INTEGRATION CLAUSES AND THE PAROL EVIDENCE RULE - NO CONTRACT
IS SAFE FROM ATTACK.
It has been the common law in California since 1935 that when a person signs a contract,
that person cannot introduce evidence that directly contradicts the express terms of the written
contract.’ This is no longer the case. The California Supreme Court’s ruling in Riverisland Cold
Storage, Inc. v. Fresno-Madera Production Credit Association 55 Cal.4th 1169, 291 P.3d 316
(2013), and its progeny, including the recent decision in Thrifty Payless, Inc. v. Americana at
Brand, LLC 218 Cal.App.4th 1230 (2013), establishes that any party’s evidence of fraud or
misrepresentation that induced another party to enter into a contract, also known as fraud in the
inducement, is admissible to attack the written provisions in fully integrated contracts. The legal
landscape concerning the certainty of written contracts has changed, and it may not be for the
better.
I.
Integration and Exculpatory Clauses and Pendergrass
Virtually every written real estate contract contains an integration clause stating that the
contract embodies the final agreement of the parties and that no prior representations, whether
written or oral, can change the terms of the written contract. Integration clauses are inserted into
written contracts to ensure the certainty and sanctity of the written agreement between the
parties. An example of a standard integration clause is as follows:
Except as is otherwise provided herein, this (Lease or Agreement)
constitutes the entire agreement among the parties with respect to the
subject matter contained herein and supersedes all other agreements,
letters, memoranda, or any other prior understanding of any type
whatsoever, whether written or oral.
In addition, many real estate contracts contain exculpatory clauses that limit or
purportedly absolve a party from liability under the proscribed circumstances. An example of an
exculpatory clause is:
The parties to this Agreement agree that the condition of the HVAC
equipment on the subject property is in good working condition, that
purchaser (or tenant) has conducted its own investigation concerning the
HVAC equipment, and that the purchaser (or tenant) is accepting the
HVAC equipment in its "as-is" condition. The seller (or landlord) shall
have no liability or obligation whatsoever concerning the repair or
maintenance of the HVAC equipment."
The California Supreme Court’s holding in Pendergrass has been repeatedly cited to
prevent a party to a contract from attempting to introduce parol evidence that directly contradicts
1
See Bank ofAmerica Nat? Trust & Sac. Assn. v. Pendergrass, 4 Cal.2d 258,48 P.2d 659 (1935). Such evidence,
whether written or oral, that is not part of the written agreement is known as parol evidence. The statutory
codification of the parol evidence rule that, in pertinent part, was enacted in 1872, conflicts with the holding in
Pendergrass, as discussed herein.
the express language in the written contract. In Pendergrass, the borrowers fell behind on their
payments and thereafter signed a new promissory note secured by additional collateral. The
express terms of the note provided that it was payable on demand. Shortly after the new note
was signed, the lender seized the collateral and sued to enforce the note. In their defense, the
borrowers argued that the lender promised that it would not interfere with their farming
operations until the end of the year, at which time the lender would take the proceeds from their
farming operation in payment.
In considering whether the borrower’s oral testimony would be admissible to establish the
lender’s alleged promise to take the proceeds at the end of the year, the court stated "This
promise is in direct contravention of the unconditional promise contained in the note.
Pendergrass, 4 Cal.2d at p. 263, 48 P.2d at p.659. The court held that its conception of the rule
that permits parol evidence to establish fraud was that such evidence could not be used to
establish a "promise directly at variance with the promise of the writing." Id.
It is this author’s belief that the Pendergrass court’s interpretation is the view of most
contracting parties. To most non-lawyers (and many lawyers), this holding makes sense because
a party may simply read the contract to determine whether there are any terms that contradict the
parties’ mutual understanding of the agreement. If it does not, the party does not have to sign
the contract. 2 However, the Pendergrass holding conflicts with the statutory parol evidence rule
in California and has led to some courts circumventing or completely overlooking the court’s
ruling in Pendergrass, as is discussed herein.
