Delaware holds sophisticated parties to their contracts. An equally common truth is that sophisticated parties enter complex transactions that may span multiple and subsequent agreements. In these circumstances, prior or parallel agreements may be incorporated into other agreements by their express terms.
As demonstrated by the Delaware Court of Chancery’s decision in Lafferty v. Corient Partners, Delaware courts will hold parties to these “nested incorporated documents,” where parties have assented to their incorporation. This includes assent through affirmative assent—like signing an agreement that incorporates another—or through assent by conduct, like accepting benefits under the contract in question. And as the Court of Chancery’s Lafferty decision further demonstrates, failure to read an incorporated document’s terms is not a defense to their enforcement.
Background and the Court of Chancery’s Decision
Defendant Segall Bryant & Hamill was acquired by affiliates of defendant Corient in 2021. The plaintiff, John Merrill Jr., was a Segal Bryant & Hamill senior portfolio manager at the time. Following the transaction, Lafferty was offered and accepted the opportunity to become a Corient Class B member. In becoming a Class B member, Lafferty signed Corient’s fourth amended and restated limited liability company agreement (the fourth LLC agreement) dated Aug. 15, 2023. The fourth LLC agreement had a Delaware exclusive forum selection clause.
By its terms, the fourth LLC agreement could be unilaterally amended by the “CI member.” On Feb. 7, 2024, the CI member amended the fourth LLC agreement by the fifth amended and restated limited liability company agreement (the fifth LLC agreement) which, relevant here, swapped out the Delaware exclusive forum selection clause in favor of arbitration.
Around the same time, Lafferty also received a notice of conversion of Class B units to Class A units, which was expressly made subject to the fifth LLC agreement’s terms. Lafferty chose to exercise his conversion right and signed an equity award agreement, on Jan. 15, 2025. The notice of conversion—including its incorporation of the fifth LLC agreement—was incorporated by reference into the equity award agreement. In connection with signing the equity award agreement, Lafferty also checked a box by which he affirmed having read the notice of conversion.
Later in 2025, Lafferty determined that his and Corient’s advisory philosophies were no longer aligned. He resigned and joined an investment management company. Corient responded by initiating an arbitration against him for alleged breaches of noncompetition and nonsolicitation covenants. After the arbitrator entered a TRO against Lafferty based on, among other things, a finding that Lafferty was bound by the fifth LLC agreement’s arbitration clause, Lafferty filed suit in the Delaware Court of Chancery.
Lafferty’s suit in the Court of Chancery sought to enjoin the arbitration based, principally, on the argument that the dispute was covered by the fourth LLC agreement and its exclusive Delaware jurisdiction clause. In support, Lafferty argued, among other things, that he was not aware of, did not consent to and is, thus, not bound by the fifth LLC agreement. After an expedited trial, the Court of Chancery rejected Lafferty’s position, finding he both affirmatively assented to the fifth LLC agreement and accepted its terms through his conduct.
First, the Court of Chancery found that Lafferty’s signing of the equity award agreement constituted affirmative assent to the fifth LLC agreement. Specifically, the equity award agreement expressly incorporated the notice of conversion. In turn, the notice of conversion expressly incorporated the fifth LLC agreement. According to the court, these “nested incorporated documents” together bound Lafferty to the fifth LLC agreement.
Second, the Court of Chancery found that Lafferty had accepted the benefits of the fifth LLC agreement and could not now “object to its perceived disadvantages. ”In particular, the Court of Chancery focused on the more than $7 million of value accruing to Lafferty as a result of accepting the conversion of units, in accordance with the fifth LLC agreement's terms.
In response to Lafferty’s arguments that he was unaware of the fifth LLC agreement and that the incorporation by reference via a chain of agreements was too attenuated, the Court of Chancery placed the responsibility squarely on Lafferty. The court reasoned that as a contracting party, Lafferty was responsible for inquiring into the terms of incorporated documents before assuming obligations under them. The court also noted that Lafferty was happy to accept the favorable parts of the fifth LLC agreement—its economic terms—and should not now be permitted to avoid those parts he does not like.In a word, the Court of Chancery found Lafferty’s failure to read the incorporated agreements before signing was a harm of his own making.
Key Takeaways
Complex transactions frequently involve multiple agreements. Those multiple agreements will, in turn, often incorporate one another’s respective terms. If a contracting party chooses to sign an agreement that expressly incorporates the terms of one or more parallel agreements, the Court of Chancery will enforce those terms against that party. A contracting party’s failure to read the incorporated terms is at its own risk.
Originally published in ALM's Delaware Business Court Insider
