Contract Drafting – Toedt Class Notes

Table of Contents

Basic class information

Important links; keyboard shortcuts

Welcome to the Contract Drafting course at UH Law Center for the spring of 2013. These notes are a work in progress; they consolidate various things I've written and/or located over the last several years, along with new material. Comments and suggestions are welcome.

Class notes

You can reach these class notes via the URL http://www.OnContracts.com/ClassNotes.

Clicker site

I will be posting clicker-poll questions for in-class discussion at the PollEverywhere site:

  • It's free.
  • You don't need to register at the site.
  • You don't need a clicker – you'll use your phone, laptop, or tablet.

Links for "back-channel" questions

I intend to experiment with taking anonymous questions on-line at the TodaysMeet.com Web site – it requires no login and you can use a "handle" or initials.

Keyboard shortcuts

Here are some basic keyboard shortcuts for this Web site:

  • Table of Contents: Press "i" (or "t" for top).
  • Go back to the page that linked to the page you're currently on: Press "b"
  • Next page: Press "n".
  • Previous page: Press "p"
  • Up one level: Press "u"

To see other keyboard shortcuts:

  • press the question mark key "?" on your keyboard, or
  • click the HELP link at the top right of the screen

Course goals

The primary goal of this course is to help students prepare for assignments they will likely see throughout their careers: drafting, reviewing, analyzing, explaining, and negotiating contracts for clients, al­ways with an eye on potential business and litigation consequences. We will focus on:

  • equipping students to spot important substantive issues in the legal- and business provisions they will see in contracts; and
  • style points that serve as the hallmark of a skilled professional.

My informal personal goal is this: When a (former) student gets to a law firm or an in-house law department, I want his or her supervising attorney to be impressed with how un-rookie-like the new lawyer is.

Our main areas of focus will be:

  • Substance: The business and legal issues that commonly arise in contract drafting- and negotiation projects
  • Strategy: Thinking ahead a few moves on the chessboard, trying to anticipate what could happen and what the client might want
  • Style: The things supervising partners, clients, and the other side's counsel will expect (consciously or otherwise)
  • Mechanics: How to move a contract negotiation from start to finish, as smoothly as the circumstances will allow
  • Self-protection: Avoiding career unpleasantness; keeping your firm (and your malpractice carrier) happy

On-going review

As you've probably heard, a key to reinforc­ing learning is repetition, repetition, repetition. Given that this is in essence a skills course, periodically we will do quick reviews of important topics on an on-going basis.

Required text

The required text is Tina Stark, Drafting Contracts: How and Why Lawyers Do What They Do (Aspen Publishers 2007).

NOTE: On some issues Prof. Stark's views are not the same as mine, so don't blindly accept what she says (nor for that matter what I say).

We will also be making extensive use of the materials in (or linked to in) this Web page.

Homework

I will let the class know in advance whether a given homework exercise will be given an actual grade "for record," or whether instead I will merely note whether the homework has been turned in and appears to reflect a good-faith effort.

To preserve homework anonymity, use your Fall 2012 exam number instead of your name.

Homework assignments are to be turned in at the beginning of the announced class periods.

I will accept late homework but I will also mark it as such and reserve the right to take away some or all credit.

We will review each homework exercise in class, in most cases using group discussion.

For some but not all homework exercises, I will mark up and return each student's exercise.

Students who put significant effort into the homework will learn the most and generally perform well in the course. The reverse is also true.

Computer use in class

Computer use in class is not just encouraged but required; you will need in-class Web access for many of the exercises. If this will be a problem, be sure to contact me well in advance.

Grading policy

Grades for the course will be based as follows:

  • 35% from the graded homework assignments;
  • 15% from the ungraded homework assignments, which I treat as one form of class par-ticipation — if you turn in all the ungraded homework assign­ments and make a reasonable effort on them, you will get full credit for that 15%; and
  • 50% from a traditional final exam.

In addition, per law-school policy I reserve the right to raise or lower a student's grade by one-half grade level (e.g., a B to a B-plus) based on that student's class participation — as you prob­ably know, this happens, notwithstanding blind grading, by my giving the administration specific names of people whose grades are to be adjusted.

Makeup days

No class

I am scheduled to be out of town on:

  • Thursday, February 14
  • Tuesday, March 19
  • Thursday, April 11

Friday makeup days – 10:30 a.m. in Room 4 BLB

The required makeup days are tentatively scheduled for the following Fridays at 10:30 a.m., in Room 4 BLB:

  • Friday, February 1
  • Friday, March 1
  • Friday, April 26

Collaboration is encouraged

Unless I say otherwise in a particular case, feel free to collaborate with your classmates, and/or to consult others (e.g., practicing lawyers), in doing homework and/or in-class exercises.

Office hours; Skype / phone conferences

I am happy to meet with students, by phone, via Skype (with screen-sharing if desired), or in person at the Law Center by appointment. In addition, feel free to call or email me with questions. My preference is to schedule phone- or Skype conferences for a time certain, which can easily be done by email.

Attendance

Attendance is extremely important, not least because the in-class practical exercises, class discussions, and on-going reviews will be a major way you acquire and retain the information you need.

In part because of accreditation requirements, the Law Center has a minimum 80% attendance policy, which translates to a maximum of five absences in a semester.

The Law Center does not differentiate between excused and unexcused absences; you are either in class or not.

Syllabus and class-by-class schedule

Topics

We will focus on the following issues, which students are very likely to encounter at some point in their first few years of practice.

  1. Contract formation issues, including
    • Signatures
    • Perils of backdating
    • Whose standard terms apply?
  2. Delivery of goods (or, in financial contracts, of money or related items)
  3. Performance of services
  4. Acceptance of goods or services
  5. Payment obligations
  6. Pricing — possibly for future transactions as well as the current one
  7. Representations and warranties, by which one party assures the other — with greater or lesser con­seq­uen­ces — that the universe is or is not in a certain state of affairs
  8. Confidentiality obligations
  9. Risk management obligations such as those relating to:
    • Required precautions
    • Prohibited activities
  10. Risk reallocation provisions, such as those relating to:
    • Limitations of liability, typically in the form of exclusion of certain types of damages, e.g., consequential damages, and caps on damage awards
    • Indemnification obligations — such as those that are being litigated in the wake of the Deepwater Horizon explosion — and the legal constraints placed on such obligations, such as the express-negligence rule; the conspicuousness requirement; and state anti-indemnity statutes
    • Insurance requirements, to shift at least part of the risk to insurance companies, with terms including certificate delivery obligations, additional-insured requirements, and waivers of subrogation
    • Liquidated damages, which put both a cap and a floor on damage awards
  11. Dispute management provisions such as:
    • Incentives to settle, e.g., attorneys' fees clauses (of several flavors), early neutral evaluation requirements, and mandatory mediation
    • Choice of governing law
    • Choice of forum for litigation
    • Arbitration of disputes in lieu of litigation;
  12. Termination — triggers, and
  13. General provisions

Contract types

  • Sales contracts
  • Services agreements
  • Confidentiality agreement
  • Letter of intent
  • Purchaser's master terms and conditions
  • Seller's master terms and conditions
  • Invention assignment agreement
  • Employment agreement (executive)
  • Lease agreement (real estate)
  • Lease agreement - equipment, software
  • Purchase and sale of real estate
  • Merger / acquisition agreement
  • Financial agreements
  • Limited liability company operating agreement

Class 1: Tuesday, January 15

Back-channel link for questions

TodaysMeet.com Web site – it requires no login and you can use a "handle" or initials.

Class discussion: Goals of a contract

What are some of the ultimate objectives of any contract?

Classroom exercise

Class 2: Thursday, January 17

Homework due today (ungraded)

Stark exercise 17-1, p. 197

Stark exercises 18-1 through 18-3

Clicker poll

In-class exercises

We will work on problem sets 1 through 5.

For problem set 1, we will do a clicker poll before and after.

Reading for today

Class 3: Tuesday, January 22

Homework due today to turn in

[TO BE POSTED BY SATURDAY NOON]

Digest — notes on selected topics

1Q, 2Q, 3Q, 4Q — see Fiscal years; fiscal quarters

Backdating a contract

Key takeaways:

  • Backdating a contract for purposes of deception, for example, to book revenue as of an earlier date, may well be a felony.
  • Signing a contract to be effective as of an earlier date might well be OK, but the fact that you're doing so should be made clear in the contract itself, to help forestall later accusations that you had an intent to deceive.
  • If you need to date your signature per se, be sure to use the actual date that you sign the document, not the earlier effective date.

Executives of software giant Computer Associates end up in prison

As I write this, the former CEO of software giant Computer Associates is serving a 12-year sentence for backdating sales contracts. (NY Times) Sanjay Kumar was also fined $8 million and agreed to settle civil suits by surrendering $800 million. (NY Times)

Mr. Kumar wasn't the only executive at Computer Associates (now known as just CA) to get in trouble for back-dating. All of the following went to prison or home confinement:

  • the CFO — seven months in prison, seven months home detention (NY Times)
  • the general counsel — two years in prison, and also disbarred (court opinion)
  • the senior vice president for busi­ness-development — 10 months of home confinement (NY Times)
  • the head of worldwide sales — seven years in prison (WSJ)

All of this mess came about because the Computer Associates executives orchestrated a huge accounting fraud: On occasions when the company realized that its quarterly financial numbers were going to miss projections, it "held the books open" by backdating contracts signed a few days after the close of the quarter. (This practice was apparently referred to internally as the "35-day month.")

Note that all the sales in question were legitimate and the cash had been collected (according to CA's press release). The only issue was one of the timing of revenue recognition. The company had booked the sales a few days earlier than was proper. But that was enough to put the sales revenue into an earlier reporting period than it should have been. That, in turn, was enough to send all those CA executives to prison. (CA press release)

Media Vision CFO goes to prison

The former CFO of Media Vision Tech­nology was sentenced to three and a half years in federal prison because his company had inflated its reported revenues, in part by backdating sales contracts. Because of the inflated revenue reports, the company's stock price went up, at least until the truth came out, which eventually drove the company into bankruptcy. (The Recorder)

Backdating for non-deceptive purposes might be OK

Having a contract be effective as of an earlier date, for non-deceptive purposes, might be just fine, depending on the circumstances.

Example: Suppose you disclose your company's confi­dential information to a potential business partner, after she first orally agrees to keep it confidential. You might well want to enter into a written nondisclosure agreement that states it is effective as of the date of your oral disclosure. (Check with your lawyer.) You still would not want to backdate your actual signature, though.

Conspicuousness

The UCC definition

The Uniform Commercial Code provides a definition of "conspicuous" in section 1-201(10):

A term or clause is conspicuous when it is so written that a reasonable person against whom it is to operate ought to have noticed it.

A printed heading in capitals (as: NON-NEGOTIABLE BILL OF LADING) is conspicuous.

Language in the body of a form is "conspicuous" if it is in larger or other contrasting type or color.

But in a telegram any stated term is "conspicuous".

Tex. Bus. & Com. Code § 1.201(10) (extra paragraphing added).

Texas's "fair notice" requirement

The Supreme Court of Texas has held that — with a possibly-significant exception — an indemnity provision protecting the indemnitee from its own negligence must be sufficiently conspicuous to provide "fair notice." The supreme court adopted the conspicuousness test stated in the Uniform Commercial Code (quoted above); the court explained:

This standard for conspicuousness in Code cases is familiar to the courts of this state and conforms to our objectives of commercial certainty and uniformity.

We thus adopt the standard for conspicuousness contained in the Code for indemnity agreements and releases like those in this case that relieve a party in advance of responsibility for its own negligence.

When a reasonable person against whom a clause is to operate ought to have noticed it, the clause is conspicuous. For example, language in capital headings, language in contrasting type or color, and language in an extremely short document, such as a telegram, is conspicuous.

Dresser Indus., Inc. v. Page Petroleum, Inc., 853 S.W.2d 505, 508-09 (Tex. 1993) (citations omitted, emphasis and extra paragraphing added).

The court also pointed out that the fair-notice requirement did not apply to settlement releases: "Today's opinion applies the fair notice requirements to indemnity agreements and releases only when such exculpatory agreements are utilized to relieve a party of liability for its own negligence in advance." Id., 853 S.W.2d at 508 n.1 (emphasis added).

Possible exception: Did the putatively-liable party have actual notice or knowledge of its obligation?

The Dresser Industries court noted an exception to the conspicuousness requirement:

The fair notice requirements are not applicable when the indemnitee establishes that the indemnitor possessed actual notice or knowledge of the indemnity agreement.

Id., 853 S.W.2d at 508 n.2 (emphasis added, citation omitted). Note especially the italicized portion of the quotation, which implies that the burden of proof of actual notice or knowledge is on the party claiming indemnification from its own negligence.

How to prove actual knowledge? In Enron Corp. Sav. Plan v. Hewitt Associates, LLC, 611 F.Supp.2d 654, 673-75 (S.D. Tex. 2008), Judge Melinda Harmon granted Enron's motion to dismiss Hewitt's claim for indemnity for failure to comply with the express-negligence rule; for completeness, she surveyed prior cases in which actual knowledge of an indemnity clause had been sufficiently established, including by ways such as:

  • evidence of specific negotiation of the indemnity obligation, such as prior drafts;
  • through prior dealings of the parties, for example, evidence of similar contracts over a number of years with a similar indemnity provision;
  • proof that the provision had been brought to the indemnitor's attention, e.g., by a prior claim). …

Conspicuous doesn't necessarily mean all-caps, bold-faced type, etc.

