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Contracts May “Legally” Obligate a Party to Pay, Even Without a Court Judgment

Time and again, courts have been tasked with construing ambiguous and inconsistent terms in contracts, which this blog previously addressed here. Recently, the Sixth Circuit revisited the issue of interpreting contractual language in Dark Horse Express, LLC v. Lancer Insurance Company, holding in its August 6, 2018 opinion that a contract’s language requiring an insurance provider “to pay all sums” that the insured “legally must pay” did not first require a court judgment. 733 F. App’x 826, 827-28 (6th Cir. 2018).

While a driver for Dark Horse, a trucking company, stopped at a hotel midway through a delivery of $250,000 worth of meat for a food supplier, his truck was stolen. Once the truck was located the following day, Dark Horse discovered that some of the meat was missing and that the trailer’s security seal had been broken. In light of this, the food supplier rejected the entire load upon delivery, per the terms of its contract with Dark Horse. After Dark Horse sold the leftover meat for $50,000 and gave that money to the food supplier, it then demanded the remaining $200,000 due. Dark Horse’s insurer, Lancer, refused to pay, so Dark Horse paid the food supplier the remaining $200,000 and subsequently sued Lancer for breach of its insurance policy.

The United States District Court for the Middle District of Tennessee ruled in favor of Lancer on summary judgment, reasoning “that the policy required coverage only for payments mandated by a court judgment.” Id. at 827.

On appeal, however, the Sixth Circuit reversed, finding that based on Tennessee law, “the phrase ‘legally must pay’ included Dark Horse’s payment obligations under contracts as well as under judgments.” Id. at 827-28. The Court framed the issue as “whether the phrase ‘legally must pay’ included payments mandated by sources other than court judgments, namely the transportation contract between Dark Horse and [the food supplier].” Id. at 827.

Relying on the “plain meaning” of the term “legally must pay,” the Court noted that such language signaled an obligation, which “can arise in the legal sense from contracts as well as judgments.” Id. Reflecting that courts typically enforce parties’ contracts, the Sixth Circuit explained that “as a matter of ordinary English, one would say that a party who breaches a contract is obligated—not only morally, but legally—to make the other party whole.” Id.

Lawyers are oftentimes inclined to use legalese instead of employing literal, straightforward language. In this case, the result might have been different had the drafting party substituted “adjudicated” for “legally,” as the only case Dark Horse cited on this issue favorably viewed such terminology. See Certain Underwriter’s at Lloyd’s of London v. Transcarriers, Inc., 107 S.W.3d 496, 501 (Tenn. Ct. App. 2002). Ultimately, it appears that it would be wise to use more specific, literal wording when drafting a contract with the intent of premising obligations under such contract on a court’s adjudication of liability.

Hannah Kay Hunt Freeman