[Expert Corner Series] Disclaimers, Qualifications & Follow Up on Due Diligence by Shashank Saurabh & Yash Mewara- PART-VII | Corp Comm Legal on Corporate Law


Due diligence is an act or exercise, performed before entering into any agreement or contract with another party. It involves investigation, audit, or review of a business, assets or a person before signing of the contract and aims to reduce the risk involved by making the decision as informed and calculated as possible through the use of a certain standard of care. In this article we discuss the various facets of the disclaimer clause and qualification clause, mapping the liability of an agency/law firm(s) undertaking the process of due diligence and follow up process that is used after it.


The collection, collation, and examination of the findings of the investigation is called Due Diligence Report. It is extremely important because it is concise and organized documentation which eventually brings clarity and efficiency to the process of Due Diligence. A report of due diligence consists broadly of four parts:

(i)                 a disclaimer section;

(ii)              an executive summary of the report;

(iii)            the report itself; and

(iv)             schedules.

According to the Black's Law Dictionary, the term 'disclaimer' refers to "a statement that one is not responsible for or involved with something or that one has no knowledge of it". Simply put, it means that an individual is not legally accountable for something.

Disclaimers are added to the reports by the agencies responsible for conducting the due diligence to shield themselves from any professional liability arising out of the report. Practically, a report of due diligence must consist of proper disclaimers stating the purposes of and situations under which the report was prepared.

Generally, the legal review is made according to the scope which has earlier been agreed upon and should be specified in the report. The report only deals with a specified legal facet of the target and is neither aimed to be nor should be understood as a legal opinion on the contents therein.

No matter how carefully it is done, there is a high possibility that certain problems might arise at the time of conducting due diligence that might also require remedial actions, such factors make it important for the disclaimer clause to be inserted in the report. Some of those factors[1] are:

1.      Non availability of information: Often, at the time of conducting due diligence certain information might be hidden and could prevent drawing up of a complete picture.

2.      Unwillingness of target company’s personnel in providing the complete information: Sometimes the staff of the target company may prove to be not very cooperative and unwilling to deliver the required information.

3.      Providing of incorrect information: If the information provided by the target company staff is incorrect, it causes hurdles in preparing the report.

4.      Complex tax policies and hidden liabilities: Complex tax policies can generate hidden tax liabilities that cannot be easily tracked.

5.      Multiple Regulations and its applicability: As new legislations come up, it might prove difficult to ascertain its applicability for business and seeking a legal opinion on it may be inexpedient or very costly.

6.      Process in providing data: Before data is made available for due diligence, it goes through a number of checks and reviews which can slow down the due diligence process.

7.      Absence of proper MIS: Lack of a proper MIS can make the process of due diligence complicated.

General Characteristics Of Disclaimers

1.      Must limit the scope to be used only by the client: This indicates that the report is prepared only for the benefit of the client in a particular transaction and must not be made available to any other party for their reliance;

2.      Clearly stipulate that the report is a derivative of the documents received by the client. This indicates that unless otherwise indicated, the report is solely prepared from the information gathered through the documents disclosed by the target and any independent research was not carried out for the purpose;

3.      Assume that the given documents were supposed to have been properly executed. This indicates that all the documents provided were executed and signed by the parties to it and were true, accurate, complete and not misleading;

4.      The report also must contain the possibility of a future amendment acknowledging the dynamics of business so that it provides for flexibility.



The agency conducting due diligence may declare any kind of reservation, adverse remark, or qualification at appropriate places. Preferably, such qualifications, reservations, or adverse remarks of the agency should be highlighted in italics or bold type in the Diligence Report.

Regarding the matters on which the agency could not form an opinion (due to insufficiency or information / data or other reasons), a clear statement must be provided pointing out the fact that the agency was unable to come up with an opinion and the reasons for the same. If certain limitations either circumstantial or imposed by the company (like certain books or papers being in the custody of another person or Government Authority) reduce the scope of work to be performed, it must be indicated in the report.[2] In case these limitations make the agency unable to express their opinion, they should state that:

“In the absence of necessary information and records, he is unable to report compliance(s) or otherwise by the Company”.


