Timing is Everything: The Importance of Complying With the Plain and Unambiguous Terms of a Contract

The First Circuit recently opined on termination rights concerning a party’s right to terminate a stock sale, highlighting the importance of negotiating an agreement’s terms and fully understanding each party’s rights. In the decision, FinSight I LP v. Seaver, 50 F.4th 226 (1st Cir. 2022), the court ultimately concluded that the termination rights the defendants negotiated into the agreement were properly exercised, allowing them to back out of the transaction.

In FinSight, the plaintiff wished to purchase shares of stock in Unity Technologies, Inc. (the
Company”) from two individual defendants. Ultimately, the parties agreed in principle that the plaintiffs would purchase 50,000 shares of stock in the Company from the defendants (25,000 from each defendant) for $29 per share[1]. The parties then began negotiating the terms and conditions of the sale, with the parties ultimately agreeing on the following termination clause:

[i]f the Closing has not taken place within 7 business days of the date specified above, other than due to a breach of this Agreement by [the defendants, the defendants] shall have the right to terminate this Agreement immediately via email without further notice to [the plaintiff][2].

The transaction was to be consummated subject to the terms and conditions the parties agreed upon, including the termination clause.[3]

The agreed-upon Stock Purchase Agreement (the “Negotiated SPA”) was dated June 11, 2020, signed by the defendants on June 12 and the plaintiff on June 15.[4] However, there remained a signature block for the Company that remained unsigned at that time.[5] Thereafter, one defendant and his representative reached out to the Company seeking its authorization and approval of the sale on both June 16 and June 17 and 29, respectively.[6] The Company, however, only conditionally approved the sale, such that it be subject to their own stock purchase agreement (the “Form SPA”), which it sent to the plaintiff for its approval on July 29.[7] The plaintiff sent the Form SPA to the defendants on the same day, well beyond thirty days after the defendants and the plaintiff had signed the Negotiated SPA.

In the interim time between the signing of the Negotiated SPA and the transmission of the Form SPA, the price of the Company stock increased significantly.[8] The defendants did not sign the Form SPA, citing the increase in the stock’s price, and ultimately sent an email to the plaintiff noting “I think we’re going to have to pass on moving forward with this.”[9] A representative from plaintiff responded noting, among other things, that it considered the Form SPA to be binding and would seek reimbursement from the defendants if they reneged.[10] The defendants this time responded more definitively than in its prior email, noting they were backing out of the deal, citing the negotiated termination clause set forth above.

The plaintiff sued the defendants in the United States District Court for the District of Massachusetts, alleging breach of contract and other related causes of action.[11] The district court concluded that “no enforceable contract had been formed and that, even if the [Negotiated SPA] constituted an enforceable contract, the defendants had properly exercised their termination right.”[12] An appeal ensued.

The First Circuit reviewed the termination clause, taking the terms of the provision at face value. The court noted that the defendants (1) did not breach the Negotiated SPA and cause a delay of its consummation (which would have limited their ability to terminate) and (2) properly exercised their termination rights within the seven days provided for. The court also looked at the negotiation process of the provision, observing that the defendants added it for the purposes of not being “tied up indefinitely” while the Company’s stock was subject to price fluctuation.[13]

As the court noted, the plaintiff “could have balked at including such a termination clause in the contract, negotiated for either a longer period of time or a clause embroidered with more contingencies, or gotten its ducks in a row before executing the [Negotiated SPA]” and that it did none of these things.[14] Conversely, the defendants were proactively trying to get the deal across the finish line pursuant to the terms of the Negotiated SPA by emailing the Company to close the deal both alone and through its representative. While the plaintiffs were ultimately at the mercy of the Company in respect of the Negotiated SPA, which subsequently dragged its feet and did not transmit the Form SPA (and which, notably did not include the termination provision as agreed upon by the defendants and plaintiff) until well after the seven days included in the termination clause had lapsed, this did not diminish the fact that the Negotiated SPA was not fully executed until well after such period.

While the plaintiff raised various other arguments ancillary to the termination clause argument, including that performance of the contract was required by the defendants due to conditions precedent being satisfied, that the defendants acted in bad faith, and theories of promissory estoppel and unjust enrichment, the plain language of the termination clause carried the day: “[t]he termination right is clearly stated, and the defendants properly exercised it.”[15]

This case appears fairly straightforward: the parties negotiated an agreement with a conspicuous termination clause and the defendants properly exercised their rights under such clause. That said, this decision highlights the importance of the negotiation process, understanding the precise terms of the agreement, and ensuring all parties to the agreement are signed off on its terms. It’s apparent from the Company’s actions that it did not entirely approve or endorse the Negotiated SPA while simultaneously being a party to the contract. Had the plaintiff ensured the Company was signed off on the terms of the deal (both literally and figuratively) and not just the defendants, it would likely have acquired the stock at what amounts to a discounted price given that the Company’s stock value appreciated substantially in the course of the parties’ dealing. Further, the termination clause was apparent on its face. Assuming the plaintiff understood the terms of the provision, it should have ensured that, following its signature, all parties had fully executed the Negotiated SPA within seven days of it being dated and executed. Lastly, the plaintiff need not have agreed to the termination clause. Although it’s unclear how heavily negotiated the termination provision was, it’s not inconceivable to think that the parties could have agreed upon different terms more favorable to the plaintiff. For example, it could have altered the clause “other than due to a breach of this Agreement by [the defendants]” to “other than due to unforeseen delay caused by a third party or beyond the control of [the defendant or the plaintiff]” or other similar language that highlights once buyer and seller agree, termination rights are extinguished absent circumstances outside their control.

Or perhaps, as the court aptly stated, the plaintiff could simply have gotten its ducks in a row.

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1. FinSight I LP v. Seaver, 50 F.4th 226, 1 (1st Cir. 2022).
2. Id.
3. Id.
4. Id.
5. Id.
6. Id.
7. Id.
8. Id.
9. Id.
10. Id.
11. Id. at 2.
12. Id.
13. Id. at 4.
14. Id. at 4.
15. Id. at 6.