Common Draft (student version only)

Some drafters might want control also to arise from one or more of the following:

• a legally-enforceable right to select a majority of the members of the organization's board of directors or other body having comparable authority — note that this alternative does not say that control exists merely because a person has a *veto* over the selection of a majority of the members of the organization's board;
• a legally-enforceable right, held by a specific class of shares or of comparable voting interests in the organization, to approve a particular type of decision by the organization;
• a legally-enforceable requirement that a relevant type of transaction or decision, by the organization, be approved by a vote of a supermajority of the organization's board of directors, shareholders, outstanding shares, members, etc.

Many contracts include provisions stating, in effect, that the agreement cannot be amended except in writing. In contract litigation (or arbitration), though, one party or another might claim that the parties orally agreed to modify the contract terms, including the amendments-in-writing provision itself. (The "business risk" preamble in the Common Draft provision is included in the hope of helping to persuade the tribunal to reject such a claim.) Courts have sometimes held that, subject to any applicable requirements of the Statute of Frauds, parties to a contract are indeed free to orally amend or waive a contract provision, even if the contract contains an express amendment-in writing or waiver-in-writing requirement.

(Note the use of orally above — the term "verbal" traces its origins to the Latin verbum, meaning "word," which encompasses writing as well as speech.)

Courts sometimes quote something that 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 [orally] 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).

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 2-209(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.) See also the notes concerning the term merchant, as well as, e.g., Wisconsin Knife Works v. Nat'l Metal Crafters, 781 F.2d 1280, 1284 (7th Cir. 1986) (Posner, J., on a panel with Easterbrook, J.) (reversing and remanding judgment on jury verdict that contract had been orally modified).

• On the other hand, under subdivision (4) of the same UCC section, a contract provision can be waived without a writing, which is why many contracts also state, as in the Waivers in Writing, that waivers likewise must be in writing.

• 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).

In a 2014 opinion, the Second Circuit explained the two judge-made exceptions to that New York statute:

First, under the principle of equitable estoppel, if a party to a written agreement has induced another's significant and substantial reliance upon an oral modification, then the party may be estopped from invoking the bar on oral modification.

Second, where there is partial performance of the oral modification sought to be enforced, the requirement of a writing may be avoided.

To invoke equitable estoppel, the parties' conduct must not otherwise be compatible with the agreement as written

and, for partial performance, the parties' conduct must be unequivocally referable to the oral modification.

Aircraft Services Resales LLC v. Oceanic Capital Co., No. 13-3738-cv, slip op. at 3-4 (2d Cir. Oct. 9, 2014) (summary order affirming district court ruling that both listed exceptions applied) (extra paragraphing added), citing Rose v. Spa Realty Assocs., 42 N.Y.2d 338, 343-44 (1977).

The Common Draft provision states that an amendment need be signed only by the party sought to be bound and not by both (or all) parties. This comports with a 2012 opinion in which the Seventh Circuit held that "[t]he critical signature [on an amendment] is that of the party against whom the contract is being enforced, and that signature was present." Hess v. Kanoski & Assoc., 668 F.3d 446, 453 (7th Cir. 2012), on remand, No. 3:09-CV-03334-SLD-JAG (C.D. Ill. March 28, 2014) (granting motion for summary judgment), affirmed, No. 14-1921 (7th Cir. May 4, 2015).

Some drafters state that amendments must be signed by all signatory parties; this can be done by redefining the term Required Amendment Signer.

For example, as of February 16 2016, the title of the Enterprise Products Partners limited-partnership agreement is "Sixth Amended and Restated Agreement of Limited Partnership of Enterprise Products Partners L.P."

To reduce the chance of possible future confusion, it might be helpful to give an amendment a series number and date in its title, e.g., "First Amendment, Dated December 25, 20X7, to Asset Purchase Agreement."

Assignment-consent requirements can be great for a party that has the right to consent to another party's assignment — and very not-great for a party that must obtain consent to such an assignment.

It's fairly typical, though, for parties to negotiate one or more of the exceptions to an assignment-consent requirement.

Imagine this:

• Supplier 1 and Customer have a contract for Supplier 1 to deliver a hill of beans to Customer's back yard.
• Supplier 1 discovers that another supplier, Supplier 2, has a bean farm that's closer to Customer's house; Supplier 2 could deliver the beans with lower transportation costs.
• Supplier 2 is willing to buy Customer's bean-delivery contract from Supplier 1; that way, both suppliers can make some money from the contract, and Supplier 1 can use his own resources to pursue other business.
• Customer, the customer, doesn't care which supplier delivers the hill of beans, as long as someone makes it happen.

Supplier 1's transfer of "the Customer contract" to Supplier 2 is referred to as an assignment of the contract. In the U.S. and similar legal systems, the law usually favors such assignments, because they promote economic efficiency, which is (usually) regarded as a Good Thing. As a result, Supplier 1 is normally free to assign the Customer contract to Supplier 2, which also entails delegating his contractual duties to her. This is more than a little bit like subcontracting. The major difference is that:

• If Supplier 1 were to subcontract to Supplier 2, then Supplier 2 would deal with Supplier 1, and Supplier 1 would deal with Customer.
• On the other hand, with an assignment of the contract, Supplier 2 would take over dealing with Customer.
• Either way, Supplier 1 would still be liable to Customer for any damage she suffered if Supplier 2 didn't deliver the hill of beans as promised.

