For parties wanting to sign fast-track deals: Balanced model clauses, in plain English, with common negotiation options and practice notes.
By Dell C. "D.C." Toedt III
Professor of practice, University of Houston Law Center. Member, State Bars of Texas and California. Former BigLaw litigation-firm partner. Former public-company general counsel. My German-origin last name is pronouced "Tate." I go by "D.C." because of my Roman numeral. More
Incomplete working draft — to navigate, click (repeatedly) on the headings in the table of contents at left.
Web page generated Jan. 24, 2025 10:08 Houston time.
IMPORTANT NOTE to the reader: Don't rely on this book as a substitute for legal advice from a licensed attorney. It's provided AS IS, WITHALL FAULTS. I'm a lawyer, but your reading or using this book doesn't make me your lawyer.
This book is a work in progress, combining features of a textbook and a dictionary or wiki:
The semester's reading list (2.3), with links, are listed week-by-week.
Specific readings are arranged alphabetically by topic, to speed up dictionary-like lookups in the future.
This book assumes at least some familiarity with basic contract law, of the kind one hopes that 2L and 3L law students will dimly remember from their 1L Contracts course.
1.2. Creative Commons distribution license
This document may be reproduced and/or distributed under the Creative Commons BY NC SA license 4.0: Attribution required; noncommercial only; share any revisions in the same way. See the CC license for details.
In addition: The Diamond Lane clauses alone may be distributed on a commercial basis under the Creative Commons BY ND license 4.0. (This doesn't include the notes and comments.)
Document-assembly vendors: Feel free to contact me about other arrangements for distribution of clauses and notes together on a commercial basis.
Contract Drafting students: This book's model clauses, options, and notes provide succinct lessons from real-life contracts and "deal crashes," i.e., court cases.
They show fair-dealing approaches that can help parties: • get business done together; • keep their contracts out of court; • demonstrate their trustworthiness (while guarding against the unscrupulous); and • build resilient commercial relationships —all while getting to signature sooner.
2.2. Simulation course: Hypothetical facts
This book is used for a simulation course in contract drafting; it's the latest (interim) version of the reading materials for the contract-drafting course I've been teaching since January 2010 at the University of Houston Law Center.
Many of the exercises and classroom-discussion questions in the course are set in the context of an evolving relationship between two companies that are based on several of my own present- and past client representations over the years. Students will "represent" one or the other of these (fictional) companies, namely the following:
MathWhiz: MathWhiz LLC is based in Houston. MathWhiz is headed by its founder and CEO "Mary Marvel." Mary is an expert in analyzing seismic data to predict where oil or natural gas deposits might be; she "came up" in the industry working for major oil companies, then started her own company.
"LLC stands for "limited liability company," which is not the same as a "corporation." We don't know whether MathWhiz was formed in Texas, as opposed to Delaware or some other jurisdiction.
(Corporations are "incorporated" in a particular jurisdiction, while LLCs, limited partnerships, and other legal entities are generally referred to as being "formed" or "organized" — be sure to keep that straight.)
MathWhiz's business has grown; the company now employs several junior analysts, and also selectively subcontracts work to others (usually, longtime friends or colleagues of Mary's) to do specialized tasks. an expert in analyzing seismic data to predict where oil or natural gas deposits might be.
Gigunda: One of MathWhiz's clients is (the equally-fictional) "Gigunda Energy," a global oil-and-gas company headquartered in California — again, not necessarily formed there — with a significant campus in Houston.
Gigunda Energy expects to collect seismic data, over a period of about a year, from a potential oil field in Outer Mongolia.
Gigunda wants to hire MathWhiz to analyze the seismic data.
Assumption: At both MathWhiz and Gigunda, most of the people are reasonable, cooperative, collegial — but each party recognizes that this won't always be the case, and wants to guard against future opportunistic‑ or predatory behavior by the other party.
2.3. Reading assigments
Students in my Contract Drafting course: This section 2.3 contains the readings for the course.
Some reading lists include text, such as the one at 2.3.2. Read that text carefully.
Most reading lists below include a link to another section. For those, do the following:
Scan the subheadings in the section's table of contents; see, e.g., the table of contents at [BROKEN LINK: eml-k]. Those subheadings are the "[BROKEN LINK: gouge]," which is a U.S. Navy term for key information, the things you need to know.
Skim the complete text of the section for context, examples, and reinforcement.
Read the complete section text as you deem appropriate.
Battle of the Forms: What if there's no contract per se?6.7 — and if you're not familiar with how purchase orders work in the business world, then read it carefully.
2.3.2. Reading: Setting up the contract's "framing"
Background of the Agreement (6.3): Draft the Background section to help future readers get themselves up to speed quickly about the parties' "deal" — but no "Whereas" clauses!
(Maybe:) Schedules of details at the front of the contract (22.1): You can make the contract easier to negotiate — and easier for you or others to later revise the contract form, to re-use it in another deal — if you group together the key business details that might change from deal to deal.
Defined terms (11.7): These are very handy to save time — and keep you from having conflicting terms. (That's why we also use the D.R.Y. rule (11.1): For terms such as numbers, Don't Repeat Yourself.)
Signature document integrity (22.5): Suppose that Party A signs the agreed final version of the contract and sends it to Party B for countersignature.
Party B should keep in mind that — fortunately, rarely — Party A might have sneaked in some surreptitious changes before sending the signed document, hoping that Party B will just countersign it as-is.
Clause 22.5 can help deter such unscrupulous conduct.
Signature procedure (22.4): In the Internet age, it's pretty easy for parties to "sign" contracts and deliver them to each other.
Very often, parties exchange signed signature pages only (electronically and/or with wet-ink signatures).
Signature authority (22.6): The law says whose signature would ordinarily bind a company or other organization, but some parties might to limit authority to sign. (Should you (the attorney) sign for the client?)
Signature blocks (22.7): Consider pre-filling in certain information to make life a bit easier on the signers — but also think about protecting the client against possible criminal liability from accusations of fraudulent backdating (6.1).
Copy-and-paste dangers (10.18): The UK's Brexit agreement provides an embarrassing example of a project where drafters mindless copied and pasted seriously-outdated language without reading what they copied.
A good contract would work for each party even if they were to "switch sides."
Such a contract would likely be quick to negotiate — if, that is, the parties were more interested in signing a serviceable contract to get business done than in the short-term thrill of scoring points in a negotiation game.
Don't raise the bar on your own client (21.1): Try to avoid setting your client up for failure by unilaterally imposing more burdens than The Other Side is asking.
But don't overdo it unless the circumstances seem to warrant — in which case, Ask The Partner first (20.1).
Don't poke the bear (20.3): Raising an issue that The Other Side hasn't mentioned could make your client worse off by reminding The Other Side to demand something that your client would prefer not to concede. (Conan O'Brien's lawyers did it right.) Relatedly: Boomerang clauses (6.5.7) are terms that, if you were to propose them, the other side might "wake up" and ask for just the opposite — and that could leave you and your client even worse off than if you'd stayed silent about your terms.
But: Provide some hamburger for the guard dog (14.1)? If you're pretty sure The Other Side is very likely to insist on having Clause X in the contract, then including a reasonable version of Clause X in your draft could help get the deal signed sooner if The Other Side's contract reviewer thinks, OK, they've got Clause X, it'll do, what else?
Disavow a binding contract? It's not uncommon for parties to engage in preliminary discussions, by email or text, about a potential transaction or relationship — but then the discussions end and one party claims that the parties had reached a legally-binding written agreement. So: • A party might include, in an email or other message, an express disclaimer of any intent to be bound, such as that in 12.6.6. • And if parties signed a so-called letter of intent ("LOI"), the LOI might state explicitly that the parties do not intend to be bound, except perhaps to a very-limited extent, e.g., perhaps by confidentiality provisions, as illustrated in Clause 16.3.
Format: Use 1.5 spacing and decent margins: Whitespace is your friend, to make your draft easier to read for:
your client (obviously)
the other side's contract reviewer (because your client does want to get to signature quickly, right?)
Build in a discussion agenda for the partner or client: Don't pester your supervising partner (and certainly not the client) every time you have a question about what you're drafting. Instead:
In the body of the document, turn on "Track Changes" redlining, then [WRITE YOUR QUESTION IN ALL CAPS LIKE THIS], with square brackets (your Track Changes configuration might show the question in a different color); and
Use the redlined, all-caps questions as a consolidated agenda for discussion.
2.3.4. Reading: Style rules
The following style rules are certainly not the only possible way to write contract terms — but:
these styles is generally acceptable in the legal community;
following these rules will help the reader; and
drafting in this way will help you reduce the chances of causing problems for your client.
In this course, you're to follow these style rules; the idea is that, by the end of the course, you'll be able to draft contract language that looks like it's been written by someone with experience who knows something about where the landmines are. In grading your writing assignments I'll be deducting points for violation of these style rules.
[In actual law practice, if you're working for a partner who prefers a different style, just do it that way (20.2) …. And in another party's draft, don't revise just to fit one of these style rules unless the original is hard for your client to read.]
Occasionally a student will complain that I'm enforcing my own personal style preferences. That's correct — but those preferences are based first and foremost on seeking to protect the client's interests.
Serve the Reader! (22.2): This is The Great Rule of All Contract Drafting — and, to a certain extent, of all writing.
The Macaroni Rule (17.1): Aim for short, single-subject paragraphs. Relatedly: Don't say "provided, that [blah blah blah]" (20.5).
The Numbers Rule (22.10): • Write out one through ten (with certain exceptions); use digits for 11 and up. • Use digits for percentages (except at the start of a sentence). • Write out millions, billions, etc. • Omit ".00" (i.e., zero cents). • Use digits, not words, for time. • D.R.Y.: Don't Repeat Yourself! (11.1)
The Partner Preference Rule (20.2): If the partner wants to use a drafting style that goes against these rules, just do it the way the partner wants, and be extra-careful to look for the kinds of problems that these rules are designed to help avoid.
The Partner Check-In Rule (20.1) for questions about how to structure business arrangements or contract terms: When In Doubt, Ask the Partner! (Or the client.) And document that you did so! You can be sure the partner won't mind — as long as you do it in an organized way and aren't constantly bugging the partner each time a question comes to your mind.
[MORE TO COME]
2.3.5. Reading: General provisions
Amendments in Writing (4.2): Skim. The problem here is that some jurisdictions will allow a party to allege that a written-amendments provision was waived by an oral agreement — how to address that possibility?
Amendments by notice (4.3): Skim. Such provisions are common in, e.g., online-service forms. In many jurisdictions, though, they risk being unenforceable unless they're done just right.
Assignment-consent requirements (5.3): Read carefully — this is an important strategic topic that lawyers should keep in mind, because clients might not think that far ahead.
Entire agreement (12.14): Skim. Note that this won't necessarily rule out claims for misrepresentation or for fraudulent inducement.
Reliance Waiver (21.14): Skim. It's a better shot at ruling out claims for fraudulent inducement, but not necessarily a slam dunk, depending on the jurisdiction.
Independent contractors (15.10): Skim. Note especially that just saying "we're independent contractors!" won't make it so
Notices (18.7): Read. Pay attention to the "Three Rs of Notice" approach (a formulation of your author), and that under this approach, the Mailbox Rule won't apply unless explicitly adopted — but sometimes the Mailbox Rule might be sensible.
Third-party beneficiaries (23.2): Skim. This is a roadblock clause to keep interlopers from claiming enforceable rights under a contract.
2.3.6. Reading: Common business transactions (1) – the basics
Sales quotations (22.20) and purchase orders (20.18): Read these to get a sense for how sales of goods and services are generally done in a business environment.
Order fulfillment (19.2): Skim these benchmarked provisions for packaging, labeling, and shipment of goods, as well as the plug-in options.
Payments (20.8): How billers and payers interact — and sometimes disagree.
2.3.7. Reading: Relationship guardrails
Catch-up calls (9.3): Read. Regularly talking to each other — and making it a breach of contract to "ghost" the other party — can help keep transactions on track and help develop trust betwen the parties.
Escalation to internal supervisors (12.16): Read. Mandatory internal escalation can help promote early settlement of disagreements by making it a breach of contract to refuse to kick a dispute upstairs.
Escalation to neutral advisor (12.17): Skim. This is sort of like a form of baseball salary arbitration, but with an opt-out right: It's structured to give parties a powerful incentive to take reasonable positions in disputes — and historically, it's highly likely that the parties will settle before trial.
Consultation in lieu of consent? (10.9): Skim. This could help to give your client more business flexibility.
2.3.8. Reading: Litigation-mindedness
Acknowledgements: (3.3): Read. If your client "acknowledges" something in a contract, it could come back to haunt them.
Bright-line standards for significant "triggers" (8.1): Read. Vague contract language can sometimes lead to trouble if the vagueness could cause disputes about whether particular rights or obligations have- or haven't been triggered. BUT: Sometimes it's better to be vague about a point that's unlikely to be contentious or that the parties are likely to be able to work out for themselves in the event.
False imperatives (13.2): When the contract says that X "will happen," be sure it's clear who will make X happen. (Or: "Whose throat do we choke?")
Demonstrative exhibits (11.10): Can you quickly build some "demonstratives" right into the contract, so that they'll go back into the jury room at trial instead of being excluded as not being "real" evidence?
Roadblock provisions (21.24, reprised): Sometimes a few extra words can be cheap insurance (9.7) against "creative" motivated reasoning by litigation counsel.
2.3.9. Reading: Reviewing & negotiating tips
Reviewing The Other Side's contract draft (21.3): Read these practical tips.
Redline your changes to The Other Side's draft (21.10): Read. This is basic professional courtesy; not doing it will definitely get you off on the wrong foot.
When you can't "just say no" (18.1): Skim. Sometimes The Other Side makes demands that your client doesn't have the bargaining power to simply reject. When that happens, there are some standard moves you can try — they might not work, but they're worth a shot.
2.3.10. Reading: Common business transactions (2)
Pay-when-paid and pay-if- paid (20.7): Skim. A prime contractor might sometimes want to hold off on paying its subcontractors ("subs") until — or unless — the prime contractor gets paid itself by the customer. (But local law might restrict such provisions, or even invalidate them.)
Guaranties ([BROKEN LINK: guar-proto]): Skim.
INCOTERMS (15.8): Skim. Drafters should know about this system of uniform shorthand abbreviations for different ways of dealing with shipping, handling, etc., in the international sales of goods.
2.3.11. Reading: Efforts provisions
Best efforts (7.1): Skim. Best-efforts obligations could be dangerous, for a variety of reasons.
Commercially-reasonable efforts (9.15): This is a very commonly-used standard, especially when parties don't feel any urgency about negotiating more-precise requirements. It can be useful for drafters to some guidance to parties (and courts).
Good faith ([BROKEN LINK: good-faith]): "The parties will work together in good faith to do X" sounds nice, but in a lawsuit, its open-ended nature could lead to costlier discovery, longer trials, and rolling the dice on how the jurors might view all the different evidence that the judge might let in.
Most-favored-customer ([BROKEN LINK: mfc-optin]): Skim. This topic concerns mainly (but not always only) pricing demands by customers.
Consumer Price Index ("CPI") (10.12): Skim. Note especially that 1) there are multiple CPIs; and 2) the Consumer Price Index might not be the best index to use for pricing-adjustment terms.
Services: note especially the parts about licenses and permits
Referrals:
Audits: relevant to referral deals; also NCD § 21.6, Hollywood accounting: relevant to referral deals
Reseller relationships; also NCD § 21.11: price fixing — antitrust issues abound here
Business planning (8.4): Skim — you won't be tested on it.
2.3.13. Reading
2.3.14. Reading
Chapter 13: Representations and warranties: Often negotiated
Chapter 14: Export controls: Help your clients stay out of prison
Chapter 15: Foreign Corrupt Practices Act: Ditto
Code of conduct limitations: Complying with customers' various codes of conduct can be a pain for suppliers
Chapter 16: Getting to signature sooner
Investopedia on gross-ups (it has an example)
2.3.15. Reading
Indemnities
Hold Harmless Definition
Defending against third-party claims
Consequential damages: See this blog post.
2.3.16. Reading
Skim the following except as otherwise indicated:
Confidential information: be sure to read carefully the parts about:
two-way vs. one-way confidentiality provisions
whether or not to require a receiving party to return or destroy a disclosing party's confidential information
a receiving party's motivation to retain archive copies per Archive copies
Business Associate Agreement: this is of interest mainly when personal health information is involved
Data privacy customer commitment
Data use authorization
Skim the following except as otherwise indicated.
Assignment consent: read carefully
General representations
Government subcontract disclaimer
Labor law rights
Letters of intent: focus on what's enforceable (also Subject to Contract Definition)
No-shop clause: applicable almost exclusively to merger- and acquisition deals
Other necessary actions: often included in M&A agreements
Past dealings disclaimer: note the commentary that this clause is likely to be a bad idea
2.3.17. Reading
Termination
Material breach definition
Wrap-up period: providing an off-ramp for gradual wind-down of, e.g., a reseller- or referral relationship
Survival of terms
Look for the main takeaways in the following:
Noncompetes; also The Disappearing Future of Non-Compete Agreements (JDSupra.com 2021).
Blue-penciling
Nonsolicitation
Selected defined terms:
Affiliate definition: affiliate status can sometimes be important
And/or: a soapbox issue of mine
Discretion definition: this sometimes gets litigated
Including definition
Midnight definition: is "12 midnight" at the beginning, or the end, of the day?
Prompt definition: "prompt" and "promptly are handy because they're less categorical than "immediately"
Will definition: see mainly the commentary
2.3.18. Reading
Escalation of disputes
Lawyer involvement in disputes
Mini-trial to senior management
Final-offer arbitration
Forum selection
Governing law
Jury trial waiver
Equitable relief such as injunctions
Bond waiver for injunctions
Dispute management
Attorney fees American Rule
Attorney fees Texas Rule – know this one!
Attorney fees California Rule
2.3.19. Reading
Chapter 17: Limitations of liability
Chapter 18: Exclusive remedies
Consequential damages
Damages cap general terms
Limitations of liability general terms
Liquidated damages
Arbitration: Focus on the enforceability of arbitration clauses, and who decides whether a given dispute is or isn't arbitrable
Lenders, landlords, and other actual- or potential creditors will sometimes want the right to "accelerate" the income stream that is expected to come from future payments if the payer breaches its payment obligation(s).
3.2.1.5. Does the Biller have a deadline to accelerate?
For any particular payment failure, the Biller's right to accelerate will expire[a,b] if the notice of acceleration has not become effective on or before the date three months after the date on which the Biller first became entitled to accelerate for that payment failure.
Note
[a] The Payer might argue that it shouldn't have to live forever under a Sword of Damocles for a payment failure — and that if the Biller can't be bothered to accelerate before the deadline, then the Payer's payment failure likely didn't harm Biller that much.
[b] Possible override: "The Biller may send its notice of acceleration any time after the payment failure in question; there is no deadline for the Biller to do so."
3.2.1.6. What must the Payer do then?
The Payer must timely pay the amount(s) stated in the Biller's notice of acceleration, as long as those amount(s) are properly subject[a] to being accelerated under this Agreement.
Note
[a] The "properly subject" language has in mind that an opportunistic Biller might demand payment of amounts that were not subject to acceleration.
3.2.1.7. What effect would that have on other rights?
For emphasis: The fact that the Biller accelerates a payment obligation will not affect:[a]
any right that the Payer might have to cure the payment failure in question;
the Biller's other available remedies for a payment failure — such as, for example, suing the Payer for the unpaid amount(s) and/or foreclosing on security interests in collateral (if any); nor
any defenses (if any) that could otherwise be asserted to try to block enforcement of the payment obligation; that will be true whether the defense could be raised by the Payer or by some other party (e.g., a guarantor).
Note
[a] Students: Note the difference between the words effect (in the heading of this section) and affect (at the end of its preamble).
3.2.2.1. Notice of acceleration is usually a legal prerequisite
Notice to the Payer is likely to be a legal prerequisite for a Biller to accelerate the due date of future payments.1
To be sure, the Biller might prefer that an accelerated debt would become immediately due and payable without notice or demand. But in some jurisdictions, such a preference would likely be invalid: New York state's highest court explained that, for "[s]uch a significant alteration of the borrower's obligations … noteholders must unequivocally and overtly exercise an election to accelerate."2
3.2.2.2. Pro tips for acceleration notices
Biller: To reduce the chance of disputes:
1. It's best if your notice of acceleration states just which payment due date(s) are being moved up (or would be moved up if payment is not made); and – the new due date(s).
2. It might also be helpful if the notice of acceleration explained, in reasonable detail, why the payment due date(s) in question are being accelerated.
3. You might want to include the notice of acceleration as part of a notice of payment failure — if you do that, then the part of the notice that mentions acceleration will preferably be conspicuous.
4. Caution: Be very clear about whether acceleration is or isn't happening, so that the parties will know whether or not the notice started the clock running on the statute of limitations for foreclosure on collateral. Example: In a 2021 decision, New York's highest court addressed a lender's warning letter to a debtor. The warning letter said, in effect "you're in default, and we might accelerate if you don't pay up." The court held that the letter did not satisfy the requirement of an "unequivocal overt act" to accelerate — and thus did not start the clock running on the lender's deadline, under the statute of limitations, to invoke remedies such as foreclosure.3 (But the lender "lost" anyway, because it had to litigate the matter.)
While we're on the subject of limitation periods: A Texas statute, Tex. Civ. Prac. & Rem. Code § 16.038, resets the statute-of-limitations deadline clock after acceleration if "the accelerated maturity date is rescinded or waived in accordance with this section before the limitations period expires …." This was explained by the Texas supreme court in a 2024 decision.4
3.2.2.3. Other forms of acceleration clause
Some acceleration provisions go into much more detail than is set out in this Clause. See, for example, this long acceleration clause in a loan agreement: It provides a "laundry list" of 13 specific events that can trigger the bank's right to accelerate.
On the other hand, an example of a more-streamlined acceleration clause can be found in another loan agreement; that clause states, in its entirety: "If any payment obligation under this Note is not paid when due, the remaining unpaid principal balance and any accrued interest shall become due immediately at the option of the Lender."
3.3. Acknowledgements Effect
Having parties "acknowledge" things in a contract can be useful to establish agreed facts for future litigation. This can help parties save the time and cost that might otherwise be needed to "prove up" those facts, because in the U.S., an "acknowledgement" in the body of a contract is much like an admission in litigation.
This Clause will govern in any case where this Agreement or a related document includes a statement that a party "Alpha"[a] acknowledges a statement of fact and/or law[b] (the "Statement").
Notes
[a] This section intentionally doesn't say that Alpha is a party to this Agreement. That's because there might be circumstances in which Alpha is a non-party to this Agreement, yet somehow is bound by an acknowledgement in this Agreement. (Offhand I can't think of how that could happen, but you never know ….)
[b] The term "fact and/or law" has in mind that Alpha might be acknowledging a legal conclusion, such as in the Cellport case discussed at 3.3.2.2.
3.3.1.2. What effect would an "acknowledgement" have?
Alpha's acknowledgement of the Statement has the effects described below in this section.
Alpha stipulates, for purposes of this Agreement, that the Statement is true.
And: If another party to this Agreement "Bravo"[a] asserts that the Statement is true in connection with this Agreement, then:
Alpha WAIVES ^{[b]} any requirement that Bravo produce evidence to support the Statement; and
Alpha agrees not to contest Bravo's assertion of the Statement.
Notes
[a] Here, the party "Bravo" is a party to this Agreement. That's because it'd be pretty open-ended for Alpha to agree that any random stranger to this Agreement could take advantage of Alpha's acknowledgement.
3.3.2.1. Caution: Potential danger of acknowledgements
An acknowlegement could lock a party into a position that it might later want to modify or even disavow based on updated information. The above language follows the general rule in, e.g., U.S. federal-court cases, where the trial judge has discretion to allow a party to back away from a previous admission, under Rule 36(b) of the (U.S.) Federal Rules of Civil Procedure:
(b) Effect of an Admission; Withdrawing or Amending It. … the court may permit withdrawal or amendment if[:]
it would promote the presentation of the merits of the action and
if the court is not persuaded that it would prejudice the requesting party in maintaining or defending the action on the merits. …
3.3.2.2. Case study: Stuck with an acknowledgement
Example: In a Tenth Circuit case:
A German company, Peiker, contracted for a license under certain patents.
In the license agreement, Peiker had "acknowledged" that two of its products came within the scope of the patent claims.
Later, though, Peiker changed its mind and tried to back away from that acknowledgement, claiming that those products weren't covered by the patent after all, and thus that Peiker shouldn't have to pay royalties for them.
Peiker won in the trial court, which said that the acknowledgement in the license agreement was merely a "rebuttable presumption." On appeal, though, the Tenth Circuit reversed and remanded as to that part of the case, holding that Peiker did indeed have to pay royalties on those products:
But [certain other contract language] does not prevent the parties from agreeing that a royalty is due on a non-infringing product if doing so would benefit the convenience of the parties.
And we do not see anything in the License Agreement that can transform Peiker's acknowledgments to rebuttable presumptions. See I Oxford English Dictionary 108 (2d ed. 1989) (defining "acknowledge" as "to recognize or admit as true").
The Colorado Supreme Court has held that acknowledgements, when included in a formal contract, can be "the best kind of evidence." Because the parties acknowledged that all products falling within the terms of 1.17(i) utilize technology, designs, or architectures covered by one or more of the claims included in the Licensed Patents, no infringement analysis is necessary. By its own force, the contract requires Peiker to pay royalties on those products included in sections 1.17(i) and 3.5 of the License Agreement.5
3.3.2.3. An "acknowledgement" might assent to contract terms
"Acknowledging" terms and conditions in a contract might be interpreted as assenting to and agreeing to be bound by those terms and conditions.
Example: An employee was held to have agreed that his employer would own certain intellectual property that the employee created, because the employee had clicked on an "acknowledge" button for the employer's invention-assignment agreement.6
Example: A client of a Royal Bank of Canada investment-banking unit signed the bank's standard customer agreement.
The customer agreement included a first-person statement in which the client said, "I agree that all transactions with respect to any such Account shall be subject to the following terms."
Among those "following terms" was that the customer's transactions with the bank would be "subject to" external rules, including FINRA rules.
Citing numerous cases, the Eighth Circuit agreed with the Second Circuit's holding that such "I agree" and "subject to" language was an acknowledgement that put the client on notice of how transactions would be handled — even though that language didn't constitute a contractual commitment by the bank to handle transactions in that way.7
Example:Cisco, a global networking-technology conglomerate, once used a set of "standard terms and conditions of purchase" (archived at https://perma.cc/SD47-YCHU, discussed briefly at 20.18.3.4) to accompany purchase orders submitted to suppliers. In those Cisco T&Cs, section 1 states as follows:
Supplier's electronic acceptance, acknowledgement of this Purchase Order, or commencement of performance constitutes Supplier's acceptance of these terms and conditions.
So: Suppose that a supplier receives one of those Cisco POs, and a supplier representative responds by email, "got it, thanks." According to Cisco's T&Cs, the supplier might have legally agreed to all of Cisco's terms.
3.3.2.4. Does an acknowledgement invite reliance?
As discussed at 21.16 (and illustrated in the "Hill of Proof" diagram at 21.16.2): If a party "Alice" wants to claim that another party "Bob" made a false representation, Alice must show:
that she (Alice) relied on the representation, and
that her reliance was reasonable.
But if Bob acknowledged the statement in a contract with Alice, then Alice would likely have a much-easier time making both of those showings.
3.3.2.5. Don't be a jerk in drafting acknowledgements
Some inexperienced drafters include statements in which another party "acknowledges" a supposed fact that would be against that party's interest. Here's an overreaching example of a kind that's sometimes seen in confidentiality agreements ("NDAs"):
Recipient acknowledges that Discloser would be irreparably harmed by a breach or threatened breach of Recipient's confidentiality obligations under this Agreement.
The intent here is presumably for Recipient to waive Discloser's burden of proof in seeking a preliminary injunction or comparable relief (see 12.15).
This would slow up getting the NDA signed, because confronted with such an acknowledgement clause in the draft NDA, many Recipient counsel would probably:
delete this equitable-relief acknowledgement entirely, or
change "would be …" to "could be irreparably harmed" — AND
be irritated at Discloser's counsel for the obnoxious drafting.
3.3.2.6. Some other acknowlegement examples "in the wild"
10. Representations, Warranties and Guarantees[sic]. a. … Vendor acknowledges and agrees [sic] that it shall be a breach of its representation, warranty and guarantee if any Goods are in violation of any Laws at any time, including after the sale of such Goods by Vendor to Purchaser. … Vendor acknowledges that its obligations under this paragraph are an appropriate allocation of risk between Vendor and Purchaser.
1. Employee Acknowledgment. Employee has been provided with, and hereby acknowledges receipt of, a Prospectus for the Plan, which contains, among other things, a detailed description of the Other Share-Based Awards provisions of the Plan. Employee further acknowledges that he or she has read the Prospectus, the Plan and this Agreement (including the Jurisdiction-Specific Addendum), and that Employee understands the provisions thereof.
(Emphasis added.)
3.3.2.7. Not quite the same: Notarized acknowlegements
An acknowledgement in a notary certificates (a.k.a. "notarization") will generally have somewhat-similar effect, in that someone signing a document:
usually must provide identification to the notary public (or other official); and
states to the notary that he or she (the signer) in fact signed the document that's being notarized.
For more about notarization, see [BROKEN LINK: notary-top].
3.4. Adoption of Diamond Lane
Clause text
When this Clause is agreed to in this Agreement: Whenever this Agreement "adopts" a Diamond Lane clause or option (each, a "provision"), the provision is incorporated by reference (15.7) into this Agreement as though the provision had been copied and pasted into this Agreement.
3.5. Advance Payment Demands
A customer might prove to be a slow payer — and at some point the supplier might say, Basta! (Italian for Enough!) and demand payment in advance for future orders. This Clause sets out a procedure for doing so. (See 6.4.2.1 for some famous examples of slow- or nonpayment.)
This Agreement contemplates that one party (the "Biller") can expect payment from another party (the "Payer") for goods, services, or something else.
This Agreement also contemplates that the Payer can pay later, e.g., by setting out payment terms (see Clause 20.8).
3.5.1.2. When might the Biller require payment in advance?
For good reason,(3.5.2.2) the Biller may require payment in advance instead of whatever payment terms were contemplated in this Agreement.
3.5.1.3. How much advance warning is required?
To require payment in advance, the Biller must so advise the Payer a reasonable time in advance8 — otherwise, the previously-agreed payment arrangements will continue in effect.
3.5.1.4. What happens if the Payer objects?
If the parties disagree about what would constitute good reason and/or reasonable notice for advance payment under this Clause, then at either party's request:9
first, the parties will escalate the dispute internally, as provided in Clause 12.16; and
if that doesn't resolve the disagreement, then the parties escalate the disagreement to a neutral advisor as provided in Clause 12.17.
So as not to delay getting to signature, a drafter representing a supplier should think about whether not to include this Clause in a contract for a customer. That's because:
The law might already permit the supplier to revert to cash-on-delivery ("C.O.D.") or advance-payment terms if the customer's late payments constituted a "material" breach of the contract (see the definition of material at Clause 17.2.1.4 and its commentary); and
Raising the issue with the customer might "poke the bear,"(20.3) i.e., it could remind the customer's contract negotiator to insist on editing the draft contract to override what the law says, in a way that might disadvantage the supplier.
3.5.2.2. What might constitute "good reason"?
This Clause intentionally doesn't try to define the term good reason for demanding payment up front. That's because it's likely not a good use of time to try to define the term up front — other than perhaps stating in this Agreement that Particular Thing‑X is deemed good reason. That's because:
A dispute on that point might never arise, so deferring discussion of the term can help the parties to get this Agreement signed more quickly; and
Section 3.5.1.4 provides for escalation of disputes, following the rule, if you don't want to (or just can't) specify the agreed outcome now, then consider specifying an agreed process to figure it out later.
But in appropriate circumstances, "good reason" for demanding advance payment could include, for example:
The Payer was late more than once in making payments required in connection with this Agreement.
The Payer was significantly late with one or more such required payments — obviously the phrase "significantly late" is open to interpretation and thus to dispute; still, including the phrase gives the Biller some room to try to protect itself from game-playing by the Payer.
The Payer is placing an unusually-large order.
The Biller has other good reason to require payment in advance.
3.6. Affiliate Definition
Sometimes contracting parties will care about what constitutes an "affiliate" of a party; see 3.6.2.1 for a discussion of some possible situations where that might be the case.
This Clause will govern in any case where it matters whether two persons[a] (referred to here as "Alpha" and "Bravo") are considered "affiliates" for purposes of this Agreement.
As one particular case: Bravo could be an organization "O" that has (i) a board, and (ii) voting shares, or equivalent interests,[b] that are entitled to vote for the election of members of the organization's board.
Notes
[a] Two persons: See the diagram at 3.6.2.2, showing the affiliate relationships between various companies in the Google corporate family.
(Keep in mind that non-parties might sometimes be affected by this Clause, as discussed at 3.6.2.9.)
[b] Equivalent interests: Some types of organization (e.g., limited-liability companies) don't have "shares" per se.
3.6.1.2. What does it take to have affiliate status?
For purposes of this Agreement, Alpha and Bravo are affiliates of each other only as follows: [a]
to the extent stated in this Clause; and/or
if this Agreement clearly says that they are. [b]
Notes
[a] For the most part, this Clause simply summarizes how the law works in the U.S., e.g., in SEC Rule 405, whose text is similar to what's seen in other sources.
(Exception: The "control by management power" provision at section 3.6.1.5 below is what could be considered a best practice, for reasons discussed in the commentary there.)
[b] This gives contract drafters an easy way to set up "custom" affiliate relationships.
3.6.1.3. Affiliate status can exist through "control"
Alpha and Bravo are affiliates if, directly or indirectly, Alpha "controls" Bravo (as defined below), directly or indirectly.
Alpha and Bravo are affiliates if, directly or indirectly, they are under common control, that is, under the direct- or indirect control of a third person.
Notes
See the diagrammed example at 3.6.2.2, showing the affiliate relationships between various companies in the Google corporate family.
3.6.1.4. "Control" can exist via voting control of the board
Alpha controls the organization O for this purpose if Alpha holds the legally-enforceable power[a] to vote more than 50%[b] of O's voting shares for the election of members of the organization's board.
Alpha also controls O for this purpose if Alpha holds the legally-enforceable power to elect or appoint more than 50%[b] of the members of O's board entitled to vote to approve or disapprove a proposed board action.${[c]}
If O's voting shares are divided into classes,[d] then control requires the requisite percentage[e] in each such class.
Notes
[a] Legally-enforceable voting power can arise in a variety of ways; see Clause 25.3.
[b] As is pretty typical, this section uses the basic majority-rule notion to define control by voting power. But: Contract drafters should think about why they're defining the term affiliate, because different answers might warrant changing the above default percentages.
[c] If someone can "hire and fire" a working majority of an organization's board, that's generally enough for control of the organization.
[d] Class-based voting isn't uncommon; again, see Clause 25.3.
[e] Using the term "the requisite percentage" deletes one possible source of revision error during negotiation, namely changing a voting percentage in subdivision a or b but forgetting to do it in subdivision c — which does happen, as discussed at the D.R.Y. rule (11.1): For terms such as numbers, Don't Repeat Yourself.
3.6.1.5. Legal power over a party's affairs could be "control"
Alpha controls Bravo if Alpha has the legally-enforceable power[a] — for example, by an enforceable contract — to direct Bravo's affairs.
3.6.1.6. Could the list of affiliates change over time?
A new person could become an affiliate by qualifying as such — moreover, if circumstances were to change, then an existing affiliate could lose that status.
Notes
Pro tip: Drafters might want to consider about what should happen in case of a change of affiliate status, e.g., because an existing affiliate gets sold to another company; see the discussion at 3.6.2.3.
3.6.2.1. Some reasons affiliate status might matter
Sometimes contracting parties will care about what constitutes an "affiliate" of a party, because:
The contract might give certain rights to "affiliates" of one or another party. This could be, for example, the right to acquire goods or services on the same terms as in this Agreement. [DCT TO DO: Find examples in master service agreements / master purchase agreements]
The contract might also impose obligations on a party, where those obligations are tied in somehow with affiliates of one or another party (e.g., an obligation to be financially responsible for actions of an affilate).
In either case, it might be important to know just who qualifies as an affiliate of the relevant party at the relevant time or times. But "roll your own" definitions of the term affiliate can lead to difficulties, as discussed below.
3.6.2.2. Some real-life affiliates through "control"
Here are some real-world example of affiliates under the control and common control branches in the above text:
Both Google and YouTube are subsidiaries of "parent company" Alphabet Inc. — so:
Alphabet and Google are affiliates of each other under subdivision 1 because Alphabet controls Google; ditto for Alphabet and YouTube;
Google and YouTube are affiliates of each other under subdivision 2 because they're both under the common control of Alphabet.
Fitbit is a subsidiary of Google, so Fitbit is an indirect subsidiary of Alphabet as well as a direct subsidiary of Google.
Fitbit is likewise an affiliate of YouTube because of their common control by Alphabet.
3.6.2.3. Could the set of affiliates grow (or shrink)?
In some situations, drafters might want to consider whether future companies should be regarded as affiliates.
Example:Ellington v. EMI Music involved the estate of the legendary musician Duke Ellington. New York's highest court held that: "Absent explicit language demonstrating the parties' intent to bind future affiliates of the contracting parties, the term 'affiliate' includes only those affiliates in existence at the time that the contract was executed."10
Counterexample: In GTE Wireless, the First Circuit held that a company, Cellexis, had breached a settlement agreement not to sue GTE (now part of Verizon) or its affiliates when it sued a company that, at the time of the settlement agreement, had not been a GTE affiliate, but that later became an affiliate. The court reasoned that when read as a whole, the contract language clearly contemplated that future affiliates would also be shielded by the covenant not to sue.11
3.6.2.4. Could unwanted future affiliates appear?
Suppose that A and B enter into a contract under which B is obligated to do certain things for A's affiliates (e.g., grant special pricing, or allow access to B's trade secrets). And now suppose that A acquires a new affiliate — namely one of B's competitors, which acquired ownership of A in a merger transaction. Clearly B might be unhappy about having to share its trade secrets with its competitor, so B's drafter(s) should keep that possibility in mind.
3.6.2.5. Caution: Control via (unspecified) "management power"?
Some contracts' definitions of affiliate refer to de facto "control relationships" — without defining what would qualify. That's generally not a good idea, even though that concept can be found in U.S. securities regulations.12
To be sure: In a regulatory context, just plain "management power," without the "legally-enforceable" part, might be acceptable, despite its vagueness. But in a commercial context, the vagueness of the generic term could lead to expensive, time-consuming litigation.
Example: In a 2010 Fifth Circuit case, the parties were forced to litigate which party had "control" of a vessel that was destroyed by fire — and thus which party or parties should be liable for damages.13 The outcome isn't important for our purposes here, just that the dispute was certainly costly to the parties.
Example: In a 2010 New York case, the uncertain meaning of "control," as used in a contract, meant that the parties had to litigate whether investment bank UBS was entitled to a $10 million fee from a company, Red Zone, headed by Daniel Snyder, the owner of what was then called the Washington Redskins NFL team.14
Another caution: A knock-on effect of the UBS lawsuit was that Red Zone scored a $17 million legal-malpractice verdict against its blue-chip NYC law firm for failing to nail down the definition of control to Red Zone's hindsight liking.
3.6.2.6. Affiliate status: Be sure this Agreement names the correct contracting party
In corporate "families," different affiliates can share variations on the same name. Example: The global technology company Apple has subsidiaries including Apple Sales International Ltd. and Apple Operations International Ltd., both of which were directly involved in a decision by the European Court of Justice that Apple owed Ireland some €13 billion (USD $14.4 billion).
Not naming the correct company as a party to the contract can be disastrous for other parties:
Example: In the Seventh Circuit's Northbound Group case, the plaintiff, Northbound, was having business difficulties and badly wanted to be acquired by the defendant, Norvax. When Northbound entered into the acquisition agreement, the other named party was not Norvax, but Leadbot, which was a newly-created subsidiary of Norvax: Leadbot was to acquire Northbound's assets and pay the purchase price in the form of an earnout. Evidently Northbound couldn't get Norvax to [BROKEN LINK: guar-proto] Leadbot's payment obligations (see [BROKEN LINK: guar-proto]).
Later, a dispute arose over payments that Leadbot had withheld. Northbound went to court for the withheld payments; it sued not just Leadbot — which had no assets and so was judgment-proof — but also Norvax, i.e., the parent company of Leadbot.
Norvax successfully sought summary judgment dismissing it from the case; in affirming, the Seventh Circuit court didn't even reach the merits: "It goes without saying that a contract cannot bind a nonparty. If [Northbound] is entitled to damages for breach of contract, it cannot recover them in a suit against [Norvax] because [Norvax] was not a party to the contract."15 Quoting one of its prior cases, the court also implicitly noted that Norvax had not guaranteed Leadbot's payment obligations.16
(This tale — of a party's entering into a relationship, but not the one the party originally intended — brings to mind a famous story from the Hebrew Bible: As recounted in Genesis chapter 29, Isaac's son Jacob (later renamed Israel) worked for his maternal uncle Laban for seven years, so that he, Jacob, could marry Laban's younger daughter Rachel. But on the wedding night, Laban brought his older daughter Leah to an unsuspecting Jacob, who duly performed his marital duty, not realizing he'd been deceived as to which sister was with him. In the Northbound case, of course, Northbound presumably knew or should have known what it was getting into.)
Example: In the 2023 Frontline Technologies case in the Delaware chancery court, employees of an LLC were granted equity interests in the LLC's parent company. The employees' equity agreement included a covenant not to compete with the parent company, but said nothing about not competing with the LLC itself, i.e., the actual employer. The Delaware chancery court held that the covenant didn't prevent the employees from leaving and going to work for a competitor of the employer.17
3.6.2.7. Caution: In this Agreement, don't list the parties as "ABC Corp. and affiliates"
It's usually a bad idea for a contract's preamble to state that the contract is between (for example) "ABC Corporation ('Customer') and its affiliates and XYZ Inc. ('Supplier').
Why might that even come up? Well, suppose that ABC is negotiating a master purchase agreement with XYZ. Not unusually, ABC wants its various affiliates to be able to place orders with XYZ on the same master agreement, so that the affiliates won't have to incur the cost and delay of renegotiating terms and conditions with XYZ.
It'd be easy — and ABC might ask — to recite, in the master purchase agreement, that the parties are as quoted above. But that's not a great idea, unless each ABC affiliate actually signs the agreement as a party, committing, on its own, to upholding the obligations in the master purchase agreement. Experienced commentators seem to agree.18
Thus, a safer practice would be to state the specific rights and obligations that affiliates have under the contract, instead of making them parties.
Example: Consider the Fifth Circuit's 2023 NOV decision: The issue was (still is?) whether a contracting party had authority to bind one of its affiliates; as near as I can tell, at this writing (fall 2024) the case seems still to be the subject of expensive and as-yet inconclusive litigation.19
3.6.2.8. Caution: Is the contracting affiliate "good for" its obligations?
When a contract addresses affiliates' rights, it might include language such as the following, adapted from the real-life Master Supply & Purchasing Agreement of one subsidiary of the alarm company ADT Corporation:
Each Affiliate shall only be liable for those obligations expressly set forth in the Purchase Order to which it is a party. In no event will Buyer be liable for any of the obligations or liabilities of any Affiliate pursuant to this Agreement.
In such a situation, the supplier might want to consider doing one or both of the following:
Put in the draft contract a provision that the supplier may reject an affiliate's order — ideally for any reason or no reason, but at a minimum if the supplier has reasonable concerns about the affiliate's ability to pay; and/or
Get the (solvent) parent company, or some other specific, creditworthy affiliate of the named customer, to guarantee payment of all orders when a customer affiliate is the buyer (see Option 20.18.2.1).
This could turn out to be important. Example: In a California case, a dispute arose between Huy Fong, a famed manufacturer of sriracha hot sauce, and Underwood Ranches, a pepper grower, because Huy Fong wanted Underwood to deal with a newly-created Huy Fong subsidiary, Chilico — but Chilico "did not have the assets to ensure that Underwood would be paid and Huy Fong refused to guarantee the Chilico contract." The dispute turned bitter, with the parties suing each other. In the end, it worked out sort-of OK for Underwood: After years of costly litigation, a California jury awarded Underwood $13 million in compensatory damages and $10 million for fraud. But the case illustrates why parties and their contract drafters should consider the risk of doing business with the "wrong" company in a corporate "family."
Relatedly, see also the discussion of the Northbound lawsuit at 3.6.2.6.
3.6.2.9. Could a non-signatory affiliate be bound by this Agreement?
An affiliate of a contracting party might be bound by the contract if:
the contracting party — or the person signing on behalf of that party — controlled the affiliate, and
the contract stated that the contract is to benefit the affiliate.
Example: In a 2016 decision, Delaware's chancery court reached the conclusion summarized above, in a case where:
the contract in suit stated that it was creating a strategic alliance for the contracting party and its affiliates, and
the contract had been signed by the president of the contracting party, who was also the sole managing member of the affiliate.
The court held that the affiliate was bound by — and had violated — certain restrictions in the contract.20
3.7. After (or from) Definition
Clause text
Defining by example:[a] A time period of one year after or from June 30, 20x4 will end at exactly12:00:00 midnight, in the relevant time zone, at the beginning of June 30, 20x5. [b]
[b] Some contracts specify that particular obligations and/or benefits will exist only during a stated period "after" or "from" a particular date or event. The precise end time could be enormously significant. Example: In a factually-complex case involving an oil-drilling lease, the Texas supreme court — after exploring state-court efforts to define "after," going back to pre-statehood days — held that a relevant time period had expired on January 1, not December 31 — for a difference in damages of some $180 million.21
3.8. Agreements to agree: They're unenforceable …
Business people and drafters can sometimes be tempted to say, in a contract, "we don't know what we want to do about Issue X, so we'll leave that for later." That might, or might not, cause problems later.
In a contract, an "agreement to agree" is not enforceable — but this is distinct from the situation in which a contract is materially complete but has "open terms" that a court can readily calculate or discern; in the latter situation, this Agreement is enforceable if it otherwise qualifies as such under the law.
Example: In a 2020 decision, the Federal Circuit explained how the law works in this regard, and affirmed a summary judgment that the contract in question was indeed an unenforceable agreement to agree, and not an otherwise-enforceable agreement with open terms.22
3.9. All Definition
You might think that the term "all" wouldn't need to be defined. But disputes have been known to arise.
The term "all" means just that, unless a party were to plead and prove (i) mutual mistake or (ii) fraud, in either case as provided by law.
For emphasis: Subdivision a will be true even if one or more parties did not know — or forgot, or could not have known — that particular things were encompassed by the term "all."
3.9.2. Reading
The Indiana supreme court's Wohlt case involved a divorcing couple, Christi and Gus, who owned a business. Their agreed settlement decree allocated certain business assets to Christi and "all" other business assets to Gus. The couple somehow forgot that their business owned 6.21 units of Bitcoin and 1,000 units each of Ethereum and Ethereum Classic — together worth nearly $4 million at this writing. • Later, Gus realized that the business owned those forgotten crypto assets; his lawyer notified Christi's lawyer. Christi went back to court, seeking to claim part-ownership of the forgotten crypto assets. • The trial court gave Christi half-ownership of those assets — but a state appeals court reversed on that point, holding that Christi never asserted mutual mistake or fraud, and so the agreement giving Gus ownership of "all" other assets meant just that. The state supreme court affirmed.23
Bad—unclear—contractual drafting …. keeps judges and lawyers gainfully employed. – Delaware Vice Chancellor Sam Glasscock III.24
The inadvertent drafting of ambiguous terms is an occupational hazard for contract drafters. You'll definitely want to stay alert to the possibility that you might be creating such terms.
A contract term is ambiguous if it is susceptible to two or more plausible interpretations — which can cause major difficulties for the parties, because an ambiguous term in a contract lets one or both parties carry on costly fights about just what meaning should be ascribed to the term.
Incidentally, in Plains Exploration, the Texas supreme court noted a generally-accepted point in the law: "Mere disagreement over the interpretation of an agreement does not necessarily render the contract ambiguous."25
If a potential ambiguity comes to light after a contract is signed, each party might have new, self-interested reasons — such as changed circumstances, or different people calling the shots — to argue for interpreting the provision in a way that disadvantages the other party. That in turn can lead to disputes and even lawsuits.
And if a dispute does arise over a potentially-ambiguous provision, the judge might be able to use standard legal rules of interpretation to decide the case quickly, e.g., on a motion to dismiss on the pleadings or a motion for summary judgment (15.22.2).
But if applying those rules doesn't resolve the dispute, then the term in question is indeed ambiguous, and (in the U.S.) the court is not allowed to grant a quick summary judgment on undisputed facts — instead, the court must conduct a trial (if they're lucky, a trial on just that one issue), with all the attendant burden, expense, and uncertainty, so that the trier of fact (a jury, or perhaps the judge) can find facts as needed to determine the parties' intent concerning the disputed provision.
And there might well be a lot of money riding on whether a court concludes that a contract term is or is not ambiguous; for example, in the Plains Exploration Texas case mentioned above, the losing party ultimately missed out recovering the roughly $44 million that it had claimed it was owed under the contract in suit, because the state's supreme court concluded that the relevant contract language unambiguously ruled out the losing party's claim.
As another high-stakes example, consider a Fifth Circuit case in which an off-shore drilling rig was severely damaged by fire while in drydock in Galveston for maintenance:
The drilling rig's owner and the drydock owner disputed which of the two parties had had "control" of the rig at the time of the fire.
The intended meaning of "control" was important because under the parties' agreement, if the drilling rig's owner had control at the time of the fire, then the drydock owner was not financially responsible for the fire damage.
Needless to say, the parties hotly contested that meaning (as it were …).
The trial court held that the term "control" was unambiguous, and granted summary judgment that, on the undisputed facts, the rig owner, not the dock owner, had been in control at the time of the fire. The appeals court affirmed; thus, the parties were spared the expense, inconvenience, and uncertainty of a trial on the issue of control of the rig.26
Of course, the drilling-rig owner would certainly have preferred to go to trial and take its chances, versus losing on summary judgment without ever getting a shot at persuading a jury. But for the drydock owner, not having to go to trial was most assuredly a win in its own right.
So: Spotting and fixing potential ambiguities in a contract before signature should be a prime goal of all contract drafters and reviewers. To adapt an in-class comment by one of my former students (in a different context), determining the meaning of an ambiguous term in a signed contract is "a conversation we don't want to have."
A New York City judge notes: "President and later Chief Justice Taft got it right, though in the negative: 'Don't write so that you can be understood; write so that you can't be misunderstood.'"27
4.1.2. Hypothetical example: A date-related ambiguity
Here's a simple example of a potential ambiguity: Suppose that our hypothetical client MathWhiz (2.2) has signed a lease for office space, where it is the tenant. And suppose also that the lease says the following:
Tenant will vacate the Premises no later than 12 midnight on December 15; Tenant's failure to do so will be a material breach of this Agreement.
(Bold-faced emphasis added.)
Now suppose that a MathWhiz representative calls you up and says that they can't move out before 10:00 a.m. on December 15.
QUESTION At that time, on that day:
Would MathWhiz still have 14 hours left in which to finish moving out?
Or would MathWhiz already in material breach because it didn't move out by the previous midnight?
In other words, does "by midnight" mean before midnight at the start of the day, or before midnight at the end of the day?
This illustrates a useful drafting principle: W.I.D.D. – When In Doubt, Define! (4.1.4)
Ripple-effect business complications can arise from such potential ambiguities — in the December 15 example above, the landlord might have already re-leased the premises to a new tenant, with a promise that the new tenant can move in on that date.
QUESTION: How would you rewrite the "Tenant will vacate the Premises …." sentence to resolve this ambiguity?
4.1.3. The A.T.A.R.I. Rule: Avoid the Argument: Rewrite It — Usually
But why usually? A: Because there are (rare) times when you might not want to fix an ambiguity, as discussed in more detail at 4.1.5.
4.1.4. The W.I.D.D. Rule: When In Doubt, Define!
Savvy contract drafters prefer not to roll the dice about whether a court will apply the above principles in a way that favors the drafter's client. So: An extremely-useful general principle of contract drafting is, W.I.D.D. – When In Doubt, Define!.
(But don't go overboard
4.1.5.But: Strategically, an ambiguity might be better left in place
The A.T.A.R.I. Rule (3.1) and W.I.D.D. are great rules of thumb — but neither is a hard-and-fast rule; a drafter should think strategically before deciding whether to revise a potentially-ambiguous contract term during negotiations.
• Did your side draft the potentially-ambiguous language? Then yes, fix it — especially if the draft hasn't yet been sent to the other side. That's because under the doctrine of contra proferentem (10.13), a court might resolve the question in favor of the other side because your side was responsible for the ambiguity.
• What if the other side drafted the potentially-ambiguous language? If the other side drafted the language in question, then you might not want to say anything about it, in the hope that contra proferentem (10.13) would result in an interpretation favorable to your client.
If you didn't have the superior bargaining position, it might be especially tempting to keep mum about a potential ambiguity: If you were to "poke the bear" (20.3) — that is, call the other side's attention to the issue — then the other side might wake up and ask for something that's even worse for your client. (See 20.3 for examples.)
BUT: Later, the other side might be able to show that you noticed, but failed to raise, an ambiguity created by the other side's drafter — and under those circumstances, the other side might try to argue that, because your client "laid behind the log," your client should be held to have waived any benefit that it might otherwise have accrued from the contra proferentem doctrine.
