At one of my recent Asia seminars, someone asked me about the practice of making a contract between fewer than all the listed parties, presumably when some drop out.
I haven’t encountered that. I would have thought you simply revise the contract to eliminate those who are dropping out, instead of manually striking their signature blocks and any other references to them.
But there might be more to this than I’m aware of. Any thoughts?
Behold the following introductory clause:
AMENDMENT, dated as of October 10, 2018, to the ISDA Master Agreement , dated as of July 12, 2017 (as amended, supplemented or otherwise modified from time to time, the “Agreement”), between JPMORGAN CHASE BANK, N.A. (“Party A”) and CAMBRIDGE MASTER FUND L.P. (“Party B”).
Note the defined terms Party A and Party B. They’re a terrible choice for defined terms for party names. Unlike defined terms based on party names (in this case, JPMorgan and Cambridge) or defined terms that are common nouns (such as the Bank and the Investor), Party A and Party B give the reader no clue as to the role each party plays in the transaction. The only advantage over the archaic and dreadful party of the first part and party of the second party is that Party A and Party B are shorter. (By the way, note that this example relates to an ISDA master agreement. I believe that ISDA form documents use Party A and Party B. Boo.)
There’s only one context in which Party A and Party B might have a role to play. Here’s MSCD 2.118:
A contract might provide for a mechanism in which either party plays a given role, with the other party playing another role. For example, either of two shareholders might have an option to buy the other out. In referring to each party when describing that mechanism, you must use a generic label instead of a party-name defined term.
MSCD goes on to provide further guidance.
But what’s interesting about Party A and Party B is that the overwhelming majority of contracts that use them as party-name defined terms are Chinese contracts. Here’s an example:
I’m not surprised. After all, I wrote this post because a participant at last week’s “Drafting Clearer Contracts” seminar in Hong Kong asked me about use of Party A and Party B.
Chinese drafters, you can do better than Party A and Party B.
You all know how I earn a living, but it’s a sideshow to my real passion, the time my contracts buddies and I spend in an immersive contracts virtual reality. There you might find, for example, @IPDraughts playing Hadley, @AlexHamiltonRad playing Baxendale, and me playing the crucial role of “another,” Hadley’s partner. It all takes weeks to unfold, and the broken crankshaft in question is as heavy in virtual reality as it was in real life, but somehow each time we play it, it’s as exciting as as it was the first time!
That’s why I particularly enjoyed watching Ready Player One, Steven Spielberg’s recent science-fiction adventure movie. I saw it in the most immersive of settings—on a Delta seat-back screen five inches from my face and 30,000 feet in the air, going from somewhere to somewhere. I revisited it a few days later, so I could share with you the most compelling part of the movie, the bill of sale and assignment and assumption agreement for acquisition of the assets of Gregarious Games! Chills.
This contract plays a key role in the closing scenes. You won’t get any spoilers here, but I will permit myself some commentary.
First, a screenshot:
The year is 2045, and we’re in Ohio. From the prose of the contract, it appears that transactional lawyers are basically the same blowhards that they are now. More specifically:
But you know what makes all those shortcomings tolerable? The contract uses this agreement, with a small a. What a tremendous advance to have made in 27 years.
And dig that crazy seal-stamp thingy.
A reader told me about this Butler & Snow newsletter on the opinion of the Sixth Circuit Court of Appeals in Dark Horse Express, LLC v. Lancer Insurance Co., 733 F. App’x 826 (6th Cir. 2018) (PDF here). At issue is how the word legally relates to contracts.
In 2014, Dark Horse contracted to transport $250,000 of meat for the Performance Food Group. Some of the meat was stolen and the trailer’s security seal was broken, so Performance rejected the entire load.
Lancer resold the remaining meat for about $50,000 and gave the money to Performance. Performance demanded that Dark Horse repay it the remaining $200,000. Dark Horse had an insurance policy with Lancer that required Lancer to pay any amount that Dark Horse “legally must pay” for loss to a customer’s cargo. When Lancer refused, Dark Horse paid Performance itself. Dark Horse then sued Lancer, alleging among other things that Lancer had breached the terms of Dark Horse’s insurance policy.
The district court granted summary judgment to Lancer, finding that the policy required coverage only for payments mandated by a court judgment—which Performance had not sought against Dark Horse.
I’ll let the Sixth Circuit take it from there:
[The Cargo Insurance] section required Lancer to “pay all sums” that Dark Horse “legally must pay as a motor carrier for ‘loss’ to Cargo while in [Dark Horse’s] custody or control in the ordinary course of transit.” The question here is whether the phrase “legally must pay” included payments mandated by sources other than court judgments, namely the transportation contract between Dark Horse and Performance.
The parties agree that Tennessee law governs the policy’s terms. Under Tennessee law, we give those terms their plain meaning. See Alcazar v. Hayes, 982 S.W.2d 845, 848 (Tenn. 1998). The term “must” signifies an obligation. See, e.g., Webster’s Third New International Dictionary 1492 (2002) (defining “must” as “required by law, custom or moral conscience to” take an act). Obligations can arise in the legal sense from contracts as well as judgments, since a contract is a promise that “the law in some way recognizes as a duty.” Restatement (Second) of Contracts § 1 (1981). Indeed, contracts exist to create legal obligations, and thus to save parties the expense of reducing every dispute to a court judgment. And when parties go to court, presumably the court simply enforces the contract. Thus, as a matter of ordinary English, one would say that a party who breaches a contract is obligated—not only morally, but legally—to make the other party whole. Accordingly, the phrase “legally must pay” included Dark Horse’s payment obligations under contracts as well as under judgments. See Certain Underwriter’s at Lloyd’s of London v. Transcarriers Inc., 107 S.W.3d 496, 501 (Tenn. Ct. App. 2002).
I have two problems with this opinion, apart from the lame citing of a dictionary for the meaning of must:
First, if you claim that I breached a contract and I pay you off, does it make sense to say I was required by law to make that payment? I suggest not. In the absence of adjudication, who determines that there has been a breach? It wouldn’t make sense to accept mere allegations of breach as having legal effect. And how parties settle a dispute can involve factors other than whether a party’s behavior constitutes breach.
And second, this expansive interpretation of legally has unsettling implications. Presumably if legally connotes compliance with contract obligations, so does the word law. But by referring in a contract to compliance with the law, drafters usually have in mind compliance with statutory law. (I generally refer to compliance with law, compliance with court orders, and compliance with contracts.) It would wreak havoc with standard contract provisions if courts were to decide that contract references to complying with law include complying with contracts to which one is party. That’s presumably something the Dark Horse Express court didn’t consider, given that it was concerned only with how to consider the status of contract nonperformance in the absence of adjudication and so didn’t consider how adding statutes to the mix might affect the analysis.
I suggest we quietly ignore Dark Horse Express. But this is subtle stuff; I invite you to add your thoughts.