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Boilerplate Clauses in Commercial Contracts: Avoiding Unintended Consequences and Implementing Practical Solutions

Navigating Common Pitfalls With Choice of Forum, Choice of Law, Force Majeure, Dispute Resolution, Assignment and Other Key Clauses

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific TUESDAY, JANUARY 24, 2017

Timothy Murray, Partner, Murray Hogue & Lannis, Pittsburgh Steven M. Richman, Member, Clark Hill, Princeton, N.J.

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Boilerplate Clauses in Commercial Contracts

Steven M. Richman, Esq. CLARK HILL PLC 210 CARNEGIE CENTER PRINCETON, NJ 08540 609.785.2911 srichman@CLARKHILL.COM Timothy Murray, Esq. Murray, Hogue & Lannis 3400 Gulf Tower Pittsburgh, PA 15219 412-263-5245 tmurray@mhandl.com

5

DISCLAIMER: THE MATERIALS HEREIN ARE NOT LEGAL ADVICE BUT PRESENTED FOR GENERAL INFORMATIONAL PURPOSES, AND NO ATTORNEY-CLIENT RELATIONSHIP IS ESTABLISHED HEREIN. FOR SPECIFIC AND APPLICABLE LEGAL ADVICE, CONSULT AN APPROPRIATE LEGAL PROFESSIONAL LICENSED TO PRACTICE LAW IN YOUR JURISDICTION

DM1/3735893v2

The 7 Ps

 All agreements can be divided into seven basic

components:

 Preliminary–the basic governing principles  Parties–who they are and the impact of location and status  Purpose–business versus legal  Payment–satisfying both sides  Parol–impact of extra-contractual acts and statements  Practicalities-getting from A to B  Penalties-dispute resolution

All drafting and negotiation should keep the "big picture" in mind.

6

Pitfalls

 As stated in the program brochure:  “Boilerplate provisions are often simply cut and

paste from one contract to another without much thought about the potential impact of their use. However, these clauses conceal significant legal and business implications that can produce unwanted future results if not tailored to the specific circumstances of the transaction.”

 We will cover pitfalls and the unintended

consequences, and how to avoid, throughout this presentation using the “7 Ps” as an outline.

7

• 1. PRELIMINARY

 Law is territorial  Boilerplate is not boilerplate  You are responsible for what you sign (even if in a different

language)

 You break it, you own it  Digital is forever  Prevention  "We have this in all our agreements"—NOT  Contract as roadmap  Contract as legal rights and obligations  The more specific governs over the more general

8

• 1. PRELIMINARY: Read it

 You need to understand the transaction and make

sure the contract reflects it.

 Do not assume any of the "legal stuff" is standard;

make sure you understand it.

 Make sure you know whose law applies so the

enforceability of terms is understood up front.

 Do not settle for ambiguity and if there is pushback,

rethink your transaction.

 Understand the cultural context and signals.

9

• 1. PRELIMINARY: "The Form"

 "[S]ome documents do use meaningless

boilerplate and, in our view, the rule should not be carried to absurd lengths to imbue meaning into every legalistic jotting." Schron v. Troutman Saunders LLP, 2012 NY Slip Op 3966 (1st Dept. 2012)

 Forms are a starting place, not a finish, and once size

does not fit all—

 Distinguish from consistent documents in similar

circumstances.

10

• 1. PRELIMINARY: Best practices

 Clarity is better than ambiguity in most cases: unless

“eyes wide open” and informed decision.

 Run down the "what ifs."  Anticipate the obvious.  Use plain, understandable language.  Use definitions and be consistent.  The "backyard barbecue" test: how would you

explain it to your half-drunk neighbor?

11

• 1. PRELIMINARY: Best practices

 Clarity is paramount—you will never hear a judge

complain that a contract is too clear for him or her.

 No one wants to hear a court say this about their

contract: “[W]e have no idea what it meant.” Orlander v. Staples, Inc., 802 F.3d 289 (2d Cir. 2015).

 AVOID – legalese, redundancy, inconsistency.

 Common problem: dealing with the same subject matter in

more than one place in the document—and using different language.

12

• 2. PARTIES: Overview

 Different jurisdictions yield different expectations.  Civil law versus common law.  United States also involves different legal cultures,

legal regimes (Louisiana: civil law).

 Territorial application of law.  Different idioms and word meanings of law.  Parent/subsidiary and affiliate issues.  "Piercing veil" and "alter ego".  Agency and estoppel.

13

• 2. PARTIES: Why it matters

 Identify correctly the parties to the contract. If not

done, can be repercussions.

