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The Logic of Legal
Agreements – Building a
Legal Reasoner
William S. Veatch
Website: www.mwnmathwithoutnumbers.com
Amazon author page: www.amazon.com/author/williamveatch
WILLIAM S. VEATCH
Copyright © 2016-2021, by William S. Veatch.

All Rights Reserved. Moral rights asserted.
ISBN: 9798468533161
DEDICATION
This book is dedicated to the memory of my parents, Richard and Lorraine,

and my brother David; and to my wife Debbie, and our three children
Christina, Will, and Margaret.
CONTENTS
Preface i
1. Introduction to Contracts as Logic Equations 1
1.1. The Importance of a Firm Foundation in Math and 1

Logic
1.2. A Sentence Reflects a Relationship Between Two Ideas 3
1.3. The Importance of the Truth Value of a Sentence 5
1.4. Sentence Types and Their Relationship to Truth Value 6
1.5. Truth Value Equations 8
1.6. The Rule of Substitution 9
1.7. Sentence “Short Names” as a Proxy for Full Sentences 9
1.8. References, Historical Notes, and Further Reading 10
2. The Starting Point: The Default Equation 11
2.1. Compliance Memorandum v. Event of Default 11

Analysis
2.2. Three Primary Components: Breach of Representation 12

OR Breach of Covenant OR Material Adverse Event
2.3. Truth Value Equations 12
2.4. Writing a Default Equation as an IF-THEN Statement 14
2.5. Incorporating Truth Value Data from Outside the 15

Contract
3. Adding Representations to the Default Equation 17
iv
WILLIAM S. VEATCH
3.1. Structure of Representations 17
3.2. Bringdown of Representations 19
3.3. Incorporation of Data from Third-Party Sources 19
3.4. Classification of Representations 19
3.5. How to Use a Truth Value Equation; Rules for 21

Simplification
3.6. Updated Default Equation 25
3.6.1. Simplified Logic Equation 25
3.6.2. Expanded Logic Equation 25
3.6.3. Logic Equation with Sentence Short Names 25
4. Adding Covenants to the Default Equation 28
4.1. Test Truth Value as of a Determination Date 29
4.2. Notice and Opportunity to Cure 31
4.3. Classification of Covenants 31
4.4. Sample Truth Value Equation 32
5. Adding Material Adverse Events to the Default Equation 37
5.1. Covenant v. Event of Default 37

WILLIAM S. VEATCH
5.2. Classification of Material Adverse Events 37
5.3. Sample Truth Value Equation 38
6. Adding Other Sentence Types 42
6.1. Remedies and Other Grants of Rights 42
6.2. Warranties and Indemnities 45
6.3. Assumption of Risk, Disclaimers, and Waivers of 48

Rights
6.4. Assignments and Directions/Orders 50
6.5. Mutual Agreement, Statement of Consideration, 51

Conditions, and Rules of Interpretation
6.6. Definitions 54
7. Portfolio Analysis Using Logic Equations 61
7.1. Aggregating Individual Contract Data 61
7.2. Correlations of Customer Data with Contract Terms 61

WILLIAM S. VEATCH
7.3. Automated Diligence for Acquisitions, Securitizations, 62

and Regulatory Compliance
7.4. Mass Amendments 62
8. Other Examples of What a Contract Equation Allows Us to Do 64
8.1. Improving the Quality of Legal Documentation 64
8.2. Auto-Generated Compliance Memorandum and 65

Checklists
8.3. Compare Standard Forms from Different Lenders 66
8.4. Preliminary Legal Advice – Building a Legal Reasoner 66
9. Conclusion 72
9.1. Why Convert Contracts to Logic Equations? 72
9.2. Incorporation of Data from Outside the Contract 73
9.3. What’s Next? 73
Bibliography 74
Index 85
WILLIAM S. VEATCH
PREFACE
In this book, we demonstrate how we can turn an entire contract into a single
logic equation at the Sentence Level. (The third book in this series will break
down Sentences at the Clause, Phrase, and Core Idea Level as well.)
Understanding Sentence Level logic is a necessary first step when building a
legal reasoner that can process questions about the contract terms, such as
whether an event of default has occurred. The challenge is that a logic
equation requires that the statements used in the logic equation have a Truth
Value, i.e., the statement must be either True or False, but it cannot have an
undetermined Truth Value. What we will see is that some sentences in a
contract (e.g., Representations) have a definite Truth Value, whereas other
sentences (e.g., Covenants) generate statements with Truth Value over time.
For example, as time passes, either the parties were or were not in compliance
with the Covenants, so we can generate statements to that effect. Sentences
with a definite Truth Value are what we refer to as Propositions in Classical
Logic.
We begin with the fundamental equation for any contract, a “Default

Equation,” where “+” means “OR” and “ ” means “NOT” in logic terms:
 Default = Representation + Covenant + Material Adverse

Event
In other words, a Default occurs when either there is a breach of a

Representation, a breach of a Covenant, or a Material Adverse Event.
From there, we will examine each of the 17 types of Sentences that are
commonly found in any contract and demonstrate how each contributes to
the Default Equation, either by providing Propositions that we can process
directly in our Default Equation or by adding to the structure of the Logic
Equation itself. With the Default Equation, as well as other Logic Equations
that we can generate from the contract, we can use a software application to
draw conclusions from the contract data, such as determining whether a
Default has occurred or to plan to ensure that a Default does not occur in
the future.
When we are planning for the future, the focus of attention is on

preventing a Default from ever occurring, so we may want to generate a
“Compliance Memorandum” outlining what the borrower/lessee/seller in a
finance contract is allowed or not allowed to do. When reviewing past events,
the focus shifts to determining whether an Event of Default has occurred.
i
WILLIAM S. VEATCH
The equation is the same, but the focus shifts from looking forward on the
Timeline to looking backwards on the Timeline. From a data and logic
standpoint, as each moment passes, a new Set of compliance data is
generated: either the parties were in compliance or they were not.
This book focuses on the contract logic at the Sentence level. The third
book in the Series, The Mathematics of Language, will break down sentences
further and examine contract logic at the Clause, Phrase, and Core Idea level
as well.
There are two complicating factors that require us to compile data from
outside of the contract. The first is that we need a way to determine whether
a Proposition is True or False. One way to handle this issue is to simply have
a party enter “True” or “False” for each Proposition, but technology offers
us a myriad of other options. For example, bank records of payments,
Secretary of State records of business filings, and SEC records of material
events could all be loaded automatically into a contract “Performance
Database.” The AI software application could read the contract, together
with the Performance Database to determine whether a Default occurred as
a factual matter.
The other issue is that many of the legal rules governing contracts are
not found in the contracts, but rather in statutes like the Uniform
Commercial Code (“UCC”) in the United States. Certain provisions of the
UCC may not be overridden by contract, so we need a “Legal Rule
Database” of legal provisions outside of the contract that impact the
interpretation of the contract.
With these three Databases of Structured Data, i.e., the contract

Database, the Performance Database, and the Legal Rule Database, we can
build a robust AI software application that can provide preliminary legal
advice for review by a licensed attorney.
Anyone wishing to contact the author may send a message to

MWNmathwithoutnumbers@gmail.com.
Disclaimer: This book does not provide legal advice. For legal advice, you
must consult with an attorney licensed to practice in your jurisdiction.
WILLIAM S. VEATCH
1. INTRODUCTION TO CONTRACTS AS LOGIC
EQUATIONS
In this book, our goal is to demonstrate how we can represent an entire
contract as a single “Logic Equation” using AND, OR, and NOT logic.
We focus on the logic of the ‘Sentences” that comprise the “Contract.” In
book three in this Series, The Mathematics of Language, we will break down
Sentences into their component parts and look at the logic of Clauses,
Phrases, and Core Ideas as well.
1.1. The Importance of a Firm Foundation in Math and Logic
The approach taken in this book is to apply the mathematics of Boolean

Algebras and Boolean Lattices of multiple Atoms to legal analysis. The
reason for choosing this system of math is explained in the author’s other
books, but in essence we chose this system because it works for legal analysis,
whereas other options fell short of the mark. Note that we are using an
algebra of “multiple Atoms,” not the Boolean Algebra with one Atom that
most people are familiar with, i.e., (0,1). The Boolean Algebra of one Atom,
obviously, has been extremely powerful in computer science focused on
processing 0’s and 1’s, but for the logic of Ideas generally, multiple Atoms
are required to process Ideas and the relationships among Ideas.
As a result, as we build our Contract Logic Equation, we will strictly

follow the rules of Boolean Algebras. We do not explain the math in this
book, but for those who are interested, the author’s other books along with
the books cited in the bibliographies to those books, explain the math in
detail, including:
 A mathematics of single Ideas based upon Boolean Algebras and
1
WILLIAM S. VEATCH
Boolean Lattices of many Atoms.

 A Boolean Algebra of Relations, which is a Boolean Algebra where
the Atoms are Ordered Pairs of Ideas.
 A Boolean Algebra of Ordered Triples and higher order Sets. (For
example, we can use Ordered Triples to model the Categorical
Syllogism.)
This “Need to Know” series of books is intentionally light on math, so

as to make the book more accessible to lawyers and business executives who
do not have a background in discrete math.
For those who want to know more about the math, we use primarily two
mathematical tools to enter contract Data into our database of contract
information:
 Partitions: A division of an Idea into subparts that are Exhaustive

(i.e., the sum of the parts equals the whole) and Pairwise Disjoint (i.e.,
the subparts do not overlap).
 Chains: A chain is essentially any set of Ideas that we place in a
specific order. We use Chains for Classification, Ordering, and for
Argument Chains, like an IF-THEN Statement.
The following books describe Partition and Chain math in detail.
Foundation in Math and Logic
The foundation in math and logic for this book on Legal Reasoning, is
found in the author’s previous books listed below and available at
https://www.amazon.com/author/williamveatch , and in the books cited
in the bibliographies contained in those books:
Math Without Numbers – The Mathematics of Ideas, [Veatch 2016]: This book
provides the foundation for a mathematics of ideas based on Set Theory, and
in particular the mathematics of Boolean algebras and Boolean lattices.
Propositional Logic as a Boolean Algebra, [Veatch 2017]. In traditional

propositional logic, Propositions have only one Attribute that we care about,
i.e., Truth Value = (True + False). In Math Without Numbers, however, we
look at how individual Ideas (and Relations consisting of Ordered Pairs as
well) can generate True/False Propositions. In this book, the author
2
WILLIAM S. VEATCH
develops an interpretation of propositional logic as a Boolean Algebra of

multiple Atoms, not just 0’s and 1’s.
The New Logic of the Law, [Veatch 2018]: In this book, the author develops a
new “Logic of Lattices” to apply to the study and practice of law.
Using the Logic of Lattices to Draw Inferences from Structured Data, [Veatch
Inferences 2021]: In this book, the author develops a systematic way to draw
Inferences, including generating True/False Propositions, from an existing
Knowledge Representation Structure or Knowledge Base.
Ontology of Legal Contracts – Focus on Finance, [Veatch 2021]: Here, we start the
process of developing a detailed Ontology or classification system for legal
contracts, with a focus on finance contracts.
Demonstration Software Applications
See also, the demonstration software applications at:

http://www.mwnmathwithoutnumbers.com/software-applications.html .
These are not production quality software applications, but rather are
simple applications for educational purposes that demonstrate some of the
ideas discussed in the books.
1.2. A Sentence Reflects a Relationship Between Two Ideas
From a Set Theory perspective, a Sentence reflects the relationship between

two Ideas. In practice, there are two ways that we can reflect the relationships
between any two Ideas: Single Sets and Relations.
In the case of Single Sets, there are only five ways that any two Sets
can be related to one another. See, Fig. 1-1.
3
WILLIAM S. VEATCH
We can write the Single Set relationships as follows:
 Identical: 𝐴 𝐵
 Disjoint: 𝐴 Ω 𝐵
 Partially Overlapping (POL): 𝐴 Π 𝐵
 Superset: 𝐴 ⊃ 𝐵
 Subset: 𝐴 ⊂ 𝐵
In the case of Relations, we use Ordered Pairs, so the notation is

different.
 R = (x, y): xRy means x “is related to” y, where R is a Relation

such as “is a parent of”, “is a subsidiary of”, or “is a subset of”.
It is important to master the difference between Single Sets and Ordered

