of the legal regime of performance or breach in California.

Performance or Breach in relation to Commercial Law

This section analizes the legal issue of performance or breach in this context, and provides information on its relation with Contracts.

Breach of the Peace

Welcome to the California legal encyclopedia's introductory part covering the breach of the peace laws of California, with explanations of the various implications of breach of the peace in California and the statutes enforced in California in connexion with breach of the peace. This introductory section covers case law related to breach of the peace in California, the legal approach on breach of the peace in the United States and related topics. The information below provides an California-specific general overview of the legal regime of breach of the peace in California.

Breach of the Peace in relation to Criminal Law & Procedure

This section analizes the legal issue of breach of the peace in this context, and provides information on its relation with Particular Crimes and Offenses.

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Illegal Contracts

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Illegal Contracts in California

Illegal and Unconscionable Contracts

Welcome to the California legal encyclopedia's introductory part covering the illegal and unconscionable contracts laws of California, with explanations of the various implications of illegal and unconscionable contracts in California and the statutes enforced in California in connexion with illegal and unconscionable contracts. This introductory section covers case law related to illegal and unconscionable contracts in California, the legal approach on illegal and unconscionable contracts in the United States and related topics. The information below provides an California-specific general overview of the legal regime of illegal and unconscionable contracts in California.

Illegal and Unconscionable Contracts in relation to Commercial Law

This section analizes the legal issue of illegal and unconscionable contracts in this context, and provides information on its relation with Contracts.

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Contracts

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Contracts in California

For California Attorneys: Contracts

There is more information about this subjet in the California legal portal in these entries: Damages Clauses Good Faith Parol Evidence Indemnity Contract Interpretation Extrinsic Evidence Best Efforts

California Contracts

This section covers California-specific basic information on contracts and related topics. Many of California's laws on contracts are similar to those of other U.S. states, with some differences (in some cases, minor differences). California contracts laws on contracts are created and revised by the actions of lawmakers and the courts. Use the cross-references and topics below to learn more about California statutes and laws on contracts, which is a basic matter in California law.

Contracts

Welcome to the California legal encyclopedia's introductory part covering the contracts laws of California, with explanations of the various implications of contracts in California and the statutes enforced in California in connexion with contracts. This introductory section covers case law related to contracts in California, the legal approach on contracts in the United States and related topics. The information below provides an California-specific general overview of the legal regime of contracts in California.

Contracts in relation to Commercial Law

This section analizes the legal issue of contracts in this context, and provides information on its relation with Contracts.

Contracts in California: General Overview

This entry offers readers with practical insight to the subject of contracts in California, a general introduction to the legal issues relating to contracts under California law and practice.

Franchise and Distribution Contracts in California: General Overview

This entry offers readers with practical insight to the subject of franchise and distribution contracts in California, a general introduction to the legal issues relating to franchise and distribution contracts under California law and practice.

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Constructive Contracts

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Constructive Contracts in California

Implied and Constructive Contracts

Welcome to the California legal encyclopedia's introductory part covering the implied and constructive contracts laws of California, with explanations of the various implications of implied and constructive contracts in California and the statutes enforced in California in connexion with implied and constructive contracts. This introductory section covers case law related to implied and constructive contracts in California, the legal approach on implied and constructive contracts in the United States and related topics. The information below provides an California-specific general overview of the legal regime of implied and constructive contracts in California.

Implied and Constructive Contracts in relation to Commercial Law

This section analizes the legal issue of implied and constructive contracts in this context, and provides information on its relation with Contracts.

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Indemnity Contracts

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Indemnity Contracts in California

Guaranty, Surety, and Indemnity Contracts

Welcome to the California legal encyclopedia's introductory part covering the guaranty, surety, and indemnity contracts laws of California, with explanations of the various implications of guaranty, surety, and indemnity contracts in California and the statutes enforced in California in connexion with guaranty, surety, and indemnity contracts. This introductory section covers case law related to guaranty, surety, and indemnity contracts in California, the legal approach on guaranty, surety, and indemnity contracts in the United States and related topics. The information below provides an California-specific general overview of the legal regime of guaranty, surety, and indemnity contracts in California.

Guaranty, Surety, and Indemnity Contracts in relation to Commercial Law

This section analizes the legal issue of guaranty, surety, and indemnity contracts in this context, and provides information on its relation with Contracts.

