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Reliance disclaimers can be a powerful tool to limit a seller’s exposure to fraud claims premised on alleged representations that didn’t find their way into the purchase agreement, but in order to be effective, the language of those disclaimers must clear a pretty high bar.  Delaware case law suggests that if you want to have an enforceable disclaimer of liability for fraud, you need to smack the other side in the face with a 2×4. Actually, maybe the better way to put it is to say that the other side needs to smack itself in the face with that 2×4.

Vice Chancellor Zurn’s recent decision in Labyrinth v. Urich, (Del. Ch.; 1/24) illustrates this point. The case involved a post-closing dispute between the buyer and seller in which the buyer alleged, among other things, that the seller made fraudulent extra-contractual representations to it in connection with the transaction.  The seller countered that these claims were barred by the stock purchase agreement’s anti-reliance language.

In support of this position, the seller pointed to the integration clause contained in Section 9.3 of the agreement, which contained standard language providing that the stock purchase agreement “sets forth the entire agreement and understanding among the parties with respect to the subject matter hereof and supersedes any and all prior agreements, understandings, negotiations and communications, whether oral or written, relating to the subject matter of this Agreement.”  It also pointed to Section 4.28, which contained language stating that aside from the reps & warranties contained in the agreement, neither the seller nor any of its related parties:

has made or makes any other express or implied representation or warranty, either written or oral, on behalf of Seller or the Company, including any representation or warranty as to the accuracy or completeness of any information regarding the Company furnished or made available to Buyer and its Representatives or any information, documents or material made available to Buyer in expectation of the transactions contemplated hereby) or as to the future revenue, profitability or success of the Company, or any representation or warranty arising from statute or otherwise in law.”)

In rejecting the seller’s argument that the language it pointed to was sufficient to preclude fraud claims premised on reps made outside the contract, the Vice Chancellor first observed that a standard integration clause does not standard integration clause doesn’t bar fraud claims, but simply limits the scope of the parties’ contractual obligations.

As to the language of Section 4.28, she noted that Delaware case law “makes it clear that in order to be effective, the contract must contain language that, when read together, can be said to add up to a clear anti-reliance clause by which the plaintiff has contractually promised that it did not rely upon statements outside the contract’s four corners in deciding to sign the contract.”  The language pointed to by the seller did not contain any such statement by the buyer and so was ineffective.

The seller had one more arrow in its quiver – the language of Section 5.7 of the agreement, which contained fairly typically language dealing with the basis for the buyer’s decision to enter into the agreement:

Buyer has conducted its own independent investigation, review and analysis of the business, results of operations, prospects, condition (financial or otherwise) or assets of the Company, and acknowledges that it has been provided adequate access to the personnel, properties, assets, premises, books and records, and other documents and data of Seller and the Company for such purpose. Buyer acknowledges and agrees that in making its decision to enter into this Agreement and to consummate the transactions contemplated hereby, none of Seller, the Company or any other Person has made any representation or warranty as to Seller, the Company or this Agreement, except as expressly set forth in Sections 3 and 4 of this Agreement (including the related portions of the Disclosure Schedules).

The seller argued that this language, together with that contained in Sections 4.28 and 9.3, should be read together to satisfy the requirement that buyer expressly acknowledge its non-reliance on extra-contractual reps. Vice Chancellor Zurn disagreed and observed that the language implies that the buyer it made its decision to purchase the company based on the information that the seller provided during the course of its “independent investigation.”  In other words, rather than enhancing a non-reliance argument, the language reinforces the argument that the buyer relied on information outside of the contract provided by the seller in deciding to enter into the deal.

– John Jenkins