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Introduction

A great way to learn to write good contract language is to practice rewriting problematic language, especially the long, complicated paragraphs that are known as “walls of words,” a term that could appropriately be shortened to WOW.  Rewriting a wall-of-words contract provision is a skill that contract pro­fes­sion­als use all the time. Most contract professionals spend much of their time re­viewing and revising others’ contract drafts, many of which include WOW provisions.

A reviewer should always consider breaking up any WOW provision, for two reasons:

  • To reduce the risk of the MEGO factor (Mine Eyes Glaze Over), and
  • to make the provision easier for the client to read.

And in any case, few drafters start a project by crafting language from scratch. Instead, they look for one or more existing contracts (or drafts) and then copy and revise language to match their current needs, and some of that language might be in WOW form.

(This learn-by-rewriting approach could be thought of as a form of “deliberate practice,” a concept originated by Professor K. Anders Ericsson. See gen­er­al­ly, e.g., K. Anders Ericsson, Michael J. Prietula, and Edward T. Cokely, The Making of an Expert, Harvard Business Review, July-August 2007.)

Here’s one example of a WOW provision, excerpted from a Collaborative Re­search and License Agreement between Pfizer and Rigel Pharmaceuticals. (You don’t need to read the provision other than to see how long it is.)

9.2.12 PATENTS AND TRADEMARKS. To the best of its knowledge (but without having conducted any special investigation), Rigel owns or pos­ses­ses sufficient legal rights to all patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information, and proprietary rights and processes (including technology currently licensed from Stanford Uni­versity) necessary for its business as now conducted and as proposed to be conducted without any conflict with, or infringement of the rights of, others. Rigel currently licenses certain technology from Stanford University (the “Licensed Technology”) on an “as is” basis, with no representation or war­ranty from Stanford University that such technology does not infringe the proprietary rights of others. To Rigel’s knowledge, Rigel has not, as of the date hereof, received any claims from any third party alleging that the use of the Licensed Technology infringes the proprietary rights of such party. Except for agreements with its own employees or consultants and standard end-user license agreements, there are no outstanding options, licenses, or agreements of any kind relating to the foregoing, nor is Rigel bound by or a party to any options, licenses, or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information, and proprietary rights and processes of any other person or entity, other than the license agreements with Janssen Pharmaceutica N.V., Stanford University, SUNY, and BASF. Rigel has not received any communications alleging that Rigel has violated or, by con­ducting its business as proposed, would violate any of the patents, trade­marks, service marks, trade names, copyrights, trade secrets, or other pro­prietary rights or processes of any other person or entity. Rigel is not aware that any of its employees is obligated under any contract (including li­cen­ses, covenants, or commitments of any nature) or other agreement, or sub­ject to any judgment, decree, or order of any court or administrative agency, that would interfere with the use of such employee’s best efforts to promote the interests of Rigel or that would conflict with Rigel’s business as pro­posed to be conducted. Neither the execution nor delivery of this Agree­ment, nor the carrying on of Rigel’s business by the employees of Rigel, nor the conduct of Rigel’s business as proposed, will, to the best of Rigel’s knowledge, conflict with or result in a breach of the terms, conditions, or provisions of, or constitute a default under, any contract, covenant, or in­stru­ment under which any of such employees is now obligated. Rigel is not aware of any violation by a third party of any of Rigel’s patents, licenses, trademarks, service marks, tradenames, copyrights, trade secrets or other proprietary rights.

Split up multiple-sentence paragraphs

The first thing to do when encountering a wall-of-words provision is to break each sentence into a separate paragraph.

(EXCEPTION: Multiple, short, sentences concerning a single topic might be left in a single paragraph.)

NOTE: You might not want to bother numbering the new separate paragraphs just yet, although the “after” examples below are generally numbered for convenient reference.

Before:

The Premises as furnished by Landlord consist of the improvements as they exist as of the Effective Date and Landlord shall have no obligation for con­struc­tion work or improvements on or to any portion of the Premises. Prior to entering into this Lease, Tenant has made a thorough and in­de­pen­dent examination of the Premises and all matters related to Tenant’s decision to enter into this Lease. Tenant is thoroughly familiar with all aspects of the Premises and is satisfied that it is in an acceptable condition and meet Tenant’s needs. Tenant does not rely on, and Landlord does not make, any express or implied representations or warranties as to any matters in­clu­ding, without limitation, (a) the physical condition of the Premises including without limitation the structural components of any improvements or any building systems within or serving the improvements (including without limitation indoor air quality), (b) the existence, quality, adequacy or avail­a­bil­i­ty of utilities serving the Premises or any portion thereof, (c) the use, hab­it­a­bil­i­ty, merchantability, fitness or suitability of the Premises for Tenant’s in­ten­ded use, (d) the likelihood of deriving business from Tenant’s location or the economic feasibility of Tenant’s business, (e) Hazardous Materials on, in, un­der or around the Premises, (f) zoning, entitlements or any laws, ord­in­an­ces or regulations which may apply to Tenant’s use of the Premises or business operations, or (g) any other matter whatsoever. Tenant has sat­is­fied itself as to such suitability and other pertinent matters by Tenant’s own inquiries and tests into all matters relevant in determining whether to enter into this Lease. Tenant accepts the Premises in their existing “AS-IS”, “WHERE-IS” condition, and “WITH ALL FAULTS”. Tenant shall, by entering into and occupying the Premises, be deemed to have accepted the Prem­is­es and to have acknowledged that the same are in good order, condition and repair in all respects. Upon the Commencement Date, tenant shall exe­cute and deliver to Landlord the Acceptance Form attached hereto as Exhibit C.

After:

(a)     The Premises as furnished by Landlord consist of the improvements as they exist as of the Effective Date.

(b)     Landlord shall have no obligation for construction work or im­prove­ments on or to any portion of the Premises.

(c)     Prior to entering into this Lease, Tenant has made a thorough and independent examination of the Premises and all matters related to Tenant’s decision to enter into this Lease.

(d)     Tenant is thoroughly familiar with all aspects of the Premises and is satisfied that it is in an acceptable condition and meet Tenant’s needs.

(e)     Tenant does not rely on, and Landlord does not make, any express or implied representations or warranties as to any matters including, without limitation,

(1)     the physical condition of the Premises including without limitation the structural components of any improvements or any building sys­tems within or serving the improvements (including without limitation indoor air quality),

(2)     the existence, quality, adequacy or availability of utilities serving the Premises or any portion thereof,

(3)     the use, habitability, merchantability, fitness or suitability of the Premises for Tenant’s intended use,

(4)     the likelihood of deriving business from Tenant’s location or the economic feasibility of Tenant’s business,

(5)     Hazardous Materials on, in, under or around the Premises,

(6)     zoning, entitlements or any laws, ordinances or regulations which may apply to Tenant’s use of the Premises or business operations, or

(7)     any other matter whatsoever.

(f)     Tenant has satisfied itself as to such suitability and other pertinent mat­ters by Tenant’s own inquiries and tests into all matters relevant in deter­min­ing whether to enter into this Lease.

(g)     Tenant accepts the Premises in their existing “AS-IS”, “WHERE-IS” condition, and “WITH ALL FAULTS”.

(h)     Tenant shall, by entering into and occupying the Premises, be deemed to have accepted the Premises and to have acknowledged that the same are in good order, condition and repair in all respects.

(i)     Upon the Commencement Date, tenant shall execute and deliver to Land­lord the Acceptance Form attached hereto as Exhibit C.

ALTERNATIVE: Add bracketed pilcrows [¶] to help the reader’s eye locate the beginnings of sentences:

The Premises as furnished by Landlord consist of the improvements as they exist as of the Effective Date and Landlord shall have no obligation for con­struc­tion work or improvements on or to any portion of the Premises. [¶] Prior to entering into this Lease, Tenant has made a thorough and in­de­pen­d­ent examination of the Premises and all matters related to Tenant’s de­ci­sion to enter into this Lease. [¶] Tenant is thoroughly familiar with all aspects of the Premises and is satisfied that it is in an acceptable condition and meet Tenant’s needs. …

Next: Split up multiple-topic paragraphs

When a paragraph covers multiple topics, even if closely related: Consider breaking up those topics into separate paragraphs each as a complete sent­ence. (You might have to add transitional language to “help lead the reader by the hand along the path.”)

Before:

The Premises as furnished by Landlord consist of the improvements as they exist as of the Effective Date and Landlord shall have no obligation for construction work or improvements on or to any portion of the Premises.

After:

(a) The Premises as furnished by Landlord consist of the improvements as they exist as of the Effective Date. and

(b) Landlord shall have no obligation for construction work or improvements on[,] or to any portion of[,] the Premises.

Watch out for parentheticals addressing separate topics

Before:

The number of shares of Purchaser Common Stock subject to each Purchaser RSU Award shall be equal to the product (rounded up to the nearest whole share unless otherwise agreed by Seller and Purchaser) of (A) the number of shares of Seller Common Stock subject to the cor­res­p­ond­ing Seller RSU Award immediately prior to the Closing and (B) the Purchaser Ratio ….

