Introduction. The Texas Supreme Court reversed a judgment rendered against IBM originally in the amount of $21 million because Lufkin Industries disclaimed its reliance upon IBM’s misrepresentations in the written contract between the parties. Int’l Bus. Machines Corp. v. Lufkin Indus., LLC, 573 S.W.3d 224 (Tex. 2019), reh’g denied (May 31, 2019).
Background. Lufkin manufactures machinery and equipment used in the energy industry. It needed to upgrade its business-operations computer-software system. After several meetings with IBM representatives, Lufkin purchased a new system from IBM. Lufkin apparently met with IBM representatives over a period of months to discuss Lufkin’s needs and the appropriate computer software system to meet those needs. After multiple meetings and discussions with IBM representatives, Lufkin signed a contract with IBM–the “Statement of Work” (SOW)–regarding the purchase and implementation of the new system. The SOW contained a disclaimer clause stating that Lufkin was not relying upon any representations by IBM not contained in the SOW.
Allegedly, the implementation of the system did not go well and the system failed numerous tests. Lufkin contended that IBM made numerous representations that the system would work and IBM would fix the problems. However, when the system went live, it failed and “crippled Lufkin’s business.” Id. at p. 227.
Lufkin filed suit against IBM including for fraud and breach of contract. The jury found that IBM committed fraud resulting in $21million in damages to Lufkin. The jury also found that IBM breached its contract with Lufkin but oddly that Lufkin sustained no damages as a result of the breach. The trial court entered a judgment for $21 million based upon the jury’s fraud findings. The Court of appeals upheld the portion of the judgment based upon fraudulent inducement but suggested a $3.5 million reduction in the damages awarded and Lufkin agreed to the reduction. IBM filed a petition for writ of review with the Texas Supreme Court.
Court’s holding. The Texas Supreme Court discussed the elements of a fraudulent inducement claim. One of the elements that must be proven is that the plaintiff relied upon the fraudulent misrepresentations. In that regard, the Court held that the following disclaimer clause in the SOW (contract) barred Lufkin from recovering on its fraud claim:
In entering into this SOW, Lufkin Industries is not relying upon any representation made by or on behalf of IBM that is not specified in the Agreement or this SOW, including, without limitation, the actual or estimated completion date, amount of hours to provide any of the Services, charges to be paid, or the results of any of the Services to be provided under this SOW. This SOW, its Appendices, and the Agreement represent the entire agreement between the parties regarding the subject matter and replace any prior oral or written communications.
Id.at p. 228.
In reaching its decision the court stated:
We have held that a merger clause, standing alone, does not prevent a party from suing for fraudulent inducement. [citation omitted] And similarly, a clause that merely recites that the parties have not made any representations other than those contained within the written contract is not effective to bar a fraudulent-inducement claim…But 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. [Citations omitted]. Not every such disclaimer is effective, and courts “must always examine the contract itself and the totality of the surrounding circumstances when determining if a waiver-of-reliance provision is binding.” [citation omitted]. Specifically, courts must consider such factors as whether (1) the terms of the contract were negotiated, rather than boilerplate, and during negotiations the parties specifically discussed the issue which has become the topic of the subsequent dispute; (2) the complaining party was represented by counsel; (3) the parties dealt with each other at arm’s length; (4) the parties were knowledgeable in business matters; and (5) the release language was clear.
Int’l Bus. Machines Corp. v. Lufkin Indus., LLC, supra, at p. 229.
The court found that the disclaimer clause in the SOW barred Lufkin from recovering on its fraud claims. This was true even though some of the alleged misrepresentations were made after the SOW was initially signed. The parties signed a series of subsequent amendments to the project after signing the SOW and each amendment incorporated the terms of the SOW including the disclaimer. Thus, the alleged post-contractual misrepresentations were also barred by the disclaimer.
However, all may not be lost for Lufkin. The court found that, contrary to the jury’s findings that IBM’s breach of contract resulted in zero damages to Lufkin, the evidence conclusively established that IBM’s breach caused some damages to Lufkin. Thus, the court remanded the case back to the trial court for a new trial on the breach of contract claim. Stay tuned.
Lessons learned. The Texas Supreme Court has handed down a series of recent decisions finding that contractual provisions barred the plaintiffs’ fraudulent inducement claims. When reviewing and revising a contract, the buyer should beware of clauses that bar the buyer from recovery for the seller’s fraud or that limit the types of damages that the buyer can recover. Further, a buyer who has sustained damages as a result of misrepresentations and breach of contract by the seller, should consider whether it might be strategically advantageous to forego suing for fraud and only sue for breach of contract, especially if the underlying contract contains language that would bar the seller from recovering for fraud. This will make a simpler case for the jury to decide, avoid the situation where the jury becomes confused in awarding damages for multiple theories of liability, and increase the odds that a judgment favorable to the plaintiff will be affirmed on appeal.