Day-by-Day Class Plans: Contract Drafting Spring 2023

By D. C. Toedt III, email: dc@toedt.com
Attorney & arbitrator — tech contracts & IP
Adjunct professor, University of Houston Law Center

Updated Wednesday February 01, 2023 20:06 Houston time

The SYLLABUS sets out general information about this course.

Today’s class plan (to be updated for each class)

First-day reading

1. Introduction

This is a working document, some parts of which are hidden for now, and other parts of which will be updated as the semester progresses. The class plans are based on how things went in past semesters, but every semester (and every course section) is different, so what a course section does on any given night could be different than what’s listed below.

  • Quizzes are due at 12:00 noon on: • Mon. Feb. 06; • Mon. Feb. 20; • Mon. Mar 20; • Mon. Apr. 10 (one attempt only) • Mon. May 01 (one attempt only); see the general notes about quizzes
  • Reading assignments
  • Homework assignment list
  • We will use the group whiteboards (both classes):       • Group 1       • Group 2       •  Group 3       •  Group 4 (caution: I will very likely “erase the whiteboards” after each class session, so be sure to copy anything you want to save.)
  • (Free) course materials: Notes on Contract Drafting, a work-in-progress of mine (“NCD”), including an interim draft of annotated contract provisions. IMPORTANT: As of this writing (Jan. 14, 2023), I’m “almost finished” with a revision of the annotated contract provisions, so I strongly suggest that you not print out those materials yet either; I’ll post the revised version when it’s finished.

For those who would like a bound book, a 200-page, 8.5x11“ paperback of NCD (not including the annotated contract provisions because of printing size restrictions) is available from Amazon for $5.50 per copy plus tax and shipping, which is basically printing cost. Disclosure: Amazon pays me a royalty of, wait for it, $0.05 per copy sold. Consider waiting to buy this until I get the update done.

2. Detailed class plans

2.1. Class 01: Wed. Jan. 18

2.1.1. Group assignments (initial)

Group 1 sits to my left; Group 4 to my right.

Grouping is alphabetical by last name, BUT first names are used here for privacy.

NOTE: I will reshuffle the groups twice during the semester.

6:00 p.m. class:

Group 1: Benjamin, Andrea, Mackenzie, Brittany
Group 2: Lexi, Orlando, Venu, Jacob
Group 3: Edward, Victor, Laura, Jared
Group 4: Joel, David, Josey, Taylor

7:30 p.m. class:

Group 1: Justin, Collin, Jared, Maycie
Group 2: Austin, Moriah, Ahmed, Kevin
Group 3: John, Maxwell, Andrew, Graves
Group 4: Brendan, Nathan, Caroline S., Caroline T.

2.1.2. Ambiguity: To Mars!

From Twitter: “Elon Musk predicts he will rocket people to Mars in less than 10 years” – does that mean people will depart for Mars in less than ten years, or that it’ll take them less than ten years go get there?

QUESTION: How could this be rewritten to clarify?

2.1.3. Exercise: Selling a used computer

In your small groups, answer the questions in this worksheet. (Once you’re in the worksheet, click on the table-of-contents link to get to your group; Groups 1-4 are in the 6:00 p.m. section, Groups 5-8 are in the 7:30 p.m. section.)

2.1.4. Introductions

Please tell us a little bit about yourself:

  • Name
  • Class year (3L, 2L, LLM)
  • Undergrad school and major
  • Work experience?
  • Contract-related experience?
  • Something boring about yourself?

2.1.5. DCT’s version of Socratic method

Here’s how I usually do Socratic-method questioning:

  • I pose a question and ask you to discuss the question in your small groups.
  • For that question, each group designates each of the group member by a letter A through D – for example, in Group 1 above for the 6:00 p.m. class, the group might designate Brittany as Person A, Benjamin as Person B, etc..
  • Then, instead of calling on a student by name, I call on a group and a letter – for example, I might say, “Group 2, Person D, what do you think?”
  • I might also call on one or more other groups and letters to see if they have anything else to add – e.g., “Group 4, Person A, what’s your thought about what [the previous student] said?”

That way:

  • Neither the students nor I know who will be called on for a question.
  • Each student must be ready to answer each question.
  • But: Each student gets to discuss each question with his/her group before I call on anyone.

I haven’t done any kind of scientific study, but my sense is:

  • that students like being able to discuss the question before I ask a student to answer the question; and
  • that students get more out of it when each student prepares to answer each question.

2.1.6. Set up email list and Canvas, etc.

Please provide emails for a (private) Google Groups email list on the Group 1 virtual whiteboard at the group whiteboards (both classes):       • Group 1       • Group 2       •  Group 3       •  Group 4. IMPORTANT: Please provide an email address that you check regularly — the Law Center asks that you use your UH email address. [I’ll be deleting the email addresses from the whiteboard when I transfer them to the Google Groups email list.]

Canvas setup:

  • Self-enroll at https://canvas.instructure.com/enroll/WDDRX3.
  • Alternatively: Sign up at https://canvas.instructure.com/register and use the following join code: WDDRX3.
  • IMPORTANT: Be sure to use your name when signing up so that I can track progress and watch out for possible issues; if you omit your name, you won’t show up on the Canvas roll-call page as being present in class, nor as having completed the homeworks and quizzes.
  • IMPORTANT: Check your personal Canvas settings to be sure that Canvas shows you as being on Central time — otherwise, Canvas will show you as being on Mountain time, and that will show your due dates as being an hour earlier than you think.

2.1.7. Read-along lecture

DCT to talk through the syllabus and the introductory parts of the Notes on Contract Drafting (a work-in-progress of mine). BE SURE TO READ these materials.

2.1.8. Ambiguity: Dad’s skull

2.1.9. Tales from the practice: Contract “signed” by email

2.1.10. Introduction: MathWhiz & Gigunda

Read along: Chapter 1: Introduction

QUESTION: Most contract preambles identify the parties as, e.g., “ABC Corporation, a Texas corporation.”

  • How would we identify MathWhiz?
  • How would we identify Gigunda Energy?

2.1.11. Turn in your name tents, please

I’ll bring them to class; that way, you won’t forget them ….

2.2. Class 02: Mon. Jan. 23

2.2.1. Drafting fail: Babies and dietary guidelines

From CNN (since changed): “New US dietary guidelines include babies and toddlers for first time”

A friend posted a screen grab on Facebook with the comment, “Thanks for the offer, but I’m vegan.”

2.2.2. Housekeeping

1.  If you haven’t already put your email address in the Google Groups email list on the Group 1 virtual whiteboard, then please do so.

2.  If you haven’t signed up for this course in Canvas, please do so, at https://canvas.instructure.com/enroll/WDDRX3.

2.2.3. Ambiguity: Whose side?

Here’s a tweet from the @TexasDemocrats Twitter account: “PRESS RELEASE: Chairman @HinojosaTX Releases Statement on Federal Judge in Texas Siding with AG Paxton, Against Texas Women”

QUESTIONS:

1.  Suppose you didn’t know Texas politics, and you also didn’t know that this tweet came from the Texas Democratic Party — might you be confused about who @HinojosaTX was siding with?

2.  How could this be clarified?

2.2.4. Homework review - signature blocks

QUESTIONS – discuss in your small groups and designate persons A through D as responders.

  1. Is “Employment Agreement” an acceptable title, and can the Agreement refer to Gigunda as “Employer”? EXPLAIN.
  2. What does “LLC” stand for? Is there a difference between an LLC and a corporation?
  3. Is it appropriate to say that MathWhiz LLC is “incorporated in Texas”? EXPLAIN. (There are two issues to spot here.)
  4. How important is it to include a party’s full legal name in a contract? EXPLAIN.
  5. Must each party’s full legal name be included in that party’s signature block? EXPLAIN.
  6. What’s Gigunda Energy’s full legal name? What would you do if you didn’t know that when drafting?
  7. What type of organization is Gigunda Energy? What would you do if you didn’t know that when drafting?
  8. Which signature block version should we use for Mary — the two-blank-lines version, or the four-blank-lines version?

[DCT to show an example of a well-done signature block]

Gigunda-MathWhiz signature blocks sample

2.2.5. Ambiguity: Once more into the breach ….

From this article: “Anti-vaccination sentiment was once more evenly distributed between parties and ideologies ….” (Emphasis added.)

