Day-by-Day Class Plans: Contract Drafting Spring 2022

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

Updated Monday April 25, 2022 19:25 Houston time

The SYLLABUS sets out general information about this course.

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

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)

• [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. Detailed class plans

1.1. Class 01: Wed. Jan. 19

1.1.1. Introduction

  • Introduction of each student via Zoom chat.

1.1.2. Set up email list and Canvas, etc.

Please provide emails for a (private) Google Groups email list on the Group 1 virtual whiteboard at the group whiteboards (both classes):       • Group 1       • Group 2       •  Group 3       •  Group 4 (Caution: I will very likely “erase the whiteboards” after each class session, so be sure to copy anything you want to save). IMPORTANT: Please provide an email address that you check regularly. [I’ll be deleting the email addresses from the whiteboard when I transfer them to the Google Groups email list.]

Canvas setup: Self-enroll at https://canvas.instructure.com/enroll/LA8HCM — be sure to use your name so I can track progress and watch out for possible issues.

IMPORTANT: If you omit your name, you won’t show up on the Canvas roll-call page as being present in class, nor as having completed the homeworks and quizzes.

1.1.3. Ambiguity: To Mars!

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

1.1.4. Discussion: Selling a used computer

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

1.1.5. Read-along lecture

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

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

1.1.7. 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?

1.1.8. Ambiguity: Lohhh-lahhh 🎵

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: In your small groups:

  • Consider how that lyric line could be clarified. (Don’t worry about rhyme or meter.)
  • Choose a spokesperson for your group — I’ll call on a group quasi-randomly.

1.2. Class 02: Mon. Jan. 24

1.2.1. In the news: Retail center sale

From today’s Houston Chronicle (article by Katherine Feser): “Houston-based Fidelis Realty Partners acquired Shadow Creek Ranch, a 613,468-square-foot, H-E-B-anchored retail center at 2805 Business Center Drive in Pearland’s Shadow Ranch community. ….”

QUESTION: What kinds (plural) of contract documents are likely to be involved here?

QUESTION: What sorts of things might the different parties be concerned about?

Feel free to use 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)

1.2.2. Ambiguity: Once more into the breach ….

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

QUESTION: How could this be clarified?

1.2.3. Homework review - signature blocks

Each group is to choose a spokesperson for each question.

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

1.2.4. Reading review: Chapter 2

QUESTION: From Chapter 2:

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

Feel free to use the the group whiteboards (both classes):       • Group 1       • Group 2       •  Group 3       •  Group 4 (Caution: I will very likely “erase the whiteboards” after each class session, so be sure to copy anything you want to save)

1.2.5. In the news: Joint venture agreement

From today’s Houston Chronicle (article by Katherine Feser): “Houston-based Hicks Ventures signed a $100 million joint venture agreement with metropolitan Washington, D.C.-based Artemis Real Estate Partners to develop inpatient rehabilitation facilities and behavioral health hospitals nationwide. Hicks and its principals, Patrick Hicks, David Steidley and Larry Vaile, have completed more than $1 billion in healthcare development projects in the last 20 years. …”

QUESTION: What kinds (plural) of contract documents are likely to be involved here?

QUESTION: What sorts of things might the different parties be concerned about?

Feel free to use 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)

1.2.6. Drafting fail: Babies and dietary guidelines

From CNN (since changed): “New US dietary guidelines include babies and toddlers for first time” A friend posted a screen grab on Facebook with the comment, “Thanks for the offer, but I’m vegan.”

1.2.7. In the news: Was this a written agreement?

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

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

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

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

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

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

1.2.8. 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?

1.2.9. In the news: Data centers purchased

From today’s Houston Chronicle (article by Katherine Feser): “Dallas-based DataBank will expand to Houston with the purchase of four data centers from CyrusOne for $670 million, the company announced. The facilities consist of 4201 Southwest Freeway and three buildings on Westway Park Boulevard campus in west Houston. …”

QUESTION: What kinds (plural) of contract documents are likely to be involved here?

QUESTION: What sorts of things might the different parties be concerned about?

Feel free to use 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)

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

See this post.

1.3. Class 03: Wed. Jan. 26

1.3.1. In the news

1.3.2. Ambiguity: Giving up meat

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

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

QUESTION: How could this be fixed?

1.3.3. (Quick) Reading review: Course details

1.3.4. Contract format examples

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

In your groups, take a look at the following things — if desired, use the group whiteboards (both classes):       • Group 1       • Group 2       •  Group 3       •  Group 4 (Caution: I will very likely “erase the whiteboards” after each class session, so be sure to copy anything you want to save):

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

Here are the examples:

1.3.5. 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?

1.3.6. 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.)

1.3.7. Reading review: Chapter 3

QUESTIONS: From Chapter 3:

–  What surprised you (if anything)?

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

Feel free to use the the group whiteboards (both classes):       • Group 1       • Group 2       •  Group 3       •  Group 4 (Caution: I will very likely “erase the whiteboards” after each class session, so be sure to copy anything you want to save)

1.4. Class 04: Mon. Jan. 31

1.4.1. From the practice: Marking up an NDA

Here are (sanitized) first pages of an NDA I marked up this morning for my real-life “MathWhiz” client. Note how the original is a “wall of words” — note also the first comment in my markup, (tactfully) addressing that problem.

Original     Markup (first two pages only)

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

1.4.2. In-class drafting exercise

FACTS:

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

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

1.4.3. Ambiguity: Traffic signs

Ambiguous: See this sign.

More clear: This sign

1.4.4. 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?

1.4.5. Reading review (part 1)

  1. QUESTION: If you wanted to have a separate document that listed exceptions to the representations in a contract, what would you (conventionally) call that document? (Hint: See here.)
  2. SCENARIO: (A) A representation in a contract is in section 5.8 of the contract. (B) In the document referred to in question 1 above, you’re listing an exception to that representation. QUESTION: How would you number that exception?
  3. QUESTION: When “redlining” another party’s contract draft, what could (should!) you do, in the Word document’s file name and in the running header, to: (A) avoid “version confusion,” and (B) make it easier to create a timeline later — e.g., in litigation?
  4. EXPLAIN IF FALSE: If parties disagree about the meaning of a term in a contract, that’s enough to require that the finder of fact (the jury, in a jury case), not the trial judge or appeals court, must determine the meaning of the term.
  5. EXPLAIN IF FALSE: Summary judgment (i.e., without a trial) is pretty much always improper when a contract term is ambiguous.
  6. TEXT: “Tenant will vacate the Premises no later than 12 midnight on December 15; Tenant’s failure to do so will be a material breach of this Agreement.” FACTS: Tenant moves out at 10:00 a.m on December 15. QUESTION: Is Tenant in material breach? EXPLAIN.
  7. QUESTION: What does contra preferentem mean — both as an English translation of the Latin, and what it means in “our world”?
  8. QUESTION: What does DCT’s mnemonic “A.T.A.R.I.” stand for?

1.4.6. 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?

1.5. Class 05: Wed. Feb. 02

1.5.1. Housekeeping: Quiz 1 coming up

Reminder: Don’t forget — you have two chances, so if you get less than a perfect score the first time, you might want to review the answers before taking the quiz a second time.

1.5.2. Aftermath of “The Big Chill 2021”: 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 no surprise that the case settled — but only after Griddy filed for bankruptcy protection to liquidate its business (in what one commentator referred to as an “off-label bankruptcy”).

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

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

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

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

1.5.3. Spaced-repetition reading review: Contract structure

Discuss in breakout rooms: Contract structure - part 1

1.5.4. 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?

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

  1. 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.)
  2. 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.”
  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 be paid 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.

1.5.6. Reading review (part 2)

Each student is to respond to each question in the Zoom chat or using the Yes / No / Raise Hand feature. (We’ll do the questions one at a time.)

  1. QUESTION: What does “D.R.Y.” stand for?
  2. QUESTION: Why did violating D.R.Y. cost a bank lender $693K? (The capital letter “K” in a number is shorthand for “thousand.”)
  3. TEXT: “Alice says that Bob is cold.” QUESTION: Is this more likely to be considered vague (Y), ambiguous (N), or both (RH)?
  4. FACTS: (A) Your client is located in Vancouver, Canada and The Other Side (which drafted the contract) is located in Houston. (B) The contract states that the amount your client must pay is $1 million. QUESTION (in chat): Is this an issue? If so, is it worth burning up negotiation time by asking The Other Side to fix it? EXPLAIN.
  5. QUESTION: When calling a partner’s or client’s attention to a problem, it’s best to have a recommended [BLANK - in chat] as well.
  6. QUESTION: When taking notes during a meeting, why is it useful to indicate whether one or more lawyers is participating? (In chat)
  7. QUESTION: What does DCT’s mnemonic “S.t.R.” (or “S.T.R.”) stand for? (In chat.)

1.5.7. Spaced-repetition discussion questions

The following questions are to be answered by everyone in the main Zoom room using the Yes / No / Raise Hand feature:

  1. Which is it: “Class starts at X o’clock”: A) ten (Y) B) 10:00 (N)
  2. Which is it: “More than X people voted to re-elect President Trump”:
    • 74,000,000 (Y)
    • seventy-four million (N)
    • 74 million (RH)
  3. Which is used to indicate permission: May (Y), or might (N)?
  4. Which is used to indicate possibility: May (Y), or might (N)?
  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. (Use Y-N-RH)
  6. True or 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. (Use Y-N-RH)
  7. True or false: Nowadays, most contracts get printed out in two copies, and each printed-out copy is signed by both parties, so that each party will have one, fully-signed original to keep. (Use Y-N-RH)
  8. True or 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.” (Use Y-N-RH)

For the following questions, each group is to designate a spokesperson:

  1. Explain if false: It’s not a great idea to put signature blocks at the front of a contract.
  2. 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.
  3. Explain if false: Each individual signer’s signature block should have a blank space for the signer to handwrite in the date signed.
  4. 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).
  5. What feature of Microsoft Word can you use to get two signature blocks side-by-side on the page? (Hint: It starts with “Ta.”)
  6. (From Contracts 101 for 1Ls:) By law, what’s the significance of the last date signed?
  7. Explain if false: It’s fine for the signature block for a corporation or LLC to state just the individual signer’s name, e.g., “Jane Doe,” without any other information.
  8. 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 #[BROKEN LINK: FoogleAdSig1] above? If so, how?
  9. 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.
  10. 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?)

1.5.8. Ambiguity: Cutting homeless people in half

Sent to me by a student:

Homeless people cut in half

1.6. Class 06: Mon. Feb. 07

1.6.1. From the pandemic: Best efforts to deliver vaccine doses

EU and AstraZeneca reach deal to end vaccine row - contract called for AZ to use “best efforts” to deliver specified number of COVID-19 vaccine doses.

(Concerning best efforts, we’ll be reading NCD § 22.20 later in the semester.)

1.6.2. In the news: Breach of long-term oral exclusive-dealership agreement results in $5.8M award

Oral contracts can bite: Farm-machinery manufacturer’s termination of oral exclusive reseller agreement results in $5.8M award against mfr. for breach of contract and violation of state good-cause dealership termination statute; 8th Cir. affirms. See S&H Farm Supply, Inc. v. Bad Boy, Inc., No. 21-1121, slip op. (8th Cir. Jan. 31, 2021).

1.6.3. In the news: Breach of oral contract for sale of business results in $1.92 million award

Vermillion State Bank v. Tennis Sanitation, LLC, No. A19-1421 (Minn. Feb. 2, 2022)

Facts:

  1. A bank loaned money to a trash-collection company (the “borrower”).
  2. The borrower’s business failed; the borrower filed for bankruptcy protection.
  3. The bank sought bidders for its borrower’s business assets (garbage trucks, etc.).
  4. The bank itself bought its borrower’s business assets.
  5. The bank entered into an oral “flip” agreement with another buyer, under which the other buyer would acquire the business assets from the bank for $6 million.
  6. The other buyer backed out of the oral agreement.
  7. The bank sold the business assets to another buyer, at a significantly lower price.
  8. A jury found that the other borrower breached an oral agreement and awarded the bank $1.9 million in damages.
  9. Held: Affirmed. The “predominant purpose” of the parties’ “hybrid” oral contract (involving both goods and intangible assets) was not for the sale of goods — “most witnesses testified to the primary value being the customer routes” (slip op. at 17) — and so the Statute of Frauds in UCC article 2 didn’t apply.

1.6.4. Homework review (continued): Tenant audit rights

NOTE: I’ve done individual comments on each student’s assignment – you can see the comments in Canvas.

(All bold-faced emphasis below is mine.)