An excellent general resource on this subject is Tina L. Stark, Assignment and Delegation, which is Chapter 3 of her book Negotiating and Drafting Contract Boilerplate (2003). Disclosure: Professor Stark is a friend and colleague; I've been using her Drafting Contracts textbook in my classes for a number of years now.

In some situations, a party to a contract won't want its opposite number to be free to assign the agreement, even though the law would normally allow it. Contracts often include language to this effect.

For example:

• You're a supplier. You're talking to a potential customer about a contract to sell them your stuff. The customer will often want you to agree not to assign the contract to anyone without their consent. Their rationale is basically this: We don't care if assignability is good for commerce in general: We want to decide who we do business with. (Yes, grammatically this gets the who-whom bit wrong.)

Customers sometime demand assignment-consent restrictions "Just Because." They're especially likely to do so if they went to some trouble picking out a supplier, for example by going through a request for proposal (RFP) process.

• You're a customer that will be licensing intellectual property, for example computer software, from a supplier. The supplier might want to restrict your ability to assign the license. Otherwise, the supplier thinks, you might negotiate a comparatively-low price for the software; later, when you decided you no longer needed the software, you might try to resell the license. The supplier doesn't want that — it wants to be the sole source of licenses, so that no one else can make money selling licenses.

For a real-world example of a software vendor controlling the supply of its software licenses in this way, see Vernor v. Autodesk, Inc., 621 F.3d 1102 (9th Cir. 2010) (vacating summary judgment granting declaratory judgment). In that case, Vernor bought used copies of Autodesk's AutoCad software from Autodesk's direct customers and then resold those copies on eBay. The appeals court held that Autodesk did not sell copies of its software, but licensed them, and therefore Vernor's actions were prohibited by copyright law, because the first-sale doctrine did not apply.

See also Adobe Systems Inc. v. Hoops Enterprise LLC, No. C 10 2769 (N.D. Cal. Feb. 1, 2012) (granting partial summary judgment in favor of Adobe; first-sale doctrine did not protect Hoops).

But now imagine this:

• Teen Idol is a teenaged singer who has posted a lot of homemade music videos to YouTube. As a result, he has become wildly popular with 'tween girls all over the world. Teen Idol has a longstanding contract with Customer; the contract calls for him to do a birthday show for Customer's twelve-year old daughter and her friends.
• Then Teen Idol gets a huge career break: The Why, a legendary rock group from the Sixties, want Teen Idol to open for them in their reunion tour. Unfortunately, for Teen Idol to open for The Why, he would have to miss Customer's daughter's birthday party.
• Teen Idol comes up with a solution: His long-time friend, Struggling Singer, who is trying to break into the business, should sing at Customer's party instead, so that Teen Idol can open for The Why. In that situation, though, a reasonable person likely would think that Struggling Singer was not an acceptable substitute for Teen Idol at Customer's daughter's birthday party.
• Consequently, U.S. law probably would not allow Teen Idol to delegate his birthday-party performance to Struggling Singer unless Customer consented to it.

Another example: 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.:

• Trademark licenses: In re XMH Corp., 647 F.3d 690 (7th Cir. 2011) (Posner, J.)
• Copyright licenses: Cincom Sys., Inc. v. Novelis Corp., 581 F.3d 431 (6th Cir. 2009)
• Patent licenses: Rhone-Poulenc Agro, S.A. v. DeKalb Genetics Corp., 284 F.3d 1323 (Fed. Cir. 2002)

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.

In a long-term contractual relationship, a customer's desire to restrict assignment can be dangerous for a provider. Suppose that a provider were required to get a customer's consent before the provider assigned a contract between them. That could give the customer a de facto veto over the provider's future strategic decisions, such as spinning off an unincorporated division, selling off a product line, or reshuffling its assets among different affiliates in its corporate "family."

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.

EXAMPLE: a woman dying of cancer arranged to leave her ownership interest in a real-estate investment to a trust for the benefit of her long-time companion. A court held that this was ineffective because of an anti-assignment clause in the investment contract documents. See Lee Graham Shopping Center, LLC v. Estate of Diane Z. Kirsch, 777 F.3d 678 (4th Cir. 2015) (affirming summary judgment).

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 different companies. At a minimum, this would be time-consuming and could easily delay closing the deal; at worst, 25 different companies could each try to extract a price for their consent — possibly with each successive company demanding more than the previous one. See MDS (Canada) Inc. v. Rad Source Tech., Inc., 720 F.3d 833, 850 (11th Cir. 2013) (affirming district court's judgment in part and certifying question of sublicense-as-assignment to Florida supreme court), certified question answered in part, No. SC13-1215 (Fla. July 10, 2014).

Some government contracts, by law, cannot be assigned by 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 Dubai deal discussed above.

Suppose that Alice and Bob are negotiating a contract between them. It'd be fairly standard for Bob to want to be able to assign the contract without Alice's consent if Bob were to do an asset disposition such as the sale of an unincorporated division or a specific product line. This could be crucial if Bob's company wanted to retain control over its own strategic destiny. It also could keep Bob's assignee ("Betty") 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 their contract negotiation, Bob 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.

Alice 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 Alice an absolute veto over an asset-disposition assignment by Bob. Instead, Bob might consider giving Alice the right to terminate the contract for convenience, as provided in the Non-Assigning Party May Terminate Agreement. Of course, the implications of termination would have to be carefully thought through.

