It is not uncommon for buyers and sellers of businesses and business assets in Florida to structure an asset purchase agreement (“APA”) in such a way that the total purchase price is paid partially in cash at closing and partially through a structured earn-out provision calculated as a percentage of revenue generated by the transferred assets.  But what happens if the earn-out anticipated by the asset seller turns out to be smaller than expected because the asset purchaser is not capable of adequately utilizing the assets?  Perhaps surprisingly, even if the APA does not contain a buyer’s representation that the buyer can utilize the assets to generate revenue and the APA affirmatively provides that the parties have not relied upon any representation not set forth therein, the seller may have a viable cause of action against the buyer for fraudulently inducing the seller to agree to the sale.  A recent Florida decision illustrates this legal principal – that a claim of fraudulent inducement cannot be defeated contractually unless the contract specifically states that a fraud claim is not sufficient to negate the contract.  Lower Fees, Inc. v. Bankrate, Inc., 36 Fla. L. Weekly D2302 (Fla. 4th DCA 2011).

In Bankrate, the buyer agreed to pay a portion of the purchase price as an earn-out based upon a percentage of the income the buyer could produce over a 5-year period using the transferred assets.  Unfortunately, the buyer did not possess the technical expertise sufficient to actually utilize the assets – meaning the seller would receive no money on the earn-out portion of the purchase price.  Predictably, the seller brought a lawsuit to rescind1 the APA under the theory that the seller was fraudulently induced to execute the APA by relying upon the buyer’s extra-contractual statement that it was capable of using the assets.  Also predictably, the buyer defended the lawsuit on the basis of a provision typically found in APA’s which provided, in pertinent part, that “[n]o representation, inducement, promise, understanding, condition, or warranty not set forth in this Agreement has been made or relied upon by the Parties.”

Although the buyer did not represent in the APA that it possessed the ability to use the assets to generate revenue, the court held that the above “no-reliance” provision did not preclude the seller’s lawsuit.  The court observed that both parties were sophisticated business entities who were represented by attorneys skilled in negotiating and preparing APA’s, the APA was 47 pages in length, it had 76 pages of exhibits and related agreements, and it contained more than 200 representations upon which the parties expressly relied.  Notwithstanding the foregoing, the APA did not contain any provision that explicitly stated that fraud shall not be a ground for rescinding the contract.  As such, the seller’s fraudulent inducement lawsuit could not be contractually precluded by the terms of the APA.

The court also addressed the logical conclusion that the seller must have “lied” in the APA when it agreed that it has not relied upon any representation not contained in the APA, but it then brought a lawsuit premised upon just such a proposition.  The court succinctly held that “the lie one tells to get a contract signed trumps the lie one tells when signing the contract itself.”  Id. The court’s reasoning supports its opinion that the contractual “no-reliance” provision is legally insufficient to preclude a subsequent claim of fraud in the inducement.

The Bankrate case should serve as a caution to entities and their counsel engaged in buying and selling businesses and business assets in Florida – particularly when an earn-out provision is contemplated.  Sellers would be well-advised to require buyers to set forth in the APA adequate representations regarding the buyer’s ability to utilize the assets to effectively generate revenue.  Likewise, buyers should pay close attention to all buyers’ representations in the APA to ensure that they are complete and accurate and do not overstate their ability to effectuate any purchase price earn-out provisions.  Finally, if the parties intend to preclude any subsequent lawsuits based upon fraud, an express provision that a claim of fraud shall not constitute grounds sufficient to rescind the contract must be included in the APA itself.