Chancellor Chandler refused to grant specific performance to URI under the specific performance provision of the agreement, section 9.10. Steven Davidoff continues his thorough coverage of the case with this report, which he’ll no doubt flesh out soon. I want to deal here with one aspect of the decision – the court's strategy in dealing with a sloppy contract.
I’ve previously noted that Harvard’s John Coates filed an expert report in this case. Here’s how Chancellor Chandler dealt with that report:
Remarkably, in his report, Professor Coates appears to excuse practices that can only be described as inartful drafting as “one of the ways that the parties [to buyout negotiations] commonly economize on time and costs.” Id. Professor Coates states that the parties, in contravention of basic principles of contract interpretation and drafting, use certain phrases (e.g., “subject to” or “notwithstanding”) so as to “avoid the need to attempt to synthesize every provision of every related agreement that is or may be partly or wholly in conflict with the provision in question.” Id. Not surprisingly, disputes often arise precisely because of provisions that are “partly or wholly in conflict” with each other.
In today's opinion, the Chancellor held that the interpretations of both URI and Cerberus were reasonable, and then resolved the dispute as follows:
The evidence presented at trial conveyed a deeply flawed negotiation in which both sides failed to clearly and consistently communicate their client’s positions. First, I find that the extrinsic evidence is not clear enough to conclude that there is a single, shared understanding with respect to the availability of specific performance under the Merger Agreement. Second, I employ the forthright negotiator principle to make two additional findings. With respect to URI, I find that even if the Company believed the Agreement preserved a right to specific performance, its attorney Eric Swedenburg categorically failed to communicate that understanding to the defendants during the latter part of the negotiations. Finally, with respect to RAM, although it could have easily avoided this entire dispute by striking section 9.10(b) from the Agreement, I find that its attorney did communicate to URI his understanding that the Agreement precluded any specific performance rights. Consequently, I conclude that URI has failed to meet its burden and determine that the Merger Agreement does not allow a specific performance remedy.
The interesting part of this (for me) is the Chancellor’s recognition that the problem in the case could easily have been avoided by striking the specific performance provision, since he concluded that both sides recognized that the termination fee was going to be the extent of Cerberus’s responsibility. The Chancellor observed:
[H]indsight affords the Court a perspective from which it is clear that this case could have been avoided: if Cerberus had simply deleted section 9.10(b), the contract would not be ambiguous, and URI would not have filed this suit. The law of contracts, however, does not require parties to choose optimally clear language; in fact, parties often riddle their agreements with a certain amount of ambiguity in order to reach a compromise.203 Although the language in this Merger Agreement remains ambiguous, the understanding of the parties does not.
203 See Richard A. Posner, The Law and Economics of Contract Interpretation, 83 TEX. L. REV. 1581, 1583 (2005) (“Deliberate ambiguity may be a necessary condition of making the contract; the parties may be unable to agree on certain points yet be content to take their chances on being able to resolve them, with or without judicial intervention, should the need arise.”).
The Chancellor seems to be saying something very similar to what Coates said – that sloppy drafting is excusable under the circumstances. But there’s an important difference. Coates’s excuse is that the parties (i.e., the lawyers) were just trying to cut the amount of time they spent on drafting.
Even if Coates is right that this is a standard practice, the court has good reason to reject this argument. That's because the court needs to give the parties an incentive to try to get this stuff right rather than dumping these lousy contracts onto courts and forcing them to sort it out. Divining the parties' intent is a difficult job that the court is likely to get wrong for the same reasons that the court is likely to err in second-guessing directors’ business judgment (hence the business judgment rule). These mistakes reflect badly on the court, not just on the drafters.
By contrast, Chandler chooses to emphasize a problem that’s harder for the parties to fix – the need for ambiguity in order to simplify negotiations. Moreover, Chandler’s resolution gives the parties an incentive to clearly communicate their intentions, which is another way to avoid the courts’ involvement in sticky disputes like this.
So here we have a lesson for litigators as well as for drafters: if you want to persuade a court, particularly a Delaware judge, consider not only what’s reasonable for the given case, but the signals the judge wants to send to future litigants.
Update: Here's Prof Davidoff's extensive analysis. See particularly paragraph 4 on the "sloppy drafting" issue discussed in the above post. Davidoff emphasizes the "forthright negotiator" ruling, which certainly is an important aspect of the case. But I still think that the Chancellor wanted to send a message that he would not accept at least some types of sloppiness as a principle of interpretation.
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