Then came the Riverisland case in 2013, whereby the law regarding parol evidence to
prove fraud would change. As a result, California courts would allow parties that are highly
sophisticated and have highly sophisticated attorneys to challenge contract provisions that they
admittedly read and understood, and nevertheless executed the contract!
II.
The Conflict Between the Codification of The Parol Evidence Rule and Pendergrass
The parol evidence rule is codified in section 1625 of the Civil Code and section 1856 of
the California Code of Civil Procedure 4 . A significant purpose of the rule is to promote the
public’s confidence in the predictability and sanctity of their agreements that they reduce to
writing, which is the rationale behind the court’s holding in Pendergrass. However, there is an
exception to the rule, which is codified in subdivision (g) of section 1856 of the Code of Civil
Procedure that states: "This section does not exclude other evidence.., to establish illegality or
fraud."
This statutory exception for fraud presented a conundrum when analyzed in conjunction
with the Pendergrass holding. On the one hand, the California Supreme Court in Pendergrass
2
Of course, distinctions can be made as to how sophisticated the parties are, whether the contract is a contract of
adhesion, whether the contract language is confusing and subject to different interpretations, etc.
Civil Code section 1652 states: "The execution of a contract in writing. . supersedes all the negotiations or
stipulations concerning its matter which preceded or accompanied the execution of the instrument."
’ Code of Civil Procedure section 1856 (a) states: "Terms set forth in a writing intended by the parties as a final
expression of their agreement. . .may not be contradicted by evidence of any prior agreement or of a
contemporaneous oral agreement."
clearly held that parol evidence of fraud may not be used to contradict "the promise of the
writing." On the other hand, California’s codification of the parol evidence rule provides a clear
exception for fraud, without any limitations. In light of this dilemma, many California courts
either tried to rule around the Pendergrass holding or, as is discussed in the next section, simply
allowed parole evidence to challenge explicit provisions in fully integrated agreements.
III.
Fully Integrated Contracts Subject to Attack Prior to Riverisland
Courts want to protect the public against fraud in the inducement of contracts. On the
other hand, the need for the public’s confidence in their ability to contract should be preserved.
However, even prior to Riverisland, the tide was shifting towards the prevention of fraud as
opposed to parties’ ability to contract and insert specific provisions into their contract that will
not be second guessed by the courts or the opposing party.
A.
Hinesley v. Oak Shade Town Center
One of the cases that clearly foreshadowed what was to come is the case of Hinesley v.
Oak Shade Town Center, 135 Cal.App.4th 289, 37 Cal.Rptr.3d 364 (2005). InHinesley, during
pre-lease negotiations, the landlord’s agent represented to the plaintiff that Dos Coyotes,
Starbucks, and Baskin-Robbins would be leasing and occupying suites near the plaintiffs suite in
a shopping center in Davis, California. The tenant alleged that based upon the agent’s
representations, the tenant executed a five year lease in July 1998 for a 1,200 square foot space at
the center. In September 1999, the tenant filed a complaint claiming fraud in the inducement
based on the alleged misrepresentations and that his business suffered because Dos Coyotes,
Starbucks and Baskin-Robbins were not tenants at the center when promised. The tenant
claimed the agent knew that the landlord did not have any contractual commitments with those
three prospective tenants at the time the representations were made. The case went to nonbinding arbitration.
At the arbitration, the arbitrator denied the plaintiffs claims for fraud and rescission and
the landlord’s claims for rent and attorneys’ fees. Both parties then requested a trial de novo,
wherein the landlord moved for summary judgment (and won) on the grounds that the alleged
statements made by the agent were non-actionable opinion and that any alleged concealment by
the landlord was not material because paragraph 25.33 of the lease provided:
Lessee does not
rely on the fact nor does Lessor represent that any specific Lessee (or) type or number of Lessees
shall during the term of this Lease occupy any space in the Shopping Center."
". . .
