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891 A.2d 1032 (Del. Ch. 2006)

Nina C. Baccala

“Don’t lie, but if you must, don’t lie about matters covered by your
representations in the contract.”1


From almost the beginning of time the notion of caveat emptor (“let the buyer beware”)

has been a part of American business dealings.2 In more recent years, however, buyers who have

been deceived by sellers have successfully obtained judicial intervention.3 On the other hand,

there has always been a countervailing American tradition of freedom of contract.4 Courts are

constantly required to balance these seemingly often-competing goals in an effort to establish a

body of commercial law that is efficient and predictable.5

Todd E. Lenson & David I. Schultz, Lies, Damn Lies and M & A Fraud, THE CORPORATE COUNSELOR, Aug. 2006,

at 2, available at

See, e.g., Conway v. Romarion, 557 S.E.2d 54, 55 (Ga. Ct. App. 2001) (involving false statements and deceptive

conduct by the sellers of a home attempting to hide extensive pet damage from the buyers).
ABRY Partners V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032, 1059 (Del. Ch. 2006).
Lenson & Schultz, supra note 1, at 2-3. See also discussion infra Part II.B.4 (reconciling the law of fraud with

freedom of contract principles).

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Consider A, a private equity firm that regularly invests in portfolio companies by

acquiring them from other private equity firms.6 Another private equity firm, B, approaches A

and offers to sell to A what appears to be a robust, growing, highly profitable business.7 A

engages in what should by all reasonable accounts be an arms-length transaction with B and buys

the portfolio company, C, only to learn after the deal closes that B provided false financial

statements and valuations of C’s worth.8 Once A learns of this it naturally attempts to rescind the

deal.9 B, however, refuses to allow A to do so, and A’s only remedy thereafter is to pursue a

fraudulent inducement claim in a civil lawsuit and request rescission from a court of law.10

The above hypothetical is unfortunately not merely just that, it is what actually happened

in the case of ABRY Partners V, L.P. v. F & W Acquisitions LLC.11 Vice Chancellor Leo E.

Strine, Jr. of the Delaware Chancery Court in ABRY upheld prior Delaware case law in

determining that “a party cannot promise, in a clear integration clause of a negotiated agreement,

that it will not rely on promises and representations outside of the agreement and then shirk its

own bargain in favor of a ‘but we did rely on those other representations’ fraudulent inducement

The term “private equity” commonly refers to any type of equity investment in which the target’s equity is not

freely tradeable on a public stock market, though such private equity firms themselves often invest in companies

listed on public exchanges and subsequently take them private. Wikipedia, the Free Encyclopedia, (last visited May 16, 2007).

Amended complaint at 1, ABRY Partners V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032 (Del. Ch. 2006) (No.

Id. at 1-2.
Id. at 67.
ABRY, 891 A.2d at 1040.
891 A.2d 1032.

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claim.”12 The ABRY case itself, however, raised a more difficult question: “[T]o what extent may

a contract exculpate a contracting party from a rescission or damages claim based on false

representation of fact made within the contract itself?”13 V. C. Strine answered that question by


To the extent that the Stock Purchase Agreement purports to limit the Seller’s
exposure for its own conscious participation in the communication of lies to the
Buyer, it is invalid under the public policy of this State. That is, I find that the
public policy of this State will not permit the Seller to insulate itself from the
possibility that the sale would be rescinded if the Buyer can show either: 1) that
the Seller knew that the Company’s contractual representations and warranties
were false; or 2) that the Seller itself lied to the Buyer about a contractual
representation and warranty. …[T]he Buyer may not escape the contractual
limitations on liability by attempting to show that the Seller acted in a reckless,
grossly negligent, or negligent manner.14

In reaching that holding, however, V.C. Strine paid lip service to the overriding public policy of

not wanting to allow parties to be able to negotiate a “license to commit fraud.”15 Though the

holding left open the possibility of a victory for the buyer if it ultimately proved that the seller

intentionally participated in lies within the four corners of the Agreement itself, 16 this case could

have been decided in a way that would have been more consonant with the underlying public

policy concerns raised by its unique facts.17 Because the truthfulness of the provisions within the

Agreement itself was at issue, it is the contention of this Comment that V.C. Strine overlooked

Id. at 1057.
Id. at 1059 (emphasis added).
Id. at 1064.
MBIA Ins. Corp. v. Royal Indem. Co., 426 F.3d 204, 218 (3d Cir. 2005) (quoting CP Kelco U.S., Inc. v.

Pharmacia Corp., No. 01-240-RRM, 2002 WL 31230816, at *5 (D. Del. Oct. 2, 2002)).
Ruling in ABRY Partners v. Providence Equity Case Has Lessons for Buyers and Sellers, PRIVATE EQUITY

UPDATE (Goodwin Procter LLP, Boston, Mass.), Mar. 14, 2006, at 1-2, available at
See infra Part II.B.

