Revisiting “Agrees That”: It Can Be Worse Than Just Clutter

Routine bits of contract clutter have the potential to create real problems. Baron Oursler, senior counsel at the transportation company FleetPride and one of the participants at last week’s “Drafting Clearer Contracts” seminar in Houston, told me about an amazing example of that. I now pass it on to you, dear reader.

The Dispute

It involves a dispute between UBS Securities and the hedge fund Highland Capital that played out in the aftermath of the financial crisis. Baron was part of the team representing Highland Capital. The dispute ended up before a New York lower court, which in 2009 considered Highland Capital’s motion to dismiss the complaint. (For a PDF of the opinion, go here.)

The dispute involved a proposed collateralized-debt-obligation transaction to be sponsored by Highland Capital. It failed, so UBS Securities sued, alleging that two offshore funds affiliated with Highland Capital, referred to in the opinion as CDO Fund and SOHC, had agreed to provide collateral to UBS to mitigate and offset any losses it suffered in case of adverse economic conditions but had failed to do so. UBS Securities alleged losses exceeding $745 million.

The transaction was expressed in three contracts: an engagement letter between UBS Securities and Highland Capital and two warehouse agreements between UBS Securities and the three Highland Capital entities.

UBS Securities alleged that Highland Capital had a duty to indemnify UBS Securities for its losses. It based that claim on two provisions in the contracts. The first is in section 3(c) of the engagement letter:

UBS Securities and [Highland Capital] agree that the CDO Fund and SOHC will in aggregate bear 100% of the risk of the Warehouse Facility in accordance with their respective Allocation Percentages (as defined in the Warehouse Documents) and otherwise in accordance with the terms of the Warehouse Documents ….

And the second is the provision in the engagement letter in which Highland Capital agreed, in essence, to indemnify UBS for any losses arising from breach by Highland Capital or its affiliates of any of their obligations in the engagement letter.

Understandably, the defendants argued, among other things, that nothing in section 3(c) triggered the indemnification obligations, as section 3(c) didn’t contain a promise by Highland Capital:

Defendants argue that it would be unreasonable to infer that this provision imposes an affirmative obligation on Highland Capital that UBS Securities did not also undertake, since they agreed upon the very same language. According to defendants, section 3(c) is just an acknowledgment by the signatories that the Funds will bear certain risks.

But the court wasn’t convinced—it declined Highland Capital’s motion to dismiss. Here’s the relevant part of the court’s reasoning (citations omitted):

The first and chief reason is that section 3(b) of the engagement letter does not in fact contain the word “acknowledge”; it states that UBS Securities and Highland Capital “agree that the CDO Fund and SOHC will in aggregate bear 100% of the risk of the Warehouse Facility.” Since the agreement is between UBS Securities and Highland Capital, but the undertaking to bear this risk is—in the first instance, at least—by the Funds, there is some question as to what UBS and Highland Capital “agree[d]” to do, if anything, in this provision. Plaintiffs argue that the parties understood and intended by this provision that Highland Capital would ensure that the Funds would bear 100% of the risk of the warehouse facility, because of its close relationship with those entities. In support of their argument, plaintiffs have submitted some evidence that Highland Capital acted on behalf of the Funds at other times during the course of this transaction. I find that plaintiffs’ reading of section 3(c) is not unreasonable based on the documents before me.

My Analysis

The construction at issue in this dispute is here is agrees that. This is what MSCD has to say about agrees that:

It’s commonplace for drafters to preface a provision in the body of the contract with agrees that, as in the parties agree that Acme shall purchase the Shares from Doe. But agrees that is redundant and so should be omitted—we know from the lead-in that the parties are agreeing to everything in the body of the contract. The same applies to covenants that.

Redundant use of agrees that is just one example of what I call “throat clearing”—tacking an extraneous subject and that-clause on to the front of what would otherwise be a self-contained provision. For other examples, see this 2014 post and this 2015 post.

But when a disgruntled contract party has enough at stake, it might be inclined to fasten on to a bit routine of clutter in a contract and use it as a stick with which to beat the other side. That’s exactly what UBS Securities did in this instance. And for purposes of a motion to dismiss, the judge—presumably a stranger to close analysis of the building blocks of contract language—was willing to give UBS Securities the benefit of the doubt.

Absence of the word acknowledge in section 3(c) is of no significance. Throat-clearing language uses a bunch of different verbs, including acknowledge. Section 3(c) works just fine without the “agree that” preamble—I suggest that it’s language of policy. Although I recommend using acknowledge in contracts only in language of declaration that serves to accept the other side’s facts, it’s unobjectionable to refer in pleadings, as Highland Capital did, to the parties acknowledging something by means of language of policy.

Without a lot of discussion, the appeals court reversed. (For a PDF of the opinion, go here.) But winning in expensive litigation is a distant second to not being involved in litigation at all. This dispute should spur drafters and reviewers to eliminate categories-of-contract-language clutter from contracts. If the other side asks why you’ve deleted a given “agrees that” from their draft, point them to this dispute.

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.

