Notwithstanding Anything To The Contrary Contained Herein

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When a carpenter or other craftsperson needs to make “that final adjustment,” she or he reaches into the toolbox and out may come a shim. We’ve all seen shims used, but not everyone knows they have a name. Those wedges, washers, and thin strips of material used to align parts or make them fit are called “shims.” We who draft agreements of every type also use shims. Reluctant as Ruminations is to use the word “all” and mean “all,” today’s use seems accurate. Who among us hasn’t slipped in at least one “notwithstanding anything to the contrary” into every agreement longer than several pages? That’s using a shim because it makes the parts of the agreement “fit” together.

Basically, this shim is used in two circumstances. The first is where, after reading what we’ve written, we realize that our crafted provision isn’t exactly right. We realize that there are one or more circumstances that don’t fit what we’ve written. We realize that what we’ve written needs adjustment. We’ve got to carve out some exceptions. So, instead of rewriting the provisions to make them say what they should say, we append a list of those things we realize don’t fit – but not of those things we didn’t realize don’t fit.

The second circumstance is when, after the agreement is all but finished, an additional mini-deal is reached, usually something that gets the dueling parties over a hump. The mini-deal changes the outcome of one or more provisions already in the agreement, but only for some special situations. So, we go straight to the provision that was at issue and we add our shim (i.e., a “notwithstanding anything to the contrary herein”) and pat ourselves on the back. Sometimes we even realize that there is something else in the nearly finished agreement that needs to be adjusted to accommodate this last minute “adjustment.” Rarely, however, do we re-read the entire agreement to see what else might be inadvertently “adjusted” by our shim or, even more rarely, what we can rewrite so that no shim will be needed.

Earlier this month, the United States Court of Appeals, Seventh Circuit issued a decision interpreting one agreement’s use of this shim. [Readers can see that decision by clicking: HERE.] Though the lease in front of the court dealt with mining rights and the body of mineral lease law stands a little out of the mainstream of leasing law, the court’s analysis may be instructive. Here is an abbreviated version of the disputed lease provision:

Lessee shall pay Lessor a royalty of … for the first 65,000 ton of sand, stone and rock products mined from the Property …. Thereafter Lessee shall pay Lessor a royalty of … for sand, stone and rock products mined from the Property (all such royalties are hereinafter referred to as “Production Royalties”) for the sand, stone and rock products mined from the Property weekly (measured from the Effective Date). … Notwithstanding anything to the contrary contained herein, Lessee shall pay to Lessor an annual minimum Production Royalty of … (the “Minimum Production Royalty”). In the event that, as of the month containing the anniversary date of the Effective Date, the monthly Production Royalties (as such may be prorated) fail to meet or exceed the Minimum Production Royalty, Lessee shall pay to Lessor the difference between the actual amount paid to Lessor during that year and the Minimum Production Royalty for such year. This catch-up payment will be made with the next monthly payment due hereunder. [The court added the italicization; we added the underlining.]

The lessee had no obligation to actually mine the property and never even began to mine any sand, stone or rock products at the property. So, it argued that no Production Royalty payments were due. The lower court agreed as did this appellate court. In doing so, each court rejected the lessor’s contention that it was entitled to the Minimum Production Royalty beginning with the effective date.

It’s instructive how those courts got “there.” First:

the placement of the sentence, in the middle of [the paragraph] after the price per ton calculations that are due for products mined from the property, indicates that the language refers to those payment calculations, and the “anything . . . herein” language refers to “anything within this paragraph” not “anything within this contract.” If the provision was meant to provide a minimum payment due each year on the anniversary of the effective date, one would expect that to be set forth separately.

Note the key reasoning: “one would expect that to be set forth separately.”

