According to Law360.com,

American Home’s appeal centered on a controversy over UMG’s “deductible reimbursement obligation” set out in the parties’ payment agreements. The Ninth Circuit rejected that appeal in May, affirming that the agreements’ mandatory arbitration provision did not extent to claims UMG had levelled against American Home since the dispute did not “arise out of” the agreements.

The Law.360.com story quotes Eric Brunstad of Dechert, who represents American Home, as saying, “The articular phrase ‘arising out of’ is commonly found in millions of arbitration agreements. It’s really important that parties understand what this phrase means, because they need to know what they are getting into.”

I have a different take on this. Here’s what I would have said: It’s really important that parties understand that if they want to be able to arbitrate anything other than contract claims arising directly out of the contract containing the arbitration provision, they should make that clear in the arbitration provision. Relying arising out of to be elastic in scope is reckless. And no, tacking and relating to onto arising out of is nowhere near adequate!

You can find the definitive treatment of this issue in, ahem, my article “The AAA Standard Arbitration Clause: Room for Improvement.” Go here for a PDF copy.

Of course, this recommendation comes too late for American Home. That’s why I’m a drafter not a litigator—I prefer avoiding messes rather than having to clean them up.

When the writer needs to tell a story, explain, or convince, one block of text picks up where the previous one left off. The reader is taken on a trip—jumping on board with the first sentence, hopping off at the end.

By contrast, a contract is made up of a set of rules. Together they make for a transaction, but no narrative thread connects them.

That’s why contract language has little use for the words used in other kinds of prose to knit blocks of prose together. Also. Therefore. Because.

Another such word is further, at least when it’s used to introduce a provision. I encountered this use the other day in a student assignment, in the phrase further represents. That phrase is illustrative of this use of further, so I took a closer look at it.

The phrase further represents is used when someone makes a representation, then makes another:

Each Lender represents that it has made and shall continue to make its own independent investigation of the creditworthiness, financial condition and affairs of the Companies in connection with the extension of credit hereunder, and agrees that Agent has no duty or responsibility, either initially or on a continuing basis, to provide any Lender with any credit or other information with respect thereto (other than such notices as may be expressly required to be given by Agent to the Lenders hereunder), whether coming into its possession before the first Credit Event hereunder or at any time or times thereafter. Each Lender further represents that it has reviewed each of the Loan Documents.

But it’s also used after something other than a representation. In such cases it means, in effect, In addition to the stuff you just read, we’re now going to make a representation!:

As an inducement to Agent and Required Lenders to execute, and in consideration of Agent’s and Required Lenders’ execution of, this Amendment, the undersigned hereby consent to this Amendment and agree that this Amendment shall in no way release, diminish, impair, reduce or otherwise adversely affect the obligations and liabilities of the undersigned under the Guaranty Agreement executed by the undersigned in connection with the Credit Agreement, or under any Loan Documents, agreements, documents or instruments executed by the undersigned to create liens, security interests or charges to secure any of the Obligation, all of which are in full force and effect. The undersigned further represent and warrant to Agent and Lenders that (a) the representations and warranties in each Loan Document to which it is a party are true and correct in all material respects on and as of the date of this Amendment as though made on the date of this Amendment (except to the extent that such representations and warranties speak to a specific date), (b) the undersigned is in full compliance with all covenants and agreements contained in each Loan Document to which it is a party, and (c) no Default or Event of Default has occurred and is continuing.

I recommend that you not use further represents. Each representation should be able to stand on its own, so using further to allude what has gone before accomplishes nothing. In fact, it’s a distraction.

When one representation follows another, use instead one of the following structures:

• Acme represents X. Acme represents Y.
• Acme represents (1) X and (2) Y.

And when a representation stands on its own, simply restrain any urge to tack a further in front.

Here’s an example (emphasis added):

Distributor shall aggressively distribute and encourage the utilization of merchandising aids and promotional materials provided at no charge by Abbott Nutrition, in its discretion, in all Outlets throughout the Territory.

What the $@/^% kind of standard for obligations is the aggressively standard? Is it the same as reasonable efforts? (If you think it’s a more onerous standard than reasonable efforts, you encounter a familiar problem—more than reasonable = unreasonable.)

