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September 09, 2025 | By Patrick T. McCloskey
Most private acquisition agreements contain complex and heavily negotiated limits on post-closing indemnification, including caps and survival periods. Fraud is almost always an exception.
Despite pages of dense definitions in high stakes merger and acquisition contracts, fraud often goes undefined. Believe it or not, this can render an exclusive remedy provision1 meaningless2 because it “captures more than the egregious conduct intended to be captured.”3 As the Delaware Court of Chancery wrote in a 2014 decision, “the fraud exception appears to liberate the party asserting fraud from the entirety of [the agreement’s] indemnification limits.”4 This is a good example of the exception swallowing the rule.
For M&A sellers, this risk can be mitigated by narrowing the definition of fraud. A recent Delaware case shows the way.
In Sam I Aggregator LP v. Mars Holding Corp et al., the Delaware Court of Chancery upheld a definition of fraud that was limited to “actual and intentional fraud” and specifically excluded “equitable fraud, negligent misrepresentation, promissory fraud, unfair dealings, extra-contractual fraud or any other fraud or torts based on recklessness or negligence.” This tailored definition protected the sellers from a fraudulent inducement claim because the court concluded the plaintiff did not sufficiently plead an intent to defraud. Citing the Delaware Supreme Court’s decision in Express Scripts, Inc. v. Bracket Holdings Corp,5 the court ruled “a seller can obtain from a buyer an agreement to a heightened intent standard that limits post-closing fraudulent inducement claims to those claims predicated on a seller’s ‘conscious participation in the communication of lies to a buyer.’”
Express Scripts is another example of how a narrow definition of fraud can save the day for the sellers. The Stock Purchase Agreement (SPA) at issue provided the buyer’s recourse for breaches of representations and warranties was limited to claims under a representation and warranty insurance policy, except for claims for deliberate fraud. The buyer recovered $13 million under the R&W policy and then sued the sellers for fraud, resulting in the jury awarding damages of $82.1 million. The Delaware Supreme Court vacated the jury verdict on the grounds that the trial court committed reversible error by instructing the jury that it could find the sellers liable for fraud based on reckless conduct. Since fraud in the SPA exception was narrowly limited to “deliberate fraud” the Delaware Supreme Court ruled:
The SPA provides unambiguously that, except in the case of deliberate fraud and certain fundamental representations, [Buyer] could only recover up to the R&W Policy’s limit for breaches of representations and warranties. Over [Seller’s] objection, however, the [trial court] instructed the jury that it could find for [Buyer] not only for deliberate fraud, but also for recklessness. A deliberate state of mind is a different kettle of fish than a reckless one. The [trial] court’s erroneous jury instruction was not harmless—it violated a key provision of the SPA and how the parties allocated risk in the transaction. We therefore reverse the [trial court’s] judgment and remand for a new trial.
Few would quarrel with the notion that fraud is a fair exception to any limit on post-closing remedies, but the failure to define “fraud” as the sellers did in Sam I Aggregator LP and Express Scripts will make it easier for a buyer to allege fraud based on recklessness, negligence or even equitable principles.
The floor for narrowing the definition of fraud for purposes of an exception to post-closing indemnification limits is deliberate lies regarding the representations and warranties contained in the contract, at least in Delaware. That comes from ABRY Partners v. F&W Acquisition LLC.6 In other words, a fraud definition so narrow that it protects a seller for intentional misrepresentations within the contract will not be enforced.
While it is unclear whether courts applying New York law would enforce a tailored definition of fraud as narrow as the ones in Sam I Aggregator LP and Express Scripts, leaving fraud undefined places the sellers at risk of an exception loophole that could defeat the purpose of having well-defined limits on indemnification.
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This post is for general informational purposes only and does not constitute legal advice. No one should rely on the information in this blog post without seeking appropriate legal, accounting, tax or other appropriate advice from an attorney, accountant or other professional properly licensed in the applicable jurisdiction(s).
1 In an exclusive remedy provision, the parties agree that the sole and exclusive post-closing remedy for breaches of representations and warranties (and covenants) is a claim for indemnification that is subject to the limits set forth in the agreement. Fraud is almost always an exception to this provision.
2 Glenn D. West, That Pesky Little Thing Called Fraud: An Examination of Buyers’ Insistence Upon (and Sellers’ Too Ready Acceptance of) Undefined “Fraud Carve-Outs” in Acquisition Agreements, 69 BUS. LAW 1049, 1052-53 (2014), citing Merrill Lynch & Co. v. Alleghany Energy, Inc., No. 02 Civ. 7689 (HB), 2005 WL 832050, at * 3 (S.D.N.Y. April 12, 2005); and Eurofms Panlabs, Inc. v. Ricerca Biosciences, LLC, C.A. No. 8431-VCN, 2014 WL 2457515, at *4 n. 33 (Del. Ch. May 30, 2014) (“the fraud exception appears to liberate the party asserting fraud from the entirety of the [agreement’s] indemnification provisions.”)
3 Id., at 1054, citing V. John Ella: Common Law Fraud Claims: A Critical Tool for Litigators, Bench and B. Minn., Sept. 2006, at 18 n. 5.
4 Eurofms Panlabs, Inc. v. Ricerca Biosciences, LLC, C.A. No. 8431-VCN, 2014 WL 2457515, at *4 n. 33 (Del. Ch. May 30, 2014).
5 248 A.3d 824, 830 (Del. 2021) (quoting Abry Partners, 891 A.2d at 1057-1058 (Del Ch. 2006)).
6 891 A.2d 1032 (Del. Ch. 2006).
