In March of this year, we reported on the California Supreme Court decision in Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Assn., which held that a borrower could sue its lender for fraud based on oral promises and assurances made by a loan officer to the borrower. This decision changed the long-standing rule that “integrated agreements” (those containing clauses which state that the agreements represent the entire agreement of the parties) may not be attacked based on alleged oral promises that contradict the terms of the agreements. In our alert, we warned that Riverisland would likely lead to a proliferation of fraud claims based on oral promises allegedly made during contract negotiations.
In two cases since our March alert, California appellate courts have followed the Supreme Court's lead in Riverisland, creating further cause for concern about the vulnerability of written contracts to claims of oral or written promises and representations made during negotiations.
In June, a California appellate court followed the new Riverisland rule in a case involving a restaurant lease. In Julius Castle Restaurant, Inc. v. Payne, the tenants asserted a fraud claim against their landlord based on the landlord’s representations about the condition of the premises and equipment, as well as promises to make repairs, which the tenants claimed the landlord made during the course of lease negotiations. Even though the lease expressly stated that the landlord made no representations as to the condition of the premises and provided for no maintenance responsibilities matching the alleged promise to repair, the court held that the landlord was responsible for those representations and promise. Unlike the borrower in Riverisland, the tenants in Julius Castle were sophisticated parties who had not only read but extensively negotiated their lease. Nevertheless, based on Riverisland the court stated that despite the existence of an integration clause, the tenants were entitled to pursue a fraud claim against the landlord based on their reasonable reliance on the landlord’s representations and promise.
In July, another California appellate court in the Thrifty Payless, Inc. v. The Americana at Brand, LLC case considered a lease dispute in which the tenant provided evidence of written representations made by the landlord during negotiations about the anticipated triple net charges under a lease for a newly-developed property. Again based on Riverisland, the court held that the tenant was entitled to seek to rescind or reform the lease or to recover damages from the landlord by proving that the tenant had reasonably relied on the landlord’s representations during negotiations even though the representations were later contradicted in the lease (and despite the lease being an integrated agreement).
Both the Julius Castle case and the Thrifty Payless case illustrate the significant dangers created by the California Supreme Court in Riverisland, and the need to avoid making any oral or written representations or commitments during the negotiation phase, even with a carefully-worded agreement at the end of negotiations.
It is difficult to prescribe any clearly effective protections against liability for representations or promises made by a party before entering into a contract, as the language of the Riverisland case and the two cases described above do not suggest any safe harbors. Only corrective legislative would offer a complete solution. That said, here are a few suggestions for minimizing the risks: (i) include recitals that the parties have read and understood the agreement, that neither party is relying on any representations or inducements to enter into the agreement, that the agreement accurately reflects the parties’ understanding, and that there are no defenses to its enforceability; (ii) include clauses stating that the parties have jointly drafted the agreement and that each party has had the advice of its own legal counsel; (iii) consider including an arbitration or judicial reference provision, in order to avoid a jury trial; and (iv) if the agreement is ever modified, obtain a release from the other party at the time the amendment is signed. While these are not surefire safeguards against the effects of the Riverisland line of cases, they should provide at least some protection for a contracting party who is attempting to rely on an agreement.