Lead Opinion
This is the rehearing under Rule 40 of the Federal Rules of Appellate Procedure of both an appeal brought by defendant Gulf & Western Industries, Inc. and a cross-appeal brought by plaintiff Coal Resources, Inc. In the district court, the plaintiff asserted claims for breach of contract, common law fraud and violations of the federal securities laws. The defendants asserted a counterclaim for fraud. A jury awarded Coal Resources $6,384,000 on the breach of contract claim, $5,666,000 on the common law fraud claim, $5,000,000 on the securities claim, $11,000,000 in punitive damages and $350,000 in attorney’s fees. Coal Resourсes subsequently accepted a remittitur under which it would receive $12,050,000 “in full of all jury awards.” The district court also granted Gulf •& Western’s motion for JNOV on the securities claim.
In its original opinion, the hearing panel affirmed the judgment on the securities law issue, reversed the judgment on the other claims and remanded those claims for a new trial.
I.
Before proceeding further, we emphasize several points which were correctly decided in our first opinion and which require no further discussion. First, we reaffirm our conclusion that the acquisition agreement in question was not a security within the meaning of the federal securities laws. See Marine Bank v. Weaver,
II.
Gulf and Western has contended throughout this litigation that it is entitled to judgment as a matter of law on the Ohio common law fraud claim. The plaintiff’s theory is one of promissory fraud. Specifically, Gulf & Western is alleged to have promised to invest $3.9 million in the leaseholds with knowledge that it would not perform the promise. This promise was not included in the written contract. The contract contains an integration clause.
Although it is clear that making a contractual promise with no present intention of performing it constitutes promissory fraud in Ohio, see Dunn Appraisal Co. v. Honeywell Information Systems Inc.,
We agree with the defendant. First, the early cases discussing promissory fraud
Second, the Dunn case, which at first glancе appears to support Coal Resources’ position, is distinguishable. In Dunn, the defendant sold a computer system to the plaintiff. Although the defendant orally promised to convert approximately four hundred of the plaintiff’s programs so that they could be used in the new system, the written agreement only stated that two hundred fifty programs would be converted. The defendant subsequently refused to convert all four hundred programs and the plaintiff sued under a promissory fraud theory. This court held that the defendant had defrauded the plaintiff in having had no intention of performing the promise to convert all four hundred prоgrams when that promise was made. This was true even though the promise to convert the additional one hundred fifty programs was not reflected in the written agreement. Hence, Dunn stands for the proposition that a defendant may be held liable for having had no present intention of performing a promise made outside the terms of a written agreement.
The Dunn case is distinguishable, however, on the ground that the opinion does not indicate that an integration clause was involved. Unlike the dissent, we are unwilling to assume that because a large corporation was involved in Dunn, an integration clause must have been included in the contract. The purpose of an integration clause stating that there are no agreements or understandings between the parties other than those reflected in the written contract is, of course, to prevent either party from relying upon statements or representations made during negotiations that were not included in the final agreement. To permit a plaintiff to use a promissory fraud theory in order to add terms to an integrated contract, as Coal Resources attempts to do here, would completely defeat the purpose of an integrаtion clause. We hold that although Coal Resources was entitled to prove through extrinsic evidence that Gulf & Western had no intention when the contract was made of performing promises that were included in the acquisition agreement, Coal Resources was not entitled to show that Gulf & Western never intended to invest $3.9 million in the leaseholds. As has been indicated, the latter promise was not part of the acquisition agreement.
Since Gulf & Western is entitled to judgment as a matter of law on the promissory fraud claim, we need not address the issue of whether the jury instructions on that claim were proper. Nor need we reach the question, which was addressed in our previous opinion, of Coal Resources’ burden of
III.
Gulf & Western has also contended on appeal and on rehearing that it is entitled to judgment as a matter of law on the breach of contract claim. Coal Resources’ breach of contract theory is three-fold. First, Gulf & Western is alleged to have breached an implied obligation to develop the leaseholds in a reasonably diligent fashion. Second, Gulf & Western is allеged to have breached certain duties, imposed by the Virginia leases, which Gulf & Western expressly assumed in the acquisition agreement. Third, Gulf & Western is alleged to have breached express promises to pay $500,000 on June 11, 1977 as part of the contract price, to obtain permits and reclamation bonds, to perform reclamation work and to pay minimum monthly royalties to the lessors of the properties in question.
According to the plaintiff’s expert witness Zegeer, diligent development of the Virginia properties during the two-year multiple period under generally accepted mining prinсiples
Coal Resources correctly argues that an implied duty of diligent performance generally exists where the contract price to be received by an assignor or seller is dependent upon the amount of future profits obtained by the assignee or buyer. See Bailey v. Chattem, Inc.,
This conclusion does not mean, however, that Gulf & Western is entitled to judgment as a matter of law on the plaintiff’s entire breach of contract claim. As had been indicated, Coal Resources’ claim is three-fold. The parties agreed in the final pre-trial order that Ohio law would control the construction of the acquisition agreement. The jury’s award of $6,384,000 on the breach of contract claim was a general verdict. This court has held that where state law is involved, a district court should construe a general verdict as would the state courts. See Keet v. Service Machine Co., Inc.,
One of Coal Resources’ alternate theories is that Gulf & Western breached express promises to pay $500,000 on June 11, 1977, to obtain permits and reclamation bonds, to perform reclamation work and to pay minimum monthly royalties to the lessors of the properties in question. Since breach of an express contractual promise obviously is a cognizable legal theory and since Coal Resources introduced evidence to support its claim that Gulf & Western breached the above mentioned express promises, we hold that Gulf & Western is not entitled to judgmеnt as a matter of law on these claims.
