Tuesday, May 29, 2018
The Supreme Court of Delaware just issued a contracts law case suitable for teaching purposes in relation to several different issues including contract formation, the parol evidence rule and forum selection clauses. It also raises some puzzling questions regarding the Court’s own analyses and conclusions.
The Court first analyzes whether three investment and tech companies displayed sufficient overt manifestation of assent – not subjective intent - to be bound by any contract at all. Referring to Professor Williston, the Court found this to be the case when a signature is present because it “naturally indicates assent, at least in the absence of an invalidating cause such as fraud, duress, mutual mistake, or unconscionability....” Because both parties here signed the contract and hugged each other after doing so (!), there was an objective manifestation of assent.
The Court then stated that “a contract must contain all material terms in order to be enforceable … Until it is reasonable to conclude, in light of all of the[ ] surrounding circumstances, that all of the points that the parties themselves regard as essential have been expressly or (through prior practice or commercial custom) implicitly resolved, the parties have not finished their negotiations and have not formed a contract.” Common sense, found the Court, “suggests that parties to a sophisticated commercial agreement … would not intend to be bound by an agreement that does not addressall terms that they considered material and essential to that agreement.” Consequently,“all essential or material terms must be agreed upon before a court can find that the parties intended to be bound by it and, thus, enforce an agreement as a binding contract.” In the case, the precise consideration under the contract was highly material to the parties. One of the documents addressed the consideration to be exchanged, although not in a concise manner. The recordregarding other terms was also “woefully undeveloped.” Some key terms were missing. Others were contested by the parties.
Nonetheless, the Court somewhat strangely did not find this to be a major problem. The real dispute was, per the Court, whether the terms relating to that consideration were sufficiently definite. The majority found this to be the case under the Restatement (Second) of Contracts § 33(2). Said the Court: “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. Indeed, as Corbin has stated, “[i]f the parties have concluded a transaction in which it appears that they intend to make a contract, the court should not frustrate their intention if it is possible to reach a fair and just result, even though this requires a choice among conflicting meanings and the filling of some gaps that the parties have left.” Because the agreement's recitals summarized that technology company owner was to contribute to the holding company all his rights in certain intellectual property and technology company securities in exchange for units in holding company, technology company owner warranted that he could deliver all securities as promised, and agreement provided for situation of employees making successful claims for technology company securities, the Court found the consideration to be sufficiently definite. Fair enough, but what about several terms either having been omitted or “differing in reality from the parties’ statements”? The Court relied on parol evidence to resolve these issues.
The Court remanded for the lower court to make explicit findings as to whether or not the parties agreed to be bound.
The dissenting justices raise some good questions. Among other things, they identify valid issues regarding the missing material terms, whether the parties even agreed on the contract at all given its short-lived nature, and whether it was a waste of judicial and party resources to remand the case when the Supreme Court found it to be sufficiently specific. Most importantly and for good reason, the dissenters focus on the contract formation issue that the majority did away with for, it seems, the somewhat simplistic reasons that the parties had signed the documents and hugged each other. If our students concluded their analyses of contract formation on this ground, we would probably also point out the problem in so doing.
Of course, the parties may also consider reaching a solution amongst themselves at this point. Said Justice Strine: One hopes that before the parties engage in remand proceedings of great expense, they exhale and consider a sensible solution so that they can move on, with [one party] receiving fair compensation for his investments, but without harming themselves or others by continuing a bitter battle over whether they should be declared to have had a brief, loveless marriage, only to then commence immediate divorce proceedings.
The case is Eagle Force Holdings, LLC and EF Investments, LLC v. Stanley V. Campbell, C.A. No. 10803-VCMR. H/t to Professor Chiappinelli for bringing this case to my attention, and congratulations to Professor Stark for being cited to by the Delaware Supreme Court.