FOREST OIL CORPORATION and Daniel B. Worden, Petitioners, v. James Argyle McALLEN, El Rucio Land and Cattle Company, Inc., San Juanito Land Partnership, and McAllen Trust Partnership, Respondents.
No. 06-0178.
Supreme Court of Texas.
Argued Oct. 16, 2007. Decided Aug. 29, 2008.
Rehearing Denied Nov. 14, 2008.
268 S.W.3d 51
Geoffrey L. Harrison, Johnny W. Carter, Richard Wolf Hess, Susman Godfrey LLP, Houston, TX, Mitchell C. Chaney, Aaron Pena Jr., Rodriguez Colvin Chaney & Saenz, L.L.P., Brownsville, TX, Neil E. Norquest, Rodriguez, Colvin, Chaney & Saenz, L.L.P., Edinburg, TX, for Petitioners.
Joseph R. Knight, Baker & Botts, L.L.P., Austin, TX, for Amicus Curiae.
Justice WILLETT delivered the opinion of the Court, in which Justice HECHT, Justice O‘NEILL, Justice WAINWRIGHT, Justice BRISTER, Justice GREEN, and Justice JOHNSON joined.
This commercial contract case asks whether an unambiguous waiver-of-reliance provision precludes a fraudulent-inducement claim as a matter of law. Here, sophisticated parties represented by counsel in an arm‘s-length transaction negotiated a settlement agreement that included clear and broad waiver-of-reliance and release-of-claims language. Because that agreement conclusively negates reliance on representations made by either side, any
1. Factual and Procedural Background
In 1999, Forest Oil Corporation settled a long-running lawsuit over oil and gas royalties and leasehold development with James McAllen and others with interests in the McAllen Ranch.1 The settlement agreement resulted from a week-long mediation and released Forest Oil from “any and all” claims “of any type or character known or unknown” that are “in any manner relating to” the McAllen Ranch Leases and the covered lands, whether the claims sound in contract, tort, trespass or any other theory.2 While this sweeping release resolved the royalty and nondevelopment disputes, the parties reserved the right to arbitrate under the Texas General Arbitration Act (TAA) claims “for environmental liability, surface damages, personal
injury, or wrongful death occurring at any time and relating to the McAllen Ranch Leases.” The parties also incorporated into the settlement agreement a separate surface agreement that detailed ongoing care and remediation of the surface estate.3
Importantly, the settlement agreement specifically disclaimed reliance “upon any statement or any representation of any agent of the parties” in executing the releases contained in the agreement.4 The parties also acknowledged they were “fully advised” by legal counsel as to both the contents and consequences of the release.
In 2004, McAllen sued Forest Oil to recover for environmental damage caused when Forest Oil allegedly “used its access under the leases to the surface estate to bury highly toxic mercury-contaminated” material on the McAllen Ranch. McAllen also alleged environmental and personal injuries caused when Forest Oil moved oilfield drilling pipe contaminated with radioactive material from the McAllen Ranch to a nearby property, the Santillana Ranch, which housed a sanctuary for endangered rhinoceroses.5
Forest Oil sought to compel arbitration under the settlement agreement, but
After an evidentiary hearing on Forest Oil‘s motion to compel arbitration, the trial court denied the motion, and the court of appeals affirmed, applying a no-evidence standard of review because the case was “an interlocutory appeal from an order denying a motion to compel arbitration that involves the defense of fraudulent inducement.”6 After examining the testimony of McAllen and a former Forest Oil employee, the court of appeals concluded there was some evidence to support the trial court‘s determination that the arbitration provision was induced by fraud.7
This interlocutory appeal followed.8 Although the court of appeals treated Forest Oil‘s argument as an evidentiary challenge, this case fundamentally poses a legal question, not a factual one: does McAllen‘s disclaimer of reliance on Forest Oil‘s representations negate the fraudulent-inducement claim as a matter of law? We review this legal question de novo.9
2. Enforcement of the Parties’ Arbitration Agreement Under the Texas General Arbitration Act
We first address application of the TAA, which the parties’ settlement
Forest Oil challenges the trial court‘s refusal to compel arbitration on three grounds: (1) the waiver-of-reliance provision in the contract precludes as a matter of law McAllen‘s ability to show the reliance element of fraudulent inducement; (2) McAllen cannot establish justifiable reliance on oral representations that directly contradict the terms of a signed contract; and (3) McAllen cannot establish justifiable reliance on statements made by an adversary. Because Forest Oil‘s first argument defeats McAllen‘s claim, we do not reach the other two.