And pragmatically: If you don’t ask the other side to correct an ambiguity that they created, then you might be setting up your client for an expensive, burdensome, future fight — a fight that perhaps might have been avoided with clearer drafting — and it might have been better to have that fight before the contract is signed, while your client still had the option to walk away.
The W.I.D.A.C. Rule applies here: When In Doubt, Ask the Client (and/or your supervising attorney), and be ready with a recommendation, including your reasons — also, be sure to confirm the decision with the client with a quick email. (See 20.1 for more on this.)
4.1.6. What if The Other Side balks at fixing ambiguities?
It's been known to happen that, during contract negotiations, Party A asks to rewrite an ambiguity, but Party B's lawyer says, there's no need to rewrite it, because the courts construe it the way you say. Is that good enough? Should Party A meekly accept Party B's assertion? Very possibly not:
In a dispute, Party B's lawyers will argue — often shamelessly — for whatever interpretation seems good to them at the time, regardless of what was previously said by Party B.
Party A will be reluctant to risk having a court hold that, by not insisting on clarifying the ambiguity, Party A waived its own preferred interpretation of the language.
On the other hand: Party B might be stuck with its prior assertion to Party A, on estoppel grounds or analogously to contra proferentem (see 10.13).
This will ultimately come down to how Party A's business people judge the overall business risk.
4.1.7. What if the other side balks at rewriting?
4.1.8.Vagueness is a type of potential ambiguity – fix it?
As one type of potential ambiguity, a term is vague if its precise meaning is uncertain.
– A classic example is the term tall: If you say that someone is tall, you could be referring to that a third-grader who is tall for his- or her age but is still very-much shorter than the general adult population.
– Another classic example of vagueness is the word cool; depending on the season and the locale, the term could refer to a wide range of temperatures. For example, in Houston in August a mid-day temperature of 80ºF would be regarded as (comparatively) cool, whereas in Point Barrow, Alaska, the same temperature at that time would likely be thought of as a real scorcher.
(Of course, as any parent in an English-speaking family knows, the word cool could also be ambiguous — in the sense of having multiple possible meanings — in addition to being vague.)
Let's look at another example, this time a silly one. Consider the following provision in a contract for a home caregiver:
Nurse will visit Patient's house each day, check her vital signs, and give her cat food.
The sentence above is potentially ambiguous, in that conceivably it could take on any of three meanings:
1. Nurse is to put a bowl of food down for Patient's cat each day.
2. Nurse is to deliver cat food to Patient when Nurse visits.
3. Nurse is to feed cat food to Patient. (OK, that one might be a stretch.)
In addition, the sentence above might also be vague if it turned out that Patient had more than one cat.
Moreover, meanings #1 and #2 above are vague in another sense as well: The term cat food encompasses wet food, dry food, etc.
Vagueness is not necessarily a bad thing. Parties might be confident that, if a question ever arises, it'll be clear (or can be expeditiously determined) just what was intended by, say, the term reasonable efforts.
But:Too-vague a term might lead to an agreement being held unenforceable. Example: Idaho's supreme court affirmed a divorce court's holding that, in a divorce settlement agreement, the term "[s]pousal support shall be reviewed every two years" was "so vague, uncertain, indefinite, and incomplete that it is unenforceable." †Smith v. Smith, No. 50184 (Id. Dec. 19, 2024).
So here's a rule of thumb: Vagueness is not always worth fixing — but a vague term is always worth taking a look at to see if it should be replaced by a more-precise term.
4.1.9. Optional further reading about ambiguity
Some amusing examples of ambiguity can be read at the Wikipedia article on Syntactic ambiguity, at https://goo.gl/6zmrH5
See also numerous categorized case citations by KPMG in-house attorney Vince Martorana, at A Guide to Contract Interpretation (ReedSmith.com 2014).
4.2. Amendments in Writing
Contracts typically state that amendments must be in writing; this is to try to forestall after-the-fact disputes about whether the parties orally agreed to modify the contract.
An amendment to this Agreement will be effective only:
as stated in this Clause; or
as expressly stated otherwise in this Agreement.[a]
Note
[a] One possible exception might be if this Agreement allows one party to amend this Agreement unilaterally by giving notice, as stated in Clause 4.3.
4.2.1.2. Each amendment must be in writing
For an amendment to this Agreement to be binding, the amendment must be clearly stated in a written document[a] (the "amendment document").[b]
[b] *Pro tip: For an extensive amendment, consider drafting a replacement version of this Agreement, with a title such as, "Amended and Restated [title of this Agreement]," as discussed at 4.2.2.4.
4.2.1.3. What kind of title must an amendment have?
The amendment document must have a title that clearly indicates that this Agreement is being modified.
Note
Requiring a clear amendment title follows the One Great Rule of Contract Drafting, namely Serve the Reader!
Drafters shouldn't assume that parties would notice a contract amendment contained in some other type of document that they're being asked to sign. (See 4.2.2.5 for examples.)
4.2.1.4. Which party must sign an amendment?
The amendment document must be signed on behalf of each party that is to be bound by the amendment.
4.2.1.6. What if a party later disputes this Clause?
This section will govern if one party (the "Claimant") claims:
that this Agreement was allegedly modified in some other manner — for example, by an oral agreement; and
that another party (the "Respondent") should be legally bound by the purported non-written amendment notwithstanding this Clause.[a]
The Claimant must support its claim with clear and convincing evidence that the Respondent knowingly and intentionally WAIVED the relevant requirements of this Clause.
If the Claimant's claim of non-written modification is made in a jury trial, then:
The Respondent may inform the jury about this Clause; and
The Claimant must not oppose including this Clause (or paraphrasing‑ or summarizing it) in the jury instructions[b] if the Respondent proposes doing so.
Note
[a] See 4.2.2.13 for discussion of the limited enforceability, in some jurisdictions, of written-amendment requirements such as that of this Clause.
[b] This subdivision has in mind that: (1) in a jury trial, the jury might not look with favor on a party's trying to back out of the written-amendment requirement of this Clause, but (2) the trial judge's jury instructions might not mention this Clause without the parties' agreement (and perhaps not even then).
4.2.2.1. Introduction: Why require written amendments?
Disputes about oral contract modifications can arise because, for example:
human memory is fallible, sometimes very much so;
people tend to remember things the way they want to remember them;
people can shade the truth, or even flat-out lie, if they think it will help them.
This is especially true as time passes after an event, often because the parties' circumstances change.
(These widespread human failings are discussed in more detail at 10.20.)
4.2.2.2. How formal must an amendment document be?
Technically, a binding written document amending this Agreement could be an exchange of emails.
Amendments can even occur in text messages — this happened in a Florida lawsuit between a digital ad agency and one of its clients, an e-cigarette manufacturer, resulting in the manufacturer having to pay the agency more than $1 million dollars in additional fees.28
Caution: A text-message amendment might not be a good idea because:
it might disappear, and
for that reason, even if it didn't disappear, it might be legally ineffective in some jurisdictions, as discussed at 23.1.
For the same reason, an amendment on something like a Post-It note would be inadvisable, even though technically it'd be binding if it was otherwise sufficient.
4.2.2.3. Is an amendment needed? Or just a waiver?
According to Black's Law Dictionary (the canonical English-language legal dictionary), an amendment is "[a] formal and usu. [usually] minor revision or addition proposed or made to a statute, constitution, pleading, order, or other instrument …."
Imagine a contract between two parties whom we'll call "Fred" and "Ginger." Suppose that the contract calls for Ginger to take care of Fred's lawn; Ginger's obligations include mowing the lawn each week, raking leaves in the autumn, etc.
Now suppose that on one particular day, Fred comes outside to talk to Ginger when she arrives to mow the lawn.
If Fred says, "Hi Ginger — I don't need the lawn mowed this week." That's known as a waiver, by Fred, of Ginger's obligation for that occasion.
Or, Fred might say, "never mind, Ginger, I don't need you to mow the lawn ever, because my teen-aged son wants to do it from now on — so let's talk about changing the contract to reduce what you have to do and also reduce what I pay you." If Ginger agrees, that's known as an amendment of the contract.
4.2.2.4. Pro tip: Consider an "amended and restated agreement"
If you'll be making extensive changes to a contract — or if there have already been multiple amendments to the same contract over time — then consider doing a complete "amended and restated" agreement, with that title.
Example: As of this writing (fall 2024), the title of the Enterprise Products Partners limited-partnership agreement is, "Seventh Amended and Restated Agreement of Limited Partnership of Enterprise Products Partners L.P." (emphasis added).
Caution: If doing an amended-and-restated agreement, you'll want to consider whether you could be wiping out a provision that your client might later want to rely on, as happened in a Sixth Circuit case where an earlier contract contained a payment guaranty, but an amended-and-restated contract did not; presumably this was to the chagrin of the creditor that, as a result, didn't get paid.29
4.2.2.5. Why every amendment needs a clear title
If a document purports to be an "amendment," that fact should be immediately obvious to the reader. Otherwise, a party to a contract might (opportunistically) claim that some random document was, surprise!, an amendment to the contract.
Example: The owner of an office complex in Maryland sold the complex to a new owner.
As is typical in such sale transactions, the complex's tenants signed an estoppel certificate.
Later, one tenant's lease term came to an end, and the tenant began preparing to vacate the premises.
The new owner demanded that the tenant bear the cost of making various repairs, claiming that the estoppel certificate signed by the tenant had modified the terms of the lease to require this.
The departing tenant refused, so the new owner sued.
The trial court granted summary judgment in favor of the departing tenant, holding that the estoppel certificate had not modified the lease, and the appeals court agreed.
Lesson: This costly litigation might have been avoided by clearer terms in the lease about what it would take to amend the lease.30
4.2.2.6. Make the title useful
Pro tip: In the amendment's title, consider including a series number and date — and perhaps even include a (brief) mention of the amendment's purpose — to reduce the chances of confusion and make it easier for a reader to find the amendment when skimming a list of document titles.
Example:
❌ Amendment
✅ Amendment No. 1, Dated December 25, 202x, to Asset Purchase Agreement (Increase of Purchase Price)
If making further amendments to Amendment No. 1 itself:
Amendment No. 2 No. 1.1, Dated December 31, 202x, to Asset Purchase Agreement
4.2.2.7. Caution: Maybe don't make all parties sign
a. If a contract states that amendments must be signed by all parties, then a missing signature could render the entire amendment unenforceable — even if the omission was inadvertent. This was the result in more than one court case, illustrating the R.O.O.M. principle — Root Out Opportunities for Mistakes (or Misunderstandings. (Or if you prefer: R.O.O.F.: Root Out Opportunities for F[oul]-ups.)
Example: In Expo Properties, cited above, the tenant's lease explicitly required both the tenant and the landlord to sign any proposed amendments of the lease — but the "estoppel certificate" in question had been signed by the tenant only, so the lease was not modified to be more favorable to the landlord.
Example: JPMorgan Chase lent money to a borrower. The loan agreement specifically said that both parties were required to sign any modification. The borrower claimed that the loan agreement had been modified — but the court said that the modification was ineffective because JPMorgan Chase never did countersign it.31
b. Sure, it's usually better if all parties sign the amendment document. But the law in the U.S. ordinarily requires the signature of just the party that's supposedly bound by the amendment.
Example: In a Seventh Circuit case, a former law-firm associate sued the firm for compensation he claimed to have been owed; a federal district court dismissed his various claims on summary judgment — but an appeals court reversed (and remanded the lawyer's breach-of-contract claims) because the law firm had signed a letter to the associate increasing his compensation over that in his employment agreement:
While the district court was apparently unsure whether [the lawyer's employment] agreement included the terms found in a June 21 letter from the firm to Hess that Hess had never signed, we see no reason not to include that material [in the agreement]. The critical signature is that of the party against whom the contract is being enforced[i.e., the law firm's signature], and that signature was present.32
Relatedly: Under the (U.S.) Uniform Commercial Code's statute of frauds provision in UCC § 2-201, a written contract (for the sale of goods) must be signed "by the party against whom enforcement is sought …."
c. If parties did want to require both signatures on an amendment, that could be stated in the contract using override language such as: "Any agreed amendment to this Agreement must be signed by all parties to this Agreement."
d. For tips on drafting amendment signature blocks, see 22.4 and especially [BROKEN LINK: sig-blocks] — the format would likely be exactly the same as for the contract itself.
4.2.2.8. What individual(s) should have to sign?
a. Typically under the law in the U.S., anyone with apparent authority33 may sign an amendment on behalf of a party.
(Apparent authority
b. A contract can generally negate apparent authority by clearly putting the parties on notice that only certain people have authority to agree to amendments.
Example: Such language is often seen, e.g., in car dealers' sales contracts, requiring manager- or vice-presidential signature on amendments — presumably, the purpose is to preclude buyers from claiming that a low-on-the-totem-pole sales representative had agreed to non-standard terms.
Caution: Such limitations should usually phrased in terms of a position title and not the name of a specific individual — at some unknown point in the future, that individual might no longer be available to sign amendments, because reasons. The title of the position would of course have to be customized for each contract (or each contract form).
Here's a hypothetical example from our MathWhiz-Gigunda simulation, shown with "redlining" (change the names appropriately, of course):
MathWhiz WILL NOT BE BOUND — and Gigunda is not to assert otherwise — by any alleged amendment to or waiver of this Agreement unless the amendment or waiver is in writing and signed by Mary MarvelMathWhiz's chief executive officer.
4.2.2.9. Be sure to save the signed amendment document!
Save any signed amendment document in a place where it can be readily found later. (This should be a routine thing for businesses already.)
Here's why: Imagine, in a contract legal dispute, that you made a particular argument, based on the contract text. But then the other side informs you that you'd previously signed an amendment to the contract that fatally undermines your argument. Both you and your client had forgotten about the amendment — but sure enough, the other side had a signed copy ….
4.2.2.10. Caution: Does the amendment include a release?
Sometimes a contract will be amended to resolve a disagreement between the parties. If that happens, a release might be drafted so broadly as to cause other rights to vanish.
Example: This is an issue (at this writing) in a pending federal-government contracting case, where fact issues precluded summary judgment whether a contract modification effected a release of certain other claims the contractor was asserting against the government.34
4.2.2.11. Caution: Could there be unwanted side effects?
Drafters of amendments should watch out for possible unwanted "side effects," in which an amendment to one provision turns out to affect one or more other provisions as well. This can be a particular problem when defined terms are used, as discussed in Kidd (stephens-bolton.com, undated).
This, incidentally, is one reason for contract drafters to follow the D.R.Y. Principle (that is, Don't Repeat Yourself, usually) to try to reduce such "dependencies" — and thus the possibility for inconsistent revisions during negotiations — between different provisions in a contract.
4.2.2.12. Is there sufficient "consideration" for an amendment?
Applicable law might require "consideration" (see 10.7) for amendments to existing contracts. Generally speaking, this means that each side gets at least some benefit from the amendment.
4.2.2.13. Can a written-amendment clause be orally waived?
Here's a business problem: Sometimes parties to a contract, in the course of their dealings will agree orally to modify the contract, or to waive a contract requirement. Of course, the parties should follow up with written documentation of the modification. But that doesn't always happen — even when the contract specifically requires such a writing.
Even when a contract clearly says that amendments must be in writing, in litigation a party might claim that the parties orally agreed to waive that writing requirement. For example, Massachusetts law allows such claims, as noted in a federal court opinion allowing a contractor's lawsuit over a purported equity grant to move forward:
A provision that an agreement may not be amended orally but only by a written instrument does not necessarily bar oral modification of the contract.
Whether an oral modification occurred can be inferred from the conduct of the parties and from the attendant circumstances of the case.
The proponent of the oral modification must present evidence of sufficient force to overcome the presumption that the integrated and complete agreement, which requires written consent to modification, expresses the intent of the parties.35
This doctrine is illustrated in a century-old New York precedent — for mnemonic purposes, we'll call it the "Cardozo Rule," after its author, later a Supreme Court justice — parties are free to orally waive a contractual requirement that amendments and waivers must be in writing, subject to any possible impact of the statute of frauds (see 19.1.2):
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 [sic] contract, no limitation self-imposed can destroy their power to contract again [to amend the first contract].36
Delaware law likewise allows a party to assert that a written-amendment requirement was orally waived — although that party must meet a heightened evidentiary burden.
Similarly, under California law, even if a contract does contain an amendments-in-writing requirement, a party can try to claim that the requirement was orally waived. Example: In a case out of Hollywood, the parties fought over how to share the profits from the TV series Home Improvement.37
And some other jurisdictions will likewise let parties at least argue that a writing requirement was orally waived. New Zealand38 and Singapore39 are two examples.
4.2.2.14. But: A written-amendment clause might well be enforced.
In New York, the Cardozo Rule has (largely) been overruled by statute; see N.Y. General Obligations Law 15-301(1), which provides that: "A written agreement … 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[:] [i] by the party against whom enforcement of the change is sought or [ii] by his agent." (Emphasis and bracketed text added.)
In some other U.S. jurisdictions, courts will likewise uphold contractual requirements that amendments and waivers must be in writing.40
Example: In a 2018 case, the UK's Supreme Court cited but expressly rejected the Cardozo Rule, concluding that "the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation."41
4.2.2.15. Special case: Sales of goods under the UCC
In Article 2 of the (U.S.) Uniform Commercial Code — which in general applies to transactions that are predominantly for the sale of goods — section 2-209(2) provides as follows:
(1) An agreement modifying a contract within this Article needs no consideration to be binding.
(2) A signed agreement which excludes modification or rescission except by a signed writing cannot be otherwise modified or rescinded, but except as between merchants [basically, regular buyers and sellers of goods of the kind] such a requirement on a form supplied by the merchant must be separately signed by the other party.
(3) The requirements of the statute of frauds section of this Article (Section 2-201) [which requires certain contracts to be in writing] must be satisfied if the contract as modified is within its provisions.
(4) Although an attempt at modification or rescission does not satisfy the requirements of subsection (2) or (3) it can operate as a waiver.
(5) A party who has made a waiver affecting an executory portion [i.e., a not-yet-started portion] of the contract may retract the waiver by reasonable notification received by the other party that strict performance will be required of any term waived, unless the retraction would be unjust in view of a material change of position in reliance on the waiver.
4.3. Amendments by Notice
You've surely seen Web site terms of service that say (among other things), "we can amend these terms any time we want by giving you X days advance notice." At least in U.S. jurisdictions, those amendment provisions will be enforced — if they're done correctly.
Caution: In some jurisdictions, a unilateral-amendment provision might be unenforceable by law.42
4.3.1.1. Which party may unilaterally amend this Agreement?
One party [a] — which must be clearly specified in this Agreement — may unilaterally amend this Agreement as stated in this Clause.
This Clause is the only way for that party to unilaterally amend this Agreement — no other purported unilateral amendment will have any effect.
Notes
[a] It'd be unusual for a contract to allow either party to amend unilaterally — though when you think about it, that might make for smoother evolution of a contractual relationship than letting either party terminate at will.
4.3.1.2. What advance notice is needed?
The amending party must give the other party reasonable advance notice[a] of the proposed amendment.
The advance notice of amendment must state — clearly and prominently — the following:
that an amendment to this Agreement is being proposed — that part must be at the beginning of the notice, so that the other party will quickly see what the notice is about;
at least one specific action[b] that the other party may take to opt out of the amendment; and
the deadline for the other party to opt out.
Notes
[a] How much advance notice to require for a unilateral amendment might be a subject for negotiation — and might be subject to legal restrictions, e.g., if consumers or employees are involved.43 • Caution: Just changing Website terms probably won't be enough notice; see 4.3.2.1.
[b] Typical opt-out actions include, for example, terminating one's user account or perhaps terminating this Agreement itself.
4.3.1.3. What if the other party disagrees about the notice?
If the parties disagree about the sufficiency of the amending party's advance notice, then:
first, the parties will escalate the dispute internally, as provided in Clause 12.16; and
if that does not resolve the disagreement, then the parties will escalate the disagreement to a neutral advisor as provided in Clause 12.17.
4.3.2.1. Just changing Website terms probably won't suffice
For agreements posted to a Website (such as "terms of service"), more than one court opinion has held that changing the agreement at the Website isn't enough for a unilateral amendment.44
4.3.2.2. Caution: Be able to "prove up" the notice
A party that might send out notices of unilateral amendment should consider whether the party's email system and procedures can produce evidence that will persuade a judge or jury that a notice was actually sent to a particular customer, user, etc.
Example: In a Seventh Circuit case, the court vacated an order confirming an arbitration award against a PayPal customer who had brought a claim against the company; the court remanded for a trial about whether the customer had in fact consented to PayPal's unilateral amendment to its terms of service, which had added an arbitration requirement:
… PayPal does not have a more specific record of sending that email notice [of PayPal's unilateral amendment] to Kass or whether it was received, bounced back, or disappeared into cyberspace.
Kass denied that she had ever received or known of the 2012 amendment to the User Agreement. By sworn declaration, Kass testified that she had never seen the amended User Agreement posted to PayPal’s website, that she did not receive an email notifying her of the amendment, and that she had never seen, known of, or agreed to the 2012 User Agreement with its mandatory arbitration clause. * * *
Whether she [Kass] was subject to mandatory arbitration under the 2012 User Agreement depends on whether Kass received an email from PayPal notifying her of that amendment. This is a question of fact that must be resolved by a trier of fact, not summarily by the court considering only the paper record.45
What odds would you give that a local jury would side with PayPal on that point?
Example: In another case, a federal court in California ruled that Dropbox had failed to unilaterally amend its terms of service (to add an arbitration requirement). Why? Because, said the court, Dropbox had not shown, by a preponderance of the evidence, that in fact it gave notice of the amendment, where the user denied having opened or read the notice email that Dropbox sent. The court said:
There is nothing in the record to suggest that Plaintiff could not use the service until he indicated his assent, that he would have been advised of new terms and conditions while using Defendant’s services, or that Defendant ever tracked whether Plaintiff had opened its email.
Even if the email alone could be considered “reasonably conspicuous notice,” Plaintiff took no action to unambiguously manifest his assent…
Given the complete lack of evidence of notice within Defendant’s service itself, Plaintiff’s ongoing use of the service is irrelevant to determining whether he had actual or constructive notice of the post-2011 terms of service.46
Professor Eric Goldman, an authority in this area, described the decision as "troubling" and said:
If you want to absolutely ensure that the TOS [terms of services] amendment sticks, you need users to click in assent. Good luck with that; but any lighter process is taking your chances.47
Example: In a Georgia case, an Uber driver murdered one of his passengers. The passenger's mother sued Uber for wrongful death. In the Georgia trial court, Uber successfully moved to compel arbitration, but an appellate court reversed and remanded, holding that a triable question existed whether the deceased passenger had in fact received updated terms and conditions from Uber — and thus had implicitly assented to arbitration by continuing to use the Uber service. That's because "neither the affidavit nor the exhibits provided by Uber list the email address to the which email was sent. … There is also no record evidence that the email was delivered to Thornton."48
4.3.2.3.Consumer contracts might have special requirements
For a perhaps-dated review of case law addressing what might be required to qualify as sufficient notice to consumers of unilateral amendment, see generally two 2016 ABA articles (probably paywalled, limited to ABA members).49
4.3.2.4. A no-limits amendment right could kill the contract
A court might hold that a contract was "illusory" — and thus that the entire contract was unenforceable — if the contract says that a party has the right to change its terms unilaterally and retroactively, at least if the party doesn't give the other party sufficient advance notice and the right to opt out. Such an unenforceability ruling could have serious ripple effects, as discussed in the examples below.
– Example: A Blockbuster customer (remember them?) sued the company for allegedly violating her privacy rights and sought class-action status. Blockbuster moved to compel individual, case-by-case arbitration, as required in the Blockbuster on-line terms of service. Harris opposed the motion — doubtless because for her lawyers, many onesie-twosie arbitration proceedings would be much less economically attractive to them than class arbitration would be. x A federal court in Texas denied Blockbuster's motion to compel arbitration, on grounds that the company's terms of service were "illusory" — because the unilateral amendment didn't include a so-called Halliburton exception — and therefore was unenforceable under the relevant state law.50
(Now think about what else could result from a court's holding about an "illusory" contract: One or both parties might lose protection that the contract might otherwise have provided, such as for example an arbitration clause with class-action waiver; a forum-selection or governing-law clause; a limitation of liability; and so on.)
– Example: A former employee of 24 Hour Fitness filed a lawsuit against the gym company. The company moved to compel arbitration, citing an arbitration provision in the company's employee handbook. The court affirmed a holding that 24 Hour Fitness's arbitration provision was unenforceable because the company reserved the right to change the employee handbook at will. That, in turn, meant that the handbook was "illusory" — and consequently, the arbitration provision was ineffective and the former employee's case would be tried in court instead of being heard privately by an arbitrator.51
Pro tip: Parties presumably would always be free to agree to amend this Agreement with retroactive effect — but then of course it wouldn't be a unilateral amendment ….
– A "going forward only" limitation might well save a unilateral-amendment clause from invalidation. Example: In a Fifth Circuit case, the court held that an employer had the right to terminate its arbitration agreement with employees, but the termination would not apply to claims that had accrued before the amendment.52
– To somewhat-similar effect, the Uber ride-sharing terms of service of April 4, 2022 (last visited May 13, 2022) states, in the penultimate paragraph of section 1, that amendments by Uber are effective after notice, which arguably implies no retroactive effect:
… Unless Uber says otherwise in its notice, the amended Terms will be effective immediately and your continued access to and use of the Services after Uber provides such notice will confirm your acceptance of the changes. If you do not agree to the amended Terms, you must stop accessing and using the Services.
(Emphasis added.)
– Somewhat more-restrictively: In a North Carolina case, a majority of the state's supreme court held that a unilateral-amendment provision in a credit union's terms of service — which the credit union used to add an arbitration requirement — sufficiently complied with the state's implied covenant of good faith and fair dealing; the unilateral-amendment provision required advance notice and an opportunity to opt out and "the changes [to add arbitration] reasonably relate to subjects discussed and reasonably anticipated in the original agreement."53
(Two dissenting judges in that case objected that, by unilaterally adding the arbitration provision, the credit union "single-handedly deprived [the credit union's customer] of her constitutional right to a jury trial on her claims and the ability to defray the burden of vindicating that right through a class action. To make matters worse, the modification’s language—drafted and adopted by CMCU alone—left [the customer] without an avenue to opt out of arbitration and the class action waiver.")54
4.3.2.5. Caution: Possible bad PR
Unilateral amendments to terms of service can lead to bad publicity. Example: In 2023, Zoom ran into a public-relations buzzsaw when it unilaterally modified its terms of service to allow the company to train AI models on customers' information.55
4.3.2.6. Selected additional court cases
As a research aid, some other cases concerning unilateral amendments are discussed at the following footnote (which is optional reading for students).56
4.4. Antitrust law (very-rough notes)
[TO DO: Block diagram of horizontal- and vertical price fixing]
The following is reproduced largely verbatim (but with minor, purely-stylistic edits) from the Ninth Circuit's 2021 opinion in Aya Healthcare Servs., Inc. v. AMN Healthcare, Inc., 9 F.4th 1102, 1109-09 (9th. Cir. 2021) (affirming summary judgment applying rule of reason in dismissing antitrust claim under Sherman Act § 1; plaintiff failed to establish existence of genuine issue of material fact whether no-solicitaiton provision had a substantial anticompetitive effect that harmed consumers in relevant market). Omitted are the court's extensive citations; internal quotation marks; and (most) alteration marks. No copyright is claimed in the text of the published opinion.
Section 1 of the Sherman Act [named after Sen. John Sherman, pictured] bars "[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States."
The Supreme Court has interpreted this text to outlaw only unreasonable restraints.
Restraints are generally categorized as horizontal or vertical:
A horizontal restraint is an agreement among competitors on the way in which they will compete with one another.
Vertical restraints are restraints imposed by agreement between firms at different levels of distribution.
We employ two different standards to determine whether a particular restraint is unreasonable:
1. The first standard involves a factual inquiry commonly known as the "rule of reason." The rule of reason weighs legitimate justifications for a restraint against any anticompetitive effects.
Nearly every vertical restraint is assessed under the rule of reason.
We conduct a fact-specific assessment to distinguish between:
restraints with anticompetitive effect that are harmful to the consumer and
restraints stimulating competition that are in the consumer's best interest.
2. The second standard is the per se standard, which recognizes that a small group of restraints are unreasonable per se because they always or almost always tend to restrict competition and decrease output. Such agreements or practices are conclusively presumed to be unreasonable because of their pernicious effect on competition and lack of any redeeming virtue.
Typically only horizontal restraints qualify as unreasonable per se.
However, not all horizontal restraints are analyzed pursuant to the per se standard. Under the "ancillary restraints" doctrine, a horizontal agreement is exempt from the per se rule, and analyzed under the rule-of-reason, if it meets two requirements.
These requirements are that the restraint must be (1) subordinate and collateral to a separate, legitimate transaction, and (2) reasonably necessary to achieving that transaction's pro-competitive purpose.
"Naked restraints" are categorically not "ancillary restraints." Thus, naked horizontal restraints are always analyzed under the per se standard. A restraint is naked if it has no purpose except stifling of competition.
Some examples of these restraints include agreements among actual or potential competitors to fix prices or divide markets.
4.4.2. One type of "section 1 violation": Unlawful (horizontal) price-fixing
Sometimes it might seem tempting to agree with a competitor to divvy up customers, or to keep your prices at an agreed level, or to take turns submitting the winning bid in response to RFPs. Those activities, though, can lead to indictment and prosecution by federal- or state authorities for violation of the antitrust laws.
Example: In 2005, the German airline Lufthansa and the British airline Virgin Atlantic blew the whistle on a price-fixing scheme by a total of 21 non-U.S. airlines, including British Airways, Qantas, and Korean Air. The U.S. Department of Justice prosecuted, resulting in
a total of some $1.7 billion in fines; and
four airline executives being sentenced to prison terms in the U.S. (link) (link)
Authorities might go for low-hanging fruit: Instead of trying to prove up an antitrust violation (a complex task), they might bring charges of obstruction of justice, akin to prosecuting Al Capone for tax evasion.
Example: December 2010 a British executive, after being extradited to the U.S., was sentenced to 18 months in prison and a $25,000 fine for conspiring to obstruct a price-fixing investigation (link).
For more information the Department of Justice has a useful antitrust primer that explains many of the relevant concepts.
Not every agreement to restrain trade violates the antitrust laws. Because some cases are more obvious than others, the law has evolved to use different tests depending on the closeness of the question.
At one end of the spectrum are arrangements that can be condemned as illegal per se, or—as in the case of horizontal agreements—at least so likely to be unlawful that just a "quick look" is enough to recognize that anticompetitive effects may be presumed.
At the other end of the spectrum are arrangements that are plainly lawful.
And in between lie the vast majority, where careful scrutiny is necessary to decide.
In this category—which includes purely vertical agreements, as well as hybrid agreements — the "quick-look" approach is inapt, and the plaintiff has the initial burden of showing anticompetitive effect under the "rule of reason."
The central—and dispositive—question in this case is which framework applies.
Appellant Winn-Dixie Stores brought suit against Appellees—the Eastern Mushroom Marketing Cooperative, Inc. (EMMC), its individual mushroom farmer members, and certain downstream distributors—claiming their price-fixing agreement violated § 1 of the Sherman Act. 15 U.S.C. § 1.
The District Court instructed the jury to apply the "rule-of-reason" test, and the jury returned a verdict in Appellees' favor.
Winn-Dixie contends this was error, and had the judge applied the "quick-look" approach and instructed the jury to simply presume anticompetitive effects, it would have found Appellees' agreement to be an unlawful restraint of trade. As plaintiff, Winn-Dixie understandably would have preferred the lower burden of proof.
But because this hybrid scheme involved myriad organizational structures with varying degrees of vertical integration, the Court was right to apply the rule of reason.
And because, under that more searching inquiry, the evidence at trial was sufficient to sustain the jury's verdict, we will affirm the judgment in favor of Appellees.
Emphasis, extra paragraphing, and bullets added.
4.5. Arbitration
In a typical arbitration proceeding, one arbitrator presides at an evidentiary hearing where the disputing parties put on witnesses and offer their exhibits, as in a court trial. After considering the parties' evidence, the arbitrator renders a binding decision, known as an "award," which can be confirmed in court and then enforced as a judgment of the confirming court. (Usually, the court won't look especially hard at "how the sausage was made" in producing the award.)
Binding arbitration is to be used[a] to resolve any dispute that relates in any way to this Agreement — other than small claims, as discussed below, no matter what the underlying legal- and/or equitable theories might be.[b]
For emphasis: This arbitration requirement encompasses, for example (see Clause 12.20), claims arising under a statute or constitutional provision.[c]
For this purpose, the term "the Arbitration" refers to an arbitration under this Clause.
Notes
[a] In subdivision a, passive voice is intentionally used in the phrase, "Binding arbitration is to be used …"; that's to accommodate the possibility that non-parties to this Agreement might be required to arbitrate disputes relating to this Agreement. (For now, that's beyond the scope of this book.)
[b] Also in subdivision a: Arbitration is required for allegations of, e.g., contract, tort, unjust enrichment, fraud, fraudulent inducement to enter into this Agreement, etc.57
[c] Subdivision b: Example: In 2009, the Supreme Court held that a particular collective bargining agreement ("CBA") was worded to "clearly and unmistakably" require arbitration of statutory age-discrimination claims.58Counterexample: In 2012, the Fifth Circuit reached the opposite result under another CBA whose arbitration provision was worded differently.59
4.5.1.2. Arbitration even for small-dollar claims?
Given the costs likely to be associated with arbitration, any party may decide to litigate a small-amount claim that would otherwise have to be arbitrated under this Agreement — but only in a "small-claims court" where:
the court's subject-matter jurisdiction (its legal authority to hear cases) is limited to small claims, by whatever term used in the relevant law;
the court has personal jurisdiction over the relevant party or parties (i.e., those parties can legally be sued in that particular court); and
filing or maintaining a lawsuit in that court would not violate a forum-selection provision in this Agreement (if any).
Notes
Small-claims courts, created by state law, generally operate more informally than courts of "general jurisdiction," for example, by allowing a company to be represented by a non-lawyer.
Generally, small-claims courts are allowed by law to hear only cases where the amount in controversy is no more than a specified "jurisdictional limit"; at this writing, the limit is $10,000 in New York and California and $20,000 in Texas.
4.5.1.3. How long to decide whether to go to small-claims court?
To reduce duplicated effort and unfairness to other parties: A party will WAIVE (see Clause 24.3) its right to litigate a small claim under this section if the party participates, in any significant way, in arbitration proceedings for that claim.
For purposes of subdivision a, a party will have participated in a "significant way" if the party does any of the following (without limitation):
For a claimant: Making a formal demand for arbitration.
For a respondent: In the Arbitration, filing an answer to the demand for arbitration — but merely advising the other party and the arbitration administrator of the respondent's intent to litigate a claim would not, in itself be considered the respondent's significant participation in arbitration proceedings for that claim.
Notes
Clearly it'd be unfair for a party to have to spend time (and legal fees) on preparing for arbitration, but then have the other party do an Emily Litella and say, "Never mind" and make everyone have to work on a small-claims lawsuit instead. Some of the previous work would doubtless be reusable, but it'd be inevitable for the parties to incur needless duplication and its associated expense.
4.5.1.4. Who decides whether a small-claims election is valid?
The arbitrator has no power to determine whether a party has validly elected small-claim litigation under this Clause — that will be strictly for a court to decide, even if the parties have otherwise delegated authority to the arbitrator, for example by agreeing to Option 4.5.3.2.
Notes
The above "has no power" language has in mind that, under the (U.S.) Federal Arbitration Act, one of the very-few grounds on which a federal court may vacate an award in arbitration is that "the arbitrators exceeded their powers …." under 9 U.S.C. § 10(a)(4). (See also section 15 concerning an enhanced right of appeal.)
4.5.1.5. What if the law prohibits arbitration in a case?
This Clause does not require[a] a party to arbitrate a dispute if the party shows that the law clearly prohibits[b] pre-dispute arbitration agreements for the type of dispute in question.
Notes
[a] This section says only that this Agreement doesn't require arbitration; it doesn't say that a party may sue in court, because there might be other barriers to filing suit (e.g., expiration of a statute of limitations).
[b] The law might flatly prohibit arbitration in some cases (see 4.5.4.12), or a court might find the arbitration agreement in question to be unconscionable.
4.5.1.6. How many arbitrators will be involved?
The Arbitration will be conducted before a panel consisting of: ✅ a single arbitrator. ❌ three arbitrators.
Notes
Three arbitrators are likely to be more than three times as expensive as one. That's because three arbitrators will necessarily spend (billable) time conferring with each other, reviewing drafts of written decisions, etc. • But: For some cases, the reassurance of having three arbitrators could be worth the expense —especially given the limited appealability of arbitration awards.
4.5.1.7. How would a three-arbitrator panel operate?
This section applies if the panel consists of more than one arbitrator.
The arbitrators are to designate, by majority vote,[a] one of their number as the panel chair.
The chair has the power to resolve any "Procedural Disputes" (defined in subdivision e below) without consulting the full panel — absent objection by any party or by any other member of the panel.[b]
The panel are to make all other panel decisions by majority vote.
For this purpose, "Procedural Dispute" refers to any dispute relating to the exchange of information or procedural matters in the Arbitration itself.
Notes
[a] Majority vote is typical of arbitration rules for panel decisions; see, e.g., AAA Rule R-44 and LCIA Rule 26.3.
[b] Allowing the arbitration panel chair to decide procedural disputes is based on concepts from AAA Rule R-44 (which are a bit convoluted); some parties might prefer to follow LCIA Rule 5.6 (which calls for the chair to be appointed by the LCIA).
4.5.1.8. What qualifications must arbitrators have?
Each arbitrator is to have qualifications:
as specified in the arbitration rules;[a] and/or
as otherwise clearly agreed by the parties — for example, specifying different arbitrator qualifications for different types of dispute.[b]
Notes
[a] If an arbitration administrator is used (e.g., the AAA), the administrator will typically maintain a pre-screened roster of neutral arbitrators.
[b] Example: In a Tenth Circuit case, the parties' arbitration agreement specified different arbitrator qualifications for energy disputes versus accounting disputes.60
4.5.1.9. Could the arbitrator be a party employee?
Each arbitrator must be, and remain, independent and impartial (a.k.a. "neutral").
Each arbitrator is to be chosen (in order of preference):
by agreement;
as provided in the arbitration rules;[a] or
as a backup method: as provided by law.[b]
Notes
[a] Arbitration rules typically provide for the arbitration administrator to present the parties with a list of candidates and for parties to strike unacceptable candidates; see, e.g., AAA Commercial Rule R-12.
[b] Absent a backup selection method, a court might refuse to compel arbitration — at this writing, that's the subject of a circuit split among U.S. federal courts.61
4.5.1.11. What law and rules will govern in U.S. cases?
Procedurally,[a] for U.S.-"seated"[b] cases, the Arbitration will be governed by the following:
the arbitration (procedural) law of California;[d] and
the Federal Arbitration Act[e] (i) where applicable by law, and (ii) for any necessary gap-filling otherwise.
Notes
[a] Agreeing on a procedural law can help provide for, e.g., enhanced appeals (see 4.5.1.23) from an adverse arbitration award.
[b] An arbitration agreement's choice of arbitral location — sometimes referred to as the "seat" of the arbitration — can have significant procedural implications, such as in determining the arbitral law.62
[c] Arbitration rules typically spell out, in detail, how any arbitration proceeding would be conducted.63
[d] California's arbitration law allows depositions and other discovery, including from third parties, as well as an expanded right of appeal if so agreed;64 as discussed in more detail at 4.5.1.23, this isn't available under the Federal Arbitration Act per se, nor under the laws of some other states. • Texas's arbitration law likewise allows broad discovery rights, as well as a similarly-expansive right of appeal if agreed by the parties.65
[e] In the U.S., the Federal Arbitration Act generally will apply in cases involving or affecting interstate commerce "absent clear and unambiguous contractual language to the contrary" in which the contract "expressly references state arbitration law."66
4.5.1.12. In non-U.S. cases, what law and rules will govern?
For other cases, the Arbitration will be governed by:
the arbitration rules of the International Centre for Dispute Resolution ("ICDR," the international division of the AAA);[a] and
English procedural law.[b]
Notes
[a] Various organization rules are available for international arbitrations.67
[b] English arbitration law is well-regarded and widely used.68
4.5.1.13. These are choices of rules, not of forum
For emphasis: The parties' agreement to arbitration rules is a choice of rules, not of forum.
Notes
This section seeks to avoid having the arbitration agreement thrown out entirely if the designated administrator declines to take the case, as has happened in several reported cases.69
4.5.1.14. Who will handle administrative details?
The Arbitration is to be administered by:–
the American Arbitration Association ("AAA"), if the case is "seated" in any geographic location subject to U.S. law; and
the International Centre for Dispute Resolution ("ICDR," the international division of the AAA) otherwise.
Notes
Arbitration requires a number of administrative chores such as scheduling of calls and hearings, etc. It's usually more cost-effective for an institution, e.g., the AAA,70 to handle such administrative chores than it would be for the arbitrator to charge for his- or her time to do so — among other advantages.71
4.5.1.15. What if the agreed administrator is a no-show?
The arbitrator is to serve as the "backup" administrator if for any reason the agreed administrator does not do so.[a]
When so serving, the arbitrator is to proceed:
as stated in the arbitration rules; and
for situations not covered by those rules, in accordance with the arbitrator's sound discretion.[b]
Notes
[a] A court might refuse to compel arbitration if the designated administrator declined to accept the dispute.72
[b] The concept of "sound discretion" in administrative matters draws on extensive case law about the discretion of trial judges to decide things such as, e.g., the admissibiity of evidence, with their decisions being reviewable under an abuse-of-discretion standard.
4.5.1.16. What language will be used in the Arbitration?
All concerned are to use the English language[a] for all proceedings, notices,[b] and arbitrator decisions[c] in arbitration, unless everyone involved agrees otherwise.
Notes
[a] Pro tip: For transnational dealings, it's useful to nail down, in advance, the language to be used in arbitration proceedings (because translators and interpreters cost money and would be one more thing that had to be arranged).
[b] Caution: Suppose you get a letter in Chinese. You're busy, so you don't get it translated right away. The letter turns out to be an official notice of arbitration — under an English-language contract you entered into with a Chinese manufacturer. And by the time you et the notice, you've missed some crucial deadlines in the arbitration. That happened to an American retailer.73
[c] Pro tip: Consider the country where an arbitration award might be enforced, because under Article IV.2 of the 1958 New York Convention, a sworn translation might be required, resulting in extra expense and delay.
4.5.1.17. What language for legal-proceedings notices?
This section will apply if, in connection with the Arbitration, a party "Alpha" starts legal proceedings against another party "Bravo."
Alpha must make sure that Bravo is immediately given[a] a reasonably-detailed notice about the legal proceedings — that notice must be written:
in English;[b] and/or
in a language that can be read by most of Bravo's senior management and other relevant employees.
Notes
[a] This term, "is immediately given," is intentionally phrased in passive voice, to account for the fact that the notice might be given by an arbitration administrator or other third party.
[b] This language requirement for notices seeks to avoid a possibility analogous to one that actually arose — and caused costly problems for — an American retailer in an arbitration with a Chinese supplier, as discussed in the comments at 4.5.1.16.
4.5.1.18. Who can grant preliminary injunctive relief?
Each party is free to ask a court (or other tribunal having jurisdiction) for preliminary injunctive relief; this will be true even if the arbitration rules would allow the arbitrator to grant preliminary relief.[a]
If a party does ask for relief under subdivision a, that in itelf will not waive whatever right the party has to require arbitration of other matters in the case.
For emphasis: This section does not authorize any party to seek other forms of equitable relief from a court when the party would otherwise have to arbitrate its claims for such relief.[b]
Nor does this section authorize the arbitrator to grant preliminary injunctive relief — that would depend on the arbitration rules and any other agreement of the parties.
If the arbitrator does grant preliminary injunctive relief, then that grant is deemed a partial final award for purposes of ascertaining whether a court has jurisdiction to review the action.[c]
Notes
[a] This section falls in the category of "cheap insurance":(9.7) Many arbitration rules already provide for parties to seek preliminary relief from the arbitrator. But it still might not hurt to be clear that you could also go to court for such relief, without waiving your right to arbitrate other matters in the case. (Whether such preliminary-injunctive relief would be granted would of course be determined in accordance with applicable law.)
[b] Such other (unauthorized) forms of equitable remedies could include, e.g., specific performance, rescission, and disgorgement. Example: In a 2022 California case, a party was allowed to litigate its claims for those particular remedies because of a similar carve-out in their arbitration agreement for "claims seeking injunctive or other equitable relief."74
[c] Even if enhanced appeal of an arbitration award is allowed, a court might dismiss an appeal of an arbitrator's preliminary injunction, on grounds that it was not an "award."75
4.5.1.19. Can an arbitrating party demand a jury? (No.)
Each party in the Arbitration WAIVES[a] any right that the party might have to a jury trial[b] for any matter being addressed in the Arbitration.
Notes
[a] Here the word "WAIVED" is in bold-faced all-caps for conspicuousness (see 10.8) as "cheap insurance" in case there's a conspicuousness requirement for jury waivers that would apply to arbitration agreements. (It's an open question whether such requirements would be preempted by the Federal Arbitration Agreement.76)
4.5.1.20. Are there limits on the arbitrator's power?
The arbitrator has no power[a] to do any of the following unless the parties — preferably but not necessarily after the arbitrator has been selected — clearly agree otherwise:
to grant relief clearly inconsistent with this Agreement or with applicable (non-arbitration) law; nor
to render an award that would be subject to being reversed or vacated, on one or more grounds, if rendered a judgment by a United States district court following a trial to the court without a jury;[b] nor
to act as amiable compositeur or ex aequo et bono.[c]
Notes
[a] The "has no power" language in this section has in mind that, under the (U.S.) Federal Arbitration Act, one of the very-few grounds on which a federal court may vacate an award in arbitration is that "the arbitrators exceeded their powers …." under 9 U.S.C. § 10(a)(4). (See also 4.5.1.23 concerning an enhanced right of appeal.)
[b] A trial court's judgment after a bench trial can be reversed on appeal (or perhaps vacated and remanded for reconsideration) if the judgment is based: (i) on findings of fact that are clearly erroneous, and/or (ii) on errors of law; certain other trial-court actions can be set aside for abuse of discretion.77
[c] The term "amiable compositeur" refers to the power that an arbitrator might otherewise have to vary the effect of the law and the parties' agreement; the term "ex aequo et bono" refers to the arbitrator's deciding the case "according to the equitable and good" — as perceived by the arbitrator, of course.78
Pro tip: Instead of cabining the arbitrator's power, consider expressly allowing the arbitrator to act as amiable compositeur and ex aequo et bono. (But many parties won't want to agree to that in advance before they know who the arbitrator will be, so this subdivision contemplates delaying that decision.)
4.5.1.21. What are some examples of things the arbitrator cannot do?
For emphasis: The arbitrator has no power to render an award that fails to give effect to a provision in the contract or the law:
that limits any party's liability, such as a damages cap or an exclusion of certain remedies; and/or
that sets a deadline — or shortens a statutory deadline, known as a "limitation period" — for a party to bring a claim in court or elsewhere.[a]
Notes
[a] The potential concern here is that, absent specific language preserving the statute of limitations, an arbitrator might be able to ignore a claim deadline under such a statute — and there might be very little the opposing party could do about it in court by way of appeal; see Kramer (2016) and the commentary at 4.5.1.23 concerning an enhanced right of appeal.
4.5.1.22. Where can an arbitration award be enforced?
This section will apply if a party ("Alpha") prevails in the Arbitration.
Alpha can go to court to "confirm" the arbitrator's award,[a] and to have the resulting court judgment (or order) judicially enforced against any relevant other party ("Bravo"):
✅ in any court that has jurisdiction over Bravo.
❌ only in a court having jurisdiction in [fill in location].[b]
Notes
[a] See the discussion of arbitration confirmation at 4.5.4.10.
[b] This alternative is a type of forum-selection provision; for more on that subject generally, see Clause 13.5. Caution: State law might provide that agreement to arbitrate in the state constitutes consent to jurisdiction — or even exclusive jurisdiction — in the courts of the state to enter judgment on the arbitration award.79 Moreover, such a statute might purport to confer exclusive jurisdiction in the courts of that state.80
4.5.1.23. To what extent could a party appeal in court?
California-law appeal right: Any party can challenge an arbitration award as provided in California's arbitration law;81 this will be true:
even if this Agreement specifies a different choice of law for this Agreement generally and/or for one or more other issues,[a] and
even when the Federal Arbitration Act would otherwise limit such challenges.[b]
Jettison if unenforceable: If this section's right of enhanced appeal is finally held to be invalid or otherwise unenforceable, by a court or other body of competent jurisdiction, with no further possibility of appeal, then Option 4.5.3.4 will govern.
Notes
[a] Concerning choosing different governing laws for different contractual purposes, see [BROKEN LINK: GovLawIssue].
[b] Ordinarily, under the (U.S.) Federal Arbitration Act, arbitration awards in the U.S. cannot be appealed in federal court except on very limited grounds — including that "the arbitrators exceeded their powers"82 — even if the court thinks the arbitrator got it completely wrong, as long as the arbitrator was even arguably applying the contract.83 (That's the motivation for the language, "the arbitrator will have no power …" in various places of this Clause.)
4.5.1.24. Who pays for related court proceedings?
This section will apply if one or more of the following is true:
a party ("Alpha") unsuccessfully challenges an arbitration provision in this Agreement, whether before or after an award;
Alpha tries to vacate (wholly or partially) an arbitration award; and/or
Alpha does not timely comply with an arbitration award, and so another party ("Bravo") files court proceedings to confirm and/or enforce the award.
In that situation:
Alpha must pay Bravo's attorney fees incurred in connection with the challenge and/or confirmation proceedings,[a]including attorney fees for any related appeals; and
Alpha must reimburse Bravo for any such payments that Bravo has already made.
Otherwise, each party is responsible for its own attorney fees in the challenge and/or confirmation proceedings.
For emphasis: This Clause does not address other possible claims for attorney fees in the Arbitration.
Notes
[a] This section is informed by case law to the effect that, under the "American Rule" for attorney fees, a party that wins an arbitration case will be denied attorney fees for the court enforcement proceedings, even if entitled to recover fees for the arbitration proceeding itself.84
4.5.1.25. Arbitration will not preclude "termination"
The parties' agreement to arbitrate does not limit (but neither does it expand) any right that a party might otherwise have to terminate this Agreement and/or a transaction or relationship governed by this Agreement.
Notes
This section seeks to disavow a Fourth-Circuit holding that "the presence of an arbitrability clause [in employment agreement] … implies for-cause termination protections, notwithstanding a state law at-will doctrine to the contrary."85
4.5.1.26. Arbitration will not preclude government action
The parties' agreement to arbitrate does not mean that a party may not bring issues to the attention of appropriate federal, state, or local authorities, nor that such authorities would be unable to act in the matter.
Notes
This language draws on ideas from section 12.3 of a New York Times terms of service document dated May 10, 2024, as well as precedent from the Supreme Court.86
4.5.1.27. Pre-existing claims must still be arbitrated after termination
If this Agreement expires or is otherwise terminated, then the parties are to continue to follow this Clause for disputes (if any) that accrued before the termination or expiration became effective.
Notes
There's case law going both ways about whether an arbitration requirement would survive if the contract containing the requirement were to expire or be terminated.87
4.5.2. Arbitration Clause (drop-in version)
(a) Binding arbitration in the English language, before a single neutral arbitrator, is to be used for all disputes relating in any way to this Agreement. (b) This arbitration requirement specifically includes, but is not limited to, claims of fraudulent inducement and those relating to statutory- and/or constitutional rights. (c) The arbitration is to be conducted in accordance with: (1) for U.S.-seated cases: (i) California procedural law; (ii) the Federal Arbitration Act for any necessary gap-filling; and (iii) the Commercial Arbitration Rules of the American Arbitration Association ("AAA"); and (2) for other cases: English procedural law and the arbitration rules of the International Centre for Dispute Resolution.
Notes
This shorter "wall of words" clause would be harder to read but easier to copy and paste into a draft contract.
For commentary, see the counterpart sections of the long-form Clause 4.5.
4.5.3. Arbitration: Optional terms
No Option below will apply unless this Agreement clearly adopts the specific Option in question.
The parties DO NOT AGREE to arbitrate[a] any case in which a party does, or attempts to do, any of the following:
consolidate any claim with claim(s) of any other party;[b]
purport to act as a representative of other claimants; and/or
purport to act as a private attorney general, whether under a statute allowing such action, sometimes referred to as "PAGA claims,"88 or otherwise.
The arbitrator has no power[c] to decide any dispute about whether either party is attempting to act contrary to this Option; any dispute in that regard is to be decided by a court that has jurisdiction.
The parties' agreement to this Option is "material" — without this Option, one or both parties would not have agreed to arbitration at all.[d]
Notes
[a] This Option seeks to leave no doubt that class arbitration (see 4.5.6) is not agreed to. Under Supreme Court precedent it shouldn't be necessary to do that, because the presumption should be the other way around. But an arbitrator might choose to pay lip service to that Court precedent while essentially ignoring it (your author has seen it done).89
[b] Especially in consumer- and employment cases, counsel for claimants in arbitration sometimes try to consolidate claims and handle them as they would a class-action lawsuit. That can be tricky in view of Supreme Court holdings — but it can make economic sense for all concerned. See the additional notes beginning at 4.5.6.
