≡ Menu

In a case involving a software sale gone wrong, the federal district court in Min­ne­sota provides a nice recap of how courts analyze whether or not a given soft­ware-license transaction is governed by Article 2 of the Uniform Com­mer­cial Code (which covers sales of goods):

<BEGIN QUOTE>

Article 2 of the UCC applies to “transactions in goods.”  Under Illinois law, whether a sale of software constitutes a “transactions in goods” depends on various considerations.

One consideration is the rights conferred to the purchaser by the Agreement. A transaction that nominally involves a mere license to use software will be considered a sale under the UCC if it involves a single payment giving the buyer an unlimited period in which it has a right to possession.

Another consideration is whether the components of the software package were developed from scratch.  Off-the-rack software is almost always a good. Customization or modification of a standard software product is generally considered the manufacture of a good rather than a service.

Additionally, contracts for the sale of software often include provisions of services, such as training and technical support. Where there is a mixed contract for goods and services, there is a transaction in goods only if the contract is predominantly for goods and incidentally for services.  Article 2 applies to sales of software where the ancillary services offered are similar to those generally accompanying sales of computer systems, such as installation, training, and technical support.

Here, the Agreement is the sale of software that has been customized for Prairie River’s business.

  • First, Prairie River purchased a perpetual enterprise license, meaning that Prairie River has a non-transferable right and license to perpetually access and use the Software.
  • Second, the Complaint and the Agreement suggest that the Software is a standard Procura product. Customization of the Software is considered the manufacture of the Software in this case.
  • Third, the ancillary services provided in the Agreement are the sorts of services — installation, training, and technical support — expected to accompany a sale of software.

Accordingly, the Court concludes that the Agreement governs a sale of goods subject to Article 2 of the UCC.

<END QUOTE>

Prairie River Home Care, Inc. v. Procura, LLC, No. 17-5121 (D. Minn. July 30, 2018) (denying defendant’s motion to dismiss) (cleaned up, bullets added).

Hat tip:  Richard Raysman and Elliot Magruder, Potentially Unconscionable Warranty Precludes Licensor’s Motion To Dismiss (Mondaq.com Oct. 5, 2018).

{ 0 comments }

If your client is going to contractually commit to using commercially rea­son­able ef­forts to do something — and if your client expects that obligation to require some­thing less than “all reasonable efforts” — then you’ll want to make that expectation clear in the contract itself:  In its October 1 decision in Akorn, Inc. v. Fresenius Kabi AG, No. 2018–0300–JTL, slip op. (Del. Ch. Oct. 1, 2018), the influential Dela­ware chancery court noted the chasm be­tween the meaning of that term to transactional lawyers versus to courts:

  • “Deal practitioners have a general sense of a hierarchy of efforts clauses,” said the court; this hierarchy ranges from good faith efforts at the low end, through reasonable efforts, commercially reasonable effortsreasonable best efforts, and finally best efforts. See id., slip op. at 213-14 (footnote omitted).
  • On the other hand (the court continued): “Commentators who have sur­veyed the case law find little support for the distinctions that transactional lawyers draw.” Id., slip op. at 214 (footnote omitted).

Seemingly disregarding practitioners’ views, the chancery court continued the Delaware trend —which that court itself started — of treating com­mer­­ci­al­ly rea­sonable efforts as requiring the obligated party to take “all rea­son­able steps”:

Under the Merger Agreement, Akorn was obligated to use commercially rea­sonable efforts to operate in the ordinary course of business in all mat­erial respects. As interpreted by the Delaware Supreme Court in Williams, this standard required that Akorn “take all reasonable steps” to main­tain its operations in the ordinary course of business. The record establishes that Akorn breached that obligation in multiple ways.

Akorn, Inc., slip op. at 216 (emphasis added), following Williams Cos. v. Ener­gy Transfer Equity, L.P., 159 A.3d 264 (Del. 2017). In Williams Cos, the state su­preme court had followed (see 159 A.3d at 272) the chancery court’s own decision in Hexion Specialty Chem., Inc. v. Huntsman Corp., 965 A.2d 715, 755 (Del. Ch. 2008). So in one sense, the Akorn decision com­ple­ted a round trip from the chancery court to the supreme court and back again.

These Delaware precedents make it important for contract drafters to consider defining what they mean by commercially reasonable efforts, as I argued in more detail here and in the Texas Bar Journ­al, as well as in the California bar’s Business Law News.

