Think You Are Protected by the Clear Terms of a Written Contract? Think Again!

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Editor’ Note:  The case discussed in the blog below was NOT an employment law case.  So why is it featured here?  Because it has an impact—a very serious impact—on every contract in the State of California, including employment contracts.  Put simply, every employer needs to be aware of this case for the simple reason that it could change the way contracts are negotiated and administered on a state-wide basis.  Besides, there is more to life than employment law cases.  Okay, not much more, but enough to be worthy of a quick look. 

The California Supreme Court just released a significant new decision dealing with the parol evidence rule that changes the law dramatically in California.  The case name/citation is Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Association, 2013 WL 141731.

This case was brought by apparently wealthy and sophisticated borrowers who supposedly did not read fully integrated loan modification documents which limited a standstill agreement by a lender to 3 months and that was given in exchange for the borrowers’ pledge of eight additional parcels of real property as security for a loan that was in default.  The borrowers claimed that the lender had orally promised that the standstill would last two years and that the former were supposedly told that the loan modification documents reflected that term.  The borrowers sued the lender for fraud and other torts, seeking money damages and equitable relief; i.e., rescission and reformation of the loan modification documents.  The lender obtained summary judgment in the trial court based on California’s long standing rule prohibiting the use of promissory fraud to overcome a fully integrated written instrument where the so-called fraud was contrary to an explicit term of the underlying document.  More specifically, the “parol evidence rule” prevents a party to a written contract from presenting evidence that contradicts or adds to the terms of the contract that appears to be whole.

The California Supreme Court reversed, stating that “[I]t was never intended that the parol evidence rule should be used as a shield to prevent the proof of fraud.”  2013 WL 141731 at 9.  However, the California Supreme Court did point out that “[t]he intent element of promissory fraud entails more than proof of an unkept promise or mere failure of performance,” while reiterating “[t]hat promissory fraud, like all forms of fraud, requires a showing of justifiable reliance on the defendant’s misrepresentation.”  Id. 

This is a major change in the law.  It means that anytime a person or entity is on the wrong side of a contract or does not like the written bargain, they can now “manufacture” a fraud claim based on alleged oral promises even though the latter contradict the terms of a fully integrated written instrument that actually contains an integration clause.  Summary judgment may now become much more difficult to obtain in contract driven litigation.  In order to deal with this potential problem, you may want to take at least the following steps with any new contract of substance:

  1. Have the other party initial each page and any key clauses.  This will help alleviate the claim that they did not read/understand same or that different terms were somehow offered to them.
  2. Use all caps or bolding to highlight key clauses and terms.
  3. Include language reflecting that the other party has actually read the underlying document and is entering same voluntarily, etc.
  4. Include comprehensive integration clauses that specifically disclaim any prior representations or agreements and which clearly waives the right of any party to claim otherwise.
  5. Include a summary of key terms/clauses at the front of the instrument in simple language.  But be careful to point out that in the event of any conflict between the summary and the actual terms, the latter will prevail.
  6. Keep meticulous records regarding all discussions concerning the drafting and administration of the contract.

Although not fixed in stone, each of these suggestions may make it much more difficult for any party to claim that some sort of oral promises or representations were made that fly in the face of the written instrument itself; i.e., bolster an argument that no justifiable reliance exists as a matter of law.

This blog is presented under protest by the law firm of Ervin Cohen & Jessup LLP.  It is essentially the random thoughts and opinions of someone who lives in the trenches of the war that often is employment law–he/she may well be a little shell-shocked.  So if you are thinking “woohoo, I just landed some free legal advice that will fix all my problems!”, think again.  This is commentary people, a sketchy overview of some current legal issue with a dose of humor, but commentary nonetheless; as if Dennis Miller were a lawyer…and still mildly amusing.  No legal advice here; you would have to pay real US currency for that (unless you are my mom, and even then there are limits).  But feel free to contact us with your questions and comments—who knows, we might even answer you.  And if you want to spread this stuff around, feel free to do so, but please keep it in its present form (‘cause you can’t mess with this kind of poetry).  Big news: Copyright 2013.  All rights reserved; yep, all of them.

If you have any questions regarding this blog or your life in general, contact Kelly O. Scott, Esq. (who else would you contact?), commander in chief of this blog and Head Honcho (official legal title) of ECJ’s Employment Law Department, at (310) 281-6348 or kscott@ecjlaw.com.

Topics:  Fraud, Loan Modifications, Parol Evidence, Riverisland

Published In: Finance & Banking Updates, Commercial Real Estate 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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