Corporate & Securities Law

Wal-Mart Case Raises Issue of Categories of Contract Language

By Ken Adams

D.C. Toedt has posted on his On Technology Contracts blog this item about an opinion of the Ninth Circuit Court of Appeals dismissing a case against Wal-Mart.

Here’s D.C.’s summary:

Wal-Mart requires its suppliers to agree to a code of conduct. It was sued, in California, by employees of suppliers in various Third World countries, on grounds that ? the retail giant had failed to police the suppliers? compliance with the code?s standards, and ? the employees were allegedly third-party beneficiaries of those standards.

Wal-Mart succeeded in having the case dismissed, on grounds that it did not undertake to police compliance, and therefore had no duty to do so; consequently, the foreign employees were not third-party beneficiaries.

Here’s the sentence from the code of conduct that was at issue (emphasis added):

To further assure proper implementation of and compliance with the standards set forth herein, Wal-Mart or a third party designated by Wal-Mart will undertake affirmative measures, such as on-site inspection of production facilities, to implement and monitor said standards.

According to the Ninth Circuit, “The language and structure of the agreement show that Wal-Mart reserved the right to inspect the suppliers, but did not adopt a duty to inspect them.” That makes sense, as it would have been odd for the suppliers to want to impose on Wal-Mart a duty to inspect them, and for Wal-Mart to have assumed such a duty.

I agree with D.C. that the language at issue could have been clearer. In the MSCD scheme of things, the clause “Wal-Mart or a third party designated by Wal-Mart will undertake affirmative measures” sounds like language of policy with respect to a contingent future event?in other words, a ground rule of the contract with respect to something that’s to happen automatically in the future under certain circumstances.

But in this context, that doesn’t work. Instead, the sentence in question would have made more sense as language of discretion. This is where I part ways with D.C. Tracking the court’s analysis, he would have used reserves the right to instead of “will.” But I say that reserves the right to is one of many pointless alternatives to may, which is what I’d have used instead. See MSCD 2.87.

Full post as published by AdamsDrafting on July 11, 2009 (boomark / email).