Common Draft

Contract terms — in short paragraphs. Extensively annotated.

Version 2016-02. Copyright © 2013-2016 D. C. Toedt III (my last name is pronounced "Tate").
Last modified Monday July 11, 2016 12:01 Houston time.

Version 2016-02

A work in progress

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Table of contents (summary)

Contract reference forms

Clauses & playbooks

Annotations

Creative Commons

CAUTION

Archive

About

Preface

Short, well-organized T&C paragraphs will speed up your contract negotiations

In reading contracts, you've surely seen long, complex paragraphs such as this one. Such paragraphs are a major reason that it can take so long for lawyers to review, revise, and negotiate terms and conditions.

It doesn't have to be that way.

  • Use the Common Draft short paragraphs as an agenda for discussion? Drafters and reviewers who must negotiate the detailed terms and conditions of a contract can more quickly reach agreement on the substance by using the short paragraphs (and the tables of contents) of the Common Draft reference forms and playbook clauses as a starting point.
  • Copy and paste? Drafters are free to copy and paste the Common Draft model clause text into specific individual contracts under a no-charge Creative Commons license (coming soon: Microsoft Word versions).
  • Incorporate by reference? For more time savings, drafters could simply incorporate by reference one or more Common Draft model clauses; specify any agreed modifications; and save an archive copy of this Web page as a PDF document.

Caution: Not a substitute for legal advice

Of course, you shouldn't rely on the Common Draft materials as a substitute for legal advice about your specific needs. Moreover, I'm not acting as your lawyer here. Keep in mind that very-small changes in facts or in wording can sometimes make a big difference in the legal outcome. At the risk of beating this horse to death: The Common Draft materials are provided AS IS, WITH ALL FAULTS; use at your own risk.

Suggestions and feedback wanted

Please email me with sug­ges­tions for ad­di­tions or re­vis­ions at dc@toedt.com. Un­less you say other­wise, I'll cred­it you in these mat­er­i­als for any sug­ges­tions that I in­corp­or­ate. Please sign up to be notified of updates.

Table of Contents

Contract reference forms

[NOTE: Don't rely on the reference forms below or their clauses as a substitute for legal advice about your specific situation. See the Cautions for more details.]

Confidentiality agreements

Confidentiality Agreement – Basic Form

This template consists of the full text of the Common Draft provisions whose headings are listed below, including their subsections and subdivisions, if any, together with any variations specified below or in the Agreement. For the convenience of the reader, the subheadings of the referenced provisions are also reproduced below in small print.

In the right margin, "CHECK" indicates that the provision applies unless the Agreement specifies otherwise. Conversely, "OPT-IN" indicates that the provision does not apply unless the Agreement so specifies.

7.1. Confidential Information – Basic Terms

27.1. General Provisions – Basic Terms

Confidentiality Agreement – Discloser Form

This template consists of the full text of the Common Draft provisions whose headings are listed below, including their subsections and subdivisions, if any, together with any variations specified below or in the Agreement. For the convenience of the reader, the subheadings of the referenced provisions are also reproduced below in small print.

In the right margin, "CHECK" indicates that the provision applies unless the Agreement specifies otherwise. Conversely, "OPT-IN" indicates that the provision does not apply unless the Agreement so specifies.

7.1. Confidential Information – Basic Terms with the following variations:

  • In the definition of section 7.1.1.1, the term Disclosing Party refers only to the party indicated in the Agreement.
  • The marking requirement of section 7.1.2 does not apply.

7.2. Confidential Information – Disclosing Party Playbook — only the following provisions of this section apply:

27.1. General Provisions – Basic Terms

Confidentiality Agreement – Discloser Hardball Form

This template consists of the full text of the Common Draft provisions whose headings are listed below, including their subsections and subdivisions, if any, together with any variations specified below or in the Agreement. For the convenience of the reader, the subheadings of the referenced provisions are also reproduced below in small print.

In the right margin, "CHECK" indicates that the provision applies unless the Agreement specifies otherwise. Conversely, "OPT-IN" indicates that the provision does not apply unless the Agreement so specifies.

7.1. Confidential Information – Basic Terms with the following variation:

In the definition of section 7.1.1.1, the term Disclosing Party refers only to the party indicated in the Agreement.

7.2. Confidential Information – Disclosing Party Playbook

26.11.2. Injunctive Relief Playbook

27.1. General Provisions – Basic Terms

27.2. General Provisions Playbook — only the following provisions of this section apply:

Confidentiality Agreement – Recipient Form

This template consists of the full text of the Common Draft provisions whose headings are listed below, including their subsections and subdivisions, if any, together with any variations specified below or in the Agreement. For the convenience of the reader, the subheadings of the referenced provisions are also reproduced below in small print.

In the right margin, "CHECK" indicates that the provision applies unless the Agreement specifies otherwise. Conversely, "OPT-IN" indicates that the provision does not apply unless the Agreement so specifies.

7.1. Confidential Information – Basic Terms with the following variation:

In the definition of section 7.1.1.1, the term Disclosing Party refers only to the party indicated in the Agreement.

7.3. Confidential Information – Receiving Party Playbook — only the following provisions of this section apply:

27.1. General Provisions – Basic Terms

27.2. General Provisions Playbook — only the following provisions of this section apply:

Confidentiality Agreement – Recipient Hardball Form

This template consists of the full text of the Common Draft provisions whose headings are listed below, including their subsections and subdivisions, if any, together with any variations specified below or in the Agreement. For the convenience of the reader, the subheadings of the referenced provisions are also reproduced below in small print.

In the right margin, "CHECK" indicates that the provision applies unless the Agreement specifies otherwise. Conversely, "OPT-IN" indicates that the provision does not apply unless the Agreement so specifies.

7.1. Confidential Information – Basic Terms with the following variations:

In the definition of section 7.1.1.1, the term Disclosing Party refers only to the party indicated in the Agreement.

7.3. Confidential Information – Receiving Party Playbook

27.1. General Provisions – Basic Terms

Letters of intent

Letter of Intent – Basic Form

This template consists of the full text of the Common Draft provisions whose headings are listed below, including their subsections and subdivisions, if any, together with any variations specified below or in the Agreement. For the convenience of the reader, the subheadings of the referenced provisions are also reproduced below in small print.

In the right margin, "CHECK" indicates that the provision applies unless the Agreement specifies otherwise. Conversely, "OPT-IN" indicates that the provision does not apply unless the Agreement so specifies.

3. Letter of intent

Confidentiality Agreement – Basic Form. Confidentiality Agreement – Basic Form

10.1. Employee Solicitation Restrictions — Basic Terms

20.1. Termination — Basic Terms

26.14. Progressive Dispute Resolution

27.1. General Provisions – Basic Terms, with the following additional provision(s):

Services agreements

Services Agreement – Basic Form

This template consists of the full text of the Common Draft provisions whose headings are listed below, including their subsections and subdivisions, if any, together with any variations specified below or in the Agreement. For the convenience of the reader, the subheadings of the referenced provisions are also reproduced below in small print.

In the right margin, "CHECK" indicates that the provision applies unless the Agreement specifies otherwise. Conversely, "OPT-IN" indicates that the provision does not apply unless the Agreement so specifies.

4.1. Services – Basic Terms

7.1. Confidential Information – Basic Terms

27.1. General Provisions – Basic Terms

Clauses & playbooks

Accelerated litigation       Acknowledgement       Affiliate       "Agreement" definitions       Amendments Must Be in Writing       And/Or       Arbitration       Arm's length negotiation       Articles and sections       Assignment consent       Associated Individuals       Attempts to Do prohibited things       Attorney fees       Audits       Automatic request approval      

Background checks       Baseball arbitration       Basket       Best efforts       Binding nature of the Agreement       Breach includes misrepresentation       Business Day  

COD terms       CPI       Calendar year       Claim       Clear and convincing evidence       Commercially reasonable       Confidential information       Confidentiality of Parties' Dealings       Consequential damages       Consultation       Copies of Agreement       Counsel consultation       Course of dealing excluded       Consumer Price Index       Customer       Contra proferentem disclaimed      

Day       Deadline       Deceptive practices prohibition       Defect correction       Defined terms       Definitions (preamble language for a definitions section)       Deliverable       Deposits       Discretion       Disparagement prohibition       Dispute escalation       Dispute Expense

Early neutral evaluation       Economical Litigation Agreement       Effective Date       Employee solicitation restrictions       Ending Time       Entire Agreement       Evergreen extensions       Escrow provisions       Ex Works and EXW       Example       Expense reimbursement       Expiration       Extrinsic evidence exclusion      

For the avoidance of doubt       Force majeure       Forum selection       Forum selection: New York Commercial Division       Franchise-law benefit waiver       Fraud proof standard

GAAP       Gender references       General damages       General provisions       Good faith       Good faith       Governing Law       Government Authority       Government subcontracting disclaimer       Gross negligence       Guaranties      

Harm       Headings for reference only       Hold harmless

If       In-House Personnel       Incidental damages       Including       Incorporation by reference       Indemnities ground-rules       Independent contractors       Infringement claim       Injunctive relief       Intellectual-property ownership       Intellectual property       Intellectual property right       Interest       Invoices

JURY TRIAL WAIVER

Knowledge

Labor-law rights acknowledgement       Language capability for oral communications       Language for written communication       Language of the Agreement       Law       Legal compliance       Letter of intent       Level X support       Limitation period       Limitations of liability: In General       Limitations of Liability: Options       Liquidated damages       Litigation & ADR

Master Agreement       Material breach       Material       May do X and may not do X       Mini-trial to senior management       Misrepresentation       Mitigation of Damages       Mitigation of damages waiver       Month

Need-not       Negligence includes gross negligence       Negligence Or Misconduct       Net-days       Non-Party       Notices

Or       Organization       Other Necessary Actions       Other Terms in Purchase Orders, Etc.       Workmanlike

Party       Patent Right       Pay-If-Paid       Pay-When-Paid       Payment Offsets       Payments       Person       Policy Statements not to be disputed       Preamble (of Agreement)       Primary-contact designation       Prime rate       Progressive dispute resolution       Prohibitions apply to attempts       Prompt       Protected Group       Provider       Publicity approval

Reasonable discretion       Reasonable efforts       Reckless       Record       Recordkeeping       Redlining representation       Release       Reliance disclaimer       Representation       Responsible       Reviews of products and services       Right of first refusal

Safety measures       Sales tax       Savings clause       Seasonable       Section definition       Serious Dispute       Service of Process by courier       Services       Settlement rejection consequences       "Shall"       Signatory Party       Signatures       Signed       Site Visits & Network Access       Softball Arbitration       Sole discretion       Specify       Status-review conferences       Subcontracting       Substantial evidence       Successors & assigns       Survival

Tax       Taxing Authority       Term of Agreement       Termination       Third-party beneficiaries       Third-party immunity       Time (of day)       Timely       Toolkit Item       Trademark       Tribunal

USD       Unilateral amendments       Unilateral extensions

Waivers Must Be in Writing       Warranties: Wish lists       Warranty       "Will" Means "Must"       Willful       Writing & Written

1 I'm Not Your Lawyer, and This Isn't Legal Advice

Each party ("you") acknowledges and agrees that:

(1) you are not relying on the Common Draft contract provisions nor on the associated comments and research notes (collectively, the "Common Draft Materials") as a substitute for legal advice from a licensed attorney about your specific needs; and

(2) you and I (the author/editor of the Common Draft Materials) do not have an attorney-client relationship, and I'm not acting as your lawyer, unless I have signed an express written agreement to that effect.

2 Definitions & Usages

[Consider putting the definitions at the back of the contract.]

2.1 Acknowledgement Definition

UP To acknowledge something (whether or not the term is capitalized) means to stipulate to its truth.

This definition is adapted from the Oxford English Dictionary, as quoted in Cellport Sys., Inc. v. Peiker Acustic GmbH & Co., KG, 762 F.3d 1016, 1022 (10th Cir. 2014) (discussed here).

See generally the Reading Notes on this subject.

2.2 Affiliate Definition

2.2.1 This is the Exclusive Definition of Affiliate

This section 2.2 sets forth the exclusive tests for whether, for purposes of the Agreement, an individual or organization (referred to for purposes of illustration as "ABC") is an affiliate of another organization (referred to as "XYZ").

This subdivision attempts to block attempts by counsel to argue that affiliate status can arise implicitly through a path not set forth in this.

2.2.2 Affiliate Status Co-Exists with a Control Relationship

At any given time, a party ("ABC") is an affiliate of another party ("XYZ") (whether or not the term is capitalized) if, directly or indirectly, ABC "controls" (as defined below), or is controlled by, or is under common control with, XYZ.

This "control" language generally tracks terminology found in U.S. securities laws such as SEC Rule 405, 17 C.F.R. § 230.405, as well as in other sources. See, e.g., UBS Securities LLC v. Red Zone LLC, 77 A.D.3d 575, 578 (N.Y. App. Div. 1st Dept. 2010) (quoting Black's Law Dictionary and citing New York and Delaware statutes). ¶ The "only if" language is intended to rule out other claims of affiliate status.

2.2.3 CHECK Control of an Organization Co-Exists with Possession of a Minimium Voting Percentage

(a) If XYZ is an organization, ABC is considered to control XYZ if ABC has the right to exercise at least 50% of the aggregate right to vote to select the members of XYZ's board of directors or comparable primary governing body (the Minimum Voting Percentage).

(b) The right to exercise referred to in subdivision (a) can arise, for example:

(i) via legal, beneficial or equitable ownership of voting securities; and/or

(2) via a voting agreement.

See the discussion of Minimum Voting Percentage. ¶ In some circumstances, a drafter might also want to consider alternative definitions of "voting power."

2.2.4 Affiliate Status Also Applies to Any Designated Affilate Groups

The members of any Designated Affiliate Groups specified in the Agreement are to be considered affiliates of each other, even if they would not be considered affiliates under section 2.2.3.

By designating specific affiliate groups, drafters can expand the definition of affiliate on a case-by-case basis as needed.

2.2.5 OPT-IN Affiliate Status Co-Exists with Management Control

ABC has control of XYZ, even in the absence of voting control, if ABC, directly or indirectly, has a legally-enforceable right and obligation, created by a written instrument (for example, a contract, a trust instrument, or a court order), to direct substantially all of XYZ's affairs.

This is a narrower and more-focused version of the broad "power to direct management" branch of the affiliate definition that appears in U.S. securities regulations such as SEC Rule 405, 17 C.F.R. § 230.405; that broad version, if used in contracts, could give rise to significant problems in the future. ¶ A customer will sometimes want as many as possible of its non-owned "affiliate" companies to be able to take advantage of the contract terms that the customer negotiates with a supplier. ¶ On the other hand, the supplier might not be enthused about that idea, because it could well (i) limit the supplier's freedom to make sales to those affiliate companies on terms more favorable to the supplier, and (ii) create a larger universe of potential plaintiffs that might someday sue the supplier.

ALTERNATIVE: This provision could be relaxed somewhat by changing the end to read "… to direct substantially all of XYZ's affairs related to the Agreement."

2.3 "Agreement" definitions

2.3.1 "The Agreement" Definition

The Agreement refers, collectively, to the following:

(1) the agreement document signed by the parties;

(2) any exhibit, schedule, appendix, or addendum attached to or forming part of the document referred to in subdivision (1); and

(3) any document, or portion thereof, that is expressly incorporated by reference in any document referred to in one or more of subdivisions (1) and (2).

This is a lengthy but still-conventional definition.

2.3.2 Agreement-Related Dispute Definition

Agreement-Related Dispute refers to any claim, controversy, or other dispute between the parties — whether based on the law of contract; tort; strict liability; statute; or otherwise — that: (i) is brought before any Tribunal; and (ii) is based upon, arises out of, or relates to any of the following:

Some of the language below is adapted from a suggestion in Glenn D. West & W. Benton Lewis, Jr., Contracting to Avoid Extra-Contractual Liability — Can Your Contractual Deal Ever Really Be the "Entire" Deal?, 64 Bus. Law. 999, 1036, text accompanying n.232.

(1) the Agreement;

(2) a document executed in conjunction with the Agreement;

(3) a transaction or relationship memorialized by, or resulting from, the Agreement (each, a "Transaction" or "Relationship", respectively);

Concerning the any transaction or relationship term, see the arbitration-clause commentary.

(4) a service provided pursuant to, or incidentally to, the Agreement or a Transaction or Relationship;

(5) insurance coverage for, or relating to, the Agreement or a Transaction or Relationship;

(6) a document that documents or otherwise contains information about any of the items listed in subdivisions (2) through (5);

(7) an application for, or an advertisement, solicitation, processing, closing, or servicing of, a Transaction or Relationship; and

(8) any representation or warranty made: (A) in or in connection with any document listed in subdivisions (6) or (7); or (B) to induce anyone to enter into, agree to, or accept any such document.

This "laundry list" borrows concepts from the second of two arbitration agreements in suit in Porter Capital Corp. v. Roberts, 101 So. 1209, 1218-19 (Ala. App. 2012) (affirming denial of plaintiffs' motions to compel arbitration of defendant's counterclaims).

2.4 And/Or Definition

The term and/or, whether or not capitalized, means the inclusive or. EXAMPLE: "The parties expect to meet on Tuesday, Wednesday, and/or Thursday" means that they expect to meet on one or more of those days, not on one and only one of them.

See generally the Reading Notes on this subject.

2.5 Applicable Law

Applicable Law (whether or not capitalized) (s)” refers to any applicable, legally-enforceable (as defined below) provision of a constitution; statute; regulation; rule; administrative- or judicial order; industry code; or the common law.

2.6 Articles and Sections

(a) Defining terms by example, this is section 2.6, which is part of article 2.

(b) Unless the Agreement clearly indicates otherwise, the terms article and section (whether or not capitalized) refer to Common Draft articles and sections.

This is a very-conventional usage definition.

2.7 Associated Individuals Definition

The Associated Individuals of an organization, if any are the following: (1) Each individual who at the relevant time is an employee, officer, director, shareholder, general- and limited partner, member, or manager of that organization; and (2) any other individuals specified in the Agreement, if any.

Parties sometimes want to extend a contract's limitations of liability to individuals who might be brought in as defendants in their personal capacities. For example, a plaintiff might believe that a defendant company had few assets that could be seized to satisfy a judgment, but that the officers of the company personally owned substantial assets. In that case, the plaintiff's counsel might be tempted to name the company officers as defendants in their personal capacities; among other advantages, that would increase the pressure on the company to settle the case before trial.

2.8 Basket Definition (cross-reference)

2.9 Best Efforts Definition

(a) Best efforts, whether or not capitalized, refers to the diligent making of reasonable efforts.

The "diligence" requirement comes from the Restatement (Second) of Contracts, as discussed in the Annotations.

(b) For the avoidance of doubt, a party required to use best efforts:

(1) is not required to take every conceivable action to achieve the stated objective;

This subdivision recognizes that with the benefit of hindsight, a motivated opposing counsel can almost always find something that the a party conceivably could have done, but in fact didn't do, to achieve the stated objective, as discussed in the Annotations.

(2) is not required to materially harm its own interests; and

This subdivision attempts to resolve the division of opinion among various courts, discussed in the Annotations.

(3) is not required to take any unreasonable action.

2.10 Breach Includes Misrepresentation

For the avoidance of doubt, the term breach, in respect of the Agreement, includes a misrepresentation made in, or incorporated by reference into, the Agreement.

Technically, the term breach relates to failure to perform a covenant (including the express- or implied covenant(s) of a warranty). This clause expands that definition to encompass misrepresentations. ¶ See also: • 20.2.1. Termination for Breach is Permitted After Notice and Cure Period; as well as • 2.58. Material Breach Definition.

2.11 Business Day Definition

The term business day, whether or not capitalized, refers to a day other than a Saturday; a Sunday; or a holiday on which banks in New York City are generally closed.

For time periods greater than five- or ten business days, it might be simpler to use the term calendar day (and indeed for all time periods), so as not to have to figure out what counts as a business day, especially if different jurisdictions are involved. See a 2015 LinkedIn discussion on that subject (membership required). ¶ See also 2.21. Day Definition.

2.12 Calendar Year Definition

(a) The term calendar year, whether or not capitalized, refers to a year according to the Gregorian calendar, beginning at the beginning of January 1 and ending at the end of the following December 31.

Many parties entering into contracts, even in non-Western countries, will likely operate on the West's conventional Gregorian calendar, but that might not be the case in, e.g., Muslim countries. See generally the blog post and comments at Ken Adams's post, Referring to the Gregorian calendar? (Nov. 14, 2013).

(b) An interval of a calendar year, specified as beginning at any time on a particular date or as following a particular date, ends at exactly 12:00:00 midnight at the beginning of the same date one year afterwards. EXAMPLE: A period of one calendar year following January 2, 20x5 ends at 12:00:00 midnight at the beginning of January 2, 20x6.

Note the use of "12:00:00 midnight at the beginning of the same date …" to remove ambiguity (is it midnight at the beginning of the day or at the end of the day)?

2.13 Claim Definition

Claim refers to any request or demand for damages or other relief by an individual or organization (including without limitation a governmental entity), where the request or demand for relief is set forth, by or on behalf of the claimant:

(1) in a written communication such as, for example, a letter or email; and/or

(2) in an original or amended complaint, petition, counterclaim, cross-claim, or other paper that is filed with (or otherwise submitted to) any court, arbitration panel, administrative agency, or other tribunal of competent jurisdiction.

This definition of claim draws on ideas set out in an article by D. Hull Youngblood, Jr. and Peter N. Flocos, Drafting And Enforcing Complex Indemnification Provisions, The Practical Lawyer, Aug. 2010, p. 21, at 27. ¶ The writing requirement avoids putting a so-called hair trigger on provisions that depend on claims being made, e.g., claim-defense requirements.

2.14 Clear and Convincing Evidence Definition

For an assertion to be proved by clear and convincing evidence, the evidence must be sufficient to produce in the factfinder an abiding conviction that the assertion's truth is highly probable.

This definition is a rephrasing, in somewhat-plainer language, of the standard set out by the Supreme Court of the United States in Colorado v. New Mexico, 467 U.S. 310, 316 (1984) (original proceeding; holding that Colorado had not shown by clear and convincing evidence that water should be diverted from Vermejo River); see also Ninth Circuit Model Jury Instructions § 1.4.

2.15 Commercially Reasonable Definition

(a) Defining the term with an illustrative example, commercially-reasonable efforts (whether or not the term is capitalized) refers to at least those efforts that people experienced in the relevant business would generally regard as sufficient to constitute reasonable efforts in the relevant circumstances. Other uses of the term commercially-reasonable have corresponding meanings.

(b) For the avoidance of doubt, a party does not fail to act in a commercially-reasonable manner, or to take commercially-reasonable action, solely because it gives preference to its own interests over those of another party.

See generally the Reading Notes on this subject.

2.16 Consequential Damages Definition

Consequential damages, whether or not capitalized, (1) refers to damages for loss, where the loss in question would be, in the ordinary course of events, a natural result — but not a necessary result — of a breach of the Agreement or other event or other event or situation for which the law permits damages to be awarded; and (2) includes, without limitation, lost profits from collateral business arrangements.

See generally the Reading Notes on this subject.

2.17 Consumer Price Index definition (cross-reference)

2.18 CPI Definition

Unless otherwise agreed in writing, the terms "Consumer Price Index" and "CPI" refer to the Consumer Price Index – All Urban Consumers ("CPI-U"), as published from time to time by U.S. Bureau of Labor Statistics.

See generally the Reading Notes on this subject.

2.19 Customer Definition

Unless the Agreement clearly indicates otherwise, Customer has the meaning set forth in the 2.76. Provider Definition.

See the commentary to the 2.76. Provider Definition.

2.20 Damages Definition

Unless otherwise specified in the Agreement, the term damages (whether or not capitalized) refers broadly to any legally-cognizable harm (whether tangible or intangible) to person, property, or other legally-protected interest, where the harm is compensable by a monetary award.

2.21 Day Definition

Unless the Agreement expressly states otherwise:

(1) The term day, whether or not capitalized, refers to a calendar day; and

(2) A period of X days begins on the specified date and ends at exactly 12 midnight (UTC if not otherwise specified) at the end of the day X days later. EXAMPLE: If a five-day period begins on January 1, it ends at exactly 12 midnight at the end of January 6.

See also the Business Day Definition.

2.22 Deadline Definition

IF: The Agreement states a deadline date marking the end of a specified period, but does not clearly indicate a time at which the period ends; THEN: The period ends at exactly 12 midnight, in the time zone where the relevant actor (or action to be taken) is (or is to be) located, at the end of the indicated date.

This definition simply provides a benchmark reference point; using this definition, drafters can precisely specify deadlines as desired.

2.23 Definitions (preamble language for a Definitions section)

As used in the Agreement, the following terms have the stated meanings; other terms might be defined "in line" in the provisions in which they are used.

2.24 Deliverable Definition

Deliverable, whether or not capitalized, refers to an item that a party is required to cause to be delivered to another party, for example pursuant to a Statement of Work for Services, other than Toolkit Items.

2.25 Discretion Definitions

(a) Discretion and reasonable discretion, whether or not capitalized, refers to discretion that is exercised in a manner that is not arbitrary, capricious, or irrational.

(b) Sole discretion: IF: The Agreement states that a party (the "electing party") may take (or not take) an action in its sole discretion (whether or not the term is capitalized); THEN: Unless the Agreement expressly states otherwise:

(1) The electing party is free to take or not take the action, with a view solely toward its own interests and desires as it perceives them.

(2) The electing party's action or inaction per se is to be conclusively deemed (i) to have complied with any applicable standard of reasonableness, good faith, or fair dealing, and (ii) not to be arbitrary, capricious, or irrational.

(c) No other party is to make any claim against an electing party that is inconsistent with subdivisions (b); this subdivision (c), however, does not in itself preclude a claim by another party that an electing party took action in a particular manner that breached the Agreement or applicable law.

See the Annotations.

2.26 Dispute Expense Definition

Dispute Expense refers to one or more of the following when incurred (for example) in a trial or arbitration hearing; an appeal at any level; or other contested proceeding in the action:

(1) reasonable fees billed by (or by one or more firms for the services of) attorneys; law clerks, paralegals, and other persons not admitted to the bar but performing services under the supervision of an attorney; and expert witnesses;

(2) reasonable expenses actually incurred by individuals and/or firms referred to in subdivision (1) in connection with the proceeding, such as (for example) printing, photocopying, duplicating, and shipping;

(3) the costs of the litigation, arbitration, or other proceeding, such as for example costs of court; administration fees charged by an arbitration provider; and arbitrator fees and expenses; and

(4) costs, fees, and other expenses incurred in enforcing a right to recover Dispute Expenses.

The text of this provision is informed in part by the attorneys-fees clause in the contract in suit in Seaport Village Ltd. v. Seaport Village Operating Co., No. 8841-VCL (Del. Ch. Sept. 24, 2014) (letter opinion awarding attorney fees). • Note that any attorney fees, etc., incurred in enforcing the right to attorney fees are themselves recoverable.

2.27 Effective Date (cross-reference)

See Preamble.

2.28 Ending Time Definition

(a) For the avoidance of doubt, IF: The Agreement states that a time period ends or expires on a specified day, but it does not specify the time of day that the period ends; THEN: The period ends or expires (1) at exactly 12 midnight at the end of that day, (2) in the time zone where the party that is allowed or required to take action during the expiring time period is located. (See also the 2.22. Deadline Definition clause.)

Another possibility is to use Universal Time, which is basically Greenwich Mean Time, with a few technical differences; see generally the Wikipedia article Universal Time.

(b) For purposes of this Ending Time Definition, the term "expires on" in respect to a date has the same meaning as "ends on" in respect to that date.

2.29 Ex Works and EXW Definition

Ex Works and EXW have the meanings stated in the INCOTERMS 2010 pre-defined commercial terms published by the International Chamber of Commerce (ICC).

Under the cited INCOTERMS 2010 definition, ex works means, in a nutshell, that a seller will make goods available for pickup at the seller's place of business at the buyer's risk and expense.

2.30 Example Definition

(a) Examples (and terms such as for example), whether or not capitalized, are used in the Agreement for purposes of illustration, not of limitation, unless another meaning is clear from the context.

Including this definition will let drafters say, e.g., "including, for example," which is somewhat less stilted than "including, by way of example and not of limitation."

(b) The parties do not intend for the principle of ejusdem generis to be used to limit the meaning of an exemplified term.

This subdivision hopes to avoid the effect of some judicial opinions that hold otherwise, as discussed here.

(c) For the avoidance of doubt, if in some places the Agreement uses longer expressions such as "by way of example and not of limitation," such usage does not mean that the parties intend for shorter expressions such as "for example" to serve as limitations unless expressly stated otherwise.

2.31 Expiration definition (cross-reference)

2.32 For the Avoidance of Doubt Definition

The term for the avoidance of doubt signifies agreed guidance concerning the intended meaning of a provision.

See generally the Reading Notes on this subject.

2.33 Force majeure (cross-reference)

2.34 GAAP Definition

GAAP refers to generally accepted accounting principles, as established and interpreted in the United States, consistently applied.

For an overview of generally accepted accounting principles, see the Wikipedia article of the same title, which also links to a discussion of the International Financial Reporting StandArds (IFRS), which according to some are beginning to replace the U.S.-oriented GAAP.

2.35 Gender References

When necessary, unless the context clearly requires otherwise, any gender-specific or gender-neutral term in the Agreement (for example, he, she, it, etc.) is to be read as referring to any other gender or to no gender.

This type of provision is sometimes seen in contracts, but it's questionable whether it's a net benefit.

2.36 General-damages definition – see Consequential Damages

2.37 Good faith definition (cross-reference)

2.38 Government Authority Definition

The terms government authority and governmental authority, whether or not capitalized:

(1) refer to any individual or group (collectively, authority), anywhere in the world, exercising de jure or de facto governmental- or regulatory power of any kind, whether administrative, executive, judicial, legislative, policy, regulatory or taxing power; and

(2) include, for example, any agency; authority; board; bureau; commission; court; department; executive; executive body; judicial body; legislative body; or quasi-governmental authority; at any level (for example, state, federal or local).

This language draws on the definition of Taxing Authority in section 3.5(f) of the Asset Purchase Agreement between Piper Jaffray Companies and UBS Financial Services, which is reproduced in David Zarfes & Michael L. Bloom, Contracts and Commercial Transactions (Wolters Kluwer Law & Business 2011).

2.39 Gross Negligence Definition

(a) Definition: The term gross negligence, whether or not capitalized, refers to conduct that evinces a reckless disregard for or indifference to the rights of others, tantamount to intentional wrongdoing; it differs in kind, not only in degree, from ordinary negligence.

With a view to usage in non-U.S. jurisdictions where the term might not be defined by law, this definition sets out a definition of gross negligence in the terms used by the Court of Appeals of New York (that state's highest court), which seems to achieve a reasonable balance of fairness and precision. See Sommer v. Federal Signal Corp., 79 N.Y.2d 540, 554 (1992). See also the Annotations for definitions in other states' laws.

(b) Proof requirement: If so specified in the Agreement, any assertion of gross negligence must be proved by clear and convincing evidence, whether the assertion is made in a claim, in a defense, or otherwise.

Subdivision (b) reminds drafters to consider requiring clear and convincing evidence of gross negligence, the same standard as is required in many jurisdictions for proof of fraud. [DCT TO DO: CITATIONS NEEDED] ¶ Drafters can also consider including 26.3.2.2. Attorney Fees for Unproved Serious Accusations.

2.40 Harm Definition

Harm, whether or not capitalized, refers to any claim, demand, liability, cost, charge, suit, judgment, or expense, of any kind.

This definition comes from the insurance contract in suit in Hanover Ins. Co. v. Northern Building Co., No. 13-2675, slip op. at 8 (7th Cir. May 8, 2014) (affirming district court award of damages and attorney fees to surety bond company against its contractor-customer), affirming 891 F.Supp.2d 1019 (N.D. Ill. 2012).

2.41 Headings Are for Reference Only

Any drafting choice stated in a heading — as a hypothetical example, "Governing law: New York" — is to be given effect; otherwise, however, headings and subheadings in the Agreement are included for convenient reference only and are not to be considered in construing the corresponding text of the Agreement.

This is not an uncommon clause, but it's not an appealing one. It signals that perhaps the drafter can't be bothered to be sure the headings are consistent with the agreement — which in turn raises another question: What else is the drafter being careless about?

2.42 Hold Harmless Means to Indemnify

For the avoidance of doubt, the term hold harmless (whether or not capitalized) has the same meaning as indemnify unless the Agreement clearly and expressly states otherwise.

See generally the Reading Notes on this subject.

2.43 If Definition

For the avoidance of doubt, the term if, when used in granting a right or imposing an obligation that would not otherwise apply, means if and only if. EXAMPLE: Consider the sentence If Alice gives Bob $10.00 by 12 noon next Tuesday, then she may take the ballpoint pen from Bob's shirt pocket and keep it. That sentence implicitly means that Alice may not take a pen from Bob's shirt pocket unless she gives him $10.00.

See generally the Reading Notes on this subject.

2.44 In-House Personnel Definition

The term in-house personnel, whether or not capitalized, when used in respect of a party, refers collectively to the following individuals:

(1) the employees of the party;

(2) the officers and directors of the party if the party is a corporation or comparable organization;

(3) the managers of the party if the party is a limited liability company (LLC) or comparable organization; and

(4) the general partners of the party if the party is a general- or limited partnership.

The definition in this clause can come into play in determining, for example, which personnel associated with a party can have access to another party's confidential information.

2.45 Incidental Damages (cross-reference)

See here (Common Draft provision) and here (Research Note).

2.46 Including Definition

(a) The terms including and like words (for example, include, includes, and included), whether or not capitalized:

(1) are to be deemed followed by the phrase by way of illustrative example and not of limitation if not followed literally by that phrase; and

This subdivision eliminates the need to repeatedly write (and read), for example, "including without limitation." It's not uncommon in contracts, and generally uncontroversial.

(2) signal the parties' intent that the listed included items should not be construed, under the principle of ejusdem generis, as defining a limiting class.

See ejusdem generis; see generally Ken Adams, An Update on "Including But Not Limited To" (AdamsDrafting.com 2015).

(b) For the avoidance of doubt, if in some places the Agreement uses other expressions such as including but not limited to or including without limitation, such usage does not mean that the parties intend for expressions such as simply including to serve as limitations unless expressly stated otherwise.

2.47 Incorporation by Reference Definition

Incorporation of material by reference into the Agreement has the same force and effect as setting forth the full text of the material in the body of the Agreement.

See generally the Reading Notes on this subject.

2.48 Individual Definition

Individual refers to a single human being.

This definition is adapted from Merriam-Webster's Collegiate Dictionary 635 (11th ed. 2003), quoted in Hoffman v. L&M Arts, No. 3:10-CV-0953-D, slip op. at part III‑C (N.D. Tex. Mar. 6, 2015) (holding that attorney fees could not be recovered from an LLC under Tex. Civ. Prac. & Rem. Code § 38.001).

2.49 Infringement claim definition (cross-reference)

2.50 Infringe Definition

Infringe, and related terms such as Infringement, refer to the infringement, misappropriation, or other violation of one or more Intellectual Property Rights specified in the Agreement. The term encompasses inducement of or contribution of such violation if applicable law provides that an inducer or contributor is liable as an infringer.

2.51 Intellectual Property Definition

The term intellectual property, whether or not capitalized, refers broadly to:

(1) approaches, concepts, developments, discoveries, formulae, ideas, improvements, inventions, know-how, methodologies, plans, procedures, processes, techniques, and technology, whether or not patentable;

(2) artwork, audio materials, graphics, icons, music, software, writings, and other works of authorship;

(3) designs, whether or not patentable or copyrightable;

(4) trademarks, service marks, logos, trade names, and the goodwill associated with each; and

(5) all other forms of intellectual property recognized by law.

2.52 Intellectual Property Right Definition

(a) The term intellectual-property right, whether or not capitalized, refers broadly to any right in intellectual property existing by law at the relevant time anywhere in the world, under intellectual-property law or industrial-property law, including without limitation the right to sue for present or past infringement of any such right.

(b) For the avoidance of doubt, the term includes, for example:

(1) all rights (whether registered or unregistered) in, or arising under laws concerning: trade secrets; confidential information; inventions; patents; trademarks, service marks, and trade names; Internet domain names; copyrights; designs; rights of publicity; and mask works;

(2) any application then pending for such a right, including for example an application for a patent or to register a copyright or trademark;

(3) any right to file such an application; and

(4) any right to claim priority for such an application.

2.53 Knowledge Definition

(a) Actual knowledge required: The term knowledge, whether or not capitalized, refers to actual knowledge; words such as knows, knowingly, and like words have a corresponding meaning.

This definition is adapted almost verbatim from subdivision (b) of UCC § 1-202. ¶ Other subdivisions of UCC § 1-202 are not incorporated into this definition. Some of those other subdivisions define "notice" and specify default rules for when an organization has knowledge or notice of a fact, but those default rules might conflict with the notice provisions of a contract. ¶ Merger- and acquisition (M&A) agreements often contain definitions of knowledge that are much more elaborate than this one; such definitions seem to be less common in contracts for commercial transactions.

(b) Organizational knowledge: An organization is not deemed to know something unless the thing is known by an individual who has management responsibility concerning the associated subject matter.

This provision is intended to avoid imputing knowledge to an organization just because, let's say, a janitor knows it.

(c) No duty of inquiry: Unless expressly agreed otherwise in writing, (1) the parties desire that a party making a statement about its knowledge of a particular matter (a "Stating Party") should hot be deemed to have a duty of inquiry about that matter; and (2) no party will assert, in any forum, that the Stating Party breached a duty of inquiry in making the statement.

Unlike UCC § 1-202, this definition does not impose a duty of inquiry; a party desiring to impose such a duty should specify it explicitly in the contract. ¶ The language of this provision is phrased very carefully, so as: • to recognize that courts generally do not consider themselves bound to follow orders — hence, this provision is not phrased as, for example, "this provision shall not be interpreted as giving rise to a duty of inquiry"; and • accordingly, to make it a separate breach of contract for a party to assert that another party had (and breached) a duty of inquiry not expressly provided for in the parties' agreement.

2.54 Law Definition

Law, whether or not capitalized, refers to any and all applicable provisions of a constitution, statute, regulation, ordinance, judgment, order, or other obligation, requirement, or prohibition having legally-binding effect at the relevant time.

It's always possible that a "creative" counsel might try to claim that some form of government requirement did not constitute "law" in connection with a contract provision. This definition is intended to forestall such an attempt. See also the 27.2.8. Governing Law clause.

2.55 Level X Support Definition

(a) Level 1 support refers to routine basic technical support for a product or service; it entails providing customers, where applicable, with compatibility information, installation assistance, general usage support, assistance with routine maintenance, and/or basic troubleshooting advice.

(b) Level 2 support refers to more in-depth attempts to confirm the existence, and identify possible known causes, of a defect in a product or an error in a service that is not resolved by Level 1 support.

(c) Level 3 support refers to advanced efforts to identify and/or correct a defect in a product or an error in a service.

See generally, e.g.: • The Wikipedia article section on multi-tiered technical support • Joe Hertvik, Help Desk Management: What is Level 1, Level 2, and Level 3 Help Desk support?

2.56 Limitation Period Definition

(a) Limitation Period refers to: One year after accrual of a claim against any Signatory Party (each, a Protected Party), where the claim arises out of the Agreement.

(b) Any such claim will be permanently barred, and the Protected Party will not be liable in respect of the claim, if the claim is not asserted before a Tribunal of proper jurisdiction and venue — for example by the filing or amendment of an action — before the expiration of the Limitation Period.

See generally the Reading Notes on this subject.

(c) IF: The Agreement and/or applicable law provides that the discovery rule applies to claims of the type to which the the Limitation Period applies; THEN: For any such claim, the Limitation Period will begin on the earlier of:

(1) the date of discovery, by or attributable to the claimant, of the facts constituting or giving rise to the claim; or

(2) if earlier, the date such facts should or could have been discovered by the claimant in the exercise of reasonable diligence.

2.57 Material Definition

A thing is material (for example, material information; a material breach) if a substantial likelihood exists that a reasonable person would consider the thing important in making a relevant decision.

This definition is adapted from the opinion of the Supreme Court of the United States in Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988), a securities-law case.

For a hair-trigger statutory definition of "material" (in the context of residential-real-estate disclosures), see Hawaii Rev. Stat. § 508D-1(3): "'Material fact' means any fact, defect, or condition, past or present, that would be expected to measurably affect the value to a reasonable person of the residential real property being offered for sale." (Emphasis added.) See generally Santiago v. Tanaka, No. SCWC-11-0000697 (Haw. Dec. 29, 2015), modified on other grounds (Haw. Jan. 15, 2016).

2.58 Material Breach Definition

(a) Restatement factors: Except to the extent (if any) otherwise stated in the Agreement, any determination whether a breach of the Agreement was (or would be) material is to take into account the factors listed in the Restatement (Second) of Contracts § 241 (1981), considering the Agreement as a whole, with no single factor necessarily being decisive.

Concerning the Restatement (Second) factors, see the Annotations.

(b) Stipulated material breaches: Any breach expressly agreed in writing by the parties to be a material breach  — if any — is conclusively considered to be a material breach, in and of itself, without regard to any other consideration.

It's not uncommon for an agreement to label specific breaches as "material"; this subdivision likely gives a party client the right to terminate or even rescind the contract in the event of such a labeled breach.

(c) Series of nonmaterial breaches: A series of breaches, whether related or unrelated, whether or not cured, and none of which individually constitutes a material breach of the Agreement, may nevertheless collectively constitute a material breach of the Agreement when considering the Agreement as a whole.

This concept is not uncommon in contracts; the specific language is modeled on section 16.3.1(1)(A) of the master service agreement in Indiana v. IBM Corp., No. 49S02-1408-PL-00513, slip op. at 11 (Ind. Mar. 22, 2016); for more details, see the Annotations.

2.59 May Do X and May Not Do X Definitions

(a) "May do X" is permissive: For the avoidance of doubt, if the Agreement states that a party may take (or not take) an action, it means that the party has the right, but not the obligation, to take (or not take) the action, in its sole and unfettered discretion, unless the Agreement clearly states otherwise.

(b) "May not do X" is prohibitive: If the Agreement states that a party may not take (or fail to take) an action, it means that the party is prohibited from taking (or failing to take) the action.

This clause is intended to preclude a party from arguing that another party that "may" do X must exercise good faith, or be reasonable, or anything like that. See generally Ken Adams, “May” Can Mean “Might,” But I Sleep Well at Night Anyway (AdamsDrafting.com Aug. 10, 2014).

2.60 Misrepresentation Definition

A claim of misrepresentation can have massive real-world consequences. For example, HP's EDS unit ended up paying more than US$ 460 million to settle British Sky Broadcasting's successful claim for fraudulent inducement and misrepresentation in connection with a software-development contract — this, even though the contract limited EDS's liability to around 10% of that number. See BSkyB Ltd. v. HP Enterprise Services UK Ltd., [2010] EWHC 86 (TCC) and Jaikumar Vijayan, EDS settles lawsuit over botched CRM project for $460M, Computerworld, June 9, 2010.

Concerning insurance to cover misrepresentation claims, see Howard T. Spilko and Scott A. Abramowitz, Use of Representations and Warranties Insurance Grows in Middle-Market Transactions (NYLJ.com 2015).

(a) Elements of proof: To establish a person's liability in respect of a claim for misrepresentation in connection with the Agreement, the claimant must show that all of the following are true:

This provision tries to synthesize various [U.S.] federal- and state-law doctrines.

(1) The person made a representation that, at that time, either: (A) was untrue as to a material fact, or (B) omitted a material fact necessary in order to make the representation, in the light of the circumstances under which it was made, not misleading.

This language is adapted from the famous Rule 10b-5 promulgated by the U.S. Securities and Exchange Commission. See generally the Wikipedia article "Rule 10b-5."

(2) The person that made the representation either: (A) failed to use reasonable care or competence in obtaining or communicating the information comprising the representation, or (B) knew, at the time of making the representation, of the circumstances described in subdivision (1)(A) or (1)(B), as applicable.

(3) The person knew or should have known that the party would rely on the representation—this is deemed conclusively established if the representation is expressly stated in the Agreement with language such as "Party A represents that …."

This subdivision takes it for granted that the claimant will rely on a (mis)representation that is stated in the agreement — otherwise, why would the parties have included the representation in the agreement in the first place? ¶ See also the notes to the Reliance Disclaimer.

(4) The claimant's reliance on the representation was reasonable.

(5) The claimant suffered harm as a result of such reliance.

(b) Option: Clear and convincing evidence: If clearly so stated in the Agreement, each element of proof listed in subdivision (a) must be shown by clear and convincing evidence.

Many [U.S.] states, in civil cases, require proof of at least some of the elements of fraud by clear and convincing evidence, although U.S. federal statutes generally require proof of fraud only by a preponderance of the evidence. See Grogan v. Garner, 490 U.S. 279, part III, text accompanying nn.15-16 (1991) (holding that the standard of proof for the dischargeability exceptions for fraud in bankruptcy proceedings is the ordinary preponderance-of-the-evidence standard).

2.61 Month Definition

(a) Unless the Agreement expressly states otherwise:

(1) the term month, whether or not capitalized, refers to the Gregorian calendar; and

(2) a period of X months (where X is a number), beginning on a specified date, ends at exactly midnight (in the relevant time zone) at the end of the same day of the month X months later (or at the end of the last day of that later month, if earlier).

(b) Hypothetical examples: A one-month period beginning on November 15 ends at exactly midnight at the end of December 15. A two-month period beginning on December 31, 2015 ends at exactly midnight at the end of February 29, 2016.

This clause could be useful for the avoidance of doubt in contracts involving companies in Muslim countries, and possibly in Israel, where a lunar calendar might be used. See generally the blog post and comments at Ken Adams's post, Referring to the Gregorian calendar? (Nov. 14, 2013), especially the comments of Mark Anderson, Francis Davey, Richard Schafer, and Benjamin Whetsell.

2.62 Need-Not Definition

For the avoidance of doubt, a statement that a party is not required to take a particular action means that the party is under no obligation whatsoever to take the action; if for any reason or no reason the party does not take the action, then the party:

(1) is to be conclusively deemed to have complied with any applicable standard of good faith, fair dealing, or reasonableness; and

(2) will not be liable for not taking the action under any legal- or equitable theory arising from or relating to the Agreement; no party is to assert the contrary.

This is a roadblock clause to try to block claims that a party failed to comply with some implied obligation of good faith and fair dealing (in the same vein, see also the commentary to the Discretion Definitions). ¶ Subdivision (1) borrows from UCC § 1-302(b) (which applies only to contracts that come within the scope of the UCC), which reads as follows: "The parties, by agreement, may determine the standards by which the performance of those obligations [of good faith, etc.] is to be measured if those standards are not manifestly unreasonable."

2.63 Negligence Includes Gross Negligence

For the avoidance of doubt, the term negligence encompasses gross negligence.

I've never seen it argued that gross negligence is not a form of negligence, but who knows whether some creative litigator might be [bold] enough to try.

2.64 Negligence Or Misconduct Definition

(a) The terms Negligence Or Misconduct and Negligence and Misconduct each refers to one or more of negligence; gross negligence (including for example reckless conduct); willful misconduct; and intentional- or unintentional noncompliance with law.

This definition is used in certain exceptions to indennity obligations and might also be useful in other contexts.

(b) For the avoidance of doubt:

(1) These terms do not include noncompliance with the Agreement where the noncompliance does not include one or more of the things referred to in subdivision (a).

(2) This definition does not alter a party's liability for breach of the Agreement that does not constitute Negligence Or Misconduct.

2.65 Net-Days Definition

For the avoidance of doubt, when used in reference to an invoice for payment, the following terms and variations on them, whether or not capitalized, have the stated meanings. The terms are defined by example; variations on the terms have corresponding meanings.

(a) Net 30 and net 30 days means that 100% of the invoiced amount is due no later than 30 days after receipt of the invoice by the paying party (or, if so agreed in writing, no later than 30 days after the date of the invoice).

(b) 2%/10 net 30 has the same meaning as net 30 except that the amount due will be reduced by 2% (that is, to 98% of the invoiced amount) if payment is received within 10 days instead of 30 days.

(c) 2% every 5 days early, net 30 means that if the invoice is paid (for example) in 10 days (that is, 20  days early, which is 4 increments of 5 days), then the amount due is equal to 92% of the invoiced amount (that is, 100% of the invoiced amount, less 4 times 2% of that amount).

See generally the Reading Notes on this subject.

2.66 Non-Party Definition

Non-party, whether or not capitalized, refers to an individual or organization that is not a signatory of the Agreement unless another meaning is clear from the context.

2.67 Or Definition

The term or, whether or not capitalized, refers to the inclusive or unless the context clearly and unmistakably indicates otherwise. EXAMPLE: "Provider may deliver goods on Monday or Tuesday" means that Provider may deliver goods on Monday, Tuesday, or both.

2.68 Order of Precedence (coming soon)

2.69 Organization Definition

Organization, whether or not capitalized, refers to a corporation; business trust; estate; trust; general- or limited partnership; limited liability company; association; joint venture; joint stock company; government; governmental subdivision, ‑agency, or ‑instrumentality; public corporation; or any other legal or commercial entity.

The language of this definition is adapted from UCC §§ 1-201(25) and 1-201(27). ¶ One court noted that the term entity (the last word of this definition) refers to an "organization (such as a business or a governmental unit) that has a legal identity apart from its members or owners.” Entity, Black's Law Dictionary (10th ed. 2014), quoted in Ineos USA LLC v. Elmgren, No. 14-0507, slip op. at 9 (Tex. June 17, 2016) (emphasis by the court, internal quotation marks omitted).

2.70 Party Definition

Unless otherwise clear from the context, the term party, whether or not capitalized, refers to a party to the Agreement.

Some contracts state that the parties are (let's say) ABC Corporation and its Affiliates. This is generally a bad idea unless each Affiliate is to be a signatory party. The much-better practice is to state the specific rights and obligations that Affiliates have under the contract. See generally Mark Anderson, Don't Make Affiliates parties to the agreement (2014). See also the Affiliate Definition and the associated clauses following it.

2.71 Patent Right Definition

The term patent rights, whether or not capitalized, singular or plural, refers generally to the following (if any) that exist, in any jurisdiction unless the Agreement specifies otherwise, at a relevant time:

(1) issued patents, including but not limited to reissue patents and reexamined patents;

(2) patent applications, both pending and abandoned, including but not limited to provisional, non-provisional, divisional, continuation, continuation-in-part, and reissue applications, whether or not published;

(3) any right to claim priority under any of the foregoing; and

(4) any right to sue for infringement of any claim in, or other right arising from, an issued patent or pending patent application.

The definition can be useful in agreements relating to intellectual property, and also as a (very) brief introduction to those unfamiliar with the subject.

2.72 Person Definition

(a) The term person, whether or not capitalized, refers to an individual, corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, government, governmental subdivision, agency, or instrumentality, public corporation, or any other legal or commercial entity.

(b) Unless otherwise clear from the context, a reference to a person encompasses that person's successors and assigns. (This subdivision, however, does not in itself authorize assignment of any right or delegation of any obligation under the Agreement.)

Subdivision (a) of this definition is adapted essentially verbatim from UCC § 1-201(27). Note that the term entity, which is the last word of subdivision (a), has been construed to be narrower than the term organization, as noted in the commentary above.

2.73 Prime Rate Definition

The term prime rate, whether or not capitalized, refers to the per annum rate of interest for commercial loans that, at the relevant time, was most recently announced or published by the Prime Rate Publisher (namely, the /Wall Street Journal/).

Drafters should become at least somewhat familiar with how the Wall Street Journal surveys banks and periodically publishes the "prime" rate; see generally Wall Street Journal prime rate (Wikipedia).

2.74 Prompt Definition

The term prompt, along with corresponding terms such as promptly, whether or not capitalized, refer to taking specified action within a reasonable time and as a high priority, but not necessarily immediately.

This definition can be useful in requiring fast action when the parties don't necessarily know (or perhaps can't agree on) a specific time frame for the action.

2.75 Protected Group Definition

The term Protected Group, in respect of a party that is identified by name in the Agreement as being the subject of a defense- and/or indemnity obligation (a "Protected Party"), refers to the following:

(1) the Protected Party itself;

(2) the Protected Party's Affiliates;

(3) any other individuals or organizations specified in the Agreement; and

(4) the employees, officers, directors, shareholders (in that capacity), general- and limited partners, members, managers, and other persons occupying comparable positions in respect of each individual and organization within the scope of in subdivisions (1) through (3), as applicable.

This is a "convenience" definition, used in clauses such as 21.1. Indemnity Ground Rules — Basic Terms. It specifies the scope of an indemnity obligation by defining which individuals and organizations that associated with an indemnified party are entitled to indemnity. ¶ Some parties might want their Protected Groups also to include even their indirect customers, suppliers, etc. — but that could dramatically expand the risk for the indemnifying party.

2.76 Provider Definition

Unless clearly indicated otherwise in the Agreement, the term Provider refers to a Signatory Party that provides deliverables and/or services to, or at the instance of, another Signatory Party (Customer) as a material aspect (i) of the Agreement, and/or (ii) of a purchase order, statement of work, or other agreement entered into under the Agreement by those Signatory Parties.

