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(Here’s an email I just sent to my students:)  The last micro-essay question on the final exam had to do with whether a lawyer should sign a contract on behalf of a client. Recall that in class I noted that if a contract were to go sideways, the lawyer’s signature on the document would create an opening for people within the client to point fingers at the lawyer. Well, that seems to have happened to the general counsel of Novartis, which entered into a consulting contract with Michael Cohen, the personal lawyer for now-President Trump:

Novartis’s top lawyer is to retire from the company over payments made by the pharmaceutical giant to President Trump’s personal lawyer Michael D. Cohen, the Swiss drug maker said on Wednesday.

In a statement, Novartis said that Felix R. Ehrat, the group general counsel, would be replaced by Shannon Thyme Klinger, who is currently the company’s top ethics officer, at the beginning of June. Mr. Ehrat was stepping down “in the context of discussions surrounding Novartis’s former agreement with Essential Consultants, owned by Michael Cohen,” the pharmaceutical company said.

“Although the contract was legally in order, it was an error,” Mr. Ehrat said. “As a cosignatory with our former C.E.O., I take personal responsibility to bring the public debate on this matter to an end.”

Prashant S. Rao and Katie Thomas, Novartis’s Top Lawyer is Out Amid Furor Over Payments to Michael Cohen (NYTimes.com May 16, 2018) (emphasis added).

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Just published in the ABA Dispute Resolution Section’s E-News: my article “EVALOA [evaluation plus last-offer arbitration]: A better way to facilitate settlements in arbitration.”

Here’s the TL;DR (too long; didn’t read):

  • Non-binding mediation, in which a mediator tries to help litigants to reach a settlement agreement, is expensive; it can often be ineffectual if one party or another won’t budge far from its position.
  • Another approach (assuming the parties so agree) is to stick with binding arbitration — but early in the case, have the arbitrator carefully give the parties her tentative, provisional views about the case, based on whatever information the parties have provided.  (This is like early neutral evaluation and mini-trials.)  That alone can help encourage implacably-stubborn parties to reconsider their views.
  • If the arbitrator’s early views don’t result in settlement, then the parties can agree to do “baseball” arbitration, in which:
    • Each party submits one or more proposed outcomes of the case;
    • The arbitrator’s sole power is to pick the party proposal that is the closest to how the arbitrator herself would decide the case.  This gives each party a powerful motivation to be reasonable, because otherwise the arbitrator might pick the other side’s proposal.  (That’s why baseball arbitration has an excellent track record of getting baseball teams and players to settle salary disputes.)
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Contract drafters should keep an unpleasant possibility in the back of their minds:  Courts in different jurisdictions might define a particular term in dif­fer­ent ways, leading to different results.  That happened in an Eleventh Circuit case, Winn-Dixie Stores, Inc. v. DolGenCorp, LLC, No. 15-12990 (11th Cir. Jan. 31, 2018), after remand from 746 F.3d 1008 (11th Cir. 2014).

Grocery-store chain Winn-Dixie leases store space in shopping centers; as an anchor tenant, it has a certain amount of bargaining power to get the lease terms it wants. The Winn-Dixie lease form in suit contains a restrictive cov­en­ant that forbids the landlord from letting other tenants sell more than a spe­ci­fied amount of “groceries” within a certain distance of the Winn-Dixie store. Under local law, that cov­en­ant apparently ran with the land and thus was binding even on subsequent tenants. Winn-Dixie sued Dollar General and others for violating the restrictive covenant. See 746 F.3d at 1016-17, part I.

Dollar General defended (in part) with the assertion that the term groceries, as used in the restrictive covenant, was ambiguous, and therefore by law the restrictive covenant was unenforceable.  In an earlier appeal in the case, the Eleventh Circuit rejected Dollar General’s ambiguity defense for stores in Florida:  The court held that the term groceries was not ambiguous for Florida stores because, in a still-earlier Winn-Dixie case, a Florida court had adopted a definition of groceries; thus, said the Eleventh Circuit, the term was not ambiguous — at least not within Florida. See 746 F.3d at 1022-24.

