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Contract Review, Negotiation & Analysis: Francis R. Powell Nelson Mullins Riley & Scarborough LLP
Contract Review, Negotiation & Analysis: Francis R. Powell Nelson Mullins Riley & Scarborough LLP
Analysis
Francis R. Powell
Nelson Mullins Riley & Scarborough LLP
1
FREQUENTLY LITIGATED CONTRACT ISSUES
2
Arbitration Clauses
• “It is well established in Massachusetts that there is a strong
public policy favoring arbitration. See Bureau of Special
Investigations v. Coalition of Public Safety, 430 Mass. 601, 603
(2000).
• “Where the contract contains an arbitration clause, there is a
presumption of arbitrability in the sense that ‘an order to
arbitrate the particular grievance should not be denied unless it
may be said with positive assurance that the arbitration clause
is not susceptible of an interpretation that covers the asserted
dispute. Doubts should be resolved in favor of coverage …”
See Drywall Systems, Inc. v. ZVI Construction Co., Inc., 435
Mass. 664, 666-67 (2002)
3
Draft such clauses carefully and specifically. Problems arise
when clauses are prepared without considering implications
of a broad application.
It is not enough to simply state “disputes arising under the
agreement shall be settled by arbitration.” This leaves too
many unanswered questions: when? where? before whom?
Proceed at your own peril when you deviate from the
standard arbitration clause. Recommended approach is use
the standard form arbitration agreement used by the
American Arbitration Association.
4
“Any controversy or claim arising out of or relating to this
contract, or the breach thereof, shall be settled by arbitration
administered by the American Arbitration Association in
accordance with its Commercial Arbitration Rules, and
judgment on the award rendered by the arbitrator(s) may be
entered in any court having jurisdiction thereof.” American
Arbitration Association, Commercial Arbitration Rules and
Mediation, Standard Arbitration Clause
5
Benefits of using AAA standard clause:
• It makes clear that all disputes are arbitrable and
minimizes delay tactics and court actions to avoid the
arbitration process.
• It is self-enforcing. Arbitration can continue despite an
objection from a party, unless the proceedings are stayed
by court order or by agreement of the parties.
• It provides a complete set of rules and procedures.
• It provides for the manner of selecting arbitrator(s).
• It provides for enforcement of the award. The award can
be enforced in any court having jurisdiction, with only
limited statutory grounds for resisting the award.
6
Specify whether you are proceeding under the
Massachusetts Arbitration Act (G.L. c. 251) or the Federal
Arbitration Act.
State whether a panel of one or three arbitrator(s) is to be
selected.
State where the arbitration will occur.
State whether attorney fees are recoverable by the
prevailing party.
7
BEWARE: Arbitral awards are “nearly impervious to judicial
oversight.” Teamsters Local Union No. 42 v. Supervalu, Inc.,
212 F.3d 59, 61 (1st Cir. 2000).
Even if “a reviewing court is convinced that the arbitrators
committed error-even serious error-does not justify setting
aside the arbitral decision. Cytyc Corp. v. DEKA Products Ltd.
Partnership, 439 F.3d 27 (1st Cir. 2006).
8
Recent developments regarding enforceability of class-action
waivers in arbitration agreements.
AT&T v. Concepcion, 131 S.Ct. 1740 (2011). U.S. Supreme
Court upheld an arbitration provision that precluded class
actions.
American Express Co. v. Italian Colors Restaurant, 133 S.Ct.
2304 (2013) the Supreme Court further clarified, and upheld,
the enforceability of such waiver clauses.
Feeney v. Dell, Inc., 466 Mass. 1001 (2013). SJC applies the
reasoning in AT&T and Amex, to uphold the enforceability of
a class action waiver clause.
9
Supreme Court of Delaware
• "Whether an arbitration provision is branded 'narrow' or
'broad,' the only question that the court should decide is
whether the subject matter in dispute falls within it. If
the subject matter to be arbitrated is the calculation of an
earn-out, or the amount of working capital, or the
company's net worth at closing, all issues as to what
financial or other information should be considered in
performing the calculation are decided by the arbitrator.
Viacom International, Inc. v. Winshall, 72 A.3d 78 (Del.
2013)
10
AAA "Optional Appellate Arbitration Rules" Effective November
1, 2013
• The parties must have provided for the appeal of an
arbitration award in their contract, or they can stipulate to
appeal.
• A party may appeal on the grounds that the Award is based
upon:
– An error of law that is material and prejudicial; or
– Determinations of fact that are clearly erroneous.
