Rules for Interpreting a Contract

January 5, 2016 § Leave a comment

Only yesterday we discussed the importance of clarity in drafting agreements for your clients. What the parties were thinking and believed at the time is of no consequence in interpreting a contract unless the court first finds that the language is ambiguous. Only then can the court delve into what went into and what was behind the drafting.

In the case of Gibbs v. Moody, decided December 1, 2015, the COA, by Judge Carlton, quoted at ¶ 13 from Royer Homes of Miss., Inc. v. Chandeleur Homes, Inc., 857 So.2d 748, 751-753 (Miss. 2003), to lay out the process the trial court is required to follow:

The primary purpose of all contract construction principles and methods is to determine and record the intent of the contracting parties. In contract construction cases[,] a court’s focus is upon the objective fact—the language of the contract. A reviewing court is concerned with what the contracting parties have said to each other, not some secret thought of one not communicated to the other. A reviewing court should seek the legal purpose and intent of the parties from an objective reading of the words employed in the contract to the exclusion of parol or extrinsic evidence. The reviewing court is not at liberty to infer intent contrary to that emanating from the text at issue.

This Court has set out a three-tiered approach to contract interpretation. Legal purpose or intent should first be sought in an objective reading of the words employed in the contract to the exclusion of parol or extrinsic evidence. First, the “four corners” test is applied, wherein the reviewing court looks to the language that the parties used in expressing their agreement. We must look to the “four corners” of the contract whenever possible to determine how to interpret it. When construing a contract, we will read the contract as a whole, so as to give effect to all of its clauses. Our concern is not nearly so much with what the parties may have intended, but with what they said, since the words employed are by far the best resource for ascertaining the intent and assigning meaning with fairness and accuracy. Thus, the courts are not at liberty to infer intent contrary to that emanating from the text at issue. On the other hand, if the contract is unclear or ambiguous, the court should attempt to harmonize the provisions in accord with the parties’ apparent intent. Only if the contract is unclear or ambiguous can a court go beyond the text to determine the parties’ true intent. The mere fact that the parties disagree about the meaning of a contract does not make the contract ambiguous as a matter of law.

Secondly, if the court is unable to translate a clear understanding of the parties’ intent, the court should apply the discretionary “canons” of contract construction. Where the language of an otherwise enforceable contract is subject to more than one fair reading, the reading applied will be the one most favorable to the non-drafting party. Finally, if the contract continues to evade clarity as to the parties’ intent, the court should consider extrinsic or parol evidence. It is only when the review of a contract reaches this point that prior negotiation, agreements[,] and conversations might be considered in determining the parties’ intentions in the construction of the contract. Of course, the so-called three-tiered process is not recognized as a rigid “step-by-step” process. Indeed, overlapping of steps is not inconceivable.

I reiterate: If you intend for your contract to say a particular thing, then include language that expressly says that particular thing. Just because you can draw an inference from your draftsmanship does not mean that a judge — or anyone else — will draw the same inference. And unless a judge rules that the language is ambiguous, the door to your thought processes and what you intended remains locked.

 

ANOTHER OBJECT LESSON IN PSA DRAFTSMANSHIP

December 21, 2011 § 2 Comments

What does the following language in a divorce property settlement agreement (PSA) mean?

The parties both agree and understand that [Stephen] will retire from Martin Marietta Manned Space Systems effective April 24, 1992. . . . The parties have agreed to accept #D-Level Income as the monthly benefit option. This will provide [Stephen] a monthly income of approximately $3[,]189.26. [He] will remit to [Gloria] one-half of this income, being the approximate amount of $1,594.63, on the first day of each month . . . commencing on January 1, 1993. These monies will be considered alimony[,] and [Gloria will be responsible for the income taxes].

That was the question squarely presented to the chancellor in litigation between former spouses Stephen and Gloria Reffalt.

Stephen and Gloria were divorced in 1993. Stephen had retired from his job with Martin Marietta (MM). Approximately two years later Stephen’s retirement benefits paid by MM were reduced when his Social Security benefits kicked in, as the plan provided. As a result of the automatic reduction, the $1,594 payments to Gloria came to represent considerably more than 1/2 of the MM benefit. Nonetheless, Stephen continued paying the $1,594 until December 2008, when he apparently decided enough was enough, and he filed a petition to modify the payments proportionally to about $1,150 a month.

Stephen took the position that the above PSA language clearly intended that Gloria receive only 1/2 of his MM retirement benefits, whatever that amount might be.

Gloria argued that the language mandated that she be paid 1/2 of Stephen’s total retirement benefits from whatever source.

The chancellor found the language to be ambiguous and accepted parol evidence of the parties’ intentions in the drafting of the contract. Placing heavy emphasis on the parties’ course of conduct over fifteen years after the reduction in MM benefits, the trial court held that the language intended that Stephen pay the higher amount, and denied his request for a downward modification.

In Reffalt v. Reffalt, decided December 13, 2011, the COA affirmed. I recommend that you read the opinion, written by Judge Ishee, for its exposition on the principles of contract interpretation and what is and is not an ambiguous contract. The opinion also touches on the question of modification of property settlement.

