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Announcement: The Common Draft contract-clause form file is posted (in draft); it includes several hundred clauses, with extensive annotations, explanations, and commentary. 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.

Definitions clauses for contracts

This is a working draft of a chapter of the Common Draft annotated contract form book. The text of the clauses below can be used in accordance with a Creative Commons license; see this page for details. Be sure to see the Cautions page for important warnings.

Symbology: The following symbols indicate my personal view of how controversial a given clause should normally be, but that may well vary from case to case; YMMV.

*This clause includes optional language that the parties can plug in if desired.
Reasonable parties ordinarily should agree to include this clause; in typ­ic­al circumstances, the clause likely would benefit one or both parties with­out significantly disadvantaging either party.
One of the parties could reasonably ask for this clause (but might not think it necessary to do so), and the other party might well go along.
One of the parties might have a reasonable objection to this clause, but the objection might not be a deal-killer.
One of the parties would likely have reason to object strongly to this clause; in some circumstances, the objection could be a deal-killer.

Affiliate *

FULL TEXT

(a) One individual or organization (“Person”) is an Affiliate of another Person if, either directly or indirectly via one or more intermediaries, the first Person controls, or is controlled by, or is under common control with, the other Person.

(b) For this purpose, a Person controls an organization if the Person has voting control — via legal, beneficial or equitable ownership; a voting agreement; or otherwise — of securities of (or other interest in) the organization having more than the Minimum Voting Percentage (51% if the Agreement does not specify otherwise) of the aggregate right to vote for the organization’s board of directors or comparable governing body.

(c) A Person also controls an organization if the Person has a legally-enforceable right to select, or to prevent the selection, of a majority of the members of that board or other body.

DRAFTER PERSPECTIVE

Consider going along with this term if (i) you want your affiliated companies to have specific rights under the Agreement, and/or (ii) you want the other side’s affiliated companies to have specific obligations under the Agreement.

REVIEWER PERSPECTIVE

Consider objecting to this term if you want to keep tight control over which corporate entity is entitled to be “the other side” of your contract.

ORIGINS

This definition seems to have its roots in language found in U.S. securities laws such as Rule 501(b) of SEC Regulation D, 17 C.F.R. § 230.501(b). It’s pretty typical in how it puts fences around the concept of affiliation by requiring at least 50% stock ownership to establish a “control” relationship.

STRATEGY
  • Think about what would happen if one of the other side’s existing or future affiliates turned out to be a competitor, or some other person or organization that you would just as soon not do business with.
  • Consider specifying, elsewhere in the Agreement, just what would happens in case of loss of affiliate status. For example, suppose that (1) that a software license agreement permitted the licensee’s affiliates to use the software, and (2) that a particular affiliate were later to lose its status as such because of a corporate divestiture. It could be disruptive if the affiliate were required immediately to stop using the licensed software.

Option: Minimum Voting Percentage: [X%]

FULL TEXT

For purposes of subdivision (b) of this section, the Minimum Voting Percentage is as stated.

DRAFTER PERSPECTIVE

Consider proposing this clause Some parties may want the Minimum Voting Percentage for Affiliate status to be less than 50% because they have (or might later have) partly-owned subsidiaries in which they don’t own that much stock.

REVIEWER PERSPECTIVE

Consider objecting to this term Instead of specifying a lower Minimum Voting Percentage, consider instead using the “Specific Designated Affiliates” option discussed just below.

Option: Specific Designated Affiliates: [LIST]

FULL TEXT

The listed group(s) of Persons, if any, are deemed Affiliates of each other regardless of control.

NOTES

Creating a list of specific Affiliates can be a compromise position for situations when a party wants a related company to be considered as an “affiliate” even if the required control relationship isn’t there.

For example, stating that a customer’s partly-owned subsidiary or joint-venture partner is an Affiliate can give that subsidiary or partner the benefit of the pricing and other terms and conditions negotiated by the customer, even though strictly speaking a control relationship might not exist.

Option: No Control From Class Voting Requirement

FULL TEXT

For the avoidance of doubt, for purposes of this section, “control” of an organization does not arise solely from a requirement that a particular type of decision by the organization be approved by a specific class of shares or of comparable voting interests.

Option: No Control From Supermajority Requirement

FULL TEXT

For the avoidance of doubt, for purposes of this section, control of an organization is not to be deemed to arise solely from a requirement that a particular type of transaction or decision by the organization must be approved by a supermajority vote of the organization’s board of directors, shareholders, members, etc.

Option: Affiliate Status Through Management Power

FULL TEXT

For purposes of determining Affiliate status, “control” of an organization also includes the power to direct or cause the direction of the management and policies of the organization, by contract or otherwise.

ORIGINS

This option is modeled on language found in the U.S. securities laws (for example, in Rule 1.02(g) of SEC Regulation S-X).

CAUTION

It might be a bad idea to include this option in a contract, because it’s not exactly precise. The SEC’s vague definition of control may be all well and good for its mission of policing corporate behavior. But if that definition were to be used in a contract, it’s not hard to imagine how, in later litigation, the parties might have to engage in extensive — and expensive — discovery about who had what management power at the relevant time(s). For an example of just such a such litigation battle over whether “control” existed, in a case involving a vessel destroyed by fire, see Offshore Drilling Co. v. Gulf Copper & Mfg. Corp., No. 08-40885 (5th Cir. Apr. 20, 2010) (affirming summary judgment in relevant part).

ALTERNATIVE

A better choice might be to use the “Specific Designated Affiliates” option to state that certain specified companies will be deemed Affiliates whether or not a control relationship exists.

