West Willow-Bay Court LLC. v. Robino Bay Court Plaza LLC, 2007 WL 3317551 (Del. Ch., Nov. 2, 2007), read opinion here. The Chancery Court in this decision upheld a bedrock principle of Delaware contract law: the court will uphold agreements entered into by sophisticated parties and will refuse to modify them or admit extrinsic evidence to interpret them, when the terms of an agreement are clear, notwithstanding the existence, with the passing of time, of hardship or burdensomeness that might have been avoided in hindsight.
In this case involving real estate agreements that required one party to obtain the consent of a third-party (which could not be obtained), on cross-motions for summary judgment, the court determined that there was a breach but that it was not an appropriate case for specific performance, which is a discretionary remedy, and that a separate proceeding would be needed to prove damages.
I try to avoid long block quotes, but here are a few practical excerpts from the opinion that are akin to a "mini-treatise" on contract law, and that I expect to refer back to often:
The goal of contract interpretation is to ascertain the shared intention of the parties. [FN79] Contracts must be construed as a whole. [FN80] Where contract language is "clear and unambiguous," the ordinary and usual meaning of the chosen words will generally establish the parties’ intent. [FN81] The presumption that the parties are bound by the language of the agreement they negotiated applies with even greater force when the parties are sophisticated entities that have engaged in arms-length negotiations. [FN82] Only where contract language is ambiguous will a court consider extrinsic evidence in interpreting an agreement, [FN83] and a court will not disturb a bargain because, in retrospect, it appears to have been a poor one. [FN84]
FN79.E.I. du Pont de Nemours & Co. v. Shell Oil Co., 498 A.2d 1108, 1113 (Del.1985).
FN80.Nw. Nat’l Ins. Co. v. Esmark, Inc., 672 A.2d 41, 43 (Del.1996). "[T]he meaning which arises from a particular portion of an agreement cannot control the meaning of the entire agreement where such inference runs counter to the agreement’s overall scheme or plan." Shell Oil Co., 498 A.2d at 1113.
FN81. Delaware adheres to the objective theory of contracts, under which it is presumed that contract language governs in the absence of ambiguity. Progressive Int’l Corp. v. E.I. du Pont de Nemours & Co., 2002 WL 1558382, at *7 (Del. Ch. July 9, 2002). Under the objective theory of contract, " ‘intent does not invite a tour through [a party’s] cranium, with [the party] as the guide.’ " Id. (quoting E. ALLAN FARNSWORTH, CONTRACTS § 3.6 (2d ed.2000)).
FN82. It should be noted that both parties’ are sophisticated entities and their agents are sophisticated businesspersons. They both have had extensive experience in real estate development and both have had ample access to counsel. It is a basic principle of contract law that a person is bound by the terms of a contract he signs, even if he has not read the agreement or is otherwise unaware of its terms. See Graham v. State Farm Mut. Auto. Ins. Co., 565 A.2d 908, 913 (Del.1989); see also Pellaton, 592 A.2d 473 (Del.1991) (enforcing contract terms despite the signing party’s assertion that he did not read the document before signing). Thus, Robino’s suggestion that Stortini executed the Second Amendment without having first scrutinized its terms is unavailing. Also, that Stortini executed the agreement without the advice of counsel is of little moment: there is no general requirement that contracts be executed under the guidance of counsel, especially when the signor is a sophisticated businessperson like Stortini.
FN83.E.g., NAMA Holdings v. World Mkt. Ctr. Venture, LLC, 2007 WL 2088851, at *6 (Del. Ch. July 20, 2007).
The Delaware Supreme Court has declared that if a contract "is clear and unambiguous on its face," a court may not consult extrinsic evidence in interpreting its provisions. Pellaton, 592 A.2d at 478 (emphasis added). In a similar vein, but employing slightly different words, this Court has stated,
When the language of a contract is plain and unambiguous, binding effect should be given to its evident meaning. Only where there are ambiguities may a court look to collateral circumstances; otherwise, only the language of the contract itself is considered in determining the intentions of the parties.