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an opportunity to reach an equitable result while simultaneously upholding existing Delaware

precedent: To allow the plaintiff buyer rescission due to the defendant seller’s breach by non-


With that in mind, Part I of this Comment delineates the background of the ABRY case, as

well as existing Delaware precedent.19 Part II of this Comment then argues that, though a trial

on the merits would have probably led to the right result,20 a better precedent would have been to

allow the plaintiff rescission based on a theory of breach by non-performance.21 As the public

policy against fraud is a “strong and venerable one” that is largely founded on the societal

consensus that lying is wrong, Part II also considers the public policy implications of the ABRY

holding, a precedent that as crafted could lead to harsh inequities in future M & A cases.22 This

Comment then concludes by considering the consequences that a decision such as ABRY will

have on the M & A world, as the latter will likely have to live with the decision for an indefinite

amount of time.23

See infra discussion Part II.
See infra Part I.
See Ruling in ABRY Partners v. Providence Equity Case Has Lessons for Buyers and Sellers, supra note 16, at 2-

See infra discussion Part II.A.
See Posting of Gordon Smith to Conglomerate,

(Feb. 28, 2006). In this paper, “M & A” is used to refer to mergers and acquisitions.
On May 25, 2006 the parties settled this lawsuit, with the defendant making an unspecified payment to the

plaintiff in exchange for a minority stake in the portfolio company. Marrecca Fiore, ABRY Settles Over F +W Sale,

FOLIO MAGAZINE, June 30, 2006, available at Although this case will therefore not

proceed to trial nor go up on appeal, the twenty-five page opinion dismissing the defendant’s motion to dismiss

© Nina Baccala 2008 4 of 25


A. ABRY Partners V, L.P. v. F & W Acquisition LLC24

1. Parties

This case involved a multiplicity of related entities.25 Plaintiffs ABRY Partners, L. P. and

ABRY Partners V Affiliated Investors (“ABRY”) are Delaware incorporated limited partnerships

with their principal place of business in Boston, Massachusetts.26ABRY is a media-focused

private equity firm that owns several media companies throughout the United States, and was on

the buy-side of the deal at issue in this case.27

Defendant F & W Acquisition, Inc. was owned by Defendant F & W Acquisition LLC,

who was in turn owned by Defendant Providence Equity Partners, Inc. and several of its

affiliates (“Providence”).28 Providence, the seller in this case, is a private equity firm

discusses concepts that are germane to nearly all M & A contracts involving private equity firms, with its holding

currently binding on all future parties who come before the Chancery Court for relief. See Franc Del Fosse, Risk

Allocation in Private Company M & A Contracts: The Delaware Court Ruling in the ABRY Partners Case, THE

CORPORATE COMMUNICATOR (Snell & Wilmer L.L.P., Phoenix, Ariz.), April 2006, at 1. Thus, this Comment strives

to provide a means of eradicating what it contends is essentially a wrongly decided case.

891 A.2d 1032 (Del. Ch. 2006).
Id. at 1036. The details as to the various entities and corresponding ownerships is actually more complicated than

how presented in this Comment; however, such configurations are not relevant to the arguments presented herein

and are thus omitted for the sake of clarity.

Id. at 1037.
Id. at 1036.

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specializing in communications and media companies, and is incorporated in Delaware, with its

principal place of business in Providence, Rhode Island.29

F & W Publications, Inc. (hereinafter “the Company”) is a publishing company based in

Cincinnati, Ohio and incorporated in Delaware.30 The Company publishes special interest

magazines and books both in the United States and internationally.31 Some of its representative

publications include Popular Woodworking, Scuba Diving, Family Tree Magazine, Country’s

Best Log Homes, and Writer’s Digest.32 At the time immediately before the Stock Purchase

Agreement was consummated, Providence (through its affiliates) owned all of the shares of the


2. Facts of the Case

Providence first acquired the Company in 2002.34 Though the Company had its own key

managers who had no previous affiliation with Providence, the latter, through its principals,

nonetheless interacted with the Company on a regular basis.35 In December 2004 Providence

decided to sell the Company through an M & A auction process,36 and began contacting potential

buyers.37 On or about March 2005 Providence contacted ABRY.38 ABRY indicated to

ABRY, 891 A.2d at 1036.
Id. at 1037.
Id. at 1037-38.
See Lenson & Schultz, supra note 1, at 1.
Amended complaint, supra note 7, at at 17, 30.
Id. at 30.

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Providence that they would offer to purchase the Company based on ten times its EBITDA for

the twelve months ending on June 30, 2005.39 Providence then provided financial statements for

the year ending December 31, 2004 and the first quarter of 2005.40 In reliance on these

statements ABRY agreed to pay $500 million for the Company41 and, accordingly, on June 11,

2005 executed a Stock Purchase Agreement to memorialize the terms of the purchase.42 The

contemplated sale of stock closed on August 5, 2005.43

Several provisions of the parties’ Stock Purchase Agreement were at issue in this case.44

The first relevant provision of the Agreement stated:

Acquiror acknowledges and agrees that neither the Company nor the Selling
Stockholder has made any representation or warranty, expressed or implied, as
to the Company or any Company Subsidiary or as to the accuracy or
completeness of any information regarding the Company or any Company
Subsidiary furnished or made available to Acquiror and its representatives,
except as expressly set forth in this Agreement . . . and neither the Company nor
Selling Stockholder shall have or be subject to any liability to the Acquiror or
any other Person resulting from the distribution to the Acquiror, or Acquiror’s
use of or reliance on any such information or any information, documents or
material . . . in expectation of, or in connection with, the transactions
contemplated hereby.45

This sort of contractual provision is known as an anti-reliance clause.46 It operates to limit a

seller’s liability to those claims and representations made within the four corners of the

ABRY, 891 A.2d at 1038. “EBITA” is a determination of a company’s free cash flow, measured by its earnings

before interest, taxes, depreciation, and amortization. Id.

