DRC Parts & Accessories, L.L.C. v. VM Motori, S.P.A.--Appeal from 151st District Court of Harris County

Affirmed in Part, Reversed and Remanded in Part, and Majority and Dissenting Opinions filed October 17, 2002

Affirmed in Part, Reversed and Remanded in Part, and Majority and Dissenting Opinions filed October 17, 2002.

In The

Fourteenth Court of Appeals

____________

NO. 14-01-00507-CV

____________

DRC PARTS & ACCESSORIES, L.L.C., Appellant

V.

VM MOTORI, S.P.A., Appellee

On Appeal from the 151st District Court

Harris County, Texas

Trial Court Cause No. 98-24396

M A J O R I T Y O P I N I O N

This breach of contract and fraud case arises from a dispute over the meaning of the term non-exclusive as used by the parties in a contract for the purchase and resale of engine parts and accessories. Appellant DRC Parts & Accessories, L.L.C. ( DRC ), appeals the entry of summary judgment in favor of appellee VM Motori, S.P.A. ( VM ).

Factual and Procedural Background

Prior to 1995, VM, an Italian manufacturer and seller of industrial diesel engines and associated parts and accessories, contracted with DRC, amongst others, to purchase and distribute its products in North America. In 1995, however, VM was purchased by Detroit Diesel Corporation ( DDC ), an American manufacturer and distributor of diesel engines and associated parts and accessories with an extensive network of representatives in North America. Despite the resultant diminution in its need for the services of DRC, VM agreed to continue the relationship because of DRC s extensive knowledge of VM s products.

On May 14, 1996, VM and DRC entered into a contract to define their new relationship. That agreement stated, in pertinent part:

VM . . . grants on a non-exclusive basis . . . DRC . . . the right to purchase and sell VM diesel engine ORIGINAL SPARE PARTS for engine series and/or engine model versions not in-current production by VM and VM ORIGINAL ACCESSORIES for current and non-current series of engines, in the USA or Canada, hereinafter referred to as the TERRITORY . . . .

This authorization to resell spare parts and accessories was valid for twelve months from the date of the contract, and was to be automatically renewed for a further year unless terminated by either party upon sixty days written notice. Further, VM had the right to revoke or modify the contract upon sixty days notice; DRC did not have a similar right. Finally, the contract provided that it substitute[d] and invalidate[d] any other former agreement.

Thereafter, DRC filed suit against VM for breach of contract,[1] alleging the contract gave it the exclusive right to sell parts for engines that were no longer being produced by VM, and that VM had breached the agreement by selling such parts directly to both its customers and DDC. VM responded by counterclaiming that DRC had breached contractual obligations under separate purchase order agreements for the delivery of several industrial engines, and by moving for traditional and no-evidence summary judgment on the basis that the contract unambiguously gave DRC only a non-exclusive right to distribute non-current production engine parts, and thus the contract had not been breached.

The trial court granted summary judgment in favor of VM on DRC s breach of contract claim without specifying the grounds therefor. Subsequently, before resolution of VM s counterclaim,[2] DRC filed a Second Amended Petition: (1) reasserting the claim that VM breached DRC s exclusive contractual right to sell parts for non-current engines; and, (2) in the alternative, if the contract granted DRC only a non-exclusive right, that VM committed fraud in inducing DRC to enter into and continue performance under the contract by misrepresenting that DRC s right would be exclusive. VM moved for traditional summary judgment as to both claims, and that motion was granted by the trial court.[3] This appeal ensued.

Standards of Review

Where, as here, the trial court does not state the grounds for granting summary judgment, and several grounds are provided, we must determine if any of the grounds would support the grant of summary judgment. Rogers v. Ricane Enter., Inc., 772 S.W.2d 76, 79 (Tex.1989). Summary judgment is proper if the defendant, as movant, disproves at least one element of each of the plaintiff s claims or establishes all elements of an affirmative defense. Am. Tobacco v. Grinnell, 951 S.W.2d 420, 425 (Tex.1997). The movant has the burden of showing there are no genuine issues of material fact and it is entitled to judgment as a matter of law. Nixon v. Mr. Prop. Mgmt. Co., Inc., 690 S.W.2d 546, 548 (Tex.1985). In deciding whether there is a disputed material fact issue precluding summary judgment, proof favorable to the non-movant is taken as true and the court must indulge every reasonable inference and resolve any doubts in favor of the non-movant. Id. at 548 49.

