Zinn v. Walker

361 S.E.2d 314 (1987) 87 N.C. App. 325

Carol Ann ZINN
v.
Philip E. WALKER.

No. 8715SC91.

Court of Appeals of North Carolina.

October 20, 1987.

Faison, Brown, Fletcher & Brough by O. William Faison and Reginald B. Gillespie, Jr., Durham, for plaintiff-appellant/appellee.

Bagwell & Associates by O. Kenneth Bagwell, Jr. and Philip S. Adkins, Chapel Hill, for defendant-appellant/appellee.

WELLS, Judge.

Defendant's Appeal

Defendant brings forward four assignments of error each of which concern the enforceability of the Resale Profits Agreement.

In his first assignment of error defendant contends that the evidence does not support the jury's answer to the first issue regarding the enforceability of the Resale Profits Agreement. Relying on Housing, Inc. v. Weaver, 305 N.C. 428, 290 S.E.2d 642 (1982) and Boyce v. McMahan, 285 N.C. 730, 208 S.E.2d 692 (1974), defendant argues that the Resale Profits Agreement constituted nothing more than an agreement to agree. "A contract to enter into a future contract must specify all its material and essential terms." Boyce at 734, 208 S.E.2d at 695. "If any portion of the proposed terms is not settled, or no mode agreed upon by which they may be settled, then there is no agreement." Boyce, supra, quoted in Weaver, supra, at 444, 290 S.E.2d 652. See also Gregory v. Perdue, Inc., 47 N.C.App. 655, 267 S.E.2d 584 (1980). ["An offer to enter into a contract in the future must, to be binding, specify all of the essential and material terms and leave nothing to be agreed upon as a result of future negotiations." Id. at 657, 267 S.E.2d at 586, citing Smith v. House of Kenton Corp., 23 N.C.App. 439, 209 S.E.2d 397 (1974)].

The Weaver court's analysis both of Boyce and its own case noted two common denominators: (1) The original agreements recited that they were preliminary agreements subject to final resolution by later agreements and (2) the agreements specified only the parties' intentions not their actual agreement.

In the present case, if the Resale Profits Agreement were the only writing or agreement in evidence, we might agree with the defendant's argument. The terms of the agreement itself suggest that it was an agreement to agree in the future: "We agree to enter into a contractual agreement concerning resale of the Bennett property...." However, while we might find, on the basis of the evidence presented, that the Resale Profits Agreement, taken alone, is an agreement to agree and not an enforceable contract, we do not believe this to be determinative. Instead, we believe the controlling contract to be the Offer to Purchase and Contract. We hold that the Resale Profits Agreement, being contemporaneously signed with the Offer to Purchase, became incorporated into the same to comprise the overall contract. We overrule the defendant's first assignment of error.

Contemporaneously signed writings may be incorporated together to divine the meaning and purpose of the contractual whole. Yates v. Brown, 275 N.C. 634, 170 S.E.2d 477 (1969). Moreover, the parties' intentions which are controlling in contract construction, Cordaro v. Singleton, 31 N.C.App. 476, 229 S.E.2d 707 (1976), may be construed from the terms of the writings and the parties' conduct. Heater v. Heater, 53 N.C.App. 101, 280 S.E.2d 19 (1981). The defendant, by his own testimony, admits that he and plaintiff had discussed the resale profits before 24 May 1983. In fact, defendant sent a letter to his attorney, dated May 23, 1983, which specified the terms of what became the resale agreement. Additionally, that the Resale Profits Agreement was signed in conjunction with the Offer to Purchase Agreement, indicates the parties' intention to include the Resale Profits Agreement in the overall contract. Yates, supra.

Furthermore, the parties' own conduct and words the following fall (1983) indicates even more clearly that both believed the Resale Profits and the Design Review Agreements to be in force and effect. The record shows that defendant sought plaintiff's approval several times that fall regarding potential buyers and a design scheme created by Martin. Defendant also suggested that he and plaintiff form a limited partnership in which plaintiff would receive 10% of the profits while defendant would receive 40%. These terms matched proportionately those terms set out in the Resale Profit Agreement (80%/20%). Finally, plaintiff and defendant both testified that plaintiff told defendant she would not sign the Offer to Purchase Contract until both the Resale Profits Agreement and Design Review Agreements were signed.

The foregoing facts adduced at trial overwhelmingly support the conclusion that the parties intended the incorporation of the Resale Profits Agreement into this resulting contract.

