1. The document discusses changes to California's parole evidence rule regarding fraud exceptions. Previously, oral inducements inconsistent with written contracts could not be used to claim fraud. However, a recent court case now allows such claims to prevent fraudulent inducement. 2. Going forward, contract expectations will be less certain as fraud claims and litigation focusing on parties' intent and reliance will be more common. Boilerplate clauses will provide less protection. Sophistication of parties and reasonableness of reliance will be important factors. 3. Some potential limitations discussed include failing to read a contract, sophistication of parties, bargaining power differences, and failure to investigate. Reformation of contract terms based on fraud may also now be available

1. 22 ORANGE COUNTY LAWYER
RESTORING THE CORNERS
TO CONTRACTS:DEALING WITH THE NEW FRAUD EXCEPTION TO THE PAROLE EVIDENCE RULE
by DAVID J. MYERS
H
istorically, the parole evidence rule
has protected California businesses
from claims that written contracts
werefraudulentbasedoninconsistent
alleged oral inducements. This
bright line approach provided
considerable comfort for clients and
attorneys, as they could limit the matters that
could be considered in interpreting contracts,
and make short work of litigation based on
inconsistent alleged oral inducements.
Those days are now gone, however, since
Riverisland Cold Storage, Inc. v. Fresno-
Madera Prod. Credit Ass’n, 55 Cal. 4th 1169
(2013) called existing law an “aberration,”
and brought California law into line with
what the court termed “the path followed
by the Restatements, the majority of other
states, and most commentators.” Not that
the court didn’t appreciate the benefits of
the existing approach. It simply found that
the importance of preventing promissory
fraud is greater, such that alleged fraudulent
inducements have to be considered even if
inconsistent with written contract terms.
So, what can we expect going forward? Are
thereanylimitsonthetypesofmattersthatcan
be asserted or contradicted? Is there anything
that can be done during the contracting phase
to protect against unwarranted fraud claims,
or conversely to preserve the right to assert
unwritten inducements, for example when
dealing with contracts of adhesion? What
are the pleading and proof requirements? And
can an actionable fraudulent inducement be
used to modify contract terms or only to
avoid the contract?
Generally, it is safe to say that contract
expectations will be less certain, and the
risks of having to deal with fraud claims
and protracted litigation will be increased.
Boilerplate “as-is” and “integration” clauses
will be ineffective. Litigation will focus
on intent and reliance on alleged oral
inducements, both of which are factual
determinationsandthusunlikelytoberesolved
quickly. Reliance will involve a number of
factors, including the sophistication and
relative bargaining positions of the parties,
and the reasonableness of their reliance
and due diligence under the circumstances.
Reformation is also still available to correct
the “mutual mistake” created by a fraudulent
inducement.
As for limitations, it is unlikely that a
party who fails to read a written contract
will be able to rely on contrary alleged oral
inducements, unless they can show good
cause. And successors that qualify as holders
in due course, bona fide purchasers, bona
fide encumbrancers, and failed financial
institutions and their assignees should also
still be able to avoid alleged collateral oral
agreements.
It is also likely that we have not heard
the last word on the enforceability of
as-is and merger provisions, and that we
may see greater acceptance of particularized
provisions negotiated by sophisticated
parties who have full access to all relevant
information, especially in settlement and other
commercial agreements that include “clear
and unequivocal” disclaimers of reliance.
We may also see limitations on the
reasonableness of reliance on matters that are
so material that they could and should have
been included in a final integrated contract if
they were in fact part of the bargain. There
are steps that parties can take to protect their
contractual interests, both in drafting and
record-keeping.
The New Rule
The facts giving rise to Riverisland were
simple enough. According to the applicable
loan documentation, a lender restructured a
loan following a default to give the borrowers
additional time to pay it off in exchange
for a pledge of additional collateral. When
the borrowers defaulted and the lender
initiated foreclosure proceedings, the
borrowers counterclaimed for fraud and
rescission, based on alleged promises during
negotiations that the extension was promised
for longer than stated and without additional
collateral. The borrowers also claimed that
they were assured at the time of signing that
the documents conformed to the alleged
oral promises, and that they signed without
reading the documents in reliance on the
alleged assurance. Id. at 1172-73.
