Merger Clauses and Fraudulent Inducement Claims
by Tracye McGaughy and Laura Keith Tapply
Recently, the Texas Supreme Court issued its opinion in Italian Cowboy Partners, Ltd. v. Prudential Insurance Co. of America, 341 S.W.3d 323 (Tex. 2011), clarifying existing case law relative to waivers of fraudulent inducement claims. The Court held that the acknowledgment by a tenant in a lease that the landlord made no representations about the leased premises except as set forth in the lease did not prevent the tenant from bringing claims for fraudulent inducement for pre-lease misrepresentations regarding the premises.
In Italian Cowboy, the landlord, Prudential, leased premises to Italian Cowboy Partners, Ltd. for restaurant use. The landlord’s agent repeatedly made representations to the tenant’s owners and operators, Francesco and Jane Secchi, that the agent was familiar with the premises and knew of no problems with the property. After signing the lease and beginning renovations on the premises, the Secchis learned that the previous tenant, also a restaurant, had experienced persistent problems with a sewage odor in the building. The Secchis contacted the landlord’s agent, who said she knew nothing about the odor.
Although the Secchis and the landlord attempted to remedy the source of the odor, their efforts were unsuccessful. The tenant briefly opened for business but was unable to draw customers. The Secchis then learned that the previous tenant had informed the landlord’s agent of the persistent odor on several occasions. The Secchis ceased paying rent, closed the restaurant, and filed suit for fraudulent inducement, among other claims.
At trial, the landlord relied on a merger clause, arguing that the tenant had acknowledged in the lease both that the landlord had made no representations except as set forth in the lease, and that the lease contained the entire agreement of the parties. The landlord contended that the tenant was therefore precluded from bringing claims for fraudulent inducement. The trial court found that the landlord was aware of the odor and found for the tenant. The appellate court reversed and rendered a take-nothing judgment.
The Texas Supreme Court reversed the appellate court’s judgment, holding that the lease did not contain clear and unequivocal language showing that the tenant intended to waive reliance on any representations made or otherwise specifically waive fraudulent inducement claims and, therefore, did not prevent the tenant from bringing a fraudulent inducement claim.
Although the lease stated that the tenant acknowledged that neither the landlord nor the landlord’s agents had made any representations with respect to the premises and that the lease constituted the final agreement between the parties, the Court found that a plain reading of these two provisions merely indicated the parties’ intent to include a standard merger clause that would supersede any previous agreements and would negate the apparent authority of an agent to later modify the contract terms. The Court cited long standing case law holding that a merger clause can be avoided by fraud in the inducement and that the parol evidence rule “does not stand in the way of proof of such fraud.” To preclude claims for fraudulent inducement, there must be clear and unequivocal language disclaiming reliance on any representations that were made or clearly expressing the parties’ intent to waive fraudulent inducement claims.
The lesson appears clear for those drafting leases on behalf of landlords that a provision including clear and unequivocal language disclaiming reliance on any representations by a landlord or landlord’s agents or an express release of claims for fraudulent inducement, should be included in the lease. However, it is also clear, as stated in the Court’s holding, that a disclaimer standing alone will not necessarily preclude a fraud claim. A disclaimer may not be enough to protect a landlord if it knows about material defects in the premises that it fails to disclose or if the landlord makes misrepresentations about the premises. A tenant, of course, will want to avoid a release of fraudulent inducement claims, and may want to require the landlord to represent either that it knows of no material defects in the premises or to provide a disclosure of all known defects.
While Italian Cowboy involved a lease contract, the same lessons apply to the negotiation and drafting of most other types of contracts, as demonstrated by the holdings of Texas courts in subsequent cases extending this principle to other types of contracts. Care should always be taken to ensure that the parties’ intent is clearly expressed in the contract.
Tracye McGaughy is an associate at Higier Allen & Lautin, P.C. and may be reached at TMcGaughy@higierallen.com. Laura Keith Tapply is Corporate Counsel for Genghis Grill and may be reached at Lori@genghisgrill.com.