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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 237 posts in Breach of Contract.
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.
This decision interpreting a credit agreement’s terms is another reminder that an alleged oral modification to a written contract will not vary the contract’s terms when it has an integration clause and otherwise speaks to the subject of the modification.
This decision is an excellent explanation of the “bootstrapping doctrine” that seems to often befuddle litigants. Briefly, a plaintiff cannot “bootstrap” a breach of contract claim into a fraud claim except in certain limited circumstances that this decision explains. For example, misrepresentations made to induce a contract may form the basis for a fraud calm.
When is a corporate employee responsible for tortious conduct in that capacity? This decision answers that question in a very helpful way. For example, mere nonfeasance is not enough to impose liability on a corporate actor.
In this decision, the Court of Chancery declines to enforce an agreement to negotiate, applying Maryland law. The agreement set the rules of the road for any negotiations taking place between the parties, nothing more.
A material adverse change or effect clause permits a party to avoid its contractual obligations under certain circumstances. Delaware courts have addressed so-called “MAC” clauses in the merger agreement context on a number of occasions. Under that precedent, the party claiming a MAC has a high burden of proof and the alleged adverse change to a company’s business must be unexpected, serious, and extend over a significant period of time. A short-term hiccup is not a MAC. This decision is notable because it largely extends this law to the commercial contract context.
This is an excellent review of when a signatory to a contract might be personally liable notwithstanding that he claims to have only signed in a representative capacity. Hint: contractual references to the signatory separate and apart from the entity for which he is signing may create an ambiguity that prevents dismissal. It also has a good discussion on the limits of immunity for court-appointed receivers.
This decision explains the difference between a defendant’s right of setoff and recoupment. The key difference is that the right of setoff arises out of an independent transaction, while recoupment must be based on the same facts that support the main claim. Another difference concerns the statute of limitations. Setoff is subject to a three-year statute of limitations, while time-barred claims can be considered for recoupment when they arise out of the same factually-related transaction as the plaintiff’s claim.
It may surprise many of us to know that a party who does not sign a general release may still be bound by its terms. Yet, that is what this decision holds under this case’s facts, which involved New York law and a release signed by the non-signatory’s affiliates. When the release binds those for whom the releasing party is authorized to act, carve out for those other parties is needed to avoid this result.