What counts as "conspicuous" will sometimes depend on the circumstances. In Enserch Corp. v. Parker, 794 S.W.2d 2, 8-9 (Tex. 1990), the Texas supreme court said that the indemnity provision in question did indeed provide fair notice:

The entire contract between Enserch and Christie consists of one page; the indemnity language is on the front side of the contract and is not hidden under a separate heading.

The exculpatory language and the indemnity language, although contained in separate sentences, appear together in the same paragraph and the indemnity language is not surrounded by completely unrelated terms.

Consequently, the indemnity language is sufficiently conspicuous to afford "fair notice" of its existence.

Id. 794 S.W.2d at 9 (extra paragraphing added).

CPI clause

Takeaways

CPI clauses are sometimes included in contracts for ongoing sales or goods or services. Such contracts will typically lock in the agreed pricing for a specified number of 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).

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).

Caution: 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.

Common Draft clause text

Consumer Price Index (CPI) refers to CPI-U

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.

Electronic signatures

The federal E-SIGN Act validates electronic signatures for transactions "in or affecting interstate or foreign commerce"

The federal Electronic Signatures in Global and National Commerce Act (E-SIGN), 15 USC § 7001 et seq., provides in part (subject to certain stated exceptions) that, for transactions "in or affecting interstate or foreign commerce," electronic contracts and electronic signatures may not be denied legal effect solely because they are in electronic form.

Uniform Electronic Transactions Acts (UETA) do likewise

At the state level, 47 states, the District of Columbia, and Puerto Rico, and the U.S. Virgin Islands have adopted the Uniform Electronic Transactions Act (UETA).

(The remaining three states — Illinois, New York, and Washington — have adopted their own statutes validating electronic signatures.)

The Texas version of UETA, at Tex. Bus. & Comm. Code § 322.001 et seq., provides in part that:

§ 322.005 USE OF ELECTRONIC RECORDS AND ELECTRONIC SIGNATURES; VARIATION BY AGREEMENT. …

(b) This chapter applies only to transactions between parties each of which has agreed to conduct transactions by electronic means. Whether the parties agree to conduct a transaction by electronic means is determined from the context and surrounding circumstances, including the parties' conduct. …

§ 322.007 LEGAL RECOGNITION OF ELECTRONIC RECORDS, ELECTRONIC SIGNATURES, AND ELECTRONIC CONTRACTS. (a) A record or signature may not be denied legal effect or enforceability solely because it is in electronic form.

(b) A contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation.

(c) If a law requires a record to be in writing, an electronic record satisfies the law.

(d) If a law requires a signature, an electronic signature satisfies the law.

§ 322.009 ATTRIBUTION AND EFFECT OF ELECTRONIC RECORD AND ELECTRONIC SIGNATURE. (a) An electronic record or electronic signature is attributable to a person if it was the act of the person. The act of the person may be shown in any manner, including a showing of the efficacy of any security procedure applied to determine the person to which the electronic record or electronic signature was attributable.

(b) The effect of an electronic record or electronic signature attributed to a person under Subsection (a) is determined from the context and surrounding circumstances at the time of its creation, execution, or adoption, including the parties' agreement, if any, and otherwise as provided by law.

322.013. ADMISSIBILITY IN EVIDENCE. In a proceeding, evidence of a record or signature may not be excluded solely because it is in electronic form.

Courts have honored electronic "signatures"

Naldi v. Grundberg, 80 A.D.3d 1, 908 N.Y.S.2d 639 (N.Y. App. Div. 2010) at http://goo.gl/1Uyug: The appellate court rejected the defendant-appellant's contention that a right of first refusal could not properly be granted by email; the court said that "an e-mail will satisfy the statute of frauds so long as its contents and subscription meet all requirements of the governing statute." Id., 80 A.D.3d at 3. The court beginning with the transitional paragraph at pp. 6-7 through the transitional paragraph at pp. 10-11.

Fiscal years; fiscal quarters

For accounting purposes, most companies keep track of their revenues, expenses, and profit or loss on an annual and quarterly basis. They use a fiscal year — often ending December 31, but sometimes ending at the end of other months, e.g., September 30 — divided into four fiscal quarters. Business people often use shorthand terms such as:

  • FY2000: The fiscal year 2000. If a company uses a calendar-year fiscal year, FY2000 ended on December 31, 2000.
  • Q1 (or sometimes 1Q): The first quarter of the fiscal year. For a company with a calendar-year fiscal year, Q1 would end on March 31.
  • 1Q2000: The first fiscal quarter of the fiscal year 2000.

Hold harmless – see Indemnify

Indemnify; hold harmless

Examples: Honeywell and GE indemnity clauses

From a Honeywell purchase-order form:

24. General Indemnification

Supplier will, at its expense, defend, indemnify and hold harmless Honeywell and

  • its subsidiaries, affiliates and agents,
  • and their respective officers, directors, shareholders, and employees,
  • and Honeywell's customers (collectively "Indemnitees")

from and against any and all[:]

  • loss, cost, expense, damage, claim, demand or liability,
  • including reasonable attorney and professional fees and costs
  • and the cost of settlement, compromise, judgment or verdict incurred by or demanded of an Indemnitee

arising out of, resulting from or occurring in connection with Supplier's[:]

  • negligence,
  • willful misconduct, or
  • breach of the terms of this Purchase Order.

Prior to service or filing of any significant pleading, motion, brief, discovery response or other document on behalf of Honeywell, Supplier will provide such documents to Honeywell for review and approval, which will not be unreasonably withheld.

In no event will Supplier enter into any settlement without Honeywell's prior written consent, which will not be unreasonably withheld.

From an AT&T-Toastmasters equipment lease agreement:

16. GENERAL INDEMNITY. Lessee shall indemnify, hold harmless, and, if so requested by Lessor, defend Lessor against all claims (Claims) directly or indirectly arising out of or connected with the Equipment or any Fundamental Agreement.

Claims refers to all losses, liabilities, damages, penalties, expenses (including legal fees and costs), claims, actions, and suits,

whether based on a theory of strict liability of Lessor or otherwise,

and includes, but is not limited to, matters regarding:

(a) the selection, manufacture, purchase, acceptance, rejection, ownership, delivery, lease, possession, maintenance, use, condition, return or operation of the Equipment;

(b) any latent defects or other defects in any Equipment, whether or not discoverable by Lessor or by Lessee;

(c) any patent, trademark, or copyright infringement; and

(d) the condition of any Equipment arising or existing during Lessee's use.

Texas's express negligence rule

In Texas as well as some other states, a contractual obligation to indemnify someone for the consequences of his own negligence must satisfy the "express negligence rule." The Supreme Court of Texas explained the policy rationale underlying this rule:

[T]he scriveners of indemnity agreements have devised novel ways of writing provisions which fail to expressly state the true intent of those provisions. The intent of the scriveners is to indemnify the indemnitee for its negligence, yet be just ambiguous enough to conceal that intent from the indemnitor. The result has been a plethora of law suits to construe those ambiguous contracts.

We hold the better policy is to cut through the ambiguity of those provisions and adopt the express negligence doctrine. The express negligence doctrine provides that parties seeking to indemnify the indemnitee from the consequences of its own negligence must express that intent in specific terms.

Under the doctrine of express negligence, the intent of the parties must be specifically stated within the four corners of the contract. We now reject the clear and unequivocal test in favor of the express negligence doctrine.

Ethyl Corp. v. Daniel Const. Co., 725 S.W.2d 705, 707-08 (Tex. 1987) (affirming ruling by court of appeals that reversed district court's grant of indemnity to owner) (emphasis and extra paragraphing added).

The supreme court later held that such an indemnity obligation must also be "conspicuous."

Are indemnify and hold harmless synonyms? Opinions vary

The term "hold harmless" is very often the second part of the doublet indemnify and hold harmless. Bryan Garner marshals an impressive body of evidence that the two are synonyms, asserting that the former is Latinate in origin, while the latter is the English counterpart. See Bryan A. Garner, Garner's Dictionary of Legal Usage, at 443-45 (2011).

There is some authority, however, indicating that hold harmless means that the obligated party will not seek to hold the protected person liable (whether by indemnity or otherwise) for any foreseeable loss, liability, or expense arising from the stated circumstance. For example, a distinction between hold harmless and indemnify — a distinction mocked by Garner as "explicit judicial nonsense" — was articulated by a California appeals court, after reviewing (and in some cases distinguishing) California case law:

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, extra paragraphing added).

Consider limiting indemnity liability in some manner

A party being asked to commit to an indemnity obligation might be more willing to agree if:

  • its liability were capped at, say:
    • a stated dollar amount, or
    • a stated multiple of the sums paid to it, or
    • the limits of its insurance coverage (if insurance were available); or
  • the indemnity did not kick in until the aggregate of all indemnifiable claims exceeded a stated amount.

Optional reading

Limitations of liability

Limitation-of-liability provisions usually rank at or near the top of the IACCM's annual surveys of the most-frequently-negotiated contract terms. Such limitations are enforceable — within limits — under common law and, for sales of goods, under Article 2 of the Uniform Commercial Code.

Example: Honeywell terms of sale

The following excerpts from a Honeywell terms-of-sale form are fairly typical of vendors' attempts to limit their liability (with extra paragraphing added for readability):

11.6 … Repair, Replacement, or credit of the original purchase price and standard labor and handling costs are the exclusive remedies under this Limited Warranty.

All Products repaired or replaced are warranted for the unexpired portion of the original Warranty Period.

In no event shall Honeywell's liability exceed the aggregate sum equal to twice the amount actually paid to Honeywell for Products subject to Buyer's warranty claims.

13. LIMITATION OF LIABILITY

In no event will Honeywell be liable for any incidental damages, consequential damages, special damages, punitive damages, statutory damages, indirect damages, loss of profits, loss of revenues, loss of use, or damage to brand name, even if informed of the possibility of such damages.

Honeywell's liability for damages arising out of or related to this agreement shall in no case exceed in the aggregate a sum equal to twice the amount actually paid to Honeywell for the products from which the claim arose or in the case of services the amount actually paid to honeywell.

Further, if buyer requires Honeywell to use a particular supplier or suppliers, then Honeywell shall have no liability for the supplier(s) performance, nor for any damages caused directly or indirectly by honeywell's product or services to the extent resulting from incorporation of such supplier(s) product or services.

To the extent permitted by applicable law, these limitations and exclusions will apply regardless of whether liability arises from breach of contract, warranty, tort (including but not limited to negligence), by operation of law, or otherwise.

Nothing herein, however, is intended to disclaim Honeywell's liability for personal injury or death caused by defective products to the extent such liability is mandated by applicable law.

Example: GE terms of sale

Another example is found in General Electric's ES-104 document setting forth GE's standard terms of sale (with extra paragraphing added):

15. Limitations of Liability

15.1 The total liability of Seller for all claims of any kind arising from or related to the formation, performance or breach of this Contract, or any Products or Services, shall not exceed the [sic]

(i) Contract Price, or

(ii) if Buyer places multiple order(s) under the Contract, the price of each particular order for all claims arising from or related to that order and ten thousand US dollars (US $10,000) for all claims not part of any particular order.

15.2 Seller shall not be liable for loss of profit or revenues, loss of use of equipment or systems, interruption of business, cost of replacement power, cost of capital, downtime costs, increased operating costs, any special, consequential, incidental, indirect, or punitive damages, or claims of Buyer's customers for any of the foregoing types of damages.

15.3 All Seller liability shall end upon expiration of the applicable warranty period, provided that Buyer may continue to enforce a claim for which it has given notice prior to that date by commencing an action or arbitration, as applicable under this Contract, before expiration of any statute of limitations or other legal time limitation but in no event later than one year after expiration of such warranty period.

15.4 Seller shall not be liable for advice or assistance that is not required for the work scope under this Contract.

15.5 If Buyer is supplying Products or Services to a third party, or using Products or Services at a facility owned by a third party, Buyer shall either

(i) indemnify and defend Seller from and against any and all claims by, and liability to, any such third party in excess of the limitations set forth in this Article 15, or

(ii) require that the third party agree, for the benefit of and enforceable by Seller, to be bound by all the limitations included in this Article 15.

15.6 For purposes of this Article 15, the term "Seller" means Seller, its affiliates, subcontractors and suppliers of any tier, and their respective employees.

The limitations in this Article 15 shall apply regardless of whether a claim is based in contract, warranty, indemnity, tort/extra­contract­u­al liability (including negligence), strict liability or otherwise, and shall prevail over any conflicting terms, except to the extent that such terms further restrict Seller's liability.

Sales of goods — Uniform Commercial Code Article 2

Where sales of goods are involved, UCC § 2-719 expressly allows the parties to limit their liability by agreement — but with some significant constraints (I've added extra paragraphing and bullets below):

(1) Subject to the provisions of subsections (2) and (3) of this section and of the preceding section on liquidation and limitation of damages,

(a) the agreement may provide for remedies in addition to or in substitution for those provided in this Article

*and may limit or alter the measure of damages recoverable under this Article,

as by limiting the buyer's remedies

  • to return of the goods and repayment of the price[,] or
  • to repair and replacement of non-conforming goods or parts; and

(b) resort to a remedy as provided is optional unless the remedy is expressly agreed to be exclusive, in which case it is the sole remedy.

(2) Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this Act.

(3) Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable.

Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not.

