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Party Uniquely Escapes An Arbitration Provision, While The Court Reminds Us That Bootstrapped Fraud Claims Are Impermissible In Delaware

Posted In Arbitration, CCLD, Fraud, M&A

AluminumSource, LLC v. LLFlex, LLC, C.A. No: N18C-07-231-EMD CCLD (Del. Super. Jan. 21, 2021)

Delaware courts commonly enforce (and support) arbitration provisions, submitting disputes under the governing contract to a third-party neutral. Equally common is the dismissal by Delaware courts of fraud claims “bootstrapped” to a breach of contract based on allegations that a contracting party never intended to perform its obligations. This recent decision from the Superior Court’s Complex Commercial Litigation Division is the unique case where, on the first issue, an arbitration provision was found unenforceable due to impossibility of performance. On the second issue, this case confirms settled law that bootstrapped fraud claims are impermissible in Delaware.

The parties to this dispute entered into a sale contract for a business unit and, as is common in such transactions, included a methodology by which the closing price would be calculated, with any disputes submitted to a third-party neutral. The Seller defended against claims that it had fraudulently induced the buyer through its closing price calculation on grounds that the dispute should be submitted to the arbitrator under the terms of the parties’ contract. In the unusual circumstances at issue, the Court found that the arbitration provision was unenforceable because Grant Thornton, the named arbitrator, had refused to perform its duties, claiming a conflict of interest. Specifically, the arbitration provision failed for impossibility of performance. Despite this atypical holding based on a unique set of facts, the Court dismissed the fraud claim on familiar grounds. The buyer’s allegations of misrepresentations in the seller’s closing price calculations allegedly violated a contractual promise to provide a good faith estimate of working capital prepared in accordance with GAAP, which promise allegedly was made to induce the buyer to enter into the agreement. The Court was skeptical the promise could have induced entry into the contract, as the estimate could be provided as late as three days prior to closing. In any event, the Court held that the buyer had impermissibly bootstrapped its fraud claim to a breach of contract, warranting dismissal.

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