 Corporate structure presumptively respected, but if

"pierced," affects:

 Personal jurisdiction  Liability—individual and affiliates  Pool of recoverable assets  Available discovery  Statutory qualification—e.g., threshold for WARN Act,

discrimination laws

14

PARTIES: Why it matters

 Defining the parties too broadly: “. . . including its

subsidiaries, divisions, parent, and affiliates.”

 Do you have authority to contract on behalf of subsidiaries and

parents?

 If you have the authority, is it a good idea?  What is an “affiliate”? Without definition, it’s been held to be

ambiguous: Omnicom Group, Inc. v. 880 West Long Lake Assocs., 504 Fed. Appx. 487 (6th Cir. 2012).

 Do you even know all of the “affiliates” of the other party?  Example of alternative to respect the corporate separateness

• f affiliates: have the supplier agree to offer same terms to

affiliates—each affiliate that accepts contracts separately.

15

• 2. PARTIES: Choice of law

 Tells the parties which substantive law governs.  US and foreign courts generally enforce.  Affects substantive rights of parties.  Applies in arbitration as well as court litigation.  If not specified, courts do their own analysis.  Important to determine choice of law up front.

16

• 2. PARTIES: Choice of law matters

 The "legal stuff" affects you.  E.g., choice of law is not esoteric.  Finnish Fur Sales Co., Ltd. v. Juliette Shulof Furs,

Inc., 770 F. Supp. 139 (S.D.N.Y. 1991)(substantive law of New York contrasted with that of Finland; a corporate officer was liable for the corporation's debt under Finnish law, but not under New York law. Court concluded that Finnish law applied.)

17

• 2. PARTIES: If no choice of law clause

 If no contractual choice of law clause, court chooses.  Creates uncertainty.  Courts generally first look to see if a conflict; if not,

don't choose law.

 Tests: "traditional," the "significant contacts," the

Restatement 2d," "lex fori," "better law" and "combined modern."

 Governs substance, not procedure.

18

• 2. PARTIES: Choice of law enforcement

 US courts generally enforce; if not specified, various

tests (substantial relationship, e.g.).

 Exceptions:

 –against public policy  –no reasonable relationship to forum

 US courts also apply foreign law (F.R.C.P. 44.1).  Can affect ability to terminate contract or amount of

damages, entitlement to interest, and others.

 Scope: tort and contract, "relating to and arising out

• f" versus "interpretation," e.g.

19

• 2. PARTIES: Choice of law: tort, contract, equity

 Contract claims are based on the agreement between

the parties.

 Tort claims are "civil wrongs," permitted by either

statute or "common law," i.e., as developed by judges.

 Equitable claims are those for which no legal

(monetary) damages exist, such as injunctions.

 Different jurisdictions occasionally have different

standards, or even different views as to what remedies exist or not.

 So what is or is not included in choice of law matters.

20

• 2. PARTIES: Choice of law scope

 Scope of the choice of law clause defined what types

• f claims would be governed by that choice of law.

The issue is the same with regard to forum selection. The language of the forum selection clause determines its scope. Schering Corp. v. First Databank, Inc., 479 F. Supp. 2d 468, 470 (D.N.J. 2007).

21

• 2. PARTIES: Choice of law language

 The breadth of the clause may preclude its

application to tort claims, as opposed to those based in contract.

 For example:

 In Miguel v. Pro and David Landscape, 2008 US Dist. Lexis

100181 (D.N.J. 2008), the court noted that choice of law clauses using the language "govern and construed by" are broad enough to capture tort and contract, but clauses that simply say "construed under" are limited to contract claims.

 Run Them Sweet, LLC v. CPA Global Ltd., 2016 U.S. Dist.

LEXIS 173901 (E.D. Va. 2016)(“governed and construed” covers extra-contractual claims).

22

• 2. PARTIES: Choice of law practical points

 It is helpful to have broader language that applies to

claims "relating to the relationship" between the parties, or words to that effect. In general, the broader the language in your choice of law clause, the better chance exists that a court will apply a contractual choice of law clause to tort claims as well.

 "[this] Agreement shall be construed under the laws

• f the State of California" did not include tort claims.

Caton v. Leach Corp., 896 F.2d 939, 942 (5th Cir. 1990)

23

• 2. PARTIES: Choice of law public policy

 Swiss competition law would apply to an agreement

with a Swiss distributor irrespective of a choice of law clause in favour of New York law, so an agreement otherwise enforceable might be deemed to violate antitrust laws.

 New Jersey Supreme Court declined to enforce a

contractual provision in a franchise agreement applying California law, where the agreement was subject to the New Jersey Franchise Practices Act.

24

• 2. PARTIES: CISG

 International parties may implicate the United

Nations Convention on Contracts for the International Sale of Goods ("CISG"), a treaty governing formation, breach and remedy issues in contracts.