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Indemnity

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Indemnity in California

For California Attorneys: Indemnity Primer

( February 2013 ) Indemnity is one of those core legal concepts that virtually every lawyer encounters somewhere down the line. Although judicial approaches to indemnity have shifted over the years, one rule holds firm: If there is an indemnity agreement, the actual words of that agreement will control. Indeed, as Justice William W. Bedsworth of the Fourth Appellate District reminds us: “If the first rule of medicine is ‘Do no harm,’ the first rule of contracting should be ‘Read the documents.’ ” (Villacreses v. Molinari, 132 Cal. App. 4th 1223, 1225 (2005))

Indemnity Basics

California statutes define indemnity as “a contract by which one engages to save another from a legal consequence of the conduct of one of the parties, or of some other person.” (Cal. Civ. Code § 2772.) The state Supreme Court has noted that indemnity “may be defined as the obligation resting on one party to make good a loss or damage another party has incurred.” (Rossmoor Sanitation, Inc. v. Pylon, Inc., 13 Cal. 3d 622, 628 (1975).) Although the parties have great flexibility in crafting their indemnity deal, the law prohibits a contract to indemnify for acts known to be illegal at the time they are committed. (Cal. Civ. Code § 2773)

Sometimes indemnity is grounded in a contract; but it can also be grounded in equity. (Prince v. Pacific Gas & Elec. Co., 45 Cal. 4th 1151, 1158 (2009))

As for terminology, the indemnitor is the party obligated to pay the indemnitee. (See Maryland Casualty Co. v. Bailey & Sons, Inc., 35 Cal. App. 4th 856, 864 (1995).) Contract-based indemnity is referred to in the case law as either “express indemnity” (Prince, 45 Cal. 4th at 1158) or “contractual indemnity” (Rossmoor, 13 Cal. 3d at 634).

Mythical Rule

In 1972 an intermediate California appellate court classified indemnity agreements as Type I, Type II, and Type III. (See MacDonald & Kruse, Inc. v. San Jose Steel, Inc., 29 Cal. App. 3d 413, 419- 421 (1972).) Just three years later, however, the state Supreme Court dealt with various types of indemnity agreements in the Rossmoor case and never even mentioned the MacDonald & Kruse classifications. And three short years after that, another intermediate appellate tribunal ruled that “the MacDonald & Kruse classification is no longer tenable in light of Rossmoor.” (Rodriguez v. McDonald Douglas Corp., 87 Cal. App. 3d 626, 674 (1978))

In 2005 the legal community was admonished that the MacDonald & Kruse nomenclature had been leading parties astray and would no longer be followed. (See McCrary Construction Co. v. Metal Deck Specialists, 133 Cal. App. 4th 1528, 1538- 1539 (2005).) In fact, a careful reading of the MacDonald & Kruse opinion reveals that the justices who authored it meant only for their classifications to aid indemnity agreement discussions, not create legal rules; even at that, the opinion splitting indemnity clauses into three distinct categories issued from a divided court. (See MacDonald & Kruse, 29 Cal. App. 3d at 418-421)

Despite the courts’ decades-long rejection of the Type I, II, and III language, lawyers today continue to use those terms – and many continue to think such labeling leads directly to legal conclusions. For example, the MacDonald & Kruse opinion classified a Type III indemnification clause as one that provides indemnity only for the indemnitor’s negligence. If an attorney mistakenly applies this classification as law, he or she might look for language requiring indemnity for only the indemnitor’s negligence and then smugly conclude that the indemnity agreement is a Type III; the lawyer may then mistakenly assume that because the agreement is a Type III, it requires indemnity only for the indemnitor’s negligence.

Such mechanical, circular logic may lead the lawyer to a correct legal conclusion, but that conclusion will surely lack any nuance contained in the specific language of the indemnity agreement itself – and there may well be language in the governing clause that raises considerations beyond the Type III categorization. In short, one can’t know what the indemnity agreement really says – much less what it truly means – without reading it very carefully. As various courts have opined, ” ‘it is the intent of the parties as expressed in the agreement that should control.’ ” (Zalkind v. Ceradyne, Inc., 194 Cal. App. 4th 1010, 1024-1025 (2011), quoting Rossmoor, 13 Cal. 3d at 633.)

