Flashcards: Contract Drafting, Spring 2017

Revised 2018-03-19 18:47 CDT (typos fixed 2018-04-16)

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1 When the effective date is to be different

QUESTION: According to Professor Toedt, in most circumstances, the best way to state the effective date of a contract that is different from the date(s) that the contract is signed is:

A.  In the preamble: "This Agreement is entered into on [DATE]."

B.  In the preamble: "This Agreement is entered into on the latest date signed as written in the signature blocks below, to be effective as of [DATE]."

C:  In the preamble: "This Agreement is entered into on [DATE]."

D.  None of the above.

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Answer: B. It's best for an agreement to state the specific dates that the agreement is signed by the different parties—although as seen in this example, the effective date can always be defined as the last-date-signed.

2 Affiliates as parties

FACTS:

  1. Your client ABC Inc. has asked you to review a contract drafted by XYZ Corporation.
  2. The preamble of the contract states that the parties are (i) ABC Inc. and (ii) XYZ Corporation and its Affiliates.
  3. In the definitions section, the contract defines the term Affiliate.

TRUE OR FALSE: This contract structure is unobjectionable.

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Answer: False. For a variety of reasons, affiliates of a signatory party normally should not be listed as parties themselves unless (i) their rights and obligations are clearly spelled out, and (ii) they also sign the agreement.

3 Affiliates placing orders

FACTS: (1) Customer Corporation negotiates a master purchase agreement with Vendor Inc. The agreement specifies the pricing that Vendor will honor, during the agreement term, for Customer's orders for particular goods and/or services.

2.  Customer wants its various "Affiliates" (defined in the agreement) to be able to place orders at the specified pricing.

QUESTION: To accommodate Customer's desire, which of the following would be the best drafting approach?

A.  In the preamble, recite that the parties are "(i) Vendor Inc. … and (ii) Customer Corporation … and its Affiliates (defined below)."

B.  In the preamble, recite that the parties are Vendor Inc. and Customer Corporation, but state in the body of the agreement that Customer's Affiliates are entitled to place orders at the agreed pricing.

C:  Both of the above.

D.  Neither of the above.

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Answer: B.

4 Agreement date: The best way

QUESTION: According to Professor Toedt, in most circumstances, the best way to state the date of a contract is:

A.  In the preamble: "This Agreement is entered into on [DATE]."

B.  In the preamble: "This Agreement is entered into on the latest date signed as written in the signature blocks below."

C:  In or just before the signature blocks: "Date: [DATE]."

D.  None of the above.

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Answer: B. This option reduces the chances of the parties' either leaving the date blank or failing to update the date to reflect the actual date of signature.

5 Two-way vs. one-way NDAs

FACTS:

  1. Your client Alice has been asked to sign a confidentiality agreement ("NDA") that was prepared by Bob ("The Other Side").
  2. Neither Alice nor you have any past history with Bob.
  3. 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.
  4. Alice is in a hurry and asks if it's OK to just sign the NDA, given point 3 above.

TRUE OR FALSE: You can probably go ahead and tell Alice "yes, it's OK to sign this."

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Answer: False. Just because a contract treats both sides equally does not mean that the contract doesn't favor the party that drafted the contract, which almost certainly knew which role it would play in the contractual relationship.

6 Injunctive relief: Stipulation of irreparable harm

FACTS: A draft NDA, prepared by the disclosing party, includes a injunctive-relief provision that states that if the receiving party breaches the NDA, then the disclosing party will be irreparably harmed and will be entitled to injunctive relief. You are reviewing the draft NDA for your client, which will be the receiving party.

TRUE OR FALSE: In these circumstances, there's probably no need to try to revise or delete this provision.

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Answer: False. A receiving party that agreed to this would stipulate away a major element of the disclosing party's burden of proof in a lawsuit.

7 Injunctive relief: Bond-waiver request

FACTS: A draft NDA, prepared by the disclosing party, includes a injunctive-relief provision that states that the receiving party waives any requirement for the posting of a bond as a prerequisite to the granting of injunctive relief. You are reviewing the draft NDA for your client, which will be the receiving party.

TRUE OR FALSE: TRUE OR FALSE: In these circumstances, it'd be worthwhile to try to revise or delete this provision. (Be prepared to explain your answer.)

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Answer: True. Suppose that (i) a receiving party were to agree to this; (ii) the disclosing party accused the receiving party of breach and was able to get a preliminary injunction; (iii) it turned out that the receiving party didn't breach after all; (iv) the preliminary injunction caused significant harm to the receiving party; but (v) the disclosing party-plaintiff didn't have money to pay a damage award for wrongful injunction. In that case, the receiving party might be stuck bearing the costs of the wrongful injunction.

8 What constitutes a warranty

TRUE OR FALSE: A contract provision can amount to a warranty even if the provision doesn't use the word warranty.

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Answer: True. See UCC § 2-313(2) (which applies only to the sale of goods).

9 Must a warranty specify a remedy?

FACTS: A contract states that "Alice warrants that the car is in good condition," but it is otherwise silent about what will happen if the car isn't in good condition.

TRUE OR FALSE: This contract provision isn't really a warranty because it doesn't specify a remedy if the warranty were to be breached.

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Answer: False. The standard remedies for breach of warranty are normally those specified by law, generally damages. Within limits, though, the parties can (i) agree on specific 'Plan B' remedies, and (ii) exclude other remedies.

10 Notices by regular mail

FACTS: Alice and Bob are entering into a contract, being drafted by Bob's lawyers. The "Notices" provision in the draft contract states: "Any notice required or permitted by this Agreement will be effective three days after being deposited in the U.S. Mail in a sealed envelope that has first-class postage affixed and is addressed to the notified party's address for notice as stated in this Agreement."

TRUE OR FALSE: TRUE OR FALSE: In these circumstances, it'd be worthwhile to try to revise or delete this provision. (Be prepared to explain your answer.)

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Answer: True. Mail can go astray — in business-to-business contracts, notices should be by certified mail, overnight delivery, or other means that can provide proof of receipt.

11 Notarizing a document for recordation

FACTS:

1.  The other side's lawyer has drafted a real-estate-related document for her client to sign and deliver to your client, which will then want you to have the document filed for recording in the deed records of a Texas county.

2.  The notary certificate after the signature line reads: "Sworn and subscribed to before me, the undersigned authority," with a blank line for the notary to fill in the date.

TRUE OR FALSE: TRUE OR FALSE: In these circumstances, it'd be worthwhile to try to revise or delete this provision. (Be prepared to explain your answer.)

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Answer: True. The quoted language in the text would be for a jurat, whereas recordation of the document will normally require an acknowledgment.

12 Material breach — "takesies"?

FACTS:

1.  A contract states that breach of a certain obligation will be considered a "material" breach that will allow the other party to terminate the contract by notice.

2.  The obligated party breaches the obligation, whereupon the other party duly terminates the contract and sues for damages.

3.  In court, the obligated party admits its breach, but it claims that the breach wasn't material and so the other party shouldn't have terminated the contract.

TRUE OR FALSE: The breaching party might have a very difficult time persuading a court that the breach wasn't material.

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Answer: True. The material-breach statement referred to in the facts might have the same effect as an acknowledgement.

13 A breach that that isn't designated as "material"

FACTS: Alice and Bob are negotiating a contract. One provision in the draft contract obligates Alice to take Action A, but it doesn't state that Alice's obligation is "material."

QUESTION: In a lawsuit arising out of the contract, Bob could still try to prove that Alice's obligation to take Action A was in fact "material" and thus that her failure to take Action A constituted a "material breach."

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Answer: True. Materiality can generally be proved up with parol evidence, so the lack of an acknowledgment of materiality in the contract itself shouldn't be fatal to Bob's materiality case, but such an acknowledgment would save some billable time for Bob's trial counsel.

14 Strategy for non-warranting parties

QUESTION: IF: You're drafting a contract for your client Alice; AND: As part of the deal, Bob is to warrant something to Alice; THEN: You'll normally want to use the phrase "Bob represents and warrants," instead of just "Bob represents."

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Answer: True. A party that will benefit from another party's warranty will pretty much always want to ask for both a representation and a warranty.

15 Representations: Language

FACTS: Alice wants to sell her car to Bob. Bob wants the contract to include a representation by Alice that the car has no significant defects.

