Download ORG Contracts Handout

CONTRACTS
(Extracted from Blumenthal and Goodenough, THIS BUSINESS OF TELEVISION, 3rd
ed., 2006, Chapt. 15)
Contract law is one of the great developments of Western mercantile culture. Under
contract law, courts will grant the force of law to an arrangement agreed upon by private
parties. But courts will not enforce every statement or promise, for instance, a gratuitous
or frivolous offer. What courts enforce is a serious transaction between two or more
parties in exchange for value on all sides. This value is sometimes called "consideration,"
and it is a necessity for a binding agreement. In some instances, however, consideration
can be supplied by the known reliance of one party on the promise of the other, even if
nothing of material value is being exchanged.
VERBAL AND WRITTEN AGREEMENTS
Notwithstanding the old truism that "an oral agreement isn't worth the paper it's written
on," verbal deals were generally enforceable under common law until 1677. The change
came with the adoption in England of the "statute of frauds," a measure intended to
prevent the frauds that may occur whenever there is no signed, written agreement.
Although England has since dropped its statute of frauds, most U.S. states have adopted
some form of it. Typically, sales agreements for goods over $500, contracts requiring
performance over a significant amount of time (commonly a year), the sale or transfer of
real estate, contracts for marriage, and contracts of guaranty and surety must all be in
writing, and signed, to be enforced. In television, verbal agreements are often used for
short-term employment, particularly if there are no rights in intellectual property or
privacy being transferred. Whenever rights are being transferred, or whenever any future
service or right is contemplated, a written agreement should be used.
The signed agreement need not be a single piece of paper. If a distributor writes a signed
letter offering to license a program to a station and the station sends back a signed letter
saying it accepts the deal, the requirements of the statute of frauds will be met. Informal
documents such as job orders, booking sheets, and deal memos can also constitute a
sufficient writing.
In most states, it is also necessary for one party to deliver the contract to the other party,
or to the other party's representatives, for a contract to be formed. If you sign the deal but
keep the signed copy to yourself, delivery has not occurred.
Federal copyright law requires that an exclusive assignment or license take the form of a
signed document in order to be effective. Similarly, some privacy-law statutes require
that any waiver of privacy rights be done in writing.
In the television business, sometimes a deal memo is sent that confirms a deal without
any provision for signature. In other cases, correspondence and contract drafts may go
back and forth for months without a final agreement getting signed. In some cases, the
money may be paid, the services may be provided, the program may be broadcast on
national television, and still no signatures.
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In cases in which a contract is not signed but performance has gone forward, the courts
are at least aware that some kind of agreement existed between the parties: they have
"performed" the agreement. The courts will seek to determine what the deal was
governing the performance and enforce it even though the technical requirements of the
statute of frauds have not been met. Then there is the concept of reliance. If one party
makes a verbal or written promise to another party, and this other party relies on it with
the knowledge of the party that made the promise, then the promise can often be enforced
even in the absence of any signed contract.
Since the television industry is somewhat casual about signing agreements before work
begins on projects, term sheets, confirming letters, or deal memos--even if unsigned by
the other side--are sometimes used to guide a court once performance has begun,
particularly if these items go uncontroverted. The ultimate weapon, short of a signed
contract, is the reliance letter. It gives notice to the other side that actual reliance is being
put on the submitted terms, even though there is nothing yet signed. Of course, the other
side can send back a "don't rely" letter, or even a "don't rely but we are relying" letter. If
performance continues and a dispute breaks out, the courts may have a hard time
untangling the record.
CONTRACT FORMATS
The signed document embodying a contract need not be in any particular form, but it
must include adequate evidence of the necessary terms of tile agreement, and must
indicate the intent of the persons signing it to be bound by it.
In effect, anything that says "this is a contract, these are the parties, and these are the
terms" should do the job. Over time, a series of generally accepted forms have evolved.
