The Supreme Court of Texas in its recent IBM decision provided further clarity to what contracting parties must say in their contracts to disclaim fraudulent inducement claims. Int’l Bus. Mach. Corp. v. Lufkin Indus., LLC, No. 17-0666 (Mar. 15, 2019). The Court endorsed provisions that disclaim reliance on any representations other than those explicitly made in the agreement, further clarifying its previous holdings on this issue in Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am., 341 S.W.3d 323, 327 (Tex. 2011) and Forest Oil Corp. v. McAllen, 268 S.W.3d 51, 60–61 (Tex. 2008).
In IBM, Lufkin Industries contracted with IBM to implement an SAP business software solution. Lufkin Industries alleged that in selling the solution, IBM falsely promised that it could implement an “out-of-the-box” or “off-the-shelf” solution that would meet 80 percent of Lufkin Industries’ needs. Instead, according to Lufkin Industries, the project took too long, went far over budget, and did not deliver the results required. A jury awarded Lufkin Industries $21 million for fraudulent inducement, $6 million for a string-along-fraud claim, and although it found breach of contract, awarded no damages for that claim.
On petition to the Supreme Court of Texas, IBM contended that the parties’ contract disclaimed reliance to support fraudulent inducement or string-along fraud. The Court agreed and rendered judgment in IBM’s favor on those claims. The Court remanded the case for a new trial on liability and damages for the breach-of-contract claim. The Court’s analysis of the contract language supported its rendition on the fraud claims and provides useful guidance for contracting parties seeking to disclaim reliance on representations outside of the contract.
The Court first reiterated its holding in Italian Cowboy, noting that neither a merger clause nor a “clause that merely recites that the parties have not made any representations other than those contained within a written contract” are effective to disclaim fraudulent inducement claims. Instead, the Court held that the contractual language at issue must “clearly and unequivocally express the party’s intent to disclaim reliance on the specific misrepresentations at issue.” The Court further noted that it must look to the contract language and the totality of circumstances surrounding the contract. The Court reiterated the non-exclusive list of factors, originally set forth in Forest Oil, that must be considered before determining that a disclaimer is effective, namely whether:
- The terms of the contract were negotiated, rather than boilerplate, and during negotiations the parties specifically discussed the issue that has become the topic of the subsequent dispute;
- The complaining party was represented by counsel;
- The parties dealt with each other at arm’s length;
- The parties were knowledgeable in business matters; and
- The release language was clear.
It is important to note that these are factors to consider, not elements of a legal test to be met. And while the Court did not explain how to balance these issues, the thrust of the opinion seems to place special emphasis on the parties’ sophistication and whether any aspect of the contract was negotiated. Indeed, the Court noted that the disclaimers at issue do not have to be negotiated as long as there was some aspect of negotiation to the transaction. Also, the parties do not have to be sophisticated as to the subject of the contract (here, software) but instead sophisticated as to “business matters.”
In IBM, the court had “no trouble concluding that the factors” supported disclaimer based on the facts that there was negotiation at arm’s length, both parties are sophisticated and were represented by counsel, and the contract had two disclaimer clauses that expressly and clearly disclaimed reliance. The language at issue was:
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.
[I]n 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.
The Statement of Work included a list of specified services to be performed at time and material rates but provided no estimated completion dates or hours for providing those services. The Court was particularly impressed that the disclaimers required that any representation be “specified” in the Agreement or Statement of Work to be actionable and also that it provided “examples of representations that were ‘not specified’ in the contract.”
This framework can be included in any contract: a contracting party should note that the representations relied on are specified in the relevant contract or any attachments setting forth services or products to be supplied and set forth examples of what is not specified. This language will not obviate the need for a court to engage in a full analysis of the factors to ensure the transaction was negotiated at arm’s length between sophisticated, represented parties. But if you are contracting with a sophisticated counterparty and both sides are represented by counsel, it puts you on good footing to disclaim fraud claims for representations outside the contract’s terms.