The Looming Specter: Post-Closing Fraud Claims in Private Company M&A Litigation

Eva Davis is a partner at Winston & Strawn LLP. This post is based on a Winston & Strawn publication by Ms. Davis, James Smith, Matthew DiRisio, and Alexandra Kushner.

So-called “reliance disclaimers” and “fraud carve-outs” in private company purchase agreements—designed, respectively, to preclude and preserve certain types of post-closing fraud claims—have taken on increased prominence for transactional lawyers drafting such agreements with an eye toward certainty of remedies in potential post-closing disputes. And with good reason. Few issues have permeated private company M&A litigation in recent years to the extent that such provisions have.

In a nutshell, non-reliance provisions seek to prevent buyers from circumventing the contractually agreed-upon remedial framework (typically, closely-negotiated indemnification rights) by including a representation that the buyer, in entering into the transaction, has not relied on any statements by the seller (or anyone else) other than the express representations and warranties in the agreement itself. Since a common law fraud claim requires both “justifiable” (or “reasonable”) reliance and reliance-in-fact, such provisions, if effective, prevent a buyer from pleading or proving a fundamental element of fraud with respect to any extra-contractual statements (including projections, diligence materials, etc.).

Judicial treatment of non-reliance provisions has varied, such that the requirements for and consequences of including such provisions in a transaction agreement can differ dramatically depending on which state’s law governs the agreement. For example, as discussed below, while certain states like Delaware and New York will enforce non-reliance provisions that meet certain standards, others, including California, flatly prohibit parties from contractually insulating themselves from fraud liability as a matter of public policy.

Moreover, the interplay between and among non-reliance clauses and other frequently-adopted provisions governing remedies in private company M&A transaction agreements—most particularly, the nearly ubiquitous “fraud carve-out”—layers additional complexity onto the post-closing landscape, particularly when, as is common, the term “fraud” itself is left undefined.

This post analyzes the current state of the law governing non-reliance clauses, fraud carve-outs and associated remedies provisions in four states whose law is often chosen to govern transaction agreements—Delaware, New York, Illinois and California. In the complete publication (available here), we append a table synthesizing, comparing and contrasting the key characteristics of each state’s law.

Non-Reliance Provisions

Concepts relating to freedom and sanctity of contract postulate that sophisticated parties should be able to negotiate and allocate risk between them as they see fit and have those choices honored by courts. On the other hand, the law’s abhorrence of fraud traditionally includes the notion that “fraud vitiates everything it touches.” Thus, the threshold question in considering a “non-reliance” provision is whether the public policy of the state(s) whose law may be chosen to govern the agreement permits contracting parties to prophylactically waive fraud claims at all. If it does, the analysis then turns to the permissible scope of such a waiver and any “magic language” that must be included in order to effectuate it. Below, we address both the threshold policy issues and specific drafting points relating to reliance disclaimers on a state-by-state basis.


Bottom Line

Delaware will enforce non-reliance provisions to bar fraud claims based on extra-contractual statements where a party contractually represents that it did not rely on any extrinsic statements in deciding to enter the agreement.

The seminal Delaware case on non-reliance provisions, authored by then-Vice Chancellor (now Delaware Supreme Court Chief Justice) Leo Strine, is Abry Partners V, L.P. v. F & W Acquisition, LLC, 891 A.2d 1032 (Del. Ch. 2006). Abry involved what has become a familiar scenario: a sophisticated private equity buyer entered into an agreement to purchase a portfolio company from a sophisticated private equity seller. Buyer subsequently sought to rescind the transaction, asserting fraud claims based on several allegedly false representations both in and outside of the purchase agreement.

The court held that Delaware public policy prohibits the enforcement of non-reliance and exclusive remedy provisions to shield a party from fraud claims based on deliberate “lies” in the contract itself. At the same time, the court enforced non-reliance and exclusive remedy provisions to dismiss buyer’s claims based alleged extra-contractual “lies” and mere recklessness. The court reasoned that clauses disclaiming reliance on extra-contractual representations should be enforced to guard against the “double liar” scenario: even if a seller has made intentionally false or misleading extra-contractual representations, allowing a buyer to pursue a fraud claim in the face of a clause whereby buyer expressly disclaimed its reliance on (and/or the very existence of) any such statements would ignore buyer’s own misrepresentation (i.e., that it had relied solely on the express representations and warranties in the agreement). This principle was subsequently confirmed by the Delaware Supreme Court in RAA Mgmt., LLC v. Savage Sports Holdings, Inc.


