A federal district court case decided last week involved an issue we see all too often. In Willis Re, Inc. v. Hearn (E.D. Pa. 2016), a chief executive officer announced his “retirement” from his long-time employer—and went to work for a competitor. The company sought repayment from the former CEO of a portion of a $1.75 million incentive awards made to him during the three years before his retirement. According to the former CEO, the governing award agreement allowed him to retain the award if he retired.

In March 2013, 2014, and 2015, the parties signed letter agreements making “AIP Awards” to the CEO of $1,750,000 each for 2012, 2013, and 2014, subject to:

If your employment with Willis ends prior to December 31, [2015] [2016] [2017] for any reason other than your incapacity to work due to your permanent disability (as “disability” or a substantially similar term is defined within an applicable Willis long term disability plan/policy), death, your redundancy (as redundancy is determined by Willis in accordance with its usual human resource administration practices) or your retirement, you will be obligated to repay to Willis a pro-rata portion of the net amount … of the Willis Retention Award (the “Repayment Obligation”).

To define “retirement” the award agreements referred to (i) “your employment agreement” or (ii) “a written retirement policy applicable to you as a Willis employee” or (iii) “by reference to the ending of your employment at such mandatory age as may apply in the applicable employment jurisdiction” or (iv) “as may be determined by Willis in its absolute discretion.” The pension plan provided for retirement benefits, including an “Early Retirement Benefit” for a participant who retires on his “Early Retirement Date,” which the plan defined as the first day of any month following the date the participant attains age 55 and has completed at least 10 years of service.

In May 2015, when he was 59-years old and employed by the company for 21 years, the CEO announced his “decision to retire from Willis Re Inc., effective May 15, 2015 to explore other options and pursue other interests.” The company agreed that the CEO was eligible for an “Early Retirement Benefit” under the pension plan, but argued that the pension plan was not a “written retirement policy” under the AIP Award letters. Instead, the company claimed that the AIP Awards allowed it to define “retirement under in its absolute discretion under subsection (iv) and that it had determined that the CEO did not retire.

Rather than construing the ambiguous contract terms against the drafter of the agreement, as many courts would do, the court instead announced that it would not assume the contract’s language “was chosen carelessly” or “that the parties were ignorant of the meaning of the language employed.”

The words used in subsection (ii) are “written retirement policy,” not “Pension Plan.” If these sophisticated parties negotiated incentive payments for a chief executive officer intended the term “written retirement policy” to be defined as eligibility for benefits under the Pension Plan, they were free to include it. The parties could have done so in the same way the parties expressly defined “disability” in the phrase “incapacity to work due to your permanent disability” as the definition “within an applicable Willis long term disability plan/policy” and “redundancy” as “determined by Willis in accordance with its usual human resource administration practices.” The parties could have referred to the Pension Plan in subsection (ii), but did not do so.

The court held that the company was entitled to define “retirement under the AIP Awards in its absolute discretion” and upheld the company’s decision that the CEO did not retire. At this stage, the company won. However, because the court’s decision was a fairly close run thing, the CEO is likely to appeal it—unless the parties negotiate a settlement. Either way, it will lead to more legal costs and headaches for the company, which could have been avoided through better drafting.

Finally, we note that because the CEO left to work for a competitor, it seems like the case should have been an easy one. The court observed that the CEO had acknowledged his obligation to “comply with certain terms and conditions applicable to time after his retirement from Willis, including an obligation not to compete with Willis for a period of [12] months beginning May 15, 2015. However, apparently those provisions also were not clear.