Arbitration/Construction Of Agreement: Order Denying Arbitration Is Affirmed Because Parol Evidence Rule Did Not Prevent Admission Of Oral Agreement Lacking Promise To Arbitrate

Two Separate Agreements, Rather Than One Fully Integrated Agreement, Governed The Relationship Between The Parties.

    Pacific Interventionalists, Inc. v. Pedes Orange County, Inc., G052815 (4/3 12/116/16) (O’Leary, Fybel, Ikola) (unpublished) delves into the application of the parol evidence rule to an agreement containing a promise to arbitrate.  In order to determine if parties intend that a written agreement serve as the exclusive embodiment of their agreement, the court may consider the instrument itself, surrounding circumstances, including prior negotiations, as well as “the collateral agreement itself to determine whether it was intended to be a part of the bargain.” 

     Here, the Court of Appeal concluded that the second agreement, which contained the arbitration provision, existed independently of an earlier oral agreement governing a physician’s compensation.  The written agreement, while fully integrated with respect to the “subject matter contained in it,” did not preclude the earlier oral agreement involving different subject matter.

      Accordingly, the Court of Appeal affirmed the trial court’s order denying arbitration, because the earlier oral contract lacking an arbitration provision continued to exist after the parties executed a written contract containing an arbitration provision.

    DRAFTING TIP:  California’s parol evidence rule is porous, since oral evidence of a collateral agreement can be admitted if a term is ambiguous or to show that the oral agreement is not part of the subject matter of the “integrated” agreement.  Nevertheless, how the written agreement is drafted is still very important.  Here, for example, the Court noted that the written agreement “was clearly limited in scope to its stated ‘subject matter,’” and that “there was no conclusive language stating, for example that, ‘there are no previous understandings or agreements not contained in the writing’ or an express intention to ‘nullify antecedent understandings or agreements.’”  The Court’s point is that an effective integration clause can be drafted more strongly than it was here.