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Patton v. Mid-Continent Systems Inc.

decided: March 8, 1988.


Appeal from the United States District Court for the Northern District of Indiana, Hammond Division, No. H 81 371, Michael S. Kanne, Judge.

Cummings, Cudahy, and Posner, Circuit Judges.

Author: Posner

POSNER, Circuit Judge.

The defendant, Mid-Continent Systems, appeals from a damages judgment entered upon a verdict for the plaintiffs (James Patton and R.L. Hildebrand, and their corporations) in a diversity breach of contract action. The jury awarded Patton and his company $592,000 in compensatory damages, and Hildebrand and his company $186,000. The jury also awarded the plaintiffs $2,250,000 in punitive damages, but the judge reduced this award to $100,000. Mid-Continent argues that it was entitled to a directed verdict on liability, that there was error in the jury instructions, that the compensatory damages were excessive, and that there was no legal basis for an award of punitive damages.

Mid-Continent provides a credit card that enables truck drivers to charge fuel and related expenses incurred at truck stops. In 1971 Patton, who operated a truck stop on Interstate Route 94 in Burns Harbor, Indiana, and Hildebrand, who operated a truck stop a few miles east on I-94 at New Buffalo, Michigan, entered into a franchise agreement with Mid-Continent. The agreement gave Patton and Hildebrand a specified territory, and authorized Mid-Continent to franchise additional truck stops in that territory only if the franchisees, upon being informed by Mid-Continent that additional coverage was required and upon being given the "first opportunity" to meet the requirement, failed to obtain the additional facilities needed.

In 1974 Mid-Continent franchised Truck-O-Mat, a truck stop located on I-94 west of the Patton and Hildebrand stops and just across the Illinois border; and beginning no later than 1976, Patton and Hildebrand complained to Mid-Continent that Truck-O-Mat's stop was in their territory, in breach of their franchise agreement. That is one of the alleged breaches; here is the other. In 1980 Mid-Continent decided it needed additional coverage in the territory occupied by Patton and Hildebrand, and so informed Patton in a letter that concluded, "We feel that a response within fifteen (15) days and a plan of action within thirty (30) days is reasonable." Two months later Patton replied, "We are working with a real estate broker to establish the coverage that you think is not covered," but added, "Before we invest much more money into this project, I would like to know what you are going to do with the other fuel stop in our franchise area. Mr. Hildebrand and I complained to you, in your office, about this over three (3) years ago. At that time you agreed that it was indeed in our area. To our knowledge there still has been nothing done." Mid-Continent replied by acknowledging that Truck-O-Mat was in the plaintiffs' area and by offering to cancel Truck-O-Mat's franchise if and when the plaintiff gave Mid-Continent the additional coverage that it desired. There was no immediate response; and seven weeks later (November 1980) Mid-Continent mailed Patton its "notification that you have been given 'right of first refusal' [and] . . . that I am now taking steps to fill this requirement." The "taking steps" involved Truckstops of America, which had opened a stop in Gary, Indiana (near Burns Harbor, the site of Patton's stop) in May 1980. Even before then, in April, the plaintiffs had seen a Mid-Continent sign lying on the ground at the Gary site and had complained to Mid-Continent, which had ordered Truckstops of America to get rid of the sign, and it did. No Mid-Continent credit cards were accepted at Truckstops' Gary stop until November 1980 - when Mid-Continent franchised that stop in order to obtain the additional coverage that it wanted.

We begin our analysis with the franchising, allegedly in breach of the plaintiff's franchise agreement with Mid-Continent, of Truck-O-Mat. The description of the plaintiffs' territory in their franchise agreement is ambiguous. Mid-Continent concedes that it was a question for the jury whether Truck-O-Mat's stop was in that territory, in which event the franchising of the stop violated the agreement, but argues that Patton's truck stop, at Burns Harbor, was not a franchised location. If this is right, Patton has no standing to complain about the invasion of his territory - he has no territory - even though the negotiating history makes perfectly clear that Mid-Continent thought it was franchising two truck stops in the same territory, Patton's at Burns Harbor and Hildebrand's at New Buffalo.

The agreement recites that it is between Mid-Continent and "Richard L. Hildebrand & Jim Patton as individuals Corporation [sic], with its place of business at New Buffalo, Michigan." The agreement contains a "description of premises" which states only: "A full service truck stop located at intersection of I-94 at Wilson Road & M-239, New Buffalo, Michigan" - location of Hildebrands' truck stop. There is no reference to Patton's truck stop at Burns Harbor. The agreement contains a standard parol evidence clause which, Mid-Continent argues, forbade judicial inquiry into the negotiating history.

