A recent Delaware Court of Chancery opinion explained the risks associated with using prior material breach of a contract as a defense. In the matter of Post Holdings Inc. v. NPE Seller Rep LLC, C.A. No. 2017-0772-AGB (Del. Ch. Oct. 29, 2018), a complaint by the buyer of a business based on alleged fraud and misrepresentation sought indemnification under the stock purchase agreement. This decision, however, addressed counterclaims by the seller that were made for the return of post-closing tax refunds that were payable to the seller pursuant to the stock purchase agreement.

Several important contract interpretation principles in this opinion are noteworthy enough that this decision deserves a place in the toolbox of those involved in corporate and commercial litigation:

  • Although a prior material breach of a contract may relieve a counterparty of performance, that relief from performance only applies if the counterparty claiming a prior material breach does not also retain the benefits of the contract, and/or where, as here, the counterparty is suing to enforce indemnification provisions of the same agreement. See footnote 35 and accompanying text.
  • The foregoing principle illustrates the risk involved with withholding performance based on the claim of prior material breach, because if the court finds that there was no prior material breach, then the lack of performance is not excused.

The court also provided useful rulings on the principles applicable to an attempted “set-off’, as well as rendering a partial final judgment based on Court of Chancery Rule 54(b).

  • The court explained that absent contractual modification, the general rule is that unliquidated claims, for example related to indemnification claims, cannot be applied to set-off (or deduct) the amount of claims made by a counterparty. In this case, even though the original claims in the complaint were much larger than the amount of the judgment granted in the counterclaims, because the indemnification claims in the complaint were unliquidated, the court ruled that the amount claimed in the complaint could not be used as a set-off (or could not be used as a means of “netting out” or deducting the lesser amount of the judgment for the counterclaims from the greater unliquidated amount sought in the complaint.)
  • Under Rule 54(b), when there is a ruling on less than all the claims asserted in a case, the court may make that ruling a final judgment and thus both subject to appeal, and if no appeal then available for execution, under certain circumstances. In this case the court found that Rule 54(b) should be applied to make the ruling on the counterclaims a final judgment for a few reasons, including because the remaining separate claims were unrelated and not likely to be resolved soon (in light of no trial date set for them yet.)