Pairs. We use both, but in calculations we cannot mix the two together.
Relations are used widely in Semantic Web technologies like RDF and OWL,
so it is important to track whether you are working with Single Sets or
Relations (i.e., Ordered Pairs).
An easy example to illustrate the differences between Single Sets and

Ordered Pairs is the following:
4
WILLIAM S. VEATCH
 Equipment and Goods:

o Single Sets:
 Subset: 𝑥 ⊂ 𝑦 𝐸𝑞𝑢𝑖𝑝𝑚𝑒𝑛𝑡 ⊂ 𝐺𝑜𝑜𝑑𝑠
o Relations:
 R = (x, y): xRy = (Equipment R Goods), where R
= “is a type of”
 Operating Company and Special Purpose Vehicle (SPV)

o Single Sets:
 Disjoint: 𝑥 Ω 𝑦 Operating Company Ω SPV
o Relations:
 R = (x, y): xRy, where R = “is a parent of”
 Operating Company “is a parent of ” SPV
In the first example, we can use either Single Sets or Relations to

represent the “Subset” relationship between two Sets. In the second
example, however, the fact that Operating Company and SPV are Disjoint
does not tell us much about how the companies are related. The Relation
xRy, however, where R = “is a parent of”, tells us what we need to know in
a very simple, convenient manner. We discuss the mathematics of Relations
in detail in the book [Veatch Inferences 2021], but for present purposes the
reader just needs to know that sometimes we will use Single Sets and
sometimes we will use Relations.
No matter how complex a Sentence may become in a legal contract, we

will see that we can always analyze the Sentence in essence as the relationship
between two Ideas. (Sometimes we will need to break down run-on
Sentences into two or more Simple Sentences, but good legal drafting should
avoid run-on Sentences.)
1.3. The Importance of the Truth Value of a Sentence
One of the central themes of this book is that a Sentence must have a
determinable Truth Value (i.e., it must be True or False, but not both) for us
to use it in a Logic Equation. There are many different ways to classify
Sentences, but in Classical Logic there are five Categories of Sentences:
 Declarative, i.e., Propositions (e.g., Representations)

 Non-Declarative
o Interrogative, i.e., questions (rarely used in contracts)
5
WILLIAM S. VEATCH
o Exclamatory (rarely used in contracts)

o Imperative (e.g., covenants)
o Performative (e.g., remedies and grants of rights)
See, [Kreeft 2010] at 142. Fig. 1-2 shows a visualization of the Sentence types.
Fig. 1-2
Of the five types of Sentences, only Declarative Sentences, i.e.,

Propositions, have a determinable Truth Value. Therefore, one of the
primary tasks in this book will be to determine which Sentences in a Contract
have a Truth Value and which do not. For those that do not, we will see that
we can still use them in a variety of ways to generate or process Propositions:
 Proposition Generators: We can use some Sentences, such as

Covenants, to generate True/False Propositions.
 Element of a Legal Test: We can use other Sentences to generate
the elements of a legal test that we can use in a Logic Equation.
1.4. Sentence Types and Their Relationship to Truth Value
When we analyze the Sentences of a Contract and categorize them by their

“Function” in the Contract, we find that there are 17 frequently used
categories.
Sentence Partition = Function: (Primary + Secondary)
Primary: (Covenant + Representation + Event of Default

+ Remedy + Condition + Mutual Agreement + Warranty
+ Indemnity)
6
WILLIAM S. VEATCH
Secondary: (Statement of Consideration + Definition +

Grant of Rights + Disclaimer + Waiver + Rule of
Interpretation + Direction/Order + Assignment +
Assumption of Risk)
Some Sentence types constitute Propositions that have an

ascertainable Truth Value, but others are used to generate or process
True/False Propositions that we can use in our Contracts Equations. Tables
1-1 and 1-2 show the Category, as defined in Classical Logic, of each of the
17 Sentence Function types.
Table 1-1 – Primary Sentence Functions

Sentence Function Proposition? Category in Classical Logic
Y/N
Covenant N Imperative; command. As time passes,
the Covenant gives rise to a Set of
True/False Propositions, i.e., either the
party did or did not perform the covenant
as promised.
Representation Y Declarative. The fact represented is
either True or False.
Event of Default N Performative. We use the Events of
Default to create the Default Equation.
Remedy N Performative.
Condition N Performative. A Condition is a
Subordinate Clause typically functioning
as an Adverbial from a Grammar
perspective. “If X, then …” As time
passes, it can give rise to a Proposition.
Mutual Agreement (facts Y Declarative. Statements agreed to by
or rights/obligations) Mutual Agreement are Propositions that
are deemed to be True.
Warranty: (express + N Performative.
implied)
Indemnity N Imperative; command.
7
WILLIAM S. VEATCH
Table 1-2 - Secondary Sentence Functions

Sentence Function Proposition? Category in Classical Logic
Y/N
Statement of Y Declarative. Statement of Consideration
Consideration is a Proposition that is deemed to be
True.
Definition Y Declarative. Definitions are
Propositions that, by mutual agreement,
are always True for purposes of the
contract.
Grant of Rights N Performative. Grants of Rights are
similar to Remedies. We can generate a
related True/False Proposition, e.g.,
“Lender has the right to [take possession
of the collateral] …”
Disclaimer N Performative.
Waiver N Performative.
Rule of Interpretation Y Declarative. A Sentence that is always
True.
Direction/Order N Imperative; command. As time passes,
the Direction/Order gives rise to a
True/False Proposition, i.e., either the
party did or did not obey the command.
Assignment N Performative.
Assumption of Risk N Performative.
As we proceed to flush out and expand our Contract Equation, we will

see how we can use Function types such as Disclaimers, Waivers, and
Assignments, and Assumptions of Risk, to generate Propositions or as
elements of a definition or cause of action.
1.5. Truth Value Equations
As we proceed through the book, we will demonstrate how to create Contract

Equations consisting of Truth/False Propositions. The following is an
example of the fundamental Contract Equation, the “Default Equation”:
 Default = Representation + Covenant + Material Adverse

Event (MAE)
The equation states that there is a Default if there is a breach of a

Representation, a breach of a Covenant, or a Material Adverse Change. Once
we know the Truth Value of each of the three Terms in the equation, we can
create a “Truth Value Equation.” For example, if the Representation is
True, the Covenant is False (i.e., was breached), and the Material Adverse
Event is False, then we have the following Truth Value Equation:
8
WILLIAM S. VEATCH
 Default Truth Value = Representation + Covenant + MAE =
True + False + False =
False + True + False =
True
In Chapter 3, we will review in detail the rules for simplifying Truth

Value Equations. For now, we just want to make the point that every
Contract Equation, such as the Default Equation, has a Truth Value
Equation associated with it. We need external input to add the Truth Values,
but then we can solve the equation to answer questions about the Contract
through an automated process.
1.6. The Rule of Substitution
In the mathematics of Boolean Algebras, if two terms are equal, e.g., A = B,

then we can substitute one for the other. See, [Whitesitt 1960] at 63. We will
use this concept extensively, such as when we substitute a Definition
Sentence for a label that we use for a defined term.
1.7. Sentence “Short Names” as a Proxy for Full Sentences
Each Sentence in a Contract has a unique “Short Name” associated with it.
Since most form contracts are viewed as proprietary by their drafters (and
also to save space), we use the Short Names as a proxy for the full Sentences.
Also, Short Names are convenient when we want to visualize Contract data
in a graph.
Here is an example of a Sentence and a Short Name that represents

that Sentence:
 Short Name: “GOVERNING LAW”

 Sentence: “THIS AGREEMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS
OF THE STATE OF NEW YORK.”
Each Short Name is unique within a single Contract, but in a portfolio

of Contracts, each Contract may contain a Sentence with the same Short
Name. For example, every credit agreement in a portfolio of credit
9
WILLIAM S. VEATCH
agreements will contain a single “Governing Law” Sentence. Since the

Sentences in the Contract are tagged with the Short Names as metadata, the
Short Names, provide us with an easy way to compare Sentences from
multiple credit agreements. With the press of a button, we can see the
Governing Law Sentence (or any other Sentence Topic, Function, or Short
Name) from every Contract in the portfolio. We use the Ontology of Legal
Contracts discussed in book one of this Series, to create a standardized list
of Topics, Functions, and Short Names.
In this book, we focus on the logic of legal agreements at the Sentence

Level, but in book three in this series, The Mathematics of Language, we break
down Sentences further into Clauses, Phrases, and Core Ideas. (Clauses have
a subject and a predicate, whereas Phrases do not.)
1.8. References, Historical Notes, and Further Reading
Propositional Logic and Truth Value Equations
[Quine 1982]
Boolean Algebras and Boolean Lattices
[Givant and Halmos 2009]

[Whitesitt 1960]
[Davey and Priestley 2001]
[Veatch 2016]
Classical Logic
[Kreeft 2010]
[Toth 2020]
10
WILLIAM S. VEATCH
2. THE STARTING POINT: THE DEFAULT

EQUATION
While many contract equations are possible, a “Default Equation” is a good
place to start our analysis. When reviewing a Contract, a party often is trying
to determine whether a Default has occurred in the past, or how to prevent
a Default from occurring in the future.
2.1. Compliance Memorandum v. Event of Default Analysis
To generate a “Compliance Memorandum,” we look forward on the

“Timeline” and create a list of what a party must do, what a party must not
do, and what Material Adverse Events could create a Default. See, Fig. 2-1.
11
WILLIAM S. VEATCH
On the other hand, if we are trying to determine whether a Default

occurred in the past, then we look backwards on the Timeline and compare
the Contract requirements with what actually happened as evidenced by our
“Performance Database” of facts evidencing what actually happened.
2.2. Three Primary Components: Breach of Representation OR

Breach of Covenant OR Material Adverse Event
The three main components of the Default Equation are: (i) breach of a
Representation; (ii) breach of a Covenant; and (iii) Material Adverse Events.
Each Sentence with the Function “Event of Default” typically falls into one
of these three categories. We can express these three components in an
equation as follows, where “+” means “OR” in logic terms:
 𝐷𝑒𝑓𝑎𝑢𝑙𝑡 𝑅𝑒𝑝𝑟𝑒𝑠𝑒𝑛𝑡𝑎𝑡𝑖𝑜𝑛 𝐶𝑜𝑣𝑒𝑛𝑎𝑛𝑡

𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝐴𝑑𝑣𝑒𝑟𝑠𝑒 𝐸𝑣𝑒𝑛𝑡 𝑀𝐴𝐸
As we proceed through this book, we will examine in detail how each

Sentence in a Contract contributes to this equation. In some cases, as with
Representations and Definitions generally, we can substitute a Sentence
directly into the Default Equation. In other cases, the contribution is
indirect. Still, every Sentence in a Contract has an essential function. If not,
it should be deleted from the Contract.
2.3. Truth Value Equations
The Default Equation states that there is a Default if there is a breach of

a Representation, OR a breach of a Covenant, OR a Material Adverse Event.
(We use “+” to mean “OR” in logic terms.) We will give one example here
of a “Truth Value Calculation” for Representations, and then cover other
types of Sentences later.
Suppose we have five Representations in a Contract:
 𝑅𝑒𝑝𝑟𝑒𝑠𝑒𝑛𝑡𝑎𝑡𝑖𝑜𝑛𝑠 𝑅1 𝑅2 𝑅3 𝑅4 𝑅5
We can create a “Truth Value Equation” to determine whether a

“Compound Argument” is True or False. Note that the Representations
are connected by “ ” which represents “AND” logic. Therefore, if all five
Representations are True, then R is True as well:
 𝑇𝑟𝑢𝑡ℎ 𝑉𝑎𝑙𝑢𝑒 𝑇𝑟𝑢𝑒 𝑇𝑟𝑢𝑒 𝑇𝑟𝑢𝑒 𝑇𝑟𝑢𝑒 𝑇𝑟𝑢𝑒
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WILLIAM S. VEATCH
𝑇𝑟𝑢𝑒
If even one Representation is False, however, then R is False:
 𝑇𝑟𝑢𝑡ℎ 𝑉𝑎𝑙𝑢𝑒 𝑇𝑟𝑢𝑒 𝑇𝑟𝑢𝑒 𝐹𝑎𝑙𝑠𝑒 𝑇𝑟𝑢𝑒 𝑇𝑟𝑢𝑒

𝐹𝑎𝑙𝑠𝑒
See, [Veatch 2018] at 81 et seq., for a primer on basic logic of Propositions.

