Forest Oil Corp. v. McAllen

delivered the opinion of the Court,

This commercial contract case asks whether an unambiguous waiver-of-reliance provision precludes a fraudulent-inducement claim as a matter of law. Here, sophisticated parties represented by counsel in an arm’s-length transaction negotiated a settlement agreement that included clear and broad waiver-of-reliance and release-of-claims language. Because that agreement conclusively negates reliance on representations made by either side, any *53fraudulent-inducement claim, lodged here to avoid an arbitration provision, is contractually barred. We enforce the parties’ contract as written. Thus, we reverse the court of appeals’ judgment and remand to the trial court to compel arbitration in accordance with our opinion.

1. Factual and Procedural Background

In 1999, Forest Oil Corporation settled a long-running lawsuit over oil and gas royalties and leasehold development with James McAllen and others with interests in the McAllen Ranch.1 The settlement agreement resulted from a week-long mediation and released Forest Oil from “any and all” claims “of any type or character known or unknown” that are “in any manner relating to” the McAllen Ranch Leases and the covered lands, whether the claims sound in contract, tort, trespass or any other theory.2 While this sweeping release resolved the royalty and nondevelopment disputes, the parties reserved the right to arbitrate under the Texas General Arbitration Act (TAA) claims “for environmental liability, surface damages, personal *54injury, or wrongful death occurring at any time and relating to the McAllen Ranch Leases.” The parties also incorporated into the settlement agreement a separate surface agreement that detailed ongoing care and remediation of the surface estate.3

Importantly, the settlement agreement specifically disclaimed reliance “upon any statement or any representation of any agent of the parties” in executing the releases contained in the agreement.4 The parties also acknowledged they were “fully advised” by legal counsel as to both the contents and consequences of the release.

In 2004, McAllen sued Forest Oil to recover for environmental damage caused when Forest Oil allegedly “used its access under the leases to the surface estate to bury highly toxic mercury-contaminated” material on the McAllen Ranch. McAllen also alleged environmental and personal injuries caused when Forest Oil moved oilfield drilling pipe contaminated with radioactive material from the McAllen Ranch to a nearby property, the Santillana Ranch, which housed a sanctuary for endangered rhinoceroses.5

Forest Oil sought to compel arbitration under the settlement agreement, but *55McAllen argued the arbitration provision was induced by fraud and thus unenforceable. McAllen recounts assurances during the 1999 settlement negotiations that no environmental pollutants or contaminants existed on the property. McAllen claims an unidentified lawyer for one of the four defendants “assured [McAllen] that there was no problem, no issue at all that [he] would be concerned about,” and McAllen says he signed the agreement based on that specific representation. McAllen claims that when this assurance of “no environmental issues” was given, Forest Oil knew all about the radioactive-contaminated pipe and the mercury-contaminated material.

After an evidentiary hearing on Forest Oil’s motion to compel arbitration, the trial court denied the motion, and the court of appeals affirmed, applying a no-evidence standard of review because the case was “an interlocutory appeal from an order denying a motion to compel arbitration that involves the defense of fraudulent inducement.” 6 After examining the testimony of McAllen and a former Forest Oil employee, the court of appeals concluded there was some evidence to support the trial court’s determination that the arbitration provision was induced by fraud.7

This interlocutory appeal followed.8 Although the court of appeals treated Forest Oil’s argument as an evidentiary challenge, this case fundamentally poses a legal question, not a factual one: does McAllen’s disclaimer of rebanee on Forest Ob’s representations negate the fraudulent-inducement claim as a matter of law? We review this legal question de novo.9

2. Enforcement of the Parties’ Arbitration Agreement Under the Texas General Arbitration Act

We first address appbeation of the TAA, which the parties’ settlement *56agreement specifically invoked. Federal and Texas law strongly favor arbitration,10 and we uphold arbitration agreements that comport with traditional principles of contract law.11 While an arbitration agreement procured by fraud is unenforceable,12 the party opposing arbitration must show that the fraud relates to the arbitration provision specifically, not to the broader contract in which it appears.13 If a trial court finds that the claim falls within the scope of a valid arbitration agreement, the “court has no discretion but to compel arbitration and stay its own proceedings.” 14

Forest Oil challenges the trial court’s refusal to compel arbitration on three grounds: (1) the waiver-of-reliance provision in the contract precludes as a matter of law McAllen’s ability to show the reliance element of fraudulent inducement; (2) McAllen cannot establish justifiable reliance on oral representations that directly contradict the terms of a signed contract; and (3) McAllen cannot establish justifiable reliance on statements made by an adversary. Because Forest Oil’s first argument defeats McAllen’s claim, we do not reach the other two.

