Opinion ID: 2382863
Heading Depth: 2
Heading Rank: 7

Heading: The Materiality of Shama's Alleged Misrepresentations.

Text: Hercules claims that it considered Shama's representations regarding its financial wherewithal so important that it made them a regular subject of discussion in the contract negotiations and based its agreement to the contract on its reliance on them. None of these assurances of financial soundness made it into the written contract, however, while an integration clause effectively saying that this is all there is was included. As Hercules complains and therefore alleges, Shama and Rippeteau offered the form contract to it on a take it or leave it basis. This court has held that evidence of negotiations conducted prior to the execution of a completely integrated contract is to be excluded because it is immaterial to a decision on the merits. 1010 Potomac Assocs., supra, 485 A.2d at 211. Moreover, we held in Luther Williams, Jr., Inc. v. Johnson, 229 A.2d 163, 165-66 (D.C. 1967), that if a judge concludes that a particular representation was superseded by the writing, he does not decide that the excluded negotiations did not take place, but merely that if they did take place they are nevertheless legally immaterial. (Emphasis in original; citations omitted). In applying the parol evidence rule, we have also held that, by definition, a completely integrated contract contains all the terms which the parties consider material and essential to the agreement. Ozerol, 545 A.2d at 641-42. This court has deemed it well established that such a contract must state all the promises of the parties with sufficient clarity and definiteness as to render the essential terms of the agreement clear without resort to parol testimony. Easter v. Kass-Berger, Inc., 121 A.2d 868, 870 (D.C.Mun.App.1956). [19] Accord, Educational Enterprises v. Greening, 265 A.2d 287, 289 (D.C.1970); Penick v. Frank E. Basil, Inc., 579 F.Supp. 160, 164 (D.D.C.1984). The parol evidence rule does not apply when a party to a contract alleges that parol representations were fraudulently made. Flippo, 531 A.2d at 269; Stamenich, 462 A.2d at 455; Giotis, 145 A.2d at 781; RESTATEMENT (SECOND) OF CONTRACTS § 214(d). Courts have recognized, however, that this fraud exception would swallow up the rule if representations made during negotiations, but not included in the contract as executed, could be characterized as fraud and then used to undo an otherwise complete agreement. There is authority for the proposition that, at least in the absence of a showing that a parol representation made during negotiations by a party to a completely integrated contract was omitted from the contract by fraud, mistake, or accident, see Bardwell v. The Willis Co., Inc., 375 Pa. 503, 506-507, 100 A.2d 102, 104 (1953), the opposing party is barred from relying on such a representation as material to its acceptance of the deal and from claiming that its reliance on it was reasonable. The United States Court of Appeals for this Circuit recently adopted this approach in One-O-One Enters. v. Caruso, 270 U.S.App.D.C. 251, 848 F.2d 1283 (1988). In that case, the parties had executed a contract for the sale of a chain of restaurants. The contract contained an integration clause stating that the written agreement superseded any and all previous understandings and agreements. Id. at 254, 848 F.2d at 1286. One-O-One claimed that, during the contract negotiations, Caruso had made fraudulent and material representations to induce One-O-One to sign, but the parties did not include these representations in the contract. In an opinion by Judge Ruth Ginsburg, the court, applying District of Columbia law relating to common law fraud, [20] held that One-O-One had not alleged a valid claim of fraudulent inducement: Were we to permit plaintiffs' use of the defendants' prior representations ... to defeat the clear words and purpose of the Final Agreement's integration clause, contracts would not be worth the paper on which they are written. Tonn v. Philco Corp., 241 A.2d 442, 445 (D.C. 1968) [quoting Upton v. Tribilcock, 91 U.S. 45, 50, 23 L.Ed. 203 (1875)]. On a matter of such large significance to the parties' bargain, silence in a final agreement containing an integration clause in the face of prior explicit representationsmust be deemed an abandonment or excision of those earlier representations.... Plaintiffs cannot overcome the written instrument here, and, particularly, the integration clause, by invoking the fraud-in-the-inducement exception to the parol evidence rule. The exception for a party who has been induced by a fraudulent misrepresentation to enter the contract, Giotis, [ supra, 145 A.2d at 781], must not be stretched or inflated in a way that would severely undermine the policy of the parol evidence rule, which is grounded in the inherent reliability of a writing as opposed to the memories of contracting parties. Tonn, [ supra, 241 A.2d at 445]. We need not belabor the point. We have here the case of a party with the capacity