NAF Holdings, LLC v. Li & Fung (Trading) Ltd. - 118 A.3d 175 (Del. 2015)

Rule:

Under Delaware law is, a promisee-plaintiff may bring a direct suit against the promisor for damages suffered by the plaintiff resulting from the promisor's breach, notwithstanding that: (i) the third-party beneficiary of the contract is a corporation in which the promisee-plaintiff owns stock; and (ii) the promisee-plaintiff's loss derives indirectly from the loss suffered by the third-party beneficiary corporation. In other words, a party to a commercial contract who sues to enforce its contractual rights can bring a direct contract action under Delaware law. Although the relationship of that party to the third-party beneficiary might well have relevance in determining whether the contract claim is viable as a matter of contract law, nothing in Delaware law requires the promisee-plaintiff's contract claim to be prosecuted as a derivative action.

Facts:

Plaintiff NAF Holdings sought to acquire Hampshire Group, a public company that produces and markets fashion apparel. Plaintiff contracted with defendant Li & Fung to serve as the sourcing agent for Hampshire which was an essential condition for the third-party financing commitments NAF needed to complete the acquisition. After contracting with defendant, plaintiff created two wholly-owned subsidiaries to effectuate the acquisition. Plaintiff’s subsidiaries entered into a merger agreement with Hampshire, which was to take effect when the Subsidiaries purchased Hampshire's stock in a tender offer. Plaintiff was not a party to the merger agreement. Defendant repudiated its contract with plaintiff and refused to serve as Hampshire's sourcing agent, causing plaintiff to lose its financing commitments. Plaintiff claimed that because of defendant’s breach, it was unable to fund the Subsidiaries' acquisition of Hampshire. Plaintiff sued defendants seeking damages based on the harm the defendants caused when it breached the contract. Defendant moved for summary judgment on the ground that plaintiff could only bring its claim as a derivative action on behalf of the Subsidiaries. The district court granted defendant’s motion, concluding that because plaintiff was injured in its capacity as 100% owner of the Subsidiaries, which had directly incurred the losses, plaintiff’s contract claim against defendant could not be maintained as a direct suit.

Issue:

Was the plaintiff’s contract claim against defendant could not be maintained as a direct suit?

Answer:

No.

Conclusion:

The court ruled that plaintiff, as a promisee of a commercial contract, had a right to bring a direct contract action against the defendant promisor for damages that it suffered due to the defendant promisor's breach, despite that the third-party beneficiary of the contract was a corporation that plaintiff owned stock in, and that plaintiff's loss derived indirectly from the loss suffered by the third-party beneficiary. Also, a derivative action was not required in the circumstance because plaintiff had its own rights as a signatory to the contract which it could seek to enforce.