commercial contract drafting and negotiation

CommerCial ContraCt Drafting anD negotiation:aDviCe for avoiDing HeaDaCHes 2011 CCCa annual ConferenCe Halifax, august 16, 2011

Table of ConTenTsTab 1: PResenTaTIonsContext & architecture in Contract Drafting

Dr. stan benda

Contract Drafting: Unenforceability & Uncertaintystuart english & Robert Cohen

Contracting Issues - best Practices and avoiding PitfallsRobert balcom

Tab 2: aDDITIonal MaTeRIalContext & architecture in Contract Drafting Paper by Dr. stan benda

Corporate Counsel bulletin board Press Release

Tab 3: bIoGRaPHIesstuart english

Robert b. Cohen

Robert balcom

Dr. stan benda

+OVERVIEW

CONTEXT

Non-Legal Considerations

ARCHTECTURE

Devices

Structure

Elements

Style

CONTEXT

Legal Considerations

SPECIFICS

Indemnifications

Reps and Warrants

Put it on the Web

16th Aug. 2011Dr. Stan Benda / CBA Annual Halifax

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NON- LEGAL CONSIDERATIONS

Personality Issues

Risk Culture Types

Negotiating Facets

Cultural Issues (Government v University v Private)


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+LEGAL CONSIDERATIONS

Preservation of promise / Allocation of Risk

Schools of Interpretation

Readership – Five Audiences

Separated in time and context

Different agendas

Speech Communities

Values and Lexicon

Fresh /Organic / Not –From – Concentrate

Opposite of innocent? Opposite of dry?


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+ARCHITECTURE

Devices

Term Sheet, MOU, Letter Agreement, Comfort Letter, Formal, Tender & RFP

Formal Contract

Recitals

Elements

Definitions, covenants, statements, reps & warranties, conditions

Style Points

Para headings, footers, sentence structure, fonts, line length & spacing, conspicuous definitions, justification, shall v will v must


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+SPECIFICS

Reps and Warrants

Objective

Definition(s)

Types

Qualifications

Indemnifications

Why – risk, control means

Structure

Scope

Term

Notifications

Exclusions

Subject

Cap

Threshold

Consequence

Web Use

Paper

Scope of work

Execution

Web – boilerplate, ADR


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Purpose of Contracts

To create enforceable obligations that reflect what you intended

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2 Key Requirements

● Enforceabilityy

● Certainty

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Six Sources of Uncertainty

● Ambiguityg y

● Undue Generality

● Inconsistency

● Redundancy

● Conflicts

● Vagueness

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Interpretation Principles

● Goal of promoting parties’ reasonable expectations p g p p

● Intention of parties determined objectively (not subjectively; not determining actual intention; parole evidence rule)

● Plain meaning assumed to represent parties’ intentions (presumed to have intended what they said)

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Interpretation Principles

● Where words bear 2 interpretations, the more reasonable p ,one, that which produces a fair result, is preferred

● Interpretation that promotes, rather than defeats, purpose and objective should be chosen (context and purpose relevant)

● Literal meaning not applied if it produces absurd or unrealistic result

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unrealistic result

Potential Causes of Ambiguity

● Modifiers

● Commas

● And/Or

● May Only

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Modifiers

Syntactic Ambiguityy g y● Adjectives Before Noun Strings

● Exclusions In-Between

● Opening/Closing Modifiers

● Time for Performance

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Modifiers

Adjectives Before Noun Stringsj g

The Software shall be fully compatible with all Applesmartphones, tablets and laptops.

The Software shall be fully compatible with all smartphones, tablets and laptops that are Apple products.

The Software shall be fully compatible with all Apple products, i l di t h t bl t d l t

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including smartphones, tablets and laptops.

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Modifiers

Exclusions In-Between

Developer licenses the Software for use on all WiFi-enabled computers, excluding tablets, netbooks and laptops.

Developer licenses the Software for use on all WiFi-enabled computers, netbooks and laptops, excluding tablets.

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Modifiers

Exclusions In-Between

Insuranceco shall reimburse Service Provider for all costs incurred in providing the Services and payments to third parties.

Insuranceco shall reimburse Service Provider for all costs incurred in providing the Services, excluding depreciation, overhead charges and other indirect costs, and payments to third parties.

Insuranceco shall reimburse Service Provider for all payments to third

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p yparties and other costs incurred in providing the Services excluding depreciation, overhead charges and other indirect costs.

Insuranceco shall reimburse Service Provider for all costs incurred in providing the Services excluding: (a) depreciation, overhead charges, and other indirect costs, and (b) payments to third parties.

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Modifiers

Opening/Closing Modifiersp g g

Insuranceco shall reimburse Service Provider for all costs incurred in providing the Services excluding overhead charges and payments to third parties not set out in the Cost Schedule and in excess of $50,000.

Insuranceco shall reimburse Service Provider for all costs incurred in providing the Services excluding overhead charges, and

t t thi d ti t t t i th C t S h d l d i

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payments to third parties, not set out in the Cost Schedule and in excess of $50,000.

Insuranceco shall reimburse Service Provider for all costs incurred in providing the Services excluding: (a) overhead charges, and (b) payments to third parties not set out in the Cost Schedule and in excess of $50,000.

Modifiers

Opening/Closing Modifiersp g g

Insuranceco shall reimburse Service Provider for all costs incurred in providing the Services excluding:

a) overhead charges, and

b) payments to third parties

not set out in the Cost Schedule and in excess of $50,000.

I h ll i b S i P id f ll t

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Insuranceco shall reimburse Service Provider for all costs incurred in providing the Services, excluding any costs not set out in the Cost Schedule and in excess of $50,000 that are: (a) overhead charges, or (b) payments to third parties.

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Modifiers

Time for Performance

If the Company disputes any amount set out in the Cost Reconciliation within 30 days Service Provider shall provide documentation supporting its calculation of the costs or a revised Cost Reconciliation.

If the Company disputes any amount set out in the Cost Reconciliation within 30 days, Service Provider shall provide

f

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documentation supporting its calculation of the costs or a revised Cost Reconciliation.

If within 30 days of receipt of the Cost Reconciliation the Company disputes any amount set out therein, Service Provider shall promptly provide documentation supporting its calculation of the costs or a revised Cost Reconciliation.

Modifiers

Time for Performance

Buyer shall pay the purchase price to Seller by wire transfer to an account designated by Seller no later than 5 business days after delivery of the goods.

Buyer shall pay the purchase price to Seller, by wire transfer to an account designated by Seller, no later than 5 business days after delivery of the goods.

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days after delivery of the goods.

Buyer shall pay the purchase price to Seller, no later than 5 business days after delivery of the goods, by wire transfer to an account designated by Seller.

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Modifiers

Drafting Tipsg p1. Where a string of nouns or clauses is preceded or followed

by a modifier, consider whether the modifier applies to all or only some of the nouns or clauses.

2. Ask yourself when each obligation must be performed; look out for sentences with multiple verb clauses and a time for performance.

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3. Clarify by: (a) reordering sentence or changing punctuation, (b) enumerating, or (c) tabulating.

Punctuation

Dear John:I want a man who knows what love is all about. You are generous, kind, thoughtful. People who are not like you admit to being useless and inferior. You have ruined me for other men. I yearn for you. I have no feelings whatsoever when we're apart. I can be forever happy--will you let me be yours?Jane

Dear John:I want a man who knows what love is All about you are generous kind

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I want a man who knows what love is. All about you are generous, kind, thoughtful people, who are not like you. Admit to being useless and inferior. You have ruined me. For other men, I yearn. For you, I have no feelings whatsoever. When we're apart, I can be forever happy. Will you let me be?Yours,Jane

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Commas

Insuranceco shall reimburse Service Provider for all costs incurred in providing the Services excluding overhead charges and payments to third parties not set out in the Cost Schedule in excess of $50,000.

Insuranceco shall reimburse Service Provider for all costs incurred in providing the Services excluding overhead charges, and payments to third parties not set out in the Cost Schedule, in excess of $50,000.

Insuranceco shall reimburse Service Provider for all costs incurred in providing the Services excluding overhead charges and payments to

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providing the Services excluding overhead charges, and payments to third parties, not set out in the Cost Schedule in excess of $50,000.

Insuranceco shall reimburse Service Provider for all costs incurred in providing the Services, excluding any costs not set out in the Cost Schedule and in excess of $50,000 that are overhead charges or payments to third parties.

Commas

Rogers Comma CasegSubject to the termination provisions of this Agreement, this Agreement shall be effective from the date it is made and shall continue in force for a period of five (5) years from the date it is made, and thereafter for successive five (5) year terms, unless and until terminated by one year prior to notice in writing by either party.

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Commas

Drafting Tipg p4. Check for unintended clauses caused by commas. When

removed, how is sentence affected?

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And/Or

“And” between 2 adjectives modifying 1 nounj y g

Credit card and chequing account holders will be entitled to reduced interest rates.

Reduced interest rates will be available to holders of credit cards and chequing accounts.

Holders of either credit cards or chequing accounts, or both, ill b titl d t d d i t t t

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will be entitled to reduced interest rates.

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And/Or

“Or” – conjunctive (inclusive) vs. disjunctive (exclusive)j ( ) j ( )

Distributor shall be entitled to sell RIM or Apple products.

Distributor shall be entitled to sell RIM and Apple products.

Distributor shall be entitled to sell RIM or Apple products, or both.

Distributor shall be entitled to sell either RIM or Apple

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ppproducts, but not both.

And/Or

And & Or in a Stringg

To qualify individuals must be over 18 years of age and students or living with their parents.

To qualify individuals must be: (a) over 18 years of age, and (b) students or living with their parents.

To qualify individuals must be: (a) over 18 years of age and t d t (b) li i ith th i t

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students, or (b) living with their parents.

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And/Or

Drafting Tipsg p5. If a noun is modified by 2 adjectives, clarify whether 2

separate categories are intended or 1 category with 2 criteria.

6. “Or” can have inclusive or exclusive meaning. Clarify to avoid uncertainty (preferably not by using “and/or”).

7. When “and” and “or” are both used in a string of nouns or

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clauses, clarify grouping by enumeration.

May Only

“May” used to grant a right or discretiony g g● Alternative to:

● shall have the right to

● is entitled to

● is authorized to

● Specifying how discretion can be exercised may be interpreted as limiting discretion

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interpreted as limiting discretion

Distributor may sell RIM products to Rogers.

Distributor may sell RIM products to any retailer including Rogers.

Distributor may sell RIM products only to Rogers.

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May Only

“May…only” – one restriction or two?y y

Distributor may only sell RIM products in Ontario.

Distributor may sell RIM products only in Ontario.

Distributor shall not sell any products in Ontario other than RIM products.

Distributor shall not sell any products, other than RIM

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y p ,products that are sold in Ontario.

Unenforceable Provisions

Uncertaintyy● If intention cannot be determined, provision or entire

contract may be unenforceable.

● Rarely due to ambiguity.

● Applies where certain terms are to be agreed upon by the parties after signing the contract; referred to as “agreements to agree”.

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EdperBrascan CasepIn the event that not all of the Investments have been sold by March 31, 1998, Brascan will on March 31, 1998 purchase the remaining Investments at their Book Values: either for cash or, at Brascan’s option, for listed common shares or convertible debentures of equivalent value of Brascan Limited, Great Lakes Power Limited, Noranda Inc., or London Insurance Group To determine equivalent value the shares

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Insurance Group. To determine equivalent value, the shares chosen by Brascan shall be valued at (a) 95% of their average trading prices on the Toronto Stock Exchange over the 30 days immediately preceding March 31, 1998, or, (b) should Labatt determine that (a) does not represent equivalent value, at a price mutually agreed.


Terms to be Agreedg● Generally unenforceable (absent objective criteria)

● Similar to letters of intent and other “agreements to agree” (except that there is an otherwise binding contract)

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Drafting Tipsg p8. If possible, do not leave matters to be mutually agreed

upon.

9. If a term is left to be agreed, consider referring to objective criteria, such as fair market value (and determination bythird party, such as accountant, expert, arbitrator).

10. Consider potential consequences of provision being

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unenforceable, either entire provision or only a portion ofthe provision. (Note the consequences in theEdperBrascan case.)