Historically, few California courts
would have considered the counterclaims
as they relied on alleged oral promises that
were inconsistent with the express terms
of integrated signed loan documents. The
court of appeal, however, found that the
“false statements about the contents of the
agreement itself” were not subject to the
limitation on the fraud exception to the
parole evidence rule. Id. at 1173. In affirming,
the California Supreme Court held that even
claims of fraud in the inducement have to
be considered to prevent nullification of
the fraud exception to the parole evidence

2. 23MARCH 2014www.ocbar.org
One clear import
of the new rule is
the avoidance of
reliance on boilerplate
provisions, especially
in higher risk
transactions such as
loan modifications
and sales and leases
of distressed assets.
rule, and that the protection against abuse
must be found in the strict pleading and
proof requirements applicable to fraud claims
in general. Id. at 1182-83.
Not surprisingly, the courts that have
since decided cases have engaged in tortured
analysis of transaction histories to resolve
the numerous questions of fact involved
in ascertaining the parties’ intentions and
justifiable reliance. For example, in Julius
Castle Rest., Inc. v. Payne, 216 Cal. App. 4th
1423, 1442 (2013), the court affirmed a fraud
judgment for damages in favor of a restaurant
operator tenant against its landlord. The lease
included the customary “as-is” provision,
a representation by the tenant that it had
inspected and approved the condition of the
premises, limitation of the landlord’s repair
obligationstothestructure,andanintegration
clause. Id. at 1427. However, the restaurant
owner obtained a preliminary injunction
restraining the sale of its liquor license, and
was allowed to assert at trial claims that the
landlord failed to disclose that substantial
improvements were undertaken without
required permits that jeopardized the ability
to operate the restaurant, misrepresented
that the restaurant equipment was in good
working order, and falsely promised that, if it
was not, he would make good on any needed
repairs. Id. at 1428-29.
Similarly, in Thrifty Payless, Inc. v.
Americana at Brand, LLC, 218 Cal. App.
4th 1230 (2013), the court reversed an order
sustaining a demurrer without leave to amend
fraud and negligent misrepresentation claims
against a shopping center landlord. Id. at
1244. The basis for the claims was that the
landlord charged Thrifty for 5.7% of the
center’s expenses under the triple net (NNN)
provision contained in its lease, more than
double the 2.2% estimated in the Letter
of Intent on which the lease was based, a
difference of about $342,704 for the first
year alone. Thrifty alleged that, despite its
lease acknowledgment, the NNN charges
provided by the landlord were only estimates,
the landlord knew Thrifty was relying on the
estimates to evaluate the suitability of the
project, that its reliance on the estimates was
reasonable because the landlord had all or
most of the needed information and a better
understanding of the needs to accurately
calculate the charges since it owned a number
of shopping centers, that Thrifty did not have
access to the necessary records and was not
in a position to discover the true ultimate
operating costs, and that it had relied upon
and received reliable comparable information
in its past dealings with the landlord. Id. at
1241-42. In addition, Thrifty discovered
after filing its complaint, and advised the trial
court at the time of hearing, that the landlord
knew or should have known the estimate was
inaccurate because it told other prospective
tenants that their NNN shares would be
substantially higher, and made a deal with
a movie theater to charge it less than its pro
rata share based on square footage. Finding
that the estimates were “grossly inaccurate,”
the court held that the facts were sufficient
to support causes of action, and that Thrifty
should have been allowed to amend its
complaint, thus suggesting a heavy pleading
requirement being imposed on Thrifty.
Potential Limitations of the New Rule
1. Failing to Read a Contract
One likely limitation is if a party claims
not to have read a contract. In that case, its
ability to assert an alleged oral inducement
will depend on the degree of fault that may be
required, in other words the “excusability,” of
the failure under the circumstances.
In Riverisland, the lender claimed that
the borrowers’ admitted failure to read the
contract should have prevented them from
demonstrating reasonable reliance as a matter
of law. Since the claim was not addressed in
the lower courts, the supreme court declined
to address the claim. Riverisland, 55 Cal.