The definitions of Customer and Provider refer to Signatory Parties in the interest of narrowing the universe of possible plaintiffs claiming to have been "Customers" entitled to remedies against a Provider.

2.77 Reasonable Discretion Definition

(a) IF: The Agreement permits a party to act in its reasonable discretion (whether or not the term is capitalized) in respect of some matter; THEN: Any party challenging the action must show that the acting party failed to act in a commercially-reasonable manner.

(b) For purposes of this provision, the term action includes omissions.

Defining the term "reasonable discretion" provides drafters with flexibility, for example in the 20.2.6. A Specified Party May Terminate for a Limited Time for Reputation Risk Created by the Other Party provision. ¶ The specific language of this definition is inspired by Dick Broadcasting Co. v. Oak Ridge FM, Inc., 395 S.W.3d 653, 656-57 (Tenn. 2013), in which the state's supreme court held that a party having the right to consent to assignment of an agreement must act in good faith and in a commercially-reasonable manner. See also 13.1. Good Faith Requirement — Basic Terms.

Drafting tip: Consider requiring that a party claiming that another party failed to exercise reasonable discretion must show a clear abuse of discretion by the other party; that would piggyback on the well-known "abuse of discretion" standard of judicial review, and would add the requirement that the putative abuse be clear.

See generally the Reading Notes on this subject.

2.78 Reasonable Efforts Definition

(a) The term reasonable efforts, whether or not capitalized, refers to one or more reasonable actions reasonably calculated to achieve the stated objective.

(b) Any assessment of reasonable efforts is to give due regard to the information reasonably available, to the relevant person at the relevant time, about (for example) the likelihood of success of specific action(s); the likely cost of other actions; the parties' other interests; the safety of individuals and property; and the public interest.

(c) A requirement to make reasonable efforts:

(1) does not necessarily require taking every conceivable reasonable action; and

(2) does not require the obligated party to put itself in a position of undue hardship.

(d) A party obligated to make reasonable efforts may consider potential cost and potential return when determining what actions it must take to satisfy that obligation.

Contract negotiators often use the term reasonable efforts, despite its vagueness, in order to get to signature. That's frequently an acceptable business risk: Most contracts are never significantly disputed, and so it's unlikely that the parties will ever need to litigate the meaning of reasonable efforts. ¶ The "undue hardship" language in subdivision (c)(2) and the "potential cost and potential return" phrase in subdivision (d) are adapted from a comment by Janet T. Erskine, Best Efforts versus Reasonable Efforts: Canada and Australia (Nov. 30, 2007). ¶ See generally the Reading Notes on this subject.

2.79 Reckless Definition

A person (the "actor") acts recklessly when the actor consciously disregards a substantial and unjustifiable risk that harm will result from the actor's conduct. The risk of harm must be of such a nature and degree that, considering the nature and purpose of the actor's conduct and the circumstances known to the actor, the disregard of the risk involves a gross deviation from the standard of conduct that a reasonable person would observe in the actor's situation.

This definition is based on Model Penal Code § 2.02(c), as implemented in, e.g., Tex. Pen. Code § 6.03(c). ¶ Some of the terms used here, such as substantial and unjustifiable risk and gross deviation, are of course vague and likely to be the subject of debate. Drafters could consider requiring any dispute about those terms to be decided by arbitration, possibly baseball-style arbitration.

2.80 Record Definition

Records, whether or not capitalized, refers to books, documents, and other data that are stored in any tangible- or intangible medium regardless of type, without regard to whether such items are in written, graphic, audio, video, or other form.

This definition is adapted from the (U.S.) Federal Acquisition Regulations, Contractor Records Retention, 48 C.F.R. § 4.703(a).

2.81 Regardless of Fault Definition

The term REGARDLESS OF FAULT, in respect of an obligation, means that the obligation applies regardless whether the obligation arose, in whole or in part, because of the negligence (see below), willful misconduct,

because of the WITHOUT REGARD TO THE CAUSE OR CAUSES OF ANY CLAIM, INCLUDING, WITHOUT LIMITATION, A CLAIM CAUSED IN WHOLE OR IN PART BY THE NEGLIGENCE (WHETHER SOLE, JOINT, CONCURRENT, COMPARATIVE, CONTRIBUTORY, ACTIVE, PASSIVE, GROSS, OR OTHERWISE), WILLFUL MISCONDUCT, STRICT LIABILITY, OR OTHER FAULT OF ANY MEMBER OF COMPANY INDEMNITEES, CONSULTANT INDEMNITEES, INVITEES AND/OR THIRD PARTIES, AND WHETHER OR NOT CAUSED BY A PRE-EXISTING CONDITION.

2.82 Representation Definition

representation is a statement of past or present fact; the verb represent has a corresponding meaning.

The phrase "statement of past- or present fact" was suggested by Professor Tina Stark, author of the well-regarded Drafting Contracts textbook. She suggests making it clear that a statement of future fact is not a representation; such a statement might constitute an enforceable promise (possibly in the form of a warranty), or it might be an unenforceable statement of opinion. See also 2.60. Misrepresentation Definition.

2.83 Responsible Definition

The term responsible, whether or not capitalized, refers to action that is both reasonable and conscientious. As an illustrative example, to make responsible efforts to achieve an objective (whether or not the term is capitalized) means to make at least such efforts as a reasonable person would make in a conscientious attempt to achieve that objective.

The term responsible is perhaps vague, but it's not unknown in the law. For example, the Delaware chancery court, in describing the duration of a preliminary injunction, referred to it as a "responsible period," albeit shorter than the period to which the claimant arguably would have been entitled. See Martin Marietta Materials, Inc v. Vulcan Materials Co., 56 A.3d 1072, 1147 (Del. Ch. 2012), aff'd, 45 A. 3d 148 (Del. 2012) (en banc).

2.84 Seasonable Definition

An action is taken seasonably (whether or not the word is capitalized) if the action is taken at or within the time agreed or, if no time is agreed, at or within a reasonable time.

The language of this definition is adapted essentially verbatim from UCC § 1-205.

2.85 Section Definition (cross-reference)

2.86 Serious Dispute Definition

The term Serious Dispute refers to any Agreement-Related Dispute that becomes, or appears reasonably likely to become, the subject of litigation or arbitration.

This definition can provide a useful shorthand for various dispute-management and -resolution clauses.

2.87 "Shall" Definition

Unless the context clearly and unmistakably requires otherwise:

(a) Terms such as "Party A shall take Action X" mean that Party A is required to take Action X.

(b) Likewise, terms such as "Party B shall not take Action Z" means that Party B is prohibited from taking Action Z.

This definition is provided because not all English speakers understand the term "shall" to mean "must." See generally the Reading Notes on this subject.

2.88 Signatory Party Definition

(a) Signatory Party refers to an individual or organization that enters into the Agreement as a named party to it.

(b) For the avoidance of doubt, no third-party beneficiary of the Agreement (if any) is a Signatory Party.

Sometimes it's useful to be very explicit that certain rights (usually) or obligations are reserved for the specific parties that are entering into the agreement.

2.89 Signed Definition

Signed and like terms such as sign, signing, and signature, whether or not capitalized, with respect to a writing or other record (collectively, "record"), refer to executing or adopting a symbol, or carrying out a process, attached to or logically associated with the record, with the intent to adopt, accept, or authenticate the record.

This definition of signed, etc., is a combination of: • the definitions of signed and writing in UCC §§ 1-201(37) and 1-201(43); and • the definitions of electronic signature and electronic record in the [U.S.] Electronic Signatures in Global and National Commerce Act ("E-SIGN"), 15 U.S.C. § 7006. ¶ The definition also draws on the definition of writing in Rule 1.00(v) of the 2010 proposed amendments to the Texas Disciplinary Rules of Professional Conduct [for lawyers]. (Those proposed amendments were rejected, for unrelated reasons, in a referendum of the State Bar of Texas.)

See generally the Reading Notes on this subject.

2.90 Sole discretion (cross-reference)

2.91 Specify Definition

IF: The Agreement requires, as a prerequisite to something (referred to as "B"), that something else (referred to as "A") must "specified" in the Agreement (whether or not the word specified is capitalized); THEN: That prerequisite is met if A is clearly indicated; it is not necessary for A to be expressly stated.

2.92 Substantial Evidence Definition

Substantial evidence is more than a mere scintilla. It means such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.

This commonly-used formulation is quoted verbatim from an opinion of the (U.S.) Supreme Court, Consolidated Edison Co. v. NLRB, 305 U.S. 197, 229 (1938).

2.93 Tax Definition

(a) The term tax, whether or not capitalized, refers to any tax, assessment, charge, duty, levy, or other similar governmental charge of any nature, imposed by any government authority.

(b) For the avoidance of doubt, the term tax does not encompass a price charged by a government authority for (i) services rendered, or (ii) goods or other assets sold or leased.

(c) Illustrative examples of taxes include the following, whether or not an obligation to pay the same is undisputed and whether or not a return or report must be filed:

(1) all taxes on income, gross receipts, employment, franchise, profits, capital gains, capital stock, transfer, sales, use, occupation, property, excise, severance, windfall profits, sick pay, and disability pay;

(2) all ad valorem, alternative minimum, environmental, license, payroll, registration, social security (or similar), stamp, stamp duty reserve, unemployment, value added, and withholding taxes; and

(3) all other taxes, assessments, charges, customs and other duties, fees, levies or other similar governmental charges of any kind whatsoever, together with

(4) all estimated taxes, deficiency assessments, additions to tax, fines, penalties, and interest.

This definition draws on: • contract language quoted by the Court of Appeals of New York in Innophos, Inc. v. Rhodia, S.A., 10 N.Y.3d 25, 27-28 (2008). In that case, the state of New York's highest court upheld a summary judgment that a $20 million-plus water usage charge, levied by a Mexican government entity, was a "tax" within the meaning of the contract's laundry-list definition; and • section 3.5(e) of the Asset Purchase Agreement between Piper Jaffray Companies and UBS Financial Services, available at the SEC's EDGAR Web site and reproduced in David Zarfes & Michael L. Bloom, Contracts and Commercial Transactions (Wolters Kluwer Law & Business 2011). ¶ See also the Sales Tax — Basic Terms.

2.94 Taxing Authority Definition

The term Taxing authority, whether or not capitalized, refers to any government authority exercising de jure or de facto power to impose, regulate, or administer or enforce the imposition of taxes.

See also the commentary to the Tax Definition, as well as the Government Authority Definition.

2.95 Time (of day) Definition

Unless clearly stated otherwise:

(1) Any reference to the time of day indicates the exact time. Hypothetical example: The term "5 p.m." refers to exactly 5:00:00.00 p.m.

(2) References to midnight on a stated day are to 12:00 midnight at the end of that day.

See generally the Reading Notes on this subject.

2.96 Timely Definition

An action is timely (whether or not the word is capitalized) if taken at or within the time agreed or, if no time is agreed, at or within a reasonable time.

This definition is the same as that of seasonably in the Seasonable Definition. It allows drafters to use timely as a synonym for seasonably. (Many modern readers seem not to be familiar with the latter term.)

2.97 Toolkit Item Definition

(a) The term Toolkit Item refers to any concept, idea, invention, strategy, procedure, architecture, or other work, that:

(1) is, in whole or in part, created by a service provider in the course of providing services to a customer; but

(2) is not specific, and/or is not unique, to the customer and its business.

This language relates to the ownership of intellectual-property rights in services deliverables.

(b) For the avoidance of doubt, the term Toolkit Item does not encompass Confidential Information of the customer.

2.98 Trademark Definition

(a) Unless otherwise clear from the context, for purposes of this Article, the term Trademark, whether or not capitalized, refers to trademarks, service marks, and trade names.

(b) As non-limiting illustrations: Things that can function as trademarks, alone or in combinations, include, for example brand names; two- and three-dimensional designs; domain names; sounds; colors and color combinations; aromas; tastes; and logos.

See generally, e.g.: • Trademark (Law.Cornell.edu) • Trademark (Wikipedia.org) • Trademark Basics (USPTO.gov) (video, with printable transcript)

2.99 Tribunal Definition

(a) Tribunal, whether or not capitalized, refers a panel of one or more neutral officials, where:

(1) one or more parties prsents evidence or legal argument or both to the panel; and

(2) thereafter, the panel renders a binding legal judgment that directly affects the interests of one or more parties in the matter in question.

(b) Examples of tribunals include a court, an arbitral tribunal, or an administrative agency or legislative body acting in accordance with subdivision (a).

This definition is adapted from proposed amendments to Rule 1.00(u) of the 2010 proposed amendments to the Texas Disciplinary Rules of Professional Conduct [for lawyers]. (The proposed amendments were rejected in a referendum for unrelated reasons.)

2.100 USD Defintion

The term USD refers to U.S. dollars.

"USD" is the ISO 4217 standard abbreviation for U.S. dollars; it is used to distinguish U.S. money from other currencies called dollars.

2.101 "Will" Means "Must" Definition

Unless the context clearly and unmistakably requires otherwise, terms such as "Party A will take Action X" mean that Party A is required to take Action X"; likewise, "Party B will not take Action Z" means that Party B is prohibited from taking Action Z.

See generally the Reading Notes on this subject.

2.102 Willful Definition

(a) Basic definition: The term willful (and its variant spelling wilful), in the context of action or conduct — for example, willful act or willful action or willful conduct or willful misconduct or willful neglect) — refers to action or conduct as to which it is shown, by clear and convincing evidence, that:

(1) the party that engaged in the action or conduct (the "actor") specifically intended to cause a particular consequence;

(2) the consequence was unlawful;

(3) the actor knew or should have known that the consequence was unlawful; and

(4) the action or conduct was not privileged.

(b) Failure to act is included: For the avoidance of doubt, for purposes of determining willfulness, the terms act, action, and conduct include one or more failures to act.

(c) Exclusions: For the avoidance of doubt, the term willful, in the context of action or conduct, does not encompass:

(1) efficient breach of contract; nor

(2) otherwise-lawful action or conduct where the actor intended at least in part to advance its own lawful interests.

This definition is based on that of New York law. If the definition ever becomes relevant, it might well be in connection with a carve-out to a limitation of liability. ¶ Even without this definition, if New York law applied, a court might hold that the the term willful in such a carve-out had approximately the meaning stated in this clause — but it doubtless would cost the parties a lot of money in legal fees to get to that result.

See generally the Reading Notes on this subject.

2.103 Workmanlike definition (cross-reference)

2.104 Writing & Written Definition

Writing and written, whether or not capitalized, refer to any tangible or electronic record of a communication or representation. The terms encompass, for example, handwriting, typewriting, printing, photocopying, photography, audio or video recording, and e-mail.

Portions of this definition are adapted from proposed amendments to Rule 1.00(v) of the 2010 proposed amendments to the Texas Disciplinary Rules of Professional Conduct [for lawyers]. (The proposed amendments were rejected in a referendum for unrelated reasons.)

3 Letter of intent

3.1 Letter of Intent – Basic Terms

3.1.1 The Parties Will Not Be Bound Unless and Until a Final, Formal Agreement is Signed

(a) The parties are entering into a letter of intent (which might be captioned as a memorandum of understanding or some similar title), which is referred to here as "the LOI," for the following purposes:

(1) to set out the parties' agreed "ground rules" for their anticipated discussion concerning the potential transaction or relationship that is the subject matter of the LOI, referred to here as the Proposed Arrangement; and

The term "Proposed Arrangement" is borrowed from generally accepted accounting principles, which require "[p]ersuasive evidence of an arrangement" before revenue can be recognized.

(2) to provide the parties with a tentative, written summary of at least some aspects of their current thinking about the Proposed Arrangement, for use as a convenient reference.

This subdivision explains to a future reader — mainly, judges — why the parties are bothering to enter into a letter of intent instead of simply proceeding straight to drafting and negotiating an Arrangement Agreement. See also the Annotations.

(b) The parties currently intend, but are not making a binding commitment, to negotiate, sign, and deliver a final, integrated, definitive agreement that sets forth all material terms of the Proposed Arrangement (referred to here as an Arrangement Agreement).

(c) Each party acknowledges — with the intent that the other party rely on that acknowledgement in entering into the LOI — and expressly agrees not to assert otherwise:

Concerning the "intent that the other party rely" language, see the Annotations.

(1) that the parties have not yet reached agreement on all material terms for the Proposed Arrangement;

(2) that in respect of the Proposed Arrangement, neither party will have any enforceable right against the other oe be bound by any obligation — whether the right or obligation allegedly arises in contract, tort, strict liability, quantum meruit, quasi-contract, or otherwise — other than those rights and obligations identified in the LOI as binding, if any — unless and until (i) all parties have signed and delivered an Arrangement Agreement, assuming one is agreed to; and (ii) any other prerequisites stated in the LOI have been met; and

(3) that the other party would not go forward with discussions about the Proposed Arrangement but for the parties' acknowledgement above and the parties' agreement to these "ground rules."

For annotated examples of short- and long-form provisions that the parties might wish to indeed be binding, see American Bar Association Section of Business Law, Letters of Intent (Ancillary Document B to Model Stock Purchase Agreement, Second Edition), Part Two, at 10.

3.1.2 The LOI Does Not Affect Any Separate Confidentiality Agreement

For the avoidance of doubt, the LOI neither limits nor expands any separate confidentiality agreement that may exist between the parties.

Letters of intent often contain their own extensive confidentiality provisions, but sometimes parties enter into separate confidentiality agreements. See also the Common Draft confidentiality provisions.

3.1.3 CHECK The LOI is Non-Exclusive

Unless the LOI expressly states otherwise, the LOI is non-exclusive; each party is free to seek, discuss, negotiate, and/or enter into arrangements that are similar (or even identical) to the Proposed Arrangement, with other parties, even if as a result the party in question would no longer be willing or able to enter into the Proposed Arrangement.

In some LOIs, one or both parties might insist on an exclusivity provision; this should be negotiated carefully.

3.1.4 CHECK The Parties Are to Be Considered to Have Satisfied Any Applicable Standard of Negotiation Conduct

Each party is to be considered to have satisfied any applicable standard of good faith, fair dealing, or similar duty, in the negotiation of an Arrangement Agreement.

This provision tries to forestall a claim that a party failed to comply with a putatively-applicable duty of good faith or fair dealing. ¶ This provision isn't phrased as "the duty of good faith doesn't apply," because that might not sit well with a judge or jury.

3.1.5 CHECK Either Party May Terminate Negotiations in Its Sole Discretion

(a) No party is obligated to continue in negotiations for the Proposed Arrangement; any party may terminate or withdraw from such negotiations at any time unless, and until, an Arrangement Agreement is signed and delivered by all parties.

(b) For the avoidance of doubt, unless the LOI expressly states otherwise, a party that wishes to terminate or withdraw from negotiations may do so:

(1) in its sole discretion;

(2) with a view toward none but its own interests and desires; and

(3) without obligation or liability of any kind, under any legal- or equitable theory, to any other party.

Note the "optics" approach taken by this provision, which specifically does not state that any obligation of good faith and fair dealing implied by law will not apply. Leaving aside whether such a statement would be enforceable, imagine how a judge or juror might react to the statement — or how it might look if reported in the newspaper.

Analogously, consider UCC § 1-302(b) (which applies only to contracts that come within the scope of the UCC): "The parties, by agreement, may determine the standards by which the performance of those obligations [of good faith, etc.] is to be measured if those standards are not manifestly unreasonable."

3.2 Letter of intent – Optional Terms

3.2.1 The Parties Will Negotiate in Good Faith

Each party will negotiate in good faith in attempting to reach agreement to the Arrangement Agreement.

CAUTION: Business people sometimes like to include provisions like this to signal (or protest) their own bona fides. But business people also sometimes think such provisions are mere throwaways. That's far from the case: in many jurisdictions, an agreement to negotiate in good faith will be legally binding — and is likely to be a serious mess to litigate. ¶ [DCT TO DO: Links to further reading?]

3.2.2 Performance Before Signature Does Not Create a Binding Agreement

(a) The Proposed Arrangement will not be binding on a party unless and until all parties have signed and delivered the Arrangement Agreement. This will be the case even if, before that time, one or more of the parties:

(1) has begun, or even substantially completed, (i) the performance of some or all of its proposed obligations, and/or (ii) the exercise of some or all of its rights, set forth in the Arrangement Agreement; and/or

(2) has accepted such performance, or acquiesced in or assented to such exercise, by another party.

(b) Any such performance or exercise is at the acting party's own risk and expense except to the extent (if any) that the parties have expressly agreed otherwise in writing.

4 Services

4.1 Services – Basic Terms

4.1.1 Definitions: Provider, Customer

(a) Provider refers to: Any party that provides services, where the services are governed by the Agreement.

The definitions of both Provider and Customer are set up to allow a drafter to simply incorporate this by reference ("grab and go"). ¶ CAUTION: Drafters should consider whether there might be a dispute about whether particular services performed by a provider are "governed by the Agreement" — conceivably there might be circumstances in which one party or another claims that particular services were, or were not, so governed.

(b) Customer refers to a party or parties to which the services referred to in subdivision (a) are provided.

4.1.2 Statements of Work Are Required

4.1.2.1 Only Services Obligations in Signed Statements of Work are Binding

(a) The only obligations of Provider to perform services under the Agreement (Services), and the only obligations of Customer to pay for Services, will be as set forth in one or more written statements of work, each signed by Provider and Customer (each, a Statement of Work or SOW).

(b) For the avoidance of doubt, no party is obligated to enter into or agree to any particular Statement of Work under the Agreement except to the extent (if any) that the Agreement expressly states otherwise.

This subdivision 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.)

(c) The Agreement itself may contain a Statement of Work in its provisions, in an exhibit, in an appendix, etc.

4.1.2.2 Changes to Statements of Work Must Be in Signed Writings

No change to a Statement of Work — including, for example, to its specification of the scope, cost, or schedule of Services or Deliverables — will be binding unless set forth in a writing signed by the party sought to be bound; each party specifically agrees not to assert the contrary.

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 27.1.1. Amendments Must Be in Writing.

4.1.2.3 Electronic Signatures Are Authorized for Statements of Work

[No clause text – the heading is sufficient]

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.

4.1.2.4 Statements of Work Take Precedence, Within Limits

(d) In the event of a conflict or other inconsistency between a Statement of Work and the Agreement, the Statement of Work will take precedence, but only if it says so explicitly.

See generally the Reading Notes on this subject.

4.1.2.5 Each Statement of Work is a Separate Agreement

Each Statement of Work is to be treated as a separate agreement that incorporates the Agreement by reference, whether or not the incorporation is expressly stated.

See generally the Reading Notes on this subject.

4.1.3 Permits and Licenses for the Services

4.1.3.1 Provider Will Obtain Its Own Professional Licenses

Provider, at its own expense, will cause to be timely obtained any professional licenses required by law for the performance of services generally (e.g., contractor licenses) by Provider and/or its subcontractors (if any) to the extent necessary for performance of the Services.

A contractor that doesn't obtain the necessary licenses might forfeit all compensation. ¶ A contractor that engages an unlicensed subcontractor might find itself liable for the unpaid wages of the subcontractor's employees.

4.1.3.2 Provider Will Obtain Any Necessary IP Licenses for Provider's Own Activities

Provider, at its own expense, will cause to be timely obtained any third-party intellectual-property licenses required for Provider to take the specific actions involved in performing the Services, including, for example, any such licenses required for Provider's use of software, data compilations, and similar tools.

Note that this is a different subject than IP licenses needed for Customer's use of deliverables, discussed below.

4.1.3.3 CHECK Provider Will Obtain Any Necessary Government Permits

Provider, at its own expense, will cause to be timely obtained any government permits (for example, building permits and the like) that are required by law for performance of the Services to be timely obtained.

In some circumstances — building a natural-gas pipeline comes to mind — the government-permitting process could be a decidedly non-trivial matter.

4.1.3.4 CHECK Customer Will (Normally) Obtain Any IP Use Licenses Needed

(a) Except as stated in subdivision (b), as between Provider and its subcontractors (if any) on the one hand, and Customer on the other hand, it is Customer's exclusive responsibility to obtain any licenses or other authorizations required for Customer's use of the Deliverables.

(b) Subdivision (a) does not apply to the extent that Provider expressly warrants that Customer's use of Deliverables will not infringe any third-party intellectual-property rights.

4.1.4 Standards for Performance of the Services

4.1.4.1 Workmanlike Performance is Required

Provider will cause all Services to be performed:

(1) in a workmanlike manner — this refers to a manner that generally would be considered proficient by those who successfully engage in the relevant trade or profession, without necessarily rising to the level of being exceptional, outstanding, or original; and

See generally the Reading Notes on this subject. ¶ The "considered proficient" language comes from a decision by the Supreme Court of Texas, discussing the implied warranty of good and workmanlike quality of services in connection with the repair of tangible goods. See Melody Home Mfg. Co. v. Barnes, 741 S.W.2d 349, 354 (Tex. 1987), quoted in Ewing Constr. Co. v. Amerisure Ins. Co., 420 S.W.3d 30, 37 (Tex. 2014) (responding to certified question from Fifth Circuit). ¶ The "without necessarily rising to the level of being exceptional, outstanding, or original" language is adapted from an alternate definition in the Merriam-Webster dictionary, namely "competent and skillful but not outstanding or original."

(2) in accordance with any additional requirements of performance, timeliness, or both, stated in the Statement of Work.

4.1.4.2 "Performance" Includes All Necessary Tasks and Materials

(a) Without limiting section 4.1.4.1: Except to the extent (if any) provided otherwise in the Agreement and/or in the Statement of Work, Provider will cause the following to be done at no additional expense to Customer:

For some services projects, it might make sense for Customer to provide some of the items below; if so, that should be documented in the Statement of Work.

(1) the performance of all individual tasks necessary for the proper rendering of the Services set forth in the Statement of Work, even if one or more such individual tasks is not expressly set forth there; and

(2) the provision of all materials, equipment, supplies, computer hardware and -software, work locations, electrical power, Internet- and other communications capability, and other items needed for Provider's performance of the Services — this obligation includes any necessary acquisition, installation, and maintenance of all such items.

Some customers are likely to want this language for comfort purposes. A provider might be concerned that such language could lead to disputes about expensive (and delay-causing) "scope creep"; my own guess, though, is that this language wouldn't do any significant harm. Here's why: Suppose the parties were to end up fighting about the scope of what the provider is supposed to do. In that case, the presence or absence of this language seems unlikely to make a difference one way or the other. So, if this language gives a customer some comfort, why not include it; doing so can help to remove a potential delay on the path to signature.

4.1.4.3 Provider Will Control the Means and Manner of Performance

As between Provider and Customer, Provider will at all times have the exclusive right and the exclusive obligation to control:

(1) the means and manner, and

(2) except as specified otherwise in the Statement of Work, the time and place,

of the performance of the Services.

4.1.4.4 Correction of Defects

Provider will address any defects in Services, or in Deliverables as delivered by or on behalf of Provider, in accordance with 5.1. Defect Correction — Basic Terms.

The "as delivered" phrase takes into account the possibility that the customer might modify a Deliverable after delivery, in which case the provider likely won't want to have to fix defects for free if the defect was not the provider's doing.

4.1.5 Provider Will Cooperate With Other Customer Contractors

(a) If so requested by Customer, Provider will provide reasonable cooperation with other contractors of Customer in their provision of goods or services for Customer.

(b) The obligation of subdivision (a) is not to be interpreted as, in itself, requiring Provider to do any of the following:

(1) share its confidential information with other contractors;

(2) license its proprietary technology (if any) to other contractors;

(3) perform services not within the scope of the Statement of Work;

(4) take or omit any action where (i) doing so is not required by the Statement of Work, and (ii) a non-trivial risk exists that doing so would increase Provider's cost of complying with the Statement of Work.

4.1.6 Billing is to be Per the Statement of Work

Billing for Services is to be:

(1) as specified in the Statement of Work (if applicable);

(2) accompanied by supporting detail sufficient to document the invoiced charges; and

(3) in accordance with 18.1. Payments — Basic Terms.

See also 19. Audits, especially

4.1.7 Customer Has the Right to Use the Deliverables

(a) Customer has the right to utilize any and all Deliverables in Customer's business as Customer sees fit, EXCEPT to the extent (if any) that the Agreement, or the relevant Statement of Work, expressly states otherwise.

(b) Customer's right under subdivision (a) applies to any and all intellectual-property rights owned or otherwise assertable by Provider.

(c) Customer acknowledges that its right under subdivision (a) might be subject to any applicable rights of third parties, for example intellectual-property rights, UNLESS Provider warrants otherwise in writing.

4.1.8 Provider Need Not Support Others' Modifications

(a) Provider may, in its sole discretion, decline to provide support for a Deliverable if Provider reasonably determines that the request for support arises from or relates to modification of the Deliverable by any individual or organization other than (i) Provider, or (ii) an individual or organization expressly authorized or directed in writing by Provider to make that modification of the Deliverable.

Providers will often be reluctant to take on any responsibility for deliverables that anyone else has "messed with."

(b) This section neither authorizes nor prohibits Customer from modifying any Deliverable.

4.1.9 Provider's Use of Customer Confidential Information is Restricted

Under the Agreement, Provider:

(1) will not obtain any ownership of Customer's confidential information or other intellectual property as a result of performing the Services; and

(2) may not utilize Customer's confidential information or intellectual property, EXCEPT that Provider may do so solely to the extent necessary for performance of the Services.

This is a "comfort" clause intended to reassure the customer.

4.1.10 CHECK Provider Will Own Any Newly-Created IP (Subject to Customer's Rights)

(a) As between Provider and Customer, unless the Agreement expressly provides otherwise, Provider will own the intellectual-property rights in and to (i) any Deliverables, and/or (ii) any Toolkit Items, that may be created, in the performance of Provider's obligations under the Agreement, by one or more employees of Provider (and/or of Provider's subcontractors, if any).

(b) The provisions of 11. Intellectual-property ownership apply to all such intellectual-property rights; upon request by Provider, Customer will take the steps called for by that section.

(c) Provider's ownership under subdivision (a) will be subject to Customer's rights in the Deliverables under the Agreement.

See generally the Reading Notes on this subject. See also: the optional provision 4.2.1. Customer Will Own All Newly-Created IP in Deliverables.

4.1.11 Procedures for Termination of a Statement of Work

4.1.11.1 Provider is to Deliver All Work-in-Progress

Upon any termination of a Statement of Work, Provider is to promptly deliver to Customer all completed- and partially-completed Deliverables for that Statement of Work.

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 will want to get as much

4.1.11.2 Customer is to Pay for Completed, Delivered Work

Upon Customer's compliance with its obligations under section 4.1.11.1 after a termination of a Statement of Work, Customer is pay Provider as provided in the Statement of Work for all materials delivered under that section.

4.2 Services – Customer Playbook

4.2.1 Customer Will Own All Newly-Created IP in Deliverables

(a) Customer will own all intellectual-property rights (to the exclusion of any retention of rights by Provider) in and to any Deliverables that may be created, in the performance of Provider's obligations under the Agreement, by one or more employees of Provider (and/or of Provider's subcontractors, if any).

(b) Provider will seasonably disclose to Customer, in writing and in detail, all intellectual property within the scope of subdivision (a).

(c) The provisions of 11. Intellectual-property ownership apply to all intellectual-property rights within the scope of subdivision (a); upon request by Customer, Provider will take the steps called for by that section.

(c) Provider specifically agrees not to challenge Customer's ownership of any Deliverable.

(d) This section takes precedence over 4.1.10. CHECK Provider Will Own Any Newly-Created IP (Subject to Customer's Rights).

See generally the Reading Notes on this subject.

4.2.2 Customer May Elect to Perform Services Itself

(a) Customer may elect to perform itself some or all Services (the Elected Services).

(b) Provider will provide reasonable cooperation with Customer in Customer's performance of the Elected Services if Customer so requests.

(c) As between Provider and Customer, Customer will be solely responsible for the performance of all Elected Services.

(d) Any failure of timely performance of the Elected Services is to be taken into account in determining whether Provider is liable for failure to timely perform other Services that are dependent on the Elected Services.

(e) For the avoidance of doubt, this section does not in itself require Provider to share its confidential information with, nor to license its proprietary technology (if any) to, Customer.

This language could lead to finger-pointing if — as not-infrequently happens — things start to go wrong, work gets delayed, costs increase, etc.

4.2.3 Customer May Further Develop Deliverables

(a) Customer may modify any Deliverable or have it modified by one or more third parties. For this purpose, "modify" includes, for example, development of improved or otherwise-revised or -altered versions of the Deliverable, including for example derivative works in the case of copyrightable works.

A customer's right to modify Deliverables is not always a given. See generally the Reading Notes on this subject.

(b) Customer may not modify any Deliverable, nor cause or induce the same, in violation of:

(1) any restrictions imposed by law, for example export-controls laws that might preclude sending Deliverables (or technical information about them) to contractors in other countries; and

(2) Provider's intellectual-property rights, if any, to the extent (if any) that such modification or further development is not authorized in writing by Provider. (This subdivision does not limit Customer's right to utilize the Deliverable as delivered by or on behalf of Provider pursuant to section 4.1.7)

4.2.4 Provider Has No Expectation of Communications Privacy on Provider's Systems

(a) Provider, on behalf of itself, its affiliates, its subcontractors (if any), and the Associated Individuals of each of them:

(1) KNOWINGLY, VOLUNTARILY, INTENTIONALLY, PERMANENTLY, AND IRREVOCABLY WAIVES any expectation of privacy that it might have in any communication or other information that is stored on, or transmitted via, any computer system or ‑network of Customer or any of its affiliates ("System"); and

(2) agrees that Customer and/or the owner or operator of the System may review and/or disclose any such communication or other information.

(b) For the avoidance of doubt, subdivision (a) applies, for example, to messages sent by email; chat; Internet messaging; and text messaging.

This is a prophylactic provision.

4.2.5 Non-Payment is a Breach of Contract, Not an Infringement

For the avoidance of doubt, IF: Customer does not timely pay amounts required by a Statement of Work; THEN: Provider's remedies (if any) will be for breach of contract and not for infringement of Provider's intellectual property rights in the Deliverables.

A customer might be interested in this clause, because otherwise non-payment of the required fee might result in infringement of the provider's intellectual property rights, which in some circumstances could result in a significantly-higher damage award than simply having to pay the required fee. [TO DO: NEED DISCUSSION OF FRANK MUSIC v. MGM GRAND HOTEL]

4.2.6 Customer Will Not Be Liable for Hindering Performance (With Exceptions)

(a) IF: Customer, directly or indirectly, delays, obstructs, disrupts, or hinders the performance of the Services (collectively, Customer Hindrance); THEN: Except to the extent (if any) that the Agreement expressly provides otherwise, in subdivision (b) or elsewhere:

(1) Provider will not be entitled to damages for any Customer Hindrance, of reasonable duration, that was within the reasonable contemplation of the parties;

(2) Provider will not make any claim for monetary relief in respect of any such Customer Hindrance; and

(3) Provider's EXCLUSIVE REMEDY for any such events will be an extension of time to complete Provider's performance, of a duration sufficient to compensate for the Customer Hindrance.

(b) For purposes of subdivision (a)(1), denial of job-site access by Customer is not within the reasonable contemplation of the parties unless the denial of access is:

(1) expressly contemplated by the Agreement or otherwise agreed in writing by the parties;

(2) required in case of genuine emergency; or

(3) in accordance with clearly-established and clearly-applicable standard practice.

(c) For purposes of subdivision (a)(1), willful misconduct and reckless- or grossly-negligent conduct by Customer or its agents are not within the reasonable contemplation of the parties.

See generally the Reading Notes on this subject.

4.2.7 Work May Not Be Suspended for Disputes

In no event may Provider suspend or terminate performance of the Services because of a dispute, including for example a dispute over payment or non-payment.

This language is modeled on § 2.5 of a 2008 outsourcing agreement between Boise Cascade, L.L.C., and Boise Paper Holdings, L.L.C.

4.2.8 Suspension of Work is Restricted

In no event may Provider suspend or terminate performance of the Services except as expressly provided in the Agreement or in the relevant Statement of Work.

This language ties up a potential loose end in an American Institute of Architects contract form, the relevant clause of which was litigated in U.W. Marx, Inc. v. Koko Contracting, Inc., 124 AD 3d 1121 (N.Y. App. 2015).

4.2.9 Provider Will Indemnify Customer Against the Specified Events

4.2.10 Provider's Indemnity Obligation Extends to All Work Site Events

Provider's indemnity obligation under section 4.2.9 extends to any event of any nature, whether or not related to the Services, where the event occurs:

(1) at any site where Services are being performed; and

(2) during transportation of tangible objects and/or individuals to or from such a site.

This type of clause is sometimes seen in contracts related to oil fields, for example drilling contracts.

4.2.11 Provider Must Promptly Notify Customer of Any Bodily Harm or Significant Property Damage

IF: Any injury to person or significant property damage occurs in connection with the Services; THEN: Provider will promptly:

(1) notify Customer;

(2) respond orally to any reasonable inquiry by Customer and/or Customer's agents concerning the event(s) in question; and

(3) if so requested by Customer, provide Customer or its designee with a non-privileged report of the event(s).

The idea for this provision came from negotiation of a services agreement used by a company in the oil-and-gas industry.

4.3 Services – Provider Playbook

4.3.1 Procedure for Handling Disagreements About Permit- and License Requirements

IF: Provider advises Customer in writing that a particular third-party approval, of any kind, may be necessary for Provider to perform some or all of the Services;

AND: Customer responds in writing that, in Customer's view, the approval in question is not required to proceed with the portion of the Services in question;

THEN: Provider will not be in breach of the Agreement or the relevant Statement of Work if, by written notice to Customer, Provider suspends work, temporarily or indefinitely, on the relevant portion of the Services.

See generally the Reading Notes on this subject.

4.3.2 Provider May Suspend Work for Nonpayment

IF: Customer does not pay Provider an amount due under the Agreement within seven days following the original payment due date (the Nonpayment Grace Period; AND: The nonpayment is not due to fault attributable to Provider; THEN:

(1) Provider may suspend its performance of the relevant Services at any time beginning at the end of seven days following notice of suspension (the Required Suspension Notice Period), without prejudice to Provider's other remedies for the nonpayment; and

(2) The price of the relevant Services is to be appropriately adjusted for account for Provider's reasonable costs, including for example those (if any) associated with (1) any resulting delay; and (2) redeployment of personnel- and material resources in connection with (i) the suspension of work and (ii) any resumption of work.

This language is modeled on an American Institute of Architects contract form, which was litigated in U.W. Marx, Inc. v. Koko Contracting, Inc., 124 AD 3d 1121 (N.Y. App. 2015). ¶ See also 4.2.8. Suspension of Work is Restricted.

4.3.3 Timely Payment is a Condition of Customer's Rights in Deliverables

Customer's timely payment of any amounts required by the applicable Statement(s) of Work in respect of a particular Deliverable is a prerequisite to Customer's continued exercise of its rights in that Deliverable.

See generally the Reading Notes on this subject.

4.3.4 Proper Performance of Services is Presumed Unless Shown to Have Been Negligent

A performance of Services that conforms to the express requirements of the Agreement (including for example those set forth in the relevant Statement of Work, if applicable) is presumed to have met the Performance Standard; overcoming that presumption as to particular Services requires a showing that those Services were negligently performed.

The presumption of satisfactory performance comes from Coulson v. Lake LBJ Mun. Utility Dist., 734 S.W.2d 649, 651 (Tex. 1987) (reversing and remanding court of appeals's setting aside of judgment on jury verdict in favor of defendant service provider).

4.3.5 Service-Bureau Use of Deliverables is Prohibited

Customer may not use any Deliverable, nor knowingly assist or permit the use of any Deliverable, for service-bureau use, which refers to the providing of services to or for third parties where such services are comprised substantially of functions performed by one or more Deliverables.

A provider might want to prevent the customer from using the provider's own software, equipment, etc. to go into competition with the provider. (The provider should ask, though, how likely this is to happen, and whether the associated business risk is worth arguing about it with the customer.)

4.4 Services – Other Optional Terms

4.4.1 Indemnity Obligation for Permits and Licenses

Any party obligated to obtain permits and licenses under the Agreement will defend and indemnify each other party against any third-party claim arising from the party's failure timely to carry out that obligation.

See 4.1.3. Permits and Licenses for the Services and 4.3.1. Procedure for Handling Disagreements About Permit- and License Requirements. ¶ Keep in mind that damages for breach of a contractual obligation would normally be limited to foreseeable damages, whereas an indemnity obligation might encompass even unforeseeable damages (unless otherwise specified in the indemnity language); see this note for additional details.

5 Defect correction

5.1 Defect Correction — Basic Terms

5.1.1 Definitions: Provider; Customer; Defect

(a) Provider refers to a Signatory Party that, under the Agreement, is to provide goods or services to another party.

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

(b) Customer refers to a party to which Provider provides goods or services under the Agreement.

See the comment to subdivision (a).

(c) Defect refers to any failure, by one or more deliverables or one or more services provided under the Agreement, to comply with agreed written specifications (for example, in the Agreement or in a purchase order or statement of work).

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.

5.1.2 Provider Will Timely Provide Customer with a Correction or Workaround for Timely‑Reported Defects

(a) Provider's obligation in this section applies to Defects that Customer reports in writing wtihin 60 days after delivery of the relevant deliverable or completion of the relevant service, as applicable (the Defect-Reporting Deadline).

(b) For any such Defect, Provider — at its own expense — will do one or both of the following before 30 days after Customer's report of the Defect to Provider under subdivision (a) (the Defect-Correction Deadline):

(1) correct the Defect, which may include repairing or replacing a defective deliverable and/or re-performing defective services; and/or

(2) deliver a commercially-reasonable workaround for the Defect if Provider reasonably determines the actions in subdivision (1) to be impractical.

This is a fairly-standard protocol for correction of software defects; it should also be useful in other contexts. ¶ Some drafters might want to provide a schedule of different reporting deadlines for different categories of Defect, based on (for example) how long it might take for a particular category of Defect to become apparent.

CAUTION: To provide some protection for limitations of liability, providers should seriously consider including 5.2.1. Customer's Backup Remedy is a Refund in the Agreement, especially if they include 5.3.1. These Provisions Are Customer's EXCLUSIVE REMEDY for Defects; see the discussion in the Annotations.

5.2 Defect Correction – Customer Playbook

5.2.1 Customer's Backup Remedy is a Refund

IF: Provider does not timely take the action or actions required by section 5.1.2 in respect of any Defect; THEN: Unless the Agreement expressly states otherwise, at Customer's written request, Provider will promptly

(1) cause a refund to be made of all amounts paid, by or on behalf of Customer, for the relevant deliverable(s) or service(s); and

(2) cancel any unpaid invoice calling for payment, by or on behalf of Customer, for those deliverable(s) and service(s).

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.

5.3 Defect Correction – Provider Playbook

5.3.1 These Provisions Are Customer's EXCLUSIVE REMEDY for Defects

Provider's defect-correction obligations stated in section 5.1 are Provider's only obligations, and the EXCLUSIVE REMEDIES available to Customer (or any individual or organization claiming through Customer), for any defect in goods or other deliverables or in services.

CAUTION: To provide some protection for limitations of liability, providers who want to include this exclusive-remedies section should seriously consider including 5.2.1. Customer's Backup Remedy is a Refund in the Agreement as well; see the discussion in the Annotations.

6 Subcontracting

6.1 Subcontracting — Basic Terms

6.1.1 Definitions: Provider; Subcontracting

These definitions are set up so that these provisions can be referred to in a contract without explicitly stating which party is "Provider" and which is "Customer."

(a) Customer – see Provider, below.

(b) Provider refers to a party providing deliverables or services under the Agreement to, or for the benefit of, another party (Customer).

(c) Subcontracting, whether or not capitalized, refers to a party's causing or permitting another individual or organization to perform any of the party's obligations under the Agreement.

This definition adapts language from the contract in suit in UPS Supply Chain Solutions Inc. v. Megatrux Transportation, Inc., 750 F.3d 1282, 1284 n.1 (11th Cir. 2014). In that case, the district court held, and the appeals court affirmed, that the defendant, a trucking company, was liable for the full amount of loss from theft of cargo after the trucking company subcontracted delivery without authorization.

6.2 Subcontracting – Customer Playbook

6.2.1 Provider is Customer's Primary Contact

For the avoidance of doubt, notwithstanding any subcontracting, Provider remains Customer's primary contact for all matters relating to Provider's obligations under the Agreement.

CAUTION: This provision sounds good in theory, but it might be inconvenient if Customer persisted in behaving otherwise – see also the other provisions in this.

6.2.2 Customer's Subcontracting Review is for Its Benefit Only

For the avoidance of doubt, any review of proposed subcontracting by Customer, and any approval of particular subcontracting, subcontracts, or subcontractors, by Customer, in and of itself:

(1) does not relieve Provider of any duty to perform its obligations under the Agreement nor for liability for breach;

(2) is not to be deemed as creating a direct contractual relationship between Customer and any subcontractor engaged by Provider; and

(3) is for Customer's own benefit only and not for that of Provider.

Subdivision (1) is modeled on the last sentence of UCC § 2-210(4); see also Assignment effect. Assignment effect (assignment does not relieve assigning party of its responsibility without non-assigning party's consent). ¶ See generally the Reading Notes on this subject.

6.2.3 Intellectual-Property Agreements with Subcontractors Are Required

To the extent that the Agreement sets forth or affects intellectual-property rights of Customer (including for example Customer's confidential information), Provider will enter into written agreements with its subcontractors (if any) that are at least as protective of those rights of Customer as the Agreement.

See generally the Reading Notes on this subject. ¶ This provision is worded provisionally (no pun intended) so that Provider's obligation to enter into an IP agreement will apply automatically, but only in circumstances where it should apply.

6.2.4 Advance Notice and/or ‑Approval of Subcontracting

IF: The Agreement specifies that one or more of advance notice or advance approval of subcontracting is required; THEN: Provider must (i) notify Customer in writing or (ii) obtain Customer's prior written approval, as the case may be, a reasonable time in advance, of any of the following:

(1) that Provider intends to subcontract some or all of its obligations under the Agreement; and

(2) to the extent so required by the Agreement: (A) the specific subcontractor(s) Provider intends to use, and (B) the specific task(s) that Provider intends to subcontract.

Customers sometimes want to include provisions like this in their services agreements, to allow them to keep track of which companies are actually doing the contracted work. ¶ See generally the Reading Notes on this subject.

6.2.5 Insurance Requirements for Subcontractors

Provider will require its subcontractors (if any) to comply with the insurance requirements of the Agreement, including for example naming Customer as an additional insured if Provider is required to do so.

Verifying compliance with insurance requirements is sometimes overlooked, which could lead to unpleasant surprises down the road.

6.2.6 Government-Required Subcontractor Reports

At Customer's written request from time to time, Provider will seasonably provide Customer with information about its subcontractors (if any) to the extent reasonably necessary for Customer to make any reports required:

(1) by law (for example, reports concerning equal opportunity or executive compensation), and/or

(2) by a contract between Customer and a governmental entity or a government contractor.

Many federal contractors are now required to report executive-compensation information for its subcontractors. See generally, e.g., Roger Waldron, Regulatory: Federal Acquisition Regulation Council Amendment Requires Greater Transparency (Sept. 8, 2010).

6.2.7 Flowdown of Government-Contracting Requirements

Provider will ensure that its agreements with its subcontractors under the Agreement (if any) include all government contracting provisions (if any) that are required by law to be included in such subcontracts.

Agreeing to this provision likely will put additional administrative burdens on a provider, but as a practical matter that burden might be unavoidable.

6.2.8 All Non-Employees Are Considered Subcontractors

For the avoidance of doubt, any individual providing services on behalf of Provider pursuant to the Agreement who is not an employee of Provider is considered a subcontractor for purposes of the Agreement.

This clause, if demanded by a customer, could be problematic for a provider that uses individual independent contractors on a long-term basis. See generally 27.1.6. Independent Contractors.

6.3 Subcontracting – Provider Playbook

6.3.1 Unreasonable Delay of Customer Approval

For the avoidance of doubt, any unreasonable delay by Customer in reviewing or approving subcontracting matters is to be taken into account in determining whether Provider is in breach of its obligations under the Agreement.

7 Confidential information

7.1 Confidential Information – Basic Terms

See generally the Reading Notes on this subject.

7.1.1 Definition of "Confidential Information"

7.1.1.1 CHECK "Disclosing Party" Refers to Each Party Unless Otherwise Agreed

(a) Disclosing Party refers to each Signatory Party when providing its Confidential Information to another party; only the Confidential Information of a Disclosing Party is protected by this.

(b) Receiving Party refers to a party, bound by the Agreement, to which Confidential Information is disclosed.

This language is set up in generic terms with a view to having this be serviceable even if a drafter doesn't fill in deal-specific details.. See also the Annotations for a detailed discussion of the pros and cons of a "two-way" confidentiality provision, in which each signatory party can be a Disclosing Party, versus a "one-way" provision, in which only one party can be a Disclosing Party.

7.1.1.2 At a Minimum, the Disclosing Party Must Have Taken Reasonable Steps to Keep the Information Secret

Confidential Information refers to information — including, for example, information in the categories listed in section 7.1.1.3 — where all of the following are true:

(1) the information is the subject of efforts that are reasonable under the circumstances to maintain its secrecy, by and/or on behalf of a Disclosing Party; and

The language, "the subject of efforts reasonable under the circumstances," is adapted from the Uniform Trade Secrets Act; see, e.g., Cal. Civ. Code § 3426.1(d)(2); Tex. Civ. Practice & Rem. Code § 134A.002(6)(B); see also these notes. See the discussion in the Annotations concerning the secrecy requirement for information to be treated as confidential.

(2) the information is initially disclosed, by or with the authorization of the Disclosing Party, to a Receiving Party during the term of the Agreement (the Protected-Disclosure Period);

Protected Disclosure Period: A receiving party wouldn't want to be ambushed by claims that disclosed information was supposedly secret when the information was first provided to the receiving party long after the agreement was signed — by which time the parties' business people might well have forgotten that their companies still technically had a confidentiality agreement in place. ¶ A receiving party might want to request an even shorter disclosure period such as (for example) the expected duration of a negotiation, plus perhaps a safety margin.

CAUTION: Even disclosures made outside the Protected-Disclosure Period might still be subject to obligations of confidence under applicable law, for example, the laws governing protected health information or nonpublic personal financial information.

(3) the initial disclosure referred to in subdivision (2) is in connection with the Agreement or a transaction or relationship resulting from the Agreement; and

In connection with the Agreement: This language helps put fences around the parties' confidentiality obligations. That can be useful for large companies that might have multiple dealings with each other, including other dealings outside the scope of the Agreement, and that don't necessarily want confidentiality obligations spilling over from one transaction to the parties' other dealings.

Any transaction or relationship: See the arbitration-clause commentary.

(4) the information is not excluded from Confidential-Information status under the Agreement by, for example, the enumerated exclusions below or failure to comply with a marking requirement (if applicable).

7.1.1.3 See This List of Representative Examples of Confidential Information

Except to the extent (if any) that the Agreement specifically provides otherwise, the term Confidential Information encompasses, by way of example and not of limitation, the following types of information when the information is otherwise eligible under the Agreement:

Algorithms; audit reports. ¶ Biological materials; business plans; business records. ¶ Circuit records; commercial information; compounds; computer programs; contracts; construction records. ¶ Data-center designs; designs; diagrams; documents; draft publications; drawings. ¶ Engineering records. ¶ Financial information; financial projections; financial statements; forecasts; formulas. ¶ Hardware items. ¶ Ideas; interpretations; invention disclosures. ¶ Leases. ¶ Machine-readable data; maps; market projections; marketing information; methods. ¶ Offers; operational data; opinions. ¶ Patent applications (when unpublished); plans; pricing information; procedures; processes; product development plans; product information programs; projections; proposals. ¶ Research data; research plans. ¶ Samples; server-configuration designs; source code for computer programs; specifications; strategies. ¶ Tax bills; technical information; technical reports; technological developments; test data; title reports.

This laundry list is a "roadblock" clause; disclosing-party counsel sometimes want to include such examples to serve as explicit reminders to the receiving party (and also as ammunition in litigation).

7.1.1.4 The Receiving Party's Notes, Etc., Are Also Considered Confidential Information

The term Confidential Information likewise encompasses the following, prepared by (or for, or on behalf of) the Receiving Party, when they contain Confidential Information: Analyses; compilations; forecasts; interpretations; notes; reports; studies; summaries; and similar materials.

This is another roadblock clause, and also a reminder to the receiving party.

7.1.1.5 Third-Party Information in the Disclosing Party's Possession Can Likewise Be Confidential

Information owned or maintained by a third party, when otherwise eligible, is considered Confidential Information to the same extent as if the information were that of the Disclosing Party, if the third-party information is disclosed or made accessible to the Receiving Party, by or on behalf of the Disclosing Party, pursuant to the Agreement.

A receiving party might want to include the 7.3.1. The Disclosing Party Warrants Its Authority to Provide Confidential Information provision.

