On Contracts

In my Contract Drafting class tomorrow I’ll be discussing the Formal Opinion 503 issued this month by the ABA’s Standing Committee on Ethics and Professional Responsibility.

(The hypothetical) facts below are those of a semester-long simulation in which students are to assume that they represent a small data-analysis company, “MathWhiz,” in dealing with a giant oil company, “Gigunda Energy.”)

FACTS:

1. You represent MathWhiz in a contract negotiation with Gigunda Energy.
2. Gigunda’s lawyer, Ginny, sends you an email.
3. The “cc” line of Ginny’s email includes Gerry, a Gigunda business person.

QUESTION: Can you do a Reply to All email — including Gerry, the Gigunda business person — without violating Rule 4.2 of the ABA Model Rules of Professional Conduct, which prohibits a party’s lawyer from communicating directly with another represented party about the subject of the representation?

POSSIBLE ANSWER: The ABA’s newly-issued Formal Opinion 503 says “yes, unless ….”:

In the absence of special circumstances, lawyers who copy their clients on an electronic communication sent to counsel representing another person in the matter impliedly consent to receiving counsel’s “reply all” to the communication.

Thus, unless that result is intended, lawyers should not copy their clients on electronic communications to such counsel; instead, lawyers should separately forward these communications to their clients.

Alternatively, lawyers may communicate in advance to receiving counsel that they do not consent to receiving counsel replying all, which would override the presumption of implied consent.

Two large companies settled a bitter contract-related dispute, but one of them later sued the other, seeking to set aside the settlement agreement on grounds of fraud (among others). The Supreme Court of Texas agreed with the defendants that the fraud claim was barred by an express disclaimer of reliance in the parties’ previous settlement agreement — and the supreme court also held that it was not inappropriate for the trial court to award attorney fees and costs to the defendants:

By asserting claims it had agreed never to assert, Petrobras broke the promise it made in the settlement agreement and caused Astra to incur substantial fees and costs to enforce that promise. We conclude the trial court did not abuse its discretion by awarding Astra its fees and costs.

Transcor Astra Group S.A. v. Petrobras America Inc., No. 20-0932, slip op. at 34 (Tex. Apr. 29, 2022) (reversing court of appeals and reinstating trial court’s summary judgment).

A manufacturer terminated a sales-representative company, as permitted by their contract, for failing to meet quota. The rep received commissions ranging between 15% and 22% of sales.

The manufacturer thought that the contract provided for the terminated sales-rep company to get a total send-off payment of 7.5% of sales for the previous 12 months, paid out monthly over six months, as compensation for a one-year, post-termination noncompetition covenant.

But here’s what the contract language actually said:

In the event this Agreement is terminated or not renewed by Exactech, then during each calendar month of the first six (6) months after such termination, Exactech will pay [Midwest] an amount equal to seven and one half percent (7.5%) of the total sales in the Territory during the trailing twelve (12) months ending on such termination date (the “Restricted Period Compensation”).

Midwest Medical Solutions, LLC v. Exactech U.S., Inc., No. 21-1621 (8th Cir. Dec. 29, 2021) (reversing summary judgment; emphasis added, alterations by the court).

The district court granted summary judgment for the manufacturer that the sales-rep company was entitled to a total payment of about $300,000, paid out over six months.

But the appeals court reversed, holding that the sales-rep company was entitled to a $300,000 payment each month for the entire six-month period:

And though the plain language may result in a large sum paid to Midwest by Exactech as [compensation for the noncompetition covenant], there is no evidence—other than the parties’ self-serving arguments—as to why this amount is or is not an absurd result.

As such, we are bound to give [the contract language] its plain and ordinary meaning. To conclude otherwise would be to substitute our views of the contract or our inferences … for the parties’ intent as indicated by the clear and unambiguous language …, terms that the parties negotiated and to which they ultimately agreed.

Id., slip op. at 6-7 (citations omitted, extra paragraphing added).

Whichever lawyer drafted (or reviewed and approved) the above language for the manufacturer has probably had at least one unpleasant conversation with the manufacturer’s business people — and possibly with the lawyer’s malpractice carrier ….

But who knows: The manufacturer might have knowingly agreed to just such a large payment, only to change its mind (or experience a convenient lapse of memory) when it actually had to write the check — it certainly wouldn’t be the first time that ever happened ….

Incidentally, that’s why it pays for lawyers to specifically bring up potential issues like this — in writing — with clients before contracts get signed, for example in an email or with a note in a Word comment bubble. That way, if a client does have a change of heart (or of memory) after the fact, the lawyer can remind the client, Hey, this was something I pointed out before you signed the deal ….

Here’s a two-sentence confidentiality provision that I recently added to the fine print of a purchase-order form proposed by a customer of one of my clients (a provider of highly specialized big-data analysis services):

Each party will maintain the other party’s nonpublic confidential information in confidence unless independently possessed in accordance with the (U.S.) Defend Trade Secrets Act. This applies both: (i) to information timely marked as confidential and (ii) to unmarked information that a reasonable person in the relevant business would recognize as likely to be confidential, in either case unless the recipient shows otherwise. 

This certainly doesn’t have all the bells and whistles of a conventional confidentiality agreement, a.k.a. nondisclosure agreement a.k.a. “NDA.” But paraphrasing what my late senior partner Tom Arnold said many years ago in similar circumstances: For everyday purposes it’s almost certainly good enough — and it’ll be agreed to quickly (as in fact it has been here).