What is Reformation of a Written Contract and the Sham Pleading Doctrine?

In an unusual 2-1 decision in Panterra GP, Inc. v. Superior Court (Rosedale Bakersfield Retail VI, LLC), the California appellate court addressed the standards for reformation of a written contract, and the sham pleading doctrine

Panterra GP, Inc. (Panterra GP) filed the underlying action against Rosedale Bakersfield Retail VI, LLC (Rosedale) and Movie Grill Concepts XX, LLC (Movie Grill).

Panterra GP sought payment from the defendants for work it allegedly performed on a construction project.

Defendants filed a demurrer to Panterra GP’s third amended complaint, relying largely on Business and Professions Code section 7031, subdivision (a). The trial court sustained the demurrer without leave to amend.

The appellate court concluded that section 7031, subdivision (a) had no applicability to claims asserted by Panterra GP, Inc., because it was licensed as a contractor at all relevant times.

It directed the trial court to vacate its order sustaining the demurrer to Panterra GP, Inc.’s amended complaint, and to issue a new order overruling the demurrer.

Panterra GP is a licensed general contractor. Rosedale and Movie Grill intended for Panterra GP to perform renovation work on the Studio Movie Grill in Bakersfield, California.

Despite this intent, defendants drafted a contract that mistakenly listed a different entity – Panterra Development Ltd., L.L.P. (Panterra Development)– as the contractor for the project.

Panterra Development is not licensed as a contractor in California. Panterra GP is the general partner of Panterra Development.

Despite the mistake in the written contract, Rosedale and Movie Grill knew, intended and agreed that, in fact, Panterra GP would act as the general contractor and would perform the work contemplated by the agreement. And, indeed, that is what happened.

Panterra GP acted as general contractor for the project and actually performed the remodeling work. Accordingly, the permit applications and building permits issued for the project by the City of Bakersfield correctly reflect that Panterra GP was the contractor.

The “Certificate of Occupancy,” issued on April 16, 2018, also correctly reflects that Panterra GP was the contractor.

After Panterra GP completed the work, Rosedale refused to pay more than $2,609,666 owed under the contract.

Panterra Development filed a mechanic’s lien identifying itself as the contractor to the project.

Panterra GP sought reformation of the contract to reflect the true agreement of the parties (Civ. Code, § 3399) and recovery of the millions of dollars it is owed for its work.

In response, Movie Grill contended that the sham pleading doctrine applied that prevents contrary allegations in subsequent complaints.

Panterra GP’s first amended complaint raised claims for “recovery on mechanic’s lien release bond”; “breach of contract”; “account stated”; and “open book account.” 

From the first amended complaint through the operative third amended complaint, Panterra GP has repeatedly alleged that it was the general contractor for the project and actually performed the work. Panterra GP also repeatedly alleged that it was the entity that entered the agreement to perform the work.

Three exhibits were attached to the first amended complaint.

The first exhibit, Exhibit A, was an American Institute of Architects form contract (Standard Form of Agreement Between Owner and Contractor). The contract identified “the Owner” as Rosedale and “the Contractor” as Panterra Development. The contract between Rosedale identified the relevant “Project” as a “Renovation for Studio Movie Grill” in Bakersfield, and it was signed on behalf of “Panterra Development Ltd., L.L.P.” by “Sean W. Rea, President of Panterra GP, Inc., The Sole General Partner of Panterra Development Ltd., L.L.P.”

The contract contains several vertical lines in its left margin, including where Panterra Development, is identified as the “Contractor.”

The second exhibit attached to the first amended complaint, Exhibit B, consisted of documents related to a mechanics lien; the mechanics lien was recorded by “Panterra Development Ltd., L.L.P.”. The claim for the mechanics lien noted the “Claimant” under the mechanics lien was “Panterra Development Ltd., L.L.P., dba Panterra Construction.”

The lien stated that “[c]laimant served as the general contractor for the Project.” The lien was signed on behalf of “Panterra Development Ltd., L.L.P. dba Panterra Construction” by “Panterra G P, Inc., its sole general partner” by Sean W. Rea, President of Panterra GP. Rea also signed a verification, under penalty of perjury, that the “contents” of the lien were “true.”

The third exhibit attached to the first amended complaint, Exhibit C, consisted of documents related to a “Partial Release of Mechanics Lien,”. The “Claimant” was identified as “Panterra Development Ltd., L.L.P. dba Panterra Construction.”

The partial release of mechanics lien further stated that claimant furnished the labor, materials, equipment, services and/or work underlying the mechanics lien, to Rosedale.

The partial release of mechanic’s lien was signed on behalf of “Panterra Development Ltd., L.L.P. dba Panterra Construction” by “Panterra G P, Inc., its sole general partner” by Sean W. Rea, President of Panterra GP. Rea also signed a verification, under penalty of perjury, that the “contents” of the partial release of mechanic’s lien were “true.”

Movie Grill filed a demurrer to the first amended complaint and the trial court ruled: First-amended Complaint is brought by plaintiff Panterra GP, Inc., the sole general partner of Panterra Development, Limited, L.L.P.  Panterra GP alleged it entered into an agreement with Rosedale, however, Exhibit A indicates that the party that entered into the agreement with Rosedale is Panterra Development, Ltd., L.L.P., not Panterra GP. Given the lack of allegations that establish Panterra GP’s standing to act on behalf of Panterra Development, Limited, L.L.P., the demurrer on standing as to all causes of action was sustained with leave to amend.

The second amended complaint again alleged that Panterra GP and Rosedale entered into an agreement whereby Panterra GP was to furnish all labor, materials, supplies and equipment necessary to perform the construction and improvements at the Movie Grill project.

The complaint alleged that “Panterra GP, Inc. was designated as the contractor” under the agreement. The complaint further alleged that Panterra GP was listed as the contractor on the building permit and certificate of occupancy. The building permit and certificate of occupancy were attached as exhibits.

The second amended complaint further alleged that Panterra GP has exclusive control over the management of Panterra Development’s business. The complaint further alleged that Panterra GP is authorized to exercise the powers of Panterra Development as an authorized representative. The trial court sustained the defendants’ demurrer.

Panterra GP, filed a third amended complaint, and after Movie Grill filed a demurrer to the third amended complaint, the trial court ruled: The First Cause of Action seeks to have the court reform the construction contract in which Panterra Development, Ltd., L.L.P. is the named party as the contractor in order to substitute in Panterra GP, Inc. as the named contractor.

The issue is whether a party may rely on equitable principles to ‘reform’ a contract in order to overcome the failure of the party identified in the construction contract as the contractor to have a valid contractor’s license as required by California’s Contractors’ State License Law as contained in Business and Professions Code section 7031. Unfortunately for plaintiff, it is well-established that equitable theories cannot overcome a failure to have a proper license.

As Movie Grill acknowledged and the trial court concluded, while Panterra GP is a general partner of Panterra Development, the two are legally distinct entities. The former has been licensed as a contractor at all relevant times, and the latter has been unlicensed at all relevant times.

It seems clear that, as an unlicensed entity, Panterra Development would be barred by subdivision (a) from recovering any compensation on any theory for its performance of any act or contract requiring licensure. But Panterra Development is not the plaintiff here; Panterra GP is. And as broadly as subdivision (a) prohibits suits by unlicensed entities, it poses no obstacle whatsoever to claims by licensed entities.Subdivision (a) provides no basis for a demurrer to a complaint by Panterra GP.

It seems clear that the language of section 7031 does not bar the claims of Panterra GP.

There are several issues with Movie Grill’s contention. First, the core factual assertions regarding the identity of the contractor for the project are not “new allegations.” Panterra GP has repeatedly alleged, across its amended complaints, that it was the general contractor for the project and actually performed the work. Panterra GP has also repeatedly alleged that it was the entity that entered into the agreement to perform the work.

Second, courts may not turn a demurrer into a contested evidentiary matter by determining what the proper interpretation of the evidence is. It is for a finder of fact to consider all the evidence to determine whether the complaint’s allegations are true. That determination cannot be made at the pleadings stage, it must be made following summary judgment or trial.

When, through mutual mistake of the parties, or a mistake of one party, which the other at the time knew or suspected, a written contract does not truly express the intention of the parties, it may be revised on the application of a party aggrieved, so as to express that intention. (Civ. Code, § 3399.)

Although “reformation” is sometimes casually referred to as a cause of action, it is actually a remedy. Reformation is not the court creating a new agreement but rather enforcing the actual agreement already made by the parties.

The operative complaint alleged a prima facie case for reformation. The complaint alleged that Rosedale and Movie Grill intended for Panterra GP to perform the work and that, despite this mutual intent, defendants drafted a contract that mistakenly listed Panterra Development as the contractor for the project.

Movie Grill contended that Panterra GP’s pursuit of reformation is improper because reformation is an equitable remedy and equitable remedies are foreclosed by subdivision (a) that precludes equitable remedies. But it only does so with respect to equitable remedies sought by an unlicensed entity. Panterra GP is not an unlicensed entity.

Movie Grill also argued that the reformation sought by Panterra GP is not permitted under a Supreme Court case from 1900, a decision that prohibited a court of equity from making a “new contract” – rather than merely reforming it – by substituting one party for another. On this basis, Movie Grill argues that reformation cannot be used to substitute parties to a contract.

However, Civil Code section 3399 permits reformation of a contract upon application of any aggrieved party. Under this statute, the right to reformation of an instrument is not restricted to the original parties to the transaction.

Thus, the proposition that a person cannot be made a party to a written instrument by reformation is an overstatement.  No "new contract" is made when the plaintiff, on a proper showing of mistake, asks to have the writing conform to the original oral agreement concerning the parties to the contract.

Movie Grill contended that reformation is not available because a contract made by an unlicensed person in violation of the licensing laws is void. This argument merely assumes the key matter in dispute: whether the agreement at issue here was made by an unlicensed person.

Panterra GP contended that the actual agreement between the parties was that it would act as contractor, and that the written contract failed to reflect that true agreement. If that allegation is accepted as true, as the appellate court must in reviewing a demurrer, then the agreement here is not one made by an unlicensed person.

Movie Grill argued that reformation is not available because Panterra GP has made a mistake caused by the neglect of a legal duty.

Specifically, that Panterra GP neglected its legal duties by: (1) failing to request an addition or deletions report; and (2) failing to consult with an attorney about the insertion of Panterra Development as the Contractor and the legal consequences of the insertion.

The purpose of section 7031 is to encourage adherence to the licensing laws and to deter persons from offering or providing unlicensed contractor services for pay.  Neither purpose is thwarted by reforming a contract to reflect the reality that several parties agreed to hire a licensed contractor for renovation work.

Given the facts asserted by the operative complaint, overruling the demurrer is not only compelled by law, but necessary to prevent defendants from walking away with a massive windfall without Panterra GP ever having its day in court.

One of the justices dissented, arguing the trial court’s ruling was proper under well-established pleading rules. Facts appearing in exhibits attached to a complaint are accepted as true and are given precedence over any contrary allegations in the pleadings.

The allegations in the body of the first amended complaint indicated that Panterra Development Ltd., L.L.P. and Panterra GP, Inc. collectively entered into the project contract with Rosedale.  However, this allegation was squarely contradicted by all three exhibits to the first amended complaint, that is, the contract, the mechanics lien, and the partial release of mechanics lien, each of which clearly indicated that Panterra Development Ltd., L.L.P. was the “Contractor” that entered into the project contract with Rosedale and the general contractor for the project.

Even if the first amended complaint were read to allege that Panterra GP, Inc. entered into the contract with Rosedale, as the trial court evidently did, that contention also conflicted with the above-described exhibits, which were properly accorded precedence over the contrary allegation in the body of the complaint as to the party that entered into the contract with Rosedale.

The dissent argued that trial court properly sustained the demurrer to the first amended complaint on grounds that Panterra GP, Inc. was not the contracting party and therefore could not recover under the contract. Panterra GP, Inc. did not challenge the court’s ruling.

The third amended complaint, for the first time, indicated it was being filed solely on behalf of Panterra GP, Inc., rather than Panterra GP, Inc. and Panterra Development Ltd., L.L.P. “collectively”; however, the complaint at times used the term “Panterra” to refer to both Panterra entities.

The sham pleading doctrine applied here and required the appellate court to disregard the inconsistent allegations added to the third amended complaint in support of the contract reformation claim added therein.

Panterra GP, Inc. cannot avoid the defects in the allegations contained in the second amended complaint by filing a third amended complaint encompassing factual allegations that are inconsistent with the allegations in the prior complaint.

LESSONS:

1.         Always have a suitable written contract for any business transactions because it     helps avoid misunderstandings and disagreements, and it may be subject to        reformation.

2.         Always consider being the drafter of the contract as you will have a better understanding of the contents of the agreement your counsel drafted, and you          can      include a provision that the presumption of responsibility for any ambiguity that is on       the drafter is waived by all parties.

3.         Know who you are precisely, with the accurate legal description of the parties,      price, and subject of the agreement, and carefully sign as and for the correct party         to the agreement.

4.         Careful drafting of the complaint(s) is required to avoid the effect of the sham       pleading doctrine, and in this case, over $2.6 million was almost lost because the           contractor apparently did not have the contract reviewed by legal counsel, and legal          counsel did not inconsistencies regarding the plaintiffs and the facts in the   complaint(s).

5.         In reviewing a contract, I first determine the precise names of the parties to the      agreement, and how they are signing, then the price and method of payment, as            those are the critical terms that are often incorrectly drafted.

What is Fraud in the Execution of a Real Estate Agreement?

Unfortunately, there are many examples of fraud in California real estate transactions, and one form was the subject of the recent decision in Munoz v. PL Hotel Group.  

I am presently handling a case that involves a form of fraud in the execution whereby my Spanish speaking client was presented with a Spanish version of an agreement, and then induced into signing an English version that was different, and resulted in a change in ownership of the real property.

The appeal in Munoz involved a form of fraud rarely seen in day-to-day litigation. It goes by various names—fraud in the factum, fraud in the execution, fraud in the inception—but they all describe the same genre of deceit.

It occurs where, after parties have agreed upon certain contract terms, one of them surreptitiously substitutes a document for signature that looks the same as the earlier draft but contains materially different terms.

Fraud in the execution is distinct from promissory fraud, which involves false representations that induce one to enter into a contract containing agreed-upon terms.

The case, on appeal after a demurrer was sustained without leave to amend, involved the purchase and leaseback of a vacant hotel and restaurant.

The nub of the lawsuit was the buyers’/plaintiffs’ claim that the sellers/defendants surreptitiously substituted altered versions of the lease and financing instruments containing terms extremely adverse to the buyers, and which they alleged were neither bargained for nor agreed to.

The allegations stated, quite literally, a textbook cause of action for fraud in the execution, as this illustration from the Restatement Second of Contracts demonstrates:  “A and B reach an understanding that they will execute a written contract containing terms on which they have agreed. It is properly prepared and is read by B, but A substitutes a writing containing essential terms that are different from those agreed upon and thereby induces B to sign it in the belief that it is the one he has read. B’s apparent manifestation of assent is not effective.” (Rest.2d, Contracts (1981) § 163, illus. 2.)

But acting under the misapprehension that plaintiffs’ theory was promissory fraud, the superior court sustained a demurrer brought by defendants Inn Lending LLC (Inn Lending) and Rajesh Patel (Rajesh) on the grounds that insufficient facts were alleged showing they made promises upon which plaintiffs relied. The court also determined that related causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, and financial elder abuse also failed.

Shivam Patel and his son, Rajesh (collectively, the Patels), owned a hotel and restaurant (Hotel). The Hotel had been closed for years and the property needed substantial repairs. When renovations were about half completed, the Patels determined the project was not viable because there was no way to get conventional financing with a half-finished Hotel that had no financial history.

The Patels formed PL Hotel Group, LLC (PL) to hold title and listed the property for sale. They structured the transaction so they would remain in possession after the sale. Toward that end, the sale included a leaseback to the Patels under a triple net lease.

A triple net lease (sometimes designated as NNN) is one in which the lessee/tenant pays taxes, insurance, and utilities.

From the buyer/landlord’s perspective, the difference between the monthly rent under the lease and cost of financing would be the return on investment.

Luis Munoz was an 80-year-old real estate investor and sole owner of LR Munoz Real Estate Holdings, LLC (collectively, Munoz). In June 2018, the Patels’ agent, Steven Davis, sent an offering memorandum to Munoz’s agent, Ryan Cassidy.

Among other terms, it stated the transaction would include a new 20-year absolute NNN lease to start at close of escrow.

In early July, the parties agreed on a $2.8 million purchase price. Cassidy drafted the purchase agreement, under which the Patels were to provide Munoz a fully executed lease that should include an "annual rent payment of $230,000 NNN paid monthly".

On July 17, the Patels (via Davis) sent a proposed but unexecuted triple net lease to Cassidy. In an accompanying e-mail, Davis reserved the Patels’ right to make further edits in case there was an error or oversight.

This lease, which the parties refer to as the “July 17 lease,” was circulated “multiple times” during the 60-day escrow. It was the only lease agreement ever circulated before close of escrow. It contained the agreed lease terms, and at no time before escrow closed did the Patels ever contend there was an error or oversight in it.

The July 17 lease was for a 20-year term, with specified options to renew, rent began at $19,167 per month, and periodically increased over the 20 year term, and the tenants (Patels) were solely responsible for (1) maintenance and repairs; (2) insurance; (3) utilities; and (4) taxes.

On August 29, Davis sent an e-mail to Cassidy attaching the July 17 lease, indicating it is the version that would be signed at closing.

On September 13 (two days after escrow closed), Shivam sent an e-mail to Cassidy stating, “Attached is the lease,” thus making it appear he had signed the July 17 lease. But the September 13 lease attached to Shivam’s e-mail was materially different.

Unfortunately for Munoz, the differences between the two leases were not so numerous to be obvious. For instance, the provision a landlord might be expected to check—rent payments—was unchanged. Munoz signed the September 13 lease after only a cursory review, believing it was the same triple-net lease the parties had circulated and approved numerous times.

But as Munoz would soon learn, the September 13 lease was anything but a triple net lease. For example:

• Maintenance and Repair: Under the July 17 lease, the landlord (Munoz) has no obligation to maintain or repair the premises. But the September 13 lease provides the landlord “shall have the duty to repair” everything beyond normal wear and tear.

• Renovations: Under the July 17 lease, the tenant (Patels) were obligated to complete renovations. Under the September 13 lease, the landlord is.

• Taxes: The July 17 lease provides the tenant pays taxes relating to the premises. The September 13 lease limits that obligation to taxes “attributable solely to any business property or personal property of the Tenant” on the premises.

• Assignment and Subletting: The July 17 lease allows the tenant to sublease to a nonaffiliated entity only with the landlord’s consent. The September 13 lease allows a sublease “without Landlord’s consent at any time.”

• Tenant’s Continuing Liability: Under the July 17 lease, an assignment or sublease does not release tenant’s liability, including for rent. But under the September 13 lease, a permitted assignment or sublease “eliminate[s]” tenants’ liability.

·      Landlord’s Remedy: The September 13 lease adds a new provision that makes retaking possession the landlord’s sole remedy on tenant’s default.

Meanwhile, as the Patels’ plan with regard to the altered lease was put in place, Munoz was unable to obtain financing from a conventional lender because the Hotel had been closed for two years. Expecting this, the Patels initiated the second phase of their plan. Not only would they be the seller/tenant in the transaction, but also the secured lender.

On the Patels’ behalf, Davis contacted Cassidy (Munoz’s agent) and recommend he hire David Hamilton of Pacific Southwest Realty Services (collectively, Hamilton) as loan broker. But this was all an illusion for Munoz’s consumption. Hamilton had no intention of shopping around for a loan. Instead, he placed the loan with Inn Lending—an alter ego entity of the Patels created just for that purpose.

On July 25, Hamilton told Munoz that a private lender, Inn Lending, would finance the purchase at six percent per annum interest, secured by a deed of trust only on the Hotel (plus an unsecured personal guarantee by Munoz). These terms were presented in an August 6 “letter of intent” Munoz signed.

Munoz paid Hamilton a $7,500 “administrative” fee to have loan documents drawn on those terms. During this whole time, Inn Lending did not even exist. It was “simply Rajesh and Shivam.”

Inn Lending did not come into existence until August 23. The next day, Hamilton sent loan documents to Munoz. In a sense, it was deja vu.

Like the leaseback, the loan was another bait and switch. The approximately 300 pages of loan documents materially varied from the letter of intent:

• The interest rate was “disguised” and was actually 7.3 percent per annum;

• The payoff amount was $300,000 more than it should have been;

·      The loan was secured not only by the Hotel, but also by Munoz’s other real estate holdings “worth several millions of dollars” and a security interest in his personal property.

On September 4, Munoz signed the loan documents, unaware of these changes. For the Patels, everything was now in place.

