Case Background
The dispute in Pilot Air Freight, LLC v. Manna Freight Systems, Inc., No. 2019-0992-JRS, 2020 WL 5588671 (Del. Ch. Sept. 18, 2020), arose out of an asset purchase agreement (the Agreement), whereby the plaintiff, Pilot Air Freight, LLC (Pilot), purchased substantially all the assets of the defendant, Manna Freight Systems, Inc. (Manna).
Under the Agreement, Manna, as the seller, made contractual representations and warranties to Pilot, the buyer, regarding the fitness of Manna’s trucking business. The parties agreed that Manna would indemnify Pilot for any breaches of the representations and warranties, and that any claim for indemnification must be filed within 15 months of the Agreement closing. Manna’s contractual representations and warranties included a statement that it had not received notice that any of its 30 largest customers for the previous calendar year would materially reduce their use of Manna’s services after the transaction closed. Apart from Manna’s contractual representations and warranties, Pilot disclaimed reliance on any extra-contractual representations.
The Agreement closed on July 16, 2018. Thereafter, Pilot alleged it discovered loss of most or all business from three of the designated key customers and one vendor, who had given Manna notice of material changes to their relationship. Pilot submitted an indemnification demand to Manna within 15 months of closing. Manna rejected the demand, resulting in Pilot filing suit against Manna more than 15 months after closing, on December 11, 2018. Pilot alleged breach of contract, breach of the implied covenant of good faith and fair dealing, fraud, and contractual indemnification against Manna.
Manna moved to dismiss Pilot’s claims. First, Manna argued the Agreement’s 15-month survival clause shortened the limitations period for claims alleging breach of representations and warranties. Second, Manna argued, among other things, that the fraud claims should fail because they were untimely for the same reason as the contractual representation and warranty claims and were barred by the anti-reliance language in the Agreement to the extent they alleged extra-contractual fraud.
The court's holding
The court granted Manna’s motion to dismiss in part and denied it in part. The court’s decision on the fraud claims asserted by Pilot is notable.
The court held that the 15-month survival clause for inaccurate representations and warranties, which barred some of Pilot’s contractual-based claims, did not bar Pilot’s fraud claims.
Manna argued that Pilot’s claim were untimely under the survival clause and, therefore, should be dismissed. In essence, Manna argued that although a party is not permitted to intentionally lie in a contract, and an anti-reliance provision cannot bar claims for “intentional fraud” predicated upon knowing falsehoods in a party’s “written representations,” nothing under Delaware law prohibits a party to a contract from agreeing not to bring such a claim after a prescribed limitations period expires.
The court disagreed with Manna because nothing in the Agreement limited intentional fraud claims to a 15-month limitations period. The court explained that, while section 9.3 of the Agreement stated Manna would have no liability for “any” claims based upon “breach” or “inaccuracy” of Manna’s representations and warranties beyond 15 months, section 9.1 stated that “[n]othing in this Agreement shall limit” Pilot’s right to recover “any amounts at any time in connection with any action or claim based upon intentional fraud.” The court held that section 9.1 of the Agreement “expressly trump[ed]” section 9.3’s broad language.
Although the court rejected Manna’s arguments, it did not rule out the possibility that “[a]t some point, in another case, this court may be called upon to assess the enforceability of a party’s unambiguous promise to bring intentional fraud claims only within a contractual limitations period.” However, the court unequivocally found that the Agreement at issue in Pilot Air Freight did not require such analysis.
Key Takeaways
- In Delaware, the default rule is that representations and warranties do not survive closing, but parties may agree to create a contractual survival period if they so choose.
- A contractual survival clause for representations and warranties, such as in an asset purchase agreement, may contractually limit the period applicable to representation and warranty claims, but it does not necessarily bar fraud claims filed after the deadline.
- Delaware law strongly favors freedom of contract, and parties to an asset purchase agreement must be aware of specific terms of the anti-reliance clause involved.
Client Alert 2020-545
