Gist of the Action Doctrine Intersects the Parol Evidence Rule

The "gist of the action" doctrine is otherwise known as the "economic loss doctrine". This doctrine originated from the concept that contract remedies should be distinguished from tort remedies. However, since its creation, the law regarding whether a tortfeasor is liable in tort for an action founded upon a contract has mutated with law's evolving complexity. 

The gist of the action doctrine bars claims for tortious conduct where the gist of the conduct sounds in contract rather than tort. Courts have generally invoked the gist of the action doctrine to bar tort claims arising from causes of action that a defendant negligently or intentionally breached a contract. Courts likewise have generally held that the gist of the action doctrine does not apply when the defendant not only breached the contract, but also made misrepresentations about the breach with intent to deceive the plaintiff. Conceptually, the doctrine precludes plaintiffs from re-casting ordinary breach of contract claims into tort claims. Consequently, there is no such tort as malicious breach of contract.

One method for determining whether a claim sounds in contract or in tort is to determine the source of the duties that the defendant has violated. If the plaintiff must rely wholly on the agreement to define the rights that the defendant violated, the claim is generally a contract claim. If the plaintiff must rely on socially-imposed duties, the claim sounds in tort. The contract must be collateral to the wrong such that the wrong becomes the gist of the action not the contract.

In Etoll, Inc. v. Elias, the Superior Court held that where there was a special, confidential or other like fiduciary relationship between the parties, that breach would generally lie in tort as opposed to contract. In Bilt Rite, the Supreme Court held that a first-party relationship secondary to a claim of negligent misrepresentation generally lies in tort. Federal and state courts have uniformly held that where a defendant breached the contract and then made misrepresentations about the breach with the intent to deceive the plaintiff such that the unsuspecting plaintiff continued the contractual relationship or failed to assert contractual rights precluded the application of the gist of the action doctrine.

Another way to determine the application of the gist of the action doctrine is whether the Complaint: (1) arises solely from a contract; (2) where the duties breached were created and grounded in the contract; (3) where the liability stems from the contract; and (4) whether the claim of tort duplicates a breach of the contract claim or the success of which is wholly dependent on the terms of the contract. The Complaint's essential ground or material part is determinative of the doctrine's application.

Fraud in the inducement of a contract is a claim in tort allowable by the gist of the action doctrine. Because a fraud intending to induce a person to enter into a contract is generally collateral to the contract itself, that tort may properly lie. However, fraud in the performance of the contract is generally barred by the gist of the action doctrine.

The parol evidence rule prohibits the admission of parol evidence to vary, add to, a written instrument intended to be the final terms of the transaction (intent governs, not necessarily whether there exists a merger clause). With the exception of the purchase of real estate, the parol evidence rule generally bars verbal misrepresentations for fraud in the inducement claims as opposed to fraud in the execution. Fraud in the inducement is a claim whereby the plaintiff contends he was induced to sign a contract containing written terms which were different than those originally promised. Fraud in the execution is where the plaintiff contends he was misrepresented the terms as contained within the signed document. Fraud in the inducement applies to a "bait and switch" in terms while fraud in the execution arises from a "switch" in ultimate documents.

The Supreme Court has held "justifiable reliance" is an element of fraud. To justifiably rely on a verbal misrepresentation there must therefore be no contradicting document. Thus, justifiable reliance arises generally in a context where there is a duty to reveal but omission.

To bring these concepts into context, take for instance the traditional real estate purchase transaction. Purchaser signs an agreement of sale containing a standard integration clause (i.e., that all representations are contained within the writing which constitutes the complete representation of all parties). The agreement of sale integrates the seller's disclosure statement. On the disclosure, a box is checked to indicate that there is not mold. Later, purchaser finds mold and files suit in fraud and breach of contract.

The gist of the action doctrine does not apply to the fraud claim because the wrong is the concealment of mold not the collateral promise to sell the real estate. The parol evidence rule would also not apply because the deception is written. However, if the deception was verbal (i.e., no disclosure), the parol evidence rule would need be analyzed. If the mold was available to be seen upon plaintiff's inspection, the parol evidence rule would bar plaintiff's fraud in the inducement claim (i.e., that plaintiff was induced to purchase the property by the misrepresentation that there did not exist mold) because plaintiff could not have justifiably relied on the misrepresentation given the mold's obvious presence. If the mold was hidden, the parol evidence rule would not bar the verbal misrepresentation because plaintiff justifiably relied on the verbal misrepresentation in contrast to what plaintiff could not see.

In that same transaction, buyer (here borrower) seeks a fully integrated purchase mortgage. Lender promises a fixed 5% interest rate. The mortgage ultimately is discovered to have omitted whether the 5% rate is variable or fixed. Lender asserts a 5% variable rate. Because the variability of the rate was omitted, borrower properly sues for fraud in the execution of which lender's verbal representation of a fixed rate is admissible. However, if the mortgage contained a written term as to the variability, borrower would not be able to sue in fraud to reform the term to become fixed: parol evidence would be inadmissible and borrower could not have justifiably relied. However, by defending against the integration clause, borrower could assert, using traditional contract defenses (i.e., ironically, fraud in the inducement), that parol evidence is admissible to prove fraud in the inducement.

To get into court in a traditional "bait and switch" (where a promise turns untrue to the detriment of the consumer), a plaintiff claiming fraud must be prepared to prove (better yet, plead) the wrong sued upon is incidental to the contract while defending against the contract's integration clause or risk a fraud claim (or fee-shifting Unfair Trade Practices claim) being reduced to a breach of contract claim whereat parol evidence to vary the contract may be excluded as a matter of law. Plaintiff may be required to prove the integration clause was induced by fraud (or other contract defenses, such as unconscionability) just to allow the fraud in the inducement claim to proceed.

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