Chancery Applies Contract’s Choice of Law to Related Fraud Claims, Declines to Dismiss Fraud Claims Where Contract Lacked Clear Anti-Reliance Language
The Anshutz Corp. v. Brown Robin Cap., LLC, 2019-0710-JRS (Del. Ch. June 11, 2020)
In dealing with what the Court of Chancery called “a version of a [commercial] dispute as old and abiding as commerce itself,” the Court provides insights useful to drafters of both pleadings and contracts.
Plaintiffs (the buyer and its parent) brought fraud and breach of contract claims arising out of their acquisition of OnRamp, a provider of customer data management services. According to Plaintiffs, Defendants provided inflated revenue projections and misleading financial data, and Defendants failed to disclose anticipated service reductions by a large client. Deciding the Defendant-sellers’ motion to dismiss, the Court largely upheld the buyer’s claims based on specific factual allegations. Several aspects of the opinion are particularly instructive.
First, the Court dismissed the buyer’s parent as lacking standing. Although the parent provided the funding for the buyer, its claims rested on the same legal theories as the buyer and alleged no injury distinct from that of the buyer’s. Endorsing the approach from the Southern District of New York, the Court reasoned that the parent suffered no direct injury, and its claim would not be against Defendants but against the buyer for a share of the buyer’s potential recovery. To avoid dismissal, a corporate parent in a similar situation should allege independent injury or separate legal theory from that of the parent’s subsidiary.
Second, the Court concluded that the parties’ contractual choice of Delaware law meant that Delaware law also governed the buyer’s fraud claims. Comparing the case to Abry P’rs V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032 (Del. Ch. 2006) (Strine, V.C.), the Court found that the buyer’s breach of contract and fraud claims involved virtually the same conduct, and the fraud claim was also “entangled at a granular level with the operative contract’s allocation of risk.” The Court rejected the buyer’s assertion that Abry was no longer persuasive. It instead restated Abry’s conclusion that applying different laws to the intertwined claims would create the “kind of confusion contractual choice of law provisions are meant to avoid.”
Finally, the Court rejected Defendants’ attempts to defeat the buyer’s fraud claims based upon the agreement’s language and bootstrapping. Although the parties’ contract expressly disclaimed any extra-contractual representations and warranties and it included a standard integration clause, it did not include an affirmative “express disclaimer of reliance” by the buyer. The Court reasoned that, while no particular “magic words” were required, “when the contract does not actually include a specific acknowledgement by a party that it is only relying on information contained within the four corners of the agreement, that party [alleging fraud] is not shirking its bargain when it later alleges that it did, in fact, rely on extra-contractual representations.” The Court distinguished this case from others in which Delaware courts had found stronger language amounted to clear anti-reliance clauses. Similarly, the Court rejected Defendants’ contention that the buyer had impermissibly “bootstrapped” a claim of breach of contract into a claim of fraud. The Court recognized that, in many instances, fraud claims based on misrepresentations in a contract may not proceed in parallel with contract claims alleging breaches of such representations. But, as the Court noted, an exception exists when a seller knowingly makes false representations and when a buyer seeks additional relief, such as rescission (or rescissory damages), rather than only compensatory damages under the contract itself. Because the fraud claim met this standard, it survived dismissal.Share