It's extremely common for services agreements to separate the "technical" details of a services contract in a statement of work.

Caution: Some contract reviewers make the mistake of ignoring statements of work, on the sometimes-mistaken assumption that only "technical" information is to be found there. It's a worthwhile exercise for a contract drafter or reviewer (here, "reviewer") at least to glance through any statement of work, because:

• the reviewer will be better able to negotiate the terms and conditions if she has some idea of the technical details; and
• perhaps unconsciously — or perhaps not unconsciously — the other side's drafter might have included important "legal"-type terms and conditions in the statement of work, in the hope that the contract reviewer might overlook them.

This section is intended to rule out claims by a contractor that a customer implicitly guaranteed that the contractor would get X amount of work. This was litigated in a case by a small contractor against, I believe, IBM; if memory serves, IBM won the case on summary judgment, but it still had to defend against the claim. (Unfortunately I can't find a citation.)

Both parties often want to require that changes to statements of work must be in writing, but it's not clear that a court would enforce it – see the discussion in the commentary to CD-24.1.1. Amendments in Writing.

This provision states that each statement of work is a separate agreement. In contrast, some services contracts purport to incorporate each statement of work into the "main" agreement, so that each statement of work becomes part of the main agreement. This is unwise, in my view, because:

• a default in one statement of work could affect other statements of work (this is sometimes referred to as "cross-default"); and
• if the vendor's liability for damages were to be capped at "the amounts paid under the Agreement," then that amount would grow over time as more statements of work were completed; the customer might like that just fine, but the vendor likely wouldn't be wild about the idea.

Not without reason, some corporate legal departments want to maintain tight control over contract-related documentation; they don't want statements of work — which might not be reviewed by "Legal" and could raise all kinds of legal issues — to supersede the contract provisions. (To paraphrase a private remark by a lawyer who shall remain nameless, I keep trying to make my master services agreements idiot-proof, but they keep making better idiots.)

That approach, though, can conflict with the way parties actually do business and could delay getting things done.

This provision attempts a compromise, namely to allow a statement of work to override the terms of a master agreement — but the parties must be explicit about it.

Some companies are reluctant to allow electronic signatures for statements of work — because of the wide variety of communications that might qualify as "signatures," for example, emails — and instead prefer to require "wet ink" signatures on paper.

It's not unusual for a customer to "pull the plug" on a statement of work if the provider isn't getting the job done. In that situation, the customer likely will want to get as much finished- and partially-completed work product as it can, so that the customer will have the option of getting someone else to finish the job.

Subdivision (c) is likely to be important to a customer that "pulls the plug" because of (alleged) poor performance by the provider.

Drafters should consider requiring that disputes about amounts due must be resolved using CD-22.2.11. Baseball Arbitration Procedure.

In the alternative, drafters might wish to consider one or more of the following:

• Change receipt of a correctly-stated invoice to the date of a correctly-stated invoice (which would give the payer less time to make a timely payment).
• Specify a discount for early payment, e.g., 2/10 net 30.
• Require payment by check; certified check; cashier's check; wire transfer or ACH to a bank account specified in writing by the payee; or, immediately-available funds.
• specify that any check must be drawn on a U.S. bank, or a bank reasonably acceptable to the payee.

For an example of very customer-biased payment terms, see section 13 of a Honeywell purchase order form, which provides not only for net-120-day terms, but for payment not even to be scheduled until then.

Occasionally, a customer's accounts-payable people will wait until the last minute to raise a payment dispute, which could restart the clock and delay the payment obligation still more.

The idea for this provision came from a services contract form used by a large company in the oil-and-gas industry.

Expense-reimbursement provisions are typically seen in, for example, services agreements, in which the Incurring Party might be a services provider or a subcontractor; the Reimbursing Party might be the customer of a services agreement, or possibly a prime contractor that must reimburse a subcontractor for the latter's expenses.

In sub­div­i­sion (b), note the "reasonable" and "actually incurred" qualifiers.

See also:

• CD-17.1.1. Payment Terms
• CD-17.3.   Invoice Requirements

Many contracts prohibit marking up of expenses, but some contracts are "cost-plus."

Customers' various expense-reimbursement policies are sometimes an administrative pain for providers, but they're often a practical necessity, especially for large corporate customers that by law must comply with internal-controls requirements. • A customer might or might not want to impose a specific written-reimbursement policy at the time of contracting, while leaving that option open for the future.

