Benson v. Stafford, Nos. 1-09-1361, 1-09-3173 (Cons.) The Nonreliance Clause Bars A Fraud Claim

The Illinois Appellate Court recently considered whether or not a party, which signs a written contract that specifically disclaims any representations and warranties, can sue for fraud?

The answer, once again, is a resounding no. The case, like the other cases it follows, is significant.

The plaintiffs brought a claim for "affirmative fraud" against the Defendant. They argued that the Defendant made affirmative misrepresentations to them to induce them to participate in the transaction.

Defendant argued that the nonreliance clause barred any recovery. The opinion sets out the text of the clause as follows:

In the case at bar, the trial court dismissed the affirmative fraud component of count II of plaintiffs’ fourth amended complaint due to the presence of a nonreliance clause in the SPAs that plaintiffs signed. The clause, located in section 6.7 of the SPAs, provided:

Nos. 1-09-1361, 1-09-3173 (Cons.) “6.7 Entire Agreement. This Agreement (including the
documents referred to herein) constitutes the entire agreement among the Parties with respect to the subject matter hereof. There are no warranties, conditions, or representations (including any that may be implied by statute) and there are no agreements in connection with such subject matter except as specifically set forth or referred to in this Agreement. No reliance is placed on any warranty, representation, opinion, advice or assertion of fact made either prior to, contemporaneous with, or after entering into this Agreement, or any amendment or supplement thereto, by any Party or its directors, officers, employees or agents, to any other Party or its directors, officers, employees or agents, except to the extent that the same has been reduced to writing and included as a term of this Agreement, and none of the Parties has been induced to enter into this Agreement or any amendment or supplement by reason of any such warranty, representation, opinion, advice or assertion of fact. Accordingly, there shall be no liability, either in tort or in contract, assessed in relation to any such warranty, representation, opinion, advice or assertion of fact, except to the extent contemplated above.” (Emphasis added.)

Additionally, although the trial court did not discuss it, defendant claimed that section 28
Nos. 1-09-1361, 1-09-3173 (Cons.) 3.1(d)(viii) of the TD Options agreement also provided a nonreliance clause:

“(d) Representations and Warranties of Members. Each Member hereby represents and warrants to the Company and to each other Member and acknowledges that: *** (viii) the determination of such Member to acquire Units in the Company has been made by such Member independent of any other Member and independent of any statements or opinions as to the advisability of such acquisition or as to the properties, business, prospects or condition (financial or otherwise) of the Company and its Subsidiaries which may have been made or given by any other Member or by any agent, employee or other Affiliate of any other Member.”

Defendant relied on the case captioned, Tirapelli v. Advanced Equities, Inc., 351 Ill. App. 3d 450. In Tirapelli, the plaintiff purchased securities from the defendant. Plaintiff's claims of affirmative fraud were dismissed by the Court and the dismissal was affirmed by the Appellate court on the ground that the plaintiffs were "sophisticated parties" who had signed a nonreliance clause. The plaintiffs, therefore, could not rely on Defendant's oral representations that were not contained in the contract. The Appellate Court in Tirapelli, held that the nonreliance clause barred the plaintiffs from stating a cause of action for fraud, stating that “[h]aving agreed in writing that they did not rely on any representations found outside the subscription documents, plaintiffs cannot be allowed to argue fraud based on such representations.” Tirapelli, 351 Ill. App. 3d at 457. We also noted that as sophisticated business people, plaintiffs could have negotiated for the inclusion of any representations that they thought were important. Tirapelli, 351 Ill. App. 3d at 457."

In the Benson case, Defendant argued, and the trial court agreed, that the presence of a nonreliance clause barred plaintiffs from bringing a claim for affirmative fraud as a matter of law.

The appellate Court held that the nonreliance clause barred the affirmative fraud claim because the plaintiffs could not establish justifiable reliance, an element of fraud.

The Court wrote: In the case at bar where there were sophisticated parties to a securities transaction, and in the presence of a non-reliance clause, we will follow Tirapelli and find that plaintiffs cannot state a claim for affirmative fraud because they cannot show reasonable reliance on defendant’s oral representations as a matter of law due to the non-reliance clause in section 6.7 of the SPAs.

Comment: Tirapelli and Benson hold that sophisticated persons who sign a contract with a nonreliance clause are bound by that clause and cannot later claim fraud or fraudulent inducement based on representations outside of the four corners of the contract.

Edward X. Clinton, Jr.