TheArtofContrac.ngToolsandTipsforIden/fyingandAvoidingCommon

TrapsinCommercialContracts

May24,2017

Crowell&MoringLLP590MadisonAvenue,20thFloor

NewYork,NY10022-2544www.crowell.com

©2017Crowell&MoringLLP

• DoyouneedatermorterminaKonprovision?

Term/TerminaKon

• Howtohandledisputesunderthecontract?

DisputeResoluKon

• Whatistheeffectofforcemajeureprovisions?

ForceMajeureorImpracKcability

OverviewofToday’sWorkshop

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TERM/TERMINATION

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DoYouNeedaTermorTermina.onProvision?

•  Thedefault/“classroom”ruleis:

1)Nodefinedtermand

2)TerminaKononlybyconsentoftheparKes

•  Considerwhetheritisadvisabletorelyonthedefaultrule.

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TermandTermina.onOp.ons

OPTIONSFixedTerm/IndefiniteTerm

Auto-Renew/Evergreen

Termina.onuponOccurrenceofEvent/Condi.on

ForCause/ForConvenience

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BasicQues.ons

•  Howlongwillthecontractlast?– Whatisthepurposeofthecontract?Toachieveadiscretegoal?OrtomanageanongoingrelaKonship?

•  Doyouneedanescapehatch?– Areyouworriedaboutbeingabletowalkaway?Orareyouworriedthatyourcounterpartyisgoingtoleaveyouinthelurch?

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EffectsofTermina.on •  Whathappenstotherela.onshipofthepar.esupontermina.on?–  WhichrightsandobligaKonswillendandwhichwillsurviveterminaKon?

•  IPConsidera.ons–  ToensureprotecKonofyourIP,thecontractmustinclude:

•  RequiredreturnofIPtoitsowner•  Non-compeKKonprovisionsthatsurviveterminaKon

–  Butwhatifyoucan’tjustgiveitback?

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Auto-Renew•  Avoidambigui.es

– Howcanapartyinterrupt/rejectrenewal?•  ConsiderseanganoKceperiodtocanceltheauto-renewaltoavoid“accidental”renewal.

– Whatisthetermofrenewal?•  Mechanismtoterminate

–  ThesecontractsmayconKnuebeyondwhattheparKesintended.

–  Considerdesigningamechanismtoterminatethecontractwhenitisnolongerinuse.

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Termina.onforBreach

•  Whatdoesa“breach”mean?– Doyouwanttospecifybreachesofspecificprovisionsor“material”breachesofanyprovision?

•  Whendoesabreachoccur?– ConsiderrequiringnoKceandacureperiod.

•  Whataretheconsequencesofabreach?

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Termina.onUponBankruptcy

•  Ipsofactoclausesareunenforceable.– Manycontractsincludethembyforceofhabit.

•  Howcanyouterminatebeforeapartyfilesforbankruptcy?– ConsiderfinancialreporKngtriggers,i.e.,covenants,audits,righttoterminateupondefault/breach

– Triggersshowingdistress,i.e.,businessslowdown

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Termina.onUponBankruptcy•  Debtor’sRighttoAssume/RejectObliga.ons

– Althoughipsofactoclausesareunenforceable,debtorsinbankruptcyreceiveprotecKonbyhavingtherighttoassumeorrejectexecutorycontracts.

–  Ensurethatyourcontractisproperlyintegratedsothatyourcounterpartycan’tassumetheupsideandrejectthedownside.

•  “Subjectto”language—referencingrelatedagreements•  Explicit“crossterminaKon”clauses

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Prac.ceTipsü ConsiderhowlongtheparKeswanttobeKedtotheagreement.

ü ConsidertheeffectsoftheterminaKonoftheagreementontheparKes.

ü ConsiderifcontrolsareneededtoensureterminaKonpriortoabankruptcyfiling.

ü IfIPisinvolved,ensureadequateprotecKononterminaKon.

