The Delaware Court of Chancery recently published a comprehensive and scholarly analysis of the limited scope of the subject-matter jurisdiction of Delaware’s court of equity, and refused to accept a case that sought a permanent injunction, in a formal opinion styled: In re Covid-Related Restrictions on Religious Services, Consol. C.A. No. 2021-1036-JTL (Del. Ch. Nov. 22, 2022).

Practice Tip: Depending on the level of scrutiny given by the court, either sua sponte or in response to the arguments made by the parties, if any, the request in a complaint for injunctive relief may not be sufficient to satisfy the requirements for enjoying the capacious benefits of the jealously-protected, narrow, equitable subject-matter jurisdiction of the Court of Chancery.

This decision corrects several mistaken prior Delaware decisions, and persuasively describes the true prerequisites for obtaining a permanent injunction. See Slip op. at 46-47.

Prefatory Comments

Experienced equity practitioners should be forgiven if they discover when reading this thoughtful decision that the finer points and nuances of the circumscribed boundaries of the equitable jurisdiction of the Court of Chancery are not always absolutely clear–if only because the members of the court do not always uniformly give this somewhat esoteric issue the same level of scrutiny. In addition, there are cases where final decisions have been rendered but neither the parties nor the court sua sponte raised the issue of equitable jurisdiction.

Most veteran Delaware litigators naturally would think that if injunctive relief (a typical equitable remedy) were to be requested, that the Court of Chancery would have subject-matter jurisdiction–but that is not always true, and it was not true in the instant case.

For those experienced equity practitioners who thought they understood the equitable basis for the Court of Chancery’s limited jurisdiction, and wonder why the court in this case rejected subject-matter jurisdiction when injunctive relief was requested, perhaps their self-doubt might be assuaged by the court’s observation in the instant opinion that many prior Delaware decisions were wrong when they did not follow the majority view nationwide about what the requirements are for a permanent injunction. See Slip op. at 42-43 and n.9.

Although the Court of Chancery has, both recently and in the more distant past, awarded injunctive relief to enjoin the enforcement of unconstitutional statutes, and it remains well-settled generally that the violation of constitutional rights amounts to irreparable harm, see generally, Doe v. Coupe, C.A. No. 10983-VCP (Del. Ch. July 14, 2015)(highlighted on these pages), the instant case (and another recent letter ruling), found that the Court of Chancery lacked equitable jurisdiction notwithstanding the request for injunctive relief based on the violation of constitutional rights.

Procedural and Factual Overview of the Decision

This case sought permanent injunctive relief based on allegations that restrictions on religious worship during formal religious services imposed during the height of the Covid-19 pandemic by the Governor of Delaware were violations of fundamental constitutional rights. Those restrictions were eventually lifted more than two years ago, in part due to settlement of a federal lawsuit in Delaware making similar allegations–but the plaintiffs sought permanent relief to prevent similar future violations of their rights by the Governor. The Governor moved to dismiss for lack of subject-matter jurisdiction in Delaware’s court of equity.

The opinion begins with a overview of the almost two dozens Emergency Orders, as amended, that Delaware’s Governor issued, starting in early 2020, as the Covid-19 pandemic resulted in many public activities around the country and the world grinding to a halt.

Legal Analysis

In addition to engaging in a deep-dive into the underpinnings of equity jurisdiction, the court also provides a practical review of the basics.

The Basics

For example, the three typical triggers for equitable subject-matter jurisdiction that open the doors of Delaware’s court of equity generally include the following:

The court “can acquire subject matter jurisdiction in the first instance by three different means: (1) the invocation of an equitable right; (2) a request for an equitable remedy when there is no adequate remedy at law; or (3) a statutory delegation of subject matter jurisdiction.” Kraft v. WisdomTree Invs., Inc., 145 A.3d 969, 973 (Del. Ch. 2016) (cleaned up). “[W]here a remedy provided by a law court of the state would be sufficient, that is, complete, practical, and efficient, this Court is without jurisdiction.” Int’l Bus. Machines Corp. v. Comdisco, Inc., 602 A.2d 74, 78 (Del. Ch. 1991) (cleaned up).

Slip op. at 29.

Requirements for a Permanent Injunction–And Why Prior Delaware Cases Are Wrong on this Point

The court candidly explains why, understandably, several prior Delaware decisions that have described the requirements for obtaining a permanent injunction are simply wrong:

Sometimes a Delaware decision deviates from a settled or majority rule intentionally and for good reason.³ Other times, a little digging uncovers one of the inevitable spontaneous mutations generated by an adversarial process in which practitioners
understandably seek to depict authorities in the manner most favorable to their clients, and in which busy judges do not always have the time for reflective consideration of every legal issue in the case.

This opinion then provides detailed reasoning, with copious citations, for this conclusion:

Delaware’s customary framing of the standard for a permanent injunction errs by projecting onto the ultimate remedial determination the requirement from earlier phases of the case that a plaintiff show imminent irreparable harm. When a party seeks interim injunctive relief, such as through a TRO or preliminary injunction, the plaintiff must show why the court needs to act at an early stage, before a final adjudication. A plaintiff makes the necessary showing by pointing to a threat of something happening that cannot be addressed after a final adjudication during the remedial phase, i.e., a threat of irreparable harm. Additionally, the threat must relate to something that may transpire before the case can reach a final adjudication during the remedial phase, i.e., it must be imminent. To earn a TRO or a preliminary injunction, therefore, a plaintiff must show imminent irreparable harm. (Some citations omitted.)

