Why Did This Contract Language Cause a Fight?

Last year someone—I’ll call him George—hired me to analyze for him a sentence in a contract.

George had sold his business. Part of the purchase price was to be paid in an earnout: after the closing of the sale, the buyer was to make up to three additional payments to George if in the three years after the closing of the transaction specified revenue targets were met. Revenues at the 12 Month Revenue Measurement Point (as defined in the contract) were determined to be 400 Spondulix (I don’t want to use actual amounts), and the buyer paid George the first Annual Earnout Payment. The buyer then told George that revenues in the second year of the three-year period were likely be approximately 100 Spondulix. George and the buyer got into a dispute over the second earnout payment.

Here’s the language at issue:

The second Annual Earnout Payment (if any) shall be based upon and thus calculated on the Revenues as of the 24 Month Revenue Measurement Point to the extent the Revenues measured at the 24 Month Revenue Measurement Point are greater than the Revenues at the 12 Month Revenue Measurement Point.

What gave rise to the fight? (Take your time.)

The buyer’s position was that “the Revenues as of the 24 Month Revenue Measurement Point” meant the second year of revenues. George’s position was that it meant the first two years of revenues. I wrote George five-page letter explaining why the wording of the contract strongly favored his interpretation.

I’m writing about this not because this dispute is somehow more compelling than any number of others. Instead, it’s simply that I spend so much of my time writing about specific words and phrases, and specific causes of uncertainty, that it’s a good idea to remind myself regularly that the causes of contract disputes are as disparate as the nature of those disputes.

In this case, the culprit wasn’t one of the usual suspects, for example a confusing phrase such as indemnify and hold harmless. Instead, the drafter referred to a point in time when they should have referred to a period of time.

So disputes can arise in innumerable ways. Let’s be careful out there.

(Oh, and George ended up settling. Whatever the merits of one’s position in a contract dispute, the person holding the money has an advantage.)

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.