# On Contract Drafting

By D. C. Toedt III
Attorney & arbitrator — tech contracts & IP
Adjunct professor, University of Houston Law Center
A work in progress — think before printing
Draft: 2017-08-17

## 1 Introduction: Serving the judge (and other readers)

### 1.1 Three crucial questions asked by judges and juries

Most contracts stay buried in the (electronic) file drawer. The contracting parties either don't get into disputes in the first place, or they successfully resolve any disputes on their own.

But woe betide the drafter (or reviewer) who forgets that ultimately a contract might have to serve as Exhibit A in a lawsuit or arbitration. For such a contract, the most important reader is the judge or arbitrator — who almost certainly is very busy; who might have little or no knowledge of the parties' business; and who would appreciate it if the contract quickly conveyed the answers to three crucial questions:

1. Exactly what — if anything — did the defendant commit to do or not do in the contract?
2. What event or events could trigger the defendant's commitment, and did the necessary triggering event or -events actually occur?
3. Was the defendant's commitment subject to any relevant exceptions or other limitations?

Clumsy drafting can sometimes make these three contract questions very difficult for the judge, arbitrator, or other reader to puzzle out. During negotiation, this can slow up the non-drafting party's legal review and delay getting the contract to signature, and in litigation or arbitration, it can increase the chances of an unforeseen result.

The drafters and reviewers of a contract can serve all future readers  — not least, the business people who must read the contract — by being as clear as possible about these questions. Clarity thus helps to reduce the odds of a dispute arising in the first place.

### 1.2 The contract drafter's job: Educate and persuade

The author of a contract-drafting style manual once opined that, apart from the opening recitals, “in a contract you don’t reason or explain. You just state rules.” Ken Adams, More Words Not to Include in a Contract— “Therefore” and Its Relatives, at http://www.adamsdrafting.com/therefore/ (2008).

That view would be fine if people were computers, which do exactly as they're told: nothing more, nothing less. But people aren't computers. Memories are often short and can sometimes be "creative." Moreover, a contracting party's circumstances can change after the contract is signed — by the time a dispute arises, key employees and executives of a party could have different views of what's important, and they might have forgotten (perhaps conveniently) what mattered during the con­tract negotiations.

Let's not forget another important group of people: Judges, jurors, and arbitrators who are asked to enforce a contract can be influenced by what they think is right and fair. Sometimes, the wording of the contract's terms can make a difference.

So: People sometimes need to be educated, and even persuaded, to do the things they’re theoretically supposed to do.

That is the contract drafter's mission: To educate the parties — and sometimes judges and jurors — and, if necessary, to persuade them, to do what your client now wants them to do.

### 1.3 P-A4-T-E-L: A checklist for commitment clarity

Beginning contract drafters can refer to the mnemonic P-A4-T-E-L as a checklist to help them make sure their contractual commitments are clear:

P: Which if any party to the contract is making the commitment? Contracts should be extremely clear about this and avoid false imperatives — e.g., in an apartment lease agreement: The apartment shall be regularly serviced by a professional pest-control service — as discussed in § 4.2.

A4: Just what action, abstention (from action), assumed fact, or assent is the party commiting to? It might be, for example —

1. A promise of action, that is, an affirmative covenant: Alice will deliver 1,000 candy canes to Bob's house at 9:00 a.m. on Christmas morning.

Another possibility would be Alice is to deliver ….

Some drafters like to use shall or must instead of will; the author prefers will because (i) it's less harsh, and (ii) in some English-speaking countries, shall might not be mandatory. [LINK]

2. A promise of abstention from action, that is, a negative covenant: Alice will not park her candy delivery truck in front of Bob's house for longer than two minutes.

Some drafters prefer to use more-emphatic language, e.g., Alice may not park, or perhaps even Alice must not park. The legal effect is essentially the same.

3. A commitment to an assumed fact, in the form of a representation and/or a warranty: Alice represents and warrants that the candy canes will be fit for human consumption. (This is technically a form of action promise, as discussed in § 7.1.)
4. A statement of assent (i) to possible future action (or abstention) by another, or (ii) to ground rules to be followed by the parties and/or by others. For example:
• Alice may dump the candy canes onto Bob's front yard. Bob implicitly assents to Alice's action (dumping the candy canes). Assent to action is in essence the same as, but it comes across more strongly than, a promise to abstain from objecting to the action.
• Alice need not individually wrap the candy canes. Bob implicitly assents to Alice's abstention from individually wrapping the candy canes.
• Any notice given under this Agreement must be in writing. Here, the parties assent to a ground rule that they will follow.
• This Agreement will be governed by Texas law. Here, the parties assent to a ground rule that they hope a court will follow.

T: What if any triggering conditions, a.k.a. conditions precedent, are necessary for the commitment to become effective? IF: Bob so requests no later than 12 midnight on Christmas Eve; THEN: Alice will cause her candy-cane delivery driver to wear a Santa suit.

E: What if any exceptions, a.k.a. conditions subsequent, would provide the commiting party with an "out"? If it is snowing on Christmas morning, then Alice may wait to deliver the candy canes until the snow stops.

L: Are there any limitations of the commitment, e.g., minimum- or maximum cost, time required, start times, deadlines, boundaries, manner, etc.? Bob will reimburse Alice for any highway tolls paid in delivering the candy canes, but only up to a maximum total reimbursement of $20. ### 1.4 Mnemonics (in progress) #### 1.4.1 In general • A.T.A.R.I. - Avoid the Argument: Rewrite It • S.T.R. - Serve the Reader • W.S.I.Y.F. - White Space Is Your Friend (for readability and faster review and -signature) • D.R.Y. — Don't Repeat Yourself (with some exceptions) • R.O.O.F. - Root Out Opportunities for F[oul]-ups (D.R.Y. is an example of this) • W.I.D.D. - When In Doubt, Define • W.I.D.A.P. — When In Doubt, Ask the Partner • W.I.D.A.C. — When In Doubt, Ask the Client • W.T.C. - Whose Throat to Choke? (Or, be careful about possible false imperatives—whom do I sue if X doesn't get done?) • O.T.C. - One Throat to Choke! (Remember: Two baseball outfielders letting a fly ball drop to the ground between them because neither one "calls it.") • G.F. - Graceful Failure - it's better to have a Plan B than to go right to litigation for breach of contract. #### 1.4.2 Specific drafting points • F.O.L.D. — Foreseeability as a Limitation (of liability) is Dangerous • "Any of A, B, and C" vs. "one or more of A, B, and C" – the former arguably means exactly one, so if that's what's meant, consider saying "any one of A, B, or C." • To avoid confusion, use may to indicate permission and might to indicate possibility. Example: Consider the two possible meanings of the statement, Consultant may not send the invoice before December 31. #### 1.4.3 Other • Right of first refusal / right of first offer • F.O.F.L. - First Offer = First Look • F.R.I.L.L. - First Refusal Is Last Look ### 1.5 "Learn the business" questions to ask the client (or partner) • S.N.I.T.S. phases to plan for that will occur in just about every relationship: • S tartup • N ormal operations • I nfrequent operations • T rouble • S hutdown • T.O. S.P.I.N. – T hreats and O pportunities presented by: • S upply networks • P eople (e.g., employees) • I nterveners (competitors, government, the press, advocacy groups, etc.) • N ature • I.N.D.I.A. – responses to a threat or opportunity: • I nformation to gather • N otification requirements (whom to notify?) • D iagnosis to confirm it's real and not a false alarm • I mmediate actions to take • A dditional- or follow-up actions • T.I.L.T. – advance preparation for actions: • T ools to acquire • I nsurance or other sources of funding • L ookouts to post (e.g., assigning responsibility for monitoring) • T raining • W.H.A.L.E.R. – fleshing out an action plan: • W ho is to take (or might take, or must not take) an action • H ow the action is to be taken, e.g., in accordance with a specified industry standard? • A utonomy of the actor (to be explained) • L imitations on the action • E conomics of the action (e.g., who pays, when, etc.) • R \ecordkeeping requirements ### 1.6 Potential test questions 1. QUESTION: Which of the following does the author think is not a good choice: A. Bob will pay Alice$1,000 no later than December 24.
B. Bob shall pay Alice $1,000 no later than December 24. C. Bob must pay Alice$1,000 no later than December 24.
D. Bob is to pay Alice $1,000 no later than December 24. 2. QUESTION: In the mnemonic P-A4-T-E-L, what are the four types of commitment symbolized by A4? 3. QUESTION: In the mnemonic P-A4-T-E-L, which of these is one of the four types of commitment symbolized by A4? A. Admission into evidence. B. Assignment of agreement. C. Acknowledgement. D. Abstention. 4. TRUE OR FALSE: In a contract to remodel a kitchen in a house, the following would be an acceptable drafting style: All building permits are to be timely obtained. ## 2 Title, preamble, etc. ### 2.1 A hypothetical example This is the preamble from the hypothetical "A Somewhat-Barebones Contract" in the Supplement (at page 1). Purchase and Sale Agreement for 2012 MacBook Air Computer THIS AGREEMENT ("Agreement") is between (i) Betty's Used Computers, LLC, a limited liability company organized under the laws of the State of Texas ("Buyer"), with its principal place of business and its initial address for notice at 1234 Main St, Houston, Texas 77002; and (ii) Sam Smith, an individual residing in Houston, Harris County, Texas, whose initial address for notice is 4604 Calhoun Rd, Houston, Texas 77004 ("Seller"). This Agreement is effective the last date written on the signature page. ### 2.2 The title Let's look at the title in isolation: Purchase and Sale Agreement for 2012 MacBook Air Computer This is worded: • to make the title easier to spot in a list of documents, e.g., an index of files; and • to make the title more descriptive when referred to in other documents, e.g., another agreement, or a pleading, brief, or court opinion. For the same reasons, it might make sense to list the parties' names in the title as well. See, for example, the merger agreement between United Airlines and Continental Airlines, whose title is: AGREEMENT AND PLAN OF MERGER Among UAL Corporation Continental Airlines, Inc. and JT Merger Sub Inc. Dated as of May 2, 2010 Another title style is that seen in a real-estate purchase agreement involving Rick's Cabaret: REAL ESTATE PURCHASE AND SALE AGREEMENT BY AND BETWEEN WIRE WAY, LLC, a Texas limited liability company (“Seller”) and RCI HOLDINGS, INC., a Texas corporation (“Purchaser”) ### 2.3 The preamble #### 2.3.1 "This Agreement" Many drafters would start this preamble by repeating the title of the agreement in all-caps: THIS PURCHASE AND SALE AGREEMENT (this "Agreement") …. But others, including your author, prefer the shorter approach shown above and reproduced just below: THIS AGREEMENT ("Agreement") …. That's because: • It's doubtful that anyone would be confused about what "This Agreement" refers to; and • The shorter version reduces the risk that a future editor might (i) revise the large-type title at the very top of the document but (ii) forget to change the all-caps title in the preamble. (This is an example of the rule of thumb: Don't Repeat Yourself, or D.R.Y., discussed in § 4.1.) In the second bullet point just above, note how the first sentence is broken up (i) with bullets, and (ii) with so-called “romanettes,” that is, lower-case Roman numerals, to make the sentence easier for a contract reviewer to skim. (This follows the maxim: Serve the Reader, discussed in § 1.1.) #### 2.3.2 Bold-faced defined terms Note how our preamble defines the terms Agreement, Buyer, and Seller: THIS AGREEMENT ("Agreement") is between (i) Betty's Used Computers, LLC, … ("Buyer") … and (ii) Sam Smith, … ("Seller"). These defined terms are not only in bold-faced type: they're also surrounded by quotation marks and parentheses. This helps to make the defined terms stand out to a reader who is skimming the document. When drafting "in-line" defined terms like this, it's a good idea to highlight them in this way; this makes it easier for a reader to spot a desired definition quickly when scanning the document to find it. Imagine the reader running across a reference to some other defined term and starting to flip through the document, wondering to herself, “OK, what does ‘Buyer' mean again?” NOTE: If you also have a separate definitions section for defined terms (see § 2.5), it's a good idea for that section to include cross-references to the in-line definitions as well, so that the definitions section serves as a master glossary of all defined terms in the agreement. #### 2.3.3 Specific terms: "Buyer" and "Seller" One more point about how we identify the buyer and the seller in this contract: THIS AGREEMENT ("Agreement") is between (i) Betty's Used Computers, LLC, … ("Buyer") … and (ii) Sam Smith, … ("Seller"). This preamble uses the defined terms Buyer and Seller instead of the parties' names, Betty and Sam, because: • Doing this can make it easier on future readers … such as a judge … to keep track of who's who. • Doing this also makes it easier for the drafter to re-use the document for another deal by just changing the names at the beginning. Sure, global search-and-replace can work, but it's often over-inclusive; for example, automatically changing all instances of Sam to Sally might result in the word samples being changed to sallyples. #### 2.3.4 Agreement "between" (not "by and between") the parties Our preamble says that the contract is between the parties — not by and between the parties, and not among them: THIS AGREEMENT ("Agreement") is between …. True, many contracts say "by and between” instead of just “between.” The former, though, sounds like legalese, and the latter works just as well. For contracts with multiple parties, some drafters will write among instead of between; that's fine, but between also works. #### 2.3.5 Stating details about the parties Our preamble provides certain details about the parties: THIS AGREEMENT ("Agreement") is between (i) Betty's Used Computers, LLC, a limited liability company organized under the laws of the State of Texas … and (ii) Sam Smith, an individual …. When a party to a contract is a corporation, LLC, or other organization, it's an excellent idea for the preamble to state both (i) the type of organization, in this case "a limited liability company," and (ii) the jurisdiction under whose laws the organization was formed, in this case "organized under the laws of the State of Texas." This has several benefits: • It reduces the chance of confusion in case the same company name is used by different organizations in different jurisdictions … imagine how many "Acme Corporations" or "AAAAAA Dry Cleaning" there must be in various states; • it helps to nail down at least one jurisdiction where the named party is subject to personal jurisdiction and venue, saving future trial counsel the trouble of proving it up; and • it helps to establish whether U.S. federal courts have diversity jurisdiction (a U.S. concept that might or might not be applicable). (A shorter version might be "Betty's Used Computers, LLC, a Texas limited liability company ….") Including the jurisdiction of organization can simplify a litigator's task of "proving up" the necessary facts: If a contract signed by ABC Corporation recites that ABC is a Delaware corporation, for example, an opposing party generally won't have to prove that fact, because ABC will usually be deemed to have conceded it in advance. (See also [TODO: ACK-DEFN] and its field notes.) This particular hypothetical agreement is set up to be between a limited liability company, or "LLC," and an individual; in that way, the signature blocks will illustrate how organizational signature blocks should be done. See the [TODO: SigsAsGoal] chapter for more details. #### 2.3.6 Principal place of business (or residence) and initial address The preamble states some geographical information about the parties: THIS AGREEMENT ("Agreement") is between (i) Betty's Used Computers, LLC, … with its principal place of business and its initial address for notice at 1234 Main St, Houston, Texas 77002; and (ii) Sam Smith, an individual residing in Houston, Harris County, Texas, whose initial address for notice is 4604 Calhoun Rd, Houston, Texas 77004 ("Seller"). … Principal place of business: Stating Betty's principal place of business helps trial counsel avoid having to prove up personal jurisdiction. For example, a Delaware corporation whose principal place of business was in Houston would almost certainly be subject to suit in Houston. Residence: Likewise, if a party to a contract is an individual, then stating the individual's residence helps to establish personal jurisdiction and the proper venue for a lawsuit against him or her. County: Stating the county of an individual's residence might be important if the city of residence extends into multiple counties. For example, Houston is the county seat of Harris County, but just because Sam lives in Houston doesn't automatically mean that he can be sued in the county's courts in downtown Houston. That's because Houston's city limits extend into Fort Bend County to the southwest and Montgomery County to the north; Sam might live in the City of Houston but in one of those other counties, and so he might have to be sued in his home county and not in Harris County. Addresses for notice: It's convenient to put the parties' initial addresses for notice in the preamble. That way, a later reader won't need to go paging through the agreement looking for the notice provision. Doing this also makes it easy for contract reviewer(s) to verify that the information is correct. #### 2.3.7 Stating the effective date in the preamble The preamble states the effective date; that's usually unnecessary unless the contract is to be effective as of a specified date, but many drafters like to include the effective date anyway. I prefer the “last date signed” approach that's used in the example above: THIS AGREEMENT ("Agreement") is between …. This Agreement is effective the last date written on the signature page. Here's a different version of the last-date-signed approach: This Agreement is made, effective the last date signed as written below, between …. In reviewing others' contract drafts, you're likely to see some less-good possibilities: This Agreement is made December 31, 20XX, between …. This Agreement is dated December 31, 20XX, between …. Either of these can be problematic because the stated date might turn out to be inaccurate, depending on when the parties actually sign the contract. CAUTION: Never backdate a contract for deceptive purposes, e.g., to be able to book a sale in an earlier fiscal period — as discussed in § 15.1, that practice has sent more than one corporate executive to prison, including at least one general counsel. On the other hand, it might be just fine to state that a contract is effective as of a different date. EXAMPLE: Alice discloses confidential information to Bob after Bob first orally agrees to keep the information confidential; they agree to have the lawyers put together a written confidentiality agreement. That written agreement might state that it is effective as of the date of Alice's oral disclosure. The following might work if it's for non-deceptive purposes: This Agreement is entered into, effective December 31, 20XX, by …. (Alice and Bob would not want to backdate their actual signatures, though.) #### 2.3.8 Include affiliates as "parties"? (Probably not.) Some agreements, in identifying the parties to the agreement on the front page, state that the parties are, say, ABC Corporation and its Affiliates. That's generally a bad idea unless each such affiliate actually signs the agreement as a party and therefore commits on its own to the contractual obligations. The much-better practice is to state clearly the specific rights and obligations that (some or all) affiliates have under the contract. This is sometimes done in "master" agreements negotiated by a party on behalf of itself and its affiliates. For example, consider a negotiated master purchase agreement between a customer and a provider. The master agreement might require the provider to accept purchase orders under the master agreement from the customer's affiliates as well as from the customer itself, so that the customer's affiliates can take advantage of the pre-negotiated pricing and terms. CAUTION: An affiliate of a contracting party might be bound by the contract if (i) the contracting party — or the individual signing the contract on behalf of that party — happens to control the affiliate, and (ii) the contract states that the contract is to benefit the affiliate. That was the result in Medicalgorithmics S.A. v. AMI Monitoring, Inc., No. 10948-CB, slip op. at 3, 52-53 (Del. Ch. Aug. 18, 2016). In that case, (i) the contract stated that a strategic alliance was being created for the contracting party and its affiliates, and (ii) the contract was 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. #### 2.3.9 Naming the "wrong" party can screw up contract enforcement Be sure you're naming the correct party as "the other side" — or consider negotiating a guaranty from a solvent affiliate. Failing to name the correct corporate entity could leave your client holding the bag. This seems to have happened in Northbound Group, Inc. v. Norvax, Inc., 795 F.3d 647 (7th Cir. 2015): • Northbound Group was a company that generated leads for life-insurance sales. Facing financial difficulties, it agreed to sell its assets to Norvax, which generated leads for health-insurance sales. • The actual asset-purchase agreement, though, was not between Northbound and Norvax, but between Northbound and a newly-created subsidiary of Norvax. • Northbound later claimed that both the named contracting party and its parent company Norvax had breached the asset-purchase agreement in various ways. • When Northbound filed suit, though, it sued only Norvax, not the named contracting party; the latter purportedly had no assets, see id. at 650, and thus might well have been judgment-proof. Northbound found that it had shot itself in the foot when it sued the parent company and not the named contracting party. The Seventh Circuit affirmed summary judgment in favor of the parent company, saying: It goes without saying that a contract cannot bind a nonparty. … If appellant is entitled to damages for breach of contract, [it] can not recover them in a suit against appellee because appellee was not a party to the contract. These are the general rules of corporate and contract law, but they come with exceptions, of course. Northbound tries to create one new exception and invokes two established ones. We find no basis for holding Norvax liable for any alleged breach of the contract between Northbound and … the Norvax subsidiary. Id. at 650-51 (internal quotation marks and citations omitted). #### 2.3.10 Does each party have legal capacity to contract? Depending on the law of the jurisdiction, an unincorporated association or trust might not be legally capable of entering into contracts. See generally Ken Adams, Can a Trust Enter Into a Contract? (AdamsDrafting.com Dec. 2014). If a contract is purportedly entered into by a party that doesn't have the legal capacity to do so, then conceivably the individual who signed the contract on behalf of that party might be personally liable for the party's obligations. #### 2.3.11 Country-specific required information? Apparently the Czech Republic and some other Central- and Eastern-European countries require contracts to include specific identifying information about the parties, e.g., the registered office, the company ID number. and the registration in the Com­mer­cial Register. See this Ken Adams blog post; also this one from 2007. Similar information can be found in this apparently-Israeli contract. ### 2.4 The background section (a.k.a. "recitals") #### 2.4.1 Style tip: Avoid "Witnesseth" and "Whereas" clauses Modern drafters avoid archaic "Witnesseth" and "Whereas" clauses, such as those seen in this real-estate purchase agreement. 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: Instead, draft background recitals … in simple, plain English. As Warren Buffett says, in his preface to the SEC's Plain English Handbook: When writing Berkshire Hathaway’s annual report, I pretend that I’m talking to my sisters. I have no trouble picturing them: Though highly intelligent, they are not experts in accounting or finance. They will understand plain English, but jargon may puzzle them. My goal is simply to give them the in­form­a­tion I would wish them to supply me if our positions were reversed. To succeed, I don’t need to be Shakespeare; I must, though, have a sincere desire to inform. No siblings to write to? Borrow mine: Just begin with “Dear Doris and Bertie.” U.S. Securities and Exchange Commission, Plain English Handbook at 2 (Aug. 1998) available at https://goo.gl/DZaFyT (sec.gov) (emphasis and extra paragraphing added). #### 2.4.2 Keep the background simple The "Background" section of the contract should briefly explain to a future reader why the parties are entering into the contract, preferably in short, numbered paragraphs. As a general proposition, the drafter should just tell the story: explain in simple terms — with short sentences and paragraphs — what the parties are doing, so as to help future readers get up to speed more quickly. #### 2.4.3 Example: The Verizon-Yahoo stock purchase agreement ##### 2.4.3.1 The original "Recitals" The following is from a highly-publicized stock purchase agreement in the tech industry:  RECITALS 1.0 Background 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; 1.1 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, in substantially the form attached to this Agreement as Exhibit A (the “Re­org­an­i­za­tion Agreement”). 1.2 Under the Reorganization Agreement, Seller and the Company are to complete certain "Re­org­an­i­za­tion Transactions" at or prior to the Closing. WHEREAS, concurrently with the execution and delivery of this Agreement, Excalibur IP, LLC, a Delaware limited liability company (“Excalibur”), and Seller are entering into an Amended and Restated Patent License Agreement substantially in the form attached hereto as Exhibit D (the “License Agreement”); 1.3 Also concurrently with the execution and delivery of this Agreement, Excalibur IP, LLC, a Delaware limited liability company (“Excalibur”), and Seller are entering into an Amended and Restated Patent License Agreement in substantially the form attached to this Agreement as Exhibit D (the “License Agreement”). WHEREAS, concurrently with the execution and delivery of this Agreement, Excalibur IP, LLC, a Delaware limited liability company (“Excalibur”), and Seller are entering into an Amended and Restated Patent License Agreement substantially in the form attached hereto as Exhibit D (the “License Agreement”); WHEREAS, Seller owns, and immediately prior to the Closing will own, all of the Shares; WHEREAS, upon the terms and subject to the conditions set forth in this Agreement, Seller desires to sell to Purchaser, and Purchaser desires to purchase from Seller, the Shares (the “Sale”); WHEREAS, the board of directors of Purchaser has approved this Agreement and the transactions contemplated hereby; and WHEREAS, the board of directors of Seller has (i) approved this Agreement and the Transactions, (ii) determined that this Agreement and Sale and the Reorganization Transactions are expedient and for the best interests of Seller and its stockholders and (iii) resolved, subject to the terms of this Agreement, to recommend that the stockholders of Seller authorize the Sale and the Reorganization Transactions. NOW, THEREFORE, in consideration of the mutual representations, warranties, covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ##### 2.4.3.2 The recitals, rewritten as a "Background" section The above original example is far from the worst you'll ever see. As shown below, though, it can be rewritten in a more-modern style, with: • the recitals retitled as a (numbered) "Background" section; • the "WHEREAS" terms deleted; • some of the sentences shortened; and • some of the "legalese" rephrased. Strikethroughs indicate deletions; underlining indicates insertions. (Not all revisions are so marked.) 1.00 RECITALS BACKGROUND 1.01 WHEREAS, concurrently 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 in substantially in the form attached hereto as Exhibit A (the “Reorganization Agreement”). pursuant to which Under the Reorganization Agreement, Seller and the Company will are to complete the Reorganization Transactions at or prior to the Closing. 1.02 WHEREAS, concurrently Also concurrently with the execution and delivery of this Agreement, Excalibur IP, LLC, a Delaware limited liability company (“Excalibur”), and Seller are entering into an Amended and Restated Patent License Agreement, in substantially in the form attached hereto as Exhibit D (the “License Agreement”). 1.03 WHEREAS Seller now owns, and immediately prior to the Closing it will own, all of the Shares (defined below). 1.04 WHEREAS, upon the terms and subject to the conditions set forth in this Agreement, Seller desires to sell the Shares to Purchaser, and Purchaser which likewise desires to purchase the Shares from Seller, the Shares on the terms and subject to the conditions set forth in this Agreement (the “Sale”); 1.05 WHEREAS, the The board of directors of Purchaser has approved this Agreement and the transactions that it contemplates. contemplated hereby; and 1.06 WHEREAS, the The board of directors of Seller has (i) approved this Agreement and the Transactions (defined below), (ii) determined that this Agreement and Sale and the Reorganization Transactions are expedient and for the best interests of Seller and its stockholders and (iii) resolved, subject to the terms of this Agreement, to recommend that the stockholders of Seller authorize the Sale and the Reorganization Transactions. 1.07 NOW, THEREFORE The parties enter into this Agreement in consideration of the mutual representations, warranties, covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged. the parties hereto agree as follows [This section 1.07 arguably could be deleted.] #### 2.4.4 Caution: Recitals might be binding A court might give special or even binding weight to recitals in a contract. 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; hat tip: Commenter "Kazu" at the Adams Drafting blog.) See also the notes to [TODO: ACK-DEFN]. #### 2.4.5 Special topic: Background section for settlement agreements When an agreement is made to settle a dispute, it can be really advantageous for the background ssection of the signed agreement to document that fact. This advantage is illustrated in Pappas v. Tzolis, 20 N.Y.3d 228 (2012). In that case: • Tzolis, a businessman, owned part of a limited liability company ("LLC") along with two colleagues, Pappas and Tziolis invested$50,000 in the company, while Ifantopoulos invested $25,000. The LLC acquired a long-term lease on a building in Lower Manhattan. • About a year later, after repeated disputes had arisen, Tzolis bought out Pappas and Ifantopoulos for 20 times (!) their respective investments. • A few months later, Tzolis sold the building lease for$17.5 million.
• Pappas and Ifantopoulos sued Tzolis for (among other things) fraud and breach of fiduciary duty, claiming that Tzolis had arranged the sale before he bought them out, without telling them he was doing so.

New York's highest court ruled that Pappas's and Ifantopoulos's complaint should have been summarily dismissed:

Here, plaintiffs were sophisticated businessmen represented by counsel. Moreover, plaintiffs' own allegations make it clear that at the time of the buyout, the relationship between the parties was not one of trust, and reliance on Tzolis's representations as a fiduciary would not have been reasonable.

According to plaintiffs, there had been numerous business disputes, between Tzolis and them, concerning the sublease. Both the complaint and Pappas's affidavit opposing the motion to dismiss portray Tzolis as uncooperative and intransigent in the face of plaintiffs' preferences concerning the sublease. The relationship between plaintiffs and Tzolis had become antagonistic, to the extent that plaintiffs could no longer reasonably regard Tzolis as trustworthy.

Therefore, crediting plaintiffs' allegations, the release contained in the Certificate is valid, and plaintiffs cannot prevail on their cause of action alleging breach of fiduciary duty.

Id. at 233 (emphasis and extra paragraphing added).

In similar fashion, in a settlement agreement, the Background section can recite facts about the dispute between the parties. The court likely will accept those facts as true. See the commentary to [TODO: ACK-DEFN]. That can help counter what one commentator says will be the plaintiffs' lawyers' response to the Pappas decision, namely not to stipulate in their complaints that the parties had a dispute. See Peter Mahler, Pappas Saga Ends … (2012).

### 2.5 Defined terms

#### 2.5.1 Some style preferences

The following are some personal style preferences that enhance readability (in the author's view):

• Put the defined term in quotes and bold-faced type to make it stand out on the screen or page and thus make the term easier to spot while scanning through the document.

• Use refers to instead of means, because the former often just sounds better in different variations.

 Before: Confidential Information means information where all of the following are true …. After: "Confidential Information" refers to information where all of the following are true ….

#### 2.5.2 Where to put definitions?

Definitions in contracts are typically found:

1. in a separate section of the contract;
2. as the defined terms occur in the contract text (see the examples in § 2.3.2); or
3. as a combination of both 1) and 2) in the same contract.

#### 2.5.3 Caution: Consistency in capitalizing defined terms can be crucial

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.

Something like that happened in the Clinton Ass'n for a Renewed Environment case:

• The defendant asserted that the plaintiff's claim was barred by the statute of limitations and therefore should be immediately dismissed.
• The plaintiff, however, countered that the limitation period began to run much later than the defendant had said.
• The court held that inconsistency of capitalization of the term "substantial completion" precluded an immediate dismissal of the plaintiff's claim.

See Clinton Ass'n for a Renewed Environment, Inc., v. Monadnock Construction, Inc., 2013 NY Slip Op 30224(U) (denying defendant's motion to dismiss on the pleadings).

In a similar vein, a UK lawsuit over flooding of a construction project turned on whether the term "practical completion" (uncapitalized) had the same meaning as the same term capitalized. The court answered that the terms did not have the same meaning; as result, a sprinkler-system subcontractor was potentially liable for the flooding. See GB Building Solutions Ltd. v. SFS Fire Services Ltd., (2017) EWHC 1289, discussed in Clark Sargent, Antonia Underhill and Daniel Wood, Ensure That Defined Terms Are Used Consistently; Ambiguity Can Be Costly (Mondaq.com 2017).

#### 2.5.4 Put the definitions at the back of this Agreement? Or in an exhibit or schedule?

A drafter can place a separate "definitions" section:

• near the beginning of the agreement — this is perhaps the most-common practice;
• at the back (with results that might be surprising);
• in a separate exhibit or schedule (which can be handy if using the same definitions for multiple documents in a deal).

On his blog, IACCM founder and president Tim Cummins tells of an IACCM member whose company saved hours of negotiating time — up to a day and a half per contract — by moving the "definitions" section from the front of its contract form to an appendix at the back of the document. Cummins recounted that "by the time the parties reached 'Definitions', they were already comfortable with the substance of the agreement and had a shared context for the definitions. So effort was saved and substantive issues were resolved." Tim Cummins, Change does not have to be complicated (July 21, 2014).

See, e.g.:

### 2.6 Alternatives

When the author was a baby lawyer, the senior partner of the author's firm, the late and legendary IP litigator Tom Arnold, asked me to draft a simple confidentiality agreement for a friend of his, “Bill,” who was going to be disclosing a business plan to Bill’s friend, “Jim.”

Tom told me not to draft a conventional contract. Instead, the contract was to take the form of a short letter along approximately the following lines:

“Dear Jim: This confirms that I will be telling you about my plans to go into business raising tribbles so that you can evaluate whether you want to invest in the business.

“You agree that (1) you won’t disclose what I tell you about my plans to anyone else, and (2) you won’t use that information yourself, unless (A) the information has become public or (B) I say in writing that it’s OK.

“If this is agreeable, please countersign the enclosed copy of this letter and return it to me.

“I look forward to working with you.

“Sincerely, Bill.”

When I’d prepared a draft, I asked Tom, isn’t this pretty sparse?

Tom replied, yes it was sparse, but:

• the signed letter would be a binding, enforceable contract, which Bill could take to court if he had to; and
• Jim would almost certainly sign the letter immediately, without the delay that would result if he felt he had to have his lawyer review it.

That was an eye-opener; it taught me that contracts aren’t magic talismans; they’re just simple statements of simple things.

### 2.7 Exercises

#### 2.7.1 Drafting exercise: Background of Agreement

The following is from a real-estate purchase agreement:

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:

EXERCISE: Redraft this into a "Background of the Agreement" section.

• Use short, simple sentences and short paragraphs.
• Eliminate as much legalese as you can.

## 3 Signature blocks

### 3.1 Overview

#### 3.1.1 "AGREED:"

It's helpful to start out a signature block with the word "AGREED:" in all-caps and followed by a colon, as shown in the examples below, thusly:

Betty’s Used Computers, LLC, by:

Betty Boop, Manager

Date signed

#### 3.1.2 Use a concluding paragraph? (No.)

The author prefers not to use an entire concluding paragraph such as the following:

To evidence the parties' agreement to this Agreement, each party has executed and delivered it on the date indicated under that party's signature.

First, that kind of concluding paragraph is overkill. There are other ways of proving up that The Other Side in fact delivered a signed contract to you … for starters, the copy in your possession that bears The Other Side's signature.

Second, at the instant of signature, a past-tense statement that each party “has delivered” the signed contract is technically inaccurate — even more so at the moment when the first signer affixes his (or her) signature.

#### 3.1.3 Blank space for date signed

Look again at the signature block above for Betty's Used Computers, LLC. It's a good idea to include, as part of each signature block, a blank space in which the signer can hand-write the date signed. The last date signed is often used to establish the effective date of the contract, and for certain sales contracts the date the agreement is completed might be necessary to establish when the seller can recognize revenue.

[TODO]

#### 3.1.4 Signature blocks for organizations

Look again at the signature block above for Betty's Used Computers, LLC. In addition to AGREED and a date-signed blank space, an organization's signature block should include:

• the organization's name (or its abbreviation, e.g., "Seller," if an abbreviation has been defined);
• the word "by," followed by a colon; and
• the signer's title, to establish that the signer has at least apparent authority. If the employee's title includes the word "president," "vice president," "manager," or "director," that might well be enough for apparent authority. Consider also including a representation by the signer that s/he has such authority.

If you don't know the name of the individual who will be signing:

Betty’s Used Computers, LLC, by:

Signature

Printed Name

Date signed

Using a suitably-worded power of attorney, the signing organization could designate an individual or organization as its attorney-in-fact to sign the contract on its behalf. (NOTE: Whoever signs the power of attorney should be – and possibly might have to be — someone who could sign the contract itself.)

Betty's Used Computers, LLC, by:

Jimmy John,
Attorney-in-fact

Date signed

Caution: A party's counsel normally won't want to sign a contract on behalf of his or her client, as discussed in section 3.2.3

#### 3.1.5 Special case: Signature block for an LLC

Look again at the signature block above for Betty's Used Computers, LLC. When a signatory party is a limited-liability company ("LLC"), check whether the LLC is member-managed or manager-managed. In the latter case, a "mere" member, acting in that capacity, might not have authority to sign on behalf of the LLC.

#### 3.1.6 Special case: Signature block for a limited partnership

In many U.S. jurisdictions, a limited partnership might be able to act only through a general partner, in which case a signature block for the limited partnership might need to include the general partner's name. And the general partner of a limited partnership might very well be a corporation or LLC; in that case, the signature block would be something like the following:

 AGREED: ABC LP, by:
ABC LLC, a Texas corporation,
general partner, by:

__________________________
Ron Roe, Manager

__________________________
Date signed



On the other hand, in some jurisdictions, a limited partnership might be able to act through its own officers; for example, Delaware's limited-partnership statute gives general partners the power "to delegate to agents, officers and employees of the general partner or the limited partnership …." Del. Code § 17-403(c) (emphasis added). In such cases, the signature block of a limited partnership might look like the signature block of a corporation or LLC, above (link).

CAUTION: A limited partner that, acting in that capacity, signed a contract on behalf of the limited partnership could be exposing itself to claims that it should be held jointly and severally liable as a general partner. (Of course, some general partners also hold limited-partnership interests and thus are limited partners in addition to being general partners.)

#### 3.1.7 Signature blocks for individuals

If an individual is a party to the contract, the signature block can be just the individual's name under an underscored blank space:

Example:

 AGREED:

__________________________
Jane Doe

__________________________
Date signed



But you might not know the signer's name in advance, in which case you could use the following format:

 AGREED:

__________________________
Signature

__________________________
Printed name

__________________________
Date signed



#### 3.1.8 Keeping signature blocks on the same page

I like to keep all of the text of a signature block together on the same page (which might or might have other text on it). That looks more professional, in my view, than having a signature block spill over from one page onto the next. This can be done using Microsoft Word's paragraph formatting option, “Keep with Next."

#### 3.1.9 Separate signature pages

Sometimes drafters put signatures on a separate page to make it easier to FAX just the signed signature pages back and forth (see the next section). That can give rise to a couple of problems, but those can be addressed with some advance planning.

Include a running header with version date: If signatures are on a separate page, then someday The Other Side might claim that it signed a different version of the contract than the one you claim it signed. One way to try to forestall such a claim would be to include, at the top of every page of every draft, a running header with a version date and time, such as that shown at the top right of this page. (Don't use Microsoft Word's automatic date fields – you don't want the date field automatically updating itself every time the document is printed.)

Include a "Page X of Y" running footer: Microsoft Word's PAGE and NUMPAGES fields can be used to create a running footer that automatically says, for example, "Page 5 of 11."

Eliminate blank space on the penultimate page: If you leave significant blank space on the last page before the signature page (the "Penultimate Page"), then a fraudster might be tempted to fill that blank space with additional provisions and then claim that the added provisions were part of the signed contract. One way to guard against that is to include — on a separate line just after the final text on the Penultimate Page — a parenthetical note such as, "(Signature page follows)" or "(Remainder of page intentionally left blank)" to signal that any additional text was not agreed to.

### 3.2 Signature mechanics

#### 3.2.1 Pro tip: Be sure a corporate title is in your client's signature block

If your client is a company, some individual human, typically an officer or manager of the company, will be signing on behalf of the client. In that situation, the client's signature block in the contract should normally state that it's the company, not the individual human in his or her personal capacity, that is signing the document. [LINK]

If your client is the company and not the human signer, then technically you're under no professional obligation to make sure that the human signer is protected from personal liability. But it's normally not a conflict of interest for you to simultaneously look out for the human signer as well as for the company.

(Reminder: As a lawyer, you might find yourself dealing with an employee of a client company in a situation where the interests of the employee and the company diverge or even conflict. One example might be an investigation of possible criminal conduct such as fraudulent backdating of a contract signature (see § 15.1). In circumstances such as those, you'll want to consider whether you should affirmatively advise the employee, preferably in writing, that you're not his or her lawyer; conceivably you might even have an ethical obligation to do so.)

#### 3.2.2 How it's done (usually)

At least in the U.S., a contract between two parties (Alice and Bob) will typically be signed and delivered in one of several different ways:

1. Old school (1): Alice and Bob meet to sign the contract; think of the treaty-signing ceremonies that you've probably seen on TV. Alice signs multiple physical copies of the contract; Bob likewise signs the same physical copies. Alice and Bob each keep (at least) one fully-signed "original."
2. Old school (2): Alice, sitting in her office (or wherever), signs two hard copies of the contract and mails them to Bob. Bob countersigns the hard copies, keeps one of them, and mails the other fully-signed hard copy back to Alice for her files.
3. Exchanging signed counterparts: Alice signs two hard copies ("counterparts") of the complete contract and sends just one of the signed hard copies to Bob. Bob does exactly the same thing. So, each party ends up with two, signed, hard copies of the contract, but each hard copy has been signed by just one of the parties.
4. Delivering signed signature pages only: In the era of electronic communication, the following is increasingly common: The final contract draft is agreed to, typically going back and forth by email and phone. Alice, in her office, signs a hard copy of the final agreed draft; Bob, in his office, does likewise. Each party scans his or her signed signature page to a PDF file, then emails the PDF to the other party as an attachment.
5. Round-robin signing of the signature page only: A variation on #4 is: Alice emails Bob a PDF of her signed signature page. Bob prints out Alice's signed signature page; countersigns it himself; scans the fully-signed signature page; and emails it back to Alice.

#### 3.2.3 Counsel normally won't want to sign contracts

A lawyer for a party entering into a contract normally won't want to be the one to sign the contract on behalf of her client, because:

• Doing so could raise questions whether, in the negotiations leading up to the contract, the lawyer was acting as a lawyer or as a business person. This could be an important distinction: in the latter case, the lawyer's communications with her client might not be protected by the attorney-client privilege and thus might be subject to discovery by third parties.
• If the lawyer's signature is on the contract, the lawyer is almost certain to be deposed in the event of a lawsuit or arbitration about the contract. This might lead to disqualification not only of the lawyer herself but also of her entire firm — and her litigation partners would not be happy about that.
• From a client-relations perspective: If the contract later "goes south," the lawyer won't want her client's business people pointing the finger at her for having made (what in hindsight they claim was) a bad business decision.

#### 3.2.4 Pro tip: Hang on to fully-signed originals

A party that wants to rely on a contract, but can't produce a copy signed by the other side, might not be completely out of luck, but it definitely will have more burden and expense at trial.

For example: In a 2014 New Hampshire case, a husband was sued for divorce by his wife of 22 years. He moved to enforce a pre-nuptial agreement.

Unfortunately for the husband, the only copy he had was not signed by his wife. The wife claimed that she didn't recall signing the agreement, that she hever possessed a signed original, and even if she did sign it, she did so under duress.

The husband had to take his case had to go all the way to the state supreme court. That court held that the husband was entitled to introduce secondary evidence to try to persuade the fact-finder that the pre-nup existed. In re Serodio & Perkins, No. 2013-199, slip op. at 5-6 (N.H. Aug. 22, 2014) (citation omitted).

The husband would have had much smoother sailing if he had just made sure to keep a fully-signed copy of the pre-nup.

### 3.3 Will an unsigned contract be enforceable anyway?

#### 3.3.1 Signatures might be necessary

In C.G. Schmidt, Inc. v. Permasteelisa North America, a general contractor (CGS) selected the bid of a potential subcontractor (PNA) to provide a glass curtainwall for a building project. PNA's bid was submitted on the bid form specified by CGS, which stated in part that "[i]n submitting and signing this bid form, Bidder agrees with all terms and conditions of the standard [CGS] agreement forms." But the subcontractor repeatedly stated that it needed to review the final prime contract before it would sign the actual subcontract. Moreover, CGS's bidder's manual "contemplated that the parties would eventually sign a formal subcontract," and additionally, "CGS's policy was to require written agreements for all subcontracts …." C.G. Schmidt, Inc. v. Permasteelisa North America, 825 F.3d 801, 803 (7th Cir. 2016) (affirming summary judgment in favor of subcontractor)

And, as the Seventh Circuit noted:

In addition, CGS and PNA did not execute a subcontract because they had not settled on the terms of the subcontract agreement. Over the next year, CGS and PNA engaged in a “value engineering process” during which they refined the price and other terms of the subcontract as they worked towards a final, signed agreement. PNA regularly updated the proposed contract price and communicated these updates to CGS. And on multiple occasions, PNA raised concerns with some of the terms of the subcontract. At no point during the negotiation process did CGS express to PNA that, in CGS’s view, there was already an existing agreement in place.

Id. The general contractor and prospective subcontractor never did enter into a formal subcontract agreement, and the prospective subcontractor eventually withdrew. The prime contractor therefore had to find another subcontractor to provide the curtainwall, at greater expense; the prime contractor sued the subcontractor for the difference, asserting that the subcontractor's bid acceptance had created a binding contract and that the parties had been negotiating changes to that contract. Both the district court and the Seventh Circuit disagreed; in affirming summary judgment in favor of the subcontractor, the appeals court said:

Before negotiations began, PNA made clear that it intended to be bound only after reviewing the prime contract and executing a formal subcontract with agreed upon language. PNA manifested a belief that it was not bound throughout negotiations, and CGS never corrected this understanding nor expressed a contrary belief.

The course of negotiations and slow build up to an integrated subcontract confirm that the parties had not yet entered into a binding agreement[.] * * *

To put this point another way, CGS never accepted PNA’s bid. Quite the opposite, CGS deliberately refrained from accepting while it reached the necessary agreements with the project owner and continued to negotiate the price and terms of the subcontract with PNA.

Id. at 806 (footnote omitted).

(The district court also rejected the prime contractor's promissory-estoppel claim. See id. at 807-09.)

#### 3.3.2 But: A party might be bound by its unsigned contract draft

Suppose that:

• Alice sends Bob a draft of a contract so that Bob's attorney can review the draft.
• Bob signs the draft, without modifying it, and returns it to Alice.
• The parties perform their obligations under the contract.
• Later, in litigation, the parties are unable to find any copy of the contract that was signed by Alice.

