Contractual Disclaimers Of Reliance, 'Big Boy Provisions,' And Their Limitations In Loan Market Transactions

Trades between Loan Market Participants ("LMPs") are often completed despite a disparity of information flow relating to the transaction between the counterparties. Contractual disclaimers of reliance ("CDRs"), also known as "Big Boy Provisions," have become a common tool used to protect sophisticated parties from exposing themselves to liability arising under common law or statutory fraud provisions. Generally, a plaintiff in a fraud case must show that the defendant knowingly made a false material statement intended to induce the plaintiff to act, or omitted to state a material fact and that the plaintiff suffered damages because of their justifiable reliance upon such statement or because of such omission.1 A standard CDR undercuts the essential element of justifiable reliance should a plaintiff bring a claim based upon an alleged fraudulent misrepresentation.2 However, a standard CDR is most commonly challenged in cases where the plaintiff's claim is based on the defendant's allegedly fraudulent omission of a material fact. Typically, caveat emptor is the general rule, and a fraud claim based on the defendant's fraudulent concealment of a material fact will fail unless the defendant has a fiduciary relationship with the plaintiff; has made a partial statement requiring disclosure to avoid misleading the counterparty; or was in possession of facts within their peculiar knowledge.3

The Peculiar Knowledge Doctrine

Under New York law, parties to a contract (especially sophisticated parties) are expected to exercise ordinary due diligence in their transactions.4 Caveat emptor notwithstanding, even in an arms-length bargain, a CDR may be rendered unenforceable if the alleged omission concerned information within the "peculiar knowledge" of the defendant.5

Peculiar knowledge is material information that is both "known and knowable only to one party" to a transaction and which "[renders] false the counterparty's basic assumptions about the transaction."6 The "Peculiar Knowledge" doctrine renders voidable a contract where a party was unaware of an omission of material fact which ordinary due diligence could not have revealed.

A potential example of peculiar knowledge within the context of the loan market relates to "Borrower Confidential Information" ("BCI"), also known as Borrower Restricted Information.7 Borrowers often disclose material information to a small group of lenders or just to the Administrative Agent. Such an LMP would, therefore, be in possession of material non-public information that is within their peculiar knowledge. The Loan Syndications and Trading Association's Code of Conduct (the "Code") forbids the practice of trading on the basis of BCI, but the Code is just a guide to LMPs.8 The more pressing concern for a defendant-seller in possession of BCI, which is by its nature, within their peculiar knowledge...