Ever get frustrated with attorneys who fuss over precise contract wording? They do it for good reason: In negotiating and drafting agreements, millions can be won or lost by the placement of commas or parentheses. Chartbrook v. Persimmon Homes, decided July 1, 2009 by the British House of Lords,* vividly illustrates the principle that a cup or two of annoying front-end fuss can avert shipping containers full of it down the road.
Chartbrook and Persimmon Homes thought they understood each other, on October 16, 2001, the day they inked a deal to develop 100 flats totaling 50-60,000 square feet of “internal area”. Not so. It took eight years, untold thousands in legal fees, three courts and 40 pages of Law Lords’ verbiage to unravel what could have been resolved with a few strategic keystrokes at the drafting stage. Did Persimmon owe Chartbrook £4,484,862 or a mere £897,051?
In their opinion reversing the trial judge and the Court of Appeals — who, in holding for Chartbrook, found the contract “clear, certain and unambiguous” with “straightforward arithmetic” — the Law Lords held for Persimmon.
While the Lords found the agreement clear on most points, to them it was ambiguous with respect to that half of the price formula termed “Additional Residential Payment” or “ARP”. The contract defined ARP as follows:
23.4% of the price achieved for each Residential Unit in excess of the Minimum Guaranteed Residential Unit Value [MGRUV] less the Costs and Incentives
At trial, J Briggs thought the interpretation obvious:
ARP means 23.4% of something. To the question ‘23.4% of what?’ the clear answer is the excess of the price achieved for each Residential Unit over the MGRUV, less the Costs and Incentives.
Note well that J Briggs added a comma not found in the original contract. The Lords, on the other hand, lamented the parties’ failure to reduce the ARP definition to an algebraic expression and dismissed Briggs’ hopeful comma. Two competing ARP formulas emerged:
1. ARP = 23.4% x (Sales Price – MGRUV – C&I), yielding £4,484,862,
2. ARP = [23.4% x (Sales Price - C&I)] – MGRUV, yielding £897,051.
Through deep discussion and copious amounts of ink, the Lords adopted the second formula. Lord Hoffman articulated the rule which guided their construction of the agreement:
There is no dispute that the principles on which a contract (or any other instrument or utterance) should be interpreted are those summarised by the House of Lords in Investors Compensation Scheme Ltd v West Bromwich Building Society  . . . It is agreed that the question is what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean. The House emphasised that “we do not easily accept that people have made linguistic mistakes, particularly in formal documents”. . . but said that in some cases the context and background drove a court to the conclusion that “something must have gone wrong with the language”. In such a case, the law did not require a court to attribute to the parties an intention which a reasonable person would not have understood them to have had.
Applying this rule, Hoffman continued:
It is, I am afraid, not unusual that an interpretation which does not strike one person as sufficiently irrational to justify a conclusion that there has been a linguistic mistake will seem commercially absurd to another. . . The subtleties of language are such that no judicial guidelines or statements of principle can prevent it from sometimes happening. It is fortunately rare because most draftsmen of formal documents think about what they are saying and use language with care. But this appears to be an exceptional case in which the drafting was careless and no one noticed. I agree with the dissenting opinion of [appellate judge] Lawrence Collins because I think that to interpret the definition of ARP in accordance with ordinary rules of syntax makes no commercial sense.
Ouch. Acknowledging the hindsight advantage and clear superiority of algebraic expression, the parties might still have avoided the legal battle with this simple rewording of the ARP definition:
ARP = 23.4% multiplied by the excess of the net price achieved for each Residential Unit, after deducting Costs and Incentives, over the Minimum Guaranteed Residential Unit Value [MGRUV].
What can be learned from the Chartbrook case? First, meticulous drafting is essential where the issues or amounts involved are material to the parties. Where the issue is monetary compensation, a clear algebraic formula may be best.
Second, it is wise to include in every contract an “integration” clause that says, in essence, “this piece of paper that we have signed revokes any prior understandings of the parties and includes their entire agreement.” In other words, you want to discourage courts as much as possible from considering evidence outside the four corners of the agreement itself.
Third, on the chance that a court (in or out of the United States) decides to consider outside evidence to aid in contract interpretation, it would be wise to preserve contemporaneous evidence of a “consensus” on key issues. Compensation, price and payment terms are usually front and center. Email trails can help narrow down the ambiguity.
Fourth, if during negotiations your attorney expresses misgivings about linguistic ambiguity in the draft, listening attentively may save you from reprising Chartbrook. No one really wins when a dispute runs on through two appeals and eight years. As a value proposition, up-front investment in quality relationship infrastructure (i.e., a well-drafted contract) pays big dividends down the road.
Fifth, attorneys who entered the legal profession to avoid math might want to consider a course in algebra. In this case, I have a feeling some attorneys in the U.K. are wishing they had.
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* For American readers, the “Law Lords” (or Lords of Appeal) of the British House of Lords are roughly speaking the U.K. equivalent of the United States Supreme Court.