When we study law we are not studying a mystery but a well-known profession. … The reason why it is a profession, why people will pay lawyers …, is that in societies like ours the command of the public force is entrusted to the judges …, and the whole power of the state will be put forth, if necessary, to carry out their judgments and decrees. People want to know under what circumstances and how far they will run the risk of coming against what is so much stronger than themselves, and hence it becomes a business to find out when this danger is to be feared. The object of our study, then, is prediction, the prediction of the incidence of the public force through the instrumentality of the courts.
Contract drafting is an exercise in prediction. We are writing for an intended outcome, based on predictions we make about how a fact-finder, judge or arbitrator will process and construe the language we’ve written. It is no less true in this endeavor than in any other: collaborating with trusted peers, and opening ourselves up to meaningful challenge, is the best way to refine our craft and improve the accuracy of our predictions.
In the US, a lawyer may not converse with or even contact a person that the lawyer knows is represented (or whose employer is represented) by counsel regarding the subject matter of the representation—unless such counsel consents. In the transactional context, compliance with the rule can be, at best, socially awkward and, at worst, an ethical trap for the unwary.
Consider the following questions (addressed in a recent Redline collaboration about this topic):
In the absence of knowledge that the other side is represented, should counsel insist on not attending phone conferences unless she can confirm that the other side’s lawyer is present or consents?
If a company is “big enough”, shouldn’t counsel assume representation, despite the actual knowledge requirement?
May counsel rely on the assurances of the other side’s non-legal staff that the other side’s lawyer consents to meeting attendance?
As presence is not equal to consent, may counsel direct an email to a represented person so long as the other side’s lawyer is copied?
If counsel is unintentionally stuck in a conference with a represented person, may counsel’s silence, from that point on, insulate her from ethical challenge?
What about “ghost-writing” emails for a client?
As a policy matter, does it make sense to anoint the lawyer as the sole source for consent? Is it paternalistic or naïve to assume that the lawyer will withhold consent only for good reasons?
The no-contact rule is not without its detractors. Professor Leubsdorf questions why the consent of the represented party is insufficient to waive operation of the rule. The rule anoints the lawyer as the absolute arbiter of whether the client may contact the other side’s lawyer, setting up an inherent conflict of interest:
If the lawyer is paid by the hour, he will profit if all communications go through him. In addition, direct communication with opposing counsel may reveal to a client that his lawyer is lazy or uninformed, or that the client’s prospects of success differ from what his lawyer has led him to believe. These possibilities may well bias the lawyer against consenting to direct communications with his client. … All in all, I do not believe that it is justifiable to empower lawyers to decide whether their clients will be able to talk with other lawyers. The rule so providing is not rooted in antiquity, serves no compelling interest, and was probably influenced by an improper desire to protect lawyers against their own clients. Granting the possible dangers of uncounseled communications, it by no means follows that the lawyer is best suited to decide whether a client should risk them, particularly when the client can obtain the lawyer’s advice before deciding. In its present form, [the no-contact rule] gives lawyers unnecessary power over their clients’ decisions and may lead to conscious or unconscious subordination of the interests of the clients.
Geoffrey C. Hazard, Jr. and Dana Remus Irwin, in Toward a Revised 4.2 No-Contact Rule (Hastings L.J. 2009), have similarly noted the paternalism exhibited by the rule and how it can work against the client’s interests. “By placing complete control of communications in the lawyer’s hands, this approach presumes the role of the traditional, faithful lawyer. But fulfillment of this role is contradicted by the very initiative the client is undertaking—contacting another lawyer after deciding a retained lawyer is not serving the client’s best interests.”
The authors propose reforms to the rule only after first making the case for the rule’s repeal in its entirety, and the case they make is not without merit. “There is a strong argument that the Rule should be repealed and its work done by Rule 4.3—that is, a lawyer should not present himself to a non-client as disinterested, should not give legal advice (except to consult another lawyer), and should not negotiate with a person he knows to be represented.”
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The intended audience for this post is licensed and practicing lawyers, not laypersons seeking legal advice for their situation. If you are not a lawyer, hire one before using or relying on any information contained here. This post is: (1) informational only and not intended as advertising or as solicitation for legal services, (2) not intended to render legal advice to you, and (3) not a substitute for obtaining legal advice from a qualified attorney to assess your exact situation. The information here is subject to change and may not be applicable or correct in your jurisdiction. The views and opinions expressed here are Sean’s alone and do not necessarily represent the positions of Sean’s present or former employers, law firms, or clients.
As deal lawyers, it’s our job to anticipate disputes. If a dispute does arise, the competence of both sides’ lawyers is immediately put to the test: in the form of a glaring spotlight on the choice of law clause. Is the dispute captured cleanly, or ambiguously? Being forced to spend legal fees on the peripheral question of applicable law is a recipe for massive client frustration.
