Author Archives: Carol Newman

Law Governing Condominiums Is Rewritten

By J. Anthony Marino, Esq., and Carol L. Newman, Esq.

The California law which for many years has governed the management and operation of common interest developments (“CIDs”), including condominiums, known as the Davis-Stirling Common Interest Development Act (“the Act”), Civil Code §s1350 et seq., is being repealed in its entirety effective January 1, 2014. It will be replaced by a new statutory scheme, AB 805 (“the new Act”), which will probably continue to be referred to as “Davis-Stirling.” All of the existing code numbers will be changed to commence with Civil Code §4000.

A CID is a housing or commercial development characterized by:

(1) separate ownership of dwelling space or a right of exclusive occupancy, together with an undivided interest in a common area, (2) covenants, conditions, and restrictions (commonly known as “CC&R’s”) that limit use of both the common area and the separate ownership interests, and (3) management of the common area and enforcement of the CC&R’s by an owner’s association. CIDs include condominiums, community apartment projects, stock cooperatives, and planned unit developments. (See current Civil Code §1351.)

The new law is mostly a rewritten, recodified, and reorganized version of the Act as it currently exists. However, some provisions have been substantively revised. The Legislative Counsel’s Digest regarding the passage of AB 805 summarizes the changes as follows:

“Existing law, the Davis-Stirling Common Interest Development Act defines and regulates common interest developments.

“This bill, on and after January 1, 2014, would comprehensively reorganize and recodify the Davis-Stirling Common Interest Development Act. The bill would also revise and recast provisions regarding notices and their delivery, standardize terminology, establish guidelines on the relative authority of governing documents, and establish a single procedure for amendment of a common interest declaration. The bill would guarantee the right of an owner of a separate interest to make changes in that separate interest, as specified, in a common interest development other than a condominium project, in which that right currently exists. The bill would establish an express list of conflicts of interest that may disqualify members of a board of directors of an association that manages a common interest development from voting on certain matters.

“The bill would also, among other things, revise provisions related to elections and voting, establish standards for the retention of records, and broaden the requirement that liens recorded by the association in error be released.”

The purpose of this article is not to provide a comprehensive summary of the law governing condominiums, but to summarize the changes in the law that will occur as a result of the passage of the new Act.

Reorganization and Restatement of the Law

The new Act attempts to “comprehensively reorganize” the Act. One of the criticisms of the old Act was that it seemed to be, at least in part, a somewhat disjointed series of statutes which were not well organized unless one knew where to look for a particular statute covering a particular topic. The new law is designed to be easier to navigate, more logical in its groupings of provisions, more concise, and simply more user-friendly and easier to understand.

Additionally, the terminology used in the old Act was not consistent or comprehensive, because in many cases two or more different terms were used to describe the same thing, and definition sections did not necessarily apply to all uses of the defined terms in the Act or include definitions of terms located elsewhere in the Act. The new law standardizes some terminology to attempt to eliminate ambiguity and inconsistency.

These changes were deemed necessary because most CIDs are small and may not be able to afford a general counsel or overall professional management. In fact, more than half of all CIDs in California consist of 25 or fewer separate interests. Levy & Erlanger, 2010 California Community Association Statistics (2010). The new law was designed, at least conceptually, to be understandable by non-lawyer board members of smaller CIDs. Whether or not that this goal has been accomplished remains to be seen.

The new law adds a new Part 5 to Division 4 of the Civil Code, beginning with Section 4000, and restates the law in eleven chapters designed to group provisions by subject matter in a coherent and logical order:

• 1. General Provisions
• 2. Application of Act
• 3. Governing Documents
• 4. Ownership and Transfer of Interests
• 5. Property Use and Maintenance
• 6. Association Governance
• 7. Finances
• 8. Assessments and Assessment Collection
• 9. Insurance and Liability
• 10. Dispute Resolution and Enforcement
• 11. Construction Defect Litigation

The new law is structurally more logical. It begins with provisions governing the application of the new law itself. Then it addresses the creation of CIDs and the nature of what a CID is (a form of property ownership). It concludes with provisions governing the operation of the CID association as among the property owners themselves and between the CID and third parties.

The new law will be given a one-year deferred operation date, to allow affected persons to adjust to the new law, and will provide that any substantive changes will not retroactively invalidate actions and documents which were completed before the effective date of the new Law which were proper under the current law. New Civil Code §4010 (hereafter all sections of the new statute are referred to as “New §”.) The new law provides a simplified procedure for updating references in the governing documents to the new Act by board resolution. New §4235.