This will be overkill for many relationships, but some reimbursing parties might want this language so as to keep very-tight control over reimbursable expenditures.

Sub­div­i­sion (a): The Direct Billing Threshold Amount has in mind that, as a matter of prudent cash-flow management, a service provider or other contract party might want its customer to "front" significant reimbursable expenses.

Sales-tax provisions are common in supply agreements and services agreements.

See generally:

• Ad valorem tax (Wikipedia)
• Consumption tax (Wikipedia)
• Excise tax (IRS.gov)
• Sales tax (Wikipedia)
• Sales and Local Tax Rates in 2015 (TaxFoundation.org) (extensively footnoted)
• Value-added tax (Wikipedia)

Determining just where sales taxes must be paid can be a non-trivial task. The issue has drawn major attention from taxing authorities in the age of Amazon.com and other Internet sellers. In supply- and services agreements, customers often want suppliers to take on this responsibility.

See also:

• CD-25.85. Taxing Authority Definition
• CD-17.3.   Invoice Requirements

Provisions like this are not uncommon in supply- and services agreements. On the other hand, though, in some transactions the price might be "grossed up" so that the amount received by the payee, net of all taxes, is a stated amount.

Customers sometimes ask for sales-tax indemnity provisions in supply- and services agreements.

As with any indemnity obligation, a would-be protected party should check whether the indemnifying party has the financial assets with which to meet the obligation; if not, the protected party should consider including a requirement that the indemnifying party carry suitable insurance coverage.

The default definitions of Guarantor, Creditor, etc., are designed to give contract drafters additional flexibility: they allow a drafter to incorporate this provision by reference without having to worry about using the exact defined terms verbatim. For example, a contract drafter representing "Alice" in a negotiation with "Bob" could say, in the draft contract, "Buford guarantees Bob's payment obligation to Alice in accordance with the Common Draft   Guaranty."

Only payment obligations are guaranteed here; that's because guaranties of performance of other types of obligation (for example, an obligation to perform consulting services, repair work, building construction, etc.) might well require considerably-more negotiation and customized language.

Drafters representing guarantors will want to be careful to define just which payment obligations are being guaranteed. A bit of an oddball case on this point was McLane Foodservice, Inc. v. Table Rock Restaurants, LLC, 736 F.3d 375 (5th Cir. 2013) (affirming district-court judgment in favor of alleged guarantor):

• A restaurant company, Table Rock, went out of business owing a food-service company, McLane Foodservice, some $447,000.
• McLane Foodservice apparently noticed that nearly 14 years earlier, the treasurer and 40%-owner of the Table Rock restaurant company had signed a personal guaranty of the debts of another restaurant company, Border Patrol, to a division of PepsiCo.
• In the interim, the PepsiCo division had sold its assets to another company, Ameriserve, which later filed for bankruptcy protection and sold its assets to McLean Foodservice, which presumably had the treasurer's signed guaranty in the files it inherited.
• Importantly (at least to the courts), the PepsiCo division never extended credit to the Table Rock restaurant company; it was McLane Foodservice, PepsiCo's successor-twice-removed, that did so.

Both the trial court and the appellate court held that the treasurer's guaranty, by its terms, covered only debts to the PepsiCo division — and because Table Rock had never incurred any such debts, its treasurer wasn't liable to McLane Foodservices under the guaranty.

The appellate court's opinion didn't even mention that, judging by the facts recited in the opinion, Table Rock's treasurer apparently had not guaranteed Table Rock's debts — his guaranty, from nearly 14 years before, was for the debts of the Border Patrol restaurant company, which had no evident connection to Table Rock. (If those were indeed the facts, then I'm surprised that McLane Foodservices' counsel wasn't sanctioned by the court for bringing a frivolous lawsuit against the treasurer.)

LESSON: Leaving aside the problem mentioned in the previous paragraph, the guaranty in McLane Foodservices could have recited that the guaranty covered all credit extended to the by the PepsiCo division and by PepsiCo's successors and assigns.

Some of the language of this provision is informed by the language of the guaranty in suit in Knauf Insulation, Inc. v. Southern Brands, Inc., No. 15-3157, slip op. at 2 (7th Cir. May 3, 2016) (affirming judgment that guarantors were liable for guaranteed payment obligations) (Posner, J).