[c] The "no power" language for class arbitration has in mind that, under the (U.S.) Federal Arbitration Act, one of the very-few grounds on which a federal court may vacate an award in arbitration is that "the arbitrators exceeded their powers …." under 9 U.S.C. § 10(a)(4). It's very likely better for a judge, not an arbitrator, to decide whether class arbitration is or isn't allowed by an arbitration agreement.90
[d] The "this is material" statement is included for the benefit of a court being asked to intervene in a dispute whether class- or collective-action arbitration is agreed to.
4.5.3.2. Option: Delegation of (Most) Arbitrability Decisions
Except as clearly provided otherwise in this Agreement, the arbitrator will decide all disputes about arbitrability,[a] including without limitation the following:
whether the parties' agreement to arbitrate was duly entered into but is nevertheless unenforceable;
whether a particular dispute comes within the scope of the arbitration agreement; and
whether the arbitration agreement conflicts with a party's non-waivable legal rights.
If a question arises whether a party seeking arbitration has waived arbitration: That question may be decided by the arbitrator or by a court of competition jurisdiction that is timely presented with the question.
But: A court of competent jurisdiction has the sole power to decide any dispute about:
whether the parties agreed to arbitrate at all;[b] and
whether this section is a valid delegation of authority to the arbitrator.[c]
Notes
[a] See the extended discussion beginning at 4.5.4.13.
[b] It could be that one party denies having agreed to arbitration in the first place — for example, because no agreement to arbitrate was ever properly formed. When that happens, the chances are that the court will insist on deciding whether the parties in fact agreed to arbitrate.91
[c] The Supreme Court has held that any challenge specifically to the delegation agreement will be heard by the court, not by the arbitrator.
4.5.3.3. Option: Nondelegation of Arbitrability Authority
Any disagreement whether or not a particular dispute is to be arbitrated will be decided by a court of competent jurisdiction and not by the arbitral tribunal, even if the applicable arbitration rules state otherwise.
Notes
See the commentary to 4.5.3.2, especially the extended discussion beginning at 4.5.4.13.
4.5.3.4. Option: Jettison Of Arbitration
This Option will be triggered[a] if both of the following are true:–
the parties' agreement to arbitrate specifies one or more provisions as "jettison triggers" (or words to that effect); and
one or more such jettison-trigger provisions is finally held, by a court or other body of competent jurisdiction, to be unenforceable, with no further possibility of appeal.
Either party ("Alpha") may jettison, that is, rescind, the parties' arbitration agreement by giving the other party ("Bravo") clear notice to that effect no later thanfive business days after the final holding described above.
If Alpha timely jettisons arbitration in accordance with this Option, then:–
Whatever actions the arbitrator previously took, in the way of a partial- or complete "final award," will be automatically "vacated," that is, set aside and of no effect;[b] and
The status of any interim actions of the arbitrator is to be determined by the court if not otherwise agreed.
If Alpha does jettison arbitration under this Option, then either Alpha or Bravo may litigate, in a court having jurisdiction, one or more of the claim(s) that were being arbitrated, but only if both of the following are true:[c]
at the time of the original demand for arbitration, the deadline had not yet expired, under an applicable statute of limitations, for the filing of a court action presenting the substance of those claim(s); and
the claim(s) are asserted in that court no later than ten business days after the final holding described above.
Notes
[a] This Option is motivated by a 2010 Tennessee supreme court decision, where the court held that an agreement to arbitrate in a contract would be judicially rescinded for mutual mistake.92 The court held that the parties' agreement to expanded judicial review was invalid, and the parties presumably would not have agreed to arbitration without the expanded judicial review, so the arbitration agreement had to be dumped.
[b] Importantly, this "vacatur" (the legalese term) would occur only if the prerequisites above were satisfied. That's because parties might prefer to negotiate a settlement instead of having to go back to Square One in litigating their dispute.
[c] This subdivision is in effect a "tolling" of any relevant statute of limitations; see generally the notes on that topic at 16.4.
4.5.3.5. Option: Severability Of Arbitration Provisions
If one or more portions of the parties' agreement to arbitrate are held to be unenforceable, by a tribunal of competent jurisdiction, then those particular portion(s) will be deemed automatically [BROKEN LINK: severability-cmt] from the agreement to arbitrate.
Notes
What should happen if part of an arbitration agreement is held to be unconscionable or otherwise unenforceable: Should arbitration continue, with the unenforceable part somehow "surgically" excised? Or should the entire arbitration agreement be thrown out? Court holdings suggest that this might turn largely on the facts.93
4.5.3.6. Option: No Punitive Damages in Arbitration
Neither party is to seek punitive damages, exemplary damages, multiple (e.g., treble) damages, or similar relief.[a]
The arbitrator has no power to award such damages.[b]
Notes
[a] This Option addresses the fear that an arbitrator might go overboard in awarding punitive damages, given the relatively-few opportunities there'd be to appeal such an award (see 4.5.1.23).94
Another approach could be to limit punitive damages to some agreed multiple of actual damages.95
4.5.3.7. Option: Punitive Damages in Arbitration
The arbitrator has the power to award punitive damages to the extent not inconsistent with the arbitration rules and applicable law.
Notes
See the comments accompanying Option 4.5.3.6 (no punitive damages in arbitration).
4.5.3.8. Option: Limited Punitive Sanctions in Arbitration
Neither party is to seek[a] — and the arbitrator has no power[b] to award — punitive sanctions[c] against a party, in respect of an issue (or multiple issues) being arbitrated, in the form of: (i) preclusion of otherwise-admissible evidence; nor (ii) entry of judgment concerning the issue.
Notes
[a] The "No party … will seek" language is intended to make it a breach of contract for a party to seek punitive sanctions of the kind mentioned; see the commentary to Clause 5.4.2.5.
[b] The "no power" language has in mind that, under the (U.S.) Federal Arbitration Act, one of the very-few grounds on which a federal court may vacate an award in arbitration is that "the arbitrators exceeded their powers …." under 9 U.S.C. § 10(a)(4).
[c] In court cases, judges have the power to punish bad behavior by parties; arbitrators have done the same. This Option addresses a concern raised by a Minnesota case where which an arbitrator, in effect, (i) struck a respondent's pleadings as a sanction for fabrication of evidence, and (ii) awarded the claimant more than $600 million; the award was upheld by the state's supreme court.97
Binding arbitration started out as a procedure to resolve disputes in business-to-business ("B2B") contracts. But arbitration requirements are increasingly found in business-to-consumer ("B2C") contracts — sometimes with terms that decidedly advantage the business — and many drafters of B2B contracts seem to want to avoid arbitration because it's said to offer "the worst of both worlds," with most of the expense of litigation but without wide-open discovery and little right to appeal an adverse outcome.
4.5.4.2. Some dispute-resolution procedures aren't "arbitration"
Example:Renaissance Hotel (1996): A California appeals court held that a "review committee" procedure in an employer's "Employee Guide" did not constitute an agreement to arbitrate, because "a third party decision maker and some degree of impartiality must exist for a dispute resolution mechanism to constitute arbitration."98
Example: In a non-arbitration context, a Delaware chancery-court judge, on his own motion, stayed (that is, suspended) the court proceedings between a former director of a biotechnology company and the company itself. The basis for the stay was that, under the biotech company's stock-option agreement, the parties' dispute about the interpretation of the agreement must be submitted to a committee of the company's board of directors.99
And mediation is often mistaken for arbitration — but a mediator generally has no authority at all except to try to help parties reach a settlement agreement, typically by "shuttle diplomacy."
Finally, expert determination is not arbitration, for reasons discussed at 12.25.
4.5.4.3. Caution: Arbitrations might not be confidential
a. Confidentiality in arbitration won't necessarily be automatic. That's true even though a primary reason parties opt to arbitrate their disputes in the first place is often to try to avoid having their business affairs made public in court proceedings.
b. The agreed arbitration rules might independently require confidentiality, possibly in the arbitrator's discretion.100
The arbitral law and/or the applicable substantive law might also require confidentiality, e.g., if personal health information or export-controlled information is involved. For example, apparently English arbitration law implies a duty of confidentiality in arbitration proceedings — and a failure to maintain confidentiality, where required, could result in the imposition of severe sanctions or the institution of legal proceedings against the discloser by other parties to the arbitration.101
c. Caution: A court being asked to enforce an arbitration agreement might not honor even an agreed confidentiality requirement — that's because of the strong presumption of public access to court proceedings and documents filed or used in court.102
d. Caution: Too-strict a confidentiality requirement in an arbitration agreement might cause enforceability problems for the arbitration agreement itself — especially in employment-related cases.103
4.5.4.4. An arbitrator isn't a "judge"
In standard business- and consumer arbitrations, each case is decided by a privately-engaged arbitrator, not by a publicly-employed judge.
(Some arbitrators are retired judges, but they still act in a private capacity, not an official one.)
The only times an actual judge would be involved would be:
if a party didn't want to arbitrate, in which case there might be court proceedings in which a judge decided whether or not to compel arbitration; and
if a party refused to comply with an arbitration award, in which case the other party would likely go to court to confirm and enforce the award.
4.5.4.5. Will arbitrator neutrality be a given? (Usually.)
A single arbitrator will usually be required to be independent and impartial, e.g., under the AAA's Commercial Rule R-18.
[b] Sometimes, parties agree that each party will appoint one non-neutral arbitrator and a third arbitrator will be neutral; see, e.g., AAA Rule R-18(b).
Rarely — if the parties have so agreed — a single, non-neutral arbitrator will decide the case, as happens in some professional sports collective-bargaining agreements that provide for a senior authority figure in one of the parties to serve as arbitrator; such an arbitrator arguably would not be neutral.
Example: Consider the famous "Deflategate" case, which centered on legendary (U.S.) National Football League quarterback Tom Brady: In 2016, the Second Circuit rejected Brady's objection to having NFL commissioner Roger Goodell sit as the arbitrator in Brady's challenge of his four-game suspension. The court held, in essence, that the players' union and the team owners had known full well the consequences of their arbitration agreement and that they could have bargained to do things differently.104
Counterexample: The First Circuit held that, under the applicable Puerto Rican law, the arbitration provision in the World Boxing Organization's agreement with boxers was unconscionable because it gave the WBO the power to select the arbitrator. The appeals court remanded the case for consideration of a savings clause that might allow arbitration to go forward anyway with an arbitrator appointed by the district court.105
Counterexample: The Seventh Circuit invalidated, as unconscionable, of an arbitration provision, in an employment agreement between a drinking establishment and an employee, because (among other infirmities), the arbitration provision gave the bar the right to choose the arbitrator. On appeal, with the bar's agreement but over the employee's objection, the appeals court directed the trial court to choose an arbitrator, as provided by the Federal Arbitration Act, and to order the parties to arbitrate. See Campbell v. Keagle Inc., 27 F.4th 584 (7th Cir. 2022) (vacating and remanding refusal to compel arbitration).
4.5.4.6. Can a party change its mind about arbitrating?
Sometimes a contract will include an agreement to arbitrate, but then when a dispute arises, one party will refuse to participate or will try to block arbitration. When that happens, the party that wants arbitration will usually go to court and seek an order compelling arbitration.
(This Clause allows one, limited exception: Under section 3, for a limited time, either party may elect to take the dispute to a small-claims court in lieu of arbitrating.)
4.5.4.7. How much discretion does an arbitrator have?
There's a perception in some quarters that arbitrators can run amok, i.e., "go rogue." Example: Some observers believed that the arbitrators went too far in a software-copyright dispute between competitors IBM and Fujitsu — in that case, the arbitrators ultimately ordered IBM to provide its operating-system source code and other secret information to Fujitsu; and ordered Fujitsu to pay significant money to IBM for the privilege.106
And worse, under U.S. law, the opportunities to appeal an adverse arbitration award could be very limited unless the agreement to arbitration limits the arbitrator's power (see the notes at 4.5.1.23 for additional discussion of that point).
Author's note: From what I've seen, most arbitrators (myself included) seem to stick to the law and the contract. Not least, that's because — wanting to be hired again and to get referrals from satisfied counsel — arbitrators can be reluctant to anger either side's counsel, which could happen if they render an award that doesn't make sense to the losing side; this is discussed in an important article by Professor Tom Stipanowich.107
4.5.4.8. How much "discovery" is available in arbitration?
In U.S. litigation, parties' counsel get to take extensive "discovery" as a matter of right; typically, this takes the form of compulsory production of documents and compulsory depositions, i.e., witness interviews under oath.
But in arbitration, the applicable arbitration rules generally allow for very little such discovery, at least not without the arbitrator's approval.
(As a practical matter, though, parties' counsel very often agree to exchange discovery; this can run up the bills for arbitration to where the expense is comparable to litigation, as discussed at 4.5.4.9.)
4.5.4.9. Is arbitration really cheaper than a lawsuit?
Some companies prefer arbitration over litigation because — when properly managed — arbitration can cost less money and take less time than court proceedings.
Moreover, for transnational arbitrations: Because of the international treaty on arbitration (the New York Convention), if a case is arbitrated in Country A, it's often easier for the winning party to get a court in Country B to enforce the arbitrator's award (e.g., by ordering seizure of the losing party's assets located in Country B) than it would be if the case had been litigated in Country A.
But: On the other hand, some parties regard arbitration as the worst of both worlds. Noted academic authority Tom Stipanowich has suggested that —
– Arbitration has been "captured" by litigation counsel who, for reasons of their own, prefer to agree with their counterparts to run arbitration proceedings in the same expensive- and time-consuming ways as they're familiar with in court (that tracks with my own experience as an arbitrator); and
– Arbitrators — mindful of getting future business and referrals from litigation counsel — can be reluctant to anger counsel in a case by overruling their procedural agreements, even though doing so would help to keep costs down in the case. 108
4.5.4.10. What if a party refuses to comply with an award?
Here's a hypothetical situation:
- "Alice" agrees to arbitrate a dispute with "Bob" over whether Alice owes Bob money.
The arbitrator decides in Bob's favor and rules that Alice must pay Bob, let's say, $1,000.
Alice refuses to comply with the arbitrator's award.
Bob can't just stroll into Alice's bank and ask a teller to hand him $1,000 from Alice's account: Bob must instead go to a court, in a jurisdiction where Alice can lawfully be sued — or has agreed she can be sued there, as in section 14 of this Clause — to "confirm" the award under the Federal Arbitration Act (in Title 9 of the U.S. Code) or, in international cases, by treaty (the New York Convention).
As explained by the Second Circuit: By law, arbitration awards "are not self-enforcing and must be given force and effect by being converted to judicial orders by courts; these orders can confirm and/or vacate the award, either in whole or in part."109
When a court does confirm an arbitration award, the award acquires the same status as a judgment of the court itself; the award can therefore be enforced by the winning party, for example by getting law-enforcement officials to seize the losing party's assets to pay a monetary award.
Once Bob gets the award confirmed, he can have the resulting court judgment "executed" — that is, then Bob can get law-enforcement authorities to confiscate enough of Alice's money and other assets to satisfy the judgment.
4.5.4.11. Courts have abandoned their former hostility to arbitration
Arbitration used to be disfavored by U.S. courts, but Congress and, repeatedly, the Supreme Court have instructed lower courts to reverse that stance, for example in Concepcion (2011):
The [Federal Arbitration Act] was enacted in 1925 in response to widespread judicial hostility to arbitration agreements. … [The Act reflects] both a liberal federal policy favoring arbitration and the fundamental principle that arbitration is a matter of contract. In line with these principles, courts must place arbitration agreements on an equal footing with other contracts and enforce them according to their terms.110
Note: As discussed at 4.5.4.12, Congress later prohibited compulsory arbitration for some types of claim.
Many states' laws likewise strongly favor arbitration. Example: In Apache Corp. (Tex. 2021), the Texas supreme court noted: "Once a valid arbitration agreement is established, a strong presumption favoring arbitration arises and we resolve doubts as to the agreement’s scope in favor of arbitration."111
4.5.4.12. But some compulsory arbitrations might be prohibited
Here are some examples of disputes in the U.S. where compulsory arbitration — mandated by contract before a dispute even arises — might be prohibited by law:
1. Sexual-assault or -harassment claims: In March 2022, President Biden signed H.R. 4445, which amended the Federal Arbitration Act to ban enforcement of pre-dispute agreements that would compel arbitration of claims of sexual assault or sexual harassment.
2. California employment- and consumer arbitration: In California, the statute known as A.B. 51 prohibits many employers from requiring mandatory arbitration of claims under the California Fair Employment and Housing Act and certain related statutes.
The California statute drew opposition, and a federal district court preliminarily enjoined enforcement of the statute on grounds of preemption by the Federal Arbitration Act; after an initial appeal and then reconsideration, the Ninth Circuit affirmed.112
Relatedly: California's S.B. 940 adds new section 1799.208 to the Civil Code; the new section prohibits sellers from requiring consumers to agree to arbitration outside of California, or under any other jurisdiction's substantive law, if the consumer's claim arises in California; consumers can void such requirements and recover their attorney fees for doing so.
3. Corporate whistleblower claims: 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 the Supreme Court's decision in Murray (2024), concerning the required elements of proof.113
4. Franken Amendment and government contracts: Government contractors and subcontractors should check the so-called Franken Amendment for its restrictions on arbitration clauses in employment agreements relating to certain government contracts. (The Franken Amendment apparently survived the GOP's takeover of Congress and the White House in the 2016 election, but it might be less relevant now in view of the 2022 enactment of HR 4445, discussed at subdivision 1 above.)
5. Moreover, in July 2014, President Obama signed an executive order stating that in federal government contracts for more than $1 million, "contractors [must] agree that the decision to arbitrate claims arising under Title VII of the Civil Rights Act of 1964 or any tort related to or arising out of sexual assault or harassment may only be made with the voluntary consent of employees or independent contractors after such disputes arise"; the order includes a flowdown requirement for subcontracts for more than $1 million.
(The order sets out exceptions for (i) the acquisition of commercial items or commercially available off-the-shelf items; (ii) collective bargaining agreements; and (iii) some but not all arbitration agreements that were in place before the employer placed its bid for the government contract in question.)
6. Car dealership franchise agreements: Federal law provides that in franchise agreements between automobile manufacturers and their dealers, pre-dispute arbitration agreements are unenforceable. Interestingly, the law also states that: "Notwithstanding any other provision of law, whenever arbitration is elected to settle a dispute under a motor vehicle franchise contract, the arbitrator shall provide the parties to such contract with a written explanation of the factual and legal basis for the award." 15 U.S.C. § 1226(a)(2).
7. Lending to military: If your client provides credit to active-duty military personnel or their eligible dependents, be sure to check the regulations that implement the Military Lending Act: Those regs essentially negate any agreement to arbitrate consumer credit disputes between lenders and such borrowers. (The regulations don't seem to distinguish between pre-dispute and post-dispute agreements to arbitrate, even though the statute itself appears to make just such a distinction.)114
8. Livestock & poultry production: Federal regulations governing livestock and poultry production impose restrictions on certain contracts mandating the use of arbitration. Under these regulations, such contracts must include, on the signature page, a specifically-worded notice, in conspicuous bold-faced type, allowing the producer or grower to decline arbitration; moreover, the Secretary of Agriculture seems to have the power to review agreements to determine "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."115
9. Home mortgage loan claims (overruled by Congress): In the Truth in Lending regulations, Regulation Z was amended to prohibit pre-dispute arbitration clauses in mortgages secured by dwellings — but that regulation was overturned in 2017 by the GOP Congress and President Trump under the Congressional Review Act (CRA).116
Relatedly: In a 2024 decision, the Second Circuit, citing cases, held that if a party were forced to arbitrate a non-arbitrable claim, it could cause irreparable harm, and that would bear on whether it would be appropriate to issue a preliminary injunction against arbitration.117
And even if a contract itself is alleged to be void for illegality, a U.S. court will likely enforce an arbitration-delegation provision contained in the contract, as happened, for example, in a 2022 Third Circuit case.118
4.5.4.13. Delegation must be clear and unmistakable
For the arbitrator to have the power to decide arbitrability disputes, the arbitration agreement itself must clearly and unmistakably delegate those specific decisions to the arbitrator, said the Supreme Court. When that happens, the arbitrator will decide the arbitrability question — and a court will likely defer to the arbitrator's decision on that point, as discussed at 4.5.1.23.119
On the other hand: In 2024, the Supreme Court held that, if there are two arguably-conflicting agreements — one that requires all controversies to be heard in a particular court, the other that contains an arbitration provision — then a court will determine which agreement controls on that point. This came up in a case where sweepstakes rules contained an exclusive forum-selection clause while the associated online terms of service required arbitration.120
4.5.4.14. Arbitration rules might provide for delegation
Many arbitration rules include a delegation provision: if an arbitration agreement adopts such rules, then the delegation agreement might follow automatically.121
But: If a party claims that it never agreed to arbitration in the first place (see this footnote), then the arbitration clause's adoption of particular arbitration rules won't be enough to delegate the arbitrability dispute.122
And if the arbitration agreement itself refers only to specified disputes, and not to all disputes, then a court might find that the agreement does not "clearly and unmistakably" delegate arbitrability decisions — even when the agreed arbitration rules might suggest otherwise.123
4.5.4.15. Wouild delegation be unconscionable?
A court might hold that the delegation agreement was unconscionable; this happened in a 2024 Ninth Circuit case; as stated in the court staff's syllabus:
The panel held that the delegation clause was part of a contract of adhesion, and the Terms on Ticketmaster's website, and the manner in which Ticketmaster bound users to those Terms, evinced an extreme amount of procedural unconscionability far above and beyond a run-of-the-mill contract-of-adhesion case.
In addition, four features of New Era's arbitration Rules supported a finding of substantial substantive unconscionability of the delegation clause[.]124
Normally, as discussed at 4.5.5.2 below, arbitration awards are largely unappealable except on very limited grounds — the theory is that, by agreeing to arbitration, the parties are getting what they bargained for, namely the arbitrator's decision, even if that decision is erroneous.
Happily, as discussed at 4.5.5.3 below: Some states do allow parties also to agree on expanded appeal rights in arbitration; this section takes advantage of that possibility by allowing reversal or vacating of an arbitrator's action on the same basis as for a non-jury trial ("bench trial") in the U.S.
4.5.5.2. Very-limited appeals under federal arbitration law
In the Supreme Court's Hall Street decision (famous, at least in the arbitration world), the Court held that — when the sole authority for an arbitration proceeding is the Federal Arbitration Act — courts may not entertain a challenge to the award except on the limited, misconduct-based grounds provided in section 10 of the Act.125
Later, in its 2013 Oxford Health Plans decision, the Court explained:
Because the parties bargained for the arbitrator's construction of their agreement, an arbitral decision even arguably construing or applying the contract must stand, regardless of a court's view of its (de)merits.
Only if the arbitrator acts outside the scope of his contractually delegated authority — issuing an award that simply reflects his own notions of economic justice rather than drawing its essence from the contract — may a court overturn his determination.
So the sole question for us is whether the arbitrator (even arguably) interpreted the parties' contract, not whether he got its meaning right or wrong.126
In W.R. Grace, though, the Court also held that a court can set aside an arbitration award that violates an explicit public policy — but the Seventh Circuit later noted in Zimmer Biomet that the public policy "must be well defined and dominant, and is to be ascertained by reference to the laws and legal precedents and not from general considerations of supposed public interests."127
And under California law (as summarized by a state appeals court in Brown), an arbitrator will exceed her powers — and thus have her award subject to being vacated — if the award "violates a party's unwaivable statutory rights or that contravenes an explicit legislative expression of public policy."128
Editorial comment: Purely from a workload-management perspective, it seems quite short-sighted for courts to prohibit enhanced appeals of arbitration awards by agreement. That's because:
parties are always free not to agree to arbitration — which means that their disputes likely would end up in court; and
surely, a busy trial judge would prefer to deal with a relatively simple case where some other "judge" — i.e., the arbitrator — had already done the work of managing the pre-trial work, trying the case, and writing an award, and all that the trial judge needed do was to sit as a reviewing court.
4.5.5.3. Enhanced appeals under state arbitration law?
Drafters can keep in mind another possibility for enhanced appellate review: In part IV of 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, the supreme courts of both California and Texas ruled that, in proceedings under the arbitration acts of their respective states, the parties were free to agree to enhanced judicial review.81
Counterexample: In 2010, the Tennessee supreme court held that an arbitration agreement's expansion of the scope of judicial review was invalid.129
4.5.5.4. Can parties agree to no arbitration appeals?
Tangentially: Some arbitration agreements take the opposite tack, stating that the arbitrator's decision will be final, binding, and not reviewable at all by a court. But U.S. courts probably won't go along with that: In 2003, the Second Circuit noted that "[s]ince federal courts are not rubber stamps, parties may not, by private agreement, relieve them of their obligation to review arbitration awards for compliance with § 10(a) [of the FAA]."130
On slightly-different facts, however, both the Fourth and Tenth Circuits held that arbitration provision can properly waive appellate review of a trial court's confirmation of an award.131
4.5.6.1. Barring class-action arbitration: A costly mistake?
Option 4.5.3.1's prohibition of class arbitration could be disastrous financially if a company found itself having to pay arbitration fees for hundreds or even thousands of coordinated individual arbitration claims:
– Suppose that an arbitrator determines that class arbitration between a company and its employees (or its customers, its "independent contractors," etc.) is not allowed.
– Later, a court might find itself compelled to accept the arbitrator's determination, however that determination comes out (see 4.5.1.23).
– This might mean that if the arbitrator decides against class arbitration, the company could find itself on the hook for millions of dollars in individual arbitration fees. Courts tend not to sympathize with companies that use class-arbitration waivers — making it costly for employees or customers to arbitrate individually — but that then try to get out of paying the required arbitration fees. Numerous cases — involving well-known companies such as Amazon, Twitter, and Uber — are cited in the following footnote (which is optional reading for students).132
4.5.6.2. Allow opting out of a class-arbitration prohibition?
Some companies include opt-out provisions in their arbitration agreements, especially in employment agremeents and customer agreements.
Opting out of arbitration would preserve an employee's or customer's right to bring class-action litigation.
And many people might not actually bother to opt out — this happened in a Ninth Circuit case in which a Bloomingdale's employee failed to timely opt out of arbitration when given the chance; she was held to have waived her right to litigate in court.133
4.5.6.3. Could "mass" arbitration be done in stages?
AT&T's October 2022 customer service agreement sets out a detailed procedure (in section 1.3.2.7) for "Administration of Coordinated Arbitrations." (The linked customer service agreement is archived at https://perma.cc/DYC6-T9WM.)
Example: Similarly, in 2023, genetic testing company 23andMe changed its terms of service to require customers to use a "mass arbitration" procedure, "after reports revealing that attackers accessed personal information of nearly 7 million people — half of the company’s user base — in an October hack."134
4.5.6.4. How should mass arbitrations be run?
The American Arbitration Association has developed supplemental rules for mass arbitration, which "were developed specifically to streamline the administration of large volume filings involving the same or related party, parties, and party representatives" with a "[t]echnology-focused approach to case management."
4.5.6.5. Or: Maybe just allow class arbitration?
At this writing, it has yet to be established which if any of the above "hybrid" approaches will be accepted by courts. As noted in a law-firm Web publication:
At least one court has tentatively blessed a variant of this approach, but in so doing, noted that if the process leads to undue delay in resolution of claims, it may ultimately be deemed unconscionable.
Whether these provisions will stand up in the end is undetermined, but regardless, they represent an imperfect solution, and may do little to avoid the enormous costs of ultimately resolving large numbers of individual arbitrations.135
So: Some parties might want to allow class arbitration, perhaps using language such as the following:
Class arbitration: Class-, collective-, and private-attorney-general arbitration are permitted in accordance with the Supplementary Rules for Class Arbitrations of the American Arbitration Association.
Parties agreeing to class arbitration might also want to agree to an enhanced right of appeal, as stated in Option 4.5.1.23.
4.5.6.6. Tangential: Would a waiver of class actions in court be given effect?
Example: In 2023, citing decisions from several jurisdictions, a federal district court in Rhode Island ruled that, in the absence of an arbitration agreement, a purported waiver of state-law class action remedies was contrary to the state's public policy and so was unenforceable.136
Counterexample: In 2024, New Jersey's supreme court, also citing other states' decisions, ruled just the opposite, namely that class-action waivers in consumer contracts were not per se contrary to public policy, but they could be unenforceable if found to be unconscionable.137
Counterexample: In 2005, California's supreme court stated (in what appears to have been a nonbinding dictum) that "the law in California is that class action waivers in consumer contracts of adhesion are unenforceable, whether the consumer is being asked to waive the right to class action litigation or the right to classwide arbitration."138
4.5.6.7. Other SCOTUS class-arbitration cases
In addition to Stolt-Nielsen, the Supreme Court has handed down other rulings about class- and collection-action arbitration, such as the following:
• Lamps Plus (U.S. 2019): "[T]he FAA similarly bars an order requiring class arbitration when an agreement is not silent, but rather 'ambiguous' about the availability of such arbitration. … Courts may not infer from an ambiguous agreement that parties have consented to arbitrate on a classwide basis. The doctrine of contra proferentem cannot substitute for the requisite affirmative contractual basis for concluding that the parties agreed to class arbitration."139
• Italian Colors Restaurant (U.S. 2013): The Act preempts state law barring enforcement of a class-arbitration waiver — thus, if you agree to a contractual waiver of class arbitration, you're likely to be stuck with the waiver, even if your cost of individually arbitrating a federal statutory claim would exceed the amount you might recover if you succeed with your claim.140
4.5.7. Arbitration: Miscellany
4.5.7.1. Arbitration clauses in online agreements
Online terms of service often require arbitration of disputes; courts have generally enforced such requirements.141
But: In 2023, a Pennsylvania appeals court held that an arbitration agreement in Uber's "browse-wrap" terms of service was not enforceable because it did not "unambiguously manifest" the user's assent to waive the constitutional right of trial by jury; see the extended discussion in the footnote at 4.5.1.19.
And online agreements seem to be especially vulnerable to unconscionability holdings in consumer-friendly jurisdictions such as California.142
4.5.7.2. Even non-signatory parties might have to arbitrate
[Optional reading for students]
Generally, a party need not arbitrate disputes if it didn't agree to arbitrate; as far back as 1960, the (U.S.) Supreme Court described arbitration as "a creature of contract."143
But: A party that didn't sign a contract containing an arbitration provision might have to arbitrate disputes arising under the contract. Example: In its 2021 Wagner decision, the Texas supreme court noted:
Federal courts have recognized that contract law and agency principles can bind a non-signatory to an arbitration agreement under the following theories: (1) incorporation by reference, (2) assumption, (3) agency, (4) alter ego, (5) equitable estoppel, and (6) third-party beneficiary.144
Example: Similarly, in a Texas case, family members of a homeowner wanted to sue the builder of the home; the state supreme court ruled that, because the family members had accepted benefits under the construction contract, the family members could be forced to arbitrate their claims against the builder under an arbitration provision in that contract.145
Example: A man's nephew bought tickets and took the man to see a "WrestleMania" show — who allegedly lost most of his hearing in one ear from pyrotechnics that were set off during the show. Affirming a WWE motion to compel the man to arbitrate his negligence claim, the Fifth Circuit said that the nephew acted as the uncle's agent for purposes of assenting to an arbitration agreement that had been presented when the nephew bought the tickets online: "An individual who permits a third party to present a ticket for admittance to an event on his behalf is bound by the terms and conditions governing the use of that ticket."146Example: To similar effect was another case brought by spectators injured at an NFL game.147
Example: And in Cure & Assoc., the Fifth Circuit reversed a trial court's refusal to compel arbitration, holding that, regardless whether California or Texas law applied, equitable estoppel principles prevented the plaintiff companies from avoiding arbitration, even though those companies had not signed the contract containing the arbitration agreement.148
Example: Going even further, Nevada's supreme court ruled that, in appropriate circumstances, one nonsignatory to an arbitration agreement could compel another nonsignatory to arbitrate.149
Counterexample: In a 2022 "edge case," an employee of a company, who was "staffed" to Phillips 66 (a customer of the employer), sued Phillips 66 for overtime pay. The employee's employment agreement with his employer included an arbitration provision, so Phillips 66 tried to use that to compel arbitration. But the Fifth Circuit said nope: "The issue is not whether [the employee] has an arbitration agreement with anyone — it is whether he has an agreement to arbitrate with the party he is suing, Phillips 66." Which he hadn't, said the court.150
Counterexample: In 2021, a federal district court in New York held that the active-voice wording of an arbitration clause — basically, that the parties must arbitrate disputes — was binding only on the parties that signed the contract, and so non-signatory parties were free to go to court, even though the dispute had arisen in connection with the contract in question.151
4.6. Archive Copies
In some contracts, one party will provide proprietary information to another party, but will expect the information to be returned or destroyed later. An archive-copies clause will often be used there — for example, in the information-purge provisions at Clause 15.12 — which in turn are likely to be used in conjunction with confidentiality obligations such as Clause 10.2.
This Clause presupposes that this Agreement clearly calls for one party (the "Retainer") to return, turn over, or destroy one or more of the following:
materials — hard copy, electronic, and otherwise152 — that were provided by another party (referred to for convenience here as the "Owner" even if the Owner technically is not an "owner" of the materials); and/or
materials that the Retainer derived from (or had others derive from) materials provided by the Owner.
4.6.1.2. Archive copies may be retained
The Retainer may cause archive copies to be maintained of the materials described in this Clause, as follows:
indefinitely, so long as the requirements of this Clause continue to be met; ⚠154
in one or more reasonable locations of the Retainer's choice — as long as those choices are consistent with this Clause (including, if applicable, any specific limitations on such locations stated in this Agreement).
4.6.1.3. What security precautions are required?
The Retainer is to cause at least prudent security measures155 to be taken to protect the archive copies.
For that purpose, the Retainer may use one or more reputable storage organizations, but only under suitable written contracts.
If the Owner asks from time to time, the Retainer will consult with the Owner about archive-copy security measures.
4.6.1.4. Are any activities off-limits?
Except as stated in this Clause, the Retainer must not do any of the following things in respect of the archive copies and any Owner confidential information that's contained in them:156
allow anyone to access to the archive copies; nor
disclose or use the information; nor
allow, or knowingly assist, in any unauthorized disclosure, use, or access; nor
confirm to any person whether or not particular information is contained in archive copies.
Of course, the Retainer may do the above things to the extent that the Owner has explicitly authorized it, in this Agreement or elsewhere in writing.
The Retainer may disclose or use information in archive copies if the Retainer clearly shows that the Retainer independently possessed the information.
4.6.1.5. What may be disclosed from archive copies?
Unless clearly agreed otherwise, the Retainer may disclose information in archive copies (subject to any restrictions in applicable law) only as follows:
to personnel of an outside archive custodian under this Clause (if any) as needed to maintain the archive copies;
to the limited extent clearly authorized by law, for example by the (U.S.) Defend Trade Secrets Act;
in response to a subpoena, search warrant, etc. — but only in accordance with Clause 10.2.1.28; and
to the extent (if any) that the Owner so agrees in writing.
4.6.1.6. Who may access archive copies?
Unless clearly agreed otherwise, the Retainer may allow others to access archive copies from time to time only in one or more of the following ways:
by the Retainer's people who maintain the archive copies (if applicable);
as agreed in writing by the Owner — including, but not limited to, for uses authorized by this Agreement; and/or
in connection with a disclosure permitted under this Agreement.
4.6.1.7. What use may be made of archive copies?
Unless clearly agreed otherwise, the Retainer may use information contained in archive copies only for one or more of the following purposes:157
determining the Retainer's continuing rights and/or obligations under this Agreement;
causing and monitoring the parties' compliance with their respective obligations;
documenting the parties' past- and present interactions relating to this Agreement;
reasonable testing of the accuracy of the archive copies; and/or
as otherwise agreed in writing by the Owner.
4.6.2. Optional terms
No Option below will apply unless this Agreement clearly adopts the specific Option in question.
4.6.2.1. Option: Use for Retainer's Business Purposes
The Retainer may, as the Retainer sees fit in its sole and unfettered discretion:
access and use archive copies — solely for the Retainer's internal business purposes⚠158 — as long as as the Retainer otherwise restricts use as stated in this Agreement; and/or
allow others to access and use archive copies — again, solely for the Retainer's own internal business purposes — in the same manner as in subdivision 1 above.
4.6.2.2. Option: "Have-Used" Rights
The Retainer may allow one or more third parties to use information in archive copies in the same way(s) as the Retainer, but only with the restrictions stated in this Option.(14.3)
The third party's use must be solely for the Retainer's benefit. (Incidentalthird-party benefit is permissible, for example if the Retainer pays the third party for services that are permitted under this Clause.)
The Retainer must enter into a written agreement with each such third party; that agreement must impose use- and disclosure restrictions on the third party that are substantially identical to those that apply to the Retainer under this Agreement.
4.6.2.3. Option: Access List for Archive Copies
Whenever the Owner reasonably asks, the Retainer will provide the Owner with a complete and accurate list of all persons who have had access to archive copies maintained by or for the Retainer. ⚠159
4.6.2.4. Option: No Outside Custodians
The Retainer will maintain all archive copies itself (i.e., with the Retainer's own employees), without using an outside archive custodian. ⚠160
4.6.2.5. Option: Only Outside Custodians
The Retainer will use an outside archive custodian, ⚠161 approved in advance by the Owner, for all archive copies — with such approval: ✅not to be unreasonably withheld, conditioned, or delayed. ❌to be granted or withheld in the Owner's sole discretion.
4.7. Arising out of or relating to (notes)
The term "arising out of or relating to" is usually interpreted broadly by courts — as the Tenth Circuit explained concerning similar wording:
Courts have generally interpreted language such as "arising from or in connection with" quite expansively.
To say that a dispute is one "arising from or in connection with maintenance performed by Williams" is to say that it had some causal connection to—that it originated from, grew out of, or flowed from—such maintenance.162
The term "relating to" is relatively broad (compared with the narrower "arising out of") but it's not of unlimited scope: In the context of determining the scope of an arbitration agreement, in 2017 the Ninth Circuit noted:
And though we have recognized that the phrase 'relate to' is broader than the phrases 'arising out of' or 'arising under,' … "related to" marks a boundary by indicating some direct relationship; otherwise the term would stretch to the horizon and have no limiting purpose ….163
In 2023, Delaware's chancery court had this to say:
This Court has considered the connector "relating to" to be paradigmatically broad. Indeed, the term "relating to" is one of the far-reaching terms often used by lawyers when they wish to capture the broadest possible universe. Given its breadth, a provision that extends to matters "relating to" an agreement encompasses *any issues that touch on contract rights or contract performance."164
Following this principle, the Delaware court held that the plaintiff's new claims for fraudulent transfer were barred by the res judicata effect of a judgment in a prior lawsuit between the parties in New York's courts, because:
The plaintiff's new fraudulent-transfer claims did not "touch on" the rights and performance of an LLC operating agreement, which included a forum-selection clause requiring litigation in Delaware of any claim "arising out of or relating in any way to this [Operating] Agreement."
The plaintiff therefore could have brought the fraudulent-transfer in the New York lawsuit, not merely in Delaware.
Consequently, the new fraudulent-transfer claims were barred by the res judicata effect of the results in the New York lawsuit.
On the other hand, said the Delaware court, the plaintiff's new claims for tortious interference were not barred by res judicata from the New York lawsuit because the tortious-interference claims did "touch on" the rights and performance of the LLC operating agreement, and so the claims were subject to the operating agreement's forum-selection clause, and thus could not have been brought in the New York lawsuit.
Variation: In 2023, the First Circuit noted (in a dictum) that a third-party claim might "arise from" an indemnifying party's act but not be "caused" by the act.165
The term "as between the parties" is used in various places to indicate that third parties are not necessarily bound by — nor favored under — what this Agreement says.
Example: As discussed at 6.3.3, California Evidence Code § 622 provides that (with certain exceptions), "[t]he facts recited in a written instrument are conclusively presumed to be true as between the parties thereto, " meaning that third parties would not be bound by the recital.
5.2. As-Is Definition
Many contracts use "AS IS" as a shorthand disclaimer of warranties and representations, often in all caps for conspicuousness. Colloquially, "as is" means, more or less, "you get what you get, and don't get upset."
(I'm borrowing here an expression I once heard used by a then-preschooler in my extended family — hi, Ryan!)
The term "as-is" (whether or not capitalized) is shorthand for a disclaimer of all impliedwarranties, representations, conditions, and terms of quality — each, generically, an implied "Warranty" — about the matter(s) in question, whether the Warranty is implied in fact or implied by law.
The term as-is does not disclaim any of the following:
any express, written Warranty — because that wouldn't be an implied Warranty; nor
any implied Warranty of title to goods or other tangible objects being conveyed, when such a Warranty is implied by law.166
Drafters who use the term AS IS will often capitalize it, in case the law requires such terms to be "conspicuous" (a topic discussed in more detail at 10.8).
5.2.2.2. England, etc.: Disclaiming implied conditions, etc.
The disclaimer of implied conditions and terms of quality is a nod to the law of England, Wales, and Northern Ireland. Example: In KG Bominflot (EWHC 2009, at ¶¶ 45-49), in the England and Wales High Court, an oil seller learned — presumably to its dismay — that its contractual disclaimer of (only) implied warranties was not enough to shield it from liability under implied conditions; the court said, "If the failure to use the word "condition" renders [the contract's disclaimer] of little or no effect, so be it. The sellers agreed to the wording of [the disclaimer] … and must live with the consequences."167
Example: At the start of the COVID-19 pandemic, Amazon stopped providing its "Rapid Delivery" service to Amazon Prime subscribers without telling them — while continuing to collect full price. A Prime subscriber brought a putative federal class action lawsuit against Amazon. The district court, though dismissed the case, and the Eleventh Circuit affirmed, because Amazon's terms of service had stated that services would be provided "AS IS" and "AS AVAILABLE."168
5.3. Assignment Consent
A contract can state that one or more specified parties may not "assign" the contract without the other party's consent, even if the law would otherwise allow assignment. This can often happen, for example, when a customer with bargaining power insists that a supplier may not assign a contract for the sale of goods or for services.
a specified party to this Agreement (the "Assigning Party") wants to assign this Agreement (5.3.3.1) to another party; but
the Assigning Party is required — by this Agreement itself,[a] and/or by law[b] — to obtain the consent of another specified party to this Agreement (the "Reviewing Party").
Note
[a] Pro tip: Here's some sample language to consider using to require assignment: "Except as clearly stated otherwise in this Agreement, [fill in the prospective assigning party's name — neither party if a name is not filled in] must not assign this Agreement without the prior written consent of [fill in the reviewing party's name — ditto]."
5.3.1.2. Assignment does not affect other rights or remedies
For emphasis: An assignment of this Agreement will not affect any right or remedy that the Reviewing Party has against the Assigning Party, where the right or remedy accrued before the assignment took effect.
Note
This is more or less how the law works in the U.S.; it's included here as a reminder for reviewers who might not know (or might not remember from 1L Contract Law class).
See also 5.3.3.17 for the special case of assignments under section 2-210 of the Uniform Commercial Code (concerning contracts for the sale of goods).
5.3.1.3. Consent not needed for a pledge of rights
For emphasis: Except as provided in subdivision c below, the Assigning Party need not obtain the Reviewing Party's consent for a "Pledge,"[a] namely:
an assignment, sale, or pledge of a right under this Agreement (for example, a right to be paid); and/or
a grant of a "security interest" in any such right.
Subdivision a will apply whether regardless whether the assignment, sale, pledge, or security-interest grant is absolute or collateral.
But: The exception of subdivision a above will not apply if the Pledge: –
delegates one or more of the Assigning Party's obligations under this Agreement;[b] and/or
has such an effect as a matter of law.
[a] Generally under the law, a "pledge" of a right to payment is not considered to be an "assignment," and thus the party making the pledge wouldn't need to get consent even if consent were needed for an "assignment." See [BROKEN LINK: pledge] for a (slightly) more-detailed explanation.
[b] This "exception to the exception" recognizes substance over form, in that sometimes, something that's called a "pledge" might reall be something more than that.
5.3.1.4. Consent is not needed for a corporate-form change
For purposes of this Clause, the term "assignment" does not include — and so the Reviewer's consent is not required for — a change in the Assigning Party's corporate form, if that change does not materially alter:
the beneficial ownership or control of the Assigning Party; nor
the day-to-day operations of the Assigning Party's business in respects that are relevant to this Agreement.
Note
For a brief discussion of changes in corporate form, see 5.3.3.9.
5.3.2. Assignment consent: Optional terms
No Option below will apply unless this Agreement clearly adopts the specific Option in question.
For emphasis: The Assigning Party need not obtain the Reviewing Party's consent to an assignment of this Agreement that occurs as a matter of law in a consolidation or amalgamation of the Assigning Party with, or merger with or into,169 another organization.170
Note
[a] For prospective assigning parties, this Option is another strategically-important add-on to an assignment consent provision, for reasons discussed at 5.3.2.2. Caution 1: Conceivably the Assigning Party might still be subject to other consent requirements arising outside this Agreement, as discussed beginning at 5.3.3.2.
Caution 2: On the other hand: The reviewing party might feel that it had made economic- or other concessions to its original counterparty that it would not be willing to do for an acquiring party.
For example: Suppose that: • Researchers at a university obtain a patent on an invention. • The university grants a license to a startup company that was founded to commercialize the invention, with the license agreement containing terms very favorable to the startup company, such as a low royalty rate. In such a situation, the university might not want the startup company to be free to be acquired by a giant corporation in the same field, because the university might not have been willing to give a giant corporation the same low royalty rate.
[b] Caution 3: In some jurisdictions, the wording of a merger agreement could automatically result in an assignment of assets by operation of law. That could mean that the transaction required consent in the same way as an "assignment." For example: If the assigning party was not the "surviving entity" in the transaction, then the transaction could constitute an "assignment" and thus would require consent — and that, in turn, would give the other party considerable leverage, and even a veto, over the assigning party's strategic options.171
5.3.2.2. Option: Asset Disposition Exception
The Assigning Party need not obtain consent to assignment of this Agreement if the assignment occurs in connection with a sale or other disposition of substantially all of the assets of:
the Assigning Party's business in its entirety; and/or
a specific line of the Assignee's business to which this Agreement relates. ⚠(5.3.3.6)
5.3.2.3. Option: Assignment Consent at Discretion
The Reviewing Party is free to grant, or withhold, or condition its consent to assignment by an Assigning Party in its sole and unfettered discretion.172
5.3.2.4. Option: Consent Not To Be Unreasonably Withheld
The Reviewing Party will not unreasonably withhold, delay, or condition its consent to a proposed assignment of this Agreement by the Assigning Party.173⚠
5.3.2.5. Option: Assignment as Material Breach
When this Option is agreed to: If the Assigning Party assigns this Agreement without a consent required by law or by this Agreement, then that assignment wil constitute a material breach of this Agreement.174
5.3.2.6. Option: Unconsented Assignment Voidable
If the Assigning Party assigns this Agreement without a consent required by law or by this Agreement, then the Reviewing Party may void the assignment,175 effective immediately upon the Reviewing Party's notice to both the Assigning Party and the assignee.
If the Reviewing Party did not void the assignment, that would not mean, in itself, that the assignment was not a breach (material or otherwise) of the consent requirement.
The assignment would not be void if the Reviewing Party did not give notice to that effect as provided in subdivision a above.
The Reviewing Party's right to void the assignment will automatically expire if its notice of voiding under subdivision a above has not become effective, as to both the Assigning Party and the assignee, on or before the date one month after the Reviewing Party first learns, by any means, of the assignment.176
The Reviewing Party's voiding of the assignment would not be the Reviewing Party's exclusive remedy for the Assigning Party's failure to obtain consent to the assignment unless this Agreement clearly said otherwise.
5.3.2.7. Option: Waiver of Damages for Withheld Consent
The Reviewing Party will not be liable to the Assigning Party, nor to any third party, for any kind of monetary award for having withheld, delayed, or conditioned its consent to the assigment — even if the Reviewing Party's action is found to have been unreasonable.177
5.3.2.8. Option: No Assignment of Third-Party Benefits
No third-party beneficiary of this Agreement (if any) may assign rights deriving from that beneficiary status — any purported assignment of such third-party benefits would be void "ab initio" (that is, from the start).178
The parties' adoption of this Option is not intended to imply that the parties to this Agreement intend for any third party to benefit from this Agreement, other than perhaps incidentally.
5.3.2.9. Option: Assignee Reasonable Assurance
This Option will govern if a party to this Agreement assigns this Agreement to another party (the "assignee").179
Another, previously-existing party to this Agreement (the "requesting party") may give the assignee written notice, in accordance with Clause 18.7, that unambiguously asks the assignee for reasonable assurance of the assignee's future performance of its obligations to the requesting party under this Agreement.
If — for any reason or no reason — the assignee does not provide such reasonable assurance within 30 days after receiving the notice, then within 30 days after the end of that 30-day period, the requesting party may terminate this Agreement — on a going-forward basis only — effective immediately upon notice to the assignee.
The requesting party's right to reasonable assurance under this Option will expire automatically if the requesting party's notice under subdivision b above has not become effective (see Clause 18.7) on or before the date 30 days after the requesting party learns, via any means, of the assignment.
Termination under subdivision c above will be the requesting party's EXCLUSIVE REMEDY for the assignee's failure to provide reasonable assurance — but without prejudice to any claim by either party for other breach of this Agreement.
If the assignee and the requesting party disagree about whether the assignee's assurance, if any, was reasonable, then the assignee and the requesting party will escalate the disagreement as provided in Clause 12.17.
5.3.2.10. Option: No Payment For Assignment Consent
The Reviewing Party will not ask for payment, no matter how labeled, from the Assigning Party (nor from any other party) in return for consent to assignment. ⚠180
5.3.2.11. Option: Deemed Consent After Deadline
The Reviewing Party will be deemed to have consented to an assignment by the Assigning Party if the Reviewing Party has not responded otherwise within ten business days after the Reviewing Party has received a written request for consent from the Assigning Party.
If, however, the Reviewing Party makes a reasonable request in writing to the Assigning Party for more information about the proposed assignment, then that request will "stop the clock," for a reasonable time, so that the Reviewing Party can review the information.181
5.3.2.12. Option: No Transfer of Consent Right
The Assigning Party need not obtain consent to assignment from a successor or assignee of the Reviewing Party. ⚠182
5.3.3.1. The general rule: Assignability of (most) contracts
Background: To promote economic efficiency, the general rule is that — with some exceptions in special cases, discussed in the additional notes beginning at 5.3.3.2 below — contracts are assignable without consent. When a contract is assigned:
the assignor delegates, to the assignee, responsibility for the assignor's obligations;
the assignor remains liable to the other party for any breach by the assignee; and
the assignee is entitled to the assignor's rights under the contract.
This general rule is reflected in, e.g., section 2-210 of the Uniform Commercial Code (which applies to the sale of goods only but is sometimes used by courts as guidance for other situations).(5.3.3.17)
The assignability of contracts is a key feature of "futures" trading in commodities, stocks, currencies, interest rates, and the like. For example, in the case of natural gas, a U.S. Department of Energy Website explains that, "The natural gas futures market is a marketplace where standardized contracts for the future delivery of set natural gas volumes are traded."183
Similarly, companies and individuals buy (or sell) standardized "call" and "put" option contracts for stocks, commodities, and the like, to reduce the risk of price volatility.184
5.3.3.2. But: IP-licenses aren't assignable by the licensee
The first exception to the general rule of free assignability is that intellectual-property licenses are not assignable by the licensee without the consent of the owner of the intellectual property in question.185
(The licensor is presumably free to assign if it wishes.)
A tangential point: Some license agreements prohibit assignment of the license but allow the licensee to sublicense to third parties. That could result in litigation over whether a given transaction by the licensee was a prohibited assignment, or instead was a permitted sublicense. Example: In a 2014 decision, Florida's supreme court declined to impose a bright-line rule on this point, noting that the name given to the transaction ("assignment" or "sublicense") would not be determinative.186
Another exception to the rule of free assignability is that a party may not assign a contract if the assigning party's performance is considered special or unique.
Caution: For any given contract, the question whether a particular party's performance would fall into this "special or unique performance" category would probably present factual issues that would have to go to trial, as opposed to being adjudicated more quickly and less expensively on the pleadings or on summary judgment. As a probably-absurd hypothetical example:
Suppose that Houston's own Megan Thee Stallion, a Grammy-winning rapper, entered into a contract to sing at a rap festival.
Now suppose that Megan wanted to assign her contract to, say, Ted Nugent (who is … not a rapper) without first getting an OK from the festival organizers: If that were to end up in a lawsuit, it would almost certainly result in summary judgment that Megan could not assign the contract.
It might be a different story question if Megan wanted to assign her contract, without consent, to one of her fellow rappers Cardi B and/or Nicki Minaj — that might well have to go to trial.
5.3.3.4. Another special case: Federal-government contracts
Author's note: For federal (U.S.) contracts, the following is an edited version of an excerpt (with extensive citations omitted) from a decision by the Civilian Board of Contract Appeals in ATS Trans LLC (2022).187 No copyright is claimed in the decision text, which is a work of officers or employees of the U.S. Government under 17 U.S.C. § 105.
The Assignment of Contracts Act, 41 U.S.C. § 6305, and the Assignment of Claims Act, 31 U.S.C. § 3727, together make up the “Anti-Assignment Acts.” These Acts generally prohibit the assignment of a government contract or claim.
The Acts serve two primary purposes – first, to prevent persons of influence from buying up claims against the United States, which might then be improperly urged upon officers of the Government; and second, to enable the United States to deal exclusively with the original claimant instead of several parties.
Any attempt to transfer a contract in violation of the Assignment of Contracts Act annuls the contract. A valid transfer subject to that statute requires government approval to be binding against the Government. The Government can recognize an assignment expressly via novation or implicitly by ratification or waiver.