  1. Delaware public policy prohibits a party from contractually insulating itself from liability for fraud involving deliberate inaccuracies in representations and warranties within the four corners of the contract. Where “a seller intentionally misrepresents a fact embodied in a contract—that is, when a seller lies—public policy will not permit a contractual provision to limit the remedy of the buyer to a capped damage claim” and instead will allow the buyer “to press a claim for rescission or for full compensatory damages.” (Emphasis added).
  2. Conversely, Delaware policy will enforce a properly framed non-reliance provision negotiated by sophisticated parties to preclude fraud claims based on extra-contractual statements.
  3. To be enforceable, a non-reliance provision must clearly evince that “plaintiff has contractually promised that it did not rely upon statements outside the contract’s four corners in deciding to sign the contract.” Thus, a boilerplate integration clause merely stating that the written contract represents the entirety of the parties’ agreement will not, alone, suffice.

Drafting Points

Since Abry and RAA, Delaware courts have further delineated how non-reliance clauses must be drafted to effectively preclude extra-contractual fraud claims:

  • No “Magic Words.” The Court of Chancery has held that no particular words are required to bar extra-contractual fraud claims. For example, the court has enforced a non-reliance provision, coupled with an integration clause, where the former acknowledged that the seller made no extrinsic representations, but did not specifically disclaim buyer’s reliance.
  • “Positive Framing” Permissible. Nor must a non-reliance provision be framed in the negative, i.e., buyer “did not rely” on any outside statements; rather, it may affirmatively state that the buyer relied solely on the representations in the contract. Such a clause, which identifies the “specific information on which a party has relied and … foreclose[s] reliance on other information,” will be enforced.
  • From the “Buyer’s Perspective.” Still, notwithstanding its previous disavowals of a formulaic approach, the Court of Chancery has recently held that a non-reliance provision—whether specific or general—must be written from the point of view of the disclaiming party. That is, the court saw a critical distinction between a seller’s representation that it made no extra-contractual statements to the buyer and a buyer’s representation that the seller made no such representations (or that the buyer did not rely on them). The latter, the court concluded, is what is required.

New York

Bottom Line

Delaware redux, with a twist. Like Delaware, New York will enforce properly drawn non-reliance provisions to bar fraud claims based on extrinsic statements (on the theory that doing otherwise would countenance the “double liar” phenomenon), but will permit fraud claims based on intentionally false contractual representation and warranties. A handful of New York-specific “twists” are discussed below.

To begin with, the “critical distinction” recently drawn by the Delaware Court of Chancery focusing on whether a non-reliance provision is written from the disclaiming party’s point of view does not appear to be a gating item in New York. New York courts have focused instead on the specificity of the non-reliance provision—that is, the extent to which the non-reliance provision “tracks” the precise categories of information later alleged to be misleading. They readily enforce provisions disclaiming reliance on the specific types of extra-contractual representations underlying the fraud claim, but more general disclaimers may be on shakier ground.

Nevertheless, specificity is not an absolute prerequisite to enforcement, particularly where the parties are sophisticated and the contractually negotiated representations are extensive. Thus, the Southern District of New York has barred fraud claims based on extrinsic misrepresentations where “sophisticated parties … include[d] [numerous] specific representations and warranties in their agreements in addition to a merger clause disclaiming all other representations.” Similarly, the Second Circuit affirmed the dismissal of a fraudulent inducement claim alleging misrepresentations during diligence based on a provision stating only that the seller had made no representations other than those in the agreement.

NY Drafting Point

Finally, it bears mentioning that, in contrast to Delaware, New York will permit fraud claims based on omissions, even in arms-length transactions. If left unaddressed, enterprising buyer’s counsel could drive the proverbial truck through this distinction post-closing. Thus, sellers looking to bar extra-contractual fraud claims should ensure that the non-reliance provision explicitly covers extrinsic misrepresentations and omissions.


Bottom Line

On the surface, Illinois espouses the same policies as Delaware and New York: parties may not contractually bar fraud claims based on intentional misrepresentations in the agreement itself, but can preclude certain extra-contractual fraud claims through a non-reliance provision. In practice, however, there are significant differences in the application of these principles in Illinois, where the enforceability and effect of non-reliance provisions will often turn on (a) whether the alleged extra-contractual misrepresentations are oral versus written, and (b) the venue (i.e., whether post-closing litigation is brought in Illinois state or federal court).

