The Admissibility of Parol Evidence to Satisfy the Statute of Frauds in California after Sterling v. Taylor

April 10, 2008

I. INTRODUCTION

The statute of frauds requires contracts for the sale of real property to be in writing.[i] In California, the courts will consider extrinsic evidence to clarify the terms of a contract.[ii] Before 2007, the California Supreme Court had never made clear whether extrinsic evidence could ever be admissible to satisfy the statute of frauds.[iii] In some cases the California Supreme Court held that allowing oral extrinsic evidence would frustrate the purpose of the statue of frauds requiring the whole agreement to be in writing.[iv] In other cases the court held that excluding extrinsic evidence would make it too easy for parties to get out of deals, which later turn out to be bad, by using the statute of frauds as a defense.[v] The California Supreme Court remained unclear until 2007, when the court held in Sterling v. Taylor, that extrinsic evidence can be used to satisfy the statute of frauds, but the extrinsic evidence “must be sufficient to demonstrate with reasonable certainty the terms to which the parties agreed to be bound.”[vi]

This article will first briefly summarize the statute of frauds and parol evidence rule in California. Then it will explore some of the conflicting case law in California. Next, the article will give an account of the facts of Sterling and briefly describe the reasoning of the trial court and court of appeal. The article will then explain the reasons the majority in Sterling allowed parol evidence, and held the evidence in Sterling did not satisfy the reasonable certainty standard of the statute of frauds.[vii] It will then discuss the reasoning of the dissent, which held that the California Supreme Court should have permitted the trier of fact to decide whose interpretation of the memorandum was correct.

The article will then continue with a detailed analysis of the two conflicting policy considerations which might have contributed to the court’s holding. On one hand, the court must consider a sharp dealing party who wishes to introduce oral evidence fraudulently. On the other hand, the court must be leery of parties using the statute of frauds to void a contract due to a clerical error. The article will conclude, considering these two views, that the court reached a good compromise, and the dissent’s view would have liberalized the parol evidence rule to the point of making the statute of frauds almost obsolete. The article will end with possible questions the courts will have to grapple with after its decision in Sterling.

II. THE STATUTE OF FRAUDS AND PAROL EVIDENCE RULE IN CALIFORNIA

A. Statute of Frauds

California Civil Code § 1624 provides that certain “contracts are invalid, unless they, or some note or memorandum thereof, are in writing and subscribed by the party’s agent:. . .”[viii] The sale of real property is a contract subject to the statute of frauds.[ix] In order to satisfy the statute of frauds a writing must state “with reasonable certainty the essential terms of the unperformed promises in the contract.”[x] The essential terms of a memorandum for the sale of real property are: “the seller, the buyer, the price to be paid, the time and manner of payment, and the property to be transferred.”[xi]

The primary purpose of the statute of frauds is evidentiary; “to prevent enforcement through fraud or perjury of contracts never in fact made.” [xii] The memorandum is not the contract, but is only evidence of its terms; the oral agreement is the contract.[xiii] Hence, two parties’ prior oral agreement may have been invalid under the statute of frauds, but a subsequent memorandum affirming the agreement can satisfy the statute of frauds.[xiv] Also, the memorandum may consist of one or more writings.[xv]

B. The Parol Evidence Rule

The traditional parol evidence rule in California provided that extrinsic evidence is inadmissible to interpret the terms of a written, fully integrated contract.[xvi] California Civil Code § 1625 embodies this idea, “The execution of a contract in writing, whether the law requires it to be written or not, supersedes all the negotiations or stipulations concerning its matter which preceded or accompanied the execution of the instrument.”[xvii]

In 1968, in an opinion written by Chief Justice Traynor, the California Supreme Court narrowed the scope of the parol evidence rule when it held extrinsic evidence is admissible “to prove a meaning in which the language of the instrument is reasonably susceptible.”[xviii] This narrowing of the parol evidence rule has been codified at California Civil Code § 1856.[xix] As a result, in most cases today, parol evidence is admissible, not merely to show that a contract is ambiguous, but also to clarify an ambiguity.[xx]

C. Conflict in California Case Law Interpreting the Effect of the Parol Evidence Rule on the Statute of Frauds.

Since the statute of frauds requires the essential terms of certain contracts to be in writing, and the parol evidence rules allows extrinsic evidence to clarify ambiguous terms, the question arises; may essential terms required by the statute of frauds ever be established by parol evidence? [xxi] Or in other words, does the statute of frauds forbid the use of oral evidence to satisfy its writing requirement? In answering this question the California courts have been divided. The court acknowledges this in Sterling when it states, “both sides of this debate find support in California case law, sometimes in the same opinion.”[xxii] Outlined below are some of the conflicting cases.

In Preble v. Abrahams, decided in 1891, the California Supreme Court held, “the description of the property in the written agreement is so entirely uncertain as to render the instrument inoperative and void, unless we can go beyond the face of it to ascertain its meaning.”[xxiii] The court considered extrinsic evidence that another buyer had purchased a 40-acre tract from the plaintiff.[xxiv] The court concluded the defendant must have agreed to purchase the remainder of plaintiff’s property, and therefore the memorandum was certain enough to satisfy the statute of frauds.[xxv] “The true rule is, that the situation of the parties and the surrounding circumstances, when the contract was made, can be shown by parol evidence . . . and if then the subject-matter is identified, and terms appear reasonably certain, it is enough.”[xxvi]

Another case allowing parol evidence to satisfy the statute of frauds was Brewer v. Horst Lachmund Co..[xxvii] In 1900, the California Supreme Court had to decide whether two telegrams written in arcane short hand satisfied the statute of frauds.[xxviii] The defendant argued the memorandum was insufficient to satisfy the statute of frauds.[xxix] The court disagreed and held, “the court is permitted to interpret the memorandum by the light all of the circumstances under which it was made . . .”[xxx] Considering the circumstances surrounding the telegrams, the court concluded that it was “plainly seen” who the parties of the contract were, the subject of the contract, and the terms of the contract; the telegrams were therefore sufficient to satisfy the statute of frauds.[xxxi]