Coal Resources’ other breach of contract theory is that Gulf & Western did not fulfill duties which were imposed by the Virginia leases and which were expressly assumed by Gulf & Western in the acquisition agreement. Before proceeding further, two preliminary points merit attention. First, Virginia law controls the question of what Gulf & Western’s obligations were under the Virginia leases. Since the district court in this case was located in Ohio, it was required to apply Ohio’s conflict of laws rules. Klaxon Co. v. Stentor Electric Manufacturing Co., Inc.,
Second, when Gulf & Western expressly assumed the duties imposed by the Virginia leases, it assumed both the obligations imposed by the language of those leases and any duties that Virginia law implies as a matter of law in lease situations. We emphasize this case presents two distinct questions: first, whether Gulf & Western was subject to implied duties under the acquisition agreement and second, whether Gulf & Western was subject to such duties under the Virginia leases. Although we have held that the integration clause prevents obligations from being implied under the acquisition agreement, we hold that the integration clause is irrelevant to the analysis of the Virginia leases because Gulf & Western expressly assumed all duties, express or implied under Virginia law,
Gulf & Western correctly argues that Virginia law implies no obligation of reasonably diligent development of the
Gulf & Western’s argument that it is entitled to judgment as a matter of law is undermined, however, when the express language of the Virginia leases is considered. All of the leases require the lessee to develop the mines in a diligent, workmanlike manner in accordance with the standards of good mining practice. Coal Resources introduced evidence through witness Zegeer that Gulf & Western neither diligently developed the mines nor observed good mining practice in failing either to install deep minеs or build a new coal washing facility. Accordingly, Gulf & Western is not entitled to judgment as a matter of law on the breach of contract claim.
Although Gulf & Western is not entitled to judgment as a matter of law, we vacate the award for breach of contract for two reasons. First, we are uncertain whether Gulf & Western’s alleged failure to discharge its obligation of reasonably diligent development caused injury of a kind that the assumption of obligations provision in the acquisition agreement was intended to prevent. We acknowledge that the purpose of the provision may have been to insure that Gulf & Western would diligently develop the Virginia properties so that Coal Resources would receive substantial sums under the multiple. If that were the parties’ intent, however, they could more easily have effectuated it by placing a clause requiring diligent development of the properties in the text of the acquisition agreement itself. More likely, the parties’ intent in placing the assumption of obligations provision in the acquisition agreement was to insure that Gulf & Western would be held liable for all damages proximately suffered by Coal Resources (including loss of payments under the multiple) if Gulf & Western failed to develop the leaseholds (or to discharge other lease obligations) and if the lessors then terminated the leases. In short, the event against which Coal Resources was seeking to protect itself through the assumption of obligations provision may have been the termination of the leases during the multiple period. If that were the parties’ intent, however, then $6,384,000 in damages could not have been caused by Gulf & Western’s alleged breach of the assumption of obligations provision by not diligently developing the leaseholds. Although the Kentucky leases were terminated during the two-year multiplе period because Gulf & Western ceased paying minimum royalties (Ex. 531, App. at 2768), the maximum amount of contract damages that Coal Resources claimed in connection with the Kentucky properties was substantially less than $6,384,000. The Virginia leases were not terminated during the two-year multiple period. Under these circumstances, Coal Resources could not have suffered $6,384,000 in damages resulting from termination of leases.
We hold that it is unclear what kind of harm the parties intended to protect against through the inclusion of the assumption of obligations clause in the acquisition agreement. On remand, еxtrinsic ev
A second reason that the award for breach of contract must be vacated is that the testimony of witness Tuck was excluded. We adhere to the holding in our previous opinion that witness Stagg’s expert opinion evidence “cannot be considered the substantial equivalent of a miner’s direct testimony as to the experience he actually had in attempting to mine the seam in question.” See Crown Cork & Seal Co. v. Morton Pharmaceuticals, Inc.,
IV.
