Costly Mistakes To Learn From

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How perfectly are we required to draft agreements? Ruminations doesn’t know. Do any readers know? If you do, please share your thoughts with the rest of us.

Do we abide by Voltaire’s admonition: “The best is the enemy of the good”? [Yes, we know, that’s not how you would have quoted him. But, it wasn’t original with him. He republished the Italian expression: “Il meglio è l’inimico del bene.” Feel free to translate that for yourself.]

[In fact, we just republished the core of the preceding paragraph from our June 7, 2015 blog posting.]

Or, are we obliged to live the life of the researcher in the almost certainly apocryphal story of his goal to write the definitive history of China. As the story is told, satisfied that he had “gotten it” after five years of daily travels throughout the entire country, he reach the port where his ship awaited him. As he began to board that ship, he overheard two passengers discussing an ancient war he had never heard of before. Disappointed that he failed to cover that part of China’s history, he turned around and began another five year stint throughout the countryside gathering “history” he had missed the first time. As readers may have already guessed, when he got back to that same port, and as he again walked down the departure ramp, he heard another story he had never heard before. This repeated every five years. He is buried in China along with his incomplete manuscript.

Which is your approach?

That debate, for which there is no “best” opinion, does not excuse sloppiness of thought or writing. Knowing that a measurable part of Ruminations’ audience likes to hear a story or two, every once in a while, we’ll oblige with two. Each tells of a mistake: one of sloppy drafting and the other of sloppy thinking. Both were avoidable with the exercise of care

When, in 2006, each Canadian dollar would be worth about 88 cents of United States money, a single misplaced comma in a 14 page contract cost one contracting party about 880 thousand of those United States dollars. We don’t reproduce the “guilty sentence” below to argue whether the court was correct or not, but only so that all of us will be sensitized to how important the second most commonly used punctuation mark can be (out of the 14 in English, or do you also include the guillemot?).

A cable company contracted to string its lines from pole to pole, each owned by a telephone company. The pole agreement, at least the English version, but maybe not the French version (which had equal status under Canadian law), contained an automatic renewal provision, similar in concept to many we’ve seen over the years. It was, however, written as follows:

This Agreement shall be effective from the date it is made and shall continue in force for a period of five (5) years from the date it is made, and thereafter for successive five (5) year terms, unless and until terminated by one year prior notice in writing by either party.

Like the title of Lynne Truss’s grammar book: Eats, Shoots & Leaves: The Zero Tolerance Approach to Punctuation, the cited contract text is capable of more than one meaning. Even the winning litigant, the phone company (i.e., the one with the poles), conceded that the cited text was capable of being read in three ways.

The phone company, however, exercised the one year termination right according to the reading it preferred, the one that would let it do so at any time, provided it was willing to send a notice and wait the year out. The cable company cried foul because it thought it had bargained for successive five year terms ending only at conclusion of each 5 year period if it or the phone company sent a termination notice before the end of the fourth year of what would have been the preceding 5 year term. Said more simply, it thought the contract was to renew for 5- year terms, automatically, unless a termination notice was sent before the start of the last year of the otherwise renewing term.

Now, honestly, don’t you agree with the cable company and disagree with the phone company? Come on, we all know what they meant, all but the Canadian telecommunications regulator who found (in 2006) that the second comma applied to both the 5-year term and to the renewal. In fact, the regulator wrote: “The meaning of the clause was clear and unambiguous.”

“Clear and unambiguous”? We think not. An easily avoidable controversy? We think so. Who read or proofread the contract? Was it someone who “knew” what that sentence meant before even reading it and thus just glossed over its words? We don’t know, but we do know that we’ve all done that ourselves. It’s just that it never mattered. Hopefully, that will be true in the future.

It isn’t only those who craft documents who can take too little time to think things through. That’s the basis for our second story. It has to do with a flawed business concept, this time by a French insurance company. The reason we offer up this story is because it fits our theme: “You’ve got to think these things through; you’ve got to ask, ‘How does this thing work?”

A predecessor of AXA, L’Abeille Vie, conjured up its “Fixed Price Arbitrage Life Insurance Contract.” Policyholders would invest in the contract and could increase their investments at any time, and the policyholder also could designate which funds, from a range of funds, would be where its money was held. She or he could reallocate the invested funds at any time.

Now, here was the flaw. In 1987, when this insurance product was designed, real time pricing was not available. So, the insurance company would announce the pricing for each fund every Friday and purchases made earlier in the week would be honored at the Friday pricing.

Not many years later, real time pricing became readily available and made the investment and reallocation decisions very profitable for policyholders, somewhat akin to being able to bet on yesterday’s horse races with today’s newspaper in hand. Max-Herve George, a policyholder, elected not to accept the offer from L’Abeille Vie to repurchase the insurance contract for 100 Francs.

Would any of us have read the contract provision and asked – “Does this make sense?” We don’t know, but hindsight is 20-20. Mr. George is probably too wealthy to proofread the agreements we write. So, the task still falls on us, the quality control gatekeepers.

 

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Comments

  1. Years ago, when negotiating lease for an American retailer in the U.K., the U.K. lawyers refrained from using any punctuation (other than periods to end s sentence) because they didn’t want to skew or influence the interpretation one way or the other. What nonsense! Punctuation, particularly, the comma are designed to make one’s intentions clear. Isn’t that the whole idea. I hope this practice has been discontinued. Consider this example from my 8th grade English class:

    Woman without her man would be a savage.

    Woman, without her, man would be a savage.

  2. Kathy Jones- Robertson says:

    No one should author a lease agreement unless they have prior experience interpreting the relationship between the lease clauses and the entities involved. Far too often landlord-tenant agreements are authored by people that only know the legalese. Companies must be able to operate and interpret these agreements without guessing the original intent of the parties. The parties of a lease are committing to a lengthy and expensive relationship that both parties should be able to understand and execute without send guessing what the document means. It’s not hard and it’s not an adversarial partnership. Far too often attorneys insert words that just sound good without understanding how many people will have to interpret their words for many years. These words can make or break a retail company.

    • Martin Sommer says:

      Those “send” guessing words are the downfall of many an agreement. Proof reading is so important.

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