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The Texas Supreme Court Gives Bitter Medicine, No Spoonful of Sugar

Spoonful of Sugar

Nat'l Prop. Holdings, L.P., et al. v. Westergren

2015 Tex. Lexis 1, Cause No. 13-0801 (Tex. 2015 - Jan. 9, 2015).

The Texas Supreme Court recently released an opinion which entails a mediated settlement agreement, an oral side agreement, and a subsequent written release. The issue before the Court was whether fraudulent inducement can be the basis to overturn a Release agreement when the party who executes and notarizes the Release did not read it before signing.

The Facts:

This case initially stems from a dispute over ownership of a 190 acre tract of land in La Porte, Texas. Westergren first entered an option contract to purchase the property. Westergren later discovered that the seller had subsequently entered into an option contract with two other interested buyers. Westergren sued the seller and the two other potential buyers and filed a lis pendens against the property.

Meanwhile, several developers, including National Property Holdings ("NPH"), were also interested in acquiring the property, but could not pursue it due to the pending litigation. The parties, including NPH, mediated that case, and entered into a written settlement agreement in which NPH would purchase the property, and all other parties would agree to release their rights to the property.

In an oral side agreement, NPH orally promised Westergren that he would become a partner with the owners of NPH and would receive $1 million plus an interest in the profits from NPH's development and future sale of the property. Later, after part of the property had been sold by NPH, Westergren sought to obtain the $1 million and a share of the profits that he was promised.

An owner of NPH told Westergren that they could only pay him $500,000 "right now." Westergren met with NPH, where he was presented with a check for $500,000 and a document titled "Agreement and Release." Westergren signed the document and had it notarized without reading it. In the document, Westergren agreed to relinquish any and all interest in the property and all claims against NPH in exchange for the $500,000.

Once Westergren finally read the document, he realized what happened and filed suit. The suit claimed breach of contract and fraud, alleging that NPH fraudulently induced him into signing the Agreement and Release. NPH defended the suit saying that Westergren released all of his claims and that the oral agreement was unenforceable under the statute of frauds.

The Court's Analysis:

At trial, the jury found that Westergren was fraudulently induced into executing the Agreement and Release, but awarded no damages. The trial court then granted a judgment notwithstanding the verdict and entered a take-nothing judgment as to all parties. The Court of Appeals disagreed, holding that an oral contract existed between NPH and Westergren, that the $500,000 payment constituted a partial payment of that oral contract which excepted the oral agreement from the statute of frauds, that NPH fraudulently induced Westergren to sign the Agreement and Release, and remanded the case for new trial on the issue of Westergren's claim for attorneys' fees.

On appeal, the Supreme Court's main focus was on whether there was legally sufficient evidence to support the jury's finding that NPH fraudulently induced Westergren to sign the Release. To prove that he was fraudulently induced into signing the Release, Westergren had to prove that (1) NPH made a material misrepresentation, (2) the representation was false and was either known to be false when made or made without knowledge of its truth, (3) the representation was intended to be and was relied upon by the Westergren, and (4) Westergren's injury was caused by that reliance.

NPH argued that Westergren's injury was not caused by any reliance, because he had the opportunity to read the Release agreement before signing, and simply chose not to do so. The Supreme Court agreed, holding that, as a matter of law, Westergren could not justifiably rely on the representation of NPH about the Release's contents. This is because NPH's representations about the Release directly contradicted the clear and unambiguous language of the Release. The Court stated that "it is not the Courts' role 'to protect parties from their own agreements.'" (internal citations omitted). The Court found that evidence was legally insufficient to support the jury's finding of justifiable reliance, and thus there was no evidence of fraudulent inducement to negate the release's validity.

What to Take Away:

When presented with a contract - READ IT. Regardless of what the other side states the contract says, a person is under a duty to read a contract before he signs it. This is especially so in an arm's length transaction where both parties are sophisticated in business dealings. 

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