Common Draft

A Public Resource for Negotiating Contracts: Term Sheets, Clauses, and Commentary

NOTE: This is an outdated version; see here for a newer one that's easier to use (but which doesn't–yet–contain all the provisions in this version). Copyright © 2013-2014 D. C. Toedt III, attorney and neutral arbitrator. All rights reserved. Unfinished draft of a work in progress; last modified 2014-04-07. Feel free to use the term sheets and clauses below in your contracts (subject to certain restrictions, and not a substitute for legal advice). To be notified of significant developments in this project, and to get a free sample chapter of my related book when I finish it, please sign up for updates at my Web site, On Contracts (I won't spam you). Comments and suggestions are welcome; please email them to me at dc@toedt.com.

Introduction

A Well-Done Contract is a Delight

I love contracts. I've dealt professionally with hundreds of them. A well-constructed contract is a Good Thing: It sets out a workable plan for accomplishing something of value; it captures insights of contract professionals past; it can serve as a guidebook for students and new professionals wanting to learn the business of the organization.

But Contract Negotiation Takes Too Long

Some things about contracts, I don't love: Hacking through thickets of convoluted clause language (only to find that the language says nothing really new). Rummaging through old contracts in search of clauses vaguely remembered. Fear that lack of knowledge about the client's business might result in missing a key point. And then there's the delay and expense that results from having to time on the repetitive grunt work of contract review and -wordsmithing, over and over and over ….

Let's Standardize Term-Sheet Templates

A contract will almost always often get to signature faster if the parties can first agree on a term sheet. When that happens, the agreed terms will largely dictate the wording, saving time for all concerned. (And if the term-sheet items are linked to known-quantity wording, then the time needed to finish the contract can be cut dramatically.)

A good term-sheet template can provide a great starting point. That's where the Common Draft term sheets below come in. Each one provides a carefully-organized "menu" of substantive choices, with each choice supported by a short, narrowly-focused, plain-English clause.

How to Use the Common Draft Materials

Try doing the following to quickly create a draft of a sophisticated, signable contract:

Step 1: Copy and paste one more of the Common Draft term sheets below into a Word document.

Step 2: Configure your term sheets the way you want your contract to read.

Step 3: Negotiate the term sheets with your counterparty.

Step 4: Either sign the Word document with the agreed terms sheets, or copy, paste, and edit the agreed Common Draft clauses into a draft contract.

To see an example of what such a term-sheet contract would look like (more are in development), see the confidentiality-agreement contract term sheets below; you can choose one that goes "down the middle," or one that favors one side or the other.

At a minimum, you can copy, paste, and edit one or more of the individual clauses belows into your draft contract, or into your markup of the other side's draft.

IACCM Project

The International Association for Contract and Commercial Management (IACCM) is undertaking a project to review and consider adopting one or more of these term sheets, in which case those particular benchmarks might be co-branded as "IACCM Contract Protocol Term Sheets." At this writing, the IACCM has not done so for any of the term sheets below.

See also

Legend

In the term sheets below, the following legends mean that the referenced clauses are included or not included in the agreement, as follows:

  • Included: The clause is included in the agreement unless the parties agree otherwise.
  • Not included: The clause is not included in the agreement unless the parties agree otherwise.
  • Consider: The clause is not included in the agreement unless the parties agree otherwise, but the parties should consider including the clause, for example if certain other provisions are included.

Defined Terms

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This term sheet consists of those Common Draft clauses listed below as "Included," subject to any variations agreed by the parties.

Defined Terms

Affiliate Status – Arises from Voting Control: Included

Agreement Definition: Included

And/Or Definition: Not included

Best Efforts Definition: Not included

Breach Definition: Not included

Business Day Definition: Included

Calendar Year Definition: Included

Claim Definition: Not included

Clear and Convincing Evidence Definition: Not included

Commercially Reasonable Definition: Not included

Consultation Definition: Not included

Consultation Definition – Freedom of Action: Not included

Consumer Price Index Definition: Included

Customer Definition: Not included

Day Definition: Included

Deadlines Usage: Not included

Defend Definition: Not included

Diligence Definition: Not included

Discretion Definition: Not included

Dollar Sign Definition: Included

Effective Date Definition: Included

Ending Time Usage: Not included

Examples Usage: Included

For the Avoidance of Doubt Usage: Included

GAAP Definition: Included

Gender References Usage: Included

Good Faith Definition: Not included

Government Authority Definition: Included

Hold Harmless Definition (same as Indemnify): Not included

If Definition: Not included

In-House Personnel Definition: Not included

Including, etc. Definition: Included

Incorporation by Reference Usage: Included

Intellectual Property Definition: Included

Intellectual Property Right Definition: Included

Joint Motion Definition: Not included

Knowledge Definition: Included

Law Definition: Included

Material Breach Definition: Not included

May Definition: Included

Misrepresentation Definition: Not included

Month Definition: Included

Month-End Definition: Not included

Net-Days Definition: Included

Non-Party Definition: Included

Organization Definition: Included

Party Definition: Included

Patent Right Definition: Included

Person Definition: Included

Prime Rate Definition: Not included

Provider Definition: Included

Reasonable Discretion Definition: Not included

Reasonable Efforts Definition: Not included

Reckless Definition: Not included

References are to this Agreement: Included

Responsible Definition: Not included

Representation Definition: Not included

Seasonable Definition: Included

Serious Dispute Definition: Not included

Shall-as-Must Definition: Included

Signature Definition: Included

Sole Discretion Definition: Not included

Tax Definition: Included

Tax Definition – Illustrative Examples: Included

Taxing Authority Definition: Included

Termination of Agreement Definition: Included

Timely Definition: Included

Tribunal Definition: Included

USD Definition: Included

Will-as-Must Definition: Included

Willful Definition: Not included

Writing & Written Definition: Included

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Affiliate Status – Arises from Voting Control

(a) One individual or organization ("Person") is an Affiliate of another Person if either of the following is true: (1) directly or indirectly via one or more intermediaries, one of those Persons controls (as defined in subdivision (b) below), or is controlled by, or is under common control with, the other Person; or (2) both Persons are members of the same Named Affiliate Group, as defined in subdivision (c) below.

(b) For purposes of determining Affiliate status, control of an organization refers to the possession of voting control — via, for example, legal, beneficial or equitable ownership, or a voting agreement — of securities of (or other interest in) an organization having at least 50% (the Minimum Voting Percentage) of the aggregate right to vote for the organization's board of directors or comparable governing body.

(c) The respective members of the following Specific Named Affiliates are deemed Affiliates of each other without regard to control: NONE NAMED

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Commentary

Variations on this clause's definition of Affiliate are widely used in contracts. They trace their lineage to language found in U.S. securities laws such as SEC Rule 405, 17 C.F.R. § 230.405. A 50% voting-control requirement seems to be fairly typical.

Subdivision (c) gives parties an easy way to expand the definition of Affiliate on a case-by-case basis by listing particular Named Affiliate Groups, without reducing the Minimum Voting Percentage in the Affiliate Status – Arises from Voting Control clause.

See also the Notebook section "Affiliates of the Parties."

Affiliate Status – Control Via Management Power

For purposes of determining Affiliate status, control of an organization also arises from the power to direct or cause the direction of the management and policies of the organization, by contract or otherwise.

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CAUTION

This clause is modeled on language found in the U.S. securities laws, for example, in SEC Rule 405, 17 C.F.R. § 230.405. Whether it's advisable to propose or agree to this clause is debatable, though. See also the Notebook section "Control through management power."

Affiliate Status – Control Via Class Voting

For purposes of determining Affiliate status, control of an organization is possesssed by a specific class of shares or of comparable voting interests in the organization if a particular type of decision by the organization be approved by that class.

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Commentary

This clause is written in passive voice; that's a no-no for certain style purists, but in this case it seems to make the substance a bit easier to grasp quickly.

Affiliate Status – Control Via Supermajority Requirement

For purposes of determining Affiliate status, control of an organization also exists if a relevant type of transaction or decision by the organization must be approved by a vote of a supermajority of the organization's board of directors, shareholders, outstanding shares, members, etc.

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Commentary

Affiliate Status – Control Through Board Selection

A Person also controls an organization if the Person has a legally-enforceable right to select a majority of the members of that board or other body.

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Commentary

Note that this subdivision does not say that control exists merely because a Person has a veto over the selection of a majority of the members of the board or other body.

Agreement Definition

Unless the context clearly indicates otherwise, the terms "the Agreement" and "this Agreement" refer, collectively, to the following: (1) the agreement document signed by the parties (the "Agreement Document"); (2) any exhibit, schedule, appendix, or addendum attached to or forming part of the Agreement Document (each, an "Additional Document"); and (3) any document, or portion thereof, that the Agreement Document or an Additional Document expressly incorporates by reference.

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Agreement-Related Definition

The term Agreement-Related refers to something – such as, for example, a dispute – that arises out of or relates to any of the following:

(1) this Agreement, including for example issues relating to this Agreement's validity, breach, termination, or enforcement; or

(2) any transaction or relationship memorialized by, or resulting from, this Agreement (each, a Transaction or Relationship, respectively).

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Commentary

This definition, per se, is new, at least so far as I know. I've included it mainly as a centralized collection of concepts sometimes seen in different clauses.

The phrase any transaction or relationship … is informed in part by an arbitration provision seen in cases decided by the Fifth and Eleventh Circuits respectively. The provision in question stated that "[a]ll disputes, claims, or controversies arising from or relating to this Agreement or the relationships which result from this Agreement… shall be resolved by binding arbitration." See Sherer v. Green Tree Servicing LLC, 548 F.3d 379, 382-83 (5th Cir. 2008) (reversing denial of motion to compel arbitration), citing Blinco v. Green Tree Servicing LLC, 400 F.3d 1308, 1310 (11th Cir. 2005) (same).

See also the Agreement Definition clause.

Agreement-Related Dispute Definition

For the avoidance of doubt, the term 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:(1) is brought before any Tribunal anywhere; and (2) arises out of or relates to any of the following:

(A) an instrument executed in conjunction with this Agreement or any transaction or relationship memorialized by, or resulting from, this Agreement (each, a Transaction or Relationship, respectively);

(B) a service provided pursuant to, or incidentally to, this Agreement or a Transaction or Relationship;

(C) insurance coverage for, or relating to, this Agreement or a Transaction or Relationship;

(D) a document or instrument that documents or otherwise contains information about any of the items listed in subdivisions (A) through (D); and

(E) an application for, or an advertisement, solicitation, processing, closing, or servicing of, a Transaction or Relationship.

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Commentary

The term defined here can be useful in, for example, attorneys' fees clauses, limitations of liability, and the like.

The five-item 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).

Concerning the any transaction or relationship phrasing, see the Notebook section Commentary.

See also:

And/Or Definition

The term and/or, whether or not capitalized, means the inclusive or, as opposed to the exclusive or. EXAMPLE: "The parties expect to meet on Tuesday and/or Wednesday" means that they expect to meet on Tuesday, on Wednesday, or on both days.

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Commentary

Best Efforts Definition

(a) Best efforts (whether or not capitalized) refers to the diligent making of all efforts reasonable under the circumstances, leaving no stone unturned to achieve the stated objective.

(b) For the avoidance of doubt, a party required to use best efforts: (1) need not take every conceivable action to achieve the stated objective; (2) need not materially harm its own interests; and (3) need not take any action that would not qualify as a reasonable effort.

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Commentary

The "diligence" term in subdivision (a) comes from the Restatement (Second) of Agency, quoted in some judicial opinions such as Corporate Lodging Consultants.

The "leaving no stone unturned" language in the same subdivision is from an opinion by the supreme court of British Columbia. See Atmospheric Diving Systems Inc. v. International Hard Suits Inc., 89 B.C.L.R. (2d) 356 (1994). I've not been able to find the full text of this opinion freely available online. It's extensively excerpted by Ken Adams in his posting "Best Efforts" Under Canadian Law.

See also:

Breach Definition

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

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Commentary

Technically, the term breach relates to failure to perform a  covenant (including the express- or implied covenant(s) of a warranty).

Business Day Definition

The term business day, whether or not capitalized, refers to a day other than a Saturday, Sunday, or holiday on which banks in the relevant country are closed. See also the Day Definition clause (definition of day).

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Commentary

Some drafters might want to be more specific about where the relevant banks are located.

Calendar Year Definition

Unless the Agreement expressly states otherwise:

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

(b) An interval of a calendar year, specified as beginning on a particular date, ends at midnight at the end of the same date one (Gregorian) year afterwards.

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Commentary

See generally the blog post and comments at Ken Adams's post, Referring to the Gregorian calendar? (Nov. 14, 2013).

Claim Definition

The term Claim, whether or not capitalized, refers to a request or demand for relief, by any third party (including without limitation any governmental entity):

(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) a court, arbitration panel, administrative agency, or other tribunal of competent jurisdiction.

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Commentary

This definition 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.

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.

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Commentary

This clause 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.

Commercially Reasonable Definition

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

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Commentary

See also the Reasonable Efforts Definition clause.

Consultation Definition

IF: The Agreement requires a specified party (the "Acting Party") to consult with another party before taking or omitting a specified action, or to take or omit the action "in consultation with" the other party; THEN: The Acting Party will

(1) seasonably advise the other party that it intends to take or omit the action; and

(2) subsequently, 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 reasonably deems appropriate; and

(B) a reasonable opportunity for the other party to be heard by the Acting Party concerning the action to be taken or omitted.

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Commentary

See also the Seasonable Definition clause.

Subdivision (1) does not specifically require the Acting Party to advise the other party in writing, but of course the Acting Party will want to consider doing so in order to avoid later "he said, she said" disputes about whether the Acting Party complied with this requirement.

Consultation Definition – Freedom of Action

For the avoidance of doubt, a consultation requirement does not limit the freedom of the Acting Party to take or omit the specified action unless this Agreement expressly states otherwise.

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Commentary

This is a "comfort" clause, intended to reassure a counterparty that might be nervous about about how a court might interpret the contract language.

Consumer Price Index Definition

Unless otherwise specified in this Agreement, the terms "Consumer Price Index" and "CPI" refer to CPI-U, US City Average, All Items, as published by the U.S. Bureau of Labor Statistics.

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Commentary

See also the Notebook section "Consumer Price Index (CPI)."

Customer Definition

Unless otherwise specified in this Agreement, Customer refers to a party that this Agreement contemplates will acquire goods (including for example intangible goods), rights, and/or services from another party.

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Day Definition

Unless the Agreement expressly states otherwise:

(a) The term day, whether or not capitalized, refers to a calendar day.

(b) A period of X days begins on the specified date and ends at midnight at the end of the day X days later. EXAMPLE: A five-day period beginning on January 1 ends at midnight at the end of January 6.

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Commentary

See also the Business Day Definition clause.

Deadlines Usage

IF: The Agreement states a deadline date marking the end of a specified period, but does not clearly indicate a time at which the specified period ends; THEN: The specified period ends at midnight at the end of the indicated date. EXAMPLE: A one-month period that begins on January 1 ends at midnight at the end of February 1. (See also the Ending Time Usage clause.)

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Defend Definition

Unless the context clearly indicates otherwise, the term defend, whether or not capitalized, refers to providing a defense in accordance with the IndemnDefenseCls clause.

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Diligence Definition

(a) The terms diligence and diligent, whether or not capitalized, refer to activity that is energetic; conscientious; perservering.

(b) As an illustrative example, the term diligent efforts (whether or not the term is capitalized) refers to efforts that reasonable people would regard as assiduous; attentive; conscientious; earnest; industrious; persevering; steady.

(c) For the avoidance of doubt, diligent efforts are not the same as reasonable efforts — a person could diligently make efforts that were ill-advised and unreasonable.

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Commentary

The definition featured here is a mash-up of various synonyms found on-line.

Discretion Definition

Unless otherwise specified in this Agreement, the term discretion (whether or not capitalized) refers to sole discretion.

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Commentary

See the commentary for the Sole Discretion Definition clause.

Dollar Sign Definition

The dollar sign $ refers to United States dollars unless clearly indicated otherwise.

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Effective Date Definition

Unless the Agreement clearly states otherwise, the term Effective Date, whether or not the term is capitalized, refers to the date on which the Agreement was signed by or on behalf of the party whose signature was the last one required for the Agreement to form a contract.

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Ending Time Usage

(a) For the avoidance of doubt, IF: The Agreement states that a time period ends or expires on a specified day; BUT: The Agreement does not specify the time of day the period ends; THEN: Unless otherwise clear from the context, the period ends or expires at 11:59:59 p.m. Universal Time on that day. (See also the Deadlines Usage clause.

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

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Commentary

Universal Time is basically Greenwich Mean Time, with a few technical differences; see generally the Wikipedia article Universal Time.

Ex Works or EXW Definition

Glossary entry: This clause will serve as an introduction for students and others who might be unfamiliar with its subject.

Ex Works and EXW are abbreviations under the INCOTERMS 2010 pre-defined commercial terms published by the International Chamber of Commerce (ICC); they mean, in a nutshell, that a seller will make goods available at the seller's place of business.

See also:

  • FOB ("Free On Board")

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Examples Usage

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

(b) 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.

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Fiscal years; fiscal quarters

Glossary entry: This clause will serve as an introduction for students and others who might be unfamiliar with its subject.

For accounting purposes, most companies keep track of their revenues, expenses, and profit or loss on an annual and quarterly basis. They use a *fiscal year* — often ending December 31, but sometimes ending at the end of other months, e.g., September 30 — divided into four fiscal quarters. Business people often use shorthand terms such as:

  • FY2000: The fiscal year 2000. If a company uses a calendar-year fiscal year, FY2000 ended on December 31, 2000.
  • Q1 (or sometimes 1Q): The first quarter of the fiscal year. For a company with a calendar-year fiscal year, Q1 would end on March 31.
  • 1Q2000: The first fiscal quarter of the fiscal year 2000.

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FOB ("Free On Board") Definition

Glossary entry: This clause will serve as an introduction for students and others who might be unfamiliar with its subject.

"FOB [place name or vessel name]" is a term commonly used in contracts for the sale of goods. It indicates where and how delivery of the goods is to occur.

The term has somewhat different meanings under section 2-319 of the [U.S.] Uniform Commercial Code, on the one hand, and the INCOTERMS 2010 pre-defined commercial terms published by the International Chamber of Commerce (ICC) on the other.

See also:

  • EXW ("Ex Works")

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For the Avoidance of Doubt Usage

IF: The parties omit from the Agreement a Clause or Subclause containing the term "for the avoidance of doubt" (or similar phrases such as "for clarity"); THEN: That omission does not in itself signify that the parties affirmatively agreed to a proposition contrary to the omitted Clause or Subclause.

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GAAP Definition

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

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Commentary

Glossary entry: This clause will serve as an introduction for students and others who might be unfamiliar with its subject.

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.

Gender References Usage

Unless the context clearly requires otherwise, any gender-specific or gender-neutral term in this Agreement (for example, he, she, it, etc.) is to be read as referring to each gender and to the neutral gender.

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Good Faith Definition

The terms good faith and good faith and fair dealing each mean honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.

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Commentary

Translations: If a contract is later translated into a different language, or is applied in a jurisdiction where the law might normally hold otherwise, the definition proposed here can help clarify the parties' intentions. See also the Notebook section "Good Faith & Fair Dealing – Additional Commentary."

Government Authority Definition

(a) Government authority and governmental authority,  whether or not capitalized, 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.

(b) The term includes, 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).

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Commentary

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).

Hold Harmless Definition (same as Indemnify)

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

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Commentary

The definition presented here reflects what seems to be a consensus by legal-writing experts as to what the term means as a matter of law; still, it might make sense to include the definition in a contract anyway (especially with multi-national parties) to avoid the confusion that has arisen in some courts.

See the #IndemnGenProvCls clause.

See also the Notebook section "Hold-harmless clauses."

If Definition

For the avoidance of doubt, the term if means if and only if unless the context clearly indicates otherwise. EXAMPLE: The term Party A will have the right to take Action X if Condition Y exists means that Party A will not have the right to take Action X unless Condition Y exists.

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Commentary

.

This clause is included because in some circumstances, the term might be ambiguous: using the example in the clause, the word if might allow for Party A to have the right to take Action X even if Condition Y did not exist; the definition in the clause rules out that possibility.

In-House Personnel Definition

The term In-House Personnel, 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.

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Commentary

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.

Including, etc. Definition

(a) The terms including and like words (for example, include, includes, and included), whether or not capitalized, are to be deemed followed by the phrase without limitation if not followed literally by that phrase.

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

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Commentary

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

Incorporation by Reference Usage

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

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Commentary

The definition in this clause should reassure a drafter who worries that the other side might get "creative" in its contract intepretation. Its language is adapted from Clauses Incorporated by Reference in the Federal Acquisition Regulations, set forth in the Code of Federal Regulations at 48 C.F.R. § 52.252-2.

INCOTERMS 2010

INCOTERMS 2010 refers to a standardized and widely-used set of abbreviations and definitions for commercial terms, published by the International Chamber of Commerce (ICC).

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Commentary

Glossary entry: This clause will serve as an introduction for students and others who might be unfamiliar with its subject.

The INCOTERMS are widely used in international commercial transactions. See also:

  • EXW ("Ex Works")
  • FOB ("Free On Board")

Intellectual Property Definition

The term intellectual property, whether or not capitalized, refers broadly to inventions, concepts, techniques, plans, designs, methodologies, procedures, programs, approaches, ideas, know-how, computer software, technology, writings, graphics, other works of authorship, trademarks, service marks, logos, trade names, and (in the case of the last four) the goodwill associated with each.

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Commentary

Intellectual Property Right Definition

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

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Commentary

Joint Motion Definition

When the Agreement authorizes a party to filea Joint Motion, it means that: (1) in filing a motion of the kind specified, the filing party may represent to the court that the motion is agreed to by the other party or parties; and (2) the other party or parties shall not oppose the motion. EXAMPLE: If the Agreement authorizes a party to file a Joint Motion to stay litigation, it means that the filing party is authorized to represent to the court that the other party has agreed to the motion

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Commentary

This definition comes into play in, for example, the ArbAutoStayCls clause, concerning stays of related litigation during arbitration.

Knowledge Definition

Knowledge refers to actual knowledge; knows has a corresponding meaning.

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Commentary

This definition is adapted almost verbatim from subdivision (b) of UCC § 1-202. Note that it does not impose a duty of inquiry.

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. Those default rules might conflict with the notice provisions of this Agreement.

Merger- and acquisition (M&A) agreements often contain definitions of knowledge (sometimes much more elaborate than this one). Such definitions seem to be less common in contracts for commercial transactions.

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.

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Commentary

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.

Material Breach Definition

When material to the Agreement as a whole, any of the following is considered a material breach of this Agreement: 

(1) a failure by a Party to comply with the terms and conditions of this Agreement;

(2) a series of two or more such failures, even if individually not material, if the series itself is material to the Agreement as a whole; and (3) a misrepresentation by a Party to another Party.

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Commentary

The "material to the Agreement as a whole" language 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).

See also the Notebook section "Material Breach – Additional Commentary."

May Definition

For the avoidance of doubt, when the Agreement states that a party may 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 discretion, unless this Agreement clearly states otherwise.

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Commentary

The 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 also the Sole Discretion Definition clause.

Misrepresentation Definition

For the avoidance of doubt, to establish a person's liability in respect of a claim for misrepresentation in connection with this Agreement, the claimant must show that all of the following are true:

(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;

(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);

(3) the claimant reasonably relied on the representation and suffered harm as a result; and

(4) the person that made the representation knew, or should have known, that the claimant would rely on the representation.

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Commentary

Glossary entry: This clause will serve as an introduction for students and others who might be unfamiliar with its subject. Translations: If a contract is later translated into a different language, or is applied in a jurisdiction where the law might normally hold otherwise, the definition proposed here can help clarify the parties' intentions.

This definition attempts to synthesize various [U.S.] federal- and state-law doctrines.

The "omitted a material fact …" 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."

Consider also including the Clear and Convincing Evidence Definition clause.

See also:

Clear and Convincing Evidence Requirement

To prevail in a claim of misrepresentation, the claimant must show the facts set forth in the Misrepresentation Definition clause by clear and convincing evidence.

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Commentary

Month Definition

Unless the Agreement expressly states otherwise, the term month, whether or not capitalized, refers to the Gregorian calendar.

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Commentary

Companies in Muslim countries, and possibly in Israel, might use lunar calendars. 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.

Month-End Definition

Unless the Agreement expressly states otherwise, a period of X months, beginning on a specified date, ends at midnight at the end of the same day (or the last day, if earlier) of the month X months later. EXAMPLE: A one-month period beginning on December 31 ends at midnight at the end of January 31. EXAMPLE: A two-month period beginning on December 31 ends at midnight at the end of February 28.

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Commentary

Net-Days Definition

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 means that 100% of the invoiced amount is due no later than 30 days after the invoice date (or, if so stated in this Agreement, no later than 30 days after the date of receipt 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).

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Commentary

Glossary entry: This clause will serve as an introduction for students and others who might be unfamiliar with its subject.

Translations: If a contract is later translated into a different language, or is applied in a jurisdiction where the law might normally hold otherwise, the definition proposed here can help clarify the parties' intentions.

Non-Party Definition

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

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Commentary

Organization Definition

Organization, whether or not capitalized, refers to a 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.

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Commentary

The language of this definition is adapted from UCC §§ 1-201(25) and 1-201(27).

Party Definition

Party, whether or not capitalized, refers to a signatory of this Agreement unless another meaning is clear from the context.

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Commentary

This is mainly a convenience definition.

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 this 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.

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Commentary

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

Person Definition

(a) Person, whether or not capitalized, refers to an individual or organization.

(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 this Agreement.)

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Commentary

The language of this definition is adapted from UCC § 1-201(27).

Prime Rate Definition

Unless otherwise specified in this Agreement, prime rate (whether or not capitalized) refers to the per annum rate of interest for commercial loans announced or published from time to time by the Wall Street Journal (the Prime Rate Organization), as in effect at the date in question.

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Commentary

Provider Definition

Unless the context indicates otherwise, Provider refers to a party that this Agreement contemplates will furnish goods (including for example intangible goods), rights, and/or services to another party.

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Q1, Q2, Q3, Q4

See Fiscal years; fiscal quarters

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Reasonable Discretion Definition

When the Agreement permits a party to act in its reasonable discretion (whether or not the term is capitalized), the party in question must act in a commercially-reasonable manner.

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Commentary

The language here is adapted from Dick Broadcasting Co. v. Oak Ridge FM, Inc., 395 S.W.3d 653, 656-57 (Tenn. 2013) (party having power to consent to assignment of agreement must act in good faith and in commercially-reasonable man-ner); cf. UCC § 2-103(b) (definition of "good faith").

See also the Commercially Reasonable Definition clause.

Clear and Convincing Evidence Requirement

Any claim that a party did not exercise reasonable discretion must be proved by clear and convincing evidence.

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Commentary

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.

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Commentary

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).

The term undue is vague, of course.

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.

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Commentary

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 even baseball-style arbitration.

See also:

References are to this Agreement

All references to articles, sections, clauses, subsections, subdivisions, paragraphs, exhibits, appendixes, addenda, and the like are to those of this Agreement unless otherwise clear from the context.

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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 reasonable efforts as a reasonable person would make in a conscientious attempt to achieve that objective.

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Commentary

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).

Representation Definition

A representation is a statement of past or present fact; the verb represent has a corresponding meaning. For the avoidance of doubt, a statement of future fact is not a representation.

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Commentary

Glossary entry: This clause will serve as an introduction for students and others who might be unfamiliar with its subject. Translations: If a contract is later translated into a different language, or is applied in a jurisdiction where the law might normally hold otherwise, the definition proposed here can help clarify the parties' intentions.

The "statement of past- or present fact" phrase in subdivision (a)(1) was suggested by Professor Tina Stark, author of the Drafting Contracts textbook that I use in my law-school course. Professor Stark also suggests making it clear that a statement of future fact is not a representation; depending on the circumstances, such a statement might be a binding warranty (see the Warranty Definition clause) or a binding covenant (promise), or it might be simply a non-binding prediction.

For a more-detailed discussion of the law concerning misrepresentation, see the Notebook section Reliance disclaimers.

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.

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Commentary

Glossary entry: This clause will serve as an introduction for students and others who might be unfamiliar with its subject.

Translations: If a contract is later translated into a different language, or is applied in a jurisdiction where the law might normally hold otherwise, the definition proposed here can help clarify the parties' intentions.

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

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.

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Commentary

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

Shall-as-Must Definition

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

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Commentary

Translations: If a contract is later translated into a different language, or is applied in a jurisdiction where the law might normally hold otherwise, the definition proposed here can help clarify the parties' intentions. Apparently non-native English speakers don't always understand the term "shall" to mean "must" — see the LinkedIn discussion at http://goo.gl/t4BNN0.

Signature Definition

Signed and like terms such as sign, signing, signature, whether or not capitalized, with respect to a writing, refer to executing or adopting a symbol, or carrying out a process, attached to or logically associated with a writing or other record, with the intent to adopt, accept, or authenticate the record. Such terms encompass, for example, an electronic signature as defined in the [U.S.] Electronic Signatures in Global and National Commerce Act ('E-SIGN'), 15 U.S.C. § 7006(5).

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Commentary

This definition is a combination of (i) the definitions of signed and writing in UCC §§ 1-201(37) and 1-201(43); and (ii) 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.

It 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.)

Sole Discretion Definition

IF: This Agreement states that a party may take an action in its sole discretion (whether or not the term is capitalized); THEN: The party in question is free to take the action, in whatever manner it deems appropriate, or not to take the action, in any case with a view solely toward its own interests and desires; the party's action or inaction is to be conclusively deemed to comply with any applicable duty of reasonableness, good faith, or fair dealing.

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Commentary

As one state's supreme court said: "under Alabama law 'sole discretion' means an absolute reservation of a right. It is not mitigated by an implied covenant of good faith and fair dealing in contracts because an unqualified reservation of a right in the sole discretion of one of the parties to a contract expresses the intent of the parties to be subject to terms that are inconsistent with any such implied covenant." Shoney's LLC v. MAC East, LLC, 27 So.3d 1216, 1220-21 (Ala. 2009) (on certification by Eleventh Circuit; footnote and citations omitted).

For a discussion of British case law on this point, see Barry Donnelly and Jonathan Pratt, Are you obliged to act reasonably?, in The In-House Lawyer [UK] (June 12, 2013). They summarize the case law as indicating that:

Where a contract confers on one party an absolute discretion to take a decision, choosing from a range of options which will have an impact on the interests of another contracting party, the court will, as a bare minimum, imply a term that the discretion must be exercised in good faith in a manner which is not arbitrary, capricious or irrational.

Subject to those limitations, the decision maker will be entitled to act in accordance with its own best interests.


It is very difficult, albeit not ‘utterly impossible’, to exclude such an implied term.


Where, however, the only choice conferred on a contracting party is whether or not to exercise an absolute contractual right provided under the contract, no such term will be implied.


(Emphasis and extra paragraphing added.)

See also the Reasonable Discretion Definition clause.

Sole Discretion – Arbitrary, Capricious, or Irrational Action Barred

A party's authority under this Agreement to act in its sole discretion is not to be exercised arbitrarily, capriciously, or irrationally.

CAUTION

This clause, based on UK case law, might provide some comfort for another party — but it also could lead to expensive, fact-intensive litigation over whether the clause's standard had been met.

See also Common Draft clause: Sole Discretion Definition

Tax Definition

Tax, whether or not capitalized, refers to any tax, assessment, charge, duty, levy, or other similar governmental charge of any nature, imposed by any taxing authority.

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Commentary

The language of 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.

See also the Sales Taxes – Itemization clause.

Tax Definition – Illustrative Examples

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.

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Commentary

The language of 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.

This language also draws on 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).

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.

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Commentary

See also the commentary to the Tax Definition clause, as well as the #govtauthoritydefn clause.

Termination of Agreement Definition

(a) For the avoidance of doubt, termination of this Agreement, whether or not the term is capitalized: (1) cancels the parties' respective rights and obligations arising after termination except to the extent, if any, otherwise provided in this Agreement (for example in a survival clause);

(2) does not affect any claim for pre-termination breach of this Agreement; and

(3) is without prejudice to any party's other rights or remedies pursuant to this Agreement except to the extent, if any, that this Agreement clearly provides otherwise.

(b) Unless otherwise clear from the context, the term termination encompasses any expiration of the term of this Agreement, if any, including, for example, due to a party exercising a right under this Agreement to opt out of an automatic-extension provision, if any.

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Commentary

Glossary entry: This clause will serve as an introduction for students and others who might be unfamiliar with its subject.

Translations: If a contract is later translated into a different language, or is applied in a jurisdiction where the law might normally hold otherwise, the definition proposed here can help clarify the parties' intentions.

See also the TermDefn clause.

Timely Definition

An action is timely taken (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.

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Commentary

Glossary entry: This clause will serve as an introduction for students and others who might be unfamiliar with its subject.

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

Tribunal Definition

Tribunal, whether or not capitalized, refers to an adjudicatory body of competent jurisdiction. Examples of tribunals include a court, an arbitral tribunal, or an administrative agency or legislative body acting in an adjudicatory capacity. For this purpose, 'acting in an adjudicatory capacity' means that in a particular matter, after the presentation of evidence or legal argument or both by one or more parties, a panel of one or more neutral officials renders a binding legal judgment directly affecting the interests of one or more parties in the matter.

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Commentary

Portions of this definition are 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.)

USD Definition

The term USD refers to U.S. dollars.

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Commentary

"USD" is the ISO 4217 standard abbreviation for U.S. dollars.

Will-as-Must Definition

Unless the context clearly 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.

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Commentary

Translations: If a contract is later translated into a different language, or is applied in a jurisdiction where the law might normally hold otherwise, the definition proposed here can help clarify the parties' intentions.

Willful Definition

(a) 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) For the avoidance of doubt, for purposes of subdivision (a), the terms act, action, and conduct include one or more failures to act.

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Commentary

See also the Notebook section "Willfulness – Additional Commentary."

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.

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Commentary

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.)

Arbitration

Term Sheet       Top       Info       TOC

This term sheet consists of those Common Draft clauses listed below as "Included," subject to any variations agreed by the parties.

Arbitration

Arbitration Requirement: Included

  • Arbitrable Disputes: Any dispute arising out of this Agreement or any transaction or relationship resulting from it.
  • Arbitral Language: English
  • Arbitration Administrator: American Arbitration Association
  • Arbitral Tribunal: A single arbitrator appointed in accordance with the Arbitral Rules (see below)
  • Arbitral Law: [U.S.] Federal Arbitration Act
  • Arbitral Rules: Commercial Arbitration Rules of the American Arbitration Association

Arbitral Tribunal Backup Appointment Procedure: Consider

  • Arbitrator Appointment Backup Procedure: Per Section 5 of the U.S. Federal Arbitration Act.

Arbitration of Statutory and Common-Law Claims: Included

Arbitration of Arbitrability Disputes: Included

Streamlining of Arbitration: Included

Enhanced Appellate Review: Not included

Arbitrator Qualifications: Not included

Arbitration Expenses: Included

Preliminary Relief in Arbitration: Included

Confidentiality of Arbitration: Included

No Amiable Compositeur or Ex Aequo et Bono: Not included

Transcript of Hearing: Not included

Arbitrator Dungeon: Not included

Reasoned Award: Not included

Findings and Conclusions: Not included

No Class-Action Arbitration: Not included

Non-Parties May Demand Arbitration: Not included

Arbitral Tribunal May Not Award Injunctive Relief: Not included

Arbitral Tribunal May Not Award Punitive Damages: Not included

All Disputes Between the Parties Are Arbitrable: Not included

Partial Retrial in Court: Not included

Baseball Arbitration Procedure: Not included

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Arbitration Requirement

(a) To the extent not clearly prohibited by applicable law, at the request of either party, any dispute arising out of this Agreement or any transaction or relationship resulting from it (the Arbitrable Dispute) that is not settled by the parties themselves is to be submitted to arbitration:

(1) in English (the Arbitral Language) before a single arbitrator appointed in accordance with the Arbitral Rules (the Arbitral Tribunal);

(2) governed by the U.S. Federal Arbitration Act (the Arbitral Law);  

(3) conducted, as a choice of rules and not of forum, in accordance with the Commercial Arbitration Rules of the American Arbitration Association in effect at the time of the demand for arbitration (the Arbitral Rules), to the extent not inconsistent with this Agreement or the Arbitral Law; and

(4) administered by the American Arbitration Association (the Arbitration Administrator).

(b) Except to the extent, if any, that this Agreement provides otherwise, the arbitration award for such a dispute: (1) will be binding, and (2) may be enforced in any court of competent jurisdiction.

(c) For the avoidance of doubt, the provisions of this Agreement relating to arbitration will survive any termination or expiration of this Agreement.

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Arbitral Tribunal Backup Appointment Procedure

For the avoidance of doubt, if for any reason the Arbitral Tribunal cannot be appointed, or a vacancy cannot be filled, in accordance with this Agreement — for example, because a designated arbitration administrator declines to act — then the arbitration is to proceed nevertheless, with the Arbitral Tribunal being appointed, or the vacancy being filled, as provided in section 5 of the U.S. Federal Arbitration Act (the Arbitrator Appointment Backup Procedure).

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Arbitration of Statutory and Common-Law Claims

For the avoidance of doubt, the term Arbitrable Dispute encompasses all claims that are explicitly or implicitly created by constitution, statute, or regulation (for example, state- or federal anti-discrimination statutes).

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Arbitration of Arbitrability Disputes

Any dispute about the arbitrability of a claim is to be decided by the Arbitral Tribunal, including for example any dispute about: (1) whether the parties have in fact entered into an agreement to arbitrate; (2) whether the agreement to arbitrate is binding; (3) whether the agreement to arbitrate is enforceable; (4) whether any party has waived its right to require arbitration; (5) whether the parties' agreement to arbitrate applies to a particular type of controversy or a particular dispute; and (6) whether the parties' agreement to arbitrate conflicts with a statutory right that cannot be waived by contract.

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Streamlining of Arbitration

In the interest of increasing efficiency and reducing cost, the Arbitral Tribunal is to take suitable measures, where appropriate, to streamline the arbitration proceedings. In appropriate circumstances, such streamlining measures may include (for example) the Arbitral Tribunal's directing or authorizing one or more of the following: (1) motion practice for early disposition of issues; (2) testimony by telephone- or video conference; (3) direct testimony by written narrative statement, with oral summarizing by the witness followed by oral cross-examination; (4) joint written reports by opposing expert witnesses, explaining their points of agreement and disagreement; (5) witness-examination procedures such as "witness panel" or "hot-tub" examination of fact- and/or expert witnesses; (6) summary exhibits to supplement or substitute for voluminous evidence; (7) issuance of a tentative or draft award to allow the parties an opportunity to comment before issuance of the final award.

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Commentary

Several of the streamlining items listed here are adapted from suggestions in the Debevoise & Plimpton LLP Protocol to Promote Efficiency in International Arbitration. See also, e.g., Elizabeth G. Thornburg, The Managerial Judge Goes to Trial, 44 U. Rich. L. Rev. 1261, 1280-81 (2010).

Most of the streamlining steps listed in this clause are available under Rules R32 through R35 of the October 2013 revision of the American Arbitration Association's Commercial Arbitration Rules.

Enhanced Appellate Review

(a) The Arbitral Tribunal's powers 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 court; or (2) is based on evidence that would not satisfy the requirements of law in a civil trial to the court; or (3) grants relief prohibited by this Agreement or not available under applicable law.

(b) Accordingly, the parties expressly agree that any award that is so based, in whole or in part, may be appealed to a court of competent jurisdiction, on grounds that the Arbitral Tribunal thereby exceeded its agreed powers, as though the award were a judgment in a civil "bench trial" to the court in a U.S. district court.

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Commentary

This clause is an attempt to "write around" a U.S. Supreme Court decision that severely restricted the ability of courts to review arbitration awards under the Federal Arbitration Act. See Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576, 128 S.Ct. 1396 (2008).

Arbitration – Enhanced Review as Condition

The parties regard the right of enhanced judicial review set forth in the Enhanced Appellate Review clause as a material consideration for and condition of the parties' agreement to arbitrate. IF: That right of enhanced judicial review right is finally held invalid, void, or unenforceable by a tribunal of competent jurisdiction, from which no further appeal is taken or possible; THEN: At either party's written election, delivered by notice to the other no later than ten business days after that final holding:

(1) the parties' agreement to arbitrate (but not other portions of this Agreement) is to be deemed rescinded by mutual agreement; and

(2) that agreement to arbitrate will be unenforceable, as will any award that might have been rendered by an Arbitral Tribunal pursuant to that agreement to arbitrate.

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Commentary

This clause is based on the rescission clause seen in Pugh's Lawn Landscape Co. v. Jaycon Dev. Corp., 320 S.W.3d 252 (Tenn. 2010), where the Tennessee supreme court held that an agreement to arbitrate in a contract must be rescinded for mutual mistake in view of the court's holding that the agreement's expansion of the scope of judicial review was invalid.

Arbitrator Qualifications

Each arbitrator is to: (1) have appropriate experience in the general field of the dispute, and preferably in the resolution of disputes in that general field; (2) preferably be licensed to practice law in one or more jurisdictions, but not necessarily in any particular jurisdiction; and (3) meet the following Special Arbitrator Qualifications: None specified.

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Commentary

In some cases, the parties might want any arbitration to be heard by an arbitrator who has significant background and experience in the field of the dispute; this clause gives drafters a way to specify this.

Arbitration Expenses

(a) Unless this Agreement states otherwise or the parties otherwise agree: (1) all joint arbitration expenses — for example, the fees and expenses of the Arbitral Tribunal and, if applicable, the Arbitration Administrator — are to be shared equally; and (2) any other arbitration expense is to be borne by the party incurring it, unless the award specifies otherwise.

(b) For the avoidance of doubt, this clause: (1) does not in itself give the Arbitral Tribunal any other power to assess expenses against a party, but (2) is without prejudice to any other agreement to that effect between the parties (including for example any provision to that effect in the Arbitral Rules).

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Commentary

The Arbitral Rules may well contain similar expense-sharing provisions. See, for example, Rule R‑54 of the AAA's Commercial Arbitration Rules, on which parts of this clause are modeled.

Preliminary Relief in Arbitration

In any dispute required by this Agreement to be arbitrated, any party may seek temporary, interim, or preliminary injunctive relief, in accordance with applicable law, (1) from a court or other tribunal of competent jurisdiction, without waiving the seeking party's right to arbitration; and/or (2) from the Arbitral Tribunal.

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Confidentiality of Arbitration

(a) Except as provided in subdivision (b), each party to the dispute; each member of the Arbitral Tribunal; and each other participant in the arbitration proceedings, must: (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.

(b) The obligations of subdivision (a) apply indefinitely except to the minimum extent authorized or required: (1) by the Arbitral Rules; (2) by order of the Arbitral Tribunal after notice to the parties and an opportunity for them to be heard; (3) with the consent of the disclosing party; or (4) by law.

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No Amiable Compositeur or Ex Aequo et Bono

In rendering its award, the Arbitral Tribunal may not act as amiable compositeur or ex aequo et bono; it 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 this Agreement, including for example any limitation of liability (a term that includes for example exclusions of remedies) and any shortened limitation period stated in this Agreement.

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Transcript of Hearing

The Arbitral Tribunal is to provide the parties with a transcript of the hearing, prepared by a suitably-qualified reporter.

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Commentary

Transcripts 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.

Arbitrator Dungeon

In the interest of expediting the preparation of the award, a tribunal of multiple arbitrators shall remain at the place of the arbitration, or at some other convenient place with access to suitable administrative support and research resources, and devote their full time and attention to the preparation of the award (except in case of true emergency or force majeure).

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Commentary

The "arbitrator dungeon" (my phrase) is based on a suggestion by the late Tom Arnold, my former senior partner, mentor, and friend, in his arbitration checklist (unfortunately no longer available on-line) to give the arbitrators an incentive to finish the award.

Reasoned Award

The Arbitral Tribunal shall 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.

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Commentary

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 Arbitral Rules will probably specify whether a "reasoned" award is to be provided.

Findings and Conclusions

To facilitate any judicial review that might occur, the Arbitral Tribunal is to include findings of fact and conclusions of law in its award.

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Commentary

An award with formal findings of fact and conclusions of law will require more arbitrator time to prepare (especially for a three-arbitrator panel) and thus will be more expensive.

No Class-Action Arbitration

For the avoidance of doubt, no party may: (1) join or consolidate claims in arbitration by or against other individuals or entities; nor (2) arbitrate any claim as a representative member of a class; nor (3) arbitrate any claim in a capacity of private attorney general.

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Rescission of Arbitration Agreement if Class-Action Prohibition Struck

The parties regard the class-action prohibition of this Agreement as material to their agreement to arbitrate disputes. Consequently, IF: That prohibition is finally held invalid, void, or unenforceable by a tribunal of competent jurisdiction from which no further appeal is taken or possible; THEN: At either party's written election, delivered by notice to the other, the parties' agreement to arbitrate (but not other portions of this Agreement) is to be deemed rescinded by mutual agreement and will be unenforceable. 

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Commentary

"Jettison" language of this kind is not uncommon in consumer contracts (which of course are drafted by companies' lawyers, not by consumers). See, e.g., Murphy v. DirecTV, Inc., No. 11-57163, part I (9th Cir. July 30, 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).

Many companies might be willing to take a chance on non-appealable arbitrations if the stakes in any given case were comparatively low. If the stakes were higher, though — as they might well be in a class-action arbitration — then such companies likely would want to preserve their right to appeal an adverse decision.

Non-Parties May Demand Arbitration

(a) The signatory parties anticipate that one or more individuals or organizations other than themselves — referred to here as non-parties — may participate in one or more transactions or relationships arising out of this Agreement.

(b) Any such non-party may demand that a claim arising out of or relating to such a transaction be arbitrated in accordance with the arbitration provisions of this Agreement. To that extent, the signatory parties intend that the non-party be a third-party beneficiary of those arbitration provisions.

(c) For the avoidance of doubt, neither this Clause nor anything else in this Agreement is intended to limit the ability of a signatory party to this Agreement to demand arbitration, in accordance with the arbitration provisions of this Agreement, of a claim made by or against a non-party, where such a demand would otherwise be permitted by applicable law.

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Commentary

This clause is informed in part by an arbitration provision upheld by the Fifth and Eleventh Circuits in separate cases involving the same defendant company. 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).

Arbitral Tribunal May Not Award Injunctive Relief

Except to the extent (if any) expressly stated otherwise in this Agreement, the Arbitral Tribunal may not include, in any award, any injunction or direction to any party other than a direction to pay one or more sums of money.

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Commentary

The language of this Clause is 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).

Caution: This provision could be found to conflict with the Preliminary Relief in Arbitration clause.

Arbitral Tribunal May Not Award Punitive Damages

The Arbitral Tribunal will not have the power to award punitive damages, exemplary damages, or the like, all of which the parties expressly waive in any arbitration proceeding.

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Commentary

This provision is phrased without the qualifier, "to the maximum extent permitted by law"; otherwise, the punitive-damages 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).

Jettison of Punitive Damages Prohibition if Struck

IF: a court or other tribunal of competent jurisdiction rules that the parties' agreed prohibition of punitive damages in arbitration in this Clause is invalid or otherwise unenforceable; THEN: That prohibition is to be severed from this Agreement and the remainder of the parties' agreement to arbitrate is to be given effect.

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Commentary

Applicable law might invalidate a no-punitives provision such as that of the Arbitral Tribunal May Not Award Punitive Damages clause. Against that possibility, a "jettison" clause like this one can save an arbitration clause that might otherwise be unenforceable because 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.

All Disputes Between the Parties Are Arbitrable

Arbitration is required for any dispute, of any nature, that may arise between the parties before termination or expiration of this Agreement, whether or not the dispute arises out of or relates to this Agreement.

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Commentary

The Eighth Circuit enforced an arbitration clause that was fairly sweeping in its scope (although it did not provide for arbitration of all disputes). See Industrial Wire Products, Inc., v. Costco Wholesale Corp., 576 F. 3d 516 (8th Cir. 2009) (reversing denial of motion to compel arbitration).

Partial Retrial in Court

(a) A final award by an Arbitral Tribunal will not be binding, and the relevant part of the underlying dispute may be adjudicated de novo in a court of competent jurisdiction, if all of the following conditions are met:

(1) A party to the arbitration that desires to challenge some or all of the final award (the "Challenger") must give notice of its challenge to each other party no later than ten business days after the issuance of the award (the Challenge Notice Deadline). The notice must contain a short and plain statement of the challenge showing that the Challenger is entitled to relief.

(2) The Challenger must duly file and serve an action (the "Challenge Action"), in a court of competent jurisdiction, against one or more other parties to the arbitration (each, a "Respondent"), no later than 30 days after the issuance of the award (the Challenge Action Filing Deadline).

(3) The Challenge Action must seek only one or both of: (A) relief that the Challenger sought, but was not granted, from or against the Respondent in the arbirration; and/or (B) 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.

(b) Time is of the essence for each condition set forth in subdivision (a); for the avoidance of doubt, IF: A Challenger, for any reason, does not meet all of those conditions as to a given Respondent; THEN:

(1) 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; and

(2) IF: The Challenge Action had already been filed when the final award became binding as to that Respondent pursuant to subdivision (1); THEN: That Respondent may file a motion, and represent to the court that it is a joint motion with the Challenger, to dismiss the Challenge Action with prejudice in respect of that Respondent.

(c) 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.

(1) For this purpose, the term "applicable limitation period" refers to any limitation period whose expiration did not preclude asserting a claim for relief in arbitration, but would preclude filing the Challenge Action.

(2) Against the possibility that applicable law does not permit the above extension of the applicable limitation period, the relevant Respondent expressly agrees not to assert the expiration of the applicable limitation period as a defense to the Challenge Action.

(d) To reduce the cost of the Challenge Action and avoid duplication of effort, any Challenger or Respondent may file a motion, and represent to the court that it is a joint motion with all other parties to the Challenge Action, requesting that the court do one or more of the following:

(1) admit into evidence some or all of the record in the arbitration hearing, in the general form of a joint appendix in an appeal under the [U.S.] Federal Rules of Appellate Procedure (or as otherwise required or permitted by applicable law or rules), without regard to any objection made at the arbitration hearing or in the Challenge Action; and/or

(2) deem the non-binding final award of the Arbitral Tribunal to be the report 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.

(e) Neither party will be entitled to discovery in or concerning the Challenge Action except by leave of the court for good cause as shown by clear and convincing evidence.

(f) 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:

(1) all costs of court taxed to that Respondent in the Challenge Action; and

(2) all reasonable expenses, including for example reasonble fees and -expenses for attorneys and expert witnesses, incurred by that Respondent in both the arbitration and the Challenge Action (including without limitation in all appeals from the judgment in the Challenge Action).

(g) To the greatest extent not prohibited by applicable law, EACH PARTY PERMANENTLY, VOLUNTARILY, KNOWINGLY, AND IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE TO TRIAL BY JURY OF THE CHALLENGE ACTION OR ANY RELATED ISSUE.

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Baseball Arbitration Procedure

(a) APPLICABILITY: This clause applies whenever: (1) the parties agree, or (2) the Arbitral Tribunal proposes, and the parties do not agree to the contrary, that a particular dispute, or one or more issues in the dispute, is to be decided using baseball-style arbitration.

(b) SUBMISSION OF PARTIES' PROPOSED AWARDS: After the arbitration hearing, each party is to provide the Arbitral Tribunal and the other party with a written proposed award disposing of the relevant issue or issues (each, a "Proposed Award").

(1) The Arbitral Tribunal may specify a deadline for doing so (ten business days after the end of the hearing if not otherwise agreed or directed).

(2) Each party may include, in its Proposed Award, a brief explanation why the Arbitral Tribunal should select that Proposed Award as the final award.

(3) In the interest of speeding up settlement discussions at the hearing, the parties are encouraged, but not required, to exchange Proposed Awards while their representatives are still at the place of the hearing.

