Recent decisions of the Delaware courts have provided arguments for considering a broader approach to the more traditional “four corners of the document” view of contract interpretation for so-called unambiguous agreements. The recent Chancery decision in Plaze, Inc. and Apollo Aerosole Industries LLC v. Callas, C.A. No. 2017-0432-TMR (Del. Ch. Mar. 29, 2018), addresses contract interpretation in the context of post-closing issues arising from Plaze’s purchase of Apollo Aerosole Industries pursuant to a stock purchase agreement which included provisions for non-competition, non-solicitation, indemnification and post-closing adjustments. This decision refers to recent Supreme Court decisions that suggest a fresh approach to the traditional theory of contract interpretation of unambiguous agreements being typically limited to the four corners of the document.
Highlights of Decision
The court began its analysis with the still applicable bedrock principle that Delaware applies to the objective theory of contracts, i.e.: “A contract’s construction should be that which would be understood by an objective, reasonable third party.” See footnote 14. The court acknowledged the traditional approach that provides for interpreting a contract based on the: “parties’ intentions as reflected in the four corners of the agreement, construing the agreement as a whole and giving effect to all its provisions.” See footnote 15.
But, citing to a recent Delaware Supreme Court decision, the most recent statement of Delaware law regarding contract interpretation provides for a more holistic approach expressed in the following quote: “In giving sensible life to a real-world contract, courts must read the specific provisions of the contract in light of the entire contract.” (citing Chicago Bridge & Iron Co. N.V. v. Westinghouse Elec. Co., 166 A.3d 912, 913-14 (Del. 2017)).
Another recent Delaware Supreme Court decision also supports the view that the current approach that Delaware courts are taking even for unambiguous contracts allows for one to “step back” to view the context in which the parties reached an agreement. See Heartland Payment Systems, LLC v. InTeam Assoc., LLC, 2017 WL 3530242, at *10 (Del. Aug. 17, 2017)(quoting Chicago Bridge & Iron Co. N.V. v. Westinghouse Elec. Co., 2017 WL 2774563, at *1 (Del June 27, 2017)). See also E. Norman Veasey & Jane M. Simon, The Conundrum of When Delaware Contract Law Will Allow Evidence Outside the Contract’s “Four Corners” in Construing an Unambiguous Contractual Provision, 72 Bus. Law. 893 (Fall 2017). The Court of Chancery very recently issued an Order with its findings on remand in the Heartland case.
The referenced article co-authored by former Chief Justice Veasey was published in the same year as two above Delaware Supreme Court decisions which arguably support the view that when construing even unambiguous agreements, the larger context in which the parties negotiated the agreements should be taken into account.
The stock purchase agreement involved in this case provided for indemnification as the sole remedy for breach of representations or warranties, and also included several restrictive covenants and confidentiality provisions. One of the issues was whether a post-closing separation agreement involving one of the executives superseded the indemnification provision. That argument was unsuccessful and the court reasoned that the extensive indemnification provisions for breach of representations and warranties was not impacted by the post-closing separation agreement with one of the executives who allegedly violated the restrictive covenants and other provisions.