See also, [Quine 1982].
If the Representations are all True, the Covenants are all True (i.e., there
are no breaches of Covenants), and the Material Adverse Events are False
(i.e., there are no Material Adverse Events), then we can complete our Default
Equation as follows:
 Step one: write standard equation:

o Default = Representation + Covenant + Material
Adverse Event
 Step two: insert truth values. In this example, the Representations
and Covenants are True, and no Material Adverse Event has
occurred, so the Truth Values are True, True, and False.
o Default = True + True + False =

False + False + False =
False
Therefore, in this scenario there is no Default.
If even one Representation is False, however, then we can complete our

Default Equation as follows with a different result:
 Step one: write standard equation:

o Default = Representation + Covenant + Material
Adverse Event
 Step two: insert Truth Values.
o Default = False + True + False =
True + False + False =
True
As we can see, to process a Sentence as a term in a Logic Equation, the

Sentence must have a definite Truth Value, i.e., it must be a “Proposition” in
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WILLIAM S. VEATCH
Classical Logic terms. Some Sentences, such as Representations, have a

definite Truth Value:
 Representation: Company A was qualified to do business in

California on August 1, 2021.
This statement about Company A is either True or False, so it qualifies as a

Proposition.
On the other hand, the Truth Value of the following Covenant cannot
be determined on the day the Contract is signed, because we cannot predict
the future. As time passes, however, we can generate a set of True/False
Propositions about whether the company was qualified to do business on
each day of the term of the Contract.
 Covenant: Company A shall remain qualified to do business in

California from the Effective Date until the Termination Date.
In this way, we can use Covenants to generate a Set of Truth/False

Propositions that we can insert into our Contract Logic Equation. As we
proceed through the book, we examine each of the 17 types of Sentences
(categorized by their “Function” in the Contract) and show how we can use
them directly as Propositions or how we can use them to generate or process
Propositions.
2.4. Writing a Default Equation as an IF-THEN Statement
Another way to view the Default Equation is using an IF-THEN

Statement:
 IF:
𝑅𝑒𝑝𝑟𝑒𝑠𝑒𝑛𝑡𝑎𝑡𝑖𝑜𝑛: There is a False Representation,
OR 𝐶𝑜𝑣𝑒𝑛𝑎𝑛𝑡: There is a breach of Covenant,
OR 𝑀𝐴𝐸: There is a Material Adverse Event,
THEN there is a Default.
The IF-THEN Statement logic can be particularly helpful when

converting a Logic Equation to a code format for a software application. See,
[Veatch 2018] at 123 et seq. regarding the use of IF-THEN Statements.
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WILLIAM S. VEATCH
2.5. Incorporating Truth Value Data from Outside the Contract
Once we have written our Contract as a Contract Equation that can process
Truth Values for Propositions, we need a way to input Truth Values into the
Contract Equation for processing. One way to do this is simply to have the
User of the software application input the Truth Values needed to process a
particular Contract Equation. This approach works, but is subjective and
could be time-consuming if there is a large number of questions and Truth
Values to enter. We can automate the process further using a Twenty
Questions User Input approach, a Legal Rule Database, and a Performance
Database as discussed below.
If we have a question about a Contract that we want to answer, where

there is a very large number of possible True/False data points, one approach
we can use to limit the number of questions is the “Twenty Questions User
Input” approach. The idea (which has its roots in information theory) is that
the AI software application asks the User a series of questions, where each
question is designed to eliminate 50% of the remaining data points. In this
way, the software application can determine the relevant data points within
20 questions, narrowing the choices from as many as 220 down to one.
Note that a contract represents the total legal obligation resulting from
an agreement of the parties, including obligations under the Uniform
Commercial Code (“UCC”) and other applicable laws. See, for example, the
definition of “contact” in Section 1-201 of the UCC. We will discuss how to
incorporate legal information from statutes and create a “Legal Rule
Database” in later writings, but for now we focus on the language in a typical
written contract.
The other need for external data, is the need for performance data to
create a “Performance Database”, so that we can determine whether a
Default has occurred. We will discuss this further as we examine different
types of Sentences. By incorporating data from bank records, Secretary of
State records, and SEC filings etc., we can limit the need for User input of
Truth Values.
Introduction to Mathematical Logic
[Rodgers 2000]
15
WILLIAM S. VEATCH
Mathematics of Ideas; Legal Logic
Math Without Numbers, [Veatch 2016]
The New Logic of the Law, [Veatch 2018]
Inferences 2021]
16
WILLIAM S. VEATCH
3. ADDING REPRESENTATIONS TO THE

DEFAULT EQUATION
In this chapter, we examine Representations in more detail. Representations
have a definite Truth Value, so we can insert them directly into a Logic
Equation. The complicating factor, however, is that we need to incorporate
data from outside the Contract to determine whether the Representation is
in fact True or False.
3.1. Structure of Representations
A typical Event of Default regarding a breach of a Representation, reads

as follows:
 Each of the following is an Event of Default: … any representation

or warranty made or deemed made by or on behalf of the Borrower
in or in connection with this Agreement, shall prove to have been
incorrect in any material respect (or, in the case of any such
representation or warranty under this Agreement or any other Loan
Document already qualified by materiality, such representation or
warranty shall prove to have been incorrect) when made or deemed
made;
A “Representation” is a statement of fact that a party to the contract

represents as being True as of a specified Date or Interval of Time. A
Representation consists of two parts: (i) a “Performative Clause” where the
party performs the action of making a Representation: E.g., “Party A hereby
represents that ….”; and (ii) a “Statement of Fact” that is represented as
being True: E.g., “Party A was qualified to do business in California on the
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WILLIAM S. VEATCH
Closing Date.” For purposes of the Default Equation, it is the Statement of

Fact that we care about most.
The Statement of Fact relates to a Block of Time either in the Past or the
Present. As a result, it has a definite and ascertainable Truth Value, i.e., it is
either True or False. Therefore, we can insert a Representation directly into
our Default Equation. For example, if our contract has three
Representations, we can update the Default Equation as follows:
 Level One:
o 𝐷𝑒𝑓𝑎𝑢𝑙𝑡 𝑅𝑒𝑝𝑟𝑒𝑠𝑒𝑛𝑡𝑎𝑡𝑖𝑜𝑛 𝐶𝑜𝑣𝑒𝑛𝑎𝑛𝑡
𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝐴𝑑𝑣𝑒𝑟𝑠𝑒 𝐸𝑣𝑒𝑛𝑡 𝑀𝐴𝐸
 Level Two:
o 𝐷𝑒𝑓𝑎𝑢𝑙𝑡 𝑅𝑒𝑝. 1 𝑅𝑒𝑝. 2 𝑅𝑒𝑝. 3
𝐶𝑜𝑣𝑒𝑛𝑎𝑛𝑡 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝐴𝑑𝑣𝑒𝑟𝑠𝑒 𝐸𝑣𝑒𝑛𝑡 𝑀𝐴𝐸
 Level Three:
𝐷𝑒𝑓𝑎𝑢𝑙𝑡
𝑅𝑒𝑝. 1 𝑸𝒖𝒂𝒍𝒊𝒇𝒊𝒆𝒅 𝒕𝒐 𝑫𝒐 𝑩𝒖𝒔𝒊𝒏𝒆𝒔𝒔. "𝑃𝑎𝑟𝑡𝑦 𝐴 𝑤𝑎𝑠 𝑞𝑢𝑎𝑙𝑖𝑓𝑖𝑒𝑑 𝑡𝑜 𝑑𝑜

𝑏𝑢𝑠𝑖𝑛𝑒𝑠𝑠 𝑖𝑛 𝐶𝑎𝑙𝑖𝑓𝑜𝑟𝑛𝑖𝑎 𝑜𝑛 𝑡ℎ𝑒 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝐷𝑎𝑡𝑒. "
𝑅𝑒𝑝. 2 𝑵𝒆𝒕 𝑾𝒐𝒓𝒕𝒉 𝒂𝒕 𝑪𝒍𝒐𝒔𝒊𝒏𝒈. "𝑃𝑎𝑟𝑡𝑦 𝐴 ℎ𝑎𝑑 𝑎 𝑛𝑒𝑡 𝑤𝑜𝑟𝑡ℎ 𝑜𝑓 $1 𝑀𝑖𝑙𝑙𝑖𝑜𝑛

𝑜𝑛 𝑡ℎ𝑒 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝐷𝑎𝑡𝑒. "
𝑅𝑒𝑝. 3 𝑵𝒐 𝑬𝒗𝒆𝒏𝒕 𝒐𝒇 𝑫𝒆𝒇𝒂𝒖𝒍𝒕 𝑼𝒏𝒅𝒆𝒓 𝑴𝒂𝒕𝒆𝒓𝒊𝒂𝒍 𝑪𝒐𝒏𝒕𝒓𝒂𝒄𝒕𝒔.

