“Disclaimer of Reliance” Provisions

Chris Hanslik

December 29, 2011

In recent years there has been an increase in acquisitions of privately held companies. While privately held companies do not always have audited financial records, they are typically valued based on financial performance. Buyers of these companies often request and review financial projections too. But can a buyer justifiably rely on the financial information provided during due diligence? Not if the purchase agreement contains a “disclaimer of reliance” provision.

Contract provisions disclaiming reliance on a party’s representation may be enforced in limited circumstances to effectively bar claims of fraudulent inducement. In order to recover on a theory of fraudulent inducement, a plaintiff must prove that he or she justifiably relied on the opposing party’s misrepresentations. Parties use waiver of reliance provisions to protect themselves from liability arising from allegations of false statements or representations made during the course of negotiations. A disclaimer of reliance will (1) disclaim all extra contractual representations; and (2) provide that the contracting parties are not relying on any representations made during the course of negotiating the contract. Provisions that clearly and unequivocally waive reliance can negate the reliance element necessary for a successful fraudulent inducement claim.

The Texas Supreme Court has enforced “disclaimer of reliance” provisions on several occasions. In doing so, the court has identified certain elements that it believes are most relevant to evaluating the enforceability of these clauses. They are:

  1. The terms of the contract were negotiated, rather than boiler plate, and during negotiations the parties specifically discussed the issue which has become the topic of the subsequent dispute;
  2. The complaining party was represented by counsel;
  3. The parties dealt with each other in an arm’s length transaction;
  4. The parties were knowledgeable in business matters; and
  5. The release language was clear.

When these factors are present a “disclaimer of reliance” provision may be enforced to preclude a claim for fraudulent inducement against the seller.