The oldest and most formal is the indenture form. The wording is derived from the forms
used for contracts in the late Middle Ages. The indenture form looks something like this:
AGREEMENT
This agreement made as of this 1st day of January, 2006 by and between the
Smith Corporation, a Delaware corporation, and John Doe, an individual,
WITNESSETH
WHEREAS, the Smith Corporation wishes to undertake a transaction with Doe
and Doe wishes to undertake a transaction with the Smith Corporation;
NOW, THEREFORE, the parties hereto agree as follows:
Buried within the arcane language of this form is a simple statement: The document is a
contract between Smith Corporation and Doe, the reasons for the contract are that Doe
and Smith Corporation want to do a deal, the deal is as follows. Such a contract might
close:
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
_______________________
John Doe
SMITH CORPORATION
By:____________________
Lisa Smith, President
A more modern but equally enforceable form of contract is the letter agreement. The
letter agreement begins by stating who the parties are, and that the letter is a contract. A
typical starting clause might read:
John Doe
[address]
January 1, 2006
Smith Corporation
[address]
Dear Ms. Smith:
When the enclosed copy of this letter is signed on behalf of the Smith
Corporation and returned to me, this letter will set forth the terms of our
agreement concerning the deal to be done between us on the following terms:
Such a contract might close with:
Please confirm that the foregoing accurately represents the agreement
between us by executing the enclosed copy on the indicated line and returning it
to me.
Yours sincerely,
John Doe
ACCEPTED AND AGREED:
SMITH CORPORATION
By:__________________
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Lisa Smith, President
Similarly, a memorandum form may be used to set forth an agreement:
From: Smith Corporation
To:
Doe
Re:
Deal
Date: January 1, 2006
This memorandum will set forth the terms of our deal and, when signed on
the indicated lines below, will constitute our binding agreement.
The memorandum form usually closes with some type of signature lines.
None of these forms has any special advantage as a matter of law, although particular
industry segments may have their preferences or traditions. They are all equally binding
as contracts. By and large, the indenture form is considered more formal than the letter
agreement and the letter more formal than the memo. As a matter of style, the formality
of the agreement should match the complexity of the transaction. For instance, the memo
form is fine for a deal that can be adequately described within a page or two. If the
agreement requires several pages, the letter agreement is better; if dozens of pages are
necessary, the indenture form may be the most appropriate format.
EMAIL AND OTHER DIGITAL AGREEMENTS
There is no inherent impediment to forming contracts via an exchange of emails,
provided that they clearly spell out the classic elements of offer and acceptance, and
contain a sufficiently clear statement of the agreed terms. The informality of emails may
make attention to detail on matching terms up particularly important. While the process
is not fully complete, many legal systems are recognizing that the intentional sending of
an e-mail, particularly one with an accurate indicia of origin, can supply to equivalent of
a signature. In cases where verification is particularly important, digital signature
protocols are being developed that will give relatively safe authentication procedures.
FORM AGREEMENTS
People in the television business frequently use pre-printed form agreements, which can
be real time-savers-with two provisos. First, the contract must fit the deal and vice versa.
Although using a form agreement helps save on legal costs, this can be a false economy if
the form simply isn't the right one, or if the deal has a complication not covered by a
standard form. Second, the forms must be fair enough to both sides to actually get signed.
Although there is always the temptation, when using a form agreement, to make it as
favorable as possible to the drafter, the contract cannot be so one-sided that no one will
sign it.
STYLE
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As a matter of law, a contract does not require any particular style of writing; it need only
state, in language that is specific and clear, the principal terms of the deal. A certain style
of writing known as "legalese" has developed over the years, but to the extent that it
confuses the untrained reader, legalese is not recommended. In certain instances, timehonored legal formulas may save space or provide a shorthand for complicated concepts.
In general, though, if the use of legalese might lead to a misunderstanding, the contract
should be worded in plain language.
NECESSARY TERMS
To be enforceable, a contract must contain certain critical, basic terms. If the price, dates,
or items to be sold or licensed are left out or are left to future negotiations, the entire
contract will probably not be considered binding by a court. In such cases, there just isn't
enough actually agreed upon to constitute a real deal. The common television-industry
practice of leaving terms for later good-faith negotiation runs the danger of rendering at
least the provision--and perhaps even the entire agreement--unenforceable. To prevent
this possibility, negotiation clauses should never be for basic terms, and when they are
used, they should outline a detailed procedure, with specific dates, parameters, and other
objective criteria on how negotiations are to proceed.
ORDER OF TERMS
The order in which terms of an agreement are set forth does not affect its binding nature;
as a practical matter, however, a good agreement should read easily and logically. Thus,
it is customary to begin with the terms of greatest importance and to proceed to the more
minor details as the contract progresses. In drafting a contract, one should begin as if
telling an uninitiated person about the contents of the deal. A program license agreement,
for instance, might well start by saying that a license is being granted and move on to
describe the programs and the term or territories involved. The next topic might be the
compensation for the license; further topics would include representations and warranties
of the parties (see below); and the final provisions might cover choice of law (see below)
and other technical matters.