QUESTION:

QUESTION: In most circumstances, which language below for the representation would Alice prefer?

A.  Alice represents that, so far as she is aware, without any particular investigation, the car has no significant defects.

B.  Alice represents that, to her knowledge, the car has no significant defects.

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Correct answer: A. If Alice were to make a no-significant-defects representation "to her knowledge," then later on an aggressive trial counsel for Bob might try to argue that Alice had implicitly represented that she was in fact knowledgeable about the car's condition.

16 Time is of the essence: Injunctive relief?

FACTS:

1.  Alice and Bob enter into a contract that requires Bob to deliver 1 million widgets (a generic product available from a wide variety of vendors) to Alice for a stated price at a specified time. The contract also states that time is of the essence for the delivery.

2.  Bob fails to deliver the widgets on time and tells Alice he just can't do it.

3.  Alice duly files suit against Bob, in a court having jurisdiction, and moves for a preliminary injunction ordering Bob to deliver the widgets.

QUESTION: Even if Alice can prove up irreparable harm and a balance of the equities in her favor, the court is unlikely to grant Alice's motion.

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Answer: True. Only in special circumstances will a court grant anything resembling injunctive relief on a contract claim, on the theory that normally such claims can be adequately remedied by an award of monetary damages.

17 Termination of Agreement: What's left?

FACTS: You are reviewing a contract (the "Agreement") that contains a section on termination of the Agreement.

QUESTION: You should consider whether the Agreement should also include a|an [BLANK] provision to keep alive any provisions that your client might want to continue in effect even after termination of the Agreement, such as (for example) choice of forum, disclaimers of implied warranties, and limitations of liability.

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Answer: Survival.

DCT COMMENT: I prefer to draft termination provisions so that only specific rights and obligations, not the Agreement itself, can be terminated.

18 Employment agreement salary amount

QUESTION: In an employment agreement for an executive, the exective's annual salary is preferably stated as follows:

A.  $X per year.

B.  A rate of $X per year.

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Answer: B. Stating the salary as an annual RATE makes it less likely that the executive could claim he or she was owed an entire year's salary for working only part of a year.

19 Interest at 5%

FACTS:

1.  You're reviewing a draft contract for a client, Alice. The contract was drafted by Bob's lawyer. Alice is in a hurry to get the contract signed.

2.  Among other things, the contract requires Alice to pay Bob for consulting services, with interest on past-due amounts at 5% until paid.

TRUE OR FALSE: In these circumstances, it'd be worthwhile to try to revise or delete this provision. (Be prepared to explain your answer.)

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Answer: True. Some points to consider:

1.  Alice should be consulted about this to get her sign-off.

2.  The provision is ambiguous as to the interest rate: is it per-year or per-month? If the latter, it's likely to be usurious in many jurisdictions.

20 Dry-erase pens

FACTS:

1. Alice sends Bob — both in Texas — a purchase order for dry-erase pens; the purchase order states in part that Alice has all rights and remedies available by law in case of any defect in the pens.

2. Bob doesn't sign the purchase order, but he returns a confirmation of the order, which says in part that all implied warranties are disclaimed, including the implied warranties of merchantability and fitness for particular purpose.

3. Bob ships what are supposedly dry-erase pens, together with an invoice; Alice timely pays the invoice.

4. Shortly thereafter, Alice discovers that the pens have been mislabeled and are actually permanent markers that ruin Alice's expensive whiteboard.

5. Alice sues Bob for breach of the implied warranty of merchantability.

6. Bob moves to dismiss, citing the implied-warranty disclaimer in his order confirmation.

QUESTION: How will the court likely rule on Bob's motion?

A.  Granted, because under the last-shot rule, Bob's order confirmation knocked out Alice's purchase-order terms.

B.  Denied, because both parties are "merchants" and Alice sent the first document.

C:  Denied, because the conflicting terms in the parties' documents will drop out under the "knock-out rule."

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Answer: C. There's a conflict between (i) the disclaimer of implied warranties in Bob's order-confirmation document , and (ii) the all-rights-and-remedies language in Alice's purchase order. Bob's disclaimer will therefore drop out — but Alice's all-rights-and-remedies language will stay because it simply states the law.

21 Negotiation in good faith

FACTS:

1.  Alice and Bob, both living and working in the U.S., are negotiating a contract. They've agreed on all the major terms, but they can't quite reach agreement on the interest rate that is to be charged on past-due payments. They decide to "kick the can down the road" by stating in the contract that, starting 90 days later, each party will negotiate in good faith to attempt to reach agreement on the interest rate.

2.  When the 90-day period is over, Bob contacts Alice to reopen negotiations about the interest rate, but Alice adamantly refuses even to discuss the matter, even after Bob threatens her with a lawsuit.

TRUE OR FALSE: Bob can recover his foreseeable, non-speculative damages resulting from Alice's breach of her agreement to negotiate in good faith. (Be prepared to explain your answer.)

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Answer: True. In the U.S., an agreement to negotiate in good faith is generally enforceable — although breach might be tricky to prove.

(Contrast this with an agreement to agree, which in the U.S. will generally not be enforceable.)

22 Agreements to agree

TRUE OR FALSE: In the U.S., an agreement to agree on something in the future will generally be enforceable.

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Answer: False. (Contrast this with an agreement to negotiate in good faith, which in the U.S. will indeed generally be enforceable.)

23 Letters of intent

QUESTION: In the U.S., which portions of a signed letter of intent ("LOI") will be binding — if any?

A.  None

B.  Only those provisions that the LOI clearly specifies are binding

C:  Possibly the entire LOI if the LOI does not clearly state otherwise

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Answer: C. The parties might also bind themselves by their post-LOI actions, as the jury found in the Energy Transfer Partners v. Enterprise Product Partners case (later reversed by an intermediate appellate court).

24 Conditions precedent

QUESTION: [BLANK] is a colloquial, one-word synonym for "condition precedent":

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Answer: Prerequisite.

25 Conditions subsequent

QUESTION: [BLANK] is a colloquial, one-word synonym for "condition subsequent":

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Answer: Exception (or, escape clause).

26 Conspicuousness options

QUESTION: In the eyes of a court, for a long contract provision, which of the following might NOT suffice to satisfy a legal requirement that the provision be "conspicuous"?

A.  The provision is rendered in all-caps.

B.  The entire contract is only one page long, the provision is in bold-faced type, and the provision is relatively short.

C:  The parties' lawyers negotiated the provision in question.

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Answer: A. At least one judge has warned that all-caps might not be enough for conspicuousness if the provision in question is buried in a sea of all-caps.

27 Indemnity financial support

FACTS: Alice is hiring Bob to do some work in her factory. Her draft of the contract requires Bob to indemnify Alice for any harm that might occur to any of his employees while at Alice's factory.

FILL IN THE BLANK: Alice should also consider inserting a provision requiring Bob to enter into and maintain this type of ancillary contract to make sure there is a pot of money available if necessary to support Bob's indemnity obligation.

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Answer: Insurance.

28 It's late, it's late, it's late, but not too late (RIP Freddie Mercury)

FACTS:

1.  It's Tuesday, May 9, 2017. Your client Alice emails you the (unprotected) Word document of a draft contract that has been prepared by Bob's lawyer. Alice says that on Monday, May 1, she and Bob agreed to the major "deal points" in the draft contract. She has looked over the draft and is satisfied that those deal points are accurately set forth, but she's not sure about certain other provisions in the draft contract. She asks if she and Bob can meet in your office late this afternoon to sign the contract.

2.  The signature blocks of the contract include the term, "Date: May 1, 2017"; otherwise, you see no changes worth holding up the deal for.

QUESTION: Which of the following actions would you recommend to Alice as the MOST sensible for you to take to get the contract signed TODAY?

A.  Contact Bob's lawyer and ask that he change the date-signed term and resend the Word document to you.

B.  Open the Word document; change the date-signed term to May 9; print out hard copies for signature; and email Bob's lawyer to advise that you changed the date-signed term.

C:  Print out hard copies of Bob's Word document and make a pen-and-ink change to the date-signed term, then have Alice and Bob each initial and date the change.

D.  Have Alice sign the document with the May 1 date-signed term.

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Answer: B. Any of these options would work in a pinch, but the question was which one would be the most sensible.

