Day-by-Day Class Plans: Contract Drafting Fall 2021

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

Updated Wednesday December 01, 2021 19:30 Houston time

The SYLLABUS sets out general information about this course.

Today’s class plan

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.

Other necessary documents for this course:
• the reading materials: Notes on Contract Drafting, a work-in-progress of mine (“NCD”), including an interim draft of the Tango Terms annotated contract provisions;
• 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)
• the questions worksheet: 6:00 p.m. class     7:30 p.m. class
• [NEW:] an extremely simple contract template to use for homework assignments

For those who would like a bound book, a 200-page, 8.5x11“ paperback of NCD (not including the Tango Terms because of printing size restrictions) is available from Amazon for $5.50 per copy plus tax and shipping, which is basically printing cost. Disclosure: I get a royalty of $0.05 per copy sold.

1. August

1.1. Class 01: Mon. Aug. 23

1.1.1. Introduction

  • Introduction of each student via Zoom chat.

1.1.2. Set up email list and Canvas, etc.

• Provide emails for a Google Groups email list on the Group 1 virtual whiteboard at 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)

• Canvas setup: Enroll at https://canvas.instructure.com/enroll/YYGCX9 — be sure to use your name so I can track progress and watch out for possible issues. (Omitting your name means that you won’t show up in the grade book as having completed the homeworks and quizzes ….)

1.1.3. Read-along lecture

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

1.1.4. Ambiguity drill (1)

(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?

1.1.5. Discussion: Selling a used computer

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

1.1.7. Ambiguity drill (2)

TEXT, from The Kinks’ famous song Lola (play the relevant clip on YouTube): “Well I’m not the world’s most masculine man | But I know what I am and I’m glad I’m a man | And so is Lohhh-lahhh …..”

QUESTION: When the artists sing, “And so is Lola,” what exactly is Lola? EXERCISE: How that lyric line could be clarified? (Don’t worry about rhyme or meter.)

1.2. Class 02: Wed. Aug. 25

1.2.1. Housekeeping

  1. If you haven’t already put your email address in the Google Groups email list on the Group 1 virtual whiteboard at 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), then please do so.
  2. If you haven’t signed up for this course in Canvas, please do so. From Monday: Enroll at https://canvas.instructure.com/enroll/YYGCX9be sure to use your name so I can track progress and watch out for possible issues. (Omitting your name means that you won’t show up in the grade book as having completed the homeworks and quizzes ….)

1.2.2. 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, The Guardian, 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?

1.2.3. 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?

1.2.4. Reading review

What’s the fastest way to signature?   Worksheet

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

See this post.

1.3. Class 03: Mon. Aug. 30

1.3.1. In the news

  • IBM fired by TXDOT (cf. Indiana v. IBM)
  • Eighth Cir.: Employment agreement term not the same as employment - noncompetion clause didn’t survive
  • From the practice: Assignment-consent / change-of-control issue
  • From the practice: IRS subpoena

1.3.2. Homework review - signature blocks

Points to note:

  1. “The following terms …”: If the signature blocks are at the end of the contract (as is usually the case for conventional drafters), you wouldn’t use the model paragraph about the terms that follow the signature blocks.
  2. Party nicknames: You want to be careful about how you pick the shorthand names for the parties; for example, in this context MathWhiz is not “Employer.”
  3. LLC vs. corporation: The abbreviation LLC stands for “limited liability company,” not corporation.
  4. Gigunda status? The facts don’t indicate that Gigunda is a corporation; it’s not unlikely, but we can’t assume that — so leave a placeholder in ALL-CAPS, along the lines of, e.g., “[INSERT GIGUNDA ENTITY TYPE].” (We also don’t know where Gigunda was incorporated; it could be California, it could be Delaware, it could be Nevada, or even elsewhere.)
  5. Nicknames alone in signature blocks? If the signature blocks are at the end of the contract, then it’s fine to just use the nicknames, as long as the contract clearly indicates each party’s full legal name and that party’s nickname — “the needful” (as Brits might say) is that a new reader, looking at the contract, will be able to quickly confirm which party has or hasn’t signed the contract.

1.3.3. Reading review: Course details

1.3.4. When style preferences clash

Discuss in the main Zoom room:

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

1.3.5. Contract framework setup

1.3.6. Drafting fail: American Girl

A CNN headline: “American Girl releases its first doll with hearing loss

QUESTION: What’s wrong with this?

QUESTION: In this context, does the problem matter in any real sense?

1.3.7. Reading review

Discuss in breakout rooms: Contract structure - part 1

1.3.8. 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?

1.3.9. MathWhiz state of organization

I had thought that the facts stated that MathWhiz LLC is a Texas LLC — well, I just looked again, and that’s not the case.

(DCT to tell the Janicke story.)

1.3.10. Ambiguity rewrite: Swearing to defend the Constitution 11 times

Here’s a tweet I saw retweeted: “I’ve sworn to defend and uphold our Constitution 11 times.”

QUESTION: What exactly does “11 times” refer to — defending and upholding the Constitution 11 times, or swearing to do so?

QUESTION: How could this be clarified?

1.3.11. Discussion questions

  1. Which is it: “Class starts at X o’clock”: A) ten B) 10:00
  2. Which is it: “More than X people voted to re-elect President Trump”: A) 74,000,000 B) seventy-four million C) 74 million.
  3. Which is used to indicate permission: May, or might?
  4. Which is used to indicate possibility: May, or might?
  5. True or false: An oral contract that might be completely performed in a year is invalid under the Statute of Frauds if it turns out that the contract isn’t completely performed in a year.
  6. Explain if false: In the U.S., before parties can use electronic signatures, they must first sign a hard-copy preliminary agreement that they can use electronic signatures for subsequent agreements.
  7. Explain if false: Nowadays, most contracts get printed out in two copies, and each copy is signed by both parties, so that each party will have one, fully-signed original to keep.
  8. Explain if false: It’s not a great idea to put signature blocks at the front of a contract. EXPLAIN.
  9. Explain if false: It’s a good idea to include language such as the following just before the signature blocks: “To evidence the parties’ agreement to this Agreement, each party has executed and delivered it on the date indicated under that party’s signature.”
  10. Explain if false: Signature blocks should have the “date signed” spaces pre-filled in so that the signers won’t have to remember to write in the dates.
  11. Explain if false: Each individual signer’s signature block should have a blank space for the signer to handwrite in the date signed.
  12. Explain if false: It’s OK to let a signature block get split between two different hard-copy pages (that is, the first part of the signature block is at the bottom of one page and the remainder is at the top of the next page).
  13. What feature of Microsoft Word can you use to get two signature blocks side-by-side on the page? (Hint: It starts with “T.”)
  14. (From Contracts 101 for 1Ls:) By law, what’s the significance of the last date signed?
  15. Explain if false: The signature block for a corporation or LLC can just state the individual signer’s name, e.g., “Jane Doe,” without any other information.
  16. FACTS: ABC Corporation’s marketing department is negotiating a contract with social-media giant Foogle for a $10 million online advertising campaign to promote ABC’s products. At the request of ABC’s director of marketing, ABC’s vice president for human resources Allen Baker Cole signs the contract. BUT: ABC’s CEO learns about the contract and immediately demands that it be set aside, because the CEO had planned to use that money for other things. ABC’s internal policy manual states that all advertising contracts must be signed by the executive vice president for sale. QUESTION: Can ABC use Allen’s lack of authority as a reason to cancel the advertising contract?
  17. DIFFERENT FACTS: Before the advertising contract was signed, ABC’s vice president of marketing sent an email to his contact at Foogle, stating that only he (the VP of marketing) had authority to sign the advertising contract; the Foogle contact emailed back, saying “fine, that works for us.” QUESTION: Does that change your answer in #16 above? If so, how?
  18. Explain if false: It’s generally OK for an attorney to sign on behalf of a client as long as the signature (or signature block) indicates that the attorney is signing in that capacity and not as an officer of the client or as an individual party.
  19. Explain if false: It’s generally OK for a company’s vice president and general counsel to sign a contract with Thomson West for the legal department’s Westlaw subscription.
  20. If exchanging signed signature pages only, how can you make sure each party’s signed signature page is from the same version of the contract? (In one case, discussed in the reading, this was a problem — what happened there?)

2. September

2.1. Class 04: Wed. Sep. 01

2.1.1. In the news

We’ll discuss each of the following later in the semester:

2.1.2. Ambiguity preview: Traffic signs

Ambiguous: See this sign.

More clear: This sign

2.1.3. Homework review - preamble

(To be shown in class)

Signature block sample:

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 kind of an unconventional title for this type of agreement. [1] Need Gigunda’s full legal name. [2] You wouldn’t say “global oil and gas company” in the preamble — in the Background, yes, 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.)

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 principal place of business [2] 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 [2] 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. [2] What’s the comment here?

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
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] [0], 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] 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?

2.1.4. Reading review (1)

Use the questions worksheet: 6:00 p.m. class     7:30 p.m. class

2.1.5. 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?

2.1.6. In-class drafting exercise

FACTS (building on our earlier discussion):

  • 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 (Caution: I will very likely “erase the whiteboards” after each class session, so be sure to copy anything you want to save):

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

2.2. Class 05: Wed. Sep. 08

2.2.1. In the news

2.2.2. From the practice

DCT to tell about a client call:

  • Somewhat unfamiliar area
  • Research: Google, scholar.google.com
  • Zoom call
  • Risk discussion, business-risk assessment
  • Follow-up email

2.2.3. Ambiguity: Cutting homeless people in half

Sent to me by a student (Megan Sheena):

Homeless people cut in half

2.2.4. Reading discussion (A)

Use the questions worksheet: 6:00 p.m. class     7:30 p.m. class

  1. FACTS: Gigunda’s services agreement template says that MathWhiz must comply with Gigunda’s expense reimbursement policy. Mary Marvel, the MathWhiz CEO, asks what you think. QUESTION: What advice do you have for her?
  2. FACTS: Gigunda’s services agreement template also says that MathWhiz must submit its invoices no later than 15 days after the end of a calendar quarter. QUESTION: What do you think Gigunda’s motivation is? QUESTION: Will MathWhiz even care? QUESTION: What do you advise Mary Marvel?
  3. FACTS: MathWhiz wants to include, in its services agreement template, a provision for charging interest. • Mary says that she’s heard of something called a “usury-savings clause,” and asks whether such a clause should be included in the MathWhiz template. QUESTION: From a purely-business perspective, what do we not know, that we might want to find out, before trying to advise Mary?
  4. FACTS (an advance look at a future subject): For particular MathWhiz obligations, Mary wants the MathWhiz services agreement template to require only that MathWhiz use its “best efforts” to perform its obligations. QUESTION: Is this a “safe” clause to include? Why or why not?

2.2.5. Homework review - Tenant audit rights (part 1)

  1. STUDENT TEXT: “Tenant and Tenant’s representatives may audit OPEX and RE Taxes records: i. Once every 12 months and,  ii) After at least 20 days’ prior written notice to Landlord.” (Revised.)
    • QUESTION: Does that mean an audit is OK, say, every three months as long as there’s at least 20 days’ prior written notice? And no notice requirement at all if every 12 months?
    • BETTER (from another student): “Tenant – or representatives of the Tenant – may audit the records once in a 12-month period. A written notice at least 20 days prior to the audit must be given to the Landlord.”
  2. STUDENT TEXT: “Any inspection by Tenant shall be for the sole purpose of verifying the OPEX and/or RE Taxes.”
    • COMMENT: I’d make this active voice, e.g., “Tenant may not conduct any inspection, nor use information obtained in an inspection, except for the sole purpose of verifying ….” (Emphasis added.)
  3. STUDENT TEXT: “Tenant shall disclose information obtained during inspection solely to its attorneys and advisors, provided: (i) Tenant informs parties of the confidential nature of information. (ii) Tenant makes good faith effort to cause parties to maintain information as confidential.”
    • COMMENT: I’d rewrite to say: “Tenant must not disclose information obtained during inspection except solely to its attorneys and advisors [DELETE: provided]. (i) Tenant must inform those parties of the confidential nature of the information. (ii) Tenant must make good faith efforts to cause parties ….” (Emphasis added.)
  4. STUDENT TEXT: “a. Any shortfall or excess revealed by Tenant’s audit shall bepaid to the applicable party within 30 days after: (i) Notification of party. (ii) Overage or shortfall has not been previously adjusted pursuant to this Lease.”
    • COMMENT: Item (i) is too terse; it doesn’t make for a complete sentence if read together with the beginning of (a).
    • COMMENT: Item (ii) has the same problem: If you read the beginning of (a), and then go straight to (ii), it’s not a coherent sentence, and it’s supposed to be that.
  5. STUDENT TEXT: “(b) If Tenant’s inspection reveals that Tenant was: (i) Overcharged for OPEX or RE Taxes by an amount of greater than six percent, (ii) Tenant paid overage and, iii. Overage not adjusted pursuant to the terms of this Lease, (c) Then, Landlord shall reimburse Tenant for costs of the audit, up to an amount not to exceed $5,000.” COMMENTS:
    • Same incomplete-sentence problems as above.
    • You wouldn’t do a new subdivision c for the “THEN” part, because it’s not a new sentence or thought.
    • Don’t spell out “six percent.”
    • REWRITE (by DCT): “IF: Tenant’s inspection reveals that: (i) Tenant was overcharged for OPEX or RE Taxes by more than 6%; or (ii) Tenant paid Overage that was not adjusted as provided in this Lease; THEN: Landlord must reimburse Tenant ….”
  6. STUDENT TEXT: “(III) If Tenant exercises its audit rights, as provided above, Tenant must 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 must be for the sole purpose of verifying the Operating Expenses and/or Real Estate Taxes. Tenant must hold any information obtained during any such inspection in confidence, except that Tenant is permitted to disclose such information to its attorneys and advisors, provided 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.”
    • COMMENT: This is good, but I’d break it up even further.
  7. STUDENT TEXT: “Tenant – or representatives of the Tenant – may audit the records once in a 12-month period. A written notice at least 20 days prior to the audit must be given to the Landlord. If Tenant exercises its audit rights, Tenant must conduct its inspection in a reasonable time and manner. Any audit conducted by Tenant may only be done for the sole purpose of verifying the records. Any information Tenant obtains through its audit is to remain confidential. Confidential information Tenant obtains may only be shared with Tenant’s attorneys and advisors.”
    • COMMENT: Nice job pointing out that Tenant might want an outside auditor to do the audit. (That brings up its own set of issues.)
    • COMMENT: I’d break this up a bit more; confidentiality is enough of a separate issue that it’s worth giving the reviewer some help by putting it in a separate paragraph.
  8. STUDENT TEXT: “If the audit reveals that Tenant paid an overcharge greater than 6% for Operating Expenses or Real Estate Taxes, Landlord may reimburse Tenant’s audit costs up to $5,000.” (Emphasis added.)
    • COMMENT: That won’t fly — Tenant will insist on being reimbursed in that situation; the discussion will be whether the threshold should be 6%, or something else.
  9. STUDENT TEXT w/ DCT notes:
    • “Landlord shall keep reasonably detailed records of all Operating Expenses and Real Estate Taxes for a period of at least two years. [BREAK HERE] Tenant, or a representative of Tenant, may audit the records of the Operating Expenses and Real Estate Taxes, but may not do so more frequently than once in every 12-month period. Tenant must also provide at least 20 days’ prior written notice to Landlord of such audit request.”
    • “If Tenant exercises its audit rights as provided above, Tenant shall conduct any inspection at a reasonable time and in a manner that will not unduly disrupt the Landlord’s conducting of business. [BREAK HERE?] Tenant shall only conduct such an inspect[ION] for the purpose of verifying the Operating Expenses and/or Real Estate Taxes.”
    • “If Tenant’s audit reveals any shortfall or excess of payment, the amount owed shall be paid to the applicable party within 30 days after that party is notified of the shortfall or excess, so long as such overage or shortfall has not previously been adjusted pursuant to this Lease. [BREAK HERE] If Tenant’s inspection of the records reveals that Tenant was overcharged for Operating Expenses or Real Estate Taxes by an amount of greater than 6%, and 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. However, reimbursement of expenses will not exceed $5,000.

2.2.6. Reading discussion (B)

  1. QUESTION: What are some possible dangers of including “good faith” requirements in a contract?
  2. QUESTION: Why include a redlining representation? How do you think the lawyers you know would react to being asked to approve it in their clients’ contracts?
  3. QUESTION: Why include a status-conferences requirement?
  4. QUESTION: How useful is it to state in a contract that the parties are “independent contractors”? EXPLAIN.

2.2.7. Pre-quiz review

In your small groups, discuss the following about what we’ve covered so far; use the questions worksheet: 6:00 p.m. class     7:30 p.m. class

  1. What was surprising to you?
  2. What was confusing to you?
  3. Are there any key points that you think young lawyers and/or clients should be sure to keep in mind?
  4. Any other questions about what we’ve covered so far?

2.2.8. Homework review - Tenant audit rights (part 2)

In the main Zoom room:

  1. STUDENT TEXT: “(e) Tenant must hold all information obtained during any inspection in confidence, except: (1) Tenant may disclose such information to its attorneys and advisors, provided; (A) Tenant informs such parties of the confidential nature of the information; and (B) uses good faith and diligence to cause such parties to maintain such information confidential.”
    • QUESTION: What could be improved here?
  2. “(f) Any shortfall or excess revealed and verified by Tenant’s audit must be paid to the applicable party within: (1) 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.”
    • QUESTION: What could be improved here?
  3. “Landlord shall keep reasonably detailed records of all Operating Expenses (“Expenses”) and Real Estate Taxes (“Taxes”) for at least two (2) years. Tenant and/or its representative shall be permitted to audit the above records by giving Landlord written notice not less than twenty (20) days’ prior to the audit date. Tenant shall exercise the audit right no more than once a year.”
    • QUESTION: What D.R.Y. failures do we see here?
    • QUESTION: Would the reader be served any better by breaking this up any further? How far would you go in doing so?
  4. “Tenant, with any representative of tenant, shall be permitted to audit the records of the Operating Expenses and Real Estate Taxes if such audit is: • Not more than once every 12-month period; and • Prior written notice, of at least 20 days, is given to Landlord.”
    • QUESTION: How could the bullet-point structure be improved?

2.3. Class 06: Mon. Sep. 13 [CANX]

[UPDATE: No class tonight due to Hurricane Nicholas; I’ve moved selected exercises, etc., to Wednesday night.

2.3.1. Quiz #1 due

2.3.2. In the news: Ambiguity and a termination right

FACTS:

  1. A merger agreement provided, in section 8.1, that if the merger was not “closed” by a specified date, then either party could pull the plug (so to speak) as long as that party’s breach was not responsible for the failure to close.
  2. The merger agreement also stated in part as follows:

Section 8.2 Effect of Termination. In the event of any termination of this Agreement as provided in Section 8.1, the obligations of the parties shall terminate and there shall be no liability on the part of any party with respect thereto, except for [surviving clauses omitted] ….

  1. For reasons not important here, one of the parties:
    • terminated the agreement as provided in the aforementioned section 8.1; and
    • sued the other parties in Delaware chancery court for breach.
  2. The defendants filed a Rule 12(b)(6) motion to dismiss for failure to state a claim upon which relief can be granted.
  3. The plaintiff (i.e., the party that terminated under section 8.1) claimed that the “no liability … with respect thereto” in section 8.2 meant no liability with respect to the termination itself, as opposed to no liability with respect to breach of the Agreement.

The Delaware chancery court ruled: “Under the Merger Agreement’s plain terms, Yatra extinguished its breach of contract claims when it elected to terminate the Merger Agreement.” Yatra Online, Inc. v. Ebix, Inc., No. 2020-0440, slip op. at 4 (Del. Ch. Aug. 30, 2021).

The court explained:

Of course, an agreement is not ambiguous simply because the parties disagree about its interpretation. Rather, a contract is ambiguous only when the provisions in controversy are reasonably or fairly susceptible of different interpretations or may have two or more different meanings. By contrast, a contract is unambiguous when the agreement’s ordinary meaning leaves no room for uncertainty, and the plain, common, and ordinary meaning of the words lends itself to only one reasonable interpretation.

[Plaintiff] Yatra’s reading of the Effect of Termination provision stretches the words beyond their tolerance. …

Id. at 23 (cleaned up, footnotes omitted).

2.3.3. Ambiguity exercise: Nestlé and Starbucks

From this BBC.com article: “Nestlé has announced that it will pay Starbucks $7.1bn (£5.2bn) to sell the company’s coffee products.”

QUESTION: Which company will sell the other company’s coffee —

  • Will Nestlé sell Starbucks coffee? or
  • Will Starbucks sell Nestlé coffee?

(Which do you think is more likely?)

(Is it possible that Nestlé might pay Starbucks $7.1bn for the privilege of Nestlé selling Nestlé’s own coffee?)

EXERCISE: In the Zoom chat window (TO ME ONLY), rewrite the above-quoted sentence twice — once for each possible interpretation.

2.3.4. Quickie writing exercise

TEXT 1: “The team held a meeting to give consideration to the issue.” (Shortened) TEXT 2: “The team considered the issue.” QUESTION: In the Zoom chat window TO ME ONLY: Is this “streamlining” safe? If not, why not?

2.3.5. Small-group session 1

INSTRUCTIONS: For each of the questions below, each group is to draft a written response that one group member — the “scrivener,” an assignment to be rotated for different questions — can copy and paste into the Zoom chat window (TO EVERYONE) when we return to the main Zoom room. Feel free to 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) and/or to pull up Microsoft Word (or whatever) and share screens in Zoom.