Assignments occurring by the “operation of law” (i.e., corporate restructurings, mergers, and name changes “where in essence the contract continues with the same entity, but in a different form”) are exempt from the Act’s application. … Courts have applied the exception to statutory mergers, concluding that such assignments do not present the danger that the statute was designed to obviate.
5.3.3.5.State-government contracts might not be assignable
Example: 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.188
The non-assignability of state contracts can give the state agency considerable leverage — and in New York, state agencies apparently can be quite unabashed about wielding that leverage, as seen in one noteworthy episode involving the Port of New York and New Jersey and a Dubai company (5.3.3.6).
5.3.3.6. Caution: An assignment consent requirement could be disastrous for a "strategic" transaction
A party might want to do a major transaction such as a merger or asset sale. Such a transaction might well entail assigning one or more associated contracts — but the assigning party might first have to get a counterparty's consent for the contract assignment. That could, in effect, give the counterparty a veto over the assigning party's ability to do the transaction — and if the counterparty were to stall (perhaps in the hope of "extracting" financial- or business concessions), the opportunity for the transaction might disappear as the other party to the transaction grew tired of waiting.
Consequently, a prospective assigning party will want to seriously consider negotiating for Option 5.3.2.2 (asset dispositions) and/or Option 5.3.2.1 (mergers), for reasons discussed in the comments there.
Example: In one high-profile, politically-sensitive case involving a Dubai company, the Port of New York and New Jersey insisted on being paid a $10 million consent fee — plus a commitment to invest another $40 million in improvements to terminal operations — in return for the Port's consent to an assignment of a lease, as reported in the New York Times.
Example:Cisco Sys. (S.D.N.Y. 2021): Tech giant Cisco Systems spun off its video services division, selling the division to a private equity firm; the spun-off division was rebranded as Synamedia. As part of the transaction, Cisco sold certain assets to Synamedia, which also assumed certain liabilities. (This is not an uncommon approach.) • But there was a problem: One of the assets to be acquired by Synamedia was a 25-year lease in Hampshire, England — and that lease required the landlord's consent to an assignment. The landlord refused to consent to the assignment — which led to Synamedia's moving out and to litigation between Cisco and Synamedia (ultimately settled) over who was responsible for paying the rent.189
Example: Restaurant chain Ruby Tuesday ("Ruby") was the tenant in a lease of a mansion that Ruby used for corporate retreats. Encountering financial difficulties, Ruby wanted to sell the lease to a real-estate developer, BNA Associates. But to assign the lease, Ruby needed the consent of one of Ruby's creditors, Goldman Sachs, because of a provision in their credit agreement. Goldman refused its consent; Ruby lost the deal and ended up in bankruptcy — and Goldman ended up with the lease that the developer had wanted to buy from Ruby.190
The real-estate developer sued Goldman for intentional interference with business relations. Affirming dismissal of the case, however, the Sixth Circuit was equally dismissive: "Goldman was perhaps playing hardball. Any rational actor would likely have done the same, were it in their perceived best interest."
5.3.3.7. Caution: A merger might be an "assignment"
See the commentary at 5.3.2.1 for more on whether a merger might constitute an assignment requiring consent.
5.3.3.8. A change of control normally won't require consent
In the U.S., a change of control of a licensee corporation, through a transfer of the corporation's stock, is not an "assignment" of the license and thus doesn't require licensor consent (assuming that the licensee remained a separately functioning corporation).191
Caution: An assignment-consent provision could specifically provide that a change of control does indeed requires consent — but that would likely be objected to by any party with any sort of bargaining power.
Caution: If a contract requires a party's consent for "direct or indirect" assignment by another party, then consent might be required for a sale of stock of the other party resulting in a change of control intended to circumvent a consent requirement.192
Example: In 2022, semiconductor designer Arm announced that it had sued its licensee Nuvia after Nuvia's acquisition by Qualcomm. Arm claimed that "Qualcomm attempted to transfer Nuvia licenses without Arm’s consent, which is a standard restriction under Arm’s license agreements"; see also the complaint at paragraphs 28 and 36. At this writing (early summer 2024), the lawsuit seems still to be ongoing.
5.3.3.9. Changes in corporate form: A deemed assignment?
Background: Sometimes a party to a contract will change its organizational form, for example:
by changing from a limited-liability company ("LLC") to a corporation, or vice versa; or
by reincorporating in a different state, e.g., "moving" from Delaware to Texas, as Elon Musk's companies SpaceX and Tesla did in 2024.
If that contract required the party to obtain consent to an "assignment," would the party breach that consent obligation if it didn't obtain consent to its change of organizational form?
The significance of this issue can be seen by a 2024 New York case:
The plaintiff was a corporation when it entered into the contract in suit with the defendant, but later the plaintiff changed its corporate form by merging with an LLC.
Importantly, the contract included an assignment-consent requirement: "This Agreement and the rights granted hereunder may not be assigned by either Party, whether by operation of law, merger, change of ownership or otherwise, without the prior written consent of the other Party, and any unauthorized assignment shall be void ab initio."(Bold-faced emphasis added; ab initio means, roughly, "from the start.")
The plaintiff sued the defendant for breach of the contract; the defendant moved to dismiss for lack of standing, on grounds that the defendant had entered into the contract with the corporation, not the LLC.
The court denied the defendant's motion, holding that "the plaintiff raised a question of fact as to whether the merger constituted an assignment that violated the nonassignment provision of the contract."193
See also the commentary at 5.3.2.1 for more on whether a merger might constitute an assignment requiring consent.
5.3.3.10. Just obtaining consent(s) can delay a deal
Even the burden and delay attendant to obtaining consents to assignment could pose a problem for an assigning party.
Example: In a 2014 Florida case, an assigning party wanted to sell a line of business but had to seek consent from some 25 different counterparties.194
Example: In 2015, General Electric announced that it was selling more than $30 billion of commercial loans to Wells Fargo, completing the sale in early 2016. In the worst case, the relevant GE company might have had to assign thousands of loan-related agreements to a Wells Fargo company — and that might have required checking each of those agreements to be sure it didn’t have a provision requiring GE to get the borrower’s or guarantor’s consent before assigning the agreement.
5.3.3.11. A reviewing party might "play chicken" about consent
A reviewing party, asked to consent to an assignment of a contract, might be willing to "play chicken" with the assigning party by (metaphorically) folding its arms and saying, in effect: We think we ARE being reasonable in withholding our consent unless you pay us big bucks. If you don't agree, then sue us — and watch your deal evaporate before your eyes while you wait months or years for the court proceedings to end.
(Presumably the reviewing party would never be so incautious as to actually say something like the previous paragraph, because it would look really bad to a judge or jury if it were to be quoted — or misquoted — in court.)
An assigning party concerned about this possibility could ask for Option 5.3.2.11 to impose a deadline for refusing consent.
5.3.3.12. "Consent not to be unreasonably withheld …" — by law?
Concerning Option 5.3.2.4: In some jurisidictions, the law might require that consent to assignment of the agreement must not be unreasonably withheld.
Example:Section 1995.260 of the California Civil Code provides that: "If a restriction on transfer of the tenant's interest in a lease requires the landlord's consent for transfer but provides no standard for giving or withholding consent, the restriction on transfer shall be construed to include an implied standard that the landlord's consent may not be unreasonably withheld. … "
Example:Nevada Atlantic (Cal. App. 2008; unpublished):195 Apropos of that statutory provision, a California appeals court held that a contract provision allowing the landlord to withhold consent "for any reason or no reason" was not to be construed as including an unreasonably-withheld standard, saying that "the parties' express agreement to a ‘sole discretion' standard is permitted under legal standards existing before and after enactment of section 1995.260, as long as the provision is freely negotiated and not illegal."
Example:Pacific First Bank (Ore. 1994):196 A lease prohibited the tenant from assigning the agreement, including by operation of law, without the landlord's consent. The lease 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 did not include a similar, no-unreasonable-withholding statement for other assignments.
Oregon's 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.
Example: In MDS (Canada) (11th Cir. 2013), 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 under the circumstances when it refused consent to an assignment by the licensee to a party that wanted to acquire the licensee's relevant product line.
(This holding provides a useful illustration of how appeals courts have limited ability to "second-guess" a trial court's findings of fact.)
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,
[then] 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.
Example: In Shoney's (Ala. 2009),198 Alabama's supreme court alluded to a similar possibility; The contract in suit specifically gave the Shoney's restauraunt chain the right, in its sole discretion, to consent to any proposed assignment or sublease of a ground lease by a real-estate developer that had acquired the ground lease from Shoney's. The supreme court held that this express language overrode a rule that had been 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.
Counterexample: In Barrow-Shaver Resources (Tex. 2019),199 the Texas supreme court declined to read a reasonableness requirement into an assignment-consent provision. Caution for Texas lawyers and law students: Barrow-Shaver fits in with Texas's non-recognition of a general implied covenant of good faith and fair dealing.200
And again: The reviewer might be willing to "play chicken" with the proposer, as discussed at 5.3.3.11.
For additional discussion of consent standards, see 10.4.
5.3.3.13. What factors might be relevant to a consent request?
In reviewing a request for consent to assignment, a reviewing party should give due consideration to any evidence that the assigning party provides concening the apparent qualifications of the proposed assignee.
But a prospective reviewing party might want to spell out, in the contract, a list of specific safe-harbor factors that could justify withholding consent. For example, in the context of a real-estate lease, Medianik (2020) notes that "[a] more aggressive landlord will expressly condition its consent [to a tenant's assignment of a lease] on the presence or absence of certain circumstances, such as: (1) the tenant not being in default under the lease …."201
Toward that end, see 10.4 concerning factors that a Reviewing Party may take into account, and those that a Reviewing Party must take into account, in deciding whether to grant consent.
5.3.3.14. Assignment in part might be desired
An assigning party might want to assign a contract only "in part" — this would be to support a not-uncommon business practice in which:
A company (the "seller") is licensed to use certain software in its business;
The seller sells an unincorporated division of its business, or a site such as a refinery or a factory;
In connection with the sale, some of the seller's people will change employers, so that after the sale closes, those people will continue in their old jobs, but they'll now be working for the buyer;
Both the seller and the buyer want those people to be able to keep using the software in question — but that might be tricky if the buyer isn't already licensed to use the software.
Moreover, the seller wants to continue using the software in the rest of its business, as before.
For that reason, Option 5.3.2.2 is set up to allow the seller to assign the software license "in part."
To be sure: If the software licensor (i.e., the company that makes and licenses the software) had enough bargaining power, then the licensor might demand that the buyer buy its own license to use the software; that could be a nice, incremental chunk of sales revenue for the licensor.
But that might well be short-sighted, because the buyer and seller of the business might ask, "Hey, the seller already paid for the license; why should the buyer have to re-buy it?"
Example: In a 2009 Cincom case, a software customer (i.e., the licensee) did a corporate reorganization by, in relevant part, a series of mergers. As a result of the mergers, the named licensee technically became part of a different corporation that was owned by the same parent company — but nothing else had changed. The software vendor demanded that the customer re-buy the license; when the customer refused, the vendor took the customer to court — and won.202
Editorial comment: The Cincom plaintiff might have been extremely short-sighted. Look at it from a sales perspective: When a vendor treats a customer that way, what are the odds that the vendor will ever be able to sell anything again to that customer — let alone convince the customer to be a reference for the vendor's future sales efforts? Talk about pennywise and pound-foolish ….
In contrast, a smart software licensor will want to agree even to just a partial assignment of the software license. Why? Because the people in the seller's spun-off division — who're now working for the buyer — could serve as unofficial ambassadors for the software licensor, encouraging their new employer to acquire more licenses to use the software elsewhere in the new employer's organization.
When a contractor enters into an agreement with an owner (for example, a construction contract to build a building), the owner's lender might ask the contractor to sign an agreement that includes — possibly among other burdens — the contractor's obligation to assign the contract to the lender in certain circumstances. For example, Taylor (2021) points out:
While the content of these agreements differs from lender to lender, here’s what they normally contain:
a. A contractor consent to a potential assignment of the prime contract to the lender in the event the owner defaults;
b. The circumstances under which the contractor will or will not get paid for past and future work;
c. A waiver of lien rights for work in place; and
d. Obligation on the contractor to seek prior written permission directly from the lender, during the project, and prior to any possible default by the owner, for any change in the plans, the schedule, and even any change orders.203
5.3.3.16. Reasonable assurance: A consent compromise?
Relevant to Option 5.3.2.9: Consider this hypothetical situation:
Two parties, "Fred," a supplier, and "Ginger," a customer, sign a contract. (This intentionally evokes Fred Astaire and Ginger Rogers — and also usefully has an alphabetical sequence.)
Fred later assigns the contract to a third party, "Harry." (Another alphabetical progression.)
But Ginger isn't totally comfortable that Harry will be able to deliver on Fred's obligations under the contract.
Now, to be sure: If Harry did fail to perform Fred's obligations, then Ginger could sue both Harry and Fred for breach of the contract.
But that might be cold comfort to Ginger, who presumably doesn't want to have to deal with a breach at all: What Ginger wants is for the job to get done — properly and on time, whether by Harry or Fred — not least because if the job doesn't get done right, it might cause major problems for Ginger's business.
Moreover, in deciding to do business with Fred, Ginger might well have done some homework ("due diligence") about Fred's reliability. She might object to having to deal instead with Harry, about whom she might know little or nothing.
Oh, sure: An assignment-consent requirement would be one way for Ginger to address that concern: Ginger could insist on including a provision in the contract, saying that Fred simply isn't allowed to assign the contract to Harry without Ginger's consent.
But: An alternative to a consent requirement might be for Ginger to request "reasonable assurance" from Harry that Harry will actually be able to deliver.
So this Option could be a useful tool for Ginger to test whether Harry is likely to present more of a business risk than Ginger is comfortable with.
5.3.3.17. What does the UCC say about assignments?
In the specific context of sales of goods, UCC § 2-210 states:
(1) A party may perform his duty through a delegate unless otherwise agreed or unless the other party has a substantial interest in having his original promisor perform or control the acts required by the contract.
No delegation of performance relieves the party delegating of any duty to perform or any liability for breach.
(2) Unless otherwise agreed all rights of either seller or buyer can be assigned except where the assignment would materially change the duty of the other party, or increase materially the burden or risk imposed on him by his contract, or impair materially his chance of obtaining return performance.
A right to damages for breach of the whole contract or a right arising out of the assignor's due performance of his entire obligation can be assigned despite agreement otherwise.
(3) Unless the circumstances indicate the contrary a prohibition of assignment of "the contract" is to be construed as barring only the delegation to the assignee of the assignor's performance. …
(4) An assignment of "the contract" or of "all my rights under the contract" or an assignment in similar general terms is an assignment of rights[,]
and unless the language or the circumstances (as in an assignment for security) indicate the contrary, it is a delegation of performance of the duties of the assignor[,]
and its acceptance by the assignee constitutes a promise by him to perform those duties.
This promise is enforceable by either the assignor or the other party to the original contract.
(Emphasis and extra paragraphing added.)
5.4. Attorney Fees
In many lawsuits (and arbitrations), attorney fees can end up being the biggest expense. Prevailing-party attorney fee clauses are not uncommon in contracts; they're sometimes referred to generically as "Loser Pays" or the "English Rule" (where it's the standard) or the "Everywhere But America Rule."
In any proceeding concerning a dispute relating to this Agreement, the prevailing party in the proceeding — determined as provided by law204 — is entitled to recover its "attorney fees" and its "costs," each as defined below, for all stages of the proceeding unless this Agreement clearly provides otherwise.
For purposes of this Agreement, the term "attorney fees" — whether or not capitalized, and with or without an apostrophe — refers to all reasonable professional fees and -expenses, of any kind, paid or owed by a party "Alpha," at all stages of the dispute.
If this Agreement requires another party "Bravo" to pay Alpha's attorney fees, thenattorney fees also includes Alpha's "costs" in the dispute, as that term is commonly understood by lawyers, such as court filing fees; arbitration administration expenses; deposition- and transcript charges; and the like.
The professional fees and -expenses referred to in subdivision b above include, without limitation, those paid to or for one or more attorneys; law firms; and testifying- and/or consulting experts.
5.4.2. Attorney fees: Optional terms
No Option below will apply unless this Agreement clearly adopts the specific Option in question.
Each party WAIVES any right it might have — and therefore it will not seek — to be reimbursed by the other party for its attorney fees,205 even if a law or rule would otherwise have entitled that party to do so for the dispute in question.(5.4.3.2)
5.4.2.2. Option: Texas Rule
A party that successfully asserts a claim for breach of this Agreement — but not a party that successfully defends against such a claim — is entitled to recover its attorney fees and costs incurred in asserting the claim.206
5.4.2.3. Option: Attorney Fees in Motion Practice
This Option will apply when a party "Alpha" prevails in an interim proceeding with another party "Bravo," such as, for example, motion practice and/or an interlocutory appeal.
In such a situation, Alpha is entitled to recover, from Bravo, Alpha's reasonable attorney fees for the interim proceeding.(5.4.3.3)
If Bravo later ends up being the prevailing party in the action as a whole, Bravo is not entitled to a refund of amounts it paid under subdivision b, nor to being reimbursed for its attorney fees for the interim proceeding.
5.4.2.4. Option: Attorney Fees for ADR Nonparticipation
This Option will apply, as an incentive to participate in dispute-resolution proceedings.207 if in or more dispute-resolution proceedings, of any kind, that are called for by this Agreement:–
a party "Alpha" tries to block in court, or
Alpha simply fails to participate in good faith to even a minimal extent.
If the other party "Bravo" is the prevailing party in the dispute, then Alpha must pay (or reimburse) all of the other party's attorney fees for the entirety of the dispute in question, at all stages, including but not limited to appeals.
Moreover, Alpha will not be entitled to recover its own attorney fees even if Alpha would otherwise be entitled to do so.
The types of dispute-resolution proceeding contemplated by this Option include, for example, arbitration; mediation; escalation (whether internal or to a neutral advisor); and mini-trial, each when called for by this Agreement.
5.4.2.5. Option: Attorney Fees for Contrary Positions
This Option will apply if, in a lawsuit or other dispute (an "action"), a party ("Alpha") asserts a position that is contrary to an express- or unmistakably-implied term of this Agreement. ⓘ208
In such a situation, Alpha must pay (or reimburse) all attorney fees and costs incurred in the action, by any other party to this Agreement ("Bravo") that contests Alpha's assertion, ending with the date (if any) that Alpha withdraws its contrary assertion in question.209
5.4.2.6. Option: Attorney Fees for Unproved Accusations
This Option will apply if, in any dispute relating in any way to this Agreement:
a party (the "accuser") accuses210 another party to this Agreement — and/or the other party's affiliates, or the people of any of them — of criminal conduct, fraud, and/or breach of fiduciary duty relating to this Agreement or the parties dealings under this Agreement; but
the accuser does not prove the accusation with the degree of proof required by law or, if higher, by this Agreement.
In that situation, the accuser must pay, or reimburse, all of the attorney fees incurred by or on behalf of the accused in defending against the accusation.
If any uncertainty exists about whether particular attorney fees come within the scope of subdivision 1 above, the uncertainty is to be resolved in favor of the accused.
An attorney-fee award can dwarf the rest of a judgment; when a contract contains a prevailing-party attorney fees clause, the losing party could find itself on the hook for attorney fees that far exceed the amount originally in controversy.
Example: In a hotly-contested 2021 Tennesee case, a home builder was found to have breached a contract with a homeowner; the builder was ordered to pay damages of $6,800 — plusmore than $200,000 in attorney fees under the contract's prevailing-party attorney fee clause.211
Caution: Some parties — for example, a large, wealthy, litigious company that's contracting with a much-smaller one — might be adamant that each party will always pay its own attorney fees; that's because the large, wealthy company wants to be able to use the cost of litigation as a way of subtly pressuring the smaller one to settle on favorable terms. To that end, parties that wanted to contractually impose the American Rule could use language such as in Option 5.4.2.1.
5.4.3.2. Statutes might allow recovery of attorney fees
By statute, Congress and various state legislatures have allowed or even required awards of attorney fees to specified classes of prevailing parties, thus overriding the "American Rule" that normally controls (see section 5.4.2.1).
Example: U.S. antitrust law requires "a reasonable attorney's fee" to be awarded to "any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws …." 15 U.S.C. § 15(a). This statute was applied in a 2016 case, in which a federal district court in California awarded more than $40 million in attorney fees to a group of current and former student athletes — the athletes had sued the NCAA over a then-existing rule that prohibited student athletes from being paid for use of their names and likenesses in advertising and video games.212
Example: Under Cal. Civ. Code § 1021.9, a "specialized" California statute (as in, benefiting a particular class of politically-important special interests):
In any action to recover damages to personal or real property resulting from trespassing on lands either under cultivation or intended or used for the raising of livestock, the prevailing plaintiff shall be entitled to reasonable attorney’s fees in addition to other costs, and in addition to any liability for damages imposed by law.
As explained by a California appeals court: "The statute is intended to ensure that farmers are able to protect their land from trespassers through civil litigation."213
A 2009 report by the Congressional Research Service lists a number of federal statutes of this nature.
Motion practice can be a major, usually-unrecoverable expense in a lawsuit or arbitration. ("Motion practice" refers to motions filed with the court or arbitrator to compel discovery, for preliminary injunctions, for summary judgment, etc.)
Much of the expense of motion practice comes from a seeming article of faith among litigation counsel, along the lines of the saying attributed to Walter Gretzky, father of hockey legend Wayne Gretzky: You miss 100% of the shots you don’t take.
For litigation counsel, Gretzky père's dictum could be paraphrased as: You’ll be denied on 100% of the motions (and oppositions) that you don’t file. The problem, of course, is that in situations like this, when a party's litigation counsel "takes the shot," it inflicts burden, expense, and delay on the other party and the court — too often, to no real purpose.
Oh, sure: The rules of procedure typically "require" lawyers and parties to play nice. And a judge could impose sanctions for bad behavior.
But in reality, judges seldom impose sanctions. And realistically, a lawyer's concern about being sanctioned will often be far outweighed by the lawyer's fear of losing the case — and/or the fear that an angry client might think that the lawyer isn't doing enough to smite the client's adversary.
So, by contractually providing for awards of attorney fees in motion practice, drafters can help encourage the parties and their lawyers to be reasonable in the positions they take along the way.
5.4.3.4. Fees to a prevailing "non-breaching" party?
In some contracts, attorney-fee clauses allow, not a prevailing party per se, but a "non-breaching party" that successfully sues for breach, to recover fees. This variation is somewhat like the "Texas Rule"; something like it was seen — but not relied on by the court — in an Eleventh Circuit case.214
Caution: If drafting a provision like this, consider referring to the breach-of-contract plaintiff, not as the non-breaching party, but instead as, say, the "contract claimant." That's because in a Northern District [of California] case, the contract in suit included a termination-for-breach provision that referred to the right of the non-breaching party to terminate. That wording, said the court, meant that the party that had purported to terminate the contract did not have the power to do so — because that party was itself in breach, of a different contract provision. On that reasoning, a breach-of-contract plaintiff could lose its claim for attorney fees because the plaintiff was itself in breach of some contract provision.215
5.4.3.5. One-sided attorney-fee clauses might well be enforced
Some contracts contain unilateral attorneys' fee clauses; for example, a real-estate lease 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. Such unilateral clauses might well be given effect by courts.216
(In a lease, the American Rule, plus such a fee-shifting provision, would normally mean that the tenant could not recover, even if it were the prevailing party in a suit brought by the landlord — unless a statute provided otherwise, as in the California Rule discussed at 5.4.3.6.)
5.4.3.6. California, Oregon: Any fee clause is "prevailing party"
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; moreover, attorney fees under that section cannot be waived.217
New York has a similar rule for consumer contracts.219
5.4.3.7. Alaska's unusual attorney-fees rule
Under Alaska R. Civ. P. 82, a prevailing party is entitled to recover its attorney fees, with the amount of the fee being a percentage of the judgment (on a sliding scale with different brackets for different outcomes, and subject to possible adjustment by the trial judge).
5.4.3.8. Delaware shareholder lawsuits
Delaware law allows awards of attorney fees in certain shareholder lawsuits even when the shareholder might not qualify as a prevailing party "where: (1) the suit was meritorious when filed; (2) the defendants took an action that produced a corporate benefit before the plaintiffs obtained a judicial resolution; and (3) the suit and the corporate benefit were causally related."220
5.4.3.9. North Carolina's "up to 15%" rule
A North Carolina statute states that a promissory note and various other forms of indebteness can require payment of attorney fees as a percentage of the "outstanding balance" (a defined term), with a ceiling (or "haircut") of 15% of the outstanding balance.221
5.4.3.10. Spelling: Attorney fees — apostrophe? If so, where?
Compare: • 42 U.S.C. § 1988 (civil rights statute), which uses "a reasonable attorney's fee"; with • 28 U.S.C. § 1927, which provides for awards of excess "attorneys' fees" against attorneys who "multiplies the proceedings in any case unreasonably and vexatiously …."
In this book we use the simpler attorney fees, as to which noted lexicographer Bryan Garner observes: "Although inelegant, attorney fees is becoming more common — presumably to avoid making a decision on the apostrophe altogether."222
It's possible that Garner's view could be catching on: As one data point, the (U.S.) Defend Trade Secrets Act, enacted in 2016, uses "attorney fees" in a provision that requires employers to advise their employees (and individual contractors and consultants) of the individuals' whistleblower rights, as discussed at 10.2.5.2.223
For a lighthearted review of "authorities" about the apostrophe, see a 2023 opinion from the Southern District of Texas.224
5.5.1. Caution — watch out for possible privilege waivers
Even inadvertent disclosure of privileged documents to others — including others within the client's own organization — could result in permanent waiver of the privilege under typical rules of evidence.225
Worse: The waiver could extend broadly as a "subject-matter waiver."
If a waiver occurs, both the client's people and counsel might have to produce documents and testify about their confidential discussions — which would not make the client particularly happy ….
5.5.2. Pro tip: Privilege legends
When sending a potentially-privileged email or other document to a client, consider prominently marking it with a legend such as (for example) "CONFIDENTIAL: ATTORNEY-CLIENT PRIVILEGE." That way, if litigation were ever to take place:
The legend will help the client's litigation counsel to spot documents that should be withheld from production to avoid waiver of the privilege (see above).
Moreover, for emails and other electronic documents, the client's litigation counsel will likely use special software to search the client's computer systems for documents that must be produced to the other side; a privilege legend will help the software to flag particular documents for review.
5.5.3. Privilege logs
When documents are produced in litigation, the producing party will generally withhold documents that might be subject to the privilege; depending on local rules and the court's case-management order, the producing party might be required to produce a "privilege log," namely a list of documents withheld from production on privilege grounds, generally with specific categories of descriptive information.226
5.6. Audit
Trust, but verify – Russian proverb, often quoted by President Ronald Reagan (to the seeming irritation of his Soviet counterpart Mikhail Gorbachev).
Any time a party will be relying on information provided by another party, the first party should consider whether to ask for audit rights — fraud examiner Craig Greene asserts that "just as good fences make good neighbors, … audits produce good relationships."
(For some examples of real-world cases where audits proved useful, see 5.6.3.3.)
This Clause will govern in any case where one or both of the following is true:
under this Agreement, a party (the "Auditing Party") is to pay another party (the "Recordkeeper") in amounts, and/or at times, that are based on information contained in records maintained by the Recordkeeper; and/or
this Agreement otherwise clearly specifies the Auditing Party, the Recordkeeper, and the auditable records.
*b. Sample audit language: "[FILL IN AUDITING PARTY NAME] may cause commercially-reasonable audits to be conducted, of relevant records maintained by or for [FILL IN RECORDKEEPER NAME], as set forth in — and subject to the limitations of — Diamond Lane Clause 5.6."
5.6.1.2. Audit right
The Recordkeeper is to allow commercially-reasonable audits to be conducted, on behalf of the Auditing Party, of "Records" as defined below.
5.6.1.3. Definition: Records
For purposes of this Clause, the term "Records" refers to non-privileged227 records, in any form or storage medium,228 where all of the following are true:–
the records confirm the Recordkeeper's performance and billing under this Agreement;
the records are maintained by (or for, or on behalf of) the Recordkeeper under this Agreement; and
the records do not reveal the Auditing Party's technical trade secrets.229
5.6.1.4. Advance notice of audits
The Auditing Party will give the Recordkeeper reasonable advance notice of any audit being requested — the intent here is to give the Recordkeeper a chance to collect and sort its records, remedy any inadvertent deficiencies, etc., and thus help lower the cost of the audit for all concerned.230
5.6.1.5. Cut-off date for audit requests
Absent clear good reason, the Recordkeeper need not allow an audit231 of a particular Record after the later of the following dates:
the end of any legally-enforceable record-retention period for that Record, if there is one; and
the end of three years232 following the end of the calendar year in which the substantive content of the Record was most-recently revised.
5.6.1.6. How often may audits be requested?
Absent clear good reason, the Recordkeeper need not allow an audit that would start any sooner than 12 months after the end of a previous audit,233 even of Records that were created or updated in the interim.
5.6.1.7. Who would be acceptable as auditors?
The Auditing Party is to use only auditors who are reasonably acceptable to the Recordkeeper.234
The Recordkeeper is to state any objections to a proposed auditor within a reasonable time.
5.6.1.8. What must an auditor agree to?
The Auditing Party must obtain a legally-binding commitment235 from the auditor to comply with the requirements of this Clause indicated as applying to the auditor.
5.6.1.9. When and where would audits take place?
The Recordkeeper may designate reasonable times and places for requested audits, with a view to reducing and/or mitigating the attendant disruption to the Recordkeeper's business.
Reasonable times and places for an audit would ordinarily include, for example, the location or locations where the Records are kept in the ordinary course of business, during the regular working hours, at that location, of the party having custody of the records.
In making such designations, the Recordkeeper will consider any input that the Auditing Party has in that regard.
5.6.1.10. What access to Records will auditors have?
The Recordkeeper is to arrange for the relevant Records to be made available to the auditor as the Records are kept in the ordinary course of business.236
In consultation with the auditors, the Recordkeeper may set reasonable limits on auditors' access to the party's facilities, computers, etc., with a view to balancing protection of the Recordkeeper's interests while still advancing the audit.237
5.6.1.11. Professional cooperation is required
All involved in an audit are to cooperate in a professional manner with a view to expeditiously getting the audit done.238
Such cooperation will normally entail the Recordkeeper's doing the following, absent clear good reason:
making reasonable working facilities available to the auditors — including without limitation standard office-type facilities in reasonable locations with normal heating, air conditioning, restroom facilities, etc.;
directing the Recordkeeper's people to provide reasonable cooperation with the auditors, including but not limited to answering reasonable questions asked by the auditors; and
providing the auditor(s) with a reasonable number of copies of requested Records, at no charge, for retention as provided below.
In addition, in connection with the audit, all involved in the audit will comply with the following:
The Recordkeeper is to allow the auditor to retain archive copies239 of Records in confidence as stated at section 5.6.1.13.
5.6.1.13. Auditors must preserve confidentiality
The auditor must preserve in confidence all Recordkeeper information learned in the course of the audit, in the same manner as for its client confidential information under standards for certified public accountants in the United States.240
The auditor is not to disclose to the Auditing Party any more information of the Recordkeeper except reporting, in reasonable detail, any noncompliance with this Agreement that is revealed by the audit.241
5.6.1.14. The Recordkeeper gets a copy of the audit report
The auditor242 is to promptly provide the Recordkeeper (at no charge) with a complete and accurate copy of the audit report.
5.6.1.15. Objections to the audit report must be timely
If either party wants to object to an audit report, it must state those objections to the other party in a reasonably-detailed writing within three months after receiving a copy of the audit report from the auditor.243
If no such objection is made, then the audit report will be deemed final and binding on all parties except in cases of fraud.
5.6.1.16. True-up: What happens after the audit?
The Recordkeeper and Auditing Party are to promptly [BROKEN LINK: c-true-up] any discrepancies identified in the audit report.
If the audit revealed underpayment(s), then the true-up payment is to include interest on the underpaid amounts, at the Wall Street Journal's prime rate plus three percentage points — or if less, the maximum rate allowed by law — from the original date(s) due until paid;244 Clause 15.16 (interest charges and usury savings) will apply.
The true-up will be the EXCLUSIVE REMEDY for discrepancies revealed by an audit except in cases where the audit reveals fraud or material breach.245
5.6.1.17. Who pays for audits?
Each party is responsible for its own audit expenses except as stated in this section.246
Exception: The Recordkeeper must promptly reimburse the Auditing Party, as provided in Clause 12.24, for reasonable fees and expenses paid to the auditor by the Auditing Party if all of the following are true:–
the audit revealed a discrepancy in the Recordkeeper's favor;
the discrepancy, for the entire period being audited, exceeded 5%;247and
the Recordkeeper was responsible for the discrepancy.248
Exception: The Recordkeeper must likewise to reimburse the Auditing Party if the audit reveals (i) fraud, or (ii) a material breach, in either case:
on the part of the Recordkeeper; and/or
on the part of one or more of the Recordkeeper's subcontractors,249 where the subcontractor's fraud or material breach adversely affected the Auditing Party.
5.6.1.18. Escalation of audit-related disputes
The Recordkeeper and Auditing Party will escalate, as stated in Clause 12.17, any disagreement about how this Clause should be applied in connection with any proposed audit-related activity.
5.6.1.19. Survival of audit-related provisions
After any termination or expiration of this Agreement, the audit-related provisions of this Agreement will continue in effect,250 as stated in Clause 23.12.0.7 (survival), for matters that were subject to audit before termination or expiration, except as specifically provided otherwise in this Agreement.
5.6.2. Audit-clause playbook: Optional terms
No Option below will apply unless this Agreement clearly adopts the specific Option in question.
The Recordkeeper will maintain Records in accordance with generally-accepted industry standards.251
5.6.2.2. Option: Examples of Auditable Records
The Records maintained by or for the Recordkeeper (and, if applicable, subcontractors of the Recordkeeper) will include, without limitation, all records sufficient to provide reasonable documentary support for each of the following, as applicable under this Agreement:252
labor, materials, and other items delivered to the Auditing Party under this Agreement;
amounts billed to the Auditing Party under this Agreement;
compliance with specific requirements of this Agreement, including but not limited to reporting requirements, when this Agreement states that such compliance may be audited;
the relevant accounting procedures and practices; and
any other clearly-agreed auditable matters.
5.6.2.3. Option: Audit Completion Deadline
If an audit has not been completed253 within one month from its start date (as reasonably reported by the auditor), then the Recordkeeper may give notice to the Auditing Party that the audit must be completed no later than a deadline clearly stated in that notice.254
The completion deadline must be no sooner than ten business days after the effective date of the notice.
The Recordkeeper is encouraged, but not required, to consult with the Auditing Party and the auditor(s) in establishing the completion deadline.255
As a matter of professional courtesy, the Recordkeeper is encouraged, but not required, to advise the auditor of the deadline.
After the completion deadline passes, the Recordkeeper may stop allowing the auditor to access the Records and the Recordkeeper's facilities and people.
The same applies to Records, facilities, and people of any Recordkeeper subcontractors (if any).
5.6.2.4. Option: Recordkeeper's Expenses
If the Recordkeeper is not required to reimburse the Auditing Party's expenses of an audit under this Agreement, then the Auditing Party will reimburse the Recordkeeper — and the subcontractors of the Recordkeeper, if applicable — for 100% of all reasonable expenses actually incurred by them in connection with the audit.256
5.6.2.5. Option: Shorter-form audit clauses
Here's a condensed version:
Audits:(a) The Auditing Party may have commercially-reasonable audits conducted, from time to time, by independent outside auditors, of the Recordkeeper's non-privileged books and records documenting the Recordkeeper's performance of its obligations under this Agreement. (b) Any disagreement concerning an audit are to be escalated internally by the parties and then, if necessary, to a neutral for a non-binding recommendation admissible as an expert report.
Or with (much) more detail, and still in single-paragraph format for easier copying and pasting:
Audits:(a) The Auditing Party may have commercially-reasonable audits conducted from time to time — upon reasonable advance notice — by commercially-reasonable independent auditors, and in strict confidence — of books and records of the Recordkeeper — in the form in which they are kept in the ordinary course of business — documenting the Recordkeeper's performance of its obligations under this Agreement, excluding technical trade secrets as well as materials subject to the attorney-client privilege or other immunity from discovery. (b) The Recordkeeper will provide reasonable cooperation with the auditor(s) — including but not limited to directing the Recordkeeper's personnel to respond to reasonable questions from the auditor(s) (c) The parties are to promptly "true-up" any discrepancy revealed in an audit, with interest on overcharges at the maximum rate allowed by law beginning on the date of each overcharge. (d) The Recordkeeper must reimburse the Auditing Party for the auditors' reasonable fees and expenses of an audit if that audit reveals a discrepancy, for which the Recordkeeper is responsible, of greater than 5% for the period being audited.
5.6.3.1. Some examples of possibly-auditable records
Auditable records could include, for example, documentation of the Recordkeeper's sales, where the Recordkeeper is, say:
a store in a commercial building, reporting its sales to a landlord for purposes of calculating agreed percentage-rent payments to the landlord; or
a licensee under a patent, reporting its sales to the owner of the patent, for purposes of calculating agreed running-royalty payments to the patent owner for use of the patented invention.
A sample right-to-audit clause, published by the Association of Certified Fraud Examiners (undated, no longer online but archived at https://perma.cc/HP6G-LEAA) sets out a long "laundry list" of specific types of documents that a party might want to require a contractor to maintain:
Such records shall include, but not be limited to, accounting records, written policies and procedures; subcontract files (including proposals of successful and unsuccessful bidders, bid recaps, etc.); all paid vouchers including those for out-of-pocket expenses; other reimbursement supported by invoices; ledgers; cancelled checks; deposit slips; bank statements; journals; original estimates; estimating work sheets; contract amendments and change order files; backcharge logs and supporting documentation; insurance documents; payroll documents; timesheets; memoranda; and correspondence.
5.6.3.2. Who might be "acceptable" as auditors?
Big Four? Except as discussed below, any Big Four accounting firm would typically be considered a reasonable choice for auditors — but they don't come cheap.
Contingent-fee auditors — objectionable? Some recordkeepers would quickly object to an auditor working on a contingent-fee basis. That's because contingent-fee auditors might be tempted to err on the side of "finding" errors. (That could be especially problematic if the auditors' findings were agreed to be binding, and in any case disputes about the auditors' findings likely would be expensive and time-consuming for all concerned.)
Danger of in-house auditors? Often, employees of the Auditing Party and its affiliates might not be considered reasonable auditors — but the Recordkeeper should consider agreeing anyway, to help keep costs down, because the Auditing Party might not want to bear the expense of having an outside auditor do the job, and instead might prefer to send in one of its own employees to "look at the books."
Use the Recordkeeper's own auditor? Contracts consultant John Tracy once suggested, in a LinkedIn discussion thread (membership required), that an auditing party should consider engaging the outside CPA firm that regularly audits the recordkeeping party's books. John says that this should reduce the cost of the audit and assuage the recordkeeping party's concerns about audit confidentiality; he also says that "the independent CPA will act independently rather than risk the loss of their [sic] license and accreditation and get sued for malpractice."
Talk to each other! This is one of those areas where communication can help.
5.6.3.3. Examples of audit rights that paid off
Here are just a couple of examples of how audit rights either did pay off or might have paid off, as reported in a 2022 Wall Street Journal article:
Publishing company Gannett Co. provided inaccurate information to advertisers for nine months, misrepresenting where billions of ads were placed, according to researchers who provided their findings exclusively to The Wall Street Journal. …
* * *
In another example observed by a Wall Street Journal reporter, Capital One and American Red Cross bought ads that seemed as though they would appear on the Sarasota Herald-Tribune website, based on the information provided in the real-time auction. In fact, the ads ran on the website of Ruidoso News, a biweekly newspaper in New Mexico.
An American Red Cross spokeswoman said the organization was unaware of the issue.
Capital One didn’t respond to a request for comment.
(Extra paragraphing added.)
In a 2003 article, fraud examiner Craig Green lists a number of things that such folks often look for, including, for example:
fictitious "shell entities" that submit faked invoices for payment;
cheating on shipments of goods, e.g., by shorting goods or sending the wrong ones;
cheating on service performance, e.g., by performing unnecessary services or by invoicing for services not performed;
Signing a contract that is "backdated" to be effective as of an earlier date might well be OK. (This is referred to in Latin legalese as nunc pro tunc, or "now for then.") The contract itself should make it clear that parties are doing this, to help forestall later accusations that one or both parties had an intent to deceive.
Example: Suppose that "Alice" discloses confidential information to "Bob," a potential business partner, after Bob first orally agrees to keep the information confidential. Alice might well want to enter into a written nondisclosure agreement with Bob that states the agreement and its confidentiality obligations are effective as of the date of Alice’s oral disclosure.
To that end, Alice and Bob could include language in this Agreement along the following lines:
This Agreement is being signed on the date(s) indicated in the signature blocks, but it will be effective as of [date]; the parties intend that this Agreement will confirm, and replace, an oral confidentiality agreement entered into by the parties during discussions on or about that date.
Caution: Falsely stating the signature dates (as opposed to the effective date of the contract) could be problematic, and even lead to prison time, as discussed at 6.1.2.
6.1.2. Caution: Deceptive backdating has led to long prison sentences
Never backdate a contract for deceptive purposes, e.g., to be able to report a sale in an already expired financial period — that practice has sent more than one corporate executive to prison for securities fraud, including at least one general counsel.
Example: The former CEO of software giant Computer Associates, Sanjay Kumar, served nearly ten years in prison for securities fraud through, among other things, backdating sales contracts (NY Times). Kumar was also fined $8 million and agreed to settle civil suits by surrendering nearly $800 million (NY Times).
Kumar wasn't the only executive at Computer Associates (now known as just CA) to get in trouble for backdating. 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: ten 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." According to CA, all the sales in question were legitimate and the cash had been collected; the only issue was one of the timing of "revenue recognition," to use the accounting term:
The company had recorded the sales on its books ("booked the sale") a few days earlier than was proper under generally-accepted accounting principles, or "GAAP."
But that was enough to put the sales revenue into an earlier reporting period than it should have been.
And that, in turn, was enough to send all those CA executives to prison. (CA press release).
Example: 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.
Even if backdating a contract didn't land one in jail, it could can cause other problems. For example, a California court of appeals held that backdating automobile sales contracts violated the state's Automobile Sales Finance Act, although the state's supreme court later reversed.258
6.2. Background Checks
It's not unusual for a customer to want its service providers to run background checks on the service providers' key personnel. The goal is normally to identify people with criminal records, drug problems, or other indicia of potential trouble that could cause problems for the customer.
(See 6.2.4.1 for a description of some typical categories of background check; for some tips on picking a background-checks vendor — seemingly by such a vendor — see Diem (2024).)
This Clause will govern whenever one party — referred to for convenience as the "Provider"259 — will be responsible under this Agreement for the performance of "Critical Activities" and/or "Restricted Activities" (those terms are defined below). 🔑260
6.2.1.2. Specified Individuals: Whose backgrounds to check?
The Provider is to have commercially-reasonable background checks conducted, in advance, on each "Specified Individual." That means each employee of the Provider,261 and of the Provider's contractors (if any), who will be performing one or more "Critical Activities" and/or "Restricted Activities," as defined below.
For emphasis: For this purpose, the term "Specified Individual" does not include any employee:–
"Critical Activity" refers to any activity under this Agreement, where the activity is expected to involve one or more of the following:263
access to the Customer's computer system(s); data; or confidential information;
the possibility of death of (or other bodily injury to) any individual — that includes, without limitation, employees of another party specified in this Agreement (referred to for convenience here as the "Customer"); and/or
the possibility of significant loss of (or other significant damage to) tangible or intangible property of the Customer.264
"Restricted Activity" refers to any activity, in the context of this Agreement that:–
entails access, by the Specified Individual, to premises, equipment, employees, suppliers, and/or customers, of the Customer; but
does not rise to the level of a Critical Activity.265
6.2.1.4. What to do with background-check results?
The Provider is to consult,266 in advance, with the Customer in any case where prudence would suggest further inquiry in connection with any Restricted Activity, including but not limited to any case in which the background check indicates:
The Provider is not to staff any individual for Restricted Activities if the Customer timely objects on reasonable grounds.268
For emphasis: The Provider will not be relieved of its responsibilities under this Agreement just because the Customer did or did not object to one or more of the Provider's staffing proposals under this Clause.
6.2.1.5. Who will pay for background checks?
Unless clearly agreed otherwise in writing:
Expenses of background checks under this Agreement are the responsibility of the Provider; and
The Provider is not to ask the Customer (or its affiliates or its people) for reimbursement for such expenses without prominently pointing out, in the request, that the expenses are not reimbursable.269
6.2.1.6. Provider's defense- and indemnity obligation
The Provider must defend and indemnify the Customer and its Protected Group from any claim — by any third party — where the claim arises from the conduct of any background check covered by this Clause.270
The claims referred to in subdivision a include, without limitation, any claim that alleges one or more of the following:
failure to obtain any required consents from the Specified Individual;
failure to comply with any applicable privacy laws;
failure to comply with any applicable notification requirement (for example, in credit-reporting laws) that a Specified Individual must be notified before or after a decision is made using information learned in the background check; and
any other alleged violation of of law by the Provider or its agents in respect of the background check.
Such third parties include, without limitation, governmental authorities.
6.2.1.7. Must the Provider maintain indemnity insurance?
Unless clearly agreed otherwise in this Agreement, the Provider may decide, in its sole discretion,
whether to maintain insurance 🔑271 for the Provider's defense and indemnity obligations under this Clause, and
if so, how much, and for what coverages.
If clearly stated in this Agreement: The Provider will maintain insurance at prudent levels appropriate for the Provider's indemnity- and defense obligations under this Clause.272
6.2.1.8. Disagreement about background checks?
At the request of any party, each party will escalate any dispute about the Provider's staffing proposals under this Clause, first internally, followed if necessary by escalation to a neutral advisor.273
6.2.2. Background Checks Short-Form Clause
(a) Whenever [fill in party name] (the "Provider") assigns personnel for potentially-sensitive activities under this Agreement (as defined in subdivision (b) below), the Provider is to have commercially-reasonable background checks conducted beforehand. (b) For purposes of subdivision (a) above, the term "potentially-sensitive activities" would ordinarily include, for example, any activity involving access to: (1) the Customer's premises, equipment, and/or computer network(s); (2) the Customer's confidential information; (3) the Customer's employees; and/or (4) in the context of this Agreement, the Customer's suppliers and customers.
6.2.3. Background checks: Options
The Options below are designed for use with Clause 6.2; none will apply unless this Agreement clearly adopts the specific Option in question.
The Provider will cause each background check required under this Agreement to include standard credit reporting ⚠274 from all major credit bureaus serving the jurisdiction in question.
The Provider is to cause each background check to include a check for substantial evidence275 that the Specified Individual has ever engaged in any of the following: (6.2.4.3)
any felony;
violence of any kind, including but not limited to sexual violence;
child- or elder abuse;
materially-deceitful conduct, including but not limited to fraud; and/or
acts of moral turpitude.
6.2.3.3. Option: Drug Concern
The Provider is to cause each background check to include a check for substantial evidence suggesting that the Specified Individual makes use of one or more of the following: ⚠276
illegal drugs;
alcoholic beverages to excess; and/or
prescription drugs other than in accordance with a lawfully-issued prescription.
6.2.3.4. Option: Contact-Information Sources
When checking with a personal reference provided by a Specified Individual, the reference's contact information is to be obtained from a source independent of the Specified Individual. 277
6.2.4.1. Some possible categories of background check
Depending on the circumstances, parties might agree that some or all of the following should be checked in connection with a background check:
1. Driving-record check: A check of records of accidents; driver's-license status; driver's-license suspensions or revocations; traffic violations; and driving-related criminal charges (e.g., DUI).
2. Education verification: Confirmation of dates of attendance, fields of study, and degrees earned. Education checks are sometimes used because résumé padding is not an uncommon occurrence. Example: The chief spokesman of Walmart resigned after the retail giant learned that he had falsely claimed to have graduated from college, when in fact he had not finished his course work; ditto the former dean of admissions at MIT.
3. Employment verification: A check of of start- and stop dates and titles of employment for the past seven years or the past two to five employers, whichever results in more employers being checked.
4. Liens: A check of records of tax- and other liens; civil judgments; and bankruptcy filings (to provide a better indication of any past financial difficulties of the checked individual).
5. Personal reference check: Telephone- or in-person interviews with at least three personal references, seeking information about the following characteristics of the individual:
ethics;
work ethic;
reliability;
ability to work with others (including, for example and where relevant, peers, subordinates, superiors, customers, and suppliers);
strengths;
areas with room for improvement;
personality.
6. Professional license verification: Verification that an individual who claims to have a professional license (e.g., doctor, lawyer, engineer, etc.):
does in fact have such a license; and
is in good standing with the relevant licensing body — because it's not impossible that someone claiming to be a doctor, lawyer, CPA, etc., might not be in good standing.
7. Residence address verification: A check of dates of residence addresses for the past seven years (to reduce the risk of the checked individual's seeking to evade a criminal-records check by omitting a residence address).
6.2.4.2. Credit checks have to be done "by the numbers"
a. Caution: Credit checks, if not done correctly, can get a checking party in trouble under the [U.S.] Fair Credit Reporting Act ("FCRA"). Noncompliance with background-check consent requirements has hit some well-known companies with sizable settlement payouts.278
One particular procedural requirement comes up regularly in class-action lawsuits: Section 1681b(b)(2)(A) of the FCRA, which states that, with certain very-limited exceptions:
… a person may not procure a consumer report, or cause a consumer report to be procured, for employment purposes with respect to any consumer, unless—
(i) a clear and conspicuous disclosure has been made in writing to the consumer
at any time before the report is procured or caused to be procured,
in a document that consists solely of the disclosure,
that a consumer report may be obtained for employment purposes; and
(ii) the consumer has authorized in writing … the procurement of the report by that person.
b. Caution:Willful violation of the FCRA disclosure requirement entitles the consumer to recover "statutory damages ranging from $100 to $1,000 per violation, punitive damages, and attorney fees."279
c. Caution: If an FCRA consent form contains anything other than the mandated disclosure — even in a footnote — the requester is in danger of being labeled a willful violator, with consequences as stated just above. Example: In a 2022 decision, a California appeals court reversed a summary judgment in favor of Barnes & Noble, on grounds that a reasonable jury could find that the company acted willfully by asking a job applicant to sign a consent form provided by a background-checking company, because the consent form included a footnote with a disclaimer of warranties and advice to employers to seek their own legal advice.280
6.2.4.3. Criminal-history checks
a. Criminal-history records checks in basic form seem to be available from any number of Web sites at low cost, including from government agencies such as the FBI and/or the Texas Department of Public Safety.
b. A criminal-history check would typically include a nationwide check of records of arrests, convictions, incarcerations, and sex-offender status.
c. Drafters could consider whether to ask a subject to submit fingerprints to confirm the subject's identity (and guard against imposters).
d. Caution: The U.S. Equal Employment Opportunity Commission (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 (2013).
The EEOC has also taken the position that a blanket prohibition against using personnel with criminal records could be alleged to have a disproportionate impact on racial- or ethnic minorities and thus to be illegal in the United States; see EEOC Enforcement Guidance (2012).
f. Caution: In addition, some states — and even cities — might 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 California, New York, Massachusetts, Illinois, and Pennsylvania (not necessarily an exhaustive list). This is because in recent years the practice of automatically disqualifying people with criminal convictions has come under fire from government regulators and the plaintiff's bar as being potentially discriminatory (the so-called "ban the box" movement).281
a. Caution: Companies should be cognizant of disability laws such as the Americans with Disabilities Act, which might affect a company's ability to deny employment because of medically-prescribed drug use.
b. Depending on the duties to be assigned, even the use of legal drugs might be a cause for concern — for example, an individual taking certain prescription medications might be unsuited to drive a bus or other commercial vehicle. (This is still-another area where language might need to be fine-tuned to fit the parties' needs.)
c. For obvious reasons, if a background check indicates that a person might have a drug-misuse problem, then tighter restrictions would appropriate, when it comes to using the person for critical activities, than for other restricted activities.
d. Pro tip: Companies might consider the possible effect on employee morale of asking them to take a drug test – and about what they might have to do if a valued employee were to bust the test. (As the saying goes: Be careful about asking a question if you're not prepared to deal with the answer.)
6.2.4.5. Pro tip: Get consent anyway?
It might be prudent to obtain a checked individual's consent to a background check even if the law doesn't require consent: If the individual were to learn of an unconsented background check, the individual's displeasure might go viral on social media, especially given today's heightened sensitivity to privacy concerns.
6.2.4.6. Are background checks actually useful?
It's been suggested that background checks on people who have lived in California might not provide employers with much real-world benefit, that that the time and money might be better spent on searching applicants' social media. In part, that's due to recent changes in California law, Senate Bill 731, which have resulted in automatic sealing of certain felony-conviction records and in limits on what employers can do with conviction information.282
6.3. Background section of this Agreement (notes)
6.3.1. Style tip: Don't do "Witnesseth" and "Whereas"
Note: Like all purely-style tips, this particular style tip isn't worth making a big deal about if you're reviewing a draft prepared by The Other Side, see 21.4. And if your supervising partner has a preference, then do it that way, see [BROKEN LINK: style-conv].
