July 26, 2017

Contracting Away Fraud: Delaware Courts provide additional guidance regarding the enforceability of nonreliance clauses in extra contractual litigation

5 min

Courts have long struggled with the question of how to address the inherent tension between a policy against fraud and the text of a contract which disclaims reliance on any extra contractual statements between the parties to the contract. Such nonreliance provisions intend to prevent the parties from relying on extra contractual representations and warranties which may have been made by the parties during the course of the deal negotiations. Instead, these clauses suggest only the carefully crafted and negotiated representations and warranties may form the basis of a breach of contract or fraud claim following the execution of the contract. While a "fraud carveout" may broaden the universe of potential claims, the text of nonreliance provisions can often bar recovery for aggrieved parties.

In a recent series of decisions, Delaware courts offered guidance regarding how to craft nonreliance provisions. As with most matters of law, however, there are no magic words to guarantee the enforceability of a particular clause.

Effective waivers affirmatively disclaim reliance on extracontractual statements

The Delaware Chancery Court recently refused to dismiss a claim that a buyer had been fraudulently induced to enter a purchase agreement. In True Blue, Inc. vs. Leeds Equity Partners IV, 2015 WL 5968726 (De. Super. Ct. Sept. 25, 2015), the buyer-plaintiff argued that, notwithstanding the provisions of the purchase agreement, the seller agreed in two instances to pay certain earn-outs in place from a prior acquisition. When the seller refused to pay the earn outs, the buyer claimed that it had been fraudulently induced into entering the purchase agreement, despite clauses in the purchase agreement stating: (i) that the buyer acknowledged and agreed that the representations and warranties regarding the target company superseded any other representations and warranties outside of the contract, and (ii) that the contract and all of the documents referenced therein contain the entire agreement between the parties (commonly referred to as an "integration" clause).

While the Delaware Chancery Court denied the buyer's claims for breach of contract, promissory estoppel and unjust enrichment, the court permitted the buyer's claim based on fraud to proceed. Despite the presence of the standard integration clause and the general representation that the buyer "acknowledge[d] and agree[d] that the representations and warranties" in the agreement "supersede, replace and nullify in every respect the data set forth in any other document, material or statement, whether written or oral, made available to the [buyer]," the court found that because the relevant provisions did not explicitly disclaim reliance upon extra contractual statements, the buyer had adequately pled justifiable reliance on the seller's alleged promises to pay the earn out.

The Delaware Chancery Court further bolstered its affirmative disclaimer concept (in this case by reaching the opposite decision) two months later in Prairie Capital III, L.P. v. Double E Holding Corp., 132 A.3d 35 (Del. Ch. Nov. 24, 2015). In Prairie Capital, the buyer sued the seller, directors and officers of the target company for fraud based on allegedly falsified sales data. The court dismissed the buyer's fraud claim based on the integration clause and the "no representations" clause because the "no representations" provision specifically disclaimed reliance on any representation or and warranty made outside of the purchase agreement. When the buyer argued the fraud claim was also based on alleged omissions from the diligence material, the court dismissed this argument because, it reasoned, the contract effectively established the purchase agreement as the sole source of information upon which the buyer was able to rely. Further, because the fraud carveout only addressed the potential avenues for recovery and not the universe of representations upon which it was able to rely, the court reasoned that a fraud claim based on extra contractual representations remained barred under the purchase agreement.

Disclaimer must be made by the aggrieved party to bar claims

In FdG Logistics LLC v. A&R Logistics Holdings, Inc., 131 A.3d 842 (Del. Ch. Feb 23, 2016), the Court of Chancery further clarified its jurisprudence regarding extra contractual representations by holding that the specific disclaimer must be made by the party bringing the fraud claim. In FdG Logistics, the court preserved the buyer's fraud claim based on alleged misrepresentations made prior to the signing of a merger agreement because the "no extra contractual reliance" language was interpreted to be binding only on the company. For the court to enforce such a clause based on fraud, the aggrieved party must have affirmatively disclaimed reliance on the extra contractual misrepresentations. Here, because the Buyer never specifically disclaimed reliance, the court permitted the fraud claim to proceed.


These three recent cases support the Delaware courts' longstanding policy to guard against fraud and its reluctance to permit any attempt to draft fraud out of a contract. In order for a waiver or disclaimer of extracontractual representations and warranties to be preserved, the aggrieved party, rather than generally acknowledging it only relied on the representations and warranties in an agreement, it must specifically agree that it did not rely on any representations and warranties made outside of the agreement. Further, parties should closely examine any fraud carveouts to these disclaimers to confirm neither provision nullifies the intent of the other. While these distinctions appear minute, like many finer points of law, they may have wide reaching legal implications should a future dispute arise.