DealLawyers.com Blog

December 2, 2022

Contract Fraud: Dealmakers Still Don’t Get Limits of Disclaimers?

A recent blog from Weil’s Glenn West reviews a pair of Delaware decisions in which non-reliance, exclusive remedy & non-recourse clauses intended to sharply curtail a plaintiff’s ability to bring fraud claims in connection with an acquisition agreement were at issue.  He concludes that despite rather clear guidance from the Delaware courts, these cases suggest that dealmakers still don’t appreciate the limits of these clauses:

Just as an exclusive remedy provision cannot eliminate claims for the seller’s extra-contractual fraud (only a non-reliance clause can do that), or for the seller’s deliberate and knowing intra-contractual fraud (it appears that nothing can do that), a non-recourse provision cannot eliminate a non-party’s liability for its own, or its participation in the seller’s, extra-contractual fraud (only a non-reliance clause can do that), or for its knowing participation in the seller’s deliberate and knowing intra-contractual fraud (it appears that nothing can do that).

Neither a non-recourse clause, nor an exclusive remedy provision, can eliminate extra-contractual fraud claims, or intra-contractual fraud claims premised upon the “conscious participation in the communication of lies” in the specific representations and warranties set forth in a written purchase. But what an exclusive remedy provision can do, according to ABRY Partners, and what a non-recourse provision should also be able to do, is eliminate the seller’s, and its non-party affiliates’, liability for the seller’s “reckless, grossly negligent, negligent, or innocent misrepresentations of fact” in a purchase agreement (all of which are potential states of mind supporting tort-based claims, including, potentially, common law or equitable fraud).

And this is accomplished by carefully defining fraud in any fraud carve-out in both the exclusive remedy and the non-recourse clauses so that the term “Fraud” is limited to “deliberate and knowing fraud respecting the representations and warranties set forth in the agreement,” which is the only type of fraud that cannot be eliminated by a combination of the non-reliance, exclusive remedy and non-recourse clauses.

The two decisions Glenn discusses in the blog are In re P3 Health Group Holdings, (Del. Ch.; 10/22), which I blogged about, and AmeriMark Interactive v. AmeriMark Holdings, (Del. Super.; 11/22), which I didn’t blog about in part because the permissions on the .pdf were restricted so I couldn’t cut & paste excerpts from it.  I guess Judge Johnston doesn’t want to be “blog-famous.”

John Jenkins