This case summary was prepared by Marielle MacMinn.
In the recent Delaware Court of Chancery decision Edinburgh Holdings, Inc. v. Education Affiliates, Inc., the court considered the viability of overlapping claims of breach of contract, breach of fiduciary duty, and the implied covenant of good faith and fair dealing. Ultimately, Vice Chancellor Slights concluded that where these claims stem from the same conduct, it is impermissible to bring them all, without additional facts, due to their duplicative nature.
EA counterclaimed, alleging that (1) they were fraudulently induced to sign the APA due to the falsely promised revenue growth, (2) Edinburgh breached the APA through their mismanagement, and (3) due to their mismanagement, Edinburgh breached their fiduciary duties to EA.
On cross motions to dismiss, the Vice Chancellor dismissed Edinburgh’s breach of the implied covenant of good faith and fair dealing claim, and EA’s fraudulent inducement and breach of fiduciary duty claims based on their duplicative nature. The only remaining issues were the breach of contract claims under the APA, which, he reasoned, encompassed the entirety of each party’s viable claims.
ANALYSIS: Overlapping Claims and Impermissible Bootstrapping
First, Vice Chancellor Slights reiterated the general Delaware rule that requires courts to “dismiss a breach of fiduciary duty claim where it overlaps completely with a breach of contract claim and arises from the same underlying conduct or nucleus of operative facts as the breach of contract claim.” Where claims appear to be duplicative and based on the same underlying conduct, the court will dismiss the repetitive claim unless “there is an independent basis for fiduciary claims arising from the same general events.”
To determine this issue, the Court “inquires whether the fiduciary duty claims depend on additional facts, are broader in scope, and involve different considerations in terms of a potential remedy.” In terms of the implied covenant, it is only available as a claim “where the terms to be implied are missing from the contract; it cannot be invoked to override the express terms of a contract.”
In addition to reaffirming the prohibition on duplicative claims that stem from the same conduct, the court rejected EA’s attempt to bootstrap their fraud claim to the breach of contract claim by merely alleging that Edinburgh never intended to perform its obligations. “In other words, a plaintiff cannot state a claim for fraud simply by adding the term ‘fraudulently induced’ to a complaint or alleging that the defendant never intended to comply with the agreement at issue when the parties entered into it.”
Citing Narrowstep, the court observed that “couching an alleged failure to comply with a contract as a failure to disclose an intention to take certain actions [which are] arguably inconsistent with that contract is exactly the type of bootstrapping this Court will not entertain.” To hold otherwise would open the door to an overwhelming number of commercial transactions where the parties contracted on projected future revenue – a number that is more akin to fortune telling than reliable fact.