Applying Plain Contract Language, Chancery Awards $147 Million in Damages to Start-Up Company for Breach of Joint Venture Agreement
Symbiont.io, Inc. v. Ipreo Hldgs., LLC, C.A. No. 2019-0407-JTL (Del. Ch. Aug. 13, 2021)
Delaware is a pro-contractarian state. When fashioning an award for a breach of contract, a Delaware court can consider: (1) the bargained-for damages remedy; (2) whether at the time of contracting the damages from a breach would be uncertain or incapable of accurate calculation; and (3) whether the amount contractually called for would be unconscionable.
Here, the Court of Chancery applied this framework and granted a significant damages award for one side’s breach of a non-competition provision in the joint venture agreement for a new venture. Two parties had sought to develop a new trading platform in the secondary market for syndicated loans. After months of mixed success in developing and securing funding for their prospective product, one of the JV parties was acquired by a company that had its own pre-existing product. This acquisition effectively gutted the joint venture, as the acquirer had no interest in helping to develop the competing product. The other JV party filed suit against its JV partner and the acquirer.
A central allegation was that the acquirer had become an “affiliate” of the acquired JV partner under the terms of the JV agreement’s non-competition provision. The parties disputed whether the JV agreement’s definition of “affiliate” was limited to entities that met the definition as of the effective date of the agreement. The Court sided with the plaintiff, rejecting the argument that present-tense language in the JV agreement meant that a subsequent acquisition would not trigger the “affiliate” definition. The Court reasoned, among other things, that no reasonable person would have accepted a non-competition provision that a counterparty immediately could circumvent by creating an entity that did not exist at signing. The Court also explained that the relevant point in time for assessing a breach in contract was when contractual compliance was required, and that Delaware courts will not focus on grammar and word tense when it would be at variance with the intent of parties as indicated by contract as a whole. The clear commercial intent of the parties was to focus their joint efforts on the development of the new platform and to establish non-competition protections to that end. Accordingly, upon acquisition, the acquirer became an affiliate of the acquired JV partner, causing that JV partner to breach the JV agreement.
To fashion a damages award, the Court applied the parties’ bargained-for remedy for a breach of the non-compete: “an equitable account of all earnings, profits and other benefits arising from any violation[.]” Given the contractual language, the plaintiff was not required to meet the elements typically required for an equitable accounting, nor to prove actual damages. Applying the bargained-for standard of lost profits and concluding that damages both were uncertain at the time of contracting and that the calculated level of lost profits was not unconscionable in light of the JV’s business prospects, the Court awarded $142 million to the JV. The Court ordered that the acquired JV partner pay damages to the JV, and that the JV then distribute those damages (including 50 percent of them back to the acquired partner) after covering outstanding costs, before completing a Court-ordered dissolution. Judicial dissolution was ordered because unremitting deadlock caused the business to cease operating in 2019.Share