You Don’t Want to Make This Kind of Mistake in a Contract Formula

If there’s anything worse than drafting confusing contract language, it’s making a mistake that results in a provision conveying a meaning that puts your client in a deep, expensive hole.

That came to mind last week, while I was in Montreal for a public “Drafting Clearer Contracts” seminar.

I had the opportunity to get together with Kevin Kyte, a partner at Stikeman Elliott. (I met Kevin when he and I were on a panel at an ABA meeting a few years ago.) Over dinner, Kevin told me about a 2009 opinion of the Quebec Superior Court that dealt with a costly mistake in stating a formula in a contract. (I hear you thinking, Hmm, that sounds like an exciting dinner!) The case was Ihag-Holding, a.g. v. Intrawest Corporation (here).

Here’s the language that ended up in the contract:

Resort Operation Payment Amount” means the amount, if any, equal to the amount by which (a) 4.8 times Net Resort EBITDA during the Resort Operation Payment Calculation Period exceeds (b) $2,000,000;

Here’s what it should have said:

Resort Operation Payment Amount” means the amount, if any, equal to 4.8 times the amount by which (a) Net Resort EBITDA during the Resort Operation Payment Calculation Period exceeds (b) $2,000,000.

The drafter’s mistake was to put the words “the amount by which” before “4.8 times” instead of after. The result was that instead of owing C$0, her client (Intrawest, a developer and manager of ski and golf resorts) found itself subject to a claim for C$6,203,632.

The court held for Intrawest, a decision that was maintained on appeal. And this being Canada, Intrawest also recovered costs, although not to the extent they had wanted. As the court noted, “Having made the drafting error in the Loan Agreement, Intrawest is very much the author of its own misfortune in this case.”

I don’t think there’s any lesson to be learned from this saga, other than let’s be careful out there.

***

By the way, the chapter of MSCD that deals with formulas (chapter 14) doesn’t get much love, but I have a soft spot for it. Whenever I read it, I give silent thanks that I won’t ever have to devote brain cells to rewriting it. In preparing it, I received much-needed assistance from Professor Colin Sparrow of the Mathematics Institute of the University of Warwick, to whom I’ve never given an online shout-out. Yo, Colin!

Posted in Bad Drafting | 5 Comments

  • Vance_Koven

    Thanks for the reminder about chapter 14, which is very solid indeed. The only nagging doubt in my mind is that the word “amount” does not to me inherently convey the concept of “an amount of money,” so I might be tempted to add those two words.

  • Kevin Kyte

    Dinner was more interesting than that! On Intrawest, I would have used a formula [E.g., A = 4.8 * (B – $2,000,000)] and maybe given some examples in a schedule.

    • http://www.adamsdrafting.com/ Ken Adams

      At some point, formulas become sufficiently complicated that you’re better off expressing them as a mathematical equation. But I think use of an asterisk to denote multiplication is a computer-science thing. (You geek, you!) I’d be inclined to stick with ×, but that’s a thrilling issue to explore in the fourth edition.

  • Tina Stark

    There’s another way: the cookbook formula.

    “Resort Operation Payment Amount” means the amount calculated as follows:

    1. Subtract $2MM from the amount equal to Net Resort EBITDA during the Resort Operation Payment Calculation Period.
    .2. Multiply the result of the paragraph 1 calculation (if positive?) times 4.8.
    3. If the paragraph 1 calculation is negative, the Resort Operation Payment Amount is $0.
    When multiple operations are involved, stating each one separately, sequentially can be helpful. Not knowing the contract, I don’t know whether my edits about the positive/negative numbers correctly states the business deal, but it addresses directly the result of a negative number resulting from the subtraction.

    • http://www.adamsdrafting.com/ Ken Adams

      That’s useful to know. I haven’t encountered this technique.