Agreement

FULL TEXT

The terms “the Agreement” and “this Agreement” refer to, collectively, (i) the agreement document signed by the parties; (ii) any exhibit, schedule, appendix, or addendum identified in the Agreement as being part of the Agreement; and (iii) any document expressly incorporated by reference into the Agreement.

SNAPSHOT ANALYSIS

Consider proposing this clause if you think someday there might be a controversy about which documents were or were not intended to be part of the Agreement.

And/or

FULL TEXT

And/or means the inclusive or. EXAMPLE: “The parties expect to meet on Tuesday and/or Wednesday” means that they expect to meet on Tuesday, on Wednesday, or on both days.

EDITORIAL COMMENT

Some critics rail against the use of and/or as allegedly being a crutch for the lazy. For example, one judge, evidently no slave to brevity, remarked that a drafter “could express a series of items as, ‘A, B, C, and D together, or any combination together, or any one of them alone.“‘ Carley Foundry, Inc. v. CBIZ BVKT, LLC, No. 62-CV-08-9791, slip op. at 8 (Minn. Ct. App., Apr. 6, 2010) (italics added). Um, sure, your honor. Certainly the world needs more sticklers for proper language. But and/or, thoughtfully used, is a perfectly serviceable shorthand; language was made for man, not man for language.

FURTHER READING

See generally the materials cited in the Wikipedia entry for the term “and/or.”

Best efforts *

FULL TEXT

(a) Best efforts (whether or not capitalized) refers to the diligent making of reasonable efforts.

(b) For the avoidance of doubt, a party required to use best efforts (i) need not take every conceivable action to achieve the stated objective, and (ii) need not take any action that would not qualify as a reasonable effort.

CAUTION

The definition of this term should be reviewed in the context of the substantive clause(s) that use the defined term. Consider a couple of typical hypothetical situations:

• Suppose a company fails to make X happen after agreeing to use its best efforts to do so. The other side might well claim that this failure was a breach of contract. Almost surely, the company would respond that it made its best efforts to do X, just as the contract required, and so there was no breach.

Just as surely, however, with 20-20 hindsight, the other side’s lawyer will think of some things the company supposedly could have done — but didn’t — to make X happen. That means (or so the other side’s lawyer argues) that by definition the company didn’t use best efforts, and therefore the company should indeed be held liable for breach of contract.

A court very likely would hold that a jury must decide whether or not the company used best efforts, and therefore would refuse to grant a motion to dismiss the case. That of course would increase the expense and uncertainty of the litigation for all concerned.

• Or suppose there’s a catastrophic delay: The company does get X done, but by then it’s too late, at least in the view of the other side. Something like that happened in the Fifth Circuit’s Hermann Holdings case. See Herrmann Holdings Ltd. v. Lucent Technologies Inc., 302 F.3d 552, 556-57 (5th Cir. 2002) (reversing in pertinent part district court’s dismissal of lawsuit).

In the Herrmann Holdings case, Lucent Technologies acquired a company in an all-stock deal; that is, Lucent paid for the acquired company with newly-issued shares of Lucent’s own stock nominally worth $438 million. Under the contract, Lucent was required to use its “reasonable best efforts” to file an S-3 registration statement with the SEC “as promptly as practicable.” Id. at 556 (emphasis added). That filing would allow the sellers to liquidate their Lucent stock by selling it in the stock market.

Unfortunately for the sellers, it took Lucent six weeks to file an S-3, which the SEC approved ten days later. By then, the market price of Lucent’s stock had dropped by 30%, meaning that the sellers were out something like $131 million. Not surprisingly, the sellers filed suit. The appeals court noted that Lucent’s obligation was not merely to file an S-3, but to make its “reasonable best efforts” to do so “as promptly as practicable.” Whether Lucent had complied with this obligation, said the appeals court, could not be determined on a motion to dismiss (meaning in effect that the question was for a jury to decide). See id. at 559-61 (citing cases).

JUDICIAL UNCERTAINTY

Courts sometimes have difficulty coming to grips with a best-efforts obligation. Does the term mean all efforts short of bankruptcy? Or just “diligent” efforts? Or merely “reasonable” efforts? For that matter, is a best-efforts obligation, without more, so vague that it’s simply unenforceable?

  • A California appeals court reviewed case law and concluded that when the contract does not define “best efforts,” the term requires the diligence of a reasonable person under comparable circumstances, not the diligence of a fiduciary:
    Best efforts does not mean every conceivable effort. It does not require the promisor to ignore its own interests, spend itself into bankruptcy, or incur substantial losses to perform its contractual obligations. Rather, it requires a party to make such efforts as are reasonable in light of that party’s ability and the means at its disposal and of the other party’s justifiable expectations. ¶ … Diligence is certainly required, but the obligation is framed within the bounds of reasonableness.
    California Pines Property Owners Association v. Pedotti, No. C066315 (Cal. App. May 24, 2012) (affirming judgment after trial to the court) (citations, internal quotation marks, and alteration marks omitted).
  • Reviewing case law, the Fifth Circuit noted that in Texas, a best-efforts obligation is unenforceable unless the contract sets out a goal or guideline against which best efforts can be measured. The court held that, on the facts of the case, a contract’s best-efforts obligation was so indefinite as to make it unenforceable; as a result, the defendant could not be held liable for allegedly entering into the contract with no intent to perform. Kevin M. Ehringer Enterprises, Inc., v. McData Serv. Corp., No. 10-10197 (5th Cir. Jul. 11, 2011) (reversing and remanding judgment on jury verdict of fraudulent inducement).
EDITORIAL COMMENT

It would probably be better for drafters to use the term diligent efforts instead of best efforts. But for better or worse, best efforts has entered the drafter’s lexicon and is likely to remain there.

