A recent Delaware Court of Chancery opinion is notable to the extent that it provides another example of how difficult it is to prevail on a claim for reformation of a contract. See In re 11 West Partners, LLC, C.A. No. 2017-0568-SG (Cons.) (Del. Ch. Mar. 20, 2019).
This case involves a three-member LLC formed by real estate investors. Contrary to instructions given to their attorney to follow a sample agreement that the parties had previously used for a prior investment, the attorney drafted the LLC agreement to require an unanimous vote to oust members (instead of a mere majority.) Two of the three members seeking reformation of the agreement did not read the agreement before signing. Their failure to read the contract, in part, hurt their reformation claims–although they were also not able to satisfy the prerequisite for a reformation claim that there was a “specific meeting of the minds regarding a term that was not accurately reflected in the final written agreement.” (citing Glidepath Ltd. v. Beumer Corp., 2018 WL 2670724, at *10 (Del. Ch. June 4, 2018)) (The Glidepath case was one that I was involved in, and the June 2018 decision in that matter is another example of the challenges in a reformation case).
- A reformation claim can be based on either mutual mistake or unilateral mistake. See footnote 48 and accompanying text for the elements of a reformation claim: By clear and convincing evidence, a party seeking reformation must prove:
“(1) that the party was mistaken about the contents of the final, written agreement; (2) that either its counterparty was similarly mistaken or that the counterparty knew of the mistake but remained silent so as to take advantage of the error; and (3) that there was a specific meeting of the minds regarding a term that was not accurately reflected in the final written agreement.”
- Although not expressly stated in the prerequisites, it is necessary to establish that the counterparty knew of the mistake prior to the agreement at issue being signed, if the argument is that the counterparty knew of the mistake–and remained silent.
As an aside, it’s notable that one of the potential ethical issues that was woven into the factual background of this case was that the attorney who drafted the LLC agreements at issue was not explicit about, at least in writing, whether he was representing the LLC, as an entity, that was involved–as compared to one or more of the individual three members of the LLC. There was some inconsistent testimony in the record about whether one or more of the three LLC members thought that the attorney drafting the LLC agreement was representing one or more of them individually–which of course would be problematic in and of itself.
Another side note of interest, not for its legal significance but for its relevance to current events, is the fact that at least one of the three LLC members wanted to expel another member from the LLC because of apparent anger over who the other member voted for in the 2016 Presidential Election (i.e., the victorious candidate.) See footnotes 37 to 40 and accompanying text. In light of the result of this case, that was not a legal basis to remove the member.