An “Efficient Breach” Does Not Absolve One from Contractually Agreed Upon Damages

In the recent case of Leaf Invenergy Co. v. Invenergy Renewables LLC, No. 308, 2018 (Del. May 2, 2019), the Delaware Supreme Court reversed the Court of Chancery’s nominal damages award under the “efficient breach” theory.  The Supreme Court confirmed that an efficient breach is not a bar to recovery or a device for modifying damages calculations.  Instead, an efficient breach occurs when a party finds an intentional breach’s benefits outweigh the damages it might owe. 

Plaintiff Leaf Invenergy Company invested $30 million in Invenergy Wind LLC.  Leaf negotiated a consent provision in the LLC Agreement that prohibited Invenergy from conducting a Material Partial Sale without Leaf’s consent, unless Invenergy paid Leaf a premium call the Target Multiple.  Several years after the investment, Invenergy closed a $1.8 billion asset sale (a Material Partial Sale) without first obtaining Leaf’s consent or redeeming Leaf’s interest at the Target Multiple.  Leaf then initiated suit for breach of the LLC Agreement.

The Court of Chancery found that Invenergy breached the Consent Provision, but Leaf was not entitled to the Target Multiple.  Applying the “efficient breach” theory, the Court of Chancery posited a hypothetical negotiation exercise where Leaf was required to show that it would have secured additional consideration if given the opportunity to negotiate for its consent, or that it suffered harm because of the asset sale.  Additionally, the Court of Chancery found, Invenergy likely would not have closed on the asset sale if it had to pay the Target Multiple. Only nominal damages were therefore appropriate.   Ultimately, the Court of Chancery ordered the parties to complete a buyout of Leaf’s interests pursuant to a put-call provision in the operative agreement, which Invenergy exercised during the suit. 

On appeal, the Supreme Court reversed, explaining that the Consent Provision was an either-or structure requiring Leaf’s consent or payment. The Court of Chancery’s analysis only considered Invenergy’s breach of the consent portion of the clause at issue, and not its breach of the payment portion of the clause. The Court of Chancery should have considered the full effect of Invenergy’s contractual breach when it failed to seek Leaf’s consent and then failed to pay the Target Multiple, rather than focusing on the harm to Leaf.

The Supreme Court also explained the trial court’s misapplication of the efficient breach theory.  The concept of efficient breach applies where it is economically advantageous for a party to breach a contract because the breach’s benefits outweigh the damages it will be required to pay to the non-breaching party. The concept does not justify modifying the amount of contractually agreed upon damages.  Instead, such damages must be calculated based on the degree of injury suffered.  Since Leaf did not give its consent, the appropriate expectation damages were the Target Multiple.  Accordingly, the Supreme Court reversed the nominal damages award, substituting an award of the Target Multiple, $126,000,000, conditional on Leaf’s surrender of its membership interests.

Read the full opinion here.

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