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Baseball-style dispute resolution is underutilized as a tool to motivate contracting parties to be reasonable in their settlement proposals.  (In that process, each party proposes one or two possible res­ol­u­tions and the judge or arbitrator decides which of the proposals is closest to the “correct” one.)  The process can work nicely:  Last week, my hometown Houston Astros and one of their starting pitchers were about to go to arbitration of the pitcher’s salary. The team proposed $3 million, the pitcher proposed $3.9 million, and the arbitral tribunal would have to pick one of the two proposals. The parties elected not to go forward with the arbitration; instead, they agreed to split the difference at a salary of $3.45 million.   See Jake Kaplan, Astros avoid arbitration with starting pitcher Mike Fiers, Houston Chronicle, Jan. 19, 2017.  “The Astros have still yet to reach settlements with starting pitcher Collin McHugh, super utility man Marwin Gonzalez and relief pitcher Will Harris. If the sides are unable to find common ground, an arbiter will decide between the salary figures proposed last week.” Id.

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Some services contracts include no-poaching / no-solicitation pro­vis­ions saying, in effect, “Customer won’t hire Provider’s em­ployees, and vice versa.”  A blanket agreement like that, not in conjunction with a contract of that kind, caused serious trouble for a number of Silicon Valley companies. Now, the Justice Department and FTC have announced a policy of bringing criminal charges against employers and individuals involved in certain agreements of that nature. Excerpt:

Naked wage-fixing or no-poaching agreements among employers, whether entered into directly or through a third-party intermediary, are per se illegal under the antitrust laws.

That means that if the agreement is separate from or not reasonably necessary to a larger legitimate collaboration between the employers, the agreement is deemed illegal without any inquiry into its competitive effects.

Legitimate joint ventures (including, for example, appropriate shared use of facilities) are not considered per se illegal under the antitrust laws.

(Emphasis and extra paragraphing added added.)

This, of course, leaves the door open to scrutiny of all no-poaching provisions under a rule-of-reason analysis.

So, drafters and reviewers of services contracts will want to give careful thought to proposing or agreeing to include such provisions.

(Hat tip:  this ABA update.)

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A British court provides a nice training exercise for contract-drafting students. I’ve modified the facts somewhat.

  • Investor and Developer enter into a contract:  De­vel­op­er is to acquire property and then build and operate a shop­ping center; Investor is to put up the necessary funding.
  • The contract is somewhat tentative, because Developer must first complete a variety of prerequisite tasks such as acquiring the land; sec­ur­ing gov­ern­ment permits; etc. It’s not clear whether all of these tasks are feasible.
  • For four of these tasks, the contract obligates De­vel­oper to make reasonable efforts to complete the tasks. The contract also says, though, that “if all these tasks are not com­ple­ted by March 31, then either party may cancel this Agree­ment by giving writ­ten notice to the other party.”
  • On April 1, three of the four tasks have been completed. That morning, Investor sends to Developer, by courier, a written can­cel­lation notice; the notice is delivered to De­vel­oper early that afternoon.
  • But Developer doesn’t want to abandon the project.  After dis­cus­sions reach an impasse, Developer sues Investor, seeking a de­clar­­atory judgment that the contract is still in effect.
  • Developer’s reasoning is this:
    • The right to cancel the contract doesn’t arise, says Developer, unless all of the tasks are not completed.
    • Here, says Developer, only one of the tasks is still incomplete, and so Investor did not have the right to cancel the contract.
  • Investor responds that the clear in­tent was that either party could cancel if any of the four tasks was not completed.

QUESTION 1: What result did the UK court reach?

(Scroll down for answer.)

 

A UK court held that similar contract language was ambiguous, and consequently that summary judgment in favor of the investor was improper. See Dooba Developments Ltd. v. McLagan Investments Ltd., [2016] EWHC 2944 (Ch) (allowing developer’s appeal).

(Hat tip: Ken Adams.)

This is potentially a significant pain in the [neck] for the parties: Unless they can settle the case, they’ll have to go back to the lower court and incur the expense and inconvenience of getting ready for trial.

