In a case that never should have been there in the first place, the Texas Supreme Court has ended a mudfight between the Brazilian state-owned oil giant Petrobras and its European adversary Transcor Astra Group that has been going for nearly 15 years. The Court reversed the Houston [14th] Court of Appeals, which kept the case alive by partially overturning a summary judgment, and rendered judgment in favor of Transcor.
Transcor Astra Group S.A., et al. v. Petrobras American Inc., et al. (No. 20-0932) arose from a nasty divorce that broke up a 2006 joint venture to operate a Pasadena oil refinery (which, by the way, Chevron ended up buying in 2019). It didn’t take long for the marriage to go bad, and by 2009 the parties were locked in a legal struggle over Petrobras’ claims that Transcor paid bribes to Petrobras employees to induce the company into the joint venture. An arbitration award in that year terminated the venture and required Transcor to sell its 50-percent share to Petrobras for $640 million. Petrobras took the share but didn’t pay the money. Dozens of lawsuits ensued, which by 2011 resulted in judgments against Petrobras of more than $750 million and another $400 million in pending claims. The parties reached a comprehensive settlement agreement in 2012, which released all prior claims and required Petrobras to pay $820 million.
Instead, it filed suit against in Harris County district court Transcor alleging fraud and corruption (i.e., bribery) with respect to both the 2006 joint venture agreement and the 2012 settlement agreement. In 2018 the trial court entered summary judgment in favor of Transcor on the basis of the 2012 settlement agreement and awarded Transcor $1.3 in attorney’s fees and costs. The court of appeals reversed, holding that Petrobras did not release its fiduciary duty claims related to the 2006 agreement to the extent they related to negotiations leading to the 2012 settlement. The court also held that the reliance disclaimer in the settlement agreement did not extend to Petrobras’ fraud claims against individuals employed by Transcor at the time of the alleged fraud. And the court of appeals reversed the trial court’s award of attorney’s fees and costs. Both parties sought review by SCOTX.
In an opinion by Justice Boyd, SCOTX reversed the court of appeals and restored the trial court’s judgment. Justice Boyd’s analysis turned on the construction of the settlement agreement’s broad release of “any and all claims, demands, and causes of action of whatever kind or character, which the . . . Parties have or may have in the future, based on acts or omissions, whether known or unknown, that have occurred on or before” the effective date of the settlement agreement. It further specifies that the release should be “construed as the broadest possible type of general release” and includes “without limitation” any and all claims connected with Transcor’s dealings with Petrobras. The release did state one limitation that applied to “claims . . . arising out of, related to, or connected in any way with the alleged breach, enforcement, or interpretation” of the settlement agreement.
Based on the scope of the release, one might wonder why the case ended up requiring a 34-page opinion that put the trial court’s judgment back in place or precisely what the question of importance to the state’s jurisprudence might be. Petrobras tried to get around the settlement agreement by characterizing its breach of fiduciary duty claims—that is, the alleged undisclosed bribery of its officials by employees of Transcor in order to induce Petrobras to settle the dispute—as “related to” the “breach, enforcement, or interpretation” of the settlement agreement. In other words, according to Petrobras, because Transcor didn’t tell us that they attempted to bribe our employees when we negotiated the settlement agreement, we didn’t mean to release those claims and the agreement should not be enforceable to that extent. The Court looked askance at this argument. The “notwithstanding clause,” Justice Boyd opined, has to do with enforcementof the settlement agreement in the event of a breach, not the enforceability of the agreement. Petrobras’ fiduciary duty claims that relate to the 2006 and 2012 agreements thus “fall squarely” within the general release. The court of appeals erred in holding otherwise.
Petrobas tried another tack by arguing that its fraud claims evaded the settlement agreement’s disclaimer of reliance on any statements or representations of the parties or their agents connected to the released claims. SCOTX was nonplussed. Although Texas law does not enforce a contract (a settlement agreement is just like any other contract) procured by fraud, establishing fraud requires a showing that “a party reasonably relied on the other party’s misrepresentations to its detriment” (citations omitted). That’s why when parties buy “peace” in a settlement agreement, they include disclaimers such as the one in this case. But a disclaimer must be “clear, specific, and unequivocal” in order to override a fraud claim. This depends on the language of the contract and the totality of circumstances, guided by a five-factor test of whether: “(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; (3) the parties dealt with each other at arm’s length; (4) the parties were knowledgeable in business matters; and (5) the release language was clear” (citing Forest Oil Corp. v. McAllen, 268 S.W.3d 51, 60 (Tex. 2008)).
