Delaware Business Litigation Report

High Court Holds that Conflicting Contract Provisions Governing Agreement’s “Term” Create Ambiguity and Require Denial of Summary Judgment

Sunline Commercial Carriers, Inc. v. CITGO Petroleum Corp., No. 185,2018 (Del. Mar. 7, 2019).

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.

In sum, the decision illustrates the Delaware courts’ approach to contract interpretation, in which the agreements are read as a whole and in light of their commercial context. If there are two reasonable but competing interpretations, it is appropriate to resort to extrinsic evidence to resolve the ambiguity.

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