Watch that Drafting!

I've been away from this blog for months — some very busy family issues — but that is going to change.  Starting today.

And one thing I am going to do, is draw even more upon my 31 years of practice to generate topics for this blog.

Today, for example, is a drafting issue that might affect you or someone you know: should you update an existing agreement when the law affecting that agreement changes significantly?

Sometimes this misalignment is correctable by and corrected by a savings clause contained in the original instrument; sometimes it is not.

But today's example is one that businesses and their attorneys almost always ignore: your state legislature substitutes a new statute for an old one, but contends that no significant change in substantive law is intended by the revision.  And your entire agreement — indeed, the very reason you have the agreement in existence at all — exists because of the body of statutes which has been replaced.  (In this blog, I am modifying the actual facts to better illustrate the principle.)

I am recalling a limited liability company operating agreement.  It contained an indemnification article.  But instead of setting forth the terms of indemnification directly, the article opted to import by reference the statutory scheme of indemnity for an analogous entity — the corporation.  It said that the LLC must indemnify managers to the fullest extent that the Corporation Statute would permit a corporation to indemnify its directors.

While perhaps a bit lazy, this drafting technique wasn't entirely unfitting.  It did represent the members' and managers' mutual intention.  And it did fill a void in the LLC statute in effect at that time, which did not create a default indemnification right for LLCs, but left that topic to be addressed — if dealt with at all — in the company or operating agreement.

But when the LLC Act was recodified by the state legislature, AND the Corporation Statute was recodified too, a crack appeared in the drafting of the operating agreement.

The problem?  The operating agreement referred the potential indemnitor and  indemnitee to the old Corporation Statute.  But that statute no longer existed!

The confusion could have been corrected had the operating agreement said that the LLC must indemnify managers to the fullest extent that the Corporation  Statute "as now existing or hereafter amended" would permit a corporation to indemnify its directors.

But without that "lawyerly language" which clients often consider superfluous, the potential indemnitor was breathing a sigh of relief, convinced there was NO obligation to indemnify, while the indemnitee was sputtering that it was "obvious of course" that the parties intended the indemnity to apply regardless of modifications of the Corporation Statute.

That of course was exactly the problem, and has presented itself in many cases: did the parties intend their covenants to be automatically adjusted whenever the applicable statute is modified, in order to be in full compliance with and as expansive as that statute,  or instead to be applied strictly as written regardless of changes in the law?

This case was a little unusual, because the statute cited in the operating agreement was no longer in effect.

But it can illustrate the importance of inserting "boilerplate" language into, or excluding it from, your contract.

 

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