The only dispute here involved the first and third factors. While there was no question that the settlement agreement was negotiated, Petrobras claimed that there was no “specific” discussion of the bribery that is the subject of the current dispute. For Justice Boyd, “the question is whether the circumstances and nature of the parties’ settlement discussions demonstrate that the parties considered the consequences of the reliance disclaimer in light of the material issues of the dispute, which supports the conclusion that an ‘all-embracing disclaimer of any and all representations’ actually ‘shows the parties’ clear intent’” (citing Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171 (Tex. 1997)). There was no evidence here that the parties discussed the allegations of bribery, but there was plenty of evidence that the settlement negotiations were both protracted and “hotly contested.” In those circumstances, the agreement’s broad disclaimer of all “known” and “unknown” claims “tilts in favor of enforcing the reliance disclaimer.
The third factor (whether the parties dealt with each other in an arm’s-length transaction) turned on whether Petrobras’ claims that the individual officers and directors of the entities formed to operate the refinery—owed fiduciary duties to Petrobras, not just to those entities. While not affirmatively ruling on the issue, Justice Boyd expressed “doubts about Petrobras’s contention that the directors and officers of the jointly owned entities assumed eternal fiduciary duties to Petrobras.” Officers and directors only owe duties to the entities they work for, not each of the entities’ individual shareholders (citations omitted). The Court was also skeptical of Petrobras’ argument, unsupported by authority, that individuals continue to owe fiduciary duties long after their employment has ceased, especially when protracted litigation over many years has occurred. To put paid to the argument, the Court noted that Petrobras never fessed up to anyone in the company actually taking a bribe or claimed that offers of bribery affected their decision to settle the case in the first place. Under the “totality of the circumstances,” SCOTX held the settlement agreement to be enforceable. It further ruled that the individual defendants’ (the guys who allegedly offered the bribes) summary judgment motion was sufficient to obtain a summary judgment against their individual liability because, in any event, they fell under the reliance disclaimer.
Finally, Petrobras argued that the 2009 arbitration award, which adjudicated Petrobras’ fraud claims relating to the 2006 agreement, included claims that were not covered by the trial court’s judgment because only the arbitrator could decide the gateway issue of arbitrability, not the trial court. SCOTX dismissed this argument. Courts, Justice Boyd wrote, must determine whether parties “in fact delegated the arbitrability question to the arbitrator, whether the parties are bound by a given arbitration clause, and whether the parties made a valid and presently enforceable agreement to arbitrate” (citations omitted). In this case, the Court must decide whether the parties’ initial arbitration agreement still exists. The answer to the question was no. The settlement agreement expressly superseded the earlier arbitration agreement (and the 2006 agreement in general), specified venue in Harris County for a dispute over the agreement, and released all prior claims. To end the pain (or perhaps to increase it, in Petrobras’ case), the Court found that the trial court did not abuse its discretion in awarding attorney’s fees and costs to Transcor.
What proposition does this case stand for? We’ve said many times that SCOTX finds ways to enforce contracts as written, not to judicially modify them. This case checks that box. Second, in litigation between mammoth multi-national corporations that are lawyered up to the teeth, you get to lie in the bed you make. Be wary of asking the Court to set aside an agreement you made that likely cost you more in legal fees than the appeal did. Third, if you ask SCOTX to intervene, you had better have clean hands in every respect. Alleging that you were defrauded because your own employees might have been influenced by offers of bribes and then not paying up when the arbitrator you picked orders you to do so is not a good look. Fourth, if anybody out there has the notion that SCOTX plays favorites or runs scared based on the identity of the parties or the attorneys involved, now is a good time to disabuse yourself of it. The justices simply don’t care who the parties are, even if one of them, as is the case here, is basically a foreign government. What they do care about is the integrity of the jurisprudence of this state and the fundamental role of the courts in an ordered and democratic society. If nothing else, this case demonstrates that in full.