I’d run a mile from aggressively. Instead, I’d try to limit the vagueness by articulating some flat obligations addressing components of the broader performance: what funds are to be expended, applications filed, meetings held, what have you. The balance I’d cover using reasonable efforts.

But it can also be surplussage, in that if something is stated as an obligation, then necessarily it’s mandatory. That’s why I think mandatory can be omitted from the following examples:

The parties agree that all claims, disputes or controversies arising out of or relating to this Agreement that do not involve an action brought by a third party against either party shall be resolved and determined exclusively under mandatory mediation and arbitration procedures [read in accordance with this section 13].

In addition to the Scheduled Payments set forth in this Note, Borrowers will make each mandatory prepayment [read prepayment] of the principal of this Note required by the Credit Agreement, including, without limitation, the mandatory prepayments [read prepayments] of the principal of this Note in the form of Excess Cash Flow Payments in the manner and to the extent set forth in the Credit Agreement.

So you might want to think for a moment before using mandatory.

I was wondering if you could clarify a point for me and my boss. It has been my understanding that when defining terms in an agreement, it is standard to use the word “together” when referring to two entities only, and to use the word “collectively” when referring to three or more entities. When I recently discussed this point with my boss and our other associate counsel, they had not heard of this approach, and they also pointed out that the common definition of “together” was not limited to only two entities. I did some research, but wasn’t able to find any clarification on this point. Am I wrong?

Here’s my answer:

No, I’m not aware of the distinction you offer. It reminds me of that red herring, the ostensible distinction between between and among (see MSCD 1.34). Both distinctions are at odds with standard English and don’t accomplish anything.

To distinguish collectively and together, let’s look at how they’re used.

Regarding collectively, here’s what MSCD 5.46 says:

If an integrated definition encompasses an entire string of nouns, you can help made that clear by adding the word collectively to the defined-term parenthetical, just before the defined term and after any language clarifying the scope of the definition (see 5.44): … relating to the confidential affairs of the Company, the Parent, and their respective subsidiaries and affiliates (collectively, the “Entities”).

If there’s any risk of the reader’s being confused about how far upstream a given collectively reaches, you’d want to clear up that uncertainty by “clarifying the scope” of the definition—adding a suitable introductory phrase to the defined-term parenthetical, such as each such entity.

As for together, here’s what MSCD 5.47 says:

You can supplement an integrated definition and thereby change the meaning conveyed by the defined term by adding appropriate language—generally using together with—to the defined-term parenthetical, just before the defined term and just after any language clarifying the scope of the definition (see 5.44) and the word collectively (see 5.46), if used: … the Companies’ officers, directors, financial advisors, accountants, attorneys, and other Affiliates (collectively, together with the Company, the “Company Group”). This manual refers to this practice as “boosting” a defined term.

If you were to use together instead of collectively, the reader would presumably understand what you were getting at, but that use would be inconsistent with standard practice. In fifteen minutes of rooting around in the “material contracts” filed on the SEC’s EDGAR system, I found only one instance of together used instead of collectively in a defined-term parenthetical:

THIS ASSIGNMENT OF ASSETS AGREEMENT (this “Agreement”) is entered into as of this 26 day of May, 2010, by and between Axius, Inc. (“Assignor”) and Geraldine Gugol and Leilane E. Macatangay (together “Assignee”).

I saw from the recitals that this contract is in effect a settlement agreement. Because they’re often drafted by litigators, settlement agreements are a good source of unorthodox usages.

Incidentally, I wouldn’t fix this example simply by using collectively rather than together. It’s of course clear from the defined terms that “Assignee” doesn’t include “Assignor”, but I’d want to make that clear as a matter of structure. I might say instead, “Gugol and Macatangay collectively, “Assignee”.

In MSCD 12.99 I note that here- and there- words such as herein and thereunder are dreary legalese. That’s why I use in this agreement instead of herein. But sometimes, a there- word allows you to avoid long-winded repetition.

Looking more closely at therefor suggests another wrinkle to there- words. In most cases, omitting therefor wouldn’t confuse the reasonable reader, as it’s clear from the context what’s being referred to. Consider the following crappy language, which I culled from EDGAR while wearing a HazMat suit:

A Participant required to sell any Depositary Receipts pursuant to this Section 6(b), shall be entitled to receive in exchange [therefor] the purchase price per Depositary Receipt received by the Majority Institutional Investors with respect to their Depositary Receipts in such transaction ….