The Spoken v. The Written Word

Illinois state courts have implemented an “automatic rule [that] damages for fraud [are precluded] based on oral representations in the presence of a nonreliance clause,” which applies even when the operative non-reliance provision is relatively general, and regardless of whether the alleged oral statements contradict a contractual representation or warranty or constitute an “oral reiteration or confirmation of allegedly false written representations” within the agreement. With respect to written extrinsic representations, by contrast, numerous decisions have declined to dismiss fraud claims notwithstanding a viable non-reliance provision (particularly where the written statements at issue were required by law), while others have been willing to dismiss such claims where the contracting parties were sophisticated and the operative non-reliance provision expressly covered “written statements.”

State Court v. Federal Court

Federal courts in Illinois have been considerably less willing than their state court counterparts to enforce non-reliance provisions to bar fraud claims at the pleading stage, having (a) mandated a factual inquiry into the disclaiming party’s sophistication level and whether it was advised by counsel, (b) required that the provision evince an intent “to apply to the subject matter of [the fraud] claims,” and (c) indicated that, regardless of the clarity of a non-reliance provision, the court “must consider all of the surrounding circumstances in deciding whether the no-reliance clause is enforceable.” Moreover, the bulk of recent federal decisions interpreting Illinois law have held that even fraud claims alleging oral extrinsic misrepresentations are not dismissible on the pleadings based on a non-reliance provision because determining whether reliance is reasonable always involves questions of fact and requires a contextual analysis.


In light of the markedly different approaches taken by Illinois state and federal courts, parties selecting Illinois as the governing law in transaction agreements should be careful, when negotiating the associated jurisdiction and venue provisions, not to simply default to a boilerplate formulation authorizing suit in any “state or federal court” sitting in Illinois. On the sell-side, the former is clearly preferable and on the buy-side, the latter.


Bottom Line

As usual, a “plaintiff-friendly” (read “buyer-friendly”) outlier. In sharp contrast to Delaware, New York and Illinois, California courts generally will not enforce non-reliance provisions—as to either contractual or extra-contractual misrepresentations—on the grounds that public policy prohibits parties from insulating themselves from liability for fraud. This is so even when the agreement is between sophisticated parties. Unsurprisingly, California (like New York and Illinois) also generally permits omission-based fraud claims even where the relationship between the parties is arms-length.

There may, however, be an Illinois-like divergence brewing between state and federal courts in California (albeit with their roles reversed). In recent years, some federal courts applying California law have enforced non-reliance disclaimers limited to specific subject matters that expressly and directly contradicted an alleged oral misrepresentation. In fact, at least one federal court has applied this reasoning to an omission-based fraud claim, holding that “there cannot be reasonable reliance upon misrepresentations or a failure to disclose that are [sic] contradicted by the express language” of an agreement. Should California state courts adopt this reasoning, the rules governing non-reliance provisions in California could shift considerably.


While non-reliance provisions will not generally provide a basis for dismissal of extra-contractual fraud claims at the pleading stage, they can still play an important role at summary judgment or trial in determining whether a plaintiff’s reliance was reasonable. Accordingly, practitioners negotiating such provisions in connection with California law-governed agreements should do so as if they matter; indeed, from the seller’s standpoint, there may be an even greater premium in California on drafting them with specificity.

Fraud Carve-Outs

Private M&A transaction agreements commonly include a series of heavily-negotiated interlocking indemnification provisions governing the parties’ remedies for breach, including: (i) survival provisions limiting the period, post-closing, during which a party can provide notice of a claim, (ii) dollar caps on damages available for certain categories of breach and an overall cap on recoverable damages (usually the amount or a percentage of the purchase price), (iii) “deductibles” or “baskets” limiting indemnification to claims exceeding a certain dollar threshold, (iv) provisions limiting the buyer’s recovery to an earmarked escrow fund, and/or (v) provisions enumerating/limiting (and sometimes defining) the types of damages available for a breach.

In order to ensure that such limitations have their intended effect, the parties typically include an “exclusive remedy” provision stipulating that indemnification pursuant to the contractual framework is the parties’ sole recourse in the event of a breach. It is, however, increasingly common for such provisions to contain a clause exempting from their scope claims for fraud or other intentional or “wilful” conduct, colloquially, a “fraud carve-out.” These clauses range from bare-bones (“except for fraud”) to borderline byzantine (defining fraud for purposes of the agreement in ways that don’t exist in nature (or at least in any well-reasoned judicial opinion)).