SIGNATURES
Any signature that identifies the signing party and its intent to be bound is adequate for a
contract. Thus, the use of a first name or initials, if effective on these points, can
constitute a signature. Although it is the custom in this country that signatures should
appear at the end of a document, there is no requirement for this in most states, provided
the signatures appear at a place in the document where they demonstrate the necessary
intent to be bound. The agreement is generally signed at an indicated space, frequently on
a line over the printed or typed name of the person signing. In order to make clear
whether the person is signing individually, as an officer of a corporation, or as a partner,
agent, or trustee, the signature line should specify the capacity in which this person is
signing. Also, if the person is signing on behalf of another entity, the signature line
should be preceded by the word "by." This designates that the person is signing on behalf
of the entity, such as a corporation or partnership, and not on his or her own behalf.
WITNESSES, NOTARIES AND SEALS
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Corporate and personal seals are generally not a necessity for agreements. In most
instances, the signatures on a contract do not have to be authenticated by witnesses, and
the contract does not have to be signed in front of a Notary Public (although these steps
can be useful as evidentiary matters should the signature ever be disputed). For land
transactions and other circumstances in which the contract is to be filed as a matter of
public record, witnesses or notarial authentication may be required, but this is seldom the
case for a television contract. In some instances, a corporate seal may be used as an
additional piece of formal evidence to authenticate that a corporate action was properly
taken.
ORIGINALS
Original signed copies are clearly preferred by a court called upon to enforce an
agreement. If an original signed copy is not available, however, the best available copy
will have to be presented to the court. A conformed copy, a photocopy, or even a faxed
copy of the signed original is usually considered acceptable--as long as there is sufficient
evidence establishing that the signed original existed and that the offered copy is a true
copy of it.
INITIALING
Initials next to a change in the contract indicate that the parties were aware of it at the
time of the signing and that it was not inserted after the fact by one of the parties. In the
case of changes added, whether by hand or in print, to an otherwise clean agreement, it is
advisable to initial the changes to minimize the potential for future disagreements.
Likewise, initials at the bottom of a contract page indicate that it is one of the original
pages and that substitute pages have not been inserted. Unless a conflict between the
parties is likely, the level of trust is exceedingly low, or a high degree of formality is
desired, the individual pages of an agreement do not have to be initialed--particularly if
each side will have a fully signed copy.
SIGNING AUTHORITY AND POWERS OF ATTORNEY
Real people can sign for themselves; business entities, being artificial creations, cannot.
Therefore, people must sign on behalf of business entities. The ability to sign on behalf of
an entity hinges on the person's having either general or specific authorization to do so. In
the case of a corporation, one can generally presume that the chairman, president, or a
senior vice president can execute most customary business contracts for a company. For a
contract involving large amounts of money, however, specific board approval may be
required to grant the authority. The other party to such a deal may request to see a
certified copy of this board action, together with certified specimens of the signatures of
the officers who are signing. In the case of a partnership, any general partner can usually
sign on behalf of the partnership and bind it. Limited-liability company contracts should
be signed by a manager, or, if no managers are designated, by a member. Again, it can
be prudent to confirm the authority by examining the underlying documents.
A person acting under a power of attorney can also bind a business entity--or an
individual--within the scope of the granted power. Talent agents will sometimes sign on
behalf of their clients and, if properly authorized as agents, will have the power of an
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attorney-in-fact for entering contracts within the scope of the agent's authority. If this is
not so, it may be grounds for the agent's client to disown the contract, particularly if it
was not reasonable to think that the agent had the power to sign.
In the final analysis, the ability of a party to bind another entity is usually evaluated on
the basis of apparent authority. If the entity in question has apparently authorized the
agent to sign--and this authority is relied upon by a person who could not have possibly
known that the agent actually had no such power--then the entity will be bound by the
signature. For better or worse, in most television deals, the parties rely on the apparent
authority of an appropriate corporate officer to bind the corporation to the contract,
without requiring the inspection of the corporate resolution granting the power.
DATES
Every contract should have a date to indicate when it was signed, when it is to be
effective, or both. Certain widely understood codes apply in giving a date. For instance, if
an agreement is to be effective on a date that is specified, but which is not necessarily the
date of signature, this date should be expressed with the words "as of." A contract that
reads, "This agreement, dated aa of the 1st day of January, 2006" could have actually
been signed weeks before or after January 1, 2006. By contrast, if the contract date is to
indicate the date of actual signing, then "as or" should not be used. The words "This
contract, made this 1st day of January, 2006" imply that the signatures were affixed on
the date given. Sometimes a date is put next to the signature line to indicate the date of
signature. This practice can be used in conjunction with an "as of" date for the entire
contract, showing both the effective date for the agreement and the actual dates of
execution.
