Int'l Bus. Machs. Corp. v. Lufkin Indus., LLC

573 S.W.3d 224
CourtTexas Supreme Court
DecidedMarch 15, 2019
DocketNo. 17-0666
StatusPublished
Cited by108 cases

This text of 573 S.W.3d 224 (Int'l Bus. Machs. Corp. v. Lufkin Indus., LLC) is published on Counsel Stack Legal Research, covering Texas Supreme Court primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Int'l Bus. Machs. Corp. v. Lufkin Indus., LLC, 573 S.W.3d 224 (Tex. 2019).

Opinion

Justice Boyd delivered the opinion of the Court.

*226Under Texas law, a party may be liable in tort for fraudulently inducing another party to enter into a contract. But the party may avoid liability if the other party contractually disclaimed any reliance on the first party's fraudulent representations. Whether a party is liable in any particular case depends on the contract's language and the totality of the surrounding circumstances. In this case involving a contract to purchase a business-management software system, we hold that contractual disclaimers bar the buyer from recovering in tort for misrepresentations the seller made both to induce the buyer to enter into the contract and to induce the buyer to later agree to amend the contract. But we also hold that, contrary to the jury's finding, the evidence conclusively established that the seller's breach of the contract caused the buyer to suffer some amount of damages. Reversing the court of appeals' judgment in part, we render judgment for the seller on the fraudulent-inducement claims and remand the case to the trial court for a new trial on the breach-of-contract claims.

I.

Background1

Lufkin Industries, a publicly traded company based in Lufkin, Texas, manufactures machinery and equipment used in various segments of the energy industry. In 2009, Lufkin decided to upgrade its business-operations computer-software system. Over a period of several months, Lufkin and IBM engaged in numerous meetings, "discovery workshops," and other discussions in which they exchanged information about Lufkin's needs and IBM's capabilities. Lufkin's representatives explained that Lufkin needed an "out-of-the-box" or "off-the-shelf" system that could quickly replace its old system for a price lower than the cost of upgrading that system. Based on Lufkin's operational needs, IBM recommended its "Express Solution for SAP," which utilizes software developed by SAP, a separate German corporation.

During these extended discussions, IBM made numerous representations about its Express Solution that turned out to be false. IBM represented that the Express Solution was a preconfigured system that could be implemented for Lufkin within four to six months and meet eighty percent of Lufkin's requirements without any enhancements. IBM knew, however, that its Express Solution would require extensive customization before it could meet most of Lufkin's needs. Yet IBM continued to represent the Express Solution as a "fit" for Lufkin, hoping it could land the sale and then figure out how to provide what Lufkin needed.

In September 2009, IBM presented a demonstration of the Express Solution for Lufkin. During this demonstration, IBM's representatives again represented that the Express Solution would meet eighty percent of Lufkin's needs without any customization. In fact, the representatives knew that Express Solution was designed for much smaller operations and could not meet Lufkin's requirements without extensive and costly enhancements. Relying on IBM's misrepresentations, Lufkin agreed to a written contract with IBM in March 2010. The contract-called the "Statement of Work," or "SOW"-gave IBM about a year to finalize and implement the system, *227projecting that Lufkin could "go live" with IBM's Express Solution system on March 1, 2011.

The implementation did not go well. Beginning in November 2010, the new system failed multiple test runs. Each time, IBM assured Lufkin that the system would work as planned if Lufkin would just be patient while IBM addressed the issues. Over time, IBM convinced Lufkin to approve nine different "Project Change Requests" in which Lufkin agreed to delay the "go-live" date and increase the overall price. Ultimately, Lufkin paid IBM just under $ 13 million, an increase of about $ 6.6 million over the original price, and agreed to settle for a "go-live-ugly" implementation on January 1, 2012. Lufkin only agreed to these repeated delays and increased costs because IBM continued to represent that once implemented, the Express Solution would meet Lufkin's needs without any further enhancements, and by then it had invested so much time and money it could not start the process over.

On the day of the "go-live-ugly," Lufkin deactivated its old system at IBM's instruction. But Lufkin was unable to use the Express Solution to invoice customers, manage inventory, track orders, shipments, or costs, calculate payroll, or pay employees and vendors. Because the system did not integrate with Lufkin's financial modules, Lufkin had to delay filing public financial reports, and its stock lost value. In short, the system failure crippled Lufkin's business.

Initially, Lufkin scrambled to perform all the necessary functions manually. Over the next year and a half, Lufkin worked with SAP and other new consultants to construct and stabilize a working system. Ultimately, Lufkin paid these consultants an additional $ 7.5 million to salvage the system IBM had delivered.

Lufkin filed this suit against IBM, asserting claims for fraudulent inducement, fraudulent misrepresentation and concealment, negligent misrepresentation, and breach of contract.2 At trial, the jury found IBM liable on all claims. As damages for fraudulent inducement, the jury awarded $ 10 million for out-of-pocket losses and $ 11 million for additional costs to mitigate and replace IBM's system. As damages for fraud-which Lufkin refers to as "string-along fraud"-the jury awarded $ 3 million for out-of-pocket losses and $ 3 million for mitigation costs. But the jury awarded zero damages for negligent misrepresentation and breach of contract.

Based on the jury's verdict, the trial court entered judgment awarding Lufkin $ 21 million for fraudulent inducement, or alternatively, $ 6 million for the string-along-fraud claim "if the judgment above for fraudulent inducement is reversed by an appellate court." The court of appeals upheld IBM's liability for fraudulent inducement but reversed the alternative string-along-fraud award, concluding that claim was based on the same misrepresentations as the fraudulent-inducement claim. Int'l Bus. Machs. Corp. v. Lufkin Indus., Inc. , 564 S.W.3d 15, 32 (Tex. App.-Tyler 2017). The court also concluded that the evidence did not support all of the $ 11 million in mitigation damages and suggested a remittitur of about $ 3.5 million, which Lufkin accepted. Id. at 37.

We granted IBM's petition for review. IBM argues that the court of appeals erred by affirming liability for fraudulent inducement because Lufkin expressly disclaimed reliance on IBM's misrepresentations.

*228Lufkin disagrees and also argues by conditional cross-points that, if we were to reverse the fraudulent-inducement award, we should render judgment in its favor on the string-along-fraud claim and either render judgment on the breach-of-contract claim or remand that claim for a new trial.

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Cite This Page — Counsel Stack

Bluebook (online)
573 S.W.3d 224, Counsel Stack Legal Research, https://law.counselstack.com/opinion/intl-bus-machs-corp-v-lufkin-indus-llc-tex-2019.