After:

(a) The number of shares of Purchaser Common Stock subject to each Purchaser RSU Award shall be equal to the product (rounded up to the nearest whole share unless otherwise agreed by Seller and Purchaser) of (A) the number of shares of Seller Common Stock subject to the cor­res­p­ond­ing Seller RSU Award immediately prior to the Closing and (B) the Purchaser Ratio ….

(b) The number of shares computed in accordance with subdivision (a) is to be rounded up ….

ALTERNATIVE, with em-dashes in lieu of parentheses for greater visibility:—

The number of shares of Purchaser Common Stock subject to each Purchaser RSU Award shall be equal to the product — rounded up to the nearest whole share unless otherwise agreed by Seller and Purchaser — of (A) the number of shares ….

Judiciously add punctuation to help guide the reader’s eye

Make a long sentence easier to grasp by judiciously inserting commas; semi-colons; parentheses; and em-dashes.

Before:

Landlord shall have no obligation for construction work or improvements on or to any portion of the Premises.

After:

Landlord shall have no obligation for construction work or improvements on[,] or to any portion of[,] the Premises.

See also the alternative above of selectively replacing parentheses with em-dashes.

Next: Spin off “provided that ….” language

Seriously consider breaking off “provided that” language into its own para­graph — possibly using terms such as “except as otherwise provided below …” or comparable language, as shown in the example below.

Before:

The number of shares of Purchaser Common Stock subject to each Purchaser RSU Award shall be equal to the product … of (A) the number of shares of Seller Common Stock subject to the corresponding Seller RSU Award immediately prior to the Closing and (B) the Purchaser Ratio; provided that, with respect to any Seller RSU Award that is subject to performance-based vesting (A) with respect to any performance year that includes the Closing Date, the number of shares of Purchaser Common Stock subject to each Purchaser RSU Award shall be based on target-level performance, and such Purchaser RSU Awards shall not be subject to performance-based vesting criteria for such performance year, and (B) with respect to any performance year that commences after the Closing Date, Purchaser or its Affiliates shall establish the applicable performance goals following the Closing.

After:

(a) Except as provided in subdivision (b) below, the number of shares of Purchaser Common Stock subject to each Purchaser RSU Award shall be equal to the product … of (A) the number of shares of Seller Common Stock ….

(b) With respect to any Seller RSU Award that is subject to performance-based vesting ….

Sometimes a bit of repetition can add clarity

In the long, single-sentence, “Before” version below, note how there are two different “branches,” labeled with “(A)” and “(B).”

The “After” version breaks up those branches into two different subdivisions.

Before:

[W]ith respect to any Seller RSU Award that is subject to performance-based vesting (A) with respect to any performance year that includes the Closing Date, the number of shares of Purchaser Common Stock subject to each Purchaser RSU Award shall be based on target-level performance, and such Purchaser RSU Awards shall not be subject to performance-based vesting criteria for such performance year, and (B) with respect to any performance year that commences after the Closing Date, Purchaser or its Affiliates shall establish the applicable performance goals following the Closing.

After:

(a)     Case 1:

(1)     This subdivision applies to any Seller RSU Award that is subject to performance-based vesting with respect to any performance year that includes the Closing Date.

(2)     For that Seller RSU Award: (A) the number of shares of Purchaser Common Stock subject to each Purchaser RSU Award shall be based on target-level performance; and (B) such Purchaser RSU Awards shall not be subject to performance-based vesting criteria for such performance year.

(b)     Case 2:

(1)     This subdivision applies to any Seller RSU Award that is subject to performance-based vesting with respect to any performance year that commences after the Closing Date.

(2)     For that Seller RSU Award: Purchaser or its Affiliates shall establish the applicable performance goals following the Closing.

Consider using a more-oral narrative style for long sentences

Give some thought to setting the stage for a long contract provision to provide some context for the reader.

Before:

[W]ith respect to any Seller RSU Award that is subject to performance-based vesting (A) with respect to any performance year that includes the Closing Date, the number of shares of Purchaser Common Stock subject to each Purchaser RSU Award shall be based on target-level performance, and such Purchaser RSU Awards shall not be subject to performance-based vesting criteria for such performance year, and (B) with respect to any performance year that commences after the Closing Date, Purchaser or its Affiliates shall establish the applicable performance goals following the Closing.

