BOSTON // HARTFORD // NEW YORK // NEWARK // STAMFORD // PHILADELPHIA // WILMINGTON
LESSONS LEARNED FROM CONTRACT DRAFTING:
WHAT YOU MAY RISK LITIGATING
Michael A. Prokop
Penelope M. Taylor
William D. Wallach
September 21, 2012
Topics
 Common Terminology and Definitions
 Useful Provisions to Consider Including
Avoid Fine Print
Print contract in a font size that
meets the applicable legal
requirements.
CPLR4544
Representations & Warranties
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A lawyer drafting a business contract has multiple responsibilities, but two of
the most important are to protect his client against risks and to secure those
advantages that are reasonable and appropriate. Having a client receive
both "representations and warranties" will generally help you fulfill these
responsibilities.
Representations and warranties are important — but different — tools for
the contract drafter. But receiving both of them from the other side usually
— but not always — provides a client with the best protection.
Representations are statements of present or past fact. For example, "The
financial statements fairly present the financial condition of the seller."
Future "facts" cannot generally form the basis of representations because
no one can know the future. At best, someone can have an opinion.
If a representation is intentionally false, a plaintiff can make a common law
claim of deceit (a tort) and allege fraudulent misrepresentation. Even if not
intentionally false, a plaintiff can assert a claim for breach of contract.
Representations & Warranties
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Common law warranty is a promise that a fact is true.
The seminal case is CBS Inc. v. Ziff-Davis Publishing Co., 75 N.Y.2d 496 (1990). In
that case, Ziff-Davis "represented and warranted" the financial condition of the
division it was selling to CBS. CBS, however, as part of its due diligence, sent in its
own accountants to review the division's financial statements. They reported that the
financial condition was not as represented and warranted. The parties closed
anyway, and then CBS sued. In New York's highest court, the issue was whether
CBS had a cause of action for breach of warranty. Ziff-Davis argued that CBS did not
because it had known about the problems with the financial statements and had not
justifiably relied on the warranties. Stated differently, Ziff-Davis argued that the
standards for a cause of action for a fraudulent misrepresentation and a breach of
warranty both required justifiable reliance on the truthfulness of the statement. ZiffDavis lost. According to the New York court, a warranty is a promise of indemnity if a
statement of fact is false. A promisee does not have to believe that the statement is
true. Indeed, the warranty's purpose is to relieve a promisee from the obligation of
determining a fact's truthfulness.
Representations, Warranties &
Disclaimers
 Since the CBS case was decided, the majority of states (including
New Jersey) have followed New York.
 The meaning of warranty is critical to plaintiffs whose defendants
made both representations and warranties. A plaintiff's fraudulent
misrepresentation claim will fail if he knew the statement was false.
But, if a plaintiff's jurisdiction follows the CBS/Ziff-Davis rule, the
plaintiff may sue for breach of warranty on the same statement and
recover despite knowledge of the falsity of the statement, subject to
some limitations.
 Other consequences flow from coupling representations and
warranties: A plaintiff may be able to win a breach of warranty claim
when it would have lost a claim for fraudulent misrepresentation
because it could not prove scienter.
Representations & Warranties
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Some parties, as a matter of principle, refuse to take fraud risk (read
punitive damages), and will not make representations, only warranties.
A more sophisticated version of this issue can arise in acquisitions.
Occasionally, a buyer will ask a seller to represent as a fact something that
the seller knows is not true or does not know whether it is true. Technically,
doing so is fraud. A buyer nonetheless defends its request by telling the
seller, "It's just risk allocation." In other words, even if the statement is not
true, it represents the business deal. A seller often accedes to this request
on the theory that it is not fraud because it has "worked it out" with the
buyer. This is cold comfort when the buyer sues for fraud, "forgetting" that it
was "just risk allocation" and "forgetting" that the seller explained the
situation's actual status. As an alternative, the seller can merely "warrant"
the statement. In that case, the seller makes no representation that can be
the basis of a fraudulent misrepresentation, and the warranty is the promise
of indemnity, precisely the risk allocation the buyer sought.
Representations & Warranties
 Remedies are a critical factor in assessing the relative
benefits of representations and warranties.
 Generally, a party injured by a fraudulent
misrepresentation has a choice of remedies. He may
rescind the contract and obtain restitution, or he may
affirm the contract and sue for damages. The ability to
rescind — to unwind a closed transaction — is a remedy
not available to a party suing for a breach of warranty,
and therefore is a benefit of including representations in
a contract.
 A second benefit is that the party may be able to obtain
punitive damages under certain circumstances.
