A recent Delaware Court of Chancery decision provides a cautionary tale about why the existence of signatures on an agreement will not always be sufficient evidence to establish that the parties intended to enter into a binding contract. In Eagle Force Holdings v. Campbell, C.A. No. 10803-VCMR (Del. Ch. Aug. 29, 2019), Justice Tamika Montgomery-Reeves, writing while she was still a vice chancellor, reasoned in a 72-page decision that based on the facts and circumstances presented during a five-day trial, two agreements that were signed by the parties were not intended to be binding contracts.

The key issue in the case was whether the parties intended to be bound by the terms of a contribution agreement and an LLC agreement that they signed. The first page at the top of the contribution agreement was marked with the word "draft," along with the date that the draft was prepared, as well as the initials of the law firm that prepared it. The LLC agreement was an exhibit to the contribution agreement. After a thorough recitation of the extensive facts and an analysis of the applicable case law, the court determined that the circumstances surrounding the signing of the document, as well as the past practice of the parties in which they signed drafts merely to confirm receipt, rebutted the presumption that often applies to suggest that a signature on an agreement expresses assent to the terms of the agreement.

The key facts of this case involve two individuals who had been negotiating for many months about becoming 50/50 partners in a startup business in which one would primarily contribute equity and the other would primarily contribute intellectual property. Two letter agreements had been signed prior to the agreements at issue. They were described as simply outlines for more formal and comprehensive agreements to be entered into in the future.

In August 2014, Stanley Campbell and Richard Kay signed a contribution agreement and an LLC operating agreement that the court's opinion refers to as the "transaction documents." The LLC agreement was an exhibit to the contribution agreement and the first page of the contribution agreement at the very top included the word draft, and the date of the draft, and the initials of the law firm that prepared the draft.

The case has a long procedural history. The complaint was filed in 2015. The post-trial opinion in this case was issued in September 2017. The Delaware Supreme Court remanded the case in March 2018. Both the Supreme Court and the Chancery Court decisions relied on prior Delaware case law regarding the necessary elements of a binding contract and the standards that apply to determine the requisite intent to be bound. See Osborn v. Kemp, 991 A.2d 1153, 1158 (Del. 2010); and also Leeds v. First Allied Connecticut, 521 A.2d 1095, 1101 (Del. Ch. 1986).

Another recent Chancery decision, from 2019, that should be consulted in connection with the issue in this case is Kotler v. Shipman Associates, 2019 Del. Ch. LEXIS 322 (Del. Ch. Aug 21, 2019), which also concluded that a signed agreement was not binding based on the facts and circumstances surrounding the signing of that document.

The Supreme Court's decision on remand in the instant case instructed the Court of Chancery not to consider "post-signing evidence" of intent to be bound, as compared to, for example, the parties' course of performance, which might suggest the intended meaning of the terms in a contract. See Eagle Force Holdings v. Campbell 187 A.3d 1209, 1229-30, 1235 (Del. 2018).

The Court of Chancery observed that despite a multimillion-dollar investment being involved, the transaction documents were signed by Campbell without him reading them, and without his attorney present, and without speaking with his attorney to determine whether or not the documents were "final." The court also described in detail the increasingly hostile and distrustful relationship between the parties in this case who were planning to become business partners. The relationship between the two businessmen that were discussing a long-term business partnership was also complicated by allegations that Campbell's prospective partner mistreated employees and was accused of racist remarks against some employees in the multi-cultural company that had already begun doing business. The new capital from the new partner was intended to bring it to the next level.

This opinion features noteworthy analysis of the law regarding the essential elements needed for the formation of contracts and the requisite intent to establish that the signatories intend to be bound. This matter provides an excellent example of the confusion that can follow, including many years of litigation as in this matter, when a document is signed but there are indicia that it is not reflective of a final binding agreement between the parties. If nothing else, one lesson that can be taken from this case is that a Pandora's Box of trouble and expense may await someone who signs an agreement with the word "draft" at the top of the first page.

As the court explains in this opinion, although some case law suggests that a signed contract creates a strong presumption that the signatory has assented to the terms of an agreement, the circumstances surrounding the execution of the transaction documents in this case indicate that the parties' signatures are not presumptive and certainly not conclusive on that point. The record evidence reveals that Campbell's "conduct and communications do not constitute an overt manifestation of his assent to be bound."

The court also recited in detail the factual context surrounding the agreement at issue, that included omissions in one of the transaction documents, that "does not reflect a document a reasonable person expects to be a final version." For example, several exhibits were referred to but never attached.

Regarding the LLC agreement, for the same reasons that the court found the contribution agreement not to be a binding agreement, the court reasoned that the draft LLC agreement could not be relied on to impose either personal jurisdiction or to enforce a forum selection clause.

Francis G.X. Pileggi is a litigation partner at Eckert Seamans Cherin & Mellott. His email address is [email protected]. He comments on key Delaware corporate and commercial decisions, and legal ethics rulings at www.delawarelitigation.com

Chauna A. Abner is an associate in the commercial litigation practice group at the Delaware office of the firm.