By:
Stephen D. Richman, Esq.- Senior Counsel- Kohrman, Jackson & Krantz
(A Watch
Your Language Series Article)
“If the law supposes that," said Mr.
Bumble, "the law is an ass — an idiot.”
Many laymen (and lawyers) believe, as Mr.
Bumble in Charles Dickens’s
Oliver Twist does, that the
law, as a general rule is absurd. Admittedly, there have been many absurd court
decisions over the years that reinforce this quotation. More often than not, however,
it is one or more of the parties to a lawsuit that are absurd, and the court
just affirms their inherent absurdity.
This is particularly true in commercial
contract law, predominantly because of the prevailing judicial deference to the
written word in commercial documents, without regard to the consequences of
such deference.
General Rule Re: Commercial Contract
Interpretation
As established in
other “Watch Your Language” articles for this Blog, as a general
rule, courts will typically uphold commercial document provisions unless
they are contrary to public policy or statutory law, or the subject of a mutual
mistake. Courts traditionally presume that commercial parties are on more of an
equal playing field and are more sophisticated concerning commercial real
estate transactions, since both parties will usually have attorneys to review
their documents. Because courts often defer to the specific language of a
commercial document (or lack thereof), unintended results are often the norm
for parties who do not seek professional advice, and for professionals who do
not closely review their documents. Even the failure to follow a seemingly
trivial grammar rule (the use of i.e. vs. e.g.) can result in unintended
consequences. In a 1995 Connecticut case, in spite of the tenant’s verbalized
intent to the contrary, the court held that the use of “i.e.” [meaning, that
is] vs. e.g. [meaning, for example] preceding a short list of repair items in a
lease served to limit landlord’s structural responsibility to only those items
listed in the lease vs. merely providing examples of the same.
Because of this judicial deference to
“commercial language”, and the fact that courts, as a general rule will not
look outside the four corners of a document (to consider extrinsic evidence of
intent) if the language is unambiguous, you must “watch your language,
and say what you mean, precisely, or a judge will decide what you
meant.”
The “Absurd Result Exception”- Beverage
Holdings, L.L.C. v. 5701 Lombardo, L.L.C., 2017-Ohio-7090 (Eighth District
Court of Appeals; See also, prior vacated opinion at 2017-Ohio-2983)
What if the
contract language is clear, but affirmation of such language would lead to an
“absurdly unfair” result?
Fortunately for
the appellant in the recent case of Beverage
Holdings, L.L.C. v. 5701 Lombardo, L.L.C., 2017-Ohio-7090 (See also, prior
vacated opinion at 2017-Ohio-2983), the Eighth
District Court of Appeals, recognizing that sometimes litigants need to be
protected from their own absurdity, confirmed that there is an exception to the
general rule of judicial deference to clear contract language, applicable when
such clear language would yield a truly absurd result.
The facts of the case are as follows:
On April 29, 2011, Defendant-appellant, 5701
Lombardo, L.L.C (“Lombardo”) and plaintiff-appellee, Beverage Holdings, L.L.C.
(“Beverage”) entered into an agreement in which Beverage purchased from
Lombardo a preschool/daycare business known as the Goddard School. Lombardo was not able to sell the building at the
time of the business sale because of outstanding debt it had on the property
(and a large prepayment penalty which would have been due upon a premature
payoff of the mortgage). As a result, Lombardo and Beverage, through related
entities, entered into a lease agreement which provided that Beverage would
lease the property at $12,500/mo. and continue to run the Goddard School until
Lombardo was able to sell the real property. Beverage also paid the taxes,
assessments, insurance, all utilities and all maintenance and repairs.
Approximately four years later, Beverage sent
Lombardo a notice of its intent to purchase the real estate for $1,202,110.09,
which included adjustments (credits) for principal payments, a prepayment fee,
$462,500 in rent credits, and the security deposit. Lombardo refused to sell at
that price and notified Beverage that it was revoking the purchase agreement.
Beverage then filed a complaint against Lombardo for declaratory judgement,
damages and other legal and equitable relief.
Predominantly at issue was Section 3(a)(ii) of
the purchase agreement, which provides that “the
purchase price shall be
decreased by [credited for]: Rents
received by Seller from the tenant of the Premises, prorated to date of closing.” While
both parties agreed that there was to be a credit for rents received, they
disagreed as to the amount. Beverage claimed the credit should be for all rents
received from the date of the agreement. Lombardo claimed the credit should
only be for a prorated amount of the rent for the month of closing.
The purchase agreement also provided that at
closing, Beverage Holdings would “receive
a credit equal to the reduction in principal for the mortgage notes from the
date of the execution of this agreement until the closing date.”
The trial court ruling:
The trial court found for Beverage, concluding
that “Section 3(ii)(a) of the Agreement
provides Beverage a credit for all rents paid from the date of the Agreement
until closing.”
To justify its ruling, the trial court first quoted
decisions establishing the “two-part general law re: contract interpretation”;
namely, that (1) “When parties to a
contract dispute the meaning of the contract language, courts must first look
to the four corners of the document to determine whether or not ambiguity
exists;” and (2) “If the contract
terms are clear and precise, the contract is not ambiguous, and must be
honored.” The trial court then reasoned that the contract was clear, as it
called for a credit of “rents received,” and there was no language in the
contract limiting the credit to rents received for the month of closing.
“Beverage Holdings I” (Beverage
Holdings, L.L.C. v. 5701 Lombardo, L.L.C., 2017-Ohio-2983- Vacated):
The Eighth District Court of Appeals in Beverage Holdings I, initially
agreed and affirmed the trial court’s decision.