(To give credit where due:  Vice Chancellor Laster’s Axiom opinion, spanning 247 (!) pages with over 110 pages of factual narrative and 866 (!) foot­notes, provides an impressive survey of scholar­ship about Material Adverse Change clauses and Material Adverse Effect [or Event] definitions. Axiomsupra, text accompanying nn.521-68. )

{ 0 comments }

Massachusetts non-compete restrictions take effect

See this analysis at the Trading Secrets blog by Dawn Mertineit, Erik Weibust and Katherine Perrelli.

In case you wondered what notwithstanding really meant ….

In an October 1 decision, the Seventh Circuit provided helpful citations sup­port­ing the common understanding of the term notwithstanding as meaning:

… without prevention or obstruction from or by; in spite of, despite, and it implies the presence of an obstacle … notwithstanding, in essence wipes out anything to the contrary[.]

Soarus L.L.C. v. Olson Mat’ls Int’l Corp., No. 18-1144, slip op. at 5 (7th Cir. Oct. 1, 2018) (cleaned up), citing, inter alia, N.L.R.B. v. SW General, Inc., 137 S. Ct. 929, 939 (2017) (in the context of interpreting a statute).

What it takes for a forum selection provision to be exclusive

A recap from the U.S. district court in Oregon:

 If the text of the forum selection clause is mandatory, courts must enforce the clause, absent exceptional circumstances, and venue will lie in the chosen forum only.

To be mandatory, a forum selection clause must contain wording suggest­ing that the parties intended to designate the specified forum as the ex­clu­sive forum. When the forum selection clause specifies only one permissible jurisdiction, however, the clause [i.e., exclusivity] will generally not be en­forced without some further language indicating the parties’ intent to make jur­isdiction exclusive.

In other words, a forum selection clause is permissive when it merely shows that the parties have consented to jurisdiction in a particular locale, but does not preclude litigation elsewhere.

Summit Foods, Inc. v. Viking Packaging Technologies, Inc.,  No. 3:18-cv-1470-SI, slip op. at 4 (D. Ore. Sept. 28, 2018) (denying defendant’s motion to dis­miss or transfer venue) (cleaned up).

The forum-selection provision in question was the following:

The courts of Sheboygan County Wisconsin will have jurisdiction to en­ter­tain and determine all disputes and claims both at law and in equity arising out of or in any way connected with the validity, existence, enforceability, con­­struc­tion, breach or alleged, threatened or anticipated breach of this Con­tract, to which the parties admit to having personal jurisdiction over them.

Id. at 6. The court held that this language didn’t go far enough to require that litigation be held in Sheboygan County.

{ 0 comments }

In May of this year, the UK Supreme Court rejected the old “Cardozo Rule,” which held that, even if a contract contained an amendments-in-writing or waiv­ers-in-writing clause, a party to the contract would still be free to claim that the writing requirement was orally waived and therefore an oral variation was enforceable. [1]  The court’s holding might embolden contract drafters to choose English law to govern an am­end­ments-in-writing or waivers-in-writing clause while ex­press­ly- or im­pli­cit­ly choosing a different law for the rest of the contract.

[1] Rock Ad­ver­t. Ltd v MWB Bus. Ex­ch. Ctrs. Ltd, [2018] UKSC 24 (Sump­ton, L.), dis­agree­ing with Beatty v Gug­gen­heim Ex­plor­a­tion Co., 225 N.Y. 380, 387-88 (1919) (Cardozo, J.).  Hat tip: Rachael Clem­ents and Aimee Donaldson, No Oral Modification Clauses – Firmly Set In Stone (Sept. 27, 2018).

The old Cardozo Rule: “No oral modification” clauses don’t count

Courts have sometimes held that at common law, parties are free to orally amend or waive a con­tract provision (subject to any applicable requirements of the Statute of Frauds), even if the contract expressly states that all amend­ments and waivers must be in writing.  Courts sometimes quote something that then-Judge (later Justice) Cardozo said in a 1919 New York case:

Those who make a contract, may unmake it. The clause which forbids a change may be changed like any other. The prohibition of oral waiver may itself be [orally] waived. Every such agreement is ended by the new one which contradicts it … What is excluded by one act, is restored by another. You may put it out by the door, it is back through the window. Whenever two men contract, no limitation self-imposed can destroy their power to contract again.

