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Chancery Awards $1 as Nominal Damages for Breach of Contract; No "Knowledge-Qualifier" for Representation Clause

By Francis G. X. Pileggi, Esq.

Ivize of Milwaukee, LLC v. Compex Litigation Support LLC, and  Ivize of Kansas City, LLC v. Compex Litigation Support LLC, No. 3158-VCL and 3406-VCL (consolidated)(Del. Ch., April 27, 2009), read opinion here.

This Delaware Chancery Court case arises out of the unhappy purchase of a litigation support company. The buyer discovered after the closing that the key employees that were responsible for the largest part of the business that he purchased, had left to form a new company the day after the closing. The essence of the lawsuit was for breach of contract--of the Asset Purchase Agreement, especially relating to the representations that between the date of the Asset Purchase Agreement and the closing, the business would operate 'in the usual and ordinary course of business.'  Importantly, the court found that the purchaser did not require as part of the agreement that key employees would remain, nor did the purchaser make as a condition of the purchase that the key employees would sign non-competition agreements.

An important discussion at page 22 of the opinion and at footnote 38, rejected the argument of the defendant that there was a 'knowledge-qualifier' to the representations. The court noted that the 'default rule' is that representations of a company are not limited by 'knowledge' of the representatives of a company unless expressly so restricted in the document. Thus, the default rule is that a representation 'must be true at the time it is made to avoid a breach, regardless of who knew whether the representation was true or not.' (See citation at footnote 34.)

The court provided instruction to drafters of Asset Purchase Agreements as follows: 'to avoid confusion, practitioners should clearly define which individuals' or groups of individuals' knowledge is included in the Purchase Agreement's definition of knowledge.'

In sum, the court found that although a breach of contract was established, because no damages were proven, only nominal damages in the amount of $1 were awarded. There is a helpful discussion of the requirements for proving damages. In this case the valuation opinion offerred at trial was based on the value of the goodwill of the key employees of the business, which the Asset Purchase Agreement did not ensure would be included in the purchase, and therefore the expert on damages provided an opinion that could not be relied on by the court.

 

Full post as published by Delaware Corporate and Commercial Litigation Blog on April 30, 2009 (boomark / email).