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Delaware Court Enforces Strict Compliance With Notice Provisions

Corporate and Securities Alert | May 17, 2018
By: Lori Smith and Michael Psathas

The Delaware Chancery Court issued a recent opinion that provides a warning for parties to contracts: strictly follow the notice instructions set forth in the agreement or otherwise jeopardize contractual rights under the agreement. In PR Acquisitions, LLC v. Midland Funding LLC, C.A. No. 2017-0465-TMR (Del. Ch. April 30, 2018), a purchaser of certain consumer debt receivables was barred from seeking a claim against the seller under the purchase agreement as a result of failing to comply with the express and clear notice instructions in the transaction documents. 

Factual Background

On May 30, 2014, Midland Funding LLC (the purchaser) entered into a purchase agreement with PR Acquisitions, LLC (the seller) which included an indemnification provision that allowed the purchaser to make claims against the seller for certain breaches of the agreement for a period of three years after the closing. As is customary with many sale agreements, the parties also executed an escrow agreement which provided that $6 million of the purchase price be escrowed for the satisfaction of any claims related to the purchase agreement during the indemnification period. However, both the purchase agreement and escrow agreement provided that written notice of such claims was required to be given to the seller (and not just the escrow agent). In addition, each agreement provided specific instructions for duly providing notice to the other party.[1] In the absence of a timely claim made by the purchaser, the escrow agent was required to release the escrow funds to the seller.

On May 26, 2017, a few days prior to the expiration of the indemnification period, the purchaser sent a letter by Federal Express and facsimile to the escrow agent identifying certain legal claims against the seller. Importantly, the purchaser failed to send the notice directly to the seller. On May 30, 2017, the escrow agent informed the seller about the letter containing the purchaser’s claims. Shortly thereafter, on June 7, 2017, the seller requested that the purchaser direct the escrow agent to release the escrow funds to the seller and disputed the claims set forth in the letter that was sent in the purchaser’s notice to the escrow agent. However, the purchaser refused to direct the escrow agent to release the escrow funds and the seller filed an action to obtain the funds from the escrow agent. 

The Delaware Chancery Court held in favor of Seller’s right to the escrow funds finding that the notice provisions of the purchase agreement and escrow agreement were “express and clear”. Specifically, since the purchaser failed to provide timely notice in accordance with the methods clearly set forth in the transaction documents prior to the indemnification expiration date, the terms of the agreements dictate that the escrow funds must be released to the seller.

Conclusion

While the purchaser tried to argue “substantial compliance” with the notice provisions since the seller had actual notice of the claim (i.e., the escrow agent provided notice to the seller on May 30, 2017), the court refused to accept this argument in the instant case since the purchaser did not strictly comply with the notice provisions. Although there may be circumstances where strict compliance with a notice provision is impossible (e.g., it is very common that the individual listed in the notice provision is no longer with the company to which notice is required to be given) or where the notice provision is ambiguous, parties to contracts need to give due attention to the specific mechanics negotiated in agreements, not only for notice provisions, but for all provisions that provide for clear and unambiguous steps that must be followed to exercise rights. 

If you have questions or would like additional information, contact Lori Smith (smithl@whiteandwilliams.com; 212.714.3075), Michael Psathas (psathasm@whiteandwilliams.com; 212.868.4833) or another member of the Corporate and Securities Group.


[1] The Purchase Agreement included the following notice provision: “Any and all notices, consents or other communications required or permitted under this Agreement shall be in writing and shall be delivered by either (a) Federal Express or similar nationally recognized overnight carrier; or (b) certified U.S. mail, postage prepaid and return receipt requested; and addressed as indicated below or otherwise indicated by the parties in writing.” The notice provision then lists the address for the seller. The Escrow Agreement included the following notice provision: “All notices or other communications hereunder shall be deemed to have been duly given and made if in writing and if served by personal delivery upon the party for whom it is intended, if delivered by registered or certified mail, return receipt requested, or by a national courier service, or if sent by facsimile, provided, however, that the facsimile is promptly followed by telephone confirmation thereof to the appropriate person at the address set forth below, or at such other address as may be designated in writing hereafter, in the same manner, by such person.” The notice provision then lists the address for the seller.

This correspondence should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult a lawyer concerning your own situation and legal questions.
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