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Announcement: The Common Draft contract-clause form file is posted (in draft); it includes several hundred clauses, with extensive annotations, explanations, and commentary. If you’d like to be notified of significant developments, please subscribe to updates at right. See also my first e‑book, Signing a Business Contract? A Quick Final Checklist for Greater Peace of Mind.

I’ve done a significant reorganization of the Common Draft annotated clause collection. A screen shot is below — check it out.
Common Draft screen shot 2014-10-23

Suppose that in a contract for services, the contract includes a requirement that the provider maintain insurance. The customer should seriously consider:

  • requiring the provider to furnish a copy of the policy itself — or better yet, requiring the provider to get the insurance carrier to furnish a copy of the policy (along with a certificate of insurance, perhaps with additional-insured-status); and
  • verifying that the policy doesn’t exclude the type of claim that the customer might bring.

Not doing so appears to have cost husband-and-wife homeowners hundreds of thousands of dollars in home-repair bills. In Crownover v. Mid-Continent Cas. Co., No. 11-10166 (5th Cir. June 27, 2014):

  • The homeowners’ building contractor botched the construction of their home; the necessary repair work cost the homeowners hundreds of thousands of dollars.
  • The homeowners brought an arbitration proceeding against the builder, and won.
  • The builder subsequently filed for bankruptcy protection; the bankruptcy judge limited the homeowners’ claim to the amount covered by the builder’s insurance policy.
  • The insurance carrier refused to pay the homeowners, on grounds that the policy excluded the type of claim brought by the homeowners (failure to repair). The homeowners sued the carrier.
  • The courts held that the homeowners’ claim against the insurance carrier was barred by an exclusion in the insurance policy for contractually-assumed liabilities.

Another lesson: A customer should think twice before agreeing to exclusion of implied warranties, because that might disqualify the customer from getting paid by the insurance company. In the Crownover case:

  • The builder’s insurance policy did cover liabilities to which the insured would have been subject anyway, even in the absence of a contract — such as implied warranties.
  • But, under applicable state law, the express warranty contained in the construction contract superseded the corresponding implied warranty that otherwise would have applied by law.
  • Therefore, the builder was not liable for breach of that implied warranty; consequently, the builder’s insurance policy did not cover the homeowners’ claim.

This past Friday, as expected, the state of Oregon filed a $3 billion lawsuit against Oracle Corporation and six Oracle employees personally, in the wake of the failed attempt to develop Oregon’s health-insurance exchange under the Affordable Care Act a.k.a. Obamacare. The six employees included the president/CFO; three vice presidents; one senior vice president; and one technical manager who was accused of having conducted a fraudulent demo of the new system’s capabilities. The state is seeking “only” some $45 million from the technical manager, as well as amounts ranging from $87 million to $267 million from various Oracle executives.

In high-dollar and high-profile cases like this, plaintiffs sometimes bring claims against company employees personally. My guess is that the reason often is to to try to rattle the employees and encourage them to cooperate as witnesses against their employers (sort of like the way criminal prosecutors bring charges against low-level employees).

Against that possibility, it’s not unheard-of for vendor companies to include, in their contract forms, language protecting employees from being sued in their personal capacities. See, for example, the model language to that effect in the Common Draft clause repository, along with the commentary following the language.

I don’t know whether the Oregon-Oracle contracts included such language. I wasn’t able readily to find the contracts in question, which according to news reports was Oracle’s standard license- and services agreement form, used as an umbrella agreement in conjunction with ordering through Dell. Oracle doesn’t appear to have posted that standard form (among others) on the Web. The closest thing I could find was a counterpart, apparently dating back to 2004, that seems to have been intended for use in Europe, the Middle East, and Africa (EMEA). I don’t recall seeing such language in any actual Oracle contracts.

High-profile lawsuits like this typically settle before trial, not least because the elected officials who bring them or authorize them would prefer to trumpet a “victory” instead of rolling the dice with the court.

But such cases don’t always settle; see, for example, the state of Indiana’s lawsuit against IBM for allegedly botching the building of a new system for administering the state’s welfare programs. IBM ended up winning a multi-million dollar judgment in the trial court. See Indiana v. IBM Corp., No. 49Dl0-1005-PL-021451 (Marion Cty Ind. Sup. Ct. July 18, 2012), affirmed in part, reversed in part, No. 49A02-1211-PL-875 (Ind. App.. Feb. 13, 2014) (holding that IBM had materially breached contract but was entitled to be paid, subject to offset).

Lesson: When embarking on a contract that could result in claims for big dollars being thrown around, a provider might want to think about including some protection for its employees. A court, especially a hometown court, might not give effect to such protection in cases of alleged fraud. But such protective language would be better than nothing.

In drafting and negotiating a formula for a contract — for example, a formula for computing damages — it’s important to consider how the computation might work under different factual scenarios. That’s because some courts take a laissez-faire attitude when contract provisions are agreed to by sophisticated parties represented by counsel. If such a formula ends up backfiring on one of the parties, that party might not get a sympathetic hearing.

For example, in a recent Seventh Circuit case:

  • A bank sold a package of distressed loans to an investment firm. The parties’ agreement included a representation about the status of the various assets that collateralized the loans in the package. That representation, however, turned out to be incorrect as to some of those assets, meaning that the bank had breached the agreement.
  • A limitation-of-liability clause in the parties’ agreement capped the investment firm’s damages at an amount to be determined by computing the result of a specified formula. On the facts of the case, that amount turned out to be a negative number, resulting in a zero damage award.

The investment firm claimed that the limitation-of-liability clause was unenforceable or waived, or that it failed of its essential purpose. The district court disagreed, and granted summary judgment for the bank.

The Seventh Circuit affirmed, saying:

Except in the most extraordinary circumstances, we hold sophisticated parties to the terms of their bargain. The terms of the parties’ bargain in this case results in zero recovery for [the investment firm]. The judgment of the district court is affirmed.

Southern Financial Group, LLC v. McFarland State Bank, No. 13-3378, part III (7th Cir. Aug. 15, 2014).

There’s a very real possibility that an exclusive forum-selection clause might be held to trump an arbitration clause in a prior or “background” agreement. For that reason, the Common Draft forum-selection clause makes it clear that the parties don’t intend that result.

At this writing there’s a split in the circuits on this point:

  • The Second and Ninth Circuits have held that an exclusive forum-selection clause does trump an arbitration provision. See Goldman, Sachs & Co. v. Golden Empire Schools Financing Authority, No. 13-797-cv (2d. Cir. Aug. 21, 2014), in which the appeals court affirmed a trial court’s grant of Goldman’s motion to enjoin FINRA arbitration, on grounds that the forum-selection clauses in the parties’ agreements superseded the arbitration provision (hat tip: Michael Oberman); see also Goldman, Sachs & Co. v. City of Reno, No. 13-15445, at part III-C, slip op. at 15-16, 19-28, 747 F.3d 733, 736 (9th Cir. 2014), where the appeals court reversed a denial of preliminary injunction and final judgment on the same grounds;
  • In contrast, the Fourth Circuit has held that an exclusive forum-selection clause does not trump an arbitration clause, on grounds that the forum-selection clause referred to litigation, not arbitration, and “we believe that it would never cross a reader’s mind that the [forum-selection] clause provides that the right to FINRA arbitration was being superseded or waived.” UBS Fin. Servs., Inc. v. Carilion Clinic, 706 F.3d 319, 329-30 (4th Cir. 2013); see also UBS Sec. LLC v. Allina Health Sys., No. 12–2090, 2013 WL 500373 (D. Minn. Feb. 11, 2013) (following Carilion Clinic).