After:

(a) Some Seller RSU Awards might be subject to performance-based vesting for which the relevant performance year includes the Closing Date. For those awards:

(1) the number of shares of Purchaser Common Stock subject to each Purchaser RSU Award shall is to be based on target-level performance; and

(2) such those Purchaser RSU Awards shall are not to be subject to performance-based vesting criteria for such performance year.

(b) Other Seller RSU Awards might be subject to performance-based vesting for which the relevant performance year commences begins after the Closing Date. For those awards, Purchaser or its Affiliates shall will establish the applicable performance goals following the Closing.

When a sentence includes an “if … then …” statement

Be sure that the word “then” is included as a visual guide at the beginning of the “then” portion. This isn’t a hard and fast rule, but it’s a useful rule of thumb.

Before:

15.5 Landlord’s Right to Cure. If Tenant shall fail or neglect to do or perform any covenant or condition required under this Lease and such failure shall not be cured within any applicable grace period, Landlord may, on five (5) business days written notice to Tenant, but shall not be required to, make any payment payable by Tenant hereunder, discharge any lien, take out, pay for and maintain any insurance required hereunder, or do or perform or cause to be done or performed any such other act or thing (entering upon the Premises for such purposes, if Landlord shall so elect), and Landlord shall not be or be held liable or in any way responsible for any loss, disturbance, inconvenience, annoyance or damage resulting to Tenant on account thereof.

After:

15.5 Landlord’s Right to Cure. If Tenant shall fail or neglect to do or perform any covenant or condition required under this Lease and such failure shall not be cured within any applicable grace period, then Landlord may ….

EVEN BETTER: If an if-then sentence is long and/or complicated, then con­sid­er writing the if-then labels as follows: “IF: …; AND: …; THEN: ….” Note es­pe­ci­ally the use of all-caps, colons, and semi-colons.

Before:

15.5 Landlord’s Right to Cure. If Tenant shall fail or neglect to do or perform any covenant or condition required under this Lease and such failure shall not be cured within any applicable grace period, Landlord may, on five (5) business days written notice to Tenant, but shall not be required to, make any payment payable by Tenant hereunder, discharge any lien, take out, pay for and maintain any insurance required hereunder, or do or perform or cause to be done or performed any such other act or thing (entering upon the Premises for such purposes, if Landlord shall so elect), and Landlord shall not be or be held liable or in any way responsible for any loss, dis­turb­ance, inconvenience, annoyance or damage resulting to Tenant on account thereof.

After:

15.5 Landlord’s Right to Cure. IF: Tenant shall fail or neglect to do or perform any covenant or condition required under this Lease; AND: Such failure shall not be is not cured within any applicable grace period; THEN: Landlord may, on five (5) five business days written notice to Tenant, ….

… Or: Spin off the conditions into a preamble

When confronted with a long if-then provision, consider turning the “if” portion into a preamble for the section, with the “then” part(s) being set forth as subdivisions.

Before:

15.5 Landlord’s Right to Cure. If Tenant shall fail or neglect to do or perform any covenant or condition required under this Lease and such failure shall not be cured within any applicable grace period, Landlord may, on five (5) business days written notice to Tenant, but shall not be required to, make any payment payable by Tenant hereunder, discharge any lien, take out, pay for and maintain any insurance required hereunder, or do or perform or cause to be done or performed any such other act or thing (entering upon the Premises for such purposes, if Landlord shall so elect), and Landlord shall not be or be held liable or in any way responsible for any loss, disturbance, inconvenience, annoyance or damage resulting to Tenant on account thereof.

After:

15.5 Landlord’s Right to Cure. IF: Tenant (i) fails to do anything required by this Agreement and (ii) does not cure the failure within the applicable grace period; THEN: The following will apply:—

(a) Landlord may, without limitation:

(1) make any payment payable by Tenant under this Agreement:

(2) discharge any lien;

(3) take out, pay for[,] and maintain any insurance required under this Agreement; and/or

(4) take (or cause to be taken) any other necessary or appropriate action.

(b) Landlord must give Tenant five business days’ written notice to Tenant before taking any action under subdivision (a).

(c) This Agreement does not require Landlord to take any action under subdivision (a).

(d) Tenant will not attempt to hold Landlord responsible or liable for any loss, disturbance, inconvenience, annoyance or damage that might result to Tenant arising from any action by Landlord under subdivision (a).

When any paragraph contains a “laundry list”

Consider spinning off a long laundry list into separate subdivisions — possibly as a defined term.

