June 5, 2020

Del. Chancery Dismisses Claims Based on Anti-Reliance Language

In its recent decision in Midcap Funding X Trust v. Graebel Companies, (Del. Ch.; 4/20), the Delaware Chancery Court relied upon a contractual disclaimer of reliance to dismiss fraud, misrepresentation and mistake claims arising out of the course of negotiations of a settlement agreement relating to $13 million of outstanding receivables.

The parties entered into the settlement agreement under the terms of which the defendants agreed to deliver funds to the plaintiff.  The plaintiffs subsequently discovered that the defendants had already billed and/or collected a larger amount of receivables than previously stated, which contradicted representations made by the defendants during the course of the settlement negotiations.

The plaintiffs filed a lawsuit in the Chancery Court alleging that the defendants actions constituted misrepresentation, fraudulent concealment, breach of the implied covenant of good faith and fair dealing, mistake, and unjust enrichment.  Vice Chancellor Zurn dismissed those allegations, and this excerpt from a recent Morris James blog on the case summarizes her reasoning:

The Court rejected these claims and granted Defendants’ motion to dismiss as to those counts. Specifically, the Court found that Plaintiffs failed to state a valid claim for misrepresentation, fraudulent concealment, and mistake because the settlement agreement contained anti-reliance and integration clauses, which precluded those causes of action.

The Settlement Agreement stated each party “is not entering into this Agreement in reliance upon any representations, promises or assurance other than those expressly set forth in this Agreement.” The integration clause also stated that the Settlement Agreement “supersedes any prior contracts, understandings, discussions, and agreements among the parties.” As the Court explained, “the [n]egotiations leading up to the Settlement Agreement,” were outside “the four corners of the Settlement Agreement” and were thus barred by the contract’s plain terms which “disclaim[ed] reliance on [] extra-contractual representations.”

The Court also held that, as a result of the anti-reliance provisions, the Plaintiffs’ consequent “failure of justifiable reliance [was] fatal to [the] claim for mutual mistake” and unilateral mistake because the claims were premised on “extracontractual representations and omissions.”

The blog also notes that the Vice Chancellor dismissed the good faith and fair dealing claim because she concluded that plaintiffs’ theory “was premised on obligations that the contract did not create, and that were inconsistent with the Settlement Agreement’s terms.” VC Zurn dismissed the unjust enrichment claim because she found that the relationship between the parties was governed by the settlement agreement.

John Jenkins