“If the law supposes that,” said Mr. Bumble,… “the law is a ass—a idiot. If that’s the eye of the law, the law is a bachelor; and the worst I wish the law is that his eye may be opened by experience—by experience.” [Charles Dickens, Oliver Twist.] Ruminations doesn’t exactly know what all of that means, but it hasn’t been our experience. The law is not “a[n] ass, a[n] idiot.” None of us should think that we can draft documents (lease, mortgages or other agreements) and then decide later what they mean. We can’t expect courts to go along with what we wished the document said or what we want the document to say. They are pretty good, though not perfect, when it comes to “calling ‘em right.”
Today’s blog posting is informed by a July 17 Opinion from the North Carolina Court of Justice, Superior Court Division. To see it, click HERE.
Here’s a snippet of common boilerplate, most often found in releases, but commonly found elsewhere in other agreements, whether using these very words or ones very close to them:
… and its predecessors, successors, directors, officers, managers, members, and their respective heirs, executors and designees…
Yes, your list may be different. It may be longer. It may be shorter. But, you have such a list.
Who is really covered by all of those words?
Here’s the cut-down story behind the North Carolina opinion. The quoted text appeared in a release given in connection with litigation. As an oversimplification, there was a trade secret dispute involving five parties, four of which were on one side of the dispute. Of those four, three were sued and settled the case. They were the ones directly accused of appropriating trade secrets and things like that. The remaining party on the same side of the dispute as those three was not involved in the settled suit. Although it was accused of similar things arising out of the same set of facts, it was not a part of that settled case. For today, we’ll call it “Supplier.”
The three who were sued, a limited liability company and two individuals who were the only members of that company, obtained a release from the suing party. The release “protected” all of those other characters listed in the quoted text shown in the box above.
While that ended the litigation for the released company and its two members, it didn’t stop a later suit by the complaining party against the Supplier. Basically, though left out of the original suit, the Supplier was now being chased for what were substantially the same claims, only this time, based on what the Supplier was alleged to have done wrong.
The Supplier argued that it was protected by the release given to the other three. It admitted that it wasn’t a party to the release and wasn’t an intended beneficiary of the release. Instead, it claimed it was a successor to the two individuals because it later purchased part of their membership interest in the company. It also contended that it was a member of the released company when it bought those membership interests. Lastly, the Supplier claimed it was a designee of the released company when the released company transferred some intellectual property to it and named it as its designee in the transferring documents.
The Supplier wasn’t successful, and in the context of our explanation, we’ll tell readers why it wasn’t. Keep in mind, today’s posting isn’t about this particular case; it is about understanding the limits of what we write. The words in question may seem like boilerplate, but even boilerplate has to mean something. We all use these words like salt into a bowl of soup, but that doesn’t mean we shouldn’t understand what they mean. Have you ever stopped to think about these words? Honestly? Basically, words like these can only be understood in the context of how they are used. So, here is the scoop.
Ruminations needs to drag out some old saws, “old” in the sense of “wise,” and “saws” in the sense of “sayings,” We’ve written these wise sayings many times before, perhaps in different words, but with no less validity. Today we spell them out the way the North Carolina court did.
Releases are contractual in nature and their interpretation is governed by the same rules governing interpretation of contracts.
Since releases are contractual in nature, we apply the principles governing interpretation of contracts when construing a release.
When the language of the contract is clear and unambiguous, construction of the agreement is a matter of law for the court, and the court cannot look beyond the terms of the contract to determine the intentions of the parties.
It must be presumed the parties intended what the language used clearly expresses, and the contract must be construed to mean what on its face it purports to mean.
So, if it hasn’t yet become clear, the words, “successor,” “member,” and “designee” (and all of the other relationships in the list) aren’t interpreted in a vacuum, they are interpreted in the context of the entire document (in this case, a release). That shouldn’t come as a surprise if you’ve been following Ruminations for even a little while. Apparently, based on our reading of lots of court decisions, it comes as a surprise to a lot of people, attorneys included.
How does this play out with the Supplier’s claimed protections?
