THE JOURNAL OF THE LITIGATION SECTION, STATE BAR OF CALIFORNIA

Volume 27 • Number 2 2014

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There has always been a tensionbetween written contract expecta-tions and judicial economy, on the

one hand, and the prevention of fraud on theother. Until Riverisland Cold Storage, Inc.v. Fresno-Madera Pro duc tion Credit Ass’n(2013) 55 Cal.4th 1169, resolution of thattension in California favored contract clarityand the minimization of litigation, even at the

expense of truth and fairness. Now, however,as in most states, California courts must con-sider oral inducements that rise to the level offraud, even if inconsistent with integratedwritten contract terms.

Riverisland:Inordinate Burdens or Leveling the Playing Field

By David J. Myers

California Litigation Vol. 27 • No. 2 • 2014

David J. Myers

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Given the current economic backdrop,this shift in priorities was obviously of greatimportance to our Supreme Court, and maynot create the unmanageable burdens thatsome may fear, due to the strict pleading andproof requirements applicable to fraudclaims that the court highlighted in supportof its decision. Indeed, a number of limita-tions are already being developed by ourcourts, or have been adopted in other statesand may also find acceptance here.

The decision may also foretell an equallysignificant shift in the resolution of the ten-sion between “at-will” termination rights andemployee expectations of ongoing employ-ment for satisfactory performance. Unlikethe impossible burden on employers andcourts to address punitive damage claimsbased on indeterminate “implied” good faithobligations that rightfully were rejected inFoley v. In teractive Data Corp. (1988) 47Cal.3d 317, proof of oral promises of ongoingemployment at variance with integrated “at-will” provisions that amount to fraud is asmanageable as in any other context, andseemingly should now be actionable.

Thus, under the new rule, the key to pro-tecting contract expectations, and avoidingfraud claims and protracted litigation, will bein the handling of negotiations, recordkeep-ing, and more particularized contract draft-ing, on what amounts to a more level playingfield that should no longer favor eitherlender or borrower, landlord or tenant, ven-dor or purchaser, employer or employee, orany other contract party that may enjoysuperior bargaining power or be able to ben-efit from standardized contract forms.

— Application So Far —

Not surprisingly, the courts that havesince decided cases have engaged in exten-sive analysis of transaction histories toresolve the numerous questions of factinvolved in ascertaining the parties’ inten-tions and justifiable reliance. For example, inJulius Castle Res taurant, Inc. v. Payne

(2013) 216 Cal.App.4th 1423, 1442, the courtaffirmed a fraud judgment for damages infavor of a restaurant operator tenant againstits landlord. The lease included the custom-ary “as-is” provision, a representation by thetenant that it had inspected and approved thecondition of the premises, limitation of thelandlord’s repair obligations to the structure,and an integration clause. (Id. at p. 1427.)However, the restaurant owner obtained apreliminary in junction restraining the sale ofits liquor license (id. at p. 1428), and wasallowed to assert at trial claims that the land-lord failed to disclose that substantialimprovements were undertaken withoutrequired permits that jeopardized the abilityto operate the restaurant, misrepresentedthat the restaurant equipment was in goodworking order, and falsely promised, if it wasnot, to make good on any needed repairs (id.at pp. 1428-1429).

Similarly, in Thrifty Payless, Inc. v.Americana at Brand, LLC (2013) 218 Cal.App.4th 1230, 1244, the court reversed anorder sustaining a demurrer without leave toamend fraud and negligent misrepresentationclaims against a shopping center landlord.The basis for the claims was that the landlordcharged Thrifty for 5.7% of the center’sexpenses under the triple net (NNN) provi-sion contained in its lease, more than doublethe 2.2% estimated in the letter of intent onwhich the lease was based, a difference ofabout $342,704 for the first year alone.Thrifty alleged that, despite its lease acknowl-edgment, the NNN charges provided by thelandlord were only estimates, the landlordknew Thrifty was relying on the estimates toevaluate the suitability of the project, that itsreliance on the estimates was reasonablebecause the landlord had all or most of theneeded information and a better understand-ing of the needs to calculate accuratecharges since it owned a number of shoppingcenters, that Thrifty did not have access tothe necessary records and was not in a posi-tion to discover the true ultimate operating

