(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’ 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 the 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, andsay 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 inBeverage 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.”