Delaware Supreme Court Surprisingly Flexible on Strict Contract Enforcement

Hall Render reports that the Delaware Supreme Court departed from its traditionally strict contract enforcement and signaled a potential willingness to excuse noncompliance with contractual conditions precedent where enforcement would result in disproportionate forfeiture.

In Thompson Street Capital Partners IV, L.P. v. Sonova United States Hearing Instruments, LLC, the Court reversed a Chancery Court ruling and remanded the case, instructing further analysis on whether indemnification notice requirements were material to the parties’ merger agreement.

This decision introduces a new layer of complexity in interpreting contractual indemnity provisions in Delaware-governed mergers and acquisitions (M&A) transactions.

The dispute arose from a post-closing indemnity claim by the buyer under a merger agreement that required strict compliance with detailed notice provisions.

These included a 30-day timeline and documentation requirements. The buyer delivered notice one day before the end of the survival period, but allegedly failed to meet the specificity and timing conditions.

The seller sought declaratory and injunctive relief to compel release of escrowed funds, arguing that the buyer’s failure to strictly comply with the notice terms forfeited its indemnity rights.

On appeal, the Delaware Supreme Court emphasized that strict enforcement of contractual terms may be set aside if a forfeiture would be disproportionate and the condition is not material to the exchange.

The Court reversed the Chancery Court’s dismissal, finding that the record lacked sufficient analysis on the materiality of the notice conditions and the extent of potential forfeiture. It remanded the case for further proceedings.

Lawyers advising on M&A deals should include explicit statements in contracts that clearly notify and indemnify parties for material conditions. Parties should consider strengthening language concerning precedents to minimize the risk that judicial discretion may override explicit contractual requirements in future disputes.