Sherrodd, Inc. v. Morrison-Knudsen Co.
815 P.2d 1135 (1991)
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Rule of Law:
The parol evidence rule bars the admission of evidence of prior oral misrepresentations, even if fraudulent, when those representations directly contradict the express terms of a fully integrated written contract.
Facts:
- Sherrodd, Inc. (Sherrodd), a construction subcontractor, was preparing a bid for earthwork on a housing project.
- A representative of the general contractor, Morrison-Knudsen, allegedly told Sherrodd's officer that the project involved 25,000 cubic yards of excavation.
- Relying on this representation, Sherrodd submitted a bid for $97,500 to the primary subcontractor, COP Construction (COP).
- After beginning work but before signing a written contract, Sherrodd discovered that the quantity of earthwork was substantially greater than 25,000 cubic yards.
- Sherrodd alleges that a COP officer threatened to withhold payment for work already performed unless Sherrodd signed a written contract for a lump sum of $97,500.
- Sherrodd further alleges the COP officer verbally promised that a future deal would be arranged to pay Sherrodd more than the contract sum.
- Sherrodd signed the written contract, which stipulated a lump sum (LS) price of $97,500 and included a clause stating that the subcontractor had satisfied himself as to the quantity of materials and that the writing superseded all prior verbal agreements.
Procedural Posture:
- Sherrodd, Inc. filed a lawsuit in the District Court for the Thirteenth Judicial District, Yellowstone County, against COP Construction, Morrison-Knudsen, Schlekeway Construction, and Safeco Insurance Company.
- The lawsuit alleged claims of fraud, constructive fraud, and breach of the covenant of good faith and fair dealing.
- The defendants moved for summary judgment.
- The District Court granted the defendants' motion for summary judgment, ruling that the parol evidence rule barred Sherrodd from introducing evidence of the alleged oral misrepresentations.
- Sherrodd, Inc., as the appellant, appealed the summary judgment to the Supreme Court of Montana.
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Issue:
Does the parol evidence rule bar evidence of alleged prior oral agreements or misrepresentations that directly contradict the express terms of a written contract, even when a party alleges the written contract was induced by fraud?
Opinions:
Majority - Chief Justice Turnage
Yes. The parol evidence rule bars evidence of prior oral agreements that directly contradict the express terms of a written contract. The rule, codified in Montana statutes, supersedes all oral negotiations that precede or accompany the execution of a written instrument. Although there is a statutory exception for fraud, that exception does not apply where the alleged oral promise directly contradicts the terms of the express written contract. In this case, Sherrodd's claim of reliance on an oral representation of 25,000 cubic yards directly contradicts the written contract's terms, which specified a 'lump sum' price and included a merger clause where Sherrodd affirmed it had satisfied itself as to the quantity of work. Allowing such evidence would undermine the commercial stability that requires parties to be able to rely on the express terms of their written agreements.
Dissenting - Justice Trieweiler
No. The parol evidence rule should not bar evidence of fraud, even where the fraudulent statements contradict the terms of the subsequent written agreement. The majority's rigid application of precedent creates a grave injustice, allowing a party in a superior bargaining position to induce a contract through fraud and then use the resulting document as a shield against liability. Montana’s statutory exception for fraud does not contain the limitation that the fraudulent oral statement cannot contradict the writing. The facts, taken as true for this proceeding, show Sherrodd was subjected to economic duress and fraudulently induced to sign the contract, and the law should provide protection for subcontractors in such vulnerable positions rather than rewarding the fraudulent party.
Analysis:
This decision strictly construes the parol evidence rule, significantly limiting the application of its fraud exception in Montana. The court establishes that the fraud exception is unavailable when the alleged fraudulent statement is directly contradicted by a term in the final written agreement. This holding prioritizes the finality and stability of written commercial contracts, especially those with merger clauses, over protecting parties from alleged fraudulent inducement that is expressly negated by the contract's text. Consequently, future litigants will find it extremely difficult to introduce parol evidence of fraud if the written agreement they signed contains terms that are contrary to the alleged misrepresentations.
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