Courts have distinguished between assigning an agreement in its entirety and assigning certain rights and benefits under the Agreement. Consider, for example, Bioscience West, Inc. v. Gulfstream Prop. & Cas. Ins. Co., No.  2D14-3946 (Fla. App. Feb. 5, 2016): In that case, an insurance policyholder assigned the benefits of her homeowner's insurance to an emergency water mitigation company (the "assignee"). The insurance carrier refused to pay the homeowner's claim, on grounds that the policy voided any "[a]ssignment of this policy" if made without the carrier's permission. In the trial court, the insurance carrier won summary judgment; after examining the policy language, though, the appellate court reversed, holding that the homeowner had not assigned the policy, but a post-loss right to payment. Id., slip op. at 4-7.

In a Wyoming case, a state district court granted summary judgment that an assignor of a contract interest who was not formally released was still obligated under the contract (but then held that enforcement was barred by laches). See Windsor Energy Group, L.L.C. v. Noble Energy, Inc., 2014 WY 96, 330 P.3d 285, 285 ¶ 1 (affirming on laches grounds).

The general rule in the U.S., sometimes known as the "American rule," is that each party must pay its own attorney fees. See, e.g., Zurich American Insurance Co. v. Team Tankers A.S., No. 14-4036, slip op. at 11 (2d Cir. Jan. 28, 2015) (reversing award of attorney fees).

Some, though, view a prevailing-party allocation of attorney fees as fundamentally more fair: If you lose a case, presumably you were responsible for the case having to be litigated, so you should pay the attorney fees and expenses that you forced the prevailing party to spend.

(The prevailing-party rule is sometimes called the "loser pays" rule, or the "everywhere but America" rule.)

Complicating the picture: Big companies sometimes regard litigation expenses as a cost of doing business. Once in a while, a big company might try to use its superior financial strength to bully a weaker counterparty. Smaller companies can try to offset that advantage by negotiating a prevailing-party clause.

Of course, a prevailing-party clause raises the stakes for a smaller litigant as well: If the smaller litigant were to lose the case, then the smaller litigant would be liable for the bigger litigant's attorney fees; those fees will often have been billed by a big, expensive law firm.

Some courts have held that, if the putatively-winning side is not the "prevailing party" if it did not receive any monetary damages or equitable relief. See, e.g., Intercontinental Group Partnership v. KB Home Lone Star LP, 295 S.W.3d 650 (Tex. 2009) (5-4 reversal of $66,000 attorney fees award to plaintiff that had received a zero-dollar damages award and no declaratory or other equitable relief).

Some commentators have suggested that drafters should specify what they mean by "prevailing party," but my guess is that most will not want to do so.

If a party negotiating a contract thinks it might be more likely to be the defendant in a dispute than the plaintiff, it might want to affirmatively include a "pay your own lawyer" provision in the contract.

In Texas, absent an agreement otherwise, a party that successfully enforces a claim against an individual or corporation on an oral or written contract — but not a party that successfully defends against an enforcement action — is entitled to recover attorney fees. See Tex. Civ. Prac. & Rem. Code § 38.001.

Courts have held that under section 38.001, attorney fees are recoverable only from an individual or corporation. See Hoffman v. L&M Arts, No. 3:10-CV-0953-D, slip op. at part III (N.D. Tex. Mar. 6, 2015) (citing cases). In 2015, a bill to change that died in committee in the Texas Legislature. See Tate Hemingson, Recovery of attorney fees under Civil Practice & Remedies Code Section 38.001 (Strasburger.com 2015).

California Civil Code § 1717 provides, in essence, that any one-way attorney fees provision (as is sometimes seen in consumer-facing contract forms) is to be treated as a prevailing-party provision, and states that attorney fees under the section cannot be waived.

In an arbitration proceeding, applicable law might override the parties' agreement that attorney fees can, or cannot, be awarded. See Recovery of Attorney Fees in International Arbitration: the Dueling "English" and "American" Rules, by John L. Gardiner & Timothy G. Nelson of Skadden Arps, available at http://goo.gl/jsjy4 (accessed Jan. 30, 2010).

Some contracts contain unilateral attorneys' fee clauses; for example, a real-estate lease agreement might state that the landlord can recover its attorney fees if it has to sue the tenant, while remaining silent as to whether the tenant can ever recover its attorney fees. (Under the 'American rule,' that would normally mean that the tenant could not recover, even if it were the prevailing party in a suit brought by the landlord — except in California, as noted above.)

Such unilateral clauses might well be enforceable. See, e.g., Allied Indus. Scrap, Inc., v. OmniSource Corp., No. 14-3403 (Ohio Jan. 21, 2015) (reversing district court's denial of attorney fees), discussing Wilborn v. Bank One Corp., 906 N.E.2d 396 (Ohio 2009) (affirming dismissal of borrowers' lawsuit against lenders claiming that unilateral attorneys' fee clause in residential mortgage loan agreement form was void as contrary to public policy).

While this provision uses the term Dispute Expenses, the concept is often stated as attorneys' fees or attorney's fees. Legal-language maven Bryan Garner suggests using the singular attorney fees.

The text of this provision is informed in part by the attorneys-fees clause in the contract in suit in Seaport Village Ltd. v. Seaport Village Operating Co., No. 8841-VCL (Del. Ch. Sept. 24, 2014) (letter opinion awarding attorney fees).

