Many dealmakers, relying on the classic adage that “fraud vitiates everything,” assume that remedy waivers, including non-reliance and exclusive remedy provisions, do not apply to claims alleging fraud. On the buy side, this assumption can sometimes lead private equity professionals and their advisors to accept broad waivers in acquisition agreements, without a carveout for fraud, because they believe such a carveout is unnecessary as a matter of law. On the sell side, the assumption can lead practitioners to decline to fight over buyer’s request for such a carveout, again on the belief that the presence or absence of the carveout is not legally relevant.
However, as a recent Delaware Supreme Court case illustrates, a significant line of case law in both New York and Delaware makes clear that broad remedy waivers of this kind are likely to be enforced, particularly if such waivers are between sophisticated parties and are not induced by a fraudulent misrepresentation expressly made by the parties in connection with the provision of the waiver. Indeed, waivers need not even specifically reference fraud in order to bar fraud claims. Accordingly, PE professionals should assume that the inclusion or omission of a carveout for fraud in a waiver provision in acquisition agreements is significant and will affect the rights and remedies of the negotiating parties.
Notably, this recent case about unwitting fraud waivers arose in the context of a transaction in which the fraud was recognized during the due diligence process and before the deal was signed. RAA Management, LLC v. Savage Sports Holdings, Inc., decided May 18, 2012, involved a claim by a prospective buyer (RAA) that a target (Savage) made fraudulent misrepresentations during the parties’ preliminary negotiations, allegedly leading RAA to spend $1.2 million on due diligence and negotiation costs that it would not have otherwise incurred. The purported misrepresentations included providing a document in the online data room misstating potential environmental liabilities, making inaccurate statements regarding the unionization of employees, and not disclosing a threatened $40 million lawsuit. RAA allegedly terminated the parties’ negotiations as a result of its discovery of the inaccuracy of the misrepresentations and subsequently sued Savage to recover its costs. The Delaware Supreme Court dismissed RAA’s claim on the grounds that the parties’ nondisclosure agreement (“NDA”) included an acknowledgement by RAA that Savage was not making any representation or warranty as to the due diligence materials provided by Savage and an agreement that Savage would not have any liability resulting from the use of such materials except as provided in a definitive purchase and sale agreement.
RAA argued that this provision applied only to negligent or unintentional misrepresentations and not to the kind of “willful falsehoods” allegedly made by Savage. The Delaware Supreme Court disagreed, noting that the “buyer beware” language of the provision did not distinguish between information that was negligently inaccurate and information that was intentionally inaccurate. Thus, the court held, in the absence of an express carveout for intentional or fraudulent misrepresentations, a broad non-reliance provision encompasses all information (or lack thereof) provided by a seller.
The court was especially reluctant to interpret the NDA language more restrictively than provided on its face because the parties were sophisticated negotiators with comparable bargaining power. In such cases, the non-reliance provision is considered to be a fully bargained-for allocation of risk.
Finally, the court held that waivers of fraud are not against public policy. RAA argued that even if the non-reliance provision was by its terms all-encompassing, it was ineffective as a matter of public policy because it would allow a party to shield itself from liability for its own dishonesty. The court rejected this argument, ruling that a public policy in favor of truthfulness would lead to the opposite conclusion. In other words, that allowing a buyer to disavow a broad non-reliance provision it had agreed to would sanction the buyer’s own misconduct.
Despite the result in the RAA case, fraud remains a powerful claim. The prospective buyer may have been more successful if the target’s allegedly fraudulent misstatements had been expressly included as a representation in the same agreement under which the prospective buyer waived the target’s liability for fraud, on the grounds that such misstatement fraudulently induced the waiver. Likewise, some courts have held that waivers of fraud are not enforceable if the fraud claim is brought under federal securities law. However, as a negotiating matter, both buyers and sellers should assume in negotiating acquisition and sale agreements that waivers of claims and limitations of remedies apply even where allegations of fraud can be made, and to agree to, or resist, inclusions or exclusions of fraud accordingly.