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Delaware defines common law fraud to include both intentional and reckless misrepresentations. In a recent decision, the Delaware Supreme Court overruled a Superior Court decision and held that the parties to an acquisition agreement may contractually limit their liability for non-intentional fraud.  Here’s an excerpt from this Dechert memo on the Court’s decision:

In Express Scripts, Inc., et al. v. Bracket Holdings Corp., the Delaware Supreme Court, sitting en banc, reversed and remanded the decision of the Delaware Superior Court, holding unanimously that (i) although common law fraud encompasses reckless misrepresentations, a contractual limitation of liability to “deliberate fraud” does not extend to reckless conduct, and (ii) parties can agree to limit the remedies for breaches of representations or warranties absent “deliberate fraud.” The decision settles the dual questions of whether and how sophisticated parties may allocate the risk that the seller recklessly makes inaccurate representations in a contract when responsibility for such recklessness would be allocated to the seller under the common-law definition of fraud.

In reaching its decision, the Court relied heavily on the Chancery Court’s reasoning in ABRY Partners v. F&W Acquisition, which endorsed the ability of sophisticated parties to craft agreements that insulate a seller from a claim arising out of a “contractual false statement of fact that was not intentionally made.”

The stock purchase agreement in the Express Strips case contained language in the indemnity section to the effect that “except in the case of any deliberate fraudulent act, statement or omission,” the buyer’s remedy would be limited to the proceeds of the R&W insurance policy. The term “deliberate” was not defined in the SPA. The Superior Court concluded that that the inclusion of this single undefined term in the indemnification section of the SPA was not sufficient to indicate that the parties had agreed to alter the mental state required for common law fraud. As this excerpt from its opinion explains, the Supreme Court disagreed:

When sophisticated parties craft purchase agreements, they typically follow a time-tested template. Specific to indemnification provisions, the buyer wants to be sure it is getting what is represented and secures representations and warranties specific to the seller’s financial information. The seller wants to limit its liability for post-closing disputes over representations and warranties. The parties channel post-closing representation and warranty disputes to the indemnification provisions of their agreement.

Here, the parties followed this well-worn path and used Section 9.6(D) to address fraud and allocate risk associated with post-closing disputes. Following Delaware law, the parties carved out deliberate fraud from the limits of the indemnification provision. But for all other states of mind, Bracket agreed to limit its remedy to the R&W Policy for breaches of the SPA’s representations and warranties.

The Court also concluded that this interpretation was consistent with the reps & warranties relating to the R&W insurance policy, which made clear “that deliberate fraudulent ‘acts, statements, and omissions’ were not covered by the R&W Policy and the carrier could subrogate a claim for these actions and omissions.”

– John Jenkins