Friday, January 22, 2010

Precluding Fraud Claims- The Winning Provision to put in your Contracts

For years, commercial litigators have used merger clauses within contracts as a defense to fraud claims. The merger clause can prevent evidence of fraud from being introduced via the parol evidence rule and can also make any alleged reliance “unreasonable.” This has been a good tool – but it lacked the ability to defeat “fraud in the inducement” claims as that type of fraud invalidates the entire contract, including the merger clause itself.

A recent decision out of the Western District of Michigan, Whitesell Corporation v Whirlpool Corp, Case 1:05-cv-00679-RHB (opinion released 10/05/09) provides an even stronger weapon that appears to reach and preclude claims of fraud in the inducement. These are “no reliance” clauses whereby the parties agree that neither is relying on any representations made by the other party. The Whitesell Court emphasized that courts are more willing to uphold these provisions if:

1. The no-reliance clause is its own separate clause rather than being embedded in another clause;

2. The clause expressly mentions and disclaims “reliance.”

3. The parties are sophisticated.

Transactional lawyers would be well advised to make sure a “no-reliance” clause becomes standard language in their documents