More about Indemnity for Lawyers

Contract Interpretation

Although there are many statutory guides for interpreting contacts in general (for example, Cal. Civ. Code §§ 1635- 1663), some specific rules cover indemnity agreements. (See for example Cal. Civ. Code §§ 2778- 2782.96.) Two of the most important provisions are found in section 2778, and they deal with the obligation of defense. One part of the section states that indemnity against claims, demands, or liabilities “embraces the costs of defense” that are “incurred in good faith, and in the exercise of a reasonable discretion.” (Cal. Civil Code § 2778(3).) Moreover, upon request by the indemnitee, the indemnitor is bound to provide a defense as to the matters embraced by the indemnity; however, the indemnitee “has the right to conduct such defenses, if he chooses to do so.” (Cal. Civil Code § 2778(4))

Case law has recognized that outside of the insurance context, it is the indemnitee who “may often have the superior bargaining power, and who may use this power unfairly to shift to another a disproportionate share of the financial consequences of its own legal fault.” Thus in a noninsurance situation, the contractual language on indemnity “must be particularly clear and explicit, and will be construed strictly against the indemnitee.” (Crawford v. Weather Shield Mfg., Inc., 44 Cal. 4th 541, 552 (2008))

Nonetheless, an appropriately worded indemnification agreement can have a sweeping effect against the indemnitor. In Crawford the state Supreme Court relied heavily on sections 2778(3) and 2778(4) to determine that the indemnitor had a duty to defend the indemnitee; and that the duty arose from the very beginning of the case brought by the injured third party and existed even though the indemnitee ultimately was found not liable on the substantive charge of injuring that third party.

Current Terminology

The courts have encouraged using the term general indemnity clause when referring to an indemnity agreement that “does not address itself to the issue of an indemnitee’s negligence.” (See McCrary, 133 Cal. App. 4th at 1537, quoting Rossmoor, 13 Cal. 3d at 628)

In many indemnity disputes, the bone of contention is the negligence – whether active or passive – of the indemnitee. In fact, the Rossmoor case dealt with that very dichotomy. As the court observed, “[p]assive negligence is found in mere nonfeasance. … Active negligence … is found if an indemnitee has personally participated in an affirmative act of negligence, was connected with negligent acts or omissions by knowledge or acquiescence, or has failed to perform a precise duty which the indemnitee had agreed to perform.” (Rossmoor, 13 Cal. 3d at 629.) The distinction is important because a general indemnity clause (one that does not address an indemnitee’s negligence) does not cover an indemnitee who has been actively negligent. (Rossmoor, 13 Cal. 3d at 629)

However, the active-passive dichotomy is not wholly dispositive. As noted above, the indemnity question is one of contract interpretation. If it can be determined that the parties clearly intended by their agreement to protect the indemnitee against claims stemming from the indemnitee’s own negligence, the courts will enforce such an agreement. (Rossmoor, 13 Cal. 3d at 633.) To reiterate, “[t]he extent of the duty to indemnify … is determined from the contract.” (Myers Building Industries, Ltd. v. Interface Technology, Inc., 13 Cal. App. 4th 949, 969 (1993).)

Development of Indemnity for Attorneys

Writing Required?

The foregoing discussion raises an important question: Must an indemnification agreement be in writing?

California’s statute of frauds says that a “special promise to answer for the debt, default, or miscarriage of another” is invalid unless set forth in writing. (Cal. Civ. Code § 1624(a)(2).) But the specific subsection concludes with a loophole of sorts: “except in the cases provided for in [Civil Code] Section 2794.” Section 2794, in turn, refers to contracts involving “an original promise of the promisor,” which are then specifically defined (these often involve surety and guaranty contracts). (See Cal. Civ. Code § 2794(1)-(6))

A prudent approach is to assume that an agreement to provide indemnity probably should be in written form; there should be at least enough documentation to argue that the contract complies with requirements of the statute of frauds. But as explained below, under certain circumstances one can wind up bound to indemnify another without a signed contract.

