The parties to a transaction, including a transaction that concludes a business divorce, will often include a provision that states that neither side is relying on verbal representations of the other. Most often, this provision refers to the due diligence that precedes a transaction, but it can also refer to other circumstances including the discovery in an ongoing litigation.
We were recently involved in a case in which one of the parties claimed that it had been fraudulently induced into a transaction, notwithstanding the substantial discovery that had occurred. It wasn’t a successful argument, but it added to the complexity of the case.
More often, however, there is a claim either that there were facts or circumstances that were hidden or that that there were oral representations made that were material to the decision to enter into the transactions. A recent decision of the Delaware Chancery Court in IAC Search, LLC v. Conversant LLC , C.A. No. 11774-CB (Del. Ch. Nov. 30, 2016) demonstrates that an anti-reliance provision in a contract can avoid such a fraud in the inducement claim.
A fraud in the inducement claim alleges that one of the parties agreement to the claim because they relied on a misrepresentation, either directly or by failure to make some disclosure. But for the misrepresentation, says the plaintiff in such a case, it would not have agreed to the transation.
An anti-reliance provision in a contract simply says that everything that the parties relied on in forming the agreement is in the agreement or some other defined circumstances like the due diligence inquiry. It is a type of integration clause that prohibits the parties from claiming reliance on other facts or statements that were not included in the agreement or due diligence. In a litigation, the parties may be served by a similar provision that states that neither is relying on statements made by the other. Here is was the languarge of the agreement in the IAC Search case provided.
Neither the Seller nor any of its Affiliates or Representatives is making any representation or warranty of any kind or nature whatsoever, oral or written, express or implied (including but not limited to, any relating to financial condition, results of operations, assets or liabilities of the Transferred Group), except as expressly set forth in this Article III, as modified by the Disclosure Schedules, and the Seller hereby disclaims any such other representations and warranties.
The Buyer’s Acknowledgment
Neither the Seller nor any of its Affiliates or Representatives is making any representation or warranty of any kind or nature whatsoever, oral or written, express or implied (including but not limited to, any relating to financial condition, results of operations, assets or liabilities of the Transferred Group), except as expressly set forth in this Article III, as modified by the Disclosure Schedules, and the Seller hereby disclaims any such other representations and warranties. to any data rooms, management presentations, due diligence discussions, estimates, projections or forecasts involving the Transferred Group, including, without limitation, as contained in the Confidential Information Packet dated August 2013 and any other projections provided to Buyer, unless any such information is expressly included in a representation or warranty contained in Article III. Nothing in this Section 4.7 is intended to modify or limit any of the representations or warranties of the Seller set forth in Article III.
The Arbry Provision
Acquiror acknowledges and agrees that neither the Company nor the Selling Stockholder has made any representation or warranty, express or implied, as to the Company or any Company Subsidiary or as to the accuracy or completeness of any information regarding the Company or any Company Subsidiary furnished or made available to Acquiror and its representatives except as expressly set forth in this Agreement.This Delaware Court of Chancery opinion should be in the toolbox of every commercial litigator, as it addresses an important issue commonly arising in connection with post-closing claims involving the sale of a business. Specifically, in this matter there was a claim that misrepresentations were made during the due diligence period regarding the financial performance of the company that was sold. The court found that the anti-reliance clauses in the agreement of sale barred the fraud claims that were based on pre-agreement statements.Background Facts :
Key to the enforceability of such a provision is the requirement that it be from the aggrieved party’s perspective, usually the buy. In other words the buyer needs to expressly agree that it is not relying on anything other than the agreement or other specified materials.
The Delaware Courts have considered the parties ability to include such anti-reliance provisions in their contracts an aspect of the essential freedom on parties to order their affairs based on negotiated contracts.
As the court explained in its opinion, the disclaimer of reliance “must come from the buyer who is asserting the claim: and not from the seller as to what it is or is not representing.
In this case, the critical provision of the agreement had the buyer representing what it had relied on in agreeing to enter into the contract, the so-called Arbry Provision, Abry Partners V, L.P. v. F & W Acquisition LLC
Francis Pileggi’s blog, the Delaware Corporate & Commercial Litigation Blog, covers the decision in more detail and certainly worth a read.
Key Legal Issue Addressed: Whether a purported disclaimer of extra-contractual representations protected a business seller from fraud claims?
Answer: Yes, based on the circumstances found in the case of IAC Search, LLC v. Conversant LLC, C.A. No. 11774-CB (Del. Ch. Nov. 30, 2016).
The transaction involved the purchase by IAC Search, LLC of six subsidiaries of ValuClick, Inc. The central claim by IAC was that ValuClick fraudulently induced IAC to overpay for one of those subsidiaries based on false information provided during the due diligence process. The fraud claims are not based on the express representations in the agreement concerning financial information but rather on information received during due diligence that the parties chose not to incorporate into an express contractual representation. […]