Gradually a Shot Rang Out -- the Dangers of Contractual Ambiguity
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(an image of Snoopy at his typewriter with the caption "gradually a shot rang out" graced the Shell v. Winterthur opinion holding that the term "sudden" meant "quick" and not simply "unexpected.")
Every deal you negotiate must eventually be "reduced to writing."
I haven't talked much about negotiated agreements here. I usually defer the entire topic of contract drafting to the experts, particularly to the meticulous and scholarly Ken Adams over at Adams Drafting.
Ken recently ran a hypothetical by me, however, that gave me pause. You can find his question, together with answers by Eric Goldman of the Technology and Marketing Law Blog and Charles B. Craver, Fred H. Alverson Professor of Law at George Washington University Law School here.
(Professor Craver's useful text on basic negotiation skills, by the way, can be found here).
Although my own response to Ken's ethical question (it's not unethical until you pull the trigger) can also be found on the linked post, it's really the pragmatic question that interests me:
IS IT EVER GOOD BUSINESS OR LEGAL PRACTICE TO INCLUDE IN A NEGOTIATED AGREEMENT AMBIGUOUS TERMS THAT ONE PARTY BELIEVES THE OTHER PARTY WOULD NOT AGREE TO FOR THE PURPOSE OF EXPANDING THE CONTRACT'S REACH AT SOME LATER DATE?
As is often the case, I find it easiest to answer that question with a story -- this time, with one about a word that cost American and U.K. businesses at least a billion dollars in legal fees.
Sudden.
Does Sudden Mean Quick?
This question consumed at least half a decade of my professional life. Why?
Because I was engaged in litigation for years concerning (among other issues) the meaning and application of the “sudden and accidental” pollution exclusion common in comprehensive general liability ("CGL") policies from the early 1970’s to the early 1980’s.
Because sudden's story is lengthy and complicated, I’m forced to reduce the tale here today to its bare essentials. If you wish to understand its well-documented journey through the American regulatory and legal system, click here or here. If the pragmatic question interests you, read on.
The Word that Launched an Entire Legal Specialty
Once upon a time, a few creative and persistent litigators of great reputation demanded insurance coverage for the environmental liabilities imposed upon their chemical and petroleum company clients by the Federal “Superfund” law (CERCLA) enacted in 1980. Many equally creative and persistent litigators of great reputation represented the insurance carriers who refused to provide coverage for many reasons, one of which was the presence of the “sudden and accidental” pollution exclusion in the “polluters’” insurance policies. Many of the names of these attorneys are here.
That provision excluded coverage for
any liability of any insured, arising out of the discharge [etc.] . . . of . . . . . pollutants into or upon land, the atmosphere or any . . . body of water unless such discharge . . . . is sudden and accidental.
The 64 hundred million dollar question?
“Does ‘sudden’ mean ‘quick’ or only ‘unexpected’?
Because most environmental contamination took place over decades as the result of the slow seepage of chemicals and petroleum products into the land, water and air, the answer to this question was worth billions of dollars to corporate insureds and to the carriers that insured them. If “sudden” meant only “unexpected,” rather than “quick,” those billions of dollars would likely be paid by Lloyds of London or AIG – two of my clients -- rather than by Texaco or ARCO, two of my husband’s clients.
The petroleum and chemical companies accused the insurance industry of dissembling about their contractual intent when seeking approval of the "sudden and accidental" exclusion language. The carriers, contended policy holders, had represented that the use of the word "sudden" would not narrow existing coverage -- coverage that would have excluded unexpected -- but not "quick" -- releases of pollutants into the environment. (see here, note 5)
Assuming that the insurance industry "gamed" regulators and policy holders by placing narrow language in a contract while simultaneously intending to interpret it broadly, and without addressing the ethical issues raised by that assumption, would it have made good business sense to have done so?
I answer with another story.
When negotiating the settlement of a $250 million environmental insurance coverage action, the General Counsel for one petroleum company said the following to me about the cost of the looming three-month trial:
You don’t seem to understand. We pour hundreds of millions of dollars a day into dry holes searching for oil. We are not risk averse. The expense of litigation does not deter us.
If you and your clients can say that – or something remotely like it – including ambiguous terms in a contract to take advantage of the uncertainty thereby created might make good business (if not necessarily ethical) sense.
If you cannot, I would suggest that contracts be used for the purpose they are intended – to create as much certainty as possible in your clients’ unpredictable future so that their plans today can make them profits tomorrow.
GC boasts aside, even the richest players far prefer planning that profitable future to fighting over an unprofitable past.