Equitable Indemnity

As noted, indemnity may be either express or implied. Indemnity that is implied is called (naturally) implied indemnity. Sometimes it is also referred to as equitable indemnity. (See Prince, 45 Cal. 4th at 1158 and 1164)

Implied indemnity is an equitable doctrine that apportions responsibility among tortfeasors responsible for the same indivisible injury on a comparative fault basis. The equitable indemnity doctrine “originated in the common sense proposition that when two individuals are responsible for a loss, but one of the two is more culpable than the other, it is only fair that the more culpable party should bear a greater share of the loss.” (Fremont Reorganizing Corp. v. Faigin, 198 Cal. App. 4th 1153, 1176 (2011))

Case law dictates that in equitable indemnity cases, “there must be some basis for tort liability against the proposed indemnitor.” (BFGC Architects Planners, Inc. v. Forum/Mackey Construction, Inc., 119 Cal. App. 4th 848, 852 (2004).) Equitable indemnity is also restitutionary in nature. The basis for the doctrine is restitution, and the concept is “that one person is unjustly enriched at the expense of another when the other discharges liability that it should be his responsibility to pay.” (Western Steamship Lines, Inc. v. San Pedro Peninsula Hosp., 8 Cal. 4th 100, 108 (1994))

Joint and several liability in the context of equitable indemnity is fairly expansive. It is not limited to the old common term joint tortfeasor, and it can apply to acts that are concurrent or successive, joint or several, as long as they create “a detriment caused by several actors.” (BFGC, 119 Cal. App. 4th at 852)

Implied Contractual Indemnity

The foregoing discussion presupposes a two-dimensional indemnity world: On one side is express contractual indemnity; on the other, implied or equitable indemnity.

Historically, there was a third dimension called implied contractual indemnity. The California Supreme Court succinctly set out the paradigm when it cast this odd doctrinal offshoot as “indemnity implied from a contract not specifically mentioning indemnity.” (Prince, 45 Cal. 4th at 1157)

However, implied contractual indemnity is no longer a separate category under the law. Though not extinguished, implied contractual indemnity is now viewed simply as “a form of equitable indemnity.” (Bay Development, Ltd. v. Superior Court, 50 Cal. 3d 1012, 1029- 1030 & fn. 10 (1990); E.L. White, Inc. v. City of Huntington Beach, 21 Cal. 3d 497, 506-507 (1998))

The state Supreme Court has explained that implied contractual indemnity is available when contracting parties are each responsible for injuring a third party (who is a stranger to their contract). The theory is that such a contract implies it will be performed properly, and that damages incurred by a contracting party that resulted from improper performance by the other contracting party are compensable in indemnity. In such cases, the “contractual” part of implied contractual indemnity has nothing to do with any indemnity clause that is (or is not) contained in the subject contract. The “contractual” component simply signifies that the duty owed to the injured third party results from a contract between the indemnitor and the indemnitee. (See Prince, 45 Cal. 4th at 1159.)

Details

Settlement Dynamics

Indemnity claims are often asserted by and between tort defendants. By doing so, an indemnity claimant hopes to force other parties – some of whom may be more culpable – to foot the bill entirely, or at least repay some portion of the damages the indemnity claimant had to pay to the plaintiff.

But what happens if a defendant makes a settlement with the plaintiff and tries to exit the case? As every personal injury and defense lawyer knows, this happens seven days a week.

The answer is fairly simple. Pursuant to a specific statute, a good faith settlement cuts off all claims for equitable indemnity based on comparative negligence. (See Code Civ. Proc., § 877.6(c))

Counsel must understand that although this rule is broad, powerful, and often-invoked, it has its limits. For example, a good faith settlement eliminates only claims for implied indemnity; there is no effect on a claim based on express contractual indemnity. (See C.L. Peck Contractors v. Superior Court, 159 Cal. App. 4th 828 (1984))

Indeed, equitable indemnity and express contractual indemnity are like oil and water; they don’t mix. Paramount among the rules governing the enforcement of indemnity agreements is that “where the parties have expressly contracted with respect to the duty to indemnify, the extent of that duty must be determined from the contract and not by reliance on the independent doctrine of equitable indemnity.” (Mel Clayton Ford v. Ford Motor Co., 104 Cal. App. 4th 46, 54 (2002))

Furthermore, even a clear indemnity contract will only supersede equitable indemnity if the agreement has covered the subject of the theoretical equitable indemnity. When the parties knowingly bargain for specific protection, the protection should be afforded. This requires an inquiry into the circumstances of the damage or injury as well as the language of the contract. “[O]f necessity, each case will turn on its own facts.” (Zalkind v. Ceradyne, Inc., 194 Cal. App. 4th 1010, 1024-1025 (2011), quoting Rossmoor, 13 Cal. 3d at 633)

Whether lawyers are dealing with express or implied indemnity, they should be guided by two basic maxims: Read the contract, and read the code. Doing so will help unravel what can otherwise be a tangle of terms, shrouded in shopworn case law, that will surely trip up a novice.