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DISPUTERESOLUTION

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»  EscalaKon/MediaKon»  ArbitraKonForDiscussionAnotherDay

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»  Choiceofforum/Choiceoflaw»  JuryWaivers»  Akorneys’feesprovisions

ProvisionsWe’llDiscuss

»  ExecuKve-to-ExecuKvemeeKngs–  CanbeveryeffecKvetool–  Coolerheads;greaterperspecKveonrelaKonship

»  MediaKon–  Asamandatorystep,notalwayseffecKve

•  SophisKcatedparKesknowhowtosekle•  CandevolveintoliKgaKonstrategydiscovery

–  ChoosemediatorqualificaKonswisely

(Don’tforgetthestatuteoflimita6ons)

Escala.onandMedia.onSteps

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Court Arbitra.onJudgeisgenerallyassigned,notchosen CanchoosearbitratorqualificaKonsand

number;canincludenon-lawyerswithspecialexperKse

Juryisavailable NojuryForummaybeunakracKve CanspecifysitusTimetoresultmaybeunpredictableoruncontrollable

CandictateKmetoresult

Fulldiscoveryisavailable CanlimitdiscoveryRighttoappealfromerrors VerylimitedabilitytoappealPresumpKvelypublic;precedenKal Canbeprivate

ShouldWeAgreetoArbitrate?

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ImportantChoices

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Arbitra.on Arbitra.on

»  Some…orall…disputes?–  InterpretaKonandperformanceofthecontract?– Arisingoutoforrelatedtothecontract?– ArisingbetweentheparKes?– Teensyones?Hugeones?

»  Shall…ormay?

Choice#1:Scope

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»  Presump/oninfavorofarbitra/onmeansthatcourtsinterpretclausesbroadly.

»  Themagicwords“arisingoutoforrelaKngtotheagreement”consKtute“thebroadclause”– Ooeninterpretedtoincludetortandothernoncontractualclaims.

Somelawonscope

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Anycontroversyorclaimarisingoutoforrela6ngtothiscontract,orthebreachthereof,shallbese=ledbyarbitra6onadministeredbytheAmericanArbitra6onAssocia6oninaccordancewithitsCommercial[orother]Arbitra6onRules[includingtheOp6onalRulesforEmergencyMeasuresofProtec6on],andjudgmentontheawardrenderedbythearbitrator(s)maybeenteredinanycourthavingjurisdic6onthereof.

AAAModelClause

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» AAA» JAMS» Other» Adhoc

Choice#2:TheAdministra.on

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»  Canbeindustryordispute-typespecific»  Canincludespecialrulesfor:

•  Complexdisputes•  Expeditedprocedures•  Emergencymeasures•  Appeal

»  BefamiliarwithAAA,JAMSRules

»  Canalsodeclinetospecifyapplicablerules

Choice#3:TheRules

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3or1? QualificaKons? SelecKonprocess

Choice#4:TheArbitrators

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»  YesorNo?» Howmuch?

» Whattype?

»  Timeframe?

Choice#5:Discovery

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»  BerealisKc,inlightofyourprocess»  Considerexpeditedproceduresforcertaintypesofclaims

Choice#6:Speed

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»  Notaforegoneconclusion»  Samplelanguage:

Exceptasmayberequiredbylaw,neitherapartynoranarbitratormaydisclosetheexistence,content,orresultsofanyarbitraKonhereunderwithoutthepriorwrikenconsentofbothparKes.

»  MayelecttorestrictonlycertaintypesofinformaKon(e.g.,tradesecrets)AmericanArbitraKonAssociaKon,DraoingDisputeResoluKonClauses:APracKcalGuide(2007).

Choice#7:Confiden.ality

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»  OrdinarilynotareasonedawardunlessallparKesrequestit

»  Samplelanguage:“Theawardofthearbitratorsshallbeaccompaniedbyareasonedaward”»  Mayunderminethefinalityofthedecision

Choice#8:ReasonedAward

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1.  I don’t want to arbitrate after all.2.  We can’t agree on an arbitrator.