They always intended to surreptitiously alter the lease knowing that the real estate agents would cooperate and/or would not be diligent enough to catch the fraud. The transaction was manipulated to make sure it would be so burdensome and unfair that Munoz would quickly default on his loan, allowing the Patels, through Inn Lending, to foreclose on not only the Hotel, but also Munoz’s other real property.

It took less than a month for the other shoe to drop. On October 1, Munoz asked the Patels for the first rent check. In response, Shivam claimed no rent was due, stating, “The landlord is supposed to reimburse the Tenant for all renovation costs.”

Three weeks later, PL’s attorney demanded Munoz reimburse for all renovation expenses. Not surprisingly, the litigation ensued.

In December 2019, Munoz filed the operative Complaint against Rajesh and/or Inn Lending, Munoz alleged causes of action for: breach of contract; elder financial abuse; “promissory fraud”; and breach of the implied covenant of good faith and fair dealing.

Rajesh and Inn Lending demurred, asserting they were in no way involved in the underlying transaction and/or in negotiating the terms of the sale/lease.

They claimed the fraud cause of action failed because as to Rajesh, there are zero allegations that he even spoke to Munoz, let alone make any representations to him. And they asserted there was no authority to support the proposition that revisions to documents by one party can equate to affirmative misrepresentations that could give rise to liability for fraud.

Opposing the demurrer, Munoz’s attorney argued, among other theories, that the defendants misconstrued the allegations, and the Complaint alleged the Patels tricked Munoz into executing an altered lease.

Citing among other authorities, California Trust Co. v. Cohn (1932), they maintained that Munoz’s failure to read the lease before signing, if induced by fraud or trickery, does not preclude relief.

After conducting a hearing, the court sustained the demurrer without leave to amend, and entered a judgment of dismissal in favor of Rajesh and Inn Lending. Postjudgment, the court awarded them $92,505 in attorney’s fees plus costs.

In sustaining the demurrer to the seventh cause of action, the trial court understood it to involve promissory fraud. This was probably in no small part because Munoz’s attorney labeled it “Promissory Fraud.”

The court explained the Complaint was insufficient because there were no allegations that Rajesh or Inn lending made promises, nor allegations as to the element of reliance.

However, the nature and character of a pleading is to be determined from the facts alleged, not the name given by the pleader to the cause of action.

The gravamen of the fraud claim is not fraud in the inducement, but rather fraud in the execution.

In the classic case of fraud in the execution, some limitation—such as blindness, illness, or illiteracy—prevents the plaintiff from reading and understanding the contract that he or she is about to sign.

For example, in Rosenthal v. Great Western Fin. Securities Corp. (1996), defendants omitted portions of the contract when reading it aloud to plaintiff, who could not read English. 

In  Jones v. Adams Financial Services (1999), defendants tricked an elderly legally blind woman into a reverse mortgage by telling her she was authorizing them to learn the payoff on her mortgage.

Closer to the facts alleged here, fraud in the execution may also occur where a contract is surreptitiously modified.

In Hotels Nevada v. L.A. Pacific Center, Inc. (2006), the owner of commercial property signed an agreement to sell the properties for $70 million in cash and another $5 million a year later. He alleged that after he signed the agreement, the buyers covertly substituted a provision entitling them to hold back the last $5 million for five years instead of one. The court held those allegations sufficed for fraud in the execution.

Another variation is typified by California Trust Co.: when the plaintiff sued to quiet title to certain real property, the defendants cross-complained alleging fraud in concise language.

According to the cross-complaint, the plaintiff represented that if defendants paid $7,500, he would hold title to the property, improve and sell it within a year, and pay the defendants $17,500 of the proceeds. The plaintiff prepared a written agreement and stated it contained these provisions, which defendants signed without reading it.

When the plaintiff demanded further payment, they read it for the first time and discovered it contained provisions significantly different from the prior oral agreement. The California Supreme Court determined the cross-complaint alleged sufficient facts to warrant reformation, commenting, a party to an instrument who by fraud leads the other party to sign without reading it is in no position to urge the latter’s negligence.

These cases reflect society’s understandable desire to repress this pernicious form of fraud. Yet at the same time, there has always been a sharp struggle between that policy upon the one hand, and on the other to discourage negligence and the opportunity and invitation to commit perjury.

The California Supreme Court stated in picturesque (if somewhat dated) language, “No rogue should enjoy his ill- gotten plunder for the simple reason that his victim is by chance a fool." (Seeger v. Odell (1941)

The countervailing policy is often expressed as a duty to read a contract before signing.

Generally, one who accepts or signs an instrument, which on its face is a contract, is deemed to assent to all its terms, and cannot escape liability on the ground that he or she has not read it. If he or she cannot read, he or she should have it read or explained to him or her.  (Ramos v. Westlake Services LLC (2015)

In balancing these competing interests, courts have required the plaintiff to have acted in an objectively reasonable manner in failing to become acquainted with the contents of the written agreement.

The plaintiff must not only have been ignorant of the surreptitiously inserted terms, but must also have had no reasonable opportunity to learn that the document contains them.

In short, the standard is one of excusable ignorance. In making that determination in the context of fraud in the execution of a negotiable instrument, the Uniform Commercial Code explains the relevant factors include: (1) the party’s intelligence, education, business experience, and ability to read or understand English; (2) the nature of the representations that were made; (3) whether the party reasonably relied on the representations or justifiably had confidence in the person making them;(4) the presence or absence of any third person who might read or explain the instrument to the signer; (5) any other possibility of obtaining independent information about the document’s terms; and (6) the apparent necessity, or lack of it, for acting quickly. (Cal. U. Com. Code, § 3305, subd. (a)(1)(C) & com. 1, ¶ 5.)

Rosenthal is a good illustration of how courts apply these principles. There, plaintiffs brought fraud claims in connection with investments they made, and the defendants sought to compel arbitration based on client agreements containing an arbitration clause.  The Supreme Court found the arbitration agreement unenforceable as to two of the plaintiffs, Giovanna Greco, an 81-year-old Italian immigrant who spoke only “ ‘a few words of English’ and "cannot read English at all,” and her daughter Rosalba Kasbarian, a 45-year-old Italian immigrant who was “able to speak and understand simple English, but cannot read English very well at all," and had difficulty reading "complicated words or legal terms.”

The court held these plaintiffs reasonably failed to read the agreement because they had a previous relationship with the defendant; they had a limited ability to understand English; Greco explained she could not understand what the representative was saying; the representative told them he would read the documents to them while Kasbarian translated for Greco; and when the representative read the documents, he did not mention the contract included an arbitration agreement or that the plaintiffs were giving up their legal rights.

In contrast, another plaintiff, Raul Pupo had no prior relationship with the defendant or its representative, and the representative did not purport to read the contract to him or orally explain its contents. The court concluded, “Under these circumstances, Pupo's failure to take measures to learn the contents of the document they signed is attributable to his own negligence, rather than to fraud on the part of defendant or its representatives.”

In this decision, the appellate court reversed the judgment of dismissal, and Appellants were awarded their costs on appeal, jointly and severally, against Rajesh Patel and Inn Lending, LLC.

LESSONS:

1.         If misrepresentations are used to cause entry into an agreement, it may be fraud in the inducement.

2.         If the agreement is changed without the knowledge of a party, it may be fraud by execution.

3.         For all real estate transactions, written agreements should be used and carefully reviewed before execution, and legal counsel should be obtained to ensure the parties understand the agreement.

Why Written Agreements Without Legal Advice Can Cause Disputes?

The recent case of Tiffany Builders v. Delrahim concerned an agreement at a coffee shop in Calabasas when David Delrahim made Edwart Der Rostamian a business proposal. Rostamian got his notebook, asked a server for a pen, and worked with Delrahim to compose two pages of text.

When they were done, each man signed the paper. Rostamian later sued Delrahim on contract claims.

The trial court granted Delrahim’s motion for summary judgment, ruling the Calabasas writing was too indefinite to be a contract.

The appellate court reversed that point, but affirmed the ruling against Rostamian’s claims for tortious interference with a contract.

According to Rostamian, the Calabasas discussion concerned the purchase of 13 gas stations. He argued that, if considered in the context of his and Delrahim’s ongoing negotiations, their signed writing was a binding contract.

This account was one-sided because Delrahim chose not to offer declarations giving his version of the facts. This one-sided account was the record in the trial court.

The gas stations in question belonged to seller Ibrihim Mekhail, operating through a family trust. Mekhail was not at the coffee shop and is not a party to this case.

Mekhail was selling the 13 stations as a block. He was offering nine of the 13 with their attached land and the other four without the land: only the businesses were for sale. The parties called the four the “dealer sites.”

Rostamian had been seeking to complete a deal with Mekhail through Rostamian’s company Tiffany Builders LLC, but the deal bogged down. Tiffany had signed a purchase agreement with Mekhail for the 13 stations. Rostamian assembled a group of other investors, including one Carol International, Inc., willing to buy Mekhail’s stations for about $12.8 million.

Rostamian opened an escrow to which Carol had contributed about $250,000, but the escrow did not close for various reasons. Rostamian eventually would assign Tiffany’s rights in the deal to Carol International, although it is not clear exactly when this happened.

In any event, Rostamian kept searching for a way to consummate the transaction and to profit from his efforts.

A mutual acquaintance introduced Rostamian to Delrahim, who expressed interest in the stations. Delrahim owned a company named Blue Vista Partners. Over an interval of some nine months, Rostamian and Delrahim met twice in Studio City and then continued to discuss, via email and text, ways to make a deal.

Then in November 2015, Delrahim said he had a proposal to discuss in person with Rostamian. The two met at the Calabasas coffee shop.

Delrahim proposed Rostamian should back his company out of the pending escrow so Delrahim could buy the stations from Mekhail for $12.4 million, or less if Delrahim and Rostamian could negotiate a lower price. Delrahim would pay Rostamian $500,000 to do this.

Delrahim also proposed Rostamian would own the four dealer sites. Delrahim would charge Rostamian a monthly fee to run these dealer sites, and Rostamian would reap their profit.

Delrahim and Rostamian worked together to word their deal. This two-page hand-written document is central to this appeal, and was termed the Writing.

Delrahim would take the lead in the stations deal in return for guaranteeing benefits for Rostamian. Delrahim would rescue Rostamian’s foundering escrow for Delrahim’s own benefit: Delrahim would buy the 13 stations at a price the two hoped they could negotiate down from the $12.4 million figure.

Delrahim would own nine stations that were not dealer sites, and would gain a $4,000 a month fee for operating the four dealer sites. Delrahim would pay Rostamian $500,000 and would give Rostamian ownership of, and profits from, the dealer sites.

None of that happened. To Rostamian’s dismay, Delrahim decided to deal directly with Mekhail and to cut Rostamian out of the picture. Delrahim bought the 13 stations for about $11 million. Rostamian got nothing.

Rostamian and Tiffany sued Delrahim and Blue Vista for breach of contract, specific performance, intentional and negligent interference with prospective economic advantage, and unfair business practices. Delrahim and Blue Vista moved for summary judgment.

The trial judge granted Delrahim’s summary judgment motion. The court reasoned the Writing was too indefinite to be a contract.

The court considered the parol evidence from Rostamian’s declaration but concluded this evidence failed to clarify the terms to a legally acceptable degree. The court ruled the most critical omission was who would own the 13 gas stations upon completion of the deal. Delrahim had argued Rostamian’s declaration was a sham because it contradicted Rostamian’s deposition testimony.

Rostamian and Tiffany appeal the judgment against them.

As supplemented by parol evidence, the Writing was definite enough to be an enforceable contract. The grant of summary judgment was error.

Three streams of law converge to control this case.

The first rule concerns parol evidence, also called extrinsic evidence.

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.

Rostamian’s declaration satisfied this test. It was relevant to prove a meaning to which the Writing was reasonably susceptible. The trial court did not rule to the contrary. It properly accepted Rostamian’s explanation of the Writing.

Delrahim incorrectly argues that Rostamian’s assertion that the contract is unambiguous estops him from arguing extrinsic evidence provides clarity. Briefing commonly, and acceptably, argues in the alternative.

The Writing, as explicated by Rostamian, was not too indefinite to enforce.

It was not an illusory contract. When people pen their names to a document they have drafted together, the law accords their act a potent meaning. Delrahim and Rostamian signed their joint creation, thereby enacting a ritual signifying commitment: an exchange of promises. Courts strive to effectuate designs like that. Powerful authority proves it.

The courts construe instruments to make them effective rather than void. This rule is of cardinal importance.

The law leans against destroying contracts because of uncertainty. If feasible, courts construe agreements to carry out the reasonable intention of the parties.

“An interpretation which gives effect is preferred to one which makes void.” (Civ. Code, § 3541.)

“A contract must receive such an interpretation as will make it lawful, operative, definite, reasonable, and capable of being carried into effect, if it can be done without violating the intention of the parties.” (Civ. Code, § 1643.)

Courts will imply stipulations necessary to make a contract reasonable regarding matters to which the contract manifests no contrary intention. (Civ. Code, § 1655.)

Indefiniteness as to an essential term may prevent the creation of an enforceable contract, but indefiniteness is a matter of degree. All agreements have some degree of indefiniteness. People must be held to their promises.

If the parties have concluded a transaction in which it appears they intend to make a contract, courts should not frustrate their intention if it is possible to reach a just result, even though this requires a choice among conflicting meanings and the filling of gaps the parties have left. This rule comes nearer to attaining the purpose of the contracting parties than any other.

There are two reasons not to enforce an indefinite agreement. First, the agreement may be too indefinite for the court to administer—no remedy can be properly framed. Second, the indefiniteness of the agreement may show a lack of contractual intent. Courts should be slow to come to this conclusion. Many a gap in terms can be filled, and should be, with a result that is consistent with what the parties said and that is more just to both than would be a refusal of enforcement.

The terms of a contract are reasonably certain if they provide a basis for determining the existence of a breach and for giving an appropriate remedy.

When the parties to a bargain sufficiently defined to be a contract have not agreed with respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court.

Rostamian’s explanation of the Writing made it definite enough for judicial enforcement. His version, which was binding on the trial court at the summary judgment stage, was a series of clear promises.

First, he would withdraw from the escrow to give Delrahim pride of place, allowing Delrahim to profit from Rostamian’s effort in finding and trying to exploit this business opportunity.

Second, Rostamian would cooperate with Delrahim’s effort to negotiate from Mekhail a price lower than $12.4 million.

Third, Rostamian would pay Delrahim $4,000 a month to operate the four gas stations referred to as dealer sites. In return, Delrahim made three clear promises of his own: to pay Rostamian $500,000; to grant Rostamian ownership of, and profits from, the four dealer sites; and to operate the four dealer sites for Rostamian.

This exchange of promises was an enforceable contract.

A contract need not specify price if price can be objectively determined. The absence of a price provision does not render an otherwise valid contract void.

In the process of negotiating an agreement, price is a term frequently left indefinite and to be settled by future agreement. If the parties provide a practical method for determining this price, there is no indefiniteness that prevents the agreement from being an enforceable contract.

Although the necessity for definiteness may compel the court to find that the language used is too uncertain to be given any reasonable effect, when the parties’ language and conduct evidences an intent to contract, and there is some reasonable means for giving an appropriate remedy, the court will strain to implement their intent.

For example, a bank signature card is a contract authorizing charges for processing checks drawn on accounts with insufficient funds and was not illusory, even though it did not specify the amount of the charges.

The Writing was definite enough to enforce contractually.

LESSONS:

1.         A written agreement prepared without legal assistance can include ambiguities and inconsistencies that may cause disputes.

2.         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.

3.         The law leans against destroying contracts because of uncertainty. If feasible, courts construe agreements to carry out the reasonable intention of the parties.

4.         “An interpretation which gives effect is preferred to one which makes void.” (Civ. Code, § 3541.)

5.         “A contract must receive such an interpretation as will make it lawful, operative, definite, reasonable, and capable of being carried into effect, if it can be done without violating the intention of the parties.” (Civ. Code, § 1643.)

6.         Courts will imply stipulations necessary to make a contract reasonable regarding matters to which the contract manifests no contrary intention. (Civ. Code, § 1655.)

What is the statute of limitations for fraudulent breach of contract to purchase real property?

In the recent case of Vera v. REL-BC, LLC, the trial court entered summary judgment on Adriana Vera’s complaint against REL-BC, LLC (REL-BC) relating to Vera’s purchase of a home in Oakland.

The court ruled the action was barred by the three-year statute of limitations for actions based on fraud in Code of Civil Procedure section 338(d).

Vera appealed from the judgment contending that the trial court erred in applying the three-year statute of limitations to her breach of contract claim, and that the court ignored disputes of material fact concerning when the limitations period began to run.

The appellate court ruled the trial court correctly concluded that Vera’s breach of contract claim was based on fraud, and therefore subject to the three-year statute in section 338(d).

The trial court also correctly concluded that the undisputed facts demonstrated Vera’s claims based on fraud accrued more than three years before she filed suit, and were therefore time-barred.

In 2011, REL-BC bought a property in Oakland to remodel and resell.

After the property was renovated for REL-BC, it signed an agreement to sell it to Vera.

The purchase agreement obligated REL-BC to disclose known material facts and defects affecting the property.

Pursuant to that provision, and as independently required by statute (Civ. Code,
§ 1102.6), REL-BC provided disclosures in which they identified material conditions of the property.

In those documents, REL-BC said it was not aware of any significant defects or malfunctions (including past defects that had been repaired) with respect to various components of the property, including the sewers and drainage.

The disclosures also stated that REL-BC was not aware of any water intrusion, leaks from the sewer system or any pipes, work or repairs that had been done without permits or not in compliance with building codes, or any material facts or defects that had not otherwise been disclosed to Vera.

Vera hired her own inspector, Eric Burtt, to examine the property and she accompanied Burtt during the inspection. Burtt’s report stated that the basement was well below the exterior grade and several areas showed a history of water intrusion, including areas that had been recently tiled and painted. The report stated, “Expect moisture and water intrusion during periods of wet weather!!” Burtt also noted that there was a sump pump in the basement that was not operating correctly.

Burtt observed through a vent that there had been some prior work or repair to the front stairs leading up to the house, but he did not inspect it because the area was inaccessible. He recommended further inspection.

In light of the considerable remodeling, some of which appeared to be peculiarly or imperfectly done, Burtt also advised Vera to obtain the property’s complete permit history to verify that the work was permitted and inspected.

Vera acquired the permit history for the property and sent it to Burtt, but Vera was unable to recall later whether she discussed the permit history with him.

Vera also had a sewer inspection done by Rhino Rooter. That inspection revealed that there was a major disconnect at the house cleanout that was leaking a large amount of water into the crawl space. REL agreed to repair several items noted in the Burtt report, including the sump pump and the sewer disconnect.

Escrow closed in 2011, but the sewer line still had not been corrected. In January 2012, a large amount of water flooded into the basement, apparently because the repairs to the sewer line were not done correctly.

Vera contacted Laura Blair, who at the time lived across the street. Blair came over and told Vera that it was not necessary to obtain another inspection of the sewer line because the water coming into the basement was rainwater. Blair told Vera that rain had previously flowed down the foundation wall when there was a sewer problem.

Sellers later admitted to Vera that the earlier sewer work had been completed without a permit, and that Vega was unlicensed, though they told Vera that Vega’s work had been done under the supervision of a licensed contractor.

In 2014, the exterior stairs leading up to the house began collapsing. Vera asked Burtt to investigate. Burtt concluded that there was no support for the stairs. Burtt also said that the unsupported joists holding up the stairs were the same repairs he had observed through the vent when he inspected the property in 2011.

On December 5, 2014, three years and three days after the close of escrow, Vera filed her initial complaint against Sellers. Vera’s second amended complaint alleged six causes of action: negligence (first and sixth causes of action), breach of warranty (second cause of action), breach of contract (third cause of action), fraud (fourth cause of action), and negligent misrepresentation (fifth cause of action).

Sellers moved for summary judgment based on, among other grounds, the three-year statute of limitations in section 338(d) for actions based on fraud or mistake. The trial court granted the motion and entered judgment for Sellers. Vera appealed.

Vera first contended the trial court erred in applying the three-year statute of limitations in section 338(d) for actions based on fraud to her breach of contract cause of action, and Vera contended the four-year statute under Code of Civil Procedure section 337(a) was controlling.

To determine the statute of limitations which applies to a cause of action, it is necessary to identify the nature of the cause of action, i.e., the ‘gravamen’ of the cause of action.

The nature of the right sued upon and not the form of action nor the relief demanded determines the applicability of the statute of limitations under our code.

In determining whether an action is on the contract or in tort, it is the nature of the grievance rather than the form of the pleadings that determines the character of the action. If the complaint states a cause of action in tort, and it appears that this is the gravamen of the complaint, the nature of the action is not changed by allegations in regard to the existence of or breach of a contract.

