Brace Industrial Contracting, Inc. v. Peterson Enterprises, Inc.
CA 11189-VCG
| Del. Ch. | Oct 31, 2016Background
- Brace Industrial Contracting, Inc. purchased Peterson Industrial Scaffolding, Inc. (PIS) from Peterson Enterprises, Inc. (PEI) on August 10, 2014 for $18.7 million; $1.87 million (10%) was placed in escrow for indemnity claims.
- The Stock Purchase Agreement (SPA) included restrictive covenants prohibiting defendants (and affiliates including Vernon L. Goedecke Co., Inc.) from engaging in the defined “Business” in the U.S. and Canada for five years, plus a Carve-Out permitting Goedecke to “design, engineer, sell and rent scaffolding equipment and other products to participants in the Business” provided it did not perform the Business.
- Plaintiffs sought a preliminary injunction to stop Goedecke’s sales/rentals to end users; the court granted preliminary relief based on an ambiguous Carve-Out but reserved final interpretation for trial.
- Plaintiffs claimed (1) defendants breached the restrictive covenants and (2) the Scaffolding List in SPA overstated transferred inventory (PERI Items and Board Items), seeking indemnification from escrow; they also alleged fraud in the alternative.
- At trial, the court found the Restrictive Covenants ambiguous, considered extrinsic evidence (negotiation emails, testimony), and held the more reasonable interpretation limited the covenant to turnkey/integrated E&D (erection & dismantling) projects, allowing separate sales/rentals by Goedecke.
- On inventory, the court accepted Plaintiffs’ expert Mary Sheet methodology over defendants’ FACTS perpetual-inventory system, awarded $703,975 for PERI Item shortages and $21,084 for Board Item shortages (total $725,059 plus interest), denied recovery of rental costs as consequential damages, and rejected fraud claims for lack of scienter.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Scope of "Business" in restrictive covenant | "Business" covers any sale or rental of scaffolding; defendants compete with Brace if they sell or rent scaffolding | "Business" means turnkey/integrated E&D projects; defendants may sell/rent standalone scaffolding | Court held covenant applies to turnkey/integrated business; Goedecke may sell/rent standalone scaffolding; preliminary injunction lifted |
| Meaning/scope of Carve-Out "participants in the Business" | Carve-Out was meant to permit only sales/rentals to shoring customers (a narrow subset of customers) | Carve-Out confirms Goedecke may sell/rent to PIS customers and others; not limited to shoring customers | Court held Carve-Out was not limited to shoring customers; defendants’ construction more reasonable |
| Inventory shortage quantification method | Use Mary Sheet analysis (historical purchases minus shipments to Africa) to calculate maximum items defendant could have had; any shortfall to Scaffolding List is indemnifiable | Use FACTS perpetual inventory (ship/return tickets, audits); Scaffolding List derived from FACTS is reliable; alleged overages should offset shortages | Court found Mary Sheet more reliable than FACTS, awarded $703,975 for PERI shortages; declined to offset alleged overages absent proof they were transferred and useful |
| Damages for inventory shortfall: replacement vs. rental costs | Seek replacement cost plus $527,981 rental costs incurred due to shortages | Rental costs are consequential and excluded by SPA §6.4(e) | Court awarded replacement cost for shortages ($725,059 total) with interest; denied rental costs as consequential damages barred by SPA |
Key Cases Cited
- Tull v. Turek, 147 A.2d 658 (Del. 1958) (restrictive covenants in purchase agreements are construed to protect purchaser's enjoyment of the acquired business)
- Salamone v. Gorman, 106 A.3d 354 (Del. 2014) (contract interpretation follows objective theory; consider four corners first, extrinsic evidence if ambiguous)
- Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153 (Del. 2010) (Delaware adheres to objective contract interpretation standards)
- GMG Capital Inv., LLC v. Athenian Venture Partners I, L.P., 36 A.3d 776 (Del. 2012) (give priority to parties' intentions as reflected in the agreement)
- In re Wayport, Inc. Litig., 76 A.3d 296 (Del. Ch. 2013) (courts may consider extrinsic evidence — negotiations, usage, parties' conduct — to resolve contract ambiguity)