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.

An audit request should be timely; otherwise, a creative counsel might try to argue that the party had the right to conduct an audit even when, for example, the underlying agreement had expired or been terminated.

A would-be auditing party's counsel tried unsuccessfully to make such an argument in New England Carpenters Central Collection Agency v. Labonte Drywall Co., No. 14-1739 (1st Cir. July 31, 2015) (affirming district court's judgment after bench trial).

Audits sometimes happen after business relationships start to turn sour. In situations like that, it's not unheard of for recordkeeping parties to make life as difficult as possible for auditors. It can help to lay out ground rules for what might otherwise be an unfriendly episode.

This clause excludes from auditing any information that is subject to the attorney-client privilege and any other applicable privilege. That's because in the case of the attorney-client privilege, disclosure of privileged information to outsiders likely would waive the privilege in many jurisdictions and thus make the privileged information available for discovery by others, including third parties.

A recordkeeping party might want to specify Other Particular Audit Exclusions to be specific about particular information to which an auditor will not have access.

Audits sometimes happen after business relationships start to turn sour. This clause can help lay out ground rules for what might otherwise be an unfriendly episode.

As one example, it's not unheard of for recordkeeping parties to make life as difficult as possible for auditors. This clause tries to forestall such uncooperative behavior.

A party agreeing to an audit clause might want to restrict the auditor's access to the facilities, computers, etc., of the party being audited. For example:

• Software vendors often include audit provisions in their license agreements.
• Such provisions allow a vendor to audit a customer's use of the software to confirm that all such use is appropriately licensed (and paid for).
• A software vendor's audit clause might allow the vendor to access the customer's computer systems.
• The customer might not want this, especially if the customer is in a sensitive industry such as finance or health care.

A possible compromise might be to allow a third-party auditor to have limited access to computer systems, etc., under a strict confidentiality agreement.

(Hat tip: Christopher Barnett, Top Three Revisions To Request In Software License Audit Clauses (ScottAndScottLLP.com 2015).)

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).

This provision includes what amounts to a nondisclosure agreement ("NDA") in miniature.

For especially-sensitive matters, the parties might wish to negotiate a separate NDA for the auditor(s) to sign.

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

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.)

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.

In the interest of avoiding satellite disputes or even satellite litigation — yet while still giving the Recordkeeping Party some comfort — the Audit Compact intentionally doesn't take a hard line as to what the Auditing Party is supposed to do to reduce the burden of the audit on the Recordkeeping Party.

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

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

Flowdown provisions are often required in U.S. Government contracts, among others.

This Baseball Arbitration Prototype provision is modeled on, wait for it, baseball arbitration, which "is designed to produce a settlement, not a verdict." Thomas Gorman, The Arbitration Process – the Basics, in Baseball Prospectus (Jan. 31, 2005) (emphasis added).

Here's how that can work:

• When baseball-style dispute resolution is used, the decision maker must choose from among the proposed resolutions submitted by the parties — the decision maker has no discretion to make any other determination about the issue.
• That constraint forces each party, in submitting its proposed resolution(s) for the issue, to think hard about:
  • how the decision maker sees the case, as opposed to how convinced the party is of the rightness of its own view; and
  • the risk that the decision maker might regard the other party's proposed resolution as being closer to the "correct" one — in golf terms, "closest to the pin" — and therefore be forced by this clause to adopt that other proposed resolution.
• That in turn improves the odds that the parties will reach an agreed settlement.

Author's note: In my own practice, in the space of about one year, three different lawsuits, for three different clients, were settled not long after the parties had agreed to baseball arbitration. I had the impression that, after seeing each other's proposed awards, the business people on each side looked at each other and said, in effect, wait a minute — we're not that far apart; we don't need to pay the arbitrator and the lawyers for this.

Another story: a lawyer friend in Silicon Valley recounted how a client of hers once got into a dispute concerning a contract that she had drafted for the client. She told the client's CEO that the contract required baseball arbitration, and explained what that entailed. The CEO responded: "Goddamn it, that means I have to be reasonable." (The parties settled the dispute.)

This is an avoidance-of-doubt provision; its wording is intended to be tactful, in acknowledgement that:

• Under most laws governing arbitration, the parties can in essence direct the arbitral tribunal to use baseball-style procedures;
• In contrast, judges and other governmental authorities generally would not be bound by the parties' agreement; consequently, this provision states the parties' joint request that baseball-style procedures be used.

One of the perceived advantages of baseball-style decision-making is that the decision-maker can neither "go rogue" nor "split the baby." That's because the decision-maker is permitted only to choose one or another of the Proposed Resolutions of the issue in question.

This provision allows each party to submit up to two Proposed Resolutions for an issue being decided by the baseball-style procedure of this clause; that allows each party to hedge its bets somewhat.

If a "baseball" provision is being used in arbitration, the parties' arbitration agreement might provide that the resulting issue determination does not immediately become binding; see, for example, the Partial Court Retrial of Arbitration Award provision.

Best-efforts clauses can be (quite) problematic, but are often used anyway because many business people like them. Providing a definition can at least reduce some of the associated uncertainty.