Several other points merit brief discussion. Coal Rеsources’ claim for breach of contract involves predominately unliquidated damages. Under Ohio law, pre-judgment interest is not available on unliquidated claims, subject to certain exceptions not relevant here. See Roth Steel Products v. Sharon Steel Corp.,
Second, since Gulf & Western is entitled to judgment as a matter of law on the promissory fraud claim, Coal Resources may not recover punitive damages at retrial. Third, since the jury found that Gulf & Western did not establish by a preponderance of the evidence
Notes
. Although the Tibbs case,
. The dissenting opinion corrеctly states that an integration clause does not bar a party from demonstrating fraud in the inducement. This point is irrelevant, however, because this case does not involve a claim of fraud in the inducement. Gulf & Western's promise (if it was made) to invest $3.9 million in the leaseholds was a promise of future performance rather than a representation of past or present material fact. At has been indicated, the purpose of an integration clause is to preclude reliance upon promises of future performance that have not been included in the contract. Since this case does not involve a claim of fraud in the inducement, our holding cannot possibly do violence to Ohio law on the subject. Similarly, our holding does not conflict with those in other states. See, e.g., Stone v. Williams,
. Coal Resources’ theory of an implied duty of diligent development rests upon what was required of Gulf & Western under generally accepted mining principles and not upon Gulf & Western’s parol promise to invest $3.9 million in the coal-bearing properties. Accordingly, the parol evidence rule is irrеlevant to the discussion of this theory.
. Whether Gulf & Western had an implied duty under the Virginia leases to develop the leaseholds in diligent fashion will be discussed below.
. This conclusion is not inconsistent with the parties’ stipulation that Ohio law controls the interpretation of the acquisition agreement.
. Under Ohio law, all mineral, oil and gas leases include an implied covenant to develop the land in reasonable fashion. Ionno v. Glen-Gery Corp., 2 Ohio St.3d 131,
. Gulf & Western has argued that Coal Resources has no standing to sue for breach of the duties that the former expressly assumed because Coal Resources is not the lessor. Gulf & Western cites Obenshain v. Halliday,
. Indeed, extrinsic evidence is admissible in this case to explain any term in the acquisition agreement. On appeal, Coal Resources has consistently argued that extrinsic evidence is necessary to explain the meaning of the contract. At trial, Gulf & Western stipulated to the admissibility of extrinsic evidence (Tr. at 618-19).
. We reiterate that we do not address the issue of whether common law fraud in Ohio must be proven by a preponderance of the evidence or by clear and convincing evidence. The jury in this case, however, was instructed under a preponderance of the evidence standard. Since Gulf & Western did not prevail under that test, it clearly would not have prevailеd under the more demanding standard.
Concurrence Opinion
concurring in part and dissenting in part.
I concur in Part I of the majority opinion.
1 dissent from the remainder of the opinion.
Ohio will no doubt be surprised to learn that it is the only state where fraudulent inducement of contract can be concealed by throwing an integration clause into the written memorial of an agreement. See, e.g., Betz Laboratories, Inc. v. Hines,
that where one party to a contract has been induced to enter into it through fraud, deceit, and misrepresentation of the other party as to material matters, the defrauded party does not become bound by its terms, notwithstanding the contract contains a provision that there are no agreements or statements binding upon the parties except thase contained therein. Fraud which enters into the actual making of a contract cannot be excluded from the reach of the law by any formal phrase inserted in the contract itself.
Niehaus, supra (quoting 24 Ohio jurisprudence 2d 639, Fraud and Deceit, Section 27).
Of course, an integration clause or a contractual provision specifically disavowing the assurances allegedly relied upon is strong evidence that thase assurances were never made or that their incorporation in the written agreement was considered and rejected. See Betz Laboratories, Inc., supra, at 406-407, Dallas Farm Machinery Company, supra. Such factors are matters for the trier of fact to weigh. Mechanistic formulations such as those adopted by the majority can only frustrate the true
I also dissent from the majority’s ruling that the integration clause bars the plaintiffs from asserting a cause of аction based on the defendants’ breach of their implied duty to develop the purchased leases in a diligent manner. Ohio courts follow the rule that “[ajbsent an express provision to the contrary, [a mineral] lease includes an implied covenant to reasonably develop the land.” Beer v. Griffith,
In rеviewing the history of this case, I have concluded that the confusion surrounding it arises from the failure to distinguish theories of liability and the remedies available under those theories. As the majority notes, “[A] plaintiff may not have a contract both enforced and rescinded at the same time.” That principle is perfectly correct as regards remedies. In seeking to establish liability, however, a party may argue that a contract should be enforced; or, in the alternative, that it should be rescinded for fraud. I am afraid the majority, recognizing the inconsistency of these theories and the overlapping damages claimed under them, has sought to simplify the trial of the issues by legal formalism. The same result could be achieved by bifurcating the trial of the issues of liability and damages. If the trier of fact finds that the defendants were guilty of both fraudulent inducement and breach of contract, the plaintiffs should then be forced to declare under which theory of liability they wish to proceed. If they choose fraudulent inducement, the plaintiffs should be forced to elect between the remedies of rescission, reformation, or damages.
. In Sparhawk v. Gorham,
. The majority’s attempt to distinguish the authorities cited in our original opinion is unpersuasive. I have scrutinized Globe Steel Abrasive Co. v. National Metal Abrasive Co.,
. Since I would hold that the defendants had an implied obligation to develop the leases under the assignment, I need not decide whether such an obligation was implied in the leases themselves. In my opinion, the most reasonable interpretation of the defendants’ promise to assume all obligations under the leases is that it was made to insure that those obligations would be performed for the lessors, not the plaintiffs' benefit. At the very least, the lessors would be an indispensable party to any action to enforce those obligations. Fed.RXiv.P. 19.