Modern contract drafters avoid using the archaic words "WITNESSETH" and "Whereas.” For an example of what not to do, see the following example from a routine commercial real-estate purchase agreement:
Don't bother reading the text below, just get a sense of how it looks.
THIS REAL ESTATE PURCHASE AND SALE AGREEMENT (this "Agreement") is made and entered into by and between WIRE WAY, LLC, a Texas limited liability company ("Seller"), and RCI HOLDINGS, INC., a Texas corporation ("Purchaser"), pursuant to the terms and conditions set forth herein.
W I T N E S S E T H:
WHEREAS, Seller is the owner of a certain real property consisting of approximately 4.637± acres of land, together with all rights, (excepting for mineral rights as set forth below) , title and interests of Seller in and to any and all improvements and appurtenances exclusively belonging or pertaining thereto (the "Property") located at 10557 Wire Way, Dallas (the "City"), Dallas County, Texas, which Property is more particularly described on Exhibit A attached hereto and incorporated herein by reference; and
WHEREAS, contemporaneously with the execution of this Agreement, North by East Entertainment, Ltd., a Texas limited partnership ("North by East"), is entering into an agreement with RCI Entertainment (Northwest Highway), Inc., a Texas corporation ("RCI Entertainment"), a wholly owned subsidiary of Rick's Cabaret International, Inc., a Texas corporation ("Rick's") for the sale and purchase of the assets of the business more commonly known as "Platinum Club II" that operates from and at the Property ("Asset Purchase Agreement"); and
WHEREAS, subject to and simultaneously with the closing of the Asset Purchase Agreement, Seller will enter into a lease with RCI Entertainment, as Tenant, for the Property, dated to be effective as of the closing date, as defined in the Asset Purchase Agreement (the "Lease") attached hereto as Exhibit B and incorporated herein by reference; and
WHEREAS, subject to the closing of the Asset Purchase Agreement, the execution and acceptance by Seller of the Lease, and pursuant to the terms and provisions contained herein, Seller desires to sell and convey to Purchaser and Purchaser desires to purchase the Property.
NOW, THEREFORE, for and in consideration of the premises and mutual covenants and conditions contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
This is pretty hard to read, no?
The above example has other problems, in addition to its use of archaic "Whereas" clauses: Because of the "as follows" language at the end of the last paragraph quoted above, it can be argued that the parties did not agree to the Whereas clauses.
6.3.2. Use the "Background" section to set the stage
Instead of "Recitals" — or worse yet, W H E R E A S clauses — you're better off describing the background in a (numbered) "Background" section of the contract.
As a general proposition, the Background section should just set up the story: Explain to the future reader, in simple terms — with short sentences and paragraphs — just what the parties are doing, so as to help future readers get up to speed more quickly.
As a horror story, consider the WHEREAS example quoted at 6.3.1 above: Good luck trying to figure out what's really going on — there seems to be some kind of business roll-up going on, with a sale and leaseback of real estate and maybe other assets, but that's not at all clear. Now imagine that you're a judge or a judge's law clerk who's trying to puzzle out the story. Worse: Imagine that you're a juror trying to make sense of this transaction.
Somewhat better is the following excerpt is from a highly publicized stock purchase agreement in the tech industry,283 rewritten into background-section form below:
Before:
WHEREAS, concurrently with the execution and delivery of this Agreement, Seller and Yahoo Holdings, Inc., a Delaware corporation (the “Company”), are entering into a Reorganization Agreement substantially in the form attached hereto as Exhibit A (the “Reorganization Agreement”), pursuant to which Seller and the Company will complete the Reorganization Transactions at or prior to the Closing;
After rewrite:
1. Background
1.01 At the same time as this Agreement is being signed, Seller and Yahoo Holdings, Inc., a Delaware corporation (the “Company”), are entering into a Reorganization Agreement.
1.02 Under the Reorganization Agreement, Seller and the Company are to complete certain "Reorganization Transactions" at or prior to the Closing.
1.03 The Reorganization Agreement is in substantially the form attached to this Agreement as Exhibit A.
Notice the shorter, single-topic paragraphs, discussed in more detail at 17.1.
6.3.3. A contract's background statements might be binding
Different jurisdictions might treat background statements differently. For example:
• California Evidence Code § 622 provides: "The facts recited in a written instrument are conclusively presumed to be true as between the parties thereto, or their successors in interest; but this rule does not apply to the recital of a consideration." (Emphasis added.)
• But in Maryland: "Contracts often contain recitals: provisions that do not make binding promises but merely recite background information about factual context or the parties' intentions. Maryland law recognizes the general principle that such recitals are not binding and, while they may aid the court in interpreting the contract's operative terms, cannot displace or supplement operative terms that are clear."
And in THR Enterpr. (Ct. Fed. Cl. 2022), the court observed:
Whereas clauses are not contractual; they are recitations laying out the background understandings of the parties.
Thus, in the face of ambiguity, they may be used to interpret the meaning the parties attached to the operative words.
But they can do even more. They tell us the assumed facts and purposes of the parties. Rather than only coming into play given ambiguous language, they also may be considered in determining whether language is clear in the first place.
But what they may not do is create ambiguity where the words have only one permissible meaning.284
6.3.4. A statement of one party's intent might not be binding
A naked statement of one party's subjective intent in entering into the contract might not suffice to be binding on another party. Example: That happened in Sprint Nextel, in which the cell-phone service provider offered "upgraded" phones to its customers at steep discounts when customers renewed their contracts — the discounts were so steep that the customers paid less than what the phones would bring on the used-phone market. Seeing a business opportunity, another company, Wireless Buybacks, bought upgraded phones from Sprint customers and resold them at a profit. Sprint sued Wireless Buybacks for tortious interference with Sprint's contracts with its customers.
Sprint claimed that its customer contract prohibited resale because it said in part: "Our rate plans, customer devices, services and features are not for resale and are intended for reasonable and non-continuous use by a person using a device on Sprint's networks." (Emphasis added.) The trial court found that this language unambiguously barred resale; the court granted partial summary judgment for Sprint.
On appeal, however, the Fourth Circuit held that the contract language "is a background statement of intent, not an enforceable promise not to resell Sprint phones."285
6.3.5. Leave rights & obligations out of the Background
Inexperienced contract drafters will sometimes put specific rights and/or obligations in a Background section. That's a bad idea for the reasons discussed above.
❌Example 1: One of the author's students once wrote in the Background section: "For all purposes, the Data is owned by Client and is provided to Contractor for completion of services under this Agreement."
COMMENT: This shouldn't go into the Background section, but instead in a substantive section, for example in a section about ownership of intellectual property.
❌Example 2: Another student wrote: "Client will pay Contractor as stated in this Agreement."
COMMENT: This shouldn't be in the Background section, because the payment provisions would (or at least should) speak for themselves — moreover, readers would naturally assume that Client would pay Contractor, so there was no need to include that fact in the Background section.
❌Example 3: Still another student wrote: "The parties have agreed that Client will compensate Provider with a flat monthly fee of $20,000 for up to 200 staff hours of work per month, with additional work hours being billed at $150 per hour."
COMMENT: This would work only if the Background section was the only place that the specific compensation details were discussed, so as not to violate the D.R.Y. (Don't Repeat Yourself) guideline discussed at 11.1.
❌Example 4: A student wrote: "Client and Service Provider enter into the Agreement for the term of one year from the effective date of the Agreement."
COMMENT: This is another item that would go into a substantive provision further down in the contract, not into the Background section.
6.3.6. (Skim:) Some other student "background" efforts
Note to students: This section will give you an idea of some minor errors that can arise in drafting a background section.
1. A student used "WHEREAS" several times.
COMMENT: That's OK if the partner wants it, but it's archaic.
2. A student described one of the parties, "Mary," as an "expert."
COMMENT: Not a great idea (for Mary): The other side might argue later that Mary had held herself out as an expert but she really wasn't.
3. Several students wrote variations on, e.g., "Gigunda desires for MathWhiz to analyze data, and MathWhiz desires to do so."
COMMENT: Not the best phrasing, because the rest of the contract can speak for itself. (And in any case, the parties' subjective desires don't enter into contract interpretation except in cases of a lack of meeting of the minds or mutual mistake.)
6.4. Backup Payment Sources
When a party ("Biller") expects to be owed money by another party ("Payer"), the Biller might be concerned whether the Payer will actually pay what it owes. That can be a particular concern for the Biller if the Biller expects to spend considerable money of its own "up front" for this Agreement. For that reason, it's not uncommon for a Biller to negotiate for the Payer to put in place some backup-payment arrangements — a.k.a. "payment security" — to shift at least some of the risk of nonpayment onto some third party such as a guarantor (see Clause [BROKEN LINK: guar-proto]) or a bank letter of credit (see [BROKEN LINK: ltr-crdt-cmt]).
This Clause will apply whenever requested by a party to this Agreement (the "Biller") of a "Payer," in each case as clearly indicated in this Agreement.
6.4.1.2. Who will set up the arrangements?
The Payer is to promptly establish, and continuously maintain in effect, one or more arrangements with one or more backup payment sources (each source, a "Bank") to pay amounts that come due to the Biller under this Agreement, in case the Payer does not pay on time.
6.4.1.3. Who will pay for the arrangements?
The Payer is to bear all expenses of establishing and maintaining the backup payment arrangements.286
The Payer is not to seek reimbursement of such expenses without prominently pointing out to the Biller's relevant people (e.g., accounts-payable personnel) that the Biller has not agreed to reimburse such expenses.287
6.4.1.4. What input will the Biller have?
The Payer is to obtain the Biller's prior written approval of:–
each Bank; and
each backup payment arrangement with each Bank.
The Biller will not unreasonably withhold, delay, or condition its approval of a Bank, nor of such an arrangement.(6.4.2.3)
6.4.1.5. Who is to confirm the arrangement?
For each backup-payment arrangement, the Payer is to have the Bank(10.3) provide the Biller with written confirmation that the agreed arrangement has been established.
6.4.1.6. The Biller may wait to start work
In the interest of reducing the Biller's contractual risk: The Biller need not incur any burden or expense under this Agreement until the Biller has received the confirmation required by section 6.4.1.5.288
6.4.1.7. What if things change?
This section will apply if the Biller reasonably289 requests it in writing.
The Payer is to promptly arrange for reasonable modification290 of the backup-payment arrangement (and confirmation to the Payer by the Bank).
If the Biller does ask for changes to a backup-payment arrangement, the Biller should consider proactively providing the Payer with reasonable detail and perhaps appropriate supporting documentation.
6.4.1.8. What if the parties disagree about this Clause?
At either party's request, the parties are to escalate disagreements about the reasonableness requirements of this Clause — first escalate to supervisors, and if that doesn't work, then to a neutral advisor.
In some deals, a party's prospect of not getting paid can be a non-trivial risk:
Example: During the economic downturn accompanying the COVID-19 pandemic, the prominent retail chain Paper Source loaded up on inventory from its small-business suppliers, ordering unusually-large quantities of merchandise — and then, in effect, tore up the bills by filing for bankruptcy protection. As reported by the Washington Post, "Paper Source ordered more from The Card Bureau in a 60-day period than it had in all of 2020." Shortly afterwards, Paper Source filed for bankruptcy protection — the legal effect of which was to allow Paper Source (mostly) to stiff its suppliers, likely paying them something like pennies on the dollar.291
Example: In the Seventh Circuit's Northbound Group case, the plaintiff company's assets were acquired by a newly-created subsidiary of the party that the plaintiff company had anticipated would be the buyer; that subsidiary turned out to be judgment-proof, but the acquisition agreement evidently didn't provide any kind of backup payment source (6.4) such as a guaranty ([BROKEN LINK: guar-proto]) of the subsidiary's payment obligations.292 (This illustrates the importance of making sure the contract names the correct party or parties, as discussed at discussion at 3.6.2.6.)
Example: Over the years, various enterprises associated with Donald Trump have reportedly "stiffed" a large number of creditors.293
6.4.2.2. One common use: Avoiding construction liens
Here's a common use for backup-payment arrangements:
A landowner enters into a "prime contract" with a general contractor (or "prime") to get a building built.
The prime contract contemplates that the general contractor will hire, coordinate, and pay, various specialist subcontractors ("subs") to do various specific things such as demolish the existing building ("demo work"); pour a foundation for the new building; erect the building's frame and roof; install electrical wiring; install plumbing; and so on.
[TO DO: Diagram showing payments by customer to contractor to subcontractor?]
The general contractor's obligation to pay its subs is important to the owner: If the general contractor were to fail to pay a sub, the law would likely allow the sub:
to demand payment from the owner — which likely has already paid the general contractor — and/or
to place a lien294 on the owner's property, thus placing a "cloud" on the owner's title and complicating the owner's life.
For that reason, in negotiating the prime contract with the general contractor, the owner might well require the general contractor to obtain "payment security" to make sure that the subs got paid.
(The prime contract likely would also require the owner to obtain financing from a bank or other lender, so that the general contractor would have assurance that it would be paid.)
6.4.2.3. What, or who, might be a suitable backup payer?
In deciding whether a particular backup-payment arrangement was acceptable, the Biller could reasonably take into account, for example, the following (without limitation):
the financial condition of the individual or organization agreeing to serve as the backup payer (i.e., the Bank);
whether the Bank was in a jurisdiction that would be convenient to the Biller for purposes of enforcing the Biller's right to payment (e.g., U.S. banks only, federally-chartered U.S. banks only, etc.);
the extent to which the arrangement covered:
pro-rata payments required under orders for goods as shipped and/or for services as performed; and
payment of any cancellation- or termination charges under such orders; and
whether the Bank would reimburse the Biller for any Biller refund of a Payer payment in proceedings under bankruptcy- or comparable laws, for example in settlement of a claim for refund of a "preference" payment (see [BROKEN LINK: guar-pmt]).295
6.4.2.4. What form(s) of backup payment might be used?
Here are a few possible backup sources of funding:
1. A supplier could ask for a deposit --- possibly into "escrow," to be held by a third party until stated conditions are met. See Clause 11.11 (deposits) and its commentary; see also Escrow (Investopedia.com).
2. A supplier could ask its customer to provide a standby letter of credit ("SLOC") — in return for a fee, a bank agrees to pay the amount due if necessary; in effect, a SLOC is a prearranged line of credit for Biller with Payer's bank, with Payer being responsible for repaying the bank. (See generally [BROKEN LINK: ltr-crdt-cmt] for a court's explanation of letters of credit.)
3. A supplier could ask its customer for a guaranty from a third party — concerning which, see Clause [BROKEN LINK: guar-proto].
4. The supplier could ask to take a security interest in real estate or other property (tangible or intangible), referred to as "collateral" — see Clause [BROKEN LINK: sec-int-top].
5. A customer hiring a contractor could ask the contractor to buy a payment bond from an insurance carrier, typically referred to as a "surety." Then, if the contractor fails to pay its subcontractors, then the surety is responsible for paying any unpaid suppliers and subcontractors. See generally Payment bond (IRMI.com).
The surety will usually try to recoup its payment(s) from its insured, that is, from the nonpaying contractor.
A customer deaing with a prime contractor will often negotiate to require the prime contractor to obtain a payment bond. The intent is to keep the prime contractor's unpaid subcontractors and suppliers from filing a mechanic's lien or materialman's lien (nowadays often referred to as a "supplier's lien") on the customer's project. See generally Mechanic's lien (Wikipedia.org).
Under the federal Miller Act,296 a prime contractor working on a government project must furnish a bond; if the prime contractor fails to pay subcontractors, laborers, and/or suppliers for "labor" or "materials," then those payees can sue the bond provider (typically an insurance carrier).
6. A customer hiring a contractor could ask the contractor to buy a performance bond, a.k.a. a contract bond, to have a backup pot of money available:
to fund a party's performance of its contractual obligations;
to guarantee availability of materials needed for the work (this is known as a supply bond); and/or
to hire a replacement contractor to finish work that the original contractor either failed to do or failed to do correctly.297
Performance bonds might be required of companies under government contracts, such as certain oil and gas leases granted by the U.S. Government.298
Caution: Performance bonds might well set forth prerequisites for a contractor to be paid by the surety; failure to comply with those prerequisites might result in nonpayment, as happened, for example, in a 2021 federal-court case in Massachusetts.299
7. Relatedly: A prime contractor could purchase subcontractor default insurance (SDI) that would allow the prime contractor (but not the end-customer) to make a claim against the policy in case of a default by a subcontractor, as suggested in a 2021 article.300
6.4.2.5. How long should backup-payment arrangements be kept?
The Biller might want this Agreement to include language along the following lines:
The Payer is to keep each backup-payment arrangement continuously in force for at least six months after the latest to occur of the following:
the last scheduled shipment of applicable ordered goods, if any;
completion of all applicable ordered services, if any;
the Biller's receipt of the final payment covered by the backup-payment arrangement; and
any other events clearly specified in this Agreement.
Note that this language requires the Payer to keep the backup-payment arrangements in place even after the Biller has received final payment. That's because conceivably the Payer could file for bankruptcy protection and then demand that the Biller refund the final payment(s) as a "preference payment."301
6.4.2.6. Backup-payment failure as material breach?
This Agreement could include language such as the following (perhaps by incorporating it by reference):
Option: Backup Payment Failure as Material Breach: Any failure by the Payer to timely provide, maintain, and/or modify, any backup-payment arrangement required by this Agreement would be considered a material breach of this Agreement.
The consequences of a material breach of contract can be significant; moreover, courts will generally defer to a contract's explicit statement that a particular type of breach would be "material," as discussed in more detail at 17.2.
For that reason, the Biller might want the Payer to stipulate that the Payer's breach of its backup-payment obligations would indeed be material — thus giving the Biller a bit more leverage over the Payer in case of difficulties.
6.4.2.7. Use a deposit as an alternative payment source?
One possible alternative to engaging a Bank would be for the Payer to provide the Biller with a deposit (concerning which, see Clause 11.11).
6.5. Balanced, two-way terms usually get signed sooner
The shortest path to signature — and the best plan for a producing a workable contract — is often to draft terms that your client wouldn't mind agreeing to if the parties were to switch sides.
If you're doing the drafting, you can help speed things up considerably by being reasonable in what you offer to the other side. That's because many business people greatly prefer to sign contracts that are reasonably balanced, because such contracts —
require less time-consuming legal negotiation; and
help to promote mutual trust between the parties' business people.
The present author learned this from personal professional experience: I used to be vice president and general counsel of BindView Corporation, a publicly-traded, network-security software company, based in Houston but with extensive international operations (until we were acquired by Symantec Corporation, the global leader in our field). As outside counsel, I'd helped BindView's founders to start the company.
As soon as I went in-house, I had to handle all our negotiations with customers about our standard contract form. That was a big time sink, both for me and for our sales people (who would sit in on negotiation calls).
To reduce the time we spent in such "legal" negotiations, in successive deals we gradually revised our standard contract form: We dramatically speeded up our deal flow by revising the contract form to proactively provide balanced legal terms that our customers typically asked for, in ways that we knew we could support.
In addition to helping us get to signature sooner, the (re)balanced contract form indirectly promoted our product in another way: Customers began to tell me how much they liked our contract, which validated their decision to do business with us.
I started making notes of customers’ favorable comments, and eventually quoted some of the comments (anonymously) on a cover page of our contract form. Here are just a few of those customer comments, which I posted online some years ago; all are from negotiation conference calls except as indicated:
– From an in-house attorney for a multinational health care company: /I told our business people that if your software is as good as your contract, we’re getting a great product.
– From an in-house lawyer at a U.S. hospital chain: /I giggled when I saw the "movie reviews" on your cover sheet. I’d never seen that before — customers saying this was the greatest contract they’d ever seen. But the comments turned out to be true.
– From a contract specialist at a national wireless-service provider: I told my boss I want to give your contract to all of our software vendors and tell them it’s our standard contract, but I know we can’t do that.
– From an in-house attorney at a global media company: This is a great contract. Most contracts might as well be written in Greek, but our business guys thought this one was very readable.
You might wonder whether BindView ever experienced legal- or business problems from having a balanced contract form. I’ll note only that:
With the CEO’s permission, I talked about our balanced-contract philosophy in continuing-legal-education ("CLE") seminars, and even included a copy of our standard form in written seminar materials; and
In due course we had a successful "exit" when we were approached and acquired by Symantec Corporation, one of the world’s largest software companies and the global leader in our field.
To be sure: Some business people just love to "win" as much as they can in every contract negotiation, often violating Wheaton's Law ("Don't be a d**k"). If that's you, please consider whether that approach best serves your long-term goals.
The W.I.D.A.C. Rule applies here: When in doubt, ask the client — and document that you raised the issue and what the client's decision was, for example in a quick confirming email to the client..
6.5.2. Rule of thumb: Don't ask for what you wouldn't agree to?
There's a useful rule of thumb when thinking about including a particular provision in a contract: Suppose that someday the parties' roles were ever to be reversed — which could happen (6.5.3) — and that you'd recommend that your client reject the provision. In that situation seriously consider omitting the provision.
The flip side of that rule of thumb is also handy when thinking about leaving out a provision: If your client would likely insist on having the provision in the contract if the parties' roles were reversed, then think seriously about including the provision.
Here again: W.I.D.A.C. — When In Doubt, Ask the Client.
6.5.3. Balanced terms make role reversal easier
Agreements that would apply equally if the parties were to switch sides will generally be more balanced; to illustrate this principle, we'll use confidentiality agreements as an example.
In many cases, a two-way confidentiality agreement that protect's each party's confidential information is likely to be signed sooner, because:
each negotiator presumably keeps in mind that today's disclosing party might be tomorrow's receiving party or vice versa; and so:
the two-way agreement is thus likely — but not guaranteed — to be more balanced.
I saw this first hand at BindView, where on a couple of occasions:
We were the customer, licensing software for our own internal use from another vendor.
On each of those occasions, the other vendor's software license agreement would have required considerable revision and, presumably, negotiation, to make it workable for us, the customer.
So instead, I proposed to the vendor that we just use our software license agreement, but with us as the customer instead of as the vendor.
Each time, the vendor reviewed our license agreement and quickly agreed to our proposal.
(This basic approach — of being reasonable — is analogous to the ancient "divide and choose" procedure, sometimes known as "I cut, you choose," by which children can evenly divide a cookie between them, often used in buy-sell agreements.)
6.5.4. Reduced danger if roles do get reversed
As an example: A two-way confidentiality agreement can reduce the future danger of later, unprotected, "afterthought" confidential disclosures by the original receiving party. With a one-way agreement, only the (original) disclosing party's information is protected, and so any disclosures by the receiving party might be completely unprotected, resulting in the receiving party's losing its trade-secret rights in its information.
Example: Just such a foot-gun hurt the plaintiff in the Seventh Circuit's Fail-Safe LLC case: The plaintiff's confidentiality agreement with the defendant protected only the defendant's information. Consequently, said the court, the plaintiff's afterthought disclosures of its own confidential information were unprotected.302
It's not hard to imagine the thought process that the plaintiff's business people's went through: "We need to disclose our information to you, but hey, we've already got an NDA in place, so sure, let's do it." But unfortunately for the plaintiff, the actual NDA didn't do what the plaintiff needed to protect its interests.
(See also 7.7.3 for discussion of this specific NDA issue.)
6.5.5. Future delays and embarrassments can be avoided
A two-way confidentiality agreement might help avoid future drafter embarrassment: Suppose that Fred and Ginger agree to a confidentiality provision that protects only Ginger's information. Also suppose that the confidentiality provision was strongly biased in favor of Ginger, who is currently the discloser.
But now suppose that, at a later date, Fred and Ginger decided that they also needed to protect Fred's confidential information as well, so that Fred can disclose it to Ginger. In that case, with the shoe on the other foot, Ginger as receiving party might not want to live with the obligations that she previously made Fred accept when she was the disclosing party.
As a result, Ginger might find herself in a doubly-embarrassing position:
Ginger would be asking Fred to review and agree to a new confidentiality provision — and having to explain to Fred why Ginger wasn't willing to live with the same procedure that she had earlier pressed upon Fred.
Moreover: Ginger might turn to (or on) her original drafter and ask, 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 provision be two-way in their effect from the start, protecting the confidential information of both parties.
6.5.6. Caution: a two-way agreement can still be biased
Any agreement that's nominally two-way could still be biased in favor of the drafting party. Example: Suppose that Fred's drafter knows that Fred will be receiving Ginger's confidential information, but Fred won't be disclosing his own confidential information. In that situation:
Representing Fred as Recipient, Fred's drafter might write a "two-way" (quote unquote) confidentiality provision that provides very little protection for anyone's confidential information, because that lack of protection won't hurt Fred as Recipient — at least not in the short term.
Ginger, as Discloser, would therefore have to review the confidentiality provisions carefully to make sure it contained sufficient protection for her Confidential Information.
Conversely, if Ginger's drafter is doing the drafting, knowing that she'll be be disclosing her information to Fred but she won't be receiving Fred's information, then Ginger's drafter might craft the confidentiality provision with burdensome requirements that Fred would have to review carefully.
6.5.7. A one-way clause could boomerang – and hurt you later …
Contract drafters will often do well to heed advice similar to that of the Kingston Trio's (somewhat-offensive) 1958 version of the risqué Spanish-language song Coplas, where Dave Guard's "translation" of one verse is, Tell your parents not to muddy the water around us — they may have to drink it soon. A contract drafter's client might someday have to live with the hardball provision that the drafter forces the other side to accept.
Example: Trump Corporation ("Trump") has been a real-estate landlord, among other things. (I wrote this section before Donald Trump announced his successful 2016 presidential campaign.)
According to AmLaw Daily, years ago Trump's lawyers took one of the company's leases, changed the names, and used it for a deal in which Trump was the tenant and not the landlord. Later, Trump-as-tenant found that its lease-agreement form gave Trump's landlord significant leverage:
"The funny part of it is what one of his internal lawyers must have done years ago," [the landlord's president] says. "Normally Trump is the landlord, not the tenant. So what they did is they took one of their leases and just changed the names. And so it's not a very favorable lease if you're the tenant."
†See Nate Raymond, Trump Misses Rent Payments …,http://goo.gl/B72TIr (AmLawDaily.Typepad.com) (accessed Apr. 27, 2015).
Ouch ….
(For the opposite story, in which the present author's former company successfully used our own standard contract for a transaction in which we were the customer, not the supplier, see 6.5.3.)
6.5.8. … or it could be thrown back at you during negotiation
Consider this not-so-hypothetical example: You're helping to negotiate a contract between your client, Ginger, and another party, Fred. Your draft contract is a tough one; among other things, it contains an exclusive-jurisdiction forum clause (see 13.5) that requires all litigation to be conducted in Ginger's home-court jurisdiction.
In negotiating the contract, Fred's counsel says, sure, an exclusive-jurisdiction clause is fine with us — BUT the exclusive jurisdiction has to be our /home court, not yours.
If Fred has more bargaining power than your client Ginger, your proposal of a tough first-draft contract might have "boomeranged" to create problems for your own client, by requiring any litigation to take place in a city that she might not want.
Exactly this once happened to one of the present author's past clients:
In a negotiation of a big commercial deal, the client had forwarded its standard form contract — which I hadn't written — to a prospective customer that had significantly-more bargaining power than my client did.
The client's standard form contract included a forum-selection provision requiring all litigation to take place exclusively in the client's home city.
The customer's lawyer saw the forum-selection clause, and said it needed to be reversed, so that the exclusive forum would be the customer's home city.
That wouldn't have been good for my client, because litigating in the other city would have been costly and inconvenient.
Fortunately, the customer's lawyer went along with my suggestion that we just drop the forum-selection clause entirely — not realizing that this was a win for my client:
Without a forum-selection stipulation, the customer likely would not have been able to sue my client in the customer's home city at all, because the courts in that city would almost certainly not have had personal jurisdiction over my client.
(Of course, that wouldn't have stopped the customer from filing suit anyway, which would have meant that my client would have to spend money to get the case dismissed or transferred.)
In contrast, my client would have been able to sue the customer in my client's home city, because the customer had significant operations in that city.
The customer's lawyer apparently didn't tumble to the fact that he was making a potentially-big concession.
6.6. Bankruptcy Code of 1978 (notes)
a. Consider the situation where a party "A" wants to terminate its contract with a counterparty "B." Under section 365(e)(1) of the (U.S.) Bankruptcy Code of 1978, if B files a petition for protection under the bankruptcy laws — or if B's creditors file an "involuntary" petition against B — then that filing creates an "automatic stay," prohibiting A from taking any of several forms of contract termination (or other action).
The rationale here is that termination of a contract could jeopardize the orderly reorganization or liquidation of B's business. In the bankruptcy proceeding, B is referred to as the "debtor," and B's business and assets are referred to as "the estate" of the debtor; the basics of this subject are usefully explained in Eisenbach (2007).303
b. As an "in the wild" example of such a provision, see a Honeywell purchase-order form at http://perma.cc/CUV6-NKTY, which states as follows:
The solvent party [sic] may terminate this Purchase Order upon written notice if the other party becomes insolvent or if any petition is filed or proceedings commenced by or against that party relating to bankruptcy, receivership, reorganization, or assignment for the benefit of creditors.
c. Pro tip: Don't say that "the solvent party may terminate," as in the Honeywell example just above, because if the terminating party is also insolvent, then a court might hold that the party wasn't entitled to terminate — and so the termination was itself an "own goal" breach of the contract — as discussed in more detail in the commentary at section 23.9.1.
6.7. Battle of the Forms: Purchase orders, etc. (notes).
6.7.1. Buyers use purchase orders to try to impose terms & conditions
Contracts can arise when parties send each other terms-and-conditions documents — a.k.a. "throw paper at each other" — in the course of doing a transaction. This can cause problems when conflicting terms exist in the parties' respective paper.304
For example: When a corporate buyer makes a significant purchase, it's extremely common (and essentially a universal practice) for the buyer's procurement people to send the seller a purchase order. Typically, the seller's invoice will include the purchase-order number — if it doesn't, then the buyer's accounts-payable department generally just won't pay the invoice.
These are routine internal-controls measures; they're almost-uniformly implemented by buyers to help prevent fraud.
But some buyers put a great deal of "legal fine print" in their purchase-order forms as well. Such fine-print terms often include:
detailed — and often onerous — terms and conditions for the purchase. This could include expansive warranties, remedies, and indemnity requirements; and
rejection of the supplier's terms, to the effect of, only our terms and conditions will apply — your terms won't count, no matter what happens.
For example, a Honeywell purchase-order form states in part — in the very first section — as follows:
Honeywell rejects any additional or inconsistent terms and conditions offered by Supplier at any time.
Any reference to Supplier’s quotation, bid, or proposal does not imply acceptance of any term, condition, or instruction contained in that document.305
The same section, incidentally, includes this … remarkable assertion:
A purchase order is deemed accepted upon a) the date the Supplier returns the acknowledgment copy of a purchase order to Honeywell or b) five calendar days from date Honeywell issues the purchase order to Supplier regardless of mechanism used to convey requirements, whichever is earlier.
(Emphasis added.) In other words: According to this language, if Honeywell sends you a purchase order out of the blue, then (saieth Honeywell) you're deemed to have accepted the purchase order in five business days. Um … good luck getting a court to go along with that assertion ….
6.7.2. Sellers do likewise with their order confirmations and invoices
Sellers aren't always innocent parties in this little dance, either.
It's not uncommon for a seller's initial sales quotation (inviting a purchase order) to state that all customer orders are subject to acceptance in writing by the seller.
Then, when the buyer does send a purchase order, the seller responds with a written "order confirmation." Often, the order confirmation that itself contains detailed terms and conditions — some of which might directly conflict with the terms in the buyer's purchase order.
Once again, Honeywell provides an example, this time when it is the supplier and not the customer: The first section of a Honeywell terms of sale document states in part as follows:
Unless and to the extent that a separate contract executed between the procuring party (“Buyer”) and Honeywell International Inc. (“Honeywell”) applies, any purchase order covering the sale of any product (“Product”) contained in this Catalog (“Order”) will be governed solely by these Conditions of Sale, whether or not this Catalog or these Conditions of Sale are referenced in the Order.
Except as provided in the “Buyer's Orders” section below, all provisions on Buyer's Order and all other documents submitted by Buyer are expressly rejected.
Honeywell will not be deemed to have waived these Conditions of Sale if it fails to object to provisions submitted by Buyer.
Buyer's silence or acceptance or use of Products is acceptance of these Conditions of Sale.306
6.7.3. Each party's paper rejects the other's terms & conditions
You might have noticed how, in the examples above, the buyer's purchase order and the seller's order confirmation each say, in effect, "only my terms and conditions will apply; yours are rejected."
This kind of language is motivated by section 2-206 of the (U.S.) Uniform Commercial Code. That section states, in part, that for sales of goods:
(1) Unless otherwise unambiguously indicated by the language or circumstances[,]
(a) an offer to make a contract shall be construed as inviting acceptance in any manner and by any medium reasonable in the circumstances ….307
In each of the Honeywell forms quoted above, the quoted language seems to state pretty clearly that acceptance is limited to the terms stated in the form.
Important: Drafters asked to prepare standard forms of this kind should strongly consider whether to include "We reject your terms!" language along these lines.
6.7.4. The Drop-Out Rule: The UCC's solution
But in real-world dealings, what practical impact will parties' we reject your terms! statements have? This is important because the parties' people might pay no attention to these dueling forms.
Instead, what could easily happen is something like the following:
The seller's sales people receive the purchase order and send it to the order-fullfilment department.
The seller's order-fulfillment department ships the ordered goods — along with a confirmation of sale document and an invoice.
The buyer's receiving department takes delivery of the ordered goods and puts them into inventor, distributes them to end users, or whatever.
The buyer's receiving department forwards the seller's invoice to the buyer's accounts-payable department, which in due course pays the invoice.
The seller doesn't sign the buyer's purchase order; neither does the buyer sign the seller's order confirmation or invoice.
Clearly, the parties have conducted themselves as though they had a contract. But neither has agreed to the other's terms and conditions?
So whose terms and conditions will govern — those of the buyer, or those of the seller?
This sort of situation is known as the "Battle of the Forms." It's exprssly contemplated by UCC § 2-207. (It's sometimes experienced in common-law situations as well.)
whatever terms are common to the parties' respective contract forms is part of "the contract"
all other terms in both parties' contract forms drop out — left on the cutting-room floor, if you will; and
the UCC's "default" terms also apply.
Here's the text of UCC § 2-207(3):
(3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract.
In such case the terms of the particular contract consist of[:] [i] those terms on which the writings of the parties agree, together with [ii] any supplementary terms incorporated under any other provisions of this Act.
(Emphasis and bracketed text added.)
So suppose that:
Buyer sends Seller a purchase order for goods; the P.O. includes terms and conditions that reject the Seller's terms;
Seller sends Buyer an order confirmation containing its own terms and conditions, which reject the Buyer's terms;
Seller ships the goods ordered and sends an invoice; and
Buyer's payables department pays the invoice.
In that situation, the parties have engaged in conduct that recognizes the existence of a contract. The terms of that contract are whatever "matching" terms exist in the parties' respective forms, plus the UCC's default provisions.
Example: In 2023, the Fifth Circuit affirmed denial of a Louisiana equipment manufacturer's motion to compel arbitration of a breach of contract lawsuit that had been brought by a Canadian customer; the court summarized the relevant salvos of paper between the parties:
In sum, below were the relevant events common to these transactions:
1. [Manufacturer] MECS sent [customer] Axiall a proposal incorporating an arbitration clause and containing express limitations on acceptance;
2. Axiall sent MECS a Purchase Order incorporating the forum selection clause and containing express limitations on acceptance;
3. MECS sent Axiall an Order Acknowledgment incorporating an arbitration clause and containing express limitations on acceptance (like MECS's proposal);
4. MECS shipped Axiall the demisters; and
5. Axiall accepted the demisters from MECS.
Citing Louisiana's counterpart to UCC § 2-207, the court described the case as "a classic 'battle of the forms'" and held that the parties had not agreed to arbitration.308
6.7.5. Caution: The UN CISG has a "last shot" rule instead
The Convention departs dramatically from the UCC by using the common-law "mirror image" rule (sometimes called the "last shot" rule) to resolve "battles of the forms." With respect to the battle of the forms, the determinative factor under the Convention is when the contract was formed.
The terms of the contract are those embodied in the last offer (or counteroffer) made prior to a contract being formed.
Under the mirror-image rule, as expressed in Article 19(1) of the Convention, "[a] reply to an offer which purports to be an acceptance but contains additions, limitations or other modifications is a rejection of the offer and constitutes a counter-offer."309
The court affirmed a judgment below that, "because Illinois Trading never expressly assented to the attorney's fees provision in VLM's trailing invoices, under the Convention that term did not become a part of the parties' contracts."
6.7.6. Selected bibliography
(Students: This additional reading is optional.)
See generally:
– Battle of the Forms – UCC and common-law variations
For an eye-glazing set of "battle of the forms" facts, see BouMatic LLC v. Idento Operations BV, 759 F.3d 790 (7th Cir. 2014) (vacating and remanding dismissal for lack of personal jurisdiction) (Easterbrook, J.).
An existing teaching case is Northrop Corp. (7th Cir. 1994): The buyer's purchase order stated that the seller's warranty provision was of unlimited duration, but the seller's acknowledgement form stated that the seller's warranty lasted only 90 days. The trial court held, the appellate court agreed, that both of those provisions dropped out of the contract, and therefore the buyer was left with a UCC implied warranty of "reasonable" duration.310
Sometimes, the vagueness of a best-efforts obligation could lead to trouble later. It therefore can be useful to define the term, so that the definition will serve as something of a guardrail. (W.I.D.D.: When In Doubt, Define!)
The term "best efforts" refers to diligent reasonable efforts to achieve the stated objective.
Notes
This Clause defines best efforts in terms of diligence, drawing on the Restatement of Agency, which states that best efforts is "a standard that has diligence at its essence …."311
7.1.1.2. What is not required by a best-efforts obligation?
For emphasis: When this Agreement requires a party to use best efforts, it does not mean that the party must do any of the following things:
make any unreasonable effort;
harm the party's own lawful interests in any non-trivial way;[a]
act as a fiduciary for another party;[b]
make every possible reasonable effort;[c] nor
actually succeed in achieving the stated objective.
Subdivision a is not intended as an exhaustive list.
Notes
This is one of those, "for the avoidance of doubt" provisions, to try to avoid disputes that have arisen in some past cases. Caution: These carve-outs might be factually complex — and thus costly to litigate if the parties get into a dispute about whether a party really did use its "best" efforts.
[a] This borrows from the Second Circuit's 1979 Falstaff Brewing decision, in which the court remarked that a best-efforts obligation "did not require Falstaff to spend itself into bankruptcy to promote the sales of Ballantine products …." 312
[b] This disclaimer of a fiduciary obligation seeks to roadblock aggressive claims of the kind made in a California case in which the court rejected the plaintiff's contention that "'best efforts' means the efforts required of a fiduciary[.]"313
[c] The Seventh Circuit once remarked that "We have found no cases … holding that 'best efforts' means every conceivable effort …."314But: In its much-noted 2017 Williams Cos. decision, Delaware's supreme court held that "reasonable best efforts" required all reasonable steps.315
7.1.1.3. What input would the other party have?
The parties are urged to consult each other about whether a best-efforts obligation would be satisfied by a particular course of action — especially a course of action not yet taken.
Notes
This is one of those areas where the Pick up the phone! general motif of this book can pay dividends.
7.1.1.4. What if the parties disagree about best efforts?
The parties are to escalate any persistent disagreement about what best efforts would be required when an agreed time for making such best efforts has not yet ended.
In 1990, a Texas appeals court explained: "Contracting parties ordinarily use best efforts language when they are uncertain about what can be achieved, given their limited resources."316 And perhaps most of the time things will work out OK, so the parties will often decide that a best-efforts obligation is an acceptable business risk, and so can help get the contract to signature sooner.
7.1.2.2. Some dangers of best-efforts obligations
Parties that agree to include a best-efforts obligation in a contract can get into costly disputes about whether particular actions satisfied the obligation. That's because:
• With the benefit of plenty of time and 20-20 hindsight, litigation counsel — coached by a motivated expert witness — will second-guess the choices that the obligated party made.
• Then it might be up to randomly-selected jurors to decide the best-efforts question — and because jurors often aren't familiar with the relevant business environment, they might end up deciding, in part, on the basis of which witnesses they liked best.
7.1.2.3. Best efforts and exclusivity
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.
7.1.2.4. Some best-efforts analogies can be useful explainers
To many business people, it might 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 to say:
Reasonable efforts will cover a range of possibilities;
best efforts refers to somewhere near the top of that range.
By analogy: On major U.S. highways, the speed-limit signs often include both maximum and minimum speeds of (say) 70 mph and 45 mph:
Let's stipulate that those two speeds establish the upper- and lower bounds of reasonableness.
Now, suppose hypothetically that a trucking company agreed that its driver would use her "best efforts" to drive a shipment of goods from Point A to Point B on such a highway.
In good weather with light traffic, driving at 55 mph — that is, 10 mph above the minimum speed but 15 mph below the maximum speed — might qualify as reasonable efforts, but likely not as best efforts.
Or to use a sports analogy: Best efforts means bring your "A" game, not your "C" game, even though C is a passing grade in (U.S.) schools, and arguably is equivalent to reasonable efforts.
7.1.2.5. "Comparables" might be a good yardstick
So-called comparables could be used in measuring compliance with a best-efforts obligation could be whether the obligated party had done what it had done in other, similar transactions; this can be seen in a Seventh Circuit by Judge Posner:
The term "best efforts" is a familiar one in contract parlance, and its meaning is especially plain in a case such as this where the promisor has similar contracts with other promisees. In such a case "best efforts" means the efforts the promisor has employed in those parallel contracts where the adequacy of his efforts have not been questioned. If Olympia worked as hard for Racine as it did for its other, but noncomplaining, customers, then it was using its best efforts within the meaning of the contract.317
7.1.2.6. Other best-efforts business considerations
Asking for best efforts 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 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.
On the other hand: Agreeing to make best efforts could 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:
• As noted above: If a problem arises, then no matter what you did or didn't do, the other side's lawyers and expert witness(es), with 20-20 hindsight, will argue that there were X number of things that you supposedly could have done to achieve the agreed goal but didn't, and so you necessarily failed to use "best" efforts, Q.E.D.
• It might be difficult or impossible to get summary judgment that you didn't breach the best-efforts obligation, in which case you're likely to have to go to the trouble and expense of a full trial or arbitration hearing. The judge or arbitrator could well say that the question involves disputed issues of material fact — those issues would 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 would then likely be denied.
• The tribunal, after hearing the evidence, could find that in fact you did not use your best efforts. If that were to happen, you'd likely have a very hard time convincing an appeals court to overturn that finding.
7.1.2.7. Could more-precise language work better?
Contract drafters considering a best-efforts obligation should consider stating:
as specifically and un-vaguely as possible: just what the best efforts are supposed to try to do. Example: In a 2024 Texas case, the buyer of a company had agreed, as part of the purchase agreement, to make earn-out payments to the seller; the buyer also committed to use its "best efforts [to operate the Company's business] in a manner that maximizes the Earn-Out Payments …." Affirming summary judgment in favor of the buyer, the court ruled that this best-efforts provision was unenforceable because "the contract at issue here lacks a clear set of guidelines against which [the buyer's] best efforts can be measured." The court held that what the contract did say on that score "is not enough to go on …."318
clear, specific actions that the obligated party is allowed to take — or required to take — in complying with the best-efforts obligation;
particular considerations that the obligated party could take into account in deciding what specific actions to take; and/or
safe-harbor (but non-mandatory) actions that, if timely taken, would be conclusively deemed to satisfy a best-efforts obligation.
But again: Clients and drafters might not want to spend the time negotiating such things in advance, especially when they're not sure what the relevant circumstances might be in the future.
7.1.2.8. Optional: Further reading about best efforts
See also: • Clause 21.6.2 (reasonable efforts); • Clause 9.15 (commercially-reasonable efforts); • Thau (2021), a student law-review note offering what seems to be a pretty-thorough review of "efforts" case law.319
In a 2008 blog posting, Ken Adams seemed to insist 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.320 To be sure, Ken does have at least some support in the case law for his position. But that arguably amounts to lawyers telling clients, for no good reason: No, you can't do your deal the way you want, because I say so. That seems to seriously overstep the service role of a lawyer or other drafter.
7.2. Binding contracts: basic legal requirements
Here's a basic review: An agreement will typically be legally binding as a contract if it meets the usual requirements, such as:
There must be a "meeting of the minds," generally in the form of an offer by one party that is accepted by another party.
"Consideration" must exist; roughly speaking, this means that the deal must have something of value in it for each party — and the "something" can be most anything of value, including for example:
a promise to do something in the future, or
a promise not to do something that the promising party has a legal right to do; this is known as "forbearance."
Both parties must have the legal capacity to enter into contracts — a child or an insane person likely would not have legal capacity, nor might some unincorporated associations.
Caution: In some circumstances, a showing of consideration might not be necessary, such as in a "contract under seal" under English law and in the doctrine of promissory estoppel, both of which are beyond the scope of this essay.
Note: In some jurisdictions, the mere fact that a contract is in a signed writing might be sufficient consideration. Example: In a 2024 decision, the Tennessee supreme cited a state statute stating that "[a]ll contracts in writing signed by the party to be bound, or the party's authorized agent and attorney, are prima facie evidence of a consideration," and noted that "the party claiming a lack of consideration for a validly executed contract has the burden of overcoming this presumption."321
7.3. Blue-Pencil Request
A so-called "blue-pencil clause" might be used with, e.g., a noncompetition clauses, asking the court to modify an unenforceable provision to make it enforceable — but some courts will refuse.
This Clause will apply if a court, agency, arbitation panel, or other tribunal of competent jurisdiction (the "Tribunal") holds that a provision of this Agreement is invalid, void, or otherwise unenforceable.
7.3.1.2. What are the parties agreeing to here?
The Tribunal is respectfully requested (if a court or other governmental body),322 or directed (if an arbitration panel), to reform the defective provision — if practicable — to the minimum extent necessary to cure the defect, while still giving effect to the intent of the defective provision.
7.3.2.1. Some courts will honor a blue-pencil request
Whether a court will honor a blue-pencil request might well vary with the jurisdiction.
Example: In BDO Seidman (N.Y. 1999), New York's highest court allowed the state's courts to engage in blue-penciling of restrictive covenants in noncompetition covenants, but only if:
the employer demonstrates an absence of overreaching, coercive use of dominant bargaining power, or other anti-competitive misconduct,
but has in good faith sought to protect a legitimate business interest,
consistent with reasonable standards of fair dealing ….323
7.3.2.2. Others: Not so much
In some other jurisdictions, courts will refuse to engage in blue-penciling of a contract even if contract specifically authorizes it, saying in effect, You people should have drafted the contract correctly; don't expect us to fix your mistake.324
A useful rule of readability, borrowed from the U.S. military,325 is BLUF: Bottom Line Up Front. (If we wanted to stay with the Pasta-Rule theme, see 17.1, we could call this "the Sauce Rule: Sauce goes on top." But BLUF takes less work to remember what it stands for, and a lot of people are already familiar with BLUF.)
To illustrate, here's another unfortunately-typical example of a spaghetti clause that's in serious need of clean-up; it's from the March 2022 merger agreement by which Hewlett-Packard (HP, Inc.) acquired well-known headset manufacturer Plantronics. Since Where's Waldo? is no longer "a thing," let's instead try playing a short game of, Where's the Action Verb?
BEFORE:
SECTION 6.07 Indemnification and Insurance. (a) All rights to indemnification, exculpation from liabilities and advancement of expenses for acts or omissions occurring at or prior to the Effective Time now existing in favor of any individual (i) who is or prior to the Effective Time becomes, or has been at any time prior to the date of this Agreement, a present or former director or officer (including any such individual serving as a fiduciary with respect to an employee benefit plan) of the Company or (ii) in his or her capacity as a present or former director or officer of one or more of the Company Subsidiaries as of the date of this Agreement (each such individual in (i) and (ii), an “Indemnified Person”) as provided in, with respect to each such Indemnified Person, as applicable, (i) the Company Charter, (ii) the Company Bylaws, (iii) the organizational documents of any applicable Company Subsidiary in effect on the date hereof at which such Indemnified Person serves as a director or officer, as applicable, or (iv) any indemnification agreement, employment agreement or other agreement made available to Parent, containing any indemnification provisions between such Indemnified Person, on the one hand, and the Company and the Company Subsidiaries, on the other hand, [ah, here comes the action verb, finally!] shall survive the Merger in accordance with their terms and shall not be amended, repealed or otherwise modified in any manner that would adversely affect any right thereunder of any such Indemnified Person with respect to acts or omissions occurring at or prior to the Effective Time.
For an even worse example in the very next paragraph of that merger agreement, see the following footnote:326
Let's rewrite subdivision (a) above, using the rules we've just discussed:
1. Short paragraphs;
2. Just one negotiation point per paragraph; and
3. Bottom Line Up Front.
Oh, and while we're at it, let's help guide the reader's eye by (judiciously) bold-facing a few key words:.
AFTER:
SECTION 6.07 Indemnification and Insurance.
(a) See subdivision (c) below for definitions of particular capitalized terms. [Comment: Note the forward reference.]
(b) If before the Effective Time, an Indemnified Person was entitled to Protection, then after the Effective Time, that person will continue to be entitled to Protection in the same manner as before.
(c) Definitions: For purposes of this section 6.07:
"Company Entity" refers to each of the following: (1) the Company; and (2) any of the Company Subsidiaries existing as of the date of this Agreement.
"Indemnified Person" refers to any individual who is, or prior to the Effective Time becomes, or has been at any time prior to the date of this Agreement, in one or more of the following categories:
(1) a present or former director or officer of any Company Entity; and/or
(2) any individual serving as a fiduciary with respect to an employee benefit plan of any Company Entity.
"Protection," with respect to an Indemnified Person, refers to the Indemnified Person's right to be indemnified; to be released from liability; and/or to have expenses advanced; as provided in one or more "Protection Documents" (see below).
"Protection Document" refers to each of the following, as applicable:
(1) the Company Charter;
(2) the Company Bylaws;
(3) the organizational documents of any applicable Company Entity;
(4) any agreement — including, without limitation, any indemnification agreement and/or employment agreement — that (A) establishes one or more rights to Protection for the Indemnified Person, and (B) was made available to Parent prior to the Effective Time.
Is there any doubt which version would be easier to read, understand, negotiate, and revise? Clearly, it's the After version.
And imaging the reader's task in reviewing and thinking about the Before version ….
7.4.2. A contract BLUF example
Before: Here's a contract provision that was litigated in a state court:
If any shareholder of the corporation for any reason ceases to be duly licensed to practice medicine in the state of Alabama, accepts employment that, pursuant to law, places restrictions or limitations upon his continued rendering of professional services as a physician, or upon the death or adjudication of incompetency of a stockholder or upon the severance of a stockholder as an officer, agent, or employee of the corporation, or in the event any shareholder of the corporation, without first obtaining the written consent of all other shareholders of the corporation shall become a shareholder or an officer, director, agent or employee of another professional service corporation authorized to practice medicine in the State of Alabama, or if any shareholder makes an assignment for the benefit of creditors, or files a voluntary petition in bankruptcy or becomes the subject of an involuntary petition in bankruptcy, or attempts to sell, transfer, hypothecate, or pledge any shares of this corporation to any person or in any manner prohibited by law or by the By-Laws of the corporation or if any lien of any kind is imposed upon the shares of any shareholder and such lien is not removed within thirty days after its imposition, or upon the occurrence, with respect to a shareholder, of any other event hereafter provided for by amendment to the Certificates of Incorporation or these By-Laws, [here we finally get to the "bottom line"] then and in any such event, the shares of this [c]orporation of such shareholder shall then and thereafter have no voting rights of any kind, and shall not be entitled to any dividend or rights to purchase shares of any kind which may be declared thereafter by the corporation and shall be forthwith transferred, sold, and purchased or redeemed pursuant to the agreement of the stockholders in [e]ffect at the time of such occurrence. The initial agreement of the stockholders is attached hereto and incorporated herein by reference[;] however, said agreement may from time to time be changed or amended by the stockholders without amendment of these By-Laws. The method provided in said agreement for the valuation of the shares of a deceased, retired or bankrupt stockholder shall be in lieu of the provisions of Title 10, Chapter 4, Section 228 of the Code of Alabama of 1975.327
(Emphasis added.)
AFTER: (short paragraphs and BLUF)
(a) A shareholder's relationship with the corporation will be terminated, as specified in more detail in subdivision (b), if any of the following Shareholder Termination Events occurs:
(1) The shareholder, for any reason, ceases to be duly licensed to practice medicine in the state of Alabama.
(2) The shareholder accepts employment that, pursuant to law, places restrictions or limitations upon his continued rendering of professional services as a physician.
[remaining subdivisions omitted]
(b) Immediately upon the occurrence of any event described in subdivision a, that shareholder's shares:
(1) will have no voting rights of any kind,
[Remaining subdivisions omitted]
(Emphasis added.)
One would hope there'd be no dispute about which of these versions is more readable.
7.4.3. A statutory BLUF example
As a statutory example, this rewrite, by law professor Mark Cooney, was retweeted by legal-writing guru Bryan Garner:
Before:
A person who engages in conduct proscribed under section 530 and who in the course of engaging in that conduct, possesses a dangerous weapon or an article used or fashioned in a manner to lead any person present to reasonably believe the article is a dangerous weapon, or who represents orally or otherwise that he or she is in possession of a dangerous weapon, is guilty of a felony punishable by imprisonment for life or for any term of years. If an aggravated assault or serious injury is inflicted by any person while violating this section, the person shall be sentenced to a minimum term of imprisonment of not less than 2 years.
