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A Party That Fails To Comply With A Notice Deadline Does So At Its Own Peril

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  • Posted on: May 21 2018

Contract provisions containing deadlines for giving notice of an event or occurrence, such as a claimed default, are key parts of commercial transactions. These provisions vary from contract to contract, often requiring different forms of notice and different timing requirements for notice to be given on different issues. Not surprisingly, notice provisions, and compliance with these provisions, are often a basis for disputes.

Recently, the Delaware Court of Chancery underscored the importance of the foregoing. In PR Acquisitions, LLC v. Midland Funding LLC, C.A. No 2017-0465-TMR (Del. Ch. April 30, 2018) (here), the court barred a claim made for funds held in escrow because the subject agreements required notice to be sent to the seller, but instead notice was sent to the escrow agent. Although the buyer gave actual notice by phone to the seller prior to the deadline, the Court rejected such notice as violative of the agreements.

Background

PR Acquisitions involved the sale of consumer debt accounts by Plaintiff PR Acquisitions, LLC (“PRA”) to Defendant Midland Funding LLC (“Midland”) pursuant to a purchase and escrow agreement. The agreements required that claims for funds held in escrow based, for example, on alleged breaches of the parties’ representations and warranties, be sent to an address provided in the agreement.

Midland drafted a letter identifying legal claims against the escrow in relation to the purchase agreement. Midland sent the letter by facsimile and FedEx to the escrow agent rather than PRA as required under the agreements. Midland never sent a copy of the letter or any other form of notice to PRA. A few days later, the escrow agent informed PRA of the letter containing Midland’s claims.

Midland conceded that the sole reason for its failure to provide notice pursuant to the purchase agreement and escrow agreement was “[h]uman error” on its side. PRA asked Midland to release the escrow funds and disputed the claims set forth in the letter. Midland refused to release the escrow funds.

PRA filed suit seeking the release of the escrow funds. Midland asserted counterclaims against PRA and third-party claims against Operating Partners Co., LLC, an affiliate of PRA that serviced the purchased accounts, alleging contractual breaches, fraud, aiding and abetting fraud, negligent misrepresentation, indemnification claims, and unjust enrichment arising from the sale of the accounts.

A couple of months later, PRA moved for summary judgment on its request to release the escrow funds. Amendments to the counterclaims followed, along with motions to dismiss the counterclaims.

On December 8, 2017, Midland moved for partial summary judgment, seeking declaratory judgment that the escrow funds should not be released until Midland’s counterclaims and third-party claims were adjudicated. The Court granted PRA’s motion and denied Midland’s motion.

The Court’s Analysis

Noting that “[t]he applicable provisions in the Purchase Agreement and Escrow Agreement [were] express and clear,” the Court rejected Midland’s argument that notice by means other than those set forth in the agreement (e.g., by telephone) should suffice.

To establish a timely claim, the Escrow Agreement requires that notice be sent either by a nationally recognized courier service or by certified mail to a specified PRA address, or by facsimile to a specified PRA location followed by a telephone call to confirm receipt thereof. If Midland fails to provide notice by these methods by the expiration date, then the terms of the transaction documents negotiated by the parties dictate that the escrow funds should be released.

Midland acknowledges that it did not comply with these requirements. But Midland notes that the escrow agent made PRA aware of Midland’s escrow claims before the expiration date. Midland argues that because PRA received actual notice, case law allows the Court to ignore the terms of the notice requirements in the Escrow Agreement. Midland further argues that the actual text of the Purchase Agreement and Escrow Agreement do not require strict compliance with the notice provision. These arguments fail.

Strict Compliance with The Terms of The Contract is Required

The Court rejected Midland’s argument that actual notice to PRA by phone should suffice as substantial compliance with the agreements. It did so by distinguishing several cases that Midland relied on.  None of the cases, however, allowed for substantial compliance when the agreement specified a particular method of delivery to a specific party by a fixed deadline as a condition for claims to an escrow fund.

PRA and Midland are sophisticated parties who negotiated the Purchase Agreement and Escrow Agreement at arm’s length. Further, in each case to which Midland points, the party actually transmitted notice to whom it was due. Here, Midland sent notice to a third party (the escrow agent) who then informed PRA of Midland’s escrow claims. Thus, I reject Midland’s argument that Midland substantially complied with the notice provision in the Escrow Agreement.

The Court also rejected Midland’s argument that the agreements did not require “strict compliance” with the notice provision. The Court noted that the Escrow Agreement specified “what constitute[d] notice and require[d] the release of the escrow funds if such notice [was] not provided by” the specified date. Midland failed to satisfy the provision and offered “no reason other than its own error for its failure to comply with the notice provision in the escrow agreement.”

Consequently, the Court granted PRA’s motion for summary judgment and denied Midland’s motion for partial summary judgment.

Takeaway

While the result in PR Acquisition may seem a bit harsh, especially since Midland gave PRA actual notice, the analysis employed to get there reflects traditional contract interpretation. As the Court noted, “[t]he terms of the contract control when they establish the parties’ common meaning so that a reasonable person in the position of either party would have no expectations inconsistent with the contract language.” Slip op. at 16 (citations and internal quotation marks omitted). In PR Acquisition, “[t]he applicable provisions in the Purchase Agreement and Escrow Agreement [were] express and clear.” Id. at 17.  As such, “the terms of the transaction documents negotiated by the parties dictate[d]” how and when notice was to be provided and the circumstances under which the escrow funds should be released. Therefore, as a matter of law, the failure to comply with the express terms of the notice provision compelled the result reached by the Court.

Given the foregoing, PR Acquisition provides a cautionary tale about the importance of complying with contractual provisions.

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