29 Baby, it's you: Most favored customer

FACTS:

1.  You represent Alice, a product vendor. Alice is negotiating a long-term sales agreement with Bob, a large customer—think, Tilman Fertita in the TV show "Billion Dollar Buyer."

2.  Bob's draft of the sales agreement includes a provision that: (i) represents and warrants that Alice has not given any other customer any better terms than those of the draft sales agreement, and (ii) requires Alice (x) to report to Bob any future deals in which she gives another customer better terms and (y) to give Bob, on a going-forward basis, the benefit of those better terms.

TRUE OR FALSE: In these circumstances, there's probably no need to try to revise or delete this provision.

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Answer: False. Most-favored-customer clauses can be both burdensome and dangerous.

30 When is reasonable reliance required

FACTS: Alice bought $1 million of widgets from Bob. She is suing him for breach of warranty and for misrepresentation because he allegedly statements about the widgets that allegedly turned out not to be true.

QUESTION:

QUESTION: Of the following causes of action, which (if any) require Alice to prove that she reasonably relied on Bob's alleged statements?

A.  Breach of warranty

B.  Misrepresentation

C:  Both A and B

D.  Neither A nor B

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Answer: B.

31 Shorter questions

32 CPI definition

QUESTION: What if anything is wrong with the following:

"Consumer Price Index" or "CPI" refers to an index of the variation in prices paid by consumers for retail goods.

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Answer: It's insufficiently specific — which index?

Also: Is there even a need for a CPI definition in the agreement?

33 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?

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Answer: Three things, possibly four:

  1. Consider how nose-hair trimmers are used: Is it likely that Buyer will even know, within 30 days after delivery, that the motors don't have the warranted service life of 100 hours? If not, then in reality, how valuable is this warranty to Buyer?
  2. Suppose that the motors consistently fail at 50 hours of service life. Will that even matter to Buyer?
  3. The "one hundred (100) hours" phrase violates the D.R.Y. principle –— it should be rewritten as just "100 hours."
  4. Buyer might prefer that Seller make the warranty not just to Buyer, but also to Buyer's customers; that way, a customer could clearly sue Seller directly for breach of warranty, even in a jurisdiction that would otherwise have required privity of contract between the customer and Seller before the customer could sue for breach of warranty.

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 the the Common Draft implied-warranty disclaimer language, 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?

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Answer: Buyer's lawyers would not want to add a disclaimer of implied warranties that would benefit Seller.

In the U.S., suppose that a draft contract for the sale of goods doesn't include a proper disclaimer. In that situation, the seller, if dealing regularly in that type of goods (see UCC § 2-104), would be deemed, under UCC § 2-314, to have made the implied warranty of merchantability. Thus, if the purchased electric motors were to have problems, this implied warranty by Seller might very well give your client Buyer some extra leverage.

Here, it seems that Seller's contract drafter screwed up by failing to include a proper disclaimer. It's not your job to fix that mistake, at least not when doing so might later disadvantage your client Buyer.

34 Payment terms

QUESTION: What if anything is wrong with the following provision? (Assume that other issues are satisfactorily addressed elsewhere.)

Buyer represents that it will pay Seller's invoices net 10 days.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: Points to note:

  1. The facts don't indicate which side you're representing! A seller would certainly love to be paid net 10 days, but a buyer might want (and indeed might need) more time to process invoices in its accounts-payable operation.
  2. This provision doesn't indicate when the ten-day period starts — at the invoice date (which Seller would love)? Or at the date of Buyer's receipt of the invoice (which Buyer would prefer)?
  3. This type of provision is not a representation, nor is it a warranty: it's a covenant and should be rewritten as "Buyer will pay [or, Buyer shall pay] Seller's invoices net 10 days."

35 Engineering work

QUESTION: What if anything is wrong with the following provision? (Assume that other issues are satisfactorily addressed elsewhere.)

The parties will agree on the specific engineering work to be done by Seller.

Decide on your answer, then click on the gray area below.
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Answer: Points to note:

  1. This might well be an agreement to agree, which in U.S. jurisdictions would very likely be unenforceable. If the agreement to agree was directed to a "material" term in the contract, then the (putative) unenforceability of the agreement to agree might jeopardize the enforceability of the entire contract.
  2. An agreement to negotiate in good faith might be enforceable, but it also might be cumbersome in operation, especially if the parties just want to get things done.
  3. The "best" solution might well be to include a "statement of work" in the contract — either that, or make the agreement a "master agreement" that expressly contemplates that the parties will separately enter into one or more statements of work.

36 Interest rate

QUESTION: What if anything is wrong with this provision? (Assume that the payment terms are adequately specified elsewhere.)

Past-due amounts will bear interest at 1.5% per month, compounded monthly, beginning on the day after the due date until paid.

Decide on your answer, then click on the gray area below.
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Answer: The answer comes in two parts:

  1. In all likelihood this provision is OK, at least in the U.S., because both the interest rate and the start date are within acceptable limits for the usury laws in the major U.S. jurisdictions.
  2. But first you'd want to know which side you were representing, because if you represented the paying party, you might want to object to paying interest at all (that's not uncommon for buyers with bargaining power).

37 Affiliate definition

QUESTION: What if anything is wrong with the following:

"Affiliate" means any entity that is controlled by a party; for this purpose, control means the power to direct the management of the entity.

Also: Does the agreement even need a definition of affiliate?

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Answer: Two things are wrong:

  1. The existing definition refers to a subsidiary, but the term affiliate normally refers not only to an entity's subsidiaries but also to its parent company or companies and to commonly-controlled companies.
  2. Expensive litigation has resulted from defining control of an entity as including the power to direct the management of the entity, because the definition is quite vague.

38 Indemnity: Liability shifting

FACTS:

  1. Alice and Bob, both residents of Houston, have entered into a contract under which Alice will paint Bob's house. Under the contract, Alice must indemnify Bob against certain third-party claims.
  2. One of Alice's workers accidentally injures a passerby on the sidewalk, Carol — who files a lawsuit against both Alice and Bob, claiming in part that Bob was negligent in maintaining the sidewalk and that this negligence contributed to Carol's injury.
  3. The contract's indemnity clause complies with the express negligence rule.

TRUE OR FALSE: Because of the indemnity clause in the contract between Alice and Bob, Bob can file a motion to be dismissed from Carol's lawsuit.

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Answer: False. Carol is a stranger to the contract between Alice and Bob; consequently, the indemnity clause doesn't affect Carol's right to claim that Bob was negligent.

39 Notice timing

Adapted from language in an actual contract: "Seller will notify Buyer at least 30 (THIRTY) days before the effective date of any price increase."

TRUE OR FALSE: This is an acceptable drafting style.

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Answer: False. Use just the digits — and, incidentally, it's really unusual to put the words in parentheses.

40 Who is a merchant?

TRUE OR FALSE: Under the Uniform Commercial Code, both buyers and sellers can be "merchants."

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Answer: True.

41 Attorney malpractice insurance: What type?

QUESTION: Attorney malpractice insurance is an example of a type of coverage that, in the business-insurance context, is normally referred to by this name:

A.  Client liability coverage

B.  Professional liability coverage

C:  Commercial General Liability coverage

D.  Umbrella coverage

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Answer: B. Professional liability coverage is sometimes referred to as Errors and Omissions, or "E&O"

42 Indemnitor reliability

FACTS: You represent Alice and are drafting a contract that she and Bob will enter into. The contract is to include an obligation for Bob to defend and indemnify Alice against certain third-party claims.

FILL IN THE BLANK: should also consider including, in the contract, a requirement that Bob acquire and maintain [BLANK] to increase the chances that enough money will be available to pay for Alice's defense and indemnity.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: Insurance.

43 Indemnity: You expect me to cover THAT?

QUESTION: Under the law in Texas (and some other places), if a contract provision requires Alice to indemnify Bob against the consequences of Bob's own negligence, that provision must be each of these two things or it will be unenforceable:

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: Express and conspicuous.

44 Amending a contract by substituting new text

QUESTION: An agreement can be amended by setting out the entire agreement anew, as modified; this is referred to as a|an [BLANK] agreement.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: Amended and restated.

45 Employment offer letters: Binding?

TRUE OR FALSE: A company's offer letter to a prospective employee could become a binding contract, depending on how the letter was worded.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: True.