As distinguished from a traditional summary judgment, we review a no-evidence summary judgment under the same legal sufficiency standard as a directed verdict. Specialty Retailers, Inc, v. Fuqua, 29 S.W.3d 140, 146 (Tex. App. Houston [14th Dist.] 2000, pet. denied). A reviewing court views all evidence in a light most favorable to the respondent against whom the summary judgment was rendered, disregarding all contrary evidence and inferences. Id.; Merrell Dow Pharm., Inc. v. Havner, 953 S.W.2d 706, 711 (Tex.1997). A no-evidence summary judgment is properly granted if the respondent fails to bring forth more than a scintilla of probative evidence to raise a genuine issue of material fact as to an essential element of the respondent s case. Tex. R. Civ. P. 166a(i); Specialty Retailers, Inc., 29 S.W.3d at 146. Less than a scintilla of evidence exists when the evidence is so weak as to do no more than create a mere surmise or suspicion of a fact. Kindred v. Con/Chem, Inc., 650 S.W.2d 61, 63 (Tex.1983). More than a scintilla of evidence exists when the evidence rises to a level that would enable reasonable and fair-minded people to differ in their conclusions. Burroughs Wellcome Co. v. Crye, 907 S.W.2d 497, 499 (Tex. 1995).

Breach of Contract: The Meaning of Non-Exclusive

In its first point of error, DRC contends the trial court erred in granting summary judgment on its breach of contract claim because the contract suffers from an ambiguity that gives rise to a question of fact. Specifically, DRC avers the term non-exclusive, as used in the contract, is subject to two reasonable interpretations: (1) that VM retained the right to sell parts for engines not in-current production to entities other than DRC; or (2) that DRC had the exclusive right to purchase and sell parts for engines not in-current production. We disagree.

The primary concern of a court in construing a written contract is to ascertain the true intent of the parties as expressed in the instrument. Nat l Union Fire Ins. Co. v. CBI Indus., Inc., 907 S.W.2d 517, 520 (Tex. 1995); Lake Charles Harbor & Terminal Dist. v. Bd. of Trs. of the Galveston Wharves, 62 S.W.3d 237, 242 43 (Tex. App. Houston [14th Dist.] 2001, pet. denied). If a written contract is so worded that it can be given a definite or certain legal meaning, then it is not ambiguous. Nat l Union, 907 S.W.2d at 520 (citing Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983)); Cook Composites, Inc. v. Westlake Styrene Corp., 15 S.W.3d 124, 131 (Tex. App. Houston [14th Dist.] 2000, pet. dism d). Parol evidence is not admissible for the purpose of creating an ambiguity. Lake Charles Harbor & Terminal Dist., 62 S.W.3d at 243 (citing Nat l Union Fire Ins. Co., 907 S.W.2d at 520; Universal C.I.T. Credit Corp. v. Daniel, 150 Tex. 513, 243 S.W.2d 154, 157 (Tex. 1951)).

However, where the language of a contract is subject to two or more reasonable interpretations, it is said to be ambiguous. Kelley-Coppedge, Inc. v. Highlands Ins. Co., 980 S.W.2d 462, 465 (Tex. 1998); Nat l Union Fire Ins. Co., 907 S.W.2d at 520. Whether a contract is ambiguous is a question of law for the court to decide by looking at the contract as a whole in light of the circumstances present at the time the contract was executed. Nat l Union Fire Ins. Co., 907 S.W.2d at 520; see also Coker, 650 S.W.2d at 394. Only when a contract is first determined to be ambiguous may the courts consider the parties interpretation and admit extraneous evidence to determine the true meaning of the instrument. Nat l Union Fire Ins. Co., 907 S.W.2d at 520.

