California Supreme Court Overrules Prendergrass

In Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Association (January 14, 2013), the California Supreme Court overruled a precedent of over 75 years’ standing (Bank of America etc. Assn. v. Pendergrass (1935) 4 Cal.2d 258) and held that a party sued on a contract will be permitted to show that the contract was induced by a fraudulent promise even though the promise directly contradicts an express term of the contract.

The parol evidence rule 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. The rule is founded on the principle that when the parties put all the terms of their agreement in writing, the writing itself becomes the agreement. The written terms supersede statements made during the negotiations. Extrinsic evidence of the agreement’s terms is thus irrelevant and cannot be relied upon.

Prendergrass held that a party to a written agreement could not defend against enforcement by showing that he was induced to sign the agreement by an oral promise directly at variance with a promise in the writing. The typical pattern was as follows. A party is sued on a contract, and he asserts that the other party assured him that the contract would not be enforced as written. Of course, any such assurance would be contrary to the terms of the contract. As a result of Prendergrass, the party would not be permitted to defend by introducing evidence of such a promise.

Prendergrass was criticized on the ground that it was inconsistent with the principle that a contract may be invalidated by a showing of fraud, but it stood as controlling precedent, binding on all courts in California, from 1935 until now.

With this decision, the supreme court holds Pendergrass wrongly decided and overruled. Henceforth, parties to a written contract will not be precluded from proving that the contract was induced by a fraudulent promise even if the fraudulent promise is directly at odds with an express term of the contract.

Although a party is no longer precluded by the parol evidence rule from showing promissory fraud, the party will still have to prove that: (1) the promise was made, (2) the promise was material,  (3) the promisor never intended to perform the promise, and (4) the party justifiably relied on the promise. A mere non-performance of the promise will not suffice to establish promissory fraud.

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