Wallace v. Bock, No. S05G1101.

• Decision Date: 11 October 2005
• Docket Number: No. S05G1101.
• Citation: 620 S.E.2d 820,279 Ga. 744
• Parties: WALLACE et al. v. BOCK et al.
• Court: Georgia Supreme Court

279 Ga. 744

620 S.E.2d 820

WALLACE et al. v. BOCK et al.

No. S05G1101.

Supreme Court of Georgia.

October 11, 2005.

Wayne Stephen Tartline, Douglas J. Davis, Belli, Weil, Grozbean & Davis, LLP, Atlanta, Kyle Gregory Anez Wallace, Harrison, for Appellant.

Ted Marcus, Atlanta, for Appellee.

CARLEY, Justice.

On July 29, 1994, John and Patricia Ann Wallace (Appellants) entered into a contract to buy a new house from Bock Homes. The closing was postponed twice because the house was not complete. At the rescheduled closing on October 3, Appellants noted that work still remained to be done. The closing attorney prepared an escrow agreement which provided that $10,000 would be held until October 14, 1994, by which time the escrow agent "must be tendered" a "clear final inspection." All parties signed the agreement, and the sale of the property closed on October 3. Work on the house was not finished by October 14. However, Appellants later learned that the escrow funds were released to Bock Homes without their knowledge or consent. They demanded completion of the work, but it was never finished.

Six years and a day after the closing, Appellants brought suit against Bock Homes and associated entities, alleging breach of the purchase agreement, breach of the escrow agreement, and fraud. The trial court granted summary judgment in favor of Bock Homes and the other defendants and, on appeal, the Court of Appeals affirmed. Wallace v. Bock, 271 Ga.App. 833, 611 S.E.2d 62 (2005). With regard to the escrow agreement, the Court of Appeals agreed with the trial court's conclusion that "Bock Homes had nothing left to perform as to that agreement after it placed into escrow the initial funds that were the subject of the agreement, and thus could not breach it as a matter of law. [Cit.]" (Emphasis omitted.) Wallace v. Bock, supra at 835(1), 611 S.E.2d 62. As for Appellants' claim for breach of the original purchase agreement, the Court of Appeals held that,

where the parties execute two successive agreements embodying completed negotiations "on the same subject," the doctrine of merger applies, and the second agreement supercedes the first. [Cits.] Here, the purchase agreement specified that only Bock Homes's obligation to complete the house would survive the closing — precisely the subject of the separate escrow agreement executed there. Thus [Appellants'] claim for breach of the purchase agreement based on Bock Homes's failure to complete its work merges into their claim under the escrow agreement. [Cit.] As explained in Division 1, [Appellants'] claim under the escrow agreement fails as a matter of law. As a result, their merged action under the purchase agreement must also fail.

Wallace v. Bock, supra at 836(2), 611 S.E.2d 62.

This Court granted Appellants' petition for a writ of certiorari, in order to address the Court of Appeals' reliance on the doctrine of contractual merger in Division 2 of its opinion.

1. "`The rational basis for the merger rule is that where parties enter into a final contract all prior negotiations, understandings, and agreements "on the same subject" are merged into the final contract, and are accordingly extinguished.' [Cits.]" (Emphasis omitted.) Health Service Centers v. Boddy, 257 Ga. 378, 380(2), 359 S.E.2d 659 (1987) (quoting Holmes v. Worthey, 159 Ga.App. 262, 267, 282 S.E.2d 919 (1981)). Although that is the general rationale, the merger doctrine has application in a variety of contexts. For example, insofar as antecedent oral negotiations, understandings and agreements are concerned, the principle of merger is effectuated by the parol evidence rule. "`Having reduced their contract to writing, all prior oral negotiations and agreements pertaining to the same subject-matter are merged into the writing and superseded by the writing. [Cit.]'" Albany Fed. S. & L. Assn. v. Henderson, 198 Ga. 116, 143(6), 31 S.E.2d 20 (1944). See also OCGA § 13-2-2(1).

This case, however, concerns the connection between the original sales contract and the subsequent escrow agreement, which are two separate and distinct written contracts entered into by the same parties, but at different times. In that context, applicability of the principal of contractual merger requires a showing of more than a similarity of subject matter. "`An existing contract is superseded and discharged whenever the parties subsequently enter upon a valid and inconsistent agreement completely covering the subject-matter embraced by the original contract ....' [Cit.]" (Emphasis supplied.) Hennessy v. Woodruff, 210 Ga. 742, 744(1), 82 S.E.2d 859 (1954). See also Arnold v. Arnold, 227 Ga.App. 152, 154(1), 489 S.E.2d 65 (1997). Such a "substituted contract discharges the original duty and [a] breach of the substituted contract by the obligor does not give the obligee a right to enforce the original duty." Restatement, Second, Contracts, § 279(2), p. 375 (1981). Thus, the principle of merger would extinguish Appellants' right to enforce Bock Homes' contractual obligations under the initial purchase agreement only if the subsequent escrow agreement was both inconsistent with that earlier contract and completely covered the same subject matter.

As the Court of Appeals noted, the subject matter of the purchase agreement included Bock Homes' obligation to complete the construction, as well as to convey title to the real property. See Holmes v. Worthey, supra (contractual obligation to build a house is not merged into or extinguished by a subsequent deed conveying title to the real property). The escrow agreement does not cover the entirety of the subject matter addressed in the purchase contract, since it deals only with the construction of the house and not the conveyance of title to the property. Moreover, the escrow agreement is not inconsistent with the purchase agreement in that regard. To the contrary, the escrow agreement reaffirmed the underlying obligation to complete the house in accordance with the purchase contract, and merely set forth an alternative procedure by which Bock Homes was to be paid the balance of the contemplated payment for its satisfaction of that obligation. Thus, the escrow agreement is not a substituted contract which relieved Bock Homes of its responsibility to finish the house. It was simply a modification of the original contract, whereby Bock Homes would no longer be entitled to full payment at the closing on October 3, but would, instead, be authorized to receive it by October 14 if the house was completed by that date. See Thomas v. Garrett, 265 Ga. 395, 396(1), 456 S.E.2d 573 (1995) (holding that the "modification of a contract may be accomplished by a subsequent mutual agreement of all the parties thereto"). Therefore, the Court of Appeals erred in relying on the merger doctrine to hold that Appellants' claim for breach of the purchase agreement was merged into and extinguished by the subsequent escrow agreement.

2. The Court of Appeals relied upon the merger doctrine, but the trial court granted summary judgment on the ground that Appellants' claim for breach of the purchase contract was time-barred. It held that

the closing was conditioned upon issuance of a certificate of occupancy. Therefore, the house was substantially completed as of October 3, 1994.... Because the present action was filed more than six years after substantial completion, [Appellants'] claim for breach of the sales contract is barred.

Bock Homes urges that, if the Court of Appeals erred in relying on the merger doctrine, the grant of summary judgment was correct for the reason given by the trial court.

"[W]hen the...