Adapted from one of the occasional emails about real-world situations that I send to my Contract Drafting students.
Here’s something to keep in mind in drafting a contract: Will your client remember to comply with an infrequently-occurring obligation?
1. Maybe once per year or so, I get asked to consult with a company in a field in which I have some expertise. This is via a national organization that has me on their roster of outside consultants; they seem to have a blue-chip clientele, although you’ve probably never heard of them. I’d not heard of them myself before they contacted me to do my first consultation.
This organization recently emailed its consultants with an update to its terms and conditions. In reviewing the revised T&Cs, I noticed the following representation:
You represent that you have not been:
- accused or convicted of, plead guilty to, or admitted committing, a felony or any offense involving dishonesty or deception (e.g., theft, fraud, etc.);
- sued for theft of corporate assets, fraud, breach of a confidentiality or non-disclosure agreement, breach of fiduciary duty, or any similar action;
- subject to an order, judgment, action, or investigation of a court or any national or state regulatory or self-regulatory organization, such as the SEC or FINRA, relating to a violation of securities laws or an accusation of civil or criminal fraud or deceptive practices; or
- named on the Excluded Parties List System (now consolidated at SAM.gov) maintained by the U.S. General Services Administration, the Specially Designated Nationals list maintained by the U.S. Department of Treasury’s Office of Foreign Assets Control, or any other similar list maintained by the U.S. or other nation or NGO.
While [the organization] reserves the right to verify this independently you agree to notify [the organization] immediately if your status changes with respect to any of these representations. [Emphasis added.]
2. QUESTION: Because I only rarely do any consulting work for this organization, they’re not top-of-mind for me — so if I were to have such a change of status, how likely is it that I’d remember to notify them as required by their T&Cs?
3. But then how to manage my life to ensure compliance? One way might be to maintain some kind of list of clients and others who must be notified of various triggering events, and then review the list every so often to see if any triggering events have occurred. (For a “notify immediately” type of obligation, daily checks of might be necessary.)
Personally, I can solve this problem by using the docket of upcoming client deadlines that I maintain: I’ll just install a recurring reminder of this contract obligation.
4. But suppose I didn’t do that — could I be successfully accused someday of “fraud in the inducement” for agreeing to this contractual commitment when I had no intention (the accuser would say) of honoring it? I say no, because:
a. I can’t imagine that I’d ever have a status change of this type and so I’d never be in breach for failing to notify the organization; and
b. Even if I did have such a status change and didn’t think to notify the organization, the resulting foreseeable damages to the organization from the putative breach are likely to be nil (for the same reason, namely that I only rarely do any work for them).
In that regard, it’s significant that the T&Cs don’t call for me to indemnify the organization for damages resulting from my breach; that would make me responsible for all damages to the organization arising from a breach even if the damages were not foreseeable. (Recall that we discussed this in class recently.)
5. A similar problem can arise in connection with a most-favored-customer clause, which we also discussed in class recently. Suppose that a vendor were to agree to a most-favored-customer clause in a contract, and that the MFC clause contained a “continuing” obligation like that of a General Services Administration (GSA) contract. The vendor must now put in place some sort of cross-checking process to make sure that it does not grant any other customer a more-favorable deal than it granted to the MFC customer. That can be time-consuming, burdensome, and expensive.