  1. FACTS: Continuing the usury discussion with Mary from last week: Mary wants to know whether California law allows usury savings clauses for interest charges (given that California is where Gigunda is located). QUESTION: What do you tell her? (Hint: Do a quick online search about California law.)
  2. FACTS: “Alice” claims that a contract term means one thing, “Bob” claims that the term means something else. TRUE OR FALSE: The fact that the parties are arguing for different interpretations means that a jury will have to decide the winner of their “he said, she said” dispute. EXPLAIN.
  3. QUESTION: In the context of contract drafting, what does BLUF stand for — and why might it be significant to a client?
  4. QUESTION: Of the rules for note-taking during contract negotiations — and during other meetings as well — what does your group think are the TWO most-important rules — and why?

2.3.6. Ambiguity exercise: A black hole … in Chile?

See the following from Nsikan Akpan, Here is the first photo of a black hole (PBS.org):

Scientists at eight radio telescopes observatories … captured images of one black hole in our Milky Way — known as Sagittarius A* — and one in a nearby galaxy called M87, over the course of a week in April 2017. (The PBS NewsHour visited one in Chile when the project was still under discussion).

QUESTION: What are the two possibilities for the “one” that PBS visited?

EXERCISE: Using the Zoom chat window TO ME ONLY, rewrite just the italicized sentence to clarify the likely intended meaning.

2.3.7. (Re)writing exercise: A termination clause

Consider the following provision (from a real contract):

12. TERMINATION

If the royalties due hereunder have not been paid within the time allowed by this Licence Agreement or if either party shall breach of any of the representations, warranties, covenants, promises or undertakings herein contained and on its part to be performed or observed and shall not have remedied such breach within thirty (30) days after notice is given to the breaching party by the non-breaching party requiring such remedy or if either party shall have an Examiner appointed over the whole or any part of its assets or an order is made or a resolution passed for winding up of such party unless such order is part of a scheme for reconstruction or amalgamation of such party then the other party may forthwith terminate this Licence Agreement without being required to give any or any further notice in advance of such termination but such termination shall be without prejudice to the remedy of such party to sue for and recover any royalties then due and to pursue any remedy in respect of any previous breach of any of the covenants or agreements contained in this Licence Agreement.

In 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), take a stab at rewriting this provision to make it more readable and conform to the drafting style rules we’ve been reading about and discussing.

(Don’t try to “retrade the deal” by altering the substantive terms.)

(I’ll show my rewrite on Wednesday night.)

2.3.8. Small-group session 2

  1. FACTS: An apartment lease states (in part): “The apartment shall be regularly serviced by a professional pest-control service.” QUESTION: This is an example of what? (Two words — and the words are not “passive voice.”) QUESTION: Is this an example of acceptable drafting? Why or why not?
  2. FACTS: Same as the previous question. Are there any circumstances in which the above-quoted apartment lease provision might be sort-of acceptable, in the sense of “hold your nose and go along with it”? (Hint: Consider the role that context plays in interpreting contract language.)
  3. FACTS: [SAVED TILL WEDNESDAY] You have graduated and are working as an associate for the law firm representing MathWhiz; you’ve just taken the bar exam. You’ve been asked to review a MathWhiz contract draft that has been prepared by a rising-2L summer associate. The draft says: “Gigunda represents that it shall arrange to pay MathWhiz a deposit in the sum-total amount of $10 thousand dollars ($10,000.00) no later than 10 days after this Agreement has been executed.” QUESTION: Could the wording of this provision be improved?
  4. FACTS: Mary Marvel asks you to add, in the background of the MathWhiz agreement with Gigunda, the following sentence: “Gigunda acknowledges that MathWhiz’s data-processing algorithms are unique and MathWhiz’s extremely-valuable trade secret.” QUESTION: What’s your response to Mary, and why?

2.4. Class 07: Wed. Sep. 15 [REV’D]

UPDATE: Tonight’s class plan is revised to accommodate Monday’s class cancellation due to Hurricane Nicholas.

2.4.1. Quiz 1 review

Any questions? Comments? Could I have written any of the questions more clearly?

2.4.2. Homework upload question

Question for Zoom chat: How did most of you upload your homework — by uploading a Word document? (A couple of students uploaded in a way that I couldn’t annotate.)

2.4.3. Ambiguity: Bubbie’s kosher practice

TEXT (in honor of Yom Kippur, from Joshua Rothman in The New Yorker): “My grandmother is ninety-three and, to my knowledge, has never kept kosher.” (Emphasis added.)

QUESTION: Is there any way the bold-faced part could be misinterpreted — perhaps intentionally?

QUESTION: How could this be rewritten to avoid reduce the chances of misinterpretation?

2.4.4. Ambiguity: Father of a friend who is 96 years old

From a Facebook comment: “A father of a friend who just turned 96 is a lifelong reader ….”

QUESTION: How old is the father? Does the text make that 100% clear?

QUESTION: How could this be rewritten — perhaps by moving words around?

2.4.5. Quickie writing exercise

TEXT 1: “The team held a meeting to give consideration to the issue.” (Shortened) TEXT 2: “The team considered the issue.” QUESTION: In the Zoom chat window TO ME ONLY: Is this “streamlining” safe? If not, why not?

2.4.6. From the practice

DCT to recount an address-for-notice provision in a contract reviewed for a client — the other side (a Gigunda-style company) insisted on a detailed notice provision with lots of “with a copy to …” subclauses.

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

DCT model answer

6.5 Tenant’s Audit Rights.

6.5.1 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 by Tenant shall is to 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 be paid to the applicable 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 If [or: IF:] Tenant’s inspection of the records for any given year or partial year reveals that:

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

(2) Tenant paid such overage[,] and

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

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

A few points
  1. Some students numbered the paragraphs 6.5.1, 6.5.2, etc., which is useful.
  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 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)

2.4.8. In the news: Ambiguity and a termination right

FACTS:

  1. A merger agreement provided, in section 8.1, that if the merger was not “closed” by a specified date, then either party could pull the plug (so to speak) as long as that party’s breach was not responsible for the failure to close.
  2. The merger agreement also stated in part as follows:

Section 8.2 Effect of Termination. In the event of any termination of this Agreement as provided in Section 8.1, the obligations of the parties shall terminate and there shall be no liability on the part of any party with respect thereto, except for [surviving clauses omitted] ….

  1. For reasons not important here, one of the parties:
    • terminated the agreement as provided in the aforementioned section 8.1; and
    • sued the other parties in Delaware chancery court for breach.
  2. The defendants filed a Rule 12(b)(6) motion to dismiss for failure to state a claim upon which relief can be granted.
  3. The plaintiff (i.e., the party that terminated under section 8.1) claimed that the “no liability … with respect thereto” in section 8.2 meant no liability with respect to the termination itself, as opposed to no liability with respect to breach of the Agreement.

The Delaware chancery court ruled: “Under the Merger Agreement’s plain terms, Yatra extinguished its breach of contract claims when it elected to terminate the Merger Agreement.” Yatra Online, Inc. v. Ebix, Inc., No. 2020-0440, slip op. at 4 (Del. Ch. Aug. 30, 2021).

The court explained:

Of course, an agreement is not ambiguous simply because the parties disagree about its interpretation. Rather, a contract is ambiguous only when the provisions in controversy are reasonably or fairly susceptible of different interpretations or may have two or more different meanings. By contrast, a contract is unambiguous when the agreement’s ordinary meaning leaves no room for uncertainty, and the plain, common, and ordinary meaning of the words lends itself to only one reasonable interpretation.

[Plaintiff] Yatra’s reading of the Effect of Termination provision stretches the words beyond their tolerance. …

Id. at 23 (cleaned up, footnotes omitted).

2.4.9. (Re)writing exercise: A termination clause

Consider the following provision (from a real contract):

12. TERMINATION

If the royalties due hereunder have not been paid within the time allowed by this Licence Agreement or if either party shall breach of any of the representations, warranties, covenants, promises or undertakings herein contained and on its part to be performed or observed and shall not have remedied such breach within thirty (30) days after notice is given to the breaching party by the non-breaching party requiring such remedy or if either party shall have an Examiner appointed over the whole or any part of its assets or an order is made or a resolution passed for winding up of such party unless such order is part of a scheme for reconstruction or amalgamation of such party then the other party may forthwith terminate this Licence Agreement without being required to give any or any further notice in advance of such termination but such termination shall be without prejudice to the remedy of such party to sue for and recover any royalties then due and to pursue any remedy in respect of any previous breach of any of the covenants or agreements contained in this Licence Agreement.

In 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), take a stab at rewriting this provision to make it more readable and conform to the drafting style rules we’ve been reading about and discussing.

(Don’t try to “retrade the deal” by altering the substantive terms.)

(I’ll show my rewrite on Wednesday night.)

DCT to demonstrate how to break up the above clause

2.4.10. Small-group session

Each group pick a (different) spokesperson for each of the questions below.

  1. FACTS: An apartment lease states (in part): “The apartment shall be regularly serviced by a professional pest-control service.” QUESTION: This is an example of what? (Two words — and the words are not “passive voice.”) QUESTION: Is this an example of acceptable drafting? Why or why not?
  2. FACTS: Same as the previous question. Are there any circumstances in which the above-quoted apartment lease provision might be sort-of acceptable, in the sense of “hold your nose and go along with it”? (Hint: Consider the role that context plays in interpreting contract language.)
  3. FACTS: You have graduated and are working as an associate for the law firm representing MathWhiz; you’ve just taken the bar exam. You’ve been asked to review a MathWhiz contract draft that has been prepared by a rising-2L summer associate. The draft says: “Gigunda represents that it shall arrange to pay MathWhiz a deposit in the sum-total amount of $10 thousand dollars ($10,000.00) no later than 10 days after this Agreement has been executed.” QUESTION: Could the wording of this provision be improved?
  4. FACTS: Mary Marvel asks you to add, in the background of the MathWhiz agreement with Gigunda, the following sentence: “Gigunda acknowledges that MathWhiz’s data-processing algorithms are unique and MathWhiz’s extremely-valuable trade secret.” QUESTION: What’s your response to Mary, and why?

2.4.11. Guaranties: A wall-of-words example

See this guaranty:

1. Guaranty. The Guarantor hereby absolutely and unconditionally guarantees, as a guaranty of payment and performance and not merely as a guaranty of collection, prompt payment when due, whether at stated maturity, by required prepayment, upon acceleration, demand or otherwise, and at all times thereafter, of any and all existing and future indebtedness and liabilities of every kind, nature and character, direct or indirect, absolute or contingent, liquidated or unliquidated, voluntary or involuntary and whether for principal, interest, premiums, fees indemnities, damages, costs, expenses or otherwise, of the Borrower to the Lender, which arise from or are in connection with that certain Credit Agreement dated as of March 24, 2009, among the Borrower, Heald Capital, LLC and the Lender (as amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”; capitalized terms used herein and not defined herein shall have the meanings ascribed such terms in the Credit Agreement) and/or the other Loans Documents (including, without limitation, any Secured Hedge Agreement), whether associated with any credit or other financial accommodation made to or for the benefit of the Borrower by the Lender or otherwise and whenever created, arising, evidenced or acquired (including all renewals, extensions, amendments, refinancings and other modifications thereof and all out-of-pocket costs, reasonable attorneys’ fees and expenses incurred by the Lender in connection with the collection or enforcement thereof), and whether recovery upon such indebtedness and liabilities under the Credit Agreement and the other Loan Documents may be or hereafter become unenforceable or shall be an allowed or disallowed claim under any proceeding or case commenced by or against the Guarantor or the Borrower under the Bankruptcy Code (Title 11, United States Code), any successor statute or any other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief laws of the United States or other applicable jurisdictions from time to time in effect and affecting the rights of creditors generally (collectively, “Debtor Relief Laws”), and including interest that accrues after the commencement by or against the Borrower of any proceeding under any Debtor Relief Laws (collectively, the “Guaranteed Obligations”). The Lender’s books and records showing the amount of the Guaranteed Obligations shall be admissible in evidence in any action or proceeding, and shall be binding upon the Guarantor and conclusive, absent manifest error, for the purpose of establishing the amount of the Guaranteed Obligations. This Guaranty shall not be affected by the genuineness, validity, regularity or enforceability of the Guaranteed Obligations or any instrument or agreement evidencing any Guaranteed Obligations, or by the existence, validity, enforceability, perfection, non-perfection or extent of any collateral therefor, or by any fact or circumstance relating to the Guaranteed Obligations which might otherwise constitute a defense to the obligations of the Guarantor under this Guaranty, and the Guarantor hereby irrevocably waives any defenses it may now have or hereafter acquire in any way relating to any or all of the foregoing (other than the defense of final payment in full in cash and performance in full of the Guaranteed Obligations, except for contingent indemnification obligations for which no claim has been asserted). Anything contained herein to the contrary notwithstanding, the obligations of the Guarantor hereunder at any time shall be limited to an aggregate amount equal to the largest amount that would not render its obligations hereunder subject to avoidance as a fraudulent transfer or conveyance under Section 548 of the Bankruptcy Code (Title 11, United States Code) or any comparable provisions of any similar federal or state law

2.5. Class 08: Mon. Sep. 20

2.5.1. Housekeeping: Zoom breakout room assignments

By request, we’re going to stick with the same small-group assignments for a few weeks. When we go to breakout rooms, I’ll be asking you to join the following rooms on your own.

(As I’ve always done during in-person classes, I’ll be reshuffling the groups at least once, probably twice, during the semester.)

Breakout groups for 6:00 p.m. class
Group 1 Chris Maria Nicky Sabrina
Group 2 Greg Dylan Matt (C…f) Muhammad
Group 3 Caroline Drew Ryan Tara
Group 4 Emily Matt (C…s) Natalie Rachel
Breakout groups for 7:30 p.m. class

Group 1: Kevin, Natalie, Noor, Sydney
Group 2: Kyle, Molly, Nick, Smith
Group 3: Alex, Chris, Katherine, Seunghyun
Group 4: Garrett, Haseeb, Ronnie, Sarah

2.5.2. Housekeeping: Attendance tracking

To track attendance for the 100-point “signing bonus” (see the discussion at § 6.1 of the Syllabus), I’m making nightly screenshots of the Zoom participant lists and then logging names into Canvas’s “Roll Call Attendance” feature. At the end of the semester I’ll be downloading an attendance-report spreadsheet and counting the number of absences to determine how many points (if any) that each student will lose due to the “clawback.”

(As you know, class was canceled on Monday Sept. 13 due to Hurricane Nicholas, so no one gets points docked for that.)

2.5.3. Housekeeping: Redline example

Per a student’s request, here’s a one-page excerpt of an actual redline that I did for my “MathWhiz” client last month.

2.5.4. Ambiguity in an obituary: Going to heaven

From an obituary: “Pamela went to heaven surrounded by family whom she loved ….” QUESTION: What possibilities does this line evoke in your minds?

2.5.5. Addams Family homework assignment review

DCT to talk about the following from the homework assignment:

  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.) A: To make his quarterly quota? To help Widgets “make the number” for what analysts are expecting?
  2. What about just signing it on April 1 when the family gets back to Houston? A: That wouldn’t fly with Widgets’ accountants, which want “ink on the signature line” by March 31 or they won’t let Widgets book the revenue in Q1. (AND: An oral contract by March 31 won’t work either.) (AND: Don’t backdate the date-signed date on the contract; that could amount to securities fraud.)
  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? A: Try an electronic signature by email or text message — the Honolulu hotel probably has a business center with computers that could be used.
  4. If Wednesday Addams asks you to sign it as the company’s lawyer, how should you respond? A: If it’s a good and longstanding client relationship, I might do it, but otherwise I’d be reluctant. If I did sign it, my handwritten signature would be something like the following: “D.C. Toedt III, attorney for Addams Investments LP, by permission”

2.5.6. Exercise (quick): Late payment

From a contract clause: “(4) Penalty for late payments: Late payments are subject to a penalty of 5%.”

EXERCISE: Spot the issues — each student should answer TO ME ONLY in the Zoom chat feature.

(Be careful — as stated, the facts give rise to some hidden issues!)

2.5.7. Incentives & business planning: The Texas electrical grid

This year’s Great Texas Blackout serves as a large-scale example of the importance of incentives. Recall the observation of Warren Buffett’s business partner Charlie Munger (section 11.7.3 in the readings): “Never a year passes but I get some surprise that pushes a little further my appreciation of incentive superpower. * * * Never, ever, think about something else when you should be thinking about the power of incentives.” (Emphasis added.)

The incentives available to Texas power generators appear to have played a major role in the blackout:

When it gets really cold, it can be hard to produce electricity, as customers in Texas and neighboring states are finding out. But it’s not impossible. Operators in Alaska, Canada, Maine, Norway and Siberia do it all the time.

What has sent Texas reeling is not an engineering problem, nor is it the frozen wind turbines blamed by prominent Republicans. It is a financial structure for power generation that offers no incentives to power plant operators to prepare for winter.

Will Englund, The Texas grid got crushed because its operators didn’t see the need to prepare for cold weather (WashingtonPost.com Feb. 16, 2021) (extra paragraphing added).

And from the NY Times:

One example of how Texas has gone it alone is its refusal to enforce a “reserve margin” of extra power available above expected demand, unlike all other power systems around North America. With no mandate, there is little incentive to invest in precautions for events, such as a Southern snowstorm, that are rare. Any company that took such precautions would put itself at a competitive disadvantage.

Clifford Krauss, Manny Fernandez, Ivan Penn and Rick Rojas, How Texas’ Drive for Energy Independence Set It Up for Disaster (NYTimes.com Feb. 21, 2021) (emphasis added).

2.5.8. Ambiguity: Bingo

Spotted in a Facebook group: “My eight year old just asked me if Bingo is the name of the farmer or the dog. And now I am questioning everything I thought I knew about life.” (Credit: @whitneyhemsath.)

2.5.9. Rewriting exercise: “Gross up”

TEXT: 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.

EXERCISE: In 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), rewrite (just) the italicized portion to be much more reader-friendly — as though you were talking to a lay jury. (Keep in mind the BLUF principle from last week, and consider whether this will be a guaranty from an individual as opposed to a company.)

QUESTION: Does the first sentence in the above clause (“The Guarantor represents and warrants …”) really belong in this provision?

When finished, come back to the main Zoom meeting (no need to wait for me to close the breakout rooms.)

[DCT to show one possible rewrite afterwards, for a guaranty from an individual]

[ADDED:] DCT Rewrite:

(a) It might be the case that taxes must be withheld from what you pay us. If so, then — except as stated in subdivision (b) — you will pay us enough extra so that, after taxes, we receive the same net amount as if the taxes had not been required to be withheld.

(b) You need not pay us extra under subdivision (a) for amounts withheld for:

        (1) withholding taxes on our net income or profits, or

        (2)  withholding taxes that would have been imposed on the relevant payment to us under the laws and treaties in effect at the time we first became a party to this Agreement or otherwise became entitled to any rights hereunder.

2.5.10. Reading lecture: Methodical business planning

[DCT to talk through chapter 19 in the readings, which is especially salient in view of the COVID-19 pandemic (with its supply-chain disruption); shipping delays due to traffic jams at ports (ditto); the Great Texas Blackout of 2021; and recent hurricanes.]

2.5.11. Reading review (1)

We’ll discuss these in small groups.

  1. QUESTION: Can you think of some examples of a safe harbor clause, other than the ones in the reading?
  2. FACTS:
    • MathWhiz asks you to develop a form of services agreement for where MathWhiz is the service provider. The agreement form will be posted on MathWhiz’s Web site so that MathWhiz’s customers can easily review the agreement form.
    • MathWhiz’s business-development VP wants you to make the form as tough as you can, to give MathWhiz maximum legal advantage over its customers.
    • You happen to know that MathWhiz also needs to engage another company to provide certain specialized services — that is, MathWhiz will itself be the customer.
    • QUESTION: Any thoughts?

2.6. Class 09: Wed. Sep. 22

2.6.1. R.O.O.F. from the real world: Citibank won’t get back $500M

2.6.2. Dilbert: A “Combat Barbie” distractor illustration

Apropos of “Combat Barbie” distractors — i.e., giving The Other Side’s contract reviewer something to object to in an otherwise-balanced draft — see the Dilbert strip for Monday, Feb. 15, 2021.

2.6.3. Reading review: Litigation prep (part 1)

  1. QUESTION: From a litigator’s perspective, what’s an advantage of litigating (or arbitrating) a contract that includes illustrative examples, charts, diagrams, etc.?
  2. QUESTION: Are there any disadvantages to including the items listed in #1 above?
  3. FACTS: (A) MathWhiz’s Mary Marvel asks you to review a contract form that’s provided by a prospective MathWhiz supplier. (B) The contract form includes a statute-of-limitations provision as follows: “Any action for breach of this Agreement must be brought within one year after the date of execution of this Agreement.” QUESTION: Any issues here?
  4. SAME FACTS AS #3: The contract says: “Either party may terminate this Agreement if the other party materially breaches this Agreement and fails to cure the breach within ten (10) business days after the first party (the terminating party) gives notice of the breach.” QUESTION: Any issues here?

2.6.4. Pro tip: Don’t be like Carr the Floor Walker

See this blog post (I’ll play the video clip).

2.6.5. Preview: Reps and warranties reading

2.6.6. Reading review: Litigation prep (part 2)

  1. FACTS: You have a school-aged daughter (let’s say). You want to bribe reward her if she makes straight-A grades for a given report-card period. Which of the following would she prefer — and why: (A) “I’ll pay you $100 at the end of the reporting period unless your report card shows any grade less than an A.” (B) “I’ll pay you $100 at the end of the reporting period if you show me your report card and it has all A’s.”
  2. FACTS: It’s summer; you’re a rising second-year associate in a law firm. A rising 3L summer associate asks you to look at a real-estate sales contract that the summer associate has drafted. You see the following: “Buyer acknowledges that the purchase price of the Property is ONE MILLION SEVEN THOUSAND DOLLARS ($1,700,000.00).” QUESTION: Any issues here?
  3. QUESTION: Have we seen any specific proof requirements in the reading so far?
  4. QUESTION: Does the Tango Terms definition of clear and convincing evidence provide any tool(s) for a decisionmaker to use in deciding whether that standard has been met?