"𝑁𝑜 𝐸𝑣𝑒𝑛𝑡 𝑜𝑓 𝐷𝑒𝑓𝑎𝑢𝑙𝑡 ℎ𝑎𝑠 𝑜𝑐𝑐𝑢𝑟𝑟𝑒𝑑 𝑢𝑛𝑑𝑒𝑟 𝑎𝑛𝑦 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑐𝑜𝑛𝑡𝑟𝑎𝑐𝑡
𝑡𝑜 𝑤ℎ𝑖𝑐ℎ 𝑃𝑎𝑟𝑡𝑦 𝐴 𝑖𝑠 𝑎 𝑝𝑎𝑟𝑡𝑦. "
𝐶𝑜𝑣𝑒𝑛𝑎𝑛𝑡 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝐴𝑑𝑣𝑒𝑟𝑠𝑒 𝐸𝑣𝑒𝑛𝑡 𝑀𝐴𝐸
Note how we apply the Rule of Substitution to move from Level One to
Level Two, and then to Level Three of the Default Equation. This ability to
expand and contract the Default Equation will prove to be an extremely
useful tool, particularly when it comes to Visualization of legal data.
Suppose we have a very large number of Representations in the Contract

we are analyzing. We may want to use aggregate product notation for the
making of Representations (∏ 𝑅𝑖 𝑅1 𝑅2 . . . 𝑅𝑖 ) and summation
notation for the breach of Representations (∑ 𝑅𝑖 𝑅1
𝑅2 . . . 𝑅𝑖), to simplify the writing of the equation. Note how negation
(i.e., the NOT symbol “ ”) reverses the logic from AND ( ) to OR (+).
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WILLIAM S. VEATCH
 Level Four: Breach of Representation Defaults
Representation = ∏ 𝑅𝑖 ∑ 𝑅𝑖 𝑅 𝑅 ⋯ 𝑅 , where
each “Ri” is a Representation.
𝐷𝑒𝑓𝑎𝑢𝑙𝑡 ∑𝑛𝑖 1 𝑅𝑖 𝐶𝑜𝑣𝑒𝑛𝑎𝑛𝑡 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝐴𝑑𝑣𝑒𝑟𝑠𝑒 𝐸𝑣𝑒𝑛𝑡 𝑀𝐴𝐸
3.2. Bringdown of Representations
Another important characteristic of Representations is that although they are

made as of a specific date, a party may be required to re-assert the
Representations again as of a later date. For example, in a credit agreement,
the Representation may be “brought down” and re-asserted as of each date
that financial statements are delivered. We need to flag these dates on our
Timeline for the Contract. (Note that if a Representation is brought down
every day, then it would be in effect a Covenant. This illustrates the
relationship between Representations and Covenants.)
3.3. Incorporation of Data from Third-Party Sources
As noted earlier, we need to incorporate Data from outside the Contract to

determine the Truth Value of a Representation. We usually start with a
Compliance Certificate where a party asserts that all Representations are True
when made, but there is always the ability to counter that assertion with
evidence from the Performance Database of facts.
3.4. Classification of Representations
When we have a large number of items (i.e., more than about 12), we can
organize them into subcategories using our standardized Ontology. See, book
one in this Series, Ontology of Legal Contracts – Focus on Finance, for examples of
how to create a Contract Ontology.
In Fig. 3-1 below, we see a visualization of the Representations

found in a typical credit agreement for an investment grade borrower.
Although there is a large number of Representations, the logic takes exactly
the same form as our simple example with three Representations.
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WILLIAM S. VEATCH
Fig. 3-1
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3.5. How to Use a Truth Value Equation; Rules for Simplification
Now that we have an updated Default Equation, we will give some examples
of how we create a related Truth Value Equation, update the Truth Value of
each Term with Data from outside the Contract, and then simplify the
equation to solve for whether a Default has occurred. We start with the
following Default Equation.
 𝐷𝑒𝑓𝑎𝑢𝑙𝑡 𝑅1 𝑅2 𝑅3 𝑅4 𝑅5
𝐶𝑜𝑣𝑒𝑛𝑎𝑛𝑡 𝑀𝐴𝐸
As a next step, we need to determine the Truth Value of each of the

seven Terms of the Default Equation. As noted earlier, we obtain the Truth
Values through a combination of the following:
 Direct User input into the AI software application

o E.g., the User could input True or False for each of the
seven Terms.
 Trusted Third-Party Sources
o E.g., information on whether payments were made on time
to a bank could be retrieved directly from the bank records.
For example, the Truth Values could be as follows in Table 3-1, for
two different Contracts with Company A and Company B, the difference
being that for Company B, one of the Representations is False.
Table 3-1
Company A Company B
R1 True True
R2 True True
R3 True False
R4 True True
R5 True True
Covenant True True
MAE False False
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WILLIAM S. VEATCH
For Company A, the Truth Value Equation would be:
 Truth Value = True + True + True + True + True +

True + False =
False + False + False + False + False + False + False =
False
Therefore, in the case of Company A, the question: “Is there a Default?” is

answered “False.”
On the other hand, for Company B, the Truth Value Equation would be:
 Truth Value = True + True + False + True + True +

True + False =
False + False + True + False + False + False + False =
True
Therefore, in the case of Company B, the question: “Is there a Default?” is

answered “True.” The reason for the different outcome is that in the case of
Truth Values connected by OR (+) logic, also known as an “Alternation,”
the statement is True if and only if the components are not all False. See,
[Quine 1982] at 16.
To simplify the notation, we use the form of notation articulated by

W.V. Quine in [Quine 1982], using “⊤” to mean True; and using “⊥” to mean
False. Rewriting the above examples, we get the following:
For Company A, the Truth Value Equation would be:
 Truth Value = ⊤+ ⊤+ ⊤+ ⊤+ ⊤+ ⊤+⊥=
⊥+⊥+⊥+⊥+⊥+⊥+⊥=
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WILLIAM S. VEATCH
Therefore, in the case of Company A, the question: “Is there a Default?” is

answered “False.”
On the other hand, for Company B, the Truth Value Equation would be:
 Truth Value = ⊤+ ⊤+ ⊥+ ⊤+ ⊤+ ⊤+⊥=
⊥+⊥+⊤+⊥+⊥+⊥+⊥=
For processing Truth Value Equations, there are three fundamental

“Laws of Truth Values” and nine “Rules of Resolution” as articulated by
W.V. Quine in [Quine 1982] at 16 and 34 - 35.
Laws of Truth Values (where p, q, … s are True/False Propositions):
1 p is True if and only if p is False

2 "pq … s" "p q … s",
is True if and only if all of p, q, . . . s are True.
3 "p q … s",
is True if and only if p, q, … , s are not all False.
Rules of Resolution:
(1) Delete “⊤” as a component of Conjunction ( )

 ⊤⊤ reduces to ⊤
 ⊤⊥ reduces to ⊥
(2) Delete “⊥” as a component of Alternation ( )

 ⊥ ⊥ reduces to ⊥
 ⊤ ⊥ reduces to ⊤
(3) Reduce a Conjunction with “⊥” as a component, to “⊥”

 ⊤⊥ reduces to ⊥
 ⊥⊤ reduces to ⊥
 ⊥⊥ reduces to ⊥
(4) Reduce an Alternation with “⊤” as a component, to “⊤”

 ⊤ ⊥ reduces to ⊤
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WILLIAM S. VEATCH
 ⊤ ⊤ reduces to ⊤
(5) Drop “⊤” as antecedent of a Conditional

 (⊤ → ⊤), reduces to ⊤.
 (⊤ → ⊥), reduces to ⊥.
(6) Reduce a Conditional with “⊥” as antecedent, or “⊤” as consequent, to

“⊤”
 (⊤ → ⊤), reduces to ⊤.
 (⊥ → ⊤), reduces to ⊤.
 (⊥ → ⊥), reduces to ⊤.
(7) If a conditional has “⊥” as a Consequent, reduce the whole to the negation
of the Antecedent.
 (⊥ → ⊥), reduces to ⊤.
 (⊤ → ⊥), reduces to ⊥.
(8) Drop “⊤” as component of a Biconditional

 (⊤ ↔ ⊤), reduces to ⊤.
 (⊤ ↔ ⊥), reduces to ⊥.
 (⊥ ↔ ⊤), reduces to ⊥.
(9) Drop “⊥” as component of a Biconditional and negate the other side.
 (⊥ ↔ ⊥), reduces to ⊤.
 (⊤ ↔ ⊥), reduces to ⊥.
 (⊥ ↔ ⊤), reduces to ⊥.
Since this book is meant to be a high-level overview of the logic of

Sentences, we do not go into detail as to how or why these laws and rules
work. We will, however, use them throughout the rest of the book to simplify
Truth Value Equations. For those who want to know more about the logic
of Truth Values, [Quine 1982] is an excellent, very readable source of
information that is accessible to non-experts.
With these Laws of Truth Values and Rules of Resolution in hand, we

can program our AI software application to simplify our Truth Value
Equation on a completely automated basis, regardless of how complex the
equation may become.
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WILLIAM S. VEATCH
3.6. Updated Default Equation
Using our example of five Representations, we can update and expand our
Default Equation as shown below.
3.6.1. Simplified Logic Equation
 𝐷𝑒𝑓𝑎𝑢𝑙𝑡 𝑅𝑒𝑝𝑟𝑒𝑠𝑒𝑛𝑡𝑎𝑡𝑖𝑜𝑛 𝐶𝑜𝑣𝑒𝑛𝑎𝑛𝑡

𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝐴𝑑𝑣𝑒𝑟𝑠𝑒𝐸𝑣𝑒𝑛𝑡 𝑀𝐴𝐸
 𝐷𝑒𝑓𝑎𝑢𝑙𝑡 ∑5𝑖 1 𝑅𝑖 𝐶𝑜𝑣𝑒𝑛𝑎𝑛𝑡 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝐴𝑑𝑣𝑒𝑟𝑠𝑒 𝐸𝑣𝑒𝑛𝑡 𝑀𝐴𝐸
3.6.2. Expanded Logic Equation
 𝐷𝑒𝑓𝑎𝑢𝑙𝑡 𝑅1 𝑅2 𝑅3 𝑅4 𝑅5 𝐶𝑜𝑣𝑒𝑛𝑎𝑛𝑡 𝑀𝐴𝐸
 𝐷𝑒𝑓𝑎𝑢𝑙𝑡 𝑅1 𝑅2 𝑅3 𝑅4 𝑅5
Note that when we distribute the NOT operation ( ) across the terms
with the parentheses, two things happen: (1) each term is preceded by NOT
( ), and (2) the logic changes from AND ( ) logic to OR ( ) logic.
3.6.3. Logic Equation with Sentence Short Names
Now, we insert the Short Names for an agreement that has 43

Representations.
 𝐷𝑒𝑓𝑎𝑢𝑙𝑡 𝑅1 𝑅2 𝑅3 𝑅4
𝑅5 . . . 𝑅43 𝐶𝑜𝑣𝑒𝑛𝑎𝑛𝑡 𝑀𝐴𝐸
 𝐷𝑒𝑓𝑎𝑢𝑙𝑡 Representation: Legal Matters: ( Organization +

Existence + Power + Qualification to Do Business + Due
Authorization + Due Execution + Enforceability + No Conflict
+ Government Approvals + Compliance with Law + Compliance
with Licenses + Investment Company Act + Anti-Corruption
Regulations + OFAC Regulations + USA PATRIOT Act +
Margin Regulations) +
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WILLIAM S. VEATCH
Representation: Financial Condition: ( Financial Statements +

Material Adverse Change + Litigation + Projections + Taxes +
Pension and Welfare Plans + Solvency + Material Agreements) +
Representation: Nature of Business: ( Capitalization +

Subsidiaries + Investments + Real Property + Debt + Liens
+ Title to Property + Labor Matters + Intellectual Property +
Environmental Matters + No Burdensome Restrictions) +
Representation: Foreign Borrowers: ( Commercial Activity + Pari

Passu Ranking + Legal Form + Foreign Taxes + Sovereign
Borrowers) +
Representation: Other: ( Completeness of Disclosures + Status as

Senior Debt + Perfection and Priority of Collateral)
The Logic Equation can become overwhelming for human review as the
size of the Contract grows, but for an AI software application, the number
of Terms in the Logic Equation is not an issue.
Logic
Methods of Logic, 4th Ed., [Quine 1982]
Standard Loan Terms
Many loan forms are available for free as publicly filed documents at
www.SEC.gov
The Loan Syndications and Trading Association (LSTA) website has a wealth
of information at https://www.lsta.org/
See also, The LSTA’s Complete Credit Agreement Guide [Bellucci and McCluskey
2017]
Boolean Algebras and Boolean Lattices
Math Without Numbers, [Veatch 2016]

The New Logic of the Law, [Veatch 2018]
26
WILLIAM S. VEATCH
Inferences 2021]
27
WILLIAM S. VEATCH
4. ADDING COVENANTS TO THE DEFAULT

EQUATION
Unlike Representations which relate to events or states of affairs in the past

or present, Covenants speak to the future, so they do not have an
ascertainable Truth Value when made. We typically break down Covenants
into three categories:
 Negative Covenants: promises not to do certain things.