Before:

Tenant does not rely on, and Landlord does not make, any express or implied representations or warranties as to any matters including, without limitation, (a) the physical condition of the Premises including without limitation the structural components of any improvements or any building systems within or serving the improvements (including without limitation indoor air quality), (b) the existence, quality, adequacy or availability of utilities serving the Premises or any portion thereof, (c) the use, habitability, merchantability, fitness or suitability of the Premises for Tenant’s intended use, (d) the likelihood of deriving business from Tenant’s location or the economic feasibility of Tenant’s business, (e) Hazardous Materials on, in, under or around the Premises, (f) zoning, entitlements or any laws, ordinances or regulations which may apply to Tenant’s use of the Premises or business operations, or (g) any other matter whatsoever.

AFTER (1):

Tenant does not rely on, and Landlord does not make, any express or implied representations or warranties as to any matters including, without limitation, the following:

(1) the structural components of any improvements or any building systems within or serving the improvements (including without limitation indoor air quality);

(2) any other aspect of the physical condition of the Premises;

(3) the existence, quality, adequacy or availability of utilities serving the Premises or any portion thereof,

(4) the use, habitability, merchantability, fitness or suitability of the Premises for Tenant’s intended use,

(5) the likelihood of deriving business from Tenant’s location or the economic feasibility of Tenant’s business,

(6) Hazardous Materials on, in, under or around the Premises, or

(7) zoning, entitlements or any laws, ordinances or regulations which may apply to Tenant’s use of the Premises or business operations.

AFTER (2): If the above list will be used more than once, turn it into a defined term as a subdivision of the section, (or alternatively in the main Definitions article if appropriate):

(a) Tenant does not rely on, and Landlord does not make, any express or implied representations or warranties as to any matters including, without limitation, the Premises Condition (defined below).

(b) “Premises Condition” refers to one or more of the following:

(1) the physical condition of the Premises including without limitation the structural components of any improvements or any building systems within or serving the improvements (including without limitation indoor air quality),

(2) the existence, quality, adequacy or availability of utilities serving the Premises or any portion thereof,

(3) the use, habitability, merchantability, fitness or suitability of the Premises for Tenant’s intended use,

(4) the likelihood of deriving business from Tenant’s location or the economic feasibility of Tenant’s business,

(5) Hazardous Materials on, in, under or around the Premises, and

(6) zoning, entitlements or any laws, ordinances or regulations which may apply to Tenant’s use of the Premises or business operations.

Spin off lengthy exceptions into separate paragraphs

Time-pressured drafters sometimes keep stuffing exceptions and “provided, that” verbiage into a paragraph as though it were a sausage. That can make life difficult for reviewers and other readers, as seen in the following Before example:

Before:

15.1 Event of Default. The occurrence of any of the following shall be an “Event of Default” on the part of Tenant: …

*  *  *

(2) Failure to perform any other covenant, condition or requirement of this Lease when such failure shall continue for a period of thirty (30) days after written notice thereof from Landlord to Tenant; provided that if the nature of the default is such that more than thirty (30) days are reasonably required for its cure, then an Event of Default shall not be deemed to have occurred if Tenant shall commence such cure within said thirty (30) day period and thereafter diligently and continuously prosecute such cure to completion. …

A better approach is to

After:

15.1 Event of Default. The occurrence of any of the following shall will be an “Event of Default” on the part of Tenant: …

*  *  *

(2) Except as provided in subdivision (b) below, failure to perform any other covenant, condition[,] or requirement of this Lease [Agreement] when such if the failure shall continue continues for a period of thirty (30) 30 days after written notice thereof of the failure from Landlord to Tenant (the “Cure Period”);

(c) Exception: IF: The nature of the default is such that more than 30 days are reasonably required to cure it; THEN: An Event of Default will not be deemed to have occurred if Tenant shall commence begins to cure the default ….

And another example:

Before:

15.6 Landlord’s Default. Landlord shall be in default under this Lease if Landlord fails to perform obligations required of Landlord within thirty (30) days after written notice by Tenant to Landlord and to the holder of any first mortgage or deed of trust covering the Premises whose name and address shall have heretofore been furnished to Tenant in writing, specifying wherein Landlord has failed to perform such obligations; provided, however, that if the nature of Landlord’s obligations is such that more than thirty (30) days are required for performance, then Landlord shall not be in default if Landlord commences performance within such thirty (30) day period and thereafter diligently prosecutes the same to completion. Tenant shall be entitled to actual (but not consequential) damages in the event of an uncured default by Landlord, but the provisions of Article 17 shall apply to any Landlord default and Tenant shall not have the right to terminate this Lease as a result of a Landlord default.