11. Describe consequences if parties cannot agree (“If the parties do not agree, then …”).

Duty of Good Faith

What it is not● No pre-contractual duty; no obligation to negotiate in good

faith

● After contract entered into, generally, no duty to negotiate in good faith any terms left to be agreed

● Exceptions:

● Objective criteria

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j

● Special relationship

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Duty of Good Faith

What it is● Standard of conduct; applies to the performance of

contractual obligations

● Categories of cases where it has been applied

● Cannot engage in conduct that has effect of defeating contract rights

● Duty to cooperate to achieve contract objectives

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y p j

● Exercise of discretion

● Implied term, interpretive tool or independent free-standing duty?

Duty of Good Faith

Best Efforts● “Best efforts” vs. “reasonable efforts”

● Other alternatives:

● Commercially reasonable efforts

● Commercially reasonable best efforts

● Good faith efforts

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Duty of Good Faith

Exercise of Discretion● Required consent, right to accept/reject terms, goods or

services

● Absence of bad faith vs. reasonable

● Capable of objective measurement

● “Sole”, “absolute” and/or “unfettered” may not be sufficient to act arbitrary (may still need to be reasonable)

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y ( y )

Duty of Good Faith

Drafting Tipsg p12. Ideally, specify what must be done (or what need not be

done), and excuses for non-performance (force majeure).

13. For broadest discretion, expressly permit unreasonableness.

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2011 CCCA Annual Conference

Enforcement Issues Arising from

C

Issues Arising from Contract Drafting

Robert B. Cohen

Halifax

August 16, 2011

Enforcement of Contractual Provisions (Arbitration Clauses)

● Overview● Review of Enforcement of Contractual Provisions in the

Context of:

● Letters of Intent

● Offers to Lease

● Restrictive Covenants

● Penalty Clauses

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● Penalty Clauses

● Arbitration Clauses

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Letter of Intent #1 – The BackgroundWallace v. Allen 2009 ONCA 36

● The defendant decided to sell his businesses and retire.

● After weeks of negotiation, the parties executed a letter of intent for the share purchase and sale of four companies.

● A draft share purchase agreement was prepared and various issues that were intended to be inserted in the share purchase agreement were resolved verbally in a meeting.

● At the closing, the plaintiff did not attend, and the defendant

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g, p ,refused to close at a later date.

● The plaintiff sued for specific performance based on the letter of intent as the share purchase agreement was never signed.

Letter of Intent #1 – The ClausesWallace v. Allen 2009 ONCA 36

● “It is also agreed by the parties that there will be much g y plegal work to be done upon acceptance by both sides and that the wording of this agreement may alter somewhat”; and

● “This letter of intent must be reduced into a binding agreement of purchase and sale by the parties within the next 40 days.”

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y

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Letter of Intent #1 – The Court Held Wallace v. Allen 2009 ONCA 36

● The Letter of Intent was binding in that the parties used g p“the language of contract”● “It is agreed”

● “Upon acceptance”

● “This agreement”

● “The language of the document itself speaks to an intention to be bound upon signing ”

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intention to be bound upon signing.

● The defendant’s refusal to sign previous drafts of the letter because they “left too much in the air” indicated an intention to be bound by this version.

Letter of Intent #2 – The Background Otter Farm & Home Co-Operative v. Sekhon, [2004] B.C.J. No. 1058

● The defendant operated a gas station that depended on a p g p“pump support” rebate paid by the plaintiff.

● The business relationship was set out in various written contracts, which did not mention pump support.

● Years later, the plaintiff made a loan to the defendant to make improvements to the gas station.

● Prior to finalizing the loan contracts the plaintiff sent a

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● Prior to finalizing the loan contracts, the plaintiff sent a letter of intent stating that pump support would be provided to the defendant’s gas station.

● The plaintiff sued over the loan, and the defendant counterclaimed for the unpaid pump support.

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Letter of Intent #2 – The Clauses Otter Farm & Home Co-Operative v. Sekhon, [2004] B.C.J. No. 1058

● “Although this letter contains points agreed to, this is not g p g ,intended to be a binding agreement.”

● “A binding agreement would be entered into only upon our delivering to you fully signed copies of all the contracts.”

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Letter of Intent #2 – The Court Held Otter Farm & Home Co-Operative v. Sekhon, [2004] B.C.J. No. 1058

● The Letter of Intent was expressly not binding on the p y gparties.

● The Petroleum Contract (one of the loan documents that followed) governed the arrangements for the supply of gasoline, and contained an “entire agreement” clause to preclude the defendant from arguing a collateral contract for pump support based upon the letter of intent.

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p p pp p

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Lessons Learned with Letters of Intent

● If you want the Letter of Intent to be binding, make sure y g,that:a)You have incorporated fundamental terms;

b)You choose language which reflects that the Letter of Intent is “binding”; and

c) You have obtained the signature of the other party to acknowledge that the terms of the Letter of Intent are

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binding, even if the parties anticipate executing more definitive agreements at a later stage.

Lessons Learned with Letters of Intent

● If you don’t want the Letter of Intent to be binding, use y g,clear language that the letter of intent is meant to be “non-binding” until and unless more formal agreements have been executed by the parties.

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Offers to Lease – The Test

● The leading test for an enforceable offer to lease was set gout in Canada Square Corp. et al. v. VS Services Ltd. et al. (1982), 34 O.R. (2d) 250 (C.A.): ● To be valid, an agreement for a lease must show:

● The parties,

● A description of the premises to be demised,

● The commencement of the term

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● The commencement of the term,

● The duration of the term,

● The rent and, if applicable, all the material terms of the contract not being matters incidental to the relationship of landlord and tenant.

Offer to Lease #1 – The Background Upper Room Alliance Group Ltd. v. John Volken Foundation (2008), 54 B.L.R. (4th) 97

● Various drafts of an Offer to Lease were exchanged concerning a furniture store.

● After weeks of discussions and negotiations, the parties signed the Offer to Lease which contained: ● A description of the parties;

● The commencement date of the lease term;

● The duration of the lease term; and

Th t

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● The rent.

● Clause 14 of the executed Offer to Lease provided that the Landlord was obligated to provide the Landlord’s standard form of lease to the Tenant.

● The Tenant refused to execute a standard form lease, and the Landlord sued on the Offer to Lease.

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Offer to Lease #1 – The ClausesUpper Room Alliance Group Ltd. v. John Volken Foundation (2008), 54 B.L.R. (4th) 97

● There was a reference to the minimum size of floor space to be leased as “not less than approximately 25,000 square feet, in the approximate location” as would be shown on a floor plan attached as a Schedule “A” to be provided by the landlord. The exact measurements were to be determined in the landlord’s standard form of lease. Schedule “A” was attached to the lease but it was blank.

● “This Offer to Lease shall act as a binding contract until such

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This Offer to Lease shall act as a binding contract until such time as the Lease is fully executed by both Landlord and Tenant.”

● “In the event the Landlord and Tenant, acting reasonably and in good faith, cannot agree to the Lease, then this Offer to Lease shall remain in full force and effect and become the Lease.”

Offer to Lease #1 – The Court HeldUpper Room Alliance Group Ltd. v. John Volken Foundation (2008), 54 B.L.R. (4th) 97

● Taken in isolation, the Offer to Lease does show a certain amount of uncertainty regarding the exact parameters and lay-out of the premises to be leased. However, as indicated in the jurisprudence, these portions of the Offer to Lease cannot be considered in strict isolation.

● The description of the premises to be rented as well as the work and estimated cost of that work, on the part of both parties, was sufficiently certain. That essential element was also met in this

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Offer to Lease.

● It is significant that the Offer to Lease itself provided a contingency, in the event that the parties could not agree on the standard form of lease. This clause reflects the parties’ mutual intention to enter into a binding lease agreement by way of the Offer to Lease.

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Offer to Lease #2 – The BackgroundHillmond Investments Ltd. v. Peel (Regional Municipality), [1992] O.J. No. 575

● The plaintiff sought a declaration that a written offer to lease p gmade with The Regional Municipality of Peel was a valid and binding agreement.

● The offer to lease related to a 15,000 square foot second floor extension to premises the plaintiff owned in a shopping mall.

● The plaintiff had unexpected difficulty in obtaining

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permission from the Municipality to build the extension.

● Aware that it could be years before the plaintiff knew whether he could build the extension, the Municipality of Peel told the plaintiff that it was withdrawing from the agreement.

Offer to Lease #2 – The ClausesHillmond Investments Ltd. v. Peel (Regional Municipality), [1992] O.J. No. 575

● “The lease shall be drawn for a term of five years, y ,renewable for a further term of five years, subject to the terms and conditions in paragraph 9.”

● “The lease term shall commence on the latter of the following: 1. March 1, 1985; or

2 The date on which the Lessee is in occupancy of the

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2. The date on which the Lessee is in occupancy of the leased premises.

Provided however, that the expiry date of the lease shall be adjusted so that it shall expire five years after the commencement date.”

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Offer to Lease #2 – The Court HeldHillmond Investments Ltd. v. Peel (Regional Municipality), [1992] O.J. No. 575

● The clause describing the commencement of the term of the glease is tantamount to saying the term will commence when it commences.

● The Court is not entitled to read into the agreement words that would make certain the date for commencement of the term of the lease, words that would make the term begin within a reasonable period after March 1, 1985, or when the premises are ready for occupation To add such words would be to write

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are ready for occupation. To add such words would be to write a new contract for the parties, one they could easily have written themselves had that been their intention. But without the addition of such words, the date for commencement of the lease is so uncertain as to make the agreement unenforceable.

Lessons Learned with Offers to Lease

● If you want the Offer to Lease to be binding, you must y g, yincorporate the fundamental terms that are not incidental to all landlord and tenant relationships, including:a)The parties;

b)The commencement and duration of the term;

c) The rent obligations; and

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Lessons Learned with Offers to Lease

d)Any other covenants, conditions and restrictions that are ) yparticular to the relationship (such as leasehold improvements, options to renew etc.).

● “Binding” language should also be referenced in the Offer to Lease, with the signature of all parties, including any guarantors.

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g

Restrictive Covenant #1 – The Background H.L. Staebler Company Limited v. Allan, 2008 ONCA 576

● The defendants were employed by the plaintiff selling p y y p ginsurance (property, casualty and automobile) to businesses.

● Both of the defendants had written employment contracts with the plaintiff which contained non-competition/non-solicitation covenants and a liquidated damages clause.

● When the defendants started their own competing

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● When the defendants started their own competing business, the plaintiff sued for damages and obtained an interlocutory injunction preventing the defendants from soliciting or accepting business from any of the plaintiff’s clients.

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Restrictive Covenant #1 – The ClausesH.L. Staebler Company Limited v. Allan, 2008 ONCA 576

● “In the event of termination of your employment with the y p yCompany, you undertake that you will not, for a period of 2 consecutive years following said termination, conduct business with any clients or customers of H.L. StaeblerCompany Limited that were handled or serviced by you at the date of your termination.”

● “The damages for any breach of this undertaking shall be a l t 1½ ti th i i i i d b

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sum equal to 1½ times the commission income received by you or your subsequent employer on account of business conducted on behalf of persons or businesses that were clients/customers of H.L. Staebler Company Limited as at the time of your termination of employment.”

Restrictive Covenant #1 – The Background H.L. Staebler Company Limited v. Allan, 2008 ONCA 576

● At trial, the judge held that the Restrictive Covenants , j gwere enforceable and awarded $2 million in damages.

● The defendants appealed…

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Restrictive Covenant #1 – The Appellate Court HeldH.L. Staebler Company Limited v. Allan, 2008 ONCA 576

● “This is a non-competition clause. It does not purport to merely restrain the employees from soliciting the clients and customers but it prohibits the employees from “conducting business” with any such clients or customers.”

● “While the Restrictive Covenant has a two-year time limit, it has no geographical limit.”

● “Furthermore, there is no limit in the Restrictive Covenant on the type of work which the Employees are prohibited from

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type of work which the Employees are prohibited from conducting: the prohibition is against doing “business” with their clients and customers.”

● “It unreasonably restricts the Employees’ economic interests and goes beyond that which is reasonably necessary to protect Staebler’s proprietary interest.”

Restrictive Covenant #2 – The BackgroundShafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6

● The defendant sold his shares in an insurance agency g ybut continued to work for the agency, entering into a series of employment contracts.

