Delaware Supreme Court Settles Split of Authority Regarding Contracts Under Seal
By Connolly Gallagher Administrator
In | On December 28, 2009
In a matter of first impression, the Delaware Supreme Court in Whittington v. Dragon Group, L.L.C., No. 392, 2009 (Del. Dec. 18, 2009), in a divided decision, resolved a split of authority in the Delaware trial courts regarding the requirements necessary to prove specialty contracts or contracts under seal. Read opinion here. The decision appealed from by the Court of Chancery was highlighted here.
Under the new bright line rule “in the case of an individual, in contrast to a corporation, the presence of the word ‘seal’ next to an individual’s signature is all that is necessary to create a sealed instrument, ‘irrespective of whether there is any indication in the body of the obligation itself that it was intended to be a sealed instrument.’”
In 2006, Plaintiff Frank C. Whittington, II filed suit in the Court of Chancery to enforce his alleged rights in a Delaware LLC, Dragon Group, L.L.C. (“Dragon Group”). In addition to Dragon Group, the remaining defendants included Whittington’s four siblings. With the underlying facts dating back to a settlement agreement from 2001, the Court of Chancery barred Whittington’s claims under the doctrine of laches, using the analogous three year statute of limitations for breaches of contract under 10 Del. C. § 8106.
Laches and the Statute of Limitations
The Court began its analysis with a brief summary of the doctrine of laches:
Both the doctrine of laches and statutes of limitations function as time bars to lawsuits. Unlike a statute of limitations, the equitable doctrine of laches does not prescribe a specific time period as unreasonable. Laches is an unreasonable delay by a party, without any specific reference to duration, in the enforcement of a right, and resulting in prejudice to the adverse party. An unreasonable delay can range from as long as several years to as little as one month. The temporal aspect of the delay is less critical than the reasons for it. In some circumstances even a long delay might be excused.
In referencing the Supreme Court’s 2009 decision in Reid v. Spazio, the Court said:
Under ordinary circumstances, a suit in equity will not be stayed for laches before, and will be stayed after, the time fixed by the analogous statute of limitations at law; but, if unusual conditions or extraordinary circumstances make it inequitable to allow the prosecution of a suit after a briefer, or to forbid its maintenance after a longer period than that fixed by the statute, the [court] will not be bound by the statute, but will determine the extraordinary case in accordance with the equities which condition it.
While statutes of limitations always operate as a time bar to actions at law, they are not controlling in equity. Indeed, the doctrine permits the Court to hold a plaintiff to a shorter period if the plaintiff should have acted “with greater alacrity, and when the plaintiff’s failure to seek equitable relief with alacrity threatens prejudice to the other party.” In citing Reid, the Supreme Court stated that there are three elements required to prove laches: (i) knowledge by the claimant; (ii) unreasonable delay in bringing the claim; and (iii) resulting prejudice to the defendant.
Analogous Statute of Limitations
In determining which statute of limitations should apply by analogy to a suit in equity, the Supreme Court stated that the general rule is that “the applicable statute of limitations should be applied as a bar in those cases which fall within that field of equity jurisdiction which is concurrent with analogous suits at law.” The Court of Chancery concluded that “Frank’s claims ultimately are predicated upon the AIP and that this action is ‘based upon a promise’ within the meaning of section 8106.”
The “Contract Under Seal” Exception
The Supreme Court noted that there is an exception to the three year statute of limitation period for “specialty contracts” or “contracts under seal.” and those contracts generally have a twenty year limitation period. In the Court of Chancery, Franks argued that the settlement agreement was a contract under seal because the word “seal” appeared beside the signature line for each signatory. Relying upon a 1993 Superior Court decision in American Telegraph Co. v. Harris Co., 1993 WL 401864 (Del. Super. Sept. 9, 1993), the Court of Chancery held that under New York law, in order for there to be a contract under seal (excluding documents of debt such as mortgages or promissory notes if they contain the most minimal reference to a seal) there must be evidence of clear intent to enter into a contract under seal. The Harris court held that “for an instrument other than a mortgage to be under seal, ‘. . . it must contain language in the body of the contract, a recital affixing the seal, and extrinsic evidence showing the parties’ intent to conclude a sealed contract. . . .’” Finding no such evidence, the Court of Chancery held that the AIP was not a contract under seal.
While the Court of Chancery applied Harris, the Supreme Court recognized that there was a split of authority in the Delaware trial courts as to what constitutes a sealed instrument, other than a mortgage or deed. Unlike Harris, the Orphan’s Court in In re Beyea’s Estate 15 A.2d 177, 180 (Orphan’s Ct. 1940), held that the mere inclusion of the word “seal” is sufficient to form a contract under seal “irrespective of whether there is any indication in the body of the obligation itself that it was intended to be a sealed instrument.”
The Supreme Court in a divided decision, decided that in the absence of legislative guidance, it would follow the ruling of In re Bayea’s Estate. In resolving the split, the Court held, “[t]he opinion in Beyea’s Estate provides a bright line standard that is easily applied. Accordingly, we hold that in Delaware, in the case of an individual, in contrast to a corporation, the presence of the word ‘seal’ next to an individual’s signature is all that is necessary to create a sealed instrument, ‘irrespective of whether there is any indication in the body of the obligation itself that it was intended to be a sealed instrument.’” As a result of the Court’s findings, the case was remanded to the Court of Chancery for reconsideration by applying the 20 year statute of limitations by analogy.
Justice Jacobs’ Dissent
Justice Jacobs in his dissent stated that the bright line created by the majority “represents an inadvisable policy choice that would frustrate the reasonable expectations of parties to many commercial contracts.” Justice Jacobs opined that the majority’s deference to a bright line standard came at the expense of another policy: “creating a period of repose from litigation after a prescribed period of time.” Unless the Delaware General Assembly abolishes the contracts under seal, Justice Jacobs believed this new rule will be troublesome. In concluding that he would have affirmed the Court of Chancery, Justice Jacobs explained:
To state it more plainly, in today’s modern commercial environment, it is unreasonable and (I submit) an inadvisable policy to subject parties to commercial contracts to the risk of litigation for twenty years without requiring at least minimally persuasive evidence that the parties intended that result. In my view, the common law rule should be that the use of the boilerplate term “seal,” without more, should be insufficient to visit twenty years of exposure to litigation upon contracting parties.
This summary was prepared by Kevin F. Brady and Ryan P. Newell.