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).
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.
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.
Resolution of the claim turned on the application of Delaware case law that addresses anti-reliance clauses in purchase agreements. A key fact that the fraud claim was based on was the accuracy of information provided during due diligence that the parties chose not to incorporate into an express representation or warranty in the agreement.
A specific provision in the agreement provided that the seller disclaimed making any extra-contractual representations. Likewise, the buyer acknowledged that the seller did not make any representations that were not expressly included in the agreement. In addition, the parties included in their agreement a standard integration clause that defined the universe of writings that made up the parties’ agreement.
This opinion of the Court of Chancery reviewed prior Chancery decisions involving similar issues. For example in the opinion of Abry Partners V, L.P. v. F&W Acquisition LLC, 891 A.2d 1032, 1059 (Del. Ch. 2006), the court attempted to balance the natural abhorrence of the law against fraud and the strong public policy of Delaware that promotes freedom of contract.
More recently, in the Chancery opinion of Prairie Capital III, L.P. v. Double E Holding Corp., highlighted on these pages, the court explained that “Delaware law does not require magic words to disclaim reliance, and that the specific language of an agreement may vary but still add up to a clear anti-reliance clause.” 132 A.3d 35, 51 (Del. Ch. 2015). In that case, the court found that a combination of a standard integration clause in an agreement representing “affirmatively” what information a buyer relied on, as opposed to one “framed negatively,” barred fraud claims based on extra-contractual statements.
Most recently, the Court of Chancery held in the case of FdG Logistics LLC v. A&R Holdings, Inc., highlighted on these pages, explained that under Delaware law: “in order to bar fraud claims, a disclaimer of reliance must come from the point of view of the aggrieved party,” meaning that it must come from the buyer who is asserting the fraud claim. An assertion from the seller of what it was and was not representing and warranting is not sufficient given the laws abhorrence of fraud.” 131 A.3d 842, 860 (Del. Ch. 2016).
The foregoing legal principles were applied to the key fact that in this case: “the buyer expressly acknowledged that the seller was not making, directly or indirectly, any representation or warranty with respect to any information it received in due diligence unless such information was expressly included in a representation and warranty in the agreement.” It was also a key fact that the buyer acknowledged the precise terms of the “universe of information” on which it relied – -and that it did not rely on – – when it entered into the agreement.
As the court explained in the Prairie Capital case, it is not necessary that the terms of an agreement be “framed negatively” to describe what the buyer did not rely on, rather it is sufficient if the contract states affirmatively what the buyer did rely on.
The court’s reasoning in this case was based on a combination of the acknowledgement by the buyer and the integration clause which “added up” to a clear anti-reliance provision that barred fraud claims based on extra-contractual statements made during due diligence. The court reasoned: “. . . the integration clause defines the universe of writings reflecting the terms of IAC’s agreement to purchase . . . and the Buyer’s Acknowledgement Clause explains in clear terms from the perspective of the buyer the universe of due diligence information on which IAC did and did not rely when it entered into the agreement.”
It is worth noting a case cited at footnote 34 of the opinion which was quoted for the following statement of Delaware law: “Clauses indicating that the contract is an expression of the parties’ final intentions generally create a presumption of integration,” (citing Addy v. Piedmonte, 2009 WL 707641, at *9 (Del. Ch. Mar. 18, 2009)).
The court included in its holding supplemental reasoning: that to permit IAC to assert a fraud claim even though those alleged misstatements were never the subject of an express representation would be to “excuse a lie made by IAC in writing that ValuClick made no such extra-contractual representations” (citing Abry, 891 A.2d at 1058).