By Bruce Sattin.

Important commercial arrangements should be put into writing.  The process of putting together a written contract has benefits above and beyond legal issues.  It forces both sides to really think about what they want out of a relationship with another company or party and the costs and benefits of the proposed arrangement. 

A good contract should inform both sides what the expectations are and the consequences if those expectations are not met.  Both sides should try to predict what will probably happen in the future and state how the relationship will adapt, or end, if certain events take place. 

There are pros and cons to different approaches to writing a contract.  One that’s broad and vague may not be useful and possibly unenforceable.  A contract that tries to cover all possible issues will be so long and wordy that a potential partner won’t want to sign it.  Putting a contract together requires agreements between the parties on many levels.

If things go bad, one party may resort to the legal system to enforce the contract, or what it interprets as the contract.  There are almost limitless contract cases decided by the  courts.  This is a New York case as an example.  It shows the importance of clarity in contract language.

In Ashwood Capital, Inc. v. OTG Management, Inc., the court affirmed the dismissal of a claim for breach of contract.   In 2003, Ashwood Capital, Inc. (“Ashwood”) agreed to transfer to OTG Management, Inc. (“OTG”), its concession rights surrounding JetBlue Airways at its Terminal Six operations atJFKAirport in exchange for a share of the gross sales. Ashwood had previously negotiated with JetBlue for such rights and subsequently opened three restaurants in Terminal 6 of the airport.  

JetBlue stopped using Terminal Six and started using Terminal Five (where OTG contracted with JetBlue directly to operate its concessions), and OTG stopped paying Ashwood.  Ashwood sued OTG for breach of contract (among other things).  Ashwood contended that, although the contract used the words “Terminal 6,” the parties meant to create a long-term relationship, awarding Ashwood an equity interest in OTG and rights to the concessions sales at Terminal 5.

The trial court disagreed with Ashwood.  It found the contract didn’t confer rights to Terminal 5 or show an intent to create a long term relationship.  The appeals court affirmed the decision.  It stated that “according to well-established rules of contract interpretation, when parties set down their agreement in a clear, complete document, their writing should as a rule be enforced according to its terms.”  This is especially true “in commercial contracts negotiated at arm’s length by sophisticated, counseled businesspeople.”   The court stated that whether a contract is ambiguous is “[a] matter of law, [with the court] looking solely to the plain language used by the parties within the four corners of the contract to discern its meaning and not to extrinsic sources.” Concluding that there was no alternative meaning for the phrase “Terminal 6,” the court found no ambiguity in either the term itself or when read in the context of the agreement as a whole.

If you’re in a situation where you have an existing contract, or want to create a new one, contact us ((609) 275-0400) so we can advise you how best to proceed to protect your interests and help your business succeed.  As this case shows, clear language can be key, as it may be difficult to convince a judge in the future that when you agreed to six, you really meant five.