3. Schlumberger Controls this Relevantly Similar Case: The Parties’ Broad Disclaimer of Reliance is Dispositive
Forest Oil contends the waiver-of-reliance provision in the settlement agreement conclusively defeats McAllen‘s fraudulent-inducement claim. We agree.
We considered today‘s question in Schlumberger Technology Corp. v. Swanson, holding that a disclaimer of reliance on representations, “where the parties’ intent is clear and specific, should be effective to negate a fraudulent inducement claim.”15 In that case—decided eighteen months before the settlement in the instant case and construing virtually identical disclaimer language—Schlumberger and the Swansons agreed to a complete release of claims to settle a dispute involving an underwater diamond-mining project off the South African coast.16 The Swansons sold their interests in the venture to Schlumberger for roughly $1 million,17 and
[E]ach of us [the Swansons] expressly warrants and represents and does hereby state ... and represent ... that no promise or agreement which is not herein expressed has been made to him or her in executing this release, and that none of us is relying upon any statement or representation of any agent of the parties being released hereby. Each of us is relying on his or her own judgment and each has been represented by Hubert Johnson as legal counsel in this matter. The aforesaid legal counsel has read and explained to each of us the entire contents of this Release in Full, as well as the legal consequences of this Release....18
After learning that Schlumberger later sold the interest to DeBeers for about $4 million, the Swansons sued, claiming Schlumberger had fraudulently induced them to accept the low-price buyout.19 They maintained that when Schlumberger entered into the settlement, it knew that the Swansons’ interest had a far higher value.20
Our decision in Schlumberger assumed that (1) the company knew during negotiations that it was misrepresenting the value of the interest, and (2) the misrepresentations were made with the intent of inducing the Swansons to settle.21 Despite these assumptions, we held as a matter of law that the Swansons could not show fraudulent inducement.22
McAllen argues that Schlumberger is not controlling because we restricted
First, McAllen stresses that the parties’ settlement in Schlumberger definitively ended their valuation dispute. McAllen points out that the settled dispute was the only dispute, meaning that the agreed-to disclaimer was sufficiently specific to bar a later fraudulent-inducement suit alleging one side misled the other about valuation.24 By contrast, in this case, ending the royalty underpayment and mineral underdevelopment dispute was not the sole purpose of the settlement agreement, McAllen argues, making the disclaimer insufficiently specific to be applied to every representation made by Forest Oil.
McAllen identifies a valid factual distinction, but we fail to see how the disclaimer‘s preclusive effect should be different where, as here, the parties agreed to resolve litigated claims and arbitrate future ones. Although we noted in Schlumberger that the company‘s representations about the project‘s value and feasibility led to “the very dispute that the release was supposed to resolve,”25 this language is more accurately interpreted as emphatic language, not limiting language. Our analysis in Schlumberger rested on the paramount principle that Texas courts should uphold contracts negotiated at arm‘s length by “knowledgeable and sophisticated business players” represented by “highly competent and able legal counsel,” a principle that applies with equal force to contracts that reserve future claims as to contracts that settle all claims.26 Essentially, Schlumberger holds that when knowledgeable parties expressly discuss material issues during contract negotiations but nevertheless elect to include waiver-of-reliance and release-of-claims provisions, the Court will generally uphold the contract. An all-embracing disclaimer of any and all representations, as here, shows the parties’ clear intent. A “once and for all” settlement may constitute an additional factor urging rejection of fraud-based claims, but a freely negotiated agreement to settle present disputes and arbitrate future ones should also be enforceable. Moreover, contrary to McAllen‘s assertions, the parties’ discussions here did in fact address environmental matters. Not only were such matters “very important” to McAllen during settlement negotiations, as he testified, the parties also negotiated the surface agreement, which directly touches on the subject of Forest Oil‘s alleged fraud: environmental contamination on the McAllen Ranch. The surface agreement, incorporated into the settlement agreement, required Forest Oil to remove hazardous material and remediate past and future contamination. Therefore, the parties expressly negotiated the treatment of surface issues; environmental issues were an important aspect of the contract. Although the settlement agreement does not preclude all future environmental disputes, it does require arbitration of them.