The "diligence" term comes from the Restatement (Second) of Agency: "Best efforts is a standard that has diligence at its essence." Restatement (Second) of Agency § 13, comment a (1957), quoted in Corporate Lodging Consultants, Inc. v. Bombardier Aerospace Corp., No. 6:03-cv-01467-WEB, slip op. at 9 (D. Kan. May 11, 2005) (finding that CLC had not failed to use its best efforts to obtain lowest and most-competitive hotel rates for Bombardier) (citation and alteration marks omitted).

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.

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? That is, reasonable efforts will cover a range of possibilities, while best efforts refers to somewhere near the top of that range. I have no formal research to support this view, but I've negotiated more than a few contracts with best-efforts clauses in them, so I'd like to think I have at least some sense of what many business people are after.

By analogy, to many business people:

• "C" is a passing grade in (U.S.) schools, and is equivalent to reasonable efforts.
• In contrast, best efforts means an "A" effort — or in basketball slang, bring your "A" game, buddy, not your "C" game.

Another analogy:

• On major U.S. highways, the speed-limit signs often include both maximum and minimum speeds of (say) 60 mph and 45 mph. Those two speeds establish the upper- and lower bounds of reasonableness.
• Now, suppose that a trucking company were to agree that its driver would use her "best efforts" to drive a shipment of goods from Point a to Point B on such a highway, where drivers must drive between 45 mph and 60 mph.
• In good weather with light traffic, driving at 45 mph might qualify as reasonable efforts. But driving at that speed likely wouldn't cut it as best efforts.

• A drafter could specify that best efforts requires the diligent making of all reasonable efforts. Reportedly, that's a common formulation in the UK; see the Helms et al. article cited below.
• A drafter could also add, at the end of subdivision (a), the phrase, leaving no stone unturned in seeking to achieve the stated objective. This language 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.

In an extended LinkedIn group discussion (membership required), a commenter opined that anything less than all reasonable efforts was, by definition, unreasonable. I responded that many people would disagree: Reasonable efforts can encompass a range of efforts; it doesn't have to be a binary, yes-no dichotomy.

Consider Scenario 1, in which Alice's contract with Bob requires Alice to make reasonable efforts to advise Bob in writing if some (non-emergency) Event X occurs. If Event X were to occur, then Alice might send Bob an email to that effect, using the email address that Bob has consistently used in his dealings with Alice. In that scenario, many business people would think that Alice had complied with her contractual obligation to advise Bob, even if for some reason Bob never got the email.

Now consider Scenario 2, in which the contract requires Alice to make all reasonable efforts to advise Bob in writing that Event X has occurred. In that scenario, if Event X were to occur, then Alice might have to try every available means of written communication — email, FAX, certified mail, FedEx, UPS, etc. — until she received positive confirmation that Bob had in fact received the message.

Depending on the jurisdiction, a court might not share the view of best efforts just described.

• 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."

• 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 2005 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, 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, 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).

[TO DO: Look up California law – all efforts even if bankruptcy? https://www.linkedin.com/grp/post/4036673-6027114806685810691]

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, 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."

"When confronted with idiosyncratic contractual language expressing sentiments akin to doing all that one can or 'all that is necessary' to complete a task, Texas courts often interpret such language as requiring 'best efforts'–an expression with a more clearly established meaning and history." Hoffman v. L & M Arts, 774 F. Supp. 2d 826, 833 (N.D. Tex. 2011) (citing cases).

"[C]ourts and arbitrators interpreting similar phrases [the phrase in question was 'every effort'] have determined, like the district court here, that they impose an obligation to make all reasonable efforts to reach the identified end." Aeronautical Indus. Dist. Lodge 91 v. United Tech. Corp.., 230 F.3d 569, 578 (2d Cir. 2000) (citations omitted).

• 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.

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 that it later 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.

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  Xnumber 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.

See also:

• The Reasonable Efforts Definition Prototype clause
• John Pavolotsky, Best efforts clauses – what buyers expect versus how suppliers respond (IACCM.com 2015).
• 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 (JonesDay.com 2007).
• Jonathan Pink, Making the Best of a Best Efforts Clause (Blogspot.com 2008).
• Janet T. Erskine, Best Efforts versus Reasonable Efforts: Canada and Australia (McCarthy.ca 2007).
• Aaron Singer, What do "Best Efforts" and "Reasonable Commercial Efforts" mean? (BCRElinks.com 2003).
• David Shine, "Best Efforts" Standards Under New York Law: Legal and Practical Issues, in The M&A Lawyer, March 2004, at 15.
• Akash D. Sethi, Derrick Carson, and Brad L. Whitlock, Boilerplate Provisions, 44 Tex. J. Bus. L. 157, 168 & n.37 (2012).
• Kenneth A. Adams, What the Heck Does "Best Efforts" Mean? (adamsdrafting.com 2008). Note: Ken thinks that best efforts is in essence a synonym for reasonable efforts, and that therefore drafters should abjure the former term in favor of the latter. While Ken does have at least some support in the case law for this position, in my view it amounts to telling business people, with no good reason: No, you can't do your deal the way you want; you have to do it the way I want. To my way of thinking, that oversteps the proper role of a lawyer or other drafter per se.
• Kenneth A. Adams, The Fifth Circuit Considers "Best Efforts," (adamsdrafting.com 2011).
• Kenneth A. Adams, "Best Efforts" Under Canadian Law (adamsdrafting.com 2009).

Commercially-reasonable is a kick-the-can-down-the-road term; it's often used in routine contracts, especially for matters for which the parties are confident they can amicably resolve any disputes that might arise.