  1. TEXT: “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.”

    • DCT COMMENT 1: Better: “Tenant may disclose such information ….”
    • I HATE “provided ….”; instead, do a new sentence such as, e.g., “Tenant must inform each such recipient ….”
  2. TEXT: “(d) Any information obtained during such inspection shall be held by Tenant in confidence, except that Tenant may disclose such information to its attorneys and advisors. (i) If Tenant discloses such information to its attorneys or advisors, Tenant shall: (1) inform such parties of the information’s confidential nature; and (2) use good faith and diligent efforts to ensure such parties keep such information confidential.”
    • DCT COMMENT: If you don’t have a “(ii),” don’t do this as “(i)” — instead, start a new paragraph (e).
  3. TEXT: “f) If Tenant’s inspection of the records for any given period reveals that: (1) Landlord overcharged Tenant for Operating Expenses or Real Estate Taxes by an amount greater than 6%; (2) Tenant paid such overcharge; and (3) such overcharge was not otherwise adjusted pursuant to the terms of this Lease: (i) Landlord shall reimburse Tenant for its reasonable, third party costs of the audit, up to an amount not to exceed $5,000.” DCT COMMENTS:
    • Same as #2 above about not using “(i)” because there’s no “(ii)”; consider instead the following: “(f) IF: Tenant’s inspection of the records … ; THEN: Landlord shall reimburse ….”
  4. TEXT: “Tenant’s inspection of the records shall be held in confidence except ….” DCT COMMENT: Held in confidence by whom? (This is what’s known as a “false imperative.”)

1.6.5. 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: Is this “streamlining” safe? If not, why not?

1.6.6. Small-group session 1

INSTRUCTIONS: For each of the questions below, each group is to pick a spokesperon. 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).

  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?

1.6.7. (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 — *especially BLUF, D.R.Y., and breaking up “walls of words.”

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

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

1.7. Class 07: Wed. Feb. 09

1.7.1. Quiz 1 review

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

1.7.2. Termination provision: DCT’s example rewrite (1)

Here’s one possible rewrite — which still has problems (which we’ll discuss below).

12.    TERMINATION.

(a)       A party may terminate this Agreement:

            (1) if the royalties due hereunder have not been paid within the time allowed by this Licence Agreement; or

            (2) if either party shall breach of breaches any of the its representations, warranties, covenants, or promises or undertakings +herein contained and on its part to be performed or observed in this License Agreement and shall not have has not remedied such breach within thirty (30) 30 days after notice is given to the breaching party by the non-breaching party the other party gives notice of breach to the breaching party; or

            (3)  either party shall have has 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.

(b)       The other party need not give any further advance notice of termination.

(c)       Termination will not affect any right the terminating party has:

            (1)  to recover any royalties then due from the breaching party; and

            (2)  to pursue any remedy in respect of any previous breach of any of the covenants or agreements contained in this Licence Agreement.

QUESTIONS:

  • How is (a)(3) different from (a)(1) and (a)(2), and does it matter? (Hint: Try reading (a) as though (1) and (2) weren’t even there: Does the language make sense?)
  • In (a)(3): If Party A breaches the agreement, does that allow Party A to terminate the agreement?
  • Is the terminology consistent?
  • In (b), does “the other party” fit?

1.7.3. Termination provision: DCT’s example rewrite (2)

Here’s a simpler rewrite, written in procedural form:

12.    TERMINATION.

(a)       Either party may terminate this Agreement if all of the following are true:

            (1)  the other party [EDIT: probably want to add “materially”] breaches this Agreement;

            (2)  the terminating party gives the breaching party notice of the breach;

            (3)  the breaching party does not cure the breach (if curable) within 30 days after the effective date of the notice of breach; and

            (4)  the terminating party then gives notice of termination to the breaching party.

(b)       In case of doubt: No cure period is required under subdivision (a)(3) if the breach in question is not curable.

(c)       Termination under subdivision (a) will be effective as soon as the notice of termination in subdivision (a)(4) is effective. [DCT TO DISCUSS]

(d)       In addition, either party may terminate this Agreement if the other party has 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. [DCT comment: This doesn’t necessarily fit with bankruptcy law, as we discussed last time.]

(e)       In case of doubt: No termination under this section 12 will affect any right that the terminating party has:

            (1)  to recover any royalties then due from the breaching party; or

            (2)  to pursue any remedy in respect of any pre-termination breach of this Agreement.

1.7.4. 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: Who just turned 96 — the friend, or the father of the friend?

QUESTION: How could this be rewritten — perhaps by moving words around and adding some punctuation?

1.7.5. Reading discussion: Expense reimbursment; interest charges

As usual, each group is to pick a spokesperson for each 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. 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?
  5. FACTS: Gigunda wants the MathWhiz contract to say that if MathWhiz doesn’t submit an invoice for work within ten days after the end of the calendar quarter in which the work is done, then MathWhiz will be deemed to have waived payment of the invoice.
    • QUESTION: Why might Gigunda want this?
    • QUESTION: How might you advise MathWhiz about this?
  6. QUESTION: What does “1% 15 days, net 30” mean?
  7. FACTS: Assume that Gigunda is a Very Big Company, along the lines of ExxonMobil or Chevron. QUESTION: Should you recommend that MathWhiz ask Gigunda to establish payment security?
  8. FACTS: MathWhiz is asked, by a startup-company customer, to do a project that will require MathWhiz to invest a lot of time and resources. Mary Marvel asks you about options for payment security.
    • QUESTION: What might you advise Mary about payment security?
    • QUESTION: Would you want the startup-company customer to confirm itself that it has arranged for payment security? Or would it be better for MathWhiz to get more confirmation than that?

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

Here’s one possible 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 audit by Tenant shall must be limited to the sole purpose of verifying the Operating Expenses and/or Real Estate Taxes.

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

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

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

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

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

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

        (2) Tenant paid such overage overcharge; and

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

Some discussion points:

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

1.7.7. Small-group session: In-the-practice issues

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?

1.7.8. 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.

1.7.9. A real-world case: 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).

1.8. Class 08: Mon. Feb. 14

1.8.1. Ambiguity? Flushing documents

Here’s a tweet concerning an allegation about NYTimes reporter Maggie Haberman concerning a recent report about the former president: “@maggieNYT insists that she did not save her report that then-President Trump clogged White House toilets by flushing documents for her book.”

(Is this really an ambiguity? Or just awkward drafting?)

1.8.2. Addams Investments drafting exercise review

  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”
  5. The facts don’t indicate that Widgets is incorporated in Texas.
  6. For the Addams signature block, see the model sig. block at NOCD § 3.7.5.
  7. For the question whether an attorney for Addams Inv. L.P. would sign, a student writes: “I would tell her that there are issues with me signing the contract, such as raising the question as to whether I am acting as a lawyer or a business person.” DCT COMMENT: Good point!
  8. The same student writes: “I would also demand to be indemnified in case the contract ‘goes south.’” DCT COMMENT: That’s not something I’d normally ask a client to do — if I wasn’t comfortable signing without an indemnity, I just wouldn’t sign.
  9. The same student writes: “After that, I would want her [Wednesday Addams] to put in writing that I have authority to sign the contract ….” DCT COMMENT: Good point — but do it in a non-threatening, non-defensive manner.
  10. The same student writes: “I  would put in a personal signer representation, and then I would sign it.” The student’s draft included the following: “Each individual who signs this Agreement on behalf of an organizational party represents that he or she has been duly authorized to do so.” DCT COMMENT: I would not do include such a representation, as it would put a target on my back — if the other side wants a representation like that from me, then let them ask for it.“
  11. A student writes, about Widgets Inc.’s motivation: “Because they want to be able to report the deal in their first quarter financial report and look good for investors.” (Emphasis added.) DCT COMMENT: The sale rep might be interested in closing the deal in Q1 so as to get a commission, or to be able to make his- or her sales quota.
  12. A student writes (I paraphrase): “Sign the deal on April 1 and recite that it confirms an oral agreement reached on March 31.” DCT COMMENT: That’s good, creative thinking — BUT: The Statute of Frauds would preclude enforcement of an oral agreement for the sale of goods for more than $500, and thus accounting standards might preclude Widgets from recognizing the revenue in Q1.
  13. Several students indicated that a “director” of Addams Operations, Inc. could sign on the company’s behalf. DCT COMMENT: That depends on what you mean by director: If it refers to an employee title (one level below VP, one level above manager), then yes. BUT: If it refers to a member of the corporation’s board of directors, then no — a board member, as such, has no management authority for the corporation.

1.8.3. Ambiguity (sort of) arising from the Super Bowl halftime show

Apparently not everyone liked yesterday’s Super Bowl halftime show — one person’s opinion: “I left the livingroom [sic] to clean the cats [sic] water bowl instead, didn’t watch. Was told they were grabbing themselves, ugh [emoji]. A commenter’s response: ”Wait until she finds out they lick their own a**.“

1.8.4. Reading discussion

As usual, each group is to designate a spokesperson for each question.

  1. QUESTION: What are some possible dangers of including “good faith” requirements in a contract?
  2. FACTS:
    • For a particular contract, MathWhiz and Gigunda exchange drafts by email, redlining changes as they go.
    • Gigunda’s lawyer emails you a PDF of the complete agreement, with the signature page signed by a Gigunda VP (let’s assume the VP has actual authority to sign).
    • You previously asked Gigunda’s lawyers to include a redlining representation but they declined; Mary Marvel (the MathWhiz CEO) said that she really wanted to get the contract signed, so she was going to hold her nose and sign despite this hint that Gigunda might not be the best of business partners.
    • QUESTION: Before getting Mary Marvel to countersign for MathWhiz, how could you get comfortable that Gigunda didn’t surreptitously sneak in some changes to the document?
  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.

1.8.5. Exercise: 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 “text” them TO ME ONLY in the Zoom chat feature.

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

1.8.6. 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 [sic; that] 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

Here’s a possible rewrite:

1.  Guaranty. The Guarantor hereby absolutely and unconditionally guarantees prompt payment, when due, of any and all existing and future indebtedness and liabilities that arise from or are in connection with the “Credit Agreement,” defined below. Each such indebtedness and liability is referred to generically as a “Debt.”

The term “Credit Agreement” refers to the Credit Agreement dated as of March 24, 2009, among the Borrower; [I changed the comma after “Borrower” to a semi-colon] Heald Capital, LLC; [note that I added an “Oxford semi-colon”] and the Lender, as amended, restated, supplemented or otherwise modified from time to time.

Capitalized terms used herein but not defined in this Guaranty and not defined herein +shall have the meanings ascribed +such terms to them stated in the Credit Agreement).

This Guaranty is a guaranty of payment and performance and not merely a guaranty of collection.

This Guaranty applies to each Debt that is not paid when due, whether the due date arises at stated maturity; by required prepayment; because of acceleration; on demand (when callable); or otherwise. ; and at all times thereafter.

The Debts covered by this Guaranty are those of every kind, nature and character.

Such a Debt could be direct or indirect; absolute or contingent; liquidated or unliquidated; voluntary or involuntary.

Such a Debt could be for principal; interest; premiums; fees; indemnities; damages; costs; expenses or otherwise.

For purposes of this Guaranty, it does not matter:

  • whether a Debt is associated with any credit or other financial accommodation made to or for the benefit of the Borrower by the Lender or otherwise;
  • when a Debt is created; nor
  • whether a Debt may be (or hereafter becomes) unenforceable;
  • whether a Debt is an allowed or disallowed claim under any proceeding or case commenced by or against the Guarantor or the Borrower under a Debtor Relief Law (defined below).

The term Debt encompasses (without limitation) all out-of-pocket costs, reasonable attorneys’ fees and expenses incurred by the Lender in connection with the collection or enforcement of a Debt.

For purposes of this Guaranty, the term “Debtor Relief Law” refers to one or more of the following in effect at the relevant time:

  • the Bankruptcy Code (Title 11, United States Code) or any successor statute; and
  • any other law concening liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief,
  • of the United States (or any of its states) or other applicable jurisdictions,
  • affecting the rights of creditors generally.

The term Debt also encompasses (without limitation) any interest that accrues after the commencement by, or against, the Borrower of any proceeding under any Debtor Relief Laws.

The Lender’s books and records showing the amount of the Guaranteed Obligations [DCT note: Guaranties are not the best vehicle to guarantee performance of an obligation other than payment.] Debts shall be admissible in evidence in any action or proceeding.

Those books and records shall will be binding upon the Guarantor and conclusive, absent manifest error, for the purpose of establishing the amount of the Debts.

This Guaranty shall will not be affected by any of the following:

  • the genuineness, validity, regularity or enforceability of any Debt or any instrument or agreement evidencing any Debt; [This could be a BIG negotiation point, depending on the guarantor’s bargaining power.]
  • the existence, validity, enforceability, perfection, non-perfection or extent of any collateral therefor, or nor
  • any fact or circumstance relating to any Debt which that might otherwise constitute a defense to the obligations of the Guarantor under this Guaranty. [Another possible negotiation point.]

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 Debts, 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

1.8.7. 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.)

1.8.8. 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).

1.8.9. 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: 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)

  1. Break up the wall of words so that each major point of possible negotiation is in its own paragraph. (Don’t worry about numbering the paragraphs.)
  2. QUESTION: Does the first sentence really belong in this provision?
  3. Rewrite just the italicized portion to be much more reader-friendly — as though you were talking to a lay jury. (Hint: BLUF.)

1.8.10. 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?

1.9. Class 09: Wed. Feb. 16

1.9.1. Housekeeping: Roll call; attendance tracking

  1. CHAT MESSAGE FOR ROLL CALL: To help me track attendance in Canvas for the “signing bonus” points (see the discussion at § 6.1 of the Syllabus), please send a quick chat message — just to me — that you’re here.
  2. ATTENDANCE POINT COMPUTATION: 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.”

