Legal Blog

Drafting

We have written about contract interpretation and contract drafting on a number of occasions. Of course, lawyers will continue to draft almost unintelligible provisions and leave them for courts to attempt to interpret what the drafter never really understood in the first place. We have concluded that the longer a sentence is, the more likely it is badly drafted. As a case in point, we will discuss Paloma Resources LLC v. Axis Insurance Company, 2025 decision of the United States Court of Appeals, for the Fifth Circuit.

The Issue

A plaintiff sued the insured, claiming that the insured’s employee colluded with two of the plaintiff’s employees to steal confidential information so that the insured could unfairly compete with the plaintiff. The insured settled the action with the plaintiff and then turned to its insurer to recover its defence costs and fund the settlement. The insurer declined coverage; in doing so, it relied on an exclusion clause in the insurance policy. The question for the court was the interpretation of that exclusion clause.

The Exclusion

Here it is in all its glory.

The Insurer shall not be liable … for Loss on account of any Claim … based upon, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving any actual or alleged infringement of copyright, patent, trademark, trade name, trade dress, or service mark or the misappropriation of ideas or trade secrets, or the unauthorized disclosure of or access to confidential information; provided that this exclusion shall not apply to Loss on account of a securities Claim, a Securityholder Derivative Demand, or a derivative action.

90 words, 7 lines, and one sentence. This is absurd drafting; it almost guarantees a dispute.

Interpretations

We are not keen on provisos that extend, and attempt to limit, the main thought of a clause. Rather than saying “provided that”, we prefer to end the main thought with a period and then start with “However,”. Accordingly, we would have drafted the proviso portion of the exclusion clause as follows: “… confidential information. However, this exclusion …”

The dispute dealt with the first part of the exclusion clause (68 words). The proviso portion was not relevant.

The insured wanted the court to interpret the exclusion clause as follows:

 …. based upon, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving

• any actual or alleged infringement of copyright, patent, trademark, trade name, trade dress, or service mark or
• the misappropriation of ideas or trade secrets, or
• the unauthorized disclosure of or access to confidential information;

The insurer wanted the words “actual or alleged” to not only modify “infringement”, but also to modify “misappropriation” and “disclosure”. Why? Because the original claim against the insured had nothing to do with infringement; it had everything to do with misappropriation of ideas and (unauthorised) disclosure of confidential information. The settlement between the plaintiff and the insure involved the release of the insured’s employees from liability and a dismissal of the action against the insured, but never determined that there was an actual misappropriation or an actual unauthorised disclosure. In order to deny coverage, the insurer needed an interpretation that allowed it to hang its hat on an alleged misappropriation or an alleged unauthorised disclosure.

 Determiner

A determiner is a “word that comes before a noun and specifies something about the noun’s quality, definiteness, or ownership. A determiner can be an article or a limiting adjective.” (per Teddy Snyder). Examples of an article are: the, and, an. Examples of a limiting adjective are: this, that, each, whose, your, many, which.

The point in drafting is to ensure that, when there is a list, each grouping of words in the list starts with the same part of speech. You will note that infringement, misappropriation, and disclosure (although first modified by “unauthorised”, an adjective) are all nouns Accordingly, this is what the exclusion clause should have said to support the insurer’s interpretation:

any actual or alleged:

• infringement of copyright, patent, trademark, trade name, trade dress, or service mark or
• misappropriation of ideas or trade secrets, or
• unauthorized disclosure of or access to confidential information;

The moment that the drafter inserted “the” in front of misappropriation and (unauthorised) disclosure, the determiner “the” broke the list so that the words “actual or alleged” only applied to the 1^st bullet. Had the drafter not inserted “the” at the start of the last 2 bullets, “alleged” would have applied to them.

The insurer’s interpretation simply made no sense grammatically. Consequently, the court preferred the insured’s interpretation. The court set aside the summary judgment against the insured and remitted the matter to the lower court for a determination, after considering its interpretation, as to whether the insurer had a duty to defend or a duty to indemnify the insured pursuant to the insurance agreement.

Suggestions

What should a drafter do (or not do) when it wants include a whole list of items in either an inclusion or an exclusion clause? There are two obvious answers:

• Do not use a clause just because someone else has used it previously. It may be outdated; it may simply be wrong. Parse the clause and understand what it actually means.
• Use bullet points; if the drafter had used the bullet points that we just referenced above, the insurer would have had no problem.

As a corollary, a drafter may break up a clause into its constituent elements without using bullet points. For example, the drafter could have drafted the clause as follows:

The Insurer shall not be liable … for Loss on account of any Claim … based upon, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving any actual or alleged (i) infringement of copyright, patent, trademark, trade name, trade dress, or service mark or (ii) misappropriation of ideas or trade secrets, or (iii) unauthorized disclosure of or access to confidential information …

This would have worked also.

As a third suggestion, but not one that is applicable to the “determiner” issue and the clause in this insurance dispute, there is no need for a 90-word or even a 68-word sentence. Any time there is a very long sentence, break it up. Insert semi-colons; insert periods; define a list of words so that the list does not have to be repeated multiple times. In essence, simplify matters so that a reader can actually understand what you are writing.

The exclusion clause has 88 words per sentence, 5.1 characters per word, and a Flesch-Kincaid grade level of 23.2 (i.e. a readability test that scores a piece of text based on the U.S. school grade level required to understand it).  A university graduate would have a grade level of 16.

In contrast to the insurance exclusion clause, this newsletter (less the exclusion clause) has an average of 19.2 words per sentence, 4.8 characters per word, 4.0% passive sentences, and a grade level of 10.2.

Words are Important

This was the title of a text that we had in Grade 13, which gives you some indication as to how old the writer is. The point is: words are important; grammar is important. And vocabulary and grammatical mistakes in commercial contracts and in court documents will demonstrate to an informed reader that the drafter may be deficient in meeting a very basic criterion to be a good lawyer.

 

Image courtesy of laj987.

Written by Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.