Reading Cases—The Key to Becoming a More Effective Contract Draftsperson
By Glenn D. West*
Introduction
It is often said that the courts’ role in interpreting contracts is to discern the intent of the contracting parties. In discerning that intent, however, courts are principally concerned only with the parties’ objective intent as manifested by the words that were actually used in the written agreement. And when a particular word or provision has been interpreted by a court as manifesting a specific intent, that word or provision needs to be thereafter understood in light of that court’s decision, particularly in that court’s jurisdiction.
Law students learn the law by reading cases, but once they become lawyers and start practicing law they somehow think they no longer need to read cases; and that is particularly true of transactional lawyers. A transactional lawyer’s job is to negotiate and draft a contract or series of contracts that, if challenged in court, will be faithfully interpreted consistent with the client’s expectations of the “deal” that was made between the client and the counterparty. To do that job effectively, transactional lawyers should “study past disputes in order to draft contractual provisions that will avoid similar disputes in the future.”[1] But how many inside or outside counsel actually engage in that practice? In other words, how many transactional lawyers are reading cases about contract drafting issues and incorporating the learning from those cases into the contracts they draft and negotiate? Too few it appears.
Scholars studying the persistent use of boilerplate provisions that have become part of the transactional marketplace have noted that there is in fact little evidence of transactional lawyers reading cases and incorporating that learning into the contracts they negotiate and draft.[2] Part of the reason for this is the consistent veneration by lawyers and clients of so-called “market terms,” even when the market has failed to keep pace with the decisions of the courts responsible for construing a particular “market” term or provision.[3] But another possible reason is that some transactional lawyers are simply not reading those cases that would serve as a basis for challenging market convention. It is the premise of this brief article that reading and staying current on the cases interpreting contracts governed by the law most likely to apply to any dispute arising out of the contracts a transactional lawyer most frequently drafts and negotiates should be part of the discipline of all transactional lawyers.
A Sampling of Recent Drafting Cases
To illustrate the premise of this article, set forth below is a small sampling of the many cases decided in 2015 that illustrate outcome determinative contract drafting issues, the study of which should result in more exact drafting and a more careful review of the starting form:
Charney v. American Apparel, Inc., C.A. No. 11098-CB, 2015 WL 5313769 (Del. Ch. Sept. 11, 2015) —the term officer and director, without a modifier, is deemed to mean only a “current” officer or director.
This Delaware Court of Chancery decision illustrates the seemingly well know distinction betweenan obligation to indemnify an individual and an obligation to advance expenses that may ultimately be indemnifiable. The former does not necessarily include the latter and vice versa. Because of the specific manner in which the Corporate Charter was drafted, “former” officers and directors were not entitled to advancement of expenses, even though they were entitled to indemnification, whereas current officers and directors were entitled to both advancement of expenses and indemnification. The Charter read as follows:
The Corporation, to the full extent permitted by Section 145 of the [Delaware General Corporation Law (“DGCL”)], as amended from time to time, shall indemnify all persons whom it may indemnify pursuant thereto. Expenses (including attorneys’ fees) incurred by an officer or director in defending any civil, criminal, administrative, or investigative action, suit or proceeding for which such officer or director may be entitled to indemnification hereunder shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized hereby.
Note that the first sentence of this provision of the Charter specifically obligates the Corporation to indemnify “all persons whom it may indemnify pursuant [to Section 145 of the DGCL].” The persons whom may be indemnified pursuant to Section 145 specifically includes both current and former officers and directors. So, the indemnification part of this provision makes mandatory what is permitted by Section 145 and covers both current and former officers and directors. In the second sentence, however, the persons entitled to advancement of expenses is not all persons who may be statutorily entitled to advancement of expenses, which would necessarily include former officers and directors, but instead is limited to only “an officer or director.” The court noted that the Delaware courts have always construed such a provision (i.e., a provision that does not explicitly modify the phrase “officer or director” with a phrase such as “who is or was” or“current or former”) so that the meaning of the phrase “officer or director” is limited to only those officers and directors who are currently serving in such capacity on behalf of the Corporation—i.e., former officers and directors are excluded. Reading and studying those Delaware decisions as to the standard meaning of the phrase “officer and director” might well have been helpful and a draftsperson intending to cover former offers and directors would have modified the phrase accordingly.
This case is also worth a read for a better understanding of the limits of indemnification and advancement generally—i.e., as only covering claims made “by reason of” a person's current or former service as an officer and director. And that is what ultimately caused the former officer and director in this case to have his claims for indemnification and advancement denied under both the Charter and his separate indemnification agreement.
Carlyle Investment Management L.L.C. v. Moonmouth Co. S.A., C.A. No. 7841-VCP, 2015 WL 5278913 (Del. Ch. Sept. 10, 2015) —binding a nonparty to a Release requires clarity.
