Matthew v. Laudamiel, C.A. No. 5957-VCN (Del. Ch. June 29, 2012).
(1) Whether the LLC Agreement required unanimous consent for both dissolution and winding-up; and (2) Whether there was a defense to performance based on breach of the agreement by the other party.
(1) The Court found that, however unusual, the LLC Agreement did not require unanimous consent to approve a dissolution but did require unanimous consent in order to the authorize the LLC’s winding-up; (2) The Court found too many issues of material fact on the contract interpretation issue and denied the motion for partial summary judgment, but nonetheless clarified when a material breach by one party would be a defense to nonperformance by another party.
A prior decision in this matter by the Court of Chancery provided additional background facts and was highlighted here. In sum, in this closely-held LLC, there was a dispute about whether or not the LLC Agreement required an unanimous vote in order to approve dissolution. The Court interpreted the contract not to require unanimous consent to approve a dissolution of the LLC, although the agreement was interpreted to require unanimous consent in order to perform the subsequent stage of winding up. The Court observed that the process begins with dissolution and winding up comes afterwards.
The Court conducts a thorough analysis of the relevant provisions on the LLC Agreement to explain why it was drafted, however inartfully or unusually, to require unanimous consent for winding up, but not to require unanimous consent to approve a dissolution.
The contract interpretation analysis is the section of the opinion that has the more widespread applicability for most practitioners.
The Court reiterates the basic Delaware law that adheres to the objective theory of contracts and under which a contract is construed as it would be understood by an objective, reasonable third party. See footnote 27.
The especially noteworthy contract analysis dealt with the issue involving those circumstances where a material breach by one party may relieve the other party of performance.
The Court emphasized that:
“Substantial failure to live up to the material terms of a valid contract nullifies that contract. A party may terminate or rescind a contract because of substantial nonperformance or breach by the other party. Not all breaches will authorize the other party to abandon or refuse further performance. To justify termination, it is necessary that the failure of performance on the part of the other go to the substance of the contract . . . and [will] discharge the . . . duty of performance only if the failure is material or substantial.” See footnote 50.
In sum: “Although a material breach excuses performance of a contract, a non-material – – or de minimis – – breach will not allow the non-breaching party to avoid its obligations under the contract.” See footnote 51.