(c) REVISION OF PROPOSED AWARDS BEFORE SELECTION: Unless the parties agree to the contrary, the Arbitral Tribunal may advise the parties, as many times as the Arbitral Tribunal deems necessary, that, in the Arbitral Tribunal's view, neither Proposed Award should be selected (preferably explaining why), in which case the Arbitral Tribunal is to allow the parties more time to submit revised Proposed Awards.

(d) SELECTION OF PROPOSED AWARDS: Except as provided in subdivision (c), the Arbitral Tribunal is to select, as the final award, without modification, the one Proposed Award that the Arbitral Tribunal regards as most-closely matching the award that the Arbitral Tribunal itself would render pursuant to this Agreement.

(e) OTHER MATTERS: All other matters concerning the arbitration are to be governed by the then-most-recent Common Draft Arbitration – Basic Clause provision to the extent not inconsistent with the other arbitration provisions of this Agreement, if any.

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Baseball Arbitration of Reasonableness Disputes

(a) This clause applies in any case in which: (1) this Agreement sets forth a reasonableness standard for something concerning an Audit (EXAMPLE: the Audit Right clause permits the Auditing Party to conduct commercially-reasonable Audits); and (2) the parties are unable to agree about whether that standard has been, or would be, met.

(b) Any such dispute will be resolved by "baseball" arbitration in accordance with the [[#[#ArbBaseballCls][/[#ArbBaseballCls/]] clause (CD14A).

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Commentary

See the commentary to the [[#[#ArbBaseballCls][/[#ArbBaseballCls/]] clause.

Assignment of Agreement

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Assignment of Agreement – Definition

(a) An assignment of this Agreement itself operates not only as a transfer of the assigning party's rights, but also as a delegation of the assigning party's duties, under this Agreement.

(b) An assignee's acceptance of an assignment of this Agreement constitutes the assignee's promise to perform the assigning party's duties under this Agreement. That promise is enforceable by either the assigning party or by the non-assigning party.

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Commentary

The language of this clause is adapted from UCC § 2-210(4).

Assignment of Agreement – No Relief from Obligations

For the avoidance of doubt, an assignment of this Agreement itself does not relieve the assigning party of its responsibility to the non-assigning party for performance of its duties under this Agreement unless the non-assigning party expressly agrees otherwise in writing.

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Commentary

This clause intentionally does not address whether an assignment of an agreement relieves the assigning party of its responsibility to third-party beneficiaries, if any. (See also the Third-Party Beneficiaries Disclaimer clause.)

Assignment Consent Requirement

Neither the Assigning Party, namely [fill in party name(s)] nor its then-current successor in interest, may assign this Agreement to any other individual or organization without the express prior written consent of the Consenting Party, namely fill in party name or its then-current successor in interest, except as expressly otherwise provided in this Agreement.

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CAUTION

Assignment-consent requirements should be approached very cautiously, because they can cause major problems for a party that wanted to engage in a corporate reorganization, a merger, a spin-off of a division, etc.

See also the Notebook section "Assignment Consent Requirements."

Assignment-Consent Exception for All-Asset Acquisitions

Consent to assignment is not required in connection with a transaction (or series of transactions) in which all assets of the Assigning Party's business are to be acquired by another party, whether the acquisition is expressly described as such or is to occur by operation of law.

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Commentary

Assignment-Consent Exception for Business-Asset Acquisitions

Consent to assignment is not required in connection with a transaction (or series of transactions) in which all the assets of the Assiging Party's business to which this Agreement specifically relates are to be acquired by another party, whether the acquisition is expressly described as such or is to occur by operation of law.

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Commentary

This is a more-permissive version of the Assignment-Consent Exception for All-Asset Acquisitions clause.

See also the Notebook section "Exception to assignment-consent requirement: Asset dispositions."

Assignment-Consent Exception for Rights Only

(a) For purposes of this clause, the term "Pledge", in respect of a right under this Agreement, refers to (1) an assignment or pledge of the right; or (2) a grant of a security interest in the right.

(b) Consent to assignment is not required in connection with a Pledge by the Assigning Party of or more of the Assigning Party's rights under this Agreement – whether the Pledge is absolute or collateral – so long as the Pledge does not purport to delegate any obligation of the Assigning Party under this Agreement.

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Commentary

Assignment by Operation of Law Requires Consent

(a) An assignment of this Agreement by the Assigning Party by operation of law requires the consent of the Consenting Party to the same extent as would an assignment by the Assigning Party to the same assignee outside of such a transaction or series of transactions.

(b) For the avoidance of doubt, a merger, consolidation, amalgamation, or other transaction or series of transactions is considered an assignment by operation of law.

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Commentary

This clause does not say that any merger, etc., entered into without the other party's consent will be void (the legal effect of such a statement in this situation is unclear; see also the Assignment Without Consent Is Void clause). Instead, consummating such a transaction without consent would simply be a breach of the Agreement.

See also the Notebook section "Mergers and "internal" reorganizations might be impeded."

Confidentiality of Assignment-Consent Requests

(a) IF: An Assigning Party requests the Consenting Party's consent to a contemplated assignment of this Agreement, or of any right or interest in this Agreement; THEN: The Consenting Party will preserve in confidence, and use only for the Assigning Party's benefit,(1) the fact that an assignment or other transaction is contemplated, together with (2) any information about the contemplated assignment or other transaction that the Assigning Party may disclose to the Consenting Party in connection with the consent request.

(b) The confidentiality obligation of subdivision (a) applies until such time, if any, as the fact of the assignment or other transaction, and/or the information in question, as applicable, becomes publicly known.

(c) For the avoidance of doubt, this clause does not limit any separate confidentiality obligation that may be agreed to by the parties, if any, in respect of the contemplated assignment.

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Commentary

See also the Notebook section "Confidentiality of assignment-related information."

Assignment Without Consent Is Void

Any putative assignment of this Agreement that is made without a consent required by this Agreement is void.

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Commentary

Assignment Without Consent as Material Breach

IF: This Agreement requires consent to an assignment of this Agreement or of one or more types of interest therein; THEN: The Assigning Party commits a material breach of this Agreement if it makes any such assignment without the required consent.

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Commentary

Assignment Consent – Sole Discretion

For the avoidance of doubt, the Consenting Party may, in its sole discretion, grant or withhold its consent to an assignment of this Agreement by the Assigning Party.

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Assignment Consent Not To Be Unreasonably Withheld

The Consenting Party may not unreasonably withhold, delay, or condition its consent to an assignment of this Agreement by the Assigning Party.

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Commentary

Damages for Unreasonable Withholding of Assignment Consent

Any unreasonable withholding of consent to assignment by the Consenting Party is not subject to any exclusion of remedies or other limitation of liability that might be set forth in this Agreement.

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Commentary

See also the Notebook section "Damages for unreasonable withholding of consent?."

No Damages for Unreasonable Withholding of Assignment Consent

(a) This clause applies if a tribunal of competent jurisdiction holds, in a final judgment or award (or comparable action) from which no further appeal is taken or possible, that the Consenting Party unreasonably withheld its consent to an assignment of this Agreement that required such consent.

(b) In such a case: (1) the Consenting Party will be deemed to have given its approval; and (2) the Consenting Party will not be liable to the Assigning Party, nor to any third party, for money damages for having withheld its consent.

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CAUTION

This language is adapted from that suggested in a comment by Ric Gruder at Ken Adams's blog. It's dangerous for an assigning party, though, because as a practical matter is transforms the Assignment Consent Not To Be Unreasonably Withheld clause into an illusory, sleeves-from-my-vest concession by the Consenting Party.

See also the Notebook section "Damages for unreasonable withholding of consent?."

Assignment to Affiliate Without Connsent

The Consenting Party's consent is not required for an assignment of this Agreement to an Affiliate of the Assigning Party.

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Commentary

See also the Notebook section "Assignment to affiliate without consent."

Assignment to Affiliate – Guaranty by Assignor

The Assigning Party, to be able to assign this Agreement to an Affiliate without the consent of the Consenting Party, must unconditionally the assignee's performance of the Assigning Party's obligations under this Agreement.

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Commentary

See the Notebook section Assignment to affiliate without consent; see also the Guaranty – Basic Provision clause and its commentary.

Assignment – Termination of Agreement

IF: [fill in party name] (the Assigning Party) assigns this Agreement; THEN: [fill in party name] (the Non-Assigning Party) may, in its sole discretion, terminate this Agreement by giving notice of termination to the Assigning Party or its assignee no later than [fill in] (the Termination Deadline).

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Commentary

This clause might help break an impasse about whether a party should be able to assign the agreement without the consent of the non-assigning party.

The Termination Deadline gives the Assigning Party and its assignee a significant incentive to notify the Terminating Party as soon as the assignment becomes effective, because that's the only way the clock will start running on the termination right.

See also:

Audits

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This term sheet consists of those Common Draft clauses listed below as "Included," subject to any variations agreed by the parties.

Audits

Records – Definition: Included

Required Records: Included

Record Retention for Specified Period: Included

  • Record Retention Period: [Fill in]

Record Retention per FARs: Not included

Audit Definition: Included

Audit Right: Included

Audits – Required Notice: Included

  • Required Audit Notice: Reasonable notice

Audits – Exclusion of Privileged Information: Included

Audits – Certain Information Not Auditable: Not included

Audits – Acceptable Auditors: Included

Audits – Confidentiality: Included

Audits – Location: Included

Audits – Facilities: Included

Audits – Cooperation: Included

Audits – At Reasonable Times: Included

Audits – Copy of Report to Recordkeeping Party: Included

Audits – Copies of Records: Included

Audits – Adjustments: Included

Audits – Expense Shifting for Discrepancy: Included

  • Expense-Shifting Threshold Percentage: 5%

Audits – Expense Shifting for Material Breach: Included

Audits – Expense Shifting for Fraud: Included

Audits – Frequency Limits: Included

  • Maximum Audit Frequency: Once per calendar year, with at least 12 months between audit requests
  • Maximum Audit Repetitions: Once per period audited

Audits – Reimbursement of Recordkeeping Party's Expenses: Not included

Audits – Report Content Limits: Not included

Audits – Subcontract Flow-Down: Not included

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Records – Definition

Unless otherwise clear from the context, the term records, whether or not capitalized, refers to books, documents, and other data, stored in any tangible- or intangible medium regardless of type, and without regard to whether such items are in written, graphic, audio, video, or other form.

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Commentary

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

Required Records

During the term of this Agreement, the Recordkeeping Party will, in the ordinary course of business, create and timely update the Required Records, namely, materially-complete and ­accurate records, in accordance with commercially-reasonable standards of recordkeeping, that are sufficient to establish the accuracy and the compliance with this Agreement (or, if applicable, compliance with documents ancillary to the Agreement such as a statement of work), of each of the following, where applicable:

(1) the performance of services for the Auditing Party, and/or the delivery of goods, equipment, or intangibles (for example, software) to the Auditing Party, by or on behalf of the Recordkeeping Party, pursuant to this Agreement;

(2) amounts billed or to be billed to the Auditing Party by the Recordkeeping Party, such as (for example) cost-plus charges for goods and time-and-materials charges for services; and

(3) amounts paid or to be paid to the Auditing Party by the Recordkeeping Party, such as (for example) royalties or rents to be paid to the Auditing Party as a percentage of the Recordkeeping Party's sales.

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Commentary

The term used to describe the Required Records is materially-complete and accurate. Some drafters use the term true and correct, but that seems both redundant and incomplete. Perhaps in an archaic sense the term true might be interpreted broadly to mean materially complete and accurate, but there seems to be little reason to take a chance that a judge would see it that way.

Record Retention for Specified Period

Tthe Recordkeeping Party will maintain each of the Required Records until at least [fill in] (the the Record Retention Period), and, if longer, the duration of any audit conducted persuant to this Agreement.

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Commentary

Two- to four years after final payment seems to be a not-uncommon record-retention period in contracts for services of various kinds, for example in the [U.S.] Federal Acquisition Regulations. See, e.g., Contractor Records Retention, 48 C.F.R. §§ 4.703(a)(1), 4.705.

Record Retention per FARs

(a) 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.

(b) For the avoidance of doubt, subdivision (a) is included for the convenience of the parties in drafting and negotiating this Agreement; the parties do not intend to imply that this Agreement and/or their relationship are in any way subject to the FARs.

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Audit Definition

For purposes of this Agreement, the term audit, as a verb, whether or not capitalized, refers to one or more of the following: (i) auditing, inspecting, examining, reviewing, and/or analyzing one or more Records; and (ii) orally discussing such Records and their contents with personnel of the recordkeeping party who might be familiar with them. The noun form of audit has the corresponding meaning.

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Audit Right

Except as otherwise provided in this Agreement, the Auditing Party may cause commercially-reasonable audits to be conducted of all Required Records, in the form in which the Recordkeeping Party keeps them in the ordinary course of the Recordkeeping Party's business.

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Audits – Required Notice

To be entitled to audit Required Records, the Auditing Party must give the Recordkeeping party reasonable notice (the Required Audit Notice) that becomes effective no later than the end of the Record Retention Period for the specific Records to be audited.

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Audits – Exclusion of Privileged Information

For the avoidance of doubt, the Auditing Party's audit rights do not extend to information that, under applicable law, would be immune from discovery on grounds of attorney-client privilege, work-product immunity, or the like.

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Audits – Certain Information Not Auditable

For the avoidance of doubt, the Auditing Party's right to audit the Recordkeeping Party's Records does not extend to (and the the Recordkeeping Party need not provide the Auditing Party or its auditors with):

(1) unrelated information such as, for example, information concerning the Recordkeeping Party's other customers, clients, business associates, and/or general business affairs;

(2) in a fixed-cost transaction, information concerning the Recordkeeping Party's costs and profit margins; nor

(3) information falling into any of the following Excluded Information Categories: None specified.

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Commentary

The recordkeeping party might well want to exclude some categories of sensitive- or competitive information from audit. See generally, e.g., Albert Bates, Jr. and Amy Joseph Coles, Audit Provisions in Private Construction Contracts: Which Costs Are Subject to Audit, Who Bears the Expense of the Audit, and Who Has the Burden of Proof on Audit Claims?, 6 J. Am. Coll. Constr. Lawyers 111, 111 (2012).

Audits – Acceptable Auditors

(a) Each audit is to be conducted by one or more of the following (each, an Acceptable Auditor): (1) employees of the Auditing Party; (2) a Big Four accounting firm; (3) any other individual or organization agreed in writing by the parties, in this Agreement or elsewhere; and (4) any other individual or organization reasonably acceptable to the Recordkeeping Party.

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Audits – Confidentiality

Absent consent of the Recordkeeping Party, the Auditing Party:

(1) will 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 this Agreement;

(2) will not disclose any such information to third parties except in response to compulsory legal process, after first (i) advising the Recordkeeping Party of such process (where not prohibited by law) and (ii) providing reasonable cooperation in any efforts by the Recordkeeping Party to preserve the confidentiality of such information; and

(3) will enter into binding written agreements with its auditors requiring them to comply with subdivisions (1) and (2) above.

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Audits – Location

All audits are to be conducted at the location where the records are kept in the ordinary course of business, or at another reasonable location designated by the Recordkeeping Party in consultation with the Auditing Party.

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Audits – Facilities

The Recordkeeping Party will provide the auditor(s) with suitable facilities, of the type customarily used by professional knowledge-based workers, with appropriate furniture, lighting, air conditioning, and electrical outlets.

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Audits – Cooperation

The Recordkeeping Party will provide reasonable cooperation with the auditor(s) in any audit permitted by this Agreement; such cooperation is to include, for example, at the request of the auditor(s), making the Recordkeeping Party's relevant personnel reasonably available to the auditor(s) and directing them to answer questions not requiring disclosure of attorney-client privileged information.

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Audits – At Reasonable Times

All audits are to be conducted at reasonable times, designated by the Auditing Party in consultation with the Recordkeeping Party, during the Recordkeeping Party's normal business hours at the relevant location.

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Audits – Copy of Report to Recordkeeping Party

If so requested by the Recordkeeping Party, the Auditing Party will promptly cause the Recordkeeping Party to be provided with a complete and accurate copy of each audit report provided to the Auditing Party by the auditor(s).

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Audits – Copies of Records

For the avoidance of doubt, the auditor(s) may make and keep copies of the Required Records it audits, so long as the auditor(s): (1) comply with the confidentiality requirements of the Audits – Confidentiality clause; 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 expiration of any applicable record-retention requirement.

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Commentary

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. Indeed, 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.

See also the Consultation Definition clause.

Audits – Adjustments

IF: An audit reveals the apparent existence of a discrepancy such as (for example) over- or underbilling; over- or underpayment; or a breach of this Agreement; AND: The party benefiting from the apparent discrepancy does not show the contrary; THEN: The party benefiting from the discrepancy will promptly take such action as may be necessary to remedy the discrepancy.

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Audits – Expense Shifting for Discrepancy

IF: An audit reveals, and the Recordkeeping Party does not disprove the existence of, a discrepancy in billing or payment, for the period being audited, in favor of the Recordkeeping Party, of at least 5% (the the Expense-Shifting Threshold Percentage); AND: The discrepancy was caused by an error that was made by, or that is imputable to, the Recordkeeping Party; THEN: The Recordkeeping Party will reimburse the Auditing Party for reasonable expenses actually incurred (for example, auditors' fees and expenses) that were reasonably necessary to the audit.

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Audits – Expense Shifting for Material Breach

The Recordkeeping Party will likewise reimburse the Auditing Party if an audit reveals, and the Recordkeeping Party does not disprove, an uncured material breach of this Agreement by the Recordkeeping Party.

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Audits – Expense Shifting for Fraud

(a) The Recordkeeping Party will likewise reimburse the Auditing Party if: (1) an audit reveals clear and convincing evidence of fraud (as defined below) by the Recordkeeping Party (and/or its subcontractors, if applicable); and (2) the Recordkeeping Party does not convincingly refute such evidence.

(b) For purposes of subdivision (a), "fraud" refers to either of the following conduct by the Recordkeeping Party: (1) the making of an untrue statement of a  material fact with knowledge of the statement's untruth; or (2) the omission of a material fact with knowledge that the material fact was necessary in order to make the statements made by the Recordkeeping Party, in the light of the circumstances under which they were made, not misleading.

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Commentary

In subdivision (a), the requirement 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).

In subdivision (b), the defintion of "fraud" 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."

Audits – Frequency Limits

Except for good reason clearly shown, the Recordkeeping Party need not permit audits: (1) more often than once per calendar year, with at least 12 months between audit requests (the Maximum Audit Frequency); nor (2) more than once per period audited (the Maximum Audit Repetitions).

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Commentary

Getting ready for an audit can be a hassle for the party whose records will be audited; that party might want the agreement to limit the frequency of such disruptions.

On the other hand, the auditing party might want to negotiate more flexibility to conduct repeat audits than is allowed in this provision, even though it would derive some protection from the good-reason exception in the preamble of this clause.

Audits – Reimbursement of Recordkeeping Party's Expenses

IF: The Recordkeeping Party is not required to reimburse the Auditing Party's expenses of the audit pursuant to the Audit Right clause; THEN: The Auditing Party will reimburse the Recordkeeping Party (and its 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.

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Commentary

An article by two construction lawyers points out that:

[A]udit 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.

Under many contracts, the Owner has essentially an unfettered right to audit all reimbursable costs, without any ability for the Contractor or its subcontractors or vendors to recoup any attendant costs from the Owner

Albert Bates, Jr. and Amy Joseph Coles, Audit Provisions in Private Construction Contracts: Which Costs Are Subject to Audit, Who Bears the Expense of the Audit, and Who Has the Burden of Proof on Audit Claims?, 6 J. Am. Coll. Constr. Lawyers 111, 132 (2012) (emphasis and extra paragraphing added).

Audits – Report Content Limits

The auditor(s) may 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.

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Audits – Subcontract Flow-Down

The Recordkeeping Party will include, in each subcontract under thie Agreement (if any), provisions for the benefit of the Auditing Party as a third-party beneficiary, as follows: (1) a requirement that the subcontractor likewise (A) keep records, and (B) permit audits by the Auditing Party, each in accordance with the audit provisions of this 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.

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Commentary

Flow-down provisions are often required in U.S. Government contracts, among others.

Background Checks

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This term sheet consists of those Common Draft clauses listed below as "Included," subject to any variations agreed by the parties.

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Background Check Requirement

[Fill in party name] (the Investigating Party) will cause commercially-reasonable background checks to be conducted on all individuals who will engage in any of the following Restricted Activities; such individuals are referred to as Relevant Individuals: (1) working on-site at any premises of [fill in party name] (the the Requesting Party); (2) having 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) the following Specified Restricted Activities, if any: None specified.

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Background Checks – Legal Compliance

The Investigating Party will take commercially-reasonable measures to ensure that all background checks are conducted in accordance with law, including for example, (1) any applicable privacy laws, including for example any requirement that an individual's consent be obtained; and (2) any applicable pre-decision and/or post-decision notification requirements, for example, in credit-reporting laws, in respect of information learned in any such background check.

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Background Checks – Consequence of Certain Adverse Information

Absent the specific approval of the Requesting Party, the Investigating Party will not assign any Relevant Individual to engage in any Restricted Activity if either of the following is true: (1) The individual's criminal-background check, if any, indicates that the individual has been convicted of, or pled guilty or no contest to either or both of (i) a felony, or (ii) a misdemeanor involving fraud or moral turpitude; and/or (2) The individual's drug test, if any, indicates either or both of: (i) the use of illegal drugs; and/or (ii) the use of prescription drugs not in accordance with a legally-issued prescription.

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Background Checks – Earliest Date

All background checks other than drug testing must be or have been completed no earlier than [describe] (the Earliest Background-Check Date).

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Background Checks – Earliest Drug-Testing Date

All drug testing must be or have been completed no earlier than [describe] (the Earliest Drug-Testing Date).

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Background Checks – Investigating Party Indemnity Obligation

The Investigating Party will defend and indemnify the Requesting Party against any and all third-party claims — including but not limited to claims by government agencies and/or private individuals — arising from any noncompliance with law in the conduct of Background Checks pursuant to this Agreement.

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Commentary

See also:

Business in General

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This term sheet consists of those Common Draft clauses listed below as "Included," subject to any variations agreed by the parties.

Business in General

Status-Review Conference Calls Upon Request: Included

Representatives Appointment: Included

Safety Measures – Commercial Reasonableness Required: Included

  • Obligated Party: [fill in party name]

Site Rules Compliance Requirement: Included

Employability Evidence Requirement: Not included

  • Visiting Party: [Fill in party name]

Background Check Requirement: Not included

Subcontracting – Notification Required: Not included

Subcontracting Does Not Affect Provider Obligations: Not included

Subcontracting – Provider Remains Customer's Primary Contact: Not included

Subcontractors – Reporting of Government-Required Data: Not included

Subcontractor IP Agreements with Provider: Not included

Subcontracts – Government Contracting Provisions Flowdown: Not included

Subcontractor Compliance with Insurance Requirements: Not included

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Status-Review Conference Calls Upon Request

The parties will participate in status-review conferences by phone or, if so agreed, in person, whenever reasonably requested by either party (the Conference Frequency).

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Conference Arrangements

Unless otherwise agreed, (1) conference details for requested conferences will be arranged by the requesting party; (2) details for regularly-scheduled conferences will be arranged by the parties on an alternating basis; and (3) each party will bear its own expenses of participating in the conference.

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Conference Agenda Template

The parties anticipate that the agenda for a status-review conference will include discussion of some or all of the following "G-PP-AA factors": (1) Goals; (2) Progress to date; (3) Problems encountered or anticipated; (4) Action plans for the future; and (5) Assumptions being made.

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Conference Minutes

(a) For convenient reference, at the request of any participating party, the party arranging the conference details should seasonably circulate a draft of written minutes of the conference (but doing so is not mandatory).

(b) Any participating party may seasonably object to the contents of the draft minutes by advising all other parties in writing of its proposed corrections and/or additions to the draft.

(c) For the avoidance of doubt, minutes will not in themselves be deemed to amend this 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 this Agreement for amendment or waiver, as the case may be.

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Representatives Appointment

Each party (the Appointing Party), upon request by the other party from time to time, will designate to the other party, in writing (including for example by email), an individual of appropriate seniority who is authorized by the Appointing Party to act as the Appointing Party's primary contact point for the other party under this Agreement.

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Authoritative Communications

The other party may rely on any communication, by or from an individual who has been so designated as a party representative, as being a communication of the Appointing Party.

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Safety Measures – Commercial Reasonableness Required

In connection with its activities in connection with this Agreement, [fill in party name] (the Obligated Party) will cause at least commercially-reasonable safety measures to be taken.

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Commentary

In some circumstances, a party might want to specify particular mandatory safety measures.

See also the Commercially Reasonable Definition clause.

Site Rules Compliance Requirement

(a) For purposes of this Agreement, the term site), in respect of [fill in party name] (the the Host Party), refers to either (1) physical premises, or (2) a computer system or network, of the Host Party; the term site visit refers to the physical presence at such premises, or access to such a computer system or network, by individuals subject to the control of [fill in party name] (the Accessing Party).

(b) The Accessing Party will cause all such individuals to comply with such reasonable site rules and policies as the Host Party may seasonably communicate in writing to the Accessing Party.

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No Unlawful Discrimination Against Visitors

For the avoidance of doubt, the Host Party may not deny access to the Accessing Party's personnel for any reason prohibited by applicable law (for example, antidiscrimination or equal-opportunity law).

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Avoiding Interference

Each party (the Obligated Party) will make reasonable efforts to avoid interfering with the activities of the other party at any site where both parties' personnel are present.

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Employability Evidence Requirement

IF: Individuals under control of [fill in party name] (the Visiting Party) are to access any physical premises controlled by another party; THEN: At the other party's request, the Visiting Party will provide the other party with reasonable evidence that such individuals are legally employable where those physical premises are located.

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Commentary

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.

Confidential Information

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This term sheet consists of those Common Draft clauses listed below as "Included," subject to any variations agreed by the parties.

Confidential Information

Confidential Information Definition: Included

Marking Requirement: Included

Security Precautions: Included

Prohibited Activities: Included

Permitted Uses: Included

Permitted Disclosures: Included

Compliance with Law: Included

Obligations Continue After Termination: Included

Copies and Excerpts: Included

Expiration of Confidentiality Obligations: Not included

Return or Destruction of Confidential Information: Not included

No Other Rights Granted in Confidential Information: Included

Disclaimer of Implied Warranties in Confidential Information: Included

Receiving-Party Liability for Certain Third-Party Misappropriation: Not included

Receiving-Party Liability for Certain Third-Party Claims: Not included

Receiving-Party Cooperation Against Misappropriators: Not included

Receiving Party's Disclaimer of Other Confidentiality Obligations: Not included

Disclosing Party's Warranty of Disclosure Authority: Not included

Receiving Party's Representation of Its Status and Intentions: Not included

Receiving Party Must Consent to Each Disclosure to It: Not included

Residuals Rights in Confidential Information: Not included

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Confidential Information Definition

The term Confidential Information refers to information – and only to information – that: (1) is maintained in confidence by or on behalf of either party to the Agreement (the Disclosing Party); (2) is made available to another party to the Agreement (the Receiving Party) pursuant to this Agreement; and (3) meets any other requirement or prerequisite stated in this Agreement to be considered Confidential Information.

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Commentary

The "maintained in confidence" phrase reflects the requirements of applicable law in U.S. and other jurisdictions.

Exclusions from Confidential Information Status

At any particular time, Confidential Information does not include information shown to be or to have been, at that time, within one or more of the following categories:

(1) The information was known by the Receiving Party before it obtained access to the information under this Agreement; or

(2) The information was provided to the Receiving Party by a third party that, at the time, was not under an obligation of confidence benefiting the Disclosing Party in respect of the information; or

(3) The information was independently developed by the Receiving Party without use of Confidential Information; or

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

(5) The information was disclosed to one or more third parties, by the Disclosing Party or with its authorization, without confidentiality obligations comparable to those of this Agreement.

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Commentary

Most confidentiality agreements contain express exclusions from confidentiality like this.

The numbered list of exclusions is fairly typical.

Subdivision (5) is sometimes omitted from exclusion clauses drafted by disclosing parties. It's unclear what the legal effect of the omission would be, because (at least in the U.S.) the law usually excludes such information from protection. See, e.g., Gal-Or v. United States, No. 09-869C (Ct. Fed. Cl. Nov. 21, 2013).

See also the Notebook section "Disclosure without obligation of confidence."

Subpoenaed Information Not Excluded

For the avoidance of doubt, the fact that Confidential Information comes within the scope of a legally-enforceable demand, issued by a third party, for disclosure does not in itself mean that the information becomes categorically excluded from Confidential Information status.

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Commentary

Some badly-drafted confidentiality exclusion language — for example, the Citigroup NDA at § 1(a) — includes subpoenaed information as a category of exclusion; this could be a big mistake for a disclosing party.

See also:

Selections and Combinations Not Excluded

A specific selection or combination of information is not excluded from Confidential Information status solely by virtue of the fact that some or all of its individual component parts are themselves so excluded, unless the selection or combination itself is shown to be so excluded.

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Commentary

See also the Notebook section "Selections and Combinations Not Excluded."

Exclusion Corroboration

A party asserting that an item of information is excluded from Confidential Information status must support that assertion with documentary evidence or other reasonable corroboration.

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Commentary

Unlike some clauses, this clause requires documentary evidence only for corroboration of a claim of exclusion, not for proof of the claim. This balances the interest of the disclosing party in avoiding 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. Cf., e.g., Sandt Technology, Ltd. v. Resco Metal & Plastics Corp., 264 F.3d 1344, (Fed. Cir. 2001) (explaining anti-fraud purpose of requirement that claims of prior invention be corroborated).

See also the Notebook section "Exclusion corroboration requirement."

Receiving Party Notes, Etc.

For the avoidance of doubt, the following types of materials prepared by (or for or on behalf of) the Receiving Party are themselves considered Confidential Information to the extent that Confidential Information is contained in them: Analyses; compilations; forecasts; interpretations; notes; reports; studies; summaries; and similar materials.

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Third-Party Information

For the avoidance of doubt, otherwise-eligible information of a third party is considered Confidential Information, to the same extent as if were the information of the Disclosing Party, if the third-party information:

(1) is in the possession of the Disclosing Party; and

(2) is disclosed or made accessible to the Receiving Party pursuant to this Agreement.

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Illustrative Examples

For the avoidance of doubt, the term Confidential Information encompasses, by way of example and not of limitation, the following types of information when otherwise eligible under this 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 (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.

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Commentary

This laundry list was harvested from a variety of contract forms.

Protected Disclosure Period

For otherwise-eligible information to be considered Confidential Information, the information must be initially disclosed or otherwise made accessible to the Receiving Party, by or on behalf of the Disclosing Party, during the following period: [fill in] (the Protected Disclosure Period).

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Commentary

A party receiving information from another party might not want to suddenly discover, years later, that it was still bound by an old and perhaps long-forgotten confidentiality agreement between the parties. This clause allows the parties to establish a cut-off date for protected disclosures.

Protected Information Categories

For otherwise-eligible information to be considered Confidential Information, the information must fall within one or more of the following categories: [fill in] (the Protected Information Categories).

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Commentary

A receiving party might want to limit its confidentiality obligations to specific categories of information, such as (for example) financial data, design data, etc.

Affiliates' Information is Protected

Except as otherwise provided by this Agreement, otherwise-eligible information that is owned or maintained by an Affiliate of the Disclosing Party but not by the Disclosing Party itself is considered Confidential Information to the same extent as if it were owned or maintained by the Disclosing Party itself.

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Commentary

Marking of Affiliate Information

Otherwise-eligible information that is owned or maintained by an Affiliate of the Disclosing Party but not by the Disclosing Party itself will not be considered Confidential Information unless the information is clearly marked as being subject to the Agreement (regardless whether this Agreement requires Confidential Information of the Disclosing Party to be marked as such).

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Commentary

Parties' Dealings are Confidential

The following are the Confidential Information of each party (even if only one party is designated as a Disclosing Party): (1) the fact and content of the parties' dealings with each other, including if applicable the fact and content of their discussions or negotiations; and (2) the fact that the parties have entered into this Agreement and its terms and conditions.

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Commentary

See also:

Marking Requirement

Except to the extent (if any) expressly provided otherwise by this Agreement, information that is made available to the Receiving Party in connection with this Agreement, by or on behalf of the Disclosing Party, will not be considered Confidential Information unless it is set forth in a copy or written summary that is marked with a reasonably-prominent, visually-readable notice such as (for example) "Confidential information of [name]" or "Subject to NDA."

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Late Marking

IF: A disclosure of Confidential Information by the Disclosing Party does not comply with the marking requirement of the Marking Requirement clause THEN: The information will not be considered Confidential Information unless the Disclosing Party

(1) advises the Receiving Party of the information's confidential status at the time of disclosure; and

(2) no later than 30 days after the initial disclosure (the Late-Marking Deadline), (A) furnishes the Receiving Party with a copy or summary of the Confidential Information that complies with that marking requirement, and (B) gives the Receiving Party notice, in accordance with this Agreement, that it has done so.

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Marking Exception For In-Place Information

A particular document or thing containing Confidential Information (for example, a paper document or an electronic file) need not be marked as confidential if both of the following are true:

(1) the Receiving Party is given access to that particular document or thing as it is kept in the ordinary course of business, for example in the Disclosing Party's paper- or electronic files; and

(2) the Receiving Party is not authorized by the Disclosing Party to remove, transmit, or otherwise take a copy of Confidential Information contained in that particular document.

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Commentary

The "not authorized" language in subdivision (2) was chosen to address the situation where a receiving party surreptitiously "stole" information by, for example, photographing a disclosing-party document, making a copy on a USB thumb drive, etc.

Marking Exception for Recognizably-Confidential Information

Information otherwise eligible to be considered Confidential Information need not be marked as confidential if, under the circumstances, a reasonable person would recognize the confidentiality of the information.

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CAUTION

Receiving parties often object to clauses like this because of the potential for later disputes about what information would qualify as reasonably-recognizable as confidential.

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Security Precautions

The Receiving Party will take, at a minimum, commercially-reasonable security precautions to protect Confidential Information, including for example precautions not less than the precautions that the Receiving Party uses to protect its own confidential information of comparable importance and value.

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Prohibited Activities

Other than as expressly permitted by this Agreement, the Receiving Party may not do any of the following without the Disclosing Party's express prior written consent: (1) use Confidential Information; (2) make copies of Confidential Information; (3) remove, obscure, or alter existing confidentiality markings from copies of Confidential Information; (4) disclose, transmit, or otherwise make Confidential Information available to a third party; or (5) confirm, to any third party, any correlation or similarity between Confidential Information and information from any other source.

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Permitted Uses

During the term of this Agreement, 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 this Agreement; (2) exercising the Receiving Party's rights under this Agreement; (3) assessing whether to enter into another agreement with the Disclosing Party; and (4) any other purpose agreed to in writing in advance by the Disclosing Party.

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Permitted Disclosures

During the term of this Agreement, the Receiving Party may disclose Confidential Information, in confidence, to one or more of 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, to managers of a limited liability company and general partners of a general- or limited partnership).

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Need to Know Requirement for Disclosures

Each individual or organization to which Confidential Information is disclosed pursuant to the Permitted Disclosures clause must have a need to know the information in question in connection with a use of Confidential Information by the Receiving Party permitted by this Agreement.

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Confidentiality Obligation for Disclosures

Each individual or organization to which Confidential Information is disclosed pursuant to the Permitted Disclosures clause must be obligated, either to the Receiving Party or to the Disclosing Party, by written agreement or as a matter of law, to comply with legally-enforceable confidentiality obligations concerning the Confidential Information that are at least as restrictive as the confidentiality obligations of this Agreement.

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Subpoenas, Search Warrants, Etc.

(a) Subject to subdivisions (b) through (e), the Receiving Party may disclose Confidential Information in response to a demand for information (1) that is initiated or propounded by a third party and (2) as to which the Receiving Party's compliance may be compelled by law, such as (for example) a subpoena; a search warrant; a civil investigative demand; or a discovery request in a lawsuit.

(b) The Receiving Party must promptly advise the Disclosing Party upon learning of the demand (to the extent that doing so is not prohibited by applicable law).

(c) 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 demand.

(d) Upon request by the Receiving Party, the Disclosing Party will reimburse the Receiving Party for all reasonable expenses incurred in providing the cooperation required by subdivision (c), including for example reasonable attorneys' fees and -expenses.

(e) The Receiving Party may disclose only so much Confidential Information as is legally required in response to the demand.

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Copies and Excerpts

The Receiving Party may make copies and excerpts of Confidential Information, solely to the extent reasonably necessary for use or disclosure permitted by this clause, subject to the following conditions: (1) The Receiving Party must ensure that any such copy or excerpt duplicates any confidentiality marking on the copy from which the copy or excerpt is made; and (2) for the avoidance of doubt, the confidentiality obligations of this Agreement apply to all such copies or excerpts.

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Compliance with Law

The Receiving Party will make prudent efforts to ensure that any use, disclosure, or copying of Confidential Information, by or on behalf of the Receiving Party, complies with applicable law, including for example any applicable law concerning privacy and export controls.

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Obligations Continue After Termination

For the avoidance of doubt, except as expressly provided otherwise in this Agreement, the Receiving Party's obligations under the Security Precautions clause and the Prohibited Activities clause will continue in effect indefinitely for all information that continues to come within the definition of Confidential Information, regardless of any termination or expiration of this Agreement or any other right or obligation under it.

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Commentary

See also the XXX clause.

Expiration of Confidentiality Obligations

The Receiving Party need not comply with the obligations of the Security Precautions clause and the Prohibited Activities clause after [fill in] (the Expiration Date) except to the extent that applicable law would independently require such compliance (for example, a law concerning personal health information or consumer financial information).

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Expiration Exception for Trade Secrets

Notwithstanding any expiration of the confidentiality obligations of this Agreement, those obligations will nevertheless remain in effect for any Confidential Information that is shown to be a trade secret under applicable law, until such time (if any) as the information becomes subject to a specific exclusion from confidentiality status under this Agreement.

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Disclosure to Receiving-Party Contractors

The Receiving Party may disclose Confidential Information, in confidence, to its contractors on the same basis as it may do so to its employees.

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Disclosure to Receiving-Party Affiliates

The Receiving Party may disclose Confidential Information, in confidence, to its Affiliates on the same basis as it may do so to its employees.

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Specific Confidentiality Instruction to Recipients Required

Before providing Confidential Information to an individual recipient (for example, a Receiving-Party officer, director, or employee), the Receiving Party must first specifically instruct the individual that he or she has a duty to abide by the confidentiality obligations of this Agreement.

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Prohibited Recipients of Confidential Information

The Receiving Party may not provide Confidential Information to any [FILL IN] (each, an Ineligible Recipient without the express prior written consent of the Disclosing Party; this prohibition takes precedence over any disclosure authorization in this Agreement.

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Copies of Confidentiality Agreements Required on Request

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

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Inclusion of Confidential Information in Public Filings After Consultation

The Receiving Party may disclose Confidential Information in any legally-required submission to a regulatory agency or other governmental body to the same extent as if the submission were required in response to a subpoena (see the ConfInfoSubpoenasCls clause), BUT ONLY IF 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.

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Commentary

Disclosure of Confidential Information to Prospective Acquirer

(a) Subject to subdivision (b), the Receiving Party may, without the Disclosing Party's consent, disclose Confidential Information to a prospective acquirer of (1) the Receiving Party itself, or (2) substantially all of the assets of the Receiving Party's business specifically associated with this Agreement.

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

Commentary

Data-Room Requirement for Disclosure to Prospective Acquirer

Any disclosure of Confidential Information to a prospective acquirer pursuant to the Disclosure of Confidential Information to Prospective Acquirer clause must be limited to making the Confidential Information availalbe to the prospective acquirer in a secure data room.

Commentary

Return or Destruction of Confidential Information

(a) REQUIREMENT: Except to the extent (if any) that this Agreement provides otherwise, the Receiving Party will make diligent efforts to do one or the other of the following in respect of all "Specimens," as defined below, of Confidential Information: (1) return the Specimens to the Disclosing Party (or to another individual or organization designated in writing by the Disclosing Party), or (2) destroy the Specimens.

(b) DEFINITION – SPECIMENS: For purposes of subdivision (a), the term "Specimens" refers to all copies of, and all physical objects embodying, Confidential Information (for example, paper- or electronic copies and hardware samples), that are in the possession, custody, or control of any of the following: (1) the Receiving Party, and/or (2) any individual or organization to which the Receiving Party made Confidential Information accessible.

(c) EXCEPTION: Subdivision (a) does not apply to copies of Confidential Information that are not reasonably capable of being readily located and segregated — for example, system-backup copies of email and other information.

(d) CONFIDENTIALITY OBLIGATION CONTINUES: For the avoidance of doubt, the confidentiality obligations of this Agreement will continue to apply to all Specimens of Confidential Information that are not returned or destroyed for so long as those obligations remain in effect.

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Certificate of Return or Destruction Required

If seasonably requested in writing by the Disclosing Party, the Receiving Party will seasonably provide the Disclosing Party with a certificate that it has complied with the obligations of the Return or Destruction of Confidential Information clause. 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 this Agreement.

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Archive Copies of Confidential Information

(a) As a limited exception to the return-or-destruction obligations of the the Return or Destruction of Confidential Information clause clause, a set of archive copies of Confidential Information, including reasonable backups for such copies, may be maintained indefinitely, by or on behalf of the Receiving Party, PROVIDED THAT the conditions set forth in subdivision (b) are met.

(b) The archive copies must be maintained at one or more locations meeting commercially-reasonable security standards and made accessible only: (1) on a need-to-know basis to the Receiving Party for purposes of compliance with the Receiving Party's confidentiality obligations under this Agreement; or (2) as directed or permitted by a tribunal of competent jurisdiction; or (3) with the Disclosing Party's consent.

(c) For the avoidance of doubt, the confidentiality obligations of this Agreement will continue in effect, in accordance with their terms, for all such archive copies.

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Archive Copies Must Be 'Outside Counsel Only'

All archive copies retained by the Receiving Party copies must be kept under the direct or indirect control of the Receiving Party's outside counsel; such control may include, for example, maintenance of the archive copies in a commercial records-storage facility operated by an individual or organization that, directly or indirectly, is contractually obligated to outside counsel to maintain the copies in confidence.

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Commentary

The phrase outside counsel only is well understood to 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.

No Other Rights Granted in Confidential Information

For the avoidance of doubt, this Agreement does not grant the Receiving Party any license right or ownership right of any kind, in Confidential Information, nor in other any intellectual property of the Disclosing Party, EXCEPT to the extent (if any) that this Agreement expressly states otherwise.

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Disclaimer of Implied Warranties in Confidential Information

For the avoidance of doubt:

(a) The Disclosing Party DISCLAIMS all warranties, representations, conditions, and terms of quality, express or implied, about Confidential Information (for example, warranties of completeness or accuracy), all of which is provided or otherwise made available AS IS, WITH ALL FAULTS, EXCEPT to the extent (if any) expressly stated otherwise in this Agreement;

(b) 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 this Agreement; and

(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 this Agreement.

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Commentary

Some language in this clause is in all-caps bold-faced type so that the language will be conspicuous.

Concerning subdivision (b), see the Notebook section Reliance disclaimers.

Receiving-Party Liability for Certain Third-Party Misappropriation

(a) This clause applies if: (1) a third party – 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 third party's relationship with the Receiving Party; and (2) that third party uses, discloses, and/or copies that Confidential Information in a manner not permitted by this Agreement.

(b) In such a situation, 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.

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

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Receiving-Party Liability for Certain Third-Party Claims

(a) The Receiving Party will defend and indemnify the Disclosing Party, its Affiliates, and the Personnel of each of them, against any claim by a third party arising out of the use of Confidential Information by, on behalf of, or with the permission of, the Receiving Party.

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

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Receiving-Party Cooperation Against Misappropriators

During the term of this Agreement, in response to any reasonable request by the Disclosing Party, the Receiving Party will provide reasonable cooperation with the Disclosing Party – at the Disclosing Party's expense – in investigating and/or taking action against a third party in connection with possible misappropriation of Confidential Information.

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Receiving Party's Disclaimer of Other Confidentiality Obligations

For the avoidance of doubt: Apart from (i) the confidentiality obligations of this Agreement or (ii) as may be required by applicable law (for example, privacy law) —

(a) The Receiving Party is under no obligation of confidence in respect of any information that the Disclosing Party causes to be disclosed or made available to the Receiving Party pursuant to this Agreement, apart from Confidential Information; and

(b) Consequently, the Receiving Party is free to use and/or disclose any or all such non-Confidential Information in its sole and unfettered discretion, as long as 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.

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Disclosing Party's Warranty of Disclosure Authority

The Disclosing Party warrants to the Receiving Party that it has the right to disclose any Confidential Information that it makes available to the Receiving Party pursuant to this Agreement.

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Receiving Party's Representation of Its Status and Intentions

To induce the Disclosing Party to provide it with access to Confidential Information, the Receiving Party makes the representation stated in this Agreement concerning the Receiving Party's status and its intentions for the use of Confidential Information.

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Commentary

This clause would "tee up" a fraud claim against the receiving party if it turned out that the receiving party intended to make an unauthorized use of Confidential Information.

A similar clause can be seen in [XXX].

Receiving Party Must Consent to Each Disclosure to It

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

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Commentary

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.

Residuals Rights in Confidential Information

(a) The Receiving Party may, without obligation to the Disclosing Party, use 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 (collectively, Residuals).

(b) For the avoidance of doubt, any such 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.

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Disclosure of Confidential Information Not Required

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

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Dispute Management

See also the Arbitration provisions.

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Early Neutral Evaluation of Serious Disputes

(a) PROCEDURE: Either party may submit any dispute that is reasonably likely to become the subject of litigation or arbitration to (nonbinding) early neutral evaluation, in accordance with the Early Neutral Evaluation procedures of the American Arbitration Association then in effect (the ENE Rules), or such other procedures as the parties may agree. In that event, each party will participate in the evaluation in good faith.

(b) DISCLOSURES OPTIONAL: For the avoidance of doubt, in addition to any confidentiality requirements in the ENE Rules: (1) in the evaluation proceedings, no party need reveal any particular information to the other party or to the evaluator; and (2) if a party privately discloses information to the evaluator, then the evaluator will not reveal that information to any other party without the disclosing party's consent.

(c) BACKGROUND: The goal of early neutral evaluation is to provide parties to a dispute and their counsel with a "reality check." The neutral's evaluation is confidential, non-binding, and not shared with the trial judge or arbitrator. Any applicable rights the parties may have, under the relevant rules of procedure, to engage in discovery and motion practice are fully preserved. The evaluator has no power to impose settlement and does not attempt to coerce a party to accept any proposed terms. 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.

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Commentary

Subdivision (a) refers to the American Arbitration Association's Early Neutral Evaluation procedures, which provide (among other things) for confidentiality.

Subdivision (b) is intended to assuage lawyers' fear of revealing too much too soon to their adversaries (even though "Perry Mason moments," of springing a surprise on the other side, almost never seem to happen).

Subdivision (c) is adapted from the Early Neutral Evaluation (ENE) Web page of the U.S. District Court for the Northern District of California, the federal court whose district includes Silicon Valley.

See also the Notebook section "Early Neutral Evaluation."

Economical Litigation Agreement Applies

(a) Any dispute arising out of or relating to the Agreement or any transaction or relationship resulting from it, including but not limited to any dispute concerning breach, termination, or validity of this Agreement, whether based on action in contract, tort, or otherwise, will be finally resolved by civil litigation in accordance with the CPR Economical Litigation Agreement (2010 edition).

(b) THE PARTIES IRREVOCABLY AGREE 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 this Agreement agree in writing to trial by jury.

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Commentary

The CPR Economical Litigation Agreement (a.k.a. a "litigation pre-nup") is a relatively new document. In the abstract, its provisions make a great deal of sense, but a party might not want to agree to them in the abstract. A drafter or negotiator should think carefully before including the ELA in a contract.

Some U.S. jurisdictions, notably California and Georgia, prohibit advance waivers of jury trials.

(1) in jurisdictions where advance waiver of jury trial is prohibited by law; or

(2) where all parties to the Agreement subsequently agree in writing to trial by jury.

Escalation of Disputes Upon Request

(a) The parties will jointly refer any disagreement between them to their respective higher management levels, including executive-level management where appropriate, whenever requested in writing by either party.

(b) Upon a request for escalation, each party will promptly advise the other party in writing of the name and contact information of a senior 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 required by subdivision (c) below.

(c) Promptly thereafter, the parties will cause their respective senior representatives: (1) to meet and confer at least once about the dispute, by telephone, or if so agreed, by video conference or in person; and (2) at each such meeting or meetings, to make a good-faith effort to settle the dispute.

(d) The party making the request for escalation will coordinate reasonable meeting arrangements. Each party will be responsible for its own expenses of the senior representatives' meeting.

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Commentary

Some lawyers believe that a dispute-escalation requirement can increase the chance of an amicable settlement. Getting new people involved in a dispute can sometimes bypass individual animosities, hidden personal agendas, and other foibles; this can help break an impasse. See generally my post, Drafting for Disputes: Keep individuals' personal interests in mind (2009).

A settlement specialist with experience both as a law-firm litigator and as in-house counsel recalls putting a dispute-escalation provision into KPMG Consulting's standard contracts; he says, "the results were outstanding — we litigated with our clients less and got back to business sooner." John DeGroote, Multi-Step Dispute Resolution Clauses: 7 Reasons Why They Work (2010; accessed July 23, 2012); see also John DeGroote, The Multi-Step Dispute Resolution Clause: a Few Reasons Why Clients Like Them (2010).

"Executive-level management"

In subdivision (a), the phrase "executive-level management" is intentionally vague; the idea is to encourage the parties to keep referring the dispute up to higher and higher levels until

(1) they resolve the dispute, or

(2) one party says "enough!" and declines to continue — at the risk of being branded as intentionally flouting its contractual obligation, which might make a poor impression on a judge or jury.

"Whenever requested in writing"

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, "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?"

See also:

To provide parties with financial incentives to comply with this clause, consider also including the Dispute-Expense Recovery Waiver clause in the Agreement.

Dispute Expenses Definition

The term Dispute Expenses refers to the following in respect of litigation, arbitration, or any other dispute-resolution proceeding:

(1) the costs of the proceeding, such as for example costs of court or administration fees charged by an arbitration provider, as applicable; and

(2) reasonable and necessary expenses actually incurred in connection with the proceeding, such as (for example) reasonable fees for attorneys and expert witnesses and the reasonable expenses of each.

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Dispute Expenses Recovery

In any Agreement-Related Dispute, the prevailing party (the Recovering Party) will be entitled to recover its Dispute Expenses from the other party, in addition to any other relief that may be granted.

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Dispute-Expense Recovery Waiver

(a) The parties believe that the following categories of 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) To create an incentive for the parties to comply with such provisions — if any are included in this Agreement — this clause applies if a party (the "non-participating party"): (1) fails to participate in dispute-resolution efforts or proceedings required by any such provision, or (2) challenges the validity or enforceability of any such provision.

(c) The non-participating party will not be entitled to recover its costs, attorneys' fees, or other expenses, AND HEREBY WAIVES, KNOWINGLY, VOLUNTARILY, AND IRREVOCABLY, ANY CLAIM TO SUCH RECOVERY.

(d) For the avoidance of doubt, the waiver of this clause applies even if the non-participating party: (1) would otherwise have been entitled to such a recovery under this Agreement or pursuant to applicable law; and/or (2) prevails in the dispute in question or in the challenge against validity or enforceability of the provision in question.

(e) For the avoidance of doubt, the waiver of this Clause is in addition to any other relief to which another party may be entitled in respect of the non-participating party's actions.

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Commentary

This clause is modeled ona mediation provision in a standard California residential real-estate purchase agreement, which has been enforced at least twice by courts. See Cullen v. Corwin, 206 Cal. App. 4th 1074, 142 Cal. Rptr. 3d 419 (2012) (reversing award of attorneys' fees to prevailing defendant, on grounds that the defendant had refused to participate in mediation as required by contract); Lange v. Schilling, 163 Cal. App. 4th 1412 (2008) (reversing award of attorneys' fees to prevailing plaintiff).

