Drafting Deal Documents- A Litigation Perspective

Drafting Deal Documents

Drafting Deal Documents

-

-A Litigation Perspective

A Litigation Perspective

If you haven’t downloaded the program

materials, please do so now at

www.kslaw.com/e-lunch/handout

To connect to the

audio

part of the

program please call:

1-888-291-5971

A customer service representative will connect you to the seminar.

For technical assistance at any time

during

the presentation please call:

1-888-865-7469

Biographies

Mark Glasser

Richard Marooney

Mark Glasseris a partner in King & Spalding’s Litigation Practice Group. He represents clients in complex commercial litigation and arbitration matters, principally focusing on the prosecution and defense of claims on behalf of oil and gas companies and financial institutions. His areas of specialization include securities litigation, insurance disputes, business torts, and breach of contract actions. Mr. Glasser also counsels and represents clients in various governmental and regulatory proceedings and investigations.

Richard Marooneyis a partner in the Litigation Practice Group of the New York office of King & Spalding. Mr. Marooney handles complex commercial litigation matters and has extensive experience in business tort litigation, energy-related litigation, international law, class actions and arbitrations.

Ed Kehoeis a partner in the New York Litigation Group of King & Spalding LLP. He has significant experience representing clients in a wide variety of business litigation matters including breach of contract claims, energy litigation, insurance disputes, complex class action and antitrust. Mr. Kehoe regularly represents clients in federal and state court actions, in arbitrations, and before governmental bodies. Clients also rely upon Mr. Kehoe to provide strategic advice for effective and efficient resolution at early stages of a dispute, and to conduct internal investigations when necessary.

Drafting Deal Documents

Drafting Deal Documents

-

-A Litigation Perspective

A Litigation Perspective

1

Drafting Deal Documents –

A Litigation Perspective

Understanding (MOUs)

• Oral modifications to contracts

• Contractual limitations on money damages

• Choosing the law and the forum

• Arbitration versus litigation

LOIs and MOUs

• Can they bind you to a transaction?

• Yes, if you are not careful.

3

What Is an LOI or MOU?

• Could also be an agreement to explore options, narrow the issues, and identify “dealbreakers”

• Theoretically non-binding with respect to proposed transaction (i.e., “mere

proposal”)

How Can an LOI or MOU Bind a

Party to a Transaction?

• Cases are fact-specific, but courts generally consider 4 factors:

– Express language of the agreement (this is paramount)

• Terms such as “non-binding,” “proposal,” and “no obligation” are good

• Terms such as “agreement,” “contract,” “shall perform,” and “firm commitment” are not good

• Terms such as “term sheet” or “status letter” are risky – The existence of material terms/open terms

– Partial performance regarding proposed transaction – The need for a more complete writing

5

How Can an LOI or MOU Bind a

Party to a Transaction?

(continued)

• Question of intent submitted to jury even though LOI stated:

– “[s]ubject to legal documentation.” (Foreca v. GRD Dev. Co., 758 S.W.2d 744 (Tex. 1988))

– “[n]ot intended to be a binding contract.” (Murphy v.

Seabarge, Ltd., 868 S.W.2d 929 (Tex. App. - Houston 1994))

– John Wood Group USA, Inc. v. ICO, Inc., 26 S.W.3d 12 (Tex. App. – Houston [1st_{Dist.], 2000, no pet.)}

EXAMPLE

15. Binding Effect. This Letter Agreement constitutes a summary of the principal terms and conditions of the understanding which has been reached regarding the sale of certain assets to Purchase. It does not address all of the terms and conditions which the parties must agree upon to become binding and consummated. The Purchaser, however, does intend to move forward with its due diligence and expects to expend considerable sums to review the Sellers’ Business. In consideration therefore, the parties have agreed to make certain covenants of this letter binding upon the parties notwithstanding the fact that not all details of the transactions have been agreed upon. Accordingly, it is understood and agreed that this letter is an expression of the parties’ mutual intent and is not binding upon them except for the provisions of paragraphs (4), (7), (9), (10), (11), (12), (13), and (14) hereof.

7

THE EFFECT OF AMBIGUITY

• The issue of “intent to be bound” will go to the jury

• The jury will, with troubling frequency, find that a contract exists when:

1. It is in writing 2. Lawyers drafted it 3. It “looks” legal 4. It is signed

5. Each party spent considerable time and effort in furtherance of it

WHAT NOT TO DO

• DON’T GET CLEVER

– AMBIGUITY IS THE FIRST STEP TOWARD ENFORCEABILITY

• DON’T GET RUSHED

– IF THE DEAL IS SO GOOD, GET IT PROPERLY AND FULLY DOCUMENTED AND EXECUTED

9

WHAT TO DO

Examples:

This document is only a list of proposed points that may or may not become part of an eventual contract. It is not based on any agreement between the parties. It is not intended to impose any obligation whatsoever on either party, including without limitation an obligation to bargain in good faith or in any way other than at arms’ length. The parties do not intend to be bound by any agreement until both agree to and sign a formal written contract, and neither party may reasonably rely on any promises inconsistent with this paragraph. This paragraph supersedes all other conflicting language.

