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Boilerplate Contract Terms: Yes, They Do Matter

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Boilerplate Contract Terms: Yes, They Do Matter

In this program, Sean Smith will discuss how to avoid unforeseen consequences from using unnecessary and misunderstood boilerplate terms when drafting contracts. The clauses in a contract added from boilerplate language are often overlooked and infrequently negotiated. We will review the most common types of boilerplate clauses and what to consider when determining whether to use them in your clients’ contracts.

Transcript

Welcome. My name is Sean Smith. I'm a lawyer in Atlanta, Georgia. I'm one of the founding members of the Continuum Legal Group here in Atlanta. For the last 35 years or so, I have been involved almost exclusively in business litigation and trial work relating to all sorts of business issues, and over the years have developed quite an expertise and an interest, more importantly, in boilerplate contract terms. And I want to explain why, because that either makes me sound particularly like a boring person or there must be something we haven't talked about. And that's what I want to focus on today. In contracts. What you will find is, generally speaking, contracts are optimistic documents. And by that I mean people enter into them with the expectation that both one side and the other side will each be able to perform the obligations they have taken on for themselves. And you have the expectation that the other side can fulfill its obligations as well. And most of the time that's true. Now, you know, I'm a litigator talking about contract terms. That's because so many of the boilerplate contract terms are really necessary for resolving disputes when things go wrong as opposed to when things are going right. And that's the focus I want to have today. Now, I think we all know basically what it goes into a written contract and that's what we'll be focusing on today is written contracts. Of course, you have to they have to be definite. The terms have to be they control what's going on. And. There has to be consideration and there has to be all the all the usual elements. But when things go wrong, those come up occasionally. But more importantly, the dispute resolution and the dispute definitions that come in boilerplate are what's important. And that's really what I want to focus on today. So you'll see that in this lesson we're going to learn about what is boilerplate. Does it matter? I'll go ahead and jump ahead and tell you. Yes. And we want to focus on how to use those boilerplate terms so that you accomplish the goals of your clients as you're drafting these documents. Now, let's go first to look at what is boilerplate. Now, some will call it the back of the book material, the the stuff that you stick in the back of the contract, the lawyer, if you will. You'll see people refer to it more as, you know, that's just the junk our lawyers will fill in. The business people will negotiate the business points. They'll get price and quantity and time of performance and various things like that, while at the same time you will you will just see them often punt to the lawyers and say, oh, well, fill in whatever we might need. And that is a dangerous position to be in. Now what we're quite certain is, as its name implies, it's the kind of language that you use in a contract that has the same basic meaning in the same context over and over. That's the dangerous part of drafting a contract and plugging in boilerplate terms. And that's really what we want to focus on today. The. You know, simply if you ask yourself, does boilerplate matter? Well, the answer is yes. It matters a lot. These are just as important contractual terms as you would have for price or quantity or anything else like that. They impact your rights. They impact the rights of your client. They impact the remedies that might be available. They impact the remedies that might be available both on behalf of your client, but also if you take incoming fire because of a contractual problem that arises. You can use them to your advantage as well. They govern how they're enforced. They govern where they're enforced. They govern. What law might control. Boilerplate terms can even negate. I mean, totally wipe out. Contractual terms that have been negotiated in good faith. Sometimes terms that are part of the of the consideration, sometimes terms that are part of the core of the negotiation. And yet courts will say, well, because of, say, another boilerplate term or because of the way the law generally works or because there's still some consideration, we won't redo the deal. I'll have an example of that later. That you'll see is it can be quite problematic. The essence of. Any contract when you get into it is you want to reflect what the parties intend. Now, in boilerplate terms, you know, let's talk about those You we've sort of got what is boilerplate. Let's look at some individual boilerplate terms and how we might use them. In developing a contract, you have to think ahead. Think to the end. When you're when you've negotiated the contract, when you've laid it out, you've got the terms, you've got the business points, you've got it the way you want it, but you have to put in the stuff in the back of the book. You have to put in the lawyer and you need to think about issues like, you know. Have we got the whole contract? Are there any other documents that need to be incorporated? How are we going to resolve things if there's a dispute? How are we going to where are we going to resolve a dispute? What damages might be available if we did have a dispute. All these are the kind of issues that you need to put on the table up front, because if you don't, it will litigation becomes litigation is inexplicably expensive as it is. If you don't deal with these things correctly, you can make it even more expensive. And certainly nobody wants to do that. Nobody wants to. Increase the cost of litigation because a bad law. Sometimes it happens because of good lawyering. Obviously, we all know that. But sometimes it can happen with bad. So let's think about what actual boilerplate terms are going to look like, what you want to put in and why they're important. And keep in mind, there's no magic language. There's no trick that if you use this word, it means you've nailed it. And