Delaware Court Holds Parties Cannot Negotiate Away Fraudulent Inducement Claims

September 7, 2021

In an Aug. 12, 2021, opinion, the Delaware Chancery Court examined two seller-friendly purchase agreement provisions and held that public policy and Delaware law prevented the seller from invoking the provisions to block well-pled allegations of fraudulent inducement.

Online HealthNow, Inc. and Bertelsmann, Inc. v. CIP OCL Investments, LLC, et al. addressed allegations that the stock purchase agreement at issue was obtained through false and fraudulent statements contained in the agreement made by the seller and related entities. The agreement contained two provisions that were the focus of the court’s opinion. The first, the agreement’s survival clause, stated that all of the representations and warranties in the agreement would “terminate effective as of the Closing and shall not survive the Closing for any purpose,” effectively ending the statute of limitations period at the time of closing. The second, the non-recourse provision, noted that claims arising out of the purchase agreement could be asserted only against the parties to the agreement itself.

After closing, the buyer discovered that certain representations regarding the purchased company’s tax liabilities and financial records were allegedly false. The parties could not resolve the buyer’s claims prior to litigation, so the buyer brought suit, alleging that (i) the seller and its affiliates purposefully withheld tax information from the buyer’s due diligence data room and then intentionally inserted false representations into the purchase agreement regarding that same information, and (ii) the seller’s affiliates, who were not parties to the purchase agreement, knowingly participated in the alleged fraudulent inducement.

In examining the allegations, Vice Chancellor Joseph Slights held as an initial matter that the fraudulent inducement claim was sufficiently pled to withstand a motion to dismiss. Turning to the specific provisions of the purchase agreement, the court determined that Delaware law and public policy prevented the seller from using the survival clause “in a contract allegedly procured by fraud to eviscerate a claim that the contract itself is an instrument of fraud.” Interestingly, the court explained that the clause did “serve[] its purpose” by preventing a breach of contract claim, but that it could not be used to defeat a well-pled allegation that the purchase agreement, and the specific provisions in dispute, was obtained through fraud.

Similarly, the court determined that the purchase agreement’s non-recourse provision did not prevent claims of fraudulent inducement and aiding and abetting fraud from being brought against defendants that did not sign the agreement. It held that the allegations that they were complicit and “knowingly participated in the alleged contractual fraud” were sufficiently pled.

While this was a buyer-friendly decision in the sense that the Chancery Court allowed the fraud claims to proceed past the motion-to-dismiss stage, Vice Chancellor Slights prefaced the ruling by noting Delaware’s long history of allowing sophisticated parties to freely negotiate contracts, including by limiting in a variety of ways how liability and risk are allocated, such as through non-reliance clauses and capping breach-of-contract damages. However, buyers and sellers negotiating purchase agreements under Delaware law should consider that this freedom to contract has its limits. It cannot to be used to absolve a seller from liability for procuring an agreement through fraud or knowingly making a fraudulent statement within an agreement. 

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