Standard Qualifications in the Legal due Diligence Report required to bypass liability[3]

One of the standard qualifications is, when the due diligence report prepared, it is supposed to be limited to the state of affairs as it was on the date the information was disclosed in the data room, creating a limitation on the information. Then comes, assumption of conformity to the originals of all documents submitted as copies It has to be assumed that all the documents provided were executed and signed by the parties to it and were true, accurate, complete, and conforms to the original document. Another is, Reliance upon statements and communications received from authorized officials of the target. Qualifications as to independent investigations is also a standard qualification.


Limitations in a DD Report

1.      Since the information received entirely depends on the data provided by the client, its quality and quantity might cause potential risk of disclosure or misrepresentation.

2.      Limitation on timing

3.      Exposure to unknown investors and also possible foreign jurisdictions

4.      Even if all the basic information is provided there might be some hidden risks as the report relies on the analysis made by the person conducting due diligence. Here, judgment of the person conducting the diligence is important.

5.      Review restricted to sanitized, vetted reports and interview with key employees- the real dirt may be elsewhere (e.g. emails and other correspondences)[4]

Ascertaining The Liability

A.    in the case of reliance requests:

In the case of financial acquisitions, the financer of the acquisition may ask to review the due diligence report prepared for the buyer. In such cases the law firm needs to remain cautious as exposing the report to the financer could expose the firm to certain liabilities.[5]

Thus, the law firm should remain prudent and take precautions while consenting to deliver or delivering the said reports. First, the law firm should make sure that the report of due diligence consists of proper disclaimers stating the purposes of and situations under which the report was prepared. Second, before consenting to deliver or delivering the reports, a law firm should:

1.      be satisfied as to the identity of the recipients of the report (e.g. their reputation as a financial institution); and

2.      come up with proper terms and conditions that the recipients would have to accept through a letter before getting access to the report.

Situation I- Non-Reliance Letters

In this case, the recipient gets access to the report on a non-reliance basis. In this case the law firm can request the recipient to issue a non-reliance letter which means that the recipients, in the letter, expressly acknowledge and consent to not rely on the report for any purpose.

Situation II- Reliance Letters

In a case where the financial institutions want the report to be delivered to them on a reliance basis, the law firm has to take certain steps to safeguard themselves from any future liabilities. Apart from the steps mentioned above, the financial institutions should be made to execute reliance letters that consist of proper disclaimers stating the purposes of and situations under which the report was prepared and submit various assumptions, limitations, and qualifications.

Ordinarily the conditions included in such a delivery are:[6]

1.        The approval to use the report for reliance by the financial institution will not create a relationship of lawyer and client between the law firm and the financial institution;

2.        The liability of the firm will be limited to a fixed amount and all claims against the law firm will only be brought within a fixed period from the delivery of the report (e.g.- one year).

3.        The law firm should deliberate upon the applicability of laws and the forum to be approached so that in case of a dispute they are not subjected to disadvantageous laws or jurisdiction.


B.     Due Diligence conducted through artificial intelligence:

AI undoubtedly brings many benefits, like time and cost efficiency, and at times increased output which makes for a good reason for law firms to adopt it in its due diligence process. However, there are certain risks attached to it too. One of the major risks can be failure of the software. The technical working of software as to its process of getting results is only known to its developers and not the lawyers using it. Thus, the lawyers should keep in mind that the software can create errors by misinterpreting an ambiguous document or due to insufficient training of the program.[7]However, due to the following risks attached to the use of AI programs which the law firms should keep in mind while making use of them.[8]

This being said, there also arise certain liabilities resulting from such failures. When a client appoints the law firm to conduct due diligence for it, it transfers the risk involved to the shoulders of the law firm by paying it for it. The hiring of a lawyer to make a due diligence report carries with it a factor of insurance. Therefore, when there is an error due to the use of AI, it exposes the law firm to liabilities. An important question that arises here is that, does such an error bring liability to the software manufacturer as well?