QUESTIONS:

1.  Are there two ways to interpret the above quote?

2.  How could this be clarified?

2.2.6. Exercises from Chapter 2 (part the first)

Do Exercises 1 through 8 of Chapter 2 — you can use the group whiteboards (both classes):       • Group 1       • Group 2       •  Group 3       •  Group 4 if you think it’d be helpful, but you might want to just make private notes.

2.2.7. Ambiguity drill: Intimacy in an arena (Maureen Dowd)

(We’ll be doing a lot of ambiguity drills.)

TEXT, from a Maureen Dowd column in the NY Times, March 5, 2016: “Like Bill Clinton, Trump talks and talks to crowds. … [H]e creates an intimacy even in an arena that leaves both sides awash in pleasure.” (Emphasis added.)

QUESTION: What, exactly, leaves both sides awash in pleasure? How could this be clarified?

2.2.8. Exercises from Chapter 2 (part deux)

Do Exercises 9 through 13 of Chapter 2 — you can use the group whiteboards (both classes):       • Group 1       • Group 2       •  Group 3       •  Group 4 if you think it’d be helpful, but you might want to just make private notes.

2.2.9. Ambiguity: Plush carpets

From an article in The Guardian:

There will be plush lecture theatres with thick carpet, perhaps named after companies or personal donors.

Martin Parker, Why we should bulldoze the business school, [BROKEN LINK: sc:], Apr. 27, 2018 (https://perma.cc/F5N6-46RE).

QUESTION: What, exactly, is named after companies or personal donors?

QUESTION: How could this sentence be rewritten to clarify it?

2.3. Class 03: Wed. Jan. 25

2.3.1. On the lighter side: The unreasonable effectiveness of commas

See this post.

2.3.2. From the practice: Were the docs actually e-signed?

DCT to recount an episode for a wealthy individual client renegotiating his compensation package as CEO of a company.

2.3.3. From the practice: A 100-page contract form

DCT to recount a “MathWhiz” client episode: A “Gigunda” customer sent two, 100-page master services agreement forms, purportedly “95% identical,” for two “rush” projects in the Middle East and East Africa. QUESTION: What to do without spending a ton of MathWhiz’s money?

2.3.4. Drafting exercise: MathWhiz-Gigunda LOI (part 1)

In this exercise:

  • Groups 1 and 3 represent MathWhiz
  • Groups 2 and 4 represent Gigunda.

Use the group whiteboards (both classes):       • Group 1       • Group 2       •  Group 3       •  Group 4

In groups: Draft a short letter of intent between MathWhiz and Gigunda, including the following:

  1. Title
  2. Preamble
  3. Statement that the parties are negotiating for MathWhiz and Gigunda to enter into a ten-year consulting agreement
  4. A brief statement of:
    • what’s binding
    • what’s not binding but the parties are going in that direction — feel free to be creative from your client’s point of view
    • what it would take for the final agreement to be binding
  5. Signature blocks — just do them one after another vertically, don’t worry about table format (unless you’re a whiz with Google Docs).

Go ahead and make up legal names, entity types, and jurisdictions as needed.

Optional: Skim through the LOI discussion in the course material to get ideas.

Just for grins: Here’s what ChatGPT came up with:

Gigunda-MathWhiz LOI by ChatGPT

2.3.5. Drafting exercise: MathWhiz-Gigunda LOI (part 2)

Negotiate the LOI:

  • Group 1 with Group 2
  • Group 3 with Group 4

2.3.6. Exercises from Chapter 2 (part 3)

Do Exercise 14 of Chapter 2 — you can use the group whiteboards (both classes):       • Group 1       • Group 2       •  Group 3       •  Group 4 if you think it’d be helpful, but you might want to just make private notes.

2.3.7. (Quick) Reading review: Course details

2.3.8. Reading review: Chapter 2

QUESTION: From Chapter 2:

  • What surprised you (if anything)?
  • What struck you as important for summer associates and new lawyers to know?

Feel free to use the the group whiteboards (both classes):       • Group 1       • Group 2       •  Group 3       •  Group 4

2.3.9. Reading review: Chapter 3

QUESTIONS: From Chapter 3:

–  What surprised you (if anything)?

–  What struck you as important for summer associates and new lawyers to know?

Feel free to use the the group whiteboards (both classes):       • Group 1       • Group 2       •  Group 3       •  Group 4

2.4. Class 04: Mon. Jan. 30

2.4.1. Ambiguity: Traffic signs

Ambiguous: See this sign.

More clear: This sign

2.4.2. Homework review: Breaking up the Tenant audit-rights clause

Here’s one possible answer:

6.5 Tenant’s Audit Rights.

6.5.1 [or, “(a)”] Landlord shall keep reasonably detailed records of all Operating Expenses and Real Estate Taxes for a period of at least two (2) years.

6.5.2 Not more frequently than once in every 12-month period, Tenant together with any representative of Tenant shall be permitted to may audit the records of the Operating Expenses and Real Estate Taxes.

6.5.3 Tenant must give Landlord at least twenty (20) 20 days’ prior written notice to Landlord.

6.5.4 Tenant shall must conduct any inspection audit at a reasonable time and in a manner so as not to unduly disrupt the conduct of Landlord’s business.

6.5.5 Any such inspection audit by Tenant shall must be limited to the sole purpose of verifying the Operating Expenses and/or Real Estate Taxes.

6.5.6 Tenant shall must hold any information obtained during any such inspection in confidence, except that Tenant shall be permitted to may disclose such information to its attorneys and advisors, provided but only if Tenant:

        (1) informs such parties of the confidential nature of such information, and

        (2) uses good faith and diligent efforts to cause such parties to maintain such information as confidential.

6.5.7 Any shortfall or excess revealed and verified by Tenant’s audit shall must be paid to the applicable party by the relevant party within thirty (30) 30 days after that party is notified of the shortfall or excess to the extent such overage or shortfall has not previously been adjusted pursuant to this Lease.

6.5.8 Landlord must reimburse Tenant for Tenant’s reasonable, third party costs of the audit, up to an amount not to exceed $5,000, if all of the following are true:

        (1) The audit for any given year or partial year reveals that Tenant was overcharged for Operating Expenses or Real Estate Taxes by an amount of greater than six percent (6%) [DISCUSSION REQUIRED];

        (2) Tenant paid such overage overcharge; and

        (3) such overage the overcharge was not otherwise adjusted pursuant to the terms of this Lease,

Some discussion points:

  1. Some students numbered the paragraphs 6.5.1, 6.5.2, etc., which is useful — alternatively, some partners might prefer the paragraphs to be “numbered” with (a), (b), etc.
  2. For anything that’s likely to be a negotiation point, consider making it a separate paragraph for easier discussion (and, if necessary, revision). Remember: Speed to signature (of agreed, workable terms) is a primary goal. Examples of separate issues:
    • Recordkeeping requirement
    • Audit right
    • Advance notice period
    • Confidentiality (but the additional confidentiality-related sentences can stay with the paragraph)
    • True-up
    • Expense-shifting (but probably OK to keep with the true-up provision)
  3. Reminder: D.R.Y. for numbers — “two (2) days”
  4. Reminder: The convention is:
    • spell out numbers from one to ten
    • use digits from 11 on up — “twenty (20) 20 days” (another D.R.Y. example as well)

2.4.3. Quick exercise: When style preferences clash

FACTS:

• Your client MathWhiz asks you to review a draft contract sent by a potential customer of MathWhiz.

• You notice that the draft spells out all kinds of numbers, e.g., “twenty thousand dollars.”

• The draft doesn’t also include the corresponding numerals in parentheses, i.e., it doesn’t say “twenty thousand dollars ($20,000.00).”

QUESTION: When reviewing and revising the draft contract, do you change “twenty thousand dollars” to “$20,000.00”? Why or why not?

QUESTION: What if you change (and redline) the actual number from $20K to, say, $25K — how do you do phrase that?
a. The same way, i.e., “twenty-five thousand dollars”?
b.  “$25,000.00”?
c.  “$25,000”?
d.  “$25 thousand”?

2.4.4. From the practice: Marking up an NDA

Here are (sanitized) first pages of an NDA I once marked up for my real-life “MathWhiz” client.

Note how the original is a “wall of words” — note also the first comment in my markup, (“tactfully”) addressing that problem.

Original (first page only)

Markup (first two pages only)

In the markup, you’ll see two different colors of revision marks. That’s because the original Word document was “Protected” to remove the identity of revisers when the document was saved. I noticed this after making the first couple of changes, and removed the protection so that there’d be a paper trail of who’d made what revisions.

