Delaware Business Litigation Report

Alleged Third-Party Beneficiary’s Contract and Alternate Unjust Enrichment Claims Survive Dismissal at the Pleadings Stage Based on Ambiguous Contract Language

CHS/Cmty. Health Sys., Inc. v. Steward Health Care Sys. LLC, C.A. No. 2019-0165-JRS (Del. Ch. Aug. 21, 2020)

A claim for unjust enrichment will not lie where there is a contract that governs the relationship between parties. Both types of claims may survive a motion to dismiss, however, if there exists a contractual ambiguity that prevents the Court of Chancery from interpreting the meaning of contract at the pleadings stage.

In a 2017 asset purchase agreement (“APA”), Steward Health Care System LLC (“Steward”) acquired substantially all of the assets of certain hospitals indirectly owned by CHS/Community Health Systems, Inc. (“CHS”). The APA included a provision under which Steward agreed to indemnify CHS and its “Affiliates.” In 2019, CHS and CHSPSC LLC (“CHSPSC”) filed suit against Steward. CHSPSC alleged it was an affiliate of CHS, and therefore an intended third-party beneficiary entitled to indemnification for more than $3 million it had paid to meet contractual liabilities that Steward was supposed to have assumed. Pleading in the alternative, CHSPSC also brought a claim for unjust enrichment against Steward to the extent CHSPSC lacked standing to sue under the APA. Steward sought to dismiss CHSPSC’s contract claim for lack of standing under the APA, or alternatively to dismiss CHSPSC’s unjust enrichment claims if CHSPSC did have standing under the APA.

The Court reviewed the APA language and determined the APA was ambiguous as to whether CHSPSC had standing to sue for indemnity as a third-party beneficiary. In addition to indemnification rights for CHS and its “Affiliates,” a specific provision of the APA began with an expression of intent to benefit “Affiliates,” but ended with a disclaimer that third-party beneficiary rights were only conferred on “Seller Entities,” which did not include CHSPSC. Together these clauses created an ambiguity. The Court explained that extrinsic evidence was necessary to resolve the contractual ambiguity, which was not appropriate on a motion to dismiss. Finally, the Court also denied dismissal of the unjust enrichment claim, reasoning that the Court could not determine whether CHSPSC could bring a non-contractual unjust enrichment claim until the Court first construed the scope and meaning of the ambiguous APA provisions to determine whether there was an enforceable contract that governed the relationship between Steward and CHSPSC.

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