But when a plaintiff seeks permanent injunctive relief after a final adjudication, a showing of irreparable harm is sufficient but not necessary. As a leading  procedural treatise explains, it should be noted that although a serious threat of irreparable injury usually must be shown on an application for a temporary-restraining order or a preliminary injunction, irreparable injury is not an independent requirement for obtaining a permanent injunction; it is only one basis for showing the inadequacy of the legal remedy.

Wright & Miller, supra, § 2944 (footnotes omitted). There is also no longer a near-term temporal requirement for the harm to take place before the court can review the matter further. Because the court is issuing its final ruling, the question is whether a permanent injunction is warranted because legal remedies are inadequate. The considerations driving that analysis need not be imminent; they need only be persuasive.

[The court divides into three parts its explanation for why imminent irreparable harm is not a requirement for a permanent injunction.]

This decision rejects the Governor’s argument that a permanent injunction requires a showing of imminent irreparable harm. The more detailed explanation unfolds in three parts. First, this decision describes the different forms of injunctive relief and the purposes they serve, which illustrates why imminent irreparable harm is a necessary element of the test for a TRO or a preliminary injunction but not for a permanent injunction. Second, this decision explains why the proper formulation of the standard for a permanent injunction should examine the inadequacy of other remedies. Finally, this decision explores how the irreparable injury prong entered Delaware’s permanent injunction test and confirms that it reflects an unintentional jurisprudential mutation rather than a conscious choice.

3 See Aranda v. Philip Morris USA Inc., 183 A.3d 1245, 1251–52 (Del. 2018)(“Although the federal courts and most state courts require an available alternative forum before dismissing for forum non conveniens, our Court never adopted this requirement. Admittedly, our cases have not directly addressed the question. But, several factors point to an implicit rejection of the requirement.” (footnotes omitted)); Abry P’rs V, L.P. v. F & W Acq. LLC, 891 A.2d 1032, 1059–64 (Del. Ch. 2006) (Strine, V.C.) (discussing the majority rule in Restatement (Second) of Contracts § 195 which prevents a contract from insulating a party from the consequences of its fraudulent conduct, then permitting a contractual anti-reliance clause to defeat a claim for extra-contractual fraud).

Slip op. at 32-34; and 42-43.

The court described the three different forms of injunctive relief that may be available–sometimes–in the Court of Chancery, and the subtle differences between them:

(i) TRO;

(ii) Preliminary Injunction; and

(iii) Permanent Injunction (which are further divided into mandatory and prohibitive injunctions.)

Slip op. at 34-38.

Inadequacy of Legal Remedy Required–But Irreparable Harm Not Needed for Permanent Injunction

Even experienced equity practitioners in Chancery who are familiar with equity practice may not be familiar with the minutiae discussed by the court in its explanation about why it must be demonstrated that a remedy at law would be inadequate–but notably: that irreparable harm is not a prerequisite for obtaining a permanent injunction. Slip op. at 38 and n.5. See also Slip op. at 44 and n.10-11.

After explaining why irreparable harm is not needed for a permanent injunction, though it remains one of several ways to show the inadequacy of a legal remedy, the court provided other examples of how the requisite inadequacy of a remedy at law may be demonstrated:

  • If the defendant is insolvent and a judgment would not be collectible, but the defendant is capable of performance to which plaintiff is entitled as an alternative to the money.
  • Defendant’s actions would require plaintiff to bring more than one suit to effectuate a legal remedy.
  • Money damages cannot be measured with any degree of accuracy, and are so speculative that any award would be inadequate.

Slip op. at 43.

The court also noted that in addition to the common formulation of money damages not being sufficient to make a party whole, the situation may exist when:

… the legal remedy is not as practicable and efficient toward the ends of justice as an injunction.

Slip op. at n.6

Proper Formulation for Requirements to Obtain Permanent Injunction–Correcting Prior Errant Chancery Decisions on this Topic

Practitioners take note: contrary to prior recitations in prior Chancery decisions, the correct list of prerequisites for a permanent injunction include the following:

  1. Actual success on the merits.
  2. Inadequacy of a remedy at law; and
  3. Balancing of the equities that favors an injunction.

Slip op. at 46.

Additionally, in order to satisfy the test for equitable subject-matter jurisdiction when seeking a permanent injunction, a threshold requirement is to allege facts that:

“create a reasonable apprehension of a future wrong.”

Slip op. at 46-47.

The Reasonable-Apprehension Test

Two competing considerations must be addressed when attempting to satisfy this requirement:

  • injunctions against future wrongdoing are generally unavailable–especially against government entities; but
  • “on the other hand”, … where there is a reason to believe that a defendant will resume his wrongful course of conduct, a court may issue a permanent injunction.

Slip op. at 47.

However, to invoke equitable jurisdiction, there must be more than “unsupported, subjective concern about a future harm….” Slip op. at 48.

Court’s Conclusion

The reasonable-apprehension requirement was not satisfied in this case to the extent that there was no likelihood that the restrictions imposed on churches during the height of the pandemic are likely to be repeated, especially in light of the Governor not imposing the initial restrictions, later lifted, when subsequent surges of Covid-19 arose two years after the initial orders were terminated–and in light of the Federal Court settlement in which the Governor agreed not to impose similar restrictions.


In closing, the court provided a potential avenue for the plaintiff to return to the Court of Chancery if, in the future, the Governor were to fail to comply with the order of another Delaware court: in which case “… coercive relief from this court will be available.” Slip op. at 50.

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).

