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Extra Equipamentos E Exportação Ltda. v. Case Corp.

September 3, 2008


Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. No. 01 C 8591-Blanche M. Manning, Judge.

The opinion of the court was delivered by: Posner, Circuit Judge.


Before POSNER, RIPPLE, and ROVNER, Circuit Judges.

Extra, a Brazilian distributor, sued Case, a large U.S. manufacturer of farm and construction equipment, in the federal district court in Chicago, charging fraud. Jurisdiction was based on 28 U.S.C. § 1332(a)(2), because the suit was between a citizen of a state (Case) and citizens of a foreign country (Extra and its boss-the latter no longer a party). The law governing the substantive issues in the case is agreed to be that of Illinois.

The district judge dismissed the suit on the ground that Case Brasil & Cia-Case's wholly owned Brazilian subsidiary-was an indispensable party to the suit. Fed. R. Civ. P. 19(b). Extra appealed and we reversed, 361 F.3d 359 (7th Cir. 2004), and the case went back to the district court for discovery. Eventually Case moved for summary judgment, which was granted, and Extra appeals. It also appeals from the district court's order awarding costs to Case as the prevailing party.

In 1992 Case Brasil had hired Extra to distribute Case products in Brazil. In 1999 Extra sued Case Brasil in a Brazilian court, claiming that corrupt employees of the subsidiary had caused it to overcharge Extra. Later that year, a "Release of Claims and Settlement of Certain Obligations" (we'll call it the "release") was negotiated and signed in Illinois by Persio Briante, Extra's president, on behalf of Extra, and by James Sharman on behalf of Case Brasil. Sharman was a vice president of Case Corporation, not of Case Brasil; no one employed by the latter was present at the negotiation or signed the release.

The release ended the Brazilian litigation and provided among other things (most not pertinent to this case) that Case Brasil would seek no more than $2 million in past-due payments that it claimed Extra owed it under the 1992 distributorship contract. In exchange, Extra, besides agreeing to drop its suit against Case Brasil and also drop an objection it had lodged with Brazilian authorities to a merger that Case wanted to make, agreed to give Case information about the corrupt conduct of Case Brasil's employees that would enable Case to have them removed (thus avoiding possible trouble with the Brazilian government) without the parent or the subsidiary incur-ring liability to the terminated employees.

The present suit, which Extra filed in 2001, charges that at the negotiation of the release Case's representative, Sharman, had promised that if Extra agreed to the release, Case Brasil would retain Extra as a Case Brasil distributor in good standing; that the promise was fraudu-lent because Case had no intention of fulfilling it; and that after the release was signed, Case Brasil, claiming not to be bound by the release because it hadn't authorized its parent to make it-indeed, contending that it had had no wind of the negotiations or of the signing of the release-terminated Extra's distributorship and refuses to recognize the $2 million limit in the release on its money claims. Thus, Extra charges, Case had "manipulated the corporate distinction between itself and Case Brasil" by falsely representing that the Case official who signed the release was authorized to sign on behalf of Case Brasil. Extra contends that as a result of the manipulation, Case obtained the benefits of the release without honoring either the obligations that the release placed on it or Sharman's oral promise to retain Extra as a Case Brasil distributor. Instead Case Brasil quickly terminated Extra as a distributor, precipitating a second Brazilian suit by Extra, in which Extra claimed that the termination violated the 1992 contract. The Brazilian courts agreed that there had been a breach of contract; but specific performance was refused and the Brazilian litigation is now in the damages-determination phase.

The district court's principal ground for dismissing the present suit is a provision in the release captioned "No Reliance On The Other Party." It states that "Both parties represent and warrant that in making this Release they are relying on their own judgment, belief and knowledge and the counsel of their attorneys of choice. The parties are not relying on representations or statements made by the other party or any person representing them except for the representations and warranties expressed in this Release." A claim of fraud requires proof that the victim of the fraud relied on the representations that he contends are fraudulent. E.g., HPI Health Care Services, Inc. v. Mt. Vernon Hospital, Inc., 545 N.E.2d 672, 681 (Ill. 1989); Vigortone AG Products, Inc. v. PM AG Products, Inc., 316 F.3d 641, 644-45 (7th Cir. 2002) (Illinois law). Otherwise he cannot have been hurt by the fraud. If reliance on the allegedly fraudulent statements that Sharman made to Briante in the negotiation of the release is negated by the no-reliance clause, Extra's fraud claim evaporates, as the district court ruled.

Drafters of contracts worry lest in the event of a dispute one of the parties ask the court to depart from the terms of the written contract on the ground that it is not the parties' entire agreement-there are additional terms to which they had agreed during the negotiations leading up to the making of the contract. If such a claim enabled the party making it to obtain a jury trial on the meaning of the contract, the contractual process would be riven by uncertainty. The law's response to this problem is the parol evidence rule, which, so far as bears on this case, forbids the introduction of evidence (whether oral or written) of what was said in the process of negotiating a contract to vary the terms of the contract that resulted from the negotiation, provided the contract seems clear and complete. A.W. Wendell & Sons, Inc. v. Qazi, 626 N.E.2d 280, 287 (Ill. App. 1993); Maas v. Board of Trustees of Community College District No. 529, 418 N.E.2d 1029, 1042-44 (Ill. App. 1981); Utica Mutual Ins. Co. v. Vigo Coal Co., 393 F.3d 707, 713-14 (7th Cir. 2004). The rule implements the parties' intention to "simplify the administration of the resulting contract and to facilitate 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." 2 E. Allan Farnsworth, Farnsworth on Contracts, § 7.2, p. 224 (3d ed. 2004).

