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Drafting Contracts to Preserve Your Deal Through Bankruptcy and Litigation

Learn how to draft contracts to protect your interests in case of bankruptcy or litigation. This article covers arbitration, termination provisions, franchise laws, special industry limitations, and more.

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Drafting Contracts to Preserve Your Deal Through Bankruptcy and Litigation

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  1. When Bad Things Happen to Good Contracts:Drafting to Preserve Your Deal Through Bankruptcy and Litigation William H. Rice IIVice President, General Counsel and Secretary, PEMSTAR Inc. Steven E. CarlsonKatherine A. ConstantineSteven J. WellsDorsey & Whitney LLP

  2. “Most Likely To Be Litigated” • Arbitration / Disputes Resolution • Termination • Confidentiality Bankruptcy Surprises

  3. Arbitration Provision • Arbitration. All disputes arising in connection with this Agreement shall be finally settled by binding arbitration to be conducted in [Chicago, Illinois, U.S.A.] under the Rules of Conciliation and Arbitration of the International Chamber of Commerce ("ICC") in the English language by [one (1) arbitrator] [three (3) arbitrators] appointed in accordance with said Rules, applying the substantive laws of [the State of Illinois, U.S.A] without regard to conflicts of law principles. Any decision rendered by any arbitration tribunal pursuant to this Section shall be final and binding on the parties thereto, and judgment thereon may be entered by any court of competent jurisdiction. Each party shall bear its owncosts and expenses (including legal fees) of sucharbitration and one-half of the fees and expensesof the arbitrator(s).

  4. Forum/location • Law to govern • Rules (AAA, ICC, etc.)

  5. Arbitration Favored • If Intent Unclear, Presumption in Favor of Arbitration

  6. Arbitration and DisputeResolution Provisions • Anticipating the Need for Speed

  7. Injunction in Aid or Anticipation of ArbitrationMerrill Lynch v. Hovey, 726 F.2d 1286 (8th Cir. 1984)

  8. Statute of Limitationsand Arbitration Har-Mar, Inc. v. Thorson & Thorshov, Inc. 218 N.W.2d 751 (1974)

  9. Termination Provision (a) Either party may terminate this Agreement by giving notice in writing to the other party in the event the other party is in material breach of this Agreement and has failed to cure such breach within thirty (30) days of receipt of a written notice from the first party specifying the nature of such breach; (b) Should an event of Force Majeure continue for more than one hundred eighty (180) days as provided in Section 13.4 below, the party not prevented from performing may terminate this Agreement by giving notice in writing to the other party.

  10. Termination Provisions • For Cause • Without Cause • Upon Event or Condition • Expiration or Non-Renewal

  11. Supply, Distribution, Licensing, “Partnering” Contracts — Beware the “Franchise Trap”

  12. Minnesota Franchise Act – Minn. Stat. § 80C.01 • Contract (i) Person or Company Is Granted the Right to Engage in the Business of Offering or Distributing Goods or Services Using the Franchisor’s Trademark; (ii) in Which the Parties Have a Community of Interest in the Marketing of Goods or Services; (iii) for Which the Person or Company Pays, Directly or Indirectly, a Fee.

  13. § 80C Limits On Termination • 90-Day Notice • Good Cause • 60 Cure Period

  14. Sales Representation Acts (e.g., Minn. Stat. § 235E.37) • “Fair Dealer Laws” (e.g., Wi. Stat. § 135.01)

  15. Special Industry Limitations • Cars – Minn. Stat. § 80E • Booze – Minn. Stat. § 325B • Gas – Minn. Stat. § 80F • Farm Equipment • “Heavy Equipment”

  16. Limits on Termination of Contracts of Indefinite Duration • UCC – § 2-309 • “Reasonable Notification” • Doctrine of Equitable Recoupment

  17. Termination on Bankruptcy Provision • “Upon the filing of a bankruptcy petition by any party to this contract, this contract* is immediately and automatically, without any action by any party, terminated.” • 11 U.S.C. §365(e)(1) nullifies this provision and applicable law allowing termination. • * assumes a contract that is executory in nature

  18. Section 365(e)(1) goes further: • NO right or obligation of any nature may be modified or terminated, because of a bankruptcy filing.

  19. Special Bankruptcy Issues

  20. Anti-Assignment Provision • “No party may assign this contract without the consent of all other parties to this contract.” • 11 U.S.C. §365(f)(1) nullifies this provision unless . . .

  21. Personal Services Contract • “This contract is a personal services contract such that state law excuses the parties from accepting performance other than by the parties hereof.” • But self-serving contract text does not control.

  22. Debt Financing Contract – not assignable by Bankruptcy Court. • Aircraft Terminals and Gates

  23. Pre Bankruptcy Waivers • “The Borrower agrees that in the event it files bankruptcy, the automatic stay shall not modify the pre-petition rights of the Lender and the Borrower shall not defend against, and shall support, any motion to modify the stay pursued by the Lender.” • Bankruptcy Courts, with narrow exceptions, won’t enforce this type of provision.

  24. Some Possible Solutions • Include facts and admissions that support: • lift stay motions • motions forcing earlier assumption/rejection of contracts • objections to contract assignment

  25. Confidentiality Provision • Consultant acknowledges that during the course of performing this Agreement it may be exposed to confidential information relating to Client’s business. During the term of this Agreement and for a period of one (1) year thereafter, Consultant will not directly or indirectly disclose any such information, will secure and protect such information in a manner consistent with the maintenance of Client's rights therein, and will take appropriate action by instruction or agreement with its employees and agents who are permitted access to such information to satisfy its obligations hereunder. The foregoing obligation with respect to confidential information of Client does not apply to information which is in the public domain, was rightfully known or becomes known by Consultant prior or subsequent to its receipt hereunder, was independentlydeveloped by Consultant, or is or becomes publicknowledge by acts of Client or a third party.

  26. Drafting Considerations • Identify the Information • Identify the Purpose for Which the Information Can (or Cannot) Be Used • Identify Exceptions (e.g., Already in Public Domain or Possession of Promisor, Received from Another Source) • Identify What Happens at the End of the Contract or Relationship

  27. What Is Confidential Information? • Uniform Trade Secrets Act (Minn. Stat. § 325C) • Not Exclusive Definition • Public Policy Considerations

  28. Beware: • Conflict of Interest • Inevitable Disclosure Doctrine -- • Pepsico, Inc. v. Redmond, 54 F.3d 1262(7th Cir. 1995) • Bankruptcy or Trial Court

  29. Unanticipated Decisions: • Bankruptcy court relies on 1872 equitablemaxim* to defeat the Uniform Commercial Code • Court recharacterizes leases as loans resultingin significantly worse treatment for creditor • * “that which ought to have been done is to be regarded as done…”

  30. Questions and Comments

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