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The New (Old) Fraud Exception to the Parol Evidence Rule

By Mark B. Wilson, P.C.

Summary

On January 14, 2013, the California Supreme Court published Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Association (2013) 55 Cal.4th 1169, 151 Cal.Rptr.3d 93, overruled Bank of America Nat. Trust & Savings Ass'n v. Pendergrass (1935) 4 Cal.2d 258 (which explained the ground rules of how to apply the fraud exception to the parol evidence rule), and substantially changed how courts will apply the fraud exception to the parol evidence rule in the future.  Interestingly, the California Supreme Court indicated Pendergrass was wrongly decided and that its new rule takes us back to how the fraud exception was originally designed by the California Legislature in 1872.  Thus, the "new" rule is in accordance with the old rule, which was suspended by Pendergrass.  For those attorneys who are uncomfortable citing cases that predate their birth dates, you will have to get used to citing cases between 1872 and 1935, as these will be the only cases (besides Riverisland) that have precedential value.

The Parol Evidence Rule

The parol evidence rule (which has nothing to do with criminal law) is codified in Code of Civil Procedure section 1856 and Civil Code section 1625 and states, in essence, that "when parties enter an integrated written agreement, extrinsic evidence may not be relied upon to alter or add to the terms of the writing. [Citation omitted.]"  Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Association, supra, 55 Cal.4th 1169, 151 Cal.Rptr.3d 93, at 96.  The parol evidence rule is described as being one of "substantive law" and not one of "evidence" because:

"It is founded on the principle that when the parties put all the terms of their agreement in writing, the writing itself becomes the agreement.  The written terms supersede statements made during the negotiations.  Extrinsic evidence of the agreement's terms is thus irrelevant, and cannot be relied upon." (Emphasis in original.) Id. at 96.

That is true until the exceptions start to apply.

The Fraud Exception to the Parol Evidence Rule as Stated in Code of Civil Procedure Section 1856

The fraud exception to the parol evidence rule states that the parol evidence rule "does not exclude other evidence . . . to establish . . . fraud."  Code Civil Procedure section 1856.

The Pendergrass Interpretation of the Fraud Exception to the Parol Evidence Rule

In Pendergrass, plaintiff sued defendants for breach of a promissory note.  The terms in the note stated the sum lent was payable on demand.  Plaintiff introduced the note into evidence and presented testimony that defendants did not pay the note.  Defendants attempted to introduce evidence that plaintiff agreed defendants would not be required to make any payments on the note, either principal or interest, until after defendants had sold their crops.

The fraud exception to the parol evidence rule is unqualified in Code Civil Procedure section 1856.  Nevertheless, the Pendergrass court placed a significant limitation on the exception:

"Our conception of the rule which permits parol evidence of fraud to establish the invalidity of the instrument is that it 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." (Emphasis added.)  Bank of America Nat. Trust & Savings Ass'n v. Pendergrass, supra, 4 Cal.2d at 263.

Since the promissory note stated it was payable on demand, the Pendergrass court held that evidence suggesting plaintiff could wait until defendants sold their crops contradicted a specific term of the note; accordingly, the fraud exception did not apply.  Bank of America Nat. Trust & Savings Ass'n v. Pendergrass, supra, 4 Cal.2d at 264.  Almost 80 years of federal and state opinions cited Pendergrass for authority to exclude similar evidence in interpreting contracts.

The Riverisland Opinion

The Riverisland court concluded Pendergrass was wrongly decided.  Among other reasons, it noted that courts struggled in evaluating whether proffered evidence was "directly at variance with the promise of the writing" or not, leading to inconsistent opinions.  Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Association, supra, 55 Cal.4th 1169, 151 Cal.Rptr.3d 93 at 97.

Recognizing the face-saving problem the Supreme Court has when it overrules itself, the Court stated:

"We respect the principle of stare decisis, but reconsideration of a poorly reasoned opinion is nevertheless appropriate.  It is settled that if a decision departed from an established general rule without discussing the contrary authority, its weight as precedent is diminished . . . [Citation omitted.]"  Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Association, supra, 55 Cal.4th 1169, 151 Cal.Rptr.3d 93 at 101.

***

"For these reasons, we overrule Pendergrass and its progeny, and reaffirm the venerable maxim . . . '[I]t was never intended that the parol evidence rule should be used as a shield to prevent the proof of fraud.'"  Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Association, supra, 55 Cal.4th 1169, 151 Cal.Rptr.3d 93 at 103, citing Ferguson v. Koch (1928) 204 Cal. 342, 347.

Accordingly, there appears to be no limitations on the fraud exception to the parol evidence rule, but the Riverisland court did not instruct lower courts on how to apply this new (old) rule.  Instead, the Riverisland court simply cited to a number of pre-1935 cases that were correctly decided.  We all know how much fun those cases are to read.

What This Opinion Means for Practitioners

Many lawyers, writers, and justices believed Pendergrass served valid purposes, and the Riverisland court cited some of these supporters.  Most importantly, parties enforcing contracts knew their opponents would be precluded from introducing evidence of oral promises which directly contradicted written obligations.  With the expansion of the fraud exception to the parol evidence rule, no written term is sacred.

Defense summary judgment motions on fraud claims (previously at risk under Pendergrass) will be more difficult to win because, in opposition, a plaintiff can present admissible evidence of the existence of an oral promise inconsistent with a provision that previously would have been barred.  For instance, parties who purchase insurance policies from unscrupulous insurance companies or agents will not be precluded from alleging they were orally promised a particular type of coverage, even if the policy states otherwise.  Plaintiffs trying to enforce what appear to be unambiguous integrated contracts need to be wary that defendants might base their defense on an oral promise which is inconsistent with the contract.  Now, all lawyers need to consider the Riverisland opinion anytime there is evidence which is inconsistent with a written term because, under the new interpretation of the fraud exception, it appears courts will have to admit all such evidence.

This article first appeared in the OCTLA Gavel, Summer 2013.

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