Avoiding a Mess:

What Litigators Want

In-House Counsel to

Know When Drafting

Contracts

December 5, 2018

Matt Karlyn

Lisa Glahn

Geoff Raux

Rebecca Golden

Arlene Feldman

Our Panel

Matt Karlyn, Partner, Foley & Lardner

Lisa Glahn, Partner, Foley & Lardner

Geoff Raux, Partner, Foley & Lardner

Arlene Feldman, Vice President & Asst. GC, BJ’s Wholesale Club

Rebecca Golden, Associate Legal Counsel, Kraft Group LLC

1

Overview

Business attorneys and litigators working together can draft the best possible contract

– A contract that is clear, precise, and says what you want it to say

– A contract that will be enforced

Don’t wait until you are sued, or want to sue, to have a litigator look at your contracts

When drafting contracts, think about what could go wrong

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Key Questions

What does the contract cover?

What issues are you trying to resolve? How are you drafting the contract to achieve resolution?

What limitations or other conditions do I face?

What remedies are available if things go wrong?

What happens when the relationship ends?

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PART ONE

Legal Considerations

TERMINATION PROVISIONS

Notice Requirements

Vague is Bad

– “REASONABLE NOTICE”

– “REASONABLE OPPORTUNITY TO CURE”

– Immediate termination upon “MATERIAL BREACH”

“This Contract shall terminate without notice upon the institution by or against either party of insolvency, receivership or bankruptcy proceedings.”

– Provision likely not enforceable

11 U.S.C. §541(c) – clause in contract that terminates because of insolvency of the debtor unenforceable once bankruptcy case filed

11 U.S.C. §365(e)(1) – same idea for executory contracts

Obligations remaining after termination

Auto-renewals with no termination for convenience

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CHOICE OF LAW

Which law do you want?

What law can you have?

– Reasonable relationship to the forum

– Statutory provisions like 6 Del. C. § 2708

What types of disputes are implicated (contract, tort or both)?

– “governed by”

– “construed in accordance with”

– “all disputes arising out of or related to”

– “interpreted under”

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CHOICE OF FORUM

Where do you want to litigate?

– Mandatory versus permissive

Is this the same location as what law governs the contract?

– Do you want it to be?

Does it include a waiver of all jurisdictional objections?

Does it include an agreement to accept or waive service?

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Melia v. Zenhire, Inc., 462 Mass. 164 (2012)

A forum selection clause in the agreement dictated that all disputes arising out of the contract or the employment relationship were to be resolved in New York. The agreement also contained a provision stating that it would be governed and construed in accordance with the laws of New York.

Plaintiff brought suit in Superior Court alleging that Zenhire violated the Massachusetts Wage Act. Argued that the forum selection and choice-of-law provisions in the employment contract were unenforceable "special contracts" that attempted to avoid application of the Massachusetts Wage Act.

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Melia v. Zenhire, Inc., 462 Mass. 164 (2012) The Supreme Judicial Court held that "a forum selection clause

operates as a special contract only when three conditions are met: the employee's claim is covered by the Wage Act; the court of the forum State, applying its choice-of-law principles, would choose a law other than that of Massachusetts to govern the dispute; and application of the foreign law will deprive the employee of a substantive right guaranteed by the Wage Act."

The Court held that a New York court applying New York's choice-of-law rules would apply Massachusetts law because the Plaintiff lived and worked in Massachusetts. As a result, the Court concluded the forum selection clause was not an unlawful "special contract," and the plaintiff must bring his claims in New York.

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ARBITRATION

Is it right for the dispute that is likely to arise from the contractual relationship?

Where and what rules will apply?

– Conflict with choice of law decision

Preserve ability to go into court in some instances

Make sure triggering event for arbitration is clearly defined

Not always cheaper and quicker – especially if you first have to litigate what is going to be arbitrated.

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ARBITRATION

Sample Arbitration Clause: – Demand for arbitration to be made “in writing, within twenty

(20) days after a dispute has arisen.”

