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Does the Parol Evidence Rule Apply to Statements Which Are the Basis for a Claim or Defense of Fraud?

In Tennessee breach of contract cases and fraud and misrepresentation cases, it is quite possible for the parol evidence rule to come into play.  (The basics of the parol evidence rule are explained in a previous blog.) It is also quite possible, in such cases, for the parol evidence rule to be outcome determinative.

A review of the relevant Tennessee case law reveals that Tennessee courts have been inconsistent in applying or not applying the parol evidence rule in cases where allegations of fraud are made, either as a defense, as a claim, or as a counterclaim.

If you want to understand the rules regarding the application of the parol evidence rule in cases where allegations of fraud (now called misrepresentation) are made, then digest the following five cases.  In the first three cases, a party relied on a statement made before the contract was signed (parol evidence) to establish a misrepresentation; the other party claimed that such statement was inadmissible under the parol evidence rule; and, the court ruled that the evidence of the statement was not barred by the parol evidence rule.  The same things happened in the second two cases except, in those cases, the courts held that evidence of the misrepresentations was barred by the parol evidence rule.

CASES ALLOWING PAROL EVIDENCE TO PROVE A MISREPRESENTATION

Samuel v. King, 14 S.W. 963 (Tenn. 1929):  The buyers of land alleged that the seller told them that talc would be found on the land in “profitable quantities.”  Apparently, the deed to the buyers did not contain this assurance.  The buyers filed suit for a rescission of the contract and for money damages.  Their claim was based on the alleged misrepresentation.

The trial court held that the parol evidence rule barred the admission of the alleged statement made by the seller.  The Supreme Court of Tennessee reversed.  It held that the statement was an “inducing misrepresentation” and, therefore, admissible.

Haynes v. Cumberland Builders, Inc., 546 S.W.2d 228 (Tenn. Ct. App. 1976): The plaintiffs purchased a house and lot from the defendant seller.  The plaintiffs claimed that, prior to the signing of the contract, the seller told them that the boundary line for the property ran in a way that the entire driveway was on the plaintiffs’ property.  It turned out that the boundary line ran down the middle of the driveway.

The plaintiffs filed a lawsuit to reform the contract and for damages for misrepresentation.  The trial court admitted evidence of the alleged statement of the seller over the seller’s objection that the statement was barred by the parol evidence rule.  The Court of Appeals affirmed the trial court. Its rationale was that the case “sounded in tort” and the parol evidence rule should have no application to a case involving a misrepresentation which induced the execution of a written contract.

Stamp v. Honest Abe Log Homes, Inc., 804 S.W.2d 455 (Tenn. Ct. App. 1991):  Buyers wanted to buy a log home kit, but wanted a “lock and key” job.  Honest Abe told them that it only sold kits, but recommended a contractor.  Honest Abe recommended Smith as an experienced and knowledgeable contractor, but knew that he was in the music business and had no knowledge of any background which he had in building homes.

Smith royally botched the building of the log home.  The buyers filed a fraud case against Honest Abe.  At trial, Honest Abe relied on a disclaimer in the written contract which provided that Honest Abe would have no liability “in connection with the construction of the home.”  One of the buyers testified at trial that Honest Abe had told her that the disclaimer would not apply.  The jury believed the buyer and found against Honest Abe.

On appeal, the Court of Appeals held that it was not error to admit buyer’s testimony.  It reasoned that the parol evidence rule had no application because the case was “an action in tort” and did not require an interpretation of the contract.

 

CASES NOT ALLOWING PAROL EVIDENCE TO PROVE A MISREPRESENTATION

Farmers & Merchants Bank v. Petty, 664 S.W.2d 77 (Tenn. Ct. App. 1983):  The bank loaned the borrower $35,000.  The borrower signed a promissory note. The borrower did not pay, and the bank filed a breach of contract case.

The borrower filed a counterclaim for fraud. At trial, the borrower testified that the bank’s president told him that he would never have to pay the note.  The jury found for the borrower and awarded him $5,000.  The bank was awarded nothing.

On appeal, the bank argued that the parol evidence rule should have prevented the admission of the borrower’s testimony about what the bank’s president allegedly told him.  The Court of Appeals agreed.  Such testimony, it stated “would be a clear instance of parol evidence offered to contradict the sole obligation of a written contract.”

United Nat.’l Real Estate, Inc. v. C.F. Thomson, 1992 WL 69642 (Tenn. Ct. App. 1992)(unpublished):  Seller wanted to sell his company.  Seller and agent signed a Listing Agreement which was a form contract which had been modified.  The Listing Agreement explained the difference between an “exclusive right to sell” listing and an “exclusive agency” listing.  An exclusive right to sell listing entitled the agent to a commission even if the seller himself found the buyer.  An exclusive agency listing meant that the agent was not entitled to a commission if the seller found the buyer.  The Listing Agreement stated that it was an exclusive right to sell listing.  The Listing Agreement also contained a clause which provided that: “no conditions or agreements exist other than those contained herein.”

Seller sold his company to Mr. Carroll, and did not pay any commission to agent.  Agent filed a breach of contract case.  Seller testified at trial that, before the Listing Agreement was signed, he and the agent had agreed that agent would not be entitled to a commission if the sale was to Carroll.

The trial judge believed the seller and dismissed the agent’s case.  The trial judge found that the fact that a sale to Carroll had not been exempted on the Listing Agreement had to be due to fraud or mistake.

The Court of Appeals reversed, holding that the parol evidence rule barred seller’s testimony.  It based its decision on the fact that the alleged agreement to exempt a sale to Carroll (so that no commission was owed from a sale to Carroll) clearly contradicted the parties’ written contract.  Significantly, the court noted that its decision might have been different if the alleged fraudulent inducement “pertained to matters not addressed in the contract.”

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If you compare the Honest Abe case (where the court allowed parol evidence to prove fraud) with the two cases where the courts did not allow parol evidence to prove fraud, you can see a completely different application of the parol evidence rule.  The parol evidence in the Honest Abe case contradicted the terms of the written contract in that case just as much as it did in the two cases where the courts held that the parol evidence of the misrepresentations was not admissible.