3. Schlumberger Controls this Relevantly Similar Case: The Parties’ Broad Disclaimer of Reliance is Dispositive

Forest Oil contends the waiver-of-reliance provision in the settlement agreement conclusively defeats McAllen’s fraudulent inducement claim. We agree.

We considered today’s question in Schlumberger Technology Corp. v. Swanson, holding that a disclaimer of reliance on representations, “where the parties’ intent is clear and specific, should be effective to negate a fraudulent inducement claim.”15 In that case — decided eighteen months before the settlement in the instant case and construing virtually identical disclaimer language — Schlumberger and the Swansons agreed to a complete release of claims to settle a dispute involving an underwater diamond-mining project off the South African coast.16 The Swan-sons sold their interests in the venture to Schlumberger for roughly $1 million,17 and *57the parties signed a settlement agreement, which included this waiver-of-reliance provision:

[E]ach of us [the Swansons] expressly warrants and represents and does hereby state ... and represent ... that no promise or agreement which is not herein expressed has been made to him or her in executing this release, and that none of us is relying upon any statement or representation of any agent of the parties being released hereby. Each of us is relying on his or her own judgment and each has been represented by Hubert Johnson as legal counsel in this matter. The aforesaid legal counsel has read and explained to each of us the entire contents of this Release in Full, as well as the legal consequences of this Release.... 18

After learning that Schlumberger later sold the interest to DeBeers for about $4 million, the Swansons sued, claiming Schlumberger had fraudulently induced them to accept the low-price buyout.19 They maintained that when Schlumberger entered into the settlement, it knew that the Swansons’ interest had a far higher value.20

Our decision in Schlumberger assumed that (1) the company knew during negotiations that it was misrepresenting the value of the interest, and (2) the misrepresentations were made with the intent of inducing the Swansons to settle.21 Despite these assumptions, we held as a matter of law that the Swansons could not show fraudulent inducement.22

McAllen argues that Schlumberger is not controlling because we restricted that holding to the record, and today’s case involves “notable distinctions” and “material fact differences.” McAllen’s chief argument to distinguish Schlumberger is that Schlumberger “focuses on representations that were made regarding the underlying agreement’s core subject matter.” The dispute in Schlumberger concerned the value of the Swansons’ interest in the sea-diamond project, and the alleged misrepresentation, as described by McAllen, “pertained to the very thing disputed, which was resolved ‘once and for all’ in the settlement.”23 This case is different, says McAllen, because the litigation that led to the 1999 settlement concerned royalty underpayments and mineral underdevelopment, issues having nothing to do with the environmental and personal-injury torts that sparked the current litigation and were excepted from the settlement agreement. That is, while the misrepresentation in Schlumberger “pertained to the very matter negotiated, settled, and released” — a factor that McAllen terms “the primary basis” for the Court’s holding— the misrepresentation here did not concern known disputed matters (which were settled and released) but potential future disputes (which were set aside and reserved). And the disclaimer applies solely to representations about the former, not the latter. Under this banner, McAllen makes three subsidiary arguments.

First, McAllen stresses that the parties’ settlement in Schlumberger definitively ended their valuation dispute. McAllen points out that the settled dispute was the only dispute, meaning that the agreed-to disclaimer was sufficiently specific to bar a *58later fraudulent-inducement suit alleging one side misled the other about valuation.24 By contrast, in this case, ending the royalty underpayment and mineral underdevelopment dispute was not the sole purpose of the settlement agreement, McAllen argues, making the disclaimer insufficiently specific to be applied to every representation made by Forest Oil.