2.4.5. Ambiguity: Giving up meat

From a Washington Monthly piece about what ordinary people might have to do to reverse the effects of climate change: “Which might mean giving up meat or traveling by air. ”

QUESTION: Is the author urging us to give up one thing, or two?

QUESTION: How could this be fixed?

2.4.6. In-class drafting exercise: Buying a used laptop computer

FACTS:

  • Mary Marvel (CEO of MathWhiz) emails you to say that she wants to buy a barely-used, top-of-the-line laptop computer from Jane Jones, who lives in River Oaks (i.e., Harris County) and is “a friend of a friend” of Mary, but Mary doesn’t know her.
  • Jane bought the laptop a few weeks ago but decided she didn’t like the feel of the keyboard, so she wants to sell it and get a different one. (She’s gone past the no-questions-asked return period from where she bought it.)
  • The purchase price will be $3,000.
  • Jane’s address for notice is at 1600 River Oaks Blvd, Houston, TX 77019.

EXERCISE: In your groups — and you might want to divide up the work — in the group whiteboards (both classes):       • Group 1       • Group 2       •  Group 3       •  Group 4:

  1. Put together a skeleton for a contract, with a title, preamble, and signature blocks (don’t worry about formatting the signature blocks, just put the necessary information in).
  2. Draft just a simple background section (a.k.a. recitals).
  3. Put together a series of short, simple paragraphs with just the “mechanics” of getting the sale done: Pricing, delivery. Don’t worry about representations or warranties or anything like that; just put in the bare-bones requirements to make a contract.

2.4.7. IRL: A supplier gets stiffed

Product Solutions Int’l, Inc.. Aldez Containers, LLC, 46 F.4th 454 (6th Cir. 2022):

  • Small company (“Orgo”) designs a custom cosmetics travel bag.
  • Orgo contracts out the design and manufacturer to a middleman supplier.
  • Middleman supplier places a big order for the cosmetics bag with a Chinese manufacturer.
  • Orgo (the small company) discovers that the cosmetics bags it designed aren’t selling; it stops accepting shipments from the middleman supplier.
  • The supplier ends up “eating” > $500K in payments to its Chinese manufacturer for the bags that the supplier ordered for Orgo.
  • The supplier sues not just Orgo, but its executives, and the shipping company (think: FedEx).
  • The supplier’s case against the executives gets poured out — see Product Solutions Int’l, Inc. v. PB Products, LLC, No. 19-CV-12790 (E.D. Mich. Jun. 12, 2020) (granting in part, denying in part, defendants’ motion to dismiss).
  • Later the supplier’s case against the shipping company gets poured out again.

LESSONS:

1.  Litigation counsel can get really aggressive — in part this is because judges seldom punish bad behavior.

2.  The middleman supplier should have been more careful about making sure that Orgo (the designer that ordered the bags) had funding available — and backup funding? — before making a big financial commitment to the Chinese manufacturer on behalf of Orgo.

2.4.8. Quick small-group discussion: Contract framework setup

2.4.9. In the news: Bed Bath & Beyond CTD

See this WSJ story (free link). Some points of interest:

  • Banks cut off BB&B’s lines of credit
  • Banks delivered notice of default to BB&B — which kicks up BB&B’s interest rate by two percentage points
  • JPMC “called the loan” (demanded immediate repayment), but BB&B doesn’t have the cash
  • BB&B has had trouble stocking its stores because it fell behind in payments to suppliers

2.4.10. Reading review (part 1)

  1. QUESTION: If you wanted to have a separate document that listed exceptions to the representations in a contract, what would you (conventionally) call that document? (Hint: See here.)
  2. SCENARIO: (A) A representation in a contract is in (let’s say) section 5.8 of that contract. (B) In the document referred to in question 1 above, you’re listing an exception to that representation. QUESTION: How would you number that exception?
  3. QUESTION: When “redlining” another party’s contract draft, what could (should!) you do, in the Word document’s file name and in the running header, to: (A) avoid “version confusion,” and (B) make it easier to create a timeline later — e.g., in litigation?
  4. EXPLAIN IF FALSE: If parties disagree about the meaning of a term in a contract, that’s enough to require that the finder of fact (the jury, in a jury case), not the trial judge or appeals court, must determine the meaning of the term.

2.4.11. In the news: NYSE computer problems caused by human error

From the NY Post:

Human error is to blame for the glitch that caused wild fluctuations in share prices at the start of trading on the New York Stock Exchange on Tuesday.

A NYSE employee who is based out of the exchange’s backup data center in Chicago failed to shut down the disaster-recovery system that is tested every day after the closing bell as part of routine maintenance, according to Bloomberg News.

Recall Murphy’s Law (“anything that can go wrong, will go wrong”), which is why, in our little contract-drafting corner of the world, we try to R.O.O.F. (Root Out Opportunities for F[oul]-ups by users).

2.4.12. Ambiguity exercise: Professor Lemley’s pants

From a Facebook post by Stanford law professor Mark Lemley:

Things I appear to like more than my Facebook friends:

1. Pants

EXERCISE: What are the two possible meanings here?

2.4.13. What was useful today?

Question: What did you find useful to you–

  • in class today
  • in the reading for this week?

Feel free to use the group whiteboards (both classes):       • Group 1       • Group 2       •  Group 3       •  Group 4

2.5. Class 05: Wed. Feb. 01

2.5.1. Housekeeping: Quiz 1 coming up

Don’t forget: You have two chances — for this quiz, but not for all of the others — so if you get less than a perfect score the first time, you might want to review the answers before taking the quiz a second time.

2.5.2. To think about for later: What was useful today?

Think about this for the end of class.

2.5.3. Real life: Was this a written agreement?

The Houston Chronicle reported on a guarantee agreement that was never signed but was supposedly agreed to. Excerpt:

At the meeting [the lawsuit says], Parker presented a written agreement, and while Souki agreed to the terms, *he refused to sign the agreement, explaining that he could not sign a written agreement since he had not disclosed to his bank his liability to Parker and Red Mango ….

Parker accepted based on the two having “a long history” and on Parker’s continued faith in Tellurian’s core business model, according to the lawsuit.

In October 2021, Parker texted Souki to set up a “firm date to close out on the guarantee,” the lawsuit says, but while Souki confirmed that he and Parker had “talked in Aspen,” he did not commit to paying Parker or fulfilling his obligation.

“Since that date, Parker, on behalf of himself and Red Mango, has demanded that Souki made the payments required of him under the contract,” the lawsuit says. “However, Souki has failed to do so in breach of his agreement.”

Natalie Postgate, Tellurian investor sues co-founder Charif Souki over millions in losses (HoustonChronicle Jan. 22, 2022) (emphasis added).

UPDATE: See Rick Carroll, Text messages don’t make a contract, Souki lawyers argue (AspenTimes.com Apr. 5, 2022) (describing motion to dismiss). Excerpt:

Souki’s attorneys, however, offered a different version of the dealings between Souki and Parker. A March 22-dated motion to dismiss the lawsuit, which was filed in U.S. District Court in Denver, called both Parker and Souki “experienced” and “sophisticated businessmen” who wouldn’t hatch a financial agreement through text messages.

“Parker and Souki know how to create legally binding contractual relationships,” the motion said. “That is particularly true of a contract potentially involving tens of millions of dollars, like the one alleged here. Sophisticated businessmen do not create valid, enforceable contracts through unsigned text messages that omit essential terms such as the identity of the parties, the nature and extent of the obligation, the method of payment, and who is to benefit from performance.”

The text messages alone showed that Parker doesn’t have a case for breach of contract, the motion said. Parker’s lawsuit cited the following text exchange from August 2019 as the written agreement between the two:

Souki to Parker: “How much stock do you have and what is your (cost) basis?”

Parker: “5.5m shares and (his) net is circa 8(.)30 now.”

Souki: “Ok. Please keep this text. I will guaranty [sic; guarantee – guaranty is the noun] your capital by dec. 2020. I’ll make up any deficiency you have at that date. Thanks for your help and confidence.”

Parker: “Ok pal I got confidence in you, always here to lend an ear or advice if needed, let’s catch up in sept for dinner.”

The motion to dismiss said the exchange didn’t meet the standards for a contractual agreement, while Red Mango, for which there is scant information available, wasn’t mentioned in the texts.

(Emphasis added.)

UPDATE 2: What little I could find online indicates that the case seems to be going to trial.

LESSON: People will sue — and will also oppose lawsuits. (Big surprise.)