On appeal, the court, without citing to Pendergrass or the statutory parol evidence rule,
held that the broker’s definite description of where the tenants would be and that they would be
operating by year end suggested that they were already tenants. The court found, for the
purposes of ruling on the landlord’s motion for summary judgment, that this was a false exertion
of an existing fact and that the exculpatory clause in paragraph 25.33 could not shield the
landlord from its misrepresentations. However, in an interesting twist which foreshadowed the
current state of the law as a result of the Riverisland case that was not to be determined for
See Riverisland, 55 CaI.4th at 1177-1178,291 P.3d 321.
3
another eight years, the court actually conducted an analysis of whether the tenant’s reliance
upon the misrepresentation was justifiable.
In finding that the tenant’s reliance was not justifiable, the court cited that 1) paragraph
25.33 of the lease stated that the tenant was not relying on the type or number of other tenants in
the center during the lease term; 2) the tenant testified that he reviewed paragraph 25.33; 3) the
tenant had a lawyer review the lease; 4) the tenant never requested any revisions to paragraph
25.33 despite asking for revisions to other parts of the lease; and 5) the tenant never asked if the
other tenants had actually signed leases. The court found that, considering the tenant’s assertion
that these other three leases were very important to him, the fact that all of the rest of the tenant’s
actions were to the contrary proved that the tenant’s reliance upon the misrepresentations was not
justifiable.
Importantly, the holding of the Hinesley court indicated that a party may claim fraud in
the inducement and use parol evidence even if there is a provision to the contrary in the lease.
Exculpatory or integration clauses would not bar a party from using parol evidence to prove a
claim of fraud in the inducement. The court stated that the "no other lessee" provision in the
lease did not insulate the landlord from fraud, but it did indicate the lease did not come with a
guaranty. Such a provision put the tenant on notice. Hinesley, 135 Cal.App.4th at 302, 37
Cal.Rptr.3d at 373.
B.
McClain v. Octagon Plaza, LLC
Another pre-Riverisland case is the case of McClain v. Octagon Plaza, LLC 159
Cal.App.4th 784, 71 Cal.Rptr.3d 885 (2008). In McClain, a shopping center tenant in Valencia,
California, brought an action against a landlord for misrepresentation, claiming that the size of
the space, as represented in the lease, was smaller than its actual size. Prior to entering the space,
when McClain investigated leasing space in the shopping center, the landlord informed her that
the unit in which she was interested was exactly 2,624 square feet. This square footage was also
used to calculate the share of the common expenses that the tenant would be responsible for
under the lease as additional rent.
As part of the tenant’s investigation prior to signing the lease, the tenant attempted to
confirm the size of the unit. However, the landlord, according to the tenant, was offended by the
inquiries and responded that measuring the area would be difficult and costly due to the unusual
shape of the space. The tenant claimed that the landlord insisted that the landlord had intimate
knowledge of every detail of the shopping center and that the tenant could rely upon the
landlord’s representations concerning the size. The tenant alleged that as a result of the
landlord’s representations, the tenant was induced to accept them and enter into the lease. The
lease contained provisions that the space was "approximately 2,624 square feet," and that "any
statement of size set forth in the Lease, or that may have been used in calculating Rent, is an
approximation which the Parties agree is reasonable and any payments based thereon are not
subject to revisions whether or not the actual size is more or less." The lease also contained a
provision that the tenant had performed its own investigation.
Shortly after signing the lease, the tenant discovered that the actual size of the leased
premises was 2,438 square feet, rather than the 2,624 square feet represented. The tenant sued
for misrepresentation, among other claims, alleging that the size difference of the space would
cause her to pay excess rent of more than $90,000.00 over the five year term of the lease. The
trial court sustained the landlord’s demurrer, finding that the lease, by its plain language, barred
the tenant from asserting the claims.
Upon appeal, the appellate court recognized that the issue was whether the lease language
caused the misrepresentation claim to be untenable. The court listed numerous cases, including
Hinesley, which held that disclaimer language in a contract does not insulate a party from fraud
or prevent a party from demonstrating justifiable reliance. The court also held that the
discrepancy was not immaterial, even though it was only approximately 7.6%, because it would
result in an overpayment of approximately $90,000.00 over the lease term. The court stated that
even though the exculpatory clause in the lease did not prevent parol evidence to be used, the
exculpatory clause was not irrelevant because it was evidence concerning the justifiable reliance
element of the claim. However, unlike Hinesley, the court remanded the case back to the trial
court on the justifiable reliance issue.
