Shearman & Sterling LLP | M&A Litigation Blog | Delaware Supreme Court Clarifies Standard For Contract Formation, Reversing And Remanding Court Of Chancery Decision On Enforceability<br >  
M&A Litigation
This links to the home page
  • Delaware Supreme Court Clarifies Standard For Contract Formation, Reversing And Remanding Court Of Chancery Decision On Enforceability
    On May 24, 2018, in an opinion by Justice Karen L. Valihura, the Delaware Supreme Court reversed a decision by the Delaware Court of Chancery dismissing breach of contract and related claims.  Eagle Force Holdings, LLC, et al. v. Campbell, C.A. No. 10803-VCMR (Del. May 24, 2018).  As discussed in our prior post on this case, the Court of Chancery found that a limited liability company agreement and associated contribution agreement under which plaintiff-appellant purported to bring claims were not binding because they lacked several “essential” terms.  Reversing, the Delaware Supreme Court concluded that the agreements “sufficiently address[ed] all issues identified by the trial court as material to the parties.”  But the Court remanded for reconsideration of the evidence to make a finding on the parties’ “intent to be bound.” 

    As noted in our prior post, the parties were in negotiations to effectuate a business partnership wherein one would contribute the intellectual property and technical expertise and the other would (and indeed already did) provide the financing.  The parties eventually signed a version of the agreements marked “draft” and containing several placeholder provisions, without their attorneys present.  Shortly thereafter, a dispute arose as to whether the signed documents constituted binding and enforceable contracts.  The Court of Chancery determined that the question depended on whether “all of the points that the parties themselves regard as essential have been expressly or … implicitly resolved.”  Pointing to the many placeholder provisions relating to the equity ownership of the operating businesses and the intellectual property to be contributed in the transaction, the Court of Chancery concluded that the parties “did not come to agreement on the consideration” and held the agreements to be unenforceable.

    The majority of a divided Delaware Supreme Court reversed and remanded.  It noted that the Court of Chancery should have addressed each of the elements of a valid, enforceable contract under Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153 (Del. 2010):  “(1) the parties intended that the contract would bind them, (2) the terms of the contract are sufficiently definite, and (3) the parties exchange legal consideration.”  There was no dispute about the exchange of consideration.  As to the second prong, however, the Supreme Court clarified that “[a] contract is sufficiently definite and certain to be enforceable if the court can—based upon the agreement’s terms and applying proper rules of construction and principles of equity—ascertain what the parties have agreed to do.”  Here, the Supreme Court found that the text satisfied this test because it enabled the Court to ascertain the consideration and also provided a means of enforcement if a party failed to perform.
    Nevertheless, the Court remanded with instructions to revisit the evidence and make an express finding on the parties’ intent to be bound.  The Court highlighted that the parties’ execution of the agreements was “powerful, contemporaneous” evidence of an intent to be bound and the parties’ embrace after signing offered “additional objective manifestation” of that intent.  But the Court acknowledged that there was evidence, such as the placeholder provisions and the draft notation, that cut the other way. 

    Notably, Chief Justice Leo E. Strine, Jr. and Justice James T. Vaughn, Jr. dissented in relevant part, concluding that the record supported a finding that the material terms were not sufficiently definite and that the documents were not intended to reflect final agreement.  Each would have affirmed the determination that no contract was formed.
    CATEGORY: Deal Disputes