For the most part, the changes were intended to be non-substantive and non-controversial, but proposed substantive changes which were not adopted in this enactment were noted by the California Law Revision Commission for future study. (See footnote 1 above.) The substantive improvements are discussed below.

Supremacy of the Act: A frequently encountered issue not resolved in the current Act is whether the governing documents, to the extent they are inconsistent with the Act, supersede the Act, or vice versa. The new Act makes it clear, for the first time, that in the event of inconsistency, the Act prevails over the governing documents. New § 4205(a).

Relative Priority of the Governing Documents: Similarly, the revised Act for the first time expressly declares the relative priority/ authority of the most common governing documents in the event of inconsistencies among them. New § 4205(b)-(d) provides that that the CC&R’s supersede the articles of incorporation; the articles and CC&R’s control the bylaws; and all of the above control the operating rules.

Members Must Receive Text of Proposed Amendment: The new Act adds a new requirement that an association must provide members with the text of any proposed amendment of the governing documents when holding a member election to approve the proposed amendment. New § 5115(e). The Act previously did not require written notice of the text of a proposed amendment.

Contents of CC&R’s: Existing law specifies what information must be included in a CID’s recorded declaration, i.e., the CC&R’s, and allows the “original signator of the declaration” to include any other information that the “original signator” deems appropriate. Civil Code § 1353. The new Act replaces the phrase “original signator” with the defined term “declarant,” which permits a successor-in-interest to the original signator to add provisions to the CC&R’s, using proper procedures for amending the CC&R’s. New §s 4130 and 4250(b).

Amendment of the CC&R’s: Existing law is not consistent with regard to the procedures for amending the CC&R’s, depending on the purpose of the amendment. Civil Code §s 1355(a), 1357. The new Act establishes a single exclusive procedure for amendment of the CC&R’s. New § 4270. That procedure also expressly recognizes that some CC&R’s may require that a person other than a member (owner) approve an amendment, and makes clear that a governing document lower in priority than the CC&R’s cannot govern the procedure for amendment of the CC&R’s.

Court-Authorized Amendment of CC&R’s: Under the existing law, the Superior Court may approve an amendment to the CC&R’s, even if the required member approval was not obtained. Civil Code § 1356. Before making such a decision, the Court must find, among other things, that an election which complied with the governing documents was held to approve the amendment. The revised Act also requires the Court to find that the election was conducted in accordance with the election provisions of the Act and any other applicable law. New § 4275(c)(2).

Amendment or Revocation of Condominium Plan: Existing law specifies that a condominium plan may be amended or revoked by recording an instrument executed by all of the persons whose signatures were required to establish the plan. Civil Code § 1351(c). It is unclear whether an amendment or revocation of the condominium plan must be signed by the original signators, or whether their successors in interest may sign. The new Act clarifies that the amendment or revocation must be signed by those persons who are current holders of the specified interests. New § 4295.

Reversals of Operating Rule Changes: Current law allows members of an association to vote on whether to reverse a recent change to an operating rule pursuant to election procedures set forth in the Corporations Code. Civil Code § 1357.140. The new Act instead cites to equivalent provisions of the new Act. New § 4365.

Right of Access to Separate Interest: The new Act clarifies that both owners and occupants (e.g., renters) are entitled to physical access to the owner’s separate interest. New
§ 4510.

Property Use: The new Act provides property owners with a more complete summary of their property use rights. New § 4730.

Modification of Separate Interest: The new Act broadens the owner’s right to make changes to his/her separate interest in any type of CID, not just a condominium project. New
§ 4760.

Grant of Exclusive Use of Common Area: The existing provisions are broadened to include, among other things, accommodating a disability. New § 4600.

Notice of Board Meetings: All associations will be required to provide advance notice of a Board meeting, including an agenda, regardless of whether the time and place of the meetings is fixed in the governing documents. New § 4920. Further, the requirement that notices of a Board meeting be “posted” in a prominent place in the common area will be deleted, in favor of “general delivery” of Board meeting notices, pursuant to New §s 4045, 4920.

Definition of “Board Meetings”: A “Board meeting” is no longer defined as a gathering of the majority of directors, but instead as the number of directors sufficient to constitute a quorum. New § 4090.

