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Tag Archive: contracts

Knowing Where to Start

Clients wonder sometimes what they are getting into when they ask a lawyer to draft a contract. Maybe their fear is that their attorney will sharpen up his metaphorical pencil, lean his chair back to think deeply on life and law for an hour or two (on the clock), and then pull out the laptop and sit down to drafts things up from scratch, like a composer writing out each note to a (very boring) symphony. The client may fear that the lawyer views every deal is different, that everything about every deal is new every time, that everything needs to be tailored like a bespoke suit.

Every deal is different, it’s often said – I’ve heard myself say it a hundred times. That’s because the facts are different, and that’s because no two people and no two companies are alike or have the exact same priorities. But that doesn’t mean that two deals – say, two leases of refrigerated warehouse space, or two agreements for the purchase of the assets of small businesses — happening 500 miles apart (or 5000 or 5) — can’t be done with forms of contract that are 90% the same.

In fact, they probably should be done that way.

And your attorney shouldn’t be spending a whole lot of time going for the Pulitzer Prize for creative nonfiction and drafting that 90% (just a percentage used for illustration purposes) from scratch.

Unless we are speaking of some sort of business deal where the industry is utterly new, the parties are utterly idiosyncratic, and the risk tolerances are off the charts (one direction or the other), or all of the above, the same basic forms work across the board. I remember Internet 1.0 – the days of AOL and Pets.com — and the ways that lawyers were trying to draft “application service provider” contracts that expressed the concept of software programs being accessed over the Internet (what we now call Software as a Service (SaaS)). But even in that time, when the Internet was beginning to utterly change the way the world operated, the contracts were pretty much built right on top of software, consulting, joint venture and financing contracts that had been around for decades before that.

The majority of the text in a contract from 1975 (the year of the room-sized computer) – for example, events of default, remedies on default, representations and warranties, indemnification, assignment, the boilerplate at the end, and the general flow and sequence of the document — was essentially the same as the text in a contract drafted in 2000 (the year of the Pets.com sock puppet). The same is even more true for commercial real estate contracts, and even holds true for many types of intellectual property agreements.

And it goes without saying that 90% of the text in an accounting SaaS services agreement from 2017 is going to be the same as a payroll SaaS services agreement from 2019.

Anyone who tells it differently is trying to create mystery where there really should be none.

That’s my candid and honest observation How does this insight relate to you?

As outside corporate general counsel, under our OPENgc service offering, GreeneHurlocker is keenly focused on saving a client time and money while still delivering the legal assistance a client needs, when they need it. We avoid reinventing wheels. We’ve been practicing enough years, in widely varying industries and for companies of all sizes, to have an experienced, intuitive sense of what works and what doesn’t, and how the work we’ve done before may apply to the work we are doing for a client now. When a client picks up the phone and asks for an individual contract to be done or an entire deal to be quarterbacked, the client can rest assured we are not starting from scratch. Instead, we’re applying all the knowledge and work we have already done.

We’re here to guide you to the end of your deal. But we also know where to start.

Good Times and Great Fellowship in Harrisonburg

Thank you! Harrisonburg partner Jared Burden and the whole GreeneHurlocker firm are grateful for the great attendance of our business clients and colleagues at our “Top Five Risks When You Sign A Contract” session with our friend Tom Mendez of McGriff Insurance Services yesterday afternoon in our offices in the Smith House. And the after-party, our Open House celebrating the successes of our first year of our Harrisonburg office, was incredible fun and filled the art gallery downstairs. We are pleased to report that all those who attended shared our Holiday spirit and wishes for a prosperous New Year were frequent and heartfelt. We can’t wait for another time to get together, so watch for our next seminar announcement in the New Year. You can see the fun for yourself below.

Words Matter in the Heart of the Deal

Lawyers trade in words.  It goes beyond dropping Latin phrases like ipsi dixit (“a dogmatic and unproven statement”) and nunc pro tunc (“now for then”) into legal briefs.  It is part of the business law as well.  Attorneys write into their contracts musty-looking words that are meaningful to them (like “hereby” and “therefor”) to telegraph something to the lawyers on the other side and to courts who might interpret the document years later.