if you use some other word, it means you've you've botched it. That is not the case. There's no book of forms, so that one size fits all. Now, this does not mean and this is important, it doesn't mean that you shouldn't look at other contracts and consider how others have dealt with certain issues that come up. But because sometimes the boilerplate is boilerplate, but only if they have been discussed and negotiated and most importantly, upfront thought about and planned for. And that's what I would like people to take away today, is that a lot of what people put in as boilerplate or think, Oh, I'll just stick that in and that'll take care of everything. Those those items are where you can really. Add value for your clients and and impress them, if you will, with your knowledge of their business and with their understanding of the issues they actually face so that you don't want a one size fits all type end of your contract. I'll give an example later when we talk about something as mundane as choice of law and choice of forum provisions, how important those can be in ways that most people don't think of. Now, let's talk about some examples. I think the first and most important example is what's generally called and it varies in different people's lexicons, but it's it's generally either an integration clause, a merger clause, a whole agreement clause, something like that. And and for any written contract. And of course you don't have boilerplate in oral contracts, so you're going to have in any written contract, the first thing that you think of as boilerplate is an integration merger, whole agreement clause. Now. If you draft a written agreement and don't have one of these, you haven't done your job. So I think everybody knows what this should look like and knows that it should be in there. But it's important to make sure you cover all the all your bases. Because on the one hand, you want to say something like the only the gist of what you want to say is the only binding terms on the parties are the terms that are actually spelled out in the agreement. Now, this can go in a couple of directions. This can you need to disclaim prior statements. So if it's a sales contract, for instance, there are examples and I think we've all seen this in our practices that. Salespeople in the field, say, or somebody at the point of sale may make representations about the quality of a product, the performance of a product, the lifespan of a product, whatever it may be, and then a written contract is entered into. You need to disclaim any of those prior statements that are not actually part of the agreement. If, if, if someone in the field or somebody making a sale says orally, verbally, you know, I in my experience, this thing, this will last you for five years. Easy. This there's no way this will break down before five years. Well, unless you're willing to put a clause in the contract that says we guarantee this, we guarantee and warrant this product for five years and we'll replace it. If it fails within five years. You need to have an integration or merger clause that disclaims that and any other statement you may or may not even know about that's been made in the field because. It's so often the case now. As I said earlier, contracts are optimistic documents. Everybody goes in with great feelings of we're going to be able to do this and the other side is going to be able to do that and everything's going to be great. And that is admittedly what often happens. But when it doesn't, it is not a shock to any human being. That often people will say, Well, you told me X, Y and Z. You told me this would work. You told me this would be functional for this purpose. And it's not. And it's not in the contract, so you need to have disclaimed it. Similarly. You can end up in situations. Where. So let's look at what this agreement contains. The entire agreement between the parties is the gist of what you want to say. You have to say no representation or statement that is not contained in this written agreement is part of the agreement. Now, without that, you can run afoul of many things. Now some. Some states and some types of contracts will require writings and it will be more obvious, say we all know, we all remember, for good or ill, the statute of frauds, both in its common law derivation and in most states, now have a have a statutory statute, a statute of frauds that varies in its own way from place to place, but it'll be contracts that have to be performed for more than a year. It can't be performed in less than a year. Contracts that are for over a certain amount in some states, contracts for the sale of real estate contracts for in some states and in some federal some federal issues as well. Contracts that relate to the borrowing of money and the paying back of that. So all those types of contracts will have to be in writing, but it still needs to be clear. Think of it this way If a dispute arises and a stranger to the agreement, a stranger to the situation comes in. That stranger needs to be able to pick up a document. And that stranger can be a judge, can be an arbitrator, can be a juror needs to be able to pick up the contract, look at it and say this is what they agreed to and nothing else. And the reason I know that is because it says so. Absent that, you're going to find a situation where there will be nibbling at the edges. There will be. It just so will happen that whatever the dispute that arises under the contract is exactly what some guy told me in the back when we were making the deal. And you want to avoid that. Any time that arises, something has gone wrong. Now that. Sounds so simple. But it's so important. That any factfinder, any decision maker relating to a dispute about the contract be able to know immediately on his or her own what the contract says. So that is the first and I think most important example of what can happen and what can go wrong, seemingly by leaving out the simplest of things. Now, similarly, you'll have situations where, let's say the contract is drafted. It's effectively drafted, it's started performance, and then things change. There's an economic downturn. There's a shortage of a certain necessary product to manufacture the ultimate end product. Any number of things can happen. Now, if you're working in an industry where that is anticipated. You can sometimes include that in the contract. But