Merger and Integration Clauses
 Typically provide that written instrument
embodies whole agreement between the
parties
 Purpose is to avoid evidence outside of the
four corners of the contract if a dispute arises
 Increases chance parol evidence rule will
apply if there is a dispute
Merger and Integration Clause
Example:
This Agreement and the attached exhibits
contain the entire agreement of the parties
with respect to the subject matter of this
Agreement, and supersede all prior
negotiations, agreements, and
understandings. This Agreement may be
amended only by a written document,
signed by all parties.
Choice-of-Law Clause
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Parties agree that law of particular jurisdiction will govern disputes arising
under the contract
Provision also may exclude application of conflict of law rules of jurisdiction
Presumptively enforceable as long as there is some relationship between
the transaction and the jurisdiction whose law would govern or another
reasonable basis for choosing the law
Choice-of-law does not = forum selection
Exceptions—Example UCC Article 9
Select a law
– with which you are familiar
– that offers a specific and tangible benefit
– that will be upheld
Choice of Law – Additional Benefits
A choice of law provision can be used to defeat
a forum non conveniens motion.
“[T]he court shall not stay or dismiss any action on
the ground of inconvenient forum, where the action
arises out of or relates to a contract . . . , and the
parties to the contract have agreed that the law of
this state shall govern their rights or duties in whole
or in part.” N.Y. C.P.L.R. 327(b).
Choice of Law: Drafting Considerations
 Attend to procedural conflicts of law
“This Agreement shall be governed in all respects,
including validity, interpretation and effect, by the laws of
the State of New Jersey without giving effect to its
conflict of law principles.”
or
“This Agreement shall be governed by and construed
under the substantive laws of the State of New Jersey.”
Choice-of-Law Clause
Examples:
This agreement shall be interpreted under the laws of the State of New Jersey without
regard to principles of conflict of laws.
Forum Designation. Any suit brought by either party against the other party for claims
arising out of this Agreement shall be brought in the United States District Court for the
District of New Jersey, or in the event that court lacks jurisdiction to hear the claim, in the
New Jersey Superior Court, Law Division, Essex County.
Forum Selection Clause
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Parties agree that litigation resulting from or relating to contract will be filed
in a particular jurisdiction
Will be enforced in New Jersey unless: they are the result of "fraud or
coercive bargaining power"; enforcement of the clause would "be seriously
inconvenient for the trial"; or enforcement would violate a "strong public
policy" of the state
Forum selection clauses are enforceable because the parties should be
allowed to agree in advance to a mutually satisfactory forum, thus insuring a
predictable and neutral locus for the resolution of any dispute.
Forum selection does not = choice-of-law
Cannot create federal jurisdiction by contract
Delaware's courts and law considered to be favorable to the needs and
interests of corporations
Forum Selection Clause
Example:
Any litigation under this agreement shall be
resolved in the trial courts of Los Angeles
County, State of California.
Contractual Limitations Periods
 Agree to shorten otherwise applicable statutes of
limitation
 Court generally enforce unless period is
unreasonable short or result from fraud, duress,
or misrepresentation
 Some states prohibit limiting to less than a
certain number of years.
Contractual Limitations Periods
Examples:
The parties agree that any action relating to an alleged breach of this Agreement shall be
commenced within one year of the date of the breach, without regard to the date the
breach is discovered. Any action not brought within that one-year time period shall be
barred, without regard to any other limitations period set forth by law or statute.
Claims for loss, damage or delay in connection with the shipment of products shipped
must be instituted within one year of the date of shipment.
No Survival of Representations and Warranties. The Parties hereto agree that the
representations and warranties contained in this Agreement shall not survive the Closing
hereunder, and none of the Parties shall have any liability to each other after the Closing
for any breach thereof. The Parties hereto agree that the covenants contained in this
Agreement to be performed at or after the Closing shall survive the Closing hereunder,
and each Party hereto shall be liable to the other after the Closing for any breach thereof.
Liability Limitations
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Consider possible liability limitations and exclusions
In New Jersey, liability limitations are enforceable so long as they do not
violate public policy
In the context of commercial contracts, parties in New Jersey can agree to
limit/cap or exclude damages (e.g., consequential damages)
References to indirect or consequential loss are a standard feature of
exclusion clauses. Indirect and consequential losses are often less obvious
losses than those arising directly and are harder to predict and quantify
when the contract is drawn up. A party wishing to keep his liability within
predictable confines should expressly exclude indirect or consequential
damages and should try to spell out within the exclusion clause examples of
the categories of loss that are intended to be excluded (e,g., loss of profit,
anticipated savings, etc.)
