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Contract-interpretation rules are like black holes: It’s usually best to steer well clear of them — but not always

From a blog commenter:

If you get caught in the gravitational pull of a black hole, it makes less sense to curse the black hole than to curse yourself for coming too close to it.

If the canons of [contract] construction are stupid default values, applicable only when the drafter fails to be clear, it makes less sense to curse the canons than to curse the drafter who put the text within their gravitational ambit.

Well said — except that there will be times when, for business reasons, a contract drafter or -reviewer might make a strategic decision to sail close to the danger.

EXAMPLE 1: A contract reviewer spots an ambig­u­ous provision in another party’s draft. The reviewer decides to gamble that a court would apply the principle of contra proferentem to resolve the ambiguity in her client’s favor. On that basis, the reviewer decides to keep quiet and not warn the drafter about the ambiguity of the provision.

EXAMPLE 2: Alpha Corporation owns a patent for technology that improves fuel economy in internal-combustion engines.  Alpha is in negotiations to grant, to Bravo Company, a manufacturer of car engines, a license to use the technology.

Alpha wants to limit the scope of the patent license that it grants to Bravo so that Bravo may not use the patented technology in airplane engines. But Alpha doesn’t want to be explicit about that limitation, because Bravo might demand for the license to include airplane engines. At a minimum, that would delay the negotiation; it also might bring down the price Bravo was willing to pay for the license.

So, Alpha crafts the granting clause to allow Bravo to use the patented tech­nology in “automobiles, trucks, tractors, and other vehicles powered by internal-combustion engines.”  In doing so, Alpha is gambling on two things:

  • That a court would apply the principle of ejus­dem generis to limit the license grant as Alpha wishes, i.e., as not encompassing use of the patented technology in airplanes; and
  • that Bravo’s contract reviewer won’t spot that danger (to Bravo) and thus won’t demand that the grant language be expanded.

(That might be a big gamble on Alpha’s part, for reasons I won’t go into here.)

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