Claims of Fraudulent Incitement in Texas | Free human rights


How express contractual terms and the negotiation process may affect liability

Parties that enter into a contract must negotiate in good faith, but the parties must also exercise due diligence to protect their own interests. In Texas, a fraudulent inducement claim will fail when the alleged misrepresentation is contradicted by the express terms of the contract and when a party fails to investigate “red flags” during negotiation.

Similar to a common law fraud claim, for a plaintiff to prevail over a fraudulent inducement claim, the plaintiff must prove:[1]

  1. The defendant made a material misrepresentation;
  2. The false statement was made with knowledge of its falsity or asserted without knowledge of its truth;
  3. The defendant made the false statement with the intention that the plaintiff would rely on or act on the false statement;
  4. The plaintiff relied on the false statement; and
  5. The plaintiff’s use of the misrepresentation caused prejudice.

Although a claim for fraudulent inducement can only occur in the context of a contract, a claimant can obtain tort damages, which are distinct from damages directly related to the contract itself.

To prevail over a claim for fraudulent inducement, the claimant’s recourse to the alleged misrepresentation must be justifiable.[2] Confidence is not justified when the express terms of the contract conflict with the alleged misrepresentation. At seacedes-Benz USA, LLC v. Carduco, Inc.,[3] the Texas Supreme Court addressed the key element of justifiable trust. In that case, the court overturned a multi-million dollar judgment that Carduco, Inc., a franchisee of Mercedes-Benz, had obtained against Mercedes, its franchisor. In this case, Carduco alleged that it had agreed to become a Mercedes-Benz dealership at a franchise establishment in Harlingen, Texas, allegedly based on claims by Mercedes-Benz that Carduco might later relocate and operate as as an exclusive Mercedes-Benz dealership in McAllen, Texas.

Shortly after Carduco signed the franchise agreement for the franchise at Harlingen, Mercedes announced that it had assigned Heller-Bird to a new franchise at McAllen. Carduco then asked to move his dealership to McAllen, and Mercedes denied his request. Carduco filed a lawsuit alleging fraudulent inducement with respect to the distribution contract. The jury awarded Carduco $ 15.3 million in damages and awarded $ 100 million in punitive damages against Mercedes and an additional $ 15 million in punitive damages against its personal representatives. The Texas Court of Appeals upheld the decision but suggested reducing punitive damages. Both parties have filed petitions for review in the Texas Supreme Court.

The Texas Supreme Court found that, from a legal standpoint, Carduco could not properly rely on Mercedes-Benz’s alleged allegations that Carduco might later move out and operate as a Mercedes-Benz dealership. Benz exclusive to McAllen because the franchise agreement expressly contradicted those claims.[4] The dealership agreement only specifically identified Harlingen as Carduco’s dealership location, provided that Carduco could not move, relocate, or modify dealership facilities without Mercedes’ prior written consent, provided that Carduco’s right to selling cars in a specific geographic area was non-exclusive, and said the deal was not intended to limit Mercedes’ right to add new dealers in the area.[5]

In addition, there is no obligation to disclose certain information during negotiations if there is no fiduciary or special relationship between the parties. For example, the Court of Carduco ruled that Mercedes had no obligation to disclose that it was in discussions with Heller-Bird about the McAllen dealership because there is no fiduciary or special relationship between a franchisor and a franchisee requiring such an obligation .[6]

Some agreements may even expressly refuse to rely on certain statements. Although the disclaimer law is not fully settled in Texas, the Texas Supreme Court has previously ruled that a contract containing a clause that clearly and unequivocally expresses the party’s intention to evade Specific statements involved can prevent a fraudulent inducement claim.[7]

Sometimes “red flags” exist during a negotiation and should cause a party to further investigate the representations.[8]Ignoring “red flags” could prevent a justifiable trust finding. In JPMorgan Chase Bank, NA v. Orca Assets GP, LLC,[9] the Court concluded that Orca could not properly rely on certain representations made by JPMorgan because Orca had expertise in the oil and gas industry and should have recognized several “red flags” related to the issue of find out if the plots she wished to rent were actually available for rent.[10] In particular, either the contradiction of the written contract or the existence of “red flags” are sufficient in themselves to deny the justifiable recourse to alleged inaccurate statements.[11]

In addition, the court will take into account the nature of the relationship between the parties and the nature of the contract when assessing the justifiable remedy.[12] A court can expect a sophisticated business entity with specialized knowledge in the field to spot and investigate certain “red flags”, but not the same scrutiny from an ordinary person less familiar with the subject. . A party alleging fraud “must have exercised due diligence to protect its own interests and cannot blindly rely on the reputation, representations or conduct of the defendant where the knowledge, experience and background of the plaintiff warrants. investigation.[13]

[1] Anderson v. During, 550 SW3d 605, 614 (Tex. 2018)

[2] Grant Thornton LLP v. Prospect High Income Fund, 314 SW3d 913, 923 (Tex. 2010).

[3] Seacedes-Benz USA, LLC v. Carduco, Inc., 583 SW3d 553 (Tex. 2019)

[4] Identifier. to 555.

[5] Identifier.

[6] Identifier. to 562.

[7] See Int’l Bus. Machines Corp. vs. Lufkin Indus., LLC, 573 SW3d 224, 229 (Tex. 2019), reh’g refused (May 31, 2019).

[8] See, for example, JPMorgan Chase Bank, NA v. Orca Assets GP, LLC , 546 SW3d 648 (Tex. 2018).

[9] Identifier.

[10] Username. at 655-58.

[11] Identifier. at 660 n.2.

[12] Carduco, 583 SW3d to 564.

[13] Identifier. at 564 (citing Orc assets, 546 SW3d to 654).

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