The Eleventh Circuit’s prior ruling applied only to stores in Florida; the appeals court remanded the case to the district court with instructions to make ad­ditional findings as to whether Alabama courts would consider groceries to be ambiguous — and on remand, the district court held that the term was indeed ambiguous in Alabama; the Eleventh Circuit affirmed. See slip op. at part IV.

Thus, in the context of the Winn-Dixie lease form:

  • In Florida, the term groceries is unambiguous, and so Winn-Dixie can stop competitors from selling groceries too close to Winn-Dixie stores in that state.
  • But just across the state line in Alabama, the term groceries is am­big­uous; consequently, a Winn-Dixie competitor can lease space in the same Ala­bama shopping center as a Winn-Dixie store and is free to sell how­ever much it pleases in the way of “groceries.”

Drafting lesson: If an important term in your contract might be interpreted differently in different jurisdictions, consider including a definition for that term.

 

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Pollution indictment could implicate Houston chemical container company’s contracts

From Mark Collette, Company indicted in toxic dumping, Houston Chronicle, Feb. 3, 2018, p.1, col.1, at https://goo.gl/2ua43D (chron.com).

A Houston chemical container company [Wright Containers, which makes steel drums, etc.] and two of its principals face felony environmental charges after using a hidden storm drain to dump benzene and other highly toxic liquids into waterways near homes and schools over a period of at least months, injuring their employees in the process, prosecutors said Friday. * * *  [T]he injured employees turned into whistleblowers …. Owner Ronald F. Wright, 50, and general manager Gregory B. Hance, 41, each face two counts of intentional water pollution and one count of improper disposal and storage of hazardous materials. If convicted, they could face up to 10 years in prison and fines of up to $250,000 per violation. The company is also named as a defendant.

Some points of interest for contract professionals and -students:

  • Cancellation of pending orders: Wright Contract’s contracts with some of its customers might include a requirement that Wright Containers comply with the customer’s code of conduct (the corporate equivalent of a “morals clause”), often allowing the customer, in a situation like this , to cancel pending orders for fear of getting spattered by bad publicity. See, e.g., section 31.1 of a Honeywell purchase-order form at https://goo.gl/t7WYSb (sensing.honeywell.com).
  • Customer disappearance: Scared-off customers might simply “ghost” Wright Container by no longer placing orders.
  • Who will pay the defense costs? The indicted principals, Wright and Hance, might have employment- or other agreements with the company; those agreements might require the company to pay for the principals’ defense.

Houston business accelerator program closes — what about its contracts with client companies?

From Andrea Rumbaugh, HTC business accelerator program closes, Houston Chronicle, Feb. 1, 2018, p. B1, col. 1, at https://goo.gl/2muSuXk: “The Houston Technology Center’s business acceleration program closed its doors Wednesday, laying off five acceleration directors and other support staff as the city takes a new approach to nurturing startups.”

(Disclosure: For several years I served pro bono as a startup-company mentor for HTC.)

So what happens to HTC’s existing client companies? When a given startup company was accepted into HTC’s accelerator program, it presumably signed an agreement under which HTC was given the right to acquire a certain percentage of the company, in return for HTC providing certain things. (This is pretty standard for accelerators; I don’t know the details here.)

QUESTION: In the agreements between HTC and its client startup companies, what if any contingency plans were made in case HTC ends its accelerator program?

Other developments

• Patrick McCallum, Carillion And Commercial Contracts: What Can We Learn? (mondaq.com): This article offers a few useful pre-need checklist items for customers and subcontractors to consider when negotiating a contract in case a contractor “goes under” in mid-project.

• An eye-glazing case from South Dakota illustrates the mischief that can result when drafters screw up their nomenclature: In Laska v. Barr, 2018 S.D. 6, parties signed a document called “Right of First Refusal” when in reality it was ambiguous as to whether it granted a right of first refusal, an option, or a so-called dual option. (The supreme court agreed with the trial court that the document granted a right of first refusal, and also that the terms amounted to an unreasonable restraint on alienation.)