In other words, it is the object of the action, rather than the theory upon which recovery is sought that is controlling.

Vera alleged that Sellers promised in the purchase agreement to provide her a disclosure statement listing all material facts known to the Sellers. She alleged the Sellers failed to disclose and misrepresented defects with the property, including prior water intrusion, structural defects, and the fact that the renovations and remodeling work were not permitted or performed by a licensed contractor.

She further asserted that Sellers performed labor and installed materials in the project in a negligent manner, which deprived her of the full use and enjoyment of the property after purchase.

After alleging causes of action for negligence and breach of warranty based on these facts, Vera incorporated all prior allegations by reference into her cause of action for breach of contract.

She claimed that Sellers agreed in the purchase agreement to provide a disclosure statement, and the agreement’s implied covenant of good faith and fair dealing required Sellers to disclose defects.

She finally alleged: In breach of the express provisions of the contract and the implied covenant of good faith and fair dealing, Seller concealed defects, failed to make repairs of items they knew were deficient, and otherwise misrepresented the condition, desirability, and value of the property.

These allegations state in essence that Sellers harmed Vera by failing to disclose material facts to her.

Section 338(d) establishes a three-year period of limitations for an action for relief on the ground of fraud of mistake, so this provision applies to Vera’s breach of contract claim.

It makes no difference that the breach of contract claim rests on a contractual duty to disclose material facts, while her fraud claim rests on the same duty under tort law. It is black letter law that section 338(d) applies regardless of the form of the action a plaintiff chooses or legal theory she advances.

Section 338(d)’s language is comprehensive, and the statute, with its favorable accrual rule, is accordingly applied to any form of action, for any kind of relief.

In other words, if fraud or mistake is the basis of the legal injury (the "ground" of the action), the section applies regardless of whether the complaint seeks legal or equitable relief or pleads a cause of action in tort or contract.

Vera argued that the trial court and Sellers failed to cite any case in which a court applied the three-year statute of limitations for fraud to a claim for breach of written contract.

However, courts routinely bar causes of action, including for breach of written contract, where the gravamen rule dictates a shorter statute of limitations.

Vera did not cite (and the appellate court was not aware of) any authority holding that claims for breach of written contract are exempt from the rule that the gravamen of a claim governs the applicable statute of limitations, nor did she point to any authority that the rule operates only to extend a limitations period.

Vera argued the summary judgment had to be reversed because the trial court ignored disputes of material fact concerning when her claims accrued for the purposes of the limitations period in section 338(d).

In general, a cause of action accrues when it is complete with all of its elements.

But section 338(d) provides that a cause of action based on fraud or mistake is not deemed to have accrued until the discovery, by the aggrieved party, of the facts constituting the fraud or mistake.

Vera argued that this provision established that a cause of action for fraud accrues only based on actual knowledge of the facts constituting the fraud, unlike other causes of action that accrue based upon mere suspicion of wrongdoing.

She maintained that the decisions applying this discovery rule to start the running of a limitations period do so only when the plaintiff has admitted actual suspicion of wrongdoing, while here there is a factual dispute about the date of her knowledge.

The language of section 338(d) on its face might support Vera’s interpretation that only actual knowledge and discovery will start the running of the statute, but it has long been settled that actual knowledge is not necessary.

The courts interpret discovery in this context to mean not when the plaintiff became aware of the specific wrong alleged, but when the plaintiff suspected or should have suspected that an injury was caused by wrongdoing.

The statute of limitations begins to run when the plaintiff has information which would put a reasonable person on inquiry.

A plaintiff need not be aware of the specific facts necessary to establish a claim since they can be developed in pretrial discovery.

The cases construing section 338(d) have held that a plaintiff must affirmatively excuse his failure to discover the fraud within three years after it took place, by establishing facts showing that he was not negligent in failing to make the discovery sooner and that he had no actual or presumptive knowledge of facts sufficient to put him on inquiry.

As these cases’ statements of the law demonstrate, Vera’s contention that the discovery rule is triggered only by actual knowledge is incorrect. A fraud claim will accrue even without actual knowledge if a plaintiff knows facts that should raise suspicion and trigger a further investigation.

While resolution of the statute of limitations issue is normally a question of fact, where the uncontradicted facts established through discovery are susceptible of only one legitimate inference, summary judgment is proper.

Vera should have been suspicious that she was injured by Sellers’ wrongdoing and investigated more than three years before she filed suit.

Vera alleged Sellers misrepresented or concealed four aspects of the property: (1) a history of water intrusion, which Sellers concealed by tiling over affected areas or covering them with drywall; (2) repairs that were unpermitted and completed by unlicensed contractors; (3) failure of the terra cotta sewer line; and (4) lack of structural framing supporting the front stairs.

Sellers contended that the Burtt and Rhino Rooter reports contradicting these assertions gave Vera reason to investigate Sellers’ alleged fraud, so the tolling of the statute under the discovery rule ended when Vera received the reports before the close of escrow.

The difference between Sellers’ statements and her inspection reports proves as a matter of law that Vera’s claims accrued because she had, at minimum, reason to be suspicious and should have investigated Sellers’ fraud.

Vera also argued Sellers’ misrepresentations tolled the running of the limitations period by actively concealing their wrongdoing. However, Vera could and did hire inspectors who revealed or at least called into serious question the truth of Sellers’ misrepresentations, so those misrepresentations did not postpone accrual of her claims.

Regarding Sellers’ misrepresentation of the permit history and licensing status, the Burtt report advised Vera to review the permit history and permit documentation for completeness and scope given the considerable remodeling work and the fact that some of the remodeling, such as the electrical panel, was “extremely peculiar” in certain respects.

Vera did, in fact, obtain the permit history, and she passed it to Burtt to review. Although this permit history would not have revealed that Sellers’ contractor was unlicensed, in conjunction with her and her inspectors’ observations of the work performed at the property, it should have shown if Sellers’ representations about permits were true or false.

LESSONS:

1.         The three-year statute of limitations in Code of Civil Procedure section 338(d) applies to actions based on fraud, even if they arise out of a contract for the purchase of real property.

2.         The statute of limitations for fraud begins to run when the plaintiff has information which would put a reasonable person on inquiry.

3.         The permit history of the real property should always be obtained by a buyer, especially if the property had been improved or remodeled.

4.         All issues raised in inspection reports should be investigated and considered in proceeding with a purchase.

Is a landowner liable for an independent contractor's injuries on the job?

In its unanimous decision in Gonzalez v. Mathis, the California Supreme Court recognized there is a strong presumption under California law that a hirer of an independent contractor delegates to the contractor all responsibility for workplace safety.

This means that a hirer is typically not liable for injuries sustained by an independent contractor or its workers while on the job. Commonly referred to as the Privette doctrine, the presumption originally stemmed from the following rationales:

First, hirers usually have no right to control an independent contractor’s work.

Second, contractors can factor in the cost of safety precautions and insurance coverage in the contract price.

Third, contractors can obtain workers’ compensation to cover any on-the-job injuries.

Finally, contractors are typically hired for their expertise, which enables them to perform the contracted-for work safely and successfully.

There are two limited circumstances in which the presumption is overcome.

First, a hirer may be liable when it retains control over any part of the independent contractor’s work and negligently exercises that retained control in a manner that affirmatively contributes to the worker’s injury.

Second, a landowner who hires an independent contractor may be liable if the landowner knew, or should have known, of a concealed hazard on the property that the contractor did not know of and could not have reasonably discovered, and the landowner failed to warn the contractor of the hazard.

The Supreme Court granted review in this case to decide whether a landowner may also be liable for injuries to an independent contractor or its workers that resulted from a known hazard on the premises where there were no reasonable safety precautions it could have adopted to avoid or minimize the hazard.

The Supreme court concluded that permitting liability under such circumstances, thereby creating a broad third exception to the Privette doctrine, would be fundamentally inconsistent with the doctrine.

When a landowner hires an independent contractor to perform a task on the landowner’s property, the landowner presumptively delegates to the contractor a duty to ensure the safety of its workers. This encompasses a duty to determine whether the work can be performed safely despite a known hazard on the worksite.

As between a landowner and an independent contractor, the law assumes that the independent contractor is typically better positioned to determine whether and how open and obvious safety hazards on the worksite might be addressed in performing the work.

California case law makes clear that, where the hirer has effectively delegated its duties, there is no affirmative obligation on the hirer’s part to independently assess workplace safety.

Thus, unless a landowner retains control over any part of the contractor’s work and negligently exercises that retained control in a manner that affirmatively contributes to the injury will not be liable to an independent contractor or its workers for an injury resulting from a known hazard on the premises.  

Defendant John R. Mathis lived in a one-story house with a flat, sand-and-gravel roof. The roof contained a large skylight covering an indoor pool.

Plaintiff Luis Gonzalez was a professional window washer who first started cleaning Mathis’s skylight in the 1990s as an employee of Beverly Hills Window Cleaning.

In the mid-2000s, Gonzalez started his own professional window washing company. Gonzalez advertised his business as specializing in hard to reach windows and skylights. His marketing materials stated that he trained his employees to take extra care with their own safety when cleaning windows.

In or around 2007, Mathis began regularly hiring Gonzalez’s company to clean the skylight. Gonzalez would climb a ladder affixed to the house to access the roof. Directly to the right of the top of the ladder, a three-foot-high parapet wall runs parallel to the skylight. Mathis constructed the parapet wall for the aesthetic purpose of obscuring air conditioning ducts and pipes from view.

The path between the edge of the roof and the parapet wall is approximately 20 inches wide. Gonzalez would walk between the parapet wall and the edge of the roof and use a long, water-fed pole to clean the skylight. Gonzalez testified that he did not walk on the other side of the parapet wall — i.e., between the parapet wall and the skylight — because air conditioning ducts, pipes, and other permanent fixtures made the space too tight for him to navigate.

In 2012, at the direction of Mathis’s housekeeper, Gonzalez went up on to the roof to tell his employees to use less water while cleaning the skylight because water was leaking into the house. While Gonzalez was walking between the parapet wall and the edge of the roof on his way back to the ladder, he slipped and fell to the ground, sustaining serious injuries.

Gonzalez did not have workers’ compensation insurance.

The trial court granted Mathis’s motion for summary judgment, finding that Mathis owed no duty to Gonzalez pursuant to the Privette doctrine.

The Court of Appeal reversed. It held that a landowner may be liable to an independent contractor or its workers for injuries resulting from known hazards in certain circumstances.  The Court of Appeal held that disputed issues of material fact existed as to whether Gonzalez could have taken reasonable safety precautions to avoid the danger, precluding summary judgment.

Over the nearly three decades since the Supreme Court decided Privette, it has repeatedly reaffirmed the basic rule that a hirer is typically not liable for injuries sustained by an independent contractor or its workers while on the job.

Delegation is the key principle underlying this rule: Because the hirer presumptively delegates to the independent contractor the authority to determine the manner in which the work is to be performed, the contractor also assumes the responsibility to ensure that the worksite is safe, and the work is performed safely.

This rule applies even where the hirer was at least partially to blame due to its negligent hiring or its failure to comply with preexisting statutory or regulatory workplace safety requirements.

It also applies to a solo independent contractor who has no employees and who has declined to obtain workers’ compensation insurance, such that the contractor will receive no coverage for his or her injuries.

There are two situations in which a hirer has failed to effectively delegate all responsibility for workplace safety to the independent contractor.

First, a hirer will be liable where it exercises retained control over any part of the contractor’s work in a manner that affirmatively contributes to the worker’s injuries.

Second, a landowner can be liable if the landowner knew, or should have known, of a latent or concealed preexisting hazardous condition on its property, the contractor did not know and could not have reasonably discovered this hazardous condition, and the landowner failed to warn the contractor about this condition.

Gonzalez contended that Mathis’s roof was hazardous because the skylight could only be cleaned while walking along an unreasonably narrow path between the parapet wall and the roof’s exposed edge and, due to Mathis’s years-long failure to maintain the roof, this path was slippery and covered in loose sand, gravel, and rocks.

Gonzalez additionally argued that he was not hired to and lacked the expertise necessary to repair the roof or change the permanent fixtures on the roof such that he and his workers could clean the skylight safely.

Thus, Gonzalez concluded, Mathis’s duty to maintain the roof in a reasonably safe condition was never delegated to him.

But while Mathis may not have delegated any duty to repair the roof or make other structural changes to it, Mathis did delegate to Gonzalez a duty to provide a safe workplace to his workers and to perform the work for which he was retained in a safe manner.

This encompassed a duty on Gonzalez’s part to assess whether he and his workers could clean the skylight safely despite the existence of the known hazardous conditions on the roof.

It was undisputed that Gonzalez was aware of the roof’s dangerous conditions. Consequently, Gonzalez had a duty to determine whether he and his workers would be able to clean the skylight safely despite the known dangerous conditions.

In sum, pursuant to Privette, Mathis delegated all responsibility for workplace safety to Gonzalez. This delegation included a responsibility on Gonzalez’s part to ensure that he and his workers would be able to clean the skylight safely despite the known dangerous conditions on the roof which increased the risk of falling.

Mathis was not liable under the well- established precedent because he did not exercise any retained control over any part of Gonzalez’s work in a manner that affirmatively contributed to Gonzalez’s injury.

Under Privette, a landowner presumptively delegates to an independent contractor all responsibility for workplace safety, including the responsibility to ensure that the work can be performed safely despite a known hazard on the worksite.

For this reason, a landowner will generally owe no duty to an independent contractor or its workers to remedy or adopt other measures to protect them against known hazards on the premises.

Though a landowner may, nevertheless, be liable for a known hazard on the premises if it exercises its retained control over any part of the independent contractor’s work in a manner that affirmatively contributes to the injury, Gonzalez failed to present any evidence tending to show that such circumstances existed in this case.

LESSONS:

1.         The basic rule that a hirer is typically not liable for injuries sustained by an independent contractor or its workers while on the job.

2.         Because the hirer presumptively delegates to the independent contractor the authority to determine the manner in which the work is to be performed, the contractor also assumes the responsibility to ensure that the worksite is safe, and the work is performed safely.

3.         A hirer will be liable where it exercises retained control over any part of the contractor’s work in a manner that affirmatively contributes to the worker’s injuries.

4.         A landowner can be liable if the landowner knew, or should have known, of a latent or concealed preexisting hazardous condition on its property, the contractor did not know and could not have reasonably discovered this hazardous condition, and the landowner failed to warn the contractor about this condition.

What is the Rate of Interest on Unpaid Promissory Note?

In the recent decision in Soleimany v. Narimanzadeh, the appellate court reviewed the rate of interest that applies for the breach of a promissory note.

Under California law, if a promissory note evidencing a loan stipulates a usurious rate of interest—that is, a rate in violation of the limits set by article XV, section 1 of the California Constitution—the interest provision is void, and the principal sum is deemed due at maturity of the note without interest (meaning that any interest paid is applied against the principal so as to reduce the principal obligation owed).

However, if any of the principal amount is unpaid at the date of maturity, the lender is entitled to damages in the form of prejudgment interest on any such unpaid amount from the date of maturity of the loan to the date of judgment.

The appropriate rate of prejudgment interest is determined by the law applicable to contracts that do not stipulate a legal rate of interest.

If a contract stipulates a legal rate of interest, that rate is the applicable prejudgment rate. (Civ. Code, § 3289(a).)

In 2008, defendant Mostafa Narimanzadeh borrowed $350,000 from plaintiffs Kiumars and Shanaz “Suzy” Soleimany (husband and wife).

The loan was documented by a promissory note which was secured by a deed of trust on real property belonging to defendant Narimanzadeh.

In 2009, defendant Fariba Atighehchi borrowed $150,000 from plaintiff Shanaz Soleimany. The loan was documented by a promissory note signed by defendant Atighehchi; the note was not secured by a deed of trust on real property.

In a court trial on plaintiffs’ action against defendants for breach of the obligation to repay the loans, the trial court voided the usurious interest rate on both notes and deemed the principal sum of the notes due at maturity.

Any interest paid by defendants up to maturity would be applied as a credit against the principal of the loans to determine if, in fact, any principal remained due at the date of maturity.

Civil Code section 3289(b) provides that if a contract “entered into after January 1, 1986, does not stipulate a legal rate of interest, the obligation shall bear interest at a rate of 10 percent per annum after a breach.”

But subdivision (b) excludes from its coverage any “note secured by a deed of trust on real property.”

For the 2009 loan, that was not secured by a deed of trust on real property, the trial court fixed the prejudgment interest rate on any unpaid principal at 10 percent.

On the 2008 loan, however, the trial court ruled that Civil Code section 3289(b) did not apply, because the promissory note was secured by a deed of trust on real property, and therefore plaintiffs were entitled to no prejudgment interest on any principal due at the date of maturity on that loan.

Based on the calculations compelled by these rulings, the evidence showed that defendants had in fact overpaid the loans.

Therefore, the court concluded that plaintiffs had not proved any damages, granted defendants’ motion for judgment, and awarded attorney fees and costs to the defendants as prevailing parties.

In the appeal by plaintiffs, the appellate court held that even though Civil Code section 3289(b) does not apply to the 2008 loan because it was secured by a deed of trust on real property, the plaintiffs were nonetheless entitled to prejudgment interest on the unpaid principal at the date of maturity at the rate of 7 percent, the default rate of prejudgment interest provided in article XV, section 1 of the California Constitution, which applies except when a statute provides otherwise.

Therefore, the judgment was reversed in part and the matter was remanded to the trial court for further proceedings.

The trial court on remand was ordered to conduct further trial proceedings on plaintiffs’ potential damages, in which the parties may present evidence as to whether, using a prejudgment interest rate of 7 percent against any amounts of unpaid principal at the date of maturity, plaintiffs incurred any damages with respect to the 2008 loan.

In light of such evidence, the trial court should enter a new judgment as appropriate.

Further, in light of the new judgment, the court shall reconsider as appropriate which parties (if any) are prevailing parties, and the amount of attorney fees and costs to which any such prevailing parties are entitled.

The relevant factual and procedural background in this case was undisputed.

In 2008, defendant Narimanzadeh borrowed $350,000 from plaintiffs Kiumars and Shanaz Soleimany. The loan was documented by a promissory note secured by a deed of trust on defendant Narimanzadeh’s specified real property located on Chantilly Road in Los Angeles.

According to the note, defendant Narimanzadeh promised to repay the principal amount, plus interest at a rate of 16 percent per annum, by March 1, 2009.

In 2009, defendant Atighehchi borrowed $150,000 from plaintiff Shanaz Soleimany. The loan was documented by a promissory note, in which defendant Atighehchi agreed to repay the principal amount, plus interest at a rate of 16 percent per annum.

It was not secured by a deed of trust on real property.

Defendants failed to pay off their respective loans by the 2009 dates of maturity. However, they continued to make payments on the loans through October 30, 2015, and at some point (the record is not clear), started paying interest at the rate of 10 percent (instead of 16 percent).

The parties agreed defendants paid plaintiffs $601,568.96 but did not distinguish between the two loans.

In 2017, plaintiffs filed the operative, first amended complaint against defendants.

As to the 2008 loan, plaintiffs alleged breach of written loan agreement against defendant Narimanzadeh, and sought judicial foreclosure against Narimanzadeh’s real property securing the loan.

As to the 2009 loan, plaintiffs alleged breach of written loan agreement against defendant Atighehchi.

Defendants conceded breach of the written loan agreements by not paying the principal on the loans by the date of maturity, but raised as an affirmative defense that the 16 percent interest rate on the loans was void as usurious.

Pursuant to the parties’ stipulation, the matter was tried to the court in two phases. In the first phase, the court considered defendants’ usury affirmative defense, and, assuming the 16 percent interest rate was usurious, the rate of prejudgment interest, if any, the law would apply to any unpaid principal on the loans.

The court found that the interest rate of 16 percent on both loans was void as usurious, exceeding the 10 percent maximum permissible rate under Article XV, section 1 of the California Constitution.

Therefore, the loans were to be treated as if they did not specify an interest rate, and the principal (without such interest) was deemed due at maturity. Any usurious interest paid on the notes was to be applied against the principal to determine if any principal amounts were still unpaid.

With respect to the issue of prejudgment interest on the principal due to which the law entitled plaintiffs, the court applied Civil Code section 3289(b) to the 2009 loan, as it was not secured by a deed of trust on real property.

Thus, the court determined that prejudgment interest at the legal rate of 10 percent would be due on the unpaid principal at the date of maturity.

However, because Civil Code section 3289(b) did not apply to the 2008 loan, which was secured by a deed of trust on defendant Narimanzadeh’s real property, the court ruled that plaintiffs were not entitled to prejudgment interest on that loan.

Thereafter, the court conducted the second phase of the trial to determine whether, based on its ruling in the first phase, plaintiffs were owed any sums as damages in addition to what defendants had already paid on their respective loans.

