Riverisland: Inordinate Burdens or Leveling the Playing Field, California Litigation, Vol. 27, No. 2 (July 2014). Discusses the litigation implications of the new fraud exception to the parol evidence rule, including the likely coming application to at-will employment contracts.

1. THE JOURNAL OF THE LITIGATION SECTION, STATE BAR OF CALIFORNIA
Volume 27 • Number 2 2014

2. 9
There has always been a tension
between written contract expecta-
tions and judicial economy, on the
one hand, and the prevention of fraud on the
other. Until Riverisland Cold Storage, Inc.
v. Fresno-Madera Production Credit Ass’n
(2013) 55 Cal.4th 1169, resolution of that
tension in California favored contract clarity
and 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 of
fraud, even if inconsistent with integrated
written 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 great
importance to our Supreme Court, and may
not create the unmanageable burdens that
some may fear, due to the strict pleading and
proof requirements applicable to fraud
claims that the court highlighted in support
of its decision. Indeed, a number of limita-
tions are already being developed by our
courts, or have been adopted in other states
and may also find acceptance here.
The decision may also foretell an equally
significant shift in the resolution of the ten-
sion between “at-will” termination rights and
employee expectations of ongoing employ-
ment for satisfactory performance. Unlike
the impossible burden on employers and
courts to address punitive damage claims
based on indeterminate “implied” good faith
obligations that rightfully were rejected in
Foley v. Interactive Data Corp. (1988) 47
Cal.3d 317, proof of oral promises of ongoing
employment at variance with integrated “at-
will” provisions that amount to fraud is as
manageable as in any other context, and
seemingly should now be actionable.
Thus, under the new rule, the key to pro-
tecting contract expectations, and avoiding
fraud claims and protracted litigation, will be
in the handling of negotiations, recordkeep-
ing, and more particularized contract draft-
ing, on what amounts to a more level playing
field that should no longer favor either
lender or borrower, landlord or tenant, ven-
dor or purchaser, employer or employee, or
any other contract party that may enjoy
superior bargaining power or be able to ben-
efit from standardized contract forms.
— Application So Far —
Not surprisingly, the courts that have
since decided cases have engaged in exten-
sive analysis of transaction histories to
resolve the numerous questions of fact
involved in ascertaining the parties’ inten-
tions and justifiable reliance. For example, in
Julius Castle Restaurant, Inc. v. Payne
(2013) 216 Cal.App.4th 1423, 1442, the court
affirmed a fraud judgment for damages in
favor of a restaurant operator tenant against
its landlord. The lease included the custom-
ary “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 obligations to the structure,
and an integration clause. (Id. at p. 1427.)
However, the restaurant owner obtained a
preliminary injunction restraining the sale of
its liquor license (id. at p. 1428), and was
allowed to assert at trial claims that the land-
lord 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, if it was
not, 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 an
order sustaining a demurrer without leave to
amend fraud and negligent misrepresentation
claims against a shopping center landlord.
The basis for the claims was that the landlord
charged Thrifty for 5.7% of the center’s
expenses under the triple net (NNN) provi-
sion 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 acknowl-
edgment, 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 understand-
ing of the needs to calculate accurate
charges since it owned a number of shopping
centers, that Thrifty did not have access to
the 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 and
received reliable comparable information in
its past dealings with the landlord. (Id. at pp.
1241-1242.) 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 sub-
stantially 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 com-
plaint, thus suggesting a heavy pleading
requirement being imposed on Thrifty.
— Potential Limitations —
The California cases have already started
to define limitations.
• Failure to Read a Contract — In River-
island, the lender claimed that the borrow-
ers’ admitted failure to read the contract
should have prevented them from demon-
strating 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. However, in a footnote at
the end of the opinion, the Court noted that it
has already held that a failure to read a con-
tract will preclude a claim for fraud in the
execution, but that since the issue is not cur-
rently before the Court, it is not expressing
any view on the “validity” and “exact parame-
ters” of a “more lenient rule that has been
applied” to promissory fraud claims. (Id., fn.
11.)
Any limitation is not likely to be absolute,
however, as evidenced by Doe v. Gangland
Productions, Inc. (9th Cir. 2013) 730 F.3d
946, 957-958, which allowed a claim of fraud
despite the plaintiff’s failure 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 over-
come a 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 decided not to have his girlfriend
read the release to him.
‘As long as they can satisfy
the proof requirements,
their fraud claims should
seemingly be heard too, a
problem to which our
Supreme Court has shown
an acute sensitivity in its
post-Foley decisions
regarding fraud claims in
the employment context.
’

