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If parties have multiple agreements governing their re­la­tionship(s), and those agreements all contain arbitration provisions, then it would behoove the drafters to make sure the various arbitration pro­vi­sions are consistent. In a Tenth Circuit case, the parties’ failure to do so led to a court refusing to com­pel arbitration, on grounds that the conflicting arbitration provisions  —  all of which applied to the dispute in question, according to the district court — meant that the parties had not reached a meet­ing of the minds about arbitration. See Ragab v. Howard, No. 15-1444 (10th Cir. Nov. 21, 2016) (af­firm­ing district court, with one dissenting vote; citing cases).

Hat tip:  arbitration maven Liz Kramer, who sum­mar­ized the case in Fuzzy Math? 6 Differing Arbitration Agree­ments = 0 Arb­i­tra­tion Agree­ment (Arbi­tra­tionNation 2016). Kramer notes that “[the] arb­i­tra­tion agreements did not provide for the same set of rules to gov­ern the arbitration, or the same method of choosing an arbitrator, or the same notice period before arbitration, or the same opportunity to recover attorneys’ fees.”

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A master agreement of sorts, styled as a “term sheet,” was held to take precedence over a contrary “sub”-agreement in Finger Lakes Capital Partners, LLC v. Honeoye Lake Acquisition, LLC, No. 42.2016 (Del. Nov. 14, 2016), affirming in pertinent part C.A. No. 9742-VCL (Del. Ch. Oct. 26, 2015).

The parties signed a term sheet to govern their overarching business relationship, under which they would make investments using funds provided mainly by one of the parties. The term sheet called for the parties to organize a limited liability company (LLC) for each invest­ment they made together; each LLC would be governed by an opera­ting agreement.

The term sheet specified how proceeds from the LLCs would be allocated among the parties. The LLC operating agreement form, though, specified a different allocation of proceeds.

Looking to parol evidence, the chancery court held that the parties did not intend for the LLC operating agreement’s allocation of proceeds to override the allocation in the term sheet. The court did so despite the fact that the LLC operating agreement included an entire-agreement provision, a.k.a. an “integration clause” or “zipper clause”:

The primary issues litigated at trial did not involve the Revolabs [LLC] Agreement itself, but rather what other agreements existed between the parties and whether those contracts survived the execution of the Revolabs Agreement. …

The question for trial was the scope of the Revolabs Agreement and whether it superseded portions of the Term Sheet affecting the parties’ overarching business relationship.

  • Finger Lakes claimed it did, such that Finger Lakes was not bound by provisions of the Term Sheet or the Clawback Agreement.
  • The record proved it did not.

The plain language of the integration clause in the Revolabs Agreement stated that it superseded all prior agreements “with respect to the subject matter hereof.” JX 51 at § 9.6. The “subject matter hereof” was the investment in Revolabs. …

Chancery-court opinion at part II.C.1, slip op. at 37-39 (extra paragraphing and bullets added).

Lesson learned: The drafter(s) of the LLC operating agreement form could have been more specific about the integration clause and its relationship to the parties’ term sheet — or alternatively they might have stated in the term sheet itself that the term sheet’s provisions would control over any contrary provisions in the LLC operating agreements.

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Reproduced below is an astonishing wall-of-words provision from an asset-purchase agreement among a BP company and others, as the sellers, and a Tesoro company as the buyer.  (The agreement is part of the course materials I use in my contract-drafting class.) The pro­vis­ion runs for more than a page and a half in the PDF that I print­ed from the SEC’s Web site.

The drafter’s goal should have been quick, accurate reading comprehension

Clearly whoever drafted the wall-of-words provision below gave a low priority to helping readers — such as clients, judges, law clerks, and jurors — to comp­re­hend the text quickly.

I’m surprised that the drafter’s client tol­er­a­ted such work, and that the other par­ties let the drafter get away with it.

A contract reviewer can break up a wall of words …

It’s generally considered bad form to revise someone else’s draft contract on stylistic grounds alone. But when I’m reviewing a draft that was prepared by another party, I pret­ty much always break up long provisions like the one below into shorter paragraphs and sentences. I do this for two reasons:

  • First, breaking up wall-of-words provisions helps me to make sure that I really understood what the provisions actually say; and
  • Second, with shorter paragraphs and sentences, my client will be better able to spot possible problems that I might have missed.

When I do break up a wall of words, I usually include a brief com­ment to the effect that I’m doing it to help my client review the provision. I’ve never had a drafter complain about it.

