An eloquent argument for enforcing nonreliance clauses: Billington v. Ginn-La Pine Island, Ltd., LLLP.
presents a persuasive argument why Florida law should allow nonreliance clauses to exclude fraud claims. This article discusses disclaimer clauses generally, the use of nonreliance clauses in selected jurisdictions across the country, the Billington decision, and concludes by analyzing the public policy arguments in favor of and against nonreliance clauses. Johnson v. Davis, 480 So. 2d 625 (Fla. 1986), actions are technically not fraud claims that require reliance, (1) so our discussion does not cover that specific tort.
History of Disclaimer Clauses and Backdrop for Nonreliance Clauses
Disclaimer clauses generally fall into three categories: "integration" or "merger" clauses, nonreliance (also called anti-reliance or no-reliance) clauses, and waiver clauses. Integration clauses state that all oral representations or statements not clearly expressed in the contract merge into and do not survive the writing of the contract. (2) Waiver clauses are contractual waivers of any fraud or wrongdoing that may have occurred. (3) Courts have traditionally declined to use these two forms to exclude fraud claims.
Merger and integration clauses, when used alone, suffer from enforcement problems because courts are reluctant to allow a technical contractual device to eliminate fraud claims. (4) Contractual waiver of fraud claims faces even more of an uphill battle as some have argued these clauses immunize fraudulent conduct. The court in Abry Partners V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032 (Del. Ch. 2006), stated:
But the contractual freedom to immunize a seller from liability for a false contractual statement of fact ends there. The public policy against fraud is a strong and venerable one that is largely founded on the societal consensus that lying is wrong. Not only that, it is difficult to identify an economically sound rationale for permitting a seller to deny the remedy of rescission to a buyer when the seller is proven to have induced the contract's formation or closing by lying about a contractually represented fact. (5)
Nonreliance clauses, however, approach extra-contractual statements and representations from the perspective of the contract and provide a much better method of memorializing and enforcing the parties' true agreement. These clauses appear to have originated in the securities industry, (6) but have now made their way into other forms of contractual instruments. As might be expected, different states have different views on these clauses.
The Approach of Different Jurisdictions
* New York--New York, for example, declines to enforce a "general, boilerplate disclaimer of a party's representations [to] defeat fraud," (7) but permits nonreliance clauses that "track the substance" of the alleged misrepresentation. (8) The reason for the difference? A party cannot reasonably rely on statements outside a contract when it states in the contract itself that it did not rely on extracontractual statements. An older real estate case demonstrates the type of language that properly disclaims reliance in New York:
The [s]eller has not made and does not make any representations as to the ... expenses, operation or any other matter or thing affecting or related to the aforesaid premises, except as herein specifically set forth, and the [p]urchaser hereby expressly acknowledges that no such representations have been made ... It is understood and agreed that ... this contract ... is entered into after full investigation, neither party relying upon any statement or representation, not embodied in this contract, made by the other. (9)
* Delaware--It is no surprise that business-friendly Delaware is more supportive of nonreliance clauses than many other jurisdictions. But even in Delaware, nonreliance clauses were initially greeted with skepticism. These clauses have, however, undergone somewhat of an evolution to reach their current state of enforcement. Specifically, Delaware's public policy favors enforcement of contract clauses, (10) but some of the same concerns raised in other states first gave some Delaware courts a moment's pause.
For example, Anvil Holding Corp. v. Iron Acquisition Co., 2013 WL 2249655 at *8 (Del. Ch. May 17, 2013), found that an agreement that stated that neither party was "'making any other express or implied representation or warranty with respect to the [c]ompany' and that the [p]urchase [a]greement constitutes the entire agreement of the parties" did not preclude a buyer's fraud claim because the agreement did not specifically disclaim reliance on extra-contractual statements. This statement did not go far enough to repudiate reliance on statements outside the contract. Likewise, earlier Delaware caselaw held that a clause that does not limit preserved claims to representations contained within the contract itself does not pass muster. (11) These cases and others gave the impression that Delaware courts needed to see "magic language" in contracts to enforce disclaimer clauses.