 Can apply to distributorships if predominantly or

predominantly sales.

 Can be disclaimed or modified.  Promotion of uniformity.  Growing body of US law; foreign law.

25

• 2. PARTIES: CISG (cont'd)

 Applies to commercial goods.  Principal place of business test.  Subjective standards.  Oral contracts and understandings permitted.  Formation rules based on offer/counteroffer rather than

rejection or UCC-style "knock-out" rule.

 Receipt rule, rather than "mailbox" rule.  Formation, not validity.  Buyer remedies include price reduction.  Concept of "fundamental" breach.

26

• 2. PARTIES: CISG specific disclaimer

 Those who do not wish the CISG to apply must make

that declination clear; most courts that have addressed the issue have held that without a specific disclaimer, simply designating a state's law as the choice of law will not suffice. See, e.g., American Mint LLC v. GOSoftware, Inc., 2006 U.S. Dist. LEXIS 1569 (M.D. Pa. 2006)

 Shantou Real Lingerie Mfg. Co. v. Native Grp. Int'l,

Ltd., 2016 U.S. Dist. LEXIS 118321 (S.D. N.Y. 2016) (if the parties derogate from the CISG, it must be done explicitly).

27

• 2. PARTIES: CISG matters

 Parol refers to oral or extra-contract

communications and behavior.

 Industry practice or party's conduct and course of

dealing may be relevant.

 Contracts can be accepted by silence if course of

conduct justifies.

 Non-contract claims, such as fraud and reliance and

misrepresentation, may result from behavior.

 CISG recognizes subjective intent of parties.

28

• 2. PARTIES: CISG matters

 CISG may not be as radically different as is

commonly believed—example, subjective intent:

 “The plain language of the Convention . . . requires an inquiry

into a party’s subjective intent as long as the other party to the contract was aware of that intent.” MCC-Marble Ceramic Ctr.,

• Inc. v. Ceramica Nuova D’Agostino, S.p.A., 144 F.3d 1384, 1387

(11th Cir. 1998).

 But even under U.S. law: “Where the parties have attached

different meanings to a [contract], it is interpreted in accordance with the meaning attached by one of them if at the time the agreement was made . . . that party did not know of any different meaning attached by the other, and the other knew the meaning attached by the first party . . . .” Restatement (Second) Contracts § 201 (2).

29

• 2. PARTIES: CISG importance

 Case-changing results—can determine what the

terms are of the contract.

 One case, where there was an oral agreement as to

price, quantity and type of goods, but no forum selection clause—so determines where case heard.

 Other situations—can find self in arbitration instead

• f court, or with certain other terms, like default

interest, had not realized.

30

• 2. PARTIES: Forum selection

 Determines where disputes will be resolved.  Witness availability, local procedures, cost of dispute

are all factors.

 Can be mixed.  Mandatory preferred over permissive.  Applies to arbitration as well as litigation.  Federal, state, county courts.  One case where contract in German and provided for

arbitration in Germany; US businessman failed to translate, signed and was bound.

31

• 2. PARTIES: Forum matters

 Important to consider choice of law in conjunction

with choice of forum.

 E.g., in N. Bergen Rex Transp. v. Trailer Leasing

Co., 158 N.J. 561, 569 (1999), the issue was the reasonableness of attorney's fees in a lease dispute.

 Though Illinois law was substantive, court held

attorney's fees were procedural and examined the reasonableness of contractually permitted fees under New Jersey law, and not Illinois law.

32

• 2. PARTIES: Forum drafting

 Raise the issue early in the drafting process, not

when it is done.

 Consider neutral jurisdictions if neither party

concedes the other's jurisdiction.

 E.g., consider New York as reasonable and

established commercial venue.

33

• 2. PARTIES: Forum background

 Restatement looks to whether:

 "chosen state has no substantial relationship to the parties or

the transaction and there is no other reasonable basis for the parties choice".

 E.g. above of New York—suppose a Danish company and

Louisiana distributor—might agree on New York as accepted commercial law.

 If chosen, say, Alaska, might not be deemed reasonable given

these parties.

34

• 2. PARTIES: Forum background

 Practical matters:

 Your client may not understand the difference between “choice

• f law” and “choice of forum.”

 If the CEO of your client is told he or she has to travel to a

faraway place for a trial, they might question why the attorney who negotiated it allowed that.

 Choice of law can be of critical importance but to make an

informed choice, the attorney negotiating the contract must know the laws of the jurisdictions that might apply –

 Example: Ask the lawyer who insists that the law of his or her

state must apply whether, under the law of that state, a well- drafted merger clause is conclusive on the question of whether the contract is fully integrated.