The use of bold-faced type for the waiver language is for conspicuousness – see the Notebook section Conspicuousness – Additional Commentary.

JURY TRIAL WAIVER

To the maximum extent not prohibited by law, EACH PARTY KNOWINGLY, VOLUNTARILY, 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.

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Commentary

This language is a two-way waiver, because a court would be more likely to disregard a one-way waiver. (And that assumes a court would give effect to an advance waiver of jury trial, which would not happen in California or Georgia.)

The use of bold-faced type is for conspicuousness – see the Notebook section Conspicuousness – Additional Commentary.

Jury Trial Waiver – No Contrary Representation

Each 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.

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Jury Trial Waiver – Materiality

Each party acknowledges that the other party has been induced to enter into this Agreement by, among other things, the mutual waivers and certifications in this Clause.

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Limitation Period

The Protected Party will not be liable in any action, proceeding, or claim for breach of any provision of this Agreement, in any forum or before any Tribunal, that is brought after the expiration of the Limitation Period; any such action, proceeding, or claim that is brought or asserted after such expiration will be barred.

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Commentary

The law generally – but by no means always – allows parties to shorten the statutory "limitation period," that is, to move up the deadline for filing a lawsuit under the agreement. See also the Notebook section "Limitation Periods."

Limitation Period — Discovery Rule

The Limitation Period will begin on (1) the date of discovery of the facts constituting or giving rise to the alleged breach; or (2) if earlier, the date such facts should or could have been discovered with reasonable diligence.

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Limitation Period – No Discovery Rule

(a) As to any claim of breach of this Agreement, the limitation period specified in this Agreement in the Limitation Period clause will begin on the date of the earliest event that, either alone or together with previous events, was necessary to give rise to the claim.

(b) For the avoidance of doubt, subdivision (a) applies regardless whether the claimant knew or should have known of the occurrence of the event or of any such previous event.

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Liquidated Damages

(a) IF: Provider (the Liable Party) fails to deliver goods or perform services as specified in this Agreement; THEN: The Liable Party shall pay the other party, in place of actual damages, [fill in] (the Liquidated Damages Amount).

(b) The parties agree that the stated liquidated damages represent a reasonable estimate of [NEEDS WORK XXX – INDIANA v. IBM]

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Commentary

This liquidated-damages language is modeled on that in Federal Acquisition Regulations § 52.211.11.

Mediation Requirement

Any party desiring to bring an action, before any tribunal, against another party, in respect of any specified dispute must first attempt to resolve the matter through non-binding mediation administered by the American Arbitration Association (the Mediation Administrator) under the AAA Commercial Mediation Rules (the Mediation Rules), or such other administrator and/or rules as the parties may agree.

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Commentary

Opinions vary as to whether mediation of disputes is worthwhile. Some practitioners take the view that when a defendant agrees to mediate, it is implicitly conceding that yes, it should pay the plaintiff, and that the main purpose of the mediation is to answer the question, how much?

See also the Tribunal Definition clause

Mini-Trial to Management

Either party may submit any Serious Dispute for consideration by a neutral advisor and a representative of each party's senior management, in accordance with the then-current mini-trial procedures of the American Arbitration Association (the Minitrial Procedures) or such other procedures as the parties may agree.

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Commentary

Mini-trials to more-senior management can sometimes help settle disputes that lower-level personnel can't resolve. At this writing, the AAA mini-trial procedures can be found at http://goo.gl/RhRL6Y.

Mitigation of Damages – Waiver of Duty

[PARTY 1 NAME] KNOWINGLY AND VOLUNTARILY WAIVES any duty on the party of [PARTY 2 NAME] to mitigate its damages in the event of a breach of this Agreement by [PARTY 1 NAME] In the event of a breach of this Agreement, the breaching party need not use reasonable efforts to mitigate its damages arising from or relating to the breach.

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Commentary

In U.S. jurisdictions, a non-breaching party's duty to mitigate its damages might exist as a matter of law. See generally Jason T. Strickland, Leaving the Apples to Rot: The Duty of a Wronged Party to Mitigate its Damages and its Potential Waiver in Commercial Contracts (2013).

Mitigation of Damages

In the event of a breach of this Agreement, the non-breaching party will use reasonable efforts to mitigate its damages arising from or relating to the breach.

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Commentary

In U.S. jurisdictions, a non-breaching party's duty to mitigate its damages might exist as a matter of law, but might be subject to waiver. See generally Jason T. Strickland, Leaving the Apples to Rot: The Duty of a Wronged Party to Mitigate its Damages and its Potential Waiver in Commercial Contracts (2013).

No Recourse Against Employees, Etc.

(a) Each party agrees not to assert any Contract Claim (defined below) against any individual or organization other than an individual or organization expressly identified in the preamble of this Agreement as entering into this Agreement (Contracting Party).

(b) As used in this Clause, Contract Claim refers to any claim, obligation, liability, or cause of action (each, a Claim) that may: (1) be based upon; (2) be in respect of; (3) arise under, out or by reason of; (4) be connected with; or (5) relate in any manner to, any of the following: (A) the Agreement; or (B) the negotiation, execution, performance, or breach of this Agreement; or (C) any representation or warranty made in, in connection with, or as an inducement to, this Agreement.

(c) For the avoidance of doubt, the term Contract 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; (A) each Contracting Party, and (B) each such affiliate.

(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, WAIVES AND RELEASES all such Contract 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. Such Claims of entitlement 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.

(g) Each Contracting Party DISCLAIMS, AND AGREES NOT TO ASSERT, ANY RELIANCE UPON any Nonparty Affiliate with respect to the performance of this Agreement or any representation or warranty made in, in connection with, or as an inducement to the Agreement.

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Commentary

This clause is adapted from language proposed by a noted corporate-law practitioner. See Glenn D. West & Natalie A. Smeltzer, ProTecting the Integrity of the Entity-Specifc Contract: The "No Recourse Against Others" Clause-Missing or Ineffective Boilerplate?, 67 BUS. LAW. 39, 71-72 (2011) (ABA Section of Business Law membership required).

In an email exchange with me on August 8, 2012, Mr. West commented that "I find general acceptance of some version of my clause as long as it's mutual. Both sides of the transaction have the same general interest in protecting the integrity of the entity-specific nature of the contract; and if they don't, this clause smokes that out and there is a real discussion about guarantors."

Service of Process by Courier

In connection with any action arising out of or relating to the Agreement or any transaction or relationship resulting from the Agreement, 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, via DHL, Federal Express, UPS, and the like) with proof of delivery; and (2) waives any objection to the sufficiency of any such method of service where the process is actually received by the party being served.

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Settlement Rejection Consequences

(a) APPLICABILITY: This clause applies if, in any dispute arising out of or relating to this Agreement or any transaction or relationship resulting from it (a Covered Dispute): (1) a party (the "rejecting party") does not timely accept a Covered Settlement Offer, namely a written offer that: (1) expressly states that it is subject to this clause; and (2) offers to settle a Covered Dispute.

(b) PAYMENT REQUIREMENT: 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.

(c) PROCEDURAL MATTERS: Matters of timing and other procedural issues concerning the offer will be governed in the general manner provided for an offer of judgment under Rule 68 of the [U.S.] Federal Rules of Civil Procedure, any necessary change being made, to the extent the parties do not agree otherwise.

(d) CONFIDENTIALITY OF SETTLEMENT DISCUSSIONS: Absent consent of the other party, each party shall preserve in strict confidence: (1) the existence and details of any offer made by the other party pursuant to this section; and (2) any subsequent communications between the parties regarding any offer made pursuant to this section.

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Equitable Relief – Availability

(a) This Clause applies if invoked by the party specified in this Agreement (each party if the Agreement does not specify a party) (a "claimant") in any case of actual or threatened breach of this Agreement by the other party (a "respondent").

(b) The parties agree that in any such case, the claimant may seek equitable relief, such as specific performance and/or injunctive relief, against the respondent in respect of the actual or threatened breach.

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Commentary

In a 2012 opinion, Chancellor Strine of the Delaware chancery court relied in part on a similar clause in granting a four-month injunction against one company's hostile takeover bid targeting another company. See Martin Marietta Materials, Inc v. Vulcan Materials Co., 56 A.3d 1072, 1144-45 (Del. Ch. 2012), aff'd, 45 A. 3d 148 (Del. 2012) (en banc).

In subdivision (b), the phrase the parties agree is redundant, of course, but in litigation it can serve as a useful sound bite.

Equitable Relief – Inadequacy of Monetary Relief

IF: The claimant proves an actual or threatened breach of the obligations of this Agreement by the respondent; THEN: For purposes of seeking injunctive relief or similar equitable remedy, the claimant is deemed to have established that monetary damages alone would not be an adequate remedy against the respondent.

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Equitable Relief – Bond Waiver

The claimant need not post a bond to obtain injunctive relief against the respondent under this the Equitable Relief – Availability clause.

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CAUTION

Agreeing to this clause might turn out to be a really bad idea. When a party seeks preliminary or temporary injunctive relief in a U.S. court, the court will often (and possibly must) require that party to post a bond as security. The purpose of the bond is to guarantee that at least some money (provided by the insurance company that writes the bond) will be available to compensate the defendant for any damage it might suffer if the injunctive relief is dissolved. See, e.g., Fed. R. Civ. P. 65(c); Tex. R. Civ. P. 684. See also, e.g., Thomas E. Patterson, Handling the Business Emergency, ch.3 (American Bar Association 2009), extensive excerpts available at http://goo.gl/ak7Mt (books.google.com).

A party agreeing in advance to waive a bond requirement might later find itself subjected to a preliminary injunction, but then prevail at trial — only to find itself unable to otain any meaningful recovery for the wrongful injunction, because the plaintiff was unable to pay a damage award.

Equitable Relief – Not Precluded

Unless the Agreement expressly states otherwise, nothing in this Agreement precludes a party from seeking a temporary restraining order, preliminary injunction, or similar relief, in accordance with applicable law, to prevent or stop irreparable injury or other harm not capable of being fully redressed by a monetary award.

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Force Majeure

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This term sheet consists of those Common Draft clauses listed below as "Included," subject to any variations agreed by the parties.

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Force Majeure – Excused Nonperformance

FILL IN PARTY NAME (the Invoking Party) may invoke force majeure to excuse a failure of timely performance, but only if the failure is caused by a Force Majeure Event, defined as one or more events as to which a prudent person in the position of the Invoking Party would not reasonably have been able to (i) anticipate the event or events and (ii) avoid the resulting failure.

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Commentary

For examples of types of force majeure events, see the Notebook section Laundry list of force majeure events.

Force Majeure – Status Reports Upon Request

(a) If so requested by the other party, the Invoking Party will provide reasonable information, from time to time, about its efforts, if any: (1) to perform its obligations under this Agreement, and/or (2) to remedy or mitigate the effect of the force majeure.

(b) The other party will maintain in confidence all force-majeure status information it receives from an Invoking Party unless and until the information becomes available to the general public.

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Force Majeure – Invoking Party Must Attempt to Remediate

The Invoking Party must make at least commercially-reasonable efforts to remediate the effects of the force majeure.

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Force Majeure – Invoking Party Must Attempt to Mitigate Effects

The Invoking Party must make at least commercially-reasonable efforts to mitigate the effect of the force majeure on the other party or parties.

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Commentary

Remediation, mitigation, or both? Note that there are two clauses here, one requiring mitigation and one requiring remediation, which are two different things.

Force Majeure – Other Party Must Attempt to Mitigate Effects

Each party other than the Invoking Party must make at least commercially-reasonable efforts to mitigate the effect upon itself of the force majeure.

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Force Majeure – Termination Right

The Terminating Party may terminate the Agreement by, and effective upon, giving notice of termination to the other party if the effect of the force majeure: (1) is material to the Agreement as a whole; and (1) lasts for longer than [fill in] (the Termination Waiting Period), which begins on the effective date of the Invoking Party's notice of invocation of force majeure.

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Commentary

Drafters should consider what should be the consequences of termination for force majeure.

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).

General Provisions

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This term sheet consists of those Common Draft clauses listed below as "Included," subject to any variations agreed by the parties.

General Provisions

Additional or Different Terms Are Excluded: Included

Additional or Different Terms – Non-Assent Examples: Included

Amendments Must Be In Signed Writings: Included

Amendments May Be Made Unilaterally: Not included

  • Amending Party: [fill in]

Assignment – Termination of Agreement: Not included

Binding on Parties & Successors & Assigns: Included

Contra Proferentem Disclaimer: Not included

Copies of Agreement Are Deemed Originals: Included

Counsel for Entry Into Agreement: Included

Course of Dealing Does Not Modify Agreement: Not included

Disclaimer of Other Commitments: Not included

Employees' Non-Waivable Redress Is Not Restricted: Not included

Entire Agreement: Included

Fiduciary- or Agency Relationship Disclaimed: Included

Forum Selection: Not included

Governing Law: Not included

Headings Are for Reference Only: Included

Independent Contractors: Included

Language of Agreement: Not included

  • Agreed Language: English

Legal Compliance Requirement: Included

  • Obligated Party: Each party

Policy Statements, Etc. Not Disputable: Included

Prohibitions Apply to Attempts, Etc.: Included

Publicity Consent Requirement: Included

Redlining Representation: Included

Representations – Reliance Disclaimer: Not included

Savings Clause: Included

Signature – in Counterparts: Included

Signature – Delivery of Signature Page Only: Included

Signers' Authority Personal Representation: Included

Signers' Availability: Included

Survival (Broad/Generic) Clause: Not included

Survival (Enumerated Provisions): Included

Third-Party Beneficiaries Disclaimer: Included

Waivers Must Be in Signed Writings: Included

Waiver of Franchise-Law Benefits: Not included

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Additional or Different Terms Are Excluded

Neither party is obligated to give effect to Additional Terms, as defined below, unless the requirements of this Agreement to amend this Agreement are satisfied. The term Additional Terms refers to terms in a quotation, purchase order, confirmation of order, shipping manifest, invoice, or similar document that may be provided by a party in connection with a transaction pursuant to this Agreement, where such terms are in addition to or different from those of this Agreement.

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Commentary

This clause is intended to preclude either party from "re-trading the deal" later on (intentionally or not) through the use of Additional Terms in a purchase order, etc.

See also the Notebook section "Additional Contract Terms in Purchase Orders, Confirmations, Etc.."

Additional or Different Terms – Non-Assent Examples

For the avoidance of doubt and as illustrative examples, a party is not deemed to assent to Additional 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, Additional Terms; (2) shipping an orally-agreed order after receiving a written purchase order containing Additional Terms; (3) paying an invoice containing Additional Terms; and/or (4) accepting or paying for goods or services after receiving a document containing Additional Terms.

#+ENDQUOTE

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Commentary

This subclause 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 the C9 Ventures opinion (2012) from the California court of appeals.

Amendments Must Be In Signed Writings

For an amendment to this Agreement to be effective, it must: (1) be in writing; (2) state or clearly indicate that the provisions of the amendment take precedence over those of this Agreement or, alternatively, the extent to which that is the case; and (3) be signed by an individual having authority to bind the party that is asserted to be bound by the amendment.

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Commentary

This clause might be unenforceable in some jurisdictions, on grounds that parties are just as free to amend an existing agreement as they are to make a new one, subject to statute-of-frauds rules. See also the Notebook section "Amendments."

Amendments May Be Made Unilaterally

[Fill in party name] (the Amending Party) may unilaterally amend this Agreement, or any exhibit, schedule, or appendix of this Agreement, by giving notice to the other party, as follows:

(a) Any such unilateral amendment will take effect at the end of 30 days following the effective date of the notice of amendment (the Amendment Notice Period).

(b) IF: The other party is unwilling for this Agreement to continue as amended; THEN: The other party may terminate this Agreement by giving notice to the Amending Party no later than the end of the Amendment Notice Period (the Termination Deadline).

(c) No unilateral amendment will retroactively modify any binding dispute-resolution provision of this Agreement (for example, a binding-arbitration provision) in respect of any then-accrued claim of breach of this Agreement by one signatory party against another unless those parties expressly agree otherwise.

(d) Without the non-amending party's express written agreement, a unilateral amendment will not retroactively eliminate or modify any right already exercised by the non-amending party, including for example any right to demand that the Amending Party perform an obligation, under this Agreement.

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Commentary

A unilateral-amendment clause can be very tricky; done improperly, it can endanger the enforceability of the contract, as discussed in the Notebook section Unilateral amendments can be problematic.

Subdivision (c) is a so-called Halliburton exception, of the kind discussed in Harris v. Blockbuster, Inc., 622 F.Supp.2d 396, 400 (N.D. Tex. 2009).

Binding on Parties & Successors & Assigns

(a) Each 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 this Agreement by another party.

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Commentary

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, copy available at http://goo.gl/ZBdAEA.

Me, I'm not so sure. Such clauses 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.

Contra Proferentem Disclaimer

The parties agree that 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 this 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.

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Commentary

This clause addresses the contra proferentem principle of contract interpretation. That principle says that — other things being equal — an ambiguity in particular language of a contract should be resolved against the party that drafted the language in question. The rationale is that the drafting party had the means and opportunity to make the language clear, one way or another; as between the drafting party and the 'innocent' other party, the former should bear the consequences of the ambiguity.

For a general discussion of this topic, see the Wikipedia article Contra proferentem.

Specimens   SPEC

Copies of Agreement Are Deemed Originals

Any reproduction of this Agreement, or of any of its pages or other components parts, that is made by reliable means is to be considered an original.

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Commentary

This language is akin to 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."

Specimens   SPEC
  • IBM NDA, last paragraph.

Counsel for Entry Into Agreement

Each party acknowledges that it has had the opportunity to be represented, by counsel of that party's choice, in deciding whether to enter into this Agreement on the terms and conditions set forth in it.

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Commentary

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.

Course of Dealing Does Not Modify Agreement

No course of prior dealing or usage of the trade is to be used to modify, supplement, or explain any term of this Agreement.

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Commentary

See generally UCC § 1-303 (course of dealing, etc., in general), § 2-208 (in agreements for sale of goods); see also the WaiversCls clause.

Disclaimer of Other Commitments

For the avoidance of doubt, each party acknowledges that, except to the extent – if any – expressly stated otherwise in this Agreement, nothing in this Agreement requires the other party to enter into any other agreement, nor to provide any goods, services, or information.

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Employees' Non-Waivable Redress Is Not Restricted

(a) For the avoidance of doubt, nothing in this 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.

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Entire Agreement

The Agreement sets forth the final, complete, exclusive, and binding statement of the agreement of its signatory parties concerning the subject matter of this Agreement. It supersedes all prior agreements and undertakings, both written and oral, between or on behalf of the signatory parties with respect to that subject matter, all of which are merged into this Agreement.

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Commentary

Drafters should be careful about entire-agreement clauses — they might unwittingly hurt their clients' position by "vaporizing" more-favorable terms in a prior agreement.

This happened, for example, in Dasher v. RBC Bank, No. 13-10257 (11th Cir. Feb. 10, 2014): RBC Bank tried to enforce an arbitration clause in its agreement with a customer. Unfortunately for RBC, it had been acquired by another company, which had exercised its right under the old agreement to cause an entirely new customer agreement to be sent out (cf. the Amendments May Be Made Unilaterally clause). Under the terms of the old agreement, the new agreement superseded the old agreement — and the new agreement did not include an arbitration clause. As a result, the district court refused to compel arbitration; the appellate court affirmed.

See also the Notebook section "Entire-agreement clauses."

Fiduciary- or Agency Relationship Disclaimed

For the avoidance of doubt, no signatory party, in entering into this Agreement, intends to enter into a fiduciary- or agency relationship except to the extent, if any, expressly so stated in this Agreement.

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Commentary

Forum Selection

(a) Any action or other proceeding to assert a claim arising out of this Agreement (each, a "proceeding") may be commenced against a party (the "defendant") in the court or courts having jurisdiction in [fill in location] (the Selected Forum), regardless where the defendant is geographically located or conducts business.

(b) For the avoidance of doubt, this clause does not negate any provision of this Agreement provisions requiring arbitration or other non-judicial dispute resolution procedure.

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Commentary

For an expanded version of "a claim arising out of this Agreement …," consider the laundry list in the Agreement-Related Dispute Definition clause.

Note that the "may be commenced" language is non-exclusive; it does not rule out either filing a lawsuit in another venue nor seeking a transfer of a case to another forum. Those possibilities are addressed in the Forum Selection is Exclusive clause.

This clause does not say that the parties agree to have suits heard "in the courts of" the specified forum location. A U.S. court might find that such language precluded the defendant from removing the suit to federal court. That happened in Doe 1 v. AOL, LLC, 552 F.3d 1077, 1081-82 (9th Cir. 2009) (per curiam), where the appeals court also held that the forum-selection clause was unenforceable.

The "geographically located" language in this clause is adapted from a forum-selection clause that was successfully asserted on appeal by the plaintiff in BlueTarp Fin., Inc. v. Matrix Constr. Co., 709 F.3d 72 (1st Cir. 2013); in that case, the appeals court reversed and remanded the trial court's dismissal of the case for lack of personal jurisdiction over the defendant.

See also the Notebook section "Forum-selection clauses."

Forum Selection is Exclusive

The jurisdiction of the court or courts specified in the Forum Selection clause is exclusive; neither party may commence any proceeding in any other forum, nor transfer the action to any other forum, and each party agrees not to attempt to do either.

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CAUTION

A drafter might not want to include an exclusive forum-selection clause in a contract. Even proposing the clause might backfire on the drafter's client; moreover, in the future the clause might prove tactically disadvantageous for the client. See also the Notebook section "An exclusive-forum clause might backfire on the drafter."

Forum Selection – Submission to Selected Jurisdiction

Each party agrees to submit to the specific jurisdiction of court or courts specified in the Forum Selection clause, but solely for proceedings specified in that clause; nothing in that clause is intended as a submission by a party to the general jurisdiction of any court or other tribunal.

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Commentary

For additional information on specific versus general jurisdiction, see the discussion at http://goo.gl/kzVUu (Wikipedia.org).

Forum Selection – Nonexclusivity

For the avoidance of doubt, unless this Agreement provides for exclusive jurisdiction in a court or courts, nothing in this Agreement is intended to negate or waive any right a party may have: (1) to assert a claim in any other proper forum; nor (2) to seek to transfer the action to another venue, for example on grounds of greater convenience to the parties and witnesses; nor (3) to remove an action from one court to another, for example to remove an action filed in state court (in the United States) to federal court.

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Commentary

Forum Selection – Non-Parties Are Bound

A signatory party to this Agreement may invoke the Forum Selection clause in any action or proceeding initiated by a non-party to this Agreement to the greatest extent permitted by law.

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Commentary

Forum Selection – Third Parties May Not Invoke

The parties do not intend that any non-party to this Agreement should be able to invoke Author's note: This is an optional subclause that can be used to augment the Forum Selection clause..

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Commentary

Governing Law

The laws that apply in [fill in] (the Governing-Law Location) will govern in any dispute arising out of or relating to this Agreement or any transaction or relationship resulting from it, without regard to conflicts-of-law or choice-of-law rules.

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Commentary

For an expanded version of "any dispute …," consider the laundry list in the Agreement-Related Dispute Definition clause.

See also the Notebook section "Governing Law."

Governing Law – Applicability to Arbitration

For the avoidance of doubt, any arbitration of disputes, pursuant to an agreement to arbitrate in this Agreement (if any), will likewise be governed by the law(s) specified in the Governing Law clause unless the Agreement expressly provides for a different arbitral law. EXAMPLE: If the Agreement contains an arbitration provision that specifies that California law will apply, then any arbitration pursuant to that provision will be governed by California law and, if applicable, the U.S. Federal Arbitration Act.

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Governing Law – Exclusion of UN CISG

The United Nations Convention on Contracts for the International Sale of Goods ("UN CISG" or "Vienna Convention") will not govern this Agreement nor any transaction or relationship arising out of it.

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Commentary

In some ways, the UN CISG amounts to an international version of the U.S. Uniform Commercial Code, but with some non-trivial differences. See generally the Wikipedia article on the UN CISG; for a comparison of the Uniform Commercial Code and the UN CISG, see John C. Tracy, UCC and CISG (Jul. 5, 2011).

Governing Law – Exclusion of UCITA

The Uniform Computer Information Transactions Act ("UCITA") will not govern this Agreement nor any transaction or relationship arising out of it.

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Commentary

The Uniform Computer Information Transactions Act is (was?) a controversial proposed uniform law. It was enacted only in Maryland and Virginia, and otherwise appears to be essentially dead. See generally the Wikipedia article on UCITA.

Section 104 of UCITA allows parties to a contract to "opt out" of the Act's applicability. Going even farther, some states have enacted so-called "bomb-shelter" legislation voiding any contractual choice of law that would result in UCITA being applied. According to materials published by an advocacy group calling itself AFFECT, Americans for Fair Electronic Commerce Transactions, such legislation has been enacted in Iowa, North Carolina, Vermont, and West Virginia.

Governing Law – Exclusion of ALI Software Contract Principles

The American Law Institute Principles of Law of Software Contracts will not govern the Agreement nor any transaction or relationship arising out of it.

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Commentary

The ALI Principles of Law of Software Contracts caused something of a stir when they were announced in 2009, but since then they appear to have vanished from view.

See also the Notebook section "Exclusion of ALI Software Contract Principles."

Headings Are for Reference Only

Headings and subheadings in this Agreement are included for convenient reference only and are not to be considered in construing the corresponding text of this Agreement.

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Independent Contractors

The parties intend for their relationship to be that of independent contractors, and nothing in this Agreement is to be interpreted as creating any other kind of relationship (such as, for example, an employment relationship) or any other kind of authority as between the parties.

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Commentary

Independent Contractors – Specific Prohibitions

Except to the extent (if any) expressly stated otherwise in this Agreement or otherwise agreed in writing, no party will hold itself out:

(1) as an employee, agent, partner, joint venturer, division, subsidiary, or branch of another party; nor

(2) as having authority to bind the other party to any promise or other commitment; representation; warranty; modification of a warranty; waiver; or other term.

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Commentary

Independent Contractors – Specific Examples of Lack of Authority

For the avoidance of doubt, and by way of example and not of limitation, except to the minimum extent (if any) expressly agreed in writing by the parties, no party has or will have any authority, on behalf of the other party – and neither party will purport – to do any of the following:

(1) hire any individual to be an employee of the other party;

(2) determine the working hours or working conditions of the other party's employees;

(3) select or assign any employee of the other party to perform a task;

(4) 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;

(5) remove any employee of the other party from a work assignment;

(6) discharge or otherwise discipline any employee of the other party;

(7) incur any debt or liability; nor

(8) bind the other party to any other type of obligation, commitment, or waiver.

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Commentary

The laundry list in the text is adapted from a sample provision (with extensive case citations) in footnote 70 of Lisa Bagley Brown and Harold J. Flanagan, Onshore Drilling Contracts: Avoiding the Pitfalls of Form Drilling Contracts.

Language of Agreement

(a) This Agreement and its appendixes, exhibits, and attachments, if any, are written in and shall be interpreted for all purposes in accordance with the English language as used in the United States of America (the Agreed Language). (French translation: Les parties conviennent expresssément que le présent Accord ainsi que toutes ses annexes seront rédigés en langue Anglaise et interprétés par référence à la terminologie utilisée aux Etats-Unis d'Amérique.) Any version of this Agreement in any other language is to be considered as being for convenient reference only and not binding on any party.

(b) Any communication made pursuant to this Agreement (including for example notices, technical support, and so forth) is to be in the Agreed Language unless the parties expressly agree otherwise in particular circumstances.

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Legal Compliance Requirement

(a) In performing its obligations and exercising its rights under this Agreement, [fill in party name] (the Obligated Party) will comply with each of the following to the extent relevant to the Obligated Party's obligations or the other party's rights under this 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, licensing requirements); and

(3) any other requirements of law agreed to in writing by the parties (which could include for example particular requirements that are specific to the other party's business or industry).

(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 unless such requirements also come within any of the categories enumerated in subdivisions (a)(1) through (a)(3).

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Policy Statements, Etc. Not Disputable

(a) Neither party will dispute the effectiveness of any statement, in this Agreement, of: (1) fact; (2) policy; or (3) legal conclusion.

(b) The kinds of statement referred to in subdivision (a) include, for example, if present in this Agreement: (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 statement referred to in subdivision (a) was orally amended or waived.

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Prohibitions Apply to Attempts, Etc.

The prohibitions and restrictions of this 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.

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Publicity Consent Requirement

Each party (the Publicizing Party) will not issue any press release about, or otherwise publicly disclose the existence or terms of, (i) this Agreement, nor (ii) the parties' business relationship contemplated by this Agreement, without the prior written consent of the other party (the Approving Party).

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Commentary

See also the Notebook section Parties' Dealings are Confidential.

Redlining Representation

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 this Agreement, including but not limited to drafts of any attachments, schedules, exhibits, addenda, etc.

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Representations – Reliance Disclaimer

As part of the parties' intentional allocation of the risks and benefits associated with this Agreement, [fill in party name] (the Disclaiming Party) represents and warrants to each other party that, in entering into this Agreement, the Disclaiming Party is not relying on any representation by the other party, other than: (1) the representations and warranties set forth in this Agreement (if any), including for example in the Agreement's exhibits, schedules, etc.; and (2) any representations or warranties expressly incorporated into this Agreement by reference.

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Commentary

See also the Notebook section "Reliance disclaimers."

Savings Clause

IF: A provision of this Agreement is held invalid, void, unenforceable, or otherwise defective by a tribunal of competent jurisdiction; THEN:

(1) All other provisions of this Agreement will remain enforceable in accordance with their terms; AND

(2) the provision in question will be deemed modified or, if necessary, severed, but in either case only: (A) as between the parties; (B) in the jurisdiction in question; (C) to the minimum extent necessary to cure the defect; and (D) until such time, if any, as the tribunal's holding, in relevant respects, is vacated, reversed on appeal, legislatively overruled, or otherwise set aside.

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Commentary

The use of the word tribunal is used to protect any arbitration clause that might be included in the Agreement. Using the word court in this clause, in a contract containing an arbitration clause, could cause a court to 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:

Signature – in Counterparts

The Agreement may be signed and delivered in separate counterpart originals; all such counterparts will be deemed to constitute one and the same instrument. Any counterpart may be signed by less than all of the parties provided that each party whose signature is required signs at least one such counterpart.

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Commentary

Signature – Delivery of Signature Page Only

Delivery of a counterpart original of this Agreement may be effected (for example) by transmitting a signed signature page by FAX, by emailed PDF, or by other electronic transmission means.

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Commentary

Signers' Authority Personal Representation

Each individual signing the Agreement on behalf of an organization personally represents that, to the best of his (or her) knowledge, his signature has been authorized by that organization.

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Signers' Availability

(a) Each individual signing the Agreement agrees to make him- or herself reasonably available to testify, and/or to produce documents and things, in any action that both (i) is duly commenced before a court or other tribunal of competent jurisdiction, and (ii) arises out of or relates to the Agreement.

(b) Each such individual PERMANENTLY, VOLUNTARILY, KNOWINGLY, AND IRREVOCABLY WAIVES any immunity or privilege from service of process or compulsory appearance to which he or she might otherwise be entitled, whether by constitution, statute, regulation, or common law.

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Commentary

This waiver-of-immunity provision tries to forestall a dispute like that of Indiana v. IBM Corp., No. 49S00-1201-PL-15 (Ind. March 21, 2012) (reversing trial court's order directing governor to testify). In that case, Indiana governor Mitch Daniels personally signed a contract with IBM to modernize and improve the state's welfare administration system, and he seems to have been personally involved in the contract's negotiations as well. When the contract later went south, Gov. Daniels refused to testify in deposition about the negotiations, successfully invoking a statutory privilege. (Even so, IBM later ended up winning a multi-million dollar judgment in the trial court. See Indiana v. IBM Corp., No. 49Dl0-1005-PL-021451 (Marion Cty Ind. Sup. Ct. July 18, 2012).)

Survival (Broad/Generic) Clause

Any right or obligation which by its nature should extend beyond termination or expiration of this Agreement for any reason will survive such termination or expiration.

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Commentary

This is pretty vague, perhaps even dangerously so; nevertheless, some contracts include language like it.

Survival (Enumerated Provisions)

For the avoidance of doubt, the rights and obligations set forth in this Agreement (if any) concerning the following subjects will survive any termination of this Agreement (including for this purpose any expiration of this Agreement): Confidentiality. Indemnification. Insurance requirements. Intellectual-property ownership. Limitations of liability. Remedy limitations. Warranty rights. Warranty disclaimers. Governing law (or choice of law). Forum selection (or choice of forum). Arbitration. Early neutral evaluation. Attorneys' fees. Expense-shifting after settlement-offer rejection.

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Commentary

This provision 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. Drafters should be careful about what rights and obligations would survive termination – see generally Jeff Gordon, Night of the Living Dead Contracts.

Third-Party Beneficiaries Disclaimer

Except to the extent (if any) clearly stated otherwise in this Agreement, the parties do not intend for the Agreement to create any right or benefit for any party except themselves.

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Waivers Must Be in Signed Writings

No effect is to be given to any claim that a party waived a right, representation, obligation, or condition (collectively, "term") stated in this Agreement, or that the party waived a breach of this Agreement, unless the purported waiver: (1) is in writing; and (2) is signed by the waiving party or by an individual authorized to make binding commitments on behalf of that party.

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Commentary

See also the Course of Dealing Does Not Modify Agreement clause.

It never hurts for waivers to be "conspicuous."

Waiver of Franchise-Law Benefits

Nothing in this Agreement is to be construed as making Licensee as a franchisee of Licensor; Licensee KNOWINGLY WAIVES the benefit of any state or federal statutes dealing with the establishment and regulation of franchises.

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Commentary

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.

Waivers – Limited Effect

For the avoidance of doubt: (1) a party's waiver of a term or breach of this Agreement will affect only that term or breach, and is not to be deemed a waiver of any other term or breach; and (2) the fact that a party, at a given moment in time, did not enforce one or more terms is not be deemed a waiver by that party of its right to enforce any term at any other time.

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Guaranties

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Guaranty – Basic Provision

[Fill In guarantor name] (the Guarantor) (each of them, if more than one) guarantees, to [fill in creditor name] (the Creditor) the timely performance by of the following Guaranteed Obligation (each of them, if more than one): [describe guaranteed obligations].

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Commentary

Drafters and reviewers should be careful to be clear to what extent multiple guarantors are to be jointly and severally liable for the guaranteed obligation(s).

Guaranty – Notice of Acceptance is Waived

For the avoidance of doubt, the obligations of a Guarantor under the guaranty provisions of this Agreement will apply even if the instrument setting forth those obligations is not signed by any Creditor.

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Commentary

Many guaranty clauses include waiver-of-acceptance language like this (or often just the text of the subheading), even though it very well might 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 bank even though the bank did not sign the guaranty documents.

Guaranty – Due Upon Written Demand After Nonperformance

(a) The Guarantor's obligations under the Guaranty – Basic Provision clause will immediately become due, upon written demand by the Creditor to the Guarantor, after any failure by the Principal to perform a Guaranteed Obligation.

(b) If one or more obligations to pay money is guaranteed, then the Guaranty – Basic Provision clause guarantees the full and prompt payment of all such obligations when due, whether by maturity, acceleration, or otherwise.

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Guaranty as Inducement to Creditor

The Guarantor undertakes the obligations of the Guaranty – Basic Provision clause to induce the Creditor to enter into this Agreement with the Principal.

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Guarantor Liability Cap Amount

The Guarantor's total liability under the the Guaranty – Basic Provision clause clause, to all Creditors in the aggregate, will not exceed [fill in] (the Guarantor Liability Cap Amount).

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Guaranty Enforcement Expenses Paid by Guarantor(s)

The Guarantor will pay or reimburse all court costs and reasonable expenses, including for example attorneys' fees and expenses, that a Creditor incurs in enforcing that Creditor's rights against the Guarantor under the guaranty provisions of this Agreement.

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Commentary

See also the Dispute Expenses Definition clause.

Guaranteed-Obligation Enforcement Expenses Are Covered

The Guarantor will pay or reimburse all court costs and reasonable expenses, including for example attorneys' fees and expenses, that a Creditor incurs in enforcing a Guaranteed Obligation against a Principal.

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Commentary

See also the Dispute Expenses Definition clause.

Technically the use of "reasonable" in this clause is redundant, because the Dispute Expenses Definition clause already requires expenses to be reasonable and necessary. But this is one of those instances where the redundancy is harmless and can reassure a contract reviewer, thus removing one possible barrier to getting to signature.

Similar language was used in clause 4 of the guaranty language in Eagerton v. Vision Bank, 99 So. 3d 299, 305 (Ala. 2012).

Guaranty Not Affected by Alteration of Underlying Obligtation

For the avoidance of doubt, an amendment to or modification of a Guaranteed Obligation does not discharge or otherwise affect the guaranty obligation of any Guarantor in respect of that Guaranteed Obligation.

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Commentary

"The general rule [which is strictly applied by courts] is 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).

Guaranty is of Collection Only

For the avoidance of doubt, the Guarantor need not pay the Guaranteed Obligation unless the Creditor, after using reasonable diligence, has been unable to collect that obligation from the Principal.

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Commentary

This language is adapted from that of the court in Haggard v. Bank of Ozarks Inc., 668 F.3d 196, 200 (5th Cir. 2012) (quoting Texas court opinion).

Guaranty – Action Against Principal Or Collateral Is Not Required

(a) A Guarantor's liability to a Creditor is not contingent: (1) on the Creditor's exercise or enforcement of any rights or remedies it may have against a Principal in respect of a Guaranteed Obligation; nor (2) on the Creditor's enforcement of any lien or security interest securing a Guaranteed Obligation.

(b) For the avoidance of doubt, subdivision (a) means that a Creditor may enforce its rights under this clause: (1) whether or not the Creditor takes action against any Principal to enforce a Guaranteed Obligation; and (2) whether or not the Creditor forecloses on any lien, security interest, or other collateral securing a Guaranteed Obligation.

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Commentary

Subdivisions (a) and (b) are arguably redundant; subdivision (b) represents an attempt to reframe subdivision (a) in plainer language.

Subdivision (a) is fairly typical of guaranty instruments; see, e.g., the discussion in LFG Nat'l Cap. LLC v. Gary, Williams et al. P.L., No. 1:12-cv-00446, part III-B (N.D.N.Y. Jul. 12, 2012) (denying guarantors' motion to dismiss; citing cases).

Guaranty – Waiver of Election of Remedies Rights and Defenses

Each Guarantor KNOWINGLY, VOLUNTARILY, AND IRREVOCABLY WAIVES all rights and defenses arising out of an election of remedies by a Creditor, even though that election of remedies, such as a nonjudicial foreclosure with respect to security for a Guaranteed Obligation, has destroyed the Guarantor's rights of subrogation and reimbursement against the Principal.

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Commentary

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

The use of bold-faced type is for conspicuousness – see the Notebook section Conspicuousness – Additional Commentary.

Guaranty – Defenses Against Guaranty Enforcement Are Waived

Each Guarantor KNOWINGLY, VOLUNTARILY, AND IRREVOCABLY WAIVES any and all defenses — and expressly agrees that it will not assert (and it will cause its affiliates not to assert), by way of claim or defense — that its obligations under this Clause are allegedly illegal, invalid, void, or otherwise unenforceable.

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Commentary

The "expressly agrees" language in this clause is technically redundant, but in litigation it might be useful as a sound bite in a brief or trial exhibit.

The use of bold-faced type is for conspicuousness – see the Notebook section Conspicuousness – Additional Commentary.

Guarantor Waives Defenses Assertable By Principal

Each Guarantor KNOWINGLY, VOLUNTARILY, AND IRREVOCABLY WAIVES any and all defenses pertaining to any Guaranteed Obligation, other than the defense of discharge by full performance. Without limiting the generality of this waiver, the Guarantor will not assert, plead or enforce, against any Creditor: (1) any defense of waiver, release, statute of limitations, res judicata, statute of frauds, fraud, incapacity, minority, usury, illegality or unenforceability which may be available to the Principal or any other person liable in respect of any Guaranteed Obligation; nor (2) any setoff available to the Principal or any other such person liable, whether or not on account of a related transaction.

#+ENDQUOTE

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Commentary

This language is based on that of the guaranty in Eagerton v. Vision Bank, 99 So. 3d 299, 309 (Ala. 2012).

The use of bold-faced type is for conspicuousness – see the Notebook section Conspicuousness – Additional Commentary.

Guarantor Remains Liable For Any Deficiency After Foreclosure

The 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 Obligation, even if the Principal's liability for such a deficiency is discharged pursuant to statute or judicial decision.

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Commentary

This language is based on that of the guaranty in Eagerton v. Vision Bank, 99 So. 3d 299, 309 (Ala. 2012).

Guarantors Are Jointly and Severally Liable

When multiple Guarantors are listed, each Guarantor is jointly and severally liable for each Guaranteed obligation.

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Indemnity and Defense in General

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This term sheet consists of those Common Draft clauses listed below as "Included," subject to any variations agreed by the parties.

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Indemnities – Definitions

For purposes of this Agreement, Indemnifying Party refers to an individual or organization that is obligated to indemnify another individual or organization (each, a Protected Person) against a claim, liability, expense, or other event.

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Indemnity Group Definition

(a) This the Indemnity Group Definition clause applies if the Agreement requires an Indemnifying Party to indemnify the Indemnity Group of another party against a claim or other occurrence – as a hypothetical illustration, "Provider will indemnify Customer's Indemnity Group."

(b) In such a situation, the Indemnifying Party will indemnify each of the following individuals and organizations against the claim or other occurrence:

(1) the other party itself;

(2) the other party's Affiliates;

(3) to the extent so specified in this Agreement (if any), the customers and subcontractors (at any tier) of each organization listed in of the other party;

(4) to the extent so specified in this Agreement (if any), the successors and assigns of each organization listed in subdivisions (b)(1) through (b)(3);

(5) 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 listed in subdivisions (b)(1) through (b)(4), as applicable; and

(6) any other individual or organization specified in this Agreement.

(c) Apropos of subdivision (b)(4): IF: This Agreement requires a member of the Indemnity Group to obtain the consent of another party before assigning the Agreement (or otherwise assigning its right to indemnification); THEN: For the avoidance of doubt:

(1) this Clause does not in itself constitute such consent; and

(2) if such consent was not obtained, then the Indemnifying Party is not obligated to indemnify the putative assignee.

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Commentary

This term is defined to make it easier to draft an indemnity provision by stating something along the lines of the hypothetical example in the text.

The main categories of membership in the Indemnity Group are fairly common; the members added by the opt-in provisions below, though, will require careful consideration by negotiators.

Indemnities – Prior Payment Not Required

The Indemnifying Party will pay an indemnified liability or expense at the request of the Protected Person (with any such request to be made by written notice), regardless whether applicable law would otherwise require the Protected Person to pay the liability or expense first and then seek reimbursement from the Indemnifying Party.

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Indemnities – Defense Against Claim Required

An Indemnifying Party's party's obligation to indemnify a Protected Person against a claim includes the obligation to provide the Protected Person with a defense against the claim (see also the IndemnDefenseCls clause).

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Commentary

This optional provision makes explicit what may already be implied by law, as is the case in California. See, e.g., Cal. Civ. Code § 2778, available at http://goo.gl/TCLIX (leginfo.ca.gov), discussed in Crawford v. Weather Shield Mfg. Inc., 44 Cal.4th 541, 553 (2008) (affirming judgment that subcontractor, even though ultimately found not negligent, was nevertheless required to provide a defense to general contractor).

Indemnities – No Liability Caps

For the avoidance of doubt, the indemnity obligations of this Agreement are not subject to any provision of this Agreement limiting the amount of the Indemnifying Party's liability.

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Commentary

Drafters might want to negotiate a special cap on indemnity liability, separate from any general cap.

Indemnities – No Coverage of Claims Between Protected Persons

For the avoidance of doubt, an Indemnifying Party's obligation to indemnify a Protected Person against claims extends only to claims by a third party and not to claims by a Protected Person against another Protected Person.

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Commentary

This Clause limits indemnity protection to claims by third parties. It's akin to the exclusion found in many insurance policies, excluding coverage of claims by one insured against another insured. (The indemnifying party's concern is that otherwise, two Protected Persons could collusively start a lawsuit in order to get money from the indemnifying party.)

Indemnities – Offset for Insurance and Contributions

The Indemnifying Party, in determining the amount it owes a Protected Person pursuant to an indemnity obligation under this Agreement, may reduce that amount by the following amounts received by the Protected Person, if any: (1) insurance proceeds in respect of the indemnified claim; and/or (2) contributions from a party jointly liable with the Protected Person.

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Commentary

This clause is based on a suggestion in a 2011 presentation by Ira Schreger, then with Vinson & Elkins LLP in New York.

Indemnities – Exclusion of Negligent or Reckless Conduct

The Indemnifying Party need not indemnify any Protected Person in respect of claims arising out of or relating to negligent or reckless conduct by, or attributable to, that Protected Person.

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Commentary

This clause is based on a suggestion in a 2011 presentation by Ira Schreger, then with Vinson & Elkins LLP in New York.

Indemnities – Liability Cap

The Indemnifying Party's MAXIMUM AGGREGATE LIABILITY FOR INDEMNIFICATION, under all indemnification obligations arising under this Agreement, is [fill in amount] (the Indemnity Cap Amount)

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Commentary

This clause is based on a suggestion in a 2011 presentation by Ira Schreger, then with Vinson & Elkins LLP in New York.

The maximum-aggregate-liability language is in bold-faced all-caps to make it conspicuous.

Indemnities – Liability Floor

The Indemnifying Party need not indemnify any Protected Person until the aggregate amount that the Indemnifying Party would be required to pay or reimburse equals at least [fill in amount] (the Indemnity Floor Amount)

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Commentary

This clause is based on a suggestion in a 2011 presentation by Ira Schreger, then with Vinson & Elkins LLP in New York.

Indemnities – Exclusion of Consequential Damages, Etc.

The Indemnifying Party need not indemnify any Protected Person for consequential, indirect, special, punitive, exemplary, or similar damages, including (for example) loss of profits from collateral business arrangements or damages from business interruption.

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Commentary

This clause is based on a suggestion in a 2011 presentation by Ira Schreger, then with Vinson & Elkins LLP in New York.

The list of excluded damages is adapted from the Excluded Damages Definition clause.

Indemnities – Reimbursement Deadline

The Indemnifying Party will reimburse the Protected Person for any indemnifiable amount that is paid by the Protected Person within 30 days (the Indemnity Reimbursement Deadline) after notice from the Protected Person with proof of payment.

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Commentary

This clause is based on a suggestion in a 2011 presentation by Ira Schreger, then with Vinson & Elkins LLP in New York.

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.

Defense Against Claims – Definitions

In connection with an obligation under this Agreement to defend an individual or organization (each, a Protected Person against a third-party claim (each, a Covered Claim, the term Defending Party refers to the party required to defend the Protected Person against the Covered Claim.

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Competent Defense

IF: A Protected Person so requests in writing in connection with a Covered Claim; THEN: The Defending Party will provide the Protected Person with a competent, diligent investigation of, and defense against, the Covered Claim.

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If Defense Not Requested

IF: A Protected Person does not request a defense against a Covered Claim within a reasonable time after learning of the claim; THEN:

(1) the Defending Party will not be responsible for any harm to the Protected Person that may result from the delay; and

(2) the Defending Party may elect, in its sole discretion, to provide a defense nonetheless.

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Control of Defense

IF: The Defending Party advises the Protected Person in writing that it will provide a defense against a Covered Claim in accordance with this Agreement; THEN: The Defending Party is entitled to control the defense against the claim; OTHERWISE: The Protected Person is entitled to control its own defense.

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Defense Counsel

The party controlling the defense against a Covered Claim (that is, the Defending Party or the Protected Person, as the case may be) will engage counsel of recognized standing, reasonably acceptable to the non-controlling party, to conduct the defense.

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Defense Against Claims – Cooperation of Protected Person

When a Defending Party provides a defense against a Covered Claim, the Protected Person will provide reasonable cooperation in the defense.

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Expenses of Cooperation in Defense

The Defending Party will reimburse the Protected Person for reasonable out-of-pocket expenses actually incurred in cooperating with the Defending Party in providing a defense against a Covered Claim.

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No Non-Factual Admissions Without Consent

In any defense against a Covered Claim, the Protected Person must not make any non-factual admission concerning the claim without the Defending Party's written consent. EXAMPLES: An admission that a third party's patent was valid and enforceable would be an example ofa non-factual admission; in contrast, an admission that, in calendar year X, the Protected Person sold Y units of its Model ABC widget would be an example ofa factual admission.

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No Waivers of Defenses Without Consent

In any defense against a Covered Claim, the Protected Person must not waive any defense to the claim (for example, a statute-of-limitations defense) without the Defending Party's consent.

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Settlement by Defending Party

IF: The Defending Party controls the defense; THEN: The Defending Party, in its sole discretion, may settle the claim on behalf of the Protected Person, EXCEPT THAT absent the Protected Person's consent, the Defending Party may not settle the claim on terms including any of the following Restricted Settlement Terms, namely any terms that:

(1) restrict or place conditions on the Protected Person's otherwise-lawful activities; 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 Defending Party — to one or more third parties; or

(3) encumber any of the Protected Person's assets; or

(4) include any non-factual admission by the Protected Person.

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Settlement by Protected Person

IF: A Protected Person controls its own defense of a Covered Claim; THEN: That Protected Person will not settle the claim without the Defending Party's express written consent, not to be unreasonably withheld.

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Effect of Unauthorized Settlement by Protected Person

IF: A Protected Person settles a Covered Claim in violation of the Settlement by Protected Person clause; THEN: The Defending Party will have no further obligation of defense or indemnity to that Protected Person unless the Defending Party unreasonably withheld its consent to the settlement.

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Commentary

Some of the language above is inspired by a sample indemnity- and defense clause set forth in a 2011 presentation by Ira Schreger, then with Vinson & Elkins LLP in New York.

Reasonable Withholding of Consent to Settlement

For the avoidance of doubt, a Protected Person's withholding of consent to a proposed settlement of a Covered Claim will not be deemed unreasonable if the proposed settlement includes any Restricted Settlement Terms enumerated in the Settlement by Defending Party clause.

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Settlement May Include Consent Judgment

For the avoidance of doubt, a party's authority to settle a case under the XXX clause includes the authority to agree to a consent judgment.

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Insurance

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This term sheet consists of those Common Draft clauses listed below as "Included," subject to any variations agreed by the parties.

Insurance

PLACEHOLDER TEXT

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Knock for Knock [TO EDIT]

The parties will be responsible for insuring all loss, INCLUDING THAT CAUSED BY NEGLIGENCE, ETC., OF OTHER PARTIES, as follows [describe]

XXX [Text to follow]

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Limitations of Liabiity

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This term sheet consists of those Common Draft clauses listed below as "Included," subject to any variations agreed by the parties.

Limitations of Liabiity

Excluded Damages Definition: Included

Protected Individuals Definition: Included

No Liability for Excluded Damages: Included

  • Protected Party: [Fill in].

No Liability in Excess of Damages Cap: Included

  • Protected Party: [Fill in].
  • Damage Cap Amount: [Fill in].

Carve-Outs from Liability Limitations: Included

Broad Effect of Limitations: Included

Materiality of Limitations: Included

Maximum Validity of Limitations: Included

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Excluded Damages Definition

(a) For purposes of this Agreement's limitation(s) of liability, the term Excluded Damages refers to consequential, indirect, special, punitive, exemplary, or similar damages arising from any breach of this Agreement. The term encompasses, for example, the following: (1) loss of profits from collateral business arrangements; (2) damages from business interruption; (3) loss of use; and (4) loss of data or privacy or confidentiality.

(b) For the avoidance of doubt, the term consequential damages refers to damages that the breaching party could not reasonably have foreseen upon entering into this Agreement; and

(c) For the avoidance of doubt, the term Excluded Damages does not encompass incidental damages, namely reasonable expenses incurred by a party incident to a breach or delay by another party; that is to say, incidental damages are not excluded.

