The Texas Supreme Court recently reaffirmed a contracting party’s ability to protect itself from liability for fraudulent inducement by bargaining for specific disclaimers of reliance on any extra-contractual statements. This decision serves as an important reminder of the power of such disclaimers, which can even bar actions based on post-signing misrepresentations if the parties later amend the contract to incorporate the terms of the original agreement.
The case, Int’l Bus. Machines Corp. v. Lufkin Indus., LLC, arose out of the decision by Lufkin Industries, LLC (“Lufkin”) to hire IBM to upgrade its software systems. Over the course of several pitch meetings before the deal was struck, IBM made various representations to Lufkin regarding the system’s suitability for Lufkin’s purposes and how soon the new system could “go live.”
Lufkin agreed to hire IBM, and the parties executed a statement of work (“SOW”) to memorialize their arrangement. Among other things, the SOW provided that “[i]n entering into this SOW, Lufkin Industries is not relying upon any representation made by or on behalf of IBM…, including, without limitation, the actual or estimated completion date” of the installation.
The upgrade proved more difficult than anticipated, and Lufkin ended up executing nine different “Project Change Requests” to delay the go-live date and provide additional compensation to IBM. When the system finally did go live, implementation difficulties “crippled Lufkin’s business,” resulting in millions of dollars of losses.
Lufkin sued IBM, alleging among other things that IBM had misrepresented its system’s capabilities and thereby fraudulently induced Lufkin into entering into the SOW. Lufkin also asserted a “string-along fraud” theory, premised on IBM allegedly having realized after the SOW was signed that the system was incompatible with Lufkin’s purposes, but concealed that fact from Lufkin in order to earn more fees. Ultimately, the jury awarded Lufkin $21 million in damages on the first theory and $6 million on the second (which the trial court modified by making the $6 million award an alternative that would only apply if the $21 million award was reversed on appeal).
The entire award was reversed on appeal, however, as the Supreme Court concluded that the terms of the SOW barred any recovery under either fraud theory.
With respect to the pre-SOW misrepresentations, the Court reaffirmed that “a clause that clearly and unequivocally expresses the party’s intent to disclaim reliance on the specific misrepresentations at issue can preclude a fraudulent-inducement claim.” Among other things, Lufkin accused IBM of misrepresenting when the system could go live, but in the SOW and the terms of the disclaimer were non-boilerplate, Lufkin disclaimed reliance on any of IBM’s representations regarding “the actual or estimated completion date.” Since IBM and Lufkin were both sophisticated parties who were represented by counsel in negotiating the SOW and the terms of the disclaimer were non-boilerplate, Lufkin could not recover for fraudulent inducement based on pre-SOW misrepresentations.
The Court also rejected the string-along fraud theory that was premised on allegedly false statements after the SOW was signed. Lufkin argued that the SOW only disclaimed reliance on pre-signing statements, directing the Court to the language of the disclaimer stating that Lufkin was not relying on IBM’s representations in “entering into” the SOW. But the Court concluded that each project change request became part of the original agreement and thus incorporated the disclaimer from the SOW. Hence, “with each change authorization, Lufkin reaffirmed that it was not relying on IBM’s representations ‘in entering into’ the Statement of Work, which then included the change authorization.”
(It should be noted that, despite having its fraud claims rejected and jury award reversed, the decision was not a total loss for Lufkin, as the Court ordered a new trial on both liability and damages on Lufkin’s contract claims.)
Lufkin underscores the power of specific, non-boilerplate disclaimers of reliance as defenses to fraudulent inducement actions. It also serves as an important reminder to parties negotiating a modification to their agreement to consider what unintended consequences the amendment may have. Above all, the decision ensures that contracting parties should pay careful attention when negotiating any disclaimers of reliance, so as to preclude any argument down the road that they were not entitled to rely on representations made in the course of negotiations.
For more information on this topic, contact any of the attorneys in the firm’s commercial litigation group or call (361) 886-3800.