≡ Menu

Some services contracts include no-poaching / no-solicitation pro­vis­ions saying, in effect, “Customer won’t hire Provider’s em­ployees, and vice versa.”  A blanket agreement like that, not in conjunction with a contract of that kind, caused serious trouble for a number of Silicon Valley companies. Now, the Justice Department and FTC have announced a policy of bringing criminal charges against employers and individuals involved in certain agreements of that nature. Excerpt:

Naked wage-fixing or no-poaching agreements among employers, whether entered into directly or through a third-party intermediary, are per se illegal under the antitrust laws.

That means that if the agreement is separate from or not reasonably necessary to a larger legitimate collaboration between the employers, the agreement is deemed illegal without any inquiry into its competitive effects.

Legitimate joint ventures (including, for example, appropriate shared use of facilities) are not considered per se illegal under the antitrust laws.

(Emphasis and extra paragraphing added added.)

This, of course, leaves the door open to scrutiny of all no-poaching provisions under a rule-of-reason analysis.

So, drafters and reviewers of services contracts will want to give careful thought to proposing or agreeing to include such provisions.

(Hat tip:  this ABA update.)

{ 0 comments }

A British court provides a nice training exercise for contract-drafting students. I’ve modified the facts somewhat.

  • Investor and Developer enter into a contract:  De­vel­op­er is to acquire property and then build and operate a shop­ping center; Investor is to put up the necessary funding.
  • The contract is somewhat tentative, because Developer must first complete a variety of prerequisite tasks such as acquiring the land; sec­ur­ing gov­ern­ment permits; etc. It’s not clear whether all of these tasks are feasible.
  • For four of these tasks, the contract obligates De­vel­oper to make reasonable efforts to complete the tasks. The contract also says, though, that “if all these tasks are not com­ple­ted by March 31, then either party may cancel this Agree­ment by giving writ­ten notice to the other party.”
  • On April 1, three of the four tasks have been completed. That morning, Investor sends to Developer, by courier, a written can­cel­lation notice; the notice is delivered to De­vel­oper early that afternoon.
  • But Developer doesn’t want to abandon the project.  After dis­cus­sions reach an impasse, Developer sues Investor, seeking a de­clar­­atory judgment that the contract is still in effect.
  • Developer’s reasoning is this:
    • The right to cancel the contract doesn’t arise, says Developer, unless all of the tasks are not completed.
    • Here, says Developer, only one of the tasks is still incomplete, and so Investor did not have the right to cancel the contract.
  • Investor responds that the clear in­tent was that either party could cancel if any of the four tasks was not completed.

QUESTION 1: What result did the UK court reach?

(Scroll down for answer.)

 

A UK court held that similar contract language was ambiguous, and consequently that summary judgment in favor of the investor was improper. See Dooba Developments Ltd. v. McLagan Investments Ltd., [2016] EWHC 2944 (Ch) (allowing developer’s appeal).

(Hat tip: Ken Adams.)

This is potentially a significant pain in the [neck] for the parties: Unless they can settle the case, they’ll have to go back to the lower court and incur the expense and inconvenience of getting ready for trial.

QUESTION 2: How could this cancellation right have been drafted more clearly, so as to avoid the need for a trial?

(Scroll down for one possible answer.)

 

 

The cancellation right could have been worded, for example: “if any of these tasks has not been met by March 31, then either party may cancel this Agreement by giving written notice to the other party.”

VARIATION:

Suppose that:

  • Investor did not give notice of cancellation until five years had passed, with no action by either party to move forward with the development project.
  • Developer makes the same objection to cancellation.
  • Investor responds that this is ridiculous in view of the circumstances.

QUESTION 3: How could the drafters have tried to avoid this difficulty?

(Scroll down for one possible answer.)

 

  • The drafters could have stated a deadline or sunset for exercise of the cancellation right — this is an example of the principle that drafters should always think about how particular rights or ob­lig­a­tions will come to an end.
  • The drafters could have built in further cancellation rights that would arise if additional stated milestones were not met.
{ 0 comments }

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.”

{ 0 comments }

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.

{ 0 comments }

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).

{ 6 comments }

On Contracts is Stephen Fry proof thanks to caching by WP Super Cache