CLIENT ALERT: Your Contract May Not Be As Integrated As You Think

Raines Feldman LLP by Eric B. Blum
April 22, 2013

Legal Alert: Recent California Supreme Court Decision Creates a Massive Shift in Contract Law - Evidence of Fraud May Now Be Used to Contradict A Written Contract

The California Supreme Court recently issued its opinion in Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Association, overruling a long standing precedent that will have a significant impact on California business.

Specifically, the Supreme Court held that parol evidence (meaning evidence like an oral agreement) may be used to show that a written contract was procured by a fraudulent statement even though the statement directly contradicts the express terms of the final, executed written contract. Prior to Riverisland, California Courts have, to various degrees, excluded evidence of fraud when the fraud is directly contrary to the terms of a written agreement.

In Riverisland, commercial borrowers sued their lender in connection with a written forbearance agreement, which provided that the lender would forbear from pursuing collection for three months in exchange for eight additional properties as collateral. The borrowers alleged that, prior to execution of the forbearance agreement, the lender’s vice president allegedly promised the borrowers orally that the forbearance would be for two years (as opposed to three months) in exchange for only two additional properties as collateral (as opposed to eight).

Thus, the alleged promise by the lender’s vice president directly contradicted the terms of the written agreement. Importantly, the borrowers had initialed the pages of the agreement which included the terms at issue. But, the borrowers claimed that they did not read the agreement and simply signed it in reliance on the lender’s oral representations of its terms.

The trial court dismissed the borrowers’ claims on the ground that they were barred from contradicting the terms of the written agreement. The California Supreme Court disagreed and allowed the case to proceed to trial where the evidence of the alleged oral statement can be presented.

The Riverisland decision is expected to significantly increase fraud claims related to written contracts of all types. Previously, the written contract terms were the last word and could not be contradicted. Now, a contracting party can allege an oral statement and potentially get around the terms of a written contract. However, the Riverisland Court also stressed that such claimants must still prove each of the elements of fraud, including justifiable reliance on the alleged misrepresentations.

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