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Delaware law permits sophisticated commercial parties to craft contracts that insulate a seller from a rescission claim for a contractual false statement of fact that was not intentionally made. In other words, parties may allocate the risk of factual error freely as to any error where the speaking party did not consciously convey an untruth. In that context, there is no moral imperative to impinge on the ability of rational parties dealing at arms-length to shape their own arrangements, and courts are ill-suited to set a uniform rule that is more efficient than the specific outcomes negotiated by particular contracting parties to deal with the myriad situations they face. But the contractual freedom to immunize a seller from liability for a false contractual statement of fact ends there. The public policy against fraud is a strong and venerable one that is largely founded on the societal consensus that lying is wrong. Not only that, it is difficult to identify an economically-sound rationale for permitting a seller to deny the remedy of rescission to a buyer when the seller is proven to have induced the contract's formation or closing by lying about a contractually-represented fact.
The plaintiffs, a group of entities affiliated with a sophisticated private equity firm named ABRY Partners (hereinafter, “Buyer”), entered into a Stock Purchase Agreement (“SPA”) with an entity owned by another private equity firm, Providence Equity Partners (hereinafter, “Seller”), whereby the Buyer bought a portfolio company from the Seller. The SPA indicated that the buyer only relied on representations and warranties within the four corners, it limited the liability of the seller for any misrepresentation of fact contained therein, and it provided that an indemnity claim was the buyer's exclusive remedy. Thereafter, the buyer filed suit, alleging that the financial statements contained material misrepresentations, resulting in excessive overpayment. The seller sought dismissal based on failure to state a claim.
Was the exclusive remedy provision stipulated in the SPA enforceable?
Yes, provided that the seller did not make intentional misrepresentations or act with knowledge of the falsity thereof.
The court initially noted that due to the forum selection clause and the choice of law principles of Del. Code Ann. tit. 6, § 2708, Delaware law was controlling. Further, the complaint was pled with sufficient particularity pursuant to Del. Ch. Ct. R. 9(b). The court found that as the parties were sophisticated, the exclusive remedy provision was enforceable to the extent that the seller did not make intentional misrepresentations or act with knowledge of the falsity thereof. However, if the buyer showed knowledge or intentional misrepresentations, then the limitation provision was invalid as against public policy.