Contract Drafting
University of Houston Law Center
Spring 2012
D. C. Toedt III
In the news: Kodak bankruptcy

Chapter 11 reorganization

Contract termination clause
(see Z&B p. 151, § 11.2.1)
In the news: Kodak bankruptcy
QUESTION: Are such termination clauses enforceable?
A.
Usually yes
B.
Depends -- examined case-by-case
C.
Usually no
In the news: Kodak bankruptcy
QUESTION: Are such termination clauses enforceable?
A.
Usually yes
B.
Depends -- examined case-by-case
C.
Usually no – “ipso facto” clause
See 11 U.S.C. §§ 365(e)(1), 541(c)
Review

What is the ultimate objective of any contract?
Stark Exercise 18-1
For purposes hereof,
“Cause” with respect to
the termination of any
Shareholder’s employment has the meaning
set forth in said Shareholder’s employment
agreement with the
Company
Stark Exercise 18-1
For purposes hereof,
“Cause” with respect to
the termination of any
Shareholder’s employment has the meaning
set forth in said Shareholder’s employment
agreement with the
Company
In connection with termination of a Shareholder’s
employment, “Cause” has
the meaning set forth in
that Shareholder’s employment agreement with
the Company
Exercise:
Addams family signature block
1. Draft the signature block yourself
2. Discuss with your teammate(s)
Addams family signature block
Addams Investments LP, a limited partnership
By:
Addams Operations, Inc., general partner
By:
Wednesday Addams, President
Signature authority
“Each individual signing this Agreement on
behalf of an organization personally
represents that his or her signature has
been authorized by that organization.”
Representation



Statement of fact
As of a moment in time
Intended to induce reliance

Justifiable reliance is required for
a negligence cause of action
Warranty

Technical definition


Real world definition


A promise that a statement is true
A promise that the maker of a statement will
pay damages to the recipient of the statement
if (i) the statement isn’t true and (ii) the
recipient suffers damages
There is no reliance component, nor intent.
Signature authority
“Each individual signing this Agreement on
behalf of an organization personally
represents that his or her signature has
been authorized by that organization.”
Exercise - Addams family:
Getting signatures
1. Write down your best solution –
and why the WidgetCo sales rep is so eager
2. Discuss with your teammate(s)
Exercise – Big Public Software
Company EOQ
Q1: Can the quarter-making sales contract be
backdated?
Q2: What happened to Computer Associates
CEO, CFO, GC?
1. Write down your answers for each question
2. Discuss with your teammate(s)
Exercise: Electronic signatures
WHAT DO CLIENTS - AND
PARTNERS - WANT?
Business plan
Leverage
PURPOSES OF CONTRACTS
Contract as business plan
4 phases of every contractual relationship
 Influencers
 What-ifs: 5Ws
 Costly – money, shot-clock time

Relationship preservation

Supplier want to keep customer

Customer wants great suppliers

Discussion channels

Problem-solving mechanisms
 ADR
(arbitration, mediation)
is just the tip of the iceberg
Contract as leverage
Objective: persuasion
 Litigation – a blunt instrument
 Relationship management

 Contact
opportunities;
 Project management
Litigation problems




Interpretation
Tactical battles
Cost
Time




Unpredictability
Appeals
Remedies
Enforcement
Damage to relationship
PRACTICAL MATTERS:
SIGNATURES
In-class reading:
Stark 17.4 – 17.8
Individual, entity signatures
 Initials?
 Notarize?
 Mechanics

Translating the
Business Deal into
Contract Concepts
Stark Legal Education, Inc. © 2007
Buying a used car
Representation



Statement of fact
As of a moment in time
Intended to induce reliance

Justifiable reliance is required for a
cause of action
Contract Drafting
2010-01-27
University of Houston Law Center
Spring 2010
D. C. Toedt III
Homework review (not graded)
Stevens v. Publicis:
 Exchange of emails w/ typed names at
bottom
 “[P]laintiff's name at the end of his e-mail
signified his intent to authenticate the
contents” – that’s a ‘signature’
 Enough to modify employment agreement
Warranty

Technical definition


Real world definition


A promise that a statement is true
A promise that the maker of a statement will
pay damages to the recipient of the statement
if the statement isn’t true and the recipient
suffers damages
There is no reliance component, nor intent.
Warranty
The car is purple.
Remedies for
breach of warranty

Benefit of bargain
 Diminution
in value
 Alt: Cost of paint job?