• The Supreme Court of Canada held that a California forum-selection provision in Facebook’s terms of service was unenforceable. Douez v. Facebook, Inc., 2017 SCC 33, discussed in Jason Hayward, Technology And The Law: Noteworthy Developments (mondaq.com).

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[This is a guest post from my friend professor Tina L. Stark about the recent Virginia supreme court case, MCR Federal, LLC v. JB&A, Inc., No. 161799 (Va. Dec. 14, 2017); I’ve made a couple of comments at the end.]

The Virginia Supreme Court recently issued a decision that is bad on the law and demonstrated a complete misunderstanding of the business deal and also the role of specific contract concepts and provisions in acquisitions. The Court held that a false statement in a bring-down certificate in an acquisition was not fraud but only a contractual breach. Wrong. In a bring-down certificate, a party remakes the representations and warranties that it made on signing (reps speak only as of a moment in time) so that the other party knows that what was true at signing is also true at the closing (a different moment in time.)

Some courts get hung up on the idea that representations in a contract can’t be fraudulent inducement. They reason that the representations do not precede the contract; so there’s no inducement. If that were correct, the duty of honesty in business transactions would only apply to pre-contract oral statements. That makes no sense.

Imagine that a party has the final agreement before it and sees the representa­tions. Were they not there, the party would not sign. The party has bargained for the reps – the right to have comfort that its counterparty is honest. The existence of the representations in the contract is the inducement to sign.

The making of the representations is simultaneous with the contract’s signing. The act of signing causes the representations to be made.

Here are the facts in the case. The acquisition agreement included a condition that a party must have delivered a bring-down certificate before the other party had an obligation to close. It was a condition, not a covenant. The mere fact that it was in a contract didn’t change its character from a condition to a covenant. The party had no obligation to deliver the certificate. The court didn’t get that.

A closing certificate is intended to give a party the same rights at closing that it would have had with respect to the reps and warranties made at signing. The bring- down certificate remakes the reps but as of a different moment in time: the closing. The way it is supposed to work is that if a party is unable to [provide] a closing certificate because the representations are no longer true, that party cannot satisfy one of the conditions to close and the closing should not happen. Here’s where the duty of honesty pops up. A party has to ‘fess up that it cannot satisfy the condition. If it delivers the closing certificate knowing that it is false, that is fraud.

The court reasoned that the duty of honesty did not apply because a contract provision (the condition) addressed the issue of the bring-down certificate. So wrong. Not only did they misunderstand how conditions work, but also, they misapplied the economic loss doctrine.

In my view, the economic loss doctrine does not apply to representations and warranties. Although warranties are covenants, they are not the types of contractual duties to which the economic loss doctrine was originally intended to apply. Warranties when joined with representations are promises that the statements in the representations are true. That’s it. They have no other purpose. Parties don’t argue that the other party negligently performed its warranty duty. Therefore, no economic loss doctrine application.

Instead, I believe, the economic loss doctrine (when properly applied) applies to covenants that must be performed during a contract term. For example, if a contractor promises to perform a task in a workmanlike manner, that is contractual covenant. The economic loss doctrine would prevent a party from claiming that the contractor committed fraud by failing to properly perform. That doctrine makes sense. Were it not the case, then we would lose the separation of tort and contract and we would be back in the middle ages. At that time, courts did not recognize executory promises as enforceable. The ever clever medieval Lawyers crafted a work around. They resort to the tort writs of trespass sur le cas and deceit and claimed that a promise had been negligently performed. Eventually, the writs turned into assumpsit and with the advent of consideration, courts enforced promises in exchange for promises. (I know that the history is very summary, but the longer version is long.)

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DCT comment:  While I’m still digesting this new case, I agree with Tina that the Vir­gin­ia supreme court’s decision does not match up well with settled busi­ness ex­pect­a­tions about the effect of a bringdown certificate.  (I‘m not yet ready, though, to en­dorse Tina’s position that the economic-loss doctrine should not apply to rep­re­sen­ta­tions and warranties; I need to think about that some more.) As always, Tina’s com­ments are in­sight­ful and thought-provoking.

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