The impact of fraud carve-outs (aimed at preserving certain fraud claims) on non-reliance provisions (aimed at excluding others) has generated a surprising amount of discourse. Some commentators suggest that a fraud carve-out can somehow completely eviscerate an otherwise enforceable non-reliance provision, while others adhere to the more intuitive view that a well-crafted non-reliance provision proscribes extra-contractual fraud claims even in the face of a carve-out for “fraud,” which they interpret necessarily to preserve only fraud claims based on contractual representations and warranties. The confusion is compounded by the fact that most fraud carve-outs fail to define “fraud.”


Case law addressing the interplay of non-reliance provisions and fraud carve-outs is sparse. One of the few cases to confront the issue directly is Prairie Capital III, L.P. v. Double E Holding Corp., in which Vice Chancellor Laster held that a carve-out for “fraud” (undefined) did not nullify an otherwise enforceable non-reliance provision and dismissed buyer’s claims based on extra-contractual statements. While the reasoning of that decision is compelling, other cases have, in varied factual settings, muddied the waters.

For instance, in JCM Innovation Corp. v. FL Acquisition Holdings, Inc., the Delaware Superior Court allowed fraud claims to proceed based on statements made during diligence notwithstanding a non-reliance provision acknowledging that the seller had made no representations or warranties outside of the agreement and expressly disclaiming reliance on “projections, estimates and other forecasts.” Notably, however, the agreement in JCM included a fraud carve-out not just to the exclusive remedies provision, but to the operative non-reliance provision itself. While earlier Delaware decisions reaching similar conclusions were based on similarly extenuating or sui generis factors (e.g., the agreement lacked a clearly enforceable non-reliance provision or the operative fraud carve-out was broader than typically found in “exclusive remedies” provisions), sellers wary of this outcome can make the case during negotiations that, under Abry, no express “carve-out” is needed in order to preserve fraud claims based on intentionally inaccurate contractual representations and warranties, and including one can only unleash the law of unintended consequences.

Everywhere Else

New York, Illinois and California have not directly confronted the interplay of an undefined fraud carve-out and an unequivocally enforceable non-reliance provision, but litigants are likely to face similar uncertainty in those jurisdictions. The Southern District of New York, for example, has allowed extra-contractual fraud claims to proceed pursuant to a fraud carve-out where the agreement’s reliance disclaimer was “broad” and “non-specific.” That disclaimer, however, was not a traditional “non-reliance” provision and may well not have sufficed, under current law, to bar extrinsic fraud claims in the first place. Indeed, interpreting an undefined fraud carve-out to nullify an otherwise viable non-reliance clause would seem inconsistent with New York law’s preference for allowing “sophisticated parties” in private company acquisitions to establish “detailed, bargained-for contractual provisions that allocate risks between them.”


Suffice it to say that an undefined fraud carve-out—which may, at best, be gratuitous “belt-and-suspenders”—can generate significant ambiguity regarding the enforceability and operation of a non-reliance provision. If the buyer is insistent on the inclusion of some form of fraud carve-out, seller’s counsel should, at a minimum: (a) seek to clarify that it applies only to claims based on representations contained in the agreement itself, and (b) at all costs, avoid its insertion in the non-reliance provision itself.

Moreover, even if an undefined fraud carve-out does not eviscerate a non-reliance provision, it is still fraught with sell-side risk insofar as it may undercut the remedial limitations of the agreement’s indemnification provisions. This is so because the unadorned term “fraud” may be read to subsume various species of torts that do not require intentional lies and thus would not otherwise be preserved as a matter of law under Abry. Equitable fraud, for example, can be based on any misstatement or omission (coupled with reliance), regardless of intent. Accordingly, an undefined fraud carve-out could vastly expand the universe of post-closing claims that could be pursued outside of the agreement’s carefully negotiated survival periods, escrows, caps, buckets and deductibles.

Leaving out the fraud carve-out altogether solves this problem. But, while here, Edward Bennett Williams’ aphorism that “nothing … is often a brilliant thing to say” arguably inures to the benefit of both the seller and the buyer (whose fraud claims based on intentionally misleading contractual representations and warranties, including “a claim for rescission or for full compensatory damages,” will be automatically preserved as a matter of public policy), buy-side counsel’s “lawyer paranoia” (a term of endearment) will often get the better of them. In that event, a seller acquiescing to the inclusion of a fraud carve-out would be well-served to define “fraud.” In order to prevent the ensuing negotiation from bordering on the Dickensian, one might suggest simply tracking the language of Abry: “fraud” means “intentional misrepresentation of a fact embodied in” the purchase agreement. If the buyer balks, seller—check your wallet. Or at least your non-reliance provision.

The complete publication, including footnotes, is available here.

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