7.1.1.6 Specific Selections and Combinations of Information Can Be Confidential

A specific selection or combination of items of information can be eligible for Confidential Information status even if some or all of the items are not themselves confidential.

This language reflects established law (at least in the U.S.), as discussed in the Annotations.

7.1.1.7 Five Categories of Information Are Excluded from Confidential‑Information Status

(a) At any particular time, the term Confidential Information does not include information that is shown — with reasonable corroboration — to be or to have been, at that time, within one or more of the following categories:

Most confidentiality agreements contain express exclusions from confidentiality such as these. The numbered list of exclusions below is fairly typical.

This provision requires only reasonable corroboration of a claim of exclusion from confidentiality, as opposed to some provisions of this kind that require documentary proof of the claim. This balances: • the interest of the disclosing party in avoiding self-interested (or even fraudulent) claims of, say, independent development by the receiving party, against • the interest of the receiving party in not having to meet an impossible burden of proof. See also the Notes for a discussion of analogous patent-law doctrines.

(1) The Receiving Party knew the information before obtaining access to it under the Agreement; or

This is one of the exceptions where the corroboration requirement can come into play. Without corroborating evidence, a judge or jury might well be skeptical of an accused misappropriator's too-convenient claim, after the fact, that: We can't be liable for misappropriating your confidential information because knew the information before you gave it to us.

(2) Both of the following are true: (A) A third party provided the information to the Receiving Party, and (B) at the time that happened, the third party was not under a legally-enforceable obligation of confidence, where the obligation of confidence (i) concerned the information and (ii) benefited the Disclosing Party.

If a third party has the information in question, and isn't obligated to keep the information secret, then it's tough for the Disclosing Party to argue that the information really is the confidential information of the Disclosing Party.

(3) The Receiving Party independently developed the information without using Confidential Information; or

As a practical matter, an accused misappropriator of confidential information might have a hard time convincing a judge or jury that it independently developed the allegedly-misasppropriated information on its own. For an example, see Celeritas Technologies Ltd. v. Rockwell Int'l, Inc., 150 F.3d 1354 (1998), where a federal-court jury in Los Angeles awarded a startup company more than $57 million because the jury found that Rockwell had breached a confidentiality agreement; the jury rejected Rockwell's assertion that its engineers had independently developed the technology in question after having been exposed to the startup company's information. (Disclosure: I was part of Rockwell's trial team in that case.)

(4) The information was published, or otherwise made generally available to one or more others not under a legally-enforceable obligation of confidence benefiting the Disclosing Party, without breach of the Agreement by the Receiving Party; or

(5) Both of the following are true: (A) The Disclosing Party (or someone authorized by the Disclosing Party) disclosed the information to one or more third parties, and (B) at that time (or at any time afterwards), at least one of the third parties was not under a legally-enforceable obligation of confidence that: (i) benefited the Disclosing Party, and (ii) included restrictions on disclosure and use comparable to those of the Agreement.

A disclosing party might try to omit exclusion #5, but in that case: ¶ The receiving party would probably push back, on the theory that if you [the disclosing party] allow others to use its information without legal restriction, then I get to do the same thing. ¶ Moreover, it's unclear what the legal effect of omitting exclusion #5 would be, because by law (at least in the U.S.), such a disclosure of information to a third party without confidentiality restrictions would have the effect of killing any trade-secret rights the discloser might have had in the information, as discussed here.

(b) The fact that information comes within the scope of a subpoena or other Compulsory Legal Demand does not in itself mean that the information becomes categorically excluded from Confidential Information status.

Some badly-drafted confidentiality exclusions state that subpoenaed information is excluded from confidentiality. This could be a big mistake for a disclosing party — a receiving party could later argue that the mere issuance of a third-party subpoena automatically resulted in the subpoenaed information being excluded from confidentiality status, even if a court were to issue a protective order restricting what the third party could do with the information. The better approach is the one taken by this provision.

7.1.2 CHECK Confidential Information Must Be Marked As Such Unless Otherwise Agreed

7.1.2.1 Confidentiality Markings Must Be Reasonably Prominent

(a) Information that is made available to the Receiving Party in connection with the Agreement, by or on behalf of the Disclosing Party, will not be considered Confidential Information unless the information is marked as provided in the Agreement.

A slightly-tricky situation is when a receiving party's people are allowed to look at a disclosing party's internal files but not to make notes, take away copies, etc. In such a situation, it might well be burdensome for the disclosing party to have to go each of the files to ensure that all confidential information is marked, on pain of losing confidentiality protection. There might also later be a he-said, she-said proof problem if a dispute were to arise about whether particular information had in fact been marked.

(b) Except as otherwise stated below, for information to be considered Confidential Information, the information must:

(1) be set forth (or summarized) in tangible form (including for example an electronic storage device); and

(2) be marked with a reasonably-prominent, visually-readable notice such as (for example) "Confidential information of [name]" or "Subject to NDA."

See the discussion of the purpose of the marking requirement in the Annotations. ¶ CAUTION: Some information (such as personal health information or personal financial information) might be subject to confidentiality obligations by law even if it is not marked as confidential, as also discussed in the Annotations.

7.1.2.2 The Disclosing Party May Do Catch-Up Marking for a Limited Time

(a) The Catch-Up Marking Period for Confidential Information is ten business days after the initial unmarked disclosure of the specific information in question.

(b) IF: A Disclosing Party discloses putatively-Confidential Information that is not marked as such (for example, disclosure in an unmarked writing or by a demonstration or oral disclosure); THEN: The Disclosing Party may retroactively mark the information as confidential, with the same effect as if the information had been timely marked, as follows.

(1) At the time of the initial unmarked disclosure of the information in question, the Disclosing Party must advise the Receiving Party, orally or otherwise, that the Disclosing Party considers the information to be Confidential Information.

(2) In addition, no later than the end of the Catch-Up Marking Period, the Disclosing Party must: (A) furnish the Receiving Party with a copy or written summary of the Confidential Information that is marked as Confidential Information; and (B) give the Receiving Party notice that it has done so.

7.1.3 The Receiving Party is Bound by the Following Confidentiality Obligations

7.1.3.1 The Receiving Party Must Take At Least Reasonable Secrecy Precautions

The Receiving Party must cause the following precautions to be taken to safeguard Confidential Information in its possession, custody, or control:

(1) at least the same precautions as the Receiving Party takes for its own information of comparable significance;

(2) in no case less than those precautions that a prudent person would take in the same circumstances; and

(3) any other particular secrecy precautions stated in the Agreement.

In many situations, these "standard" precautions are likely to satisfy the disclosing party's desires, but for some types of Confidential Information, a disclosing party might want to insist on special precautions — especially in the era of criminal hackers, and even state actors, breaking into insufficiently-secure computer systems and stealing valuable information, such as happened to Sony Pictures Entertainment, allegedly at the hands of North Korea, and to Home Depot, which booked a charge of $161 million after a 2014 theft of customers' credit-card data.

7.1.3.2 All Unauthorized Uses, Disclosures, etc., of Confidential Information Are Prohibited

The Receiving Party may not disclose, use, or copy Confidential Information, in whole or in part, except as expressly provided in the Agreement.

7.1.3.3 The Receiving Party's Activities Relating to Confidential Information Must Comply with Law

The Receiving Party is to take prudent measures to ensure that any use, disclosure, or copying of Confidential Information, by or on behalf of the Receiving Party or any party receiving Confidential Information from the Receiving Party complies with applicable law, including for example any applicable law concerning (i) privacy or (ii) export controls.

A requirement like this can be handy if the Receiving Party will be dealing with information whose distribution is restricted by law, for example personal health information or export-controlled information. ¶ This provision uses a prudent-measures standard instead of an absolute obligation. ¶ See also 7.2.5. The Receiving Party Must Defend and Indemnify Against Certain Events.

7.1.4 CHECK The Receiving Party's Confidentiality Obligations Will Last Indefinitely Unless Otherwise Agreed

(a) Confidentiality-Obligation Period refers to the period beginning on the ef­fect­ive date of the Agreement, and continuing until such time — if any — as the information in question no longer qualifies as Confidential Information.

Possible alternative: Confidentiality-Obligation Period refers to [a specific time period]. ¶ A receiving party will often want the Confidentiality-Obligation Period to be a fixed period of time to provide a bright-line marker of when the information in question is free from confidentiality obligations (except of course for any that might be imposed by law, for example personal health or ‑financial information.) Disclosing parties might go along with this if the information's value to them is likely to fade over time — but that won't always be the case; consider, for example, the recipe for making Coca-Cola® syrup. See also the discussion in the Annotations.

(b) The obligations in this section 7.1.3 apply only during the Confidentiality-Obligation Period; during that time, though, those obligations will continue to apply to all Specimens of Confidential Information, even after termination or expiration of the Agreement.

The "continue to apply" language is an avoidance-of-doubt provision that a disclosing party can cite in a dispute if necessary.

7.1.5 Certain Uses and Disclosures of Confidential Information Are Authorized

7.1.5.1 Certain Specific Uses Are Pre‑Authorized

(a) Authorized Use Period refers to the term of the Agreement.

(b) Solely during the Authorized Use Period, the Receiving Party may use Confidential Information to the extent reasonably necessary for one or more of the following:

(1) performing the Receiving Party's obligations under the Agreement;

(2) exercising the Receiving Party's rights under the Agreement;

(3) assessing whether to enter into another agreement with the Disclosing Party; and

(4) any other particular authorized uses expressly agreed to in writing by the parties — it is immaterial if one or more of such other authorized uses, if any, falls within any of subdivisions (1) through (3) above.

Many confidential-information clause templates don't specify any pre-authorized uses of Confidential Information; typically, the parties end up negotiating some fairly-standard categories of authorized use. To save negotiation time, this provision simply goes ahead and pre-authorizes some of those particular categories of use.

A receiving party might want to state explicitly that that certain specified uses are authorized.

7.1.5.2 Confidential Information May Be Disclosed in Confidence to Employees and Specified Others

Solely during the Authorized-Use Period, the Receiving Party may disclose Confidential Information — on a strict need-to-know basis in connection with the Receiving Party's use of Confidential Information permitted by the Agreement — to one or more of the following, if any:

Limiting disclosures by the Receiving Party to a need-to-know basis is pretty standard in confidentiality provisions.

(1) the Receiving Party's officers, directors, and employees, and individuals having comparable status if the Receiving Party is a non-corporate type of organization (for example, managers of a limited liability company and general partners of a general- or limited partnership); and

(2) any other authorized recipients expressly agreed to in writing by the parties, if any. (It is immaterial if one or more such other authorized recipients comes within the scope of subdivision (1) above.)

Drafters should consider the extent — if any — to which the Receiving Party's contractors, affiliates, etc., should be permitted to receive Confidential Information. This will be especially true if the Receiving Party's workforce includes so-called leased employees or other individuals working long-term in independent-contractor status.

7.1.5.3 Each Recipient Must Be Bound by Comparable Confidentiality Obligations

Each individual to whom Confidential Information is disclosed by the Receiving Party must be legally bound to comply with the provisions of the Agreement protecting Confidential Information, either:

(1) by a written agreement with the Receiving Party containing confidentiality obligations, comparable to those of the Agreement, that apply to Confidential Information; or

(2) as a matter of law, for example where (A) the recipient is an employee of the the Receiving Party and (B) under applicable law an employee is bound to preserve in confidence the confidential information of the employer.

This subdivision ia a corollary to the confidentiality obligations; see generally its commentary.

7.1.6 Limited Disclosure is Authorized in Response to Certain Subpoenas, Etc.

7.1.6.1 What Counts as a "Compulsory Legal Demand"

Compulsory Legal Demand refers to a demand for information such as (for example) a subpoena; a search warrant; a civil investigative demand; or a discovery request in a lawsuit; if in each such case, both of the following are true:

(1) the demand for information is initiated or propounded by a third party such as (for example) a litigant or a governmental entity; and

(2) the Receiving Party's compliance with the demand for information may be compelled under penalty of law.

7.1.6.2 Procedure for Disclosure in Response to Compulsory Legal Demands

The Receiving Party may disclose Confidential Information in response to a Compulsory Legal Demand, as follows:

(1) The Receiving Party must seasonably advise the Disclosing Party of the Compulsory Legal Demand (to the extent that doing so is not prohibited by law).

(2) The Receiving Party must disclose only so much Confidential Information as is required to comply with the Compulsory Legal Demand.

(3) If so requested by the Disclosing Party, the Receiving Party must provide reasonable cooperation with any efforts by the Disclosing Party to limit the disclosure, and/or to obtain legal protection for the information to be disclosed, in response to the Compulsory Legal Demand.

(4) Upon request by the Receiving Party, accompanied by (and/or supplemented with) reasonable supporting documentation, the Disclosing Party will reimburse the Receiving Party for all reasonable expenses incurred in providing the cooperation referred to in subdivision (1), including for example reasonable attorney fees.

7.1.6.3 Only Compulsory Disclosures Are Authorized by This Section

For the avoidance of doubt, this section 7.1.6 does not authorize any disclosure Confidential Information that does not qualify as a Compulsory Legal Demand (for example, a discretionary filing under the securities laws).

This provision makes it clear that voluntary or discretionary disclosures of Confidential Information are not allowed, for example in public filings with the Securities and Exchange Commission (SEC). For a case in which the voluntary-filing issue was litigated, see Martin Marietta Materials, Inc v. Vulcan Materials Co., 56 A.3d 1072 (Del. Ch. 2012), aff'd, 45 A. 3d 148 (Del. 2012) (en banc). There, the court held that Martin Marietta had breached a non-disclosure agreement by including Vulcan's confidential information in an SEC filing about Martin Marietta's proposed takeover of Vulcan. ¶ See also 7.3.9. Public Filings May Include Confidential Information Under Certain Conditions.

7.1.7 Certain Disclosures Affirmatively Authorized by Law Are Not Prohibited

(a) The confidentiality provisions of the Agreement are not to be interpreted:

(1) as precluding the Receiving Party from disclosing Confidential Information, in confidence and to the minimum extent required by law, as part of any of the following:

(A) reporting possible violations of law or regulation to any governmental agency or entity having jurisdiction, including but not limited to the United States Department of Justice, Securities and Exchange Commission, Congress, and any agency inspector general; or

(B) making other disclosures by the Receiving Party that are positively authorized by law or regulation, for example the [U.S.] National Labor Relations Act or other labor- or employment law; nor

(2) as requiring the Receiving Party to obtain the prior consent of the Disclosing Party to make such reports or disclosures; nor

(3) as requiring the Receiving Party to notify the Disclosing Party that it has made such reports or disclosures.

Several U.S. Government agencies fiercely assert that a company may not even arguably discourage, let alone prohibit, the company's employees from disclosing whistleblower information to the agencies. For example, in 2015 the Securities and Exchange Commission went after well-known contractor KBR for this; the contractor agreed to the entry of a cease-and-desist order and to pay $130,000 settlement. [SEC press release] [SEC order] [Houston Chronicle article] ¶ See also the discussion of how the [U.S.] National Labor Relations Board has taken a similar view about employees' discussing salary- and working-conditions with each other.

(b) In the interest of promoting the prompt identification and correction of possible violations of law or regulation, the Receiving Party is strongly urged to promptly advise the Disclosing Party of any facts, material to the Disclosing Party or to the relationship between the Disclosing Party and the Receiving Party, that would be contained in any report or disclosure referred to in subdivision (a)(1).

7.1.8 Necessary Copying and Excerpting of Confidential Information Are Authorized

(a) During the Authorized-Use Period, but not afterwards, the Receiving Party may make copies and excerpts of Confidential Information, solely to the extent reasonably necessary for use or disclosure permitted by the Agreement.

(b) The Receiving Party must ensure that any such copy or excerpt is marked, with reasonable prominence, as the Confidential Information of the Disclosing Party.

(c) For the avoidance of doubt, the confidentiality obligations of the Agreement apply to all such copies or excerpts.

7.2 Confidential Information – Disclosing Party Playbook

7.2.1 Clearly-Confidential Information Need Not Be Marked

The marking requirement of section 7.1.2 does not apply to information that would be recognized, by a reasonable person familiar with the type of information in question, as clearly being Confidential Information.

Some disclosing parties might not want to be bothered with having to mark their confidential information as such. Such a preference can be accommodated at least somewhat by using this provision. ¶ A receiving party, though, might well object to this provision because it's necessarily vague, which could later lead to disputres about whether particular information qualified as "clearly" confidential.

7.2.2 Affiliates' Information Can Be Confidential

(a) The information of one or more affiliates of a Disclosing Party is to be considered Confidential Information to the same extent as if it were owned or maintained by the Disclosing Party itself, but only if the information is clearly marked as being subject to the Agreement.

(b) For the avoidance of doubt, the marking requirement of subdivision (a) applies regardless whether the Agreement requires Confidential Information of the Disclosing Party itself to be marked as such.

This affiliate-information language reflects a compromise between the following party positions: • A disclosing party will often want its affiliates' confidential information to be protected without the affiliates' having to negotiate and sign separate confidentiality agreements. • On the other hand, a receiving party might insist on knowing exactly which companies conceivably might sue the receiving party someday for breach of contract. • This language allows affiliate information to be protected, while reducing the chances that the receiving party might someday be ambushed by claims of mis­ap­pro­pri­a­tion of information that its people had no real reason to know was confidential.

7.2.3 The Confidentiality of Disclosed Information is Presumed

All information of, or maintained by, the Disclosing Party is to be presumed to be Confidential Information unless and until shown otherwise.

A disclosing party might well want this presumption of confidentiality, but a receiving party might not be enthusiastic about reversing the law's usual burden of proof in this way.

7.2.4 The Receiving Party Must Segregate Confidential Information

The Receiving Party will keep all Confidential Information segregated from other information, so as to facilitate any necessary return or destruction of the Confidential Information under section 7.2.16.

Drafters should consider whether the receiving party's notes can realistically be segregated. ¶ A segregation requirement might have been useful in S.W. Energy Prod. Co. v. Berry-Helfand, No. 13-0896 (Tex. June 10, 2016). In that case, an independent oil-and-gas reservoir engineer disclosed trade-secret information to a production company under a nondisclosure agreement; when the relationship waned, the engineer asked for the information to be returned, but that proved problematic, as one individual ended up retaining some of the information in his files. See id., slip op. at 7.

7.2.5 The Receiving Party Must Defend and Indemnify Against Certain Events

(a) The Receiving Party will defend and indemnify the Disclosing Party, its Affiliates, and the Associated Individuals of each of them, against:

(1) any claim by a third party arising out of the use or disclosure of Confidential Information by, on behalf of, or with the permission of, the Receiving Party;

(2) all harm resulting from any violation of law in the use or disclosure of Confidential Information by, on behalf of, or with the permission of, the Receiving Party.

Some disclosing parties will want this kind of clause. ¶ Some receiving parties might balk at this indemnity requirement, especially if the indemnity obligation might encompass unforeseeable harm; see this note for additional details.

(b) For the avoidance of doubt, the obligations of this provision will survive any termination or expiration of the Agreement.

7.2.6 The Receiving Party Must Cooperate Against Misappropriators

During the Authorized-Use Period, in response to any reasonable request by (and at the expense of) the Disclosing Party, the Receiving Party will provide reasonable cooperation with the Disclosing Party and/or its designees in investigating and/or taking action against a third party in connection with possible misappropriation of Confidential Information provided to the Receiving Party.

7.2.7 The Receiving Party Must Give Specific Instructions to Individual Recipients

Before Confidential Information may be provided to an individual recipient under the 7.1.5.1. Certain Specific Uses Are Pre‑Authorized provision, the Receiving Party must first take reasonable steps to cause the individual to be specifically instructed that he or she has a duty to abide by the confidentiality obligations of the Agreement.

This is an extra precaution that some disclosing parties like to require of receiving parties.

7.2.8 The Receiving Party Must Provide Recipients' Confidentiality Agreements

(a) Upon request by the Disclosing Party, the Receiving Party will provide the Disclosing Party with a copy of the written confidentiality agreement between the Receiving Party and each individual or organization to which the Receiving Party provides Confidential Information.

(b) Such copies may be redacted, if so desired by the Receiving Party, to prevent disclosure to the Disclosing Party of confidential information of the Receiving Party.

This requirement might be burdensome for the receiving party, but in some situations the disclosing party might have a legitimate need for it.

7.2.9 The Receiving Party is Liable for Certain Recipient Misappropriations

IF: A third party, referred to as the Recipient – for this purpose including, for example, any employee of the Receiving Party – obtains or otherwise accesses Confidential Information in question as a result of the Recipient's relationship with the Receiving Party;

AND: The Recipient uses, discloses, and/or copies that Confidential Information in a manner not permitted by the Agreement;

THEN: The Receiving Party will be liable to the Disclosing Party for any resulting harm to the Disclosing Party or its interests, to the same extent as if the damage had been caused by use, disclosure, or copying of the Confidential Information by the Receiving Party.

A disclosing party will sometimes ask a receiving party to be liable (or, "be responsible") for any misappropriation of Confidential Information by the receiving party's employees, contractors, etc. This is an example of the "one throat to choke" principle. (OK, OK, that's an outdated expression; it's still useful.) ¶ If a receiving party objects to this provision, the objection might trigger questions from the disclosing party about the receiving party's intentions (or competence). ¶ See also 7.2.6. The Receiving Party Must Cooperate Against Misappropriators.

7.2.10 The Receiving Party Represents Its Status and Intentions (requires editing)

(a) The Receiving Party makes a representation to the Disclosing Party (the Receiving Party's Representation), concerning the Receiving Party's status and its intentions for the use of Confidential Information, as follows: FILL IN.

(b) The Receiving Party makes the Receiving Party's Representation: (1) to induce the Disclosing Party to provide the Receiving Party with access to Confidential Information, and (2) with the intent that the Disclosing Party rely on that representation.

Having the Receiving Party certify its status and its intentions for the Confidential Information would "tee up" a fraud claim against the Receiving Party if it turned out that the Receiving Party in fact intended to make an unauthorized use of Confidential Information. ¶ A clause of this kind can be seen in [TO DO: CITE TO AT&T AGREEMENT NEEDED].

7.2.11 The Disclosing Party May Inspect Confidentiality Compliance

(a) At any time that the Receiving Party has Confidential Information in its possession, the Disclosing Party, upon reasonable advance written notice to the Receiving Party, may cause reasonable inspections of the Receiving Party's relevant properties and premises to be conducted to confirm compliance with the Receiving Party's confidentiality obligations under the Agreement.

Receiving parties are highly likely to balk at this provision. In some cases, though, a disclosing party might feel it was necessary.

(b) For the avoidance of doubt, the right of inspection of this provision extends, by way of illustrative example and not of limitation, to any or all hard-copy and electronic records of any kind in the possession, custody, or control of the Receiving Party.

7.2.12 The Disclosing Party Disclaims All Unstated Warranties and Licenses

For the avoidance of doubt, EXCEPT to the extent (if any) that the Agreement or another written agreement between the parties expressly states otherwise:

(1) The Agreement does not grant to the Receiving Party, nor to any other individual or organization, any license right or ownership right of any kind, in Confidential Information, nor in other any intellectual property of the Disclosing Party; and

(2) The Disclosing Party DISCLAIMS all warranties, representations, conditions, and terms of quality, express or implied, about Confidential Information, including for example all warranties of completeness or accuracy; all Confidential Information is provided or otherwise made available AS IS, WITH ALL FAULTS.

(c) THE DISCLOSING PARTY WILL NOT BE LIABLE for any use of Confidential Information made by the Receiving Party EXCEPT to the extent (if any) expressly stated otherwise in the Agreement, for example:

(1) in a warranty clause concerning the Confidential Information, if applicable; and/or

(2) in a relevant indemnity obligation concerning the Confidential Information, if applicable.

Some drafters make a practice of including disclaimer language like this for use as litigation sound bites. ¶ Some language in this disclaimer is in all-caps bold-faced type so that the language will be conspicuous.

7.2.13 The Receiving Party Will Not Rely on Confidential Information

The Receiving Party is not entitled to rely, and agrees not to rely, on Confidential Information for any purpose, except to the extent (if any) expressly stated otherwise in the Agreement.

Some language in this provision is in bold-faced type to make it conspicuous. ¶ See also 26.16. Reliance Disclaimer.

7.2.14 The Disclosing Party Need Not Provide Confidential Information

For the avoidance of doubt, the Disclosing Party is not required to provide any particular Confidential Information to the Receiving Party except to the extent, if any, that the Agreement expressly indicates otherwise.

Some disclosing parties might want this kind of clause; I've not seen it used much if at all.

7.2.15 The Parties' Other Rights and Obligations Will Survive

For the avoidance of doubt, any termination or expiration of the Confidentiality-Obligation Period:

(1) will not waive or otherwise affect the Disclosing Party's ability to enforce its other intellectual-property rights (for example, copyrights and patents) against the Receiving Party except to the extent, if any, that the parties expressly agree otherwise in writing; and

(2) will not affect any obligation of confidentiality imposed by law.

This is another "roadblock" clause sometimes requested by disclosing parties.

7.2.16 Confidential Information Specimens Must Be Properly Disposed of After Termination

(a) Specimen of Confidential Information is any copy of, and any physical object embodying, Confidential Information — for example, any paper- or electronic copy and any specimen of hardware — where the copy or physical object is in the possession, custody, or control of: (i) the Receiving Party, and/or (ii) any individual or organization to which the Receiving Party made Confidential Information accessible.

(b) IF: The Disclosing Party makes a seasonable written request following any termination or expiration of the Agreement; THEN: except as provided in sections 7.3.4 and (if applicable) 7.3.5, the Receiving Party will promptly:

(1) return Specimens of Confidential Information to (i) the Disclosing Party, or (ii) another individual or organization designated in writing by the Disclosing Party; and

(2) subject to section 7.2.17 (if applicable), destroy any Specimens not returned.

An obligation to return or destroy Confidential Information might not be practical if (for example) Confidential Information is embodied in a deliverable (for example, custom-developed computer software, or a physical object) that the receiving party will have the right to keep on using; this might be the case in a services agreement.

PRO TIP: Unfortunately, sometimes parties forget about return-or-destruction obligations. A disclosing party will want to follow up to be sure that the return-or-destruction requirement is actually complied with; if it were to fail to do so, a receiving party (or a third party) could try to use that as evidence that the disclosing party did not take reasonable precautions to preserve the secrecy of its confidential information; see generally the Annotations. ¶ Likewise, if the receiving party were to forget to comply with its return-or-destruction obligations, then the disclosing party might use that fact to bash the receiving party in front of a judge or jury.

SUGGESTION: Consider requiring segregation of Confidential Information for easier compliance with this section.

7.2.17 Specimens May Not Be Destroyed Without the Disclosing Party's Consent

When returning or destroying The Receiving Party may not destroy any Specimen of Confidential Information without the prior written consent of the Disclosing Party.

The requirement of disclosing-party consent to destruction has in mind the situation in which the disclosing party doesn't itself have a copy of Confidential Information to be destroyed. That might occur if, say, (i) a contractor had developed particular information that, under the parties' agreement, was the property of the customer, but (ii) the contractor hadn't yet provided any copies of the information to the customer.

7.2.18 The Receiving Party Must Provide a Certificate of Return or Destruction

(a) This section is not part of the Agreement unless the Agreement expressly so states.

(b) IF: The Disclosing Party so requests in writing within a reasonable time after the return-or-destruction provisions of the Agreement become applicable; THEN: The Receiving Party will promptly provide the Disclosing Party with a certificate of its compliance with those provisions. The certificate must:

(1) be signed by an officer of the party or other individual authorized to bind the party;

(2) note any known compliance exceptions; and

(3) for each exception, note whether and how the exception is authorized by the Agreement.

Requiring the Receiving Party to certify its compliance with the return-or-destruction requirements would: • provide the Disclosing Party with "they lied!" ammunition in case it turned out that some Specimens of Confidential Information were not returned or destroyed; BUT … • thereby give the Receiving Party an incentive to do a good job in complying with the return-or-destruction requirement; and • thus help the parties identify specific areas that might need attention before a dispute arose, and thus possibly help to avoid the dispute in the first place.

7.3 Confidential Information – Receiving Party Playbook

7.3.1 The Disclosing Party Warrants Its Authority to Provide Confidential Information

The Disclosing Party will not disclose to the Receiving Party, any information that, at the time of disclosure, is subject to a legally-enforceable right of a third party to prohibit the disclosure, unless the Disclosing Party possesses either:

(1) the third party's consent to make the disclosure; or

(2) a legally-enforceable right to make the disclosure without the third party's consent.

Clauses like this are occasionally requested by a receiving party, to try to innoculate itself against claims by a third party that the disclosing party violated the third party's rights by providing information to the receiving party.

7.3.2 The Disclosing Party Must Indemnify Against Certain Events

The Disclosing Party will defend and indemnify the Receiving Party and its Protected Group from any claim, by any third party, that the Disclosing Party's disclosure to the Receiving Party was in violation of the third party's rights in the information in question.

Some drafters like to say that a breaching party must indemnify the other party (usually the drafter's client) against any damages resulting from the breach. Such an indemnity obligation, though, might expose the breaching party to greater liability than it would otherwise have; see Indemnity liability might be much more than plain breach-of-contract damages for a more extensive discussion.

7.3.3 Protection is Limited to Specified Information Only

For particular information to be considered Confidential Information, it must fall into a Protected Information Category specified in the Agreement (all categories if not otherwise specified).

A receiving party might want to limit its confidentiality obligations to specific categories of information, such as (for example) financial data, design data, etc. That way, if the disclosing party (or its personnel) provide other types of information to the receiving party, the provided information will be free for use by the receiving party without restriction.

7.3.4 Emails, Etc., Need Not Be Returned or Destroyed

Specimens of Confidential Information is not required to be returned or destroyed to the extent that they are not reasonably capable of being readily located and segregated without undue burden or expense — for example, Confidential Information contained in email correspondence or electronic back-up systems.

A receiving party might find it to be tremendously burdensome and expensive to try to return or destroy all copies of a disclosing party's confidential information, even those in emails, backup systems, etc.

7.3.5 Only Commercially-Reasonable Efforts to Return or Destroy Confidential Information Are Required

The Receiving Party need only make commercially-reasonable efforts to carry out its obligations of the return-or-destruction provisions of this section.

The reasonable-efforts option reflects the fact that, by the time a return-or-destruction obligation kicks in, the value of the Confidential Information might be low enough that it's simply not worth spending a lot of time or money on finding extant specimens.

7.3.6 Archive Copies of Confidential Information May Be Retained

A receiving party might want to be able to retain copies of Confidential Information — even after termination of the agreement — in case, for example: • the parties later got into a dispute about what the disclosing party did or did not actually disclose; or • a third party sued the receiving party (e.g., a customer of the disclosing party that claimed to have been injured as a result of the receiving party's work) and the receiving party wanted to use Confidential Information in its defense.

7.3.6.1 Archive Copies May Be Maintained Indefinitely

The archive copies may be maintained for an indefinite period.

7.3.6.2 Reasonable Backups of Archive Copies Are Permitted

The set of archive copies may include reasonable backup copies.

7.3.6.3 Only Certain Uses of Archive Copies Are Permitted

The set of archive copies is to be used solely for:

(1) helping the Receiving Party to ascertain and confirm its compliance with its continuing confidentiality obligations;

(2) documenting the parties' interactions in connection with the Agreement; and

(3) reasonable testing of the accuracy the archive copies

7.3.6.4 The Archive Copies Must Be Securely Stored

Archive copies must be maintained in accordance with commercially-reasonable security standards, for example in the custody of a reputable commercial records-storage organization that is contractually obligated to maintain the archive copies in confidence.

7.3.6.5 Access to Archive Copies Must Be Restricted

Archive copies and the Confidential Information contained in the copies are not to be made accessible to Receiving-Party personnel — other than Archive Custodians, if the Agreement permits Receiving-Party personnel to serve in that role — except (1) with the Disclosing Party's prior written consent, or (2) as directed or permitted by a tribunal of competent jurisdiction.

7.3.6.6 OPT-IN The Archive Custodian Must Be Independent

The Receiving Party may engage one or more independent Archive Custodians, each of which must be reasonably acceptable to the Disclosing Party, to maintain, in strict confidence, on behalf of the Receiving Party, a set of archive copies of Confidential Information.

If the Archive Custodian(s) does not need to be "independent" (a term well-understood by corporate lawyers), then the Custodian(s) might be, for example, the receiving party's IT staff. Alternatively, a disclosing party might want the Archive Custodian(s) to be limited to the receiving party's outside counsel. (The phrase outside counsel only is well understood by lawyers who work in litigation. See, for example, paragraph 11(c) of the protective order entered in an antitrust case brought by the [U.S.] Department of Justice.)

7.3.7 A Prospective Acquirer May be Provided Confidential Information in a Secure Data Room

(a) The Receiving Party may, without the Disclosing Party's consent, disclose Confidential Information to a prospective acquirer of: (1) substantially all shares (or equivalent ownership interest under applicable law) of the Receiving Party itself; or (2) substantially all of the assets of the Receiving Party's business specifically associated with the Agreement.

(b) Any such prospective recipient of Confidential Information must agree in writing to abide by the Receiving Party's obligations in the Agreement relating to Confidential Information.

(c) Any such disclosure must be done in one or more secure physical data rooms or via a secure online data room.

(d) The Receiving Party must not allow the recipient to keep copies of Confidential Information without the Disclosing Party's prior written consent.

This clause was inspired by a blog posting by English lawyer Mark Anderson. See generally the Wikipedia article Data room.

7.3.8 The Receiving Party is Free to Use "Residuals" of Confidential Information

(a) Residuals refers to ideas, concepts, know-how, techniques, and similar information that may be retained in the unaided memory of the Receiving Party's personnel who did not intentionally memorize the information for that purpose.

(b) The Receiving Party may use Residuals as it sees fit without obligation to the Disclosing Party — this subdivision, however, does not negate any restriction of the Agreement on the Receiving Party's disclosure of Confidential Information to third parties.

(c) For the avoidance of doubt, any use of Residuals by the Receiving Party will be subject to any applicable patent rights, copyrights, trademark rights, or other intellectual-property rights owned or assertable by the Disclosing Party.

A disclosing party likely will push back strongly against any request for this provision. In practice, the provision can amount to a blank check for the receiving party and its people to do whatever they want with the disclosing party's confidential information. ¶ See also: • Michael D. Scott, Scott on Information Technology Law § 6.25[D] (accessed Nov. 26, 2010) • Brian R. Suffredini, Negotiating Residual Information Provisions in IT and Business Process Outsourcing Transactions (2004) • Tom Reaume, This Residuals Clause Left a Bad Residue (2011).

7.3.9 Public Filings May Include Confidential Information Under Certain Conditions

The Receiving Party may include Confidential Information in a submission to a regulatory agency or other governmental body, if all of the following conditions are met:

(1) the inclusion is compelled by law, to the same extent as if the inclusion were compelled by law in response to a Compulsory Legal Demand;

(2) the Receiving Party first consults with the Disclosing Party a sufficient time in advance to give the Disclosing Party a reasonable opportunity to seek a protective order or other relief;

(3) the Receiving Party discloses only so much Confidential Information as is required to comply with the law; and

(4) the Receiving Party provides reasonable cooperation with any efforts by the Disclosing Party to limit the disclosure, and/or to obtain legal protection for the information to be disclosed, in the same manner as if the proposed disclosure were in response to a Compulsory Legal Demand.

A Receiving Party that is, or wants to be, publicly traded might feel it must disclose Confidential Information in its public filings. Such disclosure, though, can destroy the confidentiality status of the information. See generally, e.g., Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1011-12, esp. text accompanying n.15 (1984) (noting that Environmental Protection Agency's disclosure of Monsanto's pesticide test data would destroy Monsanto's trade-secret rights in the data). ¶ This basic issue arose in Martin Marietta Materials, Inc v. Vulcan Materials Co., 56 A.3d 1072, 1147 (Del. Ch. 2012), aff'd, 45 A. 3d 148 (Del. 2012) (en banc): In that case, Martin Marietta was held to have breached a confidentiality agreement by including confidential information of Vulcan Materials in a public filing with the Securities and Exchange Commission.

7.3.10 The Receiving Party's Consent is Required for Specific Disclosures to It

The Receiving Party will be under no obligation of confidence under the Agreement with respect to any Confidential Information disclosed to it unless the Receiving Party first consents in writing to the specific disclosure.

A receiving party might want to maintain tight control over the specific information (or categories of information) for which the receiving party commits to observing confidentiality obligations.

7.3.11 The Agreement's Confidentiality Obligations Do Not Imply a Fiduciary Relationship

For the avoidance of doubt, the Receiving Party's undertaking of the obligations of the Agreement concerning Confidential Information is not intended and should not be interpreted as in itself establishing a confidential‑ or fiduciary relationship between the parties.

A receiving party likely would not want to take on the higher burden of entering into a fiduciary relationship with the disclosing party. (Opinions seem to vary as to whether the term fiduciary relationship and confidential relationship are synonyms; the answer might depend on the jurisdiction. See generally John A. Day, Difference Between Fiduciary Relationships and Confidential Relationships (JohnDayLegal.com) (citing Tennessee cases).

7.3.12 The Receiving Party Has Freedom of Action Otherwise

(a) This provision applies in respect of any information that the Disclosing Party causes to be disclosed or made available to the Receiving Party pursuant to the Agreement ("Disclosed Information").

(b) The Receiving Party is bound solely by:

(1) the confidentiality obligations of the Agreement;

(2) any confidentiality obligations that may exist in any other extant and applicable written agreement between the parties; and

(3) any confidentiality obligations imposed by applicable law (for example, privacy law).

(c) Consequently, as between the parties, so long as the Receiving Party abides by the confidentiality obligations of the Agreement, the Receiving Party is free to use and/or disclose any or all such Disclosed Information:

(1) as the Receiving Party sees fit in its sole and unfettered discretion;

(2) without any obligation of compensation to the Disclosing Party or any other party claiming through the Disclosing Party;

(3) but only if such use or disclosure does not violate another intellectual-property right of the Disclosing Party (if any), such as, for example, patent rights, trademark rights, or copyrights.

Some receiving parties might want this "roadblock" clause to use as ammunition in litigation.

8 Background checks

8.1 Background Checks – Basic Terms

8.1.1 Definitions

Checked Individuals refers to the individual or individuals whose backgrounds are to be checked under the Agreement, namely any individual whom a Checking Party, directly or indirectly, causes or permits to engage in one or more Restricted Activities if not otherwise specified.

Checking Party refers to a party that is required to perform background checks under the Agreement.

Credit Check refers to standard credit reporting from all major credit bureaus serving the jurisdiction in question.

Credit checks, if not done correctly, can get a checking party in trouble under the [U.S.] Fair Credit Reporting Act, as discussed in the Annotations.

Criminal History, as to a Checked Individual, refers to the Checked Individual's having been convicted of, or having pled guilty or no contest to, one or more of (A) a felony; and/or (B) a misdemeanor involving fraud or moral turpitude.

Criminal-History Check refers to a nationwide check of records of arrests, convictions, incarcerations, and sex-offender status. A Criminal-History Check is not required to include fingerprint submission to confirm identity.

Basic online criminal records checks seem to be available from any number of Web sites at low cost. (I've never personally used any such site and can't recommend any particular one; your company's or client's HR people might be able to recommend one.) ¶ CAUTION: Using criminal-records checks to deny employment might lead to trouble with government agencies or with the persons checked if the denials have the effect of unlawful discrimination against minorities or other protected classes.

Critical Activity refers to any activity involving a substantial possibility of (i) bodily injury to or death of one or more individuals, including but not limited to a Checked Individual; and/or (ii) loss of, or damage to, tangible or intangible property of any kind; such loss or damage might be physical and/or economic.

This definition is used in the restrictions on assigning personnel to engage in Critical Activities if their background checks indicate Drug Misuse.

Driving-Record Check refers to a check of records of accidents; driver's-license status; driver's-license suspensions or revocations; traffic violations; criminal charges (e.g., DUI).

Drug Misuse, as to a Checked Individual, refers to evidence of use, by the Checked Individual, of one or more of: (1) illegal drugs; and/or (2) prescription drugs other than in accordance with a lawfully-issued prescription.

Drug Testing refers to testing for illegal drugs and controlled pharmaceuticals.

Customers with safety concerns might want its contractors' employees to be drug-tested. Depending on the position, even legal drugs might disqualify an individual. For example, an individual taking certain prescription medications might be disqualified from (say) driving a bus or other commercial vehicle. ¶ Companies, though, should be cognizant of disability laws such as the Americans with Disabilities Act, which might affect a company's ability to deny employment because of prescribed drug use. ¶ Companies might also consider the possible effect on employee morale of asking them to take a drug test – and about what they might have to do if a valued employee were to bust the test. As the saying goes, be careful about asking a question if you're not prepared to deal with the answer.

Education Verification refers to confirmation of dates of attendance, fields of study, and degrees earned.

This check is sometimes used as a way of detecting people who falsify their résumés about their education. Sadly, résumé padding is not an uncommon occurrence. For example, in 2014 the chief spokesman of Walmart resigned after the retail giant learned that he had falsely claimed to have graduated from college, when in fact he had not finished his course work (DailyMail.com 2014). Ditto the former dean of admissions at MIT (NPR.org 2015).

Employment Verification refers to confirmation of start- and stop dates and titles of employment for the past seven years.

Verification of employment dates, in particular, can help expose undisclosed résumé gaps — or "fudging" of employment dates as listed on the résumé to shorten or eliminate gaps. ¶ It's thought by some that a good practice is not to rely on employer contact information provided by the (former) employee, but instead to find the contact information independently. Otherwise, it's possible that the "employer" is actually someone colluding with the former employee to provide false information. ¶ Some parties might want to obtain more than just the listed information, adding (for example) job duties, salary history, reason for leaving, and/or eligibility for rehire. ¶ Some parties want employment history for the past five to ten years, or for the past two to five employers.

Lien, Civil-Judgment, and Bankruptcy Check refers to a check of records of tax- and other liens; civil judgments; and bankruptcy filings.

Personal Reference Check refers to telephone- or in-person interviews with at least three personal references, seeking information about the individual's ethics; work ethic; reliability; ability to work with others (including, for example and where relevant, peers, subordinates, superiors, customers, and suppliers); strengths; areas with room for improvement; personality.

Requesting Party refers to the Signatory Party other than the Checking Party.

Required Background Checks refers to the specific background check(s) are to be performed under the Agreement, namely Criminal-History Checks if not otherwise specified.

This language is set up in generic terms with a view to having this be serviceable even if a drafter doesn't fill in deal-specific details.. ¶ Some drafters will want to specify additional Required Background Checks. ¶ The defined term used here is Applicable Background Checks, as opposed to Required Background Checks, for two reasons: (1) To avoid creating the implication that the Required Background Checks are always an absolute, mandatory requirement, because that could create future difficulties if a background check were skipped and then the checked individual did something bad; and (2) less importantly, to have the term be alphabetized with the other definitions just above.

Residence Address Verification refers to confirmation of dates of residence addresses for the past seven years.

This check has in mind that an individual might omit one or more previous residence addresses in the hope of evading a criminal-records check.

Restricted Activity refers to any one or more of the following, when engaged in, in connection with the Agreement, by an employee of, or other individual under the control of, a Checking Party:

(1) working on-site at any premises of a Requesting Party;

(2) having access (including for example remote access) to the Requesting Party's equipment or computer network;

(3) having access to the Requesting Party's confidential information;

(4) interacting with the Requesting Party's employees, suppliers, or customers; and

(5) any Critical Activity.

8.1.2 Background Checks Are to Be Performed in a Reasonable Manner by a Reputable Provider

The Checking Party is to cause all Required Background Checks to be conducted on all Checked Individuals, as follows:

(1) Any Required Background Check by the Checking Party itself is to be performed in a commercially-reasonble manner;

(2) Each other Required Background Check is to be performed by a reputable service provider.

The Checking Party's obligation is to cause background checks to be conducted. Very few parties will actually conduct their own background checks. Even those (few) parties that might be able to conduct their own checks are likely to want to "outsource" that responsibility to an outside party that can do such things more cost-effectively (and at which the finger can be pointed if something goes wrong). ¶ This language gives the Checking Party a safe harbor: If it hires a reputable service provider, then it will have complied with its obligation under this provision. This obligation can be beefed up by using the 8.2.1. The Checking Party Must Indemnify the Requesting Party drop-in clause.

8.1.3 Background Checks Must Comply with the Law

The Checking Party is to take prudent measures to cause each background check to be conducted in accordance with law, including, for example:

(1) any applicable privacy laws, including for example any requirement to obtain the consent of the relevant Checked Individual; and

(2) any applicable requirement (for example, in credit-reporting laws) that the relevant Checked Individual must be notified before or after a decision is made using information learned in the background check.

This obligation is phrased in terms of "prudent measures," as opposed to an absolute obligation; it can be beefed up by using the 8.2.1. The Checking Party Must Indemnify the Requesting Party drop-in clause.

8.1.4 Evidence of Criminal History or Drug Use Will Trigger Special Requirements

(a) IF: A Checked Individual's background check reveals any Criminal History; THEN: The Checking Party is not to assign, nor permit, that individual to engage in any Restricted Activity without first consulting with the Requesting Party.

This provision requires the Checking Party only to consult with the Requesting Party, as opposed to obtaining the Requesting Party's consent. (The latter seems to be traditional in provisions of this type.) This is because in recent years the practice of automatically disqualifying people with criminal convictions has come under fire from government regulators and the plaintiff's bar as being potentially discriminatory (the so-called "ban the box" movement), as discussed in the Notes.

(b) IF: A Checked Individual's background check indicates any Drug Misuse; THEN: The Checking Party must not assign nor permit that individual:

(1) to engage in any any Critical Activity without the express prior written consent of the Requesting Party; nor

(2) to engage in any other Restricted Activity without first consulting with the Requesting Party.

For obvious reasons, this provision imposes tighter restrictions on Critical Activities than on other Restricted Activities.

8.2 Background Checks – Optional Provisions

8.2.1 The Checking Party Must Indemnify the Requesting Party

The Checking Party must defend and indemnify the Requesting Party and its Protected Group against any and all third-party claims — including but not limited to any claim by a Checked Individual and any claim by a government authority — arising from any allegation of breach of governing law in the performance of background checks under the Agreement by or at the direction of the Checking Party.

This indemnity obligation is worded carefully to focus on just what breaches are subject to that obligation. ¶ As with any indemnity obligation, drafters should consider pairing this indemnity obligation with an insurance requirement.

8.2.2 The Requesting Party Must Reimburse the Checking Party's Expenses

(a) This section is not part of the Agreement unless the Agreement expressly so states.

(b) The Requesting Party is to reimburse the Checking Party for all reasonable out-of-pocket expenses incurred by or on behalf of the Checking Party in connection with performing background checks required by the Agreement.

Service providers often take the view that any customer that wants background checks to be conducted on the provider's personnel should pony up for that cost. ¶ On the other hand, a customer might take the position that background checks should be an overhead expense that the provider must bear.

8.2.3 All References' Contact Information Must Be Independently Obtained

As a safeguard against falsified references, all reference checks (if any) other than personal character references are to be completed using contact information obtained other than from the Checked Individual.

8.2.4 The Requesting Party May Perform Its Own Background Checks

(a) The Requesting Party may cause its own background checks to be conducted on any or all Checked Individuals, in which case:

(b) in conducting any such background checks, the Requesting Party will comply with the background-check provisions of the Agreement, and defend and indemnify the Requesting Party for any noncompliance, as though the Requesting Party were the Checking Party and vice versa.

(2) the Requesting Party will bear its own expenses associated with any background checks that it conducts.

This provision allows (for example) a service provider's customer to initiate its own background checks on service-provider personnel.

8.2.5 The Checking Party Will Cooperate in Any Background Checks Conducted by the Requesting Party

IF: The Requesting Party conducts background checks under section 8.2.4; THEN: The Checking Party will cooperate with the Requesting Party in attempting to obtain any necessary consent for checks from each Checked Individual.

9 Force majeure

9.1 Force Majeure – Basic Terms

9.1.1 Force Majeure Definition

Force-Majeure Event refers generally to any event or series of events (other than one or more Excluded Events (if any; none unless expressly agreed otherwise)) as to which both of the following are true:

(1) the event or series of events causes a failure of timely performance under the Agreement; and

(2) a prudent person, in the position of the party invoking force majeure, would not reasonably have been able to anticipate and avoid the failure of timely performance.

The "actual or imminent occurrence" language in subdivision 2 contemplates that a party might invoke force majeure before the fact — for example, if a hurricane were approaching — as well as after the fact.

9.1.2 Force Majeure Can Excuse Failure of Timely Performance by Either Party

(a) In response to actual or imminent occurrence of one or more Force-Majeure Events, either party (an Invoking Party may invoke force majeure by advising another affected party by notice or other reasonable means.

(b) An Invoking Party that seasonably invokes force majeure will not be liable under the Agreement for any loss, injury, delay, damages, or other harm suffered or incurred by another affected party due to failure of timely performance, by the Invoking Party, resulting from the force majeure.

9.2 Force majeure – optional provisions

9.2.1 Examples of Force-Majeure Events (Non-Exclusive)

For the avoidance of doubt, the term Force-Majeure Event includes the following, when otherwise eligible under the Agreement:

(1) any event that (i) is not an Excluded Event and (ii) falls within one or more of the following categories (some are in bold-faced type to call drafters' attention to them): Act of a public enemy. Act of any government or regulatory body, whether civil or military, domestic or foreign, not resulting from violation of law by the Invoking Party. Act of war, whether declared or undeclared, including for example civil war. Act or omission of the other party, other than a material breach of the Agreement. Act or threat of terrorism. Blockade. Boycott. Civil disturbance. Court order. Drought. Earthquake. Economic-condition changes generally. Electrical-power outage. Embargo imposed by a governmental authority. Epidemic. Explosion. Fire. Flood. Hurricane. Insurrection. Internet outage. Invasion. Labor dispute, including for example strikes, lockouts, work slowdowns, and similar labor unrest or strife. Law change, including any change in constitution, statute, regulation, or binding interpretation. Legal impediment such as an inability to obtain or retain a necessary authorization, license, or permit from a governmental authority. Nationalization. Payment failure resulting from failure of or interruption in one or more third-party payment systems. Riot. Sabotage. Storm. Supplier default. Telecommunications service failure. Transportation service unavailability. Tornado. Weather in general; and

This "laundry list" of force-majeure examples was drawn from various agreement specimens. ¶ Concerning economic changes generally, see Kevin Jacobs and Benjamin Sweet, 'Force Majeure' In the Wake of the Financial Crisis, Corp. Coupsel, Jan. 16, 2014. ¶ In some customer-oriented supply- and service contract forms, labor difficulties are excluded from the definition of force-majeure event. ¶ This list of examples does not include so-called acts of God because of the vagueness of that term.

(2) all other particular examples of Force Majeure (if any) identified in the Agreement — it is immaterial if one or more of them also comes within the scope of subdivision (1) above.

Some drafters might want to use the "other particular examples …" option to specify particular force-majeure risks. ¶

9.2.2 Force Najeure Will Extend Periods for Exercising Rights

IF: One or more properly-invoked Force-Majeure Events make it impracticable or impossible for an Invoking Party to timely exercise a right, under the Agreement; THEN: The time for exercising that right will be deemed extended for the duration of the delay resulting from the Force-Majeure Event or Events.

This clause addresses a potential gap (depending on one's perspective) in many force-majeure clauses. This gap caused fracking companies to lose a case in New York's highest court. See Beardsley v. Inflection Energy, LLC, 2015 NY Slip Op 02677 at 9-11 (on certification from Second Circuit). In that case, the New York court aligned itself with courts in several other "oil" jurisdictions. See id. at 12.

9.2.3 Termination is Allowed After Extended Force-Majeure Delay

Effective upon written notice to all other Signatory Parties (or at such later time as may be stated in the notice), any Party Entitled To Terminate (namely, each party) may terminate its obligations under the Agreement if the aggregate effect of the relevant Force-Majeure Event(s): (1) is material to the Agreement as a whole; and (2) lasts past the Earliest Termination Date (namely, 30 days after invocation of force majeure by any party entitled to do so under the Agreement).

The "material to the Agreement as a whole" language is is adapted from the "outsourcing" master services agreement in Indiana v. IBM Corp., No. 49Dl0-1005-PL-021451, slip op. at 1, 47 (Marion Cty In. Sup. Ct. July 18, 2012) (granting judgment for IBM), reversed, 4 N.E.3d 696 No. 49A02-1211-PL-875, (Ind. App. Feb. 13, 2014), affirmed, Indiana v. IBM Corp., No. 49S02-1408-PL-00513 (Ind. Mar. 22, 2016). ¶ The parties might negotiate different Earliest Termination Dates for different parties or different situations. For example, in a supply- or services agreement, the customer might want to be able to "pull the plug" after a relatively-short period, while keeping the supplier "on the hook" for a longer period.

9.2.4 Force-Majeure Status Reports Are Confidential

Any party receiving any force-majeure status information from an Invoking Party must maintain that information in confidence unless and until the information becomes available to the general public.

A party invoking force majeure might not want its business made public. See also 9.2.7. Force-Majeure Status Reports Are Required Upon Request.

