Trust, But Verify

In commercial transactions and litigation, there is a difficult tension to maintain – building and preserving business relationships with preserving legal rights in the case of controversy.  The Russian proverb popularized by Ronald Reagan during the Cold War thaw — Доверяй, но проверяй (doveryai, no proveryai); Trust, But Verify — has served me well in my commercial transactions and litigation practice.  Negotiate terms in good faith and then verify the terms in writing!

Unfortunately, in the heat of business negotiations, I find that many clients enter into many deals by handshake (“Trust”) but forget to properly document (“Verify”) the oral understanding either in the actual language of the contract they sign or document, in writing, any modifications or amendments to an existing written contract.  When a dispute over oral discussions occurs within the jurisdiction of California, the party whose position is consistent with the terms of the written agreement usually prevails at the beginning of a litigation.  Defendants were typically able to dismiss “promissory fraud” cases at the pleading stage relying on the parol evidence rule.  The balance appears to have shifted earlier this year when the California Supreme Court, in Riverisland, joined the majority rule that allows a plaintiff to introduce evidence of fraud, usually in the form of oral statements, despite the existence of a written agreement.  See my colleague Leslie A. Baxter’s article on Riverisland.  

From a litigation perspective, this case breathes life into legitimate fraud claims for clients who trusted but failed to verify their understanding in writing.  From a transactional perspective, where it serves all parties’ best interests (except litigators) to avoid litigation, it is even more important for all parties to verify all oral understandings in writing, including explicit acknowledgment that all signers had the opportunity to review with counsel and confirmed the writing is consistent with their understanding.

 

 

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