“Equipment”: Includes, without limitation, “equipment” as defined in the UCC, and also all furniture, store fixtures, motor vehicles, rolling stock, machinery, office equipment, plant equipment, tools, dies, molds, and other goods, property, and assets which are used and/or were purchased for use in the operation or furtherance of any Guarantor’s business, and any and all accessions or additions thereto, and substitutions [therefor].

Each Agreement shall include the terms of any right of the Company to restrict or reacquire the Shares subject to the Stock Grant, including the time or attainment of Performance Goals upon which such rights shall accrue and the purchase price [therefor], if any.

An option (or any part or installment thereof), to the extent then exercisable, shall be exercised by giving written notice to the Company, at the address and in the form established by the Committee and accompanied by payment in full of the aggregate exercise price [therefor] (a) in cash or by certified check or (b) in such other form as the Committee may approve.

A merger, consolidation, or sale by the Company of all or substantially all of its assets, in which the Company is not the surviving corporation, except as set forth below or in the Agreement, the options granted hereunder as of the date of such event shall continue to be outstanding and the optionee shall be entitled to receive in exchange [therefor] an option in the surviving corporation for the same number of shares of stock of the surviving corporation as he would have been entitled to receive ….

I think it’s safe to omit therefor from each of the above examples. But in the interest of being explicit, I might be inclined to keep it in, or to use instead a full prepositional phrase. I haven’t yet made up my mind. What do you think?

I noticed that a recent newsletter issued by the Canadian law firm Fraser Milner Casgrain contains an article on that favorite topic, the meaning of various efforts standards. (Click here for a PDF copy.) The article is by two construction lawyers based in FMC’s Calgary office, Jane Sidnell and Christopher Knight. (I had an agreeable dinner with Jane and others last year while in Calgary. Yo, Jane!)

Because the FMC article offers an analysis that is inconsistent with my writings and what I tell participants in my Canadian seminars, I thought I should reiterate my views on the subject.

The FMC article considers Canadian caselaw construing best efforts, reasonable efforts, and commercially reasonable efforts. The following is from the summary:

Performing an obligation with one’s “best efforts” is likely the most onerous standard of the three discussed in this article. If a party promises “best efforts”, everything that can be done should be done, but not to the point of that party bankrupting itself. Although the “best efforts” qualifier must be set against the context and purpose of the contract in which it is found, the phrase “no stone unturned” exemplifies the “best efforts” standard.

By contrast, “reasonable efforts” implies that what can be done should be done, in the context and purpose of the contract, but without requiring a party to leave “no stone unturned”. “Reasonable efforts” is a less onerous standard than “best efforts”.

In saying that a best efforts obligation is more onerous than a reasonable efforts obligation, the FMC article cites an opinion of the British Columbia Supreme Court, Atmospheric Diving Systems Inc. v. International Hard Suits Inc. (1994), 89 B.C.L.R. (2d) 356 (S.C.). I wrote about that case in this March 2009 blog post.

Atmospheric Diving Systems is best know for the proposition that complying with a best efforts obligation means “leaving no stone unturned.” Canadian lawyers dutifully trot out that phrase, but I’m not sure how it helps—it just replaces one vague standard with another equally vague standard.

But I have a bigger problem with Atmospheric Diving Systems. Here are the first two points of its seven-point digest of the relevant caselaw:

1. “Best efforts” imposes a higher obligation than a “reasonable effort”.

2. “Best efforts” means taking, in good faith, all reasonable steps to achieve the objective, carrying the process to its logical conclusion and leaving no stone unturned.

So best efforts imposes a higher obligation than does reasonable efforts. But wait! Best efforts represents … a good-faith standard! No, wait! It’s a … reasonableness standard! So a best efforts obligation represents a more exacting standard than does reasonable efforts, but to comply with that obligation, all that’s required is that you behave reasonably!

So the logic of Atmospheric Diving Systems collapses in upon itself. It brings to mind demolition footage, with grand structures slowly imploding. I don’t care how many courts approvingly cite the case. For my purposes, game over, case closed.