To make assurance doubly sure, parties to a written contract commonly include in it an "integration" clause; for if they do not, the party resisting the invocation of the parol evidence rule can ask the judge to consider extrinsic evidence bearing on the question whether the parties really did intend the written contract to be the complete and final articulation of their agreement. Utica Mutual Ins. Co. v. Vigo Coal Co., supra, 393 F.3d at 714. The parties did include an integration clause in the release. It states: "This Release constitutes the entire agreement between the parties, and this Release supersedes all prior negotiations and agreements between the parties relating to the subject of this Release." So evidence of what was said in the negotiations that led up to the signing of the release would not be admissible-in a suit for breach of contract.

That is a critical qualification. The parol evidence rule is a rule of contract law, and a contract integration clause is a privately negotiated supplement to the rule, and most courts, including, we have assumed (though the matter is not free from doubt), Illinois, hold that neither the rule nor the clause prevents a disappointed party to the contract from basing a tort suit on proof that in the course of the negotiations the other party made fraudulent representations. Vigortone AG Products, Inc. v. PM AG Products, Inc., supra, 316 F.3d at 643-44; General Casualty Co. v. Carroll Tiling Service, Inc., 796 N.E.2d 702, 708-09 (Ill. App. 2003); Pinken v. Frank, 704 F.2d 1019, 1022-23 (8th Cir. 1983); 2 Farnsworth, supra, § 7.4, pp. 245, 247.

Granted, a suit for fraud is not a perfect substitute for a suit for breach of contract. There are additional pleading requirements, see, e.g., Fed. R. Civ. P. 9(b), and in Illinois fraud must be proved by clear and convincing evidence, and not just by a preponderance of the evidence, Hofmann v. Hofmann, 446 N.E.2d 499, 506 (Ill. 1983); Williams v. Chicago Osteopathic Health Systems, 654 N.E.2d 613, 619 (Ill. App. 1995); Association Benefit Services, Inc. v. Caremark RX, Inc., 493 F.3d 841, 852-53 (7th Cir. 2007) (Illinois law), which is all that is required to prove a breach of con-tract. Also, the statute of limitations is shorter in a tort suit than in a suit for breach of a written contract-five years rather than ten. 735 ILCS 5/13-205, -206; LeBlang Motors, Ltd. v. Subaru of America, Inc., 148 F.3d 680, 690-91 (7th Cir. 1998) (Illinois law). On the other hand, punitive damages can be awarded in a suit for an intentional tort, such as fraud, but not (with rare exceptions, Morrow v. L.A. Goldschmidt Associates, Inc., 492 N.E.2d 181, 183-86 (Ill. 1986); Zapata Hermanos Sucesores, S.A. v. Hearthside Baking Co., 313 F.3d 385, 389-91 (7th Cir. 2002) (Illinois law)) in a suit for breach of contract.

The tradeoffs are complex. But as this case, in which the claim of fraud is based on statements made in a negotiation that resulted in a contract, illustrates, a suit for fraud can be a device for trying to get around the limitations that the parol evidence rule and contract integration clauses place on efforts to vary a written contract on the basis of oral statements made in the negotiation phase. The release nowhere promises to retain Extra as a distributor of Case products; the fraud suit is based on an alleged oral promise to that effect-made en route to the signing of a contract (the release) that did not contain any such promise.

No-reliance clauses serve a legitimate purpose in closing a loophole in contract law (thus resisting, in Judge Kozinski's colorful expression, the metastasizing of contract law into tort law, Oki America, Inc. v. Microtech Int'l, Inc., 872 F.2d 312, 315 (9th Cir. 1989)). They are, we have held, enforceable in Illinois, Vigortone AG Products, Inc. v. PM AG Products, Inc., supra, 316 F.3d at 644-45, as elsewhere. Sundown, Inc. v. Pearson Real Estate Co., 8 P.3d 324, 331-32 (Wyo. 2000); Haygood v. Burl Pounders Realty, Inc., 571 So. 2d 1086, 1088-89 (Ala. 1990); Rissman v. Rissman, 213 F.3d 381, 383-85 (7th Cir. 2000); Manufacturers Hanover Trust Co. v. Yanakas, 7 F.3d 310, 315-18 (2d Cir. 1993); First Financial Federal Savings & Loan Ass'n v. E.F. Hutton Mortgage Corp., 834 F.2d 685, 687-88 (8th Cir. 1987); Landale Enterprises, Inc. v. Berry, 676 F.2d 506, 507-08 (11th Cir. 1982) (per curiam). But that is in general rather than in every case. The purpose of such a clause is to head off a suit for fraud, but the clause doesn't say that; it uses the anodyne term "reliance" and a lay person might not realize how much he was giving up by agreeing to the inclusion of the clause in his contract.