The Prairie Capital III, L.P. v. Double E Holding Corp., 132 A.3d 35 (Del. Ch. Nov. 24, 2015), case, however, dispelled that notion when it found the following language in a contract's exclusive representations clause sufficient to disclaim fraud claims:
The [b]uyer acknowledges that it has conducted to its satisfaction an independent investigation of the financial condition, operations, assets, liabilities and properties of the Double E Companies. In making its determination to proceed with the [t]ransaction, the [b]uyer has relied on (a) the results of its own independent investigation and (b) the representations and warranties of the Double E [p]arties expressly and specifically set forth in this [a]greement, including the [s]chedules. SUCH REPRESENTATIONS AND WARRANTIES BY THE DOUBLE E PARTIES CONSTITUTE THE SOLE AND EXCLUSIVE REPRESENTATIONS AND WARRANTIES OF THE DOUBLE E PARTIES TO THE BUYER IN CONNECTION WITH THE TRANSACTION, AND THE BUYER UNDERSTANDS, ACKNOWLEDGES, AND AGREES THAT ALL OTHER REPRESENTATIONS AND WARRANTIES OF ANY KIND OR NATURE EXPRESS OR IMPLIED (INCLUDING, BUT NOT LIMITED TO, ANY RELATING TO THE FUTURE OR HISTORICAL FINANCIAL CONDITION, RESULTS OF OPERATIONS, ASSETS OR LIABILITIES OR PROSPECTS OF DOUBLE E AND THE SUBSIDIARIES) ARE SPECIFICALLY DISCLAIMED BY THE DOUBLE E PARTIES. (12)
This nonreliance clause was backed up with what the court termed a standard integration clause, which read as follows:
This [a]greement ... set[s] forth the entire understanding of the [p]arties with respect to the [t]ransaction, supersede[s] all prior discussions, understandings, agreements and representations and shall not be modified or affected by any offer, proposal, statement or representation, oral or written, made by or for any [p]arty in connection with the negotiation of the terms hereof. (13)
The fact that the buyer made a specific, positive statement of nonreliance ("I relied only on" as opposed to "I have not relied on") combined with an integration clause was sufficient to disclaim fraud in the eyes of the court. No "magic words" were necessary; it was clear from the whole contract and the totality of the circumstances the parties intended to disclaim reliance on extra-contractual statements. Or in the words of the court, "[i]f a party represents that it only relied on particular information, then that statement establishes the universe of information on which that party relied. Delaware law does not require magic words. In this case, the [e]xclusive [Representations [c]lause and the [integration [c]lause combine to mean that the [b]uyer did not rely on other information. They add up to a clear anti-reliance clause." (14)
* South Carolina--At the other end of the spectrum lies South Carolina, where the South Carolina Supreme Court decided Slack v. James, 364 S.C. 609 (2005), and held the following clause did not bar fraud claims:
21. ENTIRE AGREEMENT. This written instrument expresses the entire agreement, and all promises, covenants, and warranties between the [b]uyer and [s]eller. It can only be changed by a subsequent written instrument ([a]ddendum) signed by both parties. Both [b]uyer and [s]eller hereby acknowledge that they have not received or relied upon any statements or representations by either [b]roker or their agents which are not expressly stipulated herein. (15)
The dispute in Slack arose because the purchasers of a home failed to conduct a public records search or otherwise condition purchase of a home on there being no easements across the property. Had the buyers searched, they would have found a three-inch sewer easement running across a portion of their property. The buyers would have also, of course, concluded the real estate agent's representation of no easements on the property was not true.
While the Slack decision turns on whether a motion to dismiss was properly granted (the court held it was not), the opinion discusses differing views on nonreliance clauses. A majority of the court felt the buyers reasonably relied on the misrepresentation of the sales agent because discovering the utility line would have required the services of an attorney, real estate closings happen quickly (i.e., there is no time to research land titles), and the quoted phrase above is an integration clause only and not a nonreliance clause.