Incidental damages?
 Rental

cost, while car is in paint shop
Consequentials?
 UCC:
If not disclaimed
Damages cap in contract?
 Attorneys’ fees?

Homework (not graded)
For discussion next time: Look up the
“Texas rule” on attorneys’ fees in Tex. Civ.
Prac. & Rem. Code § 38.001
Remedies for
Misrepresentations

Honest or negligent, if material
 Avoidance
 Restitutionary

Recovery
Fraud
 Choice between
 Avoidance and Restitutionary Recovery
and
 Damages
 Out-of-pocket
 Benefit of the bargain
 Punitive
Measures of Damages for
Fraudulent Misrepresentations
Purported Worth $2500
 Paid
$1000
 Actual Worth
$250
 Out-of-Pocket

 $1000

minus $250 = $750
Benefit of the Bargain
 $2500
minus $250 = $2250
Homework (not graded):

For discussion next time, skim Arete
Partners LP v. Gunnerman, No. 06-51133
(5th Cir. Jan. 19, 2010) (reversing Sparks,
J.) (be sure to skim the dissent too)

Google-search Judge Sam Sparks –
what’s his reputation?
Why Receive Both
Representations and Warranties

Representations
 Avoidance
 Punitive
damages

Warranties
 No
reliance
component --additional
cause of action
 Benefit
of the bargain
damages
 No
need to prove
defendant’s scienter
CBS v. Ziff-Davis –
sale of magazine division
Rep/warranty re financial statements
 Due diligence: Accounting problems
 Lawsuit: Misrep. + breach of warranty
(really: litigating the price afterwards)
 Holding:

 No
misrep.: Reliance not justified
 BUT: Warranty claim succeeded

Parties settled after appellate holding
Discovery issues (read: costs)
for misrepresentations

Standard of care (negligence claims):
deals, practices, problems – interrog.,
document production, depositions
 Expert witnesses – fees, report review,
depositions, trial props, trial prep
 Past

Intent (fraud claims):
 Email

trails, interrog., depositions
Net worth – for punitive damages
Risk Allocation (pp. 17-19)

Flat representation

Unequivocal
 Without wiggle room

Qualified representation

Hedged
Covenant

A covenant is a promise to perform. It
can be a promise to do something or a
promise not to do something.

It creates a duty/obligation to perform.
.
Right

A right is the flipside of a covenant.

If Sam is obligated to perform in favor of
Keesha, Keesha has a right to Sam’s
performance.
Covenants and Rights

The Landlord shall heat the Tenant’s
premises.

The Tenant has a right to have its
premises heated.
Condition to an Obligation
A condition to an obligation is a state
of facts that must exist before a party
has an obligation to perform.
Condition to an Obligation –
Ongoing Conditions
If the Retailer notifies the Manufacturer that
it requires Additional Merchandise, then the
Manufacturer shall ship the Additional
Merchandise to the Retailer no later than
three business days after it receives notice
from the Retailer.
Condition to an Obligation Walk-away Conditions
The following are conditions to the Buyer’s
obligation to perform:
1.
The Buyer must have received an opinion from
the Seller’s counsel, substantially in the form of
Exhibit A.
2.
The Seller must have obtained all the
consents listed in Schedule 3.14.
Condition to an
Obligation
Condition is satisfied.
Party performs its
obligation.
Condition is not
satisfied.
Choice
Party
exercises its
walk-away
right.
The Obligation
Party waives the
failure to satisfy the
condition and performs
its obligation, although
not obligated to do so.
Interplay of Contract Concepts

Rep and Warranty
 The

car is red.
Covenant
 Seller

shall not paint the car.
Condition
 Seller
must have complied with all covenants.
Discretionary Authority

Discretionary authority works in one of
two ways:
 Discretionary
authority gives its holder a
choice.
 Discretionary
authority gives its holder
permission to act – often when it has been
previously denied.
Discretionary Authority

Either party may terminate this Agreement at
any time by sending written notice to the other
party.

