OPINION

This is an action by three savings and loan companies against their respective bonding companies for loases which plaintiffs allegedly sustained by reason of the non-payment of certain certificates of deposit and commercial accounts by the now defunct San Francisco National Bank. The threshold issue is whether the bonds issued to plaintiffs by defendants cover losses of this nature. Defendants seek to introduce evidence of negotiations bet ween the American Surety Association and the Savings and Loan League from. 1938 until the present and an interpretation of the bonds by the Surety Association to demonstrate that the bonds do not cover these losses. Plaintiffs object to this evidence. Pursuant to a pretrial order of this court all parties have filed briefs on the admissibility of extrinsic evidence relating to the interpretation of the bonds in question and defendants have submitted an offer of proof.

FACTS

Plaintiffs allege in their complaint that their losses were the result of fraud, dishonesty, or illegal acts of one or more officers, directors, or employees of the San Francisco National Bank and other persons. The only provision of the Savings and Loan Blanket Bond .Standard Form No. 22 which possibly covers this claim is the so-called Fraud Insuring Clause, (hereinafter Clause E). The relevant sections of the bond read as follows:

Plaintiffs allege that this language means what it appears to state on its face: all losses due to dishonesty, such as those incurred by plaintiffs, are covered. Defendants, however, contend that this clause must be read in context with the following other insuring clauses and that this results in a limited construction not covering plaintiffs’ losses:

INSURING AGREEMENTS FIDELITY

AUDIT EXPENSE

ON PREMISES

OFFICES AND EQUIPMENT

IN TRANSIT

FORGERY OR ALTERATION

FRAUD '

Defendants argue that Clause E simply adds to Clause B (on premises) and Clause C (in transit) coverage for other forms of fraud and dishonesty similar to those enumerated in these clauses. This interpretation would give Clause E no independent coverage. Since plaintiffs’ losses do not fall within the scope of Clauses B or C, they would not be covered by the bonds according to defendants’ construction. Defendants’ contentions are based upon a legal opinion written by the Surety Association of America in 1939, which is set out in the margin.

QUESTION PRESENTED

The question to be decided is whether defendants may introduce extrinsic evidence to show that the language of Clause E should be given the limited construction they suggest.

DISCUSSION

The extensive offer of proof submitted by defendants, discussed at length below, goes to two issues. First, defendants attempt to demonstrate that the bond form in issue was the product of negotiations between the United States Building and Loan League, now, the United States Savings and Loan League, and the Surety Association of America. Second, defendants have produced evidence which purportedly shows that the interpretation advanced by the sureties in this litigation has been widely accepted in the savings and loan and surety industries and consequently is binding on the parties as a trade usage.

The defendants state that they will call John F. FitzGerald, who has served in various capacities on the executive staff of the American Surety Association. He allegedly will testify that he is familiar with the background and history of Bond Form 22 and has reviewed all materials in the Surety Association files relating to the bond. His testimony will show that correspondence between the Surety Association and the Savings and Loan League, memoranda of meetings between the two organizations, copies of standard bond forms, official interpretations of the bond provisions, and analyses of amendments to the bonds will demonstrate the following:

Additionally, defendants offer to prove that in 1970, as the result of further negotiations between the Surety Association and the Savings and Loan League, Clause E was redrafted to conform to the official interpretation of the Surety Association.

Numerous documents have been submitted by defendants as part of their offer of proof. Each document will be summarized briefly. The documents submitted as exhibits are labelled A through K for defendant General Insurance Company and F-l through F-10 for defendant Fireman’s Fund Insurance Company.

Exhibit A and F-l. A letter from an assistant vice president of the United States Building and Loan League to a Mr. Gilkey of the Surety Association, dated 27 July 1938. The letter refers to future discussions between the two organizations and urges revision of Form 5 for use by the savings and loan associations.

Exhibit B and F-2. A report of the results of the conference between the surety and savings and loan associations bn 10 August 1938. This memorandum reviews various negotiations between the two groups. No mention is made of Clause E.

Exhibit C and F-4. A letter from three casualty companies to the general counsel of the Building and Loan League, dated 31 August 1938. The letter accompanied a copy of the proposed revisions of Form 5 to make it suitable for savings and loans. Numerous provisions are explained; Clause E is not.