11 thoughts on “Revisiting “Agrees That”: It Can Be Worse Than Just Clutter”

  1. Good post. My overly broad rule of thumb is that 90% of the sentences in most contracts should either begin with “Party to the Contract shall….” or “If….then….”

  2. A few comments:

    1/ I agree with the appellate decision, including its concision. Why prolong the agony?

    2/ Ken’s schema seems to be that everything that doesn’t fit into another category of contract language must be language of policy.

    3/ Query: do statements of fact in recitals fall into one or more categories of contract language, or do the categories apply only to language in the body, after the lead-in’s language of agreement? And isn’t every sentence of the body of the contract, whatever other category applies, also language of agreement because the lead-in implicitly inserts the words ‘The parties agree’ at the head of every sentence?

    4/ I agree with Ken that since the lead-in applies to the whole body of the contract, the disputed language in this case (‘UBS Securities and [Highland Capital] agree that the CDO Fund and SOHC will in aggregate bear 100% of the risk of the Warehouse Facility’) means the same as the sentence shorn of the throat clearing: ‘The CDO Fund and SOHC will in aggregate bear 100% of the risk of the Warehouse Facility’.

    5/ To what category of contract language does the shorn declarative sentence belong? It’s an agreed declaration, but ‘joint acknowledgments’ don’t fit the categories of contract language as presently constituted. Eschewing the laborious periphrasis of dubbing such a sentence ‘language of policy used by the parties to acknowledge a fact’, I would call it a ‘joint acknowledgment’ and widen the category of language of declaration enough to accommodate joint acknowledgments. (Query whether Ken would stick with the ‘language of policy’ categorization if the sentence began, ‘The parties jointly acknowledge that….’?)

    6/ Wandering from the point under discussion, is the phrase ‘in aggregate’ clutter or does it add something that would be absent if the drafter omitted it?

    • Regarding point 2, your reasoning could apply to any category of contract language: “everything that doesn’t fit into another category of contract language must be language of X.” It has to fit somewhere.

      Regarding point 3, I keep recitals out of categories-of-contract-language analysis. The recitals are regular narrative prose.

      Regarding point 5, I think it best to think of language of declaration as applying to facts that are external to the contract.

      Regarding point 6, I’ll ponder.

    • #6 – I find the “in aggregate” to be surplus. There are two entities to bear 100% of the risk. I can see where it might have carried over from a different distribution among more parties: “A & B bear in aggregate 60%; C bears 40%.”

  3. The appellate court was right, but only insofar as they kicked back the question of whether Highland Capital was in a position to *cause* CDO Fund and SOHC to bear the risk. Not only was “agree that” ambiguous on whether it was an acknowledgment or an obligation, but it hid the real contractual problem, which was one of capacity to agree on behalf of non-party entities.

    The problem, therefore, was similar to the problem raised when a party agrees to something “on behalf of its affiliates.” A party can only agree to something on behalf of itself; it can *cause* an affiliate *over which it has control* to do something, but otherwise can’t agree with someone else that the affiliate will do it. Correctly drafted, therefore, that clause should have said that “Highland shall cause CDO Fund and SOHC” to undertake 100% of the risk, assuming Highland had the legal authority to do so. Thus the right category for that clause should have been language of obligation, not of declaration or policy.

    • I agree that a party can bind only itself, and that ‘Highland shall cause’ would do if that’s what the parties meant, but couldn’t the parties have meant ‘UBS Securities acknowledges that it is not Highland but the CDO Fund and SOHC that will bear the risk’?

      Or perhaps amounting to the same thing: ‘Highland is not required to bear any of the risk; the Warehouse Documents put all the risk on the CDO Fund and SOHC’.

      Oddly, the first formulation appears to be language of acknowledgment, whilst Ken would account the second (‘is not required’) language of discretion. Yet they mean the same.

      • Actually, I think the second type of formulation, which MSCD-compliant drafting would put as “Highland will not be liable for…”, would be considered language of policy, since it governs how the contract is interpreted and administered. While an acknowledgment might get around to doing the same work, by setting up an estoppel, the second approach would be clearer and more purposeful. And the parties can’t establish the third party’s liability (which I take to have been the point of the exercise) just by saying so, in the absence of some acknowledgment or agreement by the third party.

        • Agree fully, but I wonder if there shouldn’t be a category called something like ‘language of lack of obligation’.

          1/ ‘…is not required to’
          2/ ‘…will not be liable for’
          3/ ‘…shall paint houses 1 and 2, *but not 3 and 4*’
          4/ ‘…shall pay all *but the the Excepted Liabilities*’
          5/ ‘…shall do X *unless Y happens*’.

          Such declarations of non-duty seem to deserve a more descriptive label than ‘language of discretion’ or ‘language of policy’.

          After all, if statements of positive duty and negative duty deserve separate categories (obligation and prohibition), mightn’t lack of duty deserve its own?

          The proposal is tentative, because I see problems I’m still pondering.

    • The role played by CDO Fund and SOHC was covered by the warehousing agreements, so I don’t see any need for the language at issue to do anything other than reflect that.


Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.