STATIONERY AND LETTERHEAD
There is no magic to the use of stationery, or letterhead in connection with an agreement,
although in some situations there may be some evidentiary value in the use of original
letterhead. If the letter agreement form is to be used, it is logical that it appear on the
customary letterhead of the party that is writing the letter.
CHOICE OF" LAW
Contract law is basically state law, and there are the inevitable variations between the
states on specific points. The choice of which state's law will apply to the contract is too
frequently neglected by contracting parties. Sometimes, the variations in contract law
between different states can have significant implications.
Parties cannot simply choose any law, however, to govern their agreements. There must
be some relation of a logical and substantial nature between the law which is chosen to
govern the agreement and the subject matter of the agreement, the location of the parties
in general, or the location of the parties at the time of signing. In the absence of an
affirmative choice of law, the applicable state law will be chosen by the court seeking to
enforce the contract. As a starting point, most courts will prefer their own local law. A
court may consider other factors as well, such as the respective domiciles of the parties,
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the state in which performance is to take place, and the state in which the contract was
signed.
MINORS
Minors--children under the age at which they become independently responsible adults
(in most states, at 18)--receive many protections under traditional common-law
principles. At common law, most contracts with a minor can be voided by the minor at
any time until he or she becomes an adult, and for a reasonable time thereafter. Some
states, recognizing that such a blanket rule would not be appropriate for a contract with a
minor that was not abusive, have made provision for a court to review such a contract; if
the court approves it, the contract would be binding and not voidable.
In California, for instance, the Family Code gives a court the discretion to approve a wide
range of entertainment industry agreements with minors, including contracts for acting
services, management and agency agreements, and grants of rights in creative properties
and life stories. No time limit is set on the duration of service contracts, beyond the
seven-year limit generally applicable in California. Although traditionally a parent or
guardian oversaw, and sometimes abused, the receipt and application of a minor’s
earnings, by California law, a portion of the minor’s gross earnings should go into special
“blocked account” which will only be released when the beneficiary reaches adulthood.
New York law is more limited on the scope of entertainment industry agreements with
minors that the court can approve. Although the court can permit service contracts,
management agreements, and agency agreements, these documents cannot have terms of
greater than three years (certain negative covenants and participation agreements may
extend beyond the three-year limit). In addition, New York law does not empower courts
to approve grants of rights in intellectual property, although the "work for hire" doctrine
may take care of much of this at the copyright level. The New York court may also
require a set aside account to hold a portion of the earnings until maturity. Under the
terms of the New York privacy law, a parent is specifically authorized to waive privacy
rights without a court proceeding.
In New York, California, and many other states, there are labor law regulations that apply
to the employment of minors generally and in the context of film and television
production specifically.
REPRESENTATIONS AND WARRANTIES
Many contracts contain items which are called representations and warranties--fancy
words for promises about statements of fact. Thus, if a party represents and warrants that
the contract was signed on Tuesday, he is stating that it is a fact: Tuesday is the date
when the contract was signed. If this fact turns out to be wrong and damages result, this is
grounds for a suit by the other party for a breach of the contract. Representations and
warranties are frequently linked in the television world to statements about rights
clearances and the authority to enter into agreements. As a general matter, parties only
make representations and warranties about matters with which they are personally
acquainted, or over which they have personal control. In some instances, a representation
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and warranty can be softened by the insertion of "to the best of the party's knowledge" or
similar words. In this case, a breach will not occur if the statement proves wrong--but it
will occur if the representing and warranting party knew before signing that the statement
was wrong. Claims under a "to the best of knowledge" representation and warranty can
bog down in arguments over what constitutes knowledge.
INDEMNITIES
An indemnity, frequently paired with representations and warranties, is a promise by one
party to pay specified costs and losses of another party. In the contract context, an
indemnity clause generally says that if Party A suffers a loss because of Party B--for
example, because one of the reps and warranties proves to be untrue--then Party B will
make Party A's losses good, and will cover any expenses. An indemnity should be given
only for matters which the giver agreed to do, as to which the giver has provided a
representation and warranty, or which are otherwise within the indemnifying party's
knowledge, control, and legitimate risk.
