Background
“It is true that Delaware has a firm policy against fraud. It is equally true that Delaware prides itself on having and adhering to a body of efficient commercial laws and precedent in which sophisticated contracting parties’ voluntary agreements are enforced as written.”1 Courts applying Delaware law will “enforce clauses which identify the specific information on which a party has relied and foreclose reliance on other information.”2 Delaware decisions addressing anti-reliance clauses “carefully consider the need to strike an appropriate balance between holding sophisticated parties to the terms of their contracts and simultaneously protecting against the abuses of fraud.”3 Therefore, under Delaware law, “a party cannot promise, in a clear integration clause of a negotiated agreement, that it will not rely on promises and representations outside of the agreement and then shirk its own bargain in favor of a ‘but we did rely on those other representations’ fraudulent inducement claim.”4 The Delaware Superior Court’s decision in InfoMedia highlights the significant impact of including anti-reliance provisions in asset purchase agreements and merger agreements.
In InfoMedia, a buyer under an asset purchase agreement (the Purchase Agreement) filed suit against the seller and asserted claims for fraud and misrepresentation in connection with the buyer’s acquisition of service contracts from the buyer pursuant to the Purchase Agreement. The buyer alleged that, during due diligence, it repeatedly inquired with the seller regarding whether any of the seller’s customers had expressed an intent to amend, modify, and/or terminate their contracts. The buyer further alleged that the seller had orally represented on numerous occasions before the execution of the Purchase Agreement that the seller was not aware of any customer that intended to terminate contracts. Two weeks before the parties entered into the Purchase Agreement, the seller learned that a significant client intended to terminate the majority of its contracts with the seller, and was preparing a written notice of the termination. The seller did not advise the buyer of the conversation regarding the termination of material contracts and the seller instructed its employees not to disclose to anyone that the customer intended to terminate the contracts. The seller represented in the Purchase Agreement that it had not received written notice from any customer of an intent to terminate any contracts:
Neither [seller], or to the knowledge of [seller], any other party thereto, … has provided or received any written notice of any material breach or alleged material breach of, audit of, or intention to terminate, amend, or modify (including any material change in anticipated call volume), any Contract.
After the transaction closed, the buyer discovered that the customer intended to terminate its contracts, and brought suit against the seller for fraudulent inducement and negligent misrepresentation, alleging that the seller intentionally concealed the customer’s intent to terminate. The seller alleged it would not have entered the Purchase Agreement if it knew of the customer’s intention to terminate the contracts.
The Court’s decision
The seller moved to dismiss the buyer’s misrepresentation-based claims, arguing that the buyer agreed to a contractual representation limited to whether the seller had received “written notice” of termination. The seller’s argument emphasized that its representation in the Purchase Agreement was accurate, and that anti-reliance and integration clauses in the Agreement barred claims for extra-contractual representations.
When opposing dismissal, the seller argued that preclusion of its claims would be contrary to Delaware policy against fraud, that its claims challenged extra-contractual omissions and fraudulent concealment rather than affirmative misrepresentations, and that although the seller’s contractual representation that it received no written notice was true, its failure to disclose oral notice of the customer’s intent to terminate created a false impression that rendered the seller’s representation regarding written notice misleading.The Superior Court granted the seller’s motion to dismiss and held the buyer’s misrepresentation-based claims are barred by the anti-reliance and integration provisions in the Purchase Agreement. Although it was undisputed that the seller had received oral notification of the customer’s intention to terminate, the seller’s representation in the Purchase Agreement was limited to whether it had received “written notice.” The court relied on the three different provisions in the Purchase Agreement that, collectively, operated to bar the buyer’s claims based on extra-contractual representations and omissions:
Section 2.9 No Other Representations and Warranties. Except for the representations and warranties expressly set forth in this Article II, (i) neither [seller] nor any other person or entity makes, or shall be deemed to have made, any representation or warranty (whether express or implied) on behalf of [seller], the Purchased Assets, the Assumed Liabilities, the Services or the Transactions, and (ii) [seller] hereby disclaims any such representation or warranty, express or implied, oral or written, including any implied warranty or representation as to condition, value, merchantability, validity, completeness, fitness or suitability for any specific purpose, or as to future revenue, profitability or success of the Contracts, the other Purchased Assets, the Assumed Liabilities or the Services, notwithstanding the delivery or disclosure to [buyer] . . . of any materials, documentation or other information during the course of due diligence or any negotiation process . . . .
