In Matria Healthcare, Inc. v. Coral SR, LLC, (Del. Ch., March 1, 2007), read opinion here, the Delaware Chancery Court provided a very instructive primer on fundamental contract interpretation principles under Delaware law. Vice Chancellor Noble provides several gems in particular that are especially "quote worthy" and I predict they will be referred to often for their insights into Delaware contract law. The case involved several disputes, such as whether a particular "claim" under the agreement was controlled by a provision calling for arbitration with the AAA or by a separate provision calling for arbitration with a private accountant. The court noted that a motion to compel arbitration is governed by Rule 56 (applicable to summary judgments.) Here are the money quotes:
"In construing contracts, the function of the Court is to ascertain the shared intentions of the contracting parties when they entered into their agreement. The first level of analysis is deceptively simple: give the words chosen by the parties their ordinary meaning. Disputes over a contract negotiated by sophisticated parties typically fall into three broad categories. First, the parties did not anticipate and provide for future events. Thus, the contract fails to address (or to address fully) the responsibilities of the parties in a particular factual setting. Second, the parties (or their lawyers) understand that there are drafting imperfections, perhaps because the parties cannot devise a mutually acceptable resolution to certain issues. The parties do not want what (at that time) are viewed as minor impediments to derail the transaction. They hope that the identified risks will not materialize and trust that, if the unlikely events occur, some judge will fill in the gaps in a way that substantially preserves the benefits of the bargain for each side. Finally, there are disputes like the one now pending. The words, when fairly read and given their ordinary meaning, lead to a result that the Court cannot believe is what reasonable parties would have intended. In a sense, one party’s argument boils down to a plea of: “We couldn’t have been that obtuse (or worse).” The result reached here is, in large part, unpalatable; it is the product, however, of words chosen by sophisticated parties who drafted a complex and comprehensive agreement. More importantly, it is not for some judge to substitute his subjective view of what makes sense for the terms accepted by the parties."
" When interpreting a contract, the Court’s function is to “attempt to fulfill, to the extent possible, the reasonable shared expectations of the parties at the time they contracted.”The Court does this by initially looking to the contract’s express terms. If the terms are clear on their face and reasonably susceptible to only one meaning, then the Court gives those terms the meaning that would be ascribed to them by a reasonable third party. If, however, a contract’s language is ambiguous, then the Court will look beyond the “four corners” of the agreement to extrinsic evidence. A contract is not ambiguous merely because the parties disagree as to its proper construction. Instead, ambiguity exists when the terms of a contract are reasonably susceptible to different interpretations or have two or more different meanings. Also, when possible, the Court should attempt to give effect to each term of the agreement and to avoid rendering a provision redundant or illusory (footnotes omitted.)"