An ambiguity does not arise simply because the parties advance conflicting interpretations of the contract. Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132, 134 (Tex. 1994); Sun Oil Co. (Delaware) v. Madeley, 626 S.W.2d 726, 727 (Tex. 1981); see also Cook Composites, Inc., 15 S.W.3d at 131 (noting that conflicting interpretations of a contract and unclear and uncertain language do not necessarily mean a contract is ambiguous ). For an ambiguity to exist, both interpretations must be reasonable. Nat l Union Fire Ins. Co., 907 S.W.2d at 520; see also Glover v. Nat l Ins. Underwriters, 545 S.W.2d 755, 761 (Tex.1977). Thus, the appellate court must decide whether there is more than one reasonable interpretation of the contract such that a fact issue was created concerning the parties intent. Columbia Gas Transmission Corp. v. New Ulm Gas, Ltd., 940 S.W.2d 587, 589 (Tex. 1996).

In the instant case, the contract expressly grants on a non-exclusive basis . . . DRC . . . the right to purchase and sell VM diesel engine ORIGINAL SPARE PARTS for engine series and/or engine model versions not in-current production by VM . . . . Considering this sentence in light of the surrounding circumstances, we find the contract is not ambiguous. The meaning is not genuinely uncertain and doubtful. Rather, the contract clearly states that the relationship between VM and DRC as to these parts is to be non-exclusive, and thus is not reasonably susceptible to the second interpretation advanced by DRC, i.e., that it would have the exclusive right to purchase and sell parts for VM engines not in-current production.

Because the contract is unambiguous, we must give effect to the objective intention of the parties as expressed or as is apparent in the written agreement. Gold Kist, Inc. v. Carr, 886 S.W.2d 425, (Tex. App. Eastland 1994, writ denied) (citing Sun Oil Co. (Delaware), 626 S.W.2d at 731; City of Pinehurst v. Spooner Addition Water Co., 432 S.W.2d 515, 518 (Tex.1968)). Under the plain language of the contract, DRC was not made the exclusive distributor of the engine parts in question. Accordingly, VM did not breach the contract by selling such parts directly to both its customers and DDC. We overrule DRC s first point of error.

Fraud

In its second, and alternative, point of error, DRC complains genuine issues of material fact exist as to whether VM committed fraud, and thus the trial court erred in granting summary judgment as to that claim. Specifically, if the contract term non-exclusive is held to be unambiguous, DRC alleges it was fraudulently induced to enter into and continue under the contract by VM s misrepresentations that the term non-exclusive referred to the type of parts to which DRC had the exclusive right of purchase, not to VM s ability to sell any parts to any person or entity. Thus, DRC contends VM falsely represented that the contract granted DRC the exclusive right to distribute parts for not in-current production engines and that the term non-exclusive was employed only because certain of these parts ( common parts ) were being used in current production engines.

VM, on the other hand, contends that alleged misrepresentations which conflict with the terms of a written contract are not fraudulent. Relying upon Town North Nat l Bank v. Broaddus, 569 S.W.2d 489 (Tex. 1978), VM asserts that fraud can never be predicated on alleged misrepresentations that conflict with the written terms of the contract.

It is well established that extrinsic evidence is not ordinarily admissible to add to, vary, or contradict the terms of a written contract that is clear on its face. Marburger v. Seminole Pipeline Co., 957 S.W.2d 82, 86 (Tex. App. Houston [14th Dist.] 1997, pet. denied) (citing Nat l Union Fire Ins. Co., 907 S.W.2d at 521). Without such a rule, the solemnity of contracts would be extinguished. However, where one party s assent is induced by deception, no contract exists because there has been no mutuality of agreement. Moreover, such fraud can only be shown by extrinsic evidence. Thus, parol evidence is admissible to show fraud in the inducement. Id.