And this comes as no surprise. As I explain in MSCD and in my March 2009 blog post, as a matter of semantics and contract logic, it’s untenable to think that best efforts represents a more exacting standard than does reasonable efforts. That’s why U.S. courts have declined to buy into that notion, even though it seems most practitioners have. And having courts attempt to square the circle by arguing otherwise simply aggravates the confusion. (I have in mind in particular the aggressively wrongheaded English caselaw; see this February 2008 blog post and this March 2007 blog post.)

The FMC newsletter goes on to discuss caselaw regarding reasonable efforts, but that’s a subject I have little interest in. Reasonable means what’s reasonable in the circumstances. Determining whether a given action was reasonable depends so much on the circumstances that it doesn’t do the contract drafter much good to parse the caselaw. (I’ll note in passing that the FMC article quotes a court as saying that reasonable efforts “does not mean ‘every effort’”—a very questionable proposition.) 

As regards commercially reasonable efforts, the FMC article says the following:

Finally, “commercially reasonable efforts” is a standard that has received little judicial consideration and ought to be treated with caution. One possible interpretation is that the market dictates the objective measure of value so as to determine how far the obligation must be taken. However, “commercially reasonable efforts” is ambiguous and ought to be expressly defined if used in contracts.

I suggest that commercially adds nothing, because the circumstances of a business contract are necessary commercial. But there’s always a chance that a court could stoop to magic-wordery and dream up some alternative meaning. Because it’s at best pointless and at worst mischievous, you should drop commercially.

So any attempt to create a coherent distinction between various efforts standards is doomed to failure. I thought it telling that the FMC article says that best efforts is “likely” the most onerous standard. If you take that at face value, which might be unfair, it’s saying that the odds of having someone accept that best efforts represents a more demanding standard than reasonable efforts is greater than 50%. The idea of rolling the dice like that makes me hyperventilate. Contract language is akin to software code, so I don’t want to deal in probabilities. Instead, I’ll employ a given usage only if I’m sure of the meaning that a rational native-English-speaking reader would attribute to it.

That’s why I could never recommend that you use best efforts to make an obligation more demanding than one subject to a reasonable efforts standard, and why I instead recommend that you stick with reasonable efforts.

Postscript: Allow me to repeat something I said in this September 2009 blog post:

The only way to improve any body of knowledge is through the marketplace of ideas. Two commentators differ on a given issue? Have them thrash it out—may the best idea win! It does no good to tiptoe around a competing idea for fear of offending anyone. That’s the spirit behind this and a number of other recent posts. I do my best to be respectful; if I fall short, let me know.

In this February 2010 blog post I said that the word closing is ambiguous:

Does closing mean the moment a transaction is consummated? Or does it refer to the process leading up to that moment, with contracts being finalized and signed, opinions being issued, and funds being sent whizzing through the banking system? I suggest that it means both—in other words, closing is an example of lexical ambiguity.

This didn’t generate a lot of excitement among readers, but I’ve been thinking it over, and I decided that for purposes of my forthcoming booklet “The Structure of M&A Contracts” I had to propose how to resolve the ambiguity.

So of course, I turned to EDGAR. Below is an extract of a merger agreement recently filed on EDGAR. It’s entirely standard, and for that reason I didn’t see any need to redact identifying information. (Hi, Oppenheimer Wolff & Donnelly!)

SECTION 1.02 Closing. The closing of the Merger (the “Closing”) will take place at 10:00 a.m., Minneapolis, Minnesota time, on the date (the “Closing Date”) that is the second Business Day after the satisfaction or waiver (subject to applicable Law) of the conditions set forth in Article VI (excluding conditions that, by their terms, are to be satisfied on the Closing Date but subject to the satisfaction or waiver of such conditions), unless another time or date is agreed to in writing by the parties hereto. The Closing shall be held at the offices of Oppenheimer Wolff & Donnelly LLP, Plaza VII, Suite 3300, 45 South Seventh Street, Minneapolis, Minnesota 55402, unless another place is agreed to in writing by the parties hereto.

