When Litigating Confusing Contract Language, It’s Best to Have a Frame of Reference (Featuring “Stepped Rates” and “Shifting Flat Rates”)

During my blogging-in-my-bathrobe years, I entertained myself by trawling on Westlaw for court opinions dealing with confusing contract language. Good times.

In a fit of nostalgia, this evening I went back to Westlaw and entered a search, saying to myself, Yes, I can still do this! But I’d obviously lost my touch, because I forgot to limit my search to recent cases, so the first case I looked at was Tennessee Excavating Co. v. Morrison-Knudsen Co., No. 01-A–019201CH00010, 1992 WL 113426 (Tenn. Ct. App. May 29, 1992) (PDF here). It was a serendipitous mistake, because it offered the first-ever example I’ve encountered of a dispute over whether a fee schedule involved stepped rates or shifting flat rates.

“Whether a fee schedule involved what?” I hear you say. If you’re not familiar with those terms, it’s because I invented them, having never seen any discussion of the related ambiguity. (To name something is to bring it into existence.) I haven’t done a blog post about the distinction between stepped rates and shifting flat rates. It’s discussed in the fourth edition of MSCD, at 14.64–.70. Paragraph 14.66 will give you a taste:

But this schedule is ambiguous. If the annual gross revenue is $3.4 million, it’s not clear from this schedule whether the 8% rate is applied to all gross revenue (this manual refers to such a rate as a “shifting flat rate”) or only revenue over $3 million, with the lower rates being applied to the increments of revenue under $3 million (this manual refers to such a combined rate as a “stepped rate”).

It’s good to be able to point to an instance of every kind of ambiguity I write about, so I’m pleased that I encountered this opinion. But that’s not why I’m writing about it.

Instead, I noticed that, unsurprisingly, the Tennessee Court of Appeals didn’t mention stepped rates and shifting flat rates in holding that the contract was unambiguous. Instead, it blundered through an analysis that didn’t make sense to me.

One thing MSCD stands for is that if you try to make sense out of contract language that is, or might be, ambiguous and you have no experience with the subject, don’t be surprised if you fall flat on your face. By contrast, anyone familiar with MSCD who is presented with the dispute underlying Tennessee Excavating Co. would understand what’s involved by flipping to the relevant part of chapter 16. And MSCD would provide a frame of reference for explicating the dispute to others, whether in an opinion or a brief.

That’s why judges and litigators who handle contract disputes would benefit from becoming acquainted with MSCD. The foreword to the fourth edition by Vice Chancellor J. Travis Laster of the Delaware Court of Chancery (here) might help spread the word. And so might appellate guy Jason Steed’s recent review of the fourth edition (here).

And obviously, contract drafters too would benefit from being able to distinguish between stepped rates and shifting flat rates.

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.

2 thoughts on “When Litigating Confusing Contract Language, It’s Best to Have a Frame of Reference (Featuring “Stepped Rates” and “Shifting Flat Rates”)”

  1. I don’t follow the linked judgment at all (why a 42c premium above 1.5 million tons?). Perhaps it would be clearer in the context of the document as a whole.

    But the distinction you identify is known to UK taxpayers from the old system of property transfer taxes (stamp duty until 2003, and then stamp duty land tax). The tax operated on a “slab” basis (shifting flat rates, in your terminology) under which the rate of tax payable by the buyer depended on the total price. If the sale price went over a threshold – say £250,000 – then the tax rate would increase from say 1% to 3% ON THE WHOLE AMOUNT, not just the excess. So the tax payable would increase from £2,500 to £7,500.

    This system led to massive distortions. Price bunched below the thresholds and then big gaps (everyone would sell for £249,000, never £251,000). And there was a cottage industry of paying for carpet and curtains and white goods, to bring the price down below a tax threshold.

    This issue went away in 2014 when the “slab” system was replaced by a progressive “slice” system (stepped rates, in your terminology) with different rates payable on different slices of the price, so now a buyer pays 5% on the part of the price between £250,000 and £925,000.

    Perhaps needless to say, the legislation on this is drafted enough. See http://www.legislation.gov.uk/ukpga/2015/1/section/1/enacted

    Which leads me to ask, could your drafting principles be applied to legislation? Or would other considerations apply?

    • Thank you for that background. I think I’ll stick with my terminology, instead of shifting to “slab” and “slice”!

      Yes, my guidelines apply to legislation, except that the “categories of contract language” analysis would have to be adjusted and the chapter on layout would be largely irrelevant. It would be a good idea for someone to write A Manual of Style for Legislative Drafting based on MSCD, but I won’t be that person.


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