CONTRACTS:  Parol evidence rule;  Fraud
DATE RENDERED: 4/27/2007

The application of the parol evidence rule in a contract dispute alleging fraud and misrepresentation was the subject of this appeal.

Radioshack appeals a judgment confirming a jury verdict against it and in favor of the Appellees, Comsmart, Inc., and Michael Dean.  Radioshack contends that the trial court erred by allowing Comsmart and Dean to present evidence of oral statements made prior to the execution of the contract in support of their misrepresentation claim.

Radioshack also argues that it was entitled to a directed verdict or to a judgment notwithstanding the verdict because Comsmart and Dean failed to present clear and convincing evidence of fraud.

In affirming the verdict, the COA held that neither the parol evidence rule nor the merger and integration clauses in the contract precluded Comsmart and Dean from presenting evidence on their misrepresentation claim and that the jury’s verdict in favor of Comsmart and Dean was supported by substantial evidence.

Comsmart and Dean alleged that Radioshack’s representatives had made material misrepresentations about how well a previous Irvine store had done, the new store’s likely profitability, and the inventory which would be sent to the new store.

At the close of the evidence, the jury found that Radioshack had made false representations of a material fact and that Comsmart and Dean had reasonably relied on these misrepresentations. Consequently, the jury found for Comsmart and Dean on Radioshack’s claim to enforce the note.

Radioshack primarily argues that the merger and integration clauses in the contract preclude any claim of fraud in the inducement based upon misrepresentations made prior to the execution of the contract.

Radioshack’s heavy reliance upon Papa John’s International, Inc. v. Dynamic Pizza, Inc., 317 F. Supp. 2d 740 (W.D. Ky. 2004), in which the Federal District Court, applying Kentucky law, held that the presence of a merger and integration clause absolutely precludes a claim of fraud in the inducement based upon misrepresentations made prior to the execution of the contract was not found controlling as the COA noted that federal district court decision in Papa John’s cited no Kentucky authority to support this conclusion. In fact, the Kentucky authority is to the contrary.

Parol testimony is not admissible to vary the terms of a writing, and when the negotiations are completed by the execution of the contract, the transaction, so far as it rests on the contract, is merged in the writing. See, Bryant v. Troutman, 287 S.W.2d 918, 920 (Ky. 1956).

But false and fraudulent representations made by one of the parties to induce the other to enter into the contract are not merged in the contract. “It is a stern but just maxim of law that fraud vitiates everything into which it enters.” Veterans Service Club v. Sweeney, 252 S.W.2d 25, 27  (Ky. 1952).  Parol evidence is admissible to show that the making of the contract was procured by fraudulent representations. This does not vary the terms of the contract. 

The parol statements which are the basis for Comsmart’s and Dean’s action for fraud and misrepresentation are admissible as evidence in support of their cause of action. The parol evidence rule is not a procedural device but, rather, a substantive rule of law that prevents the introduction of oral statements into evidence to alter a written agreement, per force lending integrity to writings. The rule does not apply when there is an allegation of fraud in the inducement to a written agreement.

Where an individual is induced to enter into the contract in reliance upon false representations, the person may maintain an action for a rescission of the contract, or may affirm the contract and maintain an action for damages suffered on account of the fraud and deceit.  And since such a misrepresentation claim sounds in  tort rather than contract, the parol evidence rule does not apply. Hanson v. American National Bank & Trust Co., 865 S.W.2d 302, 307 (Ky. 1993),

Since the plaintiffs brought their counterclaim alleging that the contract was procured by fraud, the parol evidence was admissible to prove this claim notwithstanding the merger and integration clauses in the contracts, and the trial court properly admitted the evidence.

The relevancy of the statement was then addressed relative to fraud which requires six elements: (1) that the declarant made a material misrepresentation to the plaintiff, (2) that this misrepresentation was false, (3) that the declarant knew it was false or made it recklessly, (4) that the declarant induced the plaintiff to act upon the misrepresentation, (5) that the plaintiff relied upon the misrepresentation, and (6) that the misrepresentation caused injury to the plaintiff. United Parcel Service Co. v. Rickert, 996 S.W.2d 464, 468 (Ky. 1999).

For a declarant’s misrepresentation to be used as the basis for fraud, it must relate to an existing or past fact, and if the alleged misrepresentation relates to a future promise or an opinion of a future event, then it is not actionable.

It is well-established that a plaintiff seeking to prevail on a claim of fraud must establish, by clear and convincing evidence, Neither of these representations are actionable as fraud because Comsmart and Dean cannot prove that it reasonably relied on the representations. Harralson v. Monger, 206 S.W.3d 336, 341 (Ky. 2006).

Although the COA then concluded any promises or understandings concerning the type of inventory which Radioshack would send to Comsmart and Dean were specifically disclaimed by the franchise agreement and are therefore not actionable, it held that Comsmart and Dean presented sufficient evidence on their third and primary allegation of fraud to create a jury issue.

The jury could reasonably find that these misrepresentations were intentional or reckless, that Comsmart and Dean reasonably relied on the statements, and that they materially induced Comsmart and Dean to execute the franchise agreement, and Radioshack was not entitled to a directed verdict on the misrepresentation claim.  AFFIRMED.

Digested by Michael Stevens

Please note: I reserve the right to delete comments that are inappropriate, offensive or off-topic.

Leave a Reply

Your email address will not be published.