Keller v. A.O. Smith Harvestore Products, Inc.

819 P.2d 69, 15 Brief Times Rptr. 1410, 15 U.C.C. Rep. Serv. 2d (West) 733, 1991 Colo. LEXIS 703, 1991 WL 198076

• Court: Supreme Court of Colorado
• Decided: October 7, 1991
• Docket: 88SA397
• Status: Published

Opinions

Justice KIRSHBAUM

delivered the Opinion of the Court.

Pursuant to C.A.R. 21.1, this court has agreed to answer the following questions certified to it by the United States Court of Appeals for the Tenth Circuit:

1. Whether a cause of action for negligent misrepresentation lies against the manufacturer of a product for representations made during the course of the sale of that product despite the execution of a fully integrated sales agreement.

2. If so, whether the existence of a clause in the sales agreement specifically disclaiming reliance on representations made to the buyer prior to the execution of the sales agreement legally precludes a finding that the buyer in fact relied on such representations.¹

These questions have been certified in connection with an appellate proceeding involving, inter alia, review of a judgment entered by the United States District Court for the District of Colorado on behalf of buyers of a product and against the manufacturer of the product on a claim of negligent misrepresentation. We answer the first question in the affirmative and answer the second question in the negative.

I

The following undisputed facts are pertinent to this certification proceeding. In July 1980, Alfred A. Keller and Martha M. Keller purchased two Harvestore grain storage systems manufactured by A.O. Smith Harvestore Products, Inc. (hereinafter AOSHPI) from an independent Harvestore dealer. Harvestore systems, which include specially constructed silos and unloading equipment, are designed to prevent oxygen from coming into contact with feed stored in the silos, thus enabling ranchers to store feed indefinitely and cut feed losses. AOSHPI owns the design patent for the Harvestore Silo. Prospective buyers were advised that use of the silo would result in the reduction or elimination of protein supplements in feeding dairy herds. AOSHPI provided its distributors with video tapes, brochures, and extensive literature to promote sales of Harvestore Silos.

Based upon the representations contained in video tapes, brochures and literature prepared by AOSHPI, the Kellers signed purchase orders with an AOSHPI distributor in July 1980 for two Harvestore systems. The agreements contained the following pertinent provisions:

This order form is the entire and only agreement between the Seller and Buyer; and no oral statements or agreements not confirmed herein, or by a subsequent written agreement, shall be binding on either the Seller or Buyer.

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Buyer understands the conditions of use of the products and is not relying on the skill or judgment of the Manufacturer or Seller in selecting them because Buyer acknowledges that farming and livestock feeding results are very much the product of individual effort, combined with various climatic, soil, water, growing and feeding conditions which are beyond the control of the Manufacturer and Seller. Buyer recognizes that any advertisements, brochures, and other written statements which he may have read ... are not guarantees and he has not relied upon them as such_ Buyer understands that the sole warranty, express or implied, which is provided by [AOSHPI] ... is as follows_

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I [BUYER] HAVE READ AND UNDERSTOOD THE TERMS AND CONDITIONS OF THIS PURCHASE ORDER INCLUDING THE WARRANTIES, DISCLAIMERS AND TERMS AND CONDITIONS HEREIN GIVEN TO ME, EITHER BY THE MANUFACTURER OR THE SELLER. I RELY ON NO OTHER PROMISES OR CONDITIONS AND REGARD THAT AS REASONABLE BECAUSE THESE ARE FULLY ACCEPTABLE TO ME.

The Kellers also executed leases obligating them to pay $1,220.87 per month for ninety-six months for one system and $890.49 per month for eighty-four months for the second system.

After the Harvestore systems were installed and the Kellers began to use them, the milk production of their herd dropped; a large proportion of the herd developed sores, watery eyes, snotty noses, and rough hair coats; and some of the herd died. In addition, witnesses testified at trial that the silos failed to produce the quality of ensilage that had been promised, that at the time they executed the purchase orders the Kellers had no reasonable basis to determine whether the representations made by AOSHPI through its distributor were true, and that the only persons who had knowledge of how the Harvestore systems would operate were employees and distributors of AOSHPI.

The Kellers ultimately initiated a civil action against AOSHPI and the seller in the District Court for Morgan County, Colorado. The ease was subsequently removed to the United States District Court for the District of Colorado. See 28 U.S.C. § 1441 (1988); 28 U.S.C. § 1332 (1988). Among the claims asserted by the Kellers against AOSHPI was a claim of negligent misrepresentation based on section 552(1) of the Restatement (Second) of Torts (1965) (hereinafter section 552(1)).²

AOSHPI subsequently filed a motion to dismiss the Kellers’ negligent misrepresentation claim on the ground that such claim was barred by the terms of the purchase agreements.³ The federal trial court denied the motion.⁴ At the conclusion of the trial, the jury returned a verdict in favor of the Kellers and against AOSHPI on the Kellers’ negligent misrepresentation claim. AOSHPI appealed the judgment entered on that verdict to the Tenth Circuit Court of Appeals.

