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The Negotiation and Drafting of
International Contracts
Course of Mr. Robert Simpson
(Trento, Italy, May 2004)
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BIBLIOGRAPHY
- Contract Law, Cases Materials and Texts, Hugh BEALE,
Arthur HARTKAMP, Hein KOTZ and Denis TALLON, Hart
Publishing, Oxford, England and Portland, Oregon, 2002
(English, French, German and international law)
- Négocier et Rédiger un Contrat International, de
Dominique BLANCO, Dunod, 3ème édition, janvier 2002
- Le Contrat International, de Stéphane CHATILLON,
Vuibert, mars 2001
- The Anglo-American Law of Contracts, de Edward ERRANTE,
Second Edition, LGDI 2001
- Contracts Cases and Materials, Sixth Edition, de E.
Allan Farnsworth, William F. Young and Carol Sanger,
Foundation Press, New York, 2001 (American law)
- Contract Law Text, Cases and Materials, de Ewan
Mckendrick, Oxford University Press, 2003 (English law)
- Law of the United States, de Peter HAY, Dalloz, 2002
- International Business Transactions, de Ralph H. FOLSOM
et Michael W. GORDON, West Publishing Co., 1995
- International Chamber of Commerce Arbitration, de W.
Lawrence CRAIG, William W. PARK and Ian PAULSSON, Third
Edition, Oceania Publications, Inc., 2000
- A Guide to the New ICC Rules of Arbitration, de Yves
DERAINS and Eric A. SCHWARTZ, Kluwer Law International,
1998
- Le Droit Français de l’arbitrage Interne et
International, de Matthieu de BOISSESSON, Editions GLN,
1990
- Droit Comparé de l’arbitrage international, de JeanFrançois Poudret et Sebastien Besson, L.G.D.J., 2002
- www.lexmarcatoria.org
- www. TheLawEngine.com
- http://untreaty.un.org/English/access.asp
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- http://www.unidroit.org
-
www.cisg.law.pace.edu
Principles of International Contract Law
° Principles of International Commercial Contracts,
UNIDROIT - 1994
° The Principles of European Contract Law, Lando
Commission - completed and revised version 1998
International Conventions
° EC Convention on the Law Applicable to Contractual
Obligations (Rome 1980)
° United Nations Convention On Contracts For The
International Sale Of Goods (Vienna 1980)
° EC Convention on Jurisdiction and the Enforcement of
Judgments in Civil and Commercial Matters (Brussels 1968)
° United Nations Convention on the Recognition and
Enforcement of Foreign Arbitral Awards
(New York 1958)
OUTLINE
Part One: Contract and International Contract a Comparative Law Analysis
A. General Introduction to American Law
1. Sources of American law
2. Elements of American Society
3. Comments on the Legal Environment in the United States
and France
° Brown v. Board of Education, United States Supreme Court,
347 U.S. 483 (1954) (50th anniversary in 2004)
B. Introduction to American Contract Law (to be
studied simultaneously with C and D below)
1. Definition of contract
2. The Agreement process - Offer and Acceptance
° Lucy v. Zehmer, Supreme Court of Appeal of
Virginia,196 Va. 493, 84 S.E.2d 516 (1954)
° Dickenson v. Dodds, In the Court of Appeal, Chancery
Div. (1876) 2 Ch. Div. 463
° Lefkowitz v. Great Minneapolis Surplus Store, Supreme
Court of Minnesota, 251 Minn. 188,86 N.W.2d 689 (1957)
3. Consideration
4. Illegal Contracts
5. The Statute of Frauds
6. Interpretation of Contracts
7. Discharge of Contracts
8. Conditions
9. Impossibility
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10.
Breach of Contract
11. Remedies for Breach of Contract
° Hadley v. Baxendale, In the Court of Exchequer,
9 Exch. 341 (1854)
° Ericson v. Playgirl, Inc., Court of Appeals of
California, 73 Cal. App. 2d, 850 Cal. Reptr. 921 (1977)
° Parker v. Twentieth Century Fox Film Corp.,
California Supreme Court, Court of Appeals of New York,
3 Cal. 3d 176, 89 Cal. Rptr. 737, 474 P. 2d 689 (1970)
° Truck-Rent-A-Center, Inc. v. Puritan Farms, Inc.,
Court of Appeals of New York, 41 N.Y. 420, 393 N.Y.S.
2d 365, 361 N.E. 2d, 105 (1997)
° Osteen v. Johnson, Colorado Court of Appeals, 473 P.
2d 184 (1970)
C. Introduction to International Contract Law
1. Definition of a Contract
2. Definition of an International Contract
3. Principle Sources of International Contract Law
(Transnational Private Contract Law or Lex Mercatoria)
4. Law Applicable to International Contracts
5. The Autonomous Contract
D. General Principles of International Contract Law
1. Freedom of Contract and Mandatory Law
2. Good Faith and Fair dealing
3. Confidentiality
4. Pre-Contractual Stage
5. Formation of a Contract – Offer, Withdrawal, Revocation
6. Formation of a Contract - Acceptance, Rejection of Offer,
Counter-offer
7. Consideration
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8. Price
9. Interpretation
10.
Performance (General)
11. Non-performance, Termination and Remedies (Including
Damages)
12.
Force Majeure
13.
Hardship
14.
Anticipatory Breach
15.
Passing of Risk
Part Two: The Negotiation and Drafting of
International Contracts
A. Introduction to Negotiation and Drafting of
International Contracts
1. Techniques of Negotiating an International Contract
a. Introduction - Personal Negotiating Tips
b. “You Can Negotiate Anything”
c. Some Personal Examples of Negotiations
d. Further Considerations Concerning the Negotiation of
International Contracts
e. Mastering the Pre-Contractual Phase
2. Drafting an International Contract
a. The Contractual Framework
b. Standard International Contract Provisions
B. Analysis of Selected International Contracts
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1. Standard International Contract
2. Case Study (International Acquisition Agreement)
3. Letter of Intent (for Acquisition of Shares)
4. Due Diligence Questionnaire (for Acquisition of Shares)
5. Agreement for Sale of Stock
6. Guaranty Agreement (for Acquisition of Shares)
7. List of Closing Documents for Acquisition
8. License Agreement
9. Distribution Agreement
A. General Introduction to American Law
1. Sources of American law
a. English common law (historical development of
common law and equity in England) and American
common law.1
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The history of English common law can be divided into four basic periods: prior to 1066 (the
Anglo-Saxon period); 1066 (the Norman Conquest of England) to 1485 (the beginning of the Tudor
Dynasty); 1485-1800's (the further development of common law and the emergency of equity); and
the 1800's to the present (the ascendancy of common law and the Parliament)
a. Prior to 1066 Anglo-Saxon period
Barbarian tribes. Diverse local laws and customs. Laws and the administration of justice were
generally on a local level. The principal documents of the period are the "dooms" of barbarian
kings which are only fragments of customary laws of the time. These date from the reign of King
Aethelberht (601-604) to King Canute (1020-1034). These early laws, like the kings who
legislated, their were strongly influenced by the Christian religion, In promulgating laws, the
Kings never acted alone, but sought the counsel and consent of their wise men and relied on
custom and tradition. Consider the following excerpts:
I, then. King Alfred, have collected these (dooms) and ordered them) to be written down-(that is to say,) many of those which our predecessors observed and which were also
pleasing to me. And those which were not pleasing to me, by the advice of my witan, I have
rejected, ordering them to be observed only as amended. I have not ventured to put in
writing much of my own, being uncertain what might please those who shall come after us.
So I have here collected the dooms that seemed to me the most just, whether they were from
the time of Ine, my kinsman, from that of Off a, king of the Mercians, or from that of
Aethelberht, the first of the English to receive baptism; the rest I have discarded. I,
then, Alfred, king of the West Saxons, have shown these (dooms) to all my witan, who have
declared it is the will of all that they be observed. ...
- Dooms of Alfred
(871-901).
King Edward commands to all his reeves: that you deem such right dooms as you know to be
most right and as stand in the doombook. Nor for any cause shall you fail to declare the
customary law; and (you shall see to it) that a day is set for every cause, when that
which you decide concerning it shall be carried out.
- Dooms of Edward
the Elder (901-924).
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This writing has been copied, letter by letter, from the writing which Archbishop Dunstan
gave our lord at Kingston on the day that he was consecrated as king, forbidding him to
make any promise save this, which at the bishop's bidding he laid on Christ's altar: In
the name of the Holy Trinity I promise three things to the Christian people my subjects:
first, that God's Church and all Christian people of my realm shall enjoy true peace;
second, that I forbid to all ranks of men robbery and all wrongful deeds; third, that I
urge and command justice and mercy in all judgments, so that the gracious and
compassionate God who lives and reigns may grant us all His everlasting mercy.
- Coronation oath of Edgar
(946-963)
b. Historical development of common law - 1066 (Norman Conquest of England) to 1485 (the
beginning of the Tudor Dynasty)
William did not bring any new body of laws to England. Rather, to conciliate his English
subjects, one of his first legislative acts was to confirm existing English laws: "This I will
and order that all shall have and hold the law of King Edward as to lands and all other things
with these additions which I have established for the good of the English people." As concerns
the law, the Norman kings never considered themselves depositories of supreme power. Rather, they
accepted to maintain the ancient and reasonable customs ("general immemorial customs of the
Realm").
One of the principal results of the Norman Conquest was the establishment of feudalism in
England. William confiscated almost all the lands of England and gave them to his followers as a
reward for their services. William gave the lands subject to terms that had been customarily
applied to landholding in Normandy. Under these terms of the "feudal tenure", each holder of land
promised to render military and other services (administrative as well as financial) to the king
in return for power, including part of the administration of justice, into his own hands.
The basic fact of English legal history after 1066 is the creation of a national, efficient and
centralized administration of justice. William developed a council of advisors who often acted as
a court of justice ("curia regis"). This "King's court" followed its own precedents and thus
developed a uniform procedure. Also, it tended to be more impartial than the antiquated local
courts. The king's court became popular. Henry I (1100-1135) began sending royal justices around
the country to preside over local courts and handle other business of the king. Henry II expanded
the jurisdiction of the king's court and made increasing use of the itinerant justices. By the
end of the 12th Century, the king's court with its regular circuits became one of the most
powerful political institutions in the country. It gave a uniformity to the administration that
had never existed under the old local courts. The itinerant justices spread throughout the land
knowledge of the one set of legal principles used by the central courts. Eventually, the
institutional fact of a unified court system resulted in the growth of a law that was common to
all of the realm. New rules and techniques developed gradually during a long period in which the
rate of change was relatively slow.
Common law system of pleading
The original concept was that justice was a commodity dispensed by the king. Someone with a
complaint sought permission of the king to sue. This permission was granted for a fee. The
factual basis of various complaints tended to be the same or similar. From particular factual
situations developed the writs. A writ was an authorization to the central court or to one of the
itinerant justices to try the particular case. However, if the actual factual situation varied
from the factual situation of the writ issued, the court had no authority to hear the case.
Remedies at common law thus developed in terms of available writs and procedural forms. Each time
a new writ was issued, new law was created. In addition to the writs, the king's court developed
another technique to extend their jurisdiction: a plaintiff was allowed to make a declaration of
the facts of his case and to request the judges, in view of the facts, to hear his case. These
new actions in which the judges decided to hear the cases were called "actions on the case”.
Some important ideas to retain from a study of the development of common law include:
° Emphasis on procedure: a plaintiff needed to find an existing cause of action recognized by the
royal courts (hence the description of common law: "remedies precede rights."
° There developed only a specific number of causes of action.
° There was no distinction between private and public law (all was public).
° The existence of a rigid and complex procedural framework excluded any large-scale resort to
concepts of Roman law.
° Jurists had to learn common law and its procedures from practice, not from studying Roman law
at universities; there thus developed at an early date an independent bar of practicing lawyers.
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° The importance of the concept of natural law (a body of higher laws, basic and unchangeable,
which direct human conduct and to which human laws must or should conform); today this might be
called "the rule of law".
° The concept of the supremacy of law as a limitation on government (the sovereign as a limited
power). Consider the "Magna Carta" (1215) which established that there are certain laws even the
King must obey. Example: "No free man shall be seized, or imprisoned, or dispossessed, or
outlawed, or in any way destroyed; nor will we condemn him, nor will we commit him to prison,
excepting by the legal judgment of his peers, or by the laws of the land.”
° The importance of the dicta of Coke in Dr. Bonham's Case, 8 Coke's Reports 114a (1610): common
law will control acts of Parliament and sometimes hold them to be void "if against common right
and reason, or repugnant, or impossible to be performed." This principle later became very
important in the development of common law in the U.S.
° Common law courts became the sole guardians of common law constitutional limitations even as
against Acts of Parliament.
° Development of the concept of the legal rule or the law of the particular case (as opposed to
obiter dicta, comments by the judge in his decision that are not directly part of the holding of
the case). English law became a law based on court decisions.
° The fundamental technique of the practice of English law became the technique of distinctions:
distinguishing the fact situation of one decision from that of another.
c. Further development of common law and the emergency of equity (1485-1800's).
Over a period of time, the king delegated his judicial functions, especially the power to issue
writs, to his chancellor. The writs and actions on the case were too limited and rigid to allow
the royal courts to render justice in all circumstances. Thus, plaintiffs would go to the king to
seek special relief. These cases were usually referred to the Chancellor (the king's counselor
and "conscience") who considered the "equity" of the particular case. If the situation was harsh
enough, the chancellor granted special relief. By the 15th Century, the chancellor became almost
an independent judge. Development of chancellery courts. Consider the following order of James I
(early 1600's) to his chancellor:
We do will and command that our Chancellor or Keeper of the Great Seal for the time being,
shall not hereafter desist to give unto our subjects, upon their several complaints now or
hereafter to be made such Relief in Equity as shall stand with the Merit and Justice of
their Cause and with the former, ancient and continual Practice and Presidency of our
Chancery.
This in fact gave equity predominance over common law.
Equitable relief was discretionary. Equity would intervene only when the remedy at common law was
inadequate. At first equity was "a roguish thing and "varied like the Chancellor's foot" since
the concept of "justice, equity and good conscience" was subjective. Equity courts followed
procedure inspired by Canon law and principles from Canon and Roman law. Its proceedings were
secret. However, equity soon became as rigid as common law because it was based on ideas of
"equity" in the 15th and 16th Centuries as seen by the various chancellors.
Common law vs. equity
Equity was not new law. "Equity follows the (common) law." Some examples:
° The common law remedy for breach of contract was damages. Equity developed the decree of
specific performance (not a new law, but a new remedy).
° At common law, parties needed proof. However, common law courts could not force parties to
produce evidence. Equity developed the discovery order.
° The common law action of duress covered only physical violence. Equity covered mental violence
(undue influence).
° At common law, a trustee of a trust was the owner of the property, though he held it in trust
for another. However, common law could not force him to do so. Here again, equity courts allowed
specific performance. It is seen from the above that equity acts in personam; the chancellery
courts acted by orders or injunctions addressed to a specific person. Equitable remedies were
discretionary and one had to come into court with "clean hands", and there could be no "laches".
d. Ascendancy of common law and Parliament
(1800's - present)
Influence of democratic ideas (e.g., Bentham). Development of Parliament. Because of the rigidity
of equity, Parliament stepped in to fill the gaps and abuses of common law. Common law, through
Acts of Parliament, again became dominant. Common law also absorbed commercial law. However, the
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equity jurisdiction of the chancellery courts continued until the Judicature Acts of 1873-1875
abolished the distinction between the common law courts and the chancellery courts. Thereafter,
all superior courts (courts of general jurisdiction) became competent to hear all actions. The
20th Century has seen increased legislation, plus administrative regulations. Much of the old
common law has become statutory law.
Comparison with civil law
Neither France nor Germany had a common law in the sense of a general body of law common to the
whole country. They achieved a centralized administration of justice at a much later period than
did England. The Civil Codes (France 1804, Germany 1900) were fresh starts for their legal
systems.
Legal situation in France prior to the Codes
Four factors:
° Struggle within the more decentralized French feudal system between local seigniorial judges
and central (royal) power.
° Conflict between church and state.
° Overlapping jurisdictions.
° Administration of justice was slow, complicated and expensive. There was never any unification
of French law under the ancien regime. Voltaire: "The traveler changed his law as often as he
changed horses." One of the drafters of the French Civil Code described the French scene prior to
the promulgation of the Code:
"What a spectacle opened before our eyes! Facing us was only a confused and shapeless mass
of foreign and French laws, of general and particular customs, of abrogated and nonabrogated ordinances, of contradictory regulations and conflicting decisions; one
encountered nothing but a mysterious labyrinth, and, at every moment, the guiding thread
escaped us. We were always on the point of getting lost in an immense chaos."
The greatest achievement of the French Civil Code was to give France a national, unified and
coherent body of law. This newly-found unity is symbolized by a provision of the law promulgating
the Code:
From the day on which these laws enter into force, the Roman laws, the ordinances, the
general and the local collections of customs, the statutes, the regulations all cease to
have the force of law in the matter covered by the laws which comprise the Code.
Legal unity was even longer delayed in Germany. Modern Germany did not achieve political unity
until the final decades of the 19th Century. Before the Civil Code became effective, at least six
systems of law were in force within the territory of the new state. These systems were subject to
change by local law and custom. The law as to succession, for example, often varied from one
contiguous locality to another. Some of the laws in force were written in German, others in
French, others in Greek, Latin, or Danish. The situation prior to 1900, the date the German Civil
Code took effect, is well characterized by the observation: “That such an anomalous state of
things could have been tolerated for so long a time is a legal mystery which remains to be
solved.”
Modern tendency of the convergence of the common law and civil law systems (e.g. harmonization
and even codification in common law countries and greater resort to jurisprudence in civil law
countries).
2. Adaptation of English common law in the United States
Problems with adopting English common law in the U.S.:
° English common law procedure was too archaic.
° There were not enough American jurists trained in the technicalities of English law.
° Common law was developed in a feudal society that was repugnant to the colonialists.
° Roscoe Pound: "Ignorance was the principal factor in the development of American law. "
° Importance of the decisions in Dr. Bonham's Case (above) and Calvin's Case (1608). The latter
held that English common law was applicable in the colonies but only to the extent appropriate to
life in the new world.
The 18th Century saw development of commerce and an improvement of living conditions. The need
for a more evolved law led to a more general application of English common law. However, U.S. law
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b. Statutory law (federal and state).
c. Restatements of the law.
d. UCC.
e. Common law based on case law, uncertainty of solutions,
contradictory opinions, detailed rules, practical
character, fragmentation (50 states), volume and
complexity, stare decisis, distinguishing of decisions,
some codification (UCC, Restatement).
f. How to brief a case2.
g. Importance of precedent (stare decisis), obiter dicta
and the distinguishing of cases.
2. Elements of American society
Economy based on free enterprise system (profit motive
and competition as chief regulators), right of private
property, freedom and sanctity of contract, government
of laws, not of men, protection of the individual (Bill
of Rights), separation of powers, doctrine of judicial
review and judicial supremacy (Marbury v. Madison,
United States Supreme Court, 5 U.S. 137 (1803)),
religiosity and moral standards.
° Brown v. Board of Education, United States Supreme
Court, 347 U.S. 483 (1954) (50th anniversary in 2004)
3. Comments on the Legal environment in the United States
a. Litigious (Sue the bastards).
b. Predominance of lawyers.
accepts only such portion of English common law as conforms to the institutions of the U.S. and
its form of government and is applicable to the habits and conditions of its society. The common
law applicable in the U.S. is the common law of England prior to (and not after) 1776. The fabric
of the American society has woven into it certain fundamental ideas, policies, or institutions
which over the years have been fostered and protected by its legal system.
2
How to brief a case:
1. Identify the plaintiff and defendant (sometimes subsequently called the appellant or
the respondent if one party is appealing the decision of a lower court).
2. State the essential facts. (What is the plaintiff’s claim? What is the defendant’s
position?)
3. For which party did the court decide and what is the court’s holding?
4. Describe the court’s reasoning?
5. What is the rule of the case?
6. Is there any obiter dicta?
7. Did the court consider any reasons of public policy?
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c. Contingency fees.
d. Class actions (tort, securities, antitrust, RICO).
e. Punitive damages (tort, antitrust, RICO).
f. Protection of the individual (the syndrome of the
citizen as victim). Bill of Rights (1. freedom of speech
and separation of church and state3; 2. right to bear
arms4; 4. right against unconstitutional search and
seizure5; 5. fifth amendment right against selfincrimination6 (Miranda warnings); 6. right to counsel7;
7. right to trial by jury8.
g. 14th Amendment right to due process and equal
protection of the laws9.
3 (First Amendment) “Congress shall make no law respecting an establishment of religion,
or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the
press; or the right of the people peaceably to assemble, and to petition the government
for a redress of grievances.”
4 (Second Amendment) “A well regulated militia, being necessary to the security of a free
state, the right of the people to keep and bear arms, shall not be infringed.“
5 (Fourth Amendment) “The right of the people to be secure in their persons, houses,
papers, and effects, against unreasonable searches and seizures, shall not be violated,
and no warrants shall issue, but upon probable cause, supported by oath or affirmation,
and particularly describing the place to be searched, and the persons or things to be
seized.
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(Fifth Amendment) No person shall be held to answer for a capital, or otherwise infamous crime,
unless on a presentment or indictment of a grand jury, except in cases arising in the land or
naval forces, or in the militia, when in actual service in time of war or public danger; nor
shall any person be subject for the same offense to be twice put in jeopardy of life or limb; nor
shall be compelled in any property, without due process of law; nor shall private property be
taken for public use, without just compensation.”
Right against self incrimination. No witness may be compelled to answer a question which
will tend to expose him to a criminal prosecution or subject him to a penalty or
forfeiture. The Fifth Amendment right against self-incrimination attaches when the
defendant is questioned by law enforcement officers after he has been taken into custody
or otherwise deprived of his freedom in any significant way. In this situation, no
statements by the defendant are admissible as evidence at trial unless he has been warned
a) that he has a right to remain silent; b) that anything which he says may be used
against him in evidence; c) that he has a right to the presence of counsel; and d) that if
he cannot afford counsel, counsel will be appointed for him. Miranda v. Arizona, 384
U.S. 436 (1966).
7 (Sixth Amendment) Any statement by defendant is inadmissible if obtained in violation of
defendant’s right to counsel. This right attaches at any "critical stage" of the criminal
proceedings. After a defendant is arrested or indicted, he may no longer be interrogated
without the presence of counsel.
8 (Seventh Amendment) In suits at common law, where the value in controversy shall exceed
twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a
jury, shall be otherwise reexamined in any court of the United States, than according to
the rules of the common law.
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All persons born or naturalized in the United States, and subject to the jurisdiction thereof,
are citizens of the United States and of the state wherein they reside. No state shall make or
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h. Extraterritorial application of US laws (antitrust,
securities, corporate governance, RICO).
i. Complexity and cost of litigation (adversarial
process) (Compare US, English and French systems).
j. Discovery.
k. Pre-trial practice (multiplicity of motions).
l. Institutionalized practice of law.
m. Some American jargon (M&A, business plan, due
diligence, gentleman’s agreement, copyright, deal,
representations and warranties, most favored nation
clause, best efforts, goodwill, closing, takeovers, LBO,
LMBO, franchising, venture capital plus the entire
vocabulary of internet).
B. Introduction to American Contract Law
1. Definition of contract
Blackstone: “An agreement, upon sufficient consideration, to
do or not to do a particular thing.”
“A contract is a promise or a set of promises for the breach
of which the law gives a remedy, or the performance of which
the law in some way recognizes a duty” (Restatement Second,
§1). This definition emphasizes the for the necessity of a
remedy (“Remedies precede rights.”) and the role played by
law rather than to the intent to contract, although the
latter is necessary. The civil codes emphasize more the
subjective element of the intent of the real and common
parties rather than the objective element manifested by the
existence of remedies.
A contract is an agreement enforceable through legal
proceedings. Six elements of a contract: manifestation of
mutual assent (offer and acceptance); compliance with
evidentiary requirements (statute of frauds); reality of
consent; consideration - a benefit or a detriment which a
party receives and fairly induces it to make the
promise/contract); capacity of contracting parties; legality
of means and object.
“Remedies precede rights.”
enforce any law which shall abridge the privileges or immunities of citizens of the United
States; nor shall any state deprive any person of life, liberty, or property, without due process
of law; nor deny to any person within its jurisdiction the equal protection of the laws.
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Theories of contracts. Consensualism (voluntarism) vs.
criminal case to be a witness against himself, nor be
deprived of life, liberty, or formalism.
Why enforce promises? Social interest in the stability of
promises = security of transactions. Will theory: protect
the will of the parties. Law of contract = an attempt to
determine the rights and duties of parties under
circumstances that were not anticipated = enforcement of
distributive justice = rules according to which courts
distribute gains and losses according to the equities of the
cases.
2. The Agreement Process – Offer and Acceptance
° Lucy v. Zehmer, Supreme Court of Appeal of
Virginia,196 Va. 493, 84 S.E.2d 516 (1954)
° Dickenson v. Dodds, In the Court of Appeal, Chancery
Div. (1876) 2 Ch. Div. 463
° Lefkowitz v. Great Minneapolis Surplus Store, Supreme
Court of Minnesota, 251 Minn. 188,86 N.W.2d 689 (1957)
a. Offer
i. An offer must be: made with the intention to
contract; definite, reasonably certain and
complete; more than preliminary negotiations;
and communicated by the offeror to the offeree.
Objective theory of contracts: In determining
if an offer has been made, a court will look at
the offeror’s external manifestation of intent,
rather than his subjective, hidden intent.
(Lucy v. Zehmer). What, under the
circumstances, was the reasonable impression
created in the mind of the offeree? The mental
assent of the parties is not requisite for the
formation of a contract if there is an outward
expression of intention.
ii. Family and social agreements are normally not
contracts.
iii. Gentleman’s agreement = an expression of intent
not amounting to a contract.
iv. Letter of intent – agreements to agree: if a
material element is left for future
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negotiations, there is no contract; precontractual liability (usually in tort); UCC 2305: if no price, price is reasonable price at
time of delivery.
v. Offer to undetermined persons. In French law,
there is an offer. In American and UK law, this
is an offer to receive offers.
vi. Advertisements. Generally construed as offers
to accept offers. However, if an advertisement
is sufficiently explicit and definite and
leaves nothing open to negotiate, it may be
construed as an offer (Lefkowitz v. Great
Minneapolis Surplus Store: if an advertisement
is directed to a limited number of persons,
i.e., "a fur coat for $5 to first person in
store," there is an offer).
vii. Auction. Offering an article for sale is a
request for bids. Contract formed when the
hammer falls.
viii. Reward. Normally an offeree must know of the
reward (however, some courts take the position
that the offerer has received what he requested
and therefore he should be required to pay);
exception in case of published government
rewards.
ix.
Mistake can vitiate contract. If either party
knows that the other does not intend what his
words or other acts express, this knowledge
prevents such words or other acts from being
generative as an offer or acceptance
(Restatement 71). For an offerer not to be
bound by an offer containing a mistake, the
fact concerning which the mistake was made must
be material to the transaction and affect its
substance, and the mistake must not result from
want of the care and diligence exercised by
persons of reasonable prudence under the same
circumstances.
x. Communication of offer. Offer effective only
when received by offeree.
xi. Termination of offer. Revocation is effective
only upon receipt by offeree. However, held
that knowledge by offeree that land offered to
him had been sold to another prevented him from
16
effectively accepting offer (Dickenson v.
Dodds). If option, offer irrevocable during
option period. Termination by lapse of time
stated in offer or a reasonable time if none is
stated. Death or insanity of offeror.
xii. “Mailbox” rules. Offer is good upon receipt.
Acceptance is good when dispatched. Revocation
is good on receipt. Hypo: Dec. 1: offeror sends
offer; Dec 2: offeror sends revocation of
offer; Dec 3: offer is received by offeree; Dec
3: offeree sends acceptance to offeror; Dec 4:
Revocation of offer is received by offeree; Dec
5: acceptance is received by offeror. Valid
acceptance? Yes.
xiii. Destruction of subject matter. Supervening
impossibility or illegality. Rejection or
counter offer by offeree.
b. Acceptance
i. Restatement 52: Acceptance of an offer is “an
expression of assent to the terms thereof made by
the offeree in a manner requested by the offeror.”
ii.
An acceptance must be unequivocal and
unconditional, made with the intent to accept the
offer and communicated to the offeree. The
acceptance should match the terms of the offer.
Otherwise it is a counter-offer. This is known as
the “mirror image rule”. However, American courts
now tolerate minor differences between the offer
and the acceptance as long as they do
not materially alter the offer. In addition, UCC
2-207, acceptance is effective even though it may
state different or additional terms. The latter
are to be construed as proposals for
addition
to the contract and become part of the
contract unless: the offer expressly limits
acceptance to stated terms; they materially alter
the contract; or the offeror objects within a
reasonable time.
iii. Effect of part performance. (flag pole cases)
Normally, in a unilateral contract which invites
performance, performance must be completed for
acceptance to take place. However, some courts
have held that once performance begins by the
offeree, the offeror loses the right to revoke.
Restatement 45: When offeror invites acceptance by
17
performance, option contract is created and offer
is irrevocable once offeree has begun performance.
iv. Silence on part of offeree. Generally not
acceptance unless previous dealings establish
pattern of conduct (e.g., book clubs). It has been
held by a court that a failure of an insurance
company to reject a life insurance policy
application with reasonable promptness constituted
acceptance of the application. The silent
acceptance of personal services may result in a
contractual liability to pay the reasonable value
of such services unless the relationship of the
parties or other circumstances rule out any
contractual intent.
v. Problems of communication. Majority rule:
Offeror’s power of revocation terminates when
acceptance is dispatched. (case: offer; acceptance
posted; revocation; acceptance received =
revocation not valid. What if offeree sends both
acceptance and rejection. Majority rule: first to
be received is valid.
c. Implied in law or quasi contracts (quantum meruit).
(case: A found B’s boat and repaired and maintained it.
B seeks boat. A asks for expenses of repair and
maintenance. Example of quasi contract. Notion of
unjust enrichment. Chase v. Corcoran, 106 Mass. 286
(1817). Should a court order compensation for the
services of a doctor in an emergency?
d. Standard form contracts (exculpatory clauses).
3. Consideration
In earlier common law, consideration was a way of furnishing
evidence that the parties intended to contract. Now it is a
rule of substantive law.
Consideration is something of value or something bargained
for in exchange for a promise. The traditional rule is that
it must create a legal benefit to the promisor or a legal
detriment to the promisee.
Case of Hamer v. Sidway (the nephew refrains from smoking ,
drinking and swearing because of uncle’s promise to pay him
$5,000 when he reaches 21; held in favor of nephew: “A
waiver of any legal right is a sufficient consideration for
a promise.”).
18
Adequacy of consideration is not essential (“peppercorn
theory”). A "nominal consideration", if bargained for, can
be sufficient consideration. However, a great disparity
between the benefits received by the parties to a contract
may require a court to scrutinize the bargain for evidence
of fraud or other misconduct by the party receiving the
vastly greater benefit.
Pre-existing duty rule. Forbearance to sue. Past
consideration. Moral consideration. The following usually
do not constitute consideration: promises to donate; past
consideration; promises to perform a pre-existing duty; and
promises to forebear prosecuting an unfounded legal claim.
4. Illegal contracts
Legality of subject matter is one of the essential elements
of a valid contract. Examples of agreements in violation of
private law (agreement to commit a crime), agreements
declared void by statute (gambling), usury, regulatory
licensing statutes (stock broker, real estate agent,
artistic agent, etc.), contracts against public policy
(competition law rules against agreements in restraint of
trade). Question of the legality of contracts limiting
liability.
5. The Statute of Frauds
In 1677 the English Parliament enacted a statute entitled
"A Statute for the Prevention of Frauds and Perjuries",
usually referred to today by its short title. Statute of
Frauds. Most of the sections of this statute which relate to
the necessity of a signed writing for certain classes of
contracts have been adopted, with local variations, in each
state.
Requirement of written roof of certain types of contracts.
Examples: contracts for the sale of goods for $500 or more,
sale of land, contracts that cannot be performed within one
year, promise to pay the debt of another, promise by
administrator to personally pay estate debts, promises made
in consideration of marriage).
6. Interpretation of contracts
a. Parole evidence rule. When a contract is clear on its
face, normally it cannot be contradicted by parole
evidence. If a written contract is incomplete, ambiguous,
there is fraud, duress, mistake or misrepresentation,
then oral evidence may be introduced in legal proceeding.
UCC 2-202 applies the parole evidence rule, but with the
19
following exception: written agreement may be explained
or supplemented by (a) course of dealing or trade usage
(b) evidence of consistent additional terms unless court
finds writing intended to be complete and exclusive.
b. Construe all provisions together.
c. Ordinary words to be construed in accordance with common
and ordinary meaning unless circumstances show otherwise.
Same re technical words.
d. Contra proferentum rule. Ambiguity in contract construed
against drafting party.
e. Typed provisions prevails over printed provisions and
handwritten over typed, specific over general, words over
figures.
7. Discharge of contracts
By performance, breach, non-occurrence of condition
precedent, occurrence of condition subsequent,
impossibility, agreement, cancellation or renunciation,
operation of law.
8. Conditions
a. Conditions precedent (conditions suspensives). A
condition precedent provides for the occurrence of some
event or the existence of some fact before there is a
right to performance of some obligation created by the
contract. For example, a contract for the sale of real
estate may provide that the contract is contingent upon
the buyer being able to obtain financing according to
certain specified terms, thus creating an express
condition precedent.
b. Conditions subsequent (conditions résolutoires). A
condition subsequent in a contract extinguishes a party's
duty of performance on the happening of some event or the
coming into existence of some fact. A casualty insurance
policy which provides that the insured shall give notice
of a loss within a stated period or the company is
discharged from liability for such loss illustrates a
typical condition subsequent.
9. Impossibility
Foreseeable intervening events which merely make the
performance of a contract more burdensome for a party do not
as a general rule, excuse such party from his duty to
20
perform, even though holding him liable subjects him to
great financial loss. However, remember frustration (where
performance is possible, but the value of the performance is
substantially destroyed unexpectedly and without the fault
of either party, performance may be excused on the theory of
frustration) and general rules relating to hardship and
force majeure.
An extreme example of this rule is the case of Paradine v.
Jane, King's Bench, 1647. There the plaintiff sued for rent
payments on a house leased to the defendant. Defendant
argued that Prince Rupert, a German prince, had invaded the
land and taken possession of the house and that defendant
should therefore be excused from paying rent. The court
held that the defendant was liable for the payments and that
to be excused from liability, he should have provided
against it in his contract. There are three types of
impossibility, which the courts have traditionally
recognized as excuses for nonperformance: (1) death or
serious illness of a promisor of personal services; (2)
destruction of the subject matter or the means of
performance; and (3) subsequent illegality.
10. Breach of contract
A breach of contract is a failure without legal excuse to
perform an obligation under a contract. If a material breach
of contract is committed, the injured party is discharged
from his duty to perform, may terminate the contract and has
a right of action for damages or other appropriate relief.
Breaches less than material give the victim a cause of
action for damages.
Anticipatory breach occurs if one of the contracting parties
clearly indicates in advance that he will not perform or be
able to perform when the time for performance as called for
in the contract has arrived. Anticipatory breach is
sometimes called renunciation or repudiation. Generally, if
an anticipatory breach occurs, the aggrieved party may
immediately treat the repudiated contract as though it had
already been breached; thus the injured party may rescind
the contract or sue for damages without waiting for the
arrival
11. Remedies for breach of contract
° Hadley v. Baxendale, In the Court of Exchequer,
9 Exch. 341 (1854)
° Ericson v. Playgirl, Inc., Court of Appeals of
California, 73 Cal. App. 2d, 850 Cal. Reptr. 921 (1977)
21
° Parker v. Twentieth Century Fox Film Corp.,
California Supreme Court, Court of Appeals of New York,
3 Cal. 3d 176, 89 Cal. Rptr. 737, 474 P. 2d 689 (1970)
° Truck-Rent-A-Center, Inc. v. Puritan Farms, Inc.,
Court of Appeals of New York, 41 N.Y. 420, 393 N.Y.S.
2d 365, 361 N.E. 2d, 105 (1997)
° Osteen v. Johnson, Colorado Court of Appeals, 473 P.
2d 184 (1970)
° Warner Brothers Pictures, Inc. v. Nelson, King's
Bench Division, 1 KB 209 (1937)
The objective of the law of remedies in relation to a breach
of contract is to put the aggrieved party, in so far as is
practical, in the position he would have occupied had the
contract been fully performed. Generally, parties enter into
a business contract with the expectation of realizing an
economic gain or profit from the transaction. In most cases
a money judgment will most nearly give the victim of a
contract breach the benefits he expected to enjoy
(expectation interest) as the result of the performance of
the contract by the other party. Therefore, the legal remedy
of money damages is the remedy usually granted for a breach
of contract.
Money damages may not provide an adequate remedy for a
breach of contract. In such cases, a court may as a matter
of sound discretion grant appropriate equitable relief to
the injured party. The principal equitable remedies which
are often applied to breach of contract cases are (1)
specific performance, (2) injunction, and (3) rescission or
restitution.
a. Terms:
Common law: King’s courts: damages
- General or compensatory damages: Need breach of
contract, injury must be foreseeable and probable
result
- Consequential or special damages: (loss of
profits) foreseeability test (natural course of
events, special circumstances Hadley v. Baxendale).
- Liquidated damages: OK if actual damages hard to
determine and if reasonable calculation of actual
damages
22
- Nominal damages
- Punitive or exemplary damages
- Incidental damages - out of pocket expenses
Equity: Chancellor’s courts. Discretionary if
damages not adequate or cannot be determined or if
no damages; no laches; must come into court with
clean hands.
- Restitution
- Specific performance, injunction
b. Cases:
- Hadley v. Baxendale. Foreseeability test:
Consequential damages (loss of profit) allowed “such as
may fairly and reasonably be considered either arising
naturally, i.e., according to the usual course of
things, from such breach of contract itself, or such as
may reasonably be supposed to have been in the
contemplation of both parties, at the time they made
the contract, as a probable result of the breach of
it.” If special circumstances are communicated and
known to both parties, damages would be those that
“would ordinarily follow from a breach of contract
under these special circumstances so known and
communicated.”10
Note: This rule adopts the rule set forth in Article
1150 of the French Civil Code: “A debtor is liable only
for damages which were foreseen or which could have
been foreseen at the time of the contract, where it is
not through his own intentional breach that the
obligation is not fulfilled.”
10
See Restatement sec. 330. In awarding damages, compensation is given for only those injuries
that the defendant had reason to foresee as a probable result of his breach when the contract was
made. If the injury is one that follows the breach in the usual course of events, there is
sufficient reason for the defendant to foresee it; otherwise it must be shown specifically that
the defendant had reason to know the facts and to foresee the injury.
The following factors are useful in determining how foreseeable a particular breach is: i. the
degree of fault associated with the breach; ii. the relationship between the risk imposed on the
defendant and the price of the contract; iii. the respective abilities of the plaintiff and
defendant to assume the risk; iv. the reasonableness of the plaintiff's reliance on the contract
in extending his commitments; v. the character of the loss to be compensated (out of pocket
losses; anticipated profits); and vi. the speculative character of the loss and the feasibility
of determining the damages.
23
- Victoria Laundry v. Newman Industries Ltd. Case of a
boiler delivered a month late to a laundry. The
defendant was held liable for loss of general profits,
but not with respect to special contracts of which the
defendant could have had no notice.
Note that Anglo-Saxon contract law normally takes into
account only economic losses and punitive damages are
normally not allowed. Remember, however, the cases in
which a widow received damages for mental distress from
a funeral company when a coffin came to the surface at
a burial and a client of a tourist office received non
economic damages from the breach of contract concerning
the organization of a vacation.
Also remember Ruxley Electronics v. Forsyth (1996) 1 AC
344. A contractor was to build a pool seven feet six
inches deep for £22,560. Instead he built only 6feet
nine inches deep. The client asked for damages
permitting him to have a pool of the depth he had
ordered. The lower court awarded him 10% of the
contract value. The appellate court awarded the full
£22,560 contract price (pacta sunt servanda). The House
of Lords reversed, considering that the contractor had
substantially performed, that the work was objectively
reasonable. However, it granted damages equal to 10% of
the contract price as moral damages.
- Trans Trust v. Danubian Trading. Defendant, a Belgian
company refused to open a letter of credit for the
plaintiff for the purchase of steel. Plaintiff was to
use the letter of credit to buy the steel another
Belgian company (A) that had an option to buy from an
American manufacturer of steel. Neither the plaintiff
nor A had the money to pay for the steel from the
American company. P sued D for the profit it would have
made on the transaction and asked to be indemnified
from any action A might bring. The House of Lords
ultimately held that P should be indemnified for loss
of profit, but not for claims of A. P was held to be
entitled to recover for loss of profit if it could be
shown that such loss was at the time of the opening of
the contract foreseeable by the buyer as a probable
consequence of a breach (the Court cited the Victoria
Laundry case). Here the buyer knew that the seller
could not obtain the goods at all unless the letter of
credit was provided. P was, however, not entitled to be
indemnified for damages it may have to A, as that was a
special loss not in the contemplation of the parties. D
did not know that A was also relying on the credit in
order to obtain the goods.
24
- Ericson v. Playgirl, Inc. Ericson sought damages for
loss of publicity from a breach of a contract pursuant
to which he was to appear on the cover of Playgirl. The
court disallowed such damages as being too speculative
and conjectural. Damages from loss of general publicity
alone will almost always be wholly speculative and
conjectural. Obiter dicta:
- Damages may not be punitive or exemplary.
- Damages are limited to losses that might
reasonably be contemplated or foreseen by the
parties.
- Damages must be clearly ascertainable and
reasonably certain, both in their nature and
origin.
- Parker v. Twentieth Century Fox Film Corp. Mitigation
of damages as an affirmative defense
against a claim
for damages. A fired employee is not required to accept
the employer’s tendered substitute employment in
mitigation of damages if such substitute employment is
both different and inferior.
Normally the defendant employee has the burden of proof
of showing that the employee should have mitigated.
Remember the “honor and respect” cases. Mitigation by
the employee is not required if the circumstances are
such that further association between the parties would
be offensive or degrading to the employee.
- Truck-Rent-A-Center, Inc. v. Puritan Farms, Inc.
Liquidated damages. Parties to a contract have the
right to agree to liquidated damages clause, provided
the clause is neither unconscionable nor contrary to
public policy. “A contractual provision fixing damages
in the event of a breach will be sustained if the
amount liquidated bears a reasonable proportion to the
probable loss and the amount of actual loss is
incapable or difficult of precise estimation.” 11
11
Arguments in favor of upholding provisions for liquidated damages: (i) enhances likelihood
promises will be kept by providing possibility of a strong penalty; (ii) eliminates plaintiff's
burden of proving his damages (if defendant breaches contract why should the plaintiff be stuck
with a difficult burden of proof?) (iii) sets up a precise measure of damages; (iv) minimizes
litigation.
Arguments against such provisions: (i) likelihood of unjustly enriching one party; reliance and
expectation interests exceeded; purpose of contract damages is compensation, not windfall gains;
(ii) proliferation of contracts of adhesion - inequality of bargaining power - to extend freedom
of contract to the area of remedies further distorts the inequality of bargaining power; (iii) at
25
UCC 2-718 (1) contains a good statement of the American
rule:
Damages for breach by either party may be
liquidated in the agreement but only at an amount
which is reasonable in the light of the
anticipated or actual harm caused by the breach,
the difficulties of proof of loss, and the
inconvenience or non-feasibility of otherwise
obtaining an adequate remedy. A term fixing
unreasonably large liquidated damages is void as a
penalty.
- Osteen v. Johnson. Restitution. Substantial breach of
contract can give rise to the remedy of restitution.
“In the case of a breach by non-performance, the
injured party’s alternative remedy by way of
restitution depends on the extent of the nonperformance by the defendant.” Defendant’s nonperformance must be so material that it goes to the
essence of the contract.
- Warner Brothers Pictures, Inc. v. Nelson. Injunction.
A court will normally not grant an injunction ordering
a defendant employee to perform the contract or remain
idle or if damages would be more appropriate. However,
it may enjoin the defendant from working for another
employer in the same line of business.
C. Introduction to International Contract Law
1. Definition of a Contract
French law:
une convention par laquelle une ou plusieurs personnes
s'obligent, envers une ou plusieurs autres, a donner, à
faire ou à ne pas faire quelque chose. (Civil code.,
Art.1101).
English law:
A contract is an agreement giving rise to obligations
which are enforced or recognized by law (Treitel, The
Law of Contract, London, 1983, p.30).
American law:
the time a contract is made, most people exaggerate their ability to perform and do not give
sufficient attention to provisions relating to damages.
26
A contract is a promise for the breach of which the law
gives a remedy, or the performance of which the law in
some way recognizes a duty (American Law Institute,
Restatement Sec 1).
Consenualism (voluntarism) v. formalism.
2. Definition of an International Contract
First of all, why is it of any interest whether a contract is
international?
If a contract is international, the parties can become both
legislator and judge. That is, they can determine
contractually: (a) what law will govern their relations – a
national law or the express provisions of the contract and the
lex mercatoria to the exclusion of the application of national
law (except for matters of public policy); and (b) which judge
(a national court or an arbitrator) shall resolve disputes
arising out of the contract. To a large extent, an
international contract can escape from the application of
national laws.
When does a contract become international?
Chatillon: Le contrat est international quand il met en
jeu plusieurs droits nationaux, ou quand il entre dans le
champs d’une convention internationale, ou quand il met en
cause des intérêts du commerce international, ou quand il
implique le franchissement d’une frontière.
-
a. A contract can become international if it falls within
international treaties. Treaties apply objective tests
as to whether they are applicable. (CISG deals with
parties whose place of business is in different states;
1968 Brussels Convention deals with jurisdiction of
courts if parties have domicile in different countries;
1980 Rome Convention on law applicable to contractual
obligations applies to contractual obligations in
situations involving a conflict of laws.12
12
For example, the 1980 Vienna Convention on Contracts for the International Sale of Goods
(“CISG”) applies “to contracts for the sale of goods between parties whose places of business
(étabilissements) are in different States (Article 1). Such Article goes on to provide: “Neither
the nationality of the parties nor the civil or commercial character of the parties or of the
contract is to be taken into consideration in determining the application of this Convention.”
The 1968 Brussels Convention on Jurisdiction and Enforcement of Judgments (Article 17) and the
related Regulation of December 2000 (Article 23) as to jurisdiction of courts in the European
Union allow for the parties to choose which country’s courts will have jurisdiction if the
parties have their domicile in different States.
27
b. A contract can become international if it involves
international commerce. This is an economic rather than
objective criterion. For example, for an international
arbitration to exist under Articles 1492-1497 of the
New Code of Civil Procedure, the contract «met en cause
les intérêts du commerce international».
The Court of Cassation has judged to be international
(for the purpose of determining whether an arbitration
is national or international) «le contrat qui met en
cause les intérêts du commerce international». (for
example a contract between two French companies, signed
and carried out in France but with respect to
merchandise from abroad (Civ., 19 février 1930, Mardelé
c/ Muller et Cie; Civ., 21 janvier 1931, Dambrincourt
c/ Brossard & autres). French courts will consider
commerce to be international if there is a “double
mouvement de flux et du reflux” from one country to
another or “si le contrat dépasse le cadre de
l’économie interne.” See CA Lyon, 4 juillet 1991, JDI
1991, p. 1000, note Ph Kahn.
c. A contract can become international if it involves
crossing a national frontier.
d. Employment contracts present a special situation. For
example, an employment contract for a French resident
working in France for an American company is governed
by French law. However, a contract between a French
employee and a French company to work in New York is an
international contract and can be governed by the law
chosen by the parties.
e. Unidroit definition:
The comments to the UNIDROIT Principles of Commercial
Contracts contain the following discussion with respect
to international contracts:
The international character of a contract may be
defined in a great variety of ways. The solutions
adopted in both national and international legislation
range from a reference to the place of business or
The 1980 Rome Convention on the Law Applicable to Contractual Obligations provides (Article 1)
that: “The rules of this Convention shall apply to contractual obligations in any situation
involving a choice between the laws of different countries.” Said otherwise, the Convention
applies to contractual obligations in situations involving a conflict of laws.
In international treaties, there seems to be a preference for more objective tests rather than
less precise economic tests.
28
habitual residence of the parties in different
countries to the adoption of more general criteria such
as the contract having "significant connections with
more than one State", "involving a choice between the
laws of different States", or "affecting the interests
of international trade".
The Principles do not expressly lay down any of these
criteria. The assumption, however, is that the concept
of "international" contracts should be given the
broadest possible interpretation, so as ultimately to
exclude only those situations where no international
element at all is involved, i.e. where all the relevant
elements of the contract in question are connected with
one country only.
3. Principle Sources of International Contract law
(Transnational Private Contract Law or Lex Mercatoria)
Various international institutions have been involved in the
modeling of a new transnational legal infrastructure. They
have prepared treaties, conventions, model laws, rules,
principals, standard contracts, standard terms, etc. Such
institutions include:
-
the United Nations Commission on International Trade Law
(UNCITRAL)(la Commission pour le droit commercial
international, la CNUDI)
-
the World Intellectual Property Organization (WIPO)
(Organisation Mondiale de la Propriété Intellectuelle, la
OMPI)
-
the World Trade Organization (WTO) (l’Organisation mondiale
du commerce, OMC) created by the Marrakech Agreement of
April 15, 1994 which replaced the GATT created in 1947)
-
the International Institute for the Unification of Private
Law (UNIDROIT)
-
the International Chamber of Commerce (ICC) (Chambre
Internationale de Commerce, la CCI)
-
the Hague Conference on Private International Law
a. From these and other international institutions have
produced “state contracted international law” and
“institutionally offered lex”.