After:

15.6 Landlord’s Default.

(a) Except as provided in subdivision (c), Landlord will be in default under this Lease Agreement if Landlord fails to perform its obligations within 30 days after written notice by Tenant to Landlord.

(b) Any notice under subdivision (a) must provide reasonable detail about Landlord’s failure to perform .

(c) If the nature of Landlord’s relevant obligation(s) is such that more than 30 days are required for performance, then Landlord will not be in default if Landlord begins performance within that 30-day period and thereafter diligently prosecutes the same to completion.

(d) Tenant shall be entitled to actual (but not consequential) damages in the event of an uncured default by Landlord, but the provisions of Article 17 shall apply to any Landlord default and Tenant shall not have the right to terminate this Lease as a result of a Landlord default.

(b) IF: Landlord has provided Tenant with the name and address of the holder of a first mortgage or deed of covering the Premises; THEN: Tenant must send, to that holder, a copy of any notice under subdivision (a).

Hunt down duplication

Look for and eliminate any duplication of substantive terms in a draft agree­ment; as discussed here, failing to do so ended up costing a bank $693,000. This is especially important because, as the draft agreement evolves during the parties’ negotiations, the duplicate terms could end up being revised dif­fer­ently — and inconsistently.

Actually, never mind. (A satire.)

Forget everything you just read; instead, think about all the advantages of having your contract provisions go on and on, as discussed here.

Apply the same step-by-step rewriting skills to your own drafts

As you continue to practice the rewriting skills summarized above, you’ll find that you unconsciously do the same kinds of rewriting in your own drafting work. That will result in your producing clearer, more-understandable drafts, which in turn will help you to help your clients get workable contracts to signature sooner.

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Imagine that you’re a supplier whose order form incorporates terms and conditions by reference to your Web site. And then imagine that years later you get into a lawsuit with the customer where you need to rely on a warranty disclaimer in the incorporated T&Cs.

But you can’t put your hands on a copy of the T&Cs as they existed at the time the contract was signed — and the customer says to the court, in effect, how do we know that the terms and conditions on the Web site now are the same ones that were in effect when we signed the contract?

Exactly this happened in an Eighth Circuit case; fortunately for the supplier, the court was willing to overlook that little bit of awkwardness. Morgantown Machine & Hydraulics of Ohio, Inc., v. American Piping Prods., Inc., No. 16-3834, slip op. at 6 (8th Cir. Apr. 5, 2018) (affirming dismissal on the pleadings; contract’s incorporation-by-reference language was sufficiently clear to incorporate a disclaimer of implied warranties).

Drafting lesson: If you incorporate material by reference to your Web site, be sure to keep a copy (or copies) of the incorporated material; alternatively, you could try submitting the page in question it to an archival site such as the Internet Archive’s Wayback Machine (www.archive.org) — in which case you should definitely donate to that worthy non-profit organization.

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The Supreme Court of the United Kingdom has ruled that a no oral modi­fi­ca­tion provision in a written contract (a.k.a. amendments must be in writing) is enforceable. (See generally the Common Draft discussion of such provisions.) The supreme court reviewed precedent and statutory law from several juris­dic­tions, including the U.S. (e.g., quoting Judge Cardozo’s famous 1919 Beatty v. Guggenheim Exploration opinion), but concluded that there was no good rea­son not to enforce amendments-in-writing provisions:

12. … No Oral Modification clauses like clause 7.6 are very commonly included in written agreements. This suggests that the common law’s flexibility [about allowing contracts to be made and modified informally] has been found a mixed blessing by businessmen and is not always welcome. There are at least three reasons for including such clauses.

The first is that it prevents attempts to undermine written agreements by informal means, a possibility which is open to abuse, for example in raising defences to summary judgment.

Secondly, in circumstances where oral discussions can easily give rise to misunderstandings and crossed purposes, it avoids disputes not just about whether a variation was intended but also about its exact terms.

Thirdly, a measure of formality in recording variations makes it easier for corporations to police internal rules restricting the authority to agree them.

These are all legitimate commercial reasons for agreeing a clause like clause 7.6.

I make these points because the law of contract does not normally obstruct the legitimate intentions of businessmen, except for overriding reasons of public policy. Yet there is no mischief in No Oral Modification clauses, nor do they frustrate or contravene any policy of the law.

13. The reasons advanced in the case law for disregarding them are entirely conceptual.

Rock Advertising Ltd.  v. MWB Bus. Exchange Centres Ltd., [2018] UK 24 (emphasis and extra paragraphing added).