Adherence to customs like this is tied to the fact that lawyers live in a world where the consequences of imprecision can be a serious matter.   There are two ways to accomplish precision: write with rigorous terseness that no one can misunderstand or throw up a fence of words that hems in an unruly concept so tightly that it can’t escape.

Representations, warranties, covenants and conditions are found in most commercial contracts of any complexity, such as shopping center leases and an asset purchase agreement.  These provisions are, or at least should be, sources of comfort to the parties to a contract, because they can greatly reduce the risk that arises from the unknown.   But they are often glossed over by the principals in a deal – perhaps perceived as another lawyerly way of saying the same thing in four different ways.

The contractual basics of offer, acceptance and consideration are usually dispensed with at the top of the book – the first two or three pages of the contract.  These provisions establish the “what” of the deal.  A few pages in come the provisions in which the parties represent to each other that certain facts are true, warrant that a set of facts are accurate, covenant to do things and not do things, and state the conditions on their performance under the contract.  These sections answer the question of “why.”  The representations, warranties, covenants and conditions, and the indemnification and remedy provisions that interact with them, lay bare the reasons for the deal – the preconceptions of the parties.  This is why these provisions are usually negotiated with a high level of precision, whether the method is the rigorous terseness or the high fence of words.

The four concepts are distinct but interrelated.

  • A representation is an assertion of fact that is given by one party to another party to induce that party to enter into a contract, close on the contract, accept the risks inherent in the deal, or take some other action. If the representation of fact is untrue, it is inaccurate, and the remedies for misrepresentation set forth in the contract are available, which could include undoing the contract.   The contract sets the remedies.
  • A warranty is a promise that the facts asserted are true, which is impliedly supported by a promise to make it right if it isn’t true. If the warranted facts are untrue, it is a breach of contract, which, technically, is different than misrepresentation.
  • A covenant is a promise made by a party to take certain action, or refrain from acting. Not doing as promised is a break of contract, and the contract will usually say specifically what the remedies are.
  • A condition is a fact that must be true or an event that must have occurred before a party’s obligations or rights are triggered.

Representations and warranties, while technically different concepts, are so closely related to each other in practicality that it is excusable that the two words are written and spoken as a couplet, as with “over and done” and “peace and quiet.”    Some commentators point out differences, such as that the former is about the past and the latter is about the future.  At the end of the day, though, the distinctions are not important.  Courts often ignore the difference between the two terms, and a contract usually provides the same remedies for both.

Quite a bit is going on with representations and warranties in a corporate acquisition agreement.  They apportion risk.  They create direct claims in the case of inaccuracy.  They form the basis of the parties’ indemnification obligations.  And, they are informational.  The disclosure schedules that lay out the exceptions to the statements of fact will often increase the size of the document to the width of the Hamilton biography or beyond, because it’s in the schedules that the details of the to-be-acquired company are set forth, dialoguing with the legal, financial tax due diligence that the acquirer has undertaken.

Covenants are often intermingled with the representations and warranties – for example, when the party represents and warranties that certain facts will be true at some moment in time in the future.   This is not usually a conscious choice, and for a variety of good reasons (often having to do with clarity as to what remedies apply to what breaches), mixing these concepts together should be avoided.  It is best to keep the future – the realm of covenants — separate from the present and past – the realm of representations and warranties.

Conditions in a contract are critical because they provide the “outs” that a party needs to have in something as complex and nuanced as a corporate acquisition agreement or the contract to purchase an office complex.  The list of things which must be true to finally and inalterably bind a party to close on such a deal is long, and among the most important of them will be that the reps and warranties are accurate as of the closing date and that all actions that the other party has covenanted to take have been taken.

Some say that the only time contracts are necessary is when everything is falling apart.  If that is true, then representations and warranties, covenants, and conditions – and the thick disclosure schedules and indemnification and remedy provisions they spawn – are truly at the beating heart of the business deal.