Exhibit D and F-S. A copy of a Form' 5 bond revised to be used as Form 22.

Exhibit E and F-5. A letter from the general counsel of the Building and Loan League to a Mr. Bates of the Fidelity and Casualty Company of New York, dated 8 September 1938. The letter acknowledges receipt of the proposed bond form and indicates that the matter is being referred to a committee.

Exhibit F and F-6. A letter from Mr. Bates to the general counsel of the Building and Loan League, dated 13 October 1938. The letter states that a company not a member of the Surety Association was offering coverage to savings and loan associations and that there was need to expedite the consultations concerning a form bond.

Exhibit G and F-7. A letter from the general counsel of the Building and Loan League to Mr. Bates, dated 20 October 1938. This letter refers to the new coverage being offered, states that most of the League members on the bond committee agree with the proposed bond form, and mentions that the bond should be printed up for discussions at the upcoming League convention.

Exhibit H. An article discussing the history and development of Bond Form 22 written by Jean Harth, assistant counsel for the Savings and Loan League, which was presented to the Fidelity and Surety Law Committee of the Section of Insurance Negligence and Compensation Law of the American Bar Association. The article is taken from The Forum, Winter 1972 ed., Vol. VIII, No. 2. The negotiations between the Savings and Loan League and the Surety Association from 1938 through 1972 are reviewed in some detail.

Exhibit I. The official interpretation of Clause E by a Surety Association subcommittee, dated 2-3 November 1939. After going through the’ analysis set out in the margin above, note 1 supra, the subcommittee concluded as follows:

Exhibit J and F-8 and 9. An unsigned letter from someone in the Surety Association to the executive vice president of the Savings and Loan League, dated 8 June 1959. The letter transmits a copy of a memorandum prepared by the chairman of a subcommittee of the Surety Association relating to a meeting held between representatives of the two groups on 26 May 1959. The letter indicates that several copies are attached so that they may be distributed to “associates.” Various provisions of Form 22 were discussed at the May meeting. The portion of the memorandum discussing Clause E is quoted in its entirety here:

Exhibit K. An article by John F. FitzGerald, “Recent Developments in Form 22 Blanket Bond,” from the Savings and Loan Annals 1965. This was an address made by Mr. FitzGerald to a Savings and Loan League Convention. Defendants allege that copies of this document were distributed to all League members. FitzGerald argues for the interpretation of Clause E written in 1939 by the Surety Association.

Exhibit F-10. An unsigned letter from someone in the Surety Association to a vice president of the Savings and Loan League, dated 22 June 1959. It refers to the letter of 8 June 1959, which is Exhibit J above. The writer indicates that the official interpretation of Clause E by the Surety Association purportedly attached to the 8 June letter was omitted. Several copies of the interpretation were enclosed with the 22 June letter.

The evidence offered by defendants does establish that the predecessor of the Savings and Loan League did negotiate with the Surety Association of America with respect to the development of Bond Form 22. This does not, however, mean that the interpretation advanced by the sureties is binding on the plaintiffs in this case. First, the interpretation advanced by defendants did not come out of the negotiations in 1938; the interpretation was merely a unilateral construction of the bond provision made subsequent to the negotiations by the Surety Association. An examination of the reasoning which led to the sureties’ interpretation, set out in the margin above, note 1, supra, demonstrates that the construction did not have its genesis in any representations or agreements by the Building and Loan League. No history or record of the negotiations was cited as the basis for the sureties’ construction. In fact, the offer of proof submitted to this court reveals that the language of Clause E was not drafted as the result of the negotiations in 1938. The language of Clause E was taken, along with the major part of the bond, from Bond Form 5 which had previously been used for other types of insurance coverage. See Exhibit D.

Second, none of the plaintiff savings and loan associations were members of the League at the time of negotiations, nor in fact were they even in existence. Even if defendants could show that the predecessor to the Savings and Loan League had manifested its acceptance of the disputed interpretation during negotiations for the bond, this action of the League would not be binding on plaintiffs under any kind of agency theory in the absence of proof that they somehow had accepted, adopted, or otherwise ratified the actions of the League before their creation. For these reasons the official interpretation of the Surety Association cannot be introduced against plaintiffs to show the meaning of Clause E on the ground that it was the product of negotiations and hence binding on plaintiffs.