● The employment contracts contained restrictive covenants employed in the business of insurance brokerage within the “Metropolitan City of Vancouver” for a period of 3 years after leaving his employment for any

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p y g p y yreason other than termination without cause.

● The plaintiff brought an action against the defendant when he resigned and worked as an agent for a competing business in Richmond, B.C.

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Restrictive Covenant #2 – The ClauseShafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6

● “Shafron agrees that, upon his leaving the employment of g , p g p yMSA or KRG Insurance for any reason save and except for termination by KRG Insurance without cause, he shall not for a period of three (3) years thereafter, directly or indirectly, carry on, be employed in, or be interested in or permit his name to be used in connection with the business of insurance brokerage which is carried on with

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the metropolitan City of Vancouver.”

Restrictive Covenant #2 – The BackgroundShafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6

● The trial judge dismissed the action, finding the term j g , g“Metropolitan City of Vancouver” was ambiguous and the clause unenforceable.

● The Court of Appeal agreed that the term was ambiguous but applied the doctrine of notional severance and held the term meant “City of Vancouver, the University of British Columbia Endowment Lands, Richmond and

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Burnaby”.

● The defendant appealed to the Supreme Court of Canada…

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Restrictive Covenant #2 – The Supreme Court of Canada HeldShafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6

● For a Restrictive Covenant to be reasonable, the terms must be unambiguous. Th i th t ki t f th t i ti t t h thThe onus is on the party seeking to enforce the restrictive covenant to show the reasonableness of its terms.

● Severance can be divided into two types:

● Blue Pencil Severance – where the judge strikes out a portion of the contract, leaving the portions that are not tainted by illegality. Blue pencil severance should be resorted to sparingly and only in cases where the part being removed is clearly severable, trivial and not part of the main purport of the restrictive covenant.

● Notional Severance reading down an illegal provision to make it legal and

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● Notional Severance – reading down an illegal provision to make it legal and enforceable. Notional severance has no place in the construction of restrictive covenants in employment contracts.

● There is no legal definition for “Metropolitan City of Vancouver”. The Court of Appeal improperly relied on notional severance to resolve this ambiguity. Severance does not permit a court to re-write the covenant to reflect its own view of the parties’ consensus ad idem.

Restrictive Covenant #3 – The BackgroundBonazza v. Forensic Investigations Canada Inc. [2009] O.J. No. 2626

● The seller sold his business (an investigation service for insurance companies) and remained employed by the buyer pursuant to an employment contract.

● Both the sale agreement and the employment contract contained non-competition clauses.

● The non-competition clause in the sale agreement had expired; however, the clause in the employment contract was still in force

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force.

● The method of defining the geographical limit of prohibited competition was set out in a “descending scope clause”.

● At arbitration, it was held the clause was valid and enforceable.

● The seller appealed to the court.

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Restrictive Covenant #3 – The ClausesBonazza v. Forensic Investigations Canada Inc. [2009] O.J. No. 2626

● “The employee shall not act or serve as a director, officer, p yemployee, consultant, independent contractor or work in any other position or capacity whatsoever, or acquire an ownership interest in or otherwise conduct any business in competition with the private investigation business of the Corporation within the territories set out below:● The Province of Ontario

● The regional municipalities of York Durham Halton and Peel and

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● The regional municipalities of York, Durham, Halton and Peel and the City of Toronto

● The city boundaries of Mississauga, in the Province of Ontario

● A five kilometre radius from the office premises in which Ram Private Investigators Inc. carries on their private investigating business in the City of Mississauga, in the province of Ontario.”

Restrictive Covenant #3 – The Court Held Bonazza v. Forensic Investigations Canada Inc. [2009] O.J. No. 2626

● “The arbitrator’s reasons clearly demonstrate his awareness yof the distinction between employment contracts and purchase and sale agreements when it comes to restrictive non-competition covenants and the enforceability of those covenants.”

● ‘I would not interfere with the arbitrator’s finding in this case that all of Ontario was a reasonable geographic restriction. H id ti f “ bl ” l i

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However, considerations of “reasonableness” only arise after first finding there is no ambiguity. The arbitrator erred in resorting to severance as a means of resolving the ambiguity of the descending scope restrictive covenant. The restrictive covenant was unenforceable.’

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Lessons Learned in Terms of Restrictive Covenants

● If you want a Restrictive Covenant to be enforceable, y ,there should be:a)Fresh consideration for the Restrictive Covenant;

b)Precision in terms of the geographic limit;

c) Precision in terms of the type of “business” that is being restricted;

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Lessons Learned in Terms of Restrictive Covenants

d)A reasonable time for the Restrictive Covenant; and)

e)No reference to a “descending scope” of geographical limits.

● Note that the court is much more likely to enforce a Restrictive Covenant in the context of the sale of a business as opposed to a Restrictive Covenant in an

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business as opposed to a Restrictive Covenant in an employment contract.

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Liquidated Damages #1 – The BackgroundMascia v. Dixie X-Ray Associates Ltd. [2008] O.J. No. 4554

● The Respondents acquired the Applicant’s shares in a p q ppdiagnostic imaging business pursuant to Section 21 of the Shareholders Agreement, which enabled shareholders holding a majority of the outstanding shares to at any time require a minority shareholder to sell all of his shares.

● Section 21(1)(d) of the Shareholders Agreement further

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( )( ) grequired that, on the closing date, the selling shareholder was required to resign from his position as a radiologist, failing which the price to be paid for his shares would be reduced by 25%.

Liquidated Damages #1 – The BackgroundMascia v. Dixie X-Ray Associates Ltd. [2008] O.J. No. 4554

● The Applicant, who refused to resign, sought a pp , g , gdeclaration that the price reduction section of the Shareholders Agreement was not enforceable.

● The applications judge held it would be unconscionable or seriously unfair to enforce the price reduction section.

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Liquidated Damages #1 – The ClausesMascia v. Dixie X-Ray Associates Ltd. [2008] O.J. No. 4554

● Section 21(1)(d) requires that, on the closing date, the ( )( ) q , g ,selling shareholder, “shall resign as a radiologist and any other administrative position he may hold with the Humber River Regional Hospital, such resignation to take effect immediately”.

● “If the Principal of the Vendor does not so resign, the purchase price for the Vendor’s shares shall be reduced

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p pto equal twenty-five percent (25%) of what it would otherwise have been.”

Liquidated Damages #1 – The Divisional Court HeldMascia v. Dixie X-Ray Associates Ltd. [2008] O.J. No. 4554

● The onus of proving that a clause is a penalty lies with the p g p yparty alleging the clause is a penalty.

● If the clause is a penalty, the party must prove that the penalty is “extravagant and exorbitant in comparison with the greatest loss which could conceivably have flowed from the breach”.

● The section did not prohibit the radiologist from continuing to work. It simply imposed a reasonable economic consequence for doing so by offsetting a loss of income that the respondent

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for doing so by offsetting a loss of income that the respondent would suffer as a result of the radiologist continuing to practice in direct competition.

● The Divisional Court overturned the applications judge and held that the clause was enforceable.

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Liquidated Damages #2 – The BackgroundLoans Till Payday v. Brereton, [2010] O.J. No. 5176

● The defendant received a $450 loan from the plaintiff, $ p ,Loans Till Payday.

● A promissory note was signed agreeing to pay the plaintiff $562.50 a week later.

● When the defendant defaulted, the plaintiff claimed in Small Claims Court for the amount of the note, prejudgment interest at 59%, and liquidated damages of

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prejudgment interest at 59%, and liquidated damages of $500, for a total of $1,114.32.

● The judge did not allow the claim for $500 because he was not satisfied that it was a genuine pre-estimate of loss or reasonable under the circumstances.

Liquidated Damages #2 – The ClauseLoans Till Payday v. Brereton, [2010] O.J. No. 5176

● “Upon failure to make full payment by the specified date, p p y y p ,and should this note be turned over for collection or legal action, I understand and hereby agree to pay an additional $500.00 in costs as liquidated damages and not as penalty.”

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Liquidated Damages #2 – The Court HeldLoans Till Payday v. Brereton, [2010] O.J. No. 5176

● “The fact that the promissory note indicates that the amount p yis liquidated damages and not a penalty is not conclusive.”

● “The essence of liquidated damages is that it is, indeed, a genuine pre-estimate of damages... …Where, however, the agreement is not an agreement to estimate loss in advance but rather a penalty intended to secure performance of the contract, then it is not liquidated damages but rather a

lt d h i t bl ”

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penalty and as such is not recoverable.”

● “Given the lack of evidence in support of the claim, the judge did not err when he concluded that Loans Till Payday did not establish that the amount claimed was, indeed, a genuine pre-estimate or was reasonable.”

Liquidated Damages #3 – The BackgroundPeachtree II Associates v. 857486 Ontario Ltd., 2005 Can LII 23216 (ON CA)

● Parties entered into agreements to purchase and operate g p ptwo rental properties.

● Passive investors provided a service company with promissory notes (“C-Notes”) to secure their obligation to reimburse the service company for certain “soft costs” to be paid by the service company to set up the investment and for advances ultimately payable to the service

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y p ycompany.

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● The agreements provided that, upon the service g p , pcompany failing to cure defaults within a reasonable time after being given notice on two separate occasions, the promissory notes (the amount of which could vary but could be several millions of dollars) were deemed to be paid.

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● The service company failed to provide a promised line of p y p pcredit and failed to refund $432,000 in tax overpayments to the passive investors.

● The passive investors commenced arbitration to seek a declaration that the promissory notes were deemed to be paid in full in accordance with the stipulated term of the contract.

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Liquidated Damages #3 – The Arbitrator’s RulingPeachtree II Associates v. 857486 Ontario Ltd., 2005 Can LII 23216 (ON CA)

● An arbitrator found that there was no attempt to relate the pamount outstanding under the promissory notes to an estimate of the amount of damages and the deemed payment of the promissory notes could therefore be regarded as a “penalty”.

● However, the arbitrator proceeded to apply “equitable principles” to determine whether or not the “stipulated

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p p premedy clause” should be enforced.

Liquidated Damages #3 – The Arbitrator’s RulingPeachtree II Associates v. 857486 Ontario Ltd., 2005 Can LII 23216 (ON CA)

● The arbitrator then found that because the service company had not established a disparity between the value of the promissory notes and the damage caused by the serious breach by the service company, the “stipulated remedy clause” was enforceable, and it was inappropriate to grant relief from forfeiture in favour of the service company.

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● The service company appealed….

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Liquidated Damages #3 – The AppealsPeachtree II Associates v. 857486 Ontario Ltd., 2005 Can LII 23216 (ON CA)

● A single judge of the Ontario Superior Court upheld the g j g p parbitrator’s ruling and found that the stipulated remedy clause was not a penalty, as follows:

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● “Given the nature of the transactions, the roles of the ,parties, the “double notice” provision with its attendant opportunity for remedying the breaches, the large potential for serious damage to the interests and property of the investors, the sophistication of the parties or their representatives and the Arbitrator’s finding (that) it was uncertain that there was a disparity between the value of

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the C-Notes and the damage caused by the breaches, it had not been established that the clause in question was extravagant, extortionate, unconscionable or unreasonable….”

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● On further appeal to the Ontario Court of Appeal, the pp pp ,decision of the arbitrator and the single judge of the Ontario Superior Court was upheld. In so finding, the Ontario Court of Appeal noted:

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● “First, it seems more apt to describe deeming the notes paid , p g pas being a forfeiture rather than the payment of a penalty. A penalty is the payment of a sum as a consequence of a breach. By the terms of the clause at issue here, the appellant (the service company) pays nothing on account of its breach. Rather, the appellant forfeits the right to enforce the notes. Admittedly, in the case at bar, we are to some extent looking at two sides of the same coin but as I shall

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extent looking at two sides of the same coin, but as I shall explain, there is good authority to the effect that courts should, if at all possible, avoid classifying contractual clauses as penalties and, when faced with a choice between considering stipulated remedies as penalties or forfeitures, favour the latter.”

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Liquidated Damages #4 – “Exit Fees”?

● Contractual provisions that provide for a lump sum p p ppayment to terminate a contractual relationship prematurely without there being a breach by the other party are not considered “penalties” and are therefore not subject to attack on a “genuine pre-estimate of damages” approach as they are considered to be negotiated “exit fees” (see Pike v. Bel-Tronics Co., 2000 Can LII 22489

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ON SC).

