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

91 Min Read By: Glenn D. West


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 claim 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 set forth in the contract. Practitioners continue to exhibit a limited appreciation of the many meanings of the term “fraud” and the extent to which a generalized fraud carve-out can potentially expand the universe of claims and remedies that can be brought outside the remedies 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 carve-out issue into focus, this article will examine the various (and sometimes surprising) meanings of the term “fraud,” and the resulting danger of generalized fraud carve-outs, and will propose some possible responses to the buyer who insists upon including the potentially problematic phrase “except in the case of fraud” as an exception to the exclusive remedy provision of an acquisition agreement.


Post-closing fraud claims by a buyer against a seller are “regrettably familiar.”1 Indeed, allegations of fraud can occur whenever a buyer encounters what it contends to be an unanticipated problem with a business it acquired, and either the bargained-for contractual representations and warranties do not cover that particular problem or the bargained-for contractual cap on liability for breach of those contractual representations and warranties proves insufficient.2 If the buyer was in fact deliberately lied to by the seller, or facts were deliberately concealed from the buyer by the seller, respecting a matter that was specifically negotiated by the buyer to be represented by the seller as a predicate to the buyer’s decision to purchase, such claims are understandable and, more importantly, may be enforceable, without regard to any contractual limits on fraud claims. But, in many states, fraud claims can be premised upon something less than the intentional, personal deceit that is commonly understood to be encompassed by the term fraud.3 And for the seller who instructed its representatives to be completely forthcoming with all relevant information requested by the buyer, and who believed that it had a clear agreement with the buyer as to what the seller was and was not prepared to represent and warrant regarding the business being purchased (and the extent to which the seller was and was not prepared to compensate the buyer in the event any of those bargained-for representations and warranties were inaccurate), the assertion of a claim of fraud by the buyer is a breach of the very bargain the seller believed it had made with the buyer.

In 2009, The Business Lawyer published an article that was designed to awaken deal professionals and their counsel to the dangers of these generalized fraud in-trusions into the heavily negotiated contractual limitations of liability that are effected through indemnification caps and exclusive remedy provisions.4 Specifically, the 2009 The Business Lawyer article provided guidance for drafting contractual provisions designed to preserve the integrity of a fully negotiated contractual deal against at least some of the corrupting effects of the everelusive “fraud” claim.5

Based on the proliferation of published practice notes concerning this subject since the publication of that article,6 the message as to the need to disclaim reliance on extra-contractual representations has been heard and more or …

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By: Glenn D. West


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