Merger And Disclaimer Of Reliance Clauses: Guarding Against Crossed Fingers

• Published date: 02 January 2024
• Subject Matter: Corporate/Commercial Law, M&A/Private Equity, Corporate and Company Law, Contracts and Commercial Law
• Law Firm: Peckar & Abramson PC
• Author: Cornelius (Lee) Banta, Jr.

This article was written for the ConsensusDocs newsletter and first appeared here.

We have all been there, though we would likely want to forget it. The nightmare project is over and after much back-and-forth negotiations over dueling claims, the parties finally reach an agreement to settle their dispute. The lawyers prepare a global settlement agreement that the principals for each party sign. This headache is finally over, right? Perhaps not.

A basic legal principal is that "fraud vitiates all". While sounding eminently reasonable in the abstract, it will not stop an unscrupulous party who suffers buyer's remorse from calling foul and alleging that they were defrauded in an attempt to unwind a deal. Faced with an after-the-fact fraud claim, a party seeking to enforce the settlement will invariably flip through the agreement to see what provisions they can rely upon to stop their counterpart from unburying the hatchet and reviving the dispute.

Avoiding Contract Obligations: Fraudulent Inducement

It is well accepted that a party can avoid performing a contract that was obtained by fraud. This particular species of fraud is referred to as fraudulent inducement and is predicated on a party's duty to refrain from inducing another to enter into a contract by use of false representations. Like a garden-variety fraud claim, the party advancing the claim faces a high hurdle. Fraudulent inducement requires proof of a material misrepresentation made with knowledge of its falsity (or affirmatively asserted but without knowledge of its truth) and with the intent that the misrepresentation should be acted on by the other party.

Despite fraud being a difficult claim to prove, that does not mean it will not cause one to expend significant time and money to defeat it. As a result, settlement agreements often contain certain provisions intended to ensure finality, the two most common being the merger clause and "disclaimer of reliance" clause. However, courts are clear that only the latter provision provides the necessary protections against collateral attacks to a settlement agreement.

Merger Clause: "Close" Only Counts in Horseshoes and Hand Grenades

A merger (or integration) clause seeks to demonstrate the parties' intent that their written contract is to be considered fully integrated, that is, that all the terms come within in the four corners of the contract. For instance the ConsensusDocs 200 Owner and Constructor Agreement states at section 13.1 states:

EXTENT OF...