The Borrower shall not invest in any Person,
except the Borrower may invest in any whollyowned subsidiary of the Borrower.
Condition to Discretionary
Authority
A condition to discretionary authority
is a state of facts that must exist
before a party may exercise
discretionary authority.
Condition to Discretionary
Authority
If the Author submits an unsolicited
manuscript to the Publisher, the
Publisher may accept or reject it, in its
sole judgment.
Declaration

A statement of fact as to which both
parties agree, but with respect to which
neither party has any right or remedy

Definitions – need to be kicked into action
to have substantive, legal effect

Policy statements – have legal effect on
their own
Declarations - Definitions
Definition:
“Purchase Price” means $200,000.
Definition kicked into action:
The Buyer shall pay the Seller the
Purchase Price at the Closing.
Declarations – Policy Statements

The laws of Ohio govern all matters relating to
this Agreement, including torts.

An assignee of a limited partnership interest
cannot become a Limited Partner unless the
General Partner gives its consent.
Condition to a Declaration
A condition to a declaration is a state of
facts that must exist before a policy has
substantive consequences.
Condition to a Declaration
If a purported assignment is made in
violation of this Section 9.3, it is void.
Parts of an Agreement
 Preamble:
title, parties, and date
 Recitals
 Statement
 Definitions
of Consideration
Parts of an Agreement

Action Sections: the key business
provisions of a contract

Buyer shall buy, and Seller shall sell

Money

Closing Date (if appropriate)

Closing Deliveries (if appropriate)

Term (if appropriate)
Action Sections and Contract
Concepts

Subject matter performance provisions

Reciprocal covenants
 Self-executing provisions

Money provisions

Declaration stating the amount and
covenant to pay
 Covenant to pay that includes amount
Action Sections

Subject matter performance provision

Money

Closing date (if appropriate)

Closing deliveries (if appropriate)

Term (if appropriate)
Parts of an Agreement

Other business provisions (representations
and warranties, covenants, rights,
conditions, discretionary authority, and
declarations)

Endgame provisions

Boilerplate

Signatures
Endgame Provisions

Condition to an obligation and the
obligation


If X bad thing happens, A shall . . .
Condition to discretionary authority and
the discretionary authority

If Y bad thing happens, A may . . .
Endgame Provisions

“Event of Default” means….

If an Event of Default occurs and is
continuing, then the Bank may accelerate
the Loan, foreclose on security, etc.
Boilerplate Provisions

Provisions of general applicability that tell the
parties how to manage the agreement
 Confidentiality
 Anti-assignment
 Waiver
of jury trial
 Choice
of law and forum
 Notices
 Severability
Contract Concepts





Representation and warranty
Covenant
Right
Discretionary Authority
Conditions
 Condition
to an obligation and the obligation
 Condition
to discretionary authority and the
discretionary authority
 Condition

to a declaration and the declaration
Declaration
Adele Administrator/HHI Hypo

“Cause” means . . .

If there is Cause, then HHI may terminate
the Administrator.

If HHI terminates, HHI shall pay . . .
Reading for next time:
Read Ch. 18 – Legalese (it’s short).
 Skim Ex. 18-1 - 18-7 (we’ll do in class)
 Skim Ch. 19, § 19.4 – Numbering.
 Skim Appendix B (Website Development
Agreement) – Read the introductory
provisions.