McAllen identifies a valid factual distinction, but we fail to see how the disclaimer’s preclusive effect should be different where, as here, the parties agreed to resolve litigated claims and arbitrate future ones. Although we noted in Schlumberger that the company’s representations about the project’s value and feasibility led to “the very dispute that the release was supposed to resolve,”25 this language is more accurately interpreted as emphatic language, not limiting language. Our analysis in Schlumberger rested on the paramount principle that Texas courts should uphold contracts negotiated at arm’s length by “knowledgeable and sophisticated business players” represented by “highly competent and able legal counsel,” a principle that applies with equal force to contracts that reserve future claims as to contracts that settle all claims.26 Essentially, Schlumber-ger holds that when knowledgeable parties expressly discuss material issues during contract negotiations but nevertheless elect to include waiver-of-reliance and release-of-claims provisions, the Court will generally uphold the contract. An all-embracing disclaimer of any and all representations, as here, shows the parties’ clear intent. A “once and for all” settlement may constitute an additional factor urging rejection of fraud-based claims, but a freely negotiated agreement to settle present disputes and arbitrate future ones should also be enforceable. Moreover, contrary to McAllen’s assertions, the parties’ discussions here did in fact address environmental matters. Not only were such matters “very important” to McAllen during settlement negotiations, as he testified, the parties also negotiated the surface agreement, which directly touches on the subject of Forest Oil’s alleged fraud: environmental contamination on the McAllen Ranch. The surface agreement, incorporated into the settlement agreement, required Forest Oil to remove hazardous material and remediate past and future contamination. Therefore, the parties expressly negotiated the treatment of surface issues; environmental issues were an important aspect of the contract. Although the settlement agreement does not preclude all future environmental disputes, it does require arbitration of them.

Second, McAllen contends the settlement language itself compels a different result from Schlumberger. McAllen maintains that the disclaimer he signed is limited by its terms to representations about the matters released and settled, not to misrepresentations about matters reserved and excluded from the settlement. Here, the waiver-of-reliance provision states: “Each of the [plaintiffs] expressly warrants and represents and does hereby state and represent that no promise or agreement which is not herein expressed has been made to him, her, or it in executing the releases contained in this Agreement....”27 McAllen claims the isolated *59phrase “in executing the releases” limits the waiver’s application only to released claims because the phrase refers to “releases” in the plural. Because an arbitration provision is not a release, he reasons, the parties did not waive reliance with respect to misrepresentations concerning the matters reserved for arbitration. This argument discounts the second half of the same sentence, which makes clear the parties intended an exhaustive waiver unconfined to claims specifically released: “none of them is relying upon any statement or any representation of any agent of the parties being released hereby.”28 Contrary to McAllen’s interpretation, a natural and contextual reading, given the repeated and all-encompassing “any” modifier, is not nearly so restrictive. It rather plainly means the parties, “in executing the releases,” were not led astray by any representations whatsoever, even representations about nonreleased claims since those, too, can induce someone to release other claims. The disclaimer’s words do not say what McAllen construes them to say, that there was “no promise or agreement concerning the released claims which is not herein expressed”; those four italicized words do not exist. Waiving reliance on statements made in executing the release provisions encompasses both claims released and reserved because even statements about the latter can nudge assent to settle the former. Notably, in this case, the release itself (in a section titled “Releases” no less) specifically requires arbitration, making clear that at the time of the agreement, the parties disclaimed reliance with respect to all decisions being made during negotiations, including the decision to resolve future disputes regarding environmental and personal-injury claims via arbitration. It is difficult to argue that Forest Oil’s alleged fraud in obtaining arbitration bears no relation to the release when the arbitration requirement appears in the release. It is similarly difficult to square McAllen’s argument with this explicit language from the settlement agreement, which incorporated the surface agreement: “disputes relating to this Agreement ... will be resolved by arbitration.”29

Third, McAllen argues that fraudulent inducement “is essentially a meeting-of-the-minds argument,” and there was no such meeting here regarding the arbitration agreement because Forest Oil knew all along of the potential for environmental claims while simultaneously assuring McAllen “there [were] no issues having to do with the surface.” The parties thus had no common understanding of the facts underlying the contract, according to McAllen. But the settlement agreement itself belies this argument. The parties agreed that they might disagree and decided to arbitrate any environmental or personal-injury disputes that might later arise. If they were certain such disagreements would never arise, there would have been no need to reserve future claims for arbitration. The act of specifically carving out this discrete category of contamination claims shows that McAllen in fact placed little trust in Forest Oil’s assurances that there were “no issues having to do with the surface” and that both parties recognized the possibility that McAllen might pursue future claims. Moreover, there is an arbitration provision in the environment-focused surface agreement itself, not only in the broader settlement agreement. According to the surface agreement, *60“[s]urface issues which arise in connection with the Leases” must be arbitrated. McAllen knew environmental disputes might arise and agreed to arbitrate these disputes.

