Schwartz v. Chase, C.A. No. 4274-VCP (Del. Ch. June 29, 2010), read opinion here.
This opinion from the Delaware Court of Chancery is useful for anyone who is involved in a situation where an exchange of e-mails by attorneys is claimed by one side to constitute a binding Settlement Agreement of a lawsuit, even though that view is not shared by the other party to the alleged settlement.
This 30-page opinion addresses a Motion to Enforce a Settlement Agreement based largely on e-mail correspondence between lawyers attempting to settle a pending lawsuit, that led up to the alleged contract, as well as testimony given by several witnesses at an evidentiary hearing after the motion was filed. The Court found after a thorough review of the communications between the parties that there was no binding agreement due in part to one party imposing a condition precedent that his signature be affixed to an agreement, and that condition not being satisfied.
The key issues that were addressed in order to determine whether the agreement was binding included the following: (1) Whether the attorneys involved had the authority to bind their clients to the Settlement Agreement; and (2) Whether one party made the actual signing of the agreement a condition precedent to being bound to any agreement.
The Court recited the foundational law in these types of cases which is that “a party seeking to enforce a Settlement Agreement has the burden of proving the existence of a contract by a preponderance of the evidence.” The Court also observed that such arrangements “will bind the parties where they agreed to all material terms and intend to be bound by that contract, whether or not the contract is made in the presence of the Court, and even in the absence of a writing.” See footnotes 30 through 33. The Court also reviewed the objective theory of contracts through which all contract analysis in Delaware is performed. See generally footnotes 34 through 37.
In connection with the analysis of whether or not the attorney involved had the authority of his client to bind the client to a Settlement Agreement, the Court reviewed the three types of authority that can bind a party: (1) Express authority, which is a type of actual authority and must be apparent from either an oral or written contract. (2) Implied authority, which is derived from actual authority and allows an agent to act based on the agent’s reasonable interpretation of the principal’s manifestation in light of the principal’s objectives and other facts known to the agent. See footnote 40 for citations to authority. (3) Apparent authority is that authority which, though not actually granted, the principal knowingly or negligently permits an agent to exercise, or which he holds him out as possessing. See footnote 41.
The Court observed the general rule that “an attorney or record in the pending action who agrees to a compromise of a case is presumed to have lawful authority to make such an arrangement. The client challenging the authority of the attorney after settlement has the burden to overcome a presumption of authority.” See footnotes 42 and 43.
Although there are other decisions of the Court of Chancery that deal with similar situations as in this case, involving issues about whether a “handshake agreement” or confirmation by e-mail constituted a binding Settlement Agreement, see, e.g., Dweck v Nasser, summarized here, this case includes all of the relevant law needed to analyze such a situation under Delaware law.
For example, the Court explained that:
“When parties to a contract have agreed on all the substantial terms of the contract and intend to be bound, the fact that one of the parties understood that the contract would be formally drawn up and put in writing does not leave the transaction incomplete . . . and the absence of a positive agreement that it should not be binding until so reduced in writing and formally executed.” See footnote 66. The Court added that the question becomes whether “the parties positively agreed that there will be no binding contract until the formal document is executed.” See footnote 67.
The Court emphasized that: it is “not essential, however, that both parties require execution or a binding contract arises.” See footnote 68. Rather, if only one of the contracting parties states that he will not be bound until he signs the document, and explicitly makes that signing a condition precedent, then the agreement to settle will not be binding until that condition is met.
These essential contract principles must be part of a litigator’s toolbox when he or she is discussing settlement or “coming close to settlement” of a case, and final terms or “nearly final terms” are being communicated by e-mail or otherwise.