An "Anti-Reliance" Contract Clause May Prevent a Fraud Claim

An "Anti-Reliance" Contract Clause May Prevent a Fraud Claim
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Many, if not most, contractual transactions are legally characterized as "arms' length," meaning there is no special relationship between the parties. In an arms' length transaction there is no duty to speak or disclose facts to the other party. However, if a party does communicate and lies, then there may be a legal action for fraud. To be clear about what was communicated, a contract may specifically identify precisely what information was provided and relied upon and clearly state that the parties will not rely on any other promises or representations. A recent unpublished Delaware Court of Chancery decision illustrates this legal rule (Prairie Capital III, L.P. v. Double E Holding Corp. - decided November 24, 2015). Always consult an experienced attorney in all contractual situations.

The decision provides a detailed review of the facts, involving the sale of a portfolio company by one private equity firm to another. In the course of this transaction, a variety of fraud claims were eventually asserted, resulting in litigation. The Court noted that the standard requirements for asserting fraud are a false representation intended to induce action resulting in reasonable reliance and damages.

However, the Court quoted the "Exclusive Representations Clause" in the stock purchase agreement contract:

"The Buyer acknowledges that it has conducted to its satisfaction an independent investigation of the financial condition, operations, assets, liabilities and properties of the Double E Companies. In making its determination to proceed with the Transaction, the Buyer has relied on (a) the results of its own independent investigation and (b) the representations and warranties of the Double E Parties expressly and specifically set forth in this Agreement, including the Schedules. SUCH REPRESENTATIONS AND WARRANTIES BY THE DOUBLE E PARTIES CONSTITUTE THE SOLE AND EXCLUSIVE REPRESENTATIONS AND WARRANTIES OF THE DOUBLE E PARTIES TO THE BUYER IN CONNECTION WITH THE TRANSACTION, AND THE BUYER UNDERSTANDS, ACKNOWLEDGES, AND AGREES THAT ALL OTHER REPRESENTATIONS AND WARRANTIES OF ANY KIND OR NATURE EXPRESS OR IMPLIED (INCLUDING, BUT NOT LIMITED TO, ANY RELATING TO THE FUTURE OR HISTORICAL FINANCIAL CONDITION, RESULTS OF OPERATIONS, ASSETS OR LIABILITIES OR PROSPECTS OF DOUBLE E AND THE SUBSIDIARIES) ARE SPECIFICALLY DISCLAIMED BY THE DOUBLE E PARTIES."

Additionally, the contract contained the following "Integration Clause":

"This Agreement . . . set[s] forth the entire understanding of the Parties with respect to the Transaction, supersede[s] all prior discussions, understandings, agreements and representations and shall not be modified or affected by any offer, proposal, statement or representation, oral or written, made by or for any Party in connection with the negotiation of the terms hereof."

The party asserting fraud argued that the contractual provision did not affirmatively disclaim reliance. However, the Court stated that "Delaware law does not require magic words." The Court held that the two clauses created a clear anti-reliance clause. The Court powerfully stated that "...a party cannot point to extra-contractual information and escape the contractual limitation by arguing that the extra-contractual information was incomplete." Consequently, "When parties identify a universe of contractually operative representations in a written agreement, they remain in that universe. A party that is later disappointed with the written agreement cannot escape through a wormhole into an alternative universe of extra-contractual omissions."

However, the Court did hold open the possibility, to be developed during the litigation, that individual officers who made false statements might be liable for fraud. Of course, all of the standard requirements to prove fraud must be established.

Anti-reliance and exclusive representations contractual language must not be overlooked as meaningless "boilerplate." Additionally, an integration clause means that the written agreement is all that one should rely upon. An individual should not slip into a comfortable feeling of having a personal relationship in a commercial transaction. It is important to recall that modern business involves arms' length transactions requiring a high degree of due diligence. We are far past any mythical time when no one locked home doors and we all lived in harmony.

This comment provides a brief and incomplete educational overview of a single recent court decision and is not intended to provide legal advice. Always consult an experienced attorney in all contractual and business transactions.

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