SECTION 1.03 Effective Time. Subject to the provisions of this Agreement, as soon as practicable on the Closing Date, the parties shall prepare and execute a certificate of merger (the “Certificate of Merger“) in accordance with the relevant provisions of the DGCL, and the Surviving Corporation shall file the same with the Secretary of State of the State of Delaware. The Merger shall become effective upon the filing of the Certificate of Merger with the Secretary of State of the State of Delaware or at such subsequent time or date as Parent and the Company shall agree and specify in the Certificate of Merger (the “Effective Time“).

Here’s my version:

1.2 Certificate of Merger. On the second Business Day after satisfaction or waiver of the conditions stated in article 6, excluding conditions that, by their terms, are to be satisfied immediately before the Closing but subject to satisfaction or waiver of those conditions (that date, the “Filing Date“), the parties shall cause to be filed with the secretary of state of the state of Delaware a certificate of merger that reflects the Merger and complies with the DGCL (the “Certificate of Merger“).

1.3 Closing. The Merger will become effective when the Certificate of Merger is filed with the secretary of state of the state of Delaware, unless by agreement of the parties a later date for effectiveness of the Merger is specified in the Certificate of Merger, in which case the Merger will become effective on that date (the moment the Merger becomes effective, the “Closing“).

1.4 Meeting on Filing Date. The parties shall meet at 10:00 a.m., Minneapolis time, on the Filing Date at the offices of Oppenheimer Wolff & Donnelly LLP, Plaza VII, Suite 3300, 45 South Seventh Street, Minneapolis, Minnesota, to handle any outstanding matters relating to the Closing.

I made many minor changes so that this language would comply with MSCD, but the principal fix is that I gave the defined term Closing a lexical definition, so as to resolve the ambiguity. Usually, I’d have it mean consummation of the transaction. But in the case of a merger, you have to take into account that the certificate of merger might state that the merger is to be effective at some later time. Making that change required significant restructuring.

Closing could mean instead the time spent hanging around a conference room dealing with closing formalities. But that’s not a helpful concept. And because the representations lead-in should refer to the representations as being made at signing and at closing, and because the bringdown condition refers to accuracy of representations at closing, it’s best to consider the closing a moment in time rather than a period of several hours with an indefinite beginning and end.

I eliminated the defined term Closing Date. The day in question might not actually be the date the merger closes, either because for whatever reason the parties ended up not filing the certificate of merger on that date or because the certificate of merger provides for later effectiveness, so using the term Closing Date for that day could be misleading. By inventing a new defined term I’m doubtless provoking the gods of inertia, but what the heck.

I’m finding M&A contracts to be chock full of standard language that is ripe for scrutiny and, often enough, a significant overhaul. When creating a new M&A template, you can go to the knacker’s yard, get some old nags, throw them in the meat grinder, and see what comes out. Or you can build it from the ground up, subjecting every usage, every piece of logic, to withering scrutiny.

By the way, my version is, as usual, significantly shorter—187 words as opposed to the 230 words of the original.

I expect to tinker with my language, and you’ll probably be able to offer improvements. Heck, I’m open to having missed some crucial issue.

“Excluded Property” shall mean those items of personal property either owned by Executive or to which Executive has exclusive rights and listed on Schedule “1,” entitled “Excluded Property,” which is attached hereto and made a part hereof.

The Stock Option may be exercised, in whole or in part, at any time or from time to time during the balance of the term of the Stock Option pursuant to the vesting schedule set forth in Exhibit “A”, subject to Paragraphs 7 and 12 hereof.

Whenever I encounter this use of quotation marks, I’m tempted to submit the provision in question to the blog Unnecessary Quotes. It’s utterly pointless.

Yesterday someone asked me whether, in a provision analogous to the above examples, I’d put the comma before or after the closing quotation marks. (The above examples take different sides on this gripping issue.)

In American English usage, it’s standard to put the comma before the closing quotation marks. But if you’re aiming for extreme precision, you might want to put the punctuation outside the quotation marks. Consider the following sentence: Paint one of the following on each sign: “Red,” “Blue,” and “Green.” A literal-minded sign painter would include the punctuation on the signs. But it’s rare that I encounter this issue, and I can’t recall having encountered it in a contract.

So my response to yesterday’s inquiry was (1) I can’t see why one wouldn’t follow standard AmE practice in this context and put the comma before the closing quotation marks and (2) more to the point, why the heck would you use quotation marks in this context?

