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Court of Chancery Explains Contract, Fraud, and Fiduciary Duty Standards in Contingent Deal Price Dispute

Edinburgh Holdings Inc. v. Education Affiliates Inc., C.A. No. 2017-0500-JRS (Del. Ch. June 6, 2018)

It is common for parties to an acquisition to structure some portion of the purchase price as contingent on the acquired company’s post-close performance. With some frequency, a party dissatisfied with the resulting payment sues for breach of contract and may point the finger at those in charge during the relevant period for measurement. Out of this particular example comes reminders on well-settled standards for breach of the implied covenant of good faith and fair dealing, fraudulent inducement, and breach of fiduciary duty.  For instance, the implied covenant may be deployed as a defense to a breach of contract claim based on one party preventing the other’s performance, but it may not be used as an affirmative claim to override a contract’s express terms.  Further, Delaware law does not permit bootstrapping fraudulent inducement claims onto contract claims by alleging that a party never intended to perform its obligations.  Additionally, predictions about future performance generally cannot be the basis for fraud.  Finally, Delaware courts will dismiss a breach of fiduciary duty claim that is entirely duplicative of a breach of contract claim.