Indemnities can have important wrinkles. One is whether the indemnity covers only
breaches (actual defaults) or whether it also covers "alleged breaches," or defaults which
someone else asserts. With an alleged breach, if someone wrongfully sues Party B,
claiming that certain rights were not cleared, and if that claim is then defeated in court,
Party A, as the indemnifier, would still have to reimburse Party B for the costs of the
lawsuit. If it were an indemnity limited to actual breaches, the indemnifying party (Party
A) would not be called upon to pay the costs of Party B. Unless specifically mentioned,
indemnities may not include legal fees, and so a provision for reasonable attorney's fees
is frequently inserted. Indemnities sometimes give the indemnifying party a right to be
involved in directing any litigation for which he or she is financially responsible.
Likewise, the indemnifying party sometimes has the right to approve any settlements for
which it will have to reimburse the other party.
LENGTH OF YEARS
Although in most instances the term, or duration, of an agreement is up to the parties to
decide between themselves, there are some general limitations which can apply. Most
courts will impose some time limit on service contracts, if only as a matter of public
policy to prevent endless employment commitments. In New York, factors such as the
level of compensation and the customs of the industry are considered. In California, the
legislature has set a statutory limit of seven years for any contract for personal services.
There are also limitations on the duration of certain grants of rights. Options may be
subject to the arcane "rule against perpetuities." This rule prohibits property (including
creative works) from being tied up with contingent rights for endless periods. As a rule of
thumb, options that are open for more than 21 years may be subject to cancellation.
TERMS CONTRARY TO LAW OR PUBLIC POLICY
A court will refuse to enforce individual terms or, indeed, whole contracts--which it
deems to be contrary to public policy. For instance, contracts for murder or theft will not
be enforced. Also, laws on certain points may take precedence over tile agreement of the
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parties. The California limit of seven years for employment agreements is one example of
this.
FORCE MAJEURE
Force majeure describes a circumstance where performance of the contract is rendered
impossible or unreasonably difficult by the intervention of a force beyond the control of
the affected party. In television productions, this might include earthquakes, labor
disputes, fires, wars, or other natural and manmade disasters. In such a case, the contract
can be suspended, or even terminated, with consequences less than for full breach of
contract. Television contracts frequently describe in detail those events that constitute
force majeure, and also the consequences--including the suspension and termination of
the contract.
INCAPACITY
Television contracts, particularly those for talent services, frequently have clauses dealing
with the incapacity of the talent. In most cases, after a short waiting period, the producer
can choose either to suspend the contract and start it up again when the talent recovers, or
to terminate the contract without further obligation.
BREACHES
What happens when one or both parties to a contract fail to live up to the deal they have
made? This failure, often called a breach or a default, can occur in several ways. One
party can fail to carry out an affirmative obligation (making a payment or delivering a
finished program), or can breach a negative obligation (by failing to adhere to an
exclusivity, provision). If a representation and warranty turns out to be false, this can also
cause a default.
A default or breach may be grounds for action if it is "material." Technical lapses which
have no real consequences for the aggrieved party are generally shrugged off as being
non-material by a court brought in to settle the dispute. If seemingly trivial points are
indeed of importance, a part}, can strengthen his or her hand by providing that full
performance of them is "of the essence" (see "time is of the essence"). Even then, if the
default is truly trivial, a court may still disregard it.
Contracts will sometimes provide time periods for remedying certain kinds of lapses,
generally running from when the failing party gets notice of its default. This allows
accidental failures to be fixed without the whole contract going into default.
Sometimes a party declares that he or she is not going to be bound by the contract. Even
though there may not yet be any actual failure to perform, such a statement can constitute
an anticipatory, breach, particularly if it is not disclaimed after a request for confirmation
by the other side.
REMEDIES
If a contract is in material breach, the injured party has a number of possible responses.
As a starting point, there are certain measures of "self-help." For instance, the aggrieved
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party can suspend his or her own performance under the contract. If a producer has failed
to make payments required by the contract, an actor may stop showing up at the set. If
there is a dispute over who is in breach, however, suspension of performance can be a
dangerous step. If money is due for a print, for a soundtrack, or for other production
elements, the lab or sound mixer may be able to hold onto the material under a
"mechanic's lien" until the debt is paid.
While the dispute is pending, the aggrieved party should seek to mitigate his or her
damages, taking whatever steps are reasonably available to minimize the losses coming
from the breach. Thus, if contracts with suppliers can be canceled, this should be done; if
another purchaser for the project is waiting in the wings, he or she should be considered.