1.9.2. Housekeeping: Group reshuffling

So that students will get a chance to work with others, I’ve reshuffled the groups, this time alphabetically by last name (but listed here by first name and/or initials only, so that the full names won’t be on the Web for all to see):

6:00 p.m.:
GROUP 1: Collin, Casey, Mackenzie, Antonios
GROUP 2: Miles, Sarah (middle initial K), Juliana, Sarah (middle initial A)
GROUP 3: Wafeeq, Shantelle, Colton, Katy
GROUP 4: John, Jonathan, Sarah Y.

7:30 p.m. class:
GROUP 1: Nancy, Kyle, Will, Elina
GROUP 2: Brittney, Rachel, Isabel, Allan
GROUP 3: Benji, Taylor, Gaby, Noma
GROUP 4: Vanessa, Nicholl, Courtney, Cassie

(We’ll do one more reshuffling during the semester in late March or early April.)

1.9.3. In the news (and reading preview): Texas Oilfield Anti-Indemnity Act

From a Fifth Circuit opinion issued Monday:

The Texas Oilfield Anti-Indemnity Act (“TOAIA”) voids indemnity agreements that pertain to wells for oil, gas, or water or to mineral mines, unless the indemnity agreement is supported by, inter alia, liability insurance.

\*\*\*

When the parties agree to provide differing or unspecified amounts of coverage, the mutual indemnity obligations are limited to the lower amount of insurance.

\*\*\*

CP Well contended that it only agreed to maintain $1 million in general liability insurance and $2 million in excess liability insurance to meet its indemnification obligation under the MSA; the remaining coverage in its excess liability coverage was thus not for the benefit of Cimarex.

In response, Cimarex contended that because CP Well obtained a $1 million general liability policy and a $10 million excess liability policy, CP Well effectively agreed to maintain $11 million in indemnity coverage for Cimarex’s benefit.

\*\*\*

Enter TOAIA. The statute states that, “[w]ith respect to a mutual indemnity obligation, the indemnity obligation is limited to the extent of the coverage and dollar limits of insurance . . . each party as indemnitor has agreed to obtain for the benefit of the other party as indemnitee.” Tex. Civ. Prac. & Rem. Code Ann. § 127.005(b).

\*\*\*

The parties in this case agreed to indemnify each other, consistent with TOAIA, by setting a “floor” of required insurance coverage each was to obtain. They were free to procure more. CP Well obtained a policy that expressly set the “ceiling” of coverage “for the benefit [of Cimarex] as indemnitee” at the minimum “floor” provided by the parties’ contract. CP Well did not breach its contractual duties to Cimarex in doing so.

Cimarex Energy Co. v. CP Well Testing, L.L.C., No. 20-50892, slip op. at 1, 4, 7, 13 (5th Cir. Feb. 14, 2022) (affirming summary judgment that CP Well owed no further indemnity than the contract’s minimum insurance requirement) (cleaned up, emphasis and extra paragraphing added).

1.9.4. Ambiguity: Paul McCartney’s toothy, boyish grin

From this essay about the eight-hour Get Back documentary, referring in this quote to Paul McCartney:

We see a toothy, boyish, involuntary grin, different to his practiced public smile, which lights up his face when John makes a joke or Billy Preston plays a ravishing lick on the keyboard.

QUESTION: Which of these “lights up [McCartney’s] face” — his involuntary grin? Or his practiced public smile? (The answer should be obvious, but the words themselves leave this open.)

QUESTION: How could this ambiguity be resolved with just a change of internal punctuation?

1.9.5. 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 [sic; Development].” 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, exercisable at Buyer’s discretion.
  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.

1.9.6. A.T.E.D.: A structured approach to drafting complex provisions

This is an experiment: Consider the gross-up language that we looked at (and rewrote) on Monday:

If any such obligation [to withhold or deduct from payment to the Lender] (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.

Answer each question below with SHORT, complete sentences, in executive-summary and bullet-point form — be aggressive about deferring details until subsequent subdivisions.

  1. Action: Which party must do (or refrain from doing) what? The Guarantor must pay a Gross-Up Amount (defined below) to the Lender.
  2. Trigger(s): Is this requirement an absolute one, or will it come into effect only if triggered, and if the latter what is/are the triggers? The Guarantor is required to pay the Gross-Up Amount only if the Guarantor is required by law to withhold an amount from a payment to the Lender.
  3. Exceptions: Are there any “escape clauses” for this requirement? The Guarantor need not pay the Gross-Up Amount if the required withholding is for any of the following:
    • taxes based on, or measured by, the net income or profits of the Lender, or
    • taxes that would have been imposed on the relevant payment to the Lender under the laws and treaties in effect at the time the Lender first became a party to this Agreement or otherwise became entitled to any rights hereunder
  4. Defined terms? The term “Gross-Up Amount” refers to an additional amount, in U.S. dollars, that would cause the Lender to receive the same net amount that the Lender would have received without withholding.

1.9.7. Review: Reps and warranties reading

1.9.8. Small-group exercise & reading review: Notices

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. TEXT: “A copy of any notice required under this Agreement shall also be sent to the law firm representing the party to be noticed.” QUESTION: Any thoughts?
  2. TEXT: “Notice will be effective … after two reasonable attempts at serving notice.” QUESTION: Any thoughts?
  3. TEXT: “Notices are effective when (a) sent via certified mail and (b) upon receipt, refusal, or reasonable efforts at delivery.” QUESTION: Would notice by FedEx, with confirmed receipt, be effective under this provision?
  4. TEXT: “12.02. Mechanics. To be effective, notice must be: (i) in writing; (ii) addressed to the attention of the receiving party; (iii) accompanied by a copy to the legal department; and (iv) sent by Certified Mail.” QUESTION: Thoughts?
  5. TEXT: “Notices may be sent to either party’s registered agent.” QUESTION: Thoughts? Is this a good balancing of the risk of nondelivery versus the time it takes for notice to reach the right person? (Remember: By law in essentially all states, any corporation that does business in a state must have a registered agent in that state so that a plaintiff in that state will have a definite person or organization upon whom to effect service of process, e.g., a summons and complaint.)
  6. TEXT: “If either party changes their address during the duration of this Agreement, they shall promptly notify the other party of the address change via certified mail.” COMMENT: Should be “it shall promptly notify the other party ….” (Pronoun choice hasn’t made its way to the business-contract-drafting world yet.) QUESTION: Does this make sense?
  7. TEXT: A notice will be effective “five business days after the date it is sent by domestic registered or certified mail, with postage and charges prepaid, ….” QUESTION: Any thoughts:
  8. TEXT: “All notices required under this Agreement must be in writing and sent by any method with written verification of receipt. [¶] To reduce the chances of Notices going astray, any Notice to an organization must be addressed to the attention of the position of responsibility in the organization.” QUESTION: What happens in case of an undeliverable notice?

1.9.9. Ambiguity: “Only” and short-term trading

(Apropos of the “only” discussion this past Monday:) 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.)

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

See Citi Can’t Get Back $500 Million It Accidentally Wired To Revlon Lenders, Federal Judge Rules

(As of this afternoon, the case was pending at the Second Circuit.)

1.9.11. Reading preview: 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.]

1.9.12. 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 semester.

1.10. Class 10: Mon. Feb. 21

1.10.1. Change of plans: March 7 homework

I realized that we’ve already done the “gross-up provision” redrafting that I had originally scheduled for homework for next Monday, so I’ll be coming up with a new assignment.

1.10.2. Review: 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 — in addition, I’ll call on a group at random to explain, so pick a spokesperson for each question.

  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 button: “To MathWhiz’s knowledge, there are no lawsuits or other claims pending or threatened by any MathWhiz client against MathWhiz.”
    • No button: “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.”

    EXPLAIN.

  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? (Use the Yes or No button.) EXPLAIN.
  3. QUESTION: Under English law, is it enough for a supplier to disclaim implied warranties? (Use the Yes or No button.) EXPLAIN.

1.10.3. Homework review: Employment agreement

  1. TEXT: “Dear Dave Doright, ….” ANOTHER TEXT: “Dear Mr. Dave Doright, ….” DCT COMMENTS: For a business letter agreement, It’d be “Dear Dave:” (first name only, and with a colon, not a comma).
  2. TEXT: “The terms of this agreement can be subject to change.” DCT COMMENT: This shouldn’t be included — for “at will” employment, it’s a given, so there’s no need to rub Dave’s face in it.
  3. TEXT: “I have not relied upon any other verbal, oral, or written statements, other than the ones contained in this Employment Offer.” DCT COMMENT: Good thought, but I think I’d leave it out.
  4. TEXT: “The Company will pay you an annual salary of [$XXX,XXX.XX], payable in 24 semi-monthly payments.” DCT COMMENT: You’d want to say “a salary at a gross annual rate of ….” for reasons discussed in class — the “24 semi-monthly payments” language would arguably support Dave’s argument that he’d be entitled to a full year’s salary if he were to be let go without cause.
  5. TEXT: “This letter confirms our oral agreement ….” DCT COMMENT: You don’t want this — the offer letter is “it”; you don’t want to leave a paper trail helping Dave to prove up a claim that there was a (supposedly-binding) oral agreement that (according to Dave) differed from what’s stated in the offer letter.
  6. TEXT: “In consideration of your excellent qualifications and references, I look forward to you joining the MathWhiz team and have full confidence that you will make a significant contribution to our business development efforts.” DCT COMMENT: I wouldn’t say “In consideration of your excellent qualifications and references” — if litigation were ever to ensue between MathWhiz and Dave, the inclusion of “In consideration …” could be offered into evidence by Dave’s lawyer as evidence that MathWhiz had an opportunity to check Dave’s references and hired him after doing so.
  7. TEXT: “If these terms are agreeable, please countersign the enclosed copy of this letter and return it to me.” DCT COMMENT: This is really old-school (as in, creakily geriatric); it’s what I showed in my Tom Arnold NDA example, but that was in the early 1980s; I seriously doubt that many people use this approach in this day and age of email for pretty much everything.
  8. A couple of students’ submissions didn’t say anything about compensation — strictly speaking it’s not necessary, but it’s something that Dave likely will be very desirous of getting in writing.
  9. TEXT (in transmittal email to Mary): “I hope this Agreement is adequate ….” DCT COMMENT: I wouldn’t say this in an email to a client, even one I’d worked with for a long time — it doesn’t exactly bespeak confidence in one’s own work product ….
  10. TEXT: “Upon accepting this agreement, your employment by MathWhiz shall be in compliance by the following terms and conditions (this ‘Agreement’).”
    • COMMENT 1: So it’s “your employment by MathWhiz” that will be accepting the agreement? (Look up “dangling participial phrase” – see, e.g., this article.)
    • COMMENT 2: So who is obligated by this sentence? COMMENT 3: Also “in compliance BY the following” would not be correct – it’d be “with the following ….”

1.10.4. Reading review (1)

In small groups, be ready to discuss these:

  1. What happened to the Trump Organization when one of its contract clauses “boomeranged” on it? (This was in 2015 before Donald Trump announced his presidential candidacy.) (Hint: That part of the reading was here.)
  2. What’s DCT’s view of the term, “true and correct”? Do I have a preferred alternative? If so, why?
  3. In the Fail-Safe NDA case, what exactly went wrong for the plaintiff — as in, what did the plaintiff’s business people likely do, or not do, that caused problems for the plaintiff? (The reading: Here.)
  4. Any speculation about the historical basis for using “provided, however, that ….” (emphasis added) in wall-of-words contract provisions? (Hint: It’s been in past reading.)

1.10.5. 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. Consider whether the ATED approach would be useful.
  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–

1.10.6. 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.

1.11. Class 11: Wed. Feb. 23

1.11.1. Exercise: Contract interpretation - Latin maxims

If all else fails in trying to interpret a contract provision, what two-word Latin maxim about “against the drafter” will courts often follow?

1.11.2. Exercise: Interest rate

FACTS: A partner in your firm sends you the following email: “Hey [your name], I’m heads-down on another matter — attached is a draft of a consulting-services agreement that I’m helping one of my clients negotiate; it has an interest clause in it, quoted below. Please make a recommendation about what I should say to the client about it.” The interest clause is the following:

Past-due amounts will bear interest at 5% per month, compounded monthly, beginning on the day after the due date until paid.

QUESTION (for breakout rooms): What are you going to recommend to the partner as far as what the partner should say to the client?

1.11.3. Reading review (2)

In small groups, be ready to discuss these:

  1. What does the reading material mean by the phrase, “hamburger for the guard dog”? Is there a good example to illustrate the point — maybe one that’s better than the one in the assigned reading? (The reading: Here.)
  2. In the Tilly’s case, how did the company’s contract language boomerang on the company? (The reading: Here.)
  3. Did Conan O’Brien’s lawyers do it right, or did they screw up, when he negotiated his Tonight Show hosting contract with NBC? (The reading: Here.)

1.11.4. Exercise: Clause phrasing for yard work

FACTS:

  1. You are drafting a contract between your client Alice, and Bob, who owns a sole-proprietorship yard maintenance company that employs a number of workers.
  2. Under the contract, Bob’s workers are to replace the sod in Alice’s front yard.
  3. 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?

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

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)

FACTS: Your elderly, childless Uncle Ed is selling his car to a stranger and wants your help. He says he doesn’t know of any mechanical problems.

