RAA Management, LLC v. Savage Sports Holdings: Delaware Supreme Court Affirms Dismissal of Fraud Claims Based Upon Non-Reliance and Waiver Provisions of NDA
June 5, 2012
In RAA Management, LLC v. Savage Sports Holdings, Inc., No. 577, 2011 (Del. May 18, 2012), the Delaware Supreme Court affirmed the Superior Court’s dismissal of a fraud claim based on a non-disclosure agreement (“NDA”) entered into between RAA Management, LLC (“RAA”) and Savage Sports Holdings, Inc. (“Savage”). In the action, RAA sought to recover costs incurred performing due diligence in preparation for a potential transaction with Savage, which RAA alleged it would not have pursued but for certain misrepresentations by Savage. The Court analyzed the NDA and determined that, under either Delaware or New York law, the non-reliance and waiver provisions in the NDA foreclosed Savage’s fraud claims.
On September 17, 2010, RAA entered into an NDA with Savage in order to obtain confidential documents and information as part of a due diligence process aimed at potentially acquiring Savage. The NDA explicitly provided that (1) Savage would not be held liable for RAA’s reliance on information provided during the course of due diligence: (2) Savage did not make any representations or warranties as to the accuracy or completeness of the information provided: and (3) RAA waived its right to bring claims against Savage except with respect to any representations and warranties that may be made in a final agreement of sale. On December 22, 2010, subsequent to a cursory due diligence process, the parties executed a letter of intent (“LOI”) contemplating a cash acquisition of $170 million. Thereafter, RAA continued to engage in due diligence, until finally notifying Savage in March 2011 that it was no longer interested in the acquisition and believed it was entitled to $1.2 million for its “sunken due diligence costs.”
In April 2011, RAA filed suit against Savage alleging that Savage had told RAA at the outset of discussions that there were “no significant unrecorded liabilities or claims against Savage.” However, during the due diligence, Savage disclosed three such matters: (1) an investigation by the New York State Department of Environmental Conservation, (2) the potential unionization of the employees at Savage’s BowTech facility, and (3) a lawsuit that constituted a “multi-million” dollar potential liability. RAA claimed that had Savage disclosed any one of the foregoing matters early in the discussions, as it was obligated to do, RAA would not have expended any of its resources on due diligence. While RAA acknowledged that the NDA included non-reliance and waiver of claims provisions, RAA argued that such provisions should be construed as limited to mistakes, oversights, or simple disclosure negligence, but “not willful falsehoods.”
In affirming the lower court’s dismissal, the Supreme Court relied heavily on two cases that formerly analyzed NDA provisions similar to the NDA at issue. In Great Lakes Chemical Corp. v. Pharmacia Corp., 788 A.2d 544 (Del. Ch. 2001), the Court of Chancery found that where two sophisticated parties entered into an NDA disclaiming liability for the transfer of information, such parties were barred from asserting claims of fraud because such claims would effectively “defeat the reasonable commercial expectations of the contracting parties and eviscerate the utility of written contractual agreements.” Similarly, in In re IBP, Inc. S’holders Litig., 789 A.2d 14 (Del. Ch. 2001), the Court of Chancery considered provisions “nearly identical” to the NDA provisions at issue in RAA v. Savage and found that such provisions precluded liability for fraud claims under New York law. In that case, then-Vice Chancellor (now Chancellor) Strine reasoned that because the confidentiality agreement emphasized that the acquisition negotiation process would not provide a basis for reliance claims, it was reasonable to require the potential buyer to convert its reliance into actual contractual warranties and representations in order to establish a basis for legal claims. Following the reasoning of these decisions, the Supreme Court found that the non-reliance and waiver provisions were unambiguous and, under their plain language, were not limited to unintentional inaccuracies.
The Supreme Court also rejected RAA’s assertions that the non-reliance and waiver provisions should not bar its claims under New York’s “peculiar knowledge” exception and/or on public policy grounds. While the Court acknowledged New York’s peculiar knowledge exception—that claims of fraudulent inducement could not be barred by non-reliance provisions if the facts at issue were “peculiarly within the misrepresenting party’s knowledge”—it found that the exception had been rejected by New York courts in circumstances where sophisticated parties could have easily insisted on contractual protections for themselves. Accordingly, assuming that New York law applied (an issue that was disputed by the parties), the Court found that the “peculiar knowledge” exception would not be applicable in these circumstances. Regarding public policy, the Court relied on Abry Partners v. F&W Acquisition LLC, 891 A.2d 1032 (Del. Ch. 2006), wherein the Court of Chancery found that “to fail to enforce non-reliance clauses is not to promote a public policy against lying[;] [r]ather, it is to excuse a lie made by one contracting party in writing—the lie that it was relying only on contractual representations and that no other representations had been made—to enable it to prove that another party lied.” The Supreme Court concluded that “Abry Partners accurately states Delaware law and explains Delaware’s public policy in favor of enforcing contractually binding written disclaimers of reliance on representations outside of a final agreement of sale or merger.”