Liquidated Damages #4 – “Exit Fees”?

● Commonly found in pre-payment of mortgages or break y p p y g gfees in corporate merger and acquisition transactions.

● If early termination remedy and lump sum payment is based upon non-performance, however, the court may still consider whether the clause is substantively a “penalty clause” (see Hurley Corporation v. Canadian IPG Corporation, 2010 ON SC 681).

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p )

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Lessons Learned in Terms of Penalty Clauses

● If you want a liquidated damages clause to be y q genforceable:a)Expressly indicate that the clause is indeed a “pre-estimate

of damages”;

b)Prepare calculations to reflect how the amount was selected (for evidentiary purposes);

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Lessons Learned in Terms of Penalty Clauses

c) Select an amount that reflects the damages that could ) greasonably occasioned by the breach in question;

d)Provide opportunities to cure the default upon reasonable notice;

e)Consider whether the “stipulated remedy clause” can be drafted as a forfeiture of rights (which may then trigger “relief from forfeiture” principles); and

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f) Consider whether the “stipulated remedy clause” can be structured as an “exit fee”.

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● Enforcement of arbitration clauses ● Consideration of Triggering Language

● Remedy is to Stay Court Proceedings

● Example 1 – Narrow Scope and Permissive ● “Any question with respect to the interpretation of this

Agreement may be submitted to arbitration.”

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● Example 2 – Broad Scope and Mandatory p p y● “Any controversy, question, claim or other dispute arising

out of or relating to this Agreement or the rights and obligations of the parties in connection therewith shall be referred to a single arbitrator. The award of the arbitrator shall be final and binding and not subject to appeal.”

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● Case Scenario 1:● A and B enter into a basic unanimous shareholders

agreement which contains the following arbitration clause:

● “Any question with respect to the interpretation of this Agreement may be submitted to arbitration.”

● A is believed to be misappropriating corporate funds or has diverted corporate opportunities to a separate business

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owned by a spouse.


● B brings an action to the Ontario Superior Court to seek g pinjunctive and monetary relief.

● A will be unsuccessful in his attempt to stay (freeze) the Ontario Superior Court action in trying to enforce the arbitration clause as the arbitration clause is not mandatory and has a narrow scope; it therefore does not preclude court process.

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● Case Scenario 2:● A and B enter into a basic unanimous shareholders

agreement which contains the following arbitration clause:

● “Any controversy, question, claim or other dispute arising out of or relating to this Agreement or the rights and obligations of the parties in connection therewith shall be referred to a single arbitrator.”

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● A is believed to be misappropriating corporate funds or has pp p g pdiverted corporate opportunities to a separate business owned by a spouse.

● B brings an action to the Ontario Superior Court to seek injunctive and monetary relief.

● A will be successful in obtaining a court order to stay (freeze) the Ontario Superior Court action as the arbitration clause by its terms is broad and enforceable to preclude

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clause, by its terms, is broad and enforceable to preclude court process.

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● Consequences associated with enforcement of arbitration qclauses ● Significant distinctions between arbitration process and

typical court process.

● Enforcement of arbitration clause may have significant impact on:

● Qualifications or expertise of adjudicator

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● Speed to engage the process and to access an adjudicator


● Costs of retaining adjudicator g j

● Confidentiality of process

● Rights of appeal / delay in enforcing award

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● Court’s powers to refuse to enforce arbitration clause p● Subsequent 7(2) of Arbitration Act, 1991.

● The court may refuse to stay a proceeding commenced in the Ontario Superior Court of Justice in respect of an issue that is otherwise required to be submitted to arbitration in any of the following cases:

● A party entered into the arbitration agreement while

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under a legal incapacity.


● The arbitration agreement is invalid. g

● The subject matter of the dispute is not capable of being the subject of arbitration under Ontario law.

● The motion to stay is brought with undue delay.

● The matter is a proper one for default or summary judgment.

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Lessons Learned in Terms of Enforcement of Arbitration Clauses

● If you want the parties to be subject to mandatory y p j yarbitration, you should:● Indicate that the parties “shall” arbitrate;

● Consider the scope of the disputes that will trigger the arbitration;

● Consider whether to take away rights of appeal; and

● Consider whether to include a basic process, or reference

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Consider whether to include a basic process, or reference appropriate legislation for process, such as the Arbitrations Act, 1991 (Ontario), or the International Commercial Arbitration Act (Ontario), which incorporates the United Nations Commission on International Trade (UNCITRAL).

Panda Bear and Contract Drafting

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● “Panda Bear”: A tree-dwelling marsupial of Asian origin, g p g ,characterized by distinct black and white colouring. It also …● “Eats shoots and leaves”

● “Eats, shoots and leaves”

● What a difference a comma can make!

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● What a difference a comma can make!

1. Build Your Team

• The Team: Depending on the size and complexity of the transaction or arrangement, it could be you and one business person or a multi‐functional team with both internal andperson or a multi‐functional team with both internal and external resources

• Internal Specialists: Engage the right specialists inside your organization: tax, IP, HR/Pension, environmental affairs, finance

• External Professionals: Determine the best time to engage outside counsel accountants or other professionals if neededoutside counsel, accountants or other professionals, if needed

• Ownership: Make sure business team owns and understands the business deal – too often they will not read the document carefully

Identify owners and specialists

2. Darwin’s Theory on the Evolution of a Contract• Term Sheet

– Overview of the deal from an internal business point of view– Before drafting the LOI, start with a term sheet– Make sure you and business people understand the big picture

• Letter of Intent/Memorandum of Understanding

– Framework of the transaction – sets out the parties’ intentions

– It is not intended to be a legally binding obligation unless you specifically make (all or part of) it so

• Definitive Agreement

P i l l l h h l i hi– Particularly relevant when the relationship goes “sour” or some bad event occurs

– This is when good drafting really counts!

• Deal Summary– Useful tool for everyone to have a business‐friendly summary of the signed deal

Term SheetLOI / MOUAgreementSummary

3. Contracting with or by a Corporate Group

• Corporate Structure: Today’s reality is that many companies have complicated corporate structures involving many different legal entities. Correct entity to contract with will depend on many factors:

– Types of Clauses: Exclusivity – Non‐competition – Non‐solicitation

– Privity: Consider which entities should have legal rights and entitlement

– Confidentiality: Ability to share with corporate group

– Leverage: May gain leverage by combining related corporate entities. Do other entities in the group benefit from the contract?Do other entities in the group benefit from the contract?

• “Affiliates”: Consider importance of this definition

“Affiliates”: Could want

definition to be very broad or very narrow

4. Know your Counterparty

• Risk of Default: Consider default risk and how you would realize your remedy (i.e. indemnity claim/breach of contract claim))

• Financial Condition: How does the counterparty measure up?

– Public Company: If public, you will have its financials and credit rating. If a subsidiary, do you need the public company's guarantee or credit support?

– Private Company: If private, ask to see their financials (are they internally prepared and are they audited or reviewed by an y p p y yindependent accounting firm?)

• Consider guarantee of principal/parent company

• Dunn and Bradstreet credit check references

• Should there be insurance coverage?

• Include other provisions to deal with creditworthiness (reporting, covenants)

“Show me the money!”

5. Contract Architecture – Ordering /Presentation

• Think carefully about the ordering / presentation of the document – it should tell a story (not a New York Times bestseller b t a stor nonetheless)bestseller, but a story, nonetheless)

• A few principles:– Stick to standard contract architectures and language to speed up the

other side’s review and thus the negotiations

– Use a Table of Contents

– Present the big picture before the details – recitals serve this purpose

Use descriptive headings leads and sub leads– Use descriptive headings, leads and sub‐leads

– Break it down into manageable sections and group related information together

– Make sure to pay adequate attention to boilerplate –don’t let your “eyes glaze over” Break it down

6. Risk Management• Key consideration in drafting of all contracts

• Need to understand the business and legal risks associated with the agreement

• Ensure proper allocation of risk between the contracting parties

• In an M & A Context

– Limitations of liability: caps, baskets (tipping basket vs. true deductible), and de minimis claims

– Qualifications: materiality and knowledge

• Ensure there are not too many carve‐outs

• Ensure the right people are giving the reps

– Length of escrow fund: relationship to survival periods

– Right level of reps and warranties will depend on the size, complexity and degree of due diligence obtained

Ensure proper allocation of risk

7. Insurance

• Ask yourself: should the counterparty have insurance to back up their performance or commitment?up their performance or commitment?

• If yes, then:

– How much insurance is required?

– Be a named insured

– Ask for a certificate of insurance

– No change in insurer or coverage unless you consent

l f l b l ff– No limit of liability to affect insurance

To insure or not to insure?

8. Service Standards

• What is the service provider required to do?: When and how often? How is their performance measured? What are the consequences of failing to meet the standards?consequences of failing to meet the standards?

• KPIs: Services Agreements need clearly defined Key Performance Indicators or service standards that they deliver against

• Consequences: Termination right or financial penalties for non‐performance

• Reporting: Tell you what they have done

• Right to Audit: Access to records and monitoring

• Dispute Settlement: Consider appropriate forumfor arbitrating/settling disputes

Clearly define the KPIs

9. Implement/Adhere to Contract Authority Protocol

• Important internal governance issues to be established –consider implementing a Corporate Authority Policy

A thorit C id h h th th it t i• Authority: Consider who has the authority to sign

• Ownership: We typically have the business team leader (“owner”) and a senior lawyer sign all contracts

• How Much: Dollar thresholds for different levels of officers?

• The Board: Is Board approval required?

• Conflicts: Code of Conduct – self‐dealing or gproviding benefits to friends and family

Internal Governance

10. Contract Reporting Obligations

• Internal Reporting: Essential for private and public companies

– Contractual obligations

K d t it i– Key dates – monitoring

– Financial commitments

• External Reporting: Critical for public companies. Disclosure obligations relating to:

– Filing of Material Contracts – OSC NI 51‐102

– Derivatives – GAAP

– Guarantees / indemnification obligations – GAAP

– Onerous contracts – GAAP

– Related party contracts – GAAP

– Contractual obligations – OSC Form 51‐102F1

Will any element of this contract need to be disclosed?

Recap: Contract Drafting Considerations

1. Build your Team

2 Darwin’s Theory on the Evolution of a Contract2. Darwin s Theory on the Evolution of a Contract

3. Contracting with or by a Corporate Group

4. Know your Counterparty

5. Contract Architecture ‐ Ordering/Presentation

6. Risk Management

7. Insurance

8. Service Standards

9. Implement/Adhere to Contract Authority Protocol

10. Contract Reporting Obligations

Ethical Issues when Contracting….

You are negotiating on behalf of your client who is the purchaser in an M&A deal What are your disclosurepurchaser in an M&A deal. What are your disclosure obligations to the other side’s counsel when you discover the following:

1. The Seller has mistakenly offered a $2.5 million escrow, rather than the previously agreed to amount of $1.5 million?

2. The Seller has indicated in its environmental disclosure schedules that there are no underground storage tanks on the owned property. The Phase II Environmental Audit (either the Seller’s, in the Data Room, or your own) shows otherwise.

CONTEXT & ARCHITECTURE IN CONTRACT DRAFTING

The Opposite of Sweet is…Spicy or Dry or Sour? The Opposite of Innocent is…Precocious or Guilty?

INTRODUCTION ..................................................................................................................................................... 1 GUTENBERG V E-‐HARMONY ............................................................................................................................ 2 WHAT IS A CONTRACT? ...................................................................................................................................... 5 WHO READS A CONTRACT? .............................................................................................................................. 6 CONTRACT ARCHITECTURE ............................................................................................................................. 9 CONTRACT STYLE ELEMENTS ..................................................................................................................... 15 INDEMNIFICATIONS ......................................................................................................................................... 18 THE CONTRACT IS TOO LONG ...................................................................................................................... 22 ENDNOTES ............................................................................................................................................................ 23

INTRODUCTION

Many lawyers prefer being engineers instead of architects regarding contract drafting. As long as the engineering is good, nothing else matters. But to the architect what matters is what matters to the user. What will make the building function for people? How will people use it and will they use it properly? Will the building encourage productivity? Will people be attracted to it? Will the users readily navigate it? Can the building be adapted to different needs over time?