Problem:– The agreement did not define the term “dispute.”

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Spataro v. Hirschborn, 40 A.D. 3d 1070 (N.Y. Apell. Div. 2007) The Court found the arbitration provision unenforceable

as a contractual period of limitations because the period was unreasonably short and the provision was not clear and unambiguous. Id. at 1071.

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WAIVER OF JURY

Can you waive the right to a jury?

Do you want to?

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INTEGRATION CLAUSES

What do they accomplish?

– This Agreement constitutes the entire Agreement between the parties and supersedes all proposals, written or oral, and all other communications between the parties relating to the subject matter of this Agreement.

– The Parole Evidence Rule

• Does not preclude evidence of a subsequent modification of a written contract.

Implied Terms

– Covenant of Good Faith and Fair Dealing

Ambiguity opens the door

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Galvin v. Excel Switching Corp., 2006 Mass. Super. LEXIS 295, *1 (Mass. Super. Ct. May 31, 2006)

Plaintiffs claimed defendants breached a contractual obligation to use the employees’ hire date with the original firm as their employment date for purposes of vesting stock options. Id. at * 1.

Defendants contended that the obligations asserted by plaintiffs contradicted the clear terms of the contract. Id. at * 17.

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Galvin v. Excel Switching Corp., 2006 Mass. Super. LEXIS 295, *1 (Mass. Super. Ct. May 31, 2006) Option Agreements contained explicit integration clause.

Option Agreements provided that Excel Switching Corporation, hereby grants as of May 10, 1999 an option to purchase a certain number of shares.

Agreements provided that they were was executed as of the date written above (May 10, 1999), but plaintiffs actually received and executed agreements on June 19, 1999.

Plaintiffs sought to introduce communications after the “as of” date (May 10, 1999) in the Option Agreements but before the execution date of the Agreements (June 10, 1999), claiming the communications were subsequent modifications. Id. at * 22.

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Galvin v. Excel Switching Corp., 2006 Mass. Super. LEXIS 295, *1 (Mass. Super. Ct. May 31, 2006)

Where a writing shows on its face that it is a fully integrated written contract, the parol evidence rule will bar the introduction of antecedent or contemporaneous written or oral agreements to contradict, vary, or broaden the terms of the integrated, unambiguous writing. Id. at * 19-20.

Massachusetts case law “consistently refers to the execution of a written agreement, and not its effective date, as the event that triggers application of the parol evidence rule.” Id. at * 24.

– Taking into account the Option Agreement’s explicit integration clause, the Court found that the parol evidence rule barred plaintiffs from introducing statements made prior to the execution of the agreement.” Id.

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REMEDIES

Injunctive Relief

– Often times a contract will state that any breach will constitute irreparable harm.

– This language is especially prevalent in confidentiality agreements or non-compete agreements.

Example:– The parties hereto agree that any party by whom this Agreement is enforceable

shall be entitled to specific performance in addition to any other relief or remedy. Such party may, in its sole discretion, apply to a court of competent jurisdiction for specific performance or injunctive relief or such other relief as such court may deem just and proper in order to enforce this Agreement or prevent any violation hereof and, to the extent permitted by applicable law, each party waives any objection to the imposition of such relief.

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REMEDIES

Is it enforeceable?

– Answer is going to depend in large part on what law governs your contract.

– Delaware will likely enforce such provisions. AM Gen. Holdings LLC v. RENCO Grp., Inc., 2012 Del. Ch. LEXIS 289 (Del. Ch. Dec. 21, 2012)

– Court did note similar provisions which were enforceable explicitly stated that a breach would cause damages that “could not be reasonably or adequately compensated” or that “money damages would not be an adequate remedy.”

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REMEDIES

Another view… Dominion Video Satellite, Inc. v. Echostar Satellite Corp., 356 F.3d 1256 (10th Cir. 2004)

- 10th Circuit reversed district court’s granting of an injunction.

