Grammar And Optical Illusions

Ruminations has never really figured out when to use “which” and when to use “that.” No matter how many times we read that one is used with dependent clauses and the other is used with independent clauses, the rule never sinks in. We don’t even remember which is used with which. To us, it seems like the optical illusion of a hollow mask where you see either a convex face or a concave face depending on who knows what. Small comfort to us that we think we are in good company in this failing. [To learn more about the hollow mask, click: HERE.]

So, does this have anything to do with legal matters? We think so based on a recent decision out of the Delaware Chancery Court, one pitting lawyers from a pair of top drawer Delaware and Washington DC firms against a similar pair of top draw firms from Delaware and Washington DC. And, like many other disputes we’ve read about in judicial decisions, we just wonder: “How do some of us keep a straight face when making some of these arguments?”

We’d like to avoid describing any of the facts before the court, but that’s just not going to be possible in this non-real property dispute. In order to get any sense of the piece of the agreement in dispute that we will be quoting (or, is it “which we will be quoting”?), we’ve got to retell a small part of the story.

Do you remember that, in the late 1990’s, major cigarette companies reach a settlement agreement with most states and the settlement agreement called for periodic payments based on the market share enjoyed by each of those companies. There were 46 states in that settlement. The other four states had earlier reached their own, individual settlements with those same cigarette companies. While the larger settlement forbade any of the companies from selling their assets unless the buyer affirmatively agreed to assume the continuing payment obligation, the four stand-alone agreements were not as comprehensive in that regard.

In the Delaware case, one of those settling tobacco companies sold its brands and the purchase agreement was negotiated with a provision addressing post-sale payments to those four states. Transition arrangements were made between the buyer and three of the “independent” states, but no deal was made with the remaining state. That left the seller on the hook for payments to that state presumably based on sales made by its buyer.

That, we hope, is enough background to understand the following provision of the purchase and sale agreement:

[Buyer], …, shall use its reasonable best efforts to reach agreements with each of the [Four Previously Settled States], by which [buyer] will assume, as of the Closing, the obligations of [seller] under the [settlement agreement] with each such State, with respect to the [acquired cigarette brands], on the same basis as the [seller] prior to the Closing.

Setting aside the scope of a “reasonable best efforts” obligation, for how long do you think that obligation remains operative?

Well, we don’t know what the buyer thought, but we do know what it argued. The buyer argued that it only needed to use its reasonable best efforts until the closing took place. Basically, it asked the court to interpret the cited provision as reading that it was only obligated to “use its reasonable best efforts … prior to closing.”

It’s no surprise that the seller thought “prior to closing” described the basis upon which the seller had been making its periodic settlement payments before the closing.

For the benefit of the reader or readers (we don’t know whether the singular or plural applies) who have taken the buyer’s side, here’s how the court rejected the buyer’s suggested interpretation of the last four words: “prior to the Closing.”

Before getting to the “dependent / independent” clause explanation, we need to begin with the way this particular Delaware court explained the rules it uses when interpreting contracts. It doesn’t differ, but for the specific words used, from similar lists we’ve reproduced over the years. Nonetheless, having them proximate to reading about how this court applied them to those “four words” should aid in understanding the court’s reasoning. So, here they are:

[C]ourts are required to give unambiguous contract terms their plain meaning, without regard to extrinsic evidence.

Delaware law also “adheres to the objective theory of contracts, i.e., a contract’s construction should be that which would be understood by an objective, reasonable third party.”

When interpreting a contract, courts “will give priority to the parties’ intentions as reflected in the four corners of the agreement,” construing the agreement as a whole and giving effect to all of its provisions.

In interpreting contract language, “[c]lear and unambiguous language . . . should be given its ordinary and usual meaning.”

Courts also may look to the grammatical construction of a contractual provision to discern its meaning.

Ah ha! That last one is “new” in that it explains one of the sub-rules about finding clear and unambiguous language, and that leads right into that confusing “dependent-independent” thing.