A lost profits exclusion might be problematic

Some consequential-damages provisions state merely that lost profits are excluded. This could severely disadvantage the party claiming damages, because that could wipe out the ability to claim, for ex-ample, the profit that a vendor would have made from the transaction in question.

A court might rule, though, that "lost profits" means lost profits from collateral transactions, not the transaction that is the subject of the contract. The Second Circuit did this in a 2007 case: "In characterizing AEP's claim as one for consequential damages, the district court confused the bene-fit of the bargain with speculative profits on collateral transactions." Tractebel Energy Marketing, Inc. v. AEP Power Marketing, Inc., 487 F.3d 89, 109-10, Part IV.A (2d Cir. 2007) (vacating district-court judgment in part).

Some states restrict parties' ability to limit liability

A 2006 memo by the Pillsbury Winthrop law firm (an 83-page PDF) contains a brief, state-by-state summary of laws concerning limitation of liability.

For example, Alaska's supreme court has held that contract clauses purporting to exculpate a party from liability for its own negligence are invalid under the state's anti-indemnity statute, AS 45.45.900. See City of Dillingham v. CH2M Hill Northwest, Inc., 873 P.2d 1271 (Alaska 1994), discussed in Richard F. Paciaroni and Janet M. Serafin, Anti-Indemnity Statutes: A Threat to Limitation of Liability Clauses? (Dec. 1, 2007).

Consider negotiating limitations of liability one-by-one

As noted above, limitation-of-liability provisions are among the most-often-negotiated terms of a contract. This may result from the fact that many limitation provisions are long, generic, one-size-fits-all state­ments; their lack of speci­fi­ci­ty can give a reviewer pause:

Contract drafters can speed up discussions of liability limitations, I've found, by breaking up generic boilerplate language into more-concrete statements of risks that are of particular concern, which the parties can focus on more readily. The example below is adapted from a couple of different large-scale software license agreements I've helped negotiate in recent years; the specific entries have been generalized (because it's a hypothetical example).

For purposes of the following list:

  • the Damages Cap Amount is [$X], and
  • the term "Consequential damages, etc." refers to consequential damages, punitive or special damages, loss of profits, loss of revenue, loss of brand value or reputation, [add any others desired — but quaere what's left].

All damages not listed below: Consequential damages, etc., are: Excluded. Aggregate amount is limited to: Damages Cap Amount.

Personal injury: Consequential damages, etc., are: Not excluded. Aggregate amount is limited to: No limitation.

Tangible damage to property: Consequential damages, etc., are: Excluded. Aggregate amount is limited to: Damages Cap Amount or Provider's insurance coverage, whichever is less. NOTE: Tangible damage to property does not include erasure, corruption, etc., of information stored in tangible media where the media are not otherwise damaged.

Erasure, corruption, etc., of stored information that could have been avoided or mitigated by reasonable back-ups: Consequential damages, etc., are: Excluded. Aggregate amount is limited to: Only that amount that could not have been avoided or mitigated, up to a maximum of the Damages Cap Amount.

Other erasure, corruption, etc., of stored information: Consequential damages, etc., are: Excluded. Aggregate amount is limited to: Damages Cap Amount [or perhaps X dollars].

Lost profits from any of the above: Consequential damages, etc., are: Excluded. Aggregate amount is limited to: Damages Cap Amount [or perhaps X dollars].

Lost revenue from any of the above: Consequential damages, etc., are: Excluded. Aggregate amount is limited to: Damages Cap Amount [or perhaps X dollars].

Indemnity obligations under this Agreement: Consequential damages, etc., are: Excluded. Aggregate amount is limited to: No limitation [or perhaps X dollars].

Infringement of another party's IP rights: Consequential damages, etc., are: Excluded. Aggregate amount is limited to: As determined by applicable copyright law, patent law, etc. [or perhaps X dollars]. NOTE: For the avoidance of doubt, for purposes of this clause the term “IP rights” includes, for example, rights in confidential information. Damages for infringement are deemed direct damages and not consequential, special, etc.

Willful, tortious destruction of property: Consequential damages, etc., are: Not excluded. Aggregate amount is limited to: No limitation. NOTE: Willful, tortious destruction of property includes, for example, intentional and wrongful erasure or corruption of computer programs or -data.

Using this kind of systematic approach, if the parties decided to address additional risks in the contract, they could just add items to the list.

The parties could also add categories to the list: Instead of including a single umbrella category for “Consequential damages, etc.,” they could use separate categories for consequential damages, incidental damages, punitive damages, lost profits, lost revenues, and so on.

HYPOTHETICAL EXAMPLE: Suppose that:

  • A software vendor is negotiating an enterprise license agreement with a new customer for a mature software package.
  • The customer has successfully completed a pilot project, but it hasn't rolled out the software for enterprise-wide production use.
  • Knowing how tricky a production roll-out can sometimes be, the customer is concerned about the vendor's insistence on excluding all ‘consequential' damages, whatever that really means.

The vendor might try offering to waive the consequential-damages exclusion during, say, the customer's first three months of production use of the software, subject to an agreed dollar cap on the vendor's aggregate liability for all damages — which might be a higher dollar amount than at other times, as discussed below. This approach could make the customer more comfortable that the vendor is ‘standing behind its software' during the roll-out phase.

In theory, certainly, the vendor would be exposed to additional liability risk during those first three months. But the business risk might be eminently worth taking: Remember, we're assuming that the software is mature, that is, most of its significant bugs have already been corrected. In that case, the vendor might be willing to take on that additional theoretical risk — which in any case would go away after three months — in order to help close the sale.

Perhaps such a vendor could agree that the damages cap would be, say ---

  • 4X for any damages that arise during, say, the first three months of the relationship, or possibly until a stated milestone has been achieved;
  • 3X during the nine months thereafter;
  • 2X thereafter.

In the 4X / 3X / 2X language, X could be defined ---

  • as a stated fixed sum;
  • as the amount of the customer's aggregate spend under the contract in the past 12 months, 18 months, etc.;
  • in any other convenient way.

The details in the above example aren't important. The point is that sometimes ‘standard' limitation-of-liability language is too broad to allow the parties to specify what they really need. Negotiators might have more success if they drilled down into the language — perhaps using the list approach discussed elsewhere in these notes.

Protecting against liability for one's own gross negligence

An opinion by the New York Court of Appeals (that state's highest court) reminds drafters that, under the law of New York, a contract can be structured so that an insurance policy will at least partially shield a service provider from liability even for its own negligence or gross negligence. The trick, according to the court, is to draft the contract so that:

  1. the customer agrees to buy insurance to cover any damage or other loss that might result from the service provider's negligence; and
  2. the customer also waives the service provider's liability, agrees to look solely to its insurer for recovery, and waives subrogation, so that the customer's insurance company can't come after the service provider for reimbursement of whatever the insurance company has to pay out for the damage.

That drafting approach was upheld in a case involving Diebold, Inc., an alarm-system company. Diebold provided backup alarm service for its customer, a bank. The bank was burglarized, allegedly because of Diebold's gross negligence in ignoring problems with the alarm system. Diebold's contract with the bank included provisions like those enumerated above: The contract required the bank to buy insurance, and included a waiver of Diebold's liability and a waiver of subrogation. As the court described the provision:

Diebold's contract contained a clause entitled “Property Insurance and Waiver of Subrogation” where Abacus agreed to obtain insurance coverage to cover its losses in the event of a theft. The agreement between Diebold and Abacus provided that Abacus “shall look solely to its insurer for recovery of its loss and hereby waives any and all claims for such loss against Diebold” and that Abacus' insurance policy would contain a clause providing that such waiver would not invalidate the coverage.

Abacus Federal Savings Bank v. ADT Security Services, Inc., No. 33 slip. op. at 4 (N.Y. Mar. 22, 2012) (citations, alteration marks, and internal quotation marks omitted). In that case, the supreme court affirmed most grounds of dismissal of the bank's claim against two alarm-system companies after the burglary (but it reversed the dismissal as to a breach-of-contract claim against one defendant).

The bank — Diebold's customer — claimed that Diebold's alleged gross negligence invalidated the limitation of liability in the alarm-services contract. The court, however, held that while the exculpatory provision could not relieve Diebold for liability for gross negligence, the insurance provision and waiver of subrogation would be enforced:

A distinction must be drawn between contractual provisions which seek to exempt a party from liability and contractual provisions which in effect simply require one of the parties to the contract to provide insurance for all of the parties.

Id., slip op. at 6 (same parenthetical notes as above). The court went on to explain that,

[G]ross negligence, when invoked to pierce an agreed-upon limitation of liability in a commercial contract must smack of intentional wrongdoing. It is conduct that evinces a reckless indifference to the rights of others.

Id., slip op. at 8 (same parenthetical notes as above).

Incidentally, Diebold's co-defendant ADT Security Services did not have a mandatory insurance requirement in its contract, but merely left it up to the bank to decide whether to purchase insurance; nor did the ADT contract include a waiver of liability and of subrogation. The court held that the ADT's limitation of liability provisions could not withstand a claim (if proved) of gross negligence. See id., slip op. at 4, 9 (same parenthetical notes as above).

Comment: A contract drafter wanting to use the Diebold approach might also want to include a choice of law provision that specifies New York law as the governing law for the contract. (Of course, other states' law might be to the same effect.)

Comment: The court's reasoning seems to imply that it didn't matter which party buys the insurance — as long as the amount of the insurance wasn't unreasonable, then it was OK to require the customer (or whoever) to look solely to the insurer for recovery of any loss that might occur.

Comment: In the real world of sales negotiations, a happy medium might be for the contract to provide:

  • that the service provider's liability is limited to X dollars, or to some formula such as X times the amount paid by the customer in the previous 12 months; and
  • that the customer must purchase insurance (or self-insure) against losses in excess of the agreed limited amount, with the customer also waiving the service provider's liability in excess of that amount.

Optional reading

Q1, Q2, Q3, Q4 — see Fiscal years; fiscal quarters

Representations and warranties

A warranty about a fact might be enforceable even if the other party knows the asserted fact isn't true

Generally speaking, a warranty is basically an insurance policy: it's a promise by one party that:

  • if Fact A proves untrue,
  • and the other party shows that it incurred X dollars worth of damage as a result of Fact A's untruth,
  • then the warranting party will indemnify (that is, reimburse) the Buyer for that X dollars of damage.

Unlike the case with a representation, in most jurisdictions, the other party need not show that it justifiably relied on the supposed truth of Fact A. Indeed (subject to a significant exception), the other party might know full well that Fact A was not true, yet could still recover the X dollars in damage from the warranting party.

The rationale here is that, even though the other party was not relying on the supposed truth of Fact A, it was relying on the warranting party's promise of indemnification if Fact A turned out not to be true. A leading case on this point is from the Court of Appeals of New York (that state's highest court); see CBS, Inc. v. Ziff-Davis Publishing Co., 75 N.Y.2d 496, 503, 553 N.E.2d 997, 1001 (1990); Robert J. Johannes & Thomas A. Simonis, Buyer's Pre-Closing Knowledge of Seller's Breach of Warranty, Wis. Law. (July 2002) (surveying case law).

The influential U.S. Court of Appeals for the Second Circuit summarized New York law thusly:

… a court must evaluate both the extent and the source of the buyer's knowledge about the truth of what the seller is warranting.

Where a buyer closes on a contract in the full knowledge and acceptance of facts disclosed by the seller which would constitute a breach of warranty under the terms of the contract, the buyer should be foreclosed from later asserting the breach.

In that situation, unless the buyer expressly preserves his rights under the warranties … the buyer has waived the breach.

The buyer may preserve his rights by expressly stating that disputes regarding the accuracy of the seller's warranties are unresolved, and that by signing the agreement the buyer does not waive any rights to enforce the terms of the agreement.

On the other hand, if the seller is not the source of the buyer's knowledge, e.g., if it is merely "common knowledge" that the facts warranted are false, or the buyer has been informed of the falsity of the facts by some third party, the buyer may prevail in his claim for breach of warranty.

In these cases, it is not unrealistic to assume that the buyer purchased the seller's warranty as insurance against any future claims, and that is why he insisted on the inclusion of the warranties ….

In short, where the seller discloses up front the inaccuracy of certain of his warranties, it cannot be said that the buyer — absent the express preservation of his rights — believed he was purchasing the seller's promise as to the truth of the warranties.

Accordingly, what the buyer knew and, most importantly, whether he got that knowledge from the seller are the critical questions.

Rogath v. Siebenmann, 129 F. 3d 261, 264-65 (2d Cir. 1997) (vacating and remanding partial summary judgment that seller had breached contract warranty; emphasis added).

As renowned federal appellate judge Richard Posner put it in a dictum, “One can warrant a level of performance that one may not be confident of attaining, for by accepting a warranty a customer grants the seller an option to pay rather than perform.” Neuros Co., Ltd. v. KTurbo, Inc., Nos. 11-2260, 11-2375, slip op. at 5 (7th Cir. Oct. 15, 2012) (affirming in pertinent part, district court's award of damages and punitive damages for defamation) (Posner, J.) (emphasis added, citation omitted).

In contrast, if the Seller were to represent that Fact A was true, then the Promisee would have to jump through some additional proof hoops about scienter and reasonable reliance.  

There's a trade-off, though:  if Customer did successfully jump through those proof hoops, then damages would not be its only remedy against Vendor: it could demand rescission and perhaps punitive damages, neither of which is normally available in a breach-of-warranty action.