The defendant argues that the merger clause contained in the preprinted Offer to Purchase Contract excludes, as a matter of law, all other agreements not expressed in the Offer to Purchase Contract. We disagree. The merger clauses were designed to effectuate the policies of the Parol Evidence Rule; i.e., barring the admission of prior and contemporaneous negotiations on terms inconsistent with the terms of the writing. North Carolina recognizes the validity of merger clauses and has consistently upheld them. Hotel Corporation v. Overman, 201 N.C. 337, 160 S.E. 289 (1931); Cable TV, Inc. v. Theatre Supply Co., 62 N.C.App. 61, 302 S.E.2d 458 (1983); Smith v. Central Soya of Athens, Inc., 604 F.Supp. 518 (E.D.N.C.1985). Merger clauses create a rebuttable presumption that the writing represents the final agreement between the parties. Generally, in order to effectively rebut the presumption, the claimant must establish the existence of fraud, bad faith, unconscionability, negligent omission or mistake in fact. Smith, supra at 526; White & Summers, Uniform Commercial Code, § 2-12 (2d ed. 1980).

Nevertheless, this Court has recognized an exception to this general rule. Where giving effect to the merger clause would frustrate and distort the parties' true intentions and understanding regarding the contract, the clause will not be enforced: "... to permit the standardized language in the printed forms, ... to nullify the clearly understood and expressed intent of the contracting parties would lead to a patently unjust and absurd result...." Loving Co. v. Latham, 20 N.C.App. 318, 201 S.E.2d 516 (1974).

The distinction between the application of the two rules lies in the parties' overall intended purposes of the transaction in each case and whether admission of parol evidence will contradict or support those intentions as expressed in the writing(s). In the case of Neal v. Marrone, 239 N.C. 73, 79 S.E.2d 239 (1953) the court noted that defendant had failed to plead fraud or mistake and sought to introduce parol agreements which evidenced an entirely different contract from that written. Neal, supra. See also Cable TV, Inc., supra, when parol evidence which contradicted the express terms of a written contract as well as the parties' intentions was properly excluded. ("Tar River's problem is simply that they wanted more than they contracted for." 62 N.C.App. at 65, 302 S.E.2d at 460).

When, however, as in the present case, the parties' conduct indicates their intentions to include collateral agreements or writings despite the existence of the merger clause and the parol evidence is not markedly different, if at all, from the written contract, the parties' intentions should prevail. Loving Co., supra. Moreover, "`separate contracts relating to the same subject matter and executed simultaneously by the same parties may be construed as one agreement,'" and this is true even where one contract states that there are no other agreements between the parties. 3 Corbin on Contracts § 578 (1960 & Supp. 1984) p. 648, citing Williams v. Mobil Oil Corp., 83 A.D.2d 434, 445 N.Y.S.2d 172 (1981). See also, Dynamics Corp. of America v. International Harvester Co., 429 F.Supp. 341 (S.D.N.Y.1977); Flemington National Bank & Trust Co. v. Domler Leasing Corp., 410 N.Y.S.2d 75, 65 A.D.2d 29 (1978); 17 Am.Jur.2d Contracts, § 224, p. 668 (1964).

That the three writings were signed together within the same transaction and that plaintiff told defendant she would not sign the Offer to Purchase Agreement without his signing the Resale Profits and Design Agreements supports the conclusion that all three were to be construed together, the merger clause notwithstanding.

Defendant further assigns as error the trial court's denial of defendant's Motion in Limine requesting exclusion of any prior or contemporaneous agreements as violative of the Parol Evidence Rule. Defendant specifically assails the admission of the Resale Profits and Design Review Agreements and other oral testimony regarding the parties' preliminary negotiations. We note at the outset that the two agreements are admissible as separately signed writings which should be construed together to comprise one contract. Yates v. Brown, supra; Dynamics Corp. of America, supra; 17 Am.Jur.2d Contracts, § 224, p. 668 (1964). Lastly, defendant contends that allowing plaintiff to testify that her agreement to enter into the Offer to Purchase constituted consideration for the Resale Profits Agreement violated the Parol Evidence Rule. Since we have already decided that the Resale Profits Agreement, construed to have been incorporated into the Offer to Purchase, constitutes an enforceable contract, we have decided this point against defendant.

As his second assignment of error, the defendant contends that the parties' conduct following 24 May 1983 which culminated in the 15 July 1983 closing constituted a novation as a matter of law. Again, the facts and law of this case require a different conclusion.

The most noticeable feature of defendant's argument is defendant's own substitution of the word "novation" for the trial court's term "substitution" as the issue was put to the jury. Defendant's confusion of terms necessitates further analysis of the meaning of substitution and novation under North Carolina law. Our review of North Carolina case law and authorities persuades us that our courts have used the terms substitution and novation interchangeably, rendering them definitionally one and the same. Both substitution and novation require the substitution of a new contract for an old one which is thereby extinguished. Equipment Co. v. Anders, 265 N.C. 393, 144 S.E.2d 252 (1965); Tomberlin v. Long, 250 N.C. 640, 109 S.E.2d 365 (1959); Walters v. Rogers, 198 N.C. 210, 151 S.E. 188 (1930). We are aware that other authorities have found distinctions between the two terms. See Restatement (Second) of Contracts §§ 277-250 (1981) (and see 17 C.J.S. Contracts § 10 (1963)) but for the purposes of consistency under North Carolina law hold that substitution and novation are one and the same. Nevertheless, defendant fails to persuade us either that the contract was novated or substituted.

