Oral Negotiations Take on New Importance

A recent decision from the California Supreme Court fundamentally changes the boundaries of one of the most basic principles of modern contract law. 
The Parol Evidence Rule typically bars prior and contemporaneous oral statements that contradict clear, unambiguous terms of an integrated written agreement.  In other words, where the parties’ intentions are clear, external evidence of statements is not allowed to interpret their intentions.  However, there has been an exception for fraud claims where the parol evidence does not directly vary with (contradict) promises in the final agreement.  This rule has existed in the same form for almost 80 years, until now.  On January 14, 2013, the California Supreme Court overturned  its landmark decision in Bank of America Nat. Trust & Savings Ass'n v. Pendergrass  (1935) 4 Cal.2d 258, 259.  The court broadened the fraud exception to the Parol Evidence Rule. 

Now, even where an oral promise directly contradicts the written agreement, a party can introduce the evidence in showing fraud by the other party.  The new standard will create a substantial hurdle for fraud defendants to obliterate litigation at the early stages of demurrer and summary judgment.
The new standard stems from Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Ass'n (2013) 55 Cal.4th 1169.  The plaintiff borrowers were in arrears on their mortgage.  They spoke with the vice president of the lender credit association.  The lender’s vice president promised the borrowers that with the addition of three properties as collateral for their loan, he would extend the loan for two years.  However, the final contract included an additional eight properties as collateral and extended the loan for only three months.  The defendant lender attempted to foreclose pursuant to the written terms of the loan.  In response, plaintiffs sued based on fraud and a number of other claims.
The trial court denied the borrowers’ claims relying on the traditional Pendergrass rule.  However, the court of appeal and supreme court found in their favor, allowing the case to move forward and paving the way in future cases for a much more lenient standard to show contractual fraud.  Contractual negotiations should include plenty of time for all parties to read the terms thoroughly, ask any necessary questions, and specifically approve the integration clause.