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Drafting tip: Don’t assume parties will actually sign contracts in multiple places

A startup company’s board of directors let the company’s founder go. The company and the founder negotiated a separation agreement, which included both severance-pay provisions and a release of any claims the founder had against the company, drafted in “you hereby release” form. See Kneebinding, Inc., v. Howell, 20 Vt. 51, ¶¶ 2-3 (2014).

So far, so good.

The separation agreement also provided for the founder to serve as a consultant for six months on an as-requested basis (which never actually happened); the agreement included, as an attachment, an additional “Release of Claims” document, which was to be signed by the founder at the end of the six-month consulting period. See id. ¶ 4.

But the separation agreement also said, in effect, that the company’s obligation to pay severance benefits was conditioned on the founder’s signing the Release of Claims document — even though that wouldn’t happen for months. See id. ¶ 3.

The founder eventually signed the separation agreement, and the company paid him his monthly severance installments. Before the designated consulting period ended, the company sued the founder for allegedly breaching certain non-competition and non-disparagement covenants. The founder counterclaimed for various alleged wrongs.

The company moved for summary judgment dismissing the founder’s counterclaims. The company argued that the release in the separation agreement barred those counterclaims.

Of course, never underestimate the creativity (or brazenness) of litigation counsel: The founder’s counsel claimed that the release of claims in the signed separation agreement had never gone into effect, because the founder had never signed the additional Release of Claims document that was to have been signed at the end of the consulting period. See id. ¶¶ 11-12.

The trial court didn’t buy the founder’s proposed interpretation of the contract language, and granted summary judgment for the company in relevant respects. The state supreme court affirmed, branding the logic of the founder’s contract interpretation as “perverse.” See id. ¶ 15.

So in the end, the company won (on this issue). But they undoubtedly spent significant money on legal fees for the trial-court proceedings and the appeal.

Lessons:

1. Think twice about creating “extra” blank spaces to be signed in the future — you can’t be sure everyone will sign where they’re supposed to, and opposing trial counsel might try to “spin” any missing signature(s) as undermining your legal position.

2. A similar problem could arise from inserting blanks for initialing particular contract provisions. Some contract forms include blank lines, in the margin next to particular provisions (for example, a limitation of liability), where the parties are supposed to write their initials. That helps establish that the parties read and understood the provision in question and agreed to the provision knowingly. If such a blank line were to be left uninitialed, though, trial counsel could try to argue that the absence of initials had some legal effect such as negating the limitation of liability.

3. Consider inserting a few extra words “for the avoidance of doubt,” to preemptively rule out “creative” arguments about how to interpret the contract language. For example, we can say — with the benefit of 20-20 hindsight — that in the Kneebinding case, the company could have drafted the separation agreement to make it clear that the release in the body of the agreement was effective whether or not the Release of Claims attachment was ever signed.

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