We make contracts every single day whether we are buying toothpaste at a store or merging two public companies. And as every law student learns, probably in their first ever class, a contract involves an offer, an acceptance, and consideration. But sometimes, things can be a little murkier. And they could not have been more murky than the situation faced by the Delaware Supreme Court in Eagle Force Holdings LLC v. Campbell. There, the parties had signed two documents—a limited liability company agreement and a contribution and assignment agreement—but they disagreed as to whether those documents constituted a valid and binding contract.
The Supreme Court, although noting the basic offer-acceptance concept, found that Delaware law applies a test for the existence of a contract that is more nuanced than people might otherwise expect. Following their prior rulings, they found that a valid contract exists only where (1) the parties intended that the contract would bind them, (2) the terms of the contract are sufficiently definite, and (3) the parties exchange legal consideration.
In the Supreme Court’s view, the second and third parts of that inquiry were satisfied in Eagle Force. But it remained unclear as to whether there was an “intent to be bound.” As the Court explained, the question was whether the parties intended to be bound “as to the contract as a whole, rather than analyzing whether the parties possess[ed] the requisite intent to be bound to each particular term.” In assessing whether there was such intent, the trial court was to look at “overt manifestation of assent” rather than try to peer into the minds of the parties to determine what they were thinking. Notably, the fact that there might be a written agreement was not always enough to show an intent to be bound. As the Court explained, in determining whether a party intended to be bound:
the court reviews the evidence that the parties communicated to each other up until the time that the contract was signed—i.e., their words and actions—including the putative contract itself. And, where the putative contract is in the form of a signed writing, that document generally offers the most powerful and persuasive evidence of the parties’ intent to be bound. However, Delaware courts have also said that, in resolving this issue of fact, the court may consider evidence of the parties’ prior or contemporaneous agreements and negotiations in evaluating whether the parties intended to be bound by the agreement.
In other words, there can be situations in which there is a written, signed document, but other evidence shows that no contract was actually made.
In Eagle Force, there had been a long history of back and forth between the parties and their various law firms, during which some lengthy documents that purported to be agreements had been signed. Although the Supreme Court went through the history of the parties’ dealings at length, at the end of the day it summed them up by saying that, while there was “evidence within the four corners of the documents and other powerful, contemporaneous evidence, including the execution of the agreements, that suggests the parties intended to be bound,” there was “also evidence that cuts the other way.” It was not, however, for the Supreme Court to resolve that evidentiary conflict; the question of whether the parties intended to be bound was a “question of fact” for the trial court to resolve. The Court therefore sent the case back to the trial court for it to make that finding.
The lesson of Eagle Force is a powerful one. Generally speaking, parties trying to escape contracts tend to argue that the contract is invalid because there was coercion, duress, mutual mistake, or that the agreement is unconscionable. But, as Eagle Force shows, there is a far more fundamental question that has to be resolved: Did the parties even intend to be bound? While a signed written agreement will normally answer that question, the Supreme Court’s opinion leaves open the possibility that a signature alone might not be enough.
As a practical matter, it is imperative that parties drafting contracts ensure that the written document contains nothing that might suggest that a party never intended the document to be binding. In Eagle Force, for example, the document was labeled “Draft” and contained blank schedules. The Supreme Court pointed to those facts as potential evidence of a lack of an intent to be bound. Although the Court did not address what type of document might be overwhelming evidence of an intention to be bound, it is likely that a document that is complete an
d labeled “Execution Copy” would be almost unassailable.
For a party attempting to escape a contract, Eagle Force underscores the importance of not assuming that the presence of a signed, written document is necessarily conclusive of the existence of a contract. While some might assume that courts only look at the history of negotiations where a contract is ambiguous, the history of the parties’ negotiations can also be examined to see if a contract even exists. If there is any evidence that the parties did not intend to be bound by the written document, consideration should be given as to whether to raise that issue as a ground for challenging any claim of breach of contract.
If you have any questions about the drafting of contracts or litigation involving contracts, please contact Andrew Horne at firstname.lastname@example.org or (212) 374-9791.
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