and opportunity to read a written contract, who has executed it, not under any emergency, and whose signature was not obtained by trick or artifice; such a party, if the parol evidence rule is to retain vitality, cannot later claim fraud in the inducement. Id. See also Tonn v. Philco Corp., 241 A.2d 442, 445 (D.C.1968) (plaintiff who received an oral offer containing certain terms followed by a written offer which did not mention these terms, and who signed the written offer containing an integration clause, was bound by the contract and could not claim fraudulent inducement); Jackvony v. RIHT Fin. Corp., 873 F.2d 411, 415-16 (1st Cir.1989); Robinson v. Cupples Container Co., 513 F.2d 1274, 1277-78 (9th Cir.1975) (when plaintiff asked defendant to include in the written agreement specific representations defendant had made during negotiations, and when defendant refused to do so, the representations were not material for the purposes of plaintiff's fraud claim). In Bardwell, supra, concededly a decision which has generated its fair share of controversy, [21] the Supreme Court of Pennsylvania was confronted with a commercial tenant's claim that the landlord's representative had made fraudulent oral representations regarding the leased property. The tenant contended that the alleged fraud took the case outside Pennsylvania's parol evidence rule. For reasons that seem to us to make some practical sense, the unanimous court would have none of it: There is not the slightest doubt that if plaintiffs had merely averred the falsity of the alleged oral representations, parol evidence thereof would have been inadmissible. Does the fact that plaintiffs further averred that these oral representations were fraudulently made without averring that they were fraudulently or by accident or mistake omitted from the subsequent complete written contract suffice to make the testimony admissible? The answer to this question is no; if it were otherwise the parol evidence rule would become a mockery, because all a party to the written contract would have to do to avoid, modify or nullify it would be to aver (and prove) that the false representations were fraudulently made. ... Fraudulent misrepresentations may be proved to modify or avoid a written contract if it is averred and proved that they were omitted from the (complete) written contract by fraud, accident or mistake. Id. 375 Pa. at 507, 100 A.2d at 104 (emphasis in original). See also Contractor Utility Sales Co. v. Certain-Teed Prods. Corp., 638 F.2d 1061, 1080-81 (7th Cir.1981); Nicolella v. Palmer, 432 Pa. 502, 505-509, 248 A.2d 20, 22-23 (1968). There is no evidence in the present case that assurances regarding Shama's financial condition were omitted from the agreement by fraud, accident, or mistake; rather, they were excluded because, as Hercules alleges and thus acknowledges, it was given a form contract and invited to take it or leave it. It is true that some courts are more permissive vis-a-vis such claims of fraud in the inducement, especially in cases brought pursuant to anti-fraud securities statutes. It has been held that, even when a contract contains a merger clause, a party to it may successfully base a fraudulent inducement claim on prior oral representations not included in the contract. See, e.g., Astor Chauffeured Limousine Co., supra note 17, 910 F.2d at 1546-47; Rowe v. Maremont Corp., 850 F.2d 1226, 1233-36 (7th Cir.1988). [22] Nevertheless, because One-O-One is an opinion of the federal court of appeals for this circuit, and because the relevant portion of the opinion applies District of Columbia contract law rather than federal securities law, we must give it respectful consideration. See Hornstein v. Barry, 560 A.2d 530, 536-37 n. 15 (D.C. 1989) (en banc) (following a decision by our federal colleagues across the street both on the basis of its reasoning and in the interest of harmony between court systems and uniformity of result in the same geographical area). We need not, however, decide whether we should follow cases like One-O-One and Bardwell in the generality of fraud in the inducement disputes. The present controversy presents circumstances in which the policies against circumventing the parol evidence rule are especially compelling. Hercules is seeking to avoid an arbitration clause. If a party to an arbitration agreement, like Shama here, must litigate extensively in order to avail itself of this simplified method of resolving disputes, the purposes of arbitration are substantially undermined. A strict application of the concept of materiality is therefore appropriate, lest arbitration be thwarted at the outset upon the mere cry of fraud in the inducement. Robert Lawrence Co., supra, 271 F.2d at 410. Accordingly, Hercules' invocation of fraud to force an evidentiary trial before arbitration can proceed should be judged against a very high standard. Under that standard, once Hercules signed its name to an instrument which did not contain the assurances which it says it considered critical, it must be