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Surreptitious Contract Changes II

This weekend I posted a clause with a representation that no unmarked changes had been made to a contract, to provide a reasonable basis for signing the electronically-negotiated contract without reading the final hard copy. Today, in a very thoughtful commentary on his Corporate Law Blog, Mike O’Sullivan offers a more rigorous clause that contains both a representation and a warranty, “to also cover all redlining failures (intentional or unintentional) and to make it easier to reform the agreement under the doctrines of mutual or unilateral mistake:”

No Unidentified Changes. Each party represents and warrants that each version of this agreement distributed by such party to the other party clearly identifies each change (other than minor non-textual changes in formatting) in the version from the prior version distributed from one party to the other, with the full text of each addition being double-underlined and the full text of each deletion being struck-through. Each party acknowledges that, when such party distributed changes to this agreement, the other party was entitled to rely on the drafting party’s identification of changes without further investigation. If the drafting party fails to identify any changes, the drafting party is deemed to have intentionally failed to identify those changes and this agreement shall be reformed, at the non-drafting party’s option, to omit any unidentified additions or include any unidentified deletions made by the drafting party. For purposes of this section, any drafting action taken by a party’s counsel or other advisors shall be deemed to have been taken by the party

This would be a great clause for deals such as the M&A work that Mike does, particularly where the parties aren’t trying to establish a long-term relationship. (For that kind of contract, however, I think I would probably continue to read carefully the final, hard-copy document, just as he does.)

The clause I posted is designed for higher-volume, long-term-relationship work such as software license agreements. It balances some competing considerations with the intent of trying to get sales deals closed while still providing acceptable legal protection.

The clause includes a representation, not a warranty; that was intentional. Let me outline some of the thinking that went into the specific wording of the clause — please feel free to shoot at it.

At the end of a fiscal quarter, when a lot of sales contracts are in negotiation at once, negotiator time is a scarce resource that has to be used economically. You want to provide as much legal protection for your client as practicable, but as the clock runs down on the quarter, you also want to try to timely get the customer’s ink on the signature line.

The customer’s contract negotiator also has limited time, and might not be a lawyer. The last thing your sales people want is for the negotiator to get nervous about your language and, taking the path of least resistance, to put your deal aside until next quarter.

In my experience, a representation clause comes across as “softer” than a warranty clause, and is less likely to trigger a visceral objection from the other side.

Theoretically, a representation has different legal consequences than a warranty. But in many vendor-customer situations — particularly longer-term, high-dollar relationships such as some software license agreements — the differences likely will be academic:

  • High-dollar vendors are keenly interested in preserving their customer relationships if at all possible — they generally don’t want to file a lawsuit against a customer except as a last resort.
  • If a customer were unintentionally to make a material change in the contract without marking it, the odds are high that the vendor and customer would try to work things out amicably. In that situation, the mere existence of the representation clause would bestow a fair degree of moral- and bargaining leverage on the vendor. (It’s something I could go to my counterpart with and ask, “can’t we do something about this?”)
  • Whether the change in the contract was truly unintentional might well come down to the credibility of the customer’s witnesses — not a comfortable situation for the customer to be in. As Mike points out, if a jury were to conclude that a customer had deliberately sneaked in a material unmarked change in the contract, that likely would be fraud under my clause, giving rise among other things to the possibility of punitive damages. That likely would give the vendor even more bargaining power in negotiations to fix the contract wording.

So, on balance, for high-volume, high-dollar, long-term agreements, I prefer a simple representation that the customer is likely to accept readily, over a more-complete warranty-and-reformation clause that might require more time for customer legal review. That won’t be the case in for all situations — and for an M&A deal, a clause like Mike’s could well be superior — but it seems to work well in a lot of cases.

Thanks to Mike for his response.

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  • Corp Law Blog 2003-09-30, 9:12 am

    Corp Law 101: Substance Over Forms

    In “Contract Etiquette and Hiding the Ball” yesterday I discussed an issue posed by D.C. Toedt in his By No Other blog: how to deal with the possibility that the other side slipped an unidentified change into a contract. D.C….