9.2.5 Force-Majeure Avoidance Efforts Need Not Exceed Commercially-Reasonable Cost

An Invoking Party is considered not to be reasonably able (or not to have been reasonably able, as applicable) to avoid a failure of timely performance resulting from one or more Force-Majeure Events if avoidance is (or was) not possible at a commercially-reasonable cost.

This language gives an invoking party an "economic out" from having to deal with a Force-Majeure Event.

9.2.6 Force Majeure Excuse Requirements Apply to Subcontractor Performance

A failure of timely performance by an Invoking Party that is caused by a failure of performance of a subcontractor or supplier to the Invoking Party will be excused under this clause only if:

(1) the failure by the subcontractor or supplier otherwise qualifies as one or more Force-Majeure Events; and

(2) it was not reasonably possible for the Invoking Party to timely obtain, from one or more other sources, the relevant goods or services that were to have been provided by the subcontractor or supplier.

Some customers might want to include this clause in their contracts with their suppliers.

9.2.7 Force-Majeure Status Reports Are Required Upon Request

If so requested by another affected party, the Invoking Party will provide reasonable information, from time to time, about its efforts, if any, to remedy or mitigate the effect of the force majeure.

See also 9.2.4. Force-Majeure Status Reports Are Confidential. Depending on the nature of the contract, a party might not want to commit to providing force-majeure status reports. For example, suppose that the force-majeure clause were part of a consumer-services contract. In that situation, the service provider might well be willing to update its customers about the status of a force-majeure service outage — especially in this era of near-instantaneous public criticism on social media. On the other hand, the provider might equally well not want to be contractually obligated to provide such status reports.

9.2.8 Force Majeure Effects Must Be Mitigated

Each Invoking Party is to make any Required Mitigation Efforts that are expressly specified in the Agreement (if any) to mitigate the effects of the force majeure.

Mitigation, remediation, or both? Note that there are two distinct options presented here: One for mitigation, one for remediation, which are two different things. ¶ Some drafters might insist that the other party use its best efforts to mitigate or remediate the effects of of force majeure; see, e.g., [TO DO – CITE NEEDED – Honeywell PO 4]. ¶ Of course, a drafter should be careful not to commit a client to either mitigation or remediation efforts if such efforts are not part of the client's business model. ¶ In a supply- or services agreement, the customer might not want to be bound by any mitigation obligation. ¶ If Required Mitigation- or Remediation Efforts are going to be defined, it might make sense to refer to an exhibit or appendix where the term can be spelled out in appropriate detail.

9.2.9 Force Majeure Effects Must Be Remediated

Each Remediating Party (if any; none unless expressly agreed otherwise) is to make the Required Remediation Efforts (if any; none unless expressly agreed otherwise) to remediate the effects of the force majeure.

10 Employee solicitation restrictions

10.1 Employee Solicitation Restrictions — Basic Terms

10.1.1 Definitions

(a) Employ and Employment refer to one or more of: (A) directly or indirectly hiring or employing an individual as an employee or independent contractor; and (B) assisting any other person to do so.

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."

(b) Off-Limits Employee refers to any employee of an Off-Limits Employer who works on matters relating to the Agreement.

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.

(c) Off-Limits Employer refers to any Signatory Party whose employees are specified in the Agreement as being, in effect, off-limits from solicitation by other parties.

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

(d) Restricted Party, as to any Off-Limits Employer, refers to any other party.

(e) Restriction Period refers to the period from the effective date of the Agreement until three months after termination of (i) the Off-Limits Employer's employment of the Off-Limits Employee in question or (ii) the relevant Statement of Work, whichever comes first.

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

(f) Solicit and Solicitation refer to one or more of: (A) directly or indirectly recruiting or soliciting an individual, on behalf of any person, for Employment; and (B) assisting any other person to do so.

10.1.2 Solicitation of Off-Limits Employees is Restricted

During the Restriction Period, no Restricted Party will Solicit for Employment any Off-Limits Employee except: (1) to the extent, if any, specifically stated otherwise in the Agreement; and (2) in any specific cases in which the Off-Limits Employer agrees otherwise in writing.

10.2 Employee Solicitation Restrictions Optional Terms

10.2.1 Non-Targeted Recruiting Efforts Are Not Considered "Soliciting"

This does not apply in any case in which a Restricted Party hires an Off-Limits Employee who is shown to have made contact with the Restricted Party: (1) for that purpose, (2) on his or her own initiative, (3) without any direct or indirect solicitation for that purpose by the Restricted Party — for example in response to (i) a general advertisement or solicitation, or (ii)  a job search conducted by an independent third party, that in either case case does not target the Off-Limits Employee.

This exception is a typically-used carve-out for clauses of this nature.

10.2.2 The EXCLUSIVE REMEDY for Breach is Payment of a Finder's Fee

IF: During the Restriction Period, a Restricted Party engages any Off-Limits Employee in breach of the Agreement; THEN: The Restricted Party will pay the Employer one year's base salary of the Off-Limits Employee as in effect 30 days before the Off-Limits Employee's departure from the Off-Limits Employer (the Finder's Fee Amount) (i) as liquidated damages and also (ii) as the Off-Limits Employer's EXCLUSIVE REMEDY for the breach.

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 26.11.1. Injunctive Relief — Basic Terms and its commentary.

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

In the heading of this provision, 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.

11 Intellectual-property ownership

11.1 "Work for Hire" — Basic Terms

11.1.1 Applicability & Definitions

(a) This section 11.1 applies in any case in which the Agreement specifies that an individual or organization (the Owner is to own specified intellectual property (the Specified IP) that is or might be owned by another individual or organization (the Confirming Party).

These definitions are designed to allow this form to be used by reference without having to customize it.

(b) Each of the Owner's rights under this section 11 will pass to the Owner's successors and assigns, if any, in respect of the OWner's business relating to the Agreement.

This subdivision takes into account that companies sometimes spin off divisions, do corporate reorganizations, etc.

11.1.2 The Specified IP is a Work Made for Hire (If Eligible by Law)

To the maximum extent permitted by law, the Specified IP is to be considered a work made for hire whose author or inventor is the Owner.

Under U.S. copyright law, a contract can't designate a work of authorship as a work made for hire merely by saying so, because the work of authorship itself must meet specific statutory requirements. See generally the Reading Notes on this subject..

As to (U.S.) patents, the concept of work made for hire doesn't really apply. But an individual inventor who is employed, even without an invention-assignment agreement, might be under an implied obligation to assign her ownership rights in her invention to her employer if she (1) is subject to an employment agreement requiring her to do so; (2) was hired to invent; and/or (3) was "set to experimenting" by the employer with the invention being a result. In addition, her employer might have "shop rights" to use the invention if the inventor used the employer's time and/or resources in making the invention. See generally the Reading Notes on this subject.

11.1.3 The Confirming Party Hereby Assigns the Specified IP to the Owner

The Confirming Party hereby irrevocably assigns to the Owner and its successors and assigns all right, title, interest, and property, anywhere in the world, in and to the Specified IP (to the extent that the Specified IP is not eligible to be a work made for hire under section 11.1.2), together with:

This provision is phrased as a present assignment – as opposed to a promise to assign at some unspecified point in the future — with the intent of avoiding a timing problem of the kind that resulted in Stanford University's being unable to assert a patent that it owned (or so it had thought). See Bd. of Trs. of the Leland Stanford Junior Univ. v. Roche Molecular Sys., Inc., 583 F.3d 832 (Fed. Cir. 2009), aff'd as to a different issue, 563 U.S. __, 131 S. Ct. 2188, 2194-95 (2011).

(1) any and all original, continuation, continuation-in-part, divisional, reissue, foreign-counterpart, or other patent applications for the Specified IP, no matter when filed;

(2) any and all patents issuing on each patent application described in subdivision (1);

(3) the right to claim priority in, to, or from any patent application described in subdivision (1) or any patent described in subdivision (2);

(4) any and all registrations for, and any and all applications to register, the copyright or trademark rights (if any) in the Specified IP;

(5) any other intellectual property rights, of whatever nature, in the Specified IP, together with any applications for, or issued registrations for, the same; and

(6) the right to recover, and to bring proceedings to recover, damages and/or obtain other remedies in respect of infringement or misappropriation of any item listed in any of items (1) through (5), whether the infringement or misappropriation was committed before or after the date of the Agreement.

11.1.4 The Confirming Party Will Execute Assignments and Other Confirming Documents

(a) Whenever so requested by the Owner from time to time, for no additional compensation, the Confirming Party will cause one or more Vesting Documents (as defined below, and as provided by the Owner) to be (i) signed, (ii) acknowledged or sworn to before a notary public or comparable official (if applicable), and (iii) delivered to the Owner for filing with appropriate authorities in the Owner's sole discretion.

(b) Vesting Document refers to any of the following:

(1) patent applications and trademark- and copyright-registration applications as described in section 11.1.3(1) and (4);

(2) assignments of patents, patent applications, copyrights, trademark rights, and other intellectual-property rights;

(3) any other document that may be reasonably requested by the Owner to help the Owner or its nominee to (i) fully and effectively vest, in the Owner, the rights assigned by the Agreement; (ii) formally register the Owner’s title in the same with relevant government offices; and (iii) enjoy the full and exclusive benefit of those rights, including without limitation taking action against infringers and defending against challenges to the validity of the rights assigned by the Agreement.

Another "belt and suspenders" variation would be to state that "(1) it's a work for hire; (2) if it's not, you hereby assign the copyright to us; (3) and if that doesn't work, you hereby give us a perpetual paid-up license." Fred von Lohmann, comment on a posting at copyright scholar William Patry's blog.

11.1.5 Any Non-Assignable Rights Are Perpetually and Irrevocably Licensed to the Owner

To the extent (if any) that, by law, any moral rights or other intellectual property rights in Specified IP cannot be assigned to the Owner, the Confirming Party hereby grants to the Owner and its successors and assigns a perpetual, irrevocable, worldwide, royalty-free, fully-transferable license under all such non-assignable rights.

See generally the Wikipedia entry on moral rights.

11.1.6 The Confirming Party Will Ensure That Its Employees, Etc., Sign Suitable Agreements

(a) The Confirming Party will ensure that its employees and subcontractors (if any) have signed written agreements sufficient to enable Customer to comply with its obligations under this section 11.1.

(b) This section 11.1.6 in itself neither authorizes nor prohibits the use of subcontractors by the Confirming Party.

11.2 Joint IP Creations — Basic Terms

11.2.1 Definition: Joint IP Creation

Joint IP Creation refers to any intellectual property that is invented, authored, or otherwise created or developed jointly by two or more Joint IP Creators, where:

(1) a Joint IP Creator is:

(A) an individual Signatory Party, or

(B) an employee or other individual associated with a non-individual Signatory Party,

(each such Signatory Party, a Joint IP Owner); and

(2) each Joint IP Owner is the beneficiary of an obligation, on the part of at least one Joint IP Creator, to assign that Joint IP Creator's interest in the intellectual property to that Joint IP Owner.

Joint creation of intellectual property can occur, for example: • in services-type contracts; and • in collaboration agreements of various kinds, e.g., R&D joint-venture agreements. See generally this article about patent joint ownership and this article about copyright joint ownership.

11.2.2 CHECK Joint IP Creations Will Be Owned Equally

The Joint IP Owners will own equal, undivided interests in each Joint IP Creation unless they expressly agree otherwise in writing.

This will sometimes be a negotiation point.

11.3 Joint IP Creations Optional Terms

11.3.1 Owners of Joint IP Creations Need Not Account to Each Other for Their Uses

(a) Unless the Joint IP Owners expressly agree otherwise in writing, no Joint IP Owner that "uses" (as defined below) any Joint IP Creation is required to:

(1) share proceeds or profits from such use with any other Joint IP Owner; nor

(2) otherwise account to any other Joint IP Owner for such use.

Unless otherwise agree, joint owners of the (U.S.) copyright in a work of authorship must account to each other for their respective uses of the work. In contrast, joint owners of a (U.S.) patent for an invention are not required to account to each other for their respective uses of the patented invention unless otherwise agreed.

(b) For purposes of subdivision (a), the term use of a Joint IP Creation refers to any action that, if taken by any person other than a Joint IP Owner, would require a license under one or more intellectual-property rights in the Joint IP Creation.

12 Legal compliance

12.1 Legal Compliance — Basic Terms

(a) In performing its obligations and exercising its rights under the Agreement, each party (each, an Obligated Party) must comply with each of the following to the extent relevant to (i) that party's obligations, and/or (ii) the other party's rights, under the Agreement:

(1) all requirements of law that apply generally to the Obligated Party (for example, corporation law, employment law, and the like);

(2) all requirements of law that apply generally to the type of business engaged in by the Obligated Party (for example, professional-licensing requirements), if any; and

(3) any other laws expressly specified in the Agreement.

(b) For the avoidance of doubt, the Obligated Party is not responsible for complying with requirements of law that are specific to any other party or its business, but not to the Obligated Party or its business, unless expressly agreed otherwise in writing.

The intent of this clause is to make it clear that, if an obligated party fails to comply with relevant provisions of law, then the other party may treat that failure as a breach of the parties' agreement. (That might not always be the case otherwise.) ¶ The defined term Specific Laws for Compliance can be used to emphasize a party's need to comply with particular laws such as (for example) export-control laws; privacy laws; wage-and-hour laws; and the like. ¶ In some contracts, a customer might want to make the compliance-with-law obligation apply only to the supplier, without taking on such an obligation itself.

The compliance-with-law obligation of this clause might not provide much protection for, say, a customer that wanted to make sure that its contractor timely paid its subcontractors, because the law might make the customer responsible for the contractor's noncompliance anyway. For example, in 2014, California enacted Assembly Bill 1897 (codified as Cal. Labor Code § 2810.3), which made certain business customers liable, as a matter of law, for unpaid wages and worker's compensation coverage of their contractors' non-exempt employees. See generally Todd Lebowitz, New California Law Imposes Joint Liability on Businesses and Contract Vendors … (EmploymentLawSpotlight.com Nov. 10, 2014).

12.2 Legal Compliance Optional Terms

12.2.1 Indemnity Obligation for Noncompliance with Law

Each Obligated Party must defend and indemnify each other party against any third-party claim arising out of that Obligated Party's failure to comply with the compliance-with-law provisions of the Agreement.

It's likely that a party that wanted a compliance-with-law clause such as this one would also want an indemnity obligation for noncompliance.

12.2.2 Noncompliance with Particular Laws is a Material Breach

(a) Any failure, by an Obligated Party, to comply with one or more particular laws for compliance (if any) is to be considered a material breach of the Agreement by that party.

(b) For the avoidance of doubt: One or more other failures by an Obligated Party to comply with other laws could also constitute a material breach of the Agreement by that party.

This option allows the parties to designate particular laws as critical to the contract. Thus, for example, if the Agreement were to designate export-control laws as Particular Laws for Compliance, then any failure, by an Obligated Party, to comply with those laws would automatically constitute a material breach of the Agreement by the Obligated Party.

13 Good faith

13.1 Good Faith Requirement — Basic Terms

13.1.1 Definition: Good Faith Means Honesty in Fact and Fair Dealing

Good faith, whether or not capitalized, refers to conduct that both (1) is honest in fact and (2) comports with reasonable commercial standards of fair dealing in the trade.

This language is a blend of: • Restatement of Contracts (Second) § 205, which states: "Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement"; and • Uniform Commercial Code § 1-304, which imposes a duty of good faith on all contracts and duties within the UCC, and § 2-103(b), which defines good faith (in the case of a merchant) as "honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade." ¶ See generally the Reading Notes on this subject.

13.1.2 Each Party is to Act in Good Faith

Each party is to act in good faith in the performance and enforcement of the Agreement; a party that does so is to be conclusively deemed to have satisfied any applicable duty of good faith (as defined in any other way), fair dealing, honest performance, or similar requirement, imposed by law or otherwise, in respect of the Agreement and any transaction or relationship resulting from it.

As with the implied duty of good faith and fair dealing, this clause applies only to the performance and enforcement of the Agreement. Application of the commitment to negotiation of the Agreement could open a very large can of worms. See generally Marcia G. Madsen and Michelle E. Litteken The Implied Duty of Good Faith & Fair Dealing in Government & Commercial Contracts — An Age-Old Concept in Need of an Update? at 5 (MayerBrown.com 2014).

13.1.3 The Good-Faith Obligation Does Not Impose Duties as a Fiduciary, Nor of Disclosure

Except to the extent (if any) expressly stated otherwise in the Agreement, nothing in the Agreement obligates any party:

(1) to serve the interests of another party at all times or in all cases; nor

(2) to comply with the obligations of a fiduciary, for example a duty of loyalty to another party or a duty to put the interests of another party first; no party is to assert otherwise; nor

(3) to disclose material information; no party is to assert otherwise. (The previous sentence, though, does not excuse a party from any other applicable duty, if any, to disclose material information.)

This language is informed by the discussion by the Supreme Court of Canada in Bhasin v. Hrynew, 2014 SCC 71 [2014] 3 S.C.R. 495, ¶¶ 65, explaining some of the limitations of the general duty of good faith.

13.1.4 Neither Party Will Make Inconsistent Claims

(e) No party will make, and each party KNOWINGLY, VOLUNTARILY, INTENTIONALLY, PERMANENTLY, AND IRREVOCABLY WAIVES, any claim or other assertion inconsistent with this.

This provision is intended to make it a separate breach of contract for a party to take action contrary to the provision.

13.2 Good Faith Requirement – Optional Terms

13.2.1 The Dispute-Resolution Process Applies to Good-Faith Claims

Any claim that a party breached either (i) the 13.1. Good Faith Requirement — Basic Terms provision or (ii) a duty of good faith or fair dealing, must be submitted to the dispute-resolution process set forth in the 26.14. Progressive Dispute Resolution provision if so requested in writing by either party.

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.

13.2.2 The EXCLUSIVE REMEDIES for Breach of the Good-Faith Requirement Are in Contract, Not Tort

(a) A party that breaches a duty of good faith, fair dealing, or similar duty, under the Agreement, is liable only for contract remedies; no other party will seek any other type of remedy, including for example tort remedies, in any forum, for any such breach.

(b) Subdivision (a) does not preclude a party from seeking non-contract remedies for conduct that would be subject to such remedies regardless whether the duty encompassed by subdivision (a) had been breached.

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.

13.2.3 Clear and Convincing Evidence of Bad Faith, etc., is Required

Any claim, before any Tribunal, that a party breached a duty of good faith, fair dealing, or similar duty, under the Agreement, must be proved by clear and convincing evidence.

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.

14 Term; Extensions

14.1 Term of Agreement

(a) The term of the Agreement begins on the Effective Date of the Agreement and continues until the end of the day on the end date (if any) specified in the Agreement.

(b) If no end date is specified, then the term continues indefinitely, subject to any provision for termination stated in the Agreement or by law.

(c) If an end date is specified, then the term will not be extended except:

(1) by written agreement of the parties; or

(2) if the Agreement clearly provides for its term to be extended, either (i) unilaterally or (ii) on an automatic, "evergreen" basis.

14.2 Evergreen Extensions — Basic Terms

14.2.1 Definitions

Evergreen Period refers to: Any otherwise-expiring period that the Agreement states is subject to evergreen- or automatic extension.

Extension Duration refers to: One year.

Maximum Number of Extensions refers to: An unlimited number.

Party Eligible to Opt Out refers to: Each party.

Opt-Out Deadline refers to: 12 midnight at the end of the last business day before the then-current expiration date of the Extendable Period.

14.2.2 Extensions Are Automatic, Absent an Opt-Out

Each Evergreen Period will be automatically extended for the Extension Duration, with no other extension action required by either party, for up to the Maximum Number of Extensions, with such extensions (if any) running successively and continuously, UNLESS a Party Eligible To Opt Out, in its sole discretion, gives notice of non-extension to each other party; any such notice of non-extension must be effective no later than the then-current Opt-Out Deadline.

The "sole discretion to opt out" language is intended to forestall any claim that non-extension is subject to some sort of duty of good faith and/or fair dealing. See the cases (including U.S. cases) cited by by the Supreme Court of Canada in Bhasin v. Hrynew, 2014 SCC 71 [2014] 3 S.C.R. 495, ¶ 91.

CAUTION: A Canadian case decided after Bhasin involved the agreement between the software giant Oracle Corporation and a member of Oracle's partner network. The agreement gave Oracle the sole discretion to accept the partner's application to renew the agreement. For 20 years the agreement was renewed each year. In 2014, though, Oracle invited the partner to renew the agreement, but then rejected the partner's renewal application. The partner filed suit; the trial court denied Oracle's motion to dismiss, holding that a dictum in Bhasin "does not stand for the (extreme) proposition that under no circumstances does a 'sole discretion' contract renewal power have to be exercised reasonably." Data & Scientific Inc. v. Oracle Corp., 2015 ONSC 4178 (CanLII).

14.3 Evergreen Extensions – Optional Terms

14.3.1 Opting Out of an Extension Requires a Fee Payment

(a) Any party opting out of an extension under section 14.2 must pay the other party an Opt-Out Fee, in an amount specified in the Agreement), no later than 12 midnight UTC at the end of the day on the then-current expiration date of the Extendable Period; otherwise, the extension will go into effect, and the right to opt out of the extention will expire, automatically with no further action by any party.

This provision was inspired by an analogous provision in Foodmark, Inc. v. Alasko Foods, Inc., 768 F.3d 42 (1st Cir. 2014). In that case, the court of appeals affirmed a summary judgment that Alasko, a Canadian food distributor, owed Foodmark, a U.S. marketing firm, a fee for electing not to renew the parties' "evergreen" agreement.

(b) For the avoidance of doubt, the Opt-Out Fee is intended as a form of alternative performance and not as liquidated damages.

14.4 Unilateral Extensions — Basic Terms

14.4.1 Any Specified Party May Unilaterally Extend the Specified Term

Except to the extent (if any) that the Agreement provides otherwise, any party specified in the Agreement (each, an Extending Party) may extend the term specified in the Agreement (each such term, an Extendable Period) for up to an unlimited number of successive periods of one year each.

One year seems to be fairly typical as the duration of an Extension Period. CAUTION: Too-long an Extension Period could lock in terms and conditions (e.g., pricing) that the other party might regard as unfavorable, as discussed in this note. ¶ Concerning the maximum number of permitted extensions, see the Notes.

14.4.2 A Unilateral Extension Requires Advance Notice

To extend an Extendable Period, the Extending Party must give notice of extension to each other party; each notice of extension must be effective no later than 90 days before the then-current expiration date of the Extendable Period in question.

The required extension notice might be appropriate for negotiation, for example if another party will need time to prepare if a party having the right to extend elects to let the notice deadline go by without extending.

14.4.3 Unilateral Extensions Will Be On the Same Terms and Conditions

Unless the parties agree otherwise in writing, any unilateral extension of an Extendable Period will be on the same terms and conditions as were in effect immediately before (what would have been) the expiration of that Extendable Period.

This language is intended to forestall the result in an Eighth Circuit case, where the appellate court affirmed a declaratory judgment that a lease agreement had given the tenant an option to renew rather than an option to extend; consequently, under a state law, the landlord was free to demand that the terms be renegotiated — this, even though the lease agreement expressly termed the option as a right to extend. See Camelot LLC v. AMC ShowPlace Theatres, Inc., 665 F.3d 1008 (2012) (8th Cir. 2012). ¶ In contrast, the Third Circuit held that a contractual right to renew an insurance policy meant renewal on the same or nearly the same terms and conditions. See Indian Harbor Ins. Co. v. F&M Equip., Ltd., No. 14-1897 (3d Cir. Oct. 15, 2015). The appellate court vacated the trial court's denial of the insured's motion for summary judgment and remanded with instructions to enter summary judgment.

14.4.4 A Unilateral Extension Will Not Go Into Effect if the Other Party Timely Opts Out

A unilateral extension will not go into effect if the other party gives notice of non-extension to the Extending Party; that notice must be effective no later than ten business days before expiration of the Extendable Period.

The concept underlying the opt-out right is extremely common in unilateral-extension provisions, because the non-extending party will usually want the right to "bail" at the end of the relevant term (possibly to use as bargaining leverage to renegotiate the deal).

14.4.5 The Right to Unilaterally Extend Will Lapse if Not Timely Exercised

IF: For any reason an an Extending Party does not duly extend an Extendable Period before that period expires; THEN: The Extending Party's right to unilaterally extend that Extendable Period will permanently and irrevocably lapse.

14.4.6 A Unilateral Extension Does Not Affect a Party's Right to Terminate

The fact that an Extendable Period is unilaterally extended will not affect any right that any party might have, under one or more provisions of the Agreement or of applicable law, (i) to terminate that Extendable Period, and/or (ii) to terminate the Agreement.

14.4.7 OPT-IN A Party Opting Out of a Unilateral Extension Must Pay an Opt-Out Fee

IF: A party wishes to opt out of an extension of an Extendable Period; THEN: In addition to giving timely notice under section 14.4.2, that party must pay the Extending Party an Opt-Out Fee in an amount specified in the Agreement. The payment is due no later than the then-current expiration date of the Extendable Period. If the payment is not timely made, then the extension will go into effect and the right to opt out will expire automatically. For the avoidance of doubt, the Opt-Out Fee is intended to provide an alternative form of performance and not as liquidated damages.

See the note to the evergreen opt-out fee provision.

15 "Utility" terms

15.1 Automatic Request Approval — Basic Terms

(a) This section applies whenever the Agreement specifies that a party (the Reviewing Party) has a stated period of time (the Request Review Period in which to approve a particular request for approval (the Approval Request).

(b) The Request Review Period begins on the date that the Approval Request is received by the Reviewing Party.

(c2) The Reviewing Party is to be deemed to have approved the Approval Request if the Receiving Party has not delivered, to the Requesting Party, a written objection to the Approval Request by the end of the Request Review Period.

Some contracts include automatic-approval language, but many parties are uncomfortable with the concept.

15.2 Consultation — Basic Terms

15.2.1 Applicability

This 15.2. Consultation — Basic Terms applies whenever the Agreement provides that a specified party (the "acting party"):

(1) must consult with another party before taking or omitting a specified action, or

(2) must take or omit the action "in consultation with" another party or words to that effect.

Suppose that Alice and Bob are negotiating a contract under which Alice demands that Bob obtain Alice's consent before proceeding with a specified action (e.g., raising prices). Bob, not wanting to limit his flexibility, pushes back in response; he wants to be able to raise prices in his sole discretion. A possible compromise would be for the parties to agree that Bob will not raise prices without first consulting with Alice.

The term consult is vague, though; that vagueness could later lead to disputes about whether Bob had complied with the consultation obligation. With that in mind, this definition sets out a specific procedure for consultation, while leaving the ultimate decision authority alone.

This definition is drafted in contemplation that it might be part of a package of clauses that as a group, but not individually, are incorporated by reference into an agreement.

15.2.2 The Acting Party Must Seasonably Advise the Other Party and Provide It an Opportunity to Be Heard

Before taking or omitting the action in question, the acting party must:

(1) seasonably advise the other party, preferably but not necessarily in writing, that it intends to take or omit the action; and

This clause does not specifically require the acting party to advise the other party in writing. The acting party, though, will of course want to consider doing so in order to avoid later "he said, she said" disputes about whether the acting party complied with this requirement. ¶ See also 2.84. Seasonable Definition.

(2) if so requested by the other party, provide the other party with:

(A) such relevant information about the acting party's intentions as the acting party deems appropriate in its reasonable discretion; and

(B) a reasonable opportunity to be heard by the acting party concerning the action to be taken or omitted.

15.2.3 Freedom of Action is Not Limited by Consultation

For the avoidance of doubt, a consultation requirement in itself does not limit the freedom of the acting party to take or omit the specified action unless the Agreement expressly states otherwise.

This subdivision is a "roadblock" provision, intended to reassure an acting party that might be nervous about about how a court might interpret this.

15.3 Cooperation (rough notes only)

These materials need further thought; I'm posting them for use as a reference. The idea for this definition came from, among other places, an Oracle license-agreement document.

(a) Applicability: This Annex applies in any case as to which the Agreement provides, in this clause or elsewhere, that a party must cooperate with another party in connection with the other party's performance of obligations or exercise of rights under the Agreement. This includes, for example, situations in which the other party is:

(1) attempting to diagnose and/or repair a defect or malfunction of the cooperating party's equipment, software, configuration, or the like;

(2) rendering other services to or for the benefit of the cooperating party;

(3) inspecting or auditing the cooperating party or its records.

(b) Reasonable information to be provided: The cooperating party will timely provide relevant information to the other party or its agents when reasonably requested by one or more of them. (See also the confidentiality provisions of the Agreement, if any, to the extent applicable.)

(c) Option: Suitable working space: IF: The Agreement states that the cooperating party must provide suitable working space; THEN: The cooperating party will timely make the following available to the other party or its agents to the extent reasonably requested by the other party:

(1) working space, appropriately located and ‑furnished;

(2) any necessary utilities, such as (for example) electrical power, heating and air conditioning, and water;

(3) Internet connectivity; and

(4) any necessary parking space.

Subdivision (c) was inspired by tales of parties intentionally making it difficult and uncomfortable for other parties to take actions.

15.4 Deceptive Practices Prohibition — Basic Terms

Each Obligated Party (namely, each party) is to:

(1) refrain from knowingly engaging in any deceptive practice in connection with its activities relating to the Agreement; and

(2) defend and indemnify the other party against any third-party claim arising out of any breach of subdivision (a) by the Obligated Party.

Clauses like this are sometimes seen in contracts where, say, a manufacturer's reputation might be adversely affected by deceptive conduct on the party of a reseller.

CAUTION: This clause might strike the reader as unlikely to be controversial — who could object to it? — but in the hands of litigation counsel it could complicate the resolution of a dispute. See the commentary to 26.16. Reliance Disclaimer.

The "each party" configuration of this provision is canary-in-the-coal-mine language: If a prospective Obligated Party were to balk at it, that might be a red flag.

Some parties might balk at an indemnity obligation, which could be another canary-in-the-coal-mine event.

15.5 Disparagement Prohibition — Basic Terms

(a) Definition: Obligated Party refers to each party.

(b) Prohibition:

(1) No Obligated Party is to disparage any other Signatory Party, nor the products or services of that other Signatory Party, to third parties.

(2) For the avoidance of doubt, another Signatory Party's affiliates and the officers, employees, distributors, resellers, and agents of each of them are not considered third parties for purposes of this provision.

See generally the Reading Notes on this subject.

15.6 Escrow provisions (coming soon; notes only for now)

Cal. S. Ct. explanation of escrow agent duties: https://scholar.google.com/scholar_case?case=11301981884307642549

15.7 Master Agreement Acknowledgement

The Agreement in itself does not obligate either party except to the extent indicated otherwise; the parties intend to use the Agreement as a pre-negotiated set of terms and conditions for one or more purchase orders, statements of work, or other specific agreements incorporating the Agreement by reference.

See generally the Reading Notes on this subject. ¶ See also 27.1.5.2. OPT-IN Any Prior Master Agreements Are Superseded.

15.8 Preamble [of Agreement – requires editing]

The parties to this [FILL IN TYPE OF AGREEMENT] (this Agreement) are: ABC Corporation (ABC or Provider), a Delaware corporation, having a place of business and initial address for notice at 123 Main Street, AnyTown, AnyState 12345-6789; and XYZ LLC (XYZ or Customer), a New York limited liability company, having a place of business and initial address for notice at 456 Commerce Street, OtherTown, OtherState 98765-4321. The Agreement is effective as of the date on which the Agreement was signed and delivered by or on behalf of the party whose signature and delivery were the last ones required for the Agreement to form a contract (the Effective Date).

15.9 Primary-Contact Designation

(a) Upon a written request by any party, each party (each, a Designating Party) is to designate, in writing, and provide contact information for, one or more Primary-Contact Representatives.

Provisions like this are often seen in, e.g., services- and project agreements, where it can be important for parties to have designated points of contact.

(b) Each Primary-Contact Representative is to be an individual of appropriate seniority who is authorized by the Designating Party to act as a contact point on behalf of the Designating Party under the Agreement.

(c) Any such designation may (1) be by email; (2) state limits on the authority of the Primary-Contact Representative; (3) be amended in writing from time to time; and/or (4) be revoked in writing in the same manner as the designation.

(d) An oral communication from a Primary-Contact Representative to another Signatory Party will not be binding on the Designating Party; a written communication will be binding, and may be relied on by that other Signatory Party for any purpose relating to the Agreement, UNLESS:

(1) the communication exceeds a limitation on the Primary-Contact Representative's authority as stated in the Designating Party's most-recent written designation under subdivision (a); or

(2) the communication itself clearly states that it is not intended to be binding.

This subdivision is intended to encourage written communications in the interest of trying to forestall "he said, she said" disputes. ¶ In some circumstances, a party that designates a Primary-Contact Representative might want to restrict the representative's authority by so stating in its designation of the representative.

(e) Unless otherwise specified in the Agreement or in the written designation of a Primary Contact Representative, IF: An employee or other representative of a Designating Party, other than a Primary-Contract Representative of that party, purports to make a request or issue an instruction on behalf of the Designating Party; THEN: Other parties are not to consider the request or instruction to have been made on behalf of that Designating Party.

This subdivision addresses one of the major causes of "troubled" contracts, which is that is unauthorized people can make change requests that can lead to cost overruns and delays. See, e.g., Steve Olsen, Troubled contracts – why missing these steps may trip you up (IACCM.com 2015).

15.10 Recordkeeping

(a) Activities requiring records: During the term of the Agreement (the Recordkeping Period), any party engaged in activities described in subdivisions (1) through (4) (each, a Recordkeeping Party) is to create and maintain records sufficient to document the following, as applicable (the Required Records):

(1) all deliveries of goods and services, by the Recordkeeping Party to another Signatory Party, under the Agreement;

(2) billing of charges or other amounts, by the Recordkeeping Party to another Signatory Party, under the Agreement;

(3) all payments, by the Recordkeeping Party to another Signatory Party, under the Agreement, of amounts not verifiable by the payee, such as, for example, royalties or rents to be paid to the other party as a percentage of the Recordkeeping Party's sales; and

(4) all other information (if any) that the Agreement requires the Recordkeeping Party to report to another Signatory Party.

(b) Specific records to be kept: The Required Records are to include, for example, where applicable, the following: Sales journals; purchase-order journals; cash-receipts journals; general ledgers; and inventory records; as well as any other records expressly required by the Agreement.

(c) General requirements: All Required Records are: (1) to be accurate; (2) to be materially-complete; and (3) to conform at least to (A) commercially-reasonable standards of recordkeeping; and (B) if stricter, any other recordkeeping standards specified in the Agreement.

In some situations, parties might want to negotiate specific recordkeeping standards. ¶ See generally the Reading Notes on this subject.

(d) Record retention: The Recordkeeping Party will keep each of the Required Records for at least the longest of the following:

(1) any retention period required by applicable law;

(2) the duration of any timely-commenced audit of the Required Records permitted by the Agreement; and

(3) any other particular Record-Retention Periods expressly agreed to in writing by the parties, if any — for the avoidance of doubt, it is immaterial if one or more such other particular Record-Retention Periods is also in another category listed above.

When services are involved, two- to four years after final payment seems to be a not-uncommon retention period. See, for example, the [U.S.] Federal Acquisition Regulations. See, e.g., Contractor Records Retention, 48 C.F.R. §§ 4.703(a)(1), 4.705. ¶ Some industries or professions might require specific record-retention periods. ¶ NOTE: The Record-Retention Period is not the same as the Recordkeeping Period.

(e) Option: Record retention per FAR standards: (1) If expressly so stated in the Agreement, The Recordkeeping Party will maintain each of the Required Records for at least the period that the record would be required to be maintained under the (U.S.) Federal Acquisition Regulations ("FARs"), Contractor Records Retention, 48 C.F.R. Subpart 4.7. (2) For the avoidance of doubt, this subdivision is included for the convenient reference of the parties, who do not intend to imply or concede that the Agreement and/or their relationship are in any way subject to the FARs.

The FARs' record-retention requirements go into some detail; drafters might want to take advantage of that specificity.

15.11 Reviews of Products and Services Are Restricted

During the term of the Agreement, no the each party (namely, Restricted Party) will:

(1) participate, directly or indirectly, participate in the preparation or publication of any review (comparative or otherwise) of any product or service of any the each other party (namely, Protected Party) without the prior written consent of that Protected Party; nor

(2) permit or knowingly assist any other person to engage in any activity within the scope of subdivision (a).

This type of clause could lead to serious complications down the road, such as adverse publicity and even litigation. See generally the Reading Notes on this subject.

15.12 Right of First Refusal Procedure (coming soon)

15.13 Site Visits & Network Access

(a) Definitions: For purposes of this 15.13. Site Visits & Network Access provision:

(1) Site, in respect of a the each party (namely, Host Party), refers, as the case may be, to (A) any physical premises of that Host Party; and (B) any computer system or network of that Host Party;

(2) Site Visit refers to the physical presence at such premises, and/or access to such a computer system or network, by any the each other party (namely, Accessing Party) or any individual who is subject to the control of an Accessing Party (each, a Site Visitor).

(b) Site-rules compliance: Each Accessing Party will cause each of its Site Visitors to comply with such reasonable Site rules and policies as the Host Party may seasonably communicate in writing to the Accessing Party.

Customers' contract forms for service providers often include provisions along the lines of this clause. These definitions recognize that these days "site visits" are sometimes virtual. ¶ In many services-type agreements, the customer will be the Host Party, while the services provider coming onto the customer's site, or accessing the customer's computer network, will be the Accessing Party. In other types of agreement, it might be the other way around, e.g., with a customer's people coming onto a service provider's site for training, to have work done on vehicles or equipment, etc. ¶ This provision doesn't require site rules to be communicated in writing, but obviously that might be advisable for proof purposes if no other reason.

(c) Unlawful discrimination prohibited: For the avoidance of doubt, a Host Party may not deny access to, or otherwise discriminate against, any Site Visitor for any reason prohibited by applicable law (for example, antidiscrimination or equal-opportunity law).

This provision helps give a visiting party some cover in the event of trouble.

(d) Option: Indemnity obligations: IF: The Agreement specifies that this is coupled wiht an indemnity obligation; THEN:

(1) Each Host Party will defend and indemnify each Accessing Party against any claim by a third party (including for example claims by an individual or a government agency) of: (A) discrimination against a Site Visitor on the part of the Host Party in breach of subdivision (c); and/or (B) other unlawful conduct that affects a Site Visitor, in either case on the part of any officer, director, employee, or other individual under the control of the Host Party;

(2) Each Accessing Party will defend and indemnify each Host Party against any claim by a third party (including for example claims by an individual or a government agency) of unlawful conduct, on the part of any Site Visitor, affecting any Host-Party personnel; and

(3) For purposes of this subdivision (d), unlawful conduct includes, for example, tortious conduct.

Indemnity obligations are sometimes objected to, even when the indemnifying party would be liable for breach of contract, for reasons discussed in this annotation.

15.14 Site visits: Optional terms

15.14.1 Employability Evidence Upon Request

If seasonably requested in writing by a Host Party, an Accessing Party will provide the Host Party with reasonable evidence that the Accessing Party's Site Visitors are legally employable where the Host Party's relevant physical premises are located.

A given company might feel compelled to verify employability of any individual that comes on its premises. (That's especially possible if a company had previously entered into a non-prosecution agreement after being caught employing aliens not having the legal right to work.) ¶ This provision shouldn't be too contentious, given that U.S. law already requires most if not all employers to verify that their employees have the right to work in this country.

15.14.2 Noninterference Commitment

Each party will make commercially-reasonable efforts to avoid interfering with the activities of the other party at any site where both parties' personnel are present.

Some customers might want this to be a one-way clause, where it's only the on-site service provider that must make an effort to avoid interference with the customer, and not vice versa.

15.15 Status-Review Conferences

Many business-contract disputes could be mitigated or even avoided altogether if the participants would just talk with each other once in a while. In particular, it’s often extremely helpful to hold such a conference immediately after — or better yet, before — a missed deadline or other potential breach. Sure, this stuff is basically just "Management 101." But it can’t hurt for the contract to include a reminder.

(a) Frequency: Each party is to participate in status-review conferences in accordance with this as reasonably requested by either party.

In some situations, the parties might want to specify quarterly, monthly, or even weekly calls.

(b) Type: Conferences are to be by telephone conference call unless otherwise agreed.

Video conferences (with screen sharing) are becoming extremely affordable from provides such as Skype Business; Zoom.us; and GoToMeeting.

(c) Arrangements: Conference arrangements are to be made (i) by the requesting party for requested conferences, and (ii) by each party, on an alternating basis, for regularly-scheduled conferences (if any).

The parties might prefer to have one party (e.g., a supplier or services provider) always be responsible for arranging conference details.

(d) Expenses: Unless otherwise agreed in writing, each party is to bear its own expenses of status-review conferences.

To the extent that status-review conferences are conducted by phone, the conference expenses will often be nominal.

(e) Agenda template: A status-review conference may include discussion of some or all of the following "G-PP-AA" agenda items:

G - goals of the parties in respect of the Agreement;

P - progress to date in achieving those goals;

P - problems encountered or anticipated;

A - action plans for the future, including for example plans for addressing existing or anticipated problems; and

A - assumptions being made, especially any that might prove unwarranted.

The G-PP-AA agenda will generally provide useful topics for discussion. This provision, though, intentionally does not require conferences to follow the G-PP-AA agenda, so as not to create issues for possible dispute later.

(f) Conference minutes:

(1) Minutes of each status-review conference should preferably be produced and circulated by the party arranging the conference details, but doing so is not mandatory.

(2) Any participating party may, at any time, propose corrections and/or additions to status-review conference minutes.

(3) The timeliness of draft minutes and of proposals for correction and/or addition are to be given due weight in assessing their evidentiary value.

(4) For the avoidance of doubt, status-review conference minutes will not in themselves be deemed to amend the Agreement nor to waive any right or obligation under it, regardless whether one or both parties prepared and/or approved the minutes, unless the minutes meet the requirements of the Agreement for amendment or waiver, as the case may be.

Conference minutes can be invaluable if disputes arise later. ¶ Subdivision (f)(2), allowing corrections at any time, is intended to reduce or eliminate possible resistance to the idea of producing conference minutes. ¶ Subdivision (f)(4) makes it clear that conference minutes will not act to amend the Agreement unless specific requirements are met; see also: • 27.1.1. Amendments Must Be in Writing as well as • 27.1.15. CHECK Waivers Must Be in Writing.

15.16 Third-Party Immunity

(a) Unless expressly stated otherwise in the Agreement, each party agrees not to assert any Contract-Related Claim (defined below) against any individual or organization, other than an individual or organization expressly identified in the preamble of the Agreement as entering into the Agreement (Contracting Party).

(b) As used in this clause, the term Contract-Related Claim refers to any claim, obligation, liability, or cause of action (each, a Claim) arising out of or relating to any of the following:

(1) the Agreement;

(2) the negotiation, execution, performance, or breach of the Agreement;

(3) any representation or warranty made in, in connection with, or as an inducement to, the Agreement; and

(4) any transaction or relationship resulting from the Agreement.

(c) For the avoidance of doubt, the term Contract-Related Claim encompasses all Claims whether, for example,

(1) in contract or in tort,

(2) in law or in equity, or

(3) granted by a constitution, statute, regulation, order precedent, or other governmentally-enforceable policy.

(d) For the avoidance of doubt, the parties intend for the covenant in subdivision (a) to benefit, for example, the following NonParty Affiliates:

(1) each Affiliate of each Contracting Party; and

(2) each director; officer; employee, incorporator; member; partner; manager; stockholder; agent; attorney; or representative of; and any financial advisor or lender to each Contracting Party and each such affiliate, in each case whether past, present, or future.

(e) To the maximum extent not prohibited by law, each Contracting Party, for itself and any individual organization claiming through or under that Contracting Party, KNOWINGLY, VOLUNTARILY, INTENTIONALLY, PERMANENTLY, AND IRREVOCABLY WAIVES AND RELEASES all such Contract-Related Claims against each NonParty Affiliate.

(f) For the avoidance of doubt, the waiver and release of subdivision (e) applies, for example, to all Claims of entitlement to avoid or disregard the entity form of a Contracting Party or otherwise impose liability of a Contracting Party on a Nonparty Affiliate.

(g) The Claims of entitlement referred to in subdivision (f) include, for example, those based on theories of equity; agency; control; instrumentality; alter ego; domination; sham; single business enterprise; piercing the veil; unfairness; undercapitalization; or otherwise.

(h) Each Contracting Party KNOWINGLY, VOLUNTARILY, INTENTIONALLY, PERMANENTLY, AND IRREVOCABLY DISCLAIMS, AND AGREES NOT TO ASSERT, ANY RELIANCE UPON, any action or omission (including for example any statement or silence) by any Nonparty Affiliate with respect to:

(1) the performance of the Agreement; or

(2) any representation or warranty made in, in connection with, or as an inducement to the Agreement.

16 Warranties

16.1 Warranty — Basic Terms

16.1.1 Warranty Definition

The noun warranty (whether or not the term is capitalized) refers to a statement by a party warranting that a specified state of affairs exists (or existed or will exist at or during a specified time). The verb warrant has the corresponding meaning. HYPOTHETICAL EXAMPLE: Alice warrants that the widgets, as delivered to Bob, will be substantially free of defects in materials or workmanship.

16.1.2 Warranties Benefit the Stated Person(s)

(a) A warranty benefits all individuals and organizations expressly specified in the warranty or otherwise in the Agreement (each, a beneficiary), for example by language such as "Alice warrants to Bob and Bob's Affiliates."

(b) If not otherwise specified, the only such beneficiary is the other Signatory Party (if more than one, all other Signatory Parties) (each, a Signing Beneficiary).

16.1.3 Foreseeable Damages Are the EXCLUSIVE REMEDY for Breach of Warranty

IF: A beneficiary shows that the warranted state of affairs did not exist at the relevant time; THEN: As the beneficiary's EXCLUSIVE REMEDY for that non-existence, the warranting party will pay the beneficiary for any foreseeable damage shown to have thereby resulted to the beneficiary. (This payment obligation is subject to any limitations of liability that are stated in the Agreement or that apply by law.)

16.1.4 Warranties Are Deemed Relied On

For the avoidance of doubt, each Signing Beneficary of a warranty is deemed to have relied on that warranty as part of the basis of the bargain of the Agreement.

16.2 Warranties: Non-Warranting Party Playbook

16.2.1 Warranties are Material

For the avoidance of doubt, each warranty stated in the Agreement is a material provision of the Agreement.

CAUTION: Warranting parties should be careful about agreeing to a provision such as this, because it might mean that even an inconsequential breach of warranty might be a material breach that could entitle the other party to terminate or even rescind the Agreement.

16.2.2 Warranties Will Survive After Closing

(a) This section applies in any case in which any warranty stated in the Agreement (each, a Surviving Warranty)mess is alleged to have been breached.

(b) Subject to the limitations stated in subdivision (c), all Surviving Warranties will survive the closing or other consummation of the transaction or transactions contemplated by the Agreement (the Closing) for the period stated in subdivision (c).

(c) To be entitled to any remedy for breach of a Surviving Warranty, the party alleging the breach must:

(1) give the breaching party notice of the breach before one year after the date of the Closing; and

(2) bring any judicial- or other action for the breach before the expiration of one year and three months after the date of the Closing.

This provision tries to make it very clear just how, and for how long, specified warranties survive the closing of a contract for the sale of assets. It is intended to address the so-called merger doctrine that, in some circumstances, can extinguish warranties set forth in the contract, as discussed in the Annotations.

16.3 Warranties: Warranting Party Playbook

16.3.1 Implied Warranties are Disclaimed

(a) For the avoidance of doubt, any express warranties stated in the Agreement (if any) are unaffected by subdivisions (b) through (d) below.

(b) Each the each party (namely, Disclaiming Party) KNOWINGLY, VOLUNTARILY, INTENTIONALLY, PERMANENTLY, AND IRREVOCABLY DISCLAIMS all Implied Warranties, namely all warranties, representations, conditions, and terms of quality EXCEPT those that are expressly stated in (or incorporated by reference into) the Agreement.

The terms conditions and terms of quality are included to address the requirements of disclaimers under UK law, as discussed in the Annotations. ¶ The bold-faced, all-caps type is for conspicuousness.

(c) Without limiting the disclaimer of subdivision (b), the parties intend for that subdivision to encompass, for example, any and all Implied Warranties concerning any of the following:

The "without limiting the disclaimer" preamble phrase is intended to avoid a very-strange holding by the Georgia supreme court, discussed in the Annotations.

(1) Merchantability.

Concerning the special requirements for disclaimers of the implied warranty of merchantability of goods sold (which arises automatically under the (U.S.) Uniform Commercial Code), including a conspicuousness requirement, see UCC § 2-316(2) and (3).

(2) Fitness for a particular purpose (whether or not the Disclaiming Party or any of its suppliers or affiliates know, have reason to know, have been advised, or are otherwise in fact aware of any such purpose).

A disclaimer of the implied warranty of fitness of goods sold, which arises automatically under the (U.S.) Uniform Commercial Code, might need to be conspicuous. See UCC § 2-316(2) and (3).

(3) Quiet enjoyment.

In some jurisdictions an implied warranty of quiet enjoyment might arise in a lease of real property.

(4) Title.

The (U.S.) Uniform Commercial Code imposes special requirements for a disclaimer of the implied warranty of title in a sale of goods. See UCC S 2-312.

(5) Noninfringement.

Under the (U.S.) Uniform Commercial Code, a "merchant" that sells goods is deemed to give an implied warranty that the goods are free from third-party claims of infringement. See UCC S 2-312.

(6) Absence of viruses.

(7) Results.

(8) Workmanlike performance or effort.

(9) Implied term of quality.

This is a British-ism, as noted above.

(10) Non-interference.

(11) Accuracy of informational content.

(12) Correspondence to description.

(d) Without limiting subdivisions (b) and (c), those subdivisions apply regardless whether any allegedly-implied warranty is claimed to arise by law; by reason of custom or usage in the trade; by course of dealing or performance; or by trade practice.

See generally UCC §§ 1-303 and 2-314(3).

(e) No party will assert that a Disclaiming Party has breached any Implied Warranty.

The intent here is to make such an assertion a separate breach of contract, so that a party making such an assertion would be liable for damages in the form of attorney fees even without an attorney-fee provision.

16.3.2 Warranty Claims Must Be Timely Brought

(a) For Provider to be liable for breach of any warranty stated in or otherwise relating to the Agreement, the matters stated in subdivisions (b) through (d) must all be true.

(b) Customer must give Provider written notice that states, in reasonable detail, the facts constituting the alleged breach. The notice must be effective no later than 90 days (the Warranty Notice-Period Duration) after the date that Customer (i) knows, or (ii) in the exercise of reasonable diligence, should know, of the existence of the alleged breach (the Warranty Limitation-Period Start Date).

An action normally “accrues” at the time of the injury. In some jurisdictions, the discovery rule applies; that rule holds that, in certain circumstances, a claim accrues — and the limitation period starts to run — when the plaintiff first had, or reasonably should have had, a suspicion of wrongdoing. See, e.g., Miller v. Bechtel Corp., 33 Cal. 3d 868, 663 P.2d 177 (1983) (affirming summary judgment on limitation grounds), discussed in Jolly v. Eli Lilly & Co., 44 Cal. 3d 1103, 1111, 751 P.2d 923 (1998) (same).

(c) At Provider's request from time to time, Customer must furnish Provider with reasonable information about the facts constituting the alleged breach.

(d) Customer must duly file and duly serve a claim for the alleged breach no later one year after the Warranty Limitation-Period Start Date.

17 Safety measures

17.1 Safety Measures — Basic Terms

17.1.1 Applicability; Definition

This section 17.1 applies if the Agreement specifies that one or more parties (each, an Obligated Party) is to take safety measures.

The need for this clause will obviously depend on what kind of activities are to be engaged in under the parties' agreement. ¶ In some contracts it might make more sense to have only one party be designated as an Obligated Party.

17.1.2 At Least Reasonable Safety Measures Are Required

In connection with its activities under the Agreement, each Obligated Party will cause at least the following Minimum Safety Measures to be taken: (1) commercially-reasonable safety measures; and (2) any other safety measures specified in the Agreement.

Some parties might want to specify particular safety measures, e.g., those conforming to particular industry requirements or published specifications.

17.2 Safety measures optional terms

17.2.1 Safety Requirements Are Coupled with an Indemnity Obligation

Each Obligated Party will defend and indemnify each other Signatory Party and that Signatory Party's Protected Group against any claim, by any third party in any forum or before any tribunal, arising out of the Obligated Party's noncompliance with the safety obligations of this Agreement.

The indemnity-obligation option is a canary in the coal mine clause: If a prospective Obligated Party were to balk at it, that might raise questions about that party's long-term intentions or capabilities. ¶ Insurance: 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. ¶ For a contract with more than two Signatory Parties, it might make sense to limit the number of protected parties.

18 Payments

18.1 Payments — Basic Terms

18.1.1 Payments Must Be Timely Made Per the Agreed Terms

Unless otherwise agreed in writing, all payments required by the Agreement:

(1) are to be made by any method to which the payee does not timely and reasonably object in writing (each, an Acceptable Payment Method); and

(2) are due and payable on or before net 30 days from receipt of a correctly-stated invoice (the Payment Due Date).

