Under Pennsylvania law, fully integrated written contracts do not necessarily prevent an aggrieved party from successfully arguing that it was fraudulently induced into the contract by misrepresentations. If the contract at issue is fully integrated but lacks the “fraud-insulating” provisions needed to make it “integrated-plus,” then neither the gist of the action doctrine nor the parol evidence rule will bar a fraud claim against the party that allegedly made the pre-contractual misrepresentations.

At least that is what the U.S. Court of Appeals for the Third Circuit has held in three recent cases: Kelly v. Peerstar, Nos. 22-3031, 22-3087 (July 27, 2023); Battle Born Munitions v. Dicks Sporting Goods, No. 22-1005 (July 26, 2023) and SodexoMAGIC v. Drexel University, 24 F.4th 183 (2022).

The general fact pattern that these cases address is this: X and Y sign a written contract; X contends that, before execution of the contract, Y made certain representations (or omissions) related to the contract but that are not stated in the contract, and that X relied on those representations when X decided to sign the contract; the alleged representations turned out to be false, to X’s detriment; X sues Y for fraud, specifically for fraudulently inducing X to enter into the contract.

For instance, in Kelly, the defendant, Larry Nulton, brought a counterclaim alleging that George Kelly fraudulently failed to reveal material information before the parties entered into a written settlement agreement. Once the concealed information came to light, Nulton sought to be excused from making payments under the settlement agreement based on Kelly’s alleged fraud.

A contracting party defending against such a fraudulent inducement claim will frequently invoke two related, yet distinct, defenses: the gist of the action doctrine and the parol evidence rule. The three recent Third Circuit cases cited above illustrate the importance of knowing the differences between the two concepts and conducting the proper analysis of their potential applicability.

The gist of the action doctrine states that “when a duty is created by contract, … a claim for a breach of that duty must be brought in contract, not tort.” See SodexoMAGIC, 24 F.4th at 216. The parol evidence rule provides that, when a writing is “determined to be the parties’ entire contract, … evidence of any previous oral or written negotiations or agreements involving the same subject matter as the contract is almost always inadmissible to explain or vary the terms of the contract,” (quoting Yocca v. Pittsburgh Steelers Sports, 854 A.2d 425, 436-37 (Pa. 2004)).

In the X and Y general fact pattern described above, the gist of the action doctrine generally will not protect Y from X’s fraudulent inducement claim. The Third Circuit’s cases hold that the duty to not make fraudulent representations or omissions when negotiating a contract is a duty grounded in tort, not in contract. With the gist of such an action sounding in tort, the gist of the action doctrine is ineffective to bar the fraud claim.

With the gist of the action doctrine defeated, can Y find refuge in the parol evidence rule? Maybe. This is where Y has to trust that the contract’s drafters did not just include a mere integration clause but also included “fraud-insulating” provisions in order to make the contract an “integrated-plus” contract. In SodexoMAGIC, the written contract had an integration clause, but it lacked fraud insulation. The integration clause there said that the written contract contained and superseded any and all prior “agreements” between the parties, but the integration clause did not address expressly the effect of the execution of the written contract on any pre-contractual “representations.” By contrast, the integration clause in Kelly was slightly, but dispositively, different: it stated that the written contract “superseded all prior negotiations and agreements” and was the “entire agreement and understanding” of the parties.

While the SodexoMAGIC contract was integrated, the Third Circuit held that the Kelly contract was “integrated-plus” because it included fraud insulation. Fraud is an exception to the parol evidence rule. Lacking sufficient insulation, the integrated SodexoMAGIC contract was inadequate to defeat the fraud claim, thus activating an exception to the parol evidence rule. By contrast, in Kelly, the parol evidence rule defeated the fraud claim because the presence of the fraud-insulating provisions made the contract there integrated-plus and prevented Nulton from establishing justifiable reliance on the alleged pre-contractual fraud. Nulton had signed a contract that had disclaimed any reliance on prior negotiations (not just prior agreements) and had agreed that the writing not only captured the full agreement between the parties but also their full understanding—subtle yet dispositive differences from the SodexoMAGIC clause. Without a viable fraud claim, the fraud exception to the parol evidence rule did not apply in Kelly, and the parol evidence rule therefore barred evidence of the alleged fraudulent omission.

Conclusion

It is relatively rare for a sophisticated commercial contract to lack an integration clause entirely. The temptation, though, for contract drafters may be to treat the precise content of an integration clause as relative boilerplate: just go find a recent contract with an integration clause; cut it, paste it, and check that off of your list.

These recent Third Circuit cases demand a more deliberate approach. If you want to protect against a fraudulent inducement claim under Pennsylvania law, better not rely on the gist of the action doctrine. Instead, seek shelter in the parol evidence rule. Make sure you do not have language that merely constitutes an integration clause; make sure you draft provisions sufficient to make the agreement a fraud-insulating/integrated-plus contract. Magic words are needed, words that were absent in SodexoMAGIC.

If a dispute already has arisen, then, litigators, read the written contract’s integration clause closely against the nature of the fraud allegation. Only then will you be able to properly advise your client and argue effectively to the court about the impact of the gist of the action doctrine and the parol evidence rule on a fraudulent inducement claim.

Reprinted with permission from The Legal Intelligencer, © ALM Media Properties LLC. All rights reserved.