California Indemnity

This section covers California-specific basic information on indemnity and related topics. Many of California's laws on indemnity are similar to those of other U.S. states, with some differences (in some cases, minor differences). California indemnity laws on indemnity are created and revised by the actions of lawmakers and the courts. Use the cross-references and topics below to learn more about California statutes and laws on indemnity, which is a basic matter in California law.

Third Party Suits indemnity, Contribution and Subrogation

Welcome to the California legal encyclopedia's introductory part covering the third party suits indemnity, contribution and subrogation laws of California, with explanations of the various implications of third party suitsindemnity, contribution and subrogation in California and the statutes enforced in California in connexion with third party suitsindemnity, contribution and subrogation. This introductory section covers case law related to third party suitsindemnity, contribution and subrogation in California, the legal approach on Third Party Indemnity, Contribution and Subrogation in the United States and related topics. The information below provides an California-specific general overview of the legal regime of Third Party Indemnity, Contribution and Subrogation in California.

Third Party Indemnity, Contribution and Subrogation in relation to Workers' Compensation

This section analizes the legal issue of third party suitsindemnity, contribution and subrogation in this context.

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Parol Evidence

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Parol Evidence in California

For California Attorneys: Parol Evidence after Riverisland

( September 2013 ) Cindy Client signed a fully integrated purchase agreement requiring her to make 24 equal monthly installment payments, followed by a large balloon payment. A year into the contract she realizes, for the first time, that she has been misled by Flim Flam, the other party to the contract. He orally represented to Cindy Client that she would have 36 months before she had to make the balloon payment.

Flim Flam’s oral representation directly contradicts the written agreement. Cindy Client admits that she failed to read the agreement before signing and never noticed that she was accepting terms that were materially at odds with what she had been told.

Now Cindy Client realizes that she will be unable to make the balloon payment at the 24-month mark. She comes to you seeking legal advice on her chances of prevailing if she sues Flim Flam to nullify the agreement.

Specifically, Cindy Client wants to know whether she can introduce evidence of Flim Flam’s oral statements about the three-year payment schedule even though the contract states that it is the full and final agreement between the parties and clearly specifies a two-year time frame.

The key to this conundrum lies in a recent decision of the California Supreme Court.

Oral Promises

In Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Association (55 Cal. 4th 1169 (2013)), the plaintiffs fell behind on loan payments and restructured their debt in an agreement with their lender. The plaintiffs alleged that two weeks before the modification agreement was signed, the lender told them it would extend the loan for two years and require two parcels of additional collateral. Under the new integrated agreement, the lender was to take no enforcement action until a specified date, so long as certain payments were made.

The plaintiffs admittedly did not read the agreement before signing it. As it turned out, the agreement provided for only a three-month forbearance and identified eight parcels of additional collateral.

When the borrowers failed to make the required payments, the lender recorded a notice of default. The loan was ultimately repaid without foreclosure, but the plaintiffs sued the lender for fraud and negligent misrepresentation. The trial court entered summary judgment in favor of the lender based on an old precedent limiting the use of parol evidence in cases where the written contract purports to be the full expression of the parties’ agreement. (See Bank of America Nat’l Trust & Sav. Ass’n v. Pendergrass, 4 Cal. 2d 258 (1935).) The Riverisland case eventually reached the California Supreme Court.

Parol Evidence

The parol evidence rule is codified in two separate statutes. (See Cal. Code Civ. Proc. § 1856; and Cal. Civ. Code § 1625.) It is a rule of substantive law, not evidence, and provides that when parties enter into an integrated written agreement, extrinsic evidence generally may not be relied upon to alter or add to the terms of their writing. Integrated agreements are written agreements intended as a final expression of the agreed-upon terms (that is, the parties intend the written instrument to serve as the exclusive embodiment of their agreement). When an instrument includes a clause stating that the parties have no prior understandings or agreements concerning its subject matter or otherwise expresses the parties’ intention to nullify any such prior understandings or agreements, such a clause is highly persuasive on the issue of integration. (See Banco Do Brasil, S.A. v. Latian, Inc., 234 Cal. App. 3d 973, 1001-1003 (1991))

The purpose of the parol evidence rule is to ensure that the written final understanding of the parties is not subject to change. For example, under the rule, when an integrated written agreement provides that a loan shall mature on December 31, 2013, no party can subsequently seek to contradict the maturity date by introducing evidence to demonstrate that the parties actually intended the maturity date to be something different. Instead, the agreement is generally allowed to speak for itself on matters that are expressly set forth, without interference by the introduction of evidence of prior or contemporaneous understandings to the contrary.