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.

18.1.2 Payment Disputes Must Be Timely Reported

Any party disputing an amount that it putatively owes under the Agreement (for example, any party disputing an invoice) must:

(1) bring the dispute to the attention of the putative payee no later than the putative due date of the payment;

(2) furnish the putative payee with a written explanation of the paying party's basis for disputing the amount owed, together with (where applicable) reasonable supporting documentation; and

(3) timely pay any undisputed amount.

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.

(b) IF: Other than for good reason clearly shown, the paying party does not comply with subdivision (a); THEN: The invoice in question invoice will be rebuttably presumed to be correct.

18.1.3 OPT-IN Provider Will Separately Invoice Undisputed Amounts Upon Request

If Customer disputes part but not all of an amount invoiced by Provider, then to facilitate timely payment:

(1) Upon written request by Customer, Provider will issue a separate invoice for the undisputed portion.

(2) Payment for the undisputed portion will be due on the date that payment would have been due for the original invoice if none of it had been disputed.

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

18.2 Expense Reimbursement — Basic Terms

18.2.1 Applicability; Definitions

This provision applies when the Agreement requires a the the party indicated in the Agreement, if any (namely, Reimbursing Party) to reimburse a the the party indicated in the Agreement, if any (namely, Incurring Party) for expenses.

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.

18.2.2 The Reimbursing Party Will Reimburse Actual, Reasonable Expenses

When invoiced by the Incurring Party, the Reimbursing Party is to reimburse the Incurring Party for reasonable expenses actually incurred by the Incurring Party in the performance of the Incurring Party's obligations under the Agreement.

Note the "reasonable" and "actually incurred" qualifiers in this provision.

18.2.3 CHECK Expenses Are Not to Be Marked Up Unless So Agreed

Expenses to be reimbursed under the Agreement are to be invoiced on a straight pass-through basis, with no markup, unless otherwise agreed in writing.

18.3 Expense Reimbursement: Option Menu

18.3.1 The Invoicing Party Will Follow the ReimbursingParty's Written Expense Reimbursement Policy

(a) From time to time the Reimbursing Party may provide the Incurring Party with a copy of the Reimbursing Party's then-current standard written reimbursement policy.

(b) IF: The Reimbursing Party provides the Incurring Party with such a written policy so at least a reasonable time before the Incurring Party incurs the relevant expense(s) or otherwise becomes obligated to pay them; THEN: The Incurring Party will not invoice the Reimbursing Party for expenses, and the Reimbursing Party is not required to reimburse expenses, except in conformance with that policy.

(c) IF: The Agreement specifies that the Reimbursing Party's current written reimbursement policy is attached or has been otherwise provided to the Incurring Party (e.g., by email); THEN: That policy will apply until such time, if any, as the Reimbursing Party provides a different written policy.

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.

18.3.2 Expenses May Be Marked Up As Stated

In invoicing reimbursable expenses, the Incurring Party may mark up the expenses by up to the Maximum Permissible Expense Markup specified in the Agreement, if any; if none is specified, then the Incurring Party may not mark up the expenses.

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

18.3.3 Expenses Exceeding a Threshold May Be Direct-Billed to the Reimbursing Party

(a) The Incurring Party may arrange for individual expenses of at least USD $1,000 (the Direct Billing Threshold Amount) to be billed directly to the Reimbursing Party; the Reimbursing Party is to timely pay any such direct-billed expense.

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.

(b) If so requested by the Reimbursing Party for a particular expense, the Incurring Party will consult with the Reimbursing Party before arranging for direct billing of that expense to the Reimbursing Party.

18.3.4 Only Pre-Approved Expenses Need Be Reimbursed

The Reimbursing Party is not required to reimburse any expenses that it did not expressly approve in writing in advance.

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.

18.4 Guaranties — Basic Terms

18.4.1 Definitions

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 Guaranties — Basic Terms."

(a) Guarantor refers to each individual or organization that states, in a  writing signed by the individual or organization, that the individual or organization guarantees a Guaranteed Payment Obligation.

(b) Creditor refers to any individual or organization to which a Guaranteed Payment Obligation is owed.

(c) Payer refers to any person that owes a Guaranteed Payment Obligation.

(d) Guaranteed Payment Obligation refers to any payment, under any Guaranteed Agreement, that is guaranteed in writing.

(e) Guaranteed Agreement refers to the Agreement.

(f) Any Guaranteed Payment Obligation may be enforced against any Guarantor in any court having jurisdiction.

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 of guaranty language intended for ongoing use will want to be careful how they identify the guaranteed obligations, as discussed in the Annotations.

18.4.2 Guaranty Terms and Conditions

(a) Guaranty: Each Guarantor guarantees — to each Creditor and also to that Creditor's successors and assigns — the full and prompt payment, by each Payer, when due, of each Guaranteed Payment Obligation.

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).

(b) Additional details: The guaranty of subdivision (a) applies without regard to:

(1) how or when the Guaranteed Payment Obligation in question previously came to exist, is coming to exist now, or comes to exist in the future (including, for example, by acceleration or otherwise); or

(2) whether the Guaranteed Payment Obligation is direct or indirect, absolute or contingent.

(c) Consideration: Each Guarantor undertakes its obligations under this in consideration of, and to induce, the entry, by each Creditor, into the Guaranteed Agreement.

The "in consideration of" language in subdivision (c) is included because otherwise the guaranty might not be enforceable.

(d) Forum for enforcement: IF: The Agreement specifies one or more forums for enforcement of the guaranty of subdivision (a); THEN: Any action to enforce that guaranty against a Guarantor may be brought in any such forum; each Guarantor submits to the jurisdiction of each such forum for that purpose.

A forum-selection provision much like that of subdivision (d) 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).

18.5 Guaranties: Creditor Playbook

18.5.1 Creditors Need Not Sign the Guaranty Document

Each Guarantor waives notice of acceptance of the Guaranty by the Creditors; the Guaranty will be enforceable even if some or all Creditors do not sign it.

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.

18.5.2 The Guarantors Must Reimburse the Creditors for any Expenses of Collection and Enforcement

The Guarantor must pay or reimburse all court costs and all reasonable expenses — including for example reasonable attorney fees and expenses — that any Creditor incurs in attempting to enforce one or more of: (1) that Creditor's rights against that Guarantor under the Guaranty; and (2) the Guaranteed Payment Obligation in question.

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 the Attorney Fees – Basic Terms.

18.5.3 The Guarantors Remain Liable for Any Deficiencies Even After a Foreclosure of Collateral

Each Guarantor will be (and remain) liable, to the fullest extent permitted by applicable law, for any deficiency remaining after foreclosure of any lien or other security interest in collateral or other rights or property securing a Guaranteed Payment Obligation, even if the Payer's liability for such a deficiency is discharged pursuant to statute or judicial decision.

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.

18.5.4 The Guarantors WAIVE Any Election-of-Remedies Rights and Defenses

Each Guarantor KNOWINGLY, VOLUNTARILY, INTENTIONALLY, PERMANENTLY, AND IRREVOCABLY WAIVES all rights and defenses arising out of an election of remedies by a Creditor, even if that election of remedies, such as a nonjudicial foreclosure with respect to security for a Guaranteed Payment Obligation, resulted in impairment or destruction of the Guarantor's rights of subrogation and reimbursement against the Payer.

This waiver language is adapted from California Civil Code § 2856(c) and (d). ¶ The use of bold-faced type is for conspicuousness.

18.5.5 The Guarantors WAIVE Any Defenses Against Enforcement

(a) Each Guarantor KNOWINGLY, VOLUNTARILY, INTENTIONALLY, PERMANENTLY, AND IRREVOCABLY WAIVES any and all defenses — and expressly agrees that it will not assert (and it will cause its affiliates not to assert):

The use of all-caps and bold-faced type is for conspicuousness. ¶ The phrase "expressly agrees" is technically redundant, but in litigation it might be useful as a sound bite in a brief or trial exhibit. ¶ 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.

(1) any claim or defense that the Guarantor's obligations under this Guaranty are allegedly illegal, invalid, void, or otherwise unenforceable; and/or

(2) any claim or defense pertaining to any Guaranteed Payment Obligation, other than the defense of discharge by full performance, including without limitation any defense of waiver, release, statute of limitations, res judicata, statute of frauds, fraud, incapacity, minority, usury, illegality, invalidity, voidness, or other unenforceability that may be available to the Payer or any other person liable in respect of any Guaranteed Payment Obligation; and/or

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. ¶

(3) any setoff available to the Payer or any other such person liable, whether or not on account of a related transaction; and/or

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).

(4) any other circumstance which might otherwise constitute a defense available to, or a discharge of, the Payer or any Guarantor.

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.

18.5.6 The Guarantors Will Reimburse the Creditors for Any Payments Refunded in Bankruptcy, etc. 

(a) This provision applies if a Creditor:

(1) refunds (as defined below) a payment made by a Payer on a Guaranteed Payment Obligation because of a requirement of bankruptcy law; fraudulent-transfer law; or comparable law; or

(2) makes a partial refund of such a payment in settlement of a claim for a larger refund.

(b) In any such case, each Guarantor, jointly and severally, must reimburse the Creditor for the amount of the refund or partial refund and as well as reasonable attorney fees and expenses and costs of court, if any.

(c) For purposes of this provision, the term refund includes payments made by the Creditor to third parties, for example to a trustee in bankruptcy, a debtor-in-possession, or a receiver.

See generally the Reading Notes on this subject.

18.5.7 The Guarantors' Liability is "Joint and Several"

Except to the extent (if any) that the Agreement expressly states otherwise, each Guarantor is jointly and severally liable to each Creditor for each 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.

18.5.8 The Guarantors' Liability is Unconditional

Except to the extent (if any) that the Agreement expressly states otherwise:

(a) Each Guarantor's obligations under the Guaranty: (1) are unconditional, direct and primary; and (2) will accrue immediately, upon written demand by the Creditor to the Guarantor, after any default by the Payer in the relevant Guaranteed Payment Obligation.

(b) IF: The Guaranteed Agreement provides the Payer with the right to notice and a cure period in which to cure an alleged breach of a Guaranteed Payment Obligation; THEN: The Guarantor's obligations under the Guaranty will not accrue before the end of that cure period.

(c) The Creditor is not required to attempt to enforce the Guaranteed Payment Obligation against the Payer; for example, the Guarantor is not required to attempt: (1) to collect a judgment against the Payer, nor (2) to foreclose on any lien, security interest, or other collateral securing the Guaranteed Payment Obligation.

18.5.9 The Guaranty is Not Affected by Alteration of the Payment Obligation

For the avoidance of doubt, an amendment to or modification of a Guaranteed Payment Obligation does not discharge or otherwise affect the guaranty obligation of any Guarantor in respect of that Guaranteed Payment Obligation.

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.

18.6 Guaranties: Guarantor Playbook

18.6.1 Creditors Must Make Reasonable Efforts to Collect a Judgment Before Enforcing the Guaranty

This Guaranty may not be enforced as to any Guaranteed Payment Obligation until the Creditor:

(1) has obtained a final judgment against the Payer, from which no further appeal is taken or possible, enforcing, in whole or in part, the Guaranteed Payment Obligation in question; and

(2) has been unable to collect the judgment after diligently making reasonable efforts to do so.

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.

18.6.2 The Guarantors' Liability is Capped

In no event will the Guarantors, in the aggregate, be liable under the Guaranty for more than FILL IN (the Maximum Guarantor Liability).

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

18.7 Invoices Must Meet Specific Requirements

(a) A party desiring payment from another party of an amount due under the Agreement must send the other party an invoice that meets the following requirements:

Companies almost invariably want to receive invoices before paying amounts due, not least because they might be required to do so as part of their internal financial controls to help detect and prevent fraud. Yet many contracts don't even address the subject of invoices (although many do so).

(1) the invoice must be in the language in which the Agreement is written or, if required by law, the destination country’s official language;

(2) the invoice must be sent to the invoicing address specified in the Agreement, if any, or if different, the invoicing address specified in the relevant ordering document, or failing both, at any reasonable address;

A savvy party submitting an invoice will confirm the current address to which the invoice should be sent, lest the invoice be lost in the other party's internal correspondence routing system. ¶ With the rise of electronic invoicing- and payment systems, this provision might become less relevant.

(3) the invoice must state at least the amount due and, in reasonable detail, what the amount is due for; and

Some companies want their suppliers' invoices to include (in addition to the details specified in this provision) information such as, for example: • a purchase-order number; • a supplier identification code; • a contract identifier; • part numbers; • quantities; • units of measure; • hours billed; • unit- and total prices; • export- and safety-related information.

(4) if the Agreement expressly sets forth an invoice-submission schedule and/or an invoice-submission deadline: the invoice must be submitted in accordance with that schedule and no later than that deadline, as applicable, failing which the Invoicing Party may in its sole discretion deem payment to have been WAIVED and decline to pay the invoice.

Invoicing schedules are often a subject covered in construction- and other services agreements, where the service provider wants to be paid as work is done, as opposed to waiting to be paid until the work is 100% complete. ¶ Under (U.S.) generally-accepted accounting principles, publicly-traded companies likely will be required to account for expenses in a particular fiscal quarter, and might make it a policy not to pay invoices where that's not possible due to delay in submission. That's because if a supplier were to submit an invoice very late, conceivably the customer could have to restate its earnings for the relevant period. As the Hertz rent-a-car company's 2014 restatement reminded us, for a company to restate its earnings is generally considered a Very Bad Thing, not least because it can almost immediately lead to shareholder lawsuits claiming securities fraud.

EXAMPLE: I once read about the general counsel of a public company; the company was incurring big legal bills (for a lawsuit, I think). From what I recall: •  The general counsel didn't submit the law firm's invoices to the company's finance department for payment; instead, he just put them in a drawer. •  When the general counsel did finally submit the invoices for payment, the newly-recorded legal expense had an unwanted effect: it materially affected his company's bottom line for the relevant time period. •  That meant that the company had to restate its earnings. •  The general counsel was fired. I've tried to find the story online, including just now (August 2014), but have been unable to do so.)

18.8 Sales Tax — Basic Terms

18.8.1 Definitions: Collecting Party; Sales Tax

(a) The term Collecting Party refers to any party that, under the Agreement, invoices another party for goods, services, or other things potentially subject to sales taxes (as defined below).

(b) The term sales tax (whether or not capitalized) includes all sales taxes; use taxes; value-added taxes; excise taxes; other forms of ad valorem tax and consumption tax; and equivalent taxes.

18.8.2 The Collecting Party Will Determine, Collect, Remit, and Invoice All Applicable Sales Taxes

Unless the parties agree otherwise in writing in connection with a particular transaction, the Collecting Party will do the following, at its own expense:

(1) determine what if any sales taxes must be paid to an applicable jurisdiction in connection with the transaction;

(2) separately list all sales taxes in the relevant invoice; and

(3) timely report and remit all sales taxes to the relevant the Sales-Tax Authorities (namely, all relevant taxing authorities anywhere in the world).

18.8.3 Income Taxes, Etc., Are Not to Be  Billable as Sales Taxes

For the avoidance of doubt, each party is solely responsible for payment of taxes based on its income, franchise, or capital, and such taxes are not to be billed to any other party under the Agreement, unless expressly stated otherwise in the Agreement.

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.

18.8.4 OPT-IN The Sales-Tax Obligation Includes an Indemnity Obligation

(a) This section is not part of the Agreement unless the Agreement expressly so states.

(b) The Collecting Party is to defend and indemnify (i) each invoiced party, and (ii) each member of the invoiced party's Protected Group, against any claim by a taxing authority for unpaid Sales Taxes.

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.

18.9 Payments – Payer Playbook

18.9.1 Deposits Are to be Applied As Stated

Deposits and other advance payments, if any, are to be applied as stated in the Agreement or as otherwise agreed in writing; any remaining balance of a deposit paid under the Agreement is to be promptly refunded, without interest.

Drafters can consider stating instead that deposit balances will be refunded with interest at a specified rate. CAUTION: Be very careful about usury laws — see the Annotations.

18.9.2 Payment Offsets Are Permitted

Unless otherwise agreed in writing, a paying party may, in its sole discretion, offset against amounts it allegedly owes to another party, any amount that the other party owes to it; otherwise, the paying party may not offset any such amount.

Apparently in some jurisdictions (e.g. France), an automatic right of offset might not be enforceable, according to a LinkedIn commenter (see http://goo.gl/aWpjDv; membership required). ¶ See also 18.10.2. Payment Offsets Are Prohibited.

18.9.3 Pay-When-Paid

(a) This section applies if the Agreement clearly states that a particular payment obligation is "pay when paid" (or comparable wording) in respect of the obligated party's receipt of a third-party payment.

(b) The obligated party is not required to make the payment do so until it has received the third-party payment, but the obligated party must:

(1) make reasonable efforts to collect the third-party payment; and

(2) make the payment promptly upon receiving the third-party payment.

Pay-when-paid provisions are not uncommon in contracts involving prime- and subcontractors, where the prime contractor wants to wait on paying its subcontractors until the prime contractor itself is paid by the customer. See generally the Reading Notes on this subject..

18.9.4 Pay-If-Paid

(a) This provision applies if the Agreement clearly states that one or more particular payment obligations (each, a Contingent Payment") is "pay if paid," or comparable wording, in respect of one or more specified third-party payments (each, a Third-Party Payment) by the obligated party (the Paying Party).

(b) The Paying Party is not required to make the Contingent Payment until all specified Third-Party Payments have been unconditionally made to and accepted by the Paying Party — once that occurs, however, the Paying Party must promptly make the Contingent Payment.

(c) The Paying Party is not required to make any particular efforts to collect any Third-Party Payment; if the Paying Party elects to make such efforts, it does so in its sole discretion and solely for its own benefit.

(d) The party to which the Contingent Payment is owed (the "Payee") represents and warrants that in entering into the Agreement, the Payee:

(1) has considered each third party's solvency and willingness and ability to perform the terms of its contract with the Paying Party;

(2) is relying on the credit and willingness and ability to pay of the third party or third parties, not that of the Paying Party, for the Contingent Payment; and

(3) KNOWINGLY, VOLUNTARILY, INTENTIONALLY, PERMANENTLY, AND IRREVOCABLY ASSUMES AND ACCEPTS THE RISK that one or more third parties might be unable or unwilling to perform the terms of its contract with the Paying Party, in which case the Contingent Payment will not be paid (or will not be paid in full).

This might be unenforceable in some jurisdictions; see the discussion in the Annotations.

18.10 Payments: Payee proposals

18.10.1 Interest Is to Be Paid on Past-Due Amounts

(a) Interest rate: A party to which payment is owed under the Agreement may charge interest on past-due unpaid amounts at no more than 5% per annum simple interest or the maximum rate permitted by law under the circumstances, whichever is less (the Maximum Interest Rate), beginning no earlier than 30 days after the payment due date (the Earliest Interest Start Date).

(b) Order of payments: All payments are to be applied first to accrued interest (if any), then to unpaid principal, in each case in the order in which the obligations were incurred (that is, oldest-first).

Provisions of this kind are often seen in promissory notes. This clause is adapted from a suggestion in David Cook, The Interest Tail Wags the Profit Dog, in Business Law News Issue No. 3, 2014 (State Bar of California Business Law Section; available on-line to Section members).

(c) Usury savings: The parties intend for any interest charged or paid in connection with the Agreement, in any contingency, to comply with law. Accordingly, IF: A charge or payment in connection with the Agreement is properly characterized as interest; AND: The charge or payment is determined to have exceeded the maximum interest permitted by law (after taking all permitted steps to spread such payments over time); THEN:

(1) The excess interest is to be deemed the result of an inadvertent error, even if the party charging or paid the excess intended to take the action(s) resulting in the excess;

(2) If the excess interest has not yet been paid, then the charge for the excess interest will be canceled; and

(3) If the excess interest has been paid, then the party that was paid the excess interest will refund it, or credit it to any balance still owed by the payer, along with interest on the excess at the maximum rate permitted by law.

This usury-savings provision is typical of language in usury-savings clauses — but in some jurisdictions such language might not be effective. See generally the Reading Notes on this subject.

18.10.2 Payment Offsets Are Prohibited

A paying party may not offset against amounts it allegedly owes to another party, any amount that the other party owes to it.

18.10.3 COD Terms May Be Imposed After Late Payment

For the avoidance of doubt, in case of (i) multiple late payments, or (ii) one or more significant late payments, by a party, the other party may require cash-on-delivery (COD) terms for any subsequent transactions.

Applicable law might well implicitly permit a payee to demand COD terms after late payment if the late payment constituted a material breach of the Agreement.

19 Audits

See the Annotations for a tale of a situation in which an audit provision came in very handy for the party having the audit right. ¶ In some cases involving multiple parties to a contract, a recordkeeping party might want to restrict audit rights to only selected other parties.

19.1 Audits — Basic Terms

19.1.1 Certain Definitions

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

Auditable Records refers to records sufficient to document each of the following, as applicable:

(1) labor performed and billed under the Agreement;

(2) materials billed under the Agreement;

(3) other items billed under the Agreement;

(4) compliance with specific requirements of the Agreement; and

(5) any other matters as to which, under the Agreement, a specified party (the "Auditing Party") has the right to cause records to be audited.

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

Auditing Party — see the definition of Auditable Records.

Recordkeeping Party refers to any party that, under the Agreement, is required to keep records that qualify as Auditable Records.

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

19.1.2 The Auditing Party May Cause Audits to Be Conducted by Permissible Auditors

The Auditing Party may cause one or more audits of Auditable Records to be conducted, in accordance with the audit provisions of the Agreement, by one or more Permissible Auditors, which refers to:

(1) any Big Four accounting firm; and

(2) any other auditor proposed by the Auditing Party by written notice and reasonably acceptable to the Recordkeeping Party.

The auditing party might not want to bear the expense of having an outside auditor do the job, and might prefer instead 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.

19.1.3 The Recordkeeping Party Will Make the Auditable Records and Relevant Personnel Available to the Auditor(s)

(a) The Recordkeeping Party will provide the auditor(s) with access to the Auditable Records to the extent reasonably necessary for the audit, in the form, electronic or otherwise, in which the Recordkeeping Party keeps those records in the ordinary course of the Recordkeeping Party's business.

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).)

(b) The Recordkeeping Party will make its relevant personnel reasonably available to the auditor(s), and direct them to answer reasonable questions from the auditor(s), except as otherwise provided in the Agreement.

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.

19.1.4 Any Necessary Post-Audit Adjustments Are to Be Made, With Interest

(a) IF: An audit reveals the apparent existence of a billing- or payment discrepancy such as (for example) over- or underbilling or over- or underpayment; THEN: The party benefiting from that discrepancy is to promptly take such action as may be necessary to remedy ("true-up") the discrepancy, including, for example, refunding an overpayment or paying a shortfall, as the case may be.

(b) IF: A party — due to an error that it made or for which it is otherwise responsible — must pay a shortfall or refund an overpayment under section 19.1.4; THEN: That party must also pay interest on the shortfall or refund at 1.5% simple interest per month or the maximum rate permitted by law, whichever is less.

Drafters should be very careful about usury laws; see the Annotations. ¶ 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).

19.1.5 Audit Expenses Are to Be Reimbursed in Certain Cases

The Recordkeeping Party is to reimburse the Auditing Party for reasonable expenses actually incurred — for example, reasonable auditors' fees and expenses — if an audit reveals the existence of:

(1) a discrepancy in billing or payment, for the period being audited, that: (A) is equal to or greater than 5%; and (B) was caused by an error made by, or imputable to, the Recordkeeping Party; and (C) favors the Recordkeeping Party; and/or

Threshold possibilities: 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.

Period being audited: 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.

(2) an uncured material breach of the Agreement, or fraud,

in either case: (i) by the Recordkeeping Party; or (ii) for which the Recordkeeping Party is otherwise responsible under the Agreement.

Consider also the drop-in provision for expense-shifting in the opposite direction, i.e., the Auditing Party must reimburse the Recordkeeping Party's audit expenses if no discrepancy is found.

19.1.6 The Auditing Party Must Give Advance Notice of Audits

The Auditing Party must give the Recordkeeping Party at least ten business days' advance written notice of any proposed audit except for good reason.

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.

19.1.7 Audits May Be Conducted Only At Specified Frequencies

The Auditing Party may conduct audits no more than once per 12-month period and once per period audited except for good reason.

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.

19.1.8 Audit Requests Must Meet Specified Deadlines

(a) Except for good reason, the deadline for the Auditing Party to request an audit for any given Auditable Record is the later of:

(1) the end of any legally-enforceable record retention period for that Auditable Record, if any; and

(2) three years after the end of the calendar quarter in which the substantive content of that Auditable Record was most-recently revised.

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.

(b) For the avoidance of doubt, this subdivision does not in itself require the Recordkeeping Party to maintain that Auditable Record for that period of time, but only states a deadline for the audit request.

19.1.9 Audits Are to Be Conducted at Specific Locations During Business Hours

Unless otherwise agreed, each audit is to be conducted:

(1) at the location or locations where the Auditable Records are kept in the ordinary course of business, during the regular working hours, at that location, of the party having custody of the records; or

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.

(2) at the Recordkeeping Party's option, at one or more other reasonable times and places designated in advance by the Recordkeeping Party in consultation with the Auditing Party.

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.)

19.1.10 The Recordkeeping Party Is to Provide Suitable Work Space for the Auditor(s)

IF: An audit is to be conducted at one or more sites controlled by the Recordkeeping Party; THEN: The Recordkeeping Party is to cause the audit site(s) to be furnished with with appropriate facilities of the type customarily used by knowledge-based professionals, including, for example, furniture, lighting, air conditioning, electrical outlets, and Internet access.

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

19.1.11 Privileged- or Unrelated Information Is Not Subject to Audit

The Auditing Party's right to audit Auditable Records does not extend to any of the following:

(1) information that, under applicable law, would be immune from discovery in litigation, for example on grounds of attorney-client privilege, work-product immunity, or any other privilege;

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.)

(2) trade secrets and other confidential information relating to formulae and/or processes;

(3) costs associated with lump-sum or fixed-fee billing; and

(4) clearly-unrelated or -irrelevant information.

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.

19.1.12 The Auditor(s) May Retain Copies of Auditable Records, in Confidence

The auditor(s) may make and keep copies of the records that it audits, so long as the auditor(s):

(1) comply with the audit-confidentiality requirements of the Agreement; and

(2) return or destroy the copies, in accordance with the auditor's regular, commercially-reasonable policies and processes, within a reasonable time after the end of the last period for which Auditable Records are required to be maintained under the Agreement or by law.

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.

19.1.13 The Recordkeeping Party Is to Be Provided a Copy of the Audit Report

The Recordkeeping Party is entitled to receive, from the auditor(s), upon request, at the Auditing Party's expense, a copy of any audit report produced.

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."

19.1.14 Audits Are to Be Conducted in Confidence

(a) Absent consent of the Recordkeeping Party, the Auditing Party:

(1) may not use any nonpublic information that is learned or derived in the course of any such audit, except to the extent necessary to protect the Auditing Party's rights and/or for the Auditing Party's performance of its obligations under the Agreement;

(2) may not disclose any such information to third parties except in response to compulsory legal process, after first:

(A) advising the Recordkeeping Party of such process (where not prohibited by law); and

(B) providing reasonable cooperation in any efforts by the Recordkeeping Party to preserve the confidentiality of such information.

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.

(b) The Auditing Party must enter into binding written agreements with its auditors requiring them to comply with the audit-confidentiality requirements of the Agreement.

19.1.15 "Good Reason" is Specifically Defined for Audit Purposes

For purposes of the audit provisions of the Agreement, good reason, whether or not capitalized, includes, for example, any one or more of the following:

(1) significant lack of cooperation, by the Recordkeeping Party, in an audit under the Agreement; and

(2) the discovery of substantial evidence of fraud, or of material breach of the Agreement, on the part of the Recordkeeping Party.

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

19.1.16 These Audit Provisions Will Survive Termination

The audit provisions of the Agreement will survive any termination or expiration of the Agreement (but will also remain subject to all deadlines and other limitations stated in the Agreement).

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).

19.2 Audits – Auditing Party proposals

19.2.1 The Audit Requirements of the Agreement Must Be "Flowed Down" to Any Subcontracts

(a) The Recordkeeping Party is to include, in each subcontract under the Agreement, if any, provisions for the benefit of the Auditing Party as a third-party beneficiary, as follows:

(1) a requirement that the subcontractor permit audits by the Auditing Party in accordance with the audit provisions of the Agreement; and

(2) an authorization for the subcontractor to deal directly with the Auditing Party and its auditor(s) in connection with any such audit.

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

(b) For the avoidance of doubt, subdivision (a) neither authorizes nor prohibits the Recordkeeping Party's use of subcontractors under the Agreement.

19.3 Audits – Recordkeeping Party Playbook

19.3.1 Audits Must Be Completed by a Stated Deadline

Except for good reason, the deadline for the auditor(s) to complete a given audit is three months after the effective date of the Auditing Party's advance written notice of the audit.

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.

19.3.2 Only Specific Content May Be Included in Audit Reports

The auditor(s) must agree in writing (and provide a copy of the agreement to the Recordkeeping Party):

(1) to disclose to the Auditing Party only whether a reportable discrepancy was revealed by the audit, and if so, the size and general nature of the discrepancy; and

(2) that the Recordkeeping Party is a third-party beneficiary of that written agreement.

19.3.3 The Remedies for Audit Discrepancies Are Limited to the True‑Up Obligations Stated in the Agreement

IF: In respect of any invoicing- or payment discrepancy revealed by an audit, the Recordkeeping Party complies with the obligations of section 19.1.4 and section 19.1.5 within 30 days after receiving notice of the discrepancy and a copy of the audit report; THEN: The Recordkeeping Party will have no further obligation or liability for that discrepancy or the actions or omissions that caused it.

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.)

19.3.4 The Recordkeeping Party's Audit Expenses Are to Be Reimbursed if Audit Expenses Are Not Shifted

IF: For a particular audit, the Recordkeeping Party is not required to reimburse the Auditing Party's expenses of the audit; THEN: The Auditing Party is to reimburse the Recordkeeping Party (and the Recordkeeping Party's subcontractors, if applicable) for reasonable expenses actually incurred in connection with the audit, such as (for example) reasonable fees and expenses for an auditor engaged by the Recordkeeping Party to monitor the audit.

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).

20 Termination

20.1 Termination — Basic Terms

These Basic Terms, when incorporated by reference into an agreement, should be able to support essentially all types of terminations, whether for breach, for insolvency, at will, etc. ¶ For a useful checklist of issues to consider before terminating a contract, see Ken McIntyre, The "Top Ten" Things For a Supplier to Consider In Terminating a Distributor (2014) (also available at http://goo.gl/CQI4LM).

Food for thought: My long-time senior partner, mentor, and friend, the late Tom Arnold, held the view that a contract was an historical fact, and thus it was essentially incoherent to speak of terminating the contract, as opposed to terminating specific rights and obligations under the contract. Cf. 20.2.5. Specific Transactions May Be Terminated in Lieu of the Agreement, which would give the terminating party flexibility in that regard.

20.1.1 Termination Cancels Rights and Obligations But Not Existing Claims

For the avoidance of doubt, to the extent not clearly inconsistent with mandatory applicable law, any termination of the Agreement:

People routinely refer to termination of an agreement, when what they really mean is the termination of specific rights and obligations under the agreement. This definition should help make that clear.

(1) cancels the parties' relevant, respective, post-termination rights and obligations, except to the extent (if any) that the Agreement provides otherwise, for example in a survival clause;

(2) cancels any right a party has to continue its performance of its relevant pre-termination obligations under the Agreement;

Subdivision (2) was inspired by Miller-Davis Co. v. Ahrens Constr., Inc., No. 145052 (Mich. Apr. 15, 2014), in which the court's recitation of facts noted that "Miller-Davis gave Ahrens notice of default, terminated Ahrens's right to perform the contract, and demanded the bonding company perform under the bond." Id., slip op. at 5 (emphasis added).

(3) does not affect any claim, by any party, for pre-termination breach of the Agreement by another party; and

(4) is without prejudice to any party's other rights or remedies pursuant to the Agreement except to the extent, if any, that the Agreement clearly provides otherwise.

20.1.2 Termination Requires Specific Written Notice

For a termination to be effective, the terminating party must give the non-terminating party notice of termination (separate from any notice of breach) that describes, with reasonable specificity, the basis for termination and the putative effective date of termination.

A notice of termination should be clear; being vague about it could lead to litigation, as discussed in the Annotations.

20.2 Termination – General Playbook

20.2.1 Termination for Breach is Permitted After Notice and Cure Period

A termination-for-breach provision might not even be needed, because under the law typically applicable in the U.S., in the event of material breach of a contract, the non-breaching party can terminate the Agreement. For example, in a case involving whether a contract was a(n exclusive) requirements contract, the South Carolina supreme court noted that, if the contract did not create an exclusive relationship, then the contract's termination provisions would not be needed, because the customer could simply stop placing orders with the provider. See Stevens Aviation, Inc. v. DynCorp Int'l LLC, 407 S.C. 407, 418, 756 S.E.2d 148 (2014).

(a) Definitions: As used in this Termination for Breach is Permitted After Notice and Cure Period provision:

Terminating Party refers to any party

In some situations, a drafter might want to specify that only one party (usually the drafter's company or client) will have the right to terminate for material breach. ¶ This clause uses the term "Terminating Party" instead of the more-common "non-breaching party." That's because in one case, a supposedly non-breaching party was itself in breach of a different contract provision. The contract's termination-for-breach provision referred to the right of the non-breaching party to terminate. That, said the court, meant that the party that had purported to terminate the contract did not have the power to do so. [TO DO: Find citation]

Triggering Breach refers to material breach.

Not all breaches will necessarily be deemed "material." The Supreme Court of Delaware held that in a patent license agreement, a provision requiring the terms of the license to be kept confidential was not material, because the gravamen of the contract was the patent license, not the confidentiality provision; as a result, when the licensee publicly disclosed the royalty terms, the patent owner was not entitled to terminate the license agreement for material breach. See Qualcomm Inc. v. Texas Instr. Inc., 875 A.2d 626, 628 (Del. 2005) (affirming holding of chancery court).

See also the Required Cure Periods below.

(b) Cure periods: The Required Cure Periods for specific types of Triggering Breach are as follows; each period begins upon the effective date of the Terminating Party's notice of the Triggering Breach to the breaching party:

The cure periods stated below are placeholders; contract drafters and reviewers should give some thought to what would be appropriate for their particular situations. ¶ Failure to give notice of breach, and an opportunity to cure, to a breaching party might preclude the other party from recovering for the breach. See, e.g., the South Dakota supreme court's discussion of the issue in Tri-City Assoc., L.P. v. Belmont, Inc., 2014 S.D. 23 (vacating and remanding judgment against landlord).

Nonpayment of an amount due under the Agreement: Five business days.

Missed deadline for which Agreement states that time is of the essence: No cure period.

Other, curable missed deadline stated in the Agreement: Five business days.

Other, curable breach: Ten business days.

Breach clearly not capable of being cured: No cure period.

The Second Circuit has noted that common law might not require strict compliance with a notice-and-cure provision if cure is impossible or pointless, as discussed in the Annotations. ¶ A supposedly-incurable breach of a contract might be held not to be incurable, which could have dire consequences for a terminating party, as discussed in the Annotations.

(c) Termination after notice and opportunity to cure: The Terminating Party may terminate the Agreement, following a Triggering Breach by another party, as stated in this subdivision (c).

(1) The Terminating Party must give the putative breaching party notice stating, in reasonable detail, what the Terminating Party believes to be the Triggering Breach (all Triggering Breaches if more than one).

(2) The notice under subdivision (1) must state the duration of the specific cure period that the Terminating Party believes to be applicable, if any; see the Required Cure Periods in subdivision (b).

(3) The Terminating Party may not terminate the Agreement, and any purported termination for breach will have no effect, if, before the end of the relevant cure period, the putative breaching party both (A) cures the Triggering Breach; and (B) gives notice, to the Terminating Party, describing the cure of the Triggering Breach with reasonable specificity.

In subdivision (3), the requirement that the curing party give notice describing the cure will help "lock in" the curing party's story in case of future litigation or arbitration.

20.2.2 A Specified Party May Terminate at Will with Sufficient Advance Notice

Any party (each, a Terminating Party) may terminate the Agreement, in that party's sole discretion, by giving each other party notice of termination; the termination will take effect at the latest of:

(1) 30 days after the effective date of the Terminating Party's notice of termination;

Depending on the type of agreement, the parties might want to specify a longer- or shorter notice period. For example, in an agreement between a manufacturer and a reseller, the reseller might invest considerable time and money in training its staff about the manufacturer's products, doing local advertising, etc., In that situation, the reseller might not want to allow the manufacturer to "pull the plug" until X number of years have passed, to give the reseller a chance to try to recoup its investment.

(2) the end of the time period specified in the notice of termination; and

(3) the earliest date for termination at will if one is specified in the Agreement.

See generally the Reading Notes on this subject.

20.2.3 A Specified Party May Terminate for a Limited Time for the Other Party's Insolvency, Etc.

(a) Any party (each, a Terminating Party) may terminate the Agreement if another Signatory Party:

(1) ceases to do business in the normal course;

(2) becomes insolvent;

(3) admits in writing its inability to meet its debts or other obligations as they become due;

(4) makes a general assignment for the benefit of creditors;

(5) files a voluntary petition for protection under the bankruptcy laws or similar laws of the relevant jurisdiction, or to effect a plan or other arrangement with creditors; or

(6) has a receiver, administrative receiver, administrator, liquidator, trustee in bankruptcy, or similar functionary in the relevant jurisdiction, appointed for its business or assets; or

(7) becomes the subject of an involuntary petition under the bankruptcy laws, or a similar petition or other filing under the laws of the relevant jurisdiction, and the same is not vacated, released, dismissed, stayed, reversed or otherwise overturned, or bonded off before the end of the Involuntary-Petition Dismissal Period (namely, 60 days) after the date of the petition or other filing.

In the U.S., some of these provisions will be unenforceable if the non-terminating party has filed a petition for protection under the bankruptcy laws. See generally Robert L. Eisenbach III, Are “Termination On Bankruptcy” Contract Clauses Enforceable? (Cooley.com 2007).

(b) The right to terminate under subdivision (a) will expire (if at all) at the end of the Termination Period (namely, 90 days) after the date that the Terminating Party first learns, via any source, of the most-recent event listed in subdivisions (a)(1) through (a)(7).

This "sunset" provision will force the terminating party to fish or cut bait, and thus avoid leaving the threat of termination hanging over the other party's head.

20.2.4 A Specified Party May Terminate for a Limited Time for the Other Party's Legal Violation

(a) Any party (each, a Terminating Party) may terminate the Agreement if another party commits any act or omission that:

(1) is material to the other party's rights or responsibilities under the Agreement, and

(2) violates any applicable law where the violation is likely to materially and adversely affect the other party.

(b) IF: The Agreement clearly states that violations of law may be cured; THEN: A Terminating Party may not terminate the Agreement for violation of law if both the violation and all effects of the violation are cured before the end of the Legal-Violation Cure Period (namely, 5 business days) after the violation began. Otherwise, the Terminating Party may terminate the Agreement under subdivision (a) without giving the breaching party an opportunity to cure the breach.

See generally the Reading Notes on this subject. Drafters should carefully consider how this provision might play out in their clients' real-world circumstances. ¶ See also 12.1. Legal Compliance — Basic Terms.

(c) The right to terminate under subdivision (a) will expire if not exercised by the end of the Termination Period (namely, 90 days) after the date that the Terminating Party first learns, via any source, of the most-recent act or omission giving rise to the right to terminate.

This "sunset" provision will force the terminating party to fish or cut bait, and thus avoid leaving the threat of termination hanging over the other party's head.

20.2.5 Specific Transactions May Be Terminated in Lieu of the Agreement

In lieu of terminating the Agreement, a party authorized to so terminate may instead terminate one or more of the following specific items to the extent that they exist under the Agreement:

(1) transactions, for example, a purchase order;

(2) grants, for example, a lease or license;

(3) relationships, for example, a distributorship.

This subclause would give a terminating party more flexibility than an all-or-nothing right to terminate the Agreement.

20.2.6 A Specified Party May Terminate for a Limited Time for Reputation Risk Created by the Other Party

(a) Any party (each, a Terminating Party) may terminate the Agreement if the Terminating Party determines, in its reasonable discretion, that one or more Reputation Risk Actions, defined in subdivision (d) below, when taken by (i) another Signatory Party, or (ii) an affiliate of that other Signatory Party, are likely to create a not-insubstantial risk to the business reputation of (x) the Terminating Party or (y) any affiliate of the Terminating Party.

See generally the Reading Notes on this subject.

(b) For the avoidance of doubt, this A Specified Party May Terminate for a Limited Time for Reputation Risk Created by the Other Party provision establishes only a conditional right to terminate and not a covenant, representation, or warranty.

(c) For the avoidance of doubt, the other party will not be liable, in damages or otherwise, for any Reputation Risk Action that does not otherwise breach the Agreement.

(d) The term Reputation Risk Action means to any action (or omission) or series of actions (or omissions) (related or unrelated), where the action(s) and/or omission(s) are (i) intended by the actor, or (ii) reasonably likely, to:

(1) libel or slander another person or put another person in a false light;

(2) threaten, embarrass, harass, or invade the privacy of another;

(3) impersonate another or promote, encourage, or or assist in, such impersonation;

(4) offend a reasonable person on racial- or ethnic grounds;

(5) be prohibited by law, including for example the U.S. Foreign Corrupt Practices Act, or encourage activities prohibited by law, including (for example) bribery; identity theft; child pornography; and terrorism;

(6) be obscene;

(7) be tortious; or

(8) mistreat a person, or promote, assist in, or encourage such mistreatment.

(e) The right to terminate under subdivision (a) will expire (if at all) at the earlier of:

(1) the Termination Period (namely, 90 days) after the date that the Terminating Party first learns, via any source, of the most-recent Reputation Risk Action; or

(2) six months after that most-recent Reputation Risk Action.

This "sunset" period forces the Terminating Party to make up its mind – to fish or cut bait (or fill in your own metaphor). ¶ The six-month limit in subdivision (e)(2) has in mind that if the Terminating Party hasn't seen fit to terminate within that time — for example, because it hasn't noticed any ill effects from a Reputation Risk Action — then the right to terminate should lapse, so that the other party won't continue to have the threat of termination hanging over its head for what has become old news.

20.2.7 A Specified Party May Terminate for a Limited Time if the Other Party Has a Change of Control

(a) Any party (each, a Terminating Party) may terminate the Agreement following a change of control of the other party.

This provision has in mind that a party might not want to continue doing business with a counterparty if, say, the counterparty was acquired by one of the first party's competitors. ¶ For this purpose, the parties might want to specify a different definition of control

(b) The right to terminate under subdivision (a) will expire (if at all) at the earlier of:

(1) the Termination Period (namely, 90 days) after the date that the Terminating Party first learns, via any source, of the change of control; or

(2) six months after the effective date of the change of control.

The 90-day Termination Period forces the Terminating Party to make up its mind – to fish or cut bait (or fill in your own metaphor). ¶ The Termination Period starts when the Terminating Party first learns of the change of control, as opposed to when the other party gives notice of the change of control. The Terminating Party might prefer it to be the other way around, but that might be too burdensome for the other party to manage. ¶ The six-month limit in subdivision (b)(2) has in mind that if the Terminating Party hasn't seen fit to terminate within that time — for example, because it hasn't noticed any ill effects from a change of control — then the right to terminate should lapse, so that the other party won't continue to have the threat of termination hanging over its head for what has become old news.

20.2.8 A Specified Party May Terminate for a Limited Time Following Certain Personnel Changes at the Other Party

(a) Any party} (each, a Terminating Party) may terminate the Agreement following any change, expressly specified in the Agreement, among the personnel of the other party.

This provision might be used in a contract with a small company or startup company whose ability to survive might be called into question if too many senior- or key people were to leave. See also the commentary to 20.2.7. A Specified Party May Terminate for a Limited Time if the Other Party Has a Change of Control.

(b) The right to terminate under subdivision (a) will expire at the earlier of:

(1) 90 days after the date that the Terminating Party first learns, via any source, of the most-recent personnel change in question; or

(2) six months after the most-recent personnel change in question.

The 90-day Termination Period forces the Terminating Party to make up its mind – to fish or cut bait (or fill in your own metaphor). ¶ The six-month limit in subdivision (b)(2) has in mind that if the Terminating Party hasn't seen fit to terminate within that time — for example, because it hasn't noticed any ill effects from a personnel change — then the right to terminate should lapse, so that the other party won't continue to have the threat of termination hanging over its head for what has become old news.

20.2.9 Termination May Be Sustained on Alternative Grounds

IF: A party terminates the Agreement or a transaction under it for a stated reason; BUT: The stated reason later is found not to have been applicable; THEN: The termination will be deemed to have been made for any other reason warranting termination.

This language provides a terminating party with a backup position in case its primary reason for termination doesn't pan out. That might be handy to keep the primary termination from being held to have been itself a breah of contract, as happened in the Southland Metals case.

20.2.10 Expiration Has Same Effect As Termination

(a) Unless otherwise clear from the context, any expiration of the term of the Agreement (or, if applicable, of a transaction, grant, or relationship under the Agreement) has the same effect as a termination of the same.

(b) For the avoidance of doubt, for this purpose, the term expiration includes expiration due to a party's exercising a right under the Agreement to opt out of an automatic-extension provision.

This is one of those "roadblock" provisions designed to forestall litigation counsel from making creative arguments to the contrary.

20.2.11 Post-Termination Obligations (editing required)

[Drafters should specify the desired post-termination obligations – See generally the Reading Notes on this subject.]

20.2.12 The Agreement May Not Be Terminated Except as Expressly Stated

No party may terminate or rescind the Agreement, no matter what the circumstances, except as expressly provided in the Agreement.

This section seeks to prevent the application of the general presumption that contracts of indefinite term may be terminated at will by either party. See Burford v. Accounting Practice Sales, Inc., 786 F.3d 582, 586 (7th Cir. 2015) (reversing summary judgment that copyright license agreement of indefinite duration was terminable at will; applying Illinois law), citing Baldwin Piano, Inc. v. Deutsche Wurlitzer GmbH, 392 F.3d 881, 885-86 (7th Cir. 2004) (reversing summary judgment that trademark licensor had the right to terminate license agreement at will; applying Illinois law).

20.2.13 The Agreement May Not Be Terminated

No party may terminate or rescind the Agreement, no matter what the circumstances; in case of breach of the Agreement by the other party, that party's sole remedy shall be limited to an action at law or equity.

See generally the Reading Notes on this subject.

20.3 Termination – Terminating Party Playbook

20.3.1 Post-Termination Actions Do Not Waive Termination

(a) This provision applies if, subsequent to any termination or expiration of the Agreement, one or both parties engages in conduct contemplated by the Agreement — for example, if the parties continue to do business with each other in accordance with the terms of the Agreement.

(b) Such conduct by one or both parties is not to be construed:

(1) as a waiver of the termination or expiration of the Agreement (as applicable), nor

(2) as an extension or continuation of the term of the Agreement beyond the period specified in a notice of termination, if applicable.

This language is modeled on that of the contract in suit in Sleepy's LLC v. Select Comfort Wholesale Corp., 779 F.3d 191, 196 n.4 (2d Cir. 2015). Unlike the contract in the Sleepy's lawsuit, this language explicitly makes the no-waiver provision equally applicable to expirations and terminations; that distinction caused the Second Circuit to reverse the district court's ruling (for reasons that are not of interest here).

20.3.2 The Non-Terminating Party May Not Claim Any Loss from Termination

(a) For purposes of this clause, the term Termination-Related Claim refers to a claim for compensation for loss of distribution rights; loss of goodwill; or any similar loss, resulting from:

(1) expiration of the Agreement, including for example expiration because of a party's opting out of what otherwise would have been an automatic or "evergreen" extension (if applicable); or

(2) a duly-effected termination of the Agreement in accordance with its terms.

(b) For the avoidance of doubt:

(1) Upon any termination of the Agreement, the non-terminating party will not have, and may not assert or maintain, any Termination-Related Claim against the terminating party, nor against any member of the terminating party's Protected Group; and

(2) Upon any expiration of the Agreement, no party will have, and no party may assert or maintain, any Termination-Related Claim against any other party, nor against any member of that other party's Protected Group.

I once read, but now cannot locate, a case in which a party had allowed the term of an agreement to expire. In the ensuing lawsuit, the other party tried (unsuccessfully, if memory serves) to recover damages that it claimed to have suffered as a result of the expiration. This subclause attempts to forestall such a claim.

20.3.3 Termination Not Exclusive Remedy for Breach

For the avoidance of doubt, termination for material breach is without prejudice to any other remedies available to the terminating party (but any applicable limitations of liability stated in the Agreement will remain in effect).

This clause should help to stop a breaching party's trial counsel from claiming that the terminating party's termination of the Agreement supposedly wiped the slate clean.

20.3.4 Cross-Default Termination Option for Material Breach

Any party entitled to terminate one transaction, grant, or relationship for material breach by the other party may in its discretion terminate some or all other uncompleted transactions, grants, or relationships between the parties.

If a terminating party has multiple contracts with a breaching party, this subclause will allow the terminating party to sever all ties with the breaching party, not just the one breached contract.

20.4 Termination – Non-Terminating Party Playbook

20.4.1 A Party That Prematurely Terminates at Will Must Pay a Specified Buyout Fee

(a) A putative termination at will under section 20.2.2 that is to take effect before the applicable date specified in the Agreement (the Earliest Termination Date will not take effect until the Terminating Party pays the other party the amount specified in the Agreement (the Termination Buy-Out Fee).

(b) For the avoidance of doubt, the Termination Buy-Out Fee is not intended as liquidated damages, but as an option for alternative performance by the terminating party.

If a party terminates an agreement without cause, the question arises: To what extent should the other side be compensated for its previous investment in the agreement? This subclause can be useful for that purpose. ¶ The buy-out fee can be specified so that it is required only if the termination at will is to be effective before the occurrence of certain milestones, such as (for example): • A specified date; • the achievement of certain goals such as gross sales, royalties paid, etc.

21 Indemnities ground rules

21.1 Indemnity Ground Rules — Basic Terms

21.1.1 Applicability; Definitions

(a) This section 21.1 applies any time that that an Indemnifying Party must defend and/or indemnify a Protected Person against a Covered Claim.

This worksheet is set up so that incorporating it by reference in an agreement should automatically make it applicable to any defense‑ and/or indemnity obligations.

(b) In the Agreement, the following provisions have the stated meanings:

The research notes offer several examples of using the definitions below to quickly specify detailed indemnity obligations.

Agreement Activities, whether or not capitalized, refers to a party's action and inaction in one or more of (i) the performance of its obligations, and (ii) the exercise of its rights, under the Agreement.

An indemnity concerning Agreement Activities would be narrower than one concerning Business Activities.

Basket: See the definitions for Deductible Basket and First-Dollar Basket, below. For the avoidance of doubt, the existence of a basket does not in itself negate, decrease, or increase an agreed limitation of an Indemnifying Party's liability for defense and indemnity, if any.

A basket amount could: • apply to all protected parties collectively instead of to each protected party; • apply to all claims collectively instead of to each claim. ¶ See also: • This definition of "baskets" published by Practical Law Company • Stephen I. Glover, Indemnification Provisions: Standard Practice Revisited, in the M&A Lawyer, March 2002, at p.5 • Tina L. Stark, Negotiating and Drafting Contract Boilerplate § 10.10 (2003).

Business Activities, whether or not capitalized, in respect of an Indemnifying Party, refers to the Indemnifying Party's activities in any aspect of its business.

Suppose that a contract required Alice to indemnify Bob in respect of Alice's business activities. Without more, Bob likely wouldn't have to prove that Alice was negligent to be entitled to indemnity. For citations of cases to that effect from various jurisdictions, see the Montana supreme court's opinion in A.M. Welles, Inc. v. Montana Materials, Inc., 2015 MT 38, slip op. at 5-7 (reversing denial of summary judgment in favor of indemnified party).

Consequential-Damages indemnity exclusion: IF: The Agreement provides that consequential damages are excluded from a particular indemnity obligation; THEN: In respect of that indemnity obligation, the Indemnifying Party in question:

(1) is not required to indemnify any Protected Person for consequential, indirect, special, punitive, exemplary, or similar damages suffered by the Protected Person, including (for example) loss of profits from collateral business arrangements or damages from business interruption, other than to the extent any such damages are required to be paid to a third party — other than an affiliate of the Protected Person — pursuant to a claim against the Protected Person by the third party; and

(2) is not required to defend any Protected Person against a claim that seeks no relief other than damages described in subdivision (1).

The list of excluded damages is adapted from the exclusion of consequentlal damages; portions are adapted from the definition of "Excluded Damages" offered by Glenn West as "a potential starting point" for drafting. See West, Consequential Damages Redux, supra, 70 BUS. L. at 1001. ¶ In some situations, drafters might prefer simply to cap the Indemnifying Party's financial exposure to indemnity- and defense obligations for particular indemnity obligations, instead of potentially getting into disputes about what kinds of damages were or were not excluded under this language.