Keeping that aside and thinking just from the law firm's perspective, there can be certain possible solutions to the problem of liability of the firm. One of the solutions can be if the law firm accepts the entire risk by taking out insurance. The law firm can also, transfer the cost advantage accomplished through the use of the software to the client who would in return bear the entire risk. In this case, the software would also be chosen by the client. Another way of transferring the cost advantage accomplished through the use of the software to the client can be there. however, in this case, the software would be chosen by the firm itself and the entire risk would also be borne by it. Here, the client can be made to pay the risk premium as compensation. One easy way is if the law firm includes a disclaimer excluding itself from any liability arising in such cases. As a considerable amount can be saved from the use of AI software, it is quite probable that the clients would be willing to accept such a disclaimer and assume the entire risk itself.



Even though the greater part of the process of due diligence is carried during the implementation period, the post-diligence period is also very essential as it involves the process of making sure that an accurate assessment of the result of due diligence is done, and ensures smooth conversion of the due diligence stage to the deal completion stage and review. If the team conducting due diligence fails, the deal with the target company falls through, and this part of the process is also recorded to aid future deals.

An example of post diligence activity in an M&A due diligence would include:

·         For the Buyer- Post Merger integration and cultural adjustments;

·         For the Seller-Termination of data room and ownership exchange.

Scope And Purpose Of Follow-Up

Often, any non-compliance found during the process of due diligence is fixed at the post-diligence stage. Among different tasks arising out of the process of diligence are filing of a petition or an application for the purpose of compounding of various offences or negotiating the shareholders’ agreement, since the investors will be on a strong wicket and may negotiate the price very hard.[9]

A “shareholders agreement” is only executed after the rectifications are made following the reporting formalities. Consistent follow-ups and a methodical review are required for making these rectifications. Various clauses consisted in this agreement are: representations and warranties, tag along and drag along rights, condition precedents, and other clauses impacting the deal.

General Precautions For Avoiding Hurdles At The Time Of Follow-Up

At the time of preparation of the report, the agency that is conducting due diligence must make a final analysis of the files that were produced through the entire process of due diligence. The documents should also be put in a manner that they are readily available when needed.

This is essential as the client can at any point of time raise a question regarding a part of the report for which the agency might need to refer to a document to explain it to the client. If such an arrangement is not made at the time of the transaction, it is possible that the counsel might not be able to find the documents when needed which would make it impossible for him to recall the details of the negotiations.

Also, it might so happen that the client does not produce certain documents required for the conduct of due diligence even after requests from the agency. If these documents are provided post-diligence, the report must contain a scope of amendment or provision of a supplement report to include the essentials of the new document received.

Conducting Post-Diligence Review:  An Example Of M&A Deal[10]

A thorough evaluation and review must be made by the acquirer's management team of the results produced by due diligence. Such a review begins when a presentation is made by the due diligence team to the senior management team or the board of directors in certain cases as per the process of decision making and hierarchy inside the company. After this, a comprehensive assessment is made regarding the continuance of the acquisition.

In case the due diligence team finally recommends abortion of the acquisition plan, the acquirer team must sincerely and critically access the deal-sourcing process and analyse why the plan was forwarded in the initial due diligence and must learn from the entire process. To ensure that the knowledge gained from the experience does not go to waste and is stored for future use, a member of the due diligence team must be made in charge of knowledge management (KM) of the company. If the due diligence results in the failure of the target company, another recommendation for such acquisition should be made by the due diligence team regarding a similar sector, keeping in mind the corresponding size to the senior management team of the acquirer.

However, if the due diligence results in the passing through of the target company, a proper follow-up review must be carried on. Following thorough due diligence conducted by the due diligence team in the premises of the company, the senior management must efficiently look into the report to understand why the said acquisition was recommended. If the acquirer is intimate with the risks involved, it would be easier to mitigate them.



