M&A Vocabulary – Understanding the Experts: “Liability for pre-contractual statements”

Can a buyer hold a seller liable for statements made by the seller outside of the contract during negotiations?

After a buyer and seller have signed a purchase agreement, for example, disputes may arise regarding what a seller is liable for if they made certain statements or even representations prior to signing that were not incorporated into the contract in any form.
Difficulties can also arise if the parties sign other supplementary documents at the same time as the purchase agreement without establishing a clear reference to the main contract. In a worst-case scenario for the seller, these statements or representations could be interpreted as valid collateral agreements, meaning the seller must stand by their existence or truthfulness.

Therefore, the contracting parties should establish as much certainty as possible regarding what they have agreed upon and which obligations arise from the contract. In this context, most purchase agreements (and other contracts) include so-called “entire agreement clauses.” These clauses are intended to clarify and ensure that all terms and conditions of the deal or agreement between the parties are contained exclusively in the purchase agreement and that no collateral agreements, written or oral, have been made. Any judicial review should be limited as far as possible to the wording in the contract.

In addition, a clear reference and hierarchy must be established between different documents so that the provision also applies to the other documents or, in case of doubt, the contract containing the exclusivity clause takes precedence.

Furthermore, these clauses prevent a party from claiming that statements made by the other party—even if not included in writing in the purchase agreement—constitute additional terms or expand the scope of a provision within the agreement. In many jurisdictions, entire agreement clauses are also used to expressly exclude a party’s liability for false pre-contractual statements.

However, parties must also watch out for implied terms—that is, clauses not explicitly included in the written agreement but which may be or could become part of the written contract by law or common law if not expressly regulated otherwise. To prevent this, entire agreement clauses usually explicitly exclude implied terms.

Entire agreement clauses cannot guarantee a complete restriction of judicial review to the wording of the contract, as even written prohibitions of oral collateral agreements can be waived orally between the contracting parties. Likewise, certain duties often cannot be excluded from inclusion in a written contract, such as fiduciary duties or even, in some jurisdictions, an overarching duty of good faith.

However, these clauses can reflect the clear intention of the parties and set the threshold for proving any alternative agreement extremely high, so they should always be used for maximum security.

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