Unambiguous Provision in Asset Purchase Agreement Not Enforced According to its Plain Meaning
Unambiguous Provision in Asset Purchase Agreement Not Enforced According to its Plain Meaning
The Court of Chancery of Delaware recently issued a very interesting opinion which provides an in-depth look on how disputes related to the interpretation of a contract are resolved in said court.
Although the court concluded that the provision at issue was unambiguous—which should negate the need to examine extrinsic evidence—the court’s analysis delves into the negotiations between the parties, including examining in detail the progression of the redlines proposed by each party.
The parties executed an asset purchase agreement for the sale of a group of hospitals in Florida. Section 8.22 of the APA established a mechanism for allocating certain payments that would be received by the hospitals under a program intended to reimburse expenses associated with Medicaid patient visits (“Program”). Participating Florida hospitals would be assessed certain charges to fund the Program.
As relevant here, the main controversy arose out of the interpretation of the term “Program Year”, which was defined as “the program year (i.e., October 1 through September 30) in which assessments are collected and payments are made with respect to the […] [Program].” For the Program Year in which closing occurred the buyer would first be reimbursed for assessments the buyer paid. Any remaining portion corresponding to said year would be prorated between the seller and buyer based on the days of the year that the seller and buyer each owned the hospitals.
Any payments received after the Program Year in which the closing occurred would correspond to the buyer. Closing occurred on August 1, 2021. The Program Year associated with the closing thus ended on September 30, 2021.
Assessments and payments under the Program began in October 2021, after the Program Year in which closing occurred, relating to services performed in the Program Year in which closing occurred.
Since the assessments and payments under the Program began after the Program Year in which closing occurred, the buyer argued that it owned all of the payments, as the APA explicitly provided that payments made after the Program Year in which closing occurred would correspond to the buyer.
On the other hand, the seller argued that payments related to (or “for”) the Program Year in which closing occurred should be subject to the proration formula established in Section 8.22. The seller argued that the prepositional phrase “in which” in the Program Year definition should more properly be read as “for which.” The court agreed with the seller. It concluded that the buyer’s reading—although admittedly more faithful to the plain text at issue—would lead to “incongruities” and an absurd result, as there would be no “Program Year” in which closing occurred since payments and assessments were not made until the year following the closing but corresponded to the year of closing.