Section Review

The Business Litigation Session 2003 year in review: Holding sophisticated parties to the terms of their agreements

Patrick T. Clendenen is the chair of the Massachusetts Bar Association's Civil Litigation Section Council and a member of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. His practice is devoted primarily to business and corporate litigation.
Hillary F. Meltz is an associate, practicing in the Litigation Section of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. Her practice is devoted primarily to business and corporate litigation.

A strict approach to contractual interpretation brings uniformity and predictability to commercial disputes and is especially appropriate in situations where both parties to the negotiations possess equal bargaining power or sophistication. Unlike many consumer-business transactions where the parties stand on different footing, the commercial contract disputes most often filed in the Business Litigation Session consist generally of disputes between two sophisticated parties, knowledgeable in business and in the art of negotiation. Accordingly, equitable principles and broad contract interpretation seem to play a more limited role in the Business Litigation Session than in the general Superior Court sessions. A review of the 2003 Business Litigation Session docket supports this hypothesis, reflecting the dismissals of several complex contract claims based upon a strict interpretation of terms negotiated by sophisticated parties.

Lease agreements

A striking example of the court's refusal to apply equitable considerations to the literal meaning of a contract can be found in Epstein, Becker & Green, P.C. v. Atlas Venture, 2003 WL 1861558 (Mass. Super. Mar. 24, 2003), in which the court strictly interpreted the terms of a commercial lease. The plaintiff, Epstein, Becker & Green (EBG), is a large law firm with offices at a new office tower at 111 Huntington Ave. in Boston. EBG and another tenant, Atlas Venture, contracted with a third tenant, SAS Institute, Inc., to swap certain portions of leased space in the building. As part of the contract, EBG agreed to sublet space on the 26th floor from Atlas, provided that Atlas would cover the difference between the rent EBG received and the going rate of $61 per square foot, as set forth in the contract. What next ensued was nothing more or nothing less than a logistical oversight. For reasons wholly unrelated to Atlas, EBG learned that it would be considerably more difficult to use the 26th floor in the manner in which it had intended and, as a result, swapped plans for the 26th floor to the 27th floor. When EBG was unable to rent the subleased space on the 27th floor for the projected $61 per square foot, it demanded the difference in rent from Atlas. Atlas refused to pay on the grounds that the actual sublet space ended up being located on the 27th floor, and therefore did not meet the definition of "sublease space," set forth in the agreement as the 26th floor. Although EBG valiantly argued that "changed circumstances, unforeseen at the time the swap was entered into, required that the literal language of one portion of the [contract] be deviated from in order to effectuate the parties intent," the court rejected the equitable construction urged by EBG:

Significantly here, the plaintiff, a major national law firm, is extremely sophisticated in the matters in issue. Where a sophisticated and knowledgeable party chooses to embody its relationship in a simple written instrument crafted by it, it is entitled to and should be held to the contract language it chose.

Clearly, the parties did not intend for the windfall to Atlas that resulted from the parties' failure to amend their agreement or redefine "sublease space." Nevertheless, the court stuck to the literal meaning of the contract terms, resulting in a rare example of a full dismissal of all contractual claims against the defendant under Rule 12(b)(6). In a similar effort to stick to the plain meaning of a commercial lease agreement, the court in Slawsby v. Cifrino, 2003 WL 2152702 (Mass. Super. June 13, 2003), emphasized that both the tenant and landlord were "sophisticated and knowledgeable parties [who] chose to embody their agreement for the supermarket tenancy in issue in a detailed and carefully crafted written Lease," and were therefore "perhaps more than in other situations . . . entitled to and should be held to the contractual language they chose."

Warranty agreements and the UCC

In Kittredge Aviation, Inc. v. Bombardier Aerospace Corp., 2003 WL 369680 (Mass. Super. Jan. 24, 2003) the court dismissed various warranty claims brought by plaintiff against Bombardier Aerospace Corp. and Bombardier, Inc. (collectively Bombardier). Plaintiffs' claims arose out of the purchase of a $23.7 million jet aircraft from defendant. At the outset, the court defined plaintiff Wetherell, who owned plaintiff Kittredge Aviation, a shell corporation formed to facilitate the aircraft purchase, as a "super high net worth individual," and implied that his status was relevant in that it implied a certain level of "sophistication and ability to obtain advice and assistance in all aspects of the transaction." Id. at n. 3. Plaintiffs Wetherell and Kittredge Aviation, along with an advisory firm and an attorney from a reputable Boston law firm, entered into an aircraft purchase agreement, under which plaintiffs agreed to accept the aircraft. Section 2.4 of that agreement deemed plaintiffs to have examined the aircraft and, "subject to [plaintiffs'] rights under Article 8 as to defects, found it in conformity with the provisions of this Agreement except for defects not apparent with the exercise of reasonable care by [plaintiffs]." Article 8 contained various warranties. Importantly, Section 8.5 stated that any warranty by Bombardier concerning the aircraft "shall not apply to any engines installed in the Aircraft," but that those warranties would be covered directly by the engine manufacturer.