• Submitted to an Appeal Tribunal
• Appeal Tribunal can adopt the underlying award, substitute its
own award, or request additional information. It may not
order a new arbitration hearing or send the case back to the
original arbitrator.
11
Contract vs. Preliminary Negotiations?
• To create an enforceable contract, “there must be agreement
between the parties on the material terms of the contract, and
the parties must have a present intention to be bound by that
agreement.” Situation Mgt. Sys., Inc. v. Malouf, Inc., 430 Mass.
875, 878 (2000).
• “The parties must . . . have progressed beyond the stage of
‘imperfect negotiation.’” Lafayette Place Assocs. v. Boston
Redevelopment Auth., 427 Mass. 509, 517-518 & n.9.
• “Businessmen would be undesirably inhibited in their dealings if
expressions of intent and the exchange of drafts were taken as
legally binding agreements.” Tull v. Mister Donut Dev. Corp., 7
Mass. App. Ct. 626, 632 (1979).
• **** If you do not intend to be bound, make sure you include
language to that effect.
12
Under Massachusetts law, parties to a preliminary
agreement may provide that they do not intend to be bound
until execution of a more detailed and formal agreement.
See McCarthy v. Tobin, 429 Mass. 84, 87 (1999).
13
Example: “The purpose of this document is to memorialize
certain business points. The parties mutually acknowledge
that their agreement is qualified and that they, therefore,
contemplate the drafting and execution of a more detailed
agreement. They intend to be bound only by the execution of
such an agreement and not by this preliminary document.”
Goren, 25 Mass. App. Ct. at 177.
14
The fact that parties contemplate the execution of a final written
document justifies a strong inference that the parties do not intend to be
bound by earlier negotiations or agreements until the final terms are
settled. Rosenfeld v. United States Trust Co., 290 Mass. 210, 216 (1935).
15
See Novel Iron Works, Inc. v. Wexler Construction Co., Inc.,
26 Mass. App. Ct. 401 (1988). Court found that the parties
had intended to execute a formal contract but still found
agreement existed before formal contract executed.
“[i]t does not, however, follow conclusively from that fact the
parties did not intend to be mutually bound to the terms
agreed upon on that date until such time as the formal
contract was executed.” Id.
16
Use words that CONTROL the creation of a power of
acceptance.
Educate employees and sales force that their STATEMENTS
CAN BIND the company.
Employees need to be aware of the legal consequences of
their WORDS and CONDUCT.
Consider having standardized forms and/or approval
mechanisms that must be complied with before someone
can say “we have a deal.”
Be careful in correspondence, make clear the documents is a
“proposal” or a "draft."
17
Contract Ambiguities
• The general rule in interpreting contracts is that they are to be
enforced according to their explicit language because the parties’
expression reflects the parties’ intent. See B.J. Harland Electrical
v. Granger Brothers, 24 Mass. App. Ct. 506, 513-14 (1987).
• “[A]n agreement is to be ‘construed so as to give it effect as a
rational business instrument and in a manner which will
effectuate the intent of the parties[;]’ the parties' intent ‘must be
gathered from a fair construction of the contract as a whole and
not by special emphasis upon any one part.’ ” Kingstown Corp. v.
Black Cat Cranberry Corp., 65 Mass. App. Ct. 154 (2005) (internal
citations omitted).
• Every word in a contract should be given force so far as
practicable. Lexington Ins. Co. v. All Regions Chemical Labs, Inc.,
419 Mass. 712 , 713 (1995).
18
Use words that have a straightforward meaning; if you can’t,
then use well defined terms. Be sure to define Technical
Terms. When such terms are not defined, that is when
ambiguities arise.
19
No Ambiguity
• Interpretation of unambiguous language in a contract is a question of law
for the court to decide. Edwin R. Sage Co. v. Foley, 12 Mass. App. Ct. 20,
28 (1981).
Ambiguity
• Ambiguity exists when the language of the contract is susceptible of
more than one meaning. Jefferson Ins. Co. of N.Y. v. Holvoke, 23 Mass.
App. Ct. 472, 474 (1987).
20
Parol Evidence
21
Shareholder meetings to be held "on at least an annual
basis" – did this mean once per calendar year or within 12
months of last meeting?