A party seeking to prove (or disprove) commercial reasonableness of a transaction, contract term, decision, etc., might want to focus on the process by which the transaction, etc., came into being. The U.S. Court of Appeals for the Fifth Circuit has said that "Where two sophisticated businesses reach a hard-fought agreement through lengthy negotiations, it is difficult to conclude that any negotiated term placed in their contract is commercially unreasonable." West Texas Transmission, LP v. Enron Corp., 907 F.2d 1554, 1563 (5th Cir. 1990) (affirrming district court's refusal to grant specific performance of right of first refusal) (extensive citations omitted, extra paragraphing added).

See the commentary to the Reasonable Efforts Definition Prototype for a discussion of the vagueries of that term, which of course are inherited by the term commercially reasonable.

In a major lawsuit between the (U.S.) state of Indiana and IBM, the contract in question took a stricter view of commercially reasonable efforts. That contract defined the term as "taking commercially reasonable steps [circularity, anyone?] and performing in such a manner as a well managed entity would undertake with respect to a matter in which it was acting in a determined, prudent, businesslike and reasonable manner to achieve a particular result." Indiana v. IBM Corp., No. 49A02-1211-PL-875, slip op. at 27 n.12 (Ind. App. Feb. 13, 2014) (emphasis added, citation to trial record omitted), affirmed, Indiana v. IBM Corp., No. 49S02-1408-PL-00513 (Ind. Mar. 22, 2016).

In that case, the contract in suit called for IBM to overhaul Indiana's computer system for managing its welfare program; the project ended up being in essence a train wreck, after which the parties sued each other. The trial court rendered judgment in favor of IBM, but a state appellate court reversed in part and remanded, holding that while IBM was entitled to be paid for its work, that payment would be subject to offset (to be determined on remand), on grounds that IBM had materially breached the contract.

The issue addressed in this clause came up in a 2014 English case arising from the financial crisis of late 2008, Barclays Bank PLC v. Unicredit Bank AG, [2014] EWCA Civ 302 (affirming trial-court ruling). There, Barclays had the right to consent to a particular type of financial transaction, but it was obligated to grant or withhold such consent in a commercially-reasonable manner. The England and Wales Court of Appeals rejected Unicredit's argument that this meant that Barclays was required to take Unicredit's interests into account, not merely Barclays's own interests. See id. at para. 16; see also this annotation.

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

The Annex provision makes it clear that voluntary or discretionary disclosures of Confidential Information are not allowed, for example in public filings with the Securities and Exchange Commission (SEC).

For a case in which the voluntary-filing issue was litigated, see Martin Marietta Materials, Inc v. Vulcan Materials Co., 56 A.3d 1072 (Del. Ch. 2012), aff'd, 45 A. 3d 148 (Del. 2012) (en banc). There, the court held that Martin Marietta had breached a non-disclosure agreement by including Vulcan's confidential information in an SEC filing about Martin Marietta's proposed takeover of Vulcan.

See also Disclosure of Confidential Information in Public Filings.

Several U.S. Government agencies fiercely assert that a company may not even arguably discourage, let alone prohibit, the company's employees from disclosing whistleblower information to the agencies. For example, in 2015 the Securities and Exchange Commission went after well-known contractor KBR for this; the contractor agreed to the entry of a cease-and-desist order and to pay $130,000 settlement. [SEC press release] [SEC order] [Houston Chronicle article]

See also the discussion of how the [U.S.] National Labor Relations Board has taken a similar view about employees' discussing salary- and working-conditions with each other.

Parties often want the mere fact that they are in discussions to remain confidential, let alone the  details of their business dealings. That can present some tricky issues, though, especially in an employment-related agreement, as discussed in more detail below.

For example, in a sales agreement:

• The vendor might want for the pricing and terms of the agreement to be kept confidential. Otherwise, a buyer for a future prospective customer might say, "I know you gave our competitor a 30% discount, and I want to show my boss that I can get a better deal than our competitor did, so you need to give me a 35% discount if you want my business.”
• Conversely, the customer might not want others to know who its suppliers are, possibly because the customer doesn't want its competitors trying to use the same suppliers.

Likewise, parties to “strategic” contracts such as merger and acquisition agreements very often want their discussions to be confidential. If the word leaks out that a company is interested in being acquired, that could send its stock price down.

This clause states that the parties' dealings are confidential, not their relationship. If it were otherwise — that is, if this clause said that the parties’ relationship was confidential — it might be (mis)interpreted as a declaration of a “confidential relationship”; that in turn imply unwanted fiduciary obligations.

Clauses requiring parties' 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).

In a different case, the Supreme Court of Delaware held that in a patent license agreement, a provision requiring the terms of the license to be kept confidential was not material, because the gravamen of the contract was the patent license, not the confidentiality provision; as a result, when the licensee publicly disclosed the royalty terms, the patent owner was not entitled to terminate the license agreement for material breach. See Qualcomm Inc. v. Texas Instr. Inc., 875 A.2d 626, 628 (Del. 2005) (affirming holding of chancery court).

In employment agreements, confidentiality provisions sometimes require the employee to keep confidential all information about salary, bonus, and other compensation. The NLRB and some courts have taken the position that such a requirement violates Section 7 of the National Labor Relations Act, as explained in this Baker Hostetler memo. (See also the discussion of how the [U.S.] Securities and Exchange Commission has taken a similar view about employees' reporting possible criminal violations to government authorities.)

