Delaware Supreme Court Confirms That Imperfect Due Diligence Does Not Bar Contractual Fraud Claims

On July 1, 2026, the Delaware Supreme Court issued an opinion in Paragon Metals Holdings LLC v. Smith, affirming in part and reversing in part the Superior Court’s post-trial decision involving a $100 million acquisition gone wrong. Below, the Superior Court held that the buyers of an automobile components manufacturer (Paragon) failed to prove their fraud claim against Paragon’s founder and then-CEO (Smith) because the buyers were “willfully blind” to the falsity of Smith’s contractual representations, such that they could not establish justifiable reliance. On appeal, the Supreme Court reversed the Superior Court’s holding that the buyers’ reliance was not justified. The decision delivers important guidance for M&A practitioners on the interplay between contractual warranties, anti-reliance clauses, and the impact of imperfect due diligence on potential fraud claims.

Background / Summary of Superior Court’s Decision

Affiliates of a private equity firm (together, Stellex) acquired Paragon Metals, an auto components manufacturer, for $100 million. According to the decision, unbeknownst to Stellex, Paragon’s two largest customers had communicated their intent to materially reduce future purchase orders—and Smith had actively concealed this information during negotiations. After the transaction closed, customer orders plummeted, the company nearly went bankrupt, and Stellex was forced to inject an additional $37 million to keep operations afloat. It ultimately initiated litigation in Delaware Superior Court.

As to the fraud claim at the heart of the dispute, Stellex argued that certain representations and warranties in the operative equity purchase agreement were rendered false as a result of the concealed information—including Smith’s representations that no material adverse effect existed and that Smith had no knowledge of customers decreasing purchases.

As noted above, the trial court rejected these fraud claims on the basis that Stellex failed to establish justifiable reliance.  Per the trial court, Stellex failed to establish justifiable reliance—a necessary element for its fraud claim—because, among other things, Stellex had overlooked certain “red flags” regarding the future lower purchasing volume. The trial court’s justifiable-reliance holding also relied on the agreement’s one-sided anti-reliance clause, in which Stellex acknowledged that it was relying on its own independent investigation in addition to the express contractual representations and warranties set forth in the agreement; based on this clause, the Superior Court found that Stellex was obligated to conduct reasonable diligence (and that it would have discovered the falsity of the disputed contractual representations if it had done so). The Supreme Court disagreed.

Key Holdings on Appeal

Anti-Reliance Clause Cannot Be Invoked to Establish Justifiable Reliance. The Supreme Court explained that the agreement’s one-sided anti-reliance clause—where Stellex disclaimed reliance on extra-contractual representations—was intended to protect Smith from extra-contractual fraud claims. It cannot be invoked by Stellex to establish justifiable reliance on intra-contractual warranties, nor can it be used to impose a due diligence obligation on the buyer.

Independent-Investigation Language Did Not Impose Duty of Reasonable Due Diligence. The anti-reliance clause stated Stellex had conducted an “independent investigation” of Paragon “to its satisfaction.”  Here, again, the Court explained the intent of this provision was to “waive[] potential extra-contractual fraud claims against Smith.”  It could not be invoked by Smith to impose an affirmative obligation onto Stellex to conduct objectively reasonable due diligence: “In agreeing to the provision, Stellex intended to waive a right, rather than assume an obligation.  Further, even if the provision required Stellex to perform some due diligence, it did not impose an objective standard requiring that the diligence be reasonable.”  The diligence need only satisfy Stellex’s own subjective standard; even if the diligence was imperfect, that fact does not preclude Stellex from relying on contractual representations and warranties. 

Willful Blindness Reversed—Naïve Trust Is Not Enough. The Supreme Court reversed the trial court’s holding that Stellex remained “willfully blind” to the falsity of Smith’s representations. Willful blindness requires both (a) a subjective belief of a high probability that a fact exists and (b) deliberate actions to avoid learning that fact. The fact that Stellex trusted in Smith, “while perhaps naïve, did not amount to deliberate action to avoid discovering the truth.”  In reversing this finding, the court also emphasized that “Smith concealed the truth” when Stellex raised questions during the diligence process.

Preponderance Standard Confirmed for Delaware Fraud. The Court confirmed that common law fraud claims in Delaware are governed by the preponderance of the evidence standard—they do not require clear and convincing evidence.

Imminent Bankruptcy Constitutes an MAE. The Court affirmed that the company’s imminent risk of bankruptcy satisfied the “material adverse effect” standard under the agreement’s warranty provisions.

Key Takeaways

• Sellers cannot rely on buyers’ imperfect diligence to evade contractual fraud. Where a seller intentionally conceals material information, the buyer’s failure to independently discover the fraud does not extinguish reliance on express contractual warranties.
• Anti-reliance clauses protect sellers from extra-contractual claims—they do not impose affirmative investigation obligations on the buyer to conduct objectively reasonable due diligence.
• Willful blindness is a high bar. A buyer’s failure to follow up on ambiguous signals—or even naïve trust in a seller—does not constitute the deliberate avoidance of knowledge required for a willful blindness finding, especially where a seller is concealing information in response to a buyer’s due-diligence inquiries.
• Preponderance of the evidence continues to govern Delaware common law fraud claims.
• Practical advice for deal practitioners: Buyers should still conduct robust due diligence as a matter of best practice and risk management—but this decision ensures that a seller’s deliberate concealment will not be rewarded merely because the buyer’s diligence was imperfect.