35

2. Parties: Third Party Beneficiaries

 Clauses can either deny existence or specify TPBs.  TPBs have legal ability to enforce contract rights  Restatement (2d) of Contracts § 302 establishes TPB

where (1) parties not otherwise agreed; (2) recognition of TPB appropriate to effectuate parties’ intention; and (3) the contract terms or circumstances show (a) performance of the promise satisfies and obligation or discharge of duty or (b) the promisee intends to give the beneficiary the benefit of the promised performance.

 Status determined by choice of law in contract

36

2. Third Party Beneficiaries

 Only intended, not incidental, TPBs can enforce

contract

 Intent is determined by (1) existence of a contract,

(2) the contract intended for the third party’s benefit, and (3) the benefit is immediate and not incidental. Chen v. Street Beat Sportswear, Inc., 364 F. Supp. 2d 269 (E.D.N.Y. 2002)

 Court may disregard waiver in view of circumstances

37

• 2. Third Party Beneficiaries

 Drafting tip: A contract’s general disclaimer of third

party beneficiaries will not necessarily override more specific language in the contract that manifests an intent to benefit a certain person or class of persons. Doyle v. Jewell, 2015 U.S. Dist. LEXIS 47766, at *15 (D. Utah Apr. 9, 2015).

 Tip: If you want to make sure a person or class of persons

mentioned in the contract is not a third party beneficiary, expressly state that the contract’s disclaimer of third party beneficiaries applies to them.

38

• 3. PURPOSE: Overview

 Contract is a business roadmap.  Contract is a legal document of rights and

• bligations.

 Contracts will generally be enforced as parties wrote

them, absent public policy or "unconscionability" issues.

 Courts generally will not make better contracts for

parties than they wrote for themselves.

 Clarity versus ambiguity.  All terms should contribute towards the purpose.

39

• 3. PURPOSE: Anticipation

 Anticipate eventualities.  Currency fluctuation: who bears the risk?  Force Majeure: what excuses performance.  Are there Customs, Export Administration Act, or

• ther specialized regulatory issues?

 Be aware of Foreign Corrupt Practices Act issues.  Are your clauses susceptible of multiple meanings?

40

3. Force Majeure

 Black’s Law Dictionary: “an event or effect that can

be neither anticipated or controlled. The term includes both acts of nature (e.g., floods and hurricanes) and acts of people (e.g., riots, strikes, and wars).”

 Consider conditions: political eventuality, change of

law—while not necessarily force majeure, can be a defined condition

 Currency fluctuations can be dealt with by contract

41

3. Force Majeure

 Impossibility/impracticality of performance—NOT

defenses in all cases

 Economic hardship NOT generally a defense—but

can structure agreement with benchmarks

 If there are circumstances unique to a particular

industry that would otherwise render a certain event foreseeable, but if you want to remove all doubt be specific

 Consider conditions as alternatives

42

3. Force Majeure

 CISG recognizes certain “exemptions” from

performance, including if “failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or

• vercome it or its consequences.” (Article 79)

 If you want specifity, put it in

43

• 3. Force Majeure

 Drafting tip: Force majeure provisions have been held to

displace the default defenses automatically given by law: impossibility, frustration of purpose, and impracticability. Aquila, Inc. v. C. W. Mining, 2007 U.S. Dist. LEXIS 80276 (D. Utah Oct. 30, 2007).

 The danger in listing force majeure events: missing

something (expressio unius est exclusio alterius excludes any item not specifically listed)

 Solution: add a catch-all at the end of the list—but this catch-

all needs to deal with another canon of interpretation or construction called ejusdem generis--by referencing dissimilar events or circumstances.

44

• 3. Force Majeure

 Draft a clause that deals with expressio unius est

exclusio alterius and ejusdem generis: “The parties expressly condition the performance of their duties under this Agreement on the nonoccurrence of [list events], in addition to any and all events, regardless of their dissimilarity to the foregoing, deemed to be impracticable or impossible under the law.”

45

• 3. Force Majeure

 Are force majeure clauses necessary in sales of goods

contracts in light of the Uniform Commercial Code where it applies?

 One case suggests not, but that lawyers in "an

abundance of caution" continue to include them; if they are to expand upon or modify the Code's protections, lawyers should "do so in plain and specific language." Eastern Air Lines, Inc. v. McDonnell Douglas Corp., 531 F. 2d 957, 990-991 (5th Cir. 1976)

46

• 3. Force Majeure

 Impossibility and impracticability can be defenses,

but limited.

 Impossibility excuses performance only when the

destruction of the subject matter of the contract or the means of performance makes performance

• bjectively impossible, and that impossibility must

be produced by an unanticipated event that could not have been foreseen or guarded against in the contract.

47

• 3. Force Majeure

 Related to but different from impossibility of

performance is frustration of purpose.

