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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 17 posts in 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.
It is not always clear when two agreements are to be read as one. This is because incorporating one agreement into a second agreement may not be explicit. This decision sets out the principles under Delaware law that govern how to decide if two agreements should be read together, including that there must be an “explicit manifestation of intent” to incorporate one document into another.
Contracts often use the word “including” as part of a definition of a term. But is that to limit or enlarge what that term means? This decision holds that “including” is a term of enlargement or extension when used that way and grants a partial summary judgment based on that interpretation.
This decision explains when a fraud claim survives a motion to dismiss that is based on the argument that an integration clause in a contract precludes reliance on extra contractual representations. The short answer is that the contract must specifically deny reliance on those statements before the fraud claim is precluded.
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 ›
If a contract spells out when the time to sue under it starts to run, the time of discovery rule does not apply. Instead, the contract provision for accrual of a claim governs.
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 teaches two important lessons. First, when an asset sale agreement contains explicit requirements on how to give notice of a claim on an escrow account, those requirements must be followed or the claim will be waived. Second, absent fraud, a contractual provision will be enforced that provides that the exclusive remedy for a buyer is a claim on an escrow fund. Thus, for example, a separate breach of contract or negligent representation claim will be dismissed.
This decision holds that a contractual provision adopting Delaware law will generally be upheld. However, when applying Delaware law will violate the public policy of another state whose law would have applied but for the contractual choice of law, Delaware will not enforce that choice of law. This distinguishes the Ascension case that declined to apply Delaware law to a non-compete contract that violated California law.
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.
With every contract under Delaware law comes the obligation to not act so as to deprive the counter party of the benefit of its bargain. This implied obligation plays a limited role, however, and does not trump the contract’s plain terms. This decision addresses this principle in an earn-out dispute surrounding terms about profits and taxes.
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 is an excellent primer on the rules that guide the proper interpretation of a contract. While the rules it applies are taught to first year law students, they are too often forgotten by those of us long out of school.