29
b. State contracted international law (CISG13, other
international treaties, bilateral treaties, European
Union law. In France and in US, these treaties have the
force of law superior to national law. In UK, a treaty
must be incorporated in an act of the parliament.14
c. Institutionally offered lex. Examples: Unidroit15
principles of international commercial contracts (apply
13
The most successful example of state contracted international commercial law is the 1980 Vienna
Convention on Contracts for the International Sale of Goods (“CISG”) developed by the UNCITRAL.
As of October 2002, there were 62 states which had signed this Convention.
The CISG contains rules governing the making and interpretation of international contracts
for the sale of goods. It also provides rules governing obligations and remedies of the
parties to such transactions.
The CISG does not deprive sellers and buyers of the freedom to mold their contracts to
their specifications. Generally, they are free to modify the rules established by the
Convention or to agree that the Convention is not to apply at all….
The CISG does not apply to contracts to provide services alone. Generally, it does not
apply to sales of goods bought for personal, family or household use. For example,
ordinarily, it would not apply to the sale of a camera or clothing to a foreign tourist.
It does not apply to sales of ships, vessels, or aircraft or to contracts covering the
sale of electricity….
Over 1,000 judicial and arbitral rulings on the CISG have been identified….
To exclude the application of the CISG: The experts suggest language that specifically rules out
the application of the Convention, e.g., "the law of North Carolina, excluding the CISG" or
"Article 2 of the UCC as enacted in New York" or "the law of France, excluding the CISG." The
reason for this is that the CISG is the law of North Carolina, New York
14
The European Union, notably through its various treaties and the issuance of regulations,
directives, opinions and recommendations by the Council or the Commission, has contributed
significantly to the development of laws applicable throughout the member states. The Commission
is currently considering various possibilities for a harmonization of principles of European
contract law (including the elaboration of a model law along the lines of the American
Restatement of contract law) based upon the work of the Lando Commission.
In France, pursuant to Article 55 of the 1958 Constitution:
… les traités ou accords régulièrempent ratifies ou approuvés ont, dès leur publication,
une autorité supérieure à celle des lois, sous reserve, pour chaque accord ou traité, de
son application par l’autre partie(…)
Under French case law, Community law (whether it be one of the constituitive treaties (Rome,
Maastricht, Amsterdam, Nice; l’Acte unique) or norms established by Community regulations,
directives or decisions, prevails over provisions of French internal law even if the latter are
contained in a law enacted after the relevant European law (Cour de Cassation 1975, arrêt Jacques
Vabre; Conseil d’Etat, 2 octobre 1990).
Article 6 of the US Constitution provides:
This Constitution, and the laws of the United States which shall be made in pursuance
thereof; and all treaties made, or which shall be made, under the authority of the United
States, shall be the supreme law of the land; and the judges in every state shall be bound
thereby, anything in the Constitution or the laws of any State notwithstanding.
In English law, however, a treaty signed by the UK is applicable internally only when the
Parliament votes a law containing the provisions of the treaty.
15
UNIDRIOT’s Principles of International Commercial Contracts (1994) (“PICC”). The purpose of
these principles are set forth in their Preamble:
These Principles set forth general rules for international commercial contracts.
They shall be applied when the parties have agreed that their contract be governed by
them.
30
only to commercial contracts), the Lando Commission’s
Principles of European Contract Law16 (apply to
commercial and consumer contracts) and the ICC’s
Incoterms.
d. Lex mercatoria.
Transnational law or lex mercatoria is made possible
by: (a) States’ acceptance of freedom of contract
They may be applied when the parties have agreed that their contract be governed by
"general principles of law", the "lex mercatoria" or the like.
They may provide a solution to an issue raised when it proves impossible to establish the
relevant rule of the applicable law.
They may be used to interpret or supplement international uniform law instruments.
They may serve as a model for national and international legislators.
16
The Lando Commission’s Principles of European Contract Law (1994, revised edition
1998)(“PECL”).
Introduction to the Principles of European Contract Law
Prepared by
The Commission on European Contract Law:
A businessman is negotiating a contract with a company in another State of the European
Union, but neither party wishes to apply the law of the other country.
A lawyer is advising parties to a contract involving parties in different States.
An arbitrator has to decide a dispute under a contract "to be governed by internationally
accepted principles of law".
A professor of law wants his students to gain an understanding of the way in which
contracts are treated by the laws of the different States of the European Union, and to
learn the common principles.
A legislator is drafting a code or a statute on the law of contracts.
An European Union official is drafting a new Directive affecting contracts.
All these need to know the principles of contract law shared by the legal systems of the
Member States and to have a concise, comprehensive and workable statement of them. The
Principles of European Contract Law Parts I and II(1), which has now also been published
in the Italian langauge(2), and the coming part III will provide this.
...
The Principles have been drawn up by an independent body of experts from each Member State
of the European Union under a project supported by the European Commission and many other
organisations. The principles are stated in the form of articles with a detailed
commentary explaining the purpose and operation of each article. In the comments there are
illustrations, ultra short cases which show how the rules are to operate in practice. Each
article also has comparative notes surveying the national laws and other international
provisions on the topic.
The Principles of European Contract Law Parts I and II (hereinafter referred to as PECL I
and II.) cover the core rules of contract, formation, authority of agents, validity,
interpretation,, contents, performance, non-performance (breach) and remedies. The
Principles previously published in Part I (1995) are included in a revised and re-ordered
form
Throughout Europe there is great interest in developing a common European civil and commercial
law. The European Parliament has twice called for the creation of a European Civil Code. The
Principles of European Contract Law are essential steps in these projects.
31
(public policy excepted); (b) the general acceptance of
the principle of sanctity of contract (pacta sunt
servanda); (c) the contractual selection of dispute
resolution by international commercial arbitration (ad
hoc or institutional) and (d) the enforcement of
arbitral awards pursuant to the 1958 Convention on the
Recognition and Enforcement of Foreign Arbitral Awards.
International commercial arbitration is the essential
foundation for the development of transnational private
contract law. (See Prof. Robert Amissah, “Revisiting
the Autonomous Contract” www.Lexmercatoria.org).
Aside from treaties and institutionally inspired model
laws, transnational law is evolving due to the
harmonization of national laws and the transposition of
laws from one country to another. Lawyers from
different countries working together on international
transactions often acquire an in-depth knowledge of the
laws and practice of the countries in question and tend
to negotiate and draft contractual provisions which
take into account and even harmonize such laws. For
example, the American practice of due diligence and the
set of contractual provisions known as representations,
warranties and indemnities used in corporate mergers
and acquisition have been adopted and even become
standard procedure in international mergers and
acquisitions negotiated in various countries around the
world, even between non-American parties.
4. Law Applicable to International Contracts
Historically international contracts have been governed by
the law chosen by the parties and in the absence of a chosen
law, by the law designated by conflict of law rules.
Each country has its own conflict of law rules and national
judges, in the absence of a choice of law by the parties,
will apply his country’s conflict of law rules, (an
arbitrator will normally apply “the most appropriate law”).
(Note that the determination of applicable law is distinct
from the question of which country may have jurisdiction
over the dispute.) There is a renvoi when the foreign law
recognized as applicable by the law of a national court (lex
fori) declines its applicability and designates the
applicable law to be the law of such national court (first
degree renvoi) or the law of yet another country (second
degree renvoi). Parties to a contract may expressly
stipulate the exclusion of any renvoi.
Over time, national laws have given rise to converging rules
which have been set forth in international conventions,
32
notably the Rome Convention on the Law Applicable to
Contractual Obligations applicable in the European Community
and Hague Convention on the Law Applicable to Contracts for
the International Sale of Goods which is to complete the
CISG with respect to conflict of laws.
The 1980 Rome Convention provides basically as follows:
1. The rules of the Convention “apply to contractual
obligations in any situation involving a choice between the
laws of different countries”.
2. An international sales contract is governed by the law
chosen by the parties. Such choice may cover the entire
contract or may be limited to only a part of the contract.
(Article 3) This freedom is limited in three important
respects:
a. Application of mandatory rules:
The fact that the parties have chosen a foreign law,
whether or not accompanied by the choice of a foreign
tribunal, shall not, where all the other elements
relevant to the situation at the time of the choice are
connected with one country only, prejudice the
application of rules of the law of that country which
cannot be derogated from by contract, hereinafter called
“mandatory rules”. (Article 3.3)
b. With respect to consumer contracts:
Notwithstanding the provisions of Article 3, a choice of
law made by the parties shall not have the result of
depriving the consumer of the protection afforded to him
by the mandatory rules of the country in which he has his
habitual residence:
-
if in that country the conclusion of the contract was
preceded by a specific invitation addressed to him or by
advertising, and he had taken in that country all the
steps necessary on his part for the conclusion of the
contract, or
-
if the other party or his agent received the consumer’s
order in that country, or
-
if the contract is for the sale of goods and the
consumer raveled from that country to another country
and there gave his order, provided that the consumer’s
journey was arranged by the seller for the purpose of
inducing the consumer to buy. (Article 5.2)
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c. With respect to employment contracts:
1. Notwithstanding the provisions of Article 3, in a
contract of employment a choice of law made by the
parties shall not have the result of depriving the
employee of the protection afforded to him by the
mandatory rules of law which would be applicable
under paragraph 2 in the absence of choice.
2. Not withstanding the provisions of Article 4, a
contract of employment shall, in the absence of choice
in accordance with Article 3, be governed:
(a)
by the law of the country in which the
employee habitually carries out his work in
performance of the contract, even if he is
temporarily employed in another country, or
(b)
if the employee does not habitually carry out
his work in any one country, by the law of
the country in which the place of business
through which he was engaged is situated;
unless it appears from the circumstances as a
whole that the contract is more closely connected
with another country, in which case the contract
shall be governed by the law of that country.
(Article 6)
See description of French case law concerning employment
contracts, Chatillon, Le Contrat International, p. 96.
3. Article 4.1 of the Convention provides that if the
parties have not chosen an applicable law, “the contract
shall be governed by the law of the country with which it is
most closely connected. It also provides that “a severable
part of the contract which has a closer connection with
another country may by way of exception be governed by the
law of that other country.”
4. Article 4.2 provides that:
It shall be presumed that the contract is most closely
connected with the country where the party who is to
effect the performance which is characteristic of the
contract has, at the time of the conclusion of the
contract, his habitual residence, or, in the case of a
body corporate or unincorporated, its central
administration. However, if the contract is entered
into in the course of that party’s trade or profession,
34
that country shall be the country in which the
principal place of business is situated or, where under
the terms of the contract the performance is to be
effected through a place of business other than the
principal place of business, the country in which that
other place of business is situated.
5. The rules set forth in Article 4.1 and 4.2 do not apply
real estate contracts or carriage contracts. For real estate
contracts, “it is presumed that the contract is most
closely connected with the country where the immovable
property is located” (Article 4.3). For carriage contracts,
the contract is presumed to be most connected with the
country in which, at the time the contract is concluded, the
carrier has its principal place of business, if such country
is also the country in which the place of loading or the
place of discharge or the principal place of business of the
consignor (Article 4.4).
6. The basic rule of 4.2 does not apply if the
characteristic place of performance cannot be determined and
the presumptions in 4.2, 4.3 and 4.4 are to be disregarded
if it appears from the circumstances as a whole that the
contract is more closely connected with another country.
A European directive of May 25, 1999 with respect to certain
aspects of sales and guarantees of consumer products (JOCE
L, July 7, 1999) envisions a harmonization of the laws of
the members of the European Union by the adoption of rules
identical to those of the Convention. The transposition of
this directive will eliminate a part of the practical
interest of the Convention’s conflict rules.
5. The autonomous contract
(or the notion of international contractual sovereignty)
An autonomous contract is an international contract that can
be governed almost exclusively by the terms of the contract
and/or pursuant to specified rules of transnational private
contract law without any or only little interference by any
national laws.
In effect, an autonomous international contract can
constitute the international contract law of the parties.
One practical way to ensure that an international contract
will be as autonomous as possible is to cover all the
contractual terms as explicitly as possible and state in the
applicable law clause words such as:
35
The applicable law shall be the express provisions of
this contract and the intent of the parties expressed
herein, as may be supplemented, if and only to the
extent necessary, by principles of ______ (here you can
put a national law and/or make reference to the PICC or
the PECL.)
If reference is made to a national law, it should be a law
that clearly recognizes the parties’ freedom of to contract,
subject only to certain mandatory rules of public policy. In
such a case, a local court would then normally uphold and
enforce the parties’ contractual provisions.
The parties can provide simply that the contract shall be
governed by transnational laws and principles, for example,
by express reference to the PICC or the PECL. In fact, in
order to facilitate the unification of law within the
European Community, it has been proposed that the Rome
Convention be modified to permit parties to provide that
their contracts shall be governed by other than national
laws, for example by the PPIC or the PECL.
In France, the Court of Cassation has held that in disputes
subject to the jurisdiction of national courts, “tout
contrat international est nécessairelment rattaché à la loi
d’un Etat” (Civ., 21 juin 1950, Messageries maritimes).
However, it has also been held that an arbitral tribunal can
refer solely to “principes généraux des obligations
applicables dans le commerce international” (Civ., 2ème, 9
déc 1981, Fougerolle c/ Banque du Proche-Orient) or
“appliquer l’ensemble des principes et usages du commerce
dénommés lex mercatoria” (Paris, 13 juil. 1989 and Civ.
1ère, 22 octobre 1991, Valenciana).
If disputes are to be submitted to national courts, the
parties can also state in their contract that the contract
will be interpreted in accordance with both a national law
and international custom and usage.
The best way to ensure that an international contract will
be interpreted the greatest extent possible in accordance
with its express provisions and transnational private law is
for the parties to provide that all disputes shall be
resolved by international commercial arbitration. It should
be remembered that Article 13.5 of the ICC Rules of
Conciliation and Arbitration require that ICC arbitrators in
all cases to take into account the provisions of the
contract and commercial practice (“usages du commerce).
The comments to the PICC give the following advice:
36
As the Principles represent a system of rules of
contract law which are common to existing national
legal systems or best adapted to the special
requirements of international commercial transactions,
there might be good reasons for the parties to choose
them expressly as the rules applicable to their
contract, in the place of one or another particular
domestic law.
Parties who wish to adopt the Principles as the rules
applicable to their contract would however be well
advised to combine the reference to the Principles with
an arbitration agreement.
The reason for this is that the freedom of choice of
the parties in designating the law governing their
contract is traditionally limited to national laws.
Therefore, a reference by the parties to the Principles
will normally be considered to be a mere agreement to
incorporate them in the contract, while the law
governing the contract will still have to be determined
on the basis of the private international law rules of
the forum. As a result, the Principles will bind the
parties only to the extent that they do not affect the
rules of the applicable law from which the parties may
not derogate.
The situation may be different if the parties agree to
submit disputes arising from their contract to
arbitration.
Arbitrators are not necessarily bound by a particular
domestic law. This is self-evident if they are
authorized by the parties to act as amiable
compositeurs or ex aequo et bono. But even in the
absence of such an authorization there is a growing
tendency to permit the parties to choose "rules of law"
other than national laws on which the arbitrators are
to base their decisions. See in particular Art. 28(1)
of the 1985 UNCITRAL Model Law on International
Commercial Arbitration; see also Art. 42(1) of the 1965
Convention on the Settlement of Investment Disputes
between States and Nationals of other States (ICSID
Convention).
In line with this approach, the parties would be free
to choose the Principles as the "rules of law"
according to which the arbitrators would decide the
dispute, with the result that the Principles would
apply to the exclusion of any particular national law,
subject only to the application of those rules of
37
domestic law which are mandatory irrespective of which
law governs the contract (see Art. 1.4).
In disputes falling under the ICSID Convention, the
Principles might even be applicable to the exclusion of
any domestic rule of law.
D. General Principles of International Contract Law
Set forth below is the beginning of a comparative analysis of
substantive international contract law. With respect to the
various subjects examined, mention is made of the rules of law
developed by the various sources of contract law and
international contract law including UNIDROIT’s Principles of
International Commercial Contracts (the PICC”) and the
official Comments thereon, the Lando Commission’s Principles
of European Contract Law (the “PECL”), the United Nations
Convention On Contracts For The International Sale Of Goods
(the « CISG »), the Uniform Commercial Code (the “UCC”) and
national laws, particularly American and English common law
and French law. Reference is also made to standard contractual
provisions set forth in international contracts with respect
to the various subject matters.
1. Freedom of Contract and Mandatory Law
The laws of most of the major trading countries in the world
recognize the principle of freedom of contract in the
context of international trade. The principle of freedom of
contract is recognized by the Unidroit principles (Art. 1.1)
and the European principles (Art. 1.102 (1) which, however,
subjects this freedom to the requirements of good faith and
fair dealing and the mandatory rules in the principles).
French law:
Article 1101 of the French Civil Code:
Le contrat est une convention par laquelle une ou plusieurs
personnes s’obligent, envers une ou plusieurs autres, à donner, à
faire ou à ne pas faire quelque chose.
In France, there is no norm of constitutional value which
guarantees the principle of contractual freedom. However,
the French Constitutional Council has held that the
legislature cannot violate the economy of agreements and
contracts legally entered into in such a serious manner as
to manifestly ignore the freedom resulting from Article 4 of
the 1789 “Déclaration des droit de l’homme et du citoyen”.
38
There are, of course, numerous sectors where European as
well as American and other national laws regulate commerce
and contain provisions from which the parties to an
international contract may not derogate. The PICC and the
PECL both point out that their principles shall not restrict
the application of certain national, international or
supranational “mandatory” rules. (PICC Art. 1.4 and PECL
Art. 1.103).
The PICC and the PECL also contain provisions which are
mandatory in that the parties choosing the application of
the PICC or the PECL cannot exclude or modify them. See for
example, Article 1.7 of the PICC and Art. 1.201 of the PECL
with respect the fundamental requirement of “good faith and
fair dealing”.
2. Good Faith and Fair Dealing
The requirement for parties to a contract to act in good
faith is a standard of behavior of a mandatory character
under most domestic laws.
Art. 1134 of the French Civil Code: “Les conventions
légalement formées tiennent lieu de loi à ceux qui les ont
faites. Elles doivent être executes de bonne foi.”
Good faith and fair dealing is a fundamental idea in the
PICC (Art. 1.7) and the PECL (Art. 1.201). Under the PECL,
there is also a duty to co-operate (Art. 1.202), but unlike
the duty of good faith and fair dealing, it is not stated to
be mandatory.
American law may be somewhat less protective, hence the
usefulness of providing a contractual clause requiring the
parties to act in good faith:
The parties expressly agree to fulfill their
obligations hereunder in good faith. Each party agrees
to take or cause to be taken any and all further steps
and to execute or cause to be executed any and all
further documents as may be reasonably necessary to
effect and carry out fully all the transactions
contemplated herein.
However, UCC 1-203 provides that every “contract… imposes an
obligation of good faith in its performance or enforcement.”
Likewise, Restatement §205 provides that every “contract
imposes upon each party a duty of good faith in its
performance or enforcement.”
39
Garman law: §240 BGB true und glauber – requirement to
perform in good faith - a standard of honest, loyal and
considerate behavior.
UK law is not as protective, but the courts will sanction
bad faith under notions of fraud, misrepresentation,
negligent misstatement (tort liability).
3. Confidentiality
Each party to a contractual negotiation is bound by a
general duty of confidentiality not to disclose or use for
its own personal interest confidential information, trade
secrets or the like which may have been communicated to it
during such negotiation. This obligation exists whether or
not a contract is concluded and even after the end of a
contract. See also PICC Art. 2.16 and PECL 2.302.17
Suggested contract provision:
The ________ and the _________ shall keep totally
confidential and shall not disclose the terms and
conditions of this Agreement or the transactions
envisioned herein or any documents or information
exchanged among the parties to any third party nor make
any public announcement relating thereto without the
consent of the other party, except where such
disclosure is required by law and then only after
notice to the other party.
It is also useful to specify exactly what information or
kind of information is to be treated as confidential.
4. Pre-Contractual Stage
Some important ideas to remember:
17 PICC:
Article 2.16 - Duty of Confidentiality
Where information is given as confidential by one party in the course of negotiations, the
other party is under a duty not to disclose that information or to use it improperly for
its own purposes, whether or not a contract is subsequently concluded. Where appropriate,
the remedy for breach of that duty may include compensation based on the benefit received
by the other party.
PECL:
Article 2.302 (ex art. 5.302) - Breach of Confidentiality
If confidential information is given by one party in the course of negotiations, the other
party is under a duty not to disclose that information or use it for its own purposes
whether or not a contract is subsequently concluded. The remedy for breach of this duty
may include compensation for loss suffered and restitution of the benefit received by the
other party.
40
a. Once all the material elements of a contract are
determined and there is an intent to contract, a precontractual situation may become a contract, so beware.
If a material element is missing, there is no contract.
b. To exclude contractual liability, state so in the
document in question. If you are not sure or you want
some contractual liability, it may be best to say
nothing.
c. Pre-contractual liability is usually in tort
(responsabilité délictuelle). See Art 1382 of the French
Civil Code: “Tout fait quelconque de l’homme, qui cause à
autrui un dommage, oblige celui par la faute duquel il
est arrive à le réparer.” A party which abusively breaks
off contractual negotiations can be held liable for the
resulting harm to its co-contractor. (See Comm., 7 avril
1997, Banque franco-allemande c/ Banque Eurolactique;
Com., 22 avril 1997, Sté Iveco France c/ Sté Mabo; Com.,
7 avril 1998, Sté Laboratoires Sandoz c/ Sté Poleval.)
French law has evolved notions like the obligation to
inform, the duty to cooperate and abuse of law (abus de
droit).
d. German law and Italian law have the notion of culpa in
contrahendo which sanctions blameworthy conduct during
negotiations.
e. Parties must at all times act in good faith, even during
the negotiation of contracts
f. There is also a duty of confidentially during the precontractual phase.
g. Terms: deal memorandum, gentleman’s agreement, agreement
to agree, letter of intent (protocole d’accord), promise
to contract, heads of agreement, pacte de preference,
confidentiality agreement, non-competition and non
solicitation agreements, options, etc.
h. Certain provisions will survive the failure of
negotiations (confidentiality, non-disclosure, dispute
resolution clause, etc.)
i. Comfort letters. Two kinds – best efforts and “insure
that (faire en sorte que) (obligation de moyens et
obligation de résultat).
i. As to the necessity of having a price, see 8 below.
41
j. Remember the document for signing up players for the
professional rugby organization (“I hereby confirm my
intent (and agreement) to …”).
k. Examples:
- Pennzoil v. Texaco (memorandum of understanding signed,
but subject to final contract, held to constitute a
contract, damages of over $10 billion awarded):
Under New York law, if parties do not intend to be
bound to an agreement until it is reduced to writing
and signed by both parties, then there is no contract
until that event occurs…. If there is no understanding
that a signed writing is necessary before the parties
will be bound, and the parties have agreed upon all
substantial terms, then an informal agreement can be
binding, even though the parties contemplate evidencing
their agreement in a formal document later….
For a contract to be enforceable, the terms of the
agreement must be ascertainable to a reasonable degree
of certainty…. The question of whether the agreement is
sufficiently definite to be enforceable is a difficult
one. The facts of the individual case are decisively
important. [cites omitted] "The agreement need not be
so definite that all the possibilities that might occur
to a party in bad faith are explicitly provided for,
but it must be sufficiently complete so that parties in
good faith can find in the agreement words that will
fairly define their respective duties and liabilities."
Id. On review, the agreement must be sufficiently
definite for the court to be able to recognize a breach
and to fashion a remedy for that breach.
Kim Bassenger (Boxing Helena case) (draft of contract
written, but not signed, held to be a contract, settlement
for $3.8 million) cases.
Consider the differences between the two following
situations:
Gentlemen's Agreements
Can parties prevent the enforcement of their promises by
governmental machinery if they expressly so provide?
"In Rose & Frank v. Crompton, 2 K.B. 261, at p. 293 [1923],
a written
agreement regulating the commercial relations of the parties
to it contained the following clause: 'This arrangement is
42
not entered into, nor is this memorandum written, as a
formal or legal agreement, and shall not be subject to legal
jurisdiction in the law courts either in the United States
or England, but it is only a definite expression and record
of the purpose and intention of the three parties concerned
to which they each honourably pledge themselves with the
fullest confidence, based on past business with each other,
that it will be carried through by each of the three parties
with mutual loyalty and friendly co-operation.’/The Court of
Appeal (Bankes, Scrutton and Atkin, L. JJ.) held that the
document did not constitute a binding contract, and this
decision was afterwards affirmed in the House of Lords- see
[1925] A.C. 445. . . . Atkin, L. J., at p. 293, said: I have
never seen such a clause before, but I see nothing
necessarily absurd in businessmen seeking to regulate their
business relations by mutual promises which fall short of
legal obligations, and rest on obligations of honour or
self-interest, or perhaps both.’” Sol.L.J. 769 (1932).
McDonald signed an acknowledgment of indebtedness to Smith
for $5,000, the instrument stipulating that "it is part and
parcel of this acknowledgment . . . that it shall be void
should legal steps of any kind be taken to force payment".
Smith sued McDonald on the instrument. Held: For defendant.
The promise to pay constituted only a moral obligation.
Smith v. McDonald, 37 Cal.App. 503, 174 P. 80 (1918). See
Corbin, § 34; Parry, The Changing Conception of Contracts in
English Law (1958).
Example of a more binding letter of intent
The following letter was signed in 1995 by virtually all of
the top French rugby players with a view to participating in
a professional world rugby organization:
ABC. Pty Limited
Sydney
Australia
Dear Sirs:
You have indicated to me that ABC Pty Limited ("ABC")
undertaken to create an international organization for
professional Rugby Union football comprised of at least three
Conferences - Northern, Central and Southern - with a minimum
of ten regional teams in each Conference. You have further
indicated that in order to finalize the financing and
establishment of the worldwide network, it is essential for ABC
to obtain the commitment of a total minimum of 900 players for
thirty teams (including 90 players for three French teams) to
participate in national, regional and international
championships and other special events to be conducted by, or
in conjunction with, ABC.
43
In this context, I hereby confirm my (firm) intent (and agreement)
to become a player for one of the three professional Rugby
Union football teams to be created in France, subject only to:
ABC having funds available to it in excess of US$ 100 million
by October 31, 1995; or ABC having executed contracts with
commercial enterprises such as for television rights,
sponsorship or other commitments to the competition sufficient
for ABC to meet its contractual obligations. An employment
agreement shall be signed no later than such date with ABC or
an entity which ABC shall create or cause to be created to
manage the French team for which I shall play. Such agreement
shall, of course, be in full compliance with all applicable
laws and regulations including, in particular, with respect to
social security.
The employment agreement shall, to the extent legally possible
conform to ABC's standard terms and conditions of employment
which are based on the exclusivity provisions used in high
level worldwide professional sports.
My employment shall effectively commence on November 7, 1995
and be for a minimum of three playing seasons (approximately
March - October), ending at the close of the 1998 season.
During such period, I shall not enter into any other agreement
inconsistent with my obligations to the ABC. However, I shall
not be prevented from following any other occupation or
business, provided such shall not interfere with my obligations
to the ABC.
In consideration of my employment during the three-year period
described above, I shall be entitled to receive a gross
remuneration to be calculated on the basis of $US ____
which sum shall include all social and other charges due by the
employer with respect to my status as a salaried employee
("Charges"). Such remuneration shall consist of: (a) a contract
fee of US$ (- social charges) ; and (b) a playing fee of
US$ _____ (- social charges) during each of the three years.
(a) The contract fee shall be paid as follows: ten percent
(10%) on or before November 1, 1995; (b) ten percent (10%) on
or before March 1, 1996; and the balance in equal monthly
installments, in arrears, over the remainder of the period of
employment.
(b) The playing fee shall be paid as follows: ten percent
(10%) of the Year 1 fee on or before November 7, 1995; a
further ten percent (10%) of the Year 1 fee on or before March
1, 1996; the balance of the Year 1 fee in equal monthly
installments, in arrears, over Year 1; the Year 2 fee in equal
monthly installments, in arrears, over Year 2; and the Year 3 fee
in equal monthly installments over the remainder of the period of
employment.
Unless the condition referred to in the second paragraph of
page 1 hereof shall be met, ABC shall have no contractual
obligation whatsoever to make any payment envisioned herein. A
letter from the accounting firm of Ernst & Young certifying
that such condition has been met will be sufficient evidence of
the meeting of such condition.
I represent and warrant that, as of the date hereof and as of
44
the date of the signing of the employment agreement, I shall be
fully free and able to perform all my obligations envisioned
herein and in the employment agreement.
I expressly agree that until November 7, 1995 I shall not enter
into any letter of intent, agreement, understanding or
arrangement of any nature whatsoever with any other party to
play Rugby Union, Rugby League or any similar football game.
The terms of this letter shall remain strictly confidential
shall not be disclosed by either party without the prior
written consent of the other, except that ABC may disclose the
existence of such letters (without mentioning the players
involved) to prospective investors, sponsors, licensees of ABC
rights, etc., in order to secure the necessary financing and
sponsoring for the ABC organization.
ABC shall have the right to substitute any third party of its
choice with respect to the execution hereof.
If you agree with the above, please sign a copy of this letter
in the space indicated below.
Sincerely,
______________
Agreed to and accepted:
ABC Pty Limited
Questions: If you were the company in the above
situation, what more would you want to do to be sure
you had the strongest possible “contract”? If you were
a player, how would you want to limit your obligations?
5. Formation of Contract - Offer, Withdrawal, Revocation
There are essentially two requirements for the existence of
an offer – that it be sufficiently definite and that it
indicate an intent to be bound.
See American contract law above. Remember an offer must be:
(1) made with the intention to contract; (2) definite,
reasonably certain and complete; 3) more than mere
preliminary negotiations; and (4) communicated by the
offeror to the offeree.
PICC Art 2.2:
A proposal for concluding a contract constitutes an
offer if it is sufficiently definite and indicates the
intention of the offeror to be bound in case of
acceptance.
To the same effect, see PECL Art. 2.201
CISG Art 14:
45
(1) A proposal for concluding a contract addressed to
one or more specific persons constitutes an offer if it
is sufficiently definite and indicates the intention of
the offeror to be bound in case of acceptance. A
proposal is sufficiently definite if it indicates the
goods and expressly or implicitly fixes or makes
provision for determining the quantity and the price.
(2) A proposal other than one addressed to one or more
specific persons is to be considered merely as an
invitation to make offers, unless the contrary is
clearly indicated by the person making the proposal.
UCC 2-204 (3):
Even though one or more terms are left open a contract
for sale does not fail for indefiniteness if the
parties have intended to make a contract and there is a
reasonably certain basis for giving an appropriate
remedy.
Generally, the offer becomes effective when it reaches the
offeree (PICC Art. 2.3, PECL Art., CISG Art. 15 (1)).
Generally, revocation of an offer is effective if it reaches
the offeree before it has dispatched its acceptance. (US
majority view, PICC Art. 2.4 (1), PECL 2.202 (1) and CISG
Art. 16 (1).
6. Formation of contract – acceptance, rejection of offer,
counter-offer
“Mirror image rule” in US case law. Remember that under
common law, an acceptance had to be unequivocal and
unconditional; if it contained different or additional
terms, it constituted a counter-offer.
Battle of the forms. This was changed by the UCC which
provides (§ 2-207) that additional incidental terms become
part of the contract unless the offeror has limited
acceptance to the terms of the offer or objects to them.
Whether an additional term is part of the contract depends
on whether it is considered to be material. The UCC is less
rigid and seems more in favor of the existence of a
contract.
Art 19 of the CISG undoes this evolution of the UCC and is
closer to the old common law rule. Art 19 provides that an
acceptance with additional or modified terms is a counter
offer unless they are not material and the offeror does not
46
object to them. Material terms include price, payment,
quality and quantity of goods, place and time of delivery,
warranties or liabilities and dispute resolution clause.
Under the UCC, a stipulation for arbitration in an
acceptance would not keep a contract from arising. There
would be a contract and a question; that is, does the
contract contain an arbitration clause? The answer would
turn on whether such a clause is "material." Under the CISG,
it is likely that there would be no contract.
The PICC and the PECL both provide that only a reply that
states different or additional terms which substantially
modify the offer constitute a rejection and counter offer
(PICC 2.1118 and PECL 2.20819).
Informality of CISG The CISG is more informal in that,
unlike the UCC (which requires that contracts for the sale
of goods for more than $500 are not enforceable) and the
common law as modified by the statute of frauds, it does not
require contracts for the sale of goods to be in writing.
7. Consideration
See American law above. Historically, consideration related
more to rules of procedure to determine the existence of a
contract, is now a substantive rule of American contract
18
Article 2.11 - Modified Acceptance
(1) A reply to an offer which purports to be an acceptance but contains additions,
limitations or other modifications is a rejection of the offer and constitutes a counteroffer.
(2) However, a reply to an offer which purports to be an acceptance but contains
additional or different terms which do not materially alter the terms of the offer
constitutes an acceptance, unless the offeror without undue delay, objects to the
discrepancy. If the offeror does not object, the terms of the contract are the terms of
the offer with the modifications contained in the acceptance.
19
Article 2.208 (ex art. 5.209) - Modified Acceptance
(1) A reply by the offeree which states or implies additional or different terms which
would materially alter the terms of the offer is a rejection and a new offer.
(2) A reply which gives a definite assent to an offer operates as an acceptance even if it
states or implies additional or different terms, provided these do not materially alter
the terms of the offer. The additional or different terms then become part of the
contract.
(3) However, such a reply will be treated as a rejection of the offer if:
(a) the offer expressly limits acceptance to the terms of the offer; or
(b) the offeror objects to the additional or different terms without delay; or
(c) the offeree makes its acceptance conditional upon the offeror's assent to the
additional or different terms, and the assent does not reach the offeree within a
reasonable time.
47
law. Consideration is a detriment to the promisee or benefit
to the promisor, bargained for and given in exchange for a
promise.
The equivalent in French law is cause. Article 1131 of the
French Civil Code provides: “L’obligation sans cause, ou sur
une fausse cause, ou sur une cause illicite, ne peut avoir
aucun effet.”
There is no mention of consideration in the
PICC or PECL.
8. Price
a. French law: Normally a price has to be déterminé ou
déterminable.
Article 1591:
Le prix de la vente doit être déterminée et désigné par
les parties.
Article 1592:
Il peut cependant être laissé à l’arbitrage d’un tiers;
si le tiers ne veut ou ne peut faire l’estimation, il
n’y a point de vente.
b. US law: It is possible to have a contract even in the
absence of a price if it appears that the parties have
the intent to be bound and the price can be fixed
objectively and in good faith, even by one of the
parties. (See also UCC 2-305.)
c. CISG (Art. 14): A proposal is sufficiently definite if it
indicates the goods and expressly or implicitly fixes or
makes provision for determining the quantity and the
price.
d. PICC (Art. 5.7): If there is no price, reference is made
to:
to the price generally charged at the time of the
conclusion of the contract for such performance in
comparable circumstances in the trade concerned or, if
no such price is available, to a reasonable price.
e. PECL (Art. 6.104): If there is no price, the parties are
considered as having agreed to a “reasonable” price.
9. Interpretation
48
a. American law
See American law rules above. Remember that interpretation
is usually not allowed if the contract is clear on its face,
especially if the contract contains an “entire agreement”
clause. Civil law, the CISG, the PICC and the PECL give more
weight to the underlying intent of the parties.
b. French law:
Art. 1156
One must in agreements seek what the common
intention of the contracting parties was, rather than
pay attention to the literal meaning of the terms.
Art. 1157
Where a clause admits of two meanings, one
shall rather understand it in the one with which it may
have some effect, than in the meaning with which it
could not produce any.
Art. 1158
Terms which admit of two meanings shall be
taken in the meaning which best suits the subject
matter of the contract.
Art. 1159
What is ambiguous shall be interpreted by
what is in use in the region where the contract was
made.
Art. 1160
Terms which are customary shall be
supplemented in the contract, even though they are not
expressed there.
Art. 1161
All the clauses of an agreement are to be
interpreted with reference to one another by giving to
each one the meaning which results from the whole
instrument.
Art. 1162
49
In case of doubt, an agreement shall be
interpreted against the one who has stipulated, and in
favor of the one who has contracted the obligation.
Art. 1163
However general the terms in which an
agreement is phrased may be, it shall include only the
things upon which the parties appear to have intended
to contract.
Art. 1164
Where in a contract one case was expressed
for explaining the obligation, it shall not be deemed
that it was thereby intended to reduce the scope of the
agreement which extends as of right to cases not
expressed.
c. Swiss law:
A contract must be applied as it is written unless the
contractual language ceases to be clear. In such case, it is
the intent of the parties which prevails. This means that
substance prevails over form (Article 18 SCO).
The principle of confidence (principe de la confiance), also
referred to as the principle of efficient appearance
(principe de l’apparance efficace): requires that one party
acting in good faith is bound by the interpretation which it
knew or should have known that the other party was giving,
in good faith, to the contractual language in question.
d. CISG:
Like the PICC and the PECL, the CSIG makes it easier to
become bound by an enforceable contract. It makes it
possible to contradict and supersede the clear words of a
signed written contract by testimony and other evidence
showing that the written contract is not consistent with the
real agreement between the parties see Articles 8 and 9 of
the CISG).
e. PICC:
(Chapter 4): Importance of the common intent of the parties.
If intent cannot be established, look at “the meaning that
reasonable persons of the same kind as the parties would
give to it in the same circumstances.” Relevant
circumstances are all circumstances including preliminary
negotiations, past practices and conduct of the parties,
50
nature and purpose of the contract, meaning commonly given
in the trade concerned.
Would the following provisions of the PICC (Art. 4.2 (1) and
(2) change the result in the case of Lucy v. Zehmer?
(1) The statements and other conduct of a party shall
be interpreted according to that party’s intention if
the other party knew or could not have been unaware of
that intention.
(2) If the preceding paragraph is not applicable, such
statements and other conduct shall be interpreted
according to the meaning that a reasonable person of
the same kind as the other party would give to it in
the same circumstances.
Other rules: reference to contract as a whole, give all
terms effect, contra proferentum rule, preference for
interpretation according to a version in which the contract
was originally drafted, etc. In all cases, appropriate
terms shall be determined with regard to the intent of the
parties, the nature and purpose of the contract, good faith
and fair dealing and reasonableness.
PECL:
Rules a very similar. The primary concern is the intent of
the parties, even if it differs from the literal meaning of
the words.
10. Performance
The PICC and PECL contain rules relating to the time of
performance (as stated in the contract, or, if not, within
a reasonable time), partial performance (a party may object
unless it has no interest to object), order of performance
(simultaneous performance to be made when possible;
exception where performance of one party requires a period
of time, he is usually to perform first), earlier
performance (a party may object unless he has no legitimate
interest to do so) and place of performance (general rule
that a party performs at its place of business, re monetary
obligations, obligor performs at obliges business. To avoid
application of these rules, specify all relevant
performance matters in the contract.
11. Non-Performance, Termination of Contract (Including
Anticipatory Breach and Restitution)
51
A material breach or, in the words of the PICC and the
PECL, fundamental non-performance by one party allows the
other party to terminate the contract and seek remedies
including damages.
For example, Arts. 49 and 64 of the CISG permit a buyer or
a seller to avoid the contract if the party’s failure to
perform amounts to a “fundamental breach” of contract. Art.
25 defines a fundamental breach as follows:
A breach of contract committed by one of the parties is
fundamental if it results in such detriment to the
other party as substantially to deprive him of what he
is entitled to expect under the contract, unless the
party in breach did not foresee and a reasonable person
of the same kind in the same circumstances would not
have foreseen such a result.
Art 7.3.1 of the PICC and 8.103 of the PECL define a non
performance of an obligation to be fundamental if: (a)
strict compliance with the obligation is of the essence of
the contract; (b) it deprives the aggrieved party of what
it was entitled to expect under the contract (unless the
other party did not foresee and could not reasonably have
foreseen that result); (c) it is intentional or reckless
and causes a loss of confidence in the breaching party.
(See also Arts. 49 and 64 of the CISG).
The aggrieved party must give notice of termination.
Under certain circumstances, notification may allow the
breaching party to cure its breach.
Anticipatory breach
If it is clear to one party that there will be a
fundamental breach (an “anticipatory breach”) by the other
party, the first party may terminate the contract. See, for
example, (PICC Art. 7.3.3):
Where prior to the date for performance by one of the
parties it is clear that there will be a fundamental
non-performance by that party, the other party may
terminate the contract.
The PICC calls this anticipatory non-performance.
In addition, if a party reasonably believes there will be a
fundamental non-performance by the other party, it may
demand adequate assurance of performance and meanwhile
withhold its own performance. If the other party does not
52
give such assurance within a reasonable time, the party
demanding it may terminate the contract:
A party who reasonably believes that there will be a
fundamental non-performance by the other party may
demand adequate assurance of due performance and may
meanwhile withhold its own performance. Where this
assurance is not provided within a reasonable time the
party demanding it may terminate the contract (PICC Art
7.3.4).
In American law, the terms describing the two above
situations are anticipatory breach and prospective
inability to perform.
The PECL language is simpler:
Article 9.304 (ex art. 4.304) - Anticipatory NonPerformance
Where prior to the time for performance by a party it
is clear that there will be a fundamental nonperformance by it the other party may terminate the
contract.
See also UCC §2-610-611 and CISG Arts. 71 and 72.
In American law, the terms describing the two above
situations are anticipatory breach and prospective
inability to perform.
The perfect tender rule
There is a problem for a trader who is a CISG purchaser and
resells under the UCC or US law.
Under the UCC, a buyer is entitled to reject a tender of
delivery under a one-delivery contract of sale that fails
in any respect to conform to the contract. This is the
"perfect tender" rule.
The CISG imposes a much stricter standard for rejection and
cancellation. A buyer cannot reject defective goods and
cancel unless a non-conformity substantially deprives the
buyer of what it was entitled to expect under the contract
and, even then, only if the seller foresaw, or a party in
its position would have foreseen, such a result. This
follows from Article 49(1) which permits a buyer to avoid
the contract only if the seller's failure to perform amounts
to a "fundamental breach," as that term is defined in
53
Article 25. The buyer cannot even demand substitute goods
unless the non-conformity constitutes a fundamental breach.
This situation must be remedied by appropriate language in
the contract. For example, a seller who wants strict
adherence to its Terms of Payment clause can state "Noncompliance with any provisions of this clause shall be
regarded as a fundamental breach of contract." A buyer to
whom strict compliance with the delivery schedule is
imperative should have the phrase "time is of the essence"
in the contract.
Restitution
Upon termination of a contract, especially if damages are
not appropriate, either party may claim restitution in kind
or a money equivalent of whatever it has supplied, provided
it concurrently makes restitution of whatever it has
received (PICC Art. 7.3.6 and PECL Arts. 9.308-309).
Remember the case of Osteen v. Johnson.
Force majeure and hardship
Non-performance may be excused or suspended in the event of
hardship or force majeure (see below).
12. Damages for Breach of Contract
a. American law
See American contract law above. Damages are the preferred
remedy for breach of contract. Remember the contract of
protecting a party’s expectation interest. Damages
compensate the expectation interest by putting the aggrieved
party back in the position he would have been in, had the
contract been performed as envisioned. The aggrieved party
has the burden of proof of that he has suffered the loss
because of the breach of contract and must prove the amount
of the loss with reasonable certainty. Speculative damages
are not recoverable.
b. French law
Art. 1149. Damages due to a creditor are, as a rule,
for the loss which he has suffered and the profit which
he has been deprived of, subject to the exceptions and
modifications below.
Art. 1150. A debtor is liable only for damages which
were foreseen or which could have been foreseen at the
time of the contract, where it is not through his own
54
intentional breach that the obligation is not
fulfilled.
Art. 1151. Even in the case where the non-performance
of the agreement is due to the debtor's intentional
breach, damages may include, with respect to the loss
suffered by the creditor and the profit which he has
been deprived of, only what is an immediate and direct
consequence of the non-performance of the agreement.
Art. 1152. Where an agreement provides that he who
fails to perform it will pay a certain sum as damages,
the other party may not be awarded a greater or lesser
sum.
(Act n° 75-597 of 9 July 1975) Nevertheless, the judge
may "even of his own motion" (Act n° 85-1097 of 11 Oct.
1985) moderate or increase the agreed penalty, where it
is obviously excessive or ridiculously low. Any
stipulation to the contrary shall be deemed unwritten.
Art. 1153. (Act n° 75-619 of 11 July 1975) In
obligations which are restricted to the payment of a
certain sum, the damages resulting from delay in
performance shall consist only in awarding interests at
the statutory rate, except for special rules for
commerce and suretyship.
(Ord. n° 59-148 of 7 Jan. 1959) Those
damages are due without the creditor having to prove
any loss.
(Act n° 75-619 of 11 July 1975) They are
due only from the day of a demand for payment "or of
another equivalent act such as a letter missive where a
sufficient requisition results from it" (Act n° 92-644
of 13 July 1992), except in the case where the law
makes them run as a matter of right.
(Act of 7 April 1900) A creditor to whom
his debtor in delay has caused, by his bad faith, a
loss independent of that delay may obtain damages.
c. Swiss law
Swiss law refers to positive damages and negative damages.
Swiss law defines positive damages as loss of revenues
(lucrum cessans) and costs (damnum emergens). Positive
damages include loss of revenues (lucrum cessans) and costs
incurred (damnum emergens).
55
As concerns negative damages, the determination which is
made relates to what would have been the interest of the
victim in not having concluded the contract; the damages,
thus, cover the losses incurred by the party because of
having entered into the contract. The compensation here
tends to put the victim back in the patrimonial situation in
which it would have found itself if the contract had not
been entered into.
d. PICC
Under the Unidroit rules, any non-performance gives the
aggrieved party a right to damages either exclusively or in
conjunction with other remedies, unless the non-performance
is excused (Art. 7.4.1). The aggrieved party is entitled to
“full compensation” including for physical suffering and
emotional distress (Art. 7.4.2). Compensation is due only
for harm that is established with a reasonable degree of
certainty. There may be compensation for the loss of a
chance (Art. 7.4.3). The non-performing party is liable for
the harm “it foresaw or could reasonably have foreseen at
the time of the conclusion of the contract as being likely
to result from its non-performance.” (Art. 7.4.4.) Damages
may be determined by the cost of a replacement transaction
(Art. 7.4.5) or with reference to the current price of
goods under similar circumstances (Art. 7.4.6). The
aggrieved party is required to mitigate its losses, but may
recover costs of mitigation (Art. 7.4.8). If a party does
not pay a sum of money when due, the aggrieved party may
recover interest and any additional damages (Art. 7.4.9).
Finally, interest is due on damages for non-performance of
a non-monetary obligation from the time of non-performance
(Art. 7.4.10).
e. PECL
The PECL rules are similar (Art 9.501-507). However, the
foreseeability rule is less restrictive in that damages are
not required to have been foreseen or reasonably foreseen if
the non-performance is “intentional or grossly negligent”
(Art. 9.503).
f. CISG
Similar rules also appear in the CISG (Arts. 74-78). Its
foreseeability test is stated as follows:
Damages for breach of contract by one party consist of
a sum equal to the loss, including loss of profit,
suffered by the other party as a consequence of the
breach. Such damages may not exceed the loss which the
56
party in breach foresaw or ought to have foreseen at
the time of the conclusion of the contract, in the
light of the facts and matters of which he then knew or
ought to have known, as a possible consequence of the
breach of contract.
g. International commercial arbitration
The following rules relating to the determination of damages
have involved in the context of international commercial
arbitration:
i. The damage must be reasonably certain.
ii. The damage must be foreseeable.
iii. The aggrieved party has the right to be totally
indemnified (principle of indemnisation intégrale)
including damage to its image and commercial reputation.
iv. Expropriation (including a legal expropriation) gives
rise a right of total indemnification.
v. There is an obligation to mitigate damages. There is a
requirement to accept a substitute performance if it is
not reasonably difference from the contractual
performance.
vi. Detailed rules have developed concerning the
determination of damages arising out of the expropriation
of a company. Methods to determine losses include those
based on the patrimonial value of the enterprise (net
accounting value, replacement value and liquidation
value) and those based on a prospective analysis of the
enterprise (discounted cash flow), with the latter
becoming more widely used (despite uncertainties of
valuations, but along with appropriate adjustments to
take into account the relevant circumstances.
vii. Legal interest (intérêts moratoires) is due on an
award from the date it is rendered until final payment.
vii. Arbitrators often include a decision as to which
party or parties are to bear the expenses of the
arbitration.
viii. Punitive damages are not allowed.
ix. Arbitrators make appropriate determination of the
currency in which damages are awarded.
57
13. Specific Performance
a. American law, see above. Generally, specific performance
is inappropriate where damages are recoverable and
adequate. Specific performance is an equitable remedy
granted, at a court’s discretion, in unusual
circumstances (e.g., when an object is unique). This rule
has been broadened by the UCC which allows for specific
performance not only if goods are unique, but also in
other appropriate circumstances. The common law’s
preference for damages over specific performance is not
found in civil law countries.
b. French law:
Art. 1142. Any obligation to do or not to do resolves
itself into damages, in case of non-performance on the
part of the debtor.