QUESTION 2: How could this cancellation right have been drafted more clearly, so as to avoid the need for a trial?

(Scroll down for one possible answer.)

 

 

The cancellation right could have been worded, for example: “if any of these tasks has not been met by March 31, then either party may cancel this Agreement by giving written notice to the other party.”

VARIATION:

Suppose that:

  • Investor did not give notice of cancellation until five years had passed, with no action by either party to move forward with the development project.
  • Developer makes the same objection to cancellation.
  • Investor responds that this is ridiculous in view of the circumstances.

QUESTION 3: How could the drafters have tried to avoid this difficulty?

(Scroll down for one possible answer.)

 

  • The drafters could have stated a deadline or sunset for exercise of the cancellation right — this is an example of the principle that drafters should always think about how particular rights or ob­lig­a­tions will come to an end.
  • The drafters could have built in further cancellation rights that would arise if additional stated milestones were not met.
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If parties have multiple agreements governing their re­la­tionship(s), and those agreements all contain arbitration provisions, then it would behoove the drafters to make sure the various arbitration pro­vi­sions are consistent. In a Tenth Circuit case, the parties’ failure to do so led to a court refusing to com­pel arbitration, on grounds that the conflicting arbitration provisions  —  all of which applied to the dispute in question, according to the district court — meant that the parties had not reached a meet­ing of the minds about arbitration. See Ragab v. Howard, No. 15-1444 (10th Cir. Nov. 21, 2016) (af­firm­ing district court, with one dissenting vote; citing cases).

Hat tip:  arbitration maven Liz Kramer, who sum­mar­ized the case in Fuzzy Math? 6 Differing Arbitration Agree­ments = 0 Arb­i­tra­tion Agree­ment (Arbi­tra­tionNation 2016). Kramer notes that “[the] arb­i­tra­tion agreements did not provide for the same set of rules to gov­ern the arbitration, or the same method of choosing an arbitrator, or the same notice period before arbitration, or the same opportunity to recover attorneys’ fees.”

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A master agreement of sorts, styled as a “term sheet,” was held to take precedence over a contrary “sub”-agreement in Finger Lakes Capital Partners, LLC v. Honeoye Lake Acquisition, LLC, No. 42.2016 (Del. Nov. 14, 2016), affirming in pertinent part C.A. No. 9742-VCL (Del. Ch. Oct. 26, 2015).

The parties signed a term sheet to govern their overarching business relationship, under which they would make investments using funds provided mainly by one of the parties. The term sheet called for the parties to organize a limited liability company (LLC) for each invest­ment they made together; each LLC would be governed by an opera­ting agreement.

The term sheet specified how proceeds from the LLCs would be allocated among the parties. The LLC operating agreement form, though, specified a different allocation of proceeds.

Looking to parol evidence, the chancery court held that the parties did not intend for the LLC operating agreement’s allocation of proceeds to override the allocation in the term sheet. The court did so despite the fact that the LLC operating agreement included an entire-agreement provision, a.k.a. an “integration clause” or “zipper clause”:

The primary issues litigated at trial did not involve the Revolabs [LLC] Agreement itself, but rather what other agreements existed between the parties and whether those contracts survived the execution of the Revolabs Agreement. …

The question for trial was the scope of the Revolabs Agreement and whether it superseded portions of the Term Sheet affecting the parties’ overarching business relationship.

  • Finger Lakes claimed it did, such that Finger Lakes was not bound by provisions of the Term Sheet or the Clawback Agreement.
  • The record proved it did not.

The plain language of the integration clause in the Revolabs Agreement stated that it superseded all prior agreements “with respect to the subject matter hereof.” JX 51 at § 9.6. The “subject matter hereof” was the investment in Revolabs. …

Chancery-court opinion at part II.C.1, slip op. at 37-39 (extra paragraphing and bullets added).

Lesson learned: The drafter(s) of the LLC operating agreement form could have been more specific about the integration clause and its relationship to the parties’ term sheet — or alternatively they might have stated in the term sheet itself that the term sheet’s provisions would control over any contrary provisions in the LLC operating agreements.

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