Introduction:
The business records that every business, large and small, must keep for internal bookkeeping and tax returns also are vital for use of the courts in any litigation. Consider: without such evidence, how do you prove you are owed money or already paid for a product? How do you prove the date of delivery or that the product was critical for a time schedule you had? In short, those business records are an intrinsic part of proof for every transaction or legal action that may arise.
But such records are almost always hearsay, and the hearsay rule may ban their use in evidence. The hearsay rule, which bars evidence that does not stem from a witness that can be in court to be cross-examined, is perhaps the most basic rule of evidence in our legal system. It has solid rationale. If you witnessed something, I get the chance to cross-examine you on the stand or in deposition and can impeach your testimony. But if you are merely repeating what someone told you they witnessed, then how can I impeach the validity of what they claim to have witnessed? They are not in court to be cross-examined.
And hearsay relates to documents that a party seeks to enter into evidence. If you are simply showing a letter that purports to prove X, but the author of the document is not in court to be cross-examined, that is precisely the same situation as if you were merely testifying as to what X told you outside of court.
There are many exceptions to the hearsay rule based on common sense and practical experience. As an example, if someone makes a statement that admits wrongdoing, that is admissible in court even if the person is not in court since it is presumed that no one would make such a statement unless it was likely to be true.
But perhaps the most commonly used exception to the hearsay rule pertains to business records. This exception is utilized in the overwhelming majority of commercial cases and is the subject of this article since the requirements to claim the exception to the rule require the offering party to conform to those requirements closely.
The Basic Rule:
Both the Federal Courts and California have codified this exception to the hearsay rule.
In Federal Court:
Federal Rules of Evidence 803
The following are not excluded by the rule against hearsay, regardless of whether the declarant is available as a witness:
(6) Records of a Regularly Conducted Activity. A record of an act, event, condition, opinion, or diagnosis if:
(A) the record was made at or near the time by — or from information transmitted by — someone with knowledge;
(B) the record was kept in the course of a regularly conducted activity of a business, organization, occupation, or calling, whether or not for profit;
(C) making the record was a regular practice of that activity;
(D) all these conditions are shown by the testimony of the custodian or another qualified witness, or by a certification that complies with Rule 902(11) or (12) or with a statute permitting certification; and
(E) neither the opponent does not show that the source of information nor or the method or circumstances of preparation indicate a lack of trustworthiness.
(7) Absence of a Record of a Regularly Conducted Activity. Evidence that a matter is not included in a record described in paragraph (6) if:
(A) the evidence is admitted to prove that the matter did not occur or exist;
(B) a record was regularly kept for a matter of that kind; and
(C) neither the opponent does not show that the possible source of the information nor other circumstances indicate a lack of trustworthiness.
As to the Federal Rules, the rationale for admissibility has been considered often by the courts.
The element of unusual reliability of business records is said variously to be supplied by systematic checking, by regularity and continuity which produce habits of precision, by actual experience of business in relying upon them, or by a duty to make an accurate record as part of a continuing job or occupation. McCormick §§281, 286, 287; Laughlin, Business Entries and the Like, 46 Iowa L.Rev. 276 (1961).
The model statutes and rules have sought to capture these factors and to extend their impact by employing the phrase “regular course of business,” in conjunction with a definition of “business” far broader than its ordinarily accepted meaning. The result is a tendency unduly to emphasize a requirement of routineness and repetitiveness and an insistence that other types of records be squeezed into the fact patterns that give rise to traditional business records.
The rule therefore adopts the phrase “the course of a regularly conducted activity” as capturing the essential basis of the hearsay exception as it has evolved and the essential element which can be abstracted from the various specifications of what is a “business.”
All participants, including the observer or participant furnishing the information to be recorded, were acting routinely, under a duty of accuracy, with employer reliance on the result, or in short “in the regular course of business. If, however, the supplier of the information does not act in the regular course, an essential link is broken; the assurance of accuracy does not extend to the information itself, and the fact that it may be recorded with scrupulous accuracy is of no avail.
An illustration is the police report incorporating information obtained from a bystander: the officer qualifies as acting in the regular course, but the informant does not. The leading case, Johnson v. Lutz, 253 N.Y. 124, 170 N.E. 517 (1930), held that a report thus prepared was inadmissible. Most of the authorities have agreed with the decision. Gencarella v. Fyfe, 171 F.2d 419 (1st Cir. 1948); Gordon v. Robinson, 210 F.2d 192 (3d Cir. 1954); Standard Oil Co. of California v. Moore, 251 F.2d 188, 214 (9th Cir. 1957), cert. denied 356 U.S. 975, 78 S.Ct. 1139, 2 L.Ed.2d 1148.
In California:
Section 1271 - Business records exception
Evidence of a writing made as a record of an act, condition, or event is not made inadmissible by the hearsay rule when offered to prove the act, condition, or event if:
(a) The writing was made in the regular course of a business;
(b) The writing was made at or near the time of the act, condition, or event;
(c) The custodian or other qualified witness testifies to its identity and the mode of its preparation; and
(d) The sources of information and method and time of preparation were such as to indicate its trustworthiness.
Ca. Evid. Code § 1271
Each element of the requirements above must be proven in order to enter the records into evidence.
Note that the person who created or keeps the records as part of his or her job does have to appear in court to testify that the documents were so created. Failure to have that testimony eliminates the ability to enter the records into evidence.