This would be a good time to take another look at the cited text above, because that’s the “sentence” the court writes about in the following explanation:

This sentence consists of an independent clause and a dependent clause. The independent clause, which expresses a complete thought, appears at the beginning of the sentence: “[Buyer], …, shall use its reasonable best efforts to reach agreements with each of the [Four Previously Settled States] . . .” The dependent clause, which does not express a complete thought, comprises the latter part of the sentence: “. . . by which [buyer] will assume, as of the Closing, the obligations of [seller] under the [settlement agreement] with each such State, with respect to the [acquired cigarette brands], on the same basis as the [seller] prior to the Closing.” The first, independent clause requires [buyer] to “use its reasonable best efforts to reach agreements with each of the Four Previously Settled States.”

The second, dependent clause describes the nature of the “agreements” to be reached. Specifically, under the [] settlement agreements, [buyer] will assume, as of the Closing, the same obligations that the [seller] had prior to the Closing.

In other words, [this provision] provides that, when [the buyer] assumes the obligations of the [seller], it will step into the shoes that [the seller] occupied prior to the Closing. Thus, the phrase “prior to the Closing” is a time reference that adds precision to the nature of the obligations that [the buyer] agreed to use its reasonable best efforts to assume with each of the Four Previously Settled States.

If that’s not “strong enough,” try this “canon of interpretation out for size. [This is the first time Ruminations has had the opportunity to present it.] The court’s interpretation is consistent with the “nearest-reasonable-referent canon,” which provides that a modifying phrase “normally applies only to the nearest reasonable referent.” Here, the nearest reasonable referent to “prior to the Closing” is the immediately preceding language “on the same basis as the Settling Defendants,” not the phrase “shall use its reasonable best efforts” that appears fifty words earlier in a separate clause. [At least, that’s the way the court explained the canon.]

The court had lots of other ways to reach the same conclusion and, if any reader wants to bathe herself or himself in the courts own ruminations, feel free to do by reading the actual decision, something that (which?) can be done by clicking: HERE.

For those who choose not to read the decision, we’ll highlight one other thought, an important one, but not one that demands tons of words. The buyer argued that its offered interpretation, i.e., that its best efforts obligation ended with the closing, set a limit on its duration whereas, requiring it to use best efforts to cut a deal with the independently settling states beyond the closing made it an endless one. The court rejected that argument by saying something we all take for granted. Parties agreeing to use their best efforts (or any level of efforts), when no time limit is specified, only have to pursue those efforts for a reasonable time. Futility need not be absolute; it only has to be almost inevitable.

Do we have a takeaway? Yes, but not a big or startling one. Actually two. First, grammar matters. Second, long sentences aren’t better than short sentences. Au contraire! If we have a sentence whose meaning seems to change, back and forth like that hollow mask, with every reading, there’s something wrong with it that adding more complexity will not cure.

The flow of our thoughts today didn’t allow us to work in the following footnote used by the court in its decision. So, we decided to just tack it near the end of today’s blog posting:

“An independent clause is one that contains a subject and a predicate and makes sense standing alone, that is, it expresses a complete thought.” Hamilton v. Werner Co., 268 F. Supp. 2d 1085, 1088 (S.D. Iowa 2003) (citing Kenneth G. Wilson, The Columbia Guide to Standard American English 243 (1993)). “A dependent clause is a subject-verb construction that could not stand alone as a sentence.” Bryan A. Garner, The Redbook: A Manual on Legal Style § 1.6(d) (2d. ed. 2006).

The reason we wrote “near the end” was to allow us to add our own “footnote” (of a different sort) to our blog posting of three weeks ago, the one about enforcing a continuous operating covenant against a non-anchor retailer. Here it is: the parties settled. The retailer paid money and then closed its stores. That’s good news for the settling parties, but bad news for all of us looking forward to a court’s decision.