46 Employment offer letters: Bad form?

TRUE OR FALSE: Most lawyers prefer to draft employment agreements in the form of a conventional-style contract; such lawyers regard letter agreements as being somewhat "bad form."

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: False; for example, the Sheryl Sandberg employment agreement is drafted in the form of a letter agreement.

47 Employment offer letters: Specific requirements?

QUESTION: In most U.S. jurisdictions, a contract drafted in the form of a letter agreement will be binding only if it meets certain specific requirements that don't apply to conventional-style contracts.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: False.

48 Letter agreements

QUESTION: A contract could be drafted in the form of a signed letter from one party to the other, to be countersigned by the other party.

49 Material breach – calling it out

QUESTION: For a contract provision to be considered "material," the contract normally must so state.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: False.

50 "Acknowledge" language in a contract

FACTS: A contract between Alice and Bob states that Alice "acknowledges" Bob's Assertion X.

QUESTION: In court, Alice might not be allowed to contest Assertion X.

51 Notarizing: Two types

QUESTION: Name the two basic forms of "notarizing" a document in the U.S.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: Acknowledgment and jurat. (Someday it might be important to know the difference between the two.)

52 Notarizing an affidavit

QUESTION: An affidavit to be used in court will normally require an acknowledgement certificate signed by a notary public or other authorized officer.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: False. An affidavit would normally require a jurat, not an acknowledgement.

53 Notary self-help

QUESTION: A notary public ordinarily is allowed to "notarize" a document in which he or she is also the signer of the document.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: False. Certainly in Texas and probably in other jurisdictions, a notary public is not allowed to notarize anything in which the notary has an interest.

54 Contract signature by outside counsel?

QUESTION: Professor Toedt thinks it would normally be OK for outside counsel to sign contracts on behalf of a client.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: False. In a dispute about the contract, the signers will often be deposed, and an outside counsel won't want to have that happen — not least because it might preclude her and her firm from representing the client in the dispute, which might really displease the client and open the door for the replacement counsel to take over even more work from the client.

55 Limited partnership signature by general partner?

QUESTION: A general partner of a limited partnership has actual authority to sign a contract on behalf of the limited partnership. 

56 Limited partnership signature by limited partner?

QUESTION: A limited partner of a limited partnership, acting in that capacity, has actual authority to sign a contract on behalf of the limited partnership. 

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: False. Not only does the limited partner not have authority to bind the limited partnership: signing the contract could be evidence that the limited partner was in fact functioning as a general partner by being involved in the management of the limited partnership.

57 Limited partnership signature through power of attorney?

QUESTION: An individual of legal age who holds a written power of attorney from a limited partnership, authorizing that individual to sign a specific contract (or contracts generally) on behalf of the limited partnership, has actual authority to bind the limited partnership to that contract.

58 Limited partnership signature by all limited partners?

QUESTION: A power of attorney, giving someone the authority to sign a contract on behalf of a limited partnership, can be signed by all of the limited partners in lieu of being signed by a general partner.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: False.

59 Limited partnership officers

QUESTION: Under Texas law, a limited partnership can have one or more officers, who might have at least apparent authority to bind the limited partnership to a contract.

60 Limited partner as limited-partnership officer

QUESTION: An officer of a limited partnership who also owns a limited-partnership interest in the limited partnership can sign a contract on behalf of the limited partnership.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: True. The officer will want to be explicitly clear, in his or her title in the signature block, that he or she is signing as an officer and NOT as a limited partner.

61 Contract signature by inside counsel

QUESTION: Professor Toedt thinks it would normally be OK for an in-house counsel in a company's legal department to sign a contract on behalf of another department in the company.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: False. This might well be OK for legal department contracts such as Westlaw- or Lexis-Nexis subscriptions, but for company-politics purposes, an in-house counsel will want someone from the appropriate department to be the signer for that department's contracts.

62 Reps and warranties: Synonyms?

QUESTION: The terms warranty and representation are basically synonyms.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: False. The two terms are somewhat similar but can have very distinct proof requirements and legal consequences.

63 Strategy for warranting parties

FACTS: You're drafting a contract for your client Alice; AND: As part of the deal, Alice is to warrant something to Bob.

QUESTION: You'll normally want to use the phrase, "Alice represents and warrants," instead of just, "Alice represents."

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: False. A party being asked to warrant something will pretty much always want to consider carefully, on a case-by-case basis, whether to represent it or to warrant it.

64 Warranties: Ipsissimis verbis?

QUESTION: A contract provision can have the same legal effect as a warranty even if the provision doesn't use the word warranty.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: True. See UCC § 2-313(2).

65 Passive voice problem

QUESTION: An apartment lease agreement states (in part): "The apartment shall be regularly serviced by a professional pest-control service." This is an example of a|an [TWO WORDS] (not "passive voice"):

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: False imperative.

66 Termination of Agreement: Is that the best choice?

QUESTION: It's generally OK for a contract to provide for termination of specific rights and obligations instead of for termination of the contract itself.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: True. Professor Toedt in fact prefers the first-mentioned approach.

67 Employment agreement salary frequency

FACTS: You're drafting an employment agreement for a salaried employee. The parties have agreed on the starting salary, and you've been instructed to put that starting salary into the agreement.

QUESTION: You'll want to state that the salary will be paid:

A.  Monthly

B.  Biweekly

C:  Per the company's standard payroll procedures

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: C. The company won't want to have to make special arrangements to pay just one employee; that would be burdensome and might result in extra expense.

68 Employment duration

QUESTION: In nearly all U.S. jurisdictions — unless the employer and employee agree otherwise, or a statute provides otherwise — an employee's employment by a company will be:

A.  at will

B.  month-to-month

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: A.

69 You get what you …

QUESTION: You get what you [BLANK], not what you expect.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: INspect.

70 Do, or do not; there is no try

QUESTION: This category of contract provision is a promise or commitment to do something, or possibly not to do something.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: Covenant

71 If I'm wrong about this ….

QUESTION: This category of contract provision is a promise to pay the other party's damages (or take other specified action) if a statement about a past-, present-, or future fact proves incorrect.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: Warranty

72 Hold harmless means what?

QUESTION: In most U.S. jurisdictions "hold harmless" is treated as a synonym for this type of contract term.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: Indemnify or indemnity

73 Background section displaces this

QUESTION: This archaic introductory section of a contract has been replaced, in modern drafting, by the "Background" section.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: Whereas clauses.

74 Maybe you can be one of us ….

QUESTION: This three-word phrase can be used to cause an external document to be treated as part of a contract.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: Incorporate by reference

75 Attorney fees in Texas: Who d'ya gotta be?

QUESTION: Under Texas law, when a plaintiff successfully asserts a contract claim against a  defendant, if the plaintiff wishes to recover its attorney fees under Tex. Civ. Prac. & Rem. Code sec. 38.001, the defendant must be a[n] [BLANK] or a[n] [BLANK].

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: Individual or corporation

76 Attorney fees: The American Rule

QUESTION: Under the so-called "American rule," this party can recover its attorney fees if it prevails in contract-related litigation if the contract does not say otherwise:

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: Neither party.

77 Covenant, or condition, or something else?

QUESTION: Other things being equal: If a contract provision could be construed as either a covenant or a condition, a U.S. court will normally prefer to construe the provision:

A.  As a covenant

B.  As a condition

C:  No preference between covenant and condition—whichever is supported by the parol evidence

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: A

78 Contract interpretation: Evidence

QUESTION: Testimony and documents concerning the parties' course of dealing, offered in court to support a party's preferred interpretation of a contract provision, would be considered [BLANK] evidence.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: Parol

79 Parol evidence: When is it relevant?

QUESTION: In the U.S., courts generally will look to parol evidence to interpret a contract provision only if the provision is [BLANK]:

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: Ambiguous.

80 Arising out of vs. relating to

QUESTION: Which version of this forum-selection language would be the broadest?

A.  Any litigation arising out of this Agreement is to be brought in Houston, Texas.

B.  Any litigation arising out or relating to this Agreement is to be brought in Houston, Texas.

C:  Any litigation arising out of or relating to this Agreement or any transaction or relationship resulting from it is to be brought in Houston, Texas.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: C

81 Termination upon bankruptcy

FACTS: On behalf of your client Alice, you are reviewing a draft contract prepared by the attorney representing Bob. The draft includes the following provision: "Bob may terminate this Agreement if Alice files for protection under the bankruptcy laws."

