Court Opinion

ID: 9718995
Source: CourtListenerOpinion
Date Created: 2023-08-26 07:39:56.977045+00
Date Added: 2024-06-11T18:24:03.946100
License: Public Domain

JOHNSON, J.
—I respectfully dissent.
The majority correctly points out the controlling factor in a novation contest is the intent of the parties. The question here was whether the parties to the original agreement, the seller Lee and the buyers Grimsgaards, intended to cancel that agreement and substitute a new agreement.
“‘Novation is the substitution of a new obligation for an existing one.’ (Civ. Code, § 1530.) ‘Novation is made: 1. By the substitution of a new obligation between the same parties, with intent to extinguish the old obligation. ...’(§ 1531.)”1 (Hunt v. Smyth (1972) 25 Cal.App.3d 807, 818 [101 Cal.Rptr. 4].) The facts surrounding the case admittedly are rather unusual in a novation contest. Neither of the original parties is contesting the transaction or claiming novation. The trial court was greatly impressed with this atypical scenario. It determined the status of the parties alone provided sufficient evidence to conclusively find the parties did not intend *487a novation. Thus, he excluded other evidence which may have shown the parties had a contrary intent.
The trial judge held the parties intended a single continuous transaction, evidenced by the fact they went from point A to point B. “The Court: They [the Grimsgaards] offered to acquire the Lee property and what happened eventually? They acquired that property.” It is well established that intent can be inferred from the facts and circumstances surrounding the transactions in question. (Manfre v. Sharp, (1930) 210 Cal. 479, 480 [292 P. 465].) However, due to the nature of novation which hinges so much on the parties’ subjective intent at the time they executed the second contract, I am unwilling to hold this intent can be inferred solely from the fact the original parties are not presently disputing the validity of the second contract. Accordingly, I would reverse to allow the admission of other evidence which might bear on the crucial issue of intent.
I. Status as an Original Party Does Not Preclude a Novation of the Original Agreement
Civil Code section 1531 expressly contemplates the two original parties can create a novation. If there were a valid novation of the Grimsgaards’ contract, by substituting a new agreement for the old agreement rather than a substitution of parties, obviously Lee and the Grimsgaards would retain their status as “original” parties. Accordingly, the fact they remain the original parties is not a factor which automatically excludes the possibility of novation.
Furthermore, if one accepts the position that the status of the parties is controlling on the issue of intent, a third party with a backup contract, conditioned upon novation of the original contract, would never be able to challenge the original contract on the basis of novation. This obviously was not the intent of the seller Lee and appellants Meadows in executing the backup contract. The backup contract between Meadows and Lee was conditioned upon the “failure, termination, cancellation or novation of the Grimsgaards’ contract.” (Italics added.) If any of these conditions occurred, the Meadows contract was to become the primary contract. The event of novation would not have been included, as a condition precedent to effectiveness of the backup contract, were it not deemed to be a possible scenario between the original parties.
II. The Court Erroneously Excluded Other Evidence on the Issue of Whether the Original Parties Intended a Novation
Counsel for appellants sought to prove the intent required for a novation by questioning the parties and witnesses on cross-examination. The trial *488judge sustained objections to introduction of evidence on the issue of intent, and proceeded to question the parties himself. On appeal, the issue raised is whether the trial court erroneously prevented appellants from introducing evidence which may have supported their claim of novation. I would hold the trial court wrongfully excluded the evidence submitted by appellants. In doing so, the court precluded appellants from fully presenting their case.
The trial court based its exclusion of the evidence on several faulty premises: 1) the intent of the parties was irrelevant; 2) since the documents were unambiguous, intent of the parties was irrelevant; and 3) the issue of no-vation could be determined solely from the documents. Due to a misinterpretation of the applicable principles relating to novation, the trial court failed to correctly apply the appropriate balancing tests which are essential to a determination of whether to exclude evidence.
