• California Supreme Court Expands Scope of Evidence
  • April 15, 2013
  • Law Firm: Bremer Whyte Brown OMeara LLP - Newport Beach Office
  • Fresno, California - On January 14, 2013, the California Supreme Court reversed a 75 year-old precedent expanding the scope of evidence admissible in certain contract disputes. By way of its recent decision in Riverisland Cold Storage v. Fresno-Madera Production Credit Assn., the Court removed an important limitation to the fraud exception to the parol evidence rule, thereby increasing the ability of plaintiffs to challenge the validity of a written contract.

    In Riverisland, the plaintiffs, who had fallen behind in their loan payments, sued their lender for allegedly making an oral promise that it would extend their loan for two years. In exchange for the promise to extend the term on the loan, the plaintiffs were to put up two parcels of land as additional collateral.  The lender later presented the plaintiffs with a written agreement that they signed but admittedly did not read.  The plaintiffs claimed the lender told them the term in the writing was for two years and only two parcels of land would serve as additional security.  However, the writing provided terms that were different than what plaintiffs contended they were promised by the lender.  Specically, the written agreement provided an extension of the loan term for a period of only three months and such was in exchange for pledging eight additional parcels of land as collateral for the extension.  Such was contrary to what plaintiffs claimed was orally promised by the lender.  When the bank sought to foreclose on the property prior to the expiration of the two year period, plaintiffs led suit against the lender claiming fraud. 

    The trial court granted summary judgment in favor of the lender, citing the California Supreme Court decision in Bank of America v. Pendergrass.   In Pendergrass, the Court held that evidence of contradictory terms to an agreement under a showing of fraud, did not apply to a claim of promissory fraud if the alleged oral terms contradicted the express terms of the subsequently executed written agreement.  Thus, as the lender’s alleged oral promise directly contradicted the terms of the subsequently executed writing, under Pendergrass, evidence of that promise was barred by the parol evidence rule.  The plaintiffs in Riverisland appealed the trial court’s granting of summary judgment and the Court of Appeal reversed.  More recently, the Supreme Court unanimously affirmed the decision of the Court of Appeal.

    The Court in Riverisland was especially critical of the Pendergrass decision, explaining  the limiting rule set forth by the Court in Pendergrass "finds no support in the language of the statute codifying the parol evidence rule and the exception for evidence of fraud.  It is di#cult to apply.  It con$icts with the doctrine of the Restatements, most treatises, and the majority of our sister-state jurisdictions...[W]hile intended to prevent fraud, [it] may actually provide a shield for fraudulent conduct. [And it] departed from established California law at the time it was decided, and neither acknowledged nor justifed the abrogation.”   The Court also pointed out how even the California courts, including the Court of Appeal in Riverisland, regularly strain to avoid application of the Pendergrass rule and construe it narrowly.

    Practically speaking, the Riverisland decision simply affords a plaintiff the opportunity to prove inducement by oral fraud and that such can, if proven and reasonable, affect the ability of the other party to rely on the written agreement.  Where under Pendergrass such claims would fail typically at the summary judgment phase of litigation if they contradicted the terms of the subsequently executed writing, now, evidence of such fraud may permit such claims to move past the summary judgment stage in a case and to allow the claims to be presented to a trier of fact at trial.

    It is important to note, however, the Riverisland decision does not make a plaintiff’s burden of proof any easier in establishing the merits of a claim of promis-sory fraud.—Notably, a plainti! must still prove all the elements of fraud, including that he or she justifably relied on the oral misrepresentations about the written agreement’s express terms.  The Court in Riverisland declined to address the issue of whether there can be justifable reliance, an essential element in proving fraud, where the plaintiff fails to read a contract when he had an opportunity to do so. The e!ect that the Riverisland decision will have in actual practice remains to be seen, however, it is reasonable to anticipate changes with regards to:

    Promissory Fraud - When parties challenge the validity of a contract, it may become commonplace to include an allegation for promissory fraud in an e!ort to avoid certain terms of the writing.  Under Pendergrass, despite its narrow construction by the courts, these claims were infrequent given the long standing ruling by the Court concerning written agreements and earlier stated oral terms that conflict with the writing.  Now, under Riverisland, a plaintiff may be able to breathe life into what was previously a lifeless argument.

    Reasonable Review - As noted by the Court in Riverisland, no determination was made as to whether or not a party may justifiably rely on an oral misrepresentation in conflict with the written document’s terms when that party had an opportunity to read the agreement beforehand.  Parties should consider providing the other side reasonable time to review a contract prior to its execution, in order to anticipate a possible claim down the road.   Additionally, one should take care toensure the terms of the written agreement adequately reflect the discussions that took place before signing the document.  In areas where this has not always been the practice, there may be a shift in that direction by businesses and parties alike to lessen this scenario in the future.

    Procedure: Because the Riverisland decision potentially opens the door to increased liability to commercial entities, parties may begin to make changes to their procedures in negotiating agreements. Internally, commercial parties may begin to more effectively streamline their procedures for dealing with consumers to ensure the policies in place for communicating with consumers is more consistent.  Additional changes might also affect form agreements, letters, and other documents, which may begin to include more specific and clear provisions indicating that no statements are binding unless and until they are reduced to a writing signed by a duly authorized agent of the party. 

    The Riverisland ruling does not guarantee more litigation for everyone.  Where parties are vigilant in their efforts to avoid misstating the terms in the written agreement, and each side is permitted with sufficient time to review the agreement’s terms before signing, claims of fraud can be minimized.  This is and always was good practice, whether pre- or post-Riverisland.