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California Supreme Court Loosens Restrictions on the Fraud Exception to Allow the Use of Oral Evidence to Contradict Written Contract Terms
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CaliforniaSupreme Court Loosens Restrictions on the Fraud Exception to Allow the Use of Oral Evidence to Contradict Written Contract Terms

Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Association

In a decision released January 14, 2013,California’s high court overruled existing state case law which for decades significantly restricted the fraud exception to the parol evidence rule.

The parol evidence rule essentially prohibits using evidence of oral statements between contracting parties during litigation, requiring reliance on the written contract itself to define the terms of the contract.  One exception to the parol evidence rules is known as the fraud exception and allows the introduction of evidence of oral statements between contracting parties if the oral statements contradict the written terms of the parties’ contract.

Since contract rules and enforcement are a matter of state law, the application of various exceptions, such as the fraud exception, depends on case law developed by state courts over time.

The case law that set the precedent in Californiafor restricting the fraud exception was the 1935 case of Bank of America, etc. Assn v. Pendergrass.   In Pendergrass, the California Supreme Court held that the fraud exception could only be used to bypass the parol evidence restriction if the evidence of oral statements were offered to explain an extrinsic ambiguity or otherwise interpret the terms of the agreement, or to establish illegality or fraud.

The Riverisland decision alignsCaliforniacontract law with the majority of other states and with the Restatement of Contracts.  Overruling Pendergrass, the California Supreme Court ruled that evidence of the parties’ oral statements would be admissible under the fraud exception to the parol evidence rule where it is alleged that the party misrepresented the content of the written contract and thereby induced execution of the contract. .

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