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Sometimes it’s better not to ask for the contract language you want

The scene: You’re in a contract negotiation, representing The Good Guys Comp­a­ny. The other side, Nasty Business Partner Inc., insists on requiring The Good Guys to get NBP’s consent before assigning the agreement. NBP has all the bargaining power; The Good Guys decide they have no choice but to go along.

Trying to salvage the situation, you ask NBP for some additional language: “Consent to assignment may not be unreasonably withheld, delayed, or conditioned.” But NBP refuses.

Have you just screwed your client?

In some jurisdictions, The Good Guys might have benefited from a default rule that Nasty Business Partner Inc. had an implied obligation not to unreasonably withhold consent to an assignment of the contract. See, e.g., Shoney’s LLC v. MAC East, LLC, 27 So.3d 1216 (Ala. 2009); Pacific First Bank v. New Morgan Park Corp., 876 P.2d 761 (Or. 1994).

But you asked for an express obligation — only to have NBP reject the request — and The Good Guys signed the contract anyway.

A court might therefore conclude that the parties had agreed that NBP would not be under an obligation not to unreasonably withhold its consent to assign­ment — that NBP could grant or withhold its consent in its sole discretion. This is pretty much what happened, on somewhat-different facts, in both the Shoney’s LLC and Pacific First Bank cases:

  • In the Shoney’s LLC case, the contract had an express provision allowing the non-assigning party to use its sole discretion in deciding whether to con­sent to an assignment. The Alabama Supreme Court held that this clause trumped the general requirement of reasonableness.
  • In the Pacific First Bank case, the lease agreement in suit included a consent-not-to-be-unreasonably-withheld requirement for certain sublet arrangements, but it did not include a similar requirement for assignments. The Oregon Supreme Court held that this amounted to an implied agree­ment that for assignments, the landlord was free to grant or withhold consent in its discretion.

Illustration: Conan O’Brien’s lawyers win by letting a sleeping dog lie

You might remember that TV talk-show host Conan O’Brien’s stewardship of The Tonight Show proved disappointing to NBC. The network decided to move Jay Leno back into that time slot and bump Conan back to 12:05 a.m. This led Conan to want to leave the show and start over on another network — but if he had, he would arguably have been in breach of his contract with NBC.

Conan’s contract apparently did not state that The Tonight Show would always start at 11:35 p.m. Conan’s lawyers were roundly criticized for that alleged mistake by ex-Wall Streeter Henry Blodget and some of his readers. See Conan’s Lawyers Screwed Up, Forgot To Specify “Tonight Show” Time Slot (Jan. 11, 2010), especially the reader comments following the article.

But then wiser heads pointed out that Conan’s lawyers might have intentionally not asked for a locked-in start time:

  • The Tonight Show had started at 11:35 p.m. for decades; it could have been plausibly argued that this start time was part of the essence of The Tonight Show, and thus was an implied part of the contract.
  • Suppose that Conan’s lawyers had asked for the contract to lock in the 11:35 p.m. start time of The Tonight Show, but NBC had refused. In that case, a court might have interpreted the contract as providing that NBC had at least some freedom to move the show’s start time.
  • And suppose that Conan had asked to lock in the 11:35 p.m. start time of The Tonight Show, but that NBC had responded by insisting on just the opposite, namely a clause affirmatively stating that NBC was free to choose the start time. Given that NBC had the bargaining power at that point, Conan might have had no choice but to agree, given that he wanted NBC to appoint him as the host of the show. In that case, there’d be no question that NBC had the right to push the start time of the show back to 12:05 p.m.

Ultimately, Conan and NBC settled their dispute, with the network buying out Conan’s contract for a reported $32.5 million. This seems to suggest that NBC was concerned it might indeed be breaching the contract if it were to push back The Tonight Show to 12:05 a.m. as it wanted to do. As an article in The American Lawyer commented:

… If O’Brien had asked that the 11:35 p.m. time slot be spelled out in any agreement — and had NBC refused — the red pompadoured captain of “Team Coco” would be in a weaker position in the current negotiations.

“If you ask and are refused, or even worse, if you ask and the other side pushes for a 180, such as a time slot not being guaranteed, you can end up with something worse,” [attorney Jonathan] Handel adds. Without having their hands bound by language in the contract on when “The Tonight Show” would air, O’Brien’s lawyers are in a better position to negotiate their client’s departure from NBC.

Brian Baxter, Legal Angles Abound as Conan-NBC Standoff Nears Endgame (Jan. 20, 2010).

Judging by the outcome, it may well be that Conan’s lawyers did an A-plus job of playing a comparatively-weak hand during the original contract negotiations with NBC.

The lesson: Be careful what you ask for in a contract negotiation — if the other side rejects your request but you do the deal anyway, that sequence of events might come back to haunt you later.

Related post: Be careful what you ask for in your standard contract form – the other side may demand it for themselves (Dec. 4, 2008).

Comments on this entry are closed.

  • Mark Anderson 2012-11-20, 3:29 pm

    Interesting. Your analysis assumes that the court looks at the drafting history when interpreting the contract’s terms. Under the English system, the court does not look at drafts, and focuses only on the final agreement (except in the rare case where rectification is allowed). Not saying one is better than the other, but it can lead to a very different outcome.

  • D. C. Toedt 2012-11-20, 3:44 pm

    Mark, you’re right, this does presume that a court might look to extrinsic evidence to help interpret a contract’s terms. There are some U.S. jurisdictions where that’s the case, while others follow the so-called “four corners” rule.

  • Herb Waddell 2012-11-23, 8:20 pm

    Do you know if boilerplate stating that “This Agreement supercedes all prior ageements, written or oral” would take care of this problem?
    Such a provision would seem to make all prior discussions and negotiations moot.
    Also a clause that establishes venue for disputes might be dispositive on whether the court would apply “black letter” or “four corners” standards.

  • D. C. Toedt 2012-11-24, 6:43 am

    Herb, the entire-agreement (or, “integration”) clause you suggest would certainly have helped NBC. Of course, courts don’t always give effect to such clauses; see the discussion in this posting for more details and a case citation.

    You’re also right that a clause establishing venue (and governing law) in a “four corners” jurisdiction could also have helped NBC. Even in such a jurisdiction, though, a court might be persuaded to view the parties as having implicitly agreed that the very term The Tonight Show inherently meant “the show immediately following the 11:00 p.m. local news.” For example, while California follows the parol-evidence rule, “California also recognizes one of the broad exceptions to the parol evidence rule. Because no contract should ever be interpreted and enforced with a meaning that neither party gave it, parol evidence may be introduced to show the meaning of the express terms of the written contract.” Brinderson-Newberg Joint Venture v. Pacific Erectors, Inc., 971 F.2d 272, 277 (9th Cir. 1992) (reversing denial of plaintiff’s motion for directed verdict on breach-of-contract claim; citation, alterations, and internal quotation marks omitted).

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