oftentimes what happens is it's a smaller contract, it's a lease, it's, you know, a monthly purchase of goods that has payment terms, and it's due payments due on the fifth. And if it's not paid by the 15th, there's a 20% late charge, etcetera. We've all seen contracts like that. What you have to watch out for is sometimes good deeds can be punished if you haven't put proper provisions in your contract. So the rent was due on the fifth. There's a penalty after the 15th. Some tenant had a problem and they say, I can only get it to you by the 20th, but I promise I'll get it to you by the 20th. And they do in fact get it to you by the 20th. And you forego your client forgoes the late charge. Happens all the time or something just may not be done exactly the way the contract says, but it's close enough and nobody cares and it's not a big deal. And if it's the only problem, you leave it alone. Or they may just breach it. And you and your client has decided, I'm not going to nail them on this time. I'm going to give him. Sure, he missed a month, but I'm going to I'm going to see if he can catch up. I'm going to give I'm going to give the other guy a break. All those are fine things to do in business. But they are dangerous things to do. If you don't have some provision in your contract that says something to the effect of this agreement can only be amended by the agreement of all parties as reflected in a separate, written and signed document. So in other words, variations are fine. What you need is an affirmative statement in the written document that says just because we give you a break once doesn't mean you get to do it forever. I have been involved in numerous pieces of litigation. This often happens in banking cases where a client will say, Well, they told me I didn't really have to pay that back right now. I could just pay the interest. Even though the loan documents have it as a payback of principal and interest over a set period of time, they told me it'd be okay. Now in Georgia, we learned that's a lot of reason banks fail. Back a decade or more ago, we dealt with that a lot. And in those cases where other banks came in and took over and had to try to collect, we would face numerous claims of, well, my my loan officer told me it was okay if I didn't pay it back for a while. He said he understood I could start making my payments a year from now. Well, or they've reduced the. They forgave half the principal. You'd be amazed what people would claim had happened. In those instances. In other instances, we had contracts that specifically said you can't vary the terms of this contract without a writing. And without it being signed by all parties. That is essential. If you don't have some sort of amendment clause like that, you are invariably going to run into trouble. There will be situations where a party will unwittingly try to take, you know, something happens and then they realize, hey, it was a lot better if I didn't have to pay every month. And they'll try to make it that way. Some some people will attempt to do that very purposefully. So any time you are representing a client, you need to make sure that the written document is the written document and nothing outside of it will change. Now, there's not magic language, but you have to have some language. And the example we have here on the screen is, is one that easily shows how one might go about that. You can make it fancier. You can make it less fancy. It all really depends on what you're. Client needs to accomplish. Similarly, you'll have a no forbearance type clause and you'll see on your screen that there is a a separate clause that you want to put in that says No forbearance or failure to exercise remedies by a party shall be considered an amendment to the agreement, because some people will argue course of performance, which is a thing. I mean, obviously we all know that sometimes you can look at the course of performance of a contract and use that course of performance to try to understand what ambiguous terms might mean or to understand what the parties in practice seemed to have intended. So that happens. But what you need is to have something that says, Just because I let you do it once doesn't mean you're allowed to do it every time. And just because we did it differently than what's written on the contract, that doesn't mean we amended the contract. You will find. Shockingly that in litigation. People will often have incredibly creative memories about what they may or may not have accomplished through the use of contractual terms. And in those situations, being able to turn to the written document and point to a specific, clearly written, plain language term that says, No, that's not what happens, that's not what we meant. That's not how this contract is anticipated to operate. That will be your saving grace. And so that's exceptionally important. The next topic I want to turn to is one that seems so easy. It seems so obvious. And these are choice of will and choice of forum provisions. And I really want to talk about them some separately. The choice of law provision, obviously, is what it says. It allows the contract to define what law will govern that contract. Now, some situations, it's pretty easy. You look and you've got a company in Nebraska entering into a contract with another company in Nebraska for the delivery of a product in Nebraska. It doesn't take a big stretch to figure out that the law that should govern that contract is likely. Nebraska Law absent a choice of law clause. Nebraska law would govern that almost surely. But different states have different choice of law provisions. If anybody is has remembers back to law school and studying the different remedies that can be available and different choice of law issues that can arise where you've got a state court in Alabama hearing a case, but it's applying the law of Mississippi and how confusing and how difficult that can be. You need a choice of law provision, more importantly, when the parties are from different states. Now, if you represent a company. That does business all around the United States. Let's say you've got a company like Target that's based in Minneapolis and it does business all over the country. It may decide it is very important that all of our contractual relationships be governed by the law of Minnesota. Or it may decide for certain types of disputes. It would be the law