That Pesky Little Thing Called Fraud: An Examination of Buyers' Insistence Upon (and Sellers' Too-Ready Acceptance of) Undefined 'Fraud Carve-Outs' in Acquisition Agreements
32 Pages Posted: 27 Apr 2015
Date Written: July 7, 2014
In those states that have a high regard for the sanctity of contract, a well-crafted waiver of reliance provision can effectively eliminate the specter of a buyer’s post-closing fraud claims based upon alleged extra-contractual representations of the seller or its agents. But undefined “fraud carve-outs” continue to find their way into acquisition agreements notwithstanding these otherwise well-crafted waiver of reliance provisions. An undefined fraud carve-out threatens to undermine not only the waiver of reliance provision, but also the contractual cap on indemnification that was otherwise stated to be the exclusive remedy for the representations and warranties that were specifically set forth in the parties’ contract. And practitioners continue to exhibit a limited appreciation of the many meanings of the term “fraud” and the consequent extent to which a generalized fraud carve-out can potentially expand the universe of claims and remedies that can be brought outside the remedies otherwise specifically bargained-for under the parties’ written agreement. Given the frequent insistence upon (and continued acceptance by many of) undefined fraud carve-outs, and recent court decisions that bring the undefined fraud issue into renewed focus, this article will examine the various (and sometimes surprising) meanings of the term fraud, and the resulting danger of generalized fraud carve-outs, as well as propose some possible responses to the buyer who insists upon including the potentially ambiguous phrase “except in the case of fraud” as an exception to the exclusive remedy provision of an acquisition agreement.
Keywords: fraud carveouts, reliance, equitable fraud, promissory fraud, common law fraud, unfair dealing fraud, acquisition agreements
JEL Classification: K12
Suggested Citation: Suggested Citation