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Commentary

Unlike some one-sided provisions, this clause's definition of Excluded Damages does not encompass "incidental" damages, which are generally defined as reasonable expenses reasonably incurred by a party incident to a breach or delay by another party. See generally UCC § 2-710 (seller's incidental damages) and UCC § 2-715(1) (buyer's incidental damages).

Of course, UCC Article 2 applies only to sales of goods, and will not apply at all in non-U.S. countries. Still, the same basic concepts of incidental damages might also apply to sales of services, etc.

Protected Individuals Definition

For purposes of this Agreement's limitation(s) of liability, the term Protected Individual, in respect of a party, refers to each individual who at the relevant time is an employee, officer, director, shareholder, general- and limited partner, member, or manager of that party.

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No Liability for Excluded Damages

Except to the extent (if any) expressly provided otherwise in this Agreement, NEITHER [fill in] (the Protected Party) NOR ITS PROTECTED INDIVIDUALS WILL BE LIABLE FOR EXCLUDED DAMAGES.

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Commentary

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.

No Liability in Excess of Damages Cap

(a) LIMITATION: Except as provided in subdivision (b), in respect of any claim or group of related claims, NEITHER [fill in] (the Protected Party) NOR ITS PROTECTED INDIVIDUALS WILL BE LIABLE, in the aggregate, for damages in excess of [fill in amount] (the Damages Cap Amount) (or the applicable cap, if the Agreement provides for more than one).

(b) CARVE-OUTS: For the avoidance of doubt, subdivision (a) does not apply: (1) to amounts due pursuant to this Agreement; nor (2) to the extent expressly provided in the Carve-Outs from Liability Limitations clause or elsewhere in this Agreement.

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Commentary

In any given agreement, the specific Damages Cap Amount will very often be negotiated.

In some cases, it might make sense to provide separate damage caps for specific risks.

Carve-Outs from Liability Limitations

Damages arising from the following are not Excluded Damages under the No Liability for Excluded Damages clause, nor are they subject to any Damages Cap under the No Liability in Excess of Damages Cap clause:

(1) personal injury or death proximately resulting from breach of this Agreement by the Protected Party;

(2) the Protected Party's failure to comply with an obligation stated in this Agreement, if any, to defend and/or indemnify another Person against third-party claims — however, a specifically-stated maximum aggregate liability for such defense and indemnity obligations is not considered a Damages Cap, and such maximum aggregate liability will apply to such obligations;

(3) the Protected Party's infringement of another party's patent, copyright, trademark, or rights in confidential information;

(4) the Protected Party's intentional or reckless misrepresentation or omission of a material fact, where the other party justifiably relied on the misrepresentation or omission;

(5) the Protected Party's conversion of, or infliction of harm to, property of another party (for example, intentional and wrongful erasure or corruption of computer programs or -data), IF the same is shown, by clear and convincing evidence, to have been both intentional and wrongful.

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Commentary

Note the use of the narrower phrase, "Damages arising from the following … ," instead of the broader language, "Damages arising from or relating to the following …."

In subdivision (1), personal injury or death is carved out to avoid possible unconscionability of the limitation of liability under UCC § 2‑719(3) (which of course might not apply ina services contract or in a non-UCC jurisdiction).

Also in subdivision (1), the phrase proximately resulting from breach is adapted from UCC § 2-715. Other carve-outs here are commonly seen in contracts.

Subdivision (4) uses the term "intentional or reckless misrepresentation" instead of the term fraud, which can have different meanings in different jurisdictions or to different people.

Subdivision (5)'s carve-out would encompass, for example, an IT provider's malicious erasure of a customer's data, or sabotage or hijacking of the customer's computer system as "self-help" in a payment dispute. Note the requirement for proof of intent by clear and convincing evidence.

Broad Effect of Limitations

The parties have specifically agreed that all limitations of liability set forth in this Agreement are to apply: (1) to all claims for damages or other monetary relief, whether alleged to arise in contract, tort, or other-wise, and (2) 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 (3) even if a limited remedy fails of its essential purpose.

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Commentary

This is typical of language that's not uncommonly found in limitation-of-liability provisions.

While some drafters will view the introductory phrase, The parties have specifically agreed …, as redundant, the phrase is included to make the clause a better "sound bite."

Materiality of Limitations

Each party acknowledges that: (1) the Agreement's limitations of liability are material provisions of this Agreement; and (2)  absent those limitations of liability, one or both of the parties would have declined to enter into this Agreement on the economic- and other terms stated in it.

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Commentary

This is typical of language that's not uncommonly found in limitation-of-liability provisions.

Maximum Validity of Limitations

The parties expressly agree that IF: One or more limitations of liability benefiting a Protected Person under this Agreement is held void or unenforceable under applicable law; THEN: That Protected Person's relevant liability is nonetheless to be limited to the greatest extent consistent with that law and with this Agreement.

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Commentary

This is typical of language that's not uncommonly found in limitation-of-liability provisions.

While some drafters will view the introductory phrase, The parties expressly agree …, as redundant, the phrase is included to make the clause a better "sound bite."

Some Limitations Might Not Apply

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 this Agreement might not apply.

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Commentary

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.

No Seeking of Damages Exceeding Limitations

Each party expressly agrees not to seek damages inconsistent with any limitation stated in this Agreement on the liability of the Protected Persons.

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Commentary

This subdivision is intended to make it a separate breach of contract for the other party to seek damages not allowed by this Agreement's limitation(s) of liability. (It's unclear whether a court would give effect to this language.)

While some drafters will view the introductory phrase, Each party expressly agrees …, as redundant, the phrase is included to make the clause a better "sound bite."

Notices

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This term sheet consists of those Common Draft clauses listed below as "Included," subject to any variations agreed by the parties.

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Notices in Writing

All notices required or permitted by this Agreement must be in writing. Except to the extent, if any, that this Agreement provides otherwise, all notices are effective upon receipt or refusal.

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Commentary

This clause does not state that notices are effective a certain number of days after mailing; for that, see the Notices – by Mail clause.

The parties might not want to require formal notice for everything; for that reason, some other Common Draft clauses refer to advising a party (possibly in writing) instead of giving notice. See, for example, the Consultation Definition clause.

Notices – Permitted Addresses

Permissible addresses for notice include (1) those stated in this Agreement; and (2) any other address reasonably communicated, unless this Agreement specifically requires notice of any change of address for notice.

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Commentary

Some notices clauses, such as the Notice of Change of Address clause 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.

Still, it might make sense to require specific types of notice to be sent to the attention of one or more specific people, as discussed in the Notices – To Whom Addressed clause.

Notices – To Organization

A notice to an organization: (1) must be marked for the attention of a specific individual, office, or position in the organization; and (2) 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).

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Commentary

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.

Notices – To Whom Addressed

IF: A party's initial address for notice specifies (i) an individual to which a copy is to be sent, or (ii) a position to whose attention a copy is required to be sent (for example the notified party's general counsel, chief financial officer, etc.); THEN: A notice to that party is not effective unless such a copy is sent, in a manner prescribed or permitted by the notices clauses of this Agreement, (x) to that individual, or (y) to the attention of that position.

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Notices – by Email

(a) A notice that is delivered by email to a specific email address, but that is not read by any individual accessing that email address after delivery, is nevertheless effective as to that email address if the party being notifed has expressly designated the specific email address, in writing, as one to which notices under this Agreement may be sent.

(b) For the avoidance of doubt, the inclusion of an individual's email address in contact information for that individual or for a party does not in itself satisfy the express-designation requirement of subdivision (a).

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Commentary

This clause addresses (for example) the situation in which a notice email is sent to an individual's email address, but that individual doesn't read the email because (let's say) she is ill, or on leave, or simply chooses not to read that particular email. In that situation, it might be days, if ever, before anyone sees the notice email: Whereas a notice delivered to an absent person in hard copy would likely be noticed by others in the company, that might well not be the case for a notice delivered by email.

On the other hand, if a party designates a particular email address for notice, then it should be on the party to be sure someone regularly checks that email address.

A party that does agree to receive notice by email might want to set up a special "notice" email address that automatically forwards to a specific individual — or, preferably, more than one such individual — or to whoever is designated as having a specific role in the company.

Notices – Copies to Counsel

In the interest of expediting discussion, each party giving notice under this Agreement is encouraged, but not required, to send a copy of significant notices to the notified party's counsel by any reasonable means. A significant notice might be, for example, a notice of breach or of termination.

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Commentary

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.

Notices – When Undeliverable

For the avoidance of doubt, a notice to a party that cannot be found is deemed effective after reasonable delivery efforts.

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Commentary

Notices – by Mail

Notices given by mail are deemed effective at the end of the three business days (the Mail Delivery Period) 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: (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.

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Commentary

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.

Editorial Comment: 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.

Notice of Change of Address

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 this Agreement.

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Commentary

See the commentary to the Notices – Permitted Addresses clause.

Notice by Email is Prohibited

A communication delivered solely by email will not be deemed effective as notice under this Agreement even if the communication is actually received by its intended recipient.

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CAUTION

If a contract is silent, a notice received by email might well be effective even if no human knew it, per § 15(e) of the Uniform Electronic Transactions Act. For that reason, a party might want to prohibit notice by email for certain subjects such as breach, termination, etc.

Notice by Web-Site Posting

(a) [Fill in party name] (the Web-Hosting Party) may give any notice under this Agreement by: (1) making the notice available on the Web-Hosting Party's Web site, and (2) displaying, while the other party is accessing the hosting party's Web site, a suitably-prominent notice message containing (A) the text, or a summary, of the notice; and/or (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.

(b) Any such notice 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.

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Payments & Taxes

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Payments: Included

  • Payment Terms: [Fill in terms, e.g., net 30 days]
  • Payment Currency: [fill in, e.g., U.S. dollars]
  • Payment Method: Any means reasonably acceptable to the payee

Payment – Prompt Reporting of Invoice Disputes: Included

Payment – COD Terms After Late Payments: Not included

Payment – Not Contingent on Third-Party Payments: Not included

  • Paying Party: [Fill in party name]

Payment – Pay-When-Paid: Not included

  • Prime Contractor: [Fill in party name]
  • Subcontractor: [Fill in party name]
  • End-Customer: [Fill in name]

Payment – Offsets Are Permitted: Not included

  • Paying Party: [Fill in party name]

Payment – Offsets Are Not Permitted: Not included

  • Paying Party: [Fill in party name]

Sales Taxes – Itemization: Not included

  • Invoicing Party: [Fill in party name]
  • Paying Party: [Fill in party name]

Taxes – Income, Franchise, Etc.: Included

Expense Reimbursement Procedure: Included

Interest on Past Due Amounts: Not included

  • Payee: [Fill in party name]
  • Interest Rate: 5%
  • Interest Start Date: 30 days after the due date
  • Interest – Usury Savings: Consider

Invoice Required for All Payments: Not included

Deposit Balances Are Refundable Without Interest: Not included

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Payments

Payment of amounts due under this Agreement are to be made [fill in terms] (the Payment Terms), in [fill in currency] (the Payment Currency), by any means reasonably acceptable to the payee (the Payment Method).

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Payment – Prompt Reporting of Invoice Disputes

IF: A party receiving an invoice wishes to dispute the invoice; THEN: That party will: (1) timely pay any undisputed portion; and (2) seasonably furnish the party sending the invoice with a written explanation of the basis for its dispute, together with (where applicable) reasonable supporting documentation.

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Commentary

See also the Seasonable Definition clause

Payment – COD Terms After Late Payments

For the avoidance of doubt, in case of multiple‑ or significant late payments by a party, the other party may require cash-on-delivery (COD) terms for any subsequent transactions.

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Commentary

Applicable law might well have the same effect if late payment constitutes a material breach.

Payment – Not Contingent on Third-Party Payments

For the avoidance of doubt, the payment obligations of [Fill in payor name] (the Paying Party) are not contingent on its receipt of money owed to it.

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Payment – Pay-When-Paid

[Fill in party name] (the Prime Contractor) need not pay any invoice from [fill in party name] (the Subcontractor) until ten business days after Prime Contractor's own corresponding invoice to [fill in party name] (the End-Customer) has itself been paid.

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Commentary

This clause is not uncommon in contracts involving prime- and subcontractors. See, e.g., Allstate Interiors & Exteriors, Inc., v. Stonestreet Constr., LLC, No. 12-2431, slip op. at 3-4 (1st Cir. Sept. 20, 2013) (affirming judgment against end-customer).

Payment – Offsets Are Permitted

[Fill in payor name] (the Paying Party) may offset, against amounts it allegedly owes to the other party, any amount that the Paying Party claims is owed to it by the other party.

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Commentary

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).

Payment – Offsets Are Not Permitted

[Fill in payor name (the Paying Party) may not offset, against amounts it allegedly owes to the other party, any amount that the Paying Party claims is owed to it by the other party.

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Sales Taxes – Itemization

Unless the parties agree otherwise in writing in connection with a particular transaction, [fill in party name] (the Invoicing Party) will do the following, at its own expense:

(1) determine what if any sales taxes, including for example ad valorem taxes, must be paid to an applicable jurisdiction in connection with the transaction;

(2) timely report and remit, to all relevant taxing authorities, all sales taxes determined pursuant to subdivision (1);

(3) defend [fill in party name] (the Paying Party) against any claim by a taxing authority for unpaid sales tax(es); and

(4) indemnify the Paying Party against any such claim.

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Commentary

See also:

Taxes – Income, Franchise, Etc.

For the avoidance of doubt, each party is solely responsible for payment of taxes based on its income, franchise, or capital.

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Expense Reimbursement Procedure

[Fill in party name] (the Expense-Incurring Party) will invoice [fill in party name] (the Expense Reimburser) for reimbursement of reasonable out-of-pocket expenses actually incurred by the Incurring Party, pursuant to this Agreement, in connection with [fill in purpose or activities] (the Reimbursable Activities).

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Commentary

This clause is phrased to make it clear that the burden is on the Expense-Incurring Party to submit (correct) reimbursement invoices, as opposed to expecting the Expense Reimburser to be a mind-reader about when expenses need to be reimbursed.

Expense Reimbursement – No Markup

The Expense-Incurring Party wil not invoice the Expense Reimburser for expenses except on a straight pass-through basis with no markup unless the parties expressly agree otherwise in writing.

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Expense Reimbursement – Written Policies

IF: From time to time the Expense Reimburser provides the Expense-Incurring Party with a copy of the Expense Reimburser's then-standard writen reimbursement policy, at least a reasonable time before the Expense-Incurring Party incurs the relevant expense(s) or otherwise becomes obligated to pay them; AND: The relevant provision(s) of the reimbursement policy are not shown to be unreasonable; THEN: The Expense-Incurring Party will not invoice the Expense Reimburser for expenses except in conformance with that policy.

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Commentary

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. The language of this particular reimbursement provision has enough qualifiers in it that it should be acceptable to most providers.

Expense Reimbursement – Current Policy Attached

A copy of the Expense Reimburser's current reimbursement policy is attached to and considered part of this Agreement.

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Expense Reimbursement – Direct Billing May Be Required

IF: The Incurring Party incurs or expects to incur a charge from a third party that equals or exceeds [fill in amount] (the Direct Billing Threshold Amount); THEN: The Incurring Party may request in writing that the Expense Reimburser pay the third party directly, in which case the Expense Reimburser will timely pay all such charges.

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Expense Reimbursement – Invoices Must Be Timely Submitted

The Expense Reimburser need not reimburse expenses invoiced after [fill in date description] (the Expense Reimbursement Invoice Deadline).

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Commentary

Publicly-traded companies likely will be required to account for expenses

Interest on Past Due Amounts

[Fill in party name] (the Payee) may charge interest on past-due unpaid amounts at 5% (the Interest Rate) or the maximum rate permitted to be charged by law under the circumstances, whichever is less, beginning 30 days after the due date (the Interest Start Date) and ending when paid.

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Commentary

If a party will be charging interest, it should be sure to check applicable usury laws, which can have real teeth, including forfeiture of principal and perhaps even criminal penalties. See also the Interest – Usury Savings clause.

Interest – Usury Savings

The parties intend for any interest charged or paid pursuant to this Agreement, in any contingency, to comply with law. Consequently, IF: One or more charges and/or payments hereunder are properly characterized as interest, and are determined to have exceeded the maximum interest permitted by law (after taking all permitted steps to spread such payments over time); THEN:

(a) 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;

(b) if the excess interest has not yet been paid, then the charge for the excess interest will be canceled; and

(c) 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.

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Commentary

This language is typical of usury-savings clauses.

Invoice Required for All Payments

A party desiring payment from another party of an amount due under this Agreement must send the other party a reasonably-detailed invoice stating the amount due.

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Invoice Deadline for Delivered Goods

Provider will mail or otherwise send Customer an invoice for delivered goods on or before [fill in deadline] (the Invoice Transmission Deadline for Goods).

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Invoice Deadline for Completed Services

Provider will mail or otherwise send Customer an invoice for completed services on or before [fill in deadline] (the Invoice Transmission Deadline for Services).

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Invoices – Hard-Copy Address

All hard-copy invoices are to be sent to Customer at the address stated in the Provider-accepted purchase order or as otherwise agreed in writing.

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Deposit Balances Are Refundable Without Interest

(a) Deposits and other advance payments, if any, will be applied as stated in this Agreement or as otherwise agreed in writing.

(b) Any remaining balance will be promptly refunded, without interest, unless this Agreement clearly states otherwise.

(c) For the avoidance of doubt, interest accruing on an advance payment (if any) need not be credited to amounts due under this Agreement unless otherwise agreed in writing.

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Prohibitions & Restrictions in General

Term Sheet       Top       Info       TOC

This term sheet consists of those Common Draft clauses listed below as "Included," subject to any variations agreed by the parties.

Clauses     Top       Prohibitions and Restrictions – Miscellaneous       TOC

Deceptive Practices Prohibition

The Obligated Party will not knowingly engage in any deceptive practice in connection with its activities pursuant to this Agreement.

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Deceptive Practices – Indemnity Obligation

The Obligated Party will defend and indemnify the other party against any claim, by any third party in any forum or before any tribunal, arising out of the Obligated Party's engagement in any deceptive practice in connection with the Obligated Party's activities pursuant to this Agreement.

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Disparagement Prohibition

The Restricted Party will not disparage the other party, nor the products or services of the other party, to customers, potential customers, or the public.

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Commentary

Manufacturers sometimes ask for clauses like this in their distribution- or reseller agreements.

  • The manufacturer might want to prohibit its distributors and resellers from making negative comments to their end-customers.
  • On the other hand, distributors and resellers might well object to this statement, wanting to preserve their freedom to say whatever they please to their own customers.

Noncompetition [TO DO]

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Reviews of Products or Services Restricted

will not participate in the preparation or publication of any review (comparative or otherwise) of any prior written product or service of [fill in party name] Protected Party (the ) without the Protected Party's prior written consent.

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Commentary

This type of clause could lead to serious complications down the road, such as adverse publicity and even litigation. See, for example, Eric Pfeiffer, Woman gets $3,500 fine and bad credit score for writing negative review of business (Yahoo News Nov. 15, 2013).

Solicitation of Employees – Employer Consent Required

The Restricted Party will not, without the written consent of the Employer, recruit or solicit any employee who become known to the Restricted Party as a result of the parties' relationship documented in this Agreement (the Affected Employee) before the end of six months (the the Non-Solicitation Period) after the earliest date on which any of the following is terminated: (1) the Agreement; (2) all relevant Statements of Work; or (3) the Affected Employee's employment by the Employer.

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CAUTION

This clause could result in legal trouble — for example, a number of Silicon Valley companies such as Apple, Pixar, and Google entered into a settlement agreement with the U.S. Department of Justice prohibiting them from entering into or enforcing so-called "no poaching" agreements; that was followed by a class-action lawsuit claiming that those companies had engaged in "wage theft."

Carve-Out from Employee Solicitation Consent Requirement

For the avoidance of doubt, the Solicitation of Employees – Employer Consent Required clause does not prohibit the Restricted Party from hiring an Affected Employee who is shown to have made contact with the Restricted Party on his or her own initiative without any direct or indirect solicitation by the Restricted Party, for example in response to a general advertisement or solicitation that was not specifically directed toward or targeted at employees of the Employer.

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Sale of Goods [barely started]

Term Sheet       Top       Info       TOC

This term sheet consists of those Common Draft clauses listed below as "Included," subject to any variations agreed by the parties.

Sale of Goods /[barely started]/

PLACEHOLDER TEXT

Clauses     Top       [[#SalesArt][Sale of Goods /[barely started]/]]       TOC

Costs of Packing, Shipment, and Delivery of Goods

Unless a Provider-accepted purchase order clearly states otherwise, any pricing of goods quoted to Customer by Provider is in addition to all costs of packing, shipping, and delivery of the goods to the location specified in the purchase order or as otherwise agreed in writing.

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Delivery of Goods

Unless otherwise specified in a Provider-accepted purchase order, Provider will cause ordered goods to be shipped (and title and risk of loss will pass) as stated in the Delivery Terms.

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Premium Transportation Costs

For the avoidance of doubt, IF: Provider elects to use a more-expensive mode of transportation in delivering goods than was previously agreed to by Customer to enable Provider to meet an agreed delivery schedule; THEN: Provider will not charge Customer for any additional cost of that mode of transportation.

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Delivery Tickets

Provider will ensure that each shipment of goods is accompanied by an itemized bill of lading or delivery ticket that: (1) includes the purchase-order number or other unambiguous identifier of Customer's purchase order for the goods, if any; and (2) is securely attached to the outside of the goods or their packaging if shipped by common carrier.

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Services

Term Sheet       Top       Info       TOC

This term sheet consists of those Common Draft clauses listed below as "Included," subject to any variations agreed by the parties.

Services

Services Definition: Included

Deliverable Definition: Included

Defect Definition: Included

Toolkit Items Definition: Included

Statement of Work Definition: Included

Performance of Services: Included

Billing for Services: Included

Customer Performance of Services: Not included

Cooperation with Other Contractors: Not included

Defects in Services or Deliverables: Included

Deliverables – Customer's Right to Utilize: Included

Deliverables – Provider's Retention of IP Rights: Included

Deliverables – Customer's Rights Are Conditioned on Payment: Included

Deliverables – Remedy for Non-Payment is for Breach, Not Infringement: Included

Deliverables – No Service-Bureau Use: Not included

Deliverables – Customer May Modify: Included

Deliverables – Modification by Other Contractors: Not included

Deliverables – Customer Assignment of Its Rights: Included

Indemnity for Claims Arising Out of Provider Negligence: Not included

Indemnity for Claims Arising Out of Services: Not included

Clauses     Top       Services       TOC

Services Definition

For purposes of this Agreement Services refers to services that an applicable Statement of Work specifies will be performed by Provider.

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Commentary

See also the Statement of Work Definition clause.

Deliverable Definition

The term Deliverable, whether or not capitalized, refers to an item that Provider is required to cause to be delivered to Customer pursuant to a Statement of Work for Services. For the avoidance of doubt, the term does not include Toolkit Items.

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Commentary

See also:

Defect Definition

For purposes of this Agreement, Defect refers to a failure of a Deliverable to comply with specifications set forth in the applicable Statement of Work.

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Commentary

Note that there is no materiality qualifier in this definition; materiality issues can be addressed in other clauses.

Toolkit Items Definition

For purposes of this Agreement, the term Toolkit Items refers to concepts, ideas, inventions, strategies, procedures, architectures, or other work, that are not specific, and/or not unique, to Customer and its business.

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Statement of Work Definition

(a) The terms Statement of Work, whether or not capitalized, and SOW refer to one or more written documents — each signed or otherwise clearly agreed to in writing by or on behalf of Provider and Customer — specifying one or more Services to be performed by or on behalf of Provider for Customer.

(b) For the avoidance of doubt, this Agreement itself might, but need not, constitute a Statement of Work in itself; the Agreement might also include one or more Statements of Work as exhibits, schedules, appendixes, etc.

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Commentary

See also the ServicesCls clause.

Statements of Work – Incorporation of Agreement

Each Statement of Work (other than this Agreement itself, if it constitutes a Statement of Work) is deemed to incorporate this Agreement by reference.

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CAUTION

Some master services agreements do this the other way around, by incorporating each statement of work into the master agreement. That, though, could lead to unintended problems; for example, it could give a non-breaching party some ammunition to argue that a material breach of one statement of work was grounds for terminating other statements of work.

See also the Statements of Work – Separate Agreements clause

Statements of Work – Separate Agreements

Each Statement of Work is considered a separate agreement between the parties unless it expressly provides otherwise.

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Commentary

This is the better practice (in the author's view), but not all contracts are drafted this way.

See also the Statements of Work – Incorporation of Agreement clause.

Agreement Takes Precedence Over Statements of Work

In any case of apparent conflict between this Agreement and a Statement of Work, the provisions of this Agreement will control.

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Commentary

Some corporate legal departments want to maintain tight control over contract-related documentation; they don't want statements of work — which might not be reviewed by "Legal" — to supersede the contract provisions. That approach, though, can conflict with the way parties actually do business.

Another, more flexible approach is seen in the Statements of Work Can Take Precedence if Explicit About It clause.

Statements of Work Can Take Precedence if Explicit About It

In any case of apparent conflict between this Agreement and a Statement of Work, the provisions of this Agreement will control unless the Statement of Work (i) expressly states that its provisions override those of this Agreement and (ii) expressly identifies the overriden provisions of this Agreement.

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Commentary

This clause allows the Statement of Work to override the terms of the master agreement, but the parties must be very explicit about it. This should help satisfy corporate legal departments that maintain tight control over contract-related documentation.

See also the Agreement Takes Precedence Over Statements of Work clause and its commentary.

Changes to Statements of Work Must Be in Writing

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.

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Commentary

Both parties often want this kind of provision, but it's not clear that a court would enforce it – see the discussion at the Notebook section Amendments.

Statement of Work Changes – Representative Examples

Changes to a Statement of Work requiring the written agreement of the parties include but are not limited to, for example: Changes made to copy after the final copy has been submitted. Changes made to design once layouts, website design, or site map have been approved. Changes which Provider determines makes the work a "rush" project. Extensive alterations. Changes in Customer's business objectives. New work requested by Customer.

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Statement of Work Changes – Work Suspension Pending Agreement

IF: Customer requests changes to a Statement of Work; OR IF: Provider reasonably deems such changes necessary; THEN: Provider may, in consultation with Customer, suspend work on the relevant Services and Deliverables until the scope, schedule, and price of such changes are agreed upon by both parties.

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Statements of Work – Electronic Signatures

For the avoidance of doubt, electronic signatures are permitted for Statements of Work and change orders to them; such signatures may take the form of, for example, an exchange of emails between individuals having authority to bind the parties.

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No Obligation to Enter Into Statements of Work

For the avoidance of doubt, neither party is obligated to enter into or agree to any particular Statement of Work except to the extent (if any) that this Agreement expressly states otherwise.

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Commentary

This language is intended to preclude an aggressive provider from claiming that the customer implicitly agreed to give the provider a certain amount of work (as sometimes happens).

Performance of Services

Provider will perform Services as specified in the applicable Statement of Work.

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All Necessary Tasks Are Required

For the avoidance of doubt, Provider will cause the performance of all individual tasks reasonably 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 stated in the Statement of Work.

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Commentary

Some customers might want "all individual tasks" language like this for comfort purposes.

A provider, though, might be concerned that such language could lead to disputes about expensive (and delay-causing) "scope creep."

My guess is that the "all individual tasks" language wouldn't do any significant harm. Here's why: Suppose the parties end up fighting about the scope of what the provider is supposed to do. In that case, the presence or absence of this particular language seems unlikely to make a difference one way or the other.

So if the "all individual tasks" language gives a customer some comfort, why not include it; doing so will remove a potential delay on the road to signature.

Provider's Responsibility for Materials, Equipment, etc.

Unless the Statement of Work states otherwise, Provider will arrange, at its own expense, for any necessary acquisition, installation, maintenance, and support of materials, equipment, supplies, hardware, software, and other items needed to provide the Services.

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Workmanlike Performance Required

Provider will cause the Services to be rendered in a workmanlike manner in accordance with the requirements specified in the relevant Statement of Work; the term workmanlike refers to performance that would be generally considered proficient by those who successfully engage in the relevant trade or profession. Such performance is skillful; competent; well-executed; worthy of a good worker in the relevant field of endeavor; but not necessarily outstanding or original.

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Commentary

This clause is a streamlined version of a definition promulgated 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., No. 12-0661, slip op. at 12 (Tex. Jan. 17, 2014) (responding to certified question from Fifth Circuit). The Texas supreme court's language is supplemented here with additional verbiage drawing on concepts in various dictionaries available on-line.

See the Notebook section Workmanlike Performance.

Billing for Services

Provider will invoice Customer for Services, and Customer will pay Provider for such Services, as set forth in the applicable Statement of Work.

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Professional-License Responsibility

Except to the extent (if any) that the relevant Statement of Work provides otherwise, Provider will (1) obtain (A) all professional- and/or occupational licenses necessary for Provider's personnel to perform the Services, if any; and (B) all intellectual-property licenses required for Provider's use of Provider-furnished software, data compilations, and similar tools, if any; and (2) defend and indemnify Customer against any third-party claim resulting from its failure to do so.

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Permit Responsibility

Except to the extent (if any) that the relevant Statement of Work provides otherwise, Provider (the Party Acquiring Permits) (1) will obtain any permit, license, consent, permission, or the like — other than intellectual-property licenses — that may be required for the performance of the Services and the delivery and/or use of the Deliverables to comply with law; and (2) will defend and indemnify the other party against any claim resulting from its failure to do so.

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IP License Responsibility

Except to the extent (if any) that the relevant Statement of Work provides otherwise:

(a) Provider will (1) obtain all intellectual-property licenses required for Provider's use of Provider-furnished software, data compilations, and similar tools, if any; and (2) defend and indemnify Customer against any claim arising from Provider's failure to do so.

(b) Except as otherwise provided in subdivision (c), Customer (the Party Acquiring IP Licenses) (1) will obtain any other license that may be required for the performance of the Services and the delivery and/or use of the Deliverables not to infringe a third party's intellectual-property rights; and (2) will defend and indemnify the other party against any claim arising from its failure to do so.

(c) For the avoidance of doubt, IF: This Agreement contains (1) a warranty by Provider of non-infringement of third-party intellectual-property rights, and/or (2) an obligation on Provider's part to defend and/or indemnify Customer against claims by third parties of infringement of such rights; THEN: That warranty or obligation takes precedence over subdivision (b) to the extent of any inconsistency between them.

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Commentary

See also the IPRightsDefn clause.

Disagreement About Third-Party Approvals

(a) This clause applies if: (1) 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; but (2) Customer advises Provider in writing that, in Customer's view, the approval in question is not required to proceed with the portion of the Services in question.

(b) In any such situation: (1) Provider will not be in breach of this Agreement or Statement of Work if it declines to proceed with performing the relevant portion of the Services; (2) if Provider does so decline, it must seasonably advise Customer in writing that it is doing so; and (3) IF: Provider does proceed without the approval in question; THEN: Customer will defend, indemnify, and hold harmless Provider and its affiliates and the officers, directors, shareholders, members, employees, and agents, from any claim arising from Provider's doing so.

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Commentary

Customer Performance of Services

(a) IF: Customer elects in writing to perform itself, or to direct the performance, of some or all of the Services described in a Statement of Work ("Elected Services"); THEN: (1) Provider will provide reasonable cooperation with Customer if Customer so requests; (2) as between Provider and Customer, Customer will be solely responsible for the performance of all Elected Services; and (3) 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 dependent on the Elected Services.

(b) For the avoidance of doubt, this clause does not in itself require Provider to share its confidential information with Customer.

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Cooperation with Other Contractors

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

(b) For the avoidance of doubt, this clause does not in itself require Provider: (1) to share its confidential information with other contractors, nor (2) to perform services not within the scope of the Statement of Work.

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CAUTION

This provision has the potential to cause disputes about the scope of Provider's obligations under the statement of work; it could also lead to finger-pointing if things were to get messed up.

Defects in Services or Deliverables

(a) For purposes of this Agreement, the term Defect Defect Reporting Period refers to the 90-day period after the following, respectively: (1) for Deliverables, the date on which the Deliverable in question has been delivered to Customer in substantially the form required by the Statement of Work; and (2) for Services, the date on which the Service in question is substantially completed.

(b) IF: During the Deliverable Reporting Period, Customer reports to Provider in writing that a Service, or a Deliverable as delivered, was not substantially free from Defects; AND: Customer provides Provider with adequate supporting documentation and other information about the Defect in question and the surrounding circumstances as reasonably requested by Provider; THEN: Provider will either (1) correct or provide Customer with a workaround for the Defect within a commercially-reasonable time, not to exceed 30 days without Customer's consent, or (2) failing that, refund the fee paid by Customer for the relevant Services.

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Defects in Services or Deliverables – EXCLUSIVE REMEDIES

The parties specifically agree that the Defects in Services or Deliverables clause sets forth Customer’s EXCLUSIVE REMEDIES for any Defect in Services or in a Deliverable.

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Commentary

The introductory phrase, "The parties specifically agree," is redundant, but it's an example of how a few extra words can reinforce the parties' seriousness about the provision.

Deliverables – Customer's Right to Utilize

Except as expressly stated in this Agreement or in the relevant Statement of Work, Customer has the right, under any and all intellectual-property rights owned or otherwise assertable by Provider, to utilize any Deliverable in Customer's business as Customer sees fit.

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Commentary

Deliverables – Provider's Retention of IP Rights

For the avoidance of doubt, Provider retains ownership of any and all intellectual property that it may create in performing its obligations under this Agreement, subject to Customer's rights in (i) Deliverables, and (ii) Customer's own confidential information and other intellectual property.

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Commentary

See also:

Deliverables – Customer's Rights Are Conditioned on Payment

Customer's rights in respect of any Deliverable are conditioned on its payment of any amounts required by the applicable Statement(s) of Work for that Deliverable.

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Commentary

See generally the Notebook section Deliverables (of services)

Deliverables – Remedy for Non-Payment is for Breach, Not 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.

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Commentary

See also:

Deliverables – No Service-Bureau Use

Absent written approval by Provider, Customer's right to utilize Deliverables does not extend to using them in providing services to or for third parties if such services are comprised substantially of functions performed by one or more Deliverables.

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Commentary

See generally the Notebook section Deliverables (of services)

Deliverables – Customer May Modify

Customer may modify or otherwise further develop any Deliverable; this right has the same scope, and is subject to the same terms and conditions, as Customer's right to utilize the Deliverable pursuant to this Agreement.

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Deliverables Modifications – No Provider Support Obligation

For the avoidance of doubt, except to the extent expressly stated otherwise in this Agreement or the Statement of Work, Provider is not obligated to provide any support for any modification or further development of a Deliverable by or on behalf of Customer. (This clause does not in itself authorize any such further development by any party other than Provider.)

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Commentary

See generally the Notebook section Deliverables (of services)

Deliverables – Modifications Are Subject to Provider IP Rights

For the avoidance of doubt, any modification or further development of Deliverables by or on behalf of Customer is subject to Provider's applicable ntellectual-property rights, if any.

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Commentary

Deliverables – Modification by Other Contractors

Customer may engage one or more third parties to modify or otherwise further develop any Deliverable on Customer's behalf; this right: (1) has the same scope, and is subject to the same restrictions and other terms and conditions, as Customer's own right to further develop that Deliverable; and (2) is subject to any restrictions imposed by law, for example export-controls laws that might preclude sending Deliverables (or technical information about them) to other countries.

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Commentary

See also the Notebook section Customer rights in deliverables.

Deliverables – Modification by Provider Competitors

Without Provider's prior written consent, Customer may not engage any competitor of Provider to modify or otherwise further develop any Deliverable that:

(1) is the subject of one or more unexpired copyrights or patent claims owned by Provider that have not been shown to be invalid or enforceable, or

(2) contains trade secrets of Provider.

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Deliverables – Customer Assignment of Its Rights

Without Provider's prior written consent, Customer may assign its rights in any Deliverable under this Agreement (subject to all limitations or restrictions on those rights) only in connection with a sale or other disposition (1) of a physical object that is, or that embodies, a Deliverable; and/or (2) of substantially all the assets of Customer's business in which the Deliverable is used.

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Commentary

Under U.S. law, a customer technically might not be able to transfer its rights in licensed deliverables (for example, computer software) without the consent of the owner of the intellectual property rights in the deliverable (unless a court were to hold that the rights-owner had implicitly granted such consent). See generally the Notebook section Assignment Consent Requirements.

Indemnity for Claims Arising Out of Provider Negligence

Provider will defend and indemnify Customer and its Indemnity Group from all third-party claims arising out of Provider's alleged negligence, gross negligence, or willful misconduct in the performance of Services.

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Commentary

Note that this indemnity obligation applies only to Provider's alleged negligence in performing the services, not broadly as set forth in the Indemnity for Claims Arising Out of Services clause. See also:

Indemnity for Claims Arising Out of Services

Provider will defend and indemnify Customer and its Indemnity Group from all third-party claims arising out of Provider's performance of Services.

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Commentary

Note that this indemnity obligation is broader than that of the Indemnity for Claims Arising Out of Provider Negligence clause. See also:

Subcontracting

Clauses     Top       Subcontracting       TOC

Subcontracting – Notification Required

Provider will not subcontract any of its obligations under this Agreement without first advising Customer in writing of its intent to do so.

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Subcontracting – Consultation Required

Provider will not subcontract any of its obligations under this Agreement without first consulting (see the Consultation Definition clause) with Customer.

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Subcontractor Approval Required

Provider will not subcontract any of its obligations under this Agreement without first obtaining Customer's written approval of the proposed subcontractor.

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Subcontractor Contract Approval Required

To help Customer protect its proprietary rights and confidential information, Provider will obtain Customer's prior written approval of any written agreement between Provider and any subcontractor.

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Commentary

Customers should be cautious about asking for this clause: It could add weight to a claim by Provider or by a subcontractor that Customer had a direct contractual relationship with the subcontractor.

Subcontracting Does Not Affect Provider Obligations

For the avoidance of doubt, Customer's review and/or approval of a subcontractor or a subcontracting agreement, if any, in itself:

(1) will not excuse Provider from its obligation to select its subcontractors (if any), enter into appropriate subcontracting agreements, oversee the subcontractors' work, pay the subcontractors, and the like;

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

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

(4) will not excuse Provider from its obligations under this Agreement.

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Subcontracting – Unreasonable Delay of Approval

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

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Subcontracting – Provider Remains Customer's Primary Contact

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

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Commentary

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

Subcontractors – Reporting of Government-Required Data

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.

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Commentary

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

Subcontractor IP Agreements with Provider

Provider will enter into written agreements with its subcontractors (if any) that are at least as protective of the intellectual property rights of Customer (including for example Customer's confidential information) as those of this Agreement.

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Subcontracts – Government Contracting Provisions Flowdown

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

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Commentary

Agreeing to this clause likely will put additional administrative burdens on a provider, but as a practical matter that burden might be unavoidable. See also Clauses XXX (government contracting clauses).

Subcontractor Compliance with Insurance Requirements

Provider will require its subcontractors (if any) to comply with the insurance requirements of this Agreement.

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Subcontracting – All Non-Employees Are Considered Subcontractors

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

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Commentary

This clause could be problematic for a provider that uses individual independent contractors on a long-term basis.

Term of Agreement; Term Extensions

Term Sheet       Top       Info       TOC

This term sheet consists of those Common Draft clauses listed below as "Included," subject to any variations agreed by the parties.

Term of Agreement; Term Extensions

Term of Agreement Definition: Included

Unilateral Term Extension: Not included

  • Extending Party: Either party.
  • Earliest Notice Date: 60 days before the then-current expiration date.
  • Notice Deadline: 30 days before the then-current expiration date.
  • Extension Duration: One year each.

Unilateral Term Extension – Maximum Number of Extensions: Not included

  • Maximum Extensions: Five.

Unilateral Term Extension – Not Available When in Material Breach: Not included

Evergreen Automatic Term Extension: Not included

Term Extensions - General Provisions: Not included

  • Extension Period: One year.
  • Opting-Out Party: Either party.
  • Earliest Opt-Out Notice Date: 60 days before the then-current expiration date.
  • Opt-Out Notice Deadline: 30 days before the then-current expiration date.

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Term of Agreement Definition

Unless the Agreement clearly states otherwise, the term Term refers to the term of this Agreement, which begins on the effective date of this Agreement and ends on the date specified in this Agreement, if any. If the Agreement does not specify an end date, then the Term continues indefinitely, subject to any provision for termination stated in this Agreement or by law.

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Commentary

Some types of agreement might not even need a term; see the discussion in Ken Adams's blog post, Does a Services Agreement Need a Term?, Aug. 10, 2013.

Unilateral Term Extension

[Fill in party name] (the Extending Party) may unilaterally extend the Term by giving notice of extension to the other party, no earlier than 60 days before the then-current expiration date (the Earliest Notice Date), and no later than 30 days before the then-current expiration date (the Notice Deadline); each extension will be for one year each (the Extension Duration).

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Commentary

This clause uses the term extend instead of renew because in some situations the latter word might have unintended legal consequences such as requiring one party to renegotiate.

For example, in a 2012 case, the Eighth Circuit held that a clearly-labeled lease extension option was in fact an option to renew the lease. As a result, said the court, under Minnesota law the parties would have to negotiate the terms and conditions. See Camelot LLC v. AMC ShowPlace Theatres, Inc., 665 F.3d 1008, 1011 (8th Cir. 2012) (affirming declaratory judgment).

The 30- and 60-day periods should be considered carefully for their business implications.

Unilateral Term Extension – Maximum Number of Extensions

The Extending Party may not extend the Term pursuant to the Unilateral Term Extension clause more than five times (the Maximum Extensions) without the written agreement of the other party.

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Unilateral Term Extension – Not Available When in Material Breach

Unless expressly agreed otherwise in writing by the other party, a unilateral extension of the Term will be ineffective (and the Term will thus expire) if the Extending Party is in material breach of this Agreement at the then-effective expiration of the Term.

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Evergreen Automatic Term Extension

The Term will be automatically extended for successive "evergreen" periods, each of one year (the Extension Period), unless the either party (the Opting-Out Party) opts out by giving notice to that effect to the other party: (1) no earlier than the 60 days before the then-current expiration of the Term (the Earliest Opt-Out Notice Date), and (2) no later than the 30 days before the then-current expiration of the Term (the Opt-Out Notice Deadline).

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Commentary

See the comment to the Unilateral Term Extension clause concerning the distinction between extend and renew.

In some supplier-customer relationships, a customer might want the ability to opt out right up to the then-current expiration date, or even for a limited period of time after the automatic extension.

Some states restrict automatic extension or renewal of certain contracts unless specific notice requirements are met. Examples of such states include California, Illinois, New York, North Carolina, and Wisconsin. See Cal. Bus. & Prof. Code § 17600-17606 (consumer contracts); 815 ILCS § 601 (consumer contracts); N.Y. Gen. Oblig. L. § 5-903, contracts for services, maintenance or repair[http://law.onecle.com/north-carolina/75-monopolies-trusts-and-consumer-protection/75-41.html][N.C. Gen. Stat. § 75-41]] (consumer contracts); Wis. Stat. § 134.49 (business equipment leases and business services).

Term Extensions - General Provisions

For the avoidance of doubt:

(a) If the parties do not affirmatively agree otherwise in writing, any extension of the Term of this Agreement will be on the same terms and conditions as were in effect immediately before (what would have been) the expiration of the Term;

(b) Any extension of the Term of this Agreement is subject to any provision of this Agreement, or of applicable law, allowing a party to terminate the Agreement (see the Termination clause; and

(d) Nothing in this clause is to be construed as providing in itself for any extension of the Term.

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Termination

Term Sheet       Top       Info       TOC

This term sheet consists of those Common Draft clauses listed below as "Included," subject to any variations agreed by the parties.

Termination

Termination by Specified Party is Precluded: Included

  • Restricted Party: None specified.

Termination for Breach: Included

  • Terminating Party: Either party.

Cure Period Duration: Included

  • Nonpayment of an amount due: Two business days.
  • Missed deadline for which Agreement states that time is of the essence: No cure period.
  • Other, curable missed deadline stated in this Agreement: Five business days.
  • Other curable breach, Ten business days.
  • Breach clearly not capable of being cured, No cure period.

Other Remedies Not Precluded: Included

Deadline to Terminate for Material Breach: Included

  • Breach Termination Deadline: None specified.

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Termination by Specified Party is Precluded

[Fill in] (the Restricted Party) may not terminate nor rescind the Agreement, no matter what the circumstances; in case of breach of this Agreement by the other party, the Restricted Party's sole remedy shall be limited to an action at law.

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Commentary

This provision is modeled on one that was in the contract (but apparently did not affect the court's holding) in Mercado-Salinas v. Bart Enter. Int'l, Ltd., 671 F.3d 12 (1st Cir. 2011) (affirming preliminary injunction).

Termination for Breach

(a) Either party (the Terminating Party) may terminate the Agreement if all of the following are true:

(1) the other party materially breaches the Agreement;

(2) the Terminating Party gives the breaching party notice that describes the breach with reasonable specificity;

(3) the notice of breach states the duration of the cure period which the Terminating Party believes to be applicable, if any;

(4) (if a cure period applies per the Cure Period Duration clause:) the breaching party fails to cure the breach, to give the Terminating Party notice describing the cure with reasonable specificity, or both, before the end of the cure period; and

(5) the Terminating Party gives notice of termination to the breaching party (after the end of the cure period if applicable).

(b) For the avoidance of doubt, if no cure period applies, then the Terminating Party may give notice of termination of this Agreement to the breaching party in the same communication as the notice of breach.

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Commentary

Under the law typically applicable in the U.S., in the event of material breach of this Agreement (see the Material Breach Definition clause), the non-breaching party can terminate the Agreement.

Cure Period Duration

The cure periods for breaches of this Agreement are as follows:

(1) Nonpayment of an amount due: Two business days.

(2) Missed deadline for which Agreement states that time is of the essence: No cure period.

(3) Other, curable missed deadline stated in this Agreement: Five business days.

(4) Other curable breach, Ten business days.

(5) Breach clearly not capable of being cured, No cure period.

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Commentary

The cure periods set out in the clause configuration are placeholders; negotiators should give some thought to what would be appropriate for their particular situations.

Other Remedies Not Precluded

For the avoidance of doubt, termination of this Agreement for material breach is without prejudice to any other remedies available to the non-breaching party except to the extent expressly stated otherwise in this Agreement.

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Commentary

This provision should block any effort by a breaching party's trial counsel that the non-breaching party's termination of this Agreement supposedly wiped the slate clean.

Deadline to Terminate for Material Breach

Any right to terminate the Agreement for breach must be exercised – otherwise it will be deemed permanently and irrevocably waived – before the [flll in] (the Breach Termination Deadline).

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Termination At Will

By notice to the other party, [FILL IN] (the Terminating Party) may terminate this Agreement in its discretion (see the Reasonable Discretion Definition clause), effective as specified in the notice of termination but not less than 90 days following the effective date of the notice of termination (the At-Will Termination Notice Period).

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Commentary

A company might want a contract to contain a termination-at-will provision, allowing the company to "walk away" from the contract if desired. The company's thinking will usually be that, someday, the company might no longer wish to keep doing business deal with the other side, for any of a variety of reasons such as:

  • dissatisfaction with the other side's performance, even if not amounting to a breach of the contract;
  • the company (or a manager at the company) wants to switch the business to someone else;
  • the company experiences a power shuffle, and new executive management wants to "make a change" (this is especially likely to happen if the company gets acquired in an M&A transaction);
  • the other side gets caught in some bad publicity, and the company doesn't want to be "tainted";
  • bad blood exists between certain individuals at the two companies.

The question then becomes: To what extent should the other side be compensated if the company exercises its right to terminate at will?

Earliest Date for Termination at Will

The Terminating Party may not terminate this Agreement pursuant to the Termination At Will clause effective before the Earliest At-Will Termination Date; a purported termination before then will be of no effect.

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Buy-Out Fee for Early Termination at Will

IF: The Terminating Party terminates this Agreement pursuant to the Termination At Will clause effective before the Earliest Termination Date; THEN: That party will pay the other party the Buy-Out Fee.

  • Buy-Out Fee: none specifified.

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Termination for insolvency, etc.

Subject to any restrictions imposed by law, either party may terminate the Agreement, effective immediately upon notice of termination, if the other party does or undergoes any of the following:

(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) has a receiver, administrative receiver, administrator, liquidator, trustee in bankruptcy, or similar functionary in the relevant jurisdiction, appointed for its business or assets;

(6) 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

(7) becomes the subject of an involuntary petition under the bankruptcy laws, or a similar petition under the laws of the relevant jurisdiction, and the same is not vacated, released, dismissed, stayed, reversed or otherwise overturned, or bonded off within 90 days thereafter.

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Commentary

In the U.S., many of these so-called ipso-facto clauses will be unenforceable if the non-terminating party has filed a petition for protection under the bankruptcy laws.

Termination for Violation of Law

IF: The Breaching Party commits any act or omission pertinent to its responsibilities under this Agreement and in material violation of any applicable law; THEN: The other party will have the option, in its discretion, to terminate the Agreement effective immediately upon written notice to the Breaching Party.

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Termination for Excessive Personnel Changes

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Applicability

This the Termination for Excessive Personnel Changes clause applies if, within the Relevant Period, at least the Threshold Number of Personnel Changes occurs at the Affected Party.

  • Threshold Number of Personnel Changes: Two managers of [describe the relevant team].
  • Relevant Period: Any 12-month rolling period during the Term of this Agreement.

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Termination Right

In any case within the scope of the Applicability clause, the Terminating Party may terminate the Agreement effective immediately upon written notice of termination to the Affected Party.

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Commentary

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, e.g., [TO BE DRAFTED].

Termination Deadline

The Terminating Party must give notice of any termination pursuant to the Termination Right clause no later than the end of the Termination Option Period beginning on the date when the Terminating Party first becomes aware, by notice or otherwise, of the latest to occur of such personnel changes.

  • Termination Option Period: 30 days.

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Termination for Business-Reputation Risk

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Business-Reputation Risk Action Definition

For purposes of this the Termination for Business-Reputation Risk clause, the term Business-Reputation Risk Action refers to any act or omission, or to a series of acts and/or omissions (related or unrelated), intended by the actor or reasonably likely to:

(a) libel or slander another person or put him or her in a false light;

(b) threaten, embarrass, harass, or invade the privacy of another;

(e) impersonate another or promote, encourage, or or assist in, such impersonation;

(c) offend a reasonable person on racial- or ethnic grounds;

(c) be prohibited by law, or encourage activities prohibited by law, including (for example) identity theft; child pornography; and terrorism;

(d) be obscene;

(f) mistreat a minor or promote, assist in, or encourage such mistreatment.

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Commentary

This list of actions is adapted from language used in a number of on-line terms of service collected by Zachary West in his blog posting, "Morality clauses in domain registration."

Termination Right

The Terminating Party may terminate the Agreement, effective at the end of the Notice Period after notice of termination to the other party, if the other party engages in one or more Business-Reputation Risk Actions that the Terminating Party reasonably determines is likely to create a not-insubstantial risk to the Terminating Party's business reputation.

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Termination Deadline

The Terminating Party must give notice of any termination pursuant to the Termination Right clause no later than the end of the Termination Option Period, whcih begins on the date when the Terminating Party first becomes aware, by notice or otherwise, of the latest to occur of such personnel changes.

  • Termination Option Period: 30 days.

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Termination After Change of Control

(a) IF: The Affected Party undergoes a change of control (with control having the same meaning as in this Agreement's definition of Affiliate, if any, otherwise as defined in the Affiliate Status – Arises from Voting Control clause); THEN: The Terminating Party may terminate the Agreement effective immediately upon the Affected Party's receipt of the Terminating Party's notice of termination.

(b) Any such notice of termination must be given to be effective no later than the end of the Termination Period, which begins on:

(1) the effective date of the notice (if any) to the Terminating Party from the Affected Party that the change of control has become effective; and

(2) if earlier, the date on which the Terminating Party first acquired knowledge (actual or imputed) that the change of control had taken place.

  • Termination Period: 30 days.