In the sale of goods, the limitations are set forth in the Uniform Commercial
Code
Indemnification Clauses
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Purpose is to provide one party (such as a buyer) with a clear contractual
remedy for recovering post-closing monetary damages arising from: breach
of a covenant, breach of representation or warranty, claims by third parties,
or other claims provided in the agreement.
Provision must be clear as to scope of coverage (include duty to defend?)
Tend to be strictly and narrowly construed by courts
Be specific as to damages covered (attorneys’ fees?)
Some types of indemnification may be invalid (e.g., violations of securities
laws, etc.)
Punitive damages may not be covered
If duty to defend, then clearly identify when duty is triggered, who can
control the defense, by when notice is required, when and how settlement
may be made, etc.
Indemnification Drafting Considerations
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Should the provision include a duty to defend? Who controls the defense
and selects counsel?
Should there be mutual indemnity?
Limit to third party claims?
If there is more than one indemnitor for a loss, how will liability be
apportioned? Joint and several? Pro rata?
Should the obligation be supported by insurance?
Does the indemnity apply to willful misrepresentations?
Will the indemnitor pay attorney’s fees? If so, for defense only or also those
incurred enforcing the indemnification provision?
Will the indemnitor pay consequential damages, punitive damages, litigation
costs and expenses, fines, penalties, accountant’s fees, court costs,
insurance deductibles, and investigation expenses?
What is the duration of the indemnity?
Is there any cap or limit on the obligation?
Indemnification Clauses
Example:
Subcontractor agrees to indemnify and hold
harmless the contractor against loss or
threatened loss or expense by reason of the
liability or potential liability of the contractor
for or arising out of any claims for damages.
How could this clause be improved? What
issues does it leave open?
Indemnification Clauses
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Should there be more than one indemnitor (if so, joint and several liability)?
Who are the indemnitees? Do third parties have the right to enforce the
indemnification provisions?
What losses or expenses are covered by the indemnity? For example, is the
indemnitor required to pay the indemnitee’s attorneys’ fees incurred in enforcing the
indemnification provision?
What is the duration of the indemnity?
Is there a ceiling or a hurdle on the indemnitor’s liability?
Does the indemnity limit or even eliminate the right to pursue common law remedies?
Are recoverable “damages, liability and claims” intended to include any loss or
damage, even if beyond common law contract or tort measures of damages? Only
“direct” damages? Are “consequential” damages intended to be recoverable?
What are the procedural mechanisms by which the indemnitee is to enforce the
indemnity?
If there is a high likelihood of a particular type of claim, the process and issues raised
by that claim should be resolved in the indemnity provision.
Procedural Mechanisms for Indemnification
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Indemnity provisions may require some type of notice to be given by the
indemnitee to the indemnitor. If the notice clause is drafted as a covenant,
then the indemnitor will argue that failure to deliver notice is a breach of the
indemnity agreement. The indemnitor would contend that it is entitled to
damages based on the lack of notice and that, ifdeliveryof notice is a
condition precedent to the indemnitor’sobligation to indemnify, the failure to
satisfy the condition precedent relieves the indemnitor of its obligation to
defend or indemnify.
The delivery of notice may be a particularly significant issue when
indemnification is being sought because of a claim by a third party.
Indemnity provisions may be drafted to state that defective notice does not
excuse the indemnification obligation unless or except to the extent that as
a result, the damages to be indemnified are increased or the indemnitor is
otherwise prejudiced, e.g., the indemnitor’s ability to provide a defense is
somehow prejudiced.
Time of Performance
Example:
Time is of the essence for the completion of
the work described in this contract. It is
anticipated by the parties that all work
described herein will be completed within
two (2) weeks of the date of execution, and
that any delay in the completion of the work
described herein shall constitute a material
breach of this contract.
Time of Performance
Failure to Properly Draft:
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Powder Hollow Limited Partnership I v. Powder Hollow Associates, A4682-96T5(N.J. Super. App. Div. 1998) (Unpublished)
Dealing with a poorly drafted contract without a definite time for closing, the
court chose to terminate a contract rather than grant specific performance
which would have required the court to monitor performance for ten or more
years.
The matter before the court dealt with an unusual land sale contract which
provided one price for a particular piece of property if an interstate highway
interchange was constructed and about a 50% reduction in the purchase
price if it was not. What the contract lacked, however, was a definite time at
which closing would take place in the event that the interchange was not
built.
Arbitration Clauses
 Arbitration is an option in most commercial contexts, but
may be prohibited in some states if involves consumer
contracts (e.g. NY General Business Law section 399-c
provided arbitration clauses void in consumer contracts
for goods and services)
 Consider pros and cons of arbitration
 Pros: Faster, confidential, expert analysis of complex
issues, greater finality, no runaway juries
 Cons: Limited judicial review, harder to delay, uncertain
rules and procedures
 Class actions included?