of Delaware. And because that's maybe where it's incorporated, but for other types of disputes, it may be the law of Minnesota. What you don't want for a big client. And the reason this can be important for a big client is you need some uniformity and predictability. Part of the advantage of having contracts and the and the optimistic nature of contracts is it allows you to plan future conduct. And if you're planning future conduct, it really helps to know that one set of laws governs your. Governed your conduct and not 50 or 50 1 or 50 2 or 53, depending on where you do business. Let me give you an example of of how that can be a problem. This is this is every lawyers, every lawyer who drafts a contract. At least this is this is a scenario that would be part of your worst nightmare. You've got two parties. One, this is based on a real case. You've got one in Connecticut and one in Georgia. They get into a dispute over a piece of real estate in Georgia. Now, both of these are Delaware corporations in the sense that they're incorporated in the state of Delaware. As I say, one's in Connecticut, one's in Georgia. They're dealing with real property in Georgia. They have a dispute. The dispute gets resolved via a settlement agreement, which is just another kind of contract. And in that settlement agreement contract, the parties have to have a choice of law provision. Now, you could pick different ones. You look at that and you think, well, one's in each place. They could pick where the real estate is or they could pick, you know, whoever has the leverage in the negotiation might be able to say, no, I want my state's law to govern. That's the reason a big multi state or multinational company can often get its choice of law provision because it has the leverage, it has the bargaining power in order to accomplish what it wants to accomplish. Well, in this particular instance, the parties were equally balanced and they looked at it and without much thought and I know this because I know it because I after the fact got involved trying to fix it and it wasn't fixable. I'll give away the ending. This can be a problem. They decided. Oh. We're going to resolve this dispute about this piece of property by the owner. The Georgia party giving a right of first refusal to the Connecticut entity. For the purchase of that piece of property. And that right of first refusal is perpetual. It's not time limited. It's not 21 years after a life of being. It's not any of the things you see where this is going. There's a rule against perpetuities. Problem with that in some states, but not all states. And so without any thought as to what the state law was about this key element of the contract. Footnote that never ignore problems that you see when the little voice says, Hey, what about the rule against perpetuities? You should listen. Because here's what happens. Few years down the road, the parties get in a dispute about whether or not the holder of the right of first refusal has the right to exercise. There is an offer made. There's a claim made that it wasn't properly exercised and therefore they had no right to match and purchase the property. Someone else could buy it instead. The reason that is a problem is the property. As I said, the property is located in Georgia. The right of first refusal is going to be exercised in Georgia. And yet by contract. It is not governed by Georgia law. Well, here's what happened. Delaware law does not allow a perpetual right of first refusal. Georgia law does. But the parties had chosen not Georgia law, where the consideration of the right of first refusal would be effective. They had chosen a state which under its well-settled law, this wasn't some. This wouldn't have required some fancy bit of research. Under settled law, Delaware does not recognize a perpetual right of first refusal because it violates their rule against perpetuities for for a very technical reason. Georgia regards the right of first refusal as personal property. Delaware regards a right of first refusal as real property, as an interest in real property and. You can try to. You can't logically explain. That in either event, it's just the way it is. But in choosing Delaware law, the government of the contract because, hey, we're both Delaware corporations. We can agree on that. Nobody looked behind that. As it turns out, not a minute's thought was given to choosing Delaware and that ended up. Negating a major part of the contract. Now, when it went to court, the court said, sure, that's not enforceable. You don't have a right of first refusal, but you agreed to a severance clause and it was your own idea. The parties agreed to pick Delaware law, so you can't claim it was a unilateral mistake. You can't claim it was a mutual mistake because that's what they both meant to do. They just didn't mean for the consequences to be what they were. So that's why it's important. Something as simple as that. Which is probably decided with a moment's thought at most. Can create years of litigation and can create potential malpractice claims and can create, obviously, a serious chance that your client won't come back to you the next time they need a contract. All because. Of this simple choice and the way you should state the provision. Is also simple. This agreement is to be governed by the laws of the state of fill in your state. Whatever state you have affirmatively negotiated. And then it needs to have this little catch at the end without regard to its choice of law provisions. That should be in every choice of law. Clause in every contract because you can in in what is the kind of situation that is mind bending for non-lawyers and sort of obvious for lawyers, you can end up with a situation where it says this agreement is governed by the laws of the state of Oklahoma and the choice of law provisions in the Oklahoma Code would tell you, oh, because this contract was executed, it's final act of execution was in New Mexico. It really should be. This breach claim should be governed by the laws of New Mexico. Even though the contract says laws of Oklahoma, if you carve out the choice of law provisions of the state, you will avoid that problem. Now, similarly, you can have choice of forum clauses which tell you in its simplest form will tell you a dispute arising under this agreement should be brought in the state or federal courts of pick your location and the