FOOTNOTE: In a contract for the sale of goods, if Vendor were only to represent that X were true, that representation might well constitute a warranty anyway under the Uniform Commercial Code.  UCC § 2-313 provides that, if the representation is related to the goods and forms part of the basis of the bargain, it's deemed a warranty, no matter what it's called.

For more information, see this note; see also Tina L. Stark, Nonbinding Opinion: Another view on reps and warranties, Business Law Today, January/February 2006 (responding to Ken Adams; accessed Oct. 18, 2008).

A representation has more strings attached, but also more potential remedies

Contract drafters and reviewers should be cautious about using the phrase “Provider Inc. represents and warrants to Customer Co. that X is true ….” If things were to go badly, the ‘representation' part could open the door to allegations of negligent misrepresentation or even fraud.

Suppose Customer Co. later claimed that statement  X was untrue or even just misleading. Suppose also that a judge or jury agreed, and concluded:

  1. that Provider Inc. either knew that statement X was misleading, or it recklessly disregarded the possibility;
  2. that Provider intended for Customer to rely on statement X; and
  3. that Customer was justified in so relying.

In that situation, Customer Co. might be entitled either to:

  • a damages award — generally restitution damages, not expectation damages ('benefit of the bargain'); or
  • to unwind ('rescind') the deal.

Not only that, but Provider Inc. might be liable for punitive damages, which normally are not available in straight-up breach of contract cases.

[CASE CITES NEEDED]

You might want to say represents and warrants, but perhaps just one or the other

Conceivably, in (say) a sales contract, Vendor might want to say, Vendor represents Fact X, BUT DOES NOT WARRANT FACT X. Assuming that UCC § 2-316‘s conspicuousness requirements were met, Vendor would thereby disclaim the indemnity obligation associated with a warranty. Then if Fact X turned out not to be true, and Customer wanted to recover from Vendor, it would have to show that it justifiably relied on Vendor's representation, and that the misrepresentation was either negligent or fraudulent.

On the other hand, Vendor:

  • might not want Customer to have a shot at rescission and/or punitive damages for negligent misrepresentation, but
  • might be willing to pay out-of-pocket damages for breach of a warranty.

In that case, Vendor might be willing to warrant/ X, but not to /represent it.

Whatever kind of a deal it is, sales or otherwise, Customer ought to consider asking Vendor both to represent AND warrant X, so it gets a shot at both the warranty indemnity and the fraud/misrepresentation remedies.

11.2 Honeywell warrants to Buyer that at the time of shipment and for the Warranty Period:

(i) the Product will be free from defects in workmanship and materials, and

(ii) the Product will comply with the drawings, specifications, vehicle applications, and vehicle operating conditions set forth in the applicable Turbocharger or Thermal Release Agreement ("TRA').

11.2.1 Services will be performed in a competent and professional manner, by qualified personnel under the direction of and control of Honeywell, and in accordance with industry standards.

18. Warranty

18.1. Supplier warrants to Honeywell, its successors, assigns, customers and end users that,

  • upon delivery, and
  • during the entire Warranty Period specified below,

all Goods furnished (including all replacement or corrected Goods or components which Supplier furnishes pursuant to this warranty) will

(a) be free from defects in material, workmanship, and design, even if the design has been approved by Honeywell,

(b) conform to applicable drawings, designs, quality control plans, specifications and samples and other descriptions furnished or specified by Honeywell,

(c) be merchantable,

(d) be fit for the intended purposes to the extent the Goods are not of a detailed design furnished by Honeywell and operate as intended,

(e) comply will all applicable national and local laws,

(f) be free and clear of any and all liens, restrictions, reservations, security interests or encumbrances, and

(g) not infringe any patent, published patent application, or other intellectual property rights of any third party existing as of the date of delivery,

and not utilize misappropriated third party trade secret information.

Services will be performed in accordance with the highest standards in the industry.

The Warranty Period will be for a period of 36 months from the date of delivery to the end user

or such longer period of time as may have been accepted by Honeywell from Honeywell's customer

or the date on which any longer or broader government requirement covering the Goods ends.

These warranties will survive any delivery, inspection, acceptance or payment by Honeywell for the entire Warranty Period.

Claims for breach of warranty do not accrue until discovery of noncompliance, even if the Goods were previously inspected.

The warranties provided are cumulative and in addition to any warranty provided by law or equity.

Any applicable statute of limitations runs from the date of discovery.

Goods that meet the preceding standards are collectively called "conforming Goods."

If conforming Goods are not furnished within the time specified by Honeywell then Honeywell may, at its election and in addition to any other rights or remedies it may have at law or in equity, have the nonconforming Goods repaired, replaced or corrected at Supplier's expense.

In addition to the costs of repairing, replacing or correcting nonconforming Goods, Supplier is responsible for all related costs, expenses and damages including, but not limited to, the costs of removal, disassembly, failure analysis, fault isolation, reinstallation, re-inspection and retrofit of the nonconforming Goods or of Honeywell's affected end-product; all freight charges; all customer charges; and all corrective action costs (i.e., costs of additional inspection or quality control systems).

Unless setoff by Honeywell, Supplier will reimburse Honeywell for all such costs upon receipt of Honeywell's invoice.

A warranty of future performance can add years to the liability exposure

A subtle change in the wording of a product warranty can add years to a customer's right to sue the vendor for breach of warranty under the Uniform Commercial Code.

Product failure as the breach: Suppose that the vendor warranted that its product would be free from defects for X years after the delivery date. In many U.S. jurisdictions, that warranty would be treated as an explicit guarantee of the product's future performance. If the product were to fail, the failure itself would be deemed a breach of the warranty; the customer could sue for the breach at any time up to (usually) four years after the failure.

Product delivery as the breach: On the other hand, suppose that the vendor had promised only that it would repair or replace the product if it failed during the first X years after delivery. That language does not explicitly guarantee future performance. If the product were to fail, the courts in many U.S. jurisdictions — but not all — would deem the breach to have occurred, not on the date of the failure, but on the date the product was delivered, pursuant to UCC § 2-275.

In a case governed by the law of one of those jurisdictions, the customer would be forced to bring suit for breach within (usually) four years after delivery, not after the product failure. See generally the appellate court's review of case law in Trans-Spec Truck Service, Inc. v. Caterpillar, Inc., 524 F.3d 315, part II.B (1st Cir. 2008) (affirming summary judgment dismissing breach of warranty claim under Massachusetts law). In such cases, the language promising to take certain actions if the product fails is deemed a limitation of remedies instead of a warranty. (The analysis summarized in the previous paragraph might be different if the promissory language were deemed a separate ‘service contract,” and if the customer sued for breach of the service contract and not for breach of the product warranty. See id.)

Patent- and trademark infringement warranties should be negotiated very cautiously

A patent- or trademark infringement warranty in a contract can be a decidedly non-trivial matter, because:

  • You can infringe another party's patent or trademark without knowing it, indeed without even knowing that the patent or trademark exists;
  • You can't manage compliance with a patent- or trademark infringement warranty merely by making sure your people do their own work.
  • Your product might infringe a patent that didn't exist when you did your product-design work.
  • Your branding might infringe someone else's trademark rights even if the other person doesn't have a registration.

If you're asked to give a patent- or trademark-infringement warranty for your product or service, you'll definitely want to consult IP counsel. You and your counsel might decide you need to:

  • commission a clearance search, and
  • have IP counsel provide you with a written clearance opinion.

These things will usually involve non-trivial calendar time — several weeks for a patent search, a few days for a rush trademark search. The expense is normally non-trivial as well. The pricing and scheduling for the contract might well be affected.

Copyright- and trade-secret warranties are a bit easier to manage

By comparison, copyright- and trade-secret warranties are comparatively easy for a provider to manage. Generally speaking, if you can convince a fact-finder that you did your own work, without improperly "borrowing" from others — that is, if you can prove "independent creation," which is sometimes hard to do — then you should be able should defeat a claim of copyright infringement or trade-secret misappropriation. (There are other ways to try to defeat such a claim as well.)

The UCC creates implied warranties in sales of goods

[MORE TO COME – see UCC § 2.312, UCC § 2.314, and § 2.315]

Implied reps and warranties can be disclaimed

It's extremely common for sellers' contract forms to disclaim all implied warranties. See, e.g., § 11.11 of a Honeywell terms-of-sale document. The seller's rationale is that it wants its warranty obligations to be stated exclusively in the contract itself, and not in whatever local law happens to give to customers.

(Buyers' standard purchase-order terms, on the other hand, often state that the express warranties of the contract are in addition to those provided by law. See, e.g., § 18.1 of the Honeywell purchase order terms.)

In respect of the sale of goods, a disclaimer of implied warranties is expressly permitted by UCC § 2.316. There are two catches, though:

  • Under UCC § 2.316, a disclaimer of the implied warranty of merchantability must mention merchantability and must be conspicuous; and
  • Under UCC § 2.312(b), any disclaimer of the implied warranty that the seller has good, clear title to the goods must meet specific requirements.

Optional reading

Strategic thinking

Business planning: A three-step approach

Experienced contract drafters know that often they have to do more than just copy and edit an old form. To one degree or another in a given deal:

  • Drafters play the what-if game, trying to identify events that might occur during the course of the parties' business relationship. (Client input is always useful here.)
  • They make judgments about which contingencies ought to be covered in the contract draft. Address too many contingencies and the draft becomes time-consuming to review. Address too few contingencies, and your client might someday find itself mired in a lawsuit that could have been avoided with advance planning.
  • They try to write understandable, operationally-workable clauses to address the selected contingencies.

The first step of that process — building a reasonably-comprehensive list of contingencies to consider — might be the most crucial one. Here's a simple three-step approach.

Step 1: List the S N I T S phases of the business relationship

Any business relationship can be subdivided into some standard top-level categories (think S N I T S):

  • S - Startup
  • N - Normal operations
  • I - Infrequent but not-unexpected operations
  • T - Trouble, in various shapes and sizes
  • S - Shutdown of the relationship — every business relationship comes to an end sometime

Within each operational phase you can list specific known possibilities.

For example, under “Infrequent operations” you could list things like a product launch; a strategic review; a new funding round; etc.

Under “Trouble,” you could list, say, missing a customer deadline; a product recall; a lawsuit; bad PR; and the like.

Step 2: List the different players

The next step is to build a list of the different players who might appear on the scene during various phases of the business relationship. For example:

  • Parties X, Y, Z, etc.
  • Customers
  • Suppliers
  • Competitors
  • Alliance partners
  • Regulatory bodies
  • Law-enforcement agencies
  • Taxing authorities
  • Market-makers such as Nasdaq
  • Financiers
  • Technical-standards groups
  • Particular constituencies within each of the foregoing — employees, executives, boards, specific departments, specific individuals, etc.

Step 3: Methodically cross-match what different player(s) might want

The final step in brainstorming a what-if list is to methodically cross-match the two lists you just developed: The phases of the business relationship, and the possible players.

For each category of player, proceed briskly through the list of relationship phases. For each phase, try to imagine what that player might want to make happen — or to prevent from happening. Then decide whether to address that possibility in the contract draft.

Here's a simplified hypothetical example:

  • Player: Service provider's employees
  • Relationship phase: Normal operations
  • Something the player wants: Service provider's employees sue the customer for the provider's allegedly-improper employment practices. (This is not unheard-of: Wal-Mart was sued by employees of some of its foreign suppliers because of the suppliers' allegedly-abusive practices.)
  • Possible contractual coverage: The customer may want to include in the draft contract a requirement that the provider defend and indemnify the customer from any suits by the provider's employees, perhaps with an insurance requirement to provide the necessary funding.

The beauty of this approach is that the contingency lists and contract language you develop are often reusable.

Be mindful of individuals' personal interests

Contracts should always be drafted with an eye toward sensibly managing disputes that might arise between the contracting parties. That means giving some thought to the personal interests of the parties' in­div­id­u­al employees.

Any employee will be at least somewhat motivated to act in his own personal best interest. That might not be the same as the best interest of his employer. This is known generically as an agency cost.

Agency costs can lead to problems. A few possible ways of managing these problems contractually are summarized below.

Creative memories, changing minds

For business people as much as for any of us, memories are often short — people can forget what they discussed or even agreed to. Memories also can sometimes be "creative" — people can remember things differently than they actually were.

Moreover, a company's circumstances can change; by the time a contract dispute arises, the parties' key employees and executives could have changed their minds about what's important to them. They might well have forgotten — perhaps conveniently — what mattered to them during the con­tract nego­tiations.

Suggestion: Consider including explanatory parentheticals and/or footnotes in the contract to educate later readers about why the neg­o­ti­a­tors agreed to certain things.

Personal insecurity & defensiveness

People can get defensive if they think their work might be criticized. That could hamper discussions aimed at resolving a contract dispute.

Suggestion: Consider including a dispute-escalation clause in the contract — such clauses typically require the parties to refer any unresolved dispute up the ladder to higher levels of man­age­ment. The higher-ups might well have less personal skin in the game; they therefore might be able to assess the dispute more objectively.

Lawyers' desire to be team players

The lawyer handling the dispute for the company will naturally want the company's business people to see him as a protector who will battle to get the company the result that to which the business people feel they're entitled. The lawyer won't want to be perceived as a nay-sayer or, worse, a defeatist.

Moreover, if the lawyer is an outside counsel, his personal compensation and prestige stand to benefit if he can oversee a lawsuit that keeps one or more lawyers running their meters for a few months or a few years.

