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TECHNOLOGY, OUTSOURCING, AND COMMERCIAL TRANSACTIONS
NEWS FOR LAWYERS AND SOURCING PROFESSIONALS

A recent Delaware court ruling found an agreement to be unenforceable despite being executed by each of the parties via “orphan” signature pages because there was insufficient evidence that the parties had a meeting of the minds as to which version of the contract they were signing. While the facts of this case could be characterized as a “perfect storm” of circumstances to invalidate the commonly accepted practice, it is worth noting the court’s findings for any takeaways that could help you avoid being blindsided by the invalidation of a contract.

Kotler v. Shipman Associates, LLC, C.A. No. 2017-0457-JRC (Del. Ch. Aug. 21, 2019, corrected (typo on p. 4) Aug. 27, 2019), involved an independent contractor attempting to enforce a warrant agreement with a company to purchase equity in the company. The parties negotiated the agreement over a number of years, with the primary gating issue being the scope and duration of the noncompetition restriction on the independent contractor. Eventually, in 2007, the parties seemingly reached a final warrant agreement and executed that agreement. Then, in 2013, the company was considering a corporate reorganization that might trigger the warrant, but also determined that the independent contractor violated the perpetual, post-separation noncompetition provision included in what the company believed to be the final warrant agreement. The independent contractor claimed that the version of the warrant the parties had signed only included a pre-separation noncompete, meaning she was not in violation of, and was entitled to exercise her rights under, the warrant. The parties resorted to litigation to resolve the dispute.

The evidence around the agreement that was presented to the court was alarmingly sparse, which is where the unique circumstances of this case must be considered. As best the court could determine, the company had sent the contractor an execution version of the agreement containing the full perpetual noncompetition provision. Then, the contractor had made significant changes to the warrant agreement (namely, diluting the noncompetition provision), executed that version, then sent either a clean version (not marked to show or call out any changes) or a counterpart signature page only to the company’s CEO. The company’s CEO executed that signature page. No electronic copies of the agreement, or any correspondence around its execution, were exchanged.

Ultimately, the court found the warrant agreement to be unenforceable because even though the parties exchanged signed signature pages, the contractor did not meet her burden of proof in showing the meeting of the minds necessary to form a valid contract. The court explained:

[The] “fully executed” version of the warrant agreement does not overcome the credible and convincing evidence that these parties were not operating from the same page, or more precisely the same agreement, as they negotiated its material terms. The circumstances surrounding the execution of the warrant agreement, cloudy as they are, reflect it is just as (if not more) likely Marissa [the CEO of the company] believed she was signing a version with a perpetual non-compete as one with Kotler’s [the contractor] diluted covenants. This is particularly so since Kotler could recall nothing of importance regarding the negotiations or circumstances surrounding the execution of the warrant agreement. Incredibly, she could not even recall who she engaged as counsel to represent her during the negotiations, thereby cutting off a likely source of contemporaneous evidence.

What can we take away from this ruling? It can’t be overstated that the circumstances of this particular situation are not common for our everyday contracts—none of the parties involved retained records of the negotiations or correspondence, including emails, and the contractor was unable to identify the counsel she engaged to assist with the agreement. In fact, the court in this case described the contractor as “an incomplete and unreliable historian” and stated that the “drafting history was inconclusive.”

That being said, the ruling is a good reminder that there is still at least some level of risk in using standalone, “orphan” signature pages and/or exchanging counterpart signature pages in advance of finalizing an agreement, regardless of how prevalent these practices are. If your agreement is structured with a standalone, “orphan” signature page, best practices still dictate including the entire agreement when sending to each party for execution. Likewise, if circumstances dictate the need to exchange signature pages in advance of finalizing an agreement, the parties should ensure that the relevant signatories have specifically approved the final, agreed-upon version that they are purporting to sign, and that there is a clear audit trail by which you are able to show that was the case.