It is an oft-repeated refrain that nonparties to a contract cannot be bound to that contract. But even a non-signatory to a contract can be bound to a contract if the contract is signed on behalf of an entity that has actual or apparent authority to bind the named category of affiliated entities of the signer.
Carlyle Investment is a good reminder of the potential power of corporate group agency principles in making an affiliate of a signatory to a contract a party to that contract, even though that affiliate is not an actual signatory to the contract. But it is also a reminder that, even when that is in fact your intent, unclear drafting can make that intent ambiguous. The contract at issue in Carlyle Investment was a Release contained in a Transfer Agreement, which read as follows:
In consideration of the promises and other consideration set out herein: (a) Assignor [Bundora] and Assignee [third-party purchaser] on the one hand; and (b) the General Partners and the Partnership [Carlyle’s Affiliates] on the other hand (including in each case, each of their respective predecessors in interest, successors in interest, present and former Affiliates and any agents, representatives, officers, directors, employees, executives, parents, shareholders, partners, members, principals, subsidiaries and controlled companies, heirs, executors, administrators, successors, assigns, sister or related companies and partnerships of the foregoing (collectively, the “Related Parties”)) hereby fully release and discharge the other and, in each case, the other’s Related Parties, from any and all obligations, claims, demands, damages, liabilities, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, judgments, extents and executions whatsoever, of whatever kind or nature, actions, causes of action or suits at law or in equity of whatever kind, state or federal, known or unknown, suspected or unsuspected, whether brought in any federal or state court, or in any court, arbitration proceeding, administrative agency, or other forum in the United States or elsewhere, which any of the releasing parties ever had or now has, or may have in the future, upon or by reason of any matter, cause or thing occurring on or prior to the Effective Date, except as otherwise explicitly provided in this Agreement.
Among the issues to be decided by the court was whether the principal owner of Bundora and Bundora’s parent entity were each bound by the Release in favor of Carlyle or only Bundora itself, which was the only actual counterparty to Carlyle that was a signatory to the Release. It was apparently clear that the persons benefitting from the Release extended to all Related Parties of both parties. The question, however, was whether the “releasing parties” bound by the Release included the Related Parties of Bundora?
Carlyle and certain of its affiliates were the plaintiffs here and affiliates of Bundora were the defendants. The plaintiffs argued, of course, that all Related Parties of Bundora were unambiguously bound by the Release, while the defendants argued that only Bundora was bound by the Release. The defendants pointed out that only Bundora was identified in clause (a) of the Release “on the one hand,” while the General Partner and the Partnership were identified in clause (b) “on the other hand.” Moreover, the “in each case” language that referred to Related Parties for the purpose of who was bound to the Release (as opposed to who was benefited by the Release) was in a parenthetical in clause (b) only and did not refer to both clause (a) and clause (b). In other words, “in each case” could have theoretically referred only to the General Partner and the Partnership, notto thenamed parties in clause (a) and the named parties in clause (b). And the fact that clause (a) was separated from clause (b) by a semi-colon rather than just a comma was latched onto as making a big difference in the construction of the Release by the defendants.
Relying on New York law to interpret this “case study in garbled drafting,” the court noted that “in a contract containing punctuation marks, the words and not the punctuation guide us in it is interpretation,” and [p]unctuation is always subordinate to the text and is never allowed to control its meaning.” The court then concluded that both the plaintiffs’ construction and the defendants’ construction of the Release were reasonable. Therefore, the Release was declared ambiguous and an expensive trial will now be necessary to interpret its true meaning after considering testimony and other extra-contractualinformation.
Buckingham v. Buckingham, 3 N.Y.S.3d 921 (N.Y.A.D. March 19, 2015) —know the difference between a sale of a company and a sale of stock in a company.
In this 2015 New York case, the contract between the plaintiff and the defendant provided that the plaintiff was entitled to an applicable percentage of the proceeds "if MS or any of its subsidiaries or related companies are sold, and the proceeds of sale are not otherwise invested or reinvested in another business enterprise." MS was a company in which the defendant owned approximately 56% of the shares. The defendant sold approximately half of his shares and paid the plaintiff nothing, and apparently did not otherwise reinvest the proceeds in another enterprise. The Appellate Division held that the defendant owed the plaintiff nothing because MS had not in fact been sold; only some shares in MS had been sold. The illogic of this outcome was not missed by the concurring opinion, which noted that had MS in fact been sold in its entirety, this provision would have entitled the plaintiff to the applicable percentage of the entire proceeds of the sale not just the defendant’s 56% (an outcome with which the happy defendant in this situation would have been very unhappy in that situation). Indeed, based on the court’s interpretation of this provision, the defendant may owe money to the plaintiff based on proceeds received by others sometime in the future if the company is sold, even if he then owns no shares.The bottom line is don’t expect a court to apply what is sometimes referred to as “business common sense” to the interpretation of a provision where the words themselves do not convey that sense.[4]
Medfusion v. Allscripts Healthcare Solutions, Inc., No. 14 CVS 5192, 2015 WL 1455680 (N.C. Bus. Ct. March 31, 2015)—draft so you never need to know what an Oxford comma is.