First, just who is a “successor,” a word we banter about without much thought? According to North Carolina courts (and probably courts everywhere), a “successor” is one “that succeeds or follows; one who takes the place that another has left, and sustains the like part or character; one who takes the part of another by succession.” That means that its specific meaning has to be determined in the context of where it appears. Because courts “consider the ‘nature of the part or character to be taken’ and the ‘natural meaning of the term’ as used in context of the parties’ agreement,” draftspersons need to do so as well.
In the context of the release agreement, the court held that the term “successor” “contemplate[d] either a successor legal entity, which stands in the shoes of a party typically through merger, acquisition, or other legal means of succession, or a successor to a person in the testamentary sense, which typically involves a successor standing in the shoes of a predecessor upon a predecessor’s incapacity or death.” When the Supplier bought the individual membership interests it did not become successors to the selling members, it only purchased a particular asset, the membership interests. It wasn’t contemplated that one could buy itself into the position where it would be personally protected by the release given to its seller.
Further, in the case of a release, what the two individuals got out of the release was protection against claims makeable against them personally. They didn’t get a release against claims that might be made against anyone else, such as against the Supplier.
Here’s the specific point Ruminations wants to get across. Yes, it can be argued that the Supplier was, in some way, a successor to the two individuals, but that isn’t enough. In the context of the release, as would be the case with any other agreement, context matters, and this wasn’t what the term “successor” was intended to mean.
Way back many words ago, we wrote that the Supplier argued that it was the kind of “member” that would benefit from the release. After all, when it bought those individual membership interests, it actually became a member of the released company. Further, those two individuals were the entity’s only members at the time, so why would the release have needed to have “members” in the list of those protected if the company’s only two members were already separately released? Under the Supplier’s theory, the term “members” “must necessarily [have meant] future members in order to give effect to all the terms of” the release. Pretty creative argument, huh? Yes, but not a successful one.
Again, the problem was that the release agreement constituted only “a present release of liability among the parties.” It was a release of claims, then existing, against the parties named in the release. Releases don’t bar claims that didn’t exist at the time the release is given. In the words of the soon to be famous Marina Abramovic, “If you’re a baker, making bread, you’re a baker. If you make the best bread in the world, you’re not an artist, but if you bake the bread in the gallery, you’re an artist. So the context makes the difference.”
As if that’s not a satisfying analysis, try this common sense conclusion by the court: To accept the term “member” was intended to release future members, “leads to the implausible and fully absurd construction that the parties intended that any non-party to the Release Agreement could purchase a release of its liability … on any claim whatsoever – by purchasing a membership interest … without … having bargained for or contemplated that party’s release from liability.” That’s one reason “common sense” and “context” start with the same letters.
So, is it possible that the Supplier was a protected “designee”? Well, by this time (and for reading this far, thank you), you know this was another “loser” for the Supplier. But, here’s where it got some degree of cute. The released company, now with the Supplier as one of its members, actually “designated” the Supplier as its “designee” under the release. Yes, it executed a “Designation of Release Agreement” in favor of its newest member, the Supplier. [“Too cute by half” with credit to George J. Whyte-Melville.]
In general, it is true that “designee” includes any “person who has been designated to perform some duty or carry out some specific role.” [Black’s Law Dictionary, 8th ed.] On the other hand, as has been said over and over and over, now by the North Carolina court: “An excerpt from a contract must be interpreted in context with the rest of the agreement.” In this case it meant that the word “designee” was not an island unto itself. Here, it was part of one of those legal “trilogies” – “heirs, executors and designees” As such, as the court ably pointed out, it meant someone who serves as a representative for a natural person after death, not just any old person assigned to perform any old task.
So, what do we learn today? Certainly, we learn (again, in yet another context) that context matters. We also learn (or are reminded) of the rest of today’s title: “A word is not a crystal, transparent and unchanged; it is the skin of a living thought and may vary greatly in color and content according to the circumstances and time in which it is used.” [Oliver Wendell Holmes, Jr. For context, click HERE.]