Disqualification of Interested Directors: Existing law provides that a director is subject to the rules governing self-interested contracting in for-profit corporations. Civil Code
§ 1365.6. The new law replaces the reference to for-profit corporations with a reference to the equivalent provisions of non-profit corporation law, and expressly prohibits a self-interested director from voting on specified types of matters. New §s 5350(a), (b).

Elections: Several changes have been made.
• Procedure. Under current law, the elections procedure applies only to certain types of elections. The new law allows an association to use the statutory procedure for any type of member election, so long as a decision to use the statutory procedure in other types of elections is authorized in an operating rule. New § 5100(b).
• Notice of results. The new law also requires that “general notice” of election results be provided to all members, replacing the existing more ambiguous requirement that the results be “publicized.” New §s 4045, 5120(b); compare Civil Code § 1363.03(g).
• Destruction of ballots. The current law appears to allow the destruction of ballots nine months after an election, which is three months before the end of the period in which an election can be challenged. Civil Code §s 1363.03(h), 1363.09. The new Act requires that the ballots be retained for the full twelve-month period in which elections can be challenged. New § 5125.
• Campaign communications. Existing law restricts the use of association funds for campaign communications (anything that features the name or photograph of a candidate) in connection with a pending board election. Civil Code § 1363.04. The new Act adds an exception for communications required by law. New § 5135(b)(2).

Records and Notices:
• Association Records. Under existing law, members may inspect and copy “association records,” as defined in Civil Code §1365.2. The new Law broadens the scope of “association records” to include the governing documents, and to include those records already defined as “enhanced association records.” New §s 5200(a)(11), 5200(a)(13).
• Annual Reports and Notices. The new law reorganizes the information which an association must distribute to its members on an annual basis into three annual reports, based on subject matter: (1) an annual budget report including the budget and related financial disclosures, (2) an annual financial statement review, if required, and (3) an annual policy statement, including all other annual informational disclosures that an association must make. New §s 5300, 5305, 5310; see Civil Code §s 1365(a), (c), (d), (e), 1365.1, 1365.2.5, 1363.850, 1369.490, 1378. The new Act preserves the option for an association to send members a summary and notice of the availability at no cost of the full budget, as opposed to the budget itself, and extends that option to the annual policy statement. New §s 5310(b), 5320. All annual reporting requirements will now be located in one place in the Code, and greater flexibility as to how they are distributed will be permitted.

Commercial and industrial CIDs: The new law continues the existing exemptions for commercial and industrial CIDs from certain provisions of the Act (see Civil Code §1373). (See footnote 1 above.)

Assessments:
• Regular and Special Assessments. Under existing law, an association may not increase regular assessments unless it has either distributed a pro forma budget in compliance with Civil Code Section 1365(a) or obtained the approval of the members in a member election. In addition, the association must obtain the approval of the members before increasing regular assessments by more than 20% or imposing a special assessment that is more than 5% of the association’s budgeted gross expenses for the fiscal year. The proposed law continues these provisions (new §§5600-5740) with a minor change to remove the superseded reference to the Corporations Code election procedure.
• Assessment Payment Priority. Existing law provides that a member’s payment for assessments should be applied first to the assessments owed, before being applied to any collection costs, interest, or penalties. The Commission concluded (40 Report 262) that, under the existing provision, it is not entirely clear whether the payment priority rule is conditioned on the association having provided the member with a written notice of delinquency. New §5655 makes clear that the payment priority rule applies in all cases, regardless of whether or when the member has received a notice of delinquency.
• Lien Release. Under existing law, if it is discovered through ADR that the asso- ciation had recorded an assessment lien in error, the association is required to release the lien and reverse all costs, fees, and interest associated with the error. New §5685 would continue the rule, but expand its application so that it applies whenever the association has recorded an assessment lien in error, without regard for how the error is discovered.