Examples (cont’d):

This letter is not intended to be enforceable by or against, or in any manner binding upon, the undersigned parties, but is intended to be an outline of the major points to be negotiated between the parties as a part of a definitive agreement between the parties relating to the subject matter of this letter. Neither party shall have a good faith obligation to negotiate a definitive agreement, but each of the parties will endeavor to negotiate and execute a definitive agreement relating to the subject matter of this letter on or before ____________________, _____________, and such negotiation and execution is a condition to the formation and enforceability of any agreement relating to the subject matter of this letter. Either party, in such party’s sole and absolute discretion, may terminate the negotiations between the parties at any time, for any reason or for no reason, without any obligations of any kind to the non-terminating party.

* * * *

WHAT TO DO

11

Examples (cont’d):

This document contains an enumeration of certain business understandings the parties have reached, which may become part of a contract if the parties eventually enter into a contract. Standing on its own, however, this document is not intended to impose any obligations whatsoever on either party, with the sole exception of an obligation to bargain in good faith based upon the business understandings enumerated herein. The parties do not intend to be bound by any other agreement until both agree to and sign a formal written contract. Neither party may reasonably rely on any promises inconsistent with this paragraph. Until such a definitive agreement is finalized, approved by the respective boards of directors (which approval shall be in the sole subjective discretion of the respective boards of directors), and properly executed, neither party shall have any obligation to the other (whether under this letter of intent or otherwise), with the sole exception of a legal duty as aforesaid to continue negotiations in good faith towards the goal of reaching such a definitive agreement. This paragraph supersedes all other conflicting language in this document.

Oral Modifications to Contracts

not be modified orally, can it be?

• Sometimes. Yes!

13

Delaware Law

Bartlett v. Stanchfield (1889):

“Attempts of parties to tie up by contract their freedom of dealing with each other are futile.”

New York Law

•

agreement or other written instrument which contains a provision to the effect that it

cannot be changed orally, cannot be

changed by an executory agreement unless such executory agreement is in writing and signed by the party against whom

enforcement of the change is sought or by his agent.”

15

UCC

• N.Y.-U.C.C. § 2.209(b): “A signed agreement which excludes modification or rescission except by a signed writing cannot be otherwise modified or rescinded, but except as between merchants such a requirement on a form supplied by a merchant must be separately signed by the other party.”

• Intended to protect against false allegations of oral modifications.

What Is Needed for

Enforcement?

• Specificity so that there is no doubt

• Consideration?

• Partial Performance

17

Partial Performance

•Rose v. Spa Realty Assoc., 42 N.Y.2d 338 (1977) (partial performance and inducement to rely modifies contract)

•GE Capital Commer. Auto Fin. v. Spartan Motors, 246 A.D.2d 41 (2d Dep’t 1998) (“it is well settled that a written contract may be modified by the parties’ postagreement course of performance”)

•Puma Industrial Consulting v. Daal Assoc., 1986 U.S. Dist. LEXIS 20646 (S.D.N.Y.) (post agreement conduct “can modify an agreement which, by its own terms, requires written modification”)

Contractual Limitations on

Money Damages

• Exclusion of damages for negligence

• Exclusion of consequential damages

• Termination provisions

• Liquidated damages provisions

19

New York Policy

•“A limitation on liability provision in a contract represents the parties’ Agreement on the

allocation of the risk of economic loss…They may later regret their assumption of the risks of non-performance in this manner; but courts let them lie on the bed they made.”

Metropolitan Life Ins. Co. v. Noble Lowndes Int’l, Inc., 643 N.E.2d 504, 507 (N.Y. 1994)

• New York law permits parties to exonerate themselves from their own negligent acts

• Contract language must be clear, concise and unambiguous

• Against public policy to exonerate for gross negligence or intentional wrongdoing

Exclusion of Damages for

Negligence

21

Exclusion of

Consequential Damages

• New York courts routinely enforce exclusions of consequential damages

Direct vs. Consequential

Damages

• Courts struggle in trying to determine what is “consequential” versus what is “direct” or “actual”

• Generally, consequential damages are economic

losses that do not arise within the scope of the immediate transaction, but stem from post-breach losses by the non-post-breaching party that were reasonably foreseeable by the breaching party (e.g., lost profits)

23

Clarity in Drafting is Essential

• As a general matter, “the precise demarcation between direct and consequential damages is a question of fact…[which] must be left for resolution at trial” Roneker v. Kenworth Truck Co., 977 F. Supp. 237, 240 (W.D.N.Y. 1996)

• Court may rule as a matter of law where “the parties have gone a long way in defining the scope of consequential damages in the contract itself…, and there are no material issues of fact, or contract interpretation, as to whether the damages sought constitute direct or consequential damages” Roneker, 977 F. Supp. at 239-240.