3.  The arbitration is slow and costing me a fortune.

4.  The award takes forever. 5.  I hate the award. 6.  I AM GOING TO IGNORE THE AWARD.

WhatCanGoWrong

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» Waiveit»  Findadifferentcontract»  Fileapre-empKvelawsuit

– Maybeseekjustinterimrelief»  Craoyourclaimaroundthescope»  Allegefraud»  Allegeunconscionability(ifyouareaconsumer)»  Refusetorespondtodemand

End-RunsAroundArbitra.on

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FORCEMAJEUREORIMPRACTICABILITY

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“ForceMajeure”•  “ActofGod”or“VisMajor”•  “AneventoreffectthatcanbeneitheranKcipatednorcontrolled.”–  Black’sLawDicKonary(9thed.)

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CommonLi.ga.onIssues•  Iseventexpresslylistedinthecontract?•  Unforeseeable?•  Beyondparty’sreasonablecontrol?•  CausaKon:didtheeventreallypreventordelayperformance?

•  Whichpartybearstheriskoftheeventatissue?

…Let’sexplorethroughKelKimCorp.v.CentralMarkets,Inc.,519N.E.2d295(N.Y.1987).

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Isclaimedforcemajeureeventlisted?“IfeitherpartytothisLeaseshallbedelayedor

preventedfromtheperformanceofanyobligaKonthroughnofaultoftheirown

byreasonoflabordisputes,inabilitytoprocurematerials,failureofu.lityservice,restric.ve

governmentallawsorregula.ons,riots,insurrec.on,war,adverseweather,ActsofGod,orothersimilar

causes

beyondthecontrolofsuchparty,

theperformanceofsuchobligaKonshallbeexcusedfortheperiodofthedelay.”

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Dideventpreventordelayperformance?

“IfeitherpartytothisLeaseshallbedelayedorpreventedfromtheperformanceofanyobligaKonthroughnofaultoftheirownbyreasonoflabordisputes,inabilitytoprocurematerials,failureofuKlityservice,restricKvegovernmentallawsorregulaKons,riots,insurrecKon,war,adverseweather,ActsofGod,orothersimilarcauses

beyondthecontrolofsuchparty,theperformanceofsuchobligaKonshallbeexcusedfortheperiodof

thedelay.”

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WhatHappensNext?

•  Effectoftheforcemajeure– Excuseforfailuretoperform

•  Allowapartytodelaypaymentorperformance•  AllowareducKonorexKnguishmentofparKcularobligaKons

– FrustraKonofthewholecontract•  AllowapartytoexerciseitsterminaKonright•  ExtendthetermoftheagreementbasedupontheduraKonoftheforcemajeure

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Prac.ceTipsü  IfyouwantonlyprotecKonagainsttrulyunforeseeable

anduncontrollableevents,considerwhetherdefaultdefensesaresufficient.

ü  Ifusingaforcemajeureclause,expresslystatewhetheronlyunforeseeableeventsarecoveredtoavoidlaterconflict.

ü  Ifyouhavesomethinginmind,bespecific,andexpresslystateforcemajeurecondiKonsneednotbeunforeseeable.

ü  IfyouwantprotecKonagainstchangesineconomiccondiKons,beexplicit.

ü DoyouwantforcemajeureeventstoexcusebothparKes?36

EdBaumPartner-Li.ga.onCrowell&MoringLLP

PaulPollockPartner-CorporateCrowell&MoringLLP

AlanHowardPartner-Li.ga.onCrowell&MoringLLP

IlanaLubinCounsel-CorporateCrowell&MoringLLP

37

ebaum@crowell.com+1212.803.4033

ppollock@crowell.com+1212.895.4216

ahoward@crowell.com+1212.803.4021

ilubin@crowell.com+1212.895.4224

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EdBaumPartner-LiKgaKonCrowell&MoringLLP+1212.803.4033ebaum@crowell.com