Fraud in the inducement may be asserted either as an affirmative defense or as a cause of action. When asserted as an affirmative defense, or in an action to rescind the contract, the proponent usually seeks to add to, vary, or contradict the terms of a written agreement. Thus, the tension between the parol evidence rule and the principle that extrinsic evidence is admissible to show fraud has led to confusing and sometimes contradictory opinions.[4] Compare Prudential Ins. Co. of Am. v. Jefferson Assoc., Ltd., 896 S.W.2d 156, 162 (Tex. 1995) (holding a buyer is not bound by a written agreement to purchase a building as is that he was induced to make because of a fraudulent representation); Dallas Farm Mach. Co, 307 S.W.2d at 239 (embracing the majority position that parol evidence is admissible to establish fraud in the inducement even in the face of a merger clause in a written contract); Edward Thompson Co. v. Sawyers, 234 S.W. 873, 874 75 (Tex. 1921) (one who is entitled to avoid a written contract because it was induced by fraud is no longer bound by any of its stipulations, including those relating to representations or guaranties which induced its execution); Rapid Transit Ry. Co. v. Smith, 86 S.W. 322, 323 (Tex. 1905) (holding that a contract induced by a promise made in bad faith is voidable); and contrast with Distributors Inv. Co., et al. v. H. L. Patton, 110 S.W.2d 47, 48 (Tex. 1937) (holding that oral representations that conflict with the terms of a written contract are not admissible to show fraud because otherwise a written contract would be of no higher dignity than an oral one); Billington, et al. v. Vest, 268 S.W.2d 705, 707 (Tex. Civ. App. El Paso 1954, no writ) (holding that attaching the label of fraud to the oral representations does not change their character as inadmissible parol evidence).

In Broaddus, the plaintiff sued three co-makers for recovery on a promissory note. Two of the co-makers alleged they were fraudulently induced into signing the note by the plaintiff s representation that it would look solely to the third co-maker for payment of the loan. Town North Nat l Bank v. Broaddus, 569 S.W.2d 489, 490 (Tex.1978). In its opinion, the Texas Supreme Court cited with approval the case of Mitcham v. London, 110 S.W.2d 140, (Tex. Civ. App. Austin 1937, no writ). There the court of civil appeals confronted a similar scenario where the maker of a promissory note claimed he had been fraudulently induced into signing the note by deceptive promises allegedly made by the plaintiff. While acknowledging that fraudulent misrepresentation can, in some situations, be asserted to rescind a contract, the court declared:

The promise here complained of as being intended not to be performed was a collateral one in parol at variance with the written contract entered into, and one proof of which the law does not admit. If fraud could be predicated upon such promise and intention, then any collateral parol agreement might be asserted to contradict, vary, or even abrogate any written contract, under the guise of a fraudulent intent not to perform such collateral parol agreement. The practical effect would be to destroy the parol evidence rule altogether.

Id. at 142. Adhering to this rationale, the court held in Broaddus that extrinsic evidence of fraud is admissible to avoid a promissory note only when the evidence shows some sort of trick, artifice, or device was employed by the payee in addition to his representation to the maker that he would not be liable. 569 S.W.2d at 493.

Broaddus, however, is not applicable here. The narrow holding of Broaddus is that the mere representation by a payee to the maker that the maker will not be liable on the note does not constitute fraud in the inducement so as to be an exception to the parol evidence rule. Strickland v. Coleman, 824 S.W.2d 188, 192 (Tex. App. Houston [1st Dist.] 1991, no writ) (quoting Broaddus, 569 S.W.2d at 492). See also Garza v. Southland Corp., 836 S.W.2d 214, 220 (Tex. App. Houston [14th Dist.] 1992, no writ) (finding Broaddus is limited in its applications and only held that a negotiable instrument could not be altered by parol agreements or representations of a payee that a maker or surety will not be liable thereon. (quoting Broaddus, 569 S.W.2d at 491)).

Here, the contract at issue is not a promissory note. Moreover, unlike Broaddus, where fraud was asserted as an affirmative defense, DRC is asserting fraud as a cause of action. When fraud in the inducement is alleged as a cause of action, the parol evidence rule is not directly implicated because the plaintiff does not seek to vary the terms of the contract; rather, the plaintiff seeks tort damages for the manner in which the contract was procured. In other words, the legal duty not to fraudulently procure a contract is separate and independent from the duties established by the contract itself. Formosa Plastics Corp. USA v. Presidio Eng rs and Contractors, Inc., 960 S.W.2d 41, 46 (Tex.1998). Accordingly, tort damages are recoverable for a fraudulent inducement claim irrespective of whether the fraudulent representations are later subsumed in a contract. Id. at 47. Thus, we find extrinsic evidence was admissible to show whether DRC was fraudulently induced to enter into and continue performance under the contract.

