LegalSifter Review uses algorithms to review draft contracts to see whether provisions addressing specific contract issues are present or missing. We call our algorithms “Sifters.” In this post, the spotlight is on the Sifter Not Relying on Statements Outside the Contract.
This Sifter helps alert sellers to language it would be prudent to include in a contract to reduce the chances of being the target of a claim for fraud. Allow me to explain.
When negotiating a contract, you might say lots of things and take lots of different positions. You wouldn't want to be held to any one of those statements, divorced from the negotiating context. Instead, you'd want the contract to reflect the deal you actually agreed to.
You might think, OK, easy enough! Just include an entire-agreement provision:
This agreement constitutes the entire understanding between the parties regarding the subject matter of this agreement.
And if you’re in a belt-and-suspenders mood, you could also express the obverse:
Acme acknowledges that Widgetco has made to Acme no representations other than those contained in this agreement.
But in Texas that wouldn’t work. As I discuss in this 2011 blog post, the Texas Supreme Court has said that to preclude a claim for fraudulent inducement, you have to include no-reliance language. Here’s an example:
In entering into this agreement, Acme is not relying on any representations other than those contained in this agreement.
As a matter of semantics, that’s challenging. I can understand a court saying that an entire-agreement provision doesn’t preclude claims for fraud, as entire-agreement provisions don’t acknowledge the possibility of statements outside the contract. But if the parties acknowledge that no statements were made outside the contract, necessarily no extra-contractual statements exist for a disgruntled party to rely on.
Regardless of how the semantics play out, the Texas Supreme Court has spoken—it would be reckless to omit no-reliance language in contracts governed by Texas law.
And not just Texas law. Glenn West, the leading commentator on big-deal boilerplate, noted in this 2019 blog post an opinion in which the Delaware federal district court, applying Delaware law, followed the approach of the Texas Supreme Court in holding that saying in the contract that no extra-contractual statements were made doesn’t constitute no-reliance language.
So don’t assume that it’s only in contracts governed by Texas law that you should use some form of the verb rely or the noun reliance to increase the odds of precluding a claim for fraud. Instead, it would be prudent to do so whatever the governing law.
And not just in mergers-and-acquisitions contracts. I asked Glenn whether no-reliance language is relevant for commercial contracts too, and I included his answer in this 2016 blog post. I repeat it here:
Yes, most definitely. My own unscientific and statistically indefensible survey of cases suggests that almost any contract capable of being breached is capable of being alleged to have been entered into based on fraud of some kind or the other. Whenever the contract provides insufficient relief for the harm supposedly inflicted to the aggrieved counterparty, that counterparty uses the realm of tort to supplement the realm of contract. So, a supply or service agreement easily could have the exact same issues as a M&A transaction in the area of fraud claims, particularly when the contractual remedy is capped at a certain dollar amount or by certain damages types.
The spread of no-reliance language, in terms of both governing law and the kind of transaction, is exemplified by the image at the top of this post. It’s an extract from a New York form of lease; the inartfully drafted no-reliance language is highlighted.
Once you’re aware of the significance of no-reliance language, you can look for it yourself in draft contracts, whether you’re the side that would benefit from no-reliance language or the side that might want to bring a claim for fraud. But life would be simpler if you could upload drafts to LegalSifter Review and have our algorithms tell you whether relevant language is present and, if so, where.
And for the many who work with contracts who aren’t aware of this issue, LegalSifter Review would alert them to it and offer advice prepared by yours truly.
In other words, the Sifter Not Relying on Statements Outside the Contract, like LegalSifter Review generally, saves you time, helps you make informed decisions, and reduces the risk of unpleasant surprises.
(This is the second in an intermittent series of Why This Sifter Matters blog posts explaining why users would benefit from having a given Sifter in their array of Sifters. Go here for our post about the Sifter Jurisdiction: Consent to Jurisdiction.)