Eighth Circuit Contracts Cases 2011 (Part 7)

Anderson v. Hess Corp.

The word “or” can cause confusion in a contract that can be expensive to resolve when the assistance of lawyers and federal judges is required. Diligent drafters should be on the lookout for potential ambiguity in order to avoid unnecessary expense and litigation. Anderson v. Hess Corp. is a case in point.

The Andersons, along with the owners of several parcels of land that adjoin the Andersons’ land, were parties to an oil lease with Hess Corporation. The lease automatically renewed at the end of its term if Hess Corporation was then conducting “drilling or reworking operations.”

Anderson v. Hess Corp. turned on whether the phrase “drilling or reworking operations” should be interpreted to mean “(a) drilling or (b) reworking operations” or whether it meant “drilling operations or reworking operations.”

“Drilling” and “drilling operations” apparently have clear technical meanings in the trade. Hess Corporation was conducting drilling operations when the initial term of the lease expired, but it had not yet commenced actual drilling because of delays. Not wanting the lease to remain in effect, the Andersons claimed that the lease expired at the end of its term because Hess Corporation was not engaged in “drilling or reworking operations.”

Both the United States District Court for the District of North Dakota and the United States Court of Appeals for the Eighth Circuit held that the phrase should be interpreted to mean “drilling operations or reworking operations.”

It turns out that the phrase “drilling or reworking operations” is common in oil leases and has been well litigated. It makes me wonder why it’s still in use. Why not write “drilling operations and reworking operations”?

The answer is probably that the lawyers involved in drafting oil leases are too busy to read cases that have interpreted the very words they are drafting. In addition, most attorneys use the contract from the last similar deal that they worked on as the basis for each new contract they draft. They (we) merely revise the terms that are different in the new deal. If we don’t improve our precedent contracts along the way (and make sure we incorporate improvements into new contracts rather than let them die in a single one-off improvement), then sub-optimal language will persist even in the face of court cases that demonstrate its shortcomings.

For a discussion of syntactic ambiguity, see Ken Adams’s post A Little Syntactic Ambiguity, A Lot of Time and Money Wasted, which discusses this case. I’d also recommend reading Chapter 11 of his book A Manual of Style for Contract Drafting, which has an excellent discussion of this type of ambiguity and how to avoid it.

Erdman Co. v. Phoenix Land & Acquisition, LLC

Erdman Co. provides a lesson for litigation strategy when a binding arbitration provision in a contract is involved: in order to preserve its right to compel arbitration, a party must do all it can to make the earliest feasible determination of whether to proceed in court or by arbitration.

The plaintiffs in Erdman Co., which were a contractor and its wholly-owned engineering subsidiary, sued to enforce a contractor’s lien and an architect’s and engineer’s lien against the defendants, which had engaged the plaintiffs for a construction project. When a dispute over performance under the construction contract arose, the defendants stopped making progress payments and the plaintiffs ceased work on the project.

The construction contract contained a binding arbitration provision with an exception for claims by the plaintiffs for enforcing liens. When the plaintiffs sued, they alleged breach of contract and unjust enrichment in addition to their claims to foreclose on their liens.

The court applied a three-part test to determine whether the plaintiffs had waived their right to compel arbitration: (1) whether they knew of their existing right to arbitration, (2) whether they acted inconsistently with that right, and (3) whether they prejudiced the defendants by their inconsistent actions.

The United States District Court for the Western District of Arkansas found that the plaintiffs knew of their right to arbitrate and that the defendants were prejudiced by the plaintiffs’ actions to litigate. The trial court also found that the plaintiffs had acted inconsistently with their right to arbitrate by, among other things, bringing claims that weren’t arbitrable and answering the defendants’ counterclaims without invoking their right to arbitration.

The Eighth Circuit affirmed and stated, “[The plaintiffs] initiated the lawsuit, joining arbitrable contract and unjust enrichment claims against Phoenix Land for the alleged $2,559,948 unpaid contract balance without simultaneously seeking to arbitrate this contract dispute. In our view, that was an election sufficient to support the district court’s finding that Erdman acted inconsistently with its right to arbitrate.” In addition, the plaintiffs’ other conduct in the course of prosecuting the dispute was inconsistent with a party choosing arbitration over litigation.

In Category: U.S. 8th Circuit Contract Cases

Receive posts via email

Click Here!
Show 3 Comments
  • Ken Adams January 17, 2012, 7:00 am

    Brian: Excuse me for being a pedantic bastard, but the word or wasn’t at issue in Anderson v. Hess Corp. In other words, there was no confusion regarding whether the or was inclusive or exclusive. Instead, as you note, the problem was due to syntactic ambiguity.

    • Brian Rogers January 17, 2012, 8:00 am

      Ken: Good point. I hadn’t noticed my conflation of the two concepts in the introduction. I re-worked the first paragraph in response, as well as to avoid stating that the phrase at issue was ambiguous, because the court found that it wasn’t ambiguous.

      • Ken Adams January 17, 2012, 9:00 am

        Whether contract language is ambiguous depends on whether reasonable readers could derive alternative meanings from it. Too often what a court has to say on the subject is entirely unhelpful, so I wouldn’t be deferential.

Leave a Comment