To understand architecture – or contract drafting − you need more than a

degree (or two). You firstly need to be alive to some aspects of human behavior, and

2

© 2011 Dr. Stan Benda

yes even the human aesthetic. You next need to understand superstructures, their components and their interaction. Finally you focus on any particular problematic areas. The latter focus for this paper is on representations and warranties and indemnities.

GUTENBERG V E-‐HARMONY

To state the banal, people come with different personalities. To state the subtle, those personalities help fix the superstructure of the contract. There are multiple personality types or dimensions.1 One system colour codes and pigeon-‐holes people into the following types:

Catalyst = blue

Stabilizer = yellow / gold Theorist = green Improviser = orange

Amongst other traits blue sees possibilities, works well with others, values

teamwork, creativity, and is democratic. Green works well with ideas, likes to start

not finish, is insensitive, focuses on the big picture, and is rational. Gold prizes

harmony, is realistic, dependable, takes charge, and is orderly. Orange is resourceful,

independent, seeks action, is practical, likes to play, and is clever.

In addition, blues tend to be credulous / idealistic. Greens are skeptical /

theoretical. Yellows are fatalistic / economical. Finally oranges are cynical /

epicurean. To add complexity the theory argues that we are two colours; in the

dominant colour we are either an extrovert or introvert; in the subordinate colour

we are the opposite. Some internet dating systems use this regime to match the

colour (dominate/subordinate) and type (extrovert/introvert). It seems at business

negotiations that the colours are deliberately mismatched to fuel a fissiparous not

harmonious process.

Another pertinent psychological context is how people approach risk. One school

calls this “risk cultures”2. Each “culture” is biased towards highlighting certain risks

and downplaying others. Pertinent to contracting, there are three types of cultures:

Hierarchal: seeks legal equality – fears social deviance

Individual: seeks equality of results – fears regulation

3


Egalitarian: equality of outcome – fears technology

This might seem arcane and densely academic, but pause for a minute and place

yourself into contract negotiations having an environmental aspect. The hierarchist

will say expert knowledge is required to prevent the system from being destabilized

by human intervention. Regulation and data are necessary. The individual will hold

that people underestimate the power of human ingenuity to overcome apparent

limits. Resources can grow. Experimentation is encouraged. The egalitarian would

seek strict regulation/prohibition to stop harm to Mother Nature. Individualists and

hierarchists disturb the natural order, which is one of equality. Transmute the

theory into realty, albeit crudely, as a boardroom negotiation amongst a government

lawyer, an oil company lawyer, and an environmental lawyer.

The next consideration is negotiating types.3

Extroverts v Introverts

Intuitor v Sensor

Feeler v Perceiver

Judger v Thinker

Extraverts enjoy verbal interactions involved in negotiating, working with

teammates; they are comfortable with stating their case in an adversarial strategy

and stating clients’ needs in a problem-‐solving strategy. They do have problems

listening, think they know what you are saying before you say it or finish saying it,

and will interrupt you with detailed comments. Introverts by contrast are non-‐

talkative (better listeners usually); selectively disclose information; are reluctant to

express themselves and are frustrated by detailed conversation. They tend not to be

team players.

Sensors are linear, specific and literal. Sensors focus on facts to the exclusion of

the big picture; can’t see trends. They focus on specific details. Their opposite, the

Intuit look at the big picture, the concepts; are random, theoretical.

4


Perceivers ignore deadlines, are tentative and go with the flow. They have a

problem with making a decision, bringing things to closure, are forever seeking

more data. Perceivers prefer to act spontaneously, have greater difficulty preparing

and planning. Feelers emphasize the effect the decision will have on people and

interpersonal relationships. They attend more to human than to technical aspects of

problems and value these concerns more than any other type of evidence. Feelers

are naturally attracted to problem-‐solving strategies; prefer harmony and

agreement. Hence they do not favor a winner–take-‐all strategy

Judgers are structured in life, schedule to fixed deadlines, and seek control.

They are uncomfortable with uncertainty, need control; are impatient with

negotiating -‐-‐-‐ push to bring it to a conclusion, want to make decisions – get things

done. They favor an adversarial strategy that defines and orders issues and like to

control the flow of information. Thinkers do not focus on the needs of others. They

are impersonal decision making and avoid emotional issues. They respond to

attacking comments with strongly phrased counter attacks -‐-‐ which intensifies

conflict and may lead to impasse.

To add to this imbroglio, toss in negotiating biases. Optimum bias is the

exaggerated view of success of the dispute at another forum. One is disinclined to

make concessions e.g. requires production of all the data to disabuse the party

suffering under the illusion. Then there is Reactive Devaluation. Party devalues the

concessions or offers made, one becomes parsimonious rather than fixing the

appropriate concession. Cognitive Bias speaks to the situation of wrong

assumptions about why a party is acting a certain way thus misconstruing motives.

Those misconstrued motives now form the foundation for a "mood" or "tone" in the

negotiations.

Last but not least we have the concept of the co-‐operative vs. aggressive

negotiator. The co-‐operative can turn ineffective by becoming gentle, obliging,

patient, forgiving -‐-‐ in short, appeasing. The cooperative continually gives

concessions in the hope of securing the deal, while the aggressive keeps taking

without giving any real concessions. In a worst case scenario the cooperative

appeases an aggressive who bluffs, withholds information, demands, quarrels and is

5


disinterested in the needs of the other side. The oft quoted way to deal with an

aggressive negotiator is called “tit for tat”. No concession is given without a

reciprocating equal value concession.4

WHAT IS A CONTRACT?

One often leaves a boardroom feeling physically exhausted, emotionally

drained, intense, vaguely angry, muttering it need not have been that difficult.

When one subsequently reviews the minutes of that meeting, there are occasions

where one sputters a comment (inevitability with an expletive) that the other party

obviously was not at the same meeting! How can one proceed now? To draft , you

must reframe.

First clear the angst by recognizing the human element described above before

you walk into the room. Next re-‐characterize the negotiations. Negotiations are not

a compulsory unpleasantry on the way to a contract. Rather the negotiations are the

process that provides a detailed list of the guidelines necessary to draft an effective

contract.5 Classically property law preserved status, contract law preserved

promise, and tort preserved moral equilibrium. 6 The predominant purpose of law

now is to allocate risk. 7 You cannot allocate risk and draft an effective contract

without these idiosyncratic guidelines. Otherwise you have omissions, misdirected

resources, and out of focus and out of balance provisions.

Risk allocation hides an uneasy fact. One will always have to deal with at least a

scintilla of trust. Why?

• Contracts are designed to reinforce trust and reduce risk, but when they’re

too detailed or rigid, or when they send mixed signals, they can exacerbate

the very problems they’re supposed to prevent.

• Contracts that are too rigid can be problematic if they lock parties into

arrangements that seem like a good idea at the time but don’t allow for

important adjustments as circumstances change.

6


• Many contracts include incentives such as performance pay, earn-‐outs and

vesting schedules. However, in some contexts, such incentives can signal

mistrust.8

Stephen Covey argues that when trust goes down, speed goes down and cost

goes up. He argues it also creates work for lawyers — in itself something worth

avoiding — promotes bureaucracy and undermines trust by discouraging

spontaneous displays of goodwill.9 The Warwick Business School demonstrated that

deals conducted on the basis of trust, instead of precisely worded agreements, could

lead to benefits for both parties to the tune of as much as an additional 40% of the

total value of a contract.10

These notions of guidelines and trust are in harmony with the artisan /

architect side of a transaction lawyer: apply the law to the deal, not the deal to the

law. This is often phrased as the lawyer being a facilitator, not a spoiler. Evidently

the premium is for creativity, insights and functionality. Otherwise drafting software

readily replaces the lawyer.

WHO READS A CONTRACT?

The counsel of perfection holds that everyone should read the contract the

same way; everyone should interpret it the same way. The effluxion of time

compounds this problem in part because of the need for the contract to be both

pliable and yet rigid, 11 and in part because legal and business contexts change. Still,

who is this “everyone”? There are two schools of thought: “speech communities”

and five member audiences.

The five audiences are: the immediate parties (or more accurately the

negotiating team members in the hotel room at 2 am). Next come the

administrators / successors. Anywhere along the time line are “arbitrators”, be they

judges, mediators, or arbitrators per se. Today there are also the regulators: be they

government empowered or internal / external auditors. Finally each of these

7


parties have their advocates. And everyone is working at a different time and place

in law, business, politics, and budgets. There are also different agendas, e.g. the

administrators might be caught in a budget crunch and will narrowly interpret any

cost bearing obligations. Still the notion is that all of these audiences will read that

clause, paragraph or article as the negotiating parties intended at 2 am, whether or

not the quid pro quo that begat that wording is immediately evident.

Speech communities is another concept that lawyers might, with a whiff of

insouciance, harrumph as some obtuse academic concept. However, examine the

definition: One of the primary variables among readers is the different speech communities to which they belong. A speech community consists of a group of person who share a lexicon, a syntax, and a body of knowledge and values. A lexicon includes all the information about words that is stored in human brains. It is much more detailed, more complex and more subtle than any dictionary could ever be. Syntax refers to the ways in which words are arranged in conventional structures that are meaningful to participants in the convention. Like a lexicon, the syntax of a language is complex and subtle and may differ in small but potentially significant ways from one speech community to the next. The final thing shared by a speech community – and this is crucial – is a set of beliefs, information, assumptions, preferences and values, in short, a body of “common” sense. This is what readers rely on to make judgments about what is plausible, probable, reasonable, relevant and important. Since we do not all belong to a single speech community, but to any such communities which only partially overlap, the meaning of a text may not be the same for all of us.12 [Emphasis added]

For those involved in drafting contracts involving highly advanced technologies

—from aviation to genetics to medicine to physics to zoology—recall how you have

to both learn the subject matter and learn how to communicate with your client and

appreciate their ethos or culture.

The point is that no matter how seemingly self-‐evident the text might appear to

the lawyers or immediate parties, there are different audiences, different speech

communities. Take a single word: the adjective “fresh”. To a food shopper, “fresh”

means recently harvested and unprocessed. To the food transporter it means

unprocessed albeit preserved by gas or other means during transport,13 e.g. South

African white grapefruit. Indeed “fresh” to the food industry means less about time

or distance than the technology that protects freshness.14 To the US and Canadian

regulator “fresh” includes produce that is waxed, acid or chlorine washed, or

8


subjected to ionizing radiation.15 “Organic” too has multiple meanings often

counter-‐intuitive to our food shopper but not to those not in the industry (or speech

community) e.g. industrial organic16 or the fact of additives and synthetics, from

ascorbic acid to xanthan gum, beget the organic twinkle.17 “Orange juice” is yet

another entertaining example.18 The shopper infers “not from concentrate” as

something closer to freshly squeezed, thus fresher. The inference is wrong. Indeed

this industry has fabricated fresh.19 The audiences outside of the speech community

are not privy to these sorts of lexicons. The key member of those outside audiences

is the bench.

Consequently it comes with little surprise that this complexity of interpreting a

contract has begat a tome of legal doctrines20:

• fundamental precepts (e.g. parol evidence);

• elements (e.g. custom and usage/ dictionaries);

• implied terms;

• outside doctrines (e.g. rectification);

• contract types (e.g. insurance)

• clause types (e.g. best efforts) etc.

Then there are the strategic approaches: textual v intentional v normative. 21

The Courts have voiced support for all manner of interpretation given what was

before them.22 The guise is the oft-‐quoted “business efficacy” or “fair result”. The

point is, how can one draft anything and expect a consistent interpretation? The

drafter has to deal with a brew made up of personality / risk /negotiating types,

speech communities/audiences, with a dollop of legal interpretation doctrines and

more than a pinch of judicial arbitrariness. Using clarity of thought and

presentation is a trite but nevertheless relevant response. There are two other

strategic approaches that merit scrutiny: contract architecture and contract

elements.

9


CONTRACT ARCHITECTURE

The foundation of any agreement is choosing the right device. Classically these

structures were:

• Term Sheets / Minutes of Settlement

• Memorandum (MOU / LOU) Letter of Intent (LOI)

• Letter Agreement

• Comfort Letters

• Formal Agreement (as to structure not as to the use of a seal)

• Series of Agreements (matrix or parallel)

• Umbrella / master with subsidiary contracts

• RFP, Tenders, Expression of Interest, Request for Qualifications

Amongst the considerations in determining which device to use are: client’s

expectations, goals and needs; complexity of transaction; stage of transaction;

sophistication of the parties; and costs. Each device generally has idiosyncratic

concerns that require idiosyncratic clauses. The comfort letter should not be a de

facto undertaking.23 The MOU must explicitly identify if it is enforceable, not

enforceable or a hybrid (e.g. confidentiality provisions).24 Tendering has a whole

plethora of decisions that make Canada unique in this field.25 Letter agreements

work best in industries with a shared ethos or operating principles, eg. oil & gas.