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costs, and that it had relied upon andreceived reliable comparable information inits past dealings with the landlord. (Id. at pp.1241-1242.) In addition, Thrifty discoveredafter filing its complaint, and advised the trialcourt at the time of hearing, that the landlordknew or should have known the estimate wasinaccurate because it told other prospectivetenants that their NNN shares would be sub-stantially higher, and made a deal with amovie theater to charge it less than its prorata share based on square footage. Findingthat the estimates were “grossly inaccurate,”the court held that the facts were sufficient tosupport causes of action, and that Thriftyshould have been allowed to amend its com-plaint, thus suggesting a heavy pleadingrequirement being imposed on Thrifty.

— Potential Limitations —

The California cases have already startedto define limitations.

• Failure to Read a Contract — In River -island, the lender claimed that the borrow-ers’ admitted failure to read the contractshould have prevented them from demon-strating reasonable reliance as a matter oflaw. Since the claim was not addressed in thelower courts, the Supreme Court declined toad dress the claim. However, in a footnote atthe end of the opinion, the Court noted that ithas already held that a failure to read a con-tract will preclude a claim for fraud in theexecution, but that since the issue is not cur-rently before the Court, it is not expressingany view on the “validity” and “exact parame-ters” of a “more lenient rule that has beenapplied” to promissory fraud claims. (Id., fn.11.)

Any limitation is not likely to be absolute,however, as evidenced by Doe v. GanglandProductions, Inc. (9th Cir. 2013) 730 F.3d946, 957-958, which allowed a claim of frauddespite the plaintiff’s failure to have read thecontract at issue. There, the plaintiff allegedfraud in both the execution and inducementof a television release, and was able to over-

come a SLAPP motion to dismiss the claim,even though he did not read the releasebefore signing, based on allegations that hewas dyslexic, illiterate, told the defendant he

had an extremely difficult time reading, andwas told by the defendant that the documenthe was signing was just a receipt for the $300payment he was receiving for his interview, sothe plaintiff decided not to have his girlfriendread the release to him.

‘As long as they can satisfythe proof re quirements,their fraud claims shouldseemingly be heard too, aproblem to which our

Supreme Court has shownan acute sensitivity in its

post-Foley decisionsregarding fraud claims inthe employment context.’

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• Sophistication of the Parties — Asthings stand, a sophisticated party will notper se be barred from asserting rights underthe new rule because of its sophistication.That argument was rejected in Julius Castle.The court noted that Riverisland made nosuch holding, that the “blunt language” of theopinion belies the assertion, that the plaintiffsin Riverisland appeared to be “relativelysophisticated business people,” and that “dis-tinguishing sophisticated business parties

who should be barred from introducing parolevidence of fraud…is not as simple as defen-dants suggest.” (Julius Castle, 216 Cal.App.4th at pp. 1441-1442.)

Thus, the sophistication of the parties is afactor, and a potentially complex one, indetermining the reasonableness of a party’sconduct, in which the more sophisticated aparty, the more stringently reliance will likelybe judged, as in Thrifty.

• Bargaining Power — Similarly, relief isnot limited to parties in weak bargainingpositions, such as in “contracts of adhesion.”

That argument too was rejected in JuliusCastle, again as not having been expressedin River island, and as a limitation that thecourt declined to read into the decision. (Id.at p. 1442.) Thus, it is reasonable to expectthat the relative bargaining power of con-tract parties will be considered, and thatgreater leniency will be shown to partieswith lesser bargaining power, but that evensophisticated parties will be able to obtainrelief under appropriate circumstances.

• Failure to Investigate — Although sofar not specifically addressed, by extension,it is also reasonable to assume that a com-plete failure to undertake any investigationwill not necessarily preclude relief. Forexample, a party may be excused if legallyincapable or lacking the ability or resourcesto do so, or where there is no duty to investi-gate representations by a fiduciary. (Davis v.Kahn (1970) 7 Cal.App.3d 868, 878.)