Under classic offer-and-acceptance doctrine, Alice might very well be bound to the terms of her contract draft anyway, even if she never did sign the contract. Consider this real-world example:

• A party to a lawsuit drafted a settlement agreement and sent it to the other party.
• The other party signed the draft agreement as-is and returned it.
• In a later, unrelated lawsuit, the parties could not find any copy of the settlement agreement that had been signed by the drafting party itself.
• The parties, though, had complied with the terms of the settlement agreement.
• In the later, unrelated lawsuit, a court held that the settlement agreement was binding on the drafting party — even though the drafting party itself had not signed that agreement — and so the drafting party's unrelated claims against the other party were barred by the sweeping release language in the settlement agreement.

See Baker Hughes Inc. v. S&S Chemical, LLC, 836 F.3d 554, 561-62 (6th Cir. 2016). The result might have been different if the draft contract itself had expressly stated that Alice's offer in the draft was conditioned on both parties' signing the document. See id. at 562.

#### 3.3.3 Unsignature

There are three kinds of situations where an unsigned contract might be enforced:

1. The statute of frauds doesn't apply;
2. A contract isn't the only way to become bound by legal duties (Enterprise Producs)
3. The parties "agreed" via some other written communication(s).

The following types of non-"contract" written communication might bind the paries to an unsigned contract:

1. Email
2. Text message
3. IM / Slack / other chat
4. Social media

In every organizational signature block, the signature line for the individual signer (the person signing on behalf of the organization) should include the organizational __ of the individual.

Every organizational signature block should include the name of the organization followed by (1) the word "_," (2) a colon, and (3) a signature line for the individual signer.

### 3.4 Signature authority

#### 3.4.1 Be sure the other side's signer has authority to agree

A contract signed by an individual who doesn't have authority to commit his principal might be worthless. EXAMPLE: Liberty Ammunition, Inc. v. United States, No. 2015-5061 (Fed. Cir. Aug. 26, 2016):

• Liberty Ammunition signed several nondisclosure agreements (NDAs) with the U.S. Government.
• Under the applicable regulations, the specific individuals who signed those NDAs on behalf of the government did not have authority to bind the government.

The court held that the government was not bound by some of the NDAs, and thus was not liable for breach for its disclosure and use of the purportedly-secret technology, because (i) the lower court did not err in finding that the Army officer who signed the NDAs on behalf of the government did not have actual authority to do so, and (ii) Liberty Ammunition did not contend that the Army officer had apparent authority. See id. at part II, slip op. at 21-23.

#### 3.4.2 Rules of thumb for signature authority

The person signing a contract for The Other Side should have a title that leaves no doubt that she has authority to make binding commitments on behalf of her company. If there's going to be a problem on that score, far better to find out now, instead of when The Other Side tries to get out of its contractual obligations. Here are a few rules of thumb:

• The president of a company almost certainly has authority to commit the company to a contract.
• A vice president, "director" (not the same as a member of the board of directors, discussed below), or "manager" is very likely to have authority to commit the company in matters within their stated domains, but that might not be the case if they go outside their areas. For example, the director of marketing communications might not have authority to sign a big sales contract.
• Any other job title or purported authority should be scrutinized carefully. (Some companies seem to delight in strange titles; for example, Jerry Yang, co-founder and former CEO of Yahoo, was once called the company's "Chief Yahoo.")
• For corporations, a member of the board of directors might, but often will not, have authority to commit the company, at least not without a special authorization by the board.

#### 3.4.3 The gold standard: A secretary's certificate of a board resolution

The gold standard of corporate signature authority is probably a certificate, signed by the secretary of the corporation, that the corporation's board of directors has granted the signature authority. You've probably seen paperwork that includes such a certificate if you've ever opened a corporate bank account. The language, which is invariably drafted by the bank's lawyers, normally says something to the effect that the company is authorized to open a bank account with the bank in question and to sign the necessary paperwork, along with many other things the bank wants to have carved in stone. See this example.

#### 3.4.4 Asking for written representation of signature authority can help to smoke out problems

Suppose that an individual is designated to sign a contract on behalf of a party, but the individual balks at including this clause in the contract. That might be a sign that the other party should investigate whether the individual in fact has authority to sign on behalf of his or her party. [TODO: Link to Common Draft]

#### 3.4.5 Apparent authority

A person with "apparent authority" can bind a company to a contract, unless the other side has reason to know otherwise. So the question is: Would "a reasonable person" think the signer for The Other Side had authority to commit that company to the contract? For more information, see the Wikipedia entry on apparent authority.

#### 3.4.6 Limitations on signature authority

Even if a signer were to make a written representation that s/he had signature authority, the other side might not be able to rely on it. That happened in a Utah case:

• One Sorpold, who was one of the two managers of a limited liability company (LLC), signed an agreement granting, to a tenant, a 99-year lease on a recreational-vehicle pad and lot.
• But there was a problem: The LLC's publicly-filed articles of organization stated that neither of the two company's managers had authority to act on behalf of the LLC without the other manager's approval.
• Therefore, said the court, the tenant was on notice of manager Sorpold's lack of authority to grant the lease on just Sorpold's own signature. (The court remanded the case for trial as to whether the LLC subsequently ratified the lease agreement.)

See Zions Gate RV Resort, LLC v. Oliphant, 2014 Ut. App. 98, 326 P.3d 118, 122-23 (2014).

#### 3.4.7 Apparent authority to sign

Normally, a company officer will have at least apparent authority to commit the company, especially if the officer's title indicates he or she is responsible for a relevant area of the company's business. See, for example, Digital Ally, Inc., v. Z3 Tech., LLC, 754 F.3d 802, 812-14 (10th Cir. 2014). In that case:

• Digital Ally signed a contract with Z3, under which Z3 would design and manufacture circuit-board modules, which Digital Ally would then incorporate in its own products.
• The contract was actually signed by one Robert Haler, whose title at Digital Ally was executive vice president of engineering and production.
• Things did not go entirely as planned, and a lawsuit ensued.
• Digital Ally claimed that it was not bound by the contract because, under the company's internal signature-authority policies, Haler did not have authority to sign a contract of that type.

Digital Ally's argument didn't fly: the district court granted, and the appeals court affirmed, partial summary judgment that Haler did have at least apparent authority to sign the contract.

### 3.5 Electronic delivery of signed documents

#### 3.5.1 Electronic transmission: Background

In modern practice it's quite common for parties to sign a contract by simply FAXing signed signature pages to each other, or scanning the signed signature pages to PDF files and emailing them to each other. (Often the parties won't even bother to circulate hard copies for joint signature.) This language expressly authorizes that practice.

#### 3.5.2 Pro tip for electronic transmission: Use a running header in the document

One way to make it clear that the signed signature page is from the final version of this Agreement or other document is to include a unique identifying code in the running header on each page of each draft. I've long used the following format for such a running header: "Draft 2014-10-08 09:20 CDT" (with the date and time inserted manually, not automatically).

#### 3.5.3 Pro tip for electronic transmission: Circulate a "master" PDF with all signatures

After a contract is signed, consider:

• adding all signed pages to a PDF file of the entire Agreement;
• emailing the PDF file to all parties (or their counsel); and
• in the body of the email, explaining what you've done.

That will leave an email "paper trail" (so to speak) in the files of all concerned; that in turn should reduce the risk of a future dispute about which version the parties thought they were signing.

### 3.6 "Signing" electronically

#### 3.6.1 Electronic signatures can create enforceable contracts

In the U.S., the federal Electronic Signatures in Global and National Commerce Act (E-SIGN Act), 15 USC § 7001 et seq., provides in part (subject to certain stated exceptions) that, for transactions "in or affecting interstate or foreign commerce," electronic contracts and electronic signatures may not be denied legal effect solely because they are in electronic form.

At the U.S. state level, 47 states, the District of Columbia, and Puerto Rico, and the U.S. Virgin Islands have adopted the Uniform Electronic Transactions Act (UETA).

(The remaining three states — Illinois, New York, and Washington — have adopted their own statutes validating electronic signatures.)

The Texas version of the UETA, at Tex. Bus. & Comm. Code § 322.001 et seq., provides in part that, when the parties have agreed to conduct transactions by electronic means — which is something determined from the context and surrounding circumstances, including the parties' conduct (§ 322.005) —

• A document or signature may not be denied legal effect or enforceability solely because it is in electronic form (§ 322.007);
• an electronic "record" suffices as a writing (§ 322.007); and
• evidence of a record or signature may not be excluded solely because it is in electronic form (§ 322.013)

Courts now routinely honor electronic "signatures; see, e.g., Naldi v. Grundberg, 80 A.D.3d 1, 908 N.Y.S.2d 639 (N.Y. App. Div. 2010): the appellate court rejected the defendant-appellant's contention that a right of first refusal could not properly be granted by email; the court said that "an e-mail will satisfy the statute of frauds so long as its contents and subscription meet all requirements of the governing statute." Id., 80 A.D.3d at 3. In the slip opinion, see the transitional paragraph at pp. 6-7 through the transitional paragraph at pp. 10-11.

#### 3.6.2 Pro tip: Be able to prove up electronic signatures

In Ruiz v. Moss Bros. Auto Group, Inc., 181 Cal. Rptr.3d 781, 232 Cal. App.4th 836, 844-45 (Cal. App. 2014), a California appeals court affirmed denial of an employer's petition to compel arbitration of a wage-and-hour claim by one of its employees. The arbitration agreement had an electronic signature, but according to the court, the employer had not sufficiently proved that the purported electronic signature on the arbitration agreement was in fact that of the employee. The court seems to have given guidance about what would suffice to prove up an electronic signature:

[The employer's business manager] Main never explained how Ruiz’s printed electronic signature, or the date and time printed next to the signature, came to be placed on the 2011 agreement.

More specifically, Main did not explain how she ascertained that the electronic signature on the 2011 agreement was “the act of” Ruiz. This left a critical gap in the evidence supporting the petition.

Indeed, Main did not explain[:]

• that an electronic signature in the name of “Ernesto Zamora Ruiz” could only have been placed on the 2011 agreement (i.e., on the Employee Acknowledgement form) by a person using Ruiz’s “unique login ID and password”;
• that the date and time printed next to the electronic signature indicated the date and time the electronic signature was made;
• that all Moss Bros. employees were required to use their unique login ID and password when they logged into the HR system and signed electronic forms and agreements;
• and the electronic signature on the 2011 agreement was, therefore, apparently made by Ruiz on September 21, 2011, at 11:47 a.m.

Rather than offer this or any other explanation of how she inferred the electronic signature on the 2011 agreement was the act of Ruiz, Main only offered her unsupported assertion that Ruiz was the person who electronically signed the 2011 agreement.

Id., slip op. at 11, 12 (extra paragraphing and bullets added, citation omitted).

#### 3.6.3 An electronic signature won't always work

In SN4, LLC v. Anchor Bank, FSB, 848 N.W.2d 559 (Minn. App. 2014), two related companies wanted to buy an apartment building from the bank that had acquired title through foreclosure. The resulting email exchanges made it clear that the parties contemplated hand-signed, "wet ink" signatures on the purchase contract. The bank never hand-signed any contract draft, and ultimately decided not to sell to the buyers. The buyers sued the bank, claiming that the email exchanges themselves amounted to binding contracts. The court disagreed and granted summary judgment for the bank. Citing the Minnesota version of the UETA, an appeals court affirmed, holding:

Here, there was no express agreement between the buyers and the bank to electronically subscribe to the purported agreement. Moreover, their conduct does not evidence an implied agreement to do so.

The buyers hand-signed the initial version of the purchase agreement that was first sent to the bank on July 13. The buyers also hand-signed the purported final agreement.

Berg [the bank's attorney] and Puklich [the buyers' attorney] both stated a desire for "execution" or "fully executed" copies. And Berg wanted "hard copies' signed."

Significantly, after July 26 — the date that the buyers claim that the bank had electronically signed the purported agreement — Puklich, in numerous e-mails, continued to ask the bank to sign the agreement and to have it sent back to him by e-mail or hard-copy mail.

In fact, on July 28, Puklich specifically requested a scanned copy of the signed agreement to be return by e-mail, supporting that the buyers intended that the agreement be hand-signed.

Based on these communications, we conclude that no reasonable fact-finder could determine that the buyers and the bank intended to subscribe to the July 18th agreement by electronic means.

Id., 848 N.W.2d at 567 (extra paragraphing added, citations omitted).

#### 3.6.4 Electronic-signature vendors

For a list of electronic-signature companies, see Tabby McFarland, 10 Electronic Signature Options and Why You Should Use Them (SmallBizTrends.com June 2015) (hat tip: Brian Rogers a.k.a. @theContractsGuy).

### 3.7 Caution: An email might create a binding contract

#### 3.7.1 Email signature blocks

It's not unknown for parties to argue that an email with a signature block had the effect of "signing" a contract. For examples of cases in which counsel made such arguments, see Jeffrey Neuburger, Meeting of the Minds at the Inbox: Some Pitfalls of Contracting via Email (Proskauer.com June 2015) (hat tip: Brian Rogers a.k.a. @theContractsGuy).

My own email signature block includes a disclaimer that (as of June 2015) states as follows: Unless expressly stated otherwise, this message is not intended to serve as assent to an agreement or other document, whether or not attached to this message.

A contract's general provisions could include such a disclaimer, although conceivably a party might argue that the disclaimer had been implicitly waived. Here's one possibility:

A signature in a document is not to be considered assent or agreement to any other document unless clearly and unmistakably indicated in the document containing the signature. EXAMPLE:  Suppose that a party sends a draft of this Agreement as an attachment to an email, and that the email contains a signature block. In that situation, the email's signature block is not to be considered as assent to the draft unless the email clearly and unmistakably so indicates.
`

#### 3.7.2 The "from" field in an email might suffice as a signature

Emails normally include a "from" field that typically includes both the name and the email address of the sender. Some courts have held that this information can suffice as a signature and satisfy the Statute of Frauds; other courts, though, have reached the opposite result. For an extensive discussion of authority on this point, see Khoury v. Tomlinson, No. 01-16-00006-CV, slip op., text accompanying nn.3-5 (Tex. App. [1st Dist.] Mar. 30, 2017) (holding that "from" field sufficed as a signature, but reversing and remanding on other grounds).

One court held that a "from" field can suffice as a signature, but also held that on the facts of that case, the "from" field in an email did not act as a signature for an attached document (and also that the parties had not agreed to transact their business electronically). See SN4, LLC v. Anchor Bank, FSB, 848 N.W.2d 559 (Minn. App. 2014).

## 4 A brief pause: Ten basic writing rules

Contract-drafting students should memorize the following rules:

In a few places, this chapter steals — don't worry, it's perfectly legal — from the following sources:

The theft is legal because under 17 U.S.C. § 105, copyright is not available for works that were created by officers or employees of the U.S. Government in the course of their official duties; see generally the Wikipedia article Copyright status of work by the U.S. government.

### 4.1 D.R.Y.: Avoid the $693,000 proofreading error Stating information more than once in a contract can cause severe problems if (i) the information is revised during negotiation, and (ii) the revision is not made everywhere in the contract documents. Just this type of mistake once cost a bank$693,000:

• The bank sued to recover $1.7 million from defaulting borrowers and their guarantor. In the lower court, the bank won a summary judgment. • Unfortunately for the bank, the loan documents referred to the amount borrowed as “one million seven thousand and no/100 ($1,700,000.00) dollars” (capitalization modified, emphasis added).

• The appeals court held that, under standard interpretation principles, the words, not the numbers, controlled, and so the amount guaranteed was only $1.007 million, not$1.7 million.

See Charles R. Tips Family Trust v. PB Commercial LLC, 459 S.W.3d 147 (Tex. App.–Houston [1st Dist.] 2015) (reversing and remanding summary judgment).

Here's an example:

 Before: Bob will pay Alice one hundred thousand dollars ($100,000.00) for the House, with 50% due upon signing of this Agreement. After: Bob will pay Alice$100,000 for the House, …. (Notice how the ".00" is omitted.)

And another:

 Before: Alice will sell the house at 1234 Main Street to Bob. … [and later in the document:] Alice will not alter the house at 1234 Main Street before the Closing. After: Alice will sell the house at 1234 Main Street (the "House") to Bob. … Alice will not alter the House before the Closing.

Sometimes, though, repetition can be used (cautiously) to emphasize a point; the mission, after all, is to educate and persuade (see § 1.2), not to slavishly follow rules.

### 4.2 Avoid false imperatives

A false imperative exists when a contract purports to impose an obligation, but without specifying who is responsible for carrying it out. "Let there be [whatever]"

To help identify a false imperative, ask: If this doesn't happen, who could be sued? Or, to adapt a tired business cliché: Whose throat do I choke?

Here's a before-and-after example:

 Before: The apartment shall be regularly serviced by a professional pest-control service. [So whose job is it?] After: Tenant [or, perhaps, Landlord?] is to cause the apart­ment to be serviced, at least once per calendar quarter, by a professional pest-control service.

For a discussion of false imperatives in the context of legislative drafting, see generally Jery Payne, The False Imperative, in The Legislative Lawyer (Dec. 2010).

### 4.3 Short, single-topic sentences and paragraphs

#### 4.3.1 Introduction

You'll normally get a contract to signature sooner if you draft it as a series of short, single-issue sentences and paragraphs, because:

• Short paragraphs and sentences can be reviewed more quickly.
• Short paragraphs and sentences are easier to save for re-use, and later to snap into a new contract draft like Lego blocks, without inadvertently messing up some other contract section.
• Short paragraphs and sentences are easier to edit during drafting and/or negotiation.
• Short paragraphs and sentences reduce the temptation for the other side's reviewer to tweak more language than necessary — and that's a good thing, because language tweaks take time to negotiate, which in turn causes business people to get impatient and to blame "Legal" for delaying yet another done deal.

So: If a sentence or paragraph starts running long, seriously consider breaking it up.

Oh, and one major topic per paragraph, please. Too many contract drafters are guilty of mixing a variety of topics into a single paragraph (often with topics separated by “provided, that ….”). That just makes the paragraph all the harder for the other side's legal reviewer, which in turn will slow up getting the agreement to signature.

#### 4.3.2 Subdivisions can help

Here's an example from the PlainLanguage.gov site, slightly modified:

 Before: Except when this part provides for the granting, approval, or enforcement of leases and permits, the provisions in this part that authorize or require us to take certain actions extend to any tribe or tribal organization that is administering relevant programs or providing specific services under a contract or self-governance compact entered into under the Indian Self-Determination and Education Assistance Act (25 U.S.C. § 450f et seq.). After: Any tribe or tribal organization that is administering programs or services under 25 CFR part 900: (a) may administer the provisions in this part that authorize or require us to take certain actions; and (b) may not administer the provisions of this part relating to the granting, approval, or enforcement of leases and permits.

Subdivisions can be internal to a paragraph, as seen in this slightly-modified example from the PlainLanguage.gov site:

 Before: If any member of the board retires, the company, at the discretion of the board, and after notice from the chairman of the board to all the members of the board at least 30 days before executing this option, may buy, and the retiring member must sell, the member's interest in the company. After: A retiring board member must sell his or her interest in the company to the company if (i) the chairman of the board gives notice to all board members at least 30 days in advance of the sale, and (ii) the board, in its discretion, approves the sale.

#### 4.3.3 Actually, never mind. (A satire.)

Forget everything you just read; instead, follow the example of the drafters who wrote the warranty provision reproduced below, which is excerpted from a Collaborative Research and License Agreement between Pfizer and Rigel Pharmaceuticals. (For now, you don't need to read the provision other than to see how long it is.)

• When your client reads a provision like the one above, she'll be impressed by your lawyering skills, and happy to be paying your fees to support the creation of a true work of art.
• Your client isn't that interested in getting the deal to signature quickly, so it won't bother her that the dense verbiage will take longer for everyone to review, edit, and sign off on.
• The other side's contract reviewer, lulled by the MEGO effect ("Mine Eyes Glaze Over"), might unwittingly skip over the problematic phrase that you (inadvertently?) buried in the middle of the paragraph. Don't fret — surely your counterpart won't think you were trying to pull a fast one on him.
• Nor will your counterpart object to spending a lot of time puzzling over long sentences and paragraphs; it means more billable hours for him.
• Your firm's managing partner will thank you for using such a dense writing style — using less white space in a contract draft means you need less paper and toner to print it out, and those things aren't free. And readability is such a vague, subjective thing. But the cost savings you achieve by printing out fewer pages? Now those are easily measured, and will be noticed and rewarded.
• If the signed contract ever has to go to litigation, the judge's law clerk will be glad to have a fine specimen to study, to help fill those endless idle hours in chambers.

So by no means should you ever consider breaking up a long paragraph like the above into shorter ones.

Remember, lawyers have drafted contracts with long, hard-to-read paragraphs since time immemorial. That alone justifies their continuing to do so.

Bonus tip: Challenges to this or any other established practice can be met by closing your eyes, sticking your fingers in your ears, and chanting, "we've always done it that way; we've always done it that way …."

### 4.4 Use active voice, mostly

Active voice gets to the point by putting the actor first. Look at the following before-and-after examples:

 Before: A song was sung by her. After: She sang a song. Before: The part must have been broken by the handlers. After: The handlers must have broken the part.

But sometimes passive voice is better, for example if the doer or actor of the action is unknown, unimportant, obvious, or better left unnamed:

• The part was shipped on 1 June. (The actor is unimportant.)
• Presidents are elected every four years. (The actor is obvious.)
• Christmas has been scheduled as a workday. (The actor is better left unsaid.)

And clear, forceful, active-voice language might be inappropriate in diplomacy or in political negotiations. [DCT comment: The original USAF sentence said "… may be inappropriate," but it's better to stick with "might be."]

It's easy to let a sentence get fat and sloppy. Here are a few examples:

 Before: They made the decision to give their approval. After: They decided to approve it. Better: They approved it.
 Before: The team held a meeting to give consideration to the issue. After: The team met to consider the issue.
 Before: We will make a distribution of shares. After: We will distribute shares.
 Before: We will provide appropriate information to shareholders. After: We will inform shareholders.
 Before: We will have no stock ownership of the company. After: We will not own the company's stock.
 Before: There is the possibility of prior Board approval of these investments. After: The Board might approve these investments in advance.
 Before: The settlement of travel claims involves the examination of orders. After: Settling travel claims involves examining orders.
 Before: Use 1.5 line spacing for the preparation of your contract draft. After: Use 1.5 line spacing to prepare your contract draft. Better: Use 1.5 line spacing for your draft.

### 4.6 Numbers, currencies, percentages

Spell out the numbers one to ten; use numbers for 11, 12, 13, etc. Both in the same sentence? Consider using just numbers. There will be four students per negotiating team. There are 21 students in the class. The quiz will contain between 8 and 12 questions.

As a general rule, don't start a sentence with numerals; either spell out the numerals in words or (preferably) rewrite the sentence.

 Before: 42 was Douglas Adams's answer to The Ult­im­ate Question of Life, the Universe, and Everything. After: According to Douglas Adams, the answer to The Ultimate Question of Life, the Universe, and Everything is … 42.

Large numbers? Use million, billion, etc. (but not thousand).

 Before: More than 300,000,000 people live in the United States. After: More than 300 million people live in the United States.

Don't spell out a number in words and then restate the number in numerals — there's too much danger of changing one but not the other (see also § 4.1).

 Before: More than three hundred million (300,000,000) people live in the United States. After: More than 300 million people live in the United States.
 Before: Guarantor will pay Bank USD one million seven thousand dollars ($1,700,000.00). After: (In a lawsuit Bank lost the difference, i.e.,$693,000; see § 4.1.)

For domestic contracts, there's usually no need to say "in United States dollars." (You can put that in the Definitions & Usages section if you want.)

In international contracts, use ISO 4217 currency abbreviations such as USD, as in, "Buyer will pay USD $30 million." (The USD abbreviation goes where indicated, not after the numbers.) It's OK to spell out dollar amounts, but it's customary to just use the numbers.  Before: Twenty million dollars After:$20,000,000 Better still: $20 million Omit zero cents unless relevant.  Before: Alice will pay Bob$5,000.00. After: Alice will pay Bob $5,000. Not:$5 thousand

Spell out a percentage if it's at the beginning of a sentence — or just use numbers and rewrite the sentence to avoid starting with the percentage

 Before: 30% of the proceeds will be donated to charity. After: Thirty percent of the proceeds will be donated to charity. Or: Of the proceeds, 30% will be donated to charity. Not: Thirty percent (30%) of the proceeds will be donated to charity (see § 4.1).

### 4.7 Parallelism in lists: Be consistent

Use a consistent pattern when making a list.

 Before: The security policeman told us to observe the speed limit and we should dim our lights. After: The security policeman told us to observe the speed limit and to dim our lights.
 Before: The functions of a military staff are to advise the commander, transmit instructions, and imp­le­men­ta­tion of decisions. ["Advise" and "transmit" are verbs, while "implementation" is a noun.] After: The functions of a military staff are to advise the commander, transmit instructions, and implement decisions. [The verb "implement" is stronger than the noun "implementation."]
 Before: The functions of a military staff are to advise the commander, transmit instructions, and implement decisions. [Also: Passive voice.] After: A military staff advises the commander; transmits his instructions; and implements his decisions.
 Before: Universal military values include that we should act with integrity, dedication to duty, the belief that freedom is worth dying for and service before self. After: Universal military values include commitment to integrity, dedication to duty, service before self, and the belief that freedom is worth dying for. [DCT comment: Here, semicolons might be better than commas.]

If one of the items in a list can't be written in the same grammatical structure, then consider placing it at the end of the sentence. In the last row above, beginning with "Universal military values," the phrase “the belief that freedom is worth dying for” doesn't match the three-word construction of the other items; placing that phrase at the end of the sentence improves overall readability.

If your sentence contains a series of items separated by commas [DCT comment: Or by semicolons], keep the grammatical construction similar—if two out of three items begin with a verb, then make the third item begin with a verb too.

Don't mix things and actions, statements and questions, or active and passive instructions.

Make ideas of equal importance look equal.

Here's another example, from the SEC's Plain English Handbook (at 34), slightly edited:

 Before: If you want to buy shares in Fund X by mail, fill out and sign the Account Application form, making your check payable to “The X Fund,” and put your social security or taxpayer identification number on your check. After:* If you want to buy shares in Fund X by mail, fill out and sign the Account Application form; make your check payable to “The X Fund”; and put your social security or taxpayer identification number on your check.

Note the semicolons separating the clauses instead of commas.

And one more, from the same source:

 Before: We invest the Fund’s assets in short-term money market securities to provide you with liquidity, protection of your investment, and high current income. After: We invest in short-term money market securities to provide you with liquidity; protect your investment, and generate high current income.

For this last example, the SEC Handbook points out that the Before sentence "is unparallel because its series is made up of two nouns and an adjective before the third noun. It’s also awkward because the verb provide is too closely paired with the nominalization protection." The After sentence uses verbs throughout, and also uses semicolons instead of commas.

### 4.8 Use industry-standard terminology

When you're drafting a contract, you'll want to try to avoid coining your own non-standard words or phrases to express technical or financial concepts. If there's an industry-standard term that fits what you're trying to say, use that term if you can.

First, someday you might have to litigate the contract. You'll want to make it as easy as possible for the judge (and his or her law clerk) and the jurors to see the world the way your client does. In part, that means making it as easy as possible for them to understand the contract language.

The odds are that the witnesses who testify in deposition or at trial likely will use industry-standard terminology. So the chances are that the judge and jurors will have an easier time if the contract language is consistent with the terminology that the witnesses use—that is, if the contract "speaks" the same language as the witnesses.

Second — and perhaps equally important — the business people on both sides are likely to be more comfortable with the contract if it uses familiar language, which could help make the negotiation go a bit more smoothly.

### 4.9 Omit needless words — but remember your mission

"Omit needless words" is a famous quotation from Strunk & White's The Elements of Style. Here are some examples of possibly-needless words, from the SEC's Plain English Handbook (slightly edited):

• in order to : to
• in the event that : if
• subsequent to : after
• prior to : before
• despite the fact that : although
• because of the fact that : because; since
• in light of : ditto
• owing to the fact that : ditto

But remember your mission: To educate, and possibly persuade, readers (see § 1.2). That’s why it can sometimes be helpful to (judiciously) record reasons and explanations in a contract, to educate later readers about why the neg­o­ti­a­tors agreed to certain things.

Certainly brevity in a contract is a  virtue, but it's far from the only one or even the most important one. Sometimes a few words of explanation or clarification (possibly in footnotes) can be cheap insurance.

### 4.10 But: Do what your supervising partner prefers

The above rules aren't ethical mandates. A new lawyer might find that her supervising partner prefers to write, for example, one million seven hundred thousand dollars ($1,700,000.00) instead of the simple$1.7 million recommended in § 4.1 above. Don't fight the partner over it — for purely-stylistic matters, just do it the way that the partner prefers. There'll be plenty of time to adjust your style as you get more experienced and more trusted to handle things on your own.

(In the meantime, of course, you'll have to be extra-careful not to make the kind of mistakes that can result from some of these stylistic practices, as discussed above.)

### 4.11 Bonus: Tips for plainer English

#### 4.11.1 Improve the "flow" of the words

 Before: … in a writing signed by the party sought to be bound …. After: … in a writing that is signed by the party sought to be bound ….

#### 4.11.2 Modifier order might matter

Place modifiers correctly–"we want only the best" not "we only want the best."

#### 4.11.3 Be careful when using a verb that doubles as a noun

Let's look again at an example from the SEC's Plain English Handbook (at 32). The word supplements can be a verb, but it can also be a noun, as in, dietary supplements. That can interrupt the flow of the sentence and slow down the reader's comprehension.

 Before: The following description of the particular terms of the Notes offered hereby (referred to in the accompanying Prospectus as the “Debt Securities”) supplements, and to the extent inconsistent therewith replaces, the description of the general terms and provisions of the Debt Securities set forth in the Prospectus, to which description reference is hereby made. After: This document describes the terms of these notes in greater detail than our prospectus. It might provide information that differs from our prospectus. If the information in this document does differ from our prospectus, please rely on the information in this document.

#### 4.11.4 Gobbledygook

 Before: Consultation from respondents was obtained to determine the estimated burden. After: We consulted with respondents to estimate the burden.

#### 4.11.5 Gobbledygook (2)

 Before: The amount of expenses reimbursed to a claimant under this subpart shall be reduced by any amount that the claimant receives from a collateral source in connection with the same act of international terrorism. In cases in which a claimant receives reimbursement under this subpart for expenses that also will or may be reimbursed from another source, the claimant shall subrogate the United States to the claim for payment from the collateral source up to the amount for which the claimant was reimbursed under this subpart. After: If another source pays you, then we will reduce our payment by that amount. If we pay you, and another source also pays you for the same expenses, then you must repay us the amount that we paid you.

#### 4.11.6 Gobbledygook (3)

From the PlainLanguage.gov site:

 Before: When a filing is prescribed to be filed with more than one of the foregoing, the filing shall be deemed filed as of the day the last one actually receives the same. After: A document is considered "filed" only when all parties that are supposed to receive the document have actually received it.

### 4.12 Exercises: Basic writing rules

(You needn't do these exercises until they're specifically assigned as exercises.)

#### 4.12.1 Long paragraphs: From the SEC Plain English Handbook

From the SEC's Plain English Handbook (at 30):

NLR Insured Mortgage Association, Inc., a Delaware corporation (“NLR MAE”), which is an actively managed, infinite life, New York Stock Exchange-listed real estate investment trust (“REIT”), and PAL Liquidating REIT, Inc., a newly formed, finite life, self-liquidating Delaware corporation which intends to qualify as a REIT (“PAL Liquidating REIT”), hereby jointly offer, upon the terms and subject to the conditions set forth herein and in the related Letters of Transmittal (collectively, the “Offer”), to exchange (i) shares of NLR MAE’s Common Stock, par value $.01 per share (“NLR MAE Shares”), or, at the option of Unitholders, shares of PAL Liquidating REIT’s Common Stock, par value$.01 per share (“PAL Liquidating REIT Shares”), and (ii) the right to receive cash payable 60 days after closing on the first of any Acquisitions (as defined below) but in no event later than 270 days (nine months) following consummation of the Offer (the “Deferred Cash Payment”), for all outstanding Limited Partnership Interests and Depository Units of Limited Partnership Interest (collectively, “Units”) in each of PAL Insured Mortgage Investors, a California limited partnership (“PAL 84”), PAL Insured Mortgage Investors - Series 85, A California Limited Partnership, a California limited partnership (“PAL 85”), and PAL Insured Mortgage Investors L.P. - Series 86, a Delaware limited partnership (“PAL 86”).

EXERCISE: Rewrite this into shorter sentences and paragraphs. Don't change the substance of the provisions.

## 5 Ambiguity: The bane of drafters

### 5.1 Introduction

A contract term is ambiguous if it is susceptible to two or more plausible interpretations — and such a term can cause major difficulties for the parties. Many lawyers would agree that ambiguous language is one of the top sources of trouble for contracting parties. In litigation, creative trial counsel, exercising 20-20 hindsight, can be quite skilled at proposing alternative meanings to language that the drafters probably thought was crystal clear.

Here's a simple example from a hypothetical lease agreement: Tenant will completely 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. Suppose that at 10:00 a.m. on December 15, Tenant is still occupying the Premises. Question: Does Tenant still have 14 hours left in which to finish moving out, or is Tenant already in material breach?

Unambiguous provisions are a Good Thing because:

• Unambiguous language tends not to lead to disputes between the parties — although that's far from a universal rule.
• If a dispute does arise over an unambiguous provision, the judge will often decide the case quickly (e.g., on a motion for summary judgment). That's because interpretation of an unambiguous contract term is a question of law for the court.

So: Spotting and fixing ambiguities before the contract is signed should be a prime goal of contract drafters and reviewers.

Ambiguities aren't necessarily fatal, because the law has rules for resolving them, as discussed below. But when a contract term is ambiguous, an expensive- and time-consuming trial is likely to be needed to determine just what the parties had in mind. To borrow a phrase from a former student (in a different context), "that's a conversation I don't want to have."

### 5.2 A brief review of contract interpretation

In a 2015 opinion, the Texas supreme court recapped the basic law governing contract interpretation:

Absent ambiguity, contracts are construed as a matter of law.

In construing a written contract, our primary objective is to ascertain the parties' true intentions as expressed in the language they chose.

We construe contracts from a utilitarian standpoint bearing in mind the particular business activity sought to be served, and avoiding unreasonable constructions when possible and proper.

To that end, we consider the entire writing, harmonizing and giving effect to all the contract provisions so that none will be rendered meaningless.

No single provision taken alone is given controlling effect; rather, each must be considered in the context of the instrument as a whole.

We also give words their plain, common, or generally accepted meaning unless the contract shows that the parties used words in a technical or different sense.

A contract is not ambiguous if the contract's language can be given a certain or definite meaning.

But if the contract is subject to two or more reasonable interpretations after applying the pertinent construction principles, the contract is ambiguous, creating a fact issue regarding the parties' intent.

Summary judgment is not the proper vehicle for resolving disputes about an ambiguous contract.

[S]ummary judgment is proper if no genuine issue of material fact exists[.]

While extrinsic evidence of the parties' intent is not admissible to create an ambiguity, the contract may be read in light of the circumstances surrounding its execution to determine whether an ambiguity exists.

Consideration of the surrounding facts and circumstances is simply an aid in the construction of the contract's language and has its limits.

The rule that extrinsic evidence is not admissible to create an ambiguity obtains even to the extent of prohibiting proof of circumstances surrounding the transaction when the instrument involved, by its terms, plainly and clearly discloses the intention of the parties, or is so worded that it is not fairly susceptible of more than one legal meaning or construction.

Mere disagreement over the interpretation of an agreement does not necessarily render the contract ambiguous.

Plains Explor. & Prod. Co. v. Torch Energy Advisors Inc., 473 S.W.3d 296, 305 (Tex. 2015).

In an earlier opinion, the supreme court remarked (in a dictum) that "terms stated earlier in an agreement must be favored over subsequent terms." Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983) (citation omitted).

See also, e.g., James J. Sienicki and Mike Yates, Contract interpretation: how courts resolve ambiguities in contract documents (Lexology.com 2012: https://goo.gl/ZGkwJu).

### 5.3 Vagueness is a type of ambiguity

As one type of ambiguity, a term is vague if its precise meaning is uncertain. As a silly example, consider this 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 italicized sentence above is ambiguous, in that conceivably it might 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 bring cat food with her when s/he visits Patient.
3. Nurse is to feed cat food to Patient. (OK, this one is might not be plausible.)

The italicized sentence above might also be vague if it turned out that Patient had more than one cat.

And the first two meanings listed above are vague in another sense as well: The term cat food encompasses wet food, dry food, etc.

### 5.4 What do you do about ambiguity?

What do you do if you spot an ambiguity in a draft contract draft? The answer might depend on the circumstances:

• If your side drafted the ambiguous language, then you'll definitely want to fix the ambiguity: under the doctrine of the doctrine of contra proferentem, discussed in section [TODO] below, a court might resolve the ambiguity in favor of the other side.
• On the other hand, if the other side drafted the ambiguous language, then you might not want to say anything about it, in the hope that contra proferentem will result in an interpretation favorable to your client. (CAUTION: The other side might argue that you waived application of contra proferentem by failing to call out the ambiguity when you spotted it.)

### 5.5Contra proferentem

#### 5.5.1 Overview

Drafters should keep firmly in mind the contra proferentem principle of contract interpretation. That principle holds that if an ambiguity in particular language cannot be resolved by other conventional means (such as those discussed below), then the ambiguity should be resolved against the party that drafted the ambiguous language and thus is "to blame" for the problem. (If a contract provision is not ambiguous, then contra proferentem won't come into play in the first place.)

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

The (U.S.) Supreme Court explained the concept of contra proferentem: "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).

#### 5.5.2 Typing a provision doesn't necessarily mean drafting it

In Song v. Iatarola, No. 64A03-1609-PL-2094 (Ind. App. July 6, 2017), one party to a contract lost a case because of the way the court interpreted a particular provision in the contract. On appeal, the losing party claimed that the provision should have been interpreted against the winning party because the winning party supposedly "wrote" the provision. The record, though, contained evidence that, while the winning party had typed the provision into the Word document, the parties had jointly drafted the actual wording of the provision. That sank the losing party's argument; the appellate court held that:

During the summary judgment stage and in their appeal, the Iatarolas failed to establish that no genuine issue of material fact existed about whether Song independently drafted the addendum such that its interpretation should be construed against him. Rather, the evidence outlined above indicates that it was the Iatarolas who wanted the addendum drafted, and that both parties contributed to its preparation.

Id., slip op. at 3-4 (on rehearing; emphasis added).

#### 5.5.3 Caution: Disclaiming contra proferentem could cause problems

Suppose that a court or arbitrator concluded (1) that there was no way to resolve an ambiguity in a contract, other than by applying the contra proferentem principle, but (2) the parties had agreed that contra proferentem was not to be applied. The results in that situation might be unpredictable:

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

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

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 https://goo.gl/kQax4T.

### 5.7 Mnemonic

• A.T.A.R.I. - Avoid the Argument: Rewrite It (where "it" is a potentially-ambiguous term)

### 5.8 Possible quiz and exam questions

#### 5.8.1Contra proferentem rule

FACTS:

• You represent Buyer in negotiating a long-term master purchase agreement with Seller.
• You draft a price-increase clause that limits Seller's permissible price increases to no more than the increase in CPI (and no more than once a year as well).
• A year later, Seller says it is increasing its price by the percentage stated in a particular CPI published by the U.S. Government for the specific industry in which Seller and Buyer operate. You hadn't known there even was such a thing.
• Your client Buyer angrily tells you that Seller's price increase must be limited to the (much-lower) increase in the "regular" CPI, namely CPI-U, US City Average, All Items, 1982–1984=100.

QUESTION: On these facts, how might a court rule on Buyer's claim that Seller's price increases must be limited to the increase in CPI-U and not to the increase in the special CPI?

A: Chances are that the court would rule in favor of Seller, because you (on behalf of Buyer) drafted the price-increase provision.

## 6 Getting paid: Plan A, Plan B

### 6.1 Payment terms

#### 6.1.1 Payment due date

Contracts often specify that payments are due "net X days," meaning that payment in full is due in X days, where X is 30 days, 10 days, 60 days, etc. Longer time periods favor the payer, obviously.

 TERM FAVORS Net X days from receipt of invoice Payer Net X days from date of invoice Payee Net X days from [receipt or date] of correctly stated invoice Payee

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

Payment terms are net 120 days from receipt of a Honeywell-approved invoice unless otherwise stated on the face of the Purchase Order or other written agreement executed by both parties. Invoices will not be approved unless they accurately reference conforming Goods received by Honeywell or services satisfactorily performed for Honeywell. Payment will be scheduled for the first payment cycle following the net terms for the Purchase Order.

#### 6.1.2 Discounts — e.g., 2% 10 net 30

Sometimes payment terms are phrased as, for example, "2%/10 net 30"; this means that the payer may take a 2% discount for full payment in ten days, otherwise payment in full is due in 30 days.

#### 6.1.3 Payment methods

Acceptable payment methods might be specified as, for example:

1. Any method to which the payee does not reasonably object in writing;
2. A check — see generally Investopedia at https://goo.gl/19C7Rv:
• The agreement might require the check to be drawn on a U.S. bank, or on a specified bank, or on any bank to which the payee does not reasonably object in writing.
• The money stays in the payer's account until the check clears.
• If the payer files for U.S. bankruptcy protection before the check clears, then the check might never clear; see the bankruptcy discussion in section [TODO].
3. An automated clearing house ("ACH") debit transaction in lieu of a check — see generally Investopedia at https://goo.gl/1P9EQa;
4. A certified check — see generally Investopedia at https://goo.gl/aVLbsE:
• This is a check (see above) written by the payer and drawn on the payer's account.
• The bank guarantees to the payee that the bank has put a hold on the payer's account for the amount of the check, meaning that the check should not bounce.
• The money stays in the payer's account until the check clears.
• The same bankruptcy issues exist as for regular checks.
• Caution: Certified checks can be counterfeited, in which case the bank might not have to pay, and if the payee cashes the check, the payee might have to refund the money.
5. A cashier's check — See generally Investopedia at https://goo.gl/EZ7Vec:
• This is a check (see above) written by the bank itself, not by the payer.
• When writing the check, the bank transfers the stated amount of money from the payer's account to the bank's own account. (Note the difference between this and a certified check, discussed above.)
• The parties' agreement might specify what bank, or what type of bank, is to be used.
• Caution: Cashier's checks can be counterfeited.
6. A "wire transfer" (Investopedia at https://goo.gl/t6kisl) to give the payee "immediately-available funds" that can be immediately withdrawn and spent (Investopedia at https://goo.gl/51Ai5A).

#### 6.1.4 Notification of payment disputes

Payment terms might require a party disputing an invoice (or other amount that it putatively owes) to alert the invoicing party, so that the invoicing party can correct any discrepancies, or so that the parties can start trying to iron out the dispute.

### 6.2 Interest on past-due amounts

#### 6.2.1 How are payments to be applied?

An interest provision might well specify that payments will be applied first to accrued interest, then to unpaid interest; typically the application will be oldest-first. See generally David Cook, The Interest Tail Wags the Profit Dog, in Business Law News Issue No. 3, 2014 (State Bar of California Business Law Section; available on-line to Section members).

#### 6.2.2 Will a payee really try to collect interest?

Whether a payee will actually charge and try to collect interest is a real question. For example, suppliers sometimes hesitate to charge interest to their customers, even if their contracts permit them to do.

Some large customers have been known to announce, imperiously: We don't pay interest, period. (On the other hand, some customers can be notoriously slow payers.)

When a drafter's client will be the payee, it's worth considering whether to push hard for an interest provision.

#### 6.2.3 Putting an “interest on past due amounts” clause in an “audit rights” provision might backfire

It's probably a good idea to separate an interest clause from an audit-rights clause [TODO: LINK]. Cellport Systems, Inc. won a lawsuit against Peiker, a German company, for unpaid patent royalties under a license agreement. The agreement included an audit provision that required Peiker to pay interest on past-due royalties at 1.5% per month. The trial court, however, awarded Cellport interest at the (lower) statutory rate, on grounds that, in context, the contractual interest rates was intended to apply only to underpayments revealed in an audit. The Tenth Circuit agreed that the lower rate was proper:

According to Cellport, the License Agreement's reference to the [interest] rate contains no limitations on its application. As the district court explained, however, the sentence is in the middle of a paragraph devoted to Cellport's right to verify the royalty payments it is owed through audits. And we must interpret this provision in its context. We agree with the district court that the interest rate was contractually intended to apply only to accounting disputes. The application of the [lower] statutory rate [to the unpaid patent royalties] was appropriate.

Cellport Sys., Inc. v. Peiker Acustic GmbH & Co., KG, 762 F.3d 1016, 1028-29 (10th Cir. 2014) (affirming trial-court judgment in part; emphasis added).

#### 6.2.4 Usury: Even invoicing excess interest can cause serious trouble

Vendors sometimes add interest charges to invoices; doing so without the customer's prior agreement can result in the charge being usurious. See generally Ross Spence, Usury and How to Avoid It: Impact of New Legislation on Collection Practices at part VI-B at 24-25, (SnowSpenceLaw.com; undated), which includes extensive citations to Texas case law. (The author is a friend.)

#### 6.2.7 Interest start dates can also implicate usury laws

The usury statutes in some states (e.g., Texas) might prohibit charging interest before the end of a specified grace period.

