The parole evidence rule is an important rule of both evidence and substantive law. It provides that the terms of a writing intended to be a final agreement may not be contradicted by any prior agreement or contemporaneous oral communications. The rule is codified in California Code of Civil Procedure §1856. A significant exception to the rule [CCP §1856 (f)] provides that where the validity of the agreement is in dispute the rule does not exclude evidence relevant to that issue. The code specifically provides that the rule does not exclude other evidence concerning the circumstances under which the agreement was made, to explain an ambiguity, to interpret the terms of the agreement or to establish illegality or fraud. [See CCP §1856 (g)].
In Bank of America National Trust and Savings Association v. Pendergrass, (1935) 4 Cal.2d 258, the Supreme Court held the fraud exception to the Parole Evidence Rule described above would permit the admission of parole evidence only if it tended to prove some fraud in the inducement to enter into the contract or some other fact independent of the contract terms. Thus parole evidence of an oral promise made contemporaneously with the execution of the agreement that contradicted the written terms of the agreement was inadmissible even for the purpose of contesting the validity of the contract itself.
In Riverisland Cold Storage v. Fresno-Madera Production Credit Association, (2013) 55 Cal.4th 1169, the California Supreme Court revisited that issue and concluded that the Pendergrass rule is contrary to the language of the statute, is difficult to apply, conflicts with the Restatement, most treatises and most sister state jurisdictions. Furthermore the Court was concerned that, although intended to prevent fraud, the rule established in Pendergrass may provide a shield for fraudulent conduct. As a result, in Riverisland the Court reversed its 78 year old holding in Pendergrass and allowed the admission of parole evidence to demonstrate fraud by a lender.
In Riverisland, plaintiffs had restructured their debt with Fresno-Madeira Production Credit Association with a new agreement by which the credit association promised it would take no enforcement action until July 1, 2007 if the plaintiff made specified payments. Plaintiffs did not make the required payments and the credit association recorded a notice of default. Plaintiffs eventually repaid the loan and the association dismissed the foreclosure proceedings. Plaintiffs then filed a law suit against the association seeking damages for fraud and negligent misrepresentation including causes of action for rescission and reformation of the restructuring agreement. Plaintiffs alleged that a vice president of the association met with them two weeks before the agreement was signed and told them the association would extend the loan for two years in exchange for additional collateral consisting of two ranches. They were assured that the term was for two years and that the ranches were only additional security. The contract that they signed however only contemplated 3 months of forbearance by the association and identified 8 parcels as the additional collateral. Plaintiffs claimed that they did not read the agreement but signed it anyway. The credit association moved for summary judgment contending that because the parole evidence rule barred evidence of any representations contradicting the terms of the written agreement, the plaintiffs’ claim could not proceed. Plaintiffs argued that misrepresentations were admissible under the fraud exception but the trial court, relying on Pendergrass, granted summary judgment for the defendant.
The Court of Appeal reversed reasoning that Pendergrass was limited to promissory fraud and that false statements about the content of the agreement itself were beyond the scope of the Pendergrass rule. The Supreme Court granted review. After examining the way the statute had been applied in Pendergrass, the criticisms made and the way sister state courts have interpreted the parole evidence rule, the Supreme Court determined that its decision in Pendergrass was wrong. It concluded that the Pendergrass was a poorly reasoned opinion and a misapplication of the statute and was inconsistent with the law at the time it was decided. Stating that Pendergrass was an aberrant decision, the Supreme Court decided that it was no longer valid law and upheld the Court of Appeal’s decision to reverse the grant of summary judgment to the credit association.
Draftsmanship is not by itself going to resolve the issue of whether parole evidence will be admitted. Nevertheless, fraud is still a difficult issue to prove, even with the admission of parole evidence. Parole evidence may be admitted at least initially to allow the Court to determine if fraud is a legitimate issue for the Trier of Fact to consider. Fraud is still a difficult claim to prove. As the Supreme Court noted, it “entails more than proof of an unkept promise or mere failure of performance …. promissory fraud, like all forms of fraud, requires a showing of justifiable reliance on the defendant’s misrepresentation.” This holding is going to make the issue of “possible fraud” a significant one in many contractual disputes.
One door left open in the Riverisland decision is the holding in Rosenthal v. Great Western Financial Securities Corp., (1996) 14 Cal.4th 1494. There the Court concluded that the negligent failure to acquaint oneself with the contents of a written agreement precludes a finding that the contract is void for fraud in the execution. It is not clear what the application of Rosenthal will be with the new Riverisland approach under the parole evidence rule – an issue which will be addressed in the future as the courts attempt to deal with the new rule as it now exists.