The Eastern District of the Missouri Court of Appeals reversed a trial court’s grant of summary judgment in Pelopidas, LLC et al. v. Keller due to that court’s erroneous contract interpretation, and instead ordered that summary judgment be entered for the opposing party. In its ruling, the Court of Appeals underscored the basic tenets of contract interpretation and highlighted the role of the American Bar Association’s A Manual of Style for Contract Drafting as “a highly regarded authority on contract drafting.”
The case originated from a 2016 dispute concerning the management of a commercial enterprise jointly owned by ex-spouses. The parties entered into a settlement agreement in September 2019, whereby the ex-wife (Keller) agreed to transfer her 50% ownership in the business to Respondents (Pelopidas, LLC and Brown) in exchange for compensation of $8.85 million. Following the September 2019 settlement agreement, the timing of the Keller’s transfer of her Pelopidas stock became a point of contention between the parties, as the contract itself did not contain a date of transfer. Respondents sued to enforce the terms of the settlement agreement, claiming that Keller had transferred her 50% ownership interest effective as of the date of the settlement agreement; seeking to enjoin Keller from claiming she still had an ownership interest in the company; instructing the parties to finalize the settlement under which Keller was to be paid $1.1 million that Brown had placed in escrow; and awarding Respondents their reasonable attorneys’ fees. Keller counterclaimed, seeking damages for Respondents’ alleged failure and refusal to make an accelerated payment of $8.6 million pursuant to the terms of the settlement agreement.
The disputed language in the settlement agreement reads as follows: “… [Keller’s] stock shall be surrendered/sold, escrowed and pledged back to plaintiff.” Respondents argued that the language required Keller’s stock to be immediately transferred upon the date of settlement, September 30, 2019. Keller contended that, according to the settlement agreement’s language, the transfer would become effective on “some future date (i.e., whenever the parties could negotiate, draft, and execute the necessary supplemental documentation).”
The trial court granted summary judgment in favor of the Respondents, finding that “Keller surrendered, transferred, and assigned all right, title, and interest in Pelopidas, LLC effective September 20, 2019.” The trial court likewise denied Keller’s cross-motion for summary judgment, and awarded Respondents over $400,000 in attorneys’ fees.
On appeal, Keller argued that the lower court erred and that Respondents were not entitled to judgment as a matter of law because the settlement agreement “contained a promise of future performance regarding the transfer of her stock in Pelopidas to Brown.” Rather, Keller argued, she was entitled to summary judgment, ordering that payment be made at some reasonable future date. The Court of Appeals agreed with Keller.
The appellate court noted that summary judgment in contract interpretation disputes is not appropriate where the contract language is ambiguous or requires a factual determination by the court. But here, there was no dispute that the contract language required Keller to transfer her stock, and the only question at issue was when that transfer should occur. That issue, the Court of Appeals concluded, was ripe for summary disposition.
On the matter of contract interpretation, the appellate court emphasized the familiar principle that the judiciary should use the “plain, ordinary, and usual meaning of the contract’s words” in order to give effect to the intention of the contracting parties. In determining the timing of Keller’s stock transfer to Respondents, the court ruled that the use of “shall be” in the parties’ settlement agreement imposed a future obligation on Keller and did not create a requirement for immediate performance.
In its decision, the court endorsed Keller’s citations to the ABA Manual of Style for Contract Drafting, which instructs that contract drafters can select between “language of performance” and “language of obligation” among other types operative contract language. Language of performance “expresses actions accomplished by means of signing the contract itself” and is typically accompanied by use of the word “hereby.” Language of obligation “is used to state any duty a contract imposes on one or more parties and is typically accomplished by the use of the word “shall.”” The court further emphasized that because the English language does not contain a future tense, “shall and will have come to be used with future time.” The court further instructs that, even though “shall” is “now used in a variety of other ways, “in the stylized context of the language of business contracts … shall continues to serve as the principal means of expressing obligations.” The court also found that Keller’s interpretation of “shall” was consistent with dictionary definitions for the term.
Based on their findings, the appellate court reversed the trial court’s grant of summary judgment against Keller and instead directed the circuit court to enter judgment for Keller, plus interest and attorneys’ fees.
This case serves as an important reminder to go back to basics when drafting business contracts in Missouri. Drafters must pay special attention to the plain language meaning of the language they choose, to avoid ambiguity and ensure that the contract accurately reflects the intention of the parties. And they should pay special heed to the distinction between “language of performance” and “language of obligation”.
* Hannah D. Chanin assisted in the research and drafting of this post. Chanin earned her J.D. from Washington University School of Law in St. Louis this spring and is a current candidate for admission to the Missouri Bar.