Musings on the Nature of Ambiguity Prompted by a Recent Opinion of the Delaware Court of Chancery

Today I saw this post by Francis Pileggi on the Delaware Corporate & Commercial Litigation Blog. It’s about the recent opinion of the Delaware Court of Chancery in Cyber Holding LLC v. CyberCore Holding, Inc. (PDF here).

Cyber Holding LLC (“Seller”) sold CyberCore Corporation (the “Company”) to CyberCore Holding, Inc. (“Buyer”) (what an imaginative bunch of names) in a transaction that closed in July 2010. Here’s what happened next, as told by the court:

The Company claimed deductions for transaction-related expenses (the “Transaction Deductions”) for the tax year from January 1, 2011, to July 8, 2011 (the “Stub Year”). Because of the deductions, the Company reported a net operating loss for the Stub Year, escaped over $1 million in 2011 income tax liability, received a $214,166 refund for prepaid estimated 2011 taxes, and obtained over $3 million in income tax refunds for 2009 and 2010 by carrying back the net operating loss. Buyer has remitted to Seller refunds for the estimated prepaid taxes and the 2009 and 2010 taxes. Seller brings this action to recover $1,557,171 (the “Avoided Tax”) pursuant to Section 6.5(f)(z) of the Agreement.

Here’s the language at issue:

(f) To the extent … (z) Transaction Deductions claimed in the Tax year ending on or including the Closing Date result in a reduction of Taxes for that Tax year in excess of the amount paid to Sellers pursuant to Sections 6.5(d) and (e), then Buyer . . . shall pay to the Sellers’ Representative … an amount equal to the amount by which (i) the amount of Taxes that the Buyer, the Company and its Subsidiaries … would have been required to pay in the Tax year in question but for the deduction or the Carryforward of the Transaction Deductions … exceeds (ii) the amount of Taxes actually payable by the Buyer, the Company and its Subsidiaries … with respect to such Tax years (and in the case of payments pursuant to clause (z) above, solely to the extent such amount is in excess of the amount paid to Sellers pursuant to Sections 6.5(d) and (e)).

Again, the court:

The dispute boils down to whether the references to an amount “in excess of the amount paid to Sellers pursuant to Sections 6.5(d) and (e)” mean in excess of (1) the total amount paid pursuant to those sections (including the remittances for 2009 and 2010) or (2) the amount paid pursuant to those sections with respect to the Stub Year alone. If the first interpretation is correct, as Buyer posits, Buyer has already paid Seller over $3 million, which exceeds the amount of the Avoided Tax (approximately $1.56 million). If the second, or Seller’s, interpretation is correct, Buyer owes Seller the amount of the Avoided Tax.

The court held that the contract language at issue was ambiguous, so it denied Buyer’s motion for summary judgment. And this is where I started paying particular attention.

So the question was what the word “amount” referred to. So I asked myself what kind of ambiguity we were dealing with. The only possible candidate was lexical ambiguity, but that didn’t fit: the alternative meanings being argued over aren’t inherent in the word amount. By contrast, in a variety of contexts the word bank can mean the edge of a river or a financial institution.

That’s why I suggest that the uncertainty that caused this dispute isn’t due to ambiguity. Instead, it’s due to undue generality, which is discussed at MSCD 7.20–23. Here are the first two of those paragraphs:

If because of a lack of detail it’s unclear what a contract provision applies to, that provision can be described as overly general. As a result of undue generality, more falls within the scope of a provision than the parties had anticipated, and that can lead to confusion as to what the parties had actually intended. For example, Acme shall purchase the Ford Mustang from Widgetco is overly general if Widgetco owns more than one such car.

Overly general contract language was famously at issue in Raffles v. Wichelhaus, 2 Hurl. & C. 906, 159 Eng. Rep. 375 (Ex. 1864). The contract in question provided for purchase of cotton from a ship named “Peerless” that was to depart from Bombay. It transpired that two ships named “Peerless” were to depart from Bombay a couple of months apart—the buyer had one ship in mind, the seller the other. In failing to provide sufficient detail to distinguish the two ships, the contract was overly general.

Note that dispute over two alternative possible meanings doesn’t mean that the language at issue is ambiguous. What matters is the source of the uncertainty. If the uncertainty over the meaning of a word or phrase is entirely a function of context instead of being inherent in the word or phrase, then you haven’t got lexical ambiguity, you’ve got undue generality. (Undue generality can also engender a range of alternative possible meanings instead of just two.)

Court’s have traditionally used the label “latent ambiguity” to refer to uncertainty caused by undue generality. I suggest that it’s better to use a different label for a different mechanism.

(By the way, whoever represented Seller in this transaction should have revised the language at issue so that it refers not to “the amount paid to Sellers ” but to “the amount paid to Sellers for that Tax Year.”)


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.