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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.)

————————

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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[EDITED] In a scene from the classic movie Cool Hand Luke, Paul Newman takes the pot in a poker game after the last other player drops out.  Bystander George Ken­nedy reaches in and turns over New­man’s cards to reveal … nothing.  Ken­nedy mocks the other player, saying “he beat you with nothin’!”  Newman smiles and says, “Yeah, well, sometimes nothin’ can be a real cool hand.”

Contract professionals might riff off of that line:  Sometimes boring can be real cool. Many such folks would disagree with legal-writing expert Bryan Garner when he as­serts categorically (in a fine article) that the end of a sentence is sup­posedly its most im­por­tant part be­cause the end of the sentence packs the most punch. See Bryan A. Garner, How to start a sentence: Con­sid­er all your altern­a­tives, and sprinkle in some con­junc­tions, too (ABAJournal.com).

In a contract, it’s less important for the writing to pack a punch than it is for each sentence to make its point quick­ly, precisely, and under­stan­d­ably, so as to help speed up legal review and get the contract to signature soon­er.  And that will usually call for the kind of boring, just-the-facts-ma’am style — Alice will do X, Bob may do Y — that Garner urges writers to avoid.  [EDIT: See the end of this post for a Twitter discussion between Garner and me.]

Now to be sure, someone drafting a legal brief wants the brief to catch and hold the judge’s at­ten­tion. And in that setting, Garner is certainly right when he says that it can be bor­ing for the writer to just keep chugging along with plain old subject-verb-object sentences:

As professional rhetoricians, readers of this column should know what the most important part of a sentence is: the end. Many writers mistakenly think it’s the beginning: They begin a disproportionate number of sent­en­ces with the grammatical subject, and they rarely depart from the subject-verb-object pattern.

Boring legal writers create paragraphs of sentence after sentence begin­ning with a client’s or litigant’s name; interesting writers, by contrast, spice their prose with syntactic variety.

… A sentence might begin with an adverbial of time: “Last April, John died.” Or maybe it would include an adverbial of place: “While visiting Columbus last week, John died.”

Notice how the poignancy is lost if we were to write: “John died last April” or “John died while visiting Columbus last week.”

(Emphasis and extra paragraphing added).

But drafting a contract is not quite the same as drafting a brief for litigation, nor is reading a contract the same as reading a legal brief. When a contract reviewer looks at a draft agreement, she knows that her client gen­er­al­ly has just two ques­tions:

  1. Can I safely sign this now? 
  2. (If the answer is no:) How quickly can you make it signable? 

Many contract reviewers would say that they can better answer these client ques­tions when the con­tract uses simple, even boring, language, with short para­graphs and sentences.  (And when you draft a contract, the client gen­er­al­ly wants to pay only for “good enough” language that can be signed quickly, not for elegant literary prose.)

As always, writers must keep in mind who their readers are and what those readers will be trying to accomplish. When trying to get a workable contract to signature sooner, “bor-ing!” will normally be the way to go.

EDIT: Garner tweeted that “The principle of end weight—putting emphatic words at the ends of sentences to avoid syntactic fizzle—applies almost as strongly to contractual drafting as in other expository prose. @DCToedt, you give no contrary examples.”  He attached a photo of “Not this” and “But this” examples:

I tweeted in response: “In each of your examples, your typical overworked contract reviewer is reading as rapidly as possible and so (I claim) would prefer your ‘Not this’ example because it gets to the point immediately.”  Followed by:  “As the military briefing acronym goes: BLUF – Bottom Line Up Front.”

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Summary:  When drafting an arbitration carve-out to allow claims for injunctive relief to go to court instead of to arbitration, it might be a bad idea to exclude the entire action in which injunctive relief is sought.

A party brought a Sherman Act antitrust lawsuit, seeking both damages and injunctive relief. The defendant moved to compel arbitration because of the following provision in an allegedly-applicable agreement:

… Any dispute arising under or related to this Agreement (except for [i] actions seeking injunctive relief and [ii] disputes related to [intellectual property]), shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association ….

Archer and White Sales, Inc., v. Henry Schein, Inc., No. 16-41674, slip op. at 2 (5th Cir. Dec. 21, 2017) (emphasis and bracketed romanettes added).

The Fifth Circuit affirmed the district court’s refusal to compel arbitration, while acknowledging that the incorporated AAA rules clearly delegated the ques­tion of arbitrability to the arbitrator.  Because of the express carve-out of actions seeking injunctive relief, the court said, “the argument that the claim at hand is within the scope of the arbitration agreement is wholly ground­less” and therefore “the district court may decide the gateway issue of arbitrability despite a valid delegation clause.”  Id. at 4 (cleaned up; emphasis added).

… The arbitration clause creates a carve-out for “actions seeking injunctive relief.” It does not limit the exclusion to actions seeking only injunctive relief, nor actions for injunction in aid of an arbitrator’s award. Nor does it limit itself to only claims for injunctive relief. Such readings find no footing within the four corners of the contract. …

We see no plausible argument that the arbitration clause applies here to an action seeking injunctive relief. The mere fact that the arbitration clause allows Archer to avoid arbitration by adding a claim for injunctive relief does not change the clause’s plain meaning.

While ambiguities in the language of the agreement should be resolved in favor of arbitration, we do not override the clear intent of the parties, or reach a result inconsistent with the plain text of the contract, simply because the policy favoring arbitration is implicated.

Id. at 12-13 (cleaned up; emphasis in original, extra paragraphing added).

The court elected not to address a seemingly-simpler argument, seemingly in the interest of reiterating and fleshing out the court’s wholly-groundless doctrine, which apparently ori­gi­nated in Douglas v. Regions Bank, 757 F.3d 460, 464 (5th Cir. 2014):

There is a strong argument that the Dealer Agreement’s invocation of the AAA Rules does not apply to cases that fall within the carve-out. It is not the case that any mention in the parties’ contract of the AAA Rules trumps all other contract language. Here, the interaction between the AAA Rules and the carve-out is at best ambiguous.

On one reading, the Rules apply to “[a]ny dispute arising under or related to [the] Agreement.” On another, the provision expressly exempts certain disputes and the Rules apply only to the remaining disputes.

We need not decide which reading to adopt here because Douglas pro­vides us with another avenue to resolve this issue: the “wholly groundless” inquiry.

Archer and White,slip op. at 8 (extra paragraphing added).

(One wonders whether the wholly-groundless test is being put out there by the Fifth Circuit as a way of protecting judicial turf.)

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An Eighth Circuit decision of yesterday reminds us of a harsh reality of busi­ness:  Absent an enforceable non-competition covenant, one of your suppliers might decide to cut out the mid­dle­man, i.e., you, and begin selling directly to your customers.

That’s what happened to a vendor of specialty envelopes:  The vendor’s sup­plier, a manufacturer of envelopes, terminated its relationship with the vendor and began selling directly to the vendor’s customers — and successfully poached two of the manufacturer’s large customers. See Tension Envelope Corp. v. JBM Envelope Co., No. 14-567 (W.D. Mo. Mar. 3, 2015), affirmed, No. 16-3728 (8th Cir. Dec. 8, 2017).

The vendor that lost its customers to its manufacturer seems to have been the trusting sort:  The manufacturer: (i) had been founded by one of the vendor’s own former employees; and (ii) had leased two specialty machines from the vendor. Worse, the vendor seems never to have entered into any kind of written contract with the manufacturer.

Anyway: The vendor sued its former manufacturer for poaching its customers, but to no avail — in part because the vendor had never insisted that its former manufacturer sign a contract with an enforceable non-compete provision.

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