Second, McAllen contends the settlement language itself compels a different result from Schlumberger. McAllen maintains that the disclaimer he signed is limited by its terms to representations about the matters released and settled, not to misrepresentations about matters reserved and excluded from the settlement. Here, the waiver-of-reliance provision states: “Each of the [plaintiffs] expressly warrants and represents and does hereby state and represent that no promise or agreement which is not herein expressed has been made to him, her, or it in executing the releases contained in this Agreement....”27 McAllen claims the isolated
Third, McAllen argues that fraudulent inducement “is essentially a meeting-of-the-minds argument,” and there was no such meeting here regarding the arbitration agreement because Forest Oil knew all along of the potential for environmental claims while simultaneously assuring McAllen “there [were] no issues having to do with the surface.” The parties thus had no common understanding of the facts underlying the contract, according to McAllen. But the settlement agreement itself belies this argument. The parties agreed that they might disagree and decided to arbitrate any environmental or personal-injury disputes that might later arise. If they were certain such disagreements would never arise, there would have been no need to reserve future claims for arbitration. The act of specifically carving out this discrete category of contamination claims shows that McAllen in fact placed little trust in Forest Oil‘s assurances that there were “no issues having to do with the surface” and that both parties recognized the possibility that McAllen might pursue future claims. Moreover, there is an arbitration provision in the environment-focused surface agreement itself, not only in the broader settlement agreement. According to the surface agreement,
It is true that Schlumberger noted a disclaimer of reliance “will not always bar a fraudulent inducement claim,”30 but this statement merely acknowledges that facts may exist where the disclaimer lacks “the requisite clear and unequivocal expression of intent necessary to disclaim reliance” on the specific representations at issue.31 Courts must always examine the contract itself and the totality of the surrounding circumstances when determining if a waiver-of-reliance provision is binding. We did so in Schlumberger, but since courts of appeals seem to disagree over which Schlumberger facts were most relevant,32 we now clarify those that guided our reasoning: (1) the terms of the contract were negotiated, rather than boilerplate, and during negotiations the parties specifically discussed the issue which has become the topic of the subsequent dispute; (2) the complaining party was represented by counsel; (3) the parties dealt with each other in an arm‘s length transaction; (4) the parties were knowledgeable in business matters; and (5) the release language was clear. These factors were each present in Schlumberger, and they are each present in this case.
Refusing to honor a settlement agreement—an agreement highly favored by the law33—under these facts would invite unfortunate consequences for everyday business transactions and the efficient settlement of disputes. After-the-fact protests of misrepresentation are easily lodged, and parties who contractually promise not to rely on extra-contractual statements—more than that, promise that they have in fact not relied upon such statements—should be held to their word. Parties should not sign contracts while crossing their fingers behind their backs. McAllen accuses Forest Oil of deceit, but Forest Oil could make the same allegation against McAllen—who by his own admission and in writing is claiming the opposite now of what he expressly disclaimed then. It is not asking too much that parties not rely on extra-contractual statements that they contract not to rely on (or else set forth the relied-upon representations in the contract or except them from the dis-
We conclude the arbitration requirement is integral to the overall release and the settlement agreement‘s waiver-of-reliance language applies by its terms to the parties’ commitment to arbitrate. None of McAllen‘s arguments materially distinguishes our holding in Schlumberger: “a release that clearly expresses the parties’ intent to waive fraudulent inducement claims, or one that disclaims reliance on representations about specific matters in dispute, can preclude a claim of fraudulent inducement.”34 Today‘s holding should not be construed to mean that a mere disclaimer standing alone will forgive intentional lies regardless of context. We decline to adopt a per se rule that a disclaimer automatically precludes a fraudulent-inducement claim, but we hold today, as in Schlumberger, that “on this record,” the disclaimer of reliance refutes the required element of reliance.
4. Scope of the Arbitration Clause
Having determined that McAllen‘s fraudulent-inducement claim cannot defeat the arbitration provision in the 1999 settlement agreement, we now turn to whether McAllen‘s claims fall within the scope of that arbitration provision.35 Generally, after finding an agreement valid, a court considers the agreement‘s terms to determine which issues are arbitrable.36 This arbitration agreement, however, removes the “scope determination” from the court and places it with the arbitration panel.37 This provision, shrinking the court‘s traditional role and expanding the arbitrators‘, is not challenged on legal or public policy grounds.38 Accordingly, we have no discretion but to direct the trial court to compel arbitration and stay McAllen‘s litigation.39
The remaining question is what should happen to the claims brought by the non-signatory plaintiffs who are not parties to the arbitration requirement (or to this appeal). Forest Oil concedes the trial court cannot order the nonsignatory plaintiffs to arbitration. Section 171.025(a) of the Civil Practice and Remedies Code provides that “[t]he court shall stay a proceeding that
However, as noted above, McAllen and Forest Oil agreed to arbitrate disputes over what the agreement covers. In terms of timing, the arbitrators should decide scope before the trial court decides severance. It is impractical (and probably impossible) for the trial court to decide the severability of the nonsignatories’ claims before the arbitration panel has decided the scope of the signatories’ claims. Accordingly, the trial court, in order to make an informed severance decision, should defer its decision until the arbitrators decide which issues are arbitrable.