parties submit to the personal jurisdiction of such courts. Straightforward enough, it seems. Now, if you've got two parties again, go back to our Nebraska contract. You're going to bring it in state or federal court in Nebraska. You cannot confer by contract jurisdiction on a federal court or would not otherwise exist. You can't by contract, vary the diversity amount. You cannot, for instance, waive a diversity defense because that is a subject matter, a constitutionally based federal issue. So you cannot contract around that. But short of that, you need to pick a state that makes sense. Now, if you've got parties that are on opposite sides of the country, let's say you've got a California company and a New York company and they're trying to figure out where disputes should be resolved. There are many solutions. Sometimes it makes sense just to pick one or the other. You can, but you need to pick. You could leave it to a dispute arising under this agreement must be brought in the state or federal courts of either New York or California. That gives a lot of leverage to one of the parties, whoever's going to bring the the suit. You can just courts generally don't like to be free arbitration and mediation services. So you can't, for instance, say, well, Saint Louis is halfway in between. Let's pick Saint Louis, because most federal judges or state court judges in Missouri are not going to be real amenable to saying, okay, the parties have decided to to use our resources, even though they don't pay any money in taxes here. And it's useless to do that. So you have to make a conscious decision what to pick. If you don't. You can end up in a horrible situation such as the one I will describe in a moment. But let me suggest if you've got a solution first, if you've got two parties of relatively equal bargaining power. Say two equal sized companies that are entering into a long term agreement. And they have they have intentions of performing it well. They have intentions of doing what they're supposed to. They have pretensions of intentions of doing it correctly. What you want to do then perhaps is get the parties to say, okay. Whoever sues whoever is the plaintiff in ongoing litigation has to bring the lawsuit. In the state or location of the other party. So the defendant in any dispute would automatically get the home court advantage. Now, whether you bring it in state or federal court, you can leave that open. Typically. It would depend in my in my situation I've just done there. It's a big contract. The disputes, obviously, let's say, going to be over $75,000. The parties are diverse. They're not both Delaware corporations. They're not they don't have their principal place of business in the same state. So there's diversity. You could bring it in a federal court, but you would have to bring it. If you're the California company, you would bring it in a federal court in New York and vice versa. Now, sometimes when you're in that situation, the parties have negotiated hard. They're going at it. They're they're selling a division of a company. Let's say this is this is based on an actual case I had. And you've got very substantial law firms, one based in Chicago, one based in Atlanta. They are national name brands. They've got offices all around the world. They know what they're doing. But in negotiating this contract, they each at the time this just happened to be a quirk of the economy and of the way things go. Sometimes each of those large multinational law firms had excess capacity in their corporate departments in New York, so they agreed, hey, wouldn't it be nice? We'll have the lawyers in New York draft the draft, the agreements that are necessary for the sale of this division. We will have the the lawyers in New York, since they can be right there with each other. They can all get in the same room and work these things out and everything will be great. We'll get to the closing. The parties can sign the documents remotely in in Chicago and Atlanta. It'll be it'll be great. Well, they get down towards the end and everybody's rushing around drafting. And I know this because in the ensuing litigation I was involved in, we actually had to track changes through all the drafts of the of the sale documents, the choice of law provision, choice of forum provision, and in this instance, choice of law provision. Was plugged in because somebody went and just cut and pasted it from another contract. So you've got. The company based in Chicago, a company based in Atlanta. They're selling a division of of the company in Atlanta to the company in Chicago. And for reasons that no one could explain. Any dispute had to be resolved in New York. New York City. It specifically said and governed by the laws of New York, even though there was no connection to the state of New York other than some of the lawyers for each side who were working on the agreement happen to live there. I'll give you. I'll give you a hint. That is not. A good reason to pick a forum because the lawyers who are drafting the agreement are there. Yet. A dispute arose under the agreement. And we had to. And this will this will bleed into the next topic of arbitration clauses. We had to arbitrate the case in front of an arbitrator in. We amended the agreement only slightly. We could we could go to White Plains, New York, which in case anyone hasn't been there, it's as expensive as the city. And we didn't save any money by moving it to White Plains, let's put it that way. It was. Ultra expensive for teams of lawyers from both sides to arbitrate a case away from their offices in a very expensive location. And it was only done. Because the parties had not sat down and negotiated that issue ahead of time. Failure to negotiate an issue ahead of time is not an excuse for getting out of it later. Now let's move on to the next topic, which is arbitration clauses. I think we all generally know about arbitration. We know generally what it is, how it works, why we have it. It can be sometimes less expensive. 