A couple of words here or there in a contract can make a huge difference, particularly when those words relate to what happens if there is a breach or some other dispute between the parties. This is something that the parties in Family Endowment Partners, L.P. v. Sutow recently learned – to the tune of millions of dollars.

In 2009, James and Jane Sutow entered into a Financial Planning and Investment Advisory Agreement with Family Endowment Partners, which Agreement included the following three provisions:

  1. This Agreement shall be governed by, and construed in accordance with, the laws of the Commonwealth of Massachusetts,”
  2. “[A]ny dispute, claim or controversy between the parties arising out of or related to this Agreement, or the performance of the parties hereunder, shall be resolved by arbitration before the American Arbitration Association,” and
  3. “In no event shall [FEP or its affiliates] be held liable for any special, consequential, or incidental losses or damages.” [Emphasis added.]

After working with FEP for several years, the Sutows filed for arbitration against the company and Lee Weiss, alleging that they provided advice that was negligent, fraudulent and in breach of their fiduciary duties. After a 13-day hearing, the arbitrator issued his ruling, which included an award of $48 Million to the Sutows, part of which was triple damages under a Pennsylvania statute. While arbitration awards generally are not appealable (indeed, even establishing that the arbitrator’s “findings and legal conclusions, … appear erroneous, inconsistent, or unsupported by the record is not enough” to justify an appeal),  M.G.L. c. 251, § 12(a)(3) allows for an arbitration award to be vacated if the arbitrator exceeded his powers.

Thus, when FEP and Weiss filed an action in the Superior Court to vacate the arbitration award, one of the grounds was that the arbitrator had exceeded his powers. More specifically, FEP and Weiss argued that the arbitrator could not consider the Pennsylvania statute because the Agreement was governed by Massachusetts law, nor could he award triple damages even if that statute were in play because the Agreement prohibited any special, consequential or incidental losses or damages.

The Superior Court made short work of FEP and Weiss’s first argument, noting that:

The choice of law provision requires the application of Massachusetts law only with respect to construing and enforcing the terms of the Agreement. … Thus, a tort claim … that FEP and Weiss violated [a] Pennsylvania statute[] is beyond what is limited by the choice of law provision [and is] … not one arising under the Agreement. [Emphasis added.]

As for the award of triple damages, the Superior Court held that the Agreement did not expressly preclude “treble” or “punitive” damages, and FEP and Weiss had not come forward with any legal authority to support their contention that such damages were the equivalent of special, consequential, or incidental losses or damages. Thus, the Superior Court also refused to find that the arbitrator could not award of triple damages.

Given 20-20 hindsight, it is easy to see that if the Agreement had said that “all disputes between the parties shall be governed by Massachusetts law” and “no party shall be entitled to multiple or punitive damages,” FEP and Weiss might have saved millions of dollars. So next time you are drafting a business contract, remember Family Endowment Partners and choose your words carefully.