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A case from Mississippi’s supreme court reminds us that it can be dangerous for service providers and customers to agree orally to changes in the scope of work:

¶3. Yates Construction, LLC, and D.W. Caldwell, Inc., entered into a construction sub-contract for the roof installation on a residential dormitory at Auburn University in Auburn, Alabama. …

Early on, Caldwell employees identified structural issues with the building …. [A]fter some discussion about the repairs needed, Caldwell agreed to repair the building prior to installing the roof.

Rather than amending the existing subcontract or creating a new contract for the repair expenses, Yates urged Caldwell to bill against “unperformed work” for those costs related to the extra work completed.

Although the arrangement was unconventional, Caldwell orally agreed to the billing scheme, requiring that it be paid weekly, on a “cost plus overhead and profit basis.”

¶4. When Caldwell completed both the repairs and the roof installation, it had yet to receive total payment for the structural repairs. The companies disputed the scope and expense of these repairs and quickly negotiated their way to an impasse.

Thereafter, Caldwell filed a claim against Yates for causing delay and increased costs by failing to pay for work performed, which was in breach of the agreements between the parties.

D. W. Caldwell, Inc., v. W.G. Yates & Sons Constr. Co., No. 2017-CA-00116-SCT (Miss. May 10, 2018) (reversing trial court’s modification of arbitration award) (emphasis and extra paragraphing added).

Business lesson:  Put something in writing about what’s expected.

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(Here’s an email I just sent to my students:)  The last micro-essay question on the final exam had to do with whether a lawyer should sign a contract on behalf of a client. Recall that in class I noted that if a contract were to go sideways, the lawyer’s signature on the document would create an opening for people within the client to point fingers at the lawyer. Well, that seems to have happened to the general counsel of Novartis, which entered into a consulting contract with Michael Cohen, the personal lawyer for now-President Trump:

Novartis’s top lawyer is to retire from the company over payments made by the pharmaceutical giant to President Trump’s personal lawyer Michael D. Cohen, the Swiss drug maker said on Wednesday.

In a statement, Novartis said that Felix R. Ehrat, the group general counsel, would be replaced by Shannon Thyme Klinger, who is currently the company’s top ethics officer, at the beginning of June. Mr. Ehrat was stepping down “in the context of discussions surrounding Novartis’s former agreement with Essential Consultants, owned by Michael Cohen,” the pharmaceutical company said.

“Although the contract was legally in order, it was an error,” Mr. Ehrat said. “As a cosignatory with our former C.E.O., I take personal responsibility to bring the public debate on this matter to an end.”

Prashant S. Rao and Katie Thomas, Novartis’s Top Lawyer is Out Amid Furor Over Payments to Michael Cohen (NYTimes.com May 16, 2018) (emphasis added).

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Just published in the ABA Dispute Resolution Section’s E-News: my article “EVALOA [evaluation plus last-offer arbitration]: A better way to facilitate settlements in arbitration.”

Here’s the TL;DR (too long; didn’t read):

  • Non-binding mediation, in which a mediator tries to help litigants to reach a settlement agreement, is expensive; it can often be ineffectual if one party or another won’t budge far from its position.
  • Another approach (assuming the parties so agree) is to stick with binding arbitration — but early in the case, have the arbitrator carefully give the parties her tentative, provisional views about the case, based on whatever information the parties have provided.  (This is like early neutral evaluation and mini-trials.)  That alone can help encourage implacably-stubborn parties to reconsider their views.
  • If the arbitrator’s early views don’t result in settlement, then the parties can agree to do “baseball” arbitration, in which:
    • Each party submits one or more proposed outcomes of the case;
    • The arbitrator’s sole power is to pick the party proposal that is the closest to how the arbitrator herself would decide the case.  This gives each party a powerful motivation to be reasonable, because otherwise the arbitrator might pick the other side’s proposal.  (That’s why baseball arbitration has an excellent track record of getting baseball teams and players to settle salary disputes.)
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Contract drafters should keep an unpleasant possibility in the back of their minds:  Courts in different jurisdictions might define a particular term in dif­fer­ent ways, leading to different results.  That happened in an Eleventh Circuit case, Winn-Dixie Stores, Inc. v. DolGenCorp, LLC, No. 15-12990 (11th Cir. Jan. 31, 2018), after remand from 746 F.3d 1008 (11th Cir. 2014).

Grocery-store chain Winn-Dixie leases store space in shopping centers; as an anchor tenant, it has a certain amount of bargaining power to get the lease terms it wants. The Winn-Dixie lease form in suit contains a restrictive cov­en­ant that forbids the landlord from letting other tenants sell more than a spe­ci­fied amount of “groceries” within a certain distance of the Winn-Dixie store. Under local law, that cov­en­ant apparently ran with the land and thus was binding even on subsequent tenants. Winn-Dixie sued Dollar General and others for violating the restrictive covenant. See 746 F.3d at 1016-17, part I.

