Filed August 28, 2009
Opinion by Judge Durke G. Thompson
Held: Where written purchase-and-sale agreement was silent on outcome where both parties timely objected to first party's chosen appraiser, and where pre-formation extrinsic evidence showed no meeting of the minds on this material term, the contract is unenforceable, and the court will not supply missing terms.
Facts: Several investors formed an LLC to own two professional sports franchises. After a dispute arose between several members and another member over a player trade, all of them negotiated a written agreement to govern the majority group's buy-out of the dissenting members' interest in the company. Among other things, the agreement provided a mechanism for selecting supposedly neutral appraisers to determine the fair market value of the franchises. The agreement granted the dissenting member the right to select the first appraiser, subject to the filing of an objection within five days. The objecting party would then have the right to select the second appraiser. If that selection was timely objected to, the agreement allowed for the league to choose a third appraiser. Critically, the agreement did not expressly prohibit any party from objecting to appraisel produced by its own selection, and it made no provision for the outcome in the event two parties objected to the appraisal. This is exactly the situation that resulted when both the dissenting member and the majority group objected to the appraisal made by the appraiser originally selected by the dissenter.
Analysis: On a prior appeal, the Court of Special Appeals found the provision of the agreement governing appraiser selection and objection to be silent, and therefore, ambiguous in the event that both parties objected to a selection. On remand, and applying Delaware law, the Circuit Court for Montgomery County looked to pre-formation extrinsic evidence to determine whether there was any agreement on what would happen in the event of a bilateral objection. The court found no extrinsic evidence of such an agreement, express or implied, and that "no one contemplated the legal entanglement that resulted when both sides objected." There being no meeting of the minds, the court declared that "the contract becomes unenforceable by the courts," and it left the parties to negotiate a resolution on their own, without judicial assistance. The court declared that neither party was in breach.
Drafters are encouraged to consider the potential consequences where a contractual objection provision does not expressly foreclose a party from objecting to its own action. As this case demonstrates, if the provision is silent on the issue, there is both a risk for bad-faith manipulation of the ambiguity as well as a risk that the manipulator himself will be left with an unenforceable agreement.
The full opinion is available in PDF.