Amended complaint, supra note 7, at 33.
ABRY, 891 A.2d at 1038.
Amended complaint, supra note 7, at 39.
ABRY, 891 A.2d at 1038.
See generally id. at 1041-45 (detailing various provisions of the Agreement with citations).
Id. at 1041.
Id. at 1059.

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agreement itself.47 By its plain terms, the clause was a promise from ABRY to Providence that

neither the latter nor the Company had made any representation or warranty as to the accuracy of

any information about the Company except as set forth in the Stock Purchase Agreement itself,

and that neither Providence nor the Company would have any liability to ABRY or any other

person for any extra-contractual information made available in connection with the contemplated


Pertaining to the cause of ABRY’s fraudulent inducement claim, § 3.6 of the Agreement

promised that:

The Company Financial Statements: (i) are derived from and reflect, in all
material respects, the books and records of the Company and the Company
Subsidiaries; (ii) fairly present in all material respects the financial condition of
the Company and the Company subsidiaries at the dates therein indicated and
the results of operations for the periods therein specified; and (iii) have been
prepared in accordance with GAAP applied on a basis consistent with prior
periods except, with respect to the unaudited Company Financial Statements, for
any absence of required footnotes and subject to the Company’s customary year-
end adjustments.49

This is one of the most important representations in any acquisition agreement.50 The

representation about financial statements is “[p]robably one of the two most important

representations a Company is asked to make about its business.”51

Along with § 3.6 was § 8.2(h)(i), which required Providence to provide an Officer’s

Certificate stating that “the closing conditions relating to the accuracy of not only [Providence’s],

but also the Company’s, representations and warranties were satisfied, that the Company and

Id. at 1041.
ABRY, 891 A.2d at 1041-42.
Id. at 1042.

11.04 [8] (2001).

© Nina Baccala 2008 8 of 25

[Providence] had complied with the covenants applicable to them . . . .”52 The importance of this

section is that it brought the principal-agent relationship between Providence and the Company

within the Agreement’s four corners.53

Providence also agreed to indemnify ABRY for any inaccuracies within the Agreement


[Providence] agrees that, after the Closing Date, the Acquiror and the Company
. . . shall be indemnified and held harmless by [Providence] from and against,
any and all claims, demands, suits, actions, causes of actions, losses, costs,
damages, liabilities . . . to the extent such Damages . . . have arisen out of or . . .
have resulted from . . . an inaccuracy, misrepresentation, breach of, default in, or
failure to perform any of the representations, warranties or covenants given or
made by the Company or [Providence] in this Agreement . . .54

Other sections of the Agreement purport to limit ABRY in exercising this

indemnification right, however.55 § 9.1(c) limits the aggregate liability of Providence to the

amount of $20 million dollars, while § 9.9(a), the Exclusive Remedy Provision, provides that

“the indemnification rights . . . shall be the sole and exclusive remedy of the Acquiror . . . with

respect to this Agreement and the Sale contemplated hereby[.]”56

ABRY, 891 A.2d at 1043.
Though the ABRY court was somewhat ambivalent as to the extent of the agency relationship between Providence

and the Company, such relationship is easily inferred from Providence’s controlling ownership position and the fact

that Providence had, on its own behalf, delivered the Officer’s Certificate to ABRY at closing, warranting the

representations made within the four corners of the Agreement. See Del Fosse, supra note 23, at 2; supra text

accompanying note 52. Examining the contours of such a relationship is beyond the scope of this Comment,

ABRY, 891 A.2d at 1043-44 (emphasis omitted).
See id. at 1044-45.
Id. at 1044.

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Once ABRY assumed ownership of the Company, it began to uncover a host of serious

financial and operational problems.57 Most notable of all, it appeared to ABRY that Providence

and the Company management, working in concert, had manipulated the Company’s financial

statements in order to fraudulently induce ABRY into purchasing the Company at an excessive

price.58 Once ABRY became aware that the actual financials were different than what

Providence had represented, the former commenced an investigation, which revealed that the

Company’s financial statements were indeed fraudulent and that Providence’s representations as

to the accuracy of the financial statements had been false.59 Such fraudulent actions violated

GAAP,60 harmed the Company as an ongoing business, and made the Company’s financial

statements materially false and misleading.61 Upon concluding their investigation, ABRY

determined that the true value of the Company at the time of purchase had been closer to $400

million than $500 million, and that essentially they had purchased the Company for a grossly

See Amended complaint, supra note 7, at 49.
ABRY, 891 A.2d at 1038.
Amended complaint, supra note 7, at 65.
GAAP (Generally Accepted Accounting Principles) are accounting rules used to prepare, present, and report

financial statements for publicly-traded companies and many privately-held companies. Wikipedia, the Free

Encyclopedia, (last visited May

16, 2007). GAAP is not written in law, although the U.S. Securities and Exchange Commission (SEC) requires that

it be followed in financial reporting by publicly-traded companies. Id. Currently, the Financial Accounting

Standards Board (FASB), organized by the SEC, sets accounting principles for the profession and promulgates them

in the form of GAAP. See id., (last visited

May 16, 2007).

