LaFazia v. Howe
1990 WL 71380, 1990 R.I. LEXIS 112, 575 A.2d 182 (1990)
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Rule of Law:
A specific disclaimer clause in a contract, stating the buyer is not relying on the seller's representations concerning a particular subject like profitability, can negate the element of justifiable reliance required for a fraudulent misrepresentation claim, thereby precluding the claim.
Facts:
- Arthur LaFazia and Dennis Gasrow represented to James and Theresa Howe that their delicatessen, Oaklawn Fruit and Produce, was an 'extremely profitable business' earning between $450,000 and $500,000 annually.
- LaFazia and Gasrow provided tax returns showing low figures, but explained the discrepancy by pointing to their lavish lifestyles, which they claimed were funded solely by the business.
- The Howes, who were inexperienced in the delicatessen business, were initially skeptical but were ultimately convinced by the oral representations to purchase the business.
- On July 6, 1987, the Howes bought the business for $90,000, paying $60,000 and signing a promissory note for the remaining $30,000.
- The Memorandum of Sale contained a specific disclaimer clause stating, 'The Buyers rely on their own judgment as to the past, present or prospective volume of business or profits... and does not rely on any representations of the Seller with respect to the same.'
- After taking over, the Howes discovered the business was losing money from the first day.
- Despite believing they had been 'taken,' the Howes made two payments totaling $20,000 on the promissory note before defaulting on the final $10,000.
- In February 1988, the Howes sold the business at a loss for $45,000.
Procedural Posture:
- Arthur LaFazia and Dennis Gasrow (plaintiffs) sued James and Theresa Howe (defendants) in Rhode Island Superior Court (trial court) for breach of a promissory note.
- The Howes filed a counterclaim against the plaintiffs, alleging fraudulent misrepresentation.
- The plaintiffs filed a motion for summary judgment on their claim and on the defendants' counterclaim.
- The trial justice granted summary judgment for the plaintiffs, finding that the contract's disclaimer clauses precluded the defendants from showing fraudulent misrepresentation.
- The Howes (appellants) appealed the trial court's grant of summary judgment to the Supreme Court of Rhode Island.
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Issue:
Does a specific disclaimer clause in a sales contract, stating the buyers rely on their own judgment regarding the business's profits and not on seller representations, preclude the buyers from later bringing a claim for fraudulent misrepresentation based on the seller's prior oral statements?
Opinions:
Majority - Fay, Chief Justice
Yes. A specific disclaimer clause stating the buyer relies on their own judgment regarding profits precludes a subsequent claim for fraudulent misrepresentation. The court reasoned that to establish fraudulent misrepresentation (deceit), a party must prove justifiable reliance on the alleged false representation. While a general merger clause may not defeat a fraud claim, the clause in this contract was highly specific, disclaiming reliance on the very matter—profitability—about which the Howes claimed they were defrauded. Citing Danann Realty Corp. v. Harris, the court held that such a specific disclaimer destroys the allegation that the contract was executed in reliance on contrary oral representations. Because the Howes, represented by counsel, signed a contract explicitly stating they were relying on their own judgment as to profits, their claim of reliance on the sellers' oral statements was not justifiable as a matter of law.
Analysis:
This decision solidifies the principle that specific, tailored disclaimer clauses can effectively shield a party from liability for prior oral representations, even if fraudulent. It distinguishes between general, boilerplate merger clauses, which are often insufficient to bar fraud claims, and specific disclaimers that directly address the subject of the alleged misrepresentation. The ruling emphasizes the importance of contractual certainty and the expectation that parties, especially those represented by counsel in arm's-length transactions, are bound by the clear terms they agree to. This precedent makes it more difficult for buyers to claim fraudulent inducement if they have signed a contract explicitly disclaiming reliance on the seller's statements about a key aspect of the transaction.