2.5.4. Rewriting exercise: “Gross up”

BEFORE: From this guaranty:

2. No Setoff or Deductions; Taxes; Payments. The Guarantor represents and warrants that it is organized in the United States of America. The Guarantor shall make all payments hereunder without setoff, counterclaim, restrictions or condition, and free and clear of and without deduction for any taxes, levies, imposts, duties, charges, fees, deductions or withholdings of any nature now or hereafter imposed or levied by any jurisdiction or any political subdivision thereof or taxing or other authority therein unless the Guarantor is compelled by law to make such deduction or withholding. If any such obligation (other than one arising (i) with respect to taxes based on or measured by the net income or profits of the Lender, or (ii) with respect to any withholding tax to the extent that such withholding tax would have been imposed on the relevant payment to the Lender under the laws and treaties in effect at the time such Lender first became a party to this Agreement or otherwise became entitled to any rights hereunder) is imposed upon the Guarantor with respect to any amount payable by it hereunder, the Guarantor will pay to the Lender, on the date on which such amount is due and payable hereunder, such additional amount in U.S. dollars as shall be necessary to enable the Lender to receive the same net amount which the Lender would have received on such due date had no such obligation been imposed upon the Guarantor. The Guarantor will deliver promptly to the Lender certificates or other valid vouchers (to the extent available) for all taxes or other charges deducted from or paid with respect to payments made by the Guarantor hereunder. The obligations of the Guarantor under this paragraph shall survive the payment in full of the Guaranteed Obligations and termination of this Guaranty.

We’ll do the following:

  • Exercise 1 first;
  • Discussion of Exercise 1;
  • Exercise 2.

EXERCISE 1: Do the following in the group whiteboards (both classes):       • Group 1       • Group 2       •  Group 3       •  Group 4: Play around with breaking up and simplifying the second sentence: “The Guarantor shall make all payments hereunder without setoff, counterclaim, restrictions or condition, and free and clear of and without deduction for any taxes, levies, imposts, duties, charges, fees, deductions or withholdings of any nature now or hereafter imposed or levied by any jurisdiction or any political subdivision thereof or taxing or other authority therein unless the Guarantor is compelled by law to make such deduction or withholding.”

  • Consider breaking the sentence into two, or even three, paragraphs.
  • Think about creating one or more defined terms in their own paragraphs.
  • Think about spinning off the concluding exception into its own paragraph, then forward-referencing it in the “main” paragraph(s).
  • Don’t number your paragraphs yet.
  • QUESTION: Given the bold-faced heading of the “BEFORE” version, does the first sentence really belong in this provision?

DCT REWRITE:

(a) The Guarantor must make all payments under this Guaranty without “Setoff” or — except as provided in subdivision (d) below — deduction for “Taxes,” each as defined below.

(b) “Setoff” referes to any setoff, counterclaim, restrictions or condition.

(c) “Taxes” refers to any and all taxes, levies, imposts, duties, charges, fees, deductions or withholdings of any nature now or hereafter imposed or levied by any jurisdiction or any political subdivision thereof or taxing or other authority.

(d) Guarantor may withhold Taxes from a payment only to the extent compelled by law.

EXERCISE 2: Rewrite just the italicized portion above (quoted below) to be much more reader-friendly — as though you were talking to a lay jury. (Hint: BLUF.)

If any such obligation (other than one arising (i) with respect to taxes based on or measured by the net income or profits of the Lender, or (ii) with respect to any withholding tax to the extent that such withholding tax would have been imposed on the relevant payment to the Lender under the laws and treaties in effect at the time such Lender first became a party to this Agreement or otherwise became entitled to any rights hereunder) is imposed upon the Guarantor with respect to any amount payable by it hereunder, the Guarantor will pay to the Lender, on the date on which such amount is due and payable hereunder, such additional amount in U.S. dollars as shall be necessary to enable the Lender to receive the same net amount which the Lender would have received on such due date had no such obligation been imposed upon the Guarantor.

DCT rewrite:

2. No Setoff or Deductions; Taxes; Payments.

(a) The Guarantor represents and warrants that it is organized in the United States of America.

(b) The Guarantor shall make all payments hereunder without “Deduction,” as defined in subdivision (c) below, unless the Guarantor is compelled by law to make such Deduction.

(c) The term “Deduction” refers to one or more of the following: (i) any setoff, counterclaim, restriction, or condition, and (ii) any tax, levy, impost, duty, charge, fee, deduction, or withholding, of any nature, now or hereafter imposed or levied by any jurisdiction or any political subdivision thereof or taxing or other authority therein.

(d) Except as provided in subdivision (f): IF: The Guarantor is required by law to make any such Deduction; THEN: The Guarantor will “gross up” the payment as defined in subdivision (e).

(e) To “gross up” an amount, the Guarantor will pay to the Lender, on the date on which such amount is due and payable hereunder, such additional amount in U.S. dollars as shall be necessary to enable the Lender to receive the same net amount which the Lender would have received on such due date had no such obligation been imposed upon the Guarantor.

(f) [NEW:] The Guarantor need not gross up any deduction or withholding that is required by law:

(i) with respect to taxes based on or measured by the net income or profits of the Lender, or

(ii) with respect to any withholding tax to the extent that such withholding tax would have been imposed on the relevant payment to the Lender under the laws and treaties in effect at the time such Lender first became a party to this Agreement or otherwise became entitled to any rights hereunder)

(g) The Guarantor will deliver promptly to the Lender certificates or other valid vouchers (to the extent available) for all taxes or other charges deducted from or paid with respect to payments made by the Guarantor hereunder.

(h) The obligations of the Guarantor under this paragraph shall survive the payment in full of the Guaranteed Obligations and termination of this Guaranty.

2.5.5. Housekeeping: Collaboration rules

During the past couple of spring semesters I’ve been teaching a half-semester course on intellectual property law for MBA students at Rice University’s Jones Graduate School of Business. Recently the administration circulated a document with definitions used by the school’s Honor Council; I’m providing the link to the document in case I want to use any of the definitions in the future.

2.5.6. Homework review: Tenant audit right rewrite

Homework review: Parallelism / consistency in subdivisions

From a student’s Tenant Audit Right break-up:

STUDENT VERSION:

Tenant, together with any representative of the Tenant, may audit the Operating Expenses and Real Estate Tax records to verify the records:

  • once in a 12-month period, with
  • at least twenty days’ written notice to the Landlord,
  • at a reasonable time that will not unduly disrupt the conduct of the Landlord’s business.

DCT comment: For syntactical consistency, at the end of the first bullet point, the word “with” should be moved to the beginning of the second bullet point.

DCT REVISION:

Tenant, together with any representative of the Tenant, may audit the Operating Expenses and Real Estate Tax records to verify the records:

  • once in a 12-month period, with [DCT note: I prefer semicolons instead of commas to set off list item]
  • with at least twenty days’ written notice to the Landlord,
  • at a reasonable time that will not unduly disrupt the conduct of the Landlord’s business.

Another example:

STUDENT VERSION:

Tenant is required to maintain the confidentiality of any information obtained during the audit, unless it is necessary to discuss the information with the tenant’s attorneys and advisors, and:

  • tenant informs such parties of the confidential nature of the information, and
  • uses good faith and diligent efforts to cause such parties to maintain the confidentiality

of the information.

DCT comment: The syntactical-consistency problem here is that there’s:

  • a noun (“tenant,” which should be capitalized) at the beginning of the first bullet point, but
  • a verb (“uses”) at the beginning of the second bullet point.

DCT REVISION:

Tenant is required to must (or “is to”?) maintain the confidentiality of any information obtained during the audit, unless:

1.  it is necessary to discuss the information with the tenant’s attorneys and advisors, and:

2.  Tenant informs such parties of the confidential nature of the information, and

3.  Tenant uses good faith and diligent efforts to cause such parties to maintain the confidentiality of the information.

Homework review: Each negotiation point gets its own paragraph

STUDENT VERSION:

6.5 Tenant’s Audit Rights. Landlord shall keep reasonably detailed records of all Operating Expenses and Real Estate Taxes for a period of at least two (2) years. [The next sentence is likely to be a separate negotiation point and so should get its own paragraph:] After at least twenty (20) days’ prior written notice to Landlord, Tenant together with any representative of Tenant shall be permitted to audit the records of the Operating Expenses and Real Estate Taxes annually.

DCT REVISION:

6.5 Tenant’s Audit Rights.

(a) Landlord shall keep reasonably detailed records of all Operating Expenses and Real Estate Taxes for a period of at least two (2) two years.