… or just delete it entirely and ask for a rewrite

I might try a different approach next time:  If a wall of words seems to benefit the other side and not my client, then perhaps I’ll just delete the provision entirely (red­lining it, of course) and add a com­ment to the effect of, “This provision is too long for me to ask my client to read, but we’d be happy to con­sider one with shorter para­graphs and sentences.”

The BP-Tesoro wall of words

Here’s the wall-of words provision in the BP-Tesoro agreement.  As an exercise, try counting the number of sentences in the provision.(The agreement has several other provisions that are nearly as long.)

<BEGIN>

7.2.1 Non-Assignability of Purchased Assets. Notwithstanding anything to the contrary set forth in this Agreement, this Agreement shall not constitute an agreement of the Sellers to transfer or assign any Purchased Asset (including any lease of a Leased Real Property or Assigned Contract, but excluding any Permits), if the attempted transfer or assignment of the same, as a result of the absence of the consent or authorization of a Third Party or the failure of the notice period to expire under a right of first refusal, right of first offer or other similar preemptive right, would constitute a breach or Default under any such agreement; or would violate any applicable Law. Buyer and Sellers shall jointly use all Reasonable Efforts to take all necessary actions before Closing to permit the Purchased Asset to be transferred or assigned to Buyer, including obtaining any required Third Party consent or authorization for such transfer, assignment or waiver of any applicable right of first refusal, right of first offer, or similar preemptive right.  If any such consent, authorization, or waiver is not obtained, or if an attempted transfer, assignment or assumption would be otherwise ineffective, with respect to any such Purchased Asset (or Purchased Asset that is otherwise deemed to constitute an Excluded Asset pursuant to Sections 2.2.8 and 2.2.10, but excluding Permits, any assets and matters governed by the provisions of Article 6), so that the Buyer would not, in fact, receive all Sellers’ rights, or assume all Sellers’ obligations relating to any such period on or after the Effective Time with respect thereto as they exist prior to such attempted transfer, assignment or assumption, then (i) provided that Buyer has satisfied the Leased Real Property Conditions where required under Section 7.9, the Sellers and Buyer shall enter into such supplemental agreements (including subleases, licenses, operating or transportation agreements, the transfer of a Purchased Asset to an Affiliate of Sellers followed by the transfer of such entity to Buyer, etc., as applicable) on reasonable terms and conditions that may be necessary (including enforcement at the shared cost of the Parties of any and all rights of the Sellers against any involved Third Parties) to provide the Buyer with the same benefits of such Purchased Asset as possessed by Sellers immediately prior to Closing, and, notwithstanding anything herein to the contrary, any such Purchased Asset shall be deemed to constitute an Assumed Liability and (ii) the Sellers and Buyer shall enter into such supplemental agreements on reasonable terms and conditions that may be necessary to provide to Sellers the right to purchase certain fuel and petroleum products from Buyer in order to perform Sellers’ sales obligations under such fuel and petroleum product sales contracts to Third Parties; provided that all fuel and petroleum products purchased by Sellers from Buyer under all such supplemental agreements shall be at the same price as such fuel and petroleum products are sold by Sellers to Third Parties under such fuel and petroleum product sales contracts with Third Parties. Notwithstanding the execution of any supplemental agreements, the Parties shall continue to seek the relevant consents, authorizations or waivers and if and when such consents, authorizations or waivers, the absence of which caused the deferral of transfer of any Purchased Asset pursuant to this Section, are obtained, such Purchased Asset shall no longer be an Excluded Asset under Section 2.2.8. The Parties’ obligations under this Section, including with respect to the term of the supplemental agreements entered into pursuant to the above, with respect to the Carson Logistics and Marketing Terminals Assets and the Wilmington Calciner Assets, shall expire on the same date that Sellers’ underlying rights and obligations in connection therewith would expire, and with respect to all other Purchased Assets, shall expire on the date that is the twenty-four (24) month anniversary of the Closing Date; provided, that, with respect to all such other Purchased Assets, if, following such twenty-four (24) month anniversary of the Closing Date Buyer reasonably demonstrates to Sellers that any such other Purchased Assets are necessary for the operation of the Business (excluding any aspects of the Business related to the Excluded Assets other than those subject to the requirements of this Section 7.2.1) in the manner in which it is currently being operated and the expiration of the Parties’ obligations under this Section would have a material adverse effect, then the Parties’ obligations hereunder shall continue to survive; provided, further that any disputes with respect to the continuation of such obligations shall be resolved pursuant to Section 19.10. Subject to (i) above, in the event Sellers are unable to transfer to Buyer that certain Lease dated December 17, 1969 by and between the City of Long Beach, acting by and through its Board of Harbor Commissioners, as lessor, and Atlantic Richfield Company (predecessor-in-interest to BP West Coast Products LLC), as lessee, as amended, supplemented or assigned (the “Barn Lease”) on or before the date that any option to extend the term of the Barn Lease must be exercised then BPWCP shall, pursuant to the terms of the Barn Lease exercise its option to extend the term of the Barn Lease and BPWCP shall exercise Reasonable Efforts to achieve commercially reasonable lease payment rates thereunder. The Parties shall comply with the terms of the Technology Agreement with respect to the identification, assignment and transfer of Third Party Licenses of Third Party IT Systems and other contemplated Third Party license agreements. If any such license cannot be transferred or assigned to Buyer within a reasonable time, the Parties shall comply with the terms of this Section 7.2.1 with respect to such license and, pending resolution of the issue, Buyer shall use Reasonable Efforts to provide, either directly or through a Third Party, any transitional services that are necessary in lieu of that license, and if Buyer is not able to provide such necessary transitional services, Sellers shall use Reasonable Efforts to provide such services, if practicable, subject to the terms and conditions in Transition Services Agreement.