It is true that Schlumberger noted a disclaimer of reliance “will not always bar a fraudulent inducement claim,”30 but this statement merely acknowledges that facts may exist where the disclaimer lacks “the requisite clear and unequivocal expression of intent necessary to disclaim reliance” on the specific representations at issue.31 Courts must always examine the contract itself and the totality of the surrounding circumstances when determining if a waiver-of-reliance provision is binding. We did so in Schlumberger, but since courts of appeals seem to disagree over which Schlumberger facts were most relevant,32 we now clarify those that guided our reasoning: (1) the terms of the contract were negotiated, rather than boilerplate, and during negotiations the parties specifically discussed the issue which has become the topic of the subsequent dispute; (2) the complaining party was represented by counsel; (8) the parties dealt with each other in an arm’s length transaction; (4) the parties were knowledgeable in business matters; and (5) the release language was clear. These factors were each present in Schlumberger, and they are each present in this case.

Refusing to honor a settlement agreement — an agreement highly favored by the law33 — under these facts would invite unfortunate consequences for everyday business transactions and the efficient settlement of disputes. After-the-fact protests of misrepresentation are easily lodged, and parties who contractually promise not to rely on extra-contractual statements — more than that, promise that they have in fact not relied upon such statements — should be held to their word. Parties should not sign contracts while crossing their fingers behind their backs. McAllen accuses Forest Oil of deceit, but Forest Oil could make the same allegation against McAllen — who by his own admission and in writing is claiming the opposite now of what he expressly disclaimed then. It is not asking too much that parties not rely on extra-contractual statements that they contract not to rely on (or else set forth the relied-upon representations in the contract or except them from the dis*61claimer). If disclaimers of reliance cannot ensure finality and preclude post-deal claims for fraudulent inducement, then freedom of contract, even among the most knowledgeable parties advised by the most knowledgeable legal counsel, is grievously impaired.

We conclude the arbitration requirement is integral to the overall release and the settlement agreement’s waiver-of-reliance language applies by its terms to the parties’ commitment to arbitrate. None of McAllen’s arguments materially distinguishes our holding in Schlumberger: “a release that clearly expresses the parties’ intent to waive fraudulent inducement claims, or one that disclaims reliance on representations about specific matters in dispute, can preclude a claim of fraudulent inducement.”34 Today’s holding should not be construed to mean that a mere disclaimer standing alone will forgive intentional lies regardless of context. We decline to adopt a per se rule that a disclaimer automatically precludes a fraudulent-inducement claim, but we hold today, as in Schlumberger, that “on this record,” the disclaimer of rebanee refutes the required element of reliance.

4. Scope of the Arbitration Clause

Having determined that McAl-len’s fraudulent-inducement claim cannot defeat the arbitration provision in the 1999 settlement agreement, we now turn to whether McAllen’s claims fall within the scope of that arbitration provision.35 Generally, after finding an agreement vabd, a court considers the agreement’s terms to determine which issues are arbitrable.36 This arbitration agreement, however, removes the “scope determination” from the court and places it with the arbitration panel.37 This provision, shrinking the court’s traditional role and expanding the arbitrators’, is not challenged on legal or public policy grounds.38 Accordingly, we have no discretion but to direct the trial court to compel arbitration and stay McAl-len’s htigation.39

The remaining question is what should happen to the claims brought by the non-signatory plaintiffs who are not parties to the arbitration requirement (or to this appeal). Forest Oil concedes the trial court cannot order the nonsignatory plaintiffs to arbitration. Section 171.025(a) of the Civil Practice and Remedies Code provides that “[t]he court shall stay a proceeding that *62involves an issue subject to arbitration if an order for arbitration or an application for that order is made under this subchap-ter.” Section 171.025(b) expressly allows for the severance of nonarbitrable issues.40 Because the trial court is better positioned to make that determination in this instance, we remand the severance issue to that court.

However, as noted above, McAllen and Forest Oil agreed to arbitrate disputes over what the agreement covers. In terms of timing, the arbitrators should decide scope before the trial court decides severance. It is impractical (and probably impossible) for the trial court to decide the severability of the nonsignatories’ claims before the arbitration panel has decided the scope of the signatories’ claims. Accordingly, the trial court, in order to make an informed severance decision, should defer its decision until the arbitrators decide which issues are arbitrable.

5. Conclusion

McAllen may be correct that “[t]he facts of this case are not the facts of Schlumberger ”• — every case involves unique facts — but the decisive ones are assuredly close enough that Schlumberger binds this relevantly similar case. The unequivocal disclaimer of reliance in the parties’ bargained-for settlement agreement conclusively negates as a matter of law the element of reliance needed to support McAllen’s fraudulent-inducement claim. Because Forest Oil has demonstrated that a valid arbitration agreement exists, an agreement that empowers the arbitrators to determine what issues are arbitrable, we reverse the court of appeals’ judgment and remand this case to the trial court to compel arbitration in accordance with our opinion.