Art. 1143. Nevertheless, a creditor is entitled to
request that what has been done through breach of the
undertaking be destroyed; and he may have himself
authorized to destroy it at the expense of the debtor,
without prejudice to damages, if there is occasion.
Art. 1144. A creditor may also, in case of nonperformance, be authorized to have the obligation
performed himself, at the debtor's expense. "The latter
may be ordered to advance the sums necessary for that
performance " (Act n° 91-650 of 9 July 1991).
c. CISG
There is an important compromise between the civil law
system and the common law’s preference for damages over
specific performance :
Article 46
(1) The buyer may require performance by the seller
of his obligations unless the buyer has resorted to
a remedy which is inconsistent with this
requirement.
(However :)
Article 28
If, in accordance with the provisions of this
Convention, one party is entitled to require
58
performance of any obligation by the other party, a
court is not bound to enter a judgment for specific
performance unless the court would do so under its
own law in respect of similar contracts of sale not
governed by this Convention.
Where an action is brought in the US, the court will look
to see if specific performance is allowed under the UCC.
UCC 2-717 permits a jilted buyer of goods to seek
specific performance of the contract if the goods sold
are unique or in other appropriate circumstances.
d. PICC:
The Unidroit rules follow the civil law tradition which
does not view specific performance as an exceptional
remedy allowable only under equitable circumstances.
Article 7.2.2 - Performance of Non-Monetary
Obligation
Where a party who owes an obligation other than one
to pay money does not perform, the other party may
require performance, unless
(a) performance is impossible in law or fact;
(b) performance or, where relevant, enforcement is
unreasonably burdensome or expensive;
(c) the party entitled to performance may reasonably
obtain performance from another source;
(d) performance is of an exclusively personal
character; or
(e) the party entitled to performance does not
require performance within a reasonable time after
it has, or ought to have, become aware of the nonperformance.
e. PECL
Article 9.102 - Non-monetary Obligations
(1) The aggrieved party is entitled to specific
performance of an obligation other than one to pay
money, including the remedying of a defective
performance.
59
(2) Specific performance cannot, however, be
obtained where:
(a) performance would be unlawful or impossible; or
(b) performance would cause the obligor unreasonable
effort or expense; or
c) the performance consists in the provision of
services or work of a personal character or
depends upon a personal relationship, or
(d) the aggrieved party may reasonably obtain
performance from another source.
(3) The aggrieved party will lose the right to
specific performance if it fails to seek it within a
reasonable time after it has or ought to have become
aware of the non-performance.
(See also UCC 2-716.)
14. Force majeure and hardship
a. Force majeure
Non-performance is excused if due to an impediment beyond
the party’s control which it could not reasonably be
expected to have taken into account at the time of the
conclusion of the contract. A party invoking force majeure
has the burden of proof to show that: its failure to
perform is due to an impediment beyond its control; and
such impediment could not reasonably have been anticipated
at the time of the conclusion of the contract.
A defaulting party must give notice of the force majeure.
The defaulting party is exempted from liability to pay
damages, but the non-defaulting party may terminate the
contract if the non-performance becomes fundamental.
(See CISG Art. 79, PICC Art. 7.1.7 and PECL Art. 8.108).
Suggested contractual provision:
_.1. Neither party hereto shall be liable to the other
nor shall be deemed in default hereunder for failure or
delay to perform any of its agreements or obligations
caused by or arising out an event of force majeure. An
event of force majeure is any unforseeable and
60
irresistible act, legal or factual situation beyond the
control of the parties.
_.2. A party affected by an event of force majeure
shall promptly notify the other party, supplying full
information and any supporting public documents
relating to such event. An event of force majeure may
be pleaded only during the duration thereof and the
party concerned shall use its best efforts to avoid or
limit any damages and to remedy its failure or delay to
perform as promptly as possible.
_.3. A party affected by an event of force majeur
which does not notify the other party as provided
above shall lose any right it may have to invoke such
act of force majeure.
b. Hardship
Under American law, hardship is not an excuse for
performance. However, in exaggerated situations, performance
may be excused pursuant to notions of frustration or
impossibility.
Under both the PICC and the PECL, a party must also fulfill
its obligations even if its performance has become more
onerous.
However, if an “occurrence of events fundamentally alters
the equilibrium of the contract either because the cost of a
party’s performance has increased or because the value of
the performance a party receives has diminished” (PICC) or
performance becomes excessively onerous because of a change
of circumstances (PECL), the disadvantaged party may request
renegotiations to adapt the contract, provided the following
conditions are met: (a) the change of circumstances occurs
after the conclusion of the contract; (b) the change could
not reasonably have been taken into account at the time of
the conclusion of the contract; and (c) the risk of the
event is not one which the disadvantaged party assumed or
should be required to bear. The PICC also require that the
event be beyond the control of the disadvantaged party.
If the parties fail to reach agreement, either party may
resort to the court which may terminate the contract or
adapt the contract to distribute the losses and gains in an
equitable manner.
If you want to be sure that parties will be required to
renegotiate in the event of hardship, this should be stated
in the contract.
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15. Passing of risk
a. Basic rules
The basic rule is that risk passes at the time agreed by the
parties. In the absence of agreement, risk may pass with
title to the property or at the time of the delivery of the
property
b. French law
Unless otherwise provided, the passing of risks takes place
at the time of the formation of the contract (see Civ.3ème;
6 mars 1996: Bull. Civ. III, n° 66). The situation is
different if the seller reserves his property right to the
property (reserve de propriété) until payment or the
fulfillment of other contractual provisions. The risks
remain with the seller, and he is required to maintain the
object of the sale and to “apporter tous les soins d’un bon
père de famille” pursuant to Art. 1137 of the Civil Code.
c. UK law
Sect. 20(1) of the U.K. Sale of Goods Act 1979 states:
“Unless otherwise agreed, the goods remain at the seller's
risk until the property in them is transferred to the buyer,
but when the property in them is transferred to the buyer
the goods are at the buyer's risk whether the delivery has
been made or not.”
d. Swiss law
Swiss law recognizes, with respect to sales contract that
the transfer of ownership occurs as soon as the buyer is put
in possession of the thing sold. Expressed otherwise, the
carrying out of the characteristic performance has the
effect of transferring ownership. In this respect, the fact
that the payment occurs later, or even if it is never made,
changes nothing at all.
e. CISG
See Articles 66-7020.
20
Article 66
Loss of or damage to the goods after the risk has passed to the buyer does not discharge
him from his obligation to pay the price, unless the loss or damage is due to an act or
omission of the seller.
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f. Incoterms
For international traders, Incoterms are more suitable than
the delivery terms recited in the UCC. The CISG does not
contain definitions of delivery terms. Incoterms specify
important variations and details that are not covered by the
CISG. So, under the CISG, continue to have Incoterms address
passage of risk and the delivery conditions you want. There
is no problem using Incoterms in tandem with the Convention.
If the Convention says something different from Incoterms,
Incoterms govern.
Part Two: The Negotiation and Drafting of
International Contracts
A. Introduction to Negotiation and Drafting of
International Contracts
Article 67
(1) If the contract of sale involves carriage of the goods and the seller is not bound to
hand them over at a particular place, the risk passes to the buyer when the goods are
handed over to the first carrier for transmission to the buyer in accordance with the
contract of sale. If the seller is bound to hand the goods over to a carrier at a
particular place, the risk does not pass to the buyer until the goods are handed over to
the carrier at that place. The fact that the seller is authorized to retain documents
controlling the disposition of the goods does not affect the passage of the risk.
(2) Nevertheless, the risk does not pass to the buyer until the goods are clearly
identified to the contract, whether by markings on the goods, by shipping documents, by
notice given to the buyer or otherwise.
Article 68
The risk in respect of goods sold in transit passes to the buyer from the time of the
conclusion of the contract. However, if the circumstances so indicate, the risk is assumed
by the buyer from the time the goods were handed over to the carrier who issued the
documents embodying the contract of carriage. Nevertheless, if at the time of the
conclusion of the contract of sale the seller knew or ought to have known that the goods
had been lost or damaged and did not disclose this to the buyer, the loss or damage is at
the risk of the seller.
Article 69
(1) In cases not within articles 67 and 68, the risk passes to the buyer when he takes
over the goods or, if he does not do so in due time, from the time when the goods are
placed at his disposal and he commits a breach of contract by failing to take
delivery.
(2) However, if the buyer is bound to take over the goods at a place other than a place of
business of the seller, the risk passes when delivery is due and the buyer is aware of the
fact that the goods are placed at his disposal at that place.
(3) If the contract relates to goods not then identified, the goods are considered not to
be placed at the disposal of the buyer until they are clearly identified to the contract.
Article 70
If the seller has committed a fundamental breach of contract, articles 67, 68 and 69 do not
impair the remedies available to
the buyer on account of the
63
1. Techniques of negotiating an international contract
a. Introduction
Throughout my professional life, I have always utilized many
lessons I learned at an early age from my father who was an
executive at General Electric and spent his life negotiating
important financial transactions. Some of these lessons are as
follows:
i.
The power of positive thinking. Think positive and be a
doer. Be bigger than any problem. Be a problem solver
rather than a creator of problems. Be a chief, not an
Indian. Be a winner, not a loser.
ii.
The magic of believing.
iii. One step at a time (the motto of Alcoholics Anonymous).
iv.
One step beyond. Go as long, as hard as far as you can
until you can go no further. Then take another step and
then another. Progress lies in the steps beyond
endurance.
v.
Work hard, but also work smart.
vi.
Persistence. If at first you do not succeed, try, try
again. Keep at it until you get there.
vii. My father liked the saying by George Bernard Shaw that
Robert Kennedy quoted so often: "Some see things as they
are and ask, 'Why?' I dream things that never were and
ask, 'Why not?'"
viii. Learn anything? My father liked to tell a true-life
story about a man sitting next to him on an airplane one
morning. When the usual horrible breakfast fare was
wheeled out, this man got a nice steak. My father asked
him how he managed to do that. The man replied that he
had told the airline he had a health problem and needed a
high protein, salt-free meal. The man then proceeded to
pull out a small shaker from his pocket, generously
salted the meat and asked my father, “Learn anything?”
You must always be open and ready to learn everything
essential dealing with your negotiation. Information is
power.
Many long years later, I can summarize some additional lessons I
have learned, most of them the hard way.
64
i.
ii.
Necessity for the negotiator to have as complete an
understanding of all aspects of the transaction to be
negotiated (“bathtub theory” of a negotiator (or
litigator) – fill the negotiator up for the negotiation;
when it is over, pull the plug, empty and be ready to
start again.
Negotiate based on what objectively are your goals. What
are your real goals and how important are they? Define
objectives, clearly and precisely at all levels.
Determine real needs and margin for negotiation.
iii. Try to understand “where the other party is coming from”.
Try to understand his needs, objectives and margin for
negotiation and plan objectively.
iv.
Take the initiative at appropriate times in negotiations.
Propose to host meetings, submit the first draft of a
contract, do the hard jobs. Try to mastermind the
negotiations. Fill vacuums. Try to set the agenda at the
beginning of meetings. Example of Samuel Pisar: Opening
statement as framework, set agenda and give a summary and
conclusion at the end. If you can set the ground rules in
a negotiation, you will be off to a good start.
v.
Keep control of the drafting to the extent possible. Need
to save all successive drafts. As concerns drafting, keep
it simple, but make it complete.
vi.
Take and maintain extensive notes. Successive drafts and
notes may be useful in a subsequent dispute as to
interpretation.
vii. Maintain a positive mental attitude.
viii. Show a sense of humor and keep negotiations as light
and agreeable as possible. (Grab the bull by the tail and
face the situation. It’s as clear as mud, but it covers
the ground.)
ix.
Remain courteous and professional at all times. Do not
get involved in personal vendetta (Example of Tevini and
Zelbo in Noga arbitration).
x.
Practice the following skills: listen carefully, read
others accurately, think logically, write clearly and be
open to creative and sometimes oblique solutions (advice
from Mark McCormack).
xi.
Choice of strategy. Choice between starting from an
exaggerated position and moving toward a more balanced
situation or starting close to what you want and not
65
moving much. Much depends on the negotiating culture of
the other side. Preference for starting close to what you
want, but it is best to announce this at the outset to
the other side. Always allow for some leeway.
xii. Determine what a balanced agreement should be. What is
really in the best interests of both parties. If an
agreement is not even-handed, chances are it will not be
respected over time and will lead to disputes and
litigation. Need to preserve the ongoing relationship.
xiii. Try to construct a “win-win” situation (1+1=3) in which
there is no loser, but two winners.
xiv. One step at a time. Proceed by steps: (a) letter of
intent: general understanding of major points – try to
formalize, if possible; (b) negotiate the major open
points as to which there is a good chance of the parties
being in agreement; (c) negotiate details as to which
there is no major disagreement; (d) save the most
difficult points to be negotiated at the end (determine
in advance the margins of negotiation – both yours and
the other party’s - arrive at solutions by compromise,
give and take. Also, in proceeding by steps, use what
Blanco calls the “effet du clicquet” – that is, once you
reach agreement on one point or at a particular step, put
that aside in a category of negotiated (and, thus,
closed) matters that are not to renegotiated.
xv.
Do not rush, unless it is to your advantage. Sometimes,
“it is urgent to wait”. Take the time necessary to be
informed, clarify your goals, negotiate and agree.
xvi. Give information to get information, but do not be too
candid. Imitate the Sphinx. Even better, give the
impression by your attitude of being open, candid and
transparent, but at the same time play your cards close
to your chest.
xvii. Horses for courses. Have an appropriate team to cover
all aspects (general, tax, legal, accounting, marketing,
etc.) (Example of Bob the Closer.)
xviii. Technique of check lists. (RVP at Donovan Leisure –
blunderbuss check lists).
xix. Maintain flexibility. Always have fallback positions and
alternative language.
66
xx.
Repeat questions, ask for a translation, take a break or
use the closet negotiator as techniques to gain time when
appropriate.
xxi. Remember to include escape clauses in case the
transaction fails in whole or in part.
xxii. If you hesitate between a long and a short contract, go
for the long contract.
xxiii. If the other party argues that something goes without
saying, then say it anyway, just in case. This is
particularly true with American partners who have a
tendency to look upon the written contract as the
parties’ bible. Remember the usefulness of belts and
suspenders.
xxiv. Use previous models if appropriate, but beware (RS
example with Jim Wiener). Stick to precedents and manner
of proceeding if this has been productive between the
parties in the past.
xxv. Beware of and make judicious use of “red herrings”.
xxvi. Like a prize fighter, be able to take the hard blows
and come back fresh and ready for more.
xxvii. Anticipate problems even if they may seem remote at the
time of the negotiation. Imagine a disaster scenario.
(Example of Bruce Rappaport who negotiated the creation
of a petroleum tanker fleet with Pertamina, the
Indonesian oil company. He put in strict provisions to
protect himself in case the market turned down. Since the
market was riding high, he had no trouble negotiating the
protection he wanted - having the Indonesian government
co-sign and guarantee his agreements. Thereafter there
was an oil glut and an overcapacity in the world oil
markets. When Pertamina backed out of the deal, Rappaport
won an arbitration proceeding and was awarded over $125
million.
xxviii. Try to maintain “grace under pressure” (as Hemmingway
described the matadors) by combining commitment to what
you are negotiating with detachment.
xxix. Remember Blanco’s advice that a contract is a check
list for the negotiator and drafter, a bible for those
who carry it out and a guide in the event of disputes.
b. Hints from Herb Cohen’s “You Can Negotiate Anything”
67
(“Our best thoughts come from others.”
R.W. Emerson)
Definition of negotiation: ‘It is the use of information and
power to affect behavior within a ‘web of tension’”.
Whether or not you decide to negotiate and how hard and in what
manner depends on the answer to three questions. (1) Am I
comfortable negotiating in this situation? (2) Will negotiating
meet my needs? (3) Is the expenditure of time and energy worth
the expected benefits.
Remember when getting your feet wet by beginning to negotiate
that the secret of walking on water is knowing where the stones
are.
i.
The importance of information, time (As long as you get
there before its over you’re never late) and power.
(Power the capacity to get things done): If you think
you’ve got it, you do. If you believe firmly that you
have power, you will convey that to others and they will
believe you.
ii.
Take some risks (shrewdly calculated, based on solid
information), break free from the precedent of past
experiences, challenge assumptions, believe you have
power and increase your expectations.
iii. In taking risks, use a combination of courage and common
sense. Calculate the odds. (example of coin flip: 1: You
win = $1 million; you lose $100,000 (not many people
will take bet) 2 = you win = $100; you lose, you pay $10
- a more reasonable bet). Look at the possibility of
syndicating a risk.
iv.
As a general rule, when the outlook is uncertain, involve
others (people support what they help create). The
importance of a collaborative negotiation.
v.
Power. The importance of the appearance of power. You can
become what you believe you are (the Wizard of Oz.)
vi.
“Within reason, you can get whatever you want if you’re
aware of your options, if you test your assumptions, if
you take reasonably calculated risks, based on solid
information, and if you believe you have power.” (Example
of a prisoner asking a guard for a Marlboro)
vii. The “power of legitimacy” (the advantage of the standard
form). Use when advantageous, challenge when appropriate.
(Example: Why do 55% of Americans vote in a good year,
but 95% check out of a hotel by the mandatory check-out
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time?) (Candid Camera example of sign at the border that
“Delaware is Closed”.)
viii. Always induce the other side to invest in a situation
(the power of investment). Involvement > commitment >
power. (Example: You negotiate two hours with a store
owner. Ultimately he needs to make a sale to justify the
time spent.) (Example: After a morning of presentation by
a corporate executive to a Japanese delegation, the
Japanese ask: Could you go over that one more time?)
Tactic of the nibble.
ix.
Never make an ultimatum before the end of a negotiation.
It’s like icing on the cake. You need to bake the cake
first.
x.
Help me. Admit you do not have all the answers and ask
for help. You can turn a weakness into a strength.
(Example of my experience in Algeria.)
xi.
The power of competition. (Example: C2E negotiations.)
(Example: A potential Russian real estate joint venture
partner asserts he does not really need a partner because
his banks have already agreed to finance the entire
project.)
xii. Never enter a negotiation without options.
xiii. The power of “expertise”. Try to establish your
credentials and expertise early in the negotiation.
xiv. The power of the knowledge of needs.
xv.
The power of rewarding and punishing.
xvi. The power of identification. Get others to identify with
you. You need to have others know you personally and
respect you. (Example: Personal contacts with supers in
the neighborhood when looking for an apartment.)
Personalize yourself and the situation. Get others
emotionally involved. Robert Maxwell used to say to a
negotiating partner, “Hey you are juggling a lot of balls
in the air. Just remember that two of them are mine. If a
policeman pulls you over for speeding, say “I’m lost. Do
you know how the find such and such place. Oh, my
goodness. I never speed. This would be my first violation
in 25 years.” Example of me and my children being
stricken from an international Delta flight from Florida
to Paris. I responded by saying I was a lawyer and that I
was going to make a scandal. The hostess asked me if I
would like her to call the security guard. I realized
69
that the approach of menacing was not going to work, so I
mentioned how important it was to get my kids back to
school on time. She finally gave us $1,200 in free
tickets and re-routed us an hour later on another flight
– in first class! Personalize power. Negotiate
personally, not on behalf of a company, organization,
etc. You help determine your destiny by your own efforts.
xvii. The power of morality. Ethical negotiations. (Example:
Jimmy Carter.) (Richard Nixon: first an anti-communist,
then a law and order advocate.) (Ronald Reagan on the
Russian “Evil Empire” or George W. Bush and the “Axis of
Evil”.)
xviii. The power of precedent. In relying on precedent argue
“Don’t make waves” or “Don’t argue with success”.
xix. The power of persistence. Be tenacious like the child who
calls out to his father from his bed, “Dad, could I have
a glass of water?” Father: “No”. The child later: “Dad,
could I have a glass of water?” The father, getting mad:
“I just said no. Go to sleep.” The child again asks for
water. The father replies, “If you don’t shut up I’m
going to give you a spanking.” The child: “When you come
to give me the spanking, would you please bring me a
glass of water?”
xx.
The power of persuasive capacity (rather than just the
power of reasoning capacity). You must convince others of
what you are saying, your evidence should be overwhelming
and indisputable and the other side’s believing you must
meet their need.
xxi. The power of attitude. You always do a better job
negotiating for others than for yourself. Need to take
negotiation less seriously, as a game, as a world of
illusion. Develop the attitude of caring, but not too
much. Treat negotiating like a game. You will enjoy it
more, reduce stress and get better results.
xxii. Time. Deadlines, real or fictitious (example: April 15
in the US). Use them and know how to deal with them.
(Example: You go see your boss for a raise in salary. His
secretary informs you beforehand that you have to hurry
because he has an important meeting in five minutes.)
Know yours and the other side’s deadline. All the action
usually occurs at the eleventh hour. Be patient. Don’t
reveal your deadline (Example of Japanese asking upon
your arrival when you are leaving in order to reserve
limo; Japanese concluded deal in limo to airport at end
of scheduled 14th day). Also, deadlines (the end of
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negotiations) are always more flexible than either side
realizes. Precipitous action should be taken only when
guaranteed to be in your advantage.
xxiii. Information. Start the process of information gathering
before the negotiation. Speak with the other side’s
associates or assistants. Carefully give your own
information to get the other side’s.
xxiv. The importance of cues (unintentional, verbal or
behavioral). (Example of boss who you are seeing for a
raise in salary – first he looks out the window, then
rubs his chin, yawns, leans back in his chair, drums the
desk with his finger and finally put his arm around your
back and escorts you out of the office, complimenting you
on the good job you are doing.)
xxv. Why can’t you just tell it like it is. Because to achieve
a collaborative result in a competitive environment, you
have to play the game.
xxvi. Styles of negotiating (win at all costs (Soviet style),
sign anything and renegotiate all the time (Maxwell
style) or negotiate for mutual satisfaction (win-win).
xxvii. Soviet style: six steps: extreme initial positions,
limited authority; emotional tactics; adversary
concessions viewed as a weakness; stingy in concessions;
ignore deadlines. How to deal with this: walk away,
negotiate in the same way and beat the other side at its
own game or redirect the negotiation to a win-win
situation.
xxviii. Maxwell style (also used by the Russians): Accept
everything and sign anything to please, then never
respect the contract and renegotiate all the time.
xxix. Win-win (negotiating for mutual satisfaction). Example
of piece of pie to be split between two brothers: parent
has one cut and the other choose. Shift focus from
defeating each other to defeating the problem. If the pie
is of a fixed size and one side wins and the other loses,
need to try to find ways to increase the size of the pie.
xxx. Lubricant demeanor. Harmonize or reconcile needs.
xxxi. Build trust (necessary in a continuing relationship;
develop trust at both the process stage and at the
negotiating event), gain commitment, manage opposition.
Never do anything that will destroy the other side’s
71
confidence in you. As Robert Maxwell was fond of saying,
“Confidence is like virginity. You only lose it once.”
xxxii. Game plan: Establish trust, obtain information, meet
the other side’s needs; use the other side’s ideas;
transform the relationship into collaboration; take a
moderate risk; get the other side’s help, achieve your
goals on the most favorable terms.
xxxiii. Opposition: Idea opponents can be dealt with on an
intellectual level; they should be seen as potential
allies. Visceral opponents disagree with you but also
disagree with you as a human being. Do not humiliate o
attack the other side’s “face” or he becomes a visceral
opponent. Jefferson “Nothing gives a person so much
advantage over another as to remain always cool and
unruffled under all circumstances.” Never judge the
actions and motives of others. The importance of
compromise. Use the collaborative approach and go for
solutions rather than constantly taking an adversarial
approach.
xxxiv. Who said “Never get angry. Never make a threat. Reason
with people”? Don Corleone – The Godfather.
c. Some Personal Examples of Negotiations
i.
Eurodisneyland: Collaborative negotiation; use of lead
negotiators.`
ii.
Gas stations and HLMs in Algeria: When I was criticized
for not being an Algerian lawyer, I said, “Help me.”
iii. KECO-Cogema-Gabon: At the outset I qualified myself as an
expert, partly by clever preparation, partly by bluff.
iv.
Bourriez-Beatrice Foods: Sometimes go for the totally
unexpected.
v.
Murray Abraham film negotiation: Turn a potential lawsuit
into a new film deal)
vi.
Sun Chemical-Pechiney: How to lose control and waste
timer and money – let the other side (especially if it is
a big multinational company) submit the first draft.
vii. Sun Chemical-Total: Horses for courses, team negotiation.
viii. Maxwell-C2E: The power of competition – three companies
trying to acquire my client’s company.
72
ix.
DLNI acquisition agreement: The necessity of using the
Wall Street firm’s tried and trusted model acquisition
agreement as a basis for drafting rather than inventing
something entirely new.
x.
Leonardo Finance: The need for flexibility in a highly
competitive environment.
xi.
AIC acquisition, settlement agreement: The importance of
thorough preparation at every step of the way.
xii. IDS-McCulloch: How to seduce the enemy and get what you
want with a smile.
xiii. Maurel-US distributor: Don’t bring “Bob the Closer” for
a deal you probably don’t want.
xiv. Mobil Oil–Marcor merger: Mega-teams for mega deals. The
client needs not only top legal advice, but an “insurance
policy”. Horses for courses.
xv.
Security Pacific–Chase: How to bridge culture gaps.
xvi. Peter Brook-Broadway production: Do away with the
complicated, patchwork model contract and do a haute
couture contact (sur mesure), but beware that you don’t
inadvertently forget something important hidden away in
the model’s boilerplate (like derivative music rights)
xvii. Citizens’ Fidelity-Givaudan: Win win. When there is
enough play, get more for almost everyone.
xviii. Givenchy-Tapie: How to bluff and get a big price from a
big ego.
xix. Givenchy-LVMH: How to be obnoxiously persistent and take
several bites of the apple (and get your fees paid by the
other side) (but it is good to have a friendly sidekick).
xx.
Givenchy-Christies’: When you know how badly the other
side needs the deal you can negotiate almost anything,
even beyond reason.
xxi. RVP gimmick: When you are negotiating for someone else
(particularly if you are a lawyer), negotiate a financial
or other quantifiable result that more than covers the
cost of your legal fees or work.
xxii. Maxwell-Suez: How to kill a deal with professional
courtesy and a smile.
73
xxiii. The Edward de Bono method of creative thinking (he
taught Boeing engineers how to become creative by asking
them to consider new designs that would be necessary if a
jet landed on its tail). Look at something from a very
different or sometimes even only a slightly different
point of view. Example of my purchase of a beach house in
Florida. Rather than negotiating the high price, I
accepted the price, which put the seller immediately at
ease, and then proceeded to negotiate what to him
appeared to be minor matters, the right to take most of
the furniture, guarantees concerning delicate matters
(roof, wiring, etc.) which if they posed a problem, would
ultimately result in a reduction of the price.
xxiv. Maxwel lible suit: Go from libel which cannot be shown
to a new concept of “systematic denigration”.
xxv. How to be “Bob the Closer”: Let your role as closer be
known at the outset. Make closing the deal your most
important goal. Make all reasonable compromises to close.
Be tenacious, persistent, creative and friendly.
Facilitate everything possible. Take on the burdensome
chores of the closing.
d. Further Considerations Concerning the Negotiation of
International Contracts
i.
Choice of strategy
Extremes: Start from excessive position or from the position of
accepting anything to get the deal. Negotiate based on your
objective needs. The latter is normally more efficient. Remember
also that often you will continue to deal with your partner over
time and it is best to develop and maintain a positive, long-term
relationship. If a contract is not even-handed and well balanced,
chances are it will not survive. Do not push too hard for a deal
if it is not in the cards. Watch out in take it or leave it
situations. Though you should always concentrate on achieving
your essential objectives, you should also try to take into
consideration the reasonable objectives of the other party. Look
for elements of mutual benefit. Win-win.
Always concentrate on substantive ideas and not on personal
problems with one or more negotiators on the other side. Avoid
personnel vendetta. Keep personal feelings and animosity out of
the negotiations. Brainstorm. Try to conclude and succeed without
having to go through marathon negotiations. Be objective.
Negotiate by phase and one step at a time.
There is a question of whether to begin with major or minor
points. Best general approach: Try to negotiate general
74
principals, the easy major points, then various open minor
points, then, building up a head of steam, go on to resolve the
remaining open major points. Once a matter has been decided at
whatever level, do not go back (effet de cliquet). However,
beware of leaving big difficult open points for the last minute,
since they may break the deal after having put in an enormous
amount of work. Also, it is not a good idea to put off unresolved
problems until later on in the contractual relationship, as the
relations may deteriorate over time and make solutions even more
difficult to find later. Be careful when confronted with a
standard form contract, especially in major negotiations with
government agencies (need to negotiate appropriate outs from such
contracts). Always be prepared with fallback positions and
alternative language.
ii.
Techniques and tactics
Go for the “home base” advantage and negotiate when possible on
your own home turf unless there is a practical advantage being at
the other party’s premises (e.g., to get first hand observations
of the other party’s operations). (Example of NOGA arbitration in
the New York offices of the Russian Federation’s law firm.) You
have better logistics, will not be tired from travel or jet lag,
there will be a psychological advantage, you have more people
available for negotiation, administrative, secretarial work, your
decision makers are nearby, etc.
Advantages of a collective negotiation and teamwork (but, if so,
you need a lead negotiator (example of EuroDisneyland
negotiations). Use of the “closet negotiator” technique.
Negotiations should take place in a calm environment. Try to
mastermind and control the negotiations. Prepare the first draft.
Use appropriate techniques to gain time: ask that a question be
repeated, ask for a translation, say you need a break to obtain
instructions, etc. Be prepared to take the hard blows from the
other side. Don’t be taken aback by any theatrical presentation
by the other side. Imitate the Sphinx. Don’t be too candid. Play
your cards close to the chest, but try to give the impression you
are being open and transparent. Be aware of any important
cultural considerations.
In trying to understand where the other side is coming from,
remember that Americans and Germans are rather monochromic – they
deal with one matter at a time and are explicit. French and other
Latins are polychromic – they deal with several matters at the
same time and are less factual and more elliptic. So you need to
be like a chameleon - able to adapt rapidly.
The choice of language is critical. Each language carries with it
its own mindset and particular legal framework and expressions
75
(anticipatory breach, estoppel, trust). Need to provide in the
contract which language will govern in the event of a dispute.
Negotiations should take place in a positive spirit (not Soviet
style). If a party insists on a point or certain language and
such is acceptable, be flexible and accept. Use your sense of
humor to break the ice at difficult times. Negotiate concretely.
Give concrete examples of what you are trying to achieve. Use
check lists. Take extensive notes. Keep both in your archives.
e. Mastering the Pre-contractual Phase
i. Legal principles
French law
Pre-contractual liability arises in tort law (responsibilité
délictuelle) under Articles 1382 and 1383 of the Civil Code 1382:
1382: “Tout fait quelconque de l’homme, qui cause
à l’autrui un dommage, oblige celui par la faute
duquel il est arriver de le répareré.”;
1383: “Chacun est responsible du dommage qu’il a
cause non seulement par son fait, mais encore par
sa negligence ou par son imprudence.”
This follows naturally from the obligation to negotiate in good
faith. The right to damages in tort is considered as mandatory
and the parties cannot waive such right in advance. This means
that if one party abusively breaks off negotiations, he can be
liable to the other party for damages. Such damages normally
amount to at least la perte d’une chance. There must, of course,
be an adequate causation between the breaking off of the
negotiations and the damages sought. The courts have full
authority to decide if there is causation and to determine the
amount of damages.
Malgré son caractère unilatéral, une lettre d’intention peut,
selon ses termes, lorsqu’elle a été acceptée par son
destinataire et eu égard à la commune intention des parties,
constituer à la charge de celui qui l’a souscrite un
engagement contractuel de faire ou de ne pas faire pouvant
aller jusqu’à l’obligation d’assurer un résultat; il
appartient au juge de donner ou restituer son exacte
qualification à un pareil acte sans s’arrêter à la
dénomination que les parties en auraient proposée. Comm. 21
déc. 1987, 112, note Brill ; JCP 1988. II21113, concl.
Montanier.
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Anglo-Saxon and German law
In German law, there is the notion of culpa in contrahendo that
requires parties to negotiate in good faith. An abusive breaking
off of negotiations can give rise to pre-contractual liability.
The situation is somewhat less clear in Anglo-Saxon law. Normally
an agreement to agree is not considered to be enforceable.
However, notions such as detrimental reliance or unjust
enrichment can lead to the granting of damages in appropriate
situations. If the parties want a letter of intent or the like to
be non-binding, they should so state clearly in the document.
ii. Types of pre-contractual documents
Letters of intent
Terminology: gentleman’s agreement, deal memorandum, memorandum
of understanding (MOU), heads of agreement, letter of intent
(protocole d’accord). US practice is to state that the document
is non-binding:
The purpose of this letter is to present our proposal and
outline the basic terms of the transaction. Except as
provided otherwise herein, any pre-contractual liability or
any express or implied business combination, partnership or
venture of the parties under the principles outlined in this
letter is expressly excluded.
Offers (pollicitations)
Under civil law, an offer can be binding on the offeror for a
certain period, but requires consideration in the US. There is an
issue as to when and how an offer may be withdrawn. Normally
revocation must reach the offeree before acceptance has been
dispatched (see, e.g. CISG 16.1, Unidroit 2.4 and PECL 2.202).
Note that offers often contain conditions precedent (conditions
suspensives).
As a practical matter, the negotiator should be prepared to deal
with two matters: escape clauses – ways to withdraw an offer and
how to respond if an offer is rejected.
Other pre-contractual documents
Other pre-contractual documents include: right of first refusal
(pacte de preference), exclusivity agreement, confidentiality
agreement, non-competition agreement, agreement to reimburse
expenses, options (promesses de vente ou d’achat). Each document
should clearly state its meaning.
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Draft contracts
In practice, there is rarely an offer followed by an acceptance.
After a letter of intent, the parties usually exchange and
negotiate successive drafts of the agreement in question. Try to
submit the first draft and keep control of the drafting. Be the
scribe for the parties. Remember, however, the contra proferentum
rule. Use the parties’ existing models, if this is appropriate.
Sometimes it is necessary to follow models, especially in certain
financing documents. This is because of the presence of crossdefault clause. When there are cross-default clauses, it is best
to try to have the default conditions identical or similar in the
different contracts. Keep all your successive drafts. Always be
prepared to offer alternative language to provisions of a draft
that are not acceptable. Keep notes which can be redone and
perhaps even signed by the parties as formal minutes of a
negotiating session. Keep detailed and organized archives.
Remember Art. 1156 of the Civil Code: “On doit dans les
conventions rechercher quelle a été la commune intention des
parties contractants plutôt que de s’arrêter au sens literal des
termes.” Compare with the notion of sanctity of contract in
common law. If the contract is clear on its face, a court will
usually not look behind a clear meaning to find another intent.
Final draft
In Anglo-Saxon practice, the
binding contract. Be careful
is an intent to contract and
contract is deemed to exist.
contract. Swiss law contains
Art. 2):
final draft is usually not yet a
because under civil law, once there
agreement on essential points, a
When in doubt, state there is no
an even more explicit provision (CFO
“Si les parties se sont mises d’accord sur tous les points
essentials, le contrat est reputé conclu, lors meme que des
points secondaires ont été réservées. A défaut d’accord sur
les points secondaires, le juge les règle en tenant compte
de la nature de l’affaire.
2. Drafting an International Contract
Remember that in an international contract, the contract is the
law of the parties. An international contract should be able to
stand alone without reference to any law. It is a check list for
the drafter, a bible for those who carry out the contract and a
guide in the event of dispute. Americans, in particular, have a
tendency to live by the spirit and the letter of the written
contract, especially when it has been heavily negotiated.
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It is usually better to opt for a long, rather than a short,
contract, provided it does not contain useless verbiage and takes
into account applicable custom and usage and local practices.
Something that goes without saying goes better said. Use belts
and suspenders, but do not overdo it. Set forth below is a
general check list which can be used in most international
contracts. The list covers the general contractual and
miscellaneous typical contractual clauses.
a. The contractual framework
j. Form
Requirements as to form depend on the lex situs (examples:
“Statute of Frauds” requirements of the UCC requiring contracts
involving more than a certain amount to be in writing; necessity
of a notarized act for real estate transactions in France).
Necessity of a writing. While, in certain cases a writing may not
be necessary, it is always best to put an international contract
in writing.
Internet contracts
There is an initial question as to when a contract is formed. The
European Directive of February 28, 2000 on electronic commerce
provides that a contract is formed upon the receipt of the
acceptance (Art. 11). A French law of March 13, 2000 and a decree
of March 30, 2001 integrated into the Civil Code provide that an
electronic signature has the same value as a signature on paper.
Article 1361-1 of the Civil Code, thus, now provides:
L’écrit sous forme électronique est admise en prevue au meme
titre qu l’écrit sur support papier, sous réserve que puisse
être dûment identifiée la personne don’t il émane et qu’il
soit établi et conservé dans les conditions de nature à en
garantir l’intégralité.
A second question relates to the law applicable to Internet
contracts. As between professionals, the parties are free to
stipulate what law is applicable and in the absence of any
stipulation, The 1980 Rome Convention applies. Article 4.1 of
this convention designates the law of the country with which the
contract is “most closely connected”. Article 4.2 provides that
it is “presumed the contract is most closely connected with the
country where the party who is to effect the performance which is
characteristic of the contract has, at the time of the conclusion
of the contract, has his habitual residence, or, in the case of a
body corporate or unincorporated, its central administration
(siege).
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The CISG provides in Article 7 (2):
Questions concerning matters governed by this Convention
which are not expressly settled in it are to be settled in
conformity with the general principles on which it is based
or, in the absence of such principles, in conformity with
the law applicable by virtue of the rules of private
international law.
In B to C contracts, the parties are free to determine the
applicable law. However, their choice must not provide a consumer
of protection afforded by the country in which he has his
habitual residence. If the contract is silent, the law of the
place of the consumer’s habitual residence is applicable.
ii. Signature of contracts (the closing)
It is best to have contractual packages of all the closing
documents well prepared beforehand.
At the closing, there are three considerations concerning
signatures. First, the persons signing need to be clearly
identified. Second, powers to sign on behalf of a company or
other person need to be verified. For a company, there should be
a certified resolution of the board of directors. Third, there is
the question of where to sign. The European practice is to
initial each page (including all annexes) and sign only the
signature page or pages. The American practice is to sign only
the signature page. British practice is to bundle all the pages
into a bound package and sign only the signature page. There is a
generally accepted practice of being able to sign contracts in
counterparts. This is often stated in the contract. Remember the
French practice of “lu et approuvé” or “bon pour” in certain
contracts. Electronic signature is acceptable, but it is best to
use a system that clearly identifies the signing party (e.g.,
Data Encryption System).
See also European Directives of December 13, 1999 and June 8,
2000.
iii. Language
Importance of the choice of the language of the contract.
Note: French employment agreements must be in French.
If a contract is drafted in two or more versions, which governs?
The contract usually says which governs, that both versions have
equal value or that one governs, but the other may be used if
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necessary for clarification. Heinz example of having English
version on one side of the page and the French on the other.
The choice of language can be relevant in an arbitration. For
example, Article 16 of the ICC Arbitration Rules provides:
In the absence of an agreement by the parties, the Arbitral
Tribunal shall determine the language or languages of the
arbitration, due regard being given to all relevant
circumstances, including the language of the contract.
iv. Title of contract
Need to avoid an erroneous or insufficient titles. In the Noga
vs. the Russian Federation arbitration, there was extensive
debate with respect to a document entitled “Loan Agreement” which
was, in fact, a complex barter agreement and not a loan
agreement. The misnomer created ambiguities which were exploited
by the Russian Federation in the arbitration.
As concerns titles, it is often provided that titles and
subtitles are used for convenience purposes only and shall not
affect the meaning or interpretation of the contract.
v. The parties
It is necessary to know if the parties have the capacity to
consent validly to the contract.
As concerns individuals, the question of capacity is determined
by the law of the country of which he is a citizen. The validity
of consent is determined by the law applicable to the contract.
As concerns, legal entities, questions as to the power and
authority to contract depend on the lex societatis. In the US,
this means the law of the place of incorporation. In France, it
is the law of the siege réel. There can also be a question as to
the recognition of a legal entity in different countries. See,
for example, the Hague Conventions concerning the recognition of
foreign companies and foundations (1956),trusts (1985). There are
also provisions in the European Union treaties concerning the
mutual recognition of companies and legal entities.
One must also verify the capacity of individuals to act on behalf
of a legal entity. In France, the verification is simplified if
the person signing is the President as the president has full
power and authority pursuant to law. In the United States, you
can have a President, a Chief Executive Officer, a Chief
Operations Officer, a Chairman of the Board, etc. The powers of
each depend on the company’s articles of incorporation and bylaws (necessity of procuring an “incumbency certificate”).
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It is also necessary to verify the exact identities of the
parties. Beware of companies with parents, subsidiaries or sister
companies bearing the same name.
If a party is a government or a governmental entity or agency,
verification can sometimes be difficult. (Example of an agreement
by the Minister of Finance of Liberia being later held not to
bind the Government.) Sometimes it is even necessary to verify if
appropriate administrative measures have been taken or if the
project has been properly included in a government budget
providing authorization and funds for the project in question.
(Examples of Letco and Noga.)
Watch out for exorbitant clauses inserted by a government.
Sometimes special laws or even treaties of establishment) are
necessary (examples of KECO, IMM, Noga and EuroDisneyland).
Finally, there is the sensitive legal and political question of
the immunity of a sovereign state from jurisdiction and/or
execution. Of court judgments or arbitration awards. Distinction
between acts state acts and commercial activities.
vi. Annexes
Annexes can be used for many reasons - for secondary or technical
matters, for accompanying agreements, for political reasons, etc.
Be careful with side letters that set forth some special
provision, exception, etc. Side letters can be valid under civil
law, since one looks to the overall intent of the parties.
However, Article 321 of the French Civil Code provides that “les
contre-lettres ne peuvent avoir leur effet qu’entre les parties
contractantes; elle n’ont point d’effet contre les tiers.” Also
Article 1840 of the French Code général des impôts provides as
null and void:
toute contre-lettre ayant pour objet une augmentation du
prix stipulé dans le traité de cession d’un office
ministériel et toute convention ayant but de dissimuler
partie du prix d’une vente d’immeubles ou d’une cession d’un
fonds de commerce ou de clientèle ou de cession d’un droit à
un bail ou du bénéfice d’une promesse de bail portant sur
tout ou partie d’un immeuble et toute ou partie de la soulte
d’un échange ou d’un partage comprenant des biens immeubles,
un fonds de commerce ou une clientèle.
It is sometimes more difficult to give effect to side letters in
American practice especially if the contract contains an “entire
agreement” clause:
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This Agreement and the annexes hereto and their respective
annexes constitute the entire agreement of the parties and
supersede any and all prior agreements of the parties with
respect to the subject matter thereof. No amendments,
alterations or waivers of any of the terms of this Agreement
shall be binding unless the same shall be in writing and
duly executed by both parties.
vii. Hierarchy of terms
Special terms generally prevail over general terms. Specific
contracts prevail over framework agreements (contrats cadres).
11.
Standard international contract provisions
Set forth below is a description of typical standard provisions
(sometimes referred to as “boilerplate”) that appear in most all
“international” contracts.
i.
Title of contract
Define the contract as the “Contract” or the “Agreement” so that
every time you refer to the agreement with a capital letter, you
know you are talking about this agreement.
ii.
The parties
Define the parties. If an individual, put his nationality and
usual residence. If a corporation, put: the type of corporation;
where it is incorporated (if a US company) or where it has its
registered office (siege) if a French company; its capital; and
RCS registration number (for a French company; and who is signing
for the company and in what capacity – President, duly appointed
agent, etc.
iii. Whereas clauses (exposé)
It is strongly recommended to use whereas clauses. They give the
general background and contractual framework, show the intent of
the parties, describe consideration, set forth the parties’
objectives and the overall spirit of the contract.
iv.
“Now, therefore” clause
NOW, THEREFORE, in consideration of the above and the
mutual covenants and agreements contained herein and in
the annexes hereto and for other good and valuable
consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties hereto hereby agree as
follows:
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This is standard American language used to indicate the
consideration involved.
v.
Purpose of contract
It is useful to describe the purpose of the contract at the very
beginning. The purpose clauses may define the parties’ reciprocal
obligations, if these have not already been clarified in the
whereas clauses.
vi.
Definitions
Various concepts or words which are going to be used throughout
the contract should be defined and thereafter referred to in the
same manner. Such terms can include Term (meaning the term of the
agreement), Contractual Year, Products, Price, Territory, etc.
International contracts often have provisions that deal with a
party’s affiliate or subsidiary. For example, it is often
provided that a party may not assign the contract except to an
affiliate or subsidiary. These terms are generally defined as
follows:
Affiliate
means any corporation, partnership, association, or other
entity with respect to which a party, directly or indirectly
through a subsidiary, has not less than a majority beneficial
ownership, but only if that corporation, partnership,
association, or other entity expressly agrees in writing to
be bound by this Agreement, and only while that ownership
relationship exists.
Subsidiary
means, with respect to any Person,
(i) any corporation, association or other business entity of
which more than 50% of the total voting power of shares of
capital stock entitled to vote in the election of directors
thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other
subsidiaries of that Person (or a combination thereof) and
(ii) any partnership (a) the sole general partner or managing
general partner of which is such Person or a subsidiary of
such Person or (b) the only general partners of which are
such Person or of one or more subsidiaries of such Person (or
any combination thereof).
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vii. Term of agreement
Usually the term of the agreement is set forth in a separate
clause.
You need to define the effective date (either: on ____ or as of
____. Such effective date may be subject to the fulfillment of
various conditions precedent (see below).
You also need to define the expiration date.
You should provide what happens upon the expiration. You may want
to provide for tacit renewal (tacite reconduction).
Unless otherwise terminated pursuant to Article __ below,
the Agreement shall commence as of the date hereof and shall
remain in full force and effect for an initial period of
_______ from such date and shall be automatically renewed
for additional periods of _______, unless notice of
termination is given by either party _____ days prior to the
anniversary date.
viii. Conditions precedent
The coming into force of the contract may be subject to various
conditions precedent (conditions suspensives). These may include
appropriate financing (for example, in contracts for the purchase
of real estate), the signing of accompanying agreements, the
satisfactory completion of due diligence, the truth and accuracy
of all the representations and warranties (see below) at the date
of the signature and/or the closing, the receipt of a legal
opinion, the receipt of any required government approvals, the
successful completion of technical tests, a favorable tax ruling,
etc. You should normally provide for a specific cut-off period by
which the conditions must be fulfilled. Note that under French
law, you cannot have any conditions that are purement
potestatives.
ix. Representations, warranties and guarantees
Representations and warranties (déclarations et guaranties) are
included in most all international agreements. If the signing of
the agreement and the closing are on different dates, it is
usually specified that the representations and warranties shall
be true and accurate as of both dates (and in any event at the
closing date).
The following minimum representations and warranties are usually
included in most agreements:
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The __________ and the ___________ represent and warrant to
each other as follows:
_.1. The ____________ is a company duly organized, validly
existing and in good standing under the laws of ___________
and the ____________ is a company duly organized, validly
existing and in good standing under the laws of
______________, and each company has the requisite authority
to enter into this Agreement and consummate all the
transactions contemplated for it herein.
_.2. The execution and delivery of this Agreement and any
and all other agreements or documents relating hereto and
the consummation of all the transactions contemplated herein
have been duly and effectively authorized and approved by
all requisite action of the respective appropriate corporate
organs of the ________ and the ______________.
_.3. This Agreement shall be duly executed and delivered by
the __________ and the ________________ and shall be a valid
and binding obligation of the _____________ and
the______________, enforceable in accordance with its terms.
_.4. The consummation of the transactions contemplated
herein shall not result in a breach or violation of, or
default under, any judgment, decree, mortgage, indenture,
agreement or other instrument applicable to the ____________
or the ____________________.
_.5. The consummation of the transactions contemplated
herein shall not result in a violation or infraction by the
___________ or the ______________ of any statutes, rules or
regulations.
Representations, warranties and guarantees in the context of an
acquisition of shares or assets of a company is referred to in
French as quaranties d’actif et de passif. See the due diligence
questionnaire set forth below which details the representations
and warranties which are generally given in acquisition
agreements for the purchase of a block of shares in a
corporation.
Representations and warranties often contain a series of positive
and negative covenants (engagements de faire ou de ne pas faire).
Positive covenants include obligations to provide all necessary
documents and information, to “use best efforts”, “take all
necessary steps” or take other specified actions, to notify
government authorities, to inform of a change in control or of
any material adverse changes, to assist the other party with
respect to specified matters, etc.
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Negative covenants include obligations not to sell assets, not to
modify the business before the closing, not to declare dividends,
not to conclude any contract or undertake any commitment above a
certain specified amount, not to act in any way outside the
normal course of business, not to compete, not to solicit, etc.
The guarantees in the expression “representations, warranties and
guarantees” refer to provisions for indemnification if there is
any breach of the representations and warranties (including any
positive or negative covenants). Here is an example of a simple
indemnification clause:
Each party shall indemnify and hold harmless the other party
from and against any claims, liabilities, losses, costs and
expenses arising out of or attributable to the breach or any
representation, warranty or agreement made herein by such
other party.