(b) After at least twenty (20) twenty days’ prior written notice to Landlord, Tenant together with any representative of Tenant shall be permitted to audit the records of the Operating Expenses and Real Estate Taxes annually.

QUESTION: In subdivision (b) above, could the phrase “together with” lead to trouble?

Homework review: Ambiguity alert

From a student’s rewrite:

STUDENT VERSION:

Tenant, together with any representative of Tenant, shall be permitted to audit the records of the Operating Expenses and Real Estate Taxes:

a.  once in every 12 months; and

b.  after providing at least twenty days’ written notice to Landlord.

QUESTION: Could Tenant audit the records weekly — as long as Tenant gives landlord 20 days notice of each audit?

DCT REVISION:

Tenant, together with any representative of Tenant, shall be permitted to may audit the records of the Operating Expenses and Real Estate Taxes no more often than once in every 12 months. ; and

Tenant must provide Landlord with at least twenty 20 days’ advance written notice of any proposed audit.

Homework review: Using “then” after a long “if” preface

From a student’s rewrite:

STUDENT VERSION:

If Tenant’s inspection of the records for any given year and/or partial year reveals that:

(i) Tenant was overcharged for Operating Expenses or Real Estate Taxes by an amount of greater than 6%, or

(ii) Tenant paid such overage and such overage was not otherwise adjusted pursuant to the terms of this Lease,

Landlord shall reimburse Tenant for its reasonable, third party costs of the audit, up to an amount not to exceed $5,000.

DCT REVISION:

If Tenant’s inspection of the records for any given year and/or partial year reveals that:

(i) Tenant was overcharged for Operating Expenses or Real Estate Taxes by an amount of greater than 6%, or

(ii) Tenant paid such overage and such overage was not otherwise adjusted pursuant to the terms of this Lease,

then Landlord shall reimburse Tenant for its reasonable, third party costs of the audit, up to an amount not to exceed $5,000.

ALTERNATIVE:

6.5.5 (a) This section applies if Tenant’s inspection of the records for any given year and/or partial year reveals that:

(i) Tenant was overcharged for Operating Expenses or Real Estate Taxes by an amount of greater than 6%, or

(ii) Tenant paid such overage and such overage was not otherwise adjusted pursuant to the terms of this Lease.

(b) Landlord shall reimburse Tenant for its reasonable, third party costs of the audit, up to an amount not to exceed $5,000.

2.5.7. Ambiguity exercise: Masks and signs on cars

From a tweet encouraging attendance at an anti-lockdown protest in Maine: “[T]here will be a caravan around the Capitol … Monday. … Remain in your vehicles but masks, bandanas, flags and signs on cars are encouraged.”

QUESTION: In your view, why are caravaners being encouraged to put masks and bandanas on cars?

QUESTION: How could this be clarified?

2.5.8. It’s cold! Texas AG sues Griddy over WS Uri, Feb. 2021

From the original petition (in Harris County):

11.  Griddy, unlike traditional electric retail providers, did not own power generation capability nor did it enter into long-term pricing contracts with power generators. Instead[:]

  • Griddy purchased electricity on the open, spot market.
  • Griddy charged customers a flat monthly rate, and then passed the price at which it purchased electricity directly on to the consumer.

During times of stability and low demand on the grid, Griddy was able to purchase electricity cheaply and pass those savings to consumers. But instability in the market can expose its customers to enormous risk, resulting in massive losses to consumers. Despite that very real risk, Griddy’s marketing persistently misled its customers about the nature and extent of this risk and the costs consumers could expect when utilizing Griddy’s services. * * * 

17.  One reason consumers have been surprised by the recent price spike to $9 per kWh is because Griddy’s advertising was misleading and failed to adequately disclose the risks of its pricing model to its customers.

The Griddy.com website offered: “For only $9.99 a month, get access to the wholesale price of electricity.” However, there is no officially indexed wholesale price of electricity in Texas. Instead, Griddy passed the price it pays on to the consumer along with its monthly $9.99 fee.

The Better Business Bureau issued a consumer alert in 2019 about Griddy’s advertising claims, writing that this usage of “wholesale” should not be used unless a business “actually owns and operates or directly and completely controls a wholesale or distribution facility which primarily sells products to retailers for resale,” which is not the case here. Their repeated representation of their prices as being the “wholesale” price was thus misleading.

18.  Griddy’s representations emphasized potential savings and downplayed the effects of fluctuations in the electricity market. . . .

(Emphasis and extra paragraphing added, footnotes omitted.)

This lawsuit illustrates the role of both “interveners” and “nature” in the T O P   S P I N diagram in section 19.3 of the Notes on Contract Drafting:

h-diagram

It’s no surprise that the case settled — but only after Griddy filed for bankruptcy protection to liquidate its business (in what one commentator referred to as an “off-label bankruptcy”).

And it’s certain that Griddy had to spend a lot of money — and management bandwidth — on defending against the lawsuit, including:

  • litigation holds for emails and other documents;
  • searching for, screening, and producing documents;
  • depositions of many, many Griddy people; and
  • motion practice.

We’ll take a quick look at the actual settlement agreement:

  • Paragraph 1: Why do you suppose this is in the agreement?
  • Paragraphs 5 and 9 use the defined term “the State,” but elsewhere the defined term is “Texas” — how do you think that happened? Is that a problem?
  • Paragraph 14: Does this surprise you?
  • Paragraph 15: Why do you suppose the last part of the provision is included?
  • Paragraph 16: Do you think this would be enforceable?
  • Paragraph 18: Note how the signatures were handled.

2.5.9. Homework review Tenant audit rights rewrite (cont’d)

Homework review: Periods and parentheses

From a student’s rewrite:

STUDENT VERSION:

6.5 Tenant’s Audit Rights.

A.) Landlord will keep reasonably detailed records of all Operating Expenses and Real Estate Taxes for at least two years.

DCT REVISION:

6.5 Tenant’s Audit Rights.

A.) (a) Landlord will keep reasonably detailed records of all Operating Expenses and Real Estate Taxes for at least two years.

Homework review: A nice listing of prerequisites

From a student’s rewrite:

Tenant together with any representative may audit these records if: (a) audits are conducted at maximum once every 12 months, (b) Tenant provides at least 20 days’ prior written notice to Landlord, (c) audits occur at a reasonable time and reasonable manner to not disrupt Landlord’s business, and (d) the sole purpose of the audit is to verify the Operating Expenses and/or Real Estate Taxes.

DCT TWEAK

Tenant together with any representative may audit these records if: (a) (1) audits are conducted at maximum once every 12 months, (b) (2) Tenant provides at least 20 days’ prior written notice to Landlord, ….

Homework review: Capitalization of list items

From a student’s rewrite:

STUDENT VERSION:

  1. In this audit, the Tenant shall conduct any inspection:

a)  At a reasonable time;

b) In a manner so as not to unduly disrupt the conduct of Landlord’s business; and

c) Only for sole purpose of verifying the Operating Expenses and/or Real Estate Taxes.

2.5.10. Homework review - preamble

(To be shown in class)

Signature block sample — what’s wrong with the MathWhiz signature block?

Gigunda-MathWhiz signature blocks sample

Some examples by students (anonymous, of course); see the notes below each:

EXAMPLE 1:

Retainer [0] Agreement
for Analyzing Seismic Data

This “Agreement” is between (i) MathWiz, LLC, a limited liability company organized under the laws of the State of Texas (“Service Provider”), with its principal place of business and its initial address for notice at [FILL IN ADDRESS FOR NOTICE] and (ii) Gigunda Energy [1], a global oil-and-gas company [2] organized under the laws of the State of California (“Retainer” [0]), with its principal place of business [3] and its initial address for notice at [FILL IN ADDRESS FOR NOTICE]. This agreement [4] is effective the last date written on the signature page.

Notes:

[0] “Retainer Agreement” is an unconventional title for this type of agreement, and “Retainer” is a head-scratcher abbreviation for Gigunda. (Try “Client” or “Customer.”)

[1] Need Gigunda’s full legal name.

[2] You wouldn’t say “global oil and gas company” in the preamble — in the Background, sure, but not in the preamble.

[3] The principal place of business is usually just the city and state — the initial address for notice might be different.

[4] At this spot in the preamble, you’d say “This Agreement” (capitalized), not “This agreement” (Ken Adams thinks otherwise), but in the other side’s draft it’s probably not worth fixing.

