Richards Layton & Finger
 

Judge Carpenter Considers Enforceability of Liquidated Damages Provision and Pleading Standards for Fraudulent Inducement Claims

April 26, 2018

In DecisivEdge, LLC v. VNU Group, LLC, C.A. No. N17C-05-584-WCC-CCLD, Judge Carpenter granted in part and denied in part the defendant’s motion to dismiss claims for, inter alia, breach of contract and fraudulent inducement.

The dispute arose out of the plaintiff’s agreement to provide technology services to the defendant. The parties had entered into a series of agreements including a Master Services Agreement, four Statements of Work, a Master Technology Agreement, and two Work Plans. In relevant part, Section 19 of the Master Services Agreement allowed for early termination by the defendant and identified certain fees that would follow as a result. The parties, however, disputed whether the early termination provision was enforceable and whether the plaintiff should be entitled to early termination fees.

Specifically, the parties disagreed on whether the termination fee constituted an unenforceable penalty or a proper liquidated damages provision. The defendant argued that the fee established in Section 19 was an unenforceable liquidated damages provision because any damages for early termination were easily ascertainable, given that the parties’ agreement laid out the amounts to be paid for each work period. In contrast, the plaintiff argued that Section 19 was an enforceable liquidated damages provision because the damages were not easily ascertainable at the time of contracting. The plaintiff also argued that since the termination fee from Section 19 was only a fraction of the total damages owed, it was prima facie reasonable. Finally, the plaintiff claimed that determining the validity of Section 19 was a question of fact not appropriate for the Court to decide on a motion to dismiss.

In ruling on the liquidated damages issue, Judge Carpenter agreed with the plaintiff that determining the validity of the early termination fee was not an issue properly decided on a motion to dismiss. While Judge Carpenter explained that it was his “impression” that the contract clearly stated the amount due and that the plaintiff’s argument was “suspect,” Judge Carpenter denied the motion because he was “not in a position to find the termination fee unenforceable without additional discovery by the parties.”

In addition to the liquidated damages issue, Judge Carpenter considered the defendant’s motion to dismiss the fraudulent inducement claim. In conducting his analysis, Judge Carpenter considered whether the plaintiff was merely attempting to bootstrap its breach of contract claim into a claim of fraudulent inducement, or whether the plaintiff had sufficiently pled conduct that was separate from the conduct constituting breach of contract. Ultimately, Judge Carpenter dismissed the fraudulent inducement claim with respect to certain Statements of Work and Work Orders because the misrepresentations attributed to the defendant post-dated the agreements. Accordingly, the alleged misrepresentations could not have been an inducement to contract. However, because some alleged misrepresentations made in connection with one of the Work Orders occurred before it was executed, Judge Carpenter allowed the fraudulent inducement claim to stand for that Work Order. Judge Carpenter noted, however, that he continued to have concerns that the allegations merely referred to statements used to induce continued performance, not to induce the plaintiff to enter into the contracts as required to establish a fraudulent inducement claim.

Analysis: Similar to many CCLD cases, this case involved claims for breach of contract and fraud. Recently, the CCLD has seen a number of cases in which the enforceability of liquidated damages provisions was at issue. CRS Proppants, LLC v. Preferred Resin Holding Company, LLC, 2016 WL 6094167 (Del. Super. Ct.); Axalta Coating Systems, LLC v. FCS Software Solutions, Ltd., C.A. No. N17C-01-361-MMJ [CCLD]. Here, Judge Carpenter concluded that determining enforceability required a factual determination and denied a motion to dismiss.

With respect to the fraud claim, Judge Carpenter expressed concern with a pattern of cases where claimants tend to blur the line between fraudulent inducement and breach of contract. Specifically, Judge Carpenter noted that allegations concerning a party’s intent to perform typically support breach of contract, not fraud. Judge Carpenter also stated that fraud claims create “a sinister overtone to the contract dispute” and are improper, unfair, and prejudicial to defendants when not warranted. To avoid these consequences, Judge Carpenter looked closely at the specific allegations made in the fraudulent inducement claim to ensure that the claimant was not merely recasting its breach of contract claim in an improper manner. Judge Carpenter’s analysis is consistent with the CCLD’s scrutiny of fraudulent inducement claims to ensure that such claims are truly proper. See, e.g., Cornell Glasgow, LLC v. La Grange Properties, LLC, 2012 WL 2106945, at *9 (Del. Super. Ct.) (dismissing bootstrapped fraud claims).

Related Practices