Suggestions: Consider including:

  1. a non-binding early-neutral-evaluation clause — ENE can provide an inexpensive sanity check from an outsider, before the parties' positions become set in stone and their legal bills start to mount up.
  2. a micro-arbitration clause, re­quiring quick, streamlined arbitration of specific is­sues — for example, issues of rea­sonableness such as “rea­son­able effort.”) That could help the parties to cut to the chase before their legal fees get out of hand.

Consider spelling out exactly what the other side must do if it breaches

Contracts often contain generic statements that, in case of a breach, the breaching party will cure the breach within, say, 30 days. Some­times, however, it helps to spell out exactly what the other side must do to cure the breach. That way, the other side's lawyers will have less wiggle room to come up with ‘creative' arguments why the other side shouldn't have to do what you want them to do.

Here's an illustration: A client of mine, an enterprise software vendor, once came to me with a complaint about one of their big customers, which was ‘stealing' the software, that is, deliberately using the soft­ware far in excess of its paid-for licenses.

(The software vendor knew this because one of the customer's emp­loyees had quietly alerted the vendor's sales rep to what was going on.)

My client could have sued its customer for infringement of the copy­right in its software. In theory, the client could have sought to recover the customer's indirect profits arising from the infringement, which can be a remedy with real teeth. [FN]

But the customer had a big, capable legal staff and competent outside counsel. We knew those lawyers would look for arguments why the customer wasn't liable for infringement and didn't owe any money. If the vendor wanted to get money from the customer, it probably would have to file a lawsuit.

[FN] Consider the case of Frank Music Corp. v. Metro-Goldwyn-Mayer, Inc., 886 F.2d 1545 (9th Cir. 1989) (Frank Music II). The MGM Grand Hotel had a floor show called Hallelujah Hollywood!, which included ‘tributes' to various MGM movies. The floor show incorporated significant portions of the musical Kismet, which had been made into an MGM movie. The court found that this went beyond MGM's ‘movie rights' and therefore infringed the copyright in the musical.

After the dust settled (including two trips to the Ninth Circuit court of appeals) the resulting damage award included not just a portion of profits from the floor show itself, but 2% of the overall profits from the MGM Grand's hotel operations — including 2% of the casino profits — which, the court found, were indirectly attributable to the promotional value of the Hallelujah Hollywood floor show.

Filling a lawsuit should never be done lightly, even when a lot of money is at stake. Litigation is expensive. It's a drain on management's time and focus. You seldom know what or when the final outcome will be. Not to mention that suing a big customer is hardly a great way for a vendor to get more business from that customer.

So the client wasn't interested in filing a lawsuit. It just wanted the cust­omer to pay for what it had ‘stolen' in unauthorized use.

Fortunately, the client's standard software license agreement had good language in it. (Yes, I had written the language.) The license agreement expressly said that, if the customer made unauthorized use of the soft­ware, it agreed to buy the necessary number of catch-up licenses — and if the customer did so, then the vendor waived its right to seek copy­right damages.

That contract language proved very useful. Instead of having to argue with the customer's lawyers about how a court would apply the law of copyright, we just pointed to the contract, which stated in black and white what the customer agreed to do. In due course, the customer paid up.

The lesson: For important breaches of contract ---

  • Be careful about relying on a generic breach-and-cure provision that lawyers could argue over;
  • Instead, consider spelling out in the contract exactly what you want the other side to do.

Sometimes it's better not to ask for all the contract language you want

Illustration: Conan O'Brien's lawyers won by letting a sleeping dog lie

You might remember that TV talk-show host Conan O'Brien's stewardship of The Tonight Show proved disappointing to NBC. The network decided to move Jay Leno back into that time slot and bump Conan back to 12:05 a.m. This led Conan to want to leave the show and start over on another network — but if he had, he would arguably have been in breach of his contract with NBC.

Conan's contract apparently did not state that The Tonight Show would always start at 11:35 p.m. Conan's lawyers were roundly criticized for that alleged mistake by ex-Wall Streeter Henry Blodget and some of his readers. See Conan's Lawyers Screwed Up, Forgot To Specify “Tonight Show” Time Slot (Jan. 11, 2010), especially the reader comments following the article.

But then wiser heads pointed out that Conan's lawyers might have intentionally not asked for a locked-in start time:

  • The Tonight Show had started at 11:35 p.m. for decades; it could have been plausibly argued that this start time was part of the essence of The Tonight Show, and thus was an implied part of the contract.
  • Suppose that Conan's lawyers had asked for the contract to lock in the 11:35 p.m. start time of The Tonight Show, but NBC had refused. In that case, a court might have interpreted the contract as providing that NBC had at least some freedom to move the show's start time.
  • And suppose that Conan had asked to lock in the 11:35 p.m. start time of The Tonight Show, but that NBC had responded by insisting on just the opposite, namely a clause affirmatively stating that NBC was free to choose the start time. Given that NBC had the bargaining power at that point, Conan might have had no choice but to agree, given that he wanted NBC to appoint him as the host of the show. In that case, there'd be no question that NBC had the right to push the start time of the show back to 12:05 p.m.

Ultimately, Conan and NBC settled their dispute, with the network buying out Conan's contract for a reported $32.5 million. This seems to suggest that NBC was concerned it might indeed be breaching the contract if it were to push back The Tonight Show to 12:05 a.m. as it wanted to do. As an article in The American Lawyer commented:

… If O'Brien had asked that the 11:35 p.m. time slot be spelled out in any agreement — and had NBC refused — the red pompadoured captain of “Team Coco” would be in a weaker position in the current negotiations.

“If you ask and are refused, or even worse, if you ask and the other side pushes for a 180, such as a time slot not being guaranteed, you can end up with something worse,” [attorney Jonathan] Handel adds. Without having their hands bound by language in the contract on when “The Tonight Show” would air, O'Brien's lawyers are in a better position to negotiate their client's departure from NBC.

Brian Baxter, Legal Angles Abound as Conan-NBC Standoff Nears Endgame (Jan. 20, 2010).

Judging by the outcome, it may well be that Conan's lawyers did an A-plus job of playing a comparatively-weak hand during the original contract negotiations with NBC.

This analysis might rest on an assumption that the court can look to extrinsic evidence to help interpret a contract's terms. There are some U.S. jurisdictions where that's the case, while others follow the so-called “four corners” rule. A clause establishing venue (and governing law) in a “four corners” jurisdiction could also have helped NBC.

Even in a four-corners jurisdiction, though, a court might be persuaded to view the parties as having implicitly agreed that the very term The Tonight Show inherently meant the show immediately following the 11:00 p.m. local news.

For example, while California follows the parol-evidence rule:

California also recognizes one of the broad exceptions to the parol evidence rule. Because no contract should ever be interpreted and enforced with a meaning that neither party gave it, parol evidence may be introduced to show the meaning of the express terms of the written contract.

Brinderson-Newberg Joint Venture v. Pacific Erectors, Inc., 971 F.2d 272, 277 (9th Cir. 1992) (reversing denial of plaintiff's motion for directed verdict on breach-of-contract claim; emphasis added, citation, alterations, and internal quotation marks omitted).

Illustration: A customer's procurement people "flip" a vendor's choice-of-forum clause

A while back I helped a vendor client respond to a customer's markup of the vendor's standard sales contract. (I'm changing some details here for confidentiality reasons.) The forum-selection clause in the vendor's form contract — which I didn't draft, I hasten to add — said that all litigation would take place in the vendor's home city.

The customer, though, had the upper hand in the negotiation. Unsurprisingly, its procurement people marked up the draft contract to read that all litigation would be in the customer's home city.

We managed to convince the customer's procurement people to just delete the forum-selection clause entirely. That way, any litigation can occur wherever the default legal rules allow. (If the vendor were to be the plaintiff, its trial counsel might well recommend suing the customer in the customer's home city anyway, for tactical reasons I won't go into here.)

Even though we were successful, we still had to spend precious staff working time in negotiating this point. With the ‘shot clock' running down in the fiscal year, the vendor surely would have been happier for its staff to spend their time instead working with another customer.

Illustration: Asking for "consent not to be unreasonably withheld" could backfire

The scene: You're in a contract negotiation, representing The Good Guys Comp­a­ny. The other side, Nasty Business Partner Inc., insists on requiring The Good Guys to get NBP's consent before assigning the agreement.

Trying to salvage the situation, you ask NBP for some additional language: Consent to assignment may not be unreasonably withheld, delayed, or conditioned. But NBP refuses.

NBP has all the bargaining power; The Good Guys decide they have no choice but to sign the contract without your requested language.

You might have just screwed your client. In some jurisdictions, The Good Guys might have benefited from a default rule that Nasty Business Partner Inc. had an implied obligation not to unreasonably withhold consent to an assignment of the contract. See, e.g., Shoney's LLC v. MAC East, LLC, 27 So.3d 1216 (Ala. 2009); Pacific First Bank v. New Morgan Park Corp., 876 P.2d 761 (Or. 1994).

But you asked for an express obligation — only to have NBP reject the request — and The Good Guys signed the contract anyway. A court might therefore conclude that the parties had agreed that NBP would not be under an obligation not to unreasonably withhold its consent to assign­ment — that NBP could grant or withhold its consent in its sole discretion.

This is pretty much what happened, on somewhat-different facts, in both the Shoney's LLC and Pacific First Bank cases:

  • In the Shoney's LLC case, the contract had an express provision allowing the non-assigning party to use its sole discretion in deciding whether to con­sent to an assignment. The Alabama Supreme Court held that this clause trumped the general requirement of reasonableness.
  • In the Pacific First Bank case, the lease agreement in suit included a consent-not-to-be-unreasonably-withheld requirement for certain sublet arrangements, but it did not include a similar requirement for assignments. The Oregon Supreme Court held that this amounted to an implied agree­ment that for assignments, the landlord was free to grant or withhold consent in its discretion.

The lesson: Be careful what you ask for in a contract negotiation

In drafting a contract, sometimes it's best to let sleeping dogs lie, to be deliberately silent about Issue X, even though doing so might mean giving up the theoretical possibility of an advantage at some indeterminate point in the future. If the other side were to reject your request for particular contract language, and you ended up signing the contract anyway, the rejection of your request might come back to haunt your client later.

Drafting style

Plain English is the goal

You don't have to write a contract in legalese. Your client — and perhaps later, a judge — will be more impressed if you can succinctly convey the parties' intent in plain English.

Warren Buffett's endorsement of plain English

Contract drafters can take some lessons from the Securities and Exchange Commission's plain-English handbook. In his preface to that booklet, legendary investor Warren Buffett offered a conjecture about why some SEC filings are difficult to read; exactly the same principles apply in contract drafting:

… Maybe we simply don't have the technical knowledge to grasp what the writer wishes to convey.

Or perhaps the writer doesn't understand what he or she is talking about.

In some cases, moreover, I suspect that a less-than- scrupulous [company] doesn't want us to understand a subject it feels legally obligated to touch upon.

Perhaps the most common problem, however, is that a well-intentioned and informed writer simply fails to get the message across to an intelligent, interested reader.

In that case, stilted jargon and complex constructions are usually the villains.

[Emphasis and extra paragraphing added.]

Buffett goes on to offer a suggestion for drafters:

One unoriginal but useful tip: Write with a specific person in mind.

When writing Berkshire Hathaway's annual report, I pretend that I'm talking to my sisters.

I have no trouble picturing them: Though highly intelligent, they are not experts in accounting or finance.

They will understand plain English, but jargon may puzzle them.

My goal is simply to give them the information I would wish them to supply me if our positions were reversed.

To succeed, I don't need to be Shakespeare; I must, though, have a sincere desire to inform.

No siblings to write to? Borrow mine: Just begin with "Dear Doris and Bertie."

[Extra paragraphing added.]

The SEC's plain-English handbook is a great guide

For specific actionable suggestions about plain English, be sure to read chapter 6 of the SEC plain-English handbook Its main tips, with excellent examples, include:

  • Use the active voice with strong verbs
    • Don't ban the passive voice, use it sparingly
    • Find hidden verbs
  • Try personal pronouns
  • Bring abstractions down to earth
  • Omit superfluous words [Strunk & White famously phrased this as "Omit needless words"]
  • Write in the "positive"
  • Use short sentences
  • Replace jargon and legalese with short, common words
  • Choose the simpler synonym
  • Keep the subject, verb, and object close together
  • Write using "if-then" conditionals [more on that below]
  • Keep your sentence structure parallel

The virtues of industry-standard terminology

When you're drafting a contract, you'll want to try to avoid coining your own non-standard words or phrases to express technical or financial concepts. If there's an industry-standard term that fits what you're trying to say, use that term if you can. Why? For two reasons:

• First, someday you may have to litigate the contract. You'll want to make it as easy as possible for the judge (and his or her law clerk) and the jurors to see the world the way you do. In part, that means making it as easy as possible for them to understand the contract language.

The odds are that the witnesses who testify in deposition or at trial likely will use industry-standard terminology. So the chances are that the judge and jurors will have an easier time if the contract language is consistent with the terminology that the witnesses use — that is, if the contract “speaks” the same language as the witnesses.

• Second — and perhaps equally important — the business people on both sides are likely to be more comfortable with the contract (and to be better able to spot errors) if you use terminology with which they're familiar.

Short sentences and paragraphs are best

If a sentence that you're drafting — or a paragraph — starts getting long, then by all means break it up. In part, that's because the first task of each contract provision is to get the other side's contract reviewer to read it. If the provision is too long or too dense, and the reviewer doesn't quickly grasp the point, then he or she may well be tempted to just delete it instead of trying to understand it. (Not only have I  seen that happen, I've done it myself.)

