[Updated May 23, 2011, 11:30 a.m. EDT: Revised again to clarify the analysis. Sometimes it takes a while to get stuff right!]
In Italian Cowboy Partners, Ltd. v. Prudential Ins. Co., WL 1445950 (Tex. April 15, 2011) (PDF copy here), the Texas Supreme Court held that absent a clear disclaimer of reliance, standard entire-agreement language in a contract didn’t serve to preclude claims for fraudulent inducement. This case serves as a reminder that some courts have a soft spot for magic words.
The owners of Italian Cowboy, a restaurant, leased the restaurant premises. The lease included the following provisions:
14.18 Representations. Tenant acknowledges that neither Landlord nor Landlord’s agents, employees or contractors have made any representations or promises with respect to the Site, the Shopping Center or this Lease except as expressly set forth herein.
14.21 Entire Agreement. This lease constitutes the entire agreement between the parties hereto with respect to the subject matter hereof, and no subsequent amendment or agreement shall be binding upon either party unless it is signed by each party. …
It turned out the the premises were plagued by a nasty odor that the property manager had been aware of but had failed to disclose. Italian Cowboy sued, claiming fraud. The trial court found for Italian Cowboy, but the court of appeals reversed as to each of Italian Cowboy’s claims and held in favor of the defendant on its counterclaim for breach of contract.
In reversing the judgment of the court of appeals, the supreme court held as follows:
We turn first to whether the lease contract effectively disclaims reliance on representations made by Prudential, negating an element of Italian Cowboy’s fraud claim. We conclude that it does not. First, a plain reading of the contract language at issue indicates that the parties’ intent was merely to include the substance of a standard merger clause, which does not disclaim reliance. Moreover, even if the parties had intended to disclaim reliance, the contract provisions do not do so by clear and unequivocal language. For these reasons, we hold as a matter of law that the language contained in the lease agreement at issue does not negate the reliance element of Italian Cowboy’s fraud claim.
The supreme court noted that it has long been held that a “merger clause” (what I call, in the interest of clarity, an entire-agreement provision) has not been an obstacle to a claim for fraud. It went on to point to recent caselaw standing for the proposition that “it may be possible for a contract’s terms to preclude a claim for fraudulent inducement by a clear and specific disclaimer-of-reliance clause.”
In Italian Cowboy Partners, the question was whether the lease contained a disclaimer of reliance or whether the provisions quoted above simply amounted to an entire-agreement provision that was inadequate to disclaim reliance.
The landlord argued, on the basis of section 14.18, that by agreeing that no external representations were being made, the tenant had impliedly agreed not to rely on any external representations. The court disagreed, holding that sections 14.18 and 14.21 constituted a standard entire-agreement provision.
The court went on to say that to disclaim reliance, you must use clear and unequivocal language. It contrasted the language at issue in this dispute with the disclaimer language at issue in Schlumberger Technology Corp.v. Swanson, 959 S.W.2d 171 (Tex. 1997), which it quoted (emphasis in original):
[E]ach of us … expressly warrants and represents … that no promise or agreement which is not herein expressed has been made to him or her in executing this release, and that none of us is relying upon any statement or representation of any agent of the parties being released hereby. Each of us is relying on his or her own judgment … .
Here’s my take on this:
I understand why caselaw says that an entire-agreement provision doesn’t preclude claims for fraud. The question is, what would be the best way to make it clear in a contract that a party waives any right to bring fraud claims?
In that regard, I think that the supreme court is mistaken when it says that “the parties’ intent was merely to include the substance of a standard merger clause.” Section 14.21 is a standard entire-agreement provision—it says in effect that the only representations to which the parties are agreeing are those in the contract. By contrast, section 14.18 is a no-other-representations provision—it says that the landlord didn’t make any representations other than those in the contract.
Because the supreme court in effect ignored the meaning of section 14.18, the result is confusion. As a matter of standard English, it would be hard to distinguish between the following provisions, the first of which is analogous to section 14.18, the second of which is analogous to the reliance language endorsed by the supreme court:
Acme acknowledges that Widgetco has made to Acme no representations other than those contained in this agreement.
In entering into this agreement, Acme is not relying on any representations other than those contained in this agreement.
The first would seem semantically equivalent to the second: if Acme hasn’t made any additional representations, necessarily Widgetco can’t be said to have relied on any additional representations. By attributing significance to the reliance language, the court is straying into magic-wordery. That shouldn’t come as a surprise. This is, after all, the court that in 1464-Eight, Ltd. v. Joppich, 154 S.W.3d 101 (Tex. 2004), held that a false recital of consideration was legally effective. See MSCD 1.123.
And to make matters worse, as a means of precluding fraud claims, no-other-representations language would seem clearer than reliance language.
But given that, unfortunately, the supreme court has held that reliance language is adequate to preclude fraud claims and no-other-representations language is not, it would be rash of any drafter to ignore that for purposes of contracts governed by Texas law. But you can make the best of a bad job by expanding your reliance language so that it makes it clear what purpose it seeks to accomplish:
Acme acknowledges that because it is not relying on any statements made by Widgetco to Acme, other than in this agreement, regarding the subject matter of this agreement, Acme will have no basis for bringing any claim for fraud in connection with any such statements.
In other jurisdictions, you could use this language instead of no-other-representations language—because it refers to “any statements,” it would apply equally in those contexts where Widgetco didn’t make any other representations.
Incidentally, I don’t know whether any other jurisdictions have caselaw analogous to Italian Cowboy Partners.