Boilerplate provision (fraud carve-out) saves the buyer’s fraud lawsuit against the seller of a business

The seller owned and operated a food tray business that sold rigid trays, foam trays, and absorbent pads to food handlers and processors. In the summer of 2014, the seller sought to sell its North American foam tray and pads business, but not its rigid tray business.

On February 11, 2015, the buyer and the seller entered into an asset purchase agreement for the foam tray and padded business. The purchase price was $80 million. The buyer closed its purchase of the foam tray and padded business on April 1, 2015.

Following the closing, the seller gave the buyer access to its pre-acquisition e-mails pursuant to the terms of the acquisition documents. Those emails showed the buyer that the seller knew of material information that was bad for the value of the seller’s foam tray and padded business. The seller failed to disclose this bad news to the buyer before the closing.

Specifically, the emails showed the buyer that the seller knew that major customers were migrating or preparing to migrate away from foam trays (what the buyer purchased from seller) to rigid trays (the product line kept by the seller).

The buyer sued the seller for fraud based, in part, by its failure to disclose material information about the business which if known would have significantly reduced the agreed $80 million purchase price.

The seller filed a motion with the court to dismiss the suit claiming that the buyer filed its claim beyond the 18-month deadline. The buyer argued that it was suing for fraud not for breach of the terms of the contract; and that the 18-month deadline did not apply to fraud claims.

The court agreed with the buyer and pointed to the boilerplate exclusive remedy provision. That provision says that the only remedy a buyer has for any dispute on the deal is for breach of contract (which includes suing within 18 months). But there was an exception for fraud (which did not have an 18-month deadline).

This case is referred to as Novipax Holdings LLC v. Sealed Air Corporation, C.A. No. N17C-03-1682 EMD CCLD., Superior Court of Delaware (Decided: November 28, 2017).

Comment. The seller probably breached the asset purchase agreement. Unfortunately, the buyer could not sue for breach of contract because the buyer filed the lawsuit after the contract’s 18-month deadline.

So, the buyer sued for fraud, and under the exclusive remedy boilerplate provision the buyer was permitted to sue for fraud. This is called a fraud carve-out and is in most acquisition documents; way in the back with the other boilerplate.

By John McCauley: I help people start, grow, buy and sell their businesses.

Email: jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Posted in exclusive remedy, fraud carveout

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