Clear Contractual Language: What Are You Agreeing To?

By Larry DeMarcay

The tightening of the marine markets over the last two years have pushed some companies to do everything that they can to avoid obligations that they feel are burdensome or take advantage of obligations that provide them with a competitive advantage. The starting point for all of these analyses begins by analyzing the language of your contracts, what many refer to as “the legalese.”

Unfortunately, many of these agreements were crafted during happier times, by employees who were motivated by simply closing the deal and without any real regard for the legal technicalities of the agreement. However, as the market has changed, these contractual details can have a long term lasting impact upon your company. As such, it is important to look at each agreement with a critical eye to make sure that there are no serious gaps in the terms of the agreement, that the terms are consistent with each other, that you are aware of the details of the obligation and that the agreement makes sense in today’s economy.

Buyer’s Remorse

Many of the agreements that we see – usually after a legal claim arises – are created from old contracts and are the product of many years of revisions. These contracts usually start with an original document that was drafted by an attorney and numerous sections have been added or deleted over time. As many modifications are copied and pasted from other agreements, the obligations are not always clear when placed in the context of a different agreement. These discrepancies also lead to confusion and can often have unintended consequences.

The first thing to look for in a contract is to check that the terms of the agreement are clear. Courts hold that the language of a contract will prevail if the terms are clear, explicit and do not lead to any absurd consequences. As such, it is important to use language that clearly explains the obligations agreed to between the parties. It is best to use plain language and simple sentences. If you read an agreement and are unable to understand what the language is describing, it is always best to revise it to clearly state what you are agreeing to. Allowing language to remain in a contract that you do not understand always includes the risk of shaping the parties’ obligations in a manner that you did not intend.

Although using plain and simple language sounds easy, many contracts still look like they started from drafts that had been prepared centuries ago. We quite often see agreements that include language like “now therefore”, “now ye presents” or “in witness whereof the parties hereto.” If your standard agreement includes this type of anachronistic language, it makes sense to revise it to include a clearer recitation of what you are trying to say. Although these odd phrases may not sink your agreement, they are signs that your agreement is probably infected with language that needs to be cleaned up.

Another area of confusion occurs when a contract fails to use the same term throughout the agreement. This is often the result of copying and pasting provisions from multiple documents over a period of time. These inconsistencies can often be used to avoid obligations by arguing that the language is not clear.

Indemnity obligations provide a great example to look at because they are obligations that everyone is willing to agree to but no one wants to honor them. An indemnity obligation may include, in one section, “the company and its affiliated companies” within the scope of the obligation, where, in another section, the indemnity obligation may use the term “company group” to define who is included. The “company group” may be defined in the contract to include a different set of parties, or worse, not at all. This type of inconsistency can create a serious problem when a third party attempts to obtain indemnity under the agreement. If the language used in the contract is not consistent, courts are left to decide which companies are included within the scope of the contract, a situation that could be avoided by the use of consistent language.

Location, Location, Location

It is also important to look at your contract’s choice of law obligation. Nonsensical choice of law provision are often the result of being copied from prior agreements and usually do not have a sinister purpose. However, the court will apply the selected state law to evaluate the terms of the agreement. There is always the chance of an unintended consequence based upon the application of a state’s law that you are not familiar with.

On the other hand, some parties to an agreement will attempt to insert a choice of law provision for the sole purpose of taking advantage of the state law called for in the agreement. If you have an agreement that calls for the application of a state law that has no reasonable basis, such as an agreement between companies doing business and Louisiana and Texas calling for Alabama law to apply, it is a good idea to investigate the ramifications of such a choice of law.

These choice of law issues often arise in defense and indemnity obligations as some states prohibit indemnity for oil field related contracts. Each state treats indemnity disputes, and their related insurance obligations, differently. Thus, the selection of state law will often determine how the obligation is enforced. Thus, it is very important to look at the choice of law provision to make sure that any such selection is providing your company with enforceable obligations.

Many contracts also include arbitration provisions to evaluate disputes arising under the agreement. Although arbitration can be a faster way to resolve a dispute, it is not always cheaper as it requires the parties to shoulder the costs associated with litigating the matter, including paying the arbitrators. You are also bound by the arbitrators decision and do not have any venue available to appeal a decision that you believe is incorrect. Again, arbitration is not a bad option, but it is important that you are aware that you are agreeing to an alternate form of dispute resolution.

Forum selection clauses should also be analyzed to determine if the agreement is selecting a forum that is fair to both parties and complies with jurisdictional laws. For example, many contracts name the federal district court in a certain state as the court of jurisdiction to resolve disputes. However, if the claim does not include a basis for federal jurisdiction, a contractual statement requesting jurisdiction does not give the court the power to hear such a claim. It is also critical that the forum selected be analyzed to make sure that it provides a fair venue for adjudicating disputes. You may have issues receiving a fair trial if you are litigating in the backyard of a regionally powerful party.

Unfortunately, in bad times such as these, the details of your agreements can significantly affect your company’s bottom line. A little time and effort put into reviewing your current contracts to make sure that they clearly bind your company to the obligations you intended can save you and your company significant time and resources by avoiding contractual disputes. Furthermore, when a dispute arises, the issues can be worked out quickly if the contract provides a clear recitation of the parties’ rights and obligations.

The Author

Larry DeMarcay is a partner in the law firm of Fowler Rodriguez Valdes-Fauli. His areas of practice include Commercial Litigation, Admiralty, Personal Injury, Transportation, Real Estate, Construction and Corporate Law. Prior to attending law school, Mr. DeMarcay served on the Washington based legislative staff of Congressman Jimmy Hayes. On the web: www.frvf-law.com

(As published in the November 2016 edition of Marine News)

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