EXAMPLE 2:

Services Agreement [0]

This “Agreement” is between (i) Gigunda Energy [INSERT FULL LEGAL NAME], a [ENTITY TYPE] organized under the laws of the State of [STATE] (“Buyer” [1]), with its principal place of business and its initial address for notice at [BUYER ADDRESS]; and (ii) MathWhiz, LLC, a limited liability company organized under the laws of the State of [STATE], with its principle [2] place of business and its initial address for notice at [SELLER ADDRESS] (“Seller” [1]). This Agreement is effective the last date written on the signature page.

Notes:

[0] Good title.

[1] “Buyer” and “Seller” should probably be “Customer” and “Service Provider” (or perhaps “Contractor”).

[2] What’s the comment here?

EXAMPLE 3:

Service Agreement [0] [1]

This “Agreement” is between (i) MathWhiz LLC, a limited liability company organized under the laws of the State of [INSERT STATE OF MATHWHIZ ORGANIZATION] (“Service Provider”), with its principal place of business and its initial address for notice at [INSERT MATHWHIZ STREET ADDRESS], Houston, Texas [INSERT MATHWHIZ ZIP CODE]; and (ii) Gigunda Energy [INSERT ABBREVIATION OF GIGUNDA ENTITY TYPE], a [INSERT GIGUNDA ENTITY TYPE] organized under the laws of the State of [INSERT STATE OF GIGUNDA ORGANIZATION] (“Client”), with its principal place of business and its initial address for notice at [INSERT GIGUNDA STREET ADDRESS AND CITY], California [INSERT GIGUNDA ZIP CODE]. This Agreement is effective the last date written on the signature page.

Notes:

[0] Good title.

[1] This is just about perfect.

EXAMPLE 4:

SEISMIC DATA ANALYSIS AGREEMENT [0]

This “Agreement” is between (i) MathWhiz, a Limited Liability Company organized under the laws of the State of [Enter state] (“Vendor”), with its principal place of business and its initial address for notice at [Insert address here]; and (ii) Gigunda, a Corporation organized under the laws of the State of [Enter state] (“Recipient”), with its principal place of business and its initial address for notice at [Insert address here]. This Agreement is effective as of the last date written on the signature page.

Notes: [0] Good title.

QUESTION: What issues do we have here?

EXAMPLE 5:

Purchase and Sale of Seismic Exploration Services [0] [1]

This “Agreement” is between (i) MathWhiz LLC, a limited liability company organized under the laws of the State of [FILL IN LAWS OF INCORPORATION] (“Seller”), with its principal place of business and its initial address for notice at [FILL IN ADDRESS FOR NOTICE]; and (ii) Gigunda Energy, a global oil-and-gas company organized under the laws of the State of [FILL IN LAWS OF INCORPORATION] (“Buyer”), with it principal place of business in [FILL IN ADDRESS FOR NOTICE]. This agreement is effective the last date written on the signature page.

Notes:

[0] In an agreement title, “Purchase and Sale” customarily refers to a purchase and sale of assets, not of services. (But it’s not incorrect.)

[1] Normally you’d want the word “Agreement” in the title — so, for this, it’d be perhaps “Purchase and Sale Agreement for Seismic Exploration Services.”

QUESTION: What other issues do we have here?

EXAMPLE 6:

Independent Contractor Agreement
for MathWhiz’s seismic data analytic services

This “Agreement” is between (i) MathWhiz LLC (“Contractor”), a limited liability company organized under the laws of the State of Texas with its principal place of business in Houston, Texas; and (ii) Gigunda Energy (“Employer”), a corporation headquartered in California, with a significant campus located in Houston, Texas. This Agreement is effective the last date written on the signature page.

QUESTION: What issues do you see here?

EXAMPLE 7:

Independent Contractor Agreement
For MathWiz, LLC to analyze the seismic data for Gigunda [INSERT ENTITY] [0]

This “Agreement” [ADD: is] between (i) MathWiz, LLC, a limited liability company organized under the laws of the State of Texas (“Independent Contractor” [1]), with its principal place of business and its initial address for notice at [INSERT MATHWIZ ADDRESS] Houston, Texas [INSERT MATHWIZ ZIP]; and (ii) Gigunda [INSERT ENTITY], a [INSERT ENTITY] organized under the laws of the State of [INSERT STATE OF FORMATION] (“Hiring Firm”), with its principal place of business and its initial address for notice at [INSERT GIGUNDA ADDRESS]. This Agreement is effective as of the last date written on the below signature page.

Notes:

[0] The subtitle is a bit wordy.

[1] I’d use “Contractor” and “Client” (or perhaps “Customer”) as the parties’ nicknames.

EXAMPLE 8:

Service Provider Agreement
For seismic data analysis

This “Service Agreement” [0] is between (i) MathWhiz LLC, a limited liability company organized under the law of Texas (“Service Provider”), with its principal place of business and its initial address for notice [INSERT ADDRESS]; and (ii) Giguanda Energy (“Client”), with its principal place of business, and initial address for notice [INSERT ADDRESS]. This Service Agreement is effective the last date written on the signature page.

Notes:

[0] It’s customary to use the term “This Agreement” and not the (longer) “This Services Agreement.”

See also my other comments above.

EXAMPLE 9:

Employment Agreement [0]
for Analyzing Seismic Data

This “Agreement” is between (i) MathWhiz LLC, a limited liability company organized under the laws of the State of Texas (“Employee”), with its principal place of business and its initial address for notice at [FILL IN ADDRESS FOR NOTICE]; and (ii) Gigunda Energy, a company headquartered in [INSERT CITY, INSERT COUNTY] [1], California, whose initial address for notice is [FILL IN ADDRESS FOR NOTICE] (“Employer”). This Agreement is effective the last date written on the signature page.

Notes:

[0] What’s the objection here?

[1] Any guesses about why it’s not a bad idea to include the county?

See also my comments to the other examples above.

QUESTION: What other issues can you spot?

2.5.11. Reading review (part 2)

  1. EXPLAIN IF FALSE: Summary judgment (i.e., without a trial) is pretty much always improper when a contract term is ambiguous.
  2. TEXT: “Tenant will vacate the Premises no later than 12 midnight on December 15; Tenant’s failure to do so will be a material breach of this Agreement.” FACTS: Tenant moves out at 10:00 a.m on December 15. QUESTION: Is Tenant in material breach? EXPLAIN — INCLUDING coming up with a clearer version.
  3. QUESTION: What does contra preferentem mean — both as an English translation of the Latin, and what it means in “our [contract-drafting] world”?
  4. QUESTION: What does DCT’s mnemonic “A.T.A.R.I.” stand for?

2.5.12. Contract format examples

Contracts can have different formats; here are a few examples, more or less at random, from an advertisement-supported Web site that harvests contracts from the SEC’s EDGAR Website.

In your groups, take a look at the following things — if desired, use the group whiteboards (both classes):       • Group 1       • Group 2       •  Group 3       •  Group 4:

  • Titles of the agreements
  • Preambles
  • Recitals (“whereas” clauses), if any
  • Numbering styles for sections / paragraphs

Here are the examples:

2.5.13. What was useful today?

Question: What did you find useful to you–

  • in class today
  • in the reading for this week?

Feel free to use the group whiteboards (both classes):       • Group 1       • Group 2       •  Group 3       •  Group 4

3. Homework, week by week

3.1. Homework due Mon. Jan. 23: Signature blocks (5 pts P/F)

See the hypothetical facts at NCD § 1.2.

Draft the signature blocks for a Gigunda-MathWhiz agreement. Use the hypothetical facts given — and for those facts that aren’t given, either:

  • use placeholders such as “[INSERT FULL LEGAL NAME]” etc.; or
  • leave blank lines for the signer(s) to fill in the appropriate information, e.g., date signed.

IMPORTANT: Upload your Word document for this homework to Canvas — that allows me to quickly review and comment.

Be sure to review the examples and guidelines at NCD § 3.7.

3.2. Homework due Wed. Jan. 25: Preamble (5 pts P/F)

Draft a preamble for a services agreement between MathWhiz and Gigunda — use the hypothetical facts at NCD § 1.2 and leave placeholders — e.g., “[FILL IN ADDRESS FOR NOTICE]” — for anything else you think you need.

Be sure to review the examples and guidelines at NCD § 3.5.