Enforcement:
• Schedule of Monetary Penalties. If an association policy authorizes the imposition of a monetary penalty for a violation of the governing documents, §1369(g) requires that the association adopt a schedule of monetary penalties and deliver it to the members. If the penalty schedule is later amended, the amended penalty schedule must be delivered to the members. New §5310(a)(8) requires that the schedule be included in the policy statement that is delivered to the members annually. New §5850 also makes clear that penalties may apply to guest or tenant activities, that the penalty imposed for a violation of the governing documents is limited to the penalty in effect at the time of the violation, and that new or revised penalty schedules may be delivered by a supplement.
• Notice and Opportunity to be Heard. Before disciplining a member for a violation of the governing documents, the association must provide the member with notice of the alleged violation and an opportunity to be heard by the board. See §1363(h). New §5855 broadens that notice and hearing requirement to also apply when an association attempts to impose a monetary charge as a means of reimbursing the
association for costs incurred by the association in the repair of damage to com- mon area and facilities caused by a member or the member’s guest or tenant.

Alternative Dispute Resolution: Sections 1369.510 and following require that ADR be offered before a civil action is filed by or against an association to enforce a provision of the governing documents, the Davis- Stirling Common Interest Development Act, or a provision of the Corporations Code. The non-filing party is not required to accept the offer. However, in an action in which fees and costs may be awarded, the court may consider whether the refusal of ADR was reasonable, when determining the amount of the award. Under existing law, that rule only applies in an action to enforce the association’s governing documents. New §5960 would broaden the rule, to apply in any action in which fees and costs may be awarded.

In summary, numerous changes to the existing law, some major and some minor, have been made. All CID’s and their property managers, attorneys, and accountants need to be made aware of the new law so that they continue to operate within its requirements.

Court Decision May Undermine Enforceability of Contracts

By Carol L. Newman

Introduction

Imagine that your client presents you with the following set of facts:

· The client sold its existing business, a motel chain, to a competitor;
· Both the client and the competitor were represented by major law firms in the transaction;
· The client, through its counsel, clearly disclosed as a condition of the sale that it intended to open a new chain of motels, which would compete directly with the buyer of its existing business;
· Accordingly, the purchase agreement provided in precise language that the seller-client could not compete with the buyer for 2 years within one mile of an existing motel that was part of the sale;
· The purchase agreement was heavily negotiated by top lawyers at these major law firms, went through several drafts (all of which contained the above language regarding competition), and cost a great deal of money (hundreds of thousands of dollars) to perfect;
· The purchase agreement not only contained an integration clause but was a model of completeness and thorough lawyering;
· Nevertheless, after the sale closed, the buyer claimed that the seller had fraudulently promised before the transaction closed that the seller would never compete with the buyer – effectively negating the “2-years-within-one-mile” limitation on the non-competition provision in the purchase agreement. The buyer then sued the seller-client to put its new motel chain out of business.

This was an actual case in which I was one of the lawyers representing the seller. At the time this case was decided 20 years ago, the arbitrator ultimately awarded summary judgment to the seller on the grounds that the claim of promissory fraud could not succeed as a matter of law because the alleged fraudulent promise contradicted the express and precise language of the purchase agreement, relying on the California Supreme Court’s decision in Bank of America v. Pendergrass (1935) 4 Cal.2d 258.

That same result might not be possible today. In Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Association (Jan. 14, 2013) 55 Cal.4th 1169, 151 Cal.Rptr.3d 93, the Supreme Court expressly overruled Pendergrass and its progeny as having been “poorly reasoned” (151 Cal.Rptr.3d at 101) and “an aberration” (151 Cal.Rptr.3d at 103), and held that the parol evidence rule does not bar evidence of alleged fraudulent promises even if they are clearly inconsistent with the express terms of a written agreement. This decision represents a fundamental change in California law which threatens the certainty of contracts and has the potential of allowing contracting parties to successfully challenge contracts which they did not read or did not bother to try to understand – or which they did understand and simply wish to avoid. Indeed, it eviscerates the parol evidence rule and offers little guidance to businesses as to how to assure that their contracts are respected.

The Parol Evidence Rule

An understanding of the basic principles of the parol evidence rule is necessary in order to understand the impact of the Riverisland case. Despite the fact that the rule is called the “parol evidence rule,” it is a rule of substantive law. Riverisland, 151 Cal.Rptr.3d at 96. Code of Civil Procedure Section 1856(a)[1] states:

Terms set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement.

However, there are several exceptions to this rule, including subsection (f), which permits evidence to be introduced “[w]here the validity of the agreement is the fact in dispute,” and subsection (g), which states:

This section does not exclude other evidence of the circumstances under which the agreement was made or to which it relates . . . or to explain an extrinsic ambiguity or otherwise interpret the terms of the agreement, or to establish illegality or fraud.

