The Quest For Contractual Certainty

by Wendel, Rosen, Black & Dean LLP

The California Supreme Court has re-examined and largely restricted the scope of the parol evidence rule (Code of Civil Procedure §1856) in the case of RiverIsland Cold Storage, Inc. v. Fresno-Madera Production Credit Association 1 S.O.S. 137 (2013).  For the last 75 years, unless one proved fraud, or another invalidating cause in the very procurement of a contract, evidence, even of fraud in pre-execution conduct regarding the terms of an integrated written agreement, was inadmissible to vary or contradict the terms of the writing.  The Supreme Court has now decided that the quest for certainty should not be transmuted into a shield to preclude consideration of evidence of actual fraud.  One consequence of this change will be to reduce the reliance contracting parties can place on the literal terms of a written agreement.  Allowing evidence that contradicts the clear provisions of a writing can also be used to prolong litigation by precluding summary adjudication of the terms of a contract through the presentation of evidence of real or imagined contemporaneous oral representations that are inconsistent with the written contract.

The most obvious example is an unambiguous written agreement requiring a party to undertake a specific act such as making a payment on a date certain, transferring specific property or providing goods or services.  Now, a defendant who has failed to comply with the objective written covenants can force a trial by declaring that the other contracting party stated there would be no insistence on timely performance in conformity with the written agreement and that the defendant's reliance on that statement was reasonable.

Sophisticated parties may wish to consider mutually agreeing that they can each rely on the contract and eliminate future claims of fraud for conduct consistent with the terms of a fully integrated contract.  The question is whether the courts will enforce such a provision between parties of equal bargaining power or determine such a provision to be void for public policy reasons.  California Civil Code §1668 voids all contracts that exempt anyone from responsibility for his or her own fraud.  Given that until January 15, 2013, the parol evidence rule, as applied, was not repugnant to public policy, it is reasonable to argue that a covenant agreeing to the application of prior law should not be deemed an attempt to evade responsibility for fraud, so that such a provision would not be void.  Further, it will be harder to prove reasonable reliance on an alleged oral representation when the contract specifies the written agreement's terms trump any oral statements.

In the appropriate circumstances, sophisticated parties who wish to avoid potential future disputes about pre-contractual representations should consider a provision similar to the following:

"The Parties to this Agreement are experienced business people, under no duress or inequality of bargaining power, who value the certainty provided by the literal terms and conditions of this Agreement, which were fully negotiated.  All Parties have carefully read this Agreement, have consulted with counsel, and have fully investigated the circumstances and representations by the Parties regarding the meaning, intent, execution and provisions of this Agreement.  The Parties hereto mutually agree to strictly honor the covenants and conditions contained in this Agreement and irrevocably waive any contrary right of substantive law, except fraud in the procurement of this Agreement.  This waiver includes any right to present evidence to a court tribunal or arbitrator of extrinsic evidence against any other Party to this Agreement that purports to vary or contradict its specific terms. The Parties also acknowledge that they are not relying on any information, or obligation to provide information, from the other Parties to this Agreement."

While there is certainly no guarantee that the Courts would allow even sophisticated parties to contract around this new law change, with the proper caveats to a client there is no harm in trying.


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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