Volume 27 Number 2 2014 THE JOURNAL OF THE LITIGATION SECTION, STATE BAR OF CALIFORNIA
Riverisland: Inordinate Burdens or Leveling the Playing Field By David J. Myers David J. Myers There has always been a tension between written contract expectations and judicial economy, on the one hand, and the prevention of fraud on the other. Until Riverisland Cold Storage, Inc. v. Fresno-Madera Pro duc tion 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 consider oral inducements that rise to the level of fraud, even if inconsistent with integrated written contract terms. California Litigation Vol. 27 No. 2 2014 9
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 limitations 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 tension between at-will termination rights and employee expectations of ongoing employment 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. In teractive Data Corp. (1988) 47 Cal.3d 317, proof of oral promises of ongoing employment at variance with integrated atwill 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 protecting contract expectations, and avoiding fraud claims and protracted litigation, will be in the handling of negotiations, recordkeeping, and more particularized contract drafting, on what amounts to a more level playing field that should no longer favor either lender or borrower, landlord or tenant, vendor or purchaser, employer or employee, or any other contract party that may enjoy superior bargaining power or be able to benefit from standardized contract forms. Application So Far Not surprisingly, the courts that have since decided cases have engaged in extensive 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 Res taurant, 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 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 obligations to the structure, and an integration clause. (Id. at p. 1427.) However, the restaurant owner obtained a preliminary in junction restraining the sale of its liquor license (id. at p. 1428), 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, 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) 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 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 position to discover the true ultimate operating 10
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 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 The California cases have already started to define limitations. Failure to Read a Contract In River - island, 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 ad dress 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 contract will preclude a claim for fraud in the execution, but that since the issue is not currently before the Court, 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., 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 overcome 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 As long as they can satisfy the proof re quirements, 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. 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. 11
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 distinguishing sophisticated business parties That argument too was rejected in Julius Castle, again as not having been expressed in River island, 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 contract 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. who should be barred from introducing parol evidence of fraud is not as simple as defendants 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. 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 if legally incapable or lacking the ability or resources to do so, or where there is no duty to investigate 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 12
modify contract terms, a party could still prevail on a contract claim and lose a fraud claim, and have the verdicts setoff, as in Julius Castle. As a result, the landlord prevailed on its contract claim, and the restaurant 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 sufficient facts had been pleaded to support a reformation claim based on the mutual mistake 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 limitations 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 sophisticated parties represented by competent counsel (Italian Cowboy Partners, Ltd. v. Pruden tial 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 omitted 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 formation of an employment relationship, which California courts acknowledge may be sufficient to create an implied agreement modifying 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 prohibit proof of contemporaneous oral agreements at variance with written at-will provisions, 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 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. (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 transactions, and business, real estate and entertainment litigation. lodjm@earthlink.net 13