Beware the Boilerplate: “As-is” Provisions and Reliance-Negating Merger Clauses: A 1-2 Knockout Punch
Real estate lawyers should be particularly aware of how a disclaimer of reliance in combination with an “as-is” or “with all faults” provision in a lease1 or purchase agreement can cut off just about any claim relating to the condition of a property.
A few weeks ago, I wrote about using merger clauses that negate reliance as a way to bar claims of fraud in the inducement. While the Texas Supreme Court has yet to hold that parties can negate reliance at the inception of a relationship, a recent appellate court decision does precisely that. So today we are going to look at the Schlumberger case and its progeny in more detail, and examine how those cases might affect another common contract clause that negates reliance—the “as-is” covenant in a real estate lease or purchase agreement.
The purpose of a contract is to set out the intention of the parties. Sometimes, though, it seems that drafters go out of their way to make that intent as unclear as possible. In the context of a dispute, this is a big problem because a finding that the contract is ambiguous increases litigation cost significantly. With an ambiguous contract, parol evidence is admissible—which means it is fair game in discovery (the costliest phase of most cases) and at trial. In addition, with an ambiguous contract it’s the jury, not the judge, who decides what it means. So say what you mean and try to avoid these traps.
In most commercial loan transactions, there will be multiple documents—for example, a note, a deed of trust and a guaranty. Many times, each of these documents contains provisions intended to have a uniform effect. These are often the boilerplate clauses copied and pasted from one deal to another, but they have critical importance in the context of litigation. They contain, for example, provisions about venue, choice-of-law, waiver of jury trial and merger/integration. As a general rule, contracts executed contemporaneously will be construed together. Jim Walter Homes, Inc. v. Schuenemann, 668 S.W.2d 324, 327 (Tex. 1984).
It is fairly common for a defendant sued on a debt to assert, long after the money’s been spent, that he was defrauded into entering the transaction. Such “fraud in the inducement” claims are very difficult to have dismissed on summary judgment, because allegations of fraud are generally accepted to raise issues of fact. One of the most fact-intensive elements of a fraudulent inducement claim is whether the defrauded party actually relied on the other party’s representations in entering the contract, and whether such reliance was reasonable. A merger clause that negates reliance, may bring the lender one step closer to defeating this argument.
Choice of law and venue provisions are the legal equivalent of choosing your battlefield. A favorable choice of law provision (like New York) can ensure that the lender does not run afoul of, for example, usury statutes, or prevent the borrower or guarantor from taking advantage of onerous state-law provisions. Similarly, a venue provision can ensure that disputes are litigated in a forum that is convenient for your organization.
Times change, and so does the English language. Nowhere is this more prevalent than in the use of industry jargon and terms of art. If you’ve been using the same form of contract for years, chances are the contract contains terms that do not mean today precisely what they meant when the original form was drafted. But it is the meaning of words at the time of contracting that controls—even if the term’s meaning has changed over time.
Just as many waivers must be conspicuous in order to qualify as an “intentional relinquishment” of a right, they should, in many circumstances, also be express. While the initial impulse may be to draft a general waiver clause that does not clue the other side into exactly what waivers are important to your client, the approach is not without risk. Better to start with specific waiver language and have it negotiated out, leaving the litigator with broad, general waiver language to fight about, than to forego the opportunity to be so clear that no fight can be had. This is certainly the case with respect to matters not yet resolved by the Texas Supreme Court, such as offset for fair market value of a foreclosed property in a deficiency suit.
What is a waiver?
Loan documents (generally the note, security instrument and guaranty) often contain waiver provisions. Some common waivers are indemnity provisions, waiver of the right to jury trial, waiver of defenses and waiver of notice. While parties seeking waivers might favor sneaking such provisions into the document, this can often backfire—and it is sure to for the waivers litigants care about most.
If there’s anything we’ve learned from this Great Recession, it’s that better loans make better asset-backed securities. While lots of attention has been focused on loan quality in terms of underwriting, not much has been said about how the quality of loan documents themselves affect collectability and, by extension, value to the pool. But when the time comes to enforce a loan or guaranty, the devil is in the drafting—not just of the negotiated terms, but of those standard provisions often copied from one transaction to another. Over the next few weeks, we’ll look at several standard “boilerplate” provisions found in loan documents, and discuss why it just might be time to give your forms a second look.
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- Beware the Boilerplate: “As-is” Provisions and Reliance-Negating Merger Clauses: A 1-2 Knockout Punch
- Beware the Boilerplate: Cutting Off Fraud Claims with a Merger Clause
- Beware the Boilerplate: Not Boilerplate, But Still Beware: Overcomplicating
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