Here are some follow-up thoughts prompted by reader Chad’s comment to my recent post on use of the couplet fraud or intentional misrepresentation in indemnification provisions.
Chad suggested that although fraud includes intentional misrepresentation, at least three state courts have treated the terms fraud and intentional misrepresentation as synonyms. That doesn’t worry me, because if you use in the contract just the word fraud, those courts wouldn’t conclude that a claim for intentional misrepresentation falls outside the scope of the provision.
But of greater concern was Chad’s suggestion that the elements of a claim for misrepresentation are different from the elements of a claim for fraud. That might lead a court to treat a reference to fraud not as an umbrella term that covers various kinds of claims but instead as a reference to a kind of claim, one distinct from a claim for intentional misrepresentation.
That we’re even discussing these niceties leads me to a conclusion that I should have come to earlier: referring to fraud and intentional misrepresentation at all is a losing proposition. Using fuzzy doctrinal terms is conducive to confusion. So I say let’s get rid of them and refer instead to the underlying actions.
So rather than refer to “any claim for fraud or intentional misrepresentation,” how about saying “any claim that the Indemnifying Party supplied one or more Indemnified Parties with information that the Indemnifying Party knew was inaccurate or any claim that the Indemnifying Party withheld information from one or more Indemnified Parties.”
How does this language relate to the “entire agreement” provision? As a rule, a merger provision doesn’t prevent a party from introducing parol evidence to show fraud.
And note that with this language I attempted to exclude from its scope an “honest mistake,” a concept Chad mentioned in his comment.
Sure, this new language is wordy, and I’m sure it could be improved. But that’s a small price to pay for getting rid of words that wrap a contract in fog.
4 thoughts on “Update Regarding “Fraud” and “Intentional Misrepresentation”: Let’s Get Rid of Them!”
Ken, your suggestion may work, and I have some sympathy with it, but let me raise a couple of worries:
In my experience, the reasons for making an exception to a cap on liability in the case of fraud (or other, really bad behaviour) are either:
1. because the parties consider that in exceptional cases of bad behaviour a cap is inappropriate; or
2. because it is an easy way for a judge to strike down the clause as unenforceable, that it seeks to exclude a remedy (ie for fraud) that may not be excluded as a matter of public policy (eg see the UK case of Thomas Witter v TBP Industries  2All ER 573) or under specific legislation (eg the UK Unfair Contract Terms Act 1977). Therefore, to make the exclusion of liability more robust, the draftsman carves out categories of liability that may not be excluded.
I have two concerns about your (first draft) wording:
a. it appears to cover negligent misrepresentation, ie it is much wider than fraud or intentional misrep [Mark: I’ve removed that language; see my comment below. Ken]; and
b. by avoiding legal terms of art, it may create fuzziness as to whether you have used your “get out of jail free” card in relation to my point 2 above. It is something of a technical nicety to have to carve out fraud from the liability clause in the first place, so if you don’t use the word “fraud” it may give the judge greater scope for saying you didn’t carve out properly.
I realise that this last point is arguing for the use of magic (but fuzzy) wording in liability clauses. I think it is very difficult to avoid legal expressions in liability clauses, in view of the propensity of judges to reject such clauses on legal technicalities.
Whilst writing this, I am conscious that you have described your perspective as one of trying to avoid contractual language getting to court, by making it so clear that the parties don’t ever get to court. I “hae mi doots” as to whether this is an appropriate stance for the draftsman in relation to liability language, as I think any attempt to exclude liability needs to be directed to the court as much, if not more than, to the commercial parties.
Mark: If the caselaw were entirely clear and rational, then I might be open to using terms of art to capture it. But the view from 30,000 feet suggests that in the U.S., at least, it isn’t.
I intentionally made my language broad, but I was too broad, as I meant to refer to reckless misrepresentation. I’ve edited the post to remove that language, so as not to muddy the waters. But if you’re trying to articulate the “bad behaviour” concept, it might be appropriate to include recklessness.
Ken: I like your fresh and pioneering perspective on making contractual language more comprehensible to the contracting parties, which, in turn, will help them avoid litigation—the primary purpose of the contract. I agree wholeheartedly with this progressive line of thinking, and look forward to start reading contracts free of fuzzy legalese.
Mark: I follow your second point about losing “magic word” clarity from a judicial perspective. However, the magic words should be precise. You can lose the ambiguity by specifying what type of intentional misrepresentation. So, for anyone not willing to follow Ken’s lead (which is the better alternative), why not say, “(ii) any fraud by or fraudulent misrepresentation of the Indemnifying Party…” Further, to resolve any questions, a judge could easily look to the Restatement (Second) of Contracts, Secs. 159-173, discussing misrepresentation, or refer to another jurisdiction viewing fraud and intentional misrepresentation synonymously. This is what the parties were trying to achieve, rather than exposing themselves to a potential litigation nightmare from an intentional, material, non-fraudulent misrepresentation. For example, with this language, the clients’ could have spared the expense of such a misrepresentation/fraud argument in ABRY Partners, 891 A.2d 1032 (Del. 2006).
After addressing each of these “deficient usages” like intentional misrepresentation, contracts will become more beneficial for the client (see Ken’s prior piece at https://www.adamsdrafting.com/downloads/Adams-Business-Law-Today-Nov.-Dec.%202005.pdf).