C. Delaware
1. Delaware’s Express Warranty Statute
While the California court rejected the idea of using the language from the Uniform Commercial Code,[1] the New York court based its analysis on this section.[2]Delaware’s Uniform Code describes an express warranty as “any affirmation of fact or promise made by the seller to the buyer . . . and becomes part of the basis of the bargain.”[3]Noticeably absent from the code section is any reference to reliance by the buyer.[4]
2. Cobalt Operating v. James Crystal Enterprises
When Cobalt purchased a radio station from James Crystal Enterprises (“JCE”) it did so at least in part based on the amount of advertising revenues that JCE represented prior to closing.[5]Cobalt did perform its own due diligence, which proved the accuracy of the numbers.[6]But, when Cobalt took control of the station, revenues dropped without any change in procedure or sales. Cobalt sued for fraud, which the court would find based on the testimony at trial.[7]
JCE would then argue that Cobalt’s due diligence should have uncovered the facts at hand and, therefore, cannot claim to have relied on the representation.[8]The court rejected this contention because the purchase agreement contained “an express and unqualified representation regarding the material accuracy” of the revenues.[9]In addition, the court noted that a “breach of contract claim is not dependent on a showing of justifiable reliance.”[10]Noting the expensive nature of due diligence, the court looked to negotiated terms as “an important risk allocation function” meant to reduce the need to verify every detail.[11]
Despite the clear language of the case that prevents using the presence of due diligence as a defense to a claim of breach of warranty, the court failed to address whether such a claim requires reliance as an element.
3. Kelly v. McKesson HBOC
In another case of a business purchase that went sour, but with the seller as the party suing for breach of warranty.[12]Here the purchase was done as a merger, in which the seller merged into the buyer, and the seller received shares of the buyer as payment.[13]The number of shares were based on the buyer’s publicly traded share price.[14]However, after closing on the deal, the buyer announced a restatement of earnings that resulted in a large write-off of revenue.[15]This sent the share price plummeting, resulting in almost a $50 per share drop.[16]The seller claimed the announcement was delay to decrease the number of shares they would receive.[17]The breach of warranty action was based on the representations related to the financial results, which would later be restated.[18]
After finding that there was a warranty that the buyer had breached it, the court turned its attention to whether the seller relied on the warranty.[19]The court found precedence for reliance as a required element, noting that Delaware law requires that “a plaintiff must establish reliance for a breach of warranty claim,”[20]and that a “plaintiff must have known about the warranty and relied upon it.”[21]The court dismissed the plaintiff’s argument that reliance was not an essential element, claiming that the case the plaintiff relied upon was using Illinois law, not Delaware law.[22]
[1] Kazerouni, 278 Cal. Rptr. at 873.
[2] Ainger, 476 F.Supp. at 1228.
[3] Del. Code Ann. tit. 6, § 2-313 (West 2014).
[4] *Id.*
[5] Cobalt Operating LLC v. James Crystal Enterprises LLC, 2007 WL 2142926 at *1 (Del. Ch. 2007).
[6] *Id.*at *2.
[7] *Id.*at *2–*3.
[8] *Id.*at *27.
[9] *Id.*
[10] *Id.*
[11] Cobalt Operating, 2007 WL at *27.
[12] Kelly v. McKesson HBOC, Inc., 2002 WL 88939 (Del. Super. Ct. 2002).
[13] *Id.*at *1.
[14] *Id.*
[15] *Id.*
[16] *Id.*
[17] *Id.*
[18] Kelly, 2002 WL at *2.
[19] *Id.*at *4.
[20] *Id.*at *8.
[21] *Id.*
[22] *Id.*at *9.