In the trade, no-reliance clauses are called "big boy" clauses (as in "we're big boys and can look after ourselves"). But if someone who is not a big boy-indeed is not even represented by counsel-signs a big-boy clause, there can be a problem, and this has led some courts to require, before such a clause can be enforced, an inquiry into the circumstances of its negotiation, to make sure that the signatory knew what he was doing. See Brown v. Earthboard Sports USA, Inc., 481 F.3d 901, 920-21 (6th Cir. 2007); AES Corp. v. Dow Chemical Co., 325 F.3d 174, 180-81 (3d Cir. 2003); see also Rissman v. Rissman, supra, 213 F.3d at 387-89 (concurring opinion). (The D.C. Circuit appears to be on both sides of the question. Compare OneO-One Enterprises, Inc. v. Caruso, 848 F.2d 1283, 1286-87 (D.C. Cir. 1988), with Whelan v. Abell, 48 F.3d 1247, 1258 (D.C. Cir. 1995).)

Whether Illinois would permit or require such an inquiry we do not know, but will assume an affirmative answer. It would not follow that the enforceability of such a clause could never be decided, as Extra seems to believe, without a trial. When no reasonable jury could find that the signatory did not understand the meaning of the no-reliance clause that he signed, the issue of enforceability can be resolved on summary judgment. FMC Technologies, Inc. v. Edwards, 2007 WL 1725098, at *2-6 (W.D. Wash. June 12, 2007); see Cozzi Iron & Metal, Inc. v. U.S. Office Equipment, Inc., 250 F.3d 570, 574 (7th Cir. 2001) (Illinois law); MBIA Ins. Corp. v. Royal Indemnity Co., 426 F.3d 204, 214-19 (3d Cir. 2005). And that is the case here. Briante is the president of a very large company, and he was represented at the negotiation of the release by Brazilian and New York lawyers, all experienced in commercial transactions. Extra is a big boy and acted through counsel. It does not argue that its lawyers were unfamiliar with no-reliance clauses or failed to explain all the terms of the release to Briante, or that Case's representatives misrepresented the meaning of the no-reliance clause-that is not among the frauds alleged.

It argues instead that the representations that underlie its fraud claim were not "made by the other party"-that is, by Case Brasil-"or any person representing" it, as required by the no-reliance clause. Case Brasil was the other party, and Sharman, who signed for Case Brasil, is not employed by that company, but by Case Corporation. But we do not understand the relevance of who employed Sharman. Extra admits that Sharman represented at the negotiation that he was authorized to sign for Case Brasil, and it does not argue that this was a false representation. And Case admits that Sharman had at least apparent authority to bind Case Brasil. That must be right. He was the only signatory on Case Brasil's behalf, signing directly below the legend CASE BRASIL & CIA in the signing space of the release. If he had neither actual nor apparent authority to bind Case Brasil, the contract was not agreed to by one of its two parties and is therefore unenforceable. But Extra does not argue that it is unenforceable. It would like to have the benefit of that $2 million ceiling on money owed Case Brasil. If Extra sued to enforce the release, and Case Brasil defended on the ground that Sharman had lacked the authority to make a contract on Case Brasil's behalf, Extra would be indignant and the defense would be laughed out of court.

Extra is driven to argue that while Sharman was authorized to sign the release on behalf of Case Brasil, the representations that Extra is complaining about are representations that he made on behalf of Case rather than Case Brasil and therefore he was not speaking as a representative of the latter. This bit of wordplay does violence to the language of the no-reliance clause, which refers to representations by a party's representative-and Sharman was representing Case Brasil, a party (the only party, besides Extra). It is also unrealistic. Extra itself argues that in promising to retain Extra as a distributor, Sharman was trying to get Extra to sign the release so that Case Brasil could obtain at no cost evidence of corruption that would enable it to fire its misbehaving employees and thus avoid getting into trouble with the Brazilian government without incurring liability to them. If Sharman was lying, as Extra contends, he was lying on behalf of both his employer and the employer's wholly owned subsidiary-in which he had a special interest because he was in charge of Case's Latin American subsidiaries, which included Case Brasil.

So the no-release clause is valid and applicable. And if it weren't, that would not save the day for Extra. For its suit is a suit for fraud, and the significance of the no-reliance clause, which does not depend on its enforceability in contract law, is that its language and the circumstances of its negotiation render Extra's reliance on Sharman's supposed oral misrepresentations unreasonable as a matter of law. The principle behind a no-reliance clause is, as this court explained in Rissman v. Rissman, supra, 213 F.3d at 384, "functionally the same as a doctrine long accepted in this circuit: that a person who has received written disclosure of the truth may not claim to rely on contrary oral falsehoods." Thus, whether a person reasonably appears to have authority to sign a contract on behalf of a party is a different question from whether a reasonable person would rely on such a person's representations. Had Sharman disclaimed authority to act on behalf of Case Brasil, how could Extra reasonably have ...

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