Cutting Off Fraud Claims With A Merger Clause

A few weeks ago, I wrote about using merger clauses that negate reliance as a way to bar claims of fraud in the inducement. While the Texas Supreme Court has yet to hold that parties can negate reliance at the inception of a relationship, a recent appellate court decision does precisely that. So today we are going to look at the Schlumberger case and its progeny in more detail, and examine how those cases might affect another common contract clause that negates reliance—the "as-is" covenant in a real estate lease or purchase agreement.

Just to review, a standard merger clause is that provision (usually found in the last section of a contract) that states that all the parties' agreements are set forth in the document, and any prior agreements are merged into the current contract. A standard merger clause serves several purposes:

it invalidates and supersedes all prior agreements; it eliminates the authority of the contracting parties' agents to modify the terms; and absent ambiguity, it limits the evidence to be considered in interpreting the contract to the four corners of the agreement. That's a pretty powerful little boilerplate provision, but it can do even more.

In Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171, 177 (Tex. 1997), the Texas Supreme Court held that a merger clause in a post-dispute settlement agreement sufficiently negated reliance so as to preclude a claim that the settlement was induced by fraud, where it specified that no party was relying on any statement or representation of any other party. That disclaimer, however, applied only to past disputes between the parties.

A decade later the Texas Supreme Court extended the ability to disclaim reliance to a settlement agreement resolving both past and future claims, where the disclaimer of reliance was "all-embracing." Forest Oil Corp. v. McAllen, 268 S.W.3d 51 (Tex. 2008).

Both the Schlumberger and Forest Oil cases left open the question whether a disclaimer of reliance in a pre-dispute agreement could negate any claim of fraud in the inducement of that agreement. The Texas Supreme Court sniffed around the edges of that issue in Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of America, 341 S.W.3d 323 (Tex. 2011). The issue in Italian Cowboy was whether a disclaimer of representations in a lease contract was a standard merger clause, or a disclaimer of reliance clause that would bar a claim of fraud in the inducement. Here's what the lease said:

14.18...