In a decision issued last week, Massachusetts's highest court upheld a trial court's award of $44 million in damages and interest against a financial company's co-founder and CEO for breach of the implied covenant of good faith and fair dealing. The case offers lessons for contract drafters about not leaving important details up in the air.
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.)
In my contract-drafting course a couple of weeks ago, I explained Toyota's Five Whys approach to getting to the root of business problems. Today a New York Times reporter explains how he used the same approach to help him and his wife get home for dinner regularly with their two young children. See Charles Duhigg, How Asking 5 Questions Allowed Me to Eat Dinner With My Kids (Well.Blogs.NYTimes.com March 10, 2016).
We had started by identifying a problem — we never managed to have family dinner — and by using “the Five Whys” found a root cause: Our kids were taking too long to get dressed in the morning.
Before conducting this exercise, I had never suspected that there was a connection between our morning routines and our evening mealtimes.
But once we forced ourselves to ask why after why, it was clear what needed to change. ...
Id. (emphasis and extra paragraphing added).
This week one of my students turned in a homework assignment saying that a certain proposed action by a hypothetical client "is securities fraud." I commented to the student that you usually don't want to be so categorical, because:
- if it were to turn out that the actions in question didn't constitute securities fraud, then you might have to try to walk back your statement — this would be embarrassing, and worse, it could affect your long-term credibility with the client, the partner, opposing counsel, etc.; *
- if you were saying this to a client about the client's proposed actions, then your own words might be quoted against the client someday, for example in a court brief or a deposition or a jury argument — "ladies and gentlemen, her own lawyer said it was securities fraud" — and that might be difficult or impossible to walk away from.
In making cautionary statements of this nature, it's often better to leave room to argue to the contrary, for example, as follows — if you were to do this, then:
- it might be found to be securities fraud;
- it could be argued to be securities fraud;
- it might be characterized as securities fraud.
This language conveys the same warning, with less risk that the lawyer will be seen as implicitly endorsing the finding of securities fraud.
* As a general rule of thumb, in the eyes of a client, a partner, etc., it's usually far worse to say something that turns out not to be so, than it is simply to say, "I don't know the answer but can find out."
I quickly concluded that a weekly email digest of new posts on this blog wouldn't work, so I switched it to a nightly digest, released at 1:00 a.m. each day for any posts the previous day.