Amended complaint, supra note 7, at 49.

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overstated value.62 As a result, on November 3, 2005 ABRY requested Providence to rescind the

transaction and take back ownership of the Company.63 Providence refused and ABRY filed a

civil lawsuit in response.64

B. Existing Delaware Precedent

1. Fraudulent Inducement

Delaware has adopted the position of the Restatement Second of Contracts on the issue of

liability for fraudulent inducement: “If a party’s manifestation of assent is induced by either a

fraudulent or a material misrepresentation by the other party upon which the recipient is justified

in relying, the contract is voidable by the recipient.”65 A buyer aggrieved by fraud can typically

seek to avoid a contract or in the alternative recover damages.66 If the buyer seeks merely to

avoid the contract, it is enough to show that the misrepresentation was either intentional or

material.67 The buyer, however, must be able to show justifiable reliance on the representations

made by the seller.68 A failure of justifiable reliance is fatal to an otherwise well-pled fraudulent

inducement claim.69

2. Anti-Reliance Clauses

ABRY, 891 A.2d at 1040.
Id.; Amended complaint, supra note 7, at 67.
ABRY, 891 A.2d at 1040.
See id. at 1054 n.46 (quoting RESTATEMENT (SECOND) OF CONTRACTS § 164(1) (1979)).
Id. at 1054.
See id. at 1048 n.26 (quoting E. ALLAN FARNSWORTH, 1 FARNSWORTH ON CONTRACTS § 4.12 (3d ed. 2004)).
See Progressive Int’l Corp. v. E.I. Du Pont De Nemours & Co., No. 19209, 2002 WL 1558382, at *6 (Del. Ch.

July 9, 2002).
See id. at *7.

© Nina Baccala 2008 11 of 25

Many American jurisdictions hold that even if a buyer explicitly promised that no

representations of fact not contained in the contract had been made to it and further explicitly

promised that it was only relying on representations of fact within the contract, that same buyer

could still come forward later and assert that an extra-contractual representation of fact induced

its decision to sign the contract.70 In addressing claims involving contracts that are the product of

an arms-length negotiation between sophisticated, commercial parties, however, Delaware’s

jurisprudence has taken a different approach.71 Delaware, and the Chancery Court in particular,

have honored such anti-reliance clauses in which contracted parties have disclaimed reliance on

extra-contractual representations: “For a contract to bar a fraud in the inducement claim, the

contract must contain language that, when read together, can be said to add up to a clear anti-

reliance clause by which the plaintiff has contractually promised that it did not rely upon

statements outside the contract’s four corners in deciding to sign the contract.”72 The language of

the clause itself, however, must be explicit and, as this is a standard, not a rule, each case will

turn on the nature of its own facts.73

ABRY, 891 A.2d at 1056, 1056 n.49; Norton v. Poplos, 443 A.2d 1, 2 (Del. Super. Ct. 1982).
See ABRY, 891 A.2d at 1035, 1056, 1056 n.50 (“[T]he case law of this court gives effect to non-reliance

provisions that disclaim reliance on extra-contractual representations . . . .”). See also MBIA Ins. Corp. v. Royal

Indem. Co., 426 F.3d 204, 218 (3d Cir. 2005) (applying Delaware law and predicting that “when sophisticated

parties have inserted clear anti-reliance language . . . Delaware’s highest court will enforce it to bar a subsequent

fraud claim.”).
Kronenberg v. Katz, 872 A.2d 568, 593 (Del. Ch. 2004).
See Great Lakes Chemical Corp. v. Pharmacia Corp., 788 A.2d 544, 555 (Del. Ch. 2001).

© Nina Baccala 2008 12 of 25


A. The Legality of What Should Have Happened

1. The Theory of Breach by Non-Performance

In ABRY it is beyond dispute that the accuracy of the financial statements were material

to the Stock Purchase Agreement at issue.74 In fact, the word “material” is used twice in the

Agreement’s language addressing the financial statements.75 Furthermore, the facts also establish

that the financial statements were intentionally misleading.76 Given that ABRY had a valid

fraudulent inducement claim in that the accuracy of the financial statements were material to the

Agreement and that those statements were intentionally fraudulent,77 the rest of the case turned

on the reasonableness of that reliance in light of a strong Delaware precedent upholding anti-

reliance clauses.78 Reliance was at issue, however, not because ABRY didn’t have the right to

rely on something as material as the Company’s financial statements, but because of the

Agreement’s anti-reliance clause.79 Accordingly, “[t]he burden [was] that of demonstrating that

[the] rescission claim [was] based on false representations of fact embodied within the four

corners of the Stock Purchase Agreement itself.”80 Ironically, it is for this very reason that a

See notes 50-51 and accompanying text.
See supra text accompanying note 49.
Amended complaint, supra note 7, at 35 (“If Peggy [of ABRY] has it in her head that she is going to pay 10X

[multiple of EBITDA], let’s try to use part of the day to get her to the right EBITDA number.”).
See supra notes 50-51 and accompanying text.
See supra discussion Part I.B.2.
See ABRY Partners V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032, 1056 (Del. Ch. 2006); supra notes 45-46

and accompanying text.