So for heaven's sake, don't do as the drafters of the warranty provision reproduced below, which is excerpted from a Collaborative Research and License Agreement between Pfizer and Rigel Pharmaceuticals:

9.2.12 PATENTS AND TRADEMARKS. To the best of its knowledge (but without having conducted any special investigation), Rigel owns or possesses sufficient legal rights to all patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information, and proprietary rights and processes (including technology currently licensed from Stanford University) necessary for its business as now conducted and as proposed to be conducted without any conflict with, or infringement of the rights of, others. Rigel currently licenses certain technology from Stanford University (the “Licensed Technology”) on an “as is” basis, with no representation or warranty from Stanford University that such technology does not infringe the proprietary rights of others. To Rigel's knowledge, Rigel has not, as of the date hereof, received any claims from any third party alleging that the use of the Licensed Technology infringes the proprietary rights of such party. Except for agreements with its own employees or consultants and standard end-user license agreements, there are no outstanding options, licenses, or agreements of any kind relating to the foregoing, nor is Rigel bound by or a party to any options, licenses, or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information, and proprietary rights and processes of any other person or entity, other than the license agreements with Janssen Pharmaceutica N.V., Stanford University, SUNY, and BASF. Rigel has not received any communications alleging that Rigel has violated or, by conducting its business as proposed, would violate any of the patents, trademarks, service marks, trade names, copyrights, trade secrets, or other proprietary rights or processes of any other person or entity. Rigel is not aware that any of its employees is obligated under any contract (including licenses, covenants, or commitments of any nature) or other agreement, or subject to any judgment, decree, or order of any court or administrative agency, that would interfere with the use of such employee's best efforts to promote the interests of Rigel or that would conflict with Rigel's business as proposed to be conducted. Neither the execution nor delivery of this Agreement, nor the carrying on of Rigel's business by the employees of Rigel, nor the conduct of Rigel's business as proposed, will, to the best of Rigel's knowledge, conflict with or result in a breach of the terms, conditions, or provisions of, or constitute a default under, any contract, covenant, or instrument under which any of such employees is now obligated. Rigel is not aware of any violation by a third party of any of Rigel's patents, licenses, trademarks, service marks, tradenames, copyrights, trade secrets or other proprietary rights.

(For some ideas about how to make this paragraph more readable without breaking it into shorter paragraphs, see this section.)

When drafting long sentences and paragraphs, include visual guideposts

If you must have a long paragraph in your contract draft, consider using some or all of the following to help guide the reader who wants to skim the paragraph:

  • Pilcrows, a.k.a. paragraph marks (¶) — in Microsoft Word you can insert a pilcrow by using the Insert Symbol command, as explained in the Microsoft help page for instructions;
  • Subdivision lettering such as:
    • (1), (2), etc.
    • (a), (b), etc.
    • (i), (ii), etc., for subdivisions within a sentence — you can also use (x), (y), etc., if you need a second series of subdivisions in the same sentence, as shown in subdivision (g) of the example paragraph below;
  • All-caps, underlining, and bold-faced or italic type (be judicious, though)

Here's how the long paragraph in this section could be edited along these lines — look especially at subdivisions (d), (f), and (g) below:

9.2.12 PATENTS AND TRADEMARKS. ¶ (a) To the best of its knowledge (but without having conducted any special investigation), Rigel owns or possesses sufficient legal rights to all patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information, and proprietary rights and processes (including technology currently licensed from Stanford University) necessary for its business as now conducted and as proposed to be conducted without any conflict with, or infringement of the rights of, others. ¶ (b) Rigel currently licenses certain technology from Stanford University (the "Licensed Technology") on an "as is" basis, with no representation or warranty from Stanford University that such technology does not infringe the proprietary rights of others. ¶ (c) To Rigel's knowledge, Rigel has not, as of the date hereof, received any claims from any third party alleging that the use of the Licensed Technology infringes the proprietary rights of such party. ¶ (d) EXCEPT FOR agreements with its own employees or consultants and standard end-user license agreements, there are no outstanding options, licenses, or agreements of any kind relating to the foregoing, nor is Rigel bound by or a party to any options, licenses, or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information, and proprietary rights and processes of any other person or entity, OTHER THAN the license agreements with Janssen Pharmaceutica N.V., Stanford University, SUNY, and BASF. ¶ (e) Rigel has not received any communications alleging that Rigel (i) has violated or, (ii) by conducting its business as proposed, would violate any of the patents, trademarks, service marks, trade names, copyrights, trade secrets, or other proprietary rights or processes of any other person or entity. ¶ (f) Rigel is not aware that any of its employees is obligated under any contract (including licenses, covenants, or commitments of any nature) or other agreement, or subject to any judgment, decree, or order of any court or administrative agency, (i) that would interfere with the use of such employee's best efforts to promote the interests of Rigel or (ii) would conflict with Rigel's business as proposed to be conducted. ¶ (g) Neither (i) the execution nor delivery of this Agreement, nor (ii) the carrying on of Rigel's business by the employees of Rigel, nor (iii) the conduct of Rigel's business as proposed, will, to the best of Rigel's knowledge, (x) conflict with or result in a breach of the terms, conditions, or provisions of, or (y) constitute a default under, any contract, covenant, or instrument under which any of such employees is now obligated. ¶ (h) Rigel is not aware of any violation by a third party of any of Rigel's patents, licenses, trademarks, service marks, tradenames, copyrights, trade secrets or other proprietary rights.

Explanations can pay dividends

Brevity is far from the only virtue for a contract. Sometimes a few words of explanation or clarification can be cheap insurance. You can be sure that in a contract dispute, opposing counsel will be looking for "creative" interpretations of contract language that you thought was crystal-clear. If you want to try to nip such interpretations in the bud, it might be worth taking the time now to include a bit of extra language that nails down the parties' intent.

That's why I couldn't disagree more strongly with my friend Ken Adams's comment that, apart from the opening recitals, “in a contract you don't reason or explain. You just state rules.” That's way too categorical a statement for my taste.

People aren't computers — they often need to be persuaded

Contracts are read and followed by people, not by computers, and people sometimes need to be persuaded to do the things they're theoretically supposed to do. That's where it can be extremely helpful to record reasons and explanations into a contract.

Suppose Company A signs a contract requiring it to do X. It won't necessarily happen that way automatically. One or more /people/need to make X happen, and those people might balk at doing so.

For example, Company A's management might have changed their minds. When they signed the contract, they were willing to do X, as required by the contract. Now, though, they don't want to spend the money, or they'd rather chase a better opportunity, or whatever — now, they simply don't want to do X, even though the contract says they have to.

It might be even simpler: Perhaps it was Alice at Company A who negotiated the contract, but she moved on to another job. Now, it's her successor Allen who's responsible for making X happen — and he thinks doing X is a bad idea, so he wants a way to get out of having to do it.

What will Company A's lawyer say? He wants to please his client and make a favorable impression. If he can think of even a faintly-plausible rationale to excuse Company A from doing X, the chances are that he'll say so.

Bottom line: If Company A really doesn't want to honor its contractual commitment to do X, the odds are that the company will simply fold its arms and say “nope.” (I speak from hard experience on this score.)

That's where reasons and explanations can come in handy in a contract: If the contract explains the business reasons why Alice committed the company to doing X, there's a better chance that her successor Allen will understand her reasoning and, however grudgingly, go along with her commitment.

The same is true in contract litigation, too: Judges sometimes need to be persuaded too. This is especially true if there's more than one way to read the contract — again, this is where reasons and explanations can come in very handy.

See also: For the avoidance of doubt.

Put explanations in footnotes?

At the software company where I was general counsel, our standard license agreement forms included a few footnotes explaining why certain provisions were included, or why the provisions were worded in the way they were. The results:

  • My distinct impression was that our customers' contract reviewers found these footnotes to be helpful and, after reading them, were less inclined to ask for changes in those provisions.
  • On a couple of occasions, a customer's contract reviewer asked for a footnoted provision to be changed or deleted, only to withdraw the request when I pointed out the footnote — it turned out the reviewer hadn't read the footnote and ended up agreeing with our position.
  • On more than a few occasions, the customer signed our contract forms with the footnotes left in place. That certainly wouldn't be a bad thing if we ever had to litigate the contract — the footnotes would help the judge get up to speed.

D R Y — Don't Repeat Yourself

Suppose you inadvertently cover the same subject in two different provisions in your draft contract. The odds are that at some point in the negotiation process, you'll revise one of the provisions but not the other. So then which provision are the parties supposed to follow — or a judge supposed to enforce?

Strangely, a "longer" contract might actually get signed faster

I used to hold the view that it was a good idea to use a “compressed” format for contracts, with narrow margins, long paragraphs, and small print, so as to fit on fewer physical pages. It was my experience that readers tend to react negatively when they see a document with “many” pages.

I've since concluded, though, that if you expect to have to negotiate the contract terms, then larger print, shorter paragraphs, and more white space:

  • will make it easier for the other side to review and redline the draft — always a nice professional courtesy that might help to earn a bit of trust; and
  • will make it easier for the parties to discuss the points of disagreement during their inevitable mark-up conference call.

A more-readable contract likely will get you to signature more quickly, and that of course, is the goal.

(At least that's the intermediate goal — ordinarily, the ultimate goal should be to successfully complete a transaction, or to establish a good business relationship, in which each party feels it received the benefit of its bargain and would be willing to do business with the other side again.)

Numbers; currency; percentages

Numbers

Use numbers for 11, 12, 13, etc.: There are 21 students in the class.

Spell out one to ten: There will be four students per negotiating team.

Use all numbers instead of mixing numbers and spelled-out words.

Awkward: The quiz will contain ten to 12 questions.

Better: The quiz will contain ten to 12 questions.

Spell out "million" for numbers ≥ 1 million. see, e.g., the merger agreement between United Airlines and Continental Airlines, which uses this style.

Awkward: More than 300,000,000 people live in the United States.

Better: More than 300 million people live in the United States.

Some partners will insist that you include both spelled-out numbers and parenthetical numerals. By all means follow their instructions in this regard, but that's an archaic and potentially-dangerous practice, because there's a non-trivial chance that an inconsistency will appear during editing and be overlooked.

As one example, the merger agreement between United Airlines and Continental Airlines, which had high-powered law firms on each side of the table, did not use the archaic style, but instead used the better approach below:

Archaic: Three hundred million dollars ($300,000,000.00)

Better: $300 million

Dangerous: Three hundred million dollars ($250,000,000.00) — which is it?

Currency

There's no need to repeatedly say "X amount of money in United States dollars" – put that in the Definitions section (e.g., "all references to dollar amounts are in United States dollars").

If there's any chance of confusion, use the standard abbreviation USD to indicate U.S. dollars, e.g.: Buyer will pay Seller USD $30 million.

Abbreviations for other countries' currencies can be found at Wikipedia

Percentages

Spell out percentages at the beginning of a sentence; otherwise, just use the Arabic numerals.

Archaic: Thirty percent (30%) of the proceeds will be used to repay the Loan.

Better: Thirty percent of the proceeds will be used to repay the Loan.

Alternative: Of the proceeds, 30% will be used to repay the Loan.

Dangerous: Thirty percent (20%) of the proceeds will be used to repay the Loan — which is it?

Sample calculations

Your contract might contain a complex formula or some other particularly tricky provision. If so, consider including a hypothetical example or sample calculation to "talk through" how the formula or provision is intended to work.

A sample calculation in a promissory note could have saved some big legal fees in a Seventh Circuit case. A group of affiliated franchisees of restaurants such as Burger King and Chili's had negotiated $49 million dollars worth of corporate promissory notes. During the negotiations, the borrowers asked for a change in the lender's standard definition of “Prepayment Penalty.” The quoted term ended up being defined in all 34 promissory notes as:

the positive difference between the present value (computed at the Reinvestment Rate) of the stream of monthly payments of principal and interest under this Note from the date of the prepayment through the tenth (10th) anniversary of the First Full Payment Date at the Stated Rate . . . and the outstanding principal balance of this Note as of the date of the prepayment (the “Differential”). In the event the Differential is less than zero, the Prepayment Premium shall be deemed to be zero.

BKCAP, LLC v. CAPTEC Franchise Trust 2000-1 572 F. 3d 353, Nos. 08-3239 & 08-4038, slip op. at 4 (7th Cir. Aug. 5, 2009) (amended opinion), after remand, 688 F.3d 810 (7th Cir. 2012).

Unfortunately, according to the appeals court, the computed prepayment penalty would always be zero — which would be absurd under the circumstances because the parties clearly didn't intend that. See id., slip op. at 11.

The appeals court reversed a summary judgment in favor of the lender and directed the district court to conduct a trial to determine what the parties really meant. See id., slip op. at 17-18. On remand, the district court conducted a bench trial where it considered, among other things, the testimony of one of the lead negotiators. This time, the court found in favor of the borrowers; the Seventh Circuit affirmed the judgment. See 688 F.3d 810 (7th Cir. 2012).

Worth noting: In its first opinion, the Seventh Circuit specifically mentioned calculations that the lender submitted with its motion for summary judgment. It's a shame the drafters of the promissory note didn't think to include one or two such calculations in the body of the contract itself — by being forced to work through the calculations, they might well have spotted the problem with their language in time to do something about it.

Tables in lieu of narrative language

Instead of long, complex narrative language, use charts and tables. Here's an example of the former:

If it rains less than 6 inches on Sunday, then Party A will pay $3.00 per share, provided that,/ if it it rains at least 6 inches on Sunday, then Party A will pay $4.00 per share, /subject to said rainfall not exceeding 12 inches, [etc., etc.]

