When Passive Voice should be used by Transactional Lawyers

Forgive the clumsy title. It’s in the passive voice. The subject, transactional lawyers, is being acted upon by the verb rather than vice versa.

Those who advise transactional lawyers typically say to never use the passive voice in contracts, and most times this is sound advice. The passive voice creates undue ambiguity and risk.

But never say never. Like all parts of speech, grammatical rules, and punctuation marks, the passive voice can be useful. Today we’ll look at two passive voice cautionary tales and then explore some situations when the passive voice would be beneficial in a written agreement.

East Texas Copy Systems, Inc. v. Player

An asset purchase agreement for the sale of a small business included clauses:

– Requiring the buyer to employ the seller for a period of four years; and

– Prohibiting the seller from engaging in a competing business

The agreement also stated that the prohibition on competition would no longer be binding “if the seller’s employment with the Buyer is terminated” less than two years after the effective date of the agreement.

One day before the two-year period was going to expire, the seller quit and then sought and won a declaratory judgement from the court that the non-compete clause was no longer enforceable.

The seller hadn’t been terminated by the buyer, of course, but the passive language in the contract (“seller’s employment with the Buyer is terminated”) implied that the termination could be by either party. Using the active voice (“if the Buyer terminates the Seller’s employment” would have protected by the buyer in this circumstance.

Keltner v. Estate of Simpkins

In this case, a real estate purchase agreement ostensibly gave the buyers the option to purchase adjacent tracts of land, stating  “[s]hould Buyer exercise said option to purchase, a fair and equitable price for said property will be established at a later date.”

When the buyers attempted to purchase said tracts, the trial court (and later appellate court) ruled the option unenforceable because the price term was expressed in the passive voice (“equitable price for said property will be established at a later date”) was too vague.

It didn’t make clear how the price was to be determined, and it rendered completely invalid a key term of the agreement.

The Lesson? Use the passive voice with care.

But do not think its use is always undesirable in contracts. As a general rule, contract terms should make clear the action rather than the actor, especially when the actor is irrelevant or unknowable.

In covenants, use of the passive voice is incredibly risky and should almost never be used because it does not identify which party is under obligation.

In conditional statements, such as in loan agreements, the passive voice can be useful, even critical. the conditions of a default should be described in the passive voice because a default can include things that require no action on the part of the borrower. The active voice would actually limit the scope of default to the detriment of the lender.

Or take a merger or acquisition that’s conditioned by the absence of material adverse change before closing. The condition should be described in the passive voice because the buyer wants to be able to get out of the deal regardless of who or what causes the material adverse change.

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