It's quite common for vendors and customers to enter into "master" agreements that are intended to govern subsequent sales orders, statements of work for services, etc. It's best for the subsequent contracts to state expressly that the master agreement's terms are to control.
Consider CEEG (Shanghai) Solar Science & Tech. Co. v. LUMOS LLC, No. 15-1256 (10th Cir. Jul. 19, 2016), affirming No. 14-cv-03118 (D. Colo. May 29, 2015). In that case:
- A Chinese manufacturer of solar-panel products entered into a co-branding agreement with a U.S. retailer. That agreement called for the retailer to order solar-panel products from the manufacturer at stated prices.
- The retailer's CEO testified, and the U.S. trial court accepted, that the parties had intended that the co-branding agreement would be a "master" agreement that would govern all sales contracts.
- The co-branding agreement contained an arbitration provision, which expressly required that arbitration proceedings be in English.
- The retailer also entered into specific written sales contracts with the manufacturer; the sales contract contained an arbitration provision, but that provision did not require English-language arbitration.
- Apparently, neither the co-branding agreement nor the sales contract in question said anything about a master agreement. (The courts' opinions were not specific on this point.)
- The manufacturer and the retailer communicated exclusively in English.
- One shipment of goods had quality problems; the retailer refused to pay.
- After negotiations went nowhere, the manufacturer filed a demand for arbitration with the Chinese arbitration institution designated in the earlier, co-branding agreement.
- The Chinese arbitration institution sent the U.S. retailer a notice of arbitration, in Chinese. The U.S. retailer did not realize what the notice of arbitration was. Consequently, the retailer did not realize that under the agreed arbitration rules, a 15-day clock was ticking on the retailer's right to participate in selecting the members of the arbitration panel. That deadline passed, and the panel members were selected without input from the retailer.
- The arbitration panel ruled that the so-called master agreement did not apply and that the sales contract controlled. The arbitration panel awarded damages to the manufacturer, which then sought to enforce the award against the retailer in a U.S. court.
The Colorado district court ruled that, contrary to the decision of the arbitration panel, the testimony of the retailer's CEO established that the co-branding agreement had indeed been a "master" agreement; this meant that the Chinese-language notice of arbitration had been insufficient, and that in turn meant that, under the New York Convention, the court could decline to enforce the damages award.
The Tenth Circuit reached the same result, but used a different route to get there. The appellate court noted that arbitration awards are virtually unreviewable by courts, even if the arbitral tribunal "gets it wrong." So, the Tenth Circuit focused instead on whether the notice of arbitration, which was in Chinese, met the standard set out in the New York Convention. The court concluded that the notice standard had not been met, and that the U.S. retailer had been prejudiced as a result. See id., slip op. at 10 & n.2.
- When drafting a purchase order, statement of work, etc., that's to be governed by a "master" agreement, it's best for the draft to expressly identify the "master" agreement and state that its terms apply.
- When drafting a multi-national contract, consider specifying the language in which notices must be sent, especially notices concerning arbitration (and service of process for litigation, if applicable).
I'll be updating the Common Draft annotation about master agreements with a discussion of this case.
(A different question is: What should happen if the master agreement and the subsidiary agreement were to differ in some material respect? Should the master agreement control, or the subsidiary agreement? One approach might be to have the master agreement prevail unless the subsidiary agreement expressly and conspicuously states otherwise in the top half of its front page; that gives the parties flexibility while still alerting whoever signs the statement of work that there might be problems.
I do a fair amount of arbitration work. In response to a suggestion from a colleague, I posted a response to a questionnaire published by an international arbitration group; the response indicates my general preferences for managing arbitration proceedings.
(In a nutshell: In my view, an arbitration case should be managed as a joint business project, and not as an extended tennis match — or boxing match — between the lawyers. [This of course assumes that the parties feel that way too, which they might not.] My response to Item 16 summarizes some of my specific preferences about how to manage a case in that way.)
Emory University has named an award for excellence in teaching transactional law and skills after Tina Stark. From the press release:
Tina L. Stark, the founding director of Emory Law’s Center for Transactional Law and Practice and the author of the groundbreaking textbook “Drafting Contracts: How and Why Lawyers Do What They Do,” has worked tirelessly to assure that law students have the opportunity to graduate as practice-ready transactional attorneys.
Through her enthusiasm and perseverance, and with considerable grace and vision, she has nurtured the efforts of transactional law and skills educators the world over.
(Extra paragraphing added.)
Tina is a friend and mentor; it's a richly-deserved honor.
