According to Vice Chancellor Zurn, the SPA in dispute in Labyrinth was “rife with blunders and omissions.” Using as a cautionary tale the bad decision made by Lord Lucan in hastily interpreting an ambiguous order, Vice Chancellor Zurn refused to choose between “two reasonable interpretations . . . [and] just charge on.” Instead of resolving the matter on a motion to dismiss, the matter must now be resolved through an expensive trial, with a full “factual inquiry to determine the parties’ intent.”
And what were these “blunders and omissions”? Well, there were really only two significant ones, and they both involved “contractual signals to nonexistent provisions”—that is, busted cross-references.
The Busted Cross-References in Labyrinth
The first busted cross-reference involved the signature block for an individual party to the agreement. In that signature block, there was a reference to “Section 7.5” as being one of only two sections of the SPA to which the signatory was agreeing to be bound. The problem was that there was no Section 7.5 in the agreement. There was a Section 6.7.5, which seemed pretty clearly to be the section that the agreement intended to reference. However, Vice Chancellor Zurn concluded:
Perhaps the parties meant Section 7.5 to be Section 6.7.5; perhaps the parties intended something entirely different. The ambiguity, while perhaps so minor as to be a typo, requires a greater factual inquiry to determine the parties’ intent. It is here that I refrain from charging “forward” with the “Light Brigade.”
The second busted cross-reference was even more problematic.
The exclusive remedy provision (Section 8.9) read as follows:
Subject to Section 10.12, the parties acknowledge and agree that their sole and exclusive remedy with respect to any and all claims for any breach of any representation, warranty, covenant, agreement or obligation set forth herein or otherwise relating to the subject matter of this Agreement, shall be pursuant to the indemnification provisions set forth in this Section 8. In furtherance of the foregoing, except with respect to Section 10.12, each party hereby waives, to the fullest extent permitted under Law, any and all rights, claims and causes of action for any breach of any representation, warranty, covenant, agreement or obligation set forth herein or otherwise relating to the subject matter of this Agreement it may have against the other parties hereto and their Affiliates and each of their respective Representatives arising under or based upon any Law, except pursuant to the indemnification provisions set forth in this Section 8. Nothing in this Section 8.9 shall limit any Person's right to seek and obtain any equitable relief to which any Person shall be entitled pursuant to Section 10.12.
The plaintiffs were seeking injunctive relief to prevent violations of certain of the post-closing covenants set forth in the SPA. Once again, however, the provision referred to a section that did not exist—there was no Section 10.12. Instead, there was a Section 9.12, which provided as follows:
Each of the parties acknowledges and agrees that the other parties would be damaged irreparably in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached or violated. Accordingly, each of the parties covenants and agrees that, without posting bond or similar undertaking,each of the other parties shall be entitled to an injunction or injunctions to prevent breaches or violations of the provisions of this Agreement and to the remedy of specific performance of this Agreement and the terms and provisions hereof in any action, suit or proceeding instituted in any court as specified in Section 9.8 having jurisdiction over the parties and the subject matter, in addition to any other remedy to which such party may be entitled, at law or in equity. Each party further covenants and agrees that, in the event of any action, suit or proceeding for specific performance in respect of such breach or violation, it shall not assert that a remedy at law would be adequate.
So, again, Vice Chancellor Zurn was faced with a busted cross-reference. While she thought it likely that the reference to Section 10.12 was intended to be a reference to Section 9.12, and that the blunder had probably resulted from a section of the agreement being deleted at some point, she could not conclude so at the motion to dismiss stage: “I will not yet say the SPA precludes injunctive relief, but without greater factual confidence, neither will I say the SPA permits it.”
Say What You Mean and Mean What You Say
Obviously, more care should have been taken in checking these cross-references before finalizing the SPA. But here are a few tricks that could have helped (other than using Word’s auto cross-reference feature, which may or may not always be reliable). First, if you ever need to delete a section, just delete the text of the section (not the section number itself) and replace the deleted text with “[intentionally deleted]”—then nothing like the 10.12 becoming 9.12 could happen. Second, I always bolded or underlined cross-references; it makes them easier to spot when you are proofing. And last, I always included parenthetical section titles with my cross-references. Thus, even if I left off the “6” in 6.7.5, if the section title was “Noncompetition Agreement,” it would probably be easy enough for the court to see the obvious intent if the reference to Section 7.5 was stated as “Section 7.5 (Noncompetition Agreement).”
Some may think this is all hyper-technical silliness. But such is the life you have chosen. The objective theory of contracts requires that courts determine what parties intended by their contracts from the words used in them. Courts assume that what you meant by your contract is what the contract actually says. So, make sure that your contract actually says what you mean. Words matter, and cross-references matter.
Let’s be careful out there.