 Frustration of purpose requires proof of an

unforeseen event which destroys the underlying reasons for performing the contract so that, even if performance is possible, the party is discharged.

 The more specific the clause in dealing with what

happens when certain conditions occur, the more you can attempt to limit the more unpredictable results.

48

• 3. Force majeure

 Courts want to hold parties to their contracts.  Force majeure clauses are attempts to draft around

impossibility of performance by specifying the failures that will excuse performance.

 Can be permanent or temporary.  Scope is important and clauses will be strictly

enforced: be specific and remove doubt.

49

• 3. Force majeure

 Pay attention to force majeure clauses in light of new reality

• f terrorism—foreseeability issues.

 CISG has Article 79(a): "a party is not liable for a failure to

perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences."

 Uniform Commercial Code §2-615: "made impracticable by

the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made . . . "

50

• 7. PENALTIES: Force majeure (cont'd)

 To cover contingencies, such as political events,

make specific and do not rely on a general clause.

 Currency fluctuations and uneconomical results not

enough; consider percentage triggers.

 Use of floors and ceilings.

51

• 3. PURPOSE: Multiple documents

 There may be reasons to break up different aspects of

the transaction into multiple documents, as goods versus services.

 Make sure documents as integrated are consistent or

if not, there is a reason for the inconsistency.

 Clear incorporation of external exhibits or

references, such as Incoterms.

 Consistency of terms, definitions and default

provisions.

 Courts may find multiple documents to be one.

52

• 3. Multiple Documents

 When dealing with multiple contracts, consider a

single choice of law clause.

 If multiple choice of law clauses, consider how they

interact.

 Generally, courts review integrated documents as a

whole and try to render them consistent and give effect to their purpose.

 E.g., a mortgage on New Jersey property governed by

New Jersey law that secures a note governed by New York law.

53

4. Payment: Overview

 How will you pay or be paid? Who do you trust?  Consignment Purchase.  Secured Transaction .  Cash-in-Advance (Pre-Payment).  Open Account.  Documentary Collections.  Letters of Credit.  Factoring, Forfaiting, Swap, Hybrid.  Secured transactions.

54

• 5. PAROL: U.S. Law

55

 Purport to make the final agreement the only agreement  General merger clause cannot preclude a claim of fraud in

the inducement, nor protect against parol evidence to prove such fraud. Danann Realty Corp. v. Harris, 5 NY 2d 317, 320 (1959)

 Clear integration clause enforceable by court, and evidence

• f other oral agreements not allowed to be proven by

extrinsic evidence, provided the contract is not alleged to be "a forgery, a joke, a sham, lacking in consideration, or where a contract is voidable for fraud, duress, mistake, or illegality." Tangren Family Trust v. Tangren, 182 P. 3d 326, 330-331 (Utah Sup. Ct. 2008)

• 5. PAROL: U.S. Law

 Merger clauses are not conclusive everywhere:

“Integration clauses, also known as merger clauses, are contract provisions that generally state that the agreement as written constitutes the entire agreement between the parties and supersedes any prior representations.” But “the mere presence of an integration clause does not automatically preclude claims premised on representations or omissions that fall outside the contract.” Jacobson v. Hofgard, 2016 U.S. Dist. LEXIS 26802 (D.D.C. 2016)

56

• 5. PAROL: U.S. Law

 The limits of merger clauses: Cgbm 100 v. Flowserve

US, Inc., 2016 U.S. Dist. LEXIS 179517 (S.D. Tex. 2016)(contract’s merger clause was of no effect “since it cannot be seriously contended that Plaintiffs intended the written contract to be a complete and exclusive statement of the terms of the agreement”)

57

• 5. PAROL: U.S. Law
• Invisible terms implied in every contract: Trade Usage,

Course of Dealing and Course of Performance Bayer

• Chems. Corp. v. Albermarle Corp., 171 Fed. Appx. 392,

2006 U.S. App. LEXIS 6994 (3d Cir. March 21, 2006).

• Under the UCC, trade usage and course of dealing can be

“carefully negated.” This requires words in addition to the standard integration or merger clause.

• Can course of performance be negated? Technically, no. See

U.C.C. § 2-202 cmt. 2.

58

• 5. PAROL: U.S. Law

No oral modification clauses have nothing to do with parol evidence.

 Common law: Clauses purporting to forbid oral

modifications do not prevent oral modifications.

 UCC wrinkle: UCC § 2-209(3)—some courts say the statute

• f frauds requires any modification to be in writing.

 Roundabout way to prevent oral modifications: Include

provision stating that certain specified agents shall have no power to vary the contract or to waive the performance of conditions.

