Recent Developments in Contract Law – Oral Evidence Concerning Written Contracts

As a general rule, persons who enter written contracts can expect the terms of the contract to be enforced in court, as long as the contract is for a lawful purpose. In general, a written contract that completely integrates the mutual promises of the parties will be enforced, and its terms cannot be altered or amended by testimony concerning an oral promise made at the same time as the written agreement. This principle is known as the “parol evidence rule.” The parol evidence rule prohibits the introduction of evidence of an oral promise made either prior to or contemporaneously with a written agreement. The rule is codified at California Code of Civil Procedures §1856 and California Civil Code §1625. For many decades the rule was well established by the California Supreme Court decision of Bank of America vs. Pendergrass (1935) 4 C 2d 258, which held that parol evidence of fraud to induce a written contract would only be admissible as evidence if fraud involved some independent fact or representation, or some fraud in the procurement of the contract, or from some breach of a confidential relationship, such as exists between a principal and agent, and not merely some promise that contradicted the terms of the written instrument.

A major change in the law occurred when the California Supreme Court issued its decision in RiverIsland Cold Storage, Inc. vs. Fresno–Madera Prod. Credit Assn. (2013) 55 C 4th 1169. In RiverIsland a borrower executed a loan forbearance agreement without reading it based upon an oral representation by the president of the lender that the lender would delay collecting loan payments if the borrower would put up additional real property as collateral for the loan. However, the forbearance agreement only provided for three months of forbearance. The lender issued a notice of default to enforce its loan. The borrower sued the lender for fraud. The trial court ruled against the plaintiff/borrower. The court of appeal reversed the trial court, and held that the Pendergrass rule did not apply to claims where the defendant mischaracterized the content of the written agreement. The court of appeals also held that, where the failure to read a written agreement is induced by fraud, then the fraud may be a defense even in the absence of some special confidential or fiduciary relationship between the parties. The Supreme Court affirmed the Court of Appeals and held that oral testimony would be admissible to prove fraud in inducing the execution of a written agreement.

A plaintiff seeking to avoid the effect of a written agreement must still prove the written agreement was induced by a fraudulent representation. Good business practice would therefore seem to dictate that a careful record be kept of all communications between the parties, and/or their attorneys or representatives, in negotiating a contract, including emails, letters, telephone conversations, and meetings, and that records be maintained as to any oral promises made between the parties at or near the time of the execution of the written agreement.

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