However, the parol evidence rule is subject to certain exceptions. Thus, “[w]here the validity of the agreement is the fact in dispute, [the parol evidence rule] does not exclude evidence relevant to that issue.” (Cal. Code Civ. Proc. § 1856(f).) Similarly, an exception exists to prove illegality or fraud in a given contract. (See Cal. Civ. Code § 1856(g).)

More about Parol Evidence for Lawyers

Pendergrass Rule

Until recently, the fraud exception to the parol evidence rule was subject to a major limitation imposed by the oft-cited Pendergrass decision.

In Pendergrass, borrowers fell behind on their farm loan payments and, at their bank’s request, executed a new promissory note secured by additional collateral. The new note was payable on demand. Shortly thereafter the bank took enforcement action, including seizing the collateral. In challenging the bank’s action, the borrowers asserted that the lender had promised it would not interfere with their farming operations for the remainder of the year, and would take the proceeds of those operations in payment. The Pendergrass court noted that the alleged promise was in direct contravention to the express terms of the new note, since the note expressly provided that it was payable on demand without any limitation on when demand could be made.

The Pendergrass decision has been cited repeatedly for the proposition that when an oral promise – made at or before the time of signing – directly contradicts the specific terms of an integrated agreement, the fraud exception to the parol evidence rule does not apply; the oral promise, therefore, is not admissible to prove fraud. Thus, under Pendergrass, when an integrated contract specifically addresses an issue such as the date of loan maturity, the stated contract terms are conclusive, regardless of any prior or contemporaneous statements to the contrary.

For example, when an integrated loan forbearance agreement provides that the forbearance will expire in one year, a defendant cannot offer evidence to demonstrate he was defrauded into executing the forbearance agreement by virtue of being told by the plaintiff, prior to execution of the agreement, that the forbearance would expire in two years. After Pendergrass, it became critical for parties to read instruments before signing them in order to make sure that the instrument does not contain any terms contradictory to the oral representations that induced the contract in the first place.

If Cindy Client had approached you in 2012 about her dilemma, Pendergrass would have been controlling law. Your advice would have been that the chance of prevailing against Flim Flam is severely hampered by the parol evidence rule; indeed, pursuant to Pendergrass, the court would not permit Cindy Client to introduce evidence of Flim Flam’s prior representations that she would have 36 months before the balloon payment came due.

However, the situation changed dramatically in January when the California Supreme Court handed down its unanimous decision in Riverisland, overruling the 78-year-old Pendergrass precedent.

Shifting Tides

In the process of overruling Pendergrass, the justices reflected on several issues, reasoning that the statutes codifying the parol evidence rule do not include any limitation on the scope of the fraud exception. The court also observed that most other states do not limit the fraud exception. It noted that the Restatements of Contracts and Torts deem evidence admissible for the purpose of proving fraud without restriction. The court explained that Pendergrass potentially renders the parol evidence rule as a shield to protect misconduct or mistake, and “its limitation on evidence of fraud may itself further fraudulent practices.” (Riverisland, 55 Cal. 4th at 1177)

The state Supreme Court further expressed concern that courts were having difficulty applying Pendergrass and its progeny, resulting in uncertainty in case law. The opinion took note that judges were creating ever more exotic distinctions of fact in furtherance of applying the fraud exception to the parol evidence rule. For example, in one instance, a court of appeal distinguished between promises at variance with the terms of the contract and misrepresentations of fact about the contents of the document, adding further complexity and confusion to the legal analysis. (See Pacific State Bank v. Greene, 110 Cal. App. 4th 375 (2003))

