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

2. Common contract screw-ups

3. 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

4. Pretentiousness

5. 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

6. Defined terms

7. 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”)

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

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

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

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

12. Representations and Warranties - preview

13. 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.

14. 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.

15. 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.

16. 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

17. 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.

18. 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

19. 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.

20. 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.

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

22. 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.”

23. 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.”

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

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

26. 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):
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.

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

28. End of class