One key point gets forgotten in the fury of negotiations, personalities, industry

norms. When is the deal the deal?

If the documents or letters relied on as constituting a contract contemplate the execution of a further contract, it is a question of construction whether the execution of the further contract is a condition or term of the bargain or whether it is a mere expression of desire of the parties as to the manner in which the transaction already agreed to will in fact go through. In the former case there is no enforceable contract either because the condition is unfulfilled or because the law does not recognize a contract to enter into a contract. In the latter case there is a binding contract and the reference to the more formal document may be ignored.26 [Emphasis added]

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Consequently a clause must explicitly state when the deal crystallizes, and

contract administration must be alive for actions done on reliance of statements

made in the negotiations or consistent with practices in that “speech community”

but outside of a extant agreement.

That brings us to the formal contract and its particular architecture.

• Preamble o Title Date / Commencement / Parties

• Recitals • Consideration • Elements:

o Definitions o Obligations [Covenants] o Statements, o Reps & Warrants, o Conditions

• Testimonium, Attestation and Seals • Schedules / Appendices / Exhibits

For this drafting paper the emphasis will be on one forgotten device—

recitals—and the incorrect used of the other—elements.

Recitals are often ignored by transaction lawyers, and utilized by intellectual

property lawyers. Presumably this is because the IP bar deals with contracts that

have decade or decades-‐long terms. Regardless, recitals provide the global context

of the contract. Recitals articulate the lexicon and factual setting of the agreement.

• Explain the scientific, business, and legal backdrop in pedestrian

terms;

• Highlight the history of the parties, what they bring, what they need;

• Identify the motives, expectations and approach of the parties; and

• Incorporate the extrinsic evidence.

Recitals are a roadmap and explanation left by the negotiators for the other

audiences. One could argue recitals articulate what the “speech community” /

11


negotiators were thinking, doing and why they compromised. Recitals are

scrupulously factual. Thus recitals are a briefing note for the judge. Indeed, the

litmus test of efficacy is whether the recitals give the judge ignorant of all

circumstances in the making, contents, subject matter and community of practice of

the contract, a context and compass bearing for the intended interpretation of that

contract.

Recitals are often dismissed as meaningless or without legal import.

Incorrect. The rules are as simple as they are self-‐evident:

• If the recitals are clear and the operative part is ambiguous, the recitals

govern the construction.

• If the recitals are ambiguous, and the operative part is clear, the operative

part must prevail.

• If both the recitals and the operative part are clear, but they are inconsistent

with each other, the operative part is to be preferred.27

The high water mark for recitals was the Bitove28 decision that held that the courts

will use recitals to achieve “an intelligent economic transaction and a reasonable

arrangement between the parties”.

There is one inescapable archaic point. To make well-‐drafted recitals

effective, you must either reference the recitals in the contract proper—a statement

to the effect the recitals are true and correct—or put the contract under seal.29 The

seal or statement acts as an estoppel against any party from later denying those

facts in any action based on the contract.30

The contract proper can be broken into such divisions as consideration,

payment terms, obligations, representations, conditions, boilerplate, definitions, etc.

However the Alberta Bar in the early 1990s and the LSUC commenced teaching

contract drafting through elements. Again these are:

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• Definitions

• Covenants (obligations)

• Representations & Warranties

• Conditions

• Statements

The advantage of using the element structure to draft a contract is rooted in

the fact the elements are mutually exclusive. A contract sentence can only be one of

the five. This facilitates cleaner drafting and organization. An oft-‐quoted example is

“Time shall be of the essence”. It is written as a covenant but there is no action

vested in a party. The example is really a statement, and as such should be properly

written as “Time is of the essence”.

Definitions come in various versions and most drafting textbooks identify

them as follows:

• Restricting (means)

• Enlarging (includes)

• Confining (does not include)

• Compound (two or more defined terms)

• Extending (additional meanings)

• Clarifying

• Delegating

• Labelling (short name for a group / body / party)

The basic rule is to to avoid counter-‐intuitive definitions and not overburden them

(easier said than done with some IP licences).

Covenants are identified by the verbs: shall, will, must, is entitled to. The

key point to note is W5: who does what to whom, when and why. Furthermore, the

covenant ‘s structure is “X shall [verb] Y, by not later than…”. The subject, verb,

object format is highly recommended for clarity. Beware: this is not an excuse to

say “X agrees to assign to Y….” That is problematic for technical and substantive

13


reasons. The fact of agreement is expressed in the ceremonial consideration clause

“NOW THEREFORE in consideration….the parties agree as follows” . To repeat

“agree” is to be redundant.

A recent USSC decision also holds that to say “agrees to assign” speaks to the

future not the present. So a subsequent agreement with the party that states the

party “assigns” prevails over the antecedent agreement that covenants “agrees to

assign”.31

A statement is a bald fact: effective date, time of the essence, notice, etc.

A condition is a requirement antecedent or subsequent that then triggers or

enables action. The classic structure is:

• Terms

• Time to satisfy

• Whose benefit

• Notice of satisfaction / outstanding

• If not satisfied, remedy

• If not satisfied, waiver by beneficiary

What gets missed is that if you have a possible or discretionary condition,

then a further action is possible. Therefore the applicable verb is “will”, not “shall”,

regarding the further action. If the condition is mandatory, the applicable auxiliary

verb is “must”. Law students must article prior to their call to the bar. If the

purchaser pays 30 days in advance, then the seller will deliver to the seller the

products…

Representations and warranties are a fact and a promise of veracity and

you need both in order to have a cause of action.32 Then again some say the

distinction lies with breach. A breach of a representation is a tort, while a breach of

a warrant is purely contractual, thus having different elements, remedies and

limitations.33 Most US lawyers hold that a representation states current facts while a

warranty refers to the future.34

14


Whatever the case might eventually be, reps and warrants come in three

families: the contract itself (e.g. the party has capacity and authority); subject

matter of the contract (e.g. patents and no infringement); and the parties

themselves (e.g. financial or scientific capacity).35

Representations and warranties are fixed in time, usually the closing or

effective date. US commenters call this the “bring down”. Representations are not

made subsequent to the execution or effective date. In that instance the proper

element is a condition. Sometimes a party will say the reps and warrant survive

closing. This is not to say the reps and warrants are “evergreened”. It merely is

collateral effect from land transfers, where the reps and warrant merge with the

transfer of title.

One must be intimately familiar with the applicable area of law in order to

craft the subject specific reps and warrant. For example one does not rep that a

patent is valid; rather the rep is that the patent issued or is registered. (A patent can

be impeached unless there was litigation finding in favour of the patent, and the

appeal periods, passed. Only in that instance can one say “valid”.) One multi-‐

national corporation was notorious for demanding a rep and warrant that the

technology did not infringe any patents…or trade secrets.

Reps and warrants may be bald, but often come with some qualifications.

The generic list typically involves:

• Time

• Territory

• Subject Matter

• Scope

• Knowledge

• Materiality

• Impact / Consequence.

15


The previous qualifications about materiality / impact ensure that neither a

cosmetic breach of a rep and warrant nor a major breach with a trivial economic

consequence, sounds in damages.

As to the future, the argument is that modern drafting techniques suggest all

that is necessary is for a party “to represent”. The objective is an assertion of fact to

induce the contract. Misrepresentations come in three versions: innocent, negligent

and fraudulent and those are a sufficient framework to deal with any breaches.36

Warranty is a superfluous and confounding addition.

CONTRACT STYLE ELEMENTS

Style matters, and if you do not believe that ask yourself how you feel when

you pick up a British Law Report that is one solid page of small font print with nary

an indent, minimal line spacing and fully justified. When a page is so densely

populated with text you need to usea ruler so as not to skip any lines. This style

defeats the clarity or crispness of any drafting since readers eschew reading.

The first preliminary point is to pick the typeface, the font family. Some

fonts work best in smaller sizes, others in larger sizes and still others for

conspicousness. This is because of the height and especially the width,

thickness and distance between letters. Times Roman is often used because it was

the original default font. However, contracts are read on screens – computer, PDA,

tablets – as well as on paper. Tahoma was originally designed for computer screens

and paper.

The second point is serif or sans-‐serif. Sans serif letters do not have the little

serifs – extensions – originally unavoidable in woodcut presses. Readers prefer serif

fonts because the eye follows along via the serifs. It is easier to read long documents

in serif. Two recent fonts – Calibri (sans-‐) and Cambri (serif) were designed for

both text and screen.37 The narrative in this paper is Cambri, the headings in Calibri.

Some lawyers prefer Palatino Linotype and Book Antique for contracts and

Garamond for correspondence.38

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The next point is line spacing. Until Microsoft 2010 line spacing had three

options—1 /1.5 and 2. Most contracts had single (one) line spacing. The suggestion

then was to burrow into the software and change a setting to 1.1. Word software

now provides 4 choices — 1 / 1.15 / 1.5 and 2. The new choice of 1.15 spacing is

the line spacing in this paper.

Size matters. Type is measured in points, and anything 10 points or less is

too small. It is too small to read, too small to effectively convert to pdf, and certainly

too small for faxing.

Length matters. A line that is easy to read should be a maximum of 2

alphabets or 52 characters. After that readers start to lose their place. That is the

reason for columns in newspapers, and smaller (less than 8.5 X 11) paper sizes in

most books.39 How do you avoid overly long lines?

Paragraph sculpturing is a key style device that enables any reader at any

time to readily comprehend the objective of the paragraph Paragraph sculpturing

entails indenting each section, sub-‐section, sub-‐sub-‐section.

1.0

1.1

(a)

(b)

(i).

Justification (left, centre or right) should be left, leaving the paragraph

having a ratty edge. Left justification allows the typeface to have the same distance

between each letter and word. By contrast, full justification while seeming neater

with its box-‐like text requires differing spaces between letters and words, causing

rapid eye fatigue. Newspaper columns use full justification and you sometimes see

words s p r e a d o u t or the final word is far off.

Defined terms should be conspicuous. Lawyers often just capitalize their

defined terms. Most contracts have a multitude of capitalized terms, not all of them

defined. Hence the suggestion to used bold, italics or colour (not underlining—too

17


distracting) to strike the reader immediately that the word belongs to a lexicon /

speech community.

Title paragraphs. Sound bite headings alert the reader as to what to expect.

With Word, headings can be automatically generated into a table of contents,

enabling quick document searching as opposed to “I read it in there somewhere”.

Some lawyers add a boilerplate statement that the headings are not part of the

contract. The writer doesn’t. I want the judge to consider them; I want to focus the

judge using the headings.

The counsel of perfection states–never have cross references. The practical

answer is they are unavoidable. But cross-‐references are deadly. As draft after

draft is prepared, paragraph numbers change. The danger is not that the cross-‐

reference makes no sense in the executed copy (that is a dud). Rather the problem

is that it does operate with unintended obligations. The solution is to use both

paragraph number and paragraph heading in every cross-‐reference. The heading

clarifies any problem with the numbering.

Footers are wonderful devices to keep track of draft dates and versions.

They also act as a thread weaving the contract to the execution page to the

schedules. What belongs together is vividly marked. Thus you no longer need to

have the last portion of the contract narrative leak onto the execution page.

Last but not least, beware of what I call the three stooges: shall, will, must. As

noted there are rules for their use,

• To create a right, say “is entitled to”

• To create a discretionary authority, say “may”

• To create a duty, say “shall”

• To create a mere condition precedent, say “must”

• Post condition satisfaction obligations, say “will”

• To negate a right, say “is not entitled to”

• To negate a discretionary authority, say “may not”

18


• To create a duty or mere condition precedent, say “is not required

to”

• To create a duty not to act ,say “shall not”

To summarize up to this point:

• Be alive to human personality, risk and negotiating types. The key

point is to recognize which types conflict with your type so the

friction can be managed and the objective met.

• Identify the core values / concerns (guidelines) of the parties and

identify the degree of trust present. That can then be transmuted into

a contract prose.

