Opinion ID: 1160537
Heading Depth: 3
Heading Rank: 2

Heading: Reasonableness of Reliance as an Element of Fraud in the Inception

Text: The parties dispute whether plaintiffs' declarations, even if believed, show fraud in the inception or execution of the client agreements sufficient to render the agreements entirely void. In assessing the legal sufficiency of plaintiffs' claims, we apply the California law of contracts generally, rather than any rules uniquely tailored to enforcement of arbitration agreements. We are precluded under section 2 of the USAA from singling out arbitration provisions for suspect status. ( Doctor's Associates, Inc. v. Casarotto, supra, 517 U.S. ___, ___ [134 L.Ed.2d 902, 909, 116 S.Ct. 1652, 1656].) [10] (8a) The central disputed question is whether plaintiffs could justifiably rely on GWFSC's misrepresentations without themselves ascertaining the nature of the documents they signed. GWFSC argues plaintiffs had a reasonable opportunity to know the terms of the client agreements, but failed through their own neglect to read them. Plaintiffs, however, claim their failure to read the client agreements is legally excused by virtue of GWFSC's asserted fraud. They rely on Lynch v. Cruttenden & Co. (1993) 18 Cal. App.4th 802, 807 [22 Cal. Rptr.2d 636] ( Lynch ), in which the court stated, The general rule in California is that even in the absence of a fiduciary relationship plaintiff's failure to read a contract is excusable where reliance is placed on the misrepresentations of the other party. (Accord, Strotz, supra, 223 Cal. App.3d at pp. 218-219.) California law supports GWFSC's position that fraud does not render a written contract void where the defrauded party had a reasonable opportunity to discover the real terms of the contract. A contract may, however, be held wholly void, despite the parties' apparent assent to it, when, ` without negligence on his part, a singer attaches his signature to a paper assuming it to be a paper of a different character.' ( C.I.T. Corporation v. Panac, supra, 25 Cal.2d at p. 549, quoting 1 Williston on Contracts (3d ed. 1957) § 95A, pp. 350, 351, italics added; see also Gardner v. Rubin (1957) 149 Cal. App.2d 368, 372 [308 P.2d 892] [negotiable instrument not enforceable even by holder in due course where executed through fraud and  in the absence of negligence on the part of the maker  (italics added)]; Ramirez v. Superior Court (1980) 103 Cal. App.3d 746, 756, fn. 3 [163 Cal. Rptr. 223] [no agreement exists unless the parties signing the document act voluntarily and are aware of the nature of the document and have turned their attention to its provisions or reasonably should have turned their attention to its provisions  (italics added)].) A release of a liability claim, for example, may be rendered void on the grounds of fraud or misrepresentation regarding the nature of the claim covered by the release so long as the releasor's failure to learn the nature of the terms was not attributable to his own negligence.  ( Frusetta v. Hauben, supra, 217 Cal. App.3d at p. 557, italics added; see also Casey v. Proctor (1963) 59 Cal.2d 97, 103 [28 Cal. Rptr. 307, 378 P.2d 579] [release not binding if releaser's misapprehension of nature or scope caused by other party's misconduct and  not due to his own neglect  (italics added)].) The Restatement position is similar. Restatement Second of Contracts section 163, titled When a Misrepresentation Prevents Formation of a Contract, states as follows (italics added): If a misrepresentation as to the character or essential terms of a proposed contract induces conduct that appears to be a manifestation of assent by one who neither knows nor has a reasonable opportunity to know of the character or essential terms of the proposed contract, his conduct is not effective as a manifestation of assent. As the official comment explains, the misrepresentation in such a case goes to what is sometimes called the `factum' or the `execution' rather than merely the `inducement', and renders the contract void rather than merely voidable. (Rest.2d Contracts, § 163, coms. a & c, pp. 443, 444.) The Lynch and Strotz courts relied for their contrary statements of the law on 1 Witkin, Summary of California Law (9th ed. 1987) Contracts, section 407, pages 366-367. In that section Witkin asserts that, while misrepresentations were once regarded as an excuse for failure to read a contract only within a fiduciary relationship, [i]t is now settled ... that the excuse may be asserted even in the situation where the parties are in no such relationship. ( Id. at p. 366.) Upon examination of the authorities, we conclude Witkin and the courts in Lynch and Strotz state the rule of excuse too broadly. While some prior cases have held equitable relief, such as rescission or reformation of the contract, may be available despite the defrauded party's failure to read the contract, our law is clear that misrepresentation does not render the contract void unless the misled party, before making the agreement, lacked a reasonable opportunity to learn its terms. Aside from a case stating a special rule for insurance policies, Witkin relies principally on two decisions of this court: California Trust Co. v. Cohn (1932) 214 Cal. 619 [7 P.2d 297] ( Cohn ) and Van Meter v. Bent Construction Co. (1956) 46 Cal.2d 588 [297 P.2d 644] ( Van Meter ). (1 Witkin, Summary of Cal. Law, supra, Contracts, § 407, pp. 366-367.) Both cases, however, involve reformation of contracts, rather than the determination a contract is void for fraud in the execution. In Cohn, the cross-complainants alleged the cross-defendant had made an oral agreement to hold certain real property in trust for the cross-complainants, to sell the property to third parties, and to pay cross-complainants part of the proceeds. Cross-defendant had then prepared and, by misrepresenting the writing's contents, induced cross-complainants to sign a written agreement under which cross-complainants were obliged to purchase the property themselves. Cross-complainants sought reformation of the written contract to reflect the terms of the oral agreement. ( Cohn, supra, 214 Cal. at pp. 622-624.) This court held the alleged facts sufficient to warrant a reformation of the written contract, despite