Unsettled: When Fraud Defeats The Effect of a Release

You just settled a massive case. You made the settlement payment and your opponent signed a release. You think it’s over. Time passes. Then, one day, your opponent claims you lied during settlement negotiations to convince him or her to sign the release. Your opponent sues you a second time, this time claiming fraud.

If you think the release automatically and fully absolves you, think again. Under Minnesota law, a victim of fraudulent inducement to enter into a contract has a choice between (a) suing to rescind the contract he or she was induced to sign, or (b) keeping the contract in place and suing for damages. The victim has the same choices even if the contract at issue is a settlement agreement. The victim is not required to rescind the agreement in order to seek a remedy in court. The victim can instead sue for damages, without unwinding the agreement or returning any settlement payment received under the agreement. If the defendant raises the release provision of the agreement as a defense, proof of fraud will defeat the effect of the release. And if the defendant argues that it paid money for the release, the payment will merely serve as an offset to reduce the victim’s damages award. See Great Plains Educational Foundation, Inc. v. Student Loan Finance Corporation, 954 N.W.2d 844, 849 (Minn. Ct. App. 2020).

If you are hoping to find salvation in other boilerplate provisions of your settlement agreement, you may be disappointed. Under Minnesota law, a broad contractual disclaimer of fraud does not necessarily negate a fraud claim. Nat’l Equip. Corp. v. Volden, 252 N.W. 444, 445 (Minn. 1934). An alleged fraudster cannot avoid liability by including a contract provision that says “[t]his contract was not procured by fraud” or “the other party shall not rely upon [my fraudulent statements].” Ganley Bros. v. Butler Bros. Bldg. Co., 212 N.W. 602, 603 (Minn. 1927).

A contract can only defeat a fraud claim as a matter of law if the contract specifically contradicts the factual substance of the alleged misrepresentation.  Clements Auto Co. v. Serv. Bureau Corp., 444 F.2d 169, 178 (8th Cir. 1971).  Provisions that do not address the factual content of the alleged misrepresentation, such as boilerplate integration clauses and “no reliance” clauses, are not enough to avoid trial on a fraud claim.  Although a 2008 journal article suggested that combining a standard integration clause with a broad “no reliance” clause could bar a fraudulent inducement claim, the Minnesota Court of Appeals recently rejected that theory.  Great Plains, 954 N.W.2d at 850-51 (discussing Eric J. Magnuson & Daniel J. Supalla, Life with Hoyt: Avoiding Misrepresentation Claims in Negotiating Settlement Agreements, 1 Wm. Mitchell J. L. & Prac. 3 (2008)).  As the court made clear, non-specific contract provisions simply do not preclude fraud claims as a matter of law.