Environmental Systems, Inc. v. Rexham Corp.

• Decision Date: 10 September 1993
• Citation: 624 So.2d 1379
• Parties: ENVIRONMENTAL SYSTEMS, INC. v. REXHAM CORPORATION. 1911813.
• Court: Alabama Supreme Court

Page 1379

624 So.2d 1379

ENVIRONMENTAL SYSTEMS, INC. v. REXHAM CORPORATION.

1911813.

Supreme Court of Alabama.

Sept. 10, 1993.

David O. Upshaw of Schoel, Ogle, Benton and Centeno, Birmingham, for appellant.

L. Tennent Lee III of Burr & Forman, Huntsville, for appellee.

HORNSBY, Chief Justice.

This case involves a dispute arising out of the sale of assets and properties of the Fredericksburg Technology Center ("FTC"), ¹ by Rexham Corporation and RADG, Inc., ² to Environmental Systems, Inc. ("ESI"). Rexham sued ESI, alleging that ESI had breached the contract by failing to pay the rent, utilities, and maintenance on the FTC, which liabilities Rexham contends ESI assumed pursuant to the purchase agreement. ESI filed a counterclaim, alleging that Rexham had fraudulently induced it to enter into the purchase agreement based on false representations concerning the status and condition of the FTC. ESI sought to rescind the contract and also sought damages for fraud. ³

The trial court entered a partial summary judgment in favor of Rexham on ESI's claims of fraud and misrepresentation alleging that Rexham had falsely represented the probability of acquiring, and the value of, certain contract rights. The trial court certified the partial summary judgment as final pursuant to Rule 54(b), Ala.R.Civ.P. ESI appeals, arguing that the trial court improperly excluded extrinsic evidence of the alleged representations on the basis of the parol evidence rule and the existence of an integration, or merger, clause in the purchase agreement.

The facts giving rise to this action are not disputed. ESI executed the purchase agreement with Rexham and RADG, Inc., on November 13, 1988. The parties had negotiated this contract for approximately 8 months before executing it. The purchase agreement provided for ESI to pay $175,000 and to assume certain liabilities of RADG, Inc., and Rexham (primarily a lease on the building in which the FTC was located). In exchange, RADG, Inc., and Rexham conveyed all of their right, title, and interest in the properties and assets of the FTC. Those assets included both tangible assets, including items of equipment, furniture, and computer software, as well as intangible assets, consisting of proposals in preparation and/or under negotiation and research, development, design, and engineering of sophisticated military and commercial technology.

ESI's claims regarding the tangible assets are not at issue in this appeal. ⁴ Regarding the intangible assets, ESI argues that employees of Rexham and FTC misrepresented the value of those assets and the probability of acquiring contract rights on them. ESI presented evidence that Rexham and FTC employees made a presentation to ESI's representatives as to the capabilities of the persons at the FTC and of the technologies being developed there. ESI also presented evidence that, during that presentation, employees of Rexham and FTC gave ESI a packet of false and misleading information that included written estimates of the values, both current and one-year sales value, of products that had been developed and products that could be developed at the FTC. In addition, ESI presented evidence that the Rexham employees misrepresented estimates of the probabilities of the FTC's receiving contracts for sales of its technologies.

ESI argues that the trial court improperly entered a summary judgment on its fraud claims on the basis of an integration, or merger, clause in the purchase agreement and the operation of the parol evidence rule. The merger clause in the purchase agreement reads as follows:

"4.07 Entire Agreement. This Agreement, including the exhibits hereto and the documents, schedules, certificates and instruments referred to herein, embody the entire agreement and understanding of the parties hereto in respect of the transactions contemplated by this agreement. There are no restrictions, promises, representations, warranties, covenants or undertakings, other than those expressly set forth or referred to herein. This agreement supersedes all prior agreements and understandings between the parties with respect to such transaction."

The trial court's judgment is based on the existence of that merger clause and the application of the parol evidence rule:

"[T]he court is of the opinion that because of the provisions of paragraph 4.07 of the contract between the parties, Environmental Systems, Inc. may not recover for any misrepresentation made by Rexham Corporation or its agents concerning the probability of acquiring and the value of certain contract rights. The court is of the opinion that there is no dispute as to any material fact and that the plaintiff [Rexham] is entitled to judgment as a matter of law on [its] motion for summary judgment."

Accordingly, we address only the issue of whether the trial court properly applied the parol evidence rule to exclude ESI's evidence concerning its fraud claim.