A fraud cause of action requires a material misrepresentation, which was false, and which was either known to be false when made or was asserted without knowledge of its truth, which was intended to be acted upon, which was relied upon, and which caused injury. Formosa Plastics, 960 S.W.2d at 47 (quoting Sears, Roebuck & Co. v. Meadows, 877 S.W.2d 281, 282 (Tex. 1994)); see also Marburger, 957 S.W.2d at 86. Because each of these elements must be established in order for there to be recovery, the absence of any element is grounds for summary judgment. Formosa Plastics, 960 S.W.2d at 47 48.

In its response to VM s second motion for summary judgment, DRC presented evidence in the form of letters and memoranda originating from VM both before and after the date of the contract, and addressed to DRC and third parties, stating that DRC was to become the source of supply for the parts at issue, and that all . . . spare parts requirements ha[d] to be channelled [sic] . . . through DRC . . . for spares related to VM engines of non-current production. This evidence was buttressed by the affidavit testimony of an employee of a third-party retailer of VM products, and by DRC s president, Dale Chambliss ( Chambliss ). Further, Chambliss testified that VM represented to him the term non-exclusive was employed in the contract only to preclude VM from being in breach of the contract when it sold common parts to others, that he relied upon this representation, and that DRC was injured when VM later advanced its current interpretation of the term. We conclude, therefore, that DRC adduced sufficient evidence to raise a fact issue as to whether VM intended to comply with the representations when made, and thus whether DRC was fraudulently induced into both signing the contract and continuing performance thereunder.

Finally, we note that the contract s merger clause does not negate the element of reliance as to DRC s claim it was fraudulently induced to enter into the agreement. [A] release that clearly expresses the parties intent to waive fraudulent inducement claims, or one that disclaims reliance on representations about specific matters in dispute, can preclude a claim of fraudulent inducement. Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171, 181 (Tex. 1997) (emphasizing that a disclaimer of reliance or merger clause will not always bar a fraudulent inducement claim ). In the instant case, however, the clause provides only:

The present agreement substitutes and invalidates any other former agreement.

Despite the fact that both DRC and VM were knowledgeable and sophisticated business players, this brief clause neither clearly expresses an intent to waive claims of fraud in the inducement, nor disclaims reliance on representations about the meaning of the term non-exclusive as used in the contract. Id. at 180. Thus, having considered the nature of the transaction and the totality of the circumstances surrounding the agreement, we find this language does not preclude DRC s reliance on any alleged misrepresentations by VM. The Woodlands Land Dev. Co., L.P. v. Jenkins, 48 S.W.3d 415, 422 (Tex.App. Beaumont 2001, no pet.) (quoting Prudential Ins. Co. of Am. v. Jefferson Assocs., Ltd., 896 S.W.2d 156, 162 (Tex. 1995)).

Accordingly, we affirm the judgment of the trial court as to DRC s breach of contract claim, reverse the judgment of the trial court as to DRC s fraud claim, and remand to the trial court for further proceedings consistent with this opinion.

/s/ J. Harvey Hudson

Justice

Judgment rendered and Majority and Dissenting Opinions filed October 17, 2002.

Panel consists of Justices Hudson, Fowler, and Edelman (Edelman, J. dissenting).

Publish Tex. R. App. P. 47.3(b).

class=Section3>  

Affirmed in Part, Reversed and Remanded in Part, and Majority and Dissenting Opinions filed  October 17, 2002.

In The

Fourteenth Court of Appeals

_______________

NO. 14-01-00507-CV

_______________

DRC PARTS & ACCESSORIES, L.L.C., Appellant

V.

