The Pendergrass rule is dead. Parol evidence, even that at odds with the written terms of a contract, may be used to support claims of promissory fraud. However, where consumers have not read their contracts before signing them, they will have to present facts that tend to prove their failure to read the contracts was not negligent.
The parol evidence rule is codified in Code of Civil Procedure section 1856 and Civil Code section 1625. It provides 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. The parol evidence rule protects the integrity of written contracts by making their terms the exclusive evidence of the parties’ agreement. An established exception to the rule allows a party to present extrinsic evidence to show that the agreement was tainted by fraud.
Seventy-five years ago in Bank of America v. Pendergrass (1935), the California Supreme Court held that the fraud exception to the parol evidence rule could not be used to contradict a contract’s stated terms. The court specifically held that evidence offered to prove 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.”
Last month the California Supreme Court overruled Pendergrass and its progeny in Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Association. The court determined that the Pendergrass rule was poorly reasoned, inconsistent with California law, and “may actually provide a shield for fraudulent conduct.”
The Court reasoned that Pendergrass failed to account for the fundamental principle that fraud undermines the essential validity of the parties’ agreement, i.e., when fraud is proven it cannot be maintained that the parties freely entered into an agreement reflecting a meeting of the minds. Pendergrass also ignored California laws’ protections against promissory fraud.
The Riverisland decision will have far-reaching effects particularly in the area of real estate finance where lenders have traditionally relied on Pendergrass to bar evidence by borrowers of oral promises at odds with the written terms of their agreements. In Pendergrass and Riverisland borrowers claimed their lenders had orally promised different repayment terms than were stated in their loan documents. Consumers may now, with proper proof, present evidence of oral promises at odds with the written terms of their contracts as evidence of promissory fraud to prove their claims.
Riverisland is not a home run for consumers, however. The borrowers in Riverisland did not read their loan documents before signing them. While the borrowers can now present oral evidence at odds with the written terms of their contracts and survive a demurrer — promissory fraud requires justifiable reliance. In Rosenthal v. Great Western Fin. Securities Corp. (1996) the Supreme Court held that the negligent failure to read a contract precludes finding it void due to fraud. Consumers will have to show special circumstances which tend to prove their failure to read their documents was not negligent.
I consult with clients and accept cases concerning contract disputes including those involving promissory fraud and estoppel. For other types of cases I accept, please consult the My Practice page. If you are seeking a legal consult or representation, please give me a call at 818.971.9409. – Michael Daymude