<END>

A possible rewrite (partial)

Here’s one way to rewrite the wall-of words provision in the BP-Tesoro agreement. I’ve only done part of the provision, but it should be enough to illustrate the approach. Bold-faced type indicates specific noteworthy language.

<BEGIN>

7.2.1 Non-Assignability of Purchased Assets.

(a) Except as provided below, the parties do not intend for this Agree­ment to be interpreted as an agreement of the Sellers to trans­fer or assign (“Assign“; likewise, “Assignment” and “Assigned”) any Purchased Asset, if the attempted Assignment:

(1) would constitute a breach or Default under any agreement due to:

(A) the absence of a consent or authorization of a Third Party; or

(B) the existence of a right of first refusal, right of first offer or other similar preemptive right; or

(2) would violate any applicable Law.

[DCT NOTES: (A) The exceptions in the original text have being moved to separate paragraphs in subdivisions (1) and (2). (B) In subdivision (a), the phrasing, “the parties do not in­tend” is better than the original language, which pre­sump­tu­ously in­struct­ed future judges that “This Agreement shall not be interpreted ….”] 

(b) For clarity, subdivision (a):

(1) applies, by way of example and not of limitation, to (i) lease agree­ments for Leased Real Property, and (ii) Assigned Cont­racts; but

(2) does not apply to Permits.

(c) Buyer and Sellers will jointly use all Reasonable Efforts to take all necessary actions before Closing to permit the Purchased Asset to be Assigned to Buyer; such actions are to include, as applicable, seeking any required Third Party consents or authorizations.

(d)

(1) This subdivision (d) applies in any circumstance in which:

(A) an Assignment (i) would not be effective, and/or (ii) is prohibited by another applicable agreement; and/or

(B) for any other reason, Buyer would not, in fact, (i) receive all Sellers’ rights, or (ii) assume all Sellers’ obligations re­la­ting to, a Purchased Asset.

(2) IF: Buyer has satisfied the Leased Real Property Conditions where required under Section 7.9, THEN: Sellers and Buyer shall enter into such supplemental agreements, on reasonable terms and conditions, as may be necessary to provide the Buyer with the same benefits of the Purchased Asset in question, as pos­sessed by Sellers immediately prior to Closing.

[DCT NOTE: In subdivision (d)(2), notice the use of all-caps “IF: … ; THEN: ….,” with colons and semicolons, as eye-catching signals of where the different sub­clauses begin and end.]

[REMAINING PROVISIONS OMITTED]

 

<END>

See also:  Why you should draft contracts with long, run-on paragraphs (a satire).

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It was surprising to see the following in the Verizon-Yahoo stock purchase agreement:

[1.03] (b) At the Closing, each Seller RSU Award, or portion thereof, that is held by [a Seller] Employee … shall … be sub­sti­tu­ted for [sic] a cash-settled restricted stock unit award with respect to Purchaser Common Stock …. [Emphasis added.]