• Setoff, Reformation, and Rescission —Although, technically, the fraud exception tothe parol evidence rule may not be applied to

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modify contract terms, a party could still pre-vail on a contract claim and lose a fraudclaim, and have the verdicts setoff, as inJulius Castle. As a result, the landlord pre-vailed on its contract claim, and the restau-rant prevailed on its fraud claim, resulting in asetoff and an approximate $150,000 net judgment.

That result should be avoidable, however,as in Thrifty, in which the court held that suf-ficient facts had been pleaded to support areformation claim based on the “mutual mis-take” created by the same facts as the allegedfraud. A reformation claim based on mutualmistake was also asserted but not addressedin Riverisland. A rescission claim would alsoseem a viable option to avoid this result.

— Other Jurisdictions —

Other states have also recognized limita-tions that could find acceptance here.

• Integration Clauses and Settlements —Texas has limited challenges to integrationclauses in settlement agreements, sincedesigned to end disputes, if they contain a“clear and unequivocal” disclaimer ofreliance, and the agreement is the product ofarm’s-length negotiations between sophisti-cated parties represented by competentcounsel (Italian Cowboy Partners, Ltd. v.Pruden tial Ins. Co. of Am. (Tex. 2011) 341S.W.3d 323.)

The analysis has also been applied in othercontexts, including a residential lease. (Mat -lock Place Apartments, L.P. v. Druce (Tex.App. 2012) 369 S.W.3d 355, 369.)

• Omitted Material Terms — A Marylandcourt has also held that reasonable reliance isprecluded as a matter of law on alleged omit-ted important terms that could and shouldhave been included in a written contract ifagreed upon after prolonged negotiationsbetween sophisticated parties. (CentralTruck Center, Inc. v. Central GMC, Inc.(Md.App. 2010) 4 A.3d 515.)

— Employment Contracts —

Unlike conduct “subsequent” to the forma-

tion of an employment relationship, whichCalifornia courts acknowledge may be suffi-cient to create an “implied” agreement modi-fying an “at-will” employment relationship(Guz v. Bechtel Nat., Inc. (2000) 24 Cal.4th317, 341-343), California courts have untilnow relied on the parol evidence rule to pro-hibit proof of “contemporaneous” oral agree-ments at variance with written at-will provi-sions, and barred promissory fraud claims onthe grounds that the employee will be unableto show justifiable reliance. (Dore v. ArnoldWorldwide, Inc. (2006) 39 Cal.4th 384, 393-394; Agosta v. Astor (2004) 120 Cal.App.4th596, 606, relying on Casa Herrera, Inc. v.Beydoun (2004) 32 Cal.4th 336, 346, whichrelied on Pendergrass.)

Thus, in the same way as Riverislandeliminated the Pendergrass protections inloan transactions, and Julius Castle andThrifty did so in lease transactions involving“as-is” provisions, seemingly the Pender -grass protections should no longer apply toemployment transactions involving “at-will”provisions either. Indeed, what about theperson that forgoes another job, moves toaccept a position, or forgoes an opportunityduring employment because someone says,“All contracts here are at-will. But you don’thave to worry. You won’t be fired as long asyou’re doing a good job” (or the like).

As long as they can satisfy the proof re -quirements, their fraud claims should seem-ingly be heard too, a problem to which ourSupreme Court has shown an acute sensitivi-ty in its post-Foley decisions regarding fraudclaims in the employment context. (E.g.,Hunter v. Up-Right, Inc. (1993) 6 Cal.4th1174 [fraud in the termination of at-will em -ployment not actionable]; Lazar v. Rykoff-Sexton, Inc. (1996) 12 Cal.4th 631 [fraud inthe absence of written at-will contract actionable].)

David J. Myers practices in Los Angeles andfocuses on commercial and real estate transac-tions, and business, real estate and entertain-ment litigation. lodjm@earthlink.net