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Announcement: The Common Draft contract clauses and worksheets are posted (in draft); I plan eventually to turn the clauses and commentary into a book. If you’d like to be notified of significant developments, please subscribe to updates at right. See also my first e‑book, Signing a Business Contract? A Quick Final Checklist for Greater Peace of Mind.

In the IHR Security case, a customer of an accounting-software vendor stopped paying the vendor’s invoices because the software allegedly didn’t function as promised. The vendor sued for payment of some $52,000. The customer claimed that its liability was capped at $5,000, because that was the cap of a  limitation of liability clause that applied to each party: “Notwithstanding anything to the contrary, the total dollar liability of either party under this agreement or otherwise shall be limited to US $5,000.

The good news for the vendor was that the court did some intellectual gymnastics, holding that the damages cap applied only to the parties’ liability for damages for improper functioning or failure of the software, not to the customer’s liability for nonpayment. See IHR Security, LLC v. Innovative Business Software, Inc., — S.W.3d —, 2014 WL 1057306, slip op. at 6 (Tex.App.– El Paso Mar. 19, 2014) (affirming summary judgment in relevant part, reversing and remanding as to other issues). (Hat tip: Chicago lawyer / blogger Evan Brown, via Brian Rogers aka The Contracts Guy.)

The bad news for the vendor was that it had to litigate the issue, which no doubt cost a fair amount of money.

Lesson: When drafting a damages cap, expressly exclude amounts due under the contract; see the Common Draft damages-cap clause for sample language.

A sales guy at CDW, a large technology reseller, made a pitch to one of his long-time customers, explaining why CDW and its alliance partners could handle a major computer-system upgrade that the customer wanted to do. The customer was skeptical that CDW could handle the job.

The sales guy had a technical person ghost-write a set of questions, which the sales guy sent to the customer. The customer’s owner testified that, had he know that the email was ghost-written, he would have asked to deal with someone at CDW who had more technical competence.

The customer sent a purchase order, and the project proceeded. Things didn’t go well, though. The customer sued CDW for breach of contract — and for fraud. The trial court granted summary judgment in favor of CDW, but the appellate court reversed, on grounds that fact issues existed as to what terms were part of the parties contract (a battle-of-the-forms issue, of the kind discussed in the commentary to this Common Draft clause). In doing so, the appellate court reinstated the fraud claim. See BVS, Inc. v. CDW Direct, Inc., No. 13-1766 (8th Cir. July 17, 2014).

The fact pattern here is not unlike that of BSkyB Ltd. v. HP Enterprise Services UK Ltd., [2010] EWHC 86 (TCC), discussed in the commentary to this Common Draft clause. In that case, the court found that an EDS a sales executive had made fraudulent representations about EDS’s capabilities; this resulted in the contract’s limitation of liability being pierced, leading eventually to EDS’s having to pay some $460 million — more than four times the original value of the contract — to settle the case.

Lesson: As noted in the above-cited Common Draft commentary, “they lied!” is the trial lawyer’s weapon of choice, especially in disputes about technical contracts. The business risk to CDW might now be different if the sales guy had said, in his email, that he had asked someone to draft technical questions for him, instead of just posing the questions.

(This isn’t to say that the customer will be able to prove a fraud case against CDW, but only that CDW would have had a much-stronger argument for dismissing the fraud claim on summary judgment if the sale guy had disclosed the ghost-writing of the technical questions.)

Another possibility: Provide a risk-factors disclosure sheet to the customer, because that might even help make the sale.

Letters of intent (LOIs) and business people can be like sex and teenagers: You tell them not to do it, but sometimes they really, REALLY want to. You won’t always be there to chaperone them, and let’s face it, in the throes of desire they’re likely to forget — or ignore — your abstinence advice.

The consequences of entering into an LOI can be significant if a court finds that the parties intended to enter into a binding contract. The canonical example of this danger, of course, is that of Texaco, Inc. v. Pennzoil Co., 729 S.W.2d 768 (Tex.App.—Houston [1st Dist.] 1986, writ. ref’d n.r.e.). In that case, Texaco was hit with a damage award of some $10.5 billion, or more than $22 billion in 2014 dollars, for interfering with Pennzoil’s agreement with Getty Oil — in the form of a memorandum of understanding — under which Pennzoil would buy Getty.

Unless you want to be stuck dealing with such consequences, it might be a good idea to try to make sure that your “teenagers” use protection if they ignore your advice and start messing around with LOIs. The usual form of protection takes the form of various disclaimers of any intent to be bound.

(For a readable discussion of such disclaimers with brief sample language, see generally Rick Angel, 8 Steps to Keep Your Letter of Intent Non-Binding (undated). Much-more elaborate disclaimer language was published by the American Bar Association as part of the Model Stock Purchase Agreement, second edition.)