A failure to mitigate can be held against the aggrieved party when it comes time for a
court to make good his or her losses.
Beyond the self-help steps, the aggrieved party may have to go to court—or, if the
contract so provides, to arbitration—to get satisfaction for the breach. If there has been a
breach, a court or arbitration panel normally awards damages, that is, payments that will
rectify the losses incurred. In deciding how much to award, the first consideration is
restitution, or reimbursing the aggrieved party for any out-of-pocket losses that the failure
of the contract has caused. An additional consideration will be lost profits, some or all of
which a court may force the breaching party to pay. If the defaulting party made profits
through breaking the deal ("unjust enrichment"), a court can force some or all of these
profits to be turned over to the aggrieved party. There is als0 the possibility of an award
of punitive damages, although this is unlikely in a contract case, absent some elements of
especially willful misbehavior. If the case involves a copyright claim, the statutory
damages provided by the Copyright Act may apply.
In addition to damages, a court may grant “equitable remedies” (the term refers to the
old-fashioned "courts of equity" in which these remedies evolved). Equitable remedies
are given only when money damages are inadequate in some fashion. These remedies
include "specific performance," that is, the ordering by the court that the contract be
carried out. Specific performance is appropriate if the contract is for the sale of some
existing tangible item, such as a motion picture negative; it is untenable in the case of a
contract to perform some kind of skilled service, such as writing, acting, or directing.
Rescission, or the undoing of the entire contract, may be appropriate if there has been a
sale of fights in a program for which no payment has ever been made. A third equitable
remedy is injunction, a court order that forbids some act-for example, the telecast of a
show for which the fights were improperly cleared.
Equitable remedies tend to be more powerful contractual medicine than simple damages;
therefore, courts tend to use them only if it is shown that damages will not do the job. In
addition, the parties themselves may have agreed in the contract to waive equitable
remedies. Producers and distributors particularly dread the possibility of an injunction on
the entire program because of a payment dispute on a talent contract. This waiver often
occurs when rights are being transferred or credits being given.
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"LAWYERS' TERMS" IN EVERYDAY LANGUAGE
Contracts frequently use terms and expressions that have very specific legal meanings.
However, these meanings may not be obvious to the layperson who reads them in a
contract, or, even worse, who includes them without consulting a lawyer. This section
will address some of these words and phrases, and explain the perils and pitfalls they
involve.
Time is of the essence. This phrase means that the actions specified in the contract must
be taken on or by a particular date. There is no extension, no grace period, no time to
remedy. If the event does not happen on the date specified, there is potentially a serious
breach of the agreement.
Best efforts. More than just a good try. Some states will interpret this phrase to mean the
very best effort of which the person is capable--including, if necessary, making a
significant financial sacrifice or employing the utmost effort. A better formulation for
giving something a good try is "endeavor in good faith."
Consultation vs. approval. Consultation on a matter means just that: the other party must
consult you. It does not mean that they have to agree with you. After fair consultation,
they may tell you, "I appreciate your ideas, but I don't want to use any of them." A right
of "review" is similarly limited. A right of approval, by contrast, permits the party to say
no and make it stick. A requirement for written approval is essentially an evidentiary
matter, to avoid swearing matches between parties over what was said verbally.
Reasonable vs. sole discretion. There is an implied duty to act reasonably and in good
faith under a contract. Nonetheless, it is frequently written in television contracts that
certain actions can be taken only if they are "reasonable," or if there is a "reasonable
basis," or if they are taken "reasonably." Such a provision is often linked to a
circumstance in which one of the parties is empowered to take a discretionary action,
such as exercise approval. If approval is "not to be unreasonably withheld," or "is to be
given on a reasonable basis," this puts some limit on the discretion of the approving
party. Should the approving party fail to approve something, the other party can claim
that this failure is unreasonable and then proceed anyway, with some possibility of not
being found in breach of the contract. By contrast, a phrase like "in her sole discretion,"
when linked to an approval right, makes it probable that a whim of the approving party
will be enforceable--and that any action taken by the other party in disregard of that
whim is risky.
Covenants. "Covenant" is a fancy word for an agreement or promise. Covenants are
sometimes divided between "affirmative covenants" and "negative covenants."
Affirmative covenants are promises to actually do things; negative covenants are
promises to refrain from doing things. A contract will usually be binding without ever
mentioning the word "covenant."
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