Many of us may be familiar with the parol evidence rule barring the introduction of prior or concurrent agreements that contradict or change the terms of a fully-integrated agreement. Many of us may also be familiar with the fraud exception to the parol evidence rule. Unless you have litigated and conducted research on this issue, however, you may not be aware of the exception or the limitation to the fraud exception: promissory fraud, which can swallow up the fraud exception itself.
The parol evidence rule, found in Code of Civil Procedure section 1856, provides that written terms intended by all parties to be their definitive agreement may not be contradicted by evidence of a prior or contemporaneous written or verbal agreement. The parol evidence rule generally prohibits the introduction of this type of evidence.
Section 1856 expressly carves out exceptions to the parol evidence rule, noting that evidence pertaining to the circumstances surrounding the agreement or establishing fraud or illegality is not excluded. Thus, the parol evidence rule does not exclude evidence that a party was fraudulently induced to enter into an agreement.
Evidence of Promissory Fraud May be Barred
The fraud exception, however, has a limitation when it comes to evidence of promissory fraud. Promissory fraud, i.e., false promise, is a promise made without any intention of performing it. Bank of America v. Pendergrass (1935) appears to be the first case to address this limitation. Pendergrass concerned a promissory note that by its terms was payable on demand. The plaintiffs sought to introduce evidence that the bank promised verbally, without any intention of honoring that promise, that they would not have to pay back their loan until they were able to sell the year’s crop of lettuce seed.
The court held that section 1856 did not allow evidence of the alleged promissory fraud despite the fraud exception, because the fraud involved a false promise in direct contradiction of the original agreement, not fraud in obtaining the agreement or some breach of confidence.
The court in Bank of America v. Lamb Finance Co. (1960) came to a similar conclusion. There, the defendant attempted to void a personal guaranty she signed by introducing evidence regarding statements made by an officer of the bank that she was not in fact guaranteeing any of her personal property, she was not liable, and it was only a corporate note. The court found the evidence was not admissible because the alleged false promise directly contradicted the very essence of a guaranty.
Evidence of Factual Misrepresentations are not Barred
Evidence of factual misrepresentations, however, may not be subject to the limitation of the fraud exception. In Edwards v. Centex Real Estate Corporation (1997) the plaintiff, Edwards, sought invalidation of settlement agreements and releases made in favor of the defendant, a developer, in connection with the plaintiff’s claims for repair of construction defects based on evidence of fraud in the inducement. The trial court granted motions at the beginning of the trial to exclude all evidence of oral and written communications defendant made in response to the plaintiff’s reports of damage to his home, based in part on the parol evidence rule.
On appeal, the plaintiff contended that the trial court erred in ruling that the parol evidence rule bars the use of statements made prior to the execution of the written releases to prove fraud in the inducement as a basis for rescission. The Court of Appeal agreed, acknowledging that the fraud involved nullified the agreement between both parties, rather than directly contradicting it. It found that plaintiff was not asserting promissory fraud, which would be barred, but fraud by intentional misrepresentation of fact, which is admissible.
In another case, Continental Airlines v. McDonnell Douglas Corp. (1989), the court reached a similar conclusion, finding that while evidence of promissory fraud was barred by the parol evidence rule, evidence of factual misrepresentations were not.
The lesson to be learned for a plaintiff is that, when there is a fully integrated agreement, and the facts support it, frame the fraud claim in terms of fraudulent inducement by way of factual misrepresentations. That way, the pre-contract misrepresentations should be admissible. The defendants, on the other hand, should consider attacking the fraud allegations as mere false promises that are inconsistent with the terms of the integrated agreement, in order to keep them out.