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The BUSKLAW January Newsletter: Recent Court Decisions Prove It: Every Word in a Contract Has Meaning!

In contracts, words are weapons. A lawyer who effectively drafts contracts will make careful word choices because the client's fate often depends on it. And every word in a contract has meaning: two recent cases support that truth. 

First, we have Heimer v. Companion Life Insurance Co., a 6th Circuit Court of Appeals decision issued just a few days ago. One Beau Heimer got drunk with his friends, but they all decided to take their motorbikes off-road for even more fun. Unfortunately, Beau collided with one of his pals and suffered major injuries; the medical expenses to put Beau back into some semblance of order exceeded $200,000.00. Beau filed a claim with Companion Insurance, but they declined to pay. Why? Because the vehicle insurance policy that they issued to Beau contained an exclusion for the illegal use of alcohol

Beau's attorney was crafty. He argued that Beau didn't illegally use alcohol. Beau was not a minor and didn't drink in defiance of a court order. Beau was intoxicated for sure (twice the legal limit!), but this exclusion shouldn't apply to illegal post-consumption conduct, such as the illegal use of a motor vehicle. And the Court agreed, scolding Companion for not using specific policy language excluding coverage for claims where the insured is found to be legally intoxicated. 

The distinction between an insurance coverage exclusion for the illegal use of alcohol as opposed to being legally intoxicated may be splitting hairs, but it was enough to cost the insurance company big bucks for the failure to word the exclusion to match their intent. I bet that Companion's lawyer who drafted their policy will be more careful with his word choices in the future. 

The second case involving the impact of a few words was a 7th Circuit Appeals Court case: ADM Alliance Nutrition Inc. v. SGA Pharm Lab Inc. The parties were sophisticated businesses. SGA supplied ADM with a product used to make medicated animal feed. The parties ended their relationship by signing a termination agreement under which ADM agreed to release SGA and its officers from any and all claims, whether known or unknown. Here's the rub: after the termination agreement containing this release language was signed, ADM came to believe that SGA had misrepresented the potency of the product that SGA had supplied to ADM, so ADM sued SGA for breach of contract and fraud. SGA asked the court to dismiss the suit on the basis that the release was for claims both known or unknown.The Court agreed, finding that as between two businesses, this release language was effective to cover the unknown claims for fraud and breach of contract. 

Just because the phrase, known or unknown claims, is commonly used in a release agreement doesn't mean that ADM had to agree to it. They could have insisted on a specific description of the claims being released or simply refused to agree to the release of unknown claims. But they didn't, and they lost!

These two cases prove that every word in a contract means something. That's why contract-drafters must ponder every word and how it might relate to every eventuality. This is easier said than done, but who said that drafting effective contracts - especially using plain language instead of legal jargon - is a cinch?
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If you find this post worthwhile, please consider sharing it with your colleagues. The link to this blog is www.busklaw.blogspot.com and my website is www.busklaw.com. And my email address is busklaw@charter.net. Thanks!

Comments

As a follow-up, consider this post by Professor Toedt. (If you think you know what "groceries" mean, think again!)
http://www.oncontracts.com/definitions-groceries-ambiguous-florida-alabama/

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