3.3. Homework due Mon. Jan. 30: Tenant audit rights (5 pts P/F)

Rewrite the following, from this real-estate lease:

  • to break up the “wall of words”
  • to be more reader-friendly, as though you were talking to a lay jury; and
  • to correct any drafting-type “issues” that you see, such as:
    • passive voice;
    • D.R.Y. issues;
    • run-on sentences.

(Don’t worry about fixing the substance of the provision — yet.)

6.5 Tenant’s Audit Rights. Landlord shall keep reasonably detailed records of all Operating Expenses and Real Estate Taxes for a period of at least two (2) years. Not more frequently than once in every 12-month period and after at least twenty (20) days’ prior written notice to Landlord, Tenant together with any representative of Tenant shall be permitted to audit the records of the Operating Expenses and Real Estate Taxes. If Tenant exercises its audit rights as provided above, Tenant shall conduct any inspection at a reasonable time and in a manner so as not to unduly disrupt the conduct of Landlord’s business. Any such inspection by Tenant shall be for the sole purpose of verifying the Operating Expenses and/or Real Estate Taxes. Tenant shall hold any information obtained during any such inspection in confidence, except that Tenant shall be permitted to disclose such information to its attorneys and advisors, provided Tenant informs such parties of the confidential nature of such information and uses good faith and diligent efforts to cause such parties to maintain such information as confidential. Any shortfall or excess revealed and verified by Tenant’s audit shall be paid to the applicable party within thirty (30) days after that party is notified of the shortfall or excess to the extent such overage or shortfall has not previously been adjusted pursuant to this Lease. If Tenant’s inspection of the records for any given year or partial year reveals that Tenant was overcharged for Operating Expenses or Real Estate Taxes by an amount of greater than six percent (6%), Tenant paid such overage and such overage was not otherwise adjusted pursuant to the terms of this Lease, Landlord shall reimburse Tenant for its reasonable, third party costs of the audit, up to an amount not to exceed $5,000.

3.4. Homework due Mon. Feb. 06: Signatures - the Addams family (5 pts P/F)

FACTS:

  1. Your client is Addams Investments, L.P., a “family” limited partnership of the very-wealthy Addams clan in Galveston. The sole general partner of the limited partnership is Addams Operations, Inc.
  2. It’s 12:00 noon Houston time on March 31. The president of Addams Operations, Ms. Wednesday Addams, is on the phone. It’s a bad connection, but she wants to talk about a contract that you and she have been negotiating for Addams Investments, L.P.
  3. Under the contract, will buy a large quantity of widgets from Widgets, Inc., a Houston company that recently went public. (Family patriarch Gomez Addams is convinced the family will make a killing in the widget market.)
  4. Wednesday Addams says that she has talked by phone with her opposite number at Widgets, Inc.; she reports that Widgets, Inc., has agreed to the last contract draft that you sent over, and that everyone is ready to sign.
  5. The Widgets, Inc. people really, really want to get the contract signed and delivered today, March 31. They’ve told Wednesday Addams that they’re willing to make significant pricing concessions to make that happen.
  6. There’s a problem, though: As you learn from Wednesday Addams over the bad phone connection, she and the rest of the Addams family are at the end of a rugged backpacking vacation on a small, primitive island in Hawai’i. The island has no Internet service and barely has cell phone service.
  7. The family has just emerged from the back country. The plan is for everyone, smelly as they are, to take a private plane from a dirt landing strip on the island to the Honolulu airport. A shuttle bus will take them to a nearby hotel for a quick shower and change of clothes. The family will then board a United Airlines “redeye” overnight flight that will land in Houston on the morning of April 1.
  8. One more thing, she says: In the interest of traveling as light as possible, no one in the group brought a laptop.

EXERCISE: Draft the signature block for Addams Investments, L.P.

QUESTIONS to answer in the Word document:

  1. Why might the Widgets sales rep be so eager to get the contract signed on March 31? (Hint: It has to do with the fact that Widgets, Inc. is a newly-public company.)
  2. What about just signing it on April 1 when the family gets back to Houston?
  3. Is it physically possible for you to “make it happen” for the contract to be signed and delivered to Widgets, Inc. today, March 31? If so, how might you go about it?
  4. If Wednesday Addams asks you to sign it as the company’s lawyer, how should you respond?

3.5. Homework due Mon. Feb. 13: Employment agreement (10 pts P/F)

See generally the hypothetical facts at NCD § 1.2.

FACTS:

• Mary Marvel (MathWhiz’s CEO) has told you that MathWhiz has agreed to hire a new director of business development, “Dave Doright,” who splits his time between his home in Houston and his second home in Boise, Idaho.

• Dave is someone whom Mary really wants to “get”; he has several other companies interested in him.

• Mary has known Dave for a few years; she believes he is smart, ambitious, and driven, but also an honorable guy who — out of concern for his professional reputation, if nothing else — would not try to take undue advantage of MathWhiz.

• Mary would like for you to put together a simple, letter-style employment agreement that covers just the absolute bare minimum of issues, to increase the chances that Dave will sign the letter without getting a lawyer involved, because that could delay things and possibly jeopardize her “closing the deal” to get Dave on board at MathWhiz.

• BUT: Mary still wants the letter to be enough that she could take Dave to court if necessary. (See also my Tom Arnold story from earlier in the semester).

HOMEWORK ASSIGNMENT:

1. In a Word document, draft such a letter agreement — feel free to look for issue ideas in the model employment agreement provisions and in Sheryl Sandberg’s employment agreement, BUT: Remember Mary’s concerns about having the letter agreement cover just the absolute bare minimum of issues.

(The letter agreement should refer to “you” for Dave and to “MathWhiz” as the company.)

2. At the end of the Word document, draft the text of an email to Mary: In the email, provide a list of no more than three omitted issues that:

(i) you think are sufficiently important that you would normally want such a letter agreement to address — and why that’s the case, i.e., what could go wrong if the issues aren’t addressed in the letter agreement, BUT:

(ii) given the circumstances and Mary’s expressed concerns, you think that in Dave’s case it’s likely an acceptable risk to omit those issues from the letter agreement.

Your draft email text should explain the above to Mary in matter-of-fact, nonjudgmental terms — DON’T write it in an accusatory tone implying that you don’t support Mary’s decision to proceed in this way.

(Remember: Our job as lawyers is to point out (i) possible what-if events; (ii) potential consequences if those events occur; and (iii) opportunities for avoiding or at least mitigating those risks. As long as we don’t veer into unethical- or illegal territory, it’s always the client’s decision what risks to take or not take.)

THEN: At the end of the email, invite Mary to contact you if there’s anything she’d like to discuss further.

3.6. Homework due Mon. Feb. 20: Earn-out computations (10 pts P/F)

For general background, see this video and article.

ASSIGNMENT: Simplify the following provision (NEW: see the guidelines below):

(c)     Within sixty (60) days after the end of an applicable Earn-Out Year, Purchaser shall (i) prepare or cause to be prepared a statement setting forth: (A) following Year One, the calculation of the Annual Earn-Out Payment applicable to Year One; (B) following Year Two, the calculation of the Annual Earn-Out Payment applicable to Year Two; (C) following Year Three, the calculation of the Annual Earn-Out Payment applicable to Year Three; (D) following Year Four, the calculation of the Annual Earn-Out Payment applicable to Year Four and (E) following Year Five, the calculation of the Annual Earn-Out Payment applicable to Year Five (with respect to each Earn-Out Year, an “Earn-Out Calculation”) and (ii) deliver the applicable Earn-Out Calculation to Seller, together with (A) reasonable supporting documents and (B) payment to Seller, by wire transfer of immediately available funds to an account designated in writing by Seller, of the Annual Earn-Out Payment, if any, calculated by Purchaser to be payable based on such Earn-Out Calculation. Seller shall have a period of thirty (30) days after receipt of the applicable Earn-Out Calculation with respect to the applicable Earn-Out Year to notify Purchaser in writing of Seller’s election to accept or reject such Earn-Out Calculation as prepared by Purchaser. In the event Seller rejects in writing such Earn-Out Calculation as prepared by Purchaser, such rejection notice (the “Rejection Notice”) shall contain the reasons for such rejection in reasonable detail and set forth the amount of the requested adjustment. In the event no Rejection Notice is received by Purchaser during such thirty (30)-day period, the Annual Earn-Out Payment for such Earn-Out Year (as set forth in Purchaser’s Earn-Out Calculation) shall be deemed to have been accepted and shall be final, conclusive and binding on the Parties hereto. In the event that Seller shall timely reject an Earn-Out Calculation, Purchaser and Seller shall promptly (and in any event within thirty (30) days following the date upon which Purchaser received the applicable Rejection Notice from Seller rejecting such Earn-Out Calculation) attempt in good faith to make a joint determination of the Annual Earn-Out Payment for the applicable Earn-Out Year, and such determination and any required adjustments resulting therefrom shall be final, conclusive and binding on the Parties hereto. In the event Seller and Purchaser are unable to agree upon the Annual Earn-Out Payment for the applicable Earn-Out Year within such thirty (30)-day period, then Purchaser and Seller shall jointly engage the Accounting Firm to resolve such dispute and promptly submit such dispute for resolution to the Accounting Firm. The Parties shall jointly instruct the Accounting Firm to make a determination within thirty (30) days after its engagement or as soon as practicable thereafter. The Accounting Firm’s determination shall be limited to resolving the disagreement set forth in the Rejection Notice. The determination of the Accounting Firm and any required adjustments resulting therefrom shall be final, conclusive and binding on all the Parties hereto. The fees and expenses of the Accounting Firm shall be allocated between and paid by Purchaser and/or Seller, respectively, based upon the percentage that the portion of the contested amount not awarded to each Party bears to the amount actually contested by such Party, as determined by the Accounting Firm.