Moreover, the majority also said the clause was not enforceable because it lacked specificity. The dissent, on the other hand, pointed out the clause clearly contained nonreliance language and that failing to enforce the nonreliance provision was allowing one party to avoid contractual obligations and representations.
* Summary of Law in Other Jurisdictions --The takeaway from these decisions seems to be that merger and integration clauses alone are not sufficient to disclaim fraud. This is a logical conclusion; a true merger and integration clause is a contractual agreement to impose a rule of evidence on contract interpretation, while a tort travels outside the contract. Or as the Billington court explains it, "merger or integration clauses are intended to prevent a party from introducing parol evidence to vary the terms of a written contract ..." (16) while nonreliance clauses are intended to "head off the possibility of a fraud suit" by having the parties agree (and make representations) that they have not relied on noncontractual representations. (17) Said another way, fraud claims are not affected by merger and integration clauses but can be disclaimed by a proper nonreliance provision when reliance is an element of the tort claim.
The Billington Decision
It is against this backdrop that the Fifth District decided Billington, a real estate dispute similar to the one in Slack. The facts of the case are that Ian T. Billington purchased a $1.35 million residential lot in Lake County. Although unclear from the opinion whether it was the sales contract or a related brokerage contract, the contracts for the transaction contained the following clauses:
14. BROKER AGENCY DISCLOSURE; COMMISSIONS; DISCLAIMER OF REPRESENTATIONS.
NOTE: BEFORE BUYER SIGNS THE CONTRACT, BUYER SHOULD READ IT CAREFULLY AND IS FREE TO CONSULT AN ATTORNEY OF BUYER'S CHOICE.
c. Buyer understands and acknowledges that the salespersons representing [s]eller in connection with this transaction do not have authority to make any statements, promises or representations in conflict with or in addition to the information contained in this [c]ontract and the [c]ommunity [d]ocuments, and [s]eller and [b]roker hereby specifically disclaim any responsibility for any such statements, promises or representations. By execution of this [c]ontract, [b]uyer acknowledges that [b]uyer has not relied upon such statements, promises or representations, if any, and waives any rights or claims arising from any such statements, promises or representations.
ANY CURRENT OR PRIOR UNDERSTANDINGS, STATEMENTS, REPRESENTATIONS, AND AGREEMENTS, ORAL OR WRITTEN, INCLUDING, BUT NOT LIMITED TO, RENDERINGS OR REPRESENTATIONS CONTAINED IN BROCHURES, ADVERTISING OR SALES MATERIALS AND ORAL STATEMENTS OF SALES REPRESENTATIVES, IF NOT SPECIFICALLY EXPRESSED IN THIS CONTRACT OR IN THE COMMUNITY DOCUMENTS, ARE VOID AND HAVE NO EFFECT. BUYER ACKNOWLEDGES AND AGREES THAT BUYER HAS NOT RELIED ON ANY SUCH ITEMS. (18)
Mr. Billington later bought a second lot in the same subdivision for $1.64 million, but filed suit for misrepresentation when he learned the purchase price others paid for their lots and that he could not build private boat docks on the lots. (19) The trial court dismissed the fraudulent inducement count in Mr. Billington's fifth amended complaint because the contracts attached to the complaint contained the disclaimer clauses listed above, which negated his claims of reliance on the alleged misrepresentations. (20) The Fifth District ruled that the clauses did indeed negate Mr. Billington's claims of reliance and affirmed the trial court's ruling. (21) Of significance is how the court reached its conclusion while navigating murky Florida law on the issue.
