The point of a contract and contract drafting is to establish the duties and obligations. It also establishes the rights and responsibilities between the parties to the contract. Contracts drafted carefully and correctly minimize the risk of litigation. When someone breaks a promise, you want the ability to enforce the deal that was made. Proper contact drafting gives you the means to enforce your bargain and makes it easier to interpret the terms.
The case of Jacked Up, LLC v. The J.M. Smucker Company is a great example of why words matter in contract drafting. The opinion in this case, written by the Fifth Circuit U.S. Court of Appeals, highlights the importance of clear and precise contract drafting.
A big problem was imprecise language in the contract drafting of the Term and Termination Provisions – how long is each party obligated? and how does each party end its obligations?
Facts of the Case – Where the Contract Drafting Went Wrong
In September of 2011, Jacked Up and Sara Lee Corporation signed a licensing agreement with an effective date of October 1, 2011, in which Sara Lee would produce and sell energy drinks developed by Jacked Up. The owner of Jacked Up stated that while in the contract drafting phase and during negotiations, Sara Lee executives represented that the company “had no intent to sell the business and that it was not discussing any sale to any third party.” But on October 24, 2011, 23 days later, Sara Lee announced that it sold its beverage division to the J.M. Smucker Company, who then decided not to assume the agreement with Jacked Up. In November of 2011, Sara Lee formally terminated the contract by letter. Jacked Up then brought suit against Sara Lee alleging breach of contract.
Jacked Up also sued Smuckers. The district court granted summary judgment against Jacked Up who appealed.
Sara Lee argued that it terminated the contract in accordance with the provisions of the contract.
The contract stated, “Either party shall have the right to terminate this Agreement if it provides written notice to the other party no later than 60 days prior to any anniversary of the Effective Date.” But does this language mean (1) notice must be provided any time before the 60 day window at the end of the contract years, which gives a 10 month window to terminate; or (2) notice can only be given 60 days prior to the anniversary date otherwise the contract continues for another year.
Interpretation (1) is absurd according to the 5th Circuit since it permits termination for 10 months of the contract year but not during the last 60 days. The court stated interpretation (2) that gives a 60 day window for notice makes more sense, but doesn’t address when termination is effective.
The 5th Circuit pointed out that when notice is given is less important than when termination is effective once notice is given. The court then suggested improved language:
“Either party hereto may terminate the Agreement as of the anniversary date of the Agreement in any year by mailing written notice of its election to do so to the other party sixty (60) or more days before the effective date of such termination.”
This improved language highlights the ambiguity inherent in the original.
In proper appellate fashion, the 5th Circuit sent the case back to the lower court to resolve the ambiguity. The Circuit Court advised the lower court that it was proper to consider contemporaneous discussions to understand the parties’ intentions.
A key lesson here that wasn’t before the court is the proper creation of the deal terms. A carefully drafted and written contract in this transaction (besides correcting ambiguous termination language) must include proper Representation and Warranty and Lost Profit Damages Provisions.
Jacked Up’s attorney didn’t require Sara Lee’s senior management to confirm or deny the extent of any current or past negotiations to sell the company or its beverage division. If the attorneys invoked the requirement, it would have created an ongoing obligation to inform Jacked Up of future discussions.
The attorneys didn’t require assignment of Jacked Up’s contract to any future acquisition of the beverage division. It also didn’t require payment to Jacked Up in the event assignment isn’t made. This was a mistake in the contract drafting.
Finally, the attorneys didn’t include a lost profits remedy. Doing so would have salvaged the value of their deal in the event of a sale of the beverage division. This remedy will be discussed in a future blog post.
Here at Walker Law PC, we put in timely and thoughtful drafting of all contracts for your deal. We also help you when in a dispute involving a contract. Please contact the attorneys at Walker Law, P.C. Our team will work with you to maximize your opportunities and minimize your liabilities.