The indemnification provisions are usually hotly negotiated and
have become quite sophisticated. Appropriate notification must be
given without delay to the indemnifying party. Remedies may
include damages for the breach, partial or total restitution and
penalties and interest. To back up indemnification, part of the
purchase price is often put in an escrow reserve for a certain
period of time.
The contract may provide for liquidated damages. Remember that
French (Article 1152 Code civil) and American law rules with
respect to liquidated damages. Normally a properly drafted
international contract can escape the application of such rules,
but it is best to indicate in the contract some justification or
explanation of the basis for calculating damages.
x. Confidentiality
Each party to a contractual negotiation is bound by a general
duty of confidentiality not to disclose or use for its own
personal interest confidential information, trade secrets or the
like which may have been communicated to it during such
negotiation. This obligation exists whether or not a contract is
concluded and even after the end of a contract. See PICC 2.16 and
PECL 2.302.Likewise, confidential information exchanged by
parties during the life of the contract should also remain
confidential and not be disclosed by either party.
Confidentiality clauses often go to great detail in describing
specific information that the parties may consider as
confidential. Here is a typical example of this positive and
negative covenant (brief version).
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Each party shall keep totally confidential and shall not
disclose the terms and conditions of this Agreement or the
transactions envisioned herein or any documents or
information exchanged among the parties to any third party
nor make any public announcement relating thereto without
the prior written consent of the other party, except where
such disclosure is required by law and then only after
notice to the other party.
Another example:
All books, records, reports, accounts, data and other
information relating to the activities envisioned hereunder
shall be treated by the Parties as confidential and shall
not be disclosed in whole or in part to third parties,
except with the prior written consent of all the Parties.
Notwithstanding the foregoing, the Parties may make
disclosures to governmental entities, financial
institutions, affiliates, subcontractors or assignees, but
only to the extent that such disclosures are absolutely
necessary, and provided that such third parties agree in
advance in writing to maintain the confidentiality of all
information disclosed.
An example of a more detailed confidentiality clause:
The term "Confidential Information" refers to this Agreement
and the subject matter of this Agreement and to all
information which one party furnishes or makes available to
the other party and all information related to one party's
business which the other party and all information related
to one party's business which the other party acquires in
the course of performing its obligations under this
Agreement. Disclosure of Confidential Information by a party
is forbidden except in the following circumstances:
(i) to employees and outside parties, but only to the
extent necessary to fulfill its obligations under the
Agreement;
(ii) if the information disclosed is already publicly known
through no fault of the disclosing party;
(iii) if the information is required to be disclosed by law
or legal process, provided that the party, from whom
disclosure is promptly required, gives the other party
notice and agrees to cooperate with the non-disclosing party
as that party may reasonably request to oppose disclosure;
and
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(iv) in connection with a party's initial public offering;
provided, however, that the disclosing party shall take
reasonable measures to keep Confidential Information
confidential, including requesting confidential treatment of
this Agreement by any governmental authority and/or any
other person or third party reviewing the Agreement in
connection with the public offering. Under no circumstances
may [Party A] disclose Confidential Information including,
but not limited to, any information obtained during [Party
A]'s [Party B] site visit, to any of [Party A]'s outside
directors; provided, however, that [Party A] may disclose
general financial information (i.e., sales of Product) to
its outside directors to the extent required by law. [Party
B] (including its principals or affiliates) agrees not to
use [Party A]'s customers' data for any commercial or
improper purposes.
xi. Non-competition agreement
Non-competition clauses are frequently seen in numerous
contracts. To be effective, they should, in general, be
reasonable as to time and territory covered and cannot be in
violation of various mandatory laws such as national and
international antitrust and competition law rules and
regulations. (See, for example, Articles 81 and 82 of the
European Union treaty - formerly Articles 85 and 86 of the Rome
Treaty – which are based on American antitrust law that prohibit
certain agreements which restrain trade or harm competition in
the Community or which constitute an abuse of a dominant
position.)
Here is a typical example of this negative covenant:
The ____________ agrees not to compete with the Company (or
_______) for a period of five years from the date hereof. In
this respect, the ____________ shall not, either directly or
indirectly, itself or through any individual or legal
entity, compete with the Company (or ______)in the
development, production and/or sale of ______ and any other
products developed, manufactured and/or sold by the Company
(or _____), in any manner whatsoever, and as a general
matter, shall not act on behalf of any enterprise, entity or
business having an activity identical or similar to that
mentioned above and, consequently, shall not work with or
have any interest, of any nature whatsoever, in such
activities and/or with respect to, such enterprises,
entities or businesses, and, in particular, without limiting
the generality of the foregoing:
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-by the creation and/or holding of shares and/or any form of
interest in an enterprise entity and/or business which
corresponds to the above definition; and
- by engaging in any activity of any nature whatsoever for
or on behalf of an enterprise, entity or business
corresponding to the above definition.
The above undertaking shall apply to the following
countries: _______________________.
xii. Non-solicitation agreement
This clause prevents one party from soliciting employees of the
other party during and/or after the agreement.
Except as may otherwise be agreed in writing by the parties
hereto, the _______________, hereby agrees not to solicit,
in any manner whatsoever, directly or indirectly, for a
period of five years from the date hereof, any client,
supplier or agent of the Company whether they exist at the
date of solicitation or at any time prior to the fifth
anniversary hereof.
In the event of a breach of the above prohibition, the
_____________ shall be entitled to take all legal means to
cause such prohibited competition to cease and also to claim
from the ______________, as well as any other individuals or
companies involved in the unfair competition, before any
court with jurisdiction, an indemnity corresponding to the
damages incurred.
xiii. Suspension
The non-performance by one party may enable the other party to
suspend the contract (see discussion concerning anticipatory
breach).
A party may also suspend the execution of a contract in the event
of force majeure. Typical force majeure clauses are as follows:
Neither party hereto shall be liable to the other nor shall
be deemed in default hereunder for failure or delay to
perform any of its agreements or obligations caused by or
arising out an event of force majeure. An event of force
majeure is any unforseeable and irresistible act, legal or
factual situation beyond the control of the parties.
A party affected by an event of force majeure shall promptly
notify the other party, supplying full information and any
supporting public documents relating to such event. An event
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of force majeure may be pleaded only during the duration
thereof and the party concerned shall use its best efforts
to avoid or limit any damages and to remedy its failure or
delay to perform as promptly as possible.
A party affected by an event of force majeur which does not
notify the other party as provided above shall lose any
right it may have to invoke such act of force majeur.
***
Neither Party shall be liable for failure to perform or
delay in performing any obligation under this Agreement if
the failure or delay is caused by any circumstances beyond
its reasonable control, including but not limited to acts of
god, war, civil commotion or industrial dispute. If such
delay or failure continues for at least 7 days, the Party
not affected by such delay or failure shall be entitled to
terminate this Agreement by notice in writing to the other.
Several important elements should be remembered. First, the
definition of force majeure includes the key words unforeseeable,
irresistible and beyond the control of the parties. Second, a
party affected by an event of force majeure must so notify the
other party promptly. Third, performance is excused only during
the continuance of the force majeure. Finally, the affected party
must also act in good faith to mitigate any damages and to remedy
its failure to perform as quickly as possible.
An international contract, especially if dealing with a State can
also include a hardhip clause:
If a material change occurs to the Contractor's economic
benefits after the effective date of the Agreement due to
the promulgation of new laws, decrees, rules and regulations
made by the Government of _________, the Parties shall
consult promptly and make necessary revisions and
adjustments to the relevant provisions of the Agreement in
order to maintain the Contractor's normal economic benefits
hereunder.
xiv. Termination (résiliation anticipée)
As we have seen in reviewing the American, French Unidroit and
European rules, an aggrieved party normally has the right to
terminate a contract in the event of a “fundamental non
performance”. This is also referred to as a material or
substantial breach of contract. In practice, an international
contract usually contains its own specific language with respect
to the right to terminate. If appropriate, its lists specific
breaches that are considered as material. It usually requires a
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notice of the breach and gives the breaching party the right to
cure the breach within a given period of time. It also sets a
deadline for termination. Here is an example:
In the event of a material breach of the obligations of one
of the parties, which breach is not cured within thirty days
after notice thereof, the other party may, within thirty
days of its discovery of such breach, notify the party of
its termination of this Agreement.
An agreement may also provide for termination in the event the
closing does not occur by a specified date:
In the event the closing shall not occur on or prior to
_________, either party may at any time thereafter terminate
this Agreement forthwith by giving prior written notice to
that effect to the other party. Upon the giving of such a
notice, this Agreement shall terminate, and neither party
shall have any further liability or obligation to the other
party with respect hereto.
xv. Clauses which survive the termination of the contract
Certain contractual provisions will normally continue to bind the
parties even after the term or termination of the contract. These
include obligations of confidentiality, non-competition and nonsolicitation described above. There may also be a requirement of
restitution of documents or property and a final accounting
between the parties. Clauses concerning settlement of disputes
and applicable law will also continue to be applicable in the
event of a dispute. French case law has, for example, determined
that an arbitration clause in a contract has a valeur percée
which is binding on the parties not only after the termination of
the contract, but also if the contract fails and never even comes
into force. In France, there is also a ten-year liability in
construction contracts.
Any termination of this Agreement (howsoever occasioned)
shall not affect any accrued rights or liabilities of either
Party nor shall it affect the coming into force or the
continuance in force of any provision hereof which is
expressly or by implication intended to come into or
continue in force on or after such termination.
xvi. Independence of the parties
It is often necessary to confirm that the parties are acting as
independent contractors and that one party is not the agent of
the other and cannot bind the other. This is to avoid a party’s
becoming a permanent establishment as defined in the
international tax treaties for the avoidance of double taxation.
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Both parties shall act as principals in all respects
concerning this Agreement and neither of them shall hold
itself out as the agent of the other. Each party shall keep
the other party hereto free from all expenses and costs
other than those as may be specifically authorized by the
other in writing.
***
The parties acknowledge that they are acting as independent
contractors and that nothing in this Agreement shall be
deemed to constitute a partnership, joint venture, agency
relationship or otherwise between the parties.
xvii. Assignment of contract or of rights and obligations
under the contract
It is often provided that a party may not assign all or part of
an agreement.
Neither Party shall assign or transfer this Agreement or any
part of its rights or obligations under this Agreement
without the consent of the other Party.
Sometimes there are exceptions for assignments to affiliated
companies, but in such cases it is usual to have the transferring
party remain liable, especially if the transferee may not be able
to perform fully:
No assignment of this Agreement or of any rights or
obligations hereunder may be made by either party (by
operation of law or otherwise) without the prior written
consent of the other party and any attempted assignment
without the required consents shall be void; provided,
however, that each party may validly assign any of its
rights and obligations hereunder to an Affiliate of such
party without the prior written consent of the other party;
provided, that such assigning party shall remain liable for
any and all obligations assigned to such Affiliate.
xviii. Applicable law
For a French contract, i.e., a contract entered into in France
and to be performed entirely in France, French law will be
applicable. However, in an international contract, the parties
can choose which law, French, some other national law or other
rules will be applicable. French courts will generally apply the
law chosen by the parties. There are two ways of providing how
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French law is applicable to an international contract: either
with or without regard to French conflict of law rules.
The applicable law shall be the express provisions of this
Agreement and the intent of the parties as expressed herein,
as may be supplemented, if necessary, by principles of
French law.
***
In all respects, including all matters of construction,
validity and performance, this Agreement shall be governed
by, and construed and enforced in accordance with, the laws
of France applicable to contracts made and performed in
France, without regard to French principles regarding
conflict of laws.
***
Any interpretation of, or resolution of any dispute under
this Agreement shall be governed by and construed in
accordance with the laws of the State of New York, U.S.A.,
without regard to any conflict of law provisions.
***
This Agreement and all amendments hereof and waivers and
consents hereunder shall be governed by the internal Laws of
the State of New York, without regard to the conflicts of
law principles thereof which would specify the application
of the law of another jurisdiction.
It may be desirable to state that the contract is to be governed
by its terms and provisions and that a national law is to be
considered only if necessary: and then perhaps only to the extent
that the national law applied is consistent with international
custom and usage.
The express terms and conditions of this Agreement and the
intentions of the parties as expressed herein shall
constitute the applicable law between the parties and shall
be supplemented, but only to the extent necessary, by
applicable provisions of________ law (which are consistent
with international custom and usage).
***
Except as provided above, the validity, construction and
performance of this Agreement shall be governed by and
interpreted in accordance with the laws of the Republic of
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__________ and with generally accepted international
commercial laws, practices custom and usage.
***
The following is an example of a stabilization clause intended to
protect a private contracting party from changes in local laws.
This Agreement shall constitute the law between the parties
notwithstanding any present or future provisions of
_________ public or private law.
xix. Resolution of disputes
Under French law, the parties to a commercial contract may
provide for resolution of disputes by arbitration. A civil
contract dispute may be submitted to arbitration only after the
dispute has arisen. Parties to any type of international law
contract can provide for arbitration of all disputes.
Litigation in local courts
Any disputes arising out of or in connection with this
Agreement shall be submitted to the exclusive jurisdiction
of the French Commercial Courts. (or “to the Commercial
Court of Paris”)
ICC arbitration
All disputes arising out of or in connection with the
present Agreement shall be finally settled under the Rules
of Arbitration of the International Chamber of Commerce by
one or more arbitrators appointed in accordance with the
said rules.
***
International ad hoc arbitration
__.1. The parties shall endeavor to resolve amicably any and
all disputes arising out of or in connection with this
Agreement and undertake to meet as soon as either party
advises the other of the existence of a dispute. If the
parties are unable to meet or to settle their dispute
amicably, such dispute shall be referred to arbitration
pursuant to __.2 below.
__.2. If at any time during the continuance of this
Agreement, there shall be any question or dispute with
respect to the construction, meaning or effect hereof, or
any provision hereof, or arising out of or in connection
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herewith, or concerning the rights or obligations hereunder,
which cannot be resolved amicably, such question or dispute
shall be referred to: (a) a sole arbitrator to be selected
by the parties hereto; or (b) failing agreement in selecting
such arbitrator within seven (7) days, to a panel of three
arbitrators, one to be appointed by the ___________, one by
the ___________ and the third by the two arbitrators so
chosen. The arbitration shall take place in _______________
and shall be conducted in the ____________ language.
__.3. The award rendered by such sole arbitrator or a
majority of the three arbitrators, as the case may be, shall
be final and binding on the parties and judgment upon such
award may be entered in any court having jurisdiction.
American Arbitration Association
Any controversy or claim arising out of or relating to this
contract, or the breach thereof, shall be settled by
arbitration in accordance with the Commercial Arbitration
Rules of the American Arbitration Association, and judgment
upon the award rendered by the Arbitrator(s) may be entered
in any Court having jurisdiction thereof.
***
In the event of a dispute, claim, question or disagreement
arising from or related to this Agreement, you agree with us
to use our respective best efforts to reach a just and
equitable mutually acceptable solution. If unable to reach
such a solution within a period of 60 days, then you further
agree that either of us may, by giving notice to the other,
submit the matter to binding arbitration in the state of New
York, administered by the American Arbitration Association
under its Commercial Arbitration Rules by a panel of three
arbitrators appointed in accordance with such rules. You
further agree that a judgment of any court having
jurisdiction may be entered upon the award for resolution.
Venice Court of National and International
Arbitration
Any dispute arising out of or connected with this Contract
regarding in particular, but without prejudice to the
generality of the foregoing, its conclusion, execution,
validity, breach, termination and determination of damages,
shall be finally settled under the Rules of the Venice
Court of National and International Arbitration by one or
more Arbitrators appointed in accordance with said Rules.
Arbitration Institute of the Stockholm Chamber of
Commerce
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Any dispute, controversy or claim arising out of or in
connection with this Agreement, or the breach, termination
or invalidity thereof, shall be settled by arbitration in
accordance with the Rules of the Arbitration Institute of
the Stockholm Chamber of Commerce.
The arbitral tribunal shall be comprised of ___ arbitrators
(a sole arbitrator).
The place of arbitration shall be _.
The language(s) to be used in the arbitral proceedings shall
be -.
Clause in Noga vs. the Russian Federation:
In case of dispute arising during the execution of this
Agreement the Borrower (Russia) and the Lender agree to
concert between themselves to reach an amicable settlement
to such dispute. Should agreement not be reached by the
parties, and notwithstanding other remedies, differences
arising may be submitted to the Arbitration of the Chamber
of Commerce of Stockholm for decision. Such Arbitration
shall be argued by two arbitrators one appointed by each
party who in turn will appoint an umpire and the dispute
shall be judged in accordance with Swiss Law. The decision
reached under such Arbitration shall be final and binding on
both parties. The parties renounce to appeal against such
Arbitration sentence and the Borrower waives any rights to
immunity with respect to enforcement of any Arbitration
sentence issued against it in relation to this Agreement.
One should also consider including in an arbitration agreement
appropriate provisions with respect to: number, nationality and
qualifications of arbitrators; “terms of reference”; language(s)
of the arbitration; rules of evidence; the extent of discovery;
written and oral pleadings; hearing of witnesses; expertise
proceedings; scheduling; whether the arbitrators may act ex aquo
et bono or as mediators; possibility of provisional remedies from
local jurisdiction during arbitration; expenses. Many of these
and other items are already provided for in the arbitration rules
of the various international arbitration institutions, but are
particularly appropriate in ad hoc arbitrations.
xx. Good faith
The parties undertake to cooperate as best they can to
attain the objectives of this Agreement. In accordance with
well established general principles of international law of
contracts and commerce, each party shall deal fairly with
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the other party and shall carry out all the terms and
provisions of this Agreement with the utmost good faith, and
neither Party shall by its own act, omission or default
prevent performance of the spirit or the terms and
conditions hereof.
xxi. Further steps
Each Party shall take or cause to be taken any and all
further steps and to execute or cause to be executed any and
all further documents as may be necessary or appropriate to
effect and carry out fully all of the transactions
contemplated herein.
Example of one article covering both good faith and further
steps:
The parties expressly agree to fulfill their obligations
hereunder in good faith. Each party agrees to take or cause
to be taken any and all further steps and to execute or
cause to be executed any and all further documents as may be
reasonably necessary to effect and carry out fully all the
transactions contemplated herein.
xxii. Amendment or waiver
Any amendment or waiver of any provision of this Agreement
shall be in writing and shall be effective only in the
specific instance for which it is given. No failure or delay
on the part of any party in exercising any right hereunder
shall operate as a future waiver or amendment.
***
A Party’s failure to exercise any part of its rights under
this Agreement shall in no way be deemed to constitute
waiver of any other rights of such Party hereunder.
Likewise, a Party’s waiver of any breach of this Agreement
shall not be deemed to constitute a waiver of similar or
other breaches of this Agreement.
xxiii. Notices
All notices, consents and other communications required or
permitted to be given hereunder shall be in writing and
shall be valid and sufficient if delivered in person against
a receipt or sent by prepaid registered priority mail
(return receipt requested) or via facsimile or electronic
mail which shall be confirmed by such registered priority
mail without undue delay, directed to the Parties at the
addresses set forth above or to such other address as a
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Party may specify in a notice given in accordance with this
paragraph.
***
Any notice which may be given by a Party under this
Agreement shall be deemed to have been duly delivered if
delivered by hand, first class post, facsimile transmission
or electronic mail to the address of the other Party as
specified in this Agreement or any other address notified in
writing to the other Party. Subject to any applicable local
law provisions to the contrary, any such communication shall
be deemed to have been made to the other Party, if delivered
by:
1. first class post, 2 days from the date
of posting;
2. hand or by facsimile transmission, on
the date of such delivery or
transmission; and
3. electronic mail, when the Party sending such
communication receives confirmation of such
delivery by electronic mail.
***
Any notice, demand, request, waiver, or other communication
under this Agreement shall be in writing and shall be deemed
to have been duly given on the date of service, if
personally served or sent by facsimile; on the Business Day
after notice is delivered to a courier or mailed by express
mail, if sent by courier delivery service or express mail
for next day delivery; and on the third day after mailing,
if mailed to the party to whom notice is to be given, by
first class mail, registered, return receipt requested,
postage prepaid and addressed as follows:
***
All notices, requests, demands, waivers and other
communications required or permitted to be given under this
Agreement shall be in writing and shall be deemed to have
been duly given if (i) delivered personally or (ii) mailed
by prepaid certified or registered mail with postage
prepaid, return receipt requested, (iii) sent by telegram or
fax, or (iv) sent by E-mail with receipt confirmed as
follows (or at such other address or facsimile number for a
party as shall be specified by like notice):
xxiv. Binding on successors and assigns
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This Agreement shall be binding upon and inure to the
benefit of the successors and assigns of the parties hereto;
provided that no party shall have the right to assign this
Agreement without the prior written consent of the other.
xxv. No Waiver
The failure to insist in any instance on the strict
performance of any provision of this Agreement or to
exercise any right hereunder shall not constitute a waiver
of such provision or right in any other instance.
***
The failure of a party to insist upon strict adherence to
any term of this Agreement on any occasion shall not be
considered a waiver or deprive that party of the right
thereafter to insist upon strict adherence to that term or
any other term of this Agreement. Any waiver must be in
writing.
xxvi. Partial invalidity
If any provision hereof shall be unenforceable, the
remaining provisions of this Agreement shall not be effected
thereby and shall remain in full force and effect.
***
If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void, unenforceable or
against its regulatory policy, the remainder of this
Agreement shall remain in full force and effect and shall in
no way be affected, impaired or invalidated.
***
If one or more provisions of this Agreement are held to be
unenforceable under applicable Law, such provision(s) shall
be excluded from this Agreement and the balance of this
Agreement shall be interpreted as if such provision were so
excluded and shall be enforceable in accordance with its
terms so long as the economic or legal substance of the
transactions contemplated by this Agreement are not affected
in any manner materially adverse to any party.
***
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If any of the provisions of this Agreement should be held or
considered to be invalid or inapplicable in whole or in part
for any reason whatsoever, including public policy, such
circumstance shall not invalidate the remainder of this
Agreement, which shall remain in full force and effect. If a
Party shall consider itself to be materially prejudiced by
any such partial invalidity, it may have recourse to the
dispute resolution provisions of this Agreement. In such
event, the arbitrator(s) shall attempt to act as
conciliator(s) and may rule ex aequo et bono.
***
In the event that any provision of this Agreement is
declared by any judicial or other competent authority to be
void, voidable, illegal or otherwise unenforceable or
indications of the same are received by either you or us
from any relevant competent authority. We shall amend that
provision in such reasonable manner as achieves the
intention of the parties without illegality, or at our
discretion such provision may be severed from this Agreement
and the remaining provisions of this Agreement shall remain
in full force and effect.
***
In the event that any provision of this Agreement is
declared by any judicial or other competent authority to be
void, voidable, illegal or otherwise unenforceable or
indications of the same are received by either of the
parties from any relevant competent authority, the parties
shall amend that provision in such reasonable manner as
achieves the intention of the parties without illegality, or
at the discretion the parties, such provision may be severed
from this Agreement and the remaining provisions of this
Agreement shall remain in full force and effect.
If a court, a regulatory authority, a competent authority or
arbitrator having jurisdiction determines that any term is
invalid or unenforceable under applicable law, that
determination shall not affect the other terms of this
Agreement, which other terms shall continue to be enforced
as if the invalid or unenforceable provisions were omitted.
xxvii. Language
The English version of this Agreement shall govern and
control over any translation of this Agreement into any
other language.
***
101
This Agreement has been executed in both French and English
originals and both shall be equally controlling.
xxviii. Injunctive relief
If you wish to be sure that injunctive relief is available in the
event of a substantial non performance, you can add the
following:
In the event that one party threatens to take any action
prohibited by this Agreement, the other party agrees that
there may not be an adequate remedy at law. Accordingly, in
such an event, a party may seek and obtain preliminary and
permanent injunctive relief (without the necessity of
posting any bond or undertaking). Such remedies shall,
however, be cumulative and not exclusive and shall be in
addition to any other remedies which a party may have under
this Agreement or otherwise.
xxix. Execution in counterparts
This Agreement may be executed in one or more counterparts,
all of which, when taken together, shall constitute one and
the same agreement.
***
This Agreement may be executed via facsimile and in any
number of counterparts, each of which shall be deemed to be
an original instrument and all of which together shall
constitute one and the same instrument.
xxx. Captions (headings)
The descriptive headings of the articles, sections,
subsections, exhibits and schedules of this Agreement are
inserted for convenience only, do not constitute a part of
this Agreement and shall not affect in any way the meaning
or interpretation of this Agreement.
***
The [captions/headings] appearing in this Agreement are
inserted only as a matter of convenience and in no way
define, limit, construe or describe the scope or
interpretation of this Agreement.
***
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The captions in this Agreement are for convenience of
reference only and shall not be given any effect in the
interpretation of this Agreement.
xxxi. Expenses
Each party shall pay his or its own expenses.
Each party hereto shall pay all costs and expenses incident
to its negotiation and preparation of this Agreement and to
its performance and compliance with all the agreements and
conditions contained herein on its part to be performed or
complied with, including without limitation the fees,
expenses and disbursement of legal counsel and accountants.
Except as otherwise expressly provided in this Agreement,
all costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be
paid by the party incurring such costs and expenses.
xxxii. No broker’s commissions
Each party represents to the other that no broker’s
commission, finder’s fee or the like is payable to any third
person, firm or corporation in connection with this
Agreement.
xxxiii. Entire agreement, amendments
This Agreement and the annexes hereto constitute the entire
agreement and supersede any and all prior agreements of the
Parties with respect to the subject matter hereof. No
amendments, alterations or waivers of any of the terms of
this Agreement shall be binding unless the same shall be in
writing and duly executed by both Parties.
***
This Agreement supersedes all prior agreements among the
parties with respect to its subject matter, is intended
(with the documents annexed hereto) as a complete and
exclusive statement of the terms of the agreement among the
parties with respect thereto and cannot be changed or
terminated except by a written instrument executed by the
party or parties against whom enforcement thereof is sought.
B. Analysis of Standard International Contracts
1. Standard International Contract (Basic Provisions)
103
____________
AGREEMENT
This ________________ AGREEMENT (the "Agreement"), is made and
entered into this ___ day of ________, 2002, by and between:
___________________, a _________________ corporation organized
under the laws of __________ with offices at
_____________________________________________, hereinafter
referred to as the “______________” );
and
__________________, a French société anonyme with a capital of
________________Euros and its registered office at
_____________________, France, and registered under RCS no.
________________________(the “__________”).
WITNESSETH:
WHEREAS,
WHEREAS,
; and
WHEREAS,
NOW, THEREFORE, in consideration of the above and the mutual
covenants and agreements contained herein and in the annexes
hereto, the parties hereto hereby agree as follows:
Article 1. Definitions
1.1. The term “_____________” as employed herein shall mean
________________.
1.2. The term “_____________” as employed herein shall mean
________________.
1.3. The term “_____________” as employed herein shall mean
________________.
(or)
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The following terms, as used herein, shall have the following
meanings:
Article 2. Purpose of Agreement
The purpose of this Agreement is ____________________.
Article 3. Term of Agreement
Unless otherwise terminated pursuant to Article 7 below, the
Agreement shall commence as of the date hereof and shall remain
in full force and effect for an initial period of _______ from
such date and shall be automatically renewed for additional
periods of _______, unless notice of termination is given by
either party _____ days prior to the anniversary date.
Article 4. Representations and warranties
The __________ and the ___________ represent and warrant to each
other as follows:
4.1. The ____________ is a company duly organized, validly
existing and in good standing under the laws of ___________ and
the ____________ is a company duly organized, validly existing
and in good standing under the laws of ______________, and each
company has the requisite authority to enter into this Agreement
and consummate all the transactions contemplated for it herein.
4.2. The execution and delivery of this Agreement and any and all
other agreements or documents relating hereto and the
consummation of all the transactions contemplated herein have
been duly and effectively authorized and approved by all
requisite action of the respective appropriate corporate organs
of the ________ and the ______________.
4.3. This Agreement shall be duly executed and delivered by the
__________ and the ________________ and shall be a valid and
binding obligation of the _____________ and the______________,
enforceable in accordance with its terms.
4.4. The consummation
shall not result in a
any judgment, decree,
instrument applicable
____________________.
of the transactions contemplated herein
breach or violation of, or default under,
mortgage, indenture, agreement or other
to the ____________ or the
4.5. The consummation of the transactions contemplated herein
shall not result in a violation or infraction by the ___________
or the ______________ of any statutes, rules or regulations.
Article 5. Confidentiality
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The ________ and the _________ shall keep totally confidential
and shall not disclose the terms and conditions of this Agreement
or the transactions envisioned herein or any documents or
information exchanged among the parties to any third party nor
make any public announcement relating thereto without the consent
of the other party, except where such disclosure is required by
law and then only after notice to the other party.
Article 6. Non-competition and non-solicitation agreements
6.1. The ____________ agrees not to compete with the Company for
a period of five years from the date hereof. In this respect, the
____________ shall not, either directly or indirectly, itself or
through any individual or legal entity, compete with the Company
in the development, production and/or sale of widgets and any
other products developed, manufactured and/or sold by the
Company, in any manner whatsoever, and as a general matter, shall
not act on behalf of any enterprise, entity or business having an
activity identical or similar to that mentioned above and,
consequently, shall not work with or have any interest, of any
nature whatsoever, in such activities and/or with respect to,
such enterprises, entities or businesses, and, in particular,
without limiting the generality of the foregoing;
-by the creation and/or holding of shares and/or any form of
interest in an enterprise entity and/or business which
corresponds to the above definition; and
- by engaging in any activity of any nature whatsoever for or on
behalf of an enterprise, entity or business corresponding to the
above definition.
The above undertaking shall apply to the countries
of_______________________.
6.2. Except as may otherwise be agreed in writing by the parties
hereto, the _______________, hereby agrees not to solicit, in any
manner whatsoever, directly or indirectly, for a period of five
years from the date hereof, any client, supplier or agent of the
Company whether they exist at the date of solicitation or at any
time prior to the fifth anniversary hereof.
6.3. In the event of a breach of the above prohibition, the
_____________ shall be entitled to take all legal means to cause
such prohibited competition to cease and also to claim from the
______________, as well as any other individuals or companies
involved in the unfair competition, before any court with
jurisdiction, an indemnity corresponding to the damages incurred.
Article 7. Termination
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In the event of a material breach of the obligations of one of
the parties, which breach is not cured within thirty days after
notice thereof, the other party may, within thirty days of its
discovery of such breach, notify the party of its termination of
this Agreement.
Article 8. Force majeure
8.1. Neither party hereto shall be liable to the other nor shall
be deemed in default hereunder for failure or delay to perform
any of its agreements or obligations caused by or arising out an
event of force majeure. An event of force majeure is any
unforseeable and irresistible act, legal or factual situation
beyond the control of the parties.
8.2. A party affected by an event of force majeure shall promptly
notify the other party, supplying full information and any
supporting public documents relating to such event. An event of
force majeure may be pleaded only during the duration thereof and
the party concerned shall use its best efforts to avoid or limit
any damages and to remedy its failure or delay to perform as
promptly as possible.
8.3. A party affected by an event of force majeur which does not
notify the other party as provided above shall lose any right it
may have to invoke such act of force majeur.
Article 9. Applicable Law
The applicable law shall be the express provisions of this
Agreement and the intent of the parties as expressed herein, as
may be supplemented, if necessary, by principles of French law.
Article 10. Resolution of disputes
10.1. The parties shall endeavor to resolve amicably any and all
disputes arising out of or in connection with this Agreement and
undertake to meet as soon as either party advises the other of
the existence of a dispute. If the parties are unable to meet or
to settle their dispute amicably, such dispute shall be referred
to arbitration pursuant to 10.2 below.
10.2. If at any time during the continuance of this Agreement,
there shall be any question or dispute with respect to the
construction, meaning or effect hereof, or any provision hereof,
or arising out of or in connection herewith, or concerning the
rights or obligations hereunder, which cannot be resolved
amicably, such question or dispute shall be referred to: (a) a
sole arbitrator to be selected by the parties hereto; or (b)
failing agreement in selecting such arbitrator within seven (7)
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days, to a panel of three arbitrators, one to be appointed by the
___________, one by the ___________ and the third by the two
arbitrators so chosen. The arbitration shall take place in
_______________ and shall be conducted in the ____________
language.
10.3. The award rendered by such sole arbitrator or a majority of
the three arbitrators, as the case may be, shall be final and
binding on the parties and judgment upon such award may be
entered in any court having jurisdiction.
Article 11. Good faith; further steps
The parties expressly agree to fulfill their obligations
hereunder in good faith. Each party agrees to take or cause to be
taken any and all further steps and to execute or cause to be
executed any and all further documents as may be reasonably
necessary to effect and carry out fully all the transactions
contemplated herein.
Article 12. Amendment or waiver
Any amendment or waiver of any provision of this Agreement shall
be in writing and shall be effective only in the specific
instance for which it is given. No failure or delay on the part
of any party in exercising any right hereunder shall operate as a
future waiver or amendment.
Article 13. Notices
All notices, required or permitted to be given hereunder shall be
in writing and shall be valid and sufficient if delivered in
person against a receipt or sent by prepaid registered priority
mail (return receipt requested) or via facsimile which shall be
confirmed by such registered priority mail without undue delay,
directed to the parties at the addresses set forth above or to
such other address as a party may specify in a notice given in
accordance with this Article.
Article 14. Miscellaneous provisions
14.1. This Agreement shall be binding upon and inure to the
benefit of the successors and assigns of the parties hereto;
provided that _____________ may not assign its rights or
obligations hereunder, except to any other members of its group
of companies, without the express prior written consent of the
_______________.
14.2. The termination of this Agreement shall not act to relieve
either party hereto from performing any accrued obligations
hereunder, including payments of any amounts then due.
108
14.3. If any provision hereof shall be unenforceable, the
remaining provisions of this Agreement shall not be effected
thereby and shall remain in full force and effect.
Article 15. Entire agreement
This Agreement and the annexes hereto constitute the entire
agreement and supersede any and all prior agreements of the
parties with respect to the subject matter thereof. No
amendments, alterations or waivers of any of the terms of this
Agreement shall be binding unless the same shall be in writing
and duly executed by both parties.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
Signed in
On
In
originals
109
2. Case Study (International Acquisition Agreement)
Fact sheet
a. Buyer, a French company owned by an American
group with headquarters in the Netherlands, in
turned owned by a Japanese conglomerate, wants to
acquire intellectual property rights (the “IP”)
and services of inventor, a French national.
b. The IP can only be purchased through an existing
company (the “Company”), a French SARL which has
emerged from bankruptcy proceedings in France and
Canada. The SARL owns some technology, has a
right to a lease for a factory and offices and an
arrangement with key employees. The essential IPpatents and patent applications - has been
registered in the US and Canada, Europe, Japan,
Hong Kong and Singapore. The IP was purchased by
Mr. A’s company from the Canadian and French
liquidators of predecessor companies to the
Company, transferred from Mr. A’s company to Mr.
A personally and then from Mr. A to the Company.
c. There are two sellers - Mr. A and the inventor,
Mr. B (the “Sellers”). They have, however, agreed
to assign about 10% of the Company to minority
shareholders.
d. Mr. And Mrs. A, are basically financial managers
and, through a broker (Mr. X), have encountered
the Buyer. Mr. X wants a finder’s fee on the
transaction if it is closed.
e. The parties have agreed that the Buyer shall buy
50% of the shares of the Company and that the
Company shall be run as a joint venture among the
Buyer and the Sellers.
f. Financially, the Sellers are looking for: (a)
maximum cash for their shares, (b) an injection
of at least $1.5 million cash in the Company for
operating capital during a one-year start-up
period; and (c) the possibility of additional
payments for their shares if the Company
succeeds.
g. The Sellers need some kind of control over the
management of the Company to help ensure that the
Company will succeed so as to permit them to
110
receive their “earn-out” (additional payments for
their shares).
h. Mrs. A wants to act as the Company’s President or
General Manager, but wants to do so through an
American company she owns.
i. Mr. B wants to provide his services as inventor
as an independent contractor through a consulting
agreement, but wants the consulting agreement to
be with a British Virgin Islands company
controlled by him.
j. Buyer wants to be able to sell future products of
the Company pursuant to license and distribution
agreements. A and B want the Company to be able
to sell directly as well.
k. There are some potential problems with the chain
of title to the IP. The inventions were created
by B and several assistants while working for a
predecessor company to the Company in France. The
chain of title described in 2 above has not been
filed with the various patent offices where the
IP was filed originally.
l. All parties agree that at a certain point the
Buyer should be entitled to purchase the
remaining 50% shares of the Company.
m. The initial transaction – purchase of 50% of the
shares of the Company by the Buyer - is based
upon a detailed Business Plan prepared by the
Sellers, forecasting $1 million in operating
revenues during the first year after the closing
of the transaction.
The parties are now ready to negotiate and sign a letter
of intent. First, they should make check lists (as
detailed as possible) of the major items of concern that
each wants to cover in the letter of intent.
Check list (for letter of intent, acquisition agreement
and guaranty agreement)
The hypothetical transaction deals with the acquisition
by an American company of a 50% interest in patents and
other intellectual property which is owned by a French
company.
111
The parties should: list the principle subject matters to
be covered; list their respective concerns as to each
item; negotiate mutually acceptable provisions that cover
all such concerns.
1. Intellectual property: Patents, patent applications,
technology and know-how; trademarks; tradenames
-
Value, availability elsewhere, possibility of
developing in-house
-
How to acquire: purchase, joint venture of
independent companies, acquisition of shares of
the (French) Company owning the IP
-
Ownership: verification of perfect chain of title
from the inventor (B) and his associates to a
French company, then to a Canadian company, then
in bankruptcy, then to Mr. A’s company, then to
Mr. A then to the Company; registration of the
chain of title with patent offices
2. Form of Company in which 50% investment to be made
(currently a French SARL)). Possibilities:
-
SARL (problem is that gérant has full powers and
is difficult to control)
-
SA (with board of directors and president and
general manager or with two boards – supervisory
and directoire); which party names officers
-
SAS (great flexibility, does not have board of
directors, can describe management arrangements in
the statuts)
-
Foreign company for operational and tax reasons
(especially if the company is not going to
manufacture and will be essentially a licensing
company)
-
Escape clauses (new bankruptcy) Normally
shareholders will be liable only up to the amount
of capital contributed to the Company; however, if
a shareholder becomes actively involved in the
business and keeps the company artificially alive
and lets it continue to incur debts, there is a
possible action en comblement de passif; need to
112
beware of a future action ABS (abus de biens
sociaux)
3. Percentage of shares to be acquired
-
50% (how to deal with stalemate votes)
-
51% (can control ordinary shareholder decisions)
-
Absolute majority (requires 2/3rd plus in SA,
3/4th in SARL)
-
How to deal with any minority shareholders
4. Price
-
Valuation (DCF x coefficient; gross revenues or
net profits x coefficient)
-
Manner and time of payment (at closing? earn-out?
mixture? if earn-out, the sellers are going to
want to have an active participation, if not
control of, management)
-
Reserve fund (escrow of part of cash portion of
purchase price to back up representations and
warranties under the guaranty agreement)
5. Business plan
-
Need to set forth all the essential considerations
upon which the Sellers agree to sell and the Buyer
agrees to purchase
-
Importance of forecast of earnings during start-up
period
-
Initial financing of the business (increases in
capital, bank loans (with shareholder guarantees),
shareholder advances)
-
Key targets (revenues, cash on hand, profits –
note as to the latter, there may be a difference
of opinion as to whether surplus cash should be
reinvested in the business or distributed as
dividends)
6. Management of the Company
-
President
113
-
General manager
-
Board (if SA)- double board?
-
Financial, marketing, manufacturing managers
-
Director of Research and Development
-
Bank accounts and signatories
-
Lawyers, accountants
-
Commissaires aux comptes
-
Fiscal year; first accounting year, if not
calendar year
-
Agreement as to matters requiring joint approval
or unanimous or qualified majority vote by
shareholders
7. Products
-
Direct manufacture (cost and financing of plant,
equipment and operations)
-
Sub-contracts (outsourcing?)
-
Quality control
-
Research and development: improvements and new
products
8. Marketing
-
Direct
-
Distribution agreements (exclusive or nonexclusive, territories, right of company to sell
directly)
-
License agreements
9. Need for the negotiation and conclusion of a standard
acquisition agreement containing standard
representations, warranties and guarantees (contrat de
guaranties – declaration d’actif et du passif
114
10. Closing: (simultaneously with or subsequent to the
signing of the acquisition agreement)
11. Conditions precedent to closing of acquisition
agreement (should be met and be true and accurate at
the date of the closing)
-
Change of the company form, if required
-
Successful completion of due diligence (see due
diligence outline)
-
Confirmation of ownership of intellectual property
and other assets and the appropriate registrations
with patent offices
-
Management agreement for Mrs. A or her company
(For how long? Under what conditions can it be
terminated? Tax problems?)
-
Consulting agreement with Mr. B or his company
(For how long? Under what conditions can it be
terminated? Tax problems?)
-
Employment agreements with key employees
-
Approval of transaction by shareholders and/or
board of directors of the buyer
-
License agreement? Essential terms?
-
Distribution agreement? Essential terms?
-
Shareholders’ agreement in letter of intent,
acquisition agreement, statuts and/or separate
agreement re management, disposition of shares –
option to purchase remaining 50%, right of first
refusal, etc.
-
Completeness and accuracy of the sellers’
representations and warranties as of the date of
the closing
-
Operation in the ordinary course of business prior
to closing
12. Non-competition agreement: Area of business,
territory, period
13.
Finders: How to pay Mr. X. Who pays?
115
14. Payment of expenses: Cost of due diligence; cost of
transformation of the Company; cost of IP due diligance
and registration of the chain of title
15. Investigation (due diligence by the buyer subsequent
to the signing of the letter of intent; principle of
full disclosure; Sellers to cooperate)
16. Exclusivity: Exclusivity of dealing during the precontractual stage
17. Confidentiality: During the negotiations and
thereafter
18. Acquisition agreement (parties to proceed with the
negotiation and conclusion in good faith of acquisition
agreement and guaranty agreement)
19. Purpose and effect of the letter of intent (specify
if pre-contractual liability is to be excluded)
20. Applicable law: Contract? National law? Lex
mercatoria?
21. Resolution of disputes: National courts? Arbitration
ad hoc or institutional?
22.
Tax matters
23. Outs (for one or both parties, for example if
closing does not take place within a certain period of
time, if results of due diligence not satisfactory)
24. Representations, warranties of both parties
(capacity, good standing, authorization to enter
agreement, non-default under other agreements, etc.)
25. Sellers’ representations, warranties: with respect to
the following matters:
a. Legal status of the company (good standing)
b. Shares
c. Increase in capital
d. Transfer of shares
e. Financial statements
116
f. Assets
-
Real estate
-
Fixed assets
-
Material, equipment and furnishings
-
Inventory
-
State of assets
-
Intellectual property
-
Title to properties
-
Receivables, prepaid expenses, loans
g. Liabilities - no indebtedness or other
undertakings or liabilities other than as
disclosed in the financial statements and in
schedules to the guaranty agreement
h. Taxes and charges
i. Authorizations and compliance with laws
(especially concerning the environment)
j. Litigation
k. Insurance
l. Employees
m. Shareholdings
n. Contracts
o. Suppliers, clients and partners
p. Directors and officers, bank accounts and
financial agreements
q. Absence of materially adverse changes (between
the signing of the letter of intent and the
closing; obligation of the Sellers to run the
Company in the ordinary course of business)
25. Outline of due diligence: See Questionnaire.
117
Process: make an exhaustive list of all matters that need
to be reviewed; imagine the problems that might occur
with respect to each item; draft and provide Sellers with
questionnaire; initial responses by Sellers; questions by
Buyer; subsequent responses by Seller; and preparation of
final schedules for each item containing description or
list of documents and information supplied. Concept is
transparency and full disclosure. Liability is
essentially for failure to disclose, inadequacy of
disclosure or misrepresentation.
26. Indemnification
(see acquisition agreement for two examples)
3. Letter of Intent (for Acquisition of Shares)
(Letterhead of Purchaser)
, 2002
The Shareholders of the Company
Re.: Purchase of 50% of the shares of The Company
Dear
,
Based on various meetings and discussions and further to
our correspondence of___________, Purchaser hereby
confirms its desire to acquire a 50% interest in the
patents, intellectual property, trade marks and other
inventions as well as equipment and inventory, other
physical assets and property rights listed in Exhibit A
hereto (the «Assets») by purchasing 50% of the shares of
the Company, a French société à responsabilite limitée,
which shall be transformed into a French société anonyme
(the «Company») and into which all such Assets shall have
been contributed.
1. Purchase of 50% of the shares of the Company
Although the structure of the acquisition of 50% of the
shares of the Company and the provisions for the closing
of such acquisition (the «Closing») would be set forth in
a binding acquisition agreement, we would expect that
Purchaser or a subsidiary or affiliated corporation would
acquire 50% of the shares of the Company as follows:
118
(a) From the existing shareholdings which are as follows:
A
B
C
D
E
F
G
H
I
Total:
316
321
34
20
20
9
6
6
18
750
shares
shares
shares
shares
shares
shares
shares
shares
shares
shares
42.14%
42.80%
4.54%
2.66%
2.66%
1.20%
.80%
.80%
2.40%
100.OO%
Purchaser would buy 25% of the above, by purchasing 91
shares from A and 96 shares from B, leaving the
shareholdings as follows:
Purchaser
A
B
C
D
E
F
G
H
I
Total:
187
225
225
34
20
20
9
6
6
18
750
shares
shares
shares
shares
shares
shares
shares
shares
shares
shares
shares
24.94%
30.00%
30.00%
4.54%
2.66%
2.66%
1.20%
.80%
.80%
2.40%
100.OO%
(b) Immediately thereafter, the Company would increase
its capital and issue 376 new shares to Purchaser,
thereby resulting in the following shareholdings:
Purchaser
A
B
C
D
E
F
G
H
n. I
Total:
563
225
225
34
20
20
9
6
6
shares
50.00%
shares
20.00%
shares
20.00%
shares
3.02%
shares
1.76%
shares
1.76%
shares
0.80%
shares
0.53%
shares
0.53%
18 shares
1.60%
750 shares
100.OO%
2. Consideration
Purchaser would pay a total purchase price for the above
shares as follows:
119
(a) The consideration payable to Messrs. A and B for
their 187 shares would be deferred and determined in
function of the economic success of the Company. If the
Company meets the revenue and cash balance targets as
described in the annexed Business Plan at the end of the
first 12 months of operations subsequent to the date of
the Closing (i.e., revenue of US$ _____and a positive
cash balance of US$______), Purchaser would forthwith pay
each of Messrs. A and B US$_____ per share.
(b) The consideration for the second 25% of the shares
would be US$________ , payable at the date of the
Closing, for which the Company would issue Purchaser 376
new shares (representing a par value of ______ Euros and
an issuance premium of $___________. This consideration
is envisioned to cover the Company’s cash needs for the
first eighteen months following the date of the Closing.
3. Conditions of purchase
The purchase of the shares would be subject to the
conclusion of a mutually acceptable acquisition agreement
which would contain the following conditions precedent to
the Closing:
(a) the transformation of the Purchaser from a société à
responsabilite limitée, into a société anonyme;
(b) the successful completion of an audit and standard
due diligence by representatives of Purchaser including
with respect to the valid registration and ownership of
all intellectual property rights;
(c) the confirmation of free and complete title to the
Assets and, in particular, as concerns the bankruptcy
proceedings in which certain of such Assets have been
placed;
(d) the transfer of all the Assets to the Company, at a
symbolic price of US$1, free and clear of any liens and
encumbrances of any nature whatsoever;
(e) the conclusion of appropriate and mutually acceptable
employment or consulting agreements with X and Mr. B as
well as employment agreements with the key personnel
described in the annex hereto;
(f) the approval of the acquisition agreement and the
transactions contemplated therein by the shareholders of
the Company and the Board of Directors of Purchaser; and
120
(g) the completeness and accuracy, at the date of the
Closing of all the representations and warranties set
forth in the acquisition agreement.
4. Other conditions
(a) Prior to or simultaneously with the Closing, the
Company and Purchaser would enter into a license
agreement pursuant to which the Company would grant
Purchaser the right to manufacture and sell products
which agreement shall provide, inter alia,…….
(b) Prior to or simultaneously with the Closing, the
Company and Purchaser would enter into a non-exclusive
distribution agreement pursuant to which the Company
would grant the Purchaser a non-exclusive right to
distribute the Company’s products in (define territory).
(Note: A number of points need to be clarified. For
example, would Purchaser act as exclusive distributor of
all the Company’s present and future products or just
inks and graphic arts products? It is also necessary to
consider carefully the royalty provisions. The license
agreement must be a bona fide arms’ length transaction
between the parties. It is not possible under French law
to structure the royalty as free (this would constitute
an illegal use of the Company’s assets). Also it is not
appropriate to tie consideration for a license from the
Company to consideration payable to only certain of the
shareholders for the purchase of their shares.)
(c) Prior to or simultaneously with the Closing, the
shareholders of the Company and Purchaser would enter
into a shareholders’ agreement with respect to the
management of the Company and the disposition of shares
of the Company. In particular, the shareholders would
agree to appoint a Purchaser representative as President
(Président) of the Company and a representative of the
non-Purchaser shareholders (X) as full time General
Manager (Directeur Général) of the Company, responsible,
under the direction of the President, for the Company’s
day to day operations. The agreement would also provide
that the Board of Directors be comprised of an equal
number of representatives of Purchaser and the other
shareholders and set forth voting requirements for
strategic decisions.
