Lessons from the M&A wars: extracontractual liability and fraud clauses in tech transactions

14 May 23

In high stakes transactions in which vast sums of wealth are exchanged in return for ownership in ongoing complex businesses, mergers and acquisitions (M&A) contracts are an oft-overlooked source of clever legal craftsmanship. With so much value and risk embodied in these transactions, much compelling contract language that's produced in these deals is readily amenable for use in non-M&A contexts.

Glenn D. West, a prominent M&A lawyer and commentator whose insights reach well beyond the M&A context, has written extensively about the appropriate contract language to use in order to effectively disclaim the threat of fraud claims and avoid liability for extra-contractual statements. In two highly regarded pieces for the ABA Business Lawyer (regarding measures to avoid extra-contractual liability and fraud liability carveouts), Mr. West has proven an effective advocate for, inter alia, the following propositions:

  • more than a simple “entire agreement” integration clause is required to effectively disclaim reliance on extra-contractual statements;
  • the buyer should be required to disclaim reliance on extra-contractual statements; and
  • and a simple “except in the case of fraud” disclaimer at the end of an exclusive remedies or limitation of liability provision is unacceptably vague and imbued with risk that most practitioners would not accept if they understood the implications.
These are worthy guidelines in the licensing and technology transactions context as well. Virtually any transaction in which one side is selling something of significant value (including high-dollar technology licensing or acquisition agreements, IT outsourcing agreements, and enterprise SaaS solution terms) would benefit from the clarity and certainty that comes with limiting the remedies and risks of the parties to the four corners of the contract.

After all, it’s not uncommon for a breach of contract claim to be accompanied by a fraud claim, as a matter of course. As Mr. West ably points out:

Fraud and negligent misrepresentation claims have proven to be hard to define, easy to allege, hard to dismiss on a threshold, pre-discovery motion, difficult to disprove without expensive, lengthy litigation, and highly susceptible to the erroneous conclusions of judges and juries. And ironically, it may be the one alleging the fraud that is the actual ‘fraudster’—not the person against whom the fraud is alleged.

This dynamic is no less applicable in the technology transactions context.

When a big technology implementation project fails, the customer’s lawyers will pretty much always try hard to find opportunities to accuse the vendor of having lied. ....

Litigation counsel know that jurors typically won’t un­der­stand whatever tech­nol­o­gy is involved.  (In fact, the customer’s lawyers might well try to exclude any prospective juror who knows even a little about the technology.)

That can make it hard for customers to win such cases on garden-variety ‘technical’ grounds such as breach of contract or breach of warranty. Judges and jurors absolutely do get it, on the other hand, when it appears some­one lied or cheated. 

D.C. Toedt III, On Contracts, Why the fraud claim is the lawyer’s weapon of choice in lawsuits over failed technology projects (2010) (noting that the threat of punitive damages, not available in breach of contract claims but commonly awarded in fraud claims, raises the stakes in this context considerably).

Consequently, technology counsel for both sides should consider certain drafting points, in furtherance of making the written deal the entire deal of the parties and in adopting a mutually acceptable definition of fraud. Such points are the subject of a robust Redline discussion including clause work product and negotiating strategies.