2.6.7. Employment agreement homework review (part 1)

I’m still working my way through the employment agreements that you drafted; here are some comments that I’ve harvested.

  1. General comment: It can be useful for executives to sign a “standard” employment agreement along with an addendum; see this blog post from 2015.
  2. TEXT: “This employment agreement is between you and MathWhiz regarding your position of Director of Business Development.” COMMENT: For a new hire, the letter would typically start as something like: “MathWhiz is pleased to offer you the position of Director of Business Development on the terms and conditions stated in this letter.”
  3. TEXT: “For the term of your employment, MathWhiz agrees to employ you in the position of Director of Business Development.” COMMENT: The italicized part of this sentence could be argued to imply that there’s a fixed term of employment (although the later “at will” language seemingly negates any such argument).
  4. TEXT: “MathWhiz agrees to employ you in the position of Director of Business Developer.” COMMENT: If this were a purchase-and-sale agreement, you’d want to say (in effect) BOTH that Seller agrees to sell AND Buyer agrees to buy - otherwise it’d be an option.
  5. TEXT: “You will report to Mary Marvel (the “CEO”).” COMMENT: If Mary is the one who will be signing the letter, this will look a little funny.
  6. TEXT: “Your employment shall be “at will,” ….” COMMENT: I’m not fond of “shall be,” especially in letter agreements — use “is” or “will be” or (if imperative) “must be.”
  7. TEXT: “Your position will be full-time. You agree to work onsite at Company’s facility or on Company directed travel for at least 50% of your total working hours. For the first year of your employment, you may work remotely for up to 50% of your total working hours. After the first year, Company may, upon reasonable consultation with you, adjust your remote working hours at Company’s discretion.” COMMENT: Maybe a separate paragraph for this currently-significant topic (remote work)?
  8. TEXT: “Your annual salary will be [ADD: at an annual rate of] $[INSERT SALARY AMOUNT] ….” COMMENT: We want to rule out the employee claiming that s/he was entitled to a full year’s pay no matter how long she worked during the year.
  9. TEXT: “With management approval, you may telecommute from your alternative worksite of your home in Boise, Idaho.” COMMENT: A) This still leaves it up to MathWhiz management to approve or disapprove. B) You might consider adding some kind of “fence,” e.g., gotta be reasonably available during working hours in MathWhiz’s time zone.
  10. TEXT: “The Company intends to provide you, during the Employment Relationship, with access to pre-existing and new Confidential Information on an as-needed basis commensurate with your duties, including but not limited to access to appropriate portions of MathWhiz‘s computer network.” COMMENT: If you’re not going to spell out the confidentiality obligations, I don’t know that I’d bother with this — the confidentiality obligations would very likely apply as a matter of law anyway.
  11. TEXT: “If the Company exercises this right to termination, you shall be entitled to a severance package equal to the severance package of other MathWhiz directors as outlined in the Employee Handbook. ” COMMENT: (A) A severance package is something that would typically be negotiated — if it’s mentioned at all. (B) If the Company were to terminate for cause, there’d typically be NO severance.
  12. TEXT: “Following termination, whether exercised by you or the Company, you may not be employed by any of MathWhiz’s competitors for a period of __ months.” COMMENT: A noncompetition covenant would need considerably more than this; as written, it might not be enforceable even in Texas — let alone California (where it’d be per se unenforceable and actionable to require an employee to agree to it) or one of the other U.S. jurisdictions that restricts noncompetes.
  13. TEXT: “The Company shall pay you as compensation for your services a base salary at a gross annual rate $175,000. Such salary shall be payable in accordance with the Company’s standard payroll procedures. ” COMMENT: Nice work on the “gross annual rate.”
  14. TEXT: “MathWhiz may terminate your employment for any reason or no reason, and you may terminate the employment for any reason or no reason; provided that the terminating party gives the other at least thirty days’ written notice.” COMMENT: A) It’s not a bad idea to include the phrase “at will”: It’s a term of art that employment lawyers — and judges — are well familiar with. B) For “optics” purposes, I’d lead off with the employee’s right to terminate at will, not with the employer’s right to do so.

2.6.8. Employment agreement homework review (continued)

Here are more comments from my homework review; numbering continues that of last time:

  1. TEXT: “Salary will be reviewed each year ….” COMMENT: This language triggers the question: Reviewed by whom?
  2. TEXT: “Benefits: You will be entitled to participate in any group medical, dental, disability, and life insurance plans, 401(k) plans, pension or profit-sharing plans, stock option plans, and similar benefits that may be offered by MathWhiz.” COMMENT: Definitely add, “… to similarly-situated employees” — a director-level employee like Dave might not get the same benefits as the CEO or other C-level executives.

    (For those who don’t know: In American companies, a typical organizational-chart hierarchy is, starting at the “bottom”: A) individual contributor or “IC”; B) manager; C) director, which is different from a member of the board of directors; D) vice president, or VP; E) senior vice president, or SVP; F) executive vice president, or EVP, who will often have a “chief” title of some kind, e.g., chief financial officer (CFO), chief marketing officer (CMO), chief operating officer (COO), chief executive officer (CEO) — these are known as “C-level” or “C-suite” employees.

  3. TEXT: “Non-solicitation: You will not solicit for employment, directly or indirectly, on behalf of yourself or any other person, any employee of MathWhiz.” COMMENT: How long does this nonsolicitation covenant last? If there’s no defined expiration date, it might be invalid.
  4. One student created a formal employment agreement and used the defined term “You” for Dave Doright. I’d use “Executive” instead of “You” or “Employee” — the former title is a bit more formal, and likely would raise judge- and jury expectations about the standards that Dave was required to meet.
  5. If using the term “You” (capitalized), be consistent about capitalization — inconsistency on that score has caused problems, as discussed in § 4.6 of the Notes on Contract Drafting.

2.7. Class 10: Mon. Sep. 27

2.7.1. Quiz #2 due

2.7.2. In the news: A misplaced parenthetical in a force-majeure clause

See this article, discussing a somewhat-recent Florida bankruptcy-court decision, In re Cinemex U.S. Real Estate Holdings, concerning a COVID-19-related default.

The force-majeure contract language was as follows:

If either party to this Lease, as a result of any . . . (iv) acts of God, governmental action, or (v) other conditions similar to those enumerated in this Section beyond the reasonable control of the party obligated to perform (other than failure to timely pay monies required to be paid under this Lease), fails punctually to perform any obligation on its part to be performed under this Lease, then such failure shall be excused.

The court held that the “other than failure …” language did not apply to subdivision (iv) — so in effect the language would read as follows if more white space had been used:

If either party to this Lease, as a result of any . . .

  • (iv) acts of God, governmental action, or
  • (v) other conditions similar to those enumerated in this Section beyond the reasonable control of the party obligated to perform (other than failure to timely pay monies required to be paid under this Lease),

fails punctually to perform any obligation on its part to be performed under this Lease,

then such failure shall be excused.

The article’s author suggests that a “tighter” force-majeure clause could have read as follows:

If either party to this Lease, as a result of any . . .

  • (iv) acts of God, governmental action, or
  • (v) other conditions similar to those enumerated in this Section beyond the reasonable control of the party obligated to perform,

fails punctually to perform any obligation on its part to be performed under this Lease (other than failure to timely pay monies required to be paid under this Lease),

then such failure shall be excused.

I might have written it as follows:

If either party to this Lease, as a result of any . . .

  • (iv) acts of God, governmental action, or
  • (v) other conditions similar to those enumerated in this Section beyond the reasonable control of the party obligated to perform,

fails punctually to perform any obligation on its part to be performed under this Lease — other than an obligation to timely pay monies required to be paid under this Lease,

then such failure shall be excused.

2.7.3. Yes-No voting exercise: Reps & warranties

Discuss the following in your small groups; when we return, we’ll use Zoom’s Yes and No voting buttons for the following:

  1. FACTS: Gigunda wants its contract with MathWhiz to include a representation that MathWhiz isn’t being sued by any of MathWhiz’s other clients. QUESTION: From MathWhiz’s perspective, which would be the better phrasing?
    • Yes: “To MathWhiz’s knowledge, there are no lawsuits or other claims pending or threatened by any MathWhiz client against MathWhiz.”
    • No: “So far as MathWhiz’s officers at the vice-president level or higher are aware, there are no lawsuits or other claims pending or threatened by any MathWhiz client against MathWhiz.”
  2. FACTS:
    • (A) MathWhiz and Gigunda sign their contract for MathWhiz to perform services.
    • (B) The contract includes a MathWhiz warranty that MathWhiz will render the services in a “professional” manner.
    • (C) Later, Gigunda demands that MathWhiz reimburse Gigunda for damages allegedly arising out of MathWhiz’s professional malpractice.
    • QUESTION: If Gigunda were to sue MathWhiz for breach of warranty, would Gigunda be required to prove that Gigunda reasonably relied on MathWhiz’s warranty? (Yes or No)
  3. QUESTION: Under English law, is it enough for a supplier to disclaim implied warranties? (Yes or No)

2.7.4. Small-group exercise: Selling Uncle Ed’s car

In the Zoom breakout rooms, use the questions worksheet for today: 6:00 p.m. class     7:30 p.m. class

2.7.5. Redrafting an ambiguity from President Trump

From a presidential tweet of April 3, 2017: “Such amazing reporting on unmasking and the crooked scheme against us by @foxandfriends. …” (Hat tip: Chris Richardson.)

QUESTION – use Zoom chat: How could this be rewritten to clarify?

2.7.6. Small-group exercise: Gigunda payment language

In the Zoom breakout rooms, use the questions worksheet for today: 6:00 p.m. class     7:30 p.m. class

2.7.7. Ambiguity: Short-term trading

TEXT, from a Hacker News discussion: “You should only short term trade with your 401k.” QUESTION: How can this sentence be clarified by simply moving words around? (There are two possible meanings.)

2.8. Class 11: Wed. Sep. 29

2.8.1. In the news (sort of): Texas AG sues Griddy

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 of course far too early to know whether Griddy might actually be held liable. But it’s certain that Griddy will have 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.

2.8.2. Small-group exercise: Currency for payments

In the Zoom breakout rooms, use the questions worksheet for today: 6:00 p.m. class     7:30 p.m. class

2.8.3. Small-group exercise (short): Interest rate

In the Zoom breakout rooms, use the questions worksheet for today: 6:00 p.m. class     7:30 p.m. class

2.8.4. From the practice: Developing a master services agreement

See this blog post; DCT to recount a project shipped yesterday.

2.8.5. Small-group exercise (longer): Checking a 1L’s guaranty language

In the Zoom breakout rooms, use the questions worksheet for today: 6:00 p.m. class     7:30 p.m. class

2.8.6. Large-group exercise: Independent-contractor status

FACTS:

  1. Matthew — a California resident — goes to work for MathWhiz as a data analyst who is to work on a project-by-project hasis.
  2. The contract between MathWhiz and Matthew — drafted without your input — explicitly states:
    • that Matthew is a “gig” worker who is an independent contractor;
    • that Texas law applies;
    • that any dispute between Matthew and MathWhiz must be arbitrated in Texas;
    • that any non-arbitrable dispute between the two must be litigated in Houston; and
    • that MathWhiz has the right to modify the contract at any time.
  3. Matthew becomes disillusioned with MathWhiz and files a lawsuit against MathWhiz in California state court, claiming that he is entitled to the protection of California law relating to employees.
  4. Mary (MathWhiz’s CEO) wants your advice.

QUESTION: What would likely result if, in the California state-court lawsuit, you filed a motion to dismiss Matthew’s lawsuit because of the arbitration- and forum-selection provisions? Why?

2.8.7. Ambiguity in a force-majeure clause

From a contract discussed in a Ken Adams blog post: “If the Force Majeure Event prevents a Party from performing any of its obligations under this Agreement for two hundred seventy (270) days or more, then the other Party may terminate this Agreement immediately upon written notice to the non-performing Party.” (Emphasis added.)

Ken rightly asks: “May the other party terminate if the nonperforming party is prevented from performing one or more of its obligations? Or does it apply only if the nonperforming party is unable to perform all of its obligations? (Emphasis added.)

2.8.8. Emails to others: A thread

See this thread by Jack Shepherd.

2.8.9. Large-group exercise: Authority to expand warranties

TEXT: “No person except an officer of Client at the vice-president level or higher is authorized to agree to any other Implied Warranty on behalf of Client.”

QUESTION: Does this make any sense? (Read it carefully!)

2.8.10. Small-group exercise: Representations and warranties wording

In the Zoom breakout rooms, use the questions worksheet for today: 6:00 p.m. class     7:30 p.m. class

2.8.11. Ambiguity: No infringement?

TEXT, from the Sheryl Sandberg employment agreement in the Supplement, starting at page 101, lines 72-73: “[Y]our Employment will not infringe the rights of any other person.”

QUESTION: From a drafting-technique perspective, what’s wrong with this provision?

2.8.12. Exercise: Indemnity provision - rewrite and discuss

FACTS: 1) You represent Seller, which is selling equipment to Buyer, which in turn is engaging Contractor to do some work (think: drilling an oil well) that is being financed by multiple Lenders. ¶ 2) Buyer wants Seller to sign a sales contract that contains the following indemnity language:

10.1. General Indemnity. Seller shall INDEMNIFY, DEFEND, RELEASE AND HOLD HARMLESS Buyer (and its affiliates, co-owners, co-venturers, and partners), its respective shareholders, officers, directors, administrators, managers, employees, servants and agents, successors and assigns, Contractor and Lenders (each, a “Buyer Indemnified Party”) from and against any and all damages (whether ordinary, direct, indirect, incidental, special, consequential, or exemplary), judgments, liabilities, fines, penalties, losses, obligations, settlements, claims, actions, demands, suits, costs and expenses (including, without limitation, reasonable attorneys’ fees, court, mediation and arbitration costs, and other costs of investigation or defense) (collectively, “Losses”) directly or indirectly arising from or relating to this Agreement (or any breach hereof by Seller), the Services (if any), or any Equipment or other personal property (whether rented, sold or incorporated) delivered or made available by Seller hereunder, including, without limitation, any such Losses arising from or relating to (a) the breach or violation of any applicable laws by Seller (or any of Seller’s subcontractors of any tier, or any of its or their employees, agents, consultants or representatives (“Seller’s Contractor Group”)), (b) any alleged infringement or violation of a third party’s patent, trade secret, copyright, trademark or intellectual property right, or (c) the negligence, willful misconduct or other breach or violation of this Agreement by Seller or any of Seller’s Contractor Group, REGARDLESS OF WHETHER ANY SUCH LOSSES ARE ATTRIBUTABLE (IN WHOLE OR IN PART) TO THE SOLE, JOINT OR CONCURRENT NEGLIGENCE (WHETHER ACTIVE, PASSIVE, SIMPLE OR GROSS NEGLIGENCE), STRICT LIABILITY OR ANY OTHER LEGAL FAULT OR RESPONSIBILITY OF BUYER, SELLER OR ANY OTHER PERSON, OR IMPERFECTION OF ANY MATERIALS; PROVIDED, HOWEVER, THAT SELLER SHALL NOT BE LIABLE FOR THE INDEMINFICATION OBLIGATIONS SET FORTH HEREIN FOR CLAIMS CAUSED BY THE SOLE NEGLIGENCE OR WILLFUL MISCONDUCT OF THE BUYER INDEMNIFIED PARTY.

EXERCISE:

  1. Break up this provision; 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).
  2. In your groups, discuss:
    1. what you might advise Seller about the possible risks of agreeing to this provision;
    2. what if any changes you might ask Buyer to agree to; and
    3. how Seller might arrange its business affairs to support this provision if “forced” to agree to it.

QUESTION 1: What do you think about the term “release” — what effect could that have on Seller’s insurance carrier? (Hint: Look up “waiver of subrogation.”)

2.8.13. Reading review

  1. QUESTION: What’s Professor Toedt’s preferred way of having notices be effective — and why?

2.8.14. Small-group exercise & reading review: Notices

In the Zoom breakout rooms, use the questions worksheet for today: 6:00 p.m. class     7:30 p.m. class

2.8.15. Exercise: Payment - late payment

From a contract clause: “(4) Penalty for late payments: Late payments are subject to a penalty of 5%.”

QUESTION: Any issues here?

3. October

3.1. Class 12: Mon. Oct. 04

3.1.1. From the practice

DCT to tell about a client’s efforts to sell the company.

3.1.2. Homework review: Termination clause

3.1.3. Reading review: Background checks

See the questions worksheet: 6:00 p.m. class     7:30 p.m. class

3.1.4. Subject-verb distance: Biden and vegans

In today’s Slow Boring political newsletter, Matthew Yglesias talks about how some people are vegans, some try to cut back on meat for ethical reasons, and some are concerned about humane conditions in which animals are rasied for slaughter. Then comes this:

But absolutely nobody I know who is anywhere on the spectrum of concern about animal welfare is confused as to why Joe Biden isn’t giving speeches about this or doing “animal welfare is infrastructure” tweets and getting mad at Congress.

Notice how much “distance” there is between the subject (“absolutely nobody I know”) and the verb (“is confused”); that makes it more difficult for the reader to figure out what the sentence is supposed to be about.

Here’s one possible rewrite of the quoted sentence:

But of all the people I know who are anywhere on the spectrum of concern about animal welfare, absolutely none of them is confused as to why Joe Biden isn’t giving speeches about this (or doing “animal welfare is infrastructure” tweets) and getting mad at Congress.

Here’s another possible rewrite of the quoted sentence:

I know a lot of these people who are at various points on the spectrum of concern about animal welfare. Absolutely none of them is confused as to why Joe Biden isn’t giving speeches about this (or doing “animal welfare is infrastructure” tweets) and getting mad at Congress.

3.1.5. In real life: When a buyer disappears

From the WSJ: “Billionaire Vincent Viola’s New York Mansion to Sell for Roughly $60 Million - The townhouse, previously in contract to sell to Chinese oilman who disappeared, has a new suitor”

Excerpt:

In 2017, the home was in contract for roughly $80 million to a company linked to Ye Jianming, a Chinese oil entrepreneur with ties to China’s military who disappeared before closing on the deal, according to a different person familiar with the situation. Though that deal fell through, the sellers were able to keep the roughly $8 million deposit, according to the person with knowledge of the situation.

(Emphasis added.) Lesson: In every contract, consider including termination contingency plans in case the other side doesn’t perform.

3.1.6. Exercises: Entire agreement; good faith

Do both the Entire Agreement and Good Faith exercises in the questions worksheet: 6:00 p.m. class     7:30 p.m. class

3.1.7. In real life: Business planning and the Paper Source bankruptcy

This goes into my SPP file, a.k.a. S**t People Pull:

A store chain, Paper Source:

  • ordered unusually-large quantities of merchandise from its small-business suppliers; and
  • shortly afterwards, filed for bankruptcy protection — which lets the chain (mostly) stiff the suppliers, likely paying them pennies on the dollar.

FTA: “Paper Source ordered more from The Card Bureau in a 60-day period than it had in all of 2020, according to Velencia.” Jeremy Hill, Paper Source Bankruptcy Squeezes Small Greeting Card Sellers (WashingtonPost.com March 5, 2021).

Lesson: When drafting a contract for a supplier, consider recommending that the client:

3.1.8. Exercise: Your client’s people

See the questions worksheet: 6:00 p.m. class     7:30 p.m. class

3.2. Class 13: Wed. Oct. 06

3.2.1. Drafting fail: Impossible — for 17 years (!)

A Mississippi married couple sued the contractor that had built their home. The contractor moved to compel arbitration; the trial court granted the motion. The state’s supreme court reversed:

The contract language requires that arbitration be conducted by SAMA [the Southern Arbitration and Mediation Association].

Not only is SAMA unavailable, it was unavailable at the time the contract was executed and had been an impossibility for approximately seventeen years prior to the contract’s execution.

CCC [the contractor], as the drafter, could have rectified that issue, but it did not.

Hillhouse v. Chris Cook Constr., LLC, No. 2020-CA-00438-SCT (Miss. Sept. 30, 2021) (reversing and remanding order compelling arbitration; emphasis and extra paragraphing added).

3.2.2. In real life: Reference to “deliberate fraud” has consequences

Case: Express Scripts, Inc. v. Bracket Holdings Corp., No. 62, 2020 (Del. Feb. 23, 2021).

… The SPA [Securities Purchase Agreement] provides unambiguously that, except in the case of deliberate fraud and certain fundamental representations, [buyer and plaintiff] Bracket could only recover up to the R&W [representations and warranties insurance] Policy’s limits for breaches of the representations and warranties.

Over [seller and defendant] ESI’s objection, however, the Superior Court instructed the jury that it could find for Bracket not only for deliberate fraud, but also for recklessness. A deliberate state of mind is a different kettle of fish than a reckless one.

The court’s erroneous jury instruction was not harmless—it violated a key provision of the SPA and how the parties allocated risk in the transaction. We therefore reverse the Superior Court’s judgment and remand for a new trial.

(Emphasis in original, extra paragraphing added.)

3.2.3. Reading review: Sales

Do the questions worksheet: 6:00 p.m. class     7:30 p.m. class

3.2.4. Drafting fail: Word order can matter

From a CBSNews.com headline: “Group of bipartisan senators pushes for permanent Daylight Saving Time.”

Facebook commenters had this to say: “In the headline I would have gone with ‘bipartisan group of senators,’ not ‘group of bipartisan senators.’ As written it sounds like each senator belongs to both parties.”

A responder said: “So, like, Manchin and Sinema?”

