Contract Clause Precluded Reliance on Oral Evidence which Contradicted the Written Contract Language
Duncan v. McCaffrey Group, Inc. (Cal.App. 5 Dist., 2011) 2011 WL 5110475, 7
What happens when you sign a contract and then, in a dispute over the contract language, the other side tries to introduce oral evidence that contradicts the written word? In Duncan, the court of appeal did not allow the introduction of such evidence because of the inclusion of a “merger” or “entire agreement” clause.
In Duncan, purchasers claimed that the developers’ sales people orally promised them that the development where their lots were located would contain only custom homes. However, the written purchase and sale agreement specifically reserved to the developers the right to build other types of houses including tract homes.
The court noted the general rule (called the parol evidence rule) regarding whether oral statements could modify written contract provisions: “The parol evidence rule, codified in Code of Civil Procedure section 1856 and Civil Code section 1625 generally prohibits the introduction of either oral or written extrinsic evidence to vary, alter, or add to the terms of an integrated written agreement, although extrinsic evidence introduced to explain the meaning of a written contract is admissible if the interpretation of the contract urged is consistent with the document. In essence, the written agreement supersedes any prior or contemporaneous negotiations, either oral or written.”
One of the key inquires in the Duncan case was whether the contract was “integrated,” that is, intended by the parties to embody all the terms of the parties’ deal.
The agreement contained the following clause:
“Merger. This is the only agreement between the parties and all prior and contemporaneous negotiations are merged herein and superseded hereby. The only representations, agreements and warranties made by Seller are those set forth in writing in this Agreement. No representations, agreements or warranties, express or implied, not expressly set forth in writing in this Agreement are made by Seller to or with Buyer.”
The court of appeal stated the agreement was in fact an integrated contract because of the above quoted merger clause. Therefore, the buyers were not entitled to introduce oral evidence (alleged oral promises made by sales people) to contradict the written word.
Further, the court stated regarding the purchasers’ fraud claim: “The parol evidence rule barred purchasers' evidence that developers promised them that the development where their lots were located would contain only custom homes, on their fraud claim against the developers. The claim was not within the fraud exception to the parol evidence rule, because the purchase and sale agreement specifically reserved to the developers the right to build other types of houses including tract homes, and that reservation of rights was highlighted for the purchasers specifically as evidenced by their initials being placed next to the paragraph. An argument that the developers misrepresented the terms of the contract would not change the conclusion, because the purchasers' theory was that the developers promised they would not utilize a right included in the contract.”
Duncan also involved a claim of false advertising (a claim not based on contract) which was allowed. There are also other exceptions to the parol evidence rule that Duncan did not discuss, which may apply to particular situations.
Practice Point: Consider including a “merger” or “entire agreement” clause in your contract to prevent the use of oral evidence to contradict the written contract.
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