In a recent Delaware Court of Chancery decision in Edinburgh Holdings, Inc. v. Education Affiliates, Inc., C.A. No. 2017-0500-JRS (Del. Ch. June 6, 2018), the court addressed certain procedural rules that should be of interest to corporate and commercial litigators to the extent that the court explains when certain causes of action may or may not be pursued at the same time in the same case.
This case involved the sale of an education-related business that provided for future payments contingent upon the acquired business achieving certain revenue targets after closing. The contingent purchase price was payable in four annual installments. The litigation arose from the refusal of the buyer to make the final annual payment.
Key Legal Principles Addressed by the Court:
For purposes of this short blog post, it is useful to address three important principles applicable to corporate and commercial litigation that should be of widespread applicability and interest.
- The court explains those situations in which a breach of contract claim–and a breach of the implied covenant of good faith and fair dealing–may be pursued in the same case. There are situations where such claims would be duplicative, or an implied covenant claim would be preempted by a breach of contract claim for the same actions, but this opinion explains when one may “thread the needle” to pursue both claims at the same time. See Slip op. at 21 and footnotes 82 to 84.
- Likewise, dual claims of both breach of fiduciary duty and breach of contract in the same case may only be pursued when they do not run afoul of the following prohibition:“Delaware courts will dismiss a breach of fiduciary duty claim where it overlaps completely with a breach of contract claim and arises from the same underlying conduct or nucleus of operative facts as the breach of contract claim. To determine whether there is an independent basis for fiduciary claims arising from the same general events, the Court inquires whether the fiduciary duty claims depend on additional facts as well, are broader in scope, and involve different considerations in terms of potential remedy.” See Slip op. at 38 and footnotes 136 and 137.
Another articulation of well-established law in this decision that is of great practical usefulness for commercial litigators is the truism that the court explained: one cannot “bootstrap” a breach of contract claim into a fraud claim. See Slip op. at 26 and 27 as well as footnotes 100 and 101. In particular, the court explained that:
- “Delaware law holds that a plaintiff cannot “bootstrap” a claim of breach of contract into a claim of fraud merely by alleging that a contracting party never intended to perform its obligations. In other words, a plaintiff cannot state a claim for fraud simply by adding a term ‘fraudulently induced’ to a complaint or alleging that the defendant never intended to comply with the agreement at issue when the parties entered into it.”
- Moreover the court observed that “couching an alleged failure to comply with a contract as a failure to disclose an intention to take certain actions arguably inconsistent with that contract is exactly the type of bootstrapping this court will not entertain.”