• Chose the architectural device befitting the situation and ensure

structural and idiosyncratic clauses are prepared.

o Ensure all the audiences understand the formal document

the same way, irrespective of their knowledge or ignorance

of the subject matter and surrounding circumstances. This

entails fulsome recitals.

o Use of paragraph headings means a table of contents

precedes the recitals and reveals the entire narrative

superstructure.

o Employ style devices to easily guide the reader through the

document and facilitate use of the document by anyone no

matter how unfamiliar with the deal, subject or business

culture.

INDEMNIFICATIONS

Indemnifications are de rigeur in contracts, but so are circumscriptions. The

classic definition of an indemnity means either to prevent loss, so that it does not

19


occur, or to make reimbursement or compensation after the loss.40 From a drafting

perspective indemnifications are like ADR provisions – if not expected, a short pithy

paragraph is inserted. If there is some likelihood of invocation, the paragraph now

becomes an article or schedule in the contract.

Indemnifications arise in a number of legal contexts: statutory, contractual,

restitutionary and negotiable instruments.41 In the contractual context the

indemnifying party either indemnifies the indemnified party for losses under the

contract (direct)42 or for third party losses claimed against the indemnified party

(indirect) or both.

Indemnifications are distinct from damages in the sense that damages are

subject to legal principles of reduction, remoteness, mitigation while an indemnity

should be for “all losses”.43

In intellectual property agreements, particularly licences, require an

examination of:

• Risk -‐ stage of development of the technology;

• Control – risk factor controlled by each or both of the parties

• Means– ability of each party to accept and manage the risk.44

For instance is the level of trust and experience such that an indemnity is not

necessary? A party may be sufficiently robust and vigorous to aggressively defend

both interests. In counter-‐distinction the vulnerable party seeks insurance and

demands insurance coverage for the indemnifying party. Thorough due diligence

fixes risk, control and means.

The superstructure of an indemnity has two prongs, what is covered and

what is not. What is covered has the following components:

• Indemnity

• Subject matter

• Parties

20


• Scope of damages

• Limitations / Exclusions / Caps

• Term

• Procedures / notification

The indemnity often states “to indemnify, defend and save harmless”. There

is some dispute as to whether the three verbs are discrete. Also does the party want

the other party to hire and direct counsel or does the indemnified want to hire his

own paid by the indemnifier? Moreover the parties can wear both hats. The licensor

may indemnify the licensee for infringement actions, while the licensee indemnifies

the licensor for product liability. Regardless both parties should assist in the

litigation, one may have the documents, the other the liability.

When it comes to settlement the parties are in a conflict of interest.

Resolution for one might vests additional duties on the other or shave away some

rights. The issue can be ignored. The issue can also be addressed by holding the

party that accepts a greater economic burden will be indemnified by the party that

benefits from it.45 A licensee whose scope of IP rights is now reduced or otherwise

disrupted are defrayed by a royalty abatement or otherwise mitigated by the

licensor.

The subject matter while trite can be missed. 46 Is it obligations under the

contract only? Is it any third party claims only? Is it both? Does it encompass any

third party claims arising under the project, not just under that particular contract?

Scope can include whether the damages are foreseeable or not and whether

or not the negligence of the indemnified party is included or excluded. The

indemnity can be narrow and cover only patent infringement claims under the

licensed patent.

Term can be complicated. Is it the term of the contract, the term of the

contract plus any limitation period or for any claims arising during the term until

the litigation is completed? Make it recondite with a multi-‐jurisidiction, multi-‐legal

system indemnity.

21


Notification must be timely. In intellectual property cases the party needs to

determine if it should commence impeachment proceedings in other jurisdictions.

Conversely it enables a negotiated settlement before positions become ossified.

Notification also triggers the right of the licensee to cease paying royalties pending

resolution of the infringement action or the payment of royalties into trust.47

Exclusions from the indemnity beyond the four corners of the foregoing

points generally include:

• Categories of damages

• Scope of damages

• Deductibles / Thresholds

• Caps

• Aggregates

• Contra proferentum et al

Thresholds avoid processing every picayune claim.

Deductibles instill some further probity or a disciplined approach by

divvying some of the risk and costs.

Caps identify the maximum liability of a party per incident. For a licensor is

it is some multiplier (including 1) of the royalties received. Otherwise the licensor

could find itself in the painfully ironic position of being without an income stream

under the contract yet paying to defend a licensee.

Aggregates are simply the maximum amount payment on all claims.

Scope of damages typically excludes consequential, incidental, punitive

everything other than direct foreseeable damages.

Categories of damages often means which causes of action are in or out of

the indemnity. A strictly written indemnity for patent infringement would

necessarily exclude product liability. There are a number of torts that apply to IP /

business so an exclusion of negligence per se might be insufficient. The exclusions

would need to identify the relevant torts as well as negligence—and whose.

22


There is a plethora of decisions as to how the courts take a dim view of

exclusion clauses.48 Hunter is the seminal decision under which exclusion clauses

are rendered nugatory as unconscionable, unfair, unreasonable or contrary to public

policy.49 Consequently, one does need to remove some arrows from the judge’s

quiver. The first is the contra proferentum rule. While not possible with contracts

of adhesion, once a contract is a product of negotiation, there is no need for this

doctrine. Both parties designed the contract. Both enjoy its benefits or suffer its

deficits.

The second is collateral agreements, understandings and representations.

This is typically dealt with in the “entire agreement” provision. Nonetheless, craft

with an eye to inducements, compromises and “gentleman ‘s “ understandings that

are not evident in the document and not meant to be part of it that surrounded the

negotiation of the indemnity.

The third is insert a clause in the reps and warrants provisions that unless

otherwise explicitly prescribed in the contract, there are no other implied or

statutory representations. You want to excise this from the compass of any

indemnity.

Finally, depending on the jurisdiction, the indemnity provisions need to be

conspicuous. CAPITAL LETTERS, red ink, thick box like font, a border or shading

should be effective. Anything that makes the provisions obvious and readily

readable is the objective.

THE CONTRACT IS TOO LONG

Every lawyer has had a client instruct him or her to put the deal on one page

or at least keep it short. In one of life’s many ironies, architecturally sensitive

contracts take up to 4 times the length of the old turgid style. One could revert to

small font, legal sized, wide margined, two-‐sided printing.

The other option is to keep the scope of work and party essentials on paper

and put all of the boilerplate on the web. The federal Public Works Department has

had its Standard Acquisition and Conditions on the web for over a decade. The cell

23


phone providers have the bulk of a subscriber’s contract on the web, including the

right to amend from time to time. The administrative imperative is keeping a record

of those terms as they exist at any time, so the contract would cite: as per T & Cs,

dated X.

Whatever the case, the key for a lawyer is to aim to be a great architect,

continue to be a dependable engineer and always be a bit of a psychologist (for

himself and of those across the table). Those dimensions enable effective contract

drafting.

ENDNOTES 1 Key to Understanding Human Dynamics,, 2008, Career / Lifeskills Resources Inc., 116 Viceroy Road, 2 Douglas, Mary; Wildavsky, Aaron; Risk and Culture – An Essay on the Selection of Technological and Environmental Dangers; Berkeley: University of California Press; (1983). 3 Peters, Don, Forever Jung ”Psychological Type Theory, The Myers-‐Briggs Type Indicator and Learning Negotiation”, 42 Drake Law Review 1 (1993); Myers-‐Briggs Personality Types for Negotiation; Florida State University College of Law Research Center, Workshop PowerPoints, Spring 2009. 4 Fisher, Roger; Fry, William; Getting to Yes; Penguin: New York; (1983). 5 David Tollen is a founding partner of Adeli & Tollen. He is the author of the American Bar Association's manual on technology contracts, The Tech Contracts Handbook (ABA Publishing 2010), and also the author of The Tech Contracts Pocket Guide (iUniverse 2006). Comments made at the ABA webnair 12 July 2011, “Tech Contracts: Nine Lessons for Drafting and Negotiating Better IT Agreements”. 6 Priest, George L.; The New Legal Structure of Risk Control; Daedalus, Vol. 119, Issue #4, Fall 1990, pp. 207-‐227; p. 209. 7 Priest, George L.; The New Legal Structure of Risk Control; Daedalus, Vol. 119, Issue #4, Fall 1990, pp. 207-‐227; p. 209. 8 Malhotra, Deepak ; “When Contracts Destroy Trust”; Harvard Business Review, May 2009; http://hbr.org/2009/05/when-‐contracts-‐destroy-‐trust/ar/1. 9 Covey, Stephen; The Speed of Trust: The One Thing that Changes Everything; Free Press: (2006). 10 Sanbghera, Sathnam; You Can’t Write Trust into a Contract; The Times, 22 February 2010. 11 In general see: Hall, Geoff, Canadian Contractual Interpretation Law, LexisNexis, 2007. See also: Consolidated Bathurst Export Ltd. V Mutual Boiler and Machinery Insurance, [1980] 1 S.C.R. 888 at 901; Eli Lilly v Novopharm Ltd., [1998] 2 S.C.R. 129, para 56.

24


12 Sullivan, Ruth; Contract Interpretation in Practice and Theory; (2000), 13 S.C.L.R. (2d), pp. 369 – 394, p. 372. 13 Wills, Ron; McGlasson Barry; Graham, Doug; Joyce, Daryle; Post Harvest: An Introduction to the Physiology and Handling of Fruit, Vegetables and Ornamentals (5th ed.); Cambridge: CABI (2007) 14 Freidberg, Susanne; Fresh, A Perishable History: Cambridge: Harvard University Press; (2009); p. 5. 15 Title 21: Food and Drugs

PART 101—FOOD LABELING

Subpart F—Specific Requirements for Descriptive Claims That Are Neither Nutrient Content Claims nor Health Claims

§ 101.95 “Fresh,” “freshly frozen,” “fresh frozen,” “frozen fresh.”

The terms defined in this section may be used on the label or in labeling of a food in conformity with the provisions of this section. The requirements of the section pertain to any use of the subject terms as described in paragraphs (a) and (b) of this section that expressly or implicitly refers to the food on labels or labeling, including use in a brand name and use as a sensory modifier. However, the use of the term “fresh” on labels or labeling is not subject to the requirements of paragraph (a) of this section if the term does not suggest or imply that a food is unprocessed or unpreserved. For example, the term “fresh” used to describe pasteurized whole milk is not subject to paragraph (a) of this section because the term does not imply that the food is unprocessed (consumers commonly understand that milk is nearly always pasteurized). However, the term “fresh” to describe pasta sauce that has been pasteurized or that contains pasteurized ingredients would be subject to paragraph (a) of this section because the term implies that the food is not processed or preserved. Uses of fresh not subject to this regulation will be governed by the provisions of 403(a) of the Federal Food, Drug, and Cosmetic Act (the act).

(a) The term “fresh,” when used on the label or in labeling of a food in a manner that suggests or implies that the food is unprocessed, means that the food is in its raw state and has not been frozen or subjected to any form of thermal processing or any other form of preservation, except as provided in paragraph (c) of this section.

(b) The terms “fresh frozen” and “frozen fresh,” when used on the label or in labeling of a food, mean that the food was quickly frozen while still fresh (i.e., the food had been recently harvested when frozen). Blanching of the food before freezing will not preclude use of the term “fresh frozen” to describe the food. “Quickly frozen” means frozen by a freezing system such as blast-‐freezing (sub-‐zero Fahrenheit temperature with fast moving air directed at the food) that ensures the food is frozen, even to the center of the food, quickly and that virtually no deterioration has taken place.

(c) Provisions and restrictions. (1) The following do not preclude the food from use of the term “fresh:”

(i) The addition of approved waxes or coatings;

(ii) The post-‐harvest use of approved pesticides;

(iii) The application of a mild chlorine wash or mild acid wash on produce; or

(iv) The treatment of raw foods with ionizing radiation not to exceed the maximum dose of 1 kiloGray in accordance with §179.26 of this chapter.

25


(2) A food meeting the definition in paragraph (a) of this section that is refrigerated is not precluded from use of “fresh” as provided by this section.

