In another example of sophisticated parties ignoring the obvious, the parties to an option contract fought over the implication of standard contract language which provided that the option contract was supported “by good and valid consideration” and thus enforceable.
In a somewhat complex case, the parties entered into an agreement whereby CamEquity would lend money to SVCare so that SVCare could purchase a business. In connection with that, a CamEquity related entity was granted an option to purchase 99.999% of SVCare for $100 million. That option agreement stated that the parties had exchanged “good and valuable consideration” to create a binding and enforceable contract. The loan agreement and option contract were executed the same day.
The day came when CamEquity sought to exercise its option. SVCare argued that CamEquity provided no consideration in exchange for the option right and the right was therefore void. Aside from arguing that the loan was itself consideration, CamEquity pointed to the contract language stating that it provided valid consideration for the option right. SVCare claimed the loan was never made and that the boilerplate recitation of consideration was not true.
The Court of Appeal found for CamEquity. In doing so, the court decided that the SVCare’s attempt to introduce evidence to contradict the boilerplate consideration language–whether or not the $100 million loan was actually made–could not be considered by the court. Allowing that practice, in the face of a clear agreement negotiated and drafted by sophisticated parties, would undermine the stability and predictability of written agreements and create a setting where a party to a contract would question the ability to rely on the plain language of that contract. Because the option agreement “unambiguously provided that the mutually beneficial covenants constituted the consideration[, ] the importation of another obligation, such as a separate loan agreement,” could not be allowed. The court addressed the highly sophisticated parties to the transactions noting that “had these sophisticated business entities, represented by counsel, intended to make the $100 million loan payment a condition of the enforceability of the option, they easily could have included a provision to that effect.” Because the loan agreement was not even mentioned in the option agreement, the court refused to allow that issue to play any role in the option agreement’s terms and enforceability.
Remarkably, the Court of Appeals considered a second case among these parties, also involving an option contract, and again enforced the boilerplate consideration language. And again the court stated that if the parties intended for a provision to apply, the documents would have clearly expressed that intention–“this is not the sort of term these sophisticated, counseled parties would have reasonably left out of the option agreement.”
I realize that we do not know what took place when these agreements were signed. I also understand that hindsight is always 20-20. But understanding the implication of every contract provision–even among friendly parties–cannot be overstated. Failing to follow this rule can lead to a very expensive lesson.