## Facts

- NAF Holdings, LLC (NAF) pursued an acquisition that depended on financing conditioned on Li & Fung (Trading) Ltd. (Li & Fung) serving as a sourcing agent for the post-acquisition business.
- NAF and Li & Fung entered a commercial contract in which Li & Fung promised NAF that it would perform sourcing obligations that would benefit NAF’s future operating subsidiaries.
- NAF formed two wholly owned subsidiaries to consummate the merger with the target company.
- Li & Fung allegedly refused to perform its sourcing obligations after the transaction structure was established.
- NAF alleged the breach caused the acquisition financing to collapse and resulted in approximately $30 million in losses to NAF.
- The subsidiaries later settled with the target and released claims connected to the failed merger; neither NAF nor Li & Fung was a party to that settlement.
- NAF sued Li & Fung for breach of contract as the contract’s promisee, seeking to recover NAF’s own alleged damages.
- A federal district court granted summary judgment to Li & Fung, reasoning NAF’s claim was derivative because the economic harm flowed through NAF’s subsidiaries.
- On appeal, the Second Circuit certified to the Delaware Supreme Court whether Delaware law requires such a claim to be brought derivatively.

## Issues

1. Whether a promisee to a commercial contract may sue directly for breach to recover its own damages when the promised performance benefits a third-party corporation that the promisee owns and the promisee’s losses are indirectly derived from that corporation’s losses.
2. Whether Delaware’s direct-versus-derivative framework for stockholder claims requires dismissal of a contracting party’s breach-of-contract claim in favor of a derivative action brought in the name of the third-party beneficiary corporation.

## Decision

- The Delaware Supreme Court answered the certified question in favor of NAF.
- A party to a commercial contract enforcing its own contractual rights may bring a direct breach-of-contract action under Delaware law.
- The claim does not become derivative merely because performance was to benefit the promisee’s subsidiary and the promisee’s losses are economically tied to harm suffered by that subsidiary.
- The court stated that the fiduciary-duty-focused direct/derivative test does not displace ordinary contract principles governing who may sue on a contract.
- Because the matter arrived on certification, the court did not decide contract merits or defenses; it only addressed whether the suit could proceed directly.

## Legal Principles

- A promisee to a commercial contract has standing to sue directly to enforce its own contractual rights and seek damages it claims to have suffered from the promisor’s breach.
- The presence of a corporate third-party beneficiary, including a wholly owned subsidiary of the promisee, does not convert the promisee’s contract claim into a derivative claim.
- The direct/derivative analysis developed for fiduciary duty and stockholder reflective-injury disputes does not override traditional contract law when the plaintiff is itself a contracting party asserting its own contractual rights.
- A release executed by a nonparty corporate affiliate may be relevant as a contract defense, but it does not, by itself, require treating the promisee’s claim as derivative.

## Conclusion

Delaware law permits a contracting promisee to sue directly for breach to recover its own alleged damages even when the promised performance was to benefit the promisee’s subsidiary and the promisee’s loss is indirectly tied to the subsidiary’s loss; derivative-suit doctrine does not bar direct enforcement of the promisee’s contractual rights.


NAF Holdings, LLC v. Li & Fung (Trading) Ltd., 118 A.3d 175 (Del. 2015)