NEGOTIATION POINTERS

If your opposite number demands that your client agree to a best-efforts obligation, consider proposing “diligent efforts” or “commercially reasonable efforts” intead. That should provide you with a little more flexibility in actual operation.

If you still can’t avoid a best-efforts obligation, see my blog posting, Best-efforts obligations: Six negotiation tips, for suggestions about negotiating the language. In summary:

  • Try to define “best efforts” and “reasonable efforts” conservatively;
  • Help keep disputes from arising by forcing the parties to talk regularly and to escalate disputes to higher management;
  • Require early neutral evaluation (ENE) of best-efforts disputes;
  • Create a financial incentive to settle;
  • Require micro-arbitration of best-efforts disputes; and/or
  • Agree to refer best-efforts disputes to a special master.
FURTHER READING

See generally:

Option: No Stone Unturned

FULL TEXT

The party subject to the best-efforts obligation is to leave no stone unturned in making reasonable efforts to achieve the stated objective.

ORIGINS

The “leaving no stone unturned” phrase comes from a Canadian court decision whose text I haven’t been able to find on-line. See Atmospheric Diving Systems Inc. v. International Hard Suits Inc., 89 B.C.L.R. (2d) 356 (1994), excerpted by Ken Adams at http://bit.ly/8AdIXf.

Business day

FULL TEXT

The term business day, whether or not capitalized, refers to a day other than a Saturday, Sunday, or holiday on which banks in the applicable location are closed.

CAUTION

In theory, it could be open to factual disputes as to whether, on a given day, banks are closed in the applicable location. A 2004 memo by the Jones Day law firm notes that the traditional definition refers to days on which banks in the applicable location are required or permitted by law to close, but re­search into New York and Texas law found no such requirement nor permission. See Paco Villamar, Not Business as Usual (2004). Villamar’s memo suggests that, for a given contract, it might make more sense to define business day as something more-readily verifiable and/or more appropriate for the specific transaction; for example:

  • Days on which the Federal Reserve Bank in the relevant [U.S.] location is closed
  • Days on which the Securities Exchange Commission (SEC) does not accept filings.

Claim

FULL TEXT

Claim refers to a request or demand for relief, by any third party (including without limitation any governmental entity):

(a) in a written communication such as, for example, a letter or email; and/or

(b) in an original or amended complaint, petition, counterclaim, cross-claim, or other paper that is filed with (or otherwise submitted to) a court, arbitration panel, administrative agency, or other tribunal of competent jurisdiction.

NOTES

Many contracts include provisions requiring one party to defend and/or indemnify another party from various types of claims by third parties. An archaic approach to drafting these provisions is, each time, to repeat a laundry list of such variations. This definition allows drafters to forego such a laundry list.

FURTHER READING

The definition draws on ideas set out in an article by D. Hull Youngblood, Jr. and Peter N. Flocos, Drafting And Enforcing Complex Indemnification Provisions, The Practical Lawyer, Aug. 2010, p.21, at 27.

Commercially reasonable

FULL TEXT

(a) As an illustrative example, commercially-reasonable efforts (whether or not capitalized) refers to at least those efforts that experienced business people, in the relevant circumstances, would regard as reasonable efforts. Other uses of the term commercially-reasonable have corresponding meanings.

(b) For the avoidance of doubt, a party required to make commercially-reasonable efforts may consider potential cost and potential return when determining what actions it must take to satisfy the requirement.

PURPOSE

Sometimes contract drafters don’t want to try to define exactly what a party is supposed to achieve, for example, in promoting sales of a new product. So instead, they might say that “Party A will make commercially-reasonable efforts to promote sales.”

NOTES

This definition expressly requires assessing the obligated party’s level of effort from the point of view of a reasonably-experienced business person.

The illustrative example in subdivision (a) implicitly incorporates the definition of reasonable efforts, which potentially requires consideration of more than just purely-business issues.

The “potential cost and potential return” language in subdivision (b) is adapted from a comment by Janet T. Erskine in Best Efforts versus Reasonable Efforts: Canada and Australia (Nov. 30, 2007; accessed Aug. 12, 2012).

FURTHER READING

See the definition of best efforts and the associated commentary.

Consult; Consultation

FULL TEXT

(a) This definition applies if this Agreement requires a party (the “acting party”) to Consult with another party a specified time in advance of taking or omitting a specified action; such a requirement may be referred to as a Consultation requirement. The terms mean that, before taking or omitting the specified action, the acting party will:

(1) ad­vise the other party in writing, at least the specified time in advance, that it intends to take or not take the action; and

(2) subsequently, if so requested by the other party, (A) prov­ide such relevant in­form­a­tion to the other party about its intention as the acting party deems appropriate in its sole and un­fet­tered discretion; and (B) prov­ide the other party with a reasonable opportunity to be heard concerning the action.

(b) For the avoidance of doubt, unless expressly stated otherwise in this Agreement, the decision whether or not to take or omit the specified action will be within the sole and unfettered discretion of the acting party.

PURPOSE

This clause could offer a way to mitigate a party’s concern that the other side might make a sudden, unexpected move that affects the business relationship.

NOTES

Consent requirements can be problematic: Suppose that a customer were concerned that its service provider might suddenly replace a key person assigned to doing a customer’s work. In contract negotiations, the customer’s sledge-hammer reaction might be to demand that the service provider agree to obtain the customer’s prior consent before taking such an action.