Majkowski v. Am. Imaging Mgmt. Servs., LLC, 913 A.2d 572, 581 (Del. Ch.2006) (emphasis added). Hence, in determining whether to turn to extrinsic evidence, Delaware courts are to decide at the outset whether or not the contract language is "clear and unambiguous" or "plain and unambiguous." Although this language seems to suggest two inquiries–first, whether the language is "clear" or "plain," and second, whether the language is "unambiguous"–the terms of art "clear and unambiguous" and "plain and unambiguous" collapse into a single query centering on "ambiguity" alone. See, e.g., Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232 (Del.1997) ("If a contract is unambiguous, extrinsic evidence may not be used to interpret the intent of the parties, to vary the terms of the contract or to create an ambiguity."); City Investing Co. Liquidating Trust v. Cont’l Cas. Co., 624 A.2d 1191, 1198 (Del.1993) ("If a writing is plain and clear on its face, i.e., its language conveys an unmistakable meaning, the writing itself is the sole source for gaining an understanding of intent. However, if the words of the agreement can only be known through an appreciation of the context and circumstances in which they were used a court is not free to disregard extrinsic evidence of what the parties intended. In that situation the language used by the parties is subject to different meanings and is, thus, ambiguous, or more precisely, not reflective of the parties shared intent. " (internal citations and quotations omitted) (emphasis added)); Rhone-Poulenc Basic Chem. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1195-96 (Del.1992) ("Absent some ambiguity, Delaware courts will not destroy or twist [contract] language under the guise of construing it."); Carlson v. Hallinan, 925 A.2d 506, 527 (Del. Ch.2006) ("A court may only resort to extrinsic evidence to ascertain the meaning of the contract if it is ambiguous."); Progressive Int’l Corp., 2002 WL 1558382, at *7 ("[T]he language of a contract governs when no ambiguity exists."); E. ALLAN FARNSWORTH, CONTRACTS § 7.12, at 465 (4th ed.2004) (using "clear" and "ambiguous" as antonyms); Samuel Williston & Richard A. Lord, A Treatise on the Law of Contracts §§ 30:4-30:7, at 37-92 (4th ed.1999) (discussing ambiguity alone as the criterion to be employed in determining whether or not it is proper for a court to consult extrinsic evidence).
Naturally, "[t]here may be occasions where it is appropriate for the trial court to consider some undisputed background facts to place the contractual provision in its historical setting without violating this principle." Eagle Indus., Inc., 702 A.2d at 1233 n. 7. "But the trial court must be careful in entertaining background facts to avoid encroaching on the basic principles [concerning extrinsic evidence] set forth herein." Id. A fair reading of a contract requires an understanding of the context, but that factual background cannot be allowed to serve as a substitute for extrinsic evidence and thereby divert appropriate attention from the words employed by the parties.
FN84.See, e.g., Fed. Sav. & Loan Ins. Corp. v. Grand Forks Bldg. & Loan Ass’n, 85 F.Supp. 248, 252 (D.N.D.1949) ("[The] Court has no authority to re-make or revamp an executed contract, nor to indulge in any artificial or unreal construction in order to relieve the defendant of the seeming burdens of its contract.").
Contract liability is strict liability. It is an accepted maxim that pacta sunt servanda, contracts are to be kept. The obligor is therefore liable in damages for breach of contract even if he is without fault and even if circumstances have made the contract more burdensome or less desirable than he had anticipated…. The obligor who does not wish to undertake so extensive an obligation may contract for a lesser one by using one of a variety of common clauses: he may agree only to use his "best efforts"; he may restrict his obligation to his output or requirements; he may reserve a right to cancel the contract; he may use a flexible pricing arrangement such as a "cost plus" term; he may insert a force majeure clause; or he may limit his damages for breach. [FN94]
FN94. Restatement (Second) of Contracts ch. 11 introductory cmt. (emphasis added).
A party is not discharged from the binding language of a contract simply because its obligation under that language turns out to be difficult or burdensome. [FN102] Robino agreed, without any qualification, to secure Value City’s consent, and it cannot look to the Court for relief from that obligation. "[I]t is not for some judge to substitute his subjective view of what makes sense for the terms accepted by the parties." [FN103]
FN101.See Superior Vision Servs., Inc. v. ReliaStar Life Ins. Co., 2006 WL 2521426, at *6 (Del. Ch. Aug. 25, 2006) ("A court should not read a reasonableness requirement into a contract entered into by two sophisticated parties. It is imperative that contracting parties know that a court will enforce a contract’s clear terms and will not judicially alter their bargain, so courts do not tramp/trump the freedom of contract lightly.") (quotations and footnotes omitted). See also supra note 84.
FN102.See Safe Harbor Fishing Club v. Safe Harbor Realty Co., 107 A.2d 635, 638 (Del. Ch.1953) ("Courts cannot alter contracts merely because they work a hardship. A contract is not invalid, nor is the obligor therein in any manner discharged from its binding effect, because it turns out to be difficult or burdensome to perform.").
FN103.Matria Healthcare, Inc. v. Coral SR LLC, 2007 WL 763303, at *1 (Del. Ch. Mar. 1, 2007). Robino invokes Horizon Personal Commc’n, Inc. v. Sprint Co., 2006 WL 2337592 (Del. Ch. Aug. 4, 2006), in which the Court, applying Kansas law, observed that it would not rigidly construe the terms of a contract so as to "make[ ] performance impossible and produce [ ] an absurd result." Id. at *21. The result here is not absurd if one accepts Stortini’s view, later proven to be mistaken, that obtaining Value City’s consent would not be a problem. Additionally, Robino may have anticipated that, because Value City’s consent could not be "unreasonably withheld" under the Value City Lease, it would not be difficult to obtain.