A recent Delaware Court of Chancery decision addressed the issue of whether a seller was liable for not disclosing the notification it received prior to closing that one or more key customers were terminating their relationship with the seller’s business. Swipe Acquisition Corporation v. Krauss, C.A. No. 2019-0509-PAF (Del. Ch. Aug. 25, 2020). This decision and others cited below must be read by anyone who seeks a deep understanding of Delaware law on this topic.

Key Issue Addressed:

When will a fraud claim survive in connection with a purchase agreement that restricts claims for misrepresentations and limits claims for indemnification? In this case, most of the motion to dismiss was denied, but one of the reasons this decision is noteworthy is because it exposes the lack of a bright-line-rule on this issue when compared to other decisions addressing the same or similar issues–depending on the specific terms of the anti-reliance clause involved and the specific claims of fraudulent misrepresentations or omissions.

Many cases addressing this issue have been highlighted on these pages over the last 15 years. E.g., the Prairie Capital case in which yours truly was one of the counsel involved, and the ChyronHego Corp. decision.

As an indication of how common this issue is, a few days ago the Court of Chancery issued another decision that addressed the titular issue: Pilot Air Freight, LLC v. Manna Freight Systems, Inc., No. 2019-0992-VCS (Del. Ch. Sept. 18, 2020).

But we are fortunate to have a compilation of cases by the highly valuable electronic publication called The Chancery Daily (subscription required) that has compiled cases that have addressed the titular issue and which–though factually determinative to the extent the cases are tethered to their facts–manifest what some readers might describe as a lack of unanimity or at least the lack of a bright-line-test. This topic could easily be the subject of a law review article, but for present purposes, with thanks to The Chancery Daily, in its editions dated September 14, 15, and 17, 2020, the following cases should be consulted for anyone interested in a comprehensive understanding of Delaware law on this topic:

ABRY Partners V, LP, et al. v. F&W Acquisition, LLC, et al., C.A. No. 1756-VCS, opinion (Del. Ch. Feb. 14, 2006)

Anvil Holding Corp., et al. v. Iron Acquisition Co., Inc., et al., C.A. No. 7975-VCP, memo. op. (Del. Ch. May 17, 2013)

TEK Stainless Piping Products, Inc. v. Sheila Mahony Smith, et al., C.A. No. N13C-03-175-MMJ-CCLD, memo. op. (Del. Super. Oct. 14, 2013)

Universal American Corp. v. Partners Healthcare Solutions Holdings, LP, et al., C.A. No. 13-1741-RGA, memo. op. (D. Del. July 24, 2014)

ITW Global Investments, Inc. v. American Industrial Partners Capital Fund IV, LP, et al., C.A. No. N14C-10-236-JRJ-CCLD, opinion (Del. Super. June 24, 2015)

FdG Logistics, LLC v. A&R Logistics Holdings, Inc., C.A. No. 9706-CB, opinion (Del. Ch. Feb. 23, 2016);

Universal American Corp. v. Partners Healthcare Solutions Holdings, LP, et al., C.A. No. 13-1741-RGA, memo. op. (D. Del. Mar. 31, 2016)

IAC Search, LLC v. Conversant, LLC, C.A. No. 11774-CB, memo. op. (Del. Ch. Nov. 30, 2016)

Stephen B. Trusa v. Norman Nepo, et al. and XION Management, LLC, C.A. No. 12071-VCMR, memo. op. (Del. Ch. Apr. 13, 2017)

ChyronHego Corp., et al. v. Cliff Wight, et al., C.A. No. 2017-0548-SG, memo. op. (Del. Ch. July 31, 2018)

Affy Tapple, LLC v. ShopVisible, LLC, et al., C.A. No. N18C-07-216-MMJ-CCLD, opinion (Del. Super. Mar. 7, 2019)

Joseph C. Bamford, et al. v. Penfold, LP, et al., C.A. No. 2019-0005-JTL, memo. op. (Del. Ch. Feb. 28, 2020)

Wind Point Partners VII-A, LP v. Insight Equity AP X Co., LLC, et al., C.A. No. N19C-08-260-EMD-CCLD, opinion (Del. Super. Aug. 17, 2020)

Some of the foregoing cases have been highlighted on these pages. This may not be a complete list of Delaware cases that cover the fraud v. anti-reliance clause issue, but it’s a great start.

Key Facts of Swipe case:

This case involves a dispute over the lack of disclosure by the seller prior to closing when the seller learned that a key customer was claiming to terminate its business relationship even though the sales price was impacted by the existence of key customers. The sellers knew that if the buyers learned of the termination by the key customer involved that the deal might not close. See Slip op. at 8. Nonetheless, the sellers did not inform the buyers of the termination of the key customer at issue. Moreover, the sellers did not amend any of the financial information provided to the buyers, which had then become stale. Id. at 9. Based on weaker-than-expected performance before the closing, the buyers and the sellers did agree to reduce the purchase price even though the loss of the key customer was not disclosed.

Key Principles of Law with Widespread Applicability:

  • The court cited to multiple cases to explain when an anti-reliance clause will not bar a fraud claim. See Slip op. at 28-29.
  • The court also elucidates when a fraud claim and a contract claim will not be considered duplicative; when both can proceed at the preliminary stage of a case; and when a contract claim and a fraud claim will not be considered boot-strapped. See id. at 31-33.
  • The court explained why duplicative claims may often survive at the motion to dismiss stage. See footnote 61 and accompanying text.
  • The court explained the primacy of contract law in Delaware, and when parallel contract claims and breach of fiduciary duty claims may not proceed in tandem. See footnote 58 and accompanying text.

