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When Do Disclaimer Clauses Bar Fraud Claims?

Published: February 14th, 2017

By: Darryl M. Bloodworth

When Do Disclaimer Clauses Bar Fraud Claims: Billington v. Ginn-La Pine Island, Ltd., 192 So.3d 77 (Fla. 5th DCA 2016)

Background of Case

The Plaintiff was an investor from the UK who had invested in Bobby Ginn developments previously. In the 2004-06 time frame, he bought two lots in Bella Collina, a high end development in Lake County, Florida for a total of about $3 million. Both contracts had non-reliance clauses stating in clear terms that Plaintiff had not relied upon any representations or statements regarding the properties except those in the contracts.

In 2008, the recession hit. The value of the lots dropped precipitously. Plaintiff decided that he had been defrauded and sued in 2010 for fraud, among other claims. The trial court dismissed the fraud claims, and Plaintiff appealed. The 5th District Court of Appeals affirmed the trial court’s decision, and wrote a lengthy opinion addressing Florida law with respect to fraud in the inducement claims. The Court also certified certain questions to the Florida Supreme Court regarding whether a non-reliance clause in a contract can defeat an action for fraud in the inducement, and whether justified reliance or reasonable reliance is necessary to plead and prove misrepresentation. Unfortunately, the Plaintiff did not appeal the case to the Florida Supreme Court, so the certified questions will have to be resolved by the Supreme Court another day. Nevertheless, the opinion of the 5th DCA is important for any lawyer practicing real estate law and for trial lawyers litigating fraud and misrepresentation claims.

