Updating our recent posting concerning the enforcement of disclaimers of extra-contractual liabilities under Delaware law, in FdG Logistics LLC v. A&R Logistics Holdings, Inc. (Del. Ch. Feb. 23, 2016) the Delaware Court of Chancery held, in the context of a motion to dismiss, that any such disclaimer must be unambiguously expressed as a statement by the aggrieved party in order to be effective.
FdG Logistics arose out of the purchase of a trucking company by a private equity firm through a merger transaction. The purchaser alleged that the target company “engaged in an extensive series of illegal and improper activities that were concealed from it during pre-merger due diligence” and asserted, among other things, that the selling securityholders had committed common law fraud based on alleged misrepresentations in extra-contractual materials, including a confidential information memorandum and a management presentation.
The acquisition agreement included a customary “entire agreement” integration clause and an “exclusive representation” provision, located at the end of the list of representations and warranties by the target company, pursuant to which the target company affirmatively disclaimed all extra-contractual representations.
Reviewing Abry Partners V, L.P. v. F & W Acquisition LLC (Del. Ch. 2006) and its progeny, Chancellor Bouchard explained that an effective disclaimer must amount to a contractual promise by the plaintiff that it has not relied upon extra-contractual statements. Applying this reading, the Court of Chancery concluded that an effective disclaimer must be expressed as an affirmative statement by the aggrieved party (in this case, the purchaser). Since the exclusive representation provision at issue was worded as a declaration by the target company, rather than an acknowledgment and agreement by the purchaser, and since the integration clause “does not contain an unambiguous statement by [the purchaser] disclaiming reliance on extra-contractual statements”, the Court of Chancery denied the motion to dismiss the purchaser’s extra-contractual fraud claim. Distinguishing the recent Prairie Capital III, LP v. Double E Holding Corp. (Del. Ch. 2015) decision by Vice Chancellor Laster, Chancellor Bouchard observed that the exclusive representation provision at issue in that case was worded as an express acknowledgement by the purchaser.
The Court’s decision in FdG Logistics confirms our advice cautioning practitioners to continue to draft disclaimers of extra-contractual liability as unambiguously as possible. In particular, we continue to recommend that these disclaimers be formulated as an acknowledgment by the purchaser expressly disclaiming the existence of, and any reliance by the purchaser on, any representations other than those expressly set forth in the acquisition agreement (including in particular any representations as to the accuracy or completeness of the information made available to the purchaser).