68 Cal.2d 222, 436 P.2d 561, 65 Cal. Rptr. 545 (1968).
-Dallas and Rebecca Masterson (P) owned a ranch as tenants in common which they conveyed by grant deed to Dallas’ sister and her husband (i.e. Sine, D).
-Masterson reserved an option to repurchase the ranch within ten years in exchange for the consideration paid by Sine, plus the depreciation value of any improvements.
-Dallas later went bankrupt.
-Rebecca and Dallas’ trustee in bankruptcy (P1) brought a declaratory judgment action to establish their right to exercise the option.
-At a bench trial the court determined that the parol evidence rule precluded admission of extrinsic evidence offered by D's to show that the parties wanted the property kept in the Masterson family, and that the option was therefore personal to the grantors and could not be exercised by the trustee in bankruptcy.
The court entered judgment in favor of P and D appealed on the grounds that the option provision was too uncertain to be enforced and extrinsic evidence as to meaning should not have been admitted.
1. Under what circumstances should evidence of oral collateral agreements be excluded?
2. How must the court determine whether a collateral agreement is such that it might naturally have been made as a separate agreement?
HOLDING1. Evidence of oral collateral agreements should be excluded only when the fact finder is likely to be misled.
2. When determining that a collateral agreement is such that it might naturally be made as a separate agreement, the court must look to the actual experience and dealings between the parties as they view the status of such a collateral agreement.
The court held that it was error for the trial court to exclude extrinsic evidence that the option was personal to the grantors and therefore non-assignable. If an agreement is complete, parol evidence cannot be used to vary, contradict, or add to the terms of the contract. If an agreement is partial, parol evidence can be shown to prove the elements of the contract not reduced to writing.
It must be determined whether the parties intended the written agreement to be the final and complete embodiment of the terms; i.e., whether the agreement was an integration. The court held that if the contract states that there are no previous understandings or agreements not contained in the writing and thus clearly it expresses the parties’ intentions to nullify antecedent understandings or agreements, it need look no further for merger clauses. Otherwise, any collateral agreement must be examined to determine if the parties intended them to be included in, excluded from, or otherwise be affected by the writing. Circumstances at the time of the writing may be used to determine whether there has been an integration.
-Restatement 1st Section 240 (1)(b) permits proof of a collateral agreement if such an agreement would be naturally made by parties similarly situated as were the parties to the written agreement. UCC 2-202 states that parol evidence is not admissible if the additional terms are such that, if agreed upon, they would certainly have been included in the written contract. Thus they would exclude the evidence in still fewer instances. The option contract did not explicitly provide that it contained the complete agreement. The deed does not address assignability. This was a deed and from the very nature of deeds, the formalized structure does not lend itself to the insertion of collateral agreements and makes it less likely that all the terms of such an agreement were included.
Even when there is no explicit agreement that contractual duties shall be personal, courts will presume that intent if the circumstances indicate that performance by substituted persons would be different from that contracted for (Restatement 150). The court held that under these facts, it appeared that the collateral agreement would have been made as a separate agreement; parol evidence of the issue of assignability must be allowed.
-The right of an optionee to transfer his option to purchase property is one of the basic rights accompanying the option, unless limited by the language of the option itself. To allow an optionor to resort to parol evidence to support his assertion that the written option is not transferable is to authorize him to limit the option by attempting to restrict and reclaim rights with which he has already parted. There was nothing ambiguous about the granting language of the option and not the slightest suggestion in the document that the option was to be non-assignable. To permit such words of limitation to be added by parol is to contradict the absolute nature of the grant and to directly violate the parol evidence rule.
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