Covered Claim, whether or not capitalized, refers to any claim that is subject to an obligation of defense and/or indemnity under the Agreement, EXCEPT THAT unless expressly agreed otherwise in writing, the term does not include any claim by one Protected Person against another Protected Person.

See generally the Reading Notes on this subject.

Covered Infringement Claim (whether or not the term is capitalized), refers to a Covered Claim that a Protected Person has Infringed, or is or will be Infringing, one or more of the following:

(1) any copyright or trade-secret right of the third party;

(2) if so stated in the Agreement, any U.S. patent or design patent; and

(3) if so stated in the Agreement, any non-U.S. patent or design patent.

See generally the Reading Notes on this subject.

Covered Monetary Award, whether or not capitalized, refers to any award of money (no matter how computed or styled) to the asserter of a Covered Claim upon the successful assertion of the claim, as part of a final judgment or arbitration award from which no further appeal or other challenge is taken or possible. A Covered Monetary Award could include, for example, one or more of the following as awarded to the asserter of the Covered Claim:

(1) monetary damages, including for example the Protected Party's profits and/or the asserter's lost profits;

(2) reasonable attorney fees and other reasonable expenses incurred by the asserter of the Covered Claim; and/or

(3) costs of court or of arbitration in respect of the Covered Claim.

Deductible Basket: IF: The Agreement provides that a particular indemnity obligation is subject to a Deductible Basket (whether or not the term capitalized) of a stated amount; THEN: The Indemnifying Party is not required to indemnify any Protected Person until, and then only to the extent, that the aggregate amount that the Indemnifying Party would be required to pay or reimburse exceeds the stated amount.

Another term for Deductible Basket is "true deductible." See generally Danielle Rosato and Tracy A. Belton, Basics In M&A: Indemnification Provisions (Mondaq 2016).

Defend and Defense Obligation: Each of these terms, whether or not capitalized, in respect of an indemnity obligation under the Agreement, means that the Indemnifying Party, at its own expense, will provide each Protected Person with a defense against each Covered Claim in accordance with this worksheet.

By law, an indemnity obligation might include a defense obligation. See the the commentary to the competent-defense provisions of the 21.1. Indemnity Ground Rules — Basic Terms.

First-Dollar Basket: IF: The Agreement provides that a particular indemnity obligation is subject to a First-Dollar Basket (whether or not the term capitalized) of a stated amount; THEN:

(1) The Indemnifying Party is not required to indemnify any Protected Person until the aggregate amount that the Indemnifying Party would be required to pay or reimburse equals at least the stated amount; but

(2) once that stated amount is reached or exceeded, the Indemnifying Party must pay or reimburse up the entire aggregate amount in question.

Another term for Deductible Basket is "tipping" basket: once the deductible is reached, the indemnifying party is responsible for all losses in the basket, not just the "overflow" losses. See generally Danielle Rosato and Tracy A. Belton, Basics In M&A: Indemnification Provisions (Mondaq 2016).

Indemnified Financial Obligation, whether or not the term is capitalized, refers to any of the following:

(1) any Covered Monetary Award;

(2) any settlement of a Covered Claim that, under the Agreement, must be paid or otherwise funded by the Indemnifying Party; and

(3) any Loss Or Expense that has been suffered or incurred (or will imminently be suffered or incurred) by a Protected Person, as to which the Indemnifying Party, under the Agreement, must indemnify the Protected Person.

Indemnifying Party, whether or not the term is capitalized, refers to a party obligated by the Agreement to indemnify another party.

Indemnity, whether or not the term is capitalized, as well as corresponding terms such as indemnify and indemnity obligation, all refer to reimbursing a person for one or more Indemnified Financial Obligations.

This definition is adapted from the Maryland supreme court deision in Bd. of Trustees v. Patient First Corp., No. 89, slip op. at 1 (Md. Aug. 18, 2015), (footnote omitted), citing BLACK'S LAW DICTIONARY (9th. ed. 2009) at 837-38; see also the explanation of the concept of indemnity by a California court, quoted at length in the research notes. ¶ The definition falls in the category of "stating the obvious," but one never knows whether a party's trial counsel might try to argue that capitalization was significant, as discussed in this commentary.

Liability Cap IF: The Agreement provides that a particular indemnity obligation is subject to a Liability Cap (whether or not the term is capitalized) of a stated amount; THEN: In relation to that indemnity obligation, that Indemnifying Party is not obligated to pay or reimburse more for indemnity and/or defense under the Agreement — in the aggregate, to all parties in respect of all Indemnified Financial Obligations and all Protected Parties combined, unless the Agreement expressly states otherwise — than the stated Liability Cap amount.

See generally the Reading Notes on this subject.

Loss And Expense and Loss Or Expense, whether or not capitalized, each refers to any and all foreseeable losses, costs, expenses, and damages of any kind. For the avoidance of doubt, the terms do not include liabilities resulting from third-party claims.

This definition was harvested from a variety of contracts.

Neglience or Misconduct Exception and Negligence and Misconduct Exception (regardless of capitalization), in respect of an indemnity obligation, each means that the Indemnifying Party is not required to indemnify any Protected Person against any Covered Claim that is attributable solely to Negligence Or Misconduct by that Protected Person.

In many jurisdictions, an indemnity obligation is unenforceable to the extent it purports to indemnify a party against the consequences of its own negligence. (Insurance policies are usually exceptions to this rule.) For more details, see the discussion in the research notes. ¶ In some states, e.g., Texas, this rule is tempered by the express-negligence doctrine, which holds that a party can be indemnified from the consequences of its own negligence if the contract provision to that effect is expressed in specific and conspicuous terms, also as discussed in the research notes.

Not Assignable Without Consent: IF: The Agreement specifies that a right to indemnity and/or defense is Not Assignable Without Consent, whether or not the term is capitalized; THEN: An assignee (direct or indirect) of a Protected Person (direct or indirect) is entitled to indemnity and defense under that obligation only if the Indemnifying Party specifically and expressly consented in writing to assignment of the right to indemnity and/or defense.

See generally 24.1. Assignment Consent — Basic Terms and its commentary.

Protected Party, whether or not capitalized, refers to a party entitled to indemnity under the Agreement.

Protected Person, whether or not capitalized, refers to:

(1) each Protected Party;

(2) each Affiliate of each Protected Party;

(3) any Other Protected Group Members expressly identified in the Agreement, if any; and

(4) the employees, officers, directors, shareholders (in that capacity), general- and limited partners, members, managers, and other persons occupying comparable positions in respect of each organization within the scope of in subdivisions (1) through (3), as applicable.

Protected Group, whether or not capitalized, in respect of a Protected Party and an indemnity obligation under the Agreement, refers collectively to the individuals and organizations, other than the Protected Party, that as to the indemnity obligation are Protected Persons.

21.1.2 The Indemnifying Party Will Provide a Competent Defense

Unless the Agreement expressly states otherwise, the Indemnifying Party, at its own expense, will provide each menber ot the Protected Group with a competent, diligent defense against the claim in accordance with (and subject to the prerequisites of) the Agreement.

See generally the Reading Notes on this subject.

21.1.3 The Protected Person Must Give Timely Notice of the Claim

IF: A Protected Person does not advise the Indemnifying Party of the claim in writing on or before the Claim-Notification Deadline (namely, ten business days after first learning of the claim by any means); THEN:

(1) The Indemnifying Party will have no obligation to indemnify the Protected Person against any harm resulting from the delay in notification.

(2) For the avoidance of doubt, the delay in notification will not otherwise affect the indemnity obligation.

A drafter representing an indemnifying party might prefer to say instead that the indemnifying party will be completely absolved from any duty to defend or indemnify the protected person against the claim. That, of course, would be a much stronger statement. On the other hand, the prospective protected person would likely push back against such a variation.

21.1.4 The Indemnifying Party May Defend the Claim Without a Request

(a) IF: A Protected Person does not request defense against a Covered Claim; THEN: The Indemnifying Party may (in its sole and unfettered discretion) nevertheless defend the Protected Person against the claim.

(b) IF: An Indemnifying Party exercises its right under subdivision (a) to defend a Covered Claim; THEN: The Indemnifying Party must comply with the provisions of the Agreement that apply to the defense of Covered Claims as if the elected defense were mandatory.

See generally the Reading Notes on this subject.

21.1.5 The Protected Person Must Cooperate in the Defense of the Claim

IF: An Indemnifying Party provides a Protected Person with a defense to a Covered Claim (whether or not requested by the Protected Person); THEN:

(1) The Protected Person must provide reasonable cooperation with the Indemnnifying Party and its counsel in the conduct of the defense, including for example providing all information reasonably requested by the Indemnifying Party or its counsel.

(2) Upon request by the Protected Person, the Indemnifying Party will pay, or reimburse the Protected Person for, all reasonable out-of-pocket expenses incurred by or on behalf of the Protected Person in providing such cooperation.

21.1.6 The Indemnifying Party May Control the Defense

(a) An Indemnifying Party is entitled to control any defense to a Covered Claim that it provides under this clause except as stated in subdivision (b).

(b) If an Indemnifying Party does not provide a Protected Person with a defense to a Covered Claim as required by the Agreement, then: (1) the Protected Person may control its own defense; and (2) the Indemnifying Party must pay, or reimburse the Protected Person, for all reasonable expenses that the Protected Person incurs in the defense.

Obviously, if an Indemnifying Party doesn't "step up" to provide a defense, then the Protected Person should be able to control its own defense. But if the Indemnifying Party does provide a defense, then it should be able to control the defense — otherwise, the Protected Person's counsel — knowing that it would be the Indemnifying Party, not its client, that would eventually be paying the bills — could be tempted to put on an expensive, gold-plated defense.

21.1.7 Defense Counsel Must Be Reasonably Acceptable

A party controlling a defense against a Covered Claim (that is, the Indemnifying Party or the Protected Person, as the case may be) is to engage counsel of recognized standing, reasonably acceptable to the non-controlling party, to conduct the defense.

This language is necessarily vague, but it should serve as a warning that, say, a traffic-ticket lawyer would not necessarily be a sound choice to defend against, say, a bet-the-product-line patent infringement claim.

21.1.8 The Protected Person May Engage Monitoring Counsel at Its Own Expense

A Protected Person, at its own expense, may engage separate counsel to monitor a defense provided by an Indemnifying Party; in such an event, the Indemnifying Party and Protected Person will each instruct their their respective counsel to provide reasonable cooperation with each other concerning the defense.

21.1.9 in Case of Conflict of Interest, Separate Counsel May Be Engaged at the Indemnifying Party's Expense

IF: Reasonable minds could conclude that an Indemnifying Party's counsel has a conflict of interest that, under applicable ethics rules, would preclude the Indemnifying Party's counsel from representing the Protected Person in the defense of a Covered Claim; THEN: The Protected Person may in its sole discretion: (1) assume control of the defense; and (2) engage separate counsel for the defense, at the Indemnifying Party's expense.

The language, "if reasonable minds could conclude" (emphasis added) is intended to make sure that close calls go in favor of separate counsel.

21.1.10 A Protected Party is Not to Make Non‑Factual Admissions Without Consent

(a) This subdivision applies during any time that the Indemnifying Party is entitled to control the defense against the claim.

(b) Without the Indemnifying Party's prior written consent, a Protected Person must not (1) make any non-factual admission or stipulation concerning a Covered Claim — for example, an admission that a third party's patent was valid and enforceable would be such a non-factual admission; nor (2) waive any defense against a Covered Claim.

Admissions and stipulations can greatly streamline litigation (and arbitration). And factual admissions should be made as required. But an infelicitous non-factual admission by a Protected Person could seriously screw up the defense.

(c) A Protected Person is strongly encouraged to consult with the Indemnifying Party before making any factual admission or stipulation concerning a Covered Claim. For example, an admission that, in calendar year 20XX, the Protected Person sold Y units of its Model ABC widget would be such a factual admission.

(d) IF: A Protected Person makes an admission or waives a defense in violation of subdivision (b); THEN: The Indemnifying Party will have no further obligation to that Protected Person, in respect of the claim in question, by way of either defense or indemnity.

21.1.11 The Indemnifying Party Controls the Settlement, With Restrictions

(a) An Indemnifying Party may, at its own expense, settle a Covered Claim against a Protected Person as provided in this subdivision.

This is a detailed example of a type of clause that is often found in indemnity- and defense obligations.

(b) Without the Protected Person's prior written consent, an Indemnifying Party must not settle a Covered Claim, and the Protected Person will not be bound by any purported settlement, on any terms that:

(1) restrict or place conditions on the Protected Person's activities if those activities would not reasonably be regarded as being otherwise unlawful; or

(2) require any action by the Protected Person, other than making one or more payments of money — funded in advance by or on behalf of the Indemnifying Party — to one or more third parties; or

(3) encumber any of the Protected Person's assets; or

(4) include (or require) any admission or public statement by the Protected Person; or

(5) call for the entry of a consent judgment inconsistent with any of subdivisions (1) through (4).

Some categories of insurance contract give the insurance carrier essentially-complete control over the settlement of third-party claims. That could cause problems for the protected person if the insurance carrier were to settle a claim but then try to recoup the settlement amount from the protected person. This could happen, for example, if a contractor's surety bond decided to settle a claim and then sued the contractor to recoup the settlement payment. See, e.g., Hanover Ins. Co. v. Northern Building Co., 891 F. Supp.2d 1019, 1026 (N.D. Ill. 2012) (granting summary judgment awarding damages and attorney fees to insurance company), aff'd, No. 13-2675 (7th Cir. May 8, 2014).

(c) For the avoidance of doubt, the Indemnifying Party's settlement of a Covered Claim may, in the Indemnifying Party's sole and unfettered discretion, include the entry of a consent judgment binding on the Protected Person; the Protected Person must agree to entry of the consent judgment if the consent judgment is not inconsistent with subdivision (b).

21.1.12 Settlement by the Protected Person is Restricted

IF: A Protected Person settles a Covered Claim without the Indemnifying Party's prior written consent; THEN: The settlement will have the effect of releasing the Indemnifying Party from any further defense- or indemnity obligation as to that claim UNLESS: The Indemnifying Party unreasonably withheld, delayed, or conditioned its consent to the settlement, in which case the Indemnifying Party is to be deemed to have given its consent to the settlement.

21.2 Indemnities Ground Rules – Playbook

21.2.1 Indemnity Payments Are Due as Specified

(a) IF: A Protected Person gives notice to the Indemnifying Party that an Indemnified Financial Obligation (i) is due or (ii) has been paid (in which case evidence of payment must accompany the notice); THEN: The Indemnifying Party must do the following no later than the Indemnity-Payment Due Date (namely, ten business days after written notice): (1) pay each such Indemnified Financial Obligation directly to the individual or organization to which the Protected Person owes it, or (2) reimburse the payer if the Indemnified Financial Obligation has already been paid by or on behalf of the Protected Person.

Not directly related, but of interest, is the litigation over reimbursement payments by British Petroleum (BP) in the wake of the loss of the Deepwater Horizon drilling rig at the Macondo oil well in the Gulf of Mexico; see generally the Wikipedia article on that topic.

(b) Subdivision (a) applies regardless whether applicable law would otherwise require the Protected Person itself to pay the Indemnified Financial Obligation first and then seek reimbursement from the Indemnifying Party.

21.2.2 Indemnity Obligations Will Be Offset by Payments from Insurance and Contribution

(a) An Indemnifying Party, in determining the amount it owes under an indemnity obligation of the Agreement, may reduce that amount by the following amounts received by or on behalf of the Protected Person, if any: (1) insurance proceeds in respect of the subject matter of the indemnity obligation; and/or (2) contributions from another liable individual or organization (other than another Protected Person).

(b) For the avoidance of doubt, this provision is not to be interpreted as in itself limiting an Indemnifying Party's indemnity obligation to the amount of either insurance proceeds or of contributions from other liable individuals or organizations.

This provision is intended to prevent double-dipping by a protected party, which might recover some of its losses from other sources and yet still try to pry money out of an indemnifying party. ¶ NOTE: If Alice is asked to indemnify Bob against any damages that Bob suffers as a result of Carol's actions, then Alice might want to consider laying some groundwork for her to sue Carol under the doctrine of subrogation.

22 Limitations of liabiity

22.1 Limitations of Liability — Basic Terms

22.1.1 The Stated Limitations of Liability Apply in All Affected Disputes

All limitations of liability stated in the Agreement apply in all Affected Disputes, namely all disputes arising out of the Agreement.

A drafter representing a Disclaiming Party might want a broader definition of Affected Dispute, such as any dispute arising out of or relating to the Agreement, or even any Agreement-Related Dispute. The other side, though, might well consider such a broader definition to be overreaching.

22.1.2 The Stated Limitations of Liability Apply to All Protected Persons

All limitations of liability of the Agreement apply to all Protected Persons, defined as:

(1) the Disclaiming Party (namely, each party) (each one, if more than one);

(2) the Affiliates and agents of each Disclaiming Party;

(3) the Associated Individuals of each individual and organization listed in subdivisions (1) and (2); and

(4) any other particular Protected Persons expressly agreed to in writing by the parties, if any — for the avoidance of doubt, it is immaterial if one or more such other particular Protected Persons is also in another category listed above

This definition of the term Protected Person reflects concepts used in many limitations of liability.

22.1.3 The Stated Limitations of Liability Apply Broadly to Tort Theories, Etc.

The parties have specifically agreed that each limitation of liability set forth in the Agreement is to apply:

(1) to all claims for damages or other monetary relief, whether alleged to arise in contract, tort (including for example negligence, gross negligence, or willful misconduct), or otherwise;

(2) regardless whether the damages are alleged to arise in contract, negligence, gross negligence, other tort, willful misconduct, or otherwise;

(3) even if the allegedly-liable party was advised, knew, or had reason to know of the possibility of excluded damages and/or of damages in excess of the relevant damages cap, if any; and

(4) even if one or more limited remedies fail of their respective essential purposes.

This language is an avoidance-of-doubt "roadblock" clause; it hopes to prevent aggressive litigation counsel from trying to do an end-run around the limitations of liability. ¶ The phrase, "The parties have specifically agreed," etc., is redundant; it's included here to create a sound bite that can be used in litigation.

22.1.4 Knowledge of Risk is Irrelevant to the Stated Limitations of Liabiity

The limitations of liability of the Agreement apply even if the relevant Protected Person and/or its agents knew or had reason to know, at any time, of either or both of the following: (1) the existence of particular circumstances of the party that incurred such damages; and/or (2) that, in such circumstances, such damages were possible, likely, or even highly probable.

This type of language is often found in limitations of liability.

22.1.5 The Stated Limitations of Liability Are a Material Consideration

Each party acknowledges that the Agreement's limitations of liability are material provisions of the Agreement, and that absent those limitations of liability, one or both of the parties would have declined to enter into the Agreement on the economic- and other terms stated in it.

This language tries to convey to judges (and arbitrators) the importance of the Agreement's limitations of liability, in the hope of dissuading them from listening to lawyers trying to pierce those limitations.

22.1.6 Neither Party Will Seek Damages Inconsistent With the Stated Limitations of Liability

Each party expressly agrees not to seek damages in excess of any applicable limitation of liability stated in the Agreement.

This language is intended to make it a separate breach of contract for a party to seek damages not allowed by the Agreement's limitation(s) of liability; the intent is to allow the other party to recover its attorney fees as damages for that separate breach. (I haven't researched whether a court would give effect to this language.)

22.1.7 Some Limitations of Liability Might Not Apply

The parties acknowledge that some jurisdictions might not permit limitation or exclusion of remedies under some circumstances, in which case some or all of the limitations of liability stated in the Agreement might not apply; this sentence, though, is not to be taken as a concession that any particular limitation or exclusion should not apply.

Provisions like this are widely used in agreements that might be entered into by U.S. consumers, in case a consumer's jurisdiction restricts attempting to exclude or limit the provider's liability.

22.2 Limitations of Liability Playbook

22.2.1 Avoidable Damages Are Excluded

For the avoidance of doubt, in any Agreement-Related Dispute, NO PROTECTED PERSON WILL BE LIABLE for any loss (or portion thereof) that would have been avoided by cover or other reasonable avoidance efforts (not involving undue risk or burden) where the party incurring the loss failed to make such efforts.

This exclusion essentially states the rule in (U.S.) law; its concepts are adapted from: • Restatement (Second) of Contracts § 350, which states in part that "damages are not recoverable for loss that the injured party could have avoided without undue risk, burden or humiliation …. [but] [t]he injured party is not precluded from recovery … to the extent that he has made reasonable but unsuccessful efforts to avoid loss"; and • UCC § 2-715(2)(a), which in effect excludes from the definition of consequential damages any damages "which could not reasonably be prevented by cover or otherwise."

22.2.2 Damages are Capped as Specified

Except as expressly stated otherwise in the Agreement: The CUMULATIVE TOTAL LIABILITY of all Protected Persons, for any and all breaches of the Agreement by any and all of the Protected Persons, IS NOT TO EXCEED that amount (the Damages Cap Amount). Unless expressly stated otherwise in the Agreement, however, such a damages cap does not apply to the liability of a party in any of the following categories (but an agreed damages cap specific to such a category, if any, will apply):

(1) amounts due under the Agreement;

(2) amounts required to be paid under the Agreement for defense and/or indemnity of another party against third-party claims — for the avoidance of doubt, however, a specifically-stated maximum aggregate liability for defense and indemnity obligations will apply;

(3) infringement of another signatory party's patent, copyright, or trademark;

(4) misappropriation of another signatory party's rights in confidential information;

(5) knowing misrepresentation or omission of a material fact, with the intent that another signatory party rely on the misrepresentation or omission in entering into the Agreement, as shown by clear and convincing evidence, where the other signatory party justifiably did so rely — for the avoidance of doubt, this subdivision (5) is intended only as an exception to one or more limitations of liability and not as the parties' assent to non-contractual liability, e.g., tort-based liability for fraud; nor

(6) unlawful conversion of, or the unlawful infliction of harm to, property of another signatory party (for example, erasure or corruption of computer programs or -data), IF the liable party is shown, by clear and convincing evidence, (A) to have intended the conversion or harm, and (B) to have known of the unlawful nature of the conversion or harm.

A portion of this clause is in all-caps to make it "conspicuous," which is expressly or implicitly required for limitations of liability in some jurisdictions. ¶ Concerning the damages-cap carve-outs, see the Annotations.

22.2.3 Consequential Damages, Etc., Are Excluded

In any Affected Dispute, NO PROTECTED PERSON WILL BE LIABLE for any form of consequential, punitive, exemplary, special, or multiple (e.g., treble) damages (collectively, Excluded Damages) except to the extent, if any:

(1) that the Agreement expressly states otherwise, and/or

(2) that this such exclusion from liability would be unenforceable under applicable law, e.g., in the event of personal injury (including but not limited to death) in the case of consumer goods.

See generally the Reading Notes on this subject.

22.2.4 Incidental Damages Are Excluded

Incidental damages, as defined in § 2-710 and § 2-715 of the [U.S.] Uniform Commercial Code, are not recoverable except to the extent (if any) that the Agreement expressly states otherwise.

See generally the Reading Notes on this subject.

22.2.5 Extra-Contractual Liability for Breach is WAIVED

To the extent not expressly prohibited by law, each party (each, a Waiving Party) KNOWINGLY, VOLUNTARILY, INTENTIONALLY, PERMANENTLY, AND IRREVOCABLY:

(1) AGREES that the rights and obligations of the parties arising out of or relating to the Agreement, or any transaction or relationship resulting from the Agreement, are to be defined solely under the law of contract in accordance with the express provisions of the Agreement; and

(2) WAIVES any such obligations allegedly owed by any other party to the Agreement that are not expressly stated in the Agreement, whether those obligations are alleged to arise in (for example) quasi-contract; quantum meruit; unjust enrichment; promissory estoppel; tort; strict liability; by law (including for example any constitution, statute, or regulation); or otherwise.

This language is modeled on a clause suggested in Glenn D. West & W. Benton Lewis, Jr., Contracting to Avoid Extra-Contractual Liability — Can Your Contractual Deal Ever Really Be the "Entire" Deal?, 64 BUS. LAW. 999, 1036 (2009); the entire article is worth a complete and close reading. ¶ Some language is in bold-faced all-capital letters for conspicuousness.

22.2.6 Damages for Personal Injury or Death Are Not Limited

The limitations of liability of the Agreement do not limit otherwise-recoverable damages for injury to the person (including death) proximately resulting from breach of the Agreement.

Many limitation-of-liability clauses contain carve-outs similar to this. ¶ The phrase proximately resulting from breach is adapted from UCC § 2-715(2)(b). ¶ See also the Research Note concerning the prima facie unconscionability of exclusions of consequential damages in cases of injury to the person.

23 Liquidated damages

23.1 Liquidated Damages — Basic Terms

23.1.1 Definitions (must be edited)

For purposes of this article:

Breaching Party refers to: [FILL IN].

Triggering Breach refers to: [FILL IN].

Liquidated-Damages Amount (or Liquidated Damages Amount) refers to: [FILL IN].

Liquidated-Damages Rationale refers to: [EXPLAIN why (1) actual damages would be difficult or impossible to estimate and (2) the Liquidated-Damages Amount is a reasonable forecast of the actual damages].

It would be well for a drafter to make at least some effort to explain the Liquidated-Damages Rationale, for reasons discussed in the Annotations.

23.1.2 The Breaching Party is to Pay the Liquidated-Damages Amount

(a) IF: A Breaching Party commits a Triggering Breach of the Agreement; THEN: The Breaching Party will pay the other party, as liquidated damages, the Liquidated-Damages Amount.

Unlike some liquidated-damages provisions, this language does not say that the breaching party will pay, as liquidated damages and not as a penalty, a stated (or computable) amount, because many courts tend to ignore such self-serving exculpatory language, as discussed in the Annotations.

(b) Each party acknowledges and agrees that the actual damages, in the event of a Triggering Breach, would be difficult or impossible to estimate, and that the Liquidated-Damages Amount is a reasonable forecast of the other party's actual damages, for the reasons stated in the Liquidated-Damages Rationale.

23.2 Liquidated Damages Playbook

23.2.1 Liquidated Damages Are the Exclusive Measure of Damages

The Breaching Party's obligation to pay the Liquidated-Damages Amount is the other party's EXCLUSIVE MEASURE OF DAMAGES for the Triggering Breach.

A similar provision was included in the contract in suit in Indiana v. IBM Corp., No. 49A02-1211-PL-875, slip op. at 33 (Ind. Feb. 13, 2014), affirmed, Indiana v. IBM Corp., No. 49S02-1408-PL-00513 (Ind. Mar. 22, 2016).

23.2.2 Liquidated Damages Are the Exclusive Remedy

The Breaching Party's obligation to pay the Liquidated-Damages Amount is the other party's EXCLUSIVE REMEDY for the Triggering Breach.

Note the difference between exclusive remedy in this option and exclusive measure of damages in the option above.

23.2.3 Liquidated Damages Do Not Limit the Right to Terminate

A Breaching Party's payment of liquidated damages does not limit any right another party might have to terminate for material breach of the Agreement.

See Indiana v. IBM Corp., No. 49A02-1211-PL-875, slip op. at 33 (Ind. Feb. 13, 2014), affirmed, Indiana v. IBM Corp., No. 49S02-1408-PL-00513 (Ind. Mar. 22, 2016). In that case: • the trial court held that IBM's payment of liquidated damages was a factor that weighed against approving the state's termination of the contract in suit for material breach; • the appeals court, though, reversed. (One appellate judge dissented in pertinent part. See id., slip op. at 88-89 (Friedlander, J.).)

24 Assignment of Agreement

24.1 Assignment Consent — Basic Terms

24.1.1 Applicability; Definitions

(a) This section 24.1 applies if the Agreement specifies that a party (the Assigning Party) may not assign the Agreement without the consent of another party (the Reviewing Party).

(b) Assign the Agreement and corresponding terms such as Assignment of the Agreement refer to assigning the Agreement, or any right or interest under it, in whole or in part.

24.1.2 An Assignment Has the Effect Stated in the UCC

(a) An Assignment operates not only as a transfer of the assigning party's rights under the Agreement, but also as a delegation of the assigning party's duties under the Agreement.

(b) An Assignment does not relieve the Assigning Party of its responsibility to the Reviewing Party for performance of the Assigning Party's duties under the Agreement unless the Reviewing Party expressly agrees otherwise in writing.

(c) When an Assignment is of the entirety of the Agreement (as opposed to, e.g., a Pledge), and the Assignment is accepted by an assignee, that acceptance constitutes the assignee's promise to perform the assigning party's duties under the Agreement; that promise is enforceable by either the assigning party or the non-assigning party.

Much of this language is adapted from UCC § 2-210(4); for additional information, see also the Notes on the effect of an assignment. ¶ This language does not address whether an assignment of an agreement relieves the assigning party of its responsibility to third-party beneficiaries, if any; see also Third-Party Beneficiaries Are Disclaimed Except As Stated.

24.1.3 The Specified Party May Not Assign the Agreement Without Consent

The Assigning Party may not Assign the Agreement without the prior written consent of the Reviewing Party except as expressly provided otherwise in the Agreement.

24.2 Assignment Consent – Assigning Party Playbook

24.2.1 An All-Asset Transfer Does Not Require Consent

The Assigning Party is not required to obtain the Reviewing Party's consent to an Assignment if the Assignment is in connection with a sale or other transfer of substantially all of the assets of the Assigning Party's business (an All-Asset Transfer).

24.2.2 A Line-of-Business Asset Transfer Does Not Require Consent

The Assigning Party is not required to obtain the Reviewing Party's consent to an Assignment if the Assignment is in connection with a sale or other transfer of substantially all of the assets of the Assigning Party's business associated with the Agreement (a Line-of-Business Asset Transfer).

24.2.3 A Pledge Does Not Require Consent

The Assigning Party is not required to obtain the Reviewing Party's consent to a Pledge, namely:

(1) an assignment or pledge of a right under the Agreement; and/or

Courts have distinguished between assigning an agreement in its entirety and assigning certain rights and benefits under the Agreement, as discussed in the Annotations.

(2) a grant of a security interest in any such right, regardless whether the assignment, pledge or grant is absolute or collateral, SO LONG AS the assignment, pledge, or grant:

(A) does not purport to delegate any obligation of the Assigning Party under the Agreement and

(B) does not have such effect as a matter of law.

24.2.4 Consent to Assignment May Not Be Unreasonably Withheld

The Reviewing Party may not unreasonably withhold, delay, or condition its consent to an Assignment.

A possible alternative is section 24.3.1. ¶ See the Annotations for a discussion of the Reviewing Party's autonomy in granting consent.

24.3 Assignment Consent – Assigning Party Playbook

24.3.1 Consent to Assignment May Be Withheld at Discretion

The Reviewing Party may withhold, delay, or condition its consent to an Assignment in its sole discretion.

A possible alternative is section 24.2.4 ¶ See the Annotations for a discussion of the Reviewing Party's autonomy in granting consent.

24.3.2 Assignment Without a Required Consent is a Material Breach

IF: The Assigning Party were to Assignment the Agreement without the Reviewing Party's consent; THEN: That Assignment would be a material breach of the Agreement.

See the Annotations for a discussion of this issue. If an assignment without a required consent did constitute a material breach of the Agreement, then the non-assigning party might have the right under the law to suspend its own performance; it might also have the contractual right to terminate the Agreement for material breach.

24.3.3 An Assignment Without a Required Consent is Void

IF: The Assigning Party were to Assign the Agreement without the Reviewing Party's consent; THEN: That Assignment would be void.

See the Annotations for a discussion of this issue.

24.3.4 The Reviewing Party's Successors Inherit the Right to Consent to Assignment

An assignee of or successor to the Reviewing Party has the sole right to grant consent to an Assignment of the Agreement, to the exclusion of any then-former Reviewing Party.

24.3.5 The Assigning Party's Successors Must Obtain Consent to Any Further Assignment

An assignee of or Successor to an Assigning Party must obtain consent to an Assignment of the Agreement to the same extent as the Assigning Party.

24.3.6 Damages May Not Be Recovered for Unreasonable Withholding of Assignment Consent

IF: A Tribunal were to hold, in a final judgment or award (or comparable action) from which no further appeal is taken or possible, that the Reviewing Party unreasonably withheld, delayed, or conditioned its consent to an Assignment of the Agreement; THEN:

(1) the Reviewing Party will be deemed to have given its consent to that assignment, effective as of the date the consent was requested; and

(2) the Reviewing Party will not be liable to the Assigning Party, nor to any third party, for money damages for having withheld, delayed, or conditioned its consent.

This provision could be seriously-bad news for an assigning party; see this discussion.

24.3.7 Third-Party Benefits Are Not Assignable

For the avoidance of doubt: (1) A third-party beneficiary of the Agreement (if any) may not assign its rights deriving from that status; and (2) this provision is not to be interpreted as implying that any third party is entitled to benefit from the Agreement.

24.3.8 The Non-Assigning Party May Terminate the Agreement

Sometimes parties can get into an impasse about assignment-consent provisions. a provision such as this one could help break an impasse between, say, a customer that wants an assignment-consent right, so as to control with whom it does business, and a vendor that wants to maintain control of its strategic destiny.

(a) IF: An Assigning Party assigns the Agreement; THEN: The other party (the Non-Assigning Party) may terminate the Agreement, regardless whether the assignment was a breach of the Agreement, by giving notice of termination to the Assigning Party or its assignee.

See also 20. Termination.

(b) Any such notice to terminate the Agreement must be effective no later than the end of the Termination Period (namely, the 90-day period following the Reviewing Party's receipt of written notice of the assignment from either the Assigning Party or the assignee).

The 90-day time for exercising this termination option gives an assigning party (and its assignee) a significant incentive to notify the non-assigning party as soon as the assignment becomes effective. That's because the only way the clock will start running is for either the assigning party or its assignee to give notice to the non-assigning party.

(c) For the avoidance of doubt, the Non-Assigning Party's right to terminate under this clause does not limit:

(1) any right that the Non-Assigning Party might have to terminate the Agreement if the assignment in question constituted a breach of the Agreement; nor

(2) any remedy that the Non-Assigning Party might have for such a breach.

24.3.9 Consent is Required for Assignment by Operation of Law

(a) The term Operation-of-Law Transaction refers to a merger, consolidation, amalgamation, or other similar transaction or series of transactions involving the Assigning Party in which the Assigning Party is not the surviving entity, regardless whether an assignment is deemed to occur by operation of law.

(b) An Operation-of-Law Transaction requires consent to the same extent, if any, as would an Assignment by the Assigning Party outside of such a transaction.

A consent requirement for an assignment by operation of law could be quite dangerous for the assigning party, as discussed in the Annotations.

24.3.10 Consent is Required for a Change of Control

A consent requirement for a change of control could likewise be quite dangerous for the assigning party, as discussed in the Annotations.

(a) For purposes of this provision, the term Change of Control refers to [TO DO: DEFINITION].

(b) A Change of Control requires Consent to the same extent, if any, as would an Assignment by the Assigning Party outside of such a transaction.

24.3.11 Assignment is Grounds for Insecurity

(a) A non-assigning party may treat any assignment that delegates the assigning party's performance obligations without the non-assigning party's consent as creating reasonable grounds for insecurity.

The [U.S.] Uniform Commercial Code has a provision similar to this clause, namely UCC § 2-210(5) (which applies by its terms only to sales of goods). It states that "[t]he other party may treat any assignment which delegates performance as creating reasonable grounds for insecurity and may without prejudice to his rights against the assignor demand assurances from the assignee" under UCC § 2-609. Under the latter UCC section, the non-assigning party may suspend its performance (if commercially reasonable) and eventually treat the agreement as repudiated if the assignee does not provide adequate assurances. agreement if it does not receive adequate assurances.

(b) In any such case, without prejudice to the non-assigning party's rights against the assigning party:

(1) The non-assigning party may, by notice in accordance with the Agreement, demand assurance of due performance, from one or more of the non-assigning party and the assignee, that is commercially reasonable under the circumstances of the particular case.

(2) Until the non-assigning party receives such assurance, the non-assigning party may, if commercially reasonable to do so, suspend any performance under the Agreement for which it has not already received the agreed return.

(3) Failure by the assignee and the assigning party to provide such assurance, within a reasonable time (not to exceed 30 days) after the effective date of the notice, is a repudiation of the Agreement.

25 Arbitration

25.1 Basic Arbitration Details

(a) Arbitrable Dispute refers to any dispute arising out of or relating to the Agreement or any transaction or relationship resulting from it.

Unless expressly provided otherwise in the Agreement, every Arbitrable Dispute is to be submitted to arbitration upon written demand by either party, regardless whether the dispute arises under, for example: (1) common law, whether of contracts, torts, strict liability, or otherwise; (2) a constitution, statute, or regulation (for example, state- or federal anti-discrimination statutes); or (3) any other legal- or equitable doctrine or principle.

This definition of Arbitrable Disputes is intentionally broad, for reasons discussed in the Annotations. ¶ The "any transaction or relationship" language comes from a pair of court cases. ¶ U.S. courts have held that statute-based claims can be arbitrated, but only if the parties so agree; presumably the same rule would likely be applied to constitutional- or regulatory claims as well.

In an oddball case, a forum-selection provision in an earlier contract was "held over," and trumped an arbitration provision in a successor contract, because the arbitration language was of narrower scope. See Garthon Bus. Inc. v. Stein, 2016 NY Slip Op 3102 (reversing order compelling arbitration).

(b) Disputes about arbitrability: IF: The parties disagree about whether a particular dispute must be arbitrated; THEN: That disagreement is itself to be arbitrated.

Possible alternative: That disagreement is to be resolved by a court of competent jurisdiction.

This includes, without limitation, disagreements about, for example, one or more of the following: (1) whether the parties have in fact entered into an agreement to arbitrate the primary dispute; (2) whether the agreement to arbitrate is binding; enforceable; applies to a particular type of controversy; and/or conflicts with a non-waivable legal right; and (3) whether any party has waived its right to require arbitration.

This provision addresses a specific requirement of (U.S.) law: If the parties disagree about whether a particular dispute is arbitable, then a court must resolve that disagreement unless the parties' agreement to arbitrate clearly delegates that decision to the arbitrator. See the Annotations.for an extended discussion of on this subject.

(c) Arbitral Law refers to: The (U.S.) Federal Arbitration Act. Arbitration Rules refers to the Commercial Arbitration Rules of the American Arbitration Association.

All arbitration proceedings are to be governed by the Arbitral Law and the Arbitration Rules. For the avoidance of doubt, the Arbitration Rules are agreed to as a choice of rules and not of forum.

See the Notes for discussions of the choice of Arbitral Law and of some of the various arbitration rules that are available. ¶ In the detailed terms and conditions, the Arbitral Rules are agreed to as a choice of rules and not of forum, for reasons discussed in the Annotations. ¶ Concerning the "choice of rules and not of forum" language, see the Notes.

(d) Tribunal: The arbitration is to be heard by the Arbitral Tribunal, namely, a single individual (i) having the qualifications specified in the Arbitration Rules and (ii) selected in accordance with the Arbitration Rules or, failing that, as provided by law.

See generally the Reading Notes on this subject. ¶ As a fallback, this provision states that the Arbitral Tribunal is to be selected "as provided by law" if for some reason the agreed selection method were to fail. This is to avoid having a court refuse to compel arbitration in such a circumstance; I'm pretty sure I've read a case in which that happened, but I can't find any notes about it.

(e) Location: The arbitration hearing is to be conducted in the Arbitral Location, namely a location to be determined in accordance with the Arbitral Rules.

The choice of arbitral location can have significant procedural implications, such as in determining the Arbitral Law.

(f) Adninistration: The arbitration is to be administered by the Arbitration Administrator, namely the American Arbitration Association. If that organization declines or is unable to serve and the parties do not agree on another administrator, then the Arbitral Tribunal is to adminster the arbitration.

See generally the Reading Notes on this subject. ¶ The "declines or is unable to serve" language is a fallback provision, intended to save the parties' agreement to arbitrate in case for some reason the designated Arbitration Administrator declines to serve (as has happened in some employment- and consumer-related arbitrations) or even no longer exists.

(g) Language: The arbitration proceedings are to be conducted, and any award is to be written, in the Arbitral Language, namely the English language as spoken in the United States of America.

In transnational contracts, the parties might well choose English, the global lingua franca, as the arbitral language. Drafters might also wish to consider the language of where the arbitration award might need to be enforced.

(j) Small claims: A party may bring a claim in a court, instead of arbitrating the claim, if the amount in controversy is no more than the Small-Claims Limit, defined as USD $10.

The court must : (1) have jurisdiction over the parties and the subject matter; and (2) not be precluded by a forum-selection provision of the Agreement.

For the avoidance of doubt, this small-claims exception does not in itself authorize class- or collective-action arbitration.

See generally the Reading Notes on this subject. ¶ Possible alternative: For the avoidance of doubt, all Arbitrable Disputes must be arbitrated regardless of the amount in controversy. ¶ See also the prohibition of class- and collection-action arbitration as well as the forum-selection provisions.

25.2 Additional Arbitration Details

(a) Arbitration confidentiality: Unless the Agreement expressly provides otherwise, each party to the dispute; each member of the Arbitral Tribunal; and each other participant in the arbitration proceedings, is to:

(1) maintain in confidence all non-public information that may be disclosed, in the course of the proceedings, by any party to the dispute;

(2) use any such information only for purposes of the proceedings; and

(3) not disclose any such information to any third party, except to the minimum extent authorized or required by: (i) the Arbitration Rules; (ii) the disclosing party; or (iii) applicable law.

Confidentiality is one of the principal attractions of arbitration as an alternative to court litigation; some arbitration rules expressly require confidentiality, but others don't.

(b) Preliminary relief: Any party to an arbitration under the Agreement may seek temporary, interim, or preliminary injunctive relief, in accordance with applicable law, from one or both of (1) a court or other tribunal of competent jurisdiction; and (2) the Arbitral Tribunal; a party's seeking of such relief from other than the Arbitral Tribunal will not in itself waive that party's right to arbitrate.

Subdivision (b) is intended to forestall a waiver argument that plaintiffs' counsel sometimes make.

(c) Arbitration streamlining measures: The parties desire that the Arbitral Tribunal take appropriate measures to actively manage the arbitration proceedings, with due notice to the parties, and with the goals of (1) reducing the time and expense required for each party to present pertinent and material evidence in support of its position, while still (2) preserving the fundamental fairness of the proceedings.

In my view, this is one of the most important provisions in the entire Common Draft arbitration clause. ¶ The Notes survey a number of examples of specific streamlining techniques. ¶ Consider also the 26.4. Baseball Arbitration.

(d) WAIVER OF JURY TRIAL: By agreeing to arbitration, each party KNOWINGLY, VOLUNTARILY, INTENTIONALLY, PERMANENTLY, AND IRREVOCABLY WAIVES the right to have its case heard in court, as well any right it might have to a jury trial, except to the limited extent (if any) that the Agreement expressly states otherwise.

A New Jersey supreme court decision held that an arbitration provision was unenforceable because it did not expressly waive jury trial; to the surprise of many observers, the Supreme Court denied certiorari (that is, the Court declined to hear the losing side's appeal). See Atalese v. US Legal Serv. Group, LLP, 219 N.J. 430 99 A.3d 306 (2014), cert. denied, 576 U.S. _ (U.S. Jun. 8, 2015). ¶ To be on the safe side, the jury-trial waiver here is in bold-faced type for conspicuousness.

(e) Binding effect; enforcement of award Except to the extent that the Agreement expressly states otherwise, any award in an arbitration under the Agreement: (1) will be binding; and (2) may be enforced in any court or other forum having jurisdiction.

(f) Attorney fees for unsuccessful challenges:

(1) A party that unsuccessfully challenges the arbitrability of a dispute in court (for example, by opposing a motion to compel arbitration or by moving to enjoin arbitration) must reimburse the other party to the dispute for the other party's Dispute Expenses incurred in connection with the arbitrability challenge, in both trial- and appellate courts, in an amount to be determined by the Arbitral Tribunal, regardless of any other relief that might be granted to any party.

This provision is based on a suggestion by Gary McGowan, 12 Ways to Achieve Efficiency and Speed in Arbitration § 2, Corporate Counsel (Apr. 22, 2013).

(2) A party that successfully seeks judicial confirmation or ‑enforcement of an arbitration award under the Agreement, following a failure by another party to comply with the award, will be entitled to recover from the other party its Dispute Expenses, in both trial- and appellate courts, for all stages of the confirmation or ‑enforcement proceedings, in addition to any other relief that may be granted to the seeking party.

The provision is intended to avoid the result in Diathegen, LLC v. Phyton Biotech, Inc., No. 04-14-00267-CV (Tex. App.–San Antonio Aug. 26, 2015). In that case, an appeals court affirmed a trial court's refusal to award attorney fees that were incurred in post-arbitration confirmation proceedings. See the Notes for additional case citations.

(g) Class- or collective actions: Unless the Agreement expressly states otherwise, a claimant must arbitrate a dispute only in its individual capacity; it may not do so as a plaintiff or representative class member in a purported class- or representative proceeding, nor in a capacity of private attorney general.

This language is adapted from that of the contract in suit in AT&T Mobility LLC v. Concepcion, 563 U.S. __, 131 S. Ct. 1740 (2011), in which the Court upheld AT&T Mobility's prohibition of class-action arbitration.

(h) Survival: The provisions of the Agreement relating to arbitration are intended to survive any termination or expiration of (i) the Agreement or (ii) any one or more rights or obligations under the Agreement.

25.3 Options (not included in Agreement unless expressly stated)

25.3.1 Arbitrator May Serve as Mediator

Unless either party timely objects in writing, a member of the Arbitral Tribunal — by request of either party or at his or her own initiative, but in any case in his or her sole discretion — may serve as mediator and convene one or more mediation sessions, in accordance with the American Arbitration Association's then-current commercial mediation procedures, to help the parties attempt to resolve the dispute.

There's no reason to limit mediation to the pre-hearing mediation that's called for in Rule R‑9 of the AAA's Commercial Arbitration Rules. The parties have already paid to bring the arbitrator up to speed on the facts and the law, and he or she has already rendered the award, so he or she likely will be well-suited to serve as mediator. See also the AAA's Commercial Mediation Procedures (2013).

Anecdote: In 2015 I rendered an arbitration award in a case. The award was subsequently confirmed by a district court, but the losing party appealed, whereupon the appeals court summarily ordered the case to mediation. I learned this when the winning party contacted me to ask if I would be willing to serve as the mediator, given that I was already familiar with the facts and the law. I said I would do so if the other side didn't object, but I never heard back about it.

25.3.2 Enhanced Judicial Review is Agreed to

Normally, judicial review of an arbitration award is extremely limited; this provision might make a difference, as discussed in the Annotations.

(a) The powers of an arbitral tribunal do not include the power to render an award that:

(1) is based on errors of law or legal reasoning that would be grounds for reversal if made by a judge in a civil trial to the court (sometimes known as a "bench trial"); or

(2) is based on evidence that would not satisfy the requirements of law in such a trial; or

(3) grants relief prohibited by the Agreement or not available under applicable law.

(b) The parties expressly agree that IF: An arbitration award under the Agreement is based, in whole or in part, on one or more of the factors enumerated in subdivision (a); THEN: Upon application of either party, the award is to be vacated, by a court of competent jurisdiction, on grounds that the arbitral tribunal thereby exceeded its agreed powers.

(c) The jettison provision applies to this right of enhanced review.

The "jettison" language refernced in subdivision (c) is based on language in the contract in suit in Pugh's Lawn Landscape Co. v. Jaycon Dev. Corp., 320 S.W.3d 252 (Tenn. 2010). In that case, the state's supreme court held that an agreement to arbitrate in a contract must be rescinded for mutual mistake in view of that court's holding that the agreement's expansion of the scope of judicial review was invalid.

25.3.3 Certain Arbitrator Actions are Prohibited

(a) Prohibition: The Arbitral Tribunal has no power to take any "Prohibited Arbitrator Action" without the express prior written consent of all parties against which the prohibited action would be taken, as follows: None specified.

The Prohibited Arbitrator Actions can be specified using the defined terms below. ¶ The "has no power" language is keyed to the [U.S.] Federal Arbitration Act, 9 U.S.C. § 10(a)(4), which states that one of the few grounds on which a court may vacate an arbitration award is that "the arbitrators exceeded their powers …." ¶ Drafters of arbitration agreements might wish to include some of the specific arbitration-action prohibitions below to help alleviate any fear that the arbitral tribunal might "go rogue" — a fear that's not totally irrational, given (1) that arbitral tribunals have sometimes acted in unexpected ways, and (2) that usually a losing party has very little ability to appeal an arbitration award.

(b) Definitions: For purposes of defining the term Prohibited Arbitrator Action in section 1 above, the following capitalized terms have the stated meanings:

(1) Permanent Injunctive Relief refers to including, in any award, one or more permanent injunctions or similar directions to any party other than directions to pay one or more sums of money.

The preliminary-relief provision would take precedence over a prohibition of permanent injunctive relief (in part because the preamble of that prohibition contains an except-as-otherwise-agreed carve-out).

(2) Punitive Damages refers to including, in any award, one or more directions to pay punitive damages, exemplary damages, multiple (e.g., treble) damages, or similar relief;

(3) Punitive Sanctions refers to ordering one or more punitive sanctions against a party, in respect of an issue (or multiple issues), in the form of (i) preclusion of evidence or defense concerning the issue; or (ii) entry of judgment concerning the issue.

This prohibition seeks to avoid the result in Seagate Technology, LLC v. Western Digital Corp., 854 N.W.2d 750 (Minn. 2014). In that case, the Minnesota supreme court upheld an award in excess of $600 million — not because the claimant had proved its case, but because the arbitrator barred the respondent from contesting the claimant's assertion on one point, as a punitive sanction for alleged fabrication of evidence. (The case is also discussed in the Annotations.)

(4) Class-Action Arbitration and Multiple-Party Joinder each refer to joining or consolidating claims in arbitration by or against multiple individuals or entities, whether under class-action rules or otherwise.

(5) Collective-Action Arbitration refers to arbitrating any collective-action claim, for example under the [U.S.] Fair Labor Standards Act.

(c) Amiable compositeur; ex aequo et bono:   IF: One or both of amiable compositeur and ex aequo et bono (whether or not capitalized) are listed as among the Prohibited Arbitrator Actions; THEN: In rendering the award, the Arbitral Tribunal may not act as amiable compositeur or ex aequo et bono, and the Arbitral Tribunal has the power only to award such relief as would be both:

(1) legally able to be awarded in a court proceeding under applicable law concerning the dispute in question — including for example any applicable statute of limitation or of repose; and

(2) consistent with the Agreement, including for example any limitation of liability (a term that includes for example exclusions of remedies) and any shortened limitation period stated in the Agreement.

The doctrines of amiable compositeur and ex aequo et bono give arbitrators extremely-wide latitude to, as one state's supreme court put it, "make an award according to their own notion of justice without regard to the law." See Seagate Technology, LLC v. Western Digital Corp., 854 N.W.2d 750, 764 (Minn. 2014); see also the Annotations for a longer discussion.

(d) Punitive damages:   IF: Punitive Damages is listed as among the Prohibited Arbitrator Actions; THEN: Each party KNOWINGLY, VOLUNTARILY, INTENTIONALLY, PERMANENTLY, AND IRREVOCABLY WAIVES all such damages and similar relief in respect of each claim being arbitrated.

The waiver in this subdivision is in bold-faced type so as to be conspicuous in case applicable law requires it. ¶ This prohibition of punitive damages is phrased without the qualifier, "to the maximum extent permitted by law"; otherwise, the prohibition might be disregarded, as happened in Stark v. Sandberg, Phoenix & von Gontard, P.C., 381 F.3d 793 (8th Cir. 2004) (reversing and remanding vacation of award). ¶ Portions of this language are adapted from a provision at issue in Wells Fargo Bank, N.A. v. WMR e-PIN, LLC, 653 F.3d 702 (8th Cir. 2011) (affirming confirmation of award, albeit for procedural reasons).

(e) Jettison: This Enhanced Judicial Review is Agreed to provision is subject to the 25.3.4. Jettison of Arbitration Provision in Certain Events provision.

Under applicable law, a prohibition of punitive damages might be invalid; against that possibility, a "jettison" clause could save an arbitration clause that might otherwise be unenforceable it included a no-punitives provision. See Booker v. Robert Half Int'l, Inc., 415 F.3d 77 (D.C. Cir. 2005), in which the court, in an opinion by then-Judge (now Chief Justice) John Roberts affirmed an order compelling arbitration, despite the fact that the arbitration provision included an invalid prohibition against the award of punitive damages.

25.3.4 Jettison of Arbitration Provision in Certain Events

"Jettison" language is not uncommon in consumer-contract arbitration clauses. See, e.g., Murphy v. DirecTV, Inc., 724 F.3d 1218, 1224 (9th Cir. 2013) (affirming order compelling arbitration against one co-defendant but reversing as to other co-defendant that was not a party to the agreement to arbitrate).