VM MOTORI, S.P.A., Appellee

____________________________________________________

On Appeal from the 151st District Court

Harris County, Texas

Trial Court Cause No. 98-24396

____________________________________________________

D I S S E N T I N G O P I N I O N

I agree with the majority opinion except as to sustaining DRC s second point of error on the ground that DRC raised a fact issue on its alternative claim for fraudulent inducement. As correctly noted in the majority opinion, the contract expressly and unambiguously granted DRC only a non-exclusive right to sell VM s engine parts. As the majority opinion further reflects, DRC s fraud claim asserts that DRC was induced to enter into this contract in reliance on a misrepresentation that DRC would nevertheless have an exclusive right to sell some of VM s parts, in direct and obvious contradiction of the plain terms of the contract DRC executed. VM moved for summary judgment against this fraud claim, among other things, on the ground that DRC could not have relied upon VM s alleged misrepresentation as a matter of law because it contradicted the clear terms of the contract.

One of the elements of a fraud claim is that the plaintiff actually and justifiably relied on the misrepresentation and thereby suffered injury. Ernst & Young, L.L.P. v. Pac. Mut. Life Ins. Co., 51 S.W.3d 573, 577 (Tex. 2001); Restatement (Second) of Torts 537 (1977). In this regard, a party to an arm s length transaction must exercise ordinary care and reasonable diligence for the protection of his own interests, and a failure to do so is not excused by mere confidence in the honesty and integrity of the other party. Thigpen v. Locke, 363 S.W.2d 247, 251 (Tex.1962). Therefore, in the absence of trickery or deceit, reliance on a misrepresentation that directly contradicts the express terms of a written agreement is not justified and cannot support a claim for fraud in the inducement. See Town N. Nat l Bank v. Broaddus, 569 S.W.2d 489, 493-94 (Tex. 1978).

This principle is supported by practical as well as conceptual considerations. If a party could enter into a written contract while relying on a representation that directly contradicts a material term of the contract, then, in effect, that party is itself entering into the contract with an intent not to perform it. Consequently, in order to show reliance on the misrepresentation, that party would essentially be proving that it was guilty of fraudulent inducement as well. As between two such ostensible fraudulently inducing parties, why would the law favor the one which has withheld its intent from the contract over the other, which has at least revealed its intent in the contract?

If, as the majority holds, a claim for fraudulent inducement can lie where the alleged misrepresentation directly contradicts the written contract, then the contract ceases to establish the rights and obligations of the parties and instead merely provides a mechanism to hold a party liable for complying with it as well as not complying with it. Under those circumstances, what is the use of entering into written contracts at all, or for that matter, providing courts for the purpose of not enforcing, and thereby defeating, them? Because I agree with VM that DRC could not, as a matter of law, have justifiably relied on the alleged misrepresentation that directly contradicted the express terms of the contract, I would overrule DRC s second point of error and affirm the judgment of the trial court as to DRC s fraud claim as well as its contract claim.

/s/ Richard H. Edelman

Justice

Judgment rendered and Majority and Dissenting Opinions filed October 17, 2002.

Panel consists of Justices Hudson, Fowler, and Edelman.

Publish Tex. R. App. P. 47.3(b).

[1] DRC also sued DDC and another distributor of VM products, Stewart and Stevenson Services, Inc. ( Stewart ), alleging they tortiously interfered with the contract. Summary judgment was granted for DDC and Stewart, and DRC does not now challenge the merits of that decision.

[2] The trial court later severed VM s counterclaim from those we are here concerned with, i.e., DRC s claims against VM.

[3] In its second motion for summary judgment, VM incorporated by reference all arguments advanced in its first motion for summary judgment. Accordingly, VM moved for traditional summary judgment as to all of DRC s claims, and, in addition, for no-evidence summary judgment as to the breach of contract claim.

[4] The Texas Supreme Court has acknowledged, A review of the Texas cases on the question reveals conflicting decisions and indicates a resulting confusion which can hardly be resolved or explained away with nice distinctions. Dallas Farm Mach. Co. v. Reaves, 307 S.W.2d 233, 234 (Tex. 1957).