Chancery Refuses to Enforce Alleged Contractual Rights Not Obtained at the “Negotiating Table”
Obsidian Fin. Grp., LLC v. Identity Theft Guard Solutions, Inc., C.A. No: 2020-0485-JRS (Del. Ch. Apr. 22, 2021)
Delaware is “more contractarian” than many other jurisdictions. Accordingly, as this case illustrates, a court applying Delaware law will respect parties’ contractual choices and will not enforce alleged contractual rights not reflected in the plain language of the agreement.
Here, the plaintiff was the appointed representative of former security holders under a merger agreement governing the acquisition of defendant ID Experts (the “Company”). The Company had a valuable contract with the federal government. Part of the merger consideration was an earn-out payment if the contract was extended for a period of at least six years. The contract in question, however, was only extended for a maximum period of five-and-a half years, missing the six-year trigger. Nonetheless, the plaintiff brought suit to enforce the earn-out payment, claiming that the parties did not appreciate at the time of contracting that the federal regulations applicable to the contract at issue did not permit six-year (or longer) extensions. The plaintiff invoked the doctrines of impossibility of performance and forfeiture to support its claims.
The Court rejected both theories. Setting aside that these doctrines are defenses to breach of contract claims – not support for affirmative claims – the Court found that sophisticated parties must be held to the contracts they enter. The federal regulations which purportedly limited contract extensions to less than six years were in existence at the time of the merger agreement. Agreeing to a six-year earn-out payment contingency, despite the regulations, was the parties’ contractual choice, and any alleged impossibility of performance was a problem of their own making to which they would be held. Similarly, the Court did not invoke the doctrine of “forfeiture,” as the plaintiff requested; the Court rejected plaintiff’s argument, which it reasoned was essentially that five-and-a-half years was “close enough” to the six years to which the parties had agreed. The Court accordingly granted the defendants’ Motion to Dismiss.