[58 FR 2426, Jan. 6, 1993]

16 For industrial organic see: Guthman, Julie; Agrarian Dreams, the Paradox of Organic Farming in California, Berkeley: Berkeley University Press, (2004); for ideological organic see: Fast Food / Organic Food Reflexive Tastes and the Making of “Yuppie Chow”, Social and Cultural Geography 4.1(2003) 45-‐58; for the Christian and metaphysical roots of organic see: Conford, Philip; The Origins of the Organic Movement; Floris:Edinburgh (2001). China is rapidly becoming the largest organic producer in the world with several definitions of organic: see Mei, Yang; Jewison, Michael; Organic Products Market China; USDA Foreign Agricultural Report; GAIN Report (Global Agricultural Information Network) Number #CH6405, (2006).

17 Pollan, Michael; Behind the Organic-‐Industrial Complex; New York Times, 13 May 2001. 18 Hamilton, Alissa; Squeezed: What You Don’t Know About Orange Juice. Yale University Press; (2009). 19 Ibid., chapter 13. 20 Hall, Geoff; Canadian Contractual Interpretation Law; (1st ed); LexisNexis: Toronto;(2007). 21 Sullivan, op. cit. 22 For the intentional school see: Consolidated Bathurst Export Ltd. V Mutual Boiler and Machinery Insurance, [1980] 1 S.C.R. 888; for the textual school see Eli Lilly #& Co. v Novopharm [1998] 2 S.C.R. 129 reversing (1996) 195 N.R. 378, reversing (1996) 91 F.T.R. 161. 23 In general see: Kleinwort Benson Ltd. v Malaysia Mining Corp. Bhd., [1988] 1 All E.R. 714 (Q.B. Commercial);Toronto Dominion Bank v Leigh Instruments (1992), 4 B.L.R. 220 (C.A.); Langnese-‐Iglo GmbH v European Commission (supported by Mars GmbH) (Case C-‐279/95 P) COURT OF JUSTICE OF THE EUROPEAN COMMUNITIES (FIFTH CHAMBER) [1999] All ER (EC) 616 . 24 Bawitko Investments v Kernels Popcorn, (1991)79 DLR (4th) 97 OCA pp 103-‐4 ; see also US Jurisprudence Adkistrote Systems Inc. v GAB Bus Sys Inc, 145, F 3d 543 (2d Cir) 1998; Skycom v Telstar 813 F.3d 810 (7th Cir)– Texaco v Pennzoil 729 S.W.2d 768 (Tex App 1987). 25 Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4, [2010]; 1 S.C.R. 69; The Queen (Ont.) v. Ron Engineering, [1981] 1 S.C.R. 111. For a detailed discussion see Paul Emanuelli / The Procurement Office. 26 Von Hatzfeld-‐Wildenberg v Alexander, [1912] 1 Ch 282. 27 Ex parte Dawes, In re Moon (1886), 17 Q.B.D. 275 (C.A.) 28 Canada AG v Bitove Corp (1995), 47 R.P.R. (2d) 157. 29 Elderkin, Cynthia; Shin-‐Doi, Julia; Behind and Beyond Boilerplates: Drafting Commercial Agreements (2ed): Thomsom-‐Carswell: Toronto; (2005) p. 65. 30 McMaster University v Wilchar Construction Ltd., [1971] 3 O.R. 801, 812 (H.C.J.) As to the history and significance of a seal see: Friedmann Equity Developments Inc. v Final Note Ltd., [2000] 1 S.C.R. 842, 856. For ta text the use and need for seals under UK law see: http://www.lawsocietyshop.org.uk/ecom_lawsoc/public/saleproduct.jsf?catalogueCode=9781853286995. 31 Board of Trustees of the Leland Stanford Junior University v Roche Molecular Systems Inc. 563 US. (2011)

26


32 Chandelor v Lopus, Case 4, Exchequer-‐Chamber, CRO, JAC 4, Easter Term. 33 Darmstadter, Howard; Hereof, Thereof, and Everywhereof, a Contrarian Guide to Legal Drafting (2ed), Washington: ABA (2008), p. 120. 34 ABA model Stock Purchase Agreement (1995); Model Asset Purchase Agreement (2001); Krys v Henderson, 69 S.E. 2d 635, 637 (Ga. Ct. App. 1952). 35 Fox, Charles, Working with Contracts: What Law School Doesn’t Teach You; (2ed) Practising Law Institute: New York; (2008), pp. 11-‐15. 36 Adams, A., Kenneth; A Lesson in Drafting Contracts, What’s Up with ‘Representations and Warranties”, Business Law Today; Vol 15, No. 2; ABA; November/December 2005. 37 In general see: Lupton, Ellen; Thinking with Type: A Critical Guide for Designers, Writers, Editors and Students; Princeton Architectural Press: New York (2004). 38 Darmstadter, op. cit., p. 71. 39 Ibid., p. 72. 40 Mewburn v Mackelean (1892), 19 O.A.R. 729 (C.A.), p. 741. 41 Gray, Margaret; The Nature of Indemnities, Indemnities in Commerce and the Courts; Canadian Bar Assoc., November 1994 42 Mobil Oil Canada v Beta Well (1974), 453 D.L.R. (3d) 745, affd 50 DLR (3d) 158 found the indemnity only covered third party claims. 43 Hebert, Brenda; Taylor, Melissa; A Review of Specific Indemnity Problems Indemnities in Commerce and the Courts; Canadian Bar Assoc., November 1994, p. 11. 44 Lowman, Tim; Indemnification and Insurance Provisions in Licence Agreements; Presented to the Osgoode Hall (York University) Legal Drafting Course, Winter 2008, p. 3. 45 Lowman, Tim; Indemnification and Insurance Provisions in Licence Agreements; Presented to the Osgoode Hall (York University) Legal Drafting Course, Winter 2008, p. 6. 46 Mobil Oil Canada v Beta Well (1974), 453 D.L.R. (3d) 745, affd 50 DLR (3d) 158 found the indemnity only covered third party claims. 47 Lowman, op. cit., p. 4. 48 See in general: MacDougal, Bruce, Introduction to Contracts; Toronto:LexisNexis (2007); pp. 146-‐158; see also Hall, Geoff; Canadian Contractual Interpretation Law (1st); LexisNexis:Toronto 2007, pp. 238 – 252. 49 Hunter Engineering Co. v Syncrude Canada Ltd. [1989] 1 S.C.R. 426.

CASSELS BROCK LAUNCHES NEW WEBSITE, AN INFORMATION HUB FOR IN-HOUSE COUNSEL Published: 05/04/2011

Dedicated Website Offers ‘One-Stop’ Archive of Educational ResourcesCassels Brock & Blackwell LLP, one of Canada’s leading business law firms, has launched the Cassels Brock Bulletin Board, a ‘one stop’ compilation of its educational resources for corporate counsel.

The new dedicated website (http://ccbb.casselsbrock.com) is a repository of seminar presentation materials, newsletter articles, practice management tips and other reference materials of particular relevance to lawyers working in-house. The site features a full keyword search function and is extremely easy to navigate.

This new web portal demonstrates Cassels Brock’s commitment to continuously improve the quality and accessibility of the information and resources we share with our clients.

Media MentionsThe Corporate Counsel Bulletin Board was featured as a valuable one-stop resource for in-house counsel in The Financial Post, Business Section, Canadian Lawyer Magazine and Law Times.

STUART ENGLISH

416 860 5223 [email protected]

Education: LL.M., (IP), Osgoode Hall Law School, 2009; M.B.A., Schulich School of Business, York University, 1992; LL.B., Osgoode Hall Law School, 1992; B.Sc., Concordia University, 1988 Call to the Bar: Ontario, 1994

Expertise Stuart is a partner in the Business Law Group where he practises corporate and commercial law, and has been involved in numerous significant business acquisitions/divestitures, venture capital financings, management buy-outs, and joint ventures.

Apart from transactions, Stuart regularly advises clients on a range of corporate and commercial matters, including shareholder and partnership agreements, joint ventures and other strategic alliances, corporate governance matters, stock option and other employee incentive plans, manufacturing, distribution, outsourcing and licensing agreements, and corporate compliance programs and other risk management initiatives.

Stuart has advised clients in many industries, and has particular expertise in financing emerging technology companies and transactions involving life science companies.

Stuart is a member of Cassels Brock's Practice Support Group, which oversees the firm’s knowledge management initiatives, and is a regular speaker at Cassels Brock’s Corporate Counsel Seminar Series.

ROBERT B. COHEN

416 869 5425 [email protected]

Education: LL.B., Osgoode Hall Law School, 1989 Call to the Bar: Ontario, 1991 Associations: Canadian Bar Association; Ontario Bar Association; Toronto Lawyers Association; The Advocates’ Society Achievements: Martindale-Hubbell, BV DistinguishedTM rating

Expertise Bob practises in the field of commercial litigation and litigates cases in various areas of law, including oppression remedies and other shareholder disputes for public and private companies, securities regulation, partnership disputes, injunctions, defamation, banking disputes, employment law, real estate litigation, investor fraud, receiverships, contract disputes and professional malpractice. He acts for a broad spectrum of clients, ranging from individuals and entrepreneurs in small and large businesses as well as boards of public companies.

Bob has had a number of favourable arbitration, trial and Court of Appeal decisions, many of which have been reported in various legal reporting services. In addition to appearing in the Ontario Securities Commission as successful counsel (InterRent REIT), he has also appeared as successful counsel before the Ontario Court of Appeal in seminal decisions on banking law (Valentine v. TD Bank) and contract and disclaimer interpretation (Solway v. Kennedy). Bob also appeared as successful counsel in the Supreme Court of Canada decision determining presumptions of law as they pertain to joint bank accounts in the context of estate disputes (Saylor and Madsen v. Brooks).

Bob has considerable negotiation skills which have led to efficient and large settlements for his clients, including dozens of large settlements in multi-million dollar investment fraud cases. He is well-versed and has acted as counsel in alternative dispute resolution methods, including mediation and arbitration.

He is a member of the Canadian Bar Association, the Ontario Bar Association, the Toronto Lawyers Association and the Advocates’ Society.

Bob joined Cassels Brock in 1992 and has been a partner at the firm since 1999. He taught Civil Procedure at Osgoode Hall Law School for many years and is now a mentor in the firm's associate training program.

George Weston Limited 22 St Clair Ave E

Toronto, ON M4T 2S7 Canada

Robert A. Balcom Robert A. Balcom is Senior Vice President, General Counsel – Canada and Secretary of George Weston Limited, and Senior Vice President and Secretary of Loblaw Companies Limited in Toronto, Ontario. Prior to joining the Weston/Loblaw Group, Mr. Balcom practiced corporate/commercial law as an associate at Borden Ladner Gervais LLP. Mr. Balcom’s practice encompasses business acquisitions and divestitures, corporate finance transactions, competition law, and general commercial matters. Mr. Balcom is also involved in a variety of corporate governance and corporate secretarial matters. Mr. Balcom graduated from Acadia University in 1983 (Bus. Admin. (Hons.)), from Dalhousie University with an LLB and MBA in 1987 and from Osgoode Hall Law School with an LLM, specializing in International Trade and Competition Law, in 1998. He was admitted to the Ontario Bar in 1989. He is a member of both the Canadian Bar Association and the American Bar Association. George Weston Limited is a large North American food processing and distribution company and one of the largest corporations in Canada. Weston has two operating segments: Weston Foods and Loblaw. The Weston Foods segment is engaged in the baking industry within North America. Loblaw Companies Limited is Canada’s largest food distributor and a leading provider of general merchandise, drugstore and financial products and services.

169 - 260 Adelaide Street East, Toronto, Ontario, Canada M5A 1N1

www.iplawyertoronto.com

DR. STAN BENDA

416 366 3538 416 366 4532 [email protected]

Dr. Stan Benda holds a PhD in law (labeling of genetically modified foods), a LLM in intellectual property. He is adjunct faculty at Osgoode Hall (contracts drafting), Ryerson Business School (IP) and the University of Ontario, Oshawa (business). He graduated from RMC and trained as an armour corps officer. He was senior counsel with Justice Canada. He represented Agriculture Canada: the intellectual property office (technology transfer); legal delegate to UN FAO agricultural genetic treaty meetings. Previously he was the federal counsel on the privatization of airports in Western Canada, Maritime ferry lines and private sector projects in Banff /Jasper. He publishes in the area of plants, breeding, genetics, and food. His practice is focused on IP licensing and agricultural biotechnology / food processing.

Documents

commercial contract drafting and negotiation