3.7. Homework due Mon. Feb. 27: Termination clause (10 pts.,  P/F)

This exercise concerns the agreement-termination provision below, from the agreement by which Verizon acquired Yahoo!.

FIRST: Look at the abomination that is subdivision (b)(i):

This Agreement may be terminated at any time prior to the Closing, whether before or after the Seller Stockholder Approval is obtained, as follows: …

(a) [omitted]

(b) by either Seller or Purchaser, if:

(i) the Closing shall not have occurred by April 24, 2017 (the “Outside Date”); provided, that (A) if the SEC shall not have cleared the Proxy Statement by March 10, 2017, then either party (provided that it has complied in all material respects with its obligations under Section 4.02(a)) may, by written notice delivered to the other party, extend the Outside Date by three (3) months; and (B) if on the fifth (5th) Business Day prior to the Outside Date (including as extended one time pursuant to Section 6.01(b)(i)(A) or this Section 6.01(b)(i)(B)) the conditions set forth in Section 5.01(b) and Section 5.01(c) (solely on account of a temporary or preliminary Governmental Order) are not satisfied, but all other conditions set forth in Article V shall have been satisfied or waived (excluding conditions that, by their terms, cannot be satisfied until the Closing, which conditions would be capable of being satisfied at such time), then either Seller or Purchaser (provided that it has complied in all material respects with its obligations under Section 4.05) may, by written notice delivered to the other party hereto, extend the Outside Date by three (3) months; provided, further, that the right to terminate this Agreement under this Section 6.01(b)(i) shall not be available to a party, if any failure by such party to fulfill its obligations under this Agreement shall have been the primary cause of, or shall have resulted in, the failure of the Closing to occur on or prior to the Outside Date (as extended pursuant to clause (A) or clause (B) of this Section 6.01(b)(i)) ….

[remaining subparagraphs omitted]

SECOND: Take a stab at rewriting the following subdivision b(ii) by breaking up the “wall of words” — each subparagraph should address one

This Agreement may be terminated at any time prior to the Closing, whether before or after the Seller Stockholder Approval is obtained, as follows: …

(a) [omitted]

(b) by either Seller or Purchaser, if:

(i) [omitted - it’s shown under FIRST above]

(ii) any Governmental Authority of competent jurisdiction shall have issued or entered any Governmental Order or taken any other action permanently restraining, enjoining or otherwise prohibiting or making illegal the consummation of any of the Sale and the Reorganization Transactions, and such Governmental Order or action shall have become final and non-appealable; provided, however, that the party seeking to terminate this Agreement pursuant to this Section 6.01(b)(ii) shall have used its reasonable best efforts to remove such Governmental Order or other action; and provided, further, that the right to terminate this Agreement under this Section 6.01(b)(ii) shall not be available to a party whose failure to fulfill its obligations under this Agreement shall have been the primary cause of, or shall have resulted in, the issuance of such Governmental Order or taking of such action; or

[remaining subparagraphs omitted]

I’ll show my rewrite in due course.

3.8. Homework due Mon. Mar 06: Contractor employee compensation provision (20 pts., NOT P/F)

TEXT: This 189-word sentence is from a customer’s 302-page master services agreement that I once had to review on behalf of a supplier:

[BEGIN QUOTE]

Contractor shall pay all salaries, fees, charges, taxes and contributions of all persons who at any time are engaged in the provision of Work and/or Services under or pursuant to the Agreement and without prejudice to the generality of the foregoing Contractor shall at all times fully and effectively indemnify keep indemnified and hold harmless Buyer and its officers employees and contractors from time to time (whose loss shall be deemed to be loss suffered or incurred by Buyer and on whose behalf Contractor hereby acknowledges Buyer shall be entitled to claim) from and against all costs, losses, damages, fees, expenses and charges (including without limitation legal fees) arising from any claim howsoever and whensoever arising (and including by way of example but not limitation any law or regulation relating to the transfer of all or any part of any undertaking business or contract) by or in relation to all or any of such persons connected in any manner with their contract of employment or their contract for the provision of services (in particular but without limitation any claim of a breach of contract redundancy or unfair dismissal).

[END QUOTE]

ASSIGNMENT: Assume that you represent Contractor.

  1. In a Word document, turn the above into something much-more readable.
  2. Use Word comment bubbles to flag any issues that you think should be discussed with the client.

3.9. Homework due Mon. Mar 27: Referral agreement (30 pts.  NOT P/F)

See the hypothetical facts at NCD § 1.2.

FACTS: MathWhiz wants to have a simple agreement template under which MathWhiz can pay a referral commission to individuals and/or organizations that refer business to it. The amount of the commission will be 5% of the first sale that MathWhiz makes to a given customer.

EXERCISE: Draft such a form — use this bare-bones contract template.

  • Don’t necessarily include all the bells and whistles of the Tango Terms referral provisions — remember, MathWhiz wants a simple agreement that ideally can get signed without the other side getting its lawyer(s) involved.
  • Consider putting key business details in a schedule at the beginning

4. Reading, by week (to be updated)

4.2. Reading for Mon. Jan. 23

4.3. Reading for Mon. Jan. 30

Skim the following except as otherwise indicated:

4.4. Reading for Mon. Feb. 06

NOTE: The definitions in the following clauses are not official; they can be included in contracts precisely because the law might not have uniformly-agreed definitions. (W.I.D.D. — When In Doubt, Define!)

Just skim the following except as otherwise indicated:

4.5. Reading for Mon. Feb. 13

4.6. Reading for Mon. Feb. 27

Skim the following to get a sense of the subjects except as otherwise indicated

4.7. Reading for Mon. Mar 06

Read:

4.8. Reading for Mon. Mar 20

Read:

4.10. Reading for Mon. Apr. 03

Skim the following except as otherwise indicated:

Skim the following except as otherwise indicated.

Optional reading: See this article at the Contract Nerds blog. Excerpt:

What we wish we could say: “Stop submitting last-minute contracts for legal review!”

What we actually say: “No problem, I’ll get right on that.”

This happens ALL the time and is one of the greatest challenges for in-house attorneys to overcome.

* * * 

[T]his issue should be equally frustrating to the entire organization because it is bad for business, too. A rushed contract review negatively impacts the entire deal, including commercial terms, and can cost the business thousands, if not millions, of dollars in economic loss.

* * * 

If you’re brought in to “review” a contract that has already been negotiated (or worse, already been agreed to by both parties), then you’ve already lost. And, arguably, so has your business client, even if they can’t see the repercussions just yet because they’re too distracted by the short-term glory of signing the contract. …

Optional reading for your future reference: In the course of starting a new client project, I ran across what seems to be a very-useful long CLE paper summarizing some nuances of Texas case law about noncompetition covenants. See Zach Wolfe, Wolfe on Texas Non-Compete Litigation, or, My Big Fat Texas Non-Compete Paper (2021). The author reviews:

  • the current Texas non-compete statute, starting at page 14 of the paper;
  • what he refers to as the Five Year Rule about what constitutes a reasonable time period;
  • case law concerning reasonable geographic- and operating scope.

4.11. Reading for Mon. Apr. 10

Look for the main takeaways in the following:

Selected defined terms:

4.13. Reading for Mon. Apr. 24