(d) The shareholders’ agreement would also provide that
Purchaser have the right, for a period, commencing on
January 1, 2006 and ending on December 31, 2007, to buy
the remaining 50% of the Company’s shares for a total
121
price equal to one half of four times the Company’s EBIT
during the preceding twelve-month period. From January 1,
2008 and thereafter, Purchaser would have a right of
first refusal to purchase the remaining 50% of the
Company’s shares for a total price equal to the offer of
any bona fide, third party purchaser.
5. Non-competition agreements
(Set forth text)
6. Finders
Neither Purchaser, the Company nor the shareholders of
the Company have incurred or would incur any broker’s,
finder’s or agent’s fees in connection with the proposed
acquisition.
7. Expenses
The Shareholders, personally, and not out of the assets
of the Company, would pay any and all legal, accounting
or other expenses incurred by the Shareholders or the
Company in connection with the acquisition and the
transactions contemplated in the acquisition agreement.
Purchaser would be responsible for payment of the 4.80%
registration tax on the sale of the shares purchased from
Messrs. A and B (which it understands would in no event
exceed the maximum of approximately 3,000 Euros due on
the sale of shares of a société anonyme).
8. Investigation
From the date of the acceptance of this letter,
Purchaser, its representatives, agents, attorneys and
accountants would be permitted to continue their full
investigation of the Assets and the business and
operations of the Company and would on reasonable request
have full access to the Company’s premises, properties,
files, books and records and the possibility to consult
with the Company’s proposed management and key personnel.
9. Exclusivity
In consideration of Purchaser’s continuing to undertake
the substantial legal, accounting and other expenses
incident to its further due diligence and the preparation
of the acquisition agreement and related agreements, the
Company and the current shareholders of the Company agree
that, from the date of this letter through_________, 2002
or such other date as our discussions regarding this
122
transaction may terminate, whichever is later, neither
the Company nor the Shareholders shall engage, either
directly or through representatives, in any discussions
or negotiations with any other party relating to the
acquisition of the Company’s shares or the Assets.
Neither the Company nor the Shareholders have any other
obligations (contractual or otherwise) that would be
inconsistent with or in any way prevent it or them from
carrying out the transactions envisioned herein.
10. Confidentiality
The Company and the shareholders, on the one hand, and
Purchaser, on the other hand, would keep totally
confidential and would not disclose the transactions
envisioned herein or any documents or information
exchanged among the parties to any third party nor make
any public announcement relating thereto without the
consent of the other party, except where such disclosure
is required by law and then only after notice to the
other party.
11. Acquisition agreement
Once this letter is accepted, we would forthwith work
with you towards the negotiation and execution of a
binding acquisition agreement and related agreements
reflecting the foregoing provisions. The acquisition
agreement would include such other terms and conditions
customary in transactions of this character, including,
but not limited to, the standard representations and
warranties as to the Assets and the Company’s business
and operations.
12. Purpose and effect
The purpose of this letter is to present our proposal and
outline the basic terms of the transaction. Except as
provided otherwise herein, any pre-contractual liability
or any express or implied business combination,
partnership or venture of the parties under the
principles outlined in this letter is expressly excluded.
13. Applicable law
The applicable law shall be the express provisions of
this letter and the intent of the parties as expressed
herein, as may be supplemented, if necessary, by
principles of French law.
14. Resolution of disputes
123
Any and all disputes arising out of or in connection with
this letter, the acquisition agreement or any other
related agreement shall be submitted to the Commercial
Court of ______________.
If you find the above satisfactory, please sign a copy of
this letter and return it to us as promptly as possible.
Very truly yours,
PURCHASER CORPORATION
AGREED TO AND
ACCEPTED:
_____________________
By: ______________________
Authorized agent
4. Due Diligence Questionnaire (for Acquisition of
Shares)
Note: If any information is not documented, please supply
a precise written statement, in particular, with respect
to any oral undertakings.
1.1. Legal status of the Company
Is the Company validly in existence and able to regularly
conduct its business in compliance with its corporate
purpose and all other legal and administrative
requirements applicable to its type of activities?
Updated copy of the Company’s Articles and By-laws
(statuts).
Extract Kbis dated within the past month.
1.2. Shares
Have the Company’s shares been validly issued and fully
subscribed and paid for? Do they represent all of the
existing shares of capital stock of the Company? Do the
shareholders own all of the shares free and clear of all
liens and encumbrances whatsoever and are such shares the
subject of any change in beneficial ownership or subject
to any mortgage or the like or any other restrictions
affecting the free transfer thereof in any manner
124
whatsoever such as a promise of sale, preemptive or
preferential rights or any other restrictions?
Schedule of shareholders.
1.3. Increase in capital
Has the principle of the increase in capital reserved to
Sun been voted? Is it about to be? What are the terms and
conditions? Supply, if applicable, the drafts of
documents.
1.4. Transfer of shares of the Company
Is the transfer of the shares or the subscription by ___
to an increase in capital in violation of any law,
regulation, norm or administrative or judicial decision
or any provision of the Company’s statuts which would
result in a default under an agreement or loss of any
rights whatsoever? To the extent that may be necessary,
have all authorizations or consents been obtained?
1.5. Financial statements
a) Provide, if they exist, the balance sheet, general
operating statement and profit and loss statement of the
Company, certified by the Company’s statutory auditors as
well as their certification that such financial
statements accurately reflect the Company’s accounting
books and records and have been prepared in accordance
with generally accepted accounting principles applied on
a consistent basis.
b) Are such financial statements true and accurate and do
they substantially represent the Company’s activities and
financial situation for the periods in question?
c) Tax declarations and annexes 2002 and the
shareholders’ approval of the accounts.
1.6. Assets
a) Real estate
Provide an exact and summary description of any real
property of which the Company is the owner,
concessionaire or lessee with an indication in each case
of the corresponding legal status.
125
b) Fixed assets
Provide an exact and summary description of all fixed
assets of which the Company is the owner, concessionaire
or lessee with an indication in each case of the
corresponding legal status.
c) Material, equipment and furnishings
Is the material, equipment and furnishings used by the
Company the property of the Company or is it rented?
Provide a schedule with an indication in each case of the
corresponding legal status.
d) Inventory
Does the inventory have a useful value at least equal to
the value for which it is listed in the accounts?
e) State of assets
Are all the Company’s assets in a normal state of repair
and good working order? Are they apt to satisfy the needs
of the Company’s activity?
f)
Intellectual property
Are all the trademarks or names, the company’s name,
patents and know how used by the Company in any manner
whatsoever (hereafter “Intellectual Property”) owned by
the Company and valid and subsisting? Provide a schedule
and indicate whether each item is a patent, trademark or
name, know how, etc. and whether it is owned or licensed.
Is there any claim, demand or proceeding pertaining to
any of the Intellectual Property? Does a shareholder,
officer, director or employee have an interest in any of
the Intellectual Property? Is there any contractual or
legal restriction on the manner in which any of the
Intellectual Property may be used?
g) Title to properties
Does the Company have, with respect to the properties
used in its business, the right and title of the nature
indicated case by case in the schedules to be provided
(or, if not, some other property right)? Are such rights
free and clear of any liens, encumbrances or any other
restrictions or charges of any nature whatsoever? Are the
leases and contracts subject to any particular
restrictions and are they valid and subsisting and being
properly carried out? Is any one of them in default and
126
would the transfer of shares be in violation of any of
the provisions thereof?
h) Receivables, prepaid expenses, loans
Do all receivables, except those which are reflected in
provisions for bad debts, represent valid and binding
obligations to the Company and are they collectable with
reasonable diligence in the ordinary course of business?
Are all accounts reflected in the financial statements as
pre-paid expenses or deferred charges properly
attributable to the Company’s future operations?
Except as may be indicated in the annexes to the balance
sheets, has the Company made a loan or extended credit
which is unusual as to its amount or nature?
1.7. Liabilities
a) Except as may be indicated in the financial statements
or schedules to be provided, does the Company have any
undertaking, liability or obligation, whether or not
accrued, including without limitation, any guarantee or
security or any tax or labor liability?
b) Except as may otherwise be set forth in a schedule to
be provided, is all the indebtedness reflected in the
balance sheet and can it be reimbursed at any time
without any penalty or indemnity whatsoever?
d) Except as may otherwise be set forth in a schedule to
be provided, have all reserves have been regularly
accounted for, in particular, as concerns possible
capital losses, amortization, litigation and any other
contingent liability?
1.8. Taxes and charges
Has the Company correctly and completely filed all
declarations required to be filed on or prior to the date
hereof and has it paid when due all taxes and social
charges for the periods covered by such declarations? (it
being understood that the term “taxes and charges” shall
include all taxes, duties and levies of any kind,
national or local, including all social security,
retirement and other social charges, without any
imitation.
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1.9. Authorizations and compliance with laws
Does the Company have all necessary authorizations and
permits to conduct its business, in particular, as
concerns the protection of classified establishments and
the protection of the environment? Is the Company in
compliance with all laws concerning the protection of the
environment?
Has the Company substantially complied with all laws,
decrees and regulations actually in force or about to
enter into force concerning its activities, its business
or the envisioned sale of the shares, including without
limitation, all laws and regulations governing labor
relations and social security?
1.10. Litigation
Except as may otherwise be set forth in a schedule to be
provided, is there any action, suit or judicial
proceeding pending or threatened against the Company
and/or its shareholders, and is there any known basis for
such action, suit or proceeding?
1.11. Insurance
Is the Company normally insured with respect to its
assets and responsibilities, has there been any default
in the payment of premiums for any one of its policies or
is there any ground for cancellation or avoidance of any
one of its policies, reduction in the coverage afforded
or unusual increase in the premiums?
1.12. Employees
Except as may otherwise be set forth in a schedule to be
provided, is there any pending or threatened labor
dispute directly or indirectly involving the Company, and
is the Company party to any agreement or contract other
than collective agreements which are applicable to it
because of the nature of its business?
Provide a schedule of employees, their employment
agreements, length of service, positions, salaries and
advantages.
Do the employment agreements contain any clause
conferring to any employee any particular advantage?
What commitments have been made by the Company to
employees whose recruitment has been envisioned?
128
1.13. Shareholdings
Except as may otherwise be set forth in a schedule to be
provided, does the Company have any shareholding or
interest in another company of any kind?
1.14. Contracts
Provide a schedule of contracts in force and effect,
specifying if the Company is bound by any contracts which
are exorbitant in the context of its normal course of
business, if all the contracts to which the Company is a
party are being carried out in compliance with their
provisions and if any party to such contracts is in
default with respect to any obligation thereunder.
1.15. Suppliers, clients and partners
Do any suppliers, clients or other important business
partners benefit from any advantage which is not strictly
in compliance with normal business practice.
Provide a schedule of principal suppliers and principal
clients.
Provide a schedule of agency, intermediary, brokerage,
purchase or sale commission contracts with a description
of the conditions thereof.
1.16. Directors and officers, bank accounts and financial
agreements
The names of all the directors and officers of the
Company should be set forth in a schedule to be provided
along with the names of all employees of the Company who
are authorized on the bank accounts or have the authority
to act on behalf of the Company. An exhaustive schedule
of bank accounts, credit facilities, guarantees,
factoring and any financial agreement in general should
also be provided.
1.17. Absence of changes
Specify if the Company knows or has reason to know, since
the end of its most recent fiscal year, of any material
change in its situation (legal, financial or otherwise),
assets, liabilities, commitments, business or property
other than changes in its ordinary course of business,
the aggregate of which does not substantially affect the
Company’s value.
129
Specify if there is any fact (other than general
information relating to economic and commercial
conditions, competition, the evolution of techniques
concerned and any other similar elements) which may have
material adverse consequences on the Company’s business.
130
5. Agreement for Sale of Stock
AGREEMENT FOR SALE OF STOCK
This AGREEMENT FOR SALE OF STOCK (the "Agreement"), is
made and entered into this ___ day of ___________, 2002,
by and among:
, an individual residing at
_____________________________________________________,
_______________, a _________________ corporation with
offices at _____________________________________________,
___________________, an individual residing at
_________________________________________________________
(___________, _________________and ________________being
hereinafter referred as the “B Parties”); and Mr. A, an
individual residing at
_________________________________________________________
(the B Parties and A being hereinafter referred to as the
“Sellers” );
and
___________, a French société anonyme with a capital of
_________ Euros and its registered office at
____________, France, and registered under RCS no.
________________(the “Buyer”).
WITNESSETH:
WHEREAS, the Buyer wishes to acquire a 50% interest in
the patents, patent applications, know how and
intellectual property and other inventions as well as the
material, equipment and furnishings (as listed in the
schedules to the Guaranty Agreement annexed hereto),
which assets have recently been acquired by
________________, a French société par actions simplifiée
with a capital of 37,000 Euros, comprised of 3,700 shares
with a par value of 10 Euros per share, and its
registered office at ______________, France (hereinafter
the “Company”), by purchasing, at the closing on the date
hereof (the “Closing”) 50% of the shares of capital stock
of the Company;
WHEREAS, the Buyer wishes to have a call on the remaining
50% of the shares of the Company from January 1, 2006
through December 31, 2007 and thereafter a right of first
refusal to purchase such shares;
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WHEREAS, the Sellers are the owners of all the shares of
capital stock of the Company and wish to sell or cause to
be sold to the Buyer an initial 50% ownership of the
Company, in part by the sale of shares from the Sellers,
and in part, by the issuance of new shares to the Buyer,
as described below, and further wish to grant the Buyer
the above-mentioned call and right of first refusal with
respect to the remaining 50% of the shares of the
Company;
WHEREAS, the Sellers acknowledge that the Buyer would not
have entered into this Agreement without the Guaranty
Agreement annexed hereto, it being understood that such
constitutes an essential element of the Buyer’s
acquisition of the Shares for the agreed price;
WHEREAS, the audit conducted by the Buyer shall not in
any way affect the scope of the Guaranty Agreement;
WHEREAS, the purpose of this Contract is to set forth the
terms and conditions of the purchase of the Shares by the
Buyer (without limiting the application of the Guaranty
Agreement) at the Closing;
NOW, THEREFORE, in consideration of the above and the
mutual covenants and agreements contained herein and in
the annexes hereto, the parties hereto hereby agree as
follows:
Article 1. Acquisition of shares
1.1. The shares of the Company immediately prior to the
Closing have been held as follows:
B 1
B 2
A
925 shares
925 shares
1850 shares
25.00%
25.00%
50.00%
Total:
3700 shares
100.00%
1.2. The Sellers are causing the Company to issue at the
Closing, 1824 new shares with a par value of 10 Euros per
share, all of which shares have been reserved exclusively
for, and are being purchased and acquired entirely by,
the Buyer at the Closing. The shares of the Company,
after such increase in capital, are held as follows:
Buyer
B 1
B 2
1824 shares
925 shares
925 shares
33.020%
16.745%
16.745%
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A
1850 shares
33.490%
Total:
5524 shares
100.00%
1.3. Concomitant with the increase in capital and
purchase of the 1824 new shares of the Company at
Closing, B 1 and A are each selling 469 shares to
Buyer. Subsequent to such sale, the shares of the
are held as follows:
Buyer
B 1
B 2
A
Total:
2762
456
925
1381
shares
shares
shares
shares
5524 shares
the
the
the
Company
50.00%
08.25%
16.75%
25.00%
100.00%
1.4. (Draft language)
It is understood that, in order to simplify the Buyer’s
acquisition of the Shares, the Sellers have acquired
shares from minority shareholders. The Sellers shall
accordingly have the right, subsequent to the Closing, to
reallocate part of their shares to such minority
shareholders as follows, it being understood that the
Sellers guarantee the Buyer that such shareholders shall
have no claim against the Buyer with respect to their
receipt of such shares:
(Specify:)
1.4. (Final language:)
The Sellers shall have the right, subsequent to the
Closing, to reallocate up to 10% of their shares to
minority shareholders whose identity shall be notified to
the Buyer; as to the shares so reallocated, two fiduciary
arrangements may be concluded, one with each of the
Sellers, so that at shareholder meetings, each of the
Sellers shall ultimately have 25% of the voting rights.
Such minority shareholders shall have no claim against
the Buyer with respect to their receipt of such shares.
1.5. The Buyer is acquiring the Shares at the Closing
pursuant to the ordinary and legal guarantees applicable
in these matters and those terms and conditions set forth
herein and in the Guaranty Agreement.
1.6. The Sellers, in consideration of the payment by the
Buyer of the purchase price below, are delivering to the
Buyer at the Closing, the transfer documents representing
the 938 shares of the Company being sold by B 1and A,
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signed by each of them as of the date of the Closing, and
are causing the Company to inscribe the Buyer as holder
of both such 938 shares as well as the 1824 new shares in
the Company’s share registry and shareholder accounts
registry.
Article 2. Purchase price - payment
2.1. In consideration of the Company’s issuance and
delivery to the Buyer of 1824 new shares of the Company,
the Buyer is delivering to the Company at the Closing,
proof of a bank transfer to the Company in the amount
1,530,000 Euros and 336 Euros in cash (which shall
constitute 10 Euros per share and an issuance premium of
1,512,096 Euros). This sum is to be used to finance the
Company’s activities in accordance with the Business Plan
annexed hereto.
2.2. The Buyer shall pay a total purchase price for the
938 shares as described below. The Buyer’s undertaking is
to compensate B 1 and A for such shares, partly in cash
at the Closing, and the remainder on a performance basis,
allowing the Company to demonstrate its ability to
achieve its sales forecasts and manage its financial
resources over the next three years.
2.3. In consideration of the transfer of the 938 shares,
the Buyer is delivering at the Closing, a check to each
of B 1 and A in the amount of ____________.
2.4. The Buyer shall pay B 1 and A additional
consideration for the 938 shares, up to a total aggregate
potential of _________ (_________ each), as a function of
the economic success of the Company over the next three
calendar years.
2.5. If, during the first full calendar year, the Company
shall meet its revenue and working capital (defined as
cash on hand plus receivables minus payables) targets
(_________ and a positive cash flow), the Buyer shall
forthwith pay an additional _________ to each of B 1 and
A . Such amounts shall be creditable to the aggregate
potential price of ______________.
2.6. If the Company shall not meet its target for the
first calendar year, but shall meet 85% of its revenue
target for the second calendar year (_______ x 0.85), and
shall have maintained positive working capital (except as
to the necessity of securing a loan of up to ___________
to finance receivables or for any other services provided
by the Buyer), 85% of the above additional amount
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(___________x 0.85) shall be due to each of B 1 and Mr.
Bismuth. Also in year two, if the actual revenue shall
exceed 85% of the minimum target, the amount due to B 1
and A shall be increased by the percentage that sales
actually exceed the 85% target, thus resulting in up to
an additional __________ each, which would translate to a
total aggregate compensation of _________ to each of the
Sellers. If the Company shall sustain its revenue and
working capital performance for the third calendar year
at the level of the second year, B 1 and A shall be
entitled to an additional payment of ___________ each.
Payment of an aggregate ______________ for the 938 shares
shall constitute the maximum payment in full for such
shares and no additional payment shall be due.
2.7. If B 1 and A shall receive the additional
consideration for the first year, then their
consideration for the Company’s successful completion of
its second year target shall be limited to the additional
____________ each. Such additional consideration shall be
creditable to the aggregate potential total price of
_____________for the 938 shares.
2.8. If the Company shall not meet its target for the
first calendar year nor 85% of its target for the second
calendar year, the above additional amounts (_________ x
0.85) shall be due to B 1 and A if 85% of the revenue
target for the third calendar year is met (__________x
0.85) and the Company shall have maintained positive
working capital (except as to the necessity of securing a
loan of up to ____________ to finance receivables and any
amounts payable to the Buyer for services rendered by the
Buyer to the Company). Also in year three, if the actual
revenue shall exceed the 85% minimum target, the amount
due to B 1 and A shall be increased by the percentage
that sales actually exceed the 85% target, thus resulting
in up to an additional __________ each, which would
translate to a total aggregate compensation of _________
each. Payment of an aggregate ____________ for the 938
shares shall constitute the maximum payment in full for
such shares and no additional payment shall be due.
2.9. If B 1 and A shall receive the additional
consideration for the first and second years, then their
consideration for the Company’s successful completion of
its third year target shall be limited to the additional
_________ for each of them, calculated as described
above. Such additional consideration shall be creditable
to the aggregate potential total price of ____________
for the 938 shares.
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2.10. The conditions for the granting of the supplemental
remuneration to the Sellers shall be analyzed during each
of the calendar quarters following the end of the periods
in question. The parties appoint the Company’s statutory
auditor to determine in a report notified to each of the
parties whether or not the conditions have been met. In
the event the parties do not agree, the question shall be
submitted to arbitration pursuant to Article 9 hereof.
2.11. The Business Plan annexed hereto shows the possible
outcomes for payment.
2.12. Agreement to pay the above additional consideration
shall not constitute an obligation on the part of Buyer
to maintain the operations of the Company in the case of
financial failure.
2.12. The Buyer commits to assist the company in securing
an additional ____________ in working capital support in
the form of a loan to the Company, to be exercised only
if requested by the President and General Manager of the
Company chosen by the Sellers, no sooner than twelve (12)
months from the date of the Closing:
Any such loan shall be repaid, under terms to be agreed,
from the future cash flow of the Company’s business. In
this regard, the Buyer may make the loan itself at an
interest rate of 10% per year or co-sign for the loan in
which case, the Buyer shall receive 3% per year as
consideration.
2.13. The Buyer believes that its return on investment in
the Company will be maximized by accelerating the restart of commercial operations and by supporting both
commercial development and R&D activities. Therefore, the
Buyer may, at its sole discretion, provide functional
expertise to the Company, to assist and advise with
manufacturing, engineering, regulatory, health and
safety, purchasing, logistics, finance and accounting,
applications development, and marketing and sales
activities as may be determined to be appropriate by the
President of the Company for the Company to achieve its
objectives. Any costs payable to the Buyer for the above
services shall not be taken into account in calculating
the deferred compensation for the 938 shares purchased
from B 1 and A.
Article 3. Conditions of the Closing
The parties hereby acknowledge that the following
conditions have been met to their satisfaction as of the
date of the Closing:
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3.1. The complete transformation of the Company from a
société à responsabilité limitée into a société par
actions simplifiée, including a certified copy of the
original minutes of the meeting of the associates of the
Company approving such transformation and the signature
by the Sellers and the Buyer of new statuts for the
Company in its SAS form, a copy of which are annexed
hereto.
3.2. The receipt by the Buyer of: (a) proof of the
issuance of the 1824 new shares on the Company’s stock
registry and in the name of the Buyer in the Company’s
shareholder accounts registry and (b) as to the 938
shares, signed share transfer documents from the Sellers
and proof of the inscription of the transfer of such 938
shares in the Company’s registries.
3.3. The receipt by the Buyer of the annexed Guaranty
Agreement signed by each of the Sellers.
3.4. Proof to the Buyer’s satisfaction as to the
commercial value and the Company’s valid ownership of the
patents and patent applications identified in the
Guaranty Agreement. Such proof is described in further
detail in the Guaranty Agreement and includes, in
particular, documents reflecting the initial transfers of
the inventors’ rights (and an agreement by the inventors
that they have no further rights in and to such
intellectual property and shall not make any claim
against the Company or the Buyer relating thereto). The
transfers of patents and patent applications from the
liquidator of ________. To A Company, A Company to A and
A to the Company are valid and irrevocable. It is
understood that the transfers from _____ through to the
Company have not been registered, but shall, immediately
after the Closing, be registered in all jurisdictions in
which the patents and patent applications have been
filed.
(Final language: It is understood that the transfers of
patents and patent applications from ____ to _____, from
_____ to A Company, from A company to A and from the
latter to the Company are in the process of being
registered, which shall be completed as soon as possible
after the Closing. The registration, which is understood
to be the legal filing of the transfers of ownership,
shall, if possible, be effected directly to the current
legal owner, the Company.
137
3.5. Proof to the Buyer’s satisfaction as to the
commercial value and the Company’s valid ownership of the
know how, technology and other intellectual property
identified in the Guaranty Agreement. Such proof is
described in further detail in the Guaranty Agreement and
includes, in particular, documents reflecting the initial
transfers of the inventors’ rights (and an agreement by
the inventors that they have no further rights in and to
such intellectual property and shall not make any claim
against the Company or the Buyer relating thereto) as
well as a copy of all the documentation in the hands of
the Company or the Sellers, which documentation shall be
identified by appropriate Bates numbers. As concerns the
“Soleau envelopes”, all documentation in support thereof
shall be made available in order to enable the Company to
re-file such “Soleau envelopes”, if possible and
appropriate. All the documents referred to above are in
the Company’s hands on the date of the Closing.
3.6. Proof to the Buyer’s satisfaction of the transfer to
the Company of all the tangible assets identified in the
Guaranty Agreement, all of which assets are physically
present at the Company’s premises on the date of the
Closing.
3.7. Written confirmations from A and A Company that
neither shall have any claim against the Company or the
Buyer for any consideration other than the symbolic Euro
which A received in consideration of his transfer of all
the intellectual property and the tangible assets to the
Company.
3.8. Signature of the non-exclusive distribution
agreement annexed hereto between the Company and the
Buyer or another member of the buyer’s group. It is
understood that the purpose of this distributorship is to
formalize the joint business development activities
between the buyer’s group and the Company in all regions
where the distribution rights are granted. It is the
intent of the Buyer that its _______ operations in the
United Kingdom and its operations at ______ in the United
Kingdom and at Chicago, Illinois in the United States,
along with other regional sales groups as appropriate,
shall take an active role in the market development and
sale of products developed and produced by the Company.
3.9. Signature of the non-exclusive license agreement
annexed hereto between the Company and the Buyer or
another member of the Buyer’s group pursuant to which the
Company grants the Buyer the right to manufacture and
sell products in consideration of a royalty rate not to
138
exceed (5%). It is understood that the license is only to
be activated if: (a) the Company approves its activation
upon request by the Buyer; (b) the Company elects to
terminate its direct marketing operations; or (c) the
Company grants a license to any third party. In the
situation described in (b) above, the Buyer would seek to
recover its investment through the practice of the
license, the manufacture and pursuit of sales of the
Company’s then existing products and the development and
sale of additional products based upon the technology
covered by the license.
All other decisions by the Company concerning licenses
shall be taken by the President, after consultation with
the General Manager chosen by the Sellers.
3.10. The parties have agreed herein and/or in the
Company’s statuts the following with respect to the
management of the Company and the disposition of shares
of the Company:
(a) The statuts provide that the President of the Buyer
shall appoint a _________ representative as President of
the Company and that the President of the Company shall
appoint one or more General Managers (one of which shall
be a representative of the non-Buyer shareholders).
(b) The Buyer is appointing Mr. _________ today to the
position of President and is causing Mr. _________to
appoint today, as General Manager, Aloha Associates
(which in turn is concluding a contract with Aloha Bob to
have such position effectively assumed by her).
(c) The General Manager shall be responsible for day-today operations of the Company, under consultation with
and direction from the President. While not agreeing to
limit any of the power granted to the President of a
société par actions simplifiée under French law, the
parties acknowledge that the President’s primary
responsibilities shall be to oversee the interests of the
Buyer and of AIC, to act as the liaison between the
Company and the Buyer in regards to the functional
services to be provided as discussed in Article 3.8
above, and to help manage the distributor relationship
and any other marketing, sales and R&D activities
conducted between the Company and the __________ group.
The Buyer reserves the sole right to appoint, remove or
change the President of the Company. However, the Buyer
shall consult with the Sellers with respect to any such
decision.
139
(d) The parties have agreed upon the Business Plan
annexed hereto as the initial strategic and operating
plan for the Company’s business. The Company’s President
and General Manager shall review such Business Plan every
six months from the date hereof and make alterations
where appropriate. Such alterations may take into account
such trade-offs as between investing in further research
and development and exploiting current products and
distributing profits as a means of maximizing value. Any
material alteration in the Business Plan shall be
approved by at least seventy-five percent (75%) of the
shareholders to be effective.
(e) The Buyer shall have the right - the Agreement in
this respect constituting a unilateral promise to sell by
the Sellers - for a period, commencing on January 1, 2006
and ending on December 31, 2007, to buy the remaining 50%
of the Company’s shares for a total price equal to one
half of four times (4x) the Company’s EBIT during the
preceding twelve month period (EBIT meaning the net
income or loss (résultat net) for the period increased by
the corporate income tax and increased or decreased by
financial costs and/or financial income).21
3.10. The signature of the Agreement between the Company
and Aloha Associates annexed hereto pursuant to which
latter, represented by Aloha Bob, shall act as full time
General Manager of the Company as well as a “mirror
image” agreement (except with respect to the amount of
the remuneration) between Aloha Associates and Aloha Bob,
satisfactory in form and substance to the Buyer, pursuant
to which Aloha Associates shall make Aloha Bob available
to the Company on a full-time basis.
3.11. The signature of the Consulting Agreement between
the Company and Mr. B annexed hereto pursuant to which
Mr. B shall make his services available to the Company
140 days per year.
3.12. The initialing of the annexed employment contracts
with eight key employees, which contracts shall be
finalized when appropriate in view of the anticipated
subsidies from the ANPE.
3.13. The approval of this Agreement and all its annexes
by the Company and the Board of Directors of the Buyer.
Note: The right of first refusal referred to in the letter of
intent is now set forth in the Company’s statuts.
21
140
3.14. Opinion letter of patent counsel, as to the
existence and validity of the patents and patent
applications and the valid and irrevocable transfer
thereof to the Company.
3.15. Opinion letter from French counsel regarding the
existence of a sale to the Company of all the know how
and technology concerning the transferred patents.
Article 4. Finders
Neither the Sellers nor the Buyer have incurred or shall
incur any broker’s or finder’s or agent’s fees in
connection with this Agreement, with the exception of a
contractual consulting agreement between the Company and
Voyou, Ltd., pursuant to which the latter is to be paid
by the Company, as indicated in the cash flow and expense
forecast for the first year. It is agreed that the
consideration paid to Voyou Ltd. shall not exceed ______.
Article 5. Expenses
Expenses such as for legal and accounting fees incurred
by the Company in connection with the acquisition and the
transactions envisioned by this Agreement have been
forecasted and are provided for in the proposed operating
expense budget. The Sellers, personally, and not out of
the assets of the Company, shall pay any and all legal,
accounting or other expenses incurred appropriately and
directly by them. The Buyer shall be responsible for
payment of any registration tax on the sale of the shares
purchased from the Sellers. The Company shall incur the
registration expenses, fees and costs of the
transformation from an SARL to a société par actions
simplifiée, the increase of capital, the negotiation and
drafting of the lease as well as the fees for the
transfers of the patents and know how purchased by the
Company from A and/or B , and any legal opinions given
with respect thereto.
The Buyer shall reimburse the Company for the fees, costs
and taxes relating to the transformation of the Company
into a société par actions simplifiée
Article 6. Confidentiality
The Sellers and the Buyer shall keep totally confidential
and shall not disclose the terms and conditions of this
Agreement or the transactions envisioned herein or any
documents or information exchanged among the parties to
any third party nor make any public announcement relating
141
thereto without the consent of the other party, except
where such disclosure is required by law and then only
after notice to the other party.
Article 7. Non-competition and non-solicitation
agreements
7.1. The Sellers and Mr. B agree not to compete with the
Company for a period of five years from the date hereof.
In this respect, the Sellers and Mr. B shall not, either
directly or indirectly, themselves or through any
individual or legal entity, compete with the Company in
the development, production and/or sale of _____________
and any other products developed, manufactured and/or
sold by the Company, in any manner whatsoever, and as a
general matter, shall not act on behalf of any
enterprise, entity or business having an activity
identical or similar to that mentioned above and,
consequently, shall not work with or have any interest,
of any nature whatsoever, in such activities and/or with
respect to, such enterprises, entities or businesses,
and, in particular, without limiting the generality of
the foregoing;
-by the creation and/or holding of shares and/or any form
of interest in an enterprise entity and/or business which
corresponds to the above definition; and
- by engaging in any activity of any nature whatsoever
for or on behalf of an enterprise, entity or business
corresponding to the above definition.
The above undertaking shall apply to the countries of the
OECD including the countries of Eastern Europe.
7.2. Except as may otherwise be agreed in writing by the
parties hereto, the Sellers and Mr. B, with solidarity of
responsibility among them, hereby agree not to solicit,
in any manner whatsoever, directly or indirectly, for a
period of five years from the date hereof, any client,
supplier or agent of the Company whether they exist at
the date of solicitation or at any time prior to the
fifth anniversary hereof.
7.3. In the event of a breach of the above prohibition,
the Buyer shall be entitled to take all legal means to
cause such prohibited competition to cease and also to
claim from the Sellers and Mr. B, jointly, as well as any
other individuals or companies involved in the unfair
competition, before any court with jurisdiction, an
indemnity corresponding to the damages incurred.
142
Article 8. Applicable Law
The applicable law shall be the express provisions of
this Agreement and the intent of the parties as expressed
herein, as may be supplemented, if necessary, by
principles of French law.
Article 9. Resolution of disputes
9.1. The parties shall endeavor to resolve amicably any
and all disputes arising out of or in connection with
this Agreement and undertake to meet as soon as either
party advises the other of the existence of a dispute. If
the parties are unable to meet or to settle their dispute
amicably, such dispute shall be referred to arbitration
pursuant to 9.2 below.
9.2. If at any time during the continuance of this
Agreement, there shall be any question or dispute with
respect to the construction, meaning or effect hereof, or
any provision hereof, or arising out of or in connection
herewith, or concerning the rights or obligations
hereunder, which cannot be resolved amicably, such
question or dispute shall be referred to: (a) a sole
arbitrator to be selected by the parties hereto; or (b)
failing agreement in selecting such arbitrator within
seven (7) days, to a panel of three arbitrators, one to
be appointed by the Sellers, one by the Buyer and the
third by the two arbitrators so chosen. The arbitration
shall take place in ________, France and shall be
conducted in the English language.
9.3. The award rendered by such sole arbitrator or a
majority of the three arbitrators, as the case may be,
shall be final and binding on the parties and judgment
upon such award may be entered in any court having
jurisdiction.
Article 10. Good faith; further steps
The parties expressly agree to fulfill their obligations
hereunder in good faith. Each party agrees to take or
cause to be taken any and all further steps and to
execute or cause to be executed any and all further
documents as may be reasonably necessary to effect and
carry out fully all the transactions contemplated herein.
Article 11. Amendment or waiver
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Any amendment or waiver of any provision of this
Agreement shall be in writing and shall be effective only
in the specific instance for which it is given. No
failure or delay on the part of any party in exercising
any right hereunder shall operate as a future waiver or
amendment.
Article 12. Notices
All notices, required or permitted to be given hereunder
shall be in writing and shall be valid and sufficient if
delivered in person against a receipt or sent by prepaid
registered priority mail (return receipt requested) or
via facsimile which shall be confirmed by such registered
priority mail without undue delay, directed to the
parties at the addresses set forth above or to such other
address as a party may specify in a notice given in
accordance with this Article.
Article 13. Entire agreement
This Agreement and the Guaranty Agreement annexed hereto
and their respective annexes constitute the entire
agreement and supersede any and all prior agreements of
the parties with respect to the subject matter thereof.
No amendments, alterations or waivers of any of the terms
of this Agreement shall be binding unless the same shall
be in writing and duly executed by both parties.
IN WITNESS WHEREOF, the parties hereto have duly executed
this Agreement as of the day and year first above
written.
Signed in
On
In
originals
144
6. Guaranty Agreement (for Acquisition of Shares)
GUARANTY AGREEMENT
This GUARANTY AGREEMENT (the "Agreement"), is made and
entered into this __ day of ________, by and among:
Mr. A, an individual of ________ nationality, born in
_________, on _____________, domiciled at ___________;
and
Mr. B, an individual of French nationality, domiciled
at __________________, France;
(Mr. A and Mr. B being hereinafter referred to as the
“Guarantors”);
____________, a French société anonyme with a capital of
___________ Euros and its registered office at
______________, France, and registered under RCS no.
__________ (the “Beneficiary”).
WITNESSETH:
WHEREAS, the Company was created on _______, 2002, but
has not really commenced its activity; as of the date
hereof, it has no established balance sheet, has hired no
employees, but represents that it is the owner of assets
essentially comprised of patents and other intellectual
property described in the Agreement for Sale of Stock of
even date herewith.
WHEREAS, pursuant to such Agreement for Sale of Stock of
even date herewith, the Guarantors are selling or causing
to be sold to the Beneficiary as of today, 50% of the
capital stock (the “Shares”) of ____________ a French
société par actions simplifiée with a capital of 37,000
Euros and its registered office at ___________________,
France (hereinafter the “Company”); and
WHEREAS, the obligation of the Beneficiary to purchase
the Shares has been based on the truth and accuracy of
each of the representations and warranties and the
fulfillment by the Guarantors of each of the covenants
and agreements hereinafter set forth;
145
WHEREAS, it is agreed that any audit of the Company which
the Beneficiary may have undertaken shall in no way
diminish the scope of the guarantees given hereunder;
NOW, THEREFORE, in consideration of the mutual covenants
and agreements herein contained, the parties hereto
hereby agree as follows:
Article 1. Representations and warranties of Guarantors
The Guarantors hereby make the following representations
and warranties, with joint responsibility (solidarité)
among them, and without prejudice to the Beneficiary’s
right to recission as provided in Article 1184 of the
Civil Code:
1.1. Corporate standing of the Company
The Company has been validly transformed from a société à
responsabilité limitée into a société par actions
simplifiée and is validly in existence and able to
conduct its business in compliance with its corporate
purpose and all other legal and/or administrative
requirements applicable to its type of activities.
A certified copy of the resolution of the shareholders of
the SARL and a report of the commissaire à la
transformation with respect to its transformation into an
SAS and the Company’s current statuts are annexed hereto.
1.2. Shares
All of the Company’s initial capital stock (3,700 shares
with a par value of 1O Euros per share) has been validly
authorized and issued and is fully subscribed for and
paid. The Guarantors are the owners of all such shares.
All of the additional capital stock (1824 shares with a
par value of 10 Euros for share and an issuance premium
of 1,512,096) being reserved to the Beneficiary shall be
validly authorized and issued and, as of today, fully
subscribed for. All of the Shares are free and clear of
all liens and encumbrances whatsoever. Such Shares are
not the subject of any contract giving rise to any change
in beneficial ownership or to any mortgage or the like or
any other restrictions affecting the free transfer
thereof in any manner whatsoever, such as a promise of
sale, preemptive or preferential rights or any other
restrictions.
1.3. Authority and power of Guarantors
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The Guarantors have the authority and power to carry out
their obligations hereunder. They agree to take all
further steps as may be necessary with respect to
carrying out such obligations.
1.4. Transfer of Shares of the Company
The transfer of the Shares will not violate any law,
regulation, norm or administrative or judicial decision
or any provision of the Company’s statuts and/or result
in a default under an agreement or loss of any rights
whatsoever. To the extent that may be necessary, all
authorizations or consents for the transfer of the Shares
have been obtained.
1.5. Business Plan
In view of the fact that the Company in its SARL form was
created in July 2002 and has not been actively engaged in
business since its creation, the Shareholders are not
providing any financial statements for the Company. The
essential elements of the Company’s intended initial
business operations are set forth in the February 2002
business plan annexed hereto (the “Business Plan”).
1.6. Assets
a. Real estate
The schedule of real estate annexed hereto provides an
exact and summary description of the lease for the
building located at _________, France, which the Company
intends to sign, with an indication of the terms and
conditions of such proposed lease as well as a copy of
such proposed lease, if available. No real estate is
owned by the Company.
b. Fixed assets
The schedule of fixed assets (constructions) provides an
exact and summary description of all fixed assets of
which the Company is the concessionaire or lessee, with
an indication in each case of the corresponding legal
status. No fixed assets are owned by the Company.
c. Material, equipment and furnishings
The material, equipment and furnishings and other movable
assets which are currently in the possession of Company
are described in the schedule annexed hereto and are the
property of the Company.
147
The equipment attached to the premises and used in the
conduct of the Company’s business can be returned to the
lessor upon the termination of the lease.
d. State of assets
The Company’s fixed assets are in a normal state of
repair and good working order and are fit to satisfy the
needs of the Company’s activity. The office equipment is
in working order, but will need to be serviced in order
to insure proper operation. The laboratory and pilot
production equipment are in good condition, but need to
be serviced for proper operation. The costs envisioned
have been budgeted for in the Business Plan annexed
hereto. Additional equipment will be required and has
been budgeted for in the forecast of operation and
capital expenditures in the Business Plan.
e. Intellectual property
All the patents, patent applications and all the know how
and technology used or proposed in the Business Plan to
be used by the Company in any manner whatsoever
(hereafter the “Intellectual Property”), which are
described in a schedule of Intellectual Property annexed
hereto, are owned by the Company and are valid and
subsisting. It is understood that the transfers of
ownership of the Intellectual Property from the
liquidators of _______ (Canada) and ________ (France) to
A Company from such company to A and from the latter to
the Company have not yet been effectively registered.
Such registrations can be effected without restriction or
any other problem. There are no claims, demands or
proceedings pertaining to any of the Intellectual
Property. No third person, including any and all persons
who may have contributed in any way to the development of
any of the Intellectual Property has any interest of any
nature whatsoever in any of the Intellectual Property.
There are no contractual or legal restrictions whatsoever
(other than generally applicable laws and regulations) on
the manner in which any of the Intellectual Property may
be used. A detailed list of documents in support of the
Company’s rights to the Intellectual Property is set
forth in Article 2.5 below
f. Title to properties
All the properties in the Company’s possession which are
to be used in its business are set forth in an annexed
schedule. All such properties are fully owned by the
148
Company, free and clear of any liens, encumbrances or any
other restrictions or charges of any nature whatsoever,
except for one item, for which ________ Euros remains to
be paid (such amount being budgeted in the Business
Plan).
g. Receivables, prepaid expenses, loans
The Company has no existing receivables.
All accounts reflected in the Business Plan as pre-paid
expenses or deferred charges are properly attributable to
the Company’s future operations.
There are minor expenses incurred by personnel not yet
appointed to their positions, but who have been
supporting efforts to start operations. These expenses
which have been budgeted in the Business Plan shall not
exceed ___________.
1.7. Liabilities
The Company has no undertakings, liabilities or
obligations, whether or not accrued, including without
limitation, any guarantee or security or any tax or labor
liability, except:
a. the obligation to pay a consulting fee of
approximately _________ due to Voyou Ltd. for
services rendered, but not yet paid; this fee and
fees for potential additional services to be
rendered during the next twelve months have been
budgeted at __________;
b. the obligation to pay the lessor of the Company’s
premises in ________ a security deposit upon the
signing of a lease, as to which discussions are
currently underway;
c. the fees of the statutory auditor with respect to
the Company’s increase in capital, reserved
exclusively for the Beneficiary;
d. the fees of Mr. ____________, the commisaire à la
transformation (_________ Euros);
e. the fees of Sellers’ French counsel relating to the
drafting of the corporate documents for the
Company’s increase of capital as well as for the
annual legal and tax retainer; and
149
f. the expenses relating to the transformation:
translation of the articles of Aloha Associuates for
the Clerk of the Commercial Court (_______ Euros),
filing with the Clerk (_______ Euros), commercial
registry formalities (_______ Euros) and the filing
of minutes of an extraordinary meeting of
shareholders concerning the transformation (____
Euros).
All indebtedness as reflected in the Business Plan and
above can be reimbursed at any time without any penalty
or indemnity whatsoever. At the date hereof, the Company
not incurred any late charges or penalties with respect
to any financial commitments it may have made.
1.8. Taxes and charges
Taxes relating to the transformation of the Company from
an SARL into an SAS have been paid in full. No other
taxes or social charges of any nature whatsoever are due.
In particular, the transformation of the Company from an
SARL into an SAS has not led to the creation of a new
legal entity and accordingly the taxes imposed on the
liquidation of an SARL and the creation of an SAS are not
due. As of the date hereof, the Company has made and
filed all tax and social security declarations required
by law. The Company has paid, when due by law and
regulations, all taxes and social charges with respect to
its activity. As concerns taxes and social charges, no
late charge or penalty has been nor shall be assessed and
there shall be no assessment for back taxes.
1.9. Authorizations and compliance with laws
The Company has all necessary authorizations and permits
to conduct its business, and in particular, is not
subject to any obligation or restriction as concerns the
protection of classified establishments and the
protection of the environment.
The Company has substantially complied with all laws,
decrees and regulations actually in force or about to
enter into force concerning its activities, its business
or the envisioned sale of the Shares, including without
limitation, all laws and regulations governing labor
relations and social security.
1.10. Litigation
There are no actions, suits or judicial proceedings
pending or threatened against the Company and/or its
150
shareholders, nor is there any known basis for such
action, suit or proceeding.
There is no contingent liability with respect to the
protection of the environment.
1.11. Insurance
The Company’s assets and responsibilities are currently
insured with the _____ insurance company by A Company,
and upon the signature of a new lease for the Company’s
premises in France, a new insurance policy shall be
signed between the Company and ________. A draft of such
insurance policy is annexed hereto.
1.12. Employees
There are no pending or threatened labor disputes
directly or indirectly involving the Company, and the
Company is not a party to any agreement or contract other
than collective agreements which are applicable to it
because of the nature of its business.
A schedule of employees to be engaged by the Company as
soon as practically possible after the date hereof,
setting forth their positions, salaries and advantages is
annexed hereto. A copy of the employment agreements to be
signed between the Company and such employees is also
annexed hereto.
No employment agreements contain any clause conferring to
any employee any particular advantage,
except____________.
1.13. Shareholdings
The Company does have any shareholding or interest in
another company of any kind.
1.14. Contracts
The Company is not currently bound by any contracts other
than as set forth in 1.7 above.
1.15. Suppliers, clients and partners
No potential suppliers, clients or other important
business partners benefit from any advantage, which is
not strictly in compliance with normal business practice.
151
Annexed hereto is a schedule of principal suppliers and
principal clients of the Company’s predecessor company.
The only contract in force is with Voyou Ltd. as
described elsewhere herein. There are potential sales
commission contracts which agents used by the Company’s
predecessor company which are all in compliance with
normal business practice.
1.16. Directors and officers, bank accounts and
financial agreements
The Company’s only officer or director are: _______ who
is currently serving as the Company’s President and who
previously served as the sole Gérant of the Company in
its SARL form; and Aloha Associates which is serving as
General Manager.
An identification of the Company’s sole bank account,
which is with the _______branch of the Banque _________,
is annexed hereto. The Company has no other bank
accounts, credit facilities, guarantees, factoring or
financial agreements or the like.
1.17. Absence of changes
The Guarantors know nor have reason to know of any recent
material change in its situation, assets, liabilities,
commitments, business or property, other than changes in
its ordinary course of business, the aggregate of which
does not substantially affect the Company’s value.
The Guarantors have no knowledge of any facts (other than
general information relating to economic and commercial
conditions, competition, the evolution of techniques
concerned and any other similar elements), that are not
described herein or in the schedules annexed hereto,
which may have material adverse consequences on the
Company’s business.
Article 2. Schedules
In support of the Guarantors' representations and
warranties set forth in Article 1 above, the following
Schedules shall be annexed hereto by the Guarantors:
2.1. Corporate documents of the Company:
a. Certified copy of the original minutes of the
meeting of the associates of the Company approving
its transformation from an SARL to an SAS
152
b. Report of the Company’s commissaire à la
transformation with respect to its transformation
into an SAS.
c. Statuts of the Company
d. Proof of filing of the transformation of the
Company from an SARL into an SAS with the Clerk of
the Commercial Court of _______
e. Certified copy of a resolution of the shareholders
of the Company authorizing the increase in capital,
reserved exclusively to the Buyer, and granting the
President of the Company full power to effect such
increase in capital
f. Certified copy of extract from the Company’s stock
registry showing the issuance of 1824 new shares of
the Company to the Buyer
g. Certified copy of signed share transfer documents
from the Sellers to the Buyer for 938 of the
Company’s shares and proof of the inscription of the
transfer of such 938 shares to The Buyer in the
Company’s registries
2.2. Business Plan
2.3. Schedule of real estate (lease)
2.4. Schedule of material, equipment and furnishings
2.5. Schedule of Intellectual Property:
Proof of the Company’s valid ownership of the patents
and patent applications identified in the Guaranty
Agreement, including proof of the initial transfers of
the inventors’ rights (and an agreement by the
inventors that they have no further rights in such
intellectual property and shall not make any claim
against the Company or the Buyer relating thereto):
a. Copies of originals of patents and applications
from originals in the Canadian patent lawyer’s
office
b. Documents evidencing initial transfers of rights
by inventors and any other persons having
collaborated on the inventions covered by the
patents and patent applications (employment
contracts of employees with predecessor company)
153
c. Original document of transfer of rights to patents
and patent applications from Canadian liquidator
to A Company
d. Original document of transfer of rights to patents
and patent applications from A Company to A
e. Original of document of transfer of rights to
patents and patent applications from A to the
Company
f. Proof of commencement of the registration process
with respect to the transfers listed in c, d and e
above in all countries in which such patents and
patent applications have been registered
g. Letter from Canadian patent attorney dated ____,
2002
h. Letter from Canadian patent attorney stating he
has seen the originals of the patents and patent
applications and opining: that _____ regularly
acquired and became the valid owner of such
patents and patent applications; and as to the
regularity, validity and irrevocability of the
chain of title from Mr. B and any other persons
having collaborated on the inventions to_______,
to the Canadian liquidator to A Company to A and
to the Company).
i. Letter from Sellers’ French counsel as to the
regularity, validity and irrevocability of the
transfers of the patents and patent applications
from A Company to A and from the latter to the
Company.
