The parol evidence rule is codified in Code Civ. Proc., § 1856, and Civ. Code, § 1625. It provides that when parties enter an integrated written agreement, extrinsic evidence may not be relied upon to alter or add to the terms of the writing. An integrated agreement is a writing or writings constituting a final expression of one or more terms of an agreement.
Borrowers sued a lender seeking damages for fraud and negligent misrepresentation. The borrowers alleged that they were induced to enter into a contract with the lender by the lender's oral misrepresentations of the terms contained in the written agreement. The trial court granted the lender's motion for summary judgment, ruling that the fraud exception to the parol evidence rule does not allow parol evidence of promises at odds with the terms of the written agreement. The California Court of Appeal, Fifth Appellate District, reversed and the case was appealed to the Supreme Court of California.
Were the borrower's entitled to damages?
The judgment of the appellate court was affirmed. The court concluded that the case which adopted a limitation on the fraud exception to the parol evidence rule, was ill-considered, and should be overruled. The Pendergrass rule is difficult to apply. Pendergrass purported to follow Code Civ. Pro. $ 1856, but its restriction on the fraud exception was inconsistent with the terms of the statute, and with settled case law as well. While intended to prevent fraud, the Pendergrass rule may actually provide a shield for fraudulent conduct. The Pendergrass rule failed to account for the fundamental principle that fraud undermines the essential validity of the parties' agreement. The Pendergrass rule sought to prevent frauds and perjuries, but ignored California law protecting against promissory fraud. The parol evidence rule should not be used as a shield to prevent the proof of fraud.