QUESTION: This provision will generally not be enforceable in the United States.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: True. A bankruptcy court might allow Bob to terminate the agreement, but normally such "ipso facto clauses" are unenforceable under U.S. bankruptcy law.

REVISED 2017-05-02

82 Mediation of disputes – binding?

QUESTION: Unless the parties agree otherwise, mediation is normally binding.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: False. Contrast this with arbitration, which normally is binding unless the parties agree otherwise.

83 Arbitration of disputes – binding?

QUESTION: Unless the parties agree otherwise, arbitration is normally binding.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: True. Contrast this with meditaion, which normally is not binding unless the parties agree otherwise.

84 Mnemonic: A.T.A.R.I.

QUESTION: What does Professor Toedt mean by "A.T.A.R.I."?

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: Avoid The Argument — Rewrite It!

85 Mnemonic: A.T.P.

QUESTION: What does Professor Toedt mean by "A.T.P."?

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: Ask The Partner

86 Mnemonic: F.R.I.L.L.

QUESTION: What does Professor Toedt mean by "F.R.I.L.L."?

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: First Refusal Is Last Look

87 Mnemonic: R.O.O.F.

QUESTION: What does Professor Toedt mean by "R.O.O.F."?

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: Root Out Opportunities for F…ups

88 Mnemonic: W.I.D.D.

QUESTION: What does Professor Toedt mean by "W.I.D.D."?

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: When In Doubt, Define!

89 An unrestricted right to unilaterally amend

QUESTION: If a contract provision gives Alice the right to unilaterally amend the contract but does not put certain limits on that right, then the entire contract might be unenforceable because it is "ill" in this way:

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: Illusory.

90 Can liability for fraud be disclaimed?

QUESTION: An entire-agreement provision, by itself, won't preclude an aggrieved party from claiming misrepresentation unless the entire-agreement provision includes a disclaimer of this:

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: Reliance

91 Specifying the location for litigation

QUESTION: A drafter whose client didn't have superior bargaining power might not want to include this type of provision, stating where any litigation may (or must) take place:

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: Forum selection

92 Promises to reimburse

QUESTION: This type of contract provision is a promise to reimburse a person for any harm the person might suffer from a stated event.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: Indemnity obligation

93 Limitation of liability

QUESTION: If a drafter had is or her "thinking cap" on, he or she could draft this type of limitation of liability (A) as "one size fits all," or (B) as separate limitations for different categories of events.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: Damages cap

94 Excluded damages: Cover charges

QUESTION: In some vendors' contract forms, the list of excluded damages will sometimes include (that is, exclude) this category of damages, of which one of the examples in UCC art. 2-715 is "commercially reasonable charges, expenses or commissions in connection with effecting cover …."

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: Incidental

95 Representations in time

QUESTION: A representation is a statement about facts in this time frame:

A.  Past only

B.  Present only

C.  Future only

D.  Past or present but not future

E.  Past, present, or future

F.  Present or future but not past

G.  Past or future but not present

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: D

96 Reps and warranties: Who on earth would want both?

QUESTION: In a normal purchase-and-sale contract, this party will normally want to think about whether a particular statement should be a representation or a warranty (the other party will want it to be both).

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: Seller

97 Semi-unique remedies for misrepresentation

QUESTION: In a contract case, if Alice successfully proves the elements of misrepresentation, she might be entitled to one or both of these two remedies that might not otherwise be available to her:

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: Punitive damages and rescission

98 Remedies: Unwinding the deal

QUESTION: This remedy for breach of contract — seldom granted unless the contract itself provides for it — basically "unwinds the deal."

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: Rescission

99 The 35-day month

QUESTION: The former CEO of software giant Computer Associates spent nearly ten years in federal prison for engaging in this "35-day month" contract-signing practice to falsify quarterly financial statements.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: Backdating

100 Interpretation: Tie goes to the non-drafter

QUESTION: Under the rule of contract interpretation known by this Latin phrase, an ambiguity in a provision is resolved against the party that drafted the provision — IF other rules of interpretation don't provide a resolution.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: Contra proferentem

101 Apples, peaches, and pears, oh my!

QUESTION: Under the rule of contract interpretation known by this Latin phrase, if a contract term says "food, including apples, peaches, and pears" then a court might limit the term "food" to fruits.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: Ejusdem generis

102 New material (Nov. 2017)

103 Reaction to a bad contract provision

FACTS: For a client, you're reviewing a contract drafted by The Other Side. Your client does not have much bargaining power and would really like to see this contract signed. You see a provision that outrages you.

QUESTION: What should be your first action?

A.  Delete the provision.

B.  Put yourself in The Other Side's shoes and ask what problem they were trying to solve.

C:  Revise the provision to make it acceptable to your client.

D.  Accept the provision and advise your client about it.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: B. If you think about why The Other Side included the provision, it might give you insight into possible changes that The Other Side would go along with.



A.
Select this:
B.
Select this:
C.
Select this:
D.
Select this:
Commentary:

104 Facebook and the Winklevii

QUESTION: What connection does / did the Winklevoss twins have for Facebook?

A.  One of the twins is a member of Facebook's board of directors.

B.  They were the first two computer programmers hired by Facebook.

C:  They're connected to Google, not Facebook.

D.  Facebook paid them USD $65 million to settle their claim that company founder Mark Zuckerberg stole their ConnectU idea while all were students at Harvard.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: D. The lesson here is that startup-company founders should carefully consider whether any individuals or other companies might be able to claim an ownership interest in the company itself or its intellectual property.

105 Insurance-policy types

FACTS: Alice buys a professional-liability insurance policy for her new consulting business. Unfortuntely she is unable to attract enough work to support herself, so a few months later she shuts down the business; allows her insurance policy to lapse by not paying premiums; and takes a full-time job working for a company. ¶ Months later, but still within the relevant statute-of-limitations period, she is sued for malpractice by one of her former clients. The former client's claim would clearly have been covered by Alice's insurance policy if Alice had not allowed the policy to lapse.

QUESTION:

QUESTION: Of the two types of insurance policy — claims-made and occurrence — which would cover the claim against Alice even after cancellation of the policy?

A.  Only a claims-made policy.

B.  Only an occurrence policy.

C:  Neither.

D.  Both.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: B

106 Clause phrasing

You are drafting a contract between

1.  your client Alice, and

2.  Bob, who owns a sole-proprietorship yard maintenance company that employs a number of workers. Under the contract, Bob's workers are to replace the sod in Alice' front yard, but Bob won't be personally doing any of that work — and the contract will be between Alice and Bob, not Alice and Bob's workers.

QUESTION: How can you phrase this obligation so that it's clear that Bob is responsible for making this happen, without making it a false imperative?

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: Have the contract say something along the lines of: Bob will cause Alice's sod to be replaced ….


FILL IN THE BLANK:
Answer:

107 Nickname for a "this is acceptable" provision

A lease agreement 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 xxxx-yyyyyy provision.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: Safe-harbor


FILL IN THE BLANK:
Answer:
Reading

108 Partnership creation

QUESTION: A partnership can be created without the partners even knowing it.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: True.


TRUE OR FALSE:
Answer:
Reading

109 Termination for convenience

You are negotiating a contract for your client Alice. The contract states that the other party, Bob, may terminate the contract for convenience.

QUESTION: Name at least three kinds of fences that you might want to try to put around Bob's right to terminate for convenience.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: 1) Earliest termination date; 2) latest termination date; 3) Bob may not terminate before Alice has achieved specified goals (e.g., revenue targets) to recoup her investment; 4) early-termination fee (possibly scaled down over time).

110 Condition subsequent

QUESTION: What is a two-word colloquial synonym for "condition subsequent"?

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: Escape clause (or, exception). "A condition subsequent is a condition referring to a future event, upon the happening of which the obligation becomes no longer binding upon the other party, if he chooses to avail himself of the condition." Community Health Sys. Prof. Servs. Corp. v. Hansen, No. 14-1033, slip op. at 11 (Tex. June 16, 2017) (citation and internal quotation marks omitted).

111 "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."

QUESTION: Professor Toedt regards the "provided …" as an acceptable form.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: False. The term "provided that …." is commonly used in wall-of-text provisions but should be avoided in favor of breaking up the sentence and even the paragraph. ¶ This clause could be turned into a table, but it's short enough not to be worth bothering. ¶ 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) If no later than December 25: $100."

