Williams-Sonoma Stores, Inc. v. DDK/WE Hospitality Partners, LLC: With Contract Verb Structures, One Misstep Can Lead to Disaster

From this Reed & Smith analysis I learned of a dispute before the Delaware Chancery Court, Williams-Sonoma Stores, Inc. v. DDK/WE Hospitality Partners, LLC. It demonstrates that with contract verb structures, you can be right, but not right enough.

I’ve thought long and hard about the issues underlying this dispute, so let me walk you through it.

The deliberations in question are contained in a transcript of oral argument. I don’t have a copy of the transcript, so we’ll make do with Reed & Smith’s account. Here’s the provision at issue (emphasis added):

The parties unconditionally and irrevocably agree that, with the exception of injunctive relief as provided herein, and except as provided in Section 16(c), all Disputed Matters that are not resolved pursuant to the mediation process provided in Section 16(a) may be submitted by either Member to binding arbitration administered by the American Arbitration Association (“AAA”) for resolution in accordance with the Commercial Arbitration Rules and Mediation Procedures of the AAA then in effect, ….

And here’s Reed & Smith’s summary of what the fight was about:

The Delaware Court of Chancery … held the use of the word “may” in an arbitration clause in an LLC Agreement should be interpreted to mean “must.” In other words, the Court of Chancery held when “may” appears in an arbitration clause or mediation provision, it does not necessarily mean parties can “opt-out” of arbitration and go to court to resolve their dispute. Rather, the parties’ contractual agreement to arbitrate disputes should be enforced as a mandatory requirement.

Because the arbitration provision at issue in Williams-Sonoma Stores contemplates arbitration administered by the American Arbitration Association, let’s look at the relevant part of the AAA standard arbitration clause (emphasis added):

Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association under its Commercial Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.

The phrase shall be settled is language of obligation. Here’s what I said about it in my 2010 article in the New York Law Journal, The AAA Standard Arbitration Clause: Room for Improvement (here):

The AAA standard clause demonstrates what can be missed through overreliance on shall. It uses the passive voice, with the parties as the missing by-agent. You could instead use the active voice—The parties shall settle—but there’s a bigger issue lurking here, in that it doesn’t make sense to impose on the parties an obligation to arbitrate all disputes. Some disputes are more serious than others, and presumably a contract party would seek arbitration for only the most serious, as opposed to mediation, informal negotiations, or simply shrugging off a grievance.

The best way to reflect that would be to use language of discretion, so as to allow a party to demand arbitration, but only as the exclusive means of initiating adversarial proceeds. (It would be inappropriate to specify that arbitration is the exclusive means of resolving any dispute through adversarial proceedings, as courts have a role to play with respect to interim measures and enforcing or appealing arbitration awards.)

You could instead retain language of obligation by saying that if a party initiates adversarial proceedings, it “shall” do so by demanding arbitration. But rather than imposing a duty, which presumes the possibility of breach, it would seem simpler to state that arbitration is the only option available.

That’s why my improved version of the AAA clause uses may. Here’s the relevant part (emphasis added):

As the exclusive means of initiating adversarial proceedings to resolve any dispute arising out of this agreement or the subject matter of this agreement, a party may demand that any such dispute be resolved by arbitration administered by the American Arbitration Association in accordance with its commercial arbitration rules, and each party hereby consents to any such dispute being so resolved.

My version differs from the Williams-Sonoma Stores version in one crucial respect: the Williams-Sonoma Stores version doesn’t contain anything equivalent to this portion of my provision: “As the exclusive means of initiating adversarial proceedings to resolve any dispute arising out of this agreement or the subject matter of this agreement ….”

That language makes it clear that the only choice offered by “may demand that any such dispute be resolved by arbitration” is the choice between demanding arbitration or not initiating any adversarial proceedings.

Absence of anything equivalent in the Williams-Sonoma Stores provision created confusion, because the prospect of unfettered choice offered by may is offset by a concept know as “the expectation of relevance.” Here’s what MSCD ¶¶ 3.190–.193 says about that tension:

A grant of discretion to do one thing doesn’t necessarily equal a prohibition against doing other things. If a mother tells her son he may play video games, it wouldn’t necessarily follow that she’s forbidding him from engaging in any alternative activity.