cross-complainants' admitted failure to read the written agreement before signing it. ( Id. at p. 626.) We noted [t]here has always been a sharp struggle in the courts between the desire to repress fraud upon the one hand, and on the other to discourage negligence and the opportunity and invitation to commit perjury. ( Id. at p. 627.) We concluded that where the failure to familiarize one's self with the contents of a written contract prior to its execution is traceable solely to carelessness or negligence, reformation as a rule should be denied; but that where such failure, and perhaps negligence, is induced, as alleged and admitted by the demurrer in this case, by the false representations and fraud of the other party to the contract that its provisions are different from those set out, the courts, even in the absence of a fiduciary or confidential relationship between the parties, should reform, and in most cases have reformed, the instrument so as to cause it to speak the true agreement of the parties. ( Ibid., italics added.) Thus, in Cohn, this court allowed equitable relief for fraud, through reformation of the written contract, despite a party's failure to read the writing. We did not hold a party who had reasonable opportunity to learn the terms of a contract before executing it but failed to do so, could, because of another party's misrepresentations, obtain a judgment the contract was completely void for lack of assent. Van Meter involved a subcontractor's negligent failure to ascertain that the area of land to be cleared was greater than represented by the general contractor. As in Cohn, the plaintiff sought reformation of the contract rather than a declaration it had never been entered into. ( Van Meter, supra, 46 Cal.2d at pp. 590, 593.) This court held the subcontractor's negligence did not bar it from obtaining relief. We noted that since the general contractor had believed true its statements regarding the area to be cleared, the contract might be reformable or rescindable under a theory of mutual mistake. ( Id. at p. 594.) In addition, we relied on the principle that a defendant who had misrepresented the facts should not generally be heard, in an action for equitable relief, to assert the plaintiff's reliance on his misrepresentations was negligent, at least in the absence of facts making the plaintiff's conduct preposterous or irrational. ( Id. at p. 595.) Van Meter, like Cohn, thus concerns only the propriety of equitable relief, and does not speak to the facts necessary to show a party's apparent assent is ineffective because of fraud in the execution of the contract. Witkin also cites a section of the Restatement as treating the same subject, i.e., negligence of the defrauded party. (1 Witkin, Summary of Cal. Law, supra, Contracts, § 407, p. 367.) Notably, however, the section cited is section 172, which deals only with fraud as grounds for avoidance or reformation of a contract (Rest.2d Contracts, § 172 & com. a, p. 469), rather than section 163, which, as discussed earlier, concerns fraud negating assent to a contract and thereby rendering it void. Section 172 provides that a defrauded party's fault in not knowing or discovering the facts before making the contract does not make his reliance unjustified unless it amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing. Comment a to the section explains it as an elaboration of the rule that [t]he recipient's reliance on the misrepresentation must be justified in order to entitle him to avoidance (§ 164)[ [11] ] or reformation (§ 166). (Rest.2d Contracts, § 172, com. a, p. 469.) When the defrauded party seeks such equitable relief, relief will not be barred by the mere fact that he could, by the exercise of reasonable care, have avoided the mistake. ( Ibid. ) As the comment further explains, however, such negligence does bar the defrauded party from claiming the contract is void for lack of assent: However, the recipient's fault will prevent application of the rule stated in § 163, under which a misapprehension as to the very nature of a proposed contract makes his apparent manifestation of assent ineffective. That rule applies only if he has neither knowledge nor reasonable opportunity to obtain knowledge of the character or essential terms of the proposed contract. ( Ibid. ) The same contrast between the standards for equitable relief and a finding of voidness is made in comment b to section 163. (Rest.2d Contracts, § 163, com. b, p. 444; see also id., § 164, com. a, p. 445.) (9) We therefore conclude that, whatever validity the rule stated in Lynch, Strotz and Witkin may have when the plaintiff seeks equitable relief for fraud in the inducement of a contract, and whatever the exact parameters of that rule might be, the rule is not a correct statement of the test to be applied when the plaintiff seeks a judicial determination the contract is void for fraud in the execution. In the latter case, California law, like the Restatement, requires that the plaintiff, in failing to acquaint himself or herself with the contents of a written agreement before signing it, not have acted in an objectively unreasonable manner. One party's misrepresentations as to the nature or character of the writing do not negate the other party's apparent manifestation of assent, if the second party had reasonable opportunity to know of the character or essential terms of the proposed contract. (Rest.2d Contracts, § 163, p. 443.) If a party, with such reasonable opportunity, fails to learn the nature of the document he or she signs, such negligence precludes a finding the contract is void for fraud in the execution. ( C.I.T. Corporation v. Panac, supra, 25 Cal.2d at p. 549.) (8b) It follows that one party's unreasonable reliance on the other's misrepresentations, resulting in a failure to read a written agreement before signing it, is an insufficient basis, under the doctrine of fraud in the execution, for permitting that party to avoid an arbitration agreement contained in the contract. Whether a fraud claim that is insufficient as a defense to an arbitration demand may, if proven, nonetheless form the basis for equitable or other relief in the arbitral forum, is a separate issue, with which we have no concern in this case.