 Affirmative Covenants: affirmative promises to take certain
actions.
 Financial Covenants: financial conditions or ratios that a party
agrees to maintain at all times or as of a specific date. (Financial
Covenants could be stated in the affirmative or the negative, but we
usually separate them out as a third category of Covenant.)
We can express this in an equation as follows:
𝐶𝑜𝑣𝑒𝑛𝑎𝑛𝑡 𝑁𝑒𝑔𝑎𝑡𝑖𝑣𝑒 𝐶𝑜𝑣𝑒𝑛𝑎𝑛𝑡 𝐴𝑓𝑓𝑖𝑟𝑚𝑎𝑡𝑖𝑣𝑒 𝐶𝑜𝑣𝑒𝑛𝑎𝑛𝑡

𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝐶𝑜𝑣𝑒𝑛𝑎𝑛𝑡
See, Fig. 4-1.
28
WILLIAM S. VEATCH
Fig. 4-1
4.1. Test Truth Value as of a Determination Date
The fact that Covenants speak to the future means that we cannot
substitute Covenants directly into our Default Equation. Rather, we need to
wait for time to pass and then input into our software application some
additional data regarding whether each party to the contract performed as it
had agreed to perform.
There are several ways to input performance data into the software
application:
 A lender could require a borrower to complete a monthly or
quarterly compliance certificate in a digital format that feeds directly
into a Performance Database or into the Default Equation directly.
 The software application could incorporate data directly from
“Trusted Third-Party” sources such as the following:
o Bank records.
o Secretary of State records.
o SEC filings.
o Appraiser reports.
o Court records.
29
WILLIAM S. VEATCH
Since data is provided as of a specified Determination Date, the software

application can now process the Default Equation taking into account
whether or not a Covenant was breached in the past or present.
As the technology develops to incorporate outside factual data into the

“Performance Database,” in all likelihood we will start to see covenants
that are drafted specifically with this process in mind.
Table 4-1 illustrates how we change the wording of a forward-looking

Covenant to specify whether a default has occurred.
Table 4-1
Original No Breach as of Breach Occurred
Covenant Determination Date in Past or
(Covenant is True) Present
(Covenant is
False)
Negative Party A shall not Party A did not sell Party A sold a
Covenant sell any material any material asset. material asset.
asset.
Affirmative Party A shall file Party A did file its Party A failed to
Covenant its tax return on tax return on time. file its tax return
time. on time.
Financial Party A shall Party A did Party A failed to
Covenant maintain a maintain a Leverage maintain a
Leverage Ratio Ratio of at least 2:1. Leverage Ratio of
of at least 2:1. at least 2:1.
The third column illustrates how a Covenant can generate a “True”

Proposition. The fourth column requires some explanation. For example,
the statement “Party A sold a material asset” is “True” in the example, but it
was a breach of the Negative Covenant. Therefore, the Truth Value that we
add to the Logic Equation is “False.” In other words, the Truth Value
entered into the Logic Equation is always based upon the original covenant.
In column 3, compliance with the Contract is True; in column 4, compliance
with the Contract is False.
The good news here is that we can completely automate the tracking
of Truth Values in our AI software application.
30
WILLIAM S. VEATCH
4.2. Notice and Opportunity to Cure
Covenants are different from Representations in another material respect, in

that some Covenants are capable of being cured. For example, if a borrower
missed payment due on the first of the month, the borrower may cure default
by making the payment a day or two late. The number of days of grace
allowed in the Contract often varies by the type of default, and sometimes
notice is required to start the cure period running. In fact, in a typical
investment grade borrower credit agreement, there are seven different
categories of Events of Default, when sorted by applicable notice and cure
provisions. See, Fig. 4-2.
Fig. 4-2
4.3. Classification of Covenants
In Figure 4-3, we have a visualization of some of the Covenants

found in a typical investment grade borrower credit agreement, partitioned
by the three types of Covenant Events of Default. Notice is required only
for the Defaults with a 30-day Cure Period.
31
WILLIAM S. VEATCH
Fig. 4-3
4.4. Sample Truth Value Equation
We start with the simplified version of our Default Equation.
Event of Default =
∑ 𝑅𝑖 +
∑ 𝐶_𝑂𝑖 +
∑ 𝐶_3𝑖 𝐶𝑢𝑟𝑒_3 𝑖 ) +
∑ 𝐶_30𝑖 𝑁𝑜𝑡𝑖𝑐𝑒 𝑖 𝐶𝑢𝑟𝑒_30 𝑖) +
MAE
Let’s assume that we have only one Representation, one of each of

the three types of Covenant (in terms of Notice and Cure Period
requirements), and one Material Adverse Event, all with the Truth Values set
forth in Table 4-2.
Table 4-2
Term of Default Equation Truth Value
Representation True
Covenant with no Grace Period True
Covenant with 3-day Grace Period True, True
Covenant with Notice and 30-day False, True, False
Grace Period
MAE False
32
WILLIAM S. VEATCH
Note that where there is an applicable Notice requirement or Cure

Period, we need a Truth Value for those terms as well.
𝑇𝑟𝑢𝑡ℎ𝑉𝑎𝑙𝑢𝑒 𝑅𝑒𝑝 ⊤
𝐶_0 ⊤
𝐶_3 ⊤ 𝐶𝑢𝑟𝑒_3 ⊤
𝐶_30 ⊥ 𝑁𝑜𝑡𝑖𝑐𝑒_30 ⊤ 𝐶𝑢𝑟𝑒_30 ⊥
𝑀𝐴𝐸 ⊥
=⊤ ⊤ ⊤ ⊤ ⊥ ⊤ ⊥ ⊥
The key to the use of the symbols (adapted from [Quine 1982] at 34) is
as follows:
 " ⊤ " 𝑚𝑒𝑎𝑛𝑠True
 " ⊥ " 𝑚𝑒𝑎𝑛𝑠 𝐹𝑎𝑙𝑠𝑒
Applying the Laws of Truth Values and the Rules of Resolution (see,
Section 3.5 above), we can simplify the Truth Value Equation as follows in
Table 4-3.
Table 4-3
⊤ ⊤ ⊤ ⊤ ⊥ ⊤ ⊥ ⊥=
⊥ ⊥ ⊥ ⊤ ⊤ ⊤ ⊥ ⊥= Law of Truth
Values (1)
⊥ ⊥ ⊥ ⊥ ⊥= Rule of Resolution
(3)
⊥ Law of Truth
Values (3)
Although there was a breach of a Covenant and Notice had been

given, the 30-day Cure Period had not yet elapsed as of the Determination
Date, so there is no Event of Default.
4.5. Updated Default Equation
Now, we can update our Default Equation, keeping in mind that there
are three categories of Events of Default when we consider notice and cure
periods.
33
WILLIAM S. VEATCH
4.5.1. Simplified Logic Equation
Using the aggregate summation and product notation, we can create a

Simplified Logic Equation. In our example, Covenant type 1 has no cure
period, and therefore no notice requirement either. Type 2 has a three-day
cure period, but no notice is required, since the payment date was certain.
Type 3 has a 30-day cure period that begins upon notice from the other party
to the Contract.
Event of Default =
Default: ( Covenant + Representation + Material Adverse Event) x
Required Notice Given: (Notice) x
No Cure: ( Cure)
Breach of Representation Default

Representation = ∏ 𝑅𝑖 ∑ 𝑅𝑖 𝑅 𝑅 ⋯ 𝑅 , where each
“Ri” is a Representation.
Covenant Default
Covenant = ∏ 𝐶𝑖 ∑ 𝐶𝑖 𝐶 𝐶 ⋯ 𝐶 , where each “Ci”
is a Covenant.
To move from “Defaults” to “Events of Default,” we need to take

into account both Notice requirements and Cure Periods.
Event of Default =
∑ 𝑅𝑖 +
∑ 𝐶_𝑂𝑖 +
∑ 𝐶_3𝑖 𝐶𝑢𝑟𝑒_3 𝑖 ) +
∑ 𝐶_30𝑖 𝑁𝑜𝑡𝑖𝑐𝑒 𝑖 𝐶𝑢𝑟𝑒_30 𝑖) +
MAE
4.5.2. Expanded Logic Equation
Here, we expand the Event of Default Equation to illustrate three examples