Issues in the case

  1. Disclaimer Clauses. The 5th DCA identified 3 different types of disclaimer clauses:
    1. Merger or integration clauses. These are clauses that purport to make extrinsic agreements unenforceable unless they are contained within the written contract. Such clauses usually enable the defendant in a suit to invoke the parol evidence rule, which is a rule that prohibits oral testimony that would change or alter the terms of a written contract. The court cited Mejia v Jurich, 781 So. 2d 1175 (Fla. 3d DCA 2001) which states that a merger or integration clause does not affect oral representations which are alleged to have fraudulently induced a person to enter into the agreement.
    2. Non-Reliance Clauses. These clauses state that the parties to the contract did not rely upon statements or representations not contained within the document itself. For this, the court cited a federal case from the 7th Circuit, Vigortone AG Prods., Inc. v. PM AG Prods, Inc. 316 F. 3d 641 (7th Cir. 2002) (this case has a good explanation of the differences and the various kinds of disclaimer clauses and says that a merger or integration clause does not bar the claim of fraud based on statements not contained in the contract.) Because a non-reliance clause negates any reliance on statements not contained in the contract, such a clause defeats a claim of reliance, which is an element of fraud; therefore a non-reliance clause can defeat a claim for fraud. The Billington opinion also discussed another 5th DCA case, La Pesca Grande Charters, Inc. v. Moran, 704 So. 2d 710 (Fla. 5th DCA 1998) in which the 5th DCA held that a non-reliance clause would defeat a claim for fraud in the inducement because it defeats any claim of reliance.
    3. Waiver or Release Claims for Fraud. These are clauses that actually purport to waive or release any claim for fraud in the inducement and is the broadest form of disclaimer against fraud. The court cited a Texas case, Texas Standard Oil & Gas, L.P. v. Frankel Offshore Energy, Inc., 394 S.W.3d 753 (Tex. App. 2012), but did not comment further regarding such clauses.
  2. Cases in conflict. The 5th DCA held that the non-reliance clauses in this case negated a claim for fraud in the inducement because Dr. Billington could not recant his contractual promises that he did not rely upon extrinsic representations. However, the court had difficulty reconciling two ancient Florida Supreme Court cases that appear to be in conflict on this issue:
    1. Cassara v. Bowman, 186 So. 514 (Fla. 1939). In Cassara there was a suit for rescission of a lease and for judgment requiring refund of monies paid on the lease based upon misrepresentations that led to the signing of the lease. The lease contained a clause that looks more like a merger clause but the court treated it as a non-reliance clause. The Supreme Court affirmed the dismissal of the suit because the lease foreclosed any claim to rely upon oral representations made before the contract was entered.
    2. Oceanic Villas, Inc. v. Godson, 4 So. 2d 689 (Fla. 1941). This case came before the Florida Supreme Court only two years later, and it also involved a lease. The suit was to rescind and cancel a 99 year lease and recover from the lessor rents paid by the lessee, claiming that the lessor procured the lease by fraudulent misrepresentations regarding what the gross earnings of the property had been. This lease had a non-reliance clause. The defendant argued that the lessee was estopped to allege that the lease was procured by fraud because of the non-reliance clause. The Supreme Court held that “it is well settled that a party cannot contract against liability for his own fraud.” The court went on to say “we recognize the rule to be that fraud in the procurement of a contract is grounds for rescission and cancellation of any contract unless for consideration and expediency the parties agree that the contract may not be cancelled or rescinded for such cause and that by such special provision of a contract it may be made in contestable on account of fraud, or for any other reason.” The Florida Supreme Court quoted these principles but said that “this provision in the contract does not make the contract incontestable because of fraud, but evidences an agreement between the parties that no fraud had been committed.” The trial court had dismissed the complaint, but with leave to amend, and the Supreme Court held that the complaint could be amended, so it sustained the decision of the trial court. The Supreme Court cited its own opinion in Cassara from two years earlier but said that the facts differentiate this case from Cassara, without saying what the differentiating facts were.
  3. Justified reliance or reasonable reliance. The other issue which the 5th DCA certified to the Supreme Court in Billington dealt with the issue of what kind of reliance must be shown for a misrepresentation or fraud in the inducement claim. The court cited several cases:
    1. Fote v. Reitano, 46 So. 2d 891 (Fla. 1950). In this case the Florida Supreme Court held that reliance upon a false representation is an essential element because of action and the plaintiff must prove he was justified in relying upon the false representation, that he did rely upon it and that he acted in reliance to his injury.
    2. Avila South Condominium Ass’n v. Kappa Corp., 347 So. 2d 599 (Fla. 1977). This case actually refers to “reasonable reliance” rather than “justifiable reliance” although the 5th DCA in Billington seemed to classify it as a justifiable reliance case.
    3. Butler v. Yusem, 44 So. 3d 102 (Fla. 2010). In this case, the Florida Supreme Court held that justifiable reliance is not a necessary element of fraudulent misrepresentation. “A recipient may rely on the truth of a representation even though its falsity could have been ascertained had he made an investigation, unless he knows the representation to be false or its falsity is obvious to him.” Apparently, only reliance – not justified reliance – need be pled. However, if the claim is for negligent misrepresentation, justifiable reliance must be pled and proved. The Court pointed out that justifiable reliance doesn’t necessarily mean that one must undertake due diligence to have a negligent misrepresentation claim. Justifiable reliance requires some degree of inquiry, but not as much as due diligence would require.
  4. Conclusion. Thus, the question that the 5th DCA certified to the Florida Supreme Court was whether Butler is prevailing law and did it overrule Fote or Avila. In short, which standard applies in Florida for a misrepresentation claim, – justifiable reliance or reasonable reliance. Based upon Butler, the answer appears to be reasonable reliance which means that the falsity is not known or obvious to the recipient. Justifiable reliance appears to require some degree of inquiry although something short of “due diligence.”

Conclusion

In my opinion, the Florida Supreme Court will ultimately confirm the 5th DCA’s opinion in Billington and hold that a non-reliance clause would defeat an action for fraud in the inducement, at least with respect to sophisticated parties. Furthermore, the Florida Supreme Court likely will ultimately reaffirm its opinion in Butler to say that justifiable reliance is not required for a misrepresentation claim, but is required for a negligent misrepresentation claim.

About the Author:
Darryl M. Bloodworth is a founding shareholder of Dean, Mead, Egerton, Bloodworth, Capouano & Bozarth, P.A. He practices in the area of business and commercial litigation and has substantial experience in complex commercial litigation, corporate control litigation, breach of contract and business torts and fiduciary litigation. Mr. Bloodworth is board certified as an expert in civil trial law by The Florida Bar Board of Legal Specialization and is a certified mediator. He is a fellow of The American College of Trial Lawyers and is very active in ALFA International, an international network of 150 independent law firms throughout the world. Mr. Bloodworth is currently the Chairman of ALFA’s Business Litigation Practice Group. He may be reached at dbloodworth@deanmead.com.