That’s not all the courts seized upon. Moreover:

the language in the sentence provides for “an annual minimum Production Royalty of […]” not “an annual minimum payment” or even “an annual minimum royalty payment.” … It is characterized as a “Production Royalty,” which is defined in that paragraph as a royalty due for the tons of sand, stone and rock products mined from the property. By its definition, then, it is inapplicable before the mining commences. And the word “minimum” is not capitalized when used in defining the payment (as opposed to in the parenthetical when “Minimum Production Royalty” is termed as the shorthand reference). Here, again, is the sentence as a whole: “Notwithstanding anything to the contrary contained herein, Lessee shall pay to Lessor an annual minimum Production Royalty of […] (the “Minimum Production Royalty”).” The uncapitalized word “minimum” therefore is an adjective to the term “Production Royalty” in the sentence, thus setting a minimum, or floor, for Production Royalties in the paragraph. That interpretation is furthered by the sentence that follows which makes clear that when the Production Royalties fail to meet or exceed the Minimum Production Royalty as of the anniversary of the Effective Date, then the difference between the two must be paid — language which is consistent with the payment representing a floor for Production Royalties. It is, as the last sentence explicitly states, a “catch-up payment” when the Production Royalties do not meet expectations.

So, the “shim” didn’t fit well. It was made of the wrong material. The document craftsperson should have reached for the one that used the capitalized version of the word, “minimum.” Further, the shim was inserted to “fix” what preceded its placement in the paragraph without concern for how it “fit” the words in the rest of the paragraph.

Long-time fans of Ruminations know how often we point out the need to read an entire agreement in “context.” That’s especially important if you intend to “cancel” everything to the contrary that the agreement might contain. Context always matters, and there is no clearer example than when we write “everything to the contrary herein.” That’s the basis for a third reason the two courts ruled in favor of the lessee. In the words of the appellate court:

The structure of the rest of the lease furthers this reading of the language. First, in the lease as a whole, separate payments are set forth in separate paragraphs, with the Initial Royalty Credit, Commencement Royalty Credit, and Production Royalties set forth in paragraphs 3, 5, and 6, respectively … It would be nonsensical to place a minimum payment provision of […]—which exceeds both the Initial Royalty Credit and Commencement Royalty Credit in amount and applies each year rather than as a one-time credit — in the middle of a paragraph on Production Royalties when the other forms of payments are set forth in independent paragraphs.

And it would render those credits relatively meaningless. The Initial Royalty Credit and Commencement Royalty Credit are “used to offset any future amounts and royalties due Lessor from Lessee.” … If a minimum royalty payment was paid annually, that offset would occur within the year automatically, making the payments of minimal significance. Rather than a credit to the Lessor until mining begins, the credits would merely be a short-term advance on the minimum payment that would be paid within that year.

Yes, it would be helpful to have the entire lease in front of us in order to fully comprehend what the court is saying, but the underlying message is clear. You can’t just write “Notwithstanding anything to the contrary” if you haven’t searched the entire agreement to find what might be “to the contrary.” If the parties, especially the lessor, had done so, the court would not have been able to write:

Finally, paragraph 9 of the lease provides that: “[t]he royalties payable under paragraph 6 and paragraph 7 shall be payable based on the removal from (or transportation across) the Property.” That sentence creates no exception for the Minimum Royalty Payment, and reinforces the reading of paragraph 6 as providing for a minimum payment only once product is mined from the property.

Ruminations thinks that the court got this just right. Notwithstanding anything to the contrary, we think the appellate court missed the mark when it wrote that the lower court’s “determination [was] consistent with the clear language and structure of the lease.” As we see it, the lease’s language and structure was far from clear. Had it been “clear,” Ruminations would have had to find some other way to warn against using shims to make the provisions in our agreements fit together.

We don’t know if the parties to this mining lease intended that a minimum annual amount be paid even if no mining ever started. Assuming that this was actually the agreement, weren’t there a number of perfectly fine ways to say so directly and not by use of a “carve-out” shim? Of course there were. That’s just as true when it comes to what we ALL write. Ruminations has become convinced that there is no need to ever use this “notwithstanding” shim even if, sometimes, it makes for a perfect fit. At least until we get complacent again, we will be rethinking every use of this shim and be looking for ways to avoid the need to do so in the first place. Yes, it will take time up front, but it should save time and money when the “dispute” arises. Think about it – what did it cost the parties to this $400,000 dispute to get a decision from the United States Court of Appeals?

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