Sub­div­i­sion (c): The "in consideration of" language is included because otherwise a court might hold a guaranty to be unenforceable. The required consideration might well be the guarantor's desire to support the creditor — but not always. EXAMPLE: In Yellow Book, Inc. v. Tocci, 2014 Mass. App. Div. 20 (2014), a company's bookkeeper signed an order for ad space in a Yellow Pages phone book; unhappiily for her, she didn't read the fine print, which contained a statement that she personally guaranteed payment. A court held that she was not liable on the guaranty, because she had received no consideration for it. See id. at 22-23. The case is discussed in Robert W. Stetson, Four Tips for Drafting Enforceable Personal Guarantees, in (BNA) Corporate Counsel Weekly Newsletter, Apr. 9, 2014, which includes numerous case citations.

Sub­div­i­sion (d): A forum-selection provision much like this one was readily enforced by the Seventh Circuit in the Knauf Insulation case, even though the guarantors purportedly did not have "minimum contacts" with the selected forum; the court remarked that the guarantors "didn't have to have any contacts" with that forum. See slip op. at 3 (citing cases; emphasis in original).

Many guaranty clauses include waiver-of-acceptance and waiver-of-signature language, even though such language might very well merely duplicate applicable law. See, e.g., US Bank Nat'l Ass'n v. Polyphase Elec. Co., No. 10-4881 (D. Minn. Apr. 23, 2012): In that case, the court granted granted summary judgment that a bank was entitled to enforce guaranties of loans made by the bank, even though the bank had not signed the guaranty documents.

Language similar to that of this clause was used in clause 4 of the guaranty in Eagerton v. Vision Bank, 99 So. 3d 299, 305 (Ala. 2012). See also CD-22.3.1. Attorney Fees to Prevailing Party.

If a principal of a guaranteed payment obligation were to file for bankruptcy protection (under U.S. law), then the obligation's creditor might be forced to return any payments that were made by the principal within the 90 days preceding the bankruptcy filing date. Such payments are known as "avoidable preferences." See generally, e.g., Patricia Dzikowski, The Bankruptcy Trustee and Preference Claims (Nolo.com; undated); see also the guaranty language in Cooperatieve Centrale Raiffeisen-Boerenleenbank, B.A. v. Navarro, 2015 NY Slip Op 4753, at part I.

A creditor in bankruptcy has the right to contest its obligation to refund an avoidable preference. That can be difficult, though; the creditor must successfully jump through some hoops to prove that it was entitled to the payment. See generally, e.g., Kathleen Michon, Pre-Bankruptcy Payments to Creditors: Can the Trustee Get the Money Back? (Nolo.com; undated).

As a practical matter, many avoidable-preference cases are settled, with the creditor making a partial refund in lieu of incurring the expense of jumping through those proof hoops. In such a situation, if the original obligation had been guaranteed, then the creditor likely would want to try to recoup the partial refund from the guarantor.

"Courts have uniformly held that a payment of a debt that is later set aside as an avoidable preference does not discharge a guarantor of its obligation to repay that debt." Coles v. Glaser, No. A145642, slip op at 5 (Cal. App. Aug. 11, 2016) (extensive citations, internal quotation marks, and alteration marks omitted).

This language is based on that of the guaranty in Eagerton v. Vision Bank, 99 So. 3d 299, 309 (Ala. 2012); see also the similar language of the guaranty in Cooperatieve Centrale Raiffeisen-Boerenleenbank, B.A. v. Navarro, 2015 NY Slip Op 4753, at part I.

This waiver language is adapted from California Civil Code § 2856(c) and (d).

The use of bold-faced type is for conspicuousness.

The phrase "will not assert" is designed to make it a breach of contract — for which attorney fees might be recoverable as damages — for a guarantor to make any of the listed assertions.

Sub­div­i­sion (2): Some of the listed items are based on those of the respective guaranties in:

• Eagerton v. Vision Bank, 99 So. 3d 299, 309 (Ala. 2012); and
• Cooperatieve Centrale Raiffeisen-Boerenleenbank, B.A. v. Navarro, 2015 NY Slip Op 4753, at part I.

Sub­div­i­sion (3): The "setoff" language is not uncommon; see, e.g., the guaranty in suit in Moayedi v. Interstate 35/Chisam Road, LP, 438 S.W.3d 1, 3 (Tex. 2014) (affirming that guarantor's waiver of defenses negated statutory right of offset).