In addition to the cases cited above on the topic at hand, this decision should be compared with the Delaware Superior Court’s Infomedia decision that was issued just a few short weeks before this Chancery ruling. Of course, the exact terms of the applicable agreements and the detailed circumstances are often determinative, but in the unrelated Delaware Superior Court decision about a month earlier, the court concluded that the failure to inform the sellers shortly before the execution of an asset purchase agreement that key customers intended to terminate their service contracts, even though written notice had not yet been received, would not be a sufficient basis for fraudulent misrepresentation claims due to anti-reliance provisions in an asset purchase agreement, thereby resulting in a grant of the motion to dismiss, based on the terms of the agreement involved in that case. See Infomedia Group Inc. v. Orange Health Solutions, Inc. (Del. Super. July 31, 2020).


This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

The Chancery Court recently green-lighted key parts of an investment company’s suit against officers and owners who allegedly inflated their I.T. and data center services provider’s worth, finding the buyer plaintiff was more likely the victim of fraud and breach of contract rather than mere buyer’s remorse in LightEdge Holdings LLC, et al. v. Anschutz Corporation et al., No. 2019-0710-JRS, memorandum opinion (Del. Ch. June 11, 2020.)

Vice Chancellor Joseph R. Slights’ June 11 ruling denied the seller defendants’ motion to dismiss LightEdge Holdings LLC and parent Anschutz Corporation’s well-plead charges that they concealed bad financial news and doctored the business prospects of Delaware-chartered OnRamp Access, LLC during sale negotiations.

Fraud, contract claims survive

He found that fraud and breach of contract allegations are well-supported and unjust enrichment and some extra-contractual representations claims are not barred by the anti-reliance provision in the sale document. However, he said the buyer failed to state viable aiding and abetting claims, civil conspiracy, conversion and Colorado and Texas state law charges.

In early May 2018, LightEdge Holdings, LLC had been negotiating a $106 million sale with defendants Brown Robin Capital, LLC, a Delaware-chartered Limited Liability Company, OnRamp CEO Lucas Braun, President and Board Chairman Ryan Robinson and CFO Jack D’Angelo when OnRamp disclosed news that literally gave LightEdge and parent Anschutz pause. A major OnRamp client had cancelled its services subscription for a $600,000 revenue loss and OnRamp’s April sales were less than 1/3 of its target.

Falsified financials?

According to the opinion, the buyers were assured of the company’s continued bright prospects and talks resumed because, “under the direction of the OnRamp insiders, company management secretly falsified the product pipeline by adding more than $6 million in illusory projected annual revenue.”

In addition, one of OnRamp’s biggest customers had told its management during the sales negotiations that it planned to cut its business in half but that was concealed from the buyers, as was the un-collectability of numerous client accounts, the September 2019 complaint says.

Defendants moved to dismiss the entire 13-count complaint, but the vice chancellor found the breach of contract claims were not barred by the sales agreement, the fraud claims were not boot-strapped breach of contract claims and the unjust enrichment claims were not duplicative of the breach of contract claims.

Parent helps finance

He found that even though LightEdge was the official buyer, Anschutz, which contributed $62 million toward the purchase, had standing to sue as a defrauded buyer.

The court spent most of the June 11 ruling parsing other claims that defendants argued were duplicative of other charges or barred under Delaware law – including Colorado statutory theft and securities fraud and Texas statutory fraud and securities fra

The vice chancellor said Delaware General Corporation Law applies to both the plaintiffs’ contractual and extra-contractual claims. He said § 2708 “requires courts to presume that, where parties have chosen Delaware law in their contract, the transaction memorialized in the contract has a material relationship with our state.”

Abry is controlling

He says the extra-contractual claims are governed by Delaware law as established by then-Vice Chancellor Leo Strine’s seminal 2006 opinion in Abry P’rs V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032, 1046 (Del. Ch. 2006), which Vice Chancellor Slights quotes:

“To hold that their choice is only effective as to the determination of contract claims, but not as to tort claims seeking to rescind the contract on grounds of misrepresentation, would create uncertainty of precisely the kind that the parties’ choice of law provision sought to avoid.”

Vice Chancellor Slights agreed with that “persuasive” logic, writing that, “To try to parse out what exactly should be decided under Delaware law and what falls under another state’s law … would be a foolhardy endeavor almost certain to result in the kind of confusion contractual choice of law provisions are meant to avoid.”

Relying on anti-reliance?

Regarding defendants’ assertion that various sections of the sale agreement could be read as an anti-reliance statement, the vice chancellor said Delaware courts have consistently held that:

“sophisticated parties to negotiated commercial contracts may not reasonably rely on information that they contractually agreed did not form a part of the basis for their decision to contract.”

But he said anti-reliance language must be explicit and comprehensive, meaning the parties must:

“forthrightly affirm that they are not relying upon any representation or statement of fact not contained [in the contract].”

And although the sale contract contains a standard integration clause, “What is notably absent from these provisions is any disclaimer of reliance by Buyer,” the Court noted.


The Delaware Court of Chancery recent provided explicit guidance to drafters of M&A agreements and those that litigate such agreements, to the extent that it provides clarion instruction on the prerequisites for contractual clauses that will bar extra-contractual claims for fraud. In the case styled ChyronHego Corporation v. Wight, C.A. No. 2017-0548-SG (Del. Ch. July 31, 2018), the court dealt with the familiar claims of fraud arising from a corporate acquisition–and how such claims may be avoided.