The supreme court did allow for the possibility that a party might be estopped from denying the validity of an oral amendment or -modification by another party’s detrimental reliance on the first party’s oral agreement to the amend­ment.  The supreme court agreed with the court below, though, that there was no estoppel in the case at bar; besides, said the court:

16. … the scope of estoppel cannot be so broad as to destroy the whole advantage of certainty for which the parties stipulated when they agreed upon terms including the No Oral Modification clause.

At the very least, (i) there would have to be some words or conduct un­equiv­ocally representing that the variation was valid notwithstanding its
informality; and (ii) something more would be required for this purpose than the informal promise itself ….

Id. (citation omitted, extra paragraphing added).

Hat tip: A comment dated May 29, 2018 by Cynthia Abesa, of Sean Hogle P.C., at Sean’s redline.net site (registration required, restricted to attorneys).

EDIT:  See also Glenn West, Cognitive Dissonance in the Common Law of Contracts: Oral Modifications to Written Agreements that Purport to Invalidate Oral Modifications, Weil’s Global Private Equity Watch, May 29, 2018, at https://goo.gl/vnGVQ1

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Lessons from a failed patent-license agreement

There are several lessons for contract drafters and business people in this week’s Federal Circuit opinion in XY, LLC v. Trans Ova Genetics, L.C., No. 2016-2054 (Fed. Cir. May 23, 2018). The case in the trial court was No. 13-cv-0876 (D. Colo. Apr. 8, 2016) (decision on post-trial motions), where both a patent owner and its licensee were held liable to pay significant damages because each side had breached the license agreement between them.

The facts

The defendant, Trans Ova, performs cattle-embryo transfer and in-vitro fertilization for cows. Trans Ova formerly bought chromosome-sorted bull semen from a vendor, Inguran, LLC (Inguran), which sorted semen using a patented process that it had licensed from patent owner XY.

But Trans Ova became dissatisfied with the sorted semen it bought from Inguran. So, Trans Ova approached patent owner XY about acquiring its own license to use the patented chromosome-sorting method, so that Trans Ova could sort bull semen on its own and stop buying it from Inguran. XY and Trans Ova entered into a five-year license agreement in April 2004.

Then in November 2007, Inguran acquired XY — and shortly thereafter, XY sent Trans Ova a letter that purported to terminate the license agreement, on grounds that Trans Ova had allegedly breached the license agreement.  Trans Ova disagreed that it had breached the license agreement and asserted that XY could not properly terminate the agreement. This went on for several years, with Trans Ova continuing to send royalty payments and XY refusing to cash the checks, until finally XY filed suit in March 2012.

The license agreement was subject to automatic renewal in April 2009 — unless, among other things, Trans Ova was in material breach of the license agreement.

At trial, the jury concluded that XY, in sending its 2007 notice of termination, had breached the implied obligation of good faith and fair dealing.

But the jury also concluded that, at the scheduled time for auto-renewal, Trans Ova had indeed been in material breach; consequently, the agreement was not auto-renewed, and Trans Ova’s subsequent use of the technology infringed XY’s patent rights.

Lesson 1: Don’t commit to doing things
you might not remember to do

One of Trans Ova’s breaches of the license agreement arose from an improve­ments grant-back provision. That provision required Trans Ova (i) to notify XY if Trans Ova made any improvements to the patented process, and (ii) to assign ownership of those improvements to XY.

At trial, XY put on evidence that Trans Ova’s employees had indeed developed new techniques and had not notified XY nor assigned ownership of the new techniques to XY. According to the trial court, the jury could reasonably have concluded that the Trans Ova’s failure constituted a material breach. See the trial court post-trial opinion at 8.

But here’s a question:  When Trans Ova’s people developed the new tech­niques, did it even occur to them that they were supposed to tell the patent owner, XY? The trial- and appellate courts’ opinions don’t say. It’s a good guess that those employees were clueless about their company’s grant-back obligation.

The lesson here: When the other side asks you to take on a contract obligation for circumstances that might or might not ever arise—

Consider setting up some kind of prompting system, for example, periodic training and/or recurring calendar reminders — but that might increase your costs, which in turn might have to be taken into account in negotiating the economics; and

Consider asking to revise the circumstantial obligation so that it only kicks in when so requested by the other side, so that you won’t be in breach if the circumstances arise but you don’t think to do what’s required.

Lesson 2: Get it in writing!