5. Conclusion
McAllen may be correct that “[t]he facts of this case are not the facts of Schlumberger“—every case involves unique facts—but the decisive ones are assuredly close enough that Schlumberger binds this relevantly similar case. The unequivocal disclaimer of reliance in the parties’ bargained-for settlement agreement conclusively negates as a matter of law the element of reliance needed to support McAllen‘s fraudulent-inducement claim. Because Forest Oil has demonstrated that a valid arbitration agreement exists, an agreement that empowers the arbitrators to determine what issues are arbitrable, we reverse the court of appeals’ judgment and remand this case to the trial court to compel arbitration in accordance with our opinion.
Chief Justice JEFFERSON filed a dissenting opinion, in which Justice MEDINA joined.
Chief Justice JEFFERSON, joined by Justice MEDINA, dissenting.
According to the Court, the considerations most relevant to our analysis in Schlumberger Technology Corp. v. Swanson, 959 S.W.2d 171 (Tex.1997), were:
(1) the terms of the contract were negotiated, rather than boilerplate, and during negotiations the parties specifically discussed the issue which has become the topic of the subsequent dispute; (2) the complaining party was represented by counsel; (3) the parties dealt with each other in an arm‘s length transaction; (4) the parties were knowledgeable in business matters; and (5) the release language was clear.
268 S.W.3d 60. My disagreement with the Court centers on the first point. Under the Court‘s analysis, a party may intentionally misrepresent facts essential to the bargain to induce the other to sign, as long as the agreement says reliance is waived. This is not sound policy, and Schlumberger does not support this result. I would hold that McAllen‘s fraudulent inducement claim survives the disclaimer of reliance at issue here. Because the Court does not, I respectfully dissent.
I
Schlumberger
In Schlumberger, we noted that we had previously held “as a matter of policy, that a merger clause can be avoided based on fraud in the inducement and that the parol evidence rule does not bar proof of such fraud,” and that “[i]n doing so, we brought
But Schlumberger is not so broad. There, we held that, where the four other factors listed by the Court are present, “a release that clearly expresses the parties’ intent to waive fraudulent inducement claims, or one that disclaims reliance on representations about specific matters in dispute, can preclude a claim of fraudulent inducement.” Id. at 181. The release in Schlumberger did not contain an express waiver of fraudulent inducement claims, but did disclaim reliance on representations about specific matters in dispute. Id. at 180. The release itself noted that “there [wa]s considerable doubt, disagreement, dispute and controversy with reference to the validity of the [claim being settled],” and the “sole purpose of the release was to end [that] dispute.” Id. The Schlumberger Court therefore concluded “that the parties contemplated, by the inclusion of [the disclaimer of reliance], that the Swansons would not rely on any representations of Schlumberger about the commercial feasibility and value of this project, which, after all, was the very dispute that the release was supposed to resolve.” Id.
That the Schlumberger Court limited its holding to a release “that clearly expresses the parties’ intent to waive fraudulent inducement claims, or one that disclaims reliance on representations about specific matters in dispute” is clear from the rest of the opinion. Id. at 181. Indeed, we “emphasize[d]” in Schlumberger “that a disclaimer of reliance or merger clause will not always bar a fraudulent inducement claim.” Id. We cited Prudential Insurance Co. of America v. Jefferson Associates, in which we said “[a] buyer is not bound by an agreement to purchase something ‘as is’ that he is induced to make because of a fraudulent representation or concealment of information by the seller.” Prudential, 896 S.W.2d 156, 162 (Tex.1995). This would be a strange authority to cite if Schlumberger were as sweeping as the Court suggests: it is difficult to imagine a party making fraudulent representations on a subject that has not been discussed. And while the Court states that “this statement merely acknowledges that facts may exist where the disclaimer lacks ‘the requisite clear and unequivocal expression of intent necessary to disclaim reliance’ on the specific representations at issue,” it does so without addressing Prudential, instead quoting an earlier passage
In sum, in Schlumberger we balanced parties’ need to settle disputes against our strong aversion to fraud. The result was a narrow exception to the rule that integration clauses do not bar fraudulent inducement claims. By expanding Schlumberger, the Court‘s holding will force courts to honor contracts indisputably induced by fraud on the basis of blanket reliance waivers, like the one at issue here. I would not.