The opinion provides many important articulations of Delaware law relating to misrepresentations alleged to have been made in connection with the purchase or sale of a company. The most noteworthy iterations of Delaware law include the following:

  • Delaware law allows parties to identify the specific information on which a party has relied, and forecloses reliance on other information. See footnote 51 and accompanying text (citing Prairie Capital III, L.P. v. Double E Holding Corp., 131 A.3d 35, 50 (Del. Ch. 2015)(highlighted on these pages)).
  • In order for an anti-reliance provision to be effective, it must be unequivocally clear. By contrast, “Standard Integration Clauses” without explicit anti-reliance representations, will not relieve a party of its oral and extra-contractual fraudulent representations. Slip op. at 12 (citing Abry Partners V, L.P. v. F&W Acquisition LLC, 891 A.2d 1032, 1050 (Del. Ch. 2006) (highlighted on these pages)).
  • The court emphasized that in order for anti-reliance language to be enforceable, “the contract must contain language that, when read together, can be said to add up to a clear anti-reliance clause by which the plaintiff has contractually promised that it did not rely upon statements outside the contract’s four corners in deciding to sign the contract.” See footnote 55 and accompanying text (citing Kronenberg v. Katz, 872 A.2d 568, 593 (Del. Ch. 2004)).
  • Regarding the particular facts of this case, the court reviewed the entirety of the contract in context, and in particular analyzed in combination the following clauses: (i) a standard integration clause; together with (ii) an exclusive remedies clause; (iii) a clause defining excluded liabilities; (iv) an indemnification provision; and, significantly (v) an expressly articulated anti-reliance clause–that the court quoted on page 13 of the opinion.
  • The court also relied on the reasoning of the Prairie Capital case, linked above, which involved similar contract language that included express anti-reliance provisions. See Slip op. at pages 14 and 15.
  • The court also quoted the reasoning in the Abry Partners case, linked above, that defines the limits, based on Delaware public policy, of an anti-reliance provision. Delaware courts will not condone an anti-reliance provision that one attempts to use in order to: (1) protect a seller from liability for making false representations in a contract; or (2) avoid liability for knowledge that representations in a contract are false. See page 25. See also footnote 100 which noted the truism that knowledge or false statements by a corporate agent can be imputed to the corporation itself.

A recent decision of the Delaware Court of Chancery provides a cautionary tale for corporate and commercial litigation practitioners about the importance of complying with contractual notice deadlines. In PR Acquisitions, LLC v. Midland Funding LLC, C.A. No 2017-0465-TMR (Del. Ch. April 30, 2018), the court barred a claim made for funds held in escrow because the applicable agreement required notice to be sent to the seller, but instead notice was mistakenly sent to the escrow agent. Although actual notice by phone was given to the seller prior to the deadline, the court explained why that did not satisfy the manner of notice required by the deadline provided for in the agreement.

Brief Factual Background

The basis for the dispute between the parties was the sale of consumer debt accounts. The purchase and escrow agreements for the transaction required that claims for funds held in escrow based, for example, on allegations of breach of representations and warranties, be sent to an address for the seller provided in the agreement. The seller’s liability for those claims was limited to the $6 million held in escrow. The court found that no written request or documentation of a claim was sent to the seller by the deadline. The court described how the buyer’s general counsel gave the notice letter to his assistant, but according to the opinion, the letter was only sent to the escrow agent and not the seller directly as required by the agreement. Despite this “clerical error”, the seller was notified by phone of the claim by the deadline.

Court’s Analysis

The court rejected the buyer’s argument that actual notice to the seller by phone should suffice as substantial compliance with the deadline. Nor was the court persuaded by the argument that the agreement did not require “strict compliance” with the notice provision.

Strict Compliance Required for Notice Provisions for Contract Claims

Notably, the court supported its holding in large part by distinguishing several cases that the buyer relied on for its failed argument that “actual notice” should suffice as “substantial compliance” with a contractual notice provision.  The cases that the court distinguishes are cited at footnotes 71, 75, 79, and 88, and accompanying text. None of those cases that the buyer relied on allowed for substantial compliance when the agreement specified a particular method of delivery to a specific party by a fixed deadline–as a condition for claims to an escrow fund. The buyer offered “no reason other than its own error for its failure to comply with the notice provision in the escrow agreement.” Thus, the court granted summary judgment to the seller and barred the claims.

Liability Limited to Escrow Funds

The court also dismissed claims of fraud that would have circumvented the buyer’s claim that the seller’s limitation of liability should not be confined to the funds held in escrow. The buyer’s argument on this point was based on the decision in Abry Partners V, L.P. v. F & W Acquisitions LLC, 891 A.2d 1032, 1050 (Del. Ch. 2006). The court explained that Abry did not help the buyer in this case. The Abry opinion, authored by the current Chief Justice of Delaware when he was a Vice Chancellor, announced that the “public policy of Delaware prohibits a seller from insulating itself from the possibility that the sale would be rescinded if the buyer can show either: 1) that the seller knew that the Company’s contractual representations and warranties were false; or 2) that the seller itself lied to the buyer about a contractual representation and warranty.” 891 A.2d at 1064.

In order to make the showing explained in Abry, the buyer must “prove that the seller acted with an illicit state of mind, in the sense the seller knew that the representation was false and communicated it to the buyer. The buyer may not escape the contractual limitations on liability by attempting to show that the seller acted in a reckless, grossly negligent, or negligent manner.” Id. This statement of the law needs to be contrasted with the limitations of liability in an agreement that, if carefully drafted, will be enforced in Delaware to limit liability of the parties for representations and warranties to only that which is explicitly stated in the agreements between the parties.