Despite the decisions of cases like Preble and Brewer, conflicting cases appear in California case law. In 1920, the California Supreme Court held in Zellner v. Wassman, “The preeminent qualification of a memorandum under the statute of frauds is ‘that it must contain the essential terms of the contract, expressed with such a degree of certainty that it may be understood without recourse to parol evidence to show the intention of the parties.’”[xxxii]

In 1963, the California Supreme Court was again faced with the question of whether parol evidence can be used to satisfy the statute of frauds.[xxxiii] In Franklin v. Hansen, the plaintiff contended a telegram and subsequent writings were sufficient to satisfy the statute of frauds for the conveyance of real property, but the court disagreed, because the letter failed to mention the price of commission.[xxxiv] The plaintiff was not allowed to introduce extrinsic evidence to satisfy the statute of frauds because the court held, “The sufficiency of a writing to satisfy the statute of frauds cannot be established by evidence which is extrinsic to the writing itself.[xxxv]
It is obvious from just this handful of cases that the California case law was unsettled as to whether parol evidence is admissible to satisfy the statute of frauds. The issue remained unsettled until 2007, when the Supreme Court of California in Sterling v. Taylor admitted parol evidence in order to satisfy the statute of frauds and disapproved all prior case law holding otherwise.[xxxvi]

III. STERLING v. TAYLOR

A. Facts

In January 2000, defendant Lawrence Taylor contacted plaintiff Donald T. Sterling and proposed that Sterling purchase various real estate properties.[xxxvii] Taylor is a general partner at Santa Monica Collection Partnership (SMC).[xxxviii] SMC owns numerous real estate properties including the three apartment buildings which were the subject of the lawsuit.[xxxix] Sterling is an attorney, real estate mogul, and owner of the Los Angeles Clippers.[xl] Both Sterling and Taylor are experienced real estate investors.[xli]

On March 13, 2000, Sterling and Taylor met at Sterling’s house in Malibu to discuss the sale of real estate properties including the SMC properties.[xlii] At this meeting Sterling handwrote a one page document entitled “Contract for Sale of Real Property.”[xliii] The document involved the sale of five properties; the case only concerned three of those properties (SMC properties).[xliv] The SMC properties were identified in the document as “808 4th St.”, “843 4th St.”, and “1251 4th St.”[xlv] The price of the three properties was “approx. 10.468 X gross income estimated income 1,600,000 Price $16,750.00[xlvi].”[xlvii] Sterling dated and initialed the document but the line for the seller’s signature was left blank.[xlviii] Sterling asserts that the absence of Taylor’s signature was inadvertent,[xlix] while Taylor asserts that he did not sign because he needed the approval of the general partners of SMC.[l] On March 14, 2000, at a Clippers’ game,[li] Sterling’s accountant gave Taylor five checks, three of which were in the amount of $500,000 as a deposit for the SMC properties.[lii]

On March 15, 2000, Sterling delivered a type written letter to Taylor, which stated, “This letter will confirm our contract of sale of the above properties.”[liii] The letter mentioned the SMC properties by street address only and discussed the deposits of the prior day.[liv] The price term was not mentioned.[lv] Both Sterling and Taylor signed the letter; Taylor beneath the handwritten words, “Agreed, Accepted, & Approved.”[lvi] Taylor contends he signed the letter only as an acknowledgment of receiving the deposits. [lvii] The parties disagree about whether the March 13 handwritten document was attached to the March 15 typed letter when signed. Sterling contends the March 13 document was attached;[lviii] Taylor insists the March 13 document was not attached and Sterling is trying to attach two unrelated documents to make a contract.[lix]

On April 4, 2000, Taylor sent Sterling formal escrow instructions, which identified the properties by their full legal descriptions and the price term totaling $16,750,000 for the SMC properties.[lx] Sterling refused to sign and on April 28, 2000, told Taylor the purchase price was unacceptable.[lxi] Sterling had examined the rent rolls[lxii] of the SMC properties and determined the actual annual rental income was $1,375,404, not $1,600,000 as written on the March 13 document.[lxiii] Sterling interpreted the language of the March 13 letter to set out a formula to determine the price of the SMC properties based on gross rental income;[lxiv] therefore, Sterling wanted the lower price of $14,404,841[lxv], based on the formula of 10.468 x 1,375,404.[lxvi]

On May 23, 2000, Taylor returned the uncashed deposits checks to Sterling,[lxvii] because Taylor contended the agreed upon price was $16,750,000, and not $14,404,841 based on a formula.[lxviii] The parties conducted further negotiations in 2000 and 2001, but no agreement could be reached.[lxix] Around March 22, 2001, Sterling sued Taylor and SMC for breach of contract to sell the SMC properties for $14,404,841 and sought specific performance.[lxx] Defendants worked for summary judgment, claiming the alleged contract violated the statute of frauds.[lxxi]

B. Superior Court, Los Angeles Count

The motion for summary judgment was heard by Judge Cole in Beverly Hills Superior Court on July 26, 2002.[lxxiii] The trial court granted summary judgment, because the price term was too uncertain to satisfy the statute of fraud,[lxxiv] concluding, “It just stretches the concept of the word ‘contract’ in the context of a purchase of a multi-million dollar piece of property to consider the documents before the court as a contract.”[lxxv] It is important to note that, this was a motion for summary judgment, since all facts were viewed in a light most favorable to Sterling; therefore the court assumed the March 13 writing was attached to the March 15 letter making one memorandum signed by defendant Taylor.[lxxvi]