112 Use of other contract provisions in interpretation

TRUE OR FALSE: Parol evidence for interpreting Provision A of a contract can include the text of Provision B of the same contract.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: False. This isn't parol evidence, which is generally considered to be evidence outside the four corners of the contract itself — which of course could include attachments, exhibits, and the like as well as any documents incorporated by reference.

113 Termination with or without cause

FACTS:

  1. A contract between Alice and Bob allows Alice to terminate both (i) for cause and (ii) only during a specified time frame, without cause.
  2. Alice must give Bob written notice of either form of termination.
  3. Texas law applies.

TRUE OR FALSE: In the above contract, Alice must still have a good-faith reason for terminating without cause, otherwise she will be in breach of contract if she so terminates.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: False — under Texas law:

When a contract provides expressly that it is subject to termination upon notice, the general rule is that each party to the contract has the legal right to cancel the contract. The parties bargained for the flexibility of terminating the contract upon tender of the requisite notice. Neither party should be denied the benefit of its bargain.

Community Health Sys. Prof. Servs. Corp. v. Hansen, No. 14-1033, slip op. at 14-15 (Tex. June 16, 2017) (cleaned up), quoting Juliette Fowler Homes, Inc. v. Welch Associates, Inc., 793 S.W.2d 660, 665 (Tex. 1990).

114 Assignment of agreement w/ state agencies

TRUE OR FALSE: In contracts between state-government entities and their contractors, it's not unusual for a contract to prohibit the contractor from assigning the contract without the prior written consent of the government entity.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: True.

115 Assignment of agreement: Statutes

FILL IN THE BLANK: Name one state that has a statute prohibiting contractors from assigning their agreements with state agencies without the agency's consent.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

One answer: New York State Finance Law § 138 (link)

116 Assignment of agreement: Mergers, etc.

FACTS:

  1. Your client, a small corporation, previously entered into a contract that prohibits each party from assigning the contract without the other party's consent.
  2. Your client is about to be acquired by one of its larger competitors; the acquisition is to take place by a statutory merger of your client and a newly-created subsidiary of the larger competitor.

QUESTION: Name two factors that To what How much does it matter whether the "roll-up" would take the form of (i) an asset purchase, or (ii) a merger?

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: That might depend on:

  1. the applicable state law — in some jurisdictions, a merger is deemed to cause a transfer of assets to the surviving company, which would trigger the consent requirement; and
  2. whether the contract

117 Assignment consent: Protection

FACTS:

  1. You represent Alice's company and are reviewing a contract prepared by Bob's attorney.
  2. The draft agreement precludes Alice's company from assigning the agreement without Bob's prior written consent.
  3. You're aware that Alice's company might be seeking venture-capital financing in the near future.

QUESTION: What

Name at least two ways — other than just saying "no" — in which you might reduce Alice's business risk from the assignment-consent provision.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: In negotiating the contract, you could ask:

  1. for an exception in the case of a transfer of all assets of Alice's company's business to which the contract is related; and/or
  2. for a requirement that the consent not be unreasonably withheld, together with a fast-track arbitration provision.

118 Signing a contract

FACTS:

1.  Morticia Addams is a limited partner of Addams Investments, L.P., a "family" limited partnership (the "Partnership").

(B) The Partnership is entering into a contract with a new investment advisor so that the advisor can manage some of the Partnerhip's financial portfolio.

(C) Morticia is in town, but the rest of the family is in Europe for a wedding.

-1 T/F: From the Partnership's perspective, there'd be little legal risk associated with having Morticia sign the contract on behalf of the Partnership in her capacity as a limited partner.

Decide on your answer, then click on the gray area below.
Be prepared to explain your answer.

Answer: False: Morticia should not sign in her capacity as a limited partner.

-2 T/F: As attorney for the Partnership, you should not concern yourself with whether Morticia's signing the contract would be a good idea from her perspective.

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Answer: Technically you represent the Partnership only, but in this type of situation, as long as there's no conflict of interest, it's a good idea to keep an eye out for the interests of the partners as well.

119 Signing a contract

FACTS:

(A) Alice Alpha, a lawyer, signs a contract on behalf of her client Allen Able, who is out of the country on an extended business trip.

(B) Before Allen left, he signed and gave Alice a written power of attorney designating Alice as Allen's attorney-in-fact for purposes of signing the contract.

(C) In the contract, Alice's signature block reads as follows: "Allen Able, by Alice Alpha, attorney-in-fact."

-1 T/F: Under these circumstances, this is a sensible way for Allen and Alice to do the needful.

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Answer: This would work, but Alice probably would prefer not to sign on behalf of Allen (let the client sign it and take whatever heat might come later).

-2 T/F: Alice should attach a copy of the power of attorney to the contract.

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Answer: Not mandatory, but might be a good idea.

-3 T/F: Alice should keep a copy of her power of attorney.

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Answer: Absolutely.

120 Contract interpretation

TRUE OR FALSE: Parol evidence can be used to show that a seemingly-unambiguous contract is in fact ambiguous.

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Answer: False. "An unambiguous contract will be enforced as written, and parol evidence will not be received for the purpose of creating an ambiguity or to give the contract a meaning different from that which its language imports." David J. Sacks, P.C. v. Haden, 266 S.W.3d 447, 450 (Tex. 2008), quoted in Community Health Sys. Prof. Servs. Corp. v. Hansen, No. 14-1033, slip op. at 9 (Tex. June 16, 2017).

FACTS: (A) Alice sues Bob for breach of contract. (B) The facts are not in dispute; what is in dispute is the meaning of a particular term in the contract. (C) The court rules that the disputed term unambiguously means what Bob says it means. TRUE OR FALSE: Summary judgment in Bob's favor is appropriate.

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Answer: True. See, e.g., Lopez v. Munoz, Hockema & Reed, L.L.P., 22 S.W.3d 857, 862 (Tex. 2000), quoted in Community Health Sys. Prof. Servs. Corp. v. Hansen, No. 14-1033, slip op. at 9.

121 Termination of employment agreement

TRUE OR FALSE: A contract can provide that it is terminable without cause during one time period and is only terminable for cause at another time.

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Community Health Sys. Prof. Servs. Corp. v. Hansen, No. 14-1033, slip op. at 10 (Tex. June 16, 2017).

FACTS: A contract between Alice and Bob allows Alice to terminate both for cause and (only during a specified time frame) without cause; either form of termination written notice. TRUE OR FALSE: If Alice wants to terminate without cause, her notice of termination must state the reason for termination, so as to be clear that the termination was not for cause.

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Answer: False. "[W]hen a party properly terminates a contract pursuant to a without-cause provision, the reason for the termination is irrelevant." Community Health Sys. Prof. Servs. Corp. v. Hansen, No. 14-1033, slip op. at 13 n.6 (Tex. June 16, 2017) (extensive citations omitted).

TRUE OR FALSE: In the above contract, Alice must still have a good-faith reason for terminating without cause, otherwise she will be in breach of contract if she so terminates.

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Answer: False, at least under Texas law.

122 :OMIT:

In a contract between Alpha and Bravo: "Alpha's employee benefit plan will recognize the service of the Employee …."

"Company is to use its reasonable best efforts to [do some things]."

"Company will cause its employee benefit plan to recognize the Covered Employee's service; provided that the recognition of service will not duplicate any benefits of another plan with respect to the same period of service …."

"Financial Statements" means the income statements, balance sheets, cash flow statements, and statements of stockholders' equity for the 20XX and 20XY year ends as audited by Debit & Credit LLP."

"The term 'Affilate' refers to an individual or organization that is controlled by another individual or organization."

"Alice may terminate this Agreement, by giving Bob written notice, if Bob breaches this Agreement."

Alice and Bob enter into a contract under which Alice will sell her laptop computer to Bob. The contract contains the following definition: "CPI refers to the All Items Consumer Price Index for All Urban Consumers (CPI-U) for the U.S. City Average as published by the U.S. Bureau of Labor Statistics." Comments?

Alice sues Bob for breach of contract. The contract says in part: "Any litigation arising out of this Agreement must be brought exclusively in the courts of Texas." Bob removes to federal court.

QUESTION: What is very likely to happen?

