In this recent post I first articulated my unease regarding shall cause, and I mentioned it again in yesterday’s post on indemnification.
Given that a significant proportion of you think that indemnification smells like week-old fish, and given that for now I have no way to put you at ease on that subject, the shall cause issue isn’t going anywhere. So I thought it might be helpful—at least for me—to explore the range of my discomfort with impossible obligations. In the following list, I use upward and downward arrows to indicate the extent to which a given provision leaves me serene, (↑), or provokes increasing levels of fear and loathing, (↓↓) through (↓↓↓↓↓). And I propose RBD (Reality-Based-Drafting) Alternatives.
- Acme shall cause Wholly Owned Sub to purchase widgets: Acme has complete control over Wholly Owned Sub, so this obligation leaves me with a peaceful easy feeling. (↑)
- Acme shall cause 49% Owned Sub to purchase widgets: Um, Acme doesn’t control 49% Owned Sub. (↓↓) RBD Alternative: Provide for guaranteed minimum widget purchases.
- Acme shall cause its employees to wear badges saying “Buy Widgets!”: It’s unobjectionable to ask Acme to commit to ensuring that its employees take specified actions in the course of performing their duties. (↑)
- Acme shall cause its employees not to pilfer widgets: By contrast, it’s problematic to expect Acme to be able to ensure that its employees don’t do something illicit. Acme can instruct its employees not to pilfer widgets, and it can implement advanced anti-widget-pilfering systems, but this provision goes beyond that by in effect asking Acme to guarantee no pilfering. (↓↓) If I were Acme and some employees ended up pilfering widgets, I might be willing to fight over whether taking reasonable ant-pilfering measures means that Acme has complied with this provision. RBD Alternative: Have Acme assume any risk of pilfering.
- Acme shall cause its representatives not to pilfer widgets: Once you include Acme’s outside lawyers, accounts, and so on in the mix, you can abandon any illusion of control. (↓↓↓) Again, if I were Acme I’d say that taking reasonable steps against pilfering satisfies this requirement. RBD Alternative: Have Acme assume any risk of pilfering.
- Acme shall prevent its widgets from being pilfered: Now Acme is guaranteeing that no one will get their hands on widgets. The more unrealistic the obligation, the more likely it is to be challenged. (↓↓↓↓) RBD Alternative: Have Acme assume any risk of pilfering.
- Acme shall prevent its factories from burning down: Ah, Acme now has control of the elements! (↓↓↓↓↓) RBD Alternative: Have Acme assume the risk of any fire.
- Acme shall cause the Government Agency to issue an approval: I guess Acme runs the government too. (↓↓↓↓) RBD Alternative: Make this a condition, and perhaps provide for a breakup fee if the condition isn’t satisfied.
Numbers 1 and 3 aren’t a problem, and numbers 2 and 8 are easily fixed. With respect to the others, how do you allocate risk so as to avoid the potential for confusion posed by counterintuitive obligations? That’s what was discussed in yesterday’s post. The only way I know how to do that is through indemnification, and that’s obviously a problem, unless I can come up with a way to provide for indemnification without procedural uncertainties. (I’m assuming that those who have a problem with indemnification aren’t magic-worders who would be mollified if I were to simply change shall indemnify to shall reimburse, shall pay, will be liable for, or some such.)
In my update to yesterday’s post I dreamed up a legal fiction for purposes of a scenario equivalent to number 5 above, but as it is it strains credibility. I have a hard time imagining applying it to numbers 6 and 7.
Excuse me for harping on this issue, but it has provoked a dark night of the drafting soul—this is the first time I’ve been seriously stymied in an attempt to articulate a drafting goal simply and clearly. But this isn’t the last you’ve heard from me on this subject. (Cue groans.)
4 thoughts on “A Taxonomy of Impossible Obligations”
Interesting. I see this in the context of security and software all the time. The software supplier wants the licensee to promise that no unauthorized access or use of the software will occur. Simply not possible. This is very close to #6, I suppose.
And I agree that the only way to cure some of these is through indemnification in the event that such “prevented” action actually happens.
In employment agreements with golden parachute provisions, the employer often covenants to cause an outside accounting firm make calculations under Section 280G of the Internal Revenue Code. These calculations are almost always binding on the parties.
Is this an appropriate draftng technique?
Steve: That seems fine, as the employer isn’t obligated to have the accounting firm reach a given conclusion. Ken
I think items 6 and 7 are different from the others because there is, at least implicitly, and element of moral responsibility in items 4 and 5, compared to items 6 and 7. In items 4 and 5, the bad actors are people that Acme introduced, so a business person will expect Acme to be responsible for their actions. In items 6 and 7, you have the possibility of external actors; in item 7 you also have random chance with no bad actors. Once you get all the way to items 6 and 7, you are essentially talking about insurance policies (against theft and fire, specifically), which are certainly indemnities with pages and pages of carve-outs. Some of those carve-outs, though, are for things like items 4 and 5.
Something else to consider is how a business person would read items 6 and 7. Where I could see most business people reading item 5 and understanding exactly what it means, I can see them reading items 6 and 7 and mentally appending conditions: “Well, it must mean that I will prevent any of my people from burning down my factory. I couldn’t possibly mean to make me into an insurance company!”