New California Supreme Court Case Opens Door to Attacks on Contracts

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For the past 70 years, California courts have held that a party is barred from claiming fraud based on an alleged oral misrepresentation that directly contradicts the express terms of a written agreement. This rule had long been useful in defending a claim that a party to an agreement was orally promised something directly contradicted by the terms of the agreement. In January 2013, however, the California Supreme Court reversed this rule and held that one party to a contract may sue the other party for fraud for alleged false promises despite the contract’s express terms designed to prevent such a claim.

In Riverisland Cold Storage, Inc. v Fresno-Madera Production Credit Assn., the Court held that a borrower could sue its lender on the basis that a loan officer allegedly made an oral promise of a 2-year forbearance term and further assured the borrower that the written forbearance agreement was consistent with that promise. The borrower’s principals claimed they had not read the agreement but simply relied upon the loan officer’s assurances in signing the document. The agreement in fact provided for only a 90-day forbearance term. When the lender moved to foreclose at the end of the 90-day term, the borrowers paid off the loan but then sued the lender for fraud.

The lender defended the case based on the long-standing rule that the alleged oral promise was directly contradicted by the terms of the written agreement, which was an integrated agreement (typical for contracts, usually accomplished by an “entire agreement” or “integration” clause), intended to prevent such claims. Ultimately, the Supreme Court permitted the fraud claim to proceed, electing to reverse the rule on the basis that it did not comply with either current California statutory law or principles applied in other states. The Court left open the issue of whether the borrower’s principals could reasonably rely upon the loan officer’s oral assurances where they chose not to read the agreement.

This case will likely result in a substantial increase in fraud claims as a means to attack contracts when a party has changed its mind about a deal. Protective measures that parties negotiating contracts should consider include: emphasizing in letters of intent that only final contract documents will express the parties’ agreement; expanding use of pre-negotiation agreements; having the parties initial a provision stating that they have read the agreements; and ensuring that agreements have effective alternative dispute resolution provisions to avoid jury trials.

Topics:  Borrowers, Extrinsic Evidence, Forbearance Agreements, Fraud, Lenders, Oral Modification

Published In: Civil Procedure Updates, General Business Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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