Delaware case law is replete with decisions upholding provisions in contracts that choose Delaware as the governing law for any disputes related to an agreement. A recent Delaware decision adds to the large body of Delaware jurisprudence on this topic. See, e.g., selected decisions on choice-of-law enforceability from the Delaware Supreme Court and Delaware Court of Chancery, highlighted on these pages over the last decade or so. Similar reasoning has been applied by the Delaware courts to uphold forum selection clauses requiring that suits relating to a contract be filed exclusively in state or federal courts located in Delaware. See, e.g., selected cases on forum selection clauses highlighted on these pages over the last ten years-plus, including reference to a recent update of Delaware statutes validating such provisions in corporate bylaws. These two related topics are of widespread applicability that extend beyond the corporate and commercial litigation fare, and legal ethics topics, typically covered on this blog.

The recent decision in Change Capital Partners Fund I, LLC v. Volt Electrical Systems, LLC, et al., C.A. No. N17C-05-290-RRC (Del. Super. April 3, 2018), by the Delaware Superior Court (Delaware’s trial court of general jurisdiction that does not hear the equitable claims filed in Chancery), provides an excellent overview of the doctrinal underpinning for the longstanding position of the Delaware courts that choice-of-law provisions in agreements are generally enforceable.

The agreement involved was for the purchase of accounts receivable. The unsuccessful argument made was that either New York or Texas law should apply, despite the choice-of-law provision selecting Delaware as the governing law, because (i) either of those states would be the “default state” in the absence of a choice-of-law provision; (ii) enforcement of the agreement would be contrary to the public policy of either Texas or New York; and (iii) both New York or Texas have a materially greater interest in the determination of the issues between the parties to the agreement.

Delaware’s Public Policy Upholding Freedom of Contract

Part of the court’s introductory summary of its conclusion provides a preview of the more detailed reasoning that the scholarly decision provides: “Delaware courts are generally reluctant to subvert parties’ agreed-upon choice-of-law provisions.” In the context of a motion to dismiss, this opinion provides many eminently quotable statements of Delaware law that are perfectly suitable for use in future briefs. For example, the court started with the basic public policy of Delaware regarding contracts in general, separate from the choice-of-law issue:

Delaware courts are ‘strongly inclined’ to respect the widely recognized and fundamental principles of freedom of contract. This Court will not interfere unless ‘upon a strong showing that dishonoring the contract is required to vindicate a public policy interest even stronger than freedom of contract.’ With very limited exceptions, Delaware courts will enforce the contractual scheme that the parties have arrived at through their own self-ordering, both in recognition of a right to self-order and to promote certainty of obligations and benefits. Upholding freedom of contract is a fundamental policy of this State. (internal footnotes omitted)

Delaware Choice-of-Law Policy and the Exception in Restatement (Second) of Conflicts, Section 187(2)(b)

It remains well-settled that:

Delaware courts will honor a contractually-designed choice-of-law provision so long as the jurisdiction selected bears some material relationship to the transaction. The existence of a choice-of-law clause establishes a material relationship between the chosen state and the transaction. Title 6, section 2708(a) of the Delaware Code recognizes that a choice-of-law clause is a significant, material and reasonable relationship with this State and shall be enforced whether or not there are other relationships with this State (citing Oak Private Equity Venture Capital Ltd. v. Twitter, Inc., 2015 WL 7776758, at *9 (Del. Super. Ct. Nov. 20, 2015)).

If an agreement has no choice-of-law provision, Delaware applies the “most significant relationship” test from Section 188 of the Restatement. Where such a provision does exist, however, Section 187(2)(b) of the Restatement provides for exceptions to enforceability, which were the arguments made unsuccessfully as noted at the beginning of this synopsis. Those exceptions may apply if: (i) the “default state’s” law would apply absent a choice-of-law provision; (ii) Delaware law would be contrary to a fundamental public policy of the default state; and (iii) the default state has a materially greater interest in the enforcement of the agreement.

Importantly, a “mere difference between the laws of two states will not necessarily render the enforcement of a cause of action arising in one state contrary to the public policy of another.” (citing Vichi v. Koninklijke Philips Elecs. N.V., 62 A.3d 26, 45 (Del. Ch. 2012)). The Vichi case was highlighted on these pages. The Superior Court distinguished several mostly Chancery decisions involving covenants not to compete, in which the public policy of California and Delaware on that topic is substantially different. See, e.g., EBP Lifestyle Brands Holdings, Inc. v. Boulbain, 2017 WL 3328363, at *7 (Del. Ch. Aug. 4, 2017); Kan-Di-Ki, LLC v. Suer, 2015 WL 4503210, at *18 (Del. Ch. July 22, 2015); Ascension Ins. Holdings, LLC v. Underwood, 2015 WL 356002, at *3 (Del. Ch. Jan. 28, 2015).

Notably, the Superior Court found that New York and Delaware do have different public policy on the topic of usury laws, which were relevant to the agreement at issue in this case. New York has a strong policy against interest rates higher than 25%. See footnote 30. Delaware, by contrast, has no cap on interest rates. See footnote 31 for statutory and case law citations.

But, it is not enough for the public policy of two states simply to be conflicting. In addition, a party seeking to avoid a choice-of-law provision pursuant to Section 187(2)(b) of the Restatement, must demonstrate that the other state has a “materially greater interest in the enforcement or non-enforcement” of the agreement at issue. In this case, the Superior Court found a sufficient connection to Delaware because: (i) one of the parties was a Delaware entity; and (ii) both parties agreed to choose Delaware law to control their agreement.