Arbitration Clauses—Drafting Considerations
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Panel size
Who will administer (AAA, ICA, JAMS, etc.)
Location and governing law
Who pays what/costs/fees
Special qualification of arbitrators
Time limits and discovery
Pre-hearing and post-hearing briefing
Process for resolving prehearing disputes
Format of final hearing
Timing and form of award
Confidentiality
Appeals (judicial or non-judicial)
Consent to entry of judgment
Scope—broad versus narrow (exclusions)
Arbitration Clauses
 Arbitration is likely to be best for your client if: You want
to force payment of money quickly, you may otherwise
be exposed to an unfavorable forum, you need careful
analysis of complex
 Litigation may be best if: You need injunctive relief, have
a favorable home court, want to delay resolution, your
opponent wants to avoid a public trial
 Clauses should be tailored to specify established
organization such as AAA, JAMS, ICC, procedure for
choosing, and any injunctive relief carve out (e.g., noncompetes)
Arbitration
Example:
All disputes, controversies, or claims arising
out of or relating to this contract shall be
submitted binding arbitration in accordance
with the applicable rules of the American
Arbitration Association then in effect.
ADR – Sample Clause
Any dispute in relation to this contract, or the interpretation, making, performance,
breach or termination of it, shall be finally settled by binding arbitration in Newark,
NJ under the Commercial Arbitration Rules of the American Arbitration Association
(“Rules”) by an arbitrator appointed in accordance with the Rules. This contract
shall be governed by New Jersey law without reference to rules of conflict of law.
The arbitration proceedings shall be governed by the Rules without reference to
state arbitration law. Any award rendered in the arbitration proceedings shall be
non-appealable and final and binding upon the parties (and any attempted appeal
shall be void and of no effect), and judgment on the award may be entered by the
Superior Court of the State of New Jersey, Law Division, Essex County and
application may be made to that court for judicial acceptance of any award or an
order of enforcement. The parties consent to personal and exclusive jurisdiction
and venue in that court with regard to any such application. The parties agree that,
any provision of applicable law notwithstanding, they will not request, and the
arbitrator shall have no authority to award punitive or exemplary damages. The
costs of the arbitration, including administrative and arbitrator’s fees, shall be
shared equally by the parties. Each party shall bear the cost of its own attorneys’
fees and expert witness fees.
Jury Waiver Clauses
 Generally can waive right to jury
 Consider pros and cons of waiving a jury (likely
to be a plaintiff or defendant, forum, jury pool in
forum, legal arguments appeal more to jury)
 Some jurisdictions do not permit, but can use
arbitration agreement as an alternative
 Clauses will be strictly construed
Severability
Example:
If any provision of this Contract is held
unenforceable, then such provision will be
modified to reflect the parties’ intention and
all remaining provisions of this Contract shall
remain in full force and effect.
Attorneys’ Fees Clauses
 Fee shifting provision provides that the losing
party in a dispute relating to the contract will pay
attorneys’ fees of prevailing party
 Pros: Provides disincentive to litigate
 Cons: Raises potential costs of vindicating your
company’s rights
 Fee shifting provisions in consumer contracts
may not be enforceable
 Carefully draft conditions– “Prevailing party” or
“party who recovers damages”
Attorney Fees
Example –
In the event of litigation relating to the
subject matter of this Agreement, the nonprevailing party shall reimburse the
prevailing party for all of their reasonable
attorneys’ fees and costs.
Non-Waiver
Example:
The failure by one party to require
performance of any provision shall not affect
that party's right to require performance at
any time thereafter, nor shall a waiver of any
breach or default of this Contract constitute
a waiver of any subsequent breach or
default or a waiver of the provision itself.
Liquidated Damages Clause
 Establish a predetermined sum that must be paid if a
party fails to perform as promised
 Permissible if not contrary to public policy or
unconscionable
 Need to be reciprocal
 Where agreed sum is vastly below actual damages,
aggrieved party may be able to void clause and recover
actual damages (needs to be a reasonable forecast of
damages)
 Narrowly construed
 Will not bar equitable relief unless explicitly says so
Liquidated Damages Clauses
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Know the law that may apply
Some jurisdictions only permit if impossible or impractical to estimate
damages with any degree of certainty time of contract (e.g.. TX)
Applying New Jersey's principles regarding liquidated damages in the
context of a contract for services, the federal district court in New Jersey
has held that liquidated damages amounting to triple the amount of the
injury were not by their very nature unreasonable. Specifically, the court did
not find that such liquidated damages were either "unconscionable" or a
"penalty".