In so doing, it reiterated the general law of
commercial contract interpretation in Ohio, citing several Ohio Supreme Court
and Eighth Appellate District decisions.
According to the court in Beverage Holdings I, “Contracts
are to be read, giving effect to every part of the agreement;…the intent of the
parties is to be determined from the contract as a whole;” and while “extrinsic or parol evidence is admissible
to explain an ambiguity or uncertainty arising out of the terms of a written
instrument…[w]hen the terms in a contract are unambiguous, courts will not in
effect create a new contract by finding an intent not expressed in the clear
language employed by the parties.”
Applying the facts to the law, the court in Beverage Holdings I concluded that, “[r]elying on the four corners of the
agreement and giving these terms their ordinary meaning, the agreement provides
for all rent paid by Beverage to be deducted from the initial purchase price.”
When Lombardo sought to introduce parol
evidence to give full effect to the parties’ intent, the court in Beverage Holdings I disallowed such
evidence, determining that since “the
terms of the agreement are unambiguous, we find the parol evidence rule
inapplicable to the instant case.”
Had the story ended there, this article would
have deemed the Beverage Holdings I
decision to be just another example of a court adhering to the general rule
regarding commercial contract interpretation.
“Beverage Holdings II” (Beverage
Holdings, L.L.C. v. 5701 Lombardo, L.L.C., 2017-Ohio-7090):
However, subsequent to the Beverage Holdings I hearing, a motion
for reconsideration was filed, and upon re-review, the Eighth Appellate
District in Beverage Holdings II
(issued August 3, 2017), reversed the trial court’s holding (and its prior
decision issued May 25, 2017).
Consequently, Beverage Holdings now stands for confirmation of another exception
to the general rule of contract interpretation; the “absurdity exception.”
In its “about face”, the court in Beverage Holdings II first cited
prior Ohio Supreme Court decisions to justify its reversal of Beverage Holdings I, and its
confirmation of the absurdity exception. Quoting Alexander
v. Buckeye Pipe Line Co., 53 Ohio St.2d 241, 374 N.E.2d 146 (1978), the
court in Beverage Holdings II stated:
“Common words appearing in a written
instrument are to be given their plain and ordinary meaning, unless manifest
absurdity results or unless some other meaning is intended from the face or
overall contents of the instrument.”
The Supreme
Court of Ohio found no absurdity in the contract language of Alexander (giving the grantee the right, in an easement agreement “to lay additional lines of pipe alongside
of the first line”), but rather it established the so-called absurdity
exception in the negative. The Ohio Supreme Court in Alexander sided with the defendant, concluding that it would not
be absurd to interpret the language as allowing for limitless pipeline
installations because “the term ‘additional’
has a numerical connotation, and the term ‘alongside of’ has a geographical
connotation…[and], when the term ‘alongside of’ is read in conjunction with the
preceding phrase ’to lay additional lines of pipe,’ it is apparent that the
term ‘alongside of’ does not contain a numerical limitation, but simply
indicates that the parties intended that additional lines be laid side by side
or adjacent to the first line.”
The court in Beverage Holdings II cited further “absurdity
precedent” in several insurance policy decisions, most notably Cincinnati Ins. Co. v. Anders, 2003-Ohio-3048
(2003), whereby the Ohio Supreme Court in Cincinnati held that it
would be absurd to consider an insured’s failure to disclose prior property
damage as an “occurrence” entitling the insured to coverage for its fraudulent,
non-disclosure.
Applying the facts to the law, the court in Beverage
Holdings II basically echoed the dissenting opinion of Judge Stewart
in Beverage Holdings I, who stated: “Given that the parties understood that Lombardo had issues with its
financing prior to entering into the real estate purchase agreement, it would
be absurd to conclude that Lombardo intended to deduct from the purchase price
both principal payments and all rents received during what could be a
lengthy lease term (the parties contemplated a lease term of as much as ten
years).” According to the court in Beverage
Holdings II, interpreting the rent credit provision as requiring all
rents between contract and closing vs rents in the month of closing to be
credited, could yield the absurd result that “Beverage would not only acquire the property, but would also be owed
money at closing [from the Seller, Lombardo]-all the while enjoying the profits
from operating the business.”
Based upon the foregoing, the court in Beverage
Holdings II reversed the trial court’s decision and remanded the
case back to the trial court to determine what the parties truly intended with
their purchase agreement.
What Is
The Moral Of This Story?
Don’t hang your
hat on the “absurdity exception to the rule.” First of all, we have no
guidelines as to what is considered “absurd.” Perhaps judges will know
absurdity, like obscenity, when they see it, but we do not have the advantage
of “judicial hindsight- x ray specs.” The few “absurdity cases” out there do
seem to turn more on equitable principles than on “interpretive absurdity.” For
example, the court in Alexander
wanted to prevent an insured from benefiting from its own fraudulent, non-disclosure
and the court in Beverage Holdings II
was concerned with the plaintiff-appellant “taking
advantage of errors in drafting.” Nevertheless, despite a few hard to prove
exceptions, the general rule re: judicial deference to the written word in
commercial documents, still… rules. Commercial real estate and other contract decisions
are still yielding absurd results, for example, those turning on the use of
seemingly trivial grammar rules such as e.g. vs. i.e., and the insertion, or
omission of commas. In other words, you must still “watch your language, and
say what you mean, precisely, or a judge will tell you what you meant.”
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