3.2.5. Reading review: Reseller agreements

In Zoom breakout groups, do the following in the questions worksheet: 6:00 p.m. class     7:30 p.m. class

3.2.6. Smart-aleck ambiguity: A bagel and cream cheese

From someone tweeting — I had to think about this one for a minute:

customer: I’d like to buy a bagel with cream cheese

me: sorry, we only take cash

manager: can I talk to you

3.2.7. Employment agreement homework review (one more time …)

  1. Several students did conventional-looking employment agreements but with no preamble; if you’re going to go that route, you’ll want to include a conventional preamble — because Dave Doright might have a lawyer look at the contract, and in that situation, you want Dave’s lawyer not to wonder, “WT[x] is this?”
  2. TEXT (in email to Mary): “While your employment agreement with Mr. Doright is binding, I’ve spotted a few omissions that I believe to be prudent to address at this time.” COMMENT: I’d avoid making any pronouncements about “legally binding” — that likely would be construed as a legal opinion, and you don’t want to be doing that with a client unless you’re being very explicit about it, and going into a lot more detail about what it takes to be legally binding, and noting any assumptions and exceptions.

3.2.8. In real life: Glaxo, Delaware law, and “good faith”

Facts:

  1. A Glaxo company owned a patent covering a drug for treating lupus.
  2. For reasons not important here, Glaxo entered into an agreement with another company, Biogen, to pay Biogen royalties on Glaxo’s sales of the drug. (Biogen owned a competing patent and voluntarily gave up its patent in return for the royalty right.)
  3. The royalty agreement called for royalties to be paid on products covered by “Valid [patent] Claims.”
  4. Biogen assigned the royalty agreement to DRIT LP, which the court described as “an entity that purchases intellectual property royalty streams,” presumably to get cash up front for the anticipated royalty stream from Glaxo.
  5. The definition of “Valid Claim excluded patent claims that were ”disclaimed,“ i.e., voluntarily surrendered by Glaxo.
  6. When

Under Delaware law, sophisticated parties are bound by the terms of their agreement. Even if the bargain they strike ends up a bad deal for one or both parties, the court’s role is to enforce the agreement as written.

As we have explained, “[p]arties have a right to enter into good and bad contracts, the law enforces both.” Holding sophisticated contracting parties to their agreement promotes certainty and predictability in commercial transactions.

There are, however, instances when parties fail to foresee events not covered by their agreement or defer decisions to later. No contract, regardless of how tightly or precisely drafted it may be, can wholly account for every possible contingency.

Subject to the express terms of the agreement, when gaps in an agreement lead to controversy, the court has in its toolbox the implied covenant of good faith and fair dealing to fill in the spaces between the written words.

Th[is] implied covenant, inherent in all agreements, ensures that the parties deal honestly and fairly with each other when addressing gaps in their agreement. The court’s goal is to preserve the economic expectations of the parties.

The implied covenant, however, is a cautious enterprise. As we have reinforced on many occasions, it is “a limited and extraordinary legal remedy” and “not an equitable remedy for rebalancing economic interests that could have been anticipated.” It cannot be invoked when the contract addresses the conduct at issue.

The implied covenant should not have been deployed in this case. There was no gap to fill in the Agreement.

Glaxo Group Ltd. v. DRIT LP, 248 A.3d 911, 919-20 (Del. 2021) (reversing, in part, trial-court judgment) (cleaned up, emphasis and extra paragraphing added).

3.2.9. Ambiguity: Refuse to be put in black plastic bags

See this tweet.

3.2.10. Preview: Getting to signature sooner

DCT to preview the upcoming reading

3.3. Class 14: Mon. Oct. 11

3.3.1. Real world: A great (really) Netflix cease & desist letter

See here — read at your leisure; I’m not going to discuss it, and you won’t be tested on it.

3.3.2. Real world: A missing apostrophe could cost big bucks

See this NY Times article about an Australian defamation case. Note the quote from the book Eats, Shoots and Leaves: “No matter that you have a Ph.D and have read all of Henry James twice. If you still persist in writing, ‘Good food at it’s best’, you deserve to be struck by lightning, hacked up on the spot and buried in an unmarked grave.”

3.3.3. Reading review: Indemnity & defense obligations (1)

For each question below, choose a (different) spokesperson to answer — but also be ready to help out the spokesperson if necessary.

  1. FACTS:
    • Alpha Corporation and Bravo LLC are parties to a contract.
    • Under the contract, Alpha must indemnify Bravo if certain specified events occur.
    • Such an event occurs, and Bravo itself suffers harm from the event
    • Bravo demands that Alpha reimburse it (Bravo) for the harm that Bravo suffered.
    • Note that this is not a case where Bravo is successfully sued by a third party, Charlie Inc., and Bravo is demanding that Alpha to reimburse it (Bravo) for what Bravo must pay to defend against the suit and/or to pay any resulting damage award.
    • TRUE OR FALSE: Under Texas law, on these facts, Alpha must comply with Bravo’s demand for reimbursement. Explain your answer.
  2. TRUE OR FALSE: Indemnify means to reimburse, while hold harmless means to release from liability.

3.3.4. Homework review: Earn-outs

See my example revision. Points to note:

BEFORE: “In the event that Seller shall timely reject ….” AFTER: “If Seller timely rejects ….”

BEFORE: Seller shall have a period of 30 days ….“ AFTER: ”Seller will have 30 days ….“

3.3.5. Review exercise: Expense reimbursement

Do in the questions worksheet: 6:00 p.m. class     7:30 p.m. class

3.3.6. Real world: BMC v. IBM summary judgment order

See this article about a Sept. 10 summary judgment decision in the BMC Software v. IBM lawsuit (Texas Lawbook requires login — I think you can sign up w/ a UH email).

Excerpt from the article:

Both Judge Miller and Judge Bryan approved two damages models brought by BMC, siding with the company’s arguments that certain damages limitations in parts of the master licensing agreement are inapplicable. One model is for consequential damages for $717 million, “or alternatively, for $791 [million],” Judge Miller’s order says

Excerpt from the court’s summary judgment opinion:

The court ADOPTS the [magistrate judge’s] recommendation that BMC’s lost profits from AT&T are consequential damages barred by [Master License Agreement] § 9. Therefore[:]

  • IBM’s motion for summary judgment on BMC’s claims (Dkt. 396) is GRANTED as to this issue.
  • BMC’s motion for partial summary judgment on the construction of the damages limitations provision (Dkt. 385) is DENIED. However, the summary judgment ruling that § 9 bars BMC’s lost profit measure of damages will not preclude BMC from arguing the damage limitation provisions are unenforceable if it succeeds on its claim for fraudulent inducement of the 2015 [Outsourcing Agreement].

The court ADOPTS the [magistrate judge’s recommendation] that that BMC’s proposed damages models for $717,000,000, or alternatively for $791,000,000, are direct damages not barred by the limitation on consequential damages contained in MLA § 9. Therefore, IBM’s Motion for Summary Judgment on this issue is DENIED and BMC’s Motion for Summary Judgment on this issue is GRANTED. However, by adopting the [recommentation] the court is not ruling on the amount of damages BMC is entitled to recover as direct, benefit-of-the-bargain damages. The proper measure and amount of BMC’s direct damages remains an issue for trial.

(Formatting edited, emphasis added.)

The court also granted BMC’s motion for summary judgment on IBM’s counterclaim for breach of a most-favored-customer provision, which read as follows:

MOST FAVORED CUSTOMER. BMC represents that the pricing and terms granted to [IBM] pursuant to this [Purchase] Order are comparable to or better than the equivalent pricing and terms currently being offered by BMC to any entity competing with IBM in the provision of IT Outsourcing Services of BMC *for like transactions and volumes.*

(Italicized emphasis by the court, bold-faced emphasis added.)

3.3.7. Ambiguity: You want me to do what to my pet?

From an L.A. Times article about combatting gobbletygook in laws comes this street sign: “PERSONS SHALL REMOVE ALL EXCREMENT FROM PETS PURSUANT [¶] BY [sic] LAW #122-87 MAX. PENALTY $2000.00 [¶] THANK YOU”

Or as the L.A. Times article put it: “In other words, clean up your dog’s mess.”

3.3.8. Real world: Emerson & AspenTech

From the Wall Street Journal:

Emerson Electric Co. plans to merge two of its software businesses with Aspen Technology Inc. in a roughly $11 billion deal aimed at capturing growing demand for industrial technology. The cash-and-stock transaction would value AspenTech, as the company is known, at around $160 a share, officials from the companies said. AspenTech’s shareholders would receive $87 and 0.42 share of the combined company for each share they currently own. The transaction is expected to be announced Monday.

(Edited.)

[DCT to summarize the overall process, and how reps and warranties work]

3.3.9. Reading review: Indemnity & defense obligations (2)

FACTS:

  • Paints ’R Us, Inc. (“Paints”) is a small Houston painting contractor that you represent.
  • Paints has won a bidding process established by MegaCare Hospital Corporation, based in Nebraska, which is looking for a painting contractor to paint one of MegaCare’s Houston hospitals, inside and out. You are helping Paints in negotiating the contract’s terms and conditions.
  • MegaCare’s contract form — drafted by MegaCare’s lawyers in Omaha — states that the painting contractor must defend and indemnify MegaCare against any and all claims arising from the contractor’s activities under the contract.
  • On a Zoom call, a MegaCare lawyer explains that MegaCare’s main concern about the indemnity clause is that if a contractor employee gets hurt while “on the job” at the MegaCare hospital, MegaCare doesn’t want to have to deal with the employee’s personal-injury claim — “even if it’s totally our fault, you guys need to take care of it; we can’t be bothered.”

QUESTIONS:

  1. If a Paints employee were to sue MegaCare because of such an on-the-job injury, where would the relevant litigation likely take place, and why? (Do we even know?)
  2. In such a lawsuit, what jurisdiction’s law would likely apply in relevant respects, and why?
  3. What kind of protective provisions could Paints ask MegaCare to add to the draft contract? (If those provisions are not there already — which seems unlikely ….)
  4. Independent of the MegaCare contract, what kind of backup business protection might Paints try to put in place for this indemnity obligation? How might that help Paints’s business, independent of the MegaCare deal?

3.3.10. Real world: Lessons from a company sale

DCT to update on a client’s sale of the company

3.3.11. Homework review: Termination clause (1)

(To be shown in class)

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) Except as provided in subdivision (c), either party may terminate this Agreement if both of the following are true:

      (1)  a Governmental authority of competent jurisdiction has issued any Governmental Order that permanently restrains, enjoins, or otherwise prohibits or makes illegal the consummation of any of the Sale and the Reorganization Transactions; and

      (2)  that Governmental Order is final and non-appealable.

(c) A party may not terminate this Agreement pursuant to this Section 6.01(b)(ii), however, unless both of the following are true:

      (1)  The terminating party used its reasonable best efforts [sic] to remove the Governmental Order; and

      (2)  The terminating party’s failure to fulfill its obligations under this Agreement was not the primary cause of, or resulted in [???], the issuance of such Governmental Order or other action.

3.3.12. Real world: A general-advice referral call

At the request of a client’s general counsel, I had a Zoom call with two young entrepreneurs who are friends of the GC’s now-adult children; the GC asked me to give them “general advice.”

  • The entrepreneurs needed more work than I have time to undertake, so I referred them to a couple of different sole practitioners (who don’t charge BigLaw rates) whom I know to be experienced and cautious.
  • After we ended the Zoom call, I immediately sent a follow-up email: “XXX, it was very nice to meet you and YYY on Zoom just now. Confirming a couple of points: I won’t be undertaking any kind of representation for you or your new company; I provided contact information for [lawyers] AAA (here in town) and BBB (in California), who might be able to help you out. I hope you find my Web page, http://www.oncontracts.com/startup-law, to be useful. Best of luck!” (Emphasis added.)

3.3.13. Review exercise: Interest clauses

Do in the questions worksheet: 6:00 p.m. class     7:30 p.m. class

3.4. Class 15: Wed. Oct. 13

3.4.1. Housekeeping: Quiz #3 coming up

It’ll be on Canvas tomorrow night, due as usual.

3.4.2. Drafting fail: PILO’s misdemeanors?

From the subject line of an email that announced a presentation by the Public Interest Law Organization: “PILO’s Misdemeanors and their Impacts on Harris County”

3.4.3. Real world: Oops—contract mod wipes out $17 million due to contractor

See this article. FTA:

The Houston First Court of Appeals of Texas recently affirmed a trial court’s decision wiping out a whopping $17 million claim brought by a contractor against an owner for acceleration costs, holding that the claim was barred by release language contained in a signed contract modification of the type routinely executed by the parties over the course of the project to compensate the contractor for changes to its work.

* * * 

This case serves as a cautionary tale for contractors. If you are a contractor:

  • Pay careful attention to release language— not only in waiver and release forms, but also in contract modifications, amendments, and change orders.
  • Check if the release language exempts certain claims.
  • Make sure you have taken all necessary steps and complied with any applicable contract provisions to preserve any outstanding claims before signing any releases or modifications with release language.

Amanda Garza [of Porter & Hedges], A Cautionary Tale For Contractors: Releases In Contract Modifications And Preservation Of Claims (JDSupra 2021) (not verbatim).

3.4.4. Short exercise: Drafting problems with a contract (1)

From a contract drafted by The Other Side of a deal (sanitized):

Within thirty (60) days of the close of previous quarter term, ABC shall provide XYZ with a revenue report that provides a total amount of Data Revenue and Software Revenue obtained by ABC during the referenced quarter term, minus any associated costs or expenses and customer returns or refunds (“Revenue Report”).

QUESTIONS:

  1. Any drafting problems with this?
  2. Ignoring the substance, how might this be otherwise improved to make it more readable? Feel free to 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).

ANSWERS: (DCT to show his version)

DCT’s version
  1. “Within thirty (60) days …” is a mismatch, illustrating the reason for the D.R.Y. (Don’t Repeat Yourself) principle.
  2. “Within 30 days of the close …” is ambiguous — it could mean within the 30 days preceding the end of the quarter (although in context it’s pretty clear).
  3. In the first phrase, it should be “… days of the close of the previous quarter term.
  4. “Quarter term” is not a conventional phrase — consider “calendar quarter,” or perhaps “fiscal quarter,” instead.
  5. “ABC shall provide XYZ with a revenue report” is OK, and some practitioners prefer it, but “ABC will provide” would be softer and more collaborative-sounding — or perhaps “ABC is to provide XYZ with a revenue report ….”
  6. Will XYZ want separate line items in the report for Data Revenue (and its costs) and Software Revenue (and its costs)?

DCT REWRITE:

(a) Each quarter, ABC will provide XYZ with a revenue report for the previous quarter. The revenue report is to state the following:

      (1)     the total amount of Data Revenue and Software Revenue obtained by ABC during the previous quarter,

      (2)     minus any associated costs or expenses and customer returns or refunds.

Each such report is referred to as a “Revenue Report.” [Note the separate, unnumbered paragraph]

(b) Each Revenue Report is due no later than 30 days after the close of the previous quarter.

3.4.5. Homework review: Gross-up clause

1.  “iv. The obligations of the Guarantor under this paragraph shall will survive the payment in full of the Guaranteed Obligations and termination of this Guaranty.” QUESTION: What are the obligations “under this paragraph”? Is there a better way to phrase this?

2.  “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.“

(Too much bulleting for such a short paragraph.)

3.  Numbering of paragraphs – see below.

3.4.6. Numbering of paragraphs

The usual hierarchy of numbering schemes is something like 2, 2.1, (a), (1), (A) — and even (A) is probably too deep — with (i) reserved for within-paragraph subdivisions.

Example 1 – note the use of romanettes in mid-sentence:

4.  SERVICES

[provisions omitted]

4.2 Changes to statements of work: A change order to a statement of work must be agreed to: (i) in writing, or (ii) as shown by clear and convincing evidence, which must include corroboration of any statements by interested witnesses.

Example 2: Tango Terms 22.2.

Example 3: IBM’s acquisition of Red Hat – scroll down to Article II. (Note: underlining is passé but seems to persist in many BigLaw firms because We’ve Always Done It That Way).

3.4.7. Reps and warranties: IBM example

On the subject of the IBM-Red Hat deal and paragraph numbering, let’s look at this typical example of how reps and warranties are done in M&A agreements, at Article III.

• Note that the IBM-Red Hat deal has all reps and warranties for all companies in Article III, which means that the seller’s reps and warranties, in section 3.01, go all the way to subdivision (u). The buyer’s reps and warranties, in section 3.02, are much shorter.

• In contrast, in the Google-Motorola deal (Google acquired Motorola’s “Android” mobile-phone division) Article III was for the seller’s warranties, while Article IV was for the buyer’s warranties, with more-sensible numbering.

3.4.8. Rewriting exercise: “Provided that …”

A contract contains the following provision: “Alice will pay Bob USD $100 no later than December 25; provided, however, that if Alice pays Bob no later than December 21, the amount to be paid will be $75.”

TRUE OR FALSE: Professor Toedt regards the “provided …” as an acceptable form.

Exercise

EXERCISE: In the 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), rewrite this. (Hint: Consider using romanettes.)

DCT’s rewrite

Another approach would be to rewrite the sentence with numbers or romanettes “Alice will pay Bob as follows: (1) If no later than December 21: USD $75. (2) After that (but no later than December 25): $100.”

3.4.9. Referral agreement - prep for Oct. 25 homework

In breakout groups, brainstorm provisions that you might want for a referral agreement that’s due Oct. 25; feel free to 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).

3.4.10. Notices - getting your name in lights

See the Notices clause in the IBM-Red Hat agreement — notice anything?

3.5. Class 16: Mon. Oct. 18

3.5.1. Quiz #3 due

3.5.2. Real life: An M&A agreement

From an asset purchase agreement (“APA”) being proposed to a DCT client by a prospective acquirer — all emphasis is mine:

The duly authorized officers of Buyer and the board of directors of Seller have approved, and deem it advisable and in the best interests of their respective stockholders for (i) Seller to sell, transfer and assign to Buyer, and Buyer to purchase from Seller, the Transferred Assets, (ii) Seller to assign, and Buyer to assume, the Assumed Liabilities, and (iii) Seller and Buyer to enter into the Related Agreements ….

QUESTION 1: What do you think about the bolded part? (This is mainly for people who’ve had a Corporations or Bus Org course.)

Next:

Concurrent with the execution and delivery of this agreement, stockholders of Seller holding Seller Capital Stock with sufficient voting power to constitute the Required Vote are delivering (i) an executed written consent in the form of Exhibit A (the “Stockholders’ Written Consent”) adopting this agreement, approving the terms of the Transactions and appointing the Representative pursuant to Section 7.8(a) for the purposes set forth herein and (ii) executed joinder agreements in the form of Exhibit B (the “Joinder Agreements”).

QUESTION 2: What do you think about the use of the word “executed”?

Next:

The assumption by Buyer (or any of its Affiliates) of the Assumed Liabilities and the transfer of the Assumed Liabilities by Seller will in no way expand the rights or remedies of any Person against Buyer or Seller or their respective officers, directors, employees, shareholders and advisors as compared to the rights and remedies that such Person would have had against such parties had Buyer (or any of its Affiliates) not assumed the Assumed Liabilities.

QUESTION 3: Is there any danger that a judge might be irritated by the bolded part?

QUESTION 4: Is there a better way to phrase the bolded part, taking into account your answer to Question 3?

3.5.3. Ambiguity exercise: What’s a “living properties executive”?

From Katherine Ellison, Getting his tattoo took less than 20 minutes. Regret set in within hours (WashingtonPost.com 2020): “Slavin, a former senior living properties executive, … argued that Zapatat has performed far more [tattoo-removal] treatments than most dermatologists ….” QUESTION: What is a “living properties executive”? QUESTION: How could this be clarified?

3.5.4. Rewrite: The case of LeBron’s tattoos

FACTS: Here’s a quote from this S.D.N.Y. opinion:

Familiarity with the facts underlying this case, which have been detailed in prior decisions of the Court, including the August 2, 2016, Memorandum Opinion and Order, the May 16, 2017, Memorandum Order, and the March 30, 2018, Memorandum Opinion and Order, is presumed.

(In the lawsuit, the owner of the copyrights in various NBA players’ tattoos filed a lawsuit against the maker of an NBA-licensed video game that showed animated images of the players. The court granted the video-game maker’s motion for summary judgment dismissing the case.)

EXERCISE: Right here, right now, each student “chat” me a rewrite of the above quote to make it more readable.

Hints:

  • Could the sentence be broken up into, say, two or even three sentences?
  • Why so much verbiage between the start of the sentence and the “punch line”?

Then we’ll discuss.

3.5.5. Ambiguity: The artist and the art critic

From here (paraphrased):

A young artist is exhibiting his work for the first time.

Well-known art critic: Would you like my opinion about your work?

Young artist: Yes, please!

Art critic: It’s worthless.

Young artist: I know, but tell me anyway.

3.5.6. Homework review (continued)

(To be shown in class)

Who has the burden of proof?

One student’s rewrite:

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

(b) by either Seller or Purchaser if …

(ii) a Governmental Order (“Order”) or action by a Governmental Authority (“Authority”) of competent jurisdiction becomes final or non-appealable and the terminating party used reasonable best efforts to remove the Order or action. [Emphasis added.]

QUESTION: In a case covered by (b)(ii) above:

  • Must the terminating party first establish that it used reasonable best efforts before it can terminate?
  • Or is it the other way around: To avoid termination, the non-terminating party must establish that the terminating party did not use reasonable best efforts?

Drafting lesson: Sometimes it’s good to think about what your client might have to do.

So how about with this version?

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

(b) by either Seller or Purchaser if …

(ii) a Governmental Order (“Order”) or action by a Governmental Authority (“Authority”) of competent jurisdiction becomes final or non-appealable unless the terminating party failed to use its reasonable best efforts to remove the Order or action. [Emphasis added.]

Obligation vs. prerequisite

Option 1: “A party subjected to a Governmental Order must make reasonable efforts to remove such Governmental Order or other action.”

versus:

Option 2: “A party subjected to a Governmental Order may not terminate this Agreement under Section 6.01(b)(ii) unless that party made reasonable best efforts to remove such Governmental Order or other action.”