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Termination of Specific Transactions Instead

(a) a party that has the right to terminate the Agreement may instead, in its Sole Discretion, terminate one or more specific pending transactions entered into pursuant to this Agreement.

(b) All provisions of this Agreement concerning termination of this Agreement will apply to termination of such transactions, mutatis mutandis (that is, any necessary changes being made).

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Commentary

I'm more than a little uncomfortable with the phrase mutatis mutandis because it's vague; suggestions for improvement are welcome.

Termination - Cross-Default

Any party entitled to terminate one transaction for material breach by the other party may in its discretion terminate any and all other transactions between the parties.

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Termination 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 that could have been stated by the terminating party.

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Termination includes expiration

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Continued Customer Support Clause: [Reseller] may continue to fulfill pre-existing technical support obligations to its customers after termination

(a) The specified party may continue to fulfill any pre-existing technical support obligations to its customers after termination of this Agreement.

(b) For the avoidance of doubt, subdivision (a) does not extend to:

(1) support that the specified party would not have been authorized by this Agreement to provide before termination; nor

(2) support obligations that the specified party did not contractually commit to before termination.

Comment: Arguably this is just good end-customer relations, and good brand protection for Provider.

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[Reseller's] customer-support obligations will survive termination

Termination of this Agreement will not in itself terminate the specified party's customer-support obligations under this Agreement in respect of that party's then-current customers that, at the time of termination, are entitled to such support from that party.

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[Reseller] may not renewal or extend its customer-support obligations after termination

For the avoidance of doubt, upon any termination or expiration of this Agreement, the party specified in this Agreement will no longer be entitled to renew or extend any maintenance subscription or other commitment to provide support to any of its customers.

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[Reseller] has no claim against [Provider] for loss of distribution rights, etc., after termination or expiration

(a) For the avoidance of doubt, upon any termination or expiration of this Agreement, the party specified in this Agreement will not have any claim against the other specified party for compensation for loss of distribution rights; loss of goodwill; or any similar loss.

(b) The first specified party agrees not to bring any such claim, in any forum or before any tribunal, against the other specified party; its affiliates (if any); or any officer, director, shareholder, member, manager, general- or limited partner, or employee of any of them.

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Termination does not affect software licenses already granted to [Reseller's] customers

For avoidance of the doubt, no termination of this Agreement will in itself terminate any License already granted to a customer of the party specified in this Agreement.

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Termination: Obligations Aftewards

[IN PROGRESS]

The relevant parties will comply with the obligations in this "Post-termination obligations" section promptly after any termination or expiration of this Agreement or any Statement of Work.

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Unbilled amounts

Provider will invoice Client, and Client will timely pay, any then-unbilled amounts payable under this Agreement.

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Trademark Use

Term Sheet       Top       Info       TOC

This term sheet consists of those Common Draft clauses listed below as "Included," subject to any variations agreed by the parties.

Trademark Use

Trademark Definition: Included

Trademark License Grant: Included

Trademark License Characteristics: Not included

Trademark License – Terminates If and When Agreement Does: Included

Trademark License – No Other Use of Owner's Trademarks: Included

Domain Name Transfer After Trademark License Termination: Included

Power of Attorney for Domain Name Transfer: Included

Compliance with Mark-Owner Trademark Policies and Guidelines: Not included

Samples of Mark Use for Advance Review by Mark-Owner: Not included

Trademark License – Ownership of Licensed Mark: Not included

Trademark License – Quality Standards: Not included

Trademark License – Samples for Quality Inspection: Not included

Trademark License – Inspection of Mark-User's Facilities: Included

Trademark License – No Other Use of Licensed Mark: Included

Trademark License – No Other Use of Mark-Owner Trademarks: Included

Trademark License – Registration Requires Consent: Included

Trademark License – Registered-User Applications: Included

Trademark License – Suggestion of Registered-User Application: Included

Trademark License – All Use Inures to Mark-Owner's Benefit: Included

Mark-User's Defense and Indemnity Obligation: Not included

Mark-User's Defense and Indemnity Obligation: Not included

Trademark License Defense and Indemnity Expenditures Limited to Insurance Coverage: Not included

Trademark License Defense and Indemnity Liability Cap: Not included

No Use of Confusingly Similar Marks: Included

Validity of Licensed Mark: Included

Mark-Owner's Ownership: Included

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Trademark Definition

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

(b) As non-limiting illustrations of subdivision (a): Potential examples of things that can function as Trademarks, alone or in combinations, include brand names; two- and three-dimensional designs; domain names; sounds; colors and color combinations; aromas; tastes; and logos.

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Trademark License Grant

[Fill in licensor name] (the Mark-Owner) grants to [fill in licensee name] (the Mark-User) a license (the Trademark License) to use the mark "[describe the mark]" (the Licensed Mark) in connection with Mark-User's advertising, marketing, and sale of [describe the goods / services] (the Licensed Use), in accordance with the terms of this Agreement.

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Trademark License Characteristics

The Trademark License is non-exclusive, non-transferable, royalty free, and worldwide (the Trademark License Characteristics).

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Trademark License – Terminates If and When Agreement Does

For the avoidance of doubt, the Trademark License will end, automatically and immediately, upon any termination (for any reason) or expiration of this Agreement.

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Trademark License – No Other Use of Owner's Trademarks

(a) Mark-User will not use any Trademark of Mark-Owner except (i) as permitted by this Agreement or (ii) as expressly agreed otherwise in writing by Mark-Owner.

(b) For the avoidance of doubt, the prohibition of subdivision (a) includes, for example, use of any Trademark of Mark-Owner (1) in any trade name or corporate name of Mark-User, and/or (2) in any Internet domain name of Mark-User.

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Domain Name Transfer After Trademark License Termination

(a) Upon any termination (for any reason) or expiration of the Trademark License, Mark-User will promptly transfer to Mark-Owner any Internet domain name that incorporates any trademark of Mark-Owner.

(b) For the avoidance of doubt, subdivision (a) does not in itself authorize Mark-User to incorporate any trademark of Mark-Owner in an Internet domain name.

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Power of Attorney for Domain Name Transfer

Mark-User hereby irrevocably appoints Mark-Owner as its attorney to achieve the domain-name transfer referred to in the Domain Name Transfer After Trademark License Termination clause; this appointment is coupled with an interest.

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No Obligation to Support Mark-User or Its Customers, etc.

For the avoidance of doubt, Mark-Owner is not obliged to provide support or assistance to Mark-User, its customers, or any other party, in connection with the Licensed Use.

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Compliance with Mark-Owner Trademark Policies and Guidelines

Mark-User will comply with any written trademark-usage policies or guidelines that Mark-Owner may provide to Mark-User from time to time, such as (for example), requirements for displaying notices of Mark-Owner's trademark rights and/or registrations.

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Samples of Mark Use for Advance Review by Mark-Owner

(a) Mark-User will submit to Mark-Owner a representative sample of each proposed Use of a Licensed Mark, which for this purpose means to expose the Licensed Mark, in any form (e.g., visual or audible), to potential customers of Mark-User or other members of the public.

(b) Mark-Owner will have ten business days (the Mark Use Review Period) in which (i) to object to Mark-User in writing, or (ii) to request more information from Mark-User in writing, concerning the proposed Use of the Licensed Mark.

(c) Any such request for more information about the proposed Use of the Licensed Mark will automatically suspend the running of the Mark Use Review Period until Mark-User provides the requested information to Mark-Owner in writing, at which point the Mark Use Review Period will restart.

(d) Mark-User will not make the proposed Use of the Licensed Mark depiction until the earlier of (i) Mark-Owner's written approval, if any, or (ii) ten business days (the Licensed Mark Approval Period) after the last submission referred to in subdivisions (a) and (b) if Mark-Owner has not requested additional information or objected in writing to the proposed Use.

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Trademark License – Ownership of Licensed Mark

Mark-User acknowledges, agrees, and will not dispute, (1) that as between Mark-Owner and Mark-User, Mark-Owner (or an associated company) owns all right, title, and interest in each Trademark of Mark-Owner; and (2) that nothing in this Agreement is to be interpreted as entitling Mark-User to any such right, title or interest.

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Trademark License – Quality Standards

Mark-User will ensure that each product and service offered by Mark-User using any Licensed Mark meets or exceeds the following Trademark Use Quality Standards: [DESCRIBE].

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Trademark License – Samples for Quality Inspection

If reasonably requested by Mark-Owner from time to time, Mark-User will supply Mark-Owner or its designee, at no cost to Mark-Owner, with representative samples of (1) each product being offered by Mark-User using any Licensed Mark, and (2) each form of advertising or other marketing material bearing any Licensed Mark. Mark-Owner may inspect, test, retain, and/or destroy any such sample in its sole discretion.

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Trademark License – Inspection of Mark-User's Facilities

(a) Whenever reasonably requested by Mark-Owner from time to time, Mark-User will permit reasonable inspections, by either Mark-Owner or Mark-Owner's designee reasonably acceptable to Mark-User, of all facilities used in connection with the Licensed Use. Such facilities may include, for example, those used in manufacturing, inspecting, storing, packing, and shipping products bearing or associated with any Licensed Mark.

(b) To the extent that any such facilities are not under Mark-User's control (for example, outsourced manufacturing), Mark-User will ensure, by contract or otherwise, that it has the legal right to permit the inspections described in subdivision (a).

(c) All such inspections, if any, are to be at Mark-Owner's expense and upon reasonable notice to Mark-User.

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Trademark License – No Other Use of Licensed Mark

For the avoidance of doubt, Mark-User may not use any Licensed Mark except pursuant to the Trademark License. For purposes of this clause, "use" includes, among other things, registering or licensing a domain name containing or incorporating any such Licensed Mark.

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Trademark License – No Other Use of Mark-Owner Trademarks

For the avoidance of doubt, Mark-User may not use any Trademark of Mark-Owner (including without limitation any Licensed Mark) except pursuant to the Trademark License. For purposes of this clause, "use" includes, among other things, registering or licensing a domain name containing or incorporating any such Trademark.

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Trademark License – Registration Requires Consent

Mark-User will not file an application to register any Trademark of Mark-Owner, nor any registered-user application in respect of any such Trademark, without the prior written consent of Mark-Owner.

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Trademark License – Registered-User Applications

If so requested by Mark-Owner from time to time, Mark-User will file (and diligently prosecute), at its own expense, one or more applications, in such jurisdictions as Mark-Owner may reasonably request, to register Mark-User as a registered user of a specified Licensed Mark.

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Trademark License – Suggestion of Registered-User Application

(a) Mark-User will promptly advise Mark-Owner in writing if it believes that it is necessary or appropriate for Mark-User to file a registered-user application in respect of any Licensed Mark.

(b) For the avoidance of doubt, Mark-Owner's decision will be final and binding on the parties as to (i) whether an application referred to in subdivision (a) is to be filed and (ii) whether to continue the prosecution of any such application.

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Trademark License – All Use Inures to Mark-Owner's Benefit

All use of any Licensed Mark by Mark-User will inure exclusively to the benefit of Mark-Owner.

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Commentary

The context of this clause is that in many jurisdictions, trademark rights are based primarily on use of the mark by the party claiming such rights. A trademark licensee might later claim that its use of a licensed trademark caused it, not the owner of the trademark, to obtain rights in the mark; this clause, a fairly-standard one in many trademark license agreements, tries to forestall any such claim.

Mark-User's Defense and Indemnity Obligation

(a) For purposes of this clause, the term Covered Claim refers to a claim, by a claimant not an affiliate of Mark-Owner, arising out of Mark-User's business, OTHER THAN claims for which this Agreement expressly makes Mark-Owner responsible.

(b) Except to the extent (if any) that this Agreement expressly provides otherwise, Mark-User will: (1) defend Mark-User against any Covered Claim; and (2) indemnify Mark-User against any monetary award to the claimant by a court of competent jurisdiction in respect of the Covered Claim (for example, an award damages, court costs, or attorneys' fees and -expenses).

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Mark-Owner's Defense and Indemnity Obligation

(a) For purposes of this clause, the term Covered Claim refers to a claim, by a claimant not an affiliate of Mark-User, that the Licensed Use of any Licensed Mark infringes the Trademark rights of the claimant.

(b) Except to the extent (if any) that this Agreement expressly provides otherwise, Mark-Owner will:

(1) defend Mark-User against any Covered Claim; and

(2) indemnify Mark-User against any monetary award to the claimant by a court of competent jurisdiction in respect of the Covered Claim (for example, an award damages, court costs, or attorneys' fees and -expenses).

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Trademark License Defense and Indemnity Expenditures Limited to Insurance Coverage

In complying with its obligation under the Mark-User's Defense and Indemnity Obligation clause, Mark-Owner need not spend more, in the aggregate, than the policy limits of its insurance coverage applicable to claims that the Licensed Mark infringes a third party's rights in the third party's Trademark.

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Commentary

Drafters using this clause should consider including a requirement that Mark-Owner maintain specified types and amounts of insurance coverage.

Trademark License Defense and Indemnity Liability Cap

In complying with its obligation under the Mark-User's Defense and Indemnity Obligation clause, Mark-Owner need not spend more, in the aggregate, than [fill in amount] (the Trademark Indemnity Liability Cap).

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No Use of Confusingly Similar Marks

Mark-User will not use any trademark confusingly similar to any Licensed Mark, nor assist or knowingly permit such use by others.

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Validity of Licensed Mark

Mark-User will not dispute the validity or enforceability of Mark-Owner's rights in any Licensed Mark, nor knowingly assist another to do so.

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Mark-Owner's Ownership

Mark-User will not dispute Mark-Owner's ownership of any Licensed Mark, nor knowingly assist another to do so.

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Warranties & Disclaimers

Term Sheet       Top       Info       TOC

This term sheet consists of those Common Draft clauses listed below as "Included," subject to any variations agreed by the parties.

Warranties & Disclaimers

PLACEHOLDER TEXT

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Warranty Definition

(a) The noun warranty, whether or not capitalized, refers to an affirmation of fact that relates to the subject matter of this Agreement and becomes part of the basis of the bargain of this Agreement; the verb warrants has a concomitant meaning.

(b) For the avoidance of doubt:

(1) it is not necessary to the creation of a warranty that the warranting party use formal words such as "warrant" or "guarantee" or that the warranting party have a specific intention to make a warranty;  and

(2) an affirmation merely of the value of the subject matter of this Agreement, or a statement purporting to be merely the party's opinion or commendation of the subject matter of this Agreement, does not create a warranty.

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Commentary

Subdivisions (a) and (b) are adapted from UCC § 2-313.

Time of Warranty

The truth of a warranty is to be determined: (1) as of the time specified in the warranty, or (2) if no time is so specified, as of the time the Agreement was made.

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Claims for Breach of Warranty

IF: a party (the "claimant") shows that a warranty was untrue; THEN: The warranting party will pay the claimant — subject to any applicable limitations of liability stated in this Agreement — for all loss or expense shown to have been both: (1) incurred by the claimant; and (2) foreseeably caused by the untruth of the warranty.

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Proof of Reliance on Warranty is Not Required

For the avoidance of doubt, a party making a claim for breach of warranty need not show that it relied on the truth of the warranty. 

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Commentary

A leading case on the reliance issue is from the Court of Appeals of New York (that state's highest court); see CBS, Inc. v. Ziff-Davis Publishing Co., 75 N.Y.2d 496, 503, 553 N.E.2d 997, 1001 (1990).

For extensive additional citations, see, e.g.:

For an earlier piece on the same subject by Tina (who is the author of Drafting Contracts, a textbook I use in the law-school course I teach), see her Nonbinding Opinion: Another view on reps and warranties, Business Law Today, January/February 2006.

Some of Ken Adams's earlier essays espousing synonymity can be found at A lesson in drafting contracts — What's up with 'representations and warranties'?/, The Business Lawyer, Nov./Dec. 2005, as well as here, here and here.

See also Robert J. Johannes & Thomas A. Simonis, Buyer's Pre-Closing Knowledge of Seller's Breach of Warranty, Wis. Law. (July 2002) (surveying case law).

Warranties Extend Only to Named Parties

For the avoidance of doubt: Any warranty made in this Agreement is for the benefit only of the party or parties not making the warranty, unless the warranty language itself expressly specifies otherwise.

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Government Subcontract Disclaimer Warranty

(a) [Fill in party name] (the Warranting Party) warrants to [fill in party name] (the Protected Party) that this Agreement is not a subcontract in respect of a contract between the Warranting Party and any governmental authority

(b) 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; nor

(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).

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Commentary

See also the Government Authority Definition clause.

Implied Warranties Are Disclaimed

[Fill in party name] (the Disclaiming Party) DISCLAIMS all implied warranties, representations, conditions, terms, etc., that is, those that are not expressly stated in (or incorporated by reference into) the Agreement.

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Implied-Warranty Disclaimer – Specific Examples

The disclaimer of the Implied Warranties Are Disclaimed clause is intended to encompass, for example, any and all implied warranties, representations, conditions, and implied terms (BUT NOT express warranties stated in this Agreement) concerning any of the following, regardless whether any of the foregoing is alleged to arise by law, by reason of custom or usage in the trade, by course of dealing, or in any other manner: Merchantability. Fitness for a particular purpose (whether or not the disclaiming party or any of its suppliers know, have reason to know, have been advised, or are otherwise in fact aware of any such purpose). Quiet enjoyment. Title. Noninfringement. Absence of viruses. Results. Workmanlike effort. Implied term of quality. Non-interference. Accuracy of informational content.

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No Warranty That Software is Error-Free Or Fail-Safe

For the avoidance of doubt, in addition to any other limitations or disclaimers of warranties stated in this Agreement, the Disclaiming Party DOES NOT WARRANT that any computer software: (1) will be free of errors or defects; (2) will meet another party's needs; (3) will operate without interruption; or (4) will provide fail-safe performance when used in hazardous environments, including without limitation any application in which the failure of the software could lead directly to death, personal injury, or severe physical or property damage.

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Contract Term Sheets

Confidentiality Agreements

Short, "Down the Middle":

Confidentiality Agreement

[Not a substitute for legal advice]

[Party names, etc., omitted]

Incorporation of Common Draft term sheets: This Agreement incorporates by reference the following Common Draft term sheets and their associated clauses (version CD14A, www.CommonDraft.org), with variations as indicated below:

Defined Terms

Confidential Information

General Provisions

[Signature blocks omitted]

Favoring the Disclosing Party:

Confidentiality Agreement

[Not a substitute for legal advice]

[Party names, etc., omitted]

Incorporation of Common Draft term sheets: This Agreement incorporates by reference the following Common Draft term sheets and their associated clauses (version CD14A, www.CommonDraft.org), with variations as indicated below:

Defined Terms: included

Confidential Information: included, with the following variations:

General Provisions: included, with the following variations:

  • Governing Law: Included
    • Governing-Law Location: [Fill in Disclosing Party's preferred location]

[Signature blocks omitted]

Favoring the Receiving Party:

Confidentiality Agreement

[Not a substitute for legal advice]

[Party names, etc., omitted]

Incorporation of Common Draft term sheets: This Agreement incorporates by reference the following Common Draft term sheets and their associated clauses (version CD14A, www.CommonDraft.org), with variations as indicated below:

Defined Terms: included

Confidential Information: included, with the following variations:

General Provisions, included, with the following variations:

  • Governing Law: Included
    • Governing-Law Location: [Fill in Receiving Party's preferred location]

[Signature blocks omitted]

Author's Note

A work in progress

This clause collection and its Notebook will change constantly for awhile, without advance warning.

The evolving clause text, though, will always be available for free at the Wayback Machine. (I haven't yet decided whether the same will always be true for the Notebook, which I hope eventually to publish, in some form, as a book.)

Free use in individual contracts

The headings (titles) and full text of the Common Draft clauses (but not the commentary or Notebook entries) may be freely copied and distributed for non-commmercial purposes, subject to the restrictions in the Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License. Attribution should include a link to www.CommonDraft.org.

In addition, licensed attorneys or individuals acting under their direction may reproduce and/or modify any or all individual Common Draft clause headings (titles) and text (but not commentary or Notebook sections) for use in specific individual contracts without the need for attribution or sharing.

For the avoidance of doubt, the authorizations above do not extend to reproduction, distribution, display, or performance in, or as part of, an automated document-drafting or -assembly system; please contact me at dc@toedt.com if you'd like to discuss that option.

Easier review: Many short paragraphs

To make contract review faster and easier, the Common Draft clauses are written in the form of many short paragraphs, with many descriptive subheadings. This necessarily causes contracts drafted using the clauses to have more pages than they would if the provisions were crammed together.

Why so many defined terms?

Many clauses include defined terms that are used only once. EXAMPLE: the Affiliate Status – Arises from Voting Control clause uses the defined term Minimum Voting Percentage, even though that's only time the term is likely ever to appear in a contract. This goes against the usual (and sound) practice of defining a term only if the term is to be used multiple times in the same contract, but including the defined term in a term sheet makes it super-easy for drafters to change the substance of the relevant clause  — and also someday for a computer to compare two parties' respective preferences for a term sheet and generate a report of the specific points on which the parties disagree.

Disclaimer

Of course, don't rely on anything written here as a substitute for legal advice.

Notebook

Author's note: This section is where I'm putting draft chapters, notes, research links, etc., for a book on contract drafting. I hope it'll be helpful to readers even in its unfinished state.

Arbitration

Done properly, arbitration can lead to faster, less-expensive, and less-disruptive dispute resolution. See generally, e.g., Aaron Weems, Don't Hesitate … Arbitrate, Dec. 26, 2013.

(Disclosure: I serve as an arbitrator of commercial- and technology disputes as part of my law practice.)

Arbitrable Disputes definition

Suppose that you wanted your arbitration clause to cover even statutory causes of action, such as (for example) discrimination claims. That way, you'd be able to handle those cases privately and not in a public courtroom.

In that situation, it'd be a really good idea for your arbitration clause to state expressly that statutory claims are to be arbitrated. Otherwise, a court might well hold that such a claim must be decided in court and not in arbitration.

Here are a couple of illustrative stories:

• An employer tried to force an employment-discrimination case to be heard in arbitration under the employer's collective-bargaining agreement ("CBA") with a union. The employer managed to convince the district court to rule in its favor. But the Fifth Circuit disagreed; the appeals court said that the arbitration provision in the CBA didn't cover discrimination claims because the provision didn't include a clear and unmistakable statement that statutory claims were to be arbitrated. See Ibarra v. United Parcel Service, 695 F.3d 354, 256 (5th Cir. 2012) (reviewing Supreme Court cases; vacating and remanding summary judgment in favor of employer).

• In contrast, another employer's collective-bargaining agreement did include what the [U.S.] Supreme Court described as "a provision … that clearly and unmistakably requires union members to arbitrate claims arising under the Age Discrimination in Employment Act of 1967 (ADEA)"; the Court held that that arbitration provision was enforceable. See 14 Penn Plaza LLC v. Pyett, 556 U.S. 249 (2009) (reversing court of appeals; citation omitted).

See the commentary to the Agreement-Related Definition clause and the Agreement-Related Dispute Definition clause.

(If desired, the term Agreement-Related Dispute can be substituted into the definition of Arbitrable Dispute.)

"Submitted to" arbitration, vice resolved by it

Subdivision (a) states, in effect, that disputes will be submitted to arbitration, as opposed to being resolved by it. That's because in some circumstances, it might make sense to have the arbitration award initially be non-binding, as provided in the the Partial Retrial in Court clause clause; this is especially true if the parties want the arbitration award to be appealable on more than just the narrow grounds provided in section 10 of the [U.S.] Federal Arbitration Act. See also the commentary to the the Enhanced Appellate Review clause clause.

Arbitrate all issues, or just some?

If the parties don't want to agree to arbitrate all Agreement-Related Disputes, they could consider limiting the arbitration requirement to judgment-call issues, such as:

… all disputes about whether a party, in taking or omitting an action, breached a requirement of reasonableness, prudence, good faith, appropriateness, suitability, or similar non-specific standard set forth in this Agreement …

The notion of using arbitration to quickly resolve narrowly-focused disputes about reasonableness and other judgment calls — ideally, in a short conference call — is experimental.

Who decides disputes about arbitrability?

Under U.S. law, a court normally must determine whether the parties have agreed to arbitrate — unless the arbitration agreement itself clearly delegates that power to the arbitrator. See First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995) (reversing court of appeals and holding that parties' arbitration agreement did not give arbitrator the power to determine arbitrability).

And even then, any specific challenge to the "delegation agreement" itself will be heard by the court, not by the arbitrator. See Rent-a-Center, West, Inc. v. Jackson, 561 U.S. –, 130 S. Ct. 2772 (2010) (reversing 9th Circuit holding that court must determine enforceability of arbitration agreement).

For a useful survey of the law in this area, see Paul T. Milligan, Who Decides the Arbitrability of Construction Contracts? in The Construction Lawyer, Vol. 31, No. 2, Spring 2011.

Some additional notes on this subject:

• Agreeing to a particular set of arbitration rules might have the effect of delegating arbitrability disputes to the arbitrator. For example, in 2013, the Ninth Circuit, following the D.C. Circuit and the Second Circuit, held that incorporation of the United Nations Commission on International Trade Law (UNCITRAL) "constitutes clear and unmistakable evidence that the parties to an agreement intended to arbitrate questions of arbitrability." Oracle America, Inc. v. Myriad Group AG, No. 11-17186, part III-A (9th Cir. July 26, 2013) (XXX). The court also remarked that "[v]irtually every circuit to have considered the issue has determined that incorporation of the American Arbitration Association's (AAA) arbitration rules" (which the court noted were almost identical to the UNCITRAL rules in relevant respect) likewise "constitutes clear and unmistakable evidence that the parties agreed to arbitrate arbitrability." Id. at part III-A-3 (citations omitted).

• In a California case, the contract included an arbitration clause, but the savings clause referred to the possibility that a court might determine that the agreement as a whole was unenforceble. The California appeals court held that the contract had not clearly and unmistakably delegated the question of enforceability to an arbitrator, and therefore that question was properly resolved by the court. See Peleg v. Neiman Marcus Group, Inc., 204 Cal. App. 4th 1425, 1442-43, 140 Cal. Rptr. 3d 38 (2012), where the appellate court reversed a trial-court order directing the parties to arbitrate the case instead of trying it in court.

• In 2011, the Eleventh Circuit joined the First, Third, and Sixth Circuits in ruling that "it is presumptively for the courts to adjudicate disputes about whether a party, by earlier litigating in court, has waived the right to arbitrate. This presumption leaves the waiver issue to the decisionmaker with greater expertise in recognizing and controlling abusive forum-shopping." Grigsby & Associates Inc. v. M Securities Investment, 664 F.3d 1350, 1353-54 (11th Cir. Dec. 20, 2011) (emphasis added, citations omitted). In that case, the appellate court vacated and remanded two actions by the trial court: Denial of a motion to enjoin arbitration, and confirmation of an arbitration award.

• In a 2012 age- and sex-discrimination case, the First Circuit held that, in the particular circumstances of the case, the arbitrator and not the court must resolve an ambiguity in Puerto Rico law as to whether an employee's rights under a statute of limitations could be waived. See Escobar-Noble v. Luxury Hotels Intl of Puerto Rico, 680 F.3d 118 (1st Cir. 2012): The court vacated the trial court's dismissal of the case for lack of subject-matter jurisdiction and remanded the case to the trial court with instructions to enter an order compelling arbitration.

Arbitral Law – specifying it might be a good idea

Subdivision (a)(2) allows the parties to specify their choice of arbitral law, for example that the parties choose the Federal Arbitration Act (FAA) instead of state arbitration law. That might make a difference in, for example, the standard of review on appeal, because the arbitration laws in California, New York, and Texas (for example) allow a broader scope of appellate review than does the Federal Arbitration Act. See County of Nassau v. Chase, No. 09-3643-cv (2d Cir. Oct. 4, 2010) (comparing New York and federal arbitration statutes in affirming district court's granting of motion to confirm arbitration award) (non-precedential); see also Cindy G. Buys, The Arbitrators' Duty to Respect the Parties' Choice of Law in Commercial Arbitration, 79 St. John's L. Rev. 59 (2005).

A contract drafter's failure to specify the choice of arbitral law could have have made a difference in California's Baltazar case, where an employee brought a sexual-harassment claim. Baltazar v. Forever 21, Inc., 212 Cal. App. 4th 221 (2012). The employer moved to compel arbitration; the lower court denied the motion. The appeals court concluded that the defendant had not made a showing that the employee arbitration agreement involved "commerce"; therefore, said the court, the contract was governed by the California Arbitration Act and not by the Federal Arbitration Act. Id., 212 Cal. App. at 228-30. (That turned out not to make a difference in the result, though: the appellate court reversed the lower court's denial of the employer's motion to compel arbitration of the sexual harassment claim, holding that the arbitration agreement was not unconscionable.)

Which Arbitral Rules to specify?

The AAA Commercial Arbitration Rules of the American Arbitration Association ("AAA") seem to be a typical "default" standard in the U.S. The AAA also has expedited rules that can be used if desired, as well as rules for appeal of arbitration awards to an appellate panel of arbitrators

Some believe that the ICC arbitration rules of the International Chamber of Commerce are among the most popular world-wide, in part because the arbitration award prepared by the Arbitral Tribunal will be scrutinized by the ICC's International Court of Arbitration.

Still others view the UNCITRAL rules as the most popular.

Then there are the rules and the expedited rules of the World Intellectual Property Organization (WIPO).

The JAMS Streamlined Arbitration Rules have been praised by some arbitrators as effective.

The different sets of rules of the International Institute for Conflict Prevention and Resolution (CPR) are favored by some.

For a brief comparison of various rules, see an article by Mark Anderson on the IP Draughts blog at http://goo.gl/ZX1iy.

For a more-detailed comparison of arbitration rules in the U.S. (AAA, JAMS, and CPR), see Liz Kramer, ArbitrationNation Roadmap: When Should You Choose JAMS, AAA or CPR Rules?

For international arbitration rules, the Kennedys law firm has published a comparison in spreadsheet format at http://goo.gl/xlX5j.

"As a choice of rules and not of forum"

In subdivision (a)(3) of this clause, the "choice of rules" language is designed to forestall the result that occurred in the 1995 Salomon securities class-action case, in which the arbitration agreement stated that the rules of the New York Stock Exchange (NYSE) would control. Those rules provided for arbitration proceedings to be heard by the NYSE. In that case, however, the NYSE declined to accept the case for hearing; the court held that this action by the NYSE negated the parties' agreement to arbitrate. See In re Salomon Inc. Shareholders'Derivative Lit., 68 F.3d 554 (2d Cir. 1995); see also, e.g., Grant v. Magnolia Manor-Greenwood, Inc., 383 S.C. 125, 678 S.E.2d 435 (2009) (citing Salomon in affirming denial of motion to compel arbitration).

Other courts, however, have reached what seems to be the opposite result. See, e.g., Ferrini v. Cambece, No. 2:12-cv-01954 (E.D. Cal. June 3, 2013) (magistrate judge's recommendation that motion to compel arbitration be granted) (citing cases).

See also the discussion of what happens when the arbitral rules specify administered arbitration.

Survival of arbitration provisions

Subdivision (c) tries to forestall a party from trying to argue that an agreement to arbitrate, contained in a contract, died when the contract expired or was terminated, and that therefore any remaining disputes supposedly must be litigated in court.

Caution: Some arbitration clauses might be prohibited by law

• Drafters working in the financial-services arena should check the Dodd-Frank Act's prohibition of mandatory arbitration of Sarbanes-Oxley Act "whistleblower" claims. See generally, e.g., Federal Courts Split on Whether Dodd-Frank's Bar on Arbitration of Whistleblower Retaliation Claims Under Sarbanes-Oxley Is Retroactive (Oct. 9, 2012) (sutherland.com).

• In the Truth in Lending regulations, Regulation Z now prohibits pre-dispute arbitration clauses in mortgages secured by dwellings. See 12 C.F.R. § 1026.36(h).

• Government contractors and subcontractors should check the Franken Amendment's restrictions on arbitration clauses in employment agreements relating to certain government contracts. See Frank Murray, Assessing The Franken Amendment (Feb. 16, 2011).

• Federal law provides that in franchise agreements between automobile manufacturers and their dealers, pre-dispute arbitration agreements are unenforceable. See 15 U.S.C. § 1226(a)(2).

• The regulations implementing the Military Lending Act render unenforceable any agreement to arbitrate consumer credit disputes between lenders and active-duty military personnel or their eligible dependents; the regulations do not distinguish between pre-dispute and post-dispute agreements to arbitrate, even though the statute appears to make just such a distinction. See 10 U.S.C. § 987(e)(3), implemented in 32 C.F.R. § 232.9(d).

• Federal regulations governing livestock and poultry production require that certain contracts mandating the use of arbitration must include, on the signature page, a specifically-worded notice, in conspicuous bold-faced type, allowing the producer or grower to decline arbitration; in addidtion the Secretary of Agriculture apparently has the power to review arbitration agreements to dtermine "whether the arbitration process provided in a production contract provides a meaningful opportunity for the poultry grower, livestock producer, or swine production contract grower to participate fully in the arbitration process." See 9 C.F.R. § 201.218.

Arbitration might not be all that popular in B2B contracts

The authors of a 2007 study said that: "… less than ten percent of their negotiated nonconsumer, non-employment contracts included arbitration clauses. The absence of arbitration provisions in the great majority of negotiated business contracts suggests that companies value, even prefer, litigation as the means for resolving disputes with peers." Theodore Eisenberg, Geoffrey P. Miller, & Emily L. Sherwin, Arbitration's Summer Soldiers: An Empirical Study of Arbitration Clauses in Consumer and Nonconsumer Contracts, Cornell Law School Legal Studies Research Paper No. 08-017, at 6, Dec. 18, 2007, discussed in Jonathan D. Glater, Companies Unlikely to Use Arbitration With Each Other, New York Times, Oct. 6, 2008.

Perhaps one reason for the foregoing is that arbitration used to be regarded as faster and less expensive than litigation, but in recent years, what some have called the increasing "litigationization" of some arbitration proceedings has made that a questionable proposition. See generally Anthony C. Valiulis and Cassandra M. Crane, Winning the Battle to Arbitrate: Was the Victory Real or Pyrrhic? (Aug. 19, 2009).

In addition, some believe that corporate general counsels are reluctant to agree to arbitration in advance because of the lack of a guaranteed avenue of appeal, which can conjure the spectre of an "outlier" award by a rogue arbitrator. (For provisions that should improve the odds of getting substantive court review of an arbitration award, see the partial-retrial provision in the Partial Retrial in Court clause and the enhanced-appeal language in the Enhanced Appellate Review clause.)

One arbitrator, or three?

At least in theory, three arbitrators are more likely than a single arbitrator to consider everything that needs to be considered and not overlook significant issues or evidence. Folk wisdom among litigators and arbitrators, however, is that the cost of three arbitrators is likely to increase both delay and expense, because:

The Arbitral Rules might specify the use of a single arbitrator for "smaller" cases where the amount at stake is below a certain threshold, and three arbitrators for "bigger" cases. It's generally thought that:

  • Three arbitrators can bring different fields of expertise to the proceedings: One arbitrator might be knowledgeable in the relevant technology; another might be a litigation expert; and still another might have experience in the relevant industry.
  • Three arbitrators will typically be at least three times as expensive as a single arbitrator. The arbitrators will all be "running their meters," which alone will increase the cost of the arbitration; they'll also need extra time for communication and coordination, for example in discussing draft orders and awards among themselves.
  • Three arbitrators are less likely to "go off the rails" in rendering an award; this might be an important consideration, given the comparative unavailability of judicial review of the award.
  • Three arbitrators might "split the baby," that is, reach a compromise decision.
  • Three arbitrators are likely to need more calendar time to get things done than would a single arbitrator.

Selection procedure

Different procedures for selecting arbitrators are used by different arbitral institutions such as the American Arbitration Association and the International Chamber of Commerce. For example, under the AAA's [U.S.] commercial arbitration rules, the AAA provides the parties with a list of ten candidates from the AAA's national roster, which is sometimes referred to colloquially as the "commercial panel." Each party strikes any candidates to which it objects, and ranks the remaining ones in order of preference. The AAA then asks the remaining candidate with the highest mutual ranking if he or she will accept appointment. See generally Rules R-11 through R-15 of the AAA's Commercial Arbitration Rules.

When three arbitrators are used, it's not uncommon for one arbitrator to be appointed by each party, with the third arbitrator (who will serve as chair of the Arbitral Tribunal) being appointed by the other two arbitrators (sometimes referred to colloquially as "wing" arbitrators).

Backup appointment procedure

Subdivision (c) expressly provides a backup procedure for appointing arbitrators, for reasons explained in the discussion of the "choice of law and not of forum" language above.

Nationality

The nationality of the arbitrator can sometimes make a difference to the parties: If the parties are from different countries, one or both of them might want the arbitrator to be from a third country.

That, though, might increase the burden of finding an arbitrator or arbitrators who are familiar with both the language of the arbitration and the applicable law.

Administered vs. "ad hoc" arbitration

Many practitioners regard "administered" arbitration as preferable to "ad hoc" arbitration administered by the parties themselves. One commentator says that "the conventional wisdom is that it is easier to enforce an award given by an arbitral institution than one given by an ad hoc arbitrator." Eric S. Sherby, A Checklist for Drafting an International Arbitration Clause (Sept. 10, 2010).

In theory, ad-hoc arbitration, under rules as the CPR Rules for Non-Administered Arbitration, might be less expensive than an administered arbitration. In practice, however, the savings might well be offset by the arbitrators' billings for administrative work that would normally be handled by the institutional administrator. An experienced arbitral institution (see below) can often handle many of the administrative details of a proceeding at a lower overall cost than having the arbitrator or the parties do so.

For example, an arbitral institution will often:

  • maintain pre-screened lists of arbitrators;
  • provide facilities for hearings;
  • coordinate scheduling;
  • handle financial chores such as invoicing the parties; collecting past-due invoices; and paying the arbitrator's invoices;
  • provide a forum for a party to raise issues of possible arbitrator bias; conflict of interest; or slowness, without telling the arbitrator which party did so (thus reducing that party's fear of possible retaliation if the arbitrator were to take offense);
  • resolve procedural disputes.

See generally Gary McGowan, 12 Ways to Achieve Efficiency and Speed in Arbitration, Corporate Counsel (Apr. 22, 2013).

Disclosure: I'm a member of the panel of arbitrators for commercial cases of the American Arbitration Association, a leading arbitral institution.

The Arbitral Rules might specify administered arbitration

The applicable arbitral rules might provide for administered arbitration by default. For example, Rule R-2 of the AAA Commercial Arbitration Rules provides that the AAA will administer the arbitration, for a fee of course; ditto (by implication) Article 4 and Appendix III of the ICC Rules, along with various other rules. A court thus might easily hold that agreeing to such rules would automatically constitute agreement to have the corresponding body administer the arbitration.

On the other hand, a New York appellate court ruled in 2010 that mere reference to a set of arbitration rules does not equal an agreement by the parties that the sponsor of the rules will administer the arbitration; it characterized the reference to the rules as a choice of law and not a choice of forum. See Nachmani v By Design, LLC, 2010 NY Slip Op 04847 [74 AD3d 478] (June 8, 2010) (affirming order compelling arbitration not administered by AAA and staying arbitration that was to be administered by AAA). This was contrary to (and did not cite) the Second Circuit's 1995 Salomon case, which was decided under federal law and not New York state law; see the discussion in the discussion in the "choice of rules and not of forum" commentary.

Split the baby? Ad hoc arbitration under "administered" rules

There is no reason parties could not specify one set of rules to govern an arbitration, for example the ICC or UNCITRAL rules, but also specify that, say the American Arbitration Association would administer the arbitration.

On the other hand, if the agreement does not expressly so state, a court might balk at enforcing such a split arrangement. a California appeals court ruled in 2000 that an arbitration agreement adopting the AAA rules must be conducted before the AAA and not before another body that agreed to follow the AAA rules. See Maggio v. Windward Capital Management Co., 80 Cal. App. 4th 1210 (2000) (reversing district-court order directing arbitration before other body, and ordering entry of a new order directing arbitration before AAA).

Which administrator?

Some of the well-known administrators for an arbitration include, for example:

If the designated administrator won't (or can't) administer

In 2012, the Third Circuit decided a case in which a dissatisfied computer buyer had sued Dell Inc. in a putative class action. Dell moved to compel arbitration, per the purchase agreement. The arbitration provision, however, stated that the arbitration administrator would be the National Arbitration Forum.

By the time of the lawsuit, the NAF had agreed to a consent judgment barring it from conducting consumer arbitrations. Dell asked the court to appoint a substitute arbitrator pursuant to section 5 of the Federal Arbitration Act. The district court held that the designation of the NAF as administrator was integral to the arbitration agreement, therefore the arbitration agreement was unenforceable.

On appeal, the majority of a three-judge panel reviewed conflicting lines of cases, then reversed and remanded, holding that the district court should have appointed a substitute arbitrator. Khan v. Dell Inc., 669 F.3d 350 (3d Cir. 2012). This was directly contrary to the Second Circuit's ruling in the Salomon case, discussed in the commentary to the Arbitration - Basic Clause; the Third Circuit said that it found Salomon "unpersuasive." See id. at 356.

Streamlining the case

Arbitration proceedings can sometimes get bogged down in litigation-like rabbit trails. That can happen because attorneys (and arbitrators) are comfortable sticking with familiar rules of civil procedure. It therefore can be helpful for an arbitration agreement to expressly encourage the Arbitral Tribunal to streamline the proceedings where appropriate.

One might think that this kind of encouragement would be superfluous. Most arbitration rules already give the tribunal at least some authority to manage the proceedings.

Any given arbitrator, though, might be reluctant to exercise that authority: She might worry her streamlining directives might irritate one side or the other. That could jeopardize the arbitrator's chances of getting future business from that side and its lawyers.

Moreover, an arbitrator might also worry that excessive streamlining of a case might make the award vulnerable to being overturned in subsequent court proceedings: Under the [U.S.] Federal Arbitration Act, one of the few grounds on which a court is allowed to vacate an arbitration award is that "the arbitrators were guilty of misconduct … in refusing to hear evidence pertinent and material to the controversy." 9 U.S.C. § 10. That might not be a grave danger, though, because many arbitrators will not be eager to roll the dice on having their reputations adversely affected by the overturning of one of their awards.

Moreover, courts will often be inclined to give arbitrators a certain amount of discretion (much as appellate courts give trial courts discretion). See, e.g., Doral Financial Corp. v. Garcia-Velez, No. 12-1519 (1st Cir. July 31, 2013) (affirming confirmation of arbitration award; arbitrator did not abuse discretion by refusing to issue pre-hearing and hearing subpoenas to third party); LJL 33rd Street Assoc. LLC v. Pitcairn Properties Inc., No. 11–5425–cv (2d Cir. July 31, 2013) (vacating district court's award overturning arbitrator's decision; arbitrator's exclusion of certain hearsay exhibits was within the arbitrator's authorized discretion).

So, drafting the arbitration agreement to include an express request to "please, please streamline the proceedings" might help overcome any reluctance on the part of the arbitrator.

Streamlining the case – phased proceedings

It's not uncommon for a court to divide an entire case, or just an evidentiary hearing, into separate phases, so as to address selected issues in an orderly manner. Perhaps the most familiar example of phased proceedings in U.S. litigation is bifurcation into liability- and damages phases.

Streamlining the case – early disposition (e.g., summary-judgment motions)

In some disputes, considerable time and money might be saved by employing early-disposition procedures such as those of Rule 12(b)(6) or Rule 56 of the U.S. Federal Rules of Civil Procedure. The Arbitral Rules might expressly allow for such dispositive motions, as is the case with, e.g., Rule R-33 of the AAA's Commercial Arbitration Rules.

Some arbitrators are reluctant to grant motions to dismiss or for summary judgment. Their concern, generally, is that failing to allow a party to put on whatever evidence the party deemed appropriate could jeopardize the enforceability of the arbitration award under applicable law or the New York Convention.

Other arbitrators take a different view: They reason that contracting parties can be reluctant to agree to arbitration if an expensive, time-consuming, full-blown evidentiary hearing would be required for all issues, with no possibility of early disposition of meritless claims or defenses. See, e.g., Catherine Amifar and Claudio D. Salas, How summary adjudication can promote fairness and efficiency in international arbitration, in the International Bar Association Arbitration Newsletter, Sept. 2010, at 77.

Some general guidelines on early disposition of claims or defenses can be found at the CPR Guidelines on Early Disposition of Issues in Arbitration.

Streamlining the case – written-narrative direct testimony

An increasing number of U.S. courts are conducting bench trials by having witnesses present their direct-examination testimony by written narrative, summarized or recapped orally on the witness stand, and subject to oral cross-examination. This process is catching on in U.S. non-jury civil trials, as noted in a Second Circuit press release announcing a continuing legal education seminar on the subject:

The practice of substituting affidavits for direct testimony at bench trials is becoming more widespread in courtrooms across the country. … [I]t is already in place in the Commercial Division of the New York State Supreme Court [the name by which New York calls its trial courts] and it is prevalent in federal courts.

U.S. Court of Appeals for the Second Circuit and New York County Lawyers' Association, First-of-Its-Kind CLE Program on Using Affidavits in Lieu of Direct Testimony at Trial (press release) (Aug. 11, 2011) (emphasis added).

In the famous e-book pricing conspiracy trial of U.S. v. Apple, federal district judge Denise Cote directed that witness testimony on direct examination be taken mainly by affidavit. See United States v. Apple, Inc., No. 12 CIV 2826, slip op. at 5-6 & n.2,(S.D.N.Y. July 10, 2013) (Cote, J.).

The U.S. Federal Judicial Center has published Sample Form 49, a model order setting out procedures for direct testimony by written statement, based on an order used by then-Chief Judge Vaughn Walker of the Northern District of California.

Similar practices are followed by some other U.S. federal district judges, including, for example, Colleen McMahon of the Southern District of New York; Thomas C. Platt of the Eastern District of New York; and Douglas P. Woodlock of the District of Massachusetts. See, e.g., Individual Practices and Procedures, Judge Colleen McMahon (Dec. 20, 2012); Individual Practices of Judge Thomas C. Platt, at 8 (Dec. 18, 2002); Order Regulating Non-Jury Civil Trial, part III.2 (Woodlock, J.).

The use of written statements for direct-examination testimony is also said to be a common practice in commercial cases in England and Scotland. See generally The use of signed witness statements or affidavits in commercial actions (March 2012).

Streamlining the case – hot-tubbing of witnesses

Apparently it's not uncommon in Australian courts to have expert witnesses testify together in a panel-discussion format, known colloquially as "hot-tubbing" the witnesses. Similar procedures have been proposed for American court proceedings as well.

According to one article by U.S. and Australian lawyers at the Jones Day firm,

Justice Peter McClellan, one of the Australian judiciary's most ardent supporters of hot tubbing, has stated that evidence that may have required a number of days of testimony in direct and cross-examination can now be taken in half or as little as 20 percent of the time that would have been necessary.

John D. Hanify, Jason C. Weida, John Emmerig, and Michael Legg, Is There Room In American Courts For An Australian Hot Tub? in The Metropolitan Corporate Counsel, vol. 21, no. 5 (May 13, 2013), available at http://goo.gl/QcCXY (jonesday.com). See also, e.g., Steven Ranes, Expert Evidence in Copyright Cases – Concurrent Expert Evidence and the "Hot Tub" (Oct. 15, 2009); Gary Edmond, Merton and the Hot Tub: Scientific Conventions and Expert Evidence in Australian Civil Procedure, 72 Law & Contemp. Probl. 159 (Winter 2009); [New South Wales] Uniform Civil Procedure Rules 2005, Reg. 31.23 (expert witness code of conduct); 31.24 (conference between expert witnesses); 31.26 (joint report of expert witnesses); 31.35 (opinion evidence by expert witnesses); Expert witness code of conduct, Schedule 7 to [New South Wales] Uniform Civil Procedure Rules 2005.

In an appropriate case, a similar procedure might save time and trouble even for fact witnesses, especially if their credibility is not in issue. (In some cases, of course, the Arbitral Tribunal might have to actively manage the proceeding to maintain civility among opposing witnesses.)

Streamlining the case – summary exhibits

See generally Fed. R. Evid. 611(a) (trial judge should exercise reasonable control over order and mode of presenting evidence), 1006 (summaries).

Streamlining the case – tentative awards

Some state courts in California routinely issue tentative rulings on motions. That gives the court the opportunity to fine-tune the ruling, based on input from the parties. See, e.g., Superior Court of California, Alameda County, Tentative Rulings.

The practice of issuing a tentative award and inviting comment might well be advantageous for the parties simply because of psychology: Most arbitrators, like most other people, don't especially like admitting that they got it wrong; thus, any given arbitrator might be more likely to agree to a request to modifya tentative ruling than to grant a motion for reconsideration after the final ruling has been issued.

Enhanced appellate review

In 2008 the U.S. Supreme Court held that, when the sole authority for an arbitration proceeding is the Federal Arbitration Act, the courts may not entertain an appeal of the award except on the limited, misconduct-based grounds provided in section 10 of that statute. See Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576, 128 S.Ct. 1396 (2008).

One of those limited federal statutory grounds for vacating an award is that "the arbitrators exceeded their powers …." Hence, the use of the quoted phrase in subdivision (b) of the Enhanced Appellate Review clause, along with the express limitation on the arbitrators' power in subdivision (a).

Drafters can keep in mind another possibility for enhanced appellate review: In its Hall Street decision, the Supreme Court expressly left open the possibility that enhanced review might be available under some other authority, such as state law or (in the case of court-annexed arbitrations) a court's inherent power to manage its docket.

Subsequently, both the California and Texas supreme courts ruled that, in proceedings under the arbitration acts of their respective states, the parties were free to agree to enhanced judicial review, while the Tennessee supreme court reached the opposite conclusion. See:

  • Cable Connection, Inc. v. DIRECTV, Inc., 44 Cal.4th 1334, 82 Cal. Rptr.3d 229, 190 P.3d 586 (2008) (reversing and remanding reversal of district court's vacating of arbitration award)
  • Pugh's Lawn Landscape Co. v. Jaycon Dev. Corp., 320 S.W.3d 252 (Tenn. 2010) (holding that arbitration agreement's expansion of the scope of judicial review was invalid)
  • Nafta Traders, Inc. v. Quinn, 339 S.W.3d 84 (Tex. 2011) (reversing and remanding confirmation of arbitration award that failed to address losing party's allegation that arbitrator did not comply with law as required by arbitration agreement).

Preliminary relief in arbitration

Suppose that one party owned intellectual property (IP) rights (patents, trade secrets, trademarks, copyrights). Suppose also that this IP owning-party was concerned that the other party might "go rogue" and infringe its IP rights. In that situation, the IP-owning party might want the ability to go to court to seek an immediate temporary restraining order or other such relief. The applicable Arbitral Rules might allow the Arbitral Tribunal to issue the equivalent of a preliminary injunction; see, e.g., Rules R-37 and R-38 of the AAA's Commercial Arbitration Rules.

Of course, it would remain to be seen whether the Arbitral Tribunal could be appointed, and the request for preliminary relief heard and decided, in the time frame needed by the party seeking such relief. For that reason, subdivision (1) of this clause allows a party to seek preliminary relief in court instead.

Caution: One-sided preliminary relief might jeopardize arbitration

Parties opposing arbitration have sometimes attacked arbitration provisions that allowed only one party to pursue judicial remedies (e.g., to protect confidential information or other intellectual property rights). Generally, such parties claim that this amounts to unequal access to the courts, and that the arbitration provision is therefore procedurally unconscionable and thus unenforceable. See, e.g., Zimmer v. CooperNeff Advisors, Inc., 523 F.3d 224 (3d Cir. 2008) (vacating and remanding denial of motion to compel arbitration).

Moreover, if a party were to seek preliminary relief in court, without simultaneously demanding arbitration, the other side might argue that the first party had waived its right to insist on arbitration. Cf. Simms v. NPCK Enterprises, Inc., 34 Cal. Rptr. 2d 557, 109 Cal. App.4th 233 (2003) (reversing trial-court order finding that plaintiffs had waived arbitration by seeking a preliminary injunction after making demand for arbitration). See generally James Hosking & Yasmine Lahiou, Courts Reaffirm Availability of Provisional Measures in Aid of Arbitration (Feb. 7, 2008) (citing cases).

