Delaware Turns Away from Contractarianism

Alert

Introduction:

Delaware courts have long embraced a contractarian philosophy which respects the right of parties to freely contract and “where Delaware's law applies, with very limited exceptions, [Delaware] courts will enforce the contractual scheme that the parties have arrived at through their own self-ordering, both in recognition of a right to self-order and to promote certainty of obligations and benefits.” [1]

Delaware courts are “especially chary about relieving sophisticated business entities of the burden of freely negotiated contracts”[2], and the courts have explained they will “not rewrite [a] contract to appease a party who later wishes to rewrite a contract he now believes to have been a bad deal. Parties have a right to enter into good and bad contracts, the law enforces both.”[3]   

Under this approach, courts generally resist applying judicial or equitable doctrines that might unsettle freely negotiated contracts. The practical reason for this is clear: in disputes involving highly complex provisions where sophisticated commercial parties value certainty, a departure from contractarianism may risk injecting subjectivity and uncertainty into the enforcement of intricate deal mechanics.

In limited cases, Delaware will turn away from this tradition “to vindicate a public policy interest even stronger than freedom of contract”[4], but “such public policy interests are not to be lightly found, as the wealth-creating and peace-inducing effects of civil contracts are undercut if citizens cannot rely on the law to enforce their voluntarily-undertaken mutual obligations.”[5]  

Against this backdrop, the Delaware Supreme Court’s (the “Supreme Court”) decision in Thompson St. Cap. Partners IV, L.P. v. Sonova United States Hearing Instruments, LLC, 340 A.3d 1151, 1156 (Del. 2025) is particularly consequential.

Invoking the principle that Delaware common law “abhors a forfeiture”[6], the Supreme Court excused Sonova United States Hearing Instruments, LLC’s (“Sonova”), noncompliance with a merger agreement’s indemnification claim notice timing and specificity requirements. Although those timing and specificity requirements were express conditions precedent to indemnification rights, the Supreme Court held that noncompliance could be forgiven if two predicates were met: first, the notice and specificity requirements were not material to the agreement; and second, enforcing the condition would result in a disproportionate forfeiture.

With this decision, the Supreme Court declined to reaffirm Delaware’s commitment to contractarianism.

Relevant Background and Analysis:

The Delaware Chancery Court:

The facts underlying Thompson Street arise from a disputed indemnification claim notice delivered by Sonova to Thompson Street Capital Partners IV, L.P. (“Thompson”) under a January 13, 2022 merger agreement, pursuant to which Sonova acquired several audiology practices owned by a Thompson portfolio company. In connection with the transaction, the parties also executed an escrow agreement establishing a $7.75 million indemnity escrow fund as Sonova’s sole recourse for indemnity claims under the merger agreement (subject to customary carve‑outs).

On August 25, 2023—one business day before the August 29, 2023 escrow release date—Sonova sent Thompson and the escrow agent a two‑page indemnification claim notice (the “Notice”), reserving the entire $7.75 million fund based on alleged improper billing practices in multiple states.

Thompson sought a declaratory judgment in the Delaware Court of Chancery (the “Chancery Court”), alleging that the Notice (i) lacked the level of “specificity” prescribed by the merger agreement and (ii) was untimely, as Sonova did not deliver it within 30 days of their actual awareness of the claim, in accordance with the merger agreement.

The Chancery Court dismissed the complaint as it analyzed the specificity requirements through the escrow agreement’s “reasonable detail” lens, rather than the merger agreement’s more rigorous evidentiary standard and concluded the Notice adequately set out the claim’s nature, the implicated warranties and the quantum sought. The Chancery Court also determined that the Notice was timely under the escrow agreement’s release deadline and that Thompson failed to properly allege any material prejudice resulting from the delay.

The Delaware Supreme Court

On review, the Supreme Court departed with the Chancery Court and held that the merger and escrow agreements formed a unitary contractual scheme with respect to the Notice’s specificity and timing requirements. As such, the Notice should have adhered to both agreements, with the more specific language found in Section 9.3.2. of the merger agreement qualifying any general non-conflicting language addressing the same requirements in the escrow agreement.

Under such rules of interpretation, the Notice would have only been properly asserted if the Notice: (i) was provided no later than 30 days after Sonova actually became aware of the claim, or, if given later, the delay did not actually and materially prejudice Thompson; (ii) described the claim in reasonable detail; (iii) stated the contractual justification for the claim with reasonable specificity; (iv) included copies of all available material written evidence of the claim; and (v) indicated the estimated damages amount, if reasonably practicable.   

Based on the record developed by the Chancery Court, the Supreme Court held that it was reasonably conceivable that Sonova failed to meet these requirements. Sonova acknowledged that it did not include any written evidence with the Notice beyond the Notice’s assertions. The Supreme Court also held that Thompson sufficiently alleged noncompliance with the 30‑day timing requirement, noting the allegations that Sonova actually knew of the underlying facts months earlier and that the delay caused actual, material prejudice—such as increased risk of excess damages by disregarding contractual and statutory refund/repayment periods, undermining timely good‑faith negotiations with third‑party payors, and potentially expanding the period of noncompliance considered in damages.  