123 Contract formation

FACTS:

(A)  Seller regularly sells generic widgets. Buyer regularly buys widgets and incorporates them into, among other products, the pottery wheels that are manufactured and sold in Buyer's factory.

(B)  Buyer sends Sally Sales Rep a purchase order for 10,000 widgets at stated price- and delivery terms.

(C)  The P.O. contains a lot of detailed fine print — including a provision in which the seller warrants that the seller's goods will be fit for the purpose for which Buyer's customers use Buyer's goods; the P.O. doesn't identify those goods and Seller doesn't know that Buyer has pottery wheels in mind.

(D)  On the front, the P.O. says, in big bold letters, that the seller must sign the P.O. and return it with the ordered goods; the P.O. also says (i) that shipment constitutes acceptance of the terms, and (ii) that Buyer rejects any additional or inconsistent terms in any sales confirmation or other document that Seller provides.

(E)  Sally sends a copy of the P.O. to Seller's fulfillment department and tells them to ship the 10,000 widgets as specified in the P.O., but Sally doesn't sign or return the P.O.; Seller invoices Buyer for the stated price.

QUESTION: Was a binding contract formed? Why or why not?

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Answer: Yes: The P.O. was an offer that could be — and was — accepted by performance. (Hint: This is Contract Law 101.)

QUESTION: If a binding contract was formed, is the fit-for-Buyer's-customer's purpose warranty provision part of the contract? (Hint: This is Contract Law 101.)

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Answer: Probably, for the same reason as above.

ALTERNATIVE FACTS: Seller doesn't ship the widgets, but instead sends back a "sales confirmation" form with Seller's own version of detailed fine print, including a conspicuous, legally-adequate disclaimer of all warranties, express and implied. Buyer then cancels the order, which shocks and disappoints Seller.

QUESTION: Was a binding contract formed? Why or why not? If yes, is the fit-for-purpose warranty provision part of the contract? (Hint: This is Contract Law 101.)

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Answer: No: This is a Battle-of-the-Forms situation; Seller's sales-confirmation form materially altered the terms, and the parties didn't conduct themselves in a manner that recognized the existence of a contract, so no contract. See UCC § 2-207.

ALTERNATIVE FACTS: Seller ships the widgets and includes with the shipment the sales confirmation form mentioned in the previous paragraph, but Seller does not sign or return the purchase order.

QUESTION: Was a binding contract formed? Why or why not? If yes, what are the warranty terms of the contract? (Hint: See Battle of the Forms.)

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Answer: A contract hasn't been formed yet; it depends on whether Buyer accepts the widgets (and, possibly, on whether Buyer pays Seller's invoice). See UCC § 2-207.

ALTERNATIVE FACTS: Seller signs and returns the purchase order.

QUESTION: Was a binding contract formed? Why or why not? If yes, what are the warranty terms of the contract?

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Answer: A contract has indeed been formed; the warranty terms are those in Buyer's P.O. form.

124 Exercise: Shall, will, must, etc.

QUESTION: In your small groups, discuss which of the following Professor Toedt thinks is not a good choice:

A. Bob will pay Alice $1,000 no later than December 24.

B. Bob shall pay Alice $1,000 no later than December 24.

C. Bob must pay Alice $1,000 no later than December 24.

D. Bob is to pay Alice $1,000 no later than December 24.

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Answer: B. In some English-speaking countries, shall might be regarded as optional; moreover, will is friendlier-sounding.

125 Ambiguity: Pricing term extension

FACTS:

1.  A supply contract between Provider and Customer includes a price schedule that is to be effective for one year, expiring December 1 (the "Pricing Term"), but Customer can extend the Pricing Term once, for one more year.

2.  The extension provision says: Written notice of extension of the Pricing Term must be given no later than 30 days before its then-current expiration date. The contract does not contain any other relevant notice provision.

3.  On October 31, Customer mails Provider a written notice of extension by certified mail, return receipt requested. A week later, Customer receives back the "green card" from the U.S. Postal Service confirming receipt by Provider on November 2.

4.  Provider later tells Customer that the Pricing Term expired and that Provider's prices will increase to Provider's published list prices.

QUESTION: Has Customer effectively extended the Pricing Term? Why or why not?

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Answer: Arguably not; it depends on whether notice is "given" when mailed or when received.

126 Ambiguity: Vacating the premises

CLAUSE: Tenant will completely vacate the Premises no later than 12 midnight on December 15, 20x0; Tenant's failure to do so will be a material breach of this Agreement.

EXERCISE: Rewrite this to make it clear that if Tenant remains on the premises at 10:00 a.m. on December 15, it will be in breach.

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Answer: Tenant will completely vacate the Premises no later than 12 midnight at the beginning of December 15, 20x0; Tenant's failure to do so will be a material breach of this Agreement.

127 CPI choice

FACTS:

  • You represent Buyer in negotiating a long-term master purchase agreement with Seller.
  • You draft a price-increase clause that limits Seller's permissible price increases to no more than the increase in CPI (and no more than once a year as well).
  • A year later, Seller says it is increasing its price by the percentage stated in a particular CPI published by the U.S. Government for the specific industry in which Seller and Buyer operate. You hadn't known there even was such a thing.
  • Your client Buyer angrily tells you that Seller's price increase must be limited to the (much-lower) increase in the "regular" CPI, namely CPI-U, US City Average, All Items, 1982–1984=100.

QUESTION: On these facts, how might a court rule on Buyer's claim that Seller's price increases must be limited to the increase in CPI-U and not to the increase in the special CPI?

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Answer: Chances are that the court would rule in favor of Seller, because you (on behalf of Buyer) drafted the price-increase provision.

128 Warranty disclaimers in England

FACTS:

  • Your client, Seller, headquartered in Dallas, manufactures widgets.
  • Seller's CEO, while on a vacation in London, had the good fortune to make friends with a prominent British industrialist; the CEO landed a big order to deliver 1 million widgets to the industrialist's company in Liverpool, and brought back a signed purchase order.
  • You happen to know that Seller's standard terms-of-sale document:
    • includes a statement of limited warranties and remedies;
    • includes the following statement: "ALL OTHER WARRANTIES ARE DISCLAIMED"; and
    • is silent about choice of law.
  • You don't know whether the British industrialist's company has seen Seller's standard terms-of-sale document.

QUESTIONS:

TRUE OR FALSE: Texas law will likely apply. (Be prepared to explain your answer.)

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Answer: False: On these facts, English law will probably apply, because the .

TRUE OR FALSE: If article 2 of the Texas Uniform Commercial Code applies, Seller's disclaimer will be enough, under UCC § 2-312, to disclaim an implied warranty that Seller has the legal right to convey ownership of the widgets to the purchaser. (Be prepared to explain your answer.)

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Answer: False: Under UCC § 2-312(2), the implied warranty of title must be expressly disclaimed (or the disclaimer must be apparent from the circumstances).

TRUE OR FALSE: If English law applies, Seller's disclaimer will likely be enough to disclaim all potential liability about the widgets other than as stated in Seller's standard terms-of-sale document. (Be prepared to explain your answer.)

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Answer: False — Seller would need a disclaimer of implied conditions and (probably) terms of quality as well.

QUESTION: Could Seller's disclaimer language be improved? How?

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Answer: Yes – see, e.g., the Common Draft disclaimer of implied warranties.

129 Question: Reps and warranties strategy

FACTS: You've passed a bar (exam) and are a licensed attorney. As a favor to a friend, you're helping the friend sell a car to a stranger. The friend says that s/he doesn't know of any mechanical problems with the car.

MORE FACTS: The buyer asks the seller to represent and warrant that the car has no problems.

QUESTION: how might you respond?

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Answer: Perhaps by having the seller say simply, "so far as I'm aware, the car has no significant problems, but I'm not a mechanic and haven't had a mechanic check it out."

EXPLAIN IF FALSE: From the seller's perspective, it's acceptable for the seller to phrase the statement as, "to my personal knowledge the vehicle has no problems."

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Answer: That'd be a bad idea — phrased that way, the statement is likely to be taken as a definitive statement that indeed there are no problems.

130 Review questions

QUESTION 1: Does a representation normally relate to:

(A) a past fact?

(B) a present fact?

(C) a future fact?

(D) all of the above?

(E) none of the above?

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Answer: A and B. In rare circumstances, courts will treat C, a representation of a future fact, as a covenant or warranty (in essence, bailing out the incompetent drafter), e.g., I represent that I will pay you Tuesday for a hamburger today. NOTE: For drafting purposes, treat A and B as the only correct answers.

