In a recent Delaware Court of Chancery decision, the court explained several useful principles of contract interpretation and also provided insight into the methods the court uses to resolve ambiguous contract provisions. Cyber Holding v. CyberCore Holding, C.A. No. 7369-VCN, one of Vice Chancellor John Noble’s last decisions, resolved a contractual dispute related to a post-closing purchase price adjustment in connection with the sale of a company. The specific contractual dispute involved the seller’s claim that it was entitled to payments that benefited the company, but were created prior to the closing. The seller claimed entitlement to the amount of tax liability that was reduced based on certain pre-closing deductions.
Basic Principles
The court applied several principles of contract interpretations and shared several uncommon musings that have practical application. In a prior ruling in this case, the court denied cross-motions for summary judgment based on ambiguities in the applicable agreement. That determination permitted the introduction of extrinsic evidence. Although there was ambiguity in the agreement, the court reminded the parties that even when an agreement is “fairly susceptible to at least two interpretations,” that does not exclude the possibility that one reading may be a more compelling interpretation. The court observed the truism that Delaware follows the objective theory of contract construction. This requires the court to construe an agreement according to the meaning, “which would be understood by an objective, reasonable third party.” The court attempted to assess the agreement as a whole and to give each provision and term effect, so as not to render any part of the contract mere surplusage. The extrinsic evidence considered in order to ascertain the shared intention of the parties in this case included pre-signing negotiations, the drafting history of critical provisions, and the structure and context of the agreement.