*   *   *

First impressions matter, for judges and juries just as with anyone else. The next time I draft an LOI, I think I’ll structure it like the following, in the hope of enhancing the visual first impression of the LOI’s non-binding nature:

(1) In the body of the LOI, I’ll include ONLY the desired binding terms such as confidentiality; each party bears its own expenses; the need for a final integrated signed document; the disclaimer of any intent to be bound; and an express covenant that neither party will assert that anything else is binding until ink is on the signature lines of the main document;

(2) I’ll put the anticipated “deal terms” to a separate document entitled (something like) “Nonbinding Discussion Worksheet, Version [date]” with NO signature blocks, and a preamble saying (A)&bsp;that the worksheet is intended only as a convenient working reference, and (B) that nothing about the worksheet is intended to be binding until ink is on the signature lines; and

(3) Finally, in the body of the LOI, I’ll state that the current version of the discussion worksheet is attached for convenient reference.

This posting is adapted from my comments in a discussion about LOIs at the “Drafting Contracts” group of LinkedIn (membership required for access).

Yesterday the Supreme Court of Texas ruled that the term will, in context, did not establish a contractual obligation, but merely stated the intent of one of the parties. A dissenting justice disagreed vigorously. This suggests that it might be well to define the term will as signifying a mandatory obligation, using the Common Draft definition.

The Texas supreme court case was Lubbock County Water Control & Improvement Dist. v. Church & Akin, L.L.C., No. 12-1039 (Tex. July 3, 2014) (reversing court of appeals and dismissing claim for want of jurisdiction). The water district had signed a lease agreement under which a private company would take over operating a public marina on a lake and pay the county a nominal fixed rent plus a percentage rent. The water district terminated the lease early; in response, the company sued for breach of contract. The issue was whether the company’s claims were barred by governmental immunity — the supreme court said yes, they were indeed barred — or whether instead the contract in question came within a statutory waiver of immunity for contracts to provide goods or services to the government.

In response to an argument made by the company, the supreme court focused on the following language from the contract: “The marina will issue catering tickets that will be redeemed at the gate for admittance to the lake. …” Id., slip op. at 13 (emphasis added). The court said that in context, “we read the provision as expressing the parties’ acknowledgment of Church & Akin’s intent to issue tickets, not as a contractual promise to do so.” Id. at 15 n.10 (emphasis added). For that among other reasons, said the court, the contract was not one to provide services to the water district, and so governmental immunity was not waived. The dissent argued that “[i]n this context, ‘will,’ although it has many possible meanings depending on context, here indicates a mandatory requirement.” Dissent at 5 (footnote omitted). In the dissent’s view, the contract clearly was one to provide services to the water district, and thus immunity was waived. See id. at 9.

Even after this decision, I still prefer using the term will, not shall, to state contractual obligations. My on-line friend Professor Tina Stark (whose book I use in my course) disagrees [1], as does Ken Adams, author of A Manual of Style for Contract Drafting [2]. Nevertheless:

  • Contracts should be in plain, contemporary English wherever possible, but the term shall carries the faint whiff of musty, archaic legalese. When I read sentences such as Party A shall take Action X, it makes me think of my late grandmother, who would say things such as, “I shall have a cup of tea.”
  • The term will has a more-collaborative feel to it, and less of a master-servanty tone, than shall. That, I think, can provide just a smidgen of help in achieving two goals: (1) Establishing a cooperative attitude among the parties, which can be important to a successful long-term relationship or even to just a one-shot transaction; and (2) getting the parties to signature, as I discussed in Shall versus will: A sales-related reason to use the latter.
  • I’m given to understand by foreign counsel that, in some English-speaking countries, the term shall might be construed as tentative or optional, not as mandatory.

In view of this Texas case, however, I’m going to seriously consider including the Common Draft Will-as-Must Definition clause in more contracts:

Unless the context clearly requires otherwise, terms such as “Party A will take Action X” mean that Party A is required to take Action X”; likewise, “Party B will not take Action Z” means that Party B is prohibited from taking Action Z.

While it might seem like overkill to include this clause, it also might be one of those cases where a few extra words can be cheap insurance.

Notes

[1] Tina L. Stark, Drafting Contracts: How and Why Lawyers Do What They Do ch. 13 & § 10.2.1 (2d ed. 2014).

[2] Kenneth A. Adams, A Manual of Style for Contract Drafting (3d ed. 2013). A Google search will help the reader to find Ken’s various on-line postings about shall versus will.

My wife and I just got back from a business trip in Copenhagen, followed by a wonderful vacation in England and France with close friends. It gave me an idea for an analogy to use with my students: Contract drafting is like planning a group trip with people whom you might not know. As a rough rule of thumb, for each of the items listed below, contract drafters should consider the 5W+H factors — Who, What, When, Where, Why, and How — and “Plan B” for each of the following:

  • Resources that might be needed at various points along the way (in our case, plane- and bus tickets; hotel reservations; walking shoes; local currencies; etc.) and who will provide them;
  • People with whom you might have to deal, such as:
    • government officials (in our case, passport-control officials);
    • service providers (hotel clerks);
    • financiers (ATMs and currency exchanges);
    • competitors (the crowds who wanted to get into the Louvre);
    • hostiles (someday I might write about my encounter with a pickpocket, who didn’t get quite what he’d expected);
    • each other;
  • Problems that could arise with resources or with people — for travelers, that could be car breakdowns; canceled flights; lost luggage; bad weather; disagreements about what to see and do next; etc.;
  • Extra time and money to budget as a safety margin.

Contract drafters can help their clients systematically think through these issues and figure out how to deal with them. That can be a big help in achieving a successful business result.