Court of Chancery Holds "Anti-Reliance" Contract Provisions Cannot Exclude Liability For Fraudulent Misrepresentations
Abry Partners V, L.P., et al. v. F&W Acquisitions LLC, et al., C.A. No. 1756-N, (Del. Ch. Feb. 14, 2006) (published at 891 A.2d 1032 (Del. Ch. 2006).
This is plaintiffs' suit for rescission of a corporate acquisition contract. The seller moved to dismiss the case for failure to state a claim. The court focused on the law and policy of the unambiguous bar to recessionary relief and limitations in damage recovery for misrepresentations through the contract's exclusive indemnity-limiting provision.
The court reconciled the power of privately ordered contracts allocating risk between the parties and Delaware's public policy disfavoring a bar on recessionary remedies and damages for willful misrepresentations. Additionally, the court examined the elective remedies available to the plaintiff-buyer.
A buyer acting through a sophisticated and affiliated equity-entity bought a portfolio publishing company. The stock purchase agreement secured the buyer's promises by carefully restricting its right to relief even for willful misrepresentations through an "anti-reliance" clause and limited damages to 4% of the sale price. The court examined various contract provisions that purportedly carried misrepresentations and limited the remedies.
Applying Delaware's law by a "choice-of-law" provision, the court observed that a schedule attached to the amended Complaint fulfilled the particularized fraud-pleading requirements under Ch. Ct. R. 9(b).
The plaintiff attacked the contract's indemnification restrictions on public policy grounds. Agreeing with the seller that its exclusive remedy provisions were correct, the court nevertheless struck down sellers arguments on public policy grounds after exhaustively tracing Delaware precedent and legislative intent. Drawing a distinction between enforcement of "non-reliance" clauses and the actual act of misrepresentation through a public-policy lens, the court examined Delaware's law of exculpation and held that it did not extend to lies and willful misrepresentations.
The court thus denied the seller's motion to dismiss on all grounds except negligent misrepresentation. The court also required the plaintiff to elect either rescission or compensatory damages as a remedial measure if it could prove "reasonable reliance" in its fraud claim.