Delaware Public Policy to Uphold Contracts Generally is Stronger than Public Policy of Other States to Enforce This Particular Agreement Under Other State Law

Several prior Delaware decisions were cited to support the reasoning in this opinion that when the court must choose between the law of other states that arguably may apply, the choice of Delaware law typically prevails. See, e.g., footnotes 40 and 47. For example, in Abry Partners V, L.P. v F & W Acquisition, LLC, 891 A.2d 1032, 1048, n.25 (Del. Ch. 2006), the Court of Chancery needed to choose among different choice-of-law provisions in several interlocking agreements that provided for different state laws to apply, and reasoned that no rational businessperson would intend that the law of multiple jurisdictions would apply to a single controversy having its origin in a contract-based relationship. In Abry, therefore, the agreement calling for Delaware law prevailed.

Additional reasoning to support the conclusion in this Superior Court opinion was based on the recognition that there is an inherent difficulty in avoiding the terms of a contract based on allegedly contrary public policy of another state. In part, this is due to the fundamental, strong Delaware public policy of freedom of contract and the inclination of the Delaware courts to enforce otherwise valid contracts. Stated another way, “Delaware courts regularly express their reluctance to allow avoidance of the contractual choice-of-law provision” and are “strongly inclined to respect [a] parties’ agreement….” See footnotes 36 to 39 and accompanying text.

In sum, this opinion should be included in the toolbox of every litigator who needs to know the latest iteration of Delaware law on the enforceability of choice-of-law provisions selecting Delaware law to govern issues that arise in connection with an agreement.

In the context of cross-claims of fraudulent inducement by parties to a merger, the Court of Chancery discussed several principles of Delaware law that serve as useful references for those involved in corporate and commercial litigation.  The opinion in LVI Group Investments, LLC v. NCM Group Holdings, LLC, C.A. No. 12067-VCG (Del. Ch. Mar. 28, 2018), provides useful iterations of the following principles of Delaware law:

·     The extended scope of the director consent statute which allows for the imposition of personal jurisdiction on officers and directors of Delaware entities even when the claims are not for breach of fiduciary duty.  This opinion amplifies the Delaware Supreme Court’s recent Hazout decision which reversed decades of prior precedent on this topic, highlighted on these pages, interpreting Section 3114 of Title 10 of the Delaware Code.

·     The court also discusses the general rule that a civil conspiracy may not be formed between a director and the corporation that she represents, however, there are exceptions to this rule which are explored in this opinion.  For example, the court noted that it was unaware of any Delaware authority in support of a per se rule that a private equity firm and its principal cannot conspire with a company controlled, but not wholly owned, by them.  The court cited to several decisions addressing this issue including Prairie Capital III, L.P. v. Double E Holding Corp., 132 A.3d 35, 60 (Del. Ch. Nov. 24, 2015), which was highlighted on these pages.  The court also cited Prairie Capital for the principle that a corporate officer can be held personally liable for the torts he commits and cannot hide behind a corporate shield when he is a participant in the tort.

·     The court also considered the extent to which a fraud claim can be pursued in the presence of a non-reliance clause and an integration clause.  The court explained that this was not a bar to claims that representations within the agreement itself were fraudulently made.  See Abry Partners V, L.P. 891 A.2d at 1064 (“To the extent that the stock purchase agreement purports to limit the Seller’s exposure for its own conscious participation in the communication of lies to the Buyer, it is invalid under the public policy of this State.  That is, I find that the public policy of this State will not permit the Seller to insulate itself from the possibility that the sale would be rescinded if the Buyer can show either:  (1) that the Seller knew that the Company’s contractual representations and warranties were false; or (2) that the Seller itself lied to the Buyer about the contractual representations and warranty.”)  See also Prairie Capital III, L.P., 132 A.3d at 61. 

·     The court also explained that equitable fraud claims, also known as negligent misrepresentation claims, require a special relationship, such as a fiduciary relationship, as a prerequisite in order for the scienter requirement of common law fraud to be waived.

The Delaware Court of Chancery recently addressed a common type of claim in commercial litigation: Post-closing adjustments to the purchase price. Sparton Corporation v. O’Neil, C.A. No. 12403-VCMR (Del. Ch. Aug. 9, 2017).

Basic Facts: The claims in this case involved an assertion that the defendant directors changed the selling company’s accounts receivable after an amount was determined for an escrow account for post-closing adjustments–but the change was made prior to the closing, unbeknownst to the buyers. In essence, the court found that the allegations of fraud did not satisfy the prerequisites for specificity, and, in addition, a robust anti-reliance clause prevented claims based on representations outside the contract.

Key Takeaways

Anti-Reliance Provision and Fraud Claims

The most noteworthy statement of law from this decision, that has the most widespread application, is based on the strong anti-reliance provision in the agreement, and settled Delaware law that prevented claims based on misrepresentations outside the four corners of the agreement. The anti-reliance clause was quoted at length in the opinion and was very specific to the extent that the parties agreed that the sole and exclusive representations were those contained in the  agreement and that no representations outside the agreement were relied upon in connection with the purchase. (See footnote 44 which cited to the well-known Abry case on which the court’s reasoning was based.)

In addition, the court relied on the basic pleading prerequisites for fraud which require much more specificity than non-fraud claims require. In addition, the court distinguished the Osram case which noted that “a mere allegation that a defendant knew or should have known about a false statement is not sufficient to plead the requisite state of mind” for fraud.The court reasoned that in this case, none of the defendants personally represented the accuracy of the financial statements, and that they were not a position to know the veracity of the statements. Also, the plaintiff did not plead any particularized facts about the roles of the defendant in the company or the relationships of the defendants with management. Nor did the plaintiffs allege any facts to show that the defendants would be a position to know that the documents were falsely prepared.

