Client Alert: Order Matters: Delaware Court Rewrites the Rules on Materiality Scrapes
Date: August 27, 2026
Background
ISS Facility Services sold its cleaning services and janitorial services business to JanCo for $80 million in 2021. After closing, JanCo brought an indemnification claim alleging that ISS breached its "absence of changes" representation. The trigger was not dramatic: a spike in temporary labor costs and operational disruption caused by a botched HR system rollout during the pre-closing period. See JanCo FS 2, LLC v. ISS Facility Services, Inc., 344 A.3d 1009 (Del. Super. Ct. Aug. 21, 2025). The post-trial opinion was issued by the court's Complex Commercial Litigation Division.As written, the representation was tied to a "Material Adverse Effect." But the purchase agreement also contained a standard materiality scrape. For indemnification purposes, the scrape disregarded all qualifications tied to "materiality," "Material Adverse Effect," "Material Adverse Change" and similar terms when determining whether a breach had occurred.
The Court's Order-of-Operations Holding
The decision's central holding concerns sequencing. The court held that a materiality scrape must be applied in two steps, in order:
- First, substitute the defined term ("Material Adverse Effect") with its full definitional text.
- Then strip the materiality qualifiers out of that expanded text.
Applied in that order, ISS's "Material Adverse Effect" standard collapsed into a bare "adverse effect" standard. Under that lowered standard, the court found ISS had breached, even though the underlying facts fell well short of a true Material Adverse Effect. The court noted that Delaware cases finding a Material Adverse Effect have generally involved profit declines in the range of 40% or more.
Deal Structure as Supporting Evidence
The court did not rely on the contract text alone. It also pointed to the deal's economics, specifically the indemnification basket and cap, as confirmation that the parties intended the lower standard. A relatively modest basket, the court reasoned, would make little sense if proof of a true Material Adverse Effect were required, since a loss of that size would blow through both the basket and the cap regardless.The court also rejected ISS's argument that this result set an unfairly low bar for breach. It declined to penalize JanCo, the buyer, for having negotiated favorable terms.
The Catch: Breach Does Not Equal Recovery
Winning on breach translated into no recovery at all. The court found that JanCo's damages theory, an all-or-nothing figure that was not apportioned among its various claims, was untethered to the single breach it proved, and it separately held that JanCo's losses were barred by the agreement's exclusion of consequential, incidental and special damages, lost profits and diminution in value—an exclusion that by its terms applied "regardless of legal theory." (Those limits fell away only for fraud or willful misconduct, but JanCo's fraud and willful misconduct claims failed independently—in part because JanCo knew of the staffing and operational issues before closing, defeating justifiable reliance—so the exclusions remained fully in force.) The case is cited not only for its scrape-sequencing holding, but as a reminder that proving a breach is only the first step. Buyers still need a damages theory that fits within what the agreement actually permits. Two points follow. First, a buyer should build a damages argument tied to the specific breach proved, rather than relying on a generic, deal-wide figure. Second, a buyer should not assume the familiar diminution-in-value (or "at the multiple") measure will survive the agreement: Delaware often treats diminution in value in an acquisition as direct, general damages that a bare consequential-damages waiver would not reach, but here the exclusion named those categories and disclaimed them regardless of how they were characterized, foreclosing that argument. Where the damages provision is drafted that way, the buyer needs a different, expressly permitted route to recovery.Takeaways for Drafters
- Check how the scrape interacts with defined terms. A scrape that disregards materiality qualifiers "wherever they appear, including within defined terms" can gut an MAE-based representation, even if that was not the intent.
- Specify what the scrape is for. Scrapes are sometimes intended to apply only when calculating damages, so that immateriality cannot be used as a shield. But a scrape can also govern the breach determination itself. Here the language expressly applied "in determining whether a breach had occurred," and the court gave it that effect. Drafters should state clearly whether the scrape governs breach, damages or both.
- Check consistency with the basket, cap and exclusions. Courts may treat the surrounding deal structure as evidence of intent. A low basket paired with a scrape that appears to require MAE-level harm may be read as internally inconsistent, and resolved against the drafter.
- Mind the line between direct and consequential damages. A waiver of "consequential damages" alone may not bar the losses a buyer most wants, because diminution in value and lost profits are frequently treated as direct (general) damages in the M&A context. A seller that means to foreclose them should name them specifically and disclaim them "regardless of legal theory"; a buyer that accepts that language, as JanCo did, may be giving up its principal measure of recovery.
- Do not stop at breach. Buyers should confirm independently that their damages provisions capture the losses they are actually likely to suffer, and that any fraud or willful misconduct carve-outs from those exclusions are realistically available. A strong breach finding does not guarantee a meaningful recovery.
About Whiteford
Whiteford provides comprehensive business law and litigation services to clients ranging from innovative start-ups to middle market companies to Fortune 100 enterprises. With a growing footprint of East Coast offices from New York to Florida, and a new office in Denver, Colorado, we serve clients regionally, nationally and internationally.Clare Lewis, Eric Vendt and Megan Wen are attorneys at Whiteford. They advise clients on mergers and acquisitions, indemnification and deal-structuring issues, including materiality scrapes, representation and warranty drafting, and post-closing dispute risk.
The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.