Trans Ova’s other breach of the license agreement was underpayment of royalties for years — the trial court said that this was due to Trans Ova’s erroneous belief that the the license agreement had been modified after an oral agreement with patent owner XY’s CEO. See the trial court post-trial opinion at 8. (The trial court said that Trans Ova made the oral agreement with a Dr. Mervyn Jacobson; in an earlier denial of a summary-judgment motion, the trial court identified Dr. Jacobson as XY’s chairman and CEO.)

The lesson here: When amending a contract to reduce your obligations, get it in writing!  Here, at a minimum the licensee, Trans Ova could have could have sent the patent owner XY’s CEO an email confirming the oral agreement to reduce the royalty rate; if the CEO hadn’t timely objected to the email confirmation, then Trans Ova would have been in a much stronger position.

Lesson 3: Be careful with material-breach exceptions to automatic renewal

The XY license agreement provided that the the agreement would auto­mat­ic­al­ly renew for an additional five-year period “provided that the Licensee is not in material breach.”  Trial court post-trial opinion at 9 (cleaned up).  Importantly, the provision did not require the patent owner, XY, to give notice of breach to the licensee, Trans Ova, nor did it give Trans Ova the right to cure the breach. The trial court “reject[ed] Trans Ova’s argument that the lack of prior notice necessarily means that the Agreement must have automatically renewed.” Id.

The lesson here: When negotiating an automatic-renewal provision, if there’s going to be an exception for material breach, then consider having the pro­vis­ion not kick in unless some prerequisites are met — for example:—

This Agreement will not be automatically renewed, however, if all of the following are true at the time when this Agreement would expire if not automatically renewed:

(1) (i) the Licensor gave the Licensee notice of the breach, or (ii) it is clearly shown, with reasonable corroboration, that one or more persons in the Licensee’s relevant manage­ment structure was aware, not merely that the Licensee had committed acts later found to constitute a material breach, but that the acts in fact constituted a material breach; and

(2) the Licensee had an opportunity to cure the breach, of the duration specified in this Agreement for termination for breach; but

(3) the breach remains uncured.

This would give the licensee at least some protection from ambush non-renewals.

CAUTION: Consider whether the term used should be automatic renewal or automatic extension, because the difference could be significant, as discussed here.

Lesson 4: Don’t score an own-goal when terminating for alleged breach

The licensee, Trans Ova, wasn’t the only one held liable for breach of contract. The jury found that the patent owner, XY, was also liable for breach of the implied covenant of good faith and fair dealing. The reason:  XY terminated the license agreement, allegedly for material breach by Trans Ova, in the same month that XY was acquired by Inguran — which, of course, was the vendor of chromosome-sorted semen that Trans Ova had previously jilted to take up with XY. See trial court’s post-trial opinion at 7.

The lesson here: When terminating a contract for (what you think is) a breach by the other side, make sure you’re right — otherwise you might be the one in breach.

(For other examples of own-goal termination, see, e.g.,  Southland Metals, Inc. v. Amerian Castings, LLC, 800 F.3d 452 (8th Cir. 2015); Automated Solutions Corp. v. Paragon Data Sys., Inc., 2006 Ohio 3492, 167 Ohio App.3d 685 (2006) (affirming judgment after bench trial).)

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A case from Mississippi’s supreme court reminds us that it can be dangerous for service providers and customers to agree orally to changes in the scope of work:

¶3. Yates Construction, LLC, and D.W. Caldwell, Inc., entered into a construction sub-contract for the roof installation on a residential dormitory at Auburn University in Auburn, Alabama. …

Early on, Caldwell employees identified structural issues with the building …. [A]fter some discussion about the repairs needed, Caldwell agreed to repair the building prior to installing the roof.

Rather than amending the existing subcontract or creating a new contract for the repair expenses, Yates urged Caldwell to bill against “unperformed work” for those costs related to the extra work completed.

Although the arrangement was unconventional, Caldwell orally agreed to the billing scheme, requiring that it be paid weekly, on a “cost plus overhead and profit basis.”

¶4. When Caldwell completed both the repairs and the roof installation, it had yet to receive total payment for the structural repairs. The companies disputed the scope and expense of these repairs and quickly negotiated their way to an impasse.

Thereafter, Caldwell filed a claim against Yates for causing delay and increased costs by failing to pay for work performed, which was in breach of the agreements between the parties.

D. W. Caldwell, Inc., v. W.G. Yates & Sons Constr. Co., No. 2017-CA-00116-SCT (Miss. May 10, 2018) (reversing trial court’s modification of arbitration award) (emphasis and extra paragraphing added).

Business lesson:  Put something in writing about what’s expected.

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