of each type of potential Event of Default.
34
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directions, came after a time to puzzle him. But to solve this knotty
problem, which became more and more of a puzzle, there came to
his aid another hallucination. Phœbe’s spirit or some power of the air
or wind or nature would tell him. If he stood at the center of the
parting of the ways, closed his eyes, turned thrice about, and called
“O-o-o Phœbe!” twice, and then threw his cane straight before him,
that would surely indicate which way to go for Phœbe, or one of
these mystic powers would surely govern its direction and fall! In
whichever direction it went, even though, as was not infrequently the
case, it took him back along the path he had already come, or across
fields, he was not so far gone in his mind but that he gave himself
ample time to search before he called again. Also the hallucination
seemed to persist that at some time he would surely find her. There
were hours when his feet were sore, and his limbs weary, when he
would stop in the heat to wipe his seamed brow, or in the cold to
beat his arms. Sometimes, after throwing away his cane, and finding
it indicating the direction from which he had just come, he would
shake his head wearily and philosophically, as if contemplating the
unbelievable or an untoward fate, and then start briskly off. His
strange figure came finally to be known in the farthest reaches of
three or four counties. Old Reifsneider was a pathetic character. His
fame was wide.
Near a little town called Watersville, in Green County, perhaps four
miles from that minor center of human activity, there was a place or
precipice locally known as the Red Cliff, a sheer wall of red
sandstone, perhaps a hundred feet high, which raised its sharp face
for half a mile or more above the fruitful corn-fields and orchards that
lay beneath, and which was surmounted by a thick grove of trees.
The slope that slowly led up to it from the opposite side was covered
by a rank growth of beech, hickory, and ash, through which threaded
a number of wagon-tracks crossing at various angles. In fair weather
it had become old Reifsneider’s habit, so inured was he by now to
the open, to make his bed in some such patch of trees as this to fry
his bacon or boil his eggs at the foot of some tree before laying
himself down for the night. Occasionally, so light and inconsequential
was his sleep, he would walk at night. More often, the moonlight or
some sudden wind stirring in the trees or a reconnoitering animal
arousing him, he would sit up and think, or pursue his quest in the
moonlight or the dark, a strange, unnatural, half wild, half savage-
looking but utterly harmless creature, calling at lonely road
crossings, staring at dark and shuttered houses, and wondering
where, where Phœbe could really be.
That particular lull that comes in the systole-diastole of this earthly
ball at two o’clock in the morning invariably aroused him, and though
he might not go any farther he would sit up and contemplate the
darkness or the stars, wondering. Sometimes in the strange
processes of his mind he would fancy that he saw moving among the
trees the figure of his lost wife, and then he would get up to follow,
taking his utensils, always on a string, and his cane. If she seemed
to evade him too easily he would run, or plead, or, suddenly losing
track of the fancied figure, stand awed or disappointed, grieving for
the moment over the almost insurmountable difficulties of his search.
It was in the seventh year of these hopeless peregrinations, in the
dawn of a similar springtime to that in which his wife had died, that
he came at last one night to the vicinity of this self-same patch that
crowned the rise to the Red Cliff. His far-flung cane, used as a
divining-rod at the last cross-roads, had brought him hither. He had
walked many, many miles. It was after ten o’clock at night, and he
was very weary. Long wandering and little eating had left him but a
shadow of his former self. It was a question now not so much of
physical strength but of spiritual endurance which kept him up. He
had scarcely eaten this day, and now exhausted he set himself down
in the dark to rest and possibly to sleep.
Curiously on this occasion a strange suggestion of the presence of
his wife surrounded him. It would not be long now, he counseled with
himself, although the long months had brought him nothing, until he
should see her, talk to her. He fell asleep after a time, his head on
his knees. At midnight the moon began to rise, and at two in the
morning, his wakeful hour, was a large silver disk shining through the
trees to the east. He opened his eyes when the radiance became
strong, making a silver pattern at his feet and lighting the woods with
strange lusters and silvery, shadowy forms. As usual, his old notion
that his wife must be near occurred to him on this occasion, and he
looked about him with a speculative, anticipatory eye. What was it
that moved in the distant shadows along the path by which he had
entered—a pale, flickering will-o’-the-wisp that bobbed gracefully
among the trees and riveted his expectant gaze? Moonlight and
shadows combined to give it a strange form and a stranger reality,
this fluttering of bog-fire or dancing of wandering fire-flies. Was it
truly his lost Phœbe? By a circuitous route it passed about him, and
in his fevered state he fancied that he could see the very eyes of her,
not as she was when he last saw her in the black dress and shawl
but now a strangely younger Phœbe, gayer, sweeter, the one whom
he had known years before as a girl. Old Reifsneider got up. He had
been expecting and dreaming of this hour all these years, and now
as he saw the feeble light dancing lightly before him he peered at it
questioningly, one thin hand in his gray hair.
Of a sudden there came to him now for the first time in many years
the full charm of her girlish figure as he had known it in boyhood, the
pleasing, sympathetic smile, the brown hair, the blue sash she had
once worn about her waist at a picnic, her gay, graceful movements.
He walked around the base of the tree, straining with his eyes,
forgetting for once his cane and utensils, and following eagerly after.
On she moved before him, a will-o’-the-wisp of the spring, a little
flame above her head, and it seemed as though among the small
saplings of ash and beech and the thick trunks of hickory and elm
that she signaled with a young, a lightsome hand.
“O Phœbe! Phœbe!” he called. “Have yuh really come? Have yuh
really answered me?” And hurrying faster, he fell once, scrambling
lamely to his feet, only to see the light in the distance dancing
illusively on. On and on he hurried until he was fairly running,
brushing his ragged arms against the trees, striking his hands and
face against impeding twigs. His hat was gone, his lungs were
breathless, his reason quite astray, when coming to the edge of the
cliff he saw her below among a silvery bed of apple-trees now
blooming in the spring.
“O Phœbe!” he called. “O Phœbe! Oh, no, don’t leave me!” And
feeling the lure of a world where love was young and Phœbe as this
vision presented her, a delightful epitome of their quondam youth, he
gave a gay cry of “Oh, wait, Phœbe!” and leaped.
Some farmer-boys, reconnoitering this region of bounty and
prospect some few days afterward, found first the tin utensils tied
together under the tree where he had left them, and then later at the
foot of the cliff, pale, broken, but elate, a molded smile of peace and
delight upon his lips, his body. His old hat was discovered lying
under some low-growing saplings the twigs of which had held it
back. No one of all the simple population knew how eagerly and
joyously he had found his lost mate.
THE SECOND CHOICE
SHIRLEY DEAR:
You don’t want the letters. There are only six of them,
anyhow, and think, they’re all I have of you to cheer me on my
travels. What good would they be to you—little bits of notes
telling me you’re sure to meet me—but me—think of me! If I
send them to you, you’ll tear them up, whereas if you leave
them with me I can dab them with musk and ambergris and
keep them in a little silver box, always beside me.
Ah, Shirley dear, you really don’t know how sweet I think
you are, how dear! There isn’t a thing we have ever done
together that isn’t as clear in my mind as this great big
skyscraper over the way here in Pittsburgh, and far more
pleasing. In fact, my thoughts of you are the most precious
and delicious things I have, Shirley.
But I’m too young to marry now. You know that, Shirley,
don’t you? I haven’t placed myself in any way yet, and I’m so
restless that I don’t know whether I ever will, really. Only
yesterday, old Roxbaum—that’s my new employer here—
came to me and wanted to know if I would like an assistant
overseership on one of his coffee plantations in Java, said
there would not be much money in it for a year or two, a bare
living, but later there would be more—and I jumped at it. Just
the thought of Java and going there did that, although I knew I
could make more staying right here. Can’t you see how it is
with me, Shirl? I’m too restless and too young. I couldn’t take
care of you right, and you wouldn’t like me after a while if I
didn’t.
But ah, Shirley sweet, I think the dearest things of you!
There isn’t an hour, it seems, but some little bit of you comes
back—a dear, sweet bit—the night we sat on the grass in
Tregore Park and counted the stars through the trees; that
first evening at Sparrows Point when we missed the last train
and had to walk to Langley. Remember the tree-toads, Shirl?
And then that warm April Sunday in Atholby woods! Ah, Shirl,
you don’t want the six notes! Let me keep them. But think of
me, will you, sweet, wherever you go and whatever you do?
I’ll always think of you, and wish that you had met a better,
saner man than me, and that I really could have married you
and been all you wanted me to be. By-by, sweet. I may start
for Java within the month. If so, and you would want them, I’ll
send you some cards from there—if they have any.
Your worthless,
Arthur.
She sat and turned the letter in her hand, dumb with despair. It
was the very last letter she would ever get from him. Of that she was
certain. He was gone now, once and for all. She had written him only
once, not making an open plea but asking him to return her letters,
and then there had come this tender but evasive reply, saying
nothing of a possible return but desiring to keep her letters for old
times’ sake—the happy hours they had spent together.
The happy hours! Oh, yes, yes, yes—the happy hours!
In her memory now, as she sat here in her home after the day’s
work, meditating on all that had been in the few short months since
he had come and gone, was a world of color and light—a color and a
light so transfiguring as to seem celestial, but now, alas, wholly
dissipated. It had contained so much of all she had desired—love,
romance, amusement, laughter. He had been so gay and
thoughtless, or headstrong, so youthfully romantic, and with such a
love of play and change and to be saying and doing anything and
everything. Arthur could dance in a gay way, whistle, sing after a
fashion, play. He could play cards and do tricks, and he had such a
superior air, so genial and brisk, with a kind of innate courtesy in it
and yet an intolerance for slowness and stodginess or anything dull
or dingy, such as characterized—— But here her thoughts fled from
him. She refused to think of any one but Arthur.
Sitting in her little bedroom now, off the parlor on the ground floor
in her home in Bethune Street, and looking out over the Kessels’
yard, and beyond that—there being no fences in Bethune Street—
over the “yards” or lawns of the Pollards, Bakers, Cryders, and
others, she thought of how dull it must all have seemed to him, with
his fine imaginative mind and experiences, his love of change and
gayety, his atmosphere of something better than she had ever
known. How little she had been fitted, perhaps, by beauty or
temperament to overcome this—the something—dullness in her
work or her home, which possibly had driven him away. For,
although many had admired her to date, and she was young and
pretty in her simple way and constantly receiving suggestions that
her beauty was disturbing to some, still, he had not cared for her—
he had gone.
And now, as she meditated, it seemed that this scene, and all that
it stood for—her parents, her work, her daily shuttling to and fro
between the drug company for which she worked and this street and
house—was typical of her life and what she was destined to endure
always. Some girls were so much more fortunate. They had fine
clothes, fine homes, a world of pleasure and opportunity in which to
move. They did not have to scrimp and save and work to pay their
own way. And yet she had always been compelled to do it, but had
never complained until now—or until he came, and after. Bethune
Street, with its commonplace front yards and houses nearly all alike,
and this house, so like the others, room for room and porch for
porch, and her parents, too, really like all the others, had seemed
good enough, quite satisfactory, indeed, until then. But now, now!
Here, in their kitchen, was her mother, a thin, pale, but kindly
woman, peeling potatoes and washing lettuce, and putting a bit of
steak or a chop or a piece of liver in a frying-pan day after day,
morning and evening, month after month, year after year. And next
door was Mrs. Kessel doing the same thing. And next door Mrs.
Cryder. And next door Mrs. Pollard. But, until now, she had not
thought it so bad. But now—now—oh! And on all the porches or
lawns all along this street were the husbands and fathers, mostly
middle-aged or old men like her father, reading their papers or
cutting the grass before dinner, or smoking and meditating afterward.
Her father was out in front now, a stooped, forbearing, meditative
soul, who had rarely anything to say—leaving it all to his wife, her
mother, but who was fond of her in his dull, quiet way. He was a
pattern-maker by trade, and had come into possession of this small,
ordinary home via years of toil and saving, her mother helping him.
They had no particular religion, as he often said, thinking reasonably
human conduct a sufficient passport to heaven, but they had gone
occasionally to the Methodist Church over in Nicholas Street, and
she had once joined it. But of late she had not gone, weaned away
by the other commonplace pleasures of her world.
And then in the midst of it, the dull drift of things, as she now saw
them to be, he had come—Arthur Bristow—young, energetic, good-
looking, ambitious, dreamful, and instanter, and with her never
knowing quite how, the whole thing had been changed. He had
appeared so swiftly—out of nothing, as it were.
Previous to him had been Barton Williams, stout, phlegmatic,
good-natured, well-meaning, who was, or had been before Arthur
came, asking her to marry him, and whom she allowed to half
assume that she would. She had liked him in a feeble, albeit, as she
thought, tender way, thinking him the kind, according to the logic of
her neighborhood, who would make her a good husband, and, until
Arthur appeared on the scene, had really intended to marry him. It
was not really a love-match, as she saw now, but she thought it was,
which was much the same thing, perhaps. But, as she now recalled,
when Arthur came, how the scales fell from her eyes! In a trice, as it
were, nearly, there was a new heaven and a new earth. Arthur had
arrived, and with him a sense of something different.
Mabel Gove had asked her to come over to her house in
Westleigh, the adjoining suburb, for Thanksgiving eve and day, and
without a thought of anything, and because Barton was busy
handling a part of the work in the despatcher’s office of the Great
Eastern and could not see her, she had gone. And then, to her
surprise and strange, almost ineffable delight, the moment she had
seen him, he was there—Arthur, with his slim, straight figure and
dark hair and eyes and clean-cut features, as clean and attractive as
those of a coin. And as he had looked at her and smiled and
narrated humorous bits of things that had happened to him,
something had come over her—a spell—and after dinner they had all
gone round to Edith Barringer’s to dance, and there as she had
danced with him, somehow, without any seeming boldness on his
part, he had taken possession of her, as it were, drawn her close,
and told her she had beautiful eyes and hair and such a delicately
rounded chin, and that he thought she danced gracefully and was
sweet. She had nearly fainted with delight.
“Do you like me?” he had asked in one place in the dance, and, in
spite of herself, she had looked up into his eyes, and from that
moment she was almost mad over him, could think of nothing else
but his hair and eyes and his smile and his graceful figure.
Mabel Gove had seen it all, in spite of her determination that no
one should, and on their going to bed later, back at Mabel’s home,
she had whispered:
“Ah, Shirley, I saw. You like Arthur, don’t you?”
“I think he’s very nice,” Shirley recalled replying, for Mabel knew of
her affair with Barton and liked him, “but I’m not crazy over him.” And
for this bit of treason she had sighed in her dreams nearly all night.
And the next day, true to a request and a promise made by him,
Arthur had called again at Mabel’s to take her and Mabel to a
“movie” which was not so far away, and from there they had gone to
an ice-cream parlor, and during it all, when Mabel was not looking,
he had squeezed her arm and hand and kissed her neck, and she
had held her breath, and her heart had seemed to stop.
“And now you’re going to let me come out to your place to see
you, aren’t you?” he had whispered.
And she had replied, “Wednesday evening,” and then written the
address on a little piece of paper and given it to him.
But now it was all gone, gone!
This house, which now looked so dreary—how romantic it had
seemed that first night he called—the front room with its
commonplace furniture, and later in the spring, the veranda, with its
vines just sprouting, and the moon in May. Oh, the moon in May, and
June and July, when he was here! How she had lied to Barton to
make evenings for Arthur, and occasionally to Arthur to keep him
from contact with Barton. She had not even mentioned Barton to
Arthur because—because—well, because Arthur was so much
better, and somehow (she admitted it to herself now) she had not
been sure that Arthur would care for her long, if at all, and then—
well, and then, to be quite frank, Barton might be good enough. She
did not exactly hate him because she had found Arthur—not at all.
She still liked him in a way—he was so kind and faithful, so very dull
and straightforward and thoughtful of her, which Arthur was certainly
not. Before Arthur had appeared, as she well remembered, Barton
had seemed to be plenty good enough—in fact, all that she desired
in a pleasant, companionable way, calling for her, taking her places,
bringing her flowers and candy, which Arthur rarely did, and for that,
if nothing more, she could not help continuing to like him and to feel
sorry for him, and, besides, as she had admitted to herself before, if
Arthur left her— * * * * * Weren’t his parents better off than hers—
and hadn’t he a good position for such a man as he—one hundred
and fifty dollars a month and the certainty of more later on? A little
while before meeting Arthur, she had thought this very good, enough
for two to live on at least, and she had thought some of trying it at
some time or other—but now—now——
And that first night he had called—how well she remembered it—
how it had transfigured the parlor next this in which she was now,
filling it with something it had never had before, and the porch
outside, too, for that matter, with its gaunt, leafless vine, and this
street, too, even—dull, commonplace Bethune Street. There had
been a flurry of snow during the afternoon while she was working at
the store, and the ground was white with it. All the neighboring
homes seemed to look sweeter and happier and more inviting than
ever they had as she came past them, with their lights peeping from
under curtains and drawn shades. She had hurried into hers and
lighted the big red-shaded parlor lamp, her one artistic treasure, as
she thought, and put it near the piano, between it and the window,
and arranged the chairs, and then bustled to the task of making
herself as pleasing as she might. For him she had gotten out her one
best filmy house dress and done up her hair in the fashion she
thought most becoming—and that he had not seen before—and
powdered her cheeks and nose and darkened her eyelashes, as
some of the girls at the store did, and put on her new gray satin
slippers, and then, being so arrayed, waited nervously, unable to eat
anything or to think of anything but him.
And at last, just when she had begun to think he might not be
coming, he had appeared with that arch smile and a “Hello! It’s here
you live, is it? I was wondering. George, but you’re twice as sweet as
I thought you were, aren’t you?” And then, in the little entryway,
behind the closed door, he had held her and kissed her on the mouth
a dozen times while she pretended to push against his coat and
struggle and say that her parents might hear.
And, oh, the room afterward, with him in it in the red glow of the
lamp, and with his pale handsome face made handsomer thereby, as
she thought! He had made her sit near him and had held her hands
and told her about his work and his dreams—all that he expected to
do in the future—and then she had found herself wishing intensely to
share just such a life—his life—anything that he might wish to do;
only, she kept wondering, with a slight pain, whether he would want
her to—he was so young, dreamful, ambitious, much younger and
more dreamful than herself, although, in reality, he was several years
older.
And then followed that glorious period from December to this late
September, in which everything which was worth happening in love
had happened. Oh, those wondrous days the following spring, when,
with the first burst of buds and leaves, he had taken her one Sunday
to Atholby, where all the great woods were, and they had hunted
spring beauties in the grass, and sat on a slope and looked at the
river below and watched some boys fixing up a sailboat and setting
forth in it quite as she wished she and Arthur might be doing—going
somewhere together—far, far away from all commonplace things and
life! And then he had slipped his arm about her and kissed her cheek
and neck, and tweaked her ear and smoothed her hair—and oh,
there on the grass, with the spring flowers about her and a canopy of
small green leaves above, the perfection of love had come—love so
wonderful that the mere thought of it made her eyes brim now! And
then had been days, Saturday afternoons and Sundays, at Atholby
and Sparrows Point, where the great beach was, and in lovely
Tregore Park, a mile or two from her home, where they could go of
an evening and sit in or near the pavilion and have ice-cream and
dance or watch the dancers. Oh, the stars, the winds, the summer
breath of those days! Ah, me! Ah, me!
Naturally, her parents had wondered from the first about her and
Arthur, and her and Barton, since Barton had already assumed a
proprietary interest in her and she had seemed to like him. But then
she was an only child and a pet, and used to presuming on that, and
they could not think of saying anything to her. After all, she was
young and pretty and was entitled to change her mind; only, only—
she had had to indulge in a career of lying and subterfuge in
connection with Barton, since Arthur was headstrong and wanted
every evening that he chose—to call for her at the store and keep
her down-town to dinner and a show.
Arthur had never been like Barton, shy, phlegmatic, obedient,
waiting long and patiently for each little favor, but, instead, masterful
and eager, rifling her of kisses and caresses and every delight of
love, and teasing and playing with her as a cat would a mouse. She
could never resist him. He demanded of her her time and her
affection without let or hindrance. He was not exactly selfish or cruel,
as some might have been, but gay and unthinking at times,
unconsciously so, and yet loving and tender at others—nearly
always so. But always he would talk of things in the future as if they
really did not include her—and this troubled her greatly—of places
he might go, things he might do, which, somehow, he seemed to
think or assume that she could not or would not do with him. He was
always going to Australia sometime, he thought, in a business way,
or to South Africa, or possibly to India. He never seemed to have any
fixed clear future for himself in mind.
A dreadful sense of helplessness and of impending disaster came
over her at these times, of being involved in some predicament over
which she had no control, and which would lead her on to some sad
end. Arthur, although plainly in love, as she thought, and apparently
delighted with her, might not always love her. She began, timidly at
first (and always, for that matter), to ask him pretty, seeking
questions about himself and her, whether their future was certain to
be together, whether he really wanted her—loved her—whether he
might not want to marry some one else or just her, and whether she
wouldn’t look nice in a pearl satin wedding-dress with a long creamy
veil and satin slippers and a bouquet of bridal-wreath. She had been
so slowly but surely saving to that end, even before he came, in
connection with Barton; only, after he came, all thought of the import
of it had been transferred to him. But now, also, she was beginning
to ask herself sadly, “Would it ever be?” He was so airy, so
inconsequential, so ready to say: “Yes, yes,” and “Sure, sure! That’s
right! Yes, indeedy; you bet! Say, kiddie, but you’ll look sweet!” but,
somehow, it had always seemed as if this whole thing were a
glorious interlude and that it could not last. Arthur was too gay and
ethereal and too little settled in his own mind. His ideas of travel and
living in different cities, finally winding up in New York or San
Francisco, but never with her exactly until she asked him, was too
ominous, although he always reassured her gaily: “Of course! Of
course!” But somehow she could never believe it really, and it made
her intensely sad at times, horribly gloomy. So often she wanted to
cry, and she could scarcely tell why.
And then, because of her intense affection for him, she had finally
quarreled with Barton, or nearly that, if one could say that one ever
really quarreled with him. It had been because of a certain Thursday
evening a few weeks before about which she had disappointed him.
In a fit of generosity, knowing that Arthur was coming Wednesday,
and because Barton had stopped in at the store to see her, she had
told him that he might come, having regretted it afterward, so
enamored was she of Arthur. And then when Wednesday came,
Arthur had changed his mind, telling her he would come Friday
instead, but on Thursday evening he had stopped in at the store and
asked her to go to Sparrows Point, with the result that she had no
time to notify Barton. He had gone to the house and sat with her
parents until ten-thirty, and then, a few days later, although she had
written him offering an excuse, had called at the store to complain
slightly.
“Do you think you did just right, Shirley? You might have sent
word, mightn’t you? Who was it—the new fellow you won’t tell me
about?”
Shirley flared on the instant.
“Supposing it was? What’s it to you? I don’t belong to you yet, do
I? I told you there wasn’t any one, and I wish you’d let me alone
about that. I couldn’t help it last Thursday—that’s all—and I don’t
want you to be fussing with me—that’s all. If you don’t want to, you
needn’t come any more, anyhow.”
“Don’t say that, Shirley,” pleaded Barton. “You don’t mean that. I
won’t bother you, though, if you don’t want me any more.”
And because Shirley sulked, not knowing what else to do, he had
gone and she had not seen him since.
And then sometime later when she had thus broken with Barton,
avoiding the railway station where he worked, Arthur had failed to
come at his appointed time, sending no word until the next day,
when a note came to the store saying that he had been out of town
for his firm over Sunday and had not been able to notify her, but that
he would call Tuesday. It was an awful blow. At the time, Shirley had
a vision of what was to follow. It seemed for the moment as if the
whole world had suddenly been reduced to ashes, that there was
nothing but black charred cinders anywhere—she felt that about all
life. Yet it all came to her clearly then that this was but the beginning
of just such days and just such excuses, and that soon, soon, he
would come no more. He was beginning to be tired of her and soon
he would not even make excuses. She felt it, and it froze and
terrified her.
And then, soon after, the indifference which she feared did follow
—almost created by her own thoughts, as it were. First, it was a
meeting he had to attend somewhere one Wednesday night when he
was to have come for her. Then he was going out of town again,
over Sunday. Then he was going away for a whole week—it was
absolutely unavoidable, he said, his commercial duties were
increasing—and once he had casually remarked that nothing could
stand in the way where she was concerned—never! She did not
think of reproaching him with this; she was too proud. If he was
going, he must go. She would not be willing to say to herself that she
had ever attempted to hold any man. But, just the same, she was
agonized by the thought. When he was with her, he seemed tender
enough; only, at times, his eyes wandered and he seemed slightly
bored. Other girls, particularly pretty ones, seemed to interest him as
much as she did.
And the agony of the long days when he did not come any more
for a week or two at a time! The waiting, the brooding, the
wondering, at the store and here in her home—in the former place
making mistakes at times because she could not get her mind off
him and being reminded of them, and here at her own home at
nights, being so absent-minded that her parents remarked on it. She
felt sure that her parents must be noticing that Arthur was not
coming any more, or as much as he had—for she pretended to be
going out with him, going to Mabel Gove’s instead—and that Barton
had deserted her too, he having been driven off by her indifference,
never to come any more, perhaps, unless she sought him out.
And then it was that the thought of saving her own face by taking
up with Barton once more occurred to her, of using him and his
affections and faithfulness and dulness, if you will, to cover up her
own dilemma. Only, this ruse was not to be tried until she had written
Arthur this one letter—a pretext merely to see if there was a single
ray of hope, a letter to be written in a gentle-enough way and asking
for the return of the few notes she had written him. She had not seen
him now in nearly a month, and the last time she had, he had said he
might soon be compelled to leave her awhile—to go to Pittsburgh to
work. And it was his reply to this that she now held in her hand—
from Pittsburgh! It was frightful! The future without him!
But Barton would never know really what had transpired, if she
went back to him. In spite of all her delicious hours with Arthur, she
could call him back, she felt sure. She had never really entirely
dropped him, and he knew it. He had bored her dreadfully on
occasion, arriving on off days when Arthur was not about, with
flowers or candy, or both, and sitting on the porch steps and talking
of the railroad business and of the whereabouts and doings of some
of their old friends. It was shameful, she had thought at times, to see
a man so patient, so hopeful, so good-natured as Barton, deceived
in this way, and by her, who was so miserable over another. Her
parents must see and know, she had thought at these times, but still,
what else was she to do?
“I’m a bad girl,” she kept telling herself. “I’m all wrong. What right
have I to offer Barton what is left?” But still, somehow, she realized
that Barton, if she chose to favor him, would only be too grateful for
even the leavings of others where she was concerned, and that even
yet, if she but deigned to crook a finger, she could have him. He was
so simple, so good-natured, so stolid and matter of fact, so different
to Arthur whom (she could not help smiling at the thought of it) she
was loving now about as Barton loved her—slavishly, hopelessly.
And then, as the days passed and Arthur did not write any more—
just this one brief note—she at first grieved horribly, and then in a fit
of numb despair attempted, bravely enough from one point of view,
to adjust herself to the new situation. Why should she despair? Why
die of agony where there were plenty who would still sigh for her—
Barton among others? She was young, pretty, very—many told her
so. She could, if she chose, achieve a vivacity which she did not feel.
Why should she brook this unkindness without a thought of
retaliation? Why shouldn’t she enter upon a gay and heartless
career, indulging in a dozen flirtations at once—dancing and killing
all thoughts of Arthur in a round of frivolities? There were many who
beckoned to her. She stood at her counter in the drug store on many
a day and brooded over this, but at the thought of which one to begin
with, she faltered. After her late love, all were so tame, for the
present anyhow.
And then—and then—always there was Barton, the humble or
faithful, to whom she had been so unkind and whom she had used
and whom she still really liked. So often self-reproaching thoughts in
connection with him crept over her. He must have known, must have
seen how badly she was using him all this while, and yet he had not
failed to come and come, until she had actually quarreled with him,
and any one would have seen that it was literally hopeless. She
could not help remembering, especially now in her pain, that he
adored her. He was not calling on her now at all—by her indifference
she had finally driven him away—but a word, a word— She waited
for days, weeks, hoping against hope, and then——
The office of Barton’s superior in the Great Eastern terminal had