- Contract provided: Accordingly, each of the parties hereto hereby agrees that the nonbreaching parties…shall have the right to obtain an order or decree of such specific performance, or a preliminary or permanent injunction (without the necessity of posting or filing a bond or other security) against the breach or threatened breach of any term or in aid of the exercise of any power or right granted in this Agreement

- Despite this language, 10th Circuit ruled: Were we to affirm this district court’s finding on irreparable harm, we would in essence be ruling that whenever a party enters into a contract containing some form of exclusivity provision, injunctive relief is automatic upon breach of the clause even when the breaching party has refuted every assertion of specific irreparable harm put forth by the opposing party. We are not willing to go that far.

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REMEDIES

Make sure contract’s chosen law allows for the enforcement of such a provision.

Explicitly state that money damages would not be an adequate remedy.

Think about the type of contract that is containing the provision:

- Would monetary damages really solve all of the problems?

- If so, why would you seek an injunction?

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REMEDIES

Liquidated damages

– Is it a penalty?

– Is it against public policy?

Attorneys’ fees

– For what types of claims?

– Unilateral or Bilateral Provision

• In California it may not matter, regardless of law governing contract

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CA Civil Code Section 1717

In any action on a contract, where the contract specifically provides that attorney’s fees and costs, which are incurred to enforce that contract, shall be awarded to either one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney’s fees in addition to other costs.

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Part Two

Other Considerations

CLEAR DRAFTING

Case studies

Jerry’s Hardware v. Hillcrest Partners

– Lease agreement to build out custom space, subject to condition precedent to obtain financing

• “CONDITION PRECEDENT: If any of the conditions are not satisfied or waived on or before the dates set forth above, this Lease may be terminated by such party upon written notice to the other.”

– Financing not obtained, Lessor does not perform. Lessee sues and recovers storage costs, costs of retrofitting a different location, and costs for new equipment.

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CLEAR DRAFTING

Case studies (cont.)

Driver Pipeline Co. v. Williams Transport, LLC

– Work Order with attached Terms and Conditions

– Work Order states: “The agreements and stipulations of this Work Order supersede the attached Terms and Conditions.”

– Terms and Conditions included arbitration clause. Work Order is silent on disputes.

– One party moves to compel arbitration.

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CLEAR DRAFTING

Precision and Time References

– Precision:

• Draft contract to precisely and accurately reflect the agreements and intentions of the parties

– Time References:

• Specific dates

• Date based

• Promptly/timely

Use of commas and the Oxford Comma

– The canning, processing, preserving, freezing, drying, marketing, storing, packing for shipment or distribution of…

Organizing the agreement

Headings and other considerations 27

COMMAS and OTHER PUNCTUATION

Use of commas and the Oxford Comma

– The canning, processing, preserving, freezing, drying, marketing, storing, packing for shipment or distribution of…

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SOFTENING THE EDGES

Materiality

Reasonableness

Consent not to be unreasonably withheld, delayed, or conditioned

Levels of effort

– Best

– Diligent

– Reasonable

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WORDS TO SCRUITINZE CAREFULLY

Solely

Estimate

Goal

Shall vs. May

Would vs. Could

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TRUMPING PROVISIONS

Notwithstanding anything to the contrary…

Except as otherwise provided…

Without limiting the generality of the foregoing…

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REVIEW THE ENTIRE CONTRACT

Don’t forget that a Court will treat the Agreement as One document

Make sure one provision doesn’t cancel another provision out

– Limitation of Liability vs. Attorneys’ Fees

Ultimately, make sure you have thought through the risks and are prepared to accept the consequences

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ATTORNEY ADVERTISEMENT. The contents of this document, current at the date of publication, are for

reference purposes only and do not constitute legal advice. Where previous cases are included, prior results

do not guarantee a similar outcome. Images of people may not be Foley personnel.

© 2018 Foley & Lardner LLP

Thank You

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