A. Parol Evidence Is Admissible to Show Novation
It is fundamental to our court system that “[a] party is entitled to have received in evidence and considered by the court, before findings are made, all competent, relevant and material evidence on any material issue.” (Estate of Horman (1968) 265 Cal.App.2d 796, 808 [71 Cal.Rptr. 780].) However, in a contract action, parol evidence is generally inadmissible where the terms of the agreement are in writing. (Code Civ. Proc., § 1856.) Nonetheless, the rule of exclusion does not apply where extrinsic evidence is offered to interpret, or explain the meaning of a written contract, or to show discharge by any permissible means of extinguishing a contractual obligation. (Griswold v. Frame (1920) 48 Cal.App. 178, 182 [191 P. 962].) In the case at bench we are primarily concerned with the parol evidence rule as it relates to admissibility of evidence to show a novation.
As previously noted, the controlling factor in a novation contest is the intent of the parties at the time the agreement in question was executed. (Alexander v. Angel (1951) 37 Cal.2d 856, 860 [236 P.2d 561].) The trial court held that due to the unambiguous nature of the writings, the intent of the parties was irrelevant. However, parol evidence is admissible to show intent when there is a dispute as to the meaning of the terms used in the contract, even if the terms appear clear and unambiguous to the court. (Pacific Gas & E. Co. v. G. W. Thomas Drayage etc. Co. (1968) 69 Cal.2d 33, 37, 39 [69 Cal.Rptr. 561, 442 P.2d 641, 40 A.L.R.3d 1373].) In this case the dispute goes directly to the issue of the intent of the parties in executing the second contract. By the terms of section 1531 itself the intent with which the second contract is made becomes the critical element in determining whether a novation has occurred. We know a new obligation was substituted between the original parties. The question is whether this *489document was executed “with intent to extinguish the old obligation.” (Civ. Code, § 1531, subd. 1.) “[Where] . . . there [is] a dispute with reference to the intent of the parties . . . parol evidence is always admissible.” (Ehrenreich v. Shelton (1963) 213 Cal.App.2d 376, 381 [28 Cal.Rptr. 855].)
Appellants’ counsel sought to elicit testimony from the parties and witnesses which he claimed would prove Lee and the Grimsgaards intended to substitute the new agreement for the old agreement, thereby effectuating a novation. The trial court sustained objections to this testimony stating the documents themselves were dispositive on the issue. The trial court’s exclusion of the evidence is not consistent with established rules of admitting parol evidence in a novation contest.
A novation has been found to exist where all terms of a subsequent agreement changed with respect to the same subject property. (Simmons v. Sweeney (1910) 13 Cal.App. 283 [109 P. 265].) In that case the terms of the two agreements were entirely inconsistent and could not be operative at the same time. Furthermore, the evidence presented showed the parties acted in pursuance of the second agreement. (13 Cal.App. at p. 288.) In this case, the facts are similar in that the two agreements between Lee and the Grims-gaards were entirely inconsistent as to terms and conditions with respect to the same subject property, the two agreements could not be operative at the same time, and the parties acted in pursuance of the second agreement. Thus, it was reasonable for the Meadows to assume a novation had occurred. If there was any possibility a novation had occurred, the Meadows’ had a valid cause of action to enforce their backup contract. In Reynolds v. Mead (1944) 62 Cal.App.2d 179, 180 [144 P.2d 424], the court held “[i]f the [second] note [was] . . . taken as a substitute for the note in dispute, with the intent of extinguishing the obligation of it . . . the transaction constituted a defense by way of novation under Sections 1530, 1531, 1532 of the Civil Code; and the defendants were entitled to have presented [their evidence] . . . .” Likewise, in the instant case the Meadows should have been allowed to present the evidence which would show an intent to novate.