The prov­id­er, though, likely will push back against such a consent re­quire­ment. The prov­id­er will usually be reluctant to give the customer a veto over how it runs its business. More­over, it could be a management burden for the provider to have to check every customer’s contract to see what internal management decisions required prior customer approval.

Consultation as a compromise: As a compromise, the service provider might be willing to commit to consulting with the customer before taking a specified action that couild cause heart­burn for the customer. That way, the customer would at least get notice, perhaps an explanation, and an opportu­ni­ty to be heard. This could ease the resulting stress on the parties’ business relationship.

Consumer Price Index (CPI): [CPI-U]

FULL TEXT

Unless otherwise specified, the terms “Consumer Price Index” and “CPI” refer to CPI-U, US City Average, All Items, as published by the U.S. Bureau of Labor Statistics.

PURPOSE

A contract for ongoing sales or goods or services will sometimes lock in the pricing for years, subject to periodic increases by X% per year (let’s say) or by the corresponding increase in CPI, whichever is greater (or sometimes, whichever is less).

CAUTION
  • Depending on the industry, CPI-U might or might not be the best specific index for estimating how much a provider’s costs have increased. This is explained in the FAQ page of the Bureau of Labor Statistics (accessed Aug. 16, 2012).
  • Prohibiting a provider from increasing its pricing by more than the increase in CPI or X percent per year, whichever is less, would force the provider to ‘eat’ any increases in its own costs that exceeded the increase in the particular index chosen.

Customer

FULL TEXT

A party that the Agreement contemplates will acquire goods (including for example intangible goods), rights, and/or services from another party.

FURTHER READING

See also Provider.

Covered Contract Dispute

FULL TEXT

Covered Contract Dispute refers to any dispute arising out of or relating to any of the following, whether based on action in contract, tort, or otherwise:

(a) the Agreement or its validity, breach, termination, or enforcement;

(b) any transaction or relationship resulting from the Agreement.

PURPOSE

This definition is stated here to make it available for possible use in various other provisions relating to (for example) limitations of liability, arbitration, etc.

CAUTION

The definition of this term should be reviewed in the context of the substantive clause(s) that use the defined term.

Day

FULL TEXT

The term day, whether or not capitalized, refers to a calendar day unless expressly stated otherwise.

Deemed Granted In [Ten Business Days]

FULL TEXT

(a) The term Deemed Granted In [TIME] may be used in respect of an action, omission, decision, or draft document (each referred to as a “submission”) that, pursuant to the Agreement, is submitted by one party to a reviewing party for the reviewing party’s approval or consent.

(b) The term means that the reviewing party will be deemed to have approved or consented to submission if it has not advised the submitting party, in writing, of its objection(s) within such time as is specified in the Agreement, or within ten business days if no time is specified.

CAUTION

The definition of this term should be reviewed in the context of the substantive clause(s) that use the defined term.

PURPOSE

This definition makes it easy to say (for example): No Press Release Without [Party X] Approval, Deemed Granted In 10 Business Days.

Discretion; at discretion

FULL TEXT

The terms discretion and at discretion, whether or not capitalized — for example, as used in the terms “in [Party Name]‘s discretion” or “may proceed at discretion” — refer to sole and unfettered discretion, acting (or not acting) with regard solely to one’s own interests and desires, and unless the Agreement expressly states otherwise, without reference to any putative standard of reasonableness, good faith, or fair dealing.

CAUTION

The definition of this term should be reviewed in the context of the substantive clause(s) that use the defined term.

See also the Good Faith Requirement definition.

PURPOSE

Some contracts say that a party can do X (or decline to do X) “in its sole and unfettered discretion.” In some jurisdictions, though, the law might impose an implied covenant of good faith and fair dealing, even on a discretionary decision, unless the parties had expressly agreed otherwise. The prospect of such judicial second-guessing likely would lead to (expensive and time-consuming) discovery as each side tried to convince the court that a party had or had not exercised its discretion “fairly” or “in good faith.” The provision in the main text tries to avoid this burden by disavowing any putative standard of reasonableness, good faith, etc.

FURTHER READING

See generally the Wikipedia article, Implied covenant of good faith and fair dealing.

Examples

FULL TEXT

(a) Examples (and terms such as for example), whether or not capitalized, are used in the Agreement for purposes of illustration, not of limitation, unless another meaning is clear from the context.

(b) For the avoidance of doubt, if in some places the Agreement uses longer expressions such as “by way of example and not of limitation,” such usage does not mean that the parties intend for shorter expressions such as “for example” to serve as limitations unless expressly stated otherwise.

PURPOSE

This definition eliminates the need to repeatedly write (and read), for example, “by way of example but not of limitation.” It’s not uncommon in contracts, and generally uncontroversial.

GAAP

FULL TEXT

GAAP refers to generally accepted accounting principles, as established and interpreted in the United States, and consistently applied.

FURTHER READING

For an overview of generally accepted accounting principles, see the Wikipedia article of the same title, which also links to a discussion of International Financial Reporting Standards (IFRS), which according to some are beginning to replace the U.S.-oriented GAAP.

Good Faith Requirement

FULL TEXT

If this term is used in connection with a specified right or obligation, it means that the party exercising the right or performing the obligation is required to do so in good faith.

Government authority

FULL TEXT

Government authority and governmental authority, whether or not capitalized, refer to any individual or group (collectively, “authority”), anywhere in the world, exercising de jure or de facto governmental- or regulatory power of any kind. The term includes, for example, any agency; board; bureau; com­mis­sion; court; executive; executive body; judicial body; legislative body; or quasi-governmental authority; at any level (for example, state, federal or local).