Commercially Reasonable Efforts

Also noteworthy is the court’s treatment of a claim that “commercially reasonable efforts,” as required by the agreement, were not employed. The case law on the “commercially reasonable efforts standard” has been written about on these pages in connection with recent decisions, but because case law about that contractual standard is not fully evolved, I mention it here in passing even though the court’s discussion is not comprehensive. See Slip op. at page 15.The allegation was that it should have been self-evident that because certain actions did not take place by a certain deadline in the agreement, that the reason must have been the lack of an exercise of commercially reasonable efforts. The court rejected this conclusory allegation because it was not self-sufficient and did not satisfy the “reasonably conceivable test” under Rule 12(b)(6).

Key Legal Issue Addressed: Whether a purported disclaimer of extra-contractual representations protected a business seller from fraud claims? Answer: Yes, based on the circumstances found in the case of  IAC Search, LLC v. Conversant LLC, C.A. No. 11774-CB (Del. Ch. Nov. 30, 2016).

This Delaware Court of Chancery opinion should be in the toolbox of every commercial litigator, as it addresses an important issue commonly arising in connection with post-closing claims involving the sale of a business.  Specifically, in this matter there was a claim that misrepresentations were made during the due diligence period regarding the financial performance of the company that was sold.  The court found that the anti-reliance clauses in the agreement of sale barred the fraud claims that were based on pre-agreement statements.Image result for free graphic of stop sign

Background Facts:

The transaction involved the purchase by IAC Search, LLC of six subsidiaries of ValuClick, Inc.  The central claim by IAC was that ValuClick fraudulently induced IAC to overpay for one of those subsidiaries based on false information provided during the due diligence process.  The fraud claims are not based on the express representations in the agreement concerning financial information but rather on information received during due diligence that the parties chose not to incorporate into an express contractual representation.

Resolution of the claim turned on the application of Delaware case law that addresses anti-reliance clauses in purchase agreements.  A key fact that the fraud claim was based on was the accuracy of information provided during due diligence that the parties chose not to incorporate into an express representation or warranty in the agreement.

A specific provision in the agreement provided that the seller disclaimed making any extra-contractual representations.  Likewise, the buyer acknowledged that the seller did not make any representations that were not expressly included in the agreement.  In addition, the parties included in their agreement a standard integration clause that defined the universe of writings that made up the parties’ agreement.

Court’s Analysis:

This opinion of the Court of Chancery reviewed prior Chancery decisions involving similar issues.  For example in the opinion of Abry Partners V, L.P. v. F&W Acquisition LLC, 891 A.2d 1032, 1059 (Del. Ch. 2006), the court attempted to balance the natural abhorrence of the law against fraud and the strong public policy of Delaware that promotes freedom of contract.

More recently, in the Chancery opinion of Prairie Capital III, L.P. v. Double E Holding Corp., highlighted on these pages, the court explained that “Delaware law does not require magic words to disclaim reliance, and that the specific language of an agreement may vary but still add up to a clear anti-reliance clause.”  132 A.3d 35, 51 (Del. Ch. 2015).  In that case, the court found that a combination of a standard integration clause in an agreement representing “affirmatively” what information a buyer relied on, as opposed to one “framed negatively,” barred fraud claims based on extra-contractual statements.

Most recently, the Court of Chancery held in the case of FdG Logistics LLC v. A&R Holdings, Inc., highlighted on these pages, explained that under Delaware law:   “in order to bar fraud claims, a disclaimer of reliance must come from the point of view of the aggrieved party,” meaning that it must come from the buyer who is asserting the fraud claim.  An assertion from the seller of what it was and was not representing and warranting is not sufficient given the laws abhorrence of fraud.”  131 A.3d 842, 860 (Del. Ch. 2016).

The foregoing legal principles were applied to the key fact that in this case:  “the buyer expressly acknowledged that the seller was not making, directly or indirectly, any representation or warranty with respect to any information it received in due diligence unless such information was expressly included in a representation and warranty in the agreement.”  It was also a key fact that the buyer acknowledged the precise terms of the “universe of information” on which it relied – -and that it did not rely on – – when it entered into the agreement.

As the court explained in the Prairie Capital case, it is not necessary that the terms of an agreement be “framed negatively” to describe what the buyer did not rely on, rather it is sufficient if the contract states affirmatively what the buyer did rely on.

The court’s reasoning in this case was based on a combination of the acknowledgement by the buyer and the integration clause which “added up” to a clear anti-reliance provision that barred fraud claims based on extra-contractual statements made during due diligence.  The court reasoned:  “. . . the integration clause defines the universe of writings reflecting the terms of IAC’s agreement to purchase . . . and the Buyer’s Acknowledgement Clause explains in clear terms from the perspective of the buyer the universe of due diligence information on which IAC did and did not rely when it entered into the agreement.”

It is worth noting a case cited at footnote 34 of the opinion which was quoted for the following statement of Delaware law:  “Clauses indicating that the contract is an expression of the parties’ final intentions generally create a presumption of integration,” (citing Addy v. Piedmonte, 2009 WL 707641, at *9 (Del. Ch. Mar. 18, 2009)).

The court included in its holding supplemental reasoning:  that to permit IAC to assert a fraud claim even though those alleged misstatements were never the subject of an express representation would be to “excuse a lie made by IAC in writing that ValuClick made no such extra-contractual representations” (citing Abry, 891 A.2d at 1058).