always made him an easy object for her blandishments, coming and
going, as she frequently did, via this very station. He was in the
office of the assistant train-despatcher on the ground floor, where
passing to and from the local, which, at times, was quicker than a
street-car, she could easily see him by peering in; only, she had
carefully avoided him for nearly a year. If she chose now, and would
call for a message-blank at the adjacent telegraph-window which
was a part of his room, and raised her voice as she often had in the
past, he could scarcely fail to hear, if he did not see her. And if he
did, he would rise and come over—of that she was sure, for he never
could resist her. It had been a wile of hers in the old days to do this
or to make her presence felt by idling outside. After a month of
brooding, she felt that she must act—her position as a deserted girl
was too much. She could not stand it any longer really—the eyes of
her mother, for one.
It was six-fifteen one evening when, coming out of the store in
which she worked, she turned her step disconsolately homeward.
Her heart was heavy, her face rather pale and drawn. She had
stopped in the store’s retiring-room before coming out to add to her
charms as much as possible by a little powder and rouge and to
smooth her hair. It would not take much to reallure her former
sweetheart, she felt sure—and yet it might not be so easy after all.
Suppose he had found another? But she could not believe that. It
had scarcely been long enough since he had last attempted to see
her, and he was really so very, very fond of her and so faithful. He
was too slow and certain in his choosing—he had been so with her.
Still, who knows? With this thought, she went forward in the evening,
feeling for the first time the shame and pain that comes of deception,
the agony of having to relinquish an ideal and the feeling of despair
that comes to those who find themselves in the position of
suppliants, stooping to something which in better days and better
fortune they would not know. Arthur was the cause of this.
When she reached the station, the crowd that usually filled it at
this hour was swarming. There were so many pairs like Arthur and
herself laughing and hurrying away or so she felt. First glancing in
the small mirror of a weighing scale to see if she were still of her
former charm, she stopped thoughtfully at a little flower stand which
stood outside, and for a few pennies purchased a tiny bunch of
violets. She then went inside and stood near the window, peering
first furtively to see if he were present. He was. Bent over his work, a
green shade over his eyes, she could see his stolid, genial figure at
a table. Stepping back a moment to ponder, she finally went forward
and, in a clear voice, asked,
“May I have a blank, please?”
The infatuation of the discarded Barton was such that it brought
him instantly to his feet. In his stodgy, stocky way he rose, his eyes
glowing with a friendly hope, his mouth wreathed in smiles, and
came over. At the sight of her, pale, but pretty—paler and prettier,
really, than he had ever seen her—he thrilled dumbly.
“How are you, Shirley?” he asked sweetly, as he drew near, his
eyes searching her face hopefully. He had not seen her for so long
that he was intensely hungry, and her paler beauty appealed to him
more than ever. Why wouldn’t she have him? he was asking himself.
Why wouldn’t his persistent love yet win her? Perhaps it might. “I
haven’t seen you in a month of Sundays, it seems. How are the
folks?”
“They’re all right, Bart,” she smiled archly, “and so am I. How have
you been? It has been a long time since I’ve seen you. I’ve been
wondering how you were. Have you been all right? I was just going
to send a message.”
As he had approached, Shirley had pretended at first not to see
him, a moment later to affect surprise, although she was really
suppressing a heavy sigh. The sight of him, after Arthur, was not
reassuring. Could she really interest herself in him any more? Could
she?
“Sure, sure,” he replied genially; “I’m always all right. You couldn’t
kill me, you know. Not going away, are you, Shirl?” he queried
interestedly.
“No; I’m just telegraphing to Mabel. She promised to meet me to-
morrow, and I want to be sure she will.”
“You don’t come past here as often as you did, Shirley,” he
complained tenderly. “At least, I don’t seem to see you so often,” he
added with a smile. “It isn’t anything I have done, is it?” he queried,
and then, when she protested quickly, added: “What’s the trouble,
Shirl? Haven’t been sick, have you?”
She affected all her old gaiety and ease, feeling as though she
would like to cry.
“Oh, no,” she returned; “I’ve been all right. I’ve been going through
the other door, I suppose, or coming in and going out on the
Langdon Avenue car.” (This was true, because she had been
wanting to avoid him.) “I’ve been in such a hurry, most nights, that I
haven’t had time to stop, Bart. You know how late the store keeps us
at times.”
He remembered, too, that in the old days she had made time to
stop or meet him occasionally.
“Yes, I know,” he said tactfully. “But you haven’t been to any of our
old card-parties either of late, have you? At least, I haven’t seen you.
I’ve gone to two or three, thinking you might be there.”
That was another thing Arthur had done—broken up her interest in
these old store and neighborhood parties and a banjo-and-mandolin
club to which she had once belonged. They had all seemed so
pleasing and amusing in the old days—but now— * * * * In those
days Bart had been her usual companion when his work permitted.
“No,” she replied evasively, but with a forced air of pleasant
remembrance; “I have often thought of how much fun we had at
those, though. It was a shame to drop them. You haven’t seen Harry
Stull or Trina Task recently, have you?” she inquired, more to be
saying something than for any interest she felt.
He shook his head negatively, then added:
“Yes, I did, too; here in the waiting-room a few nights ago. They
were coming down-town to a theater, I suppose.”
His face fell slightly as he recalled how it had been their custom to
do this, and what their one quarrel had been about. Shirley noticed it.
She felt the least bit sorry for him, but much more for herself, coming
back so disconsolately to all this.
“Well, you’re looking as pretty as ever, Shirley,” he continued,
noting that she had not written the telegram and that there was
something wistful in her glance. “Prettier, I think,” and she smiled
sadly. Every word that she tolerated from him was as so much gold
to him, so much of dead ashes to her. “You wouldn’t like to come
down some evening this week and see ‘The Mouse-Trap,’ would
you? We haven’t been to a theater together in I don’t know when.”
His eyes sought hers in a hopeful, doglike way.
So—she could have him again—that was the pity of it! To have
what she really did not want, did not care for! At the least nod now
he would come, and this very devotion made it all but worthless, and
so sad. She ought to marry him now for certain, if she began in this
way, and could in a month’s time if she chose, but oh, oh—could
she? For the moment she decided that she could not, would not. If
he had only repulsed her—told her to go—ignored her—but no; it
was her fate to be loved by him in this moving, pleading way, and
hers not to love him as she wished to love—to be loved. Plainly, he
needed some one like her, whereas she, she——. She turned a little
sick, a sense of the sacrilege of gaiety at this time creeping into her
voice, and exclaimed:
“No, no!” Then seeing his face change, a heavy sadness come
over it, “Not this week, anyhow, I mean” (“Not so soon,” she had

