On Oct. 6, 2009, the Delaware Court of Chancery issued a new opinion in the case of West Willow-Bay Court, LLC v. Robino-Bay Court Plaza, LLC (West Willow II), in which the court declined to reform an amended asset purchase agreement on grounds of mistake.2 In so doing, the Court of Chancery added color to its previous decision in the West Willow case (West Willow I), that when parties unambiguously agree to an unqualified duty to obtain third-party consents, a party who fails to meet this obligation will be held in breach of the agreement, even if such an unqualified obligation is difficult or burdensome.3
West Willow is a breach of contract case involving an asset purchase agreement pursuant to which Robino-Bay agreed to sell a shopping center pad site to West Willow-Bay, which was to be subsequently improved as a convenience store and gas station by West Willow-Bay.4 The claim arose after a tenant in the shopping center, whose lease gave the tenant the right to consent to certain improvements in the shopping center, refused to consent to the sale.5 At issue in the case was whether, under the amended purchase agreement, Robino-Bay had an unconditional obligation to obtain third-party consents, or whether it was only required to use its best efforts.6
The question as to the applicable standard for third-party consents was the result of an amendment to the purchase agreement.7 The parties entered a memorandum of understanding ("MOU") to amend the agreement after the local municipality conditioned its approval of the sale on a grant of certain easements and access rights.8 This condition prompted a meeting between the parties, at which the purchase price was renegotiated upward.9 Although the main point of the amendment was to change the price, the question as to the standard for obtaining third-party consents arose because the MOU, which was non-binding, stated that Robino-Bay was to use its best efforts to obtain third-party consents.10 Despite this language in the MOU, the subsequent amendment signed by the parties contained an unconditioned and unqualified obligation on Robino-Bay to obtain third-party consents.11 When Robino-Bay failed to obtain the consent of the tenant, West Willow-Bay sued for breach of the amended purchase agreement.12
The Delaware Court of Chancery held in West Willow I that because the amendment was unambiguous on its face, extrinsic evidence in the non-binding MOU could not be considered. Therefore, Robino-Bay breached the amended purchase agreement when it failed to obtain the consent of the tenant.14 The court noted that Robino-Bay's argument that an unconditional duty to obtain third-party consents worked an "absurd result" was "not without some appeal."15 Nonetheless, the court held that "where...parties have voluntarily ordered their relationship through a binding contract...[such] party is not discharged...simply because [an obligation] turns out to be difficult or burdensome."16
The question of reformation at issue in West Willow II was before the Court of Chancery on remand from the Delaware Supreme Court.17 The Supreme Court remanded the question to determine whether the amended purchase agreement should be reformed from an unconditional obligation to a best-efforts obligation because of mutual mistake or unilateral mistake.18 The Court of Chancery began its analysis in West Willow II by noting the standards for mutual mistake and unilateral mistake.19 Under the doctrine of mutual mistake, the party asserting the doctrine "must show that both parties were mistaken as to a material portion of the written agreement," and under the doctrine of unilateral mistake, the party asserting the doctrine "must show that it was mistaken and that the other party knew of the mistake and remained silent."20 In addition, for either doctrine, the party asserting the doctrine must show "by clear and convincing evidence that the parties came to a specific prior understanding that differed materially from the written agreement."21
The court first analyzed whether Robino-Bay was mistaken as to the level of its obligation to obtain third-party consents under the amendment. The court noted that the amendment, in which "the term 'best efforts' is simply not found," was "roughly one page in length," and therefore a "careful reading" should have informed the principal of Robino-Bay that there "was something in the contract that he had not expected."22 Despite this, the court found that the principal of Robino-Bay believed and expected the "obligation to obtain third-party consents to be in the nature of best efforts," noting that the principal, an individual with sophistication in such matters, would "typically be reluctant to undertake an unconditional obligation to acquire third-party consents."23 Therefore, the court held that the principal of Robino-Bay was in fact mistaken, and understood the obligation to obtain third-party consents to be best efforts, despite the language of the amendment.24
The court next turned to whether West Willow-Bay was mistaken. The court held that representatives of West Willow-Bay, who drafted the amendment, consciously modified the language in the MOU so that the amendment assigned an "unconditional duty" to obtain third-party consents.25 Thus, West Willow-Bay was not mistaken as to the requirements for obtaining third-party consents.26 Accordingly, reformation of the amended purchase agreement based on mutual mistake was foreclosed.27
This determination left the court to examine whether representatives of West Willow-Bay knew of Robino-Bay's mistake, yet remained silent.28 The court found that Robino-Bay failed to meet its burden of proof as to this element of the unilateral mistake doctrine for three reasons:29
- First, the court found that, although representatives of Robino-Bay may have expected the standard in the amendment to be best efforts, given the language of the MOU, the MOU was non-binding and nothing prevented West Willow-Bay from revising the requirement for third-party consents.30
- Second, the court again referenced the short length of the amendment and noted that careful reading would have "informed Robino appropriately."31 The court concluded that West Willow-Bay was entitled to "expect that Robino would read the [amendment] with care" and that, because Robino-Bay had been represented by counsel in previous negotiations of the amendment, West Willow-Bay was entitled to "expect that Robino would have had legal review of the [amendment]," although the principal of Robino-Bay did not seek legal review before signing.32
- Third, the court found that representatives of Robino-Bay had made clear to representatives of West Willow-Bay before the amendment was signed that consent from the tenant in issue would not be difficult to obtain.
