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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 245 posts in Breach of Contract.
High Court Holds that Conflicting Contract Provisions Governing Agreement’s “Term” Create Ambiguity and Require Denial of Summary Judgment
The parties disputed the termination date of two related agreements through which CITGO agreed to ship oil using the plaintiff trucking company, with CITGO arguing for an earlier termination date. On appeal from a decision granting summary judgment in CITGO’s favor, the Delaware Supreme Court reversed and remanded the matter. Applying de novo review, the high court found that the two related contracts governing the transaction had conflicting terms and therefore were ambiguous with respect to the termination date. Although a provision in one agreement clearly set a one-year term – which the lower court found dispositive – the agreements read as a whole were ambiguous. In particular, the same contract with a one-year term (i) contemplated renewals, (ii) required 60 days’ notice for a termination and (iii) also provided for a review of pricing terms 60 days prior to the one-year period. That contract also provided (confusingly) that it would remain in effect until the termination of the second, related contract, which had a later default termination date. The Supreme Court also observed that avoiding an abrupt termination made sense in the commercial circumstances given the magnitude of the endeavor. In light of the resulting ambiguity, the Supreme Court reasoned it was appropriate to consider extrinsic evidence, which included internal CITGO emails indicating that it understood the contract to continue beyond the one-year term. The Court accordingly reversed and remanded the case for a trial on the issue of the agreements’ disputed term. More ›
This is an interesting decision because it deals with the rare instance when a party can prove a mutual mistake as to a contract’s terms so as to avoid having to comply with those terms. Here both a borrower and a loan officer clearly agreed a loan could be repaid without penalty. The actual loan documents had a prepayment penalty that the borrower did not read before signing. The Court held the borrower was excused from catching that penalty clause given the assurance he had there was no prepayment penalty.
While every contract has an implied covenant requiring the parties to act fairly and in good faith, it is not always easy to know how that applies in a given case. This decision is a good example of how the court will approach that issue. It finds that the contract impliedly limited the right of a party to compete with an entity it had formed with another party to exploit a business opportunity.
This decision on a undisputed factual record interpreted a contractual right to put stock by rejecting one side’s argument as “commercially irrational.” It also held that the valid exercise of the put made the holder a creditor of the company entitled to enforce the put against the surviving party of a merger.
How to interpret the provisions of preferred stock is often a difficult task. Any preference must be spelled out and any doubts resolved against preferring one class of stock over common stock. This decision holds that the preferred stock must show evidence it was intended to a preference at least when the authorization for that stock is ambiguous. The decision also affirms that stockholder rights to inspect records cannot be taken away by a certificate of incorporation.
Court of Chancery Enforces Redemption Rights and Addresses the Potential Effect of a Merger on Previously-Exercised Put Rights
This decision is necessary reading for drafters of redemption rights. It involves the interpretation of a redemption rights agreement granting a stockholder the right to force the company to buy back its shares and some interplay between those put rights and the DGCL in the event of a merger. More ›
This drama arises from a dispute involving the Curran Theatre in San Francisco. The decision mostly deals with when alleged conversations are not enough to constitute an enforceable contract, exhaustively reviewing the applicable law. Basically, if you want to enforce a promise, reduce it to a writing including all essential terms. Contemporaneous evidence of a sufficiently detailed promise is a potential fallback, but conflicting testimony about vague terms is not. More ›
When the parties to a LLP agree on the standard of conduct the general partner should follow, its failure to live up to that standard is a breach of the parties’ agreement. Here the parties agreed the general partner would use industry practices in managing the business and when it failed to monitor the business to ensure those practices were followed, it was liable to the limited partners for the damages that resulted. The use of a somewhat vague standard of how the business should be conducted is therefore risky.
Court of Chancery Explains Contract, Fraud, and Fiduciary Duty Standards in Contingent Deal Price Dispute
It is common for parties to an acquisition to structure some portion of the purchase price as contingent on the acquired company’s post-close performance. With some frequency, a party dissatisfied with the resulting payment sues for breach of contract and may point the finger at those in charge during the relevant period for measurement. Out of this particular example comes reminders on well-settled standards for breach of the implied covenant of good faith and fair dealing, fraudulent inducement, and breach of fiduciary duty. For instance, the implied covenant may be deployed as a defense to a breach of contract claim based on one party preventing the other’s performance, but it may not be used as an affirmative claim to override a contract’s express terms. Further, Delaware law does not permit bootstrapping fraudulent inducement claims onto contract claims by alleging that a party never intended to perform its obligations. Additionally, predictions about future performance generally cannot be the basis for fraud. Finally, Delaware courts will dismiss a breach of fiduciary duty claim that is entirely duplicative of a breach of contract claim.
This decision addresses two contracting parties’ divergent expectations relating to whether a delayed closing affected the agreement’s earn-out period. The parties failed to alter the contract to adjust the earn-out period after a delayed closing had the effect of starting the period prior to closing. The negatively-affected party argued in favor of reforming the earn-out period to take into account the delayed closing. As the Court explains, however, reformation under Delaware law requires clear and convincing proof of a mutual mistake in drafting a document or unilateral mistake that is known to the other party who remains silent. Both circumstances were absent here.
When have the parties actually formed a contract? In this decision the Supreme Court adopts the Osborn decision as the analytical framework to determine if they manifested agreement, if the essential terms were adopted and so on.
This is an important decision because it points out that the breach of a contract does not always mean damages will be awarded. For example, an investor's right to consent to certain transactions or to receive a payment absent that consent does not mean that the failure to get his consent must entitle him to that payment. Rather if the contract does not provide for a measure of damages for its breach, the plaintiff must prove the breach harmed him. Here the transaction in question actually benefitted the plaintiff so that he would have consented to it had he been asked. While the no damages result may seem counterintuitive at first, the result makes sense.
Too frequently a plaintiff seeks to buttress its case by adding a fraud or tort claim to what is really just a breach of contract. But as this decision points out, just alleging the defendant did not intend to pay what was due when the contract was signed is not enough to support a fraud count. The decision is also very helpful in repeating the Delaware law on when a claim for breach of the covenant of good faith and fair dealing may be filed.
This is a great explanation of when a director is authorized to enter into an oral agreement that is enforceable, here to add two directors to a corporate board. To make the agreement depend on entering into a written contract, there must be a “positive agreement” that the oral agreement is not otherwise enforceable.
Some assume that a statute of limitations will not apply in the Court of Chancery. But as this decision illustrates, that is an oversimplification. The Court of Chancery may well use the same statute of limitations period applicable in an action at law, by analogy, under the equitable doctrine of laches. This is especially true when the claim is a legal one seeking legal relief. This decision also illustrates an important point regarding claim accrual. When a claim arises out of an obligation to make a series of payments over time, it is possible the Court will start to run the laches period from the first non-payment. In other words, subsequent non-payments might not constitute a new claim with a new limitations period or otherwise lengthen the time period to sue.