IV.
Riverisland Overruled Pendergrass
The case of Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit
Association was reported in the February 2013 edition of the California Real Estate Reporter at
p. 75, so it will not be detailed at length here. However, the basic facts are that the
plaintiffs/borrowers fell behind on their loan payments to the defendant lender. The plaintiffs
alleged that the lender’s vice-president told the borrowers that the lender would extend their loan
for two years in exchange for additional collateral consisting of two ranches. The loan contract
actually extended the loan for only three months and included eight parcels as additional
collateral. The borrowers did not read the contract, but simply initialed and signed the contract.
After the plaintiffs again fell behind on their payments, the lender recorded a notice of
default. The plaintiffs repaid the loan, the lender dismissed its foreclosure proceedings, and the
plaintiffs then filed an action seeking damages for fraud and negligent misrepresentation. The
trial court granted summary judgment for the lender, relying on the Pendergrass case, citing that
the fraud exception to the parol evidence rule does not allow parol evidence of promises at odds
with the express terms of the written agreement. For a long list of reasons discussed within the
case and summarized in the February 2013 edition of this publication, the court revisited and
then overruled Pendergrass, removing the Pendergrass limitation that parol evidence cannot be
used to establish an element of fraud that was in direct variance with the express written terms of
a contract.
The Riverisland court stressed that promissory fraud requires more than a simple
misrepresentation; it also requires a showing of justifiable reliance. The court took into account
the fact that the borrowers did not read the contract, but the court declined to explore the
degree to which the failure of a party to read a contract affects the viability of a claim of fraud in
the inducement. A party would not be immunized from fraud as a result of the parol evidence
rule, and thereby would have access to a fact finder (by not being barred at the initial pleading or
the summary judgment stage), but such party would still need to prove to the fact finder that its
actions in light of the express terms of the contract were reasonable.
The Hinesley court was actually prophetic in its handling and ruling concerning the same
issues back in 2005. However, it is important to note that justifiable reliance, except in extreme
circumstances, will be a question of fact that will be determined by a fact finder, as opposed to a
court as was the case in Hinesley.
V.
The Julius Castle Case Confirms That There is no "Sophisticated Party" Exception
For the Challenging of Fully Integrated Leases.
Shortly after the Riverisland decision, the case of Julius Castle Restaurant, Inc. v. Payne
216 Cal.App.4th 1423, 157 Cal.Rptr.3d 839 (2013), was decided. Julius Castle was summarized
in depth in the July 2013 edition of the California Real Estate Reporter at page 264. In summary,
two restaurateurs leased a landmark restaurant site in San Francisco, California. The leased
property contained restaurant equipment that the tenants claim they believed was in good
working order as a result of assurances and guarantees that were given to them by the landlord,
including the landlord’s assurances that he would make repairs.
However, the lease contained provisions stating that "Tenant acknowledges that as of the
date of this Lease, Tenant has inspected the Premises and all improvements on the Premises and
that the Premises and improvements are in good order, repair, and condition." In addition, the
lease contained an integration clause that provided, "This instrument constitutes the sole
agreement between Landlord and Tenant respecting the Premises, the leasing of the Premises to
Tenant, and the specified lease term, and correctly sets forth the obligations of Landlord and
Tenant. Any agreement or representations respecting the Premises or their leasing by Landlord
to Tenant not expressly set forth in this instrument are void.