Plaintiffs called one witness, Winnes Wong, CPA. In calculating the prejudgment interest due on the amounts of the unpaid principal from the date of maturity of both loans (the measure of plaintiffs’ damages), Ms. Wong applied a prejudgment interest rate of 10 percent to both loans, even though the trial court had determined in the first phase that such prejudgment interest applied only to the 2009 loan.

Ms. Wong conceded that if no prejudgment interest was attributed to the unpaid principal on the 2008 loan (as was compelled by the court’s ruling in the first phase), there would be an overpayment by defendants of $84,914 on the two loans combined.

On such evidence, defendants orally moved for a directed verdict, based on plaintiffs’ failure to establish damages. The trial court construed defendant’s motion as a motion for judgment pursuant to Code of Civil Procedure section 631.8 and granted the motion.

The court issued its tentative decision, which became the final statement of decision, in which it found that plaintiffs had failed to establish damages.

Defendants filed a motion for attorney fees and costs as prevailing parties.

The court entered judgment pursuant to its statements of decisions under which plaintiffs took nothing by their operative complaint against defendants and defendants recovered from plaintiffs their costs of suit and attorney fees in amounts to be determined by the court.

Plaintiffs did not challenge the trial court’s ruling that the 16 percent interest rate on both loans was usurious and that each note was payable at maturity without the specified interest.

Further, they did not challenge the court’s ruling applying the 10 percent rate of prejudgment interest of Civil Code section 3289(b) to the 2009 loan.

However, as to the 2008 loan, they contended that they are entitled to prejudgment interest of 10 percent under article XV, section 1 of the California Constitution.

On loans not primarily for personal, family or household purposes, the California Constitution permits parties to contract for interest not to exceed the higher of 10 percent per annum or 5 percent over the amount charged by the Federal Reserve Bank of San Francisco on advances to member banks on the 25th day of the month before the loan. In the pertinent time periods here, the higher of these two rates was 10 percent.

Plaintiffs were entitled to prejudgment interest on the unpaid principal of the 2008 loan, but not at the rate of 10 percent to which the parties could have contracted under article XV, section 1, but rather at a rate of 7 percent (calculated from the date of maturity of the loan), which is the default prejudgment interest rate set by article XV, section 1 except as provided by statute.

Because the 16 percent interest rate on the 2008 and 2009 loans exceeded the constitutional maximum, the interest provisions were void and the notes were properly treated as if they called for no interest.

Despite the specified void interest rate established by the notes, plaintiffs were still entitled to prejudgment interest as provided by law on any unpaid principal at maturity.

Civil Code section 3289 provides rules for prejudgment interest rates applicable to breaches of contract. If the contract specifies a legal rate of interest, a court will apply that rate “after a breach [of contract] until the contract is superseded by a verdict or other new obligation.”

If a contract does not stipulate a legal rate of interest, a 10 percent per annum interest rate applies in the event of a breach.

However, “the term contract shall not include a note secured by a deed of trust on real property.”

In the present case, as the trial court correctly concluded, the 10 percent prejudgment interest rate of Civil Code section 3289(b) applied to the 2009 loan, which was not secured by a deed of trust, but not to the 2008 loan, which was.

But the inapplicability of Civil Code 3289(b) to the 2008 loan does not mean that plaintiffs were entitled to no prejudgment interest on any principal due at the date of maturity.

Besides permitting parties in certain situations to contract for a higher rate of interest, article XV, section 1 provides a default prejudgment interest rate of 7 percent per annum. It states in relevant part: “The rate of interest upon the loan or forbearance of any money, goods, or things in action, or on accounts after demand, shall be percent per annum but it shall be competent for the parties to any loan or forbearance of any money, goods or things in action to contract in writing for a [different] rate of interest” as specified.

The California Constitution provides for prejudgment interest at 7 percent per annum.

Thus, although no case (until now) has so held, as observed by a leading treatise, for a note secured by a deed of trust on real property, in the absence of a rate specified in the contract, the prejudgment rate will be seven percent.

Plaintiffs’ contention that the applicable interest rate is 10 percent per annum was without merit.

The constitutional provision merely allows parties to “contract in writing for a rate of interest” up to 10 percent.

Absent such a specified legal contract rate (and a promissory note with a void usurious rate is treated as having no rate specified), the default prejudgment interest rate remains at 7 percent, unless otherwise provided by statute.

The trial court erred in not applying prejudgment interest of 7 percent per annum to the 2008 loan, from the date of maturity to judgment.

LESSONS:

1.         A lender should always require a promissory note that specifies a legal rate of interest.

2.         If a contract stipulates a legal rate of interest, that rate is the applicable prejudgment rate under Civil Code § 3289(a).)

3.         The California Constitution provides for prejudgment interest at 7 percent per annum.

4.         For a note secured by a deed of trust on real property, in the absence of a rate specified in the contract, the prejudgment rate will be 7 percent per annum.

5.         Always consider security in the form of a deed of trust for a promissory note, and the better security is a first deed of trust on real property that has sufficient value to allow recovery on the debt from a foreclosure sale.

6.         The better practice is to specify an interest rate of no more than ten percent, unless the loan is "made or arranged" by a license real estate broker in which case the usuary laws do not apply, but that is a subject for another newsletter.

Should Legal Documents Be Read and Understood?

This issue was addressed in the recent case of Eskra v. Grace wherein Brandy L. Eskra (Brandy) filed a probate petition seeking to be appointed the personal representative of her late husband’s estate.

The trial court denied her petition based on a premarital agreement (Agreement) that waived Brandy’s interests in her husband’s separate property, and the court appointed his parents (respondents) co-administrators of the estate.

In a prior appeal this court held Brandy was entitled to introduce extrinsic evidence in support of her argument that she and her late husband mistakenly believed the Agreement would apply only in the event of divorce, rather than upon death.

On remand, the trial court found that the mistake was a unilateral mistake on Brandy’s part and that she was not entitled to rescission. Brandy again appealed.

The appellate court affirmed the trial court's ruling.

Because Brandy failed to read the Agreement and to meet with her attorney to discuss it before signing it, she bore the risk of her mistake and was not entitled to rescission. 

Scott died intestate (i.e., without a will or trust) in an accident in March 2018.

The day before Brandy and Scott married, they executed the Agreement.

The trial court concluded, and the parties do not dispute, that the language of the Agreement effectively terminated any rights Brandy had in Scott’s estate, should he predecease her.

If the agreement was valid and enforceable, Scott’s minor daughter from a prior marriage would inherit Scott’s estate by way of intestate succession.

If the agreement was not valid or enforceable, then Brandy and Scott’s minor daughter would share in Scott’s estate.

The Agreement provided that the parties desire that all property owned by either of them be preserved as the separate property of each party. All property acquired by either party by gift or inheritance during their marriage, or by earnings, will be entirely his or her separate property.

The Agreement specified that the parties intended to occupy Scott’s home, that any payments made by Brandy toward that property would become Scott’s separate property, and that Brandy would not be reimbursed for any such payments in the event of the parties’ separation or divorce, or upon the death of either party.

The Agreement stated that both parties were represented by independent counsel, and it included a standard integration clause stating that it contained the entire understanding and agreement of the parties.

After Scott died in 2018, Brandy petitioned to be appointed personal representative to administer his estate.

Scott’s parents, respondents Steve Eskra and Catherine Grace, filed a competing petition for appointment as personal representatives.

The court found the Agreement was voluntary and enforceable. The court denied Brandy’s petition and granted the competing petition of Scott's parents, appointing the parents as co-administrators of the estate.

On May 1, 2015, Brandy and Scott went to the attorney's office to sign the Agreement.

Neither Brandy nor Scott reviewed the Agreement before they signed it.

Following the close of evidence and argument, the trial court found the doctrine of mutual mistake did not apply because Scott was not mistaken when he signed the Agreement.

The court relied on the attorney's testimony that the Agreement reflected Scott’s intentions and the testimony of other witnesses that Scott wanted his estate to go solely to his daughter.

As to unilateral mistake, the trial court found that Brandy established that Brandy did not want the Agreement to apply in the event of Scott’s death, but the court held Brandy’s unilateral mistake did not justify rescission of the Agreement because there was insufficient evidence that Scott encouraged or fostered Brandy’s mistaken belief.

Further, the court determined Brandy “bears the risk of her mistake” because she did not act “with reasonable care” when she failed to read the Agreement or consult with her attorney after it was revised.

A party may rescind a contract if the party’s consent was given by mistake.

The grounds for rescission are stated in Civil Code section 1689. One such ground exists when consent to a contract is given by "mistake." The term "mistake" in Civil Code section 1689, however, is a legal term with a legal meaning. The type of "mistake" that will support rescission is defined in Civil Code section 1577 ("mistake of fact") and Civil Code section 1578 ("mistake of law").

Section 1577 provides, “Mistake of fact is a mistake, not caused by the neglect of a legal duty on the part of the person making the mistake, and consisting in: 1. An unconscious ignorance or forgetfulness of a fact past or present, material to the contract; or, 2. Belief in the present existence of a thing material to the contract, which does not exist, or in the past existence of such a thing, which has not existed.”

Section 1578 provides, “Mistake of law constitutes a mistake, within the meaning of this Article, only when it arises from: 1. A misapprehension of the law by all parties, all supposing that they knew and understood it, and all making substantially the same mistake as to the law; or, 2. A misapprehension of the law by one party, of which the others are aware at the time of contracting, but which they do not rectify.”

A mistake of law is when a person knows the facts as they really are, but has a mistaken belief as to the legal consequences of those facts.

Misinterpretation of a contract is a mistake of law.

In the present case, Brandy claims she was mistaken as to the content of the Agreement, because she believed it had been amended to remove all provisions making it applicable in the event of death.

Brandy’s mistake claim is that she did not know the facts as they really were, not that she had a mistaken belief as to the legal consequences of the real facts.

Therefore, although misinterpretation of a contract is a mistake of law, the trial court properly analyzed the rescission claim as being based on a unilateral mistake of fact as to whether the Agreement had been amended in accordance with Brandy’s wishes.

It is well established that ordinary negligence does not constitute neglect of a legal duty within the meaning of Civil Code section 1577.

A necessary prerequisite for obtaining rescission of a contract based on unilateral mistake of fact is that the party seeking rescission did not bear the risk of the mistake.

A unilateral mistake of fact renders an agreement voidable where the mistake was known to and encouraged or fostered by the other party.

The critical question in the present case was whether Brandy’s failure to read the Agreement and meet with the attorney regarding the changes to the Agreement constituted neglect of a legal duty within the meaning of Civil Code section 1577.

The California Supreme Court has previously addressed whether the failure to read a contract constitutes such neglect and concluded under the circumstances, the failure of plaintiff to recognize that the release included a discharge of liability for personal injuries had been held to be attributable to his own neglect

It is well established, in the absence of fraud, overreaching or excusable neglect, that one who signs an instrument may not avoid the impact of its terms on the ground that he failed to read the instrument before signing it.

Failure to make reasonable inquiry to ascertain or effort to understand the meaning and content of the contract upon which one relies constitutes neglect of a legal duty such as will preclude recovery for unilateral mistake of fact.

Absent some credible evidence showing consent was obtained through fraud or compulsion, a party who has signed an agreement with the capacity of reading and understanding its contents will be bound by its contents.

The failure to read a contract constitutes failure to act in good faith and in accordance with reasonable standards of fair dealing within the meaning of that section.

Generally, a party who assents to a writing is presumed to know its contents and cannot escape being bound by its terms merely by contending that the party did not read them; the party’s assent is deemed to cover unknown as well as known terms.

Brandy suggested Scott had a heightened disclosure obligation due to their intimate relationship. But parties negotiating a premarital agreement are not presumed to be in a confidential relationship that would give rise to fiduciary duties owed between spouses or to the presumption of undue influence when a transaction benefits one of the parties.

On the contrary, it is evident that the Uniform Premarital Agreement Act was intended to enhance the enforceability of premarital agreements, a goal that would be undermined by presuming the existence of a confidential or fiduciary relationship.

Even considering the nature of her relationship with Scott, Brandy bore the risk of her mistake because she not only failed to read the Agreement, but she also failed to attend the meeting with the attorney that was scheduled for the purpose of reviewing the revised Agreement before Brandy signed it.

Family Code section 1615, subdivision (c)(2)(B), provides that, for agreements executed after January 1, 2020, the party against whom enforcement is sought must have seven days between the time that party was first presented with the final agreement and the time the agreement was signed, regardless of whether the party is represented by legal counsel.

LESSONS:

1.         A mistake of law is when a person knows the facts as they really are, but has a mistaken belief as to the legal consequences of those facts, and misinterpretation of a contract is a mistake of law.

2.         A necessary prerequisite for obtaining rescission of a contract based on unilateral mistake of fact is that the party seeking rescission did not bear the risk of the mistake.

3.         A unilateral mistake of fact renders an agreement voidable where the mistake was known to and encouraged or fostered by the other party.

4.         The failure to read a contract constitutes failure to act in good faith and in accordance with reasonable standards of fair dealing within the meaning of that section.

5.         This case illustrates the need for parties to read and understand the content of their agreements, and to obtain legal counsel as to the contents and effect of the agreement.

Is a Letter of Intent Enforceable as a Binding Contract in California?

I reported on the opinion in the previous appeal in this case of Munoz v. Pater on January 8, 2022, and this new decision confirms when a letter of intent constitutes a binding contract.

Luis Munoz and LR Munoz Real Estate Holdings, LLC (LRM Holdings) (together, Munoz) bought a hotel from a company owned and managed by Rajesh Patel (Rajesh) and his son, Shivam Patel (Shivam). Before escrow closed, the parties negotiated a leaseback arrangement requiring Munoz to lease the hotel back to the Patels’ company after the sale.

Escrow closed and the parties thereafter executed the previously-negotiated lease—or so Munoz thought.

According to Munoz, the Patels secretly swapped out the agreed- upon lease for a different one—a lease substantially more beneficial to the Patels and worse for Munoz—and then tricked him into signing it.

Munoz filed the present action against the Patels, an alleged alter ego entity of the Patels called Inn Lending, LLC (Inn Lending), and other defendants involved in the sale.

Rajesh and Inn Lending demurred to the operative second amended complaint, the trial court sustained the demurrer without leave to amend, and Munoz appealed the ensuing judgment.

In a prior opinion, the appellate court reversed the judgment and determined, among other things, that Munoz alleged a viable fraud cause of action based on a theory of fraud in the execution.

With the benefit of supplemental briefs, the appellate court now concluded the operative complaint alleged facts sufficient to state a viable cause of action for fraud in the execution against Rajesh, but not against Inn Lending.

Additionally, it concluded the complaint plead facts sufficient to state an elder financial abuse cause of action against both Rajesh and Inn Lending.

Finally, it concluded Munoz failed to establish that the trial court erred in dismissing his breach of contract and bad faith causes of action.

Munoz was told that a private lender, Inn Lending, would finance the Hotel purchase at six percent annual interest, secured by a deed of trust on the Hotel only. Munoz would need to execute a personal guarantee, but he would not have to pledge collateral in connection with the guarantee.

These proposed terms were presented to Munoz in a letter of intent, which he signed on August 6. That same day, Munoz paid Hamilton a $7,500 administrative fee to have the loan documents prepared.

As it turns out, Inn Lending did not exist when Munoz signed the letter of intent. It came into existence several weeks later, on August 23. Even worse, Inn Lending—once it finally came into existence—was the Patels’ alter ego entity, which they managed and controlled.

On August 24, Hamilton sent the loan documents to Munoz. Like the leaseback arrangement, the loan was another bait-and-switch.

The approximately 300 pages of loan documents varied from the letter of intent in several ways: (1) the interest rate was 7.3 percent, not 6 percent; (2) the payoff amount was $300,000 higher than it should have been; and (3) the loan was secured not only by the Hotel, but also by Munoz’s personal property and his other real estate holdings worth “several millions of dollars.”

On September 5, Munoz—unaware of these differences—signed the loan documents, and Inn Lending became Munoz’s secured lender.

In November, Munoz filed a complaint in the superior court against the Patels, PL, Inn Lending, and other defendants involved with the sale and loan.

For the fraud cause of action, Munoz sought: (1) monetary damages; (2) a judicial declaration of the parties’ contractual rights; and (3) either rescission of the purchase agreement, the September 13 lease, and the loan documents, or reformation of the September 13 lease and the loan documents.

The trial court sustained the demurrer to Munoz’s first cause of action for breach of contract, reasoning he failed to plead facts showing the existence of a binding contract between himself and the demurring parties.

On appeal, Munoz contended the letter of intent—which the parties executed in anticipation of the loan transaction—was “binding as to certain loan terms” because the loan terms were “negotiated and agreed to.” The appellate court disagreed.

Preliminary negotiations or an agreement for future negotiations are not the functional equivalent of a valid, subsisting agreement.  A manifestation of willingness to enter into a bargain is not an offer if the person to whom it is addressed knows or has reason to know that the person making it does not intend to conclude a bargain until he has made a further manifestation of assent.

On its face, the letter of intent does not evince the parties’ mutual assent to the proposed loan terms expressed therein.

It begins with a proviso stating it is merely a “financing proposal,” and the “proposal is for discussion purposes only.”

Elsewhere, it states it does “not serve as a binding agreement on the part of [the] lender or [the] applicant.”

Further, the letter of intent is notable for what it does not do. Nowhere does it require the lender to issue a loan upon the parties’ execution of the letter of intent or upon the satisfaction of any other condition precedent.

Instead, it simply requires the lender to “begin its due diligence” after the parties have executed the letter of intent and Munoz has paid an administrative fee.

Because the letter of intent unambiguously states it is a nonbinding proposal for discussion purposes only, it cannot reasonably be read as an enforceable contract binding the parties to issuance of a loan with specific loan terms.

On appeal, Munoz did not argue that Inn Lending or Rajesh entered into, or breached, any alleged contract other than the letter of intent.  Further, he made no other cogent argument in support of his claim that the trial court erroneously sustained the demurrer to his breach of contract cause of action.

Thus, Munoz did not satisfy his burden of establishing that the court erred by sustaining the demurrer to his breach of contract cause of action.

Munoz’s challenge to the dismissal of his bad faith cause of action fared no better.

The trial court found Munoz did not plead facts stating a bad faith cause of action because such a claim requires “the existence of a binding contract,” and, as just noted, the letter of intent is not a binding contract.

The operative complaint and Munoz’s appellate briefs were, at times, vague concerning which misrepresentations, and Munoz alleged there were three categories of fraudulent misrepresentations:

(1) the defendants’ false promises that PL would enter into a triple-net lease;

(2) the defendants’ misleading statements implying the September 13 lease was the July 17 lease, and their related concealment of the fact the Patels had swapped the leases; and

(3) the defendants’ false statements on the letter of intent for the loan.

The second category was sufficient to state a cause of action because it gave rise to a valid cause of action for fraud in the execution against Rajesh.

Fraud in the execution, sometimes known as fraud in the inception or fraud in the factum, occurs when “the promisor is deceived as to the nature of his act, and actually does not know what he is signing, or does not intend to enter into a contract at all.”

Where there is fraud in the execution, mutual assent is lacking, and the contract is void.

If, because of a misrepresentation as to the character or essential terms of a proposed contract, a party does not know or have reasonable opportunity to know of its character or essential terms, then he neither knows nor has reason to know that the other party may infer from his conduct that he assents to that contract. In such a case there is no effective manifestation of assent and no contract at all.

Fraud in the execution most often arises where some limitation—such as blindness, illness, or illiteracy—prevents a party from reading or understanding a contract he or she is about to sign.

Fraud in the execution can also arise in cases like the present one, where the parties reach consensus on the material terms of an agreement, but one side surreptitiously swaps or modifies the agreement memorializing the terms without the other side’s knowledge.

As a procedural matter, parties usually invoke fraud in the execution as a defense to the enforcement of an ostensible contract—for example, to oppose the enforcement of an arbitration agreement.

Or, in some cases, they invoke the doctrine while seeking rescission of a contract or a judicial declaration that the contract is void for lack of mutual assent.

This case did not fall neatly into either of these categories. Munoz sought recission or reformation of the September 13 lease. However, he prayed for these remedies in connection with a fraud cause of action that seeks, as an alternative remedy, monetary damages.

Despite the somewhat unusual procedural posture presented here, there was no reason why Munoz’s seventh cause of action cannot be based on a fraud in the execution theory— at least so long as he alleges and ultimately proves the essential elements of a traditional cause of action for fraud.

Without question, the allegations of fraud in the inception and fraudulent failure to perform state a cause of action for fraud.

Fraud in the factum is a traditional fraud.  Those essential elements are

(1) misrepresentation (false representation, concealment, or nondisclosure);

(2) knowledge of falsity (scienter);

(3) intent to defraud (i.e., to induce reliance);

(4) justifiable reliance; and

(5) resulting damage.

