Tuesday, March 11, 2008

contracts - fraud - parol evidence - integration clause

Bray v. Dewese - ED Pa. - March 6, 2008


When plaintiff sued on a promissory note, defendant counterclaimed for fraudulent inducement and common law fraud concerning alleged misrepresentations about the financial health of a company in which defendant then bought shares.

The court held that the parol evidence rules bars admission of evidence in support of defendant's claim that plaintiff misrepresented or omitted certain facts during pre-contract discussions. The counterclaim did not contain any specific allegations about any facts that plaintiff allegedly misrepresented in the contract, which contained an integration clause stating that it was the entire agreement, and that there were no representations, warranties or covenants except as set forth in the agreement.

The court cited Dayhoff, Inc. v. H.J Heinz Co., 86 F.3d 1287, 1300 (3d Cir. 1996), and Toy v. Metropolitan Life Ins. Co., 928 A.2d 186, 206 (Pa. 2007), as setting forth the applicable rule in Pennsylvania that "the parol evidence rule bars consideration of prior representations concerning matters covered in a written contract, even those alleged to have been made fraudulently, unless the representations were fraudulently omitted from the contract." (emphasis in original). Defendant did not claim any such fraudulent omission. "Accordingly, since the Agreement contains an integration clause, Defendant may not offer evidence of Plaintiff's prior misrepresentations and omissions to prove his fraud counterclaims, and Plaintiff's motion to dismiss will be granted."

In n. 6, the court contrasts the Pennsylvania rule with the "general rule, adopted in most jurisdictions,...that fraud is an exception to the parol evidence rule. See 11 Williston on Contracts § 33:14 (4th ed.) (The parol evidence rule “permits the admission of facts that negate mutuality of assent, such as duress or fraud”); Parol-evidence rule; Right to show fraud in inducement or execution of written contract, 56 A.L.R. 13 (“It is a general rule, supported by many decisions, that as fraud vitiates any contract or transaction into which it enters, the doctrine that parol or extrinsic evidence is inadmissible to contradict, vary, or explain the terms of a written contract is inapplicable where the issue is whether the contract was procured by fraud.”). However, the Pennsylvania Supreme Court noted in Toy that 'while the fraud exception to the parol evidence rule potentially applies in two scenarios – fraud in the inducement, where a party alleges that he was induced into entering the agreement through the other’s fraud, and fraud in the execution, where a party alleges that he was mistaken as to the terms and the actual contents of the agreement he executed due to the other’s fraud – this Court has determined that in Pennsylvania, only fraud in the execution ... is excepted from the parol evidence rule’s operation.' Toy, 928 A.2d at 206. Compare, Mellon Bank Corp. v. First Union Real Estate, 951 F.2d 1399, 1408 (3d Cir. 1991), a pre-Toy case.