QUESTION: Suppose that Party A is subjected to a Governmental Order but doesn’t use reasonable efforts — what are Party B’s options?

3.5.7. Reading review: Getting to signature sooner

In Zoom breakout rooms and 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), come up with a list of (up to) five noteworthy points in Chapter 16: Getting to signature sooner.

QUESTION: Did anything in this chapter remind anyone of anything they’ve experienced themselves?

3.5.8. A contract template in Word

Here’s a simple contract template — use it for the upcoming homework assignment.

3.5.9. Group work on upcoming homework assignment

See 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). Caution: Be sure to copy, into your own document, anything you want to keep — I’ll be “erasing the whiteboard” after each class.

3.5.10. Ambiguity: Sex with any celebrity

See this tweet:

h-diagram

QUESTION: What one word could be changed in the underlying Johnny Morris tweet to eliminate — or at least reduce — the ambiguity?

Note: At this writing (Sunday night), the Johnny Morris tweet has 908 likes; the Benjamin Dreyer response has almost 186,000 likes.

3.6. Class 17: Wed. Oct. 20

3.6.1. Real life: Rice sues former coach

See Ryan Herrera, Rice sues a former coach for $87,500 in [sic] breach of contract, Houston Chronicle, Mar. 26, 2021, p. c5, col. 1:

  • A Rice assistant women’s basketball coach signs a one-year contract running April 1, 2020 through March 31, 2021.
  • The contract says that if the coach leaves to take another coaching job before the contract is up, he must repay a buy-out amount equal to one-half of his annual salary, or $87.5K — and the buy-out amount is the same regardless whether he leaves on Day 1 or Day 364.
  • The coach resigns on July 21, 2020 to take a job at Duke.
  • The coach doesn’t pay any part of the buy-out amount; neither does Duke.
  • Rice sues.

Questions likely to be raised:

  1. Is this an unenforceable penalty?
  2. Why didn’t Duke pay the buy-out?
  3. Why did things get this far?

UPDATE: Rice soon dismissed the case unilaterally — what do you think happened?

3.6.2. Redrafting an ambiguity in the Amazon forest

From Smithsonian.com: “Researchers Discover the Tallest Known Tree in the Amazon”

Discuss.

3.6.3. Exercise: Background check clause review & revision

This is a provision from an actual contract form provided by Customer.

EXERCISE: In 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):

  1. Break up the “wall of words” in the provision below to make it more readable — think about whether a conversational style would work for some or all of it.
  2. Fix any drafting errors you see — including “style” errors, as though you were using the language below as a “go-by” in preparing your own first draft.
  3. As the attorney for Provider, build a list of substantive issues to discuss with Provider, e.g., whether Provider wants to offer up a particular term on the front end, or whether Provider instead wants to keep that term in reserve as a potential negotiation concession.

–BEGIN QUOTE–

Provider warrants that it has with respect to all Provider’s Personnel who are expected to perform Services under this Agreement: (i) conducted background checks; (ii) conducted checks against relevant persons-wanted lists published by national or international law enforcement bodies, the Consolidated Screenings List compiled by the United States Departments of Commerce, State, and Treasury, and any comparable lists maintained by non-U.S. authorities that are applicable to the activities engaged in under this Agreement (collectively “Government Sanctions or Watch List”); (iii) verified all qualifications used as a condition of employment (e.g., education, licensing, certifications, references, previous employers, etc.); and (iv) conducted a credit history review if the position pertains to a position of substantial trust such as involving large sums of money or substantial assets of value where theft or similar financial improprieties could reasonably occur. At a minimum, background checks required in (i) above shall include the checking of criminal convictions for any offenses other than minor traffic violations for all geographic areas wherein such individual have resided during the past five (5) years. Should any member of Provider’s Personnel appear on a Government Sanctions or Watch List, or the background checks or verifications disclose inaccurate or false information, a criminal conviction record, credit history or factors that could bear upon the desirability of a particular individual performing Services under this Agreement, Provider will advise Customer of the result of the check.  Customer shall have the right to request that Provider remove from the Services or Customer’s or its Affiliate Companies’ premises, any such individual. Provider shall be responsible for complying with any notice requirements associated with such disqualification as may be established by Applicable Law. Provider warrants that it has, by operation of law or valid agreements with Provider’s Personnel, the right to obtain this information and to disclose it to Customer as required herein, to the extent reasonably practicable. Additionally, Customer shall have the right to conduct additional background checks on Provider’s Personnel who will be performing Services for Customer. Provider shall take all actions and execute all documents and shall cause Provider’s Personnel to take all actions and execute all documents as are necessary to assist Customer in this process.

–END QUOTE–

3.6.4. Drafting fail: “Each male grandson ….”

From this article:

… when I was 13 I was bequeathed a shotgun after my grandfather died. Each male grandson was given one.

QUESTION: What are two possible ways of improving this passage?

3.6.5. Group work on upcoming homework assignment

See 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). Caution: Be sure to copy, into your own document, anything you want to keep — I’ll be “erasing the whiteboard” after each class.

3.6.6. Review question: Key difference between rep and warranty

From a litigation perspective, what is likely to be the most-significant difference between a representation and a warranty, in terms of being able to get summary judgment?

3.6.7. Oracle’s most-favored-customer problem

Reading review

QUESTIONS:

  1. What happened to Oracle when it breached its most-favored-customer clause with the U.S. Government (in its GSA contract)?
  2. What specifically did Oracle do that brought down the government’s wrath on it?
  3. How much money did the whistleblower get for his trouble?

3.7. Class 18: Mon. Oct. 25

3.7.1. Housekeeping: New Zoom breakout room assignments

As previously announced, I’m reshuffling the Zoom breakout rooms, effective now:

New breakout groups for 6:00 p.m. class
Group 1 Chris Maria Matt (C…s) Nicky Ryan Sabrina Muhammad
Group 2 Greg Dylan Maria Matt (C…f) Natalie Muhammad Tara
Group 3 Caroline Drew Dylan Ryan Nicky Tara Rachel
Group 4 Emily Matt (C…s) Drew Natalie Matt (C…f) Rachel Sabrina
Breakout groups for 7:30 p.m. class
Group 1: Kevin Natalie Haseeb Noor Katherine Sydney Smith
Group 2: Kyle Molly Natalie Nick Ronnie Smith Seunghyun
Group 3: Alex Chris Molly Katherine Noor Seunghyun Sarah
Group 4: Garrett Haseeb Chris Ronnie Nick Sarah Sydney

3.7.2. Drafting fails - shared by a student

See this (redacted) document excerpt (thanks, Haseeb!) DISCUSS.

3.7.3. Discuss: Jacobs Engineering v. ConAgra

In Zoom breakout groups:

(If necessary, introduce yourselves in your new groups.)

FACTS: See the case summary of Jacobs Eng’g Group v. ConAgra Foods in the commentary to the Indemnities Protocol.

QUESTION 1: Why was Jacobs Engineering even involved in the lawsuit by ConAgra’s injured employees?

QUESTION 2: Why did Jacobs Engineering settle the claims brought against it in the ConAgra employees’ lawsuit?

QUESTION 3: Why do you think ConAgra refused to comply with its contractual duty to indemnify Jacobs Engineering?

QUESTION 4: When negotiating its contract, should Jacobs Engineering have asked ConAgra to obtain insurance to cover ConAgra’s indemnity obligation? Why or why not?

3.7.4. Exercise: Indemnity 1 (Stanford-Tesla lease)

The provision below, at https://goo.gl/Qn2e9m (edgar.sec.gov), is from a 2007 real-estate lease in which Tesla Motors, Inc., leased a building from Stanford University:

–BEGIN QUOTE–

12.5 Indemnity. Tenant shall indemnify, defend (by counsel reasonably acceptable to Landlord), protect and hold Landlord and Landlord’s trustees, directors, officers, agents and employees and their respective successors and assigns (collectively, “Landlord’s Agents”), free and harmless from and against any and all claims, liabilities, penalties, forfeitures, losses or expenses (including reasonable attorneys’ and consultants’ fees and oversight and response costs) to the extent arising from (a) Environmental Activity by Tenant or Tenant’s Agents; or (b) failure of Tenant or Tenant’s Agents to comply with any Environmental Law with respect to Tenant’s Environmental Activity; or (c) Tenant’s failure to remove Tenant’s Hazardous Materials as required in Section 12.4. Tenant’s obligations hereunder shall include, but not be limited to, the burden and expense of defending all claims, suits and administrative proceedings (with counsel reasonably approved by Landlord), even if such claims, suits or proceedings are groundless, false or fraudulent; conducting all negotiations of any description; and promptly paying and discharging when due any and all judgments, penalties, fines or other sums due against or from Landlord or the Premises. Prior to retaining counsel to defend such claims, suits or proceedings, Tenant shall obtain Landlord’s written approval of the identity of such counsel, which approval shall not be unreasonably withheld, conditioned or delayed. In the event Tenant’s failure to surrender the Premises at the expiration or earlier termination of this Lease free of Tenant’s Hazardous Materials prevents Landlord from reletting the Premises, or reduces the fair market and/or rental value of the Premises or any portion thereof, Tenant’s indemnity obligations shall include all losses to Landlord arising therefrom.

–END QUOTE–

ASSIGNMENT: In your breakout groups, as the attorney for Tenant:

1.  Break up the provision — 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).

Use subdivision “numbers” (a), (b), etc., for the first-level subdivisions, and (1), (2), etc., for the second level.

CONSIDER:

  • Could some of the lists be moved to “definition” subdivisions, instead of having them part of a wall of words? (Example: “Landlord’s Agents”)
  • Could any of these provisions be moved to “list” subdivisions? (E.g., in the sentence starting out with “Tenant’s obligations hereunder shall [ugh] include ….”

QUESTION: What “fences” might you want to consider asking Landlord to put on Tenant’s obligations? (Think: Time? Money? Geography?)

QUESTION: Anything else you might want to request on behalf of Tenant? (Scan through the Tango Terms Defense of Claims clause for possible ideas.)

3.7.5. Review: Most favored customer: A $69 million problem

DataTreasury Corporation (DTC) had to refund $69 million to JPMorganChase (JPMC) because:

  • DTC granted a patent license to to JPMC for $70 million with a most-favored-licensee clause on a going-forward basis; and
  • more than seven years later, DTC granted a much-smaller bank a license on terms that would have required JPMC to pay just $1 million.

See JP Morgan Chase Bank, NA v. DataTreasury Corp., 823 F.3d 1006 (5th Cir. 2016) (affirming district court).

Here’s the text of the relevant part of the most-favored-licensee (“MFL”) provision, which is also known as a most-favored-nation (“MFN”) or most-favored-customer (“MFC”) provision:

9. Most Favored Licensee

If DTC grants to any other Person a license to any of the Licensed Patents, it will so notify JPMC, and JPMC will be entitled to the benefit of any and all more favorable terms with respect to such Licensed Patents. …

Id. at 1009 (emphasis added).

QUESTION: What could DTC have done differently — both in the contract AND operationally?

3.7.6. Real world: McDonald’s sues its former CEO to recoup severance

McDonald’s Corp. v. Easterbrook, No. 2020-0658, slip op. at text accompanying n.45 (Del. Ch. Feb. 2, 2021):

  • The fast-food restaurant chain’s CEO left the company after being accused of an inappropriate relationship with a subordinate. The CEO and the company entered into a “termination without cause” separation agreement that gave the CEO substantial severance benefits.
  • But then allegations surfaced that the CEO had engaged in other inappropriate relationships with subordinates.
  • The company filed suit against the CEO, claiming that he had fraudulently induced the company into entering into the separation agreement and paying him severance benefits, when it could have simply terminated his employment with cause and therefore with no severance benefits.

The court denied the former CEO’s motion to dismiss, on grounds that the entire-agreement / no-outside-representations clause in the separation agreement was not enough, in itself, to defeat the fraudulent-inducement claim.

3.8. Class 19: Wed. Oct. 27

3.8.1. Self-editing tip from LawProse

From Bryan Garner’s Website: To help you cast a fresh eye on your own first draft, print out the draft in a different and bigger font, with two-inch margins.

3.8.2. Real life: Brooks Brothers bankruptcy

See NY Times article.

QUESTION: What — if anything — could this small company have done to protect itself (contractually or otherwise)?

3.8.3. Helpful reading: The Recipe for Better Contract Design

See The Recipe for Contract Design, by Stephania Passera (@StewieKee), a Finland-based designer who specializes in trying to make contracts more understandable.

I’ll point out selected highlights:

  • Relationship
  • How to Design Contracts with the Relationship in Mind
  • How to Design Contracts with Usability in Mind

3.8.4. Real life: Consequential-damages carve-out triggered

In anticipation of a future reading assignment, see this blog post.

3.8.5. Review: Reseller agreement concepts

FACTS: Widgets, Inc. (from the Addams Family exercise) has contacted you.* Widgets has been approached by MyReps, LLC, which wants to get the right to resell the Widgets product line. Widgets’ CEO, Wanda, doesn’t know anything about MyReps; she’d like your assistance in checking out MyReps and — if it makes sense to do business with MyReps — in drafting and negotiating the contract.

* If a party in a contract negotiation is impressed with the other party’s lawyer, it’s not unusual for the first party to want to hire the other party’s lawyer to help with subsequent contract negotiations.

Discuss the following in Zoom breakout groups (picking a spokesperson for each question as usual); 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):

QUESTION 1: What sorts of information might Widgets want to know about MyReps? How might Widgets (or you) go finding out? Any legal issues there?

QUESTION 2: What sorts of things might go wrong in a reseller relationship between Widgets and MyReps? How might you contractually try to protect Widgets? (I’ll be asking this of multiple groups.)

MORE FACTS: MyReps wants an exclusive territory for all of Widgets’s product lines.

QUESTION 3: How might you advise Wanda? (I’ll be asking this of multiple groups.)

3.8.6. Exercise: Termination - twenty questions (part 1)

Feel free to 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).

Caution: I’ll be erasing the “whiteboards” in between classes, so save whatever notes you want.

1.  “If (1) either Party breaches this Agreement, and (2) the breaching party fails to cure the breach within 5 business days after receiving written notice of the breach from the non-breaching party ….” DISCUSS.

2.  “‘Good Reason’ [for termination] means (i) a transfer of all, or substantially all of Client’s business assets to another entity, and (ii) a contraction of Client’s business eliminating Client’s need for Service Provider’s data analytic services.” (Emphasis added.) QUESTION: Are both (i) and (ii) required to establish “Good Reason,” or would just one suffice?

3.  “The solvent Party may Terminate upon the filing by the other Party (the insolvent party) ….” DISCUSS. (Hint: See question 1.)

4.  “If the Termination at will is for a material breach, ….” QUESTION: Does this even make sense?

5.  “Except for material breach or legal violation, Client may terminate this Agreement at-will where Client gives written notice: ….” DISCUSS.

6.  “However, if the Terminating Party and the Nonterminating Party fail to cooperate, in a professional manner, both the Terminating Party and Nonterminating Party may agree to a shorter effective termination date.” QUESTION: What are the odds that there’d be such an agreement if, by hypothesis, the parties failed to cooperate in a professional manner?

7.  QUESTION: If termination is at-will, would the notice of termination need to state a basis for termination?

8.  “This Agreement may be terminated by either party upon no less than 30 calendar days written notice, without cause, unless a lesser time is mutually agreed upon by both parties. Said notice shall be delivered by certified mail, return receipt requested, or in person with proof of delivery.” QUESTION: Any issues about the italicized part?

9.  “Either Buyer or Seller may terminate the Agreement if the other party commits any act or omission that: a. is material to the other party’s rights or responsibilities under the Agreement, and b. violates any applicable law where the violation is likely to materially and adversely affect the other party.” QUESTION: Does this allow termination for breach?

10.  “11.1 Any termination of the agreement does the following: [¶] 11.1.1 cancels any right that a party has to continue its performance [¶] 11.1.2 cancels any relevant post-termination rights of the parties ….” COMMENT: Use (1), (2), etc., or romanettes — not “11.1.1,” etc. — for subdivisions that aren’t complete sentences.

11.  “X.1. Each party may, at its sole discretion and with at least 30 days written notice, terminate this Agreement at-will. All amounts due must be paid within 30 days of termination.” QUESTION: Any thoughts about the italicized part?

12.  “Upon the occurrence of a material breach, as that term is defined in this Agreement and as it is defined under the laws of the State of Texas, the party not responsible for said material breach may, at its option, terminate this Agreement.” QUESTION: Would that work for you if your client might someday be a breaching party?

3.8.7. Exercise: Signature authority?

Some time back I finished negotiating a contract between a client, which I’ll call “ABC Inc.,” and a customer, which we’ll call “XYZ-Services LLC,” which everyone referred to during the discussions as simply “XYZ.”

XYZ’s in-house counsel, “Xavier,” and I agreed that the parties would sign the agreement by email.

At the last minute, XYZ’s in-house counsel Xavier said that the contracting party for the other side would be “XYZ-Payroll LLC” and that the signer would be Jane Jones, the general counsel.

By prior agreement with Xavier, I sent the following email to all concerned, including Xavier, Jane Jones (the GC and signer) and my client’s CEO, whom we’ll call “Albert”:

[Subject line:] CONTRACT SIGNATURE BY EMAIL: ABC Inc. & XYZ-Payroll LLC Terms of Service / Software License Agreement

ALBERT and JANE: Please do a Reply to All with the text “Agreed” to confirm that ABC Inc. and XYZ-Payroll, LLC. have agreed to the attached ABC Inc. Terms of Service / Software License Agreement, reflecting agreed revisions.

XAVIER: As previously discussed by email, the attachment is a PDF of the final document that we discussed by email today, with no other changes.

Regards,

[my signature block]

Jane replied “Agreed” — her signature block said that she was “General Counsel, XYZ-Services LLC” (emphasis added), with no mention of XYZ-Payroll.

QUESTION: Should I have inquired about Jane’s authority to sign on behalf of XYZ-Payroll? Discuss.

3.8.8. Exercise: Termination - twenty questions (part 2)

Feel free to 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) — e.g., to note which students will be the spokesperson for which questions.

Caution: I’ll be erasing the “whiteboards” in between classes, so save whatever notes you want.

13.  “This provision will apply if the Agreement, or applicable law, provides for termination at will.” QUESTION: So is termination-at-will allowed, or not?

14.  “Should either party desire to terminate the Agreement, that party will provide a minimum of thirty-days’ written notice to the other before doing so.” QUESTION: Any thoughts about the drafting style of the italicized part?

15.  “… any termination of the Agreement has the effect of releasing both parties of all obligations and rights – except for those regarding confidentiality – that exist under the Agreement.” QUESTION: Any concerns here?

16.  “For a termination to be effective, the terminating party must give the non-terminating party 30 days notice of termination (separate from notice of breach, if any).” QUESTION: Would this work for you if your client was the terminating party?

17.  What does it actually mean to “terminate” a contract?

18.  Is there any downside to sending a notice of termination for breach?

19.  Under U.S. law, is a termination-for-breach provision even necessary in a contract?

  • If yes: What law gives rise to the need to include a termination-for-breach provision in a contract?
  • If no: Why include a termination-for-breach provision?

20.  Cure periods: Discuss the pros and cons of having different cure periods for different breaches, versus one, one-size-fits-all cure period.

4. November-December

4.1. Class 20: Mon. Nov. 01

4.1.1. Ambiguity in a job-application form

From here: “When filling out a job application, I saw they had a section for ‘previous life experience’, so I wrote down that I was a Pharoah in 2300 B.C.”

4.1.2. Oops: Too-broad a general release (and pomposity)

From my tweet:

Judge’s clerk running amok? 1st Cir. uses “abcederian,” “anent” in first few pages. (Reversing SJ: A broad general release, to settle a lawsuit ancillary to a patent license agreement, wiped out a royalty obligation under that agreement - oops!) https://cases.justia.com/federal/appellate-courts/ca1/20-2126/20-2126-2021-10-21.pdf?ts=1634857205

4.1.3. Reading review

Using 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), make some group notes about:

  • what you thought was noteworthy about this week’s reading
  • questions you think business people might have about carrying out confidentiality provisions

4.1.4. Examples in a contract can trump narrative language

Here’s a case from the High Court (i.e., trial court) in England, which I ran across over the weekend:

  • A contract appendix provided a step-by-step narrative of how a particular payment calculation was to be made; the appendix also provided several “worked examples” with hypothetical calculations.
  • But some of the worked examples included an extra calculation step — which hadn’t been described in the appendix’s step-by-step narrative.

One party asserted that the extra calculation steps in the appendix’s worked examples should be ignored because those extra steps weren’t part of the appendix’s step-by-step narrative. The court* disagreed:

The “Worked Examples” in Section 5 of Appendix M do not appear, in their context, to be mere optional extras, but rather to be integral parts of the contract terms which explain how that adjustment is to be calculated. Each of those two “Worked Examples” specifically provides for what I have referred to as “Step 6”. To disregard them would, in my judgment, be to re-write the contract that the parties have made.

Altera Voyageur Production Ltd v Premier Oil E&P UK Ltd [2020] EWHC 1891 (Comm), para 66.

Incidentally, the judge in the case was not a full-time judge, but a working lawyer (in this case a QC, or Queen’s Counsel) sitting as a part-time deputy district judge.

4.1.5. From the practice: Let sleeping dogs lie?

TEXT, provided by a customer to my client (“Supplier”): “Prices in this Agreement are fixed for the initial five (5) [sic] years of this Agreement. Supplier reserves the right to increase prices for subsequent Renewal Terms by giving 30 days’ notice, subject to a cap not to exceed the increase in the Consumer Price Index (CPI). [and later:] The [sic] Agreement shall renew [sic] automatically for 12 months at the end of the Initial Term (the ‘Renewal Term’) and at the end of each Renewal Term unless notice to terminate is provided in writing at least 30 days before the end of the Initial Term or Renewal Term.” (Emphasis added.)

