Forthright
Negotiator Principle
The “Forthright
Negotiator Principle” is the name that has been used by the
Delaware Court of Chancery since 1996 to refer to a
principle of contract interpretation used on occasion by
courts to resolve contract ambiguities on the basis of
extrinsic evidence regarding the "shared intent" of the
parties to an ambiguous contract. As considered below in
this item It is actually an application of § 201(2) of the
Restatement (Second) of Contracts.
Under the Forthright Negotiator Principle as articulated by
the Delaware Court of Chancery in several opinions if, in
resolving an ambiguity, a review of the extrinsic evidence
does not lead the court to an "obvious" conclusion, the
court may enforce as a contractual duty an objectively
reasonable interpretation that is in fact held by one side
of a negotiation and which the other side knew or had
reason to know that the first party held Another
articulation of the forthright negotiator principle is that
"…in cases where the extrinsic evidence does not lead to a
single, commonly held understanding of a contract's
meaning, a court may consider the subjective understanding
of one party that has been objectively manifested and is
known or should be known by the other party. The Court
explains that this principle is based on the concept that
"…it is logically impossible for a contracting party,
operating in good faith, both to have a subjective
interpretation of ambiguous language different from that of
her counterparty and to know of her counterparty's
differing interpretation.
The Forthright Negotiator Principle is spelled out, but not
by that name, in Restatement (Second) Of Contracts § 201(2)
(1981) which provides that:
"Where the
parties have attached different meanings to a promise or
agreement or a term thereof, it is interpreted in
accordance with the meaning attached by one of them if at
the time the agreement was made
(a) that party did not know of any different meaning
attached by the other, and the other knew the meaning
attached by the first party; or
(b) that party had no reason to know of any different
meaning attached by the other, and the other had reason to
know the meaning attached by the first party."
Prior to this
principle being latched onto by the Delaware Chancery Court
the Restatement provision had been referenced in several
cases involving ambiguous documents
UNITED RENTALS, INC. v.
RAM HOLDINGS, INC. 937 A.2d 810, 830 (Del. Ch.
2007) decided
December 19, 2007 involved an attempt by the frustrated
seller to specifically enforce a Merger Agreement in a
failed seven billion dollar acquisition.
The language of
the Merger Agreement presented to the court a direct
conflict between two
provisions on remedies. Section 9.10 of the Merger
Agreement provided for specific performance of the
prospective purchasers obligation to use its reasonable
best efforts to obtain financing and to consummate the
transaction if financing is available. By its terms Section
9.10 was made subject in all respects to Section 8.2(e) of
the same agreement. Section 8.2(e) provided that the right
of the seller to terminate the agreement and receive a one
hundred million dollar termination fee was to be the
seller's sole remedy notwithstanding anything to the
contrary in the agreement including Section 9.10.
After a hearing on the merits Chancellor Chandler of the
Delaware Court of Chancery decided that the
agreement was ambiguous,
that the extrinsic
evidence of the
negotiation process was too muddled to permit the court to
find that either
party's interpretation of the Merger Agreement represented
a common understanding
of the parties. Chancellor Chandler then concluded that
under what he referred to as the "Forthright Negotiator
Principle", the subjective
understanding of one party to a contract may bind the other
party when the other party
knows or has reason to know of that understanding. and that
since the evidence in
this case showed that defendants understood this agreement
to preclude the remedy of
specific performance and that plaintiff knew or should have
known of such
understanding, the prospective seller seeking specific
performance had failed to meet its burden as the plaintiff
and denied specific
performance.
Use this link
for my
comments on certain aspects of Section 9.10
of the Merger Agreement in Union Rentals v. Ram Holdings,
Inc. entitled
"Specific Performance" and of Section 8.2 (e) which
relates to termination.
