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Business Law Today

October 2024

Can “Promissory Fraud” Be Defeated by an Integration or Entire-Agreement Clause?

Glenn Doyle West

Summary

  • In contrast to the Shareholder Representative Services LLC v. Albertsons Cos. decision, Trifecta Multimedia Holdings, Inc. v. WCG Clinical Services LLC and Fortis Advisors LLC v. Johnson & Johnson held that an integration clause alone is not enough to bar a fraud claim based on a future promise.
  • Promissory fraud actually involves more than a future intention to perform a promise; it involves a false statement of existing fact—the existing fact being the promisor’s existing intention to perform the promise.
  • A disclaimer-of-reliance provision is the only sure way to defeat claims of extra-contractual fraud based on extra-contractual statements that are representations of existing fact or promises of future performance that are alleged to have never been intended to be performed. 
  • The disclaimer-of-reliance provision must disclaim reliance on all extra-contractual statements made—whether they purport to be traditional statements of existing fact or future promises that carry with them representations of existing fact.
Can “Promissory Fraud” Be Defeated by an Integration or Entire-Agreement Clause?
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This article is Part II in the Many Splendors of Fraud Claims series by Glenn D. West, which explores recent cases that affect drafting practices for avoiding fraud claims in private company M&A.

Delaware has made clear that a standard integration provision has no impact on extra-contractual fraud claims based upon false statements of existing fact; instead what is required to defeat such a claim is a clause clearly disclaiming reliance upon any extra-contractual statements. We saw that requirement in action in Part I of this series. But what about extra-contractual promissory fraud—that is, fraud premised upon a promise of future performance? Why shouldn’t an ordinary integration clause defeat any fraud claims premised on that extra-contractual promise? After all, the purpose of an integration clause is to bar parol evidence of alleged prior extra-contractual promises and agreements that are not contained in the written agreement.

In Shareholder Representative Services LLC v. Albertsons Companies, Inc., the Delaware Court of Chancery held that “[w]hile anti-reliance language is needed to stand as a contractual bar to an extra-contractual fraud claim based on factual misrepresentations, an integration clause alone is sufficient to bar a fraud claim based on expressions of future intent or future promises.” According to the court, “[a]s distinguished from a claim of extra-contractual fraud based on a statement of fact, the fraud claim based on a ‘future promise’ amounts to an improper attempt to introduce ‘parol evidence that would vary the extant terms in the subsequent integrated writing.’”

Recently, however, Vice Chancellor Laster, in Trifecta Multimedia Holdings, Inc. v. WCG Clinical Services LLC, refused to follow the Albertsons decision. While promissory fraud may be based upon extra-contractual promises rather than extra-contractual statements of purported existing fact, it is still an extra-contractual fraud claim, not an effort to introduce an additional covenant into a fully integrated agreement. Indeed, promissory fraud is not a separate species of fraud at all. Promissory fraud actually involves more than a future intention to perform a promise; it involves a false statement of existing fact—the existing fact being the promisor’s existing intention to perform the future promise. Technically, promissory fraud is not based on “future intent” at all; it is based upon the present intent not to perform a future promise.

According to the Restatement (Second) of Torts, “[s]ince a promise necessarily carries with it the implied assertion of an intention to perform[,] it follows that a promise made without such an intention is fraudulent and actionable in deceit.” And, as Lord Bowen famously said, “the state of a man’s mind is as much a fact as the state of his digestion. . . . A misrepresentation as to the state of a man’s mind [i.e., the present intent to perform a future promise] is, therefore, a misstatement of fact.”

In Trifecta Multimedia Holdings, there was no disclaimer-of-reliance provision, only an integration clause. And the court ruled in favor of the sellers, who alleged that the buyers never intended to fulfill certain extra-contractual promises made in order to induce them into agreeing to an earnout.

Even more recently, in Fortis Advisors LLC v. Johnson & Johnson, Vice Chancellor Will also rejected a party’s contention that an integration clause could defeat a promissory fraud claim. While recognizing the existence of prior Delaware authority suggesting otherwise, Vice Chancellor Will held that only “unambiguous anti-reliance language” is effective to defeat any extra-contractual fraud claim. Vice Chancellor Will also noted that, in the prior cases holding otherwise, “the purported oral misrepresentations” about future promises “conflicted with the terms of the contracts.” An anti-reliance clause is less relevant when the alleged extra-contractual misrepresentations conflict with express language in a fully integrated contract because “reliance upon an oral representation that is directly contradicted by the express, unambiguous terms of a written agreement between the parties is not justified as a matter of law.”

Regardless of whether the extra-contractual statements are representations of existing fact or promises of future performance that are alleged to have never been intended to be performed (and therefore constitute representations of existing fact—i.e., the current intention to perform those promises), the only sure way to defeat those claims of extra-contractual fraud based on those statements is through a disclaimer-of-reliance provision.

And just as you cannot simply declare in a fraud definition that extra-contractual fraud is not fraud, the common practice of listing “promissory fraud” as something that is not considered fraud may not actually accomplish the desired result if your disclaimer-of-reliance provision does not affirmatively disclaim reliance on all extra-contractual statements made (whether they purport to be traditional statements of existing fact or future promises that carry with them representations of existing fact).

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