After sub­div­i­sion (5), some drafters might wish to consider adding: Each Guarantor also waives any defense to liability that could be asserted by any Payer in respect of the Guaranteed Payment Obligation.

It's a really good idea for drafters (and reviewers) to be clear about the extent to which multiple guarantors are to be jointly and severally liable for the guaranteed payment obligation(s). In a given transaction, for example, Alice might guarantee the obligations of Alan, and Bob might guarantee the obligations of Betty, but not vice versa — that is, Alice does not guarantee Betty's obligations nor does Bob guarantee Alan's obligations.

Sub­div­i­sion (a): See the notes accompanying CD-17.10.11.   Reasonable Collection Efforts.

An "absolute and unconditional" guaranty is likely to be enforced even in what might seem like unfair circumstances such as collusion between the lender and the principal. For an example of this, see the decision by the Court of Appeals of New York (which is that state's highest court) in Cooperatieve Centrale Raiffeisen-Boerenleenbank, B.A. v. Navarro, 2015 NY Slip Op 4753. In that case, a guarantor sought to avoid liability as provided under an "unconditional and absolute" guaranty in favor of plaintiff, on grounds that the default judgment against the guarantor was obtained by the plaintiff's collusion. The court of appeals concluded that the plaintiff's collusion claim constituted a defense, and therefore was barred by the express language of the guaranty. (The court of appeals also concluded that the guarantor's claim of collusion was contradicted by the record.) See id., slip op. at 1-2.

The intent of this provision is to override the general rule — which is strictly applied by courts — that "a guarantor is discharged if, without his or her consent, the contract of guaranty is materially altered." Eagerton v. Vision Bank, 99 So. 3d 299, 305-06 (Ala. 2012) (holding that modification of loan discharged guarantors from further obligations) (citations, quotation marks, and alterations omitted); accord, Sterling Development Group Three, LLC, v. Carlson, 2015 N.D. 39 (affirming holding that guaranty was discharged by alteration of guaranteed obligations without guarantor's knowledge or consent) (citing state statute). For an example of clause language like this, see the guaranty in Cooperatieve Centrale Raiffeisen-Boerenleenbank, B.A. v. Navarro, 2015 NY Slip Op 4753, at part I.

Creditors will typically object to this language; they normally want to be able to go after guarantors immediately to get their money, as opposed to incurring the delay, burden, expense, and uncertainty of first having to file suit against their debtors.

In some transactions a cap on Guarantor liability might be a possible negotiation point.

Negotiators can consider attaching other conditions and limitations to guaranty obligations. For example, a guaranty for a lease agreement might state that the landlord cannot proceed against the guarantor before the landlord has exhausted all possible avenues of collection against the tenant, including obtaining a judgment against the tenant (this is known as a guaranty of collection).

This language is set up in generic terms with a view to having this provision be serviceable even if a drafter doesn't fill in deal-specific details..

Permissible Auditors: Contract-negotiation consultant and author John Tracy suggests (in a LinkedIn discussion thread) that an auditing party should consider agreeing in advance that, if it wishes to audit the recordkeeping parties books and records, the auditing party will engage the outside CPA firm that regularly audits the recordkeeping party's books anyway. John says that this should reduce the cost of the audit and assauge the recordkeeping party's concerns about audit confidentiality; he also says that "the independent CPA will act independently rather than risk the loss of their license and accreditation and get sued for maipractice."

In some cases involving multiple parties to a contract, a recordkeeping party might want to defined Auditing Party to include only selected other parties.

The "cause" language has in mind that:

• An auditing party might not want to bear the expense of having an outside auditor do the job, and instead might prefer to send in one of its own employees to "look at the books";
• On the other hand, a recordkeeping party might not want the auditing party's own personnel crawling around in the recordkeeping party's records, but might be OK with having an outside accountant (or other independent professional) do so.

A recordkeeping party might want the absolute right to veto the auditing party's choice of auditors, instead of having the right to give reasonable consent. On the other hand, the auditing party might not trust the recordkeeping party to be reasonable in exercising that veto, and could be concerned that a dispute over that issue would be time-consuming and expensive. This provision represents a compromise.

An auditing party might want to add that consent is deemed given if the recordkeeping party doesn't object in writing within X days after receiving or refusing the auditing party's written proposal of an auditor.