Section 3.6 Acknowledgement of Seller Representations and Warranties. [Buyer] acknowledges that, except for the representations and warranties contained in Article II, it is not relying on any representation or warranty (whether express or implied) by or on behalf of [seller] or any other person or entity in connection with the Transaction Documents or the Transactions, notwithstanding the delivery or disclosure to [buyer] . . . of any materials, documentation or other information during the course of due diligence or any negotiation process (including information memoranda, data room materials, projections, estimates, management presentations, budgets and financial data and reports).
Section 7.1 Entire Agreement; Assignment; Successors. This Agreement, together with the other Transaction Documents, constitute [sic] the entire agreement among the Parties with respect to the subject matter hereof and supersedes all other prior and contemporaneous representations, warranties, covenants, agreements and understandings, both written and oral, among the Parties with respect to the subject matter hereof and thereof.
The Superior Court relied most heavily on sections 2.9 and 3.6 when dismissing the buyer’s misrepresentation-based claims. The court explained that, under Delaware law, section 2.9 likely would not preclude the buyer’s reliance on extra-contractual representations. In order to bar fraud claims under Delaware law based on anti-reliance provisions, the disclaimer of reliance “must come from the point of view of the aggrieved party.”5 Section 3.6, unlike section 2.9, is an affirmative representation from the perspective of the buyer, the aggrieved party. The court in InfoMedia referred to section 3.6 as the “critical clause in which [buyer] confirmed it was not relying on any [extra-contractual] representations.” The court also relied on the “standard integration clause” in section 7.1 of the Purchase Agreement, through which the parties agreed that the Purchase Agreement and associated transaction documents “constituted the parties’ entire agreement.”
The Superior Court discussed earlier Delaware decisions analyzing anti-reliance provisions. The court’s survey of earlier cases demonstrates there is no single blueprint for crafting enforceable anti-reliance provisions. The court recognized that “[t]he clauses at issue in this case are, if anything, more plainly worded than those at issue in” earlier Delaware decisions that dismissed fraud claims based on extra-contractual representations that were barred by anti-reliance provisions.6 The touchstone inquiry under Delaware law is whether “the contractual language, when read as a whole, ‘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.’”7
Key takeaways
- InfoMedia demonstrates Delaware law’s strong public policy to respect freedom of contract, particularly between sophisticated parties.
- As illustrated in InfoMedia, well-crafted contractual “anti-reliance” provisions are an important tool to preclude fraud-based claims arising from alleged extra-contractual statements relating to parties’ entry into asset purchase agreements and merger agreements.
- A standard integration clause is insufficient under Delaware law to preclude a counterparty from pursuing fraud claims based on extra-contractual statements.
- Even a provision that limits that scope of the representations a party is making (as opposed to the scope of representations on which the counterparty is relying) will likely not be sufficient under Delaware law to preclude fraud claims based on extra-contractual statements.
- Although there is no single blueprint for crafting effective anti-reliance provisions, Delaware courts have held that the “touchstone inquiry” is whether the contractual language, when read as a whole, adds up to a clear anti-reliance clause by which the plaintiff has contractually promised that it did not rely upon statements outside the four corners of the contract.
- InfoMedia Grp., Inc. v. Orange Health Sols., Inc., 2020 WL 4384087, at *4 (Del. Super. Ct. July 31, 2020).
- See FdG Logistics LLC v. A&R Logistics Holdings, Inc., 131 A.3d 842, 858 (Del. Ch. 2016).
- Id.
- Abry Partners V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032, 1057 (Del. Ch. 2006).
- See FdG Logistics, 131 A.3d, at 860; see also InfoMedia, 2020 WL 4384087, at *3 n.14.
- See InfoMedia, 2020 WL 4384087, at *5.
- Id. at *4 (quoting Kronenberg v. Katz, 872 A.2d 568, 593 (Del. Ch. 2004)).
Client Alert 2020-501