As an alternative ground for admissibility, defendants contend that the interpretation advanced by them is in the nature of a trade usage and therefore admissible to aid in construing the contract. A trade usage is “a uniform practice or course of conduct that is followed in certain lines of business or professions, or in some procedure or phase of such business or profession.” Turner v. Donovan, 3 Cal.App.2d 485, 487 , 39 P.2d 858,859 (1935).

Before examining the substantive law relating to usages, the respective roles of the court and the jury must be defined. The law on this procedural aspect of the issue is well summarized by Williston:

Whether a usage exists is a question of fact, though the evidence of it may be insufficient to warrant submission to the jury. Whether the facts are such that the parties must be assumed to have adopted the usage because of actual knowledge or duty to know is also a question of fact. On the other hand, the validity of the usage and its effect, if any, upon the contract of the parties is a question of law. 5 Willis-ton on Contracts 118-19 (1961).

In determining whether defendants’ offer of proof is sufficient for the issue to go to a jury, this court may consider the law of California relating to the admissibility of usage evidence. Rule 43, F.R.Civ.P. The California Supreme Court articulated the applicable law in Ermolieff v. R.K.O. Radio Pictures, 19 Cal.2d 543, 550 , 122 P.2d 3, 5 (1942):

The question remaining is whether the offer of proof meets the requirements for establishing a usage.

Roberts Distributing Co. v. Kaye-Halbert Corp., 126 Cal.App.2d 664, 676 , 272 P.2d 886 (1954). Merely proving that a usage exists is, however, not necessarily sufficient to permit introduction of the evidence to aid in the interpretation of a contract. In Miller v. Stults, 143 Cal. App.2d 592, 601-602 , 300 P.2d 312, 318-319 (1956), the appellate court in California specified the additional requirements:

Similarly, after an extensive analysis of the admissibility of usage evidence, Williston concludes that

The offer of proof submitted by defendants must now be examined in light of these requirements. At the outset, certain exhibits must be ruled clearly inadmissible as not relevant to this discussion. Any evidence relating to a time after the date on which a bond was purchased by one of the plaintiffs cannot be used to establish that a usage was in existence at the time of contracting. This eliminates Exhibit H, the 1972 article by Harth, and Exhibit K, the 1965 article by FitzGerald. Since they were written after the bonds in question here were issued, they could not be used to show knowledge by plaintiffs, and any statements contained therein relating to past negotiations would be inadmissible unsworn evidence. Similarly, any evidence of revisions in 1970 would be irrelevant. A review of the exhibits discloses that Exhibits A, B, C, D, E, F, and G are also irrelevant in that they in no way bear upon the interpretation of Clause E urged by defendants. This leaves for the court’s consideration Exhibit I, the official interpretation of Clause E by the Surety Association, Exhibit J, a letter of transmittal and a copy of the 1959 memorandum relating to a meeting between the surety and savings and loan associations, Exhibit F-10, a 1959 letter transmitting copies of the 1939 interpretation, and the testimony of FitzGerald.

This evidence fails to establish a usage for several reasons. First, there is no evidence that the 1939 interpretation was communicated in any way to the Savings and Loan League until 1959. Thus, any usage must necessarily have developed between 1959 and the date the bonds were issued to plaintiffs. The bonds were issued as follows:

From To Date

Aetna Life and Casualty Fidelity Savings and Loan (predecessor) 15 September 1961

Fireman’s Fund Insurance Co. Same 15 December 1960

General Insurance Co. of America City Savings and Loan (predecessor) 13 August 1964

Fireman’s Fund Insurance Co. City Savings and Loan (predecessor) 24 October 1961

Fidelity and Deposit Co. of Maryland Security Savings and Loan-4 December 1962

Although not conclusive, the relatively short period between the time the interpretation urged by defendants was communicated to the Savings and Loan League and the date on which plaintiffs purchased their bonds makes it highly unlikely that the interpretation urged could have become “uniform[], general, wide[ly] accepted, and notori [ous].” See 5 Williston on Contracts, supra.

Second, the language of Clause E was negotiated at most once, i. e. in 1938 when the Surety Association and the predecessor of the Savings and Loan League met. Therefore, defendants’ interpretation is not the product of a series of negotiations “of a similar character performed at different times.” See Roberts Distributing, supra.