C. Court of Appeal, Second District, Division 5

On October 29, 2002 Sterling appealed the trial court’s ruling to the Second Appellate District.[lxxvii] On November 26, 2003, in an opinion delivered by Justice Mosk, the court unanimously reversed the lower court’s decision.[lxxviii] First, the court held, “there is no logical reason why parol evidence should not be admissible here to satisfy the statute of frauds.”[lxxix] The court then considered Sterling’s testimony in support of a price term based on a formula taking into consideration the actual annual gross rental income, rather than the estimated annual income in the memorandum.[lxxx] Based on this evidence, the court concluded, “even though an essential term in a memorandum is ambiguous and requires evidence to clarify any ambiguities, the writings are not insufficient to satisfy the statute of frauds.”[lxxxi]
D. Supreme Court of California, Majority

On March 1, 2007, in an opinion delivered by Justice Corrigan, a majority of five justices reversed the judgment of the court of appeal, and reinstated the trial court judgment.[lxxxii] The court first considered the issue of the use of extrinsic evidence to satisfy the statute of frauds, and held that the “statute of frauds does not preclude the admission of evidence in any form.”[lxxxiii] Nevertheless, after considering extrinsic evidence, the court held there is not enough evidence to satisfy the statute of frauds pertaining to the price term sought by Sterling.[lxxxiv]

In ruling that extrinsic evidence is admissible to satisfy the statute of frauds the court relied on the fact that the statute of frauds serves only an evidentiary purpose and does not establish the terms of an agreement.[lxxxv] The primary purpose of the statute of frauds is to prevent the enforcement of a contract never in fact made.[lxxxvi] The court then quotes extensively both Corbin on Contracts and Williston on Contracts[lxxxvii]in support of their holding that, “ if a memorandum includes the essential terms of the parties’ agreement, but the meaning of those terms is unclear, the memorandum is sufficient under the statute of frauds if extrinsic evidence clarifies the terms with reasonable certainty and the evidence as a whole demonstrates that the parties intended to be bound.”[lxxxviii]

In its opinion, the court acknowledged other cases have conflicted with their holding,[lxxxix] but stated the law of California unequivocally: “We disapprove the statements of California cases barring consideration of extrinsic evidence to determine the sufficiency of a memorandum under the statute of frauds.”[xc]

Applying the rule of law to the present facts the court concluded, first, that considering the surrounding circumstances, the seller and buyer and the properties were “sufficiently identified.”[xci] Sterling and Taylor displayed no uncertainty to those terms before the dispute over price arose.[xcii] Although the properties were only mentioned by street address, the court may consider extrinsic evidence to locate a property described in imprecise terms.[xciii]
Second, the extrinsic evidence and the documents considered together are insufficient to establish Sterling’s price term with reasonable certainty.[xciv] The price term in the memorandum was ambiguous because of the use of the word “approx.” before the multiplier.[xcv] The court then considered Sterling’s testimony that the word “approx.” was meant to modify the total price, thus the writing was merely to serve as a formula for calculating the sale price.[xcvi] Because Sterling’s interpretation is disputed by Taylor, is based solely on his own testimony, and the price he seeks is not reflected in the memorandum, there was insufficient evidence to establish price with the reasonable certainty required by the statute of frauds.[xcvii]
E. Supreme Court of California, Dissent

Justice Kennard authored the dissenting opinion, which was joined by Justice Werdegar.[xcviii] The dissent agreed with the majority’s opinion that extrinsic evidence should be admissible to satisfy the statute of frauds.[xcix] However, they disagreed with the majority’s view that the court should resolve the conflict in evidence; this should be done by the trier of fact.[c]

The language in the memorandum is ambiguous, because it is reasonably susceptible to one or more meanings.[ci] Sterling’s view is that “10.468 X gross income estimated 1,600,000” was a formula to determine the price of the SMC properties depending on the actual gross annual rental income.[cii] Taylor’s view is that “Price $16,750,000” is the actual purchase price agreed upon by the parties.[ciii] Which view should be accepted “is a determination to be made by the trier of fact” after considering extrinsic evidence.[civ] The dissent claims the majority’s opinion adopts Taylor’s point of view instead of letting the trier of fact resolve the conflict.[cv] The court weighed the evidence and concluded the agreed upon price was $16,750,00 and Sterling is trying to alter the writing.[cvi] But Sterling’s interpretation is just as likely as Taylor’s, and the trier of fact should resolve this ambiguity, not the court.[cvii]

IV. ANALYSIS

A. Two Public Policy Considerations

There seem to be two public policy considerations at work in the court’s opinion. On one hand, it is good public policy that sellers or buyers cannot use the statute of frauds as a technicality to get out of a deal, which in hindsight was poor. On the other hand, it is also good public policy not to allow a buyer or seller to use extrinsic to fraudulently alter the agreement into something other than what the parties intended at the time of contract. Two amicus briefs were filed in Sterling, one in favor of respondent, and the other in favor of petitioner.[cviii] Both of these briefs concluded, although differently, that one of the two public policy issues should have more weight and govern the rule of law in California.

