RAA Management, LLC v. Savage Sports Holdings, Inc., No. 577, 2011 (Del. May 18, 2012).
Issue Addressed: Whether a disclaimer in a non-disclosure agreement barred claims for fraud by a potential buyer of a business. Short Answer: Yes.
Supplement: Professor Bainbridge has a post that addresses this issue in his usual scholarly manner and also links to this summary by your truly.
This appeal involved RAA Management, LLC which was one of several bidders for the defendant, Savage Sports Holdings, Inc. A precondition to Savage providing RAA with confidential information about the company was that RAA enter into a non-disclosure agreement (“NDA”). RAA terminated negotiations with Savage before the parties executed a final sale agreement. RAA claimed $1.2 million that it spent in due diligence and negotiation costs, and that were incurred prior to RAA becoming aware of “significant unrecorded liabilities or claims against Savage,” that Savage did not disclose. The trial court dismissed the claims.
The Supreme Court assumed that New York would apply, even though the trial court did not specify whether Delaware law or New York law applied, but the High Court of Delaware concluded that “the outcome would be the same under Delaware law.”
The Court cited to two prior decisions by the Delaware Court of Chancery that were “virtually identical to the issues in the present case. In both cases, the Court of Chancery found the disclaimer language at issue to be unambiguous under both New York and Delaware law.” See Great Lakes Chemical Corp. v. Pharmacia Corp., 788 A.2d 544 (Del. Ch. 2001); In re IBP, Inc. S’holders Litig., 789 A.2d 14 (Del. Ch. 2001).
In the Great Lakes case, the Court of Chancery held that several clauses in a purchase agreement between two sophisticated corporations precluded the buyer from asserting any fraud claims against the seller under Delaware law. That case involved an NDA almost identical to the one in the instant appeal, and prevented any liability resulting from any information made available to the buyer or any representations as to the accuracy or completeness of any information made in connection with an investigation or due diligence of the company. The IBP, Inc. case also barred fraud claims due to a disclaimer in an NDA. That case dismissed claims that the seller lied during the due diligence discussions about the current sales performance of the target.
The Court also referred to Delaware case law involving the following principle: “Contract interpretation that adds a limitation not found in the plain language of the contract is untenable.” See fn. 4.
Public Policy Supports Disclaimers for Statements Outside Contract
The Court also rejected the public policy arguments. The only case cited in support of the appellant’s public policy arguments was Abry Partners V, L.P. v. F&W Acquisition LLC, 891 A.2d 1032 (Del. Ch. 2006). The Abry Partners case explained the public policy of Delaware that favors enforcing contractually binding, written disclaimers of reliance on representations outside of a final sales agreement. The decision in that case emphasized that a contract between sophisticated parties would be upheld if it contains a provision that explicitly disclaims reliance upon representations outside of a contract.
The Abry Partners Court distinguished fraud claims based on representations made outside of a merger agreement – which can be disclaimed through nonreliance language – – with fraud claims based on “false representations of fact made within the contract itself” – – which cannot be disclaimed. See fn. 25 and 26.
The Court emphasized that Abry Partners accurately states Delaware law and explains Delaware’s public policy in favor on enforcing contractually binding written disclaimers of reliance on representations outside of a final agreement of sale or merger.
The Court also emphasized that the purpose of a confidentiality agreement is to promote and facilitate such precontractual negotiations; and nonreliance clauses in a confidentiality agreement are intended to limit or eliminate liability from misrepresentations during the due diligence process.
The Court opined that: “The efficient operation of capital markets is dependent upon the uniform interpretation and application of the same language and contracts or other documents . . . [T]he reasonable commercial expectations of the parties as set forth in a nonreliance disclaimer clauses . . . must be enfoced.”
Those involved in the drafting of nonreliance clauses and those who seek to enforce or defend agreements with disclaimers designed to prevent claims of misrepresentation based on statements or omissions outside of a contract, need to read this opinion.