A Delaware court recently reaffirmed how precise sellers have to draft their purchase agreements to limit exposure to fraud claims. In Labyrinth, Inc. v. Urich, No. 2023-0327-MTZ, 2024 Del. Ch. LEXIS 78 (Del. Ch. Jan. 26, 2024), Vice Chancellor Zurn held that language of the stock purchase agreement did not relieve seller from liability for extra-contractual fraudulent representations even though the agreement included a standard reliance disclaimer with respect to extracontractual representations and an integration clause.
The dispute arose following the closing of the parties’ sale transaction, when the buyer alleged that seller made fraudulent extra-contractual representations regarding the target company and the transaction. Seller argued that the fraud claims were barred by the stock purchase agreement’s anti-reliance and integration provisions.
Consistent with prior opinions, the Court stated that the contract “must contain language that, when read together, 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.” Despite the presence of an anti-reliance clause in the agreement, the Court determined that the language of the stock purchase agreement stating that buyer “conducted its own independent investigation” from information that seller provided “can be read to reflect that buyer was expressly representing it did rely on extra-contractual information.” Accordingly, the fraud claims could survive despite seller’s clear intention to preclude them through the agreement. The “buyer investigation” clause, which previously was thought to protect sellers by shifting the risk of diligence and collecting information to buyers, now appears harmful to sellers under Delaware law by preserving fraud claims against the seller based upon information revealed during those buyer investigations.
Sellers and their counsel should look carefully at the language being included in their sale agreements and determine if language beyond the standard anti-reliance and integration provisions is required to adequately protect against post-transaction fraud claims. Eric Zacks’s 2024 article providing a comprehensive examination of contractual practices to disclaim, diminish and define fraud claims can be found at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4802412, and WBK’s 2022 update regarding fraud disclaimers can be found at https://www.wolfsonbolton.com/news-updates/2022/september/delaware-court-holds-anti-reliance-provisions-do-not-bar-fraudulent-inducement-claim/.