1. Public policy consideration of avoiding contractual obligations

The California Association of Realtors (CAR) filed an amicus brief arguing parol evidence should be permitted to satisfy the statute of frauds, because ruling otherwise would allow either the buyer or seller to avoid a contractual obligation.[cix] If a buyer or seller finds a better deal, due to changing property prices, they can use the statute of frauds as a defense so they can void their prior obligation and pursue the new deal. CAR is comprised of over 150,000 real estate brokers, and one of its purposes is “promoting and establishing reasonable legal standards to govern the transfer of real estate.”[cx]

CAR’s brief goes on to argue that the buying and selling of real estate is a very complicated procedure involving a lot of paperwork.[cxi] Many real estate transactions involve standard forms, some of which can be eight pages long.[cxii] Due to the complex nature of real estate transactions there may be ambiguities in material terms.[cxiii] This is not only the case where buyers and sellers enter into an agreement without the aid of standard forms, but also where standard forms are used.[cxiv] If parol evidence is not considered, a simple clerical error or uncertainty may be enough to void a million dollar contract.[cxv] In most cases however, a clerical error or uncertainty can be made clear by looking at extrinsic evidence, like the “parties actions in pursuing an agreement” and the “pages upon pages of written material” outside of the memorandum.”[cxvi]

There are many situations CAR argues, where simply looking at extrinsic evidence can clear up any disputes over terms on the face of the memorandum.[cxvii] One such example may involve the price term in a standard offer of sale form.[cxviii] In a standard form used by CAR, the price term appears in two different places.[cxix] Sometimes a party may not transcribe all the numbers correctly from one spot to another.[cxx] Afterwards, an escrow holder will send out a confirming letter, which does not need to be signed, stating the agreed upon price.[cxxi] The buyer will then seek a loan for the amount outlined in the letter.[cxxii] If one of the parties is dissatisfied with the deal he or she could claim the standard form does not satisfy the statute of frauds because of the discrepancy in the two price terms.[cxxiii] However, if extrinsic evidence is admissible like the confirming letter, loan sought, and subsequent conduct, it will be easy to tell which one of the price terms the parties agreed upon, or whether they did not agree on a price term.[cxxiv]

2. Public policy consideration of avoiding fraud

The Apartment Association of Greater Los Angeles (AAGLA) filed a short amicus brief that argued allowing parol evidence to satisfy the statute of frauds “opens the way for dishonest dealing and sharp real estate practice.”[cxxv] AAGLA is the oldest and largest association of apartment owners in California, and is comprised of some 25,000 members.[cxxvi] The amicus brief is only four pages long and states in conclusory fashion that the court of appeal’s decision will lead to “dishonest dealing.”[cxxvii] However, this conclusion is not apparent, so we must analyze it a little more.

The purpose of the statute of frauds is to avoid fraud, and it does this by requiring certain aspects of the contract to be in writing.[cxxviii] For example, a seller of property could own two houses, one which is worth more than the other, and both are located on Lincoln Street. In a memorandum for the sale of one of the houses, the seller writes, “I sell the property located on Lincoln Street, Santa Monica for $755,000.” Then both parties sign the memorandum. At the time it was understood by both parties that the house for sale was the lesser valued one of the two on Lincoln Street. After carefully reading the memorandum, the buyer realizes he or she might be able to purchase the higher valued price home on Lincoln Street at steal of $750,000. If extrinsic evidence is admissible, the buyer could fraudulently testify that the parties agreed upon the higher valued property on Lincoln Street when they signed the memorandum. Furthermore, if the buyer is of even more dubious character, they might even write the higher priced property in a forged letter confirming the deal. If the court does not consider extrinsic evidence then this forged letter will not be admissible, and therefore will have to chance of tricky a judge or jury.

B. Good Compromise Between the two Competing Public Policy Issues

The California Supreme Court’s holding in Sterling is a good compromise between the two conflicting public policy considerations outlined above. If the court accepted Taylor’s view that parol evidence should not be admissible at all to satisfy the statue of frauds, then the statute of frauds would too easily allow parties to avoid contractual obligations based on clerical errors or inadvertent mistakes in formalizing the agreement in writing. On the other hand, if the court accepted Sterling’s and the dissent’s view of permitting parol evidence and then allowing the jury to decide whose interpretation the parties agreed upon, the purpose of the statute of frauds would then be frustrated.

The rest of this section will focus on how the court’s holding reaches a middle ground between the two competing public policies.

1. The written memorandum must include the essential terms

The court held parol evidence is admissible, but first the memorandum must include the essential terms, and the meaning of those terms must be unclear.[cxxix] The court did not spend much time questioning whether the memorandum agreement between Sterling and Taylor included the essential terms. This was probably because the standard the court had in mind in analyzing this question was a very low one. Basically, did the memorandum have any term written for the seller, buyer, price, time and manner of payment, and property? If so, then it satisfies the first part of the court’s holding.

The ease of satisfying the court’s requirement of having the essential terms in writing before they will consider parol evidence is apparent in the facts of Sterling. The property location in the memorandum was devoid of any city or state; “843 4th St.” for example. However, the court still held the memorandum included the essential term of property to be acquired.[cxxx]

The next step in the analysis is to decide whether any term is unclear. In Pacific Gas & Electric Co. v. G.W. Thomas Drayage & Rigging Co., the California Supreme Court said a term is unclear when it is, “fairly susceptible” to two interpretations.[cxxxi] Since a judge interprets a contract with their “own linguistic education and experience,” the court will consider extrinsic evidence so it can be in the same “situation which the parties found themselves at the time of contracting.”[cxxxii] After considering the extrinsic evidence the judge will decide if the contract is “fairly susceptible of either one of the two interpretations contended for.”[cxxxiii]

In Sterling, the court considered extrinsic evidence after determining the price term was ambiguous.[cxxxiv] The term was ambiguous because of the word “approx” before the multiplier, the total price left off a zero, and the uncertainty about what “gross income” means.[cxxxv] The court’s opinion did not spend much time in determining that the price term was ambiguous before looking at extrinsic evidence. This was probably because the memorandum itself contained an ambiguity on its face. In Sterling, the court never dealt with the question of whether extrinsic evidence is admissible when on the face of memorandum the term is not ambiguous.

Proponents of the idea that parol evidence should never be admissible to satisfy the statute of frauds, even if the writing includes all the essential terms but is unclear, would disagree with the court’s holding.[cxxxvi] They contend the two requirements are too easily satisfied and increase the chance of fraud by allowing extrinsic evidence. It is true that the court did weaken the strength of the statute of frauds, especially when it effectively overruled prior cases, which did not allow parol evidence to clarify essential terms.[cxxxvii] However, Sterling’s and CAR’s arguments are persuasive that such a strict rule of no admissibility would facilitate buyers and sellers escaping their contractual obligations.