The Supreme Court then analyzed whether compliance with the more specific notice requirements in the merger agreement was a condition precedent to Sonova’s right to seek indemnification under the merger agreement. The Supreme Court found the indemnification notice requirements in Section 9.3.2 of the merger agreement “unambiguously creat[ed] a condition precedent that provides for a forfeiture.”[7] The Supreme Court relied on the following provision of the merger agreement in support of this finding: “The Purchaser Indemnified Parties shall have no right to recover any amounts pursuant to Section 9.2 unless the Purchaser notifies the Members’ Representative in writing of such Claim pursuant to Section 9.3 on or before the Survival Date.”[8]

Despite finding that the clear condition precedent was established and that it was “reasonably conceivable” that Sonova did not meet the requirements of such condition precedent, the Supreme Court ultimately held that because Delaware “common law abhors a forfeiture,” Buyer’s noncompliance with the condition precedent could be excused if “(i) the timing and specificity requirements were not material to the agreement and (ii) the noncompliance would result in a disproportionate forfeiture.”[9]  

The Supreme Court remanded the case back to the Chancery Court to make this determination. If the timing and specificity requirements were material to the agreed exchange, then the Chancery Court should not move on to the second prong regarding disproportionate forfeiture. If the Chancery Court finds the timing and specificity requirements were not material to the agreement, then the Chancery Court should engage in the disproportionate forfeiture analysis.  

In assessing whether a breached condition was a material part of the agreed exchange, the Supreme Court instructed the Chancery Court to apply Restatement (Second) of Contracts § 241. The Chancery Court should consider: (a) the extent to which the nonbreaching party was deprived of the benefit it reasonably expected; (b) whether that loss can be adequately compensated for; (c) the extent of forfeiture the breaching party would suffer; (d) the likelihood of cure in light of the circumstances; and (e) whether the breaching party acted in good faith. The materiality inquiry also looks to the parties’ negotiations and deal context to determine whether the requirement was treated as meaningful in the bargain.

In assessing whether a forfeiture is disproportionate, the Chancery Court “must weigh the extent of the forfeiture by the obligee against the importance to the obligor of the risk from which he sought to be protected and the degree to which that protection will be lost if the nonoccurrence of the condition is excused to the extent required to prevent forfeiture.”[10]  

Impact:

Delaware reaffirmed several familiar contract-interpretation principles, for example, integrated agreements must be read together, the specific governs the general, and courts should avoid readings that render terms meaningless. But, it also signaled a departure from pure contractarianism. Now, where two sophisticated parties use unambiguous, textbook condition-precedent language, Delaware’s aversion to forfeiture may lead a court to excuse strict compliance with text of a freely negotiated contract.

When a failed condition precedent would cause forfeiture, it remains uncertain when Delaware courts will apply this excusal analysis. There is some guidance on how courts evaluate the materiality of the condition, as noted above, but if the condition is deemed non‑material to the agreed upon exchange, whether to excuse noncompliance to avoid a disproportionate forfeiture is “within the sound discretion of the court.”[11]  

Practical Implications to Consider:

• Drafting: To avoid any ambiguity regarding the materiality of a provision, parties should expressly state that key conditions (like timing, survival and notice requirements) were a material part of the parties’ agreed exchange and specifically include language whereby both parties acknowledge noncompliance with any condition precedent under the relevant agreement will not constitute a disproportionate forfeiture to the applicable obligee.
• Delaware Governing Law: Deal parties may consider choosing the governing law of other contractarian states, like New York or Texas, for private M&A. Recent developments in non-compete law in Delaware (limiting, in some respects, the enforceability of non-compete provisions) potentially make this an even more attractive option.
• Coordination Among Deal Documents: While courts will generally enforce more specific provisions relative to general provisions where the two provisions address the same subject matter, where possible, it is best to mirror provisions addressing the same subject matter across various documents to avoid confusion and potential misinterpretation.
• Litigation Cost: Enforcing a condition precedent may require costly litigation and extensive fact development if a court elects to consider negotiation history or other extrinsic evidence bearing on materiality or disproportionate forfeiture. Parties should anticipate discovery, evidentiary hearings, and a burdensome investigative process before the enforceability of the condition is resolved. More precise drafting—as noted above—can help to avoid or reduce these costs.

[1] Ascension Ins. Holdings, LLC v. Underwood, No. CV 9897-VCG, 2015 WL 356002, at *4 (Del. Ch. Jan. 28, 2015).

[2] Abry Partners V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032, 1061–62 (Del. Ch. Feb. 14, 2006).

[3] Nemec v. Shrader, 991 A.2d 1120, 1126 (Del. 2010).

[4] Libeau v. Fox, 880 A.2d 1049, 1056 (Del. Ch. June 16, 2005), aff’d in part, rev’d in part other grounds, 892 A.2d 1068 (Del. 2006).

[5] Id. at 1056-57.

[6] Thompson St. Cap. Partners IV, L.P. v. Sonova U.S. Hearing Instruments, LLC, 340 A.3d 1151, 1156 (Del. 2025)

[7] Id. at 1172.

[8] Id. at 1158.

[9] Id. at 1157.

[10] Id. at 1179.

[11] Id. at 1169.