As the Supreme Court states in Riverisland, California always recognized a fraud exception to the parol evidence rule. 151 Cal.Rptr.3d at 101. However, this exception was never consistently applied, nor should it have been.

The Pendergrass case

Pendergrass was a lawsuit by a lender to collect on a promissory note executed by its borrowers. In that case, after the borrowers fell behind on their loan payments, they entered into a new promissory note which was secured by additional collateral and payable on demand. Shortly thereafter, the lender seized the collateral and sued on the note. The borrowers raised the defense, among others, that the new note had been obtained by fraud because the lender had promised to postpone all payments for a year.[2]

The Supreme Court held that “[o]ur conception of the rule which permits parol evidence of fraud to establish the invalidity of the instrument is that it must tend to establish some independent fact or representation, some fraud in the procurement of the instrument or some breach of confidence concerning its use, and not a promise directly at variance with the promise of the writing.” 4 Cal.2d at 263 (emphasis added). The alleged evidence that the lender had promised to postpone all payments for a year directly contradicted the unconditional promise in the new note to pay the money on demand. Therefore, the Court held that the parol evidence rule barred the admission of such evidence. 4 Cal.2d at 263-264.

The Pendergrass case was an effort to harmonize the fraud exception with the parol evidence rule – to avoid having the exception swallow the rule. If contracting parties are allowed to make claims that false promises were made to them which contradict explicit terms of the contract, they will have little incentive to read the contract. It is good policy to encourage contracting parties to read what they are agreeing to, and to require them to seek advice if they do not understand it. It is also good policy that if the written agreement in fact contradicts what was allegedly promised, the contracting parties should be encouraged to discuss the contradictions before either side relies on the contract. If a party signs a contract knowing that it says something different than what was promised, that party may not be able to prove that it reasonably relied upon what was allegedly promised.

The Pendergrass rule was criticized by some courts and commentators for allegedly providing a shield for fraudulent conduct. Nevertheless, it was the law in California for nearly 80 years.

The Riverisland Case

Like Pendergrass, Riverisland involved loan borrowers who fell behind in their payments and restructured their debt to the lender in a written agreement. The written agreement provided that the lender would take no enforcement action for 3 months if the borrowers made their payments. Additionally, in the written restructuring agreement the borrowers pledged additional collateral, 8 separate parcels of real property, and initialed pages of the agreement containing the legal descriptions of those parcels.

The borrowers failed to make the required payments, and the lender began foreclosure proceedings. The borrowers repaid the loan and sued the lender for damages, claiming that two weeks before the new written agreement was signed, the lender’s vice president had told them the lender would extend the loan for two years in exchange for additional collateral consisting of 2 parcels. They further claimed that when they signed the new agreement the vice president assured them that its term was 2 years and the 2 parcels were the only additional security. Significantly, the plaintiffs admitted that they had not read the new agreement when they signed it.

The lender moved for summary judgment, and the trial court granted the motion, relying on Pendergrass. The Court of Appeal reversed, holding that Pendergrass is limited to cases of promissory fraud, but false statements as to the contents of the agreement were not false promises, but rather factual misrepresentations, and therefore actionable. 151 Cal.App.3d at 95-96. The Supreme Court granted the lender’s petition for review.

The Supreme Court discussed at length, among other things, the parol evidence rule, the Pendergrass case, prior decisions of the Supreme Court, subsequent cases’ treatment of Pendergrass, criticism of Pendergrass, defenders of Pendergrass, and the revisions to Section 1856 in 1978 which omitted any mention of Pendergrass.[3] The Court stated:

Accordingly, we conclude that Pendergrass was an aberration. It purported to follow section 1856 . . . but its restriction on the fraud exception was inconsistent with the terms of the statute, and with settled case law as well. Pendergrass failed to account for the fundamental principle that fraud undermines the essential validity of the parties’ agreement. When fraud is proven, it cannot be maintained that the parties freely entered into an agreement reflecting a meeting of the minds. Moreover, Pendergrass has led to instability in the law, as courts have strained to avoid abuses of the parol evidence rule. The Pendergrass court sought to “prevent frauds and perjuries” . . . but ignored California law protecting against promissory fraud.

