Supreme Court of Delaware Examines “Efficient Breach” Theory
Meghan A. Adams, Morris James LLP
In Leaf Invenergy Co. v. Invenergy Renewables LLC, 2019 WL 1965888 (--- A.3d ----) (Del. May 2, 2019), the Supreme Court of Delaware examined the “efficient breach” theory under Delaware law. By way of background, plaintiff Leaf Invenergy Company invested $30 million in Invenergy Wind LLC through Series B convertible notes. Important to the issue here, the Series B Note Agreement required that “Invenergy could not conduct a ‘Material Partial Sale’ without majority noteholder consent unless the noteholders received the Target Multiple at the closing of such a sale.” The Target Multiple “was defined as multiples of the noteholders’ initial investment that grew over time.” Combined, these terms meant that Invenergy could conduct a large asset sale either with or without the noteholders’ consent. In exchange for the right to conduct a sale without the noteholders’ consent, the noteholders could cash out with an agreed-upon return on their investment upon Invenergy’s exercise of that right. In 2015, Invenergy closed a $1.8 billion asset sale without first obtaining Leaf’s consent and without redeeming Leaf’s call right. Leaf then filed an action in the Court of Chancery.
The Court of Chancery held that Invenergy breached the LLC Agreement by not obtaining Leaf’s consent or paying the target multiple. However, the court held that Leaf was not entitled to the Target Multiple, holding that the Consent Provision was not an either-or provision, even though until midway through the case, all parties interpreted the LLC Agreement to mean that a failure to obtain Leaf’s consent would require redemption at the Target Multiple. Thus, the court reasoned that Leaf was only entitled to nominal damages because Invenergy likely would not have made the Material Partial Sale if it had to pay the Target Multiple and that Leaf was no worse off with the transaction. The court then applied the “efficient breach” theory and “disregarded the parties’ subjective expectations” by finding that they were not a reliable basis to form the basis of a damages award.
The Supreme Court of Delaware reversed, holding that the LLC Agreement “unambiguously require[d] Invenergy to pay Leaf the Target Multiple if it conducts a Material Partial Sale without Leaf’s consent.” The Supreme Court held this “plain and logical reading” was consistent with the parties’ shared interpretation “until Invenergy saw the light after the Court of Chancery’s pre-trial breach ruling.” The Supreme Court also explained that an “efficient breach is based on the idea that a party might find it economically worthwhile to breach a contract because that breach yields economic benefits that exceed the value of the damages it must pay to the non-breaching party.” Here, the Court of Chancery misapplied this theory by reconsidering its damages theory in response to perceived “efficiency.” Specifically, efficient breach does not bar discovery or modify damages calculations; rather, it recognizes that “a party may find it advantageous to refuse to perform a contract if he will still have a net gain after he has fully compensated the injured party for the resulting loss.” Importantly, damages are an issue of contractual expectations. Here, the parties’ expectations were that in order for a Material Partial Sale to close, Leaf would either give consent or be redeemed at the Target Multiple. The Supreme Court therefore reversed, holding that Leaf was entitled to an award of the Target Multiple, conditioned on Leaf surrendering its membership interests in the LLC.
Controversial ALI Consumer Law Project Postponed
By Keith R. Fisher
For several years the American Law Institute (ALI) has been working on a proposed Restatement of Consumer Contract Law. The project sought to harmonize principles from the Restatement (Second) of Contracts, the Uniform Commercial Code, and court opinions adjudicating disputes between businesses and consumers. The three reporters for the project, all “law and economics” disciples, proposed among other things that consumers could be bound by all but an unconscionable contract, even if they never read it or even knew it existed. In short, the Restatement Tentative Draft would replace the traditional requirement of mutual assent with mere notice. The draft was opposed by a bipartisan group of 24 State Attorneys General, who on May 19 wrote to the ALI members a letter urging them to withhold support from the draft. Ultimately the ALI voted to approve only Section 1, defining the scope of the project, albeit with a modification that it would address only contracts for services, not for goods.