SMALL ERRORS COSTLY

I have written earlier on how I became a part of the creation of currency swap and hedge agreements, which led to a variety of other financial derivative instruments -- and which have been a partial cause of todayπs worldwide economic troubles. See Fuji Diary 19, Winter 2004. One of those agreements involved a quite different issue – an issue that involves a much more common job for lawyers, which is writing good documents and catching typographical errors (≥typos≤).

Back in the 1980πs, I had to review and modify an early international hedge agreement prepared by others. Typically, these agreements each involve many million dollars and are very carefully written to avoid risk. Indeed, the whole purpose of a currency or other hedge is to avoid financial exposure. In the United States, financial agreements often are one to two hundred pages in length. Reading these is a difficult, potentially boring job. After having read several, one must continue to pay full attention, since the terms tend to be very similar and it is easy to take them for granted. Precise language is very important and misspellings and typos can be costly, as will be seen below.

I once found a major error. As I proudly told my son, who was then in college and now is a successful investment banker, one word had been misspelled at around page 70. In fact, it was only one letter of that word. An obligation to pay ≥Taxes,≤ a defined term meaning those taxes withheld on periodic payments under the agreement, was wrongly spelled ≥taxes≤ with a small ≥T.≤ The result would potentially have been to obligate my company to pay all of the taxes incurred by the other party, anywhere in the world. I thought this was pretty fine work on my part, especially since I calculated the potential exposure to be around US $350 million!

Catching that error made all my laborious effort seem worthwhile to me. Of course, I did not treat it as a big issue with the other partyπs lawyers, but rather quietly noted the correction as we went through the agreement page by page. They accepted the change without comment.

That such errors could be expensive has long been clear. In 2006, for example, a lawsuit between two Canadian communications companies involving cancellation of a contract for telephone poles turned on the interpretation of a single comma in a 14-page contract. The issue was whether a one-year prior notice requirement for cancellation applied to the original term as well as to renewals. The answer was worth US $1 million.

In an earlier case decided in 1992 in New York, Prudential Insurance Company sued the law firm of a lender, United States Lines, over a legal opinion letter confirming that the lenderπs debt restructuring documents were legally binding. Unfortunately, due to a typo that had been overlooked by the lawyers, the debt was stated in one of the documents to be $92,885 rather than $92,885,000. This typo, as I recall, had been missed by a paralegal and then by the supervising lawyer. Thus Prudential sued the law firm for negligent misrepresentation. The New York Court of Appeals ultimately decided that, while the law firm owed a duty of care to Prudential in this situation, the facts did not prove a breach of that duty, since the opinion letter only gave general assurances without stating a specific dollar amount. Thus the court ruled for the law firm. That was an extremely fortunate decision for the law firm which, facing huge risk, had to appeal all the way to the top court before winning.

Thus, as I told my son, I was extremely gratified that with my draft agreement, I had protected my company from any such exposure. My diligence and meticulous work had a wonderful result.

His reply to me was that this was exactly why he did not plan to become a lawyer. ≥Why,≤ I asked? ≥I do not want to catch typos,≤ he replied. ≥Iπll hire others to do that.≤

© Norman R. Solberg 2009