NAF Holdings, LLC v. Li & Fung (Trading) Limited, Del. Supr., No. 641, 2014 (Del. June 24, 2015). This Delaware Supreme Court decision held that a party has a direct claim to pursue a breach of contract action for a contract to which it is a party in order to enforce its own contractual rights. The claim does not become a derivative claim simply because there may be a related injury to a corporation as well.
This en banc decision was presented as a question of law certified by the U.S. Court of Appeals for the Second Circuit arising out of an appeal from a decision by the U.S. District Court for the Southern District of New York. The very lengthy articulation of the issue presented by the Second Circuit was summarized by the Supreme Court as a question of Delaware law answered in the following formulation: “A promisee-plaintiff may bring a direct suit against a promisor for damages suffered by the plaintiff resulting from the promisor’s breach, notwithstanding that: (i) the third-party beneficiary of the contract is a corporation in which the promisee-plaintiff owns stock; and (ii) the promisee-plaintiff’s loss derives indirectly from the loss suffered by the third-party beneficiary corporation.”
The Supreme Court determined to be inapplicable the decision in Tooley v. Donaldson, Lufkin & Jenrette, 845 A.2d 1031, 1039 (Del. 2004), which the District Court for the Southern District of New York misapplied, according to the Supreme Court. Some of the nuggets from the decision of the Delaware Supreme Court include the following:
● “A party to a commercial contract may sue to enforce its contractual rights directly, without proceeding by way of a derivative action. Tooley and progeny do not, and were never intended to, subject commercial contract actions to a derivative suit requirement.”
● An important initial question for these issues is: “Does the plaintiff seek to bring a claim belonging to her personally or one belonging to the corporation itself?”
● The District Court for the Southern District of New York misconstrued Delaware law and applied Tooley in a “decontextualized manner.”
● The opinion is replete with citations to cases that support the important principle in Delaware law of freedom of contract, and the fundamental principle of contract law that parties to a contract bound by its terms have a corresponding right to enforce them. The court also added that Delaware law “seeks to promote reliable and efficient corporate laws in order to facilitate commerce.” See generally State v. Tabasso Homes, Inc., 28 A.2d 248, 252 (Del. Gen. Sess. 1942) (“. . . the right to contract is one of the great, inalienable rights accorded to every free citizen . . ..”)
● The Supreme Court concluded its opinion by clarifying its holding as follows: “. . . a suit by a party to a commercial contract to enforce its own contractual rights is not a derivative action under Delaware law.”