The fraud exception has been part of the parol evidence rule since the earliest days of our jurisprudence, and the Pendergrass opinion did not justify the abridgment it imposed. For these reasons, we overrule Pendergrass and its progeny, and reaffirm the venerable maxim stated in Ferguson v. Koch, supra, 204 Cal. At page 347, 268 P. 342: “[I]t was never intended that the parol evidence rule should be used as a shield to prevent the proof of fraud.”

151 Cal.Rptr.3d at 103.

Parol Evidence Rule v. the Statute of Frauds

Nearly 30 years ago, the Supreme Court had taken what it called “a similar action” (151 Cal.Rptr.3d at 103) in Tenzer v. Superscope, Inc. (1985) 39 Cal.3d 18, in which the Court overruled Kroger v. Baur (1941) 46 Cal.App.2d 801, and held that a fraud action is not barred by the statute of frauds. The Supreme Court addresses that decision briefly in Riverisland, stating that “[c]onsiderations that were persuasive in Tenzer also support our conclusion here. . . . The Tenzer court noted the principle that a rule intended to prevent fraud, in that case the statute of frauds, should not be applied so as to facilitate fraud.” (Id., citing 39 Cal.3d at 29.)

Since then, some commentators have predicted that the Supreme Court might eventually apply the same reasoning to the parol evidence rule. However, in Riverisland the Court has not limited its ruling to cases in which damages are sought, but has established a much broader principle.

Moreover, the policy considerations between the statute of frauds and the parol evidence rule are very different. The statute of frauds merely seeks to assure that competent evidence of certain discrete types of agreements will be presented to the Court and the trier of fact. The parol evidence rule, on the other hand, applies to all integrated written agreements. Riverisland affects many more agreements than does the statute of frauds. Now any allegation that any written agreement, no matter how expertly negotiated, was induced by fraudulent promises or representations will be admissible. Riverisland is potentially a much more far-reaching decision than Tenzer ever was or will be.

Suggestions for Counsel Negotiating Contracts

As indicated above, Riverisland makes it more difficult to determine whether a written contract will be enforceable in the face of an allegation that it was procured by a false promise. As the Supreme Court recognized in Riverisland, it makes no real difference whether the allegation is that the contract was procured by a false promise or that the contents of the contract were factually misrepresented. That is a false distinction without a difference. 151 Cal.Rptr.3d at fn 7. Riverisland expands exponentially the evidence a breaching party may introduce to try to invalidate a contract.

The Supreme Court’s decision gives cold comfort to counsel seeking some certainty in this regard:

Here, as in Tenzer, we stress that the intent element of promissory fraud entails more than proof of an unkept promise or mere failure of performance. We note also that promissory fraud, like all forms of fraud, requires a showing of justifiable reliance on the defendant’s misrepresentation. (Lazar v. Superior Court, supra, 12 Cal.4th at p. 638 . . .) The [defendant] contends the [plaintiffs] failed to present evidence sufficient to raise a triable issue on the element of reliance, given their admitted failure to read the contract. However, we decline to decide this question in the first instance. The trial court did not reach the issue of reliance in the summary judgment proceedings below, nor did the Court of Appeal address it.

151 Cal.Rptr.3d at 104.

As experienced business lawyers know, allegations that a contract was obtained by fraud are fairly common in business cases. This decision renders it more likely that parties seeking to enforce contracts will be put on the defensive. Breach of contract cases are more likely to turn into tort cases in which tort damages are recoverable — against the plaintiff rather than the defendant. Additionally, trial courts may be less willing to award summary judgment to plaintiffs, as the question of whether or not reliance is justifiable is ordinarily a question of fact. OCM Principal Opportunities Fund v. CIBC World Markets Corp. (2007) 157 Cal.App.4th 835, 864.

It is disappointing that the Supreme Court expressed no opinion that a party – especially a sophisticated party– should at least read the contracts it signs.[4] While the Court may have wished to overrule Pendergrass, it picked an unfortunate case in which to do so. Moreover, the Court neglected to address Civil Code Section 1625, which unequivocally provides that “[t]he execution of a contract in writing, whether the law requires it to be written or not, supersedes all the negotiations or stipulations concerning its matter which preceded or accompanied the execution of the instrument.”

Business lawyers will be assessing the effect of Riverisland going forward. Counsel should take any actions they can take to establish, at the very least, that the promisor cannot claim it reasonably and justifiably relied on anything claimed to have been said outside the four corners of the contract. At the very least, before the contract is signed, counsel should assign a competent witness to explain the material terms of the contract to the opposing party either in person or in writing, and the opposing party should acknowledge in writing in some fashion that the material terms of the contract were explained before the contract is signed.