II

1. Whether a cause of action for negligent misrepresentation lies against the manufacturer of a product for representations made during the course of the sale of that product despite the execution of a fully integrated sales agreement.

It is well established that in some circumstances a claim of negligent misrepresentation based on principles of tort law, independent of any principle of contract law, may be available to a party to a contract. See, e.g., Rosales v. AT & T Info. Sys., Inc., 702 F.Supp. 1489 (D.Colo.1988); Wagner v. Cutler, 232 Mont. 332, 757 P.2d 779 (1988); Raritan River Steel v. Cherry, Bekaert & Holland, 322 N.C. 200, 367 S.E.2d 609 (1988); First Interstate Bank of Gallup v. Foutz, 107 N.M. 749, 764 P.2d 1307 (1988); Hoffer v. State, 110 Wash.2d 415, 755 P.2d 781 (1988). In addition, as we have observed,⁵ section 552(1) contains a definition of negligent misrepresentation. It is thus clear that a contracting party’s negligent misrepresentation of material facts prior to the execution of an agreement may provide the basis for an independent tort claim asserted by a party detrimentally relying on such negligent misrepresentations.

That principle is fully compatible with previous decisions of this court and of our Court of Appeals. See Cosmopolitan Homes, Inc. v. Weller, 663 P.2d 1041 (Colo.1983); Bill Dreiling Motor Co. v. Shultz, 168 Colo. 59, 450 P.2d 70 (1969); Lembke Plumbing & Heating v. Hayutin, 148 Colo. 334, 366 P.2d 673 (1961). See also Wolther v. Schaarschmidt, 738 P.2d 25 (Colo.App.1986); Robinson v. Poudre Valley Fed. Credit Union, 654 P.2d 861 (Colo. App.1982); First Nat’l Bank in Lamar v. Collins, 44 Colo.App. 228, 616 P.2d 154 (1980); Birkenmayer & Co. v. Homestead Minerals, 32 Colo.App. 258, 510 P.2d 449 (1973). Under the particular circumstances disclosed by the record, we conclude that the definition of negligent misrepresentation contained in section 552(1) is persuasive and controls the resolution of the legal issues presented in this case. We also conclude that the Kellers’ complaint alleged sufficient facts to establish a claim of negligent misrepresentation against AOSHPI.

AOSHPI argues that, assuming the availability of a negligent misrepresentation claim in the circumstances of this case, the Kellers’ execution of a fully integrated sales agreement precludes their assertion of such a claim. We disagree.

Integration clauses generally permit contracting parties to limit future contractual disputes to issues relating to the reciprocal obligations expressly set forth in the executed document. KN Energy, Inc. v. Great Western Sugar Co., 698 P.2d 769 (Colo.1985). See Moore v. Georgeson, 679 P.2d 1099 (Colo.App.1983). Thus the terms of a contract intended to represent a final and complete integration of the parties’ agreement are enforceable and parol evidence offered to establish the existence of prior or contemporaneous agreements is inadmissible to vary the terms of such contract. Sentinel Acceptance Corp. v. Colgate, 162 Colo. 64, 66, 424 P.2d 380, 382 (1967). However, as we have noted, claims of negligent misrepresentation are based not on principles of contractual obligation but on principles of duty and reasonable conduct. Cosmopolitan Homes, Inc., 663 P.2d at 1043. The parol evidence rule does not bar the admission of evidence to establish tort claims not specifically prohibited by the terms of an agreement. Agristor Leasing v. A. O. Smith Harvestore Prods., Inc., 869 F.2d 264 (6th Cir.1989) (general release of claims clause ineffective to bar claims of fraud and misrepresentation in. the inducement). See Formento v. Encanto Bus. Park, 154 Ariz. 495, 744 P.2d 22 (App.1987). We recognized this distinction in Bill Dreiling Motor Co., wherein we concluded that the parol evidence rule applicable to contract disputes had no force in a tort action alleging fraudulent misrepresentation in the inducement to execute an agreement. See also Lembke Plumbing & Heating, 148 Colo. 334, 366 P.2d 673.

Many other courts have also concluded that the mere presence of a general integration clause in an agreement does not bar a claim for negligent or fraudulent misrepresentation. Agristor Leasing v. Saylor, 803 F.2d 1401 (6th Cir.1986); Moffatt Enters., Inc. v. Borden, Inc., 807 F.2d 1169 (3d Cir.1986) (applying Pennsylvania law); Formento, 154 Ariz. 495, 744 P.2d 22; Martens Chevrolet, Inc. v. Seney, 292 Md. 328, 439 A.2d 534 (1982); Gilliland v. Elmwood Property, 301 S.C. 295, 391 S.E.2d 577 (1990). See also Restatement § 552C comment b (code and contract defenses are inapplicable in tort action); A. Corbin, Contracts § 580 (1989 Supp.); W. Keeton, D. Dobbs, R. Keeton & D. Owen, Prosser and Keeton on the Law of Torts § 110 (5th ed. 1984). We conclude that a general integration clause does not effect a waiver of a claim of negligent misrepresentation not specifically prohibited by the terms of the agreement. The general language of the integration provisions of the purchase agreements here at issue does not specifically preclude negligent misrepresentation claims.