ABRY, 891 A.2d at 1056.

© Nina Baccala 2008 13 of 25

better approach to achieving essentially the same outcome in ABRY would have been to grant

rescission based on a theory of non-performance of the contract by Providence.81 Such a holding

would have obtained an equitable result without offending any of Delaware’s existing anti-

reliance precedent.82

As early as 1969 Delaware recognized breach by non-performance.83 “As a general rule,

the party first guilty of a material breach of contract cannot complain if the other party

subsequently refuses to perform. . . . All that the plaintiff must show is freedom from fault with

respect to performance of dependent promises, counterpromises or conditions precedent.”84 In

recognizing breach by non-performance, the Chancery Court has adopted the position of the

See infra text accompanying notes 92-94.
See Homan v. Turoczy, No. 19220, 2005 WL 2000756, at *18 (Del. Ch. Aug. 12, 2005) (upholding the anti-

reliance clause against an assertion of fraudulent inducement based on plaintiff’s reliance on oral representations

made outside of the contract); Kronenberg v. Katz, 872 A.2d 568, 594 (Del. Ch. 2004) (integration clause alone,

without specific anti-reliance language, will not bar recovery for fraudulent inducement); H-M Wexford LLC v.

Encorp, Inc., 832 A.2d 129, 147 (Del. Ch. 2003) (upholding liability for fraudulent inducement where

representations made within the four corners of the agreement itself later proved false; language of the anti-reliance

clause only excluded reliance on representations made outside of the contract); Progressive Int’l Corp. v. E.I. Du

Pont De Nemours & Co., No. 19209, 2002 WL 1558382, at *7 (Del. Ch. July 9, 2002) (plaintiff relied upon oral

representations made outside of the contract; recovery barred by anti-reliance clause); Great Lakes Chemical Corp.

v. Pharmacia Corp., 788 A.2d 544, 556 (Del. Ch. 2001) (upholding the anti-reliance clause against an assertion of

fraudulent inducement based on plaintiff’s reliance on oral representations made outside of the contract); see also

MBIA Ins. Corp. v. Royal Indem. Co., 426 F.3d 204, 217 (3d Cir. 2005) (no liability for fraudulent inducement

where anti-reliance clause disclaimed representations made both outside and inside the four corners of the contract).

See also infra text accompanying note 95.

See Hudson v. D & V Mason Contractors, Inc., 252 A.2d 166 (Del. Super. Ct. 1969).
Id. at 170.

© Nina Baccala 2008 14 of 25

Restatement Second of Contracts.85 “When performance of a duty under a contract is due any

non-performance is a breach.”86 Furthermore, such breach is said to be “total” if “it so

substantially impairs the value of the contract to the injured party at the time of the breach that it

is just in the circumstances to allow him to recover damages based on all his remaining rights to

performance.”87 A total breach relieves or “discharges” the non-breaching party from his

remaining duties under the contract.88 The language of the Chancery Court on this matter is even

more unambiguous: “A party is excused from performance under a contract if the other party is

in material breach thereof.”89 Furthermore, while the Restatement speaks of damages as the sole

remedy for breach by non-performance,90 Delaware has gone a step further in its jurisprudence

and has recognized, in addition to an award of damages, the remedy of rescission for breach by


2. Why Breach by Non-Performance Works Better Than the ABRY Holding

The court in ABRY could have easily granted rescission for breach of the Agreement due

to Providence’s failure to deliver to ABRY financial statements that were “true and correct in all

material respects, were prepared in accordance with GAAP . . . and present fairly in all material

See Biolife Solutions, Inc. v. Endocare, Inc., 838 A.2d 268, 278 (Del. Ch. 2003); Moore Business Forms, Inc. v.

Cordant Holdings Corp., No. 13911, 1998 WL 71836, at *8 n.35 (Del. Ch. Feb. 6, 1998, revised Mar. 5, 1998).
Id. § 243(4).
See id. §§ 243(1), 245.
Biolife, 838 A.2d at 278.
RESTATEMENT (SECOND) OF CONTRACTS § 243(1) (1979) (“[A] breach by non-performance gives rise to a claim

for damages . . . .”).

Quinn v. Mitchell, No. 9559, 1989 WL 12178, at *2 (Del. Ch. Feb. 13, 1989).

© Nina Baccala 2008 15 of 25

respects the financial position of the Company.”92 When such conditions were not met, the

Company and Providence were both in breach of material terms of the Agreement.93 As a result

of Providence’s total breach, ABRY was discharged from further duty under the contract and

should have been granted rescission, since discharge would have thereafter excused ABRY from

the limitations of the Agreement’s Exclusive Remedy Provision.94 Since this particular case

turned on the failure of the promise of delivery of accurate financial statements (representations

within the contract), rather than on the actual inaccuracies contained in the financial statements

themselves (representations made outside of the contract), the ABRY court would have been able

to grant rescission without offending any of Delaware’s existing anti-reliance precedent, as the

anti-reliance provision in this case only prohibited reliance on representations made outside of

the contract’s four corners.95 Additionally, the law of integration would have been completely

maintained, as integration issues arise only when one of the parties steps outside of the four

corners of the document, while non-performance is based on what has occurred in relation to

what is inside the document.96

ABRY Partners V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032, 1042 (Del. Ch. 2006) (emphasis added).
See supra notes 50-51 and accompanying text.
Cf. Del Fosse, supra note 23, at 3. In the alternative, the court could have simply recognized the discharge and

then proceeded to consider ABRY’s fraudulent inducement claim for damages, as the occurrence of the discharge

would have also excused ABRY from the indemnity cap of $20 million. Cf. id.
For example, breach by non-performance would not be possible if the fraud had occurred solely outside of the

four corners of the contract, rather than within a term of the contract itself. See, e.g., H-M Wexford LLC v. Encorp,

Inc., 832 A.2d 129, 142-143, 144-147 (Del. Ch. 2003) (distinguishing between representations that occur outside of

the contract and representations made within the contract). See also text accompanying note 45.
See supra note 82.