Generally, it is not reasonable to fail to read a contract; this is true even if the plaintiff relied on the defendant’s assertion that it was not necessary to read the contract.  Reasonable diligence requires a party to read a contract before signing it.

However, a party’s failure to read a contract does not necessarily negate reasonable reliance where, as here, an allegedly defrauded party seeks equitable remedies such as reformation of the subject contract.

It is established in California that the person who has been induced to enter into a contract by fraudulent misrepresentations as to its contents may rescind or reform the contract.

His negligence in failing to read the contract does not bar his right to relief if he was justified in relying upon the representations.

Where the failure to familiarize one’s self with the contents of a written contract prior to its execution is traceable solely to carelessness or negligence, reformation as a rule should be denied; but that where such failure, and perhaps negligence, is induced by the false representations and fraud of the other party to the contract that its provisions are different from those set out, the courts, even in the absence of a fiduciary or confidential relationship between the parties, should reform, and in most cases have reformed, the instrument so as to cause it to speak the true agreement of the parties.

Munoz alleges facts sufficient to establish reasonable reliance, despite his failure to read the September 13 lease. In particular, he alleges:

(1) he is 80 years old, Spanish is his primary language, and he is “not proficient” in reading English, the language in which the lease is written;

(2) he has never purchased a hotel before, let alone as part of a sale/leaseback arrangement; (3) the July 17 lease was circulated and confirmed as “the final lease at least four times,” with the last confirmation coming “just days before the close of escrow”;

(4) Munoz “reviewed and approved the July 17 Lease”;

(5) the email attaching the July 17 lease only reserved PL’s right to “make further edits in case there was an error or oversight,” and no one associated with PL ever claimed there was an error or oversight;

(6) in his email attaching the September 13 lease, Shivam did not disclose that he and Rajesh had swapped the leases; and

(7) the differences between the leases were “not so numerous to be obvious” to the naked eye.

These allegations plead adequate facts to satisfy the element of reasonable reliance.

For the reasons stated above, Munoz alleged facts sufficient to state a fraud in the execution cause of action based on Rajesh’s substitution of the leases and his related concealment of the swapped leases.

Munoz’s third cause of action alleges the demurring parties violated the Elder Abuse and Dependent Adult Civil Protection Act (Welf. & Inst. Code, § 15600, et seq.; hereafter, the Act).

In particular, it alleges they committed financial elder abuse in violation of Welfare and Institutions Code section 15610.30. Further, it alleges Munoz is entitled to remedies under Welfare and Institutions Code section 15657.6, which governs the return of property taken from elders who lack capacity or are of unsound mind.

The operative complaint does not allege that Munoz lacked capacity or was of unsound mind during the period described in the complaint. Indeed, Munoz does not contend otherwise. In the absence of such factual allegations, the complaint does not establish that the demurring parties had a duty to return property to Munoz under Welfare and Institutions Code section 15657.6.

However, that determination does not end the inquiry into whether Munoz alleged a violation of the Act. As noted, the third cause of action does not merely seek a return of property under Welfare and Institutions Code section 15657.6.

It also alleges the demurring parties committed financial elder abuse under Welfare and Institutions Code section 15610.30. A financial elder abuse claim lies when a person or entity “[t]akes, secretes, appropriates, obtains, or retains real or personal property of an elder or dependent adult for a wrongful use or with intent to defraud, or both,” or assists in such conduct. (Welf. & Inst. Code, § 15610.30, subd. (b).)

Under these standards, the operative complaint pleads facts sufficient to state a financial elder abuse cause of action. It alleges Munoz is 80 years old and a resident of Los Angeles. Thus, it alleges he is an “elder” for purposes of the Act. (Welf. & Inst. Code, § 15610.27.)

The complaint also alleged the demurring parties received Munoz’s property.

Because the operative complaint alleges that the demurring parties obtained the property of an elder for a wrongful purpose, or with fraudulent intent, it alleged facts sufficient to state a financial elder abuse cause of action.

LESSONS:

1.         Preliminary negotiations or an agreement for future negotiations are not the functional equivalent of a valid, subsisting agreement.

2.         If a letter of intent is intended to not be binding by one of the parties, it should unambiguously state it is a nonbinding proposal for discussion purposes only, it should not be read as an enforceable contract binding the parties to issuance of a loan with specific loan terms.

3.         If the operative complaint alleges that the demurring parties obtained the property of an elder for a wrongful purpose, or with fraudulent intent, it alleged facts sufficient to state a financial elder abuse cause of action.

When is it a Lease or a License Agreement in California Real Estate?

This issue was explored in the recent case of Castaic Studios, LLC v. Wonderland Studios, LLC.

Plaintiff Castaic Studios, LLC (Castaic) and Wonderland Studios, LLC (Wonderland) entered an agreement under which Castaic granted Wonderland the “exclusive right to use” certain areas of its commercial property.

The agreement specified that it was a “license agreement,” as opposed to a lease, with Castaic “retain[ing] legal possession and control” of the premises.

The agreement was to be “governed by the contract[] laws and not by the landlord tenant laws.”

When Wonderland defaulted, Castaic nonetheless filed an unlawful detainer action seeking possession of the property.

The trial court sustained Wonderland’s demurrer without leave to amend, reasoning that Castaic had waived its right to pursue the remedy of unlawful detainer.

This was correct, so the appellate court affirmed.

Castaic owns a commercial property in Castaic, California. In October 2021, Castaic entered a “License Agreement” with Wonderland, under which Castaic granted Wonderland “the exclusive,” but “non-possessory” right “for the use of” the property, with the exception of a stage area and storage building.

The agreement afforded Wonderland 35 consecutive one-month options to extend. To exercise these options, Wonderland was required to timely make all payments owed and to send Castaic a letter of intention to extend the term for the next period at least 20 days before the end of the current month.

In July 2022, Wonderland was in default of the payments owed and failed to timely send a letter of intention to extend the term for August of 2022 as required.

Therefore, Castaic alleged the agreement expired by its own terms as of July 31, 2022.

On July 13, 2022, Castaic sent Wonderland an email notifying Wonderland that it was in default.

Section 6 of the agreement states it was not a lease or any other interest in real property. It was a contractual arrangement that creates a revocable license. Licensor retains legal possession and control of the Premises and the areas assigned to Licensee. Licensor has the right to terminate this Agreement due to Licensee's default.

Section 13.3(a) provides that if Wonderland defaults, Castaic may immediately terminate Licensee’s right to use of the Premises by any lawful means, in which case Licensor’s obligations under this Agreement shall immediately terminate and Licensor shall have option to immediately take over use of the Premises from the Licensee.

Section 29 provides, “[t]his agreement will be governed by the contract[] laws and not by the landlord tenant laws.”

Castaic filed its complaint for unlawful detainer against Wonderland on August 22, 2022, seeking possession of the property and unpaid “rent.”

Wonderland demurred on the grounds the agreement expressly states it is not governed by landlord-tenant laws and the three-day notice Castaic served on Wonderland did not contain the information that Code of Civil Procedure section 1161(2) requires before the filing of an unlawful detainer action.

The trial court sustained the demurrer without leave to amend.

Relying on sections 6 and 29 (designating agreement as “revocable license,” “not a lease,” and governing law as “contract[] law,” not “landlord tenant law”), the court concluded that Castaic had waived its right to pursue the remedy of unlawful detainer.

The court reasoned Castaic has not alleged and cannot allege a relationship between it and Wonderland that would allow Castaic to pursue an unlawful detainer action against Wonderland.

The trial court also observed that even if Castaic could state a claim under the unlawful detainer statute, Castaic failed to comply with the statutory notice requirements set forth in Code of Civil Procedure section 1161(2).

Castaic asserted that the trial court erred in sustaining Wonderland’s demurrer without leave to amend, arguing that despite express designation of “contract[] laws” and disavowal of “landlord tenant laws” as the governing law, the agreement did not preclude Castaic from resorting to the summary proceedings of unlawful detainer.  

The fundamental goal of contract interpretation is to give effect to the mutual intention of the parties as it existed at the time they entered into the contract.

When the contract is clear and explicit, the parties’ intent is determined solely by reference to the language of the agreement.”

The words of the contract are to be understood in their ordinary and popular sense.

The principles of contract interpretation apply equally to leases as to any other kind of contract.

Anyone may waive the advantage of a law intended solely for his benefit. But a law established for a public reason cannot be contravened by a private agreement.

Unlawful detainer is a remedy available to a landlord against a tenant who breaches a lease and is intended and designed to provide an expeditious remedy for the recovery of possession of real property.

Whether an agreement constitutes a lease or a license is “a subtle pursuit.”

Although Castaic argued at length that the agreement was in fact a lease despite its express designation to the contrary, the appellate court did not need to decide this issue to resolve the appeal.

Even assuming the agreement contains some elements of a lease, its express terms show the parties’ intent to waive any rights afforded by the landlord-tenant laws, including a landlord’s remedy of unlawful detainer. That is what the trial court concluded, and the appellate court agreed.

The parties’ intent to avoid application of landlord-tenant law is evinced by Castaic retaining “legal possession” of the premises. Simply put, the parties unmistakably recorded their intent to forego the application of laws specific to landlord tenant relationships.

On appeal, Castaic urged that the parties may not elect to contract around particular statutory protections.

But Castaic did not cite a single authority that supports this position. Nor did Castaic argue that the parties’ election to disavow the applicability of landlord-tenant laws violated any public policy.

A bedrock principle of contract law in California has always been that competent parties should have the utmost liberty of contract to arrange their affairs according to their own judgment so long as they do not contravene positive law or public policy.

Because the parties were found to have waived the landlord-tenant laws, no unlawful detainer could be filed.

LESSONS:

1.         The fundamental goal of contract interpretation is to give effect to the mutual intention of the parties as it existed at the time they entered into the contract.

2.         When the contract is clear and explicit, the parties’ intent is determined solely by reference to the language of the agreement.”

3.         The words of the contract are to be understood in their ordinary and popular sense.

4.         The principles of contract interpretation apply equally to leases as to any other kind of contract.

5.         Anyone may waive the advantage of a law intended solely for his benefit. But a law established for a public reason cannot be contravened by a private agreement.

Is Rescission of a Contract Available When Consent Was Caused by Menace?

It sometimes seems like California has a statute for everything. In the recent appellate decision in the Tran v. Nguyen case, the parties disputed whether there is a civil cause of action for extortion.

The trial court agreed with defendant Que Phung Thi Nguyen’s contention that plaintiff Bruce Tran’s extortioncause of action could only move forward if it arose out of a threat to initiate a false criminal or civil prosecution—and thus no such cause of action could be based on the facts in the case. The court of appeal disagreed.

Civil Code sections 1566, 1567, and 1570 establish a right to rescission in cases in which a person’s consent to atransaction was obtained by menace, threats of confinement, of unlawful violence to the person or his or her property, or of injury to a person’s character. This is effectively the civil version of extortion.

Here, Nguyen allegedly threatened to expose the existence of plaintiff’s child birthed by another woman during his marriage; and the appellate court concluded such a threat falls within the statutory prohibition.

The judgment entered against plaintiff Bruce Tran was reversed, and the case remanded to the trial court with directions to allow Plaintiff leave to amend his cause of action for

recovery of the funds he paid to Nguyen as a result of her threats to reveal their affair— and the existence of their child—to his wife.

Tran’s first amended complaint (FAC) against Nguyen stated causes of action for intentional infliction of emotional distress, and civil extortion.

The complaint alleged Tran and his wife were married in 2003 and have two children.

Between 2010 and 2011, the Trans separated. During their separation, Tran began a romantic relationship withNguyen; a few weeks into the relationship, Nguyen informed Tran she was pregnant with his child.

According to the FAC, Nguyen later “began to blackmail” Tran by demanding that he pay her thousands ofdollars, or she would disclose their relationship and the child’s existence to his wife.

Tran claimed he was afraid he might lose his family. He therefore paid Nguyen approximately $500,000 and purchased a BMW vehicle for her.

In 2017, Tran learned Nguyen had created a Facebook account in the name of the child, and she used it to post pictures featuring Tran, herself, and the child.

In 2018, when he concluded Nguyen’s financial demands would never cease, Tran refused to pay her more orbuy her the home she demanded.

Nguyen then added more than 500 photos to the child’s Facebook account. In the account, Nguyen referred toTran as her husband. She restored the account settings to public in late December 2018.

In January 2019, Nguyen sent an email directly to Tran’s wife, informing her of Tran’s relationship with Nguyen and providing a link to the child’s Facebook page.

The FAC alleges Nguyen is liable for civil extortion because she obtained property or other consideration fromhim, with his consent, induced by a wrongful use of force or fear and that the fear was induced by a threat toexpose, or impute to, [him] disgrace or to expose a secret affecting him.

Tran also alleged Nguyen was liable for intentional infliction of emotional distress in the form of repeatedly extorting him by threatening to disclose to Mrs. Tran the previous relations he had with Defendant Nguyen and the secret existence of the Child.”

He alleged Nguyen’s conduct was outrageous because, among other reasons, it is civil extortion.

Nguyen demurred, arguing California law does not recognize a cause of action for civil extortion under these circumstances.

She claimed the intentional infliction of emotional distress cause of action fails because (1) Tran has not adequately alleged outrageous conduct, and (2) it violates Civil Code section 43.5, California’s “anti-heart-balm” statute.

Following the court’s order sustaining Nguyen’s demurrer without leave to amend to both causes of action alleged on behalf of Tran, the court entered a judgment against Tran.

Tran argued the court erred in concluding a cause of action for civil extortion can be stated only in cases involving the wrongful threat of criminal or civil prosecution. He relied on a variety of authorities, both common law and statutory, to support his argument.

This approach confuses the issue because a statutory right and a common law right that is developed independently of that statute, exist separate and apart from each other.

Nonetheless, when it separated these two potential sources of a cause of action, the appellate court concluded the statutory right to rescind consent based on “menace,” which is grounded in Civil Code sections 1566, 1567 and 1570, is analogous to the crime of

extortion—and is applicable in the circumstances alleged here.

Extortion is the obtaining of property or other consideration from another, with his or her consent induced by a wrongful use of force or fear.

Fear, such as will constitute extortion, may be induced by a threat of any of the following: 1. To do an unlawfulinjury to the person or property of the individual threatened or of a third person; 2. To accuse the individualthreatened of a crime, 3. To expose, or to impute to him a deformity, disgrace, or crime, 4. To expose a secret affecting him, her, or them, 5. To report his, her, or their immigration status or suspected immigration status.

The concept of coerced consent is at the heart of extortion.

To constitute extortion the victim must consent, albeit it is a coerced and unwilling consent, to surrender of his property.

When extortion is based on the fear of a criminal accusation or a threatened exposure of a deformity, disgrace or secret, there is no requirement that the victim be innocent of the crime or free of the deformity, disgrace or secret; the misconduct is founded in the use of fear to obtain the victim’s money or property without the victim’s free consent.

Threats to do the acts that constitute extortion under Penal Code section 519 are extortionate whether or not the victim committed the crime or indiscretion upon which the threat is based and whether or not the person making the threat could have reported the victim to the authorities or arrested the victim.

Even it a defendant had the right to arrest the victim, he was not at liberty to threaten to arrest her for the purpose of extorting money or property from her.

The crime of extortion focuses on coerced consent as a means of obtaining the victim’s agreement to the transfer of property.

Likewise, Civil Code section 1566 provides a civil remedy when a person’s consent to a transaction is obtained through wrongful means: A consent which is not free is nevertheless not absolutely void, but may be rescinded by the parties, in the manner prescribed by the Chapter on Rescission.

Civil Code section 1567 expands the analysis: An apparent consent is not real or free

when obtained through: 1. Duress; 2. Menace; 3. Fraud; 4. Undue influence; or 5. Mistake.

Civil Code section 1569 defines "duress” as the confinement of a party or family member;

Civil Code section 1570 defines “[m]enace” as the threat of duress, of unlawful and violent injury a person or property, or of injury to the character of a person.

These statutes provide a remedy of rescission in cases where a party’s consent to a transaction was obtained through threats of injury to a person’s character.

Thus, the appellate concluded that a cause of action for rescission based on menace is the civil statutory counterpart to a criminal extortion claim.

Although the categories of threats that could qualify as “menace”—i.e., threats of confinement, of physical violence or of harm to character—are relatively narrow, this case

satisfies the statutory requirement because the threat of exposure alleged (that Tran had fathered a child with Nguyen while married to his wife), constituted threatened harm to his character.

Nguyen also argued Tran’s attempt to recover the payments he made to her violates “the policy behind the anti-heart-balm statue.” That statute, Civil Code section

43.5 (section 43.5), precludes causes of action based on acts of sexual seduction; specifically, slienation ofaffection, criminal conversation (the tort of seducing a wife), seduction of a person over the age of legal consent, or breach of promise of marriage.

Tran’s claim for recovery of the payments he made to Nguyen is none of those. His claim for rescission isbased on Nguyen’s wrongful use of menace as a means of coercing him into paying her money he would nototherwise have agreed to pay. That is a different theory of recovery than any of the claims prohibited bysection 43.5.

Such a cause of action for rescission, which entitles a party to seek rescission of the consent underlying atransaction, sounds in contract rather than tort. Thus, it does not support recovery of emotional distressdamages.

Rescission is a contractual remedy which allows for the recovery of consequential damages, but not damagesfor emotional distress.

This limitation on the scope of recovery is consistent with the rule that the victim of a crime, including the crime of extortion, would be entitled to an award of restitution based solely on “economic loss.

The judgment was reversed, and the case is remanded to the trial court with instructions to allow Tran leave to amend his cause of action for civil extortion based on Civil Code sections 1566, 1567, and 1570.

LESSONS:

1.         Extortion is the obtaining of property or other consideration from another, with his or her consent induced by a wrongful use of force or fear.

2.   To constitute extortion the victim must consent, albeit it is a coerced and unwilling consent, to surrender of his property.

3.         When extortion is based on the fear of a criminal accusation or a threatened exposure of a deformity, disgrace or secret, there is no requirement that the victim be innocent of the crime or free of the deformity, disgrace or secret; the misconduct is founded in the use of fear to obtain the victim’s money or property without the victim’s free consent.

4.         Threats to do the acts that constitute extortion under Penal Code section 519 are extortionate whether or not the victim committed the crime or indiscretion upon which the threat is based and whether or not the person making the threat could have reported the victim to the authorities or arrested the victim.

What Constitutes a Valid Electronic Signature in California?

This issue was discussed in the recent decision in Park v. NMSI, Inc., where at the request of plaintiffs Julie Park and Danny Chung, the trial court issued prejudgment right to attach orders (RTAO) in the aggregate amount of $7,192,607.16 against their former employer, NMSI, Inc.

Appealing the orders NMSI contended Park and Chung failed to establish the probable validity of their claims because, contrary to the allegations in their first amended complaint, the agreements underlying their breach of contract causes of action had been modified through an exchange of emails with electronic signatures, as well as by the parties’ subsequent conduct.

The court of appeal rejected these contentions, and affirmed the trial court's ruling.

NMSI is a residential mortgage lender licensed in 26 states.  NMSI funded loans exceeding $5.5 billion in 2020 and $5.6 billion in 2021.

A real property loan generally involves two documents, a promissory note and a security instrument. The security instrument secures the promissory note. This instrument entitles the lender to reach some asset of the debtor if the note is not paid.

In California, the security instrument is most commonly a deed of trust (with the debtor and creditor known as trustor and beneficiary and a neutral third party known as trustee). The security instrument may also be a mortgage (with mortgagor and mortgagee, as participants). In either case, the creditor is said to have a lien on the property given as security, which is also referred to as collateral.

Park and Chung were both employed in NMSI’s Brea office. Chung was the company’s chief marketing officer; Park was the executive vice president.

In January 2019 Chung and Park entered into branch manager/sales manager employment agreements with NMSI (2019 agreements).

Pursuant to their 2019 agreements, Park and Chung were both responsible for the operation of the branch, including hiring and paying operating expenses. In consideration Park and Chung were jointly entitled to 75 percent of the net revenue generated by loans originated by their branch office provided the net revenue of the office was greater than $90,000.

The 2019 agreements were fully integrated and provided they could be modified only by the written agreement of the parties.

In September 2019 Jae Chong, NMSI’s chief executive officer, first proposed a change to the compensation structure in the 2019 agreements.

According to Chong, Chung orally agreed to the terms of the modifications, which were then confirmed in an email Chong sent Chung on October 22, 2019. 

Beginning in January 2020 NMSI paid Park and Chung according to the October 2019 sliding scale model.

Chung promptly notified NMSI’s accounting department that neither he nor Park had agreed to modify their compensation structure.

Nevertheless, the reduced compensation continued; and, as Park and Chung alleged in their lawsuit, NMSI reduced their compensation even further by refusing to share revenues generated by loan servicing and the sales of servicing rights.

Later, Park and Chung were advised that NMSI was terminating their employment.