Moreover, doubts surrounded the Pendergrass rule almost from the date it was issued. For example, just two years after the decision, the California Supreme Court declared in no uncertain terms that “fraud may always be shown to defeat the effect of an agreement.” (See Fleury v. Ramacciotti, 8 Cal. 2d 660 (1937) (emphasis added))

In overruling its prior decision, the Riverisland court stated that Pendergrass was plainly out of step with established California law, adding that, “the authorities to which it referred, upon examination, provide little support for the rule it declared.” Accordingly, the court concluded that Pendergrass itself was an aberration. The case “failed to account for the fundamental principle that fraud undermines the essential validity of the parties’ agreement. When fraud is proven, it cannot be maintained that the parties freely entered into an agreement reflecting a meeting of the minds.” (Riverisland, 55 Cal. 4th at 1182.)

Development of Parol Evidence for Attorneys

A New Rule

The Riverisland opinion recognizes that “the intent element of promissory fraud entails more than proof of an unkept promise or mere failure of performance.” (55 Cal. 4th at 1183.) Justifiable reliance is a necessary element of fraud – and that element is hard to prove if a party never read the contract in the first place. The state Supreme Court, however, declined to address this issue, stating that “we need not explore the degree to which failure to read the contract affects the viability of a claim of fraud in the inducement.” (55 Cal. 4th at 1183 & n. 11)

Given the Riverisland ruling, what will happen in future cases where a borrower or guarantor claims that a bank fraudulently induced them to sign a written agreement? Unless the trial court accepts an argument – at the pleading stage or on summary judgment – that the borrower or guarantor could not have reasonably relied on the allegedly fraudulent oral promise, the matter will presumably proceed to trial.

The Riverisland decision dramatically changes the litigation landscape for contractual disputes – potentially dragging things out. In many cases, there is now little hope of resolving an action via a pretrial motion; litigants can defeat summary judgment by submitting declarations alleging that prior oral promises made were at odds with the written instrument. The only way to adjudicate such a dispute is by trial on the merits. This is true even when the oral representations contradict the terms of a fully integrated writing, notwithstanding that the party asserting fraud admits he did not read the agreement prior to execution. As such, Riverisland does away with the certainty that has always been the primary purpose of utilizing a written agreement in the first place.

Moreover, decisions issued in the months since Riverisland indicate that the ruling is not restricted to unsophisticated parties. It appears to apply across the board. (See Julius Castle Restaurant Inc. v. Payne, 216 Cal. App. 4th 1423 (2013))

Practically speaking, this means there will likely be an exponential increase in cases that must be tried, and a judge or jury will be tasked with weighing the evidence of fraud to determine whether the agreement is enforceable. This rise in litigation, combined with the many courtroom closures forced by California’s budget cuts, means that such cases will take longer to resolve. As a result, alternative dispute resolution, compromise, and settlement will become more attractive than ever as a negotiated solution will remove the uncertainty and doubt associated with a “he-said, she-said” swearing contest before the trier of fact.

Details

Practical Suggestions

To soften the impact of Riverisland, parties should make sure to include arbitration and judicial reference clauses in all written agreements. Such clauses, when enforced, will preclude trial by jury.

Moreover, whenever lender clients extend or renew any credit to their customers, the agreements should include recitals acknowledging the debt, the amounts owed, and the fact that there are no defenses to the obligation. This step is important, because such recitals are conclusively presumed to be true as between the parties or their successors in interest. (See Cal. Evid. Code § 622.) A well-written recital will therefore block evidence of any alleged promises prior to or contemporaneous with the original loan or any prior amendment to it.

However, this approach will not protect against any prior or contemporaneous promises allegedly made by the client concerning inducement to enter into the extension or renewal agreement itself.

Finally, lender clients should be advised to obtain releases from their customers at the time of extension or renewal of credit.

So as her lawyer, how should you respond to Cindy Client’s predicament? Assuming she asked for advice after Riverisland came down, it would appear that a lawsuit against Flim Flam has a good chance of surviving a demurrer as well as his summary judgment motion. Pendergrass would no longer interfere with Cindy Client’s ability to introduce evidence that, prior to her execution of the agreement, Flim Flam represented to her that she would have a total of 36 months before the balloon payment became due – she can now make that claim even though she didn’t read the agreement before signing it.

To the extent that Cindy Client can convince the court that she reasonably relied on Flim Flam’s prior oral promise, tell her that she has a reasonable chance of prevailing at trial.