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The California Supreme Court Makes It Easier To Attack Written Contracts

1/22/2013 Articles

On January 14, 2013, the California Supreme Court overruled a decision it issued 78 years ago, making it easier for parties to a written contract to offer evidence showing fraud in the making of the contract.

The Court’s unanimous decision in Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Association overrules Bank of America vs. Pendergrass, which held that evidence of promissory fraud, or a promise made without intention to perform, that varied or contradicted the terms of the written promise was inadmissible.  Under Riverisland, such evidence is now admissible.

In Riverisland, Plaintiffs entered into a forbearance agreement with a credit association for repayment of over $700,000 owed by Plaintiffs to the association.  When Plaintiffs failed to make the required payments under the agreement, the association recorded a notice of default.  Plaintiffs filed suit for damages, claiming that the association’s vice president assured them that the association would extend the loan for two years in exchange for additional collateral consisting of two ranches, but instead the contract terms provided for only three months of forbearance and identified eight parcels as additional collateral.  Plaintiffs did not read the agreement but simply signed at the locations tabbed for signature.

California Code of Civil Procedure § 1856(f) provides that when a party challenges the validity of a contract, he or she may offer parol evidence (evidence outside the four corners of the contract) to demonstrate why the agreement is invalid, including in the case of fraud.  Despite the language of Section 1856, the Pendergrass court imposed a limitation on the fraud exception, holding that it did not apply to alleged promises that are in direct conflict with the contract terms.  Writing for the Pendergrass court in 1935, Judge Ira Thompson wrote that parol evidence “must tend to establish some independent fact or representation, some fraud in the procurement of the instrument or some breach of confidence concerning its use, and not a promise directly at variance with the promise of the writing.”

In Riverisland, the Supreme Court found that there were “good reasons” for reconsidering the long-standing holding of Pendergrass.  The Court found the “primary ground of attack” of Pendergrass was that its limitation finds no support in the language of Section 1856.  In addition, it is difficult to apply, and it conflicts with well-established treatises and the law of many other state jurisdictions.  Furthermore, while intended to prevent fraud, the Court found that the Pendergrass rule may actually provide a shield for fraudulent conduct.  Finally, Pendergrass departed from well-established case law at the time it was decided, “and neither acknowledged nor justified the abrogation.”  Judge Corrigan’s opinion in Riverisland notes that “Pendergrass failed to account for the fundamental principle that fraud undermines the essential validity of the parties’ agreement.  When fraud is proven, it cannot be maintained that the parties freely entered into an agreement reflecting a meeting of the minds.”

Riverisland establishes a more liberal and consistent fraud exception in California, one that will hopefully lead to more predictable litigation outcomes.  This decision makes it easier to attack written contracts and may result in increased allegations of promissory fraud made in an effort to defeat written contracts.  Also left open by the Court was the degree to which failure to read a contract affects the viability of a claim of fraud in the inducement. 

As a practical matter, to avoid efforts to defeat a written contract, make no promises regarding the contract not contained in its express terms.  And by all means, if you’re signing a contract, read it first!

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