The court began its discussion by noting that even though it was dicta, the Fifth District previously approved the use of nonreliance clauses in its earlier decision of La Pesca Grande Charters, Inc. v. Moran, 704 So. 2d 710, 714 n. 1 (Fla. 5th DCA 1998) (a contractual statement to "forego reliance on any prior false representation and limit ... reliance to the representations ... expressly contained in the contract" negates an action for fraud in the inducement). (22) The Billington court surveyed nonreliance clauses throughout the country and found that the majority rule appears to be enforcement of nonreliance clauses. (23) The court next turned to Florida law and attempted to reconcile the two Florida Supreme Court decisions on the subject: Cassara v. Bowman, 186 So. 514 (1939), and Oceanic Villas, Inc. v. Godson, 4 So. 2d 689 (1941).
Despite valiantly trying to do so, the Billington court was not able to harmonize the two decisions. The problem seems to be that the two cases do not fit the more modern view of disclaimer clauses: (24) Both cases involved fraud in the inducement claims arising out of leases, but the Cassara court upheld a dismissal based on a merger and integration clause, while the Oceanic Villas court reversed a dismissal based on a nonreliance clause. (25) As seen above, the converse is generally true throughout the country. As the Billington court pointed out, this confusion at the Supreme Court level has created confusion in the district courts of appeal. (26) Attacking this problem, the Billington court extrapolated between the two decisions and found "an express waiver of the right to maintain a fraud claim is all that is required to avoid liability for fraud," (27) or as the Fifth District more eloquently put it:
Accordingly, we hold that the "nonreliance" clauses in this case negate a claim for fraud in the inducement because [a]ppellant cannot recant his contractual promises that he did not rely upon extrinsic representations. We also conclude, pursuant to Oceanic Villas, that an express waiver of the right to base a claim on pre-contract representations renders the contract "incontestable ... on account of fraud." We emphasize that the disclaimer clauses here are as clear and conspicuous as they are comprehensive. If these clauses are insufficient to render a claim for fraud "incontestable" within the contemplation of the Oceanic Villas court, then no disclaimer can possibly accomplish that objective--an objective that is both reasonable and essential in our complex and litigious society. Written contracts are intended to head-off disputes. Public policy strongly favors the enforcement of contracts. Although our decision might benefit those who would use a disclaimer clause to cleverly avoid the consequences of a deliberate fraud, contracting parties can protect themselves against such fraudulent practices by respecting the gravity inherent in the contracting process and carefully reviewing a contract to ensure that material representations are expressed in the instrument. The law necessarily presumes that parties to a contract have read and understood its contents. Were we to reach a contrary holding, contracting parties would have no ability to protect themselves against those who would fabricate claims of fraud to avoid the consequences of a contractual obligation. On balance, the sanctity of a contract and predictability of an outcome in a dispute should take precedence where, as here, the parties clearly manifest the intent to avoid such claims. (28)
An Argument for Freedom of Contract
Billington, as quoted above, presents a compelling argument for freedom of contract. Nonreliance clauses accomplish the primary function of contracts: To force parties to carry out the promises they made in a contract as those promises are set forth in the contract.
Whether because of a "channeling function" or a "moral function," nonreliance clauses force each party to tell the other party what deal points they are relying upon when entering into the contract. Not only does this lead to a more fair allocation of risk and pricing (i.e., each party knows exactly what it is selling or buying), disclaimer clauses also avoid the renegotiation and litigation that arise from undisclosed subjective beliefs. Nonreliance clauses reaffirm Florida's long-standing objective theory of contract interpretation. (29) While doing so subtly, Billington focuses on what is fair for both parties (not just the allegedly defrauded party) and concludes that a proper allocation of societal resources is best served by having the parties clearly express their deal and perform their deal as stated in the contract.
This is not to say that nonreliance clauses are without detractors; some have even called these provisions "liberty to lie" clauses. (30) But these arguments against nonreliance clauses miss on several points. First, such an approach places all inferences in favor of the allegedly defrauded party and relieves that party from the contractual obligations it agreed to. Second, such an argument already presumes the party claiming fraud is right, and that the alleged tortfeasor is wrong. Third, it creates an evidentiary catch-22 when the alleged tortfeasor is forced to look into the subjective mind of the allegedly defrauded party, ascertain their contractually unstated beliefs and intentions, and perform the contract in accordance with these hidden desires. Perhaps most important of all, this argument encourages contract breaches instead of promoting the societally beneficial goal of adherence to one's promises.
