Evidence of Fraudulent Statements At Variance With Contractual Language Allowed by New California Supreme Court Case

in Civil Litigation by Stephen Raucher

The California Supreme Court recently decided Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Association, 55 Cal.4th 1169 (2013), and changed the fraud exception to the parol evidence rule. The Court departed from the highly criticized Pendergrass rule, which took a narrow view of the fraud exception and limited the type of evidence that could be introduced when interpreting contracts. The Riverisland decision makes it easier to challenge a contract by expanding the type of evidence of fraud that can be introduced by a party.

The parol evidence rule is codified in Code of Civil Procedure §1856 and Civil Code §1625. It is intended to protect the integrity of written contracts by prohibiting courts from considering extrinsic evidence to alter or add to the terms of the contract itself. The fraud exception allows a party to introduce extrinsic evidence, including oral representations not included in the final written agreement, to establish that an agreement was tainted by fraud.

In Bank of America etc. Assn. v. Pendergrass, 4 Cal.2d 258, 263 (1935), the California Supreme Court imposed a limitation on the fraud exception by holding that “parol evidence of fraud to establish the invalidity of the instrument . . . 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.” This effectively disallowed a party from introducing parol evidence of an alleged misrepresentation if it contradicted the written terms of the final agreement.

The Pendergrass rule received much criticism over the years. The Pendergrass rule had the potential to actually further fraudulent practices by encouraging individuals to make oral promises they never intended to perform because evidence of these promises would be inadmissible. In 1977, the California Law Revision Commission ignored the Pendergrass rule when proposing modifications to section 1856, even though it could have codified the limitation. Finally, the Pendergrass rule was a minority view in the United States, as the majority of states, the Restatements, and most commentators declined to subscribe to the limitation.

The seminal decision in Riverisland abrogates a rule that not only had little legal support, but that was also unpopular in other jurisdictions and among commentators. Proving fraud through parol evidence will still require a showing of justifiable reliance on the defendant’s misrepresentation. However, the stringent limitation that prohibited parol evidence of promises at odds with the terms of a written agreement is no longer a part of California law.