The policy of encouraging honesty and candor in contract negotiations, which policy is reflected in the recognition of an implied covenant of good faith and fair dealing, supports this result. The implied covenant of good faith and fair dealing would virtually be eliminated if a contracting party could escape liability for negligent conduct simply by inserting a general integration clause into the agreement. Martens Chevrolet, Inc. v. Seney, 292 Md. 328, 337 n. 7, 439 A.2d 534, 539-40 n. 7 (1982). As the court in Formento stated, “a seller should not be allowed to hide behind an integration clause to avoid the consequences of a misrepresentation, whether fraudulent or negligent.” Formento, 154 Ariz. at 499, 744 P.2d at 26.

AOSHPI also asserts that the Kellers may not recover on their negligent misrepresentation claim because under section 552(1) they assumed the burden of establishing that AOSHPI was in the business of supplying information for the guidance of others in their business transactions with third parties and they failed to satisfy that burden of proof at trial. We do not accept AOSHPI’s invitation to explore in the abstract this portion of section 552(1). The first certified question requests a determination of the effect of a contractual integration clause on the Kellers’ negligent misrepresentation claim, not a determination of whether the Kellers established the elements of such claim. Furthermore, we are in no position in this certification proceeding to evaluate evidence contained in the record of the United States District Court trial proceedings.

We also reject AOSHPI’s argument that claims of negligent misrepresentation should not be available in suits against manufacturers as opposed to suits against service providers or others in the business of providing information. There is no basis in principle to create a special shield encouraging manufacturers to make negligent misrepresentations of material fact in promoting purchases of their products.

For the foregoing reasons, we answer the first certified question in the affirmative.

III

2. If so, whether the existence of a clause in the sales agreement specifically disclaiming reliance on representations made to the buyer prior to the execution of the sales agreement legally precludes a finding that the buyer in fact relied on such representations.

The contract in question contains the following provisions:

Buyer recognizes that any advertisements, brochures, and other written statements which he may have read ... as well as any oral statement which may have been made to him, concerning the potential of the Harvestore ... are not guarantees and he has not relied upon them as such.

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[Buyer has] read and understood the terms and conditions of this purchase order including the warranties, disclaimers and terms and conditions herein given to me, either by the manufacturer or the seller. [Buyer relies] on no other promises or conditions and regards that as reasonable because these are fully acceptable to [Buyer].

AOSHPI contends that these provisions constitute a waiver by the Kellers of any claim that requires proof of reliance on statements made by AOSHPI prior to the formation of the purchase agreements. AOSHPI relies on decisions holding that particular disclaimers of reliance clauses constituted waivers of negligence claims against manufacturers or sellers in certain circumstances. See, e.g., One-O-One Enters., Inc. v. Caruso, 848 F.2d 1288 (D.C.Cir.1988); Condios, Inc. v. Driver, 145 Ga.App. 537, 244 S.E.2d 85 (1978); Rio Grande Jewelers Supply, Inc. v. Data Gen. Corp., 101 N.M. 798, 689 P.2d 1269 (1984); Danann Realty Corp. v. Harris, 5 N.Y.2d 317, 157 N.E.2d 597, 184 N.Y.S.2d 599 (1959).

We disagree with AOSHPI’s argument in the particular circumstances of this case. A contract provision purporting to prohibit a party to the contract from asserting a claim of negligent misrepresentation must be couched in clear and specific language. See Agristor Leasing v. A.O. Smith Harvestore Prods., Inc., 869 F.2d 264 (6th Cir.1989); Agristor Leasing v. Saylor, 803 F.2d 1401 (6th Cir.1986); Moffatt Enters., Inc. v. Borden, Inc., 807 F.2d 1169 (3d Cir.1986); Formento v. Encanto Bus. Park, 154 Ariz. 495, 744 P.2d 22 (Ariz. Ct.App.1987); Martens Chevrolet, Inc. v. Seney, 292 Md. 328, 439 A.2d 534 (1982). The non-reliance provisions in this case simply state that the Kellers recognize that certain oral and written statements were not “guarantees” and that the Kellers did not rely upon those statements “as such.” The language of those provisions does not clearly and specifically disclaim reliance by the Kellers on all representations made by AOSHPI prior to the execution of the contract.

For the foregoing reasons, we answer the second certified question in the negative.

ROVIRA, C.J., dissents.

1 . A third question originally certified for this court's response has been withdrawn.

2 . That section contains the following definition of negligent misrepresentation:

TOPIC 3. NEGLIGENT MISREPRESENTATION § 552. Information Negligently Supplied for the Guidance of Others (1) One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.

Restatement § 552(1).

3 . It is apparently not disputed that AOSHPI, although not a party to the purchase agreements, is entitled to rely upon the provisions of those agreements in defense of the Kellers' claims.

4 . Prior to removal, AOSHPI unsuccessfully requested the state trial court to enter summary judgment against the Kellers on their negligent misrepresentation claim on the ground that such claim was barred by the terms of the purchase agreements.

5 .Note 2, supra.