So what exactly is the bottom line of this statutory provision?
BLUF rewrite by Prof. Cooney:
A person is guilty of a felony if, while committing a crime under section 530, he or she:
(1) possesses a dangerous weapon;
(2) possesses an article used as a dangerous weapon; … [etc.]
(Emphasis added.)
7.4.4. BLUF clauses are more memorable, too
Researchers at MIT conducted an experimental study (led by a career-changing Harvard law graduate) of legalese comprehension. The study's results pointed to a chief villain in legalese, namely "center-embedded clauses" — i.e., sentences and paragraphs where the action verb is buried in a spaghetti-clause (see 17.1) mass of verbiage. The researchers found that such clauses "inhibited recall to a greater degree than other features" such as jargon and passive voice.328
The terms "board of directors" and "board" refer generically to the principal governing body of an organization, such as (without limitation) the board of directors of an American corporation.329
7.5.2. Reading: Board membership by contract
In some situations, a contract between a company and an investor might give that investor the right, by contract, to appoint a certain number of members of the company's board.
Example: Consider a startup company that succeeds in attracting investment from a venture-capital firm. It's very common for the investment contract between the company and the VC firm to give the VC firm, as part of the deal, the contractual right to appoint at least one member of the startup's board (to keep an eye on things). This can come into play in determining affiliate status, as discussed at Clause 3.6.
7.6. Bond Waiver
In American law, when a party (the "movant") seeks a preliminary injunction or temporary restraining order, the movant typically must post security — usually in the form of a bond, commonly issued by an insurance carrier. The reason is to be sure that a pot of money is available to compensate the restrained party in case the preliminary injunction turns out to have been wrongly granted.330 • Big companies sometimes want smaller ones to waive any requirement for a bond in connection with a motion for preliminary- or permanent injunction — but that can be a bad idea for the waiving party, as discussed in the comments below.
This Clause will apply if, in any action relating to this Agreement, either party (referred to here as the "Movant") applies to a court or other tribunal for a preliminary injunction, temporary restaining order, or similar interim relief against another party (the "Respondent").331
7.6.1.2. What are the parties agreeing to here?
By entering into this Agreement, the Respondent WAIVES any requirement that the Movant post a bond, or other security, as a prerequisite to obtaining the requested interim relief.
Consider this hypothetical situation: You're a small vendor trying to make a sale to a giant conglomerate:
As usual, the giant conglomerate insists on using its own purchase-order form (concerning which, see 6.7).
And that PO form allows the giant conglomerate to seek a preliminary injunction against you in various circumstances — as well as proclaiming that you, the vendor, waive the bond requirement.
From the congomerate's perspective, your bond waiver would save their legal department a bit of trouble in rustling up a bond, should the conglomerate ever decided to seek a preliminary injunction against you for (allegedly) breaching the the contract.
So should you, the vendor, agree to the waiver? Ideally, no, for the reasons discussed below — although it might be an acceptable business risk.
7.6.2.2.Caution: Agreeing to a bond waiver could be dangerous
Any party asked to agree to a bond waiver should think hard about it. Suppose that events play out like this:
The movant successfully obtains a preliminary injunction forbidding the respondent from doing whatever is upsetting the movant.
This interferes greatly with the respondent's business — possibly even putting the respondent out of business.
Then later, it turns out (perhaps after a full trial) that the preliminary injunction shouldn't have ben granted after all.
If the respondent had previously waived the bond requirement, then the respondent would have no recourse for the wrongful injunction.
Example: In 1983, the Supreme Court noted: "A party injured by the issuance of an injunction later determined to be erroneous has no action for damages in the absence of a bond" (citations omitted).332
Of course, a court might not give effect to a contractual bond waiver. Example: In a 2023 Delaware chancery-court case, Vice Chancellor Glasscock imposed a bond requirement notwithstanding a contractual waiver, noting that "although this Court has enforced bond waivers when granting motions for preliminary injunctions, the existence of such a waiver does not bind the Court."333
But as the saying goes, hope is not a plan — it might be a considerable business risk to count on a court's disregarding a bond waiver.
7.7. Boomerang clauses could hurt you later
In the Kingston Trio's (somewhat-offensive) 1958 version of the risqué Spanish-language song Coplas, Dave Guard's "translation" of one verse is, Tell your parents not to muddy the water around us: They may have to drink it soon. Contract drafters who want to include "hardball" provisions (as opposed to striving for balanced, thoughtful terms, see 6.5) will often do well to heed similar advice: Their clients might someday have to live with the hardball provision they force the other side to accept. This section discusses a few examples.
7.7.1. Example: Trump Corporation's lease terms
(Author's note: This section was written before Donald Trump announced his successful 2016 presidential campaign.)
Trump Corporation ("Trump") has been a real-estate landlord, among other things. According to AmLaw Daily, years ago Trump's lawyers took one of the company's leases, changed the names, and used it for a deal in which Trump was the tenant and not the landlord.
Later, Trump-as-tenant found that its lease-agreement form gave Trump's landlord significant leverage:
"The funny part of it is what one of his internal lawyers must have done years ago," [the landlord's president] says. "Normally Trump is the landlord, not the tenant. So what they did is they took one of their leases and just changed the names. And so it's not a very favorable lease if you're the tenant."
7.7.2. Example: Tilly's sets the signature bar too high
Tilly's, Inc. and World of Jeans & Tops, Inc. ("Tilly's") had an employee sign an employment agreement (the "2001 employment agreement") containing an arbitration provision. The 2001 employment agreement included a carve-out for statutory claims (which thus could be brought in court, not in arbitration). Importantly, the 2001 employment agreement also stated that any modifications to the agreement would need the signatures of three executives: The company's president; senior vice president; and director of human resources.
In 2005, the company had its employees sign an acknowledgement of receipt of an employee handbook containing a different arbitration provision, which didn't contain the carve-out for statutory claims. BUT: The signed acknowledgement didn't contain the three executive signatures needed to modify the 2001 employment agreement.
So: Because Tilly's set the so bar high for modifying the 2001 employment agreement — requiring three executive signatures — the company found itself facing high-stakes litigation by a class of plaintiffs, whereas it had thought it would be arbitrating low-stakes claims individually. See Rebolledo v. Tilly's, Inc., 228 Cal. App. 4th 900, 924, 175 Cal. Rptr. 3d 612 (Cal. App. 4th Div. 2014) (affirming denial of motion to compel arbitration).
7.7.3. Example: A one-way NDA later leaves a party unprotected
With a one-way nondisclosure agreement, only the originally-intended disclosing party's information is protected. This means that any disclosures by the receiving party might be completely unprotected — resulting in the receiving party's losing its trade-secret rights in its information.
That's just what happened to the plaintiff in a Seventh Circuit case: The plaintiff signed a confidentiality agreement with the defendant, but that agreement protected only the defendant's information. Consequently, the plaintiff's later disclosures of its own confidential information were unprotected.334 (For more about the dangers of unrestricted disclosures of confidential information, see 10.2.1.17.)
It's not hard to imagine the thought process that the plaintiff's business people's went through: "We need to disclose our information to you, but hey, we've already got an NDA in place, so sure, let's do it." But the NDA didn't do what the plaintiff needed.
Vague language can sometimes lead to trouble if the vagueness can lead to disputes about whether particular rights or obligations have been triggered. Here are a couple of examples:
• It's better to refer to the contract's being "signed" instead of "executed," because the latter could be interpreted as the contract's being performed by the parties; this happened in a Delaware case.335
• A particular referral agreement stated that a referring party would be paid a commission by a supplier whenever the supplier "consummated" a transaction with a referred customer during a stated time period. For one referred transaction, the supplier signed a contract with a referred customer during the stated time period, but nothing else happened until after the time period had ended. This led to litigation whether the transaction had been "consummated" during the time period, and thus whether the referring party was entitled to a commission for that transaction.336
Lesson: Refer to a more-certain date, such as: • the date the contract was signed; • the date of the invoice; • the date payment was collected.
Likewise, don't write that notice must be "given" by a certain date; instead, say that notice must be "received" or "effective" (if effectiveness is defined) or "sent" by that date.
But: For situations where bright-line standards aren't practicable (or desired), consider: • "baseball arbitration" determination of disputes to promote settlement, along the lines of Clause 12.17, where the arbitrator's only power is to pick one or the other of the parties' respective final proposals — this provides a powerful incentive for each party to be reasonable; or • expert determinations, as often seen in construction contracts.337
8.2. Business Associate Agreement
In certain circumstances in the United States, service providers and others that deal with "protected health information" ("PHI") on behalf of a "covered entity" (e.g., health-care providers) must sign a so-called business associate agreement ("BAA") to protect the PHI. This is required by rules promulgated under two federal statutes, the Health Insurance Portability and Accountability Act ("HIPAA") and the HITECH Act (Wikipedia.org).
This Clause will govern in any case where one party to this Agreement (the "Business Associate") will be a "business associate" of another party to this Agreement (the "Covered Entity") under 45 C.F.R § 160.103.
8.2.1.2. Adoption of HHS Model BAA (with modifications)
The parties are to comply with the Model Business Associate Agreement338 published by the U.S. Department of Health and Human Services (archived at https://perma.cc/57BP-KAPJ) (the "HHS Model BAA"), which is incorporated by reference into this Agreement — as modified by this Clause.
8.2.1.3. Modification: Notices per the "Three Rs"
Notices under the HHS Model BAA will be effective only upon receipt, refusal, or after reasonable but unsuccessful attempts at delivery.339
8.2.1.4. Modification: Use of de-identified PHI
This section applies to "de-identified"(8.2.2.2) (or "anonymized") personal health information ("PHI"), namely information that cannot practicably be used to identify any individual nor obtain any individual's personal health information.
Unless clearly agreed otherwise, this Agreement does not prohibit340 the Business Associate from using and/or disclosing anonymized PHY that the Business Associate obtains and/or creates under this Agreement.
A reminder: De-identified personal health information is not the same as aggregated PHI, which is not addressed by this Clause. ⚠(8.2.2.3)
8.2.2.1. Do you need a business-associate agreement?
Not every recipient of personal health information ("PHI") will be a "business associate," which means that a business-associate agreement won't be required for every disclosure of protected health information: In its January 2013 comments in the Federal Register concerning this part of the rule, the Department of HHS had this to say:
Disclosures by a business associate pursuant to § 164.504(e)(4) and its business associate contract for its own management and administration or legal responsibilities do not create a business associate relationship with the recipient of the protected health information because such disclosures are made outside of the entity’s role as a business associate.
However, for such disclosures that are not required by law, the Rule requires that the business associate obtain reasonable assurances from the person to whom the information is disclosed that[:]
it [the information] it will be held confidentially and used or further disclosed only as required by law or for the purposes for which it was disclosed to the person[;] and
the person [i.e., the recipient of the information] notifies the business associate of any instances of which it is aware that the confidentiality of the information has been breached.341
8.2.2.2. "De-identified" personal health information: Valuable?
Concerning section 8.2.1.4: So-called "de-identified" protected health information can be commercially valuable, but its use might be subject to legal restrictions.342 Seeing a need, some vendors have produced specialized "clean room" software that anonymizes consumer data.343
8.2.2.3. Aggregated information: Different rules
Under HHS regulations, a business associate may use aggregated protected health information only in limited circumstances. The HHS definition of data aggregation provides as follows:
Data aggregation means, with respect to protected health information created or received by a business associate in its capacity as the business associate of a covered entity,
the combining of such protected health information by the business associate with the protected health information received by the business associate
in its capacity as a business associate of another covered entity,
to permit data analyses that relate to the health care operations of the respective covered entities.344
As pointed out by a healthcare lawyer: "Per the regulations and commentary, the 'data aggregation' exception would not apply unless (1) the data aggregation is for the covered entity’s healthcare operations, not the business associate’s own purposes; and (2) the BAA expressly authorizes the business associate to perform the data aggregation services."345
8.2.2.4. Some "covered entity" rules have to be "flowed down"
Under 45 CFR § 164.528, a covered entity must account to individuals for PHI disclosures; if you're a business associate, those obligations are largely "flowed down" to you. (For more on flowdown requirements see [BROKEN LINK: flowdown-cmt].)
Moreover, if you're a business associate:
you also must comply with certain requirements of Subpart E of 45 CFR Part 164 that apply to the covered entity;346
you're required to ensure — in accordance with 45 CFR §§ 164.502(e)(1)(ii) and 164.308(b)(2), as applicable — that any subcontractors that create, receive, maintain, or transmit protected health information on your behalf have agreed to the same restrictions, conditions, and requirements that apply to you with respect to such information;
under 45 CFR § 164.410, if you become aware of uses or disclosures of PHI that aren't provided for by the parties' contract, then you're required to report it to the covered entity. This includes, for example:
any demand by a governmental entity for disclosure of PHI.
(See also section 10.2.1.28 in Clause 10.2, which addresses how subpoenas, etc., for confidential information are to be handled.)
8.2.2.5. You might have to return or destroy PHI
Locating, extracting, and returning PHI could be a major, costly burden and so should be planned for accordingly.
8.2.2.6. Certain obligations continue after termination
When you're a business associate, termination or expiration of your business-associate agreement won't end your obligations under the agreement to safeguard PHI that was:
received from the covered entity, or
created, maintained, or received by the business associate on behalf of the covered entity.
8.2.2.8. A HIPAA violation could lead to federal monitoring
If you're a business associate and you suffer a data breach ("get hacked"), you could find yourself in the cross-hairs of the federal government. Example: In 2023, the Department of Health and Human Services ("HHS") announced a settlement with MedEvolve, Inc., a business associate that provides software services to covered health care entities, after a MedEvolve server was found to have exposed protected health information of more than 230,00 individuals on the internet. According to the HHS press release:
The potential HIPAA violations in this case include[:]
the lack of an analysis to determine risks and vulnerabilities to electronic protected health information across the organization, and
the failure to enter into a business associate agreement with a subcontractor.
MedEvolve paid HHS $350,000 and agreed to implement a corrective action plan — and it also agreed to being monitored by HHS for two years and to provide annual- and incident-based reports. 347
8.2.2.9. You could be inspected for compliance
When you're a business associate, you're required to make your internal practices and its books records available for compliance inspections by the Secretary of the U.S. Department of Health and Human Services.
(You could try negotiating to conduct the inspection in accordance with Clause 15.14, inspections, and Clause 5.6, audits.)
If you don't know where you're going, you might not get there. – Yogi Berra.
Be Prepared. – Boy Scout motto.
Plans are worthless; planning is everything. – Dwight D. Eisenhower.
[N]o plan of operations extends with any certainty beyond the first contact with the main hostile force. – Helmuth von Moltke the Elder (often paraphrased as "no plan survives first contact with the enemy").
8.4.2. Stephen Colbert proves the benefits of thinking ahead
Years ago, Stephen Colbert — and his agent — showed that there's more to contract drafting than just putting words on the page. This was back when Colbert, as his "character," was hosting the Comedy Central show that made him famous, The Colbert Report.
When Colbert's contract with Comedy Central was up for renewal, he and his agent apparently negotiated to have successive contract terms expire at the same time as David Letterman's contracts with CBS. That way, if Letterman ever decided to retire, Colbert would be able to leave his existing show and throw his hat in the ring to take over Letterman's The Late Show on CBS.349 And of course that's just what happened: By prior planning, Colbert was able to seize an important opportunity, instead of remaining tied up by an existing contract.
8.4.3. Hope is not a plan
Wishful thinking can be dangerous, but some people are prone to it — including business people. Contract negotiators should keep this in mind in brainstorming scenarios and action plans.
Example: Where will the money come from? When drafting a critical contract obligation for the other side — for example, an indemnity obligation — consider imposing additional requirements to be sure that there's money somewhere to fund the obligation, such as:
an insurance policy;
a third-party guaranty;
a letter of credit from a bank or other financial institution;
or even taking a security interest in collateral that could be seized and sold to raise funds.
Apropos of wishful thinking, there's an old joke about economists that seems to have been first published in 1970:
A physicist, a chemist, and an economist are shipwrecked on a desert island with nothing to eat.
A pallet full of cans of food washes up on the beach, but the castaways have no tools with which to open the food cans.
The physicist and the chemist each propose ingenious but complicated mechanisms to open the cans, using the materials at hand.
The economist has a simpler solution: "We'll assume we have a can opener." See Wikipedia, Assume a can opener, quoting Kenneth E. Boulding, Economics as a Science at 101 (McGraw-Hill 1970).
8.4.4. Example: Tesla's supply-chain issues
Here are some dangers that a company can encounter: (1) Not getting paid; (2) not being able to build your product because your suppliers won't supply you with parts unless you pay cash on delivery (C.O.D.); (3) having a supplier go out of business because you didn't pay them. From a Bloomberg story:
… [A short-seller of Tesla stock] said her firm sees some suppliers to Tesla filing for bankruptcy, which poses particular risk to the carmaker because many of its components are single-sourced. * * *
The Wall Street Journal reported in August on an Original Equipment Suppliers Association survey of executives that found most respondents believed Tesla posed a financial risk to their companies. Some small suppliers claimed in the previous several months that they failed to get paid, the newspaper reported, citing public records.350
8.4.5. "Hey, you: Learn the business!" OK, fine — but how?
One of the big complaints clients have about lawyers is that "they just don't understand the business." But it's singularly unhelpful to just say to a lawyer: Hey, you: Learn the business! The beneficiary of such advice might not know what to do to make that happen.
Neither is it particularly useful to add, Just ask questions! It might not be obvious what questions should be asked.
So, this chapter presents a series of questions, with handy mnemonic acronyms, to help contract professionals and their clients:
identify threats and opportunities that might need to be addressed in a contract;
develop action plans to prepare for and respond to those threats and opportunities; and
flesh out the details of the desired actions;
all with the goal of drafting practical contract clauses.
8.4.6. T O P S P I N: Identifying threats and opportunities
The acronym T O P S P I N can help planners to identify threats and opportunities of potential interest. (The acronym is inspired by the business concept of SWOT analysis, standing for Strengths, Weaknesses, Opportunities, and Threats.)
The first part of the acronym, T O P, refers to the threats and opportunities that can arise in the course of the different phases of the parties' business relationship. (Those phases can themselves be remembered with the acronym S N O T S: Startup; Normal Operations; Trouble; and Shutdown.)
The second part of the acronym, S P I N, reminds us that various threats and opportunities can be presented by one or more of the following:
• S: The participants in the respective supply chains in which the contracting parties participate, both as suppliers and as customers, direct and indirect. If the parties are "Alice" and "Bob," then we can think of Alice's and Bob's respective supply chains as forming a capital letter H, as illustrated below:
• P: The individual people involved in the supply chains — all of whom have their own personal motivations and interests;
• I: Interveners such as competitors; alliance partners; unions; governmental actors such as elected officials, regulators, taxing authorities, and law enforcement; the press; and acquirers. Don't forget the individual people associated with an intervener, all of whom will have personal desires, motives, and interests; Political issues can raise their heads; for example, in 2019, convention organizers attracted attention for inserting "morals clauses" into their contracts: "Organizations will not bring events to Texas if [anti-LGBTQ] discriminatory bills become law, and most convention contracts allow organizers to cancel if such laws take effect." Chris Tomlinson, Bigot bills would damage Texas economy, [BROKEN LINK: sc:], April 3, 2019, page B1, at B7 col. 2 (emphasis added).
• N: Nature, which can cause all kinds of threats and opportunities to arise in a contract relationship.
ICE-CREAM EXAMPLE: Mother Nature might create a threat — and an opportunity for competitors — if an ice-cream manufacturer's products were to become contaminated with listeria bacteria (as happened in 2015 to famed Texas dairy Blue Bell).351
8.4.7. I N D I A T I L T: Deciding on responsive actions
Once planners have compiled a list of threats and opportunities of interest, they should think about the specific actions that might be desirable — or perhaps specific actions to be prohibited — when a particular threat or opportunity appears to be arising. Many such actions will fall into the following categories:
• I: Information to gather about the situation in question;
• N: Notification of others that the threat or opportunity is (or might be) arising. Refer to the SPIN part of the TOP SPIN acronym above for suggestions about players who might be appropriate to notify.
• D: Diagnosis, i.e., confirmation that the particular threat or opportunity is real, as opposed to being an example of some other phenomenon (or just a false alarm).
• I: Immediateaction, e.g., to mitigate the threat or to seize the opportunity.
• A: Additionalactions, e.g., to remediate adverse effects or take advantage of the opportunity.
ICE-CREAM EXAMPLE: Consumers have been known to become ill, and a few have died, after eating ice cream that, during manufacturing, became contaminated with listeria bacteria. The grocery store's planners might want to use the I N D I A checklist to specify in some detail how the ice-cream manufacturer is to respond to such reports, with requirements for notifying the grocery store; product recalls; and so on.
Some plans are likely to require advance preparation. Planners can use the T I L T part of the acronym to decide whether any of the following might be appropriate:
• T: Acquisition of tools — such as equipment, information, consumables, etc. — for responding to the threat or opportunity.
• I: Acquisition of insurance (or other backup sources of funding).
• L: Posting of a lookout, that is, putting in place a monitoring system to detect the threat or opportunity in question.
• T: Training of the people and organizations who might be called on to respond to the threat or opportunity.
8.4.8. W H A L E R analysis: Fleshing out the action plans
In specifying actions to be taken, planners will often want to go into more detail than just the traditional 5W + H acronym (standing for Who, What, When, Where, Why, and How). Planners can do this using the acronym W H A L E R:
• W: Who is to take (or might take, or must not take) the action.
• H: How the action is to be taken, e.g., in accordance with a specified industry standard.
• A: Autonomy of the actor in deciding whether to take or not take the action. Depending on the circumstances, this might be:
No autonomy: The action in question is either mandatory or prohibited, with nothing in between.
Total autonomy: For the action in question, the specified actor has sole and unfettered discretion as to whether to take the action.
Partial autonomy: The decision to take (or not take) the action must meet one or more requirements such as:
Reasonableness — be careful: that can be complicated and expensive to litigate;
Good faith — ditto;
Notification of some other player, before the fact and/or after the fact;
Consultation with some other player before the fact; or
Consent of some other player (but is consent not to be unreasonably withheld? A claim of unreasonable withholding of consent could itself be one more thing to litigate.)
• L: Limitations on the action — for example, minimums or maximums as to one or more of time; place; manner; money; and people.
• E: Economics of the action, such as required payment actions (each of which can get its own W H A L E R analysis), and backup funding sources.
• R: Recordkeeping concerning the action in question (with its own W H A L E R analysis).
8.4.9. The "bow tie method": A diagrammatic approach
A more-complicated approach to identifying and planning for risks is the so-called "bow tie" method, developed by oil-and-gas giant Shell and later adopted in other industries.352
The bowtie method of diagramming risks and consequences is reminiscent of Feynman diagrams in the world of physics.353
8.4.10. Finally, ask the investigator's all-round favorite question
When I was a baby lawyer at Arnold, White & Durkee, I worked a lot with partner Mike Sutton. One of the many things Mike taught me was that when interviewing or deposing a witness, a useful, all-purpose question consists of just two words: Anything else?
That same question can likewise help contract planners get some comfort that they've covered the possibilities that should be addressed in a draft agreement.
8.5. Buy-sell agreements (notes)
A "buy-sell" procedure is related to the ancient "divide and choose" procedure, sometimes known as "I cut, you choose," by which children can evenly divide a cookie between them.
Something like this procedure is seen in the Book of Genesis, when Abram (later Abraham) and his kinsman Lot agree to separate, and by agreement, Abram allows Lot to choose which part of the Promised Land to claim and settle in.354
Buy-sell agreements are often used for breakups of small companies. Suppose that a company has two owners, "Fred" and "Ginger," who find that they can no longer get along. A buy-sell agreement requires (let's say) Fred to offer to buy out Ginger's share of the company so that she'll be the one to exit the business and leave Fred as the sole owner — but then Ginger gets to decide whether —
to accept Fred's buy-out offer and leave the business; or
instead, to require Fred to sell out to her — on the terms that Fred had proposed to her.
This gives Fred a powerful incentive to offer fair terms to Ginger — because if Fred's terms aren't fair, then Ginger can turn the tables on him and kick him out of the business instead of exiting the business herself.
A buy-sell agreement is somewhat akin to baseball arbitration, which likewise encourages parties to make fair offers to settle disputes, as discussed at 12.17.
Optional further reading:
Both buy-sell agreements and last-offer arbitration ("baseball arbitration"; see Clause 12.17) could be thought of as examples of what the late philosopher John Rawls referred to as "the veil of ignorance."
Mahler (2017) urges not including provisions for the accepting party to demand revision of the price.
A calendar year runs January 1 through December 31, inclusive, on the Gregorian calendar.355
A period of one calendar year beginning on (for example) July 1 ends at exactly 12:00.000 midnight356 at the beginning of July 1 in the following year.
Exception: If a calendar-year period begins on February 29 (that is, on a leap day), then that period ends at exactly 12 midnight at the beginning of March 1 of the following year.
A period of one calendar year following (for example) June 30 ends at exactly 12 midnight at the end of June 30 in the following year.
9.2. Capitalization consistency
It’s a really good idea to be consistent about capitalization when drafting a contract. 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 kind of bad news happened in a New York 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 inconsistency of capitalization of the term "substantial completion" precluded an immediate dismissal of the plaintiff's claim.357
Similarly: In a UK lawsuit, a construction project experienced flooding, and the parties fought over who was potentially liable for the flooding. The case turned on whether, in the relevant contract, the term "practical completion," when uncapitalized, had the same meaning as the same term when it was capitalized. The court held that the capitalized‑ and uncapitalized terms did not have the same meaning; as result, a sprinkler-system subcontractor was potentially liable for the flooding.358
9.3. Catch-Up Calls
The biggest cause of serious error in this business is a failure of communication. Construction executive Finn O'Sullivan.359 (See 9.3.2 for more on this subject.)
The parties are to arrange for a catch-up call whenever either party reasonably requests it, e.g., to deal with problems and/or ‑opportunities (existing or anticipated).
When agreed, the parties will schedule regular calls as calendar placeholders.
Notes
Pro tip: Monthly or even weekly pre-scheduled calls might be appropriate, perhaps with different schedules for different operational phases in the parties' dealings.
9.3.1.2. How are catch-up calls to be made?
Each catch-up call is to be conducted by video conferencing — e.g., Teams, Zoom, etc. — as is convenient.
9.3.1.3. Who is to participate in the call?
For each catch-up call, each party is to have appropriate people participate.
Notes
There seems to be little purpose for a hard-and-fast rule here.
9.3.1.4. What will the agenda be?
On the call, unless otherwise agreed, the parties are to follow the SPUR Agenda — Status, both good and bad — things done, and left undone; Possibilities, good and bad, including problems and plans; Uncertainties, for example unknowns and untested; and Risks, both downside and upside.
The parties are encouraged:
to circulate agenda items for the call in advance; and
to use a shared electronic whiteboard for interactive notes.[a]
Notes
[a] "Whiteboarding" is a key business practice at AI chipmaker Nvidia.360 • Your author has long had students use shared Google Docs as "electronic whiteboards" in their small-group brainstorming and drafting.
9.3.1.5. Are meeting minutes required?
Meeting minutes are not required, but circulation of some sort of written record of the discussion is encouraged.
Notes
It's often useful for one or more parties to prepare and circulate a readout (see 21.5) of what the sending party regards as noteworthy points discussed on the call.
9.3.1.6. What if agreements are reached on the call?
If, during the call, the parties agree to modify or waive any provision of this Agreement, they are to follow Clause 4.2 (amendments) and/or Clause 24.3 (waivers), as applicable.
9.3.2.1. Communication is key to reliable relationships
♫ Wouldn't it be nice to work together? ♫ Many clients would be pleased if their contract relationships could look a bit like what they see in (fictional) TV shows such as Grey's Anatomy, The West Wing, and M*A*S*H: Serious, competent professionals who team up in the service of common goals; deal with disagreements and other adversities together; and with any luck, start to develop trusted, collegial relationships.
Timely communication is key to such relationships.
9.3.2.2. Tragedy can result from lack of communication
The single biggest problem in communication is the illusion that it has taken place. (Mis?)attributed to George Bernard Shaw.
In the world of contracts, parties not communicating has often resulted extra expense and even disastrous problems.
– General contractors that build skyscrapers.
– Surgical teams that do complex operations.
– Pilots that fly airliners and other aircraft.
All of those professionals are trained in lessons of history that are "written in blood," as pilots sometimes say.
Outcomes can be greatly improved — and sometimes, catastrophic failures averted — by pre-planned habits of communication.
The world has seen tragic examples of failures in this regard:
All were caused at least in part by communications failures.
By comparison, here's an almost-trivial example: In a project to reconstruct a bridge, a subcontractor spent more than $120,000 above the agreed price in trying to resolve an unexpected problem. The prime contractor refused to pay the extra money. The sub sued the prime for payment — and lost. During the trial, the parties learned that if they'd just talked to one another, they likely would agreed to an alternative approach that would have saved over $100,000 of that extra cost — and that doesn't even take into account the time and money the parties spent in litigating the sub's claim for payment.361
9.3.2.3.Structured communications can help — sometimes, a lot
The importance of structured communication is a subtext of Dr. Atul Gawande's 2009 book, The Checklist Manifesto (highly recommended reading, by way). That book grew out of Gawande's 2007 article in The New Yorker. Gawande recounts his visit to the construction site of the Russia Wharf, a 32-floor building in Boston (now called the Atlantic Wharf). Gawande learned that particular, time-specific communications were an important feature of the checklists used by the general contractor's construction executives:
While no one could anticipate all the problems, they could foresee where and when they might occur. The checklist therefore detailed who had to talk to whom, by which date, and about what aspect of construction—who had to share (or 'submit') particular kinds of information before the next steps could proceed.
The submittal schedule specified, for instance, that by the end of the month the contractors, installers, and elevator engineers had to review the condition of the elevator cars traveling up to the tenth floor.
The elevator cars were factory constructed and tested. They were installed by experts.
But it was not assumed that they would work perfectly. Quite the opposite.
The assumption was that anything could go wrong, anything could get missed. What? Who knows? That’s the nature of complexity.
But it was also assumed that, if you got the right people together and had them take a moment to talk things over as a team rather than as individuals, serious problems could be identified and averted.362
To be sure: In many contracts such intensive communication would often be costly overkill.
But anyone with much experience "in the field" would probably tell you that in the contract world, the problem is usually too little communication.
9.4. Certifications Definition
Some contracts require one party to "certify" in writing that the certifying party has complied with specified contract obligations; see, e.g., Option 10.2.2.1. What does that mean?
If a party "CP" certifies a statement, whether in this Agreement or in a related document, then unless the certification clearly states otherwise, CP is doing the following things:
When you're the certifying party, a certification requirement can:
give you an incentive to do a good job in complying with the relevant contract obligations; and
help you to identify specific areas that might need attention before a dispute arose — and thus possibly help to avoid the dispute in the first place.
9.4.2.2. Possible downside
Your certification would give the other party ammunition with which to blast you with a "they lied!" accusation, if it were to turn out that you'd overlooked something and thus your certification was incomplete or inaccurate.
(See 21.16.4.6 for more about how trial lawyers like to use "they lied!" in litigation, because non-expert judges and jurors will understand lying, whereas they might or might not fully understand the merits.)
9.5. Change of control definition [TO DO]
It's fairly common for the term "change of control" to refer solely to a change of ownership of the power to vote more than 50% of the voting power entitled to vote for members of a party's board of directors (or equivalent body in a non-corporate organization).
From the lawyer site redline.net (requires an account), an (anonymous) poster provided a somewhat-onerous change of control clause, which the poster described as, "taken from a well-known and large Silicon Valley law firm, from their flagship Technology License Agreement template–so [it] must be good, right?" Here it is:
"Change of Control" of Licensee means a transaction or series of related transactions resulting in:
(a) the acquisition of ownership, directly or indirectly, beneficially or of record, by any individual, entity or group, of equity interests representing more than 50% of the aggregate ordinary voting power or beneficial interest represented by the issued and outstanding equity interests in Licensee;
(b) the consummation by Licensee or any direct or indirect parent of Licensee of a merger or consolidation with any other entity or any other such group; or
(c) the transfer, sale, assignment, exclusive license, or other disposition of all or substantially all of Licensee’s or any direct or indirect parent of Licensee’s tangible or intangible assets, personnel, technology, equipment, business, equity interest, or voting interest relating to this Agreement.
Licensee shall notify Licensor in writing of a Change of Control within thirty days of its occurrence.
This Agreement will terminate at any time immediately upon written notice by Licensee following a Change of Control. [Huh? What does this mean?]
"Cheap insurance" is a metaphor for small, low-cost habits or actions that might never pay off — but that can help avoid big problems later. An example from everyday life is when you get home, putting your keys in the same place every time, to reduce the chances that you'll forget where you put them. As a character in a Pulitzer Prize-winning novel said:366These dull habits sometimes pay off.
Here are a few contract-drafting examples:
• Try not to leave big blank spaces on a page of a contract, in case an unscrupulous person later uses one of those blank spaces to insert additional details that weren't agreed to ([BROKEN LINK: sig-block-follows]). Sure, maybe you can later prove the forgery, but why not roadblock the attempt?
• Consider putting the word WAIVE and its variations (waives, waived, waiver, etc.) in bold-face all caps, in case a jurisdiction requires it for conspicuousness (24.3.1.3).
• Consider whether to include "for the avoidance of doubt" clauses to roadblock later attempts at "creative" contract interpretations, e.g., concerning assignment consent at discretion (Option 5.3.2.3). BUT: Consider also whether including such a clause would "poke the bear" — causing the other side to notice and insist on rewording in a manner not to your liking.(20.3)
9.8. Checklist benefits
Why use planning checklists? Because even the most-competent professional will sometimes miss things — and such a lapse, if not caught in time, could have grave consequences. This was catastrophically illustrated in a 1935 prototype test flight of the legendary B-17 "Flying Fortress" bomber:
Before takeoff, the crew neglected to remove locking devices from certain control surfaces.
In the resulting crash, both the U.S. Army's chief of flight testing and Boeing's chief test pilot were killed.
Those and other bitter lessons led to aviation's emphasis on checklists as a crucial backup to fallible human memory: Pilots are trained to complete a checklist before every flight (and at other important times too).
As a U.S. Air Force officer once wrote: "The majority of the notes, warnings, and cautions [in these checklists] have been written in blood." Gary S. Rudman, Checklist mentality … it’s a good thing (safety.af.mil 2012).
9.9. Claim Definition
9.9.1. Clause text
The term "claim" — whether or not capitalized — refers to any request or demand for damages, an injunction, and/or any other form of legal- or equitable relief, by one or more individuals and/or organizations.367
A claim could be made by (without limitation) one or more government authorities.
A claim could be made in any forum, official or otherwise, allegedly having the power to award such relief.
In case of doubt: The term claim encompasses — without limitation — counterclaims and cross-claims, and not merely claims in "kick-off" documents such as complaints, original petitions, and the like.369
In case of doubt: A claim could be set forth, without limitation:
in a written communication such as, for example, a letter or email; and/or
in a filing with, or a submission to, a tribunal of competent jurisdiction.
9.10. Clean sheet of paper? Be careful ….
9.10.1. Yes, existing model contracts can acquire a lot of cruft …
Contract forms tend to grow by accretion, as lawyers think of issues that could arise and fret about malpractice claims, and then add language to their forms.
As a result, what a commenter said about politicians (fearful of voter backlash) might apply equally to contract drafters: "[E]fforts to reform airport security are hamstrung by politicians and administrators who would prefer to inflict hassle on millions than be caught making one mistake."370 In much the same way, many contract drafters would prefer to inflict extra work on clients and counterparties, because they fear someday being criticized for having missed an issue that, in hindsight, became the subject of a dispute.
9.10.2. … and long-winded contracts delay deals
Some contract drafters try to plan for every conceivable future risk in their drafts. That can cause immediate problems for their clients — and clients can be decidedly unfond of that.
Example: The legal department of one General Electric (GE) unit found that its "comprehensive" contracts were getting in the way of closing sales deals:
When GE Aviation combined its three digital businesses into a single Digital Solutions unit, their salespeople were eager to speed up the growth they had seen in the years before the move. They found plenty of enthusiastic customers, but they struggled to close their deals. The reason: Customers often needed to review and sign contracts more than 100 pages long before they could start doing business.
The new business inherited seven different contracts from the three units. The clunky documents were loaded with legalese, redundancies, archaic words and wordy attempts to cover every imaginable legal [sic]. No wonder they languished unread for months.
"We would call, and customers would say, 'I can’t get through this,'" says Karen Thompson, Digital Solutions contracts leader at GE Aviation. “And that was before they even sent it to their legal team! … We were having trouble moving past that part to what we needed to do, which was sell our services.”
For those customers who did read the contract, negotiations would drag on and on.371
9.10.3. So a clean sheet of paper can be tempting …
In the GE Aviation story above, GE's legal department decided to do something about it. Shawn Burton, the general counsel of that GE business unit, described his team's approach in a Harvard Business Review article.
• First, the legal team met with business people — who were enthusiastic about the prospect of simplifying their contracts — to identify business risks
• Then:
Next the legal team started drawing up the contract, beginning from scratch.
No templates. No “sample” clauses. No use of or reference to the existing contracts.
We simply started typing on a blank sheet of paper, focusing only on the covered services and the risks we’d identified.
Throughout the process, we applied our litmus test: Can a high schooler understand this?372
Burton provides several examples of streamlined provisions, such as the following revision:
Before:
Customer shall indemnify, defend, and hold Company harmless from any and all claims, suits, actions, liabilities, damages and costs, including reasonable attorneys’ fees and court costs, incurred by Company arising from or based upon (a) any actual or alleged infringement of any United States patents, copyright, or other intellectual property right of a third party, attributable to Customer’s use of the licensed System with other software, hardware or configuration not either provided by Company or specified in Exhibit D.3, (b) any data, information, technology, system or other Confidential Information disclosed or made available by Customer to Company under this Agreement, (c) the use, operation, maintenance, repair, safety, regulatory compliance or performance of any aircraft owned, leased, operated, or maintained by Customer of [sic; or](d) any use, by Customer or by a third party to whom Customer has provided the information, of Customer’s Flight Data, the System, or information generated by the System.
After:
If an arbitrator finds that this contract was breached and losses were suffered because of that breach, the breaching party will compensate the non-breaching party for such losses or provide the remedies specified in Section 8 if Section 8 is breached.
(Emphasis added.)
9.10.4. … but a clean sheet can also be dangerous
Very few contract drafters do what the GE Aviation unit did, i.e., start with a clean sheet of paper. That's because it's challenging to remember all the issues that might need to be addressed — and that makes it dangerous to throw out an existing contract form and start over unless you methodically list and address the principal business risks that the parties might encounter, just as the GE Aviation unit did — and even then, how do you know you've thought of all the possible risks?
Throwing out an existing contract, and starting over with a clean sheet of paper to draft a much-shorter contract, can be dangerous:
The existing contract might well capture past experience with oddball issues that can cause disputes.
The drafters of the new, shorter contract might inadvertently overlook one or more of those issues.
The language in the previous contracts presumably reflected past experience in how to handle the unusual- or oddball situations that can sometimes arise and lead to disputes. Throwing out the previous contracts might have lost that often-hard-won knowledge.
By analogy: The computer-programming world is quite familiar with this danger of losing knowledge gained from bitter experience. Users of software expect the software to work well even in oddball situations, especially those that the aviation world calls "pilot error," a.k.a. stupid human tricks (just as business clients expect contracts to accommodate unusual situations that might arise between the parties). A much-cited 2000 essay, by highly-regarded software developer and entrepreneur Joel Spolsky, argues that throwing out the source code of an existing computer program and rewriting it from scratch is a terrible idea, one that has caused major headaches for companies such as Netscape (which developed one of the first widely-used Web browsers):
The idea that new code is better than old is patently absurd. Old code has been used. It has been tested. Lots of bugs have been found, and they’ve been fixed. … Each of these bugs took weeks of real-world usage before they were found. …
When you throw away code and start from scratch, you are throwing away all that knowledge. All those collected bug fixes. Years of programming work.373
The same could be true about contracts: If you throw out existing contract language and start from scratch, you risk losing years of accumulated knowledge of how the real world can work.
Consequently contract drafters often start with some form of prior agreement.
9.10.5. A safer approach: Gradual clean-up ("refactoring")
There's another, safer approach: Do what software developers refer to as "refactoring," namely cleaning up existing language bit by bit, as discussed in 17.1:
breaking its long, "wall of words" provisions into smaller chunks; and
as necessary, rewriting legalese to make it sound more like how you'd explain the concept to a judge or jury.
During the semester we'll get lots of practice at doing that.
This Clause will apply if this Agreement requires a particular factual allegation by a party to be supported by "clear and convincing evidence," as compared to the lower, "preponderance of the evidence" standard mainly used in civil cases.
9.11.1.2. What does clear and convincing evidence require?
The term "clear and convincing evidence" refers to evidence sufficient to produce, in the mind of the factfinder, an abiding conviction that the assertion's truth is highly probable.375
In particular: If an asserting party proffers testimony by a witness who has an interest (e.g., testimony by the asserting party's own people), thenclear and convincing evidence must include (at a minimum) reasonable corroboration of such testimony.377
9.12. Clearly Agreed Definition
9.12.1. Clause text
For a thing to be "clearly agreed" or "clearly agreed to" by a party (which is said to "clearly agree"), the party's agreement to the thing must be:–
Any claim that this Clause was waived is to be governed by Delaware law.(4.2.2.13)
9.13. Click-wrap and browse-wrap agreements (notes)
Background:
1. "Click-wrap agreements": When a user installs software on a computer, or signs up for an online service, very often the user must click on a button or link that says (in effect) "I agree"; the click purportedly signifies that the user — and the user's company — are agreeing to detailed terms and conditions.
2. "Browse-wrap agreements": An online service might also include a purported agreement that the user supposedly agrees to: (i) by continuing to take an action, e.g., continuing to browse a Web site, or (ii) by not taking other action, e.g., by not leaving a Web site.
For convenience, here we'll refer to the terms of either type of agreement as simply "Wrap Terms."
The enforceability of click-wrap and browse-wrap agreements has been often litigated; see generally the posts of law professor Eric Goldman — who knows pretty much what there is to be known on this subject — and his colleagues at his Technology & Marketing Law Blog.
For a UK perspective, see the court of appeal's discussion in Parker-Grennan (UK App. 2024), discussed by Blest & Shaw (2024).
Often, Wrap Terms will be unobjectionable, addressing matters such as not making unreasonable use of an online service, not trying to steal other users' data, and the like.
But sometimes, Wrap Terms will be like a supplier's order confirmation, setting out the supplier's wish list for ground rules — and sometimes a supplier's click-wrap or browse-wrap agreement will contain terms and conditions that affect the parties' negotiated deal.
So, in section 12.14.1.6 of Clause 12.14, the "are rejected" language is intended to preclude Wrap Terms from becoming part of this Agreement when they address matters that are covered (explicitly or implicitly) in this Agreement.
9.14. Code of Conduct Compliance
A customer might demand that its supplier contractually commit to abiding by a "code of conduct." Some customer codes of conduct can be overreaching and overbearing — possibly trampling on the supplier's legitimate interests and giving the customer unfair leverage in unrelated disputes. • So: This Clause puts "fences" around the customer's code of conduct, to help the customer and the supplier to postpone discussion of specific practices that the customer might strongly prefer or even insist on. (See also Clause 23.11, addressing termination for reputation risk.)
This Clause will govern if and when, in this Agreement or otherwise, one party (referred to for convenience as the "Customer") prescribes a code of conduct (the "Code") that is to be followed by another party (the "Supplier").
In case of doubt, this Clause will govern:
even if the Code has a different title such as "policy manual" or "supplier handbook"; and
even if the Code takes the form of, or is derived from, a general industry standard or practice.
9.14.1.2. What if this Agreement and Code don't match?
This Clause will take precedence over any inconsistent provision in this Agreement or the Code.
As one, non-limiting example of subdivision a: Even if this Agreement or the Code requires the Supplier to strictly comply with the Code, it would be enough for the Supplier to do as stated in this Clause.
The parties are encouraged to consult with each other if an issue comes up that might implicate the Code.379
9.14.1.3. Must the Supplier always comply with the Code?
The Supplier is entitled to not comply with some or all of the Code if one or more of the following are true:380
the Customer does not require such compliance by the Customer's other suppliers and relevant counterparties generally; see below concerning confirmation of this point; or381
the Supplier reasonably concludes382 that compliance with the Code would require breaking the law (or running any significant risk of doing so); or
the Code deviates unreasonably from standard business practices in the relevant line of business; or
the Customer does not provide the Supplier with the Code — in writing — on a timely basis.383 (A link to a publicly-available version would suffice.)
At reasonable intervals and upon reasonable notice, the Supplier may have an independent firm of certified public accountants (CPAs) do the following in accordance with Clause 5.6 (audits and inspections, with confidentiality obligations):
inspect 🔑384 a representative sample of the Customer's other relevant contracts from time to time; and
report to the Supplier whether or not the Customer does in fact contractually require agreement to the Code by the Customer's relevant counterparties generally.
9.14.1.4. What would constitute "sufficient" Code compliance?
As a safe harbor, the Supplier will be deemed to have complied with the Customer's Code if, when reasonably requested by the Customer, the Supplier timely does the following:385
gives [BROKEN LINK: good-faith] consideration to whether the Supplier's business practices are a "fit" for the Code (or could reasonably be adjusted to be a fit); and
consults with the Customer about any particular business-related practices that the Code indicates the Supplier is to follow (or not follow).
9.14.1.5. Code agreement is not a general representation
In case someone tries to raise the issue: The Supplier's agreement to follow the Customer's Code is not a representation or warranty that all of the Supplier's relevant business practices would necessarily meet (or have met) with the Customer's approval.387
9.14.1.6. Customer's termination remedy for Code violation
If the Supplier does not cure a noncompliance with the Customer's Code within a reasonable time388 after the Customer calls the Supplier's attention389 to the noncompliance via any reasonable means, then the Customer may terminate390 this Agreement — but on a going-forward basis only — by giving the Supplier notice to that effect.
9.14.1.7. Could Customer sue Supplier for a Code breach?
Other than termination as set forth above, the Customer is not to take any other action391 against the Supplier for breach of the Code unless one or more of the following is shown:–
the Supplier's action (or inaction) that failed to comply with the Code also constituted a breach of this Agreement apart from the Code; and/or
this Agreement as negotiated by the parties — not just the Code, and not just this Agreement in a form that the Customer provided, e.g., in the fine print of a purchase order form — clearly and specifically says that the Customer may sue the Supplier for breach of this Agreement even if the Supplier breaches only the Code.392
For emphasis: The prohibition of subdivision a extends (without limitation) to the Customer's doing any of the following in response to the Supplier's noncompliance with the Code:
filing suit against the Supplier;
demanding arbitration; and/or
withholding payment that would otherwise be due.
By entering into this Agreement, the Customer WAIVES, and therefore must not seek,393 any recourse for the Supplier's noncompliance with the Code except as clearly stated in this Clause.
9.14.1.8. When would Customer's Code termination right expire?
The Customer's right to terminate under this Clause will lapse394 automatically if the Customer's notice of termination to the Supplier has not become effective in accordance with Clause 18.7 on or before the earlier of the following:
the date 60 days395 after the date that the Supplier first became aware, by any means, of the earliest event putatively constituting the Code breach (the "Triggering Event"); or
if earlier, the date six months396 after the date of that Triggering Event, regardless when, or whether, the Customer learned or should have known about it.
9.14.1.9. Would Code termination kill other rights, etc.?
If the Customer terminates for Supplier noncompliance with the Customer's Code, the termination will not affect any party's other accrued rights and obligations under this Agreement, including without limitation the following — if any:
the Customer's warranty rights; and
the Supplier's payment rights for already-completed sales.
The parties' (canceled) future rights and obligations would include, for example, the following — if any:
any post-termination right of the Customer to purchase goods or services from the Supplier at stated pricing or at a stated discount; and/or
any post-termination obligation of the Customer to buy goods or services from the Supplier during any particular time.
9.14.1.10. Survival of this Clause
If the Customer does terminate for a Code breach, then this Clause will continue in effect as stated in Clause 23.12.0.7 (survival) except as specifically provided in this Clause.
9.14.2.1. How might a customer's code of conduct be a problem?
For the supplier, managing compliance with many customers' different codes can be a pain; here are a few specific potential concerns:
Audit provisions in P2P [private-to-private] Codes are often unrestricted in scope and lack protections for such concerns as confidentiality, waiver of attorney-client privilege, or competition-law exposure. …
Zero-tolerance prohibitions on investment in suppliers by public officials or their families are not unheard of[.]
Some P2P Codes require notification if any of the business partner’s employees or their relatives have any financial interest in the code’s sponsor — all this in this age of public companies, mutual funds and 401Ks. …
Breach of any of these unrealistic requirements could be used as grounds for a pretextual contract termination, or withholding of payment.397
9.15. Commercially-Reasonable Efforts Definition
Many business people probably think they have a pretty good idea what the term "commercially-reasonable efforts" means. In court, though, the term doesn't have a settled, standard meaning, as discussed below. This Clause therefore proposes some general guidelines to help determine what's required — and what's not required — of a party that commits to using commercially-reasonable efforts.
This Clause will apply when a party (the "obligated party") is required to use "commercially-reasonable efforts" (with or without a hyphen) to achieve a stated goal.
9.15.1.2. A prudence standard will govern.
The obligated party must make efforts that prudent people — experienced in the relevant area of business — would generally regard as constituting reasonable efforts for the circumstances in question.
Notes
We'll follow IBM's lead in defining commercially-reasonable efforts in one of its IT contracts with a state government; the contract itself defined commercially reasonable efforts (somewhat circularly) as: "taking commercially reasonable steps [sic] 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 …." 398
9.15.1.3. Certain categories of effort are not required.
For emphasis: When this Agreement requires a party to use commercially-reasonable efforts, it does not mean that the party must do any of the following things:
make any unreasonable effort;
harm the party's own lawful interests in any non-trivial way;[a]
make every possible reasonable effort;[b] nor
actually succeed in achieving the stated objective.
Subdivision a is not intended as an exhaustive list.
Notes
Here we insert some roadblocks against aggressive arguments by litigation counsel.
[a] This addresses an issue raised in a 2010 California federal-court case, where the court opined that "it is an absurdity to suggest a reasonable business entity would contractually obligate itself to operate [making commercially-reasonable efforts] without regard to its business interests."399
[b] This seeks to "write around" a seeming suggestion by Delaware's supreme court that commercially-reasonable efforts requires the making of all reasonable efforts; the Williams Cos. court reached this conclusion even though the contract elsewhere used the term reasonable best efforts — even though the contract-interpretation principle of expressio unius, exclusio alterius would have suggested that the parties intended for the two terms to have different meanings.400 • Also in Williams Cos. (in a dissent on other grounds), Chief Justice Strine opined that commercially reasonable efforts is "a comparatively strong" commitment, one that is only "slightly more limited" than best efforts.401
9.15.2.1. Why do drafters use commercially reasonable efforts?
Contract drafters often use the term commercially reasonable about, e.g., an efforts requirement:
when they don't want to take the time to negotiate a specific standard of performance, especially if their clients simply don't know what the standard should be in as-yet undetermined future circumstances;
to emphasize that the term requires what business people would regard as reasonable efforts; and
as an alternative to the stronger commitment of best efforts (see Clause 7.1).
9.15.2.2. Problem: The lack of clarity in the case law
In a 2024 Delaware case, Vice Chancellor Will noted that "there is no agreement in case law over whether [efforts clauses] create different standards. Delaware courts have viewed variations of efforts clauses—particularly those using the term 'reasonable'—as largely interchangeable."402
Likewise, a federal court in California noted that that "[t]here is no settled or universally accepted definition of the term commercially reasonable efforts."403
Similarly, the Southern District of New York — after extensively reviewing case law — remarked that "New York case law interpreting other efforts clauses, including best efforts and reasonable efforts clauses, is anything but a model of clarity."404
9.15.2.3. Would (a quick) summary judgment be available? (Maybe not.)
It will often be "a factually intense issue" whether a party has complied with an obligation to exert commercially reasonable efforts — and thus it frequently happens that a court will deny summary judgment, necessitating a costly trial, as happened in Citri-Lite, cited above, and in other cases.405
9.15.2.4. Inward vs. outward focus: A real-world example
Example: In a 2023 Seventh Circuit decision, the contract in suit provided an example of an extremely-detailed definition of "commercially reasonable efforts"; that definition focused "inward" on the buyer's own practices, as opposed to an "outward" focus on industry standards for what would be done by similarly-situated business.406
9.15.2.5. Use "comparables"? (Maybe not.)
Industry standards or other "comparables" might not be helpful: In a 2024 Delaware case, the contract in suit defined "commercially reasonable efforts" as "the exercise of such efforts and commitment of such resources by a company with substantially the same resources and expertise as [the defendant], with due regard to the nature of efforts and cost required for the undertaking at stake." Vice Chancellor Glasscock characterized this definition as "unusual" and remarked that "[a]fter trial, I find this method unworkable; no exemplar companies operate under the actual conditions of Defendants, who, I note, are also different from one another as to their circumstances."407
9.15.2.6. Pro tip: Agree to a process instead?
Outside of the context of efforts, a party seeking to prove (or disprove) the commercial reasonableness of a transaction, contract term, decision, etc., might want to focus on the process by which the transaction, etc., came into being. Example: In a 1990 decision, the Fifth Circuit remarked that "[w]here 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."408
This suggests that, when it comes to commercially-reasonable efforts, if parties can't (or don't want to take the time to) specify what outcome they want, then perhaps they could agree instead to a reasonable process that they will use later to decide what the outcome will be, such as the escalation clause at Clause 12.17.
