Contract Drafting Class 19 Tues. Mar. 27

1. Contract DraftingClass 19Tues. Mar. 27 University of Houston Law Center D. C. Toedt III

2. Avoidable ambiguities

3. Overstuffed contract clauses FACTS:Contract had the following provision: 3. Deferred Compensation; Death Benefit …. Commen-cing upon the Employee’s retirement from the Employer … the Employee shall be paid [$100,000 per year]. If, at the time of Employee’s death, Employee is survived by, and is still married to, [his current spouse] …, then the Employer shall [pay her $100,000 for life]. Employee died while still employed. Q: Does the widow get $100K for life? See Williams v. CDP, Inc., No. 10-1396 (4th Cir. Mar. 22, 2012) (reversing and remanding summary judgment) (unpublished)

4. Overstuffed contract clauses QUESTION: How could the contract provision have been made more clear?

5. Z&B Chapter 5ALoan Agreement A guided tour (continued)

6. Loan Agrmt § 4.1(a) – p. 326 DISCUSSION QUESTION: How can Borrower “cause” its Subsidiaries to comply with the Borrower’s covenants? (Note the definition of “Subsidiary.”)

7. Loan Agrmt § 4.1(a) – p. 326 DISCUSSION QUESTION: CanBorrower make the reps and warranties about all Subsidiaries? (Note the definition of “Subsidiary.”)

8. Loan Agrmt DISCUSSION QUESTION: What’s the “nuclear” option for Lender? (Hint: See p. 354, 372-73)

9. Loan Agrmt DISCUSSION QUESTION: Why might Lender want, or not want, to exercise its “nuclear” option?

10. Z&B Chapter 5BSecurity Agreement

11. SPG Agreement – Z&B p. 384 QUESTION: How could these definitions have been structured to reduce the risk of inter-agreement inconsistency?

12. SPG Agreement QUESTION: Generally speaking, how would Lender perfect its security interest in the Collateral? (Hint: See Z&B p. 376)

13. SPG Agreement QUESTION: Is it worth the Lender’s while to go through the motions of perfecting its security interest in the Collateral? Not really – perfecting a security interest often isn’t worth the trouble Yes – perfecting a security interest can provide the Lender with benefits

14. SPG Agreement FACT: Borrower files for bankruptcy protection. QUESTION: What can Lender do with the Collateral? (Hint: See http://goo.gl/35ZlW - scroll down to the “XXX in Chapter 11” heading.)

15. SPG Agreement § 2.07(a) QUESTION: Why is Borrower required to keep its chief place of business and chief executive office and records in a specific address? (Hint: See UCC § 9.401, Tex. Bus. & Comm. Code § 9.501.)

16. SPG Agreement § 3.01(b), (c) QUESTION: Must Lender successfully sue Borrower and obtain a judgment before it can proceed against a Guarantor or its assets? Yes No Maybe

17. SPG Agreement § 3.01(b), (c) QUESTION: If Borrower could successfully defend against a collection suit by Lender, would that stop Lender from collecting from a Guarantor? Yes No Maybe

18. SPG Agreement § 3.01(b), (c) FACTS: 1) Borrower files for bankruptcy protection. 2) The trustee in bankruptcy success-fully forces Lender to return a payment Borrower previously made, on grounds that it was a “preference.” QUESTION: Can Lender collect the returned payment from a Guarantor? Yes No Maybe

19. Preferences in bankruptcy FACTS: 1) Supplier fills an order from Customer under a longstanding Master Purchase Agreement. 2) Customer pays Supplier’s invoice. 3) Customer files for bankruptcy protection 89 days later. QUESTION: Will Supplier have to return Customer’s payment? (Hint: See this article.) Yes No Maybe

20. Prep for next week: Limitations of liability

21. Types of limitation of liability Warranty disclaimers Remedy exclusions Dollar cap(s) on liability

22. Customer argument to provider You have to have skin in the game – economic incentive to use appropriate care Aren’t you willing to stand behind your work?

23. Provider argument to customer You’d have the same risks if your own people did the work We’re selling services, not business-risk insurance

24. Warranty disclaimers Implied warranties (U.S.) Implied conditions or terms of quality (U.K.) Representations (also disclaim reliance) “Sales” tip: State that express warranties aren’t excluded

25. Warranty disclaimer: Common Draft § 702.01 QUESTION: Why is this paragraph surrounded by a border? Each party disclaims all "Implied Warranties," which refers to any warranty, representation, condition, term of quality, or other statement of fact, that etc., that are not expressly stated in or incorporated by reference into this Agreement. This disclaimer includes, for example, any implied warranties, representations, conditions, and terms — BUT NOT express warranties stated in this Agreement — concerning any of the following, regardless whether they are alleged to arise by law, by reason of custom or usage in the trade, by course of dealing, or in any other manner: [List follows]

26. Warranty disclaimers SPECIFIC EXAMPLES: Merchantability (UCC art. 2) Fitness for particular purpose (ditto) Title (ditto) Noninfringement (ditto) Workmanlike effort (tough to sell) Results

27. Remedy exclusions Consequential damages Incidental damages? Punitive / exemplary damages Implied conditions or terms of quality (U.K.)

28. Remedy exclusions – Common Draft § 803.01 QUESTION: Why is this paragraph surrounded by a border? (a)Except as expressly provided otherwise in this Agreement, neither Provider or its affiliates (each, a Protected Party), nor the employees, officers, directors, shareholders, general- and limited partners, members, and managers (if any) of each of them (each of them and each Protected Party, a Protected Person), will be liable for consequential, incidental, indirect, special, punitive, exemplary, or similar damages (each, Disallowed Damages) arising from, or in respect of, any breach of this Agreement — however caused and regardless of the theory of liability, whether in contract, tort (including negligence, gross negligence, and strict liability), or otherwise  — even if the Protected Person (or its suppliers or licensors, if applicable) have been advised of the possibility of such damages. ¶ (b) For purposes of illustration, damages relating to loss of profits from collateral business arrangements; to business interruption; and to loss of data or privacy or confidentiality, are examples of Disallowed Damages.

29. Dollar caps on damages EXAMPLES Fixed dollar amount Multiple of amount paid by customer in previous 12 months Amount of applicable insurance coverage (in which case an insurance requirement should also be negotiated)

30. Dollar-cap carve-outs (typical) • Gross negligence • Willful misconduct • Indemnity obligations • Bodily injury (incl. death) • Property damage • Carve-out from the carve-out: Data loss

31. Dollar caps on damages Consider capping damages risk-by-risk, instead of one-size-fits-all (See blog posting at http://goo.gl/Ew7Aj for more info.)

32. Dollar caps on damages

33. Bulletproof a limitation of liability • Abacus Fed. Svgs. Bk. v. ADT Security Serv., Inc., summarized in this blog posting • Diebold’s magic formula: • Limitation of liability • Customer must buy insurance • Customer waives subrogation

34. Subrogation Party A must buy insurance Party B is an “additional named insured” Party A waives subrogation Waiver is binding on insurance carrier So even if Party B is at fault, insurance carrier can’t sue Party B to recoup payout (See this blog posting for cites)