Nonreliance clauses, on the other hand, force parties to trust but verify. Admittedly nonreliance clauses are not perfect; one can always find extreme situations in which a nonreliance clause can be used to swindle another party. Condoning such activity is certainly not in the best interest of society, but employing some of the protections put in place by other states can greatly reduce the risk of contractual oppression. (31)
Not enforcing nonreliance clauses is much worse, as it allows parties to avoid their contractual obligations and use the courts to renegotiate contracts--outcomes that disserve society even more. On balance, nonreliance clauses are useful mechanisms for achieving what society needs most from contracts: channeling to make sure that all parties are on the same page and certainty of risk and outcome.
Nonreliance clauses promote positive social norms by reinforcing well-accepted contractual principles while discouraging frivolous litigation and claims. Likewise, the alleged risks of nonreliance clauses appear overstated and can be greatly reduced--if not entirely eliminated--by conditioning their use together with safeguards found in other states. The use of specific, detailed nonreliance clauses in Florida should be greatly expanded so that parties may be free to contract without fear of being unjustifiably accused of fraud.?
(1) See Billian v. Mobil Corp., 710 So. 2d 984, 989 (Fla. 4th DCA 1998) ("Nothing in the supreme court's holding in Johnson indicates that actionable non-disclosure must be accompanied by the same intent to defraud required in other types of fraud cases. Johnson is consistent with the modern view that the theoretical basis of liability for non-disclosure is not an outgrowth of the law of fraud, where a non-disclosure of material information would be characterized as a type of misrepresentation.") (citations omitted).
(2) Mejia v. Jurich, 781 So. 2d 1175, 1178 (Fla. 3d DCA 2001).
(3) Texas Standard Oil & Gas, L.P. v. Frankel Offshore Energy, Inc., 394 S.W.3d 753, 768 (Tex. App. 2012).
(4) Northwest Bank & Trust Co. v. First Illinois National Bank, 354 F.3d 721, 725-26 (8th Cir. 2003) (merger clause will not preclude a fraud claim even if the parties are sophisticated).
(5) Abry Partners, 891 A.2d at 1035-36.
(6) Edwin D. Eshmoilit, Note, Big Boy Letters: Trading on Inside Information, 94 Cornell L. Rev. 133, 140 (2008). The author argues nonreliance clauses, often termed "big boy letters" for the view that parties to sophisticated securities agreements were "big boys" and could take care of themselves, emerged in response to a U.S. Supreme Court case regarding the misappropriation theory of insider trading: "This liability carve-out in [United States v.] O'Hagan[, 521 U.S. 642 (1997)] subsequently gave birth to the idea of big boy letters-agreements that allow a party to trade on material, nonpublic information without having to disclose any such information." Id.
(7) JM Vidal, Inc. v. Texdis USA, Inc., 764 F. Supp. 2d 599, 623 (S.D.N.Y. 2011).
(8) Harbinger Capital Partners Master Fund I, Ltd. v. Wachovia Capital Markets, LLC, 27 Misc. 3d 1236(A) at *5, 910 N.Y.S.2d 762 (Sup. Ct. May 10, 2010).
(9) Danann Realty Corp. v. Harris, 5 N.Y.2d 317, 320 (1959). New York has an exception for "peculiar knowledge" when a party would face extraordinarily high costs or great difficulty in ascertaining the truth or falsity of statements. See, e.g., Schooley v. Mannion, 659 N.Y.S.2d 374, 375 (1997) (insulation within the structure was "not easily verified without destructive testing"). But the exception is subject to an exception if the party has the means to ascertain the truth using ordinary intelligence. See ACA Fin. Guar. Corp. v. Goldman, Sachs & Co., 25 N.Y.3d 1043, 1044 (2015).
(10) RAA Mgmt., LLC v. Savage Sports Hldgs., Inc., 45 A.3d 107, 118-19 (Del. 2012).