Proof of the Company’s valid ownership of the know how,
technology and other intellectual property
identified in the Guaranty Agreement:
a. Inventory of documents supplied by Mr. B
b. Bates numbering of inventoried documents
c. Attestation by the Guarantors as to the existence
and availability to the Company of all the
inventoried documents
d. Original documentation with respect to the
“Soleau envelopes” and the filings thereof
154
e. Documents evidencing transfers of rights by
inventors or persons having collaborated on the
development of the know how, technology and other
intellectual property identified in the Guaranty
Agreement (employment agreements of employees
with predecessor company)
f. Waivers by the persons described in e above of
any potential rights to any of the know how,
technology and other intellectual property
identified in the Guaranty Agreement
g. Opinion letter from Sellers’ French counsel
regarding the reality and validity of the
transfer to the Company (and the absence of any
potential claims from any third party) of all the
know how and technology and the Company’s right
to file new “Soleau envelopes”
Letter from Mr. B to the Company renouncing all
rights with respect to the patents and patent
applications and the know how, technology and “Soleau
envelopes”.
2.6. Schedule of rights to property
2.7. Schedule of insurance (draft insurance policy)
2.8. Schedule of employees to be engaged and employment
agreements
2.9. Schedule of principal suppliers, clients and
commercial partners of the Company’s predecessor
2.10. Schedule of the Company’s bank account
All the representations and warranties contained in the
Schedules shall be true and correct as of the date stated
therein and the date of the transfer of the Shares.
Article 3. Indemnification of Beneficiary
3.1. Indemnity
The Guarantors indemnify the Beneficiary jointly
(solidairement) with respect to any damage whatsoever
which it may incur because of the inaccuracy any of the
Guarantors’ representations and warranties hereunder.
155
In this respect, the Guarantors undertake to reimburse
the Beneficiary, up to the amount of the sales price for
the 938 shares, an amount equal to the damage incurred.
The damage shall be equal to the gross amount of the
decrease in value of the assets and/or the increased
liability related to the inaccuracy of any
representation and warranty less any corresponding
reduction of the Company’s income tax, increased by any
other justifiable losses incurred by the Beneficiary.
In the event of a claim hereunder, the Beneficiary shall
notify the Guarantors, indicating the basis for the claim
and the gross amount of the loss incurred in order to
enable the Guarantors to protect their interests.
Any claim shall be taken into account by the Guarantors
if the registered letter required by Article 8 hereof is
mailed prior to the expiration of the period of
guarantee.
In the event the Guarantors refuse to indemnify, for any
reason whatsoever, they shall, within a period of fifteen
days from the date of the receipt of the above-mentioned
registered letter, notify their position to the
Beneficiary, with an indication of the reason for such
refusal.
In the absence of such response, the Guarantors’ refusal
shall no longer be taken into account.
It is agreed that no claim shall be due by the
for any cumulative amount under _______ Euros.
claims presented by the Beneficiary separately
single occasion shall exceed ______ Euros, the
shall be due starting from the first Euro.
Guarantors
If the
or one
indemnity
No claim by the Beneficiary shall be taken into account
unless it is for a gross amount above ___________ Euros.
3.2. Period of indemnity
The Guarantors’ obligation to indemnify the Beneficiary
shall continue for a period of two years from the date
hereof, except for claims relating to taxes and charges
which may be presented until the expiration of the
applicable statute of limitations.
3.3. Role of Guarantors
156
The Guarantors, if they so desire, may intervene solely
with respect to the protection of their own interests
with respect to the guarantee hereunder.
Article 4. Applicable law
The applicable law shall be the express provisions of
this Agreement and the intent of the parties as expressed
herein, as may be supplemented, if necessary, by
principles of French law.
Article 5. Resolution of disputes
5.1. The parties shall endeavor to resolve amicably any
and all disputes arising out of or in connection with
this Agreement and undertake to meet as soon as either
party advises the other of the existence of a dispute. If
the parties are unable to meet or to settle their dispute
amicably, such dispute shall be referred to arbitration
pursuant to 5.2 below.
5.2. If at any time during the continuance of this
Agreement, there shall be any question or dispute with
respect to the construction, meaning or effect hereof, or
any provision hereof, or arising out of or in connection
herewith, or concerning the rights or obligations
hereunder, which cannot be resolved amicably, such
question or dispute shall be referred to: (a) a sole
arbitrator to be selected by the parties hereto; or (b)
failing agreement in selecting such arbitrator within
seven (7) days, to a panel of three arbitrators, one to
be appointed by the Sellers, one by the Buyer and the
third by the two arbitrators so chosen. The arbitration
shall take place in ________, France and shall be
conducted in the ________ language.
5.3. The award rendered by such sole arbitrator or a
majority of the three arbitrators, as the case may be,
shall be final and binding on the parties and judgment
upon such award may be entered in any court having
jurisdiction.
Article 6. Good faith – further steps
The parties expressly agree to fulfill their obligations
hereunder in good faith. Each party agrees to take or
cause to be taken any and all steps and to execute or
cause to be executed any and all further documents as may
be reasonably necessary to carry out all the transactions
contemplated herein.
157
Article 7. Amendment or waiver
Any amendment or waiver of any provision of this
Agreement shall be in writing and shall be effective only
in the specific instance for which it is given. No
failure or delay on the part of any party in exercising
any right hereunder shall operate as a future waiver or
amendment.
Article 8. Notices
All notices, required or permitted to be given hereunder
shall be in writing and shall be valid and sufficient if
delivered in person against a receipt or sent by prepaid
registered priority mail (return receipt requested) or
via facsimile which shall be confirmed by such registered
priority mail without undue delay, directed to the
parties at the addresses set forth above or to such other
address as a party may specify in a notice given in
accordance with this Article.
Article 9. Entire Agreement
This Agreement and the Agreement for Sale of Stock to
which it is annexed and their respective annexes
constitute the entire agreement and supersede any and all
prior agreements of the parties with respect to the
subject matter thereof. No amendments, alterations or
waivers of any of the terms of this Agreement shall be
binding unless the same shall be in writing and duly
executed by all parties.
IN WITNESS WHEREOF, the parties hereto have duly executed
this Agreement as of the day and year first above
written.
Signed in
On
In
originals
***
Consider the alternative language for the indemnity
provisions negotiated in another similar acquisition:
3.1. Indemnity
3.1.1. Damages – Claim
158
The Guarantors jointly indemnify the Beneficiary with
respect to any damages whatsoever as defined below,
having their origin prior to the date hereof, not having
been the subject of a representation or having been the
subject of an incomplete and/or inaccurate
representation, having caused a reduction of the value of
an asset and/or an increase of a liability which has not
been taken into account in the Company’s accounts
(hereinafter “Damages”), it being noted that the amount
of such Damages shall be reduced by any corresponding tax
benefit or increased by other losses incurred by the
Beneficiary if it shall justify them.
In this respect, the Guarantors undertake to reimburse
the Beneficiary an amount equal to the Damages incurred,
up to a maximum amount of thirty percent (30%) of the
sales price.
In the event of a claim hereunder, the Beneficiary shall
send the Guarantors a registered letter, return receipt
requested, indicating the basis for the application of
the guaranty and the amount of Damages, along with
supporting evidence (hereinafter the “Claim”).
Any Claim by the Beneficiary shall be taken into account
by the Guarantors and the corresponding indemnity shall
be due, provided the Claim:
a) be notified by no later than thirty (30) days
from the Beneficiary’s knowledge of the facts and/or
elements which are the basis for the Damages; and
b) is mailed prior to the expiration of the guaranty
period.
Otherwise, the Beneficiary’s Claim shall no longer be
allowed.
In the event the Guarantors object to the application of
their guarantee, for any reason whatsoever, they shall,
within a period of thirty (30) days from the date of the
Claim, notify their position to the Beneficiary, with an
indication of the reason for such objection.
Otherwise, the Guarantor’s objection shall no longer be
allowed.
3.1.2. Limitations
a) Exemption
159
It is agreed that no Claim shall be due by the
Guarantors to the Beneficiary as long as the total
amount of Claims shall not exceed an exempted amount
of fifteen thousand (15,000) Euros. If the Claims
asserted by the Beneficiary separately or one single
occasion shall be above such exemption, the
indemnity shall be due only for the amount of the
Claim(s) exceeding this exemption.
b) De minimis
No Claim by the Beneficiary shall be taken into
account unless the Damages are for an amount above
one thousand, five hundred twenty-four and fortynine one-hundredths (1,524.49) Euros.
c) Ceiling
The payments made by the Guarantors hereunder shall
not exceed, all items taken together, thirty percent
(30%) of the sales price.
3.2. Period of guaranty
The Guarantors’ obligation to indemnify the
Beneficiary shall continue for a period of eighteen
(18) months from the date hereof, except for Claims
relating to taxes and social charges which may be
presented until the expiration of the applicable
statute of limitations.
3.3. Role of Guarantors
The Guarantors shall have the right, at their sole
expense, to organize the defense, in the name of the
Company, against any action or claim of a third
party relating to a Claim. The Guarantors shall be
authorized, in this context and upon their request,
to conduct any negotiation or procedure in the first
instance or on appeal.
In addition, the Beneficiary undertakes and shall
cause the Company to do the following:
a) to take, at the request of the Guarantors, all
steps necessary to avoid, resist or settle any
situation which might give rise to a Claim,
immediately or over time, and in this respect,
manage any proceedings in the name of the Company,
at the request and expense of the Guarantors;
160
b) to authorize the Guarantors and their
representatives to have access to, and make copies
of, any of the Company’s files or registries,
provided the Guarantors shall keep all such
information confidential, except communications
which are necessary with respect to such
proceedings;
c) to require from the Company’s personnel, the
production of declarations and proof and to
participate in any lawsuit or hearing which might
produce such declarations or proof; provide all
assistance necessary in order to permit the
Guarantors to avoid, defend or settle any action,
without such assistance giving rise to a billing to
the Guarantors; and
d) to take or cause the Company to take all steps
necessary to reduce the amount of any loss relating
to such actions or claims.
3.4. Payment of Claims
3.4.1. Claims of third parties
The Beneficiary shall not be entitled to seek
indemnification for Damages resulting from a claim
against the Company by a third party unless it
results in a recovery or decision definitively
liquidated and paid by the Company or from a
settlement duly approved by the Guarantors.
The Guarantor’s liability with respect to any Claim
shall be reduced by any amounts which have been or
may be received or obtained by the Beneficiary or
the Company from any third party liable, in whole or
in part, for the situation or circumstances having
given rise to such Claim (the Beneficiary
undertaking to take or cause the Company to take all
steps to pursue such third party).
In the event that a sum is recovered in this respect
after the Guarantors have indemnified the
Beneficiary, the Beneficiary shall refund or cause
the Company to refund to the Guarantors the lesser
of the following two sums:
a) the amount already paid by the Guarantors
pursuant to this agreement; or
b) the recovery made.
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3.4.2. Tax effects
Any indemnity which may be due with respect to a
Claim shall be reduced by any tax benefit or any
increase in tax deficit which would result from the
existence of an expense, damage, loss or increase in
charges having given rise to the Claim for the
Company.
As concerns the potential payment of back taxes, the
latter shall be taken into account only for the net
amount of the additional liability. In this respect,
payments for back taxes for which the effect for the
Company will only be temporary shall not be taken
into account. The same shall be true, for example,
for reserves provisionally considered to be nondeductible as well as any expense the deduction of
which is postponed in time. In such a case, however,
penalties, late charges and interest incurred by the
Company shall be taken into account.
3.4.3. Exclusions
The Guarantors shall not have any liability to the
Beneficiary to the extent that a Claim:
a) is or shall be compensated by an increase in
assets, a reduction of liabilities or any other
favorable event affecting the Company and resulting:
-
from an elimination of a reserve in the Company’s
accounts relating to the Company’s activities;
-
from the payment to the Company or the Beneficiary
of an insurance indemnification or from a third
party in the context of a legal proceeding
relating to the subject of a Claim;
b) results from or is attributable to an act or
omission of the Beneficiary or the Company after the
Closing of the sale or more generally the subject of
which has its origin after the Closing of the sale;
c) results from a legislative or administrative text
not yet in force on the date hereof or any change in
tax rates and as to which the Guarantors shall have
no information prior to the Closing.
3.4.4. Effect of a Claim
162
Any sum paid by the Guarantors to the Beneficiary
for a Claim shall be considered as constituting a
revision of the purchase price for the Shares
pursuant to the Agreement for Sale of Shares.
3.5. Protection of the Guarantors
3.5.1.
The Beneficiary recognizes having entered into
this agreement based upon the information and
representations set forth herein and the
documents and information which can be proved
to have been communicated during the audit it
has conducted of the Company and that it does
not have knowledge, as of the date of entering
into this agreement, of any fact or event which
could give rise to any Claim whatsoever.
3.5.2.
No Claim, except if it relates to additional Damages
consecutive to Damages for which indemnification has
made, shall be asserted as to one or another of the
representations in this agreement, in the event
that the fact or event upon which it is shall have
been the subject of a Claim which shall have been
satisfied with respect to another representation.
3.5.3.
In the event that a Claim is asserted, the
Beneficiary shall authorize counsel for
the Guarantors to consult the Company’s books,
registers and documents, so that the Guarantors can
accept and, if appropriate, object such Claim with
full knowledge.
7. List of Closing Documents (for Acquisition of Shares)
1.
Agreement for Sale of Stock
2.
Guaranty Agreement (Representations, warranties and
guarantees of assets and liabilities)
3.
Extract K-bis of the Company
4.
Certified copy of the original minutes of the meeting
of the associates of the Company approving its
transformation from an SARL to an SAS
163
5.
Report of the Company’’s commissaire à la
transformation with respect to its transformation
into an SAS and proof of the filing of the
transformation with the Clerk of the Commercial Court
of ________.
6.
Statuts of the Company (SAS)
7.
Certified copy of a resolution of the shareholders of
the Company authorizing the increase in capital at
the Closing, reserved exclusively to the Buyer and
granting the President of the Company full power to
effect such increase in capital at the Closing
8.
Certified copy of extract from the Company’s stock
registry showing the issuance of 1824 new shares of
AIC to the Buyer
9.
Certified copy of signed share transfer documents
from the Sellers to the Buyer for 938 of the
Company’s shares and proof of the inscription of the
transfer of 938 shares to the Buyer in the Company’s
registries
10. Bank check from the Buyer to the Company in the
amount of ___________ Euros and __________ Euros in
cash; checks from the Buyer for ____________to each
of A and Mrs. B
11. Letter of resignation of Mr. _______ as President of
the Company
12. Letter from the President of the Buyer appointing
_____________ as President of the Company
13. Proof of the Company’s valid ownership of the patents
and patent applications identified in the Guaranty
Agreement, including proof of the initial transfers
of the inventors’ rights (and an agreement by the
inventors that they have no further rights in such
intellectual property and shall not make any claim
against the Company or the Buyer relating thereto):
a. Copies of originals of patents and patent
applications from originals
b. Documents evidencing initial transfers of rights by
inventors and any other persons having collaborated
on the inventions covered by the patents and patent
applications (employment contracts of employees with
predecessor company; waivers of ______ and ________)
164
c. Copy of transfer of rights to patents and patent
applications from _______ to ________
d. Letter from Canadian liquidator concerning the
transfer of rights to patents and patent
applications from Canadian liquidator to A Company
e. Original document of transfer of rights to patents
and patent applications from A Company to A
f. Original of document of transfer of rights to
patents and patent applications from A to the
Company
g. Proof of commencement of the registration process
with respect to the transfers listed in c, d, e and
f above in all countries in which such patents and
patent applications have been registered
h. Letters from Canadian patent attorney dated
2002
,
i. Letter from Canadian patent attorney dated , 2002
stating he has seen the originals of the patents and
patent applications and opining: that ____ regularly
acquired and became the valid owner of such patents
and patent applications; and as to the validity and
irrevocability of the chain of title from ______ to
_______, from the Canadian liquidator to A Company,
from A Company to A and from A to the Company, as
well as the absence in Quebec of any conflicting
filings which could affect the chain of title in any
way.
j. Letter from French counsel opining as to the
existence of a sale of the patents and patent
applications from A to the Company.
14. Proof of the Company’s valid ownership of the know
how, technology and other intellectual property
identified in the Guaranty Agreement:
a. inventory of documents supplied by Mr. B
b. Bates numbering of inventoried documents
c. Attestation by the Guarantors as to the existence
and availability to the Company of all the
inventoried documents
165
d. Original documentation with respect to the “Soleau
envelopes” and the applications relating thereto
e. Documents evidencing transfers of rights by
inventors or persons having collaborated on the
development of the know how, technology and other
intellectual property identified in the Guaranty
Agreement (employment agreements of employees with
predecessor company) (See 13b)
f. Waivers by the persons described in e above of any
potential rights to any of the know how, technology
and other intellectual property identified in the
Guaranty Agreement
g. Opinion letter from French counsel regarding the
validity of the transfer to the Company (and the
absence of any potential claims from any third
party) of all the know how and technology
15. Letter from Mr. B to the Company renouncing all
rights with respect to the patents and patent
applications and the know how, technology and the
“Soleau envelopes”
16. Inventory of all the tangible assets (material,
equipment and furnishings) identified in the Guaranty
Agreement and attestation by the Guarantors that all
such assets are physically present at the Company’s
premises on the date of the Closing
17. Written confirmations from Mr. A and A Company that
neither shall have any claim against the Company or
the Buyer for any consideration other than the
symbolic Euro which Mr. A received in consideration
of his transfer of all the intellectual property and
the tangible assets to the Company
18. Non-exclusive Distribution Agreement between the
Company and Buyer Group BV
19. Authorization from Buyer Group BV for ________ to
sign the Distribution Agreement
20. Non-exclusive License Agreement between the Company
and Buyer Group BV
21. Authorization from Buyer Group BV for __________ to
sign the License Agreement
22. Business Plan dated _________ 2002
166
23. Agreement between the Company and Aloha Associates
pursuant to which latter, represented by Aloha Bob
(who shall also sign such Agreement), shall act as
full time General Manager of the Company
24. Consulting Agreement (in French) between the Company
and Mr. B
25. Initialing of employment contracts with eight key
employees of the Company
26. Copy of certified original of minutes of the Board of
Directors of the Buyer authorizing its President to
sign the Agreement for Sale of Stock and all its
annexes and related agreements
27. List of expenses as of the Closing date to be assumed
by the Company and reimbursed by the Buyer
29. Additional documents to be annexed to the
Guaranty Agreement:
a. Lease for premises in France
b. Company’s insurance policy
c. List of principal suppliers, clients and
commercial partners of the Company’s predecessor
d. Schedule regarding the Company’s bank account(s)
including bank signature papers reflecting agreed
authorizations at appropriate levels
8. License Agreement
International License Agreement
(Check list for the international negotiator)
1. Parties
2. Whereas clauses
3. Essential definitions
a. Products
b. Patent Rights (patents and patent applications specify in detail)
167
c. Improvements (improvements, new patents)
d. Trademark Rights
e. Technical Information (know-how) (invention
records, laboratory records and notebooks,
research reports, development reports,
experimental engineering reports, plant design and
operation specifications, production equipment,
raw material specifications and control methods).
f. Territory - Exclusive or non exclusive or mixture?
g. Net Sales Receipts
h. Term - Initial period, renewal periods, tacit
renewal?
4. Appointment of Licensor and Grant of Rights
a. Appointment of Licensor - Exclusive or nonexclusive - Can the Licensor exploit the same
rights in the Territory?
b. Description of rights granted under the patents,
technical information and trademarks
c. Transferability of rights to other companies of
the Licensor’s group? How to define such group
(usually based on notion of control)?
d. Right to have sub-licensees?
e. Rights retained by the Licensor?
f. Restrictions on Licensee?
5. Duties of Licensee
a. Acceptation of appointment by Licensee
b. Representations as to the Licensee’s ability to
perform
c. Use of best efforts (or commercially reasonable
efforts?) by the Licensee to make, use and sell
the Products in the Territory. Penalty for lack of
diligence? Provisions like these are especially
necessary if there is no minimum royalty
168
d. At its own expense? Any participation by the
Licensor, e.g., as to marketing, furnishing
standard technical and marketing documents, etc.?
e. Licensee’s express recognition of the Licensor’s
ownership of the Patent Rights, Trademark Rights
and Technical Information?
f. Obligation of Licensee to grant back to Licensor
any patents, improvements, know-how, etc.?
g. Compliance with all applicable laws and
regulations (e.g., concerning the manufacture
sale, use, packaging and labeling of Products)
h. Obligations in the event of infringements?
6. Technical information
a. Included or not included in the license?
b. Disclosure to Licensee - How? Provision for
present and future information
c. Method of furnishing the technology (documents,
language, training at the Licensor’s plants,
inquiries, payment of expenses)
d. Supplying of ongoing technical assistance during
the term of the agreement
e. Confidentiality
f. Non-responsibility of the Licensor for
manufactured by the Licensee
7. Infringements
a. Infringement by Licensee
b. Licensee to notify Licensor of any infringements
in the Territory (by or against third parties) Description of how to handle infringement by
others and claims of others of infringement of
their rights - Who will notify, defend and pay
costs? Who will be in charge of any litigation?
8. Royalties and payments
a. Details of calculation of royalties - Percentage
of Net Sales Receipts?
169
b. Requirements for minimum annual royalties?
Rattrapage?
c. Records - Obligation to keep true and accurate
books and records
d. Reporting of Net Sales Receipts (statements of
earned royalties) - Annual, quarterly, monthly?
e. Payment of royalties - Payments in advance?
f. Provisions concerning taxes and withholding
g. Audit of books and records by Licensor
9. Quality control
a. Product specifications to be supplied by the
Licensor
b. Licensee to follow the Licensor’s product
instructions
c. Inspection and testing of Products by the
Licensee
d. Furnishing of samples to the Licensor
e. Inspection of plant and processes by the
Licensor
f. Each party will notify the other of any major
product problems and means of correction
10. Trademarks and Tradenames
a. Licensor to assist Licensee re any necessary
filing of Trademarks and Tradenames in the
Territory.
b. Licensee to obtain approval of Licensor re signs,
labels, packaging, advertising, etc.
c. Requirement of notification by Licensee on
Products (that the Products are manufactured
pursuant to a license agreement with Licensor)
d. Licensee to have no rights to the Trademarks and
Tradenames in the Territory except as Licensee
under the license agreement
170
11. Confidentiality
a. During the term of the agreement
b. After the agreement - How long?
c. Each party to impose confidentiality obligation
on employees or others who may receive
confidential information
12. Warranties and product liability
a. No express warranties by the Licensee without the
approval of the Licensor
b. Licensor does not warrant the Licensee’s Products
and will not be liable for breach of warranty or
other product complaints
13. Defaults and remedies
a. Liability for breach of any material provision of
the contract - Definition of what specific
elements each party considers as material (nonpayment of royalties, bankruptcy of a party, a
non-permitted assignment under the agreement, an
attempted misappropriation by the Licensee of any
rights granted under the agreement, etc.)
b. Notice of breach to be given within certain time
frame
c. Cure period?
d. Right to resort to remedy of anticipatory breach?
Under what circumstances?
e. Damages for breach of contract - Compensatory
damages? Consequential damages (lost profits)?
Liquidated damages? Mitigation of damages?
14. Termination
a. Right to terminate - Under what circumstances
(material breaches as defined)?
b. Notice of termination
c. Termination not to prejudice right to remedies
including damages
171
15. Effect of expiration or termination
a. Licensee to cease sale of Products - What to do
with unsold Products – Licensee to sell or
return?
b. Return of confidential information
c. Right of the Licensee to sell remaining stock for
specified period of time in the event of the
termination of the agreement?
16. Resolution of disputes
a.
National courts or arbitration?
b.
If arbitration, ad hoc or institutional?
c.
Other provisions concerning arbitration (number
and choice of arbitrators, language of
arbitration, place of arbitration, etc.)
17. Miscellaneous provisions
a. Agreement binding on successors and assigns
b. Assignability or non-assignability of agreement
and/or rights and obligations under the
agreement
c. Failure to insist on performance does not
constitute a waiver for the future
d.
Parties acting as principals and independent
contractors (and not as principal and agent,
partners or joint venturers) - One party cannot
bind the other to third parties
e. Most favored nation clause?
f. Force majeure, hardship clauses?
g. Good faith - further steps
h.
i.
j.
Applicable law
Interpretation (headings and sections for
convenience purposes only)
Amendments - In writing?
172
k.
Notices under the agreement
l.
Partial enforceability
m.
Partial invalidity clause
n.
Execution in counterparts
o.
Language
p.
Expenses
q.
Entire agreement (“merger clause”)
173
LICENSE AGREEMENT
This LICENSE AGREEMENT (the “Agreement”) is made and
entered into this day of
, by and between:
______________, a French société par actions simplifiée,
with its registered office at ___________,
France, represented by its President, Martin Cellérier
(hereinafter referred to as the "LICENSOR");
and
__________________, a Dutch limited liability company
with offices at ______________, The Netherlands,
represented by _________, authorized agent (such company
as well as any other member of its group of companies to
which it may assign this Agreement and/or or its rights
and obligations hereunder being referred to hereinafter
as the "LICENSEE").
WITNESSETH:
WHEREAS, LICENSOR is the owner of certain Patent Rights
(as hereinafter defined), certain Trademark Rights (as
hereinafter defined) and certain Technical Information
(as hereinafter defined) relating to the Subject Products
(as hereinafter defined);
WHEREAS, LICENSEE desires to obtain for itself and/or
other members of its group of companies, a non-exclusive
license under said Patent Rights, Trademark Rights and
Technical Information to make, use and sell Subject
Products in the Territory (as hereinafter defined); and
WHEREAS, LICENSOR is willing and able to grant LICENSEE
such a non-exclusive license under the terms and
conditions set forth hereinafter;
NOW, THEREFORE, in consideration of the above and the
mutual covenants and agreements contained herein, the
parties hereto hereby agree as follows:
Article 1. Definitions
1.1. The term "Subject Products" as employed herein shall
mean and include all pigments, colors, inks and ink
products useful in the graphic arts, including, but not
necessarily limited to, printing inks, components
thereof, and all chemical compositions or machines useful
174
in the employment thereof and any other products
developed, manufactured and/or sold by LICENSOR.
1.2. The term "Improvement" as employed herein shall mean
new compositions and processes pertaining to the Subject
Products, their manufacture, use and sale, including, but
not limited to, new compositions comprising Subject
Products, new techniques of using, applying or selling
the Subject Products, and new methods, technology,
processes and know-how for manufacturing the Subject
Products.
1.3. The term "Patent Rights" as employed herein shall
mean and include all patent applications and patents
controlled, owned or possessed by LICENSOR or to which
LICENSOR has rights which may be granted to LICENSEE
hereunder, in the Territory, during the term of this
Agreement, and which relate to Subject Products,
including those listed or referred to in the Agreement
for the Sale of Stock of even date herewith with respect
to LICENSEE’s purchase of stock of LICENSOR.
1.4. The term "Trademark Rights" as employed herein shall
mean and include all trademarks, trade names and trade
designations which are controlled, owned and/or employed
by the LICENSOR during the term of this Agreement, which
relate to the Subject Products including those listed in
Schedule B attached and as amended from time to time.
1.5. The term "Technical Information" as employed herein
shall mean and include such “Soleau envelopes”, process
technology, know-how, data, scientific, commercial or
other information and Improvements relating to the Patent
Rights and/or the manufacture, use and/or sale of Subject
Products, including those listed or referred to in the
Agreement for the Sale of Stock of even date herewith
with respect to LICENSEE’s purchase of stock of LICENSOR,
which are acquired, owned and/or controlled by the
LICENSOR or to which LICENSOR has the right to use or
license, during the term of this Agreement.
1.6. The term "Territory" as employed herein shall mean
and include all countries of the World.
1.7. The term "Net Sales Receipts" as employed herein
shall mean the gross amounts invoiced by LICENSEE on the
sale of Subject Products manufactured by LICENSEE to an
independent third party customer, less normal and
customary trade and quantity allowances or credits to
customers on account of settlement of complaints, price
adjustments, rejection, or return of products; only to
175
the extent any of the foregoing may be paid or allowed;
PROVIDED that Subject Products shall be considered sold
when shipped or billed out, whichever comes first.
Article 2. Grant of Rights
2.1. During the term of this Agreement, LICENSOR shall
and hereby does, to the extent it is legally able, grant
to LICENSEE, the non-exclusive right and license under
LICENSOR's Patent Rights, Trademark Rights, Improvements
and Technical Information, and to make, use and sell
Subject Products in the Territory. In connection with
this grant of rights, LICENSOR shall provide LICENSEE
with all Technical Information and any and all other
documents and information and assistance as may be
reasonably necessary for LICENSEE to make, use and sell
Subject Products in the Territory.
2.2. The rights and
hereunder shall not
LICENSEE, except to
group of companies,
of the LICENSOR.
licenses granted to LICENSEE
be transferable or assignable by the
other members of the Sun Chemical
without the express written consent
Article 3. Duties of LICENSEE
3.1. LICENSEE agrees to employ its commercially
reasonable efforts to make, use and sell Subject Products
in the Territory.
3.2. LICENSEE hereby recognizes and acknowledges the
validity and ownership of LICENSOR's Patent Rights,
Trademark Rights, Technical Information, and Improvements
and agrees not to contest such ownership or validity,
directly or indirectly, by assisting other persons during
the life of this Agreement.
3.3. In the event this Agreement must be approved by any
governmental body or agency, LICENSEE shall exert its
best efforts to obtain such approval.
Article 4. Royalties and Payment
4.1. In consideration of the rights and licenses granted
herein, LICENSEE agrees, during the term of this
Agreement, to pay or cause to be paid to LICENSOR, the
royalty rate annexed hereto, which rate may be changed
from time to time by the parties, but which shall at no
time exceed five percent (5%) of the LICENSEE’s Net Sales
Receipts.
176
4.2. LICENSEE, within forty-five (45) days after the
first day of January, April, July and October of each
year this Agreement is in effect, shall deliver or cause
to be delivered to LICENSOR, a true and accurate report
of the Net Sales Receipts obtained during the preceding
three (3) months under this Agreement as are pertinent to
an accounting for royalties due thereunder.
Simultaneously with the delivery of each such report,
LICENSEE shall pay or cause to be paid to LICENSOR the
royalties due for the period covered by such report. If
no royalties are due, it shall be so reported.
4.3. LICENSEE shall keep true and accurate books of
account containing all particulars which may be necessary
for the purpose of showing the amounts payable to
LICENSOR by way of royalties hereunder. Said books shall
be kept at LICENSEE's place of business and shall be
available and open at all reasonable times for two (2)
years following the end of the calendar year to which
they pertain, to the inspection of a certified public
accountant selected by LICENSOR for the purpose of
verifying the accuracy of the statements to be provided
hereunder.
4.4. The royalties provided for herein shall be payable
in full, less any amounts LICENSEE is required to
withhold pursuant to any laws, statutes, regulations or
requirements of any governmental body.
Article 5. Technical Information
5.1 At the request of LICENSEE any time during the term
of this Agreement, and at no additional cost to LICENSEE,
LICENSOR shall, to the extent it is legally able to do
so, disclose to LICENSEE and to the extent reasonably
possible, in writing, such Technical Information as may
then be acquired, possessed, controlled, developed or in
the process of being developed by LICENSOR.
5.2. LICENSEE shall receive all such Technical
Information and maintain same in strictest confidence and
shall not reveal or disclose same to any third parties
without the express written consent of the LICENSOR, and
LICENSEE shall take all necessary measures to assure that
no such unauthorized disclosure is made; PROVIDED that
the foregoing prohibition as to disclosure shall not
extend to such Technical Information which enters the
public domain through no fault of LICENSEE.
5.3. It is understood and agreed that by virtue of the
rights and licenses granted hereunder, LICENSOR shall not
177
have any liability or responsibility for the products
which may be made, used or sold by LICENSEE hereunder.
LICENSEE shall and hereby does accept full and complete
responsibility for such products and agrees to hold
LICENSOR harmless from any claims which may arise
relating to said products.
5.4. LICENSOR agrees, during the term of this Agreement
and upon request of the LICENSEE, to provide LICENSEE
with such technical assistance as may be reasonably
necessary to permit LICENSEE to continue to make, use and
sell Subject Products hereunder.
Article 6. Patent Rights
In the event any Patent of LICENSOR's Patent Rights is
held invalid by the decision of a court of competent
jurisdiction, and no reversal of that decision is or can
be obtained by LICENSOR, then said Patent shall no longer
be considered to be contained in LICENSOR's Patent
Rights, on a country-by-country basis.
Article 7. Term and Termination
7.1. It is understood that the license under this
Agreement shall be activated only if: (a) LICENSOR
approves its activation upon request by LICENSEE; or (b)
LICENSOR elects to terminate its direct production and
marketing operations; or (c) LICENSOR grants a license to
any third party.
7.2. Unless sooner terminated as herein otherwise
provided, the term of this Agreement shall commence on
the date hereof and be for an initial period of ten (10)
years from the date of the activation of the license set
forth in 6.1 above, and shall be automatically renewed
for additional periods of one (1) year each unless
terminated by either party by giving written notice to
the other party at least ninety (90) days prior to the
end of the then current period.
7.3. Either party may terminate this Agreement in the
event of a default of the other party in any of its
substantial obligations hereunder; PROVIDED that the
party not in default shall give written notice thereof to
the defaulting party and if said default is not cured
within thirty (30) days after said notice, this Agreement
shall terminate forthwith.
Article 8. Trademarks and Tradenames
178
8.1. LICENSOR agrees to give LICENSEE any necessary
assistance to enable LICENSEE to file as a registered
user of LICENSOR's trademarks in the Territory, to the
extent such filings may be desirable or required by law.
8.2. LICENSEE shall follow any reasonable request of
LICENSOR with respect to use of licensed marks, and
LICENSEE shall obtain the approval of LICENSOR with
respect to signs, labels, packaging material, advertising
or the like bearing the licensed marks prior to the use
thereof; PROVIDED that such approval shall not be
unreasonably withheld.
8.3. LICENSEE agrees that nothing contained herein shall
give LICENSEE any right, title or interest in the
Licensed Marks (except the right to use the Licensed
Marks in accordance with the terms of this Agreement),
that the licensed marks are the sole property of LICENSOR
and that any and all uses by LICENSEE of the licensed
marks shall inure to the benefit of the LICENSOR.
8.4. In the event of the termination of this Agreement
for any reason whatsoever, LICENSEE shall have the right,
for a period not to exceed six (6) months, to continue to
sell Subject Products then on hand bearing licensed
marks; PROVIDED that at the expiration of said six (6)
month period, LICENSEE shall cease to use said licensed
arks, and shall deliver to LICENSOR, free of charge, all
remaining signs, labels, packaging materials, advertising
or the like, bearing licensed marks which are then in the
possession of LICENSEE.
8.5. LICENSEE agrees to notify LICENSOR of any adverse
uses in the Territory of marks confusingly similar to the
licensed marks and agrees to take no action of any kind
with respect thereto except with the express written
authorization of LICENSOR.
8.6. LICENSEE may only use licensed marks in their
standard form and style as they appear upon the Subject
Products or as instructed in writing by LICENSOR. No
other letter(s), word(s), design(s), symbol(s), or other
matter of any kind shall be superimposed upon, associated
with or shown in such proximity to the licensed marks so
as to tend to alter or dilute them and the LICENSEE
further agrees not to combine or associate any of such
licensed marks with any other trademark or tradename.
8.7. Every licensed mark used or displayed by the
LICENSEE may be identified as a trademark owned by
LICENSOR and such identification can be accomplished by
179
placing as asterisk (*) adjacent to the trademark with
the asterisk referring to a footnote reading: "Licensed
Trademark(s) of (LICENSOR).
Article 9. Confidentiality
9.1. Each party shall treat as strictly confidential and
secret all oral and written communications, lists,
circulars and other documents with which it has been
entrusted and which can be regarded from the normal
commercial viewpoint or upon special indication by the
other as trade secret or confidential information. Each
party recognizes as confidential the terms and conditions
of this Agreement, including price lists.
9.2. Each party shall impose similar obligations on its
employees and others who may be required to have
knowledge of any information in the ordinary course of
business.
Article 10. Resolution of Disputes
10.1. The parties shall endeavor to resolve amicably any
and all disputes arising out of or in connection with
this Agreement and undertake to meet as soon as either
party advises the other of the existence of a dispute. If
the parties are unable to meet or to settle their dispute
amicably, such dispute shall be referred to arbitration
pursuant to 10.2 below.
10.2. If at any time during the continuance of this
Agreement, there shall be any question or dispute with
respect to the construction, meaning or effect hereof, or
any provision hereof, or arising out of or in connection
herewith, or concerning the rights or obligations
hereunder, which cannot be resolved amicably, such
question or dispute shall be referred to: (a) a sole
arbitrator to be selected by the parties hereto; or (b)
failing agreement in selecting such arbitrator within
seven (7) days, to a panel of three arbitrators, one to
be appointed by the LICENSOR, one by the LICENSEE and the
third by the two arbitrators so chosen. The arbitration
shall take place in_______, France and shall be conducted
in the English language.
10.3. The award rendered by such sole arbitrator or a
majority of the three arbitrators, as the case may be,
shall be final and binding on the parties and judgment
upon such award may be entered in any court having
jurisdiction.
180
Article 11. Miscellaneous Provisions
11.1. This Agreement shall be binding upon and inure to
the benefit of the successors and assigns of the parties
hereto; PROVIDED that LICENSEE may not assign its rights
or obligations hereunder, except to any other members of
the Sun Chemical group of companies, without the express
prior written consent of LICENSOR.
11.2. The failure to insist in any instance on the strict
performance of any provision of this Agreement or to
exercise any right hereunder shall not constitute a
waiver of such provision or right in any other instance.
11.3. Both LICENSOR and LICENSEE shall act as principals
in all respects concerning this Agreement and neither of
them shall hold itself out as the agent of the other.
LICENSOR and LICENSEE shall keep the other party hereto
free from all expenses and costs other than those as may
be specifically authorized by the other in writing.
11.4. The applicable law shall be the express provisions
of this Agreement and the intent of the parties as
expressed herein, as may be supplemented, if necessary,
by principles of French law.
11.5. No modification of this Agreement shall be
effective unless in a writing signed by both parties
hereto.
11.6. All notices, required or permitted to be given
hereunder shall be in writing and shall be valid and
sufficient if delivered in person against a receipt or
sent by prepaid registered priority mail (return receipt
requested) or via facsimile which shall be confirmed by
such registered priority mail without undue delay,
directed to the parties at the addresses set forth above
or to such other address as a party may specify in a
notice given in accordance with this Article.
11.7. The termination of this Agreement shall not act to
relieve either party hereto from performing any accrued
obligations hereunder, including payments of any amounts
then due.
11.8. If any provision hereof shall be unenforceable, the
remaining provisions of this Agreement shall not be
effected thereby and shall remain in full force and
effect.
181
11.9. This Agreement, including the Schedules annexed
hereto, contains the entire agreement of the parties and
supersedes and terminates any prior agreements between
the parties hereto relating to the subject matter hereof.
IN WITNESS WHEREOF, the parties have duly executed this
Agreement as of the day and year first above written.
LICENSOR
By: _________________________________
LICENSEE
By: __________________________________
182
9. Distribution Agreement
International Distribution Agreement
(Check list for the international negotiator)
1. Parties
2. Whereas clauses
3. Essential definitions
a. Products. Right to sell similar products
developed by Company?
b. Territory - Exclusive or non exclusive or
mixture?
c. Term - Initial period, renewal periods, tacit
renewal?
4. Appointment of Distributor
a. Right to sell similar products? How to define
similar products
b. Possibility of assignment of rights to other
companies of the Distributor’s group? How to
define such group (usually based on notion of
control)
c. Use of sub-distributors?
d. Rights retained by the Company?
5. Duties of Distributor
a. Acceptation of appointment by Distributor
b. Representations as to the Distributor’s ability
to perform
c. Use of best efforts (or commercially reasonable
efforts?) by the Distributor to promote the
distribution and sale of the Products
d. At its own expense? Any participation by the
Company, e.g., as to marketing, furnishing
standard technical and marketing documents, etc.?
183
e. Compliance with all applicable laws and
regulations (e.g., concerning sale, use,
packaging and labeling of Products)
f. Agreement not to make changes in the Products
(without prior approval)
g. Providing of after-sale services to customers?
6. Purchase of Products
a. Requirement as to minimum orders? Annual,
monthly? Rattrapage?
b. Agreements concerning placing of orders (annual,
monthly or other regular order forecasts? Sending
of orders by specific dates?
c. Agreement to stock minimum amount of Products?
d. Defective Products?
7. Delivery
a. Issues of place of delivery, passing of risk,
insurance, etc.
b. Choice of applicable INCOTERM
8. Prices
a. Initial prices for Products
b. How to handle future prices - Indexation Advance
notification of new prices - Applicable INCOTERM
- Prices net of taxes (payable by Distributor)
9. Terms of payment
a. Manner of payment (documentary letter of credit?)
b. Currency
c. Dates for payment
10.Duties of the Company
a. Supply the Products with trademarks (trademarks
of the Company, the Distributor or of a client)?
If so, grant of right to use trademarks
184
b. Provisions concerning private label sales
c. Provisions concerning packaging
d. Technical or marketing training made available to
the Distributor? Under what terms and conditions?
At whose cost?
e. Keep Distributor advised of modifications or
improvements in the Products?
f. How to handle defective Products
g. Compliance of Products with applicable laws and
regulations
11.Specific undertakings of the Distributor
a. Act as principal and not as agent of the Company
b. Not to damage, misuse or bring the Products or
the Company into disrepute
c. Not to create any expense or liability chargeable
to the Company
d. Not to contest the Company’s rights re the
Products, copyrights, trademarks, patents or
technology.
12.Confidentiality
a. During the term of the agreement
b. After the agreement? How long?
c. Each party to impose confidentiality obligation
on employees or others who may receive
confidential information
13.Warranty, limited warranty, limitation of liability
and indemnification
a. Extent of warranty (freedom from defects in
material and workmanship)
b. Limitation of warranty (need to determine
legality of any such limitation in the different
countries of the Territory (national and European
185
laws concerning limitations of liability, hidden
defects, etc.)
c. Which party will be required to commence or
defend against legal actions? Which party will
bear the costs? Does one party hold the other
harmless with respect to certain matters?
Requirement of notifying the other party of any
legal action. Will the parties be required to
cooperate with respect to certain legal actions?
14.Defaults and remedies
a. Liability for breach of any material provision of
the contract - Definition of what specific
elements each party considers as material
(payment, timely delivery, quality of goods,
bankruptcy of a party, a non-permitted assignment
under the contract, etc.)?
b. Notice of breach to be given within certain time
frame
c. Cure period?
d. Right to resort to remedy of anticipatory breach?
Under what circumstances?
e. Damages for breach of contract. Compensatory
damages? Consequential damages(lost profits)?
Liquidated damages? Mitigation of damages?
15.Termination
a. Right to terminate - Under what circumstances
(material breaches as defined)?
b. Notice of termination
c. Termination not to prejudice right to remedies
including damages
16.Effect of expiration or termination
a. Distributor to cease sale of Products. What to do
with unsold Products – Distributor to sell or
return?
b. Return of confidential information
186
c. Shall Distributor be entitled to any compensation
or indemnity? Suppose the Distributor has built
up a very valuable clientele? Need to review any
national or European laws protecting distributors
d. Waiver of termination rights by the Distributor?
17.Resolution of disputes
a. National courts or arbitration?
b. If arbitration, ad hoc or institutional?
c. Other provisions concerning arbitration (number
and choice of arbitrators, language of
arbitration, place of arbitration, etc.)
18.Miscellaneous provisions
a. Agreement binding on successors and assigns
b. Assignability or non-assignability of agreement
and/or rights and obligations under the agreement
c. Failure to insist on performance does not
constitute a waiver for the future
d. Parties acting as principals and independent
contractors (and not as principal and agent,
partners or joint venturers). One party cannot
bind the other to third parties
e. Force majeure - hardship clauses?
f. Good faith - further steps
g. Applicable law
h. Interpretation (headings and sections for
convenience purposes only)
i. Amendments - In writing?
j. Notices under the agreement
k. Partial enforceability
l. Partial invalidity clause
m. Execution in counterparts
187
n. Language
o. Expenses
p. Entire agreement (“merger clause”)
19.Miscellaneous legal issues
a. Need to review any applicable laws concerning the
legality of exclusive distribution agreements
b. Need to review laws affecting imports and exports
- European directives covering many sectors of
the economy - Quality criteria? Quotas?
c. Issue of parallel imports
d. Need especially to review any applicable laws
concerning rights of the Distributor upon
termination
e. Distinguish international distributors from
international sales agents - Choice of
distributor or commission agent - Review European
directive and national laws concerning agents
188
DISTRIBUTION AGREEMENT
This DISTRIBUTION AGREEMENT (the “Agreement”) is made and
entered into this ________ day of ___________, 2002, by
and between:
_________________., a French société par actions
simplifiée, with its registered office at
_______________, France, represented by its President,
__________________(hereinafter referred to as the
"COMPANY");
and
__________________, a Dutch limited liability company
with offices at ________________________, The
Netherlands, represented by____________________,
authorized agent (such company as well as any other
member of its group of companies to which it may assign
this Agreement and/or or its rights and obligations
hereunder being referred to hereinafter as the
“DISTRIBUTOR”).
The COMPANY hereby agrees to sell Products (as
hereinafter defined) to DISTRIBUTOR and DISTRIBUTOR
hereby agrees to purchase Products from the COMPANY upon
the following terms and conditions:
Article 1. Definitions
1.1. The term “Products” shall mean and include
__________________________ and any other products
developed, manufactured and/or sold by the COMPANY,
including those listed or referred to in the Agreement
for the Sale of Stock of even date herewith with respect
to DISTRIBUTOR’s purchase of stock of the COMPANY. From
time to time during the term of this Agreement, the
parties may agree to add or delete Products covered by
the Agreement.
1.2. The term “Territory” shall mean worldwide.
1.3. The term “Term” shall mean an initial period of ten
(10) years, provided that this Agreement may be renewed
upon mutual written agreement of the parties.
Article 2. Appointment of DISTRIBUTOR
189
2.1. The COMPANY hereby appoints DISTRIBUTOR as a nonexclusive distributor of the Products in compliance with
the terms of this Agreement.
2.2. The rights and privileges of this Agreement are
personal to DISTRIBUTOR and may not be assigned,
transferred or assigned, in any manner whatsoever, except
to any other members of DISTRIBUTOR’s group of companies,
without the COMPANY’s written consent; provided, however,
that the parties acknowledge that DISTRIBUTOR may
distribute the Products through its own sub-distributors
worldwide.
2.3. It is agreed that the execution of this Agreement
shall not limit in any way DISTRIBUTOR’s right to sell
any Products similar to the Products directly to any
class of customers, for private label by third parties,
through other distributors or in any other way, in any
geographical location.
Article 3. Duties of DISTRIBUTOR
3.1. DISTRIBUTOR hereby accepts the appointment as
distributor (as described in Article 2 above), represents
that it and other companies of its group have adequate
facilities and personnel to perform the services
hereinafter set forth.
3.2. It is the current intent of DISTRIBUTOR that
_________’s operations at ______________ in the United
Kingdom and its specialty operations at _______ in the
United Kingdom and at Chicago, Illinois in the United
States, along with other regional sales groups as
appropriate, shall take an active role in the market
development and sale of the Products.
3.3. DISTRIBUTOR agrees to the following:
3.3.1. DISTRIBUTOR shall use its commercially reasonable
efforts to promote the distribution and sale of the
Products in the Territory.
3.3.2. DISTRIBUTOR shall promote the Products throughout
the Territory at its own expense.
3.3.3. DISTRIBUTOR shall comply with all applicable laws
and regulations relating to the sale, use, packaging and
labeling of the Products.
190
3.3.4. DISTRIBUTOR shall not make any changes in the
Products, except with the prior written approval of the
COMPANY.
3.3.5. DISTRIBUTOR shall provide Product services to its
clients within the Territory.
Article 4. Purchase of Products
DISTRIBUTOR shall provide to the COMPANY, during the term
of this Agreement, appropriate purchase orders for its
requirements of Products. DISTRIBUTOR shall also provide
appropriate forecasts for anticipated future purchases of
Products. The COMPANY shall use its reasonable best
efforts to fulfill firm purchase orders.
Article 5. Delivery
All Products shall be shipped to DISTRIBUTOR's designated
facility.
Article 6. Prices
Net prices for the sale of Products by the COMPANY to
DISTRIBUTOR (including applicable discounts if any) are
FOB DISTRIBUTOR's facility, Incoterms 2000, and shall be
set by the COMPANY. DISTRIBUTOR shall be responsible for
any taxes. Annexed hereto are the net prices in effect on
the date of execution of this Agreement. The COMPANY
shall give DISTRIBUTOR sixty (60) days' notice of any
price change.
Article 7. Payments for Products
Terms of payment shall also be annexed hereto.
Article 8. Duties of the COMPANY
The COMPANY agrees to the following:
8.1. To supply Products with the COMPANY’s trademarks, if
so requested by DISTRIBUTOR.