30 years ago, I would have told you it was definitely less expensive than going to court. Now, that isn't always the case because of the topics that get left out. Sometimes when you negotiate a contract, you anticipate that there may be a very large. If something were to go wrong, it would be big, not small. So you may want a panel of three arbitrators instead of one. As as you can do the math. Not only is that three times more expensive in terms of what you have to pay the actual arbitrators, it increases the administrative costs of whatever organization you're using and it increases the amount of time lawyers have to spend on the case dealing with what I think of as ministerial and procedural matters. So in an arbitration clause, which may say something as simple as, you know, the parties to this agreement agree to arbitrate this claim instead of going to court. That would be that would be an enforceable arbitration clause, although it would be a somewhat useless arbitration clause because it doesn't talk about the essence of what you need, like number of arbitrators. I recommend one in almost all cases. What organization? It used to be that you couldn't find many independent arbitrators who were who were worth their salt. And so when you went to hire, you might find that, you know, we got to go with one of these big organizations, Triple A American Arbitration Association jams some of the regional ones here in Atlanta. And Miles, mediation is a regional one. I know most of the major cities and even even secondary legal markets have arbitrators available. There is a danger in naming the organization in advance. And here's what it is. You can name Triple A or jams or any of the big ones and get excellent arbitration, get excellent procedures. You get an excellent case manager and it costs money. If you have a $20,000 dispute. You have defeated the purpose of arbitration by having an expensive arbitration that costs $40,000. So even with Triple A's streamlined procedures that are sometimes available, you will end up spending more than it's worth. So you may want to set up even an arbitration clause that is gradated so that if the dispute is potentially worth more than X, we will use triple A. If it's only below a certain threshold, we will pick our own arbitrator by submitting a list of five people. We'll come up with a list of 20 available in the city. We're going to arbitrate in because you've already had your choice of law and choice of forum clause. Even with an arbitration clause. But what you have to do is use the common sense and say, okay, if it's a $20,000 dispute, we'll get we'll just figure out a way to pick from a list either that you've pre agreed on or that you come up with a list of 20. Each party picks five. And if you have if you hit on each of you pick the same person, that's who you go to first. But there needs to be a mechanism for picking the arbitrator. So many times you end up spending months fighting about who the arbitrator is going to be. And when you're having that fight, you aren't even in a position to have somebody else resolve the fight. So you see you see how that could be a be a terrible sinkhole of litigation costs. Sometimes in an arbitration clause, depending on the relationship of the parties and the relative power negotiating power and otherwise of the parties, you may want to put in a clause that says before we arbitrate, we have to go through mediation in front of us. And you can even you can say anybody, you can say a mutually agreed upon mediator, you can say a certified mediator, some states. Many states now have training programs where you go through and you get certified by the state as a mediator at least means you've been through the process of learning how to be a mediator. And oftentimes you have experience. And the last thing in an arbitration clause. And this is where, as I mentioned earlier, it's sometimes, but not always less expensive. If you can limit the scope of discovery up. If you limit if you say, for instance, the parties will exchange written one set of written document requests not to, you know, number more than 20 requests, including subhas. And you say the parties will not allow interrogatories or requests for admission. And the party each party can take two depositions or whatever it may be if you negotiate that upfront. And tailor it to the types of disputes that may arise. I mean, if it's a small contract, it's going to be a small scope or maybe no discovery. If it's a huge sale of part of a business to another business, you're going to want some discovery, but you're going to want to have limitations. You're not going to want to have wide open six months of let's depose everybody whose name appears on a document. And oh, by the way, give us every document you have that will have saved little. If anything, it may have even increased the scope of discovery from what a court would allow. So you have to anticipate these issues ahead of time. And that anticipation comes from a combination of experience, from just do a little game theory in your head and figure out, okay, what happens if we have to sue? What happens if they have to sue? What would we be happy with? And an understanding of your client's business so that you know, okay, this is where a problem has arisen in the past sometimes. So let's anticipate that that's the kind of arbitration we might have. Those are small. We don't need to have the gold standard of arbitrators. We can do with somebody who's got good sense and an office and you go from there. So as you'll see from the example of what an arbitration clause might look like, you know, you can. It's it's the blank that's the negotiating part. If you've agreed, if you've agreed in the in the. Drafting of the contract to have arbitration. That's great. But you need to describe what that arbitration is going to look like and how the process starts, how you pick an arbitrator, what notice do you have to give ahead of time, etcetera? I think those are all. Essential. To. Presentation of an arbitration issue. I've been involved in cases where we had to use Triple A and three arbitrators. And have discovery in order to resolve a $50,000 dispute. All the arbitration clause there accomplished was that the parties sort of without discovery, without any input from the outside, just decided, hey, it's easier to negotiate this out. And if that's what you want to accomplish, fine. Uh, it's not fine if that's not what your client wanted to accomplish. If they feel like they got denied their day in court or they they got denied a fair evaluation of their position, they're not going to be pleased with their lawyer. And ultimately, taking care of your clients is why we're in this business. So that is essential. Now another another type of