EdBaumisapartnerinCrowell&Moring'sNewYorkofficeandamemberofthefirm'sLiKgaKonGroup(includingleadingtheliKgaKonpracKcesintheNewYorkoffice).Ed'spracKceisconcentratedonrepresenKngpublicandprivately-heldenKKesandtheirprincipalsinmulK-facetedbusiness-relatedliKgaKons.Edrepresentspreeminentmembersofthefinancialservices,entertainment,informaKontechnology,pharmaceuKcal,automoKve,legal,andinsuranceindustries.Heoffersclientsthecombinedbenefitsofextensiveexperienceintheartsoftrialandappellateadvocacy,aswellasin-depthpracKcalknowledgeofmulKplesubstanKvedisciplinesthatareooeninvolvedintoday'scomplexbusinessdisputes.HiscasesfrequentlyinvolvetheinterplaybetweenthecompeKngandatKmesinconsistentlawsgoverningfinancialservices,securiKes,anKtrust,bankruptcy,productandconsumerliability,andthediscriminaKon,compensaKon-related,andunfaircompeKKon/tradesecretslawsthatshaperelaKonsbetweenbusinessenKKesandtheirseniorpersonnel.EdregularlyservesasnaKonalorcoordinaKngcounselforclientsfacingclassacKons,governmentalinvesKgaKonsandliKgaKons,orotherpotenKallysignificantmakersrequiringexperienceinmulKpledisciplines.HealsofrequentlycounselsclientsintransacKonalmakersandbusinessplanning,onassessingpotenKalliabiliKes,andindevelopingacKonplanstopreventorminimizeliKgaKonrisks.OtherlawyersandlawfirmsfrequentlyretainEdtocounselandrepresenttheminissuesinvolvingprofessionalresponsibilityandethics,aswellastorepresentthelawfirms—orthechiefexecuKvesandotherseniorofficersofthoseotherlawfirms'clients—inemploymentanddisciplinarymakers.InaddiKon,drawingonhisextensiveformaltrainingandexperienceindisputeresoluKon,Edooenserves,bothasadvocateandasaneutral,inmediaKons,arbitraKons,andotheralternaKvedisputeresoluKonproceedings.Educa.on•  CornellUniversity,B.S.industrial&laborrelaKons,withhonors•  ColumbiaLawSchool,J.D.;HarlanFiskeStoneScholar

39

PaulPollockisapartnerintheNewYorkofficeofCrowell&MoringandconcentrateshispracKceonmergersandacquisiKonsandcorporatefinance.Heservesasamemberonthefirm'sCorporateGroupSteeringCommikee.PaulalsoprovidesongoingrepresentaKontomiddlemarketprivateequitysponsorsandtheirporzoliocompanies,aswellaspublicandprivatecompaniesthatarenotprivateequitybacked.Paul'sindustryexperienceincludesrepresenKngclientsinfinancialservices,manufacturing,telecommunicaKons,soowareproducts,publishingandentertainment.

Paulrepresentsprivateequitysponsorsandgrowth-orientedcompaniesinexecuKngtheiracquisiKonobjecKves.Heworksonboththebuyandsell-sideofmiddle-marketbusinessesseekingtorealizevaluethroughthesaleoftheirbusinesses,andwithnon-U.S.basedcompanieswhoareseekingtoentertheU.S.marketplace,accesstheU.S.securiKesmarketsortoengageintransacKonswithU.S.companies.

InaddiKon,PaulhasextensivedistresseddebtexperienceincludingworkrepresenKnglenders,buyersandsellersinacquisiKonsbothinandoutsideofbankruptcy,aswellasworkoutsandrefinancingsoftroubledcompanies.ThesetransacKonsincludeassetsales,363sales,andleveragedandnon-leveragedrecapitalizaKons.

PaulworkswithcompaniesthroughtheirenKrelifecycleincludingadvisingontheformaKonandchoiceofbusinessenKty;preparingandnegoKaKngshareholderandlimitedliabilitycompanyagreements,employmentagreementsandothercriKcalcorporatecontracts;advisingonmulKpleroundsofprivateequityfinancinganddebtfinancing;andrepresenKngcompaniesintheiniKalpublicofferingsandinconnecKonwithongoingsecuriKescompliancefilingswork.

InaddiKontorepresenKngissuersinacquisiKonsanddivesKtures,privateandpublicofferingsanddebtfinancings,hehasalsorepresentedunderwritersinpublicofferingsandplacementagentsinprivateplacementsaswellasforeignissuersinconnecKonwithofferingsunderSECRegulaKons.