Park, Chung, Koh and Kim sued NMSI and Chong and filed a verified amended complaint on January 7, 2022, alleging causes of action for breach of contract, failure to pay wages, breach of fiduciary duty, accounting and violation of California’s unfair competition law.

Park filed ex parte applications for writ of attachment. Park’s application included a declaration describing NMSI’s breach of the 2019 revenue sharing agreements and asserted that she and Chung were owed past compensation totaling $9,624,329.39.

They argued that NMSI breached Plaintiffs’ branch manager agreements by failing to apply the proper compensation formula to the net revenues generated in 2020 and 2021, as well as by failing to pay any share of other revenues that were excluded from the profit and loss statements.

The trial court found Park and Chung had established the probable validity of their breach of contract claims and issued right to attach orders and authorized writs of attachment on behalf of Park and Chung for $3,596,303.58 each (a combined total of $7,192,607.16).

The court concluded (using the probable validity standard) the 2019 agreements had not been modified as argued by NSMI, finding that Chung did not insert an electronic signature or other symbol showing intent to sign a modified agreement by his email”.

In addition, Chung did not have authority to enter into any modification agreement on behalf of Park. The court also found the 2019 agreements had not been modified by the subsequent conduct of Park and Chung.

NMSI contended the trial court misinterpreted the law regarding electronic signatures when finding the email exchange between Chong and Chung did not effect a modification of the 2019 agreements.

According to NMSI, Chung’s email which included his full name, title, address, two phone numbers, email address, and webpage URL, was all that was needed to satisfy the electronic signature requirement of the Uniform Electronic Transactions Act.

Under the UETA an electronic signature has the same legal effect as a handwritten signature. (Civil Code, § 1633.7, subd. (a).)

A signature may not be denied legal effect or enforceability solely because it is in electronic form.

But to be effective, an electronic signature must be executed or adopted by a person with the intent to sign the electronic record.

Thus, although Chung’s name was at the bottom of his October 23, 2019, email, more was required to establish he electronically signed the email with the intent to modify his (let alone Park’s) revenue sharing agreement.

Attributing the name on an e-mail to a particular person and determining that the printed name is the act of this person is a necessary prerequisite but is insufficient, by itself, to establish that it is an electronic signature.

NMSI’s contention the UETA does not require evidence of an intent to sign unless the authenticity of an electronic signature has been called into question—and that the trial court, therefore, erred in finding no modification of the 2019 agreement had occurred—finds support in neither statutory language nor pertinent case law.

The UETA only applies to a transaction between parties each of which has agreed to conduct the transaction by electronic means. Whether the parties agree to conduct a transaction by electronic means is determined from the context and surrounding circumstances, including the parties’ conduct.

Based on the evidence it received regarding the October 2019 emails, the trial court found that Chung did not insert an electronic signature or other symbol showing intent to sign a modified agreement by his email because the body of the emails appears to document a discussion or thoughts about a revised compensation structure.

In the October 23 email, Chung asked a follow-up question to Chong, which suggests that the parties were still discussing potential terms of a modification, not that they were executing a final modified agreement.

There similarly was no merit to NMSI’s argument challenging the trial court’s probable validity finding directed to NMSI’s contention the 2019 agreements were modified by the subsequent conduct of Park and Chung.

A written contract that expressly precludes oral modification may nonetheless be modified by an oral agreement to the extent that the oral agreement is executed by the parties. (Civ. Code, § 1698, subd. (b).)

Where, as here, a written agreement prohibits oral modifications, an oral modification nevertheless is enforceable to the extent it has been executed by the parties.

Moreover, even if not modified by an executed oral agreement, the parties may, by their words or conduct, waive contractual rights.

The parties may, by their conduct, waive a no oral modification provision where evidence shows that was their intent.

The pivotal issue in a claim of waiver of contractual rights is the intention of the party who allegedly relinquished the known legal right.

Waiver is ordinarily a question of fact unless there are no disputed facts and only one reasonable inference may be drawn.

Substantial evidence supported the trial court’s finding that the November 3, 2020 email does not show that both Chung and Park personally supervised the calculations of the Brea branch profit and loss figures which reflected the modified profit- sharing model, which they then sent to and confirmed with NMSI’s accounting team.

Substantial evidence also supported the further finding that the email did not confirm the modified revenue sharing agreement because it failed to include the attachment with the cover email, so it cannot be determined from the November 2020 email what Plaintiffs were confirming.

LESSONS:

1.         Under the UETA an electronic signature has the same legal effect as a handwritten signature. (Civ. Code, § 1633.7, subd. (a). )

2.         A signature may not be denied legal effect or enforceability solely because it is in electronic form.

3.         But to be effective, an electronic signature must be executed or adopted by a person with the intent to sign the electronic record.

4.         The pivotal issue in a claim of waiver of contractual rights is the intention of the party who allegedly relinquished the known legal right.

Are Electronic Signatures the Same as Handwritten Signatures?

As discussed in the recent California Appellate Court decision in Ramirez v. Golden Queen Mining Company, LLC, Carlos Ramirez filed a class action lawsuit against his former employer alleging various violations of the Labor Code and unfair competition. The employer moved to compel arbitration.

The trial court denied the motion on the ground that the employer failed to demonstrate the existence of an executed arbitration agreement.

The employer appealed, contending it carried the initial burden of making a prima facie showing that a written arbitration agreement existed.

The employer also contended Ramirez’s statements that he did not recall being presented with or signing an arbitration agreement were insufficient to rebut its initial showing and create a factual dispute about the authenticity of a handwritten signature.

There is a split of authority among the Courts of Appeal as to what constitutes sufficient evidence to create a factual dispute about the authenticity of a handwritten signature on a document agreeing to arbitration.

The decision in Iyere v. Wise Auto Group concluded that an individual is capable of recognizing his or her handwritten signature and if that individual does not deny a handwritten signature is his or her own, that person’s failure to remember signing the document does not create a factual dispute about the signature’s authenticity.

Here, Ramirez’s declaration asserts he does not recall ever being presented with or signing an arbitration agreement.

The declaration, however, omited several significant facts.

First, the declaration failed to state whether Ramirez even reviewed the arbitration agreement, the related handbook acknowledgement, or any other documents purportedly signed by him and included in the employer’s moving papers. A review of those documents, the handwritten signatures, and the handwritten initials might have improved Ramirez’s recollection.

Second, the declaration did not address whether Ramirez recalled signing the handbook acknowledgement, which is the document relied upon by the employer to show his consent to arbitration. The acknowledgement included a bolded, underlined sentence stating he agreed to the terms of the arbitration agreement in the employee handbook.

Third, Ramirez’s declaration did not state, one way or the other, whether the handwritten signature on the handbook acknowledgement is his.

Based on these omissions, the appellate court concluded Ramirez did not rebut the employer’s initial showing that an arbitration agreement existed.

Appellant Golden Queen Mining Company, LLC (Queen Mining) is a California limited liability company that operates the Soledad Mountain gold and silver mine in Mojave, California. The open-pit mine operates 24 hours per day, 365 days per year. Queen Mining’s operations use equipment, explosives and chemicals obtained from sources outside California.

All the gold and silver recovered from the crushed ore is sold to a refinery outside of California. Based on its purchases and sales, Queen Mining contends its business operations involve interstate commerce and, therefore, the Federal Arbitration Act governs its arbitration agreements.

In 2019, Ramirez was hired by Queen Mining as a nonexempt hourly employee to perform electrical work. Ramirez’s employment ended in August 2022.

As part of Queen Mining’s onboarding process, new employees are provided with many documents including an employee handbook containing an arbitration agreement.

In October 2022, Ramirez filed a class action complaint against Queen Mining alleging causes of action for failure to pay overtime wages, pay minimum wages, provide meal periods, provide rest periods, pay all wages due upon termination, provide accurate wage statements, indemnify employees for expenses incurred in performing their jobs, and pay for vested, unused vacation time upon termination.

In 2023, Queen Mining filed a motion to compel arbitration and supporting declarations. The declaration of Latasha Marshall, Queen Mining’s human resources manager, asserted Ramirez signed an Arbitration Agreement on or about March 28, 2019.

Marshall attached as exhibits to her declaration copies of (1) a two-page arbitration agreement, (2) a handbook acknowledgement purportedly signed by Ramirez and dated March 28, 2019, and (3) six other documents purportedly signed by Ramirez and dated March 28, 2019.

Ramirez opposed the motion, contending that Queen Mining could not prove the existence of an arbitration agreement between the parties because (1) Queen Mining had failed to authenticate the proffered arbitration agreement, and (2) even if authentic, a signature on an employee handbook acknowledgement did not constitute valid assent to arbitration. 

When presented with a motion or petition to compel arbitration, a trial court must determine whether an agreement to arbitrate the controversy exists.

The party seeking arbitration has the burden of proving the existence of an arbitration agreement by a preponderance of the evidence. The agreement must be in writing to be valid and enforceable.

A written arbitration agreement does not necessarily need to be signed because a party’s acceptance may be implied in fact or be effectuated by delegated consent.

The party opposing arbitration bears the burden of proving by a preponderance of the evidence any defense to the agreement’s enforcement.

Whether the arbitration agreement is a legally enforceable contract is determined by applying general principles of California contract law. 

A signature manifesting assent to arbitration need not be on the arbitration agreement itself.

In Iyere, three employees who had been terminated by their employer filed a joint complaint alleging many employment-related causes of action. The employer filed a motion to sever the complaints and compel each plaintiff to submit his claims to individual arbitration. The trial court denied the motion, concluding the employer failed to prove the authenticity of the plaintiffs’ signatures on the arbitration agreements.

On appeal, the First District addressed whether the plaintiffs' evidence was sufficient to create a factual dispute shifting the burden of production back to the employer.

The employer’s moving papers included copies of arbitration agreements bearing the plaintiffs’ apparent handwritten signatures. The plaintiffs’ opposition papers included each plaintiff’s declaration stating that, on the first day of work, he (1) was given a stack of documents, (2) was told to quickly sign the documents so he could get to work, and (3) signed the stack of documents immediately and returned them.

Each declaration also stated: “ ‘I do not recall ever reading or signing any document entitled Binding Arbitration Agreement .... I do not know how my signature was placed on [the document].’ ” Each plaintiff further stated that if he had understood that the agreement waived his right to sue the employer, he would not have signed it.

The First District concluded the declarations did not create a factual dispute as to whether the plaintiffs signed the agreements, stating: The declarations explicitly acknowledge that plaintiffs signed a stack of documents and do not deny that the stack included the agreement.

Although plaintiffs state they do not recall signing the agreement, there is no conflict between their having signed a document on which their handwritten signature appears and, two years later, being unable to recall doing so.

In the absence of any evidence that their purported signatures were not their own, there was no evidence that plaintiffs did not in fact sign the agreement.

The First District distinguished cases involving a plaintiff’s statement that he or she did not recall electronically signing an arbitration agreement because the individual’s inability to recall signing electronically may reasonably be regarded as evidence that the person did not do so.

However, an individual is capable of recognizing his or her own personal signature. If the individual does not deny that the handwritten personal signature is his or her own, that person’s failure to remember signing is of little or no significance. 

Consequently, in Iyere, the First District concluded that, if a plaintiff presented with a handwritten signature on an arbitration agreement is unable to allege the signature is inauthentic or forged, the plaintiff’s failure to recall signing the agreement “neither creates a factual dispute as to the signature’s authenticity nor affords an independent basis to find that a contract was not formed.

Because Ramirez had the burden of producing evidence, we describe some seemingly obvious points that are omitted from his declaration.

First, Ramirez’s declaration did not state he reviewed the arbitration agreement and other documents attached to Marshall’s declaration. The idea that a witness’s inspection of a writing may refresh the witness’s memory is long established.

Here, Ramirez’s evidence does not allow the appellate court to discern whether he took the fundamental step of inspecting the arbitration agreement included in Queen Mining’s moving papers. It follows that whether such an inspection would have improved his ability to recall being presented with the arbitration agreement and related acknowledgement.

Second, Ramirez’s declaration did not state he examined any of the seven handwritten signatures on the documents that Queen Mining contended he purportedly signed.

Third, Ramirez’s declaration did not state he did not recall signing the “HANDBOOK ACKNOWLEDGEMENT,” which is the specific document relied upon by Queen Mining to manifest Ramirez’s assent to arbitration.

The distinction between a signed arbitration agreement and a signed acknowledgement is significant in the context of this case because Ramirez’s opposition papers explicitly raised that distinction.

Read literally, Ramirez’s broad representation that he did not recall ever being presented with an arbitration agreement implies either that his attorney did not have Ramirez review the arbitration agreement in Queen Mining’s moving papers before signing the declaration or that Ramirez did review the arbitration agreement but, due to a poor memory or some other reason, he could not recall it by the time he signed the declaration.

LESSONS:

1.         An individual’s inability to recall signing electronically may reasonably be regarded as evidence that the person did not do so.

2.         However, an individual is capable of recognizing his or her own personal signature. If the individual does not deny that the handwritten personal signature is his or her own, that person’s failure to remember signing is of little or no significance. 

What is the Scope of Title Insurer’s Duty to Defend a Policy Holder in California?

This issue was answered in the recent California appellate decision in Bartel v. Chicago Title Insurance Company which centered on the scope of an insurer’s duty to defend a policy holder in litigation when it is not clear whether the policy covers the underlying dispute.

Plaintiff Richard Bartel bought a property in rural Santa Cruz County to enjoy a quiet retirement. The property was so rural that no public roads connected to it.

Bartel accessed the nearest public road by using a private road that traversed the property of his neighbors to the west. Bartel believed the private road terminated at his western property line.

However, Bartel’s neighbor to the east believed he, too, had access to the private road using a route that crossed Bartel’s property.

This disagreement became acute when the property of the eastern neighbor became a site for marijuana cultivation, serviced by trucks driving through Bartel’s property during the night. Bartel installed security devices and informed his easterly neighbor that he had no right to cross Bartel’s property.

Bartel’s neighbor twice brought suit against Bartel, asserting a right to use the private road that crossed Bartel’s property. The neighbor voluntarily dismissed both suits without prejudice.

The trucks continued driving by Bartel’s house, and Bartel in turn brought suit against his neighbor to quiet title. The neighbor cross-complained, alleging a right to an easement over the private road crossing Bartel’s property.

The matter eventually went to trial, and it resulted in a judgment (affirmed on appeal in this court) that the neighbor had an express easement over the private road through Bartel’s property, based on a deed executed at the time the properties were subdivided in 1971.

Bartel largely self-funded the litigation against his neighbor using money from his retirement account. Chicago Title Insurance Company—the issuer of a title insurance policy Bartel purchased when he bought the property in 1998—rejected Bartel’s tender for defense in the suits brought by his neighbor.

Chicago Title asserted it had no duty to defend Bartel because of exclusions in his title insurance policy–one of which was general (carving out easements not recorded in a public deed) and one of which was specific (carving out claims arising from a 1970 agreement among the neighbors) between Bartel and his neighbor.

Moreover, Chicago Title asserted its duty to defend Bartel arose when the neighbor filed his cross-complaint, and it had no duty as to the earlier litigation.

Bartel denied there was a deeded easement.

Bartel disagreed with Chicago Title’s decision and continued to seek tender based on his title insurance.

Chicago Title eventually determined that it did have a duty to defend Bartel, but only after five years of litigation.

Bartel brought suit against Chicago Title for breach of contract and breach of the covenant of good faith and fair dealing. The dispute between Bartel and Chicago Title went to trial in two phases.

In the first phase, the trial court rejected Chicago Title’s statute of limitations defense and held that the insurer had a duty to defend Bartel as of his initial tender of defense.

In the second phase, the court rejected certain claims by Bartel for damages for periods outside the litigation but awarded additional damages for the diminution in value of Bartel’s property.

The court further found that although Chicago Title could have performed its duties better and more expeditiously in response to Bartel’s tender requests, it did not act in bad faith.

On appeal, Bartel challenged the trial court’s rejection of his bad faith claim and request for punitive damages, argues the court erred in denying reimbursement of his litigation costs and attorney fees for the period between actions in the underlying litigation, and asserted the court awarded inadequate prejudgment interest.

In its cross-appeal, Chicago Title asserts that the trial court erred both in finding it had a duty to defend the easement claim as of the date of Bartel’s first tender and in applying equitable tolling to reject Chicago Title’s statute of limitations defense.

The appellate agreed with Bartel that the trial court erred in its finding that Chicago Title did not act in bad faith. It rejected all other claims raised by both parties and remanded for further

proceedings.

The duty to defend is guided by several well-established principles

An insurer owes a broad duty to defend against claims that create a potential for indemnity under the insurance policy.

An insurer must defend against a suit even where the evidence suggests, but does not conclusively establish, that the loss is not covered.

Any doubt as to whether the facts give rise to a duty to defend is resolved in the insured’s

favor.

The insurer has a duty to defend the insured as to the claims that are at least potentially covered.

The determination whether the insurer owes a duty to defend usually is made in the first instance by comparing the allegations of the complaint with the terms of the policy. Facts extrinsic to

the complaint also give rise to a duty to defend when they reveal a possibility that the claim may be covered by the policy.

This includes all facts, both disputed and undisputed, that the insurer knows or becomes aware of from any source if not “at the inception of the third party lawsuit, then at the time

of tender.

The California Supreme Court has recognized that facts known to the insurer and extrinsic to the third party complaint can generate a duty to defend, even though the face of the complaint does not reflect a potential for liability under the policy.

This is so because current pleading rules liberally allow amendment; the third party plaintiff cannot be the arbiter of coverage.

Stated differently, that the precise causes of action pled by the third party complaint may fall outside policy coverage does not excuse the duty to defend where, under the facts alleged, reasonably inferable, or otherwise known, the complaint could fairly be amended to state

a covered liability.

Thus, if any facts stated or fairly inferable in the complaint, or otherwise known or discovered by the insurer, suggest a claim potentially covered by the policy, the insurer’s duty to defend arises

and is not extinguished until the insurer negates all facts suggesting

potential coverage.

To determine whether the insurer owed the insured a duty to defend, the reviewing court examines the insurance policy at issue.

Insurance policy interpretation is a question of law.

Appellate courts apply an independent standard of review to decisions interpreting, constructing, and applying insurance policies to determine the scope of actual or potential coverage.”

Bartel’s title insurance policy provides for the defense of the insured “in litigation in which any third party asserts a claim adverse to the title or interest as insured.

Applying the appellate court’s independent construction of the policy language, Composti’s claim of easement against the property—once asserted  in litigation within the meaning of the policy language—would adversely affect title to the estate or interest described in the policy.

The complexity of the underlying facts does not shield the insurer from the risk of erroneously denying the tender of defense. With regard to the denials of a deeded easement, the ambiguity in the pleading of Composti I and Composti II and resulting confusion as to whether the claimed easement was subject to the exclusion from coverage based on the 1970 agreement raises considerable doubt as to the legal effect of the denials. As a consequence, Composti’s disclaimer does not eliminate the possibility of a covered claim.

While it may be true that Chicago Title was not required to speculate about unpleaded theories of easement, it wasobligated to investigate whether the extrinsic facts known to it at tender raised a possibility of liability within the scope of the policy’s coverage.

The carrier must defend a suit which potentially seeks damages within the coverage of the policy and cannot construct a formal fortress of the third party’s pleadings and retreat behind its walls. The pleadings are malleable, changeable and amendable.

The trial court’s ruling on Chicago Title’s duty to defend, based on the presence of the Boyd-Sluyter deed in the materials accompanying Bartel’s first tender of defense, is consistent with the case authority. It confirms only that an insurer’s duty to defend is based on the information known to the insurer at the time of the third party lawsuit, as distinguished from issues not litigated in that action (such as the construction of the policy language).

Bartel contends the trial court erred in finding Chicago Title not liable for bad faith based on what he characterizes as Chicago Title’s patently unreasonable treatment of his tender for defense in disregard of California law.

Bartel asserted that the court applied a legally erroneous standard in its phase II determination of bad faith by ignoring the interim judgment’s findings on the duty to defend and excusing Chicago Title’s failure to conduct a reasonable investigation or acknowledge the possibility of coverage.

Chicago Title countered that the trial court applied the correct legal standards and based its determination on substantial evidence that Chicago Title did not act unreasonably given the complexity of the fact pattern concerning the easement, the difficulty of determining which roads

were part of the 1970 agreement, and the fact that Composti specifically asserted causes of action that were excluded under the policy.

The law implies in every contract, including insurance policies, a covenant of good faith and fair dealing.

The implied promise requires each contracting party to refrain from doing anything to injure the right of the other to receive the agreement’s benefits.

In other words, it imposes upon each party the obligation to do everything that the contract presupposes they will do to accomplish its purpose.

An insurer is said to act in “bad faith” when it not only breaches its policy contract but also breaches its implied covenant to deal fairly and in good faith with its insured.

