The Effect of Merger and No Reliance Clauses on Fraud Claims in Texas

Effect of Merger and No Reliance Clauses on Fraud Claims

Written contracts are intended to memorialize the understanding between parties, and it is important to accurately document each parties’ promises and intentions in a contract. However, sometimes the recitations and representations in a contract may not accurately represent what actually occurred in the negotiation and formation process. For example, common sense would tell us that a used car dealer can't represent that a car without a motor runs great and then claim protection from later fraud claims due to an as-is clause in the bill of sale.

Sophisticated parties often attempt to rely on merger clauses and no reliance clauses to protect themselves from later fraud claims. By including a merger clause in the contract, the parties are confirming it as their final and complete agreement. Additionally, by including a no reliance clause, the parties are attempting to disclaim their reliance on any warranties, statements, or representations not contained in the final contract. Without incorporating a merger clause or a no reliance clause into the agreement, a party is more likely to succeed on claims involving representations made outside the contract.

Merger and no reliance clauses are occasionally overlooked as boilerplate language, yet play important roles in defending a fraud claim. In 2011, the Texas Supreme Court addressed the issue of whether a merger clause may preclude claims of fraudulent inducement. The court concluded that “[a] merger clause does not waive the right to sue for fraud should a party later discover that the representations it relied upon before signing the contract were fraudulent.” Italian Cowboy Partners v. Prudential Ins. Co., 341 S.W.3d 323 (Tex. 2011). In support of public policy, the Texas Supreme Court cited an earlier case: “[t]o refuse relief would result in opening the door to a multitude of frauds and in thwarting the general policy of the law.” Dallas Farm Mach. Co. v. Reaves, 307 S.W.2d 233, 239 (Tex. 1957).

However, courts have determined that a no reliance clause may bar an argument of fraudulent inducement, depending on certain factors. To determine whether a fraudulent inducement claim should be barred, the court considers whether the parties specifically discussed the exact issue in question, whether the plaintiff was represented by counsel, and whether the parties were knowledgeable in the business. Dallas Farm Mach. Co. v. Reaves, 307 S.W.2d 233, 337 (Tex. 1957). The court in Schlumberger Tech Corp. v. Swanson held that “a release that clearly expresses the parties’ intent to waive fraudulent inducement claims or one that disclaims reliance on representations about specific matters in dispute, can preclude a claim of fraudulent inducement.” Schlumberger Tech Corp. v. Swanson, 959 S.W.2d 171, 181 (Tex. 1997).

Drafting no reliance clauses commensurate with case law can increase the likelihood of barring fraud claims. It is important to involve a competent attorney early in the drafting process to help ensure a favorable result should litigation ensue.

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