Here's the same provision, this time recast in table form — clearly it's easier to read:

Party A will pay for the shares at the rate set forth in the table below, depending on the amount of rain on Sunday:

AMT OF RAINPAYMENT DUE
Less than 6 inches$3.00 per share
6 to 12 inches$4.00 per share

Negotiation strategy

Rejecting the other side's form could kill the deal in the cradle

Don't follow the advice of some commentators who say you should never allow the other side to draft the agreement. That's unrealistic; for reasons good and bad, big companies usually want to use their contract forms, not yours.

Certainly it's important to offer to draft the contract. And if the big company really wants to do a deal with you, then you might get away with insisting on controlling the typewriter.

But bad things can happen, though, if you simply fold your arms and refuse to negotiate the other side's contract paper.

  • Even if the big company's negotiators grudgingly agree to work from your draft contract, they'll start the negotiation thinking your company is less than cooperative (which isn't good for the business relationship).
  • Then later, when you ask for a substantive concession that's important to you, they may be less willing to go along.
  • In any case, their agreement to use your contract form, in their minds, will be a concession on their part, meaning that you now owe them a concession.

For a vendor lawyer, there's another danger in insisting on using your own contract form: Your client's sales people will blame their lack of progress on you ---

  • Sales folks are always having to explain to their bosses why they haven't yet closed Deal X.
  • Your insistence on using your contract form gives them a ready-made excuse: They can tell their boss that you're holding up the deal over (what they think is) some sort of petty legal bulls__t.

Even if that's not the whole story, it's still not the kind of tale you want circulating among your client's business people.

How tough should your contract form be?

Leading off with a “hardball” contract form document might be a bad idea

Some say it's best to start a contract negotiation by sending the other side your “hardball” or “killer” contract form that's extremely biased toward your side. Loading up your contract form with a lot of provisions that you don't care that much about, according to this view, gives you flexibility to make concessions later, and thus appear to be a cooperative negotiator, without giving up what you really want. By doing so, says this theory, you increase the odds that you'll eventually get more of what you want.

Certainly there are transactions in which it makes at least some sense to do this. And of course it's always fun to play “the art of the deal”; it feels just plain good to think you came out on top when negotiating the legal fine points.

But don't underestimate the price you'll pay for these putative benefits:

  • You'll spend more business-staff time.
  • You'll spend more in legal expenses.
  • You'll incur opportunity costs: As the ‘shot clock' runs down at the end of the fiscal quarter, you'll be spending time on legal T&Cs instead of on closing additional business.

So when negotiating a deal, you might want to ask yourself whether “hardball” legal negotiation is really what you want to be spending your time doing.

Jamming a killer contract might give you a wounded tiger to deal with later

Suppose a customer company has a lot of bargaining power. And suppose the customer uses that power to force a vendor to make some tough concessions in a contract negotiation.

The customer's negotiators might well regard those concessions as an entitlement: We're the big dog; of course we get what we want.

But they should recall that ultimately, all contracts have to be performed by people. And people will almost certainly be influenced, not just by the words of the contract, but by their employer's then-current interests — and by their own personal interests as well.

If the vendor's people feel they've been crushed by the customer, they're unlikely to harbor warm and fuzzy feelings for the customer. (This is at least doubly true if the contract later proves to be a train wreck for their company — most business people know that being associated with a train wreck is seldom good for anyone's professional reputation.)

The vendor's people are not likely to be motivated to go above and beyond for that customer. They may be tempted to “work to rule,” to use an expression from the labor-relations world — to do just what the contract requres, and no more. That does neither party any favors.

The reverse can be true when the shoe's on the other foot. Suppose the customer thinks that it's been taken advantage of by a vendor. When it comes time for renewals, or repeat business, or recommendations to other companies, that vendor probably won't have a lot of brownie points with the customer's people.

So even if you've got the power to impose a killer contract on the other side, think twice before you try to do so. You could be setting up your client to have to deal later with a wounded tiger.

A real-life example

In a prior life, I was vice president and general counsel of a medium-sized, publicly-traded software company. Whenever a customer asked us to agree to a change in our standard contract form, we treated it as a marketing opportunity.

Our thinking was this: Prospective Customer A thinks its life will be better if we can make this commitment. Hmm — maybe we can tailor our business processes so that we can comfortably make this commitment, not just for this customer, but for others too. That might give us yet another point of differentiation for our products.

In many cases we changed our standard form, so that in the future, our basic offering would already include what Customer A had found it necessary to ask for.

This approach paid big dividends: As our contract form evolved, it began to get rave reviews from customers' lawyers. My sense was that this significantly sped up our sales-negotiation cycle.

I made notes of customers' favorable comments. I finally got smart and quoted the comments (anonymously) on a cover page of the contract form. This also turned out to be a good move, because it helped us “sell” customers' legal people on the idea of using our contract form. Here are a few of the comments, all made by in-house counsel:

When I first looked through this, I wondered ‘did someone already negotiate this for us?' It's a pretty nifty document you've got there; I liked it very much.

I told our business people that if your software is as good as your contract, we're getting a great product.

I giggled when I saw the ‘movie reviews' on your cover sheet. I'd never seen that before – customers saying this was the greatest contract they'd ever seen. But the comments turned out to be true.

We might have given away some theoretical legal advantages, but nothing worth worrying about, and the business people loved the speeded-up sales cycle.

And needless to say, our sales people were not unhappy about getting to signature faster.

You might wonder whether we ever experienced legal problems from having a customer-friendly contract form. I'll note only that my CEO let me talk about our approach at continuing legal education (CLE) seminars (so this information isn't confidential), and that we were eventually acquired by one of the world's largest software companies.

Incidentally, a fringe benefit of having such a customer-friendly contract was that I could enforce a policy with our sales people: I would not negotiate a customer's contract form until the sales manager got me a five-minute phone call with the customer's contracting people. In most cases, I was able to persuade the customer's contract reviewers that using our contract would get us to signature with less work for all of us. In the cases where we did end up using the customer's form, that initial five-minute phone call helped establish a positive working relationship which, among other things, helped soften the blow if we had to do a serious markup of their paper.

Proposing a fair contract might not really give away that much

“If the other side doesn't know what to ask for, it's not my job to educate them.” That's one reason a contract drafter might not want to use a fair contract form. But consider these points:

• Your notion that you're the one with superior knowledge might be wishful thinking. The other side could bring in an expert who knows exactly what changes to demand.

You might be better off setting the tone with a demonstrably-reasonable contract, and then standing on principle to reject unreasonable change requests.

• Suppose you're right, and the other side doesn't really know what they're doing. Chances are you'll get them to signature faster — and you'll be laying a foundation for a trusting re­la­tion­ship — if the draft you're proposing seems fair and balanced.

• It can be dangerous to have a clueless contract reviewer on the other side. The reviewer might make un­rea­son­able demands, but being clueless, s/he won't know that, and can't be convinced otherwise. That could drive the negotiation right into the ditch.

When you can't just say no in a contract: Three creative compromises

Companies often don't have the bargaining power to get their way in contract negotiations. When that's the case, they have to think of other ways to help protect their business interests.

EXAMPLE: Imagine that a customer is negotiating a master purchasing contract with a vendor.

  • The customer would love to flatly prohibit the vendor from raising prices without the customer's consent, or to limit price increases to a single increase of no more than some specified percentage per year (typically CPI). But the vendor's negotiators won't go along with such a prohibition.
  • The vendor would love to have the unfettered discretion to raise the customer's prices whenever it wants. But the customer's negotiators insist on at least some protection on that score.

What to do? In no particular order, here are three possible approaches that the parties could consider trying. These examples are specific to price increases, but the concepts can be adapted to a variety of needs.

Non-discrimination language

A non-discrimination requirement at least brings a bit of overall-market discipline into the picture.

EXAMPLE: Vendor will not increase the prices it charges to Customer except as part of a non-targeted, across-the-board pricing increase by Vendor, applicable to its customers generally, for the relevant goods or services.

COMMENT: Vendor might want to qualify this language, so as to limit how general a price increase must be before it can be applied to Customer.

Advance-warning requirement

An advance-warning requirement can buy time for its beneficiary to look around for alternatives (assuming of course that the contract doesn't lock in the beneficiary somehow, for example with a minimum-purchase requirement or a “requirements” provision).

EXAMPLE: Vendor will give Customer at least X [days | months] advance notice of any increase in the pricing it charges to Customer under this Agreement.

Transparency requirement

Requiring a party to provide information justifying its action, upon request, can force that party to think twice about doing something, even though it technically has the right to do it.

EXAMPLE: If requested by Customer within X days after notice of a pricing increase, Vendor will seasonably provide Customer with:

  • documentation showing, with reasonable completeness and accuracy,
  • a written explanation of the reason for the increase, including reasonable details about Vendor's relevant cost structures.
  • relevant to the pricing increase.

Customer will maintain in confidence any nonpublic information in such explanation, will not disclose the nonpublic information to third parties, and will use it only for purposes of making decisions about potential purchases under this Agreement.

COMMENT: Note the if-requested language, which relieves Vendor from the burden of continually managing this requirement — although a smart vendor would plan ahead and have the required documentation ready to go.

Termination right

Still another possibility is to give the other party the option to terminate the contract if the first party does something the other party doesn't like.

Note-taking: Easy habits you'll be glad you followed

Chances are that at some point in your career, a lawyer — yours, or someone else's — will want to review notes you took at a meeting or during a phone conversation. So thinking ahead to that possibility, whenever you take notes, you should routinely do as many of the fol­low­ing things as you can remember, especially the first four things, to increase the odds that a later reviewer will get an ac­cur­ate picture of the event. It will help you stay out of un­de­served trouble and save money on legal fees

1. Remember that your notes might be reviewed by an adversary or a judge someday

Be clear about what you're saying in your notes; leave as little room for doubt as you can. Cryptic notes that can be interpreted in multiple ways can cause problems.

2. Indicate who said what you're writing down

Unless you want to risk having someone else's statements mistakenly attributed to you, indicate in your notes just who has said what. EXAMPLE:  Suppose that John Doe says in a meeting that your company's off­shore oil-well drilling project can skip certain safety checks. Re­mem­ber­ing the BP drilling disaster in the Gulf of Mexico, you don't want anyone to think you were the guy who sug­ges­ted this. So your notes might say, for example, "JD: Let's skip safety checks"; if you omitted John Doe's initials, it wouldn't be clear that you weren't the one who made his suggestion.

3. On every page, write the meeting date and time, the subject, and the page number

In a future lawsuit, your lawyer will probably want to build a chronology of events; you can help her put the meeting in­to the proper context by “timestamping” your notes. This will also reduce the risk that an unfriendly party might try to quote your notes out of context.

4. If a lawyer is participating, indicate this in your notes

Identifying lawyer participants in your notes will help to flag the notes as possibly subject to the attorney-client privilege. EXAMPLE:  "Partici­pants:  John Doe (CEO); Ron Roe (ABC Consulting, Inc.); Jane Joe (general counsel)."

5. Start with a clean sheet of paper

When copies of documents are provided to opposing counsel, in a lawsuit or other investigation, it's better if a given page of notes doesn't have un­re­la­ted in­for­ma­tion on it. This goes for people who take notes in bound paper note­books too: It's best to start notes for each meeting or phone call on a new page, even though this means you'll use up your note­books more quickly.

6. Write your notes in pen

Writing your notes in pen makes them easier to photocopy and/or to scan. Moreover, notes written in pencil might cause a reviewer — for example, an opposing counsel — to wonder whether you might have erased anything, and perhaps falsely ac­cuse you of having done so.

7. Write CONFIDENTIAL and/or PRIVILEGED at the top of each page that is (or might be)

Marking your notes as confidential and/or privileged will help preserve any applicable trade-secret rights; it will also help your lawyer segregate such notes for possible special handling in a lawsuit or other investigation.

8. List the participants in the meeting or phone call

Listing the participants serves as a key to the initials you'll be using, as discussed in item 2 above.  It can also refresh your recollection if you ever have to testify about the meet­ing or phone call.

If some people are participating in an in-person meeting by phone, indicate that.

9. Indicate each participant's role

EXAMPLE: "Partici­pants:  John Doe (CEO); Ron Roe (ABC Consulting, Inc.); Chris Coe (marketing).”

Remember, just because you know that Ron Roe worked for another company, that doesn't mean someone else will.

10. Indicate the time someone joins or leaves the meeting …

… es­pe­ci­al­ly if it's you, so that you're not later accused of having still been there if something bad happened after you left.

11. Write down the stop time of the meeting

Writing down the stop time of the meeting usually isn't a big deal, but it's always nice to have for completeness.

Problem sets

1. Post-signature changes to document, exhibits, etc.

Facts

Yesterday your client and "the other side" signed a contract that included several exhibits.

You have all signed copies of the contract in your possession and are supposed to send one fully-signed copy to the other side today.

You just noticed that one of the exhibits includes a significant typographical error.

Question and clicker poll: Just change it?

Can you just change out the exhibit pages in the various copies before you send the fully-signed copy to the other side? Why or why not?

SUGGESTED READING:

Question: What other options?

How else could you handle this situation?

2. Switched-out pages?

Facts

Your client manually signs two originals of a contract. You mail both originals to the other side with a cover letter asking for one of the fully-executed originals to be returned to you. A couple of days later, you receive a fully-executed original; per the client's request, you put it in your file.