(11) Airborne Health, Inc. v. Squid Soap, LP, 984 A.2d 126,141 (Del. Ch. 2009).
(12) Prairie Capital III, L.P., 132 A.3d at 51 (emphasis in original).
(15) Slack, 364 S.C. at 642.
(16) The Billington court analyzes in detail and adopts the reasoning of Judge Posner in Vigortone AG Products, Inc. v. PM AG Products, Inc., 316 F.3d 641, 644 (7th Cir. 2002).
(17) Billington, 192 So. 3d at 84.
(18) Id. at 79 (emphasis in original).
(21) Id. at 79-80.
(22) Id. at 80.
(24) Recall that Cassara is a 1939 decision and that Oceanic Villas is a 1941 decision, while nonreliance clauses first appeared in response to a 1997 Supreme Court decision.
(25) Billington, 192 So. 3d at 82.
(27) Id. at 85.
(28) Id. at 84. The decision goes on to certify conflict with Lower Fees, Inc. v. Bankrate, Inc., 74 So. 3d 517 (Fla. 4th DCA 2011), "to the extent that the disclaimer language there did not contain a waiver," and to list six questions of great public importance: Did the court's decision in Oceanic Villas, Inc. v. Godson, 4 So. 2d 689 (1941), sub silentio overrule its decision in Cassara v. Bowman, 186 So. 514 (1939)? If Oceanic Villas did not overrule Cassara, does a merger clause such as that discussed in Cassara, negate a claim for fraud? Do clear and unambiguous disclaimer clauses, such as those in this case, negate or "ma[ke] incontestable" a claim for fraud as discussed in Oceanic Villas? Does a clear and unambiguous nonreliance clause negate a claim for fraud, where one party alleges justifiable reliance on an extrinsic representation? Did Butler v. Yusem, 44 So. 3d 102 (Fla. 2010), overrule Fote v. Reitano, 46 So. 2d 891 (Fla. 1950), and Avila South Condominium Ass'n v. Kappa Corp., 347 So. 2d 599 (Fla. 1977), and reject Restatement (Second) of Torts [section] 537, by holding that reliance need not be justified to maintain a fraudulent misrepresentation claim? If Butler did not overrule Fote or Avila, which standard applies in Florida, "justifiable" reliance or "reasonable" reliance? Id. at 85. Unfortunately for the body of Florida law on this topic, none of the parties sought review of the district court decision in the Florida Supreme Court. Had the parties done so, many of the questions that have caused conflicting district court of appeal decisions might have been resolved. One remaining area of particular concern is whether the Florida Supreme Court believes that reliance is necessary for misrepresentation claims, and if so, whether "justifiable" reliance or "reasonable" reliance is the proper standard.
(29) Gendzier v. Bielecki, 97 So. 2d 604, 608 (Fla. 1957) ("The making of a contract depends not on the agreement of two minds in one intention, but on the agreement of two sets of external signs--not on the parties having meant the same thing but on their having said the same thing.").
(30) Zeitlin, Andrew M. and Baker, Alison P., At Liberty to Lie? The Viability of Fraud Claims after Disclaiming Reliance, ABA Section of Litigation, Business Tort & Unfair Competition (Apr. 23, 2013).
(31) Some states require the combination of merger/integration clauses with nonreliance clauses, specific detailing of the representations relied upon, or require affirmative as opposed to negative "I have not relied on" statements. Moreover, some states limit use of nondisclaimer clauses when one party has all the relevant information, and the other party does not have the means to obtain the information.
Manuel Farach is a member at McGlinchey Stafford in Ft. Lauderdale. Farach is board certified by The Florida Bar in real estate law and business litigation, and is the author of Florida Real Estate Law and the Case Law Update, a weekly summary of Florida real estate and business cases.
This column is submitted on behalf of the Business Law Section, Jon Polenberg, chair, and Stephanie C. Lieb, editor.
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|Publication:||Florida Bar Journal|
|Date:||Apr 1, 2017|
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