8.2. To supply Products to be sold as private label, if
so requested by DISTRIBUTOR, in standard, plain boxes or
containers or, if DISTRIBUTOR so requests, to apply
DISTRIBUTOR's private label packaging (in which case
DISTRIBUTOR shall supply all copy and artwork). In such
case, the COMPANY shall apply on each Product package
trademarks and labels conforming to negatives and
specifications provided by DISTRIBUTOR. DISTRIBUTOR shall
191
bear the cost of any change requested by DISTRIBUTOR to
the COMPANY’s standard packaging. No trademark,
decorative feature, carton, label or other form of
Product identification, other than those specified by
DISTRIBUTOR, shall be visible during transportation for a
normal use of the Product by an end-user. The COMPANY
agrees that nothing contained herein shall be construed
to grant to the COMPANY any rights in or any right to use
any trademarks, trade names or logos of DISTRIBUTOR.
8.3. To make available to DISTRIBUTOR technical training
adequate in the COMPANY’s opinion to facilitate sales and
service of the Products.
8.4. To supply DISTRIBUTOR with a reasonable amount of
technical and sales literature for Products.
8.5. To keep DISTRIBUTOR advised of any modifications of
or improvements to the Products.
Article 9. Specific Undertakings of DISTRIBUTOR
During the term of this Agreement, DISTRIBUTOR agrees
that:
9.1. It shall resell Products as a principal and not as
an agent of the COMPANY. Unless DISTRIBUTOR elects to
have the COMPANY’s label applied by the COMPANY,
DISTRIBUTOR shall apply its own labels to all such
Products which it resells.
9.2. It shall not damage, misuse or bring Products into
disrepute.
9.3. It shall not create any expense or liability
chargeable to the COMPANY.
9.4. It shall not contest the right, title or interest of
the COMPANY or assist in any action contesting the right,
title or interest of the COMPANY in the Products or any
copyright, trademark or patent which may pertain thereto,
except as to DISTRIBUTOR's copyrights, trademarks or
patents.
Article 10. Confidentiality
10.1. Each party shall treat as strictly confidential and
secret all oral and written communications, lists,
circulars and other documents with which it has been
entrusted and which can be regarded from the normal
commercial viewpoint or upon special indication by the
192
other as trade secret or confidential information. Each
party recognizes as confidential the terms and conditions
of this Agreement, including price lists.
10.2. Each party shall impose similar obligations on its
employees and others who may be required to have
knowledge of any information in the ordinary course of
business.
Article 11. Limited Warranty; Limitation of Liability;
Indemnification
11.1. The COMPANY warrants that the Products shall be
free from defects in material or workmanship for the term
applicable to each Product. THE COMPANY DISCLAIMS ALL
OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING THE
IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE. THE COMPANY’S SOLE OBLIGATION AND
DISTRIBUTOR'S SOLE REMEDY ON ACCOUNT OF BREACH OF
WARRANTY IS TO REPLACE DEFECTIVE PRODUCT, OR AT THE
COMPANY’S DISCRETION, ISSUE A CREDIT FOR SAME. The
COMPANY retains the right to inspect any Product alleged
to be defective.
11.2. IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR ANY
DAMAGES, WHETHER DIRECT, INCIDENTAL OR CONSEQUENTIAL,
INCLUDING CLAIMS FOR LOST BUSINESS, PROFITS OR REVENUES,
EVEN IF IT HAD OR SHOULD HAVE HAD KNOWLEDGE OF THE
POSSIBILITY THEREOF.
11.3. The COMPANY represents and warrants to DISTRIBUTOR
that the COMPANY, at its own expense and in timely
fashion, will defend, indemnify and hold DISTRIBUTOR
harmless against any and all liabilities, damages, costs
and expenses, including reasonable attorney fees, which
DISTRIBUTOR may incur by reason by any claim or action
instituted by any third party for infringement or
misappropriation of proprietary rights; provided
DISTRIBUTOR gives the COMPANY prompt notice of such
claim, permits the COMPANY to defend or settle such
claim, and provided the claim is not based upon any
combination of the Product with any other product or upon
modification of the Product by other than the COMPANY.
11.4. DISTRIBUTOR shall defend and indemnify the COMPANY
against any claims brought by any end-user based upon
warranties or representations as to the Products made by
DISTRIBUTOR in excess of any warranty or representation
made in writing by the COMPANY.
Article 12. Default and Remedies
193
12.1. In the event that either DISTRIBUTOR or the COMPANY
fails to perform any material obligation or provision of
this Agreement, including but not limited to the payment
for the Products, and such failure is not cured within
thirty (30) days after receipt of notice from the party
not in default, or if either party becomes subject to any
bankruptcy proceedings, then the other party may
terminate this Agreement.
12.2. In the event DISTRIBUTOR shall be in default in the
performance of any of its obligations hereunder,
including the payment of invoices when due, the COMPANY
shall, in addition to any other remedies it may have
available to it, have the right to withhold further
shipment of Products until such default shall be cured.
Article 13. Effect of Expiration or Termination
Upon the expiration of the term of this Agreement or the
earlier termination thereof:
13.1. DISTRIBUTOR thereafter shall not sell the Products
directly or indirectly without the COMPANY’s written
consent, with the exception of material fully paid for
and in the possession of DISTRIBUTOR.
13.2. DISTRIBUTOR and the COMPANY shall promptly deliver
to the other all confidential information and other
pertinent documentation in such party's possession.
13.3. DISTRIBUTOR shall not use or disclose to any other
person confidential information concerning Products after
the date of termination or expiration of this Agreement.
13.4. DISTRIBUTOR shall not be entitled to any
compensation or indemnity, statutory or otherwise.
Article 14. Resolution of Disputes
14.1. The parties shall endeavor to resolve amicably any
and all disputes arising out of or in connection with
this Agreement and undertake to meet as soon as either
party advises the other of the existence of a dispute. If
the parties are unable to meet or to settle their dispute
amicably, such dispute shall be referred to arbitration
pursuant to 14.2 below.
14.2. If at any time during the continuance of this
Agreement, there shall be any question or dispute with
respect to the construction, meaning or effect hereof, or
194
any provision hereof, or arising out of or in connection
herewith, or concerning the rights or obligations
hereunder, which cannot be resolved amicably, such
question or dispute shall be referred to: (a) a sole
arbitrator to be selected by the parties hereto; or (b)
failing agreement in selecting such arbitrator within
seven (7) days, to a panel of three arbitrators, one to
be appointed by the COMPANY, one by DISTRIBUTOR and the
third by the two arbitrators so chosen. The arbitration
shall take place in _______, France and shall be
conducted in the English language.
14.3. The award rendered by such sole arbitrator or a
majority of the three arbitrators, as the case may be,
shall be final and binding on the parties and judgment
upon such award may be entered in any court having
jurisdiction.
Article 15. Miscellaneous Provisions
15.1. This Agreement shall be binding upon and inure to
the benefit of the successors and assigns of the parties
hereto; provided that DISTRIBUTOR may not assign its
rights or obligations hereunder, except to any other
members of DISTRIBUTOR’s group of companies, without the
express prior written consent of the COMPANY.
15.2. The failure to insist in any instance on the strict
performance of any provision of this Agreement or to
exercise any right hereunder shall not constitute a
waiver of such provision or right in any other instance.
15.3. Both the COMPANY and DISTRIBUTOR shall act as
principals in all respects concerning this Agreement and
neither of them shall hold itself out as the agent of the
other. The COMPANY and DISTRIBUTOR shall keep the other
party hereto free from all expenses and costs other than
those as may be specifically authorized by the other in
writing.
15.4. The applicable law shall be the express provisions
of this Agreement and the intent of the parties as
expressed herein, as may be supplemented, if necessary,
by principles of French law.
15.5. No modification of this Agreement shall be
effective unless in a writing signed by both parties
hereto.
195
15.6. All notices, required or permitted to be given
hereunder shall be in writing and shall be valid and
sufficient if delivered in person against a receipt or
sent by prepaid registered priority mail (return receipt
requested) or via facsimile which shall be confirmed by
such registered priority mail without undue delay,
directed to the parties at the addresses set forth above
or to such other address as a party may specify in a
notice given in accordance with this Article.
15.7. If any provision hereof shall be unenforceable, the
remaining provisions of this Agreement shall not be
effected thereby and shall remain in full force and
effect.
15.8. This Agreement, including the Schedules annexed
hereto, contains the entire agreement of the parties and
supersedes and terminates any prior agreements between
the parties hereto relating to the subject matter hereof.
IN WITNESS WHEREOF, the parties have duly executed this
Agreement as of the day and year first above written.
COMPANY
By: _________________________________
DISTRIBUTOR
By: __________________________________
196
US Cases to Brief
197
Brown v. Board of Education, 347 U.S. 483 (1954)
Decided May 17, 1954
APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT
OF KANSAS [*]
Syllabus
Segregation of white and Negro children in the public schools of a State solely on the
basis of race, pursuant to state laws permitting or requiring such segregation, denies to
Negro children the equal protection of the laws guaranteed by the Fourteenth
Amendment -- even though the physical facilities and other "tangible" factors of white
and Negro schools may be equal. Pp. 486-496 .
(a) The history of the Fourteenth Amendment is inconclusive as to its intended effect
on public education. Pp. 489-490 .
(b) The question presented in these cases must be determined not on the basis of
conditions existing when the Fourteenth Amendment was adopted, but in the light of
the full development of public education and its present place in American life
throughout the Nation. Pp. 492-493 .
(c) Where a State has undertaken to provide an opportunity for an education in its
public schools, such an opportunity is a right which must be made available to all on
equal terms. P. 493 .
(d) Segregation of children in public schools solely on the basis of race deprives
children of the minority group of equal educational opportunities, even though the
physical facilities and other "tangible" factors may be equal. Pp. 493-494 .
(e) The "separate but equal" doctrine adopted in Plessy v. Ferguson, 163 U.S. 537 ,
has no place in the field of public education. P. 495 .
(f) The cases are restored to the docket for further argument on specified questions
relating to the forms of the decrees. Pp. 495-496 .
Opinions
WARREN, C.J., Opinion of the Court
[p*486] MR. CHIEF JUSTICE WARREN delivered the opinion of the Court.
These cases come to us from the States of Kansas, South Carolina, Virginia, and
Delaware. They are premised on different facts and different local conditions, but a
common legal question justifies their consideration together in this consolidated
opinion. [n1] [p*487]
198
In each of the cases, minors of the Negro race, through their legal representatives,
seek the aid of the courts in obtaining admission to the public schools of their
community on a nonsegregated basis. In each instance, [p*488] they had been denied
admission to schools attended by white children under laws requiring or permitting
segregation according to race. This segregation was alleged to deprive the plaintiffs of
the equal protection of the laws under the Fourteenth Amendment. In each of the
cases other than the Delaware case, a three-judge federal district court denied relief to
the plaintiffs on the so-called "separate but equal" doctrine announced by this Court in
Plessy v. Fergson, 163 U.S. 537 . Under that doctrine, equality of treatment is
accorded when the races are provided substantially equal facilities, even though these
facilities be separate. In the Delaware case, the Supreme Court of Delaware adhered
to that doctrine, but ordered that the plaintiffs be admitted to the white schools
because of their superiority to the Negro schools. The plaintiffs contend that
segregated public schools are not "equal" and cannot be made "equal," and that hence
they are deprived of the equal protection of the laws. Because of the obvious
importance of the question presented, the Court took jurisdiction. [n2] Argument was
heard in the 1952 Term, and reargument was heard this Term on certain questions
propounded by the Court. [n3] [p*489]
Reargument was largely devoted to the circumstances surrounding the adoption of the
Fourteenth Amendment in 1868. It covered exhaustively consideration of the
Amendment in Congress, ratification by the states, then-existing practices in racial
segregation, and the views of proponents and opponents of the Amendment. This
discussion and our own investigation convince us that, although these sources cast
some light, it is not enough to resolve the problem with which we are faced. At best,
they are inconclusive. The most avid proponents of the post-War Amendments
undoubtedly intended them to remove all legal distinctions among "all persons born
or naturalized in the United States." Their opponents, just as certainly, were
antagonistic to both the letter and the spirit of the Amendments and wished them to
have the most limited effect. What others in Congress and the state legislatures had in
mind cannot be determined with any degree of certainty.
An additional reason for the inconclusive nature of the Amendment's history with
respect to segregated schools is the status of public education at that time. [n4] In the
South, the movement toward free common schools, supported [p*490] by general
taxation, had not yet taken hold. Education of white children was largely in the hands
of private groups. Education of Negroes was almost nonexistent, and practically all of
the race were illiterate. In fact, any education of Negroes was forbidden by law in
some states. Today, in contrast, many Negroes have achieved outstanding success in
the arts and sciences, as well as in the business and professional world. It is true that
public school education at the time of the Amendment had advanced further in the
North, but the effect of the Amendment on Northern States was generally ignored in
the congressional debates. Even in the North, the conditions of public education did
not approximate those existing today. The curriculum was usually rudimentary;
ungraded schools were common in rural areas; the school term was but three months a
year in many states, and compulsory school attendance was virtually unknown. As a
consequence, it is not surprising that there should be so little in the history of the
Fourteenth Amendment relating to its intended effect on public education.
In the first cases in this Court construing the Fourteenth Amendment, decided shortly
after its adoption, the Court interpreted it as proscribing all state-imposed
199
discriminations against the Negro race. [n5] The doctrine of [p*491] "separate but
equal" did not make its appearance in this Court until 1896 in the case of Plessy v.
Ferguson, supra, involving not education but transportation. [n6] American courts
have since labored with the doctrine for over half a century. In this Court, there have
been six cases involving the "separate but equal" doctrine in the field of public
education. [n7] In Cumming v. County Board of Education, 175 U.S. 528, and Gong
Lum v. Rice, 275 U.S. 78, the validity of the doctrine itself was not challenged. [n8]
In more recent cases, all on the graduate school [p*492] level, inequality was found in
that specific benefits enjoyed by white students were denied to Negro students of the
same educational qualifications. Missouri ex rel. Gaines v. Canada, 305 U.S. 337 ;
Sipuel v. Oklahoma, 332 U.S. 631; Sweatt v. Painter, 339 U.S. 629 ; McLaurin v.
Oklahoma State Regents, 339 U.S. 637 . In none of these cases was it necessary to
reexamine the doctrine to grant relief to the Negro plaintiff. And in Sweatt v. Painter,
supra, the Court expressly reserved decision on the question whether Plessy v.
Ferguson should be held inapplicable to public education.
In the instant cases, that question is directly presented. Here, unlike Sweatt v. Painter,
there are findings below that the Negro and white schools involved have been
equalized, or are being equalized, with respect to buildings, curricula, qualifications
and salaries of teachers, and other "tangible" factors. [n9] Our decision, therefore,
cannot turn on merely a comparison of these tangible factors in the Negro and white
schools involved in each of the cases. We must look instead to the effect of
segregation itself on public education.
In approaching this problem, we cannot turn the clock back to 1868, when the
Amendment was adopted, or even to 1896, when Plessy v. Ferguson was written. We
must consider public education in the light of its full development and its present
place in American life throughout [p*493] the Nation. Only in this way can it be
determined if segregation in public schools deprives these plaintiffs of the equal
protection of the laws.
Today, education is perhaps the most important function of state and local
governments. Compulsory school attendance laws and the great expenditures for
education both demonstrate our recognition of the importance of education to our
democratic society. It is required in the performance of our most basic public
responsibilities, even service in the armed forces. It is the very foundation of good
citizenship. Today it is a principal instrument in awakening the child to cultural
values, in preparing him for later professional training, and in helping him to adjust
normally to his environment. In these days, it is doubtful that any child may
reasonably be expected to succeed in life if he is denied the opportunity of an
education. Such an opportunity, where the state has undertaken to provide it, is a right
which must be made available to all on equal terms.
We come then to the question presented: Does segregation of children in public
schools solely on the basis of race, even though the physical facilities and other
"tangible" factors may be equal, deprive the children of the minority group of equal
educational opportunities? We believe that it does.
In Sweatt v. Painter, supra, in finding that a segregated law school for Negroes could
not provide them equal educational opportunities, this Court relied in large part on
200
"those qualities which are incapable of objective measurement but which make for
greatness in a law school." In McLaurin v. Oklahoma State Regents, supra, the Court,
in requiring that a Negro admitted to a white graduate school be treated like all other
students, again resorted to intangible considerations: ". . . his ability to study, to
engage in discussions and exchange views with other students, and, in general, to
learn his profession." [p*494] Such considerations apply with added force to children
in grade and high schools. To separate them from others of similar age and
qualifications solely because of their race generates a feeling of inferiority as to their
status in the community that may affect their hearts and minds in a way unlikely ever
to be undone. The effect of this separation on their educational opportunities was well
stated by a finding in the Kansas case by a court which nevertheless felt compelled to
rule against the Negro plaintiffs:
Segregation of white and colored children in public schools has a detrimental effect
upon the colored children. The impact is greater when it has the sanction of the law,
for the policy of separating the races is usually interpreted as denoting the inferiority
of the negro group. A sense of inferiority affects the motivation of a child to learn.
Segregation with the sanction of law, therefore, has a tendency to [retard] the
educational and mental development of negro children and to deprive them of some of
the benefits they would receive in a racial[ly] integrated school system. [n10]
Whatever may have been the extent of psychological knowledge at the time of Plessy
v. Ferguson, this finding is amply supported by modern authority. [n11] Any
language [p*495] in Plessy v. Ferguson contrary to this finding is rejected.
We conclude that, in the field of public education, the doctrine of "separate but equal"
has no place. Separate educational facilities are inherently unequal. Therefore, we
hold that the plaintiffs and others similarly situated for whom the actions have been
brought are, by reason of the segregation complained of, deprived of the equal
protection of the laws guaranteed by the Fourteenth Amendment. This disposition
makes unnecessary any discussion whether such segregation also violates the Due
Process Clause of the Fourteenth Amendment. [n12]
Because these are class actions, because of the wide applicability of this decision, and
because of the great variety of local conditions, the formulation of decrees in these
cases presents problems of considerable complexity. On reargument, the
consideration of appropriate relief was necessarily subordinated to the primary
question -- the constitutionality of segregation in public education. We have now
announced that such segregation is a denial of the equal protection of the laws. In
order that we may have the full assistance of the parties in formulating decrees, the
cases will be restored to the docket, and the parties are requested to present further
argument on Questions 4 and 5 previously propounded by the Court for the
reargument this Term [n13] The Attorney General [p*496] of the United States is
again invited to participate. The Attorneys General of the states requiring or
permitting segregation in public education will also be permitted to appear as amici
curiae upon request to do so by September 15, 1954, and submission of briefs by
October 1, 1954. [n14]
It is so ordered.
201
* Together with No. 2, Briggs et al. v. Elliott et al., on appeal from the United States
District Court for the Eastern District of South Carolina, argued December 9-10,
1952, reargued December 7-8, 1953; No. 4, Davis et al. v. County School Board of
Prince Edward County, Virginia, et al., on appeal from the United States District
Court for the Eastern District of Virginia, argued December 10, 1952, reargued
December 7-8, 1953, and No. 10, Gebhart et al. v. Belton et al., on certiorari to the
Supreme Court of Delaware, argued December 11, 1952, reargued December 9, 1953.
1. In the Kansas case, Brown v. Board of Education, the plaintiffs are Negro children
of elementary school age residing in Topeka. They brought this action in the United
States District Court for the District of Kansas to enjoin enforcement of a Kansas
statute which permits, but does not require, cities of more than 15,000 population to
maintain separate school facilities for Negro and white students. Kan.Gen.Stat. § 721724 (1949). Pursuant to that authority, the Topeka Board of Education elected to
establish segregated elementary schools. Other public schools in the community,
however, are operated on a nonsegregated basis. The three-judge District Court,
convened under 28 U.S.C. §§ 2281 and 2284, found that segregation in public
education has a detrimental effect upon Negro children, but denied relief on the
ground that the Negro and white schools were substantially equal with respect to
buildings, transportation, curricula, and educational qualifications of teachers. 98
F.Supp. 797. The case is here on direct appeal under 28 U.S.C. § 1253.
In the South Carolina case, Briggs v. Elliott, the plaintiffs are Negro children of both
elementary and high school age residing in Clarendon County. They brought this
action in the United States District Court for the Eastern District of South Carolina to
enjoin enforcement of provisions in the state constitution and statutory code which
require the segregation of Negroes and whites in public schools. S.C.Const., Art. XI, §
7; S.C.Code § 5377 (1942). The three-judge District Court, convened under 28 U.S.C.
§§ 2281 and 2284, denied the requested relief. The court found that the Negro schools
were inferior to the white schools, and ordered the defendants to begin immediately to
equalize the facilities. But the court sustained the validity of the contested provisions
and denied the plaintiffs admission to the white schools during the equalization
program. 98 F.Supp. 529. This Court vacated the District Court's judgment and
remanded the case for the purpose of obtaining the court's views on a report filed by
the defendants concerning the progress made in the equalization program. 342 U.S.
350. On remand, the District Court found that substantial equality had been achieved
except for buildings and that the defendants were proceeding to rectify this inequality
as well. 103 F.Supp. 920. The case is again here on direct appeal under 28 U.S.C. §
1253.
In the Virginia case, Davis v. County School Board, the plaintiffs are Negro children
of high school age residing in Prince Edward County. They brought this action in the
United States District Court for the Eastern District of Virginia to enjoin enforcement
of provisions in the state constitution and statutory code which require the segregation
of Negroes and whites in public schools. Va.Const., § 140; Va.Code § 22-221 (1950).
The three-judge District Court, convened under 28 U.S.C. §§ 2281 and 2284, denied
the requested relief. The court found the Negro school inferior in physical plant,
curricula, and transportation, and ordered the defendants forthwith to provide
substantially equal curricula and transportation and to "proceed with all reasonable
diligence and dispatch to remove" the inequality in physical plant. But, as in the South
Carolina case, the court sustained the validity of the contested provisions and denied
202
the plaintiffs admission to the white schools during the equalization program. 103
F.Supp. 337. The case is here on direct appeal under 28 U.S.C. § 1253.
In the Delaware case, Gebhart v. Belton, the plaintiffs are Negro children of both
elementary and high school age residing in New Castle County. They brought this
action in the Delaware Court of Chancery to enjoin enforcement of provisions in the
state constitution and statutory code which require the segregation of Negroes and
whites in public schools. Del.Const., Art. X, § 2; Del.Rev.Code § 2631 (1935). The
Chancellor gave judgment for the plaintiffs and ordered their immediate admission to
schools previously attended only by white children, on the ground that the Negro
schools were inferior with respect to teacher training, pupil-teacher ratio,
extracurricular activities, physical plant, and time and distance involved in travel. 87
A.2d 862. The Chancellor also found that segregation itself results in an inferior
education for Negro children (see note 10, infra), but did not rest his decision on that
ground. Id. at 865. The Chancellor's decree was affirmed by the Supreme Court of
Delaware, which intimated, however, that the defendants might be able to obtain a
modification of the decree after equalization of the Negro and white schools had been
accomplished. 91 A.2d 137, 152. The defendants, contending only that the Delaware
courts had erred in ordering the immediate admission of the Negro plaintiffs to the
white schools, applied to this Court for certiorari. The writ was granted, 344 U.S. 891.
The plaintiffs, who were successful below, did not submit a cross-petition.
2. 344 U.S. 1, 141, 891.
3. 345 U.S. 972. The Attorney General of the United States participated both Terms as
amicus curiae.
4. For a general study of the development of public education prior to the
Amendment, see Butts and Cremin, A History of Education in American Culture
(1953), Pts. I, II; Cubberley, Public Education in the United States (1934 ed.), cc. IIXII. School practices current at the time of the adoption of the Fourteenth
Amendment are described in Butts and Cremin, supra, at 269-275; Cubberley, supra,
at 288-339, 408-431; Knight, Public Education in the South (1922), cc. VIII, IX. See
also H. Ex.Doc. No. 315, 41st Cong., 2d Sess. (1871). Although the demand for free
public schools followed substantially the same pattern in both the North and the
South, the development in the South did not begin to gain momentum until about
1850, some twenty years after that in the North. The reasons for the somewhat slower
development in the South (e.g., the rural character of the South and the different
regional attitudes toward state assistance) are well explained in Cubberley, supra, at
408-423. In the country as a whole, but particularly in the South, the War virtually
stopped all progress in public education. Id. at 427-428. The low status of Negro
education in all sections of the country, both before and immediately after the War, is
described in Beale, A History of Freedom of Teaching in American Schools (1941),
112-132, 175-195. Compulsory school attendance laws were not generally adopted
until after the ratification of the Fourteenth Amendment, and it was not until 1918 that
such laws were in force in all the states. Cubberley, supra, at 563-565.
5. Slaughter-House Cases, 16 Wall. 36 , 67-72 (1873); Strauder v. West Virginia, 100
U.S. 303 , 307-308 (1880):
203
It ordains that no State shall deprive any person of life, liberty, or property, without
due process of law, or deny to any person within its jurisdiction the equal protection
of the laws. What is this but declaring that the law in the States shall be the same for
the black as for the white; that all persons, whether colored or white, shall stand equal
before the laws of the States, and, in regard to the colored race, for whose protection
the amendment was primarily designed, that no discrimination shall be made against
them by law because of their color? The words of the amendment, it is true, are
prohibitory, but they contain a necessary implication of a positive immunity, or right,
most valuable to the colored race -- the right to exemption from unfriendly legislation
against them distinctively as colored -- exemption from legal discriminations,
implying inferiority in civil society, lessening the security of their enjoyment of the
rights which others enjoy, and discriminations which are steps towards reducing them
to the condition of a subject race.
See also Virginia v. Rives, 100 U.S. 313, 318 (1880); Ex parte Virginia, 100 U.S. 339,
344-345 (1880).
6. The doctrine apparently originated in Roberts v. City of Boston, 59 Mass.198, 206
(1850), upholding school segregation against attack as being violative of a state
constitutional guarantee of equality. Segregation in Boston public schools was
eliminated in 1855. Mass.Acts 1855, c. 256. But elsewhere in the North, segregation
in public education has persisted in some communities until recent years. It is
apparent that such segregation has long been a nationwide problem, not merely one of
sectional concern.
7. See also Berea College v. Kentucky, 211 U.S. 45 (1908).
8. In the Cummin case, Negro taxpayers sought an injunction requiring the defendant
school board to discontinue the operation of a high school for white children until the
board resumed operation of a high school for Negro children. Similarly, in the Gong
Lum case, the plaintiff, a child of Chinese descent, contended only that state
authorities had misapplied the doctrine by classifying him with Negro children and
requiring him to attend a Negro school.
9. In the Kansas case, the court below found substantial equality as to all such factors.
98 F.Supp. 797, 798. In the South Carolina case, the court below found that the
defendants were proceeding "promptly and in good faith to comply with the court's
decree." 103 F.Supp. 920, 921. In the Virginia case, the court below noted that the
equalization program was already "afoot and progressing" (103 F.Supp. 337, 341);
since then, we have been advised, in the Virginia Attorney General's brief on
reargument, that the program has now been completed. In the Delaware case, the
court below similarly noted that the state's equalization program was well under way.
91 A.2d 137, 149.
10. A similar finding was made in the Delaware case:
I conclude from the testimony that, in our Delaware society, State-imposed
segregation in education itself results in the Negro children, as a class, receiving
educational opportunities which are substantially inferior to those available to white
children otherwise similarly situated.
204
87 A.2d 862, 865.
11. K.B. Clark, Effect of Prejudice and Discrimination on Personality Development
(Mid-century White House Conference on Children and Youth, 1950); Witmer and
Kotinsky, Personality in the Making (1952), c. VI; Deutscher and Chein, The
Psychological Effects of Enforced Segregation A Survey of Social Science Opinion,
26 J.Psychol. 259 (1948); Chein, What are the Psychological Effects of Segregation
Under Conditions of Equal Facilities?, 3 Int.J.Opinion and Attitude Res. 229 (1949);
Brameld, Educational Costs, in Discrimination and National Welfare (MacIver, ed.,
1949), 44-48; Frazier, The Negro in the United States (1949), 674-681. And see
generally Myrdal, An American Dilemma (1944).
12. See Bolling v. Sharpe, post, p. 497 , concerning the Due Process Clause of the
Fifth Amendment.
13.
Assuming it is decided that segregation in public schools violates the Fourteenth
Amendment
(a) would a decree necessarily follow providing that, within the limits set by normal
geographic school districting, Negro children should forthwith be admitted to schools
of their choice, or
(b) may this Court, in the exercise of its equity powers, permit an effective gradual
adjustment to be brought about from existing segregated systems to a system not
based on color distinctions?
On the assumption on which questions 4(a) and (b) are based, and assuming further
that this Court will exercise its equity powers to the end described in question 4(b),
(a) should this Court formulate detailed decrees in these cases;
(b) if so, what specific issues should the decrees reach;
(c) should this Court appoint a special master to hear evidence with a view to
recommending specific terms for such decrees;
(d) should this Court remand to the courts of first instance with directions to frame
decrees in these cases and, if so, what general directions should the decrees of this
Court include and what procedures should the courts of first instance follow in
arriving at the specific terms of more detailed decrees?
14. See Rule 42, Revised Rules of this Court (effective July 1, 1954).
205
LUCY v. ZEHMER
Supreme Court of Appeal of Virginia
196 Va. 493, 84 S.E.2d 516 (1954)
BUCHANAN, Justice.
This suit was instituted by W. 0. Lucy and J. C.
Lucy, complainants, against A. H. Zehmer and Ida S.
Zehmer, his wife, defendants, to have specific
performance of a contract by which it was alleged
the Zehmers had sold to W. 0. Lucy a tract of land
owned by A. H. Zehmer in Dinwiddie County containing
471.6 acres, more or less, known as the Ferguson
farm, for $50,000. J. C. Lucy, the other
complainant, is a brother of W. 0. Lucy, to whom
W. 0. Lucy transferred a half interest in his
alleged purchase.
The instrument sought to be enforced was written by
A. H. Zehmer on December 20, 1952, in these words:
"We hereby agree to sell to W. 0. Lucy the Ferguson
Farm complete for $50,000.00, title satisfactory to
buyer," and signed by the defendants, A. H. Zehmer
and Ida S. Zehmer.
The answer of A. H. Zehmer admitted that at the time
mentioned W. 0. Lucy offered him $50,000 cash for
the farm, but that he, Zehmer, considered that the
offer was made in jest; that so thinking, and both
he and Lucy having had several drinks, he wrote out
"the memorandum" quoted above and induced his wife
to sign it; that he did not deliver the memorandum
to Lucy, but that Lucy picked it up, read it, put it
in his pocket, attempted to offer Zehmer $5 to bind
the bargain, which Zehmer refused to accept, and
realizing for the first time that Lucy was serious,
Zehmer assured him that he had no intention of
selling the farm and that the whole matter was a
joke. Lucy left the premises insisting that he had
purchased the farm.
Depositions were taken and the decree appealed from
was entered holding that the complainants had failed
to establish their right to specific performance,
and dismissing their bill. The assignment of error
is to this action of the court.
W. 0. Lucy, a lumberman and farmer, thus testified
in substance: He had known Zehmer for fifteen or
twenty years and had been familiar with the Ferguson
206
farm for ten years. Seven or eight years ago he had
offered Zehmer $20,000 for the farm which Zehmer had
accepted, but the agreement was verbal and Zehmer
backed out. On the night of December 20, 1952,
around eight o'clock, he took an employee to
McKenney, where Zehmer lived and operated a
restaurant, filling station and motor court. While
there he decided to see Zehmer and again try to buy
the Ferguson farm. He entered the restaurant and
talked to Mrs. Zehmer until Zehmer came in. He asked
Zehmer if he had sold the Ferguson farm. Zehmer
replied that he had not. Lucy said "I bet you
wouldn't take $50,000.00 for that place." Zehmer
replied, "Yes I would too; you wouldn't give fifty."
Lucy said he would and told Zehmer to write up an
agreement to that effect. Zehmer took a restaurant
check and wrote on the back of it, "I do hereby
agree to sell to W. 0. Lucy the Ferguson Farm for
$50,000 complete." Lucy told him he had better
change it to "We" because Mrs. Zehmer would have to
sign it too. Zehmer then tore up what he had
written, wrote the agreement quoted above and asked
Mrs. Zehmer, who was at the other end of the counter
ten or twelve feet away, to sign it. Mrs. Zehmer
said she would for $50,000 and signed it. Zehmer
brought it back and gave it to Lucy, who offered him
$5 which Zehmer refused, saying, "You don't need to
give me any money, you got the agreement there
signed by both of us."
The discussion leading to the signing of the
agreement, said Lucy, lasted thirty or forty
minutes, during which Zehmer seemed to doubt that
Lucy could raise $50,000. Lucy suggested the
provision for having the title examined and Zehmer
made the suggestion that he would sell it "complete,
everything there," and stated that all he had on the
farm was three heifers.
Lucy took a partly filled bottle of whiskey into the
restaurant with him for the purpose of giving Zehmer
a drink if he wanted it. Zehmer did, and he and Lucy
had one or two drinks together Lucy said that while
he felt the drinks he took he was not intoxicated,
and from the way Zehmer handled the transaction he
did not think he was either.
December 20 was on a Saturday. Next day Lucy
telephoned to J. C. Lucy and arranged with the
latter to take a half interest in the purchase and
pay half of the consideration. On Monday he engaged
207
an attorney to examine the title. The attorney
reported favorably on December 31 and on January 2
Lucy wrote Zehmer stating that the title was
satisfactory, that he was ready to pay the
purchase price in cash and asking when Zehmer would
be ready to close the deal. Zehmer replied by
letter, mailed on January 13 asserting that he had
never intended to sell.
Zehmer testified in substance as follows:
He bought this farm more than ten years ago for
$11,000. He had had twenty-five offers, more or
less, to buy it, including several from Lucy, who
had never offered any specific sum of money. He had
given them all the same answer, that he was not
interested in selling it. On this Saturday night
before Christmas it looked like everybody and his
brother came by there to have a drink. He took a
good many drinks during the afternoon and had a pint
of his own. When he entered the restaurant around
eight-thirty Lucy was there and he could see that he
was "pretty high." He said to Lucy, "Boy, you got
some good liquor, drinking, ain't you?" Lucy then
offered him a drink. "I was already high as a
Georgia pine, and didn't have any more better sense
than to pour another great big slug out and gulp it
down, and he took one too."
After they had talked a while Lucy asked whether he
still had the Ferguson farm. He replied that he had
not sold it and Lucy said, "I bet you wouldn't take
$50,000.00 for it." Zehmer asked him if he would
give $50,000 and Lucy said yes. Zehmer replied,
"You haven't got $50,000.00 in cash." Lucy said he
did and Zehmer replied that he did not believe it.
They argued "pro and con for a long time," mainly
about "whether he had $50,000 in cash that he could
put up right then and buy that farm." Finally, said
Zehmer, Lucy told him if he didn't believe he had
$50,000, "you sign that piece of paper here and say
you will take $50,000.00 for the farm." He, Zehmer,
"just grabbed the back off a guest check there" and
wrote on the back of it. At that point in his
testimony Zehmer asked to see what he had written to
"see if I recognize my own handwriting." He examined
the paper and exclaimed, "Great balls of fire, I got
‘Firgerson’ for Ferguson. 1 have got satisfactory
spelled wrong. I don't recognize that writing if I
would see it, wouldn't know it was mine."
208
The defendants insist that the evidence was ample to
support their contention that the writing sought to
be enforced was prepared as a bluff or dare to force
Lucy to admit that he did not have $50,000; that the
whole matter was a joke; that the writing was not
delivered to Lucy and no binding contract was ever
made between the parties.
It is an unusual, if not bizarre defense. When made
to the writing admittedly prepared by one of the
defendants and signed by both. clear evidence is
required to sustain it.
In his testimony Zehmer claimed that he "was high as
a Georgia pine," and that the transaction "was just
a bunch of two doggoned drunks bluffing to see who
could talk the biggest and say the most." That claim
is inconsistent with his attempt to testify in great
detail as to what was said and what was done. It is
contradicted by other evidence as to the condition
of both parties ... The record is convincing that
Zehmer was not intoxicated to the extent of being
unable to comprehend the nature and consequences of
the instrument he executed, and hence that
instrument is not to be invalidated on that ground.
The appearance of the contract, the fact that it was
under discussion for forty minutes or more before it
was signed; Lucy's objection to the first draft
because it was written in the singular, and he
wanted Mrs. Zehmer to sign it also; the rewriting to
meet that objection and the signing by Mrs. Zehmer;
the discussion of what was to be included in the
sale, the provision for the examination of the
title, the completeness of the instrument that was
executed, the taking possession of it by Lucy with
no request or suggestion by either of the defendants
that he give it back, are facts which furnish
persuasive evidence that the execution of the
contract was a serious business transaction rather
than a casual, jesting matter as defendants now
contend.
If it be assumed, contrary to what we think the
evidence shows, that Zehmer was jesting about
selling his farm to Lucy and that the transaction
was intended by him to be a joke, nevertheless
the evidence shows that Lucy did not so understand
it but considered it to be a serious business
transaction and the contract to be binding on the
Zehmers as well as on himself. The very next day
209
he arranged with his brother to put up half the
money and take a half interest in the land. The day
after that he employed an attorney to examine the
title.
Not only did Lucy actually believe, but the evidence
shows he was warranted in believing, that the
contract represented a serious business transaction
and a good faith sale and purchase of the farm.
In the field of contracts, as generally elsewhere,
"We must look to the outward expression of a person
as manifesting his intention rather than to his
secret and unexpressed intention. 'The law imputes
to a person an intention corresponding to the
reasonable meaning of his words and acts.'" First
Nat. Exchange Bank of Roanoke v. Roanoke Oil Co.,
169 Va. 99, 114, 192 S.E. 764, 770.
At no time prior to the execution of the contract
had Zehmer indicated to Lucy by word or act that he
was not in earnest about selling the farm. They had
argued about it and discussed its terms, as Zehmer
admitted, for a long time. Lucy testified that if
there was any jesting it was about paying $50,000
that night. The contract and the evidence show that
he was not expected to pay the money that night.
Zehmer said that after the writing was signed he
laid it down on the counter in front of Lucy. Lucy
said Zehmer handed it to him. In any event there had
been what appeared to be a good faith acceptance,
followed by the execution and apparent delivery of a
written contract. Both said that Lucy put the
writing in his pocket and then offered Zehmer $5 to
seal the bargain. Not until then, even under the
defendants' evidence, was anything said or done to
indicate that the matter was a joke.
The mental assent of the parties is not requisite
for the formation of a contract. If the words or
other acts of one of the parties have but one
reasonable meaning, his undisclosed intention is
immaterial except when an unreasonable meaning which
he attaches to his manifestations is known to the
other party. Restatement of the Law of Contracts,
Vol. I, § 71, p. 74. So a person cannot set up that
he was merely jesting when his conduct and words
would warrant a reasonable person in believing
that he intended a real agreement.
210
Whether the writing signed by the defendants and now
sought to be enforced by the complainants was the
result of a serious offer by Lucy and a serious
acceptance by the defendants, or was a serious offer
by Lucy and an acceptance in secret jest by the
defendants, in either event it constituted a binding
contract of sale between the parties.
Defendants contend further, however, that even
though a contract was made, equity should decline to
enforce it under the circumstances. These
circumstances have been set forth in detail above.
They disclose some drinking by the two parties but
not to an extent that they were unable to understand
fully what they were doing. There was no fraud, no
misrepresentation, no sharp practice and no dealing
between unequal parties. The farm had been bought
for $11,000 and was assessed for taxation at $6,300.
The purchase price was $50,000. Zehmer admitted that
it was a good price. There is in fact present in
this case none of the grounds usually urged against
specific performance.
The complainants are entitled to have specific
performance of the contract sued on. The decree
appealed from is therefore reversed and the cause is
remanded for the entry of a proper decree requiring
the defendants to perform the contract in accordance
with the prayer of the bill.
Reversed and remanded.
211
DICKINSON v. DODDS
In the Court of Appeal, Chancery Div
(1876) 2 Ch. Div. 463
On Wednesday, the 10th of June, 1874, the
defendant John Dodds signed and delivered to the
plaintiff, George Dickinson, a memorandum, of which the
material part was as follows:
“I hereby agree to sell to Mr. George
Dickinson the whole of the dwellinghouses, garden
ground, stabling, and outbuildings thereto
belonging, situate at Croft, belonging to me, for
the sum of £800 As witness my hand this tenth day
of June, 1874.”
“800. [Signed] John Dodds.“
"P.S. offer to be left over until Friday, 9
o'clock a. m. J. D. (the twelfth), 12 June, 1874.
[Signed] J. Dodds.”
The bill alleged that Dodds understood and
intended that the plaintiff should have until Friday, 9
a.m., within which to determine whether he would or would
not purchase, and that he should absolutely have until
that time the refusal of the property at the price of
and that the plaintiff in fact determined to accept the
offer on the morning of Thursday, the 11th of June, but
did not at once signify his acceptance to Dodds,
believing that he had the power to accept it until 9 a.m.
on the Friday.
In the afternoon of the Thursday the plaintiff
was informed by a Mr. Berry that Dodds had been offering
or agreeing to sell the property to Thomas Allan, the
other defendant. Thereupon the plaintiff, at about half
past seven in the evening, went to the house of Mrs.
Burgess, the mother of Dodds, where he was then staying,
and left with her a formal acceptance in writing of the
offer to sell the property. According to the evidence of
Mrs. Burgess this document never in fact reached Dodds,
she having forgotten to give it to him.
On the following (Friday) morning, at about seven
o'clock, Berry who was acting as agent for Dickinson,
found Dodds at the Darlington railway station, and handed
to him a duplicate of the acceptance by Dickinson, and
explained to Dodds its purport. He replied that it was
too late, as he had sold the property. A few minutes
212
later Dickinson himself found Dodds entering a railway
carriage, and handed him another duplicate of the notice
of acceptance, but Dodds declined to receive it, saying:
“You are too late. I have sold the property."
It appeared
11th of June, Dodds
sale of property to
received from him a
that on the day before, Thursday, the
had signed a formal contract for the
the defendant Allan for and had
deposit of £40.
The bill in this suit prayed that the defendant
Dodds might be decreed specifically to perform the
contract of the l0th of June, 1874; that he might be
restrained from conveying the property to Allan; that
Allan might be restrained from taking any such
conveyance; that, if any such conveyance had been or
should be made, Allan might be declared a trustee of the
property for, and might be directed to convey the
property, to the plaintiff, and for damages.
The cause came on for hearing before Vice
Chancellor Bacon on the 25th of January, 1876. (It was
his opinion that Dodds could withdraw only by giving
notice to Dickinson, and that the contract took effect by
the doctrine of relation back as of the time of the offer
and hence was prior to the sale to Allan. He therefore
decreed specific performance in favor of the plaintiff.
From the decision, both of the defendants appealed.]
JAMES, Lord Justice, after referring to the
document of the 10th of June, 1874, continued:
The document, though beginning “I hereby agree to
sell," was nothing but an offer, and was only intended to
be an offer, for the plaintiff himself tells us that he
required time to consider whether he would enter into an
agreement or not. Unless both parties had then agreed,
there was no concluded agreement then made; it was in
effect and substance only an offer to sell. The
plaintiff, being minded not to complete the bargain at
that time, added this memorandum: "This offer to be left
over until Friday, 9 o'clock a.m. 12th June, 1874." That
shows it was only an offer. There was no consideration
given for the undertaking or promise, to whatever extent
it may be considered binding, to keep the property unsold
until 9 o'clock on Friday morning; but apparently
Dickinson was of the same opinion, that he (Dodds) was
bound by that promise, and could not in any way withdraw
from it, or retract it, until 9 o'clock on Friday
morning, and this probably explains a good deal of what
afterwards took place. But it is clear settled law, on
213
one of the clearest principles of the law, that his
promise, being a mere nudum pactum, was not binding, and
that at any moment before a complete acceptance by
Dickinson of the offer, Dodds was as free as Dickinson
himself.
Well, that being the state of things, it is said
that the only mode in which Dodds could assert that
freedom was by actually and distinctly saying to
Dickinson, “Now, I withdraw my offer." It appears to me
that there is neither principle nor authority for the
proposition that there must be an express and actual
withdrawal of the offer, or what is called a retraction.
It must, to constitute a contract, appear that the two
minds were at one, at the same moment of time, that is,
that there was an offer continuing up to
the time of the acceptance. If there was not such a
continuing offer, then the acceptance comes to nothing.
Of course it may well be that the one man is bound in
some way or other to let the other man know that his mind
with regard to the offer has been changed; but in this
case, beyond ail question, the plaintiff knew that Dodds
was no longer minded to sell the property to him as
plainly and clearly as if Dodds had told him in so many
words, “I withdraw the offer." This is evident from the
plaintiff's own statements in the bill.
The plaintiff says in effect that, having heard and
knowing that Dodds was no longer minded to sell to him
and that he was selling or had sold to some one else,
thinking that he could not in point of law withdraw his
offer, meaning to fix him to it, and endeavoring to bind
him: "I went to the house where he was lodging, and saw
his mother and left with her an acceptance of the offer,
knowing all the while that he had entirely changed his
mind. I got an agent to watch for him at 7 o'clock the
next morning, and I went to the train just before 9
o'clock, in order that I might catch him and give him my
notice of acceptance just before 9 o'clock, and when that
occurred he told my agent, and he told me, 'You are too
late,' and he then threw back the paper." It is to my
mind quite clear that before there was any attempt at
acceptance by plaintiff, he was perfectly well aware that
Dodds had changed his mind, and that he had in fact
agreed to sell the property to Allan. It is impossible,
therefore, to say there was ever that existence of the
same mind between the two parties which is essential in
point of law to the making of an agreement. I am of
opinion, therefore, that the plaintiff has failed to
prove that there was any binding contract between Dodds
and himself.
214
[The bill] will be dismissed with costs.
215
LEFKOWITZ v. GREAT MINNEAPOLIS SURPLUS STORE
Supreme Court of Minnesota
251 Minn. 188,86 N.W.2d 689 (1957)
MURPHY, Justice.
This is an appeal from an order of the Municipal
Court of Minneapolis denying the motion of the defendant
for amended findings of fact, or in the alternative, for
a new trial. The order for judgment awarded the plaintiff
the sum of $138.50 as damages for breach of contract.
This case grows out of the alleged refusal of the
defendant to sell to the plaintiff a certain fur piece
which it had offered for sale in a newspaper
advertisement. It appears from the record that on April
6, 1956, the defendant published the following
advertisement in a Minneapolis newspaper:
"Saturday 9 A.M. Sharp
3 Brand New
Fur
Coats
Worth to $100.00
First Come
First Served
$ 1
Each"
On April 13, the defendant again published an
advertisement in the same newspaper as follows:
"Saturday 9 A.M.
2 Brand New Pastel
Mink 3 Scarfs
Selling for $89.50
Out they go
Saturday. Each... $1.00
1 Black Lapin Stole
Beautiful,
worth $139.5 ... $1.00
First Come
First Served"
The record supports the findings of the court
that on each of the Saturdays following the publication
of the above ads the plaintiff was the first to present
himself at the appropriate counter in the defendant's
store and on each occasion demanded the coat and the
stole so advertised and indicated his readiness to pay
216
the sale price of $ 1. On both occasions, the defendant
refused to sell the merchandise to the plaintiff, stating
on the first occasion that by a "house rule" the offer
was intended for women only and sales would not be made
to men, and on the second visit that plaintiff knew
defendant's house rules.
The trial court properly disallowed plaintiff's
claim. for the value of the fur coats since the value of
these articles was speculative and uncertain. The only
evidence of value was the advertisement itself to the
effect that the coats were "Worth to $100.00," how much
less being speculative especially in view of the price
for which they were offered for sale. With reference to
the offer of the defendant on April 13, 1956, to sell the
"I Black Lapin Stole... worth $139.50..." the trial court
held that the value of this article was established and
granted judgment in favor of the plaintiff for that
amount less the $1 quoted purchase price.
1. The defendant contends that a newspaper
advertisement offering items of merchandise for sale at a
named price is a “unilateral offer" which may be
withdrawn without notice. He relies upon authorities
which hold that, where an advertiser publishes in a
newspaper that he has a certain quantity or quality of
goods which he wants to dispose of at certain prices and
on certain terms, such advertisements are not offers
which become contracts as soon as any person to whose
notice they may come signifies his acceptance by
notifying the other that he will take a certain quantity
of them. Such advertisements have been construed as an
invitation for an offer of sale on the terms stated,
which offer, when received, may be accepted or rejected
and which therefore does not become a contract of sale
until accepted by the seller and until a contract has
been so made, the seller may modify or revoke such prices
or terms.
The defendant relies principally on Craft v.
Elder & Johnston Co. In that case, the court discussed
the legal effect of an advertisement offering for sale,
as a one special, an electric sewing machine at a named
price. The view was expressed that the advertisement was
(38 N.E.2d 417, 34 Ohio L.A. 605) "not an offer made to
any specific person but was made to the public generally.
Thereby it would be properly designated as a unilateral
offer and not being supported by consideration could be
withdrawn at will and without notice." It is true that
such an offer may be withdrawn before acceptance. Since
all offers are by their nature unilateral because they
217
are necessarily made by one party or on one side in the
negotiation of a contract, the distinction made in that
decision between a unilateral offer and a unilateral
contract is not clear. On the facts before us we are
concerned with whether the advertisement constituted an
offer, and, if so, whether the plaintiff's conduct
constituted an acceptance.
