7TH CIRCUIT: INTEGRATION CLAUSE IN CONTRACT NO BAR TO FRAUD CLAIM

March 18, 2003

By Steven P. Garmisa
Hoey Farina & Downes 
sgarmisa@felahfd.com

There are conflicting rulings from the Illinois Appellate Court on whether an integration clause in a contract precludes a fraud claim. Vigortone AG Products Inc. v. PM AG Products Inc., 316 F.3d 641 (7th Cir. 2000).

Illinois law governed a fraud claim arising out of the sale of a company that manufactured a food supplement for pigs. According to plaintiff Vigortone Ag Products, a Provimi subsidiary, defendant PM AG Products made oral misrepresentations about the business. But, as Judge Richard A. Posner of the 7th U.S. Circuit Court of Appeals recounted, "These were oral assurances made before the contract was signed, and PM argues that the integration clause in the contract precludes Provimi's relying on such assurances to establish fraud."

PM relied on Barille v. Sears Roebuck & Co., 682 N.E.2d 118 (Ill.App. 1997), "which holds that an integration clause does extinguish a claim of fraud based on precontractual misrepresentations," Posner recounted. "But Barille contains no discussion of the issue -- just a conclusion -- and no reference to the general rule. Moreover, another case in Illinois' intermediate Appellate Court is directly contrary to Barille, though also unreasoned. See Salkeld v. V.R. Business Brokers, 548 N.E.2d 1151, 1157-58 (Ill.App. 1989). There is a dictum to the same effect in another case in the intermediate Appellate Court. Pecora v. Szabo, 418 N.E.2d 431, 435 (Ill.App. 1981)."

Because of the confusion in the Illinois Appellate Court, Posner looked to the general rule in other jurisdictions.

The general rule is that an integration clause in a contract doesn't bar a fraud claim, Posner noted, citing Schlumberger Technology Corp. v. Swanson, 959 S.W.2d 171, 179 (Texas 1997); Danann Realty Corp. v. Harris, 157 N.E.2d 597, 598-99 (N.Y. 1959); Lewelling v. Farmers Insurance of Columbus Inc., 879 F.2d 212, 216 (6th Cir. 1989); UAW-GM Human Resource Center v. KSL Recreation Corp., 579 N.W.2d 411, 418 (Mich.App. 1998); and E. Allan Farnsworth, "Contracts," section 7.4, pp. 442-43 (3d ed. 1999).

"By virtue of the parol evidence rule," Posner explained, "an integration clause prevents a party to a contract from basing a claim of breach of contract on agreements or understandings, whether oral or written, that the parties had reached during the negotiations that eventuated in the signing of a contract but that they had not written into the contract itself. ... But fraud is a tort, and the parol evidence rule is not a doctrine of tort law and so an integration clause does not bar a claim of fraud based on statements not contained in the contract.

"Doctrine aside, all an integration clause does is limit the evidence available to the parties should a dispute arise over the meaning of the contract. It has nothing to do with whether the contract was induced, or its price jacked up, by fraud."

A no-reliance clause might have been the winning ticket, though.
"One consequence of the rule [on integration clauses] is that parties to contracts who do want to head off the possibility of a fraud suit will sometimes insert a 'no-reliance' clause into their contract, stating that neither party has relied on any representations made by the other. Rissman v. Rissman, 213 F.3d 381, 383-84 (7th Cir. 2000); First Financial Federal Savings & Loan Association v. E.F. Hutton Mortgage Corp., 834 F.2d 685, 687 (8th Cir. 1987); Landale Enterprises Inc. v. Berry, 676 F.2d 506, 507-08 (11th Cir. 1982) (per curiam); Danann Realty Corp. v. Harris, supra, 157 N.E.2d at 599, 600; see also Jackvony v. RIHT Financial Corp., 873 F.2d 411, 416-17 (1st Cir. 1989). Since reliance is an element of fraud, the clause, if upheld -- and why should it not be upheld, at least when the contract is between sophisticated commercial enterprises -- precludes a fraud suit, as the cases we have just cited make clear."

Trying to take advantage of this rule, PM argued the integration clause was actually one of no-reliance. "But it is not," Posner declared. "It is a standard integration clause. It contains no reference to reliance."

Applying its "best guess" that the Illinois Supreme Court would follow the majority rule, the 7th Circuit concluded that an integration clause doesn't preclude a claim of fraud.

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