Co-author Trevor Lawhorn
A lot, if the claim before the court is for fraudulent inducement. Points to remember:
- Oral promises that contradict contract terms are pretty much worthless. In reviewing a fraudulent inducement claim, a court will assume the “victim” knows facts that would have been discovered by a reasonably prudent person similarly situated.
- Which means ask questions. A negotiating party is rarely obliged to volunteer information.
- If you want understandings to be binding, put them in the contract. A court will tell the plaintiff that he “… should have insisted on these [exclusivity] terms in the parties’ contract rather than agreeing in writing to the opposite.”
- Merger clauses are there for a reason.
In Mercedes-Benz USA, LLC, et al v. Carduco, Inc. dealership franchisee Carduco sued franchisor Mercedes Benz for fraudulent inducement and negligent misrepresentation. Carduco claimed that Mercedes employees fraudulently induced it to purchase an existing Mercedes dealership by promising Carduco that it would be the only Mercedes dealer in the McAllen area and that Mercedes didn’t plan on putting another dealer there. Carduco didn’t know that while they were negotiating, Mercedes was also negotiating with another franchisee to establish a second dealership in the area. Carduco bought the dealership and sued when he learned what had happened.
The agreement differs from the oral statements
The dealer agreement presented hurdles that Carduco couldn’t overcome. It:
- … identified Harlingen as Carduco’s dealership location,
- … prohibited Carduco from changing that location without Mercedes’s written consent,
- … further described the dealer’s “area of influence” as a geographic area in which the dealer agreed it had no exclusive right to sell products in, and
- … allowed Mercedes to add new dealers to or relocate dealers into Carduco’s influence area.
- … had a merger clause disclaiming reliance on anything other than the contract language.
Plaintiff wins over the jury
A jury found for Carduco and awarded $15.3 million in actual damages and $115 million in punitives. No surprise there. The court of appeals affirmed but suggested that the punitive damages be reduced. Both parties sought review from the Supreme Court. Mercedes complained about fraudulent inducement. Carduco complained about the reduction in punitive damages.
The Supreme Court has the last word
Judgment rendered that Carduco take nothing. Contract language directly contradicting Carduco’s belief about its exclusivity negated the “justifiable reliance” element of the fraudulent inducement claim.
Did Mercedes have a duty to inform Carduco about the other franchisee when Carduco was negotiating the purchase? No, according to the Court. Carduco had a duty to protect its own interests by exercising reasonable diligence rather than relying on vague assurances about exclusivity (especially in light of the fact that Carduco’s sole owner had decades of experience as a car dealer).
The Court referred to JP Morgan Chase Bank v. Orca Assets, an oil and gas case (reported by us). Although Orca Assets discussed both direct contradiction with a written contract and other “red flags”, that case does not require them both to negate justifiable reliance. That decision noted just the opposite, stating that either could be sufficient to preclude justifiable reliance. When a plaintiff asserts reliance on a misrepresentation that the written contract directly and unambiguously contradicts, both are present because the existence of such a conflict is itself a large red flag.