Energy-related contracts are frequently price sensitive. A good deal for both sides when oil is $90 a barrel becomes a windfall for one and a disaster for the other when oil prices move significantly in either direction. When that occurs, the loser of the price-swing lottery has a financial incentive to repudiate the agreement. One way to do so is for the unhappy party to claim the other party fraudulently induced it into entering into the agreement. In drafting energy contracts, in-house counsel can protect the company from fraudulent-inducement claims with the addition of two contractual provisions: a merger clause and a disclaimer-of-reliance provision.

First, it’s helpful to review some basics of fraudulent inducement. A party attempting to void a contract may claim that it was fraudulently induced into entering the agreement because of something said during negotiations. Under the Texas Supreme Court’s 1998 decision in Johnson & Higgins of Texas Inc. v. Kenneco Energy Inc. , establishing a fraudulent-inducement claim requires proof that: 1. the defendant made a material representation; 2. the representation was false; 3. when the defendant made the representation, it knew the representation was false or it made the representation recklessly, as a positive assertion and without knowledge of its truth; 4. the defendant made the representation with the intent that the plaintiff act upon it; 5. the plaintiff relied upon the representation; and 6. the representation caused the plaintiff injury.

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