#### 6.2.8 Is a given late charge really "interest"?

Not all so-called "interest" charges will be subject to usury laws. For example, in Texas, interest is defined by statute as "compensation for the use, forbearance, or detention of money. The term does not include time price differential, regardless of how it is denominated. …" Tex. Fin. Code § 301.002(4); See Ross Spence, Usury and How to Avoid It: Impact of New Legislation on Collection Practices at 9 (SnowSpenceLaw.com; undated).

What is this "time price differential" of which the statute speaks? One article explains the quoted term in relation to Texas law:

If certain requirements are met and a transaction is not designed to circumvent the usury laws, a merchant may sell merchandise at a higher price for credit than for cash and the price difference is not usurious. The new statute codifies the common law time-price doctrine.

In order to apply the time-price doctrine, it must be shown that the seller clearly offered to sell goods for both a cash price and a credit or time price, that the purchaser was aware of the two offers, and that the purchaser knowingly chose the higher time or credit price.

If an agreement fails to qualify as a time-price differential contract, then the finance charges may be found to constitute usurious interest.

Spence, supra, part VI-F at 27 (citations omitted, extra paragraphing added).

### 6.3 Security interests, liens, etc.

#### 6.3.1 Introduction

Overly simplified: Contracts often require one party, the "debtor," to pay money to another party, the "creditor." As a Plan B, the creditor might want to have the debtor, and/or a guarantor (section 6.4), grant the creditor a "security interest" in saleable property, referred to as "collateral." Assuming that the i's are dotted and the t's crossed, when the debtor doesn't pay, the creditor — after jumping through various hoops — can foreclose on the collateral (that is, seize and sell it) and use the sale proceeds to pay down the debt, with any remaining proceeds going to the collateral's former owner.

In the U.S., depending on the type of collateral, a security interest or other lien can be created:

#### 6.3.2 Caution: Must the security interest be "perfected"?

Just because Creditor A acquires a security interest (or other lien) doesn't automatically mean that Creditor A would get to seize and sell the collateral if the debtor didn't pay. Either intentionally or inadvertently, the debtor might grant a different Creditor B a security interest in the same collateral without telling either creditor about the conflicting security interests. That might well trigger a dispute over which creditor — each having a legitimate claim to the collateral or its proceeds — was entitled to priority. (We won't address here the rules for resolving such a dispute.)

Perfection by public notice: Creditor A might well be able to cut off claims of later creditors by timely filing a public notice of Creditor A's security interest or other lien. That way, by law, future creditors won't be able to claim that they had no reason to know of Creditor A's security interest because the future creditors could and should have searched the appropriate public records as part of their due diligence.

In many cases, such a public notice will take the form of a UCC-1 financing statement, filed by Creditor A with the state secretary of state (or, for some types of collateral, in county records). See generally the Wikipedia article UCC-1, at https://goo.gl/g0FnIg.

"Perfection" by possession: Some security interests and liens can be "perfected" by taking possession of the collateral (and, in the case of mony, only that way): Under UCC § 9-313, "a secured party may perfect a security interest in negotiable documents, goods, instruments, money, or tangible chattel paper by taking possession of the collateral. A secured party may perfect a security interest in certificated securities by taking delivery of the certificated securities under Section 8-301." A practical implication is that a creditor, seeking to take a security interest in such collateral, might insist on seeing the collateral to confirm that it wasn't in someone else's possession under a prior, perfected security interest.

#### 6.3.3 Pro tips for taking security interests in collateral

When drafting a contract that calls for your client to take a security interest in collateral of another party, consider the following:

• For collateral consisting of negotiable documents, goods, instruments, money, or tangible chattel paper (see above), confirm that the collateral is not in the possession of some other creditor and thus would presumably be already subject to that creditor's security interest;
• Check the appropriate public records to find out whether any existing security interests or liens might impair your client's ability to claim proceeds from the collateral;
• In the contract, expressly prohibit the debtor (i) from granting any other security interest or lien in the collateral, or (ii) from allowing a lien to attach as a matter of law, e.g., through the debtor's failure to pay taxes or other amounts owed;
• File a UCC-1 financing statement in the appropriate location (or locations?) to put future creditors on notice of your client's claim to the collateral;
• Get a representation [LINK NEEDED], and/or a warranty, that no other security interests or liens have been granted except as expressly disclosed;

### 6.4 Guaranties

#### 6.4.1 Spelling: Guaranty, or gurantee?

In U.S. law, the terms "guaranty" and "guarantee" are usually associated with a third party's commitment to make good on a principal party's failure to comply with an obligation. Traditionally, "guaranty" is the noun, while "guarantee" is the verb; see, e.g., Uhlmann v. Richardson, 287 P.3d 287 (Kan. App. 2012), citing Bryan Garner, Garner's Dictionary of Legal Usage 399 (3d ed. 2011).

For example, when the author's daughter was in college, the author signed a guaranty (noun) by which the author guaranteed (verb) her payment of her apartment rent.

A related point: People sometimes use the terms guarantee (or guaranty) and warranty interchangeably; the two terms are close in meaning but warranty is broader.

#### 6.4.2 Just what obligations are guaranteed?

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

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

• A restaurant company, Table Rock, went out of business owing a food-service company, McLane Foodservice, some $447,000. • McLane Foodservice apparently noticed that nearly 14 years earlier, the treasurer and 40%-owner of the Table Rock restaurant company had signed a personal guaranty of the debts of another restaurant company, Border Patrol, to a division of PepsiCo. • In the interim, the PepsiCo division had sold its assets to another company, Ameriserve, which later filed for bankruptcy protection and sold its assets to McLean Foodservice, which presumably had the treasurer's signed guaranty in the files it inherited. • Importantly (at least to the courts), the PepsiCo division never extended credit to the Table Rock restaurant company; it was McLane Foodservice, PepsiCo's successor-twice-removed, that did so. Both the trial court and the appellate court held that the treasurer's guaranty, by its terms, covered only debts to the PepsiCo division — and because Table Rock had never incurred any such debts, its treasurer wasn't liable to McLane Foodservices under the guaranty. The appellate court's opinion didn't even mention that, judging by the facts recited in the opinion, Table Rock's treasurer apparently had not guaranteed Table Rock's debts — his guaranty, from nearly 14 years before, was for the debts of the Border Patrol restaurant company, which had no evident connection to Table Rock. (If those were indeed the facts, then I'm surprised that McLane Foodservices' counsel wasn't sanctioned by the court for bringing a frivolous lawsuit against the treasurer.) LESSON: Leaving aside the problem mentioned in the previous paragraph, the guaranty in McLane Foodservices could have recited that the guaranty covered all credit extended to the by the PepsiCo division and by PepsiCo's successors and assigns. #### 6.4.3 Consideration for a guaranty Guaranties will often recite that the guarantor agrees to the guaranty in consideration of the creditor's entry into an agreement, or some such. Absent consideration, a court might hold a guaranty to be unenforceable. The required consideration might well be the guarantor's desire to support the debtor — but not always. Example: In Yellow Book, Inc. v. Tocci, 2014 Mass. App. Div. 20 (2014), a company's bookkeeper signed an order for ad space in a Yellow Pages phone book; unhappiily for her, she didn't read the fine print, which contained a statement that she personally guaranteed payment. A court held that she was not liable on the guaranty, because she had received no consideration for it. See id. at 22-23. The case is discussed in Robert W. Stetson, Four Tips for Drafting Enforceable Personal Guarantees, in (BNA) Corporate Counsel Weekly Newsletter, Apr. 9, 2014, which includes numerous case citations. #### 6.4.4 Forum selection A guaranty might include a provision stating that the guarantor agreed to personal jurisdiction in a court convenient to the creditor. Such a forum-selection provision was readily enforced by the Seventh Circuit in the Knauf Insulation case, even though the guarantors purportedly did not have "minimum contacts" with the selected forum; the court remarked that the guarantors "didn't have to have any contacts" with that forum. See slip op. at 3 (citing cases; emphasis in original). #### 6.4.5 Waiver of creditor signature Many guaranty clauses include language stating that the guarantor waives acceptance and signature by the creditor. Such language might very well merely duplicate applicable law. See, e.g., US Bank Nat'l Ass'n v. Polyphase Elec. Co., No. 10-4881 (D. Minn. Apr. 23, 2012): In that case, the court granted granted summary judgment that a bank was entitled to enforce guaranties of loans made by the bank, even though the bank had not signed the guaranty documents. #### 6.4.6 Guarantor pays collection expenses A guaranty will often require the guarantor to pay any expenses incurred by the creditor in collecting the debt. See, e.g., clause 4 of the guaranty in Eagerton v. Vision Bank, 99 So. 3d 299, 305 (Ala. 2012). See also [TODO: AttyFeesExpenses]. #### 6.4.7 Refunds in bankruptcy If a debtor of a guaranteed payment obligation were to file for bankruptcy protection (under U.S. law), then the obligation's creditor might be forced to return any payments that were made by the principal within the 90 days preceding the bankruptcy filing date. Such payments are known as "avoidable preferences." See generally, e.g., Patricia Dzikowski, The Bankruptcy Trustee and Preference Claims (Nolo.com; undated); see also the last paragraph of the guaranty language in Cooperatieve Centrale Raiffeisen-Boerenleenbank, B.A. v. Navarro, 2015 NY Slip Op 4753, 25 N.Y.3d 485, 488-89, 36 N.E.3d 80 15 N.Y.S.3d 277, at part I. A creditor in bankruptcy has the right to contest its obligation to refund an avoidable preference. That can be difficult, though; the creditor must successfully jump through some hoops to prove that it was entitled to the payment. See generally, e.g., Kathleen Michon, Pre-Bankruptcy Payments to Creditors: Can the Trustee Get the Money Back? (Nolo.com; undated). As a practical matter, many avoidable-preference cases are settled, with the creditor making a partial refund in lieu of incurring the expense of jumping through those proof hoops. In such a situation, if the original obligation had been guaranteed, then the creditor likely would want to try to recoup the partial refund from the guarantor. "Courts have uniformly held that a payment of a debt that is later set aside as an avoidable preference does not discharge a guarantor of its obligation to repay that debt." Coles v. Glaser, 2 Cal. App. 5th 384, 389-90 (2016) (extensive citations, internal quotation marks, and alteration marks omitted). #### 6.4.8 Guarantor liability for deficiencies Guaranty language often states that the guarantor will be liable This language is based on that of the guaranty in Eagerton v. Vision Bank, 99 So. 3d 299, 309 (Ala. 2012); see also the similar language of the guaranty in Cooperatieve Centrale Raiffeisen-Boerenleenbank, B.A. v. Navarro, 2015 NY Slip Op 4753, 25 N.Y.3d 485, 488-89, 36 N.E.3d 80 15 N.Y.S.3d 277, at part I. #### 6.4.9 Waiver of defenses, etc. A guaranty might state that the guarantor waives any defense or right of setoff that might be asserted by the guarantor and even by the debtor. See, for example: #### 6.4.10 Joint and several guarantor liability It's a really good idea for drafters (and reviewers) to be clear about the extent to which multiple guarantors are to be jointly and severally liable for the guaranteed payment obligation(s). In a given transaction, for example, Alice might guarantee the obligations of Alan, and Bob might guarantee the obligations of Betty, but not vice versa — that is, Alice does not guarantee Betty's obligations nor does Bob guarantee Alan's obligations. #### 6.4.11 Unconditional guarantor liability An "absolute and unconditional" guaranty is likely to be enforced even in what might seem like unfair circumstances such as collusion between the lender and the principal. For an example of this, see the decision by the Court of Appeals of New York (which is that state's highest court) in Cooperatieve Centrale Raiffeisen-Boerenleenbank, B.A. v. Navarro, 2015 NY Slip Op 4753, 25 N.Y.3d 485, 36 N.E.3d 80 15 N.Y.S.3d 277. In that case, a guarantor sought to avoid liability as provided under an "unconditional and absolute" guaranty in favor of plaintiff, on grounds that the default judgment against the guarantor was obtained by the plaintiff's collusion. The court of appeals concluded that the plaintiff's collusion claim constituted a defense, and therefore was barred by the express language of the guaranty. See 25 N.Y..3d at 492, 495,97 (The court of appeals also concluded that the guarantor's claim of collusion was contradicted by the record.) #### 6.4.12 Alteration of guaranteed obligation A guaranty might provide that an alteration of the guaranteed obligation does not affect the guaranty. The intent of such language would be to override the general rule — which is strictly applied by courts — that "a guarantor is discharged if, without his or her consent, the contract of guaranty is materially altered." Eagerton v. Vision Bank, 99 So. 3d 299, 305-06 (Ala. 2012) (holding that modification of loan discharged guarantors from further obligations) (citations, quotation marks, and alterations omitted); accord, Sterling Development Group Three, LLC, v. Carlson, 2015 N.D. 39 (affirming holding that guaranty was discharged by alteration of guaranteed obligations without guarantor's knowledge or consent) (citing state statute). For an example of clause language like this, see the guaranty in Cooperatieve Centrale Raiffeisen-Boerenleenbank, B.A. v. Navarro, 2015 NY Slip Op 4753, 25 N.Y.3d 485, 488-89, 36 N.E.3d 80 15 N.Y.S.3d 277. #### 6.4.13 Reasonable collection efforts A guarantor might want the guaranty to state that, before the creditor can come after the guarantor, the creditor must first obtain a judgment against the debtor and then be unable to collect on the judgment. Creditors, of course, will typically object to this language; they normally want to be able to go after guarantors immediately to get their money, as opposed to incurring the delay, burden, expense, and uncertainty of first having to file suit against their debtors. #### 6.4.14 Guarantor liability cap? In some transactions a cap on the liability of some or all guarantors might be a possible negotiation point. #### 6.4.15 Consider other ways of "guaranteeing" payment, too Drafters representing a guaranty creditor should consider other possible ways of securing the guaranteed payment obligation, such as (for example): An interesting form of payment security can be seen in Falco v. Farmers Ins. Gp., 795 F.3d 864 (8th Cir. 2015) (affirming summary judgment in favor of defendants). In that case: • An independent insurance agent's contract with an insurance carrier entitled the agent to a certain termination payment if he ever ceased representing the carrier. • Some 16 years after signing on with the insurance carrier, the agent took out a line-of-credit loan from the carrier's employee credit union. • As part of the loan documentation, the agent signed a power of attorney giving the credit union the power to submit the agent's resignation from representing the carrier, in which case the carrier would pay the agent's termination payment to the credit union. • Five years later, the agent didn't make his payments on his line-of-credit loan, so the credit union did just as described above: It tendered the agent's resignation from representing the insurance carrier; collected the termination payment and applied it to the agent's outstanding loan balance; and remitted the balance to the agent. The agent filed suit against pretty much everyone in sight. The district court granted summary judgment in favor of all defendants; the appeals court affirmed. #### 6.4.16 Additional reading about guaranties See, e.g., Henri Chalouh, The Commercial Lease Guarantee: An Overview For Landlords And Tenants (Mondaq.com 2015). #### 6.4.17 [DCT to-do items] Add language for: • Guarantor must provide audited financials periodically • Guarantor consents to jurisdiction somewhere convenient to the creditor (e.g., where leased property is located if guarantor is guaranteeing tenant's payment of lease) • Guarantor appoints an agent for service of process • Representation by signer of corporate guaranty that the signer is duly authorized to do so. These are inspired by Pamela Westhoff, Charles Donovan and Lydia Lake, Commercial Lease Guaranties From Foreign Entities: What You Need to Know to Safeguard Your Security (Shepard Mullin 2015). ### 6.5 Payment bonds Payment bonds are in essence a type of insurance policy. They are often required by contracts such as, e.g., construction contracts: • The prime contractor is likely to have to buy materials from suppliers, and might engage subcontractors. Those costs are normally built into the prime contractor's bid price. • The customer doesn't want to pay the prime contractor but then have the prime contractor go out of business or file for bankruptcy protection, stiffing one or more suppliers and/or subcontractors. • Those companies might have a legal right to sue the customer for payment. • A stiffed supplier or subcontractor might also have the statutory right to put liens [LINK] on the customer's relevant property or properties. Such liens could well impede the customer's ability to get financing; the existence of liens could also constitute a breach of covenants in the customer's financing agreement(s) with lender(s). • To avoid these hassles, customers often insist on a requirement, in the prime contract, that the prime contractor must buy a payment bond. (The cost of the payment-bond premium will of course be factored into the prime contractor's bid price.) Government contracts often require payment bonds. Think about why that is the case: A government contract will often be for a local contruction project, with local suppliers and subcontractors — and those people vote and make political contributions. See also Performance Bonds [LINK] ## 7 Responsibility for assumed facts: Reps and warranties ### 7.1 Key takeaways about reps and warranties Parties entering into a contract almost always make assumptions about past, present, or future facts. The parties are likely to want to expressly allocate responsibility for ensuring the truth of those facts, or at least for checking on them. (The alternative might be to roll the dice on doctrines such as mistake.) Representations and warranties are classic ways of allocating that responsibility; here are some things every contract drafter and reviewer should know about them. 1. A representation is not the same thing as a warranty, at least not in U.S. law. The two terms relate to different categories of fact, and they have different legal ramifications in litigation. 2. A representation is, in essence, a statement of past or present fact. Example: Alice represents that her car has never been in an accident [past fact] and is in good working order [present fact]. 3. A representation might be paraphrased as: So far as I know, X is true, but I'm not making any promises about it. 4. When qualifying a representation as in #3 above, use a term such as, so far as I know, and not the term to my knowledge: In a lawsuit, an aggressive trial counsel might claim that the latter term amounts to an implicit representation that the representing party did indeed have knowledge. 5. A representation can include the disclaimer without any particular investigation; this could be paraphrased as: I represent that X is true, but I'm not saying that I've done any particular investigation into the question. 6. The term warranty is a shorthand label for a kind of conditional covenant, a promise that if the warranted fact(s) are shown to be untrue, then the warranting party will make good on any resulting losses suffered by the party to whom the warranty was made. Example: Consider the simple warranty, Alice warrants to Bob that Alice's car will run normally for at least 30 days. This is tantamount to a promise by Alice that, if Alice's car fails to run normally for at least 30 days, then Alice will pay for repairs, a rent car, and any other foreseeable damages resulting from the failure. 7. A warranty might be paraphrased as: I'm not going to say whether X is or isn't true, but I'll commit that, if it turns out that X isn't true, then I'll reimburse you for any resulting foreseeable losses that you suffer (or alternatively: then I'll take the following specific steps, and only those steps, to try to make it right for you). 8. Representations and warranties can be carefully drafted so as to be narrowly specific. 9. A warranty can be drafted to limit the remedies available if the warranted facts turn out not to be true. (A typical triad of remedies can be summarized as, repair, replace, or refund.) 10. A party that is asked to make a representation and warranty about particular facts (e.g., a seller of goods being asked to represent and warrant the quality of the goods) should consider whether it really wants to make both of those commitments for all the requested facts — that party might want to make only representations as to some facts and only warranties as to other facts. On the other hand, suppose that a services provider and a customer are entering into a contract for services. If the provider will be giving any kind of warranty about its services, the customer should always at least try to get both a representation and a warranty; that will give the customer more flexibility in litigation. 11. Don't use the term represents to indicate that a party will take or abstain from action — commitments to future action should instead be written as promises (covenants).  Before: Bob represents that he will pay Alice …. After: Bob will pay Alice … In the "Before" example above, if Bob failed to pay Alice, he might try to claim that he should not be liable for nonpayment because when he made the representation, he had no reason to believe that he would not make the payment. A court might treat such a "representation" as a simple promise, see Lyon Fin. Serv., Inc. v. Illinois Paper & Copier Co., 848 N.W.2d 539 (Minn. 2014) (on cert­if­i­ca­tion from 7th Circuit), but the drafter would do all concerned a disservice by not making the obligation clear. ### 7.2 Representations vs. warranties Suppose that the following takes place: • Alice and Bob enter into a contract for Alice to sell Bob a house located several hundred miles away from either of them. • In the contract, Alice represents to Bob that the house is in good condition, but she does not warrant it. • After the closing, the house turns out to be a wreck. Even though Alice didn't warrant the condition of the house, Alice might be liable for misrepresentation. For Bob to succeed with a misrepresentation claim, though, he would have had to jump through some additional proof hoops: He would have to show (probably among other things) that (1) Alice had acted (i) negligently or (ii) with intent to deceive, and (2) that he (Bob) had reasonably relied on Alice's representation. Of course, Bob might well have a powerful incentive to try to jump through these proof hoops: If he could establish liability for misrepresentation, then he might be able to rescind the contract, and perhaps even recover punitive damages. Neither of those remedies is normally available in a breach-of-warranty action. Moreover, a non-expert fact finder, such as a judge or juror, might not fully understand the technical aspects of a case — but she probably would understand the simple claim "they lied!" (See here for more discussion.) From a litigator's perspective, the following chart summarizes the key differences between representations and warranties under American law (see also the notes following the chart):  ITEM REP. WARRANTY Can be disclaimed [a] [b] Can relate to past facts x x Can relate to present facts x x Can relate to future facts x Plaintiff must prove falsity x x Strict liability if false x Plaintiff must prove reliance [c] Plaintiff must prove reasonable reliance [c] [d] Plaintiff must prove materiality of statement x Plaintiff must prove scienter [e] Proof of due diligence can help defeat liability [f] Remedy: Expectancy damages x Remedy: Rescission x Remedy: Restitution / reliance damages x Remedy: Punitive damages [g] NOTES: [a] Disclaimers of representations usually relate to representations external to the contract; under Texas law, such extrinsic representations technically can't be disclaimed, but the contract can state that a party is not relying on such representations, as discussed in § 7.5. [b] Warranties can typically be disclaimed, but in some U.S. jurisdictions, some warranties might be non-disclaimable; see § 7.4.2. [c] A party's reasonable reliance on a representation will probably be a given if the contract expressly uses the term represents. For example, if a contract stated that "Alice represents to Bob that her candy meets the health-code requirements for human consumption," then it seems very likely that a jury would find both (i) that Bob relied on Alice's representation and (ii) that his reliance was reasonable. [d] Normally, a plaintiff claiming that a warranty was breached need not prove that it reasonably relied on the warranty. In some jurisdictions, though, the warranting party might be able to defeat the plaintiff's claim by showing that the warranting party itself disclosed facts to the plaintiff that made it unreasonable for the plaintiff to have relied on the warranty; see § 7.3.4. [e] For misrepresentation, scienter could take the form of (i) negligence in making the representation; (ii) reckless disregard for the truth; or (ii) intentional misstatement. (This gives plaintiff's trial counsel a reason to use "They lied!" in front of a jury.) [f] Proof of due diligence in making a representation would normally defeat a claim of scienter (see above). [g] Punitive damages would be available in cases of intentional misrepresentation, and possibly in cases of negligent misrepresentation as well. ### 7.3 More about warranties #### 7.3.1 What is a warranty (1): Learned Hand's view The concept of "warranty" is not necessarily an easy one to grasp. One widely-held view was expressed by the legendary judge Learned Hand: [A warranty is] an assurance by one party to a contract of the existence of a fact upon which the other party may rely. It is intended precisely to relieve the promisee of any duty to ascertain the fact for himself; it amounts to a promise to indemnify the promisee for any loss if the fact warranted proves untrue …. To argue that the promisee is responsible for failing independently to confirm it, is utterly to misconceive its office. CBS, Inc. v. Ziff-Davis Publishing Co., 75 N.Y.2d 496, 503, 553 N.E.2d 997, 1001 (1990), quoting Metropolitan Coal Co. v Howard, 155 F.2d 780, 784 (2d Cir 1946) (cleaned up). #### 7.3.2 What is a warranty (2): A conditional covenant The author submits that a warranty is best thought of as a conditional covenant, tantamount to an insurance policy: In effect, the warranting party promises that, if the warranted state of affairs turns out not to be true, then the warranting party will do as stated in the contract — or, if the contract is silent, then the warranting party will make good on any foreseeable damages that, as a result, are incurred by the party (or parties) to whom the warranty was made. Consider a contract for Alice to sell a car (the "Car") to Bob. The contract says: Alice warrants that the Car, when delivered, will be in good working order. Now consider two, alternative, fork-in-the-road scenarios: 1. In Scenario 1, the contract also says: IF: Bob shows that the Car was not in good working order when delivered; THEN: AS BOB'S EXCLUSIVE REMEDY, Alice will reimburse Bob for up to$X in repair costs. (This means that Alice and Bob are voluntarily sharing the risk that the Car isn't in good working order; that sharing of the risk presumably is reflected in the negotiated price of the Car.)
2. In Scenario 2, the contract is silent about what Alice will do if the Car turns out not to have been in good working order when delivered. Under the law, that is equivalent to the contract's saying: IF: Bob shows that the Car, when delivered to him, was not in good working order; AND: As a result, Bob suffers foreseeable damages; THEN: Alice will pay Bob the amount of those damages.

#### 7.3.3 The warranty as insurance policy

A warranty is akin to an insurance policy: both are contractual commitments to assume certain risks. As the Restatement (Second) of Contracts puts it:

d. Promise of event beyond human control; warranty. Words which in terms promise that an event not within human control will occur may be interpreted to include a promise to answer for harm caused by the failure of the event to occur. An example is a warranty of an existing or past fact, such as a warranty that a horse is sound, or that a ship arrived in a foreign port some days previously. Such promises are often made when the parties are ignorant of the actual facts regarding which they bargain, and may be dealt with as if the warrantor could cause the fact to be as he asserted. …

Restatement (Second) of Contracts § 2 cmt. d.

#### 7.3.4 Warranties carry fewer proof requirements

A party to whom a warranty is given doesn't need to prove that the warranting party acted negligently or intentionally in misstating the warranted state of affairs. This is in contrast to tort-based theories of misrepresentation, where a party claiming misrepresentation must provide such proof.

And in the so-called modern [U.S.] view, the beneficiary of a warranty is not required to prove that it justifiably relied on a warranty. A leading case on point is from the Court of Appeals of New York (that state's highest court). See CBS, Inc. v. Ziff-Davis Publishing Co., 75 N.Y.2d 496, 503, 553 N.E.2d 997, 1001 (1990).

Cf. also Lyon Fin. Serv., Inc. v. Illinois Paper & Copier Co., 848 N.W.2d 539, 543-44 & n.6 (Minn. 2014) (declining to decide whether requirement of reliance in 1944 opinion of supreme court was still good law); see generally Matthew J. Duchemin, Whether Reliance on the Warranty is Required in a Common Law Action for Breach of an Express Warranty, 82 Marq. L. Rev. 689 (1999).

#### 7.3.5 The warranting party's timely "whoops" might matter

A different situation might be presented if, before the contract was signed, a warranting party disclosed that a warranty in the contract was not accurate. While the law seems still to be evolving in this area, the influential U.S. Court of Appeals for the Second Circuit summarized New York law thusly:

… a court must evaluate both the extent and the source of the buyer's knowledge about the truth of what the seller is warranting.

Where a buyer closes on a contract in the full knowledge and acceptance of facts disclosed by the seller which would constitute a breach of warranty under the terms of the contract, the buyer should be foreclosed from later asserting the breach.

In that situation, unless the buyer expressly preserves his rights under the warranties … The buyer has waived the breach.

The buyer may preserve his rights by expressly stating that disputes regarding the accuracy of the seller's warranties are unresolved, and that by signing the agreement the buyer does not waive any rights to enforce the terms of the agreement.

On the other hand, if the seller is not the source of the buyer's knowledge, e.g., if it is merely "common knowledge" that the facts warranted are false, or the buyer has been informed of the falsity of the facts by some third party, the buyer may prevail in his claim for breach of warranty.

In these cases, it is not unrealistic to assume that the buyer purchased the seller's warranty as insurance against any future claims, and that is why he insisted on the inclusion of the warranties ….

In short, where the seller discloses up front the inaccuracy of certain of his warranties, it cannot be said that the buyer — absent the express preservation of his rights — believed he was purchasing the seller's promise as to the truth of the warranties.

Accordingly, what the buyer knew and, most importantly, whether he got that knowledge from the seller are the critical questions.

Rogath v. Siebenmann, 129 F. 3d 261, 264-65 (2d Cir. 1997) (vacating and remanding partial summary judgment that seller had breached contract warranty; emphasis edited, extra paragraphing added, internal quotation marks and extensive citations omitted).

#### 7.3.6 Special case: Sales of goods under the Uniform Commercial Code

In a contract for the sale of goods, if Vendor were only to represent that X were true, that representation might well constitute a warranty anyway under the Uniform Commercial Code. UCC § 2-313 provides that, if the representation is related to the goods and forms part of the basis of the bargain, it's deemed a warranty, no matter what it's called.

#### 7.3.7 Is a warranty a guarantee?

Colloquially the terms "warranty" and "guarantee" are alike, but technically there are some differences; see generally § 6.4.

#### 7.3.8 Materiality of warranties

Some contracts provide that each stated warranty is a material provision of the agreement. Warranting parties should be careful about agreeing to a provision such as this, because it might mean that even an inconsequential breach of warranty might be a material breach that could entitle the other party to terminate or even rescind the agreement.

#### 7.3.9 Is "represents and warrants" necessary?

It's tempting to write the well-known couplet represents and warrants as if by reflex. As discussed above, however, the two are distinct legal concepts, with different proof requirements and different legal effects.

#### 7.3.10 Be careful what you warrant

In a British Columbia case:

• A supplier sold water pipes to a customer for use in a construction project designed by the customer.
• The pipes conformed to the customer's specifications — in other words, the supplier delivered what the customer ordered.
• Flaws in the customer's design led to problems.
• The contract's warranty language stated that the supplier warranted that the pipes were "free from all defects arising at any time from faulty design" (emphasis added).
• As a result, the supplier was held liable because of its warranty, even though the problem was the customer's fault.

See Greater Vancouver Water Dist. v. North American Pipe & Steel Ltd., 2012 BCCA 337 (CanLII) (reversing trial court's judgment in favor of supplier). The appeals court said:

[24] North American was obliged to deliver pipe in accordance with the appellant’s speci­fi­ca­tions. North American agreed to do so.

Quite separately, it warranted and guaranteed that if it so supplied the pipe, it would be free of defects arising from faulty design. These are separate contractual obligations. The fact that a conflict may arise in practice does not render them any the less so.

The warranty and guarantee provisions reflect a distribution of risk.

* * *

[34] Clauses such as 4.4.4 distribute risk. Sometime they appear to do so unfairly, but that is a matter for the marketplace, not for the courts.

There is a danger attached to such clauses. Contractors may refuse to bid or, if they do so, may build in costly contingencies. Those who do not protect themselves from unknown potential risk may pay dearly. …

Parties to construction or supply contracts may find it in their best interests to address more practically the assumption of design risk. To fail do to so merely creates the potential for protracted and costly litigation.

Id. at ¶¶ 24, 32 (emphasis and extra paragraphing added).

#### 7.3.11 Warranty survival

Anyone drafting a warranty provision in a contract for the sale of assets should consider whether to specify whether, and for how long, specified warranties will survive the closing. That's because, in some circumstances, the so-called merger doctrine can extinguish contractual warranties upon closing.

For example: In a contract for sale of real property, the seller will generally make certain stated war­rant­ies (which are often extensively negotiatied). In some jurisdictions, at the closing of the sale, all such warranties are deemed to "merge" into — and thus be extinguished by — the seller's delivery of the deed conveying the property, that is unless the contract provides otherwise. That way, "the deed is deemed to express the final and entire contract between the parties." Ram's Gate Winery, LLC v. Roche, 235 Cal. App. 4th 1071, 1079, 185 Cal. Rptr. 3d 935 (2015) (reversing and remanding summary adjudication and holding that fact issue remained as to whether parties intended warranties to survive closing) (citations and internal quotation marks omitted).

A similar but not-identical issue can arise in corporate merger & acquisition (M&A) transactions: Careless use of the phrase "warranties will survive the closing" can create confusion: If a warranty breach allegedly occurs, it might be unclear whether the non-breaching party must merely notify the breaching party witnin a stated period of time after closing, or whether the non-breaching party must file a lawsuit or demand for arbitration within that time. See, e.g., Jeffrey H. LaBarge, They don't call it a survival clause for nothing … (NixonPeabody.com 2011).

### 7.4 Disclaiming implied warranties

#### 7.4.1 Overview

Many contracts include disclaimers of implied warranties; the idea could be paraphrased as, whatever representations and warranties are in this contract, that's it. For a detailed example with commentary, see the Common Draft disclaimer provision at https://goo.gl/uWzWES.

A disclaimer of implied warranties and representations could usefully include a disclaimer of conditions and of terms of quality to address the requirements of disclaimers under UK law; see § 7.4.3.

The word DISCLAIMS could be in bold-faced, all-caps type for conspicuousness, to meet the special requirements for disclaimers of the implied warranty of merchantability of goods sold (which arises automatically under the (U.S.) Uniform Commercial Code), specifically UCC § 2-316(2) and (3).

#### 7.4.2 Effect of consumer-protection statutes on warranty disclaimers

Any company offering consumer-product warranties (in the U.S.) should carefully study the requirements of various federal- and state consumer protection laws, such as:

• the Magnuson-Moss Warranty Act, which is the federal law that governs consumer product warranties; it requires manufacturers and sellers of consumer products to provide consumers with detailed information about warranty coverage, and also affects both the rights of consumers and the obligations of warrantors under written warranties (this paragraph is adapted from the FTC guide linked above); and
• state statutes such as California's Song-Beverly Act, which requires manufacturers of consumer goods sold in California to jump through various hoops (and imposes stringent requirements if the manufacturer wants to disclaim the implied warranties of merchatability and fitness).

The E-Warranty Act of 2015 requires any written warranty for consumer products costing more than $15 to be made available before the sale, as discussed here. In Texas and probably other jurisdictions, homebuilders cannot disclaim the implied warranty of habitability. See Centex Homes v. Buecher, 95 S.W.3d 266 (Tex. 2002). #### 7.4.3 Warranty disclaimers for UK transactions should also disclaim “conditions” If you're a vendor doing a sales transaction under UK law (England, Wales, Northern Ireland), be sure that your warranty disclaimer addresses not just implied warranties but also implied “conditions.” An oil seller failed to do so and learned that its disclaimer didn't preclude liability. See KG Bominflot Bunkergesellschaft Für Mineralöle mbh & Co KG v. Petroplus Marketing AG, [2009] EWHC 1088 (Comm). In that case: • The parties entered into a contract for the sale of gasoil, a type of heating oil. The contract was governed by English law. • The contract provided that delivery was complete, and title and risk passed to the buyer, when the gasoil was loaded onto a certain ship. • The gasoil met the contractual specifications when it was loaded. By the time the ship arrived at its destination, however, the gasoil no longer met the agreed specifications. The claimed damages were in excess of USD$3 million. Id. ¶ 8.

The seller took the position that all title and risk had passed, therefore the damages were the buyer's problem. The buyer, though, argued that under the Sale of Goods Act 1979, “it was an implied condition of the sale contract that the goods would be reasonably fit for the purpose of remaining, during their time on the vessel and for a reasonable time thereafter, within the specifications set out in the sale contract." Id. ¶ 7 (quoting buyer's argument).

The judge agreed with the buyer, holding that by failing to disclaim implied conditions as well as implied warranties, the seller had left itself open to the buyer's claim:

49. If the failure to use the word “condition” renders clause 18 [the warranty dis­claim­er] of little or no effect, so be it. The sellers agreed to the wording of clause 18 in the face of Wallis v Pratt and must live with the consequences.

### 7.5 Disclaiming representations (by disclaiming reliance)

#### 7.5.1 Legal background

Under the law in many U.S. jurisdictions, a contracting party that claims misrepresentation by the other side normally would have to prove, among other things, that it reasonably relied on the alleged misrepresentation. That gives the other side's contract drafter a reason to include a disclaimer of reliance.

If Hewlett-Packard's EDS subsidiary had included a no-reliance disclaimer clause in its software-system development agreement with British Sky Broadcasting, then perhaps it might not have had to pay some $460 million to settle Sky's successful claim for fraudulent inducement. See BSkyB Ltd. v. HP Enterprise Services UK Ltd., [2010] EWHC 86 (TCC). In the same vein, a software developer found itself having to defend against a customer's claim that the developer had not only "breached its obligations under the contract … but also that [the developer] wrongfully induced [the customer] into entering a contractual relationship knowing that [the developer] did not have the capability to perform any of the promised web-related services." The Colorado supreme court held that those allegations "state a violation of a tort duty that is independent of the contract" and thus should not have been dismissed under the economic-loss doctrine. Van Rees v. Unleaded Software, Inc., 2016 CO 51, 373 P.3d 603, 607, ¶ 13 (Colo. 2016). #### 7.5.2 An entire-agreement "merger" clause alone won't defeat "they lied!" Standing alone, an entire-agreement provision, also known as a merger clause or integration clause, generally won't protect Alice if Bob claims that Alice fraudulently induced Bob to enter into the contract in the first place. The Supreme Court of Texas explained: Pure merger clauses, without an expressed clear and unequivocal intent to disclaim reliance or waive claims for fraudulent inducement, have never had the effect of precluding claims for fraudulent inducement. … There is a significant difference between a party[:] • disclaiming its reliance on certain representations, and therefore potentially relinquishing the right to pursue any claim for which reliance is an element, and • disclaiming the fact that no other representations were made. [DCT comment: In the context of a fraudulent-inducement analysis, though, don't these two disclaimers amount to exactly the same thing? As explained further down in this excerpt, though, the Texas supreme court seems to have felt that a disclaimer of extrinsic representations, standing alone, wasn't sufficiently explicit and "in your face" to alert the other side about what it was being asked to give up.] * * * Here, the only plain reading of the contract language in sections 14.18 and 14.21 is that the parties intended to include a well-recognized merger clause. Nothing in that language suggests that the parties intended to disclaim reliance. * * * We have repeatedly held that to disclaim reliance, parties must use clear and unequivocal language. this elevated requirement of precise language helps ensure that parties to a contract — even sophisticated parties represented by able attorneys — understand that the contract's terms disclaim reliance, such that the contract may be binding even if it was induced by fraud. Here, the contract language was not clear or unequivocal about disclaiming reliance. Forinstance, the term "rely" does not appear in any form, either in terms of relying on the other party's representations, or in relying solely on one's own judgment. This provision stands in stark contrast to provisions we have previously held were clear and unequivocal [three-column table, contrasting different clauses, omitted]. Italian Cowboy Partners, Ltd. v. Prudential Ins. Co., 341 S.W. 3d 323, 333-37 (Tex. 2011) (reversing court of appeals; merger clause did not preclude tenant's claim that landlord had fraudulently induced lease agreement by misrepresenting condition of property) (extra paragraphing and bullets added, citations and some internal quotation marks omitted). As another example, Bank of America sold a foreclosed home subject to an "as-is" disclaimer, but the bank stated that it had "little or no direct knowledge" of problems, when in fact it knew that there were serious mold problems. The appeals court affirmed judgment on a jury verdict in favor of the buyer, saying that: There was sufficient evidence to support the jury’s verdict that the Bank made a deceptive statement concerning the sale of the property [namely, that the bank had little or no direct knowledge of the condition of the house] with the intention of inducing the sale of the property and that Fricano suffered a loss as a result of that representation. The “as is” and exculpatory clauses in the parties’ contract do not, as a matter of law, relieve the bank/seller of liability under § 100.18(1) for its deceptive representation in the contract which induced agreement to such terms. We affirm. Fricano v. Bank of America NA, 2016 WI APP 11 (2015). #### 7.5.3 But a clear non-reliance disclaimer might work When a reliance disclaimer is sufficiently clear, courts might well give effect to it. For example: Shakeri v. ADT Security Services, Inc., No. 15-10539, slip op. at 10-11 (5th Cir. Mar. 7, 2016) (per curiam): The contract between an alarm-system company and its jewelry-store customer contained the following reliance disclaimer: "In executing this Agreement, Customer is not relying on any advice or advertisement of ADT." Id., slip op. at 3 (capitalization omitted). The Fifth Circuit held that this language "was sufficiently clear as to disclaim any reliance by plaintiffs on any alleged misrepresentation ADT made prior to Plaintiffs entering into the contract. Accordingly, Plaintiffs’ fraudulent inducement claim is barred under Texas law." Id., slip op. at 17. Pappas v. Tzolis, 20 N.Y.3d 228 (2012): Tzolis, a businessman, owned part of a limited liability company ("LLC") along with two colleagues, Pappas and Tziolis invested$50,000 in the company, while Ifantopoulos invested $25,000. The LLC acquired a long-term lease on a building in Lower Manhattan. The three got into a dispute over subleasing the building. Tzolis bought out Pappas and Ifantopoulos for 20 times their investment. The buyout-agreement documents included statements by Pappas and Ifantopoulos disclaiming any reliance on representations by Tzolis, and vice versa. A few months later, Tzolis sold the building lease for$17.5 million. Pappas and Ifantopoulos sued Tzolis for (among other things) fraud, claiming that Tzolis had arranged the sale before he bought them out, without telling them he was doing so.

New York's highest court ruled that Pappas's and Ifantopoulos's complaint should have been summarily dismissed:

Plaintiffs' cause of action alleging fraud and misrepresentation must be dismissed ….

