Legal Updates

When a contract drafted by sophisticated parties lacks to define a certain term the assumption is that the parties have waived it

January 25, 2022

Company shareholders executed a founders agreement, under which a shareholder is prohibited from contacting entities represented by the company. However, the term "represented entities" was not defined in the agreement. After the departure from the company of one of the shareholders, he began to contact company customers and suppliers.

The Court held that the former shareholder's actions did not amount to competition with the company. Generally, the wording of the contract has a decisive status in contract interpretation. However, a distinction must be made between a contract drafted in general terms and an exhaustive contract which terms are all defined. Similarly, a distinction is made between a contract entered into by sophisticated and represented parties, who are assumed to know how to anchor their interests in the contract and a contract made by “ordinary” people, who are not familiar with the contractual wording. Here, the founders agreement was an exhaustive one, executed between sophisticated parties, and therefore the assumption is that they anchored their interests in the contract. Thus, as the agreement did not define "represented entities," the term should not be interpreted broadly by including customers and suppliers of the company. As a result, the former shareholder’s conduct does not amount to competition with the company.