Third, the offer of proof fails to show that there has ever been any true “usage.” All that the proof demonstrates is that a bond form was negotiated and that this form has been used many times since the negotiations. Nothing more has been shown than that a series of insurance contracts containing Clause E have been sold. Clause E has been nothing but an executory provision; it has never been tested by use. Thus, there is no evidence to demonstrate that the surety and savings and loan industries have in fact followed “a uniform practice or course of conduct” in using the language of Clause E. Unilateral legal opinions, even if communicated to another party, cannot be equated with the numerous arm’s-length transactions which normally form the basis for finding the existence of a usage. Usages develop out of language which is tested by numerous instances of actual performance, not merely expected performances, or legal interpretations.

Finally, the relevant law quoted above requires a showing that the usage was known to the contracting party against whom it is raised or else so widely accepted in the trade that the other party is presumed to have known of it when contracting. Defendants, however, fail to prove that plaintiffs had actual knowledge of the alleged usage or that the usage was so widespread that plaintiffs should be held to have contracted with knowledge of it. The evidence showing that copies of the 1939 interpretation by the Surety Association were transmitted in 1959 to the Savings and Loan League, Exhibits J and F-10, demonstrates only that the executive staff of the Savings and Loan League had knowledge of the legal opinion prepared by the Surety Association in 1939. The only other evidence relevant to this issue is the testimony of FitzGerald that the officers of the Savings and Loan League agreed with the sureties’ interpretation at the 1959 meeting between representatives of the two industries and the memorandum prepared by the Chairman of the American Surety Association’s negotiating committee allegedly reporting the substance of the 1959 meeting, Exhibit J. This document states that the 1939 interpretation was discussed and that “[a]fter thorough discussion, it was felt that the revision of the bond could be made on the basis of the official interpretation. Accordingly, Insuring Clauses [B] and [C] are to be redrafted and Insuring Clause [E] is to be deleted.” This was not done, however. Defendants state FitzGerald will testify that thé “reason for this is that although the participants all agreed that the official interpretation governed the meaning of these clauses, nevertheless, they felt the clauses themselves were sufficiently clear so that no changes [needed to] be made in the existing language in order to make explicit the official interpretation.” Even assuming that the executive board of the Savings and Loan League did concur in the sureties’ interpretation, there is no evidence to show that this interpretation was ever communicated to the plaintiffs before this court.

The only ground on which defendants can argue that the alleged usage is binding on plaintiffs, therefore, is that the usage was so widespread that everyone in the industry was aware of it. Yet defendants have failed to produce one shred of evidence of any kind to show that the interpretation was widely accepted in the industry. All that has been shown is that a unilateral legal interpretation was written by the Surety Association in 1939, that some twenty years later it was communicated to the executive board of the Savings and Loan League, and that a memorandum and the testimony of an officer, both from the Surety Association, indicate that representatives of the Savings and Loan League concurred in the interpretation at a 1959 meeting. Defendants’ own evidence discloses that Clause E was not in fact redrafted in accordance with their interpretation after the 1959 meeting. No evidence has been presented which originated with the Savings and Loan League or one of its members indicating acceptance of the interpretation. Not a single instance in which Clause E has been construed as the defendants now suggest in practice has been shown to the court.

Implicit in the very concept of a trade usage is the requirement that it must be widely accepted and have been relied upon in numerous transactions. Where, in fact, a valid usage does exist the task of mustering evidence to prove its existence in court should be an effortless one. Yet, while defendants urge this court to find that there is enough evidence of a trade usage for the issue to go to a jury, they are unable to present anything more substantial than scanty, one-sided evidence. The court must not, however, ignore the underlying rationale which justifies the admission of trade usage by permitting defendants to introduce evidence which falls far short of the legal standards set out above. The evidence offered by defendants even if accepted by a jury could not establish that the plaintiffs had knowledge of the usage or that it was so widespread that plaintiffs may be held to have contracted with knowledge of it.

CONCLUSION

Defendant’s interpretation was not the product of the 1938 negotiations. Even if it had been, it would not be binding on plaintiffs. Defendants’ evidence also fails, as a matter of law, to establish the existence of a valid trade usage or that it would be binding on plaintiffs. Clause E must therefore be interpreted without reference to the offered extrinsic evidence.