When contract drafters can't agree on a standard of performance (or can't express the standard in words), they often kick the can down the road by stating that the party in question must make "commercially reasonable efforts." But what exactly does the quoted term mean? A holding by the Delaware chancery court suggests that the Indian-English expression "do the needful" might be a useful shorthand reference. See Williams Cos. v. Energy Transfer Equity, L.P., No. 12168-VCG (Del. Ch. Ct. June 24, 2016); see also the annotation to the Common Draft definition of commercially reasonable.
- The case involved a multi-billion-dollar oil industry merger agreement in which a buyer was to acquire the assets of a seller.
- The agreement gave the seller an "out" from the deal: The seller would not have to close the deal if it did not get a favorable opinion from its own tax counsel (as opposed to, say, getting an opinion from an independent expert) about the deal's expected tax consequences.
- The agreement, though, also required the seller to use commercially reasonable efforts to get a favorable opinion.
- After the merger agreement was signed, the market price of crude oil collapsed. This brought with it a drastic drop in the value of the seller's assets, making the deal much less attractive to the buyer.
- The buyer ended up backing out of the deal, citing newly-discovered concerns about the expected tax consequences. The seller tried to assuage the buyer's new concerns; when that failed, the seller sued the buyer for breach of contract. The seller alleged, among other things, that the buyer had failed to honor its commitment to use commercially reasonable efforts to obtain a favorable tax opinion.
The chancery court noted that the merger agreement did not define "commercially reasonable efforts"; it found that:
… by agreeing to make “commercially reasonable efforts” to achieve the 721 Opinion, the Partnership [i.e., the seller] necessarily submitted itself to an objective standard—that is, it bound itself to do those things objectively reasonable to produce the desired 721 Opinion, in the context of the agreement reached by the parties.
Williams Cos., slip op. at 46 (emphasis added). The court held that, in view of the facts of the case, the buyer had not breached its obligation to use commercially reasonable efforts.
I'll be updating the annotation to the Common Draft definition of commercially reasonable to include a reference to this case.
A company (let's call it "Lead Source") signed an agreement to work with a call-center service provider ("Call Center").
- The goal was for Lead Source to help Call Center land the business of a particular customer ("Customer").
- In return, Call Center was to pay Lead Source a 5% commission on the revenue that Call Center received from Customer during term of the contract between Call Center and Customer "and any renewals pursuant thereto." (Emphasis added.)
Customer signed a three-year contract with Call Center. For those three years, Call Center paid Lead Source a 5% commission on its revenue from Customer, as agreed.
When the three-year contract between Call Center and Customer was ending, Call Center and Customer could have extended or renewed the contract. But they didn't do either. Instead, they negotiated a new contract, which expressly stated that it "supersede[d] and replace[d]" the old one.
(According to the appeals court, the two contracts between Call Center and Customer were substantially similar in their terms, and the two even shared a misspelling.)
Call Center then stopped paying commissions to Lead Source, claiming that it was no longer required to do so because Call Center and Customer didn't renew their original contract. Lead Source said otherwise, claiming that the new contract between Call Center and Customer was indeed a renewal of the old contract. A lawsuit ensued.
Both the trial court and the appeals court agreed with Call Center that the agreement between Call Center and Lead Source was unambiguous: Lead Source was to be paid commissions only on renewals of the contract between Call Center and Customer — and that contract wasn't renewed. See Gateway Customer Solutions, LLC v. GC Serv. L.P., No. 15-1878 (8th Cir. June 10, 2016) (affirming summary judgment).
Lessons for drafters:
- Look to the underlying business reality, and plan for the possibility that your counterparty might try to take advantage of (what you might think of as) loopholes in your agreement.
- If you're going to be paid commissions for revenue that gets generated long after you help to put the deal in place, you should anticipate that the party paying you might want to stop paying, on grounds that you supposedly "didn't earn it." (I've heard sales people refer to this as getting paid on "farmed revenue.")
- One possible compromise might be to structure the commission agreement so that you continue to be paid farther into the future, but at a decreasing rate as time goes on, until at some point the commission payments stop altogether. (This will have the advantage of keeping you and/or your sales people looking for new business and not simply coasting on the commissions from old deals.)
- The appeals court ended its analysis with a useful reminder: "Because we agree with the district court that the relevant contract provisions are not ambiguous, we may not consider extrinsic evidence, nor does the doctrine of contra proferentum [sic; contra proferentem] apply (construing a contract in favor of the non-drafter)." Id., slip op. at 5-6 (citation omitted).
- There's one more thing that's not apparent from this case: Your business people might trust their counterparts on the other side. But that really means they trust the specific individuals with whom they've been dealing. If a "crunch time" were to come, those trustworthy individuals might not still be there; they might have been promoted, or left the company, or even died. Their replacements might be folks whom you couldn't trust as far as you could throw them. So it's best to plan accordingly.