(a) Certain other provisions of the Agreement (each, a Referring Provision) state that they are subject to this provision. The parties consider that each such Referring Provision is a material consideration for, and a material condition of, the parties' agreement to arbitrate. Consequently:

(b) With respect to any such Referring Provision, IF: Either of the Triggering Events described in subdivision (c) below occurs; THEN: Each party will have a Rescission Option — exercisable unilaterally by that party in its sole discretion by timely written election as set forth in subdivision (d) below — to rescind and render unenforceable the following:

(1) any award rendered by the Arbitral Tribunal in respect of the claim or claims in question; and

(2) if so specified in the rescinding party's written election: the parties' agreement to arbitrate the claim or claims in question (but not other portions of the Agreement and not the agreement to arbitrate other claims).

(c) For any Referring Provision, the Triggering Events giving rise to the Rescission Option are the following:

(1) the Arbitral Tribunal issues an award or other directive inconsistent with that Referring Provision (an Inconsistent Order); or

(2) that Referring Provision is finally determined, by a court of competent jurisdiction, to be invalid, void, or otherwise unenforceable (a Final Invalidity Determination).

A California court once ruled — only to be overturned by the (U.S.) Supreme Court — that an arbitration provision with a class-action prohibition was unenforceable because, by its own terms, the arbitration provision did not apply if the class-action prohibition was contrary to "the laws of your state." The Supreme Court held that the lower court's interpretation was preempted by federal law. See DIRECTV, Inc. v. Imburgia, 136 S. Ct. 463 (2015).

(d) A party's written election to exercise the Rescission Option under subdivision (b) must be delivered to the other party by notice in accordance with the Agreement. The notice must be effective no later than the last day for challenging the Inconsistent Order or the Final Invalidity Determination in court, whether (i) in an action to confirm or vacate an award or (ii) in an appeal, at any level, from a decision in such an action.

25.3.5 Partial Court Retrial is Agreed to

Under U.S. federal law, a party dissatisfied with an arbitration award might well have only a limited right to appeal or otherwise contest the award on its merits and/or on procedural grounds, even if the parties had previously agreed otherwise. See generally the commentary to the Enhanced Judicial Review is Agreed to. Some practitioners see as a significant disadvantage, and even a fatal one, of arbitration. This provision tries to remedy that problem.

This provision's delay in an award's binding effect could well help promote settlement; see generally the settlement recounted in Barbara Reeves Neal and Kenneth C. Gibbs, Construction Defect Disputes and the Abandoned Policyholder: Getting the Carrier to the Table (Law.com June 9, 2014). (Hat tip: Paul Lurie of Schiff Hardin.)

Thanks to Robert L. Arrington and Paul Lurie for their comments on an earlier version of this clause; any errors or idiocies are of course mine alone.

(a) Delay of binding effect: A final award by an Arbitral Tribunal will not be binding, and the relevant part or parts of the underlying dispute may be adjudicated de novo in a court of competent jurisdiction under this (subject to any forum-selection provision of the Agreement), if any party to the arbitration (each, a Challenger) challenges the award in accordance with this Compact.

This provision is intended to avoid the lock-in effect that results (under U.S. law) when a final arbitration award is issued, as discussed in the Notes.

(b) Notice of challenge: The Challenger must give notice of its challenge to each other party, effective no later than 12:00:00 midnight UTC at the end of the day on the date five business days after the issuance of the final award, setting forth a short and plain statement of the challenge showing that the Challenger is entitled to relief.

The notice of challenge must be served on a fairly-short fuse. More time is allowed for the actual filing of the Challenge Action (described below), so as to give the challenger time to get the necessary papers together, and also to give both parties an opportunity to discuss settlement.

(c) Filing and service of Challenge Action: The Challenger must duly file and serve an action (the Challenge Action), in such a court, against one or more other parties to the arbitration (each, a Respondent), no later than the close of business for the court in question on the date ten business days after the issuance of the final award,Challenge Filing Deadline.

(d) Limitations on Challenge Action: The Challenge Action must seek only one or both of the following:

(1) relief that the Challenger sought, but was not granted, from or against the Respondent in the arbitration; and/or

(2) a declaratory judgment (or comparable action by the court) that a Respondent was not entitled to relief that was granted against the Challenger in the final award.

(d) Award binding if not timely challenged: Time is of the essence of the Challenger's obligations under subdivisions (b) and (c); for the avoidance of doubt, IF: A Challenger, for any reason, does not both (i) give notice of a Challenge, and (ii) file a Challenge Action, in each case within the specified times; THEN: The final award will automatically become binding as between that Challenger and that Respondent, without further action on the part of any individual or organization.

(e) Extension of limitation period:

(1) Any applicable limitation period, as defined below, is to be extended until the Challenge Action Filing Deadline to the extent necessary to permit filing of the Challenge Action.

(2) For this purpose, the term "applicable limitation period" refers to any period, under a statute of limitation or of repose, whose expiration did not preclude asserting a claim for relief in arbitration, but would preclude filing the Challenge Action.

(3) Against the possibility that applicable law does not permit extension of a limitation period by agreement, the relevant Respondent separately and expressly agrees not to assert the expiration of the applicable limitation period as a defense to the Challenge Action.

It's entirely possible that, by the time an arbitration award is issued, the deadline will have already passed for filing a lawsuit under a relevant statute of limitations. This provision expressly addresses that possibility by extending the limitation period, known as "tolling" the statute, to the extent necessary for the filing of a Challenge Action.

(f) Jury trial waiver: To the greatest extent not prohibited by applicable law, EACH PARTY KNOWINGLY, VOLUNTARILY, INTENTIONALLY, PERMANENTLY, AND IRREVOCABLY WAIVES any right it may have to trial by jury of the Challenge Action or any related issue.

This provision's waiver of a jury trial should be enforceable even in states such as California and Georgia, which prohibit advance waivers of the jury-trial right. That's because the Challenger would not make the decision to bring the Challenge Action — and, thus, would not make the decision to waive a jury trial — until after an arbitration award. That, of course, would be long after the dispute arose, and so the Challenger's waiver of a jury trial would not be an advance waiver. ¶ A party seeking to enforce the waiver might try to argue that state-law prohibitions of jury-trial waivers were pre-empted by the Federal Arbitration Act. ¶ See generally the commentary to the JURY TRIAL WAIVER.

(g) Motions to admit arbitration award and record:

To avoid wasting time and money, this language allows for re-use of the record already developed in the arbitration, while still allowing either party to challenge particular evidence (as to its weight, not its admissibility).

In the Challenge Action, any Challenger or Respondent may file one or more of the following motions, and represent to the court that it is a joint motion with all other parties to the Challenge Action:

(1) a motion that the court admit into evidence some or all of the record in the arbitration hearing (this provision does not preclude any Challenger or Respondent from arguing that particular evidence should be given more or less weight than indicated by the Arbitral Tribunal); and/or

(2) a motion that the court deem the non-binding final award of the Arbitral Tribunal to be the report and recommendation of a master who was appointed, with the consent of the parties, to hold trial proceedings and recommend findings of fact, with the same effect as stated in Rule 53(f) of the [U.S.] Federal Rules of Civil Procedure.

Because of the jury-trial waiver of this provision, the Challenge Action will be heard by a judge, not a jury. That means there's no reason not to allow the judge to consider the arbitration award and its record "for what it's worth." ¶ The master's-report language gives the losing party a fresh opportunity to reargue the case to the judge. That's because, under Rule 53(f) of the [U.S.] Federal Rules of Civil Procedure (which is referenced in this language), the judge must give the parties notice and an opportunity to be heard; may receive evidence; and must decide de novo, that is, decide independently, all objections made by the parties to any findings of fact and conclusions of law in the award.

(h) Discovery restrictions: In the interest of reducing cost and duplication of effort in the Challenge Action, neither party will be entitled to — and each party agrees not to seek — discovery in or concerning the Challenge Action except by leave of the court for good cause shown.

Discovery is widely acknowledged to be one of the most costly aspects of litigation. This provision severely limits the availability of discovery in a post-award challenge, but tempers that limitation by giving the court the flexibility to allow targeted discovery in appropriate cases.

(i) Expense-shifting: With respect to any given Respondent, IF: The final judgment in the Challenge Action, from which no further appeal is taken or possible, is not at least 20% more favorable to the Challenger than the arbitration award; THEN: The Challenger must pay or reimburse that Respondent for its Dispute Expenses in the Challenge Action.

The cost- and expense-shifting features of this provision are designed to discourage challenges to the arbitration award; they are similar to provisions in the Federal Rules of Civil Procedure and in various state statutes, as noted below. ¶ This provision is similar to: • Fed. R. Civ. P. 68 (offers of judgment; shifts costs only, not attorney fees); • Ariz. Rev. Stat. § 12-133(I) (the letter in parentheses at the end is I, "eye") (relates directly to trial de novo of arbitrations); • Fla. Stat. § 44.103 (ditto); • Ga. Code Ann. § 9-11-68 (offer of judgment; shifts both court costs and attorney fees); • New Jersey Court Rule 4:58 (ditto); • Tex. Civ. Prac. & Rem. Code ch. 42 (ditto). ¶ These cost- and expense-shifting provisions also fit a U.S. Department of Defense description of "incentive arbitration": "In non-binding arbitration, the parties agree to a penalty [sic] if one of them rejects the arbitrator's decision, resorts to litigation, and fails to improve his position by some specified percentage or formula. Penalties may include payment of attorney fees incurred in the litigation."

25.3.6 Conference-Call Interview Procedure

(a) Introduction: When so agreed by the parties, any party may conduct, record, and introduce into evidence a conference-call interview of an individual (a witness), without thereby limiting any right the party might have (if any) to take a later deposition of that witness.

Conference-call interviews by agreement can be useful because they can reduce the perceived need for compulsory depositions (assuming that compulsory depositions are an option at all). If a party or a prospective deponent were to prove uncooperative, that might help to confirm the need for a compulsory deposition (if available).

This procedure is based largely on one developed by a special litigation committee of the American Bar Association's Section of Intellectual Property Law in the late 1990s. See American Bar Association Section of Intellectual Property Law, Special Committee on Intellectual Property Litigation Forms, Model Case Management Orders for Patent Cases, Model Order No. 30.1 (1998). (I chaired the committee and served as lead drafter.)

See also section 11.3 of the CPR Economical Litigation Agreement (2010 edition), which proposes a similar procedure.

(b) Recording of interview:

(1) Any party that participates in such a conference-call interview may record it, electronically or by stenographic transcription, at that party's own expense.

(2) A party that records such a conference-call interview is to announce that fact while the witness and all parties are on the line.

(c) Swearing of witness is optional: A party conducting such a conference-call interview may arrange for the witness to be sworn; alternatively, the party may ask the witness simply to state that he or she will tell the truth, or the party may elect to remain silent on that point.

(d) Witness's right to decline: During such a conference-call interview, the witness may, in his or her sole discretion, on advice of counsel or otherwise:

(1) decline to be sworn or to state that he or she will tell the truth;

(2) decline to answer one or more questions; and

(3) terminate the conference-call interview.

In determining how much weight to give to a witness's testimony in such a conference-call interview, a fact-finder may take into account (in addition to any other appropriate evidence) the circumstances of the case in the categories set forth in sub­div­i­sions (1) through (3).

(e) Other questioning not precluded: A party’s right, if any, to question a witness (on direct examination, cross-examination, re-direct, re-cross, etc.) in an informal interview or in a subsequent deposition, hearing, or trial is not waived, limited, nor expanded:

(1) by that party’s participation or non-participation in such a conference-call interview of that witness; nor

(2) by the witness’s refusal to participate in such a conference-call interview; nor

(2) by the witness’s refusal to answer any particular question during such a conference-call interview.

(f) Video-conference deposition: When so agreed by the parties and the witness, such a conference-call interview may be conducted by video conference, for example using laptop Web cameras and a service such as Skype, Zoom.us, GoToMeeting, etc. (no endorsement of these providers is implied).

25.3.7 Written Deposition-Question Procedure

In many depositions and interviews, the use of advance written questions could save time and money for all concerned.

This procedure is based largely on one developed by a special litigation committee of the American Bar Association's Section of Intellectual Property Law in the late 1990s. See American Bar Association Section of Intellectual Property Law, Special Committee on Intellectual Property Litigation Forms, Model Case Management Orders for Patent Cases, Model Order No. 30.11 (1998). (I chaired the committee and served as lead drafter.)

(a) Any party conducting an oral deposition may provide the deponent, in advance, with written questions, especially but not exclusively concerning subjects expected not to be in dispute such as (for example) questions about work history, dates, participants in meetings, etc.

(b) Whether or not to respond in writing to any particular written question is within the sole discretion of the deponent, on advice of counsel or otherwise.

(c) The parties, each in its sole discretion, may agree on a procedure for accepting the deponent's written answers to particular questions, if any, in lieu of orally posing those questions to the witness.

(d) A deponent's’s written answer to, or failure to answer, a particular written question will not in itself limit or expand the questioner’s right, if any, to ask the same question again orally at a deposition or at the arbitration hearing.

25.3.8 Arbitration Hearing Transcript Upon Request

If so requested by either party, the Arbitral Tribunal is to arrange to have the parties provided with a transcript of any hearing, prepared by a suitably-qualified reporter.

Transcripts of arbitration proceedings add to the expense, but during a long hearing the arbitrator may have trouble listening to testimony and taking notes at the same time; moreover, a transcript might be needed for appellate review.

To save money, another possibility might be to make an audio recording of the hearing and have only selected portions transcribed — that, though, might be a false economy if counsel ended up spending additional billable time in reviewing the audio recording.

25.3.9 Three-Arbitrator Redo Upon Request

This provision allows a party dissatisfied with the result of a single-arbitrator proceeding to have a "re-do" with a three-arbitrator panel — but at a price.

(a) Applicability: This provision applies only if (i) the Arbitral Tribunal consists of a single arbitrator, and (ii) the final award by the single arbitrator (the First Award) includes one or more of the following against a party (the Appealing Party):

(1) a take-nothing award against the Appealing Party for any claim or counterclaim exceeding the Threshold Amount for a Redo Arbitration (namely, USD $10,000);

(2) an award in favor of the Appealing Party, on any claim or counterclaim by the Appealing Party, where the claim exceeded the Threshold Amount for Redo Arbitration, but the award was at least 20% less than that amount;

(3) an award against the Appealing Party of more than the Threshold Amount for Redo Arbitration;

(4) an award of injunctive relief against the Appealing Party, or denial of injunctive relief duly sought by the Appealing Party. (This subdivision does not in itself authorize or prohibit injunctive relief.)

(b) Redo notice: To challenge the awrd, before the expiration of ten business days after the date of the final award (the Deadline for Notice of Redo Arbitration, the Appealing Party must first notify the other party or parties, as well as the Arbitration Adminstrator, in writing, that it demands a second, new arbitration under the Arbitration Rules and the Agreement (the Redo Arbitration).

IF: No party duly and timely demands a Redo Arbitration; THEN: The First Award will automatically become binding upon the expiration of the Deadline for Notice of Redo Arbitration.

(c) Three-arbitrator panel: In the Redo Arbitration, the Arbitral Tribunal is to consist of a three-arbitrator panel selected in accordance with the Arbitration Rules and the Agreement.

(d) Expense-shifting: As an economic incentive for the Appealing Party to accept the First Award, IF: The Appealing Party demands a Redo Arbitration; THEN: The Appealing Party must pay:

(1) all fees and expenses charged for the Redo Arbitration by the arbitration administrator (if any) and by the members of the three-arbitrator tribunal; and

(2) all reasonable expenses for the Redo Arbitration incurred by any other party to the Redo Arbitration.

In a case involving a consumer contract, a California court found that a redo-arbitration clause like this one was unconscionable because its provisions "create a situation in which the arbitration appellate rules benefit the economically stronger party (the automobile dealer) to the detriment of the weaker party (the consumer) and, in doing so, defeat an essential purpose of the FAA [Federal Arbitration Act], which is to encourage efficient and speedy dispute resolution." Trabert v. Consumer Portfolio Servs., Inc., 234 Cal. App. 4th 1154, 1158 & n.1 (2015) (internal quotation marks omitted). (The appeals court, though, reversed the trial court's refusal to sever the redo-arbitration clause from the rest of the arbitration terms. See id. at 1167.)

25.3.10 Reasoned Arbitration Award Upon Request

If so requested by either party, the Arbitral Tribunal is to issue its award in a written statement that sets forth the tribunal's reasons for the award, with enough detail to provide reasonable support for the award (in case of subsequent judicial review) without being excessively wordy.

Losing parties usually want at least some explanation of why they lost, but a "reasoned award" might be overkill, costing more money (in arbitrator fees) and taking more time than is warranted.

In addition, a reasoned award might well give the losing party more ideas about possible ways to attack the award in court.

The Arbitration Rules will probably specify whether a "reasoned" award is to be provided. Some parties might want the Arbitral Tribunal to produce findings of fact and conclusions of law, but that can increase the cost of the award.

25.3.11 Arbitration Award Findings and Conclusions Upon Request

If so requested by either party, the Arbitral Tribunal is to include findings of fact and conclusions of law in its award.

A reasoned award might be preferable to findings of fact and conclusions of law; the latter will require more arbitrator time to prepare (especially for a three-arbitrator panel) and thus will be more expensive.

25.3.12 Arbitrator Jail Upon Request

If the Arbitral Tribunal comprises multiple arbitrators, then if so requested by either party, all arbitrators are to remain at the place of the arbitration, or at some other convenient place with access to suitable administrative support and research‑ and writing resources, where they are to devote their full time and attention to the preparation of the award (except in case of true emergency or force majeure).

I've never seen this provision in an actual agreement — it's based on a suggestion by the late Tom Arnold, my former senior partner, mentor, and friend, in his arbitration checklist, which unfortunately is no longer available on-line. The provision's intent is to give the arbitrators an incentive to finish the award promptly so they can go home.

25.3.13 Non-Parties May Not Demand Arbitration

No party other than a Signatory Party ("Non-Party") may demand arbitration under the arbitration provisions of the Agreement.

This clause is informed in part by an arbitration provision that, according to both the Fifth and Eleventh Circuits, allowed a non-party to demand arbitration. See Sherer v. Green Tree Servicing LLC, 548 F.3d 379, 382-83 (5th Cir. 2008) (reversing denial of motion to compel arbitration) (emphasis added), citing Blinco v. Green Tree Servicing LLC, 400 F.3d 1308, 1310 (11th Cir. 2005) (same).

26 Litigation & ADR

26.1 Accelerated Litigation

(a) The parties hereby jointly request that, in any litigation arising out of or relating to the Agreement or any transaction or relationship resulting from it, the court follow the procedures set out in the then-current rules the Commercial Division of the New York State Supreme Court, including without limitation the accelerated procedures of those rules.

Concerning the any transaction or relationship term, see the arbitration-clause commentary.

(b) In any such litigation, either party may file a motion with the court making the request set forth in subdivision (a), representing that it is a joint motion.

A court might be more likely to grant a motion that is labeled as a joint motion — and if a party to the contract were to oppose the motion, the moving party could respond: You see, Your Honor? Clearly these folks think the rules don't apply to them, that they can toss aside their contractual commitments whenever it suits them.

26.2 Arbitration (cross-reference)

26.3 Attorney fees

26.3.1 Attorney Fees – Basic Terms

(a) In any litigation, arbitration, or other action arising out of or relating to the Agreement or any transaction or relationship resulting from it, the Recovering Party, namely the prevailing party (if any), will be entitled to recover its Dispute Expenses from the other party, in addition to any other relief that may be granted.

While this provision uses the term Dispute Expenses, the concept is often stated as attorneys' fees or attorney's fees. Legal-language maven Bryan Garner suggests using the singular attorney fees.

(b) All provisions of the Agreement relating to the recovery of attorney fees and other Dispute Expenses will survive each of the following: (1) any termination, expiration, or other coming to an end of the Agreement; and (2) the entry of a judgment, arbitration award, or other decision in a contested proceeding — for the avoidance of doubt, this Attorney Fees – Basic Terms is not to be considered to have merged into that decision.

Subdivision (b) is informed in part by the attorneys-fees clause in the contract in suit in Seaport Village Ltd. v. Seaport Village Operating Co., No. 8841-VCL (Del. Ch. Sept. 24, 2014) (letter opinion awarding attorney fees).

26.3.2 Attorney Fees – Playbook

26.3.2.1 Attorney Fees May Be Awarded in Motion Practice

(a) This provision is agreed to as an incentive for the parties to amicably resolve any subsidiary- or ancillary dispute that is brought before a tribunal in a case (each, a Motion).

(b) The prevailing party in the Motion will be entitled to recover its Dispute Expenses for the Motion unless the Tribunal, for good cause, rules otherwise; the Tribunal's decision on the attorney-fee recovery issue for the Motion is final and non-appeable.

Much of the expense of litigation (and, to a lesser extent, of arbitration) comes from pre-trial motion practice. This drop-in provision tries to provide an incentive for the parties to avoid such motion practice.

(c) Motion-related Dispute Expense recoveries may not be recaptured as part of a later recovery of Dispute Expenses for the overall action.

EXAMPLE: Suppose that a party ("Alice") recovers Dispute Expenses from another party ("Bob") in connection with a Motion in an action. Suppose also that Bob later prevails in the overall action and becomes entitled to recover Dispute Expenses from Alice, either by agreement or by law. In that case, Bob is not entitled to a refund of the Dispute Expenses that Alice recovered from him in connection with the Motion.

26.3.2.2 Attorney Fees for Unproved Serious Accusations

This provision is intended to discourage parties and their trial counsel from making baseless accusations in the hope of prejudicing the jury, judge, or arbitrator; see this discussion for more details.

(a) Serious Accusation refers to an assertion by one or more individuals and/or organizations (each, a "claimant"), before any Tribunal, by way of claim or defense to a claim, that one or more other individuals and/or organizations (each, a "defendant") engaged or is engaged in one or more of the following:

(1) conduct punishable as a felony;

(2) fraud;

(3) bad faith;

(4) unfairness;

(5) breach of an express or implied obligation of good faith and fair dealing;

(6) breach of fiduciary duty;

(7) gross negligence;

(8) willful misconduct; and

(9) any other particular Serious Accusations expressly agreed to in writing by the parties, if any — for the avoidance of doubt, it is immaterial if one or more such other particular Serious Accusations is also in another category listed above.

(b) Applicability: This applies in any case in which:

(1) a claimant makes a Serious Accusation; and

(2) in the final judgment in litigation or final arbitration award, as the case may be, the Tribunal does not find that the claimant proved the Serious Accusation by the quantum of proof required by law, or if greater, the quantum of proof required by the Agreement.

(c) Liability: In any case described in subdivision (b), regardless of any other outcome of the litigation or arbitration, the claimant:

(1) must reimburse the defendant for all of its Dispute Expenses incurred in the entire case (not merely in defending against the Serious Accusation), unless the Tribunal determines otherwise for good reason supported by clear and convincing evidence; and

(2) is not entitled to recover any of its attorney fees or other expenses or costs of the litigation or arbitration, and hereby KNOWINGLY, VOLUNTARILY, INTENTIONALLY, PERMANENTLY, AND IRREVOCABLY WAIVES any such recovery, regardless whether such recovery would otherwise be available under the Agreement or applicable law.

(d) Liquidated damages: In addition, in any case described in subdivision (b), regardless of any other outcome of the litigation or arbitration, the claimant must pay the defendant the Serious Accusation Liquidated Damages Amount (namely, USD $100,000) to compensate the defendant for the additional expense, burden, and inconvenience of defending against all of the one or more Serious Accusations in the case, over and above the defendant's Dispute Expenses.

(e) Severability: The parties intend for subdivision (d) to be severable from the remainder of this, and for this to be severable from the Agreement, if either is found to be unenforceable for any reason.

26.3.2.3 Attorney-Fee Recovery is Waived by ADR Non-Participation

(a) Background: The parties believe that the following categories of dispute-resolution provision (each, a Dispute-Resolution Provision) hold out the possibility of promoting amicable settlement of disputes between the parties, or at least of helping reduce the expense and burden of such disputes:

(1) arbitration;

(2) early neutral evaluation;

(3) economical litigation agreement;

(4) escalation of disputes;

(5) forum selection;

(6) jury-trial waiver;

(7) mediation;

(8) mini-trial to management;

(9) service of process by courier.

(b) Applicability: To create an incentive for the parties to comply with any Dispute-Resolution Provisions that are included in the Agreement (if any), this clause applies if a party (the Non-Participating Party) does any of the following:

(1) fails, upon written request by another party, to participate in dispute-resolution efforts or proceedings required by a Dispute-Resolution Provision; or

(2) challenges the validity or enforceability of a Dispute Resolution Provision.

(c) Disqualification: No Non-Participating Party will be entitled to recover its Dispute Expenses, and each party KNOWINGLY, VOLUNTARILY, INTENTIONALLY, PERMANENTLY, AND IRREVOCABLY WAIVES ANY CLAIM TO SUCH RECOVERY to the extent that the waiving party is such a Non-Participating Party, even if the Non-Participating Party:

(1) would otherwise have been entitled to such a recovery, whether under the Agreement or under applicable law; and/or

(2) prevails in the dispute in question or in the challenge against validity or enforceability of the Dispute-Resolution Provision in question.

(d) For the avoidance of doubt, this Attorney-Fee Recovery is Waived by ADR Non-Participation provision does not limit any other party's right to relief, if any, in respect of an action or omission by the Non-Participating Party.

This clause is modeled on a mediation provision in a standard California residential real-estate purchase agreement, which has been enforced at least twice by courts. See generally • Cullen v. Corwin, 206 Cal. App. 4th 1074, 142 Cal. Rptr. 3d 419 (2012) (reversing award of attorney fees to prevailing defendant, on grounds that the defendant had refused to participate in mediation as required by contract); and • Lange v. Schilling, 163 Cal. App. 4th 1412 (2008) (reversing award of attorney fees to prevailing plaintiff). Cf. also Thompson v. Cloud, 764 F.3d 82 (1st Cir. 2014), where the court denied the winning party's request for attorney fees under an analogous clause, on grounds that the winning party never asked for mediation and thus the losing party didn't refuse to mediate. See id. at 92. ¶ The use of bold-faced type for the waiver language is for conspicuousness.

26.4 Baseball Arbitration

26.4.1 Definitions

(a) Baseball Dispute refers to one or more of the following:

(1) any dispute about a numerical quantity, e.g., revenues, costs, profits, damages, etc.;

(2) any dispute about what if any future action (or ‑inaction) by an individual or organization would be required to comply with an applicable requirement: (A) of law; (B) of the Agreement; (C) of good faith; (D) of fair dealing; or (E) of reasonableness;

(3) any dispute about what if any action (or inaction) should be ordered by the Decision Maker, where the Decision Maker has authority to issue such an order; and

(4) any other dispute as to which the parties have agreed to the use of the procedure of this 26.4. Baseball Arbitration (the "Baseball Process").

"Baseball"-style arbitration is also known as a final-offer or last-best-offer procedure. It is "designed to produce a settlement, not an award." As a U.S. Department of Defense description noted, baseball arbitration is "used increasingly in commercial disputes …. This approach imposes limits on the arbitrator's discretion and gives each party an incentive to offer a reasonable proposal, in the hope that the decision-maker will accept it."

(b) Decision Maker refers to an individual or organization having authority to resolve a Baseball Dispute, defined below. A Decision Maker might be, for example, an arbitral tribunal or a court, having authority to decide the Baseball Dispute (i) by agreement of the parties, or (ii) by law.

26.4.2 Applicability of Baseball Process

(a) The parties intend that all Baseball Disputes be decided in accordance with regardless whether the context is (i) a final resolution of the dispute in question, e.g., a final arbitration award or final judgment; or (ii) an interim resolution, e.g., an interim arbitration award or a decision on a motion.

(b) IF: The Decision Maker is an arbitral tribunal; THEN: The Decision Maker is to use the Baseball Process to decide the dispute.

(c) IF: The Decision Maker is a court, administrative agency, or other governmental authority having jurisdiction; THEN: (i) the parties hereby jointly request that the Decision Maker decide the dispute in accordance with the Baseball Process; and (ii) either party may file a motion or comparable request to that effect and represent to the Decision Maker that it is a joint motion.

Subdivision (c) takes into account the facts that under most laws governing arbitration, the parties can in essence direct the arbitral tribunal to use baseball-style procedures, but the same wouldn't be true of courts and other governmental authorities generally would not be bound by the parties' agreement; consequently, this provision states the parties' joint request that baseball-style procedures be used. ¶ In subdivision (c)(ii), the authorization of a joint-motion representation is intended to create a first impression in the mind of the judge, law clerk, and/or other individual who consider the motion.

26.4.3 Selection of Exactly One Proposed Resolution

(a) This section 3 applies whenever the Baseball Process is used.

(b) Each party is to provide both the Decision Maker and the other party with at least one, but no more than two, written proposed resolutions of the Baseball Dispute (each, a Proposed Resolution). If the parties do not agree to a deadline for exchanging their Proposed Resolutions, then the Decision Maker is to specify a deadline.

Subdivision (b) allows each party to submit up to two Proposed Resolutions for an issue being decided by the baseball-style procedure of this clause; this allows each party to hedge its bets somewhat.

(c) Each party may include, in any Proposed Resolution, a brief explanation why the Decision Maker should select that Proposed Resolution.

(d) The Decision Maker may advise the parties, no more than once, that in the Decision Maker's view, no Proposed Resolution should be selected (preferably explaining why), in which case the Decision Maker is to allow the parties a reasonable time to submit revised Proposed Resolutions if they so choose.

(e) Except as provided in subdivision (d), the Decision Maker is to select, as the resolution of the dispute, without modification, the one Proposed Resolution that the Decision Maker regards as most-closely matching the resolution that the Decision Maker would adopt had the parties not agreed to use the Baseball Process.

One of the perceived advantages of baseball-style decision-making is that the decision-maker can neither "go rogue" nor "split the baby." That's because the decision-maker is permitted only to choose one or another of the Proposed Resolutions of the issue in question.

26.4.4 Effect of Baseball Decision

The parties' agreement and applicable law will determine the effect of the Decision Maker's selection of a Proposed Resolution (for example, the extent, if any, to which the determination is binding on the parties).

If a "baseball" provision is being used in arbitration, as opposed to litigation, the parties' arbitration agreement might provide that the resulting issue determination does not immediately become binding; see, for example, the 25.3.5. Partial Court Retrial is Agreed to.

26.5 Dispute-Escalation

26.5.1 Escalation Requirement

(a) Whenever requested in writing by either party, the parties will jointly refer any Dispute (namely, any Agreement-Related Dispute) "up," in succession:

(1) if necessary, to a total of at least the Required Number of Escalation Levels (namely, two levels) of management; or

(2) if a party has fewer levels "up" remaining in its management structure, to the highest management level (e.g., CEO).

The "whenever requested" phrase in subdivision (a) should give the other side ammunition with which to respond if one party's "guy" were to balk at escalating a disagreement up the chain of command. The requesting party can ask the balking individual, "hey, look — are you going to get your boss involved here, like the contract says, or does our lawyer have to call your lawyer about breach of contract?"

In subdivision (1): Forcing the parties to escalate a dispute at least two successive levels "up" in their respective hierarchies should be enough to get each party to take a fresh look at the dispute. ¶ Some such provisions require escalation all the way up to "executive-level management." Apart from the vagueness of the quoted term, a giant multinational corporation isn't likely to want to be forced to escalate a small-dollar dispute all the way to its executive suite.

For another example of escalation-clause language, see the CPR International Model Multi-Step Dispute Resolution Clause (scroll down to "(A) Negotiation").

To provide parties with financial incentives to comply with a dispute-escalation requirement, consider also including in the Agreement the 26.3.2.3. Attorney-Fee Recovery is Waived by ADR Non-Participation provision.

(b) Upon any request for escalation of a Dispute, each party will promptly advise the other party in writing of the name and contact information of a representative at the relevant management level (each, a Representative) who:

(1) has authority to discuss — and, preferably, the authority to settle — the Dispute on behalf of the advising party, and

(2) is available for the meeting(s) required by this 26.5. Dispute-Escalation.

(c) EXAMPLE: Suppose (hypothetically) that the parties normally deal with each other at the manager level, with each party's manager reporting to a director, and each director reporting to a vice president. Suppose also that the managers cannot resolve a dispute, and that the Required Number of Escalation Levels is two. In that case:

(1) At either party's request, the managers' respective directors must personally participate as provided in this clause; and

(2) If the parties' directors are unable to resolve the dispute, then at either party's request, the directors' respective vice presidents must personally participate as provided in this clause.

26.5.2 Meetings; Exchange of Written Statements

(a) Upon a request for dispute escalation, each party will promptly cause its Representative:

(1) to meet with the other party's Representative at least once by telephone, or if so agreed by the Representatives, by video conference or in person; and

(2) at each such meeting or meetings, to attempt in good faith to settle the Dispute.

When a dispute is escalated, video-conference meetings might well offer many of the benefits of in-person meetings, with greater timing flexibility and lower expense.

An exchange of written statements can help clarify the dispute, especially if it were to turn out that the parties had previously been "talking past each other."

(b) A reasonable time in advance of each meeting, each party is to provide the other party with a reasonably-detailed written statement of the providing party's then-current position in the dispute. (A written statement is not required to conform to any particular requirements of format or content.)

(c) All meeting arrangements are to be coordinated by the party making the request for escalation.

(d) Each party will be responsible for its own expenses of all Representatives' meetings.

26.5.3 Escalation Required Before Legal Action

A party desiring to bring legal action against another party before any tribunal in respect of the Dispute must first escalate the dispute accordance with this 26.5. Dispute-Escalation EXCEPT to the minimum extent, if any, necessary:

(1) to prevent irreparable harm, or

(2) to avoid a bar under an applicable statute of limitations.

The exceptions are intended to overcome possible opposition to the escalation requirement.

26.5.4 Inadmissibility of Escalation Communications

All oral, written, and other communications under this clause are to be treated as made in compromise negotiations; neither party will attempt to offer any such communication into evidence, either to prove or disprove the validity or amount of a disputed claim or to impeach by a prior inconsistent statement or a contradiction.

A contractual requirement that parties discuss their disputes with each other will normally include a provision analogous to Rule 408 of the [U.S.] Federal Rules of Evidence. American litigators will of course know that Rule 408 provides that — with certain limited exceptions — communications made in the course settlement discussions are inadmissible in court. (So, too, do many counterpart state-law rules.) The rationale for inadmissibility is that parties are likely to be more candid in settlement discussions if they have some basis for assuming that a carelessly-worded comment, by a party or by counsel, won't later be quoted by opposing counsel in front of a judge or jury.

26.6 Early Neutral Evaluation

(a) This applies whenever a dispute arising out of or relating to the Agreement becomes, or appears reasonably likely to become, the subject of litigation or arbitration.

(b) At any time before trial (including for this purpose an arbitration hearing), either party may submit the dispute to (nonbinding) early neutral evaluation in accordance with the Early Neutral Evaluation procedures of the American Arbitration Association as then in effect, or such other rules or procedures as the parties may agree.

(c) Each party is to participate in the early neutral evaluation proceedings in good faith.

See generally the Reading Notes on this subject.

(d) For the avoidance of doubt:

(1) The goal of early neutral evaluation is merely to provide parties to a dispute and their counsel with a neutral "reality check."

(2) In the evaluation proceedings, no party need reveal any particular information to the other party or to the evaluator (but are encouraged to make a full disclosure of their position and supporting evidence).

(3) If a party privately discloses information to the evaluator, then the evaluator is not to reveal that information to any other party without the disclosing party's consent.

(4) The results of the evaluation are confidential and not shared with the trial judge or arbitrator.

(5) The evaluator has no power to impose settlement and does not attempt to coerce a party to accept any proposed terms.

(6) While the parties may agree to a binding settlement, if no settlement is reached, the case remains on the litigation- or arbitration track, as applicable.

(7) Any applicable rights the parties may have, under the relevant rules of procedure, to engage in discovery and motion practice are unaffected by the evaluation procedure itself.

26.7 Economical Litigation Agreement

(a) Applicability: Except as otherwise provided below, any dispute arising out of or relating to the Agreement or any transaction or relationship arising from it is to be finally resolved by civil litigation in accordance with the CPR Economical Litigation Agreement (2010 edition) (the ELA), including, without limitation: (1) all disputes concerning breach, termination, or validity of the Agreement; and (2) all disputes based on action in contract, tort, or otherwise.

See generally the Reading Notes on this subject.

(b) Notification requirement; opt-out window: IF: A party that intends to enforce this in the context of a specific dispute; THEN:

(1) That party must give seasonable written notice of that intent to each other party that is putatively bound by this; and

(2) Each such other party may opt out of the ELA by giving written notice to the enforcing party within five business days after the effective date of the enforcing party's notice of intent.

When the ELA was proposed in 2010, I warned against making an irrevocable commitment to it, because: • the concept was just too new; • as a result, parties likely would be reluctant to agree to its (voluminous) provisions and also to take the time to think through the provisions; and so • to reduce what I expected would be "sales resistance" among counsel, I suggested providing an opt-out window, so that companies could agree to the ELA in principle while deferring the need to make a final decision until an actual dispute arose. The notification requirement and opt-out window of subdivision (2)(b) is included toward that end.

(c) JURY TRIAL WAIVER: EACH PARTY KNOWINGLY, VOLUNTARILY, INTENTIONALLY, PERMANENTLY, AND IRREVOCABLY AGREES TO TRIAL TO A JUDGE SITTING WITHOUT A JURY, EXCEPT that trial will be to a jury: (1) in jurisdictions where pre-dispute waiver of jury trial is prohibited by law; or (2) where all parties to the Agreement agree in writing to trial by jury.

In California and Georgia, and possibly elsewhere, pre-dispute waivers of jury trial are not enforceable. [DCT TO DO: CITES NEEDED]. See generally the Reading Notes on this subject.

26.8 Extrinsic Evidence Exclusion

The parties desire that extrinsic evidence not be considered in determining the meaning of the Agreement, or any provision of it, in any judicial- or arbitral proceeding; each party agrees not to offer any such evidence for that purpose.

This provision is based on one that was successfully asserted by a defendant in Hot Rods, LLC, v. Northrop Grumman Sys. Corp., No. G049953, slip op. at 9 (Cal. App. 4th Dist. Dec. 7, 2015) (reversing and remanding damages award). ¶ CAUTION: A party that asks for such provision might be setting a trap for itself — imagine a judge's reaction if that party later changed its mind and sought to offer extrinsic evidence to support its preferred interpretation of the contract after all. ¶ NOTE: UCC § 2-202(a) expressly permits the terms of an agreement to be supplemented or explained by "course of dealing or usage of trade … or by course of performance," even when the agreement contains an entire-agreement provision. ¶ See also 27.1.5. Entire Agreement.

26.9 Forum Selection: New York Commercial Division

Subject to the requirements for a case to be heard in the Commercial Division of the New York State Supreme Court, the parties agree to submit to (i) the EXCLUSIVE JURISDICTION of the Commercial Division and (ii) the application of the court's accelerated procedures, in connection with any dispute, claim or controversy arising out of or relating to this agreement, or the breach, termination, enforcement or validity thereof.

This clause is based on a New York statutory rule; it's copied largely verbatim from the suggested language in Rule 9 of 22 NYCRR § 202.70(g). ¶ This is essentially a type of forum-selection clause, coupled with an agreement to streamlined litigation in accordance with the cited rule. This means drafters should be careful not to be inconsistent by agreeing to a different forum-selection clause. ¶ See also 26.1. Accelerated Litigation.

26.10 Fraud Proof Standard

(a) Any claim that a person committed or engaged in fraud must be established by showing one or both of the following by clear and convincing evidence:

(1) that the person made an untrue statement of a material fact with knowledge of the statement's untruth; or

(2) that the person omitted a material fact with knowledge that the material fact was necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.

These proof requirements are adapted from the definition in the famous Rule 10b-5 promulgated by the U.S. Securities and Exchange Commission; see generally the Wikipedia article "Rule 10b-5." ¶ The requirement in subdivision (1) that fraud be proved by clear and convincing evidence is based on the widely-applied standard in U.S. law. See, e.g., New York Pattern Jury Instruction 3:20 (not available on-line, apparently).

(b) For the avoidance of doubt:

(1) The requirements of subdivision (a) apply (A) to any claim of fraud arising out of or relating to the Agreement or any transaction or relationship resulting from it; and (B) whether the claim is in contract, tort, strict liability, statute, or otherwise; and

(2) Each party KNOWINGLY, VOLUNTARILY, INTENTIONALLY, PERMANENTLY, AND IRREVOCABLY WAIVES any claim of fraud not supported by facts shown in accordance with subdivision (a).

26.11 Injunctive relief

26.11.1 Injunctive Relief — Basic Terms

(a) Nothing in the Agreement precludes any Signatory Party ("Claimant") from seeking injunctive relief (or comparable relief) against any other party ("Respondent") — upon proper proof in accordance with applicable law — in respect of an actual or threatened breach of the Agreement, for the purpose of preventing or stopping irreparable injury or other harm that is not capable of being fully redressed by a monetary award.

(b) For purposes of subdivision (a), the term injunctive relief includes, for example, orders directing specific per­form­ance; injunctions; and similar relief.

Drafters of "form" contracts (for example, consumer contracts) sometimes write "one-way" equitable-relief clauses in which only their side is entitled to relief. This clause is written as a two-way provision, in part because contract reviewers tend to respond more favorably to provisions that apply equally to all parties. (As a practical matter, though, it might be that only one side would be likely ever to seek equitable relief, for example the disclosing party in a one-way confidentiality agreement.) See also the extended discussion in the research notes.

26.11.2 Injunctive Relief Playbook

26.11.2.1 Irreparable Harm and Right to Relief Are Stipulated

Respondent stipulates that: (1) any breach of the Agreement by Respondent will result in harm to Claimant that cannot be adequately compensated by monetary damages or other remedies at law; and (2) Respondent will be entitled to equitable relief, including injunction and specific performance, as remedy for any such breach.

A potential future Respondent might not want to stipulate to irreparable harm, because doing so would absolve the Claimant from what might be a significant burden of proof. On the other hand, in some cases — e.g., misappropriation of crucial trade secrets — the existence of irreparable harm might be pretty obvious. In such a case, it might not be much of a concession for a potential Respondent to stipulate in advance to the existence of irreparable harm. See also the discussion in the research notes.

26.11.2.2 Any Injunction Bond Requirement Is WAIVED

Respondent KNOWINGLY, VOLUNTARILY, INTENTIONALLY, PERMANENTLY, AND IRREVOCABLY WAIVES any requirement that Claimant post a bond as a condition of obtaining injunctive relief or other equitable relief against Respondent for breach or threatened breach of the Agreement.

This bond-waiver provision is potentially dangerous to the waiving party, as discussed in the research notes.

26.12 JURY TRIAL WAIVER

(a) To the maximum extent not prohibited by law, each party (each, a Waiving Party) KNOWINGLY, VOLUNTARILY, INTENTIONALLY, PERMANENTLY, AND IRREVOCABLY WAIVES ANY RIGHT IT MIGHT HAVE TO TRIAL BY JURY of any dispute arising out of or relating to the Agreement or any transaction or relationship arising from the Agreement.

This language is set up by default as a two-way waiver, because a court would be more likely to disregard a one-way waiver. ¶ The use of bold-faced type is for conspicuousness. ¶ See generally the Reading Notes on this subject.

(b) Each Waiving Party certifies that no representative, agent or attorney of any other party has represented, expressly or otherwise, that such other party would not seek to enforce the Agreement's waiver of jury trial.

(c) Each Waiving Party acknowledges that the other party has been induced to enter into the Agreement by, among other things, the mutual waivers and certifications in this clause.

An advance waiver of the right to a jury trial is not enforceable in California and Georgia, and possibly in other jurisdictions. See generally the Reading Notes on this subject.

26.13 Mini-Trial to Senior Management

IF: An Agreement-Related Dispute appears clearly likely to lead to litigation or arbitration; THEN:

(1) Either party may submit the dispute to a non-binding mini-trial in accordance with the Mini-Trial Rules (namely, the then-current mini-trial procedures of the American Arbitration Association); and

(2) In the event of such a submission, each party will provide a senior management representative to participate personally in the mini-trial proceedings as called for by the Mini-Trial Rules.

See generally the Reading Notes on this subject.

26.14 Progressive Dispute Resolution

(a) Mandatory dispute-resolution steps before claim assertion: Except as otherwise provided in this, in any Agreement-Related Dispute, no party ("Claimant") may assert a claim against another party ("Respondent") in a lawsuit or arbitration ("Claim") unless the Claim has first been addressed in the dispute-resolution proceedings referred to in this.

Rare is the relationship unaffected by occasional disputes; it's never a bad idea for drafters to plan ahead for that possibility. The Common Draft 26.14. Progressive Dispute Resolution sets out a fairly-standard approach to requiring dispute-resolution efforts before litigation.

(b) Escalation of dispute: The Claim must be escalated at least two levels in accordance with the 26.5. Dispute-Escalation.

(c) Either early neutral evaluation or mediation: If the dispute is not resolved through escalation, then the Claim must be submitted to either of the following, with the choice being that of the Claimant in consultation with the Respondent:

(1) evaluation by a neutral in accordance with the 26.6. Early Neutral Evaluation, or

Some dispute-resolution clauses require mediation; this one includes early neutral evaluation as an option as well.

(2) mediation administered by the Mediation Administrator (namely, the American Arbitration Association) or such other administrator as the parties may agree.

(d) Mini-trial to senior management: In a trial or other proceeding, the Claimant may not assert the Claim (and agrees not to do so) unless the Claim has been made the subject of a mini-trial in accordance with the 26.13. Mini-Trial to Senior Management.

Mini-trials are regarded by some as the most-effective single approach to resolving disputes, as discussed in the commentary to 26.13. Mini-Trial to Senior Management.

(e) Exception for irreparable harm or statute of limitations:

(1) A Claimant may assert a Claim in a lawsuit or arbitration without complying with subdivisions (a) through (d) if such assertion is necessary: (A) to seek equitable relief to prevent irreparable harm; or (B) to meet a deadline under a statute of limitation, a statute of repose, or an agreed limitation period.

Only rarely will a party to a contract dispute seek a preliminary injunction or other temporary relief. (In part, this is because it's expensive and challenging to get a court to grant such relief.). Still, the possibility is a checklist issue for contract drafters, so this clause allows for it.

(2) A Claimant asserting a Claim in a lawsuit or arbitration under subdivision (1) must immediately: (A) move for a stay of the lawsuit or arbitration to permit the dispute-resolution steps described in this; and (B) in the motion, represent to the tribunal that the motion is a joint motion with the Respondent pursuant to the Agreement.

(f) Waiver of inconsistent relief: Each party KNOWINGLY, VOLUNTARILY, INTENTIONALLY, PERMANENTLY, AND IRREVOCABLY WAIVES all relief inconsistent with this until this has been complied with.

This provision attempts to block attempts by creative trial counsel to wiggle out of the requirements of this.

(g) Liability for attorney fees: A Claimant that fails to comply with the requirements of this must reimburse the Respondent for all Dispute Expenses associated with seeking a stay of some or all proceedings pending such compliance.

This provision is intended to give Claimants an additional financial incentive to comply with this Clause.

26.15 Release

(a) Applicability: This Release governs whenever one or more parties (each a Releasing Party) releases one or more other parties (each, as well as each of its Associated Persons, defined below [if any], a Discharged Party) from one or more specified Claims, as defined below (each specified Claim, a Released Claim), in a signed and delivered written release document (the Release Document), EXCEPT to the extent, if any, that the Release Document itself expressly states otherwise.

(b) Effect of release: In entering into the Release Document, the Releasing Party (or ‑Parties) and the Discharged Party (or ‑Parties) are completely and fully settling each Released Claim; by signing and delivering the Release Document, the Releasing Party — on behalf of itself and each of its Associated Persons, as defined below, if any — KNOWINGLY, VOLUNTARILY, INTENTIONALLY, PERMANENTLY, AND IRREVOCABLY and forever:

(1) RELEASES AND DISCHARGES each Discharged Party from all Released Claims, of any nature whatsoever, no matter how characterized, known and unknown, whether or not apparent, as well as any yet to be discovered, suspected or unsuspected; and

(2) WAIVES all monetary, equitable, and other relief, of any nature whatsoever, in respect of each Released Claim.

(c) Claim definition: For purposes of this Release, the term Claim, in respect of a particular matter, refers to any and all accusations, actions, allegations, causes of action, charges, claims, complaints, controversies, demands, grievances, and suits (each, an Action) that (i) have been made or could be made in or before any court, administrative agency, arbitration body, or other forum anywhere, of any kind or nature (each, a Forum); and (ii) allegedly arise from, or that otherwise relate in any way, to that particular matter.

(1) The term Claim encompasses — by way of example but not of limitation — all allegations of one or more of the following: bad faith; breach of contract; breach of warranty; debt; embarrassment; emotional distress; fraud; humiliation; indemnity; loss or deprivation of anything of any kind, tangible or intangible; mental anguish; misrepresentation; pain and suffering; strict liability; tort; and violation of any federal, state, or local statute, rule, regulation, or ordinance.

(2) The term Claim likewise encompasses — again by way of example but not of limitation — all demands for one or more of the following (incurred or to be incurred in the case of monetary relief): arbitration costs; attorney fees; compensatory damages; court costs; defense costs; enhanced damages; expenses related to any item listed in this subdivision; fees; indemnity; injunctive relief of any kind; liquidated damages; medical costs; penalties; punitive damages; reimbursement; reliance damages; restitution; special damages; specific performance; treble damages and other increased- or multiple damages; and lost, back, and front wages.

(d) Associated Persons: For purposes of this Release, the term Associated Persons), in respect of a Person, refer to:

(1) the Person's predecessors (including without limitation predecessors in interest);

(2) the Person's successors (including without limitation successors in interest) and assigns;

(3) the past, present, and future affiliates of each Person listed in subdivisions (1) and (2);

(4) the suppliers, customers, licensors, licensees, and insurers, if any, of each Person listed in subdivisions (1) through (3)

(5) the past, present, and future officers, directors, shareholders, interest holders, members, partners (general, limited, and other), attorneys, accountants, agents, employees, managers, representatives, family members, heirs, assigns, executors, administrators, and insurers of each Person listed in subdivisions (1) through (4); and

(6) each Person acting or claiming by, through, under, or in concert with any Person listed in subdivisions (1) through (5).

(e) Releasing Party's warranties: Each Releasing Party represents and warrants to each Discharged Party:

(1) that the Releasing Party has both the power and the authority to execute and deliver the Release Document for the purpose stated in that document and in this Release;

(2) that no Released Claim has been assigned or transferred; and

(3) that the Releasing Party has identified, to the Discharged Party to which the signed Release Document is being delivered, all actions, suits, and other proceedings, in any Forum, in which any Released Claim has been asserted.

(f) Releasing Party's agreement not to sue, etc.: The Releasing Party specifically agrees: (1) never to initiate any Action, in any Forum, on or concerning any of the Released Claims; and (2) promptly to withdraw or move for dismissal with prejudice of any such Action that is now pending.

(g) Option: General release: IF: The Release Document specifies that the release set forth there is a general release (whether or not the term is capitalized) as to any Discharged Party; THEN:

(1) The Release has the effect described in subdivision (b) for any and all Claims that the Releasing Party could have alleged against that Discharged Party, in any Action in any Forum, at any time in the past up until the Releasing Party's execution and delivery of the Release Document, including but not limited to Claims arising from (A) any past- or then-pending litigation or other dispute between the Releasing Party and that Discharged Party; and (B) any other dealings between the Releasing Party and that Discharged Party, of whatever nature, whether voluntary or otherwise; and

(2) The Releasing Party — having had the opportunity to consult legal counsel of the Releasing Party's choice and to ask questions of one or more of the Discharged Parties — KNOWINGLY, VOLUNTARILY, INTENTIONALLY, PERMANENTLY, AND IRREVOCABLY WAIVES the benefits of Section 1542 of the California Civil Code, which states: "A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her must have materially affected his or her settlement with the debtor."

(h) Confidentiality: Each party specifically agrees to keep in strict confidence all non-public facts and circumstances concerning the Released Claims and the Release Document, other than the fact that the Released Claim(s) were settled by agreement.

(i) No admission: Nothing in the Release Document is intended to constitute an admission of liability by any Discharged Party; the Releasing Party specifically agrees not to assert to the contrary.

(j) Opportunity to consult counsel: Each Releasing Party acknowleges that it has had the opportunity to consult with legal counsel of that Releasing Party’s choice concerning the Released Claims and the Release Document.

(k) Attorney fees: In any Action arising out of or relating to the Release Document, the prevailing party will be entitled to recover its Dispute Expenses.

(l) Savings: If any portion of the Release Document is held to be unenforceable, the remainder shall be enforced to provide Releasees the broadest release possible.