QUESTION 1: If the stranger asks Uncle Ed to represent and warrant in writing that the car has no problems, how might Uncle Ed respond as to the requested representation?

QUESTION 2: How might Uncle Ed respond as to the requested warranty?

1.11.6. Review - from 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:

1.11.7. Employment agreement - Holy Hand Grenade

From an employment agreement for the vice-chairman of the board (!) of The Men’s Wearhouse:

… In the event of termination of Employee’s employment, other than for “cause”, as described in Section 7, or by reason of voluntary termination as described in Section 8, a number of unvested shares of Restricted Stock shall immediately vest equal to 19,360 times a fraction the numerator of which shall be the sum of (i) the number of days from and including the most recent February 6 to and including the Termination Date (as defined below) and (ii) the lesser of 730 or the number of days from the Termination Date to and including the second following February 5, and the denominator of which shall be 365; any other unvested shares of Restricted Stock shall immediately terminate and be of no further force or effect.

(Emphasis added.)

This brought to mind Monty Python’s Holy Hand Grenade of Antioch scene from Monty Python and the Holy Grail:

And the Lord spake, saying, “First shalt thou take out the Holy Pin. Then shalt thou count to three, no more, no less. Three shall be the number thou shalt count, and the number of the counting shall be three. Four shalt thou not count, neither count thou two, excepting that thou then proceed to three. Five is right out! Once the number three, being the third number, be reached, then lobbest thou thy Holy Hand Grenade of Antioch towards thy foe, who, being naughty in My sight, shall snuff it.

Here’s a possible rewrite, along the general lines of NCD § 7.11:

[x]. Accelerated vesting.

(a) This section will apply if either of the following occurs:

      (1) the Employee’s employment is terminated by the Company, other than for “cause”, as described in Section 7; or

      (2) the Employee resigns for “good reason” as set forth in Section 6.

(b) When this section applies, a certain number of previously-unvested shares of the Employee’s Restricted Stock will immediately vest as follows:

  • No. of shares vesting = 19,360 x Vesting Fraction (defined below)
  • Vesting Fraction = Additional Vesting Days (defined below) / 365
  • Additional Vesting Days = The sum of:

            (i) the number of days: (x) from and including the most recent February 6; (y) to and including the Termination Date (as defined below); and

            (ii)  the lesser of (x) 730, and (y) the number of days from the Termination Date to and including the second following February 5.

(c) Any other unvested shares of Restricted Stock will immediately terminate and be of no further force or effect [sic].

1.11.8. 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 three months 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 non-breaching party gives notice of the breach.” QUESTION: Any issues here?

1.11.9. Redrafting an ambiguity from President Trump

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

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

1.12. Class 12: Mon. Feb. 28

1.12.1. Reading review: Litigation prep: Straight A report card

  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?

1.12.2. R.O.O.F.-related article

See Gabby Birenbaum, Accidents Waiting to Happen, Wash. Monthly, Jan/Feb./Mar. 2022, reviewing Jessie Singer, There Are No Accidents: The Deadly Rise of Injury and Disaster—Who Profits and Who Pays the Price (2022).

Excerpt from Birenbaum review:

In Singer’s telling, mistakes are inevitable. Injury and death should not be. But our workplaces and politics mete out individual punishment for mistakes, rather than preventative measures that make such mistakes less lethal. We’re terrible at holding institutions accountable for their systemic errors even as we hunt for individual culprits.

1.12.3. Employment agreement review (part deux)

  1. 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.
  2. 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 (or a noncompetition covenant supported by 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.
  3. 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 — and it’d be unlikely to be mentioned in an employee handbook. (B) If the Company were to terminate for cause, there’d typically be NO severance.
  4. 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.
  5. 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.”
  6. 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.

1.12.4. Planning exercises: Warranty duration for nose-hair trimmers

FACTS: Consider a contract for the purchase of 1,000 small electric motors, which Buyer — your client — 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 the Tango Terms 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?

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

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

1.12.6. 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.”)

1.12.7. Earn-out calculation homework review

I’m about halfway through grading these; here are just a couple of early observations.

  1. TEXT: “In the event Seller rejects in writing such Earn-Out Calculation, such rejection notice (the “Rejection Notice”) shall contain the reasons for such rejection …” DCT COMMENTS:
    • Better: “In the event If Seller rejects … ”
    • Better: “such the rejection notice … shall contain is to contain the reasons for such rejection ….”
  2. TEXT: “If Seller and Purchaser are unable to agree on an Annual Earn-Out Payment for the applicable Earn-Out Year within 30 days of Purchaser’s receipt of the Rejection Notice, [ADD: then] Purchaser and Seller ….”

1.12.8. 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.

1.12.9. 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?

1.13. Class 13: Wed. Mar 02

1.13.1. Housekeeping: Homework change (reminder)

As previously announced, I’ve replaced the homework assignment that’s due this coming Monday, March 7 with a new one (because we largely did the previous version in class).

1.13.2. Gross-up exercise revision review

See here.

1.13.3. Group exercise: Independent contractor (7:30 p.m. class only)

See here.

1.13.4. 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?

1.13.5. 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.)

1.13.6. Emails to others: A thread

See this thread by Jack Shepherd.

1.13.7. Quick 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!)

1.13.8. Small-group exercise: Representations and warranties wording

In the Zoom breakout rooms, do the usual.

FACTS: You represent MathWhiz — for each of the following, write out your group’s thoughts about whether it makes sense to include the text in a MathWhiz / Gigunda contract.

CONSIDER ALSO how the language might be rephrased if necessary.

  1. TEXT: “MathWhiz represents and warrants that MathWhiz’s business includes analyzing seismic data.”
  2. TEXT: “MathWhiz warrants that MathWhiz is headed by Mary Marvel.”
  3. TEXT: “So far as MathWhiz is aware, some individuals have called Mary Marvel an ‘expert in analyzing seismic data to determine where oil and gas natural deposits may be.”
  4. TEXT: “Gigunda represents and warrants that all seismic data from the Mongolian Field was lawfully obtained and that Gigunda has the legal power to share the data with MathWhiz.”

1.13.9. 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?

1.13.10. Reading review: Notices

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

1.13.11. On-the-fly group research: Background checks

In your Zoom breakout rooms, quickly skim this reading material.

  1. QUESTION: For background checks, what if any consent requirements exist everywhere in the U.S.?
  2. QUESTION: When a customer and a services provider enter into an agreement, what actual- or potential advantage(s) does the customer get from having explicit requirements for the qualifications of the individuals who perform the services?
  3. QUESTION: What are some common scenarios in which a customer might want a supplier’s people to be background-checked?
  4. QUESTION: What happened to Chuck E Cheese concerning its background checks?

1.13.12. 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.

1.13.13. 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.

1.14. Class 14: Mon. Mar 07

1.14.1. 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

1.14.2. D.R.Y. example

DCT to recount his wife’s DAR bylaw-amendment problem:

  • Any proposed bylaw amendment must be distributed to the chapter members 30 days before the meeting where the amendment is to be voted on.
  • She emailed a proposed amendment well in advance.
  • But she discovered today that in another place in the bylaws, there’s another “copy” of the language to be amended, which wasn’t mentioned in her email about the proposed amendment.

1.14.3. Reading review: Sales

  1. QUESTION: Name four examples of “Hollywood accounting.” (I’ll ask each group for an example.)
  2. FACTS: MathWhiz is ordering some expensive, high-powered computer gear from a supplier in Singapore, to be delivered to Ulaan Baatar (the capital of Mongolia).

    QUESTION: Would MathWhiz prefer that delivery of the equipment be made under: A) INCOTERMS DDP; or B) INCOTERMS EXW? Why?

  3. FACTS: MathWhiz and Gigunda are negotiating a master services agreement under which MathWhiz might undertake any number of projects for Gigunda — some of which will be high-dollar.

    QUESTION: What are some pros and cons of:

    • having each successive new project’s “statement of work” under the master services agreement become an addition to that agreement, versus
    • having each new statement of work be a separate agreement that incorporates the master agreement by reference?
  4. FACTS: Gigunda asks MathWhiz to send Gigunda a sales quotation (a “quote”) for data-processing services for a different project.

    QUESTION: Why might MathWhiz want its quote to have an expiration date?

  5. FACTS: You represent a supplier, ABC Corporation, whose customer, XYZ Inc., wants XYZ’s “affiliates” to be listed in the preamble as parties to a master purchasing agreement with the following language: “This Master Purchasing Agreement is between ABC Corporation (‘Supplier’) and XYZ Inc. and its affiliates (‘Customer’).”

    QUESTION: As ABC’s lawyer, what do you think of this — what do you think XYZ really wants?

  6. FACTS: Same as in #5.

    QUESTION: As ABC’s lawyer, how might you structure the contract to accommodate Customer’s likely desires — and to protect Supplier?

  7. FACTS:

    • MathWhiz is negotiating a referral agreement with MegaLeads, Inc.
    • Under the referral agreement — drafted by MegaLeads — MathWhiz will pay MegaLeads a commission on all MathWhiz sales to a new customer, referred by MegaLeads, that are “consummated” within one year after MegaLeads introduces MathWhiz to the new customer.

    QUESTION: What do you think of the word “consummated” in this context?

1.14.4. Drafting exercise: Most-favored customer

FACTS: In the negotiation of a master services agreement (see item #3 in the previous exercise), Gigunda wants the agreement to contain a most-favored customer (“MFC”) clause.

EXERCISE: Draft the MFC clause, as follows:

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

BE SURE to address how the MFC clause will be administered as time goes on.

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)

1.15. Class 15: Wed. Mar 09

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

See this tweet.

1.15.2. Drafting fail and daylight savings: Word order can matter

Apropos of Daylight Savings Time this weekend:

  • 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?”

1.15.3. Litigation news: Failure to permit ≠ prohibition

From the pending BMC v. IBM lawsuit:

Nevertheless, [the fact] that § 5.1 [of the parties’ contract] cannot be read to authorize IBM to displace BMC’s software does not mean, as a matter of logic or contract interpretation, that it prohibits displacement. Failure to permit displacement does not, by itself, transform into a prohibition against displacement. This is especially the case given that § 5.4 governs displacement.

BMC Software, Inc. v. Int’l Bus. Machines Corp., No. H-17-2254 (S.D. Tex. Feb. 7, 2022)

1.15.4. Reading review: Reseller agreements

BASIC FACTS:

  • MathWhiz has developed a software package, “GeeWhiz,” that will let customers do a lot of the data-analytics that MathWhiz does in its consulting business.
  • Because MathWhiz doesn’t yet have much of an internal sales force, MathWhiz asks you to develop a form of reseller agreement.
  • Under the reseller agreement as MathWhiz envisions it:
    • The reseller will buy licenses to use the new GeeWhiz software at a stated discount from MathWhiz’s list price.
    • The reseller will try to resell the GeeWhiz licenses to customers identified by the reseller, at whatever price the reseller chooses.
  1. MORE FACTS: Mary Marvel asks you if MathWhiz can specify a minimum price at which the reseller may resell the GeeWhiz licenses.

    QUESTION: What do you tell her — and how can you help her achieve her (likely) business objective? EXPLAIN.

  2. MORE FACTS: The reseller wants MathWhiz to agree that the reseller will have exclusive rights to resell the GeeWhiz licenses.

    QUESTION: What if any legal and/or business issues does that raise in your mind? (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. QUESTION: In #2, what business goals do you think the reseller is concerned about? How might you help the reseller accommodate the reseller’s concern(s) — assuming that MathWhiz is OK with doing so?

1.15.5. 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.)

1.15.6. 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).

1.15.7. Reading review: Services

For the following, 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.  List one point from this reading that you’re glad you knew before doing the reading about services — or that you’re glad you learned from doing it.

2.  List three points in this reading that you would want MathWhiz to be sure to know if you were representing that company.

3.  Same as #2, but this time as if you were representing Gigunda.

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

Case: Express Scripts, Inc. v. Bracket Holdings Corp., 248 A.3d 824, 825 (Del. 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.)

1.15.9. (Malpractice) Insurance, in real life

DCT to recount his recently-retired wife’s consideration of whether to buy “tail coverage” for her arbitrator malpractice insurance.

1.15.10. Homework review: Termination clause

Here’s my revision of the “Termination” clause homework:

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 (c) and (d): 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]

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

(d) ; 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 the term “resulted in” swallow the term “primary cause”?], the issuance of such Governmental Order or taking of such action

And 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 (c) and (d): 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]

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

(d) A party may not terminate this Agreement under 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

Another, even-more-readable possibility:

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 or other action that permanently restrains, enjoins, or otherwise prohibits or makes illegal the consummation of any of the Sale and the Reorganization Transactions (a “Blocking Action”); and

      (2)  the Blocking Action is final and non-appealable.

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

      (1)  The terminating party used its reasonable best efforts [sic] to have the Blocking Action set aside; 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 the Blocking Action.

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

WARM-UP QUESTION: What does Texas law say about the implied covenant of good faith and fair dealing — does it apply in all contracts?

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 contract included a Delaware choice-of-law clause.
  4. The royalty agreement called for royalties to be paid on products covered by “Valid [patent] Claims.”
  5. 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.
  6. The definition of “Valid Claim excluded patent claims that were ”disclaimed,“ i.e., voluntarily surrendered by Glaxo.