Shortly after Wetherell's maiden flight, he experienced low oil pressure on two separate occasions, both resulting in the shutdown of an engine and ultimately a harrowing emergency landing. After grounding the aircraft indefinitely, plaintiffs brought claims against Bombardier alleging that the engine problem fell within the category of defects not known to plaintiff and were therefore covered by the Bombardier warranty. Plaintiffs urged the court to read Section 2.4 of the agreement to trump Section 8.5, reading the engine exception out of Section 8.5 in cases where the defect was unknown to defendant. In a strict interpretation of the parties' agreement, the court disagreed and found that Section 2.4 "does not mean that Article 8 of the [agreement] is read out of the agreement entirely when dealing with nonapparent defects. Rather, it implies that all of the limitations that apply to knowable defects will not be applicable to unknowable defects."

In support of its decision, the court emphasized heavily the parties' sophistication and substantial expertise in the aircraft purchase area. The court stated, "[h]ere - perhaps more than in situations in which there is a disparity in bargaining power or a general lack of sophistication about the matter at hand - where knowledgeable and fully represented parties chose to embody their relationship in a detailed and carefully crafted written instrument, they are entitled to and should be held to the language they chose." Indeed, "to conclude that [plaintiffs] were lacking in sophistication or that their advisors were neophytes in the transaction at hand or that they, and their advisors and counsel, were not fully knowledgeable about matters relating to the [agreement] and the Engine Warranty would be a misunderstanding of gigantic proportion by this Court."

Similarly, the court dismissed plaintiffs' claims based on plaintiff's lack of security interest priority in Chesapeake Investment Servs., Inc. v. The Olive Group Corp., 2003 WL 369682 (Mass. Super. Jan. 30, 2003). By giving practical effect to a subordination agreement between plaintiffs and Fleet Bank, the court precluded plaintiffs from collecting on a defaulted promissory note and security agreement that they had previously entered into with defendant. "A key to determining the present motion involves interpretation of the Subordination Agreement executed by [the parties]," stated the court, and therefore "[t]he agreement's plain language becomes critical." In response to plaintiffs' attempt to "cure" defendant's alleged default under the agreements by transferring title to a primary asset of defendants, the court called plaintiffs to the table on their borderline behavior:

A subordinated creditor, Chesapeake, is attempting to find a default by its debtors, Omega III and OGC, so that Chesapeake can seize an asset worth millions of dollars more than the outstanding indebtedness. And Chesapeake is doing so despite the fact that the two notes representing loans by it are now - and so far as the record before the Court shows, always have been - fully current in payments of principal and interest on the dates that each such payment has become due. Thus, Chesapeake seems to be searching frantically to find a default, however technical, by the Defendants in their obligations to Fleet, while Fleet seems utterly indifferent to the situation between it and its debtors. Chesapeake's activities are all occurring despite the specific limitations imposed on it by the Subordination Agreement.

Id. at *6. Although the court noted, in a one-sentence paragraph at the beginning of its opinion, that "[n]either Gangi nor Chesapeake is in the regular business of making loans to restaurants or other any other entities," plaintiffs' inexperience with respect to business loans ultimately did not affect the court's reasoning. Rather, the court considered plaintiffs sophisticated enough to understand the inescapable consequences of entering into a subordination agreement and dismissed their claims accordingly.

Settlement agreement

In Rauseo v. Massachusetts Port Auth., Civ. Action No. 01-1053BLS (memorandum and order on cross motions for summary judgment), the court interpreted the word "allow" in the strictest of senses. In 1995, defendant Massachusetts Port Authority appealed from the grant of a variance by the Boston Board of Appeal to plaintiffs Michael Rauseo and the Suffolk/Medford Realty Trust. The variance permitted plaintiffs to convert a warehouse in Charlestown to much-needed residential and working space. Several years later, Massport entered into an agreement with plaintiffs whereby, for certain rights regarding the property, it would dismiss its appeal of the board's decision to grant plaintiffs a variance. Specifically, the agreement stated that the plaintiffs would be "allowed to pursue its present plans to rehabilitate the existing building. . . ." Plaintiffs then had to petition to move the boundaries of the designated port area in which the pending project fell. But Massport refused to support plaintiffs' petition, knowing full well that without such a redesignation the plaintiffs' project could not possibly move forward. Massport's refusal to support plaintiffs' endeavor fueled plaintiffs' breach of contract claim against it. The court, however, refused to interpret the agreement between Massport and the plaintiffs as anything more than an agreement by Massport to "allow" plaintiffs to proceed. By parsing the words of the parties' agreement, the court found that Massport was in full compliance because it "allowed" the variance, which the court interpreted as simply "not opposing" the plaintiffs' efforts. The court then concluded that sufficient facts did not exist with which to find that Massport actively opposed plaintiffs' petition, dismissing plaintiffs contract claims.

Consistency and predictability, two of the goals originally advanced in favor of the Business Litigation Session, continue to fuel its popularity and, as demonstrated by the above-summarized 2003 Business Litigation Session commercial contract cases, rightfully so. Attorneys are better able to gauge the particular outcome of a contract case in the Business Litigation Session and are better able to enforce the benefit for which their client bargained. Indeed, by its uniform approach and strict interpretation of contracts and agreements between sophisticated parties, the Business Litigation Session is just what it purports to be - all business.

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