precluded (at least in the absence of evidence that the representations were omitted from the agreement by fraud, mistake, or accident) from thereafter claiming that those representations were material in the sense required to support a claim of fraudulent inducement of the arbitration clause. Given the judicial favor accorded to agreements to arbitrate, we think that even those courts which would view One-O-One and similar cases as going too far on their facts might well be more exacting in evaluating the sufficiency of the complaint where, as here, the efficacy of a voluntary arbitration clause is imperiled. This is not a case in which a powerful party forced a helpless supplicant into submission. We have no reason to doubt that Hercules and Shama, like the parties in One-O-One, were sophisticated business institutions dealing with each other on a level playing field. In attempting to explain why it did not see to it that Shama's assurances were included in the contract, however, Hercules told the trial court that it was browbeaten into accepting what it characterizes as the one-sided terms of Shama's proposed contract, and that it was not accorded an opportunity to incorporate any of its desired changes into the form contract. The judge responded to this argument quite appropriately: I don't put [Hercules] Corporation, or any other contractor like [Hercules], in the same situation [as] I would a little old family with ten kids [whose] house just burned down, and [who] are looking for another house, and [whose] real estate agent says, Look, we have got [a house] here, but it [has] got some plaster falling, it [has] got this or that, but this is it, take it or leave it; they have got to have a roof over the head of those kids at night, so they take it. You know the contract is [one of] adhesion in [that its terms are] all in favor of the landlord. Here [Hercules] could have just said, Look, forget it, if I don't get this [in] ironclad writing ..., we are not going to sign the contract. ... I don't think Hercules was in such a limited bargaining position that it had to bow down, knuckle down, and sign this contract....[ [23] ] We agree with the judge's view that, in light of the commercial context in which these two corporations were dealing, Hercules and Shama are presumed to have been negotiating with each other from equal bargaining positions. Hercules' complaint contains no allegation to the contrary. As the trial court held in One-O-One Enters. v. Caruso, 668 F.Supp. 693, 698 (D.D.C.1987), the decision later affirmed by the Court of Appeals in One-O-One, supra, [a]fter eight months of vigorous negotiations, the parties reached a final agreement that was lengthy, detailed, and comprehensive. During these eight months many offers, promises, and representations were made, and several preliminary agreements were drafted. To avoid a misunderstanding and to make clear that the only understanding between the parties was that expressed in the Agreement, the parties agreed that the Agreement supersede[d] any and all previous understandings and agreements.... Therefore, when the representations were superseded by the Agreement there was no representation upon which plaintiffs could base a fraud claim. (Emphasis deleted). As in One-O-One, the parties in the present case, each concededly represented by competent counsel, engaged in arm's length negotiations before reaching agreement. Each side presumably had the opportunity to make a variety of representations, promises, and offers. The parties ended up with a contract which did not include the representations which Hercules now says Shama made. If Hercules considered these assurances important enough to induce it to agree to the contract (including the arbitration clause), it could have conditioned its agreement on the explicit inclusion of those representations in the contract. If Shama or Rippeteau refused to go along, Hercules could have walked away from the deal. Since Hercules did none of these things, but instead signed the contract and got the job, it is bound by the terms of the instrument to which it affixed its name, and cannot now be heard to complain that it was browbeaten or fraudulently induced into agreeing to arbitrate. Hercules concedes that it did not make the unequal bargaining position argument that the subcontractors in Moseley did. It contends, however, that this is not crucial to Hercules' right to a trial on the merits of Hercules' claim of fraud in the inducement of the arbitration clause. We cannot agree. In order to be entitled to an evidentiary hearing on its claim of fraudulent inducement, Hercules must plead facts capable of establishing each of the requisite elements of fraud, including that of materiality. Bennett, supra, 377 A.2d at 59-60. The lack of any allegation that Hercules and Shama were negotiating from unequal bargaining positions effectively disposes of Hercules' claim of materiality, and is therefore crucial to the question whether Hercules has a right to an evidentiary hearing. [24]