The case entitled Coral Farms, L.P. v. Mahony (2021) 63 Cal.App.5th719 involved a dispute between three neighboring property owners that incurred varying damages due to a mudslide. The three parties sued and countersued one another for negligence and other claims related to water drainage. The parties eventually settled their dispute.  As part of the settlement, the owners agreed to perform mitigation and repair work on their own properties according to their own separate plans. The agreement was memorialized in a Settlement Agreement. The Settlement Agreement contained a “Final Approval” provision which stated: “Upon completion of the work, each party shall obtain a written report by the design engineer or geologist that the work performed is in substantial compliance with that Parties’ plan . . . and will provide a copy to all other Parties within 30 days of completion.”

Subsequently, two owners sued the third owner. Those two owners alleged the third owner breached the Settlement Agreement because the work completed by the third owner was not in substantial compliance with their plan. But in a bench trial, the court found that the defendant owner complied with the contract, which merely required the owner to provide a copy of an engineer’s report stating their work was substantially completed in accordance with the approved plans (which, as noted above, the third owner did in fact provide).

The Court of Appeal agreed with the trial court’s findings and observed that it is a well-settled rule that, when parties to a contract agree that the sufficiency of a party’s performance is to be decided by a third person (such as an engineer, in this instance), that third person’s decision is conclusive and binding on the parties in the absence of bad faith, fraud, or gross negligence. Per the Court of Appeal: “Courts are not in the business of rewriting ill-advised contract provisions. Plaintiffs were stuck with the contract they signed.”

Plaintiffs attempted to argue that the Settlement Agreement “does not state that the report of each party’s design engineer is valid, or that it is conclusive, or that it is binding.”  The Court, while agreeing with that general statement, held that it is of no consequence. “The incorporation of current law into a contract is presumed and does not require a deliberate expression by the parties.”  The Court focused its attention on the “Final Approval” heading and held that under the facts of this case, the Court must presume Plaintiffs were aware of the conclusive consequences of the “Final Approval” provision in their fully integrated contract and the Court found that there is no evidence to the contrary. “In any event, even though the precise words may not be explicitly stated in the Settlement Agreement, the valid, conclusive, and binding nature of the “Final Approval” provision is apparent from the contract’s plain language.”

This opinion is a helpful reminder for contracting parties to carefully review the language of their contracts and retain an experienced attorney who is familiar with the current state of the law to ensure the parties’ intentions are accurately set out in the contract and that they will be enforced in court.