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 [of good faith and fair dealing], 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).

1.15.12. Review exercise: Interest clauses

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

1.16. Class 16: Mon. Mar 21

1.16.1. AMA (“Ask Me Anything”) coming up

Later in the hour, I’ll do an AMA for anything you want to ask about the course.

1.16.2. In the news: BMC v. IBM breach-of-contract trial starts

See this Texas Lawbook report (paywalled, but your UH credentials might get you in).

1.16.3. Services: Discussion questions

Discuss in your groups — 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. How much time should a lawyer spend reviewing the statement of work for a client?
  2. Should MathWhiz agree to obtain all permits and licenses needed related to its performance of services for Gigunda? Careful: Think broadly about what permits and/or licenses:
    • might be needed by someone; and
    • might be claimed — in hindsight — to have been “related to” MathWhiz’s services.
  3. QUESTION: What could happen if a Provider failed to get required occupational licenses, e.g., construction-contractor licenses?
  4. FACTS: A home builder finishes a new house and turns the keys over to a young couple, who move in with their new baby (and the wife’s in-laws, visiting from out of town). BUT: The builder failed to get the final city inspection done, so the city orders the family to move out, and they have to spend three days in a hotel. QUESTION: Who pays the hotel bills?
  5. QUESTION: Why would a customer/client want to require a contractor to use people who are “competent and suitably trained for the task”? (Think: Litigation proof.)
  6. QUESTION: What does “workmanlike performance” mean? (Use Texas law as a typical version.) Why is that typically used as a standard of performance for services?
  7. QUESTION: Why might a customer want to state that the service provider is responsible for determining the “means and manner” of the work?
  8. QUESTION: What are DCT’s “Three R’s” for agreed ways of addressing defects in deliverables? (Note: This is different than DCT’s “Three R’s” for notices.)

1.16.4. MIT study supports BLUF for legal docs

See Anne Trafton, Objection: No one can understand what you’re saying (MIT.edu March 7, 2022). Excerpt (bold-faced and italics emphasis added):

The biggest culprit, they found, was center-embedding. In this type of construction, a writer introduces the subject of a sentence, then inserts a definition of the subject, and then continues on with the sentence. In their paper, the researchers included this sentence, with a lengthy definition in parentheses, as an example:

“In the event that any payment or benefit by the Company (all such payments and benefits, including the payments and benefits under Section 3(a) hereof, being hereinafter referred to as the ‘Total Payments’), would be subject to excise tax, then the cash severance payments shall be reduced.”

The paper offers this as a more understandable alternative, with the definition separated out:

“In the event that any payment or benefit by the Company would be subject to excise tax, then the cash severance payments shall be reduced. All payments and benefits by the Company shall hereinafter be referred to as the ‘Total Payments.’ This includes the payments and benefits under Section 3(a) hereof.”

The researchers found that when they tested people on their ability to understand and recall the meaning of a legal text, their [sic; whose?] performance improved the most when center-embedded structures were replaced with more straightforward sentences, with terms defined separately. [Implied: Break up long sentences into shorter ones]

* * * 

[The MIT researchers] found that many of the jargony terms used in legal documents can be replaced with more common words without changing the meaning, and the center-embedded clauses can also be replaced by nonembedded clauses to give rise to the same meaning.

You’re encouraged to read the whole thing.

1.16.5. Homework review: Contractor employee payment obligation

(Original version)

QUESTIONS TO CONSIDER:

  1. Business practicality: Buyer wants Contractor to “just take care of it” for ALL claims concerning Contractor’s or subcontractors’ employees, no matter what law a claim happens to arise under. As in: “Hey Contractor: As Buyer, I don’t want to have to think about these things, I want you to take care of them.”

    COMMENT: These should be fairly-predictable risks for Contractor, and less so for Buyer, so it’s not unreasonable for Buyer to want Contractor to take responsibility.

  2. It’s not unreasonable for Buyer to want Contractor’s indemnity obligation (for Contractor’s employees) to extend to Buyer’s other contractors.
  3. Put fences around indemnity obligation? Time? (Buyer might agree.) Dollar cap? (Buyer will push back.)
  4. “Without prejudice to the generality of the foregoing” is a stupid phrase here, because it’s an expansion of subdivision (a), not an illustrative example of what’s required by subdivision (a).
  5. “Deemed to be Losses suffered by Buyer” — how is that useful? (Hint: It’s not, as far as I can tell.)
  6. What does “keep indemnified” mean? (At best, it’s redundant — same with “hold harmless.”)

DCT mark-up:

(a) As between Contractor and Buyer, Contractor shall [in a markup, I wouldn’t change “shall” to will“] pay [what about subcontractors’ responsibility for their employees?] all salaries, fees, charges, taxes[,] [I insist on the Oxford comma but won’t mark off for omitting it … this time] and contributions [meaning, e.g., 401(k) contributions] of all persons who at any time are engaged in the provision of Work and/or Services under or pursuant to the Agreement.

(b) Without prejudice to the generality of +the foregoing limiting subdivision (a), Contractor shall at all times fully and effectively defend and indemnify keep indemnified and hold harmless Buyer and its officers, employees, and contractors from time to time (whose loss shall be deemed to be loss suffered or incurred by Buyer and on whose behalf Contractor hereby acknowledges Buyer shall be entitled to claim from and against all costs, losses, damages, fees, expenses and charges (including without limitation legal fees) [this invites Buyer to hire a Sidley or Kirkland firm to provide a gold-plated defense]) arising from any claim, by any such person:

(1) that Contractor failed to comply with subdivision (a); and/or

(2) otherwise arising out of the person’s relationship with Contractor.

[Add language giving Contractor the right to control the defense and any settlement, within limits]

DCT write-up without markup:

(a) As between Contractor and Buyer, Contractor shall pay all salaries, fees, charges, taxes, and contributions of all persons who at any time are engaged in the provision of Work and/or Services under or pursuant to the Agreement.

(b) Without limiting subdivision (a), Contractor shall defend and indemnify Buyer and its officers, employees, and contractors against all costs, losses, damages, fees, expenses and charges (including without limitation legal fees) arising from any claim, by any such person:

(1) that Contractor failed to comply with subdivision (a); and/or

(2) otherwise arising out of the person’s relationship with Contractor.

[Add language giving Contractor the right to control the defense and any settlement, within limits]

1.16.6. Ambiguity (well, sort of): An asteroid hits Earth

Asteroid ambiguity

1.16.7. Drafting fail: PILO’s misdemeanors?

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

1.16.8. 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).

1.16.9. Contract template w/ preset, numbered clause styles

1.17. Class 17: Wed. Mar 23

1.17.1. In Zoom chat: AMA (“Ask Me Anything”)

Use the Zoom chat feature — to just me, if you prefer — to ask me anything about what we’ve done so far in the course.

1.17.2. Creator of GIF dies

See this tweet from today — not for any ambiguity or anything like that ….

GIF creator dies

1.17.3. Numbering of paragraphs (7:30 p.m. section only)

The usual hierarchy of numbering schemes is something like this:

Example 1 – this is typical for merger- and acquisition agreements:

  • Article 2
  • Section 2.1 (or Section 2.01)
  • (a)
  • (1)
  • (A) — and even (A) is probably too deep —

with (i) reserved for within-paragraph subdivisions.

Example 2 – the numbering hierarchy is similar but without the words “Article” and “Section”:

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 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).

1.17.4. 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.

(For your amusement, disgust, or both: Take a look at the WOW Section 3.04 in this agreement.)

1.17.5. 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.

1.17.6. Notices - getting your name in lights

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

1.17.7. 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: Rewrite this. (Hint: Consider using romanettes.) Use 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).

1.17.8. Drafting exercise: A bare-bones, one-paragraph audit clause

You previously rewrote an audit clause — now work together to draft a bare-bones, one-paragraph audit clause that you could save for use as a “hamburger for the guard dog” 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)

1.17.9. Referral agreement - prep for April 2 homework

In breakout groups, brainstorm provisions that you might want for a referral agreement that’s due April 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).

(Hint: For your homework submission, use this bare-bones contract template.)

1.17.10. Real life: An M&A agreement

From an asset purchase agreement (“APA”) under which one of my clients was acquired by a Silicon Valley giant (and the client and I spent most of the fall of 2021 doing the deal); all emphasis is mine:

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 1: 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 2: Is there any danger that a judge might be irritated by the bolded part?

QUESTION 3: Is there a better way to phrase the bolded part, taking into account your answer to Question 2?

1.17.11. 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?

1.17.12. 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?

1.17.13. Rewrite (in Zoom chat): The case of LeBron’s tattoos

BACKGROUND: 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.

TEXT: Here’s a quote from the 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.

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

Hints:

  • Do we reallly need so much verbiage between (i) the start of the sentence, and (ii) the punch line, i.e., the words “is presumed,” at the end?
  • Would the sentence be more readable if it were broken up into, say, two sentences — or even three?
  • Do we really even need the “Familiarity … is presumed” thought? Or is the excerpt just as useful with just a list of the prior decisions?

Then we’ll discuss.

1.18. Class 18: Mon. Mar 28

1.18.1. In the news: Lawyer scammed for ~$400K

1.18.2. Ambiguity (and drafting fail): The Slap

From my Facebook feed:

h-diagram

[Person 1:] … The Oscar Committee should press charges against him [Will Smith] as well as Chris Rock. …

[Person 2:] “Press charges” against Chris Rock for what?

1.18.3. Ambiguity (and drafting fail): Sex with any celebrity

See this tweet:

h-diagram

QUESTION: What one word could be changed — really, substituting one letter for three other letters — in the underlying Johnny Morris tweet to eliminate — or at least reduce — the ambiguity?

1.18.4. Termination clause 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?

1.18.5. Contractor employee compensation homework review

General notes:

  1. A number of students seriously misread the “without prejudice” language.
  2. “Contributions” refers to things such as 401(k) contributions (and probably health-insurance premiums). THAT MEANS that the Contractor wouldn’t pay those things to its employees, etc. but for (or of) its employees.
  3. The language about “losses are considered to have been suffered by Buyer” is probably intended to give Buyer the “standing” to sue Contractor for breach if Contractor doesn’t indemnify as required.
  4. The “Contractor acknowledges” term is probably superfluous.

1.18.6. Reading review

  1. QUESTION: What is the “express negligence” rule?

FACTS: MathWhiz agrees to defend and indemnify Gigunda against certain claims.

  1. QUESTION: Why would MathWhiz want the right to control the defense?
  2. QUESTION: Might Gigunda be concerned about letting MathWhiz control the defense? Why? How might MathWhiz and Gigunda compromise about control of the defense?
  3. QUESTION: What would be a sensible way of allocating control of settlement authority?

1.18.7. Real life: Alec Baldwin claims indemnity- and defense rights for movie-set shooting death

From Sonia Rao, Alec Baldwin denies financial responsibility for ‘Rust’ shooting death:

Alec Baldwin’s lawyers argued in an arbitration demand filed Friday against fellow “Rust” producers that his contract shields him from financial responsibility in the on-set death of Halyna Hutchins, the cinematographer he fatally shot in October. They also asked the production to cover his legal fees. …

In the filing, Baldwin’s lawyers wrote that his only financial involvement on “Rust” was the $100,000 portion of his own fees that he “gave back to the production to enhance the budget.” The document states that his contract as a producer required Rust Movie Productions to “indemnify, defend, and hold harmless” Baldwin and his company, El Dorado Pictures, from “any loss, damage, liability, claim, demand, action, cost and expense” arising from issues with the production.

  1. QUESTION: Based just on what we know from this article excerpt, how enforceable is this indemnity provision likely to be in Texas?
  2. Same question, but for other jurisdictions in general?
  3. QUESTION: For the sake of argument, assume that Baldwin was negligent in firing the shot that killed the cinematographer (which Baldwin has denied) — under Texas law, does that affect the analysis of whether Baldwin’s indemnity clause is enforceable?

1.18.8. 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.)

1.19. Class 19: Wed. Mar 30

1.19.1. Useful reading: A primer on M&A contracts

See Shaun Sethna, An M&A Guide (For Those Who Barely Know What M&A Is) (ContractNerds.com Mar. 30, 2022).

1.19.2. Drafting fails - shared by a student

1.19.3. Redrafting an ambiguity in the Amazon forest

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

Discuss.

1.19.4. Continue with Stanford-Tesla lease indemnity “rewrite”

We’ll continue with this redrafting, 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)

CLARIFICATION: Instead of thinking of this as a rewriting project, imagine that you’re using the Stanford-Tesla provision as a “go-by” to do your own draft.

EXPERIMENT: Try breaking the original clause down into (comparatively) short, “See Spot run” sentences with defined terms. EXAMPLE: “Tenant must indemnify Landlord if any Indemnifiable Event (defined below) occurs. ¶ The term ”Indemnifiable Event“ refers to each the following ….”

1.19.5. 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?

(Each student should put an answer in the Zoom chat, to just me if you want.)

1.19.6. 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?

1.19.7. Reading review: Oracle’s most-favored-customer problem

Reading review

In groups:

QUESTIONS - 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 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?

1.19.8. Discuss: Jacobs Engineering v. ConAgra

In groups; 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):

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?

1.19.9. 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?