clause you may see periodically are jury trial waivers. Now. In some states, that makes sense. Let's say you've decided. Your client says, I don't really like this arbitration stuff. It doesn't. I've had bad luck with it. I have a bad feeling about it, whatever. So I want to have a court, but I don't want a jury because I'm worried about 12 strangers who aren't familiar with my computer business and aren't tech savvy or aren't familiar with the way that a corporation sells a division to another corporation and what the standard provisions are. So they say what I'd like is to sort of split the split the difference and have. A court decide this, but not a jury. Okay. That's a perfectly rational position to have. And in many states, if you are going to waive a jury trial, you can do it. In some states, however, you cannot. So you need to tie anytime somebody says, hey, let's let's do a jury trial waiver. You need to look at the state. Obviously, the law of the state you've chosen, if you've chosen one, the law of the different states. I'll just I'll just tell you, for instance, Georgia courts will not recognize a prospective jury trial waiver. They just won't. It's it violates the state constitution because. For the for the unusual reason that in this particular instance, Georgia has extended through its state constitution a broader protection of a of a citizen's right to a jury trial. Then the federal Constitution does so in Georgia. You could not have a prospective jury trial waiver. Many people try to put this in. Some states will allow it only if you have a separate little place to either initial or sign that you've agreed to it sometimes. And and sometimes that's a good idea to put when you're drafting a contract. If you have certain things, say an arbitration clause, a jury trial waiver in a state where it would be enforceable, certain other things we may talk about here at the end in terms of waiver of certain types of damages, certain types of warranties, etcetera. It's it's a good idea if practical. And sometimes you have to convince your client it's a good idea to it's a it's a good idea to to have a spot on the contract where somebody can initial it. Both parties, whoever's signing the agreement for them puts their initials next to. Yes, I agree to the jury trial waiver. Yes, I agree to arbitration. Yes, I agree that, you know, our damages will be capped at cost of goods plus 10% or whatever, whatever your limitation there may be, that is where you will find that. Just understanding your client's business, thinking through who they're dealing with and what sort of problems historically have arisen. Questions that you might not think to ask when you're drafting a contract will actually assist you in drafting. The contract will save money in the process of drafting the contract and will definitely save money if anything goes wrong. And that's essential. I think that is the essence of what we need to accomplish in situations like this. Now you'll see from the next example, and I alluded to this when I was talking about the choice of law problem between the Connecticut and the Georgia company over the right of first refusal. Severability clauses are about as common as you would as you could find in contracts, because all they say is if a court decides that one portion of this contract is not enforceable under law, it can be stricken from the contract without going to the trouble of rewriting the contract. We'll just take it out and the rest of the contract will be the same. Well, if you had some minor little point that didn't matter and somehow it was against some state procedure or something, you know, you can come up with an example where you would say, so what? That's great. Strike. What you what you want to avoid. Is giving courts free rein to blue pencil your your clients agreements after the fact and still leave them enforceable. When you put something like that in place, you can have a problem, as happened when the consideration, the right of first refusal was was struck down. The court looked at it and said, sure, that was part of the consideration. But we find since consideration can be practically a peppercorn on up, there was just some exchange of value. We aren't going to judge whether it's fair or not. A court could strike that out and say, but you've still got to live with the contract. So the underlying litigation was settled still without the benefit that one of the parties had really gotten from the settlement. And yet a court said, well, if you didn't want that to happen, you shouldn't have you shouldn't have allowed for it to happen, which you have to admit is not a totally illogical position to take. So here's what I would tell you about severability clause. You're going to see them in contracts that other people prepare. You're going to want to put them in contracts that you prepare. But. If you look at a situation and think, well, we would be happy with a severability clause, except. You know, if a provision in this contract that constitutes part of the consideration is found to be illegal. No severability. If some other term that we didn't negotiate as heavily or that both sides either benefit or injured from it's being stricken from the agreement. That's a different thing. So identify problems, deal with them upfront if you can. And if you can't, then your client has to make in negotiation with the other side, make the hard decision of whether or not you are going to put in a blanket severability clause without any indication that. Everything's on the table, everything's fair game. Now, the next type of clause that we often see are what are called cooperation clauses and cooperation clauses. They, in my mind, go back to what you were taught in kindergarten. You know, do unto others, be be nice. Don't be a jerk If if the contract and what a cooperation clause typically says is not don't be a jerk. I don't want to mislead anybody on that. Probably a good rule, but it's not in the contract. What a cooperation clause will say is. If we need to, if if something else is needed from you to implement the purposes of the contract, you will agree to it. Even if it's not enumerated here. It could be something as simple as if you've acquired a business and it had ongoing contracts with third party customers. You would need to have assignments of those contracts and therefore the cooperation clause would encourage