Plaintiffs principally allege that Tzolis represented to them that he was aware of no reasonable prospects of selling the lease for an amount in excess of $2,500,000. However, … in [one of the buyout-agreement documents], plaintiffs in the plainest language announced and stipulated that they were not relying on any representations as to the very matter as to which they now claim they were defrauded. Moreover, while it is true that a party that releases a fraud claim may later challenge that release as fraudulently induced if it alleges a fraud separate from any contemplated by the release, plaintiffs do not allege that the release was itself induced by any action separate from the alleged fraud consisting of Tzolis's failure to disclose his negotiations to sell the lease. Id. at 233-34 (extra paragraphing added, internal quotation marks, alteration marks, and citations omitted). Bank of America, N.A. v. JB Hanna, LLC, No. 12-3239, part V, slip op. at 22 (8th Cir. Sept. 8, 2014) (affirming summary judgment in favor of bank); One Communications Corp. v. JP Morgan SBIC LLC, Nos. 09-1815-cv, 10-0424-cv, slip op. at 4-5 (2d Cir. June 17, 2010) (affirming summary judgment dismissing misrepresentation claim); K3C Inc. v. Bank of America, N.A., No. 06-50343, slip op. at 13-14 (5th Cir. Nov. 6, 2006) (unpublished) (affirming judgment after bench trial; non-reliance clause in interest-rate swap agreement precluded plaintiffs' negligent-misrepresentation claim against defendant bank); Abu Dhabi Comm'l Bank v. Morgan Stanley & Co., No. 08 Civ 7508, slip op. at part IV (S.D.N.Y. March 5, 2013) (Scheindlin, J., citing New York law in granting defendant Morgan Stanley's motion for summary judgment dismissing negligent-misrepresntation claim as to some plaintiffs but not others); Bristol Bay Prods., LLC v. Lampack, 2013 CO 60, No. 12SC138, slip op. at ¶ 26 (Colo. Oct. 21, 2013) (recapitulating Colorado law in case where author Clive Cussler was accused of fraud in misrepresenting the number of copies of his books that had been sold; "There is no dispute that the elements of fraud in California and Colorado are identical in all substantive respects" [footnote omitted]); • Mark P. Gergen, Negligent Misrepresentation as Contract, 101 Cal. L. Rev. 953 (2013); • Daniel W. Bishop II, Business Tort Update 2005, part I (reviewing Texas law). • Brian S. Fraser, Paul B. Haskel, and Tamala E. Newbold, Litigating and Drafting Contractual Disclaimers of Reliance in a Post-Financial Crisis World, Bloomberg BNA Banking Report, June 17, 2014. For a useful review of Texas jurisprudence in this area, see Dragon Fish, LLC v. Santikos Legacy, Ltd., 383 S.W.3d 175 (Tex. App.–San Antonio 2012). In that case, the court affirmed a trial court's partial summary judgment dismissing a claim by shopping-center tenants against the shopping center's developers; the dismissal was based on a reliance disclaimer contained in the lease agreements. Of course, fraud claims might survive even a no-reliance provision. Suppose that Alice claims that Bob misrepresented facts to induce Alice to enter ito a contract, and that Bob's misrepresentation wasn't merely negligent, but intentional. And suppose also that the contract contains a no-reliance clause. In that situation, Bob should not hold out much hope that a court would summarily toss out Alice's fraudulent-inducement claim against him; the judge might very well insist on a full trial. See generally Andrew M. Zeitlin & Alison P. Baker, At Liberty to Lie? the Viability of Fraud Claims after Disclaiming Reliance, Apr. 23, 2013. See also Neal A. Potischman, Stephen Salmon, Alyse L. Katz, John A. Bick, Kirtee Kapoor and Lawrence Portnoy, Will Anti-Reliance Provisions Preclude Extra-Contractual Fraud Claims? Answers Differ In Delaware, New York, And California (Mondaq.com 2016). #### 7.5.4 Drafting tip: Be specific about what's disclaimed? Courts seem to have more sympathy for a reliance disclaimer if, in the words of the Second Circuit's Caiola v. Citibank opinion, the disclaimer "tracks the substance of the alleged misrepresentation." the court reversed a lower court's dismissal of a claim under federal securities law, but the underlying principle might well apply in contract cases as well. See Caiola v. Citibank, NA, 295 F.3d 312, 330 (2d Cir. 2002) (reversing dismissal of claim under federal securities law) (citing cases; internal quotation marks and alteration omitted). #### 7.5.5 Drafting tip: Initial the disclaimer? If there's a concern that a party might someday try to repudiate its reliance disclaimer, it can't hurt to have that party separately initial the contract as close as possible to the disclaimer, and be sure the party actually does initial it. For example: In a New York case, an estranged married couple reconciled — temporarily, as it turned out. During their reconciliation, the wife voluntarily dismissed her three pending lawsuits against the husband, and they signed a settlement agreement to that effect. But then the couple separated again, and the wife sued the husband again, this time claiming that he had fraudulently induced her to dismiss her other lawsuits by promising that he would return to her and permanently resume their marital relationship. Unfortuantely for the wife, the settlement agreement she signed included a reliance disclaimer, which she had specifically initialed; as the court acidly noted: "There is no allegation in the complaint that plaintiff did not read or did not understand the agreement; in fact, she initialed the agreement in the margin opposite the very paragraph disclaiming the alleged representation." Cohen v. Cohen, 1 A.D.2d 586 (N.Y. App. Div. 1956) (per curiam; affirming dismissal of complaint for insufficiency). In this situation, the drafting party should make damned sure the signing party actually does initial the disclaimer where indicated. Otherwise the drafting party might have an even worse problem: the uninitialed blank line could help persuade a judge or jury that the signing party really did overlook the disclaimer; that's just the opposite of what the drafting party wanted. #### 7.5.6 One-way or two-way disclaimer of reliance? In some situations, a one-way disclaimer of reliance might be appropriate, i.e., if one party really was relying on the other party's extrinsic representations. Of course, in that situation the better practice might be to list such external representations in the parties' agreement, so that the representations were no longer extrinsic but instead were express. #### 7.5.7 Even a non-reliance disclaimer might not be enough, depending on the facts A no-reliance clause in a contract might not enough to convince a court to toss out a fraudulent-inducement or negligent-misrepresentation claim. That was the outcome in a case due to factors explained by the court of appeals: In this case, the parties did not enter into the agreement containing the disclaimer to resolve an ongoing dispute. There was, in fact, no existing dispute at the formation stage of the agreement. Unlike the Schlumberger agreement, which contemplated the termination of a business relationship, the agreement entered into in the instant case contemplated creating a business relationship. Considering that no dispute existed between the parties during the formation of the agreement creating the parties business relationship, when compared to Schlumberger, the disclaimer clause in this case is not an important part of the basis of the bargain. Furthermore, Carousel did not retain counsel to negotiate with Marble Slab, and Marble Slab has not directed us to evidence in the record suggesting that the parties negotiated at arms-length in arriving at the final terms of the agreement. Finally, considering that the supreme court decided Schlumberger on its specific facts, we note that the level of sophistication exhibited by Carousel does not rise to that of the Swansons in Schlumberger. Carousel's Creamery, L.L.C. v. Marble Slab Creamery, Inc., 134 S.W.3d 385 (Tex. App.–Houston [1st Dist.] 2004) (reversing and remanding directed verdict for defendant on negligent-misrepresentation claim) (emphasis and extra paragraphing added). ### 7.6 Mnemonics about reps and warranties • R.R.P.P.(f) - Representations Relate to Past or Present (facts) • W.P.P.F.(f) - Warranties: Past, Present, or Future (facts) • R.R.R.R.S. - Representations Require Reasonable Reliance and Scienter • W.I.L. - Warranties (are) Insurance (and should have) Limits ### 7.7 Possible quiz & exam questions #### 7.7.1 Question: Warranty disclaimers in England FACTS: • Your client, Seller, headquartered in Dallas, manufactures widgets. • Seller's CEO, while on a vacation in London, had the good fortune to make friends with a prominent British industrialist; the CEO landed a big order to deliver 1 million widgets to the industrialist's company in Liverpool, and brought back a signed purchase order. • You happen to know that Seller's standard terms-of-sale document: • includes a statement of limited warranties and remedies; • includes the following statement: "ALL OTHER WARRANTIES ARE DISCLAIMED"; and • is silent about choice of law. • You don't know whether the British industrialist's company has seen Seller's standard terms-of-sale document. QUESTIONS: (1) T/F: Texas law will likely apply. A: On these facts, English law will probably apply. (2) T/F: If article 2 of the Texas UCC applies, Seller's disclaimer will be enough, under UCC § 2-312, to disclaim an implied warranty that Seller has the legal right to convey ownership of the widgets to the purchaser. A: Under UCC § 2-312(2), the implied warranty of title must be expressly disclaimed (or the disclaimer must be apparent from the circumstances). (3) T/F: If English law applies, Seller's disclaimer will likely be enough to disclaim all potential liability about the widgets other than as stated in Seller's standard terms-of-sale document. A: No - need a disclaimer of implied conditions and (probably) terms of quality as well. (4) QUESTION: Could Seller's disclaimer language be improved? How? #### 7.7.2 Question: Reps and warranties strategy FACTS: You've passed a bar (exam) and are a licensed attorney. As a favor to a friend, you're helping the friend sell a car to a stranger. The friend says that s/he doesn't know of any mechanical problems with the car. MORE FACTS: The buyer asks the seller to represent and warrant that the car has no problems. QUESTION: how might you respond? A: Perhaps by having the seller say simply, "so far as I'm aware, the car has no significant problems, but I'm not a mechanic and haven't had a mechanic check it out." QUESTION: T/F: It's acceptable for the seller to phrase the statement as, "to my personal knowledge the vehicle has no problems"? [Note where the question mark is, i.e., outside the quotation mark.] A: That'd be a bad idea — phrased that way, the statement is likely to be taken as a definitive statement that indeed there are no problems. #### 7.7.3 Review questions QUESTION 1: Does a representation normally relate to: (A) a past fact? (B) a present fact? (C) a future fact? (D) all of the above? (E) none of the above? A and B. In rare circumstances, courts will treat C, a representation of a future fact, as a covenant or warranty (in essence, bailing out the incompetent drafter), e.g., I represent that I will pay you Tuesday for a hamburger today. NOTE: For drafting purposes, treat A and B as the only correct answers. QUESTION 2: What are the basic elements that a plaintiff generally must establish to succeed in a claim for misrepresentation? A: Here's the general "proof checklist" for an action for misrepresentation? (a) A statement, made by the defendant; (b) The statement was false or misleading when made; (c) (With variations:) The defendant knew, or should have known, that the statement was false or misleading; (d) (With variations:) The defendant knew, or should have known, that the plaintiff would rely on the statement; (e) The plaintiff did in fact rely on the statement; (f) The plaintiff's reliance was reasonable; and (g) The plaintiff suffered damage attributable to the statement. QUESTION 3: Should factual representations normally be included in an agreement's recitals? Why or why not? A: This is a matter of convention – like It's not customary to include factual representations in the recitals. It might also be dangerous to do so: If memory serves, in some jurisdictions the courts might not treat the recitals as part of the contract. The safer thing to do would be to rework the recitals as a "1. Background" section and have the parties make whatever initial representations they're willing to make. ### 7.8 Further reading (optional) For a succinct overview of the practical differences between representations and warranties, it's well worth the time to read Professor Stephen L. Sepinuck's article, The Virtue of “Represents and Warrants”: Another View, Business Law Today, Nov. 2015 (AmericanBar.org: https://goo.gl/jxNmBc); For extensive citations in this area, see Professor Tina Stark's scholarly pummeling of the misguided notion that represent and warrant are supposedly interchangeable, in two comments on Ken Adams's blog (AdamsDrafting.com 2013: https://goo.gl/q7PdrG and https://goo.gl/vD5Apk). Disclosure: Tina is a friend and mentor and the author of the well-regarded textbook Drafting Contracts: How and Why Lawyers Do What They Do (second edition 2013). See also Tina L. Stark, Nonbinding Opinion: Another view on reps and warranties, Business Law Today, January/February 2006 (AmericanBar.org: https://goo.gl/4aAGQh). Bryan Garner goes into more detail in a passage quoted in this Ken Adams blog post (AdamsDrafting.com 2011: https://goo.gl/wysCUc). As will be apparent, the present author disagrees completely with Adams's contention that the terms Alice represents X and Alice warrants X are supposedly synonyms and that both should be replaced with Alice states, as he argues in the other posts linked at the beginning of the cited blog post. A claim of misrepresentation can have massive real-world consequences. For example, HP's EDS unit ended up paying more than US$ 460 million to settle British Sky Broadcasting's successful claim for fraudulent inducement and misrepresentation in connection with a software-development contract — this, even though the contract limited EDS's liability to around 10% of that number. See BSkyB Ltd. v. HP Enterprise Services UK Ltd., [2010] EWHC 86 (TCC) and Jaikumar Vijayan, EDS settles lawsuit over botched CRM project for $460M, Computerworld, June 9, 2010. Concerning insurance to cover misrepresentation claims, see Howard T. Spilko and Scott A. Abramowitz, Use of Representations and Warranties Insurance Grows in Middle-Market Transactions (NYLJ.com 2015: https://goo.gl/N837Uo). For an overview of UK Law about representations, see generally two articles addressing the High Court's decision in Idemitsu Kosan Co. v. Sumitomo Corp., [2016] EWHC 1909: For an earlier piece on the same subject by Stark, see her Nonbinding Opinion: Another view on reps and warranties, Business Law Today, January/February 2006. Some of Ken Adams's earlier essays espousing the purported synonymity of the two terms can be found at: See also Robert J. Johannes & Thomas A. Simonis, Buyer's Pre-Closing Knowledge of Seller's Breach of Warranty, Wis. Law. (July 2002) (surveying case law). An English court decision highlighted the difference between representations and warranties: See Sycamore Bidco Ltd v Breslin & Anor [2012] EWHC 3443 (Ch) (2012), discussed in, e.g.: Concerning reliance disclaimers: ## 8 Responsibility for risk: Indemnities and insurance ### 8.1 Indemnities #### 8.1.1 What exactly is an "indemnity" obligation? In many contracts, indemnity provisions are intensely-negotiated. As explained by a California appeals court: Generally, indemnity is defined as an obligation of one party to [i] pay or [ii] satisfy the [x] loss or [y] damage incurred by another party. A contractual indemnity provision may be drafted either[:] • to cover claims between the contracting parties themselves, or • to cover claims asserted by third parties. Indemnity agreements are construed under the same rules which govern the interpretation of other contracts. Accordingly, the contract must be interpreted so as to give effect to the mutual intention of the parties. The intention of the parties is to be ascertained from the clear and explicit language of the contract. And, unless given some special meaning by the parties, the words of a contract are to be understood in their ordinary and popular sense. In interpreting an express indemnity agreement, the courts look first to the words of the contract to determine the intended scope of the indemnity agreement. Rideau v. Stewart Title of Cal., Inc., 235 Cal. App. 4th 1286, 1294, 185 Cal. Rptr. 3d 897 (2015) (interal quotation marks, alteration marks, and extensive citations omitted; extra paragraphing, bracketed numbering, and bullets added). #### 8.1.2 Caution: Is the indemnity obligation backed by enough money? A right to be indemnified (like any other) might be worthless if the indemnifying party can't afford to do the needful. Consequently, a party wanting an indemnity commitment should consider negotiating backup sources of cash to support the indemnity obligation, commonly in the form of (for example) an insurance policy; a from a third party; an escrow; and/or a standby letter of credit (which of course is itself a form of guaranty). #### 8.1.3 Caution: Is an indemnity obligation a good idea? Any party asked to agree to an indemnity obligation should think about it carefully. That's especially true if the indemnity obligation would apply regardless of the other party's own negligence or other "misconduct"; if you agree to that kind of obligation, in effect you've become the other party's insurance carrier. #### Indemnity liability might be much more than plain breach-of-contract damages Suppose that Alice agreed to indemnify Bob from all losses, damages, etc., arising from Alice's breach of contract (or breach of warranty or misrepresentation). That might open up Alice to far-greater liability than she would normally risk for a "garden variety" breach of contract. That's because, at least in Anglo-American jurisprudence: • Damages for breach of contract are generally limited to those that are foreseeable, and a non-breaching party will generally have a duty to mitigate its damages; • In contrast, liability for indemnity might not be subject to such a foreseeability limitation (although the case law is unclear on this point). See generally: #### An obligation to indemnify a party against its own fault might be unenforceable In the interest of deterring negligent conduct, some jurisdictions entirely bar a party from being indemnified for the consequences of its own negligence. As the South Carolina supreme court explained: The policy basis for the negligence rule is simple—barring indemnification when the indemnitee is at fault for the damages serves to deter negligent conduct in the future, for the indemnitee will know that the indemnification agreement will not save it from liability if it fails to act with due care. Ashley II of Charleston, L.L.C. v. PCS Nitrogen, Inc., No. 27420, part II-A (S.C. July 23, 2014) (on certified question) (emphasis added). The supreme court held that the same rationale did not apply in cases of strict liability, because the same deterrent effect would not be present. See id. Likewise, California Civil Code Section 1668 provides that "[a]ll contracts which have for their object, directly or indirectly, to exempt any one from responsibility for [i] his own fraud, or [ii] willful injury to the person or property of another, or [iii] violation of law, whether willful or negligent, are against the policy of the law." (Bracketed lettering added.) Such contracts are therefore void under section 1667(2). In some jurisdictions, legislatures have enacted anti-indemnity statutes that, for certain types of contract, prohibit indemnity clauses that would shift the risk of Bob's own negligence onto Alice. Such indemnity clauses are often found in construction contracts, in which prime contractor Bob might require subcontractor Alice to indemnify him even against the consequences of Bob's own negligence. See, e.g., the Texas Anti-Indemnity Act, codified in Chapter 151 of the Texas Insurance Code. See also Foundation of the American Subcontractors Association, Inc., Anti-Indemnity Statutes in the 50 States (2013). #### The "express negligence rule" might impose conspicuousness requirements for some indemnity obligations Less restrictively than the outright ban just discussed: In some jurisdictions the "express-negligence rule" precludes enforcement of a contract provision requiring Bob to indemnify Alice for the consequences of Alice's own negligence unless the contract provision is both express and conspicuous. See, e.g., Crawford v. Weather Shield Mfg. Inc., 44 Cal. 4th 541, 552 (2008); Dresser Industries v. Page Petroleum, Inc., 853 S.W.2d 505, 508 (Tex. 1993) (conspicuousness requirement); Ethyl Corp. v. Daniel Constr. Co., 725 S.W.2d 705, 708 (Tex. 1987) (express-negligence doctrine). See generally, e.g., Byron F. Egan, Indemnification in M&A Transactions for Strict Liability or Indemnitee Negligence: The Express Negligence Doctrine (JW.com 2014). #### 8.1.4 Caution: Will a contractual indemnity be excluded from the indemnifying party's insurance coverage? Any party that is asked to agree to indemnify another party should consider checking whether its applicable insurance policies exclude coverage for indemnity obligations. This was an issue in Ewing Constr. Co. v. Amerisure Ins. Co., 420 S.W.3d 30 (Tex. 2014), which is discussed in this blog post by insurance agent Randy Maniloff. #### 8.1.5 Stories (in development) ##### Particular scope-of-indemnity language A lease agreement for retail space contained an indemnity provision. The indemnity provision required the retailer to indemnify the landlord against, among other things, "any [losses, etc.] caused by injuries to persons or property while in, on or about [the retail premises] …." An employee of the retalier became sick while working in vacant retail space in the building, which the landlord had allowed the retailer to use for temporary storage after flooding. The employee sued the landlord, which cross-sued the retailer on the indemnity provision. The state supreme court held that the indemnity provision did not apply. Once Upon a Time, LLC v. Chappelle Properties, LLC, No. 1141052 (Ala. May 27, 2016) (reversing and remanding trial court's denial of retailer's motion for summary judgment). #### 8.1.6 Additional reading #### 8.1.7 Flashcards: Indemnities ##### 8.1.7.1 Indemnity: Basic questions QUESTION 1: How does an indemnity relate to a warranty? A: An indemnity is a reimbursement; a warranty is a promise to reimburse (i.e., indemnify) someone if a warranted state of affairs turns out not to be true. QUESTION 2: IF FALSE, EXPLAIN WHY: IF: Alice agrees to indemnify Bob against damage arising from occurrence of Event X; THEN: This reduces the risk to the parties associated with the (possible) occurrence of Event X. (CAUTION: Read this carefully.) A: False — it doesn't reduce the risk, it allocates the risk. QUESTION 3: IF FALSE, EXPLAIN WHY: An indemnity obligation allocates at least some of the financial risk of Event X. A: True. QUESTION 4. IF FALSE, EXPLAIN WHY: The following is an acceptable conventional phrasing: Alice hereby indemnifies Bob against any damage Bob might incur if it rains tomorrow. A: False — it should be "Alice will indemnify Bob [i.e., future tense] …." ##### 8.1.7.2 Indemnities: Duty to defend SUGGESTED READING: FACTS: Suppose that: • You draft an indemnity obligation that does not expressly require the subcontractor to defend your client, the general contractor, from claims, but merely obligates the subcontractor to indemnify the general contractor. • An employee of the subcontractor writes a letter to the general contractor, asserting a claim. Assume for this purpose that the employee's claim comes within the scope of the subcontractor's indemnity obligation. • The general contractor forwards the employee's letter to the subcontractor and demands that the subcontractor engage outside counsel to investigate the claim. QUESTIONS: 1. Must the subcontractor engage outside counsel for the general contractor? 2. Would your answer be different if all of this were taking place in Los Angeles instead of Houston? Cite the relevant authority. ##### 8.1.7.3 Indemnity exercise: The spontaneously-combusting widgets FACTS: 1. Alice manufactures electronic widgets. Each widget has a battery that is sealed into the widget and not replaceable. 2. Bob manufactures electronic gadgets that include electronic widgets. 3. Bob enters into a contract with Alice to buy electronic widgets from her. 4. The contract includes, among other provisions: • a warranty that the widgets do not contain any defects in design or manufacture; • a provision requiring Alice to indemnify Bob against any harm Bob suffers from defects in the widgets; and • an exclusion of incidental- and consequential damages. 5. Bob takes delivery of a large quantity of Alice's widgets and stores them in an appropriate storage room. 6. In the storage room, the batteries in several of Alice's widgets spontaneously catch fire, resulting in major damage and causing significant "down time" for Bob's gadget-manufacturing operations. (Think: Hoverboards.) 7. Citing the indemnity provision, Bob demands that Alice reimburse him for the cost of: • repairs; • replacement of the damaged contents of the storage room; • the travel expenses that Bob incurred in going to China and India to check out alternative sources of widgets; • the profits that Bob lost from the manufacturing down time. QUESTIONS: 1. EXPLAIN IF FALSE: Alice is not required to reimburse Bob because an indemnity provision covers claims by third parties against the protected party, not direct claims by the protected party against the indemnifying party. 2. EXPLAIN IF FALSE: If Bob sues Alice for breach of her indemnity obligation, Alice can probably get Bob's claim for lost profits thrown out early (by moving for partial summary judgment) as barred by the contract's exclusion of consequential damages. 3. EXPLAIN IF FALSE: If Alice had negotiated the indemnity provision to cover only third-party claims, the provision likely would be enforceable. 4. EXPLAIN IF FALSE: Alice can probably get Bob's claim for travel expenses dismissed on partial summary judgment as barred by the contract's exclusion of incidental damages. ##### 8.1.7.4 Exercise: Defense against indemnified claims 1. FACTS: A. Alice's contract with Bob obligates her to reimburse Bob for his attorney fees and expenses in defending against certain third-party claims. B. A third party, Carol, brings such a claim against Bob. C. Bob hires Skadden Arps (a top NYC firm) to defend him against Carol's claim. D. Alice has plenty of money to pay legal bills. QUESTION: Speculate about what incentives might motivate Skadden in conducting Bob's defense. QUESTION: Name two ways that Alice, during negotiation of her contract with Bob, could have limited her financial exposure to Bob's cost of defending against Carol's claim. 2. MORE FACTS: E. Alice's contract with Bob also requires her to indemnify Bob against any monetary awards resulting from such third-party claims. F. Bob neglects to mention to either Alice or Skadden that Carol had filed her third-party claim weeks before, and that when Bob failed to file a timely answer, Carol moved for and obtained a default judgment for a large amount of money. QUESTION: Name two ways that Alice, during negotiation of her contract with Bob, could have limited her exposure to Bob's screw-up. 3. ALTERNATE FACTS: G. Alice's contract with Bob requires her to provide Bob with a defense, as opposed to reimbursing Bob for his defense expenses. H. Alice engages her regular lawyer, Andy, to conduct Bob's defense against Carol's claim. I. Bob finds that he and Andy don't get along so well. QUESTION: During negotiation of the contract, what sort of clause could Bob have asked to be included in the contract to protect him against this uncomfortable situation? 4. ALTERNATE FACTS: J. It turns out that Alice can't afford to pay Bob's legal bills for defending against Carol's claim. QUESTION: What if anything might Bob have done during contract negotiation to mitigate this problem? ## 9 Standards ### 9.1 Reasonable efforts In an extended LinkedIn group discussion (membership required), a commenter opined that anything less than all reasonable efforts was, by definition, unreasonable. I responded that many people would disagree: Reasonable efforts can encompass a range of efforts; it doesn't have to be a binary, yes-no dichotomy. Consider Scenario 1, in which Alice's contract with Bob requires Alice to make reasonable efforts to advise Bob in writing if some (non-emergency) Event X occurs. If Event X were to occur, then Alice might send Bob an email to that effect, using the email address that Bob has consistently used in his dealings with Alice. In that scenario, many business people would think that Alice had complied with her contractual obligation to advise Bob, even if for some reason Bob never got the email. Now consider Scenario 2, in which the contract requires Alice to make all reasonable efforts to advise Bob in writing that Event X has occurred. In that scenario, if Event X were to occur, then Alice might have to try every available means of written communication — email, FAX, certified mail, FedEx, UPS, showing up at Bob's house, etc. — until she received positive confirmation that Bob had in fact received the message. ### 9.2 Commercially reasonable (efforts, etc.) #### 9.2.1 Overview: "Commercially reasonable" is a kick-the-can provision Commercially-reasonable is a kick-the-can-down-the-road term; it's often used in routine contracts, especially for matters for which the parties are confident they can amicably resolve any disputes that might arise. #### 9.2.2 Commercial reasonableness might be proved up indirectly A party seeking to prove (or disprove) commercial reasonableness of a transaction, contract term, decision, etc., might want to focus on the process by which the transaction, etc., came into being. The U.S. Court of Appeals for the Fifth Circuit has said that "Where two sophisticated businesses reach a hard-fought agreement through lengthy negotiations, it is difficult to conclude that any negotiated term placed in their contract is commercially unreasonable." West Texas Transmission, LP v. Enron Corp., 907 F.2d 1554, 1563 (5th Cir. 1990) (affirrming district court's refusal to grant specific performance of right of first refusal) (extensive citations omitted). #### 9.2.3 Is the term commercially reasonable too vague? See the commentary to [TODO: RsnblEffortsDefn] for a discussion of the vagueries of that term, which of course are inherited by the term commercially reasonable. #### 9.2.4 A court might apply a "prudence" standard In a major lawsuit between the (U.S.) state of Indiana and IBM, the contract in question took a stricter view of commercially reasonable efforts. That contract defined the term as "taking commercially reasonable steps [circularity, anyone?] and performing in such a manner as a well managed entity would undertake with respect to a matter in which it was acting in a determined, prudent, businesslike and reasonable manner to achieve a particular result." Indiana v. IBM Corp., No. 49A02-1211-PL-875, slip op. at 27 n.12 (Ind. App. Feb. 13, 2014) (emphasis added, citation to trial record omitted), affirmed, Indiana v. IBM Corp., No. 49S02-1408-PL-00513 (Ind. Mar. 22, 2016). In that case, the contract in suit called for IBM to overhaul Indiana's computer system for managing its welfare program; the project ended up being in essence a train wreck, after which the parties sued each other. The trial court rendered judgment in favor of IBM, but a state appellate court reversed in part and remanded, holding that while IBM was entitled to be paid for its work, that payment would be subject to offset (to be determined on remand), on grounds that IBM had materially breached the contract. (In a bench trial on remand, the trial judge held IBM liable for$78 million; IBM announced that it would appeal. See, e.g., Rick Callahan and Tom Davies, Judge: IBM owes Indiana $78M for failed welfare automation, Washington Post, Aug. 7, 2017.) #### 9.2.5 Giving preference to one's own interests In a 2014 English case arising from the financial crisis of late 2008, the Barclays bank had the right to consent to a particular type of financial transaction, but it was obligated to grant or withhold such consent in a commercially-reasonable manner. The England and Wales Court of Appeals rejected Unicredit's argument that this meant that Barclays was required to take Unicredit's interests into account, not merely Barclays's own interests. Barclays Bank PLC v. Unicredit Bank AG, [2014] EWCA Civ 302 ¶ 16 (affirming trial-court ruling). #### 9.2.6 Is "doing the needful" the standard for commercially reasonable efforts? A holding by the Delaware chancery court suggests that the Indian-English expression do the needful might be a useful short­hand reference for commercially reasonable efforts. • The case involved a multi-billion-dollar oil industry merger agreement in which a buyer was to acquire the assets of a seller. • The agreement gave the seller an "out" from the deal: The seller would not have to close the deal if it did not get a favorable opinion from its own tax counsel (as opposed to, say, getting an opinion from an independent expert) about the deal's expected tax consequences. • The agreement, though, also required the seller to use commercially reasonable efforts to get a favorable opinion. After the merger agreement was signed, the market price of crude oil collapsed. This brought with it a drastic drop in the value of the seller's assets, making the deal much less attractive to the buyer. • The buyer ended up backing out of the deal, citing newly-discovered concerns about the expected tax consequences. The seller tried to assuage the buyer's new concerns; when that failed, the seller sued the buyer for breach of contract. The seller alleged, among other things, that the buyer had failed to honor its commitment to use commercially reasonable efforts to obtain a favorable tax opinion. The chancery court noted that the merger agreement did not define "commercially reasonable efforts"; it found that: … by agreeing to make “commercially reasonable efforts” to achieve the 721 Opinion, the Partnership [i.e., the seller] necessarily submitted itself to an objective standard—that is, it bound itself to do those things objectively reasonable to produce the desired 721 Opinion, in the context of the agreement reached by the parties. Williams Cos. v. Energy Transfer Equity, L.P., No. 12168-VCG, slip op. at 46 (Del. Ch. Ct. June 24, 2016) (emphasis added). The court held that, in view of the facts of the case, the buyer had not breached its obligation to use commercially reasonable efforts. ### 9.3 Best efforts #### 9.3.1 CAUTION Consider a party that agrees to use its "best efforts" to do something, which we'll call "X." Suppose that the party doesn't succeed in doing X. The obligated party might think it won't be in any legal jeopardy, because after all it wasn't obligated to actually do X. In litigation, though, it usually wouldn't be hard for the other side's lawyer — who of course has 20-20 hindsight — to think of other things the obligated party supposedly could have done, and thus should have done. Therefore (so the lawyer argues), the obligated party clearly didn't use “best” efforts, QED. This suggests that it can be dangerous to agree to a best-efforts obligation. But sometimes a company feels it has no choice but to undertake such an obligation, and it's willing to take on the resulting business risk. Here are six things the company could consider putting in the contract to help manage that risk. #### 9.3.2 Diligence might be the touchstone of "best efforts" the Restatement (Second) of Agency defines best efforts in terms of diligence: "Best efforts is a standard that has diligence at its essence." Restatement (Second) of Agency § 13, comment a (1957), quoted in Corporate Lodging Consultants, Inc. v. Bombardier Aerospace Corp., No. 6:03-cv-01467-WEB, slip op. at 9 (D. Kan. May 11, 2005) (finding that CLC had not failed to use its best efforts to obtain lowest and most-competitive hotel rates for Bombardier) (citation and alteration marks omitted). #### 9.3.3 Business context of best-efforts requests Best-efforts obligations are especially common when one party grants another party exclusive rights, for example exclusive distribution rights or an exclusive license under a patent, trademark, or copyright. That was the situation in the Kevin Ehringer Enterprises case, for example. See Kevin M. Ehringer Enterprises, Inc. v. McData Serv. Corp., 646 F.3d 321, 325-27 (2011) (holding that best-efforts clause was too indefinite to be enforceable under Texas law). To many business people, it may seem self-evident that when a contract uses the term best efforts, it calls for "something more" than mere reasonable efforts — otherwise, why bother even saying best efforts? That is, reasonable efforts will cover a range of possibilities, while best efforts refers to somewhere near the top of that range. I have no formal research to support this view, but I've negotiated more than a few contracts with best-efforts clauses in them, so I'd like to think I have at least some sense of what many business people are after. #### 9.3.4 A sports analogy: Bring your "A" game By analogy, to many business people: • "C" is a passing grade in (U.S.) schools, and is equivalent to reasonable efforts. • In contrast, best efforts means an "A" effort — or in basketball slang, bring your "A" game, buddy, not your "C" game. Another analogy: • On major U.S. highways, the speed-limit signs often include both maximum and minimum speeds of (say) 60 mph and 45 mph. Those two speeds establish the upper- and lower bounds of reasonableness. • Now, suppose that a trucking company were to agree that its driver would use her "best efforts" to drive a shipment of goods from Point A to Point B on such a highway, where drivers must drive between 45 mph and 60 mph. • In good weather with light traffic, driving at 45 mph might qualify as reasonable efforts. But driving at that speed likely wouldn't cut it as best efforts. #### 9.3.5 Possible variation: "All reasonable efforts" instead of "best efforts" • A drafter could specify that best efforts requires the diligent making of all reasonable efforts. Reportedly, that's a common formulation in the UK; see the Helms et al. article cited below. • A drafter could also add, at the end of sub­div­i­sion (a), the phrase, leaving no stone unturned in seeking to achieve the stated objective. This language is from an opinion by the supreme court of British Columbia. See Atmospheric Diving Systems Inc. v. International Hard Suits Inc., 89 B.C.L.R. (2d) 356 (1994). I've not been able to find the full text of this opinion freely available online. It's extensively excerpted by Ken Adams in his posting "Best Efforts" Under Canadian Law. (Warning: I strongly disagree with Ken's view that "best efforts" means simply "reasonable efforts.") #### 9.3.6 Best efforts means different things to different courts Depending on the jurisdiction, a court might not share the view of best efforts just described. • As one court explained, "[c]ontracting parties ordinarily use best efforts language when they are uncertain about what can be achieved, given their limited resources." See CKB & Assoc., Inc. v. Moore McCormack Petroleum, Inc., 809 S.W.2d 577, 581-82 (Tex. App. – Dallas 1990) (affirming summary judgment that defendant had failed to use its best efforts). On the facts of the case, the court affirmed summary judgment that an oil refiner had failed to use its best efforts to produce specified volumes of refined petroleum products. The refiner had focused its efforts on high-priced products, while making no effort to produce the specific products that it was contractually obligated to produce. The court remarked that "[a]s a matter of law, no efforts cannot be best efforts." • Some — but not all — U.S. courts have seemingly equated best efforts with mere reasonable efforts, contrary to what business people are likely to think they're getting in a best-efforts clause. As one 2005 review of case law puts it, "For years U.S. courts have used the phrases 'reasonable efforts' and 'best efforts' interchangeably within and between opinions. Where only one of the terms is used, the best-efforts obligation frequently appears indistinguishable from a reasonable-efforts obligation. Some recent cases have gone so far as to equate best efforts and reasonable efforts." See Scott-Macon Securities, Inc. v. Zoltek Cos., Nos. 04 Civ. 2124 (MBM), 04 Civ. 4896 (MBM), part II-C (S.D.N.Y. May 11, 2005) (citing cases). (Some of those cases, though, might be interpreted more narrowly as holding merely that a best-efforts obligation does not require the obligated party to make unreasonable efforts, while still requiring diligence in the making of reasonable efforts.) • Fortunately, still other U.S. courts seem to have recognized that best efforts means something more than merely reasonable efforts. For example, in the Tigg Corp. v. Dow Corning Corp. case, the Third Circuit held that, at least where the contract involved an exclusive-dealing arrangement, "[t]he obligation of best efforts forces the buyer/reseller to consider the best interests of the seller and itself as if they were one firm." the appellate court affirmed a trial court's judgment, based on a jury verdict, holding Dow Corning liable for breaching a best-efforts obligation in an exclusive-dealing agreement. The appellate court agreed with Dow Corning, however, that the trial court had erred in entering judgment on the amount of monetary damages Dow Corning should pay, and remanded the case for a new trial on that issue. Tigg Corp. v. Dow Corning Corp., 962 F.2d 1119 (3d Cir. 1992). Likewise, in Macksey v. Egan, a Massachusetts appeals court construed the term best efforts "in the natural sense of the words as requiring that the party put its muscles to work to perform with full energy and fairness the relevant express promises and reasonable implications therefrom." Macksey v. Egan, 36 Mass. App. Ct. 463, 472, 633 N.E.2d 408 (1994) (reversing judgment on jury verdict that defendant had breached best-efforts obligation; extensive citations omitted). • Some UK and Canadian courts have defined the standard of performance for best efforts as, in essence, all reasonable efforts. For a survey of such cases, see Shawn C. Helms, David Harding, and John R. Phillips, Best Efforts and Endeavours – Case Analysis and Practical Guidance Under U.S. and U.K. Law, July 2007. For example, in its Atmospheric Diving Systems opinion (1994), the supreme court of British Columbia held that best efforts requires "taking, in good faith, all reasonable steps to achieve the objective, carrying the process to its logical conclusion and leaving no stone unturned. … doing everything known to be usual, necessary and proper for ensuring the success of the endeavour." Similarly, in Australia, the term best endeavours seems to be treated as synonymous with all reasonable endeavours; in its Hospital Products opinion (1984), that country's highest court held that "an obligation to use 'best endeavours' does not require the person who undertakes the obligation to go beyond the bounds of reason; he is required to do all he reasonably can in the circumstances to achieve the contractual object, but no more … [A] person who had given such an undertaking … in effect promised to do all he reasonably could …." Hospital Prods. Ltd v. United States Surgical Corp., 1984 HCA 64, 156 CLR 41, paras. 24, 25. Adding to the difficulty, some U.S. courts have held that the term best efforts is too vague to be enforceable unless the parties agree to some sort of objective standard of performance, "some kind of goal or guideline against which best efforts may be measured," in a case quoted by the court in the Kevin Ehringer Enterprises case. One court held that "as promptly as practicable" and "in the most expeditious manner possible" were sufficient to meet that requirement. See Herrmann Holdings Ltd. v. Lucent Technologies Inc., 302 F.3d 552, 559-61 (5th Cir. 2002) (reversing dismissal under Rule 12(b)(6); citing cases). With all of this in mind, the definition of best efforts in this clause attempts to draw at least a somewhat-bright line that provides an objective standard of performance (albeit one that might require a trial to determine whether it had been met). [TO DO: Look up California law – all efforts even if bankruptcy? https://www.linkedin.com/grp/post/4036673-6027114806685810691] #### 9.3.7 "Best efforts" might be held to be unenforceably vague According to some U.S. courts, the term best efforts is too vague to be enforceable unless the parties agree to some sort of objective standard of performance. In the Kevin Ehringer Enterprises case, the Fifth Circuit, quoting a Texas appellate court, held that under state law, "to be enforceable, a best efforts contract must set some kind of goal or guideline against which best efforts may be measured." #### 9.3.8 "Every effort" clauses and the like are often interpreted similarly "When confronted with idiosyncratic contractual language expressing sentiments akin to doing all that one can or 'all that is necessary' to complete a task, Texas courts often interpret such language as requiring 'best efforts'–an expression with a more clearly established meaning and history." Hoffman v. L & M Arts, 774 F. Supp. 2d 826, 833 (N.D. Tex. 2011) (citing cases). "[C]ourts and arbitrators interpreting similar phrases [the phrase in question was 'every effort'] have determined, like the district court here, that they impose an obligation to make all reasonable efforts to reach the identified end." Aeronautical Indus. Dist. Lodge 91 v. United Tech. Corp.., 230 F.3d 569, 578 (2d Cir. 2000) (citations omitted). #### 9.3.9 Asking for a best-efforts commitment can make business sense Sure, there's some legal uncertainty associated with a best-efforts commitment. But from a business perspective it can make good sense to ask the other side for such a commitment anyway: a party that makes a best-efforts commitment — to the extent 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. #### 9.3.10 Agreeing to a best-efforts commitment might lead to trouble If you commit to a best-efforts obligation, and the other side later accuses you of breaching that obligation, and you can't settle the dispute, then you're likely to have to try the case instead of being able to get rid of it on summary judgment. That's because: • No matter what you do, if a problem arises, the other side's lawyers, with 20-20 hindsight, will argue that there were Xnumber of things that you supposedly could have done to achieve the agreed goal. • You're unlikely to be able to get summary judgment that you didn't breach the best-efforts obligation. Instead, you're likely to have to go to the trouble and expense of a full trial or arbitration hearing. The judge or arbitrator may well say that the question involves disputed issues of material fact. Those issues will have to be resolved by witness testimony and cross-examination about such things as industry practices; the then-existing conditions; etc. According to the rules of procedure in many jurisdictions, that will require a trial and will not be able to be done in a summary proceeding. Your motion for summary judgment is therefore likely to be denied. • The tribunal, after hearing the evidence, may find that in fact you did not use your best efforts. If that happens, you're going to have a very hard time convincing an appeals court to overturn that finding. #### 9.3.11 Best-efforts takeaways • Drafters should try very hard to be as precise as possible in specifying just what goal the best efforts are to be directed to achieving. • Obligated parties should think long and hard before agreeing to a best-efforts obligation, because in the long run it could prove to be burdensome and expensive. #### 9.3.12 Further reading about best efforts See also: #### 9.3.13 Best-efforts obligations Best-efforts obligations could divert substantial resources, because some courts have held that best efforts means, in essence, all efforts short of bankruptcy. Tip: Consider using alternative language such as reasonable efforts or commercially-reasonable efforts (but watch out for all reasonable efforts). Tip: If you must agree to a best-efforts obligation, see if you can define it in a reasonable way; one possible definition might be: [ADD LINK] ## 10 Services ### 10.1 Statements of work ("SOW") #### 10.1.1 Overview It's extremely common for services agreements to segregate the "technical" details of a services contract into a statement of work, sometimes referred to as an "SOW." Caution: Some contract reviewers make the mistake of ignoring statements of work, on the sometimes-mistaken assumption that only "technical" information is to be found there. It's a worthwhile exercise for a contract drafter or reviewer (here, "reviewer") at least to glance through any statement of work, because: • the reviewer will be better able to negotiate the terms and conditions if she has some idea of the technical details; and • perhaps unconsciously — or perhaps not unconsciously — the other side's drafter might have included important "legal"-type terms and conditions in the statement of work, in the hope that the contract reviewer might overlook them. For a useful overview of statements of work, see Stephen F. Pinson, Negotiating a Statement of Work: Key Terms (ScottAndScottLLP.com 2016: https://goo.gl/hWmHcP). #### 10.1.2 Obligation to agree to statement of work? Both parties to a services agreement might want the Agreement to state that neither of them is obligated to enter into or agree to any particular statement of work. That would rule out (for example) claims by a contractor that a customer implicitly guaranteed that the contractor would get X amount of work. This was litigated in a case by a small contractor against IBM (if the author remembers correctly); IBM won the case on summary judgment, but it still had to defend against the claim. Unfortunately the author is unable to find a citation for the case. #### 10.1.3 Modifications to statements of work Services agreements typically provide that changes to a statement of work must be in writing and signed by the parties. It's not clear, though, that a court would enforce such a requirement; see the discussion in the commentary to [TODO: AmendmentsInWriting]. #### 10.1.4 Statements of work as separate agreements? A "master" services agreement will often provide that each statement of work is to be governed by the master agreement. But which way should it go — 1. Should each statement of work incorporate the master agreement by reference? 2. Or should each statement of work become part of the master agreement? In the author's view, each statement of work should be a separate agreement. True, some services contracts purport to incorporate each statement of work into the "main" agreement, so that each statement of work becomes part of the main agreement. But this is potentially dangerous, because: • a default in one statement of work could affect other statements of work (this is sometimes referred to as "cross-default"); and • if the vendor's liability for damages were to be capped at "the amounts paid under this Agreement," then, over time, that amount would increase as more statements of work were completed; the customer might like that just fine, but the vendor likely wouldn't be wild about the idea. #### 10.1.5 Which takes precedence: The master agreement, or the statement of work? Not without reason, some corporate legal departments want to maintain tight control over contract-related documentation; they don't want statements of work — which might not be reviewed by "Legal" and could raise all kinds of legal issues — to supersede the contract provisions. (To paraphrase a private remark by a lawyer who shall remain nameless, I keep trying to make my master services agreements idiot-proof, but they keep making better idiots.) That approach, though, can conflict with the way parties actually do business and could delay getting things done. One compromise is for the master agreement to provide that a statement of work can override the terms of a master agreement — but the parties must be explicit and even conspicuous about it. #### 10.1.6 Electronic signatures for statements of work? Some companies are reluctant to allow electronic signatures for statements of work — because of the wide variety of communications that might qualify as "signatures," for example, emails — and instead prefer to require "wet ink" signatures on paper. ### 10.2 Permits, licenses, and inspections #### 10.2.1 Typical provider permit responsibilities It's not uncommon for services agreements to state that the provider, at its own expense, will cause to be timely obtained: 1. any professional- or occupational licenses required by law for the performance of services generally (e.g., contractor licenses) by the provider and/or its subcontractors (if any) to the extent necessary for performance of the services; 2. any government permits (for example, building permits and the like) that are required by law for performance of the services; 3. any third-party intellectual-property licenses required for the provider to take the specific actions involved in performing the services, including for example any licenses required for the provider's use of software, data compilations, and similar tools; 4. any inspections required, e.g., by city building inspectors. Obtaining government permits (see subdivision 2) could be a decidedly burdensome undertaking; for example, recall the signficant controversies associated with the permitting process for the Keystone XL pipeline to carry Canadian oil to refineries in Illinois and Texas. #### 10.2.2 Typical customer permit responsibilities It's also not uncommon for services customers to be required to obtain any intellectual-property licenses or other authorizations that might be needed for the customer to use the deliverables. The agreement might include a warranty by the provider that the deliverables per se do not infringe third-party IP rights. Under the Uniform Commercial Code, if the agreement is considered primarily for the sale of goods, with the services being incidental, then UCC § 2-312 might imply such a warranty: (3) Unless otherwise agreed a seller who is a merchant regularly dealing in goods of the kind warrants that the goods shall be delivered free of the rightful claim of any third person by way of infringement or the like but a buyer who furnishes specifications to the seller must hold the seller harmless against any such claim which arises out of compliance with the specifications. Such an as-delivered warranty might not provide customer with much comfort about third-party infringement claims arising from the customer's use of the deliverables. A customer, of course, could ask the provider to warrant expressly that the customer's use of the deliverables will not infringe any third-party IP rights; that, though, would likely be the subject of negotiation (because non-infringement assurances concerning patents and design patents are not cheap and carry significant liability exposure). #### 10.2.3 Disagreement about permit- and license requirements? It's been known to happen: A services provider tells a customer that a particular permit or license (or other third-party approval) is needed. But then the customer says nah, we don't need no stinkin' permit; get to work. In that situation, the provider might want to: • have the right to suspend work; and/or • be able to require the customer to defend and indemnify the provider (and its affiliates, etc.) from any claim arising from the lack of the third-party approval. (Of course, anyone drafting or reviewing an indemnity obligation should consider whether the indemnifying party will have the necessary financial wherewithal, failing which an insurance policy might be appropriate.) #### 10.2.4 Danger: Starting licensed work without a license In some jurisdictions, a contractor that undertakes work required to be done by a licensed contractor (e.g., certain construction- or remodeling work), but that doesn't itself have the proper license(s) at all times while performing the work, might forfeit its right to be paid for any of the work. See, e.g., Great West Contractors, Inc., v. WSS Industrial Construction, Inc., 162 Cal. App. 4th 581, 76 Cal. Rptr. 3d 8 (2d Dist. 2008) (reversing$220,000-plus judgment in favor of subcontractor, on grounds that subcontractor had not obtained the required license when it prepared initial shop drawings and did other preliminary work).

Moreover, under a 2002 'disgorgement' amendment to the California statute, such a contractor might have to repay any payments it did receive for the work. Cf. The Fifth Day, LLC v. Bolotin, 72 Cal. App. 4th 939 (2d Dist. 2009) (reversing summary judgment that party was barred from recovering compensation for services; party was not a "contractor" within the meaaning of the statute).

#### 10.2.5 Danger: Using an unlicensed subcontractor

California courts have looked to Cal. Lab. Code § 2750.5 to hold that a contractor that uses an unlicensed subcontractor is responsible for unpaid wages, withholding, and worker’s compensation premiums of the subcontractor’s employees; see generally this Pillsbury Winthrop memo.

#### 10.2.6 Indemnity obligation?

When drafting a permits-and-licenses obligation, consider whether to include an accompanying indemnity obligation. Suppose that:

• Alice enters into a construction contract with Bob, under which Alice will build a strip-mall shopping center for Bob.
• Bob has pre-leased space in the shopping center to a variety of tenants; each lease agreement sets forth a specific date for the tenant to move into the leased space.
• The construction contract requires Alice to obtain the necessary building permits from the city, but she fails to do so, thus breaching the construction contract.
• City inspectors see the un-permitted construction going on and issue a cease-and-desist order shutting down the job. This results in weeks of delay — and, as a ripple effect, in Bob's tenants' not being able to move in on their scheduled move-in dates.
• Bob's tenants want Bob to reimburse them for their resulting damages.