Two important considerations in this context are (1) ensuring that the clause captures not just contract, but tort and statutory claims (including IP infringement claims in tech license and confidentiality agreements); and (2) specifies not just substantive but procedural law–especially statutes of limitations, which are often outcome-determinative.
Another drafting tip: rather than excluding all conflicts of laws principles, preserve those that support the agreed-upon choice.
The enforcement and interpretation of, and all claims or disputes arising out of or related to, this Agreement will be governed by the procedural and substantive laws of [New York], including its statute of limitations, without regard to conflicts of laws principles that would cause the application of another jurisdiction’s laws to apply.
The intended audience for this post is licensed and practicing lawyers, not laypersons seeking legal advice for their situation. If you are not a lawyer, hire one before using or relying on any information contained here. This post is: (1) informational only and not intended as advertising or as solicitation for legal services, (2) not intended to render legal advice to you, and (3) not a substitute for obtaining legal advice from a qualified attorney to assess your exact situation. The information here is subject to change and may not be applicable or correct in your jurisdiction. The views and opinions expressed here are Sean’s alone and do not necessarily represent the positions of Sean’s present or former employers, law firms, or clients.
In a study published in the Journal of Corporation Law, law school Professors Badawi and Webber examined, over a five-year period, takeover target share price changes in reaction to the perceived quality of the law firm(s) filing litigation challenging, on behalf of institutional shareholders, the fairness of the announced proposed merger or acquisition. The professors grouped the plaintiff firms into “high quality” and “low quality”, based on a number of critieria, including value of settlements recovered and whether any of the firms were openly criticized by the Delaware Chancery judges as being, well, worthless leeches, basically.
The study’s authors conclude that when the “high quality” firms file (which they often do on the same day the merger or acquisition is announced), shareholders win. When the “lower quality” firms file (which typically wait a couple of days after the announcement), shareholders lose. Upon filing of the case, our results suggest that there is a relative increase in target stock price when higher quality law firms are involved in the litigation. Alternatively, when no top quality law firms are present, but a lower quality firm is, the relative value of the target’s shares appears to decrease. We attribute these results to the market’s recognition of the possibility that the higher quality firms will be able to obtain a significant settlement for shareholders. Lesser quality firms may be less able to win such settlements, which would explain the negative effect on target share price when they, but not top firms, are litigating cases. The effect of these firms on target share price may be limited to the threat that they can hold up a deal. Alternatively, the negative effect of filing by a low quality law firm may reflect the market’s “disappointment” that a deal with material flaws will not be targeted by a top law firm.
Incidentally, the top three plaintiff firms earned an average of $6.1 million in fees per case.
The bottom three firms? $670,000 in average fees per case.
Regardless of how the top firms got there, it doesn’t seem like they are going to be displaced anytime soon. A nice gig if you can get it.
In the early 20th century, the limited liability afforded by the corporate form was in its nascency. Lawyers consequently resorted to contract language to shield shareholders from liability for the corporation’s debts, using the so-called “no recourse against others” clause.
Today, most lawyers take corporate liability protection for granted, and probably assume that such a clause is unnecessary. Yet, trust in the supposed impenetrability of the corporate veil could be misplaced.
According to one appellate survey: almost half of all veil-piercing claims in the US are successful; in New York and Texas, about 20 percent of all reported decisions involving parent-subsidiary piercing claims have been successful; such claims have increased significantly in recent years; and courts are three times more likely to pierce the veil in a contract case than in a tort case.
In fact, as recently as May of this year, the Delaware Court of Chancery, in Manichaean Capital, LLC v. Exela Technologies, Inc. (May 25, 2021), held that in appropriate circumstances, reverse veil piercing (to go after subsidiaries of a parent debtor) was an available remedy for a judgment creditor who could not collect directly from the judgment debtor.
Counsel may want to consider language, inspired by early 1900s bond indentures, that purports to eliminate recourse against non-parties—especially for use in private M&A-related or investment/lending agreements, JVs, and situations in which it otherwise just makes sense to be solicitous of non-parties.
No Recourse against Non-Parties. Each party waives and releases all claims, obligations, and liabilities, whether under law, equity, contract, tort or statute, that arise under or relate to this Agreement or its negotiation, performance or breach, against any person or entity that is not a signatory to this Agreement, including any director, officer, employee, member, shareholder, affiliate, or agent of, or lender to, a signatory to this Agreement or its affiliates. Each party relinquishes any claim in the nature of disregarding the corporate entity or piercing the corporate veil.
The intended audience for this post is licensed and practicing lawyers, not laypersons seeking legal advice for their situation. If you are not a lawyer, hire one before using or relying on any information contained here. This post is: (1) informational only and not intended as advertising or as solicitation for legal services, (2) not intended to render legal advice to you, and (3) not a substitute for obtaining legal advice from a qualified attorney to assess your exact situation. The information here is subject to change and may not be applicable or correct in your jurisdiction. The views and opinions expressed here are Sean’s alone and do not necessarily represent the positions of Sean’s present or former employers, law firms, or clients.
