Non-reliance Clause
(Acquisition Agreements)

Summary

This clause is a non-reliance provision whereby a buyer specifically disclaims reliance on any extra-contractual representations and warranties made to it by the seller. By doing so, the buyer forecloses any claims of fraudulent inducement, fraudulent misrepresentation, or negligent misrepresentation made outside of the four corners of the acquisition agreement. This clause includes practical guidance and drafting notes. Purpose of a Non-reliance Provision A non-reliance provision (also known as a no-reliance provision, an anti-reliance provision, or a big boy provision) is a provision sometimes included in private M&A representations and warranties included in the four corners of the acquisition agreement (and any ancillary agreements incorporated by reference therein). In this way, a non-reliance provision is intended to bar extra-contractual evidence that might otherwise establish a claim based in tort (most commonly fraudulent inducement and fraudulent misrepresentation, but also possibly negligent misrepresentation) proffered by the acquirer. A non-reliance claim is not technically exclusive to sellers in M&A transactions, but because the seller is typically the party making most of the substantive representations and warranties in an acquisition agreement, the provision is usually drafted to protect the seller. This practice note reviews the law of non-reliance provisions in New York and Delaware, the two most common choices for the governing law of M&A acquisition agreements. Without a non-reliance provision, an acquirer could claim that information provided to it during the due diligence process or through false or misleading information otherwise provided to it outside of the acquisition agreement should form the basis of a claim of fraudulent inducement, fraudulent misrepresentation, or negligent misrepresentation. However, a properly drafted non-reliance provision can bar, as a matter of law, such claims based on extra-contractual information. Where representations and warranties actually included in the acquisition agreement prove to be false or misleading, the aggrieved party can pursue a misrepresentation claim pursuant to the rights granted to it under the acquisition agreement (including, typically, indemnification). Where such contractually made representations are incorrect or misleading because of fraudulent acts perpetrated by the disclosing party, a claim based in tort (e.g., fraudulent misrepresentation) will also be available due to the common law in Delaware and New York, regardless of whether an acquisition agreement purports to limit such rights through an exclusive remedy clause (by for example, purporting to limit the victim of fraud to indemnification rights). Thus, a non-reliance provision is focused on preventing a claim based solely on extra-contractual information. Elements of an Effective Non-reliance Provision Identify the representations and warranties made by the seller. The first part of a non-reliance claim specifies that the seller is not making any representations or warranties other than those expressly set out in the acquisition agreement. The acquirer expressly disclaims reliance on any representation. The second, and most critical aspect of an effective non-reliance provision is that the acquirer acknowledge it is not relying on any representation, warranty, or other information other than the representations and warranties made by the seller in the acquisition agreement. The tort claims of fraud and negligent misrepresentation both require that the plaintiff show that it reasonably or justifiably relied on the seller's false or misleading statement. By stipulating that the reliance element of such claims has not been fulfilled, a non-reliance statement attempts to bar, as a matter of law, the claims of fraud and negligent misrepresentation by an acquirer. See Chyronhego Corp. v. Wight, No. 2017-0548-SG, 2018 Del. Ch. LEXIS 258 (Ch. July 31, 2018). Case law has established that it is critical that this disclaimer of reliance be from the point of view of the acquirer (i.e., disclaiming its reliance) and not from the point of view of the seller disclaiming the making of representations or warranties not contained within the acquisition agreement (i.e., the disclaimer must be framed positively). See FdG Logistics LLC v. A&R Logistics Holdings, Inc., 131 A.3d 842 (Del. Ch. 2016). Notwithstanding the above, case law states that no particular "magic words" are needed in order to make a non-reliance provision enforceable, although Anvil Holding Corp. v. Iron Acquisition Co., 2013 Del. Ch. LEXIS 129 (Del. Ch. May 17, 2013), states that a party must specifically "disclaim reliance" in order for such a provision to be effective. An acquirer who agrees to an explicit non-reliance provision and then pursues a claim based in extra-contractual fraud would, in effect, be rewarded for its false statement in the non-reliance provision. Courts have thus enforced properly constructed non-reliance provisions notwithstanding the public policy goal of discouraging fraud. Furthermore, courts have expressed a strong preference in allowing sophisticated parties to contract freely, including by barring claims based on extra-contractual fraud. Specific categories of information being disclaimed. If practicable, the acquisition agreement should contain reasonably specific categories of information that the seller did not provide to the acquirer and as to which the seller is not representing (e.g., financial projections and information beyond