Texas Supreme Court continues to hold that merger clauses alone do not defeat fraudulent inducement claims.

The Texas Supreme Court recently issued its opinion in Int’l
Bus. Machines Corp. v. Lufkin Indus., LLC
, 17-0666 (Tex. Mar. 15, 2019),
clarifying existing law relative to waivers of fraudulent inducement and
“string along fraud” claims. In this case involving a contract to purchase a
business-management software system, the Court once again affirmed that clear
and specific contractual disclaimers bar recovery for misrepresentations made:
(1) to induce a buyer to enter into a contract; and (2) to induce a buyer to
later agree to amend a contract. Lufkin sued IBM for fraudulent inducement,
“string along fraud,” and breach of contract. The trial court entered judgment
on a jury verdict in favor of Lufkin for fraud, with damages totaling $23
million. The Supreme Court reversed the judgment on fraud.

In 2009, Lufkin decided to upgrade its computer software
system. Over several months, Lufkin explained to IBM that it needed a system
that could quickly replace its old system for a price lower than the cost of
upgrading that system. Based on Lufkin’s operational needs, IBM represented
that it could meet Lufkins needs and subsequently recommended a certain
product. The implementation did not go well, and the system failed multiple
test runs and took longer to implement and upgrade than IBM promised. IBM kept
assuring Lufkin that, with patience and more money, everything would get
implemented correctly.

The Court reiterated that a merger clause, standing alone,
does not prevent a party from suing for fraudulent inducement. The Court also
reiterated that, by itself, “a clause that merely recites that the parties have
not made any representations other than those contained within the written
contract is not effective to bar a fraudulent inducement claim.”

The Court clarified, however, that “a clause that clearly
and unequivocally expresses a party’s intent to disclaim reliance on the specific
misrepresentations at issue
can preclude a fraudulent-inducement claim.”

The Court also concluded that Lufkin disclaimed reliance on IBM’s misrepresentations because the parties negotiated at arm’s length, they were both knowledgeable in business matters, they were represented by counsel, and the contract “expressly and clearly disclaimed reliance.” The lesson for those drafting contracts on behalf of sellers is to include clear and unequivocal language disclaiming reliance on any representations by a seller or seller’s agents or an express release of claims for fraudulent inducement. These clauses should be specific and clear that the buyer is disclaiming any reliance on outside or even ongoing promises regarding performance. A boilerplate disclaimer may not be enough to protect against failure to disclose material defects, for example, so it is important to make any such disclaimers clear and specific. A buyer, of course, will want to avoid a release of fraudulent inducement claims, and may want to include specific representations about performance in the contract.

By: Rusty O’Kane