you to to engage in that sort of cooperation. That makes sense. And those will happen. Uh, similarly, you might have a situation where the cooperation clause is harder to interpret. Let's say you've sold a piece of property that's contiguous to what you retain. Your client retains the bulk of the property, but sells a piece on the corner and. The people who acquire it want to get it rezoned to make it commercial instead of agriculture or commercial instead of residential. Because they're buying it with the anticipation. And frankly, your client was probably selling it with the anticipation that they would be able to develop the lot in a certain way. Well. So. And then. The person retaining the bulk of the property decides they don't want him to rezone that. I'm going to go oppose that down at the county commission. Well, would it cooperation clause prohibit them from doing that? It depends on the language of the contract. It depends on what the parties put in that contract. But what you could do and this is what I would recommend, and this is where cooperation clauses can be really useful because it causes you to think on behalf of your client and with your client. Think of things that might come up. Okay. What if this person were to oppose rezoning? We should put something in there that says either they won't oppose it or they won't take any actions to encourage others to oppose it or. If you can get this even better, they will affirmatively support our petition to rezone the property. As an example of where a cooperation clause can become more of a substantive clause and less of just what you might think of as the back of the book boilerplate. Oh, why can't we all just get along clause? Because those are really, really important. Now the last bit I want to talk about are just for a moment, I want to touch on limitation of damages, warranty provisions and indemnification clauses. I will be honest with you, these topics are something you should always be thinking about but are really very state law specific. You'll see them in all sorts of different types of contracts. If you have a sale of goods contract, for instance, that's going to be subject to the Uniform Commercial Code. You need to look at the uniform commercial code in the state that it's in, which are almost you know, it's called a uniform commercial code for a reason. But sometimes there will be slight variations either in language or in application. And you need to understand those. You can have liquidated damage clauses. Sometimes they'll be enforceable, sometimes they won't because they cannot be punitive. They have to reflect what you think the damages might be in a given situation. Otherwise they won't be enforceable. Because we all remember from first year contracts, you can't get punitive damages in a contract case, so you can't write them into the contract either. That's the logic behind the limitation on liquidated damages. You get the same sort of thing with limitation of damages clauses. They need to be negotiated. If you say, you know, your client is supplying a piece of equipment, a piece of a machine that's being built, so they make a certain types of belts that get sent to the manufacturer who then uses them in the product. You'll probably have some unequal bargaining power issues there. But what you want to do is instead ensure that what you've got is a situation where the limitation of damages is not backbreaking for either side, but fair. You'll see the same thing with indemnification clauses. The most important thing about an indemnification clause is ask yourself, you know, it'll seem so simple. You know, Party A agrees to indemnify party B for any claims brought by non parties relating to X. Okay. Think it through. Use game theory to your advantage here. Really game it out. Think. Okay. What happens if who sues whom for what? Who's really going to benefit from this and who's not. Because I have I have unfortunately seen a number of indemnification clauses where when you really get down to it, it's unclear who's indemnifying whom. It's unclear what you're being indemnified for. And it's unclear whether the indemnification would even be legally enforceable under some state law. You can't have an indemnification clause in indemnifies you against intentional torts, for instance. Policy behind that is obvious. Additionally, think of warranty provisions. That's where the UCC comes in. In many instances, when you're selling goods and services, you need to understand what warranties are implied, what warranties are expressed, what warranties you may be disclaiming, and you need to do that expressly. So really, as we think about it at the end and go through practice tips. Boilerplate terms have to be taken seriously. They have to be considered. They have to be thought about and offtimes they actually need to be negotiated. You can't just use a fill in the blank. Style. That doesn't work. And just because somebody else did it doesn't mean that it's right for you. It doesn't mean it's right for your client. To close. I will tell you that one of the one of the biggest warning moments, and if this hadn't been such a kind senior partner would have been a terrible learning moment. But instead, it was a good learning moment. When I was a young associate back in the 80s, I cut and pasted something into a document thought. It was good enough for somebody I knew. Down the hall is good enough for me. Take it to the partner. Show it to him. She says to me. Not that stupid or not. That's terrible, she says. Can you explain to me why this this term is in here and how it would work? And embarrassingly, I had to say no. She said, Well, maybe it should be in there or maybe it shouldn't. Why don't you go figure it out and come back and see me? And that was the most important learning experience I had that year as a lawyer, for sure. Don't take these things for granted just because computers make it easy to cut and paste. Don't do it. Think. Negotiate. Read them aloud to yourself. Think about how they play out and you will be considered to be the star in what you do. And you won't do anything that embarrasses yourself, your firm or your clients. And that's a good day for any lawyer. So thank you very much for your time and I appreciate your attention.

Presenter(s)

SS
Sean Smith
Partner
Continuum Legal Group LLP

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