“The general rule in Delaware is that an enforceable liquidated damages
provision is distinguishable from a penalty where two criteria are met. First,
the damages which the parties might reasonably anticipate to result from a
breach must be difficult or impossible to prove accurately and second, the
agreed upon sum must be reasonable.” Pierce Assoc., Inc. v. Nemours
Foundation, 856 F.2d 530, 546 (3d Cir. 1988)
Liquidated Damages Clauses—Drafting
Considerations
 State rationale or criteria for amount
chosen
 Be as detailed and specific as possible
 Make damages commensurate with injury
 Use industry standards, if possible
 Need not be monetary damages
Liquidated Damages
Example:
Monthly parking tenants canceling their
parking contracts after the 1st of the month
shall pay liquidated damages in the amount
of $10.00 per day for the remainder or
unexpired portion of their monthly
agreements, not to exceed $100.
Assignment
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An assignment-consent requirement can give the non-assigning party a chokehold on
a future merger or corporate reorganization by the assigning party
A party being asked to agree to an assignment-consent requirement should consider
trying to negotiate carve-out provisions below. For example, when the assignment is
connection with a sale of substantially all the assets of the assignor’s business.
Case illustration--The Dubai port In 2006, a Dubai company that operated several
U.S. ports agreed to sell those operations. (The agreement came about because of
publicity and political pressure about the alleged national-security implications of
having Middle-Eastern companies in charge of U.S. port operations.) A complication
arose in the case of the Port of Newark: The Dubai company’s lease agreement gave
the Port Authority of New York and New Jersey the right to consent to any
assignment of the agreement — and that agency initially demanded $84 million for its
consent. After harsh criticism from political leaders, the Port Authority backed down a
bit: it gave consent in return for “only” a $10 million consent fee, plus $40 million
investment commitment by the buyer.
Assignment
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Possible language--Consent is not required for an assignment of this Agreement in connection
with a sale or other disposition of substantially all the assets of the assigning party’s business.
Optional: Alternatively, the sale or other disposition may be of substantially all the assets of the
assigning party’s business to which this Agreement specifically relates. Optional: The assignee
must not be a competitor of the non-assigning party.
Consider if either party may assign this Agreement without consent to its affiliate. Optional: The
assigning party must unconditionally guarantee the assignee’s performance. Optional: The affiliate
must not be a competitor of the non-assigning party. Optional: The affiliate must be a majorityownership affiliate of the assigning party.
Consider a provision that consent may not be unreasonably withheld or delayed. Optional: For
the avoidance of doubt, any damages suffered by a party seeking a required consent to
assignment of this Agreement, resulting from an unreasonable withholding or delay of such
consent, are to be treated as direct damages. Optional: For the avoidance of doubt, any damages
suffered by a party seeking a required consent to assignment of this Agreement, resulting from an
unreasonable withholding or delay of such consent, are not subject to any exclusion of remedies
or other limitation of liability in this Agreement.
Even if this provision were absent, applicable law might impose a reasonableness requirement.
An unreasonable-withholding provision should make the non-assigning party think twice about
dragging its feet .
If a party wants the absolute right to withhold consent to an assignment in its sole discretion
include that in the contract language.
Termination Clauses
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How and under what circumstances can the contract be terminated?
– Cancellation by default (require material breach? Define?)
– Without cause (cancellation for convenience)
– Cancellation by mutual consent
– Notice
– Default and right to cure breach
– Termination fees
– Termination if bankruptcy
– Any value given automatic stay?
Facts court consider in determining whether a breach was material:
– Was there a failure of an essential feature on the contract which had induced the
non-breaching party to enter the contract?
– Did the breach go to the substance of the contract and defeat the non-breaching
party's purpose for making it?
– Did the non-breaching party receive substantially less or different from that which
he had bargained?
Remedies on Breach
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Declare termination of contract
Interest
Damages
Liquidated Damages
Consequential Damages
Consent to entry of judgment
Checklist of Boilerplate Provisions
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Costs and attorneys’ fees
Waiver
Severability
Integration
Notice
Assignment
Indemnification
Liquidated Damages
Arbitration/ADR
Fee shifting
Checklist of Provisions to Consider
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Termination
Escrow
Jury trial waivers
Limits on damages/liability
Confidentiality
Counterparts
Choice-of Law
Forum Selection
Contractual limitations
Representations and Warranties
Thank You!
Questions?
Remember: One way to avoid or
limit legal fees later is by well
thought out contract drafting