That, though, is the reverse of what (presumably) is actually going to happen, namely that existing unvested RSUs held by Yahoo em­ploy­ees are to be replaced by Verizon RSUs.  See generally, e.g., the Merriam-Webster online dictionary, which de­fines the verb sub­sti­tute as “to put or use in the place of another … to take the place of: REPLACE.”

I assume this was drafted by the highly-regarded Wachtell Lipton firm, which apparently is serving as counsel for Verizon.

Unfortunately, I see this exactly-backwards usage of substitu­t­ed fairly regularly. Kids these days ….

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(If you’re reading this on the front page of this Web site, click on the post title to see the post with a table of contents.)

Sign up for LES Houston chapter negotiation workshop

  • What: “The Art of Negotiation and Dealing with Unexpected Surprises” – a workshop by the Licensing Executives Society’s Houston chapter. I’ll be one of the speakers; we’ll be leading a short panel discussion followed by small-group mock negotiations of a specific issue.
  • When: Tuesday October 18, 2016, 5:00pm to 7:30pm
  • Where: Houston Technology Center, 410 Pierce.
  • CLE credit: 1.25 hours, with 0.5 hours of ethics.
  • Cost: As low as $10 for early-bird LES members.

Sign up here.

Terminating a contract might not terminate all rights under the contract

Drafters should keep in mind that terminating a contract — assuming that an agreement can be terminated* — might not terminate specific rights created by the agreement.

* Tom Arnold, my late senior partner, mentor, and friend, espoused the view that a contract was an historical fact and therefore could not be “terminated”; he maintained that only specific rights and obligations created by the contract could be terminated.

A case in point is Smith v. Barnesandnoble.com, LLC, No. 15?3508-cv (2d Cir. Oct. 6, 2016). In that case:

  • An author entered into an online publishing agreement with Smashwords, a distributor of digital books. Smashwords, as authorized by its agreement with the author, in turn authorized Barnes & Noble to sell the digital book on the BN.com Web site and to provide free samples to prospective buyers.
  • The book did not sell a single copy, and in fact only one Barnes & Noble customer even signed up to access a free sample from the BN.com Web site. Disappointed, the author terminated his agreement with Smashwords, but BN.com did not immediately take down the free sample.
  • On two occasions after termination, the same Barnes & Noble customer re-accessed the free sample of the book on the BN.com Qeb site. The author’s widow sued Barnes & Noble, claiming that this violated the author’s copyright in the book.

The Second Circuit affirmed summary judgment in favor of Barnes & Noble. The court held that while the author had terminated his agreement with Smashwords, that did not have the effect of terminating the Barnes & Noble customer’s right to access the free sample.

Drafting lesson: When drafting an agreement-termination provision, consider what if any rights and obligations will, and/or should, “survive” the termination.

Mark Cuban lawsuit lesson: Simplicity often works

The following quote is from a highly-successful litigator who filed what’s been described as “the world’s greatest summary-judgment motion” (see below); what he says is equally true of many transactional lawyers and other contract professionals:

Trial lawyers are creatures of habit. Despite big talk about how creative or groundbreaking one litigator or another might be, in reality we have a strong tendency to fall back on what has worked for us already. Success breeds repetition. If an approach or technique helped us before, then we’re likely to try it again. And if something we tried failed, it will be a long time before we try it again.

Thomas M. Melsheimer, Litigating Against the Grain, LITIGATION, vol. 42, no. 3, p. 37 (americanbar.org 2016). Melsheimer successfully defended billionaire Mark Cuban, owner of the NBA’s Dallas Mavericks team, against a lawsuit by Ross Perot, Jr. and other minority investors in the team. The lawsuit alleged that Cuban had mismanaged the team, but the team won the NBA championship. Melsheimer filed his summary judgment motion just a few days after the final game in the championship series. The argument portion of the motion consisted, in its entirety, of the following:

On June 12, 2011, the World Champion Dallas Mavericks defeated the Miami Heat to claim the franchise’s first NBA championship. A true and correct photo of one of the many victory celebrations is incorporated herein:

[half-page photo of joyous Mavericks holding the trophy aloft]

Under [plaintiff’s] ownership, the team was deemed the “worst franchise” in all of professional sports. Under [defendant] Cuban’s stewardship the Mavericks have become one of the league’s most successful teams and are now NBA champions. Accordingly, there can be no genuine question that [plaintiff’s] claims of mismanagement lack merit and [plaintiff’s] claims should be disposed of on summary judgment.

The court granted the motion; the appellate court affirmed.

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