On Typos in Contract Drafting

The ever-vigilant Steven Sholk told me about this post on Footnoted. It describes how in an exhibit to an employment agreement filed on the U.S. Securities and Exchange Commission’s EDGAR system, the company undertook that in addition to paying the executive’s moving expenses, “in consideration of other relocation expenses that Executive and his family will incur, $87,500,000 will be paid upon the Effective Date of the Agreement and $87,500000 will be paid upon final relocation to Atlanta, Georgia.”

Footnoted thinks that in each instance the intended figure was $87,500, and it suggests that as long as the executive doesn’t attempt to collect $175 million from the company, the error “seems more likely to elicit laughter, rather than heart failure, in the board room.”

Footnoted’s account caused me to consider the implications of typographic errors—typos—in contract drafting.

But first, what is a typo? I think the definition offered by The Free Dictionary is OK: “An error while inputting text via keyboard, made despite the fact that the user knows exactly what to type in. This usually results from the operator’s inexperience at keyboarding, rushing, not paying attention, or carelessness.” Excluding glitches that are due to the drafter’s coming up with the wrong words means that, for example, an instance of inadvertent use of less instead of more, as described in this August 2008 blog post, is best considered not a typo but rather a different kind of mistake.

So here’s my taxonomy of contract-drafting typos:

First, some typos are clearly typos, in that the result makes no sense. Of the 787 “material contracts” filed on EDGAR that contain the word pubic, in only a tiny proportion was the word used intentionally. (For example, I spotted one reference to “pubic bone.”) Other instances constitute examples of a typo beloved of adolescents of all ages, pubic for public—hence “initial pubic offering,” “pubic announcement,” “pubic utilities,” and the like. Because the nature of the typo is so apparent, it’s inconceivable that it would ever provoke a fight. Of course, even more clearly the result of a typo are those collections of characters that don’t even constitute a word, as in—to invent an example—blg, blgo, or bloog for blog. Whether you can decipher what the parties intended depends on the nature of the typo.

Second, you have typos that don’t render text nonsensical but would result in a ludicrous outcome if taken at face value. Offering an executive $175 million in relocation expenses would fall into this category.

Third, you have typos that create an alternative meaning that makes sufficient sense that a contract party is willing to argue that in fact there was no typo. For example, in a contract between a union and an employer, the employer agreed to comply with the union’s collective bargaining agreement and any changes “herein.” In subsequent litigation, the trustees of the union’s pension fund argued that “herein” should have been “therein”; the employer argued for “herein.” See Calhoun v. Bernard, 333 F.2d 739 (9th Cir. 1964). If in cases such as this the party claiming typo prevails and the other party convinces the court that it hadn’t been aware of the typo, the court may well hold that there was no valid contract, on the grounds that there hadn’t been a meeting of the minds.

And fourth, you have typos that don’t result in text that is nonsense or ludicrous, but nevertheless the typos are subsequently readily identified as such because it can clearly be established that both parties knew at the time of signing what the text should have said. A good example of this kind of typo is how, in a mortgage prepared in 1986, the principal amount was erroneously stated as $92,885 rather than the correct amount, $92,885,000. (Of course, a secretary was blamed; I suspect that she was the fall guy. And in any event, many lawyers at different organizations missed the typo.) The sad story is recounted in this 1991 New York Times article.

You’d think that the fourth kind of typo would, like the first and second, be essentially benign. But circumstances can result in that being far from the case. In the mortgage example, one of the lenders felt compelled to give the borrower $11.4 million to drop its claim. And the lender estimated that after adding in its other expenses, the typo had cost it $31 million.

Of course, these musings have no bearing on how you avoid typos. For that, your only defense is … proofreading! (For more on that, see this January 2009 blog post.)