Contracting parties sometimes attempt to rely on merger clauses to avoid future claims arising from reliance on extra-contractual representations such as fraudulent inducement. But in Texas, the inclusion of a standard merger clause does not preclude such a claim. See Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am., 341 S.W.3d 323, 327 (Tex. 2011).
This is because standard merger clauses typically state that “no representations were made other than those contained in the contract, without speaking to reliance at all,” and “[t]here is a significant difference between a party disclaiming its reliance on certain representations, and therefore potentially relinquishing the right to pursue any claim for which reliance is an element, and disclaiming the fact that no other representations were made.” Id. at 334–35 (emphasis in original). A contract entirely devoid of the term “rely” or “reliance” will not bar a fraudulent inducement claim. Id. at 336.
Instead, to preclude a future claim for fraudulent inducement, a clause must “clearly and unequivocally express[] the party’s intent to disclaim reliance on the specific misrepresentations at issue.” IBM v. Lufkin Indus., LLC, 573 S.W.3d 224, 229 (Tex. 2019). And not every disclaimer of reliance, though clear and unequivocal, will be effective. Texas courts also consider the following factors set forth in Forest Oil Corp. v. McAllen, 268 S.W.3d 51, 60 (Tex. 2008):
- Whether the terms of the contract were negotiated, rather than boilerplate, and if during negotiations the parties specifically discussed the issue that has become the topic of the subsequent dispute
- Whether the complaining party was represented by counsel
- Whether the parties dealt with each other at arm's length
- Whether the parties were knowledgeable in business matters
- Whether the release language was clear
Thus, “[w]hen sophisticated parties represented by counsel disclaim reliance on representations about a specific matter in dispute, such a disclaimer may be binding, conclusively negating the element of reliance in a suit for fraudulent inducement.” IBM, 573 S.W.3d at 229 (internal quotations omitted).
In IBM, the Texas Supreme Court had “no trouble concluding” that reliance was effectively disclaimed where the parties had negotiated the agreement at issue at arm’s length, were both knowledgeable in business matters, and were represented by counsel, and the clauses included in the agreement “expressly and clearly disclaim reliance”:
In entering into this SOW, Lufkin Industries is not relying upon any representation made by or on behalf of IBM that is not specified in the Agreement or this SOW, including, without limitation, the actual or estimated completion date, amount of hours to provide any of the Services, charges to be paid, or the results of any of the Services to be provided under this SOW. This SOW, its Appendices, and the Agreement represent the entire agreement between the parties regarding the subject matter and replace any prior oral or written communications.
* * *
This SOW and the referenced Agreement identified below are the complete agreement between Lufkin Industries and IBM regarding Services, and replace any prior oral or written communications between us. Accordingly in entering into this SOW, neither party is relying upon any representation that is not specified in this SOW including without limitation, any representations concerning 1) estimated completion dates, hours, or charges to provide any Service; 2) the experiences of other customers; or 3) results or savings Lufkin Industries may achieve.
Id. at 228–29 (emphasis added); see Forest Oil, 268 S.W.3d at 59–61 (holding that provision stating that no party is “relying upon any statement or any representation of any agent of the parties” refuted element of reliance in fraudulent inducement claim); see also Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171, 180–81 (Tex. 1997) (holding that contractual language stating that “none of us is relying upon any statement or representation of any agent of the parties being released hereby[, e]ach of us is relying on his or her own judgment” clearly and unequivocally disclaimed reliance on representations and barred fraudulent inducement claim).
Recently, another Texas court addressed whether the following clause effectively precluded a claim for fraudulent inducement based on alleged material oral misrepresentations made during the negotiation of a purchase agreement:
This Agreement contains the entire agreement between the parties with respect to this subject matter and is not subject to any prior or contemporaneous oral or written agreements. The undersigned parties affirm that they have not relied on any representations not expressed in this Agreement in deciding to enter into this Agreement. The undersigned parties further affirm that they are relying solely on their own judgment (and the advice of their own counsel) in deciding to enter into this Agreement.
W. Loop Hosp., LLC v. Houston Galleria Lodging Assocs., LLC, 649 S.W.3d 461, 489 (Tex. App.—Houston [1st Dist.] 2022, pet. denied). The court held that this language, which specifically disclaims reliance on any representations not expressed in the purchase agreement and states that the parties affirmatively relied on their own judgment and advice of counsel, was “similar to language that the Texas Supreme Court has held constitutes a valid disclaimer of reliance that bars fraudulent inducement claims.” Id. (citing IBM, Forest Oil, and Schlumberger).
Further, the “totality of the surrounding circumstances”—the Forest Oil factors—supported the court’s finding that the no-reliance language was effective to waive reliance. Id. at 490. There was evidence that the purchase agreement was the result of an arm’s-length transaction entered into by parties experienced in real estate transactions and represented by counsel, and that the parties had discussed the specific representations at issue during the negotiation of the purchase agreement. Id.
Thus, contracting parties that wish to avoid any future claims based on extra-contractual representations, such as fraudulent inducement, should be sure to include language that specifically disclaims any reliance on representations not included in the parties’ agreement—not just language that states there were no such representations. The more specific the language of the no-reliance clause, the more easily a reviewing court can conclude that the intent to disclaim such reliance was “clear and unequivocal,” as required by Texas law.
Where possible, including specific representations or categories of representations not relied upon, or including affirmative statements that sophisticated parties relied on their own judgment or that of counsel, can bring peace of mind that any claims of fraudulent inducement are put to bed.
Authored by litigators from our energy team, the Not Just Boilerplate series on Power & Pipes provides real-world examples of the impact that certain contract clauses can have on energy companies. Whether in repeat form agreements, employment agreements, or heavily negotiated one-off deals or mergers, there can sometimes be a tendency to just “grab” clauses from prior agreements, with the thinking that “it has always worked before . . .”
Our energy lawyers have experience with a wide array of litigation matters that have turned on various common contract clauses, some of which may have not received much attention at the time they were included in the agreement. We thought it might be useful to pass on some real-world “lessons learned” from the litigators who have actually fought the battles. Such perspectives might help to inform your next contract—or dispute.