QUESTION 2: What are the basic elements that a plaintiff generally must establish to succeed in a claim for misrepresentation?

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Answer: Here's the general "proof checklist" for an action for misrepresentation?

(a) A statement, made by the defendant;

(b) The statement was false or misleading when made;

(c) (With variations:) The defendant knew, or should have known, that the statement was false or misleading;

(d) (With variations:) The defendant knew, or should have known, that the plaintiff would rely on the statement;

(e) The plaintiff did in fact rely on the statement;

(f) The plaintiff's reliance was reasonable; and

(g) The plaintiff suffered damage attributable to the statement.

QUESTION 3: Should factual representations normally be included in an agreement's recitals? Why or why not?

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Answer: This is a matter of convention – like It's not customary to include factual representations in the recitals. It might also be dangerous to do so: If memory serves, in some jurisdictions the courts might not treat the recitals as part of the contract.

The safer thing to do would be to rework the recitals as a "1. Background" section and have the parties make whatever initial representations they're willing to make.

131 Indemnity: Basic questions

QUESTION 1: How does an indemnity relate to a warranty?

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Answer: An indemnity is a reimbursement; a warranty is a promise to reimburse (i.e., indemnify) someone if a warranted state of affairs turns out not to be true.

QUESTION 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.)

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Answer: False — it doesn't reduce the risk, it allocates the risk.

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

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Answer: True.

QUESTION 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.

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Answer: False — it should be "Alice will indemnify Bob [i.e., future tense] …."

132 Indemnities: Duty to defend

SUGGESTED READING:

FACTS: Suppose that:

  • You draft an indemnity obligation that does not expressly require the subcontractor to defend your client, the general contractor, from claims, but merely obligates the subcontractor to indemnify the general contractor.
  • An employee of the subcontractor writes a letter to the general contractor, asserting a claim. Assume for this purpose that the employee's claim comes within the scope of the subcontractor's indemnity obligation.
  • The general contractor forwards the employee's letter to the subcontractor and demands that the subcontractor engage outside counsel to investigate the claim.
  • Texas law applies.

QUESTION 1: Must the subcontractor engage outside counsel for your client the general contractor?

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Answer: No, at least not technically; see this discussion. (But it might behoove the subcontractor to do so anyway — why?)

QUESTION 2: Would your answer be different if all of this were taking place in Los Angeles instead of Houston and California law applied? Cite the relevant authority.

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Answer: Yes — a California statute (Cal. Civ. Code § 2278(3))states that a contractual duty to indemnify another party includes a duty to defend unless the contract specifies otherwise.

133 Indemnity: The spontaneously-combusting widgets

FACTS:

  1. Alice manufactures electronic widgets. Each widget has a battery that is sealed into the widget and not replaceable.
  2. Bob manufactures electronic gadgets that include electronic widgets.
  3. Bob enters into a contract with Alice to buy electronic widgets from her.
  4. The contract includes, among other provisions:
    • a warranty that the widgets do not contain any defects in design or manufacture;
    • a provision requiring Alice to indemnify Bob against any harm Bob suffers from defects in the widgets; and
    • an exclusion of incidental- and consequential damages.
  5. Bob takes delivery of a large quantity of Alice's widgets and stores them in an appropriate storage room.
  6. 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. (Think: Hoverboards.)
  7. 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.

QUESTIONS:

1.  EXPLAIN IF FALSE: Alice is not required to 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.

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Answer: False — an indemnity obligation covers whatever it says it covers, which (as here) might extend to more than just third-party claims.

2.  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.

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Answer: Unclear. The indemnity obligation might override the exclusion of consequential damages — but it might be vice versa. (Can the two even be reconciled?)

3.  EXPLAIN IF FALSE: If Alice had negotiated the indemnity provision to cover only third-party claims, the provision likely would be enforceable.

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Answer: True.

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.

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Answer: Unclear. The indemnity obligation might override the exclusion of incidental damages — but it might be vice versa. (Can the two even be reconciled?)

134 Exercise: Defense against indemnified claims

  1. FACTS:

1.1  Alice's contract with Bob obligates her to reimburse Bob for his attorney fees and expenses in defending against certain third-party claims.

1.2  A third party, Carol, brings such a claim against Bob.

1.3  Bob hires Skadden Arps (a top NYC firm) to defend him against Carol's claim.

1.4  Alice has plenty of money to pay legal bills.

QUESTION: Speculate about what incentives might motivate Skadden in conducting Bob's defense.

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Answer: Skadden might be tempted to mount a gold-plated defense for its client Bob, knowing that it wouldn't be Bob who'd be paying the bills.

QUESTION: Name two ways that Alice, during negotiation of her contract with Bob, could have limited her financial exposure to Bob's cost of defending against Carol's claim.

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Answer: Alice could have: (i) insisted that she would control the defense, including hiring counsel of her choice; and/or (ii) capped her monetary liability for providing a defense.

2.  MORE FACTS:

2.1  Alice's contract with Bob also requires her to indemnify Bob against any monetary awards resulting from such third-party claims.

2.2  Bob neglects to mention to either Alice or Skadden that Carol had filed her third-party claim weeks before, and that when Bob failed to file a timely answer, Carol moved for and obtained a default judgment for a large amount of money.

QUESTION: Name two ways that Alice, during negotiation of her contract with Bob, could have limited her exposure to Bob's screw-up.

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Answer: Alice could have asked for the defense-and-indemnity provision to require Bob to give her notice of any indemnifiable event within X days after the event, failing which: (i) Alice would not be responsible for any harm resulting from the delay in notification, or even (ii) Alice would be entirely released from the defense-and-indemnity obligation.

3. ALTERNATE FACTS:

3.1  Alice's contract with Bob requires her to provide Bob with a defense, as opposed to reimbursing Bob for his defense expenses.

3.2  Alice engages her regular lawyer, Andy, to conduct Bob's defense against Carol's claim.

3.3  Bob finds that he and Andy don't get along so well.

QUESTION: During negotiation of the contract, what sort of clause could Bob have asked to be included in the contract to protect him against this uncomfortable situation?

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Answer: Bob could have asked for the defense-and-indemnity provision:

  • to allow him to hire separate monitoring counsel at his own expense, along with requiring Alice's counsel Andy to cooperate with Bob's monitoring counsel; and/or
  • to allow Bob to hire his own counsel to take over the defense in case of a conflict of interest or a fundamental disagreement about strategy — but then Alice would want to say, fine, but I'm off the hook if your lawyer loses the case.

4.  ALTERNATE FACTS:

4.1  It turns out that Alice can't afford to pay Bob's legal bills for defending against Carol's claim.

QUESTION: What if anything might Bob have done during contract negotiation to mitigate this problem?

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Answer: Bob could have asked for the contract to require Alice to maintain insurance to cover the defense costs.

135 Affiliate status via voting control

FACTS: ABC-Mexico S.A. owns 25% of the shares of voting stock of ABC-USA Inc.; the remaining shares are owned by various investors.

QUESTION 1: Under the Common Draft definition, does ABC-Mexico qualify as an Affiliate of ABC-USA?

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Answer: No — under the linked definition, Affiliate status depends on "control," and the Minimum Voting Percentage required for control is 50%. This means that ABC-Mexico doesn't own enough stock to control ABC-USA or vice versa — and, in turn, In turn, under this definition the two companies are not Affiliates.

(But the parties' agreement might contain other definitions of Affiliate.)

MORE FACTS: ABC-Mexico, which owns 25% of the voting stock of ABC-USA Inc., enters into voting agreements with the holders of an additional 28% of the voting stock of ABC-USA Inc.; under each voting agreement, ABC-Mexico is given an irrevocable proxy to vote the holders' shares of ABC-USA's stock.

QUESTION 2: Under the Common Draft definition, does ABC-Mexico now qualify as an Affiliate of ABC-USA?

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ANSWER: Yes: Under subdivision (c)(2) of the Common Draft definition, the voting proxies, plus ABC-Mexico's own stock ownership, give ABC-Mexico enough voting control to qualify as an Affiliate of ABC-USA.

That situation could change, however, if the proxies were to expire at some point — most proxies do — and were not renewed, extended, or replaced.

136 HTML export

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