BACKGROUND: Supplier wants to make sure that it can non-renew if necessary, so that it doesn’t get stuck with five-year pricing. I could propose to revise the italicized part so that it reads, “unless notice to terminate is provided in writing by either party ….”

QUESTION 1: Should I propose such a revision?

QUESTION 2: In return for the five-year price lock-in, should Supplier ask for some kind of business- or economic concession?

QUESTION 3: In return for the CPI-based price lock-in after the first five years, should Supplier ask for some kind of business- or economic concession?

4.1.6. Real life: ERCOT insurer tries to bail

See Paul Takahashi, Faulting ERCOT, insurer says it shouldn’t have to cover storm damages (HoustonChronicle Apr. 8, 2021). EXCERPT:

ERCOT’s insurance company is seeking a court ruling excusing it from defending Texas’ electric grid manager from lawsuits or covering damages stemming from the catastrophic power failure in February.

The Cincinnati Insurance Co. on Tuesday sought relief from the U.S. district court in Austin, arguing it does not have to defend the Electric Reliability Council of Texas because it does not view the power outages as an accident, defined by the insurer as a “fortuitous, unexpected, and unintended event.” As a result, the company said it has no obligation under its insurance policy to cover ERCOT, which faces a flood of lawsuits after the winter storm.

“The allegations in the Underlying Lawsuits allege ERCOT either knew, should have known, expected, and/or intended, that Winter Storm Uri would cause the same power outages which occurred as a result of previous storms in Texas, including storms in 1989 and 2011,” the insurer said in court documents. “The Underlying Lawsuits allege the power outages caused by Winter Storm Uri were a result of the exact same failures including failures of the same generators which failed in the previous winter storms, and therefore, the power outages were foreseeable, expected, and/or intended.”

4.1.7. Exercise: Termination - twenty questions (part 1)

Feel free to 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).

Caution: I’ll be erasing the “whiteboards” in between classes, so save whatever notes you want.

1.  “If (1) either Party breaches this Agreement, and (2) the breaching party fails to cure the breach within 5 business days after receiving written notice of the breach from the non-breaching party ….” DISCUSS.

2.  “‘Good Reason’ [for termination] means (i) a transfer of all, or substantially all of Client’s business assets to another entity, and (ii) a contraction of Client’s business eliminating Client’s need for Service Provider’s data analytic services.” (Emphasis added.) QUESTION: Are both (i) and (ii) required to establish “Good Reason,” or would just one suffice?

3.  “The solvent Party may Terminate upon the filing by the other Party (the insolvent party) ….” DISCUSS. (Hint: See question 1.)

4.  “If the Termination at will is for a material breach, ….” QUESTION: Does this even make sense?

5.  “Except for material breach or legal violation, Client may terminate this Agreement at-will where Client gives written notice: ….” DISCUSS.

6.  “However, if the Terminating Party and the Nonterminating Party fail to cooperate, in a professional manner, both the Terminating Party and Nonterminating Party may agree to a shorter effective termination date.” QUESTION: What are the odds that there’d be such an agreement if, by hypothesis, the parties failed to cooperate in a professional manner?

7.  QUESTION: If termination is at-will, would the notice of termination need to state a basis for termination?

8.  “This Agreement may be terminated by either party upon no less than 30 calendar days written notice, without cause, unless a lesser time is mutually agreed upon by both parties. Said notice shall be delivered by certified mail, return receipt requested, or in person with proof of delivery.” QUESTION: Any issues about the italicized part?

9.  “Either Buyer or Seller may terminate the Agreement if the other party commits any act or omission that: a. is material to the other party’s rights or responsibilities under the Agreement, and b. violates any applicable law where the violation is likely to materially and adversely affect the other party.” QUESTION: Does this allow termination for breach?

10.  “11.1 Any termination of the agreement does the following: [¶] 11.1.1 cancels any right that a party has to continue its performance [¶] 11.1.2 cancels any relevant post-termination rights of the parties ….” COMMENT: Use (1), (2), etc., or romanettes — not “11.1.1,” etc. — for subdivisions that aren’t complete sentences.

11.  “X.1. Each party may, at its sole discretion and with at least 30 days written notice, terminate this Agreement at-will. All amounts due must be paid within 30 days of termination.” QUESTION: Any thoughts about the italicized part?

12.  “Upon the occurrence of a material breach, as that term is defined in this Agreement and as it is defined under the laws of the State of Texas, the party not responsible for said material breach may, at its option, terminate this Agreement.” QUESTION: Would that work for you if your client might someday be a breaching party?

4.1.8. ABA Journal tips for 4Ls

From Dustin M. Paul and Jennifer L. Eaton, 11 tips to survive your freshman year as an associate:

Doing good work means not only creating a strong work product but anticipating the next step.

  • If you are drafting a responsive pleading, you should be thinking about the discovery you will soon serve to support the claims or defenses.
  • If you are researching whether a particular contractual provision is permissible in a business contract, consider drafting your own clause.

You will stay busy if partners can trust you and your work product. If you do a good job on an assignment, they will come back to you again and again. …

Don’t just come with problems — come with proposed solutions. In your first year, don’t always expect your solutions to be the right ones. But a proposed solution demonstrates that you are striving for excellence and independence.

(Emphasis and bullets added.)

4.1.9. Exercise: Termination clause rewrite

This is a provision from an actual contract form provided by Customer; do the following in 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).

–BEGIN–

x.x Termination. Customer may terminate the Agreement or any Statement of Work, in whole or in part, for convenience (i.e., for any reason or no reason) effective as of any date by giving Provider written notice of the termination. Except as provided in the last sentence of this Section, Customer’s failure to perform in accordance with the Agreement or otherwise comply with the terms of the Agreement will not be deemed to be grounds for termination by Provider, and Provider hereby expressly waives any such termination rights it may have. Provider acknowledges that Customer would not be willing to enter into the Agreement without assurance that the Agreement may not be terminated by Provider and that Provider will not have the right to suspend performance of the Services, in each case except, and only to the extent, expressly provided in the following sentence. If Customer fails to pay Provider when due any amount owed Provider hereunder, Provider will notify Customer of such default in writing, and if Customer has not cured such default within sixty (60) days after Customer’s receipt of such notice, then Provider may terminate the affected Statement of Work in whole upon at least ninety (90) days prior written notice to Customer.

–END–

ASSIGNMENT: As the attorney for Provider:

  • Break up the provision.
  • Build a list of issues to discuss with Provider and/or with Customer, as follows:
    • substantive issues — both legal- and business-related; and
    • “necessary” stylistic changes, e.g., for enhanced client readability and/or to R.O.O.F.

Use the questions worksheet: 6:00 p.m. class     7:30 p.m. class

4.1.10. Homework review: Gross-up provision

(To be shown in class)

4.1.11. Forum selection update

… Because we conclude that the parties’ venue-selection agreement unambiguously precludes litigation of this case in federal court, we affirm the district court’s remand order.

The contracts at issue contain identical venue-selection clauses that provide: “Venue for litigation shall be in Linn County, Oregon.” Notwithstanding this provision, CH2M removed the case under 28 U.S.C. § 1441 to the United States District Court for the District of Oregon. Linn County lies within the district court’s Eugene Division, but there is no federal courthouse located in Linn County.

* * * 

… An agreement limiting venue for litigation to a particular county unambiguously prohibits litigation in federal court when there is no federal courthouse located in the designated county. The clear import of the venue-selection clause at issue in this case was to ensure that any litigation arising out of the contracts would take place within the geographic boundaries of Linn County. If the case proceeded in federal court, litigation would instead occur in Lane County. Thus, permitting CH2M to remove the case to federal court would violate the plain terms of the parties’ agreement.

City of Albany v. CH2M Hill, Inc., 924 F.3d 1306, 1307, 1308 (9th Cir. 2019) (affirming remand to state court after defendant’s removal to federal court) (emphasis added).

Drafting lesson: If you want your client (and the other side, of course) to be able to remove to federal court, be sure that your forum-selection clause refers to “the state- and federal courts having jurisdiction in” the specified place, versus “in” the specified place.

4.2. Class 21: Wed. Nov. 03

4.2.1. ABA Journal tip for 4Ls (cont’d)

From Dustin M. Paul and Jennifer L. Eaton, 11 tips to survive your freshman year as an associate:

… if something goes wrong, you will likely bear at least some responsibility. Take the initiative to send reminder emails and offer your assistance to colleagues. Saying: “I thought you were handing that”—even when a partner told you they would handle it—will rarely absolve you of responsibility.

(Emphasis added.)

4.2.2. Real life: H-E-B v. Maverick on disinfecting wipes

Article: H-E-B wipes deal gets messier (ExpressNews.com) (paywalled); earlier article w/ background. Summary:

  • During the initial pandemic supply shortages, H-E-B bought disinfecting wipes from Maverick Int’l, L.P. of Beaumont.
  • H-E-B sued for breach of contract, claiming that Maverick allegedly failed to deliver the quantities ordered.
  • H-E-B is now claiming fraud: Maverick allegedly told H-E-B that the wipes didn’t need EPA approval — but EPA has said that’s not correct and has ordered H-E-B to pull the wipes from the shelves.

4.2.3. Referral agreement homework review

  1. COMMENT: I can see why a drafter wouldn’t include an audits provision for a referral agreement. But if this were a major revenue-producing agreement for the other party, MathWhiz likely would want to include an audits provision just to forestall having the other party propose a really-onerous one.
  2. I docked one point for not updating the running footer in the document.
  3. TEXT: “Associate will refer Prospective Customers ….” COMMENT: That might not be appropriate: Normally, referral agreements don’t require referrals, they just say, in effect, if you do refer a customer, then I’ll pay you a commission.
  4. TEXT: “Associate’s duties under this Agreement are limited exclusively to locating Prospective Customers and notifying Company.” COMMENT: This limitation on “duties” doesn’t preclude Associate from doing other things if it wants — and MathWhiz might well want to impose such limitations.
  5. TEXT: “Any expenses incurred by Associate in connection with carrying out its duties under this Agreement will be paid by Associate.” COMMENT: This is passive voice — better to say, “Associate will pay …” or “Associate is responsible for ….” (This isn’t one of those cases where it doesn’t matter who actually does the action.)
  6. TEXT: “Company will have no obligation to reimburse Associate for any expenses incurred ….” BETTER: “Company need not reimburse Associate ….”
  7. TEXT: “Non-exclusivity: During the Term of this Agreement Company may engage any other firms and/or individuals to act as an Associate with respect to the sale of any of Company’s goods or services.” COMMENT: Better to just say “This Agreement is non-exclusive as to each party,” because Company’s right to engage others won’t expire with the Term. (Here, it doesn’t matter, but in other contexts, it might.)
  8. TEXT: “All non-public, confidential, or proprietary information of Company or Associate ….” COMMENT: MathWhiz isn’t going to want to commit to confidentiality obligations for Associate’s information — there won’t be any disclosed (in all likelihood), and MW won’t want to open that door.

4.2.4. Homework review: Gross-up provision (cont’d)

  1. TEXT: “1) The Guarantor shall make all payments below without a) setoff, counterclaim, restrictions or condition, and b) free and clear of and without deduction for ….” COMMENT: Remember the rule that any list item should make sense if all other list items are deleted — in this case, item b doesn’t make sense if item a is deleted (“The Guarantor shall make all payments below without free and clear ….”). WARNING: I WILL BE DEDUCTING POINTS FOR THIS SORT OF THING.
  2. Be consistent: Use “Guarantor” or “the Guarantor” but not both. (Ditto with “Lender” and “the Lender.”)

4.2.5. Exercise: A CarMax warranty limitation

TEXT: In California, an automobile sales contract disclaimed implied warranties beyond the remedies set forth in an express warranty, which stated: “The dealer will pay 100% of the labor and 100% of the parts for the covered systems that fail during the [30-day] warranty period.“ The contract also limited the customer’s remedies to those stated in the contract.

(See Gutierrez v. CarMax Auto Superstores California LLC, 19 Cal. App. 5th 1234, 1240 (Cal. App. 2018).)

FACTS: Gutierrez bought the car on May 5, 2013. The car started having transmission problems, including making a grinding noise and having trouble accelerating in traffic. Gutierrez took the car to the dealer for warranty work on June 7.

IN BREAKOUT ROOMS, discuss the following:

QUESTION 1A: Was the car’s transmission trouble covered by the 30-day warranty? QUESTION 1B: If you were trial counsel for Gutierrez, what kinds of evidence might you try to develop that you could introduce at trial? QUESTION 1C: Same question, but this time you’re trial counsel for CarMax?

QUESTION 2: If CarMax engaged you to review the warranty provision above, what if any advice might you give about its wording? (Hint: Consider the problems of proof.)

4.2.6. Exercise: Nickname for a “this is acceptable” provision

A lease states that

1.  Tenant must pay the rent by a means reasonably acceptable to Landlord, and

2.  Venmo is to be conclusively deemed an acceptable means of payment.

QUESTION: Subdivision (2) is an example of a [WORD 1] [WORD 2] provision.

4.2.7. Exercise: CPI

QUESTION: If a contract refers to “CPI” (Consumer Price Index), which CPI is likely meant if not specified otherwise? (Hint: See the reading material.)

4.2.8. Discussion questions: Title, preamble, background

  1. FACTS: MathWhiz’s CEO asks you to draft a confidentiality agreement (“NDA”) between MathWhiz and Gigunda Energy. TRUE OR FALSE: In the NDA’s preamble, it’s OK to list Gigunda as simply “Gigunda Energy,” without more. EXPLAIN.
  2. What would be a good title for the NDA?
  3. For the NDA in #1, describe two ways you could avoid having to repeat the parties’ full legal names throughout the contract. What are some pros and cons of each way?
  4. How would you write the very first sentence of the NDA’s preamble?
  5. In the NDA’s preamble, how important is it to include the parties’ full legal names, and why? What about their state(s) of incorporation or other organization?
  6. In the NDA’s preamble, would you say that the confidentiality is (i) “between,” or (ii) “by and between,” or (iii) “among,” Gigunda and MathWhiz?
  7. MORE FACTS: MathWhiz’s CEO tells you that she and her contact at Gigunda have already discussed, on a Zoom call, a limited amount of each party’s confidential information but they agreed orally to keep the information confidential. QUESTION: Is that oral agreement enforceable?
  8. Same facts as #7: How could you set up the written NDA to cover the previous Zoom call?
  9. MORE FACTS: MathWhiz’s CEO tells you that Gigunda wants the NDA to cover not just Gigunda’s confidential information, but also some confidential information of Gigunda’s wholly-owned Mongolian subsidiary. QUESTION: How could you do that?
  10. Exercise: Using what you know from the above, draft a very simple “Background” section for the NDA.
  11. To what extent would you want to put specific details of the NDA — for example, how long the confidentiality obligations of the NDA will last — into its Background section?
  12. FACTS: Gigunda’s lawyer has prepared a draft of the NDA, which says at the beginning: “This Agreement is made effective January 31, 20xx.” MathWhiz’s lawyer has asked you to review the draft and make any necessary revisions. QUESTION: Would you change the just-quoted sentence to state that the Agreement is effective the last date signed? Why or why not?
  13. Draft a preamble and background section for the Gigunda-MathWhiz agreement.
  14. True or false: In an agreement title that contains party names, the full legal names of the parties must be spelled out in full.

4.2.9. Negotiation exercise: Warranties – who can sue?

FACTS:

  • You have been asked to represent Gigunda USA in negotiating a master purchase agreement under which Gigunda USA and its various affiliates can issue purchase orders to buy widgets from Widgets Inc. You’ve been asked to review a draft of the master agreement, prepared by Widget’s lawyers.

QUESTION 1: Can you ethically represent Gigunda USA in this matter?

MORE FACTS:

  • The preamble of the master purchase agreement begins: “This ‘Agreement’ is between Gigunda USA Corporation (‘Gigunda’), a California corporation ….”
  • One provision of the draft states that “Widgets warrants to Gigunda that the widgets, as delivered, will be free from defects in materials and workmanship.”

HYPOTHETICAL: Suppose that one of Gigunda USA’s affiliate corporations, Gigunda Europe, were to order widgets under this master agreement, and it turned out that those widgets did have defects.

QUESTION 2: Would Gigunda Europe be able to sue Widgets for breach of warranty?

QUESTION 3: As Gigunda USA’s lawyer, how could you improve the warranty provision on this point?

4.3. Class 22: Mon. Nov. 08

4.3.1. Quiz #4 due

4.3.2. ABA Journal tips for 4Ls (cont’d)

From Dustin M. Paul and Jennifer L. Eaton, 11 tips to survive your freshman year as an associate:

Usually, the best thing to do in a difficult situation—whether with a client, attorney or colleague—is document, document, document. Make sure your position on difficult issues is known. You want to be on record if something goes sideways.

4.3.3. Termination clause - a look back

See this rewrite of a (statutory) termination clause.

4.3.4. Discussion about the reading

In your groups, and using 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) if desired, consider the following:

  1. What exactly does the phrase “terminate this Agreement” mean? Is that what’s desired?
  2. Under what circumstances are post-employment noncompetition covenants enforceable in Texas?
  3. Under what circumstances are post-employment noncompetition covenants enforceable in California?
  4. Is a letter of intent (“LOI”) usually intended to be binding, or nonbinding?
  5. What exactly does “12 midnight on November 8” mean — is it coming up in a few hours, or has it already passed? Are there other ways to write this term?
  6. To a prospective assigning party, what’s a principal danger of an assignment-consent requirement?
  7. How can a prospective assigning party reduce the danger of an assignment-consent requirement?

4.3.5. Exercises: Services - topics for discussion

In your breakout rooms, prepare to discuss the following — any student should be prepared to answer any question; feel free to 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):

  1. What’s a sensible “default” payment schedule for services?
  2. In an ideal world, what kind of payment schedule would a customer prefer?
  3. In an ideal world, what kind of payment schedule would a service provider prefer?
  4. Why might Customer want to specify that failing to start the services on time is a material breach?
  5. Review: What makes a material breach special?
  6. More generally: Why list specific events of material breach? Is there any downside to doing so?
  7. If you’re representing a services provider, what might be of concern if a prospective customer were to ask for the right to terminate a statement of work “at will” (synonym: “for convenience”)?
  8. Under what circumstances does it make business sense for a customer to own the IP rights in deliverables created by a services provider under a statement of work?

4.3.6. Real life: Parties sign different versions — so no arbitration

The Fourth Circuit agreed that an arbitration agreement was unenforceable when the parties signed (via DocuSign) two versions of their contract with significantly-different details that did not relate to arbitration; thus, said the court, there was no meeting of the minds and consequently arbitration had not been agreed to. See Rowland v. Sandy Morris Financial & Estate Planning Services, LLC, No. 20-1187, slip op. (4th Cir. Apr. 7, 2021) (affirming denial of motion to compel arbitration).

(The Fourth Circuit did not address whether the parties could have been viewed as having agreed to arbitration even if there’d been no meeting of the minds about other matters.)

This is of a piece with a Delaware case mentioned in the reading: In that case, the parties had exchanged signed signature pages of a contract, but the pages were from two different drafts, only one of which included the crucial provision in the litigation (a noncompetition covenant). The chancery court held that there had been no meeting of the minds and thus there was not a valid contract. See Kotler v. Shipman Assoc., LLC, No. 2017-0457-JRS (Del. Ch. Aug. 27, 2019) (rendering judgment for company).

4.3.7. All-caps annoys SCOTX?

In what might have been a subtle rebuke to the drafter(s) of a contract in suit, the Supreme Court of Texas reproduced an indemnification clause from the contract and added a footnote: “This text appeared in all capital letters in the original, but we have normalized the capitalization for readability.” Wagner v. Apache Corp., No. 19-0244, slip op. at 2 n.1 (Tex. Apr. 9, 2021) (affirming reversal of refusal to compel arbitration; emphasis added).

4.4. Class 23: Wed. Nov. 10

4.4.1. Astroworld Travis Scott concert tragedy - contract implications?

From an email from a student, alerting me to this story about a camera operator on a platform (this is the video):

We were discussing the potential accountability of the camera operator and speculating the terms of his contract (potentially with Live Nation).

For example: is he an employee or a subcontractor, can he be held accountable, would an indemnification clause or other save him, etc.

We understand that this tragedy is fresh, so if it is insensitive or inappropriate to discuss in class, we’d love just to get your take on it.

For Example:

What kind of contract the camera operator is probably working under?

Could the camera operator even be held accountable?

What contract terms would protect or aid the camera operator if he were held accountable in any manner?

4.4.2. Exercise: Assignment of Mickey-Dee franchise agreement

FACTS:

  • You represent Smith LLC, a family business that operates three Mickey-Dee franchised restaurants in Houston.
  • Smith LLC owns the land and buildings of the restaurants, which are built to specifications developed by the global franchising firm Mickey-Dee Incorporated.
  • The restaurants all use trademarks owned by Mickey-Dee Inc., including the signage, logos, the name “Mickey-Dee,” uniform styles etc.
  • The franchise agreement is silent about assignability of the agreement.
  • Smith LLC wants to sell its three franchised restaurants to Jones Inc., another family business.

QUESTIONS:

  1. Can your client Smith LLC sell the franchised restaurants to Jones Inc., so that Jones Inc. can continue operating them as before, without Mickey-Dee’s consent? Why or why not?
  2. What if anything could Mickey-Dee do if Smith LLC were to assign the franchise agreement to Jones, Inc. without Mickey-Dee’s consent?
  3. If you had been representing Smith LLC in negotiating the original franchise agreement with Mickey-Dee, what changes might you have requested in the franchise agreement?
  4. What if Smith LLC wanted to merge with Jones Inc. — would that trigger the assignment-consent requirement?

