Should Courts Enforce Contracts Induced by Lying?

The most recent issue of the Marquette Law Review includes a provocative article written by Professor Allen Blair of Hamline University Law School on contracts and fraud (92 Marq. L. Rev. 423).  In the article, Professor Blair explores why courts tend to not enforce so called “no reliance” clauses in contracts, clauses in which one party disclaims any liability for fraudulent statements (which includes lies) made outside of the four corners of the contract.

According to Professor Blair, courts generally refuse to enforce no-reliance clauses on the grounds that it violates public policy to protect a person against his own fraud.  While some courts have enforced no-reliance clauses, they have generally done so only after finding that the clauses were specifically negotiated, and only to the extent that they set out the precise representation on which the other party may not rely.  Only a handful of courts have upheld no-reliance clauses without attaching these types of limitations.

While Professor Blair does not promote blind enforcement of all no-reliance clauses, he argues that courts should not ignore the numerous legitimate reasons why sophisticated parties in complex transactions might agree to a no-reliance clause. 

For instance, in sophisticated transactions that are negotiated by many agents on behalf of both buyers and sellers, it is simply not possible for one party to monitor all of the representations made by its agents — and in fact it may be more efficient for the other side to monitor those representations.  The sheer number of representations that are made in sophisticated transactions only increases the likelihood of misunderstandings between the parties. No-reliance clauses can also provide an increased incentive for sellers to disclose more information to buyers, as it frees them of the risk of future fraud claims.  For these reasons, the parties might agree to a no-reliance clause to impose the monitoring costs on the party better able to bear the risk.  Moreover, a buyer might get a better price for a good or service where the sales agreement includes a no-reliance clause.  And in fact there are numerous extra-legal sanctions, such as reputational sanctions, that deter parties from making fraudulent statements.  Given these (and undoubtedly other) reasons why parties might rationally agree to no-reliance clauses, Professor Blair simply asks courts not to hold such clauses as automatically unenforceable on moral grounds.  Rather, in his view, courts should either enforce these clauses without limitations, or articulate a more robust moral basis for a public policy prohibition against enforcement.

I generally agree with Professor Blair’s analysis that courts should not blindly hold no-reliance clauses as unenforceable based simply on the notion that lying is immoral.  Rather, in my view, where a sophisticated party knowingly and voluntarily agrees to a no-reliance clause, the court should largely defer to the deal struck by the parties unless there is an overwhelming policy reason not to.  That would mean balancing the policy of discouraging fraud (especially the use of intentional lies) against the benefits of upholding a no-reliance clause in a particular context.  While this type of balancing might lead to more uncertainty, imprecision associated with a balancing test should not deter courts from employing this type of test where it more appropriately captures all of the policy concerns involved.

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