Reliance? Material Inducement? Wut?

The other day, while researching contract provisions that refer to reliance, I saw the following in a provision waiving jury trial (excuse the all caps; bold added):

EACH PARTY HERETO ACKNOWLEDGES THAT IT HAS BEEN INFORMED BY THE OTHER PARTIES HERETO THAT THIS SECTION 8(C) CONSTITUTES A MATERIAL INDUCEMENT UPON WHICH THEY ARE RELYING AND WILL RELY IN ENTERING INTO THIS AGREEMENT.

Leaving aside other shortcomings, I wondered about the references to reliance and material inducement, so I asked the LinkedIn group for A Manual of Style for Contract Drafting (here) whether anyone had any thoughts. I then did some rooting around. I would have done this follow-up post in my LinkedIn group, but it’s too long for that. So here goes:

Let’s consider reliance first. Reliance is an element for bringing a tort claim. According to 37 Am. Jur. 2d Fraud and Deceit § 231, “Both negligent misrepresentation and fraud require a plaintiff to prove actual, reasonable, or detrimental reliance on a misrepresentation or an omission.”

Material inducement is also an element for a claim of fraud. “False and fraudulent misrepresentations by a seller as to the subject matter of the contract may constitute fraud for which the buyer may maintain an action for damages or rescind the sale, and as a general rule, every willful misrepresentation by the seller in respect to a fact, which affords a material inducement to the sale and operates to deceive the buyer, may be made the basis of a charge of fraud.” 37 Am. Jur. 2d Fraud and Deceit § 59.

But why mention reliance and material inducement in a contract provision? It appears to be the result of a common enough form of confusion. The following is from an old law review article, but it will do for now:

It is sometimes difficult to separate the requirement of justifiable reliance from that of materiality. The former assumes reliance and concerns the issue of whether plaintiff should have acted upon the representation without first having investigated the truthfulness of the representation. The latter deals with the question of whether plaintiff—as a reasonable man—would have acted upon the representation in the first place. In strict theoretical analysis the two requirements are independent of each other, but the courts often do not recognize this distinction and talk about the justifiability of reliance when the real issue is whether plaintiff relied at all.

Joseph M. Stool, The Element of Materiality in Deceit Cases, 29 Tex. L. Rev. 644, 650 (1951).

But the bigger question is, why worry about establishing in a contract the elements for a tort claim? I see two problems.

First, a court might pay some attention to what you say in a contract, but you’ll nevertheless have to establish the elements of your claim instead of just pointing to the contract.

And second, if the other side makes various statements of fact in a contract, it seems bizarre to single out some statements of fact in this manner—that suggests you don’t care about the rest. And flagging all statements of fact seems redundant—if you weren’t relying on the other side’s statements of fact, you wouldn’t have asked it to make those statements of fact.

So I say the heck with this-is-for-our-future-tort-claim drafting. It just clogs up the works.

Regarding the provision that prompted this deal, it’s not a statement of fact that underlies the deal. Instead, it’s an action taken by means of signing the contract, so it seems an unlikely basis for a fraud claim. But don’t take my word on that: I’m no litigator.

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.