• Lesson – clarify the types of damages that the parties consider as consequential

Example

•“in no event, whether based on contract, indemnity, warranty, tort, strict liability or otherwise, shall [client] be liable for special, incidental, exemplary, punitive or consequential damages including, but not limited to, loss of profits or revenue, loss of use of any property, cost of capital, cost of substitute equipment, facilities or services, downtime costs, claims of customers . . . .”

25

Termination Provisions

• Parties are free to provide for the right to terminate their contract

• Courts will not read materiality into the contract if the termination provision fails to specify materiality

• Reflects New York courts’ respect for commercial parties’ right to allocate risk and craft remedies

Liquidated Damages (LDs)

• Parties agree ahead of time on amounts that will be owed in event of contract breach (i.e., $10,000,000)

• If the LDs provision is enforceable, it

makes no difference if the actual damages are higher or lower

27

Enforceable LD Provisions

• The amount provided for must bear a

reasonable relation to the probable loss to be incurred as a result of a breach (as understood by the parties at the time of contracting); and

• The actual damages must be difficult to estimate at the time of contracting

Choice of Law

• Why do many contracts specify New York law and courts?

29

Choice of Law

• Reasons why New York is popular:

– Case law is well-developed

– Parties generally are familiar with New York law – Financial institutions generally require it

– Judges routinely handle complex commercial cases – Jury duty rules in New York

– New York courts give great deference to New York choice of law and venue provisions

NY Choice of Law Statute

• General Obligations Law § 5-1401: Parties may provide in contract that New York law applies “whether or not such contract, agreement or undertaking bears a reasonable relation to this state.”

• Creates exception to general common law rule that choice of law provision must bear a reasonable relation to New York

• Dispute must involve more than $250,000

• Personal service contracts are excluded

• No monetary requirements if there is a substantial relationship between New York and party in transaction

31

New York Forum Selection

Statute

• General Obligations Law § 5-1402: parties may

provide in a contract that any disputes will be resolved in a New York courthouse

• Dispute must involve more than $1 million

Keys to a Successful New York Forum

Selection Clause

• Effective clause generally precludes arguments that New York lacks personal jurisdiction over the defendant and that the forum is

“

”

• Clause should be mandatory rather that

“

”

• Ambiguity will result in additional legal fees 33

Examples of New York Choice of Law

and Venue Provisions

• Choice of Law:

– “Any and all disputes arising out of or relating to this Agreement shall be governed by and construed in

accordance with the laws of the State of New York, without giving effect to principles of conflicts of law.”

• Forum Selection:

– “Each party submits to the jurisdiction of the state and federal courts located in New York City, Borough of Manhattan for any action or proceeding arising out of or relating to this Agreement and expressly waives any objection it may have to such jurisdiction or the convenience of such forum.”

Manhattan State versus

Federal Court

• Traditionally, parties have

selected New York federal courts over state courts to hear their disputes

• Implementation of the Commercial Division in Manhattan Supreme Court has lessened the distinction between litigation in state and federal court

• Six judges hear only commercial disputes 35

Manhattan Supreme Court

Commercial Division

• Cases qualify for Commercial Division if a party seeks compensatory damages of over $125,000 and principal claims involve:

Manhattan Supreme Court

Commercial Division’s Scope

business tort or statutory violation arising out of business dealings

– transaction governed by the UCC

– complicated transactions involving commercial real estate

– shareholder derivative or commercial class actions

– commercial banking transactions

– internal affairs of business organizations or liability to third parties

– malpractice by accountants or actuaries (but not attorneys)

– complicated environmental insurance coverage litigation

37

Commercial Division and

Federal Court Distinctions

• Certain distinctions still exist between the Commercial Part and Federal Court:

– Some Southern District of New York judges proceed on an expedited basis and tend to accelerate pre-trial proceedings – Out of state, non-party discovery generally is easier in

federal court

– Procedural advantage of the Federal Rules of Civil Procedure

Arbitration v. Litigation

•Domestic arbitration

•International arbitration

39

Potential Advantages to

Arbitration versus Litigation

• Expert arbitrators

• Confidentiality

• Speed and cost

• Finality of awards

Potential Disadvantages to

Arbitration versus Litigation

• Multi-party disputes

• Awards not binding on third parties

• Usually less “discovery” (certainly less in international arbitrations)

• Appeal rights

• A compromise solution?

41

Follow-Up

• Please let us know what you thought of this presentation

• Subsequent questions? Please contact:

– Ed Kehoe (212) 556-2246 [email protected] – Rich Marooney (212) 556-2242 [email protected] – Mark Glasser (713) 751-3212 [email protected] ₄₃