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When Bad Things Happen to Good ContractsDrafting
to Preserve Your Deal Through Bankruptcy and
Litigation
William H. Rice IIVice President, General
Counsel and Secretary, PEMSTAR Inc. Steven E.
CarlsonKatherine A. ConstantineSteven J.
WellsDorsey Whitney LLP
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Most Likely To Be Litigated

• Arbitration / Disputes Resolution
• Termination
• Confidentiality

Bankruptcy Surprises
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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 owncosts and expenses (including
  legal fees) of sucharbitration and one-half of
  the fees and expensesof the arbitrator(s).

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• Forum/location
• Law to govern
• Rules (AAA, ICC, etc.)

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Arbitration Favored

• If Intent Unclear, Presumption in Favor of
  Arbitration

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Arbitration and DisputeResolution Provisions

• Anticipating the Need for Speed

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Injunction in Aid or Anticipation of
ArbitrationMerrill Lynch v. Hovey, 726 F.2d
1286 (8th Cir. 1984)

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Statute of Limitationsand Arbitration Har-Mar,
Inc. v. Thorson Thorshov, Inc. 218 N.W.2d 751
(1974)

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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.

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Termination Provisions

• For Cause
• Without Cause
• Upon Event or Condition
• Expiration or Non-Renewal

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Supply, Distribution, Licensing, Partnering
Contracts Beware the Franchise Trap

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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
  Franchisors 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.

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 80C Limits On Termination

• 90-Day Notice
• Good Cause
• 60 Cure Period

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• Sales Representation Acts (e.g., Minn. Stat.
  235E.37)
• Fair Dealer Laws (e.g., Wi. Stat. 135.01)

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Special Industry Limitations

• Cars Minn. Stat.  80E
• Booze Minn. Stat.  325B
• Gas Minn. Stat.  80F
• Farm Equipment
• Heavy Equipment

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Limits on Termination of Contracts of Indefinite
Duration

• UCC 2-309
• Reasonable Notification
• Doctrine of Equitable Recoupment

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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

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Section 365(e)(1) goes further

• NO right or obligation of any nature may be
  modified or terminated, because of a bankruptcy
  filing.

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Special Bankruptcy Issues

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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 . . .

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• 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.

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• Debt Financing Contract not assignable by
  Bankruptcy Court.
• Aircraft Terminals and Gates

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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, wont
  enforce this type of provision.

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Some Possible Solutions

• Include facts and admissions that support
• lift stay motions
• motions forcing earlier assumption/rejection of
  contracts
• objections to contract assignment

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Confidentiality Provision

• Consultant acknowledges that during the course of
  performing this Agreement it may be exposed to
  confidential information relating to Clients
  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
  independentlydeveloped by Consultant, or is or
  becomes publicknowledge by acts of Client or a
  third party.

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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

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What Is Confidential Information?

• Uniform Trade Secrets Act (Minn. Stat.  325C)
• Not Exclusive Definition
• Public Policy Considerations

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Beware

• Conflict of Interest
• Inevitable Disclosure Doctrine --
• Pepsico, Inc. v. Redmond, 54 F.3d 1262(7th Cir.
  1995)
• Bankruptcy or Trial Court

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Unanticipated Decisions

• Bankruptcy court relies on 1872 equitablemaxim
  to defeat the Uniform Commercial Code
• Court recharacterizes leases as loans
  resultingin significantly worse treatment for
  creditor
• that which ought to have been done is to be
  regarded as done

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Questions and Comments