Judge Davis Finds Anti-Reliance Provision Insufficient to Bar Fraud Claims

January 24, 2018

Publication

In Novipax Holdings LLC, et al. v. Sealed Air Corp., et al., C.A. No. N17C-03-1682 EMD, Judge Davis denied a motion to dismiss a complaint filed by plaintiffs Novipax Holdings LLC and Novipax LLC (collectively, “Novipax”) against defendants Sealed Air Corporation, Cryovac, Inc., Sealed Air Corporation (US), and Sealed Air Corporation (Canada) (collectively, “Sealed Air”). Novipax had entered into an Asset Purchase Agreement (“APA”) in connection with its acquisition of Sealed Air’s foam tray and pads business. Novipax alleged that Sealed Air omitted and concealed information from, and made material misrepresentations to, Novipax in order to mislead and induce it into buying the business. After Novipax brought suit against Sealed Air, Sealed Air filed a motion to dismiss contending that the claims were barred by the terms of the contract.

In support of its motion, Sealed Air argued that the non-reliance and integration provisions of the APA limited the representations and warranties that could be relied on by either party to those contained within the APA and that the APA superseded all prior understandings or representations, thus barring Novipax’s fraud claims. In response, Novipax argued that the non-reliance and integration provisions did not bar its fraud claim because another section in the APA expressly preserved the claim. In support of this argument, Novipax cited Anvil Holding Corp. v. Iron Acquisition Co., 2013 WL 2249655 (Del. Ch. May 17, 2013) and Airborne Health, Inc. v. Squid Soap LP, 984 A.2d 126 (Del. Ch.) to support its position. In Anvil, the Court refused to dismiss a fraud claim based on the agreement’s non-reliance provisions because the provision did not unambiguously demonstrate that both parties disclaimed reliance on extra-contractual statements and the agreement’s exclusive remedy clause preserved the fraud claim. In Airborne, the Court of Chancery held that the APA in dispute did not bar fraud claims because the integration clause was insufficient to operate as an anti-reliance provision and the exclusive remedy provision preserved the fraud claim. Ultimately, Judge Davis found the present case to lie somewhere between Anvil and Airborne because both parties expressly represented in the APA that they were not relying on extra-contractual representations, but also included an exclusive remedies provision that expressly preserved fraud claims. The Court held that “the non-reliance provision likely places a limit on the types of fraud claims that can be brought to those based on written representations in the APA.”

Second, Sealed Air asserted that Novipax failed to send a claim notice as required by the agreement to secure indemnification. In response, Novipax argued that the APA only imposed such a requirement for indemnification claims—a category of claim that Novipax had not pled. In evaluating the parties’ competing positions, Judge Davis denied the motion to dismiss and held that both parties provided reasonable interpretations of the contractual agreement and therefore, at this stage in the litigation, the Court had to resolve the ambiguity in favor of Novipax.

Novipax also argued that the provisions of the APA did not bar its fraud claim because Sealed Air fraudulently induced it into closing the transaction through the representations, warranties, and covenants it made in the APA. The Court compared the facts of the present action to Abry Partners V, L.P. v. F&W Acquisition, LLC, 891 A.2d 1032 (Del. Ch. 2006), a case in which the agreement at issue contained representations and warranties about the company’s finances that were discovered to be fraudulent, and the Court of Chancery declined to dismiss the fraud claim because the financial statements were intended to induce the close of sale through their inclusion in the representations and warranties. The Court concluded that Novipax’s assertion that representations contained in the APA were false and that the defendant failed to correct the misrepresentations were sufficient for the fraudulent inducement claim to survive.

Sealed Air next argued that Novipax was bootstrapping its fraudulent inducement claim to a breach of contract claim. Judge Davis disagreed and found that Novipax was not trying to bootstrap a fraud claim to a breach of contract claim. Rather, Judge Davis found that “the principal claim in the Complaint is for fraud and fraudulent inducement that renders the APA void” and the “breach of contract claim is an alternative remedy.”

Finally, Judge Davis concluded that Novipax had properly pled claims for breach of contract, unjust enrichment, and declaratory judgment. Although Sealed Air attacked these causes of action as unsupportable based on the allegations in the complaint, Judge Davis held that the complaint did contain allegations that Sealed Air had breached certain provisions. Judge Davis also found that the unjust enrichment claim was pled in the alternative and that the declaratory judgment claim was appropriate for the purpose of declaring whether Sealed Air has a right to make a claim for an adjustment amount under the transactions documents.

Analysis: This decision reflects the type of dispute that the CCLD commonly handles and contains a detailed analysis regarding anti-reliance provisions in transaction documents. Ultimately, Judge Davis concluded that the anti-reliance provision was insufficient to bar the plaintiff’s fraud claim given that other provisions in the agreement appeared designed to preserve fraud claims. Judge Davis’s analysis highlights that careful drafting is needed if parties truly wish to limit available remedies to indemnification.