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An Innocent Party May Rescind a Contract that is Obtained by Way of a False Statement


Can a Contract be Rescinded if it was Obtained by Fraud?

When a party to a contract finds out that the other party made a false statement to induce the innocent party to sign a contract, can the innocent party rescind the agreement? One would hope so. However, the defrauded party will face a few obstacles before successfully undoing the agreement.

The "Integration Clause"

First, most contracts contain an "integration clause." An integration clause simply says that all prior negotiations, whether written or oral, are "integrated" into the written agreement. The parties have agreed that the written agreement is the only agreement between them. If the defrauded party has not carefully read the written agreement, he or she can be in for a big surprise!

The "Parol Evidence" Rule

The "parol evidence rule" says that if the parties have entered into an integrated written agreement, no written or oral statements can be used to contradict the terms of the written integrated agreement. So, can a huckster lie and get away with it? If this argument is applied, the crook may get away with his or her fraud!

Fraud Overcomes Both the Integration Clause and the Parol Evidence Rule

In 2013, the Californa Supreme Court said in Riverisland Cold Storage, Inc. v. Fresno-Madera Prod. Credit Ass'n, 55 Cal. 4th 1169, 1182 (2013) that "it was never intended that the parol evidence rule should be used as a shield to prevent the proof of fraud.” Therefore, an innocent party who signed a contract relying on a false material statement of fact to his or her detriment is not obligated to perform on that promise.

Fraud is not Easily Proven

After overcoming the integration clause and parol evidence rule, the innocent party's work is not over. To prevail on this issue, the defrauded party must also prove that the person who made the misrepresentation intended to defraud him or her. Proving intent is not easy. The proof must be more than just the failure to keep a promise.

Balancing of Interests

As is common in the law, the parol evidence rule is a balancing of interests. Application of the rule  "protects the integrity of written contracts by making their terms the exclusive evidence of the parties' agreement..." Id., at 1171–7112. However, when the agreement embodied in the writing was obtained by fraud, excluding evidence of the fraud would assist in the perpetration of the fraud the rule was intended to prevent.