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The D.C. Circuit held yesterday that shall was mandatory in a contract’s forum-selection clause saying that a Saudi grievance council “shall be assigned for settlement of any disputes or claims arising from” the contract. See D&S Consulting, Inc. v. Kingdom of Saudi Arabia, No. 18-7140, slip op. at 5-6 (D.C. Cir. June 19, 2020) (affirming dismissal; citations omitted).

The contrary argument isn’t frivolous; as the D.C. Circuit noted: “To be sure, one way to make a clause mandatory is to specifically refer to the designated forum as ‘exclusive’ of other fora.” One could argue that any waiver of the right to sue in an otherwise-proper forum must be clear and unmistakable, and that the forum-selection clause doesn’t meet that standard.

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Advice to a new in-house counsel

One of my former students emailed me yesterday to ask for advice: The former student is being offered a ground-floor opportunity to be the general counsel at a new hedge fund started by a friend. Here’s what I responded, lightly edited.

Great to hear from you, [NAME]. Congratulations on the new situation.

I’m glad you found the tips-for-new-GCs article useful. In 2005 my friend and co-author Bob Robinson and I did an updated version; it’s posted at https://www.oncontracts.com/350-plus-tips-for-new-general-counsel-from-others-who-have-been-there/

If you haven’t already, you might want to look at a document I maintain with basic legal tips for startups, at  http://www.oncontracts.com/startup-law/. From an investor perspective, the tips are probably more relevant to VCs and angels than to hedge funds, but they should still be useful in terms of issues for you to be aware of in respect of your portfolio companies.

Some of the most important things I learned as a GC are:

1. Business is full of risks, and business people are willing to take some risks as long as they seem to make sense. Lawyers, in contrast, are trained to spot and warn about risks; too often that training metastasizes into the lawyer being “Dr. No.” 

In part, that’s because we usually don’t share the upside of the risk. If the risk goes badly, it’s human nature for the business people to want to point fingers somewhere. We lawyers, being not of their tribe, are an obvious target. All of this means that we lawyers tend to focus on (and sometimes fret about) the downside of the business risks.

2. You’ll want the business people to see you as a team player — but at the same time, if someone has to go to jail, make sure it’s not you. If the business people want to start getting close to criminal- or unethical stuff, you still want to be respectful and supportive but to make it very clear that you might have to resign — and in some situations it might have to be a “noisy” withdrawal (see, e.g., this article about Sarbanes-Oxley Act requirements). 

3. The great rule of improv comedy is never to say “no,” but rather to say “yes, and.”  Likewise, one of my senior partners, the late Bill Durkee (as in Arnold, White & Durkee) used to say that a lawyer should never tell a client, or in your case a business executive, “No, you can’t do that.” 

Instead, our job is to point out possible consequences and to offer suggestions about preparations for those consequences, matter-of-factly and supportively.

Example:  “Sure, the company can do X. • We’d want to think about lining up a criminal-defense lawyer because this is the kind of thing for which the Department of Justice has recently been bringing criminal indictments against corporate executives. • One complication is that under the Sarbanes-Oxley Act, if we do decide to start doing X, I’m personally required to report it to the board of directors. • We’d want to add Clauses A and B and C to our standard contracts. • We’d want to check with our insurance broker to make sure we’ve got coverage for possible product-liability lawsuits, and also make sure we have director-and-officer (“D&O”) coverage for the shareholder lawsuits.”

(These things shouldn’t be said sarcastically.)

4. Never be afraid to cheerfully confess ignorance and ask the business people, or the portfolio company’s business people: “Hey, I’m just a lawyer — could you explain this to me the way you would to a college student?” 

By the same token, you can cheerfully “play back” what you heard and say something like, “OK, this is what I think you’re saying: ….”

That’s all that comes to mind at the moment.  Best of luck, and keep in touch.

Regards,

D. C.

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A SCOTUS case about contracts!

It’s not every day that the Supreme Court weighs in on a contract dispute. That happened yesterday in a maritime case in which an oil tanker, in the last 900 feet of its 1,900-mile journey, ran over a submerged anchor abandoned on the floor of Delaware River, puncturing the tanker’s hull and resulting in an oil spill of some 246,000 gallons — with cleanup costs of more than $135 million. CITGO Asphalt Refining Co. v. Frescati Shipping Co., 589 U.S. _, No. 565 (Mar. 30, 2020) (Sotomayor, J.).

The decision itself was not especially surprising: The Court granted cert to resolve a circuit split — siding with the Second and Third Circuits, the Court held that the safe-berth term in question was an express warranty with strict liability. See id., slip op. at 5. The contract apparently was governed by maritime law and thus by general principles of contract law. See id.

For contract drafters, here are some key points of interest in the Court’s decision; again, they’re unsurprising, but it could be a nice teaching case:

  • The term “warranty” encompasses a statement of fact about a material matter: “It is well settled as a matter of maritime contracts that statements of fact contained in a charter party agreement relating to some material matter are called warranties, regardless of the label ascribed in the charter party.” Id. at 7 (cleaned up).
  • Materiality can sometimes be determined on summary judgment: See id. at 7-8 & n.4.
  • The word “warranty” isn’t necessary: Under the tanker charter agreement, the party that chartered the tanker was required to select a “safe” berth for the ship — and even though the provision didn’t use the terms warrant or warranty, that was the legal effect. Id. at 6-7.
  • Breach of contract is a strict-liability matter: “Under elemental precepts of contract law, an obligor is liable in damages for breach of contract even if he is without fault.” Id. at 9 (cleaned up, citation omitted).
  • Expressio unius est exclusio alterius: Other provisions of the contract expressed limited the breaching party’s liability; that weighed against interpreting the “safe berth” provision as likewise being one of limited liability. Id. at 9-10.

Justice Thomas dissented, joined by Justice Alito, “conclud[ing] that the plain meaning of the safe-berth clause does not include a warranty of safety.” Dissent at 2.

* * *

The tanker’s unfortunate accident so close to the end of its journey brought to mind the 1983 grounding in San Francisco Bay of my former ship, the USS Enterprise, a mere half-mile from its home pier, after a months-long overseas deployment. That was several years after I’d left the ship and the Navy to attend law school.

USS Enterprise passing under the Golden Gate Bridge, Oct. 1985
https://commons.wikimedia.org/wiki/File:USS_Enterprise_(CVN-65)_passing_under_the_Golden_Gate_Bridge_-_DN-SC-86-03238.jpg
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In class this week we talked about the potential dangers of appointing a contracting party as your “agent.” Here’s a Seventh Circuit opinion issued yesterday: “[A] district judge concluded that DISH Network and its agents committed more than 65 million violations of telemarketing statutes and regulations. The penalty: $280 million.” United States v. DISH Network LLC, No. 09-3073, slip op. at 1 (7th Cir. Mar. 26, 2020) (cleaned up; emphasis added). 

The court noted: “The contract [between DISH and its representatives] asserts that it does not create an agency relation, but parties cannot by ukase negate agency if the relation the contract creates is substantively one of agency.” Id.,, slip op. at 5 (italics in original, bold-facing added).

Judgment affirmed, mostly. (The damages award was vacated and remanded for reconsideration for unrelated reasons.)

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From the 9th Circuit, in a case under Hawai’i law: “[T]he terms of a contract alone cannot require a court to grant equitable relief. In doing so, we adopt the accepted rule of our sister circuits that have addressed the question.” Barranco v. 3D Sys. Corp., No. 18-1608, slip op. at 16 (9th Cir. Mar. 12, 2020) (reversing grant of disgorgement remedy) (citing cases).

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