ORIGINS

This language draws on the definition of Taxing Authority in section 3.5(f) of the Asset Purchase Agreement between Piper Jaffray Companies and UBS Financial Services, available at the SEC’s EDGAR Web site and reproduced in David Zarfes & Michael L. Bloom, Contracts and Commercial Transactions (Wolters Kluwer Law & Business 2011).

Gross negligence

FULL TEXT

Unless applicable law clearly requires otherwise, the term gross negligence, whether or not capitalized, refers to conduct that evinces a reckless disregard for or indifference to the rights of others, smacking of intentional wrongdoing; it differs in kind, not only degree, from ordinary negligence.

NOTES

In contract disputes, the concept of gross negligence normally comes into play in connection with risk-shifting provisions, such as:

  • limitations of liability;
  • indemnity obligations;
  • clauses exculpating parties from liability for their future actions or omissions.

Such risk-shifting provisions sometimes include an exception (commonly referred to as a carve-out) for cases in which gross negligence is proved.

For example, a limitation clause that caps a vendor’s liability for damages at a stated dollar amount might contain an exception for cases in which the vendor was grossly negligent.

In some U.S. jurisdictions, however, if “gross” negligence was involved, then applicable law might disregard such risk-shifting provisions, as a matter of public policy, no matter what the contract said.

Different U.S. states define gross negligence differently. Moreover, some non-U.S. jurisdictions apparently have not settled on a view whether gross negligence can be distinguished from ordinary negligence.

A contractual definition of gross negligence might therefore be helpful or even essential to determining whether a risk-shifting clause should be pierced. The above definition might applies a fairly-restrictive “New York” standard, in contrast to the arguably-fuzzier and more plaintiff-friendly “California” standard (explained in the blog post cited under “Further reading” below).

Whether a given court would give effect to the definition might depend on whether public policy required a specific definition of gross negligence and precluded parties from agreeing to a different definition.But there is at least a chance that a court might hold that public policy did not bar the parties from agreeing to their own definition of that term.

So all in all, including a definition of gross negligence in a contract is probably worth the effort.

FURTHER READING

For more details and case citations, see my blog posting, Defining gross negligence in a contract.

Hold harmless

FULL TEXT

For the avoidance of doubt, hold harmless (whether or not capitalized) has the same meaning as indemnify unless the Agreement clearly and expressly states otherwise.

NOTES

The very-real conceptual distinction between hold harmless and indemnify seems to be more academic than practical. Con­seq­uent­ly, in the interest of reducing uncertainty and following what seems to have become conventional practice, this definition unilaterally declares the two terms to be synonymous — forcing them onto a Procrustean bed, so to speak — on the theory that if the parties intend otherwise, they can simply draft their contract language accordingly.

This approach fits in with the tendency of some leading authorities to treat the two terms as being practically synonymous, even though ordinarily courts construe contracts so as to give effect to each provision. See, for example, an opinion by Vice Chancellor Strine of the Delaware Court of Chancery in Majkowski v. American Imaging Management Services, LLC, 913 A.2d 572, 587-89 (Del. Ch. 2006):

As a general matter, Majkowski is correct that courts attempt to interpret each word or phrase in a contract to have an independent meaning so as to avoid rendering contractual language mere surplusage. But …

The terms “indemnify” and “hold harmless” have a long history of joint use throughout the lexicon of Anglo-American legal practice. The phrase “indemnify and hold harmless” ap­pears in countless types of contracts in varying contexts.

The plain fact is that lawyers have become so accustomed to using the phrase “indemnify and hold harmless” that it is often almost second nature for the drafter of a contract to include both phrases in referring to a single indemnification right.

Indeed, were I to hold for Majkowski in this case, I imagine many transactional lawyers would be quite surprised to learn that by using the phrase “indemnify and hold harmless,” they had all along unwittingly been creating mandatory advancement rights.

As a result of its traditional usage, the phrase “indemnify and hold harmless” just nat­ur­al­ly rolls off the tongue (and out of the word processors) of American commercial law­yers. The two terms almost always go together.

Indeed, modern authorities confirm that “hold harmless” has little, if any, different mean­ing than the word “indemnify.” Black’s Law Dictionary in fact defines “hold harmless” by using the word “indemnify.” It defines “hold harmless agreement” as a “contract in which one party agrees to indemnify the other.” In defining “hold harmless clause,” it simply says “[s]ee INDEMNITY CLAUSE.”

Id., 913 A.2d at 588-89 (holding that indemnity- and hold-harmless provision did not entitle protected person to advancement of expenses in lawsuit against him by promisor) (extra paragraphing added). (Hat tip: Ken Adams, who usefully summarizes some relevant authorities in the Revisiting “Indemnify” posting at his Koncision contract-automation site.)

