Will Anti-Reliance Provisions Preclude Extra-Contractual Fraud Claims? Answers Differ In Delaware, New York, And California

Merger agreements and other complex contracts often contain "anti-reliance" provisions reciting that the representations in the agreement are the sole representations on which the parties relied in entering into the contract. The law regarding the interpretation and enforceability of such clauses—whether in a merger agreement, a settlement agreement, or other commercial contract—varies by jurisdiction, and continues to develop. On November 24, 2015, the Delaware Court of Chancery in Prairie Capital III, L.P. v. Double E Holding Corp.1 held that, as a matter of Delaware law, there are no "magic words" to disclaim reliance on extrinsic representations. While a standard integration clause (reciting that the contract is the sole agreement between the parties and replaces any prior agreements) is insufficient to limit the parties' obligations to promises within the agreement, the Court of Chancery reaffirmed that where a party expressly represented that it had relied only on information within the contract, that party could not later state a fraud claim relating to other, extrinsic promises.

Delaware's anti-reliance law is similar to that of New York, but stands in contrast to the law in California, which disfavors allowing even sophisticated parties represented by counsel to contract away liability for fraud. In all jurisdictions, anti-reliance clauses that are clear and specific have a greater chance of being enforced than do more vague or general statements.

Background: Claims of Fraudulent Inducement Based on Representations Made Outside of a Contract

Fraud claims based on extra-contractual statements arise in numerous contexts, such as mergers and acquisitions (including regarding earn-outs), commercial contracts, securities purchase agreements,2 and settlement agreements resolving litigation. Such claims may be brought in lieu of, or in addition to, claims for breach of contract. Fraud claims can carry reputational and other risks for the defendant, including potentially damages in excess of what would be available in suits for breach of contract.

Courts across the country differ in their interpretation and enforcement of integration clauses and "anti-reliance" (or "no-reliance") language in agreements. A typical integration clause states that the contract constitutes the entire agreement between the parties and that it supersedes all prior agreements or representations, whether oral or written. Anti-reliance provisions are more specific, typically stating that the parties are (a) relying only on written representations expressly set forth in the agreement, and/or (b) disclaiming reliance on representations not explicitly contained in that agreement.

Delaware's Stance on Integration Clauses and Anti-Reliance Language

Delaware public policy favors the enforcement of contractual language disclaiming reliance on representations made outside of a final agreement.3 Despite this policy, Delaware courts repeatedly have held that standard integration clauses alone do not contain "anti-reliance" language sufficient to bar extra-contractual fraud claims.4 For example, in Kronenberg v. Katz, the court held that the following integration clause did not disclaim reliance on extrinsic representations:

This Agreement . . . constitutes the entire agreement and understanding of the parties hereto with respect to the subject matter hereof and supersedes all prior or contemporaneous agreements, understandings, inducements, or conditions, oral or written, express or implied.5

In another decision, Airborne Health v. Squid Soap, the court additionally noted that the presence of an "Exclusive Remedy" provision preserving the parties' rights to pursue fraud claims—a provision that did not expressly limit such preserved claims to those involving representations within the contract—further supported the conclusion that the integration clause did not operate as an anti-reliance provision.6

Under Delaware law, in order for a party to disclaim reliance on extra-contractual representations, an agreement must contain language that, when read cohesively, can "add up to a clear anti-reliance clause."7 In other words, Delaware courts will enforce anti-reliance language that identifies the "specific information on which a party has relied and which foreclose[s] reliance on other information."

The Prairie Capital case involved the sale of a portfolio company from one private equity sponsor to another. The transaction was governed by a stock purchase agreement containing both a standard integration clause and an "Exclusive Representations" clause, the latter of which...