As a matter of course, a seller of a business includes a provision in a sale agreement to limit its liability to breaches of specific representations and warranties included in the sale agreement and not for representations made outside of the contract such as management presentations, data room disclosures and projections. The seller’s goal is to eliminate all such extra contractual claims including fraud claims. The buyer, on the other hand, will generally push back that if a seller commits fraud (i.e. intentionally misleads or omits to disclose a material fact) in extra contractual communications, most likely found in projections, the seller should not be able to avoid liability. But how does each accomplish its goals?

Of recent date, the Delaware courts have given guidance on this matter. See IAC Search, LLC v. Conversant LLC; C.A. No. 11774–CB Submitted: September 20, 2016. Decided: November 30, 2016; Anvil Holding Corporation v. Iron Acquisition Company, Inc., C.A. Nos. 7975–VCP, N12C–11–053–DFP [CCLD]. Submitted: April 22, 2013. Decided: May 17, 2013; and TransDigm Inc. v. Alcoa Global Fasteners, Inc., C.A. No. 7135–VCP. Submitted: Feb. 1, 2013. Decided: May 29, 2013.

A seller looking to bar claims based on extra-contractual statements, including fraud claims, should include an affirmative, comprehensive buyer acknowledgement clause with a clear statement that the buyer did not rely on any extra-contractual information, and that no other representations or warranties were made, including with respect to virtual data rooms, due diligence materials, management presentations, etc., unless such information is expressly included in a representation and warranty in the sale agreement. A seller should also include a standard integration clause to compliment the buyer acknowledgement clause to properly limit the documents that constitute the parties’ agreement. A buyer must be diligent when negotiating a buyer acknowledgement clause and should confirm the scope of the acknowledgement to prevent the seller from overreaching. Moreover, a buyer should ask for a specific fraud carve out to preserve its right to claims for fraud based on extra-contractual statements and representations.

A buyer and seller each have compelling arguments for their respective positions and the outcome is found in the art of persuasion and negotiation of the sale agreement terms.