This case is yet another example of draftsmanship that may appear at first blush to be clear, but on further inspection is susceptible to several different interpretations. Consider the language ” … This will provide …” and ” … one half of this income …” To what do the pronouns this refer? Are their objects the same thing or different? Better to have said “… one half of the #D-Level benefit each month …” Or “Stephen will pay to Gloria the sum of $1,594 each month.” Or “The amount payable by Stephen shall be adjusted automatically to be equal to 50% of his #D-Level benefit actually received, without any voluntary action on his part to reduce the amount received.”

A few suggestions:

  • As I have said here before, it’s a good idea to draft and set aside that agreement for a day or two. Then pick it up and read it through different eyes. Cast yourself in the role of the judge looking at it years later, or the plan administrator considering how to apply it, or another lawyer to whom your former client has carried it.
  • Go pronoun hunting. Eliminate as many as you possibly can, replacing them with the specific term that you intend to refer to.
  • Does your language say exactly what you mean to say, or is it indirect and prolix? More words are not always better. The more verbosity you use, the more likelihood that confusion, unintended meanings and ambiguity will grow and fester in that thicket like a staph infection. 
  • Here are five suggestions for improving your PSA’s.
  • And here are five more.
  • Here is a post about a nightmare scenario in draftsmanship.
  • Kicking the can down the road, and why it’s not a good idea in your PSA’s. 
  • And here is a post on some examples of the hidden costs of divorce that you need to take into account when drafting a PSA.

Give your PSA’s some thought. That’s what you’re being paid for. Strive for your PSA’s to be better than 99% of other attorneys’. Make it your goal that no judge will ever have to find one of your PSA provisions to be ambiguous.

KICKING THE CAN DOWN THE ROAD

October 3, 2011 § 1 Comment

What you thought would be a simple irreconcilable differences divorce has proven to be anything but. You’re bone-weary of your client’s whining. The other party is an intransigent j*ck*$$ over every minor detail. Counsel opposite has been an uncommunicative pain and no help at all with his client. Getting all the issues nailed down has taken a monumental effort. And now, with the final draft of the property settlement agreement nearing the finish line, all that remains is to settle the personal property.

But, that is where the parties are stuck. Husband wants this and that. Wife wants this and that. Counsel opposite is no help at all. You could spend some more time insisting that the parties resolve the personal property issues, but you don’t want to make the effort, especially without any help from the other attorney.

So you say to yourself, “What the heck; let someone else deal with it,” and you draft some language to fill in that pothole in the agreement. Parties sign and judge signs the judgment.

Deal done. Case closed. For now.

Only problem is, the parties will likely be back in court sooner or later battling over that pothole.

I call that “kicking the can down the road (KCDTR).” You do enough to get by, but in the process you draft a ticket back to court for your clients. You kick the can down the road where the next person coming along will have to pick it up and deal with it.

Of course, case weariness is only one source of the KCDTR phenomenon. Some lawyers KCDTR out of sheer laziness, others out of lack of drafting skills, others from haste, and others from oversight or lack of care.

Consider a recent case I had in which the property division read, “Husband shall have ownership of the former marital residence, and wife shall have ownership of the furnishing [sic].”

Wife moved and took with her all of the furniture and her personal effects. She also took the light fixtures and window blinds, along with a barbecue grill, a fountain (she left the base), a yard sweeper implement and various other items in the yard. Husband punched his ticket back to court.

After three days of trial (there were other issues involved), it was left to me to determine whether all the stuff that wife took was “furnishing.”

No need to go into detail about my ruling. You can probably guess how it came out. My point here is that if the drafting lawyer had said, “No, I am not going to put this PSA in final form unless and until you can give me a list of all the items that you two agree that wife will remove,” we would have avoided having to try that issue later.

Incidentally, the COA case of Aegler v. Gambrell, decided April 26, 2011, offers an insight into what exactly are considered “furnishings,” “personal things,” and fixtures.

Some other KCDTR examples:

  1. “The former marital residence shall be sold at a price to be agreed between the parties.” What if the parties can’t agree?
  2. “Husband shall be responsible for one-half of the school expenses.” Husband thinks this means he will pay for daughter’s cheerleading expenses. Wife thinks it means that husband will pay one-half of the private school tuition and assessments.
  3. “Husband and wife shall each pay one-half of the child’s extra-curricular activities.” What activities are included, and who decides?

I could go on and on, but I hope you get my point. A lawyer is paid to draft an agreement that will avoid future problems. If you are not accomplishing that in the instruments you draft, you are taking your clients’ money and not delivering what was paid for.

FYI … you can read some tips for PSA drafting here and here. A post on some hidden dangers in some commonly-used PSA language is here. A post on the hidden costs of divorce is here. An object lesson in the ramifications of drafting is here. A few tips from Ernest Hemingway that may help improve your legal writing are here.

Draftsmanship is one of the hallmarks of a good lawyer. The good ones draft PSA’s that are clear and unambiguous, address all that needs to be addressed without unnecessary prolixity and fluff, and are not only enforceable on their own terms, but also are stout enough to withstand attack.

Good lawyering = good draftsmanship. Not-so-good lawyering = KCDTR.

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