Misdiagnosing Uncertainty in Contract Language

I recently learned of a Wisconsin appellate case, Appleton Papers, Inc. v. Andritz, Inc., 2011 WL 867754 (Wis. Ct. App.) It provides an interesting example of the confusion that can follow if you misdiagnose the sources of uncertainty in contract language.

The defendant, Andritz, had granted the plaintiff an option to purchase equipment, then had refused to sell at the agreed price when the plaintiff attempted to exercise the option. The lower court awarded the plaintiff $29.1 million in damages. On appeal, the plaintiff contended, among other things, that the contract precluded consequential damages, so it shouldn’t be liable for $10.6 million of building modification costs.

Here’s the language at issue:

In no event shall either party hereto be liable to the other for any incidental, special, indirect or consequential damages of any kind, or for lost profits, lost revenues, loss by reasons of plant shut-down or down-time or the plant’s inability to operate at full capacity to the extent arising out of the work authorized under this letter agreement.

And here’s the court’s analysis (citations omitted):

According to Andritz, this provision contains two distinct limitations of liability: a broad limitation of all incidental or consequential damages, and a specific limitation of lost profits arising from plant shutdowns. Andritz emphasizes the use of “for,” and then “or for,” arguing the insertion of the second “for” clearly signals a break in structure. Thus, Andritz asserts, the paragraph’s limiting clause, “to the extent arising out of the work authorized under this … agreement,” applies only to the language following “or for.”

However, if the paragraph is read as Andritz suggests, then the limiting clause is rendered meaningless surplusage. Lost profits are a subset of consequential damages. If all consequential damages are barred, then all lost profits would already be barred regardless of how they arise. “[A] construction of an agreement which leaves a part of the language useless or creates surplusage is to be avoided.”

A construction based on grammar and punctuation will not prevail if it leads to an unreasonable result.

In the first paragraph of its analysis, the court identifies the problem but doesn’t articulate it clearly. What we have here is our old friend syntactic ambiguity—uncertainty over which part of a sentence a given word or phrase modifies. (See MSCD chapter 11; and go here for a clutch of posts about syntactic ambiguity at AdamsDrafting.) More specificially, we have a closing modifier, and it’s not clear whether it modifies just the immediately preceding phrase beginning with for or whether it also modifies the immediately preceding one too.

Identifying the problem more clearly might have helped the court in its analysis. As it is, I think the court went off the rails in the second and third quoted paragraphs. If consequential damages include lost profits, then the second for-phrase is redundant, no matter how you read the closing modifier. And that still leaves you with the question of the scope of the closing modifier. (I’m not in a position to resolve the ambiguity myself, as that requires delving into the intent of the parties.)

This case also reminded that if a court fails to identify the source of uncertainty in contract language, others can add to the confusion. I learned about this case from an analysis that a law firm posted on its website. The analysis was entitled “The ‘Or’ That Cost $10.6 Million: A Contract Drafting Cautionary Tale.” Well, the ambiguity associated with or is one of my grand passions (see MSCD chapter 10), and or was an innocent bystander in this instance of ambiguity.

The moral of this story is that the sources of uncertainty in contract language fall into distinct categories, and you’re more likely to understand (if you’re a court) and learn to avoid (if you’re a drafter) any such uncertainty if you know how to diagnose it.

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.