In response to feedback from colleagues, I’ve tweaked my attorney-client master engagement agreement form and set it up so that any licensed attorney is free to use it (modified if desired) in his or her own practice, possibly by doing a short-form email agreement in the same way that I do with my clients. Of course, the agreement form is published “AS IS, WITH ALL FAULTS”; if a lawyer uses it, that doesn’t mean that the lawyer’s client is in any kind of attorney-client relationship or other relationship with me. (Feedback and suggestions are most welcome; I’ll assume I’m free to use them unless otherwise specified.)
In a recent Texas case, two sophisticated parties in the oil and gas business — let’s call them Alpha and Bravo — were negotiating a contract.
- Alpha’s first draft provided that Bravo could not assign the contract without Alpha’s consent, which Alpha would not unreasonably withhold. (NB: It’s pretty unusual for a drafting party to volunteer to submit to such a restriction in its own draft.)
- Later, however, Alpha revised its draft, deleting the no-unreasonable-withholding restriction, so that the new draft simply stated that Bravo could not assign the contract without Alpha’s express prior written consent, period.
- Bravo objected to the deletion, but Alpha held firm; the contract, as signed, did not include the requirement that Alpha not unreasonably withhold its consent to assignment by Bravo.
- Later, Bravo wanted to assign the contract to a third party. Alpha refused consent. (Bravo had declined Alpha’s request that Bravo buy out Alpha’s interest for $5 million.) Bravo’s incipient deal with the third party fell through.
After a jury trial, Bravo won a $31 million judgment against Alpha, but the court of appeals sided with Alpha — and the Supreme Court of Texas reached the same result, holding that the contract unambiguously allowed Alpha to withhold its consent to Bravo’s assignment without restriction:
We conclude that the express language of the consent-to-assign provision can be construed with only one certain and definite interpretation—a consent obligation only as to Barrow-Shaver and no qualifications as to Carrizo’s right to withhold consent.
Barrow-Shaver Resources Co. v Carrizo Oil & Gas, Inc., No. 17-0332, slip op. at 16 (Tex. June 28, 2019) (affirming court of appeals’ reversal of trial-court judgment on jury verdict) (emphasis added). The court noted similar holdings by Texas appeals courts. See id. at 32-33 (citing cases).
The supreme court also rejected Bravo’s attempt to use evidence of industry custom about the supposed meaning of the term “consent” to imply a reasonableness requirement:
JUSTICE GUZMAN’s use of industry custom to imply a reasonableness obligation into the consent-to-assign provision, see post at _, is a veiled attempt to use industry custom and usage to create a covenant of reasonableness and good faith applicable, at a minimum, to farmout agreements and probably to every contract with a consent provision, if not every contract of any type. Using industry custom in the manner JUSTICE GUZMAN proposes would open the door to litigating the meaning of every term in every contract and any obligation not in a contract, creating lucrative business opportunities for so-called experts in every industry and allowing juries to imply obligations to which parties did not agree.
Id., slip op. at 25 (emphasis added) (responding to a three-justice dissent).
Finally, the supreme court held that in this particular situation, Bravo was not justified in relying on oral representations, by a representative of Alpha, that consent would be granted; the court noted the “red flags” that precluded justifiable reliance:
Without even having to reach the parties’ substantive negotiations, we point out the following red flags: (1) the farmout agreement imposed an unambiguous obligation on [Bravo] and imposed no obligation on [Alpha]; (2) the oral representations contradicted the clear and unambiguous consent provision; (3) both [Bravo] and [Alpha] were sophisticated oil and gas companies, so [Bravo] should have understood that the oral representations had no bearing on the contract’s express language; (4) [Bravo’s] representative’s extensive experience in the oil and gas industry—specifically, thirty-three years of experience; (5) the fact that negotiations took place at arm’s length to create an agreement other than a form agreement; (6) the parties knew utilizing consent-to-assign provisions is a common industry practice; and (7) the substance of the representation was inherently unverifiable because it conveyed a vague intent for someone else to do something sometime in the future under some circumstances not yet known.
