Opinion ID: 1481578
Heading Depth: 1
Heading Rank: 4

Heading: Common Law Unilateral Mistake and Rescission

Text: Generally, a party may rescind an agreement based on its unilateral mistake if the following conditions are met: (1) the enforcement of the agreement would be unconscionable; (2) the mistake relates to the substance of the consideration; (3) the mistake occurred regardless of the exercise of ordinary care; and (4) it is possible to place the other party in the status quo. 13 Williston on Contracts § 1573 (3d ed. 1970). The Court of Chancery found that ENSTAR was negotiating under the mistaken belief that the Belzbergs still possessed their shares. In re ENSTAR Corp., 593 A.2d at 552. As a corollary, ENSTAR was unaware that the Belzbergs had received the merger consideration. [4] Id. Nevertheless, applying the foregoing unilateral mistake rule, the Court of Chancery opined that ENSTAR was not entitled to rescind the agreement because ENSTAR did not exercise ordinary care to ascertain whether the Belzbergs' shares had previously been exchanged for the merger consideration, and that it was not unconscionable to enforce the agreement because ENSTAR's unilateral mistake did not relate to the substance of the consideration. Id. The former conclusion was erroneous, as a matter of law, and the latter conclusion is not supported by the Final Order. The Court of Chancery concluded that, notwithstanding ENSTAR's unilateral mistake, ENSTAR's lack of ordinary care in ascertaining that the Belzbergs' shares had been exchanged for the merger consideration precluded ENSTAR from rescinding the agreement. The Court of Chancery thereby placed a legal duty upon ENSTAR to discover the identity of the beneficial owners whose shares had been tendered in the merger. However, this Court has held that, in appraisal proceedings, the risks attendant upon holding one's shares through nominees are those of the stockholder and should not be shifted to, or borne by, the issuing corporation. ENSTAR Corp. v. Senouf, Del.Supr., 535 A.2d 1351, 1354-55 (1987). Therefore, ENSTAR did not have an affirmative duty to reasonably discover the identity of the beneficial owners of any shares which were tendered by a nominee in exchange for the merger consideration. Consequently, the Court of Chancery erred, as a matter of law, in imposing an obligation upon ENSTAR to have used ordinary care to ascertain that the shares owned beneficially by the Belzbergs had already been exchanged for the merger consideration by the shareholder of record, Cede. The exchange of the Belzbergs' shares for the merger consideration was a single transaction. Nevertheless, the Court of Chancery examined the surrender of the Belzbergs' shares and the Belzbergs' receipt of the merger consideration as separable events. The Court of Chancery's treatment of the Belzbergs' stock exchange in 1984 was not only bifurcated but resulted in attributions of significance to each element of the transaction which were diametrically opposed. The Court of Chancery's opinion concluded that ENSTAR's mistake as to the location of the share certificates did not relate to the substance of the consideration. In re ENSTAR Corp., 593 A.2d at 552. Conversely, the Final Order of the Court of Chancery reflects that the location of the merger consideration did relate to the substance of the consideration to be paid to the Belzbergs pursuant to the settlement agreement. The Court of Chancery succinctly summarized its view of the parties' January 17, 1986 agreement as follows: The basic predicate of the settlement agreement was that the Belzbergs would relinquish all their legal claims against Enstar, without regard to whatever merit they may have had, and Enstar would pay to the Belzbergs an agreed sum. Id. The Court of Chancery recognized that if ENSTAR was required to pay the Belzbergs the exact settlement consideration (agreed sum), the Belzbergs would be paid twice for their shares. The Court of Chancery stated that there is nothing in the record to support a finding that the Belzbergs intended to receive a double payment (the merger consideration plus the settlement price).... Id. at 550. In fact, the Court of Chancery found the payment of the merger consideration to the Belzbergs was so related to the substance of the settlement consideration that its Final Order required the merger consideration previously received by the Belzbergs to be deducted from the settlement consideration and returned, in part, to ENSTAR. Consequently, although it was denominated Order and Final Judgment for Specific Performance, the Final Order of the Court of Chancery did not grant the Belzbergs' motion for specific performance. The Final Order of the Court of Chancery reflects a specific determination that it would have been inequitable to enforce the parties' agreement, according to its terms, because specific enforcement of the agreement would have resulted in the Belzbergs being paid for the value of their shares twice, i.e., the settlement consideration (agreed sum) in addition to the merger consideration which they had already received. The Final Order of the Court of Chancery evidences a determination that it would have been unconscionable to specifically enforce the parties' agreement because it would have resulted in an unintended double payment to the Belzbergs. In view of that determination, the Court of Chancery should have ruled that ENSTAR was entitled to rescind the agreement. Instead, the Court of Chancery's Final Order reformed the parties' agreement by ordering ENSTAR to pay the Belzbergs the settlement consideration (agreed sum) minus the merger consideration. The facts of this case fit squarely within the paradigm of the unilateral mistake rule and compel the equitable remedy of rescission. First, enforcement of the parties' agreement would be unconscionable because it would result in the Belzbergs being paid for their shares twice, a result which even the Belzbergs do not advocate. Second, ENSTAR's mistake was material and directly related to the substance of the settlement consideration, i.e., the agreed sum, because ENSTAR did not know that the Belzbergs had previously received the merger consideration. See Rosenblatt v. Getty Oil Co., Del.Supr., 493 A.2d 929 (1985). Third, ENSTAR's mistake occurred regardless of ordinary care. Since the Belzbergs were never shareholders of record, the prior tender of their shares by a nominee did not place ENSTAR on notice of anything regarding the Belzbergs' shares. In addition, Borisoff affirmatively represented to Richards that the Belzbergs still had their shares. [5] Fourth, it is possible to place the Belzbergs in the status quo ante because a rescission of the parties' agreement leaves the Belzbergs with the right to pursue their demand for a statutory appraisal of their shares, subject to ENSTAR's right to assert its defenses. ENSTAR's unilateral mistake should have resulted in rescission. Hearne v. Marine Ins. Co., 87 U.S. (20 Wall) 488, 22 L.Ed. 395 (1866). A unilateral mistake cannot be a basis for reforming a contract. Id. See Hob Tea Room, Inc. v. Miller, Del.Supr., 89 A.2d 851, 857 (1952). The equitable remedy of reformation is only available to correct a mutual mistake in order to conform an agreement to the original intent of the parties. Waggoner v. Laster, Del.Supr., 581 A.2d 1127, 1135 (1990). Consequently, the record reflects that the Court of Chancery erred, as a matter of common law equity jurisprudence, in denying ENSTAR's application for rescission based upon ENSTAR's unilateral mistake. Hearne v. Marine Ins. Co., 87 U.S. (20 Wall) 488, 22 L.Ed. 395 (1866); 13 Williston on Contracts § 1573 (3d ed. 1970).