The recent Delaware Supreme Court decision in Exelon Generation Acquisitions, LLC v. Deere & Company, No. 28,2017 (Del. Supr., Dec. 18, 2017), reversed the trial court ruling and rejected an earn-out claim based on the application of well-settled contract interpretation principles.
The specific contract terms that were interpreted are fairly sui generis and not widely applicable, in terms of the factual aspects of the trigger for the earn-out payment, but several contract interpretation principles are noteworthy for their wide-spread applicability.
Background Facts: In this case, Excelon agreed to make earn-out payments to Deere if it reached certain milestones in the development of three wind farm projects that were underway at the time of sale. One of the projects became impossible to develop due to local ordinances that were passed. The issue arose about whether the development of another wind farm 100 miles away, that was not referenced in the applicable agreements, could satisfy one of the milestones that would trigger the earn-out payment.
Key Contract Interpretation Principles: Several basic contract interpretation principles in this decision have widespread applicability:
- Delaware adheres to an objective theory of contracts. Contract construction should be that which is understood by an objective, reasonable third party.
- 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.
- One contract may incorporate discrete parts or terms from another contract without necessarily incorporating the entire contract. See footnote 33 (citing 11 Richard A. Lord, Williston on Contracts § 30: 25, at 234, 238 (4th ed. 1999)).
- Extrinsic evidence cannot be used to interpret the intent of the parties or to vary the terms of the contract unless the contract suffers from ambiguity.
- In interpreting an earn-out provision, the parties’ post-closing conduct may be used to determine whether there is a breach, but post-closing evidence cannot be used as an aid to interpreting the meaning of the contract when the contract is unambiguous.