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Contract Terms Have Specific, Carefully Defined Meanings, and are Not Ambiguous, and so Extrinsic and Parol Evidence to be Excluded, and Buyer of Kalamazoo Coating Resin Business Must Remediate Site

A recent federal case in New York was a reminder that in contract litigation, the parties should be careful what they claim about how "unambiguous" a contract provision assigning environmental liabilities, as elsewhere, and that in contract drafting, even apparently simple phrases have certain meanings and not others. The indirect lesson is that business people should not assume that environmental and real estate lawyers' insistence on the use of very specific terms in contracts is more academic than practical and serves no useful purpose. Indeed, the care with which such terms were defined and used provided the winning margin for Cytec Industries (Cytec).

CASE BACKGROUND

In 2012, Cytec began to market the sale of its coating resin business, which included many facilities, one of which was in Kalamazoo, Michigan. Advent/Allnex entered contract negotiations to purchase following Cytec's environmental assessments of the property noted soil and groundwater contamination. Advent's environmental due diligence showed sulfuric acid spills, and liquid alum waste leftover from the coating resin manufacturing process. Advent entered three bids for the business. The final bid was $1.35 billion, which listed "environmental liabilities" of $35.1 million.

During the sale negotiations, Advent sought to change the definition of "Assumed Liabilities" listed in the stock asset purchase agreement. Cytec's counsel rejected almost all the proposed changes. Soon after the agreement had been signed, the parties began to dispute who was liable for the cleanup of the Kalamazoo facility. Each party moved for summary judgment seeking declaratory judgment as to the meaning of the environmental liabilities provisions of the Agreement.

DISPUTE OVER CONTRACT TERMS

Both sides asserted that the language of the contract was unambiguous, but also offered extrinsic evidence from meetings and correspondence to support their arguments over where liability for the environmental remediation should fall. The court held that the parties' assertions that the language was unambiguous, however, precluded any extrinsic evidence from being considered under the Parol Evidence Rule and the merger clause holding that all agreements between the parties were embodied in the executed Agreement. As such, the court was bound by the four corners of the agreement when resolving the dispute, and looked to the definition of "Assumed Liabilities" within the text:

"Assumed Liabilities" means (i) all Liabilities of Seller [Cytec] and its Affiliates (other than the Transferred Subsidiaries) to the extent related to, or used or held in connection with, the Business as conducted at any time by Seller and its Affiliates, including, for the avoidance of doubt, all such Liabilities to the extent relating to Environmental Laws with respect to any facilities located in the United States (but excluding, for the avoidance of doubt, all Liabilities to the extent relating to Environmental Laws with respect to facilities located in Belmont, West Virginia, Coventry, Rhode Island and Stamford, Connecticut)[...]"

It was Advent's argument that the language defining "Assumed Liabilities" as "liabilities of Seller [...] to the extent related to, or used in connection with, the Business as conducted at any time by Seller[...] including[...] all such liabilities to the extent relating to Environmental laws with respect to any facilities located in the United States" meant that they were only liable for environmental cleanup that was related to the production of coating resin, when the environmental liabilities in question arose from sulfuric acid production from a different process at that facility. However, the court zeroed in on the parenthetical language, "excluding, for the avoidance of doubt, all Liabilities to the extent relating to Environmental Laws with respect to facilities located in[...]."

COURT'S DECISION AND OUTCOME

The court ruled that this language unambiguously assigned all liability relating to Environmental Law to Advent, from whatever business operations took place, except for the facilities specifically named in the contract. Since the Kalamazoo facility was not one of the excluded facilities listed, in granting Cytec's summary judgment motion in its entirety (and denying Advent's motion in its entirety), the court ruled that it was the clear intent of the parties that liability for the cleanup of that site would rest with the buyer, Advent, regardless of whether the Environmental Law issues stemmed from the manufacture of coating resin or another one of the businesses engaged in by the Kalamazoo facility.

This case is an important lesson in contract drafting, including the definitions of key terms, including a merger clause providing that the executed Agreement reflected the entire agreement of the parties, and the limitations created by the Parol Evidence Rule. If either Cytec's counsel had been less specific in their language, or if Advent had asserted that the contract was in fact ambiguous, the court could possibly have looked beyond the four corners of the contract to resolve this dispute. However, with the Parol Evidence Rule firmly limiting the interpretation of the contract to its own terms, it is Cytec's specific and detailed language that allowed them to win their case. Indeed, the case turned on the meaning of terms such as: "Assumed Liabilities," "business" and "related to, or used or held in connection with," which the court took pains to explicate in its reasoning in favor of granting summary judgment to Cytec.

Click here to read the decision in Cytec Industries, Inc. v. Allnex, No. 14-cv-1561(PKC) (S.D.N.Y 2017)

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