"In reviewing the disposition of a motion for summary judgment, we utilize the same standard as the trial court in determining whether the evidence before [it] made out a genuine issue of material fact" and whether the movant was "entitled to a judgment as a matter of law." Bussey v. John Deere Co., 531 So.2d 860, 862 (Ala.1988); Rule 56(c), A.R.Civ.P. When the movant makes a prima facie showing that there is no genuine issue of material fact, the burden shifts to the nonmovant to present substantial evidence creating such an issue. Bass v. SouthTrust Bank of Baldwin County, 538 So.2d 794, 797-98 (Ala.1989). Evidence is "substantial" if it is of "such weight and quality that fair-minded persons in the exercise of impartial judgment can reasonably infer the existence of the fact sought to be proved." West v. Founders Life Assurance Co. of Florida, 547 So.2d 870, 871 (Ala.1989).

Our review is further subject to the caveat that this Court must review the record in a light most favorable to the nonmovant and must resolve all reasonable doubts against the movant. Hanners v. Balfour Guthrie, Inc., 564 So.2d 412, 413 (Ala.1990).

ESI argues that neither the integration clause nor the parol evidence rule operates to preclude it, as a matter of law, from introducing extrinsic evidence of fraud in the inducement as to the purchase agreement. We agree.

I. PAROL EVIDENCE RULE

The parol evidence rule provides that, absent some evidence of fraud, mistake, or illegality, a party to an unambiguous written contract cannot offer parol, or extrinsic, evidence of prior or contemporaneous oral agreements to change, alter, or contradict the terms of the contract. Bussey v. John Deere Co., 531 So.2d 860, 862 (Ala.1988); Colafrancesco v. Crown Pontiac-GMC, Inc., 485 So.2d 1131, 1132-33 (Ala.1986). Accordingly, one who seeks, in a breach of contract action, to enforce an oral representation or promise relating to the subject matter of the contract cannot succeed, because of the parol evidence rule. See Ramsay Health Care, Inc. v. Follmer, 560 So.2d 746, 748 (Ala.1990).

This action, however, is not a contract action. ESI does not seek to enforce an asserted right at variance with the terms of the contract, in which case the evidence would be inadmissible, but ESI seeks to avoid and defeat the contract on account of fraud, and to recover damages for fraud, independently of the contract; in other words, the gravamen of ESI's action is the fraud, not the contract itself.

This Court has consistently held that the parol evidence rule has no application in an action alleging fraud. See, e.g., Downs v. Wallace, 622 So.2d 337 (1993); Harris v. M & S Toyota, Inc., 575 So.2d 74, 77 (Ala.1991); Dixon v. SouthTrust Bank of Dothan, N.A., 574 So.2d 706, 708-09 (Ala.1990); Hall v. Integon Life Ins. Co., 454 So.2d 1338, 1343 (Ala.1984); Brenard Mfg. Co. v. Pearson, 213 Ala. 675, 676, 106 So. 171, 172 (1925); Nelson v. Wood, 62 Ala. 175, 177 (1878); Thweatt v. McLeod, 56 Ala. 375, 377 (1876); Kennedy's Heirs v. Kennedy's Heirs, 2 Ala. 571 (1841). See also Ala.Code 1975, § 12-21-33. Accordingly, the parol evidence rule does not apply to ESI's claims of fraud.

In Dixon v. SouthTrust Bank of Dothan, N.A., 574 So.2d at 708, this Court noted the distinction between application of the parol evidence rule in contract actions and its applications in tort actions:

"Under Alabama law, an action alleging fraud in the inducement is an action in tort, and in such a case the parol evidence rule does not apply. In Ramsay Health Care, Inc. v. Follmer, 560 So.2d 746, 748 (Ala.1990), this Court stated that in Alabama the parol evidence rule applies to actions in contract and not actions in tort, and that parol evidence is admissible to show that a written agreement was procured by fraud. Id. at 748. [citations omitted].

"We have long made this distinction between tort and contract actions."

(Emphasis supplied.)

Similarly, in Ramsay Health Care, Inc. v. Follmer, 560 So.2d 746, 748 (Ala.1990), this Court held that "[p]arol evidence is ordinarily admissible to show that a written agreement was procured by fraud." This principle has long been the settled law of this state. In Alabama Machinery & Supply Co. v. Caffey, 213 Ala. 260, 262, 104 So. 509, 511 (1925), this Court held as follows:

"A stipulation in the written contract that there are no verbal understandings not incorporated herein does not estop the party to set up fraud in verbal misrepresentations inducing the contract as a whole. The law does not countenance a contract against the consequences of fraud."

This Court has recently reaffirmed this principle in Downs v. Wallace, supra, noting: "As a general proposition, the parol evidence rule applies to contract actions, not [to] actions in tort. Parol evidence is ordinarily admissible to show that a written agreement was procured by fraud." 622 So.2d at 340. The New York Supreme Court Appellate Division has stated the rule as follows:

"A contract, the making of which was induced by deceitful...