4th at 1183. However, in a footnote at the
end of the opinion, the court noted that
it has already held that a failure to read a
contract will preclude a claim for fraud in
the execution, but that since the issue is not
currently before it, it “is not expressing any
view on the ‘validity’ and ‘exact parameters’
[of a] more lenient rule that has been applied”
to promissory fraud claims. Id. at 1183 n.11
Notably, Doe v. Gangland Prods., Inc., 730
F.3d 946, 957-58 (9th Cir. 2013) allowed a
claim of fraud despite the plaintiff’s failing
to have read the contract at issue. There the
plaintiff alleged fraud in both the execution
and inducement of a television release, and
was able to overcome an anti-SLAPP motion
to dismiss the claim even though he did not
read the release before signing, based on
allegations that he was dyslexic, illiterate, told
the defendant he had an extremely difficult
time reading, and was told by the defendant
that the document he was signing was just a
receipt for the $300 payment he was receiving
for his interview, so the plaintiff forewent
having his girlfriend read the release to him.
Obviously Gangland was an extreme case,
and should not be relied upon in business
transactions, in which it would be safe to
assume that, barring extreme circumstances
such as a legal incapacity or fraud by a
fiduciary, a failure to read a contract would
likely not be well received. There may also
be some lenience in consumer “contracts
of adhesion,” in which arguably it doesn’t
matter if you read them since you don’t have
a choice anyway.
2. Sophistication of the Parties
As things stand, a sophisticated party
will not per se be barred from asserting
rights under the new rule because of its
sophistication. That argument was made and
rejected in Julius Castle. In disposing of the
assertion, the court noted that Riverisland
made no such holding, that the “blunt
language” of the opinion belies the assertion,
that the plaintiffs in Riverisland appeared to
be “relatively sophisticated business people,”
and that “distinguishing sophisticated
business parties who should be barred from
introducing parole evidence of fraud . . . is
not as simple as defendants suggest.” Julius
Castle, 216 Cal. App. 4th at 1441-42.
Thus, the sophistication of the parties is
a factor, and a potentially complex one, in
determining the reasonableness of a party’s
conduct, in which the more sophisticated a
party, the more stringently reliance will likely
be judged. This view finds support in Gangland,
in which great lenience was shown towards an
uneducated gang member who claimed to have
been duped into signing a release he didn’t
understand, and in Thrifty, in which extensive
pleading of diligence was required.
3. Bargaining Power
Similarly, relief is not limited to parties
in weak bargaining positions, such as in

3. 24 ORANGE COUNTY LAWYER
ON POINT
Litigation will focus
on intent and reliance on
alleged oral inducements,
both of which are factual
determinations and
thus unlikely to be
resolved quickly.
“contracts of adhesion.” That
argument was also made
and rejected in Julius Castle,
again as not expressed
in Riverisland, and as a
limitation that the court
declined to read into the
decision. Thus, it is reasonable
to expect that the relative
bargaining power of contract parties
will be considered, that greater leniency will
be shown to parties with lesser bargaining
power, but that even sophisticated parties
such as lenders and institutional consumer
product providers will be able to obtain relief
under appropriate circumstances. Id. at 1442.
4. Failure to Investigate
Although so far not specifically addressed,
by extension, it is also reasonable to assume
that a complete failure to undertake any
investigation will not necessarily preclude
relief. For example, a party may be excused
who is legally incapable or who lacks the
ability or resources to investigate, and has
no duty to investigate representations by a
fiduciary. Davis v. Kahn, 7 Cal. App. 3d 868,
878 (1970).
By contrast, the duty of investigation by
an institutional client may be greater, as
suggested by Thrifty, and will extend to most
parties to some extent, depending on their
relative sophistication and bargaining power,
and the known and reasonably available
information. Bank One Texas, N.A. v.
Pollack, 24 Cal. App. 4th 973, 981-82 (1994).
5. Reformation
Arguably the fraud exception to the parole
evidence rule may not be applied to “modify”
contract terms, as in Julius Castle, in which
the court allowed evidence of the alleged
fraudulent oral promises at trial to prove fraud,
but not to modify the applicable contracts. As
a result, the landlord prevailed on its contract
claim, and the restaurant prevailed on its fraud
claim, resulting in a set-off and an approximate
$150,000 net judgment.
In Thrifty, however, the court held that
sufficient facts had been pleaded to support
a reformation claim based on the “mutual
mistake” created by the same facts as the
alleged fraud. Julius Castle, 216 Cal. App.
