Transcript When Bad Things Happen to Good Contracts: Drafting to

When Bad Things Happen to Good Contracts:
Drafting to Preserve Your Deal Through
Bankruptcy and Litigation
William H. Rice II
Vice President, General Counsel and Secretary, PEMSTAR Inc.
Steven E. Carlson
Katherine A. Constantine
Steven J. Wells
Dorsey & Whitney LLP
“Most Likely To Be Litigated”
• Arbitration / Disputes Resolution
• Termination
• Confidentiality
Bankruptcy Surprises
Arbitration Provision
Arbitration. All disputes arising in connection with this
Agreement shall be finally settled by binding arbitration to be
conducted in [Chicago, Illinois, U.S.A.] under the Rules of
Conciliation and Arbitration of the International Chamber of
Commerce ("ICC") in the English language by [one (1)
arbitrator] [three (3) arbitrators] appointed in accordance with
said Rules, applying the substantive laws of [the State of
Illinois, U.S.A] without regard to conflicts of law principles. Any
decision rendered by any arbitration tribunal pursuant to this
Section shall be final and binding on the parties thereto, and
judgment thereon may be entered by any court of competent
jurisdiction. Each party shall bear its own
costs and expenses (including legal fees) of such
arbitration and one-half of the fees and expenses
of the arbitrator(s).
• Forum/location
• Law to govern
• Rules (AAA, ICC, etc.)
Arbitration Favored
• If Intent Unclear, Presumption in Favor of
Arbitration
Arbitration and Dispute
Resolution Provisions
• Anticipating the Need for Speed
Injunction in Aid or
Anticipation of Arbitration
Merrill Lynch v. Hovey, 726 F.2d 1286
(8th Cir. 1984)
Statute of Limitations
and Arbitration
Har-Mar, Inc. v. Thorson & Thorshov, Inc.
218 N.W.2d 751 (1974)
Termination Provision
(a) Either party may terminate this Agreement by giving
notice in writing to the other party in the event the
other party is in material breach of this Agreement and
has failed to cure such breach within thirty (30) days of
receipt of a written notice from the first party
specifying the nature of such breach;
(b) Should an event of Force Majeure continue for more
than one hundred eighty (180) days as provided in
Section 13.4 below, the party not prevented from
performing may terminate this Agreement by giving
notice in writing to the other party.
Termination Provisions
• For Cause
• Without Cause
• Upon Event or Condition
• Expiration or Non-Renewal
Supply, Distribution, Licensing,
“Partnering” Contracts —
Beware the “Franchise Trap”
Minnesota Franchise Act –
Minn. Stat. § 80C.01
Contract
(i)
Person or Company Is Granted the Right to
Engage in the Business of Offering or
Distributing Goods or Services Using the
Franchisor’s Trademark;
(ii) in Which the Parties Have a Community of
Interest in the Marketing of Goods or Services;
(iii) for Which the Person or Company Pays, Directly
or Indirectly, a Fee.
§ 80C Limits On Termination
• 90-Day Notice
• Good Cause
• 60 Cure Period
• Sales Representation Acts (e.g., Minn. Stat.
§ 235E.37)
• “Fair Dealer Laws” (e.g., Wi. Stat. § 135.01)
Special Industry Limitations
• Cars – Minn. Stat. § 80E
• Booze – Minn. Stat. § 325B
• Gas – Minn. Stat. § 80F
• Farm Equipment
• “Heavy Equipment”
Limits on Termination of Contracts
of Indefinite Duration
• UCC – § 2-309
• “Reasonable Notification”
• Doctrine of Equitable Recoupment
Termination on
Bankruptcy Provision
“Upon the filing of a bankruptcy petition by any
party to this contract, this contract* is immediately
and automatically, without any action by any party,
terminated.”
11 U.S.C. §365(e)(1) nullifies this provision and
applicable law allowing termination.
* assumes a contract that is executory in nature
Section 365(e)(1) goes further:
NO right or obligation of any nature may be
modified or terminated, because of a
bankruptcy filing.
Special Bankruptcy Issues
Anti-Assignment Provision
“No party may assign this contract without the
consent of all other parties to this contract.”
11 U.S.C. §365(f)(1) nullifies this provision unless . . .
Personal Services Contract
“This contract is a personal services contract such
that state law excuses the parties from accepting
performance other than by the parties hereof.”
But self-serving contract text does not control.
Debt Financing Contract – not assignable by
Bankruptcy Court.
Aircraft Terminals and Gates
Pre Bankruptcy Waivers
“The Borrower agrees that in the event it files
bankruptcy, the automatic stay shall not modify
the pre-petition rights of the Lender and the
Borrower shall not defend against, and shall
support, any motion to modify the stay pursued by
the Lender.”
Bankruptcy Courts, with narrow exceptions, won’t
enforce this type of provision.
Some Possible Solutions
Include facts and admissions that support:
• lift stay motions
• motions forcing earlier assumption/rejection of
contracts
• objections to contract assignment
Confidentiality Provision
Consultant acknowledges that during the course of performing this
Agreement it may be exposed to confidential information relating to
Client’s business. During the term of this Agreement and for a
period of one (1) year thereafter, Consultant will not directly or
indirectly disclose any such information, will secure and protect
such information in a manner consistent with the maintenance of
Client's rights therein, and will take appropriate action by instruction
or agreement with its employees and agents who are permitted
access to such information to satisfy its obligations hereunder. The
foregoing obligation with respect to confidential information of
Client does not apply to information which is in the public domain,
was rightfully known or becomes known by Consultant prior or
subsequent to its receipt hereunder, was independently
developed by Consultant, or is or becomes public
knowledge by acts of Client or a third party.
Drafting Considerations
• Identify the Information
• Identify the Purpose for Which the Information
Can (or Cannot) Be Used
• Identify Exceptions (e.g., Already in Public
Domain or Possession of Promisor, Received
from Another Source)
• Identify What Happens at the End of the
Contract or Relationship
What Is Confidential Information?
• Uniform Trade Secrets Act (Minn. Stat. § 325C)
• Not Exclusive Definition
• Public Policy Considerations
Beware:
• Conflict of Interest
• Inevitable Disclosure Doctrine -• Pepsico, Inc. v. Redmond, 54 F.3d 1262
(7th Cir. 1995)
• Bankruptcy or Trial Court
Unanticipated Decisions:
• Bankruptcy court relies on 1872 equitable
maxim* to defeat the Uniform Commercial Code
• Court recharacterizes leases as loans resulting
in significantly worse treatment for creditor
* “that which ought to have been done is to be regarded as done…”
Questions and Comments