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• 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 rejected in Julius Castle.
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 “dis-
tinguishing sophisticated business parties
who should be barred from introducing parol
evidence 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 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, as in Thrifty.
• Bargaining Power — Similarly, relief is
not limited to parties in weak bargaining
positions, such as in “contracts of adhesion.”
That argument too was rejected in Julius
Castle, again as not having been expressed
in Riverisland, and as a limitation that the
court declined to read into the decision. (Id.
at p. 1442.) Thus, it is reasonable to expect
that the relative bargaining power of con-
tract parties will be considered, and that
greater leniency will be shown to parties
with lesser bargaining power, but that even
sophisticated parties will be able to obtain
relief under appropriate circumstances.
• Failure to Investigate — Although so
far not specifically addressed, by extension,
it is also reasonable to assume that a com-
plete failure to undertake any investigation
will not necessarily preclude relief. For
example, a party may be excused if legally
incapable or lacking the ability or resources
to 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 to
the 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 fraud
claim, and have the verdicts setoff, as in
Julius Castle. As a result, the landlord pre-
vailed on its contract claim, and the restau-
rant prevailed on its fraud claim, resulting in a
setoff 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 a
reformation claim based on the “mutual mis-
take” created by the same facts as the alleged
fraud. A reformation claim based on mutual
mistake was also asserted but not addressed
in Riverisland. A rescission claim would also
seem 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 integration
clauses in settlement agreements, since
designed to end disputes, if they contain a
“clear and unequivocal” disclaimer of
reliance, and the agreement is the product of
arm’s-length negotiations between sophisti-
cated parties represented by competent
counsel (Italian Cowboy Partners, Ltd. v.
Prudential Ins. Co. of Am. (Tex. 2011) 341
S.W.3d 323.)
The analysis has also been applied in other
contexts, 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 Maryland
court has also held that reasonable reliance is
precluded as a matter of law on alleged omit-
ted important terms that could and should
have been included in a written contract if
agreed upon after prolonged negotiations
between sophisticated parties. (Central
Truck 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, which
California 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.4th
317, 341-343), California courts have until
now 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 on
the grounds that the employee will be unable
to show justifiable reliance. (Dore v. Arnold
Worldwide, Inc. (2006) 39 Cal.4th 384, 393-
394; Agosta v. Astor (2004) 120 Cal.App.4th
596, 606, relying on Casa Herrera, Inc. v.
Beydoun (2004) 32 Cal.4th 336, 346, which
relied on Pendergrass.)
Thus, in the same way as Riverisland
eliminated the Pendergrass protections in
loan transactions, and Julius Castle and
Thrifty did so in lease transactions involving
“as-is” provisions, seemingly the Pender-
grass protections should no longer apply to
employment transactions involving “at-will”
provisions either. Indeed, what about the
person that forgoes another job, moves to
accept a position, or forgoes an opportunity
during employment because someone says,
“All contracts here are at-will. But you don’t
have to worry. You won’t be fired as long as
you’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 our
Supreme Court has shown an acute sensitivi-
ty in its post-Foley decisions regarding fraud
claims in the employment context. (E.g.,
Hunter v. Up-Right, Inc. (1993) 6 Cal.4th
1174 [fraud in the termination of at-will em-
ployment not actionable]; Lazar v. Rykoff-
Sexton, Inc. (1996) 12 Cal.4th 631 [fraud in
the absence of written at-will contract
actionable].)
David J. Myers practices in Los Angeles and
focuses on commercial and real estate transac-
tions, and business, real estate and entertain-
ment litigation. lodjm@earthlink.net