Zell v. American Seating Co.
138 F.2d 641 (1943)
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Rule of Law:
The parol evidence rule does not apply when parties agree that a written contract is a sham and not intended to be their actual, legally binding agreement; extrinsic evidence is admissible to prove that the writing was not intended to be operative.
Facts:
- Zell offered in a letter to procure defense manufacturing contracts for American Seating Co. in exchange for a $1,000 monthly payment and a commission of 3% to 8% of the contracts' value if successful.
- Zell and the President of American Seating Co. orally agreed to the terms set forth in Zell's letter.
- Contemporaneously with the oral agreement, the parties executed a written instrument stating that the $1,000 per month would be 'full compensation' and any bonus would be discretionary.
- At the time of execution, the parties orally agreed the written instrument was a deliberately erroneous sham, created solely to avoid potential criticism of contingent-fee war contracts, and that their prior oral agreement remained their actual contract.
- Through Zell's efforts, American Seating Co. procured contracts worth $5,950,000.
- American Seating Co. paid Zell $1,000 per month but refused to pay the commission as specified in the oral agreement.
Procedural Posture:
- Zell, the plaintiff, filed an action against American Seating Co., the defendant, in the U.S. District Court (trial court).
- The defendant moved for summary judgment.
- The trial court granted the defendant's motion for summary judgment and dismissed the plaintiff's action.
- The plaintiff, Zell, appealed the trial court's judgment to the U.S. Court of Appeals for the Second Circuit.
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Issue:
Does the parol evidence rule bar admission of evidence of a prior oral agreement when the parties contemporaneously agree that a subsequent, integrated written contract is a sham document not intended to reflect their true agreement?
Opinions:
Majority - Frank, Circuit Judge.
No. The parol evidence rule does not bar extrinsic evidence showing that a facially complete written instrument was intended by the parties to be a mere sham and not their real, legally operative agreement. The court, applying Michigan law, determined that a writing does not gain a 'dominating position' under the parol evidence rule if extrinsic evidence proves the parties never intended it to be an exclusive memorial of their agreement. Citing Michigan precedents like Woodard v. Walker, the court noted that courts will enforce a prior oral agreement over a subsequent sham writing designed to deceive third parties, so long as the purpose is not fraudulent or illegal. Judge Frank also launched a broader critique of the parol evidence rule, arguing its purported benefits of promoting business stability and preventing perjury are largely illusory and that its main purpose is an outdated distrust of juries. The court concluded that since the parties here mutually intended the writing to be a misleading statement of their real agreement, the rule is inapplicable.
Analysis:
This case establishes a significant precedent for the 'sham exception' to the parol evidence rule, prioritizing the parties' subjective intent over the objective text of a document when there is proof the document was never meant to be legally effective. Judge Frank's opinion is notable for its extensive critique of the formalism of the parol evidence rule, arguing it often causes injustice by excluding evidence of the parties' true agreement. This decision encourages courts to look beyond the four corners of a contract when there are credible allegations that the writing is a fiction, thereby weakening a rigid application of the rule and impacting how future contract disputes involving integrated writings are litigated.
