A recent Delaware Court of Chancery decision is noteworthy for its clarification of the nuanced contours of Delaware law regarding contractual restrictions on the perennial feature of Delaware commercial litigation, known as post-closing fraud claims. In Online Healthnow, Inc. v. CIP OCL Investments, LLC, C.A. No. 2020-0654-JRS (Del. Ch. Aug. 12, 2021), the court pronounced key statements of Delaware law on the titular topic in ruling on a Motion to Dismiss. The best way to begin short highlights of this 60-page decision is with a money quote:
“Under Delaware law, a party cannot invoke provisions of a contract it knew to be an instrument of fraud as a means to avoid a claim grounded in that very same contractual fraud.”
Slip. op. at 4. See generally seminal Chancery decision in Abry and its progeny, some of which have been highlighted on these pages.
Selected Key Facts:
Of course, a detailed grasp of the extensive factual recitations in this opinion are important for a full understanding of its holding, but a few selected key facts include the following: The Stock Purchase Agreement (SPA) involved in this post-closing dispute included representations that all tax returns of the seller were timely filed and accurate, and that there were no undisclosed liabilities. By contrast, the complaint alleges in extensive detail that large tax liabilities were not disclosed and that they were actively hidden during the due diligence period.
The buyer represented that it had accurate access to the records of the seller, and the SPA included anti-reliance provisions stating that the buyer was not relying on any representations other than those in the SPA.
The SPA also had detailed procedures to address post-closing purchase price adjustments, such as working capital. Disputes within the scope of that provision were to be submitted to an independent accounting firm.
But the parties contested what issues, or if all the issues, were required under the SPA to be submitted to the independent accounting firm, and whether the SPA allowed for any issues to be litigated in court.
Key Statements of Law:
• The court explained that Delaware public policy prohibits a party from contractually exempting itself for liability for fraud, or avoiding liability for intentionally or recklessly causing harm. Slip op. at 35-40. The opinion also relies on the reasoning in the Prairie Capital case, for example, with the following quote: “flesh and blood humans also can be held accountable for statements that they cause an artificial person, like a corporation, to make”. 132 A.2d at 59.
• The opinion includes a discussion of case law relating to the impact of “survival clauses” in connection with Delaware public policy against contractual barriers to fraud claims. Slip op. at 41-46.
• The weight of authority and public policy as explained in this decision, and applied to the facts of this case, prevented the use of the savings clause in the SPA to bar contractual fraud claims. Specifically, the court reasoned that:
“Sellers cannot invoke a clause in a contract allegedly procured by fraud to eviscerate a claim that the contract itself is an instrument of fraud.”
Slip op. at 52-53.
• The court also emphasized that the non-recourse provisions in the SPA could not be relied on to bar the fraud claim. Slip op. at 53-54.
• The parties agreed that the fraud claims were outside of the scope of the post-closing issues that the SPA required to be submitted to an accounting firm but disagreed on what other claims were required to be submitted to the accounting firm.
• In closing, the court determined that the scope of the fraud, if any, that occurred, was a ripe controversy for purposes of a declaratory judgment claim that must be decided by the court before the neutral accounting firm provided for in the SPA could begin its work. See footnote 217 and accompanying text (compiling cases on this topic regarding the scope of an accountant’s role to decide post-closing disputes).