The difference between consequential damages and "general" damages can sometimes be unclear. The commentary to the Restatement (Second) of Contracts contrasts the two terms:

Loss that results from a breach in the ordinary course of events is foreseeable as the probable result of the breach. Such loss is sometimes said to be the "natural" result of the breach, in the sense that its occurrence accords with the common experience of ordinary persons. … The damages recoverable for such loss that results in the ordinary course of events are sometimes called "general" damages.

If loss results other than in the ordinary course of events, there can be no recovery for it unless it was foreseeable by the party in breach because of special circumstances that he had reason to know when he made the contract. … The damages recoverable for loss that results other than in the ordinary course of events are sometimes called "special" or "consequential" damages.

These terms are often misleading, however, and it is not necessary to distinguish between "general" and "special" or "consequential" damages for the purpose of the rule stated in this Section.

Restatement (Second) of Contracts § 351, "Unforeseeability And Related Limitations On Damages," comment b (citations omitted, emphasis and extra paragraphing added).

FOOTNOTE: The above-quoted Restatement excerpt exemplifies what seems to be a modern trend of collapsing the traditional two-prong formulation of Hadley v. Baxendale into a single test: Whether the claimed damages were foreseeable by the breaching party. Under that test, one way for the non-breaching party to establish that its particular damages were foreseeable is for the non-breaching party to inform the breaching party, at the time the breaching party became bound by the obligation, of the non-breaching party's particular requirements or circumstances. See generally, e.g., Thomas A. Diamond & Howard Foss, Consequential Damages for Commercial Loss: An Alternative to Hadley v. Baxendale, 63 Fordham L. Rev. 665, part I-B, esp. n.35 & accompanying text (1994) (reviewing modern approaches to Hadley).

In the Uniform Commercial Code, section 2-715(2) defines consequential damages as follows:

Consequential damages resulting from the seller's breach include[:] (a) any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise …."

(Emphasis added.)

The Supreme Court of Texas has observed that:

Direct damages are the necessary and usual result of the defendant's wrongful act; they flow naturally and necessarily from the wrong…. Consequential damages, on the other hand, result naturally, but not necessarily….

El Paso Marketing, L.P. v. Wolf Hollow I, L.P., 383 S.W.3d 138, 144 (Tex. 2012) (internal quotation marks and footnote omitted, alterations by the court), subsequent proceeding, No. 13-0816, (Tex. Nov. 21, 2014) (reversing court of appeals order remanding for new trial on damages).

Noted practitioner-commentator Glenn D. West observes:

In 1984, an Atlantic City casino entered into a contract with a construction manager respecting the casino’s renovation. The construction manager was to be paid a $600,000 fee for its construction management services. In breach of the agreement, completion of construction was delayed by several months. As a result, the casino was unable to open on time and lost profits, ultimately determined by an arbitration panel to be in the amount of $14,500,000. There was no consequential damages waiver in the contract at issue in this case.

Glenn D. West, Consequential Damages Redux: An Updated Study of the Ubiquitous and Problematic “Excluded Losses” Provision in Private Company Acquisition Agreements, 70 BUS. L. 971, 984 (Weil.com 2015) (footnote omitted), citing Perini Corp. v. Greate Bay Hotel & Casino, Inc., 129 N.J. 479, 610 A.2d 364 (1992) (affirming judgment confirming arbitration award), abrogated on other grounds by Tretina Printing, Inc. v. Fitzpatrick & Assocs., Inc., 35 N.J. 349, 640 A.2d 788 (1994) (restricting grounds on which arbitration awards can be reviewed by courts, but stating that parties could expand those grounds by contract).

As another example, a Dr. Kitchen, an Australian opthmalmologist, wrongfully terminated his service agreement with an eye clinic. The service agreement did not include an exclusion of consequential damages. The Supreme Court of Queensland held him held liable for the clinic's lost profits and other amounts, in the total sum of AUD $10,845,476. See Vision Eye Institute Ltd v Kitchen, [2015] QSC 66, discussed in Jodie Burger and Viva Paxton, Australia: A stitch in time saves nine: How excluding consequential loss could save you millions (Mondaq.com 2015).

Some drafters like to enumerate specific categories of risk for which damages cannot be recovered, and cross their fingers that a court will enforce the enumeration congenially to them. The following categories have been harvested from various agreement forms but should be reviewed carefully, as some could be a bad idea:

• breach of statutory duty;
• business interruption;
• loss of business or of business opportunity;
• loss of competitive advantage;
• loss of data;
• loss of privacy;
• loss of confidentiality [Editorial comment: This would normally be a really bad idea, at least from the perspective of a party disclosing confidential information.]
• loss of goodwill;
• loss of investment;
• loss of product;
• loss of production;
• loss of profits from collateral business arrangements;
• loss of cost savings;
• loss of use;
• loss of revenue.

For a summary of cases in U.S., English, and Australian courts addressing such "laundry lists," see West, Consequential Damages Redux, supra, 70 BUS. L. at 987-91.