1.19.10. Exercise: Survival- & termination wrap-up clauses

In groups, answer the questions in the following Google Doc:

6:00 p.m. class

7:30 p.m. class

1.19.11. Sheryl Sandberg’s employment agreement - termination provisions

In groups, answer the questions in the following Google Doc:

6:00 p.m. class

7:30 p.m. class

1.20. Class 20: Mon. Apr. 04

1.20.1. Housekeeping: Group reshuffling

As previously announced, I’ve reshuffled the groups again: I took the names from the previous Group 1 and made them the first names in the new Groups 1 though 4, then the previous Group 2 became the second names in the new groups, and so on.

As before, the names are listed here by first name and/or initials only, so that the full names won’t be on the Web for all to see.

6:00 p.m.:
GROUP 1: Collin, Miles, Wafeeq, John
GROUP 2: Casey, Sarah (middle initial K), Shantelle, Jonathan
GROUP 3: Mackenzie, Juliana, Colton, Sarah Y.
GROUP 4: Antonios, Sarah (middle initial A), Katy

7:30 p.m. class:
GROUP 1: Nancy, Brittney, Benji, Vanessa
GROUP 2: Kyle, Rachel, Taylor, Nicholl
GROUP 3: Will, Isabel, Gaby, Courtney
GROUP 4: Elina, Allan, Noma, Cassie

1.20.2. Real world: Helping the other side to say “yes”

FACTS: This is about a client of mine, a longtime “SaaS” (Software as a Service) provider — let’s call it “MathWhiz” to fit in with our semester-long fact pattern, even though it wasn’t my MathWhiz client.

  1. MathWhiz was recently acquired by a leading Silicon Valley company, which we’ll call “Gigunda.”
  2. Under one of the related agreements, each of two MathWhiz executives and major shareholders signed a noncompetition agreement in which the executive was labeled as a “Stakeholder.” (This is quite common in acquisitions of non-public companies.)
  3. The noncompetition agreement required the Stakeholder, i.e., the former MathWhiz executives, to notify Gigunda of any new position that the Stakeholder accepted during the noncompetition period.
  4. One of the MathWhiz executives — we’ll say it was “Mary Marvel” — was approached about becoming an executive in another company whose business was somewhat related to that of MathWhiz.
  5. Mary asked me to represent her individually to make sure she wasn’t going to violate her noncompetition agreement with Gigunda. (This is important to remember: Clients’ people will sometimes change jobs, and could be a source of additional work at the new job.)
  6. At Mary’s request, I drafted the following notice email to Gigunda; Mary reviewed the text and made some minor edits, after which I sent the notice to the “legal-notices@gigunda.com” email address specified in the noncompetition agreement.
  7. For pedagogical reasons, I’ve slightly edited the email text (which is in bold). The italicized text was not part of the email.

1.  On behalf of Mary Marvel, this is a contractual notice under section 4 of Mary’s noncompetition agreement with Gigunda (as part of the MathWhiz acquisition), advising that Mary expects to join GeoData, Inc. [a fake name and Web address] in an executive position that includes joining the board of directors and a potential future cash investment as a shareholder.

The “On behalf of …” phrase establishes for the record that I’m acting as Mary’s attorney.

As an attention-getter, I used the term “contractual notice.”

In a longer email like this, I like to number the paragraphs, for two reasons: (A) to signal the reader when a somewhat-different topic is coming up, and (B) to make it easier, in the future, to reference specific parts of the email.

I included the word “MathWhiz” to increase the chances that my email would show up in any litigation-discovery search relating to Gigunda’s acquisition of MathWhiz.

This notice is required by section 4 of Mary’s noncompetition agreement, which says as follows: [quotation omitted].

I cited the section number of the specific notice requirement, and reproduced its text, as a form of “completed staff work,” so that the Gigunda people wouldn’t have to hunt through the document — the idea is (i) to identify all the little tasks that might delay Gigunda’s response, and (ii) to do as many of those little tasks as possible for Gigunda.

2.  REQUEST: Please acknowledge receipt of this email, as contemplated in section 7(a) of the noncompetition agreement.

Notice how I put the word “REQUEST,” above, in all-caps, bold-faced type. Also note how I cited the specific section of the noncompetition agreement that requires receipt.

I’m sending this email to the Gigunda email address for notice that’s stated in the noncompetition agreement.

The notices provision of the agreement specified a preference for email notices, but also that emailed notices were not effective unless receipt was acknowledged, and NOT just by an auto-responder.

Per Mary’s request, I’ve copied [two Gigunda execs].

This leaves a paper trail that, when I copied the two Gigunda execs on my email, I was acting under instructions from my client. That’s because under legal ethics rules, a lawyer is not supposed to communicate directly with another party concerning a matter if the lawyer knows that the other party is represented by counsel in that matter. It’s unclear whether this rule extends to copying non-lawyer people on emails when counsel is also copied.

I’m also copying Jane Doe [a Gigunda in-house attorney], who oversaw the legal aspects of the MathWhiz acquisition for Gigunda, to keep her in the loop.

This was a professional courtesy, even though I didn’t know for sure that Jane Doe would be handling this matter — Jane and I had worked well together during Gigunda’s acquisition of MathWhiz, and I wanted to keep that going.

3.  GeoData’s Website indicates that the company’s XXX™ offering provides “[quotation from GeoData Website omitted].” I’ve attached a screenshot of a portion of the home page to provide more detail.

This was is another “completed staff work” example — but ALSO note how I worded item 3 by explicitly quoting a publicly-available data site, so that I myself wasn’t personally representing anything to Gigunda about GeoData.

4.  Mary advises that in previous email correspondence, [a Gigunda exec] indicated informally that this likely wouldn’t be a problem for Gigunda but that Gigunda wasn’t in a position to formally confirm that it wouldn’t breach Mary’s noncompetition obligation.

Item 4 has two purposes: (A) To give Gigunda’s decision-maker — whose identity we didn’t know — some background context, in case he or she wasn’t already up to speed; and (B) to provide the same background context to possible future readers — such as litigation counsel.

Here again I made sure to specify that was Mary, not I, who was making statements about what Gigunda’s execs had said — I’d seen the email correspondence but that was only because Mary had forwarded the emails to me.

5.  As always, please let me know if you have any questions.

Regards,

–D. C.

Somewhat to my surprise, Gigunda’s in-house attorney Jane Doe responded later that day, copying all concerned:

Congrats, Mary. Receipt confirmed.

Additionally, I confirm that GeoData’s business, as it is currently conducted, is not considered to be a “Competing Business Purpose” by Gigunda, as defined in the non-competition agreement.

Best,

Jane

Mary emailed me:

Nicely done!

I responded to Mary:

I was a bit surprised that they confirmed there wasn’t a problem with the new position; if I had to guess, they appreciated that we played nice with them, including providing a link, screenshots, and the text of the relevant sentence of the noncompete — that made it easy for Jane to go, “yup, it’s fine.” I’m going to show this to my students [anonymized of course] as an example of how to make the client’s business go more smoothly by doing “completed staff work” for others with whom you’re dealing.

Mary responded to me:

I was shocked as well, particularly how quickly they responded.

1.20.3. How to respond professionally – when you want to scream at the person ….

See this list.

1.20.4. Referral agreement review

  1. At the beginning, “This Clause applies …” isn’t appropriate (it should be: “This Agreement ….”) . The Tango Terms referral language is written designed to be incorporated by reference; if you’re going to copy and paste that language into an actual contract, then the language needs to be adjusted accordingly.
  2. Gigunda: The assignment facts didn’t say Gigunda would be a referrer, nor to plug in Gigunda’s name.
  3. “Resident”: In a contract, an organization typically isn’t referred to as being a “resident” of a particular county or state; a corporation or LLC is organized under the laws of a particular state, and it has its principal place of business in a specified city, county, etc.
  4. “Person” generally means an individual or organization, so you wouldn’t say “person or organization” (emphasis added.)
  5. Running header: Good idea — but be sure that it’s hand-typed in, not an automatically-updated Word field.
  6. Recordkeeping: Until such time (if any) as the Tango Terms become more widely recognized and adopted, it’s better either: (i) to leave out a recordkeeping requirement, or (ii) to include a bare-bones requirement in the body of the agreement, without referencing the Tango Terms as an external standard. (The same is true for all Tango Terms protocols.)
  7. Numbering: For subdivision paragraphs that are all part of the same sentence, it’s better to use (a), (b) or (1), (2) — numbering such as “3.2.1” should be for complete sentences.
  8. Numbering: The (a), (b) numbering works here, but for internal subdivisions in a sentence, I often go with (i), (ii), etc.
  9. Numbering: If you don’t have a subdivision (b), then you don’t want to use “(a)”; you could just make it a standalone, unnumbered, grammatical paragraph.
  10. Capitalization: Be consistent about capitalizing “Company” and similar defined terms; see the readings about defined terms for cases where that has been important.
  11. Paragraphing: The Tango Terms referral language is heavily paragraphed for easy skimming — but that might not be the best approach for an actual contract provision.
  12. Evergreen term: Some students had a “termination” section that included both a 30-day termination-at-will clause AND a 30-day period to opt out of an automatic evergreen term extension — but that means the opt-out period is redundant. COMMENT: It’s usually better to keep an opt-out provision together with the “evergreen” provision so that in the future they can be “transplanted” together into another contract.
  13. Confidentiality: “All” reasonable measures (equivalent to “best efforts”) is more than you’d want to commit MathWhiz to doing for the other party’s information — if anything, you’d want to limit the confidentiality obligations to just the referring party.
  14. Termination for breach after 30 days might be too long a cure period; from MathWhiz’s perspective, it might make more sense to just be silent and count on the law.
  15. Performance requirements: These are something you might not put into a garden-variety referral agreement, as opposed to a reseller agreement — especially if there’s a short-notice “termination at will” provision.
  16. Reduced commission percentage: One student usefully stated that the first referred sale would get 5%, the second referred sale would get 2.5%, and then nothing after that. This is good, because it gives the referring company an incentive to go and find more customers to refer, instead of just sitting back and collecting commissions on previous referrals.sale second
  17. Entire-agreement & amendments-in-writing provisions: Almost any contract should have an entire-agreement provision, and probably an amendments-in-writing provision as well.
  18. Governing law: In many low-footprint commercial agreements (such as a low-dollar referral agreement), you can probably get away without a governing-law clause — and including such a clause could amount to kicking a sleeping dog.
  19. Signatures: For a reusable contract form, it’s best to leave the client’s signature block “blank” (as with the signature block for the other party). That’s because, for any given deal, we don’t know who will be signing on behalf of the client.

1.20.5. Ambiguity: Louis C.K.’s Grammy award

From this tweet:

Louis C.K. Grammy png

1.20.6. Small-group discussion: Assignment consent

  1. What’s the general rule about the assignability of contracts — and why is that the rule?
  2. What three categories of contract can’t be assigned without the other party’s consent — even if the contract is silent about assignability the subject?
  3. What’s a strategic danger in agreeing to obtain the other party’s consent to assigning the contract?
  4. What kind of language can be inserted into an assignment-consent provision —
    • to mitigate the strategic danger in #3 entirely?
    • to reduce the danger that the reviewing party will just sit on the request for consent?
  5. In the real world, how useful is a “consent not to be unreasonably withheld” provision in an assignment-consent requirement? EXPLAIN.
  6. Would a sale of all shares of a corporate party trigger an assignment-consent requirement (if the party was required to obtain consent)?
  7. FACTS:
    • A contract says that Assignor must obtain consent.
    • The contract also says that Reviewer may not unreasonably withhold consent.
    • There’s no exception to the consent requirement for asset-related transactions.
    • Reviewer withholds consent to an asset spinoff — and Assignor’s deal blows up.
    • Assignor sues Reviewer; the jury finds that Reviewer unreasonably withheld its consent.
    • The contract includes an exclusion of “consequential damages.”
    • QUESTION: Would the exclusion of consequential damages apply to Assignor’s claim for damages against Reviewer?

1.20.7. Ambiguity: Red squirrels

From this Facebook post that was “liked” by a former colleague:

Red squirrels drive slowly

1.20.8. Exercise: Assignment-consent rewrite

The following comes from a software-development agreement in an arbitration case in which I was engaged to be the arbitrator (the case was settled before the hearing).

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)

[BEGIN QUOTE]

9.7 Assignment. No Party may sell, transfer, assign, assume or subcontract any right nor obligation set forth in this Agreement by contract, operation of law or otherwise, except as expressly provided herein, without the prior written consent of the other Party; provided, however, upon providing the other Party written notice, any Party may without the consent of the other Party: (a) (i) assign any or all of its rights and interests hereunder to one or more of its Affiliates or (ii) designate one or more of its Affiliates to perform its obligations hereunder, in each case, so long as the assigning Party is not relieved of any liability hereunder and so long as any such Affiliate remains such Party’s Affiliate; provided, however, that such Affiliate assignee(s) provide the other Party with written acknowledgement of and agreement to the assigning Party’s obligations under the Agreement that were assigned to it; or (b) assign or transfer this Agreement as a whole to any Person that succeeds to all or substantially all of the business or assets of such Party related to the subject matter of this Agreement.

[END QUOTE] EXERCISE: Break this up into shorter, one-subject paragraphs; consider using “internal” defined terms.

1.20.9. 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.

1.20.10. 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)?