those included in the acquisition agreement (including by reference)). Under New York law, however, a buyer's disclaimer of reliance may not be enforced against it if the buyer brings a claim based on non-disclosure of facts within the "peculiar knowledge" of the seller such that reasonable diligence could not have uncovered such information. See Warner Theater Assocs. P'ship v. Metro Life Ins. Co., 149 F.3d 134 (2nd Cir. 1998), and Harbinger Capital Partners Master Fund I, Ltd. v. Wachovia Capital Mkts., LLC, 2010 NY Slip Op 51046(U), 27 Misc. 3d 1236(A), 910 N.Y.S.2d 762 (Sup. Ct.). Sophisticated parties and equal bargaining power. New York and Delaware courts both require that, in order to contractually waive their ability to pursue an action based on fraud, the parties be sophisticated. It must also be clear that neither party was coerced into agreeing to the non-reliance disclaimer because of a disparate imbalance of bargaining power. Distinguished from an Entire Agreement Provision A non-reliance provision shares a similar purpose as, but is distinct from, an entire agreement provision (also known as an integration provision or merger provision) (see Critical Boilerplate in Acquisition Agreements — Entire Agreement for more information). Although these two provisions both seek to prohibit the use of evidence outside of the four corners of the contract (i.e., parol evidence / extra-contractual evidence) to establish a claim, an entire agreement provision has generally not been recognized by courts to defeat claims based in tort because they tend to be general and vague in nature. It is this comparison that has led some courts to refer to non-reliance provisions as "explicit non-reliance" provisions and entire agreement provisions as "standard entire agreement" provisions. Courts have required explicit statements of non-reliance by the acquirer in order to permit parties to bar tort claims based on extra-contractual evidence relating to an acquirer's decision to enter into an acquisition agreement and have further determined that typical entire agreement provisions do not satisfy that standard and thus do not bar claims of extra-contractual fraud. Interplay with Exclusive Remedy Provision A non-reliance provision is also related to, but distinct from, an exclusive remedy provision (also known as a sole remedy provision) (see "Exclusivity of Indemnification Remedies" in Indemnification Provisions in Private Acquisition Agreements — Limitations). A private M&A acquisition agreement will often include an exclusive remedy provision that states that the parties' only remedies for a breach of the acquisition agreement are those set forth in the indemnification section. In this way, an exclusive remedy section purports to limit the manner in which an aggrieved party (usually, the buyer) can pursue claims against the other party, while an entire agreement provision and a non-reliance provision both purport to limit the basis of such claims. Both New York and Delaware courts have rejected the idea that parties can limit their exposure to damages for claims based on fraud, finding that the public policy goal of discouraging fraud supersedes the desire to allow sophisticated parties the freedom to contract as they choose. While Delaware courts have limited this reasoning to intentional fraud by the liable party (see, e.g., ABRY Partners V, L.P. v. F&W Acquisition LLC, 891 A.2d 1032 (Del. Ch. 2006) and Airborne Health, Inc. v. Squid Soap, LP, 984 A.2d 126 (Del. Ch. 2009)), New York courts have further extended this rationale to willful or grossly negligent acts as well (see e.g., Pfizer, Inc. v. Stryker Corp., 348 F. Supp. 2d 131 (S.D.N.Y. 2004)). Indeed, the court in Airborne stated that if an exclusive remedy claim in an indemnification provision carves out fraud (as is standard, given that, per the above, courts will read such a carve-out in, even where it is not included), it must be specifically limited to carving out fraud claims based on representations within the acquisition agreement; otherwise, a court will deem the fraud carve-out to apply to extra-contractual fraud claims as well. Thus, with a properly constructed non-reliance provision, a party can successfully limit its exposure to claims of fraud to the extent such claims are based on information made outside of the four corners of the contract (indicating the courts' desire to respect the freedom of sophisticated parties to contract as they choose). Should the fraud (or in the case of New York, gross negligence) be based on representations or warranties actually included in the contract, courts will favor the public policy prohibition on fraudulent conduct. The lesson for the parties is that, particularly if a non-reliance provision is included in the acquisition agreement, if a given piece of information informed a party's decision to enter into the contract, in the form in which it was executed, and on the terms it was executed on, in any material way, that information should be specifically represented to in the acquisition agreement. Click here to see recent examples of non-reliance provisions in publicly filed acquisition agreements in Market Standards, the Practical Guidance database of publicly filed M&A deals that enables users to search, compare, and analyze transactions using 150+ deal points to filter search results. For a full listing of M&A transaction content, see Asset Acquisition Resource Kit, Stock Acquisition Resource Kit, Private Merger Transaction Resource Kit, Public Merger Transaction Resource Kit, and M&A Provisions Resource Kit.