The Eastern District of Missouri recently highlighted the importance of plain language, or the ordinary meaning doctrine, which suggests words in contracts should be given their everyday meaning unless the context of the contract indicates an alternative.
Pelopidas v. Keller
Pelopidas v. Keller involved a dispute between a previously marred couple and their respective interest in a company. After divorcing, the couple agreed to retain their respective 50% ownership of the Pelopidas holding company. One spouse remained the owner/manager of the company and the other was an owner/employee drawing salary and benefits.
The owner/employee brought claims for breach of fiduciary duty in 2016. Ultimately, the owner/manager ex-spouse resigned from the company in 2019 and the company’s largest client and primary source of revenue terminated its business relationship with Pelopidas. Following these events, the parties mediated the lawsuit and entered into a written agreement titled “Memorandum of Settlement” outlining an agreed transfer of interest from the owner/employee to the owner/manager in exchange for a monetary payment.
The contract language included “Plaintiff’s stock shall be surrendered/sold, escrowed and pledged back to Plaintiff” and included a payment schedule over three and a half years. There was no effective date for the transfer of the owner/employee’s interest. In early 2020, the parties reached an impasse regarding finalizing the settlement and transfer of stock. The owner/employee then filed suit to enforce her version of the transfer of stock settlement which included a different effective date than that proposed by the owner/manager. The trial court granted summary judgment in favor of the owner/manager on the grounds that the effective date of the transfer of stock was the date in which the settlement was executed. The owner/employee appealed.
The Eastern District reversed the trial court’s ruling, instead directing the court to enter summary judgment in favor of the owner/employee. The Eastern District stated, “It is well established that the cardinal principle for contract interpretation is to ascertain the intention of the parties and to give effect to that intent. To that end we use the plain, ordinary, and usual meaning of the contract’s words and consider the document as a whole.”
What’s The Difference Between Language of Performance and Language of Obligation?
The appeals court went on to determine the plain meaning of the use of “shall be” in relation to the transfer of the stock to determine the intent for whether it imposed a future obligation or immediate performance. The Court stated, “very simply, it is the only reasonable interpretation of the words “shall be” in [the contract clause], which clearly commands that each of these requirements occur sometime after [the date the settlement was executed].”
The Court went on to cite to the American Bar Association’s A Manual of Style for Contract Drafting which notes the differences between language of performance and language of obligation.
Language of Performance: Expresses actions accomplished by means of signing the contract itself, is typically accomplished by use of the word “hereby.”
Language of Obligation: States any duty a contract imposes on one or more parties and is typically accomplished by use of the word “shall” or “will.”
The Court noted that this plain language interpretation is reinforced by the fact that the dismissal of the underlying lawsuit was accomplished with the same language “shall be” with the intent that the lawsuit be dismissed at a future date following the execution of the supplemental documentation related to stock transfer.
“Hereby” vs. “Shall Be”
The takeaway lesson for businesses and contract drafters is to avoid utilizing any language of obligation if the intent of the parties is to effectuate the date of the agreement at the time of execution. In fact, the ABA manual specifically states in Section 3.72, that the word “shall” should not be used to express anything other than language of obligation in a contract. The alternative language to effectuate the date of the stock transfer as the date of the settlement execution could have been, “Plaintiff’s stock is hereby surrendered/sold, escrowed and shall be pledged back to Plaintiff.”
When drafting a contract, the details are of utmost importance. RDM’s Business Law Team understands the ins and outs of complex contractual agreements and can help you ensure that what you see is what you get. Contact RDM before you sign on the dotted line.
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