Again, the issue to be determined was whether or not the relevant provisions of the lease
barred parol evidence submitted by the plaintiffs concerning the landlord’s guaranty of the
restaurant’s equipment. During the appeals process, the Riverisland case was decided and the
parties were asked to submit briefs for oral argument. The landlord argued that Riverisland did
not apply to sophisticated parties, such as those in the Julius Castle case. The appellate court did
not agree with the landlord’s argument, and found that the parol evidence rule did not bar
evidence to show that the tenant was induced to enter the contract based upon misrepresentations
made by the landlord. The court stated that after Riverisland, parties are better served to address
the heightened burden of proving fraud. A party’s credibility and their bargaining positions will
be assessed and attention will now focus on the justifiable reliance element of fraud. Julius
Castle, 216 Cal.App.4th 1423, 1441-1442, 157 Cal.Rptr.3d 839, 852-853.
VI.
The Thrifty Payless Case.
Shortly after the Julius Castle case, the case of Thrifty Payless, Inc. v. Americana at
Brand, LLC 218 Cal.App.4th 1230, 160 Cal.Rptr.3d 718 (2013), was decided. The Thrifty
Payless case is a disturbing case for some practitioners because it establishes the fact that
No
integration clauses and exculpatory clauses in leases have completely eroded to the point of
being meaningless except as a piece of evidence in a justifiable reliance analysis - even when the
parties (and their attorneys) are highly sophisticated.
Plaintiff Thrifty/Payless (doing business as Rite Aid) was a tenant of defendant
Americana at Brand’s combined retail and non-retail development/shopping center in Glendale,
California. In September 2004, before the development of the shopping center, Thrifty and
Americana entered into negotiations for Thrifty to lease retail space at the shopping center.
Americana’s agent submitted two letters of intent to Thrifty detailing specific terms and
conditions of the proposed lease, with both letters stating that numbers provided for the common
expenses were estimates only and that there were "no caps provided." In the initial letter of
intent, the Landlord estimated that the annual real property taxes were $3.00 per square foot, the
annual insurance premiums were $0.80 per square foot, and the annual common area
maintenance for the first year of the lease was $14.50 per square foot. The total retail space in
the development was projected to be 450,000 square feet.
Thrifty made changes to the letter of intent and returned it to Americana. Thrifty
requested a breakdown of the common area maintenance ("CAM") obligations, writing "Please
provide a budget which justifies the $14.50 estimate as I am not agreeing to this amount without
seeing the line items." A few days later, Americana returned a revised letter of intent to Thrifty,
providing that Thrifty would pay its pro rata share of CAM expenses with no caps, estimated at
$14.35 per square foot annually. Thrifty crossed out that estimate and the representative for
Thrifty wrote in "budget to be provided to tenant prior to lease execution."
On September 1, 2004, Americana provided Thrifty with a detailed breakdown of the
CAM. The letter stated "I have.., attached our preliminary CAM budget for your eyes only, so
that you may be armed with necessary explanations as to CAM costs. Please remember that the
costs reflected are purely estimated values." (italics added) The breakdown stated that Thrifty’s
proportionate share of the CAM charges, based upon square footage, was 2.2% of the total
CAM, estimated to be $14.35 per square foot.
Approximately six months later, Thrifty and Americana executed a written lease that was
silent as to the actual CAM expenses to be charged. The first full year in which Thrifty was
obligated to pay its share of CAM charges was 2009 (more than four years after the estimates
were provided). In 2009, Americana charged Thrifty $169,686.00 in taxes, instead of the
$43,836.00 that would have been due under the rate specified in the final letter of intent (a 387%
difference); $28,110.00 for insurance instead of the $11,689.60 that was estimated (a 239%
difference); and $412,307.00 for CAM expenses instead of the $211,874.00 that was estimated (a
196% difference). The letters of intent and the breakdown provided to Thrifty by Americana
showed its share of expenses would be 2.2%, whereas Thrifty’s actual share was more than
double at 5.67%.
Thrifty eventually filed a complaint alleging fraud and deceit, negligent
misrepresentation, innocent misrepresentation, mutual mistake, breach of the implied covenant
of good faith and fair dealing, and breach of the lease. For its claims of fraud and negligent
misrepresentation, Thrifty alleged that Americana knew that the estimated taxes, insurance, and
7
CAM charges were material to Thrifty and that Thrifty was relying on these estimates to evaluate
the suitability of the project. Thrifty alleged that Americana knew the representations were false
at the time that they were made, or were made with no reasonable basis to believe they were true.