Under standard contract law, Bob might well be able to recover any amounts for which he must reimburse his tenants because of Alice's breach. But if the construction contract included a consequential-damages disclaimer [LINK], then (i) Alice might claim that the disclaimer covered those reimbursement amounts, and (ii) therefore, Alice argues, she need not pay Bob those amounts.

And keep in mind that damages for breach of a contractual obligation would normally be limited to foreseeable damages, whereas an indemnity obligation might encompass even unforeseeable damages (unless otherwise specified in the indemnity language). [LINK: #IndemnVsBreach]

So, in our hypothetical case, it might have been better for the construction contract to have stated explicitly that Alice must indemnify Bob against any failure by Alice to obtain the necessary permits.

### 10.3 Performance standards

#### 10.3.1 Workmanlike performance

A "standard standard" of services performance is workmanlike, or sometimes good and workmanlike, or perhaps even careful, skillful, and workmanlike (the latter two seem redundant). See generally Fed. Ins. Co. v. Winter, 354 S.W.3d 287, 292-93 (Tenn. 2011) (extensively reviewing case law and treatises).

The Supreme Court of Texas has framed the meaning of workmanlike in pragmatic, market-based, but fact-intensive terms:

We have defined “good and workmanlike” as “that quality of work performed by one who has the knowledge, training, or experience necessary for the successful practice of a trade or occupation and performed in a manner generally considered proficient by those capable of judging such work.”

Ewing Constr. Co. v. Amerisure Ins. Co., 420 S.W.3d 30, 37 (Tex. 2014) (responding to certified question from Fifth Circuit), citing and quoting Melody Home Mfg. Co. v. Barnes, 741 S.W.2d 349, 354 (Tex. 1987) (discussing the implied warranty of good and workmanlike quality of services in connection with the repair of tangible goods).

The "without necessarily rising to the level of being exceptional, outstanding, or original" language is adapted from an alternate definition in the Merriam-Webster dictionary, namely "competent and skillful but not outstanding or original."

#### 10.3.2 Implied warranties of workmanlike performance

Drafters should be aware that in some states the law might automatically impose a warranty of workmanlike performance, or something close to it. See, e.g., Fed. Ins. Co. v. Winter, 354 S.W.3d 287, 291-94 (Tenn. 2011) (citing numerous authorities but not explicitly defining workmanlike).

Implied warranties of workmanlike performance come into play especially in connection with the sale of a new residence. The imposed warranty might even be non-waivable and/or non-disclaimable. For example:

• Home construction: Forty-three states provide an implied warranty of habitability for new residences, according to the Utah supreme court, while three others provide a warranty of workmanlike manner. See generally Davencourt at Pilgrims Landing Homeowners Association v. Davencourt at Pilgrims Landing LC 30, 2009 Utah 65, 221 P.3d 234, 250 (reversing dismissal of implied-warranty claim; "in every contract for the sale of a new residence, a vendor in the business of building or selling such residences makes an implied warranty to the vendee that the residence is constructed in a workmanlike manner and fit for habitation").
• Repairs of tangible goods or property: In its Melody Homes decision, cited above, the Texas supreme court held that an implied warranty of good and workmanlike performance extends to repairs of tangible goods or property. Two sharp dissents (in the form of concurrences in the judgment) noted that the court had defined that implied warranty in a manner that might well require expert testimony in many cases (but that would seem to be true of almost any standard of performance of services).

#### 10.3.3 Alternatives to "workmanlike"

Some service providers might balk at using the term "workmanlike" performance because they fear the term could be ambiguous. They might prefer in accordance with the specifications, or perhaps competent and diligent.

Of course, any of those terms is likely to involve factual determinations in litigation or arbitration, so it's hard to see how one is more- or less favorable than the other.

On the other hand, some customers prefer stricter standards of performance such as, for example:

• In a professional manner: This is found in many customer-oriented forms, but providers don't like it because of a concern that, in the minds of judges and juries, the term professional might subtly raise the bar of expected performance.
• In accordance with industry standards: This phrase and workmanlike seem synonymous, in which case the latter term is more conventional and more likely to find acceptance among contract reviewers and the courts.
• In accordance with the highest professional industry standards: For a provider, this is the worst of all worlds: Not only is the phrase vague, but a provider that agreed to this might as well have hung a "Kick Me" sign on its own back, because anything less than perfection would be open to cricitism in court. (On a related note, see also the discussion of best efforts.)

#### 10.3.4 Performance standards: Further reading

See generally, e.g.:

### 10.4 Who should do (or furnish) what, exactly?

Some services contracts state that the provider is to cause:

1. the performance of all individual tasks necessary for the proper rendering of the services as set forth in the statement of work, even if one or more such individual tasks is not expressly set forth there; and
2. the provision of all materials, equipment, supplies, computer hardware and -software, work locations, electrical power, Internet- and other communications capability, and other items that might be needed for the provider's performance of the services, with that obligation includes any necessary acquisition, installation, and maintenance of all such items.

Such requirements are arguably redundant, but they can be useful reminders; some customers are likely to want such language for comfort purposes.

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

Another issue that for some projects, it might make sense for the customer, not the provider, to furnish some of the listed items. If so, that can be documented in the statement of work on an exception basis.

### 10.5 HSSE: Health, safety, security, and environment

Many services contracts include detailed written compliance requirements concerning health, safety, security, and environment (“HSSE”) issues. Providers typically take these requirements into account in pricing their work.

### 10.6 Provider's control of means and manner

Many services contracts state that, as between the provider and the customer, the provider will at all times have the exclusive right and the exclusive obligation to control 1) the means and manner, and 2) except as otherwise specified in the statement of work, the time and place, of the performance of the services. A customer is likely to want such language to help establish that that the provider is truly an independent contractor, and thus that the provider's employees are not considered employees of the customer. [LINK: #IndepContractor].

### 10.7 Defects in services or deliverables

A services contract will typically obligate the provider to fix problems with the services and/or the deliverables as delivered in accordance with a specified procedure or protocol; one common protocol can be summed up as "repair, replace, or refund" (see [LINK]).

Specifying that the provider's obligation applies to deliverables as delivered takes into account the possibility that the customer might modify a deliverable after delivery. If that were to be the case, then the provider likely wouldn't want to have to fix defects for free, or at least not if the defect were not the provider's doing.

### 10.8 Reports of bodily harm or significant property damage

A services agreement might require the provider to promptly report to the customer any bodily harm or significant property damage that occurs in connection with the services, so that the customer will be aware of the incident — and possibly report the incident to the customer's insurance carrier and/or to government authorities. See [LINK: reporting] for further discussion.

### 10.9 Billing for services

Services agreements typically require billing by the provider to be 1) as specified in the statement of work, e.g., with progress payments; and 2) accompanied by supporting detail sufficient to document the invoiced charges.

### 10.10 Customer's rights in deliverables

#### 10.10.1 Express right to utilize?

When a customer pays a service provider to create a deliverable, the customer might assume that it (the customer) is free to do whatever it wants with the deliverables. That will not always be the case: if the provider owns intellectual-property rights in the deliverable, the customer might be limited in what it can do with the deliverable.

For that reason, a master services agreement might state explicitly that the customer may utilize any deliverable in any way that the customer sees fit, except to the extent that the agreement or the relevant statement of work expressly states otherwise.

#### 10.10.2 Restricted service-bureau use?

A provider of computer software might want to consider restricting the customer's use of the software to provide services for others, because otherwise the customer might in effect use the provider's own software to compete with the provider. (The provider, though, should ask itself 1) how likely is it that this might happen, and 2) whether the associated business risk is worth arguing about it with the customer.)

As when drafting any restriction or prohibition, the drafter should consider whether also to prohibit the restricted party from "knowingly assisting or permitting" others to engage in the restricted activity. [LINK]

#### 10.10.3 Customer's further development of deliverables

A customer negotiating a service contract might want the contract expressly to state that the customer has the unfettered right: 1) to modify or further develop one or more deliverables furnished by the provider, and/or 2) to have other contractors do such modification or further development. do so for the customer. The general attitude of customers on this point can be summed up as: We paid for you to build this, so we should be able to do whatever we want with it.

A customer's right to modify a deliverable is not always a given, though. Under standard intellectual-property law, just because a customer paid for a deliverable does not mean it necessarily gets to do whatever it wants with the deliverable. In particular, if the deliverable is a copyrighted work of authorship such as computer software, the provider might have the right to prevent the customer from modifying or inproving the deliverable without the provider's permission.

(In litigation the customer might be able to argue successfully that the provider implicitly granted the customer a license to do whatever it wanted with the deliverable; see, e.g., TO DO: CITATION TO SOFTWARE DEV. CASES NEEDED.)

If a provider will be creating something that the customer will be using in its business, the customer might well want to nail down its right to modify or further develop the deliverable.

Some software-related deliverables, though, might include trade secrets of the provider. In that type of situation, the provider likely won't want any of its competitors to have access to the deliverables. In such a case, the provider might want the agreement to prohibit the customer from modifying or further developing the deliverable in violation of the provider's intellectual-property rights.

The provider might also want 1) a written assurance that the customer's modification or further development will comply with any applicable law, and perhaps 2) an indemnity obligation burdening the customer as a Plan B.

The provider might also want to explicitly state that the provider need not provide technical support for deliverables modified by others.

#### 10.10.4 Timely payment as prerequisite of customer's rights

A services provider, concerned about the possibility of not getting paid, might seek to include a contract provision that the customer's rights in the deliverables are dependent on the customer's timely payment of amounts required by the statement of work.

A customer likely would object to such a provision; the customer would assert that a minor payment dispute should not call into question the customer's right to use the deliverable(s), possibly even disrupting an M&A transaction.

A provider, on the other hand, will legitimately be concerned that the customer might file for bankruptcy protection, meaning that the customer would continue to enjoy its rights in the deliverable(s) while paying the provider pennies on the dollar if anything.

In the U.S., as a compromise the provider might want:

• to take a security interest in the customer's right to use the deliverable(s), using a clause provision such as [TO BE DRAFTED]; and
• to "perfect" the security interest by filing a UCC-1 financing statement.

### 10.11 Who owns services-created intellectual property?

A project undertaken under a services agreement will often result in the creation of one or more forms of intellectual property. This is especially true of software-development agreements, but also when an outside consultant is hired to create an illustration, to draft marketing materials, and the like. So who should own that intellectual property?

#### 10.11.1 When the customer insists on owning the IP rights

It's not unusual for a big customer with barganing power to insist on owning the IP rights in any intellectual property that a smaller provider might create in the course of a services project. Such a customer's attitude is usually along the lines of, "if I pay for it, I own it."

Often, though, a customer's insistence on IP ownership simply won't make business sense:

• The customer might not have any real use for the IP rights and might have no reason to insist on ownership, other than sheer willfulness;
• The provider's cost structure and pricing probably depend on its ability to re-use its prior work product on current- and future projects; and
• The customer's ownership of the IP rights could choke the provider's ability to compete in its own market, and might deprive the provider from the necessary standing to sue for infringement of the IP rights.

#### 10.11.2 Compromise: Allocating the ownership of specific items

One possible compromise to the IP-ownership dispute might be as follows:

1. The customer would own the intellectual-property rights to the specific deliverables identified in the statement of work.
2. The provider would continue to own its rights in any preexisting work.
3. The provider would also own the rights in any "toolkit items" that might be developed in the course of the project, namely any inventions, concepts, procedures, materials, tools, ideas, etc., that were not specific, and/or were not unique, to the customer and its business.
4. The customer would have a permanent, irrevocable, worldwide, royalty-free, "background rights" license, under the provider's IP rights, to use the deliverables, subject to any limitations stated in the statement of work.
5. The provider would not have any right to use the customer's confidential information except for purposes of the project.

#### 10.11.3 Third-party IP rights

Services customers should keep in mind that their legal right to utilize deliverables might be subject to the IP rights of third parties. That can be the subject of one or more representations and/or warranties from the provider. [LINK]

### 10.12 Can services be suspended?

It's not uncommon for service providers and customers to get into disputes. A typical vignette might be the following:

• The customer finds fault with the service and refuses to pay an invoice.
• The provider asserts that its services were just fine, thank you, and stops work because of the nonpayment.

So then what? In the contract, the customer might want to restrict or even eliminate the provider's ability to suspend work; on the other hand, the provider might want to expressly preserve that right in the event of nonpayment. See, e.g., U.W. Marx, Inc. v. Koko Contracting, Inc., 124 AD 3d 1121 (N.Y. App. 2015): In that case, the contract in suit was based on an American Institute of Architects agreement form, which expressly gave the contractor the right to suspend work for nonpayment, but only after notice.

(Drafters should consider providing for an independent expert to determine whether the work was in fact up to par and thus whether the customer's withholding of payment was or was not warranted.)

### 10.13 Termination or expiration of statement of work

A statement of work for services might expire by its terms. For example, the term of an outsourcing agreement will come to an end and one or both parties doesn't want to extend the term.

Or, one party or another might want to "pull the plug" early on the statement of work. For example, the customer might want to fire the provider, or vice versa.

#### 10.13.1 The customer's post-termination wish list

In any of these situations, the customer will generally want the option to keep the project going on its own or to transfer it to another provider. The customer will thus want the provider to turn over:

• undelivered deliverables;
• work in progress, in whatever stage of completion the work happens to be;
• relevant data maintained by the provider, in a usable form; this would be especially important in, say, an outsourcing agreement;
• materials, tools, equipment, etc., that the provider acquired for the project (the cost of which was presumably priced into the contract price).

To the same end, the customer likely will also want the provider:

• to assign any relevant software licenses or other third-party contracts — this presupposes that those agreements are in fact assignable;
• ideally, to allow the customer or a replacement contractor to continue using the provider's proprietary technology, if applicable; and
• to make the provider's personnel available to the customer or a replacement contractor.

See generally Blaine Green and Michael Murphy, Lessons from Litigating Technology Services Agreements (PillsburyLaw.com 2014).

#### 10.13.2 The provider's post-termination wish list

Upon a termination or expiration of a services agreement or statement of work, the provider's first priority will probably be to get paid. That might be an awkward discussion if the customer claims that the provider failed to meet its obligations.

## 12 Verification

You get what you inspect, not what you expect.
–Old saying from the U.S. Navy nuclear propulsion program

### 12.3 Background checks

#### 12.3.1 Business purpose of background checks

It's not uncommon for customers to want service providers to do background checks on the providers' key personnel. The goal is normally to identify people with criminal records or other indicia of potential trouble. As discussed below, this can be a sensitive topic, possibly with legal complications.

A customer might especially want (or need) for a supplier to have background checks run on the supplier's personnel, for example:

• if the customer is a government contractor;
• if the supplier will have access to the customer's confidential- or sensitive information;
• if the supplier's personnel will "face" the customer's own customers or clients, that is, be seen or heard by them.

NOTE: It's entirely possible that, due to the nature of the industry (e.g., technology consulting services), the contractor might have already had background checks performed on its relevant people.

#### 12.3.2 Caution: Obtaining consent of checked individuals might be advisable even if not legally mandatory

Parties conducting or commissioning background checks should be sure to check applicable law to see if any particular form of consent is required. See also [TODO: BkgdChkLegalCompl].

It might well be prudent to obtain consent to a background check even if the law doesn't require it. If the individual were to learn of an unconsented background check, his displeasure might go viral on social media, especially given today's heightened sensitivity to privacy concerns.

#### 12.3.3 Caution: Credit-check issues under the Fair Credit Reporting Act

Credit checks can get a checking party in trouble under the [U.S.] Fair Credit Reporting Act. One particular procedural requirement seems to come up in class-action lawsuits: Section 1681b(b)(2)(A) of the Act, 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–

1. 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.

(Emphasis and paragraphing added.) Hat tip: Ken Remson, Employers Hit With Background Check Lawsuits, May 20, 2014; see also Todd Lebowitz, Publix to Pay $6.8 Million Settlement over Noncompliant Background Check Forms (EmploymentClassActionReport.com Nov. 3, 2014). In July 2015, the Chuck E. Cheese restaurant company settled a class-action lawsuit by employees who asserted that the company's background-check consent form did not comply with the FCRA's strict requirements. See, e.g., David M. Gettings, Timothy St. George and David N. Anthony, Chuck E. Cheese Settles Background Check Lawsuit For$1.75 Million (Mondaq.com).

#### 12.3.4 Caution: Disclosure of medical test results might well require consent

"Physicians and other providers are often paid by employers to conduct drug tests, fitness-for-duty or return-to-work exams, or employment physicals for employees. In such circumstances, the physician may mistakenly assume that they may disclose the test and exam results to the employer without the patient’s authorization, but that is not correct." Kim C. Stanger, HIPAA: disclosing exam results to employers (Lexology.com 2015).

#### 12.3.5 Caution: Restricting personnel assignments might be attacked as discriminatory

A blanket prohibition against using personnel with criminal records could be problematic: It might be alleged to have a disproportionate impact on racial- or ethnic minorities and thus to be illegal in the U.S. See generally the EEOC general counsel's enforcement guidance published in April 2012.

The EEOC has filed lawsuits against employers who allegedly "violated Title VII of the Civil Rights Act by implementing and utilizing a criminal background policy that resulted in employees being fired and others being screened out for employment …." EEOC press release, June 11, 2013.

Companies should also be cognizant of disability laws such as the Americans with Disabilities Act, which might affect a company's ability to deny employment because of prescribed drug use, as opposed to making accommodations of some sort.

#### 12.3.6 Caution: State- or federal law might restrict employers' personnel decisions

In addition, some states 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 New York, Massachusetts, Illinois, and Pennsylvania (not necessarily an exhaustive list).

On a related note: "Bills pending in both houses of Congress would make it unlawful for most federal contractors to request a job applicant, whether orally or in writing, to disclose criminal history record information before the applicant has received a conditional offer of employment." Garen E. Dodge, Richard I. Greenberg, and Susan M. Corcoran, Proposed ‘Ban the Box’ Legislation Would Limit Criminal History Inquiries by Federal Contractors (JacksonLewis.com 2015).

For a list of states and cities with ban-the-box laws, see Michelle Natividad Rodriguez and Nayantara Mehta, Ban the Box: U.S. Cities, Counties, and States Adopt Fair Hiring Policies (NELP.com 2015).

#### 12.3.7 Legal-compliance indemnity option

Suppose that Customer requires Provider to have background checks done on all Provider personnel who will be accessing Customer's premises. Then suppose that a Provider employee complains that the background check violated his rights under applicable law. The Provider employee might be tempted to sue Customer, not just Provider. In that situation, this provision would require Provider to protect Customer from the cost of defending and/or paying damages for such claims.

As with any indemnity obligation, drafters should consider whether the indemnifying party might be liable for unforeseeable damages as well as foreseeable damages; see this note for additional details.

Consider checking the Wikipedia entry on background checks to get ideas for further research on this subject.

### 12.4 Audits

#### 12.4.1 Why audit clauses can be useful: A real-world example

The nuclear Navy, in which I served, has a saying: You get what you inspect, not what you expect. This saying can be equally true in the world of contract relationships: Mistakes can happen — and sometimes, so can creative accounting, stonewalling, and even outright fraud. Here's a real-world situation in which an audit provision in a contract came in handy for the would-be auditing party:

### 13.10 Assignment without consent: Void?

Suppose that Bob purports to assign his contract with Alice without her consent, in violation of a requirement in the contract. Is the assignment a nullity? Or instead is the assignment technically valid, but a breach of the agreement, for which Alice can recover her proved damages – if any? The law varies on this point.

• A court applying the so-called 'classical approach' might hold that an assignment was void if made without a required consent. See, e.g., Condo v. Connors, 266 P.3d 1110, 1117-18 (Colo. 2011).

• In contrast, a court applying the so-called “modern approach” (or one of its variations) might hold that such an unconsented assignment was a breach of the contract, for which damages might be available, but that the assignment per se was not void unless the contract said so, perhaps with requisite “magic words.” See id. at 1119 (following modern approach but declining to apply magic-words test on the facts of the case); cf. David Caron Chrysler Motors, LLC v. Goodhall's, Inc., 43 A.3d 164, 170-72 (Conn. 2012) (reviewing case law from numerous jurisdictions).

### 13.11 Assignment by operation of law?

#### 13.11.1 Under applicable law, a merger might or might not constitute an "assignment"

The law seems to vary as to whether a merger or similar transaction effects an assignment of contracts by operation of law.

• In one case, the Delaware chancery court ruled, on summary judgment, that "mergers do not result in an assignment by operation of law of assets that began as property of the surviving entity and continued to be such after the merger." Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH 62 A.3d 62 (Del. Ch. 2013) (partially granting motion for summary judgment) (emphasis added).

• A California federal court, reviewing case law, noted the existence of variations in different states' laws on this point. The court held that the law governing the license agreement would control. See Netbula, Llc v. BindView Development Corp., 516 F. Supp.2d 1137, 1148-50 (N.D. Cal. 2007), where the court granted the defendants' motion for summary judgment dismissing the plaintiff's claim of copyright infringement. (Disclosure: I was vice president and general counsel of the defendant BindView during most of the relevant events and was a deposition witness in the lawsuit.)

• See generally a state-by-state survey by Jolisa Dobbs of the Thompson Knight law firm at http://goo.gl/Sd1wz3.

#### 13.11.2 Danger: Loss of valuable rights

If a merger or reorganization did constitute an unauthorized assignment, then the affected party might lose valuable rights. For example:

• A company that had licensed the use of an expensive computer program found itself liable to the vendor for $459,000 — i.e., the original price of the license — because the customer did an internal reorganization that resulted in a different corporate affiliate's using the software, without the vendor's consent. See Cincom Sys., Inc. v. Novelis Corp., 581 F.3d 431 (6th Cir. 2009). (DCT comment: That software vendor likely shot itself in the foot: it probably will never, ever make another sale to that customer.) A bank lost roughly half of 50-year real-estate lease after it merged into its own wholly-owned subsidiary without the landlord's consent. See Pacific First Bank v. New Morgan Park Corp., 876 P.2d 761 (Ore. 1994). Cf. ClubCorp, Inc. v. Pinehurst, LLC, C.A. No. 5120-VCP, slip op. at 6 (Del. Ch. Nov. 15, 2011) (denying motion for summary judgment; contract language was ambiguous as to whether party's right to indemnification had survived party's merger). #### 13.11.3 A stock sale alone would not effect an assignment A Seventh Circuit opinion followed what seems to be the general (U.S.) rule that a mere change of control of a licensee corporation, through a transfer of the corporation's stock to a new owner, does not constitute an "assignment" of the license that would require consent of the licensor (assuming, that is, that the licensee remains a separately-functioning corporation): … [T]he sale of all the stock in a closely held corporation whose principal asset is a contract does not violate a nonassignment clause even when the stock is sold to a person to whom, previously, the counterparty had explicitly refused that the contract be assigned. If the counterparty to a contract with a corporation wishes to limit the persons to whom ownership or control of the corporation can be sold, it must do this through specific language to that effect in the contract (a "change of control" clause); a nonassignment clause will not suffice. [T]he mere change of stock ownership would not nullify a non-assignable license, absent a change in control provision. VDF Futureceuticals, Inc. v. Stiefel Labs., Inc., 792 F.3d 842, 846 (7th Cir. 2015) (Posner, J.) (extra paragraphing added, alteration marks by the court, internal quotation marks revised), quoting Kenneth Ayotte & Henry Hansmann, Legal Entities as Transferable Bundles of Contracts, 111 Mich. L. Rev. 715, 724 (2013), and Elaine D. Ziff, The Effect of Corporate Acquisitions on the Target Company’s License Rights, 57 Bus. Lawyer 767, 789 (2002). ### 13.12 Alternative: Consultation requirement In a contract between "Alice" and "Bob," it might not be necessary to give Alice an absolute veto over an assignment by Bob; instead, Bob might consider agreeing not to assign his assets without first consulting with Alice. ### 13.13 Alternative: Termination option Sometimes parties can get into an impasse about assignment-consent provisions. a provision such as this one could help break an impasse between, say, a customer that wants an assignment-consent right, so as to control with whom it does business, and a vendor that wants to maintain control of its strategic destiny. Such a termination option might be coupled with a time limit, to give an assigning party (and its assignee) a significant incentive to notify the non-assigning party as soon as the assignment becomes effective: • The only way the clock will start running is for either the assigning party or its assignee to give notice to the non-assigning party; and • The non-assigning party must fish or cut bait about the assignment. ## 14 Selected special topics ### 14.1 Acknowledgements in a contract A contract reviewer should be extremely careful about statements in a draft agreement in which the parties “acknowledge” something or another. Such language might preclude the reviewer's client from later disputing what was acknowleged in the contract. Consider Cellport Sys., Inc. v. Peiker Acustic GmbH & Co., KG.[1] In that case, a license agreement between a manufacturer of cell-phone docking stations and a patent owner required the manufacturer to pay royalties on its products that were covered by the patent. The license agreement included a statement in which the manufacturer "acknowledged" that certain specific docking stations were indeed covered by the patent. The manufacturer later denied that some of those specific docking stations were covered by the patent. The court, though, held that the acknowledgement language in the contract precluded the manufacturer from denying the patent's coverage. But contract drafters should still give some thought to judiciously including one or more factual acknowledgements in a draft. Doing so could help to reduce the cost and burden of any future disputes, as well as make it easier for the client's future trial counsel to do their jobs. On the other hand, nobody likes a drafter who asks the other side to “acknowledge” something that clearly is or would be in dispute. EXAMPLE: Suppose that a customer's purchase-order form includes printed boilerplate language stating that "Supplier acknowledges that any failure by Supplier to deliver the goods or services required by this purchase order at the stated delivery date will cause Customer significant long-term harm." In a particular case that might be true, but in a standard form it's just obnoxious. EXAMPLE: Suppose that a supplier's standard terms of sale recite that "Customer acknowledges that Supplier's products have a reputation for exceptionally-high quality and value for the money." Come on, now; few if any customers would willingly agree to such a statement in a lawsuit, so it's bad form for the supplier to ask the customer to agree to it in the contract. ### 14.2 Acknowledgement in a notary certificate #### 14.2.1 "Notarizing" a document with an acknowledgement certificate (This section discusses the certificate of acknowledgement by a notary public or other authorized official; that's a different type of certificate than a [BROKEN LINK: JuratNotes], in which the notary or other official certifies that the signer of the document personally declared, under penalty of perjury, that the document's contents were true.) A document such as a deed to real property might include, after the signature blocks, a space for a notary to sign a certificate that the signer appeared before the notary, presented sufficient identification, and acknowledged that the signer indeed signed the document. In many jurisdictions, the notary's signed certificate and official seal serve as legally-acceptable evidence that the document isn't a forgery — that is, that the document is authentic. (This is sometimes referred to as making the document self-authenticating or self-proving.) The law likely requires a notary's certificate of acknowledgement if the document is to be recorded in the public records so as to put the public on notice of the document's contents. Let's illustrate the process with a hypothetical example. • Suppose that "Alice" is selling her house. To do so, she will ordinarily sign a deed and give it to "Bob," the buyer. • Bob will normally want to take (or send) the deed to the appropriate government office to have the deed officially recorded. That way, under state law, the world will be on notice that Bob now owns Alice's house. But how can a later reader know for sure that the signature on the deed is in fact Alice's signature and not a forgery? The answer is that under the laws of most states, for Alice's deed to Bob even to be eligible for recording in the official records, the deed must include an acknowledgement certificate, signed by a notary public or other authorized official. The notary's certificate must state that Alice: • personally appeared before the notary (usually on a stated date); • produced sufficient identification to prove that she was indeed Alice; and • acknowledged to the notary that she had signed the deed. If Alice signed the deed in a special capacity (e.g., as trustee of a trust or executor of her father's estate), then the notary's certificate will usually say that, too. Once Alice has done this, the notary will sign the certificate and imprint a seal on the deed. The notary might do this with a handheld "scruncher" that embosses the paper of the deed, or instead with an ink stamp (this depends on the jurisdiction). Typically, the notary is also required to make an entry in a journal to serve as a permanent record. This acknowledgement procedure allows the civil servants who must record Alice's deed to look at the deed and have at least some confidence that the signature on it isn't a forgery. Incidentally, state law usually determines just what wording must appear in an acknowledgement. In some jurisdictions, Alice is not required to actually sign the deed in the presence of the notary; she need only acknowledge to the notary that yes, she signed the deed. See generally: • Acknowledgements and Jurats (NationalNotary.org); and • [BROKEN LINK: JuratNotes] — a jurat is a certificate by a notary public (or other authorized officer) that the signer of a document has stated, under oath, that the contents of the document are true. #### 14.2.2 Other, non-notary officials might also be authorized to certify signature authenticity By statute, certain officials other than notaries public (note the plural form) are authorized to certify the authenticity of signatures in certain circumstances. See, e.g., Tex. Civ. Prac. & Rem. Code § 121.001, which gives the power to certify signature acknowledgements to district-court and county-court clerks and, in certain cases, to commissioned officers of the U.S. armed forces, among others. #### 14.2.3 A notary public can't certify a signature if s/he has a conflict of interest See generally, e.g., American Society of Notaries, Conflicts of Interest (2008). See also Tex. Civ. Prac. & Rem. Code § 121.002: That statute specifically allows a corporate employee (who is a notary public) to certify the acknowledgement of a signature on a document in which the corporation has an interest unless the employee is a shareholder who owns more than a specified percentage of the stock. #### 14.2.4 A flawed signature-acknowledgement certificate can lead to serious problems in court Parties will want to double-check that the notary "does the needful" (it's an archaic expression, but I like it) to comply with any statutory requirements. In a New York case, a married couple's prenuptial agreement was voided because the notary certificate for the husband's signature didn't recite that the notary had confirmed his identity. See Galetta v. Galetta, 21 N.Y.3d 186, 191-92, 991 N.E.2d 684, 969 N.Y.S.2d 826 (2013) (affirming summary judgment that prenup was invalid). • It was undisputed that the couple's signatures on the agreement were authentic, and there was no accusation of fraud or duress. See id., 21 N.Y.3d at 189-90. • Even so, said the state's highest court, the notarization requirement was important because it "necessarily imposes on the signer a measure of deliberation in the act of executing the document." Id. at 191-92. #### 14.2.5 A lawyer who certifies a client's signature acknowledgement might have to testify about it In many states it's easy to become a notary public. Some lawyers themselves become notaries so that they can certify the authenticity of clients' signatures on wills, deeds, and the like. But that might lead to the lawyer's being called someday to testify in a court proceeding about a signed document. • For example, the notary might have to explain how he or she confirmed the signer's identity if that information isn't stated in the lawyer's notary records. • That in turn might disqualify the lawyer from being able to represent the client whose signature was certified. See, e.g., Tex. Civ. Prac. & Rem. Code § 121.001; Tex. Discipl. R. Prof. Conduct 3.08 ("Lawyer as Witness"). (As a practical matter, though, that might not be too much of an issue, because the lawyer might already have to testify by virtue of having participated in the events leading up to the signing of the document.) #### 14.2.6 Review questions 1. FACTS: Your client, Landlord, has negotiated a five-year commercial lease agreement for one of its office buildings. The tenant's lawyer wants the signers to have their signatures notarized. Landlord agrees to have the signatures notarized. ASSUME: All events take place in Texas and are subject to Texas law. 2. QUESTION: Why might the tenant's lawyer want the lease agreement to be notarized? Would that be in your client Landlord's best interest? Explain, citing relevant statutory provisions, including the relevant subdivision(s) if any. Suggested reading: J. Allen Smith & Michael R. Steinmark, Tenants' Rights Under Unrecorded Leases, at http://goo.gl/S2prC (2010); Tex. Prop. Code §§ 12.001, 13.001, 13.002. 3. QUESTION: If the notary public can't find her notary seal, may she sign the notary certificate and skip applying the seal? Explain, citing relevant statutory provisions, including the relevant subdivision(s) if any. Suggested reading: Tex. Gov. Code § 406.013; Tex. Civ. Prac. & Rem. Code § 121.004. 4. QUESTION: What must the notary public do before signing the notary certificate to confirm that the signers are who they claim to be? Explain, citing relevant statutory provisions, including the relevant subdivision(s) if any. Suggested reading: Tex. Civ. Prac. & Rem. Code § 121.005(a). 5. QUESTION: Must the notary's certificate say anything in particular about the identity of the signer? Explain, citing relevant statutory provisions, including the relevant subdivision(s) if any. Suggested reading: Tex. Civ. Prac. & Rem. Code § 121.005(b). 6. QUESTION: What must the notary do after notarizing the signature(s)? Explain, citing relevant statutory provisions, including the relevant subdivision(s) if any. Suggested reading: Tex. Civ. Prac. & Rem. Code § 121.012; Tex. Gov. Code § 406.014. 7. QUESTION: If no notary is around, can you notarize the signatures as an attorney? Should you? Explain, citing relevant statutory- and regulatory provisions, including the relevant subdivision(s) if any. Suggested reading: Tex. Civ. Prac. & Rem. Code § 121.001; Tex. Discipl. R. Prof. Conduct 3.08 ("Lawyer as Witness"). 8. QUESTION: Surprise! The person who will sign the lease for the tenant has gone on a business trip to Kuwait and will FAX her signed signature page to you. Can your secretary, who is here in Houston and is a notary public, notarize that signature page? Explain, citing relevant statutory provisions, including the relevant subdivision(s) if any. Suggested reading: Tex. Civ. Prac. & Rem. Code § 121.004(a). 9. QUESTION: Another document in the transaction must be signed and notarized by an individual who's in California. Is anything special required for the notary certificate? What downside risk does the notary have if the notary is asked to sign the certificate in the absence of the individual who's going to sign the document? Explain, citing relevant statutory provisions, including the relevant subdivision(s) if any. Suggested reading: Cal. Civ. Code § 1189(a). 10. QUESTION: Who in Kuwait could "notarize" the signature? Explain, citing relevant statutory provisions, including the relevant subdivision(s) if any. Suggested reading: Tex. Civ. Prac. & Rem. Code § 121.001. ### 14.3 Affiliate status #### 14.3.1 Business context Affiliate status can be important in a contract because the contract might give rights to — and/or (purport to) impose obligations on — the "affiliates" of one or both of the parties. For example, a software license agreement might grant the right to use the software not only to the named licensee company, but also to affiliates of the licensee company. Such an agreement will almost certainly impose corresponding obligations on any affiliate that exercises the right to use the software. Or, a customer will sometimes want its non-owned "affiliated" companies to be allowed to take advantage of the contract terms that the customer negotiates with a supplier. A supplier, though, might not be enthused about an expansive definition of affiliate. The supplier will often not want to limit its own freedom to negotiate more-favorable terms with the customer's affiliates. #### 14.3.2 Specify that the definition is exclusive? As with any definition, it might be worthwhile to specify that the definition of affiliate is exclusive. Otherwise, creative counsel might try to argue that affiliate status can arise in some other way. #### 14.3.3 Affiliate status through voting control: Language origins Most definitions of affiliate include references to control of the right to vote for an organization's board of directors (or equivalent). Such language generally tracks terminology found in U.S. securities laws such as SEC Rule 405, 17 C.F.R. § 230.405, as well as in other sources. See, e.g., UBS Securities LLC v. Red Zone LLC, 77 A.D.3d 575, 578 (N.Y. App. Div. 1st Dept. 2010) (quoting Black's Law Dictionary and citing New York and Delaware statutes). #### 14.3.4 Deciding on the minimum voting percentage for control A minimum voting percentage for control of 50% seems to be pretty typical. Drafters, though, should think about why they're defining the term affiliate, because the answer might warrant changing the percentage. #### 14.3.5 Other definitions of voting control Some drafters might want voting control also to arise from one or more of the following: 1. a legally-enforceable right to select a majority of the members of the organization's board of directors or other body having comparable authority — note that this alternative does not say that control exists merely because a person has a veto over the selection of a majority of the members of the organization's board; 2. a legally-enforceable right, held by a specific class of shares or of comparable voting interests in the organization, to approve a particular type of decision by the organization; or 3. a legally-enforceable requirement that a relevant type of transaction or decision, by the organization, must be approved by a vote of a supermajority of the organization's board of directors, shareholders, outstanding shares, members, etc. (The required supermajority might be two-thirds, or three-fourths, or 80%, etc.) #### 14.3.6 Designating named affiliate groups can add flexibility By designating specific affiliate groups, drafters can expand the definition of affiliate on a case-by-case basis as needed. This can be useful because voting control might not capture all of the individuals and/or orgainzations that a party wants to name as affiliates. If it's not possible to determine in advance who all the named affiliate groups will be, the parties could consider: • letting one party unilaterally name additional affiliates with the other party's consent, not to be unreasonably withheld; and/or • designating specific "open enrollment" periods in which affiliates can be named. #### 14.3.7 The danger of affiliate status via "management control" The vagueness of the "management power" language could lead to expensive litigation. Drafters should therefore be cautious in taking such an approach, even though it's often seen in existing contracts and templates. It might be the case that the definition of affiliate would be relevant only to determine, say, which affiliates of a customer are entitled to the negotiated pricing, or are entitled to use licensed software. In that situation, the downside risk of a management-power definition of affiliate might be manageable. But it's not hard to imagine how, in later litigation, the parties might have to engage in extensive – and expensive – discovery for trial of a fact-intensive dispute about who had what management power at the relevant time(s). If a contract really needs to define Affiliate without being limited by a certain percentage of voting control, one better approach is for the contract to designate specific affiliates. Consider the Offshore Drilling Co. case: the parties in the lawsuit hotly disputed who had had "control" of a vessel destroyed by fire, and thus which party or parties should be liable for damages. The specific facts and outcome of the case aren't important here — what matters is that the parties almost-certainly had to spend a lot of time and money fact-intensive litigation over the control issue. See Offshore Drilling Co. v. Gulf Copper & Mfg. Corp., 604 F.3d 221 (5th Cir. 2010) (affirming summary judgment in relevant part). That's the last thing parties to a contract should want. And in the UBS v. Red Zone case, the UBS investment bank and Red Zone LLC, a private equity firm (whose managing member was Dan Snyder, owner of the Washington Redskins) entered into a contract which stated, in part, that Red Zone would pay UBS a$10 million fee if Red Zone succeeded in acquiring — or in acquiring "control" of — the amusement-park company Six Flags. Apparently Red Zone never did acquire more than 50% of Six Flags's stock, but because of other circumstances the appellate court held that:

… Red Zone clearly controlled Six Flags once its insiders and nominees constituted the majority of the board and took over the company's management.

It cannot be disputed that Red Zone had seized the power to direct Six Flags' management and policies.

We reject Red Zone's argument that it did not control Six Flags simply because it did not obtain ownership of the majority of its voting shares. The argument is at odds with the inclusive definition of "control" ….

UBS Securities LLC v. Red Zone LLC, 77 A.D.3d 575, 578, 910 N.Y.S.2d 55 (N.Y. App. Div. 1st Dept. 2010) (reversing denial of UBS's motion for summary judgment). After losing its case with UBS, Red Zone successfully sued its law firm for malpractice in contract drafting, winning a $17.2 million judgment. See Red Zone LLC v. Cadwalader, Wickersham & Taft LLP, 45 Misc.3d 672, 994 N.Y.S.2d 764 (N.Y. Sup. Ct. 2013), aff'd, 2014 NY Slip Op 4570, 118 A.D.3d 581 988 N.Y.S.2d 588 (App. Div. 1st Dept. 2014). (Hat tip: Ken Adams.) #### 14.3.8 Pro tip: Plan for changes in affiliate status Contract drafters and reviewers should plan for changes in affiliate status, in case one or more of the following things happens: • A party acquires a new affiliate, e.g., because its parent company makes an acquisition; • Two companies cease to be affiliates of one another, e.g., because one of them is sold off or taken private; • A third party – perhaps an unwanted competitor – becomes an affiliate of "the other side." In some circumstances, affiliate status might exist at some times and not exist at others. That could be material to a dispute. Compare, for example: • "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." Ellington v. EMI Music Inc., 24 N.Y.3d 239, 246, 21 N.E.3d 1000, 997 N.Y.S.2d 339, 2014 NY Slip Op 07197 (affirming dismissal of complaint). • In GTE Wireless, Inc. v. Cellexis Intern., Inc., 341 F.3d 1 (1st Cir. 2003), the appeals court held that Cellexis breached a settlement agreement not to sue GTE 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. Reversing a summary judgment, the appeals court reasoned that the contract language as a whole clearly contemplated that future affiliates would be shielded by the covenant not to sue. See id. at 5. (Hat tip: Ken Adams.) ### 14.4 Agreements to agree It can be tempting In U.S. jurisdictions, an agreement to agree is generally unenforceable. That will be true not just of contracts as a whole, but of specific provisions [2] ### 14.5 Agreements to negotiate in good faith Sometimes when parties can't agree about a specific point, they might be tempted to agree that they'll negotiate that point later in good faith. That, though, could really complicate the parties' lives if they can't reach agreement. Unlike an agreement to agree, an agreement to negotiate in good faith is likely to be enforceable, and breaching that agreement could end up being expensive for the breacher. Consider, for example, SIGA Technologies, Inc. v. PharmaThene, Inc.,[3] in which breach of an agreement to negotiate in good faith resulted in a$113 million damage award. SIGA was the financially-troubled developer of an experimental smallpox drug. It had a serious need for cash. The drug developer approached a potential rescuer, PharmAthene, about merging. The two companies had unsuccessfully discussed merger before.

The parties signed a detailed, non-binding term sheet. The term sheet stated that the drug developer and its rescuer would enter into a "partnership"; in that partnership, the drug developer would eventually merge with the rescuer after licensing the smallpox drug to the rescuer.

Separately, To provide the drug developer with some much-needed immediate cash, the parties also signed a bridge-loan agreement. Among other things, that agreement included a "Plan B" obligation under which the parties would negotiate in good faith a license agreement, in accordance with the detailed economic provisions set forth in the term sheet, if the merger agreement were to fail to go through. The parties then turned their attention to the merger agreement itself; they eventually negotiated and signed the formal merger agreement; that agreement, too, included a "Plan B" obligation to negotiate a license agreement in good faith as "Plan B" if the merger agreement were to be terminated.

After that, though, the drug developer got several items of good news: It was awarded a substantial financial grant from the National Institute of Allergy and Infectious Disease; its initial clinical trials of its new smallpox drug went very well; and it received a sizable contract from the National Institutes of Health. The drug developer — now concluding that it no longer needed to be rescued after all — terminated the merger agreement with its would-be rescuer.

The merger agreement gave the drug developer a termination right because the merger had not been completed on or before a drop-dead date, due to the SEC's delay in approving a proxy statement.

The jilted rescuer, resorting to the previously-agreed "Plan B," informed the drug developer that the rescuer was ready to sign a license agreement for the new smallpox drug in accordance with the economic provisions of the now-abandoned term sheet. The drug developer, though, insisted on drastically re-trading the economic terms of the deal.

#### 14.19.2 Confidentiality of parties' dealings, not of their relationship

Drafters should be careful to make it clear that the parties' /dealings/ are confidential, not their /relationship/. If it were otherwise — that is, if an agreement said that the parties' /relationship/ was confidential — then the confidentiality provision might be (mis)interpreted as a declaration of a “confidential relationship”; that in turn might imply unwanted fiduciary obligations.

#### 14.19.3 Confidential-dealings clauses have been enforced

Clauses requiring parties' contract terms to be kept confidential have been enforced. For example, in 2013 the Delaware chancery court held that a party materially breached an agreement by publicly disclosing the agreement's terms in violation of a confidentiality clause, thereby justifying other party's termination of agreement. /See/ eCommerce Indus., Inc. v. MWA Intelligence, Inc., No. 7471-VCP, part II-A, text accompanying notes 117 et seq. (Del. Ch. Oct. 4, 2013).

#### 14.19.4 But a confidential-dealings clause might not be "material"

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

#### 14.19.5 Beware of confidential-/dealings/ clauses in employment agreements

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

### 14.20 Consent – unreasonable withhholding (rough notes)

For a discussion of one particular type of situation where this issue can arise, see [TODO: AssmtAutonomyNUW] and its commentary.

For a review of English case law — and a reminder that such cases will usually be highly fact-intensive — see generally Porton Capital Technology Funds v. 3M UK Holdings Ltd, [2011] EWHC 2895 (Comm), paragraphs 219 et seq. In that case:

• A biotech company sold itself to 3M. As is not uncommon in such cases, the biotech company's shareholders received not only cash but, importantly, an earn-out, that is, the right to a series of future payments whose amounts would rise or fall with the success of the company under 3M's ownership.
• The agreement required 3M to obtain the consent of the shareholders before shutting down the business (because shutting the business down would deprive the shareholders of potential earn-out payments), but the shareholders could not unreasonably withhold their consent.
• The business did not do well, and 3M wanted to shut it down; the shareholders refused to consent, but 3M shut the business down anyway, and the shareholders sued.

#### 14.21.3 Consequential damages — other specific examples

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

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

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

#### 14.21.4 "Lost profits" will often be direct damages, not consequential damages

The laundry list of excluded damages should not be drafted, though, so as to be overly broad for the situation. That's why the lost-profits exclusion in this clause is phrased as lost profits from collateral business arrangements. See, e.g., Biotronik A.G. v. Conor Medsystems Ireland, Ltd., 2014 NY Slip Op. 02101, where New York's highest court, reviewing case law held that, on the facts of the case, "lost profits were the direct and probable result of a breach of the parties' agreement and thus constitute general damages" and thus were not barred by limitation-of-liability clause.

