Texas Supreme Court Limits Fraud Recoveries

In its last two terms, the Texas Supreme Court has decided two important cases that will severely limit the ability of parties to contracts from suing on oral misrepresentations that may have induced the parties to enter into the contracts. These cases illustrate the importance for parties to contracts to make sure that contractual terms and provisions accurately reflect the expectations of the parties and are not inconsistent with oral representations leading to the contracts.

The first case, decided last term, is JPMorgan Chase Bank, N.A. v. Orca Assets G.P., L.L.C.. This case involved an oil and gas lease entered into between JPMorgan, acting as trustee for a trust it managed, and Orca. After the lease was signed, the parties discovered that the property was already subject to an oil and gas lease signed several months earlier. Orca sued claiming that JPMorgan’s representative had fraudulently represented that the property was available for lease when it had already been leased. The trial court dismissed the case and Orca appealed. The Texas Supreme Court upheld the trial court’s dismissal, holding that Orca could not justifiably rely upon the oral representations for two reasons. First, there were negotiated provisions in the lease agreement that directly contradicted the oral representations. Second, there were multiple “red flags” that made it objectively unreasonable for Orca to rely on the oral representations.

The second case, decided in February, 2019, is Mercedes-Benz USA LLC et al. v. Carduco Inc. This case involved an agreement for Carduco to acquire an auto dealership in Harlingen, Texas from Mercedes-Benz that Carduco wanted to relocate to McAllen, Texas. After Carduco acquired the Harlingen franchise, Mercedes-Benz granted a new dealership in McAllen and refused to allow Carduco to relocate the Harlingen dealership. Carduco sued claiming that Mercedes-Benz fraudulently induced Carduco to buy the Harlingen dealership by falsely promising that Carduco could relocate the dealership to McAllen. Carduco won a large jury verdict for damages, but the Texas Supreme Court reversed and ordered that Carduco take nothing from its suit.

Citing to the JPMorgan v. Orca case, the court found that Carduco could not justifiably rely upon representations by Mercedes-Benz that were directly contradicted by the contract. The contract identified only Harlingen as the location for the dealership and provided that Carduco could not move the dealership without written consent from Mercedes, that Carudco’s right to sell cars in any particular geographic area was non-exclusive, and that Mercedes was not limited in adding new dealers in the area. Because the written agreement directly contradicted the representations, the court held that Carudco could not justifiably rely upon those representations as a matter of law.

These two cases reinforce legal limitations that parties to contracts will have in suing for fraud based upon representations that are contradicted by provisions in the contract. Therefore, before entering into contracts, parties need to make sure that the contract terms are consistent with any representations that are important to the decision to enter into the contract.