Sub­div­i­sion (a): An auditing party probably would not want a recordkeeping party to just print out its electronic records on paper and deliver them to the auditors; in all likelihood, that would significantly increase the cost of the audit. See Ryan C. Hubbs, The Importance of Auditing In An Anti-Fraud World — Designing, Interpreting, And Executing Right to Audit Clauses For Fraud Examiners, at 4 (Assoc. of Certified Fraud Examiners 2012).

A party agreeing to an audit clause might want to restrict the auditor's access to the facilities, computers, etc., of the party being audited. For example, software vendors often include audit provisions in their license agreements, to allow a vendor to audit a customer's use of the software to confirm that all such use is appropriately licensed (and paid for). A software vendor's audit clause might allow the vendor to access the customer's computer systems, but the customer might not want this, especially if the customer is in a sensitive industry such as finance or health care. A possible compromise might be to allow a third-party auditor to have limited access to computer systems, etc., under a strict confidentiality agreement. (Hat tip: Christopher Barnett, Top Three Revisions To Request In Software License Audit Clauses (ScottAndScottLLP.com 2015).)

Sub­div­i­sion (b): Audits sometimes happen after business relationships start to turn sour. In situations like that, it's not unheard of for recordkeeping parties' personnel to be uncooperative. So, it can help to lay out ground rules for what might otherwise be an unfriendly episode.

Subdivision (b) (interest charges): Drafters should be very careful about usury laws, which can have real teeth.

CAUTION: If an agreement is going to provide for charging interest on past-due amounts apart from an audit provision, then that interest provision probably should be separate from the audit provision. In the 2014 Cellport case, a contract drafter's failure to keep the two provisions separate resulted in a contract plaintiff's winning the case, but receiving a much-lower interest rate than was called for by its contract. See Cellport Sys., Inc. v. Peiker Acustic GmbH & Co., KG, 762 F.3d 1016, 1028-29 (10th Cir. 2014).

Sub­div­i­sion (1): The discrepancy revealed by the audit must exceed the stated threshold percentage for the period being audited. That will help to avoid unfair expense shifting if, say, a discrepancy for a single month was discovered in an audit for five years' worth of records. In that kind of situation, the Recordkeeping Party argably shouldn't have to foot the bill for the entire five-year audit; on the other hand, neither should the Recordkeeping Party necessarily escape the consequences of the ten-percent discrepancy in that one month. The language of this provision represents a compromise position.

Subdivision (1)(A): The threshold for shifting audit expenses might well be negotiable, often falling in the range between 3% and 7% for royalty-payment discrepancies and perhaps in the range of 0.5% for billing discrepancies in services.

Sub­div­i­sion (2): Consider also CD-18.2.21.   Recordkeeping Party Expenses.

This provision reminds drafters that in an unfriendly audit, the recordkeeping party might try to demand that auditable records be produced for audit at a location not desired by the auditing party, or vice versa.

In some contracts it might be desirable for the audit provision to specify either (1) an agreed location for audits, or (2) if a specific location can't be satisfactorily determined in advance, an agreed procedure for determining the location if the parties are unable to agree on one. (This is an example of the truth that if parties can't agree in advance on an outcome – possibly because one or more of them simply doesn't know what outcome they want – then perhaps they can agree on a process for determining the outcome when the circumstances arise.)

This clause excludes from auditing any information that is subject to the attorney-client privilege and any other applicable privilege. That's because in the case of the attorney-client privilege, disclosure of privileged information to outsiders likely would waive the privilege in many jurisdictions and thus make the privileged information available for discovery by others, including third parties. (A recordkeeping party might also want to specify other particular audit exclusions.)

Sub­div­i­sion (2) might be open to dispute, but at least it gives the Recordkeeping Party ammunition with which to oppose an unreasonable "fishing expedition" by the Auditing Party.

Normally, both parties will benefit if the recordkeeping party has a reasonable time to collect its records, remedy any deficiencies, etc., before the auditor(s) get there. On the other hand, if the auditing party suspects cheating or other malfeasance, a surprise audit might be in order.

An audit might end up being at least somewhat burdensome and disruptive to the recordkeeping party; most recordkeeping parties will want to limit the auditing party's ability to initiate audits. See also • the definition of good reason; and • the option requiring the Auditing Party to reimburse the Recordkeeping Party's expenses.