Beatty v Guggenheim Exploration Co., 225 N.Y. 380, 387-88 (1919), quoted in Israel v. Chabra, 12 N.Y.3d 158, 163-64 (2009) (emphasis added, internal citations and quotation marks omitted).

(Some statutory provisions expressly validate no-oral-variation clauses; see the commentary to the Common Draft amendments-in-writing clause.)

The UK Supreme Court rejects the Cardozo Rule

In Rock Advertising, the UK Supreme Court quoted the Cardozo Rule in its sur­vey of laws governing no-oral-variations clauses in contracts. Id. at ¶¶ 7-9.  The court concluded, however, that “the law should and does give ef­fect to a con­tractual pro­vi­sion requiring spe­cified formalities to be ob­served for a var­iation.” Id. at ¶ 10 (emphasis added). Lord Sumpton branded as “a fal­la­cy” the rat­ionale that the importance of party autonomy precludes parties from “validly bind[ing] them­selves as to the man­ner in which future chan­ges in their legal relations are to be achieved”; he noted that:

  • by entering into a contract in the first place, the parties are limiting their future autonomy to a certain extent; and
  • “There are many cases in which a particular form of agreement is pre­scribed by statute …. There is no principled reason why the parties should not adopt the same principle by agreement.”

Id. at ¶ 11.

The judge explained why no-oral-variation clauses can make business sense:

There are at least three reasons for including such clauses.

The first is that it prevents attempts to undermine written agreements by in­form­al means, a possibility which is open to abuse, for example in raising de­fen­ces to summary judgment.

Secondly, in circumstances where oral discussions can easily give rise to mis­­understandings and crossed purposes, it avoids disputes not just about whe­ther a variation was intended but also about its exact terms.

Thirdly, a measure of formality in recording variations makes it easier for corp­­orations to police internal rules restricting the authority to agree them.

These are all legitimate commercial reasons ….  I make these points be­cause the law of contract does not normally obstruct the legitimate in­ten­tions of businessmen [sic], except for overriding reasons of public policy. Yet there is no mischief in No Oral Modification clauses, nor do they frustrate or contravene any policy of the law.

Id. at ¶ 12 (emphasis and extra paragraphing added).

For additional com­men­tary on the Rock Advertising case, see Glenn D. West, Cognitive Dissonance in the Common Law of Contracts: Oral Mod­i­fi­ca­tions to Written Agreements that Purport to Invalidate Oral Modi­fi­ca­tions  (May 29, 2018).

So: Choose English law to govern no-oral-variations clauses?

A bold American contract drafter might want to try to take advantage of the Rock Advertising holding by using a targeted, single-clause choice of law, per­haps along the lines of the following language:

The parties expressly agree that this provision [OP­T­IONAL: but no other] is to be interpreted and applied in ac­cord­ance with English law as announced in Rock Ad­ver­t. Ltd v MWB Bus. Ex­ch. Ctrs. Ltd, [2018] UKSC 24.

After all: Choice-of-law clauses are widely used and readily enforced in the United States (unless the choice of law offends some public policy of the forum state), as discussed in the commentary to the Common Draft gov­ern­ing-law provision.

It might seem strange for a contract to specify different choices of law to gov­ern dif­fer­ent clauses of the contract.  But conceptually this isn’t unheard of:

