Texas Supreme Court Closes the Door to Transactional Fraud Claims Based on False Representations That Conflict With an Agreement’s Express Terms
A recent decision from the Texas Supreme Court has closed the door for good on certain fraud and fraudulent inducement claims based on false representations that are contradicted by the parties’ agreement. In Mercedes-Benz, LLC USA v. Carduco, the Texas Supreme Court clarified that, under Texas law, a party may not justifiably rely on misrepresentations by another contracting party when such misrepresentations are contradicted by the terms of the parties’ written contract. This sweeping opinion will now bar fraud claims between contracting parties, even if the parties make outlandish and blatantly false or misleading oral representations to one another in the course of their negotiations.
This decision is instructive for any party doing business in Texas, and reinforces the critical need to ensure that any transaction documents are complete and include all material representations between the parties.
On February 22, 2019, the Texas Supreme Court reversed a multi-million dollar judgment against Mercedes-Benz LLC USA (“Mercedes”) and three of its employees awarded to a Mercedes franchisee, Carduco, Inc. (“Carduco”). Carduco alleged that Mercedes fraudulently induced it into purchasing the assets of a Mercedes dealership in Harlingen, Texas by making express oral representations that it could relocate its dealership to McAllen, Texas and be the area’s exclusive dealer of Mercedes-Benz vehicles. Carduco claimed that they repeatedly informed Mercedes of their intentions to move to McAllen, and that Mercedes representatives even went with them to scout for new locations in McAllen. At the same time, Mercedes company representatives were negotiating with another party to open a dealership in McAllen without the franchisee’s knowledge.
Carduco subsequently entered into a contract purchasing the assets of the Harlingen dealership and a separate Dealer Agreement with Mercedes. Both agreements limited the franchisee’s right to operate to the dealership in Harlingen, Texas and provided that the franchisee did not have any exclusive rights to sell Mercedes-Benz automobiles. After Mercedes announced that a different dealer would be locating near McAllen, Carduco made a formal request to relocate its Harlingen dealership to McAllen. Mercedes denied the request.
Carduco subsequently filed suit against Mercedes and the individuals who allegedly made the misrepresentations, alleging that Mercedes had fraudulently induced it into the agreements by making false misrepresentations regarding the franchisee’s right to relocate to McAllen with exclusive rights to sell Mercedes-Benz automobiles. At trial, the jury awarded actual damages of $15.3 million to the franchisee, as well as punitive damages against the defendants, collectively exceeding more than $112 million. The court of appeals affirmed the jury verdict, but reduced the punitive damages award to $600,000.
The Texas Supreme Court reversed the court of appeals and ordered that Carduco take nothing on its fraudulent inducement claim. The court reasoned that the franchisee could not have justifiably relied on any oral representations from Mercedes or its representatives because the express language of the contracts clearly stated that the franchisee had no right to relocate and had no right to exclusivity within a particular geographic area. Because the representations that allegedly induced the franchisee into the agreements were expressly contradicted by the terms of the agreements themselves, the court held that the franchisee’s reliance on such representations was unjustified as a matter of law.
This is a cautionary tale for any party doing business in Texas. Most importantly, the lesson of Mercedes-Benz is that parties cannot rely upon oral representations made by the other contracting party if such representations conflict with the express terms of the agreement. Thus, parties and their counsel involved in transactions in Texas must be aware to: (1) include all material representations in the terms of the agreement; and (2) include a “merger clause,” which supersedes and negates all prior representations by the parties other than those included in the agreement itself.
By taking these practical steps to contract drafting, a party can preempt disputes with other contracting parties based on prior negotiations and, depending on the party’s position, either limit liability for potential fraud claims or ensure that the material representations upon which each party is relying are memorialized in the agreement itself.