Writing Contracts Requires Imagination

When your lawyers lack imagination, it could cost you $5.5 million. Cognitive psychologist and author Steven Pinker wrote that writing requires imagination. Writers, according to Pinker, have to imagine interacting with their audience without the benefit of direct feedback, such as verbal response, facial expression, or body language. Even text messages have a level of immediate feedback that writing prose or poetry lacks.

Lawyers who are writing contracts have an added challenge. When a lawyer writes a contract for a client, they must engage in two imaginary scenarios:

  1. What will their client need and want from the contract? The client-centric analysis is done quite well by most lawyers after all the lawyer has the benefit of being able to talk to their client.
  2. What will the client’s customer or business partner want or expect from the contract? This is the second analysis that is often not done. Part of the reason, I believe, has to do with the profession (lawyering is a client-centric profession), but because the clients often need to help lawyers with a customer-centric analysis. No one knows their customers better than the business who serves them, but lawyers often don’t ask for and clients rarely provide details about what the customer wants in the contract.

Here is an example of what happens when a little imagination might have saved $5 million.Those of you who love college basketball know how hard it is to predict the perfect bracket for March Madness. A couple of years ago, Yahoo! considered having a $1 billion prize for someone who could correctly predict the outcome of all 63 games in the bracket. Yahoo! then entered into a contract with SCA Promotions, Inc., a company that does risk management for contests and promotions, to have the $1 Billion prize. In exchange for Yahoo! paying an $11 million fee, SCA said they would pay $1 Billion to whomever accurately predicted all 63 games. There was a cancellation provision in case Yahoo! decided not to put on the contest. In the end, Yahoo! decided not to announce the contest and hearts were broken even before their brackets got busted.

The contract had an initial deposit of $1.1 million at the end of 2013 and the remaining $9.9 million due by February 15, 2014. The rest of the contract was fairly innocuous if a tad wordy. But, the cancellation provisions were less than clear, and that is where the real story begins. At stake in the case was this provision:

Cancellation fees: Upon notice to SCA to be provided no later than fifteen (15) minutes to Tip-Off of the initial game, Yahoo may cancel the contract. In the event the contract is cancelled, Yahoo will be entitled to a refund of all amounts paid to SCA subject to the cancellation fees set forth in this paragraph … Should the signed contract be cancelled between January 16, 2014 and February 15, 2014, a cancellation penalty of 50% of the fee will be paid to SCA by Sponsor (emphasis added).

Yahoo! had paid the initial payment of $1.1 million. Then Yahoo! canceled the contract before paying the $9.9 million. Yahoo! said it owed SCA a cancellation fee of $550,000 or 50% of the money Yahoo! had already paid. SCA argued that the cancellation fee was $5.5 million of 50% of the entire fee. The parties went to court over the $5 million difference. An appellate court said that SCA was right and Yahoo! owed $5.5 million. The case is SCA Promotions, Inc. v. Yahoo!, 868 F.3d 378  (Fifth Cir. 2017).

So what happened? Bad contract drafting happened but not necessarily in the language. Although some better language might have been used, the purpose of the cancellation provision was pretty clear. Ken Adams, author of A Manual of Style for Contract Drafting blames antecedent ambiguity. Certainly, from a straight contract writing perspective, Ken is right. Both sides missed the ambiguity in the phrase the fee (more on that in another post).  Remember, these parties have lots of high-priced legal talent on call. While sloppy language and sloppy editing play a role, the problem is a bit more basis than simple word choice. All that high-priced talent screwed this contract up because they failed to imagine what the other party might want in a cancellation fee provision.

The lawyers for each side failed to imagine what is likely a pretty easy scenario to envision. What would happen if the Yahoo! canceled the contract before the full $11 million fee was paid? It is a simple question. Yahoo! had a fair amount of time, about six weeks, after they paid the first installment of the fee and the deadline to pay the second installment. You don’t have to be the Amazing Kreskin to know that Yahoo! would want to minimize their loss if they canceled the contract. Nor do you have to be the Amazing Kreskin to know that SCA would want to maximize their gain if Yahoo! canceled.

Both sides failed to imagine what the other side would want and therefore assumed (and you do know what assume means) that their interpretation was correct. By the way, SCA lost during the trial in a lower court but won on appeal.

In case you are wondering, what would I have done to write this contract? Put some hard numbers in the Cancellation Fee provision. Something like this:

Cancellation fees: Yahoo! may cancel the contract upon written notice to SCA no later than fifteen minutes to Tip-Off of the initial game. If Yahoo! cancels the contract before the first installment is paid, the Cancellation fee is $10,000.00. If Yahoo! cancels the contract after the first installment is paid but before the second installment is paid, the Cancellation Fee is $550,000.00. If Yahoo! cancels the contract after the second installment is paid, the cancellation fee is $5,500,000.00.

There is no ambiguity, antecedent or otherwise, about what the cancellation fee is or what the amount of the cancellation fee. Would the parties have negotiated the matter if drafted the way I suggest? Probably, but if everyone signed the agreement with this provision, there would not have been a lawsuit about the matter. This lawsuit was a waste of money, not counting the $5.5 million Yahoo! had to pay.

Lack of imagination is expensive.

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