Thrifty asserted its reliance was reasonable based on Americana’s superior knowledge and
experience building and operating shopping centers of similar size and scope, because
Americana was familiar with the level of common area services to be provided, the terms of
other leases contemporaneously being negotiated, the insurance policies to be obtained, and
because Thrifty had an existing landlord/tenant relationship with an affiliate of Americana and
regularly received accurate additional rent estimates from such affiliate.
Americana demurred to the complaint, arguing that Thrifty’s claims were barred by the
exculpatory and integration clauses contained within the lease. The lease contained provisions
that provided, in pertinent part, as follows: "The Overall Project ... shall include space used for
other than retail purposes (the ’NonRetail Portion’). The NonRetail Portion shall be operated
in part by Landlord and in part by parties unaffiliated with Landlord.... In addition, Landlord, in
its reasonable discretion, shall allocate certain Common Area Operating Expenses between the
NonRetail Portion and the Retail Center, based on usage, burden and value, using sound
accounting and management principles." (italics added) "This Lease... set[s] forth the entire
agreement between the parties. Tenant enters into this Lease on the basis of its own independent
investigation only and not any statement or representation of anyone else, including without
limitation Landlord or Landlord’s employees or agents." "Tenant shall pay to Landlord, without
offset, Tenant’s Pro Rata Share of the Common Area Operating Expenses." "Tenant shall be
liable for Tenant’s Pro Rata Share of the [CAM] which are incurred during the Lease Term by
Landlord ... including ... Real Property Taxes ... all insurance premiums ... for insurance
coverage selected by Landlord..." The lease did not specify the CAM charges and did not
contain any cap for the CAM charges.
Americana argued that Thrifty was one of the first tenants at the site, which was a 15.5acre, mixed use shopping center/residential space in Glendale, California and that all of its CAM
estimates that were given prior to the execution of the lease were purely estimates and were
represented to be purely estimates. Thrifty countered that the landlord represented to other
tenants that the CAMs would be substantially higher than what they were represented to be to
Thrifty, and that the landlord had also cut a deal with a movie theater to reduce its CAM
contributions. Americana stood on its argument that Thrifty was informed that the CAMs were
estimates for a yet to be built center, and that the CAMs were not capped by the estimates.
Moreover, there was nothing that precluded the landlord from making concessions or working
out deals with the other tenants concerning the amount of CAMs to be paid. In fact, the lease
stated that Americana could allocate the common expenses at its "reasonable discretion." The
lease also stated that the landlord could enter into leases with others and that the other tenants
may contribute to the common expenses in a different manner "or not at all."
At the hearing on the demurrer, Thrifty argued that a fraud case could be based on
estimates citing McClain, supra, and that if a party provides an estimate that it knows or should
know is inaccurate, the party may be liable for misrepresentation. The trial court sustained
Americana’s demurrer on the basis that Americana provided estimates and that Thrifty then had a
duty to perform its own investigation.
In forming its opinion wherein it reversed the trial court, the appellate court stated that
Riverisland reaffirmed that "it was never intended that the parol evidence rule should be used as
a shield to prevent the proof of fraud." The court found that under Riverisland, extrinsic
evidence was available and admissible to establish fraud or negligent misrepresentation in the
face of the lease’s integration clause. The court also stated that the information Thrifty presented
at the hearing indicated that there was evidence that Americana knew or should have known that
the information was inaccurate because Americana allegedly told other prospective tenants that
their pro rata shares would be substantially higher that the rates represented to Thrifty and
Americana allegedly struck a deal with a movie theater to charge it less than the pro rata share
based on square footage. Importantly, the court indicated that the huge disparity between the
estimates and the ultimate costs supported an inference of misrepresentation.
