There are four cardinal virtues that must be adhered to when drafting a contract. The contract language must be clear, it must be concise, and it must be internally consistent. A deficit of any one of these four “Cs” could result in a judicial determination that important contract terms are ambiguous.
Ambiguity is to contracts what rust is to steel. It undermines the integrity of mutual assent and the purpose of a contract is to serve as a written record of mutual assent. Ambiguity leads to misunderstanding, mistrust, arguments, resentment and broken relationships, and all of those consequences can and often do lead to lawyers and litigation.
Ambiguity also is unnecessary and preventable. Those negotiating the terms of a contract and putting those terms into writing must follow the four “Cs” of contract drafting – the contract language must be clear, concise, comprehensive and consistent. A contract is:
- Clear is it leaves no room for doubt or multiple interpretations,
- Concise if it values brevity over needless elaboration and detail,
- Comprehensive if it defines its limits and addresses all contingencies that fall within those limits, and
- Consistent if it lacks internal contradictions.
Every lawyer has either experienced, read about, or heard about a costly misplaced comma, a stray or dropped zero, or an inadvertent use of the word “may” instead of “shall” or “will.” Those mistakes are obvious. The more frequent mistakes are those made when:
- Assumptions are made that “everyone understands” what is being referred to, or
- The meaning of a term should be obvious (but is not when read literally), or
- Contract terms are copied from other agreements, agreements that do not quite fit the transaction at issue, or
- Provisions are copied wholesale from that bottomless pit of legal errors – the internet.
Equally problematic are those irksome “defined terms” which all-too-often are not well-defined at all. Such was the case for an Ohio company, GrafTech International in a recent decision handed down by the Delaware Chancery Court.
In 2017, Lionel Batty, 34-year employee of the GraftTech and its predecessor, resigned for “good reason” as that terms was defined in a severance compensation agreement that Batty had previously entered in July 2000. That agreement provided that in the event of a change in control of the company and following a qualifying termination of employment (including his resignation for “good reason”), Batty would be entitled to certain severance benefits. Among those severance benefits was Batty’s “accrued Incentive Compensation,” a defined term in the agreement.
The problem was that “accrued Incentive Compensation” was not well defined in the eyes of the Chancery Court, which deemed that term to be ambiguous because it was reasonably susceptible of more than one meaning. On that basis, the Court denied GrafTech’s motion to dismiss the complaint, leaving for later the issue of whether Batty’s interpretation or the Company’s interpretation was the more reasonable.
This is every corporate lawyer’s nightmare. No one want to leave the question or the meaning of a critical contract term to the discretion of a judge, jury or arbitrator, but this happens all too often. This should never happen, particularly on a fundamental term such as the amount of severance benefits payable under a severance agreement. In this case, the difference in the parties conflicting “reasonable” interpretations is a $1.5 million question.
GrafTech could still prevail following discovery and/or a trial, but the cost of determining whether the company’s interpretation is more reasonable than the employee’s interpretation is going to be expensive for both sides with attorney’s fees likely run well into six figures.
This is too bad, because it is a dispute that was preventable by a well-thought-out agreement that followed the four Cs of contract drafting; the contract must be clear, concise, comprehensive and consistent.