As the Second Circuit explained:

Lost profits are consequential damages when, as a result of the breach, the non-breaching party suffers loss of profits on collateral business arrangements.

In the typical case, the ability of the non-breaching party to operate his business, and thereby generate profits on collateral transactions, is contingent on the performance of the primary contract. When the breaching party does not perform, the non-breaching party's business is in some way hindered, and the profits from potential collateral exchanges are "lost."

Every lawyer will recall from his or her first-year contracts class the paradigmatic example of Hadley v. Baxendale, where Baxendale's failure to deliver a crank shaft on time caused Hadley to lose profits from the operation of his mill.

In New York, a party is entitled to recover this form of lost profits only if (1) it is demonstrated with certainty that the damages have been caused by the breach, (2) the extent of the loss is capable of proof with reasonable certainty, and (3) it is established that the damages were fairly within the contemplation of the parties.

By contrast, when the non-breaching party seeks only to recover money that the breaching party agreed to pay under the contract, the damages sought are general damages. The damages may still be characterized as lost profits since, had the contract been performed, the non-breaching party would have profited to the extent that his cost of performance was less than the total value of the breaching party's promised payments.

But, in this case, the lost profits are the direct and probable consequence of the breach. The profits are precisely what the non-breaching party bargained for, and only an award of damages equal to lost profits will put the non-breaching party in the same position he would have occupied had the contract been performed.

Tractebel Energy Mktg., Inc. v. AEP Power Mktg., Inc., 487 F.3d 89, 109-110 (2d Cir. 2007) (reversing judgment, after bench trial, denying plaintiff its lost profits) (citations and footnote omitted, emphasis and extra paragraphing added).

#### 14.21.5 Fourth Circuit's lecture to negotiators of consequential-damages exclusions

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

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

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

Severn apparently did take the former precaution – it has recovered over $19 million in insurance proceeds from a company whose own business involves the contractual allocation of risk. But it did not take the latter one, and there is no inequity in our declining to rewrite its contractual bargain now. Severn Peanut Co. v. Industrial Fumigant Co., No. 15-1063, slip op. at 9 (4th Cir. Dec. 2, 2015) (affirming summary judgment in favor of service provider that had caused millions of dollars to its customer's facility) (extra paragraphing added). #### 14.21.6 Further reading See: ### 14.22 Conspicuous text #### 14.22.1 Overview 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. (Spoiler alert: A long provision in all-capital letters ("all-caps") won't necessarily be deemed conspicuous; it's just less readable.) The SEC's Plain English Handbook (at 43) points out that: … All uppercase sentences usually bring the reader to a standstill because the shapes of words disappear, causing the reader to slow down and study each letter. Ironically, readers tend to skip sentences written in all uppercase. To highlight information and maintain readability, use a different size or weight of your typeface. Try using extra white space, bold type, shading, rules, boxes, or sidebars in the margins to make information stand out. … Whatever method you choose to highlight information, use it consistently throughout your document so your readers can recognize how you flag important information. (Extra paragraphing added.) The Handbook gives a "before" example: THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. It suggests replacing the all-caps with italics: The Securities and Exchange Commission has not approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Or bold-faced type: The Securities and Exchange Commission has not approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. #### 14.22.2 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 eneacted. Still, its definition of "conspicuous" in section 1-201(10) (Texas version) nevertheless provides useful guidance: A term or clause is conspicuous when it is so written that a reasonable person against whom it is to operate ought to have noticed it. A printed heading in capitals (as: NON-NEGOTIABLE BILL OF LADING) is conspicuous. Language in the body of a form is "conspicuous" if it is in larger or other contrasting type or color. But in a telegram any stated term is "conspicuous". Tex. Bus. & Com. Code § 1.201(10) (extra paragraphing added). #### 14.22.3 In judging conspicuousness, courts tend to focus on "fair notice" In a non-UCC context, the Supreme Court of Texas held that — with a possibly-significant exception — an indemnity provision protecting the indemnitee from its own negligence must be sufficiently conspicuous to provide "fair notice." The supreme court adopted the conspicuousness test stated in the UCC, quoted above; the court explained: This standard for conspicuousness in [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. Dresser Indus., Inc. v. Page Petroleum, Inc., 853 S.W.2d 505, 508-09 (Tex. 1993) (citations omitted, emphasis and extra paragraphing added). The Dresser court also pointed out that the fair-notice requirement did not apply to settlement releases: "Today's opinion applies the fair notice requirements to indemnity agreements and releases only when such exculpatory agreements are utilized to relieve a party of liability for its own negligence in advance." Id., 853 S.W.2d at 508 n.1 (emphasis added). #### 14.22.4 Fair notice will often depend on the circumstances What counts as "conspicuous" will sometimes depend on the circumstances. In still another express-negligence case, the Texas supreme court said that the indemnity provision in question did indeed provide fair notice because: The entire contract between Enserch and Christie consists of one page; the indemnity language is on the front side of the contract and is not hidden under a separate heading. The exculpatory language and the indemnity language, although contained in separate sentences, appear together in the same paragraph and the indemnity language is not surrounded by completely unrelated terms. Consequently, the indemnity language is sufficiently conspicuous to afford "fair notice" of its existence. Enserch Corp. v. Parker, 794 S.W.2d 2, 8-9 (Tex. 1990) (extra paragraphing added). #### 14.22.5 Actual knowledge – when proved – might substitute for conspicuousness Texas's Dresser court noted an exception to the conspicuousness requirement: "The fair notice requirements are not applicable when the indemnitee establishes that the indemnitor possessed actual notice or knowledge of the indemnity agreement." Id., 853 S.W.2d at 508 n.2 (emphasis added, citation omitted). Note especially the italicized portion of the quotation, which implies that the burden of proof of actual notice or knowledge is on the party claiming indemnification from its own negligence. In contrast, a federal district judge in Houston granted Enron's motion to dismiss Hewitt Associates' claim for indemnity, on grounds that the contract in question did not comply with the conspicuousness requirement of the express-negligence rule; the judge surveyed prior cases in which actual knowledge (of an indemnity clause) had been sufficiently established, including by ways such as: • evidence of specific negotiation, such as prior drafts; • through prior dealings of the parties, for example, evidence of similar contracts over a number of years with a similar provision; • proof that the provision had been brought to the affected party's attention, e.g., by a prior claim. See Enron Corp. Sav. Plan v. Hewitt Associates, LLC, 611 F. Supp. 2d 654, 673-75 (S.D. Tex. 2008). #### 14.22.6 Conspicuous doesn't necessarily mean all-caps or bold-faced type Contract drafters sometimes put entire paragraphs into all-capital letters in the hope of making them "conspicuous." You've 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. The Georgia supreme court observed acidly (but arguably in dicta): 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. Raysoni v. Payless Auto Deals, LLC, 296 Ga. 156, 766 S.E.2d 24, 27 n.5 (2014) (reversing and remanding judgment on the pleadings) (emphasis and extra paragraphing 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. See also Linda R. Stahl, Beware the Boilerplate: Waiver Provisions (Andrews Kurth Jan. 14, 2013) (citing Texas cases). ### 14.23 Consultation requirement: Suppose that Alice and Bob are negotiating a contract under which Alice demands that Bob obtain Alice's consent before proceeding with a specified action (e.g., raising prices). Bob, not wanting to limit his flexibility, pushes back in response; he wants to be able to raise prices in his [BROKEN LINK: SoleDiscrDefn]. A possible compromise would be for the parties to agree that Bob will not raise prices without first consulting with Alice. The term consult is vague, though; that vagueness could later lead to disputes about whether Bob had complied with the consultation obligation. With that in mind, this definition sets out a specific procedure for consultation, while leaving the ultimate decision authority alone. This provision is drafted in contemplation that it might be part of a package of clauses that as a group, but not individually, are incorporated by reference into an agreement. This provision does not specifically require the acting party to advise the other party in writing. The acting party, though, will of course want to consider doing so in order to avoid later "he said, she said" disputes about whether the acting party complied with this requirement. See also [TODO: SeasonableDefn]. ### 14.24 Consumer Price Index ("CPI") Unless otherwise agreed in writing, the terms "Consumer Price Index" and "CPI" refer to the , as published from time to time by U.S. Bureau of Labor Statistics. • Comment • Business context CPI clauses are sometimes included in contracts for ongoing sales or goods or services. Such contracts will typically lock in the agreed pricing for a specified number of years, subject to periodic increases by X% per year (let's say) or by the corresponding increase in CPI, whichever is greater (or sometimes, whichever is less). Depending on the industry, CPI-U might or might not be the best specific index for estimating how much a provider's costs have increased. this is explained in the FAQ page of the Bureau of Labor Statistics (accessed Aug. 16, 2012). • Caution: "The lesser of CPI or X%" could be dangerous Prohibiting a provider from increasing its pricing by more than the increase in CPI or X percent per year, whichever is less, would force the provider to 'eat' any increases in its own costs that exceeded the increase in the particular index chosen. • Consider: What if CPI goes down? A drafter might want to specify whether agreed pricing, rent, etc., can ever decrease as a result of changes in CPI. • Consider: Are pricing increases to be compounded? If price increases are limited to adjusting for increases in CPI over a baseline figure, that will automatically take care of compounding. But if the permissible price increase is "the change in CPI or X%, whichever is greater," then the X% might end up being compounded over time, so that the X% increase in Year One would itself be increased by another X% in Year Two. [NEED EXAMPLE] • See also ### 14.25 Cross-references A UK legislative drafting guide suggests, at page 25, § 3.10 (with examples): • A cross-reference might not be needed. • "3.10.2 It is helpful to refer to a substantive rule or proposition, rather than the statutory provision containing it (in which readers are unlikely to be interested)." • "3.10.4 It is generally helpful to provide a parenthetical description [of a cross-referenced provision] …. But consider the usefulness of the descriptive words against the disadvantage of interrupting the flow of text." (Thanks to English solicitor Paul de Cordova for the above link.) ### 14.26 Dealer agreements ### 14.27 Discretion #### 14.27.1 U.S. law about discretion might vary by jurisdiction In Illinois, a party's discretion might be constrained by an obligation of reasonableness. See Han v. United Continental Holdings, Inc., 762 F.3d 598 (7th Cir. 2014) (affirming dismissal with prejudice of purported class-action complaint). As it happens, in that case the appeals court upheld a ruling that United Airlines did not unreasonably exercise its discretion in interpreting the term "miles flown," in the rules for its frequent-flier program, as the miles between the relevant airports and not the miles actually flown by the aircraft in traveling between the two airports. On the hand: [U]nder Alabama law "sole discretion" means an absolute reservation of a right. It is not mitigated by an implied covenant of good faith and fair dealing in contracts because an unqualified reservation of a right in the sole discretion of one of the parties to a contract expresses the intent of the parties to be subject to terms that are inconsistent with any such implied covenant. Shoney's LLC v. MAC East, LLC, 27 So.3d 1216, 1220-21 (Ala. 2009) (on certification by Eleventh Circuit; emphasis added, footnote and citations omitted). See also [TODO: SoleDiscrDefn]. #### 14.27.2 UK: Arbitrary, capricious, or irrational exercise of discretion might be actionable There is case law in the UK indicating that discretion cannot be exercised arbitrarily, capriciously, or irrationally. See Barry Donnelly and Jonathan Pratt, Are you obliged to act reasonably?, in the In-House Lawyer [UK] (June 12, 2013); they summarize the case law as indicating that: Where a contract confers on one party an absolute discretion to take a decision, choosing from a range of options which will have an impact on the interests of another contracting party, the court will, as a bare minimum, imply a term that the discretion must be exercised in good faith in a manner which is not arbitrary, capricious or irrational. Subject to those limitations, the decision maker will be entitled to act in accordance with its own best interests. It is very difficult, albeit not ‘utterly impossible', to exclude such an implied term. Where, however, the only choice conferred on a contracting party is whether or not to exercise an absolute contractual right provided under the contract, no such term will be implied. (Emphasis and extra paragraphing added.) See also: It is now well established that, in the absence of very clear language to the contrary, a contractual discretion must be exercised in good faith for the purpose for which it was conferred, and must not be exercised arbitrarily, capriciously or unreasonably (in the sense of irrationally)[.] Novus Aviation Ltd. v. Alubaf Arab Int'l Bank BSC(c), [2016] EWHC 1575 (Comm) (citations omitted). See also [BROKEN LINK: SoleDiscrDefn] and [BROKEN LINK: RsnblDiscrDefn]. ### 14.28 Disparagement prohibition #### 14.28.1 Business context Manufacturers sometimes ask for clauses like this in their distribution- or reseller agreements, with the idea that they can prohibit their distributors and resellers from making negative comments to end-customers. Distributors and resellers might well object to this statement, wanting to preserve their freedom to say whatever they please to their own customers. #### 14.28.2 State-law prohibitions In 2014, California enacted Cal. Civ. Code § 1670.8 prohibiting such clauses in consumer contracts, with civil penalties for violation. (Hat tip: Prof. Nancy Kim.) #### 14.28.3 Bad publicity A disparagement prohibition can lead to terrible PR, as discussed in the commentary to [TODO: ReviewRestrict] concerning product reviews. And consider the how Donald Trump's presidential campaign required its volunteers to sign agreements forever prohibiting them from disparaging "Mr. Trump" or any member of his family, his company, or their productds. See Jeremy Fugelberg, Want to dial for Donald Trump? First, sign this legal form, Cincinnati Enquirer, Sept. 2, 2016. #### 14.28.4 The "Streisand effect" Parties wanting a clause like this should consider the Streisand effect, which is named for the famed singer and actress: When word got out that she was trying to suppress unauthorized photos of her residence, the resulting viral Internet publicity resulted in the photos being distributed even more widely — thus defeating her original purpose of her suppression attempt. (The Wikipedia article contains numerous other examples.) #### 14.28.5 The litigation privilege might trump a non-disparagement provision The litigation privilege might trump a non-disparagement provision. See the decision of Maryland's highest court in O’Brien & Gere Engineers, Inc. v. City of Salisbury No. 15 (Md. Apr. 26, 2016). ### 14.29 Economic loss doctrine notes The economic loss doctrine generally precludes recovery in tort for purely-economic losses resulting from a party’s failure to perform under a contract when the harm consists only of the economic loss of a contractual expectancy. • Under this doctrine, if the defendant’s conduct would give rise to liability only because it breaches the parties’ agreement, the plaintiff’s claim ordinarily sounds only in contract. • However, the doctrine does not bar all tort claims arising out of a contractual setting. A party states a tort claim when the duty allegedly breached is independent of the contractual undertaking and the harm suffered is not merely the economic loss of a contractual benefit. In this analysis, the nature of the injury most often determines which duty or duties are breached. • If the injury would give rise to liability independent of the fact that a contract exists between the parties, the plaintiff’s claim may also sound in tort. • The economic loss rule does not preclude tort recovery if the injury involves physical harm to the ultimate user or consumer or other property. The foregoing summary is adapted from the text (which contains extensive citations of Texas law) of Shakeri v. ADT Security Services, Inc., No. 15-10539, slip op. at 10-11 (5th Cir. Mar. 7, 2016) (per curiam). In that case: • The owners of a jewelry store sued an alarm-system company for damages after the store were robbed at gunpoint and one of the owners was severely beaten and tasered; the alarm system's panic button failed, allegedly because of faulty workmanship by a technician working for the alarm-system company. See id., slip op. at 4. The owners pleaded that the technician failed to properly repair the alarm system, left it in a condition where it did not work, yet told the owner that the alarm was in working order. See id., slip op. at 13 n.2. • The appeals court held that the district court had improperly dismissed the owners' negligence claim against the alarm-system company because the owner's physical injuries were not covered by the economic loss rule. (The appeals court affirmed dismissal of the plaintiffs' other tort claims. The district court also had limited the plaintiffs' breach-of-contract damages to$1,000 in accordance with a damages-cap provision; the Fifth Circuit did not address that ruling, as discussed [BROKEN LINK: ShakeriDamagesCap]. )

See also Restatement (Third) of Torts: Liab. for Econ. Harm § 3 cmt. b (Am. Law Inst. 2012) (“An actor whose negligence causes personal injury or physical harm to the property of another can be held liable in tort regardless of whether the negligence occurs in the performance of a contract between the parties.”), quoted in Shakeri, slip op. at 11.

For more on the economic-loss doctrine, see Economic Loss Doctrine in All 50 States (MWL-Law.com 2013).

### 14.30 Exclusive dealing (notes only)

Exclusivity arrangements ideally should include limitations on time, place and manner:

• a "sunset" provision stating that the exclusivity ends (and perhaps the entire agreement ends) after a certain period if not extended:
• by agreement;
• [BROKEN LINK: UnilateralExtensionCls] if the other party does not opt out;
• [BROKEN LINK: EvergreenCls], if neither party opts out.
• time – , place, and subject matter.

### 14.31 Exclusive-rights provisions

Exclusive-rights grants can limit your flexibility, possibly making it difficult or impossible to do similar business with other companies. A grant of exclusivity can also make your company fatally unattractive to a potential acquirer or merger partner.

Tip: Consider trying to limit any grant exclusivity by putting time- or geographic limits on it, and/or by requiring The Other Side to hit periodic performance targets to maintain exclusivity.

### 14.32 Export controls

Some key takeaways:

The export-controls laws in the U.S. are a bit complicated, but it's extremely important for companies to sort them out. Here are a couple of examples of "exports" that might be surprising:

• Disclosure of controlled technical data to a foreign national in the U.S. can constitute an "export" that requires either a license or a license exception.
• Emailing controlled technical data to a U.S. citizen located in a foreign country could constitute an export of the data.

Failure to get an export license (or come within a license exception) can lead to all kinds of trouble, including imprisonment for up to ten years; millions of dollars in fines and civil penalties; and denial of export privileges.

For example: A 71-year old emeritus professor at the University of Tennessee was sentenced to four years in prison for export-controls violations. The professor had been doing research, under an Air Force contract, relating to plasma technology designed to be deployed on the wings of remotely-piloted drone aircraft. [link] Apparently, his crime was to use, as part of the project staff, two graduate students who were Iranian and Chinese nationals respectively. It probably didn't help that he was found to have concealed those graduate students' involvement from the government. See the Justice Department press release announcing his indictment, which has more details; also, the DOJ press release announcing his conviction.

For additional information, see the Commerce Department's Introduction to Commerce Department Export Controls [link] (which has links to information about State Department export controls as well).

### 14.33 Fraud allegations

#### 14.33.1 Motivation: "They lied!" is a go-to phrase for trial counsel

When a big contract fails, trial counsel will pretty much always try hard to find opportunities to accuse the other side of having misrepresented facts. Why? Because it can work, sometimes spectacularly well. Jurors and even judges might not understand the nuances of the dispute, but they will definitely undertand the accusation that "they lied!"

Consequently, every contract drafter should be mindful of the possibility that if a serious dispute were ever to arise concerning the contract, the other side might claim that the drafter's client engaged in fraudulent behavior. We see this in the civil complaint filed by the state of Oregon against Oracle, in which the second paragraph said, in its entirety (with extra paragraphing added for readability):

Oracle lied to the State about the “Oracle Solution.”

Oracle lied when it said the “Oracle Solution” could meet both of the State’s needs with Oracle products that worked “out-of-the-box.”

Oracle lied when it said its products were “flexible,” “integrated,” worked “easily” with other programs, required little customization and could be set up quickly.

Oracle lied when it claimed it had “the most comprehensive and secure solution with regards to the total functionality necessary for Oregon.”

As another example, consider BSkyB Ltd. v. HP Enterprise Services UK Ltd., [2010] EWHC 86 (TCC). In that case:

• British Sky Broadcasting ("Sky") contracted with EDS to develop a customer relationship management (CRM) software system.
• Things didn't go as planned, and Sky eventually filed suit.
• In the (non-jury) trial, the judge concluded that EDS had made fraudulent misrepresentations when one of EDS's senior UK executives, wanting very much to get Sky's business, lied to Sky about EDS's analysis of the amount of elapsed time needed to complete the initial delivery and go-live of the system. See id. at ¶ 2331 and ¶¶ 194-196.
• The judge also concluded that during subsequent talks to modify the contract, EDS made additional misstatements that didn't rise to the level of fraud, but still qualified as negligent misrepresentations. See id. at ¶ 2336.
• A limitation-of-liability clause in the EDS-Sky contract capped the potential damage award at £30 million.
• By its terms, though, that limitation did not apply to fraudulent misrepresentations; the judge held that the limitation didn't apply to negligent misrepresentations either. See id. at ¶¶ 372-389.

(One of the most interesting aspect of the judge's opinion, it seems to me, is its detailed exposition of the facts, which illustrate the ‘sausage factory' by which technology deals sometimes get made — and how even just one vendor representative can make a deal go terribly wrong for his employer.)

In early June 2010, EDS reportedly agreed to pay Sky some US$460 million — more than four times the value of the original contract — to settle the case. See Jaikumar Vijayan, EDS settles lawsuit over botched CRM project for$460M, Computerworld, June 9, 2010.

Still another example is Waste Management, Inc.'s lawsuit against SAP over a failed enterprise resource planning (ERP) software implementation, reported to have settled for an undisclosed sum. At the heart of Waste Management's case was its allegation, not just that SAP had breached the contract, but that it was guilty of fraudulent inducement, fraud, and negligent misrepresentation. See Chris Kanaracus, SAP, Waste Management settle lawsuit, Computerworld, May 3, 2010.

#### 14.33.2 The threat of punitive damages and rescission raises the stakes

If a customer's lawyers can prove fraud by the vendor, then the customer may be able to recover not just ‘benefit of the bargain' contract damages, but possibly punitive damages as well. This is important because "punis" ordinarily aren't available in garden-variety contract cases. For that reason, even when evidence of fraud is weak, the mere threat of punitive damages can give the customer more leverage in making settlement demands.

A fraud claim also raises the spectre of rescission, that is, unwinding the transaction and putting the parties back at Square One, which conceivably could be equally scary to the claim's target.

#### 14.33.3 Fraud claims can be expensive to defend against

A fraud claim might well be more expensive to defend against than would a garden-variety breach-of-contract claim. That's because the defendant's intent is relevant to the fraud inquiry, which opens up all kinds of possibilities for requests by the claimant for costly discovery.

#### 14.33.4 In California, mere negligent misrepresentation counts as "fraud"

"Under California law, negligent misrepresentation is a species of actual fraud and a form of deceit." Wong v. Stoler, No. A138270, part III-B(2), slip op. at 12 (Cal. App. May 26, 2015) (designated as not for publication; citing cases).

### 14.34 Good cause

Executives' employment agreements commonly prohibit the employer from terminating the employment except for "cause," which is typically defined with great care. See, e.g., the 2012 employment agreement between Facebook and its chief operating officer Sheryl Sandberg.

In a Seventh Circuit case, the contract in suit defined good cause, allowing a dairy-equipment to terminate a dealership, as "Dealer’s failure to comply substantially with essential and reasonable requirements imposed upon Dealer by BouMatic." Tilstra v. BouMatic LLC, 791 F.3d 749, 751 (7th Cir. 2015) (Posner, J). In that case, the manufacturer eliminated the dealer's territory, under a clause giving the manufacturer the right to adjust territory boundaries, in order to force the dealer to sell out to another dealer. The jury concluded that the manufacturer had effectively terminated the dealership, but without good cause, and awarded damages; the appeals court affirmed judgment on the jury's verdict.

### 14.35 Good faith

#### 14.35.1 Legal background

"The doctrine [of good faith and fair dealing] is invoked in practically every type of commercial contract dispute, including insurance, employment contracts, franchise and dealer contracts, leases, and construction disputes." Marcia G. Madsen and Michelle E. Litteken The Implied Duty of Good Faith & Fair Dealing in Government & Commercial Contracts — An Age-Old Concept in Need of an Update? at 6 (MayerBrown.com 2014.)

In many — but not all — U.S. jurisdictions, and in Canada, every contract includes an implied covenant of good faith and fair dealing. See, e.g., the following:

• Uniform Commercial Code § 1-304, which imposes a duty of good faith on all contracts and duties within the UCC;
• UCC § 2-103(b), which defines good faith (in the case of a merchant) as "honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade";
• Restatement of Contracts (Second) § 205, which states: "Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement";
• For Canada: Bhasin v. Hrynew, 2014 SCC 71 [2014] 3 S.C.R. 495 (Canada).

UK courts, on the other hand, have rejected the notion of a general duty of good faith and fair dealing, on grounds that "if a general principle of good faith were established it would be invoked as often to undermine as to support the terms in which the parties have reached agreement." Paul Davis, English Court Of Appeal Rejects The "Organizing Principle Of Good Faith" (Mondaq.com 2016), quoting MSC Mediterranean Shipping Company S.A. v. Cottonex Anstalt, [2016] EWCA Civ 789 ¶ 45; see also Claire Haynes, What Does A Duty To Act In Good Faith Mean? (Mondaq.com 2017).

#### 14.35.2 Business rationale for good-faith commitment

In Bhasin v. Hrynew, 2014 SCC 71 [2014] 3 S.C.R. 495, Canada's supreme court explained the business rationale for implying an obligation of good faith:

[60] Commercial parties reasonably expect a basic level of honesty and good faith in contractual dealings. While they [the parties] remain at arm’s length and are not subject to the duties of a fiduciary, a basic level of honest conduct is necessary to the proper functioning of commerce.

• The growth of longer term, relational contracts that depend on an element of trust and cooperation clearly call for a basic element of honesty in performance,
• but, even in transactional exchanges, misleading or deceitful conduct will fly in the face of the expectations of the parties[.]

[61] … [E]mpirical research suggests that commercial parties do in fact expect that their contracting parties will conduct themselves in good faith[.]

It is, to say the least, counterintuitive to think that reasonable commercial parties would accept a contract which contained a provision to the effect that they were not obliged to act honestly in performing their contractual obligations.

Id. at ¶¶ 60-61 (citations omitted, bracketed paragraph numbers in original, extra paragraphing and bullets added).

#### 14.35.3 Examples of bad faith

The Restatement lists examples of conduct that would breach the duty of good faith:

A complete catalogue of types of bad faith is impossible, but the following types are among those which have been recognized in judicial decisions:

• evasion of the spirit of the bargain,
• lack of diligence and slacking off,
• willful rendering of imperfect performance,
• abuse of a power to specify terms, and
• interference with or failure to cooperate in the other party’s performance.

Restatement of Contracts (Second) § 205, comment d, quoted in Marcia G. Madsen and Michelle E. Litteken The Implied Duty of Good Faith & Fair Dealing in Government & Commercial Contracts — An Age-Old Concept in Need of an Update? at 1 (MayerBrown.com 2014).

See also, e.g., Steven J. Burton, Good Faith in Articles 1 and 2 of the U.C.C.: The Practice View, 35 Wm. & Mary L. Rev. 1533 (1994),

In a 2016 decision, Massachusetts's highest court upheld a trial court's award of $44 million in damages and interest against a financial company's CEO on grounds that the CEO had violated the implied covenant of good faith and fair dealing by failing to pay an investor and friend who had staked the CEO to more than$650,000 to buy additional shares in the company. See Robert and Ardis James Foundation v. Meyers, 474 Mass. 181 (2016), reversing 87 Mass. App. Ct. 85 (2015).

#### 14.35.4 Should a contract try to define good faith?

The [U.S.] Supreme Court has noted that:

While most States recognize some form of the good faith and fair dealing doctrine, it does not appear that there is any uniform understanding of the doctrine's precise meaning. The concept of good faith in the performance of contracts is a phrase without general meaning (or meanings) of its own.

Of particular importance here, while some States are said to use the doctrine to effectuate the intentions of parties or to protect their reasonable expectations, other States clearly employ the doctrine to ensure that a party does not violate community standards of decency, fairness, or reasonableness.

Northwest, Inc. v. Ginsberg, 134 S. Ct. 1422, 1431, at part III (2014) (internal quotation marks, alteration marks, and extensive citations omitted).

Parties' use of a good-faith standard, though, itself usually results from their inability (or unwillingness to invest the time and money) to compile an exhaustive list of what will constitute a particular type of breach. Two commentators have proposed that:

… "good faith" is interpreted by the law as meaning honesty in fact and the observance of reasonable commercial standards of fair dealing. We have suggested that the parties agree to such a standard when they wish to harness the benefit of a court’s hindsight and to address the risk that the debtor will game specific events of default. It is tempting to argue, nonetheless, that this vague standard of good faith—standing alone—is simply not verifiable or is too uncertain.

Robert E. Scott and George G. Triantis, Anticipating Litigation in Contract Design, 115 Yale L.J. 814, 852 (2006) (footnotes omitted). The authors discuss several examples in which this is the case, such as acceleration rights in loan agreements; franchisee obligations; force majeure; and liquidated damages. See id. at 852-56.

#### 14.35.5 Good faith in performance, not negotiation, of the contract

The implied duty of good faith and fair dealing will normally apply (if at all) to the performance and enforcement of an agreement, not to negotiation of the agreement (unless the agreement obligates one or both parties to negotiate in good faith). See generally Marcia G. Madsen and Michelle E. Litteken The Implied Duty of Good Faith & Fair Dealing in Government & Commercial Contracts — An Age-Old Concept in Need of an Update? at 5 (MayerBrown.com 2014).

#### 14.35.6 Limitations on the duty of good faith

The Supreme Court of Canada discussed some of the limitations of the duty of good faith (in Canadian law) in the important case of Bhasin v. Hrynew, 2014 SCC 71 [2014] 3 S.C.R. 495:

[65] … While “appropriate regard” for the other party’s interests will vary depending on the context of the contractual relationship, it does not require acting to serve those interests in all cases. It merely requires that a party not seek to undermine those interests in bad faith.

This general principle has strong conceptual differences from the much higher obligations of a fiduciary. Unlike fiduciary duties, good faith performance does not engage duties of loyalty to the other contracting party or a duty to put the interests of the other contracting party first.

[70] The principle of good faith must be applied in a manner that is consistent with the fundamental commitments of the common law of contract which generally places great weight on the freedom of contracting parties to pursue their individual self-interest.

In commerce, a party may sometimes cause loss to another — even intentionally — in the legitimate pursuit of economic self-interest[.] Doing so is not necessarily contrary to good faith and in some cases has actually been encouraged by the courts on the basis of economic efficiency[.]

The development of the principle of good faith must be clear not to veer into a form of ad hoc judicial moralism or “palm treeˮ justice. In particular, the organizing principle of good faith should not be used as a pretext for scrutinizing the motives of contracting parties.

Id. (citations omitted, extra paragraphing added).

### 14.36 Government subcontracting

Depending on the law, a subcontractor under a government contract could be subject to specific requirements imposed by statute or regulation such as:

• equal-opportunity reporting requirements;
• affirmitive-action obligations;
• prohibitions of various employment practices;
• restrictions of various kinds, e.g., on assignments.

See, e.g., Robin Shea, Applicant tracking and the EEOC: "You can SUE us for that?" (EmploymentAndLaborInsider.com 2016). For that reason, a disclaimer might be in order. [TO DO: NEED CITES]

Entire books have been written on the issues arising from government subcontracting, of course; this disclaimer is intended to try to rule out the need to understand those issues.

### 14.37 Gross negligence

#### 14.37.1 Language origin

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

Sub­div­i­sion (b) reminds drafters to consider requiring clear and convincing evidence of gross negligence, the same standard as is required in many jurisdictions for proof of fraud. [DCT TO DO: CITATIONS NEEDED]

Drafters can also consider including [TODO: SeriousAccusationToProve].

Contracts sometimes use the term gross negligence, as distinct from ordinary negligence. For example, a contractual limitation on a party's liability for negligence might include a carve-out saying that the limitation will not apply if the party is grossly negligent. Unfortunately, the difference between negligence and gross negligence may be hard to assess in practice.

#### 14.37.3 Texas-law definition of gross negligence

A Texas statute, in the context of establishing prerequisites for awards of punitive damages, sets out a far-more restrictive definition of gross negligence, added as part of a far-reaching 2003 tort-reform package enacted by the legislature. See Tex. Civ. Prac. & Rem. Code § 41.001(11), discussed in Robert J. Witte and James G. Ruiz, House Bill 4 – Article 13 – Damages, J. Tex. Consumer L. 33 (date not available). The definition is used in § 41.003 of the Code, which conditions an award of punitive damages on a showing, by clear and convincing evidence, of fraud, malice, or gross negligence:

(11) "Gross negligence" means an act or omission:

(A) which when viewed objectively from the standpoint of the actor at the time of its occurrence involves an extreme degree of risk, considering the probability and magnitude of the potential harm to others; and

(B) of which the actor has actual, subjective awareness of the risk involved, but nevertheless proceeds with conscious indifference to the rights, safety, or welfare of others.

#### 14.37.4 California-law definition of gross negligence

The California supreme court, in its 2007 Janeway opinion, noted that "[g]ross negligence long has been defined in California and other jurisdictions as either a want of even scant care or an extreme departure from the ordinary standard of conduct." City of Santa Barbara v. Janeway, No. 1111681, slip op. at 6, 161 P.3d 1095 (Cal. 2007) (internal quotation marks and citations omitted, emphasis added). The supreme court held that in cases of gross negligence, advance releases of liability are unenforceable as being against public policy; the court affirmed a judgment that release language in a contract did not shield a defendant from an allegation of gross negligence in the drowning death of a disabled teen-ager at a city pool.

#### 14.37.5 Federal-law definition of gross negligence

In the litigation over the notorious "BP oil spill" in the Gulf of Mexico, a federal district court wrote at length about the definition of gross negligence in the context of the (federal) Oil Pollution Act of 1990 and how BP was guilty of gross negligence; the court held that gross negligence was less than reckless conduct (much as in the California definition discussed above). See In re: Oil Spill by the Oil Rig “Deepwater Horizon” in the Gulf of Mexico, on April 20, 2010, paragraphs 481 et seq., esp. 494 & n.180, 495 (E.D. La. Sept. 4, 2014) (findings of fact and conclusions of law).

### 14.38 Master Agreements

#### 14.38.1 Business purpose of a master-agreement acknowledgement

Companies often enter into master agreements that don't create any obligations of their own, but do set up a framework for any agreed transactions. Such a master agreement can be useful in business by allowing parties to pre-negotiate the "legal T&Cs" just one time; the parties can later re-use those T&Cs in future transactions by signing short-form contracts that (ideally) incorporate the master agreement by reference and set forth any transaction-specific terms.

#### 14.38.2 Some specific terms to consider for master agreements

• Pricing terms are sometimes pre-negotiated in master agreements. When that happens, it is useful also to include an agreed mechanism for periodically adjusting the pricing, so that the supplier won't potentially be stuck with outdated pricing long after the deal was struck.
• [BROKEN LINK: EvergreenCls] and [BROKEN LINK: UnilateralExtensionCls] can also be useful, but should be approached with caution.
• A [BROKEN LINK: TerminationAtWill] (with suitable "fences" around it) can provide parties with a way to bail out of a master agreement that's no longer suitable.

#### 14.38.3 A company can negotiate a master agreement for its corporate "family"

Companies sometimes want to negotiate pricing and other terms & conditions on behalf of their affiliates; that can help to reduce the transaction costs that would attend negotiation of individual contracts between each affiliate and the same counterparty. An easy way to do this is to pre-negotiate a "master" agreement that can be incorporated by reference into other contracts.

EXAMPLE: a company signs a master purchase agreement. It wants its affiliates to be able to make purchases from the seller, on the same negotiated terms and conditions and/or at the same negotiated pricing. By having the master agreement say just that, the company can ensure that its affiliates won't have to negotiate their own deals with the seller. (Of course, any given affiliate might want to negotiate its own deal.)

In that situation, consider doing the following:

• The parent company signs a master agreement with stated pricing and other T&Cs.
• The master agreement states that either party and its affiliates can utilize the master agreement by entering into a short-form agreement (for example, a purchase order) that incorporates the master agreement by reference.
• If a buyer's subsidiary places a purchase order with the seller, then the subsidiary doesn't become a party to the master agreement per se; it's a party only to the contract formed by its own purchase order.
• The purchasing subsidiary is a third-party beneficiary of the master agreement, but only in the limited sense that it has the right to place orders at the stated pricing and under the stated T&Cs.
• The purchasing subsidiary's parent company avoids being liable for the subsidiary's financial obligations under the subsidiary's purchase orders (unless of course the seller negotiates a guarantee from the parent). That's something the parent company's lawyers and finance people will usually want.
• If a lawsuit should come to pass over a particular purchase order, there's little room for satellite disputes about who has standing to sue whom and who the necessary parties are.

#### 14.38.4 Pro tip: Have "subsidiary" contracts expressly state that the master agreement controls

CAUTION: When using a master agreement, it's best for any subsequent contracts to expressly state that the master agreement's terms are to control. Consider See CEEG (Shanghai) Solar Science & Tech. Co. v. LUMOS LLC, 829 F.3d 1201 (10th Cir. 2016), affirming No. 14-cv-03118 (D. Colo. May 29, 2015). In that case:

A Chinese manufacturer of solar-panel products entered into a co-branding agreement with a U.S. retailer. That agreement called for the retailer to order solar-panel products from the manufacturer at stated prices. The co-branding agreement contained an arbitration provision, which expressly required that arbitration proceedings be in English.

• The retailer also entered into specific written sales contracts with the manufacturer; the sales contract contained an arbitration provision, but that provision did not require English-language arbitration.
• The retailer's CEO testified, and the U.S. trial court accepted, that the parties had intended for the co-branding agreement to be a "master" agreement that would govern all sales contracts.
• Apparently, though, neither the co-branding agreement nor the sales contract in question actually said referred to the master agreement (the courts' opinions were not specific on this point).
• The manufacturer and the retailer communicated exclusively in English.
• One shipment of goods had quality problems; the retailer refused to pay. After negotiations went nowhere, the manufacturer filed a demand for arbitration with the Chinese arbitration institution designated in the earlier, co-branding agreement.
• The Chinese arbitration institution sent the U.S. retailer a notice of arbitration, in Chinese. The U.S. retailer did not realize what the notice of arbitration was. Consequently, the retailer did not realize that under the agreed arbitration rules, a 15-day clock was ticking on the retailer's right to participate in selecting the members of the arbitration panel. That deadline passed, and the panel members were selected without input from the retailer.
• The arbitration panel ruled that the so-called master agreement did not apply and that the sales contract controlled. The arbitration panel awarded damages to the manufacturer, which then sought to enforce the award against the retailer in a U.S. court.

The Colorado district court ruled that, contrary to the decision of the arbitration panel, the testimony of the retailer's CEO established that the co-branding agreement had indeed been a "master" agreement; this meant that the Chinese-language notice of arbitration had been insufficient, and that in turn meant that, under the New York Convention, the court could decline to enforce the damages award.

Citing the virtual unreviewability of arbitration awards even when grounded on errors of law, the Tenth Circuit chose not to address the master-agreement issue:

[O]ur holding does not rely on the conclusion that the [sales contract] was bound by the terms of the [co-branding agreement].

Rather, the [co-branding agreement] is one piece of evidence demonstrating that the parties understood their relationship would proceed in English,

and that [the manufacturer] suddenly deviated from that understanding and practice when providing notice.

Id., 829 F.3d at 1207 n.2 (emphasis and extra paragraphing added).

DRAFTING LESSON: It's best if purchase orders, statements of work, etc., expressly identify a "master" agreement and state that the master agreement applies.

#### 14.38.5 Should a master agreement override purchase orders, etc., no matter what?

A master agreement might state that its terms apply to all transactions between the parties, even if the parties use a purchase order, statement of work, etc., that doesn't refer to the master agreement. This was suggested in a LinkedIn comment (group membership required) by attorney Michael Little.

I'm on the fence about that one:

• In one sense, Mike's suggestion might be safer, at least in the short term, in that the parties (and thus the client) wouldn't have to remember to incorporate the master agreement by reference.
• On the other hand, it might not be ideal for parties that did a lot of business together in different divisions, geographic territories, etc.
• And this practice could lead to parties, long afterwards, inadvertently incorporating a forgotten "zombie" master agreement by reference, to unclear effect.

My own preference is often to be silent on this point in the master agreement, so that the parties will have to remember to expressly incorporate the master agreement by reference. My guess is that they'll be more likely to remember to do that than to research whether any previously-negotiated master agreement still applies. But this is a judgment call, to be made based on the particular circumstances and the client's desires.

#### 14.38.6 Danger of a master agreement's setting the bar too high

In an Eighth Circuit case, the parties' master services agreement set the bar too high for services agreements, and as a result the master agreement was found not to apply. The master agreement prescribed the exact language that a statement of work was required to include to incorporate the master agreement by reference:

Barkley shall performfor [Gabriel Brothers] certain services which shall be agreed to by the parties on a project-by-project basis . . . . The Services agreed to for each Project shall be designated in a written Statement of Work (“Statement of Work”).

Each Statement of Work shall contain the following provision:

“This Statement of Work is incorporated into, and made a part of, that certain Master Services Agreement . . . between the parties dated [October 5,] 2012, which Agreement governs the relationship of the parties. All terms and conditions provided in the Agreement shall apply to this Statement of Work.”

Barkley Inc. v. Gabriel Bros. Inc., 829 F.3d 1030, 1034-35 (8th Cir. 2016) (extra paragraphing added, alteration marks by the court).

As to the relevant statement of work:

• The service provider began working while the parties were negotiating the statement of work.
• At some point the customer pulled the plug by invoking a termination-at-will provision in the master agreement — and at that point the parties had not signed the statement of work; consequently, there was no signed statement of work containing the prescribed incorporation-by-reference language.
• The provider sued the customer; it alleged that, because the customer failed to pay for the work already started for the (unsigned) statement of work, the customer thereby breached the master agreement.

The district court granted partial summary judgment in favor of the customer, on grounds that because the statement of work was never signed, the specific requirements of the master agreement had not been met, so there was no breach of that agreement. The appeals court affirmed:

The Agreement states that "[t]he services agreed to for each Project shall be designated in a written Statement of Work" and that "[e]ach Statement of Work shall contain" the Agreement's incorporation clause. The use of the word "shall" indicates that a written statement of work is required and that any statement of work must contain the incorporation clause. Accordingly, because the alleged February 21, 2013, draft 2013 statement of work was not part of a written contract and the document did not contain the Agreement's incorporation clause, the district court did not err in granting summary judgment to Gabriel Brothers on Barkley's breach-of-the-Agreement claim.

Id., 829 F.3d at 1038-39 (alteration marks by the court). In the court below, though, a jury held the customer liable for damages for breaching a subsequent [oral?] agreement that apparently wasn't "under" the master agreement; the appeals court affirmed judgment on that verdict.

#### 14.38.7 Should a master agreement specify the form to be used?

In a thoughtful LinkedIn group discussion comment (group membership required), attorney Michael Little suggested that a master agreement should "specify" the form of purchase orders, statements of work, etc., by including the form(s) in an exhibit.

My own view is different: It can be useful to include such a form as an example, but I don't like to specify that use of that form is required. That's because, in a particular transaction, the parties might thoughtlessly (or intentionally) use a different form instead of one matching the exhibit. That, in turn, might give rise to a dispute over whether the master agreement's terms applied to that transaction, just as happened in the Barkley v. Gabriel Bros. case discussed in section 14.38.6.

#### 14.38.8 A master agreement might contain an entire-agreement clause

For an example of a master agreement with an entire-agreement clause, see Grandoe Corp. v. Gander Mountain Co., 761 F.3d 876 (8th Cir. 2014) (affirming denial of defendant's motion for judgment as a matter of law). In that case:

• The plaintiff was a manufacturer of gloves; the defendant was a national retailer of outdoor sporting goods.
• The manufacturer and the retailer entered into a written contract (the "RAC") that established percentage discounts and a few other terms that would apply to the retailer's oral orders for gloves.
• The written contract did not obligate either party to sell or buy gloves.

The court noted that:

… notwithstanding the RAC's integration clause, it does not appear that the parties intended the RAC to be the final expression of their agreement.

Rather, the RAC explicitly contemplates a future contract for the sale of gloves, and it does not specify that such a contract must be in writing.

The RAC's integration clause itself reflects this understanding: it states that the RAC “is the entire agreement between the parties with respect to the subject matter of this Agreement” (emphasis added), but the subject matter of the RAC does not include the actual sale or purchase of gloves.

If that were the case, then no gloves would ever have been exchanged, since the RAC does not include a quantity term.

Id. at 887 (emphasis by the court, extra paragraphing added).

