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Beneficial breach may still bring legal action

Virginia business owners may want to pay heed to a recent decision resulting from a lawsuit brought by Fletcher International, Ltd. against Ion Geophysical Corporation. In 2009, Ion entered into an agreement to raise financing that it needed to stay liquid and avoid bankruptcy. Contractually, it was required to obtain approval from Fletcher before entering into one part of the financing arrangement but it failed to do so.

Even though Fletcher benefited from the new funds raised by Ion, it sued for breach of contract. The Delaware Court of Chancery ruled in part for Fletcher, but deferred on the decision for damages until each party had submitted its proposal. In its subsequent ruling, the court described Fletcher's subsequent submission as "cartoonish", but acknowledged that a breach had indeed occurred.

The court ultimately held that Ion had to pay Fletcher $300,000. This is three times the amount that other lenders were paid for granting permission for Ion's bridge financing to move forward. The court pointed out another case where an unharmed company was awarded only $1.00 for a breach of contract suit, but in this case the court chose a higher payment amount.

A lesson to be learned from this case is that a party that is considering a willful breach of contract, even if the breach benefits the other party, should consider the consequences of its actions. Even if damage cannot be shown, the party may still be held responsible for injunctive relief and possibly other non-monetary remedies. Input from a business lawyer can be very valuable in developing an understanding of the potential results of such a decision.

Source: Forbes, "When A Breach Is A Benefit", Oliver Herzfeld, April 23, 2014