When a contract is reduced to a writing intended to be the complete expression of the parties' agreement, the parol evidence rule is triggered and, in the event of a lawsuit, sharply restricts the admissibility of evidence concerning the negotiations leading up to the writing. See Farnsworth, Contracts § 7.2 (1982). Why this should be so is one of the common law's enduring piles. The traditional explanation for the rule, that it reflects a preference for written over oral evidence (see, e.g., Franklin v. White, 493 N.E.2d 161, 166 (Ind. 1986); Charles T. McCormick, The Parol Evidence Rule as a Procedural Device for Control of the Jury, 41 Yale L.J. 365 (1932)), seems inconsistent with the fact that the rule makes evidence of prior negotiations inadmissible even if written. The traditional explanation also makes the rule redundant, since if a contract is clear "on its face" - that is if any judge reading it without special knowledge concerning its background, would extract the same meaning from it - "extrinsic" evidence, evidence outside the "four corners" of the written contract, is inadmissible to vary that meaning, independently of the parol evidence rule. See, e.g., Amoco Oil Co. v. Ashcraft, 791 F.2d 519, 521 (7th Cir. 1986) (Indiana law); Skrypek v. St. Joseph Valley Bank, 469 N.E.2d 774, 777 (Ind. App. 1984); English Coal Co. v. Durcholz, 422 N.E.2d 302, 308-09 (Ind. App. 1981). Granted, the "four corners," "extrinsic evidence," and parol evidence rules are often run together, as in American Fletcher National Bank & Trust Co. v. Pavilion, Inc., 434 N.E.2d 896, 904 (Ind. App. 1982), vacated on other grounds, 453 N.E.2d 156 (Ind. 1983). The first two rules seem identical; and Hauck v. Second National Bank of Richmond, 153 Ind. App. 245, 260, 286 N.E.2d 852, 861 (1972), describes the parol evidence rule as a "logical extension" of the "four corners" rule. But that should make one wonder whether the parol evidence rule might not have a separate function, beyond protecting contracting parties in advance from the certainty inherent in allowing a jury to range freely over testimony and revise the parties' deal to the jury's own liking; the other rules take care of that problem.

A somewhat more satisfactory explanation of the rule is that it expresses the parties' in Farnsworth's words, to "simplify the administration of the resulting contract and to facilitiate the resolution of possible disputes by excluding from the scope of their agreement those matters that were raised and dropped or even agreed upon and superseded during the negotiations." Farnsworth, supra, § 7.2, at p. 451. It might appear that this is ground, too, is traversed by the other rules - that testimony about the negotiations would be just another form of "extrinsic" evidence, or, equivalently, of evidence outside the "four corners" of the written contract. But there is more to it than this, since even if neither party denies that they came to an agreement during the negotiations, their subsequent action in signing a written contract intended to be the complete expression of their deal will make the prior agreement unenforceable.

One can argue that the garble in the description of the parties ("individuals Corporation") opened up this case to oral testimony for interpretive purposes only, a use that the parol evidence rule does not bar, at least if the written contract is ambiguous, see id., § 7.12. This conclusion may seem inconsistent with the "integration" (i.e., no-parol-evidence) clause in the franchise agreement, but the position in Indiana is that such "clauses, rather than operating to exclude evidence, are merely probative of the parties' intentions. . . . [T]he preliminary question of integration, either complete or partial, requires the court to hear all relevant evidence, parol or written." Franklin v. White, supra, 493 N.E.2d at 166-67.

But the ambiguity angle need not be pursued in this case, for what we have called the alternative explanation of the parol evidence rule disposes of any suggestion that the rule is applicable. Patton is not trying to burden Mid-Continent with obligations not assumed in the contract though perhaps discussed at the negotiating stage; he is merely trying to correct an oversight in drafting - the omission of his place of business. Mid-Continent does not argue that Patton and Hildebrand were joint venturers at the New Buffalo site; it does not argue that Patton had any interest in the site; it does not deny that Patton operated a truck stop in Burns Harbor and signed the franchise agreement in order to be able to honor the Mid-Continent credit card at his stop. It is merely trying to exploit a conceded mistake - its mistake, as the contract's drafter - in failing to list Patton's place of business. Commercial life in this country would slow perceptibly if harmless errors in the drafting of contracts were beyond judicial power to correct.

They are not; as was held in Ligon Specialized Hauler, Inc. v. Hott, 179 Ind. App. 134, 384 N.E.2d 1071, 1074-75 (Ind. App. 1979), a case factually similar to the present one, the parol evidence rule does not prevent the reformation of a contract on grounds of mutual mistake. See also Yarn Industries, Inc. v. Krupp International, Inc., 736 F.2d 125, 129 (4th Cir. 1984); Farnsworth, supra, § 7.5, at pp. 471-72. Of course this is just a conclusion, but the reason for it flows easily from the alternative explanation for the parol evidence rule, although we confess that we do not find that explanation set forth in any opinion of an Indiana court. The rule gives expression to the parties' desire to replace any agreements they may have arrived at in preliminary negotiations with a definitive written contract. The parties here, having initially decided that Patton's truck stop would be franchised, did not then decide, when they came to the stage of writing up a definitive agreement, to delete his stop. On this point the writing is not the definitive agreement. Indeed ,the written agreement lists Patton as a party to the contract, and he signed it.

It may seem that the parol evidence rule would be a practical nullity if a party were free to testify that, despite a parol evidence clause, the written contract was not complete, definitive, integrated, etc., because it mistakenly omitted a part of the parties' agreement. But since reformation is an equitable doctrine and, as noted in Ligon (see 384 N.E.2d at 1075), requires "clear and satisfactory proof" of mutual mistake (see also Travelers Indemnity Co. v. Calvert Fire Ins. Co., 798 F.2d 826, 835 (5th Cir. 1986), modified on rehearing on other grounds, 836 F.2d 850 (5th Cir. 1988)), the danger of facile invocations of mutual mistake to get around the parol evidence rule is limited. The party alleging mutual mistake must convince the judge, and convince him clearly. That is no problem here; there is no doubt at all that the parties intended to franchise Patton's fuel stop as well as Hildebrand's. This is clear not only from the negotiations leading up to the signing of the franchise agreement and from the ...

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