The recent Delaware Court of Chancery decision in Windy City Investments Holdings, LLC v. Teachers’ Insurance and Annuity Association of America, C.A. No. 2018-0519-MTZ (Del. Ch. July 26, 2019), discussed an often recurring issue in commercial litigation: a seller of a business who claims that the Earn-Out provisions in the agreement of sale were not complied with by the buyer.

Key Takeaways:

The most noteworthy aspects of this decision are the thorough recitation of important contract interpretation principles, and a similarly thorough application of those principles. The key statements of law are found on pages 14 and 17.  The court’s reasoning is found most prominently at pages 15 and 22.

·     For example, the court explained that in the context of a motion to dismiss, the moving party in a contract dispute must demonstrate that its interpretation is the only reasonable reading of the disputed provision.

·     However, when the court “may reasonably ascribe multiple and different interpretations to a contract, it will find that the contract is ambiguous.  To be ambiguous, a disputed contract term must be reasonably susceptible to more than one meaning.”  See footnotes 36 and 37 and accompanying text.

·     In this case, the court found that each party’s contract construction left “something to be desired,” and would require the court to “import extra-contractual concepts to reconcile” the language in the agreement.

·     The court observed that an unreasonable interpretation of an agreement “produces an absurd result or one that no reasonable person would have accepted when entering the contract.”  See footnote 46 and related text.

·     The court reasoned that no party offered the only reasonable construction, and because the contract was susceptible to two or more reasonable interpretations and two of more meanings, the contract was ambiguous and required extrinsic evidence to determine the contractual intent of the parties–thus being inappropriate for decision at the motion to dismiss stage.  See footnote 58 and accompanying text.