22
"Includes" vs. "Including, but not limited to"
23
"I will not hold [Defendant] responsible for the hair
reduction or skin treatment results I experience." Elsesser
v. Sleek, Inc., 30 Mass. L. Rptr. 122 (2012)
24
Construction Against the Draftsman
25
Construction and Interpretation of Agreement
• Should any provision of the Agreement require
interpretation or construction, the parties hereto agree
that the court, administrative body, or other entity
interpreting or construing the Agreement shall not apply a
presumption that the provisions herein shall be more
strictly construed against one party by reason of the rule
of construction that the provisions of a document shall be
more strictly construed against the party who itself or
through its representatives prepared same; it being
agreed that the parties and their respective attorneys
have fully participated in the preparation of all provisions
of the Agreement.
26
Oral Modification of Contract
• [A] provision that an agreement may not be amended orally
but only by a written instrument does not necessarily bar
oral modification of the contract.” Cambridgeport Sav. Bnk
v. Boersner, 413 Mass. 432 (1992).
• “But in order to support the existence of an oral
modification, the parol evidence must be sufficiently
weighted and of competent probity to present a material
issue for trial; that is, the parol evidence must be of
sufficient strength to present an ambiguity between the
actual conduct of the parties and the contract.” Wells Fargo
Business Credit v. Environamics Corp., 77 Mass. App. Ct. 812
(2010)
27
Sample Merger or Integration Clause
ENTIRE AGREEMENT; AMENDMENTS
• This Agreement represents the final, entire agreement among
the parties hereto and supersedes any and all prior
commitments, agreements, representations and
understandings, whether written or oral, relating to the subject
matter hereof and may not be contradicted by evidence of
prior, contemporaneous, or subsequent oral agreements of the
parties hereto. There are no unwritten agreements between
the parties hereto. This Agreement can be amended, modified,
supplemented, extended, terminated, discharged or changed
only by an agreement in writing which makes specific reference
to this Agreement and which is signed by all parties hereto.
28
Incorporation By Reference Clauses
29
• Applicable to arbitration provisions. See Travelers Cas.
and Sur. Co. of America, Inc. v. Long Bay Management
Co. 58 Mass. App. Ct. 786 (2003)
30
Be sure to obtain and review all of the incorporated
documents.
31
Indemnification and Related Issues
• Duty to Defend/Control of Defense (Insurance context)
– The duty to defend is broader than the duty to indemnify. In
general, if the allegations against an insured are “reasonably
susceptible of an interpretation that they state or adumbrate
a claim covered by the policy terms, the insurer must
undertake the defense.” See e.g., Essex Ins. Co. v.
BloomSouth Flooring Corp., 562 F.3d 399 (1st Cir. 2009)
– “In order for the duty of defense to arise, the underlying
complaint need only show, through general allegations, a
possibility that the liability claim falls within the insurance
coverage. There is no requirement that the facts alleged in
the complaint specifically and unequivocally make out a claim
within the coverage.” Sterilite Corp. v. Continental Cas. Co.,
17 Mass. App. Ct. 316 (1983).
–
32
Indemnification and Related Issues (cont.)
• The duty to defend is based not only on the facts alleged in the
complaint but also on those facts which are known by the
insurer that may aid in its interpretation of the allegations in
the complaint. See Boston Symphony Orchestra, Inc. v.
Commercial Union Ins., 406 Mass. 7 (1989).
33
Reservation of Rights
• The duty to defend under a reservation of rights does not
obligate the insurer to pay all attorney's fees incurred by
the insured, regardless of the reasonableness of those
fees. Rather, the duty to defend obligates the insurer to
pay the full amount of reasonable attorney's fees
incurred. See Magoun v. Liberty Mutual Ins. Co., 346
Mass. 677 (1964);
• Where insurers agreed that they had a duty to defend,
but under a reservation of rights, the insurers lost the
right to retain counsel for the insured, which now had the
right to defend and control the defense of the lawsuit.
34
The insurer cannot “reserve its rights to disclaim liability in a case and
at the same time insist on retaining control of its defense.” Three
Sons, Inc. v. Phoenix Ins. Co., 357 Mass. 271, 275-277 (1970).
See Watts Water Technologies, Inc. v. Fireman's Fund Ins. Co., 2007
WL 2083769, 22 Mass. L. Rptr. 659 (Mass. Super. 2007) (Gants, J.) for
a discussion about an insurer’s obligation to pay for local and national
counsel, and to pay market rates as opposed to “panel rates.”
35
Duty to Defend/Control of Defense (Non-insurance context)
• No Massachusetts case law directly on point with respect to
indemnitor’s right to control defense/select counsel in the
commercial context where the contract language states
“defend and indemnify.” Look to insurance law for guidance.
