Square Peg, Round Hole: Preventing the “Tortification” of a Contract Claim

The vast majority of legal practitioners are familiar with the parol evidence rule, which prevents a party to a written contract from contradicting, or supplementing, the terms of a contract by introduction of evidence outside the four-corners of the document. An example of this extrinsic (or outside) evidence is found in oral or written representations made before the final contract is executed. To prevent the introduction of extrinsic evidence, parties frequently negotiate “integration” clauses into a contract; that is, a clause which defines the written contract as the entire agreement between the parties, superseding all prior negotiations and agreements. Thus, where a contract contains an integration clause, the parol evidence rule may be successfully invoked, and the party challenging the contract barred from introducing extrinsic evidence.

But, what happens when the party challenging the contract boot-straps a fraud claim to a breach of contract claim? Does the parol evidence rule apply to bar extrinsic evidence? The answer is “NO,” as the parol evidence rule is a principle of contract law, with no application to tort based claims. Indeed, many perceptive attorneys have recognized this loop-hole, and have circumvented the parol evidence rule by crafting fraud based claims out of facts that support nothing more than a garden variety breach of contract claim.  These attorneys are the flag bearers of what Judge Kozinski so eloquently called the “tortification of contract law” in Oki America, Inc. v. Microtech Int’l, Inc., 872 F.2d 312 (9th Cir.1989).

So, is the sanctity of a contract lost, and extrinsic evidence introduced, whenever the party challenging the contract alleges a fraud occurred in the negotiations leading up to the contract? Not necessarily, according to Judge Richard Posner in a recent Seventh Circuit Court of Appeals decision in Extra Equipamentos E Exportacao Ltda. v. Case Corp., 541 F.3d 719 (7th Cir. 2008). In Equipamentos, the court addressed the enforceability of a “big boy” clause, which in legal parlance is referred to as a “no-reliance clause.” A typical no-reliance clause states that the parties have not relied upon any oral representations leading up to the execution of the contract. Reliance is, of course, a critical element of any fraud claim, so the inclusion of a no-reliance clause may defeat such a claim. The plaintiff in Equipamentos sued the defendant for fraud, maintaining that he signed a release based on false statements and promises made by the defendant. In response, the defendant argued that the no-reliance clause precluded any such fraud claim. In holding that the no-reliance clause defeated the plaintiff’s fraud claim, the court cautioned that big boy clauses may not be enforceable if one of the contracting parties is not actually a “big boy,” like an unsophisticated person or a party not represented by counsel. In such a scenario, a court will conduct an inquiry into the circumstances surrounding the negotiations to ensure that the unsophisticated party understood what  rights he or she was waiving in the no-reliance clause.

The lesson of Equipamentos is clear: it behooves legal practitioners – and business owners – to consider “big boy” clauses in their contracts to head off fraud claims where the actual dispute involves nothing more than a breach of contract. If you are a business owner interested in learning more about no-reliance clauses, in the transactional or litigation realm, please feel free to contact us to speak with one of our attorneys at Acumen Law Group.

Authored by Bardia Fard, Esq.