However, Taylor’s and the AAGLA’s arguments are also persuasive. So how is the court going to protect buyers and sellers from fraudulent dealing? The second part of the court’s holding is what provides adequate protection.

2. Statute of frauds requires reasonable certainty that the parties agreed on the term

After finding that the memorandum includes all the essential terms, but at least one of those terms is unclear, the court will then consider parol evidence, and ask whether the extrinsic evidence “clarifies the terms with reasonable certainty and the evidence as a whole demonstrates that the parties intended to be bound.” This is where the statute of frauds still has some teeth.

In considering all the extrinsic evidence in Sterling, the court held, “the price term in the memorandum, considered together with the extrinsic evidence of the contemplated price, leave a degree of doubt that the statute of frauds does not tolerate.”[cxxxviii] The court focused on the fact that the only extrinsic evidence in support of Sterling’s interpretation of a formula based price term, was his own testimony.[cxxxix] This requirement of “reasonable certainty” is enough to preserve the purpose of the statute of frauds to “prevent enforcement through fraud or perjury of contracts never in fact made.”[cxl]

For the sake of argument, assume Taylor and Sterling never in fact agreed on a formula based price term, and Sterling through fraud is trying to enforce his interpretation of the memorandum. This may or may have not been the case. Sterling did have a huge incentive to try to buy the SMC properties at $14,404,841 instead of $16,750,000, this being a difference of $2,345,159. Furthermore, between the signing of the memorandum in March, 2000, and the filing of the complaint in March, 2001, real estate prices had increased, and at that point it would have been considered a steal if Sterling could acquire the property at $14,404,841.[cxli]
In this scenario Taylor would be prevented from fraud because in order for the memorandum to satisfy the statute of frauds, the court needed at least more extrinsic evidence than Sterling’s own testimony to collaborate his interpretation. Taylor thus avoided a long trial trying to show his interpretation of the memorandum was correct, because of one fraudulent claim.
Also, this requirement of “reasonable certainty” will not allow people to avoid their contractual obligations through a mere clerical error in drafting agreement. For example, the memorandum in Sterling only referred to the properties by street, and omitting the city and state. This error would be considered a mere inadvertent clerical error, and is most likely the result of the informal drafting process the parties used. The court considered extrinsic evidence, and was able to easily conclude the properties were located in Santa Monica, because SMC only owns properties in Santa Monica, and the purchase agreement contained the full legal descriptions, which were not disputed.[cxlii] Here, Taylor was not able to use the statute of frauds to avoid a contractual obligation due to an inadvertent clerical error.

The majority’s view seems to find a good middle ground, while the dissent’s view would liberalize the parol evidence rule to the point where the statute of frauds is almost non-existent. The dissent would rather have the rule of law be: once there is an ambiguity in the memorandum, the trier of fact should resolve the conflict in the evidence.[cxliii] In the dissent, it is hard to see where the statute of frauds has any relevance, since Judge Kennard does not even mention that the essential terms must be included in a written memorandum, but rather starts her analysis from the point of ambiguous terms.[cxliv] The dissent accuses the majority of weighing the evidence and deciding that Taylor’s interpretation of the memorandum is the correct one.[cxlv]

The dissent is correct when it states there is conflicting extrinsic evidence, but it does not accurately capture what the majority was doing its opinion. The court’s holding is not that Taylor’s interpretation of the memorandum is in the fact the correct one, but rather that the evidence in support of Sterling’s interpretation is insufficient to satisfy the statute of frauds with reasonable certainty.[cxlvi] It would be a totally different story if the court was being asked to decide which price term the parties agreed upon. Taylor is not seeking to force Sterling to buy the SMC properties at the higher price; he merely wants to be avoid being forced to sell at the lower one. Taylor is not asking the court to find that his price term is the correct one, merely to hold that statement there of the price term to satisfy the statute of frauds.

The dissent also fails to consider, “it is a question of law whether a memorandum, considered in light of the circumstances surrounding its making, complies with the statute of frauds.”[cxlvii] The question of whether the memorandum was reasonably certain to satisfy the statute of frauds is a question of law to be decided by the judge, not the trier of fact. Since this case was a hearing on summary judgment, if the majority had upheld the court of appeal, the case would have had to go to trial, where a trier of fact would decide whose interpretation the parties agreed upon. The dissent would rather skip the intermediate step of deciding whether the statute of frauds has been satisfied, and go straight to a trier of fact to decide between the conflicting interpretations. Besides wasting valuable judicial resources by having a trial to determine every ambiguous term, the dissent’s approach gets rid of the only requirement (reasonable certainty) the statute of frauds imposes on parties. Once it goes to trial, the trier of fact will only be deciding whose interpretation is more likely than not. Parties would be able to side step the statute of frauds, by merely claiming the memorandum contains ambiguous terms. Although reasonable people disagree as to whether the statute of frauds is still needed[cxlviii], as long as it is on the books, parties should not be able to avoid it so easily.

C. The Effect of the Court’s Holding on Future Cases

Although the court’s holding did strike a good compromise between the two conflicting public policies, it is not perfect. The court will still have to resolve specific questions concerning its holding.

1. What memorandum would fail to satisfy the requirement of essential terms?

As previously mentioned, the memorandum in Sterling clearly contains the essential terms; the concern was whether it was reasonably certain the parties agreed upon those essential terms. In its holding, the majority did not articulate what facts would fail to meet this requirement. It would seem fairly obvious that if a memorandum did not mention price or property location at all, it would fail this requirement. However, how far will the court go in determining whether the memorandum includes essential terms?