9.15.2.7. Whose burden is it to justify a definition?
A party that sues for breach of a commercially-reasonable-efforts obligation might need to adduce specific evidence to educate the court about just what level of effort was required to meet the obligation in the particular circumstances — failing which, the court might dismiss the claim.
Example: The SDNY explained: "When the term 'commercially reasonable efforts' is not defined by the contract, courts in this district require the party seeking to enforce the efforts provision to establish the objective standard by which the breaching party's efforts are to be judged, in the context of the particular industry."409
9.16. Commissions (on sales) (rough notes)
As explained by the Texas supreme court in 2022, Texas law applies a fairly-simple rule to commission payments if the parties' contract doesn't specify otherwise:
When a seller agrees to pay sales commissions to a broker (or other agent), the parties are free to condition the obligation to pay commissions however they like.
But if their contract says nothing more than that commissions will be paid for sales, Texas contract law applies a default rule called the "procuring-cause doctrine." Under that rule, the broker is entitled to a commission when a purchaser was produced through the broker’s efforts, ready, able and willing to buy the property upon the contracted terms.410
A dissenting opinion argued that:
The Court’s adoption of this default rule [the "procuring-cause doctrine"] threatens the expectations of at-will employers and employees who have agreed to a commission structure but, for whatever reason, failed to reduce it to writing with perfect clarity.
They will be surprised to learn that, under the default rule the Court adopts today, an at-will salesperson is entitled to commissions for any sale—here, perhaps hundreds or thousands of sales—a jury determines the salesperson “set in motion.”
And they will be stunned to learn that, under the default rule, the entitlement to commissions may extend years after their employment relationship ended.411
Drafting tip: When putting together a written commission plan, consider using one or more roadblock clauses to make it abundantly clear when commissions are not owed.
Counterexample: A 2024 Fifth Circuit case involved an engagement letter between an equipment-rental company, which wanted to sell itself, and a business broker.
The engagement letter specifically stated that the company would owe the broker a commission if the company completed a sale transaction within an 18-month "tail period" after any termination of the engagement.
Due to the COVID-19 pandemic, the rental company put its sale efforts on hold and terminated the engagement letter.
A year later, the rental company re-engaged with a prospective buyer, which had previously declined to buy; this time, the prospect agreed to buy, and the sale was closed 15 months after termination of the broker's engagement — i.e., during the 18-month tail period.
The broker sued the rental company for its commission; affirming summary judgment in favor of the broker, the court held that:
Under Texas supreme court precedent, the specific 18-month tail period in the engagement letter overrode the procuring-cause doctrine under state law, which provided only a "default" (i.e., a gap-filler provision).
Consequently, said the court, the rental company did indeed owe a commission to the broker — even though the broker had not been involved with the sale transaction.412
9.17. Computer-System Access
This Clause draws on numerous online "terms of service" such as, for example, Amazon's AWS agreement (which might have changed since this writing).
9.17.1. Clause text
9.17.1.1. When would this Clause come into play?
This Clause will govern ⚠413 whenever a "User," defined below, of a party (an "Accessing Party") accesses a "Host System," also defined below, of another party (a "Host").
This Clause itself does not authorize anyone to access any Host System, but only states ground rules for any such use.
9.17.1.2. Definitions
For purposes of this Clause:
"Host System" refers to, for example, a workstation; network; email system; telephone system; or other similar system — generically, a "host system" (lower case) — maintained by or for414 a Host. (These are not exclusive examples.)
"User" refers to an individual or computer system employed by a Accessing Party (or otherwise under the Accessing Party's control) that engages in accessing (or trying to access) any Host System.415
9.17.1.3. Basically, what must the Accessing Party do?
The Accessing Party is to do the following:
See to it that the Accessing Party's Users comply with this Clause416 — this is to include, for example, appropriately instructing those Users in their obligations under this Clause; and
Defend and indemnify the Host and its Protected Group from any harm arising from use, by any of the Accessing Party's Users, of any Host System, where the use did not conform to the requirements of this Agreement (including but not limited to this Clause).
9.17.1.4. User sign-up information must be accurate.
If a User asked to provide sign-up information to a Host System, then: the User must ensure:
that any such information that the User provides417 is complete and accurate; and
that any identity-verification information submitted by or for the User is authentic (for example, proof that the User actually is who the User purports to be).
9.17.1.5. Unreasonable use is prohibited.
Each User must strictly avoid unreasonable use418 of any Host System, such as, for example, those listed at section 9.17.1.10.
9.17.1.6. Prudent malware protection is required at all time.
Each User must maintain prudent419 malware protection for any laptop, workstation, smartphone, tablet, terminal, etc., with which the User accesses any Host System.
The obligation of subdivision a is not limited to times when the User is actually accessing a Host System.420
9.17.1.7. Users must comply with other rules, too.
Each User must comply with the following at all times while accessing any Host System:421
this Clause;
Clause 22.33 (site visits), because Host-System access is considered one kind of site visit;
any other relevant provisions of this Agreement;
normal professional standards of conduct for host-system usage;
any other usage policies of the Host that get timely communicated to the User — which might happen orally and/or in writing, and maybe on an ongoing- and/or as-needed basis, instead of inundating the User with all the policies at once; and
privacy-related laws and Host rules concerning personal information accessible via any Host System.
9.17.1.8. The Host may monitor Users' access
The Accessing Party and each User are each deemed to consent to the Host's doing any and all of the following things — which would be solely for the Host's benefit:
monitoring the User's access to any Host System;
having a third party engage in such monitoring; and/or
temporarily- or permanently suspending the User's access in case of suspected- or demonstrated violation of this Clause.
9.17.1.9. Special rules for U.S. Government Users
This section applies if a User accesses a Host System in the User's capacity422 as an officer, employee, or agent of the U.S. Government.423
The Host System is made available to that User as a commercial item,commercial computer software,commercial computer software documentation, and/or technical data, as applicable, as the italicized terms are defined the Federal Acquisition Regulations (FARs) and/or the Defense Federal Acquisition Regulations (DFARs).
9.17.1.10. Appendix: Checklist of some probably-unreasonable activities
Unreasonable use of a Host System would almost certainly include any or all of the following:
deception;
defamation — commonly understood as including libel (written defamation) and slander (oral defamation);
illegal activity, including but not limited to deployment of ransomware and other theft;
infringement of others' rights, including but not limited to use or reproduction of information or other content owned by someone else without the owner's permission;
invasion of privacy, including but not limited to doxxing, that is, publicly identifying or publishing private information about (someone) especially as a form of punishment or revenge (see Merriam-Webster.com);
knowing or reckless introduction of malware, including but not limited to bots, corrupted files, crawlers, hoaxes, keystroke recorders, ransomware, Trojan horses, and viruses;
nuisiance, including but not limited to use in any manner that, in the Host's judgment, unreasonably burdened the Host System, any network associated with it, or any other network associated with the Host — this could include, for example (but not as a limitation), bandwidth usage that the Host judged to be excessive;
obscenity according to the standards in the geographic community where the User accessed the Host System;
unsolicited bulk email creation, transmission, and/or use — this particular prohibition is intended to encompass, without limitation, junk mail, "spam," and multi-level marketing ("MLM") solicitations; and/or
violation of any other acceptable-usage policy that the Host might publish from time to time — the Host would of course have to give the User and/or the Accessing Party reasonable notice if it did publish such a policy;
allowing anyone else to access the Host System using one's own access credentials;
using someone else's credentials to access the Host System;
impersonating someone else in connection with the Host System;
establishing multiple user accounts to engage in one or more prohibited;
falsely pretending to represent another individual or entity in connection with the Host System;
accessing anyone else's information stored on the Host System without proper authorization;
tracing any information about, or owned by, any other user of the Host System — this would include, without limitation, personal identifying information and financial information of other users;
engaging in spoofing, for example, disguising the origin of any transmission sent via the Host System or any network associated with it;
interfering with anyone else's use of the Host System;
selling or leasing access to the Host System;
probing or attempt to defeat or bypass security measures, access-control filters or -blocks, or other mechanisms built into the Host System to enforce limitations such as (for example) time, geography, etc.;
making, distributing copies of, or creating derivative works based on, any content, data, or other information provided via the Host System, other than: (i) the User's own content, or (ii) as expressly authorized in writing by the Host or other owner of the content;
otherwise infringing anyone else’s copyright, trademark, trade secret, or other intellectual property right in the course of using the Host System;
disassembling, decompiling, or otherwise reverse-engineering any aspect of the System;
use of a bot, screen scraper, Web crawler, or similar method to access the Host System or any content stored at the Host System, or otherwise accessing the Host System using any method other than the user interface provided by the Host;
use of the Host System for high-risk activities — such as, without limitation, the operation of nuclear facilities, air traffic control, life-support systems, and/or the sole delivery of emergency communications — where the use, or failure, of the Host System could lead to death, personal injury, or environmental damage;
attempting to do something prohibited by this Agreement, whether or not the attempt is successful;
inducing, soliciting, allowing, or knowingly helping anyone else to do something prohibited by this Agreement, whether for the User's own benefit or otherwise.
A covenant is an agreement to act or refrain from acting in a certain way. A breached covenant gives rise to a cause of action for damages, and a material breach excuses the other party from performance. It is a fundamental principle of contract law that when one party to a contract commits a material breach of that contract, the other party is discharged or excused from further performance.
By contrast, a condition precedent is an event that must happen or be performed before a right can accrue to enforce an obligation, and if an express condition is not satisfied, then the party whose performance is conditioned is excused from any obligation to perform.424
10.2. Confidential Information
Many contract professionals would agree that among the most-used types of contract, confidentiality agreements — a.k.a. "nondisclosure agreements"† [sic], commonly referred to as "NDAs" — rank near the top. That's likely because many businesses regularly exchange confidential information: and as discussed at 10.2.1.17, without a confidentiality agreement in place, such an exchange could destroy any trade-secret rights available for the information. Moreover, quite a few other types of contract include provisions requiring one or both parties to maintain the confidentiality of another party's information.
† The name "nondisclosure agreement" is a bit misleading because NDAs almost invariably include nonuse obligations as well as other prohibitions and restrictions.
10.2.1.1. "Recipient": Which party will have confidentiality obligations?
The confidentiality obligations of this Clause will bind each "Recipient"; that term refers to any party to this Agreement that:
has clearly agreed — which could be in this Agreement itself, or otherwise ⚠🔑425 — to abide by the confidentiality obligations of this Agreement for Confidential Information of a "Discloser,"426 defined below; and
accesses such Confidential Information in connection with this Agreement.
If this Agreement states that each party is a Recipient, then: By entering into this Agreement, each party has clearly agreed as provided in subdivision a.1 above.
10.2.1.2. "Discloser": Which party's information is potentially protectable?
The term "Discloser" refers to is protected under this Clause; that term refers to each other party to this Agreement with respect to the Recipient(s) as defined above
10.2.1.3. "Confidential Information": What could qualify?
The term "Confidential Information" refers to any information427 where all of the following are true:428
the information has been, and continues to be, the subject of reasonable measures ⚠429 by the Discloser to keep the information secret;
the information was initially made available to the Recipient during the "Disclosure Term," defined below;
the information was initially made available to the Recipient under this Agreement, as opposed to in the course of other business dealings between the Discloser and the Recipient;435 and
the information is not within one or more of the exclusions below (beginning at section 10.2.1.12).
10.2.1.4. "Disclosure Term": Time-wise, which disclosures are protected?
For particular Discloser information to be protectable under this Clause, the information must be initially made accessible to the Recipient during the "Disclosure Term," which:
begins upon the effective date of this Agreement — which could be before the effective date of this Agreement if this Agreement states that the parties are confirming a prior confidentiality agreement, for example, an oral agreement;(10.2.5.1) and
10.2.1.5. Should the Recipient alert the Discloser about possible exclusions?
In the interest of professional comity, the Recipient shouldconsider promptly advising the Discloser437 if the Recipient believes that it does not have to follow this Clause for particular Discloser information, for example:
because the information supposedly was not marked as confidential; and/or
because the information arguably comes within within one or more of the exclusions from Confidential Information status in this Clause.
10.2.1.6. Marked information is presumed to be confidential
If the Recipient gains access to particular Discloser information that is marked, ⚠438 with appropriate prominence,439 as confidential, then the Recipient is to provisionally treat the information as Confidential Information until such time (if any) as proved otherwise.
10.2.1.7. Catch-up marking is allowed (within limits)
This section applies if the Discloser gives the Recipient access to unmarked information440 that the Discloser later wants to mark as Confidential Information.
The Discloser has the option of retroactively marking the unmarked information as Confidential Information by doing the following:
providing the Recipient with a marked written version of the information (this could be a reasonably-detailed written summary); and
giving notice441 to the Recipient that the Discloser has sent the marked written version.
To be effective for retroactive marking, the Discloser's notice of it must be effective no later than:
a reasonable time after the unmarked disclosure; or
if after that time: before the Recipient has reasonably relied on the previous lack of marking.
10.2.1.8. Other information is also presumed confidential
The Recipient is likewise to treat particular information of the Discloser as provisionally being Confidential Information if one or more of the following is true:
the Recipient initially gained access to the information in one or more of the Discloser's own files442 (hard copy, digital, or otherwise); and/or
reasonable people in the relevant trade or business443 would recognize the information as likely to be confidential.
10.2.1.9. Other parties' information can be confidential
If the Discloser gives the Recipient access to particular information of third parties (including but not limited to information of Discloser affiliates), then: The Recipient is to treat that information as Confidential Information if both of the following are the case:
the information appears as though it might be otherwise eligible under this Clause; and
the information is marked, with reasonable prominence, as being confidential — this is to help ensure that the Recipient and its people are alerted about their obligations for the non-Discloser information.444
10.2.1.10. What if a third party objects to disclosure of its information?
If the Discloser provides confidential information of any third party to the Recipient without that third party's authorization, then: The Discloser will defend and indemnify the Recipient and its Protected Group against any resulting claim by that third party.446
10.2.1.11. "Secret sauce" as Confidential Information
When otherwise eligible, particular selections and/or combinations of items of Discloser information can qualify as Confidential Information — even if one or more of the individual items (or even each of them) are within one or more of the exclusion categories of this Clause.(10.2.4.4)
10.2.1.12. Exclusion: Information previously possessed
The term Confidential Information does not include informa tion that was in the Recipient's possession before the Recipient gained access to it via the Discloser.
If the Recipient asserts this exclusion, the weight to be given to the assertion is to take into account the extent to which statements by interested witnesses are independently corroborated. 🔑447(10.2.6.5)
10.2.1.13. Exclusion: Information published, etc.
The term Confidential Information does not include information that is, or becomes, patented, published,(10.2.4.3)448 or otherwise publicly available.
A reminder: The term "public domain" is not a synonym for "publicly available." ⚠449
10.2.1.14. Exclusion: Readily-ascertainable information
The term Confidential Information does not include450 information that is generally known or readily ascertainable — without the use of improper means451 — by persons within the circles452 that normally deal with the kind of information in question. ⚠453
10.2.1.15. Exclusion: Information from a third party
The term Confidential Information does not include information provided to the Recipient by a third party, as long as in doing so, the third party does not violate an obligation of confidence that benefits the Discloser. ⚠454
10.2.1.16. Exclusion: Independently-developed information
The term Confidential Information does not include information independently developed by the Recipient without use of Confidential Information.
If the Recipient asserts this exclusion, the weight to be given to the assertion is to take into account any evidence that independently corroborates any statements by interested witnesses. ⚠455
10.2.1.17. Exclusion: Freely-disclosed information
Confidential Information does not include information that the Discloser makes available to one or more others without restrictions that are comparable to those of this Agreement. ⚠456
10.2.1.18. Exclusion: Toolkit Items
Unless this Agreement clearly states otherwise, the Recipient's obligations under this Clause concerning the Discloser's Confidential Information do not extend to any concept, idea, invention, strategy, procedure, architecture, or other work (collectively, "Toolkit Item"), where all of the following are true:457
the Toolkit Item was wholly- or partly created by or for the Recipient while working with the Discloser's Confidential Information; but
the Toolkit Item is not specific, nor unique, to the Discloser and its business; and
the Toolkit Item itself does not include, nor otherwise reveal or clearly suggest, the Discloser's Confidential Information.
10.2.1.19. Exclusion: General knowledge & skills
This exclusion458 will apply to the Recipient's people who:
access Confidential Information under this Agreement; and
improve their general knowledge, skills, and experience, in the general field(s) of the Confidential Information or otherwise, as a result of their exposure to that information.
The Recipient's obligations under this Clause do not require the Recipient to limit what those people do in their jobs. ⚠459
10.2.1.20. Is subpoenaed information excluded?
A reminder: Information is not considered to be within the scope of any of the exclusions above just because the information was sought by someone in a subpoena, search warrant, etc. — that possibility is addressed at section 10.2.1.28.460
10.2.1.21. What secrecy measures must the Recipient take?
The Recipient must take at least prudent measures429 to preserve the secrecy of Confidential Information within the Recipient's possession, custody, or control.461
The Recipient's measures might not be considered prudent if not at least as protective as the measures that the Recipient uses for its own confidential information of comparable significance.462
10.2.1.22. What must the Recipient not do with Confidential Information?
Except as clearly agreed by the Discloser, the Recipient must not do any of the following:
use Confidential Information;
disclose Confidential Information to others;
reproduce Confidential Information;
translate Confidential Information;
reverse-engineer Confidential Information or use it in reverse-engineering anything else — this is intended as a WAIVER of any right that the Recipient might otherwise have by law to engage in reverse engineering;(21.20)
remove the Discloser's confidentiality markings (if any);
attempt to do anything listed in any of subdivisions 1 through 6; nor
authorize or knowingly help anyone else to do anything listed in subdivisions 1 through 7 above.
10.2.1.23. What about derivatives of Confidential Information?
The Recipient is to treat "derivatives" of Confidential Information as being subject to the same Confidentiality Obligations above as is Confidential Information.
Here, the term derivatives refers to things such as the following when: (i) they contain or are based on Confidential Information, and (ii) are prepared by, for, or on behalf of, the Recipient:
analyses;
compilations;
forecasts;
interpretations;
notes;
reports;
studies;
summaries;
and similar materials.
10.2.1.24. When would the Recipient's confidentiality obligations expire?
The Recipient's Confidentiality Obligations above will not expire(10.2.4.5) for Confidential Information that qualifies as a "trade secret" (as defined in the U.S. Defend Trade Secrets Act) where, before expiration, the Discloser provides the Recipient with a writing that — with reasonable prominence – designates the information in question as being a trade secret.
For Confidential Information that does not qualify as a trade secret:463 The Recipient's Confidentiality Obligations will expire three years464 after the end of the Disclosure Term. ⚠465
10.2.1.25. How may the Recipient use Confidential Information?
This Clause does not prohibit466 the Recipient from using Confidential Information — subject to the limitations in this Clause and any other such limitations in this Agreement and/or the law — as reasonably necessary for any or all of the following purposes:467
assessing whether to enter into another agreement with the Discloser;
performing the Recipient's obligations, and/or exercising the Recipient's rights, under this Agreement;468 and/or
any other purpose specified by this Agreement or otherwise agreed in writing by the Discloser. ⚠469
10.2.1.26. Preauthorized disclosures: To employees, etc.
This Clause does not prohibit466 the Recipient from disclosing Confidential Information to the Recipient's employees, officers, directors, and other individuals holding comparable positions in non-corporate organizations (collectively, "individuals") as stated in this section.
Each such individual must be bound by legally-enforceable confidentiality obligations — in a written agreement, or otherwise470 — that cover the Confidential Information in question.
Each such disclosure must be on a need-to-know basis in connection with an authorized use, disclosure, or translation of the Confidential Information.
The Recipient is to cause each such individual to be appropriately instructed about the confidentiality obligations attached to the Confidential Information.
10.2.1.27. Legally-immune disclosures are OK
This Clause does not prohibit466 the Recipient from disclosing Confidential Information if the disclosure falls in one of the categories of limited disclosure to law enforcement, government officials, etc., that is immune from liability under, and/or expressly authorized by, the Defend Trade Secrets Act, at Title 18, Section 1833(b) of the United States Code. 🔑471
This Clause does not prohibit466 the Recipient from disclosing Confidential Information, in a strictly-limited way, in response to compulsory legal process — for example, a subpoena or search warrant, where noncompliance could result in adverse action such as jailing — as long as the Recipient complies with this section.
The Recipient must alert the Discloser immediately upon being served with the compulsory legal process — except that the Recipient may exercise discretion about whether and when to do so:
if law enforcement asks the Recipient not to do so; and/or
if alerting the Discloser would violate applicable law.
If the Recipient does alert the Discloser, then — only to the extent that the Discloser asks — the Recipient is to provide reasonable cooperation473 with any efforts by the Discloser to limit or otherwise seek protection for such compulsory disclosures.
Whether or not the Recipient alerts the Discloser, the Recipient is not to disclose more Confidential Information than the minimum required by the compulsory legal process.
For emphasis: This Clause does not authorize the Recipient to make non-compulsory disclosures of Confidential Information, for example in public filings with the Securities and Exchange Commission (SEC).474
10.2.1.29. Pre-authorized copies and translations
The Recipient may make copies and/or translations of Confidential Information (or have them made475 by contractors under suitable obligations of confidence) as follows:
copies and translations of Confidential Information to the extent reasonably necessary for authorized uses and disclosures;
archive copies of Confidential Information in accordance with Clause 4.6; and
normal IT backup copies of electronically-stored Confidential Information.
All copies and translations of Confidential Information made by or for the Recipient must reproduce the Discloser's confidentiality markings (if any) contained in or on the Disclosure source document(s) being copied and/or translated.
Hypothetical example A: (12.20.2)Situation: The Recipient makes a copy of only a portion of a Discloser source document; that document contains a confidentiality marking at the beginning. Action required: The Recipient must ensure that the copy has the same marking.
Hypothetical example B: Situation: The Recipient then causes the copied portion to be translated into French. Action required: The Recipient must ensure that the translation includes the same marking, also translated into French.
10.2.1.30. Required: Recipient's compliance with law
In all of the Recipient's activities involving Confidential Information, the Recipient must comply with applicable law, including but not limited to laws concerning privacy; export controls; and insider trading.476
For emphasis: The Recipient's obligations under this section 10.2.1.30 will not expire.
10.2.1.31. When will these use rights, etc., expire?
Except as clearly provided otherwise in this Clause, the Recipient's permissions under this Clause concerning Confidential Information will apply only during the term of this Agreement.477
10.2.1.32. Indemnity & release: What if the Recipient's activities lead to trouble?
The Recipient must defend and indemnify the Discloser and its Protected Group against any harm — and the Recipient hereby RELEASES the same parties from any liability for any harm — where the harm is alleged to arise from any activity under this Clause by the Recipient and/or anyone to whom the Recipient makes Confidential Information available.478
The Recipient's obligation and release under this section 10.2.1.32 will not expire.
10.2.1.33. Must the parties keep their dealings secret?
The fact, status, and financial terms of the parties' business together are the Confidential Information of each party, ⚠479 when not publicly disclosed or otherwise ineligible — even if only one party is designated in this Agreement as the Discloser.
But: To preserve the parties' general business flexibility, each party may disclose to others ⚠480 that it has entered into an unspecified agreement with the other party that includes confidentiality provisions — but only if each such disclosure:
is commercially reasonable; and
is on a one-by-one basis and not in a general- or public announcement.
For emphasis: Any party may disclose information about the parties' dealings together:
if all relevant parties consent; and/or
if the law requires or explicitly permits such disclosure.481
10.2.2.1. Option: Return or Destruction (Upon Request)
This Option will apply if the Discloser requests (in writing) the return or destruction ⚠482 of Confidential Information within a reasonable period after termination or expiration of this Agreement.
The Recipient, though, need not return or destroy emails, text messages, and similar messages containing Confidential Information — but see paragraph 6 below for an exception to this exception.483
The Recipient need not return or destroy electronic backup copies containing Confidential Information, created as part of the Recipient's commercially-reasonable regular practice — but see paragraph 6 below for an exception to this exception.484
The Recipient need not return or destroy archive copies containing Confidential Information, as long as those copies are retained in strict confidence and used only for archival purposes485 as stated at Clause 4.6 — but see paragraph 6 below for an exception to this exception.
The above exceptions to this Option's return-or-destroy requirement do not apply — other than as stated in section 7 below — if the Recipient is an employee or individual contractor of the Discloser.486
Even if the Recipient is an employee or contractor of the Discloser, the Recipient need not return or destroy copies containing Confidential Information that are retained solely for the purpose of:
reasonably-anticipated disclosure permitted by law under Clause 10.2.1.27; and/or
disclosure in response to a then-pending compulsory legal process under Clause 10.2.1.28.
For any copies not returned or destroyed, the Recipient must continue to comply with the confidentiality obligations of this Agreement until such time — if any — as those obligations no longer apply.(10.2.1.24)
If the Discloser so requests in writing within a reasonable time after the return-or-destruction request, then the Recipient is to promptly provide the Discloser with a written certificate ⚠487 of the Recipient's compliance with this Option — noting any known areas of noncompliance.
10.2.2.2. Option: Required Recipient Cooperation
This Option will apply — if and as requested by the Discloser488 — if there has been a possible unauthorized use and/or disclosure of particular Confidential Information to which the Recipient had access.
Upon request, the Recipient is to provide reasonable assistance489 to the Discloser and/or the Discloser's counsel in identifying, and/or taking legal action concerning, the unauthorized use and/or disclosure.
In providing such assistance, the Recipient is to follow the (lawful) directions of the Discloser and/or the Discloser's counsel.
But: In deciding what it will do to provide such assistance, the Recipient may take into account (without limitation) any applicable attorney-client privilege to which the Recipient is entitled
On its own, the Recipient is not to take any action under paragraph 1 against a third party — other than the Recipient's own employees and contractors490 — unless the Discloser specifically so requests.
10.2.2.3. Option: Recipient's Responsibility for Third-Party Actions with Confidential Information
This Option will be triggered if both of the following are true:
A third party obtains or otherwise accesses Confidential Information as part of the Recipient's relationship with the third party; and
the third party uses, discloses, and/or copies Confidential Information in a manner not permitted by this Agreement.
The Recipient must defend and indemnify the Disloser and its Protected Group from any third-party claim, or other harm to their respective interests, arising from the third party's action, to the same extent as would apply to the Recipient's own use, disclosure, or copying of the Confidential Information.491
For purposes of this Option, the term third party includes, without limitation, the Recipient's current- and former employees.492
10.2.2.4. Option: Restraining Order Against Breach
The Discloser may seek493 a restraining order494 against unauthorized use or disclosure of Confidential Information in accordance with applicable law.
The Recipient must promptly alert the Discloser to any potential unauthorized use or disclosure of Confidential Information of which the Recipient becomes aware, even if the Recipient is actually, potentially, or arguably at fault.495
For emphasis: This Option would require the Recipient to report suspected activity by one or more of:
the Recipient itself;
one or more Recipient's employees, whether or not in the scope of their employment; and/or
any other party to which the Recipient provides Confidential Information, whether or not as authorized by this Agreement.
10.2.2.6. Option: Written Confidentiality Agreements
This Option will apply, at the Discloser's request, if the Recipient provides Confidential Information to any person (including but not limited to the Recipient's employees) (the "Downstream Recipient").
The Recipient and the Downstream Recipient must enter into a written confidentiality agreement496 in which both of the following are clearly stated:
the Downstream Recipient commits to complying with the same confidentiality obligations as apply to the Recipient under this Agreement; and
the Discloser is a named third-party beneficiary of that confidentiality agreement.
10.2.2.7. Option: Copies of Confidentiality Agreements
This Option will apply, at the Discloser's request, if the Recipient provides Confidential Information to any individual and/or organization ("other person") to which the Recipient make Confidential Information available.
The Recipient must obtain — and provide the Discloser with a copy of — a signed written confidentiality agreement between the Recipient and each such individual or organization. ⚠497
Each such agreement must obligate the other person in substantially the same way as the Recipient is obligated under this Agreement.
The copy of the agreement provided to the Discloser may be redacted — to a reasonable extent498 — so that the Discloser will not have access to confidential information of the Recipient and/or of the other person.
The parties are to escalate any persistent disagreement about redactions if any party asks.
10.2.2.8. Option: Confidential Information Segregation
The Recipient must keep Confidential Information reasonably segregated from other information, if and when the Discloser so requests in writing with regard to that information, with a view to:
providing additional secrecy protection, and
facilitating any return or destruction that might be required by this Agreement (if any).499
This Option will apply at any time that the Recipient has, or might have, Confidential Information in its possession.
The Recipient must allow the Discloser to cause reasonable inspections ⚠500 of the Recipient's relevant properties and premises (tangible, electronic, and otherwise) to be conducted from time to time.
In case of doubt, the Discloser must use any such inspection (and allow it to be used) for no other purpose than to confirm that the Recipient is complying with its confidentiality obligations under this Agreement.
The following additional terms would also govern any such inspection, to the extent applicable:
Clause 15.14 (general rules for inspections, including reasonable-notice requirements); and
Clause 9.17 (general rules for computer-system access).
The Recipient is to include appropriate flow-down provisions501 for this Option in any agreement under which the Recipient makes Confidential Information accessible by a third party.
the Recipient's use of Confidential Information, and/or
the Recipient's disclosure of Confidential Information to other parties.
For emphasis: The Recipient's obligations under paragraph 1 apply whether or the Recipient's relevant use and/or disclosure of Confidential Information was of a kind contemplated by this Agreement.
10.2.3.1. Option: Discloser Representation of Secrecy
The Discloser represents🔑505 that the Discloser has not made any Confidential Information available to any third party without confidentiality obligations substantially the same as those of this Agreement.506
10.2.3.2. Option: Recipient Disclosure to Prospective Acquirer
This Option will apply if the Recipient contemplates507 engaging in a merger, spin-off, or similar "Transaction.".508
The Recipient may disclose Confidential Information to one or more "Transaction Prospects," in accordance with this Option, as follows:
a prospective acquirer of substantially all assets of (i) the Recipient's business as a whole, or (ii) the portions of the Recipient's business to which this Agreement relates;
a prospective acquirer of substantially all of the Recipient's shares — if the Recipient is a corporation or similar organization having shares — or of equivalent ownership interest under applicable law, if the Recipient is an organization that does not have shares; and/or
a party (or an affiliate509 of a party) with which the Recipient anticipates engaging in a merger, or similar transaction.
As long as this Option is complied with, the Recipient and/or any of the Transaction Prospect(s) may provide the Discloser's Confidential Information to the following if they qualify under paragraph 2:
employees, bd-defn members, attorneys, accountants, and other professional advisers — these categories of individuals are referred to generically for convenience as "Advisers" — of the Recipient; and
But: Neither the Recipient nor the Transaction Prospect may disclose Confidential Information to an Adviser unless, in each case:
the Adviser has a legitimate need to know in connection with the possible transaction; and
each Adviser has a legal duty — by contract, or as a matter of law or comparable professional governance standards,511 e.g., in an attorney-client relationship with the possibility of disbarment — to preserve the information in confidence in accordance with this Option.
The Transaction Prospect must agree with the Recipient, in writing, to comply with this Option concerning the Discloser's Confidential Information.
If the Discloser asks, the Recipient is to promptly provide the Discloser with a copy of the signed confidentiality agreement between the Recipient and the Transaction Prospect.
The copy provided to the Discloser may be reasonably redacted to delete or conceal information that does not concern the Transaction Prospect's confidentiality obligations that would benefit the Discloser.
The Recipient is to make sure that any disclosure to a Transaction Prospect or its Advisers under this Option is done in one or more secure physical- and/or online data rooms.512
Each data room must be under the Recipient's control.
Unless the Discloser gives its prior written consent, the Recipient must take prudent measures to keep the Transaction Prospect (and the Recipient's and Transaction Prospect's respective Advisers) from:
making copies513 of the Discloser's Confidential Information, and/or
providing Confidential Information to others not authorized by this Agreement.
Neither the Recipient nor the Transaction Prospect are required to inform the Discloser:
The Discloser must preserve in strict confidence — and neither use nor disclose — non-public information that the Discloser obtains about the discussions between the Recipient and the Transaction Prospect.
The Discloser may, however, provide information about the possible transaction:
to others, without restriction, to the extent (if any) that the provided information has been publicly announced by either the Recipient or the Transaction Prospect; and
to the Discloser's own Advisers, under the same restrictions as the Discloser's information may be provided to Advisors of the Recipient and/or of the Transaction Prospect (except that a data room need not be used).
10.2.3.3. Option: Disclosure for Use by Recipient Contractors
The Recipient may disclose Confidential Information to the Recipient's suppliers and contractors,515but only where all of the following are true:
the disclosure must be solely for use by the supplier or contractor for the Recipient's direct benefit;516
the Recipient must first obtain a written confidentiality agreement from the relevant supplier or contractor; and
that confidentiality agreement must contain confidentiality provisions — expressly benefiting the Discloser — that are substantially identical to those of Clause 10.2.
The Recipient may include Confidential Information in a legally-required submission to a regulatory agency or other governmental body, but only as stated in this Option. ⚠517
Before any public-filing disclosure under this Option, the Recipient will first consult with the Discloser,518 early enough to give the Discloser a reasonable opportunity to seek an order for confidential treatment or comparable relief.
At the Discloser's request, the Recipient will cooperate any efforts by the Discloser to limit the disclosure, and/or to obtain legal protection for the information to be disclosed, in the same manner as if the proposed disclosure were in response to a compulsory legal demand as provided in 10.2.1.28 (subpoenas, etc.).519
If so requested by the Discloser, the Recipient will reimburse the Discloser for reasonable expenses incurred by the Discloser in any efforts under section 1.
The Recipient must not disclose more Confidential Information in a public-filing disclosure than is required to comply with the law.
10.2.3.5. Option: Recipient's Post-Term Residuals Rights
The Recipient will not be liable to the Discloser ⚠520 under this Clause (for compensation or otherwise) if the Recipient makes unaided use of Confidential Information "residuals," defined below, as stated in this Option.521
The Recipient shouldconsiderconsulting with the Discloser522 about any proposed reliance on this Option by the Recipient.
In this context, the term "residuals" refers to ideas, concepts, know-how, techniques, and similar information, where each of the following523 is shown by clear and convincing evidence (defined at Clause 9.11):
the information was retained in the unaided memory of one or more of the Recipient's people;524 and
none of those people intentionally memorized the information for that purpose. ⚠525
The parties desire that this Option be interpreted narrowly, ⚠526 because it is intended only to mitigate the potential for costly and time-consuming disputes that could arise from inadvertent breach of the Recipient's confidentiality obligations under this Agreement.
Reminders:
This Option does not relax any restriction of this Agreement on the Recipient's disclosure of Confidential Information.
Nor does this Option give the Recipient any license under any patent or other intellectual property right of the Discloser.
10.2.4.1. "Trade secrets" vs. "ordinary" Confidential Information
a. In the U.S., a "trade secret" is particular confidential information that derives independent economic value from secrecy; this is provided in both:
b. In court, the Discloser would likely have to prove the economic value of its alleged trade secrets, and that the value came from the secrecy of the information in question. Example: In Synopsys (2023), the Fourth Circuit held that "part of [the plaintiff's] obligation was to come forward with evidence that its seventy-five alleged trade secrets had value because they remain secret. Proof of value untethered to value derived from secrecy does not show an alleged trade secret’s independent economic value."527
c. In the U.S., various statutory remedies are available to possessors of "trade secrets" under the laws cited just above.
d. Drafters should keep in mind that "Confidential Information" can encompass more than just "trade secrets" that provide economic advantage. Example: In a 2020 decision, the Northern District of California noted that "a defendant may breach a contract for disclosing confidential information that does not constitute a trade secret."528
e. Here's an edge case: If information has no economic value unless it becomes public, then the information can't be a trade secret — so held the court in Novus Group (2022), where a company tried unsuccessfully to claim trade-secret protection for a contractual addendum (or "rider") that could be added to a standard annuity agreement to provide enhanced wealth-transfer benefits to the purchaser of the annuity.529
f. Tangentially: Two leading IP scholars have argued that "[a] company can 'abandon' its trade secrets by failing to derive economic value from keeping them secret"; in such a case, conceivably information could lose its trade-secret status but still remain Confidential Information.530
10.2.4.2. Negative know-how can qualify
Negative know-how can be Confidential Information. The concept was pithily summarized up by legendary inventor Thomas Edison, who is widely quoted as having said, "I have not failed. I've just found 10,000 ways that won't work." That kind of knowledge could have economic value and thus could be a trade secret if maintained in confidence.
But: Negative know-how is one of those areas where proof of secrecy and value of the negative know-how itself will be especially important. Example: In a 2020 decision, a federal district judge in New York City observed (arguably in a nonbinding dictum) that "[i]t is difficult to see how negative trade secrets consisting of unsuccessful efforts to develop trade secrets and experimental dead ends can have independent economic value when the end result of the process, the positive trade secrets, have in fact been uncovered."531
10.2.4.3. Publicly-available information doesn't qualify
Publication — of which patenting is one form — is one way in which allegedly-confidential information can be conclusively disqualified from confidentiality status. As the SDNY noted: "It is axiomatic that a plaintiff cannot recover for the misappropriation of a trade secret if he revealed that secret in a published patent or patent application."532
b. Likewise, when computer-program source code is part of a U.S. copyright registration filing, the code (generally) is publicly available from the Copyright Office and so cannot be a trade secret.533
c. But: The fact that information is included in a publication known to those who work in one particular field won't necessarily destroy the information's trade-secret status in "an entirely different field from the one to which the publication was addressed."534
10.2.4.4. "Secret sauce" as confidential information: Coca-Cola, KFC, etc.
Concerning section 10.2.1.11: You're doubtless familiar with the notion of "secret sauce," i.e., a secret selection and/or combination of known "ingredients"; here are a couple of well-known examples:
• There's the formula for making Coca-Cola — although that's been described as largely a marketing strategy: According to a former Pepsi CEO's memoir, supposedly the company's food chemists were readily able to reverse-engineer the formula; Pepsi's then-CEO claimed that it took the company's food chemists only a week to reverse-engineer the Coke formula and produce a drink that was essentially identical to The Real Thing.535
• Consider the Kentucky Fried Chicken "secret blend" of 11 herbs and spices: That's also perhaps mainly a marketing strategy (supposedly, the key ingredient is white pepper).
But "secret sauce" can be more than just a marketing strategy: A number of courts have held that secret selections and combinations of non-secret information can be eligible for trade-secret protection. Here are a few examples:
• Insurance policyholder data, compiled into a spreadsheet;536
• Proprietary flowcharts showing publicly-available information in a useful form;537
• Meat-packing information, commonly-known but selected and compiled;538
• A "winning combination" of known, generic software programs.539
10.2.4.5. Expiration date for confidentiality obligations?
Section 10.2.1.24 is a "sunset" provision that tries to compromise between the parties interests:
A Recipient, for its own business efficiency, will likely want to have a "sunset" for its confidentiality obligations. That way, after the sunset date, the Recipient can relax about whether particular "ordinary" confidential information is still subject to such obligations, because it won't have to think about the question.
The Discloser, on the other hand, is likely to balk at expiration. That's because, if an NDA allowed confidentiality obligations to expire, it would likely destroy the Discloser's legal rights in any trade secrets that the Discloser had provided under the NDA, i.e., information that gave the Discloser an economic advantage from its secrecy. That could be a serious concern.
Example:BladeRoom (9th Cir 2021): In a case peripherally involving Facebook, the court reversed a trial-court's judgment awarding $30 million for breach of an NDA because the NDA's confidentiality obligations had unambiguously ended due to a "sunset" two years after NDA was signed.540
Example: The SDNY once noted that: "Once a third party's confidentiality obligation … expires, so does the trade secret protection."541
10.2.4.6. Compromise: No expiration for trade secrets
Let's split the difference: The trade-secrets exception, at section 10.2.4.5, gives the Discloser a reasonable opportunity to exclude valuable information from the expiration of the Recipient's confidentiality obligations.
This written-designation requirement is informed by "a growing body of law [that] requir[es] the trade secret plaintiff to identify its alleged trade secrets with reasonable particularity in an initial trade secret disclosure statement before the defendant is required to respond to plaintiff’s trade secret-related discovery requests."542
Of course, for both trade secrets and other Confidential Information, Recipient's confidentiality obligations would automatically end if, at any time, the information in question were shown to come with one of the Confidential Information exclusion categories at Clause 10.2.
10.2.4.7.Perpetual confidentiality obligations might be unenforceable
In contrast, a Discloser might well want confidentiality obligations to last indefinitely. But the law might invalidate perpetual confidentiality obligations — at least for non-trade-secret confidential information; this happened to Facebook-related company Meta Platforms in Bright Data (N.D. Cal. 2024).543
10.2.5.1. Confirm a previous oral confidentiality agreement?
A drafter could adjust the start date of the Disclosure Term to take into account that the parties might want to have written confidentiality obligations to cover information that one or more of them (hypothetically) disclosed earlier under an oral confidentiality agreement. When that's the case, it's useful to be clear that such earlier-disclosed information is considered covered by the written NDA, to reduce the chances of "misunderstanding" later.
(Catch-up written agreements of this kind are sometimes referred to by the Latin phrase nunc pro tunc, "now for then.")
A written catch-up agreement can address this problem: If, say, the Discloser later had to sue the Recipient for breaching the (alleged) oral confidentiality agreement, then the Discloser's success would depend on whether the judge and/or jury believed the Discloser's witness(es) that the Recipient had indeed orally agreed to keep the Discloser's information confidential.
And the details of the oral agreement are likely to matter. Example: In Pauwels (2023), the Second Circuit didn't regard an oral agreement as sufficiently robust to protect the alleged confidential information, describing the oral agreement as being "at most an informal understanding among [the parties]."544
So the Discloser's drafter might want to include language in this Agreement along the following lines:
This Agreement is being signed on the date(s) indicated in the signature blocks, but it will be effective as of [INSERT DATE]; the parties intend that this Agreement will confirm, and replace, an oral confidentiality agreement entered into by the parties during discussions on or about that date.
Caution: In some circumstances, falsely stating the signature dates of a contract (as opposed to the contract's effective date) could be problematic, and even lead to prison time.(6.1.2)
10.2.5.2. Discloser Rule: Tell employees about their whistleblower rights – and don't ask them to waive those rights
Section 10.2.1.27 addresses the Recipient's possible need to disclose Confidential Information in either of the following situations:
the disclosure falls in one of the categories of disclosure that is immune from liability under, and/or expressly authorized by, the Defend Trade Secrets Act, Title 18, Section 1833(b) of the United States Code; and/or
the disclosure is affirmatively authorized by law or regulation, for example applicable labor- or employment law — including the law in a growing number of states, especially in the wake of the #MeToo movement, as summarized in a 2021 law-firm article.545
b. Caution: In employment-related agreements, the (U.S.) National Labor Relations Board (NLRB or "Board") has been known to be hostile to language that could be interpreted as insufficiently explaining to employees their right to engage in concerted action under the National Labor Relations Act, as seen in a 2019 Advice Memorandum from the Board's general counsel, concerning a non-disparagement clause in a law firm's employment agreement.546
Likewise, the Board has traditionally been hostile to contractual confidentiality restrictions that purport to limit employees' discussions of wages and working conditions; see, e.g., Long Island Assoc. for AIDS Care (2017), in which the Second Circuit afirmed the Board's ruling on that point.547
An undated Board Web page states:
Under the National Labor Relations Act (NLRA or the Act), employees have the right to communicate with their coworkers about their wages, as well as with labor organizations, worker centers, the media, and the public. Wages are a vital term and condition of employment, and discussions of wages are often preliminary to organizing or other actions for mutual aid or protection.548
And in recent years with Democratic majorities on the NLRB, the Board has taken the position that:
[under] the Board’s recent decision in McLaren Macomb, … the Board returned to longstanding precedent holding that employers violate the National Labor Relations Act when they offer employees severance agreements that require employees to broadly waive their rights under the Act. … [S]everance agreement provisions that could violate the Act if proffered, maintained, or enforced, includ[e] confidentiality, non-disclosure, and non-disparagement, among others.549
c. The Federal Trade Commission's antitrust lawyers aren't letting the NLRB have all the fun: In a 2023 announcement, the FTC's Bureau of Competition warned that it regarded confidentiality agreements and employer-notification requirements as "imped[ing] Bureau investigations" and so "are contrary to public policy and therefore unenforceable." The announcement explained:
Although exact terms vary, the following general types of contract provisions can impede Bureau investigations:
confidentiality agreements,
nondisclosure agreements, and
notice-of-agency-contact provisions. …
The exact terms and conditions may vary, but these restrictions and requirements can all have the same chilling effect on individuals’ willingness to speak voluntarily with Bureau staff. That chilling effect impedes the Federal Trade Commission’s ability to carry out its statutory mandate.
Federal Trade Commission, Bureau of Competition, Contracts That Impede Bureau of Competition Investigations 1, 2 (FTC.gov June 15, 2023) (extra paragraphing and bullets added).
It might not be enough for a contract to include a disclaimer: In 2023, the SEC also announced that it had settled civil charges against Monolith Resources, LLC for using a form of separation that:
… stated that "nothing in this agreement is intended to limit in any way your right or ability to file a charge or claim with any federal, state, or local agency," but the agreement also took away an employee’s right to recover a monetary award for filing a claim with, or participating in an investigation or action by, a governmental agency.
(Emphasis added.) Without admitting liability, Monolith consented to the entry of a cease-and-desist order and agreed to pay a civil penalty of $225,000.
e. Note that in the U.S., an online service provider's disclosure of non-content customer information to legal authorities could be immune from liability under 18 U.S.C. § 2703(e) no matter what the contract's confidentiality provisions might say.
10.2.5.3. Pro tip: Asking for an NDA might scare a recipient
Depending on the circumstances, the business benefit of asking another party for an NDA might be outweighed by the risk that the other party might be scared off by the request, out of concern that the NDA would give the first party a weapon with which to sue the other party — triggering the expense and burden of litigation and the risk of making a bad impression on a jury — if the relationship were to go south.
Example: In Celeritas Technologies, a federal-court jury in Los Angeles awarded a one-man startup company more than $110 million (in 2024 dollars) against aerospace conglomerate Rockwell International for breaching a confidentiality agreement that had been entered into to discuss a possible royalty-bearing license. • Rockwell's position was that the startup company's technology consisted of well-known engineering techniques and so royalty payments weren't warranted. • But the jury didn't buy Rockwell's story — after the trial, jurors said that one Rockwell employee's deposition testimony on video had made a very bad impression.550
So in terms of "deal psychology," the prospective Discloser's best bet might be to hold off on asking the other party to sign an NDA, and instead — for the time being — to provide only information that wouldn't seriously harm Discloser if it were to become public or get into the hands of a competitor. That would allow the parties to defer negotiating an NDA.
10.2.5.4. Special case: Disclosure to venture capitalists, etc.
Amplifying the discussion in 10.2.5.3: Potential investors in a company might be reluctant to sign a nondisclosure agreement ("NDA"). In particular, venture capitalists ("VCs") often flatly refuse to sign NDAs with prospective portfolio companies, because they don't want to risk saying "no" to a company about investing, only to be sued years later for allegedly disclosing the company's technology to someone else.
Of course, it's not as if recipients never, ever acquire confidential information under an NDA and then use the information anyway. Amazon's venture-capital arm supposedly did that to small tech companies DefinedCrowd, LivingSocial, and others, according to press reports.551
But even so: As a practical matter, going without an NDA with non-corporate venture capitalists might not be a bad bet, because:
You can try to be very, very selective about what you disclose without an NDA, so that you're not giving away the "secret sauce"(10.2.4.4) of your idea.
Individual "angel" investors and others generally do have one or two other things on their minds. They generally see lots of entrepreneurs who are convinced they've got a world-beating "unicorn" idea. You'll probably be lucky to get these investors to pay attention for two minutes. Ask yourself how likely it is that they'll want to take your idea and spend time and money building a business without you.
Contracts aren't the only thing that discourage bad behavior. If an investor stole someone's idea, and if word got around, then that investor might later find it hard to get other people to talk to him.
You have to decide what risks you want to take. Your business might fail because an investor steals your idea and beats you to market. Or it might fail because you can't raise the money you need to get started.
By analogy: It's sort of like having to take a trip across the country, and you have to decide whether to fly or drive:
If you flew, there's a risk you could die in a plane crash flying from one side of the country to the other, and you'd be contributing to greenhouse gases.552
But if you were to drive the same route, your risk of dying in a car crash has been estimated as being something like 65 times greater than if you flew — and you'd still be contributing at least somewhat to greenhouse gases, possibly even more so than flying.553
As the old saying goes, you pays your money and you takes your choice.
Pro tip: If your client will be dealing with venture capitalists, you might want to check out the redline.net clauses for VC disclosure.
10.2.5.5. NDA overbreadth could be problematic
In TLS Mgmt. (2020), decided under Puerto Rican law, the First Circuit cited case law from the mainland United States holding that "overly broad confidentiality agreements constitute unreasonable restraints on trade which unduly restrict the free flow of information necessary for business competition and are thus unenforceable."554
When dealing with other parties in contract situations, you'd be well-advised to be choosy about accepting the other party's confidential information — and to consider using "protection" in the form of a confidentiality agreement that includes appropriate exclusions such as those in Clause 10.2.
Example: It can be dangerous to acquire confidential information of a competitor, for example in merger negotiations, even under a confidentiality agreement ("NDA"). That's because if a deal doesn't come to pass, the "owner" of the confidential information might later claim that the recipient made improper use of the target company's confidential information. Something like this happened in a 2021 Ninth Circuit case in which Facebook was caught in the middle.555
See also the discussion of the Celeritas v. Rockwell case, where a one-man startup company scored a $110 million verdict against a defense contractor.(10.2.5.3)
10.2.6.2. Use a nonconfidentiality agreement?
A prospective Recipient might want to ask the Discloser to enter into a nonconfidentiality agreement that states explicitly that the Recipient has no confidentiality obligations concerning the Discloser's information. For years, toy companies and car companies have required "off the street" submitters of ideas to sign such agreements; see, e.g., section 7 of Mattel's Web terms of service.
10.2.6.3.Always ask for a two-way NDA — because a one-way NDA could be dangerous later
Let's return to our course hypothetical where small-company MathWhiz is trying to get a consulting contract from a potential customer, Gigunda: As a big company, Gigunda might want MathWhiz to sign a "one-way" NDA that protects only Gigunda's information. That way, Gigunda wouldn't have to worry about keeping MathWhiz's information confidential. Question: Can the NDA accommodate Gigunda's wish, while still providing at least some protection for MathWhiz? The above language offers one possibility.
In the real world, the NDA likely would indicate which party's or parties' information would be protected. And the NDA might explicitly indicate that MathWhiz's confidential information won't be made available to Gigunda. This could be because MathWhiz wants to be clear that it won't be disclosing its trade secrets to Gigunda (at least not before a deal is signed). But it could also be that Gigunda wants to be clear that Gigunda is not agreeing to be bound by confidentiality obligations for whatever information MathWhiz does provide. ⚠556
But even if MathWhiz and Gigunda intend for only Gigunda to disclose its confidential information to MathWhiz, their NDA should preferably still be two-way, not one-way. Here's why:
Later, the parties' business people might decide it'd be good for MathWhiz to reveal certain of its own confidential information to Gigunda.
And those business people — without checking with "the lawyers" — might well assume, wrongly, that "we have an NDA in place so sure, let's do it."
But that's not OK — at least not from MathWhiz's point of view:
The existing, one-way NDA was drafted to protect only Gigunda's information, not MathWhiz's.
That, in turn, means that Gigunda has no confidentiality obligations with respect to MathWhiz's information.
And so, MathWhiz's unprotected provision of trade secrets to Gigunda will likely destroy MathWhiz's legal rights in those trade secrets.557
To accommodate the above concern, section 10.2.1.1 allows for MathWhiz and Gigunda to use a one-way NDA, initially protecting only Gigunda's information, to also protect MathWhiz's information. This provides flexibility for the parties: Assuming that Gigunda did agree to confidentiality obligations for MathWhiz's information, it'd be easy for MathWhiz to get Gigunda to indicate that agreement in writing, e.g., in an email.
And also later, if all else failed, MathWhiz could try to show that the circumstances indicated that Gigunda did in fact consent to receiving MathWhiz's information in confidence; here are two possibilities:
The parties' emails, while not explicitly saying, "Gigunda agrees," might still clearly indicate that Gigunda gave such consent;
Mary Marvel (MathWhiz's CEO) could email someone in authority at Gigunda to confirm an oral agreement that the NDA would apply to MathWhiz's information, with Gigunda not timely objecting and acting consistently with such an agreement; or
Gigunda's oral agreement might be confirmed by some disinterested third party (which seems unlikely).
10.2.6.4. Two-way NDA terms are usually more balanced — but not always
Other things being equal, a supposedly "two-way" agreement, one that applies equally when either party plays a particular role — here, MathWhiz and Gigunda as Disclosers and Recipients — is likely (but not guaranteed) to be more balanced.
But: An agreement that's nominally two-way can still be biased in favor of the drafting party. Example: Suppose that Gigunda's lawyer (i) is doing the drafting, and (ii) knows that Gigunda will be getting access to MathWhiz's confidential information but not the other way around. In that situation:
– Recipient Gigunda's lawyer might write a nominally two-way confidentiality provision that in fact provides very little protection for discloser MathWhiz's information, because Gigunda's lawyer wants to "win the negotiation" for Gigunda. (This desire to "win" is an occupational hazard for lawyers.)