Equating the hold harmless with indemnify also fits in with the fact that the hold-harmless language of UCC § 2-312(3), concerning infringement warranties, appears to have been treated by courts as simply an indemnification obligation. See generally the cases cited in Charlene M. Morrow, Indemnity Ex­clu­sions for Goods Made According to Specification or Industry Standard, parts I-B and I-G (2009)

Still, the conceptual distinction between the two terms is worth pondering. The term indemnify is more-or-less universally understood as a commitment by the promisor to reimburse the protected person for stated losses or liabilities. The term hold harmless, on the other hand, has been treated by some courts as amounting to an advance waiver, release, or exculpation, by the promisor, of stated claims against the person held harmless. For example:

  • In its 2012 Morrison opinion, the Idaho Supreme Court considered a release form that had been signed by an employee of a private university in conjunction with the employee’s participation in a team-building exercise. In essence, the release form exculpated the university, in advance, from any injury that the employee might suffer (and in fact the employee did suffer serious injury in falling from a climbing wall). The court referred to the release form, and to similar language in other contracts, as a “hold harmless agreement.” Morrison v. Northwest Nazarene University, 273 P.3d 1253 (Id. 2012) (affirming summary judgment dismissing injured employee’s claim against university).
  • In the Queen Villas Homeowners Association case, a California court of appeals, after reviewing (and in some cases distinguishing) California case law, articulated what Ken Adams calls a fab­ri­ca­ted distinction: “Are the words ‘indemnify’ and ‘hold harmless’ synonymous? No. One is offensive and the other is defensive — even though both contemplate third-party liability situations. ‘In­dem­nify’ is an offensive right — a sword allowing an indemnitee to seek indemnification. ‘Hold harm­less’ is defensive: The right not to be bothered by the other party itself seeking in­dem­nif­ic­a­tion.” Queen Villas Homeowners Ass’n v. TCB Prop. Mgmt., No. G037019, slip. op. at 9-10 (Cal. App. Mar. 29, 2007) (reversing summary judgment in favor of defendant; emphasis in original).

Vice-Chancellor Strine, though, is probably right: As a practical matter, for better or worse, lawyers and judges have come to equate hold harmless with indemnify. If parties negotiating a contract believe that the two terms ought to have different meanings, they should draft their contract language accordingly, so as to be clear about their intentions.

Include, including, etc.

FULL TEXT

(a) The terms include and like words (for example, includes, included, and including), whether or not capitalized, are to be deemed followed by the phrase “without limitation” if not followed literally by that phrase

(b) For the avoidance of doubt, if in some places the Agreement uses longer expressions such as “including but not limited to” or “including without limitation,” such usage does not mean that the parties intend for other, shorter expressions such as “including” to serve as limitations unless expressly stated otherwise.

PURPOSE

This definition eliminates the need to repeatedly write (and read), for example, “including without limitation.” It’s not uncommon in contracts, and generally uncontroversial.

Incorporated by reference

FULL TEXT

For the avoidance of doubt, text incorporated by reference into the Agreement has the same force and effect as if it were set forth in full text in the body of the Agreement.

PURPOSE

This is a “comfort” clause that should reassure a drafter who thinks the other side might try to argue that incorporated by reference means something other than the accepted meaning.

ORIGINS

The language of this definition is adapted from Clauses Incorporated by Reference in the Federal Acquisition Regulations, set forth in the Code of Federal Regulations at 48 C.F.R. § 52.252-2.

Indemnity Group *

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IF: The Agreement requires a party to indemnify the Indemnity Group of another party against a claim or other occurrence — as a hypothetical illustration, “Provider will indemnify Customer’s Indemnity Group” — THEN: The first party will indemnify each of the following Persons against the claim or other occurrence:

(a) the other party itself;

(b) the other party’s Affiliates; and

(c) the employees, officers, directors, shareholders (in that capacity), general- and limited partners, members, man­ag­ers, and other persons occupying comparable positions in respect of each organization listed in subdivisions (a) and (b).

Option: Successors and Permitted Assigns of [Party Name] Included

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(1) Except as provided in subdivision (3) below, the Indemnity Group of the specified party additionally includes the successors and assigns of each individual and organization coming within the scope of the definition of that term.

(2) For the avoidance of doubt, IF: The Agreement requires a member of the Indemnity Group to obtain the consent of another party before assigning the Agreement (or otherwise assigning its right to indemnification); THEN: (i) This option does not in itself constitute such consent; and (ii) If such consent was not obtained, then the indemnifying party is not obligated to indemnify the putative assignee.

CAUTION

A party’s indemnity rights under a contract might disappear if the party assigns the contract without a required consent — and an “assignment” could include an assignment by operation of law, for example, in a corporate merger. That was the issue in a 2011 Delaware case, ClubCorp, Inc. v. Pinehurst, LLC, C.A. No. 5120-VCP, slip op. at 6 (Del. Ch. Nov. 15, 2011) (Parsons, V.C.) (denying motion for summary judgment). The parties’ indemnification agreement prohibited assignment, but also stated that the rights of the indemnified party extended to its successors and assigns. The court held that the contract language was ambiguous about whether the indemnity right survived the unauthorized merger, and consequently denied a motion for summary judgment brought by the indemnified party’s successor in interest.

Option: Subcontractors of [Party Name] Included

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The Indemnity Group of the specified party additionally includes the subcontractors (at any tier) of that party.

Option: Customers of [Party Name] Included

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The Indemnity Group of the specified party additionally includes the customers of that party.

PURPOSE

The term Indemnity Group is defined to make it easier to draft an indemnity provision. The main categories of membership in the Indemnity Group are fairly common; the optional members, though, will require careful consideration by negotiators.

Intellectual property; intellectual-property right

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(a) Intellectual property, whether or not capitalized, refers broadly to inventions, concepts, techniques, plans, designs, methodologies, procedures, programs, approaches, ideas, know-how, computer software, technology, writings, graphics, other works of authorship, trademarks, service marks, logos, trade names, and (in the case of the last four) the goodwill associated with each.