What if the memorandum did not say, “843 4th street,” as in Sterling, but rather, “4th street,” or “843”? What it only had the number “8,” or just said “United States”? Would the court conclude the memorandum included the essential term of property location and then consider parol evidence to clarify the term? In regards to price terms, what if the memorandum stated, “price: C”, or “price: $”? The memorandum does include something for price although not numbers. What if the parties wrote, “price term: TBD”. Most people would construe this as not satisfying the essential terms requirement for price, because the parties were going to determine the price later and therefore was not included in the memorandum at the time. Would it make a difference if one of the parties could bring in extrinsic evidence that they orally agreed upon a price later or that they buyer and seller had a code way of communicating where each letter equals its corresponding number in the alphabet?[cxlix]

2. How much evidence is needed to demonstrate with reasonable certainty the parties agreed to be bound under the statute of frauds?

Unlike the requirement of the essential terms being in the memorandum, the court does give guidance for future cases to determine how much evidence is required to satisfy the statute of frauds with reasonable certainty.[cl] If the only evidence in support of a party’s interpretation is their own testimony, then this will be insufficient.[cli] In dicta, the court suggests what evidence would have been sufficient.[clii] “Had Taylor testified that the parties meant to leave the price open to determination based on a rental income figure that was yet to be determined, this would be a different case.”[cliii] The testimony of Taylor corroborating Sterling’s story would have provided enough evidence to be reasonably certain for the statute of frauds. But how often is a defendant, on a contested issue like this, going to testify in favor of the plaintiff? If they were going to do this then they would not be in court in the first place.
The court does not define what it means by “reasonable certainty,” and like other legal standards,[cliv] it will have to be fleshed out by subsequent cases. “Reasonable certainty” does seem like a heightened standard. Presumably it means something more than “more likely than not,” and less than “beyond a reasonable doubt.” Besides Taylor testifying in favor of Sterling, what other extrinsic evidence would have satisfied the statute of frauds? Consider the following pieces of evidence, and determine whether they would satisfy the “reasonable certainty” requirement of the statute of frauds, (assume all pieces of evidence are admissible):
a) Sterling introduces testimony from his accountant, who testifies Sterling told him the price was based on a formula. b) Sterling introduces in evidence a letter written by Taylor, which was sent with the rent rolls, and states, “here are the rent rolls you requested. These will allow us to figure out the actual price of the SMC properties.” c) Sterling introduces the same evidence as above, but Taylor introduces evidence of letter written by Sterling which reads, “I’m writing to confirm the sale of the SMC properties for $16,750,000.”

V. CONCLUSION

One of the main purposes of contract law is help increase economic efficiency.[clv] If parties can easily avoid contractual obligations by resorting to a strict statute of frauds, parties will be hesitant to enter into contracts, because they know the other party will find a way to back out of the deal. On the other hand if parol evidence too easily satisfies the statute of frauds, then parties will be less inclined to enter into contracts because of fear of being subject to a fraudulent contractual duty never bargained for in the original contract, and also because fear of being hauled into court to dismiss a fraudulent claim. Either situation leads to a decrease in economic efficiency. However, the court’s holding in Sterling finds a middle ground and allows parties to enter into contracts knowing that the other side will not be able to avoid a contractual obligation due to an inadvertent error, and they will not be subject to a fraudulently claimed obligation.

___________________________________________________________________
[i] Cal. Civ. Code § 1624 (West 2008)
[ii] Cal. Civ. Code § 1625 (West 2008)
[iii] Sterling v. Taylor, 40 Cal.4th 757, 765 (2007).
[iv] See Ellis v. Klaff, 96 Cal.App.2d 471 (1950); Franklin v. Hansen, 59 Cal.2d 570 (1963); Zellner v. Wassman, 184 Cal. 80.
[v] See Preble v. Abrahams, 88 Cal. 245, 249-50 (1891); Brewer v. Horst Lachmund Co., 127 Cal. 643 (1900).
[vi] Sterling, 40 Cal.4th at 761.
[vii] Id.
[viii] Cal. Civ. Code § 1624 (West 2008)
[ix] Cal. Civ. Code § 1624(a)(3) (West 2008)
[x] Restatement (Second) of Contracts § 131 (2007).
[xi] King v. Stanley, 32 Cal.2d. 584, 589 (1948).
[xii] Restatement (Second) of Contracts § 131 cmt. a (2007).
[xiii] B.E. Witkin, Summary of California Law, 1 Contracts § 350, 397 (10th ed. 2005).
[xiv] Id.
[xv] Restatement (Second) of Contracts § 132 (2007).
[xvi] Olivia Karlin & Louis Karlin, The California Parol Evidence Rule, 21 Sw.U.L.Rev. 1361, 1364-65 (1992).
[xvii] Cal. Civ. Code § 1625 (West 2008)
[xviii] Pacific Gas & Elec. Co. v. G.W. Thomas Drayage & Rigging Co., Inc., 69 Cal.2d 33, 37 (1968).
[xix] Cal. Civ. Code § 1856 (West 2008)
[xx] Olivia Karlin & Louis Karlin, The California Parol Evidence Rule, 21 Sw.U.L.Rev. 1361, 1366 (1992), See also B.E. Witkin, California Evidence, 2 Docu Evid § 76 (4th ed. 2000), Testator’s Declarations of intent excluded in resolving patent ambiguity, 14 STNLR 409 (1962).
[xxi] Brief for Petitioners at iv, Sterling v. Taylor, 40 Cal.4th 757 (2007)(No. S121676)
[xxii] Sterling v. Taylor, 40 Cal.4th 757, 765 (2007).
[xxiii] 88 Cal. 245, 249-50 (1891).
[xxiv] Id. at 250.
[xxv] Id.
[xxvi] Id. at 250-51.
[xxvii] 127 Cal. 643 (1900).
[xxviii] Id. at 646.
[xxix] Id.
[xxx] Id.
[xxxi] Id.
[xxxii] 184 Cal. 80, 85-86.
[xxxiii] Franklin v. Hansen, 59 Cal.2d 570 (1963).
[xxxiv] Id. at 572,577.
[xxxv] Id. at 573-74.
[xxxvi] Sterling, 40 Cal.4th at 770.
[xxxvii] Id. at 762.
[xxxviii] Id.
[xxxix] Sterling v. Taylor, 113 Cal.App.4th 931, 840 (2003), overruled by Sterling v. Taylor, 40 Cal.4th 757, 765 (2007).
[xl] Brief for Respondent at 3, Sterling v. Taylor, 113 Cal.App.4th 931 (2003)(No. B162961); Donald Sterling (2008), available at http://en.wikipedia.org/wiki/Donald_Sterling.
[xli] Sterling, 40 Cal. 4th at 762.
[xlii] Brief for Respondent at 3, Sterling v. Taylor, 113 Cal.App.4th 931 (2003)(No. B162961).
[xliii] Id., Sterling, 113 Cal.App.4th at 840 (the document may be rendered in typescript as follows:
“Seller Larry Taylor, & Christina Development, and Buyer Donald T. Sterling, Trustee of Sterling Family Trust, agree to the following terms and conditions:

D.P.

3,000,000

“1. Fox Plaza
3,000,000
(cash to loan)

Price
$31,000,000

“2. Barrington Bldg.
2,000,000 DP


Price
$12,700,000
6,000,000 DP

“3. 808 4th St.
)
approx. 10.468 x gross income


“4. 843 4th St.
}
estimated income 1,600,000
Price
$ 16,750.00

“5. 1251 14th St.
)
escrow 30 days. Brentwood scrow [sic]

“Cash to loan.
“Contract to be completed within 30 days.


“Date 3/13/2000
Seller



Buyer
DTS
”



[xliv] Sterling, 40 Cal. 4th at 763.
[xlv] Id.
[xlvi] The price term on the March 13 document is only 16,750.00. Sterling admits “he accidently left off one zero” and the price was meant to be $16,750,000. Id. at 764.
[xlvii] Id. 10.468 x 1,600,000 equals 16,748,800 not 16,750,000. Sterling contends this is because they rounded.
[xlviii] Id.
[xlix] Appelants’ Opening Brief at 7, Sterling v. Taylor, 113 Cal.App.4th 931(2003)(No. B162961).
[l] Brief for Respondent at 4 n.1, Sterling v. Taylor, 113 Cal.App.4th 931 (2003)(No. B162961).
[li] Surprisingly the Clippers beat the Nuggets 110 to 106. CLIPPERS SCHEDULE 1999-01, available at http://www.nba.com/clippers/schedule/results_1999.html.
[lii] Brief for Respondent at 4 , Sterling v. Taylor, 113 Cal.App.4th 931 (2003)(No. B162961).
[liii] Sterling, 113 Cal.App.4th at 841. The letter in its entirety read:
“This letter will confirm our contract of sale of the above buildings.
“As we discussed I am leaving for a week. In order to expedite our sale pursuant to our contract, I agreed to give you the following deposits:

“1. 3025 Barrington Ave.
$
2,000,000.00
“2. 808 4th Street
500,000.00
“3. 843 4th Street
500,000.00
“4. 1251 14th Street
500,000.00
“5. 10000 Santa Monica Blvd.
1,200,000.00
.

“These Deposits Were Given To You To Enable You To Have Three Million Dollars To Deposit 1/2 Of The Down Payment Of The Fox Property. I Agreed To Pay The Other 1/2 So We Would Have A Total Of 6 Million, The Difference Between The $25,000,000 Loan And The Price Of $31,000,000.
“I am also enclosing the 1.2 million deposit and down payment for the purchase of 10000 Santa Monica Boulevard which represents the same amount you invested in this property.
“This letter will also confirm our agreement that the depreciation allocation and tax benefits will be given to me no later than April 1, 2000, since I now have equitable tittle [sic]. Of course I will be fully responsible for all recapture liabilities.
“Darren is prepared to wire the balance of the funds needed if you will call my office. If you have any questions or your understanding is different from mine, please contact me immediately.
“Warm Personal Regards,
“Don” Id.