In this context, the term bad faith is used as a shorthand reference to a claimed breach by the insurer of the covenant of good faith and fair dealing.

An insurer’s tortious breach of the implied covenant of good faith and fair dealing involves something beyond breach of the contractual duty itself.

That is, an insurer’s responsibility to act fairly and in good faith in handling an insured’s claim is not the requirement mandated by the terms of the policy itself—to defend, settle, or pay. It is the obligation under which the insurer must act fairly and in good faith in discharging its contractual responsibilities.

In simple terms, an insurer’s tortious bad faith conduct is conduct that is unreasonable.

Reasonableness is an objective standard and must be evaluated as of the time of the insurer’s decisions and actions, not in the light of subsequent events that may provide evidence of the insurer’s errors.

In sum, the undisputed facts established that Chicago Title repeatedly disregarded the California standard applicable to the duty to defend.

Chicago Title not only violated its contractual duty to defend Bartel but also its implied covenant to fairly and in good faith assess the possibility of coverage based on the available facts.

LESSONS:

1.         An insurer owes a broad duty to defend against claims that create a potential for indemnity under the insurance policy.

2.         An insurer must defend against a suit even where the evidence suggests, but does not conclusively establish, that the loss is not covered.

3.         Any doubt as to whether the facts give rise to a duty to defend is resolved in the insured’s

favor.

4.         The carrier must defend a suit which potentially seeks damages within the coverage of the policy and cannot construct a formal fortress of the third party’s pleadings and retreat behind its walls. The pleadings are malleable, changeable and amendable.

5.         The law implies in every contract, including insurance policies, a covenant of good faith and fair dealing.

6.         The implied promise requires each contracting party to refrain from doing anything to injure the right of the other to receive the agreement’s benefits.

Can Written Agreements Without Legal Advice Cause Disputes?

The California appellate decision in Tiffany Builders v. Delrahim concerned an agreement at a coffee shop in Calabasas when David Delrahim made Edwart Der Rostamian a business proposal. Rostamian got his notebook, asked a server for a pen, and worked with Delrahim to compose two pages of text.

When they were done, each man signed the paper. Rostamian later sued Delrahim on contract claims.

The trial court granted Delrahim’s motion for summary judgment, ruling the Calabasas writing was too indefinite to be a contract.

The appellate court reversed that point, but affirmed the ruling against Rostamian’s claims for tortious interference with a contract.

According to Rostamian, the Calabasas discussion concerned the purchase of 13 gas stations. He argued that, if considered in the context of his and Delrahim’s ongoing negotiations, their signed writing was a binding contract.

This account was one-sided because Delrahim chose not to offer declarations giving his version of the facts. This one-sided account was the record in the trial court.

The gas stations in question belonged to seller Ibrihim Mekhail, operating through a family trust. Mekhail was not at the coffee shop and is not a party to this case.

Mekhail was selling the 13 stations as a block. He was offering nine of the 13 with their attached land and the other four without the land: only the businesses were for sale. The parties called the four the “dealer sites.”

Rostamian had been seeking to complete a deal with Mekhail through Rostamian’s company Tiffany Builders LLC, but the deal bogged down. Tiffany had signed a purchase agreement with Mekhail for the 13 stations. Rostamian assembled a group of other investors, including one Carol International, Inc., willing to buy Mekhail’s stations for about $12.8 million.

Rostamian opened an escrow to which Carol had contributed about $250,000, but the escrow did not close for various reasons. Rostamian eventually would assign Tiffany’s rights in the deal to Carol International, although it is not clear exactly when this happened.

In any event, Rostamian kept searching for a way to consummate the transaction and to profit from his efforts.

A mutual acquaintance introduced Rostamian to Delrahim, who expressed interest in the stations. Delrahim owned a company named Blue Vista Partners. Over an interval of some nine months, Rostamian and Delrahim met twice in Studio City and then continued to discuss, via email and text, ways to make a deal.

Then in November 2015, Delrahim said he had a proposal to discuss in person with Rostamian. The two met at the Calabasas coffee shop.

Delrahim proposed Rostamian should back his company out of the pending escrow so Delrahim could buy the stations from Mekhail for $12.4 million, or less if Delrahim and Rostamian could negotiate a lower price. Delrahim would pay Rostamian $500,000 to do this.

Delrahim also proposed Rostamian would own the four dealer sites. Delrahim would charge Rostamian a monthly fee to run these dealer sites, and Rostamian would reap their profit.

Delrahim and Rostamian worked together to word their deal. This two-page hand-written document is central to this appeal, and was termed the Writing.

Delrahim would take the lead in the stations deal in return for guaranteeing benefits for Rostamian. Delrahim would rescue Rostamian’s foundering escrow for Delrahim’s own benefit: Delrahim would buy the 13 stations at a price the two hoped they could negotiate down from the $12.4 million figure.

Delrahim would own nine stations that were not dealer sites, and would gain a $4,000 a month fee for operating the four dealer sites. Delrahim would pay Rostamian $500,000 and would give Rostamian ownership of, and profits from, the dealer sites.

None of that happened. To Rostamian’s dismay, Delrahim decided to deal directly with Mekhail and to cut Rostamian out of the picture. Delrahim bought the 13 stations for about $11 million. Rostamian got nothing.

Rostamian and Tiffany sued Delrahim and Blue Vista for breach of contract, specific performance, intentional and negligent interference with prospective economic advantage, and unfair business practices. Delrahim and Blue Vista moved for summary judgment.

The trial judge granted Delrahim’s summary judgment motion. The court reasoned the Writing was too indefinite to be a contract.

The court considered the parol evidence from Rostamian’s declaration but concluded this evidence failed to clarify the terms to a legally acceptable degree. The court ruled the most critical omission was who would own the 13 gas stations upon completion of the deal. Delrahim had argued Rostamian’s declaration was a sham because it contradicted Rostamian’s deposition testimony.

Rostamian and Tiffany appeal the judgment against them.

As supplemented by parol evidence, the Writing was definite enough to be an enforceable contract. The grant of summary judgment was error.

Three streams of law converge to control this case.

The first rule concerns parol evidence, also called extrinsic evidence.

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.

Rostamian’s declaration satisfied this test. It was relevant to prove a meaning to which the Writing was reasonably susceptible. The trial court did not rule to the contrary. It properly accepted Rostamian’s explanation of the Writing.

Delrahim incorrectly argues that Rostamian’s assertion that the contract is unambiguous estops him from arguing extrinsic evidence provides clarity. Briefing commonly, and acceptably, argues in the alternative.

The Writing, as explicated by Rostamian, was not too indefinite to enforce.

It was not an illusory contract. When people pen their names to a document they have drafted together, the law accords their act a potent meaning. Delrahim and Rostamian signed their joint creation, thereby enacting a ritual signifying commitment: an exchange of promises. Courts strive to effectuate designs like that. Powerful authority proves it.

The courts construe instruments to make them effective rather than void. This rule is of cardinal importance.

The law leans against destroying contracts because of uncertainty. If feasible, courts construe agreements to carry out the reasonable intention of the parties.

“An interpretation which gives effect is preferred to one which makes void.” (Civ. Code, § 3541.)

“A contract must receive such an interpretation as will make it lawful, operative, definite, reasonable, and capable of being carried into effect, if it can be done without violating the intention of the parties.” (Civ. Code, § 1643.)

Courts will imply stipulations necessary to make a contract reasonable regarding matters to which the contract manifests no contrary intention. (Civ. Code, § 1655.)

Indefiniteness as to an essential term may prevent the creation of an enforceable contract, but indefiniteness is a matter of degree. All agreements have some degree of indefiniteness. People must be held to their promises.

If the parties have concluded a transaction in which it appears they intend to make a contract, courts should not frustrate their intention if it is possible to reach a just result, even though this requires a choice among conflicting meanings and the filling of gaps the parties have left. This rule comes nearer to attaining the purpose of the contracting parties than any other.

There are two reasons not to enforce an indefinite agreement. First, the agreement may be too indefinite for the court to administer—no remedy can be properly framed. Second, the indefiniteness of the agreement may show a lack of contractual intent. Courts should be slow to come to this conclusion. Many a gap in terms can be filled, and should be, with a result that is consistent with what the parties said and that is more just to both than would be a refusal of enforcement.

The terms of a contract are reasonably certain if they provide a basis for determining the existence of a breach and for giving an appropriate remedy.

When the parties to a bargain sufficiently defined to be a contract have not agreed with respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court.

Rostamian’s explanation of the Writing made it definite enough for judicial enforcement. His version, which was binding on the trial court at the summary judgment stage, was a series of clear promises.

First, he would withdraw from the escrow to give Delrahim pride of place, allowing Delrahim to profit from Rostamian’s effort in finding and trying to exploit this business opportunity.

Second, Rostamian would cooperate with Delrahim’s effort to negotiate from Mekhail a price lower than $12.4 million.

Third, Rostamian would pay Delrahim $4,000 a month to operate the four gas stations referred to as dealer sites. In return, Delrahim made three clear promises of his own: to pay Rostamian $500,000; to grant Rostamian ownership of, and profits from, the four dealer sites; and to operate the four dealer sites for Rostamian.

This exchange of promises was an enforceable contract.

A contract need not specify price if price can be objectively determined. The absence of a price provision does not render an otherwise valid contract void.

In the process of negotiating an agreement, price is a term frequently left indefinite and to be settled by future agreement. If the parties provide a practical method for determining this price, there is no indefiniteness that prevents the agreement from being an enforceable contract.

Although the necessity for definiteness may compel the court to find that the language used is too uncertain to be given any reasonable effect, when the parties’ language and conduct evidences an intent to contract, and there is some reasonable means for giving an appropriate remedy, the court will strain to implement their intent.

For example, a bank signature card is a contract authorizing charges for processing checks drawn on accounts with insufficient funds and was not illusory, even though it did not specify the amount of the charges.

The Writing was definite enough to enforce contractually.

LESSONS:

1.         A written agreement prepared without legal assistance can include ambiguities and inconsistencies that may cause disputes.

2.         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.

3.         The law leans against destroying contracts because of uncertainty. If feasible, courts construe agreements to carry out the reasonable intention of the parties.

4.         “An interpretation which gives effect is preferred to one which makes void.” (Civ. Code, § 3541.)

5.         “A contract must receive such an interpretation as will make it lawful, operative, definite, reasonable, and capable of being carried into effect, if it can be done without violating the intention of the parties.” (Civ. Code, § 1643.)

6.         Courts will imply stipulations necessary to make a contract reasonable regarding matters to which the contract manifests no contrary intention. (Civ. Code, § 1655.)  .

Can a Lease Include a Provision for Defense and Indemnity?

In the recent California appellate decision in Gumarang v. Braemer on Raymond, LLC, the Plaintiff and cross-defendant Allan Gumarang appealed the trial court’s order granting in part and denying in part his special motion to strike.

In 2016, Lessor and Gumarang executed a “Standard Multi-Tenant Shopping Center Lease” (Lease) through which Lessor agreed to lease to Gumarang commercial property (Property) in Pasadena for seven years.

Gumarang intended to use the Property to operate an ice cream parlor. Gumarang personally guaranteed the Lease.

Several provisions of the Lease address the parties’ respective rights and obligations. Under Paragraph 7.2, Lessor must, among other things, “keep in good order, condition and repair the foundations, exterior walls, structural condition of interior bearing walls, exterior roof, fire sprinkler system, Common Area fire alarm and/or smoke detection systems, fire hydrants, parking lots, walkways, parkways, driveways, landscaping, fences, signs and utility systems serving the Common Areas . . . .”

Paragraph 8.2 requires Gumarang to obtain general liability insurance with a minimum coverage limit of $1,000,000 to protect himself and Lessor against “claims for bodily injury, personal injury and property damage based upon or arising out of the ownership, use, occupancy or maintenance” of the property.

Paragraph 8.7 of the Lease, entitled “Indemnity,” provides: “Except for Lessor’s gross negligence or willful misconduct, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor’s master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, liens, judgments, penalties, attorneys’ and consultants’ fees, expenses and/or liabilities arising out of, involving, or in connection with, the use and/or occupancy of the Premises by Lessee. If any action or proceeding is brought against Lessor by reason of any of the foregoing matters, Lessee shall upon notice defend the same at Lessee’s expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be defended or indemnified.”

Paragraph 8.8, entitled “Exemption of Lessor and its Agents from Liability,” states that notwithstanding Lessor’s or its agents’ negligence or breach of the Lease, neither Lessor nor its agents could be held liable for any injury or loss arising on or from the property, including damage or injury caused by fire.

Instead, Paragraph 8.8 provides, Gumarang’s “sole recourse in the event of such damages or injury [shall] be to file a claim on the insurance policy(ies) that [Gumarang] is required to maintain pursuant to the provisions of Paragraph 8.”

In February 2017, after spending approximately eight months renovating the Property, Gumarang opened his ice cream parlor.

In October 2017, a fire destroyed the Property.

The Pasadena Fire Department investigated the fire and later released an investigation report.

According to the report, the fire originated in the Property’s rear storage room. There were no “fire stops” in the walls of that room, and the Property did not have functioning fire protection or alarm systems.

The report concluded that the fire was accidental and most likely caused by “a non-specific electrical failure within an interior wall of the structure.”

In March 2020, Gumarang filed his lawsuit, and, he filed a second amended complaint against Lessor, Management, and others to recover damages stemming from the fire that destroyed the Property.

Against Lessor and Management, Gumarang asserted causes of action for breach of contract, negligence, breach of the implied covenant of good faith and fair dealing, breach of fiduciary duty, negligent misrepresentation, and violations of Business and Professions Code section 17200 et seq.

Gumarang alleged that Lessor and Management failed to ensure the Property was equipped with, among other things, electrical and fire prevention systems that were in good working condition, which caused the fire that destroyed the Property.

Gumarang also alleged that Management failed to notify him that the Property lacked adequate electrical wiring and fire prevention systems before he executed the Lease.

In February 2021, counsel for Lessor and Management sent Gumarang a letter demanding that he “defend and indemnify them and their agents . . . as required under the terms and conditions of the [Lease]” and to place his insurance “carrier on notice of this claim.”

Gumarang’s counsel later denied Lessor and Management’s request, claiming, among other things, that the Lease’s indemnity clause applied only to claims brought by third parties.

In August 2021, Lessor and Management filed a cross- complaint against Gumarang, as well as other individuals and entities not party to this appeal.

Lessor and Management’s cross-claims for contractual indemnity, breach of contract, and declaratory relief all arise out of allegations that Gumarang agreed to defend and indemnify Lessor and its agents, including Management, against any claims arising out of his use or occupancy of the Property when he signed the Lease.

In mid-September 2021, Gumarang’s insurance carrier notified counsel for Lessor and Management that it would defend Lessor, but not Management, against the claims raised in Gumarang’s lawsuit because only Lessor was named as an insured in Gumarang’s insurance policy.

The parties do not dispute that Management’s cross-claims for contractual indemnity, breach of contract, and declaratory relief concerning Gumarang’s obligations under the Lease’s indemnity provision are all premised on common factual allegations. The parties disagree, however, on what those common allegations are.

According to Gumarang, Management’s cross-claims arise out of his protected activity of suing Management to recover damages from the destruction of the Property.

Management, on the other hand, asserts that the cross-claims arise out of Gumarang’s nonprotected activity of breaching the Lease’s indemnity provision by refusing to defend and indemnify Management against any claims, losses, or damages arising out of his use or occupancy of the Property, including the damages to the Property at issue in Gumarang’s lawsuit.

A claim for contractual indemnity is akin to a claim for breach of contract.

Thus, a claim for contractual indemnity and breach of contract based on a refusal to honor an indemnity provision consist of the same elements: (1) the existence of an agreement containing a contractual indemnity provision; (2) the indemnitee’s performance of the relevant provisions of the agreement; (3) a loss within the meaning of the indemnity agreement; and (4) damages sustained as a result of the breach of the indemnity agreement.

Here, Gumarang’s breach of Paragraph 8.7 of the Lease, which Management claimed requires him to defend and indemnify Management against any losses or damages arising out of his use or occupancy of the Property, constituted the wrongful conduct alleged in the challenged cross-claims.

Specifically, Management alleges that Gumarang agreed to be bound by Paragraph 8.7 when he signed the Lease.

In this case, it was not Gumarang’s filing of the underlying lawsuit that forms the basis of Management’s cross- claims for contractual indemnity, breach of contract, and declaratory relief.

Rather, it was Gumarang’s alleged breach of the Lease’s indemnity provision by refusing to defend and indemnify Management against claims arising out of Gumarang’s use or occupancy of the Property that gave rise to those claims.

LESSONS:

1.         A lease should be carefully reviewed to determine if there are any indemnity provisions, what triggers the right to indemnity, and which party is entitled to indemnity.

2.         Coverage under an insurance policy requires that a party seeking policy benefits is an insured, and a lessor should require a lessee to name the lessor as an additional insured party under the lessee’s policy.

3.         A claim for contractual indemnity is akin to a claim for breach of contract.

 .

Is a Release and Waiver of Liability Enforceable in California?

In the recent appellate decision in Diamond v. Schweitzer,  Plaintiff Zackary Diamond appealed from a judgment entered after the trial court granted a motion for summary judgment brought by defendants Scott Schweitzer, Schweitzer Motorsports Productions doing business as Bakersfield Speedway, and Christian Schweitzer, an individual doing business as Starting Line Refreshments.

Plaintiff suffered injuries from a punch inflicted by a third party during an altercation in the restricted pit area at Bakersfield Speedway.

Plaintiff alleges defendants were negligent in failing to provide reasonable security, adequately responding to the altercation, and undertaking reasonable rescue efforts.

Defendants moved for summary judgment, asserting plaintiff’s negligence claims were barred by the release and waiver of liability form he signed to gain admission to the pit area.

The trial court granted the motion, concluding the release’s language was clear, unequivocal, broad in scope, and included the negligent conduct alleged in this case. The court interpreted the release as including risks arising out of or related to racing activities. It concluded the assault was such a risk and, thus, was the type of event anticipated and covered by the release.

On appeal, plaintiff contended the release is unenforceable because the injury- producing act of negligence was not reasonably related to the purpose for which he signed the release, which he describes as observing the race up close from the restricted pit area while it was occurring.

In addition, the parties responded to this court’s request for supplemental briefing regarding whether plaintiff pled a theory of gross negligence and whether that theory was or was not subject to defendants’ motion for summary judgment.

The appellate court concluded the requirements for an enforceable release have been met:

(1) the release contains a clear, unambiguous and explicit expression of the parties’ intent to release all liability for plaintiff’s injury;

(2) the alleged acts of negligence resulting in the injury are reasonably related to the object or purpose for which the release was given; and

(3) the release does not contravene public policy.

It also concluded defendants adequately raised a complete defense based on the signed release of liability to all theories of negligence alleged in the complaint, and plaintiff failed to rebut that defense in opposition to defendants’ motion for summary judgment.  

In March 2020, plaintiff, through Linda Valdez, his guardian ad litem, filed a complaint for damages against defendants,alleging causes of action for (1) negligence, (2) premises liability, (3) negligent hiring, selection, approval, retention, and supervision, and (4) negligent infliction of emotional distress.

Plaintiff alleged that defendants breached their duty of care by failing to take reasonable steps to ensure plaintiff’s safety from dangerous conditions while attending a June 9, 2018, racing event at defendants’ raceway.

Plaintiff alleged that defendants negligently failed to provide adequate security or supervision, including by failing to hire, train, and supervise adequate security staff where plaintiff observed the events that day, respond to the ongoing fight that resulted in plaintiff’s injury, and undertake appropriate rescue efforts.

Defendants answered the complaint with a general denial, and the seventh affirmative defense alleged that plaintiff expressly in writing waived and released all liability against them based on their alleged negligence, agreed to indemnify and hold them harmless, and assumed all risks and dangers “broadly associated” with attending the event.

In January 2022, defendants filed and served a motion for summary judgment, or, alternatively, summary adjudication. After briefing and oral argument, the trial court granted defendants’ motion for summary judgment in December 2022, and entered judgment in defendants’ favor. Plaintiff filed a timely notice of appeal.

Plaintiff attended the June 9, 2018, races at the raceway with his mother, Linda Valdez, to watch his brother, Jacob Diamond, and his stepfather, Daniel Valdez, race Modlite cars. Plaintiff watched the races with his mother from the pit area. David Hays, his wife, Sonja Hays, and Sonja’s son, Kyle Flippo, were present in the pit area, too.

After a race finished, David Hays, upset over Jacob Diamond’s driving, confronted Jacob, yelling at him and using profanity. Plaintiff and his mother arrived, and David began yelling at them, with his wife, Sonja, joining in. The altercation ended without violence.

When plaintiff Linda Valdez later returned to the pit area, Sonja Hays started another verbal altercation that escalated, with Sonja charging Linda Valdez and shoving her with both hands. David Hays lunged between the two women and shoved Linda to the ground.