(b) Intellectual-property right, whether or not capitalized, refers broadly to any intellectual-property right or industrial-property right existing by law at the relevant time anywhere in the world, including without limitation the right to sue for present or past infringement thereof. For the avoidance of doubt, the term includes, for example:

(1) all rights (whether registered or unregistered) in, or arising under laws concerning: trade secrets; confidential information; inventions; patents; trademarks, service marks, and trade names; Internet domain names; copyrights; designs; rights of publicity; and mask works;

(2) any pending application for such a right, including for example an application for a patent or to register a copyright or trademark; and

(3) any right to file such an application.

NOTES

Goodwill is significant in connection with trademarks and service marks. a mark’s legal significance is that it symbolizes the pubilc “goodwill” associated with a product or service that originates with, or is sponsored or endorsed by, the owner of the mark. If the mark owner purports to assign the right to use the mark apart from that goodwill, it can destroy the owner’s rights in the mark. See generally Irene Calboli, What If, After All, Trademarks Were “Traded in Gross”?, 2008 Mich. St. L. Rev. 345.

Knowledge

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Knowledge refers to actual knowledge; knows has a corresponding meaning.

ORIGIN

This definition is adapted almost verbatim from subdivision (b) of UCC § 1-202.

Other subdivisions of UCC § 1-202 are not incorporated into this definition; some of those other subdivisions define “notice” and specify default rules for when an organization has knowledge or notice of a fact, which might conflict with the notice provisions of the Agreement.

NOTES

Merger- and acquisition (M&A) agreements often contain definitions of knowledge (sometimes much more elaborate than this one). Such definitions seem to be less common in contracts for commercial transactions.

This definition does not impose a duty of inquiry.

Law

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Law, whether or not capitalized, refers to any and all applicable provisions of a constitution, statute, regulation, ordinance, judgment, order, or other obligation, requirement, or prohibition having legally-binding effect at the relevant time.

PURPOSE

It’s always possible that a “creative” counsel might try to claim that some form of government requirement did not constitute “law” in connection with a contract provision. This definition is intended to forestall such an attempt.

Non-party

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Non-party, whether or not capitalized, refers to an individual or organization that is not a signatory of the Agreement.

PURPOSE

This is a convenience definition

Organization

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Organization, whether or not capitalized, refers to a corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, government, governmental subdivision, agency, or instrumentality, public corporation, or any other legal or commercial entity.

NOTES

The language of this definition is adapted from UCC §§ 1-201(25) and 1-201(27).

Party

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Party, whether or not capitalized, refers to a signatory of the Agreement unless another meaning is clear from the context.

Patent rights

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The term patent rights, whether or not capitalized, refers generally to the following, as in existence at a relevant time: (i) issued patents; (ii) patent applications, both pending and abandoned, including but not limited to provisional, non-provisional, divisional, continuation, continuation-in-part, and reissue applications; and (iii) all rights to sue for infringement of any claim in, or other right arising from, a patent or patent application.

Person

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Person, whether or not capitalized, refers to an individual or organization.

NOTES

The language of this definition is adapted from UCC § 1-201(27).

Preliminary Injunctive Relief Not Precluded

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When used in a section of the Agreement, the term Preliminary Injunctive Relief Not Precluded means that, for the avoidance of doubt:

(a) The section does not preclude a party from seeking a temporary restraining order, preliminary injunction, or similar relief, in accordance with applicable law, to prevent or stop irreparable injury or other harm not capable of being fully redressed by a monetary award; and

(b) If a party does so seek a form of relief referred to in subdivision (a), that fact in itself will not waive the party’s right to demand compliance with that section of the Agreement.

Provider

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A party that the Agreement contemplates will furnish goods (including for example intangible goods), rights, and/or services to another party.

FURTHER READING

See also Customer.

Reasonable efforts

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(a) The term reasonable efforts, whether or not capitalized, refers to one or more reasonable actions reasonably calculated to achieve the stated objective.

(b) Any assessment of reasonable efforts is to give due regard to the information reasonably available, to the relevant person at the relevant time, about (for example) the likelihood of success of specific action(s); the likely cost of other actions; the parties’ other interests; the safety of individuals and property; and the public interest.

(c) For the avoidance of doubt, a requirement to make reasonable efforts does not necessarily require taking every conceivable reasonable action, nor does it require the obligated party to put itself in a position of undue hardship.

PURPOSE

Contract drafters not-infrequently resort to stating that a party will make “reasonable efforts” to achieve something, instead of imposing an absolute obligation to do so. This definition attempts to give some predictability to the quoted term. See also the definition of best efforts and the associated commentary, which contains citations to court cases and links to further reading.

NOTES

Undue hardship — subdivision (c): This language is adapted from a comment by Janet T. Erskine, Best Efforts versus Reasonable Efforts: Canada and Australia (Nov. 30, 2007; accessed Aug. 12, 2012).

Seasonable

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An action is taken seasonably (whether or not the word is capitalized) if the action is taken at or within the time agreed or, if no time is agreed, at or within a reasonable time.

NOTES

The language of this definition is adapted essentially verbatim from UCC § 1-205.

Signed

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Signed and like terms such as sign, signing and signature, whether or not capitalized, with respect to a writing, refer to executing or adopting a symbol, or carrying out a process, attached to or logically associated with a writing or other record, with the intent to adopt, accept, or authenticate the record. The term includes, for example, an electronic signature as defined in the [U.S.] Electronic Signatures in Global and National Commerce Act (“E-SIGN”), 15 U.S.C. § 7006(5).

