In Wal-Mart Stores, Inc. v. AIG Life Insurance Company, download file, the Delaware Supreme Court addressed claims that have now been reviewed twice each by the trial and appellate courts in Delaware. The high court reversed the Chancery Court’s decision that dismissed an amended complaint.
The Supreme Court found that the amended complaint adequately alleges a claim of fraud in pleading that AIG sold Wal-Mart a product that was an economic sham designed to create enormous tax deductions and that AIG did so knowing that their product was flawed and without disclosing that those flaws jeopardized the favorable tax treatment that formed the basis of the deal. Page 8 of the decision, which is available at the above link, provides the three citations to the three prior reported decisions.
Although reversing the trial court, the Delaware Supreme Court did agree with the Chancery Court that Wal-Mart failed to state a claim under the doctrine of commercial frustration which excuses future performance under a contract only as follows:
“where, after a contract is made, a party’s principle purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or circumstances indicate to the contrary.”
In addition, the Supreme Court agreed with the Chancery Court that there was no fiduciary duty and no fiduciary relationship created by the transaction between the parties,as the court defined them, and cited to authorities discussing when a fiduciary relationship would be created, despite labels such as “agent”. In this instance, the court agreed that the relationship with the insurance company and Wal-Mart was a “normal, arm’s-length business relationship.”
The Supreme Court also discussed the law of equitable fraud.
(see below link for completion of summary).
This variant of common law fraud can include a statement that is: “facially true . . . [but] may constitute an actionable misrepresentation if it causes a false impression about the true state of affairs, and the act had failed to provide qualifying information to cure a mistaken belief (citing Norton v. Poplos, 443 A.2d 1, 5 (Del. 1982) (referring to Norton as describing different types of misrepresentations in its consideration of the innocent misrepresentation at issue.))
Finally, the Supreme Court noted that equitable fraud does not “swallow” common law fraud because it can only be applied in those cases in which one of two fundamental sources of equity jurisdiction exists: “An equitable right founded upon a special relationship over which equity takes jurisdiction; or where equity affords a special remedy (e.g., rescission or cancellation).” However the Supreme Court deferred to the Chancery Court to consider the issue of equitable jurisdiction upon remand.
The claims and defenses discussed in this opinion have wide application in many business litigation cases including those involving the DGCL.