Shearman & Sterling LLP | M&A and Corporate Governance Litigation Blog | Delaware Supreme Court Holds That Employer May Not Avoid Advancing Former Executive’s Litigation Expenses By Claiming Hiring Was Induced By Fraud<br >  
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  • Delaware Supreme Court Holds That Employer May Not Avoid Advancing Former Executive’s Litigation Expenses By Claiming Hiring Was Induced By Fraud
     

    12/12/2016
    On November 28, 2016, in a decision penned by Chief Justice Leo E. Strine Jr., the Delaware Supreme Court affirmed the Delaware Court of Chancery’s ruling that fraud in the inducement could not be raised as a defense to a summary advancement proceeding.  Trascent Mgmt. Consulting, LLC v. Bouri, No. 126, 2016 (Del. Nov. 28, 2016).  More specifically, the Court held: “Where a party has employed an officer under a contract where that party agreed to provide for advancement [of legal fees and costs] . . . until a court’s final judgment that the officer is not entitled to indemnification, that party may not escape the obligation by injecting into a summary advancement proceeding a defense based on the argument that the underlying contract under which the parties are operating is invalid altogether, because of fraud in the inducement.”

    Appellee George Bouri had been employed as an executive of appellant Trascent Management Consulting, LLC (“Trascent”) for approximately sixteen months before Trascent terminated Bouri and sued him for violating his employment agreement.  Bouri, in turn, demanded Trascent advance his defense costs pursuant to that same employment agreement.  Trascent, however, argued that Bouri had fraudulently induced it to enter into the employment agreement and, therefore, the advancement clause was unenforceable. 

    The Court of Chancery rejected Trascent’s argument, reasoning that an employer that promises its employee advancement of fees could not escape that obligation by contending the employment contract was invalid and delaying the employee’s right to advancement until the employer’s plenary claim is adjudicated.  The Delaware Supreme Court agreed.  Sanctioning that kind of defense, according to the Court, would permit the employer “to escape its clear promise to make advancement until a court found indemnification inappropriate.”  In so ruling, the Court noted that “Trascent knew it agreed to provide a right [to advancement], subject to expedited specific enforcement, and it could not [have] reasonably believe[d] that it could deny that right simply by alleging that the contract was invalid.” 

    Interestingly, in a footnote, the Court analogized advancement provisions to agreements to arbitrate, “where similar incentives for unproductive gamesmanship arise” and parties often argue that the arbitration provision was induced by fraud in order to avoid arbitration when a dispute actually arises.  The Court highlighted that “[m]uch like contracts for advancement, this state’s public policy favors enforcement of valid arbitration agreements and therefore these arguments have been rejected by our courts.”      
    CATEGORY: Attorneys’ Fees

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