1.20.11. 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

1.20.12. 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.)

1.20.13. 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.

1.21. Class 21: Wed. Apr. 06

1.21.1. From the practice: Small world

DCT to recount a call.

1.21.2. 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.”

1.21.3. Assignment-consent rewrite (DCT’s version) (with apologies to Taylor Swift)

Original:

[BEGIN QUOTE]

9.7 Assignment. No Party may sell, transfer, assign, assume or subcontract any right nor obligation set forth in this Agreement by contract, operation of law or otherwise, except as expressly provided herein, without the prior written consent of the other Party; provided, however, upon providing the other Party written notice, any Party may without the consent of the other Party: (a) (i) assign any or all of its rights and interests hereunder to one or more of its Affiliates or (ii) designate one or more of its Affiliates to perform its obligations hereunder, in each case, so long as the assigning Party is not relieved of any liability hereunder and so long as any such Affiliate remains such Party’s Affiliate; provided, however, that such Affiliate assignee(s) provide the other Party with written acknowledgement of and agreement to the assigning Party’s obligations under the Agreement that were assigned to it; or (b) assign or transfer this Agreement as a whole to any Person that succeeds to all or substantially all of the business or assets of such Party related to the subject matter of this Agreement.

[END QUOTE]

DCT rewrite (bold-faced emphasis indicates noteworthy points):

9.7 Assignment.

9.7.1 No Party may sell, transfer, assign, assume or subcontract any right nor or obligation set forth in this Agreement — by contract, by operation of law[,] [!!] or otherwise — except: (i) as expressly provided herein, or (ii) with the prior written consent of the other Party.

9.7.2 Any Party may without the consent of the other Party: (i) assign any or all of its rights and interests hereunder to one or more of its Affiliates, or (ii) designate one or more of its Affiliates to perform its obligations hereunder, but only as follows:

(a) The assigning Party will not be deemed relieved of any liability hereunder under this Agreement.

(b) Each such Affiliate assignee or designee must provide the other Party with written acknowledgement of and agreement to the assigning Party’s obligations under the Agreement that were assigned to the Affiliate.

(c) A designation under subdivision (ii) of this section 9.7.2 will expire automatically if and when the designated Affiliate ceases to be the designating Party’s Affiliate.

9.7.3 Any Party may assign or transfer this Agreement[,] as a whole[,] to any Person that succeeds to all or substantially all of the business or assets of such Party related to the subject matter of this Agreement.

9.7.4 Any Party assigning or delegating under sections 9.7.2 and/or 9.7.3 must promptly notify the other Party of the assignment or delegation.

1.21.4. Consequential-damages flow chart

This past Monday at the whiteboard, I tried sketching a Venn diagram of consequential damages but wasn’t happy with it. I did some more work using PowerPoint; here’s the result:

Consequential damages flow chart

Study suggestion: Hand-copy the above diagram — research has shown that handwritten notes help with both comprehension and retention.

UPDATE: I still wasn’t happy with the diagram so I turned it into a proof-path flowchart:

Consequential damages flow chart 2

1.21.5. Reading review: Confidential information, etc.

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 (including but not limited to confidentiality provisions)
  • questions you think business people might have about carrying out confidentiality provisions

1.21.6. Examples in a contract can trump narrative language

Here’s a case from the High Court (i.e., trial court) in England:

  • 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.

1.21.7. 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: My client 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?

1.21.8. 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?

1.22. Class 22: Mon. Apr. 11

1.22.1. In the news: No harm, no foul - SwiftAir v. Southwest Airlines

A party might breach a contract but then be held not liable because the other party failed to prove that it was harmed. Here’s an example:

  • A software development company, SwiftAir, entered into an agreement with Southwest Airlines.
  • Under the agreement:
    • Southwest was required to serve as a beta tester of certain software that SwiftAir was developing;
    • after completion of the testing, Southwest was required (i) to enter into good-faith discussions with SwiftAir to negotiate a full license agreement for the new software, and (ii) to timely remove the software from Southwest’s aircraft.
  • A California jury found that Southwest had breached its obligations listed in items (i) and (ii) of the previous bullet.
  • Importantly, though, the jury also specifically answered that SwiftAir had not been harmed by Southwest’s breach.

A California appeals court affirmed the trial court’s take-nothing judgment in favor of Southwest. See SwiftAir, LLC v. Southwest Airlines Co., No. B303314 (Cal. App. Apr. 5, 2022).

1.22.2. Exercise: Signature authority? (From real life.)

I once negotiated a contract between my “MathWhiz” client and “Gigunda.

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

At the last minute, Gigunda’s in-house counsel George said that the contracting party for the other side would be “Gigunda-Payroll LLC” and that the signer would be Gina Garson, the general counsel.

By prior agreement with George, I sent the following email to all concerned, including George, Gina Garson (the GC and signer) and my client’s CEO, Mary Marvel:

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

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

GEORGE: 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]

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

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

1.22.3. Delaware case: “Sandbagging” in reps and warranties?

FACTS — from Arwood v. AW Site Services, LLC, No. 2019-0904 (Del. Ch. Mar. 24, 2022):

  1. Seller, a waste-management business, enters into a contract to sell its business to Buyer in a “roll-up” transaction.
  2. A representative of Buyer, one Sean Mahon, “embeds” (my term) with Seller for months and gets complete access to Seller’s books.
  3. In the contract, Seller represents and warrants that the financial statements attached to the contract are accurate. But Seller never had any financial statements — such financial statements as there were, had been prepared by Mahon and given to Seller — and in any case Mahon’s financial statements weren’t attached to the contract despite what the contract said.
  4. Also in the contract, Seller agrees to “indemnify” (i.e., reimburse) Buyer for breaches of the reps and warranties — subject to a cap of $3.9 million.
  5. The deal closes; as is typical, part of the purchase price gets put into escrow as a source of funding for Seller’s indemnity obligations.
  6. After the closing, Sean Mahon takes over running the waste-management business for Buyer.
  7. Mahon learns from other employees that Seller had been overbilling its customers and otherwise engaging in unlawful business practices — and as a result, some of Seller’s reps and warranties about the business had been false.
  8. Seller argues that Buyer should have known about the problems because Mahon had complete access to the business and simply didn’t look.
  9. The trial judge (known in the Delaware chancery court as a “vice chancellor”) holds that Buyer’s fraud claim is untenable because Buyer’s reliance on Seller’s reps and warranties was unreasonable, given Mahon’s embedding with Seller.
  10. BUT: Seller’s indemnity obligation (see #4 above) survives, because reliance isn’t part of a breach of contract claim (cf. CBS v. Ziff-Davis, cited in the opinion).
  11. The vice chancellor holds that Seller is liable for $3.9 million — which, as noted above, was the contractually-stated cap on indemnity liability for breach of the reps and warranties.
  12. COMMENT: This case has attracted attention because the vice chancellor said (in dicta) that Delaware was, or at least should be, a “pro-sandbagging” jurisdiction, i.e., that a party should be allowed to sue for breach of warranty even when the party knew that the warranty was untrue. (It was dicta because the contract had expressly allowed for sandbagging.)

1.22.4. Exercise: Termination clause rewrite

This is a provision from an actual contract form provided by the “Customer” party; 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:

  1. Break up the provision.
  2. Rewrite to improve the readability AND to R.O.O.F.
  3. Be prepared to discuss: Under what circumstances might this be a reasonable provision, looking at the provision “neutrally,” i.e., without advocating for either party?

1.22.5. Ambiguity: Who was going to be killed?

Here’s an ambiguity about a tragic story:

This weekend, police identified the victim as Sandra J. Feuerstein — a longtime federal judge in the Eastern District of New York, the Palm Beach Post reported, who was most recently presiding over a headline-making case against a former New York police officer accused of orchestrating a hit on her husband.

Katie Shepherd, Federal judge killed by hit-and-run driver found with drugs after claiming to be ‘Harry Potter,’ police said (WashingtonPost.com Apr. 12, 2021).

QUESTION: From the quotation: Wasn’t it a conflict of interest for the judge to preside over a trial where her own husband was the intended victim? Or is that the correct way to read the quotation?

QUESTION: From the headline in the link: Who was “found with drugs after claiming to be ‘Harry Potter’” — the judge, or the hit-and-run driver? EXERCISE: How could this headline be rewritten to clarify?

1.22.6. Ambiguity exercise: North Korean weaponry

From Yochi Dreazen, Here’s what war with North Korea would look like (Vox.com):

Gregson thinks Kim [Jong Un] wouldn’t only use his chemical weapons against military targets in South Korea. The Pentagon has a sizable military presence in neighboring Japan, and the island of Guam is a US territory that is home to more than 163,000 American citizens. Both are well within range of Kim’s missiles and rockets — and Gregson expects both would be hit.

QUESTION: What are the two possible meanings of the italicized portion?

EXERCISE: Come up with two better ways to phrase the italicized portion — one for each possible meaning.

1.22.7. 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).

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: Can either Buyer or Seller terminate 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? Is payment of amounts due a prerequisite to the right to terminate, or is it a post-termination obligation? QUESTION: How could this be clarified?

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? EXPLAIN.

1.22.8. Small-group discussion: Letters of intent

QUESTIONS — 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) to make notes:

  1. What are some reasons business people often like letters of intent?
  2. What could go wrong with signing a letter of intent, and how could a drafter try to put up guard rails?
  3. What happened in the Pennzoil v. Texaco case?

1.22.9. 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.

1.22.10. 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.”)

1.22.11. 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.

1.22.12. 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.)

1.22.13. Negotiation exercise: Warranties – who can sue?

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)

FACTS:

  • Gigunda is impressed with how you’ve represented MathWhiz, and has asked you 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?

1.23. Class 23: Wed. Apr. 13

1.23.1. 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.)

1.23.2. Ambiguity: Bubbie’s kosher practice

TEXT (in honor of the upcoming first night of Passover, 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?

1.23.3. 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? [Careful: This is a trick question.]
  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?

1.23.4. NDA questions (review): 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. 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?
  5. In the NDA’s preamble, would you say that the confidentiality agreement is (i) “between,” or (ii) “by and between,” or (iii) “among,” Gigunda and MathWhiz? (Does it matter?)
  6. 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?
  7. Same facts as #6: How could you set up the written NDA to cover the previous Zoom call?
  8. 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?
  9. 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 the NDA’s /Background section?
  10. MORE FACTS: You learn that Gigunda’s lawyer has already prepared a draft of the NDA; that draft says, at the beginning: “This Agreement is made effective January 31, 20xx.” MathWhiz’s CEO asks 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?
  11. True or false: In an agreement title that contains party names, the full legal names of the parties must be spelled out in full in the title.

1.23.5. Exercise: Subcontracting clause - strategic thinking

1.24. Class 24: Mon. Apr. 18

1.24.1. 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.)

1.24.2. Ambiguity and the Easter service booklet

FACTS: This is adapted from my church’s Easter Sunday service booklet of a few years ago (with the family’s name changed):

Easter flowers and decorations are given
to the glory of God
and in memory of their grandmother Jane Doe
In honor of all Christians,
Especially those persecuted
By the Doe family

QUESTION: How could this be fixed with just one additional character?

1.24.3. Termination clause - a look back

See this rewrite of a (statutory) termination clause.

1.24.4. 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., 627 S.W.3d 277, 280 n.1 (Tex. 2021) (affirming reversal of refusal to compel arbitration; emphasis added).

1.24.5. Exercise: MathWhiz wants to offload an office lease

FACTS:

  1. MathWhiz leases a small office in Williamsburg (a gentrified, upscale neighborhood in Brooklyn, NY) to accommodate Sally, one of MathWhiz’s Ph.D. scientist-employees, who for family reasons wants to live and work there.
  2. MathWhiz’s office lease states that MathWhiz may not assign the lease without the landlord’s consent.
  3. Over time, Dr. Sally ends up working pretty much exclusively on projects for Gigunda.
  4. Sally is on very good terms both with Gigunda and with her colleagues at MathWhiz.
  5. Gigunda asks MathWhiz if MathWhiz would mind if Gigunda approached Sally about coming in-house with Gigunda.
  6. MathWhiz is actually OK with having Sally go in-house with Gigunda, because:
    • Gigunda can give Sally stock options and other compensation that MathWhiz can’t match — so MathWhiz doesn’t want Sally being resentful;
    • Working at Gigunda, Sally would get more visibility into Gigunda’s projects and would be in a position to refer work to MathWhiz; and
    • Because of increasing gentrification in Williamsburg, MathWhiz’s office lease is getting increasingly costly, and MathWhiz wouldn’t mind getting rid of it.
  7. MathWhiz and Gigunda agree that Gigunda will take over MathWhiz’s office lease so that Sally can keep working there after she moves to Gigunda.
  8. BUT: There’s bad blood between the landlord’s leasing manager and MathWhiz’s chief operating officer (“COO”) — they just don’t like each other — and the landlord refuses to consent to MathWhiz’s assigning the lease to Gigunda.
  9. MathWhiz’s CEO, Mary Marvel, asks your advice.

QUESTION: What options — both legal and business — might MathWhiz have?

(Don’t be afraid to think outside the box about what might succeed in persuading — or compelling — the landlord to grant its consent. BUT: Also think about the likely economic- and relational costs of particular courses of action.)