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Furthermore, recognizing discharge in the case of non-performance avoids the subjective

inquiry involved in discerning one’s intent.97 Had breach by non-performance been recognized

by the court as a basis for allowing ABRY’s fraudulent inducement claim instead of the creation

of a fact-specific “what the parties knew” standard, the decision whether or not to grant

rescission under circumstances such as those at issue in ABRY would not ever have to turn on

intent, in that breach by non-performance is applicable to claims involving misrepresentations as

well as fraud.98 Such a result would be especially advantageous to the M & A world, in that both

in M & A and in securities law, “fraud” is generally understood to encompass intentional as well

as reckless misconduct, including both affirmative misrepresentations and omissions.99 Since

breach by non-performance does not take the breaching party’s intent into account, such a

finding would have been more consistent with the bodies of law governing M & A transactions

than was V.C Strine’s intent-based holding.100

A finding of breach by non-performance would also avoid the problem of rewarding a

buyer who knew of the non-performance and nevertheless chose to close on the contract

anyway.101 By not exercising the option to terminate at the time of contracting, a buyer’s right to

later assert breach by non-performance would essentially be waived, because in that instance the

Cf. Ruling in ABRY Partners v. Providence Equity Case Has Lessons for Buyers and Sellers, supra note 16, at 2-

3. See also discussion infra Part II.B.1.

Cf. supra text accompanying note 86. A cause of action for misrepresentation is the same as that for fraud, with

the exception that the defendant need not know or believe that its statement is false. Stephenson v. Capano Dev.,

Inc., 462 A.2d 1069, 1074 (Del. 1983).

Lenson & Schultz, supra note 1.
See Lenson & Schultz, supra note 1; supra text accompanying note 14.
ABRY Partners V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032, 1065 n.86 (Del. Ch. 2006).

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buyer could not truly be said to have been injured by the seller’s non-performance.102 “The

Buyer’s ability to assert a fraud claim . . . may be adversely affected if the Buyer discovers an

inaccuracy before closing but fails to disclose the inaccuracy to the Sellers until after the

closing.”103 Conversely, having the inquiry turn on the seller’s intent alone would only

perpetuate instances where the buyer closes on a deal in which he or she knew of the breach

beforehand but failed to object to it.104 No reasonable business entity would or should agree to

allow the other party to the contract to lie within that contract.105 And if they do agree to such a

deal, equity could not possibly sanction rescission under those circumstances.106

B. The Policy of Why It Should Have Happened

Though V.C. Strine did not appear morally troubled by the result of his holding,107 others

have not been so quick to embrace it, and some have predicted that ABRY rests on shaky legal

analysis.108 V.C. Strine himself noted that the terms of an anti-reliance clause would stand only

“[a]bsent an overriding public policy.”109 That being said, and given that there is a public policy

interest in truthfulness, that interest should apply with more force, not less, to contractual

Cf. id.

Cf. id.
See Posting of Larry Ribstein to Ideoblog,

(Feb. 27, 2006, 06:37 PM).

See ABRY, 891 A.2d at 1065 n.86.
Id. at 1035 (“[T]here is no moral imperative to impinge on the ability of rational parties dealing at arms-length to

shape their own arrangements.”).

See, e.g., Posting of Larry Ribstein to Ideoblog, supra note 105.
ABRY, 891 A.2d at 1055.

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representations of fact.110 As such representations of fact ought to be the most reliable of

representations, a law intolerant of fraud should abhor parties that make them knowing they are

false.111 To hold otherwise would be tantamount to promoting a public policy that permits


1. The “Double Liar” Problem

ABRY’s holding raises several additional public policy concerns.113 The first is the

“double liar” problem.114 Allowing a party to sue for fraudulent inducement in the face of an

anti-reliance clause to the contrary has the problem of “excus[ing] 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 orally or in writing

outside the contract’s four corners.”115 In such a scenario a plaintiff would be pointing a finger at

the defendant, calling him a liar, while at the same time being a liar himself.116 To allow a buyer

to prevail on its claim in such an instance would be equivalent to sanctioning the buyer’s own

fraudulent conduct.117

The ABRY holding does not make this problem go away, in that if the buyer promised not

to sue for rescission even if the seller lied to it about the accuracy of a contractual representation,

Id. at 1057.
See supra note 15 and accompanying text.
See supra text accompanying note 1.
See ABRY, 891 A.2d at 1058.
See id.

