Delaware Superior Court Weighs in on Contract Ambiguity

In V&M Aerospace, LLC v. V&M Co., the Superior Court engaged in contract interpretation to resolve a dispute arising out of an Asset Purchase Agreement (APA) entered into in 2015 by V&M Aerospace LLC (Aerospace) and V&M Company (VMC) for the sale of substantially all of the assets of VMC’s chrome plating business.

Aware that the land the facility was environmentally situated on was contaminated, the parties expressly provided within the term of the APA that VMC would indemnify Aerospace and would be held responsible for any environmental losses occurring prior to the APA’s closing date. Similarly, Aerospace would be held responsible for environmental losses occurring on or after the APA’s closing date and have an obligation to indemnify VMC in actions arising from that harm. An environmental claim was filed in California in 2017 against VMC, who then filed a cross-complaint against Aerospace seeking indemnification under the belief the harm occurred after the APA’s closing date.

Subsequently, Aerospace notified VMC that it would be offsetting any attorneys’ fees incurred against its next quarterly payment to VMC. Aerospace claimed that it was entitled to do so under the APA, which granted it the right to offset any claim for a loss against payments owed to VMC. The question presented before the court was whether Aerospace was justified in exercising its offset rights given that it is allegedly responsible for the harm underlying the California litigation.

The court resolved this dispute by interpreting Section 17 of the APA, the portion granting Aerospace offset rights. The first sentence of Section 17 provided Aerospace offset rights for losses related to non-environmental claims and the second sentence provided offset rights for losses related to environmental claims. The court concluded that the inclusion of the limiting phrase “subject to indemnification” within the first sentence and the phrase’s exclusion in the second sentence demonstrated an intended distinction between the scope of the two offset rights. Further, the court held that based on the clear and unambiguous language of the APA and strong policy of freedom of contract, Aerospace may offset losses related to environmental claims regardless of whether those losses are “subject to indemnification”.

In response to VMC’s arguments that this result would unjustly punish it for exercising indemnification obligations, the court countered that regardless of whether the offset was due to loss from an environmental or non-environmental claim, Aerospace would be permitted to exercise this right before indemnification obligations were resolved. Moreover, the court dismissed VMC’s objections that the interpretation was fundamentally unfair by assuring VMC that if the indemnification obligations were resolved in its favor, it would be able to recoup all improperly offset amounts as contemplated by the language of Section 17, which discussed offsets that are later determined to be improper by the court or arbitrator.

Read the full opinion here.

Kaitlin McCaffrey & Chris Lee

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