In assessing claims that a party waived its right to demand arbitration, courts seem to pay attention to factors such as:

  • which party filed suit;
  • how much time elapsed after litigation began before arbitration was demanded;
  • whether the party seeking arbitration had first attempted to use litigation discovery processes to "get a leg up";
  • whether the party seeking arbitration appeared to be doing so for forum-shopping or other "strategic" purposes, for example in response to an adverse court ruling; and
  • whether the other party was prejudiced by the delay in seeking arbitration.

Compare, e.g., Nicholas v. KBR Inc., 565 F.3d 904 (5th Cir. 2009) (affirming denial of plaintiff's motion to compel arbitration after having litigated in court for ten months) with Zimmer v. CooperNeff Advisors, Inc., No. 04-03816 (E.D. Pa. 2008) (on remand, concluding that former employer had not waived arbitration, and granting motion to compel the same).

Parties should keep in mind that

(1) preliminary injunction hearings can be extremely expensive because of the intense trial-like preparation packed into a short time; and

(2) as a practical matter, the outcome of a preliminary injunction hearing might force one side or another into an undesirable settlement.

For additional reading, the Proskauer firm (a noted global law firm) has published a guide to international litigation and arbitration that contains a useful discussion of preliminary injunctions in the arbitration context. See Proskauer on International Litigation and Arbitration, ch. 22, at http://goo.gl/ozt7OX (proskauer.com).

Confidentiality of arbitration

A primary reason parties opt to arbitrate their disputes is to try to avoid having their business affairs made public in court proceedings. Arbitration proceedings might not be confidential, however, unless the parties expressly so agreed.

The chances are that the Arbitral Rules will include more-detailed confidentiality provisions, such as Rule R-23 of the Commercial Arbitration Rules of the American Arbitration Association.

Drafters could also use the ConfInfo clause if a more-extensive confidentiality provision is desired.

A survey of some relevant holdings in various countries, and of various arbitration rules that do or do not contain confidentiality provisions, can be found in a 2007 article; see Claude R. Thomson & Annie M. K. Finn, Confidentiality in Arbitration …, Dispute Resolution Journal, May-Jul 2007.

Amiable Compositeur and Ex Aequo et Bono

This clause should prevent the Arbitral Tribunal from rendering an award according to the Tribunal's notions of fairness and justice independent of the contract and the law.

Some contracting parties are reluctant to agree to arbitration because they are concerned that an arbitrator might make what they would regard as an "outlier" award. This might not be an unwarranted fear: An arbitrator acting as amiable compositeur or ex aequo et bono is allowed to set aside what might be called technicalities of the law, and instead may issue an award she deems just. See, e.g., the respective articles on "Ex aequo et bono" by McGill University and Wikipedia.

Applicable law might permit or even encourage arbitrators to act in this way. Under New York law, for example, "arbitrators are not bound by principles of substantive law or legal procedure: An arbitrator may do justice as he sees it, applying his own sense of law and equity to the facts as he finds them to be and making an award reflecting the spirit rather than the letter of the agreement." County of Nassau v. Chase, No. 09-3643-cv (2d Cir. Oct. 4, 2010) (affirming district court's refusal to vacate award) (non-precedential; internal quotation marks omitted), quoting Silverman v. Benmor Coats, Inc., 61 N.Y.2d 299, 308 (1984).

In some jurisdictions, however, it's the other way around. That is, an arbitrator is not permitted to act as amiable compositeur or ex aequo et bono unless the arbitration agreement expressly says so. Likewise, Article 21.3 of the ICC Rules of Arbitration require agreement of the parties as a prerequisite to the arbitrator's deciding as amiable compositeur or ex aequo et bono; ditto Article 33.2 of the UNCITRAL Arbitration Rules and Article 59(a) of the WIPO Arbitration Rules.

On the other hand, Rule 43 of the AAA's Commercial Arbitration Rules expressly authorizes the arbitrator to "grant any remedy or relief that the arbitrator deems just and equitable and within the scope of the agreement of the parties …."

Consequently, a party that agrees to such rules may well have agreed to having the arbitrator amiable compositeur or ex aequo et bono.

In subdivision (2), if more detail is desired in spelling out exclusions of remedies, see the detailed examples in Charles M. Sink, Negotiating Dispute Clauses That Affect Damage Recovery in Arbitration, The Construction Lawyer, vol. 22, no. 3, summer 2002.

Prohibition of class action arbitration

Class-action arbitrations are prohibited unless permitted by the arbitration agreement

The U.S. Supreme Court has held that class-action arbitration is prohibited under the Federal Arbitration Act unless the parties have agreed to it. See Stolt-Nielsen SA v. AnimalFeeds International, 559 U.S. 662, 130 S. Ct. 1758 (2010): The Court reversed a ruling by the Second Circuit that class-action arbitration was implicitly permitted if not prohibited by the arbitration agreement or applicable law.

The Court reasoned that:

… a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.  * 

An implicit agreement to authorize class-action arbitration … is not a term that the arbitrator may infer solely from the fact of the parties' agreement to arbitrate. This is so because class-action arbitration changes the nature of arbitration to such a degree that it cannot be presumed the parties consented to it by simply agreeing to submit their disputes to an arbitrator.

In bilateral arbitration, parties forgo the procedural rigor and appellate review of the courts in order to realize the benefits of private dispute resolution: lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes.  * 

Consider just some of the fundamental changes brought about by the shift from bilateral arbitration to class-action arbitration.

  • An arbitrator chosen according to an agreed-upon procedure no longer resolves a single dispute between the parties to a single agreement, but instead resolves many disputes between hundreds or perhaps even thousands of parties.
  • Under the Class Rules [of the American Arbitration Association], the presumption of privacy and confidentiality that applies in many bilateral arbitrations shall not apply in class arbitrations, thus potentially frustrating the parties' assumptions when they agreed to arbitrate.
  • The arbitrator's award no longer purports to bind just the parties to a single arbitration agreement, but adjudicates the rights of absent parties as well.
  • And the commercial stakes of class-action arbitration are comparable to those of class-action litigation, even though the scope of judicial review is much more limited.

We think that the differences between bilateral and class-action arbitration are too great for arbitrators to presume, consistent with their limited powers under the FAA, that the parties' mere silence on the issue of class-action arbitration constitutes consent to resolve their disputes in class proceedings.

Id., 130 S.Ct. at 1775 (emphasis in original, extra paragraphing and bullets added).

The Court has also held that:

  • The Act preempts state law barring enforcement of a class-arbitration waiver – see AT&T Mobility LLC v. Concepcion, 563 U.S. __, 131 S. Ct. 1740 (2011) (reversing Ninth Circuit); and
  • a contractual waiver of class arbitration is enforceable under the Act even when the plaintiff's cost of individually arbitrating a federal statutory claim exceeds the potential recovery. See American Express Co. v. Italian Colors Restaurant, 130 S.Ct. 2401 (U.S. June 20, 2013) (reversing Second Circuit).
But an arbitrator's finding of class-action agreement will probably be binding

On the other hand, the Supreme Court has held that if an arbitrator holds that an arbitration agreement allows class-action arbitration, then a court may not set aside that holding except on the very-limited grounds permitted by the Act:

In this case, an arbitrator found that the parties' contract provided for class arbitration. The question presented is whether in doing so he "exceeded [his] powers" under §10(a)(4) of the Federal Arbitration Act (FAA or Act). We conclude that the arbitrator's decision survives the limited judicial review §10(a)(4) allows.

Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064 (2013) (affirming denial of motion to vacate arbitrator's approval of class action) (emphasis added).

Partial retrial in court

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 Appellate Review clause.

Some practitioners see this as a significant disadvantage of arbitration, perhaps even outweighing what the U.S. Supreme Court has referred to as the benefits of "lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes." Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 559 U.S. 662, 130 S.Ct. 1758, 1775, at part IV-B (2010) (reversing Second Circuit).

To try to remedy that problem, this experimental clause briefly delays the binding effect of an arbitration award. The intent is to give a dissatisfied party a short period of time in which to commence a non-jury court action to retry the dispute — with cost-shifting provisions to encourage the dissatisfied party to accept the award instead. In the interest of reducing duplication of effort and expense, this clause also provides:

  • for the re-use of the evidentiary record of the arbitration hearing in the challenge proceeding; and
  • for the arbitral tribunal's award to serve as the report and recommendations of a master.
"Short and plain statement"

In subdivision (a)(1), the 'short and plain statement' requirement is modeled on that of Rule 8 of the [U.S.] Federal Rules of Civil Procedure; see also the [U.S.] Supreme Court's holdings on this point in its Twombly and Iqbal cases. The requirement is included here in case the rules of procedure in the court in which the Challenge Action is filed do not require such a statement.

Cost- and fee-shifting

The cost- and fee-shifting provisions of subdivision (f) are similar to those of:

These provisions fit a U.S. Department of Defense description of incentive arbitration:

Incentive Arbitration In non-binding arbitration, the parties agree to a penalty 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 attorneys' fees incurred in the litigation.

Jury trial waiver

In subdivision (g), the waiver of a jury trial might be unenforceable in some states such as California and Georgia. 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.

Baseball arbitration procedures

Baseball arbitration can powerfully motivate settlement

Baseball arbitration is designed to produce a settlement, not a verdict." Thomas Gorman, The Arbitration Process – The Basics, in Baseball Prospectus (Jan. 31, 2005). Here's how that can work:

  • When the parties agree to baseball arbitration, the Arbitral Tribunal must choose between the competing awards submitted by the parties.

    Putting it in golf terms: the final award in the arbitration will be whichever party gets its award "closest to the pin," that is, the closest to what the arbitrator regards as the "right" award.

  • That forces each party to think hard about how the arbitrator sees the case and whether the arbitrator will regard the other party's proposed award as closer to the right award.
  • That in turn greatly improves the odds that the parties will reach an agreed settlement. voluntarily agree to a settlement. in some cases, forcing the parties to formulate and exchange proposed awards can help lead to an agreed settlement of some or all of the issues in dispute, without the need for an arbitration award.
Origins of the name "baseball arbitration"

Baseball arbitration takes its name from salary arbitrations in baseball; it is is also known as pendulum arbitration or final-offer arbitration. For additional information, see, e.g., the CPR Model Clauses and Sample Language (scroll down to or search for the sample baseball arbitration language).

Note on this clause's "architecture"

This clause, and in particular subdivision (e), is designed so that drafters can copy and paste the clause, or incorporate it by reference, into an agreement and have the Arbitration Requirement clause provision apply automatically. That should simplify the drafters' task by allowing them to copy and paste just this clause and not have to bother with other clauses.

Audits

Recommended reading

Any contract drafter who will be negotiating audit clauses would do well to study carefully the primer found in Ryan C. Hubbs, The Importance Of Auditing In An Anti-Fraud World — Designing, Interpreting, And Executing Right To Audit Clauses For Fraud Examiners (Assoc. of Certified Fraud Examiners 2012).

Purpose

One fraud examiner asserts that "entities often implicitly trust vendors. but just as good fences make good neighbors, vendor audits produce good relationships." Craig L. Greene, Audit Those Vendors (2003). The author lists some of the things that fraud examiners watch for (quoting here):

  • fictitious "shell entities” set up by employees or others that may or may not provide goods or services;
  • substitution-of-material schemes that supply faulty or inferior goods;
  • short shipments or goods not delivered;
  • services allegedly performed that were not needed in the first place, such as equipment repairs, or services never performed at all;
  • high prices when the goods can be bought directly or less expensively from the same or another vendor; and
  • corruption schemes including[:]
    • improper payments and kickbacks,
    • conflicts of interest,
    • gifts and gratuities to company employees, and
    • commissions to brokers and others.

Id. (extra bullets added).

What records should be kept?

According to a study of U.S. construction companies, interviewees reported that unless the contract spells out in detail just what records are to be kept, "it is incredibly difficult to obtain the proper records from the Contractor in order to conduct a proper audit." Albert Bates, Jr. and Amy Joseph Coles, Audit Provisions in Private Construction Contracts: Which Costs Are Subject to Audit, Who Bears the Expense of the Audit, and Who Has the Burden of Proof on Audit Claims?, 6 J. Am. Coll. Constr. Lawyers 111, 114 (2012) (footnote omitted).

A sample clause published by the Association of Certified Fraud Examiners contains a laundry list of types of documents that a vendor might want to require a contractor to maintain.

"Materially complete and accurate records"

In subdivision (b),

Exclusion of privileged information

The definition of Auditable Records excludes from auditing any information that is subject to the attorney-client privilege. That's because 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. (See also the Audits – Certain Information Not Auditable clause.)

Production in electronic form

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).

Expense shifting – discrepancy threshold

Subdivision (f) addresses who pays for the expense of an audit. Expense shifting can be at least somewhat of a disincentive to cheating by the recordkeeping party. Suppose that the recordkeeping party's only obligation was to pay what it should have paid in the first place, perhaps with interest. Clearly, the recordkeeping party would have an implicit economic incentive to roll the dice by cheating. (Of course, the recordkeeping party would risk losing the auditing party's trust, which could be an even bigger disincentive to cheating.)

In subdivision (f)(1), the Expense-Shifting Percentage Threshold 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 services billing discrepancies..

Subdivision (f)(1) requires the percentage-discrepancy to be for the entire period being audited. That will help to avoid unfair expense shifting if, say, a discrepancy for one month was discovered in an audit for five years' worth of records. Suppose that:

  • the auditing party conducted an audit of three years' worth of records; (and the agreement did not preclude audits of records older than, say, one year);
  • the audit revealed a 10% discrepancy for a single year;
  • no discrepancy was detected for any other year; and
  • spread out over the entire three-year period, the discrepancy revealed by the audit was 2.5\%.

In that situation, the recordkeeping party argably shouldn't have to foot the bill for the entire three-year audit. On the other hand, neither should it necessarily escape the consequences of the 10% discrepancy in that one year. The language of subdivision (f)(1) represents a compromise position.

Subdivision (f)(3) provides for expense-shifting in cases of fraud, which is defined using language adapted from subdivision (b) of the famous (U.S.) Rule 10b-5, 17 C.F.R 240.10b-5. The clear-and-convincing-evidence requirement is adapted from the general rule

Confidentiality

Subdivision (g) 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.

Licensed professionals such as CPAs and attorneys might decline to sign an NDA, on grounds that it's unnecessary, given that they could lose their licenses if they were to violate their professional confidentiality obligations.

Auditor acceptability

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.

On the other hand, 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."

A recordkeeping party might want the ability to veto the auditing party's choice of auditors. 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.

Audit location

In some contracts it might be desirable for the audit provision to specify either:

  • an agreed location for audits, or
  • 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 circumstanes arise.

Auditor copies of records

Audits – excluded information

Deliverables (of services)

A provider could propose the Deliverables – Customer's Rights Are Conditioned on Payment clause to give it more leverage in case the customer doesn't pay its bills.

A provider could propose the Deliverables – No Service-Bureau Use clause to prevent the customer from using the provider's own software to go into competition with the provider. (How likely that is, will vary with the circumstances; often it won't be very likely.)

A customer might be interested in the Deliverables – Remedy for Non-Payment is for Breach, Not Infringement clause. A development- or license agreement could be drafted so that non-payment of the required fee resulted 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. [XXX NEED DISCUSSION OF FRANK MUSIC v. MGM GRAND HOTEL]

Customer rights in deliverables

Under standard intellectual-property law, just because a customer paid for a deliverable does not mean it necessarily gets to do whatever it wants with the deliverable. In particular, if the deliverable is a copyrighted work of authorship such as computer software, the provider might have the right to prevent the customer from modifying or inproving the deliverable without the provider's permission.

(In litigation the customer might be able to argue successfully that the provider implicitly granted the customer a license to do whatever it wanted with the deliverable; see, e.g., [XXX CITATION NEEDED].)

Customers, though often want the unfettered right to modify or further develop the deliverables furnished by the provider. Their general attitude can be summed up as: We paid for you to build this, so we should be able to do whatever we want with it.

When it comes to warranting a Deliverable, the provider should take into account the possibility that the customer might cause modifications to be made in the Deliverable.

Limitations of Liability

Excluding "consequential" damages might not gain you much

Depending on the situation, an exclusion of consequential damages might not provide a breaching party with much protection if a tribunal concludes that particular damages are "direct." Ken Adams points out that "courts are prone to holding that elements of damages that the seller might have intended to exclude are in fact direct rather than consequential." He cites a UK case, GB Gas v.

Trying to exclude all damages might be ineffective

One aggressive drafter included a disclaimer of all damages in a limitation of liability clause. A trial court went along with the disclaimer, but the appellate court had a very different view. See Innovate Tech. Solutions, L.P. v. Youngsoft, Inc., No. 05-12-00658-CV (Tex. App.–Dallas Nov. 19, 2013) (reversing and remanding partial summary judgment and directed verdict).

In that case, Youngsoft and Innovate were companies in the information technology (IT) space. They entered into a professional services agreement for Youngsoft to do some work for Innovate. The agreement included the following limitation of liability clause:

Not withstanding [spelling by the court] anything contained elsewhere in this Agreement and under any circumstance, for any reason whatsoever, YS shall not be liable for any incidental, ancillary, direct, indirect, special or consequential damages, including but not limited to lost profits, whether in tort or contract, and based on any theory of liability. [Emphasis added.]

As the appeals court put it, "[t]here is evidence the project did not proceed smoothly and that the client was unhappy." Innovate failed to pay Youngsoft, which filed a lawsuit to collect what it claimed was owed to it.

Innovate counterclaimed for breach of express warranty and breach of contract. The trial court granted Youngsoft's motion for judgment that Innovate's counterclaims were all barred by the limitation of liability clause.

In the end, the jury awarded Youngsoft damages of $43,452.50. The trial court entered judgment based on the verdict, and Innovate appealed.

The appellate court reversed and remanded. It agreed with Innovate that it had been improper for the trial court to focus solely on the purported exclusion of direct damages, because doing so would:

  • disregard other provisions in the contract, such as a mutual indemnity clause, a warranty clause, and a confidentiality clause; this would violate the rule that "courts must favor an interpretation that affords some consequence to each part of the instrument so that none of the provisions will be rendered meaningless" (citation and internal quotation marks omitted); and
  • render the agreement "illusory, void, and unenforceable."

At this writing, it remains to be seen whether the trial court might strike down still-more portions of the liability limitation.

The lesson for drafters might be like the old advice for stock traders: Bulls make money; bears make money; pigs get slaughtered.

Negotiation

Avoiding premature contractual relations

Consider including an agreement disclaimer in your signature block, e.g., Unless expressly stated otherwise, this message is not intended to serve as an electronic signature nor as assent to an agreement.

Parties

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 Status – Arises from Voting Control clause and the associated clauses following it.

Defining Terms

Try to be consistent about capitalization

If you define a capitalized term but then use a similar term without capitalization, that might give rise to an ambiguity in the language — which in turn might preclude a quick, inexpensive resolution of a lawsuit.

That happened in the Clinton Ass'n for a Renewed Environment case: The defendant asserted that the plaintiff's claim was barred by the statute of limitations and therefore should be immediately dismissed. The plaintiff, however, countered that the limitation period began to run much later than the defendant had said. The court held that a difference in language resulted in an ambiguity that precluded an imediate dismissal of the plaintiff's claim. The court said:

The Contract is ambiguous as to whether it purports to limit the application of the "continuous treatment" doctrine to toll the three-year limitations period.

In the Contract, "Substantial Completion" is a defined, capitalized term. However, the Contract says that the limitations period will begin to run no "later than the date when the Architect's services are substantially completed." …

The Contract is ambiguous as to whether the time when "services are substantially completed" is referring to the defined date of "Substantial Completion." The time that "services are substantially completed" could reasonably be read as referring to the time when work on the project was mostly complete rather than the date of Substantial Completion.

According to Plaintiffs, Defendants carried out a significant amount of work after the date of Substantial Completion. Therefore, Defendants' "services" may not have been "substantially completed," even though Defendants had already issued the Certificate of Substantial Completion.

Because the Contract is ambiguous, its meaning cannot be determined as a matter of law on a motion to dismiss.

Clinton Ass'n for a Renewed Environment, Inc., v. Monadnock Construction, Inc., 2013 NY Slip Op 30224(U) (denying defendant's motion to dismiss on the pleadings; citations omitted, extra paragraphing added).

Case: Kevin Ehringer Enterprises

Citation: Kevin Ehringer Enterprises Inc. v. McData Services Corp., No. 10-10197 (5th Cir. Jul. 11, 2011).

A jury found that the defendant was liable for fraudulently inducing the plaintiff to enter into a contract. The defendant's alleged wrongdoing was that the contract called for the defendant to use its best efforts to promote a certain product line, but according to the plaintiff, the defendant had no intention of honoring that commitment.

The appeals court reversed; it held that under Texas law, the term best efforts was too vague to be enforceable without "some kind of goal or guideline against which best efforts may be measured. Consequently, the best-efforts clause in the contract didn't live up to that standard, and therefore it could not support a fraudulent-inducement claim. The appellate court remanded the case to the trial court with instructions to enter judgment in favor of the defendant. The appellate court cited the CKB & Assoc., Inc. v. Moore McCormack Petroleum, Inc. case for the applicable Texas law.

C9 Ventures (case)

Citation: C9 Ventures v. SVC-West, L.P., 202 Cal. App. 4th 1483 (2012).

A California appellate court held that, in the particular circumstances of the case, the fact that a buyer paid the seller's invoice did not mean that the buyer had agreed to the seller's terms that were printed on the invoice:

… SVC-West, L.P. (SVC), telephoned C9 Ventures (C9) and placed a rush order for eight helium-filled tanks used to inflate festive balloons.

C9 accepted the order and later that day delivered the tanks without obtaining a signature on an invoice for them.

On the reverse of the invoice was an indemnification provision requiring SVC to indemnify C9 for any loss arising out of the use or possession of the helium-filled tanks.

C9 later picked up the tanks, and, weeks later, SVC paid the invoice.

SVC had obtained helium-filled tanks from C9 on prior occasions.

After the tanks were delivered on July 3, a boy was injured when one of the helium-filled tanks fell on him. SVC and C9 each paid the boy's family to settle a lawsuit brought to recover for his injuries. C9 filed a cross-complaint against SVC to enforce the indemnification provision on the back of the unsigned invoice.

The question: Is the indemnification provision on the back of the unsigned invoice enforceable against SVC?

The trial court answered the question yes, finding under California Uniform Commercial Code section 2207, the indemnification provision did not materially alter the contract and therefore became an added term. The trial court accordingly granted judgment in favor of C9 and awarded it attorney fees.

We answer the question differently and hold the indemnification provision is not binding on SVC. … [T]he summary of our answer is the following. SVC and C9 entered into an oral contract when C9 accepted SVC's telephone order for eight helium-filled tanks. The oral lease was sufficiently definite, although it left open various terms. Under [UCC] section 2207, on which the trial court relied, additional terms proposed in an acceptance or confirmation may become terms of the contract in certain situations. … The oral contract between SVC and C9, however, was a lease of personal property (the helium-filled tanks), and personal property leases are governed by division 10, not division 2, of the California Uniform Commercial Code.

City of Santa Barbara v. Janeway (case)

Citation: City of Santa Barbara v. Janeway, 41  Cal. 4th 747, 62 Cal. Rptr. 3d 527, 161 P.3d 1095 (2007) (affirming refusal, by court of appeals, to grant defendant city's request for writ of mandate ordering summary judgment).

In Janeway, a disabled teen-ager drowned at a city pool. Her parents sued the city. The teen-ager's mother had signed paperwork releasing the city in advance from any negligent act.

The supreme court held that, because Janeway's parents had alleged gross negligence by the city, the advance release of liability was unenforceable as against public policy.

Sommer v. Federal Signal Corp. (case)

Citation: Sommer v. Federal Signal Corp., 79 N.Y.2d 540, 554 (1992) (affirming reversal of summary judgment granted by trial court in favor of fire-alarm company).

In Sommer, a fire-alarm company's dispatcher ignored a series of alarms coming from Manhattan skyscraper. The dispatcher thought — wrongly, as it turned out — that the alarms were going off because the alarm system was being taken out of service so that work could be done at the building.

The actual cause of the alarms, however, was a four-alarm fire that caused significant damage. Litigation ensued, of course.

After discovery, the alarm company moved for summary judgment dismissing the case, on grounds that an exculpatory clause in its contract with the building owner absolved the alarm company from all liability.

The trial court granted the alarm company's motion. The court noted that the exculpatory clause would be unenforceable in cases of gross negligence, but held that the evidence did not present a triable issue of gross negligence.

An intermediate appellate court, however, reversed the summary judgment, holding that there was enough evidence of gross neglience to necessitate a trial. The supreme court (that is, the Court of Appeals) affirmed the intermediate appellate court on the gross negligence issue.

The supreme court noted its prior opinions holding that "[i]t is the public policy of this State … that a party may not insulate itself from damages caused by grossly negligent conduct. … Gross negligence, when invoked to pierce an agreed-upon limitation of liability in a commercial contract, must "smack of intentional wrongdoing. It is conduct that evinces a reckless indifference to the rights of others." [Internal quotation marks and citations omitted.]

Limitation Periods

Limitation period: the Limitation Period clause provides language for parties to agree to shorten the statutory limitation period that would otherwise apply — that is, to agree to a stated (shorter) deadline for a party to bring a claim of breach of warranty or other form of breach of contract.

In most (but not all) U.S. states, the general rule is that, because of the public policy favoring freedom of contract, such provisions are enforceable, as long as "the contractually shortened limitations period is reasonable and not contrary to other statutory provisions or to public policy …." Creative Playthings Franchising Corp. v. Reiser, 463 Mass. 758, 760 (2012) (answering certified question from federal district court; shortened limitation was invalid for purporting to eliminate discovery rule, as discussed below).

Here are a few notes:

The UCC provision: In an agreement for the sale of goods, the [U.S.] Uniform Commercial Code allows the limitation period to be shortened to not less than one year, but the shortening must occur in the original agreement:

(1) An action for breach of any contract for sale must be commenced within four years after the cause of action has accrued.

By the original agreement the parties may reduce the period of limitation to not less than one year but may not extend it.

(2) a cause of action accrues when the breach occurs, regardless of the aggrieved party's lack of knowledge of the breach.

A breach of warranty occurs when tender of delivery is made,

except that where [i] a warranty explicitly extends to future performance of the goods and [ii] discovery of the breach must await the time of such performance[,] the cause of action accrues when the breach is or should have been discovered.

UCC § 2-725 (emphasis, extra paragraphing, and bracketed numbers added).

Contractually eliminate the discovery rule? In 2013, a California appellate court held that a contract for construction of a hotel could cause the statutory limitation period for warranty claims to begin running upon substantial completion of construction and not when the claimed defect was (or should have been) discovered. See Brisbane Lodging, LP v. Webcor Builders, Inc., No. A132555 BL 146042 (Cal. App. June 3, 2013) (affirming summary judgment in favor of builder), discussed in Aaron R. Gruber, California Decision Approves Shortening Statutes of Limitation and Eliminating the Discovery Rule Via Contract, Jones Day Publications, June 2013.

On the other hand, the Massachusetts supreme court held in 2012 that "a contractual limitations provision that did not permit operation of the discovery rule would be unreasonable and, therefore, invalid and unenforceable." The contract's language imposed an absolute 18-month deadline for bringing a claim, even if the claimant did not know and could not have known the relevant facts in time to bring the claim; the court held that this language "would appear to impose a limitation of repose, which would be per se invalid and unenforceable; limitations of repose may be imposed only by the Legislature." Creative Playthings Franchising Corp. v. Reiser, 463 Mass. 758, 764 (2012) (answering certified question from federal district court).

State law might prohibit shortening the limitation period

A Missouri law flatly prohibits reducing the statutory limitation period: "All parts of any contract or agreement hereafter made or entered into which either directly or indirectly limit or tend to limit the time in which any suit or action may be instituted, shall be null and void." Mo. Rev. Stat. § 431.030, discussed in Brian Rogers, Contractual Limitations: Why Are You Suing Me When Our Contract Says You Can't?, TheContractsGuy.net, Nov. 30, 2012.

Missouri has enacted the Uniform Commercial Code, however, and so where the contract is for the sale of goods, the Missouri version of UCC § 2-725 presumably overrides the flat prohibition.

State law might impose special procedural requirements

In a 2013 case, the Nevada supreme court – after reviewing case law from other state- and federal courts – said that the state would follow the general rule that a contract can shorten the limitation period to a reasonable length, as long as doing so did not contravene a specific statute or public policy.

In that case, though:

  • The contract in question was for construction of a residential condominium;
  • A Nevada statute allowed the limitation period to be shortened to no less than two years if done by a "separate instrument"; and
  • The provision shortening the limitation period was contained in an arbitration agreement, which the supreme court held did not meet the requirement for a separate instrument.

See Holcomb Condominium Homeowners' Ass'n, Inc. v. Stewart Venture, LLC, 129 Nev. Adv. Op. 18 (Nev. 2013) (reversing summary judgment dismissing homeowners' association claims as time-barred).

Use a notice deadline instead (or additionally)?

Brian Rogers, author of TheContractGuy blog, reports that many Missouri lawyers include notice-of-claim requirements in their contracts: That is, a claimant against, say, a contractor is not allowed to file suit unless it gives the contractor notice of the claim within, say, 90 days after completion of the last work by the contractor on which the claim is based. Brian cites one 1991 Missouri appellate case in which a surety bond – in essence, an insurance policy guaranteeing payment – required that notice of the claim for payment be given within 90 days after completion of the last work. See Frank Powell Lumber Co. v. Fed. Ins. Co., 817 S.W.2d 648 (Mo. App. 1991) (affirming judgment in favor of surety company on grounds that sub-subcontractor claimant had not given notice of claim for payment within 90 days as required by bond). Not without reason (in my view), Brian expresses concern that other courts might not go along with such a short notice period. By statute, Texas precludes such a notice period from being less than

Contract Housekeeping

It's important to file contracts so that you can find them later

Unfortunately, sometimes companies don't keep copies of their contracts. That can lead to significant problems down the road.

For example, in the Netbula v. BindView case, neither party to a software license agreement could find a copy of the agreement document entered into by the licensee's predecessor in interest. As a result, the court was unable to determine what if any anti-assignment provisions the agreement had. That ended up being crucial to the court's holding that the plaintiff had failed to prove that the defendants violated those (alleged) anti-assignment provisions. See Netbula LLC v. BindView Development Corp., 516 F.Supp.2d 1137, 1146, 1150 (N.D. Cal. 2007) (granting defendants' motions for summary judgment dismissing claims of copyright infringement, etc.). Disclosure: I was vice president and general counsel of defendant BindView at the time the dispute arose; I testified in deposition on an unrelated issue.

Additional Contract Terms in Purchase Orders, Confirmations, Etc.

Business background: The Battle of the Forms

When a corporate buyer makes a significant purchase, it's quite common for the buyer's procurement people to send the seller a purchase order. Typically, if the seller wants to get paid, it must quote the purchase-order number on the invoice, otherwise the buyer's accounts-payable department simply won't pay the bill. This is a common internal-controls measure implemented by buyers to help prevent fraud.

Many buyers, however, try to use their purchase-order forms, not just for fraud prevention, but to impose legal terms and conditions on the seller. These buyers put a lot of fine print on the backs of their purchase-order forms; that fine print typically sets out detailed — and often onerous — terms for the purchase.

Sellers aren't always innocent parties in this little vignette, either: It's not uncommon for a seller's quotation to state that all customer orders are subject to acceptance in writing by the seller. Then, the seller's written acceptance takes the form of an "order confirmation" that itself contains detailed terms and conditions — some of which might directly conlict with the buyer's purchase order.

This is known as the "Battle of the Forms," of the kind contemplated by UCC § 2-207 and sometimes experienced in common-law situations. That subject won't be discussed here, because the Common Draft clauses are very likely to be used when the parties are negotiating the terms and conditions of their agreement, and it simply won't be appropriate for either party to try to impose its own standard-form terms and conditions.

Accordingly, this clause simply states that no additional or different terms are to be given effect unless they meet the requirements for amending this Agreement.

Additional reading

Affiliates of the Parties

Business background

Affiliate status is sometimes important in a contract because the contract might give rights to (or impose obligations on) the "affiliates" of one or both of the parties.

For example, a software license agreement might grant the right to use the software not only to the named licensee company, but also to affiliates of the licensee company; such an agreement will almost certainly impose corresponding obligations on any affiliate that exercises the right to use the software.

Control through management power

Some contracts include language similar to the Affiliate Status – Control Via Management Power clause, stating that for purposes of defining an Affiliate of an organization, the term control includes the power to direct the management and policies of the organization. This language derives from language found in the U.S. securities laws, for example, in SEC Rule 405, 17 C.F.R. § 230.405.

For regulatory purposes, the SEC's management-power language may be all well and good. But if the same language were to be used in a contract (as it sometimes is), it's not hard to imagine how, in later litigation, the parties might have to engage in extensive – and expensive – discovery for trial of a fact-intensive dispute about who had what management power at the relevant time(s).

For an example of such a dispute, consider the Offshore Drilling Co. case. The parties hotly disputed who had "control" of a vessel destroyed by fire, and thus which party or parties should be liable for damages. The specific facts and outcome of the case aren't important here — what matters is that the parties almost-certainly had to spend a lot of time and money fact-intensive litigation over the control issue. See Offshore Drilling Co. v. Gulf Copper & Mfg. Corp., 604 F.3d 221 (5th Cir. 2010) (affirming summary judgment in relevant part).

If a contract really needs to define Affiliate without being limited by a certain percentage of voting control, the better approach is to have the contract list specific named affiliate groups, stating that certain specified companies will be deemed affiliates of each other even without a control relationship.

Pro tip: Plan for affiliate status changes

Contract drafters and reviewers should plan for changes in Affiliate status, in case one or more of the following things happens:

  • a party acquires a new Affiliate;
  • two companies cease to be Affiliates of one another
  • a third party – perhaps an unwanted competitor – becomes an Affiliate of "the other side."

Amendments

An amendments-in-writing clause might be unenforceable

In some circumstances, a court might decline to enforce a clause like this one. The rationale would typically be that the parties were free to orally agree to waive the written-amendment requirement. As then-Judge (later Justice) Cardozo said in a 1919 New York case:

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

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

Statutory law might make a difference

In at least some circumstances, though, a statute might validate a contract's statement that the contract can be amended only in writing. For example:

• In contracts for the sales of goods, section 2-202(2) of the Uniform Commercial Code provides that "[a] signed agreement which [sic] excludes modification or rescission except by a signed writing cannot be otherwise modified or rescinded, but except as between merchants such a requirement on a form supplied by the merchant must be separately signed by the other party." (Emphasis added.)

• In New York, General Obligations Law § 15-301(1) provides that '[a] written agreement or other written instrument which contains a provision to the effect that it cannot be changed orally, cannot be changed by an executory agreement unless such executory agreement is in writing and signed by the party against whom enforcement of the change is sought or by his agent.' For a discussion of the history of that statute, see the opinion in of the Court of Appeals of New York (that state's highest court) in Israel v. Chabra, 12 N.Y.3d at 163-67 (2009) (on certification to the Second Circuit).

Unilateral amendments can be problematic

Unilateral-amendment clauses are not uncommon in Web sites' terms of service, cable- and telephone-service contracts, and the like. See, for example, the Facebook Statement of Rights and Responsibilities § 14.

But:

• Such a unilateral-amendment provision might cause some or all of a contract — for example, an arbitration provision with a class-action waiver — to be unenforceable, on grounds that the contract is illusory.

• That in turn might strip a provider of legal protection that the contract might otherwise have provided, in the form of, e.g., an arbitration clause with class-action waiver; a forum-selection or governing-law clause; and so forth.

That's what happened in the Harris v. Blockbuster case: A Blockbuster customer sued the company for allegedly violating her privacy rights and sought class-action status. Blockbuster sought to parry the suit by moving to compel individual, case-by-case arbitration, as required in the Blockbuster on-line terms of service. The customer opposed this, because it would be much less economically attractive for her lawyers. The court denied Blockbuster's motion, on grounds that the customer agreement was illusory and therefore was unenforceable under the relevant state law. See Harris v. Blockbuster, Inc., 622 F.Supp.2d 396, 400 (N.D. Tex. 2009). (See also the No Class-Action Arbitration clause and its commentary.)

Much the same result occurred in Carey v. 24 Hour Fitness USA: A former employee filed a lawsuit against 24 Hour Fitness. The company moved to compel arbitration, citing an arbitration provision in the company's employee handbook. The court held that the arbitration provision was unenforceable because the company reserved the right to change the employee handbook at will. That meant that the former employee's case would be tried in court instead of being heard privately by an arbitrator. See Carey v. 24 Hour Fitness USA, Inc., 669 F.3d 202 (5th Cir. 2012).

Subdivision (c) of the Amendments May Be Made Unilaterally clause attempts to avoid that result through the use of a so-called Halliburton exception to the right to unilaterally amend the agreement. That exception is discussed in the Harris v. Blockbuster case cited above.

Not quite on point: Instagram changed its terms of service and gave its users 30 days to stop using the service if they did not want to be bound by the new terms of service. One Rodriguez continued to use the service, but sued Instagram for breach of the duty of good faith and for violation of California's unfair-competition law. In March 2014 a California state court rejected the plaintiff's claims, as discussed in a post on Prof. Eric Goldman's blog.

Just changing an agreement on the Web likely won't be enough notice of a unilateral amendment

Talk America Inc., a long-distance telephone service provider, tried to enforce an arbitration clause and class-action waiver in the provider's standard on-line service contract. Talk America wanted to preclude a class-action lawsuit brought by a customer, one Joe Douglas, who was upset with certain charges on his bill.

Talk America's standard contract form, though, was not what Mr. Douglas had agreed to with Talk America's predecessor, America OnLine. Mr. Douglas's original contract with AOL did not contain an arbitration clause, nor a class-action waiver.

Talk America had unilaterally changed its contract form by posting the revised contract on its Web site. It claimed that Mr. Douglas had agreed to the revised contract by continuing to use the long-distance service.

The Ninth Circuit made short shrift of Talk America's claim:

Douglas alleges that Talk America changed his service contract without notifying him. He could only have become aware of the new terms if he had visited Talk America's website and examined the contract for possible changes.

The district court seems to have assumed Douglas had visited the website when it noted that the contract was available on "the web site on which Plaintiff paid his bills." However, Douglas claims that he authorized AOL to charge his credit card automatically and Talk America continued this practice, so he had no occasion to visit Talk America's website to pay his bills.

Even if Douglas had visited the website, he would have had no reason to look at the contract posted there. Parties to a contract have no obligation to check the terms on a periodic basis to learn whether they have been changed by the other side. [FN1] …

[FN1:] Nor would a party know when to check the website for possible changes to the contract terms without being notified that the contract has been changed and how. Douglas would have had to check the contract every day for possible changes. Without notice, an examination would be fairly cumbersome, as Douglas would have had to compare every word of the posted contract with his existing contract in order to detect whether it had changed."

Douglas v. United States District Court ex rel. Talk America Inc., No. 06-75424 (9th Cir. Jul. 18, 2007) (vacating district court's order compelling arbitration) (emphasis in original, extra paragraphing added).

(Hat tip: Prof. Eric Goldman.)

See also the Notice by Web-Site Posting clause.

Confidential Information

Two-way confidentiality agreements are usually better

Referring to subdivision (a): Some confidentiality agreements are "one-way" agreements in which only one party is designated as a Disclosing Party. This means that only that party's information is protected — which could lead to problems down the road.

A confidentiality agreement with just one Disclosing Party will usually take longer to negotiate: That's because a confidentiality agreement will (usually) be more balanced — and therefore quicker to negotiate and easier to work with — if its provisions will apply equally to the confidential information of each party, not just one party. (Beware, though: even a two-way agreement can be drafted so as (subtly) to favor the drafter's client.)

A two-way agreement can protect future "afterthought" confidential disclosures by the receiving party: The Seventh Circuit's 2012 Fail-Safe case illustrates the potential danger of using a one-way confidentiality agreement: If the receiving party later discloses its own confidential information to the disclosing party, that information might not be protected.

A two-way agreement might help avoid future embarrassment: Agreeing to a two-way confidentiality agreement can save future embarrassment for all concerned.

Suppose that two parties entered into a confidentiality agreement that protected only one party's information. Also suppose that the agreement's terms were strongly biased in favor of that party.

But now suppose that, at a later date, the parties decided that they also needed to protect the confidential information of the other party. That is, the party that originally was only going to receive confidential information from the first party would now be disclosing its own information to the first party.

In that case, with the shoe on the other foot, the original disclosing party might well not want to live with the obligations it had previously gotten the original receiving party to accept. As a result, whoever negotiated the (one-way) confidentiality agreement for the original disclosing party might find himself in a doubly-embarrassing position: He would be asking the original receiving party to negotiate a new agreement. And his boss might wonder, Why didn't you do this the right way in the first place, instead of wasting everybody's time?

So it's often a good idea to insist that any confidentiality provisions be two-way in their effect from the start, protecting the confidential information of both parties.

"Maintained in confidence"

Subdivision (a) reflects the fact that in most if not all [U.S.] jurisdictions, a party claiming misappropriation of trade secrets or breach of a confidentiality agreement must adduce evidence showing that the information in question was in fact maintained in confidence. Courts generally will only protect a party's supposedly-confidential information if that party has made efforts that are reasonable under the circumstances to maintain the information in confidence. This prerequisite generally comes from the definition of "trade secret," as found either in the relevant statute — which typically will be a variation of the Uniform Trade Secrets Act — or section 757 of the Restatement of Torts.

• Here's a typical statutory example, from the California Uniform Trade Secrets Act (CUTSA): "'Trade secret' means information, including a formula, pattern, compilation, program, device, method, technique, or process, that … Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy" [emphasis added].

• To like effect is the commentary to section 757 of the Restatement of Torts, which sets out a number of factors affecting whether particular information is a trade secret, including "3. the extent of efforts taken … to guard the secrecy of the information …" (emphasis added).

It's not always necessary to keep information locked up in Fort Knox-like secrecy; in some circumstances, less-strict security measures may well suffice. See, e.g., Learning Curve Toys, Inc. v. PlayWood Toys, Inc., 342 F.3d 714 (7th Cir. 2003) (reversing judgment as a matter of law and remanding with instructions to reinstate jury verdict of misappropriation; applying Illinois law).

Still, some effort to keep information confidential will be necessary. Here's a real-world example of how failure on this point can be fatal to a trade-secret claim: In the Fail-Safe LLC v. A.O. Smith Corp. case mentioned above, the Seventh Circuit noted pointedly that Fail-Safe had made no effort to preserve its so-called trade secrets in confidence:

Marking requirement

In assessing whether particular information was in fact maintained in confidence, courts often consider evidence of whether the information was marked as confidential. In the Fail-Safe case, the court pointedly noted that the plaintiff had not marked its information as confidential; the court affirmed the district court's summary judgment dismissing the plaintiff's claim of misappropriation.

Moreover, failure to mark confidential information as such when required by a confidentiality agreement or nondisclosure agreement ("NDA") can be fatal to a claim of misappropriation of trade secrets or misappropriation of confidential information. For example, in Convolve v. Compaq, the computer manufacturer Compaq (now part of Hewlett-Packard) defeated a claim of misappropriation of trade secrets concerning hard-disk technology because the owner of the putative trade-secret information did not follow up its oral disclosures with written summaries as required by the parties' non-disclosure agreement. See Convolve, Inc. v. Compaq Computer Corp., No. 2012-1074, slip op. at 14, 21 (Fed. Cir. July 1, 2013) (affirming summary judgment).

Of course, applicable law might independently impose a confidentiality obligation benefiting third parties, regardless of marking; for example, the U.S. Health Insurance Portability and Accountability Act (HIPAA) imposes such obligations in respect of patients' protected health information.

Permitted uses

Subdivision (f) allows the Receiving Party to engage in certain pre-approved uses of Confidential Information. Most confidential-information clauses leave this part blank and require the drafter to specify how the Receiving Party is permitted to use confidential information. That seems like an unnecessary paperwork step, given that many if not most permitted-use clauses fall into one or more of the categories enumerated in the text. Consequently, subdivision (f) simply goes ahead and pre-authorizes all of those typical uses.

Subpoenas, etc.

Subdivision (i) ["eye"] authorizes disclosures in response to subpoenas, search warrants, etc. The specific language used is intended to make it clear that voluntary disclosures, for example in public filings with the Securities and Exchange Commission, are not allowed; on that subject, see the optional clause the Inclusion of Confidential Information in Public Filings After Consultation clause.

Compliance with law – prudent efforts

Subdivision (k) requires the Receiving Party to make "prudent" efforts to ensure compliance with law. The term prudent is intended to require something more than reasonable efforts but not necessarily as much as best efforts or all reasonable efforts, which are discussed in the Notebook section Best Efforts Clauses.

See also:

Consumer Price Index (CPI)

Common Draft clause: Consumer Price Index Definition

CPI clauses are sometimes included in contracts for ongoing sales or goods or services. Such contracts will typically lock in the agreed pricing for a specified number of years, subject to periodic increases by X% per year (let's say) or by the corresponding increase in CPI, whichever is greater (or sometimes, whichever is less).

Depending on the industry, CPI-U might or might not be the best specific index for estimating how much a provider's costs have increased. This is explained in the FAQ page of the Bureau of Labor Statistics (accessed Aug. 16, 2012).

CAUTION: Prohibiting a provider from increasing its pricing by more than the increase in CPI or X percent per year, whichever is less, would force the provider to 'eat' any increases in its own costs that exceeded the increase in the particular index chosen.

See also:

Guaranties

Is it "guarantee" or "guaranty"?

Traditionally, "guaranty" is the noun, while "guarantee" is the verb. See Uhlmann v. Richardson, 287 P.3d 287 (Kan. App. 2012), citing Bryan Garner, Garner's Dictionary of Legal Usage 399 (3d ed. 2011).

• CAUTION: Drafters of guaranties will want to be careful, because in the U.S., guaranties are typically construed strictly in favor of the guarantor, with ambiguities resolved against the creditor; see, e.g., Haggard v. Bank of Ozarks Inc., 668 F.3d 196, 201-02 (5th Cir. 2012) (vacating and remanding summary judgment in favor of bank).

In U.S. law, the term "guarantee" is usually associated with a third party's commitment to make good on a principal party's failure to comply with an obligation. For example, when my daughter was in college, I signed a guaranty (noun) in which I guaranteed (verb) her payment of her apartment rent; if she had failed to pay, the landlord could have come after me for the payment.

Guaranties often have negotiated conditions and limits attached to them. For example, a guaranty for a lease agreement might state that the landlord cannot come after the guarantor until the landlord has exhausted all possible avenues of collection against the tenant, including obtaining a judgment against the tenant (this is known as a guaranty of collection). Or, the guaranty might state that the landlord U2can come after the guarantor as soon as the tenant fails to pay, without having to take the tenant to court (this is a guaranty of payment). a guaranty might have a dollar cap attached to it; a waiver of defenses; and other terms.

Colloquially the terms guarantee (or guaranty) and warranty and are alike, but technically there are some differences in conventional usage that drafters should keep in mind.

Who is protected by a guaranty?

Drafters of guaranty language intended for ongoing use will want to be careful how they identify the guaranteed obligations. In an oddball case, a corporate officer, acting in his individual capacity, signed a guaranty of (what the parties expected would be) the corporation's debt to a predecessor of the plaintiff. But the predecessor ended up never extending credit to the corporation. See McLane Foodservice, Inc. v. Table Rock Restaurants, LLC, No. 12-50980 (5th Cir. Nov. 15, 2013).

The predecessor (and would-be creditor) later filed for bankruptcy protection. Its assets were purchased by the plaintiff in the lawsuit, which did extend credit to the corporation.

The corporation defaulted on more than $400,000 in debt to the plaintiff. The plaintiff sued both the corporation and the individual guarantor, claiming that the corporation's defaulted debt was covered by the individual's guaranty to the plaintiff's predecessor (which, as noted above, had never extended credit to the corporation).

After a bench trial, the district court found, and the appellate court agreed, that the individual guarantor was not liable, because his guaranty, by its terms, covered only credit extended by the predecessor of the plaintiff (and the predecessor's "affiliates," a term that did not include the plaintiff itself), and not credit extended by the plaintiff.

LESSONS: The original drafter of the guaranty could have described the guaranteed obligations as including credit extended to the corporation by the predecessor and the predecessor's successors and assigns, not merely the predecessor's affiliates.

Alternatively, the successor-plaintiff could have required the individual guarantor to sign a new guaranty.

And/or – go ahead and use it (appropriately)

While the term and/or can be inappropriately used, it can nevertheless be a serviceable shorthand; critics who scorn it are off-base.

For an example of the lengths some critics think writers should go to avoid using and/or, see a dictum in Carley Foundry, Inc. v. CBIZ BVKT, LLC, No. 62-CV-08-9791, slip op. at 8 (Minn. Ct. App., Apr. 6, 2010): The opinion castigates and/or as "an indolent way to express a series of items that might exist in the conjunctive, but might also exist in the disjunctive. It is a totally avoidable problem …." The author of the opinion — evidently not a slave to brevity — suggested that a drafter instead "could express a series of items as, 'A, B, C, and D together, or any combination together, or any one of them alone.'" Um, sure, Your Honor.

Ken Adams, author of A Manual of Style for Contract Drafting, helpfully suggests that, when dealing with a list of three or more items, use "one or more of A, B, and C." That might well work in some cases. See Kenneth A. Adams, "A, B, and/or C", Dec. 2, 2012.

Ken also cites an article by Ted Tjaden that contains numerous useful case citations (although in my view the article's anti-and/or thesis is misguided). See Ted Tjaden, Do Not Use "and/or" in Legal Writing, Jul. 27, 2011.

Assignment Consent Requirements

Background: Most contracts — but not all — are freely assignable

Under U.S. law, most contract rights are freely assignable, and most contract duties are freely delegable, absent some special character of the duty, unless the agreement says otherwise. In some situations, however, the parties will not want their opposite numbers to be able to assign the agreement freely; contracts often include language to this effect.

Licenses of intellectual property are an exception to the general rule of assignability. Under U.S. law, an IP licensee may not assign its license rights, nor delegate its license obligations, without the licensor's consent, even when the license agreement is silent. See, e.g., In re XMH Corp., 647 F.3d 690 (7th Cir. 2011) (trademark licenses – Posner, J.); Cincom Sys., Inc. v. Novelis Corp., 581 F.3d 431 (6th Cir. 2009) (copyright licenses); Rhone-Poulenc Agro, S.A. v. DeKalb Genetics Corp., 284 F.3d 1323 (Fed. Cir. 2002) (patent licenses). For further discussion of the assignability of IP licenses, see this article, posted on the Web site of the Licensing Executives Society, by Finnegan Henderson attorneys John Paul, Brian Kacedon, and Douglas W. Meier, at http://goo.gl/F2ivo.

An assignment consent requirement can pose a strategic danger

An assignment-consent requirement could give the non-assigning party a de facto veto over the assigning party's future strategic decisions.

• EXAMPLE: In one high-profile, politically-sensitive case involving a Dubai company, the Port of New York and New Jersey was able to extract a $10 million consent fee, plus a commitment to invest $40 million in improvements to terminal operations, in return for its consent to an assignment of a lease agreement, as reported in the New York Times.

Obtaining assignment consents could be burdensome

In one case involving assignment consents, the assigning party wanted to sell a product line but had to seek consent from some 25 companies. See MDS (Canada) Inc. v. Rad Source Tech., Inc., 720 F.3d 833, 850 (11th Cir. July 1, 2013) (affirming district court's judgment in part and certifying question of sublicense-as-assignment to Florida supreme court).

At a minimum, this would be burdensome and could easily delay closing the deal; at worst, 25 different companies could try to extract a price for their consent — possibly with each successive company demanding more than the previous one.

Mergers and "internal" reorganizations might be impeded

Some contracts state that an assignment by operation of law through a party's merger, consolidation, etc., requires the other party's consent. That could result in serious business harm to the merging party and its successor.

