Settlement Agreements: Fraudulent Inducement and the Duty to Read Your Contract

fraudulent-inducement-texas Settlement agreements are contracts. They impose binding obligations on both parties. Consider the following example: 

Employer sues ex-employee for breach of non-compete. Employee files a counterclaim for unpaid sales commissions. Eventually, the two parties sign a settlement agreement. As part of the settlement agreement, the parties agree to release all pending litigation. The ex-employee and the employer also agrees not to bring suit in the future regarding the dispute at hand. Although these agreements are typically binding, there are some exceptions.

Specifically, a party cannot be induced by fraud to sign a settlement agreement. However, a party claiming fraud nonetheless has a duty to exercise ordinary care and reasonable diligence when contracting

In other words, the defense of “I didn’t know that was in the contract” generally will not work.  Commonly, courts in Texas say, “you should have read it before you signed it.”

Fraudulent Inducement Claim Example from the Texas Supreme Court

The Texas Supreme Court recently dealt with a case of this nature. In this case, the parties settled their dispute in mediation. In exchange for the plaintiff’s release of litigation against the defendant, the defendant orally agreed to give to the plaintiff:

  1. a partnership share in his company,
  2. $1 million in cash, and
  3. an interest in future profits from the sale of property in dispute.

Later, a written agreement was signed by both parties. When the plaintiff never received his other cash, profits, and partnership interest, he read the settlement agreement, for the first time

To his dismay, the written settlement agreement only required the defendant to tender $500,000 to the plaintiff in exchange for his release of its claims.  The plaintiff brought suit for breach of contract, specifically, fraud in the inducement of a settlement agreement.

At trial the plaintiff admitted he did not read the settlement agreement, and relied solely on the defendant’s oral promise.  However, the court held that the plaintiff could not have relied on the statements by the defendant because the plaintiff did not read the settlement agreement. The court ruled that it would not save the plaintiff from his contract because he had a “reasonable opportunity to review the written agreement but failed to exercise ordinary care to do so.”