Documenting the Deal: A Lesson in Ambiguity
When entering a contractual relationship with another party, the importance of drafting a comprehensive, legally sufficient document cannot be understated. Not only does this ensure that your rights as a party are properly protected, but it also can prevent unnecessary and very costly court involvement down the road.
In Miller v. National Land Partners, the failure to have a comprehensive document did not ultimately doom the Defendant, but it took the power to determine the contractual relationship out of the hands of the contracting parties and placed that burden upon the court.
In November of 2008, Plaintiff Miller was engaged in divorce litigation in West Virginia with her estranged husband, Defendant Wilson. The two former spouses owned 50% each of a West Virginia real estate development company (“HCWV”) that became the central issue of the Delaware case. The West Virginia Family Court awarded Miller $4.9 million in the divorce settlement in exchange for Miller’s 50% interest in HCWV. Around the same time the Family Court made its decision, Wilson caused HCWV to pay roughly the same amount to National Land Partners (“National Land”), a company that HCWV contracted with. According to Wilson, the payment to National Land was properly owed by HCWV under the contract it had with National Land (the “Agreement”). Miller felt differently; she argued that the payment between the companies was a fraudulent conveyance by her former husband to avoid the Family Court’s order.
On review of the Agreement, there was no requirement as it was written that HCWV pay National Land, but the Defendants argued that the written agreements accidentally left out the language that made HCWV responsible to National Land for “negative management fees.”
The agreements between HCWV and National Land prior to the one at issue all included the “negative management fees” language, which represented that when an HCWV project failed to generate sufficient gross sales, thereby causing a loss to National Land, HCWV would be responsible to National Land for the payment of that lost amount.
The Defendants testified that the language was inadvertently deleted from the Agreement and it was nothing more than a scrivener’s error. After substantial testimony, the court found that the contractual language at issue was missing from the Agreement due to a scrivener’s error, as the Defendants argued, and not by intention. The court concluded that the “negative management fees” language was included in prior agreements, the Defendants were unaware the language was not part of the Agreement until the onset of litigation, and that even after the language was accidentally removed, HCWV continued to pay these fees when owed.
National Land provides an important lesson for businesses, business owners, and lawyers alike. Although the Defendants got the result they wanted, they were forced to rely upon the court to interpret the Agreement, a potentially risky proposition. If the Defendants were more careful and thorough, they would have reviewed the Agreement prior to its ratification and found that the language at issue was missing. By doing this, the Plaintiff’s claim would have no legs and court action would likely be avoided.
The Defendants’ failure to properly document their deal placed them in litigation for the better part of five years. Not only could they have avoided lengthy litigation, they also could have avoided substantial legal fees if they were more comprehensive by ensuring that their contract incorporated all of the agreed-upon terms in writing. Here, failure to do so did not doom their case, but this is certainly not the norm.
In a contractual relationship, ambiguity favors the party that did not draft the agreement. Here, ambiguity was refuted with ample evidence of prior and current conduct of the contracting parties. To avoid putting the fate of your business in the hands of the court to determine the terms of your contract, ensure that your agreements incorporate the entirety of the contractual relationship. That way, your contractual relationship is governed by what you say, not by what a court says.
- 1Miller v. Nat’l Land, 2014 Del. Ch. LEXIS 99 (2014).
- 2Id. at 2.
- 5Id. at 12-13.
- 6Id. at 28.
- 7Id. at 43.