#### 14.38.9 Further reading on master agreements

• [TODO: EntireAgreement]
• [TODO: IncorpByRefDefn], especially [BROKEN LINK: IncorpByRefDefnClearIntent]

### 14.39 Fiduciary duty

#### 14.39.1 Safe-harbor language can sometimes contractually eliminate fiduciary duties

See Dieckman v. Regency GP LP, No. 11130-CB (Del. Ch. Mar. 29, 2016), where the court dismissed a complaint, by a former limited partner, that the general partner breached its fiduciary duty. The limited-partnership agreement contained a (typical) safe-harbor provision that expressly authorized certain potentially-conflicted transactions as long as any one of several stated procedures was followed:

(a) Unless otherwise expressly provided in this Agreement . . ., whenever a potential conflict of interest exists or arises between the General Partner or any of its Affiliates, on the one hand, and the Partnership, any Group Member or any Partner, on the other,

any resolution or course of action by the General Partner or its Affiliates in respect of such conflict of interest shall be permitted and deemed approved by all Partners, and shall not constitute a breach of this Agreement . . . or of any duty stated or implied by law or equity,

if the resolution or course of action in respect of such conflict of interest is

(i) approved by Special Approval [defined elsewhere as approval by a Conflicts Committee of directors of the corporate general partner],

(ii) approved by the vote of a majority of the Common Units (excluding Common Units owned by the General Partner and its Affiliates),

(iii) on terms no less favorable to the Partnership than those generally being provided to or available from unrelated third parties or

(iv) fair and reasonable to the Partnership, taking into account the totality of the relationships between the parties involved (including other transactions that may be particularly favorable or advantageous to the Partnership).

Id. at part I.B, text accompanying n.2 (footnote omitted, extra paragraphing added). The chancery court held that this provision, and the defendants' compliance with one of the safe-harbor procedures, eliminated the defendants' putative fiduciary duty.

### 14.40 Flip insurance

Flip insurance is (my term for) a type of clause sometimes seen in, for example, asset-sale agreements. Such a clause provides that if the buyer sells the purchased asset at a higher price within a stated period of time (often one year), then the seller is entitled to a share of the difference.

#### 15.1.4 Three reasons a court might not give effect to a backdated date

Suppose that you and your counterparty agree to date a contract "to be effective as of" a past date. That doesn't mean a court will necessarily give effect to that agreed past date if, for example:

• the evidence does not indicate that the parties had agreed to the material terms of the agreement on or before the as-of date; or
• the contract language does not unambiguously state that the parties intend the agreement to have retroactive effect; or
• an unrelated third party's rights and obligations might be affected by the backdating.

See, e.g., FH Partners, LLC v. Complete Home Concepts, Inc., 378 S.W.3d 387 (Mo. App. 2012) (reversing in part and remanding summary judgment), analyzed in Brian Rogers, Backdating Contracts Is Tricky Business (TheContractsGuy.net 2013: https://goo.gl/tXUkua).

#### 15.1.5 Don't knowingly write, or accept, an incorrect date as your "date signed"

Many contracts' signature blocks include spaces in which the signers are expected to hand-write the signature date, or in which a date is already printed. To avoid later questions about possible deceptive intent, a signer should always write the actual signature date; if an incorrect date is already printed in the signature block, the signer should insist that the incorrect date be changed, or perhaps manually correct the date in pen and ink, initialing the change.

### 15.2 Round-trip sales transactions

Round-trip sales transactions are those in which, in essence, one company says to another, You'll buy my stuff, but I'll buy enough of yours to cover your cost. (It's sometimes referred to as "buying revenue.") This type of deal can be a species of securities fraud, and can get companies and individuals sued by the SEC and/or by securities plaintiffs.

The SEC explained the basics of round-trip transactions in a 2005 press release charging Time Warner (then AOL) with the practice, a charge that eventually cost Time Warner nearly $3 billion (extra paragraphing has been added for readability): [AOL] effectively funded its own online advertising revenue by giving the counterparties the means to pay for advertising that they would not otherwise have purchased. To conceal the true nature of the transactions, the company typically structured and documented round-trips as if they were two or more separate, bona fide transactions, conducted at arm's length and reflecting each party's independent business purpose. The company delivered mostly untargeted, less desirable, remnant online advertising to the round-trip advertisers, and the round-trip advertisers often had little or no ability to control the quantity, quality, and sometimes even the content of the online advertising they received. Because the round-trip customers effectively were paying for the online advertising with the company's funds, the customers seldom, if ever, complained. AOL / Time Warner almost immediately settled with the SEC for$300 million; in 2009 it settled a related class-action lawsuit for $2.65 billion. ### 15.3 Hidden side-letter agreements Signing a side letter agreement, and then concealing it from the accountants, can lead to a prison sentence for securities fraud. In this context, a "side letter" is, in essence a secret annex to a sales contract, allowing the buyer to cancel the transaction. That means the deal is a sham, because the seller does not have a binding contract and cannot enforce a right to payment. If the seller reports the revenue as part of its periodic financial reporting, it likely will constitute securities fraud, and both the vendor and the customer can get in serious trouble for it. Here are some examples from the news: • The former CEO of McKesson Corporation was sentenced to ten years in prison for concealing side letters, as well as for backdating contracts (SFGate.com: https://goo.gl/vcy4eM). • A Kansas City bank president was convicted of bank fraud for signing a side letter in connection with a questionable loan to a real-estate developer, but then concealing the side letter from bank examiners. See Feingold v. United States, 49 F.3d 437 (8th Cir. 1995) (affirming conviction). • In one case, the SEC didn't just go after a vendor that used a secret side letter, it also filed a civil lawsuit against an executive of a customer that made a sham$7 million purchase. According to the SEC's complaint, the customer executive not only knew that the vendor planned to fraudulently misstate its financial results, he even advised the vendor's sales people how to conceal the cancellation right from the vendor's finance department (SEC.gov: https://goo.gl/8sfMWL).

For additional information, see What to Do When You Find the Side Letter… (BorisFeldman.com 2001: https://goo.gl/ehJbzm).

### 15.4 Price-fixing and other unlawful collusion

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.

For 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 in four airline executives being sentenced to prison terms in the U.S. (NBCNews.com 2011: https://goo.gl/UQQTKH) (Justice.gov 2007: https://goo.gl/i75Knn). Don't forget that prosecutors might reach for the low-hanging fruit — instead of trying to prove up an antitrust violation, they might bring charges of obstruction of justice (akin to prosecuting Al Capone for tax evasion, or Martha Stewart for making a false statement to the SEC). For example, in December 2010 a British executive, after being extradited to the U.S., was sentenced to 18 months in prison and a$25,000 fine — not for price fixing itself, but for conspiring to obstruct a price-fixing investigation (Justice.gov 2010: https://goo.gl/5ch725).

For more information about unlawful collusive practices, the Department of Justice has a useful antitrust primer that explains many of the relevant concepts (Justice.gov: https://goo.gl/vMMb7m).

### 15.5 "Bribing" foreign "officials"

In recent years the U.S. Government has been enforcing the Foreign Corrupt Practices Act (FCPA) with increasing vigor, resulting in an aggregate of almost $1.8 billion in fines in 2010 alone. For example, former KBR CEO Albert "Jack" Stanley was sentenced to 30 months in prison and a restitution payment of$10.8 million. Stanley pled guilty to conspiracy to bribe Nigerian officials to obtain construction contracts for KBR.

Here's how the Department of Justice describes the basic workings of the FCPA, with bulleting added: [link]:

… the anti-bribery provisions of the FCPA prohibit • the willful use of the mails or any means of instrumentality of interstate commerce • corruptly • in furtherance of any offer, payment, promise to pay, or authorization of the payment of money or anything of value to any person, • while knowing that • all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to a foreign official • to influence the foreign official in his or her official capacity, induce the foreign official to do or omit to do an act in violation of his or her lawful duty, or to secure any improper advantage • in order to assist in obtaining or retaining business for or with, or directing business to, any person.

The Justice Department also has a useful on-line guide resource guide about the FCPA (Justice.gov: https://goo.gl/PpAFZU).

Some key takeaways:

The export-controls laws in the U.S. are a bit complicated, but it's extremely important for companies to sort them out. Here are a couple of examples of "exports" that might be surprising:

• Disclosure of controlled technical data to a foreign national in the U.S. can constitute an "export" that requires either a license or a license exception.
• Emailing controlled technical data to a U.S. citizen located in a foreign country could constitute an export of the data.

Failure to get an export license (or come within a license exception) can lead to all kinds of trouble, including imprisonment for up to ten years; millions of dollars in fines and civil penalties; and denial of export privileges.

For example: A 71-year old emeritus professor at the University of Tennessee was sentenced to four years in prison for export-controls violations (Bloomberg.com 2012: https://goo.gl/gfvGhR) (FBI.gov 2012: https://goo.gl/jtZR7C). The professor had been doing research, under an Air Force contract, relating to plasma technology designed to be deployed on the wings of remotely-piloted drone aircraft. Apparently, his crime was to use, as part of the project staff, two graduate students who were Iranian and Chinese nationals respectively. It probably didn't help that he was found to have concealed those graduate students' involvement from the government.

For additional information, see, e.g., a University of Southern California primer about export controls (USC.edu: https://goo.gl/EjnztS) and a slide deck from an Association of Corporate Counsel presentation (ACC.com 2003: https://goo.gl/qN7diu).

## 16 Reference materials

### 16.1 Honeywell Standard Purchase Order Terms and Conditions for Goods and Services

Reformatted from the PDF document at http://www.schmiedecorp.com/wp-content/uploads/2015/02/4-Honeywell-General-Purchase-Order-Provisions-GPOP-v.02-12.pdf

1. Acceptance - Order of Precedence - Modification

This Purchase Order is for the purchase of goods, services, or both as described on the face of this document (collectively, "Goods") and is issued by the member of the Honeywell International Inc. group of companies identified on the face of this document ("Honeywell").

This Purchase Order is deemed accepted when Supplier returns the acknowledgment copy of this Purchase Order or begins performing, whichever is earlier.

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.

No course of prior dealing or usage of the trade may modify, supplement, or explain any terms used in this Purchase Order.

These terms and conditions together with any previously executed non disclosure agreement (the obligations of which remain in effect) and with the exhibits, schedules, specifications, drawings, or other documents referred to on the face of the Purchase Order, or attached, or any documents incorporated by reference, supersede any prior or contemporaneous communications, representations, promises, or negotiations, whether oral or written, respecting the subject matter of this Purchase Order.

All contract documents related to this Purchase Order are interpreted together as one agreement;

provided, however, that in the event of any conflict among the provisions of one or more of such contract documents as are validly in effect at the time of such conflict, the following order of precedence applies:

(a) any consignment, stocking or other replenishment agreement; then

(b) any supply agreement; then

(c) any contract for labor services; then

(d) the face of the Purchase Order and any supplemental terms included or incorporated by reference; then

(e) these general Purchase Order provisions; and finally

(f) other contract documents agreed to in writing by the parties.

No change to or modification of this Purchase Order will be binding upon Honeywell unless in writing, specifically identifying that it amends this Purchase Order, and signed by an authorized procurement representative of Honeywell.

If Supplier becomes aware of any ambiguities, issues, or discrepancies between this Purchase Order and any specification, design, or other technical requirement applicable to this Purchase Order, Supplier will immediately submit the matter to Honeywell for resolution.

No course of dealing, prior dealings, usage of trade or course of performance will be used to modify, supplement or explain any terms used in, or incorporated by reference into, this Purchase Order.

2. Delivery, Shipment and Packaging

2.1. Supplier will deliver Goods in the quantities and on the date(s) specified on the Purchase Order or Purchase Order schedule releases.

If delivery dates are not stated, Supplier will offer its best delivery date(s), which will be subject to acceptance or rejection by Honeywell.

Unless otherwise directed, all Goods shipped in one day from and to a single location must be consolidated on one bill of lading or air waybill, as appropriate.

TIME IS OF THE ESSENCE.

2.2. If the delivery schedule is endangered for any reason other than Honeywell's fault then Supplier will, at its expense, deliver Goods by the most expeditious shipping method required to fulfill the Purchase Order delivery requirements.

Honeywell reserves the right to reject, at no expense to Honeywell, all or any part of any delivery that varies from the quantity authorized by Honeywell for shipment.

Honeywell reserves the right to pursue additional remedies caused by late delivery, including but not limited to:

(a) incremental freight expenses incurred by Honeywell for shipments of Goods to Honeywell and for shipments of Goods or finished product containing or incorporating the Goods from Honeywell to any customer of Honeywell, and

(b) all liquidated damages payable by Honeywell as a result of any such late delivery.

Supplier will not make any substitutions without Honeywell's prior written approval.

All items will be packaged according to Honeywell's instructions or, if none, according to good commercial practice in a manner sufficient to ensure receipt in an undamaged condition.

Honeywell will not be liable for any discharge, spill or other environmental incident or condition (including clean-up costs) involving any Goods shipped under the Purchase Order unless caused by Honeywell and in no event until delivery to the destination designated by Honeywell.

All containers will be properly marked for identification as instructed on Honeywell's Purchase Order and contain a packing slip that details, at a minimum, the Honeywell Purchase Order number(s), product part number, detailed product description, country of origin, total number of boxes in shipment, quantity of product shipped, and final delivery address.

Items shipped in advance of Honeywell's delivery schedule may be returned at Supplier's expense.

For domestic shipments, if requested by Honeywell, and for all international shipments, Supplier will give notice of shipment to Honeywell when the Goods are delivered to a carrier for transportation.

The Purchase Order number(s) must appear on all correspondence, shipping labels, and shipping documents, including all packing sheets, bills of lading, and air waybills.

2.3. All Goods, unless specifically exempted by the destination country's governing authorities, must be marked with the country of origin (manufacture) of the Goods in a conspicuous place as legibly, indelibly, and permanently as the nature of the article or container permits.

2.4. Supplier will provide Honeywell with

(a) the Harmonized Tariff Schedule number, country of origin information or certificates, manufacturer's affidavits, applicable free trade agreement ("FTA") certificates, and any other documents or information Honeywell may require to comply with international trade regulations or to lawfully minimize duties, taxes, and fees, and

(b) FTA certificates for all Goods that qualify under one or more FTAs.

Supplier will provide Honeywell all documents, records, and other supporting information necessary to substantiate the Goods' qualification under an FTA.

Supplier will exert reasonable efforts to qualify the Goods under FTAs.

2.5. Within one business day after Supplier delivers the Goods to the carrier or at such earlier time as Honeywell may request, Supplier will send Honeywell a complete set of shipping documents including but not limited to the commercial invoice, packing list, and air waybill, or three original parts of the combined through-bill of lading, clean without notation, necessary to release the Goods to Honeywell's custody.

3. Notice of Delay.

Supplier must immediately notify Honeywell in writing with all relevant information relating to any delay or threatened delay or the timely performance of this PO.

4. Excusable Delay (Force Majeure)

Neither party will be in default for any delay or failure to perform due to causes beyond its control and without its fault or negligence, but any delay or failure to perform caused by the default of a sub tier supplier of Supplier will be excused only if

(a) it is beyond the control of both Supplier and its sub-tier supplier(s) and without the fault or negligence of any of them, and

(b) the Goods to be furnished cannot be obtained from other sources in sufficient time to permit Supplier to meet the delivery schedule.

Supplier's ability to sell Goods at a more advantageous price or Supplier's economic hardship in buying materials or processing necessary for manufacture of the Goods will not constitute an excusable delay event.

The party affected by an excusable delay will promptly provide written notice to the other, explaining in detail the full particulars and expected duration of the excusable delay, and will use its best efforts to remedy the delay if it can be remedied.

If Supplier's delivery is delayed, Honeywell may cancel deliveries scheduled during the excusable delay period or elect to extend the period of performance to cover the period of delay caused by the excusable delay.

If an excusable delay occurs that affects delivery of Goods to Honeywell, Supplier will allocate its available supply of Goods in a manner that assures Honeywell of at least the same proportion of Supplier's total output of Goods as was allocated to Honeywell before the excusable delay event.

If delivery of any Goods is delayed for more than 30 days, Honeywell may, without liability, cancel all or any part of this Purchase Order.

5. Performance Assurance Plan

If Honeywell, in its sole discretion, determines there is a significant risk that Supplier will fail to meet its performance or delivery requirements under this Purchase Order, Honeywell may require Supplier to perform under a Honeywell Performance Assurance Plan.

The Performance Assurance Plan may include specific reporting and performance requirements reasonably tailored to ensure Supplier's adequate performance under identified provisions of this Purchase Order.

Any failure by Supplier to satisfy the terms of the Performance Assurance Plan is a material breach of this Purchase Order.

6. Shipping Terms, Title and Risk of Loss

6.1. If the Goods will be transported from Supplier's location in the U.S. to Honeywell's designated delivery location in the U.S., unless otherwise specified on the face of the Purchase Order or in a separate signed agreement, the F.O.B. point is Honeywell's designated delivery location.

When the F.O.B. point is Supplier's location, Supplier bears all risk of loss or damage to the Goods and title passes to Honeywell upon delivery of the Goods by Supplier to the carrier designated or approved by Honeywell.

When the F.O.B. point is Honeywell's location, Supplier bears all risk of loss or damage to the Goods and title passes to Honeywell upon delivery of the Goods by Supplier at Honeywell's designated delivery location.

6.2. In all other cases, unless otherwise specified on the face of the Purchase Order or in a separate signed agreement,

(a) Supplier will deliver the Goods DAP (INCOTERMS 2010) at Honeywell's designated delivery location, and

(b) title to Goods passes to Honeywell upon receipt at Honeywell's designated delivery location.

6.3. The foregoing does not relieve Supplier of any responsibility for hidden damages discovered after acceptance of the Goods.

Notwithstanding the foregoing, title and risk of loss to Goods subject to a consignment, stocking or other replenishment agreement pass upon release of the Goods from consigned inventory or at such other time set forth in such consignment, stocking or other replenishment agreement.

Honeywell may direct Supplier to ship the Goods to Honeywell or to any third party designated by Honeywell.

7. Import/Customs Compliance

Supplier assumes all responsibility and liability for any shipments covered by this Purchase Order requiring any government import clearance.

If government authorities declare or otherwise impose countervailing duties, antidumping duties, or retaliatory duties on the Goods imported under this Purchase Order, Honeywell reserves the right to terminate this Purchase Order under the Termination provisions of this Purchase Order.

Supplier will be debited for any duties, fees, or freight incurred by Honeywell due to Supplier's failure to comply with the terms and conditions of this Purchase Order.

8. Drawback

To the extent applicable to any shipment of Goods to Honeywell or Honeywell's designee, all drawback of duties, and rights thereto, related to duties paid by Supplier or Honeywell when the Goods are imported or any materials or components used in manufacturing of the Goods will accrue to the exclusive benefit of Honeywell.

Duty drawback rights include rights developed by substitution and duty drawback rights obtained from sub-tier suppliers related to the Goods.

Supplier will provide Honeywell with all documents, records, and other supporting information necessary to obtain any duty drawback, and will reasonably cooperate with Honeywell to obtain payment.

9. Offset

If Supplier is a non-U.S. entity, Supplier will assist Honeywell in obtaining credit from Supplier's government for the value of relevant Goods purchased to meet any present or future contractual offer or industrial benefit requirements imposed upon Honeywell or its subsidiaries or affiliates.

Assistance includes, but is not limited to, providing upon Honeywell's request evidence of the existence, value, content, and other pertinent information relating to the purchases.

Honeywell reserves the right to claim these credits for itself or third parties.

If Supplier is a U.S. entity that awards any portion of the work under this Purchase Order to any lower tier non-U.S. supplier, Supplier will assign to Honeywell any credits obtained from the lower tier non-U.S. supplier's government relating to this transaction and assist Honeywell in obtaining the earned credits.

10. Honeywell-Supplied Materials, Tooling, Equipment and Technical Data

10.1. Title to any material, components, tooling, equipment, or technical data that Honeywell pays for or provides to Supplier or is responsible for providing to Supplier, including replacements ("Honeywell Property"), will remain or vest with Honeywell.

Supplier will conspicuously label Honeywell Property as such, maintain it in good condition, keep written records of the Honeywell Property in its possession and the location of the property, not allow any liens to be placed upon it, and not change its location without prior written approval from Honeywell.

Supplier is responsible for inspecting and determining that the Honeywell Property is in useable and acceptable condition.

10.2. Supplier will use Honeywell Property exclusively to fulfill Honeywell Purchase Orders unless otherwise authorized in writing by Honeywell's procurement representative.

Honeywell Property is intended for use at the Supplier's site only or as otherwise authorized in writing by Honeywell's procurement representative and, to the extent applicable, is subject to U.S. and other government export or re-export requirements.

Supplier is responsible for any loss, damage, or destruction of Honeywell Property and any loss, bodily injury, damage or destruction resulting from Supplier's use of Honeywell Property.

Supplier will not include the cost of any insurance for Honeywell Property in the prices charged under this Purchase Order and, to the extent that any Goods contain any Honeywell Property, will not include in the price of any such Good any mark-up or fee with respect to such Honeywell Property.

Supplier will return Honeywell Property or dispose of it as Honeywell directs in writing.

Honeywell makes no representations and disclaims all warranties (express or implied) with respect to Honeywell Property.

11. Price

Supplier will furnish the Goods at the prices stated on the face of the Purchase Order.

If prices are not stated on the face of the Purchase Order, Supplier will offer its lowest prices subject to written acceptance by Honeywell.

Unless otherwise provided on the face of the Purchase Order, the prices include all packaging and freight to the specified delivery point; applicable taxes and other government charges including, but not limited to, all sales, use, or excise taxes; and all customs duties, fees, or charges.

To the extent that value added tax (or any equivalent tax) is properly chargeable on the supply to Honeywell of any Goods, Honeywell will pay the tax as an addition to payments otherwise due Supplier under this Purchase Order, if Supplier provides to Honeywell a value-added tax (or equivalent tax) invoice.

To the extent Honeywell has not received from Supplier all applicable forms regarding compliance with applicable tax law, Honeywell reserves the right to deduct from any payment to Supplier pursuant to this Purchase Order those amounts that Honeywell, in its sole discretion, deems to be required to be withheld in order to comply with the tax laws of any applicable jurisdiction.

Upon the agreement of the parties to reduced pricing for the Goods, such pricing shall immediately apply to all Goods in consignment, stocking or replenishment arrangement with Supplier, all undelivered Goods, all open and unfilled Purchase Orders, all future Purchase Orders and all unconsumed inventory owned by Honeywell.

12. Price: Most Favored Customer and Meet or Release

Supplier warrants that the prices charged for the Goods delivered under this Purchase Order are the lowest prices charged by Supplier for similar goods.

If Supplier charges a lower price for similar goods, Supplier must notify Honeywell and apply that price to all Goods ordered under this Purchase Order by immediately paying Honeywell the price difference and applying the lower price to all Purchase Orders.

If at any time before full performance of this Purchase Order Honeywell notifies Supplier in writing that Honeywell has received a written offer from another supplier for similar goods at a price lower than the price set forth in this Purchase Order, Supplier must immediately meet the lower price for any undelivered Goods.

If Supplier fails to meet the lower price, in addition to other rights or remedies, Honeywell, at its option, may immediately terminate the balance of the Purchase Order without liability.

As directed by Honeywell, Supplier will provide the Goods at the prices listed on the face of this Purchase Order, subject to these terms and conditions, to other Honeywell divisions and affiliates and any third-party Honeywell sub-supplier or designee.

13. Invoicing and Payment

After each shipment made or service provided, Supplier will submit to the address indicated on the Purchase Order an invoice listing a description of the Goods provided and, as applicable, part numbers, quantity, unit of measure, hours, and the unit and total prices.

This invoice must match the corresponding Purchase Order pricing, quantities, and terms,

and must be sent to the invoice address listed on the Purchase Order.

All applicable taxes and other Government charges including, but not limited to, sales, use, or excise taxes; value added tax, customs duties, fees and all incidental charges including but not limited to royalties, selling commissions, nonrecurring engineering, or other incidental charges must be separately itemized and identified on the invoice.

The invoice must also include the following information in English, or in the destination country's official language if required:

(a) name and address of Supplier and the Honeywell entity purchasing the Goods;

(b) name of shipper (if different from Supplier);

(c) Honeywell's Purchase Order number(s);

(d) country of export;

(e) detailed description of the Goods;

(f) Harmonized Tariff Schedule number;

(g) country of origin (manufacture) of the Goods, or if multiple countries of origin, the country of origin of each part shipped;

(h) weights of the Goods shipped;

(i) currency in which the sale was made;

(j) payment terms;

(k) shipment terms used; and

(l) all rebates or discounts.

The invoice will be accompanied (if applicable) by a signed bill of lading or express receipt evidencing shipment.

Payment of an invoice does not constitute acceptance of the Goods and is subject to appropriate adjustment should Supplier fail to meet the requirements of the Purchase Order.

Payment terms are net 120 days from receipt of a Honeywell-approved compliant invoice unless otherwise stated on the face of the Purchase Order or other written agreement executed by both parties;

provided, however, that in the event that applicable law requires a payment terms period of shorter duration, payment terms shall be the maximum period allowed by applicable law.

Invoices will not be approved unless they accurately reference conforming Goods received by Honeywell or services satisfactorily performed for Honeywell, as well as a valid Purchase Order number, supplier name and address, line description, quantity at line level, price at line level, withholding rates and/or amounts for applicable taxes.

Payment will be scheduled for the next payment cycle following the net terms for the Purchase Order.

14. Set Off.

Honeywell may deduct any amount owing from Supplier to Honeywell as a set off against any amount owing to Supplier under this Purchase Order.

15. Inspection

15.1. All Goods may be inspected and tested by Honeywell, its customers, higher-tier contractors, and end users at all reasonable times and places.

If inspection or testing is made on Supplier's premises, Supplier will provide, without charge, all reasonable facilities and assistance required for the inspection and tests.

Supplier's standard inspection and testing system must be approved by Honeywell in writing.

All inspection and testing records, including sub-tier supplier records relating to the Goods, will be maintained by Supplier and made available to Honeywell during the performance of this Purchase Order, and for such longer periods if specified by Honeywell.

15.2. Final inspection and acceptance by Honeywell will be at destination unless otherwise specified in this Purchase Order.

Honeywell may inspect all or a sample of Goods, at its option, and may reject all or any portion of the Goods if Honeywell determines them to be defective or nonconforming within 90 days of delivery.

If Honeywell performs any inspection (other than the standard inspection) after discovering defective or nonconforming Goods, any additional inspection costs will be paid by Supplier.

No inspection, tests, approval, design approval, or acceptance of the Goods relieves Supplier from responsibility for warranty or any latent or patent defects, fraud, or negligence.

If Goods are defective or nonconforming, Honeywell may, by written notice to Supplier:

(a) rescind this Purchase Order as to the Goods;

(b) accept the Goods at an equitable reduction in price; or

(c) reject the Goods and require the delivery of replacements.

Delivery of replacements will be accompanied by a written notice specifying that the Goods are replacements.

If Supplier fails to deliver required replacements promptly, Honeywell may correct any retained defective or nonconforming Goods at Supplier's expense; replace them with Goods from another supplier and charge the Supplier the cost thereof, including cover, and any incidental costs; or terminate this Purchase Order for cause.

16. Warranty

16.1. Supplier warrants to Honeywell, its successors, assigns, customers, and end users that during the entire Warranty Period specified below, all Goods furnished (including all replacement or corrected Goods or components and regardless of whether all or any part of such furnished Goods or any replacement or corrected Goods was manufactured, distributed or otherwise commercialized by a third party prior to delivery by or on behalf of Supplier to Honeywell) will

(a) be free from defects in material, workmanship, and design, even if the design has been approved by Honeywell,

(b) conform to applicable drawings, designs, quality control plans, specifications and samples and other descriptions furnished or specified by Honeywell,

(c) be merchantable,

(d) be fit for the intended purposes and operate as intended,

(e) comply with all laws,

(f) be free and clear of any and all liens or other encumbrances, and

(g) not infringe any patent, published patent application, or other intellectual property rights of any third party and not utilize misappropriated third party trade secret information.

Goods that fail to meet the preceding standards are collectively called "non-conforming Goods."

Supplier must obtain third party warranties consistent with Section 16 for all raw materials, components, and services required by Supplier to perform under this Agreement ("Components") and Supplier is solely responsible for ensuring that all Components meet these requirements.

Any Component that fails to meet these requirements will be deemed to be a non-conforming Good.

16.2. As to services, in addition to any express or implied warranties, Supplier warrants that

(a) it possesses the requisite expertise, facilities and equipment necessary and appropriate to perform the services,

(b) the services will be performed in a safe and workmanlike manner, and

(c) the services will be performed in accordance with the highest standards in the industry.

16.3. The Warranty Period is 36 months from the date of delivery to the end user or such longer period of time mandated by any longer government requirement covering the Goods.

In addition to the warranties described above, Supplier also warrants all Goods to the same extent and for the same time period (if extending beyond 36 months) as the warranties provided by Honeywell to Honeywell's customers relating to such Goods.

These warranties are for the benefit of Honeywell, Honeywell's customers, and any other person claiming by or through Honeywell.

These warranties will survive any delivery, inspection, acceptance, or payment by Honeywell.

Claims for breach of warranty do not accrue until discovery of nonconformance, even if the Goods were previously inspected.

Any applicable statute of limitations runs from the date of discovery.

If conforming Goods are not furnished within the time specified by Honeywell then Honeywell may, at its election, have the nonconforming Goods repaired, replaced, or corrected at Supplier's expense or credited to Honeywell.

Supplier is responsible for the costs of repairing, replacing or correcting nonconforming Goods or crediting them to Honeywell, and for all related costs, expenses and damages including, but not limited to, the costs of removal, disassembly, failure analysis, fault isolation, reinstallation, re-inspection, and retrofit of the nonconforming Goods or of Honeywell's affected end-product; all freight charges, including but not limited to incremental freight expenses incurred by Honeywell for shipments of repaired, replaced, or corrected Goods to Honeywell and for shipments of repaired, replaced, or corrected Goods or finished product containing or incorporating repaired, replaced, or corrected Goods from Honeywell to any customer of Honeywell; all customer charges; and all corrective action costs.

Unless set off by Honeywell, Supplier will reimburse Honeywell for all such costs upon receipt of Honeywell's invoice.

Any replacement Goods are warranted for the same period as the original Goods.

Additionally, if any services are found not to be performed as warranted within a period of 36 months after the conclusion of the performance of the services by Supplier, Honeywell may direct Supplier to either refund to Honeywell the amount paid for the services, or perform the services again in a proper manner to the extent necessary to provide Honeywell with the result originally contemplated by Honeywell.

The warranties and rights provided are cumulative and in addition to any warranty provided by law or equity.

16.4. If, following delivery, Goods exhibit a substantially similar repetitive root cause, failure mode or defect indicating a common or systemic failure ("Epidemic Failure"), then, without prejudice to Honeywell's rights under Section 22:

(a) the party discovering the failure will promptly notify the other and Supplier will provide to Honeywell a preliminary plan for problem diagnosis within one business day of such notification, which plan Supplier will revise at Honeywell's request;

(b) Supplier and Honeywell will diagnose the problem, plan an initial work-around and effect a permanent solution;

(c) Supplier and Honeywell will agree on a plan for customer notification, replacement scheduling and remediation, including identification of suspect population, field removal, return and reinstallation, work in process ("WIP"), inventory replacement, and repair, or retrofitting, regardless of location or status of WIP completion; and

(d) Supplier is responsible for all costs and damages associated with any Epidemic Failure.

Honeywell and Supplier will work together in good faith to establish and expeditiously implement an Epidemic Failure action plan.

If Supplier or any of its Component suppliers initiate any Product or Component recalls, retrofits, or service bulletins that affect Product quality, Supplier will immediately communicate this information to Honeywell.

16.5. No part of any software or other deliverables delivered by Supplier under this Purchase Order shall contain any software or component licensed or obtained under any Open Source licensing program.

"Open Source" shall mean any software or other material that is distributed as "free software", "open source software" or under a similar licensing or distribution model (including but not limited to the GNU General Public License (GPL), GNU Lesser General Public License (LGPL), Mozilla Public License (MPL), and the Apache License)

If Supplier uses Open Source in any software or deliverable, Supplier must first seek written approval from Honeywell and if approved, Supplier must identify each Open Source item along with the applicable license terms.

For any such approved Open Source, Supplier represents that

(a) Supplier is in compliance with the terms and conditions of all applicable licenses for Open Source and

(b) Honeywell's use of such Open Source

(i) will not adversely impact Honeywell's proprietary software

(ii) will not require Honeywell to make available the source code for any Honeywell propriety software

(iii) will not prohibit or limit Honeywell from charging a fee in connection with sublicensing or distributing the software.

17. Changes

Honeywell may, by written or electronic notification, direct changes in the drawings, designs, specifications, method of shipment or packing, quantity, or time or place of delivery of the Goods; reschedule the services; or require additional or diminished services.

Only authorized Honeywell procurement representatives may issue changes to the Purchase Order.

If any change causes an increase or decrease in the cost of, or the time required for, performing this Purchase Order, an equitable adjustment will be made in the Purchase Order price, delivery dates or both, and this Purchase Order will be modified in writing or electronically accordingly.

Any claim by Supplier for adjustment under this provision may be deemed to be waived unless asserted in writing (including the amount of the claim) and delivered to Honeywell within 30 days from the date of the receipt by Supplier of the Honeywell-directed change to the Purchase Order.

If the cost of property made obsolete or excess as a result of a change is paid by Honeywell, Honeywell may prescribe the manner of disposition of the property.

Notwithstanding any disagreement between the parties regarding the impact of a change, Supplier will proceed diligently with its performance under this Purchase Order pending resolution of the disagreement.

18. Design and Process Changes

Supplier will make no changes in the design, materials, manufacturing location, manufacturing equipment, production process, changes between a manual and automated process, or any other processes related to the Goods specified in the Purchase Order or documents referenced in it, or if none, those in place when the Purchase Order is issued, without the advance written approval of Honeywell's procurement representative.

This requirement applies whether or not the change affects costs and regardless of the type of change, including product improvements.

19. Stop Work

At any time by written notice and at no cost, Honeywell may require Supplier to stop all or any part of the work under this Purchase Order for up to 120 days ("Stop Work Order"), and for any further period as mutually agreed.

Immediately upon receipt of a Stop Work Order, Supplier will comply with its terms.

At any time Honeywell may, in whole or in part, either cancel the Stop Work Order or terminate the work under the Termination section of this Purchase Order.

To the extent the Stop Work Order is canceled or expires, Supplier must immediately resume work.

20. Termination

20.1. The nonbreaching party may terminate this Purchase Order if the other party commits a material breach and fails to remedy the breach within 10 calendar days following receipt of written notice specifying the grounds for the breach,

except in the case of breach related to safety, health, or security, Honeywell will have the right to immediately terminate the Order.

A material breach includes, but is not limited to, late delivery or delivery of nonconforming Goods.

If Supplier breaches its obligations to Honeywell and Honeywell terminates this Purchase Order in whole or in part, Honeywell may charge Supplier for any additional cost it incurs in performing Supplier's obligations or in having such obligations performed by a third party.

The solvent party 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.

If a termination by Honeywell for breach by Supplier is determined to have lacked cause, such termination will be treated as a termination without cause under Section 20.2.

20.2. Notwithstanding any firm time period or quantity on the face of the Purchase Order, Honeywell may terminate this Purchase Order in whole or in part at any time with or without cause for undelivered Goods or unperformed services upon 10 days' prior written notice.

20.3. If Honeywell terminates this Purchase Order under either 20.1 or 20.2, Honeywell's sole liability to Supplier, and Supplier's sole and exclusive remedy, is payment for Goods received and accepted by Honeywell before the date of termination.

The payment can be set off against any damages to Honeywell.

Upon termination, Honeywell may require Supplier to transfer title and deliver to Honeywell any completed Goods and Honeywell will pay the Purchase Order price for those Goods subject to set off against any damages to Honeywell.

Honeywell may also require Supplier to transfer title and deliver to Honeywell any or all property produced or procured by Supplier to perform this Purchase Order.

Honeywell will credit Supplier with the reasonable value of the property, but not more than Supplier's actual cost or the Purchase Order value, whichever is less.

20.4. To the extent that any portion of this Purchase Order is not terminated under 20.1 or 20.2 above, Supplier will continue performing that portion.

21. Cessation of Production

If production of any Good is to be discontinued or suspended within 1 year after final delivery under this Purchase Order, Supplier must give Honeywell as much prior written notice as commercially reasonable of the discontinuance or suspension.

For at least 180 days from the discontinuance or suspension, Supplier must accept orders from Honeywell for the Good at the price and on the terms of this Purchase Order.

22. General Indemnification

Supplier will, at its expense, defend, hold harmless and indemnify Honeywell and its customers, subsidiaries, affiliates, and agents, and their respective officers, directors, shareholders, and employees, (collectively "Indemnitees")

from and against any and all loss, cost, damage, claim, demand, or liability, including reasonable attorney and professional fees and costs, and the cost of settlement, compromise, judgment, or verdict incurred by or demanded from the Indemnitee ("Loss")

arising out of, resulting from or occurring in connection with

Supplier's Goods or the performance of the Services by Supplier or its personnel (including any employment-related Loss arising out of, resulting from or occurring in connection with the performance),

the acts, omissions, negligence or willful misconduct of Supplier or its personnel,

Supplier's breach of the terms of this Agreement,

or any theft or other misappropriation of Honeywell's or its personnel's information, property or funds by Supplier or its personnel.

Supplier will not enter into any settlement or compromise without Honeywell's prior written consent, which will not be unreasonably withheld.

If Honeywell is obligated to pay any Loss or any damages pursuant to its contract with a customer, then Supplier will be liable for such Loss any damages to the extent Supplier causes or contributes to such Loss or any damages.

Nothing in this Section limits Honeywell's right to claim all actual damages sustained by Honeywell as a result of Supplier-caused delays.

23. Intellectual Property Indemnification

For Goods provided under this Purchase Order, Supplier will, at its expense, defend and indemnify Honeywell and its customers (Indemnitee) from and against any and all loss, cost, damage, claim, or liability, including reasonable attorney and professional fees and costs, and the cost of settlement, compromise, judgment, or verdict incurred by or demanded from Indemnitee arising out of, or relating to any alleged or actual:

(b) unlawful disclosure, use, or misappropriation of a trade secret; or

(c) violation of any other third-party intellectual property right, and from expenses incurred by Indemnitee in defense of such suit, claim, or proceeding if Supplier does not undertake the defense thereof.

Supplier will not enter into any settlement without Honeywell's prior written consent, which will not be unreasonably withheld.

Indemnitee may participate in the defense or negotiations to protect its interests.

If any injunction or restraining order is issued, Supplier will, at Honeywell's option and Supplier's expense, obtain for Indemnitee either the right to continue using and selling the Goods or replace or modify the Goods to make them noninfringing; without any loss of functionality.

24. Insurance

Supplier will maintain and carry liability insurance in an amount no less than the greater of

(a) the minimum amount required by applicable law, or

(b) the following coverages:

commercial general liability (including product liability and, for services to be performed, completed operations liability) in a sum no less than $5 million, automobile liability in a sum no less than$5 million,

worker's compensation in an amount no less than the applicable statutory minimum requirement, and