Therefore, the court concluded, "West Willow did not know Robino was acting under a mistaken belief" and thus the requirements of the unilateral mistake doctrine were not met.
The Court of Chancery continued its analysis for "completeness," and examined whether representatives of both Robino-Bay and West Willow-Bay shared a specific prior understanding on the meaning of the term "best efforts" and how it would be applied.33 The court found that "the text of the memorandum of understanding demonstrates that something other than an unconditional obligation was anticipated by both sides," and that, because of this, Robino-Bay demonstrated by clear and convincing evidence that there was a specific prior understanding that the obligation to obtain third-party consents would not be unconditional.34
Nonetheless, because neither the requirements of the doctrine of mutual mistake nor the requirements of the doctrine of unilateral mistake were fully met, the court entered judgment in favor of West Willow-Bay and declined to reform the amended purchase agreement.35
West Willow II, and the prior decision in West Willow I, underscore the importance of clarifying the level of effort necessary to obtain third-party consent in acquisition agreements, and assuring that level of effort is met when a binding agreement is in place. Moreover, both opinions highlight the Court of Chancery's respect for unambiguous contractual obligations, even in cases where such obligations are unconditional and burdensome.
Footnotes
1.West Willow-Bay Court, LLC v. Robino-Bay Court Plaza, LLC, C.A. No. 2742-VCN, Oct. 6, 2009 Memorandum Opinion on Remand, p. 1 (Del. Ch. 2009).
2.West Willow-Bay Court, LLC v. Robino-Bay Court Plaza, LLC, C.A. No. 2742-VCN (Del. Ch. 2009).
3.West Willow-Bay Court, LLC v. Robino-Bay Court Plaza, LLC, 2007 Del. Ch. LEXIS 154, 50-56 (Del. Ch. 2007).
4.West Willow-Bay Court, LLC v. Robino-Bay Court Plaza, LLC, C.A. No. 2742-VCN at pp. 1–6 (Del. Ch. 2009).
5.Id. at p. 1.
6.Id. at p. 2, West Willow-Bay Court, LLC v. Robino-Bay Court Plaza, LLC, 2007 Del. Ch. LEXIS 154 (Del. Ch. 2007).
7.West Willow-Bay Court, LLC v. Robino-Bay Court Plaza, LLC, C.A. No. 2742-VCN at pp. 2–6 (Del. Ch. 2009).
8.Id.
9.Id.
10.Id.
11.Id.
12.Id. at p. 6.
13.West Willow-Bay Court, LLC v. Robino-Bay Court Plaza, LLC, 2007 Del. Ch. LEXIS 154 at pp. 37–51 (Del. Ch. 2007).
14.Id. at pp. 60–61.
15.Id. at pp. 53–55.
16.Id.
17.West Willow-Bay Court, LLC v. Robino-Bay Court Plaza, LLC, C.A. No. 2742-VCN at p. 2 (Del. Ch. 2009).
18.Id.
19.Id. at p. 6.
20.Id. at pp. 6-7.
21.Id. at p. 7.
22.Id. at pp. 7–10.
23.Id. at p. 8.
24.Id. at pp. 9–10.
25.Id. at pp. 9–10, note 21.
26.Id.
27.Id. at p. 11.
28.Id. at pp. 11–14.
29.Id. at pp. 12–14.
30.Id. at p. 12.
31.Id. at p. 13.
32.Id. at pp. 5, 12–13.
33.Id. at p. 14, note 27.
34.Id. at pp. 15–16.
35.Id. at p. 16.
This article is presented for informational purposes only and is not intended to constitute legal advice.