A similarly situated “savvy participant” would have recognized that [Alpha] could change its mind, if [Alpha’s representative] Laufer’s representations were binding at all, and would have weighed the risk of that happening before entering into the agreement. … Instead, [Bravo] chose to rely blindly on [Alpha’s] representations when the contract provision clearly entitled [Alpha] to withhold its consent, thereby preventing an assignment. Here, Laufer’s vague and general statements indicating that [Alpha] would give its consent were merely Laufer’s representations of [Alpha’s] future intentions, statements that were inherently unverifiable, which should have been a red flag to [Bravo] not to accept them blindly. We conclude that there are sufficient red flags in the entirety of the circumstances surrounding the farmout agreement’s formation to negate justifiable reliance on [Alpha’s] oral representations as a matter of law.
Id. at 50-51 (citation and parenthetical omitted).
Drafting lesson: If you’re in Bravo’s shoes in Texas, and you want to be sure Alpha won’t unreasonably withhold its consent to your assigning the contract, then you’d better negotiate such an obligation into the contract itself. In some other states — in some circumstances — you might be able to argue that there is indeed an implied obligation of reasonableness in granting or withholding consent. But that’s a much tougher sell in Texas.
When drafting a services agreement, it can be a big mistake for a customer to fail to establish clear lines of responsibility about who will obtain any third-party authorizations that might be needed. A California business owner got an expensive lesson on that subject when he hired a Web developer to revamp the business’s Website. The revamped Website included three copyrighted photographs that had been taken, and were owned, by a professional photographer, who filed suit for copyright infringement.
The business owner claimed that he had thought that the Web developer would take care of obtaining any necessary copyright clearances. Evidently, however, the trial judge and jury were not impressed: the jury found the business owner liable for contributing to the copyright infringement and awarded maximum statutory damages of $150,000 for each of the three photographs, plus attorney fees and other amounts, for a total of more than $636,000; the appeals court affirmed the judgment.
When you draft an exclusion of consequential damages, do you exclude “lost profits”? In a Seventh Circuit case, a manufacturer’s contract with a distributor contained just such an exclusion of lost profits — but it did not specify that this referred to lost profits from collateral business transactions. As a result, the court affirmed a judgment that:
- under the circumstances of the case, lost profits were the only remedy available for breach (because the defendant manufacturer had so argued and thus had waived any contention otherwise);
- the exclusion of lost profits therefore caused the contract’s limited remedy to fail of its intended purpose; and so,
- under Wisconsin’s arguably-outdated interpretation of the UCC, all remedies under article 2 (sales) were therefore available to the plaintiff.
Sanchelima Int’l, Inc. v. Walker Stainless Equipment Co., No. 18-1823, slip op. (7th Cir. Apr. 10, 2019).
The Seventh Circuit did not address case law from other jurisdictions, e.g., New York, where courts held that lost profits from the contemplated transaction were direct damages, not consequential damages, and thus were not encompassed by an exclusion of lost-profits consequential damages. See, e.g., Biotronik A.G. v. Conor Medsystems Ireland, Ltd., 22 N.Y.3d 799, 11 N.E.3d 676, 988 N.Y.S.2d 527 (2014), where New York’s highest court held that, on the facts of the case, “lost profits were the direct and probable result of a breach of the parties’ agreement and thus constitute general damages” (emphasis added, citations omitted), and thus were not barred by a limitation-of-liability clause. (For additional citations, see the Common Draft commentary on that point [self-cite].)
From the Illinois supreme court in 1550 MP Road LLC v. Teamsters Local No. 700, 2019 IL 123046 (Mar. 21, 2019): A landlord sued its defaulting tenant, a union local. The landlord won a $2.3 million judgment against the union in the trial court, only to see the award thrown out in the state supreme court. Why? Because in signing the lease, the union official had not complied with the requirements of a state statute that authorized unincorporated associations to lease or purchase real estate in their own names.
The statute required an unincorporated association to submit a proposed real-estate lease to vote of the membership, after advance written notice. The statute also required the lease to be signed by both the president and the secretary of the association. Neither of those requirements were met.
Holding that the lease was void ab initio, the supreme court reversed a judgment of $2.3 million in favor of the landlord and remanded with instructions to enter a take-nothing judgment in favor of the union.