Published by Ask General Counsel on InsideNova, 12/15/2022

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In this edition of Ask General Counsel, the attorneys of General Counsel, P.C. discuss what many may believe a boring subject – the importance of clear and concise language in contracts.

However, if you have ever been involved in a contract dispute, perhaps resulting in litigation or significant personal or business losses, you know how important clear and unequivocal language is within a contract.

Contracts are critical in the business world. Employment agreements, purchase contracts and non-disclosure agreements are only a few examples of the various contracts that play a large role in the success of a business.

However, not all contracts are created equal. Each agreement should be drafted specifically to address the specific parties to a matter and adequately plan for and cover a range of related possibilities (this is why most lawyers will discourage clients from using LegalZoom or equivalent services). One of the most importance aspects of a successful contract is precise drafting. Three recent cases from the Delaware Court of Chancery are examples of the problems that can arise from imprecise drafting. Ambiguity in agreements can have harsh negative consequences.

In XRI Investment Holdings LLC. v. Holifield, a contract’s use of the term “void” rather than “voidable” resulted in what the court deemed “an inequitable result.” There, in an LLC agreement, a provision stated that any transfer of a member’s interest that violated the agreement’s transfer prohibitions is “void.” After a violation of this provision occurred, the court held that the transfer was “void ab initio” and never became effective. While parties often equate “void” with “voidable,” the court does not have that discretion when interpreting a contract’s plain language.

In ITG Brands LLC v. Reynolds American Inc., the court interpreted the meaning of “subject to” in an Assumption of Liabilities provision in an asset purchase agreement. The agreement stated that “subject to the Agreed Assumption Terms,” the buyer assumed the post-closing liabilities for a preexisting settlement for a third party. The parties disagreed about how the phrase “subject to the Agreed Assumption Terms” should be read related to the Agreed Assumption Terms, which placed an obligation on the buyer to use “reasonable best efforts” to get the third party’s consent to the assumption of liabilities.  The court determined that “subject to” didn’t nullify the buyer’s obligation to assume the liabilities and concluded the seller was entitled to indemnification from the buyer.

In Weinberg v. Waystar Inc. the court answered the question of whether “and” in the provision at issue denoted options available to a party or prescribed rights only available if multiple conditions are met. There, a party was entitled to exercise a call right in a stock option agreement “ . . . during the six (6) month period . . . following . . . (x) . . . the Termination of such Participant’s employment . . . for any reason . . . , and (y) a Restrictive Covenant Breach.” The company terminated the employee and exercised the call right, but there was no violation of a restrictive covenant. The court held “and” essentially meant “or” and the company was entitled to exercise the call right.

The key takeaway here is that contract language needs to be precise. Imprecise drafting or incorrect use of language can have serious unintended consequences. Courts often look to the plain language when interpreting an agreement.

Those drafting contract language should aim to be as clear as possible. Drafters may wish to include additional language for provisions that may be unclear, such as including examples of different scenarios. Additionally, drafters should ensure that individual provisions don’t conflict with other provisions in the agreement. When interpreting contracts, courts will often look at the agreement as a whole to see whether other provisions support a particular interpretation. Ensuring that key provisions make sense with other contract provisions helps to avoid uncertainty.

If you need more guidance or information, contact the business law experts at General Counsel, PC today at 703-556-0411, intake@gcpc.com or this Contact Us Form. Attorneys at General Counsel, PC have experience drafting, negotiating, and litigating a wide range of agreements for business owners throughout the Washington, D.C. Metro area (and beyond).