4.4.3. Real life: Unilateral amendments can’t go too far

Apropos of unilateral amendments and arbitration clauses: In March, the Sixth Circuit held that a bank’s unilateral amendment to its depositor agreement was ineffective to impose an arbitration agreement because:

  • the original agreement said nothing about alternative dispute resolution;
  • the addition of an arbitration provision was too different; and
  • customers’ silence in response to the unilateral amendment was not enough to signify assent.

See Sevier Cty. Schools Fed. Credit Union v. Branch Banking & Trust, 990 F.3d 470 (6th Cir. 2021) (reversing order compelling arbitration).

4.4.4. Ambiguity: Professor Goodenough’s prospects

From the Houston Chronicle, when pioneering American battery researcher John Goodenough (professor at Oxford University and later UT Austin) was awarded the Welch Award in Chemistry (he later received the Nobel Prize in Chemistry):

Feeling behind in school wasn’t new for Goodenough when he started his physics Ph.D. at the University of Chicago. As a child, his dyslexia went undiagnosed. But it still stung when, after serving in World War II, an administrator told him he wouldn’t make it as a physicist because he had started too late. He was in his 20s.

QUESTION: What’s wrong with the italicized portion? (Hint: Who served in WWII?)

4.4.5. Short redrafting exercise: Selling a house

TEXT: Alice will sell the house at 1234 Main Street to Bob. … [and later in the document:] Alice will not alter the house at 1234 Main Street before the Closing.

EXERCISE: Rewrite.

4.4.6. Exercise: Honeywell warranty text

In your small groups, use this checklist (in NCD) and 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) to help you to answer the questions below about this purchase-order form (which I have not broken up, but you’re free to do so):

16. Warranty

16.1. Supplier warrants to Honeywell, its successors, assigns, customers, and end users that during the entire Warranty Period specified below, all Goods furnished (including all replacement or corrected Goods or components and regardless of whether all or any part of such furnished Goods or any replacement or corrected Goods was manufactured, distributed or otherwise commercialized by a third party prior to delivery by or on behalf of Supplier to Honeywell) will (a) be free from defects in material, workmanship, and design, even if the design has been approved by Honeywell, (b) conform to applicable drawings, designs, quality control plans, specifications and samples and other descriptions furnished or specified by Honeywell, (c) be merchantable, (d) be fit for the intended purposes and operate as intended, (e) comply with all laws and regulations, (f) be free and clear of any and all liens or other encumbrances, and (g) not infringe any patent, published patent application, or other intellectual property rights of any third party and not utilize misappropriated third party trade secret information. Goods that fail to meet the preceding standards are collectively called “non-conforming Goods.” Supplier must obtain third party warranties consistent with Section 16 for all raw materials, components, and services required by Supplier to perform under this Agreement (“Components”) and Supplier is solely responsible for ensuring that all Components meet these requirements. Any Component that fails to meet these requirements will be deemed to be a non-conforming Good.

16.2. As to services, in addition to any express or implied warranties, Supplier warrants that (a) it possesses the requisite expertise, facilities and equipment necessary and appropriate to perform the services, (b) the services will be performed in a safe and workmanlike manner, and (c) the services will be performed in accordance with the highest standards in the industry.

16.3. The Warranty Period is 36 months from the date of delivery to the end user or such longer period of time mandated by any longer government requirement covering the Goods. In addition to the warranties described above, Supplier also warrants all Goods to the same extent and for the same time period (if extending beyond 36 months) as the warranties provided by Honeywell to Honeywell’s customers relating to such Goods. These warranties are for the benefit of Honeywell, Honeywell’s customers, and any other person claiming by or through Honeywell. These warranties will survive any delivery, inspection, acceptance, or payment by Honeywell. Claims for breach of warranty do not accrue until discovery of nonconformance, even if the Goods were previously inspected. Any applicable statute of limitations runs from the date of discovery. If conforming Goods are not furnished within the time specified by Honeywell then Honeywell may, at its election, have the nonconforming Goods repaired, replaced, or corrected at Supplier’s expense or credited to Honeywell. Supplier is responsible for the costs of repairing, replacing or correcting nonconforming Goods or crediting them to Honeywell, and for all related costs, expenses and damages including, but not limited to, the costs of removal, disassembly, failure analysis, fault isolation, reinstallation, re-inspection, and retrofit of the nonconforming Goods or of Honeywell’s affected end-product; all freight charges, including but not limited to incremental freight expenses incurred by Honeywell for shipments of repaired, replaced, or corrected Goods to Honeywell and for shipments of repaired, replaced, or corrected Goods or finished product containing or incorporating repaired, replaced, or corrected Goods from Honeywell to any customer of Honeywell; all customer charges; and all corrective action costs. Unless set off by Honeywell, Supplier will reimburse Honeywell for all such costs upon receipt of Honeywell’s invoice. Any replacement Goods are warranted for the same period as the original Goods. Additionally, if any services are found not to be performed as warranted within a period of 36 months after the conclusion of the performance of the services by Supplier, Honeywell may direct Supplier to either refund to Honeywell the amount paid for the services, or perform the services again in a proper manner to the extent necessary to provide Honeywell with the result originally contemplated by Honeywell. The warranties and rights provided are cumulative and in addition to any warranty provided by law or equity.

16.4. If, following delivery, Goods exhibit a substantially similar repetitive root cause, failure mode or defect indicating a common or systemic failure (“Epidemic Failure”), then, without prejudice to Honeywell’s rights under Section 22: (a) the party discovering the failure will promptly notify the other and Supplier will provide to Honeywell a preliminary plan for problem diagnosis within one business day of such notification, which plan Supplier will revise at Honeywell’s request; (b) Supplier and Honeywell will diagnose the problem, plan an initial work-around and effect a permanent solution; (c) Supplier and Honeywell will agree on a plan for customer notification, replacement scheduling and remediation, including identification of suspect population, field removal, return and reinstallation, work in process (“WIP”), inventory replacement, and repair, or retrofitting, regardless of location or status of WIP completion; and (d) Supplier is responsible for all costs and damages associated with any Epidemic Failure. Honeywell and Supplier will work together in good faith to establish and expeditiously implement an Epidemic Failure action plan. If Supplier or any of its Component suppliers initiate any Product or Component recalls, retrofits, or service bulletins that affect Product quality, Supplier will immediately communicate this information to Honeywell.

16.5. [Omitted]

16.6. Goods and Services covered by this Purchase Order will comply with all applicable treaties, laws, regulations of the place of manufacture and Canadian, European Union and U.S. state and federal laws, regulations and standards (a) concerning the importation, sale, design, manufacture, packaging and labeling of its Goods, (b) regulating the sale of Goods, and (c) relating to the environment and/or the toxic or hazardous nature of Goods or their constituents, including (without limitation) the U.S. Toxic Substances Act, the U.S. Occupational Safety and Health Act, the U.S. Hazardous Communication Standard, the Federal Hazardous Substances Act, the California Proposition 65, European ROHS standards, and other current and subsequently applicable requirements; and Supplier agrees that it shall furnish promptly on request and provide all information and certifications evidencing compliance with such laws, regulations, standards and requirements.

QUESTIONS:

  1. Who could sue Supplier for breach of warranty?
  2. How long do Supplier’s warranties last?
  3. Do Supplier’s warranties say that:
    • goods will be in a specified condition at delivery; and/or
    • goods will perform in a certain way for a certain period of time? Does that make any difference?
  4. What if goods are bad due to a design flaw for which Honeywell is responsible?
  5. In 16.1(c), what does “merchantable” mean?
  6. In 16.1(d), what is “the intended purpose”?
  7. In 16.1(g), what would it take for Supplier to know whether goods infringed a patent?
  8. In 16.2, is there any inconsistency between (b), “safe and workmanlike,” and (c), “in accordance with the highest standards in the industry”?
  9. In 16.2(a), why does Honeywell want Supplier to warrant Supplier’s skill, etc. — why not just ask for a warranty of results?
  10. In 16.2, what is the implication of “in addition to any express or implied warranties”?
  11. In 16.3, second and third sentences: Any issues here?
  12. In 16.3, what could be the significance of the following:
    • “These warranties are for the benefit of Honeywell, Honeywell’s customers, and any other person claiming by or through Honeywell”
    • “Any applicable statute of limitations runs from the date of discovery.”
    • Any replacement Goods are warranted for the same period as the original Goods.“ Any ambiguity here?
    • “The warranties and rights provided are cumulative and in addition to any warranty provided by law or equity.”
  13. In 16.3, do you see any potentially-enormous financial exposure for Supplier?
  14. In 16.4(c): “Supplier and Honeywell will agree on a plan for customer notification, replacement scheduling and remediation, including identification of suspect population, field removal, return and reinstallation, work in process (“WIP”), inventory replacement, and repair, or retrofitting, regardless of location or status of WIP completion[.]” QUESTION: Any issues here?
  15. In 16.6: Any potential problems here?

4.4.7. Ambiguity: Separate interviews

From an arbitration award I was writing (and caught myself): “Ms. Doe and her coworker Jane Roe were separately interviewed by Human Resources manager John Doe and Becky Bow.”

QUESTION: How many people were interviewed, by how many people?

4.4.8. Subcontracting clause exercise - strategic thinking (Part 1)

4.4.9. Negotiation exercise: Warranties – who can sue?

FACTS:

  • You have been asked to represent Gigunda USA in negotiating a master purchase agreement under which Gigunda USA and its various affiliates can issue purchase orders to buy widgets from Widgets Inc. You’ve been asked to review a draft of the master agreement, prepared by Widget’s lawyers.
  • The preamble of the master purchase agreement begins: “This ‘Agreement’ is between Gigunda USA Corporation (‘Gigunda’), a California corporation ….”
  • One provision of the draft states that “Widgets warrants to Gigunda that the widgets, as delivered, will be free from defects in materials and workmanship.”

HYPOTHETICAL: Suppose that one of Gigunda USA’s affiliate corporations, Gigunda Europe, were to order widgets under this master agreement, and it turned out that those widgets did have defects.

QUESTION 1: Would Gigunda Europe be able to sue Widgets for breach of warranty? [1]

QUESTION 2: As Gigunda USA’s lawyer, how could you improve the warranty provision on this point? [2]

4.5. Class 24: Mon. Nov. 15

4.5.1. Real life: Amazon sued over delivery company’s vehicle crash

On the subject of “independent contractors,” here’s something from Latest Amazon Driver Lawsuit Eyes Algorithms to Assign Fault (PYMNTS.com):

The most recent case making headlines concerns 24-year-old Ans Rana, a graduate of Kennesaw State University in Kennesaw, Georgia who reportedly was planning to take his MCAT later this month and apply to medical school. Rana was in the backseat of a Tesla being driven by his brother when they were rear-ended by an Amazon delivery van.

Rana, who is now cared for by his sister and needs a ventilator to breathe, filed a lawsuit in June alleging that Amazon is liable for the accident because of the algorithms, apps and devices the company uses to operate its logistics unit, according to reports.

Amazon, however, maintains that it is not legally at fault because the driver that crashed worked for Harper Logistics, a company launched solely to handle Amazon deliveries, according to Bloomberg.

The attorney for Rana, Scott Harrison, is homing in on the key role algorithms play as a way to prove that Amazon controls its entire logistics operation and oversees everything, including which drivers should be hired and fired.

Drivers working for Harper Logistics are also required to wear Amazon-branded uniforms.

According to the lawsuit, Amazon isn’t a client of Harper Logistics; Amazon actually manages the company from the outside, Bloomberg reported. This assertion is expected to weigh heavily on determining Amazon’s level of fault, if any.

(Emphasis added.)

4.5.2. Unnecessary repetition in contract clauses: The Holy Hand Grenade of Antioch

4.5.3. From the practice: A stubborn counterparty lawyer

FACTS: In an actual contract negotiation, Buyer’s counsel proposed the following language for a noncompetition covenant to be agreed to by Seller’s major shareholders:

(2) A “Competing Business Purpose” means the design, development, manufacture, production, marketing, distribution or sale of any [software] product or the provision of any service, related to [let’s say, widget manufacturing], including cost modeling and optimization, application/workload discovery, dependency mapping, or billing (the “Business”) in the Restrictive [sic] Territory.

MORE FACTS: All of the activities listed after the word “including” — cost modeling and optimization, etc. — are done in all kinds of businesses, not just widget manufacturing.

QUESTION: Does the above language preclude Seller’s major stockholders, during the noncompetition period, from being involved in selling software for, e.g., cost modeling and optimization outside the context of widget manufacturing?

MORE FACTS: I proposed rewriting the “including” part to read, “including, to the extent involved in widget manufacturing, cost modeling and optimization, [etc.].” BUT: In a Zoom call this morning, Buyer’s lawyers dug their heels in and insisted that the provision was clear.

QUESTION: What do you think Seller (my client’s principal stockholders) did?

QUESTION: To what extent can I ethically advise the shareholders, given that I represent Seller?

4.5.4. Exercise: Preliminary injunctions

FACTS:

  • Your client Alice has been asked to sign a confidentiality agreement (“NDA”) that was prepared by Bob (“The Other Side”).
  • Neither Alice nor you have any past history with Bob.
  • The NDA’s terms apply equally to the confidential information of both Alice and Bob, not just to the confidential information of only one party or the other.

QUESTION 1: Alice, in a hurry, and asks if it’s OK to just sign the NDA, given the third bullet point above. What’s your answer — and why? (Hint: What do we NOT know from these facts?)

MORE FACTS:

  • Bob’s draft states that the parties’ confidentiality obligations will expire one year from the effective date of the NDA — period.

QUESTION 2: Alice wants to know if she can agree to that.

MORE FACTS:

  • Bob’s NDA includes:
    • a provision that each party receiving confidential information agrees to entry of a preliminary injunction against actual or imminent breach of the confidentiality obligations; and
    • a waiver of any requirement that the disclosing party post a bond when seeking such an injunction.

QUESTION 3: Is the preliminary-injunction agreement this a good idea for Alice? Why or why not?

QUESTION 4: Is the bond waiver a good idea for Alice? Why or why not?

Hint: For each of the above questions, do we know enough to be able to advise Alice? What else might we want to know?

4.5.5. Exercise: Indemnities

In breakout rooms — feel free to 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)

1. What is the difference — if any — between an indemnity and a warranty?

2. IF FALSE, EXPLAIN WHY: IF: Alice agrees to indemnify Bob against damage arising from occurrence of Event X; THEN: This reduces the risk to the parties associated with the (possible) occurrence of Event X. /(CAUTION: Read this carefully.)

3. IF FALSE, EXPLAIN WHY: An indemnity obligation allocates at least some of the financial risk of Event X.

4. IF FALSE, EXPLAIN WHY: The following is an acceptable conventional phrasing: /Alice hereby indemnifies Bob against any damage Bob might incur if it rains tomorrow.

4.5.6. It’s vs. its

Know the difference — “it’s never a good thing to assume that a party will always act in its own best interest.”

4.5.7. Ambiguity: California ballot initiatives

TEXT: “Proposition 24, also known as the California Privacy Rights and Enforcement Act of 2020, … required businesses to do the following: • not share a consumer’s personal information upon the consumer’s request; ….” (From Ballotpedia.org, emphasis added.)

QUESTION: What’s the alternative — but in context, nonsensical — way that the above text could be read grammatically?

4.5.8. Exercise: Acknowledgement in a confidentiality agreement

FACTS: You represent Supplier, Inc., which is considering signing a confidentiality agreement (“NDA,” or nondisclosure agreement) with a potential customer, Buyer, Inc.

MORE FACTS: The NDA says:

The Receiving Party acknowledges that the Confidential Information is proprietary to the Disclosing Party, has been developed and obtained through great efforts by the Disclosing Party and that Disclosing Party regards all of its Confidential Information as trade secrets.

QUESTION: As Supplier’s attorney, are you OK with this? Do you know enough to say?

4.5.9. Ambiguity: Long hours in BigLaw

From Erin Johnston, Not All at Once, And Not All Alone, ABA Journal, Nov. 2018, at 14:

My success [as a Kirkland & Ellis litigation partner] has not been the result of a perfectly-executed master plan. But I can say that I have unapologetically asked for what I needed and was pleasantly surprised by the responses I received. No one above me assumed they knew what I wanted, or that what I wanted would always be the same.

At times I turned down opportunities to avoid travel or to focus on my family; other times I chose to take that trip or work long hours. …

(Emphasis and extra paragraphing added.)

QUESTIONS:

  1. What are two possible meanings of the italicized portion?
  2. How could the italicized portion be clarified?

4.6. Class 25: Wed. Nov. 17

4.6.1. Drafting fail: American Girl

4.6.2. Ambiguity: President Obama on President G.H.W. Bush

Barack Obama had this to say on Nov. 27, 2018, about his predecessor George H.W. Bush (who died three days later):

HOUSTON, Texas (KTRK) – Former President Barack Obama paid homage to Houston’s most famous resident, former President George H.W. Bush, just three days before his death.

Obama met with Bush 41 briefly Tuesday afternoon before conducting a statesman’s discussion at a Rice University gala with Bush’s former chief of staff and Secretary of State James Baker[.]

During Tuesday night’s discussion, Obama lauded the former president and Baker for their diplomacy.

“When it comes to foreign policy, the work that President George H.W. Bush did with Jim at his side was as important and as deft and as effective a set of foreign policy initiatives as we saw in recent years, and deserve enormous credit for navigating the end of the Cold War in a way that could have gone sideways, all kinds of ways,” Obama said.

Obama said a challenge of working in the White House is not always getting credit “when nothing happens.”

“And nothing happening is good,” Obama said, to laughs.

QUESTION: What’s another possible meaning of the italicized portion — a meaning that might also have triggered laughter? (Hint: Think of who was occupying the Oval Office at the time.)

4.6.3. Planning exercises: Warranty duration

FACTS: Consider a contract for the purchase of 1,000 small electric motors, which Buyer intends to use in manufacturing small, battery-powered nose-hair trimmers. (Yes, there is such a thing.) All parties are in Texas. The contract, drafted by Seller, states in part as follows:

Seller warrants to Buyer, for 30 days after delivery, that the motors will have a service life of at least one hundred (100) hours.

QUESTION 1: What if anything is wrong with this provision?

MORE FACTS: A summer associate is reviewing and redlining Seller’s draft contract for you on behalf of your client Buyer. The summer associate notices that there is no disclaimer of implied warranties in the draft. After looking up some implied-warranty disclaimer language examples, the summer associate inserts the following text into the draft (with redlining, of course):

Seller DISCLAIMS all other warranties, express or implied.

QUESTION 2: What if anything is wrong with this provision?

4.6.4. Preview lecture: Limitations of liability

I’ll go over some of the basics of the reading for next week — especially “consequential damages,” which are often misunderstood.

Then we’ll go to the breakout rooms to see what questions you have and what could be explained better.

4.6.5. Review exercise: When clients are in a hurry

  1. FACTS: Alice and Bob are natural-gas traders. Alice sends Bob an Internet instant message (“IM”) offering to sell Bob a stated quantity of natural gas, of a specified, industry-standard quality, for delivery at a specified location and date, at a stated price. Also by IM, Bob responds “Yes.” Let’s assume there are no defenses to formation such as lack of capacity. QUESTION: Have Alice and Bob entered into an enforceable contract? (Vote “Yes” or “No” using the Zoom participant list voting buttons; Raise Hand if unsure.)
  2. True / false / maybe: The terms of a “letter of intent” will generally be non-binding, because that’s why parties sign a letter of intent in the first place. EXPLAIN.
  3. FACTS: The CEO of MathWhiz and a VP of Gignda Energy have a lunch meeting in Houston to talk about a quickie data-analysis project that Gigunda wants MathWhiz to undertake the following day.
    • The lunch is in a family-style restaurant that has paper “coloring book” placemats, with crayons for kids to use in coloring in the drawings.
    • Neither executive thought to bring a pen or pencil, so using crayons to write on the back of one of their placemats, the two executives jot down bullet points for the main terms of the data-analysis project — what MathWhiz will do, the delivery date (the following day), and the fee that Gigunda would pay upon completion.
    • Each executive signs and dates the placemat at the bottom.
    • The MathWhiz CEO uses her camera to take a picture of the signed placemat, then emails the photo to the Gigunda Energy vice president.
    • When the executives leave the restaurant, one of them tears up the placemat, wads it up the strips, and leaves them to be picked up and trashed when the table is bussed.
    • QUESTIONS:
      • A) True or false: This is a “verbal” contract. EXPLAIN.
      • B) True or false: This is a “written” contract.
  4. True or false: At least some types of binding contract can be formed by exchanging emails.
  5. True or false: A contract that might be completely performed in a year is invalid under the Statute of Frauds if it turns out that the contract isn’t completely performed in a year.
  6. True or false: At least some types of binding contract can be formed by exchanging text messages.
  7. True or false: An oral contract could be binding, depending on the circumstances.
  8. True or false: An email can provide evidence to corroborate the existence of a binding oral contract even if the email doesn’t itself constitute a binding written contract.
  9. True or false: For an email contract to be binding, each party’s email must include the specific word “Signed” to make it clear that the party is assenting to the terms.
  10. True or false: In at least one state, text messages likely won’t be enough to form a certain type of contract.
  11. True or false: An agreement to agree will generally be enforceable in the U.S. — the court will weigh expert testimony to determine what reasonable parties likely would have agreed to.

4.6.6. Ambiguity examples from Wikipedia

See here.

