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A redundant phrase or two in a contract can sometimes be cheap litigation insurance

A few days ago there was a discussion at Ken Adams’s blog about why some lawyers feel the need to say, for example “irrevocably waives” instead of just “waives.” My comment was that drafters sometimes include (seem­ingly) redundant language like this in the hope of heading off later arguments by opposing counsel that black really means white:

Suppose the contract is silent on revocability. Sure as shootin’, some litigator will argue that, under the circumstances, his poor, maltreated client has an inherent right to revoke, because otherwise it would just be so … unfair.

That’s one reason contracts are so long: because the drafters feel they have to expressly negate things that shouldn’t have to be negated in the first place.

Illustrating my point, just last week a federal appeals court confronted just such a “creative” contract interpretation. The case was Sonoran Scanners, Inc. v. PerkinElmer, Inc., 585 F.3d 535 (1st Cir. 2009), affirming in relevant part a summary judgment that rejected a claim for breach of contract.

(The appeals court reversed the summary judgment on one issue of reasonableness, however, and remanded that issue for a full trial, on grounds that the material facts on that issue were not undisputed and therefore summary judgment was improper.)

Background

In the Sonoran Scanners case, a small start-up company, finding itself running out of cash, looked for a buyer. Eventually it sold its assets to a much-bigger company for $3.5 million plus an earn-out that potentially could have reached the same amount if certain business goals had been achieved. The bigger company hired all but one of eight specified employees of the start-up, including the founder. The exception was the head of sales, who declined the bigger company’s employment offer, evidently because he wasn’t satisfied with the compensation package he was offered.

After the acquisition, the acquired business eventually failed; the bigger company shut down the business and laid off its personnel, including the start-up’s founder.

The start-up company (still technically in existence as a legal entity) and its founder then sued the bigger company for breach of the asset purchase agreement.

The plaintiff’s “creative” contract interpretations

The start-up company offered some … unusual interpretations of the contract language. As described by the appeals court:

We begin with Sonoran’s contention that PerkinElmer breached § 6.3(b) of the Purchase Agreement.

That provision, entitled “Sharing of Data,” provided in part that “The Parties agree that from and after the Closing Date they shall cooperate fully with each other to facilitate the transfer of the Acquired Assets from the Seller to the Buyer and the operation thereof by the Buyer.”

Although Sonoran apparently contends that the “shall cooperate fully” language of § 6.3(b) created a freestanding obligation on the part of PerkinElmer to “cooperate” with Sonoran and Donahue in operating the business, the unambiguous language of the provision was to the contrary.

Specifically, § 6.3(b) stated that the duty of cooperation was intended to benefit PerkinElmer——that the parties shall cooperate to facilitate transfer of Sonoran’s business “to the Buyer” and to facilitate “the operation thereof by the Buyer.”

The district court correctly held that no basis exists to conclude that PerkinElmer breached § 6.3 of the Purchase Agreement.

(Citations omitted, italicized emphasis by the court, bold-faced emphasis and extra paragraphing added.)

Another example: The smaller company claimed that, because its head of sales declined the bigger company’s job offer, the bigger company supposedly breached its obligation to offer him a job:

During negotiations with PerkinElmer before execution of the Purchase Agreement, [founder] Donahue made clear to PerkinElmer that [head of sales] Bogen would require a raise from his current salary of $100,000 a year to $125,000 a year, as well as reimbursement for commuting expenses and a fair commission, in order to remain with the business.

In April 2001 PerkinElmer made offers to the eight Sonoran employees listed in Schedule 6.1 of the Purchase Agreement, including Norm Bogen. PerkinElmer offered Bogen only his current salary with no additional amount for expenses or commission.

Bogen rejected the offer. Upon learning of Bogen’s rejection, Donahue asked Greg Baxter, the head of Lithography, to increase the offer.

Baxter represented that he would get a better offer for Bogen after closing, though no such language was added to the Purchase Agreement.

PerkinElmer never made a better offer to Bogen, and Bogen never accepted employment with PerkinElmer.

We agree with the district court that § 6.1 only required PerkinElmer to make a bona fide offer of employment to Bogen; it did not require PerkinElmer to make any particular offer to Bogen or to make a second, better offer to Bogen after closing when the first offer was rejected by Bogen. …

Under these circumstances, the failure to make an offer of employment to Bogen after execution of the Purchase Agreement could not be a violation of the Purchase Agreement.

(Bold-faced emphasis and extra paragraphing added.)

An indirect lesson: “Redundant” language in a contract can be cheap litigation insurance

To be sure, brevity in contracts is laudable. But brevity isn’t the be-all and end-all. And in many cases, brevity can be a false economy. That’s because litigation counsel, under cover of their duty of zealous advocacy, will often argue for contract interpretations that others might think far-fetched or even risible.

A few extra sentences here and there in a contract, expressly ruling out possible “creative” contract interpretations, might someday save the client a lot of trouble and expense.

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