Substitution of a contract may be effected only by acts or words wholly inconsistent with the material terms of the old contract. 17 C.J.S. Contracts § 10 (1963); 17A C.J.S. Contracts § 395 (1965). Whether a new contract between the same parties discharges or supercedes a prior agreement depends upon their intention as ascertained from the instrument, the relation of the parties and the surrounding circumstances. Tomberlin v. Long, supra.

In the present case, the parties' intention as construed from their conduct and the circumstances surrounding the 15 July 1983 closing was to carry out the transaction contemplated on 24 May 1983. Plaintiff purchased the 36 acres and the option she had bargained for on 24 May. The defendant likewise purchased the same tract he had contemplated, with plaintiff producing the "front money" which deferred his payment obligations until 31 December 1987. Only the financing terms and the means by which plaintiff and defendant obtained title to the Bennett property differed from the original agreement. Moreover, the making of a second contract dealing with the same subject matter does not necessarily abrogate the former contract between the same parties. Turner v. Turner, 242 N.C. 533, 89 S.E.2d 245 (1955). We therefore hold that the contract was not substituted but modified. A contract may be modified by parol or subsequent conduct of the parties. Yamaha Corp. v. Parks, 72 N.C.App. 625, 325 S.E.2d 55 (1985); Son-Shine Grading v. ADC Construction Co., 68 N.C.App. 417, 315 S.E.2d 346 (1984). Biggers v. Evangelist, 71 N.C. App. 35, 321 S.E.2d 524 (1984). (Defendant's argument that the former contract was "abandoned" likewise is not persuasive for the reasons outlined above. Hayes v. Griffin, 13 N.C.App. 606, 186 S.E.2d 649 (1972); Campbell v. Blount, 24 N.C.App. 368, 210 S.E.2d 513 (1975)).

Defendant finally contends that the trial court's instruction on the burden of proof for substitution of contract was error. The trial court instructed the jury that defendant's burden of proof on the issue of substitution was by clear and convincing evidence. Relying on Equipment Co. v. Anders, supra, defendant contends that in that case the court set forth the burden of proof for novation—specifically that novation must be proved to the jury's satisfaction—the equivalent of the preponderance of the evidence. Nevertheless, for reasons that follow, we do not believe Anders to be dispositive on this point.

North Carolina case law is sparse on the issue of the requisite burden of proof for novation, Anders apparently being the only North Carolina case even remotely on point. However, there is authority in other jurisdictions which supports a clear and convincing standard for novation. Spering v. Sullivan, 361 F.Supp. 282 (D.Del.1973); Dunlop Tire & Rubber Corp. v. Thompson, 273 F.2d 396 (8th Cir. (1959)). It is also well settled that proof of contract modification must be clear and convincing. Lambe-Young, Inc. v. Cook, 70 N.C.App. 588, 320 S.E.2d 699 (1984); Tile and Marble Co. v. Construction Co., 16 N.C.App. 740, 193 S.E.2d 338 (1972). It follows that it is only logical that the complete eradication of a contract as by substitution or novation should require a standard of proof at least as high as that required for modification of the same contract. Additionally, it is telling that abandonment of a contract, a point defendant asserts within his novation argument, requires clear and convincing evidence. Bixler Co. v. Britton, 192 N.C. 199, 134 S.E. 488 (1926); Hayes v. Griffin, supra. If abandonment of a contract which discharges an earlier agreement, as do substitution and novation, requires a clear and convincing burden of proof, novation and substitution should be treated in like fashion. We therefore hold that the trial court correctly instructed the jury that the burden of proof for substitution is by clear and convincing evidence.

Plaintiff's Appeal

Plaintiff appeals the directed verdict for the abuse of process claim and the resulting judgment. Plaintiff's argument fails to persuade us because, as a matter of law, defendant was entitled to a directed verdict for plaintiff's misuse of the lis pendens. N.C.Gen.Stat. § 1-116(a) (1983) makes clear that if neither a foreclosure nor attachment order are involved, a lis pendens may be filed only where a legitimate interest in real property may lie. See also Pegram v. Tomrich Corp., 4 N.C. App. 413, 166 S.E.2d 849 (1969). Plaintiff argues that she was attempting to impose a constructive trust on the property for her share in the resale profits; however, plaintiff only held a contractural interest in the resale profits. There was no real property interest which she could claim. Therefore we affirm the trial court's decision and award of $4,800 against the plaintiff.

Finally, plaintiff contends that the judgment failed to include her rights to the resale profits in the event of foreclosure or other similar contingency. We agree that the judgment should incorporate the terms of the escrow agreement and, in any event, insure plaintiff's rights to 20% of the resale profits in whatever form they take. Therefore, we remand for an amendment to the judgment in accordance with this opinion.

No error; remanded for amendment of judgment.

EAGLES and MARTIN, JJ., concur.