4.6.7. Exercise: Subcontracting clause (Duke Energy)

The provision below is from a services agreement form used by Duke Energy, at https://goo.gl/imaf3v (archive.org):

–BEGINQUOTE

B.  Subcontracting. Upon prior written notice to and consent of Duke Energy (not to be unreasonably withheld), Contractor may have any portion of the Services performed by any Subcontractors of, including Persons related to or affiliated. with, Contractor. Contractor and any proposed Subcontractors must meet the specific safety criteria as defined in the Duke Energy Health and Safety Supplemental Requirements. If subcontracting is permitted by Duke Energy, Contractor will still continue to be responsible for the performance and completion of the Services. If requested by Duke Energy, Contractor must provide Duke Energy with copies of any contracts with third parties regarding the assignment of rights or delegation of duties hereunder. Contractor must obtain terms and conditions in its contracts with Subcontractors and suppliers which are consistent with the rights of Duke Energy and the duties of Contractors pursuant to this Agreement. Contractor will deliver to Duke Energy for Duke Energy’s review a written list of the Subcontractors that the Contractor proposes to engage or use in the performance of the Services before the Contractor enters any contract with any Subcontractor, and Duke Energy will have the right to approve or reject each proposed Subcontractor. No contractual relationship will exist between Duke Energy and any Subcontractor with respect to the Services. Contractor will be fully responsible to Duke Energy and any applicable third party for all acts, omissions, failures, and faults of all Subcontractors as fully as if they were the acts, omissions, failures, and faults of Contractor.

–ENDQUOTE

ASSIGNMENT: As the attorney for Contractor:

First, if you want, break up the paragraph for easier review; feel free to 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)

QUESTION 1: What if any problems do you anticipate with the “not to be unreasonably withheld” provision in the first sentence — and what would you propose to do about them?

QUESTION 2: Re-read the penultimate sentence, which begins: “No contractual relationship will exist between Duke Energy and any Subcontractor with respect to the Services.” QUESTION: How enforceable do you think that is?

QUESTION 3: What other issues (if any) do you think might be troublesome for Contractor — and what would you propose to do about them if, before the agreement was signed, you were negotiating it on behalf of the Contractor?

4.7. Class 26: Mon. Nov. 22

[CANCELED]

4.8. Class 27: Mon. Nov. 29

4.8.1. Ambiguity exercise: A finder’s fee upon “consummation”

(Not in a Zoom breakout room)

FACTS:

1. Alice and Bob enter into a referral agreement; under that agreement, Alice must pay Bob a finder’s fee for every contract that Alice “consummates” with anyone referred to her by Bob during a specified time period.

2. During the specified time period, Bob refers Carol to Alice. Before the specified time period ends, Alice signs a contract with Carol; BUT: Alice does not actually begin performing her obligations under the contract with Carol until after the specified time period ends.

3. Alice claims that she therefore does not owe Bob a finder’s fee for her contract with Carol.

QUESTION: What result?

QUESTION: How could the finder’s-fee agreement have been clarified? SOURCE: Fed Cetera, LLC v. Nat’l Credit Servs., Inc., 938 F.3d 466 (3d Cir. 2019) (reversing and remanding summary judgment in favor of “Alice”).

4.8.2. Vote: Who decides ambiguities?

QUESTION 1: In federal- or state-court litigation in the U.S. — where a jury has been timely demanded — a material ambiguity in a contract provision will be resolved by A) the judge; B) the jury; C) one or more other officials.

QUESTION 2: In litigation, what does “material” mean?

4.8.3. Review: When the client is in a hurry

FACTS: MathWhiz’s CEO, Mary Marvel, asks you to draft a short contract in which MathWhiz will do some data-analysis for a longtime client.

  • Mary says that she and her contact at the client — a senior vice president (SVP) in charge of the division that wants the data analysis — have agreed on all the details in a series of Zoom calls.
  • Mary has drafted a “term sheet,” with bullet points outlining the agreed business- and technical details; she says that her client’s SVP has reviewed the term sheet and said it’s fine.
  • The client’s SVP doesn’t want to get his company’s lawyers involved, so Mary has asked you whether “the contract” could be drafted as just a short email that she will send to the SVP, with the term sheet attached.

QUESTION 1: What do you advise Mary, and why?

QUESTION 2: How would you advise her — that is, what exactly would you do to convey your advice — and why that way?

QUESTION 3: Are there any particular protective terms that you might want to make sure that Mary’s term sheet includes?

QUESTION 4: Are you OK with having the client’s SVP be the signer of the contract? EXPLAIN?

MORE FACTS: MathWhiz’s CEO also thinks that the other party to the contract (MathWhiz’s longtime client) is likely to be acquired in the next year or so — by whom exactly, the CEO doesn’t know — and that it’d likely be an “acqui-hire” in which many of the other party’s senior executives and -managers would be let go (with their stock options and a severance package) as no longer needed.

QUESTION 5: What if anything might you do differently in drafting the contract?

4.8.4. Drafting exercise: Limiting liability for widget warranties

FACTS:

  • You represent Alice, who manufactures electronic widgets. Each widget has a battery that is sealed into the widget and not replaceable.
  • Bob manufactures electronic gadgets that include electronic widgets.
  • Alice wants you to draft a contract for her to enter into with Bob; under that contract, Bob will buy electronic widgets from Alice.
  • Bob has told Alice that he wants the contract to include, among other provisions:
    • a warranty that the widgets do not contain any defects in design or manufacture; and
    • a provision requiring Alice to indemnify Bob against any harm Bob suffers from defects in the widgets.

QUESTION 1: What kind of “fences” might Alice want in the two provisions?

MORE FACTS:

  • IMPORTANT: The negotiated contract between Alice and Bob includes an exclusion of incidental- and consequential damages.
  • Bob takes delivery of a large quantity of Alice’s widgets and stores them in an appropriate storage room.
  • In the storage room, the batteries in several of Alice’s widgets spontaneously catch fire, resulting in major damage and causing significant “down time” for Bob’s gadget-manufacturing operations. (Remember hoverboards from a few years ago.)
  • Citing the indemnity provision, Bob demands that Alice reimburse him for the cost of:
    • repairs;
    • replacement of the damaged contents of the storage room;
    • the travel expenses that Bob incurred in going to China and India to check out alternative sources of widgets;
    • the profits that Bob lost from the manufacturing down time.

QUESTION 2 – EXPLAIN IF FALSE: Alice need not reimburse Bob because an indemnity provision covers claims by third parties against the protected party, not direct claims by the protected party against the indemnifying party.

QUESTION 3 – EXPLAIN IF FALSE: If Bob sues Alice for breach of her indemnity obligation, Alice can probably get Bob’s claim for lost profits thrown out early (by moving for partial summary judgment) as barred by the contract’s exclusion of consequential damages.

QUESTION 4 – EXPLAIN IF FALSE: Alice can probably get Bob’s claim for travel expenses dismissed on partial summary judgment as barred by the contract’s exclusion of incidental damages.

4.8.5. Liquidated damages

A student wrote: “If Math-whiz fails to provide the Invoice on the tenth day of any particular month, Gigunda will penalize Math-Whiz up to USD$200.00 per day until the Invoice is received. This provision may be altered by written agreement, acknowledged by both parties.”

QUESTION 1: Is the “penalize” language the best choice?

QUESTION 2: What’s an alternative way to express this?

QUESTION 3: What exactly does the second sentence mean?

4.8.6. Review: Battle of the Forms

FACTS: A potential customer sends a purchase order to a supplier for 1,000 widgets;

  • The purchase order’s fine print contains detailed terms and conditions, including a rejection of any other terms provided by the supplier.
  • The supplier ships the 1,000 widgets to the customer together with an invoice.
  • The fine print in the supplier’s invoice contains detailed terms and conditions, including
    • (i) a rejection of any other terms provided by the customer;
    • (ii) a conspicuous disclaimer of all implied warranties; and
    • (iii) a requirement that all disputes must be resolved by binding arbitratation, not by litigation in court.
  • Under the applicable law, all sales of goods include an implied warranty of merchantability unless conspicuously disclaimed in the parties’ contract.

QUESTION 1: If the customer wants to make a claim against the supplier for breach of the implied warranty of merchantability, must the customer arbitrate the claim, or can it bring a lawsuit in court? (Assume for now that the arbitration clause would be enforceable IF the parties agreed to it.)

FACTS: A Houston-area Honda dealership sells a new Honda to a customer, taking the customer’s used Ford “in trade.”

  • Assume (incorrectly) that in Texas, sales of cars are not governed by any special laws other than the Uniform Commercial Code.

QUESTION 2: In Texas, is the Honda dealer a “merchant” as to the used Ford? Why or why not?

VARIATION: The Honda buyer, instead of trading in a used Ford, offers a bass boat on a trailer. The dealership accepts the trade because the dealership’s owner has long wanted to take up fishing again and figures he can use the bass boat to teach his grandchildren how to fish.

QUESTION 3: Is the dealership a “merchant” as to the bass boat?

FACTS: Two Houston companies, ABC Corp. and XYZ LLC, enter into a contract for XYZ to build a warehouse on ABC’s property in northwest Houston for a stated price.

  • Before any work starts on the project at all, the on-the-ground managers for the two companies can’t seem to get along. One day, ABC’s manager angrily tells her boss that XYZ’s construction supervisor told her, “that’s it, we’re done, find yourself another builder!”
  • ABC decides that yes, it’d be better for it to use another builder. So ABC signs a contract with MNOP LLC — at a significantly-higher price — and sues XYZ for breach of contract, asserting that XYZ’s construction supervisor repudiated the contract and so XYZ should be liable for the extra cost that ABC would incur by switching to MNOP LLC.
  • At the jury trial, ABC’s manager testifies under oath that XYZ’s construction supervisor said what’s described above; in his own testimony, XYZ’s supervisor denies this, also under oath.

QUESTION 4: What kinds of other evidence could ABC seek to adduce at trial to support its theory of the case — IF it had such evidence?

QUESTION 5: If the jury accepts one side’s version of events, how easy would it be for the trial judge to overrule the jury’s finding at the losing party’s request? What about an appellate court? (Hint: See the Seventh Amendment and Fed. R. Civ. P. 50(a) concerning judgment as a matter of law.)

QUESTION 6: What does the above tell you about the importance of (i) putting things in writing, and (ii) keeping the writings?

4.8.7. Ambiguity: Ivanka Trump in South Korea

From President Trump: “My daughter, Ivanka, just arrived in South Korea. We cannot have a better, or smarter, person representing our country.” From Jonathan Chait: “That second sentence can really be read a couple ways.” [DCT comment: It’d be better to say “a couple of ways.”] From Gary Schroeder: “Also, the use of commas implies that she is his only daughter.”

4.8.8. Ambiguity exercise: Prime rate plus 2%

TEXT (from a dispute that I arbitrated): A contract states that payments remaining past due more than 30 days after the due date will bear interest at “a rate per annum equal to the prime rate published by the Wall Street Journal on the business day before the date on which such interest begins to accrue, changing with each change in such published rate, plus two percent (2%).“

FACTS: On the relevant date, the Journal’s published U.S. prime rate was 4.00%.

QUESTION: On its face, from a drafting style perspective, what’s wrong with this interest-rate provision?

QUESTION: What interest rate should be applied to the late payment — 6%, or 4.08%?

QUESTION: How could the interest-rate language be clarified?

4.8.9. Poor word choice: “Loanee”

From Katie Stancombe, COA affirms breach, fraud, unjust enrichment claims brought by bank, TheIndianaLawyer.com Oct. 26, 2018:

A bank that brought breach of contract, fraud and unjust enrichment claims against its loanee won each of those claims on appeal, but failed to state a claim that the loanee violated the “usual and customary practices” laid out in its participation agreement, according to a Friday opinion from the Indiana Court of Appeals.

(Emphasis added.)

QUESTION: “Loanee” ?????

4.9. Class 28: Wed. Dec. 01

4.9.1. Ambiguity in a tragic headline

From the Houston Chronicle, Nov. 30, 2021: Offer to massacre survivors draws scorn

(My wife spotted this one over breakfast — and in this morning’s paper, a letter to the editor said that the headline writer and editor were tone-deaf.)

4.9.2. Discussion questions: Notary certificates

One of the tasks you’re likely to face as a junior associate will be to supervise having contract-related documents “notarized.”

FACTS: Your client, Landlord, has negotiated a five-year commercial lease for one of its office buildings. The tenant’s lawyer wants the signers to have their signatures notarized. Landlord agrees to have the signatures notarized.

ASSUME: All events take place in Texas and are subject to Texas law.

NOTE: When a question cites a specific subdivision of a Texas statute — e.g., “(c)” or “(d)” — be sure to zero in on that specific subdivision.

QUESTION 1: Why might the tenant’s lawyer want the lease to be notarized? Would that be in your client Landlord’s best interest? EXPLAIN. See generally J. Allen Smith & Michael R. Steinmark, Tenants’ Rights Under Unrecorded Leases, at http://goo.gl/S2prC (2010) (read the first few paragraphs, through the part about “memorandum of lease); Tex. Prop. Code §§ 12.001, 13.001, 13.002.

QUESTION 2. If the notary public can’t find her notary seal, may she sign the notary certificate and skip applying the seal? EXPLAIN. See Tex. Gov. Code § 406.013; Tex. Civ. Prac. & Rem. Code § 121.004(b)(3).

QUESTION 3. What must the notary public do before signing the notary certificate to confirm that the signers are who they claim to be? See Tex. Civ. Prac. & Rem. Code § 121.005(a).

QUESTION 4. Must the notary’s certificate say anything in particular about the identity of the signer? EXPLAIN. See Tex. Civ. Prac. & Rem. Code § 121.005#121.005(b).

QUESTION 5. What must the notary do after notarizing the signature(s)? EXPLAIN. See Tex. Civ. Prac. & Rem. Code § 121.012; Tex. Gov. Code § 406.014.

QUESTION 6. If no notary is around, can you notarize the signatures as an attorney? Should you? EXPLAIN. See Tex. Civ. Prac. & Rem. Code § 121.001; Tex. Discipl. R. Prof. Conduct 3.08(a) (“Lawyer as Witness”).

QUESTION 7. Surprise! The person who will sign the lease for the tenant has gone on a business trip to Kuwait and will FAX her signed signature page to you. Can your secretary, who is here in Houston and is a notary public, notarize that signature page? EXPLAIN. See Tex. Civ. Prac. & Rem. Code § 121.004(a) and this Texas Secretary of State publication.

QUESTION 8. Who in Kuwait could “notarize” the tenant signer’s signature? EXPLAIN. See Tex. Civ. Prac. & Rem. Code § 121.001(c) and (d).

QUESTION 9. Why “notarize” a document signature with an acknowledgement, as opposed to a jurat? EXPLAIN. See this explanation.

4.9.3. Review: Street smarts

QUESTION 1: Who are some of the people who might someday read: (i) the draft contract; (ii) the signed contract — and what will they likely be hoping to accomplish?

QUESTION 2: True or false: Contract drafters should pretty-much-always avoid including explanations of particular terms. EXPLAIN.

QUESTION 3: You are drafting a contract for MathWhiz and are getting ready to send it to MathWhiz’s CEO, Mary Marvel. Name two reasons that Mary will likely prefer that the contract be written in plain language.

QUESTION 4: In the context of contract drafting, what’s a “L.O.A.D.”, and what’s one of the most important ways of avoiding being one?

QUESTION 5: Based on whatever experience you’ve had so far — personal and/or professional — would you prefer to review a contract with (i) fewer pages with dense paragraphs, or (ii) more pages but shorter paragraphs and more white space?

QUESTION 6: What does BLUF mean?

QUESTION 7: What’s “the MEGO factor”?

QUESTION 8: Name two advantages of putting a contract’s key business details into a schedule, perhaps at the front of the contract.

4.9.4. Jeopardy-style game for review

5. Readings & homework, week by week

5.2. Prep for Week 2 (Mon. Aug. 30)

5.2.1. Homework due Monday: Signature blocks — 5 pts (P/F)

See the hypothetical facts at NCD § 1.2 and the general notes about homework.

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

5.2.2. Homework due Wednesday: 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.

See also the general notes about homework.

5.2.3. Reading

5.3. Prep for Week 3 (Mon. Sep. 06)

Homework due Wednesday: Tenant audit rights (5 pts P/F)

See the general notes about homework.

Part 1: 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.

Part 2: What changes you might want to make if you were representing Landlord?

5.3.1. Reading

(No class on Monday — Labor Day)

Skim the following except as otherwise indicated:

5.4. Prep for Week 4 (Mon. Sep. 13)

Homework due Monday: Signatures - the Addams family - 5 pts P/F

See the general notes about homework.

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?

5.4.1. Reading

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:

5.5. Prep for Week 5 (Mon. Sep. 20)

5.5.1. Homework due Monday: Short employment agreement

See generally the hypothetical facts at NCD § 1.2 the general notes about homework.

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.

5.5.2. Reading

5.6. Prep for Week 6 (Mon. Sep. 27)

Homework due Monday: Earn-out computations - 10 pts P/F

See the general notes about homework.

For general background, see this video and article.

ASSIGNMENT: Simplify the following provision:

(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.

DCT example:

(c)     Within 60 days after the end of an applicable Earn-Out Year, Purchaser will do the following:

      (1) cause to be prepared a statement setting forth, for that Earn-Out Year, the calculation of the Annual Earn-Out Payment for that Earn-Out Year (the “Earn-Out Calculation” for that Earn-Out Year); and

      (2) deliver to Seller: (A) the applicable Earn-Out Calculation; (B) reasonable supporting documents[;] and

      (3) pay the Annual Earn-Out Payment, if any, by wire transfer of immediately available funds to an account designated in writing by Seller.

(d)     Seller will have 30 days after receipt of an Earn-Out Calculation to notify Purchaser in writing of Seller’s election to accept or reject the Earn-Out Calculation.

(e)     If Seller rejects an Earn-Out Calculation, the notice of rejection (the “Rejection Notice”) must set forth the reasons for rejection in reasonable detail and set forth the amount of the requested adjustment.

(f)     If Purchaser does not receive a Rejection Notice before the end of the 30-day period, then the Annual Earn-Out Payment for that Earn-Out Year will be final, conclusive[,] and binding on the Parties.

(g)     If Seller timely rejects an Earn-Out Calculation, Purchaser and Seller will promptly attempt in good faith to make an agreed determination of the Annual Earn-Out Payment.

(h)     If Seller and Purchaser are unable to agree upon the Annual Earn-Out Payment for the applicable Earn-Out Year within 30 days after Purchaser receives the Rejection Notice, then Purchaser and Seller will: (1) jointly engage the Accounting Firm to resolve the dispute; and (2) promptly submit the dispute to the Accounting Firm for resolution within 30 days or as soon as practicable thereafter.

(i)     The Accounting Firm’s determination is to be limited to resolving the disagreement set forth in the Rejection Notice.

(j)     The Accounting Firm’s determination, and any required adjustments resulting therefrom, will be final, conclusive and binding on the Parties.

(k)     The fees and expenses of the Accounting Firm are to 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 that Party, as determined by the Accounting Firm.

5.7. Prep for Week 7 (Mon. Oct. 04)

Homework due: Termination clause (10 pts.,  P/F)

See the general notes about homework.

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. Here it is:

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]

(ii) subject to subdivisions (XX) and (YY): any Governmental Authority of competent jurisdiction shall have has 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

[other subparagraphs omitted]

(XX) The party A party seeking to terminate this Agreement pursuant to this Section 6.01(b)(ii) shall must have used its reasonable best efforts [???] to remove such Governmental Order or other action.

(YY) ; and provided, further, that the right to A party may not terminate this Agreement under this Section 6.01(b)(ii) shall not be available to a party whose if that party’s failure to fulfill its obligations under this Agreement shall have been was the primary cause of, or shall have resulted in [QUESTION: Does “resulted in” swallow “primary cause”?], the issuance of such Governmental Order or taking of such action

Without redlining:

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]

(ii) subject to subdivisions (XX) and (YY): any Governmental Authority of competent jurisdiction has 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 has become final and non-appealable; or

[other subparagraphs omitted]

(XX) A party seeking to terminate this Agreement pursuant to this Section 6.01(b)(ii) must have used its reasonable best efforts [???] to remove such Governmental Order or other action.

(YY) A party may not terminate this Agreement under this Section 6.01(b)(ii) if that party’s failure to fulfill its obligations under this Agreement was the primary cause of, or resulted in [QUESTION: Does “resulted in” swallow “primary cause”?], the issuance of such Governmental Order or taking of such action

5.8. Prep for Week 8 (Mon. Oct. 11)

Homework due Monday: Gross-up provision (10 pts.,  P/F)

See the general notes about homework.

TEXT: 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.

EXERCISE:

1.  Break up this provision. (Consider: Does the first sentence in this provision really belong here, given the subheading of the provision?)

2.  Rewrite just the italicized portion to be more reader-friendly, as though you were talking to a lay jury.

5.8.1. Reading

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

5.9. Prep for Week 9 (Mon. Oct. 18)

5.9.1. Reading

Read:

5.10. Prep for Week 10 (Mon. Oct. 25)

5.10.1. Homework due: Referral agreement (30 pts.,  NOT P/F)

See the hypothetical facts at NCD § 1.2 the general notes about homework.

FACTS: MathWhiz wants to have a simple agreement form 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. [ADDED 2021-11-01: Use the contract template that was previously posted (see the class notes for Oct. 18).]

  • 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

5.11. Prep for Week 11 (Mon. Nov. 01)

5.11.1. Reading

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.

5.12. Prep for Week 12 (Mon. Nov. 08)

5.12.1. Reading

Look for the main takeaways in the following:

Skim the following except as otherwise indicated.

Selected defined terms:

5.14. Prep for Week 14 (Mon. Nov. 22)

Footnotes:

[1]

Possibly not, because the warranty is to Gigunda USA. In any case, that’s a conversation you don’t want to have.

[2]

One possibility, with two steps: (1) Define a term such as Buyer (or perhaps Purchaser) as, whichever entity is making purchases under the master agreement; and (2) Rewrite the warranty provision to read, “Widgets warrants to Buyer” instead of “Widgets warrants to Gigunda USA ….”