– As a result, MathWhiz's lawyer would have to review the confidentiality provisions carefully to make sure it contained sufficient protection for MathWhiz's information.
Conversely, if it's discloser MathWhiz's lawyer who's doing the drafting, then the confidentiality provisions might contain requirements that recipient Gigunda's lawyer would have to review carefully to be sure that the provisions wouldn't impose too much of a burden on Gigunda.
10.2.6.5. Collect & save independent-possession evidence
Caution: A judge or jury might be skeptical of a Recipient's after-the-fact claims of independent acquisition.
Example: In ResMan, LLC (E.D. Tex. 2021), a federal-court jury awarded software vendor ResMan $152 million (later reduced by the judge to $62.5 millon to eliminate duplicate recoveries) because a customer had helped a ResMan competitor to reverse-engineer ResMan's software product in violation of the license agreement; the jury evidently didn't believe the competitor's claim that it developed its own software without using the vendor's software.558
Example: In S.W. Energy (Tex. 2016), a jury evidently didn't believe a recipient's claim of having independently developed information about "sweet spots" in oil and gas reservoirs; the jury awarded the discloser more than $40 million. (On appeal, the damages award was vacated and remanded for a new trial; in an SEC filing in February 2017, the recipient disclosed that the parties had settled on a confidential basis.)
Example: In Celeritas Technologies (Fed. Cir. 1998), a federal-court jury in Los Angeles awarded a one-man startup company more than $110 million (in 2024 dollars) because the jury found that defense contractor Rockwell had breached a confidentiality agreement with the startup company. Rockwell insisted that its engineers had independently developed the technology in question — even though they'd been exposed to the startup company's allegedly-confidential information — but the jury didn't buy Rockwell's story.(10.2.5.3)
Such cases suggest that recipients should plan to document independent possession of information:
by preserving documentary evidence of having received the information from another source; and
by using "clean room" techniques to document independent development of the information.
To help prove prior knowledge of information, the Recipient should consider notifying the Discloser — promptly and in writing — if the Discloser provides the Recipient with information that the Recipient already knew. (This might be overly burdensome on the business, though.)
But: The Recipient probably should push back against any request by the Discloser to make such notification a contractual requirement.
Example: In Structured Capital (E.D.N.Y. 2016) (Rakoff, J.), the parties' contract included such a notification requirement, but the recipient didn't comply with the requirement; that contributed to the court's denial of the recipient's motion for summary judgment.
10.2.6.6. Write up an "invention disclosure" beforehand?
Pro tip: Before agreeing to receive confidential information, the Recipient could consider getting its relevant engineers, etc., together to write up internal "invention disclosure statements" to document their existing knowledge of projects in the works. (Hat tip: Dr. Louise Levien.)
10.2.6.7. Defer discussion of confidential information?
As a negotiation possibility, a prospective Recipient could consider asking Discloser to agree to defer — for the time being — giving Recipient access to confidential information, with the understand that later the parties could revisit the question.
10.2.6.8. Push back against requests for individual employee NDAs?
In some cases, a Discloser might try to demand that each Recipient employee, etc., must personally sign an individual confidentiality agreement with the Discloser (see the optional clause language at Clause) — thus exposing the employee to personally being sued by the Discloser merely for doing his- or her job.
(If a Recipient's counsel rejecs such a Discloser demand, at least for routine matters the Discloser often won't push the point.)
Why might this be important? Because:
1. Lawsuit plaintiffs will sometimes sue defendants' employees individually, perhaps to try to muscle the employees into cooperating against their employers, e.g., in discovery matters.
Example: The State of Oregon once sued Oracle over alleged problems in implementing the state's Obamacare exchange system; the state sued not just Oracle itself, but also various Oracle employees personally — including a demand that an Oracle technical manager personally pay the state $45 million (!).(12.7)
2. The Recipient likely will not want its employees to feel conflicted about their obligations to the Recipient, versus their personal exposure to possible liability from a lawsuit by the Discloser.
10.2.6.9. Danger: Noncompetition provisions in NDAs
Example: In Harcus Sinclair (2021), a UK lawyer signed a confidentiality agreement relating to a group of law firms' representation of plaintiffs in the Volkswagen "Dieselgate" engine emissions matter. The NDA included what amounted to a noncompetition covenant (concerning which, see generally 18.4), which barred the lawyer's firm from representing other plaintiffs in the matter for six years. The UK Supreme Court affirmed enforcement of the noncompete.559
Note: In the U.S., such a lawyer- and law-firm noncompetition covenant might well be unenforceable as violating the clients' right to choose their counsel.560
Example: In Brown (2020), a California appeals court ruled that a confidentiality clause in an employment agreement was so broad as to amount to a noncompetition clause (concerning which, see 18.4) and therefore was unenforceable.561
Example: In Stanford v. Roche (2009), a Stanford University researcher, getting some training from a colleague at an outside company (Cetus, later acquired by Roche), signed a "Visitor Confidentiality Agreement" that assigned, to the outside company, the Stanford researcher's future rights in any inventions developed as a consequence of the researcher's work at the outside company. As a result, Stanford University found itself having to share ownership of a patent, one that evidently was important enough to litigate all the way to the U.S. Supreme Court on a tangential issue.562
(That case is also discussed at 15.19.1.9 concerning the difference between a "present assignment" of future IP rights and an agreement to assign such rights in the future.)
It's not unheard of for an NDA to state that the Recipient must not try to "poach" any Discloser employee; see 18.6 for more details and cautions.
10.3. Confirmations – get directly from third parties?
Getting confirmation from an independent source relates to the principle that you get what you INspect, not what you EXpect.(15.14)
When two parties enter into a contract — let's call them "Fred" and "Ginger" — they might want independent confirmation of information provided by the other party, instead of taking the other party's word for it.
Example: Suppose that under the contract, Ginger is supposed to arrange for a third party, "Harry," to provide one or more benefits for Fred if Fred so requests — such as, for example:
Harry's guaranty to pay Fred what Ginger owes him if Ginger doesn't pay on time;
an insurance policy (see 15.15) to support Ginger's indemnity obligation;
a payment bond, under which Harry agrees to pay Ginger's subcontractors if Ginger fails to pay them, so that the subcontractors won't put a lien on Fred's property.
In that situation, suppose that, in due course, Ginger reports to Fred that yes, she has indeed made the necessary arrangements with Harry to provide Fred with the agreed benefit.
Should Fred take Ginger's word for it? Quite possibly not; it might be better for the contract to require Ginger to get Harry to confirm to Fred, in writing, that Ginger has in fact made the necessary arrangements. Otherwise:
Ginger might neglect to make such arrangements with Harry; that could leave Fred stuck without the benefits that Harry was supposed to provide him — for example, without insurance to cover Ginger's indemnity obligation if Ginger didn't have the money to do so herself.
Worse: If Ginger is a shady character, she might be tempted to lie — to state falsely that she had made the arrangements with Harry — or even to provide Fred with a forged- or otherwise-fraudulent confirmation, purportedly from Harry.
The law might give Fred more rights against Harry if Harry provides Fred with confirmation.
This concern is reflected in some Diamond Lane provisions such as the following (possibly among others):
5.6.1.14 (in an audit, recordkeeper is entitled to get a copy of auditor's report directly from the auditor)
6.2.3.4 (in a background check, getting independent contact information for references)
18.7 (requiring independent confirmation of receipt of notice in most cases)
6.4 (requiring confirmation of payment security to come from the bank, not the payer)
10.4. Consent Requests
This Clause addresses the situation where a reviewer wants the right to consent to an action by or for a proposer — as in, the contract would provide that the proposer must not take the action without the reviewing party's prior written consent.
The parties are to follow this Clause whenever one party563 (the "Proposer") asks another party (the "Reviewer") for consent to a particular action (the "Action"), where the consent is required (i) by this Agreement, and/or (ii) as a matter of law.
10.4.1.2. Can the Reviewer defer the consent decision?
The Reviewer is free to defer the consent decision if reasonable564 to do so in the circumstances, for example if additional information is reasonably needed.
When the Reviewer consents to the proposed Action, it does not mean that the Reviewer affirmatively approves or authorizes the action, but only that the Reviewer will not object to the Action nor seek to block it.565
10.4.1.5. Consent is not a substitute for judgment or advice
The Proposer is not to rely on the Reviewer's consent as a substitute for the Reviewer's own judgment, nor for input from the Proposer's own licensed attorney and/or other professional advisor.566
10.4.1.6. Consent is for the Reviewer's benefit only
The Reviewer's consent-related actions are solely for the Reviewer's benefit.(23.2)
10.4.1.7. Are there limitations on the right to refuse consent?
This Agreement could limit the Reviewer's right to refuse consent.(10.4.2.1)
10.4.1.8. Silence does not imply consent
If the Reviewer does not respond to a Proposer request for consent, it does not constitute implied consent by the Reviewer — unless this Agreement clearly says otherwise, that is, for example by stating that a failure to object to the action within X amount of time would be deemed as consent.
10.4.1.9. Must the Reviewer explain a declined consent?
The Reviewer is encouraged to consider explaining to the Proposer, in reasonable detail, the Reviewer's then-existing reasons for declining to give consent.(10.4.2.1)
10.4.2.1. Some possible restrictions on consent denial
A consent requirement in this Agreement could include restrictions such as (for example) one or more of the following limitations or expansive permissions:
– [Reviewer's name] may not unreasonably withheld, delay, or condition its consent to [Action].
– [Reviewer's name] may withhold consent to [Action] in its sole and unfettered discretion.
– It is conclusively deemed unreasonable and arbitrary for [Reviewer's name] to require a fee or other payment (no matter how named) in return for consent to [Action] — but a fee or other payment that would otherwise be due anyway under this Agreement would not be considered such a fee.
– [Reviewer's name] is free to charge a fee for its consent to [Action], in any amount, to the extent not inconsistent with applicable law.
10.4.2.2. "not unreasonably withheld" – a requester trap?
When a party "Fred" negotiates a requirement that he seek "Ginger's" consent before taking some action, Fred might be tempted to ask to add, that "consent must not be unreasonably withheld, delayed, or conditioned." That might cause more problems that it solves.
a. For assignment-consent requests, a might be implied by law in certain circumstances;567 still, some reviewing-party drafters like to say this explicitly as cheap insurance.
b. "Not to be unreasonably withheld" might not be worth much: When one party demands the right to consent to some action by the other party, the other party will likely ask for a "consent not to be unreasonably withheld" qualifier. That might sound good, but for assignment consents it might not be of much practical value: If the reviewing party wants to cause trouble, the resulting delay and expense could impede — and even kill — the assigning party's desired transaction that it has in mind.
c. And even asking for this Option could be a case of poking the bear that causes the other party to respond by insisting on the right to grant or withhold consent in that party's sole discretion.
10.4.2.3. Caution: Don't tie your client's hands in its own form
Suppose that you're drafting a contract form that your client expects to use with lots of other parties. You do not want to add language stating that your client will obtain the other party's consent before doing something — call it "Action X" — such as assigning the contract (see 5.3). That's because:
• If your client ever did want to take Action X, your client would need to seek the consent of all of the various other parties with which your client has used the contract form.
• Even seeking such consent could be burdensome and costly, as discussed at 5.3.3.10.
• And there's always the risk that one or more of the other parties might seize the opportunity to demand major concessions from your client as part of the price of giving consent.
10.5. Consequential Damages
10.5.1. Clause text
10.5.1.1. "Consequential damages": What does it mean?
In all matters relating to this Agreement, the term "consequential damages"568 refers to a monetary award to compensate a party for harm resulting from a breach of this Agreement, where all of the following are true: 🔑569
the harm was not generally foreseeable — that is, reasonable people, experienced in the relevant area of business, would not have expected the harm to be, in the ordinary course of things, the probable result of breach from the breach — and so the breaching party normally would not have been liable for that harm; but:
at the time of entering into this Agreement, the breaching party knew (or should have known) that, due to special circumstances, the harm was nevertheless reasonably likely to result from breach, and so the harm was foreseeable to the breaching party.570
For convenience, this Clause sometimes uses the term "atypical damages," which is intended to have the same meaning.571
10.5.1.2. Exclusion — and WAIVER — of consequential damages
No party to this Agreement will be liable for consequential damages — that is, for atypical damages — from breach of this Agreement. 🔑572
For emphasis: Each party WAIVES — and agrees not to assert any claim — seeking to recover any such damages for breach from any other party to this Agreement.
10.5.1.3. Would knowledge of special circumstances matter?
The exclusion of this Clause will apply even if it turns out that the breaching party actually knew or should have known573 of "special circumstances," whether at the time of forming this Agreement or prior to the alleged breach.
10.5.1.4. Certification: No known special circumstances
Each party CERTIFIES that, so far as the certifying party is aware, there are no "special circumstances," of the kind referred to above, that could give rise to the certifying party's incurring "atypical damages" as a result of any other party's breach of this Agreement.574
10.5.1.5. The parties are relying on this exclusion
Each party acknowledges that each other party is actually, and reasonably, relying (21.14) on the parties' agreement to this Clause as a "material" element (that is, an important part) of the economic bargain reflected in this Agreement.
10.5.1.6. Particular case: Lost profits
This Clause's exclusion of consequential damages:
excludes, without limitation, lost profits from collateral business arrangements, but
does not exclude lost profits that were a direct and probable result of a breach of this Agreement and thus constitute general damages.575
10.5.1.7. General liability-limitation terms incorporated
Clause 16.5 is incorporated by reference into this Clause.
10.5.2.1. Economics of consequential-damages exclusions
In a 2015 decision applying North Carolina law, the Fourth Circuit explained some facts of life to customers that negotiate services contracts containing consequential-damages exclusions. This took place in a case where:
While doing an $8,400 job, a fumigation company had improperly applied a dangerous pesticide to a peanut dome owned by the plaintiff — this led to "fire, an explosion, loss of approximately 20,000,000 pounds of peanuts, loss of business, and various cleanup costs"; the plaintiff's total losses amounted to some $19 million.
The peanut company (and its insurer) filed suit against the fumigation company, but the trial court granted summary judgment in favor of the fumigation company because the company's contract excluded consequential damages.
The appeals court affirmed, explaining:
[Customers] faced with consequential damages limitations in contracts have two ways to protect themselves.
First, they may purchase outside insurance to cover the consequential[sic] risks of a contractual breach [by the supplier],
and second, they may attempt to bargain for greater protection against breach from their contractual partner.
Severn [the plaintiff] 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., 807 F.3d 88, 92 (4th Cir. 2015) (affirming summary judgment in favor of service provider that had caused millions of dollars to its customer's facility) (formatting altered).
10.5.2.2. Consequential damages can be big
Consequential damages can be grossly disproportionate to the value of the underlying contract. Example: In 2024, the notorious Crowdstrike outage — caused by an error in an update to CrowdStrike's cybersecurity software — caused millions of computer systems around the world to crash, with estimated economic damage of some USD $10 billion, including cancellation of thousands of scheduled airline flights. Reportedly, CrowdStrike's license agreement limited customers' remedies to a refund of fees paid, but many big customers, such as Delta Airlines, weren't accepting that, and notified CrowdStrike that it should prepare for litigation.
Students: Just skim the rest of this section's examples.
Example: In a 2015 article, noted practitioner-commentator Glenn West observed:
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 [$14.5 million]. There was no consequential damages waiver in the contract at issue in this case.576
Example: In Australia, an opthmalmologist, a Dr. Kitchen, wrongfully terminated his service agreement with an eye clinic. The service agreement didn't 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 more than AUD $10 million.577
Example: In Ohio, a contractor agreed to gut and remodel a building for use as a neighborhood bar. The contractor didn’t do so by the agreed completion date — causing the customer, a would-be bar owner, to miss the November-December holiday season. The court agreed with the bar owner that the contractor’s conduct had been "reckless" — causing the breach to fall within a carve-out from the contract’s exclusion of consequential damages. As a result, the court affirmed an award of the bar owner’s lost profits.578
Example: From a corporate press release: A Taiwan company, TSMC, manufactures computer chips. It recently learned that "a batch of photoresist [a light-sensitive material used in 'etching' circuits onto chips] from a chemical supplier contained a specific component which [sic] was abnormally treated, creating a foreign polymer in the photoresist." BOTTOM LINE: "This incident is expected to reduce Q1 revenue by about US$550 million …."
Example: Here's a dated but famous example from 1999: A botched software implementation at Hershey caused it to be unable to deliver some $100 million of Hershey's Kisses for Halloween — the biggest candy "season" of the year.579
Now imagine that you were the supplier that provided the software to Hershey, or that provided the photoresist to the chip manufacturer: How would you like to have to litigate which damages were "direct" and which were "consequential"?
10.5.2.3. Consequential-damages claims can complicate litigation
Students: Read the IBM example below, then just skim the rest of this section.
Discerning the difference between excluded consequential damages and recoverable "general" damages can sometimes be difficult; courts are often forced to parse sometimes-needlessly complex contract language and lawyer arguments to determine which is which.
Classifying particular types of damages as consequential or "direct" — a poor choice of names, IMHO — might be a very subjective exercise. Example: Consider an Indiana appellate court's 2018 decision in the long-running Indiana v. IBM litigation — in a second trial (on remand) over a failed computer-system acquisition, the trial judge held that:
– IBM had to pay for a replacement computer system that the state acquired after IBM was fired, known as the "Hybrid" system — even though the Hybrid system was an upgrade from the system that IBM had agreed to build; and
– The additional cost of the upgrade, said the trial judge, was properly classified as direct[sic] damages resulting from IBM's breach — and thus was subject to an agreed cap of $125 million — and not as consequential damages, which would have been subject to a much-lower cap of $3 million.
The trial judge's decision was affirmed on appeal.580
But: Dissenting on the upgrade-as-direct-damages issue, a state supreme court judge argued unsuccessfully that:
[I]t was not IBM's breach but the State's decision to switch to the different, more expensive Hybrid system that caused the State to incur these additional expenses. The State's additional, Hybrid-related costs are at most consequential damages, not direct damages.581
Students: You can just skim the rest of this section.
Example: In a (debatable) 2020 ruling from the Internet age, the New Hampshire supreme court affirmed a trial-court holding that a customer's cost of recreating lost data, necessitated by its outsourcer's alleged mistakes that caused the loss of the data, were "consequential" damages and therefore not recoverable because of an exclusion clause in the contract.582 (Less debatably, the court came out the same way on the customer's claim for damages for its inability to bid on certain government contracts due to the unavailability of the lost data.)
10.5.2.4. Pro tip: Use a damages cap instead?
Some experienced practictioners (including your servant) believe that a more-sensible approach will sometimes be:
not to bother with an exclusion of consequential damages, because of the proof difficulties summarized above; and
10.5.2.5. Reasons not to include a "laundry list" of exclusions
Some drafters like to include a detailed "laundry list" of highly-specific categories of excluded damages, such as the examples below.
My usual practice is to provide such a laundry list only cautiously and selectively, because doing so generally entails the drafter's figuratively crossing his- or her fingers —
that courts will interpret the laundry list as the drafter hoped; and
that in drafting the list, the drafter won't inadvertently omit one or more categories of damages that later proves important. (Relatedly: See also the discussion of the doctrine of ejusdem generis at 15.6.)
The following list of categories of damages to be excluded have been compiled from various agreement forms, but the list should be reviewed carefully, as some could be a bad idea in particular circumstances:
incidental damages — which are defined in sections 2-710 (seller's incidental damages) and 2-715 (buyer's consequential damages) of the Uniform Commercial Code;
punitive, exemplary, or special damages — which normally would not be available in a pure breach-of-contract case but might be available under other theories, for example in tort;
indirect damages;
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 exclusion 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;
wasted expenditure.
For a summary of cases addressing such "laundry lists" in U.S., English, and Australian courts, see a 2015 article by noted scholar-practitioner Glenn West.
Concerning wasted expenditure, see the 2022 English case of Soteria Insurance v IBM UK — which seems to have been a sad tale of an IT project gone sideways — where the court of appeal held that an contract's exclusion of "loss of profit, revenue, [and] savings" did not protect IBM from being held liable for its customer's "wasted expenditure" resulting from IBM's wrongful repudiation of the contract.
10.5.2.6. Caution: Unconscionability of an exclusion?
Courts will sometimes hold that exclusions of consequential damages are "unconscionable." Indeed, UCC § 2-719(3) specifically says:
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.
(Extra paragraphing added.)
Example:Procura (2019): This lawsuit involved a failed project to install computer software. A federal district court in Minnesota refused to give effect (at least initially) to a consequential-damages exclusion that benefited the vendor, because the court deemed the exclusion to be unconscionable.
10.5.2.7. Origins: The influence of Hadley v. Baxendale
This Clause essentially follows the rule in the landmark 1854 English case of Hadley v. Baxendale (the "corn mill crankshaft case").583
Some American courts have tried reformulating the Hadley rule, as discussed at 10.5.2.10, but this Clause sticks to the traditional Hadley formulation.
Hadley has been much remarked on over the decades; the opinion and its progeny are still relied on in American courts and likely studied by most if not all American law students. In Hadley:
– A corn mill in Gloucester utilized a steam engine to clean and grind corn.
– The steam engine's crankshaft broke.
– The mill owners were informed that to have a new crankshaft made, they would have to ship the broken shaft to a manufacturer in Greenwich so that the new one could be made to the same dimensions, using the broken one as a pattern.
– The mill owners shipped off the broken crankshaft, but the carrier was five days late in delivering the broken crankshaft to the manufacturer.
The corn mill's owners sued the carrier for, among other things:
the profits that the corn mill would have earned during the mill's extra "down time" caused by the carrier's delay in shipping the broken crankshaft; and
the wages that the corn mill's owners had to pay their idle employees during that extra down time.
Now we think the proper rule is such as the present is this:
Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising[:]
naturally, i.e., according to the usual course of things, from such breach of contract itself, or
such as may reasonably be supposed to have been[:]
in the contemplation of both parties,
at the time they made the contract,
as the probable result of the breach of it.
Now, if the special circumstances under which the contract was actually made were communicated by the plaintiffs to the defendants, and thus known to both parties, [then] the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated.
But, on the other hand, if these special circumstances were wholly unknown to the party breaking the contract, [then] he, at the most, could only be supposed to have had in his contemplation the amount of injury which would arise generally, and in the great multitude of cases not affected by any special circumstances, from such a breach of contract.
For such loss would neither have flowed naturally from the breach of this contract in the great multitude of such cases occurring under ordinary circumstances, nor were the special circumstances, which, perhaps, would have made it a reasonable and natural consequence of such breach of contract, communicated to or known by the defendants. …
(Formatting lightly edited for readability.)
10.5.2.8. The Restatement simply looks at foreseeability
On the subject of consequential damages, the Restatement (Second) of Contracts uses types of foreseeability to differentiate between general damages and consequential damages.
First are general damages, which, to be recoverable, must have been foreseeable to others generally:
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.584
Next, are so-called consequential damages, namely uncommon or out-of-the-ordinary damages that nevertheless, at the time the parties entered into the contract, were foreseeable by the breaching party due to special circumstances and thus would be recoverable unless excluded:
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.585
10.5.2.9. Study aid: A consequential-damages flow chart
Study suggestion:Hand-copy the flow chart below, because research has shown that handwritten notes help with both comprehension and retention.
10.5.2.10. Some courts have tried to redefine "consequential damages"
Some American courts have tried different ways of defining consequential damages, but it's not clear that these redefinitions are helpful.
Example: In AcryliCon USA (2021), the Eleventh Circuit remarked that "[t]he key distinction between direct damages and consequential damages is that the former compensate for the value of the promised performance, while the latter compensate for additional losses incurred as a result of the breach."586
Note
]
Example: In a similar vein, in Severn Peanut (2013), the Fourth Circuit ventured that "[c]onsequential or special damages for breach of contract …. are distinguished from general damages, which are based on the value of the performance itself, not on the value of some consequence that performance may produce."587
This distinction seems unhelpful: Arguably, "the value of the performance itself" is the value of the consequences to be produced — no more and no less. As Harvard Business School professor Theodore Levitt famously put it:
People don't want to buy a quarter-inch drill. They want a quarter-inch hole!588
Similar thoughts had been expressed previously, e.g., "When you buy a razor, you buy a smooth chin—but you could wear a beard."589
Perhaps the focus of the value of the performance would be more useful if it were phrased as the market value of the performance itself, i.e., the value that others, not in the plaintiff's particular circumstances, would theoretically pay for the performance.
Example: The Supreme Court of Texas espoused a variation on the Hadley approach in a 1997 decision, where the court held 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.590
For cases decided under Texas law, the court's Arthur Andersen test thus replaces Hadley's "usual course of things" with "necessary and usual."
It's unclear, though, how helpful the Texas court's reformulation would be to trial counsel hoping to prove (or refute) a case, or to a jury seeking to distinguish recoverable from unrecoverable damages.
10.5.2.11. "Consequential damages" isn't the best name
I wish (but I'm not holding my breath) that the legal community could agree to rename "consequential damages" as something like "atypical damages" — both are clunky, but at least the latter one conveys the essence of the concept: While unforeseeable damages are never recoverable, it's possible for damages to be foreseeable in one of two different ways:
because, in the ordinary course without any special circumstances, reasonable people would have foreseen the damages possibility; and/or
because, at the time that the parties entered into the contract, the defendant had some other reason to foresee such damages; as the Texas supreme court held in 2022: "When one party has given notice of the consequences of breach at the time of contracting, no further inquiry into the foreseeability of those consequences is required";
finally, if neither of the above conditions is shown to be true, then the damages simply aren't recoverable, period.
Note
See id. at 184 (reversing court of appeals and rendering judgment against plaintiff because "legally insufficient evidence supported the award of consequential damages").
10.6. Consider Definition
10.6.1. Clause text
This Clause addresses the case where this Agreement calls for a party P to "consider" doing something ("Thing‑X").
This Clause will govern unless this Agreement clearly says otherwise for particular cases.
P is not obligated to do Thing‑X.
P gets to decide — in its sole discretion — whether, when, where, and how to do Thing‑X.
P's consideration isn't required to rise to any particular level or otherwise meet any particular standard.
P's consideration is solely for P's own benefit, not for the benefit of any other party.
Note
This definition supports various Clauses that call for a party to "consider" doing something or another — notably, checking with The Other Side about a matter (see Pick up the phone!).
10.7. Consideration (notes)
Consideration is something studied by every first-year law student in the U.S. and similar jurisdictions, because in those jurisdictions a contract ordinarily requires at least some kind of "consideration" to be binding.
Note
See, e.g., 1464-Eight, Ltd. v. Joppich, 154 S.W.3d 101 (Tex. 2004) (nonpayment of the recited nominal consideration does not preclude enforcement of the parties' written option agreement) (extensively reviewing case law).
Example:: In a 2024 decision, the Fifth Circuit, reversing a summary judgment, held that an email exchange between Wells Fargo and Occidental Petroleum was not a contract (although another agreement between them, was):
Though Wells Fargo unambiguously agreed to transfer the stock between January 6 and January 10, Occidental offered nothing in exchange. In other words, Wells Fargo received no benefit from the e-mail exchange; nor did Occidental suffer any detriment. Accordingly, the December 2019 e-mail chain, standing alone, did not create an enforceable contract.
Occidental Petroleum Corp. v. Wells Fargo Bank , N.A., 117 F.4th 628, 637 (5th Cir. 2024) (emphasis added), affirming622 F. Supp. 3d 495 (S.D. Tex. 2022) (granting summary judgment for Occidental on other grounds).
Amendments to an existing contract will often require consideration (mentioned but not discussed at 4.2.2.12).
[SEE ALSO THE GEOFFREY MILLER PIECE CITED IN GOV. LAW, at 13-16, about the differences between NY law and California law.]
10.8. Conspicuous: It doesn't mean long, all-caps verbiage
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.
Example: Under the "express negligence" doctrine in Texas law,(15.9.3) an indemnity provision that purports to protect a party from the consequences of its own negligence must not only be expressly stated, it must also be "conspicuous" in accordance with the Uniform Commercial Code standard.591
10.8.2. All-caps ≠ "conspicuous" – and might be dangerous?
Contract drafters sometimes put entire paragraphs into all-capital letters in the hope of making them "conspicuous." The reader has probably seen examples of this particular disorder in warranty disclaimers and limitations of liability.
But keeping the all-caps going for line, after line, after line, can be self-defeating. A Georgia supreme court justice noted that the drafter of a contract in suit had made the justice's job more difficult — which is not a good look, to put it mildly:
No one should make the mistake of thinking, however, that capitalization always and necessarily renders the capitalized language conspicuous and prominent.
In this case, the entirety of the fine print appears in capital letters, all in a relatively small font, rendering it difficult for the author of this opinion, among others, to read it.
Moreover, the capitalized disclaimers are mixed with a hodgepodge of other seemingly unrelated, boilerplate contractual provisions — provisions about, for instance, a daily storage fee and a restocking charge for returned vehicles — all of which are capitalized and in the same small font.592
In a similar vein, the Ninth Circuit noted acerbically:
Lawyers who think their caps lock keys are instant"'make conspicuous" buttons are deluded. … A sentence in capitals, buried deep within a long paragraph in capitals will probably not be deemed conspicuous.
Formatting does matter, but conspicuousness ultimately turns on the likelihood that a reasonable person would actually see a term in an agreement.593
Even worse, drafting a long block of text in all-caps might actually hurt the drafter's own client. Here's a tweet by Boston-area tech lawyer turned entrepreneur Luis Villa: "Love to see an ALL CAPS AND BOLD section of a contract that is so typographically painful to read that the company’s lawyers didn’t actually proof it, and made a substantive error in my favor as a result." (Emphasis added.)
The drafting tips here, of course, are:
Be judicious about what you put in all-caps.
Don't use too-small a font for language that you want to be conspicuous.
10.8.3. A pathological "don't do this!" example
If you want an example of what NOT to do to make something conspicuous, just glance at (don't even try to read) the following abomination, which is near the very front of a real-estate purchase agreement for a Dallas-area "gentlemen's club":
Section 1.02. Disclaimer and Indemnity. THE PROPERTY SHALL BE CONVEYED AND TRANSFERRED TO PURCHASER “AS IS, WHERE IS AND WITH ALL FAULTS”. EXCEPT FOR THE REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLER SET FORTH IN ARTICLE V OF THIS AGREEMENT, SELLER DOES NOT WARRANT OR MAKE ANY REPRESENTATIONS, EXPRESS OR IMPLIED, AS TO FITNESS FOR A PARTICULAR PURPOSE, MERCHANTABILITY, DESIGN, QUANTITY, QUALITY, LAYOUT, FOOTAGE, PHYSICAL CONDITION, PERATION, COMPLIANCE WITH SPECIFICATIONS, ABSENCE OR LATENT DEFECTS OR COMPLIANCE WITH LAWS AND REGULATIONS (INCLUDING, WITHOUT LIMITATION, THOSE RELATING TO HEALTH, SAFETY AND THE ENVIRONMENT) OR ANY OTHER MATTER AFFECTING THE PROPERTY AND SELLER SHALL BE UNDER NO OBLIGATION WHATSOEVER TO UNDERTAKE ANY REPAIRS, ALTERATIONS OR OTHER WORK OF ANY KIND WITH RESPECT TO ANY PORTION OF THE PROPERTY. FURTHER, PURCHASER SHALL INDEMNIFY, DEFEND AND HOLD HARMLESS SELLER AND SELLER’S REPRESENTATIVES FROM AND AGAINST ANY CLAIMS OR CAUSES OF ACTION ARISING OUT OF THE CONDITION OF THE PROPERTY BROUGHT BY ANY OF PURCHASER’S SUCCESSORS OR ASSIGNS, OR ANY THIRD PARTY, AGAINST SELLER OR SELLER’S REPRESENTATIVES. INFORMATION PROVIDED OR TO BE PROVIDED BY SELLER IN RESPECT OF THE PROPERTY WAS OBTAINED FROM A VARIETY OF SOURCES. SELLER HAS NOT MADE AN INDEPENDENT INVESTIGATION OF SUCH INFORMATION AND MAKES NO REPRESENTATIONS AS TO THE ASSURACY OR COMPLETENESS THEREOF. PURCHASER HEREBY ASSUMES ALL RISK AND LIABILITY RESULTING FROM THE OWNERSHIP, USE, CONDITION, LOCATION, MAINTENANCE, REPAIR OR OPERATION OF THE PROPERTY, WHICH PURCHASER WILL INSPECT AND ACCEPT “AS IS”. IN THIS REGARD, PURCHASER ACKNOWLEDGES THAT (a) PURCHASER HAS NOT ENTERED INTO THIS AGREEMENT IN RELIANCE UPON ANY INFORMATION GIVEN TO PURCHAWSER PRIOR TO THE DATE OF THIS AGREEMENT, INCLUDING, BUT NOT LIMITED TO, PROMOTIONAL MATERIALS OR FINANCIAL DATA , (b) PURCHASER WILL MAKE ITS DECISION TO PURCHASE THE PROPERTY BASED UPON PURCHASER’S OWN DUE DILIGENCE AND INVESTIGATIONS, (c) PURCHASER HAS SUCH KNOWLEDGE AND EXPERIENCE IN REAL ESTATE INVESTIGATION TO EVALUATE THE MERITS AND RISKS OF THE TRANSACTIONS PROVIDED IN THIS AGREEMENT, AND (d) PURCHASER IS FINANCIALLY ABLE TO BEAR THE ECONOMIC RISK OF THE LOSS OF SUCH INVESTMENT AND THE COST OF THE DUE DILIGENCE AND INVESTIGATIONS UNDER THIS AGREEMENT. IT IS UNDERSTOOD AND AGREED THAT THE PURCHASE PRICE HAS BEEN ADJUSTED BY PRIOR NEGOTIATION TO REFLECT THAT THE PROPERTY IS SOLD BY SELLER AND PURCHASED BY PURCHASER SUBJECT TO THE FOREGOING. Disclaimers similar to the foregoing in form satisfactory to Seller as well as Seller’s reservation of the mineral estate shall be inserted in any and all documents to be delivered by Seller to Purchaser at Closing.594
10.8.4. The UCC definition of conspicuousness
The [U.S.] Uniform Commercial Code doesn't apply to all types of transaction, nor in jurisdictions where it has not been enacted. Still, the UCC's definition of "conspicuous," such as in section UCC § 1-201(10) (Texas version) nevertheless provides useful guidance:
"Conspicuous," with reference to a term, means so written, displayed, or presented that a reasonable person against which it is to operate ought to have noticed it.
Whether a term is "conspicuous" or not is a decision for the court.
Conspicuous terms include the following:
(A) a heading in capitals equal to or greater in size than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same or lesser size; and
(B) language in the body of a record or display in larger type than the surrounding text,
or in contrasting type, font, or color to the surrounding text of the same size,
or set off from surrounding text of the same size by symbols or other marks that call attention to the language.595
Courts often adopt the UCC standard for conspicuousness, as explained in the next section.
10.8.5. In judging conspicuousness, courts tend to focus on "fair notice" — which will often depend on the circumstances
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 [Uniform Commercial] 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.596
The 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."597
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.598
10.8.6. Proven actual knowledge might be enough for conspicuousness
In Dresser, the Texas supreme 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."599
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, namely that an agreement to indemnify a party for the consequences of the party's own negligence must be both express and conspicuous).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. 600
10.9. Consultation in lieu of consent?
Sudden, unexpected moves by one party to a contract can make the other party nervous. Example: The business relationship between a service provider and a customer could be damaged if the service provider were to suddenly replace a key person assigned to the customer's work without advance notice.
The usual, sledge-hammer approach to dealing with this problem is to contractually require the provider to obtain the customer's prior consent before taking such an action.
The provider, though, will usually push back against such a consent requirement — the provider will be reluctant to give the customer a veto over how it runs its business.
Moreover, it could be a management burden for the provider to have to check every customer's contract to see what internal management decisions required prior customer approval.
As an alternative (and compromise), the provider might be willing to commit to consulting with the customer before taking a specified action that could cause heartburn for the customer. That way, the customer would at least get notice, perhaps an explanation, and an opportunity to be heard, which could make a big difference in the customer's reaction and to the parties' business relationship.
Example: A services contract could say that, for example, "Except in cases of emergency, Service Provider will consult with Customer at least ten business days in advance of replacing Service Provider's supervisor in charge of the Project." That would at least get the parties talking to one another, which can help avoid strains in their business relationship.
Of course, a party would also have to keep track of its consultation commitments, just as much as for its consent obligations.
10.10. Consummated - not a great word (commentary)
Caution: Be careful about using terms such as "consummated" sales — that led to what must have been a costly lawsuit over a finder's fee for helping land a federal contract: The court ruled that the finder's-fee agreement did not require the resulting contract to be "performed" during a particular time period in order for the transaction to be "consummated"; instead, the fact that that the contract was signed during the relevant time period was enough, and so the finder's fee was therefore due and owing.601
10.11. Consumer contracts (notes)
This is where I'm "saving string" for possible future use.
Unless clearly agreed otherwise, "Consumer Price Index" and "CPI" each refer to the All Items Consumer Price Index – All Urban Consumers ("CPI-U"), as published from time to time by U.S. Bureau of Labor Statistics.
Some contracts include inflation-adjustment clauses that lock in agreed pricing levels for a specified time period — but allowing the supplier to increase pricing by no more than X% per year (let's say) or by the corresponding increase in CPI, whichever is greater (or sometimes, whichever is less).
The problem is, there are multiple "CPIs," and sometimes parties can disagree about which CPI to use. Depending on the purpose of the inflation adjustment, the CPI-U measure might or might not be the best specific index to use; see 10.12.2.2 for other possibilities.
For convenience and certainty, when a contract just says (for example) "price increases no greater than CPI," this Clause specifies one of them as the "default" adjustment index.
10.12.2.2. Which is the "right" price index?
As explained in a FAQ page of the Bureau of Labor Statistics (see question 15):
Various indexes have been devised to measure different aspects of inflation. Inflation has been defined as a process of continuously rising prices or, equivalently, of a continuously falling value of money.
The CPI measures inflation as experienced by consumers in their day-to-day living expenses;
the Producer Price Index (PPI) measures inflation at earlier stages of the production process;
the International Price Program (IPP) measures inflation for imports and exports;
the Employment Cost Index (ECI) measus inflation in the labor market; and
the Gross Domestic Product (GDP) Deflator measures inflation experienced by both consumers themselves as well as governments and other institutions providing goods and services to consumers.
There are also specialized measures, such as measures of interest rates.
(Extra paragraphing and bullets added.)
10.12.2.3. Could other inflation indexes be better?
There are also other inflation adjustment indexes such as, for example:
CPI-W, Consumer Price Index for Urban Wage Earners and Clerical Workers;
Each party agrees that this Agreement is to be interpreted as though its wording resulted from the parties' informed negotiation of that wording, without applying the interpretive doctrine of contra proferentem ("against the offeror").
No party will assert otherwise.
10.13.2. Reading: Introduction
Contra proferentem means, approximately, "against the offeror." It's a Latin phrase, used as shorthand for how — if a contract provision is capable of two or more plausible meanings — then a court might interpret the provision in favor of the party that didn't draft the provision. Note to students: Learn how to spell contra proferentem!
Contra proferentem can come into play if a potential ambiguity in particular contract language can't 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. When that occurs, courts will often resolve the matter by interpreting the language against the party that drafted it and thus is "to blame" for the problem.
(But: If a contract provision isn't ambiguous, then contra proferentem won't come into play in the first place.)
10.13.3. Why do courts (sometimes) use the contra proferentem doctrine?
The policy basis for contra proferentem was explained by the Supreme Court in Shearson Lehman Hutton (U.S. 1995):
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) (citations and footnotes omitted).
The contra proferentem principle is roughly analogous to the well-known "I cut, you choose" approach that is seen, for example, in what are sometimes called "shotgun" buy-sell agreements. See, e.g., Divide and choose (Wikipedia.org); Spice (2017) (application to gerrymandering).
10.13.4. Who might want to disclaim contra proferentem – and why?
A party to a contract might have sufficient bargaining power that the party can successfully insist on using its own contract form in dealing with other parties. When that's the case, that party (i.e., the party with the bargaining power) might try to include a waiver of the contra proferentem doctrine in its contract form.
10.13.5. Caution: Disclaiming contra proferentem can cause problems.
In some jurisdictions, courts readily enforce contra proferentem disclaimers. Delaware is such a jurisdiction, as noted by the Chancery Court in Texas Pacific Land Corp. (2023).
To similar effect is the Tenth Circuit's ORP Surgical (2024), where the court applied New Jersey law and the contract language in question was: "The Parties acknowledge that this Agreement is the result of negotiations so neither Party shall avail itself of any rule of construction that would resolve ambiguities against a drafting party." ORP Surgical, LLC v. Howmedica Osteonics Corp., 92 F.4th 896, 921 n.14 (10th Cir. 2024).
But: Suppose that a court or arbitrator concluded that there was no way to resolve an ambiguity in a contract, other than by applying the contra proferentem principle — 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 anyway to resolve the ambiguity; or
the tribunal might rule that the ambiguous provision could not be enforced — which in some circumstaces might jeopardize the enforceability of the entire contract.
10.13.6. Courts use contra proferentem only as a last resort
Courts generally won't apply contra proferentem unless both the following are true:
First: A particular provision in a contract must appear to be "ambiguous" — that is, there must be two or more potentially-plausible meanings for the provision.
If a contract provision clearly isn't ambiguous — for example, if one of the party-asserted meanings simply isn't plausible — then the contra proferentem doctrine won't come into play in the first place.
Second: The seeming ambiguity must not be capable of being resolved by other conventional methods — for example, by consulting other language in the contract and/or by considering extrinsic evidence such as course of dealing and usage in the trade. As the U.S. Supreme Court explained in Lamps Plus (2019):
The [contra proferentem] rule applies only as a last resort when the meaning of a provision remains ambiguous after exhausting the ordinary methods of interpretation.
At that point, contra proferentem resolves the ambiguity against the drafter based on public policy factors, primarily equitable considerations about the parties' relative bargaining strength. …
Unlike contract rules that help to interpret the meaning of a term, and thereby uncover the intent of the parties, contra proferentem is by definition triggered only after a court determines that it cannot discern the intent of the parties.
When a contract is ambiguous, contra proferentem provides a default rule based on public policy considerations; it can scarcely be said to be designed to ascertain the meanings attached by the parties.
Like the contract rule preferring interpretations that favor the public interest, contra proferentem seeks ends other than the intent of the parties.
Lamps Plus, Inc. v. Varela, 587 U.S. _ _, 139 S. Ct. 1407, 1417 (2019) (reversing and remanding Ninth Circuit's affirmance of order compelling class-wide arbitration) (cleaned up, emphasis in original, extra paragraphing added).
10.13.7. Other policy considerations can outweigh contra proferentem
Based as it is on public-policy considerations, the contra proferentem principle can be trumped by other policies. The (U.S.) Supreme Court explicitly so held in its 2019 Lamps Plus decision concerning an arbitration provision; see 10.13.6.
In Lamps Plus, the Ninth Circuit had applied contra proferentem to an ambiguous arbitration provision and determined that the parties had implicitly agreed to class-wide arbitration (see generally the commentary at 4.5.3.1). The Supreme Court would have none of it, with the majority remarking that "[s]uch an approach is flatly inconsistent with the foundational FAA principle that arbitration is a matter of consent." Lamps Plus, Inc. v. Varela, 587 U.S. _ _, 139 S. Ct. 1407, 1417, 1418 (2019) (reversing and remanding Ninth Circuit's affirmance of order compelling class-wide arbitration) (extra paragraphing added).
10.13.8. Special case: Standard form contracts
The contra proferentem principle might be especially important when interpreting an ambiguous provision of a standard form contract. In Bandera Master Fund (2021), the Delaware chancery court explained that when a contract isn't negotiated, "[e]xtrinsic evidence … cannot speak to the intent of all parties to the agreement." Bandera Master Fund LP v. Boardwalk Pipeline Partners, LP, No. 2018-0372, slip op. at 111 (Del. Ch. Nov. 12, 2021) (after bench trial, holding that general partner was liable for nearly $690 million in damages; ambiguous provisions in limited partnership agreement are construed against the general partner) (emphasis added); rev'd on other grounds, Boardwalk Pipeline Partners LP v. Bandera Master Fund LP, 288 A.3d 1083, 1134-35 (Del. 2022) ("this extrinsic evidence may provide a view of what occurred in the periphery").
10.13.9. Related: "No drafting history" clauses might be enforced
Example: In Texas Pacific Land (2023), Vice Chancellor Laster of Delaware provided an extensive review of case law in enforcing the "No Drafting History" provision at the end of the following contract clause:
Each party and its counsel cooperated and participated in the drafting and preparation of this Agreement,
and any and all drafts relating thereto exchanged among the parties will be deemed the work product of all of the parties and may not be construed [sic; see 14.7 on humility in drafting] against any party by reason of its drafting or preparation.
Accordingly, any rule of law or any legal decision that would require interpretation of any ambiguities in this Agreement against any party that drafted or prepared it is of no application and is hereby expressly waived by each of the parties,
and any controversy over interpretations of this Agreement will be decided without regard to events of drafting or preparation.
See Texas Pacific Land Corp. v. Horizon Kinetics LLC, 306 A.3d 530, 549 (Del. Ch. 2023) (emphasis by the court, extra paragraphing added), aff'd w/o opinion, No. 478, 2023 (Del. Feb. 26, 2024).
10.14. Contract-Related Claim Definition
The term "Contract-Related Claim" refers to any claim, obligation, liability, or cause of action — each, a "Claim" — arising out of or relating to one or more of the following:
this Agreement;
the negotiation, execution, performance, or breach of this Agreement;
any representation or warranty made in, in connection with, or as an inducement to, this Agreement; and/or
any transaction or relationship resulting from this Agreement.
Note
This Clause is a purely convenience definition; it's used, for example, in Clause 12.7 (non-recourse against party employees).
In case of doubt: The term Contract-Related Claim encompasses all Claims whether, for example —
arising in contract or in tort;
arising in law or in equity; and/or
created or granted by a constitution, statute, regulation, order precedent, or other governmentally-enforceable policy.
10.15. Contractions (notes)
Author's note: The clauses in this book are written in what I hope is pretty-accessible language. Here and there, I've used contractions, such as "don't" instead of "do not."
Contractions and other accessible language are catching on in legal-related writing. From plainlanguage.gov:
While many legal authorities say that contractions don’t belong in legal writing, Bryan Garner, a leading authority on legal writing, advocates their use as a way to make legal writing, including opinions and rules, less stuffy and more natural. Contractions make your writing more accessible to the user.
Research shows that that they also enhance readability.
In a 2017 post, Ross Guberman, another legal-writing guru, notes that fully 63% of judges surveyed either are OK with contractions in parties' briefs or simply don't care.
And some justices use contractions in their opinions.
Example: From opinions by Justice Kagan (all emphasis added):
"So a defendant would get safety-valve relief only if he doesn't have any of the three listed criminal-history features. … * * * But second, suppose the same chef typically places a food order if the restaurant 'does not have meat, produce, or bread.' That most likely means he'll place an order when the restaurant runs out of one of those foodstuffs, not wait until it is lacking all three."602
"The clear-error standard is a recognition of comparative competence. And it is a forced dose of humility—a virtue which sometimes doesn't come naturally to appellate courts. * * * Now I'll admit: I'm not a statistician. I can see what the majority is saying, but my inclination would be to seek out other opinions …. The problem is I can't do that here. … Sure, it's fun to play armchair statistician. But it's irresponsible to reverse a trial court's decision — on clear-error review — based on such hypothesizing."603
"Congress knows what it doesn't and can't know when it drafts a statute; and Congress therefore gives an expert agency the power to address issues—even significant ones—as and when they arise. * * * Until the agency action at issue, tobacco products hadn't been spoken of in the same breath as pharmaceuticals (FDA's paradigmatic regulated product)."604
Example: From opinions by Justice Gorsuch (all emphasis added):
"Statutes aren't games or puzzles but instruments of a practical nature, founded on the common business of human life, and fitted for common understandings."605
"Maybe so, Justice SOTOMAYOR replies, but what if other States pass legislation similar to S. B. 8? Doesn't that possibility justify throwing aside our traditional rules?"606
"In light of Pereira, the government now concedes the first document isn't enough to trigger the stop-time rule."607
"By contrast, the dissent doesn't try to defend Louisiana's law on Sixth or Fourteenth Amendment grounds …."608
Example: And, from the Supreme Court of Texas: "Words aren’t ambiguous merely because they can be read differently in the abstract."609
10.16. Contrary Positions Consequences
Contrary Positions Consequences
If this Agreement adopts this Clause, it will apply if, in a lawsuit or other dispute, a party is found, by a tribunal having jurisdiction, to have asserted a position contrary to an express- or unmistakably-implied term of this Agreement.
Note
I've not seen, in actual contracts, language along the lines of this Clause. But drafters might want to consider it, for the reasons discussed in the notes following the language below
In such a situation, that asserting party must pay or reimburse all attorney fees and costs incurred by any other party to the dispute through the date (if any) that the asserting party formally withdrew the assertion in question:
in a writing communicated to the other party in question and the tribunal, or
if orally, on the record in a proceeding of the tribunal.
The attorney fees and costs referred to in subdivision 2 are those for all aspects of the entire dispute, at all stages of the dispute proceedings, through the date indicated.
10.16.1. Why consider this Clause?
Without language such as that of this Clause, a limitation of liability (e.g., a damages cap or a consequential-damages exclusion) might be held to constitute merely a waiver and not a breachable covenant. That was the central issue in two Texas supreme court cases in the same year — with opposite results.
In the first such case, James Construction Group (2022), a construction contract was between a customer and a contractor. The contract excluded consequential damages, stating that "no claim shall be made by [either party] against the other for such damages."
A 5-4 majority of the Texas supreme court held that the contract's exclusion of consequential damages was not really a covenant not to seek such damages — and thus the customer did not breach the contract by seeking such damages from the contractor. See James Constr. Grp., LLC v. Westlake Chem. Corp., 650 S.W.3d 392, 415-18 (Tex. 2022) (reversing court of appeals).
In a strong partial dissent, Justice Boyd (joined by Justices Blacklock and Huddle) argued that "the parties' agreement that 'no claim shall be made' for consequential damages constitutes a covenant not to sue for such damages." One can wonder whether Justice Boyd's view might have prevailed if the contract had abjured the passive voice and said, "neither party shall make any claim" instead of "no claim shall be made …." Id. at 425 (Boyd, J., dissenting).
On the other hand: In Transcor Astra Group (2022), the same court, this time unanimously, seems to have interpreted a settlement agreement's statement of release from liability as implicitly promising not to assert the released claims:
By asserting claims it had agreed never to assert, Petrobras broke the promise it made in the settlement agreement and caused Astra to incur substantial fees and costs to enforce that promise. We conclude the trial court did not abuse its discretion by awarding Astra its fees and costs.
Transcor Astra Group S.A. v. Petrobras America Inc., 650 S.W.3d 462, 483 (Tex. 2022) (reversing court of appeals; reliance disclaimer in settlement agreement barred fraud claims) (emphasis added).
Perhaps in Transcor Astra the court regarded dispute-settlement agreements as warranting special treatment, having noted that "Texas law encourages parties to resolve their disputes by agreement …." Id. at 473
10.16.2. What kinds of assertion might trigger this Clause?
Here are a few examples of assertions that would normally be contrary to this Agreement and thus would trigger this Clause:
claiming consequential damages (see Clause 10.5) if this Agreement excludes the claimant's recovery of such damages;
claiming damages in excess of an agreed "cap" or other monetary limitation (concerning which, see Clause 16.5.5);
asserting a purported right, or a purported obligation, that had previously been waived (see Clause 24.3);
asserting a claim that had been released (see the real-world example at 10.16.1);
asserting that a notice took effect at a time inconsistent with the notice provisions stated in this Agreement (concerning which, see Clause 18.7);
asserting that this Agreement or a related document was amended or otherwise modified in a manner inconsistent with the amendment provisions of this Agreement (see Clause 4.2);
an assertion that an action was timely if taken after a deadline stated in this Agreement or a related document (for example, a statement of work);
filing a lawsuit or arbitration in a forum inconsistent with a forum-selection clause (concerning which, see Clause 13.5);
asserting that the governing law is that of some jurisdiction other than as stated in a governing-law clause (see Clause [BROKEN LINK: GovLaw]).
(This isn't an exclusive list, of course.)
10.17. Cooperation
When this Agreement adopts this Clause, the term "cooperate" (whether or not capitalized) refers to working together with a specified party in [BROKEN LINK: good-faith], and in a reasonable manner, in pursuit of a specified goal; the term "cooperation" has the corresponding meaning.
If either party asks, the parties will escalate any disagreement about whether a proposed course of action would satisfy the requirements of this Clause
Note
a. This definition is provided to support parties who want to "kick the can down the road" (granted, an overused expression) by deferring discussion of issues when they're reasonably confident that they'll be able to work things out between them
10.18. Copy-and-paste can be dangerous if done mindlessly
Don't just copy and paste language from an old contract without thoroughly reviewing it. One very-public "fail" on that score occured in the UK's negotiation of its Brexit deal; as reported by the BBC:
References to decades-old computer software are included in the new Brexit agreement, including a description of Netscape Communicator and Mozilla Mail as being "modern" services.
Experts believe officials must have copied and pasted chunks of text from old legislation into the document.
The references are on page 921 of the trade deal, in a section on encryption technology.
It also recommends using systems that are now vulnerable to cyber-attacks.
The text cites "modern e-mail software packages including Outlook, Mozilla Mail as well as Netscape Communicator 4.x."
The latter two are now defunct — the last major release of Netscape Communicator was in 1997.610