VII. The Fraud Exception Has Swallowed the Parol Evidence Rule
The holding in Thrifty, as it interpreted Riverisland, is troublesome because it indicates a
clear and complete erosion of integration and exculpatory clauses as they were previously
commonly understood. Prior to Riverisland, Julius Castle and Thrifty Payless, parties may have
had some comfort and assurance that provisions that they wrote into a contract that the other
party read, understood and signed would essentially shield them from claims that there were
prior agreements or understandings that were contrary to the written language within the
contract.
It is understandable that, under the facts such as in the Riverisland case, where the lender
was highly sophisticated and the borrowers were not, that an unsophisticated party should not be
barred if the other party puts a contract in front of them to sign while telling them that the terms
are different than what is actually contained in the contract. Home buyers are routinely given
contracts that they sign, undoubtedly without reading, based on what was previously represented
to them by the lender. If a party places a contract in front of another party for signature which is
clearly contrary to what was negotiated or represented before and the unsuspecting party fails to
read the contract based on those representations, then there are strong argument that fraud
evidence should be allowed. This is essentially how the Pendergrass court viewed the parol
evidence rule. Parol evidence would be allowed to show the party was not signing the contract
they thought they were signing, which is fraud in the execution of the contract.
However, in contracts between highly sophisticated parties, it seems to be a waste of
time, money and the court’s resources to allow a party to get to a fact finder because the party is
unhappy with a provision in a contract that he or she understood, read, and willingly and
knowingly executed. In effect, any real estate contract currently written in California, whether it
is a lease, purchase agreement or loan document, can actually make it past the demurrer and
summary judgment stages if properly pled, simply upon an opposing party stating that they were
promised something else before they executed the contract. At this stage, integration clauses and
specific provisions in contracts are meaningless. The parties then proceed to the next phase,
which would be the justifiable reliance phase, where they would try to convince the fact finder
that the complaining party either did or did not justifiably rely upon the misrepresentation. The
defending party would then utilize the contract language as evidence. Accordingly, parties must
now draft more involved and complicated contracts to try to protect themselves.
A.
Longer contracts and more litigation
There are no longer any safe harbors. As a result of the fraud exception essentially
nullifying the parol evidence rule, parties will now be prudent to draft more specific and detailed
contracts to enhance their chances of winning on the justifiable reliance element of the fraud in
the inducement claim. Integration and exculpatory clauses were originally designed to prevent a
party from making it past the initial pleading phase of a case. Now, the Riverisland holding and
its progeny may result in a flood of nuisance lawsuits, similar to ADA lawsuits before the
legislature tightened up the ADA rules.
Of course, the argument will be made that the plaintiff will still have to prove justifiable
reliance, but a flood of litigation may not be the answer. It remains to be seen whether the
legislature will step in or whether the courts will work this out in later rulings when it becomes
clear that any tenant or landlord, borrower or lender, or buyer or seller, can sue the opposing
party for any portion of an agreement that they disagree with after they knowingly and
voluntarily signed the agreement. As has been stated above, with reference to unsophisticated
parties, the result is not as egregious. However, in the case where the parties are highly
sophisticated and have spent thousands, if not tens of thousands, of dollars negotiating an
agreement, the fact that a party is able to get past the demurrer or summary judgment stage by
simply claiming that they may have not read the lease or that they were told something different
than what they expressly agreed to in the lease, is somewhat disheartening and puts into doubt
sanctity of written contracts and the reliance of the public on their ability to contract.
B.
How Parties May Protect Themselves
In light of the change to the fraud exception of the parol evidence rule, integration clauses
are just one provision parties should include in their contracts. They should also include explicit
provisions excluding specific prior promises or negotiations that a party has any reason to
believe may become an issue. Parties need to be careful in their pre-contract negotiations and
include disclaimers in all prior writings. More initial pages in both contracts and in the
disclaimer sections of letters of intent would be prudent. In addition, it may be wise to include
judicial reference and binding arbitration clauses in all contracts to preclude the drawn out trial
process and to attempt to save money on legal fees. Also, be wary of any refusal to provide a
cap on estimates!
10