But the presumption that a grant of discretion doesn’t also entail prohibition comes up against what this manual calls “the expectation of relevance.” (Relevance is a principle of linguistics. According to The Cambridge Grammar of the English Language, at 38, “A central principle in pragmatics … is that the addressee of an utterance will expect it to be relevant, and will normally interpret it on that basis.”) The more specific a grant of discretion is, the more likely it is that the reader would conclude that the discretion is limited—otherwise there would be no point in being so specific. And the more likely a court would be to invoke the arbitrary rule of interpretation expressio unius est exclusio alterius—the expression of one thing implies the exclusion of others.

Consider the sentence Acme may sell the Shares to Doe. Maybe the parties had in mind that Acme could sell the shares to anyone—they addressed sale to Doe explicitly simply because otherwise it would have been uncertain whether Acme could sell the shares to Doe. But the expectation of relevance suggests that if the parties mentioned only Doe when authorizing Acme to sell the shares, it’s because Acme was precluded from selling the shares to anyone else.

To avoid any uncertainty regarding the expectation of relevance, be explicit as to whether discretion is limited. If Acme has unlimited discretion to sell the shares, it would be preferable to say Acme may sell the Shares to any Person. If its discretion is limited, it would be preferable to say The only Person to whom Acme may sell the Shares is Doe. Or you could use language of prohibition—Acme shall not sell the Shares to anyone other than Doe.

My version of the AAA standard arbitration clause makes it explicit that discretion is limited; the Williams-Sonoma Stores provision does not, leaving open the possibility that a party could opt for a different form of dispute resolution. It appears that whether or not it was conscious of doing so, the Delaware Chancery Court relied on the expectation of relevance in deciding that arbitration was the only option.

I think that was the appropriate decision. But this dispute could have been avoided if those who drafted and negotiated the provision at issue had been more astute about verb structures. Here’s what I take away from this dispute.

First, whoever drafted the William-Sonoma Stores provision did well by opting for may, but they didn’t go far enough. And no prizes are awarded for effort: all that matters is that their drafting caused confusion leading to litigation.

Second, the complexity involved in making sense of the alternative interpretations in this dispute reminds me of the naïveté of the modernizer school of contract drafting—those who say that optimal contract drafting requires only that you write clearly and use short sentences. (See this 2017 post for more about that.) The misstep on display in the Williams-Sonoma Stores provision was so subtle you’d need a black belt in contract verb structures to spot it. You can’t wish away the potential for confusion that’s inherent in contract language.

Third, there’s no point in trying to alert the vast majority of drafters to this kind of issue. Instead, we should focus on ways to propagate quality contract language, to drown out dysfunction.

And fourth, the AAA standard arbitration clause is unchanged from when I originally looked at it in 2010—it’s still clumsy traditional language.

(Thanks to cousin Joshua Stein for alerting me to the Reed & Smith analysis.)

Updated 1 February 2020:

I received a copy of the transcript. Vice Chancellor Laster presided over the proceedings, and here’s how he stated his position:

Plaintiff’s counsel has pointed out that the provisions use “may,” suggesting, therefore, that they are an opt-in regime and something that is permissive. But having looked at the decisions that have been cited, as well as somewhat more broadly, it is my view of the case law that courts have interpreted “may” when it appears in an arbitration clause or a mediation provision to mean that you get to choose whether or not you invoke it, but you have to use it as your chosen means of dispute resolution. You don’t get to opt out of it and go to court.

Using “may” avoids the following drafting problem. In the event of a dispute, X shall arbitrate. That would suggest that whenever there is a dispute, you must act. The parties can’t opt to wait. So that’s how these provisions seem to be interpreted. There’s also a policy rationale that the cases cite, which is that it would be fairly silly to build in a relatively detailed dispute mechanism and then conclude that just because it says “may,” people can bypass it and go to court.

In other words, the Vice Chancellor’s analysis is the same as mine, but it uses around a thousand fewer words.