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California Supreme Court eliminates controversial exception to parol evidence rule
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State Supreme Court Finally Rejects Unusual Fraud Exception to Parol Evidence

Recognizing some notable exceptions, the state of California, like other states, require that contracts be in writing. But the California parol evidence rule, codified in the state’s Code of Civil Procedure section 1856, has always permitted parties to a contract to present oral evidence that may challenge a contract as being the result of mistake, fraud, duress, undue influence, illegality, alteration, lack of consideration, or another invalidating cause. But, with regard to the exception for fraud, the state’s Supreme Court has, since 1935, imposed a specific limitation: the oral evidence supporting the allegation of fraud “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.” (Bank of America etc. Assn. v. Pendergrass (1935) 4 Cal.2d 258, 263-4 [48 P.2d 659] (Pendergrass)).

In other words, a party which suggests that a particular term or condition of an agreement should be either included or excluded on the basis of some oral discussion not reduced to writing cannot prevail in making that argument: such testimony or oral statements cannot be allowed as evidence in a case. Under this Pendergrass rule, oral evidence of fraud can only be admissible if it influences the way in which the contract was made. This restriction on the fraud exception is unusual relative to other jurisdictions which follow the Restatement of Law relating to the use of parol evidence in assessing contracts. The Pendergrass decision has drawn consistent criticism for making it too difficult to have a contract invalidated for fraud. Last year a decision by the California Supreme Court eliminated the rule fashioned by the court in Pendergrass.

In the case of Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Assn., 55 Cal. 4th 1169 (Calif. Supreme Ct. 2013), this court found that the rule may actually shield purveyors of fraud. The Plaintiffs in the case alleged that, in essentially refinancing a deal requiring the payer to put up certain parcels of land as collateral, the Defendants fraudulently entered in to the deal expecting default so they could turn around and foreclose on the collateralized real estate.  Noting that the Pendergrass rule departs from California’s own statute on the subject and conflicts with the view of courts in other states, the Court rejected the rule and allowed the Plaintiffs to present certain evidence that the defendants fraudulently induced the Plaintiffs to enter in the agreement in question. The result is that litigants now will have an easier opportunity in California courts to challenge the validity of a contract on grounds of fraud.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services and advice for clients in all aspects of commercial compliance, business litigation and transactional law.  Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at www.glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

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