The general idea behind putting up a disclaimer is to make the preconditions loud and clear and it is done to wave off the professional liability and to avoid future risks, in this case, arising out of the report. There are certain risks like- Non-availability of information, the Unwillingness of the target company's personnel in providing the complete information, etc, which make the presence of the disclaimer clause even more important. There is also a need for standard qualifications to be inserted in the report to bypass liability and further, the firm can even ask the recipient for a reliance/non-reliance letter, ascertaining the liability.

Due diligence is an increasingly important and common practice that also often consumes a lot of time and resources. Artificial intelligence might help to solve this problem and increase efficiency by reducing time and cost. Although exposed to certain risks, AI is going to be the future of everything including Due Diligence and reduction of risk is a big hurdle which both AI and Firms conducting Due Diligence face.

The process doesn't stop after successfully conducting the due diligence as it needs proper follow-ups and post diligence reviews to ensure better results. The earlier articles in the series have already analysed all the aspects related to due diligence, one cannot emphasize enough on how it is all about proper risk management, and in many cases, the risk is dynamic. Hence, proper follow-ups are extremely important to ensure the efficiency of Due Diligence.

 The author of the post, Shashank Saurabh is a law student at NUSRL, Ranchi & Yash Mewara is a law Student at Institute of Law, Nirma University and currently intern at Corp Comm Legal under Mr. Bhumesh Verma.

[1] ICSI, Due Diligence and Corporate Compliance Management (The Institute of Company Secretary of India, 2011), 282, http://www.icsi.in/Study%20Material%20Professional/DUE%20DILIGENCE%20AND%20CORPORATE%20COMPLIANCE%20MANAGEMENT.pdf 

[2]ICSI, Guidance Note on Diligence for Banks (The Institute of Company Secretary of India, 2009), 6, https://www.icsi.edu/media/webmodules/pcs/GUIDANCE%20NOTE%20ON%20DILIGENCE%20REPORT%20FOR%20BANKS.pdf

[3] Pooja Patel, Path to successful M&A Transaction: An effective legal Due Diligence (The Institute of Company Secretary of India, 2017), 4, https://www.icsi.edu/media/portals/72/year%202017/presentation/Legal%20Due%20Diligence%20-%20180217%20-%20Pooja%20Patel.pdf

[4]Id at 5.

[5] Project Committee, IBA Corporate and M&A Law Committee Legal Due Diligence Guidelines (International Bar Association, 2018), 33, file:///C:/Users/Pc/Downloads/Corp-MA-Legal-Due-Diligence-Guidelines-September-2018-FULL%20(3).pdf


[7] Javier Tortuero, Artificial Intelligence and M&A Due Diligence Current Trends (New York State Bar Association) 3, http://www.nysba.org/Sections/International/Events/2017/Corporate_Wedding_Bells_CrossBorder_Mergers_and_Acquisitions/Coursebook/Panel_2/ARTIFICIAL_INTELLIGENCE_AND_MA_DUE_DILIGENCE_CURRENT_TRENDS.html

[8]Id at 39.

[9] ICSI, Due Diligence and Corporate Compliance Management (The Institute of Company Secretary of India, 2011), 12, http://www.icsi.in/Study%20Material%20Professional/DUE%20DILIGENCE%20AND%20CORPORATE%20COMPLIANCE%20MANAGEMENT.pdf

[10]Kwek Ping Yong, Due Diligence in China: Beyond the Checklist (Wiley, 2013), https://learning.oreilly.com/library/view/due-diligence-in/9781118469057/xhtml/Chapter08.html

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  • To Read, [Expert Corner Series] Due Diligence Checklist and What is to be done during Due Diligence by Riddhi Joshi- PART-V | Corp Comm Legal on Corporate LawClick Here
  • To Read, [Expert Corner Series] Origin of Due Diligence and What precedes due diligence by Bodhisattwa Majumder- PART-VI | Corp Comm Legal on Corporate Law, Click Here

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