[liv] Sterling, 40 Cal. 4th at 763.
[lv] Id.
[lvi] Id.
[lvii] Brief for Respondent at 6 fn.2 , Sterling v. Taylor, 113 Cal.App.4th 931 (2003)(No. B162961).
[lviii] Appelants’ Opening Brief at 8, Sterling v. Taylor, 113 Cal.App.4th 931(2003)(No. B162961).
[lix] Brief for Respondent at 6 fn.2 , Sterling v. Taylor, 113 Cal.App.4th 931 (2003)(No. B162961).
[lx] Sterling, 40 Cal. 4th at 763.
[lxi] Id.
[lxii] The rent roll is, “A list of tenants, generally with the lease rent and expiration date for each.” Business Dictionary: Rent Roll, available at http://www.answers.com/topic/rent-roll-1?cat=biz-fin.
[lxiii] Sterling, 40 Cal. 4th at 763.
[lxiv] Sterling v. Taylor, 113 Cal.App.4th at 842.
[lxv] The product of 1,375,404 multiplied by 10.468 is 14,397,729, not 14,404,841. In a declaration filed by the trial court, Sterling explained that he made a mistake. Sterling, 40 Cal. 4th at 763 fn. 2.
[lxvi] Id.
[lxvii] Id. at 764.
[lxviii] Taylor, 113 Cal.App.4th 931at 841 (2003
[lxix] Sterling, 40 Cal. 4th at 764.
[lxx] Id.
[lxxi] Id.
[lxxii] Pictures taken by author, March 10, 2008.
[lxxiii] Brief for Respondent at 9, Sterling v. Taylor, 113 Cal.App.4th 931 (2003)(No. B162961).
[lxxiv] Sterling, 40 Cal. 4th at 764.
[lxxv] Brief for Respondent at 9, Sterling v. Taylor, 113 Cal.App.4th 931 (2003)(No. B162961).
[lxxvi] Sterling, 113 Cal.App.4th at 843.
[lxxvii] Brief for Petitioners at 5, Sterling v. Taylor, 40 Cal.4th 757 (2007)(No. S121676)
[lxxviii] Sterling, 113 Cal.App.4th at 840, 853.
[lxxix] Id. at 846.
[lxxx] Id. at 851.
[lxxxi] Id.
[lxxxii] Sterling, 40 Cal. 4th at 776.
[lxxxiii] Id. at 765.
[lxxxiv] Id.
[lxxxv] Id. at 766.
[lxxxvi] Id.
[lxxxvii] Id. at 770-71.
[lxxxviii] Id.
[lxxxix] Id. at 769.
[xc] Id. at 770. The Court thus overturned, at least in part; Franklin v. Hansen, 59 Cal.2d 570; Zellner v. Wassman, 184 Cal. 80; Seymour v. Oelrichs, 156 Cal. 782; Craig v. Zelia; 137 Cal. 105; Burge v. Krug, 160 Cal.App.2d 201; Ellis v. Klaff 96 Cal.App.2d 471.
[xci] Id. at 772, 773 n.16
[xcii] Id. at 772.
[xciii] Id. at 773, see Beverage v. Canton Mining Co., 43 Cal.2d 769, 774-75 (1955).
[xciv] Id. at 775.
[xcv] Id. at 774.
[xcvi] Id.
[xcvii] Id at 775.
[xcviii] Id. at 776 (Kennard, J. dissenting).
[xcix] Id.
[c] Id.
[ci] Id. at 777. See Dore v. Arnold Worldwide, Inc., 39 Cal.4th 384, 391 (2006).
[cii] Id. at 778.
[ciii] Id.
[civ] Id.
[cv] Id.
[cvi] Id.
[cvii] Id. at 778-79.
[cviii] Brief of Amici Curiae California Association of Realtors, Sterling v. Taylor, 40 Cal.4th 757 (2007)(No. S121676); Brief of Amici Curiae Apartment Assoication of Greater Los Angeles, Sterling v. Taylor, 40 Cal.4th 757 (2007)(No. S121676)
[cix] Brief of Amici Curiae California Association of Realtors at 6-7, Sterling v. Taylor, 40 Cal.4th 757 (2007)(No. S121676);
[cx] Id. at 2. Although I don’t wish to imply motive, it might be important to remember that real estate agents make their money on a commission basis. If the deal is voided by the statute of frauds they will not receive their commission, so there might be an incentive on the part of CAR to argue for allowing parol evidence hoping more contracts will be deemed enforceable.
[cxi] Id. at 3.
[cxii] Id. at 5.
[cxiii] Id. at 7.
[cxiv] Id. at 6.
[cxv] Id.
[cxvi] Id.
[cxvii] See Id.
[cxviii] Id. at 8.
[cxix] Id.
[cxx] Id. at 9.
[cxxi] Id.
[cxxii] Id.
[cxxiii] Id.
[cxxiv] Id.
[cxxv] Brief of Amici Curiae Apartment Assoication of Greater Los Angeles at 3, Sterling v. Taylor, 40 Cal.4th 757 (2007)(No. S121676)
[cxxvi] Id.
[cxxvii] Id.
[cxxviii] See Preble v. Abrahams, 88 Cal. 245, 249-50 (1891); Brewer v. Horst Lachmund Co., 127 Cal. 643 (1900).
[cxxix] Sterling, 40 Cal. 4th at 771.
[cxxx] Id. at 773.
[cxxxi] 69 Cal.2d at 40.
[cxxxii] Id.
[cxxxiii] Id.
[cxxxiv] Sterling, 40 Cal. 4th at 773-74.
[cxxxv] Id.
[cxxxvi] See Brief for Petitioners at 5, Sterling v. Taylor, 40 Cal.4th 757 (2007)(No. S121676); Brief of Amici Curiae Apartment Assoication of Greater Los Angeles at 3, Sterling v. Taylor, 40 Cal.4th 757 (2007)(No. S121676)
[cxxxvii] See Gordon v. Perkins, 108 Cal.App. 336 (1930). (“The writing must disclose a description which is itself definite and certain.”)
[cxxxviii] Sterling, 40 Cal. 4th at 775-76.
[cxxxix] Id. at 775.
[cxl] Id.
[cxli] Ten Year Home Appreciation for MajorMetros, available at http://www.housingbubblebust.com/OFHEO/NYear/10Year.html#California
[cxlii] Sterling, 40 Cal. 4th at 773.
[cxliii] Id. at 776 (Kennard, J. dissenting).
[cxliv] This might be because she assumes that the essential terms must be in the statute of frauds, and starts her discussion only from the point she disagrees with the majority.
[cxlv] Id. at 778.
[cxlvi] Id. at 775.
[cxlvii] Phillippe v. Shapell Industries, 43 Cal.3d 1247, 1258 (1987).
[cxlviii] See B.E. Witkin, Summary of California Law, 1 Contracts § 342 (10th ed. 2005), 68 Harv. L. Rev 383, Sunset-Sternau Food Co. v. Bonzi, 60 C.2d 834, 838 (1964).
[cxlix] Like, A=1, B=2, C=3, and so forth.
[cl] Sterling, 40 Cal. 4th at 772-76.
[cli] Id. at 775.
[clii] Id. at 774.
[cliii] Id.
[cliv] See criminal standard of guilt, reasonable person standard, civil standard or guilt, due process, etc..
[clv] E. Allan Farnsworth, William F. Young, Carol Singer, Contracts Cases and Materials, (University Case book 2001 6th edition).