A recent Delaware Supreme Court decision is noteworthy for: (1) addressing damages for breach of consent-rights, as well as (2) discussing the concept of efficient breach.  In Leaf Invenergy Company v. Invenergy Renewals LLC, No. 308, 2018 (Del. Supr., May 2, 2019), the en banc court also engaged in a rare reversal of a Court of Chancery decision.

Brief Background:

The LLC Agreement included a provision which prohibited a company called Invenergy from conducting a “material partial sale” without the consent of the plaintiff, unless Invenergy paid plaintiff a premium called a “target multiple.”  The Court of Chancery determined that although Invenergy had breached the material-partial-sale consent provisions, the plaintiff was not entitled to the target multiple.  The court awarded nominal damages, because the Court of Chancery found that Invenergy engaged in an “efficient breach.”

Highlights of the Supreme Court Decision:

·     A helpful reminder of basic contract interpretation principles, including the objective theory of contracts followed by Delaware, is found at pages 16 and 17.

·     Delaware’s High Court discusses the concept of consent rights, and refers to Delaware case law on the topic at page 21.  The court rejected the reasoning of a 2017 Court of Chancery decision that ruled on consent rights. See In re Appraisal of GoodCents Holdings, Inc., 2017 WL 2463665 (Del. Ch. June 7, 2017).  Specifically, the Supreme Court ruled as follows:  “to the extent that GoodCents turns on an interpretation that the above-quoted provision [regarding consent rights quoted at page 23 of the Slip Opinion], cannot yield damages in the amount of the liquidation preference even in the absence of consent, we reject it.”  Slip op, at 24.

Breach of Consent-Right Damages:

·     The Supreme Court explained that the proper measure of damages for breach of the consent right in this case should give Leaf the benefit of the bargain it struck with Invenergy, and should be based on Leaf’s expected position–but for Invenergy’s breach.  Slip op. at 26.

·     The court further reasoned that the correct:

“but-for-the-breach” frame of reference is not what might had happened had Invenergy asked Leaf for its consent, because Invenergy’s contractual obligations and the means of performing them were not so narrowly drawn.  Invenergy’s “breach was only complete when it failed to obtain Leaf’s consent and when it failed to pay the target multiple at closing.”

·     The court further explained that:

“. . . when considering the breach as a whole, what would most aptly repair that breach is Invenergy’s payment–now in satisfaction of a damages award–of the amount it agreed it would pay for the right to engage in a material partial sale without Leaf’s consent.”

·     Delaware’s High Court also explained that remedial provisions and liquidated damage clauses are not the only way for a contract to specify the damages flowing from the breach.  For example, in a sales contract in which the seller fully performs and the buyer does not pay at all, the seller is entitled to the sales price specified in the contract.

Efficient Breach:

·     The court thoroughly addressed the concept of efficient breach.  See Slip op. at pages 29 The court’s reasoning is at pages 29-30.

·     The court explained efficient breach as a “concept that recognizes that ‘properly calculated expectation damages increase economic efficiency by giving the other party an incentive to breach the contract if, but only if, he gains enough from the breach that he can compensate the injured party for his losses and still retain some of the benefits from the breach.’”  See footnote 49.

·     The court further explained efficient breach as being “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.”

·     The court further instructed that: efficient breach does not bar recovery or modify damages calculations.  Rather the efficient-breach theory 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.”  See footnote 52 (emphasis omitted).

·     The Supreme Court in this opinion rejected or distinguished at least one aspect of another Court of Chancery opinion–from 2013.  The court observed that Fletcher International, Ltd v. ION Geophysical Corp., 2013 WL 6327997 (Del. Ch. Dec. 4, 2013), involved a hypothetical negotiation as a method of calculating damages, but the court found that to be inapposite in this matter.  In Fletcher, there was no practical, contractually specified way for the breaching party to cure its breach.  Unlike in the instant matter, in Fletcher, the only way the breaching party could close the transaction in substantial conformity with the contract was by obtaining the injured party’s consent, which was impractical given the status of the litigation.  By contrast, in the instant matter, the agreement did specify how Invenergy could avoid obtaining Leaf’s consent and still perform the contract.