Seeing this, plaintiff ran to his mother, but Kyle Flippo intercepted him and punched his chin. Plaintiff fell to the ground, cracking his skull in three places upon impact and causing subdural and internal bleeding.

Defendants’ asserted they were entitled to summary judgment, in relevant part, because plaintiff signed an express waiver, release, and assumption of risk prior to attending the racing event where he was injured.

Defendants argued the release precluded plaintiff from establishing that defendants owed him any duty, a necessary element for his negligence causes of action. Defendants argued that the release broadly covered any negligence, including negligent rescue operations, and injuries that might be sustained in restricted areas like the pit, even if the injured party might not know of that particular risk. Defendants argued that the release did not violate public policy and was thus enforceable.

Plaintiff’s separate statement in opposition to defendants’ motion for summary judgment disputed defendants’ assertion that he released them from liability “for injuries he might sustain during the running of the race event if caused by negligence and negligent rescue operations.”

Plaintiff interpreted the release to mean (1) he “released only Scott Schweitzer and Schweitzer Motorsports Productions,” not all defendants, and (2) those two defendants were released only from liability for “injuries arising from or relating to the event(s).”

Plaintiff’s separate statement asserted he “was not injured during the running of a race event or while engaged in any activity associated with the operation of a motor vehicle” but rather by “[a] violent attack” that was “not reasonably related to racing or the running of a racing event.”

Plaintiff also asserted no races were in progress when Kyle Flippo blindsided him with a punch.

Plaintiff’s memorandum of points and authorities contended the required act of negligence resulting in the injury “be reasonably related to the object or purpose for which the release was signed.”

Plaintiff argued that the act of punching another person was “not reasonably related to the purpose for which [he] signed the release—to watch racing in the pits.”

Defendants asserted plaintiff’s injuries were covered by the release because the injuries arose out of or were related to the racing activities. Defendants argued the fight occurred because there had been a race and those involved in the fight were with teams or were related to the drivers and the argument arose over what happened on the track. Thus, defendants concluded the fight would not have occurred without racing. Defendants distinguish Sweat by asserting there was no true relationship between the integrity of the bleachers and racing—that is, the collapse of the bleachers was not a race- dependent incident.

Plaintiff’s complaint alleged causes of action for (1) negligence, (2) premises liability, and (3) negligent hiring, selection, approval, retention, and supervision.

Each of these causes of action is based on the elements of negligence. (See Civ. Code,
§ 1714, subd. (a) [all persons are legally responsible “for an injury occasioned to another by his or her want of ordinary care or skill in the management of his or her property”].)

A release need not be perfect to be enforceable.

A release must be clear, unambiguous, and explicit in expressing the parties’ intent by stating the language used must be clear, explicit and comprehensible in each of its essential details. Such an agreement, read as a whole, must clearly notify the prospective releasor or indemnitor of the effect of signing the agreement.

Any ambiguity in a release is usually construed against its drafter.

Whether the provisions of a contract, including a release, are clear and unambiguous is a question of law, not of fact.  

The language in a contract cannot be found to be ambiguous in the abstract.

The language “‘must be construed in the context of that instrument as a whole, and in the circumstances of that case.

Generally, contractual language is interpreted in its “ordinary and popular sense.” (Civ. Code, § 1644.)

Courts often look to dictionary definitions for a word’s ordinary and popular meaning.

Under these principles, a disagreement concerning the meaning of a word or phrase, or the fact that a word or phrase isolated from its context is susceptible to more than one meaning, does not make the language ambiguous.

The first numbered paragraph of the release supports a broad interpretation of the term “related.” That paragraph required plaintiff to immediately advise officials and, if necessary, leave a restricted area if “he feels anything to be unsafe.” The pit area in which plaintiff was injured was a restricted area. The word “anything” is broad and, therefore, the paragraph does not expressly or impliedly restrict the release’s scope.

The use of “arising out of or related to” is broad, not narrow, and does not create an ambiguity. It encompasses injuries having a causal connection to the events or having a logical connection to the events.

The release does not define the term “EVENT(S).” However, immediately below its title, the release has a blank line for a “DESCRIPTION AND LOCATION OF SCHEDULED EVENTS.” Handwritten above that line is the venue’s name: “Bakersfield Speedway.” On the blank line for “DATE RELEASE SIGNED” is handwritten “June 9, ’18.” Thus, the release identified the location and date, but did not specifically describe the scheduled events.

Based on the way the release was filled out, the dictionary definitions, and the case law, the term “EVENT(S)” is not ambiguous in the context of this case. It refers to the races held at the Bakersfield Speedway on June 9, 2018.

Based on the undisputed facts of this case, the appellate court found as a matter of law that plaintiff’s injury is “related to” the races. In particular, the facts establish the “but for” test for a causal connection is satisfied.

But for the races, plaintiff and Kyle Flippo would not have been in the speedway’s pit area on that date and, as a result, the altercations in the pit area that resulted in plaintiff being punched would not have occurred.

A direct causal link to the racing activity is not required by the release’s “related to” language.

Thus, the indirect link between the races and the incident supplies the requisite connection.

Here, the release and waiver provision explicitly refers to any injury “CAUSED BY THE NEGLIGENCE OF THE RELEASEES OR OTHERWISE.” The assumption of risk provision uses the same language. The release used the term “negligence” a total of four times and “NEGLIGENT RESCUE OPERATIONS” twice. Consequently, the release’s language is sufficient to include negligence in providing security for the events and, thus, meets the requirement of being explicit in expressing the intent of the parties.

Further, the last portion of the Agreement indicates that [the plaintiff] intended his signature to be ‘A COMPLETE AND UNCONDITIONAL RELEASE OF ALL LIABILITY TO THE GREATEST EXTENT ALLOWED BY LAW.’ Even when strictly construed against Wiscasset Raceway, the Agreement ‘expressly spell[s] out with the greatest particularity the intention of the parties contractually to extinguish negligence liability.’”

If the negligent act is so related then, as a matter of law, it is reasonably foreseeable whether or not it was actually in the contemplation of either party.

The scope of a release generally determines whether negligent conduct reasonably relates to the “object or purpose for which the release was given.”

Though the release must apply to the negligence at issue, it need not specify every possible specific act of negligence.

Nor is it relevant whether the particular risk of injury is inherent in the recreational activity to which the release applies, but rather the scope of the release.

Because the release at issue specifically mentions the activities for which plaintiff sought entrance to the venue— observation of the race—the purpose and object of the release clearly relates to the alleged negligence arising out of conduct related to the race.

Defendants’ alleged negligence in providing security at the racing events on June 9, 2018, is reasonably related to the release’s purpose.

The release is worded, as noted above, to obtain a broad, unconditional waiver of any liability for injuries directly and indirectly arising from or related to attendance at the event on June 9, 2018, and caused by defendants’ negligence.

The purpose of the release was clearly to obtain entry to the venue, including the pit area.

Plaintiff undisputedly sought entry to the event, generally, and the pit area, specifically, to participate in the event, and, per the release’s terminology, “observe” his brother race. Plaintiff wrote in the word “pit” after his signature and under the column in the release titled “duties.”

His additional material facts assert he entered the speedway “through the pits to assist his brother and stepfather before their race.” This assertion clearly indicates plaintiff signed the release to not only observe but participate in the preparation for his family members’ race that day. After the race, he was injured during an altercation about his brother’s racing conduct. All participants in that altercation were in the pit area for the express purpose of attending the race.

Altercations about a sporting event are reasonably related to the purpose and object of a release that exchanges a release of liability for entry to the racing event. Applied here, the altercation about his brother’s racing conduct was reasonably related to the purpose or object of the release: to gain entry to the venue to observe the event.

Exculpatory agreements in the recreational sports context do not implicate the public interest and therefore are not void as against public policy.

California courts, including the Supreme Court, have manifestly concluded categorically that private agreements made in the recreational sports context releasing liability for future ordinary negligence do not implicate the public interest and therefore are not void as against public policy.

Obviously, no public policy opposes private, voluntary transactions in which one party, for a consideration, agrees to shoulder a risk which the law would otherwise have placed upon the other party.

The release does not involve a transaction that affects the public interest, and the release’s enforcement does not contravene public policy.

LESSONS:

1.         Many tickets to sporting events set forth a release and waiver of liability.

2.         The requirements for an enforceable release are:

(1) the release contains a clear, unambiguous and explicit expression of the parties’ intent to release all liability for plaintiff’s injury;

(2) the alleged acts of negligence resulting in the injury are reasonably related to the object or purpose for which the release was given; and

(3) the release does not contravene public policy.

3.         A release must be clear, unambiguous, and explicit in expressing the parties’ intent by stating the language used must be clear, explicit and comprehensible in each of its essential details. Such an agreement, read as a whole, must clearly notify the prospective releasor or indemnitor of the effect of signing the agreement.

4.         All persons are legally responsible “or an injury occasioned to another by his or her want of ordinary care or skill in the management of his or her property.

5.         Exculpatory agreements in the recreational sports context do not implicate the public interest and therefore are not void as against public policy.

What are Necessary Elements of Agreement to Arbitrate in California?

The necessary elements of an agreement to arbitrate a contract claim in California were the subject of the recent case of West v. Solar Mosaic LLC.

A home improvement and solar panel salesperson visited the home where senior citizens Harold and Lucy West lived with their adult daughter Deon.

By the time he left, a loan agreement package had been completed electronically with Harold’s electronic signature.

A subsequent dispute led to litigation, and lender Solar Mosaic LLC (Mosaic) petitioned the court to compel arbitration based on arbitration provisions in the loan agreement.

The trial court declined on the ground that Mosaic had failed to establish the existence of an agreement to arbitrate.

The appellate court affirmed the court’s order.

In July 2022, Ilai Mitmiger, a sales representative for Elite Home Remodeling, Inc. (Elite), visited Harold, Lucy and Deon at the Wests’ home. Harold and Lucy were both in their 90’s and suffered from dementia. Neither used e-mail, computers, or mobile phones.

When Mitmiger arrived, Deon woke Harold and brought him from bed into the living room. There, in Mitmiger’s account, Mitmiger informed the Wests of the home solar installation Elite could provide and the availability of financing through Mosaic.

He examined a recent electric bill and told the Wests he “believed they could potentially reduce their electric bill by going solar” and “might be eligible to receive tax credits.”

According to Mitmiger, “all three family members” asked him questions about “how solar works.” Harold and Lucy, Mitmiger declared, “appeared to be excited about moving forward with a home solar system.”

Also according to Mitmiger, Deon told him “the family had previously spoken with two other contracting companies about a potential home solar installation but that Elite seemed to be the right company for the job.” Mitmiger said he heard Deon suggest to her parents that Elite should perform the work.

In Mitmiger’s version of events, when Mitmiger mentioned that Elite offered home renovation services, Harold and Lucy insisted he inspect their bathroom, which was in disrepair and had visible mold growth. They informed him the bathroom needed plumbing and electrical work and asked about replacing the tile. Mitmiger said he told them Elite could perform this work.

According to Deon, Mitmiger never mentioned being associated with Elite or Mosaic and instead claimed to work with a government program that helped senior citizens to fix up their homes.

Harold and Lucy had previously had their home painted at no cost by Habitat for Humanity, and Deon asked if the program Mitmiger was working for was similar to Habitat for Humanity.

Mitmiger said it was.

In Deon’s account, Mitmiger said he could obtain a new shower for the only bathroom in the house that had a shower and bathtub. He said it would cost $25,000 to renovate the bathroom, but did not specify who would pay for it.

Mitmiger also said he could include solar panels on the home at no additional cost.

To Deon’s knowledge, her parents had never considered installing solar panels, but Mitmiger said solar panels could lower Harold and Lucy’s taxes and electric bills.

According to Deon, they never discussed how her parents would pay any of the cost of this work, and Mitmiger did not ask for any financial information from them. Harold and Lucy lived on their retirement and Social Security benefits, and they could not afford to pay $25,000 for a home renovation.

Based on what Mitmiger told them, Deon believed the renovations would be paid for, at least in part, by Mitmiger’s government program.

During this conversation, in Deon’s view, Harold “did not seem to understand what was going on.” According to Deon, Mitmiger obtained her e-mail address so he could send a “quote.”

In Mitmiger’s account, Harold and Lucy informed him they wanted to proceed with the installation and financing of the home solar system and a bathroom renovation, so Mitmiger asked Mosaic to send a loan agreement package by e-mail for their review and signature.

Mosaic uses DocuSign for its contracts. The signature process is: (1) documents are e-mailed from Mosaic to the signer; (2) the signer receives an e-mail requesting that they sign online; (3) the signer clicks the link in the e-mail to open the document for review, and the document has areas marked for the signer to execute; (4) the signer creates a DocuSign electronic signature and clicks to place their signature in the document; and (5) once the signature has been inserted in all the required locations, the signer confirms signing as the final step and clicks a button saying “Finish.”

The documents were sent to Deon’s e-mail address at 6:29:20 p.m. They were viewed on a mobile device at 6:29:30 p.m. The documents were signed electronically in Harold’s name and completed at 6:29:43 p.m.

Harold’s electronic signature appears in seven places in the 33-page long loan document package.

According to Deon, workers came to the house the following day and demolished the bathroom that was to be renovated. Deon tried to contact Mitmiger to ask how much, if anything, the work would cost her parents, but Mitmiger never responded.

Deon declared that in August 2022 she discovered the construction contract and loan agreement.

Deon denied she and/or her parents had entered into a contract, and she attempted to cancel it. Elite refused.

Work ceased on the West home, leaving Harold and Lucy to bathe in their kitchen sink because Elite had demolished their only shower and bathtub.

Elite contended it was refused access to the home, attempted to collect payment from Harold and Lucy, and filed a mechanic’s lien on the property. Harold and Lucy sued Elite and Mosaic.

Mosaic petitioned the trial court to compel arbitration based on arbitration provisions in the electronically-completed loan agreement.

The trial court denied the petition on the ground that Mosaic had not met its ultimate burden of proving the existence of an arbitration agreement, specifically finding Mosaic had not proven Harold was the person who completed the loan documents or that Deon had the authority to bind Harold to an arbitration agreement. Mosaic appealed.

When a party to a civil action asks the trial court to compel arbitration of the pending claim, the court must determine whether an “agreement to arbitrate the controversy exists.” (Code Civ. Proc., § 1281.2.)

Because the existence of the agreement is a statutory prerequisite to granting the petition, the petitioner bears the burden of proving its existence by a preponderance of the evidence.

The trial court determines whether an agreement to arbitrate exists using a three-step burden-shifting process.

First, the party petitioning to compel arbitration must state the provisions of the written agreement and the paragraph that provides for arbitration. The provisions must be stated verbatim or a copy must be physically or electronically attached to the petition and incorporated by reference.

Signatures on the arbitration agreement need not be authenticated at this initial stage.

If the petitioner meets their initial burden, the burden of production shifts to the party opposing the petition to compel arbitration, who must offer admissible evidence creating a factual dispute as to the agreement’s existence.

When the dispute centers on the authenticity of signatures, the opponent need not prove that his or her purported signature is not authentic, but must submit sufficient evidence to create a factual dispute and shift the burden back to the arbitration proponent, who retains the ultimate burden of proving, by a preponderance of the evidence, the authenticity of the signature.

Mosaic argues the trial court’s ruling on the motion to compel arbitration was erroneous because once Mosaic met its initial burden of production and the burden shifted to the Wests, they failed to submit evidence sufficient to meet their burden of demonstrating a factual dispute as to the authenticity of Harold’s electronic signatures.

The appellate court ruled Mosaic was incorrect.

The loan documents were sent to Deon’s e-mail address, Deon told the Mosaic representative she would go check her e-mail, the documents were opened on a mobile phone 10 seconds after being sent, they were completed with seven electronic signatures within the space of 13 seconds, and Deon confirmed the documents’ completion.

Harold was in his 90’s, suffered from dementia, did not use a computer, mobile phone, or e-mail, and was unable to answer simple questions such as his birthdate and telephone number without assistance and significant delay.

The evidence strongly suggested Harold lacked the technical facility to open his daughter’s e-mail on what was presumably her mobile phone, create a digital signature, electronically click through and execute the loan agreement in seven locations, and submit those signatures, all in the space of 23 seconds, and it unquestionably demonstrates the existence of a factual dispute as to whether Harold actually executed the electronic signatures on the loan documents.

Mosaic argued the evidence was insufficient to demonstrate a factual dispute because “Harold himself never submitted any declaration or affidavit to support the assertion that he did not sign the Loan Agreement.

Mosaic offers no authority to support its contention that a personal declaration from Harold was required to shift the burden of production back to Mosaic.

An agent is someone who represents another—the principal—in dealings with third parties. (Civ. Code, § 2295.)

‘An agent has such authority as a principal actually or ostensibly confers upon him. (§ 2315.)

Actual authority is such as a principal intentionally confers upon an agent, or intentionally or by want of ordinary care allows the agent to believe himself to possess. ([Id.,] § 2316.)

Ostensible authority is such as a principal, intentionally or by want of ordinary care, causes or allows a third person to believe the agent to possess.

Agency may be created, and authority conferred, by a principal’s subsequent ratification of an agent’s conduct. (Civ. Code, § 2307.)

Ordinarily, the law requires that a principal be apprised of all the facts surrounding a transaction before he will be held to have ratified the unauthorized acts of an agent. However, where ignorance of the facts arises from the principal’s own failure to investigate and the circumstances are such as to put a reasonable man upon inquiry, he may be held to have ratified despite lack of full knowledge.

In the trial court, Mosaic argued that even if Harold did not physically sign the agreement, it was nonetheless binding upon him. First, Mosaic asserted that Deon’s actions “in holding herself out as a representative of [Harold] on the recorded Welcome Call with a representative of [Mosaic] supported a finding that she was authorized to act as [his] agent with regard to the Loan Agreement transaction.”

Second, Mosaic argued Harold later ratified the agreement through the recorded telephone call in which he responded affirmatively to information regarding the loan.

The trial court, however, ruled that the brief conversation between Harold and the Mosaic representative was “insufficiently clear to demonstrate any ratification or even awareness of Deon West having just executed a loan agreement or arbitration agreement on his behalf,” and that Mosaic had not presented evidence that Deon had actual or ostensible authority to bind Harold to the agreement containing the arbitration provision.

On appeal, Mosaic argued that the recorded telephone call does in fact demonstrate Harold’s ratification of the loan agreement.

Mosaic pointed out that its representative repeatedly referred to a loan during the conversation.

Sensibly, Mosaic does not renew the argument it made in the trial court that Deon was Harold’s actual or ostensible agent. Mosaic presented no evidence that Harold consented to Deon acting as his agent, and the Mosaic representative did not ask Harold whether he had authorized Deon to act on his behalf.

The hallmarks of actual agency are consent and control: Agency is the relationship which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act.

As for ostensible agency, it is plain that Mosaic did not believe Deon was authorized to act as Harold’s agent. Had Mosaic believed Deon was entitled to act for Harold, there would have been no reason for the representative to ask Deon to put Harold on the phone—the representative would have run through the required disclosures with Deon and inquired of Deon, not Harold, whether she understood.

Where, as here, the judgment is against the party who has the burden of proof, it is almost impossible for him to prevail on appeal by arguing the evidence compels a judgment in his favor.

Here, the court found the telephone call lacked sufficient weight to carry Mosaic’s burden of proof regarding ratification, and the record does not compel a contrary finding as a matter of law.

Mosaic contended at oral argument that it may be inferred that Harold understood the arrangements being made because he had been fully informed about and discussed the contract with Mitmiger in the family’s living room.

However, Mitmiger’s declaration does not indicate that Harold personally discussed any contract during this meeting, nor does it identify any specific statement or action by Harold indicating any understanding of the transactions entered into in his name.

To the contrary, Deon observed in her declaration that Harold did not appear to understand what was happening.

At oral argument, Mosaic argued that the trial court did not expressly find that Harold lacked capacity, so the evidence does not establish he was incapable of entering into or ratifying the contract.

There was no need for the court to make any finding about Harold’s overall competence or lack of capacity; all that matters in this analysis is whether Harold understood what was happening here, and the trial court found the recorded conversation did not demonstrate any awareness on Harold’s part that Deon had just entered into a loan agreement on his behalf.

LESSONS:

1.         When a party to a civil action asks the trial court to compel arbitration of the pending claim, the court must determine whether an “agreement to arbitrate the controversy exists.” (Code Civ. Proc., § 1281.2.)

2.         The existence of the agreement is a statutory prerequisite to granting the petition, the petitioner bears the burden of proving its existence by a preponderance of the evidence.

3.         An agent is someone who represents another—the principal—in dealings with third parties. (Civ. Code, § 2295.)

4.         The hallmarks of actual agency are consent and control: Agency is the relationship which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act.