The Delaware Court of Chancery recently addressed important contract principles, including when a non-signatory will be bound by a contract, as well as burden of proof standards and requirements to establish damages, that have wide application for corporate and commercial litigation, in Medicalgorithmics S.A. v. AMI Monitoring, Inc., C.A. No. 10948-CB (Del. Ch. Aug. 18, 2016).
The first 48-pages of this 86-page opinion are mostly factual details that are important for understanding the case, but for purposes of a short overview and to provide minimum context of the more widely applicable legal principles, this case can be described pithily as involving a manufacturer of medical devices that sent a notice of termination to its exclusive U.S. distributor after learning that the distributor was violating the agreement by developing a competing product, and based on related troubles with the contractual relationship. In return, the distributor counterclaimed that the manufacturer was in breach. After a careful analysis, the court found that the distributor was in material breach and the manufacturer’s notice of termination was justified.
The court provided an unusual analysis to support its finding that a non-signatory was bound to a contract because it was an affiliate of the signatory, and was controlled by the signatory, and the contract applied to affiliates. Moreover the affiliate accepted the benefits of the contract. See footnote 219.
The court describes the factors that must be considered in order to conclude that a breach is material such that it relieves the other party to the contract of its performance obligations. See page 66.
The analysis of when a party has materially breached such that the other contractual party need not perform is a high-stakes determination because if a court later finds that there was no material breach, then of course the contractual obligation to perform will be turned against the party claiming a breach.
A useful definition of the burden of proof based on a preponderance of the evidence standard, is something that all litigators should keep in mind at the outset of a lawsuit. See page 50.
The court observed that damages need not be proven with mathematical certainty but that speculative damages will not suffice. See pages 73 and 79.
Postscript: A useful practice tip for litigators is found at footnote 214 in which the court observed that a motion that is filed but not sufficiently “called to the attention of the court” later in the litigation may be deemed waived or abandoned.