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. 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.
Recent Delaware Cases
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. Even though the transferor established the elements of an equitable defense, the court wouldn’t allow the defense since the transfer was void rather than voidable under the agreement. While the court found the result was inequitable, it was bound by Delaware Supreme Court precedent.
The court there noted the “lack of consistency in how courts, legislatures, and parties have used the term ‘void’ and its linguistic cousins, such as null and void, void ab initio, voidable, invalid, ineffective, without effect, and the like.” While parties often equate “void” with “voidable,” the court does not have that discretion when interpreting a contract’s plain language. Words or phrases that may seem interchangeable may have very distinct legal meanings.
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 seller argued the buyer assumed the liability regardless of whether it used reasonable best efforts to join the agreement. The buyer argued it agreed only to use reasonable best efforts to join the agreement and assume the settlement obligations thereunder. The parties disagreed over what happened if the buyer used reasonable efforts, but failed to get the third party’s content. 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 seller.
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 Defendant companies argued they could exercise the call right during the six-month period following an employee’s “Termination . . . for any reason,” and also during the six-month period following a “Restrictive Covenant Breach. The employee argued that the Defendants could only exercise the Call Right if she has been “Terminated . . . for any reason” and she has also committed “a Restrictive Covenant Breach.” The court agreed with the Defendants’ interpretation, because it was consistent with the plain language and the “several” use of “and” that is used in permissive sentences. Under this interpretation, “and” essentially meant “or” and the company was entitled to exercise the call right.
Takeaways
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 if other provisions support a particular interpretation. Ensuring that key provisions make sense with other contract provisions helps to avoid uncertainty. As we saw in ITG Brands, phrases referencing other provisions, such as “subject to” or “except as provided in” can cause confusion in interpretation. Focusing on these provisions and how they fit within the contract as a whole is important for ensuring precise drafting. It’s also important for drafters to keep up to date on judicial decisions, such as those discussed here, to remain informed about courts’ determinations about different phrases or provisions and how they affect contract interpretation.
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).