1.24.6. 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.)

1.24.7. 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?

1.24.8. Attorney fees - negotiation strategy

FACTS:

  • MathWhiz LLC’s draft services agreement with Gigunda Energy Inc. is silent about attorney fees.
  • MathWhiz is in Texas, Gigunda in California.
  • MathWhiz will be doing its work pretty much exclusively in Texas.
  • Mary Marvel (MathWhiz’s CEO) has heard confidentially that Gigunda’s board of directors is likely to fire the company’s CEO, and that Mary and Gigunda’s likely new CEO do not have a great relationship.
  • MathWhiz expects that it might have to sue Gigunda for payment.

CHALLENGE: Figure out how to set up the MathWhiz-Gigunda contract so that:

  • Gigunda would (likely) be liable for MathWhiz’s attorney fees if MathWhiz had to sue for payment and won; BUT
  • MathWhiz (likely) would not be liable for Gigunda’s attorney fees if MathWhiz sued for payment and lost.

QUESTION 1A: If Texas law applied, and the contract was silent about attorney fees, what would be the attorney-fees rule if MathWhiz sued Gigunda for payment and won? EXPLAIN IN DETAIL.

QUESTION 1B: Same question as 1A but MathWhiz sues Gigunda for payment and loses. EXPLAIN IN DETAIL.

QUESTION 2A: If California law applied, and the contract was silent about attorney fees, what would be the attorney-fees rule if MathWhiz sued Gigunda for payment and won?

QUESTION 2B: Same question as 2A but MathWhiz sues Gigunda for payment and loses.

QUESTION 3: What’s likely to happen if MathWhiz proposes the following clause to Gigunda: “Texas law will govern the interpretation and enforcement of this Agreement?

QUESTION 4: Under standard choice-of-law rules, what jurisdiction’s law will a court normally apply if neither side says anything on that subject?

QUESTION 5: Under standard choice-of-law rules, what factors would a court likely consider in determining what law to apply to a contract if the contract itself is silent about governing law?

QUESTION 6: In what jurisdiction is a contract considered to have been “made” if the contract is silent on that point?

QUESTION 7 — wrap-up: How could you, as MathWhiz’s counsel, try to set things up so that MathWhiz might get the result it wants as described at the beginning of this document?

1.24.9. Ambiguity and green hydrogen

TEXT: From a Chris Tomlinson column in today’s Houston Chronicle: “Today, hydrogen is made almost exclusively for industrial uses from natural gas.”

POSSIBLE REWRITES — note the subtle differences in meaning:

  1. “Today, hydrogen is made almost exclusively from natural gas.”
  2. “Today, hydrogen is made almost exclusively for industrial uses.”
  3. “Today, when it comes to industrial uses, hydrogen is made almost exclusively from natural gas.”
  4. “Today, hydrogen is made almost exclusively from natural gas, and most hydrogen production goes to industrial uses.”

1.24.10. Exercises: Services - topics for discussion

In your breakout rooms, prepare to discuss the following; 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? What would a service provider prefer?
  3. Who should arrange for licenses and permits? [Careful: This is a trick question.]
  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?

1.24.11. Ambiguity in an obituary

From the obituary of Inez Neill Winton, who died at age 97:

In early 1942, when American’s [sic] of Japanese ancestry were taken from their homes and relocated to internment camps, Inez went to the camp at Amache, Colorado to teach the children and open a library. She still received Christmas cards from several of the children she taught well into the 1960s including two who fought in the 442nd Infantry Regiment Brigade [sic].

QUESTION: What are two possible interpretations of the italicized portion? How could this be rewritten to clarify?

1.24.12. 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.

1.24.13. 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?

1.24.14. 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?

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

Apropos of unilateral amendments and arbitration clauses: 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).

1.24.16. 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?)

1.24.17. 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.

1.24.18. 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?

1.24.19. 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?

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

1.25. Class 25: Wed. Apr. 20

1.25.1. Ambiguity: Keith Urban and the serial comma

From a former student:

Keith Urban and Nicole Kidman

(When I looked up the actual article, it had been revised to fix this problem.)

1.25.2. Guest speakers: Kate Vitasek & Jim Bergman

Read: David Frydlinger, Oliver Hart, and Kate Vitasek, A New Approach to Contracts – How to build better long-term strategic partnerships, Harv. Bus. Rev. vol. 97, no. 5, Sept.-Oct. 2019, pp. 116+.

Also of interest: Kate Vitasek, Jane K. Winn, and Toni E. Nickel: The Vested Way: A Model of Formal Relational Contracts, 52 U. Pac. L. Rev. 125 (2020).

We will have as guest speakers (Wed. April 20, for about 30 minutes) one of the authors of the HBR piece, Kate Vitasek, along with lawyer Jim Bergman (a friend of DCT; Jim and Kate Vitasek are among the co-authors of the Contracting in the New Economy book that’s part of the optional reading).

Your questions are encouraged!

QUESTIONS FOR THE SPEAKERS:

  1. Motivation: Why should companies care about relational contracting — what’s in it for them? Has anyone actually done that successfully?
  2. The HBR article and the book talk about three different shortcomings of the traditional contract approach: Hold-ups; incomplete contracts; and shading.
    • Can you give us an example of a “hold-up”?
    • What about an incomplete contract — is that a real problem, and why can’t lawyers just draft more-complete contracts?
    • What do you mean by “shading”?
  3. Let’s talk about contracts that allow termination at will.
    • Some years ago there was an article by a UK in-house lawyer named Steve Weatherley about the Pathclearer approach. He worked for a brewery called Scottish & Newcastle.
    • Weatherley’s team got rid of long, complicated distributorship agreements, in favor of short letter agreements that relied on the general law and left each party free to turn down future business, and even walk away.
    • Does relational contracting have any advantages over Pathclearer’s walk-away approach?
  4. Can you give some examples of “switching costs”? How about in the Dell-FedEx relationship that you talk about in the HBR article?
  5. The HBR article talks about formal relational contracts — why bother, when parties either will or won’t develop mutual trust over time?
  6. The HBR article outlines a five-step process to get to a formal relational contract — do you have a sense for what the most important step is?
  7. It sounds as though a formal relational contract between two parties would be pretty costly to get rolling.
    • Are there ways to make the process more affordable for lower-value contracts, or for parties that can’t afford a big upfront investment?
    • Or is it a case of “horses for courses,” i.e., formal relational contracting simply isn’t a one-size-fits-all tool that can be used in every situation?
  8. With informal relationships, is there any danger from personnel transitions? (Chrysler example)

1.25.3. 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?

1.26. Class 26: Mon. Apr. 25

1.26.1. Ambiguity examples from Wikipedia

See here.

1.26.2. In the news: Wording of forum-selection clause waives right to remove to federal court

Summary:

  • A contract’s forum-selection clause said that lawsuits “shall be brought before the district courts of Harris County” (Houston).
  • The clause provided an exception for IP- or confidentiality-related injunctive relief “in any appropriate jurisdiction.”
  • The plaintiff sued in state court.
  • The defendant removed to federal court.
  • The trial judge (Judge Lee Rosenthal) ordered remand to state court.
  • The Fifth Circuit affirmed, on grounds that the forum-selection clause was worded in a way that waived removal right: “Removal would thus amount to bringing a matter before a U.S. district court, in violation of the Agreement’s forum selection clause.” (Cleaned up.)

See Dynamic CRM Recruiting Solutions, L.L.C. v. UMA Educ., Inc., No. 21-20351, esp. at nn.27-32 (5th Cir. Apr. 19, 2022) (citing cases).

1.26.3. 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.”

1.26.4. Glenn West on the survival of covenants vs. survival of reps and warranties

Apropos of a recent Delaware case, noted author (and Weil Gotshal partner) Glenn West writes: “… distinguishing between covenants and representations and warranties is the drafting equivalent of basic blocking and tackling.”

1.26.5. Drafting exercise: Limiting liability for widget warranties

FACTS:

  • You represent Wanda, who manufactures electronic widgets. Each widget has a battery that Wanda buys from Bob; the battery is sealed into the widget and not replaceable.
  • Gary manufactures electronic gadgets that include electronic widgets.
  • Wanda wants you to draft a contract for her to enter into with Gary; under that contract, Gary will buy electronic widgets from Wanda.
  • Gary has told Wanda 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 Wanda to indemnify Gary against any and all harm or expense that Gary suffers or incurs as a consequence of defects in the widgets.

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

MORE FACTS:

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

QUESTION 2 – EXPLAIN IF FALSE: Wanda need not reimburse Gary 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 Gary sues Wanda for breach of her indemnity obligation, Wanda can probably get Gary’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: Wanda can probably get Gary’s claim for travel expenses dismissed on partial summary judgment as barred by the contract’s exclusion of incidental damages.

1.26.6. 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).

1.26.7. Course objectives review

See the course objectives in the Syllabus — we’ll do an “after-action review” to see how well we did.

1.26.8. Feedback (for DCT) and UH course eval

1.26.9. Jeopardy-style game for review

2. Homework, week by week

2.1. Homework due Mon. Jan. 24: Signature blocks (5 pts P/F)

See the hypothetical facts at NCD § 1.2.

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

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

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

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

2.2. Homework due Wed. Jan. 26: 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.

2.3. Homework due Mon. Jan. 31: Tenant audit rights (5 pts P/F)

Rewrite the following, from this real-estate lease:

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

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

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

2.4. Homework due Mon. Feb. 07: Signatures - the Addams family (5 pts P/F)

FACTS:

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

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

QUESTIONS to answer in the Word document:

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

2.5. Homework due Mon. Feb. 14: Employment agreement (10 pts P/F)

See generally the hypothetical facts at NCD § 1.2.

FACTS:

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

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

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

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

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

HOMEWORK ASSIGNMENT:

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

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

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

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

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

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

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

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

2.6. Homework due Mon. Feb. 21: Earn-out computations (10 pts P/F)

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.

2.7. Homework due Mon. Feb. 28: Termination clause (10 pts.,  P/F)

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

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

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

(a) [omitted]

(b) by either Seller or Purchaser, if:

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

[remaining subparagraphs omitted]

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

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

(a) [omitted]

(b) by either Seller or Purchaser, if:

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

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

[remaining subparagraphs omitted]

I’ll show my rewrite in due course.

2.8. Homework due Mon. Mar 07: Contractor employee compensation Gross-up provision (20 pts., NOT P/F)

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

[BEGIN QUOTE]

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

[END QUOTE]

ASSIGNMENT: Assume that you represent Contractor.

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

2.8.1. Follow-up: “Gross-up” revision

A prior class had a nice “take” on the gross-up provision that we edited; I’ve reproduced it below with some minor tweaks:

Gross Up Provision

(a) Guarantor’s payments to Lender may could be subject to tax liabilities, as defined in subdivision (d), that must be paid by Lender.

(b) Except as provided in subdivision (c), in any situation described in subdivision (a), Guarantor will pay Lender amounts necessary to cover the tax liabilities owed by Lender so that Lender receives the net amount due in the Guaranty that it would have received absent the tax liabilities.

(c) Exception: Subdivision 2 does not apply to [LENDER’S INCOME TAXES].

(d) For this purpose, the term “tax liability” refers to all taxes, levies, imposts, duties, charges, fees, deductions or withholdings of any nature now or hereafter imposed or levied by any jurisdiction or any political subdivision thereof or taxing or other authority therein.

COMMENT: Use the “nickname” defined terms consistently — for example, use either “Guarantor” OR “the Guarantor” but not both.

(Old version — we did this in class so it’s not assigned as 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 [already done]:

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.

2.9. Homework due Mon. Mar 28 Sat. Apr. 2 Referral agreement (30 pts.  NOT P/F)

[CHANGE: I want to get my feedback to you sooner after you submit your assignment, so this is due at 5 p.m. on Saturday, vice the previous Monday; I plan to grade on Sunday and Monday.]

See the hypothetical facts at NCD § 1.2.

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

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

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

3. Reading, by week

3.2. Reading for Mon. Jan. 31

3.3. Reading for Mon. Feb. 07

Skim the following except as otherwise indicated:

3.4. Reading for Mon. Feb. 14

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:

3.5. Reading for Mon. Feb. 21

3.6. Reading for Mon. Feb. 28

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

3.7. Reading for Mon. Mar 07

Read:

3.8. Reading for Mon. Mar 21

Read:

3.10. Reading for Mon. Apr. 04

Skim the following except as otherwise indicated:

Skim the following except as otherwise indicated.

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

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

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

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

* * * 

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

* * * 

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

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

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

3.11. Reading for Mon. Apr. 11

Look for the main takeaways in the following:

Selected defined terms:

3.13. Reading for Wed. Apr. 20 (ADDED 1/26/22)

Read: David Frydlinger, Oliver Hart, and Kate Vitasek, A New Approach to Contracts – How to build better long-term strategic partnerships, Harv. Bus. Rev. vol. 97, no. 5, Sept.-Oct. 2019, pp. 116+.

We will have as guest speakers (Wed. April 20, for about 30 minutes) one of the authors of the HBR piece, Kate Vitasek, along with lawyer Jim Bergman (a friend of DCT; Jim and Kate are among the co-authors of the Contracting in the New Economy book that’s part of the optional reading).

3.14. Reading for Mon. Apr. 25