Private Equity

Contracts involve the voluntary imposition of specific obligations on the parties, but there are independent obligations that are imposed on all members of society as a matter of tort law irrespective of any contractual arrangement.  And, as anyone that has been involved in a post-closing dispute involving an acquisition transaction knows, tort-based, extra-contractual claims frequently accompany alleged breaches of contract arising from the terms of the acquisition agreement.  But if tort duties exist independently of voluntarily imposed contractual duties, does that mean that the voluntary ordering of the parties relationship pursuant to a written acquisition agreement cannot impact the efficacy of a tort-based claim related to an alleged breach of that acquisition agreement? 

The answer of course is no; contractual language that has the effect of negating an element of the alleged tort can in many states effectively foreclose that tort-based claim.  Words matter in tort just as they do in contract.  And words in a contract can in certain circumstances have the effect of ensuring that no tort in fact occurred.  Of course using words in a contract to eliminate an element of a tort claim is fundamentally different than using words in a contract to attempt to waive or eliminate the tort duties themselves.

When I teach my M&A Contract Drafting class at SMU Law School, I often use an illustration from a famous 17th century English case to demonstrate how and why words in a contract can defeat a necessary element of a tort-based claim related to that contract.  The case, Tuberville v. Savage, [1669] EWHC KB J25, 86 ER 684, (1669) 1 Mod Rep 3, does not involve the use of words in a contract, but instead involves words spoken in connection with an alleged assault.  Contrary to popular belief, the tort of classic common law assault does not require that a person be physically touched or harmed by another (that’s battery).  Instead, all that is required is a person intentionally threaten another person with immediate bodily harm and take some action demonstrating a current ability to carry out that threat. 

As every lawyer over a certain age learned in first year Torts class, the facts in Tuberville v. Savage were undisputed.  Mr. Tuberville and Mr. Savage were involved in a physical altercation that resulted in Mr. Tuberville being injured.  Apparently this physical altercation was preceded by Mr. Savage insulting Mr. Tuberville. No one knows what was said by Mr. Savage to insult Mr. Tuberville, but the words and actions that Mr. Tuberville then took have been recorded for posterity in the English Law Reports.  Placing his hand on the handle of his sword as if to draw it from its sheath, Mr. Tuberville said to Mr. Savage:  “If it were not assize-time [the time when judges would periodically hold court in English towns], I would not take such language from you.”  Mr. Savage’s response to this perceived threat from Mr. Tuberville was to preemptively attack Mr. Tuberville and relieve him of his sword.  In the ensuing struggle, Mr. Tuberville was wounded and brought a claim for assault and battery against Mr. Savage (the judges were conveniently in town since it was, after all, assize-time).

Mr. Savage’s defense was that he was simply defending himself against the assault that Mr. Tuberville had perpetrated upon Mr. Savage by the threatening gesture Mr. Tuberville made with his hand upon his sword and the accompanying words uttered.  Mr. Savage may well have had a good claim that he had been the victim of an assault but for the fact that Mr. Tuberville’s words clearly negated any intention on Mr. Tuberville’s part to carry out any kind of immediate attack upon Mr. Savage.  Instead, Mr. Tuberville indicated clearly with his words that he would not attack Mr. Savage because the judges were in town (it was assize-time). Thus, Mr. Savage’s defense based upon the alleged assault upon Mr. Savage by Mr. Tuberville was rejected by the court and judgement was rendered in favor of Mr. Tuberville.

So what is the point?  Well, if spoken words can negate a necessary element of the tort of assault, so too can contractual words negate a necessary element of the kinds of business torts that are alleged to have occurred in common post-closing M&A disputes (such as fraud or negligent misrepresentation). We know, for example, that courts in many states, including Delaware, have held that clear language in an acquisition agreement, whereby the buyer disclaims reliance upon any statements made outside the written acquisition agreement, effectively precludes any claims for fraud or negligent misrepresentation based on extra-contractual representations allegedly having been made by the seller. 

But why does a no-reliance clause have that effect?  It’s not because the contract has purported to waive tort based duties that preclude persons from committing fraud.  No, it’s because the no-reliance clause defeats a necessary element of a fraud or negligent misrepresentation claim.  Unless the recipient of a fraudulent or negligent misrepresentation justifiably (or reasonably) relied upon that misrepresentation, the tort of fraud or negligent misrepresentation cannot be established.  By agreeing in the contract that the buyer did not rely upon any extra-contractual representations, the buyer has no reasonable or justified basis for latter claiming that it did in fact rely upon any purported extra-contractual representation.  

We all know that no-reliance clauses work in many states, but perhaps the story of the unfortunate Mr. Tuberville helps better explain why they work.