Supreme Court of California Overrules 78-Year-Old Rule, Makes It Easier to Attack the Validity of Contracts with Evidence of Fraudulent Promises

Supreme Court of California Overrules 78-Year-Old Rule, Makes It Easier to Attack the Validity of Contracts with Evidence of Fraudulent Promises

Excerpt:

In a decision with important consequences to businesses that enter into contracts with consumers, the Supreme Court of California in Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Association, 2013 Cal. LEXIS 253 (2013) [an enhanced version of this opinion is available to lexis.com subscribers], ended the state's long adherence to the Pendergrass rule, which had stood for almost 78 years. Riverisland brings California in line with the majority of other jurisdictions in holding that fraud, without restriction, is admissible to challenge the validity of a written agreement.

The Pendergrass Rule

It is a generally accepted exception to the parol evidence rule that a party to an agreement may present extrinsic evidence without restriction to show that the agreement was tainted by fraud. Corbin on Contracts explains:

"It is widely agreed that oral testimony is admissible to prove fraud or misrepresentation . . . . This exception to the parol evidence rule applies even if the testimony contradicts the terms of a completely integrated writing."

In [Bank of America etc. Assn. v. Pendergrass, 4 Cal. 2d 258 (1935) enhanced version] the California Supreme Court manufactured a limitation to the fraud exception that was inconsistent with even settled California law at the time it was decided in1935. Pendergrass held that evidence offered to prove fraud "must tend to establish some independent fact or representation, some fraud in the procurement of the instrument or some breach of confidence concerning its use, and not a promise directly at variance with the promise of the writing."

Almost eight decades later in Riverisland, the California Supreme Court concluded that the Pendergrass rule restricting the evidence that may be admitted to prove fraud needed to be scrapped because it was "bad policy" and out of step with the California Code of Civil Procedure, the majority of other jurisdictions, as well as the consensus of leading contract law commentators. In addition, the rule Pendergrass created has proven largely unworkable: California courts followed it with only "varying degrees of fidelity," and they invented all manner of artifice to avoid its impact. Finally, as a practical concern, instead of preventing fraud, adherence to the Pendergrass limitation actually promoted it.

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Timothy Murray is a partner with the Pittsburgh, Pennsylvania firm Murray, Hogue & Lannis. He has been a member of the Pennsylvania bar since 1984, and is also admitted to practice in the U.S. District Court, Western District of Pennsylvania and the U.S. Court of Appeals, Third Circuit. He co-authors with Dr. John E. Murray, Jr., the biannual supplements to the landmark contract law treatise Corbin on Contracts. He is co-author of Contract Law for the 21st Century Lawyer: Critical Analysis and Practical Application (PBI Press 2013). Mr. Murray is currently revising various chapters in Lexis' form book series, Current Legal Forms. He is also one of Lexis' authors of Emerging Issues Analyses, and Lexis Practice Advisor.

Mr. Murray has represented numerous businesses and individuals in all manner of contract transactional matters and disputes, including automobile manufacturers and dealers. He has been the course planner for numerous contract law seminars in Pennsylvania and Ohio and has been a presenter at contract law seminars for the Pennsylvania Bar Institute.