NOTES

This definition is a combination of (i) the definitions of signed and writing in UCC §§ 1-201(37) and 1-201(43); and (ii) the definitions of electronic signature and electronic record in the [U.S.] Electronic Signatures in Global and National Commerce Act (“E-SIGN”), 15 U.S.C. § 7006. The definition also draws on the definition of writing in proposed Rule 1.00(v) of the 2010 proposed amendments to the Texas Disciplinary Rules of Professional Conduct [for lawyers]. (Those proposed amendments were rejected, for unrelated reasons, in a referendum of the State Bar of Texas.)

Tax

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(a) Tax, whether or not capitalized, refers to any tax, assessment, charge, duty, levy, or other similar governmental charge of any nature, imposed by any taxing authority.

(b) Illustrative examples of taxes include the following, whether or not an obligation to pay the same is undisputed and whether or not a return or report must be filed:

(1) all taxes on income, gross receipts, employment, franchise, profits, capital gains, capital stock, transfer, sales, use, occupation, property, excise, severance, windfall profits, sick pay, and disability pay;

(2) all ad valorem, alternative minimum, environmental, license, payroll, registration, social security (or similar), stamp, stamp duty reserve, unemployment, value added, and withholding taxes; and

(3) all other taxes, assessments, charges, customs and other duties, fees, levies or other similar governmental charges of any kind whatsoever, together with

(4) all estimated taxes, deficiency assessments, additions to tax, fines, penalties, and interest.

NOTES

The language of this definition draws on:

  • Contract language quoted by the Court of Appeals of New York in Innophos, Inc. v. Rhodia, S.A., 10 N.Y.3d 25, 27-28 (2008). In that case, the state of New York’s highest court upheld a summary judgment that a $20 million-plus water usage charge, levied by a Mexican government entity, was a “tax” within the meaning of the contract’s laundry-list definition; and
  • Section 3.5(e) of the Asset Purchase Agreement between Piper Jaffray Companies and UBS Financial Services, available at the SEC’s EDGAR Web site and reproduced in David Zarfes & Michael L. Bloom, Contracts and Commercial Transactions (Wolters Kluwer Law & Business 2011).

Taxing authority

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Taxing authority, whether or not capitalized, refers to any government authority exercising de jure or de facto power to impose, regulate, or administer or enforce the imposition of taxes.

NOTES

The language of this definition draws on the definition of Taxing Authority in section 3.5(f) of the Asset Purchase Agreement between Piper Jaffray Companies and UBS Financial Services, available at the SEC’s EDGAR Web site and reproduced in David Zarfes & Michael L. Bloom, Contracts and Commercial Transactions (Wolters Kluwer Law & Business 2011).

Term

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Term, when used to indicate a period of time, refers to the term of the Agreement, unless another meaning is clear from the context.

Tribunal

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Tribunal, whether or not capitalized, refers to an adjudicatory body of competent jurisdiction. Examples of tribunals include a court, an arbitral tribunal in a binding arbitration proceeding, or an administrative agency or legislative body acting in an adjudicatory capacity. For this purpose, “acting in an adjudicatory capacity” means that in a particular matter, after the presentation of evidence or legal argument or both by one or more parties, a panel of one or more neutral officials renders a binding legal judgment directly affecting the interests of one or more parties in the matter.

NOTES

Portions of this definition are adapted from proposed amendments to Rule 1.00(u) of the 2010 proposed amendments to the Texas Disciplinary Rules of Professional Conduct [for lawyers]. (The proposed amendments were rejected in a referendum for unrelated reasons.)

Warrant; warranty

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(a) This definition is agreed to for the avoidance of doubt.

(b) When a party warrants (whether or not the term is capitalized) a fact to another party, such action constitutes an undertaking by the warranting party, referred to as a warranty, that IF: The warranted fact is shown to have been untrue at the relevant time defined below (such untruth being referred to as a breach of the warranty); THEN: The warranting party will reimburse the other party for all loss or expense shown to have been (1) incurred by the other party; and (2) foreseeably caused by the breach.

(c) For purposes of subdivision (b), the relevant time for determining breach of a warranty is (1) the time specified in the warranty, or (2) if no time is so specified, at the time the warranty was made.

(d) Any such reimbursement for breach of a warranty is subject to any remedy limitations stated in the Agreement.

(e) For the avoidance of doubt, the other party’s entitlement to reimbursement for breach of a warranty does not depend on (1) whether the warranting party knew or should have known that the warranted fact was untrue; nor (2) unless otherwise specified in the Agreement, whether the other party relied on the purported truth of the warranted fact; nor (3) whether such reliance, if any, was justified.

Workmanlike

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Workmanlike refers to performance that is skillful; competent; well-executed; worthy of a good worker in the relevant field of endeavor; but not necessarily outstanding or original.

NOTES

The definition of “workmanlike” here is my own coinage; it draws on concepts in various definitions I found on-line.

Writing; written

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Writing and written, whether or not capitalized, refer to any tangible or electronic record of a communication or representation. The terms encompass, for example, handwriting, typewriting, printing, photocopying, photography, audio or video recording, and e-mail.

NOTES

Portions of this definition are adapted from proposed amendments to Rule 1.00(v) of the 2010 proposed amendments to the Texas Disciplinary Rules of Professional Conduct [for lawyers]. (The proposed amendments were rejected in a referendum for unrelated reasons.)

Usages

FULL TEXT

Unless otherwise clear from the context:

  • All references to articles, sections, subsections, subdivisions, paragraphs, exhibits, appendixes, addenda, and the like are to those of the Agreement unless otherwise clear from the context.
  • a dollar sign ($) refers to U.S. dollars.
  • a reference to a person includes the person’s successors and permitted assigns.
NOTES

This is a fairly conventional “usages” provision.