An audit request should be timely; otherwise, a creative counsel might try to argue that the party had the right to conduct an audit even when, for example, the underlying agreement had expired or been terminated. A would-be auditing party's counsel tried unsuccessfully to make such an argument in New England Carpenters Central Collection Agency v. Labonte Drywall Co., No. 14-1739 (1st Cir. July 31, 2015) (affirming district court's judgment after bench trial).

At some point, the recordkeeping party might want to be able to get rid of its records; also, it won't want to have to support an audit of (say) 20 years of past records.

This provision includes what amounts to a nondisclosure agreement ("NDA") in miniature. For especially-sensitive matters, the parties might wish to negotiate a separate NDA for the auditor(s) to sign.

In an unfriendly audit, an uncooperative recordkeeping party might try to make the auditors work in a closet, a warehouse, or worse.

Either of the two listed items might well warrant setting aside the usual agreed limitations on advance notice, deadlines, etc.

Not specifying that audit rights survive termination of the Agreement might result in the audit right ending when the Agreement does. That happened in New England Carpenters Central Collection Agency v. Labonte Drywall Co., No. 14-1739 (1st Cir. July 31, 2015) (affirming district court's judgment after bench trial).

The Recordkeeping Party might not care about getting a copy of an audit report if the report says, basically, everything's cool here. But if the Recordkeeping Party will have to come up with extra money, or is accused of a material breach, it likely will indeed want to get a copy of the audit report.

The Auditing Party might object to providing the Recordkeeping Party with a copy of the audit report. But face it: If the dispute goes to litigation or even arbitration, the odds are high that the Auditing Party's lawyers will be able to get a copy of the audit report as part of the discovery process (for example, by issuing a subpoena to the auditors)

Note for contract-drafting students: This provision is intentionally phrased in a form of passive voice in an effort to make it not only clear but also "palatable."

Flowdown requirements are often found in U.S. Government contracts, among others.

Three months should normally be more than enough time for an auditor to complete a reasonable audit unless one or another party is unreasonable about scheduling, access, etc.

A Recordkeeping Party might want this if it is concerned that the auditor(s) might need to delve into confidential information that the Recordkeeping Party doesn't want to be provided to the Auditing Party.

An auditing party might object to this provision if it wanted to be free also (i) to terminate the Agreement if the discrepancy were material, and/or (ii) to demand a greater measure of damages for the discrepancy if that were available by law (such as indirect damages resulting from copyright infringement).

As a contrary example, though: A software customer might want this provision as a shield against an aggressive software licensor in case an audit by the licensor revealed that the customer was making more use of the software than it had paid for. See, e.g., Christopher Barnett, Top Three Revisions To Request In Software License Audit Clauses (ScottAndScottLLP.com 2015). (Software licensors might well be willing to go along with such a limitation of liability — but possibly with the proviso that any catch-up license purchases would be at full retail price, regardless of any negotiated discount; otherwise the customer would have an incentive to roll the dice and cheat on obtaining licenses.)

An auditing party's auditors might well find it burdensome (and therefore more expensive for the auditing party) to be precluded from making copies of the recordkeeping party's records.

Outside auditors might insist on being able to take copies with them to file as part of their work papers.

In some circumstances, the recordkeeping party might want to negotiate for limits on the types of records that the auditor(s) are allowed to copy and take away.

An article by two construction lawyers points out that "audit provisions rarely address the apportionment of the costs incurred by the Contractor or its subcontractors in facilitating the audit, managing the audit, reviewing and responding to the audit results, and other related activities if the audit fails to demonstrate signicant overbilling by the Contractor." Albert Bates, Jr. and Amy Joseph Coles, Audit Provisions in Private Construction Contracts …, 6 J. Am. Coll. Constr. Lawyers 111, 132 (2012) (emphasis added).

This language is set up in generic terms with a view to having this provision be serviceable even if a drafter doesn't fill in deal-specific details..

The definition of Defect is fairly standard. Notably, it does not include a materiality qualifier; the materiality of Defects can be addressed in other provisions.

Providers will want to establish a cutoff date for their defect-correction obligations.

Customers, of course, will want to make sure that the cutoff date is far enough ahead that defects are reasonably certain to become apparent.

The concept of a workaround comes from the software world; it might or might not be relevant in other fields.

This section states that Provider will "cause" a refund to be made; this language anticipates that Customer might have purchased the relevant goods or services via a reseller or other third party.

