The Sixth Circuit’s Notions About How “Legally” Relates to Contracts

A reader told me about this Butler & Snow newsletter on the opinion of the Sixth Circuit Court of Appeals in Dark Horse Express, LLC v. Lancer Insurance Co., 733 F. App’x 826 (6th Cir. 2018) (PDF here). At issue is how the word legally relates to contracts.

In 2014, Dark Horse contracted to transport $250,000 of meat for the Performance Food Group. Some of the meat was stolen and the trailer’s security seal was broken, so Performance rejected the entire load.

Lancer resold the remaining meat for about $50,000 and gave the money to Performance. Performance demanded that Dark Horse repay it the remaining $200,000. Dark Horse had an insurance policy with Lancer that required Lancer to pay any amount that Dark Horse “legally must pay” for loss to a customer’s cargo. When Lancer refused, Dark Horse paid Performance itself. Dark Horse then sued Lancer, alleging among other things that Lancer had breached the terms of Dark Horse’s insurance policy.

The district court granted summary judgment to Lancer, finding that the policy required coverage only for payments mandated by a court judgment—which Performance had not sought against Dark Horse.

I’ll let the Sixth Circuit take it from there:

[The Cargo Insurance] section required Lancer to “pay all sums” that Dark Horse “legally must pay as a motor carrier for ‘loss’ to Cargo while in [Dark Horse’s] custody or control in the ordinary course of transit.” The question here is whether the phrase “legally must pay” included payments mandated by sources other than court judgments, namely the transportation contract between Dark Horse and Performance.

The parties agree that Tennessee law governs the policy’s terms. Under Tennessee law, we give those terms their plain meaning. See Alcazar v. Hayes, 982 S.W.2d 845, 848 (Tenn. 1998). The term “must” signifies an obligation. See, e.g., Webster’s Third New International Dictionary 1492 (2002) (defining “must” as “required by law, custom or moral conscience to” take an act). Obligations can arise in the legal sense from contracts as well as judgments, since a contract is a promise that “the law in some way recognizes as a duty.” Restatement (Second) of Contracts § 1 (1981). Indeed, contracts exist to create legal obligations, and thus to save parties the expense of reducing every dispute to a court judgment. And when parties go to court, presumably the court simply enforces the contract. Thus, as a matter of ordinary English, one would say that a party who breaches a contract is obligated—not only morally, but legally—to make the other party whole. Accordingly, the phrase “legally must pay” included Dark Horse’s payment obligations under contracts as well as under judgments. See Certain Underwriter’s at Lloyd’s of London v. Transcarriers Inc., 107 S.W.3d 496, 501 (Tenn. Ct. App. 2002).

I have two problems with this opinion, apart from the lame citing of a dictionary for the meaning of must:

First, if you claim that I breached a contract and I pay you off, does it make sense to say I was required by law to make that payment? I suggest not. In the absence of adjudication, who determines that there has been a breach? It wouldn’t make sense to accept mere allegations of breach as having legal effect. And how parties settle a dispute can involve factors other than whether a party’s behavior constitutes breach.

And second, this expansive interpretation of legally has unsettling implications. Presumably if legally connotes compliance with contract obligations, so does the word law. But by referring in a contract to compliance with the law, drafters usually have in mind compliance with statutory law. (I generally refer to compliance with law, compliance with court orders, and compliance with contracts.) It would wreak havoc with standard contract provisions if courts were to decide that contract references to complying with law include complying with contracts to which one is party. That’s presumably something the Dark Horse Express court didn’t consider, given that it was concerned only with how to consider the status of contract nonperformance in the absence of adjudication and so didn’t consider how adding statutes to the mix might affect the analysis.

I suggest we quietly ignore Dark Horse Express. But this is subtle stuff; I invite you to add your thoughts.

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.