At the Full Day Course “Real World Document Drafting: Form, Style and Substance” New York City Bar, Friday, September 12, 2008 - Materials distributed in addition to the Book included the following:


4.10 "No Default" Conditions 


4.10.1      Background


- It is not uncommon for a “standard form” of a semi-adhesion agreement, such as a landlord's form of office building or shopping center lease or a franchise or distribution agreement, to condition exercise by the "adhered" party of specified rights upon no “default” existing at the time of exercise of such right. For instance, a distribution agreement may be for a fixed initial term, perhaps five or ten years with a right of the distributor to extend for additional five-year or ten-year terms, provided that the distributor is not in default at the time of giving notice of each such extension or perhaps even after the giving of the notice until the commencement of the new term.  Such an apparently innocuous introduction to a grant of a right presents a number of problems as considered below.


4.10.2      Issues

 - Why should, for instance, a right to renew a valuable right be contingent upon a default not existing at the time of exercise of the right? If a default is grounds for termination, why shouldn’t the termination provisions be used rather than the nonrenewal back door? The burden of proof may be different. If the nondefault is a condition, is it necessary for the distributor to prove affirmatively that it was not in default to establish its right to extend the term of the distributorship and remain in business?


                        This condition is often so articulated as to eliminate procedural safeguards otherwise provided for by the document in the event of an attempt by one party to terminate a relationship or obligation. For instance, the right to be exercised may be conditional upon “there being no default "rather than there being no “Event of Default.”[517]Consider the situation in which an “Event of Default” under the remedies provisions of an agreement is conditioned upon notice and failure to cure or commence to cure within a specified cure period.  If under the same agreement there is a default of which the holder of the conditional right (the distributor in this example) has no knowledge and was never notified and which could easily have been cured if the distributor knew of its existence, [518] it may nevertheless be the basis of the supplier rejecting an attempted extension of the term of the distributorship?[519]There are many variations on this theme. It may be that both the distributor and the supplier know of the circumstances, but that the supplier had acquiesced in the distributor’s lack of strict conformity with a provision of the distribution agreement.[520]


4.1.3      Drafting Approaches


  If you are representing the party that will be seeking to exercise a right that is conditioned in some manner on a default not existing, the most direct approach is for you to seek to have the condition eliminated.  If this does not prove feasible, you might seek to have the agreement provide that the condition is effective only if your client receives the same notice that it would have received had the other side sought to exercise any of the other remedies available in the event of a default. The agreement might provide that your client does not lose such right until all notice and cure rights have expired without the default being cured. Try to avoid language such as “or there exists acts or omissions that with the passage of time, if not cured, would constitute an Event of Default." 


517        See discussion of the structure of a default provisions at Item 2 above on methods to provide for notice and opportunity to cure.
518      Or did not understand the sign. 
519      In many, if not the vast majority of these situations, the distributor would not have entered into the arrangement with its supplier and expended its time and resources to develop the distribution rights had it not been granted the renewal rights so as to permit it to develop a valuable franchise. Under such circumstances the non-renewal is in effect the imposition of  a forfeiture without the usual protections the law provides against forfeitures.
520     The agreement’s “Non-Waver” provision might preclude the Distributor from  effectively claiming that the manufacture’s failure to give notice of reoccurring defaults of a specified nature precluded reliance upon such default in seeking to impose the forfeiture incident to a non renewal.