To get back into the swing of things, I’ll now consider a particularly interesting usage—for any reason or for no reason.

As Used to Express At-Will Employment

I associate for any reason or for no reason primarily with language used to express the notion of at-will employment. If you’re an at-will employee, that means that your employer can fire you whenever they want. Click here for Nolo’s explanation of at-will employment.

To get a better grasp of how to articulate the notion of at-will employment in a contract, I contacted Dan Schwartz, litigator, blogger at the Connecticut Employment Law Blog, and Legal Rebel to boot.

 I first asked Dan in what circumstances you would want to specify in a contract that an employee is an at-will employee. Dan explained that even if an employee is an at-will employee, you may well want to have them enter into a contract governing matters such as confidentiality, severance, and ownership of intellectual property, and that it would make sense also to address employment status in any such contract.

But why not simply say “During the Employee’s employment by Acme, the Employee will be an at-will employee”? Dan said that at-will employement is a legal concept, and you can’t expect any given employee to know what it means. That’s why Dan supplements such language by having a contract state that the employer can terminate the employee for any reason or for no reason. (He also sees for cause or for no cause used to the same end.)

Now that I better understand the context, here’s my take on for any reason or for no reason. First off, or for no reason is illogical, in that no one acts for no reason. Every action is prompted by something—if you want true randomness, the only place you’ll find it is in quantum physics. If Acme fires Roe, it may be because Roe has proved himself to be ineffectual; because Roe behaved inappropriately at the Christmas party; because Acme’s CEO wants to hire his cousin instead; because Acme’s CEO doesn’t like Roe’s hairstyle; because Acme’s CEO is a raging misanthrope. Each of those constitutes a reason for firing Roe. Reason doesn’t imply rational thought—there are good reasons and bad reasons.

I suspect that what or any reason is intended to articulate is the notion that Acme doesn’t have to explain itself. I’d say as much.

Another issue is that you cannot in fact terminate an employee for any reason. In particular, statutes make it illegal in the U.S. to terminate an employee because of their race, religion, or gender. If I wanted to be as clear as possible in drafting my at-will language, I’d refer to such limits.

Taking into account the above points, here’s what my proposed at-will language looks like:

During the Employee’s employement with Acme, the Employee will be an at-will employee. That means that Acme may terminate the Employee at any time and for any reason, except as provided by law, and Acme will not be required to explain why it terminated the Employee.

Perhaps Dan Schwartz will let us know what he makes of this language.

As Used in Other Language of Discretion

You also see for any reason or for no reason used in other kinds of language of discretion. The following examples are from “material contracts” filed on the SEC’s EDGAR system:

Buyer shall have until February 26, 2010 to waive or elect not to waive the Remaining Due Diligence Contingencies (for any reason or for no reason), by delivery of written notice to Seller.

In the event that the Commencement shall not have occurred, the Company shall have the option to terminate this Agreement for any reason or for no reason without any liability whatsoever of any party to any other party under this Agreement.

My observations regarding for any reason or for no reason in the context of at-will employment apply equally here, but I have a bigger concern.

MSCD 2.111–126 discusses how using at its discretion as a means of giving a party unfettered discretion risks falling foul of the implied duty of good faith. (An earlier version of that discussion is contained in this December 2006 blog post.) One could argue that for any reason or for no reason articulates unfettered discretion more clearly than does at its discretion. And there’s some support for that notion. For example, in Tymshare, Inc. v. Covell, 727 F.2d 1145 (D.C. Cir. 1984), then Circuit Judge Scalia said that the phrase at its sole discretion “is not necessarily the equivalent of ‘for any reason whatsoever, no matter how arbitrary or unreasonable.’”

But I think you still face the same issue—can you contract around the implied duty of good faith? That issue doesn’t arise with at-will employment, as that’s one context where the implied duty of good faith doesn’t apply.

As Used in Conditional Clauses

The only place you find for any reason or for no reason outside of language of discretion is in conditional clauses. In this context the phrase constitutes needless elaboration—nothing is gained by articulating subsets of the circumstances in question. (See this November 2007 blog post for more on needless elaboration.)

Here’s an exmple from EDGAR:

If by the Maturity Date for any reason or for no reason the full Available Amount under this Agreement has not been purchased as provided for in Section 2 of this Agreement, …