Our first blog post of the New Year looks back at an important case the Texas Supreme Court decided in 2019, and its potential impact on majority owners seeking to avoid fraud claims by new investors. See Int’l Bus. Machines Corp. v. Lufkin Indus., LLC, 573 S.W.3d 224 (Tex. 2019), reh’g denied (May 31, 2019).  The case is notable because the Supreme Court reversed the trial court’s judgment following a jury trial that resulted in a fraud judgment against IBM in the amount of $21 million before IBM’s appeal.

The Supreme Court overturned the judgment, because in the parties’ contract, Lufkin Industries (the buyer of computer management software) had expressly disclaimed that it was relying on any misrepresentations that IBM (the software seller) had made about its software’s expected performance before the parties signed their agreement.  Stated simply, the Court held in Lufkin that a buyer cannot pursue a claim for being defrauded into signing a contract if the buyer agrees to expressly disclaim in the contract that it was relying on any of the statements at issue.

The Court’s language was clear in setting forth the legal standard at issue that applies in  regard to claims for fraudulent inducement.

Supreme Court’s Lufkin Holding

”Under Texas law, a party may be liable in tort for fraudulently inducing another party to enter into a contract.  But the party may avoid liability if the other party contractually disclaimed any reliance on the first party’s fraudulent misrepresensations.  Whether a party is liable in any particular case depends on the contract’s language and the totality of the surrounding circumstances.  In this case involving a contract to purchase a business-management software system, we hold that contractual disclaimers bar the buyer (Lufkin Industries) from recovering in tort for misrepresentations the seller (IBM) made both to induce the buyer to enter into the contract and to induce the buyer to later agree to amend the contract.” 

This post will focus on the guidance that the Supreme Court has provided in the recent Lufkin case for majority owners who are considering bringing new investors into the business.

Elements of Disclaimer – Factors the Court Considers

The Court in Lufkin made clear that it was not eliminating all claims for fraud based on the standard merger and integration clauses that are set forth in contracts, but it held that “a clause that clearly and unequivocally expresses the parties’ intent to disclaim reliance on the specific misrepresentations at issue can preclude a fraudulent inducement claim.”  The Court cited with approval on this point, its previous decision issued ten years earlier in Forest Oil.  See Forest Oil Corp. v. McAllen, 268 S.W.3d 51, 60-61 (Tex. 2008)(emphasis added).

According to the Court, not every disclaimer is effective, and courts “must always examine the contract itself and the totality of the surrounding circumstances when determining if a waiver-of-reliance provision is binding.  See Forest Oil, 268 S.W.3d at 60.  The Court stated that in deciding if a particular disclaimer provision will be upheld and require dismissal of a fraud claim, trial courts should consider whether:

  1. The terms of the contract were negotiated rather then being mere boilerplate, and whether during the negotiations the parties specifically discussed the issue or issues that have become the focus of the dispute;
  2. The complaining party was represented by counsel;
  3. The parties dealt with each other at arms length;
  4. The parties were knowledgeable in businesses matters; and
  5. The release/disclaimer language was clear.

Citing to Italian Cowboy Partners, Ltd. v. Prudential Ins. Co of Am. 341 S.W.3d 323, 327 (Tex. 2011).

The Fraud Disclaimer Provision – Make It Clear and Specific

When majority owners bring new investors into the business, they typically do so through a written agreement that provides the investor with an ownership stake in the business.  This contract document is therefore critical to eliminate to the extent possible future fraud claims by these new investors who become disgruntled about their investment at some point in the future.

To meet the legal standard confirmed in the Court’s Lufkin decision last year, as well as the factors set forth above from the Italian Cowboy Partners decision, a majority owner will want to be sure that the agreement issuing equity to all new investors contains clear terms that will disclaim any valid basis for a later fraud claim.  The specific disclaimers/representations the majority owner will therefore be seeking from the new investor are summarized below.

  • The investor has been provided and reviewed the company’s financial statements and that the investor is not relying on any financial information provided by the company of any kind that is separate and apart from these actual financial statements themselves (the investor may pursue a fraud claim if the financial statements themselves contain false representations, but the investor should be restricted solely to claims about what is contained in the financial statements);
  • The investor has been represented by its own independent counsel;
  • This is an arms length transaction, no fiduciary duties exist and the investor is making his, her or its own independent judgment with advice from its own advisors;
  • The investor is sophisticated and knowledgeable—in fact, the investor may be required to state that it is a qualified investor with more than $1 million in assets that are separate from the amount of the investment that is behind made in the company; and
  • The release/disclaimer language clearly states that the investor has conducted its own due diligence and is not relying in whole or in party on any predictions, forecasts, anticipated results, pro formas or other estimates that have been made or provided by the company or by any of its representatives regarding the company’s future performance and, instead, the investor is relying solely on its own due diligence and made it own independent determination and calculations regarding the reasons for the investment.
  • Finally, and particularly for start-up companies, the investor should acknowledge that the investment is consider both “speculative and “high risk,” and that there is a therefore a considerable risk that the investor may lose some or even all of its invested capital because of the high risk nature of the investment.


There is no guaranty that a disclaimer provision will bar all fraudulent inducement claims by investors even after the Supreme Court’s decision in Lufkin issued last year. Trial courts will continue to be required to consider the totality of the surrounding circumstances in each case and then carefully apply the five factor test that is set forth in the Italian Cowboy case.

Yet, the Court in Lufkin has has shown that is increasingly open to upholding fraud disclaimers when they are included in the contracts of sophisticated business parties, when the provisions are stated in clear and specific terms, when the parties are operating at arms length and when they are represented by legal counsel.  For business owners bringing new business partners into the fold this year, there is no reason not to exercise caution and include these carefully worded fraud disclaimers in all of their agreements with new investors.

Best wishes to all business owners for a healthy and highly prosperous 2020, and one that is wholly devoid of any fraudulent inducement claims by their investors.