Educa.on•  ColgateUniversity,B.A.,cumlaude•  FordhamUniversitySchoolofLaw,J.D.

PaulPollockPartner-CorporateCrowell&MoringLLP+1212.895.4216ppollock@crowell.com

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AlanHowardPartner-LiKgaKonCrowell&MoringLLP+1212.803.4021ahoward@crowell.com

AlanHowardisapartnerinCrowell&Moring'sNewYorkoffice.AlanisanaccomplishedtrialakorneywhohasovertwodecadesofexperiencehandlingliKgaKonandarbitraKonmakersdomesKcallyandinternaKonally.HehastriedcasestojuriesandjudgesinfederalandstatecourtsthroughouttheU.S.andtoarbitratorsinproceedingsundertherulesoftheAmericanArbitraKonAssociaKon,JAMS,andtheInternaKonalChamberofCommerce.

Alanfocusesoncommercialcontractdisputes,ooeninvolvingmanufacturing,producKonand/ordistribuKonofgoods,technologyorsooware,orjointventures.AlanalsorepresentsparKesengagedinmulKpleproceedingsinmulKplejurisdicKonsandhasparKcularexperiencerepresenKngforeigncompanies,andseniorofficersofforeignanddomesKccompaniesengagedinhighstakesdisputes.HehasextensiveexperiencerepresenKngfinancialinsKtuKons,andinparKcular,intheareaofAnK-MoneyLaunderingregulaKonsandcompliance.Alanalsohastriedanumberofintellectualpropertymakers,includingpatentcases,casesinvolvingtheooftradesecretsanddisputesinvolvingsoowareproviders.

Alanalsodoesextensiveprobonowork.HewasleadcounselforthenamedplainKffsinDavidv.SignalInterna6onal,LLC,anacKonbroughtonbehalfofhundredsofskilledworkersfromIndiawhowereluredbyfalsepromisesofgreencardsandforcedtoliveinlaborcampsandworkinmarinefabricaKonfaciliKesinMississippiandTexasin2006-2007.TheacKoninvolvedclaimsofforcedlabor,traffickinginforcedlabor,civilRICO,discriminaKon,andfraud.Alanledateamthathandledthefirsttrial,onbehalfoffiveworkers,thattookplaceinJanuaryandFebruary2015beforeafederaljuryinNewOrleans,Louisiana.ThattrialresultedinaverdictforplainKffsonallclaimsagainstalldefendantsandanawardofcompensatoryandpuniKvedamagestotalingover$14million.Thiswasoneofthelargestcasesofitskindeverbroughtandoneofthelargestverdictseverobtainedinthistypeofcase.

AlanisthechairoftheBoardofDirectorsoftheSouthernPovertyLawCenter.

Educa.on•  YaleUniversity,B.A.,magnacumlaude•  HarvardLawSchool,J.D.,cumlaude

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IlanaLubinisacounselinCrowell&Moring'sNewYorkofficeandamemberofthefirm'sCorporateGroup.Ilanafrequentlyrepresentsclientsintheapparel,fashion,retail,luxury,andbeautysectorsregardingcross-borderanddomesKcmergersandacquisiKons,jointventures,andprivateequityinvestments.ShealsorouKnelydraosandnegoKatesintellectualpropertylicensingandothergeneralcorporateandcommercialtransacKons,andshehasexperienceworkingin-houseacrossbusinessunits,includinginconnecKonwithglobalmergerandacquisiKonandlicensingacKvity.Ilana'sbackgroundincludestherepresentaKonofavarietyofcompaniesfromincepKon,includingadvisementwithrespecttomakersrelaKngtoformaKonandstructuring,equityanddebtfinancing,employment,andcommercialleasing.Educa.on•  CornellUniversity,B.S.,policyanalysisandmanagement•  BenjaminN.CardozoSchoolofLaw,J.D.

IlanaLubinCounsel-CorporateCrowell&MoringLLP+1212.895.4224ilubin@crowell.com