4th at 1243-44. A reformation claim based
on mutual mistake was also asserted but not
addressed in Riverisland.
Other Jurisdictions
Although new in California, other states
have developed some additional limitations
that may prove useful in future cases.
1. As-Is Provisions
The Texas Supreme Court
has held that where an as-
is clause is “an important
part of the bargain, and
not just a boilerplate
provision,” causation is
generally negated as a matter
of law, unless a fraudulent
misrepresentation or concealment
is shown, or other circumstances warrant
intervention, such as impairment of a party’s
investigation. Prudential Ins. Co. of Am. v.
Jefferson Assocs., 896 S.W.2d 156, 161-62
(Tex. 1995).
Although the court did not specifically
address the burden of proof, a U.S. District
Court for Texas has held that once a valid
written contract containing an as-is provision
is established, the burden shifts to the party
challenging the provision. Owens v. Mercedes-
Benz USA, LLC, 541 F. Supp. 2d 869, 873
(N.D. Tex. 2008).
2. Integration Clauses and Settlements
The Texas Supreme Court has also
recognized limits to challenges to integration
clauses in settlement agreements, holding that
they will be enforced if they contain a “clear
and unequivocal” disclaimer of reliance, and
the agreement is the product of arm’s length
negotiations between sophisticated parties
represented by competent counsel. Italian
Cowboy Partners, Ltd. v. Prudential Ins. Co.,
341 S.W.3d 323 (Tex. 2011).
A material factor in the decisions regarding
settlement agreements is to promote finality
in the resolution of disputes. However,
the analysis has also been applied in other
contexts, including a residential lease.
Matlock Place Apartments, LP v. Druce, 369
S.W.3d 355, 369 (Tex. App. 2012).
3. Omitted Material Terms
Another state has also held that reasonable
reliance is precluded as a matter of law on
important terms that could and should have
been included in a written contract if agreed
upon after prolonged negotiations between
sophisticated parties. Cent. Truck Ctr., Inc. v.
Cent. GMC, Inc., 4 A.3d 515 (Md. App. 2010).
Preventive Measures
1. Avoidance of Boilerplate
One clear import of the new rule is the
avoidance of reliance on boilerplate provisions,
especiallyinhigherrisktransactionssuchasloan
modifications and sales and leases of distressed
assets. Transaction-specific representations,
warranties, disclosures, disclaimers, waivers,
and acknowledgements will have a better
chance of acceptance. Addendums could
be prepared for standard contracts like AIR
commercial leases and CAR residential
purchase and lease contracts. Initial spaces
could be required for important terms. And
attorney sign-offs could be required, as typical
in settlements.
2. Making a Record
In addition, the benefits of making
a detailed record cannot be overstated.
The more communications that can be
handled or confirmed in writing, the better,
especially concerning material matters such
as representations, warranties, conditions,
disclosures, acknowledgements, due
diligence, and performance of conditions.
3. Certificate of Independent Review
Another alternative would be to adopt a
procedure like the Certificate of Independent
Review available under the Probate Code,
section 21351(b), to insulate testamentary
transfers to certain unrelated parties against
claims of fraud and undue influence. The
process could be used to confirm that the
parties read, understand, and agree that the
document they signed accurately expresses
their agreement and does not contain any
omissions; it could even be required if
requested and paid for by any contract party.
Even without legislative authorization, as
long as foundational safeguards for reliability
are respected, presumably the certification
would be admissible in evidence, and would
at least provide independent percipient
confirmation of the scope of the contract in
the event of a dispute, if the mere existence of
the certification isn’t enough to discourage an
unmerited claim.
David J. Myers is Of Counsel at the law firm
of Enenstein and Ribakoff in Santa Monica.
He handles both commercial transactions
and litigation, and has extensive experience
litigating alleged oral side agreements and
fraud claims. His email address is dmyers@
enensteinlaw.com.
This article first appeared in Orange County
Lawyer, March 2014 (Vol. 56 No. 3), p. 22.
The views expressed herein are those of the
Author. They do not necessarily represent the
views of Orange County Lawyer magazine,
the Orange County Bar Association, the Orange
County Bar Association Charitable Fund, or
their staffs, contributors, or advertisers. All
legal and other issues must be independently
researched.