Superior Court’s Complex Commercial Litigation Division Reaffirms Delaware’s Public Policy Against Intra-Contractual Fraud

Morris James LLP

Aveanna Healthcare, LLC v. Epic/Freedom LLC, N20C-08-055 AML CCLD (July 29, 2021).

Under Delaware law, parties may agree contractually to disclaim reliance – and potential liability for fraud – based on false extra-contractual statements. Delaware public policy, however, does not allow a party to disclaim liability for fraudulent statements within the parties’ contract. In addition, an owner who knowingly causes a company to make misrepresentations may be personally liable for fraud, even though an agreement provides such representations are made by “the company.”

Here, the purchase agreement contained representations by the companies attesting to the accuracy of their financial statements. The buyer discovered documents post-closing that allegedly showed the seller had falsified the financial statements to inflate the purchase price. Deciding the sellers’ motion for judgment on the pleadings, the Court held that, under its own terms, the anti-reliance clause at issue expressly was applicable to extra-contractual representations, not the intra-contractual representations concerning the companies’ financial statements; its plain language thus mirrored the result impliedly compelled by Delaware public policy. The Court also rejected the seller’s argument that the fraud claim was based on extra-contractual statements merely because alleged evidence of the alleged fraud came from documents (here, internal company emails discovered post-closing) outside of the purchase agreement. 

 The Court also held that certain owners could not avoid fraud liability simply because the company made the representations at-issue in the purchase agreement. Reviewing Delaware cases on this issue, the Court reasoned that under the Court of Chancery’s 2006 ABRY Partners decision and its progeny, sellers may be liable for fraud if they knew the representations were false when made. Here, the buyer had sufficiently pleaded the seller’s knowledge. 

 Accordingly, the Court denied the sellers’ motion for judgment on the pleadings.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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