Dollar General defended (in part) with the assertion that the term groceries, as used in the restrictive covenant, was ambiguous, and therefore by law the restrictive covenant was unenforceable.  In an earlier appeal in the case, the Eleventh Circuit rejected Dollar General’s ambiguity defense for stores in Florida:  The court held that the term groceries was not ambiguous for Florida stores because, in a still-earlier Winn-Dixie case, a Florida court had adopted a definition of groceries; thus, said the Eleventh Circuit, the term was not ambiguous — at least not within Florida. See 746 F.3d at 1022-24.

The Eleventh Circuit’s prior ruling applied only to stores in Florida; the appeals court remanded the case to the district court with instructions to make ad­ditional findings as to whether Alabama courts would consider groceries to be ambiguous — and on remand, the district court held that the term was indeed ambiguous in Alabama; the Eleventh Circuit affirmed. See slip op. at part IV.

Thus, in the context of the Winn-Dixie lease form:

  • In Florida, the term groceries is unambiguous, and so Winn-Dixie can stop competitors from selling groceries too close to Winn-Dixie stores in that state.
  • But just across the state line in Alabama, the term groceries is am­big­uous; consequently, a Winn-Dixie competitor can lease space in the same Ala­bama shopping center as a Winn-Dixie store and is free to sell how­ever much it pleases in the way of “groceries.”

Drafting lesson: If an important term in your contract might be interpreted differently in different jurisdictions, consider including a definition for that term.

 

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Pollution indictment could implicate Houston chemical container company’s contracts

From Mark Collette, Company indicted in toxic dumping, Houston Chronicle, Feb. 3, 2018, p.1, col.1, at https://goo.gl/2ua43D (chron.com).

A Houston chemical container company [Wright Containers, which makes steel drums, etc.] and two of its principals face felony environmental charges after using a hidden storm drain to dump benzene and other highly toxic liquids into waterways near homes and schools over a period of at least months, injuring their employees in the process, prosecutors said Friday. * * *  [T]he injured employees turned into whistleblowers …. Owner Ronald F. Wright, 50, and general manager Gregory B. Hance, 41, each face two counts of intentional water pollution and one count of improper disposal and storage of hazardous materials. If convicted, they could face up to 10 years in prison and fines of up to $250,000 per violation. The company is also named as a defendant.

Some points of interest for contract professionals and -students:

  • Cancellation of pending orders: Wright Contract’s contracts with some of its customers might include a requirement that Wright Containers comply with the customer’s code of conduct (the corporate equivalent of a “morals clause”), often allowing the customer, in a situation like this , to cancel pending orders for fear of getting spattered by bad publicity. See, e.g., section 31.1 of a Honeywell purchase-order form at https://goo.gl/t7WYSb (sensing.honeywell.com).
  • Customer disappearance: Scared-off customers might simply “ghost” Wright Container by no longer placing orders.
  • Who will pay the defense costs? The indicted principals, Wright and Hance, might have employment- or other agreements with the company; those agreements might require the company to pay for the principals’ defense.

Houston business accelerator program closes — what about its contracts with client companies?

From Andrea Rumbaugh, HTC business accelerator program closes, Houston Chronicle, Feb. 1, 2018, p. B1, col. 1, at https://goo.gl/2muSuXk: “The Houston Technology Center’s business acceleration program closed its doors Wednesday, laying off five acceleration directors and other support staff as the city takes a new approach to nurturing startups.”

(Disclosure: For several years I served pro bono as a startup-company mentor for HTC.)

So what happens to HTC’s existing client companies? When a given startup company was accepted into HTC’s accelerator program, it presumably signed an agreement under which HTC was given the right to acquire a certain percentage of the company, in return for HTC providing certain things. (This is pretty standard for accelerators; I don’t know the details here.)

QUESTION: In the agreements between HTC and its client startup companies, what if any contingency plans were made in case HTC ends its accelerator program?

Other developments

• Patrick McCallum, Carillion And Commercial Contracts: What Can We Learn? (mondaq.com): This article offers a few useful pre-need checklist items for customers and subcontractors to consider when negotiating a contract in case a contractor “goes under” in mid-project.

• An eye-glazing case from South Dakota illustrates the mischief that can result when drafters screw up their nomenclature: In Laska v. Barr, 2018 S.D. 6, parties signed a document called “Right of First Refusal” when in reality it was ambiguous as to whether it granted a right of first refusal, an option, or a so-called dual option. (The supreme court agreed with the trial court that the document granted a right of first refusal, and also that the terms amounted to an unreasonable restraint on alienation.)

• The Supreme Court of Canada held that a California forum-selection provision in Facebook’s terms of service was unenforceable. Douez v. Facebook, Inc., 2017 SCC 33, discussed in Jason Hayward, Technology And The Law: Noteworthy Developments (mondaq.com).

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