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April 17, 2014

Beware the Boilerplate: Merger and Integration Clauses

It is fairly common for a defendant sued on a debt to assert, long after the money’s been spent, that he was defrauded into entering the transaction. Such “fraud in the inducement” claims are very difficult to have dismissed on summary judgment, because allegations of fraud are generally accepted to raise issues of fact. One of the most fact-intensive elements of a fraudulent inducement claim is whether the defrauded party actually relied on the other party’s representations in entering the contract, and whether such reliance was reasonable. A merger clause that negates reliance, may bring the lender one step closer to defeating this argument.

Can a merger clause beat allegations of fraud in the inducement? Maybe.

A merger clause is a contractual provision to the effect that the written terms of the contract may not be varied by prior agreements because all such agreements have been merged into the written document. IKON Office Solutions, Inc. v. Elfert, 125 S.W.3d 113, 125 n.6 (Tex. App.—Houston [14th Dist.] 2003, pet. denied). Most merger clauses look something like this:

All understandings, representations and agreements heretofore had with respect to this Guaranty are merged into this Guaranty which alone fully and completely expresses the agreement of Guarantor and Lender.

Such a clause is insufficient to beat a fraudulent inducement claim. Dallas Farm Mach. Co. v. Reaves, 307 S.W.2d 233, 239 (Tex. 1957). But the Texas Supreme Court has held that under certain circumstances fraudulent inducement can be avoided by a merger clause that expressly indicates an intention to negate reliance and/or preclude fraudulent inducement claims.

In Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171, 177 (Tex. 1997), the Texas Supreme Court held that the following merger clause, which was contained in a post-dispute release agreement, sufficiently negated reliance so as to preclude a claim that the settlement was induced by fraud:

[E]ach of us expressly warrants and represents and does hereby state . . . and represent . . . 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 and each has been represented by Hubert Johnson as legal counsel in this matter. The aforesaid legal counsel has read and explained to each of us the entire contents of this Release in Full, as well as the legal consequences of this Release . . .

In doing so, the Court held that disclaimers of reliance are binding when the circumstances surrounding formation of an agreement support the notion that the parties intended to release all further disputes between the parties. Id. at 179-80. That may not be the case in a pre-dispute merger clause because fraud vitiates the entire contract, including the disclaimer of reliance, but there is no reason to deprive yourself of this potential argument if language disclaiming reliance can be negotiated into the contract. You can be sure that without it, a claim of fraud in the inducement is going to have to be either settled or tried.

Bottom line

The courts have not ruled on whether a disclaimer of reliance in a pre-dispute merger clause will cut off a claim of fraud in the inducement, but it is worth trying. And in every post-dispute settlement agreement or forbearance agreement, disclaimer of reliance is an absolute necessity.

© 2014 Andrews Kurth LLP

About the Author

Linda R. Stahl, Commercial Litigation Attorney, Andrews Kurth, Law Firm
Partner

Linda Stahl is a litigation partner practicing complex commercial litigation, a member of the firm’s Pro Bono Committee and the Pro Bono Coordinator for the Dallas Office.

Linda handles a wide variety of complex commercial disputes, including intellectual property matters, oil and gas related litigation, fiduciary duty claims and enforcement of financial instruments.

The clients Linda represents include financial institutions, energy producers and internet companies. Through her successful representation of loan sellers, servicers and trustees of commercial...

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