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its decision to later renege on that promise if the buyer could prove that the seller intentionally

lied within the contract suggests that the former was untruthful in the first instance.118 By instead

recognizing the plaintiff’s discharge from further duty under the contract, however, the plaintiff

would no longer be fostering a “double liar” scenario, in that he or she would have been

equitably discharged from the remaining requirements of the contract that would purport to limit

the seller’s liability.119 “Given the potential for misrepresentation from each side of the

agreement, the safer route therefore would be to leave parties that can protect themselves to their

own devices, enforcing the agreement that they actually fashion.”120 Thus, a finding based on

recognition of Providence’s breach due to its non-performance would resolve the “double liar”

problem inherent in V.C. Strine’s holding,121 by making the dispute turn on the parties’ actual

performance rather than on a subjective inquiry of what each party’s intent was when forming

the contract.122

2. The Market Inefficiency Problem

Id. at 1064 n.85.
See RESTATEMENT (SECOND) OF CONTRACTS § 245 (1979) (“Where a party’s breach by non-performance

contributes materially to the non-occurrence of a condition of one of his duties, the non-occurrence is excused.”).
MBIA Ins. Corp. v. Royal Indem. Co., 426 F.3d 204, 218 (3d Cir. 2005). This language is especially pertinent

when one considers that the Agreement at issue in ABRY did not contain an anti-reliance clause disclaiming liability

for representations within the contract itself. Supra text accompanying note 45; see also In re IBP, Inc.

Shareholders Litig., 789 A.2d 14, 74 (Del. Ch. 2001) (“To the extent that a contracting party chose not to negotiate

for specific language regarding an issue, the most plausible inference is that the issue was simply not fundamental

enough to buttress a rescission claim.”).

ABRY, 891 A.2d at 1064 n.85.
See Ruling in ABRY Partners v. Providence Equity Case Has Lessons for Buyers and Sellers, supra note 16, at 3.

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V.C. Strine further asserted in ABRY that “[i]f the Seller, a private equity firm, gets a rap

as a fraudster who tries to sell portfolio companies based on false representations, that Seller will

pay a price.”123 A theory of market efficiency, though a desirable goal, is just not tenable in a

situation such as the one at bar, considering that in hotly sought-after M & A deals, buyers, to

increase the likelihood of winning an M & A auction, are regularly willing to accept various

seller-oriented provisions.124 This is particularly common in M & A auctions, such as the one in

ABRY.125 As buyers tend to view these provisions as mere boilerplate having less significance

than the agreement’s primary business terms, the M & A market is not likely to do justice within

itself.126 Though one could argue that after ABRY buyers should be more informed, doesn’t such

a holding defeat the very goal of efficiency that the court was aiming for?127 Now that buyers

will have to be so excessively leery of what the seller knew and didn’t know, that will likely

impede market efficiency much more so than a decision that would have allowed rescission of

the contract on the basis of Providence’s non-performance.128

3. The Excessive Litigation Problem

The holding in ABRY will also surely impede another efficiency goal: minimizing the

number of civil lawsuits filed.129 In the M & A environment, disputes involving alleged fraud

ABRY, 891 A.2d at 1061.
Lenson & Schultz, supra note 1.
See supra note 36 and accompanying text.
See Lenson & Schultz, supra note 1.
Cf. Ruling in ABRY Partners v. Providence Equity Case Has Lessons for Buyers and Sellers, supra note 16, at 3.
Cf. supra text accompanying note 97.
Cf. Ruling in ABRY Partners v. Providence Equity Case Has Lessons for Buyers and Sellers, supra note 16, at 3.

© Nina Baccala 2008 21 of 25

have become more common.130 The private equity market in particular has recently experienced

much growth; inherent in such growth, however, is increased competitive pressures and less

collegiality than what was a generation ago.131 Cases such as ABRY indicate that the typically

insular world of sophisticated private equity firms is becoming less averse to resolving disputes

through the very public means of litigation.132 Thus, litigation between private equity firms “is

unlikely to decrease.”133 A holding such as ABRY’s that now requires a factual analysis of the

parties’ intent, rather than a legally-mandated adherence to the explicit terms of the agreement’s

four corners,134 will only likely increase the amount of litigation in an environment that is

already seeing it multiply.135

4. The “Freedom of Contract” Problem

V.C. Strine would not come out differently in ABRY for another reason: an overwhelming

desire on his part to uphold freedom of contract.136 In the opinion, V.C. Strine notes the “wealth-

creating and peace-inducing effects of civil contracts.”137 V.C. Strine advises that courts, when

fashioning common law limits on contractual freedoms, avoid inhibiting economic activity that

“might be valuable to the parties and society more generally.”138 If freedom of contract is so

See Del Fosse, supra note 23.
Ruling in ABRY Partners v. Providence Equity Case Has Lessons for Buyers and Sellers, supra note 16, at 3.
See supra notes 120-122 and accompanying text.
See Ruling in ABRY Partners v. Providence Equity Case Has Lessons for Buyers and Sellers, supra note 16, at 3.
See ABRY Partners V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032, 1059-60 (Del. Ch. 2006).
Id. at 1060 n.66 (quoting Libeau v. Fox, 880 A.2d 1049, 1056 (Del. Ch. 2005), aff’d in part, rev’d in part, 892

A.2d 1068 (Del. Super. Ct. 2006)).

Id. at 1061.

