Disclaimed warranties and representations: promissory fraud and the right to lie

December 17, 2010

What your mom taught you about telling the truth is still good advice. While it may seem to go without saying, at least one judge has reaffirmed your mother’s rule: “it’s not okay to lie,” even if your contract says you don’t have to tell the truth. In Abry Partners V, L.P. v. F&W Acquisition, LLC, the court had to decide whether a very explicit disclaimer of all warranties and representations would be enforced to limit the liability of a company that had knowingly made false representations to induce the sale of the business to another company.

On its face, the disclaimer was very clear – the company that made the false representations had no contractual duty to tell the truth to the acquiring company, and any liability for false statements was limited to a predetermined amount. While the exact wording of the disclaimer may be too long to repeat here, it might as well have said: “Company A may make any false statement or misrepresentation to Company B to induce the sale, and Company B’s only legal remedy shall be capped at XYZ dollars.” This kind of disclaimer was written in two different sections of the sales contract.

Yet writing something in a contract doesn’t necessarily make it so. Judges have broad discretion regarding the enforcement of contract terms. Even though both Company A and Company B were sophisticated businesses with teams of legal professionals to advise this multi-million dollar transaction, the judge in this case held that it would be against public policy to enforce the disclaimer and to protect the company that made false representations.

What’s the moral of this story? Honesty isn’t just the best policy – it’s the law of the land, and no wording in a contract will change that. Further, as a general rule, you can’t rely solely upon the wording of a contract to forecast the outcome of potential legal disputes. Ultimately, courts strive to preserve justice, and a judge may easily override overbearing or unfair contracts.

Topics: Sales, Featured, Business Best Practices, Management, Legal, Articles

James Blake

The Blake Law Firm, PLLC.

James Blake is a growth-oriented business attorney who strives to be a creative business partner, to identify value-add opportunities, and to crystallize the relationships, structures, and processes that will drive your commercial success. James Blake practices law in Texas and Hawaii, and has protected the interests of businesses across a broad range of industries, including technology, construction, service and retail, food and beverage, franchisors and franchisees, product manufacturers, and investors. His work experience encompasses commercial transactions, litigation, and advising business operations in the U.S., Africa, and Asia. James was an editor of Law Review at the University of Hawaii and conducted international commercial law research for the Institute of Asian Pacific Business Law. He served as the Official Reporter for the 2008 IAPBL China Enterprise Bankruptcy Law Symposium held in Hong Kong, and in the same year worked at a large firm in Singapore. James currently advises clients in international business and investment issues in addition serving his client’s legal and business needs in Hawaii and Texas. Currently based in Austin, Texas, James is an avid writer and enjoys speaking at business-law seminars in addition to his legal practice. In his spare time, James enjoys sculling and kayaking on Ladybird Lake, outdoor photography, and supporting visual and performing arts.
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