  • In the 1988 update to the Restatement (Second) of Conflicts of Laws, comment i to § 187 states in part that “the parties may choose to have different issues involving their con­tract governed by the local law of dif­fer­ent states.”  The comment cites  Kronovet v. Lipchin, 288 Md. 30, 415 A. 2d 1096 (1980), in which loan docu­ments for a real-estate project ad­opt­ed local Maryland law for interest- and usury issues but New York law for others.
  • In its Akorn decision earlier this week, the Delaware chancery court ob­served: “At­ten­t­ive readers will have noted that none of the parties to the Mer­ger Agree­ment is a Delaware entity. … The parties nevertheless chose Delaware law to gov­ern the Mer­ger Agreement (excluding internal affairs matters gov­erned by Lou­i­si­a­na law) and selected the courts of this state as their ex­clu­sive forum for litigation.” Akorn, Inc. v. Fresenius Kabi AG, No. 2018–0300–JTL, slip op. at 11 n.14 (Del. Ch. Ct. Oct. 1, 2018).
  • The EU’s Rome I Regulation on contractual obligations states in Article 3.1 that “… By their choice the parties can select the law applicable to the whole or to part only of the contract.”
  • An international contract might specify that it is to be governed by the laws of, say, Brazil, but that any arbitration is to be “seated” in England, which might well mean that the arbitration pro­ceed­ings would be gov­erned by Eng­lish law.  That was precisely the holding of an English court in Sul­america CIA Nacional De Seg­ur­os SA & Ors v Enesa Engenharia SA & Ors, [2012] EWCA Civ 638, dis­cussed in Sherina Petit and Marion Edge, The gov­ern­ing law of the arb­i­tra­tion agree­ment Q&A, in Norton Rose Ful­bright, Int’l Arbitr. Rpt. 2014 – issue 2.  I also seem to re­member seeing (but can’t lay my hands on) at least one contract that ex­press­ly speci­fied one country’s law to govern the contract but another country’s law to govern arbitration proceedings.
  • Domestic contracts often specify that the substantive law of a particular jur­is­dic­tion will apply — which implicitly leaves in place the procedural law of the for­um state — or they might specify a jurisdiction to provide both sub­stantive and procedural law, although a court might not honor a choice of procedural law.   See generally (the extremely-useful) John F. Coyle, The Canons of Con­struc­tion for Choice of Law Clauses, 92 Wash. L. Rev. 631, 648-55 (2017).  When a contract requires that amendments and waivers be in wri­ting, it like­wise amounts to a choice of procedural rules.

What grounds might exist for disregarding such a choice of law?

A clause-specific choice of law is unlikely to work when the clause in question offends a public policy of the forum state.  See the examples in the com­ment­ary to the Common Draft governing-law clause.  As the Rock Ad­ver­ti­sing court notes, however, it’s not as though a no-oral-variation clause would offend pub­lic policy.

One more possible concern:  What if neither the parties, nor the subject of the con­tract, had anything to do with Eng­land — would that dissuade a U.S. court from applying English law?  Probably not:  The parties’ joint desire for a neu­tral, well-established law such as that of New York, Delaware, or England would likely be honored as an “oth­er rea­son­able basis for the parties’ choice.” Restatement (Second) of Con­flicts of Laws, § 187(2)(a) (1971).

Compare the related subject of choice of forum, where the Supreme Court said:

Not surprisingly, foreign businessmen prefer, as do we, to have disputes re­solved in their own courts, but if that choice is not available, then in a neu­tral forum with expertise in the subject matter. Plainly, the courts of Eng­land meet the standards of neutrality and long experience in admiralty litiga­tion. The choice of that forum was made in an arm’s-length negotiation by ex­per­i­enced and sophisticated businessmen, and absent some com­pel­ling and countervailing reason it should be honored by the parties and en­forced by the courts.”

The Bremen v. Zapata Off-Shore Co., 407 US 1, 11-12 (1972).  Similar con­sid­er­ations would seem to favor allowing parties to choose a neutral, established law to govern their contract, even when they have no other connection to the jurisdiction of that law.

Proving oral waiver of the choice of English law could be tricky

Suppose that a contract chose English law for the amendments- and waivers-in-writing clauses.  Even so, a contracting party, following Beatty, might still try to claim that the parties had orally agreed to amend or waive, not just the par­tic­­u­lar pro­vision in dispute, and not just the writing requirement, but also the English choice of law.  Imagine the opening statement at trial:  Ladies and gen­tle­men of the jury, the landlord and my client, the tenant, orally agreed to three things:  That the landlord would reduce the monthly rent; that the lease’s no-oral-modifications clause was waived; and the lease’s choice  and the lease’s choice of English law for that requirement was also waived.”  Many judges and jurors would rightly be skeptical of such an argument.

Question to readers: What other contract clauses might benefit?

I’d welcome any suggestions as to any other contract provisions that might benefit from a clause-specific choice of law.

Acknowledgements

Many thanks to Professor John F. Coyle and noted corporate lawyer Glenn D. West for their input; any errors and/or inanities are of course mine alone.

{ 0 comments }

I’ve been having issues with the email plugin that I use to let subscribers know about new posts. I tried an alternative but it’s not especially satisfactory, so I’ve switched back to the old plugin.  (I think the issues might be fixed now; apologies to any subscribers who were inconvenienced.)

Anyway, I published a post today that didn’t have an email announcement; it’s on how patent-infringement warranties and indemnity obligations are like hurricane insurance, with pro tips for negotiators.

{ 0 comments }

On Contracts is Stephen Fry proof thanks to caching by WP Super Cache