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important, then, if anything, Delaware law ought to take “contracts and written representations

seriously[,]”139 and have granted rescission based on a failure of performance of the Agreement’s

very terms.140 V.C. Strine makes another assertion: “There remains much harshness in the world,

and such entities are unlikely candidates to place at the head of the line for judicial protection,

especially when the legislature is free to consider providing such relief.”141 Though this is a true

statement in that judicial overreaching is never good policy,142 it is nonetheless the decision

maker’s role to enforce agreements based on an objective discernment of the terms of the parties’

agreement.143 But if that decision maker enforces the wrong agreements, those that shouldn’t be

enforced, then we are as far from freedom of contract as we would be were the decision maker to

refuse to enforce any agreements at all.144 “The institution [of freedom of contract] . . . is as

much constituted by the exceptions to enforcement as by the practice of enforcement.”145 More

specifically, in achieving true freedom of contract, a decision maker should allow the parties to

buy and sell at whatever price they like and on whatever terms, as long as the agreement meets

the test of voluntariness, for one should not be bound unless they affirmatively intended to be

Homan v. Turoczy, No. Civ.A. 19220, 2005 WL 2000756, at *17 (Del. Ch. Aug. 12, 2005).
See supra note 95.
ABRY, 891 A.2d at 1062.
See, e.g., Lochner v. New York, 198 U.S. 45, 64-65 (1905) (invalidating a democratically-enacted employment

regulation because of the Court’s belief that the provision was not a good idea).
See THE FEDERALIST NO. 78, at 474 (Garry Wills ed., 1982) (“The interpretation of the laws is the proper and

peculiar province of the courts.”).

Duncan Kennedy, Distributive and Paternalistic Motives in Contract and Tort Law, With Special Reference to

Compulsory Terms and Unequal Bargaining Power, 41 MD. L. REV. 563, 569 (1982).

© Nina Baccala 2008 23 of 25

bound.146 Anything less is not true freedom of contract.147 As ABRY did not affirmatively agree

to be bound by Providence’s fraudulent conduct, a policy true to freedom of contract would have

granted rescission of the Agreement due to the latter’s breach by non-performance, instead of

upholding an agreement whose true character lacked voluntariness.148


Thus, ABRY Partners V, L.P. v. F & W Acquisitions LLC was wrongly decided and its

holding should be reconsidered by the Chancery Court in future cases.149 As V.C. Strine so

rightfully notes “it is difficult to identify an economically-sound rationale for permitting a seller

to deny the remedy of rescission to a buyer when the seller is proven to have induced the

contract’s formation or closing by lying.”150 For a court to choose to follow an approach when

dealing with fraud or misrepresentation that recognizes breach by non-performance is not to

allow an entity who entered a contract off the hook when the contract becomes inconvenient for

them; rather, it is because enforcement of the contract threatens a well-recognized public policy

interest of concern to the business community.151 Such an alternative holding in ABRY would

have obtained equity for the plaintiffs, who had contracted for certain affirmative representations

within the four corners of the Agreement that were not met, while simultaneously upholding

Id. at 569-70.
Id. at 569.
See id. at 570.
See supra discussion Part II.
ABRY, 891 A.2d at 1036.
See id. at 1061 n.75 (noting that the courts will not allow rescission as “a sword for parties to avoid their

contracts when avoidance suits their personal interests, but as a shield to protect the community in general when the

terms of a contract endanger the public interest.”).

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existing Delaware precedent concerning anti-reliance clauses.152 A theory of breach by non-

performance would not reward carelessness or parties who fail to use the protections within the

contract that they bargained for,153 but would instead circumvent the evidentiary uncertainty

inherent in trying to ascertain one’s intent or knowledge base, thus avoiding “a tour through [a

defendant’s] cranium”154 Additionally, the problems of “double liar,” economic inefficiency, and

excessive litigation are avoided.155 Lastly, granting rescission due to breach by a party’s non-

performance best balances the law of fraud with the desire for freedom of contract and actually

reconciles the two without dicta that is reminiscent of the dead doctrine of economic substantive

due process.156

Once ABRY was settled, both corporations sent a memo to investors, stating “‘there has

been an end to the pending litigation, which we believe is a win-win solution and in the best

interests of both parties. [The settlement] will . . . avoid the expenditure of additional finance and

human resources to pursue the litigation.”157

It’s time now for the Chancery Court to recognize a separate but related principal:

“[T]here is no economic efficiency to reward parties who ‘lie.’”158

See supra note 82.
See Homan v. Turoczy, No. 19220, 2005 WL 2000756, at *18-19 (Del. Ch. Aug. 12, 2005).
Skycom Corp. v. Telstar Corp., 813 F.2d 810, 814 (7th Cir. 1987).
See discussion supra Part II.B.1-3.
See Marc C. Niles, Ninth Amendment Adjudication: An Alternative to Substantive Due Process Analysis of

Personal Autonomy Rights, 48 UCLA L. REV. 85, 137 n.165 (2000) (the “‘substantive due process’ doctrine was an

invention designed to authorize what was, in fact, the illegitimate judicial imposition of a theory of economic

efficiency and the morality of economic relations on the people of the states and the nation.”).
Fiore, supra note 23.
See Lenson & Schultz, supra note 1, at 3.

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