This language is distilled from a variety of sources, including: • Kenneth G. Hausman and Ellen Kaye Fleishhacker, Limiting Your Liability: How To Protect Yourself With a Well-Written General Release (ArnoldPorter.com 2008); • Epic Communications, Inc. v. Richwave Technology, Inc., 237 Cal. App. 4th 1342, 1348 n.6, 188 Cal. Rptr. 3d 844 (2015) (reversing summary judgment and holding that defendants had not been rendered inmmune from liability by release executed in settlement of another dispute to which defendants were strangers); • the proposed release in Billington v. Benton NWA Properties, LLC, 2015 Ark. 291, slip op. at 3 (reversing order enforcing alleged settlement agreement; district court erred in concluding that parties had agreed on the scope of the release language); and • Jeremy A. Mercer and Evan A. Bloch, Settlement Agreement and Release: A U.S. Example (PepperLaw 2011).

The waiver, in subdivision (g)(2), of rights under a California statute might be subject to challenge. See generally Kurt Melchior, Catching a Waiver (Nossaman.com 2009).

26.16 Reliance Disclaimer

(a) As part of the parties' intentional allocation of the risks and benefits associated with the Agreement, each party (each, a Disclaiming Party) represents and warrants to each other party that, in entering into the Agreement, that Disclaiming Party:

(1) is capable of evaluating and understanding (on its own behalf or through independent professional advice) the terms, conditions and risks of the Agreement and the transaction(s) contemplated by the Agreement;

(2) understands and accepts those terms, conditions, and risk; and

(3) is not relying on any Extra-Contractual Statement by that other party, namely any representation, warranty, recommendation, advice, statement, or other communication, written or oral, by that other party other than (i) the representations and warranties set forth in the Agreement (if any), including for example in the Agreement's exhibits, schedules, etc.; and (ii) any representations or warranties expressly incorporated into the Agreement by reference.

(b) Each Disclaiming Party, having had the opportunity to consult legal counsel of the Disclaiing Party's choice, hereby:

(1) releases each other party from any and all claims by the Disclaiming Party arising from any reliance by the Disclaiming Party on any Extra-Contractual Statement by (or otherwise attributable to) that other party; and

(2) KNOWINGLY, VOLUNTARILY, INTENTIONALLY, PERMANENTLY, AND IRREVOCABLY WAIVES the benefits of Section 1542 of the California Civil Code, which states: "A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her must have materially affected his or her settlement with the debtor."

This provision draws on a disclaimer successfully invoked by a bank in Bank of America, N.A. v. JB Hanna, LLC, 766 F.3d 841, 856 (8th Cir. 2014) (affirming summary judgment in favor of bank). (Hat tip: Brian Rogers; I had previously cited this case in the commentary to the jury-trial waiver clause but had missed its no-reliance language.) The release language in subdivision (b)(1) is based on an online comment. ¶ See generally the Reading Notes on this subject.

26.17 Service of Process by Courier

In connection with any Agreement-Related Dispute, each party irrevocably:

(1) authorizes the other party to cause process to be served on the authorizing party by sending the process via established courier (for example, DHL, Federal Express, UPS, and the like) with proof of delivery; and

(2) KNOWINGLY, VOLUNTARILY, INTENTIONALLY, PERMANENTLY, AND IRREVOCABLY WAIVES any objection to the sufficiency of any such method of service where the process is actually received by the party being served.

Clauses like this are not uncommon in contracts between businesses; they make service of process more convenient and less expensive.

26.18 Settlement Rejection Consequences

As discussed in the Annotations, this Clause is patterned on Rule 68 of the (U.S.) Federal Rules of Civil Procedure and several comparable state-law provisions.

(a) Applicability: This Clause applies, in the interest of promoting the settlement of disputes, in any dispute arising out of or relating to the Agreement or any transaction or relationship resulting from the Agreement.

(b) Definition: Covered Settlement Offer refers to a written offer that:

(1) expressly states that it (the offer) is subject to this Clause; and

(2) makes a proposal to settle a dispute.

The "expressly states" requirement is intended to prevent a party from being ambushed by another party's claim that (for example) a vague settlement proposal from the other party constituted a Covered Settlement Offer.

(c) Expense-shifting: IF: The Rejecting Party finally fails to obtain a result in the dispute at least 20% more favorable than the Covered Settlement Offer; THEN: The Rejecting Party must pay or reimburse the offeror's Dispute Expenses that the offeror incurred in the dispute after making the Covered Settlement Offer.

(d) Procedure: Matters of timing and other procedural issues concerning the offer are to be governed in the general manner provided for an offer of judgment under Rule 68 of the [U.S.] Federal Rules of Civil Procedure (with any necessary change being made) to the extent the parties do not agree otherwise in writing.

The general procedures of Federal Rule 68 are adopted here because they cover the required ground reasonably well and are familiar to (U.S.) counsel.

(e) Confidentiality: Absent consent of the other party, each party shall preserve in strict confidence:

(1) the existence and details of any Covered Settlement Offer made by the other party;

(2) any communications between the parties regarding any Covered Settlement Offer.

Confidentiality of settlement offers would normally be required by standard American rules such as Rule 408 of the Federal Rules of Evidence; this subdivision makes that requirement explicit.

26.19 Softball Arbitration (rough notes only)

27 General provisions

27.1 General Provisions – Basic Terms

27.1.1 Amendments Must Be in Writing

Any amendment to the Agreement:

(1) must be in a written instrument that is signed by an authorized representative of at least the party sought to be bound; and

(2) must conspicuously indicate that the Agreement is being amended, where the conspicuous indication:

(A) is in the title of the written instrument; and/or

(B) is separately signed (which for this purpose includes initialing).

This provision tries to reconcile: (i) the legitimate concern that an unscrupulous party might try to get another party's personnel to sign a form (a purchase order, an order confirmation, etc.) that would have the effect of modifying a previously-negotiated agreement; (ii) the concern that a party might claim that a "stray remark" in an email, etc., had the effect of modifying an existing agreement; and (iii) the need for parties to have at least some flexibility in their dealings, without being unduly hamstrung by what might be a long-forgotten contract. ¶ Some drafters might prefer to require instead that amendments be signed by each party, not merely by the party to be bound; see also the discussion in the Annotations. ¶ CAUTION: Some courts might not give effect to an amendments-in-writing provision in some contracts. As discussed in the Annotations, the position usually taken by these courts (citing an opinion by then-Judge Cardozo) is that — absent a statute-of-frauds issue — the parties to a written contract are always free to later agree orally to ignore an amendments-in-writing provision in the written contract.

27.1.2 Binding Nature of the Agreement

(a) Each signatory party acknowledges that it has read the Agreement; understands it; and agrees to be bound by it.

(b) The Agreement is likewise binding on the respective heirs, legal representatives, successors, and assigns of the parties, if any — this subdivision (b), though, is not to be interpreted as one party's consent to assignment of the Agreement by another party.

Contracts sometimes recite that their terms are binding (i) on the parties and, sometimes, (ii) on the parties' successors and assigns. ¶ Ken Adams, author of A Manual on Style for Contract Drafting, has no use for successors-and-assigns clauses and argues they should be eliminated. See Kenneth A. Adams, It's Time to Get Rid of the "Successors and Assigns" Provision, The Advocate, June/July 2013, at 30. Me, I'm not so sure; such clauses could be an example of how a few extra words can provide cheap insurance against the wiles of trial counsel seeking to put a "creative" spin on contract language.

27.1.3 Copies of Agreement May Be Used As Originals

Any reproduction of the Agreement that is made by reliable means is to be considered an original unless (1) a genuine question is raised about the authenticity of the reproduction, or (2) the circumstances make it unfair to admit the reproduction. The same is true of any of the pages or other components parts of the Agreement.

This language is adapted from Fed. R. Evid. 1003, which provides that in federal-court litigation, "[a] duplicate is admissible to the same extent as the original unless a genuine question is raised about the original's authenticity or the circumstances make it unfair to admit the duplicate."

27.1.4 CHECK Defined Terms Have Common Draft Meanings

Any term in the Agreement that is linked to a Common Draft definition has the meaning stated in that definition unless the Agreement expressly states otherwise.

This obviates the need to include lists of defined terms.

27.1.5 Entire Agreement

27.1.5.1 The Agreement is the Parties' Final, Exclusive Agreement

The Agreement:

(1) sets forth the final, complete, exclusive, and binding expression of the agreement of the parties concerning the subject matter of the Agreement; and

(2) supersedes any prior agreements and commitments, both written and oral, between or on behalf of the parties with respect to that subject matter; all such prior agreements and commitments, if any, are merged into the Agreement.

Entire-agreement clauses (sometimes known as "integration clauses" or "merger clauses" or "zipper clauses") are very common in contracts, but they won't necessarily preclude a party from claiming fraudulent misrepresentation by the other side; that possibility can be addressed with a no-reliance provision. ¶ The "final, complete, exclusive, and binding" language is modeled on UCC 2-202. ¶ "Concerning its subject matter" allows for use in a master agreement. ¶ See generally the Reading Notes on this subject.

27.1.5.2 OPT-IN Any Prior Master Agreements Are Superseded

IF: The Agreement is a master agreement; THEN:

(1) All prior master agreements between the parties concerning the subject matter of the Agreement are cancelled on a going-forward basis; thus, the Agreement (along with any applicable transaction-specific agreement) will govern any transaction concerning that subject matter whose performance is begun during the term of the Agreement.

(2) Unless the Agreement expressly states otherwise, IF: Performance of a transaction has already commenced under a prior master agreement between the parties; THEN: That prior master agreement will remain in effect as to that transaction until its performance is completed.

27.1.6 Independent Contractors

27.1.6.1 The Parties Intend to Be Independent Contractors

Each party acknowledges:

(1) that the parties intend for their relationship to be strictly that of independent contractors; and

(2) that nothing in the Agreement is intended to be interpreted as creating any other kind of relationship between the parties, such as (for example) an employment relationship, joint venture, or partnership.

27.1.6.2 Neither Party Will Take Certain Actions Inconsistent With Independent‑Contractor Status

Each party (i) acknowledges that neither that party nor any officer, director, employee, agent, or other representative of that party is authorized to do any of the following things, and (ii) agrees not to do, attempt to do, or hold itself out as having authority to do, any of the following, except to the minimum extent, if any, expressly stated otherwise in the Agreement:

Subdivision (ii) is intended to make it a breach of the agreement, thus creating possible liability for damages, if a party takes action prohibited by this provision.

(1) make any promise, representation, or warranty on behalf of any other party concerning the subject matter of the Agreement, other than as expressly stated in the Agreement;

(2) hold itself out as an employee, agent, partner, joint venturer, division, subsidiary, or branch of another party;

Suppose that a manufacturer terminates (say) a distributor relationship. It's not unheard-of for the terminated distributor to continue holding itself out as an authorized representative of the manufacturer. This subdivision is intended to make that a specific breach of contract, which might be easier to "sell" to the distributor's management (and possibly to a court) as requiring the distributor to cease and desist.

(3) hire any individual to be an employee of the other party;

(4) determine the working hours or working conditions of the other party's employees;

(5) select or assign any employee of the other party to perform a task;

(6) direct or control the manner in which any employee of the other party performs his or her work, as distinct from the result to be accomplished;

(7) remove any employee of the other party from a work assignment;

(8) discharge or otherwise discipline any employee of the other party;

(9) incur any debt or liability on behalf of the other party; nor

(10) bind the other party to any other type of obligation, commitment, or waiver.

27.1.6.3 The Parties Do Not Intend a Fiduciary Relationship Unless Expressly Stated

For the avoidance of doubt, the Signatory Parties do not intend, by entering into the Agreement, to enter into any fiduciary relationship, with each other or with any other party, EXCEPT to the limited extent — if any — that the Agreement expressly so states.

This is a lawyer-repellent clause, intended to try to dissuade trial counsel from alleging that counsel's client was owed a previously-unsuspected and now-breached fiduciary duty by another party. Such claims of fiduciary duty are not at all unheard of; for an example, see Pappas v. Tzolis, 20 N.Y.3d 228 (2012).

27.1.6.4 OPT-IN The Independent-Contractors Commitment is Coupled With an Indemnity Obligation

(a) This section is not part of the Agreement unless the Agreement expressly so states.

(b) Any party that fails to comply with the requirements of this section 27.1.6 must, upon request by an affected Signatory Party:

(1) defend and indemnify that Signatory Party against any third-party claim resulting from the non-compliance; and

(2) indemnify that Signatory Party and its Protected Group against any Loss Or Expense resulting from such non-compliance.

Without an express indemnity obligation, a party harmed by a breach of the independent-contractor clause might have to pay for the resulting harm itself, and only then make a claim for reimbursement.

27.1.7 Notice Procedures

27.1.7.1 All Notices Must Be in Writing

All notices required or permitted under the Agreement must be in writing except to the extent, if any, that the Agreement expressly provides otherwise.

27.1.7.2 Notices Are Effective Upon Receipt or Refusal

Any notice required or permitted under the Agreement will be effective upon receipt or refusal except to the extent, if any, that the Agreement expressly provides otherwise.

As the Third Circuit pointedly noted, in today's world it's cheap and easy to get independent written confirmation that a notice was indeed delivered, e.g., by certified mail or by a courier service such as FedEx. See generally the Reading Notes on this subject.

In a situation where notice by regular mail is desired, see 27.1.7.7. OPT-IN Notices May Be Sent by Regular Mail.

27.1.7.3 Notices to Organization Must Be Marked for Specific Attention

(a) A notice to an organization must be marked for the attention of a specific individual, office, or position in the organization.

The "marked for the attention of …" language is included because in a corporate setting, hard-copy notices can sometimes go astray if the mailroom people don't know whom to route it to.

(b) A notice to an organization is effective only upon receipt or refusal by an individual who is the organization's agent for purposes of receiving communications of the general type sent (for example, a mailroom clerk).

The "effective only upon receipt or refusal by an agent" language puts the burden on a party giving notice to be sure that the notice gets into the hands of a responsible individual at the organization that is being notified.

27.1.7.4 Additional Copies of Notices Must Be Sent as Indicated

For a notice to be effective, a copy of the notice must be sent to, or to the attention of, any particular individual or position so designated in a party's address for notice, if any — for example, "With a copy to the attention of the Legal Department" — in a manner prescribed or permitted by the notices provisions of the Agreement.

Some notice provisions contain variations on this language. This version is intentionally phrased in "must be sent" terms for emphasis (which results in the provision being stated in passive voice, but for this purpose that works better).

27.1.7.5 Any Communicated Address for Notice May Be Used

Notices are to be addressed to: (1) the addresses for notice stated in the Agreement, if any; and/or (2) any other address for notice communicated in any reasonable written manner by the party to whom notice is to be sent, unless the Agreement specifically requires notice of any change of address for notice.

Many notices clauses specify addresses for notice, but such provisions are often cumbersome (for example, requiring formal notice of a change of address for notice). Given that the notices-in-writing clause specifies that notices are effective only upon receipt or refusal, the approach of this clause likely will be easier for the parties to manage. ¶ This language doesn't require formal notice of a change of address, but it does leave room to use 27.1.7.9. OPT-IN Formal Notice of Change of Address is Required to impose such a requirement.

27.1.7.6 Copies of Significant Notices Should Be Sent to Legal Counsel

Any party giving a significant notice under the Agreement (for example, a notice of breach or of termination) is encouraged, but not required, to provide a copy of significant notices to the notified party's legal counsel by any reasonable means.

In cases of breach or termination, it's usually better for a notified party's lawyers to be brought into the picture sooner rather later, if for no other reason than to try to get the dispute settled sooner.

27.1.7.7 OPT-IN Notices May Be Sent by Regular Mail

(a) This section is not part of the Agreement unless the Agreement expressly so states.

CAUTION: In the author's view — and, apparently, in the view of the Third Circuit — few if any contracts between businesses should permit important notices to be effective solely with the passage of time after mailing. Trackable delivery is inexpensive and readily available, so the burden of showing delivery of the notice should be on the sender of the notice, rather than placing the burden of showing non-delivery on the addressee.

(b) Notices are deemed effective at the end of the Mailing Period for Notice (namely, five business days) after being deposited with the official government postal service of the jurisdiction in which the sender is located, in a properly-addressed and postage-prepaid envelope either:

Drafters might want to adjust the time at which notice by mail becomes effective, so as to match the expected postal delivery time in the relevant jurisdiction(s).

(1) as first class mail or its equivalent in the jurisdiction in question; or

(2) as automation-compatible mail, that is, mail prepared according to postal-service standards so it can be scanned and processed by automated mail processing equipment such as a barcode sorter.

The "first-class mail" option for notice does not require certified- or registered mail. The thinking is that mailed notices are most likely to be used in mass-mailing situations, in which certified- or registered-mail would likely be burdensome.

27.1.7.8 OPT-IN Notices by Email or FAX Are Restricted

(a) This section is not part of the Agreement unless the Agreement expressly so states.

(b) Because of the possible unreliability of email delivery, an emailed notice will not be effective unless the notice is acknowledged in writing (including for example by email) by the party to which the notice was directed.

(c) IF: A notice is delivered by FAX or email to a specific FAX number or email address (collectively, "address"); BUT: The notice as delivered to that address is not acknowledged in writing by an individual who is an agent of the notified party for purposes of receiving notices of the type in question; THEN: The notice is not effective as to that address unless the party being notifed has expressly designated the specific address, in writing, as one to which notices under the Agreement may be sent.

(d) For the avoidance of doubt, the inclusion of an individual's FAX number or email address in contact information for that individual or for a party does not in itself satisfy the express-designation requirement of subdivision (a).

Some contracts make the categorical statement that notices by email (and/or FAX) are ineffective. That seems too extreme. This clause provides a compromise that should accommodate all concerned. See generally the Reading Notes on this subject.

27.1.7.9 OPT-IN Formal Notice of Change of Address is Required

(a) This section is not part of the Agreement unless the Agreement expressly so states.

(b) A party desiring to change its address for notice must give the other party notice of the change in accordance with the notice requirements of the Agreement.

Some notices clauses require that any change of address be communicated by formal notice. For many contracts, though, this might well be overkill; such a requirement seems too likely to be overlooked, thus increasing the potential for unnecessary disputes. ¶ On the other hand, it might be easy for a less-formal change of address notification to go astray, as discussed below.

27.1.7.10 OPT-IN Notice of Change of Address is to be Copied to Legal Counsel

(a) This section is not part of the Agreement unless the Agreement expressly so states.

(b) A copy of any notice of change of address for notice must be marked for the attention of the other party's legal counsel, and for the avoidance of doubt is not effective unless it is so marked.

This subdivision provides backup support for a company's contract administrators, in an effort to avoid the unfortunate result in Comm'l Resource Group, LLC v. The J.M. Smucker Co., 753 F.3d 790 (8th Cir. 2014) (reversing district court). In that case, a landlord's change-of-address notice to its tenant went astray; as a result, the tenant didn't receive a routine notice that the lease agreement would be automatically renewed, which in turn meant that the tenant ended up locked in to the lease for another year, even though the tenant had already moved to other premises.

27.1.7.11 OPT-IN Notice by a Specified Party May Be Given by Web Posting

(a) This section is not part of the Agreement unless the Agreement expressly so states.

(b) [FILL IN] (the Posting Party) may give any notice under the Agreement by:

(1) making the notice available on its relevant Web site, and

(2) displaying, while the other party is accessing the Web site, a suitably-prominent notice message containing one or both of the following:

(A) the text, or a summary, of the notice; and

(B) an alert that advises of the existence of the notice and contains a link to (or other instructions for accessing) the content of the notice.

(c) Any notice given in accordance with subdivision (b) will be effective as to the other party at such time (if any) as the other party accesses the Web site and is presented with the notice message.

The Posting Party will generally be a supplier or services provider. ¶ CAUTION: See also the commentary to unilateral amendments — a provision that states that a party can unilaterally change any provision of the contract might be unenforceable on grounds that it is "illusory," which in turn might mean that critical provisions in the contract (e.g., limitations of liability, forum-selection provisions, confidentiality requirements, etc.) might go away.

27.1.8 Other Terms in Purchase Orders, Receipts, Etc., Are Excluded

This provision is intended to preclude either party from "re-trading the deal" later on (intentionally or not) through the use of additional or different terms in a purchase order, confirmation, invoice, etc. See the Annotations concerning the Battle of the Forms.

27.1.8.1 Definition: Other Terms

(a) Other Term refers to any substantive term in a quotation, purchase order, confirmation of order, shipping manifest, invoice, receipt, bill of sale, bill of lading, or similar document that may be provided by a party in connection with a transaction pursuant to the Agreement, where the substantive term is (i) in addition to, or (ii) different from, the terms and conditions of the Agreement.

This definition tries to "cover the waterfront" of documents in which parties might sometimes try to slip in their own preferred terms and conditions. ¶ The "in addition to or different from, the terms and conditions of the Agreement" language is adapted from UCC § 2-207.

(b) For the avoidance of doubt, the term Other Term does not encompass case-specific details that are not addressed in the Agreement such as (for example, and to the extent applicable) the price, quantity, and delivery date of goods being sold in a particular sale transaction under the Agreement; the services to be performed under a statement of work; and the like.

27.1.8.2 Other Terms Must Meet the Requirements for Amendments

Other Terms will be of no effect unless the amendment requirements of the Agreement are satisfied so as to modify the Agreement, either generally or for a particular case only.

This language gives the parties the flexibility to agree to vary the terms of the contract for specific situations, e.g., one-off transactions.

27.1.8.3 Certain Actions Are Not to Be Construed As a Party's Assent to Other Terms

For the avoidance of doubt and as illustrative examples, a party is not to be deemed to have assented to Other Terms by doing one or more of the following pursuant to a previously-formed contract:

(1) performing one or more actions called for by, or otherwise described in, Other Terms;

(2) shipping an orally-agreed order after receiving a written purchase order containing Other Terms;

(3) paying an invoice containing Other Terms; and/or

(4) accepting or paying for goods or services after receiving an order confirmation or other document containing Other Terms.

This subdivision lists some specific examples of things that do not count as assent to additional terms, in the interest of discouraging parties from claiming that such terms supposedly govern. ¶ For a review of some of the case law on this point, see C9 Ventures v. SVC-West, L.P., 202 Cal. App. 4th 1483 (2012), where the court held that, in the particular circumstances of the case, the fact that a buyer paid a seller's invoice did not mean that the buyer had agreed to the seller's terms that were printed on the invoice.

27.1.9 Redlining: Each Party Has Called Attention to Its Changes

Each party represents that it or its counsel has "redlined" or otherwise called attention to all changes that it made and sent to the other party in previously-sent drafts of the Agreement, including but not limited to drafts of any attachments, schedules, exhibits, addenda, etc.

This clause helps to streamline the process of contract review. It also serves as a schmuck-detector clause: If a party balks at including the clause in the contract (which once happened to me), it raises a red flag. See generally the Reading Notes on this subject.

27.1.10 CHECK Savings Clause

IF: A provision of the Agreement is held invalid, void, unenforceable, or otherwise defective by a tribunal of competent jurisdiction; THEN: (i) all other provisions of the Agreement will remain enforceable in accordance with their terms; AND (ii) the provision in question will be deemed modified or, if necessary, severed, but in either case only as follows:

The word tribunal is used to protect any arbitration clause that might be included in the Agreement. If the word court were to be used in this clause, and this clause were to be included in a contract containing an arbitration clause, then a court might conclude that the parties had not clearly delegated decisions about arbitrability to the arbitrator. That happened in Peleg v. Neiman Marcus Group, Inc., 204 Cal. App. 4th 1425, 1442-43, 140 Cal. Rptr. 3d 38 (2012) (reversing order compelling arbitration); see also the definition of disputes that must be arbitrated.

(1) as between the parties;

(2) in the jurisdiction in question;

(3) to the minimum extent necessary to cure the defect; and

(4) until such time, if any, as the tribunal's holding, in relevant respects, is vacated, reversed on appeal, legislatively overruled, or otherwise set aside.

Suppose that a company used a form contract, and that a court held that a particular provision — for example, a punitive-damages exclusion in an agreement to arbitrate — was invalid. In that situation, the company might still want to assert the provision against other counterparties who had entered into the same form contract. The company wouldn't want the savings clause itself to implicitly extend the invalidity to all other counterparties. (The company might be barred from doing so by the doctrine of collateral estoppel, but that's another matter.) See also: • a discussion in the LinkedIn "Drafting Contracts" group (2014); and • The Tribunal Definition clause.

27.1.11 Signatures

27.1.11.1 Signatures in Counterparts Are Authorized

(a) A document may be signed and delivered in separate counterpart originals; all such counterparts will be deemed to constitute one and the same instrument.

(b) Any counterpart may be signed by less than all of the parties, so long as each party whose signature is required signs at least one such counterpart.

See generally the Reading Notes on this subject.

27.1.11.2 Signed Signature Pages May Be Delivered As Electronic Imagea

(a) This section applies unless clearly stated otherwise in the Agreement or in the signed document referred to in subdivision (b).

(b) A party may deliver a signed signature page of a document (alone or as part of the entire document) by electronically transmitting an image of the signed signature page by FAX, email, or other electronic transmission means.

(c) A delivery under subdivision (b) of a signed signature page alone (i.e., separated from the remainder of the signed document) will not be effective unless (i) the signature page is labeled as being part of the signed document, or (ii) other circumstances make it clear that the signature page is from the signed document.

See here and here.

27.1.11.3 CHECK Electronic Signatures Are Authorized

(a) For the avoidance of doubt, a party may sign a document by stating assent electronically, for example:

(1) by an authorized individual's transmission of an email stating such assent; or

(2) by an authorized individual's clicking on or otherwise actuating an electronic statement of such assent, for example on a Web page or other electronic form.

(a) Delivery of a statement of assent to a document in accordance with subdivision (a) will have the same effect, and any party may rely on that delivery, as though a signed original of the document had been duly delivered.

See generally the Reading Notes on this subject.

27.1.11.4 Signature Blocks in Transmittal Emails, Etc., Are Not Binding Unless Explicitly Stated

A signature in a document is not to be considered assent or agreement to any other document unless clearly and unmistakably indicated in the document containing the signature. EXAMPLE: Suppose that a party sends a draft of the Agreement as an attachment to an email, and that the email contains a signature block. In that situation, the email's signature block is not to be considered as assent to the draft unless the email clearly and unmistakably so indicates.

This is a roadblock clause intended to discourage trial counsel from making "what the hell, let's give it a shot" arguments to the contrary, which has been known to happen.

27.1.11.5 CHECK Each Signer Personally Represents His or Her Signature Date and ‑Authority

(a) This section is not part of the Agreement unless the Agreement expressly so states.

(b) This section concerns each individual who signs the Agreement or a document that the Agreement contemplates to be signed, referred to as a Signer and Signature Document, respectively.

(c) Each Signer represents, in his or her personal capacity, to each Signatory Party (other than him- or herself if a Signatory Party), that:

(1) the Signer is actually signing the Agreement on the date written as his or her signature date; and

Backdating a contract could lead to prison time — for  more than just the signer(s). See the backdating notes.

(2) if the Signer is signing on behalf of an organization, then to the best of the Signer's knowledge, his or her signature has been authorized by that organization.

See generally the Reading Notes on this subject.

27.1.12 Successors & Assigns

(a) The Agreement is binding on the respective heirs, legal representatives, successors, assigns (and assignees) (to the extent that assigns/assignees are not considered successors) of each party, if any.

(b) This section 27.1.12 is not to be interpreted (i) as one party's consent to assignment of the Agreement by another party to a third party, nor (ii) as a prohibition of such an assignment.

Ken Adams, author of A Manual on Style for Contract Drafting, has no use for successors-and-assigns provisions and argues they should be eliminated. See Kenneth A. Adams, It's Time to Get Rid of the "Successors and Assigns" Provision, The Advocate, June/July 2013, at 30. Me, I'm not so sure: Such provisions could be an example of how a few extra words can provide inexpensive insurance against the wiles of trial counsel seeking to put a "creative" spin on contract language.

27.1.13 CHECK Survival: Certain Provisions Will Continue in Effect After Termination

27.1.13.1 Specified Categories of Provision Will Survive Termination

The rights and obligations set forth in the Agreement (if any) concerning the following subjects will survive any termination of the Agreement (which for this purpose includes any expiration of the Agreement): (edit as necessary)

(1) Arbitration.

(2) Attorney fees.

(3) Confidentiality.

(4) Early neutral evaluation.

(5) Expense-shifting after settlement-offer rejection.

(6) Forum selection (or choice of forum).

(7) Governing law (or choice of law).

(8) Indemnification.

(9) Insurance requirements.

(10) Intellectual-property ownership.

(11) Limitations of liability.

(12) Remedy limitations.

(13) Warranty disclaimers.

(14) Warranty rights.

Drafters should be careful about what rights and obligations would survive termination – see generally Jeff Gordon, Night of the Living Dead Contracts. ¶ Subdivision (a) tries to preclude trial counsel for one party or another from arguing that a particular contractual right or obligation ended when the contract did. Survival provisions of this kind are not uncommon in contracts of any length.

27.1.13.2 OPT-IN Some Provisions Will Survive By Their Nature

(a) This section is not part of the Agreement unless the Agreement expressly so states.

(b) All other provisions of the Agreement that, by their nature, should extend beyond termination or expiration of the Agreement will survive any such termination or expiration.

This optional provision is pretty vague, perhaps even dangerously so; nevertheless, some contracts include language like it.

27.1.14 Third-Party Beneficiaries Are Disclaimed Except As Stated

Except to the extent (if any) clearly stated otherwise in the Agreement, the parties do not intend for the Agreement to create any right or benefit for any party except themselves.

See generally, e.g., Third-Party Beneficiary (Wikipedia.org). ¶ In a 2016 case, the Seventh Circuit held that a customer who bought from a manufacturer's distributor was not a third-party beneficiary of the contract between the manufacturer and the distributor; consequently, said the court, the customer could not sue the manufacturer for wrongs allegedly done to the customer by the distributor. See Am. Comm'l Lines, LLC v. Lubrizol Corp., No. 15-3242, slip op. at 4 (7th Cir. Mar. 25, 2016) (affirming summary judgment).

27.1.15 CHECK Waivers Must Be in Writing

(a) A waiver of any right or obligation under the Agreement must be in a writing, signed by the waiving party, that clearly states that party's intent to waive.

Depending on the circumstances, a court might or might not give effect to this provision, as discussed in the Annotations.

(b) For the avoidance of doubt:

(1) A party's waiver of a term or breach of the Agreement will affect only that term or breach, and is not to be deemed a waiver of any other term or breach.

(2) A party's failure (i) to require strict performance by another party, or (ii) to exercise any right or remedy available under the Agreement or by law, will not preclude the first party's requiring strict performance or exercising any right or remedy in the future.

(3) IF: A tribunal holds that, notwithstanding this clause, a party, at a given moment in time, waived its right to enforce one or more terms of the Agreement by not doing so; THEN: That non-enforcement is not be deemed a waiver by that party of its right to enforce any term at any other time.

Subdivision (b) is fairly conventional in long-form waiver provisions.

27.2 General Provisions Playbook

27.2.1 Arms-Length Negotiation Has Occurred

Each party acknowledges that the Agreement is the result of arm’s-length negotiations by sophisticated parties.

Contracts sometimes contain acknowledgements that the parties engaged in arms-length negotiations, so as to try to preclude either party from claiming duress, procedural unconscionability, etc. Such language is often seen in, for example, merger- and acquisition agreements. See generally Glenn D. West & W. Benton Lewis, Jr., Contracting to Avoid Extra-Contractual Liability — Can Your Contractual Deal Ever Really Be the "Entire" Deal?, 64 BUS. LAW. 999, 1036 (2009); the entire article is worth a complete and close reading.

Consider also an acknowledgement that each party had the opportunity to be represented by counsel.

27.2.2 The Parties' Dealings Are to Be Kept Confidential

Each party (each, the Obligated Party) is to preserve in confidence: (1) the fact and content of the parties' dealings with each other, including if applicable the fact and content of their discussions or negotiations; (2) the fact that the parties have entered into the Agreement; and (3) the terms and conditions of the Agreement.

See generally the Reading Notes on this subject.

27.2.3 The Contra Proferentem Interpretation Doctrine is Disclaimed

The contra proferentem ("against the offeror") principle of contract interpretation is not to be applied to the Agreement; that is, any ambiguity or inconsistency in the Agreement is not to be resolved strictly against the party that drafted the ambiguous or inconsistent provision(s), but instead is to be resolved in accordance with the most reasonable construction.

See generally the Reading Notes on this subject.

27.2.4 Each Party Has Had the Opportunity to Consult Counsel

Each party ("ABC") acknowledges that, in connection with the parties' negotiation of and entry into the Agreement:

(1) ABC has had the opportunity to be represented, by counsel of its choice, in deciding whether to enter into the Agreement on the terms and conditions set forth in it;

This clause says that the parties have had the opportunity to be represented by counsel, as opposed to saying that the parties have been represented by counsel. This clause also refers to representation by counsel when the parties were entering into the Agreement, not to when they were negotiating the Agreement. That's because, as a factual matter, there might not actually have been any negotiations.

(2) if ABC did not consult counsel, it made an informed decision not to do so; and

The idea for subdivision (2) came from a services-contract form used by a large company in the oil and gas industry.

(3) ABC has not been and is not being represented by, and it is not relying on advice from, the legal counsel of any other party.

Subdivision (2) can provide protection for the parties' attorneys against later claims, by a disgruntled counterparty, to the effect of, I thought you were my lawyer; you had a conflict of interest and didn't disclose it. (Claiming conflict of interest is not an uncommon tactic when suing attorneys — it's something easy for jurors to understand, akin to They lied!)

27.2.5 The Parties' Course of Dealing is Excluded from Contract Interpretation

No course of prior dealing or usage of the trade is to be used to modify, supplement, or explain any term of the Agreement.

Clauses like this are sometimes seen in purchase-order terms and conditions. I haven't researched whether a prohibition like this would be given effect by a court. (Even if the prohibition were enforceable, it's not at all clear that it'd be a good idea to take away a potentially-useful tool for resolving ambiguity or confusion in a contract.) ¶ See generally: • UCC § 1-303 (course of dealing, etc., in general); • UCC § 2-208 (course of dealing, etc., in agreements for sale of goods); Ambiguity and vagueness. Ambiguity and vagueness.

27.2.6 Forum Selection

27.2.6.1 The Parties Choose the Selected Forum for all Affected Actions

(a) Any action against a party (the "defendant") that arises out of the Agreement (each, an Affected Action) may be brought in any court or other tribunal specified in the Agreement (each, a Selected Forum), regardless where the defendant is geographically located or conducts business.

The term Affected Action does not encompass proceedings merely "relating to" the parties' agreement; see the Annotations for a hypothetical example why that might be appropriate. ¶ Another possibility would be to have the forum-selection clause apply to any Agreement-Related Dispute. ¶ This language does not say that any Agreement-Related Dispute will be litigated in the agreed forum, but only that litigation may be brought; even that language is non-exclusive, so as not to rule out (i) filing a lawsuit in another venue, nor (ii) seeking a transfer of a case to another forum after its filing. ¶ The "regardless where the defendant is geographically located" language is adapted from a forum-selection provision that was successfully asserted on appeal by the plaintiff in BlueTarp Fin., Inc. v. Matrix Constr. Co., 709 F.3d 72 (1st Cir. 2013).

(b) IF: The Agreement states simply that (for example) disputes may be brought in a specified city or other location; THEN: (1) any Affected Action may be brought in any court having jurisdiction in that location; AND: (2) each such court is a Selected Forum.

27.2.6.2 The Selected Forum is Exclusive If the Agreement So States

(a) IF: The Agreement specifies that a Selected Forum is (or that the Selected Forums are) to be exclusive; THEN: Unless the Agreement expressly states otherwise, no party is to do or attempt either of the following:

(1) commence an Affected Action in any forum other than a Selected Forum; nor

(2) transfer or remove an Affected Action to any such other forum.

An exclusive-forum provision can be a hand grenade, in that it might be caught and thrown back by the reviewer so that it disadvantages the drafter; see the Annotations for a real-world example. ¶ An exclusive-forum might also turn out to be tactically disadvantageous to the drafter, as also discussed in the Annotations.

(b) IF: The Agreement provides for more than one Selected Forum; AND: The Agreement provides for "the Selected Forum" (singular) to be exclusive; THEN: Any Affected Action may be brought in any Selected Forum.

27.2.6.3 The Forum Selection Has No Effect on Arbitration or Other ADR

Even if the Agreement provides that a Selected Forum is exclusive, the parties do not intend for that provision to negate or limit any provision of the Agreement, nor of any other agreement between the parties, that requires:

(1) arbitration or other non-judicial dispute resolution procedure; nor

(2) non-binding action to attempt to resolve a dispute by agreement, such as (for example) escalation of the dispute to higher levels of the parties' managements; early neutral evaluation; and/or mediation.

This provision is designed to avoid the result that occurred in some of the cases discussed in the Annotations.

27.2.6.4 The Parties Submit to the Specific Jurisdiction of the Selected Forums

Each party consents to the specific personal jurisdiction of the Selected Forum (or each of them, if more than one), but solely for Affected Actions; nothing in this is intended as a consent by a party to the general jurisdiction of any court or other tribunal.

The term "submit to" is likely to be held to confer non-exclusive jurisdiction. See, e.g., America First Fed. Credit Union v. Soro, No. 64130, 131 Nev. Adv. Op. 73 (Nev. 2015) (citing cases). ¶ But this submit-to language might be superfluous: "[T]o agree to a forum thus is to agree to personal jurisdiction in that forum." BouMatic LLC v. Idento Operations BV, 759 F.3d 790, 793 (7th Cir. 2014) (vacating and remanding dismissal for lack of personal jurisdiction). The court noted a distinction familiar to those first-year law students who paid attention in Civil Procedure: "Litigants cannot confer subject-matter jurisdiction by agreement or omission, but personal jurisdiction is a personal right that a litigant may waive or forfeit." Id. (emphasis added).

27.2.6.5 The Forum Selection Has No Effect on Transfer or Removal

For the avoidance of doubt, unless the Agreement provides that the Selected Forum is exclusive, nothing in this clause is intended to negate or waive any right that a party may have:

(1) to commence an Affected Action or otherwise assert a claim in any other proper forum; nor

(2) to seek to transfer an Affected Action to another venue, for example on grounds of greater convenience to the parties and witnesses or on first-to-file grounds; nor

(3) to remove an Affected Action from one court to another, for example to remove an action filed in state court (in the United States) to federal court.

This provision tries to avoid the result that occurred in a Ninth Circuit case discussed in the Annotations.

27.2.7 Franchise-Law Benefits Are Waived

Nothing in the Agreement is to be construed as making any party a franchisee of the other party; each party KNOWINGLY, VOLUNTARILY, INTENTIONALLY, PERMANENTLY, AND IRREVOCABLY WAIVES the benefit of any state or federal statutes dealing with the establishment and regulation of franchises.

In some jurisdictions, this clause will be unenforceable or even void; see, e.g., Cal. Corp. Code § 31512: "Any condition, stipulation or provision purporting to bind any person acquiring any franchise to waive compliance with any provision of this law or any rule or order hereunder is void." Even so, language like this clause is sometimes seen in contracts.

27.2.8 Governing Law

27.2.8.1 The Parties Choose the Law of the Specified Governing‑Law Jurisdiction

Except to the extent (if any) that the Agreement expressly states otherwise, the law applicable to contracts made and performed entirely in the Governing-Law Jurisdiction specified in the Agreement, by residents of that jurisdiction, is to be applied in any Agreement-Related Dispute (each, a Covered Dispute), without regard to conflicts-of-law rules that would result in the application of the law of another jurisdiction.

The "without regard" language addresses the renvoi issue: The law of the chosen jurisdiction might include conflict-of-law provisions that, in theory, could cause a different jurisdiction's substantive rules to be applied. ¶ Renvoi shouldn't be an issue in a contract governed by New York law, because courts there will not undertake a conflict-of-law analysis when the parties have agreed to a choice of law. See Ministers and Missionaries Benefit Bd. v. Snow, 2015 NY Slip Op 9186 (2015).

27.2.8.2 An Agreement on a Choice of Arbitral Law Takes Precedence

(a) Any arbitration of a dispute, pursuant to an agreement to arbitrate in the Agreement (if any), will be governed by the Governing-Law Jurisdiction unless the Agreement expressly provides for a different arbitral law, in which case that arbitral law will govern.

(b) Hypothetical example: IF: The Agreement specifies that Texas is the Governing-Law Jurisdiction; BUT: The Agreement contains an arbitration provision that specifies that New York law will apply as the arbitral law; THEN: Any arbitration pursuant to that provision will itself be governed by New York arbitration law and, if applicable, the U.S. Federal Arbitration Act, not by Texas arbitration law.

See the discussion in the Annotations.

27.2.8.3 Excluded Laws Are Not to Govern

Any body of law or other governing principles identified in the Agreement as an Excluded Law is not to be applied in any dispute to which this Governing Law applies.

See generally the Reading Notes on this subject.

27.2.9 Government Subcontracting Disclaimer

27.2.9.1 the Agreement is Not a Government Subcontract

Each party (each, a Warranting Party) warrants, to each other Signatory Party, that — except to the extent (if any) expressly disclosed otherwise in the Agreement — the Agreement is not a subcontract in respect of a contract between the Warranting Party and any governmental authority.

Depending on the law, a subcontractor under a government contract could be subject to specific requirements imposed by statute or regulation. See, e.g., Robin Shea, Applicant tracking and the EEOC: "You can SUE us for that?" (EmploymentAndLaborInsider.com 2016). For that reason, a disclaimer might be in order. [TO DO: NEED CITES] ¶ Entire books have been written on the issues arising from government subcontracting, of course; this disclaimer is intended to try to rule out the need to understand those issues.

27.2.9.2 The Warranting Party Will Not Bind the Other Party to Any Government-Contracting Obligations

Without the other party's express prior written consent, the Warranting Party will not purport to:

(1) obligate the other party, as a subcontractor or otherwise: (A) to any government authority; nor (B) to the terms of any government contract, whether through flow-down provisions or otherwise;

(2) make any representation, warranty, or certification, on behalf of the other party, concerning the other party's business practices, work force, or other status, in any report to a government authority (for example, an equal-opportunity compliance report).

27.2.9.3 CHECK The Government Subcontracting Disclaimer is Coupled With an Indemnity Obligation

Each Warranting Party will defend and indemnify each other party against any claim that arises out of the Warranting Party's breach of subdivisions (a) or (b) above.

This indemnity obligation might well carry greater financial exposure than damages for a "plain" breach of contract or breach of warranty; see this note for additional details.

27.2.10 Labor-Law Rights Acknowledgement

(a) For the avoidance of doubt, nothing in the Agreement is intended to restrict a party's ability to exercise any legally-protected and non-waivable right:

(1) to engage in collective action, for example under the U.S. National Labor Relations Act ("NLRA"); or

(2) to file a charge or other claim with a governmental authority, for example the U.S. National Labor Relations Board ("NLRB") or the U.S. Equal Employment Opportunity Commission ("EEOC").

(b) Subdivision (a) is not to be interpreted as establishing or evidencing, nor as an assertion by any party: (1) that an employment relationship exists between the parties; nor (2) that the NLRA or other legislation applies; nor (3) that the NLRB or EEOC has jurisdiction.

This clause is informed by attempts on the part of the EEOC and NLRB to invalidate certain kinds of agreements between companies and their employees See, e.g.: • Hunton & Williams LLP, NLRB Strikes Down Employee Conduct Rules and Non-Disclosure Agreement … (2014) • Kerry Notestine, Terri Solomon, and Dan Thieme, EEOC Lawsuit Against CVS Pharmacy Challenging Severance Agreements Dismissed (2014) • Murphy Oil USA, Inc. v. NLRB, No. 14-60800 (5th Cir. Oct. 26, 2015): Murphy Oil's employees were required to sign an arbitration agreement that prohibited "class action" arbitrations. The NRLB ruled that this constituted an unfair labor practice. The Fifth Circuit disagreed — but it did agree that Murphy Oil was required to clarify the language in its arbitration agreement to ensure that employees understood that they were not barred from filing charges with the NLRB.

27.2.11 Language of the Agreement

Except to the extent (if any) expressly agreed otherwise in writing, the Agreement and its appendixes, exhibits, and attachments, if any, are written in and are to be interpreted for all purposes in accordance with the Contract Language, namely English as used in the United States of America; any other version of any such document that is written in a different language is to be considered as being for convenient reference only and not binding on any party.

Drafters dealing with multi-lingual appendixes, exhibits, etc., will want to consider this provision carefully. ¶ Drafters of transnational contracts will want to check local law (and perhaps engage local counsel) for possible language requirements. For example: • Indonesia • Québec • China. ¶ See also the research notes, as well as 27.2.13. Language Capability for Oral Communications is Required and 27.2.12. Language for Written Communication.

27.2.12 Language for Written Communication

Except in cases of emergency or other compelling reason, any written communication made pursuant to the Agreement (including for example notices, technical support, and so forth) is to be in the Contract Language.

Requiring written communications to be in a specified language can prove useful in case of litigation, arbitration, or other dispute-related proceedings. ¶ See also 27.2.11. Language of the Agreement and 27.2.13. Language Capability for Oral Communications is Required and 27.2.12. Language for Written Communication.

27.2.13 Language Capability for Oral Communications is Required

(a) Each party is to maintain the capability of conducting routine business orally (e.g., in person or by telephone) in the Contract Language, whether through party personnel who can speak that language or through translators engaged at the party's expense.

(b) Subdivision (a) does not limit any party's right to communicate orally in any other language when agreed to by the individuals involved and not a hindrance to the purpose of the Agreement.

This provision tries to balance: • the parties' interest in making sure they can communicate orally, against • the possible threat of legal action from employees claiming discrimination on the basis of national origin. See, e.g., Can You Require Employees to Speak Only English on the Job? (CBIA.com, undated). ¶ See also 27.2.11. Language of the Agreement and 27.2.12. Language for Written Communication.

27.2.14 Mitigation of Damages is Required

(a) Each party (each, an Obligated Party) must make reasonable efforts to mitigate its damages resulting from a breach of the Agreement by another party.

(b) For the avoidance of doubt, on the issue of mitigation of damages, the breaching party bears both the burden of coming forward with evidence and the ultimate burden of persuading the finder of fact.

This clause might be useful in legal systems where the duty to mitigate damages is not clear (or non-existent). See generally the Reading Notes on this subject.

27.2.15 Mitigation of Damages is Not Required

Each party (each, a Waiving Party) KNOWINGLY, VOLUNTARILY, INTENTIONALLY, PERMANENTLY, AND IRREVOCABLY WAIVES any obligation on the part of another party to mitigate the waiving party's damages resulting from a breach of the Agreement by the waiving party.

27.2.16 Other Necessary Actions Are to Be Taken

Each party will execute any documents, and take any further actions, as may be reasonably requested by the other party or necessary to carry out the intent and purpose of the Agreement.

Clauses like this are sometimes seen in, e.g., merger- and acquisition agreements.

27.2.17 Policy Statements Are Not to Be Disputed

(a) Neither party will dispute the validity or enforceability of any statement, in the Agreement, of fact; policy; or legal conclusion, such as, for example:

(1) a statement to the effect that a particular party will own any intellectual property created;

(2) a disclaimer of warranties;

(3) a limitation of liability;

(4) an entire-agreement provision; and

(5) a requirement that amendments or waivers be in writing.

(b) Neither party will assert that any party orally waived, nor that the parties orally agreed to amend, any part of this 27.2.17. Policy Statements Are Not to Be Disputed provision, including without limitation this subdivision (b).

The basic idea behind this clause is this: Suppose that a party signs an agreement containing, for example, a limitation of liability, but then later tries to claim that the limitation is invalid or unenforceable. Under this clause, that would be a breach of contract (and might make the claimant liable for the other party's attorney fees). ¶ It's unclear to what extent this clause might be given effect by a court; see the commentary to 27.1.1. Amendments Must Be in Writing.

27.2.18 Publicity Requires Advance Approval

Without the prior written consent of the other party (the Reviewing Party), no party (each, a Restricted Party will issue any press release about, nor otherwise publicly disclose the existence or terms of (1) the Agreement; nor (2) the parties' business relationship contemplated by the Agreement.

In many clauses of this nature, only one party will be a Restricted Party, with the other party being the only Reviewing Party. ¶ Consider also 15.1. Automatic Request Approval — Basic Terms. ¶ See also 27.2.2. The Parties' Dealings Are to Be Kept Confidential.

27.2.19 Prohibitions Apply to Attempts as Well as Actions

The prohibitions and restrictions of the Agreement extend, without limitation, to: (1) attempts to do a prohibited or restricted things; and (2) inducing, soliciting, permitting, or knowingly assisting anyone else to do, a prohibited or restricted thing.

27.2.20 Unilateral Amendments May Be Made by a Specified Party

See generally the Reading Notes on this subject.

(a) Amending Party refers to: Any party that the Agreement states may unilaterally amend the Agreement or other document (each, an Amendable Document.

This definition is set up so that it can apply automatically without being expressly incorporated by reference. ¶ See also Amendments.

(b) An Amending Party may unilaterally amend any Amendable Document by giving the other party at least 30 days advance written notice.

CAUTION: A Web-site posting of a proposed amendment might not be enough notice to make the amendment effective; see the Annotations.

(c) In response to a notice of unilateral amendment under subdivision (b), the other party may vie the Amending Party written notice that the other party is unilaterally terminating the Agreement; the notice must be effective no later than 12 midnight at the beginning of the day that the amendment would go into effect.

It's pretty conventional for unilateral-amendment provisions to give the non-amending party the right to opt out of the agreement if it doesn't want to accede to a unilateral amendment. ¶ In a mass-market form contract, a unilateral-amendment provision might instead allow (or require) a non-amending party simply to terminate its account with the amending party or to cease utilizing the amending party's services, as opposed to giving notice of termination.

(d) No unilateral amendment will affect any accrued right or liability under the Agreement.

This subdivision is included to help make the provision palatable to a prospective non-amending party, which might be concerned that an Amending Party might try to modify the Agreement retroactively to the disadvantage of the non-amending party.

(e) Except as otherwise agreed in writing:

(1) a unilateral amendment:

#+BEGINSUBDIV (A) will not retroactively eliminate or modify any binding dispute-resolution provision of the Agreement (for example, a binding-arbitration), if any, that otherwise would apply to a then-accrued claim of breach of the Agreement; and

This is a so-called Halliburton exception; it is included to prevent the agreement from being deemed "illusory" and therefore unenforceable, as discussed in the Annotations.

(B) will apply equally to any such claims of any party; and

(2) a unilateral amendment will not take effect without at least the advance written notice required by subdivision (b). #+ENDSUBDIV

Advance notice of a unilateral contract amendment might be necessary to save an arbitration provision in the contract, as discussed in the Annotations.

27.2.21 Unilateral Amendments – Option to Reject Changes to Dispute-Resolution Provisions

(a) In any case of unilateral amendment under section 27.2.20, a party other than the Amending Party may reject any change to a binding dispute-resolution provision of the Agreement (for example, a binding-arbitration provision) by giving notice of rejection within 30 days after the effective date of the notice of unilateral amendment.

(b) IF: A party does not timely give notice of rejection in accordance with subdivision (a); THEN: The proposed amendment will go into effect as to all disputes, including but not limited to any dispute that was pending at the time of the notice of unilateral amendment.

This provision is modeled on a comparable one at the end of section 6 of the Uber ride-sharing terms of service (last visited December 13, 2015).

Annotations

Table of Contents

A   B   C   D   E   F   G   H   I   J   K   L   M   N   P   Q   R   S   T   U   V   W

A

Accelerated litigation per New York rules

See also the Common Draft provision(s)

Running a lawsuit in accordance with the New York Commercial Division's accelerated rules could significantly streamline the proceedings. The streamlined procedures of Rule 9 include, for example:

  • trial in nine months;
  • waiver of the right to jury trial — note that in some jurisdictions an advance waiver like this might be unenforceable;
  • significant limitations on discovery, especially electronic discovery;
  • waiver of punitive damages;
  • no interlocutory appeals.

For further reading, see generally:

Acknowledgements in contract language

[G] Caution: "Acknowledging" something in a contract could hurt the client later

A contract reviewer should be extremely careful about statements in a draft agreement in which the parties “acknowledge” something or another. Such language might preclude the reviewer's client from later disputing what was acknowleged in the contract.

As an illustration, consider Cellport Sys., Inc. v. Peiker Acustic GmbH & Co., KG, 762 F.3d 1016, 1022 (10th Cir. 2014) (reversing and remanding trial-court judgment in part). In that case:

  • A license agreement between a manufacturer of cell-phone docking stations and a patent owner required the manufacturer to pay royalties on its products that were covered by the patent.
  • The license agreement included a statement in which the manufacturer "acknowledged" that certain specific docking stations were indeed covered by the patent.
  • The manufacturer later denied that some of those specific docking stations were covered by the patent.
  • The court, though, held that the acknowledgement language in the contract precluded the manufacturer from making that denial.
Acknowledgements are an opportunity for drafters — but don't be a jerk about it

Contract drafters should give some thought to judiciously including one or more factual acknowledgements in a draft. Doing so could help to reduce the cost and burden of any future disputes, as well as make it easier for the client's future trial counsel to do their jobs.

On the other hand, nobody likes a drafter who asks the other side to “acknowledge” something that clearly is or would be in dispute.

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