Providing the right to a refund as a "backup" remedy might be crucial in case other remedies fail.

• Consider: UCC § 2-719(2) provides: "Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this Act."
• UCC article 2 applies only to the sale of goods, of course, but courts have sometimes looked to article 2 for guidance in non-goods cases.)
• In other words, if providing a correction or workaround for a defect is the customer's exclusive remedy, but the provider is unable to make good on doing so, then in some jurisdictions all limitations of liability might be out the window, including for example an exclusion of consequential damages or a cap on damages.

See, e.g., John F. Zabriskie, Martin J. Bishop, and Bryan M. Westhoff, Protecting Consequential Damages Waivers In Software License Agreements (2008).

For a now-dated student note reviewing case law in this area, see Daniel C. Hagen, Sections 2-719(2) & 2-719(3) of the Uniform Commercial Code: the Limited Warranty Package & Consequential Damages, 31 Val. U. L. Rev. 111, 116-18 (1996).

Suppliers are very prone to include exclusive-remedy provisions like this in their terms of sale.

Under section 2-719 of the [U.S.] Uniform Commercial Code, a contract for the sale of goods can specify that a remedy is exclusive (but there are restrictions and exceptions to that general rule).

A real-world eample is BAE Sys. Information & Electr. Sys. Integration, Inc. v. SpaceKey Components, Inc., 752 F.3d 72 (1st Cir. 2014):

• A vendor delivered lower-quality integrated circuits ("ICs") to a customer than had been called for by their contract.
• The vendor had previously alerted the customer in advance that the ICs in question would not conform to the agreed specifications.
• The customer accepted the ICs anyway. (The customer later asserted that it assumed the vendor would reduce the price.)
• The customer refused to pay for the nonconforming ICs.
• The vendor terminated the contract and sued for the money due to it.
• The customer counterclaimed — but it did not first invoke any of the contract's specified remedies, namely repair, replace, or credit (as opposed to refund).

For that reason, the trial court granted, and the appellate court affirmed, summary judgment in favor of the vendor.

Drafters might want to tailor this definition to match their particular circumstances. As a general rule of thumb, the narrower the restriction, the less likely it is that a court would hold that the restriction was unenforceable.

Sub­div­i­sion (a): The "independent contractor" language has in mind the situation in which (say) a customer of a supplier says something like the following to an employee of the supplier: "Jane, we love working with you, but we're not entirely happy with your employer, and it's obvious that you're not entirely happy with them either. So, why don't you leave to start your own company; we'll switch our business to you."

From an enforceability standpoint, the shorter the Restriction Period, the better, for reasons that should be clear from the Annotations.

Obviously the scope of this provision will depend greatly on the defined terms.

This exception is a typically-used carve-out for clauses of this nature. It might lead to proof problems if a dispute were to arise, but the parties might be willing to take that risk in the interest of getting to signature.

CAUTION: Including this Finder's Fee Option might preclude the Employer from obtaining injunctive relief to enforce the restrictions of this: the defendant could argue, quite plausibly, that the Employer had already agreed that monetary damages would sufficiently compensate the Employer for the Restricted Behavior, and therefore the Employer was incapable of making one of the key factual showings to support injunctive relief, namely "irreparable harm." See generally CD-22.10.1. Injunctive Relief Not Precluded and its commentary.

The exclusive-remedy language in this provision might help protect the from antitrust challenge.

By default, the Finder's Fee is pegged to the salary as in effect 30 days before the employee's departure. This is to (try to) preclude a situation where:

• an Off-Limits Employee gives her Employer two weeks notice that she is quitting to go to work for the Restricted Party;
• the Employer reduces the Off-Limits Employee's salary to minimum wage and then, the next day, fires her;
• the Employer then claims that the amount of the Finder's Fee is one year of minimum wage and not one year of the (former) employee's salary before she gave notice.

Claims of breach of a covenant of good faith can be especially fact-intensive and thus especially expensive and burdensome to litigate; this provision tries to reduce that expense and burden.

This language is likewise informed by the discussion by the Supreme Court of Canada in Bhasin v. Hrynew, 2014 SCC 71 [2014] 3 S.C.R. 495, ¶ 88.

An accusation of bad faith is necessarily inflammatory and, potentially, unfairly prejudicial. Such an accusation arguably should require proof by more than just a bare preponderance of the evidence.