[1] Hereafter all references are to the Code of Civil Procedure unless otherwise stated.

[2] Another defense raised, not relevant here, was violation of the one-action rule. Section 726.

[3] The modified statutory formulation adopted the Supreme Court’s liberalization of the rule as set forth in such cases as Masterson v. Sine (1968) 68 Cal.2d 222, and Pacific Gas & Electric Co. v. G.W. Thomas Drayage Co. (1968) 69 Cal.2d 33.

[4] In footnote 11, the Court addresses its own opinion in Rosenthal v. Great Western Financial Securities Corp. (1996) 14 Cal.4th 394, in which the Court ruled that negligent failure to read a written agreement precludes a finding that the contract is void for fraud in the execution. (14 Cal.4th at 423.) “Fraud in the execution” means that the party does not know what it is signing, or does not intend to enter into a contract at all. Rosenthal, 14 Cal.4th at 415. Generally, in contract litigation the party alleging fraud is not alleging fraud in the execution, but rather fraud in the inducement, in which the signing party knows what it is signing but its consent is induced by fraud. Id. The Supreme Court said in footnote 11 of Riverisland that “[w]e expressed no view in Rosenthal on the ‘validity’ and ‘exact parameters’ of a more lenient rule that has been applied when equitable relief is sought for fraud in the inducement of a contract. . . . Here as well we need not explore the degree to which failure to read the contract affects the viability of a claim of fraud in the inducement.”

de of Civil Procedure unless otherwise stated.

[1] Another defense raised, not relevant here, was violation of the one-action rule. Section 726.

[1] The modified statutory formulation adopted the Supreme Court’s liberalization of the rule as set forth in such cases as Masterson v. Sine (1968) 68 Cal.2d 222, and Pacific Gas & Electric Co. v. G.W. Thomas Drayage Co. (1968) 69 Cal.2d 33.

[1] In footnote 11, the Court addresses its own opinion in Rosenthal v. Great Western Financial Securities Corp. (1996) 14 Cal.4th 394, in which the Court ruled that negligent failure to read a written agreement precludes a finding that the contract is void for fraud in the execution. (14 Cal.4th at 423.) “Fraud in the execution” means that the party does not know what it is signing, or does not intend to enter into a contract at all. Rosenthal, 14 Cal.4th at 415. Generally, in contract litigation the party alleging fraud is not alleging fraud in the execution, but rather fraud in the inducement, in which the signing party knows what it is signing but its consent is induced by fraud. Id. The Supreme Court said in footnote 11 of Riverisland that “[w]e expressed no view in Rosenthal on the ‘validity’ and ‘exact parameters’ of a more lenient rule that has been applied when equitable relief is sought for fraud in the inducement of a contract. . . . Here as well we need not explore the degree to which failure to read the contract affects the viability of a claim of fraud in the inducement.”


Footnotes:

1. Hereafter all references are to the Code of Civil Procedure unless otherwise stated.

2. Another defense raised, not relevant here, was violation of the one-action rule. Section 726.

3. The modified statutory formulation adopted the Supreme Court’s liberalization of the rule as set forth in such cases as Masterson v. Sine (1968) 68 Cal.2d 222, and Pacific Gas & Electric Co. v. G.W. Thomas Drayage Co. (1968) 69 Cal.2d 33.

4. In footnote 11, the Court addresses its own opinion in Rosenthal v. Great Western Financial Securities Corp. (1996) 14 Cal.4th 394, in which the Court ruled that negligent failure to read a written agreement precludes a finding that the contract is void for fraud in the execution. (14 Cal.4th at 423.) “Fraud in the execution” means that the party does not know what it is signing, or does not intend to enter into a contract at all. Rosenthal, 14 Cal.4th at 415. Generally, in contract litigation the party alleging fraud is not alleging fraud in the execution, but rather fraud in the inducement, in which the signing party knows what it is signing but its rather fraud in the inducement, in which the signing party knows what it is signing but its consent is induced by fraud. Id. The Supreme Court said in footnote 11 of Riverisland that “[w]e expressed no view in Rosenthal on the ‘validity’ and ‘exact parameters’ of a more lenient rule that has been applied when equitable relief is sought for fraud in the inducement of a