Months later, a question comes up about the contract. You look at your file copy. A significant point isn't drafted the way you remember; it's different from the earlier drafts.

You contact the other lawyer, who says he doesn't know what you're talking about.

Question: Prevention?

How could you have prevented this from arising?

INSTRUCTIONS:

  • Write out your own answer
  • Compare your answer with those of your nearby "partners"
  • Stand by for class discussion

SUGGESTED READING: Stark § 17.6

3. The Addams family wants to sign a contract while en route from Hawai'i

Facts

Your client is Addams Investments, L.P., a "family" limited partnership of the very-wealthy Addams clan in Galveston. The sole general partner of the limited partnership is Addams Operations, Inc.

It's 12:00 noon Houston time on September 30. The president of Addams Operations, Wednesday Addams, is on the phone. It's a bad connection, but she wants to talk about a contract that you and she have been negotiating for Addams Investments, L.P.

Under the contract, will buy a large quantity of widgets from Widgets, Inc., a Houston company. (Family patriarch Gomez Addams is convinced the family will make a killing in the widget market.)

Wednesday Addams says that she has talked by phone with her opposite number at Widgets, Inc.; she reports that Widgets, Inc., has agreed to the last contract draft that you sent over, and that everyone is ready to sign.

The Widgets, Inc. people really, really want to get the contract signed and delivered today, September 30. They've told Wednesday Addams that they're willing to make significant pricing concessions to make that happen.

There's a problem, though: As you learn from Wednesday Addams over the bad phone connection, she and the rest of the Addams family are at the end of a rugged backpacking vacation on a small, primitive island in Hawai'i. The island has no Internet service and barely has cell phone service.

The family has just emerged from the back country. The plan is for everyone, smelly as they are, to take a private plane from a dirt landing strip on the island to the Honolulu airport. A shuttle bus will take them to a nearby hotel for a quick shower and change of clothes. The family will then board United Airlines Flight 200, a "red eye" that leaves at 7:35 p.m. Hawaii time (11:35 p.m. Houston time) and lands in Houston at 8:11 a.m. on October 1.

One more thing, she says: In the interest of traveling as light as possible, no one in the group brought a laptop.

Question: Form of signature block?

How should the contract signature block for Adams Investments, L.P., be written?

INSTRUCTIONS:

  • Write out your own answer
  • Compare your answer with those of your nearby "partners"
  • Stand by for class discussion

Question: Sign on October 1?

Why might the Widgets sales rep be so eager to get the contract signed today, September 30? Could that pose a problem?

INSTRUCTIONS:

  • Write out your own answer
  • Compare your answer with those of your nearby "partners"
  • Stand by for class discussion

Question: Signature mechanics?

Can you "make it happen" for the contract to be signed and delivered today, September 30? If so, how might you go about it?

INSTRUCTIONS:

  • Write out your own answer
  • Compare your answer with those of your nearby "partners"
  • Stand by for class discussion

4. This diamond ring doesn't shine for him anymore

Facts

Your client TexBling is a Houston company that sells jewelry on-line, but only to Texas customers. One particular customer is Nick, an individual living in Houston.

On January 17, Nick clicks on "I agree" to buy a $20,000 diamond engagement ring. He wants to pop the question to his girlfriend, Nora, at a Houston Rockets game on January 26. He has arranged with the Rockets to show his proposal on the Jumbotron at the Toyota Center.

The price of the ring would bust out Nick's credit-card limit, so he checks the box to pay C.O.D. instead and borrows the cash from his parents.

TexBling's Web site says that with ground shipping, the ring should arrive in 7 to 10 days, that is, some time between January 24 and January 27. Nick figures that's good enough, so he doesn't pay extra for second-day air.

January 26 arrives, but the ring doesn't. Nick goes ahead anyway with proposing to Nora at the Rockets game.

To Nick's horror, though, Nora turns him down, bursts into tears, and storms out of the arena to get a cab home — live on the Jumbotron and, as it happens, on national TV. (Here's a real-life example — supposedly.)

The next day, the delivery van arrives with the engagement ring from TexBling. The grief-stricken Nick no longer wants it, though. He refuses to take delivery, and he also refuses to pay for it. (Cue Gary Lewis and the Playboys.)

TexBling, the jewelry vendor — heedless of the potential bad publicity — tells you it wants you to sue Nick for breach of contract in failing to pay for the ring.

Question: Statute of frauds defense?

Could Nick assert a statute-of-frauds defense, on grounds that he never signed a contract? Briefly explain your answer.

Question: Hard copy signature needed?

Could Nick assert that TexBling failed to obtain his handwritten, hard-copy signature, agreeing that it was OK to use electronic signatures? Briefly explain your answer.

Question: Paperless records OK?

Back when TexBling consulted you about setting up their on-line sales operation, should you have told them to be sure to save a hard-copy printout of Nick's "I agree" contract form to make it enforceable? Please explain your answer.

SUGGESTED READING:

5. Notarizing a document

Facts

Your client, Landlord, has negotiated a five-year commercial lease agreement for one of its office buildings. The tenant's lawyer wants the signers to have their signatures notarized. Landlord agrees to have the signatures notarized.

Question: Why ask for notarization?

Why might the tenant's lawyer want the lease agreement to be notarized? Would that be in your client Landlord's best interest?

SUGGESTED READING:

Question: Notarize without a seal?

If your secretary can't find her notary seal, can she sign the notary certificate without one?

SUGGESTED READING:

Question: Identifying the signer

What must your secretary do before signing the notary certificate to confirm that the signers are who they claim to be?

SUGGESTED READING:

Question: Record of identification

Is the notary's certificate required to say anything in particular about the identity of the signer?

SUGGESTED READING:

Question: What to do after notarizing?

What must your secretary do after notarizing the signature(s)?

SUGGESTED READING:

Question: Attorney as notary?

If no notary is around, can you notarize the signatures as an attorney? Should you?

SUGGESTED READING:

Question: Notarize remotely?

Surprise! The person who will sign the lease for the tenant has gone on a business trip to Kuwait and will FAX her signed signature page to you. Can your secretary, who is here in Houston, notarize that signature page?

SUGGESTED READING:

Question: Notarization in a foreign country?

Who in Kuwait could "notarize" the signature?

SUGGESTED READING:

6. A sales quotation for keychain split rings

Facts

Your client is L.P., a Houston-based Texas limited partnership that manufactures novelty items. You're on the phone with one of Buyer's managers, Betty Boop, with whom you've dealt before. Betty says:

  • Buyer has a short-notice opportunity to make 10,000 custom-branded novelty keychains for a buyer that wants to use them as giveaways at a Hong Kong trade show.
  • This wouldn't be a new product line for Buyer, which often manufactures customized keychains.
  • Buyer's keychains typically include the usual metal split rings that can tear your fingernail when you try to add or remove a key.
  • Buyer recently used up all of its inventory of split rings; Betty has been tasked with procuring 10,000 of them as soon as possible.
  • Betty has found a supplier, Seller Corporation of Galveston, that has enough of the split rings in stock.
  • Sam Seaborn, one of Seller's sales representatives, has sent Betty an email that includes a Word document as an attachment. He wants Betty to print, sign, and date the attachment and FAX it back to him.
  • Betty has forwarded Sam's email and its attachment to you.
  • The text of the Word document attached to Sam's email, in its entirety, is the following:

SALES QUOTATION – SELLER CORPORATION

Buyer: Betty Boop

Product: One-inch metal split rings

Quantity: 10,000.

Price: $1.00 each plus shipping.

Terms: Half up front, balance net 30 days after delivery.

ACCEPTED:

___________
Betty Boop

____________
Date


Question: "Merchant"?

For purposes of the Uniform Commercial Code (UCC), would a court likely hold that Buyer L.P. is a "merchant" with respect to metal split rings? Explain briefly.

SUGGESTED READING:

Question: Sufficient detail?

ASSUME ARGUENDO:

  • The sales quotation is otherwise enforceable as a contract.
  • One of the parties later wants to challenge the enforceability of the sales quotation as a contract on grounds of indefiniteness, because the sales quotation supposedly didn't contain enough detail.

Would such a challenge be likely to succeed? Explain briefly.

SUGGESTED READING:

Question: Formation of a contract?

ASSUME ARGUENDO:

  • The sales quotation contains enough detail to be enforceable as a contract if duly signed and delivered.
  • Betty prints out the sales quotation; manually signs it with pen and ink; FAXes the signed document back to Sam Seaborn as he requested; and shreds the signed original.

On these assumed facts, would a court likely hold that a contract was thereby formed? Explain briefly.

SUGGESTED READING:

Question: Federal E-SIGN Act applicability?

Delivery location

ADDITIONAL FACTS: Sam Seaborn, having received Buyer's 50% down payment, sends Betty Boop an email saying that the split rings are ready to be picked up at Seller's warehouse in Galveston.

QUESTION: Would Seller likely be found in breach of contract if it did not deliver the split rings to Buyer's Houston offices? Explain briefly.

SUGGESTED READING:

Payment terms

QUESTION: In the "Terms" line, what does "net 30 days" mean?

QUESTION: If the sales quotation hadn't specified payment terms, when would have payment have been due?

SUGGESTED READING:

Form of signature

QUESTION: Given that your client is Buyer L.P. and not Betty Boop personally, would you advise Betty to sign the sales quotation in its present form? Explain briefly.

Liability for payment

SUPPOSE: Betty sends Sam a check, drawn on a Buyer L.P. account, for the 50% deposit, and takes delivery of the metal split rings. But then Buyer L.P. goes out of business before paying Seller's invoice for the remaining balance. Seller then sues Betty, personally, for the balance.

Betty moves for summary judgment that she is not personally liable because (she says) the contract was with Buyer L.P. Seller cross-moves for summary judgment that Betty is indeed personally liable.

QUESTION: if you were the trial judge, how would you rule? Explain briefly.

QUESTION: What advice would you have given Betty if she had consulted you before signing and

SUGGESTED READING:

Enforcement

ASSUME ARGUENDO: Sam Seaborn tells Betty that Seller Corporation is going to file suit for the 50% balance due.

QUESTION: Will Seller Corp. necessarily have to hire an attorney? Explain briefly.

SUGGESTED READING:

Merchandise quality

SUPPOSE:

  • When Buyer L.P.'s people unpack the 10,000 metal split rings, they find that one of them is so defective as to be unusable. The other 9,999 of them are fine.
  • Betty Boop contacts Sam Seaborn and asks for the defective split ring to be replaced; Sam refuses, saying that Buyer L.P.'s workers must have broken the defective ring.
  • Enraged by Sam's obstreperousness, the CEO of Buyer L.P. decides to sue Seller Corp. for breach of warranty because of the defective split ring.

QUESTION: Given the absence of any warranty language in the sales quotation, is Buyer L.P. likely to recover damages for breach of warranty? Explain briefly.

SUGGESTED READING:

Stolen property

SUPPOSE:

  • Split Rings, Inc., one of Seller Corp.'s competitors, successfully sues Buyer L.P. for recovery of the 10,000 split rings, on grounds that Seller Corp. stole the rings from Split Rings, Inc.
  • The sales quotation also contains the following language: All goods are provided "as is, with all faults."

Question: Does Buyer L.P. have any recourse against Seller Corp.?

7. Backdating a contract at the end of the quarter

Facts

It's the last week of March. Your client Big Public Software Company ("BPSC") has a calendar-year fiscal year, and its shares are traded on Nasdaq. That means it must file financial reports with the SEC within a certain number of days after each March 31, June 30, September 30, and December 31 /(commonly referred to as Q1 through Q4 respectively, or sometimes 1Q through 4Q)/.

BPSC's sales people are working on a huge deal. If the deal closes, BPSC will "make the number," that is, its earnings will match analysts' expectations; if not, BPSC will "miss," and the price of its stock likely will nosedive.

The BPSC sales people stay late at the office on March 31, hoping to iron out the last negotiation points. But the parties don't actually come to agreement until April 3.

Question: Backdate the signatures?

On April 3, BPSC's vice president of sales calls you with an urgent question: Can the parties backdate their signatures to March 31, so that BPSC can book the sale in Q1 so that it won't "miss"?

SUGGESTED READING: Backdating signatures

Optional question: Personal motivations for backdating?

What personal motives might the VP of sales have for backdating the contract signatures? Consider, for example:

  • financial incentives
  • non-financial motivations

8. Warranty-of-quality comparison: Honeywell vs. Honeywell

Briefly summarize the differences between the warranty- and remedy provisions that Honeywell sets out in section 11 of its terms of sale, versus those in section 18 of its terms of purchase, on the following subjects:

  • To whom does the seller make the warranty?
  • For goods: To what extent is the intended use of the goods relevant?
  • For services: To what quality standards will services conform?
  • With what laws will the seller comply?
  • How long does the Warranty Period last?
  • Are the stated warranties the exclusive ones?
  • How restricted are the remedies for breach of warranty?

SUGGESTED READING: Representations and warranties.

[x]. Introductory paragraphs of a contract

[IN PROGRESS]

Question: Minimum information needed?

What do you think is the minimum information needed for the introductory paragraph of a contract? Compare, for example:

Question: Benefit to including information?

Is there any actual benefit to including the information you typically see in the introductory paragraph of a contract? Consider, for example, the usual recitations of:

  • the state(s) in which the parties are incorporated
  • the parties' principal places of business

SUGGESTED READING:

[N/A – this section is used for course development]