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When negotiating a contract, should you include a no-reliance clause? Often known as “big boy” clauses (as in “we’re big boys and can look after ourselves”), no-reliance clauses are typically included in negotiated contracts in a preemptive effort to stop a party from sculpting what would otherwise be a breach of contract case into an accusation of fraud.
Contracts usually contain one of three types of clauses: integration, merger or no-reliance. The first two types typically state that the contract itself constitutes the entire agreement between the parties, that all prior negotiations and agreements are merged in that agreement, and that all additions or modifications to the contract must be made in writing and signed by both parties. On the other hand, a no-reliance clause is a paragraph stating that the parties have not relied upon oral representations in entering into or executing the contract.
All three types of clauses demonstrate the all-inclusive nature of the written instrument and furnish an additional reason for applying the so-called “parol evidence rule,” which in general precludes all prior or contemporaneous statements contradicting the terms of the written agreement. However, because integration and merger clauses are generally boilerplate provisions included in most contracts and are not negotiated by either party, courts often ignore them in fraud claims. But the same is not necessarily the case for no-reliance clauses.
Recent Case Law
The enforceability of the no-reliance clause as it relates to fraud claims was recently addressed in Extra Equipamentos E Exportacao Ltda. v. Case Corp., a case before the United States Court of Appeals for the Seventh Circuit. In this case, the plaintiff had sued the defendant for fraud, arguing that it was induced to sign a release based on certain alleged misrepresentations and promises made by the defendant. The defendant argued that the inclusion of the no-reliance clause in the release eradicated the claim for fraud.
The Seventh Circuit, in an opinion by Judge Richard Posner, explained that if someone who does not fall into the “big boy” category (particularly a party not represented by counsel) signs a no-reliance clause, the courts may require an inquiry into the circumstances of the negotiation of the contract to make sure that the signatory was aware of what he or she was signing and the implications of the clause. However, in Extra Equipamentos E Exportacao Ltda. v. Case Corp., the Seventh Circuit determined that the plaintiff was precluded from pursuing its fraud claim as no reasonable jury could find that the plaintiff did not understand the meaning of the no-reliance clause. Thus, the no-reliance clause included within the contract “serve[d] a legitimate purpose in closing a loophole in contract law by heading off the suit for fraud.”
When drafting a contract, it is important to think ahead to safeguard yourself from potential litigation. While a no-reliance clause can serve as a safe haven to protect you from being sued for fraud in what could otherwise be a simple breach of contract case, it is important to consult an attorney well versed in contract law to provide counsel according to your unique circumstances.
© 2010 Much Shelist Denenberg Ament & Rubenstein, P.C.