Note also that documents created significantly after the event will not meet the requirements. Thus, if a small business waits until the end of the quarter to create the records as to shipments, an objection to those records will be taken seriously by the Court or if the records were not normally part of the record-keeping the company uses in all of its transactions, they are inadmissible.
As an example, if the company fails to itemize in detail the product it delivers but did create that record for this transaction once litigation was apparent, it would not qualify as an exception to the hearsay rule.
But even if all those elements are met, both Federal and California law have a category of objection based on unspecified facts that are such that the court would find them trustworthy. This allows the other party to bring in any objection it wishes to argue that the records are somehow not trustworthy.
In one case, the opposing party discovered that the bookkeeper who kept the records had been fired by our client for embezzlement and the parties argued for over an hour as to whether that made the records untrustworthy. Eventually, we prevailed by showing that no customers had ever complained as to the delivery of product while she was the bookkeeper, thus the documents were trustworthy, but it was a hard argument to win.
There is a tendency on the part of counsel to assume that getting business records into evidence is easily accomplished and to not prepare for the surprise objection. While this is normally true, it is far more appropriate to be ready to surprise objections. Since the entire case depends on their admission into evidence, a successful objection can destroy an otherwise carefully prepared case.
It is also critical for the client to realize that those records are only admissible if all the criteria are met and to take time to ensure that each element is being adhered to. Wise counsel will forward the statutes above to the client when the case first commences to make sure that the records are admissible.
THIRD-PARTY RECORDS
The California Supreme Court in Pacific Gas & Electric Co. v. G.W. Thomas Drayage & Rigging Co., 69 Cal. 2d 33 (1968) addressed the question of hearsay objections to records kept by a non-party in the case. G.W. Thomas was a property damage case where the defendant was hired to remove and replace a steam turbine's cover. In the course of the defendant's work, the cover fell and damaged the turbine. To prove its damages, the plaintiff introduced invoices received from a third party. The plaintiff testified that it received and paid the invoices. The plaintiff also called an expert witness (a mechanical engineer) who relied on the invoices to opine that (1) the repairs were actually made, and (2) the charges were reasonable. The defendant appealed and argued that the trial court erred in admitting the invoices into evidence.
On appeal, the Court looked at how the invoices were used at trial: first, to corroborate the plaintiff's testimony that it paid for the repairs; second, to prove that the repairs were actually made. With respect to the first use, the Court explained that "invoices, bills, and receipts for repairs are inadmissible independently to prove [1] that liability for the repairs was incurred, [2] that payment was made, or [3] that the charges were reasonable."
But although the invoices were hearsay, the Court explained they could be used for the limited purpose of corroborating the plaintiff's testimony: "If, however, a party testifies that he incurred or discharged a liability for repairs, any of these documents may be admitted for the limited purpose of corroborating his testimony [citations omitted], and if the charges were paid, the testimony and documents are evidence that the charges were reasonable." This rule may be supported by the observation that a party who receives a bill or invoice normally has every interest to dispute its accuracy or reasonableness if there is reason to do so. Thus, if a bill or invoice is paid, the court is assured of the accuracy and reasonableness of the charges.
The above high court case is an important case because it illustrates how a document's admission can turn on the proponent's reason for using it. If a party uses a third-party document to simply corroborate a witness' testimony, it is likely admissible without testimony fulfilling the requirements of Section 1271. On the other hand, if a party intends to rely on a third-party document to independently establish certain facts found therein, the records are inadmissible hearsay.
PUBLIC RECORDS (California Evidence Code 1280)
The elements of the public records exception closely resemble those of the business records exception. The public records rule is as follows:
Evidence of a writing made as a record of an act, condition, or event is not made inadmissible by the hearsay rule when offered in any civil or criminal proceeding to prove the act, condition, or event if all of the following applies:
(a) The writing was made by and within the scope of duty of a public employee.
(b) The writing was made at or near the time of the act, condition, or event.
(c) The sources of information and method and time of preparation were such as to indicate its trustworthiness.
Cal. Evid. Code § 1280.
Unlike the business records exception, there is no requirement for testimony as to the identity and mode of preparation of the writing. Instead, Evidence Code section 664 presumes that the method and preparation were reliable, and thus the opponent of the record bears the burden to show that the method or preparation were unreliable. Cal. Evid. Code § 664 ("It is presumed that official duty has been regularly performed....").
Conclusion:
A court of law is unlike any other locale in the United States. It is immersed in thousands of rules and rituals and will often enforce them despite the efforts of parties seeking to ignore them. One of the most difficult tasks for an attorney to confront is to educate a client as to how to conform to the rules of evidence despite the client’s often outraged conviction that such rules are simply a hindrance to the proper and efficient delivery of justice.
But the reason the United States court system is considered by most the fairest and best system of justice worldwide is precisely those rules. All the parties, regardless of status and income, are to be held to the same standard of conduct and the same rules and the court is to be an impartial entity delivering justice.
The problem with the system is economic. The complex procedures and rules make going to trial an extremely expensive process and there can be little doubt that the party with the larger resources has an advantage over the less endowed party. Arbitration, which is, essentially, a private system of courts, is much faster and often less expensive and they relax the rules of evidence in arbitration a great deal.
But if one wants a system that has developed its rules and procedures, including the rules of evidence, over hundreds of years, then the court is the forum to choose. That choice necessarily requires that the wise client will find out which rules apply and how to conform to them. That is true both in the creation and maintenance of business records.