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Posted: August 8, 2017

Merger Clause Bars Fraud Claim

On July 31, 2017, Justice Sherwood of the New York County Commercial Division issued a decision in Representaciones E Investigaciones Medicas, S.A. De C.V. v. Abdala, 2017 NY Slip Op. 31619(U), dismissing a fraud claim relating to the acquisition of a pharmaceutical company based on a contract’s merger clause.

In Representaciones E Investigaciones Medicas, the plaintiffs’ fraud claim was based on alleged misrepresentations relating to compliance with the law. The court first found that to the extent that it was based on breach of contractual representations and warranties, it was duplicative of the plaintiffs’ breach of contract claim and must be dismissed. To the extent “the fraud claim is based on false statements . . . made during due diligence, it is barred by the” purchase agreement’s merger clause. The court explained:

According to the complaint, Teva was shown false documents and given false information during due diligence, and, deceived, decided to proceed with the transaction. However, Teva is a sophisticated entity and performed extensive due diligence. Plaintiffs are correct that where the complaint states a cause of action for fraud, the parol evidence rule is not a bar to showing the fraud — either in the inducement or in the execution — despite an omnibus statement that the written instrument embodies the whole agreement, or that no representations have been made. However, this waiver is not unenforceably broad, as plaintiffs claim. Here, plaintiff has in the plainest language announced and stipulated that it is not relying on any representations as to the very matter as to which it now claims it was defrauded. Such a specific disclaimer destroys the allegations in plaintiffs complaint that the agreement was executed in reliance upon these contrary oral representations. . . . The merger clause in the SPA disclaims reliance on materials presented or viewed during due diligence, which is exactly the basis for the plaintiffs’ claim for fraud. As mentioned above, Teva is a sophisticated entity. If it had wanted to include a carve-out that it could rely on the materials presented to it, or information included in due diligence, or a representation that the material it viewed during due diligence was correct, it could have done so. It did not.

Plaintiffs further argue that the merger clause cannot be enforced here, because it only applies where the facts represented are not matters peculiarly within the representing party’s knowledge, and the other party has the means available to him of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation, , , , Here, plaintiffs allege the defendants presented them with the double-bookkeeping documents, false responses to their due diligence requests, and powerpoint slides with false information, and hid the true facts from them during the due diligence process. However, they also allege they performed extensive and thorough due diligence. . . . [P]laintiffs have not alleged how the alleged misrepresentations remained particularly in the knowledge of the defendants despite Teva’s access to Rimsa’s personnel, facility, and products. . . .

It is well settled that the general rule is that if the facts represented are not matters peculiarly within the party’s knowledge, and the other party has the means available to him of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation, he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations. Where a party has no knowledge of a latent condition and no way of discovering the existence of that condition in the exercise of reasonable diligence then he may overcome a specific disclaimer clause and introduce parol evidence of fraudulent inducement. Here, plaintiffs have provided no explanation for why the truth was outside their reach. Unlike the plaintiffs in TIAA Global Investors, Teva provides no reason that it could not have discovered the truth. It only states it did not discover the truth. Plaintiffs have failed to allege facts to support their argument that the merger agreement cannot be enforced. Accordingly, the first cause of action alleging fraud shall be dismissed.

(Internal quotations and citations omitted) (emphasis added).

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