The laundry list of excluded damages should not be drafted, though, so as to be overly broad for the situation. That's why the lost-profits exclusion in this clause is phrased as lost profits from collateral business arrangements. See, e.g., Biotronik A.G. v. Conor Medsystems Ireland, Ltd., 2014 NY Slip Op. 02101 (reversing intermediate appellate court, reviewing case laws), where New York's highest court held that, on the facts of that case, "lost profits were the direct and probable result of a breach of the parties' agreement and thus constitute general damages" and thus were not barred by limitation-of-liability clause; see also Thomas H. Warren, W. Jason Allman & Andrew D. Morris, Top Ten Consequential Damages Waiver Language Provisions to Consider (2012) and West, Consequential Damages Redux, supra, 70 BUS. L. at 992.

The Fourth Circuit 'splained things to customers that negotiate services contracts containing consequential-damages exclusions:

Companies faced with consequential damages limitations in contracts have two ways to protect themselves.

First, they may purchase outside insurance to cover the consequential risks of a contractual breach, and second, they may attempt to bargain for greater protection against breach from their contractual partner.

Severn apparently did take the former precaution – it has recovered over $19 million in insurance proceeds from a company whose own business involves the contractual allocation of risk.

But it did not take the latter one, and there is no inequity in our declining to rewrite its contractual bargain now.

Severn Peanut Co. v. Industrial Fumigant Co., No. 15-1063, slip op. at 9 (4th Cir. Dec. 2, 2015) (affirming summary judgment in favor of service provider that had caused millions of dollars to its customer's facility) (extra paragraphing added).

The contra proferentem principle of contract interpretation holds that if an ambiguity in particular language cannot be resolved by other conventional methods — e.g., by consulting other language in the contract and/or by considering extrinsic evidence such as course of dealing and usage in the trade — then the ambiguity should be resolved against the party that drafted the ambiguous language and thus is "to blame" for the problem. (If a contract provision is not ambiguous, then contra proferentem won't come into play in the first place.)

The contra proferentem principle gives drafters a powerful incentive to draft clearly: As between the drafter of ambiguous language, on the one hand, and the "innocent" other party, it's the drafter that must bear the consequences of the ambiguity.

As the Supreme Court of the United States put it:

… respondents cannot overcome the common-law rule of contract interpretation that a court should construe ambiguous language against the interest of the party that drafted it. Respondents drafted an ambiguous document, and they cannot now claim the benefit of the doubt. The reason for this rule is to protect the party who did not choose the language from an unintended or unfair result.

Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 62-63 (1995) (reversing 7th Circuit's affirmance of district-court action vacating punitive-damage portion of arbitration award) (emphasis added, citations and footnotes omitted).

A contra-proferentem prohibition could cause problems if a contract provision was ambiguous. Suppose that a court or arbitrator concluded that there was no way to resolve the ambiguity other than contra proferentem — but the parties had agreed that contra proferentem was not to be used. The results in that situation might be unpredictable:

• The tribunal might disregard the contra proferentem prohibition and apply the principle to resolve the ambiguity; or
• The tribunal might rule that the provision could not be enforced — which in some circumstaces might jeopardize the enforceability of the entire contract.

(Hat tip: Jonathan Ely, in a comment in a LinkedIn group discussion (group membership required).)

For additional information, see generally:

• The Wikipedia article Contra proferentem
• Michelle E. Boardman,Contra Proferentem: The Allure of Ambiguous Boilerplate, 104 Mich. L. Rev. 1105 (2006) (hat tip: Anna Sharova in a LinkedIn group discussion (group membership required).

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).

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.

A drafter might want to specify whether agreed pricing, rent, etc., can ever decrease as a result of changes in CPI.

If price increases are limited to adjusting for increases in CPI over a baseline figure, that will automatically take care of compounding.

But if the permissible price increase is "the change in CPI or X%, whichever is greater," then the X% might end up being compounded over time, so that the X% increase in Year One would itself be increased by another X% in Year Two. [NEED EXAMPLE]

• Malik Crawford and Kenneth J. Stewart, Writing an escalation clause using the Consumer Price Index (BLS Nov. 2012)
• Bureau of Labor Statistics, Frequently Asked Questions (FAQs)

The definitions in this worksheet are phrased with a view to making the defect-correction provisions workable as long as the incorporating agreement is clear that Defects are to be corrected.

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

This language tries to stave off finger-pointing between Provider and Customer if a Defect arises, by:

• requiring Customer to provide information to Provider upon request;
• but putting the burden on Provider to ask for the information.

It is not unusual for Defect-Reporting Deadlines to be anywhere from 10 days to 120 days after delivery or completion of services.

This is a fairly-standard protocol for correction of software defects; it should also be useful in other contexts.

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

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

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

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

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

Suppliers are very prone to include clauses like this in their terms of sale.

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

A real-world eample is BAE Sys. Information & Electr. Sys. Integration, Inc. v. SpaceKey Components, Inc., No. 13-2240 (1st Cir. May 9, 2014):

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

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

In Illinois, a party's discretion might be constrained by an obligation of reasonableness. See Han v. United Continental Holdings, Inc., 762 F.3d 598 (7th Cir. 2014) (affirming dismissal with prejudice of purported class-action complaint). As it happens, in that case the appeals court upheld a ruling that United Airlines did not unreasonably exercise its discretion in interpreting the term "miles flown," in the rules for its frequent-flier program, as the miles between the relevant airports and not the miles actually flown by the aircraft in traveling between the two airports.

On the hand:

[U]nder 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; emphasis added, footnote and citations omitted).

See also Discretion Definition Prototype.

There is case law in the UK indicating that discretion cannot be exercised arbitrarily, capriciously, or irrationally. 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.