59

• 5. PAROL: CISG

 Article 8: "statements made by and other conduct of

a party" interpreted according to intent where other party aware or should have been aware.

 Article 9: parties bound to "any usage to which they

have agreed and by any practices which they have established between themselves".

 Article 11: "contract of sale need not be concluded in

• r evidenced by writing" or limited to one form.

 Be careful what goes into emails.

60

• 6. PRACTICALITIES: Overview

 Contract reflects the business decision of how to

engage in a particular market.

 Involve professionals: tax, banking, freight

forwarders, lawyers, accountants.

 US Government programs and assistance.  Local professionals.  Regularly review the "standard terms and

conditions".

61

• 6. PRACTICALITIES: Assignment

 Assignees are those to whom the contract rights and

• bligations are conveyed.

 A successor as well receives title.  No meaningful distinction: persons or entities to

whom the original parties to the contract want to convey rights and obligations.

62

• 6. PRACTICALITIES: Assignment (cont'd)

 May not want assignment where reliability, quality

• r financial wherewithal at issue.

 On the other hand, free assignability of a contract

can possibly ensure performance over a longer period of time, or provide a substitute for a party no longer able to fulfill its obligations.

63

• 6. PRACTICALITIES: Assignment (cont'd)

 Sometimes clauses seem to contradict each other.  A contract may have a non-assignment clause in one

place, and in another, a clause that says the agreement is binding on the parties' successors and assigns.

 You are advised to watch for this. Even if both

clauses appear, they may not necessarily be inconsistent and can be reconciled.

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• 6. PRACTICALITIES: Assignment (cont'd)

 "will not transfer, sell, hypothecate, assign, or in any

manner whatever dispose of said real property, or any interest therein or any portion thereof".

 Assignment: transfer an interest.  Alienate: convey or transfer.  Hypothecate: pledge as security.  Transfer: make over possession or control.  What about convey? Why all the words?  Less is more: ejusdem generis

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• 6. PRACTICALITIES: Assignment (cont'd)

 Unless the parties otherwise agree, courts recognize

the free assignability of contracts.

 Whether or not the parties restrict assignments,

assignability of rights may otherwise be limited by law or by public policy.

 A clause prohibiting assignments will be enforced in

accordance with its terms provided it does not violate public policy, is overreaching or otherwise was procured by fraud, or otherwise prohibited by statute.

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• 6. PRACTICALITIES: Assignment (cont'd)

 Assuming that a party violates the anti-assignment

clause, the remedy will depend upon the language used.

 If the language simply precludes the assignment,

then the aggrieved party has a claim for damages, but the assignment is valid.

 If, however, the language made the assignment void

by its terms, then the courts will honor such language.

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• 6. PRACTICALITIES: Notice

 Commonly, contracts call for the providing of notice.  May be to renew or to terminate an agreement, with

regard to the exercise of a right of first refusal, or any

• ther number of things.

 Should delineate the entity or person, address and

means by which notice is sent.

 Problem arises when parties fail to keep up to date or

modify the contract to reflect changes, or commit technical violations of the terms of the notice provision.

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• 6. PRACTICALITIES: Notice (cont'd)

 Courts will not exalt form over substance. Failure to

comply with all technical requirements will not defeat proof of actual notice. See, e.g., Brunswick Hills Racquet Club, Inc. v. Route 18 Shopping Center Associates, 182 N.J. 210 (2005)

 However, important to distinguish between the level

• f differentiation from the strict terms of the
• contract. One thing to allow a facsimile transmission

as opposed to regular mail. There may be significant difference, though, where oral notice is involved.

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• 6. PRACTICALITIES: Waiver.

 Bankruptcy Code waivers:  Automatic Stay: Typical clause:  Relief from Automatic Stay. The issuance of the Approval

shall constitute relief to Haymarket from the automatic stay pursuant to Section 362 . . . without the requirement of any further relief from the Bankruptcy Court, for all actions by Haymarket in carrying out the provisions of this Settlement Agreement or otherwise exercising its rights as mortgagee. . . . “In re Powers, 170 BR 480 - Bankr. Court, D. Massachusetts 1994)

 Not per se invalid but not self-executing and cannot bind

third parties, who can contest the motion. Id.

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• 6. PRACTICALITIES: Bankruptcy Waivers

 Courts enforcing it find public policy of encouraging

restructuring and settlements. In re Bryan Road, LLC, 382 B.R. 844, 849 (Bankr. S.D. Fla. 2008) (factors include party sophistication, consideration, other affected parties and feasibility of plan)

 Courts not enforcing it do so on the facts or in some cases,

finding it unenforceable per se due to lack of capacity (distinguishing between the individual and the legal “debtor”). Matter of Pease, 195 B.R. 431 (Bankr. D. Neb. 1996).