• “The inclusion of attorneys' fees as an expense for which there
shall be indemnity does not automatically impose a duty to
defend similar to that inherent in an insurance contract.” Miley
v. Johnson & Johnson Orthopaedics, Inc., 41 Mass. App. Ct. 30
(1996)
• If the indemnity provision makes no mention of any duty to
defend, indemnitee must provide its own defense, but it is still
entitled to recover its attorneys fees.
36
Under Massachusetts law, when a right to indemnify is
conferred the indemnitee may recover reasonable legal fees
and costs incurred in resisting a claim within the compass of
the indemnity. See Amoco Oil Co., v. Buckley Heating, 22
Mass. App. Ct. 973 (1986).
38
Recovery of Attorneys' Fees In Action To Enforce
Indemnification Obligation (Commercial Context)
39
See Great Northern Ins. Co. v. Paino Associates, 457 F. Supp.
2d 104 (D. Mass. 2006) (“The agreement in question does not
overcome a presumption against fee-shifting nor does it
convert [Indemnitor] from a commercial indemnitor into a
liability insurer. This Court therefore holds that the contract
in the instant case cannot be read to include an agreement
to pay fees and expenses incurred in pursuit of a declaratory
judgment.”)
40
Assignment of Contractual Indemnification Rights
41
Choice of Law Provisions
42
Massachusetts courts have repeatedly held that claims of fraudulent
inducement do not fall within the scope of contractual choice-of-law
provisions. See, e.g., Kitner v. CTW Transport, Inc., 762 N.E.2d 867
(Mass. App. Ct. 2002)
Parties frequently battle over whether c. 93A claims are excluded
when another forum’s law is specified to govern the contract.
Availability of c. 93A remedy depends on whether claim is contract or
tort based.
“[W]hen parties agree that ‘contract related’ claims will be tried
under, say, the law of California, they do not mean that a claim of
‘serious' or ‘rascal-like’ breach of contract [recognized under Chapter
93A] will be tried under the law of Massachusetts.” Northeast Data
Sys., Inc. v. McDonnell Douglas Computer Sys. Co., 986 F.2d 607 (1st
Cir. 1993).
43
Forum Selection Clauses
44
Exclusive vs. Permissive Forum Selection Clauses
45
Implied Conditions
46
Related but different concept is implied covenant to use best
efforts.
Sonoran Scanners, Inc. v. Perkinelmer, Inc., 585 F.3d 535 (1st. Cir
2009) (asset purchase agreement containing earn out provisions)
Court concluded that Buyer had an implied obligation to use
reasonable efforts to develop and promote Seller’s technology.
Court rejected Buyer’s argument that Massachusetts law
concerning implied obligations should be limited to exclusive
licensing arrangements, and that an implied obligation is only
appropriate where there is no other consideration supporting the
existence of a contract, and not, as here, where Seller had already
paid $3,500,000 at closing.
47
Prejudgment Interest
• Interest added to damages from contract actions is governed
by G.L. c. 231, § 6C, whose purpose is “to compensate a
damaged party for the loss of use or the unlawful detention of
money.” Conway v. Electro Switch Corp., 402 Mass. 385, 390
(1988).
• Unless otherwise specified in the contract, interest shall be
added to the damages at “the rate of twelve per cent per
annum from the date of the breach or demand.” G.L. c. 231, §
6C.
• If neither date is established, then the date of commencement
of the action controls.
• Consider whether to provide a specific (lower) interest rate in
the agreement.
48
Statutes of Limitations
49
Contracts “Under Seal” 20 year SOL based on c. 260, sec. 1.
50
Damages Limitation Clauses
51
Liquidated damages
• “Where actual damages are difficult to ascertain and where the sum
agreed upon by the parties at the time of the execution of the
contract represents a reasonable estimate of the actual damages,
such a contract will be enforced. Liquidated damages will not be
enforced if the sum is ‘grossly disproportionate to a reasonable
estimate of actual damages’ made at the time of contract formation.”
Kelly v. Marx, 428 Mass. 877 (1999)
• Caution - A liquidated damages clause does not preclude other
remedies available at law or equity absent the clear intention of the
parties to the contrary.
• A court will permit recovery under alternative remedies where the
intention of the parties, as expressed through the terms of the
contract, liquidates some, but not all, of the damages. North Am.
Consol., Inc. v. Kopka, 644 F. Supp. 191 (D. Mass. 1986).
• *** Include terms “sole and exclusive remedy.”
52