II
McAllen‘s Fraudulent Inducement Claim
As discussed above, under Schlumberger, to bar a fraudulent inducement claim, a disclaimer of reliance must either expressly waive the claim or disclaim reliance on representations about the specific disputed matter, Schlumberger, 959 S.W.2d at 181; otherwise, the general rule that integration clauses do not bar fraudulent inducement claims applies. The disclaimer in this case does neither. The relevant portion of the disclaimer reads:
Each of the Plaintiffs and Intervenors expressly warrants and represents and does hereby state and represent that no promise or agreement which is not herein expressed has been made to him, her, or it in executing the releases contained in this Agreement, and that none of them is relying upon any statement or any representation of any agent of the parties being released hereby.
This disclaimer makes no explicit reference to fraudulent inducement. The question, then, is whether it disclaims reliance on representations about a specific disputed matter in the agreement. While the disclaimers in this case and Schlumberger may appear to be “virtually identical,” 268 S.W.3d at 60, the factual differences between this case and Schlumberger are critical. In Schlumberger, there was essentially one dispute—specifically described in the agreement—being settled, and therefore, “[b]ecause courts are to assume that the parties intended every contractual provision to have some meaning,” the Court was able to “presume” that the disclaimer of reliance applied specifically to representations about that sole dispute. Schlumberger, 959 S.W.2d at 180. In the instant case, in contrast, the settlement agreement covered a number of topics, chiefly royalty underpayment and mineral underdevelopment. Thus, unlike Schlumberger, we cannot presume that the disclaimer of reliance referred specifically to environmental issues, and the general rule that fraudulent inducement claims are not barred by integration clauses should apply.
III
Forest Oil‘s Remaining Issues
Forest Oil argues that McAllen could not have justifiably relied on Forest Oil‘s representation that there were no existing issues with the surface because that representation was contradicted by the agreement‘s express terms. Because the surface agreement contains no contrary statement regarding surface conditions, it is not necessary to examine this claim in detail.
Forest Oil also argues that McAllen could not justifiably rely on the representation of his litigation adversary during settlement negotiations. Forest Oil cites McCamish, Martin, Brown & Loeffler v. F.E. Appling Interests, for the proposition that “a third party‘s reliance on an attorney‘s representation is not justified when the representation takes place in an adversarial context.” McCamish, 991 S.W.2d 787, 794 (Tex.1999). This statement, however, refers not to whether attorneys’
Q. (By Mr. Mancias) Yes, sir. Were you told in no uncertain terms by the oil companies, including Forest Oil Company, that there were no contaminants or pollutants on the surface of your property?
A. (By Mr. McAllen) Yes. And all the Forest attorneys were there. I believe Forest Doran himself was there.
Q. Who is Forest Doran?
A. I believe he‘s the majority stockholder of Forest Oil Company.
Q. Can you tell the Judge whether or not Mr. Doran was present when those representations you just testified about were made to you?
A. That, I can‘t recall.
Q. All right, sir. But the attorneys were present?
A. The attorneys—his attorneys were present.
* * *
A. But during the process, the owners for Forest and Conoco and everybody else who was involved in the lawsuit assured me that there was no issues [sic] having to do with the surface, and if I wanted to get this settlement agreement behind us, I had to do that. But they were very convincing.
(Emphasis added.) McAllen‘s reliance on these statements was not, therefore, unjustifiable as a matter of law.
IV
Conclusion
Today the Court replaces Schlumberger‘s requirement that a release must “clearly express[] the parties’ intent to waive fraudulent inducement claims, or disclaim[] reliance on representations about specific matters in dispute” in order to preclude a fraudulent inducement claim, 959 S.W.2d at 181, with the requirement that the parties merely “specifically discussed the issue which has become the topic of the subsequent dispute” during negotiations, 268 S.W.3d 60. Courts, including this one, have long battled the specter of fraud in contracts; I fear that the Court‘s opinion may one day be a weapon in the hands of those who profit from it. I respectfully dissent.
RELIANCE STEEL & ALUMINUM COMPANY and Samuel Alvarado, Appellants, v. Michael L. SEVCIK and Cathy S. Loth, Appellees.
No. 13-03-00407-CV.
Court of Appeals of Texas, Corpus Christi-Edinburg.
March 9, 2006.
Rehearing Overruled April 13, 2006.