I would further rely on an independent and sufficient ground for allowing parol evidence concerning the two contracts between the original parties. This is a dispute between one set of parties and appellants who are strangers to the contract. As Jefferson summarizes California law: “It long has been the law that when a written contract is involved, the parol evidence rule applies only between the parties to the contract and their successors in interest. It follows, therefore, that in an action between a party to a written agreement . . . and a nonparty, extrinsic evidence may be introduced to contradict or vary the written agreement.” (2 Jefferson, Cal. Evidence Benchbook (2d ed. 1982) Parol Evidence Rule, § 32.8, p. 1168; see Nichols *490v. Arthur Murray, Inc. (1967) 248 Cal.App.2d 610 [56 Cal.Rptr. 728]; Gordon v. D & G Escrow Corp. (1975) 48 Cal.App.3d 616 [122 Cal.Rptr. 150].) Appellants are not parties to the contract they seek to prove was extinguished by novation. Nor are they parties to the second contract they contend accomplished a novation of the first. And merely because a novation of the contract between two other parties would activate their independent backup contract does not make them “successors” of either of the original parties. Consequently, they are nonparties as far as the first and second contracts in this action are concerned. As such, they are entitled to introduce parol evidence about them even if this evidence would, in some sense, contradict or vary the express terms of these contracts. (Gordon v. D & G Escrow Corp., supra, 48 Cal.App.3d 616, 626.)
B. Oral Evidence as to the Original Parties’ Intent Was Not Properly Excluded Under the Best Evidence Rule
The trial judge claimed the written documents were the “best evidence” of the intent of the parties, and sustained objections to appellant’s questions on that basis. Even respondents concede this was a misapplication of the best evidence rule. The best evidence rule merely serves to exclude secondary evidence—written or oral—about the content of an original document unless and until the absence of the original document is excused. (2 Jefferson, Cal. Evidence Benchbook, supra, Best Evidence Rule, § 31.1, pp. 1081-1085, and cases cited therein.) In effect this rule implements the principle “the document speaks for itself.” If a litigant is seeking to introduce evidence of the words contained in a document, then he must introduce the document itself not some copy of the document or someone’s verbal recollection of what words were in the document. But the best evidence rule has nothing to do with a situation where, as here, we are seeking to divine the intent with which the document was executed rather than what words are in the document. Then the writing does not speak for itself. Indeed we may need extrinsic evidence to determine what the words in the document were intended to convey. Accordingly, as respondents concede, the court clearly erred in excluding cross-examination about the parties’ intent on grounds it ran afoul of the best evidence rule and I would so hold.
C. The Exclusion of This Evidence Cannot Be Justified Under Evidence Code Section 352
After conceding the court misapplied the best evidence rule, respondents attempted to save the rulings on the basis of Evidence Code section 352. Respondents contend the trial judge properly could have excluded the evidence based on his discretion under Evidence Code section 352. According to Evidence Code section 352, “[t]he court in its discretion may exclude *491evidence if its probative value is substantially outweighed by the probability that its admission will (a) necessitate undue consumption of time or (b) create substantial danger of undue prejudice, of confusing the issues, or of misleading the jury.”
Although the court is accorded broad discretion to exclude evidence based on one of the above reasons, it does not have unlimited discretion. “The discretion granted the trial court by section 352 is not absolute [citations] and must be exercised reasonably in accord with the facts before the court. [Citations.]” (Brainard v. Cotner (1976) 59 Cal.App.3d 790, 796 [130 Cal.Rptr. 915], Furthermore, “[w]hile it is within the sound discretion of the trial court to define the issues and direct the order of proof, the court may not act so as to preclude a party from adducing competent, material and relevant evidence which tends to prove or disprove any material issues.” (Estate of Horman (1968) 265 Cal.App.2d 796, 809 [71 Cal.Rptr. 780].) “There are, of course, many factors which a trial court must consider when it is requested to exercise its discretion to deprive a party of probative evidence. Among these are: first, a determination that the evidence is relevant to an issue that is in dispute; second, a consideration of other proof on that issue available to the party which offers the evidence; and, third, that party’s relatively greater need for the evidence if it must carry the burden of proof on the issue to which the evidence relates.” (Thor v. Boska (1974) 38 Cal.App.3d 558, 568, fn. 8 [113 Cal.Rptr. 296].) The court elaborated on these factors in Burke v. Almaden Vineyards, Inc. (1978) 86 Cal.App.3d 768, 774 [150 Cal.Rptr. 419]: “Among factors which should be considered are its materiality; the strength of its relationship to the issue upon which it is offered; whether it goes to a main issue or merely to a collateral one; and, whether it is necessary to prove proponent’s case or merely cumulative to other available and sufficient proof.”
