One of the joys of being a contract-drafting guy is that I don’t have to dwell on the mess that results when courts have to make sense out of contract language that’s unclear. Instead, I focus on how to avoid such problems.
But it’s a good idea to look at case law every so often, if only to remind yourself of the consequences of suboptimal drafting. So I was pleased to have had occasion recently to explore a recurring question under contract law—does a given contract provision using shall express an obligation or a condition? (In MSCD 3.101 I mention a classic first-year-contracts-class case on this issue, Howard v. Federal Crop Insurance Corp., 540 F.2d 695 (4th Cir. 1976).)
Consider the following example: Jones shall submit any Dispute Notice to Acme no later than five days after delivery of the related invoice.
If this example expresses an obligation, Jones would be entitled to dispute an invoice even if he were to submit a Dispute Notice more than five days after delivery of the related invoice, and Acme’s only recourse would be to seek damages for Jones’s untimely delivery of the Dispute Notice.
If, on the other hand, this example expresses a condition, Jones wouldn’t be entitled to dispute an invoice if he had failed to satisfy the condition by timely submitting a Dispute Notice.
How does a court go about determining whether such language constitutes an obligation or a condition? Here’s what a leading contract-law treatise has to say on the subject:
The first step, therefore, in interpreting an expression in a contract, with respect to condition as opposed to promise, is to ask oneself the question: Was this expression intended to be an assurance by one party to the other that some performance by the first would be rendered in the future and that the other could rely upon it? If the answer is yes, we have found the expression to be a promise that the specified performance will take place. The alternative question to be asked is: Was this expression intended to make the duty of one party conditional and dependent upon some performance by the other (or on some other fact or event)? If the answer to this question is yes, we have found that the specified performance is a condition of duty, but we have not found that anyone has promised that the performance will take place. It is not difficult to draw the logical distinction between a promise that a specified performance will be rendered, and a provision that makes a specified performance a condition of the legal duty of a party who promises to render another performance. The first creates a legal duty in the promisor; the second limits and postpones a promisor’s duty. Often the contracting parties do not make this logical distinction and as a result word their agreements so as to make interpretation difficult. When that is the case, the court is free to give the contract the ”construction” that appears to be the most reasonable and just.
8-30 Corbin on Contracts § 30.12
In this case, I think that a disinterested person would conclude that Acme had in mind that the provision would constitute a condition. The five-day time limit was presumably established in order to ensure some predictability regarding whether a given invoice could be disputed. The five-day time limit is necessarily arbitrary, and allowing Jones to require that Acme show damages if it wants to enforce the five-day limit would eliminate the predictability that the time-limit was intended to afford.
On the other hand, the language uses shall, a hallmark of language of obligation. Although shall is, in fact, drastically overused and so can be found in all sorts of contract language, a court could seize upon use of shall as sufficient basis for finding that the provision in question is an obligation:
Such drafting provides the court with a basis for doubt in interpreting the language. With some doubt established, a court may proceed to a rule of construction, i.e., where it is doubtful whether language creates a promise or a condition, the language will be construed as creating a promise. This ”rule” is simply a species of the general abhorrence of forfeitures. If the language is construed as a condition, the failure of the condition to occur may cause a forfeiture. If, however, it is construed as a promise and the promise is breached, the promisor is liable in damages but will not suffer a forfeiture. A corollary of the ”rule” that a construction resulting in a promise rather than a condition will be preferred is another ”well settled rule of contract interpretation that conditions are disfavored and will not be found in the absence of unambiguous language indicating the intention to create a conditional obligation”—another species of the policy against forfeitures. It is clear beyond peradventure that courts frown upon the construction of language as conditional and favor the construction of the same language as promissory to avoid forfeitures.
1-7 Murray on Contracts § 102; see also Williston on Contracts § 38:13; Southern Surety Co. v. MacMillan Co., 58 F.2d 541, 546–48 (10th Cir. 1932) (“Considering the nature of the details of the performance guaranteed, the failure to use apt words to express an intent that obligation should cease upon the failure to give notice, the use of words of promise rather than of the happening of an event, we do not believe that the parties intended that liability upon the bond should end with the failure to notify, where no prejudice resulted from such failure.”).
Note also that unless the contract language in question is unmistakably a condition, “Even if it is determined that the language is language of condition, to the extent that the nonoccurrence of a condition would cause disproportionate forfeiture, the Restatement (Second) provides that a court may excuse the nonoccurrence of that condition unless its occurrence was a material part of the agreed exchange.” Williston on Contracts § 38:13.
So the bottom line is that even though the example used earlier in this post makes most sense as a condition, a court reviewing it might well treat it as an obligation, so as to avoid having Jones forfeit his right to dispute the invoice.
The moral of this story is that you should always express a condition in a way that makes it clear that it’s a condition. In particular, never use shall when expressing conditions. MSCD 3.84–101 discusses the three ways to express any given condition. Here’s one way to redraft the example used in this post: In order to dispute any invoice, Jones must submit to Acme a Dispute Notice relating to that invoice no later than five days after Acme delivers that invoice to Jones.