EXAMPLE: In a 2007 case, a federal district court in California held that "The crucial inquiry is whether the law governing [a license agreement] would consider [two] reverse triangular mergers [in which the original licensee and its successor were acquired, seven years apart to constitute a transfer or assignment of [the licensor's] assets or license rights." See Netbula LLC v. BindView Development Corp., 516 F.Supp.2d 1137, 1146, 1150 (N.D. Cal. 2007) (granting defendants' motions for summary judgment dismissing claims of copyright infringement, etc.). Disclosure: I was vice president and general counsel of defendant BindView at the time the dispute arose; I testified in deposition on an unrelated issue.

EXAMPLE: The Delaware chancery court ruled, on summary judgment, that "mergers do not result in an assignment by operation of law of assets that began as property of the surviving entity and continued to be such after the merger [emphasis added]." Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH 62 A.3d 62 (Del. Ch. 2013) (partially granting motion for summary judgment).

EXAMPLE: Loss of lease: The Oregon supreme court ruled, in effect, that a bank materially breached a lease agreement when it merged with its own wholly-owned subsidiary without first obtaining the landlord's consent. That ruling presumably gave the landlord the right to demand whatever it wanted from the bank to cure the breach, at least if the bank wanted to continue to occupy the leased premises. See Pacific First Bank v. New Morgan Park Corp., 876 P.2d 761 (Ore. 1994) (reversing trial-court judgment).

EXAMPLE: Paying twice for the same IP license: In the Sixth Circuit's Cincom case, a customer of a software vendor did an internal reorganization involving certain merger activity among corporate affiliates. As a result, the vendor's software ended up being operated by a sister company of the original customer. The vendor demanded that the sister company buy a new license; when the sister company refused, the vendor successfully sued for copyright infringement and received the price of a new license as its damages. The appeals court held that it did not matter whether state law would have considered the merger to have effectuated an assignment of the software license: Under the federal law governing the assignment of copyright licenses, said the court, the merger did indeed constitute an assignment, and the consent of the licensor was required. Cincom Sys., Inc. v. Novelis Corp., 581 F.3d 431 (6th Cir. 2009) (affirming summary judgment in favor of software vendor).

(DCT comment: The Cincom case strikes me as shortsighted behavior on the part of the software vendor — I can't imagine that the customer was ever again willing to buy anything else from that vendor.)

EXAMPLE: Loss of indemnification rights: Indemnity rights under a contract might disappear if the indemnified party were to merge without the consent of the indemnifying party. This was the issue in a 2011 Delaware case: The parties' indemnification agreement prohibited assignment, but also stated that the rights of the indemnified party extended to its successors and assigns. The court held that the contract language was ambiguous about whether the indemnity right survived the unauthorized merger; consequently, the court denied a motion for summary judgment brought by the indemnified party's successor in interest. ClubCorp, Inc. v. Pinehurst, LLC, C.A. No. 5120-VCP, slip op. at 6 (Del. Ch. Nov. 15, 2011) (Parsons, V.C.) (denying motion for summary judgment).

Government contracts might require consent by statute

A New York statute provides that, whenever a company enters into a contract with a state agency, the company cannot assign the contract without the agency's consent; if the contractor fails to obtain the consent, the agency shall revoke and annul such contract," and the contractor forfeits all payments except that needed to pay its employees. See N.Y. State Fin. L. art. 9, § 138.

That, of course, would give the state agency considerable leverage — which New York state agencies apparently can be unabashed about wielding, as seen in the discussion of the Dubai port deal.

Exception to assignment-consent requirement: Asset dispositions

It's fairly common for companies to want to be able to assign their contracts without consent from the other party in the case of an asset disposition such as the sale of an unincorporated division or a specific product line. This can be crucial to a company that wants to retain control over its own strategic destiny. It also can keep the assignee from having to re-buy and pay again for an IP license that the assigning party already paid for once, as happened in the Cincom case discussed above

In contract negotiation, a prospective assigning party might argue for a consent carve-out along the following lines:

We need to keep control of our strategic destiny. If we ever wanted to sell a product line or a division (or even the whole company) in an asset sale, we'd need to be able to assign this agreement as part of the deal. We don't want to have to worry about whether somebody at your company was going to get greedy and try to hold us up for a consent fee.

The prospective non-assigning party might respond in the negotiation with something like this:

What if you decided to sell a product line or a division to one of our competitors? We need to retain control over that possibility. The only way for us to do that is to retain the absolute right to consent to any assignment you might make.

It might not be necessary to give the non-assigning party a veto over asset-disposition assignments. Instead, consider giving that party the right to terminate the contract for convenience, as provided in Clause XXX. (Of course, the implications of termination would have to be carefully thought through.)

Confidentiality of assignment-related information

A party requesting another party's consent to an assignment would almost certainly want the other party to keep the request confidential, perhaps:

  • for competitive reasons; and
  • the requesting party might be concerned about leaking of M&A-related information, and the "complications" that can arise from insider trading.

Assignment without consent – should it be void, or just a breach?

What is the legal effect if a company purports to assign its contract in violation of an assignment-consent requirement? Is the assignment a nullity? Or instead is the assignment technically valid, but a breach of the agreement, for which the non-assigning party can recover its proved damages – if any?

• A court applying the so-called 'classical approach' might hold that the unconsented assignment was void. That was the result in Colorado's Condo v. Connors case, where the Colorado supreme court affirmed a holding that an assignment of an interest in a limited liability company (LLC) was void because consent to the assignment was not obtained as required by the LLC operating agreement. See Condo v. Connors, No. 10sc703 (Colo. Dec. 19, 2011).

• In contrast, a court applying the so-called 'modern approach' (or one of its variations) might hold that an unconsented assignment was a breach of the contract, for which damages might be available, but that the assignment per se was not void unless the contract said so, perhaps with requisite "magic words." See id., slip op. at 10 & n.4, 19-25 (citing cases).

A similar result occurred in Connecticut's David Caron Chrysler case: The state supreme court followed the modern approach, holding that the acquisition of majority interest in an LLC without consent, in violation of a contractual prohibition, was not void. See David Caron Chrysler Motors, LLC v. Goodhall's, Inc., No. 18694 (Conn. May 15, 2012).

Assignment without consent – should it be a material breach?

A material-breach clause gives the consenting party more leverage

When a prospective non-assigning party asks for a material-breach clause, it probably wants the right to terminate the Agreement — or even rescind it, that is, unwind it — if the other party were ever to assign the agreement without consent. That prospect might give the non-assigning party + a lot of leverage to demand money or other concessions as the price of not exercising its termination right, akin to the consent-requirement leverage discussed above.

A material-breach clause could provide an excuse for ditching a partner   SPP

A material-breach clause would also give the consenting party an excuse to toss the original contracting party out the door and take up with another, more-lucrative party. That seems to have been the situation in Hess Energy Inc. v. Lightning Oil Co., 276 F.3d 646, 649-51 (4th Cir. 2002) (reversing summary judgment). In that case:

• The contract in suit was a natural-gas supply contract.

• The customer buying the natural gas was acquired by a larger company, which became the customer's new parent company.

• The new parent company took over some of the customer's contract-administration responsibilities, such as payment of the natural-gas vendor's invoices.

• The vendor decided it wanted to sell its natural gas to someone else – at a higher price than it was getting under the contract with its existing customer.

• The vendor therefore sent a notice of termination to the customer's new parent company. The alleged grounds for termination were that the customer had supposedly "assigned" the agreement to its new parent company, in violation of the contract's assignment-consent provision.

• The appeals court, though, expressed considerable doubt that the customer had indeed assigned the contract. The court went on to say that, even if the customer had in fact assigned the contract, the resulting breach of the agreement would not have beena material breach, and therefore the vendor did not have the right to terminate the contract.

Lack of a material-breach clause might leave a party stuck

Without a material-breach clause, a non-assigning party might not be able to terminate the contract merely because the other party assigned the Agreement without consent. That could mean the non-assigning party would be stuck with a new contract partner.

Consent at sole discretion, or not to be unreasonably withheld?

See:

A party that wants the absolute right to refuse consent to an assignment should consider asking for the Assignment Consent – Sole Discretion clause, in case applicable law implies a standard of good faith or reasonableness.

The asking party, though, should also consider that if it fails to get the other party to agree to including this clause, then a court might hold that the parties had implicitly agreed to a good-faith or reasonableness standard.

Likewise, a party wanting to maintain its freedom to assign a contract should at least consider asking for a provision such as the Assignment Consent Not To Be Unreasonably Withheld clause. If the contract language didn't expressly require reasonableness, the non-assigning party might be tempted to drag its feet, and that could cause delays that in turn could scuttle the assigning party's proposed transaction.

One warning: Even an express reasonableness requirement might not prevent the non-assigning party from dragging its feet in the hope of extracting concessions. Still, a prohibition against unreasonably withholding consent should make the non-assigning party at least think twice about doing so, because of the potential threat of damages for a blown deal.

And even worse: Asking for a reasonableness requirement, but not getting it, could backfire later. Suppose that during contract negotiations one side asked to include a clause saying that consent to assignment would not be unreasonably withheld, but the other side rejected the proposed language, and the final, signed contract did not include the proposed language. In that situation, a court could well construe that sequence of events as a signal that the parties intended the opposite of the requested language — namely that consent to assignment could be granted or withheld in the discretion of the non-assigning party.

Something akin to that seems to have happened in the Pacific First Bank case, in which a lease agreement prohibited the tenant from assigning the agreement, including by operation of law, without the landlord's consent. The lease agreement also stated that the landlord would not unreasonably withhold its consent to an assignment of the lease to a subtenant that met certain qualifications. Notably, though, the lease agreement did not include a similar statement for other assignments. The Oregon supreme court held that ordinarily, the state's law would have required the landlord to act in good faith in deciding whether or not to consent to an assignment. But, the court said, the parties had implicitly agreed otherwise; therefore, the landlord did not have such a duty of good faith. See Pacific First Bank v. New Morgan Park Corp., 876 P.2d 761 (Or. 1994) (affirming court of appeals decision on different grounds, and reversing trial-court declaration that bank-tenant had not materially breached lease agreement).

In a factually-messy Eleventh Circuit case, the court upheld a trial court's finding that the owner of a patent, which had exclusively licensed the patent to another party, had not acted unreasonably when it refused consent to an assignment by the licensee to a party that wanted to acquire the licensee's relevant product line. MDS (Canada) Inc. v. Rad Source Tech., Inc., 720 F.3d 833, 850 (11th Cir. July 1, 2013) (affirming district court's judgment in part and certifying question of sublicense-as-assignment to Florida supreme court).

The Tennessee supreme court held that "where the parties have contracted to allow assignment of an agreement with the consent of the non-assigning party, and the agreement is silent regarding the anticipated standard of conduct in withholding consent, an implied covenant of good faith and fair dealing applies and requires the nonassigning party to act with good faith and in a commercially reasonable manner in deciding whether to consent to the assignment." Dick Broadcasting Co. v. Oak Ridge FM, Inc., 395 S.W.3d 653, 656-57 (Tenn. 2013) (affirming vacation of summary judgment and remand to district court).

Likewise, the Alabama supreme court alluded to such a possibility in the Shoney's case. The contract in suit specifically gave Shoney's the right, in its sole discretion, to consent to any proposed assignment or sublease. The supreme court held that this express language trumped a rule that had laid down in prior case law, namely that a refusal to consent is to be judged by a reasonableness standard under an implied covenant of good faith.

"Succinctly stated, under Alabama law 'sole discretion' means an absolute reservation of a right. It is not mitigated by an implied covenant of good faith and fair dealing in contracts because an unqualified reservation of a right in the sole discretion of one of the parties to a contract expresses the intent of the parties to be subject to terms that are inconsistent with any such implied covenant." Shoney's LLC v. MAC East, LLC, 27 So.3d 1216, 1220-21 (Ala. 2009) (on certification by Eleventh Circuit).

State law also might impose a reasonableness requirement if a commercial- or residential lease agreement requires the landlord's consent before the tenant can assign the lease. I haven't researched this in any depth, but I did run across an unpublished California opinion and an old law review article, each collecting cases.

See, e.g.:

  • Nevada Atlantic Corp. v. Wrec Lido Venture, LLC, No. G039825 (Cal. App. Dec. 8, 2008) (unpublished; reversing judgment that sole-discretion withholding of consent was unreasonable).
  • Paul J. Weddle, Pacific First Bank v. New Morgan Park Corporation: Reasonable Withholding of Consent to Commercial Lease Assignments, 31 Willamette L. Rev. 713 (1995) (first page available for free at Hein Online, http://goo.gl/JKw6B; also available for a fee at the LexisNexis Web site at http://goo.gl/gNeQa).

Damages for unreasonable withholding of consent?

See:

Drafters should consider whether a would-be assigning party's damages for a busted M&A deal should be categorized as "consequential" damages — and thus subject to an exclusion of consequential damages set forth elsewhere in the agreement. If that were to be the case, then the non-assigning party might not have to pay any damages if the contract excluded such damages, as many contracts do.

To give an idea of the potential size of a damages award in such a case, recall the famous Pennzoil vs. Texaco case: Texaco was hit with a $10.5 billion jury verdict — in 1987 dollars — for tortiously interfering with Pennzoil's agreement to acquire Getty Oil. (The case ultimately settled for some $3 billion.) See, e.g., Tamar Lewin, Pennzoil-Texaco Fight Raised Key Questions, N.Y. Times, Dec. 19, 1987.

CAUTION: Some prospective consenting parties might ask to include the No Damages for Unreasonable Withholding of Assignment Consent clause. That could be dangerous for the prospective assigning party: By the time a final judgment of unreasonable withholding of consent has been entered and is no longer subject to further appeal, however, the assigning party's would-be assignee will almost certainly have moved on in search of other opportunities. The assigning party might as well resign itself to the fact that, with this type of language, as a practical matter the consenting party will have the sole and unfettered discretion to grant or withhold consent – and thus to extort extract some sort of concession, possibly a major one, from the assigning party and its assignee in return for such consent, as discussed in the Notebook section An assignment consent requirement can pose a strategic danger.

Assignment to affiliate without consent

Relevant to: the Assignment to Affiliate Without Connsent clause

A prospective assigning party might argue that it should not have to get consent before assigning the Agreement to one of its affiliates. Its argument might run something like this:

We sometimes routinely move assets around within our corporate structure. We need to be able to do so with this contract without having to take the trouble to get your approval.

The other, non-assigning party might reasonably object, though, perhaps saying something like:

We have no idea whether your affiliate would be in a position to fulfill your obligations under the contract.

Nor do we know whether we'd be able to recover from you if your affiliate were to breach the contract.

If you're willing to unconditionally guarantee your affiliate's performance, we might be able to go along with this.

Otherwise, though, we have a problem with this carve-out.

A compromise might be to allow unlimited assignments to affiliates, but only if the assigning party guarantees the affiliate's performance; see the Assignment to Affiliate – Guaranty by Assignor clause for sample language.

Assignment – termination

Sometimes parties can get into an impasse about assignment-consent provisions. A provision such as the Assignment – termination clause can sometimes 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.

Assignment consent – specimens

  • Boeing-Alaska Airlines aircraft purchase agreement § 9.1.
  • Disney-Pixar Coproduction Agreement §§ 21, 22, 23.
  • Ford Motor Co. Services Agreement § 20.4.
  • IBM NDA § 8(b).
  • Johns Hopkins University Affiliation Agreement § 5.2, 7.1.
  • SmithKline Trademark License Agreement § 16.
  • UT Austin NDA § 12.
  • Verizon NDA § 5.
  • Wal-Mart Stores Money Services Agreement Part III.

Background-Check Requirements

Customers sometimes ask for background checks when a supplier's personnel will have access to important or sensitive facilities, equipment, information, etc. 

Motivation

A customer might want a supplier to have background checks run on the supplier's personnel, for example:

  • if the customer is a government contractor;
  • if the supplier will have access to sensitive information of the customer's;
  • if the supplier's personnel will interact with, or be seen or heard by ("face") the customer's own customers.

Obtaining background checks

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.)

Have background checks already been done?

It's entirely possible that, due to the nature of the industry (e.g., technology consulting services), the contractor might have already had background checks performed on its relevant people.

Drug testing

Customers with safety concerns might want contractor employees to be drug-tested. Providers, though, should think about 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 busted the test.

As the saying goes, be careful about asking a question if you're not prepared to deal with the answer.

Who pays for background checks?

Providers often take the view that any customer that wants background checks to be conducted on the provider's personnel should pony up for the incremental cost.

On the other hand, a customer might take the position that background checks should be an overhead expense that the provider must bear.

Legal compliance requirement

A background-check requirement might include a requirement that the party doing background checks must comply with applicable law. Such a requirement might seem superfluous, but it's useful:

  • to remind drafters and parties of privacy laws protecting employees and consumers, including for example the Fair Credit Reporting Act, and
  • to give the other party a contractual remedy — not to mention a certain amount of political cover — in case the party required to conduct background checks violates the law in doing so.

Such a legal-compliance requirement is sometimes coupled with an obligation to indemnify the other party from any third-party claims arising from the background checks.

Disqualification dangers

A blanket prohibition against using personnel with criminal records could have a disproportionate impact on racial- or ethnic minorities and thus might be illegal in the U.S. See generally the EEOC general counsel's enforcement guidance published in April 2012. The EEOC has filed lawsuits against employers who allegedly "violated Title VII of the Civil Rights Act by implementing and utilizing a criminal background policy that resulted in employees being fired and others being screened out for employment …." EEOC press release, June 11, 2013.

In addition, some states may likewise restrict an employer's ability to rely on criminal background information in making employment-related decisions. Drafters should pay particular attention to the law in New York, Massachusetts, Illinois, and Pennsylvania (not necessarily an exhaustive list).

Best Efforts Clauses

Business context

As one court explained, "[c]ontracting parties ordinarily use best efforts language when they are uncertain about what can be achieved, given their limited resources." See CKB & Assoc., Inc. v. Moore McCormack Petroleum, Inc., 809 S.W.2d 577, 581-82 (Tex. App. – Dallas 1990) (affirming summary judgment that defendant had failed to use its best efforts).

On the facts of the case, the court affirmed summary judgment that an oil refiner had failed to use its best efforts to produce specified volumes of refined petroleum products. The refiner had focused its efforts on high-priced products, while making no effort to produce the specific products that it was contractually obligated to produce. The court remarked that "[a]s a matter of law, no efforts cannot be best efforts."

Consider a hypothetical example: Imagine that a manufacturer of "widgets" is negotiating a contract with a distributor.

  • The manufacturer wants the distributor to achieve the highest sales possible, or perhaps simply sales of X dollars per year.
  • The distributor, though, isn't sure it can achieve that particular level of sales.

In such a case, the parties might draft the agreement so as to require the distributor to use its "best efforts" to achieve those results.

Best-efforts obligations are especially common when one party grants another party exclusive rights, for example exclusive distribution rights or an exclusive license under a patent, trademark, or copyright. That was the situation in the Kevin Ehringer Enterprises case, for example.

"Best efforts" means different things to different courts

To many business people, it may seem self-evident that when a contract uses the term best efforts, it calls for "something more" than mere reasonable efforts — otherwise, why bother even saying best efforts?

By analogy, to many business people, "C" is a passing grade in (U.S.) schools, but best efforts means an "A" effort — or in basketball slang, bring your "A" game, not your "C" game.

Depending on the jurisdiction, though, a court might not see it that way:

• Some — but not all — U.S. courts have seemingly equated best efforts with mere reasonable efforts, contrary to what business people are likely to think they're getting in a best-efforts clause.

As one 2007 review of case law puts it, "For years U.S. courts have used the phrases 'reasonable efforts' and 'best efforts' interchangeably within and between opinions. Where only one of the terms is used, the best-efforts obligation frequently appears indistinguishable from a reasonable-efforts obligation. Some recent cases have gone so far as to equate best efforts and reasonable efforts." See Scott-Macon Securities, Inc. v. Zoltek Cos., Nos. 04 Civ. 2124 (MBM), 04 Civ. 4896 (MBM), part II-C (S.D.N.Y. May 11, 2005) (citing cases).

(Some of those cases, though, might be interpreted more narrowly as holding merely that a best-efforts obligation does not require the obligated party to make unreasonable efforts, while still requiring diligence in the making of reasonable efforts.)

• Fortunately, still other U.S. courts seem to have recognized that best efforts means something more than merely reasonable efforts.

For example, in the Tigg Corp. v. Dow Corning Corp. case (1992), the Third Circuit held that, at least where the contract involved an exclusive-dealing arrangement, "[t]he obligation of best efforts forces the buyer/reseller to consider the best interests of the seller and itself as if they were one firm." The appellate court affirmed a trial court's judgment, based on a jury verdict, holding Dow Corning liable for breaching a best-efforts obligation in an exclusive-dealing agreement. The appellate court agreed with Dow Corning, however, that the trial court had erred in entering judgment on the amount of monetary damages Dow Corning should pay, and remanded the case for a new trial on that issue. Tigg Corp. v. Dow Corning Corp., 962 F.2d 1119 (3d Cir. 1992).

Likewise, in Macksey v. Egan (1994), a Massachusetts appeals court construed the term best efforts "in the natural sense of the words as requiring that the party put its muscles to work to perform with full energy and fairness the relevant express promises and reasonable implications therefrom." Macksey v. Egan, 36 Mass. App. Ct. 463, 472, 633 N.E.2d 408 (1994) (reversing judgment on jury verdict that defendant had breached best-efforts obligation; extensive citations omitted).

• Some UK and Canadian courts have defined the standard of performance for best efforts as, in essence, all reasonable efforts. For a survey of such cases, see Shawn C. Helms, David Harding, and John R. Phillips, Best Efforts and Endeavours – Case Analysis and Practical Guidance Under U.S. and U.K. Law, July 2007.

For example, in its Atmospheric Diving Systems opinion (1994), the supreme court of British Columbia held that best efforts requires "taking, in good faith, all reasonable steps to achieve the objective, carrying the process to its logical conclusion and leaving no stone unturned. … doing everything known to be usual, necessary and proper for ensuring the success of the endeavour." 

Similarly, in Australia, the term best endeavours seems to be treated as synonymous with all reasonable endeavours; in its Hospital Products opinion (1984), that country's highest court held that "an obligation to use 'best endeavours' does not require the person who undertakes the obligation to go beyond the bounds of reason; he is required to do all he reasonably can in the circumstances to achieve the contractual object, but no more … [A] person who had given such an undertaking … in effect promised to do all he reasonably could …." Hospital Prods. Ltd v. United States Surgical Corp., 1984 HCA 64, 156 CLR 41, paras. 24, 25.

Adding to the difficulty, some U.S. courts have held that the term best efforts is too vague to be enforceable unless the parties agree to some sort of objective standard of performance, "some kind of goal or guideline against which best efforts may be measured," in a case quoted by the court in the Kevin Ehringer Enterprises case.

One court held that "as promptly as practicable" and "in the most expeditious manner possible" were sufficient to meet that requirement. See Herrmann Holdings Ltd. v. Lucent Technologies Inc., 302 F.3d 552, 559-61 (5th Cir. 2002) (reversing dismissal under Rule 12(b)(6); citing cases).

With all of this in mind, the definition of best efforts in this clause attempts to draw at least a somewhat-bright line that provides an objective standard of performance (albeit one that might require a trial to determine whether it had been met).

"Best efforts" might be held to be unenforceably vague

According to some U.S. courts, the term best efforts is too vague to be enforceable unless the parties agree to some sort of objective standard of performance. In the Kevin Ehringer Enterprises case (2011), the Fifth Circuit, quoting a Texas appellate court, held that under state law, "to be enforceable, a best efforts contract must set some kind of goal or guideline against which best efforts may be measured."

Asking for a best-efforts commitment can make business sense

Sure, there's some legal uncertainty associated with a best-efforts commitment. But from a business perspective it can make good sense to ask the other side for such a commitment anyway: A party that makes a best-efforts commitment — to the extent it thinks about that commitment at all — will at least be aware that it might well have to make more than just routine, day-to-day, "reasonable" efforts. That alone might be worthwhile to the party asking for the commitment.

Agreeing to a best-efforts commitment might lead to trouble

If you commit to a best-efforts obligation, and the other side later accuses you of breaching that obligation, and you can't settle the dispute, then you're likely to have to try the case instead of being able to get rid of it on summary judgment. That's because:

• No matter what you do, if a problem arises, the other side's lawyers, with 20-20 hindsight, will argue that there were X number of things that you supposedly could have done to achieve the agreed goal.

• You're unlikely to be able to get summary judgment that you didn't breach the best-efforts obligation. Instead, you're likely to have to go to the trouble and expense of a full trial or arbitration hearing. The judge or arbitrator may well say that the question involves disputed issues of material fact. Those issues will have to be resolved by witness testimony and cross-examination about such things as industry practices; the then-existing conditions; etc. According to the rules of procedure in many jurisdictions, that will require a trial and will not be able to be done in a summary proceeding. Your motion for summary judgment is therefore likely to be denied.

• The tribunal, after hearing the evidence, may find that in fact you did not use your best efforts. If that happens, you're going to have a very hard time convincing an appeals court to overturn that finding.

Takeaways

• Drafters should try very hard to be as precise as possible in specifying just what goal the best efforts are to be directed to achieving.

• Obligated parties should think long and hard before agreeing to a best-efforts obligation, because in the long run it could prove to be burdensome and expensive.

See also

Confidential Information

Disclosure without obligation of confidence

Subdivision (a)(5) reflects the legal principle that trade-secret status can be destroyed by disclosing the secret to others without an obligation of confidence.

Perhaps an extreme illustration of this rule is provided by the Gal-Or v. United States case, in which an Israeli scientist sued the U.S. Government for having used, without his permission, his alleged trade secrets relating to stealth aircraft and cruise missiles. The court had no trouble dismissing the scientist's case, remarking that:

[I]nstances in which Mr. Gal-Or took proactive steps to protect the confidentiality of his trade secrets are simply overwhelmed [emphasis in original] by the number of times he did not. …

In sum, because Mr. Gal-Or disclosed trade secrets to others, who were under no obligation to protect the confidentiality of the information, Mr. Gal-Or lost any property interest he may have held.

Gal-Or v. United States, No. 09-869C (Ct. Fed. Cl. Nov. 21, 2013).

Interestingly, the judge in that case, Hon. Susan G. Braden, had convincingly demonstrated her expertise in trade-secret law 20 years before: While in private practice, she successfully represented the defendant in one of the most-important early cases concerning copyright and trade secrets in computer software, namely the long-running Computer Assoc. Int'l, Inc. v. Altai, Inc., 982 F.2d 693 (2d Cir. 1992) (affirming trial-court decision that Altai had not infringed the copyright in CA's software); see also Computer Assoc. Int'l, Inc. v. Altai, Inc., 918 S.W.2d 453 (Tex. 1994) (on certification from Second Circuit, holding that discovery rule did not apply to claims for misappropriation of trade secrets – a ruling that later was overturned by statute).

Another example: In April 2010, Lockheed Martin sued a competitor for misappropriation of trade secret. The jury awarded $ 37 million in damages. but the judge tossed out the verdict and ordered a new trial. The judge found that Lockheed Martin had withheld evidence suggesting that the company had disclosed the trade secrets in question to a competitor without restrictions — which would have killed the company's legal rights in the information. The case later settled. See R. Robin McDonald, Discovery Failure Sinks Lockheed's $37 Million Win, Apr. 6, 2010; see also R. Robin McDonald, Lockheed and L-3 settle five-year battle, Nov. 29, 2010. For a more-detailed discussion of the specifics of the lawsuit, see this blog entry of Apr. 6, 2010 by "Todd" (Todd Harris?) at the Womble Carlyle trade secrets blog.

Subpoena does not exclude information from confidentiality

Some badly-drafted conf­id­en­ti­al­i­ty exclusion language — for example, the Citigroup NDA at § 1(a)  — does just that, however. That normally would be a big mistake for the disclosing party, because it could reduce the likelihood that a court would grant a motion for protection of the subpoenaed information.

The better approach is to provide that the Receiving Party may disclose Confidential Information pursuant to a subpoena, etc., as long as it meets certain conditions, as stated in the ConfInfoDefn clause.

Selections and combinations of non-confidential information

the Selections and Combinations Not Excluded clause reflects the established law that particular selections and compilations of information can qualify as confidential information or even as a trade secret, even if the individual information components are not confidential.

Here's a case in point:

  • A company, Tewari, claimed to have developed a zero-oxygen technique for packing meat.
  • Tewari demonstrated the technology for a specialty meats company, Mountain States, but only after the two companies had signed an NDA.
  • Tewari later sued Mountain States for allegedly misappropriating Tewari's trade secrets.
  • Mountain States responded that:
    • most of the disclosed information was published in Tewari's patent application, and
    • the rest was common knowledge in the industry.
  • Tewari replied that the specific combination of things it had disclosed to Mountain States was not public.

Initially, Mountain States prevailed: The trial judge agreed with Mountain States's argument and granted summary judgment dismissing Tewari's case.

The appeals court, however, reversed (in part): The court held that there was a genuine dispute about whether the specific combination of things was in fact generally known. Therefore, the appeals court said, it was premature for the trial court to have granted summary judgment. See Tewari De-Ox Systems, Inc., v. Mountain States/Rosen, L.L.C., 637 F.3d 604 (5th Cir. 2010).

For another example, see the Integrated Cash Management case, in which the Second Circuit observed that "a trade secret can exist in a combination of characteristics and components, each of which, by itself, is in the public domain, but the unified process, design and operation of which, in unique combination, affords a competitive advantage and is a protectible secret." Integrated Cash Mgmt. Servs., Inc. v. Digital Transactions, Inc., 920 F.2d 171, 174 (2d Cir. 1990) (emphasis added; internal quotation marks and citation omitted).

Exclusion corroboration requirement

At trial, it might all come down to whom the jury believes about whether the defendant knew the allegedly-confidential information beforehand, etc. That's why disclosing parties sometimes want to require receiving parties to providing corroborating evidence. This clause accommodates that preference by requiring the receiving party to corroborate any claim that information was not confidential.

A disclosing party will sometimes propose requiring the receiving party to prove any exclusion from conf­id­en­ti­al­i­ty with documentary evidence, not just oral testimony. The disclosing party usually has a specific concern: That the receiving party's personnel, trying to dodge a charge of misappropriation of trade secrets, might be tempted to dissemble or even lie about, for example, their having independently developed the information.

The disclosing party's underlying concern is a valid one — and isn't unique: Patent law faces a similar problem, namely that of determining who was the first inventor. Under (U.S.) patent law, someone claiming an invention date earlier than the filing date of his patent application must corroborate that claim, for example with a signed and witnessed laboratory notebook.

The receiving party, however, likely will object to having to prove an exclusion using documentary evidence alone. The receiving party probably has no way to assess, in advance, whether it will have documentary evidence that, standing alone, would convince a judge or jury.

To resolve these conflicting views, this clause therefore borrows the concept of corroboration from patent law:

  • The receiving party is not required to prove its assertion of an exclusion using documentary evidence alone;
  • The receiving party is required to adduce documentary evidence to corroborate its assertion. This helps to guard against the possibility that the receiving party's personnel might "describe [their] actions in an unjustifiably self-serving manner …. The purpose of corroboration [is] to prevent fraud, by providing independent confirmation of the [witness's] testimony." See Sandt Technology, Ltd. v. Resco Metal & Plastics Corp., 264 F.3d 1344, No. 00 1449 (Fed. Cir. 2001) (affirming relevant part of summary judgment; as a matter of law, inventor provided sufficient corroboration of date of invention) (internal quotation marks and citation omitted).

Confidentiality of parties' dealings

Clauses requiring contract terms to be kept confidential have been enforced. For example, in 2013 the Delaware chancery court held that a party materially breached an agreement by publicly disclosing the agreement's terms in violation of a confidentiality clause, thereby justifying other party's termination of agreement. See eCommerce Indus., Inc. v. MWA Intelligence, Inc., No. 7471-VCP, part II-A, text accompanying notes 117 et seq. (Del. Ch. Oct. 4, 2013)

Specimens

The examples below take a tougher stance than this clause does: They appear to require that exclusions from confidentiality be proved, not merely corroborated, with documentary evidence:

  • Johns Hopkins NDA § 4(b) – written records are required to show that information was in the receiving party's possession or readily available from another source.
  • University of North Carolina NDA § 2(c)(i) — documentary form required for information in receiving party's possession prior to disclosure by disclosing party.
  • UT Austin NDA Exhibit a § 1 (definition of Confidential Information) — "competent written proof" required.
  • Verizon NDA §§ 3.1, 3.2, 3.4 — written evidence is required to show that information was already in receiving party's posession, publicly available, and/or independent developed.

Conspicuousness – Additional Commentary

In some jurisdictions, certain types of clauses might not be enforceable unless they are "conspicuous." For clauses in this category, courts typically want extra assurance that the signers knowingly and voluntarily assented to the relevant terms and conditions.

The UCC Definition

Even though the [U.S.] Uniform Commercial Code doesn't apply to all types of transactions (nor in jurisdictions where the UCC has not been eneacted), its definition of "conspicuous" in section 1-201(10) nevertheless provides useful guidance:

A term or clause is conspicuous when it is so written that a reasonable person against whom it is to operate ought to have noticed it.

A printed heading in capitals (as: NON-NEGOTIABLE BILL OF LADING) is conspicuous.

Language in the body of a form is "conspicuous" if it is in larger or other contrasting type or color.

But in a telegram any stated term is "conspicuous".

Tex. Bus. & Com. Code § 1.201(10) (extra paragraphing added).

Courts tend to focus on "fair notice"

In a non-UCC context, the Supreme Court of Texas held that — with a possibly-significant exception — an indemnity provision protecting the indemnitee from its own negligence must be sufficiently conspicuous to provide "fair notice." The supreme court adopted the conspicuousness test stated in the UCC, quoted above; the court explained:

This standard for conspicuousness in Code cases is familiar to the courts of this state and conforms to our objectives of commercial certainty and uniformity. We thus adopt the standard for conspicuousness contained in the Code for indemnity agreements and releases like those in this case that relieve a party in advance of responsibility for its own negligence.

When a reasonable person against whom a clause is to operate ought to have noticed it, the clause is conspicuous.

For example, language in capital headings, language in contrasting type or color, and language in an extremely short document, such as a telegram, is conspicuous.

Dresser Indus., Inc. v. Page Petroleum, Inc., 853 S.W.2d 505, 508-09 (Tex. 1993) (citations omitted, emphasis and extra paragraphing added).

The Dresser court also pointed out that the fair-notice requirement did not apply to settlement releases: "Today's opinion applies the fair notice requirements to indemnity agreements and releases only when such exculpatory agreements are utilized to relieve a party of liability for its own negligence in advance." Id., 853 S.W.2d at 508 n.1 (emphasis added).

Actual knowledge – when proved – might substitute for conspicuousness

Texas's Dresser court noted an exception to the conspicuousness requirement: "The fair notice requirements are not applicable when the indemnitee establishes that the indemnitor possessed actual notice or knowledge of the indemnity agreement." Id., 853 S.W.2d at 508 n.2 (emphasis added, citation omitted).

Note especially the italicized portion of the quotation, which implies that the burden of proof of actual notice or knowledge is on the party claiming indemnification from its own negligence.

In contrast, a federal district judge in Houston granted Enron's motion to dismiss Hewitt Associates' claim for indemnity, on grounds that the contract in question did not comply with the conspicuousness requirement of the express-negligence rule; the judge surveyed prior cases in which actual knowledge (of an indemnity clause) had been sufficiently established, including by ways such as:

  • evidence of specific negotiation, such as prior drafts;
  • through prior dealings of the parties, for example, evidence of similar contracts over a number of years with a similar provision;
  • proof that the provision had been brought to the affected party's attention, e.g., by a prior claim.

See Enron Corp. Sav. Plan v. Hewitt Associates, LLC, 611 F.Supp.2d 654, 673-75 (S.D. Tex. 2008) (Harmon, J.).

Conspicuous doesn't necessarily mean all-caps, bold-faced type, etc.

What counts as "conspicuous" will sometimes depend on the circumstances. In still another express-negligence case, the Texas supreme court said that the indemnity provision in question did indeed provide fair notice because:

The entire contract between Enserch and Christie consists of one page; the indemnity language is on the front side of the contract and is not hidden under a separate heading.

The exculpatory language and the indemnity language, although contained in separate sentences, appear together in the same paragraph and the indemnity language is not surrounded by completely unrelated terms.

Consequently, the indemnity language is sufficiently conspicuous to afford "fair notice" of its existence.

Enserch Corp. v. Parker, 794 S.W.2d 2, 8-9 (Tex. 1990) (extra paragraphing added).

See also:

Contract Review

Dealing with a mass of text

Lawyers sometimes have to review contracts that have long, undifferentiated paragraphs, single-spaced in small fonts.

If you have (or can create) a Word document, the first thing to do is to Select All (in Word) and double-space the entire document. (Later on, signature blocks and the like can be single-spaced.)

It also helps to break up long paragraphs into one- or two-sentence individual paragraphs.

It might even be worth turning on Word's line numbering feature.

These steps make the document much easier for the lawyer — and later, her client — to read, understand, edit, and annotate. Other parties seldom if ever object to this.

Conversely, sometimes a drafter will be sending the other side a first-draft contract that has short paragraphs and lots of white space – and thus lots of pages. In that situation, it helps to explain, in the transmittal email, that the document may seem long, but that the white space greatly improves readability, which will speed up getting the contract to signature. it's in the interest of readability.

Early Neutral Evaluation

This comment relates to the Early Neutral Evaluation of Serious Disputes clause.

Some courts routinely refer certain cases to early neutral evaluation in the hope of providing a "reality check" for the parties that can help promote settlement. In part, this is likely to be because:

  • Lawyers – especially male lawyers – tend to be overly optimistic about whether they're going to win their cases; see this summary in the ABA Journal of the published research findings.
  • Both lawyers and clients can get into ego clashes with the other side, sometimes vulgarly referred to as "[anatomy]-measuring contests."
  • Lawyers want to be perceived by their clients as team players who are committed to doing "whatever it takes" to win the case for the client; they therefore have at least some incentive to tell their clients what they think the clients want to hear, and to try to protect their clients from unpleasant truths.
  • And of course lawyers will miss out on a certain amount of fee income from litigation if their clients' disputes are settled early.

These factors can hamper getting disputes settled quickly, and in fact can cause disputes to escalate, leading to extra expense and grief for all concerned.

In that situation, sometimes an early, non-binding "sanity check" from a knowledgeable neutral can help the parties and their lawyers get back onto a more-productive track. Otherwise, positions can harden and business relationships suffer — and of course, legal bills start to mount up.

Some courts refer selected cases to mandatory early neutral evaluation ("ENE"). This is explained at the Web site of the U.S. District Court for the Northern District of California, the federal court whose district includes Silicon Valley:

  • The goals of early neutral evaluation include "provid[ing] a 'reality check' for clients and lawyers";
  • "The evaluator has no power to impose settlement and does not attempt to coerce a party to accept any proposed terms.”
  • "The parties' formal discovery, disclosure and motion practice rights are fully preserved.”
  • "The confidential evaluation is non-binding and is not shared with the trial judge.”
  • "The parties may agree to a binding settlement.”
  • "If no settlement is reached, the case remains on the litigation track.”

See U.S. Dist. Ct. for the N.D. of Cal., Early Neutral Evaluation (ENE).

Procedurally, the clause provides for resort to the American Arbitration Association Early Neutral Evaluation procedures if they can't agree otherwise. AAA involvement in a consultation with a neutral would entail an administration fee payable to the AAA ($500 per party when last checked). The parties might prefer to avoid this expense by doing a self-administered ENE, but many practitioners have found that having a neutral administrator is often well worth the money.

The AAA procedures contain evidentiary provisions analogous to Rule 408 of the Federal Rules of Evidence. 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 is that parties are likely to be more candid in settlement discussions if they don't have to worry about having a carelessly-worded comment quoted back to them by opposing counsel in front of a judge or jury.

See also:

Entire-agreement clauses

Relevant to the Entire Agreement clause

"Supersedes"

Drafters will want to be careful about stating that a contract 'supersedes' language in prior agreements. If a contract were to omit a previously-agreed provision such as an arbitration clause, then a court might hold that the previous provision was eliminated and thus no longer applied.

This happened to a company's arbitration provision in Grey v. American Mgmt. Serv., 204 Cal. App. 4th 803, 807-08, 139 Cal. Rptr. 3d 210 (2012): In that case:

  • an employee signed an employment application containing a broad arbitration clause;
  • the employee later signed an employment agreement;
  • the employment agreement also contained an arbitration clause — but of considerably-narrower scope than the arbitration clause of the employment application;
  • the employment agreement also contained a typical entire-agreement clause that included "supersedes" language;
  • the employee brought a lawsuit against the company;
  • a district court granted the employer's motion to compel arbitration; and
  • the arbitrator rendered an award in favor of the company;
  • the district court confirmed the award, whereupon the employee appealed.

The appellate court held that:

  • the later, narrower arbitration clause superseded the earlier, broader one; and
  • the employee's claim was not covered by the later, narrower arbitration clause.

The appeals court therefore reversed the district court's order confirming the award; it remanded the case to the district court with instructions to vacate the award.

Caution: Courts might not enforce this clause   BOOK

Whether a court will enforce an entire-agreement clause may depend on the jurisdiction and the circumstances. For example, in a 2008 case, a group of Shell gasoline dealers claimed that Shell had orally amended the franchise agreement — this, even though the agreement purported to rule out oral promises. The appeals court affirmed the judgment against Shell. Marcoux v. Shell Oil Prods. Co. LLC, 524 F.3d 33 (1st Cir. 2008). The court quoted the Restatement (Second) of Contracts § 209 cmt. b (1981): "Written contracts, signed by both parties, may include an explicit declaration that there are no other agreements between the parties, but such a declaration may not be conclusive." (Emphasis added.) See also the discussion in the commentary to the written-amendments clause.

Can an entire-agreement clause be beefed up?   BOOK

Drafters should consider trying to "beef up" their entire-agreement clauses to increase the chances that a court would enforce the clause. Here are several possibilities:

  • Include a disclaimer of reliance on any external representations or promises;
  • Make the entire-agreement clause conspicuous;
  • Include a statement just above the signature line to the effect that the signers had read and understood the entire agreement;
  • Require the other party to initial the entire-agreement clause — that could be dangerous, though: Suppose that the contract included underlined spaces in the margin where the parties were supposed to write their initials. But suppose also that the parties — or just one party — didn't initial in the margin where indicated. Trial counsel might argue that this meant the non-initialing party didn't agree to the entire-agreement clause.

Extraneous phrases

Lawyer Vance Koven argues that contracts should not include "[s]care words like 'under no circumstances,' 'whatsoever,' 'never,' and 'strictly.'"; he says "[i]t's patronizing and rude, and doesn't bespeak a proper attitude to a business deal."

It can sometimes be in order, though, to (sparingly) include quotable "sound bites" to help convey more meaning to future readers such as business executives, judges, and jurors.

A contract is not a computer program that will be read and performed by a bloodless machine. For any given provision in a contract, the drafter's overall objective must be to educate — and sometimes to persuade — the busy and fallible humans who will read the provision in the future.

A few extra words here and there can sometimes help; while "good"style is a legitimate goal, it should always yield to that overall objective.

EXAMPLE: Consider the short and sweet "Party A will not do X." Compare that with the much-stronger "Party A specifically agrees that under no circumstances will it ever do X.”

Logically, the two seem equivalent. BUT, imagine that in the future, an executive of Party A decides that it would be a really, really good idea for Party A to do X, despite the seeming contractual prohibition. As executives are wont to do, she forcefully argues her case to her colleagues and Party A's counsel.

The stronger phrasing above is just a bit more likely to help keep the executive from prevailing in her argument. Moreover, if the exective does prevail, and then Party A does proceed with doing X despite the contractual prohibition, then the stronger version is more likely to persuade a judge or jury that Party A should be held liable.

My on-line friend Mark Anderson argues that "[u]ltimately, the business person will be taking advice from the lawyer on the correct interpretation of the contract, who will not be so influenced by the hyperbole." That will be true in some cases, but by no means all.

(1) As a class, business executives tend to be somewhat strong-willed, and also to be creative in coming up with rationalizations why they should get what they want. (As a general rule, passive people and weak personalities are less likely to rise to the executive ranks.)

A powerful business executive might well say something like, "Yeah, the contract says we will not do X — but we're not -really- doing X, and besides, we have special circumstances here that the parties didn't think about when drafting the contract. So the clause saying we won't do X doesn't apply to what we want to do.”

As an example, consider the recent litigation between giant retailers Macy's and J.C. Penney over JCP's carrying Martha Stewart product lines. Martha Stewart's company had an exclusive deal with Macy's, but entered into an agreement with JCP anyway. Macy's recently settled with Martha Stewart Enterprises, but its lawsuit against JCP continues. See, e.g., http://goo.gl/XCCIxT [reuters.com] and http://goo.gl/05532Z [online.wsj.com].

(2) Lawyers have significant incentives to go along with what their clients want. Outside counsel want to protect the client relationship for repeat business — in a law firm, a partner's power and position depend largely on his book of business. Inside counsel want (or want to keep) a seat at the table, to not be marginalized in decision-making.

(3) Lawyers are trained to be imaginative in formulating arguments why the client's position is correct. We're also professionally socialized to allow the client, not ourselves, to make the call about what business risks to accept.

The net effect is that if our hypothetical business executive really wanted to do X, even though it's prohibited by the contract, her lawyer might well go along with it. And even if the lawyer objects, the business executive might proceed anyway.

That being the case, a bit of emphasis in the contractual prohibition against doing X might help.

Force majeure

The Supreme Court of North Dakota provided a useful recap of the (U.S.) law concerning force majeure:

… Black's Law Dictionary defines a force majeure clause as "[a] contractual provision allocating the risk of loss if performance becomes impossible or impracticable, esp[ecially] as a result of an event or effect that the parties could not have anticipated or controlled." Black's Law Dictionary 718 (9th ed. 2009).

According to 30 Williston on Contracts § 77.31, at 364 (4th ed. 2004), a force majeure clause is equivalent to an affirmative defense. "What types of events constitute force majeure depend on the specific language included in the clause itself." Id.

"[N]ot every force majeure event need be beyond the parties' reasonable control to still qualify as an excuse." Id. at 367.

"A party relying on a force majeure clause to excuse performance bears the burden of proving that the event was beyond its control and without its fault or negligence." Id. at 365.

[A] force majeure clause relieves one of liability only where nonperformance is due to causes beyond the control of a person who is performing under a contract. An express force majeure clause in a contract must be accompanied by proof that the failure to perform was proximately caused by a contingency and that, in spite of skill, diligence, and good faith on the promisor's part, performance remains impossible or unreasonably expensive. Id. at 366.

Entzel v. Moritz Sport & Marine 2014 N.D. 12 (extra paragraphing added, alteration marks by the court).

Are force-majeure clauses too lenient?

One commentator has questioned the appropriateness of force majeure clauses; in his view, the risks of doing business that are generally considered "force majeure" (weather, loss of electrical power, etc.) are well-enough understood that contractors should anticipate and provide for them. [XXX LOOK THIS UP]

Laundry list of force majeure events

The list below was harvested from various contracts:

  • Act of a public enemy
  • Act of any government or regulatory body, whether civil or military, domestic or foreign
  • Act of war, whether declared or undeclared, including for example civil war
  • Act or omission of the other party
  • Act or threat of terrorism
  • Blockade
  • Boycott
  • Civil disturbance
  • Confiscation by a governmental authority not resulting from violation of law by the Invoking Party
  • Court order
  • Earthquake
  • [Economy:] A change to economic conditions generally – see generally Kevin Jacobs and Benjamin Sweet, 'Force Majeure' In the Wake of the Financial Crisis, Corp. Counsel, Jan. 16, 2014
  • Electrical-power outage, if so indicated in this Agreement
  • Embargo imposed by a governmental authority
  • Epidemic
  • Explosion
  • Fire
  • Flood
  • Hurricane
  • Insurrection
  • Internet outage, if so indicated in this Agreement
  • 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

Whether

Forum-selection clauses

Relevant to the Forum Selection clause

U.S. courts routinely enforce forum-selection clauses, at least absent circumstances such as unconscionability or an adverse effect on the public interest. In Atlantic Marine Construction (2013), the Supreme Court noted, in a unanimous opinion, that:

[A] forum-selection clause [calling for disputes to be litigated in a particular U.S. federal court] may be enforced by a motion to transfer …. When a defendant files such a motion, … a district court should transfer the case unless extraordinary circumstances unrelated to the case clearly disfavor a transfer.

Atlantic Marine Construction Co., Inc. v. United States District Court for the Western District of Texas, No. 12-929, slip op. at 1 (U.S. Dec. 3, 2013).

Forum selection in state courts

In the U.S., state courts likewise generally honor forum-selection provisions "unless the party challenging enforcement establishes that such provisions are unfair or unreasonable, or are affected by fraud or unequal bargaining power." Paul Business Systems, Inc. v. Canon U.S.A., Inc., 97 S.E.2d 804, 807-08 (Va. 1990) (affirming dismissal of complaint) (emphasis added, extensive citations and internal quotation marks omitted).

Public-policy concerns and forum-selection clauses

[NEED a SENTENCE OR TWO ABOUT S. CT.'S ATLANTIC MARINE CASE] Courts will sometimes refuse to honor a contract's forum-selection clause if it offends a strong public policy of the forum location. For example:

Doe 1 v. AOL, LLC, 552 F.3d 1077, 1084 (9th Cir. 2009): A group of users of the America OnLine (AOL) service sued AOL in California and sought class-action status. The AOL user agreement required all disputes to be litigated in Virginia. Citing the forum-selection clause, a federal district court in California dismissed the case but said it could be re-filed in Virginia state courts as required by the user agreement.

The federal appeals court disagreed. It held that California had a strong public policy favoring class-action relief, and noted that such relief was not available in Virginia state courts. Therefore, said the appeals court, "the forum selection clause in the instant member agreement is unenforceable as to California resident plaintiffs bringing class action claims under California consumer law."

In re AutoNation, Inc., 228 S.W.3d 663 (Tex. 2007): This Texas case had a very different outcome: A Florida-based car dealer filed suit, in Florida, against a former employee who lived in Texas and had worked for the car dealer there. The former employee's employment agreement contained a choice-of-law clause calling for Florida law to apply, together with a forum-selection clause requiring any litigation to take place in Florida.

Before learning of the Florida action, the former employee sued the car dealer in Texas, seeking a declaratory judgment that the non-competition covenant of the employment agreement was unenforceable under prior Texas supreme court precedent. Granting a writ of mandamus, the Texas supreme court ruled that while it was not questioning the validity of its prior precedent, it would still enforce the "freely negotiated" [sic] forum-selection clause to allow the first-filed suit in Florida to proceed.

(Thanks to my then-student Glen Tedham for alerting me to this case.)

For additional discussion and case citations, see generally Paulo B. McKeeby, Solving the Multi-State Non-Compete Puzzle Through Choice of Law and Venue (2012).

QUESTION: On the AutoNation facts, what are the odds that the Florida court would have applied Texas law, given that the contract included a Florida choice-of-law clause?

A Massachusetts forum might be dangerous for defendants

If a contract selects Massachusetts as the forum state for litigating disputes, the defendant might find that its bank account and other assets have been "attached" even before trial if the plaintiff can show a likelihood of success on the merits. See Shep Davidson, When an Out-of-State Company Can Be Sued in Massachusetts and Why You Should Care (2013).

Forum selection – for which disputes, exactly?

It might very well make a difference whether a choice-of-law clause said that the specified law would govern: • the interpretation and enforcement of the contract; or • all disputes arising out of the contract; or • all disputes arising out of or relating to the contract.

Consider a software vendor entering into a license agreement with a customer.

  • The vendor might be willing to agree to litigate actions arising out of the license agreement in the customer's home jurisdiction.
  • On the other hand, the vendor might not want to agree up front to litigate all possible related disputes in the customer's home jurisdiction.

For example, suppose that the customer were to help a competitor of the vendor to steal the vendor's trade secrets. In that situation, the vendor might want to be free to sue both the competitor and the customer in the vendor's own home jurisdiction; it would not want to engage in "satellite" litigation over whether the suit was required to be brought in the customer's home court.

