A recent Court of Chancery decision explains when an agreement will be deemed ambiguous such that extrinsic evidence will be allowed, and related contract interpretation principles.
Key Issue Addressed:
The court, in Zayo Group, LLC v. Latisys Holdings, LLC, C.A. No. 12874-VCS (Del. Ch. Nov. 26, 2018), described the “real controversy” in the matter as one arising from the parties’ disagreement about what the contract regarding the sale of a company provided in connection with whether a disclosure was required when a customer “failed to renew” as opposed to “terminated” its status as a customer.
Key Legal Principles Addressed:
· The court explained when an agreement will be considered ambiguous such that extrinsic evidence will be permitted. The court emphasized that a contract is not rendered ambiguous simply because the parties do not agree on its proper construction. Rather a contract is ambiguous only when the provisions in controversy are “reasonably or fairly susceptible of different interpretations or may have two or more different meanings.” See pages 34 to 35.
· The court described the types of extrinsic evidence that will help to inform the court regarding the intent of the parties based on an objective theory of contracts, e.g., usage of trade and course of dealings, as well as the drafts of the agreement leading to a final document and the negotiation history of the parties. See pages 36 to 37.
· The court observed that although a basic rule of contract construction is not to render terms of a contract superfluous, that rule doesn’t apply to synonyms–in this matter the court referred to various sources to interpret the definitions in this context of “terminate” and “cancel” to be essentially synonymous.
· The extrinsic evidence in this matter revealed that the parties did not intend to equate the terms “terminate or cancel” with “non-renewal” of customer agreements such that it required disclosure of those customers who chose “not to renew.” See 37 to 39.
· Two other points supported the court’s reasoning. Prior drafts of the agreement showed that the buyer tried to include as part of required disclosures, those customers who “refused to renew” but the seller rejected that language and it did not appear in the final agreement. The court also referred to the hoary concept of caveat emptor. This made it incumbent on the buyer to be explicit and precise about what risk it was–or was not–assuming.
· Regarding damages, the court explained “benefit of the bargain damages” when the value of a sold company is impaired by misrepresentations. See page 45 and footnote 200.
· In addition to failing to prove breach of contract, the plaintiff also failed to establish the minimum damages or “basket” that had to be met before the indemnification duty was triggered in this matter.
Compare: recent decision in the Great Hill Equity matter, highlighted on these pages, which interpreted an indemnification clause which had a “cap”–as opposed to the provision in this indemnification clause in this matter which had a “minimum basket” that had to be met (filled) before any indemnification obligations were triggered.
Compare also: recent article by Bryan Garner in the ABA Journal that discusses what the famous wordsmith refers to as “contractual busts” or provisions in contracts that “make no literal sense at all.”
Supplement: Regarding the meaning of words in contracts, Professor Gordon Smith, Dean at the Brigham Young University Law School and the co-author of the well-read blog called Conglomerate, discusses in a recent post a new approach to researching the meaning of words and the use of words, especially as a word is used during different periods of time, called “Corpus Linguistics.” He refers in the above-linked post to a recent United States Supreme Court decision that appears to refer to this approach, and the BYU-developed database on which it is based called the Corpus of Historical American English.