Contract Drafting Class 10 Thurs. Feb 16 University of Houston Law Center D. C. Toedt III

Common contract screw-ups

Common contract screw-ups “7. The contract that has additional signature blocks in [a schedule or exhibit, e.g., a form of deed], and these are signed as well as or instead of the main signature blocks of the contract.” [From “Top 10 howlers when preparing contracts for signature,” by the IP Draughts blog at http://goo.gl/Km6Dw.]

Pretentiousness

Some pretentious expressions How could these be improved? During such time as Customer needs help During the course of Provider’s work Provider will effectuate its obligations The parties will endeavor to agree Provider will forthwith notify Customer

Defined terms

Defined terms – where to put? Team exercise: Write down six places where you might find the definition of a defined term in a contract (careful – try to think “outside the box”)

Introducing a defined term Stark p. 80: “Mechanical Failure” means [definition follows] Adams, MSCD: Mechanical Failure refers to [definition follows]

Can Stark be improved on? P. 84, # 19 (“Song” example) Compare with p. 81, # 13 P. 84, # 20

Which do you like better, & why? Stark p. 87, # 1 Version 1? Version 2

Dell Master Purcha-sing Agrmt (Z&B pp. 236 et seq.)

Representations and Warranties - preview

Buying a used car What are the important points about this car that a buyer might want to know? What would be deal-breakers? What would affect the price the buyer would be willing to pay? [STUDENT DISCUSSION] Reps and warranties can take up to 30% of a contract.

Representation (Stark p. 12) Statement of fact As of a moment in time Intended to induce reliance Justifiable reliance is required for a cause of action As of a moment in time – got to go back in time; that’s when liability attaches Due diligence: You don’t get what you EXpect, but only what you INspect. Client would rather find out NOW.

Warranty (Stark p. 13) Technical definition Real world definition A promise that a statement is true Real world definition A promise that the maker of a statement will pay damages to the recipient of the statement if the statement isn’t true and the recipient suffers damages There is no reliance component, nor intent. Deal lawyers commonly ask for “reps” – they mean both.

Warranty The car is yellow. Richard Pryor – who you gonna believe: Me, or your lying eyes? Warranty: You can believe the guy. Representation: Gotta believe your eyes – reliance must be justified

Remedies for breach of warranty (Stark pp. 14-16) Benefit of bargain Diminution in value Alt: Cost of paint job? Incidental damages? Rental cost, while car is in paint shop Consequentials? UCC: If not disclaimed Damages cap in contract? Attorneys’ fees? Watch out for a drafter “sneaking in” a disclaimer of incidentals.

Remedies for Misrepresentations Honest or negligent, if material Avoidance Restitutionary Recovery Fraud Choice between Avoidance and Restitutionary Recovery and Damages Out-of-pocket Benefit of the bargain Punitive

Trade-offs: Representations versus Warranties Avoidance Punitive damages Warranties No reliance component Benefit of the bargain damages No need to prove defendant’s scienter If you’re a vendor, you might not WANT to give both reps and warranties.

CBS v. Ziff-Davis – sale of magazine division Rep/warranty re financial statements Due diligence: Accounting problems Lawsuit: Misrep. + breach of warranty (really: litigating the price afterwards) Holding: No misrep.: Reliance not justified BUT: Warranty claim succeeded Parties settled after appellate holding Rep about financial statements is VERY common. Wanted to close the deal because it still made sense.

British Sky Broadcasting v. EDS Case: http://bit.ly/9bPMbe (468-page PDF) HTML: http://bit.ly/c3SUZh Entire-agreement clause £30MM damages cap N/A to fraud. misrep. or negl. misrep. UK judge found EDS exec lied No contract liability finding

British Sky Broadcasting v. EDS ¶ 841: “Although it is not necessary to establish motive, motive provides support. Joe Galloway was quite clearly anxious to further his career. He was ambitious and to achieve a successful bid with Sky for the CRM Project would provide him with an opportunity to demonstrate his abilities to those in EDS. It was that motive which led him to say that he could achieve the Sky CRM Project in the required timescale when he knew that he had no proper basis for doing so. EDS say that there can be no motive in obtaining a project on the basis of times which cannot be met. I do not think he took that type of long term view. His wish was to be awarded the CRM Project and use that for advancement.”

211 – No reliance Representations outside this Agreement: None – the parties have specifically negotiated this section. Each party represents and warrants that, in entering into this Agreement, it is not relying on any representation by the other party, other than those set forth herein or incorporated by reference. Bold-faced emphasis: Convince a judge to “buy” it Representation and warranty: Defendant can respond to a fraudulent-rep claim: “YOU lied by signing the agreement.”

Why include no-reliance clause? Vendor: Avoid fraudulent-misrep. claims Customer (silver lining if forced to agree): Identify problems BEFORE they arise

Discovery issues for either warranty or misrep. claim True value of asset sold Inspections Comparables Expert testimony Alt: Repair costs Estimates

Extra discovery issues for misrepresentations Standard of care (negligence claims): Past deals, practices, problems – interrog., document production, depositions Expert witnesses – fees, report review, depositions, trial props, trial prep Intent (fraud claims): Email trails, interrog., depositions Net worth – for punitive damages From a trial-tactics perspective, why would a customer want to make a fraud accusation? Because non-technical jurors are more likely to grasp “they lied!” than technical claims about product performance.

Negotiating risk allocation (Stark pp. 17-19) See Stark’s examples Flat representation Unequivocal Without wiggle room Qualified representation Hedged

End of class