There are numerous authorities which hold that a
particular advertisement in a newspaper or circular
letter relating to a sale of articles may be construed by
the court as constituting an offer, acceptance of which
would complete a contract... The test of whether a
binding obligation may originate in advertisements
addressed to the general public is "whether the facts
show that some performance was promised in positive terms
in return for something requested." 1 Williston,
Contracts (Rev. ed.) 27.
The authorities above cited emphasize that, where
the offer is clear, definite, and explicit, and leaves
nothing open for negotiation, it constitutes an offer,
acceptance of which will complete the contract.
Whether in any individual instance a newspaper
advertisement is an offer rather than an invitation to
make an offer depends on the legal intention of the
parties and the surrounding circumstances. Annotation,
157 A.L.R. 744, 751; 77 C.J.S. Sales 25b; 17 C.J.S.
Contracts 389. We are of the view on the facts before us
that the offer by the defendant of the sale of the Lapin
fur was clear, definite, and explicit, and left nothing
open for negotiation. The plaintiff having successfully
managed to be the first one to appear at the seller's
place of business to be served, as requested by the
advertisement, and having offered the stated purchase
price of the article, he was entitled to performance on
the part of the defendant. We think the trial court was
correct in holding that there was in the conduct of the
parties a sufficient mutuality of obligation to
constitute a contract of sale.
2. The defendant contends that the offer was
modified by a "house rule" to the effect that only women
were qualified to receive the bargains advertised. The
advertisement contained no such restriction. This
objection may be disposed of briefly by stating that,
while an advertiser has the right at any time before
acceptance to modify his offer, he does not have the
right, after acceptance, to impose new or arbitrary
conditions not contained in the published offer.
218
Affirmed.
219
HADLEY v. BAXENDALE
In the Court of Exchequer
(1854) 9 Exch. 341
[Statement of facts by the reporter:] At the trial before
Crompton, J., at the last Gloucester Assizes, it appeared that the
plaintiffs carried on an extensive business as millers at
Gloucester; and that, on the 11th of May, their mill was stopped
by a breakage of the crank shaft by which the Mill was worked. The
steam-engine was manufactured by Messrs. Joyce & Co., the
engineers, at Greenwich, and it became necessary to send the shaft
as a pattern for a new one to Greenwich. The fracture was
discovered on the 12th, and on the 13th the plaintiffs sent one of
their servants to the office of the defendants, who are well-known
carriers trading under the name of Pickford & Co., for the purpose
of having the shaft carried to Greenwich. The plaintiffs' servant
told the clerk that the mill was stopped, and that the shaft must
be sent immediately; and in answer to the inquiry when the shaft
would be taken, the answer was, that if it was sent up by twelve
o'clock any day, it would be delivered at Greenwich on the
following day. On the following day the shaft was taken by the
defendants before noon, for the purpose of being conveyed to
Greenwich, and the sum of 2£,4s. was paid for its carriage for the
whole distance; at the same time the defendants' clerk was told
that a special entry, if required, should be made to hasten its
delivery. The delivery of the shaft at Greenwich was delayed by
some neglect; and the consequence was, that the plaintiffs did not
receive the new shaft for several days after they would otherwise
have done and the working of their mill was thereby delayed, and
they thereby lost the profits they would otherwise have received.
(Note: The shaft was delivered to Joyce & Co. a week later, rather
than the next day.)
On the part of the defendants, it was objected that these damages
were too remote, and that the defendants were not liable with
respect to them. The learned Judge left the case generally to the
jury, who found a verdict with £25 damages beyond the [£25 which
the defendants, had previously paid into Court].
Whateley, in last Michaelmas Term, obtained a rule nisi for a new
trial, on the ground of misdirection.
The judgment of the Court was now delivered by ALDERSON, Baron.
We think that there ought to be a new trial in this case; but in
so doing, we deem it to be expedient and necessary to state
explicitly the rule which the Judge, at the next trial, ought, in
220
our opinion, to direct the jury to be governed by when they
estimate the damages.
It is, indeed, of the last importance that we should do this; for,
if the jury are left without any definite rule to guide them, it
will, in such cases as these, manifestly lead to the greatest
injustice.
Now we think the proper rule in such a case as the present is
this: -- Where two parties have made a contract which one of them
has broken, the damages which the other party ought to receive in
respect of such breach of contract should be such as may fairly
and reasonably be considered either arising naturally, i.e.,
according to the usual course of things, from such breach of
contract itself, or such as may reasonably be supposed to have
been in the contemplation of both parties, at the time they made
the contract, as the probable result of the breach of it. Now, if
the special circumstances under which the contract was actually
made were communicated by the plaintiffs to the defendants, and
thus known to both parties, the damages resulting from the breach
of such a contract, which they would reasonably contemplate, would
be the amount of injury which would ordinarily follow from a
breach of contract under these special circumstances so known and
communicated. But, on the other hand, if these special
circumstances were wholly unknown to the party breaking the
contract, he, at most, could only be supposed to have had in his
contemplation the amount of injury which would arise generally,
and in the great multitude of cases not affected by any special
circumstances, from such a breach of contract. For, had the
special circumstances been known, the parties might have specially
provided for the breach of contract by special terms as to the
damages in that case; and of this advantage it would be very
unjust to deprive them.
Now the above principles are those by which we think the jury
ought to be guided in estimating the damages arising out of any
breach of contract. It is said, that other cases such as breaches
of contract in the non-payment of money, or in the not making a
good title to land, are to be treated as exceptions from this, and
as governed by a conventional rule. But as, in such cases, both
parties must be supposed to be cognizant of that well-known rule,
these cases may, we think, be more properly classed under the rule
above enunciated as to cases under known special circumstances,
because there both parties may reasonably be presumed to
contemplate the estimation of the amount of damages according to
the conventional rule. Now, in the present case, if we are to
apply the principles above laid down, we find that the only
circumstances here communicated by the plaintiffs to the
defendants at the time the contract was made, were, that the
article to be carried was the broken shaft of a mill, and that the
plaintiffs were the millers of that Mill.
221
(Note: Contrast this assertion by the judge that the only
information which the plaintiffs communicated to the defendants
was that the article being shipped was a shaft from the
plaintiffs' mill, with the reporter's statement of the facts at
the beginning of the case, which states that the plaintiffs'
employee also advised the carrier that the shaft had to be sent
"immediately." Of course, the court's analysis of the facts is
determinative.)
But how do these circumstances show reasonably that the profits of
the mill must be stopped by unreasonable delay in the delivery of
the broken shaft by the carrier to the third person? Suppose the
plaintiffs had another shaft in their possession put up or putting
up at the time, and that they had only wished to send back the
broken shaft by the carrier to the engineer who made it; it is
clear that this would be quite consistent with the above
circumstances, and yet the unreasonable delay in the delivery
would have no effect upon the immediate profits of the mill. Or,
again, suppose that, at the time of the delivery to the carrier,
the machinery of the mill had been in other respects defective,
then, also, the same results would follow.
Here it is true that the shaft was actually sent back to serve as
a model for a new one, and that the want of a new one was the only
cause of the stoppage of the mill, and that the loss of profits
really arose from the delay in delivering the broken one to serve
as a model. But it is obvious that, in the great multitude of
cases of millers sending of broken shafts to third persons by a
carrier under ordinary circumstances, such consequences would not
in all probability, have occurred; and these special circumstances
were here never communicated by the plaintiffs to the defendants.
It follows, therefore, that the loss of profits here cannot
reasonably be considered such a consequence of the breach of
contract as could have been fairly and reasonably contemplated by
both parties when they made this contract. For such loss would
neither have flowed naturally from the breach of this contract in
the great multitude of such cases occurring under ordinary
circumstances, nor were the special circumstances, which perhaps,
would have made it a reasonable and natural consequence of such
breach of contract, communicated to or known by the defendants.
The Judge ought, therefore, to have told the jury, that, upon the
facts then before them, they ought not to take the loss of profits
into consideration at all in estimating the damages. There must
therefore be a new trial in this case.
Rule absolute.
222
ERICSON y. PLAYGIRL, INC.
Court of Appeals of California
73 Cai.App.3d 850 Cal.Rptr.921 (1977)
FLEMING, Acting Presiding Justice.
Were damages awarded here for breach of contract
speculative and conjectural, or were they clearly
ascertainable and reasonably certain, both in nature and
in origin?
The breach of contract arose from the following
circumstances: plaintiff John Ericson, in order to boost
his career as an actor, agreed that defendant Playgirl,
Inc. could publish without compensation as the centerfold
of its January 1974 issue of Playgirl photographs of
Ericson posing naked at Lion Country Safari. No immediate
career boost to Ericson resulted from the publication. In
April 1974 defendant wished to use the pictures again for
its annual edition entitled Best of Playgirl, a
publication with half the circulation of Playgirl and
without advertising. Ericson agreed to a rerun of his
pictures in Best of Playgirl on two conditions: that
certain of them be cropped to more modest exposure, and
that Ericson's photograph occupy a quarter of the front
cover, which would contain photographs of five other
persons on its remaining three-quarters. Defendant
honored the first of these conditions but not the second,
in that as the result of an editorial mixup Ericson's
photograph did not appear on the cover of Best of
Playgirl. Ericson thereupon sued for damages, not for
invasion of privacy from unauthorized publication of his
pictures, but for loss of the publicity he would have
received if defendant had put Ericson's picture on the
cover as it had agreed to do.
All witnesses testified that the front cover of a
magazine is not for sale, that a publisher reserves
exclusive control over the front cover because its format
is crucial to circulation, that consequently it is
impossible to quote a direct price for front cover space.
Witnesses also agreed that a picture on the front cover
of a national magazine can provide valuable publicity for
an actor or entertainer, but that it is difficult to put
a price on this publicity. Analogies were sought in the
cost of advertising space inside and on the back cover of
national magazines. In July 1974 a full-page
advertisement in Playgirl cost $7,500 to $8.000, a
quarter page $2.500, and the back cover $11,000. However,
Best of Playgirl carried no advertising and enjoyed only
half the circulation of its parent magazine.
223
The trial court awarded plaintiff damages of $12,500,
expressly basing its award on the testimony of Richard
Cook, western advertising manager for TV Guide. According
to Cook, the value to an entertainer of an appearance on
the cover of a national magazine is "probably close to
$50,000, and t base that on this: That magazine lays on
the newsstand, a lot of people that never buy it see it,
and everybody that does buy it certainly sees it." Cook
said that the circulation of a magazine affects the value
of a cover appearance, as does the magazine's
demographics, i.e., the specific audience it reaches, He
based his opinion on his knowledge of Playgirl, for he
had no knowledge of the circulation, demographics, or
even existence of Best of Playgirl. He also quantified
his opinion by stating that if the picture only occupied
a quarter of the cover instead of the full cover, the
value of the appearance would be only a fourth of
$50,000, which was the figure used by the trial court in
fixing plaintiff's damages for loss of publicity at
$12,500.
On appeal the sole substantial issue is that of damages,
for it is clear the parties entered a contract which
defendant breached.*
*The contract consisted of the following letter:
"I, John Ericson. hereby release to Playgirl the use
of my centerfold, cropped to eliminate genital
exposure, to appear as a fold-out in 'The Best of
Playgirl'. Also, it is understood that a head shot
of me will appear on the front cover of 'The Best of
Playgirl', lower left. I further release all other
pictures which appeared in the January centerfold
section for use in The Best of Playgirl'."
In reviewing the issue of damages we first note that the
cause of action is for breach of contract and not for a
tort such as invasion of privacy. Defendant is not
charged with committing a civil wrong but merely with
failing to keep its promise. From this classification of
the action as breach of contract, three important
consequences affecting the measure of damages follow:
1. Damages may not be punitive or exemplary and may not
be imposed as a form of chastisement (Civil Code section
3294).
2.
Damages are limited to losses that might reasonably
be contemplated or foreseen by the parties (Civil Code
224
sections 3300, 3358; Hadley y. Baxendale (1854) 156 Eng.
Rep. 145).
3.
Damages must be clearly ascertainable and reasonably
certain, both in their nature and origin (Civil Code
section
3301).
Plaintiff's claim of damages for breach of contract was
based entirely on the loss of general publicity he would
have received by having his photograph appear, alongside
those of five others, on the cover of Best of Playgirl.
Plaintiff proved that advertising is expensive to buy,
that publicity bas value for an actor. But what he did
not prove was that loss of publicity as the result of his
nonappearance on the cover of Best of Playgirl did in
fact damage him in any substantial way or in any specific
amount. Plaintiff's claim sharply contrasts with those
few breach of contract cases that have found damages for
loss of publicity reasonably certain and reasonably
calculable, as in refusals to continue an advertising
contract. In such cases the court bas assessed damages at
the market value of the advertising, less the agreed
contract price. (See Metropolitan Broadcasting
Corporation v. Lebowitz (D.C.Cir. 1961) 293 F.2d 524, 110
App.D.C. 336, 90 A.L.R.2d 1193). Plaintiff's claim for
damages more closely resembles those which have been held
speculative and conjectural, as in the analogous cases of
Jones v. San Bernardino Real Estate Board (1959) 168
Cal.App.2d 665, 336 P.2d 606, where the court declined to
award purely conjectural damages for loss of commissions,
contacts, business associations, and clientele allegedly
occasioned by plaintiff's expulsion from a local realty
board; and of Fisher v. Hampton (1975) 44 Cal.App.3d 741,
118 Cal.Rptr. 811, where the court rejected an award of
damages for defendant's failure to drill a $35,000 oil
well when geological reports opined that oil would not be
found and no evidence whatever established that plaintiff
had been damaged. Under normal legal rules plaintiff's
claim for damages failed to satisfy the requirements of
reasonable foreseeability (Civil Code section 3300) and
reasonable certainty (Civil Code section 3301), and
therefore took on a punitive hue (Civil Code section
3294).
Plaintiff, however, contends that special rules of
foreseeability and certainty of damages apply to loss of
publicity by actors, entertainers, and other performing
artists dependent upon public patronage for the success
of their careers. In substance, plaintiff argues that for
artists the loss of any kind of publicity is harmful and
225
detrimental to their careers; hence for them any loss of
publicity in breach of contract is compensable in
damages. In order to evaluate this contention we must
consider the nature and kind of publicity that plaintiff
bas lost.
All persons who offer personal services to the general
public rely on goodwill to establish and maintain custom,
and at first blush it seems reasonable to assume that the
better known they are, the more likely they are to
attract custom. But to be accurate we must make this
assumption more precise. We must ask the question better
known for what? A lawyer who is a famous yachtsman may
not necessarily attract legal business; a dentist world
as a mountain climber may not necessarily improve his
practice of dentistry as a consequence of his renown; a
hairdresser who swims the Catalina Channel in record time
may not necessarily increase the patronage of her beauty
salon. For publicity to be of value and result in custom
it must relate to the specific aspect of the human
activity that is involved. General publicity bears little
relation to the repute that leads to custom and trade,
for it is specific reputation that brings about gain or
loss of business. It follows that damages for loss of
publicity in breach of contract must be tied to loss of
publicity for some particular event, such as a musical
concert or a prize fight, or loss of publicity for some
continuing activity, such as the conduct of a specific
business at a specific location or the practice of a
particular skill or art. Consequently, damages from loss
of general publicity alone will almost always be wholly
speculative and conjectural.
Plaintiff, however, insists that actors and performing
artists fall in a special category apart from other
purveyors of personal services. He argues that an actor
needs an audience to perform; that an actor must be
visible to patrons of his art to become successful; that
only by becoming publicly visible can an actor become
favorably known to patrons of his art and to producers of
dramatic productions who provide him with employment;
therefore all publicity is valuable to an actor, and the
loss by an actor of any publicity is injurious and
damaging. To a considerable extent the argument is sound
except for the breadth of its final conclusion. In our
view it is not any kind of publicity, celebrity, or
notoriety that is valuable to an artist's career, but
instead the publicity which is valuable to the artist is
publicity related to the performance of his art.
Publicity of this sort, gained by the performance or
production of his art, is the type of publicity that
226
creates good will, reputation, and custom, and which
taken at the flood leads to fame and fortune. Hence the
importance to actors of appearances on the stage and
screen, to musicians of appearances in concerts, and to
writers and composers of credits for the works they have
written or composed. Loss of publicity of this type as a
result of breach of contract is compensable to an actor,
musician, or writer, because the lost publicity is
directly connected with the performance of his art, grows
out of his profession, and directly affects his earning
power.
The compensability in damages for an artist's loss of
publicity in connection with his art as a result of
breach of contract was established by a series of English
cases that culminated in Herbert Clayton and Jack Waller
Ld. v. Oliver [1930] A.C. 209. In that case the House of
Lords squarely held that an actor whose contract of
employment has been breached has a cause of action not
only for loss of salary but for loss of publicity
resulting from the denial of the opportunity to appear in
public in his professional capacity. California has
adopted the English rule in Colvig v. R.K.O. General,
Inc. (1965) 232 Cal.App.2d 56, 42 Cal.Rptr. 473.*
* New York still rejects the rule that an artist's
loss of publicity as a result of his employer's
violation of contract is compensable in
damages. (Amaducci v. Metropolitan Opera Association
(1969) 33 App.Div.2d 542, [304 N.Y.S.2d 3221.)
But an examination of the cases allowing recovery of
damages for loss of publicity as a result of breach of
contract discloses that in each instance the lost
publicity grew out of the loss of the artist's exercise
of his profession, i.e., loss of the opportunity to act,
to broadcast, to sing, to conduct an orchestra, to
entertain; or resulted from the loss of credit to the
artist for professional services connected with a
particular work, i.e., a script, play, musical
composition, design, production, and the like.*
* Herbert Clayton and Jack Waller Ld. v. Oliver
[19301 A.C. 209 (actor not allowed to act); Marbe
Edwards v. Daly's Theater, Inc. [1928] 1 K.B. 269
(actress not allowed to act); Bunning v. Lyric
Theater Ltd. [ 1894] 71 L.T. 396 (musical director
not allowed to conduct orchestra); Colvig v. R.K.O.
General, Inc. (1965) 232 Cal.App.2d 56, 42 Cal.Rptr.
473 (radio announcer not allowed to announce);
Taloney v. Criterion etc. (1936) 2 All E.R. 1625
227
(screen credit not given to author of script);
Paramount Productions v. Smith (9th Cir. 1937) 91
F.2d 863 (screen credit not given to author of
original story from which picture was made); Lloyd
v. California Pictures Corp. (1955) 136 Cal.App.2d
638, 289 P.2d 295 (screen credit and star billing
not given to Harold Lloyd). For a limited
application of the rule to business employment, see
Restatement Second of Agency section 433, and
McLaughlin v. Union Corporation (1955) 99 N.H. 492,
116 A.2d 489 (advertising manager of newspaper not
allowed to work).
Publicity in both these categories performs a similar
function in that it permits patrons and producers to
evaluate the artist's merits in connection with the
performance of his art. Damages for the loss of such
publicity does not present insuperable difficulties in
calculation, for the artist's future earnings can be
directly correlated to his box office appeal or to his
known record of successes. But even here proof of damages
from loss of publicity must be reasonably certain and
specific, and those claims that appear speculative and
conjectural are rejected. For example, in Zorich v.
Petroff (1957) 152 Cal.App.2d 806, 8 11, 313 P.2d 118,
the court declined to award damages to an associate
producer of a motion picture for defendant's failure to
give him screen credit. In that case the motion picture
was a failure, no evidence of actual damage was
introduced, and the court opined that screen credit, if
given, might have turned out to be a liability rather
than an asset.
A yawning gulf exists between the cases that involve loss
of professional publicity and the instant case in which
plaintiff complains of loss of mere general publicity
that bears no relation to the practice of his art. His
situation is comparable to that of an actor who hopes to
obtain wide publicity by cutting the ribbon for the
opening of a new resort complex, by sponsoring a golf or
tennis tournament, by presenting the winning trophy at
the national horse show, or by acting as master of
ceremonies at a televised political dinner. Each of these
activities may generate wide publicity that conceivably
could bring the artist to the attention of patrons and
producers of his art and thus lead to professional
employment. Yet none of it bears any relation to the
practice of his art. Plaintiff's argument, in essence, is
that for an actor all publicity is valuable, and the loss
of any publicity as a result of breach of contract is
compensable. Carried to this point, we think his claim
228
for damages becomes wholly speculative. It is possible,
as plaintiff suggests, that a television programmer might
have seen his photograph on the cover of Best of
Playgirl, might have scheduled plaintiff for a talk show,
and that a motion picture producer viewing the talk show
might recall plaintiff's past performances, and decide to
offer him a role in his next production. But it is
equally plausible to speculate that plaintiff might have
been hurt professionally rather than helped by having his
picture appear on the cover of Best of Playgirl, that a
motion picture producer whose attention had been drawn by
the cover of the magazine to its contents depicting
plaintiff posing naked in Lion Country Safari might
dismiss plaintiff from serious consideration for a role
in his next production. The speculative and conjectural
nature of such possibilities speaks for itself.
Assessment of the value of general publicity unrelated to
professional performance takes us on a random walk whose
destination is as unpredictable as the lottery and the
roulette wheel. When, as at bench, damages to earning
capacity and loss of professional publicity in the
practice of one’s art are not involved, we think recovery
of compensable damages for loss of publicity is barred by
the Civil Code requirement that damages for breach of
contract be clearly foreseeable and clearly
ascertainable. (Sections 3300, 3301.)
Plaintiff, however, is entitled to recover nominal
damages for breach of contract. We evaluate plaintiff's
right to nominal damages by analogy to Civil Code section
3344, which provides minimum statutory damages of $300
for knowing commercial use of a person's name or likeness
without his consent. The statute’s obvious purpose is to
specify an amount for nominal damages in situations where
actual damages are impossible to assess. Accordingly,
although we find no support for any assessment of
compensatory damages in plaintiff's favor because of the
wholly speculative nature of the detriment suffered by
plaintiff as a result of his nonappearance on a fourth of
the cover of Best of Playgirl, plaintiff is entitled to
nominal damages for breach of contract, which we fix in
the sum of $300.
The judgment is modified to reduce the amount of damages
to $300, and, as so modified, the judgment is affirmed.
Costs on appeal to plaintiff.
COMPTON, Justice, and BEACH, Justice, concurred.
229
PARKER v. TWENTIETH CENTURY-FOX FILM CORP.
California Supreme Court
3 Cal.3d 176, 89 Cal. Rptr. 737,474 P.2d 689 (1970)
BURKE, Justice.
Defendant Twentieth Century-Fox Film Corporation appeal
from a summary judgment*
*(Summary judgment is a device utilized by a court
to dispose of an action without a trial, and
therefore without the participation of a jury. The
judge may reach a decision on his own only if there
are no disputes regarding the facts of the case, and
only issues of law remain to be resolved. If the
judge finds that a factual dispute exists, the jury
must resolve it and summary judgment cannot be
granted.)
granting to plaintiff the recovery of agreed
compensation under a written contract for her services
as an actress in a motion picture. As will appear, we
have concluded that the trial court correctly ruled in
plaintiff's favor and that the judgment should be
affirmed.
Plaintiff [Shirley MacLaine Parker] is well known as an
actress, and in the contract between plaintiff and
defendant is sometimes referred to as the "Artist."
Under the contract, dated August 6, 1965, plaintiff was
to play the female lead in defendant's contemplated
production of a motion picture entitled "Bloomer Girl."
The contract provided that defendant would pay
plaintiff a minimum "guaranteed compensation" of
$53,571.42 per week for 14 weeks commencing May 23,
1966, for a total of $750,000. Prior to May 1966
defendant decided not to produce the picture and by a
letter dated April 4, 1966, it notified plaintiff of
that decision and that it would not "comply with our
obligations to you under" the written contract.
By the same letter and with the professed purpose "to
avoid any damage to you," defendant instead offered to
employ plaintiff as the leading actress in another film
tentatively entitled "Big Country, Big Man"
(hereinafter, "Big Country"). The compensation offered
was identical, as were 31 of the 34 numbered provisions
or articles of the original contract. Unlike "Bloomer
Girl," however, which was to have been a musical
production, "Big Country" was a dramatic "western type"
230
movie. "Bloomer Girl" was to have been filmed in
California; "Big Country" was to be produced in
Australia. Also, certain terms in the proffered
contract varied from those of the original.*
*(Article 29 of the original contract specified
that plaintiff approved the director already
chosen for “Bloomer Girl" and that in case he
failed to act as director plaintiff was to have
approval rights of any substitute director.
Article 31 provided that plaintiff was to have the
right of approval of the "Bloomer Girl" dance
director, and Article 32 gave her the right of
approval of the screenplay.
Defendant's letter of April 4 to plaintiff, which
contained both defendant's notice of breach of the
"Bloomer Girl" contract and offer of the lead in
"Big Country," eliminated or impaired each of
those rights. It read in part as follows: "The
terms and conditions of our offer of employment
are identical to those set forth in the 'BLOOMER
GIRL' Agreement, Articles 1 through 34 and Exhibit
A to the Agreement except as follows:
"1. Article 31 of said Agreement will not be
included in any contract of employment regarding
‘BIG COUNTRY, BIG MAN' as it is not a musical and
it thus will not need a dance director.
"2. In the -BLOOMER GIRL' agreement, in Articles
29 and 32, you were given certain director and
screenplay approvals and you had preapproved
certain matters. Since there simply is
insufficient time to negotiate with you regarding
your choice of director and regarding the
screenplay and since you already expressed an
interest in performing the role in 'BIG COUNTRY,
BIG MAN,' we must exclude from our offer of
employment in 'BIG COUNTRY, BIG MAN' any approval
rights as are contained in said Articles 29 and
32; however, we shall consult with you respecting
the director to be selected to direct the
photoplay and will further consult with you with
respect to the screenplay and any revisions or
changes therein, provided, however, that if we
fail to agree... the decision of... [defendant]
with respect to the selection of a director and to
revisions and changes in the said screenplay shall
be binding upon the parties to said agreement.")
231
Plaintiff was given one week within which to accept;
she did not and the offer lapsed. Plaintiff then
commenced this action seeking recovery of the agreed
guaranteed compensation.
The complaint set forth two causes of action. The first
is for money due under the contract; the second, based
upon the same allegations as the first, is for damages
resulting from defendant's breach of contract.
Defendant in its answer admits the existence and
validity of the contract, that plaintiff complied with
all the conditions, covenants and promises and stood
ready to complete the performance, and that defendant
breached and "anticipatorily repudiated" the contract.
It denies, however, that any money is due to plaintiff
either under the contract or as a result of its breach,
and pleads as an affirmative defense to both causes of
action plaintiff's allegedly deliberate failure to
mitigate damages, asserting that she unreasonably
refused to accept its offer of the leading role in "Big
Country."
Plaintiff moved for summary judgment under Code of
Civil Procedure section 437c, the motion was granted,
and summary judgment for $750,000 plus interest was
entered in plaintiff's favor. This appeal by defendant
followed.
The familiar rules are that the matter to be determined
by the trial court on a motion for summary judgment is
whether facts have been presented which give rise to a
triable factual issue. The court may not pass upon the
issue itself. Summary judgment is proper only if the
affidavits or declarations in support of the moving
party would be sufficient to sustain a judgment in his
favor and his opponent does not by affidavit show facts
sufficient to present a triable issue of fact.
The general rule is that the measure of recovery by a
wrongfully discharged employee is the amount of salary
agreed upon for the period of service, less the amount
which the employer affirmatively proves the employee
earned or with reasonable effort might have earned from
other employment. However, before projected earnings
from other employment opportunities not sought or
accepted by the discharged employee can be applied in
mitigation, the employer must show that the other
employment was comparable, or substantially similar, to
that of which the employee has been deprived; the
employee's rejection of or failure to seek other
232
available employment of a different or inferior kind
may not be resorted to in order to mitigate damages.
In the present case defendant has raised no issue of
reasonableness of efforts by plaintiff to obtain other
employment; the sole issue is whether plaintiff's
refusal of defendant's substitute offer of "Big
Country" may be used in mitigation. Nor, if the "Big
Country" offer was of employment different or inferior
when compared with the original "Bloomer Girl"
employment, is there an issue as to whether or not
plaintiff acted reasonably in refusing, the substitute
offer. Despite defendant's arguments to the contrary,
no case cited or which our research has discovered
holds or suggests that reasonableness is an element of
a wrongfully discharged employee's option to reject, or
fail to seek, different or inferior employment lest the
possible earnings therefrom be charged against him in
mitigation of damages.*
* (Instead, in each case the reasonableness
referred to was that of the efforts of the
employee to obtain other employment that was not
different or inferior: his right to reject the
latter was declared as an unqualified rule of law.
Thus, Gonzales v. Internal. Assn. of Machinists,
213 Cal.App.2d 817, 823-824, holds that the trial
court correctly instructed the jury that plaintiff
union member, a machinist, was required to make
"such efforts as the average [member of his union]
desiring employment would make at that particular
time and place" (italics added); but, further,
that the court properly rejected defendant's offer
of proof of the availability of other kinds of
employment at the same or higher pay than
plaintiff usually received and all outside the
jurisdiction of his union, as plaintiff could not
be required to accept different employment or a
nonunion job.)
Applying the foregoing rules to the record in the
present case, with all intendments in favor of the
party opposing the summary judgment motion — here,
defendant — it is clear that the trial court correctly
ruled that plaintiff's failure to accept defendant's
tendered substitute employment could not be applied in
mitigation of damages because the offer of the "Big
Country" lead was of employment both different and
inferior, and that no factual dispute was presented on
that issue. The mere circumstance that "Bloomer Girl"
was to be a musical review calling upon plaintiff's
233
talents as a dancer as well as an actress, and was to
be produced in the City of Los Angeles, whereas "Big
Country" was a straight dramatic role in a "Western
Type" story taking place in an opal mine in Australia,
demonstrates the difference in kind between the two
employments; the female lead as a dramatic actress in a
western style motion picture can by no stretch of
imagination be considered the equivalent of or
substantially similar to the lead in a song-and-dance
production.
Additionally, the substitute "Big Country" offer
proposed to eliminate or impair the director and
screenplay approvals accorded to plaintiff under the
original "Bloomer Girl" contract (see fn. 2, ante), and
thus constituted an offer of inferior employment. No
expertise or judicial notice is required in order to
hold that the deprivation or infringement of an
employee's rights held under an original employment
contract converts the available "other employment"
relied upon by the employer to mitigate damages, into
inferior employment which the employee need not seek or
accept.
The judgment is affirmed.
SULLIVAN, Acting Chief Justice (dissenting).
The basic question in this case is whether or not
plaintiff acted reasonably in rejecting defendant's
offer of alternate employment. The answer depends upon
whether that offer(starring in "Big Country, Big Man")
was an offer of work that was substantially similar to
her former employment (starring in "Bloomer Girl") or
of work that was of a different or inferior kind. To my
mind this is a factual issue which the trial court
should not have determined on a motion for summary
judgment. The majority have not only repeated this
error but have compounded it by applying the rules
governing mitigation of damages in the employeremployee context in a misleading fashion. Accordingly,
I respectfully dissent.
The familiar rule requiring a plaintiff in a tort or
contract action to mitigate damages embodies notions of
fairness andsocially responsible behavior which are
fundamental to our jurisprudence. Most broadly stated,
it precludes the recovery of damages which, through the
exercise of due diligence, could have been avoided.
Thus, in essence, it is a rule requiring reasonable
conduct in commercial affairs. This general principle
234
governs the obligation of an employee after his
employer has wrongfully repudiated or terminated the
employment contract. Rather than permitting the
employee simply to remain idle during the balance of
the contract period, the law requires him to make a
reasonable effort to secure other employment. He is not
obligated, however, to seek or accept any and all types
of work which may be available. Only work which is in
the same field and which is of the same quality need be
accepted.
Over the years the courts have employed various phrases
to define the type of employment which the employee,
upon his wrongful discharge, is under an obligation to
accept. Thus in California alone it has been held that
he must accept employment which is "substantially
similar," "comparable employment," employment "in the
same general line of the first employment, "equivalent
to his prior position," "employment in a similar
capacity," employment which is " not... of a different
or inferior kind."
The relevant language excuses acceptance only of
employment which is of a different kind... It has never
been the law that the mere existence of differences
between two jobs in the same field is sufficient, as a
matter of law, to excuse an employee wrongfully
discharged from one from accepting the other in order
to mitigate damages. Such an approach would effectively
eliminate any obligation of an employee to attempt to
minimize damage arising from a wrongful discharge. The
only alternative job offer an employee would be
required to accept would be an offer of his former job
by his former employer.
Although the majority appear to hold that there was a
difference "in kind" between the employment offered
plaintiff in "Bloomer Girl" and that offered in "Big
Country"... an examination of the opinion makes crystal
clear that the majority merely point out differences
between the two films (an obvious circumstance) and
then apodically assert that these constitute a
difference in the kind of employment. The entire
rationale of the majority boils down to this: that the
"mere circumstances" that "Bloomer Girl" was to be a
musical review while "Big Country" was a straight drama
"demonstrates the difference in kind" since a female
lead in a western is not "the equivalent of or
substantially similar to" a lead in a musical. This is
merely attempting to prove the proposition by repeating
it. It shows that the vehicles for the display of the
235
star's talents are different but it does not prove that
her employment as a star in such vehicles is of
necessity different in kind and either inferior or
superior.
I believe that the approach taken by the majority (a
superficial listing of differences with no attempt to
assess their significance) may subvert a valuable legal
doctrine.*
*(The values of the doctrine of mitigation of
damages in this context are that it minimizes the
unnecessary personal and social (e.g.,
nonproductive use of labor, litigation) costs of
contractual failure. If a wrongfully discharged
employee can, through his own action and without
suffering financial or psychological loss in the
process, reduce the damages accruing from the
breach of contract, the most sensible policy is to
require him to do so. I fear the majority opinion
will encourage precisely opposite conduct.)
The inquiry in cases such as this should not be whether
differences between the two jobs exist (there will
always be differences) but whether the differences
which are present are substantial enough to constitute
differences in the kind of employment or, alternately,
whether they render the substitute work employment of
an inferior kind.
It seems to me that this inquiry involves, in the
instant case at least, factual determinations which are
improper on a motion for summary judgment. Resolving
whether or not one job is substantially similar to
another or whether, on the other hand, it is of a
different or inferior kind, will often (as here)
require a critical appraisal of the similarities and
differences between them in light of the importance of
these differences to the employee. This necessitates a
weighing of the evidence, and it is precisely this
undertaking which is forbidden on summary judgment.
It is not intuitively obvious, to me at least, that the
leading female role in a dramatic motion picture is a
radically different endeavor from the leading role in a
musical comedy film. Nor is it plain to me that the
rather qualified rights of director and screenplay
approval contained in the first contract are highly
significant matters either in the entertainment
industry in general or to this plaintiff in particular.
Certainly, none of the declarations introduced by
236
plaintiff in support of her motion shed any light on
these issues. Nor do they attempt to explain why she
declined the offer of starring in "Big Country, Big
Man." Nevertheless, the trial court granted the motion,
declaring that these approval rights were "critical"
and that their elimination altered "the essential
nature of the employment."
I cannot accept the proposition that an offer which
eliminates any contract right, regardless of its
significance, is, as a
matter of law, an offer of
employment of an inferior kind. Such an absolute rule
seems no more sensible than the majority's
earlier suggestion that the mere existence of
differences between two jobs is sufficient to render
them employment of different kinds. Application of per
se rules will severely undermine the principle of
mitigation of damages in the employer-employee context.
I remain convinced that the relevant question in such
cases is whether or not a particular contract provision
is so significant that its omission creates employment
of an inferior kind. This question is, of course,
intimately bound up in what I consider the ultimate
issue- whether or not the employee acted reasonably.
This will generally involve a factual inquiry to
ascertain the importance of the particular contract
term and a process of weighing the absence of that term
against the countervailing advantages of the alternate
employment. In the typical case. this will mean that
summary judgment must be withheld.
I believe that the judgment should be reversed so that
the issue of whether or not the offer of the lead role
in "Big Country, Big Man" was of employment comparable
to that of the lead role in "Bloomer Girl" may be
determined at trial.
237
TRUCK RENT-A-CENTER, INC. v. PURITAN FARMS 2ND, INC.
Court of Appeals of New York
41 N.Y.2d 420,393 N.Y.S.2d 365, 361 N.E.2d 1015 (1977)
JASEN, Judge.
The principal issue on this appeal is whether a provision in a truck
lease agreement which requires the payment of a specified amount of
money to the lessor in the event of the lessee's breach is an enforceable
liquidated damages clause, or, instead, provides for an unenforceable
penalty.
Defendant Puritan Farms 2nd, Inc. (Puritan), was in the business of
furnishing milk and milk products to customers through home delivery.
In January, 1969, Puritan leased a fleet of 25 new milk delivery trucks
from plaintiff Truck Rent-A-Center for a term of seven years
commencing January 15, 1970. Under the provisions of a truck lease
and service agreement entered into by the parties, the plaintiff was to
supply the trucks and make all necessary repairs. Puritan was to pay an
agreed upon weekly rental fee. It was understood that the lessor would
finance the purchase of the trucks through a bank, paying the prime rate
of interest on the date of the loan plus 2%. The rental charges on the
trucks were to be adjusted in the event of a fluctuation in the interest
rate above or below specified levels. The lessee was granted the right to
purchase the trucks, at any time after 12 months following
commencement of the lease, by paying to the lessor the amount then
due and owing on the bank loan, plus an additional $100 per truck
purchased.
Article 16 of the lease agreement provided that if the agreement
should terminate prior to expiration of the term of the lease as a result of
the lessee's breach, the lessor would be entitled to damages, "liquidated
for all purposes", in the amount of all rentals that would have come due
from the date of termination to the date of normal expiration of the term
less the "re-rental value" of the vehicles, which was set at 50% of the
rentals that would have become due. In effect, the lessee would be
obligated to pay the lessor, as a consequence of breach, one half of all
rentals that would have become due had the agreement run its full
course. The agreement recited that, in arriving at the settled amount of
damage, "the parties hereto have considered among other factors,
Lessor's substantial initial investment in purchasing or reconditioning
for Lessee's service the demised motor vehicles, the uncertainty of
Lessor's ability to re-rent the said vehicles, the costs to Lessor during
any period the vehicles may remain idle until re-rented, or if sold, the
uncertainty of the
sales price arid its possible attendant loss. The parties have also
considered, among other factors, in so liquidating the said damages,
Lessor's saving in expenditures for gasoline, oil and other service items."
Puritan tendered plaintiff a security deposit, consisting of four
weeks' rent and the lease went into effect. After nearly three years, the
lessee sought to terminate the lease agreement. On December 7, 1973,
Puritan wrote to the lessor complaining that the lessor had not repaired
and maintained the trucks as provided in the lease agreement. Puritan
stated that it had "repeatedly notified" plaintiff of these defaults, but
plaintiff had not cured them. Puritan, therefore, exercised its right to
terminate the agreement 'without any penalty and without purchasing the
trucks". (Emphasis added.) On the date set for termination, December 14,
1973, plaintiff's attorneys replied to Puritan by letter to advise it that
plaintiff believed it had fully performed its obligations under the lease
and, in the event Puritan adhered to the announced breach, would
commence proceedings to obtain the liquidated damages provided for in
article 16 of the agreement. Nevertheless, Puritan had its drivers return
the trucks to plaintiff's premises, where the bulk of them have remained
ever since. At the time of the termination, plaintiff owed $45,134.17 on
the outstanding bank loan.
Plaintiff followed through on its promise to commence an action for
the payment of the liquidated damages. Defendant counterclaimed for
the return of its security deposit. At the close of the trial, the court found,
based on the evidence it found to be credible, that plaintiff had
substantially performed its obligations under the lease and that defendant
was not justified in terminating the agreement. Further, the court held
that the provision for liquidated damages was reasonable and
represented a fair estimate of actual damages which would be difficult to
ascertain precisely.
The primary issue before us is whether the "liquidated damages"
provision is enforceable. Liquidated damages constitute compensation
which, the parties have agreed, should be paid in order to satisfy any loss
or injury flowing from a breach of their contract. (Wirth & Hamid Fair
Booking v. Wirth, 265 N.Y. 214, 223, 192 N.E. 297, 301.) In effect, a
liquidated damage provision is an estimate, made by the parties at the
time they enter into their agreement, of the extent of the injury that
would be sustained as a
238
result of breach of the agreement. (5 Williston, Contracts [3d ed.], § 776. p.668.)
Parties to a contract have the right to agree to such clauses, provided that the
clause is neither unconscionable nor contrary to public policy. (Mosler Safe Co. v.
Maiden Lane Safe Deposit Co., 199 N.Y. 479, 485, 93 N.E. 81, 83.) Provisions
for liquidated damage have value in those situations where it would be difficult, if
not actually impossible, to calculate the amount of actual damage. In such cases,
the contracting parties may agree between themselves as to the amount of
damages to be paid upon breach rather than leaving that amount to the calculation
of a court or jury. (14 N.Y.Jur., Damages. § 155, pp. 4-5.)
On the other hand, liquidated damage provisions will not be enforced if it is
against public policy to do so and public policy is firmly set against the imposition
of penalties or forfeitures for which there is no statutory authority. (City of Rye v.
Public Serv. Mat. Ins. Co., 34 N.Y.2d 470, 472-473. 358 N.Y.S.2d 391. 392393,
315 N.E.2d 458, 359.) It is plain that a provision which requires, in the event of
contractual breach, the payment of a sum of money grossly disproportionate to the
amount of actual damages provides for penalty and is unenforceable. A liquidated
damage provision has its basis in the principle of just compensation for loss. (Cf.
Restatement. Contracts, § 339, and Comment thereon.) A clause which provides
for an amount plainly disproportionate to real damage is not intended to provide
fair compensation but to secure performance by the compulsion of the very
disproportion. A promisor would be compelled, out of fear of economic
devastation, to continue performance and his promisee, in the event of default,
would reap a windfall well above actual harm sustained.
Similarly, the agreement should be interpreted as of the date of its making and not
as of the date of its breach.
In applying these principles to the case before us, we conclude that the
amount stipulated by the parties as damages bears a reasonable relation to the
amount of probable actual harm and is not a penalty. Hence, the provision is
enforceable and the order of the Appellate Division should be affirmed.
Looking forward from the date of the lease, the parties could reasonably
conclude, as they did, that there might not be an actual market for the sale or
re-rental of these specialized vehicles in the event of the lessee's breach. To be
sure, plaintiff's lost profit could readily be measured by the amount of the weekly
rental fee. However, it was permissible for the parties, in advance, to agree that the
re-rental or sale value of the vehicles would be 50% of the weekly rental. Since
there was uncertainty as to whether the trucks could be re-rented or sold, the
parties could reasonably set, as they did, the value of such mitigation at 50% of the
amount the lessee was obligated to pay for rental of the trucks. This would take
into consideration the fact that, after being used by the lessee, the vehicles would
no longer be "shiny, new trucks", but would he used, possibly battered trucks,
whose value would have declined appreciably. The parties also considered the fact
that, although plaintiff, in the event of Puritan's breach, might be spared repair and
maintenance costs necessitated by Puritan's use of the trucks, plaintiff would have
to assume the cost of storing them and maintaining trucks idled by Puritan's refusal
to use them. Further, it was by no means certain, at the time of the contract, that
lessee would peacefully return the trucks to the lessor after lessee had breached the
contract.
We attach no significance to the fact that the liquidated damages clause
appears on the preprinted form portion of the agreement. The agreement was fully
negotiated and the provisions of the form, in many other respects, were amended.
There is no indication of any disparity of bargaining power or of unconscionability.
The provision for liquidated damages related reasonably to potential harm that was
difficult to estimate and did not constitute a disguised penalty.
The rule is now well established. A contractual provision fixing damages in
the event of breach will be sustained if the amount liquidated bears a reasonable
proportion to the probable loss and the amount of actual loss is incapable or
difficult of precise estimation. If, however, the amount fixed is plainly or grossly
disproportionate to the probable loss, the provision calls for a penalty and will not
be enforced. In interpreting a provision fixing damages, it is not material whether
the parties themselves have chosen to call the provision one for 'liquidated
damages", as in this case, or have styled it as a penalty. Such an approach would
put too much faith in form and too little in substance.
Accordingly, the order of the Appellate Division should be affirmed, with
costs,
OSTEEN v. JOHNSON
Colorado Court of Appeals
473 P.2d 184 (1970)
DUFFORD, Judge.
This was an action for breach of an oral contract. Trial was to the court,
which found that the plaintiffs had paid the sum of $2.500. In exchange, the
defendant had agreed to "promote" the plaintiff's daughter, Linda Osteen, as a
singer and composer of
country-western music. More specifically, it was found that the defendant had
agreed to advertise Linda through mailings or a period of one year: to arrange and
furnish the facilities necessary for Linda to record several songs: to prepare two
records from the songs recorded: to press and mail copies of one of the records to
disc jockeys throughout the country: and, if the first record met
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with any success, to press and mail out copies of the second record.
The trial court further found that the defendant did arrange for several
recording sessions, at which Linda recorded four songs. A record was
prepared of two of the songs, and 1,000 copies of the record were then
pressed. Of the pressed records, 340 copies were mailed to disc jockeys, 200
were sent to the plaintiffs, and the remainder were retained by the defendant.
Various mailings were made to advertise Linda; flyers were sent to disc
jockeys throughout the country; and Linda's professional name was
advertised in trade magazines. The record sent out received a favorable
review and a high rating in a trade magazine.
Upon such findings the trial court concluded that the defendant had
substantially performed the agreement. However, a judgment was entered in
favor of the plaintiffs in the sum of $1.00 and costs on the basis that the
defendant had wrongfully caused the name of another party to appear on the
label of the record as co-author of a song which had been written solely by
Linda. The trial court also ordered the defendant to deliver to the plaintiffs
certain master tapes and records in the defendant's possession.
1. Right of Restitution
Although plaintiff's reasons are not clearly defined, they argue here that
the award of damages is inadequate, and that the trial court erred in
concluding that the defendant had substantially performed the agreement.
However, no evidence was presented during the trial of the matter upon
which an award of other than nominal damages could be based. In our
opinion, the remedy which plaintiffs proved and upon which they can rely is
that of restitution. See 5 A. Corbin, Contracts § 996. This remedy is available
where there has been a contract breach of vital importance, variously defined
as a substantial breach or a breach which goes to the essence of the contract.
See 5 A. Corbin, Contracts § 1104, where the author writes:
"In the case of a breach by non-performance, the injured party's
alternative remedy by way of restitution depends upon the extent of the
non-performance by the defendant. The defendant's breach may be nothing
but a failure to perform some minor part of his contractual duty. Such a
minor non-performance is a breach of contract and an action for damages can
be maintained. The injured party, however, cannot maintain for restitution of
what he has given the defendant unless the defendant's non-performance is so
material that it is held to go to the 'essence'; it must be such a breach as
would discharge the injured party from any further contractual duty on his
own part. A minor breach by one party does not discharge the contractual
duty of the other party; and the latter being still bound to perform as agreed
can not be entitled to the restitution of payments already made by him or to
the value of other part performances rendered."
2. Breach of Contract
The essential question here then becomes whether any breach on the
part of the defendant is substantial enough to justify the remedy of
restitution. Plaintiffs argue that the defendant breached the contract in the
following ways: First, the defendant did not
promote Linda for a period of one year as agreed; secondly, the defendant
wrongfully caused the name of another party to appear on the label as
co-author of the song which had been composed solely by Linda; and thirdly,
the defendant failed to press and mail out copies of the second record as
agreed.
The first argument is not supported by the record. Plaintiffs brought the
action within the one-year period for which the contract was to run. There
was no evidence that during this period the defendant had not continued to
promote Linda through the use of mailings and advertisements. Quite
obviously the mere fact that the one-year period had not ended prior to the
commencement of the action does not justify the conclusion that the
defendant had breached the agreement. Plaintiff's second argument overlooks
the testimony offered on behalf of the defendant that listing the other party as
co-author of the song would make it more likely that the record would be
played by disc jockeys.
The plaintiff's third argument does, however, have merit. It is clear from
the record and the findings of the trial court that the first record had met with
some success. it is also clear that copies of the second record were neither
pressed nor mailed out. In our opinion the failure of the defendant to press
arid mail out copies of the second record after the first had achieved some
success constituted a substantial breach of the contract and, therefore,
justifies the remedy of restitution. Seale v. Bates, 145 Cob. 430, 359 P.2d
356; Colorado Management Corp. v. American Founders Life Insurance Co.,
145 Cob. 413, 359 P.2d 665; Bridges v. Ingram, 122 Cob. 501, 223 P.2d
1051. Both parties agree that the essence of the contract was to publicize
Linda as a singer of western songs and to make her name and talent known to
the public. Defendant admitted and asserted that the primary method of
achieving this end was to have records pressed and mailed to disc jockeys.
3. Determining Damages
It is clear that the defendant did partially perform the contract and, under
applicable law, should be allowed compensation for the reasonable value of
his services. See 5 A. Corbin. Contracts § 1114, where the author writes:
"[A]l1 courts are in agreement that restitution by the defendant will not
be enforced unless the plaintiff returns in some way what he has received as a
part performance by the defendant."
It shall, therefore, be the ultimate order of this court that prior to
restoring to the plaintiffs the $2,500 paid by them to the defendant further
proceedings be held during which the trial court shall determine the
reasonable value of the services which the defendant rendered on plaintiffs'
behalf.
The judgment is reversed, and this case is remanded with directions that
a new trial be held to determine the one issue of the amount to which the
plaintiffs are entitled by way of restitution. Such amount shall be the $2,500
paid by plaintiffs to defendant less the reasonable value of the services which
the defendant performed on behalf of plaintiffs.
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