 Courts may not enforce in single asset case whether enforcement

completely undermines bankruptcy case. In re DB Capital Holdings, LLC, 454 BR 804 (Bankr. D. Col. 2011)

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• 6. PRACTICALITIES: No Waiver of Rights

 Clause means that excusing a default in one instance

does not mean waiver of right to enforce in another instance

 Generally enforceable but not dispositive; better to

have than not

 However, can be undone by conduct, or other

theories, such as estoppel, reliance or fraud.

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• 7. PENALTIES: General

 Anticipate dispute resolution.  Think through intermediate steps, what is material

and non-material, and termination provisions.

 Also think through the logistics of what happens

during cure periods.

 Consider limitations on damages and other relief.  Recovery of attorney's fees and costs.

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• 7. PENALTIES: Overview

 Minimize disputes and resolve expeditiously.  Choice of law and forum.  Arbitration versus litigation.  Attorney-client privilege.  Discovery and privacy.  International parties involve different countries and

different legal system, with different expectations.

 Civil law versus common law.  Different translations of English and idioms.

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• 7. PENALTIES: Arbitration

 Must be in writing; public policy in favor of.  Awards enforceable by treaty, and federal and state

statutes.

 Hall Street limits appeal to statutory grounds.  Supposedly faster, private, confidential, cheaper,

though not all agree.

 Scope of clause determines issues and authority.  Rules of evidence do not apply unless specified.  Dealing with vacancies, discovery, emergencies.

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• 7. PENALTIES: Arbitration is a favored remedy

 Mastrobuono: general choice of law clause does not

• verride arbitral rules.

 Green Tree Financial Corp: arbitrator decides

whether contractual clause permits class arbitration.

 Stolt-Nielsen: no class action arbitration to be

inferred; must be specified.

 AT&T MOBILITY: upheld the validity of class action

waivers in arbitration clauses.

 New IBA Rules on Taking of Evidence.  Lesson: think through and specify.

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• 7. PENALTIES: Scope

 Scope important to determine what is arbitrable and

what is not.

 IBA Guidelines for Drafting International Arbitration

Clauses.

 AAA Drafting Dispute Resolution Clauses.  Address authority of tribunal, document production,

confidentiality issues, allocation of costs and fees, qualifications of arbitrators, time limits, finality, cooling off periods, mandatory versus permissive, multiparty and multi-contract issues, preliminary relief, all or none, reasoned opinion, language.

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7. Arbitration: Scope

 The majority view, as set forth in ACE Capital Re

Overseas Ltd. v. Cent. United Life Ins. Co., 307 F.3d 24, 32 (2d Cir. N.Y. 2002) limited “arising under” language to a very narrow interpretation to one case

• n its facts, and otherwise takes a broader reading.

 The 9th Circuit takes a minority view on interpreting

“arising under” and “arising out of” language as being restrictive unless barred by the economic loss doctrine, would permit tort claims, as non-

• arbitrable. Tracer Research Corp. v. Nat'l Envtl.
• Servs. Co., 42 F.3d 1292, 1295 (9th Cir. 1994):

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• 7. PENALTIES: Limitations of arbitration

 Difficulty in procuring documents in discovery.  Difficulty in procuring third-party testimony or

documents.

 Difficulty in enforcement of nationwide subpoenas.  Limited motion practice.  No or rare depositions.

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• 7. PENALTIES: Ad hoc or institutional arbitration

 Arbitration provision must be in writing.  Parties can always agree to arbitrate.  Parties can informally select an ad hoc arbitrator and

formalize in writing.

 Parties can designate one of the arbitration

institutions to handle the arbitration.

 Parties can designate their own arbitrators or use the

institution's list.

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• 7. PENALTIES: Mediation

 Opportunity to "test drive" your case.  Allows other party to see you directly without filter of

adversary counsel.

 Allows parties to vent.  Allows a third party to comment to each side on

strengths and weaknesses.

 Only works if parties are serious.

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7. PENALTIES : Jury Waiver

 The right to a civil jury generally stems from a

constitution

 The issue must be of a legal rather than equitable

nature, the relief to be awarded must be legal rather than in equity, and the issue must be one that jurors can resolve given their abilities and limitations

 Cases brought in federal court, whether under

diversity or otherwise, look to federal law to determine whether a jury trial is warranted; federal law will determine whether the claim is legal or equitable

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7. PENALTIES : Jury Waiver

 Where a jury waiver clause is sought to be enforced in the

forum state, but it is contained in a contract with a choice of law provision applying the law of another state, the forum state may still apply its own law, or not necessarily apply the chosen law, in determining validity of the jury waiver. Fairfield Leasing Corp. v. Techni-Graphics, Inc., 256 N.J.