For that reason, from the vendor's perspective it might make sense to limit the scope of the forum-selection clause.

Here are a few examples from actual cases:

Benchmark Electronics, Inc. v. JM Huber Corp., 343 F.3d 719, 726 (5th Cir. 2003): Benchmark bought the stock of a manufacturing company from Huber. The stock purchase agreement provided that the agreement would "be governed by, and construed in accordance with, the internal laws of the State of New York…."

Benchmark later sued the seller for fraud; negligent misrepresentation; and breach of contract. The district court, looking to New York law, granted summary judgment dismissing all of Benchmark's claims, including its fraud claims concerning extra-contractual representations allegedly made by Huber. (See also the discussion of reliance disclaimers at the XXX clause.)

The Fifth Circuit reversed and remanded. Noting that the choice of law would be "[p]ivotal to the merits," the appellate court began with the premise that, for a federal court sitting in diversity, the choice-of-law rules are those of the forum state, in that case Texas.

The appellate court reasoned that under Texas's choice-of-law rules, the agreement's narrowly-phrased choice of law clause did not apply to Benchmark's extra-contractual claims of fraud and misrepresentation. With the contractual choice of law out of the picture, the application of Texas's choice-of-law rules to the facts of the case required judging the extra-contractual claims under the substantive law of Texas, not New York. Under Texas's substantive law, Benchmark's fraud claim could go forward as to representations expressly made in the body of the contract.

Narayan v. EGL Inc., 616 F.3d 895, 898-99 (9th Cir. 2010): A group of California-based freight delivery drivers sued the Texas-based shipping company for which they worked. The drivers were putatively independent contractors, but they claimed that the company had violated certain California statutory provisions governing the wages and working conditions of employees.

A federal district court granted summary judgment in favor of the company. The court held that the contract's Texas choice-of-law clause applied, and that under Texas law, the drivers were indeed independent contractors, who therefore were not entitled to the benefit of the California statutory provisions.

The Ninth Circuit reversed and remanded the case for trial. The appellate court noted that when a federal court exercises its diversity jurisdiction, it applies the law of the state in which the court sits, which in that case was California. Under California law, when a contract includes a choice-of-law clause, a court is to determine the scope (or breadth) of the clause by referring to the law specified in the clause – which in that case was that of Texas. Under that (Texas) law, if the choice-of-law clause narrowly specifies only the law under which the agreement is to be "interpreted and enforced," then the specified law does not apply to other, non-contractual disputes between the parties. The drivers' claim against the company arose from a California statute, not from the contract; that claim was therefore governed by California law and not by the Texas law specified in the contract.

An exclusive-forum clause might backfire on the drafter

Relevant to the Forum Selection is Exclusive clause

Asking for – or insisting on – a forum-selection clause might fall into the category of "be careful what you wish for"; the courts in the forum state might decide matters differently than what you expected. A Massachusetts company learned a painful lesson in that regard in Taylor v. Eastern Connection Operating, Inc., discussed in note #GovLawBackfireFN. [FIX THIS CITE – NO LONGER a FOOTNOTE]

And there's another, more-immediate danger of backfire: Suppose that your draft contract contains an exclusive-jurisdiction forum clause that requires all litigation to be conducted in your home-court jurisdiction. In negotiating the contract, the other side might want to flip that clause: We're fine with an exclusive-jurisdiction clause, but it has to be our home court, not yours. If the other side has more bargaining power, your insistence on a "tough" first draft might have created problems for you in the end.

An exclusive-forum clause might be tactically disadvantageous

Relevant to the Forum Selection is Exclusive clause

Imagine that years or days after signing the contract, your client decides to seek a temporary restraining order or preliminary injunction against the other side – for example, because the client things that the other side is violating a confidentiality clause. In that case, the client might well be better off suing in the other side's home jurisdiction, because:

  • it's likely that you'll be able to complete the service of process on the other side more quickly in its own home court;
  • the other side's documents and witnesses are more likely to be within the immediate subponea power of the court there;
  • if you're successful in getting injunctive relief, you'll be able to serve the relief on the other side more readily if the relief is issued by a court in the other side's home jurisdiction; and
  • if the other side violates the injunction, you'll probably be able to haul them back more quickly into court for contempt proceedings.

Good Faith & Fair Dealing – Additional Commentary

The Uniform Commercial Code

Article 1 of the Uniform Commercial Code imposes an implied covenant of good faith on contracts that are subject to the UCC:

Every contract or duty within this title imposes an obligation of good faith in its

  • performance or
  • enforcement.

See, e.g., Tex. Bus. & Com. Code § 1.304 (bullets added).

UCC section 2-103(1)(b) contains a similar definition for merchants (but that definition is not included in the Texas version):

"Good faith" in the case of a merchant means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.

UCC article 1 defines good faith as requiring not merely honesty in fact, but also commercially-reasoanble behavior:

"Good faith," except as otherwise provided in Chapter 5, means

  • honesty in fact and
  • the observance of reasonable commercial standards of fair dealing.

See, e.g., Tex. Bus. & Com. Code § 1.201(20) (bullets added).

If the UCC applies, the parties might not be able to "write around" the good-faith requirements:

The obligations of good faith, diligence, reasonableness, and care prescribed by this title may not be disclaimed by agreement.

The parties, by agreement, may determine the standards by which the performance of those obligations is to be measured if those standards are not manifestly unreasonable. …

See, e.g., Tex. Bus. & Com. Code § 1.302(b) (emphasis and extra paragraphing added).

The Restatement (Second) of Contracts: Good faith and fair dealing

Section 205 of the Restatement (Second) of Contracts, added in 1979, requires not only good faith but also "fair dealing" (but not all jurisdictions follow the Restatement on this point):

Duty of Good Faith and Fair Dealing. Every contract imposes upon each party a duty of good faith and fair dealing in its performance and execution.

Texas non-UCC law: No general implied covenant of good faith, but …

A 2005 Texas court of appeals opinion summarized that state's law rejecting an implied duty of good faith and fair dealing:

The Texas Supreme Court

  • has declined to impose an implied duty of good faith and fair dealing in every contract,
  • though it has recognized that such a duty may arise as a result of "a special relationship between the parties governed or created by a contract."

Such "special relationships" have been found to arise where contractual relationships are marked by shared trust or an imbalance of bargaining power.

When a special relationship between parties gives rise to independent duties, such as a duty of good faith and fair dealing, those duties are enforceable as torts.

However, absent a "special relationship," any duty to act in good faith is contractual in nature and its breach does not amount to an independent tort.

Texas courts have found no special relationship between a mortgagor and a mortgagee, or between a creditor and a guarantor, that would impose an independent common law duty of good faith and fair dealing.

UMLIC VP LLC v. T & M Sales & Envt'l Sys., Inc., 176 SW 3d 595 (Tex. App. – Corpus Christi-Edinburg 2005) (reversing award of tort damages, but affirming contract damages, for wrongful foreclosure) (footnotes and citations omitted, paragraphing edited, bullets added); see also, e.g., Motten v. Chase Home Finance & Wilmington Trust Co., 831 F.Supp.2d 988, 1004 (S.D. Tex. 2011) (granting motion to dismiss claim for wrongful foreclosure).

A commenter has suggested that the Texas supreme court might change its mind about a general implied duty of good faith and fair dealing. See Mark A. Senn, Implied Covenants: How a Court Will Help You Draft Your Lease (Years After You've Done It) (Univ. of Texas CLE paper 2005).

UK law: No implied covenant of good faith – but might that be changing soon?

For a readable discussion, see Mark Anderson, As you were! Duty of good faith not implied into English law contract (2013).

Governing Law

Relevant to the Governing Law clause

In the U.S., courts typically enforce choice-of-law provisions in a contract. There can be significant exceptions to that general rule, though.

Public-policy exceptions

A court might not give effect to a governing-law clause in a contract if doing so would lead to a result that contravened a fundamental public policy of the law of the jurisdiction in which the court sits. Here are some examples.

Pathway Medical Technologies, Inc. v. Nelson, No. CV11-0857 PHX DGC (D. Ariz. Sept. 30, 2011): A medical-device sales representative quit his job in Arizona and started working for a direct competitor of his former company. So, the former company filed a lawsuit in federal court in Arizona. The former company wanted to enforce a non-competition covenant in the sale rep's employment agreement; it asked the court for an immediate temporary restraining order (TRO) to prohibit the sales rep from working for the competitor.

The Arizona federal court refused to grant the requested restraining order. The court recognized that the employment agreement's governing-law clause specified that the law of Washington state would apply. But, said the Arizona court, in this area the laws of Arizona gave more weight to employees' right to earn a living than did Washington law, and this was an area of fundamental public policy for Arizona law. Consequently, the court refused to give effect to the agreement's choice of Washington law; the court also held that under Arizona law, the sales rep's non-competition covenant was unenforceable.

Narayan v. EGL Inc., 616 F.3d 895 (9th Cir. 2010): A California truck driver sued the Texas-based trucking company for which he worked for violating California employment law. The driver's contract with the company specified that Texas law would apply and said that the driver was an independent contractor, not an employee.

A California federal court granted summary judgment in favor of the employer. The court reasoned that Texas law governed, as required by the contract. Applying Texas law to the facts of the case, the court concluded that the driver was indeed an independent contractor and therefore could not sue the company for violating California employment law.

The federal appeals court, though, reversed. It held that California courts would not give effect to the contract's choice of Texas law, but instead would apply California law. Under California law, said the appeals court, the driver was really an employee, not an independent contractor, and therefore could properly sue the trucking company for violating California employment law.

A governing-law clause might backfire

Specifying the law that you want to govern your contract, or your contractual relationship, might lead to unexpected results. For example:

Taylor v. Eastern Connection Operating, Inc., No. SJC-11222 (Mass. May 17, 2013): This was an overtime case; a group of couriers, working in New York as couriers for a Massachusetts-based company, sued the company in Massachusetts. These New-York based couriers claimed to be entitled to the protection of Massachusetts statutes governing independent contractors, wages, and overtime.

Normally, people who file employment-type lawsuits against their companies tend to do so in their own home jurisdictions. That's understandable; the home-court advantage is not to be sneezed at – and it's also why companies like for their contracts to specify their home court for any lawsuits.

Well, that's just what had happened here: The courier company had used a standard form for its contracts with its New York courier personnel. The contract form stated that Massachusetts law would apply and that all disputes would be litigated in Massachusetts.

When confronted by an actual employee lawsuit in the forum it had specified, the company moved to dismiss the case — and the Massachusetts trial court granted the motion — on the theory that the employment laws of Massachusetts did not apply to people who worked in New York.

The Massachusetts supreme court disagreed; it reversed the trial court's decision, giving an interim win to the New York-based courier personnel. The supreme court held that it would not be unfair to enforce the courier company's own forum-selection and governing-law clauses against the company. Moreover, said the supreme court, enforcement of those clauses would not contravene a fundamental policy of the state of New York, where the couriers worked.

The supreme court said that the trial court would need to conduct an evidentiary hearing to determine whether, on the facts of the case, the forum-selection and governing-law clauses should be enforced. The court remanded the case to the trial court for further proceedings.

Exclusion of UCITA

The Uniform Computer Information Transactions Act is a controversial proposed uniform law that so far has been enacted only in Maryland and Virginia. See generally the Wikipedia article on UCITA.

Section 104 of UCITA allows parties to a contract to "opt out" of the Act's applicability. Going even farther, some states have enacted so-called "bomb-shelter" legislation voiding any contractual choice of law that would result in UCITA being applied. According to materials published by an advocacy group calling itself AFFECT, Americans for Fair Electronic Commerce Transactions, such legislation has been enacted in Iowa, North Carolina, Vermont, and West Virginia.

Exclusion of ALI Software Contract Principles

Relevant to the Governing Law – Exclusion of ALI Software Contract Principles clause

The American Law Institute's Principles of the Law of Software Contracts from 2009 are disliked by many software vendors — for good reason, in my view. See, for example:

As one problematic example, the Principles proclaim, out of thin air, a warranty — which cannot be disclaimed — that the software contains no known material hidden defects. Many vendors would regard this as ludicrous: First, the standard of materiality is vague, which would invite expensive, discovery-intensive litigation; second, in most cases, the cost of testing software, and of documenting the test results, to achieve that vague standard would make it inordinately expensive.

The Reporter for the project makes the dubious claim that this non-disclaimable warranty merely restates existing law.

See Robert A. Hillman, American Law Institute Approves the Principles of the Law of Software Contracts (June 2, 2009) (written by one of the two Reporters for the Principles).

To many practitioners, though, this warranty seems more like a stimulus package for underemployed litigation counsel.

The actual text of the Principles — which the drafters clearly intended to be adopted by courts as law — is available only by buying it from ALI for $87, or as a $40 download of the proposed final draft.

At this writing, I've seen no indication that anyone pays even the slightest bit of attention to the Principles: So far as I've been able to tell, the Principles have not been adopted by any state legislature, nor has any court has followed or even cited them. So in all likelihood, vendors really don't have any reason for concern.

Hold-harmless clauses

The term "hold harmless" is very often the second part of the doublet indemnify and hold harmless. Legal lexicographer Bryan Garner marshals an impressive body of evidence that the two should be treated as synonyms, asserting that the former is Latinate in origin, while the latter is the English counterpart. See Bryan A. Garner, Garner's Dictionary of Legal Usage, at 443-45 (2011), excerpt available at http://goo.gl/LdVxN.

(This, even though courts ordinarily construe contracts so as to give effect to each provision.)

In the Majkowski case (2006), Delaware's then-vice-chancellor Leo Strine observed:

As a result of its traditional usage, the phrase "indemnify and hold harmless" just naturally rolls off the tongue (and out of the word processors) of American commercial lawyers. The two terms almost always go together.

Indeed, modern authorities confirm that "hold harmless" has little, if any, different meaning than the word "indemnify." Black's Law Dictionary in fact defines "hold harmless" by using the word "indemnify." It defines "hold harmless agreement" as a "contract in which one party agrees to indemnify the other." In defining "hold harmless clause," it simply says "[s]ee INDEMNITY CLAUSE." ) [Footnotes omitted]

Majkowski v. American Imaging Management Services, LLC, 913 A.2d 572, 588-89 (Del. Ch. 2006) (Strine, V.C.) (holding that indemnity- and hold-harmless provision did not entitle a protected person to advancement of expenses in a lawsuit against him by the indemnifying party).

Still, the conceptual distinction between hold harmless and indemnify is worth pondering.

On the one hand, the term indemnify is more-or-less universally understood as a commitment by the promisor to reimburse the protected person for stated losses or liabilities.

On the other hand, the term hold harmless has been treated by some courts as amounting to an advance waiver, release, or exculpation, of stated claims against the person held harmless. For example:

• In its 2012 Morrison opinion, the Idaho supreme court consistently referred to an advance-release form, and to similar language in other contracts, as a "hold harmless agreement." Morrison v. Northwest Nazarene University, 273 P.3d 1253, passim (Id. 2012) (affirming summary judgment dismissing injured employee's claim against university).

• A California court of appeals, after reviewing (and in some cases distinguishing) California case law, mused: "Are the words 'indemnify' and 'hold harmless' synonymous? No. One is offensive and the other is defensive — even though both contemplate third-party liability situations. 'Indemnify' is an offensive right — a sword allowing an indemnitee to seek indemnification. 'Hold harmless' is defensive: The right not to be bothered by the other party itself seeking indemnification." Queen Villas Homeowners Ass'n v. TCB Prop. Mgmt., No. G037019, 149 Cal. App.4th 1, 56 Cal. Rptr.3d 528, 534 (2007) (reversing summary judgment in favor of defendant; emphasis in original).

The Queens Villa pronouncement was dismissed as a "fabricated" distinction by Ken Adams, author of A Manual on Style for Contract Drafting. See Kenneth A. Adams, Revisiting "Indemnify," July 27, 2012. The court's reasoning was mocked by Bryan Garner as "just explicit judicial nonsense[.]" Garner at 445.

Prudent contract drafters do well to live by the motto: When in doubt, define. The brute fact is that many lawyers and judges do equate hold harmless with indemnify. Consequently, if parties negotiating a contract believe that the two terms ought to have different meanings, they should seriously consider drafting their contract language accordingly, so as to make their intentions clear to future readers.

With that in mind, the definition of hold harmless in the text follows what seems to be the conventional approach: It peremptorily declares hold harmless and indemnify to be synonymous. That approach also fits in with the fact that the hold-harmless language of UCC § 2-312(3), concerning infringement warranties, appears to have been treated by courts as simply an indemnification obligation. See generally the cases cited in Charlene M. Morrow, Indemnity Exclusions for Goods Made According to SpeCiFication or Industry StandArd, parts I-B and I-G (2009).

Are indemnify and hold harmless synonyms? Opinions vary

The term "hold harmless" is very often the second part of the doublet indemnify and hold harmless. Bryan Garner marshals an impressive body of evidence that the two are synonyms, asserting that the former is Latinate in origin, while the latter is the English counterpart. See Bryan A. Garner, Garner's Dictionary of Legal Usage, at 443-45 (2011).

There is some authority, however, indicating that hold harmless means that the obligated party will not seek to hold the protected person liable (whether by indemnity or otherwise) for any foreseeable loss, liability, or expense arising from the stated circumstance. For example, a distinction between hold harmless and indemnify — a distinction mocked by Garner as "explicit judicial nonsense" — was articulated by a California appeals court, after reviewing (and in some cases distinguishing) California case law:

Are the words "indemnify'"and"'hold harmless" synonymous? No. One is offensive and the other is defensive — even though both contemplate third-party liability situations.

"Indemnify" is an offensive right — a sword allowing an indemnitee to seek indemnification.

"Hold harmless" is defensive: The right not to be bothered by the other party itself seeking indemnification.

Queen Villas Homeowners Ass'n v. TCB Prop. Mgmt., No. G037019, Slip. op. at 9-10 (Cal. App. Mar. 29, 2007) (reversing summary judgment in favor of defendant; emphasis in original, extra paragraphing added).

Indemnities – Additional Commentary

Indemnity theory in contract drafting

An indemnity obligation is in essence a promise by the obligated party to make another party whole if certain events come to pass. Some of the basic points to note are the following:

  • It's supposedly simpler and easier to enforce an indemnity obligation as a debt, than it is to get a damage award for breach of a covenant. In part, this is because an indemnity obligation might extend even to remote losses that come within the scope of the indemnity, whereas some losses from a breach of contract might be too remote to be compensable.
  • If you agree to indemnify another party against losses from a stated event, the other party might not have a duty to mitigate those losses (in contrast to the general rule in the U.S. that non-breaching parties must mitigate their damages).

Further reading:

Indemnities in other jurisdictions

Indennity obligations might be unenforceable under Russian law. See Practical Law Company, Representations, warranties and indemnities: a Russian and English law comparison (undated)

Limitations of liability for indemnity

Unless applicable law has something weird in it, there shouldn't be any reason that contracting parties can't agree to limitations of liability for an indemnification obligation. Indemnities are essentially insurance policies, and insurance companies routinely impose policy limits and policy exclusions.

Intellectual-property indemnities

I think suppliers should always consider pushing to cap their IP indemnity obligations (as distinct from defense obligations, which can often legitimately be left uncapped).

Looking at it just from the patent side, two aspects of U.S. law are salient here:

  1. a product can infringe a patent without the supplier's even knowing it; and
  2. a patent owner can seek damages for the customer's use of an infringing product, not just for the supplier's sale of the product.

Consequently, a patent owner could seek use-based damages that far, far exceed the price the customer paid to the supplier for the infringing product.

(With this in mind, a good patent-drafter can often craft specific claim language to increase the patent owner's leverage.)

This means in turn that when a customer asks a supplier for an uncapped IP indemnity, it's essentially asking the supplier to provide an insurance policy — with no policy limits — against the infringement risk specific to the customer's use of the supplier's product, which can be very difficult to underwrite. From the supplier's perspective, that's a dangerous commitment to make, unless of course the price is right.

Customer negotiators often toss out the bromide that the supplier ought to be willing to stand behind its product. The supplier's proper response is that the agreed pricing includes a modest insurance policy against infringement claims, and all insurance necessarily has policy limits; if the customer wants a higher policy limit, then the pricing needs to be revisited, because an extra "premium" payment will be required.

(I'm not addressing carve-outs here, such as no indemnity for combination use not described in the user documentation or for customer modifications to the product where the infringement claim isn't made against the product as delivered by the supplier.)

Examples: Honeywell and GE indemnity clauses

From a Honeywell purchase-order form:

24. General Indemnification

Supplier will, at its expense, defend, indemnify and hold harmless Honeywell and

  • its subsidiaries, affiliates and agents,
  • and their respective officers, directors, shareholders, and employees,
  • and Honeywell's customers [!] (collectively "Indemnitees")

from and against any and all[:]

  • loss, cost, expense, damage, claim, demand or liability,
  • including reasonable attorney and professional fees and costs
  • and the cost of settlement, compromise, judgment or verdict incurred by or demanded of [!] an Indemnitee

arising out of, resulting from or occurring in connection with Supplier's[:]

  • negligence,
  • willful misconduct, or
  • breach of the terms of this Purchase Order.

Prior to service or filing of any significant pleading, motion, brief, discovery response or other document on behalf of Honeywell, Supplier will provide such documents to Honeywell for review and approval, which will not be unreasonably withheld.

In no event will Supplier enter into any settlement without Honeywell's prior written consent, which will not be unreasonably withheld.

From an AT&T-Toastmasters equipment lease agreement:

16. GENERAL INDEMNITY. Lessee shall indemnify, hold harmless, and, if so requested by Lessor, defend Lessor against all claims (Claims) directly or indirectly arising out of or connected with the Equipment or any Fundamental Agreement.

Claims refers to all losses, liabilities, damages, penalties, expenses (including legal fees and costs), claims, actions, and suits,

whether based on a theory of strict liability of Lessor or otherwise,

and includes, but is not limited to, matters regarding:

(a) the selection, manufacture, purchase, acceptance, rejection, ownership, delivery, lease, possession, maintenance, use, condition, return or operation of the Equipment;

(b) any latent defects or other defects in any Equipment, whether or not discoverable by Lessor or by Lessee;

(c) any patent, trademark, or copyright infringement; and

(d) the condition of any Equipment arising or existing during Lessee's use.

Texas's express negligence rule

In Texas as well as some other states, a contractual obligation to indemnify someone for the consequences of his own negligence must satisfy the "express negligence rule." The Supreme Court of Texas explained the policy rationale underlying this rule:

[T]he scriveners of indemnity agreements have devised novel ways of writing provisions which fail to expressly state the true intent of those provisions. The intent of the scriveners is to indemnify the indemnitee for its negligence, yet be just ambiguous enough to conceal that intent from the indemnitor. The result has been a plethora of law suits to construe those ambiguous contracts.

We hold the better policy is to cut through the ambiguity of those provisions and adopt the express negligence doctrine. The express negligence doctrine provides that parties seeking to indemnify the indemnitee from the consequences of its own negligence must express that intent in specific terms.

Under the doctrine of express negligence, the intent of the parties must be specifically stated within the four corners of the contract. We now reject the clear and unequivocal test in favor of the express negligence doctrine.

Ethyl Corp. v. Daniel Const. Co., 725 S.W.2d 705, 707-08 (Tex. 1987) (affirming ruling by court of appeals that reversed district court's grant of indemnity to owner) (emphasis and extra paragraphing added).

NOTE: The supreme court later held that such an indemnity obligation must also be "conspicuous."

Consider limiting indemnity liability in some manner

A party being asked to commit to an indemnity obligation might be more willing to agree if:

  • its liability were capped at, say:
    • a stated dollar amount, or
    • a stated multiple of the sums paid to it, or
    • the limits of its insurance coverage (if insurance were available); or
  • the indemnity did not kick in until the aggregate of all indemnifiable claims exceeded a stated amount.

Particular indemnity obligations

REAL-ESTATE COMMISSIONS: In

Maryland - assignees of buyer's interest were entitled to refund of deposit after deal fell apart, BUT the assignees' claim would be offset by the amount due to the seller for the buyer's obligation to indemnify the seller against claims for real estate commissions. Pines Plaza Limited Partnership v. Berkley Trace, LLC, No. 30 (May 21, 2013).

Statutory restrictions

Some states have enacted laws that make void any contractual provision requiring "Alice" to indemnify "Bob" from the consequences of Alice's own negligence.

Minnesota, for example – building and construction contracts: https://www.revisor.mn.gov/statutes/?id=337

Optional reading   CMT

Insurance

A provider's CGL policy is not a performance bond

When a customer enters into a contract for services — for example, a contract to build a building, a Web site, or a computer program — the customer will often want the provider to commit to carrying insurance. But what kind of insurance?

A drafter representing such a customer should keep in mind that a commercial general liability (CGL) policy will not necessarily cover poor workmanship by the insured service provider. (For that, a performance bond might be necessary.) See generally, e.g., Carl A. Salisbury and Edmund M. Kneisel, Alabama Supreme Court Weighs In Again On Faulty Workmanship As an "Occurrence" (2013) (contrasting majority and minority rules); Matthew Horowitz, CGL Builder's Risk Monograph at 28-31 (ABA 2004).

Limitations of liability

Limitation-of-liability provisions usually rank at or near the top of the IACCM's annual surveys of the most-frequently-negotiated contract terms. Such limitations are enforceable — within limits — under common law and, for sales of goods, under Article 2 of the Uniform Commercial Code.

Example: Honeywell terms of sale

The following excerpts from a Honeywell terms-of-sale form are fairly typical of vendors' attempts to limit their liability (with extra paragraphing added for readability):

11.6 … Repair, Replacement, or credit of the original purchase price and standard labor and handling costs are the exclusive remedies under this Limited Warranty.

All Products repaired or replaced are warranted for the unexpired portion of the original Warranty Period.

In no event shall Honeywell's liability exceed the aggregate sum equal to twice the amount actually paid to Honeywell for Products subject to Buyer's warranty claims.

13. LIMITATION OF LIABILITY

In no event will Honeywell be liable for any incidental damages, consequential damages, special damages, punitive damages, statutory damages, indirect damages, loss of profits, loss of revenues, loss of use, or damage to brand name, even if informed of the possibility of such damages.

Honeywell's liability for damages arising out of or related to this agreement shall in no case exceed in the aggregate a sum equal to twice the amount actually paid to Honeywell for the products from which the claim arose or in the case of services the amount actually paid to honeywell.

Further, if buyer requires Honeywell to use a particular supplier or suppliers, then Honeywell shall have no liability for the supplier(s) performance, nor for any damages caused directly or indirectly by Honeywell's product or services to the extent resulting from incorporation of such supplier(s) product or services.

To the extent permitted by applicable law, these limitations and exclusions will apply regardless of whether liability arises from breach of contract, warranty, tort (including but not limited to negligence), by operation of law, or otherwise.

Nothing herein, however, is intended to disclaim Honeywell's liability for personal injury or death caused by defective products to the extent such liability is mandated by applicable law.

Example: GE terms of sale

Another example is found in General Electric's ES-104 document setting forth GE's standard terms of sale (with extra paragraphing added):

15. Limitations of Liability

15.1 The total liability of Seller for all claims of any kind arising from or related to the formation, performance or breach of this Contract, or any Products or Services, shall not exceed the [sic]

(i) Contract Price, or

(ii) if Buyer places multiple order(s) under the Contract, the price of each particular order for all claims arising from or related to that order and ten thousand US dollars (US $10,000) for all claims not part of any particular order.

15.2 Seller shall not be liable for loss of profit or revenues, loss of use of equipment or systems, interruption of business, cost of replacement power, cost of capital, downtime costs, increased operating costs, any special, consequential, incidental, indirect, or punitive damages, or claims of Buyer's customers for any of the foregoing types of damages.

15.3 All Seller liability shall end upon expiration of the applicable warranty period, provided that Buyer may continue to enforce a claim for which it has given notice prior to that date by commencing an action or arbitration, as applicable under this Contract, before expiration of any statute of limitations or other legal time limitation but in no event later than one year after expiration of such warranty period.

15.4 Seller shall not be liable for advice or assistance that is not required for the work scope under this Contract.

15.5 If Buyer is supplying Products or Services to a third party, or using Products or Services at a facility owned by a third party, Buyer shall either

(i) indemnify and defend Seller from and against any and all claims by, and liability to, any such third party in excess of the limitations set forth in this Article 15, or

(ii) require that the third party agree, for the benefit of and enforceable by Seller, to be bound by all the limitations included in this Article 15.

15.6 For purposes of this Article 15, the term "Seller" means Seller, its affiliates, subcontractors and suppliers of any tier, and their respective employees.

The limitations in this Article 15 shall apply regardless of whether a claim is based in contract, warranty, indemnity, tort/extra­contract­u­al liability (including negligence), strict liability or otherwise, and shall prevail over any conflicting terms, except to the extent that such terms further restrict Seller's liability.

Sales of goods — Uniform Commercial Code Article 2

Where sales of goods are involved, UCC § 2-719 expressly allows the parties to limit their liability by agreement — but with some significant constraints (I've added extra paragraphing and bullets below):

(1) Subject to the provisions of subsections (2) and (3) of this section and of the preceding section on liquidation and limitation of damages,

(a) the agreement may provide for remedies in addition to or in substitution for those provided in this Article

and may limit or alter the measure of damages recoverable under this Article, as by limiting the buyer's remedies

  • to return of the goods and repayment of the price[,] or
  • to repair and replacement of non-conforming goods or parts; and

(b) resort to a remedy as provided is optional unless the remedy is expressly agreed to be exclusive, in which case it is the sole remedy.

(2) Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this Act.

(3) Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable.

Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not.

A lost-profits exclusion might lead to confusion

Some consequential-damages provisions state that "lost profits" are excluded. At least on a cursory reading, this could disadvantage the party claiming damages, because that could wipe out the ability to claim, for ex­ample, the profit that a vendor would have made from the transaction in question.

A court might well rule, though, that "lost profits" means lost profits from collateral transactions, not from the transaction that is the subject of the contract. The Second Circuit did this in a 2007 case: "In characterizing AEP's claim as one for consequential damages, the district court confused the benefit of the bargain with speculative profits on collateral transactions." Tractebel Energy Marketing, Inc. v. AEP Power Marketing, Inc., 487 F.3d 89, 109-10, Part IV.A (2d Cir. 2007) (vacating district-court judgment in part).

Similarly, in 2014 the First Circuit ruled that the lost-profits damages claimed by the plaintiff were consequential in nature, not direct, and because the contract excluded consequential damages, the plaintiff was not entitled to recover its lost profits. Atlantech Inc. v. American Panel Corp., No. 13-1437, slip op. at 12-13 (1st Cir. Feb. 20, 2014) (citing cases). As the court explained:

When a general contractor sues for its remaining contract price less saved expenses, the damages do not depend on the future action of any third party; they are determined by the terms of the contract and the circumstances of the breach. Thus, they are "always provable" in the sense that they do not require evidence of what some other party might have done.

[In contrast, t]he damages suffered by the doctor with a malfunctioning MRI machine depend on how many patients one might have seen if the machine were working. The doctor very well might be able to recover such damages by showing evidence of how many patients were normally seen in the past, but they would remain consequential damages.

Other circuits have reached a similar understanding of the distinction between the two types of lost profits ….

Id.

Carefully review what damages are excluded

Contract reviewers are well-advised to pay close attention to the precise nature of damages that would be excluded by a limitation-of-liability clause. In the First Circuit's 2014 Atlantech case, the contract in suit disclaimed the supplier's liability for "cost of replacement goods"; the court affirmed a judgment that the disclaimer was effective to protect the supplier from a damage award for that cost. Atlantech Inc. v. American Panel Corp., No. 13-1437, slip op. at 3, 14-15 (1st Cir. Feb. 20, 2014).

Some states restrict parties' ability to limit liability

[[http://www.pillsburylaw.com/index.cfm?pageid=34&itemid=38157[A 2006 memo]] by the Pillsbury Winthrop law firm (an 83-page PDF) contains a brief, state-by-state summary of laws concerning limitation of liability.

For example, Alaska's supreme court has held that contract clauses purporting to exculpate a party from liability for its own negligence are invalid under the state's anti-indemnity statute, AS 45.45.900. See City of Dillingham v. CH2M Hill Northwest, Inc., 873 P.2d 1271 (Alaska 1994), discussed in Richard F. Paciaroni and Janet M. Serafin, Anti-Indemnity Statutes: a Threat to Limitation of Liability Clauses? (Dec. 1, 2007).

Consider negotiating limitations of liability one-by-one

As noted above, limitation-of-liability provisions are among the most-often-negotiated terms of a contract. This may result from the fact that many limitation provisions are long, generic, one-size-fits-all state­ments; their lack of speci­fi­ci­ty can give a reviewer pause:

Contract drafters can speed up discussions of liability limitations, I've found, by breaking up generic boilerplate language into more-concrete statements of risks that are of particular concern, which the parties can focus on more readily. The example below is adapted from a couple of different large-scale software license agreements I've helped negotiate in recent years; the specific entries have been generalized (because it's a hypothetical example).

For purposes of the following list:

  • the Damages Cap Amount is [$X], and
  • the term "Consequential damages, etc." refers to consequential damages, punitive or special damages, loss of profits, loss of revenue, loss of brand value or reputation, [add any others desired — but quaere what's left].

All damages not listed below: Consequential damages, etc., are: Excluded. Aggregate amount is limited to: Damages Cap Amount.

Personal injury: Consequential damages, etc., are: Not excluded. Aggregate amount is limited to: No limitation.

Tangible damage to property: Consequential damages, etc., are: Excluded. Aggregate amount is limited to: Damages Cap Amount or Provider's insurance coverage, whichever is less. NOTE: Tangible damage to property does not include erasure, corruption, etc., of information stored in tangible media where the media are not otherwise damaged.

Erasure, corruption, etc., of stored information that could have been avoided or mitigated by reasonable back-ups: Consequential damages, etc., are: Excluded. Aggregate amount is limited to: Only that amount that could not have been avoided or mitigated, up to a maximum of the Damages Cap Amount.

Other erasure, corruption, etc., of stored information: Consequential damages, etc., are: Excluded. Aggregate amount is limited to: Damages Cap Amount [or perhaps X dollars].

Lost profits from any of the above: Consequential damages, etc., are: Excluded. Aggregate amount is limited to: Damages Cap Amount [or perhaps X dollars].

Lost revenue from any of the above: Consequential damages, etc., are: Excluded. Aggregate amount is limited to: Damages Cap Amount [or perhaps X dollars].

Indemnity obligations under this Agreement: Consequential damages, etc., are: Excluded. Aggregate amount is limited to: No limitation [or perhaps X dollars].

Infringement of another party's IP rights: Consequential damages, etc., are: Excluded. Aggregate amount is limited to: As determined by applicable copyright law, patent law, etc. [or perhaps X dollars]. NOTE: For the avoidance of doubt, for purposes of this clause the term "IP rights” includes, for example, rights in confidential information. Damages for infringement are deemed direct damages and not consequential, special, etc.

Willful, tortious destruction of property: Consequential damages, etc., are: Not excluded. Aggregate amount is limited to: No limitation. NOTE: Willful, tortious destruction of property includes, for example, intentional and wrongful erasure or corruption of computer programs or -data.

Using this kind of systematic approach, if the parties decided to address additional risks in the contract, they could just add items to the list.

The parties could also add categories to the list: Instead of including a single umbrella category for "Consequential damages, etc.,” they could use separate categories for consequential damages, incidental damages, punitive damages, lost profits, lost revenues, and so on.

HYPOTHETICAL EXAMPLE: Suppose that:

  • a software vendor is negotiating an enterprise license agreement with a new customer for a mature software package.
  • The customer has successfully completed a pilot project, but it hasn't rolled out the software for enterprise-wide production use.
  • Knowing how tricky a production roll-out can sometimes be, the customer is concerned about the vendor's insistence on excluding all ‘consequential' damages, whatever that really means.

The vendor might try offering to waive the consequential-damages exclusion during, say, the customer's first three months of production use of the software, subject to an agreed dollar cap on the vendor's aggregate liability for all damages — which might be a higher dollar amount than at other times, as discussed below. This approach could make the customer more comfortable that the vendor is ‘standing behind its software' during the roll-out phase.

In theory, certainly, the vendor would be exposed to additional liability risk during those first three months. But the business risk might be eminently worth taking: Remember, we're assuming that the software is mature, that is, most of its significant bugs have already been corrected. In that case, the vendor might be willing to take on that additional theoretical risk — which in any case would go away after three months — in order to help close the sale.

Perhaps such a vendor could agree that the damages cap would be, say —

  • 4X for any damages that arise during, say, the first three months of the relationship, or possibly until a stated milestone has been achieved;
  • 3X during the nine months thereafter;
  • 2X thereafter.

In the 4X / 3X / 2X language, X could be defined —

  • as a stated fixed sum;
  • as the amount of the customer's aggregate spend under the contract in the past 12 months, 18 months, etc.;
  • in any other convenient way.

The details in the above example aren't important. The point is that sometimes ‘standard' limitation-of-liability language is too broad to allow the parties to specify what they really need. Negotiators might have more success if they drilled down into the language — perhaps using the list approach discussed elsewhere in these notes.

Protecting against liability for one's own gross negligence

An opinion by the New York Court of Appeals (that state's highest court) reminds drafters that, under the law of New York, a contract can be structured so that an insurance policy will at least partially shield a service provider from liability even for its own negligence or gross negligence. The trick, according to the court, is to draft the contract so that:

  1. the customer agrees to buy insurance to cover any damage or other loss that might result from the service provider's negligence; and
  2. the customer also waives the service provider's liability, agrees to look solely to its insurer for recovery, and waives subrogation, so that the customer's insurance company can't come after the service provider for reimbursement of whatever the insurance company has to pay out for the damage.

That drafting approach was upheld in a case involving Diebold, Inc., an alarm-system company. Diebold provided backup alarm service for its customer, a bank. The bank was burglarized, allegedly because of Diebold's gross negligence in ignoring problems with the alarm system. Diebold's contract with the bank included provisions like those enumerated above: The contract required the bank to buy insurance, and included a waiver of Diebold's liability and a waiver of subrogation. As the court described the provision:

Diebold's contract contained a clause entitled "Property Insurance and Waiver of Subrogation” where Abacus agreed to obtain insurance coverage to cover its losses in the event of a theft. The agreement between Diebold and Abacus provided that Abacus "shall look solely to its insurer for recovery of its loss and hereby waives any and all claims for such loss against Diebold” and that Abacus' insurance policy would contain a clause providing that such waiver would not invalidate the coverage.

Abacus Federal Savings Bank v. ADT Security Services, Inc., No. 33 slip. op. at 4 (N.Y. Mar. 22, 2012) (citations, alteration marks, and internal quotation marks omitted). In that case, the supreme court affirmed most grounds of dismissal of the bank's claim against two alarm-system companies after the burglary (but it reversed the dismissal as to a breach-of-contract claim against one defendant).

The bank — Diebold's customer — claimed that Diebold's alleged gross negligence invalidated the limitation of liability in the alarm-services contract. The court, however, held that while the exculpatory provision could not relieve Diebold for liability for gross negligence, the insurance provision and waiver of subrogation would be enforced:

A distinction must be drawn between contractual provisions which seek to exempt a party from liability and contractual provisions which in effect simply require one of the parties to the contract to provide insurance for all of the parties.

Id., slip op. at 6 (same parenthetical notes as above). The court went on to explain that,

[G]ross negligence, when invoked to pierce an agreed-upon limitation of liability in a commercial contract must smack of intentional wrongdoing. It is conduct that evinces a reckless indifference to the rights of others.

Id., slip op. at 8 (same parenthetical notes as above).

Incidentally, Diebold's co-defendant ADT Security Services did not have a mandatory insurance requirement in its contract, but merely left it up to the bank to decide whether to purchase insurance; nor did the ADT contract include a waiver of liability and of subrogation. The court held that the ADT's limitation of liability provisions could not withstand a claim (if proved) of gross negligence. See id., slip op. at 4, 9 (same parenthetical notes as above).

Comment: a contract drafter wanting to use the Diebold approach might also want to include a choice of law provision that specifies New York law as the governing law for the contract. (Of course, other states' law might be to the same effect.)

Comment: The court's reasoning seems to imply that it didn't matter which party buys the insurance — as long as the amount of the insurance wasn't unreasonable, then it was OK to require the customer (or whoever) to look solely to the insurer for recovery of any loss that might occur.

Comment: In the real world of sales negotiations, a happy medium might be for the contract to provide:

  • that the service provider's liability is limited to X dollars, or to some formula such as X times the amount paid by the customer in the previous 12 months; and
  • that the customer must purchase insurance (or self-insure) against losses in excess of the agreed limited amount, with the customer also waiving the service provider's liability in excess of that amount.

Optional reading

Material Breach – Additional Commentary

In a case of breach of contracct, the parties are likely to disagree strenuously whether the breach in question was "material." In general, courts address this question by examining whether the breach went to "the heart of the contract" — or, putting it another way, whether the breach was "so fundamental to the contract" that it "defeat[ed] the essential purpose of the contract …." (23 Williston on Contracts § 63.3.) Those things, of course, are likely to be highly fact-intensive and might not be easily resolved summarily wihtout a trial.

Many courts look to the specific factors listed in section 241 of the Restatement (Second) of the Law of Contracts in determining whether a given breach of contract was material. Those factors are excerpted in the Wikipedia article Breach of contract. They could be paraphrased in question form as follows:

• What benefit would the non-breaching party reasonably have been able to expect from the contract?

• To what extent was the non-breaching party deprived of that expected benefit?

• Would a payment of money be enough to compensate the non-breaching party for what it was entitled to get, but didn't?

• If the contract were to be terminated, what harm would come to the breaching party? (Putting it another way: Would the punishment fit the crime?)

• How likely is it that the breaching party can and will cure the breach? The answer to this question should take all the circumstances into account, including any reasonable assurances the breaching party might make.

• Did the breaching party act in bad faith, or unfairly?

Reliance disclaimers

Basic purpose of reliance disclaimers

When a drafter includes a reliance disclaimer in a contract, the intent is usually to try to preclude the other party from later making a claim of "fraudulent inducement," that is, that the the other party was induced to enter into the contract by fraudulent misrepresentation on the part of the drafting party.

Misrepresentation claims usually require proof of reliance

Under the law in many U.S. jurisdictions, the dissatisfied party normally would have to prove, among other things, that it reasonably relied on the alleged fraudulent misrepresentation; logically, a no-reliance clause should preclude such proof. Consequently, courts have been known to give effect to no-reliance disclaimer clauses, especially when the parties are sophisticated (but often not in cases of intentional false representations, as discussed below).

See, e.g.:

  • One Communications Corp. v. JP Morgan SBIC LLC, Nos. 09-1815-cv, 10-0424-cv, slip op. at 4-5 (2d Cir. June 17, 2010) (affirming summary judgment dismissing misrepresentation claim);
  • K3C Inc. v. Bank of America, N.A., No. 06-50343, slip op. at 13-14 (5th Cir. Nov. 6, 2006) (unpublished) (affirming judgment after bench trial; non-reliance clause in interest-rate swap agreement precluded plaintiffs' negligent-misrepresentation claim against defendant bank);
  • Abu Dhabi Comm'l Bank v. Morgan Stanley & Co., No. 08 Civ 7508, slip op. at part IV (S.D.N.Y. March 13, 2013) (Scheindlin, J., citing New York law in granting defendant Morgan Stanley's motion for summary judgment dismissing negligent-misrepresntation claim as to some plaintiffs but not others);
  • Bristol Bay Prods., LLC v. Lampack, No. 12SC138, slip op. at ¶ 26 (Colo. Oct. 21, 2013) (recapitulating Colorado law in case where author Clive Cussler was accused of fraud in misrepresenting the number of copies of his books that had been sold; "There is no dispute that the elements of fraud in California and Colorado are identical in all substantive respects" [footnote omitted]);
  • Mark P. Gergen, Negligent Misrepresentation as Contract, 101 Cal. L. Rev. 953 (2013);
  • Daniel W. Bishop II, Business Tort Update 2005, part I (reviewing Texas law).

For a useful review of Texas jurisprudence in this area, see Dragon Fish, LLC v. Santikos Legacy, Ltd., 383 S.W.3d 175 (Tex. App. –San Antonio 2012). In that case, the court affirmed a trial court's partial summary judgment dismissing a claim by shopping-center tenants against the shopping center's developers; the dismissal was based on a reliance disclaimer contained in the lease agreements.

For example, New York's highest state court said in a 1959 opinion that "plaintiff has in the plainest language announced and stipulated that it is not relying on any representations as to the very matter as to which it now claims it was defrauded. Such a specific disclaimer destroys the allegations in plaintiff's complaint that the agreement was executed in reliance upon these contrary oral representations."

Danann Realty Corp. v. Harris, 5 N.Y.2d 317, 320-21 (1959) (affirming district court's dismissal of fraudulent-inducement claim; citation omitted).

Real-world consequences of misrepresentation can be massive

In 2010, Hewlett-Packard probably wished its new EDS subsidiary had included a no-reliance disclaimer clause in its software-system development agreement with British Sky Broadcasting. Had that been the case, then perhaps HP might not have had to pay more than US$ 460 million extra to settle Sky's successful claim for fraudulent inducement. BSkyB Ltd v. HP Enterprise Services UK Ltd, 2010 EWHC 86 (TCC), ¶¶ 194-196, 372-389, 2331, 2336.

In that case:

  • British Sky Broadcasting contracted with EDS to develop a customer relationship management (CRM) software system. Things didn't go as planned; Sky eventually filed suit.
  • The judge concluded that one of EDS's senior UK executives had lied to Sky about EDS's analysis of the amount of elapsed time needed to complete the initial delivery and go-live of the system.
  • The judge also concluded that during subsequent talks to modify the contract, EDS made misstatements that didn't rise to the level of fraud, but still qualified as negligent misrepresentations.
  • One clause in the contract capped the potential damage award at £30 million — but by its terms, that limitation didn't apply to fraudulent misrepresentations. The judge held that the limitation didn't apply to negligent misrepresentations either.

After the decision was handed down, Sky announced that it expected the damage award to be at least £200 million. Had it not been for the misrepresentation claims, the pure-contract damages presumably would have been capped at £30 million. The difference works out to about US$270 million.

In early June 2010, EDS agreed to pay Sky some US$ 460 million — more than four times the value of the original contract — to settle the case. /See/ Jaikumar Vijayan, EDS settles lawsuit over botched CRM project for $460M, Computerworld, June 9, 2010.

Practice pointer: Have the parties initial the reliance disclaimer?

If there's a concern that a party might someday try to repudiate its reliance disclaimer, it can't hurt to have that party separately initial the contract as close as possible to the disclaimer.

In a New York case, an estranged married couple reconciled — temporarily, as it turned out. During their reconciliation, the wife voluntarily dismissed her three pending lawsuits against the husband, and they signed a settlement agreement to that effect.

But then the couple separated again. The wife sued the husband again, claiming that he had fraudulently induced her to dismiss her other lawsuits by promising that he would return to her and permanently resume their marital relationship.

Unfortuantely for the wife, the settlement agreement she signed included a reliance disclaimer, which she had specifically initialed:

There is no allegation in the complaint that plaintiff did not read or did not understand the agreement; in fact, she initialed the agreement in the margin opposite the very paragraph disclaiming the alleged representation.

Cohen v. Cohen, 1 A.D.2d 586 (N.Y. App. Div. 1956) (per curiam; affirming dismissal of complaint for insufficiency).

Practice pointer: Be specific about what's disclaimed?

Courts seem to have more sympathy for a reliance disclaimer if, in the words of the Second Circuit's Caiola v. Citibank opinion, the disclaimer "tracks the substance of the alleged misrepresentation." The court reversed a lower court's dismissal of a claim under federal securities law, but the underlying principle might well apply in contract cases as well. See Caiola v. Citibank, NA, 295 F.3d 312, 330 (2d Cir. 2002) (reversing dismissal of claim under federal securities law) (citing cases; internal quotation marks and alteration omitted).

Fraud claims might survive a no-reliance provision

Suppose that Alice claims that Bob misrepresented facts to induce Alice to enter ito a contract, and that Bob's misrepresentation wasn't merely negligent, but intentional. And suppose also that the contract contains a no-reliance clause. In that situation, Bob should not hold out much hope that a court would summarily toss out Alice's fraudulent-inducement claim against him.

See generally Andrew M. Zeitlin & Alison P. Baker, At Liberty to Lie? The Viability of Fraud Claims after Disclaiming Reliance, Apr. 23, 2013.

Signing a contract

Electronic signatures

The federal Electronic Signatures in Global and National Commerce Act (E-SIGN), 15 USC § 7001 et seq., provides in part (subject to certain stated exceptions) that, for transactions "in or affecting interstate or foreign commerce," electronic contracts and electronic signatures may not be denied legal effect solely because they are in electronic form.

At the state level, 47 states, the District of Columbia, and Puerto Rico, and the U.S. Virgin Islands have adopted the Uniform Electronic Transactions Act (UETA).

(The remaining three states — Illinois, New York, and Washington — have adopted their own statutes validating electronic signatures.)

The Texas version of UETA, at Tex. Bus. & Comm. Code § 322.001 et seq., provides in part that, when the parties have agreed to conduct transactions by electronic means — which is something determined from the context and surrounding circumstances, including the parties' conduct (§ 322.005) —

  • a document or signature may not be denied legal effect or enforceability solely because it is in electronic form (§ 322.007);
  • an electronic "record" suffices as a writing (§ 322.007); and
  • evidence of a record or signature may not be excluded solely because it is in electronic form (§ 322.013)

Courts now routinely honor electronic "signatures; see, e.g., Naldi v. Grundberg, 80 A.D.3d 1, 908 N.Y.S.2d 639 (N.Y. App. Div. 2010): The appellate court rejected the defendant-appellant's contention that a right of first refusal could not properly be granted by email; the court said that "an e-mail will satisfy the statute of frauds so long as its contents and subscription meet all requirements of the governing statute." Id., 80 A.D.3d at 3. In the slip opinion, see the transitional paragraph at pp. 6-7 through the transitional paragraph at pp. 10-11.

Backdating a contract can lead to prison time

Backdating a contract for purposes of deception, for example, to book revenue as of an earlier date, may well be a felony. At this writing, the former CEO of software giant Computer Associates is serving a 12-year sentence for backdating sales contracts. (NY Times) Sanjay Kumar was also fined $8 million and agreed to settle civil suits by surrendering $800 million. (NY Times)

Kumar wasn't the only executive at Computer Associates (now known as just CA) to get in trouble for back-dating. All of the following went to prison or home confinement:

  • the CFO — seven months in prison, seven months home detention (NY Times)
  • the general counsel — two years in prison, and also disbarred (court opinion)
  • the senior vice president for busi­ness-development — 10 months of home confinement (NY Times)
  • the head of worldwide sales — seven years in prison (WSJ)

All of this mess came about because the Computer Associates executives orchestrated a huge accounting fraud: On occasions when the company realized that its quarterly financial numbers were going to miss projections, it "held the books open" by backdating contracts signed a few days after the close of the quarter. (This practice was apparently referred to internally as the "35-day month.")

Note that all the sales in question were legitimate and the cash had been collected (according to CA's press release). The only issue was one of the timing of revenue recognition. The company had booked the sales a few days earlier than was proper. But that was enough to put the sales revenue into an earlier reporting period than it should have been. That, in turn, was enough to send all those CA executives to prison. (CA press release)

Likewise, the former CFO of Media Vision Tech­nology was sentenced to three and a half years in federal prison because his company had inflated its reported revenues, in part by backdating sales contracts. Because of the inflated revenue reports, the company's stock price went up — at least until the truth came out, which eventually drove the company into bankruptcy. (The Recorder)

Backdating for non-deceptive purposes might be OK

Signing a contract to be effective as of an earlier date might well be OK, but the fact that you're doing so should be made clear in the contract itself, to help forestall later accusations that you had an intent to deceive.

EXAMPLE: Suppose you disclosed your company's confi­dential information to a potential business partner, after she first orally agrees to keep it confidential. You might well want to enter into a written nondisclosure agre