M&A Vocabulary – Experts explain: Liability for pre-contractual statements

published on 16 May 2024 | reading time approx. 2 minutes

In this ongoing series, a number of different M&A experts from the global offices of Rödl & Partner present an important term from the specialist language of the mergers and acquisitions world, combined with some comments on how it is used. We are not attempting to provide expert legal precision, review linguistic nuances or present an exhaustive definition, but rather to give or refresh a basic understanding of a term and provide some useful tips from our consultancy practice.

Can a buyer make a claim against a seller for statements made by the seller as part of the negotiations?

After a buyer and a seller have signed a purchase agreement, a dispute may arise as to whether or not a seller is liable for certain statements he has made, possibly even assurances he has given, before the agreement was signed, but which have actually not been included in written form in the purchase agreement.

Difficulties may also arise if the parties sign other, supplementary documents at the same time as the purchase agreement is entered into and the interaction between such documents and the purchase agreement is not clear. In the worst case for the seller, these statements or assurances given outside of the framework of the purchase agreement could be interpreted by a court as being valid collateral agreements, meaning that the seller could be liable for them.

The contracting parties should therefore establish as much certainty as possible about what they have agreed and what obligations arise for them from the contract. In this context, so-called "entire agreement clauses" are helpful. These clauses are intended to clarify and ensure that all terms and conditions of the transaction or agreement between the parties are contained exclusively in the purchase agreement and that no ancillary agreements, written or oral, have been made. Any judicial review should be limited as far as possible to the wording in the contract itself.

In addition, a clear relationship and hierarchy between different documents must be established so that the provision also applies to the other documents or, in case of doubt, the "main" contract (in our example the purchase contract) takes precedence.

Furthermore, "entire agreement" clauses can be used to prevent one party from relying on statements made by the other party, even if they are not contained in writing in the purchase agreement, as constituting additional terms or extending the scope of a provision of the purchase agreement. In many jurisdictions, "entire agreement" clauses are also used to expressly exclude a party's liability for pre-contractual misrepresentations.

However, parties must pay attention to terms that may be implied into a contract, i.e. terms that are not expressly included in the written agreement, but which by statute or common law are or could potentially be part of the written contract if not excluded or amended. To ensure that this is not the case, "entire agreement" clauses usually expressly exclude all implied terms.

"Entire agreement" clauses of course cannot guarantee a complete limitation of a judicial review to the wording of the contract, as even written prohibitions of oral collateral agreements could be deemed to have been amended or even removed based on oral agreement between or conduct of the parties to the contract. Similarly, certain duties often cannot be excluded from being included or deemed included in a written contract, e.g. fiduciary duties or even, in some jurisdictions, an overarching duty of good faith.

However, the clauses can help to reflect the clear intention of the parties and generally set the threshold for possible proof of an agreement to the contrary extremely high, so they should always be used to maximise certainty of what has been agreed between the parties.