In this 2015 decision out of North Carolina construing a contract governed by Illinois law, the court refused to dismiss a breach of contract claim alleging damages for loss of profits notwithstanding an excluded losses provision that precluded liability for “any loss or damage to revenues, profits, or goodwill or other special, incidental, indirect, or consequential damages of any kind.” The reason: By failing to include an “Oxford” (or serial) comma after the word “goodwill,” it was ambiguous whether the parties intended the phase “or other special, incidental, indirect, or consequential damages” to modify only “goodwill” or to also modify “revenues” and “profits.” The argument was that if it modified all three categories of damages then it effectively meant that only revenues and profits that otherwise constituted consequential, special, incidental or indirect damages were actually precluded, not revenues and profits that would constitute direct damages. The Oxford comma is a tool that, if consistently used in an agreement, is deemed by some courts to avoid the application of the “last antecedent” rule (mostly applicable to statutes, but also applied to contracts) so that not only the last antecedent (“goodwill”), but all proceeding antecedents (“revenues, profits, or good will”) are modified by the qualifying phrase (“or other special, incidental, indirect, or consequential damages”). The absence of an Oxford comma in a particular clause, where it is present in other clauses, can also be evidence of intent that the last antecedent is in fact the only one qualified by the qualifying phrase.
Illustrating the Oxford comma as a proper tool to avoid confusion is fairly easy. For example, “I attended the game with my partners, a college professor and a circus performer.” Without a final comma after “college professor” and before “and,” the sentence could be read as suggesting that my partners are a college professor and a circus performer. But with the comma it becomes clear that I attended the game with three different persons or groups of persons: My partners, a college professor, and a circus performer. Of course the sentence could be rewritten to avoid the need for a serial comma to clarify the meaning: “I attended the game with a college professor, a circus performer and my parents.” Whether you use the final comma or not in that formulation, no one is left wondering if my partners are a college professor and a circus performer.
In this case, the issue was whether the lack of an Oxford comma resulted in lost profits and lost revenues being deemed independent exclusions not simply an example of the broader category of consequential, special, incidental or indirect damages. Of course, without the word “other” in the last clause, it is difficult to see how anyone would have been able to argue that all of the foregoing damage types were modified by the last clause, with or without a comma.
The best advice, of course, is not to draft in a manner that the last comma can be meaningful one way or the other (and, for goodness’ sake,try to avoid such ambiguous terms as consequential and special damages if at all possible).[5]
DKN Holdings LLC v. Faerber, 2015 WL 4182820 (Cal. July 13, 2015)—the distinction between joint and several liability may not be what you think.
This recent California Supreme Court decision reads like a law school lecture on basic principles of contract liability and the means and manner of enforcing that liability where two or more parties have agreed to become counterparties to such a contract and there is a breach. Does the non-breaching party have to sue all the counterparties at the same time, or can the non-breaching party pick and choose who to sue and when? And if the non-breaching party decides to sue only one of the counterparties and obtains a judgment against that counterparty for that breach, but the judgment remains unpaid, can the non-breaching party then sue another counterparty and obtain yet another judgment against that additional party for the full amount of the same liability covered by the prior judgment? The answer is that, unless the contract provides otherwise, of course he or she can—that is the very nature of “joint andseveral” liability (which is generally presumed when you have more than one party agreeing to liability on a contract).
While there is lots of interesting stuff in this opinion about the difference between claim preclusion and issue preclusion and who is precluded in each, for transactional types the most interesting discussion is that revolving around what “joint and several” liability really means. Many drafters appear to assume that the term “several” (or “severally”) somehow equates to limiting each of the co-parties to responsibility for their individual breach but not the breach of another co-party, while the term “joint” (or “jointly”) equates to full responsibility for a breach by any of the co-parties signing up to the obligation. Based on that assumption, contracts will sometimes use the following formulation: “Sellers hereby, severally, but not jointly, represent and warrant to the Purchaser that:” Even if the representations and warranties that follow that lead-in state something like “each seller is [normal organizational, capitalization and ownership of shares statements],” have the individual sellers actually limited their exposure to liability that arises only from their individual breach of the representations that specifically relate to them, and exculpated themselves from any breach that relates to any of the other sellers?