• Super. 538 (Law Div. 1992).

 Although a fundamental right that may be found in a state’s

constitution, a jury trial may be waived and that waiver

• enforced. L and R Realty v. Connecticut National Bank,

246 Conn. 1 (1998). Comparable principles apply in federal

• court. Mowbray v. Zumot, 536 F. Supp. 2d 617, 620 (D.
• Md. 2008)

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7. PENALTIES : Jury Waiver

 Minority view: Where a state statute or rule implements the state’s

constitutional right to a civil jury trial, that statute’s provisions regarding waiver must be consulted. Grafton Partners L.P. v. The Superior Court of Alameda County, 36 Cal. 4th 944, 951 (2005).

 Scope Issues: Where an action involves both legal and equitable

remedies and the facts are related, a court may order a jury trial on the particular legal issues, and reserve the equitable issues for bench

• determination. Colorado Visionary Academy v. Medtronic, Inc., 397

F.3d 867 (10th Cir. 2005)

 Should be conspicuous

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• 7. PENALTIES: Damages

 Liquidated damages provision.  Injunctive relief—agreement in advance to irreparable

harm.

 Limitations on consequential damages—what are they?  UCC formulae.  "Willful misconduct" and "malice".  Interest.  Enforcement/recognition issues.  Warranties: repair and replace—who chooses?

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• 7. PENALTIES: Limitations of damages

 Clauses that limit the type of damages, the amount

• f damages, or a liquidated damages clause.

 Other types of non-monetary relief addressed by

contract, such as injunctions.

 While it may be possible to have a one-way

limitation, i.e., you can get it all but the other party cannot, the more likely result is a mutually binding

• clause. Give thought to whether you can obtain a

limitation of damages that binds the other party only but if not, you may not want to so limit yourself.

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• 7. PENALTIES: Damages

 Direct damages are the costs of a plaintiff getting

what the defendant was supposed to give—the costs

• f replacing the defendant's performance.

 Consequential damages are other losses beyond

the immediate scope of the contract that were not part of what the plaintiff was supposed to get from the defendant--but that flowed from the breach.

 Jay Jala, LLC v. DDG Constr., Inc., 2016 U.S. Dist. LEXIS

150969 (E.D. Pa. 2016).

 Foreseeability is not the distinction between direct and

consequential damages

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• 7. PENALTIES: Damages

 The default remedies generally favor buyers.  Presumption of cumulative remedies:

 Presumption: remedies are cumulative.  If you want to make a remedy the exclusive remedy,

merely listing remedies in your contract--without stating they are the exclusive remedies--will not be sufficient to prevent the other party from obtaining the default remedies allowed by law.

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• 7. PENALTIES: Damages

Where a contract provided that in the event of

nondelivery of coal, the seller “shall” pay the buyer the difference between the total base price under the contract and the price at which the buyer purchases substitute coal, the court held that the contract did not clearly express an intent that this was to be the exclusive remedy. Consolidation Coal Co. v. Marion Docks, Inc., 2010 U.S. Dist. LEXIS 31365 (W.D. Pa. Mar. 31, 2010).

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• 7. PENALTIES: Damages

 “Where circumstances cause an exclusive or limited

remedy to fail of its essential purpose, remedy may be had as provided in this Act.” § 2-719(2).

 What if contract also contains an exclusion of consequential

damages? Some jurisdictions say that that when the remedy fails of its essential purpose, so does the exclusion.

 Drafting tip: “The parties also agree that, regardless of the

failure of the sole and exclusive remedy, seller will not be liable for any consequential damages of whatsoever kind or nature. The parties intend the exclusion of consequential damages as an independent agreement apart from the sole and exclusive remedy herein.”

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• 7. PENALTIES: Term sheets

 Parties must intend an agreement to be binding. Jordan Panel

Systems Corp. v. Turner Construction Company, 45 A.D. 165 (1st Dep't 2007)(term sheet made clear it was not binding until both parties signed final contract)

 Term sheet can be enforceable as preliminary agreement if reflects a

comprehensive meeting of the minds between the parties on every issue necessitating negotiation leaving only a formal writing to be completed. Guggenheim Corp. Funding, LLC v. Access.1 Communications Corp., 2009 NY Slip Op 52702 (NY Cty 2009)

 Term sheet that commits only to negotiation does not bind parties to

ultimate term. Id.

 Until term sheet is truly final, specific disclaimers of final agreement

should be used in header, together with tag phrase "for discussion purposes only."

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PROPHYLACTIC: The 8th P

 Think twice and draft once  Anticipate  Ask "what if"  If you don't understand it, don't use it  Avoid "legalese"  "I meant what I said, and I said what I meant" Dr.

Seuss, Horton Hears a Who

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