employer's liability in an amount of no less than $5 million, all with insurance carriers with an AM Bests rating of no less than A- or equivalent. In addition, Supplier is responsible for maintaining an adequate level of insurance to cover any potential losses due to damage to Honeywell Property, as defined in Section 10. All insurance required by this Section must cover Honeywell, its subsidiaries and affiliates, and their respective officers, directors, shareholders, employees and agents as additional insureds. Before delivery of any Goods or commencement of any services under the Purchase Order, Supplier will provide to Honeywell evidence that Seller maintains the described insurance, and that the coverage will not be changed without 30 days advance written notification to Honeywell from the carrier(s). Except where prohibited by law, Supplier will require its insurers to waive all rights of recovery or subrogation against Honeywell, its subsidiaries and affiliated companies, and its and their respective officers, directors, shareholders, employees, and agents. The amount of insurance carried in compliance with the above requirements is not to be construed as either a limitation on or satisfaction of the indemnification obligation in this Purchase Order. 25. Lien Waivers Supplier will furnish, upon Honeywell's request, waivers by Supplier and all other persons entitled to assert any lien rights in connection with the performance of this Purchase Order and will indemnify Honeywell against all costs, loss or liability incurred by Honeywell as a result of any failure by Supplier or any other person to comply with this provision. 26. Confidentiality; Intellectual Property; Data Protection 26.1. All information, including without limitation specifications, samples, drawings, materials, know-how, designs, processes, and other technical, business, or financial information, that: (a) has been or will be supplied to Supplier by or on behalf of Honeywell; or (b) Supplier will design, develop, or create in connection with this Purchase Order; as to individual items or a combination of components or both, and whether or not completed, and all derivatives of (a) and (b) that Supplier has or will design, develop or create are deemed to be "Confidential Information" of Honeywell. All Confidential Information is work made for hire and made in the course of services rendered. All rights to it belong exclusively to Honeywell, with Honeywell having the sole right to obtain, hold, and renew, in its own name or for its own benefit, patents, copyrights, registrations, or other appropriate protection. To the extent that exclusive title or ownership rights in Confidential Information may not originally vest in Honeywell, Seller irrevocably assigns transfers and conveys to Honeywell all right, title, and interest therein. 26.2. Honeywell's Confidential Information will remain the property of Honeywell. It may not be used by Supplier for any purpose other than for performing this Purchase Order, may not be disclosed to any third party, and will be returned to Honeywell upon the earlier of Honeywell's written request or completion of the Purchase Order. If, with Honeywell's prior written approval, Supplier furnishes Confidential Information to a sub-tier supplier, Supplier will bind the sub-tier supplier to confidentiality requirements substantially identical to this provision and Supplier will remain responsible to Honeywell for any breach of this provision by its sub-tier suppliers. No disclosure, description or other communication of any sort will be made by Supplier to any third person of[:] the fact of Honeywell's purchase of Goods hereunder, the terms of this Purchase Order, the substance of any discussions or negotiations concerning this Purchase Order, or either party's performance under this Purchase Order. 26.3. "Personal Data" means any information relating to an identified or identifiable natural person; an identifiable person is one who can be identified, directly or indirectly, in particular by reference to an identification number or to one or more factors specific to his physical, physiological, mental, economic, cultural or social identity. Supplier will treat any Personal Data of all Honeywell officers, directors, employees, agents, contractors, customers, and suppliers as Confidential Information. The Parties agree that the Supplier will be the Data Processor (as defined in the EU Data Protection Directive 95/46/EC or any successor Directive) for the purposes of processing Personal Data pursuant to this Purchase Order. Supplier will: (a) take appropriate technical and organizational security measures as are reasonably required by Honeywell to protect Personal Data; (b) use and permit employees and third parties to use Personal Data pursuant to Honeywell's instructions only for purposes directly related to the provision of Goods or performance of services or related obligations under this Purchase Order; (c) refrain from transferring Personal Data out of the European Union unless Honeywell has given its prior written consent to the transfer and Supplier has satisfied any further requirements reasonably imposed by Honeywell. If with Honeywell's prior permission Supplier will process Personal Data that Honeywell transfers from any of its affiliates in the European Union to any of its affiliates in the U.S. pursuant to the U.S. - EU Safe Harbor Framework ("Safe Harbor Personal Data"), [then] Supplier warrants that either Supplier self-certifies to the U.S. - EU Safe Harbor Framework with respect to the processing of the Safe Harbor Personal Data and will notify Honeywell immediately if its self-certification terminates for any reason, or Supplier must provide at least the same level of privacy protection as required by the U.S. - EU Safe Harbor Framework; (d) indemnify Honeywell against all losses, costs, expenses, damages, liabilities, demands, claims, actions or proceedings which Honeywell may suffer or incur arising out of any breach of this Section; and (e) promptly notify Honeywell about: any legally binding request for disclosure of Personal Data by a law enforcement agency (unless otherwise prohibited); any accidental or unauthorized processing of Personal Data; and any requests received from individuals to whom Personal Data relates, without responding to that request unless it has been otherwise authorized to do so by Honeywell. With the exception of Personal Data, this Agreement imposes no obligation upon Supplier if Supplier can demonstrate that the Confidential Information: (a) was rightfully in Supplier's possession before receipt from Honeywell and was not accompanied by a duty of confidentiality; (b) is or becomes a matter of public knowledge through no fault of Supplier; (c) is rightfully received by Supplier from a third party and is not accompanied by a duty of confidentiality; (d) is disclosed by Honeywell to a third party without a duty of confidentiality on the third party; (e) is independently developed by Supplier without use of Honeywell's Confidential Information; or (f) is disclosed under operation of law, provided Supplier notifies Honeywell and upon Honeywell's request and at Honeywell's cost cooperates in all reasonable respects to contest the disclosure or obtain a protective order or other remedy. 27. Audit 27.1. Supplier will maintain detailed records reflecting Supplier's compliance with this Purchase Order for at least 10 years from the date of last delivery. Supplier will provide, and will cause each of its sub-tier suppliers to provide, access for Honeywell's personnel, auditors, all regulatory authorities and Honeywell's customers to have access at all reasonable times to facilities, books and other pertinent records and any other information as requested by Honeywell or Honeywell's auditors. Supplier will require each of its sub-tier suppliers to do likewise with respect to their records and materials. 27.2. If any invoice submitted by Supplier is found to be in error, an appropriate adjustment will be made to the invoice or the next succeeding invoice following the discovery of the error and the resulting payment/credit will be issued promptly. Supplier will, and will cause its sub-tier suppliers to, promptly correct any other Supplier deficiencies discovered as a result of the audit. 28. Limitation of Liability HONEYWELL IS NOT LIABLE FOR ANY SPECIAL, INDIRECT, INCIDENTAL, CONSEQUENTIAL, EXEMPLARY, OR PUNITIVE DAMAGES (INCLUDING ANY DAMAGES FROM BUSINESS INTERRUPTION, LOSS OF PROFITS OR REVENUE, COST OF CAPITAL, OR LOSS OF USE OF ANY PROPERTY OR CAPITAL) EVEN IF ADVISED, OR OTHERWISE AWARE, OF THE POSSIBILITY OF ANY SUCH DAMAGES. THE EXCLUSION OF SUCH DAMAGES IS INDEPENDENT OF, AND WILL SURVIVE, ANY FAILURE OF THE ESSENTIAL PURPOSE OF ANY LIMITED REMEDY UNDER THESE TERMS AND CONDITIONS. 29. Assignment and Subcontracting This Purchase Order will be binding on the parties and their respective permitted successors and assigns. Supplier will not assign this Purchase Order or any rights or obligations under this Purchase Order or subcontract the manufacture of the Goods or performance of any related services without the prior written approval of Honeywell. Any transfer of this Purchase Order by Supplier by merger, consolidation, or dissolution, or any change in ownership or power to vote a controlling share of the voting stock in Supplier, will constitute an assignment for the purpose of this Agreement. Any assignment or subcontract without Honeywell's written approval will be voidable at the option of Honeywell. Honeywell may assign this Purchase Order or any rights or obligations under this Purchase Order to any of its subsidiaries or affiliates or to any purchaser or successor to all or substantially all of the assets of Honeywell without Supplier's consent and upon written notice to Supplier. To the extent Supplier assigns or subcontracts all or part of the manufacture of the Goods or performance of any related services as permitted under this Purchase Order, Supplier will be responsible for its assignees and subcontractors (including but not limited to its affiliates) and their personnel to the same extent as if the acts or omissions were performed by Supplier and its employees, agents and personnel. 30. Relationship of Parties/Independent Contractor Nothing in this Purchase Order will be construed to place Supplier and Honeywell in an agency, employment, franchise, joint venture, or partnership relationship. Neither party has the authority to obligate or bind the other in any manner, and nothing contained in this Purchase Order will give rise or is intended to give rise to rights of any kind to any third parties. Neither party will make any representation to the contrary. The parties agree that Supplier will perform its obligations under this Purchase Order as an independent contractor. Supplier will be solely responsible for all Employer Obligations with respect to Supplier personnel, even if a court or other body deems the personnel to be Honeywell employees. "Employer Obligations" means all obligations of any kind imposed customarily or by law or agreement on persons acting in the capacity of an employer, including, without limitation, responsibility for (a) hiring, assigning, compensating, and terminating personnel; (b) withholding and paying taxes; (c) verification of employment eligibility, including compliance with work authorization and immigration laws and export licensing and control requirements; (d) compliance with all federal, state, and local laws (both common and statutory) and regulations related to employment and the rights of personnel. Supplier represents and warrants that it and all its subcontractors, if any, comply and will continue to comply with all applicable employment laws and regulations related to personnel working on Honeywell matters, that all personnel working on Honeywell matters are authorized to work in the relevant jurisdiction, and that it does not employ child or forced labor. 31. Compliance with Laws and Integrity 31.1. Supplier will comply with all laws, regulations and ordinances and Honeywell's Code of Business Conduct ("Code") in performing this Purchase Order. A copy of the Code may be obtained at http://www.honeywell.com/sites/honeywell/codeofconduct.htm. Supplier agrees to abide by and maintain an integrity and compliance program that encompasses at a minimum the standards of business conduct set forth in the Code and that effectively prevents and corrects ethical violations and maintains compliance with laws. Supplier will also comply with Honeywell's Information and System Security Supplier Terms and Conditions to the extent deemed applicable by Honeywell. 31.2. Upon request, in form and substance satisfactory to enable Honeywell to meet its compliance obligations with regard to Regulation (EC) No 1907/2006 ("REACH"), Supplier will provide Honeywell with complete information regarding the chemical composition of any Goods supplied under this Purchase Order, including all safety information required under REACH and information regarding the registration or pre-registration status of any Deliverables pursuant to REACH promptly but no later than 30 days of receiving such request. Supplier agrees that it will include any Honeywell "Identified Use" in its REACH registrations or applications for Authorization, unless Supplier notifies Honeywell that it rejects the Identified Use in order to protect human health or the environment and specifies the reason for the rejection. In this case Honeywell will have the right to terminate this Purchase Order without incurring any damages. 31.3. Absent Honeywell's prior written consent, no Goods will contain any of the substances identified in (a) Article 4(1) of the European Parliament Directive 2011/65/EU (the "RoHS Directive") as the RoHS Directive may be updated from time to time and as such Directive is implemented in any country, but only to the extent that the Directive applies to the commercialization, sale or use of such Goods, or (b) similar applicable laws or regulations, restricting the use of hazardous materials in such other jurisdictions to the extent that any such law or regulation applies to the commercialization, sale or use of such Goods . 31.4. Goods will comply with the restrictions set forth in the Montreal Protocol on ozone-depleting substances. 31.5. Supplier will be responsible for all costs and liabilities for or relating to the recycling of Goods pursuant to the most current version of European Parliament Directive 2012/19/EU (the "WEEE Directive") as the WEEE Directive may be updated from time to time and as such Directive is implemented in any country. 31.6. To the extent applicable, this Purchase Order is subject to the requirements of 41 CFR 60-1.4, 41 CFR 60-250.5 and 29 CFR part 471, Appendix A to Subpart A, which are incorporated into this Purchase Order by reference. In addition, to the extent applicable, this Purchase Order is subject to the requirements of 41 CFR 60-300.5(a) and 41 CFR 60-741.5(a), which are incorporated herein by reference. The latter two U.S. regulations prohibit discrimination against qualified individuals on the basis of protected veteran status and disability and, if applicable, require affirmative action to employ and advance in employment protected veterans and qualified individuals with disabilities. 31.7. In accordance with applicable "Conflict Minerals" laws, Honeywell must determine whether its products contain tin, tantalum, tungsten or gold ("3TG") originating in the Democratic Republic of the Congo and adjoining countries ("Conflict Minerals"). To the extent Supplier supplies Goods containing 3TG to Honeywell under any Purchase Order, Supplier commits to have a supply chain process to ensure and document a reasonable inquiry into the country of origin of the 3TG minerals incorporated into such Goods. If requested, Supplier will promptly provide information or representations that Honeywell reasonably believes are required to meet its conflict minerals compliance obligations. 32. Applicable Law and Forum 32.1. United States If Honeywell is a legal entity formed in the United States, then the construction, interpretation, performance, and enforcement hereof, all transactions hereunder and the parties relationship in connection therewith or any related claims whether founded in contract, tort or otherwise, will be governed by the laws of the State of New York, U.S.A. without regard to or application of its principles or laws regarding conflicts of laws, and excluding the United Nations Convention on the International Sale of Goods of 1980 (and any amendments or successors thereto), and the federal or state courts in New York, New York will have exclusive jurisdiction of any dispute. 32.2. China If both parties are legal entities formed in The People's Republic of China, then the construction, interpretation, performance, and enforcement hereof, all transactions hereunder and the parties relationship in connection therewith or any related claims whether founded in contract, tort or otherwise, will be governed by the laws of The People's Republic of China without regard to or application of its principles or laws regarding conflicts of laws, and excluding the United Nations Convention on the International Sale of Goods of 1980 (and any amendments or successors thereto). Any dispute not resolved by the parties through consultations will be subject to binding arbitration in accordance with the rules of the China International Economic Trade Arbitration Commission (CIETAC). In any arbitration there will be three arbitrators. Each Party will select and appoint one arbitrator within 30 days after the date of a request for arbitration. The third arbitrator will be jointly selected and appointed by the Parties. If the Parties fail to select and appoint the third arbitrator, the Chairman of CIETAC will select the third arbitrator. If a Party does not select and appoint an arbitrator within 30 days after the selection and appointment of the first arbitrator, the relevant selection and appointment will be made by the Chairman of CIETAC. The place of arbitration will be Shanghai. If Honeywell is a legal entity formed in The People's Republic of China and the Supplier is not a legal entity formed in The People's Republic of China, then the construction, interpretation, performance, and enforcement hereof, all transactions hereunder and the parties relationship in connection therewith or any related claims whether founded in contract, tort or otherwise, will be governed by the laws of England and Wales without regard to or application of its principles or laws regarding conflicts of laws, and excluding the United Nations Convention on the International Sale of Goods of 1980 (and any amendments or successors thereto). Any dispute not resolved by the parties will be subject to arbitration in accordance with the rules of the Singapore International Arbitration Centre. 32.3. Korea, Hong Kong, Malaysia, Singapore, Indonesia, Vietnam, Australia, and New Zealand If Honeywell is a legal entity formed in Korea, Hong Kong, Malaysia, Singapore, Indonesia, Vietnam, Australia, and New Zealand, then the construction, interpretation, performance, and enforcement hereof, all transactions hereunder and the parties relationship in connection therewith or any related claims whether founded in contract, tort or otherwise, will be governed by the laws of the country under which the Honeywell entity is formed, excluding the UN Convention on Contracts for the International Sale of Goods of 1980 (and any amendments or successors thereto), and any dispute arising out of or relating to this Purchase Order, including the breach, termination or validity thereof, will be finally resolved in accordance with the rules of arbitration as noted below. Judgment upon the award rendered by the arbitrators may be entered by any court having jurisdiction thereof. The place of arbitration will be selected by Honeywell. " Singapore, Indonesia, Vietnam, Australia, New Zealand, - in accordance with the arbitration rules of the Singapore International Arbitration Center " Korea - in accordance with the arbitration rules of the Korean Commercial Arbitration Board " Hong Kong - in accordance with the arbitration rules of the Hong Kong International Arbitration Center " Malaysia - in accordance with the arbitration rules of the Kuala Lumpur Regional Arbitration Centre " Taiwan - in accordance with the arbitration rules of the local Arbitration Act 32.4. Europe, Middle East, Africa If Honeywell is a legal entity formed in India or in a European, Middle Eastern and African country or formed in a country not identified in Section 32.1, Section 32.2 or Section 32.3 above, then the construction, interpretation, performance, and enforcement hereof, all transactions hereunder and the parties relationship in connection therewith or any related claims whether founded in contract, tort or otherwise, will be governed by the laws of England and Wales without regard to or application of its principles or laws regarding conflicts of laws, and excluding the United Nations Convention on the International Sale of Goods of 1980 (and any amendments or successors thereto). Any dispute arising out of or relating to this Purchase Order, including the breach, termination or validity thereof, will be finally resolved by a panel of three arbitrators in accordance with the Rules for Arbitration of the International Chamber of Commerce. Judgment upon the award rendered by the arbitrators may be entered by any court having jurisdiction thereof. The place of arbitration will be London, England. 32.5. Additional Rules Applicable to Arbitration Any award will be payable in the currency of this Purchase Order. Either party may apply to the arbitrators seeking injunctive relief until the arbitration award is rendered or the controversy is otherwise resolved. Either party also may, without waiving any remedy under this Purchase Order, seek from any court having jurisdiction any interim or provisional relief that is necessary to protect the rights or property of that party, pending the arbitrators' determination of the merits of the controversy. The language of the arbitration will be English. Pending settlement or final resolution of any dispute, Supplier will proceed diligently with the performance of this Purchase Order in accordance with Honeywell's directions. 33. Remedies All Honeywell remedies set forth in this Purchase Order are in addition to, and will in no way limit, any other rights and remedies that may be available to Honeywell at law or in equity. 34. Notices Notices relating to this Purchase Order must be in writing and may be delivered personally, by overnight courier, or by certified first class mail, postage prepaid (each to the respective addresses appearing on the face of this Purchase Order; or sent by fax to the respective fax number provided by Honeywell or Supplier. Notice will be deemed given on the date delivered if delivered personally; three business days after being placed in the mail as specified above; or upon confirmation receipt that it was transmitted satisfactorily if transmitted by fax. 35. Publicity Any news release, public announcement, advertisement, publicity or any other disclosure concerning this Purchase Order to any third party except as may be necessary to comply with other obligations stated in this Purchase Order requires prior written approval of Honeywell. Supplier will not use Honeywell's name or marks or refer to or identify Honeywell in any advertising or publicity releases or promotional or marketing materials without Honeywell's prior written approval. Furthermore, Supplier will not claim or suggest, implicitly or explicitly, that Honeywell's purchase of its Goods use of its services or deliverables constitutes Honeywell's endorsement of its Goods, services or deliverables. 36. Headings and Captions Headings and captions are for convenience of reference only and do not alter the meaning or interpretation of any provision of this Purchase Order. 37. Waiver The failure or delay of either party to enforce at any time any of the provisions of this Purchase Order will not be construed to be a continuing waiver of those provisions, nor will any such failure or delay prejudice the right of the party to take any action in the future to enforce any provision. 38. Severability If any provision of this Purchase Order (or portion thereof) is held to be illegal, invalid, or unenforceable by a court of competent jurisdiction, the parties agree that the court will construe the provision in a manner that renders the provision valid and enforceable to the fullest extent possible under the law of the applicable jurisdiction and that the remaining provisions will remain in full force and effect. 39. Supply Chain Security Supplier will implement the Business Partner Criteria of any Supply Chain Security Program that the country of import for the Goods may adopt such as the U.S. Customs-Trade Partnership AgainstTerrorism (C-TPAT) or the Canadian Partners in Protection (PIP) Program. 40. Survival All provisions of this Purchase Order which by their nature should apply beyond its term will remain in force after any termination or expiration of this Purchase Order including, but not limited to, those addressing the following subjects: Import/Customs Compliance, Drawback, Offset, Honeywell-Supplied Materials, Tooling, Equipment and Technical Data, Price, Price: Most Favored Customer and Meet or Release, Invoicing and Payment, Set Off, Warranty, Cessation of Production, General Indemnification, Intellectual Property Indemnification, Insurance, Lien Waivers; Confidentiality/Data Privacy and Intellectual Property, Audit, Relationship Between the Parties/Independent Contractor, Applicable Law and Forum, Publicity, Waiver, and Survival. Honeywell Standard PO Terms and Conditions for Goods and Services ACS Revision 01/03/2014 ### 16.2 Honeywell International Inc. Terms & Conditions Conditions of Sale 1. APPLICABILITY 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. Any modification or addition to these Conditions of Sale must be in writing and signed by an authorized representative of Buyer and Honeywell. Any irreconcilable conflict among these Conditions of Sale, the General Terms section and the Supplier CAGE Code Information section of this Catalog will be resolved by giving precedence in the following order from highest precedence to lowest: (1) Supplier CAGE Code Information, (2) General Terms, and (3) Conditions of Sale. This Catalog and price list is not an offer. Honeywell reserves the right to reject any Order submitted for its acceptance. 2. BUYER'S ORDERS Orders should specify: (1) Purchase Order number; (2) Honeywell.s part number; (3) requested delivery dates; (4) price; (5) quantity; (6) location to which the Product is to be shipped; and (7) location to which invoices will be sent for payment. Buyer's Orders are subject to Honeywell's minimum order requirements, if any, and Honeywell's acceptance. Honeywell reserves the right to limit order quantities for certain Products. Honeywell's order acknowledgment will not constitute acceptance. Any additional or conflicting terms on an Order will not apply unless specifically agreed to in writing by Honeywell. 3. DELIVERY Delivery terms are EXWORKS (Incoterms 2000), Honeywell's facility. Honeywell will schedule delivery in accordance with its standard lead-time unless Buyer's Order requests a later delivery date or Honeywell agrees in writing to an earlier delivery date. Buyer will pay all transportation costs (including insurance and customs duties) and for any claims to be filed with the carrier. If Honeywell prepays transportation charges, Buyer will reimburse Honeywell upon receipt of an invoice for those charges. Title and risk of loss or damage will pass to Buyer when Honeywell places Product at Buyer's disposal at Honeywell's facility, except that title and risk of loss or damage to all Product shipped via air freight directly to Buyers located outside of the United States of America will pass to the Buyer immediately after such time as the Products first leave the overlying airspace of the United States. Honeywell reserves the right to impose additional charges for any special routing, packing, labeling, handling or insurance requested by Buyer. 4. ACCEPTANCE Products are presumed accepted unless {1} Honeywell receives written notice of rejection from Buyer explaining the basis for rejection within 10 calendar days after delivery and {2} Buyer dispositions the Product to Honeywell in accordance with Honeywell's written instructions. Honeywell will have a reasonable opportunity to repair or replace rejected Product, at its option. Subject to the terms of the article titled "Taxes", Honeywell assumes shipping costs in an amount not to exceed actual reasonable direct freight charges to Honeywell's designated facility to return properly rejected Products. Buyer will provide copies of freight invoices to Honeywell upon request. Following initial delivery, the party initiating shipment will bear the risk of loss or damage to Products in transit. If Honeywell reasonably determines that rejection was improper, Buyer will be responsible for all expenses caused by the improper rejection. 5. CHANGES Honeywell may, without notice to Buyer, incorporate changes to Products that do not alter form, fit or function of the Products. Honeywell may, at its sole discretion, also make such changes to Products previously delivered to Buyer. 6. PRICES AND PAYMENTS Prices for each Product are set forth in this Catalog, stated in United States currency, and valid for products shipped from January 1, 2010 through December 31, 2010, unless stated otherwise. Honeywell reserves the right to correct any inaccurate invoices and to change Catalog prices. Payment must be received by Honeywell 30 calendar days from date of invoice. Payment(s) must be made in United States currency and must be accompanied by remittance detail containing at a minimum the invoice number and amount paid per invoice. Payments must be in accordance with the "Remit To" field on each invoice. Honeywell may without notice to Buyer, modify or withdraw credit terms including, but not limited to, requiring advance payment, guarantees, or other security. If Buyer is delinquent in its payment to Honeywell, then until all delinquent amounts are paid: (1) Honeywell will be relieved of its obligations with respect to guarantees, including without limitation, turnaround times, spares support and delivery lead times; and (2) refuse to process any credit to which Buyer may be entitled; (3) set off any credit or sum owed by Honeywell to Buyer against any undisputed amount owed by Buyer to Honeywell; (4) withhold future shipments to Buyer; (5) declare Buyer's performance in breach and terminate any Order; (6) repossess Products for which payment has not been made; (7) deliver future shipments on a cash-with-Order or cash-in-advance basis; (8) charge interest on delinquent amounts at a rate of 1.5% per month or the maximum rate permitted by law, if lower, for each month or part thereof; (9) charge storage or inventory carrying fees on Products; (10) recover all costs of collection including, without limitation, reasonable attorneys' fees; (11) if Buyer is delinquent on a payment schedule, accelerate all remaining payments and declare the total outstanding balance then due and owing; or (12) combine any of the above rights and remedies as may be permitted by applicable law. The above remedies are in addition to all other remedies available at law or in equity. 7. SETOFF Buyer will not set off or recoup invoiced amounts or any portion thereof against sums that are due or may become due from Honeywell, its parents, affiliates, subsidiaries or other divisions or units. 8. PRODUCT WARRANTY "Nonconformance" means failure to comply with, or failure to operate due to noncompliance with, applicable Honeywell drawings or having defects in workmanship or material. Normal wear and tear and the need for regular overhaul and periodic maintenance do not constitute a Nonconformance. For the purposes of this section the term Product includes end items, including its line replaceable units and components, including those returned for exchange. Products that are normally consumed in operation or which have a normal life inherently shorter than the foregoing warranty period including, but not limited to, consumables (e.g. flashtubes, lamps, batteries, storage capacitors) are not covered under this warranty. Honeywell warrants that at time of shipment to Buyer its Products will comply with applicable Honeywell drawings, and for a period of the earlier of 6 months from first use or 12 months after shipment of the Products will be free from defects in workmanship and material. These warranties run to Buyer, its successors, permitted assigns, and customers. Buyer must notify Honeywell in writing during the warranty period of a Nonconformance and, within 30 calendar days of discovery of the Nonconformance, disposition the Product in accordance with Honeywell's written instructions. Honeywell's obligation and Buyer's sole remedy under this warranty is repair or replacement, at Honeywell's election, of any Product Nonconformance. All Products repaired or replaced are warranted only for the unexpired portion of the original warranty period. Honeywell assumes round trip shipping costs for Nonconforming Products in an amount not to exceed actual reasonable direct freight charges to and from Honeywell's nearest warranty repair facility for such Products. Buyer will provide copies of freight invoices to Honeywell upon request. Round trip shipping costs expressly exclude freight forwarding charges, taxes, duties and tariffs. The party initiating transportation bears the risk of loss or damage to Products in transit. If Honeywell reasonably determines that a Nonconformance does not exist, then Buyer will pay all expenses related to the improper return including, but not limited to, diagnostic and shipping charges. Honeywell will not be liable under this warranty if the Product has been exposed or subjected to any: (1) maintenance, repair, installation, handling, packaging, transportation, storage, operation or use that is improper or otherwise not in compliance with Honeywell's instruction; (2) Product alteration, modification or repair by anyone other than Honeywell or those specifically authorized by Honeywell; (3) accident, contamination, foreign object damage, abuse, neglect or negligence after shipment to Buyer; (4) damage caused by failure of a Honeywell-supplied product not under warranty or by any hardware or software not supplied by Honeywell; (5) use of counterfeit or replacement parts that are neither manufactured nor approved by Honeywell for use in Honeywell-manufactured Products; Honeywell has no obligation under this warranty unless Buyer maintains records that accurately document operating time, maintenance performed and the nature of the unsatisfactory condition of Honeywell's Product. Upon Honeywell's request, Buyer will give Honeywell access to these records for substantiating warranty claims. THESE WARRANTIES ARE EXCLUSIVE AND IN LIEU OF ALL OTHER WARRANTIES, WHETHER WRITTEN, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY, AND FITNESS FOR PARTICULAR PURPOSE. IN NO EVENT WILL HONEYWELL BE LIABLE FOR ANY INCIDENTAL, CONSEQUENTIAL, SPECIAL, OR INDIRECT DAMAGES, EVEN IF INFORMED OF THE POSSIBILITY OF SUCH DAMAGES AND NOTWITHSTANDING THE FAILURE OF THE ESSENTIAL PURPOSE OF ANY LIMITED REMEDY. NO EXTENSION OF THIS WARRANTY WILL BE BINDING UPON HONEYWELL UNLESS SET FORTH IN WRITING AND SIGNED BY HONEYWELL'S AUTHORIZED REPRESENTATIVE. 9. EXCUSABLE DELAY OR NONPERFORMANCE Honeywell will not be liable to Buyer for any failure to meet its obligations due to any cause beyond its reasonable control including, but not limited to: government embargoes or any other government acts that interfere with performance; blockades; seizure or freeze of assets; delays or refusals to grant an export license or the suspension or revocation thereof; fires, floods, severe weather conditions; any other acts of God, quarantines or regional medical crisis; labor strikes or lockouts; riots, strife, insurrection, civil disobedience, armed conflict, terrorism or war, declared or not or impending threat of any of the foregoing, if reasonably expected to cause injury to people or property; and shortages or inability to obtain materials or components. The due date of any performance affected by such an event will be extended by the period of time that Honeywell is actually delayed. If the inability to perform continues for longer than 6 months, either party may terminate the affected Order by providing written notice to the other party. 10. CANCELLATION Buyer may cancel any Order or portion of an Order by giving Honeywell written notice specifying the detailed reason for the cancellation only if: (1) Honeywell fails to correct a breach of these Conditions of Sale within 90 calendar days of written notice from Buyer of the breach; or (2) any insolvency or suspension of Honeywell's operations or any petition filed or proceeding commenced by or against Honeywell under any state or federal law relating to bankruptcy, arrangement, reorganization, receivership or assignment for the benefit of creditors. 11. DISPUTES Any dispute arising out of or relating to these Conditions of Sale, including the breach, termination or validity thereof ("Dispute"), will be finally resolved by arbitration. The arbitration will be conducted in English. If Buyer is incorporated in the United States, a single arbitrator will apply the Center for Public Resources Institute for Dispute Resolution Rules for Non-Administered Arbitration then currently in effect to finally resolve the Dispute. The arbitration will be governed by the Federal Arbitration Act, 9 U's.C. secs. 1-16, and judgment upon on the award rendered by the arbitrator may be entered by any court having jurisdiction thereof. The place of arbitration will be New York City, New York. If Buyer is not incorporated in the United States, a panel of three arbitrators will apply the International Chamber of Commerce ("ICC") Rules for Arbitration to finally resolve the Dispute. The place of arbitration will be Brussels Belgium. Any award will be payable in U's. dollars, and judgment on the award rendered by the arbitrator(s) may be entered by any court having jurisdiction thereof. Either party may apply to the arbitrator seeking injunctive relief until the arbitration award is rendered or the controversy is otherwise resolved. Either party also may, without waiving any remedy under these Conditions of Sale, seek from any court having jurisdiction any interim or provisional relief that is necessary to protect the rights or property of that party, pending the arbitrator's determination of the merits of the controversy. If any dispute, or response to any dispute, includes an allegation that potentially concerns whether any intellectual property right owned, controlled or licensable by either party is invalid, unenforceable or infringed or misappropriated, or is otherwise limited in scope or application, then either party may, in its sole discretion, elect to have that dispute adjudicated before a court of competent jurisdiction and this section will not be binding on either party with respect to that dispute in its entirety or any related dispute, including any portions of a dispute that do not concern intellectual property rights. 12. APPLICABLE LAW These Conditions of Sale will be governed by the laws of the State of New York, U.S.A. without regard to conflict of law principles. The United Nations Convention on Contracts for the International Sale of Goods, 1980, and any successor thereto, will not apply. 13. LIMITATION OF LIABILITY IN NO EVENT WILL HONEYWELL BE LIABLE FOR ANY INCIDENTAL DAMAGES, CONSEQUENTIAL DAMAGES, SPECIAL DAMAGES, INDIRECT DAMAGES, LOSS OF PROFITS, LOSS OF REVENUES, OR LOSS OF USE, EVEN IF INFORMED OF THE POSSIBILITY OF SUCH DAMAGES. HONEYWELL's LIABILITY FOR DAMAGES ARISING OUT OF OR RELATED TO THIS ORDER IS LIMITED TO THE ORDER PRICE FOR THE SPECIFIC PRODUCT THAT GIVES RISE TO THE CLAIM. TO THE EXTENT PERMITTED BY APPLICABLE LAW, THESE LIMITATIONS AND EXCLUSIONS WILL APPLY REGARDLESS OF WHETHER LIABILITY ARISES FROM BREACH OF CONTRACT, WARRANTY, TORT (INCLUDING BUT NOT LIMITED TO NEGLIGENCE), BY OPERATION OR LAW, OR OTHERWISE. 14. NONDISCLOSURE AND NON-USE OF HONEYWELL's CONFIDENTIAL DATA AND INFORMATION These Conditions of Sale do not supersede any confidentiality agreement executed by Buyer and Honeywell that otherwise applies to products, services, technical data or other information delivered in connection with an Order. In the absence of such an agreement, Buyer may use Honeywell's confidential information only in the normal operation of Honeywell's Products. Further, Buyer may disclose Honeywell's confidential information only on a need-to-know basis, will protect against inadvertent disclosure, and will not disclose such information to any third party without Honeywell's prior written consent. 15. INDEMNITY AGAINST PATENT AND COPYRIGHT INFRINGEMENT Honeywell will defend Buyer against any suit arising out of any actual or alleged patent or copyright infringement of a valid patent or copyright, to the extent based on the Product as delivered by Honeywell, and indemnify for any final judgment assessed against Buyer resulting from such suit provided that Buyer notifies Honeywell as soon as it is aware of the third-party claim, and agrees to give sole and complete authority, information and assistance (at Honeywell's expense) for the defense and disposition of the claim. Honeywell will not be responsible for any compromise or settlement made without Honeywell's prior written consent. Honeywell will have no obligation or liability with respect to: (1) Products provided pursuant to Buyer's designs, drawings or manufacturing specifications; (2) Products used other than for their ordinary purpose; (3) claims of infringement resulting from combining any Product furnished hereunder with any article not furnished by Honeywell; or (4) any modification of the Product other than a modification by Honeywell. Because Honeywell has exclusive control of resolving infringement claims hereunder, in no event will Honeywell be liable for Buyer's attorney fees or costs. Further, Buyer agrees to indemnify and defend Honeywell to the same extent and subject to the same restrictions set forth in Honeywell's obligations to Buyer as set forth in this "Indemnity Against Patent and Copyright Infringement" section for any suit against Honeywell based upon a claim of infringement resulting from (1), (2), (3), or (4) of the preceding paragraph. If a claim is brought or if Honeywell believes that a claim is likely, Honeywell may, at its option, and at its expense, (1) procure for Buyer the right to continue using the Product; (2) replace or modify the Product so that it becomes non-infringing; or (3) accept return of the product or terminate Buyer's license to use the allegedly infringing Product and grant Buyer a credit for the purchase price or license fee paid for such Product, less a reasonable depreciation for use, damage, and obsolescence. Further, Honeywell may cease shipping the subject Products without being in breach of these Conditions of Sale. Any liability of Honeywell under this "Indemnity Against Patent and Copyright Infringement" is subject to the provisions of the "Limitation of Liability" section of these Conditions of Sale. This "Indemnity Against Patent and Copyright Infringement" section states the parties. entire liability, sole recourse and their exclusive remedies with respect to infringement. All other warranties against infringement of any intellectual property rights, statutory, express, or implied are hereby disclaimed. 16. SOFTWARE LICENSE "Licensed Software" means software, including all related updates, changes, revisions and documentation, if any, that Buyer is entitled to use under these Conditions of Sale and which is not subject to a separate software license between the parties. Subject to Buyer's compliance with these Conditions of Sale, Honeywell grants to Buyer and Buyer accepts a nontransferable, nonexclusive license, without the right to sublicense, to use the Licensed Software in the ordinary and normal operation of the Product on which it is installed or with which it is intended to be used under this license. Honeywell (and its licensors, if applicable) retains all title to the intellectual property related to all material and software provided under these Conditions of Sale. Buyer may transfer its license to use the Licensed Software to a third party only in conjunction with Buyer's sale of any Honeywell or Buyer Product on which the Licensed Software is installed or with which it is used. Buyer's transfer of the Licensed Software as authorized herein must be under terms consistent with and no less stringent than the terms set forth in these Conditions of Sale. Except as specifically permitted in these Conditions of Sale, the Licensed Software may not be sublicensed, transferred or loaned to any other party without Honeywell's prior express written consent. Unless specifically authorized by Honeywell in writing, Buyer is prohibited from making copies of Licensed Software except for backup purposes. Buyer will reproduce and include all Honeywell proprietary and copyright notices and other legends both in and on every copy made. Buyer may not directly or indirectly make any effort to deconstruct the software provided, including, but not limited to: translating, decompiling, disassembling, reverse assembling, reverse engineering, creating derivative works or compilations, or performing any other operation to obtain any portion of its contents. Buyer will take all reasonable actions necessary to prevent unauthorized access, disclosure or use of the software provided. Notwithstanding the warranties provided elsewhere herein, Buyer acknowledges that Licensed Software may be product, aircraft, or sensor specific and, as such, may require reasonable adjustment or refinement to suit Buyer's specific requirements. Subject to the receipt of adequate written notice and reasonable aid from Buyer, Honeywell will make reasonable, commercial efforts to accomplish reasonable adjustments or refinements for up to 90 calendar days after initial delivery of the Licensed Software. Except as expressly granted herein, no license or right, including sublicensing rights, either expressly, implicitly, by estoppel, conduct of the parties, or otherwise, is granted by Honeywell to Buyer. 17. SPECIAL TOOLING AND DATA Honeywell owns all rights to all specifications, drawings, engineering instructions, data, material, equipment, software, processes, facilities and tooling, including, but not limited, to jigs, dies, fixtures, molds, patterns, taps, gauges, test equipment, manufacturing aids and replacements items, now existing or hereafter created, except to the extent that title is specifically transferred in writing from Honeywell to Buyer. 18. EXPORT Honeywell will apply for United States Government export authorizations required for delivery of any goods, services or technical data under an Order. Buyer will promptly provide all information required by Honeywell to complete the authorization application. Buyer will apply for all other necessary import, export or re-export approvals. Buyer will comply with all applicable export and import control laws and regulations, including the United States Export Administration Regulation (EAR) and the United States International Traffic in Arms Regulations (ITAR), and will retain documentation evidencing such compliance. Buyer is aware that U's. export law may impose restrictions on Buyer's use of the goods, services, or technical data, or on their transfer to third parties. Buyer will immediately notify Honeywell and cease distribution activities with regard to the transaction in question if Buyer knows or has a reasonable suspicion that the products, technical data, plans, or specifications may be redirected to other countries in violation of export control laws. Honeywell will not be liable to Buyer for any breach resulting from government actions which impact Honeywell's ability to perform, including but not limited to: (1) refusal to grant export or re-export license; (2) cancellation of export or re-export license; (3) any subsequent interpretation of United States export laws and regulations, after the date of Honeywell's acceptance of an Order, that limits or has a material adverse effect on the cost of Honeywell's performance under an Order; or (4) delays due to Buyer's failure to follow applicable import, export, transfer, or re-export laws and regulations. If Buyer designates the freight forwarder to be used for export shipments from the United States, then Buyer's freight forwarder will export on Buyer's behalf and Buyer will be responsible for any failure of Buyer's freight forwarder to comply with all applicable export requirements. Honeywell will provide Buyer's designated freight forwarder with required commodity information. 19. TAXES Honeywell's pricing excludes all taxes (including, but not limited to, sales, use, excise, value-added or other similar taxes), duties and charges (collectively, "Taxes"). Buyer will pay all Taxes resulting from an Order or Honeywell's performance, whether imposed, levied, collected, withheld or assessed now or later. If Honeywell is required to impose, levy, collect, withhold or assess any Taxes on any transaction under an Order, then in addition to the purchase price, Honeywell will invoice Buyer for the Taxes unless, at the time of Order placement, Buyer furnishes Honeywell with an exemption certificate or other documentation sufficient to verify exemption from the Taxes. If any Taxes are required to be withheld from amounts paid or payable to Honeywell under an Order: (1) such withholding amount will not be deducted from the amounts due Honeywell as originally priced; (2) Buyer will pay the Taxes on behalf of Honeywell to the relevant taxing authority in accordance with applicable law, and (3) Buyer will forward to Honeywell within 60 days of payment proof of Taxes paid sufficient to establish the withholding amount and the recipient. In no event will Honeywell be liable for Taxes paid or payable by Buyer. 20. NOTICES Every notice between the parties relating to an Order will be made in writing and, if to Buyer, to Buyer's authorized representative or, if to Honeywell, to Honeywell's authorized representative. Notices will be deemed received when delivered either: 1. Two (2) calendar days after mailing by certified mail, return receipt requested and postage prepaid; or 2. One (1) business day after deposit for next day delivery with a commercial overnight carrier provided the carrier obtains a written verification of receipt from the receiving party. All notices must be addressed as follows: To Honeywell: Honeywell International Inc. Address: See the Supplier CAGE Code Information section of this Catalog for complete addresses. To Buyer: Address: Buyer's address on the Order or to Buyer's purchasing representative. 21. GENERAL PROVISIONS Assignment. Buyer will not assign any rights nor delegate any obligations under an Order or any portion thereof without Honeywell's advance, written consent which will not be unreasonably withheld. Honeywell may assign an Order in connection with the sale or transfer of all or substantially all of the assets of the business to which it pertains. Any attempt to assign or delegate in violation of this section will be void. Waiver. Failure of either party to enforce at any time any of the provisions of these Conditions of Sale will not be construed to be a continuing waiver of any provisions hereunder. Severability. If any provision of these Conditions of Sale is determined to be illegal, invalid, or unenforceable by an arbitrator appointed in accordance with the Disputes section of these Conditions of Sale or court of competent jurisdiction, the remaining provisions will remain valid and enforceable and, in lieu of the illegal, invalid, or unenforceable provision, there will be added as part of these Conditions of Sale one or more provisions as similar in terms as may be legal, valid and enforceable under applicable law. Third Party Beneficiaries. Except as expressly provided to the contrary in these Conditions of Sale, the provisions of these Conditions of Sale are for the benefit of the parties to these Conditions of Sale only and not for the benefit of any third party. Independent Contractor. The parties acknowledge that they are independent contractors and no other relationship, including without limitation partnership, joint venture, employment, franchise, master/servant or principal/agent is intended by these Conditions of Sale. Neither party has the right to bind or obligate the other. Headings. Headings and captions are for the convenience of reference only and do not alter the meaning or interpretation of these Conditions of Sale. Commercial Use. Buyer represents and warrants that all purchases of Products hereunder will not be used in the performance of a contract or subcontract with any government in a manner so as to affect Honeywell rights to data, technology, software or other intellectual property supplied by Honeywell. Survival. All rights, duties and obligations which by nature should apply beyond the term of Honeywell's obligations under an Order including, but not limited to, Sections 6, 8, 12, 13, 14, 15, 16, 17, 20, and 21 will remain in force after the acceptance and complete performance of any Order. Entire Agreement. The terms contained in these Conditions of Sale, together with General Terms section and Supplier CAGE Code Information section of this Catalog, is the entire agreement between Buyer and Honeywell with respect to an Order and supersede any prior agreements and representations, oral or written, and all other communications between Buyer and Honeywell relating to an Order. GENERAL TERMS [PORTIONS OMITTED] MINIMUM ORDER AMOUNT Honeywell reserves the right to require a$500 minimum order amount for each line item, per delivery, in response to orders unless waived by Honeywell in writing.

MAXIMUM ORDER AMOUNT

Honeywell reserves the right to limit order quantities for certain parts.

PURCHASE ORDER CANCELLATION

Cancellation of an order, for any reason except those contained in the "Standard Conditions of Sale", will be allowed only upon written approval by Honeywell.

In the event Buyer cancels an order, Honeywell reserves the right to invoice Buyer for costs incurred due to the cancellation up to the price of cancelled part.

An order may be canceled only upon receipt of written acceptance of the cancellation fees from Buyer in the form of a purchase order in the amount of assessed cancellation fees.

The minimum cancellation fee for an order will be subject to is fifteen percent (15%) of the order value or $300 whichever is greater. Buyer has a maximum of seven calendar days to cancel an Order for items not specifically listed in Honeywell's current catalogs or electronic commerce media ("Non Catalog Items"). Cancellation must be received by Honeywell in writing within seven calendar days following the date of Order placement by Buyer. Failure by Buyer to cancel an Order within seven calendar days of the date of Order placement will result in Honeywell completing the Order within the agreed upon period and Buyer assuming the obligation to pay the full amount of the invoiced price in accordance with the Conditions of Sale. PUBLISHED AVAILABILITY DATES Buyer Orders requesting delivery of parts in less than catalog lead time are subject to review and acceptance, based on material availability. In circumstances when parts are not available from stock, Honeywell may offer alternate delivery dates, not to exceed catalog lead time commitments (if any). In such cases, Honeywell will advise Buyer of the new request date in the Order acknowledgement. Catalog lead times are based on the most current, available information, and unexpected demand may affect Honeywell's ability to meet these lead times. Unusually large order quantities will be filled from available material; the balance of the requested delivery quantities and delivery dates may change based on material availability. This policy is not applicable to AOG Orders. [PORTIONS OMITTED] RETURNED MATERIAL AUTHORIZATION (RMA) Except for standard repairs (including warranty), the return of cores, quality and errors in shipment, returned materials will not be accepted. Return of material to Honeywell must have prior approval or returned materials will not be accepted. Requests for returns must be submitted within 30 days after original receipt of hardware by Buyer. Requests for returns received by Honeywell beyond the 30 day period may not be accepted. Credit may be issued upon return of new, unused, undamaged parts in the original packaging; however, Honeywell reserves the right to apply a restocking fee of 15% of the Item price or$250.00, whichever is greater.

If original packaging is opened a re-test fee could apply.

If the material was acquired on an AOG status order, the buyback will be subject to a restocking fee of 25% of the item price or \$500.00 whichever is greater.

Return shipments to Honeywell without proper authorization and documentation may be returned at Buyer's expense.

For approved RMA's Honeywell must receive the product within 30 days of the RMA issue date.

Honeywell reserves the right to return the Product received beyond the 30 day window at Buyer's expense.

ERROR IN SHIPMENT

Written notification of any short shipments or receipt of incorrect material against an order must be received by Honeywell within 30 calendar days after receipt of the shipment.

CREDIT HOLDS / LIMITS

If Buyer has exceeded its credit limit and partial payment is received, Honeywell reserves the right to release order shipments on a part availability aged order basis.

If Buyer has not maintained acceptable credit practices, Honeywell reserves the right to review, adjust prices(s) and delivery schedules or cancel existing orders.

If Buyer's credit terms are Payment Prior to Shipment (PPS) and payment is not received within 30 days after order placement, Honeywell reserves the right to cancel order as stated in Honeywell's Terms and Conditions of Pro-forma Invoice.

Honeywell will consider the invoice correct and payable in accordance with its terms unless Buyer notifies Honeywell within 14 days of any suspected disputes or errors.

REQUESTS FOR CREDIT

All credit limit arrangements are made through Honeywell Aerospace Credit & Collection (ACC).

Terms:

Standard payment terms are Net 30 days from invoice date, subject to credit worthiness and the attached Standard Conditions of Sale.

Other possible payment terms are Payment Prior to Shipment, Credit Card, or Letters of Credit.

Honeywell may, without notice to Buyer, change Buyer's credit terms based on Buyer's payment practices or any other identified risk factors.

Additionally, if Honeywell does not receive Buyer's payment in accordance with the Catalog Conditions of Sale and General Terms, Honeywell may change Buyer's credit terms and credit limit without notice, and Honeywell may impose stop shipment, or PPS.

Honeywell may also review or amend price and delivery or cancel existing orders.

[PORTIONS OMITTED]

PAYMENTS

Payment Method:

Wire transfers are the preferred and requested method of payment for our Buyers, as they assure prompt and accurate credit to the Buyer's account.

It is critical for that all payments to Honeywell are supported by a detailed Remittance Advice.

Please send your remittance info by email to "GCTS AeroRemittance@Honeywell.com". The remittance advice will include Buyer identification number, as well as reference numbers of invoices and credit memos being paid or applied.

Remittance Advise must be sent with, or prior to, payment to ensure accurate and timely application.

[PORTIONS OMITTED]

PRICING AND DELIVERY

Orders will be priced in the year of confirmed delivery.

Except for Service Parts, orders for delivery beyond current year must be revised by Buyer at year end with next year's pricing to ensure delivery in the following year.

Honeywell reserves the right to arrange for partial or drop shipments directly from its supplier's facilities in order to comply with FAA requirements.

[PORTIONS OMITTED]

I'm an AV-rated business lawyer and neutral arbitrator in Houston, as well as a part-time law professor teaching contract drafting. I'm licensed in Texas and California and am registered to practice in the U.S. Patent and Trademark Office. (My last name is pronounced “Tate”; because of my Roman numeral my parents called me “D.C.,” which stands for Dell Charles.)

I'm a member of the bar in Texas and California, as well as registered to practice in the U.S. Patent and Trademark Office.

I serve as a neutral arbitrator in tech-contract disputes. I'm an adjunct professor at the University of Houston Law Center, teaching contract drafting, as well as a frequent invited speaker at continuing-legal-education conferences. I also maintain a limited solo practice advising tech companies, both established and startups.

I was formerly a partner and member of the management committee at Arnold, White & Durkee, one of the largest IP-only law firms in the United States, with some 150 lawyers in six offices.

I left AW&D to become vice president and general counsel of BindView Corporation, a publicly-traded software company with some 500 employees in six countries. As outside IP counsel, I'd helped the founders to start the company and later to go public; I served in-house until our successful "exit," when we were acquired by Symantec Corporation, the world leader in our field.

I serve in national- and international professional associations, including past service: • on the governing council of the American Bar Association's Section of Intellectual Property Law, where I'd previously chaired the Section's computer-software committee and the Section's information-technology division; • as co-chair of the Commercial Transactions Committee of the State Bar of California's Business Law Section; and • currently, on the leadership team of the Houston chapter of the Licensing Executives Society USA/Canada, where I'll be the chapter chair in 2017-2018.

My law degree is from the University of Texas at Austin, where I was on law review; that's also where I received my undergraduate degree, with high honors, in mathematics.

In between college and law school, I did my ROTC scholarship pay­back time as a U.S. Navy nuclear engineering officer (the Rickover program) and surface warfare officer, including three years of sea duty in the aircraft carrier USS ENTERPRISE. I was in charge of a 150-man engineering division; I also served as officer of the deck underway (in charge of the entire ship and its 5,000-man crew while on watch) and qualified as [chief] engineer officer of a naval nuclear powered ship.

My wife, Maretta Comfort Toedt, and I have two adult children who live and work in Houston (and, says Maretta, don't call us enough).

Any views I might express here are my own, of course, and not necessarily those of clients, former employers, etc., etc.

## Footnotes:

[1]
762 F.3d 1016, 1022 (10th Cir. 2014) (reversing and remanding trial-court judgment in part)
[2]
See generally, e.g., Daniel P. Graham and Tyler E. Robinson, Enforceable Contract or Unenforceable Agreement to Agree? The Importance of Specificity in Teaming Agreements (WileyRein.com 2013).
[3]
No. 2627-VCP (Del. Dec. 23, 2015)
[4]
E.g., Gordon G. Gallup and Rebecca L. Burch, Semen Displacement as a Sperm Competition Strategy in Humans, 2 Evol. Psych. 12 (2004),