The trial judge failed to properly weigh the enumerated factors in his determination to exclude the evidence. He concluded the offered evidence on the issue of intent had little relevance based on his legal conclusion that the status of the parties was determinative on the issue of intent to novate. Since the status of the parties in a novation contest is not conclusive on the issue of intent, the trial judge should have given much greater weight to the relevance of other offered evidence. The evidence which appellant attempted to introduce was relevant because it was directed to the issue of intent, which is the controlling issue in a novation contest. Turning to other factors, the evidence was not cumulative, because the intent appellants sought to prove was not manifest on the face of the documents, nor was it necessarily to be found within the documents. Furthermore, appellants had no other evidence but the facts and circumstances surrounding the execution of the agreements, to show the intent to novate which would prove their case. *492Thus, cross-examination was essential to elicit such evidence. Finally, as noted by the majority, appellants had a very heavy burden of proof due to their status as third parties to the transactions in question. Therefore, they had an unusually great need to present evidence that would prove their case.
Based on a fair balancing of all the above factors, it is clear the considerations for admitting the evidence far outweighed any factors which would justify its exclusion.
Respondents claim exclusion of the offered evidence resulted in harmless error, since the inference of intent not to novate was amply supported by the evidence. This conclusion is erroneous in light of the court’s misinterpretation of the applicable rules of law. Had the court correctly applied the appropriate balancing tests, the offered evidence would have been admitted, and it may have been sufficient to support the opposing inference of intent to novate. Thus, the evidence, if admitted may have resulted in a decision for appellants. When evidence this central to the core issue of the case is excluded no court is really in a position to find its admission could not have changed the outcome. True, other evidence which was allowed in may be “sufficient” in one sense to support the trial court’s judgment. But that does not mean this judge would have reached the same conclusion if he had admitted the contrary evidence offered by appellants on the issue of intent. Thus, in my view it is not possible to hold this error was harmless.
III. Backup Contracts Should Be Interpreted as Operative When The Original Parties Indeed Create a Novation of Their Original Contract
As the majority correctly points out, contracts should be interpreted as operative whenever possible. The policy which supports interpreting contracts as operative whenever possible is equally applicable to third party backup contracts. Thus, the backup contract negotiated between the seller Lee and appellants Meadows should have been given full effect as binding upon the parties. The terms of the backup contract did not state it was effective only against other third parties desiring to obtain the property. Rather, its effectiveness was conditioned upon termination of the original contract. Considering the fact that novation was included as a means of termination, the back-up contract would appear, on its face, to be effective against original parties as well. Therefore, in order to give the backup contract full effect as a binding contract, a renegotiation or substitution of a new agreement between the original parties would require consent of the third party, or an additional renegotiation of the backup contract.
Although contracting parties have a right to modify the terms of their agreements, without effectuating a novation, Travelers Ins. Co. v. Work*493men's Comp. App. Bd. (1967) 68 Cal.2d 7, 17 [64 Cal.Rptr. 440, 434 P.2d 992], it does not follow that third parties with backup contracts should be squeezed out of the benefits of their contracts by original parties who want to change their minds one or more times. At least he should be given a fair opportunity to prove the original parties indeed did engage in novation. To rule as the majority does will, I fear, discourage people from agreeing to sign up as “back-up parties.”
A petition for a rehearing was denied January 8, 1986, and appellants’ petition for review by the Supreme Court was denied March 26, 1986.
Bird, C. J., was of the opinion that the petition should be granted.

 Section 1531 of the California Civil Code sets forth the manner in which a novation may be made. “Novation is made: [¶] 1. By the substitution of a new obligation between the same parties, with intent to extinguish the old obligation; [¶] 2. By the substitution of a new debtor in place of the old one, with intent to release the latter; or [¶] 3. By the substitution of a new creditor in place of the old one, with intent to transfer the rights of the latter to the former.”