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Copyright © 2016-2021, by William S. Veatch.

This book is dedicated to the memory of my parents, Richard and Lorraine,

1. Introduction to Contracts as Logic Equations 1

1.1. The Importance of a Firm Foundation in Math and 1

1.2. A Sentence Reflects a Relationship Between Two Ideas 3

1.3. The Importance of the Truth Value of a Sentence 5

1.4. Sentence Types and Their Relationship to Truth Value 6

1.5. Truth Value Equations 8

1.6. The Rule of Substitution 9

1.7. Sentence “Short Names” as a Proxy for Full Sentences 9

1.8. References, Historical Notes, and Further Reading 10

2. The Starting Point: The Default Equation 11

2.1. Compliance Memorandum v. Event of Default 11

2.2. Three Primary Components: Breach of Representation 12

2.3. Truth Value Equations 12

2.4. Writing a Default Equation as an IF-THEN Statement 14

2.5. Incorporating Truth Value Data from Outside the 15

2.6. References, Historical Notes, and Further Reading 15

3. Adding Representations to the Default Equation 17

3.1. Structure of Representations 17

3.2. Bringdown of Representations 19

3.3. Incorporation of Data from Third-Party Sources 19

3.4. Classification of Representations 19

3.5. How to Use a Truth Value Equation; Rules for 21

3.6. Updated Default Equation 25

3.6.1. Simplified Logic Equation 25

3.6.2. Expanded Logic Equation 25

3.6.3. Logic Equation with Sentence Short Names 25

3.7. References, Historical Notes, and Further Reading 26

4. Adding Covenants to the Default Equation 28

4.1. Test Truth Value as of a Determination Date 29

4.2. Notice and Opportunity to Cure 31

4.3. Classification of Covenants 31

4.4. Sample Truth Value Equation 32

4.5. Updated Default Equation 33

4.5.1. Simplified Logic Equation 34

4.5.2. Expanded Logic Equation 34

4.5.3. Logic Equation with Sentence Short Names 35

4.6. References, Historical Notes, and Further Reading 36

5. Adding Material Adverse Events to the Default Equation 37

5.1. Covenant v. Event of Default 37

5.2. Classification of Material Adverse Events 37

5.3. Sample Truth Value Equation 38

5.4. Updated Default Equation 39

5.4.1. Simplified Logic Equation 39

5.4.2. Expanded Logic Equation 40

5.4.3. Logic Equation with Sentence Short Names 40

5.5. References, Historical Notes, and Further Reading 41

6. Adding Other Sentence Types 42

6.1. Remedies and Other Grants of Rights 42

6.2. Warranties and Indemnities 45

6.3. Assumption of Risk, Disclaimers, and Waivers of 48

6.4. Assignments and Directions/Orders 50

6.5. Mutual Agreement, Statement of Consideration, 51