Contract Drafting Readings (Toedt)

This is very much a work in progress. Please see the table of contents in the upper right corner.

Updated 2017-02-13 15:50 CST

1 Introduction: The role of the contract drafter

1.1 A contract drafter must wear multiple hats

An effective contract drafter (or reviewer/reviser) serves in at least five important roles:

  • She is a trip-planner who tries to imagine what could happen in the parties' relationship;
  • She is an explainer whose clarity of expression might someday help (or hinder) the work of those who will carry out the contract — and of those who might have to enforce it;
  • She is a litigation-work-dispatcher whose choice of words can set the bar for each party's burden of proof in a dispute;
  • She is an evidence creator, from using acknowledgements in the body of the contract, to fashioning a key exhibit for arbitration or litigation — an exhibit that might well be included in juror notebooks for their reference;
  • Lastly, she is a sales person who must sometimes "sell" her contract concepts to the other side, and possibly even to her own client.

1.2 A contract drafter must address multiple audiences

Anyone creating language for a contract draft must keep in mind that:

  • During contract negotiation, the draft will almost certainly be read by the other side's contract reviewer(s), who likely are quite busy and want to finish as quickly as they can.
  • In addition, the business people of one or both parties are likely to read at least portions of the draft.
  • During performance of the contract's terms, one or both parties might have occasion to consult the contract language — although it's often said that most contracts "stay in the drawer."
  • If a dispute arises, the parties' lawyers will look for loopholes.
  • If the dispute goes to litigation or arbitration, then a whole new class of readers — a judge, an arbitrator, jurors — will become relevant; these new readers almost certainly will have no prior knowledge of the parties' dealings, and might not even understand the business context of the contract.

1.3 Contracts needn't always be long, formal documents

When I was a baby lawyer, the senior partner of my firm, the late Tom Arnold, asked me to do a simple confidentiality agreement for a friend of his, "John Doe." John was going to be disclosing some confidential business plans to his friend "Ron Roe."

Tom told me NOT to draft a conventional contract; instead, I was to draft just a short letter agreement along approximately the following lines:

Dear Ron: 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, then please countersign the enclosed copy of this letter and return it to me. I look forward to working with you.

Sincerely,
(handwritten signature)
John Doe

AGREED:

______________________
Ron Roe

______________________
Date signed

When I'd prepared a draft, I asked Tom, isn't this pretty sparse? Tom replied, yes it was sparse, but:

  • The client, John, wanted to get to signature quickly; in view of his relationship with Ron, John wanted the written agreement only as insurance;
  • Ron would almost certainly sign a short letter agreement immediately, whereas he would probably want to have his lawyer review a longer, formal contract, and that would slow things up for John;
  • For this kind of situation, a short, signed letter agreement could be just as binding, and just as enforceable in court, as a long, formal contract.

This story might remind lawyers of something analogous that they probably learned in school, namely that a short, handwritten last will and testament can be valid and enforceable:

On 8 June 1948 in Saskatchewan, Canada, a farmer named Cecil George Harris who had become trapped under his own tractor carved a will into the tractor's fender. It read, "In case I die in this mess I leave all to the wife. Cecil Geo. Harris." The fender was probated and stood as his will. The fender is currently on display at the law library of the University of Saskatchewan College of Law.

Wikipedia, Holographic wills (accessed 2016-01-04; links and footnotes omitted, extra paragraphing added).

For continuing commercial relationships such as distributor agreements, consider also the Pathclearer approach:

In our view, it is often better to leave continuing commercial relationships largely to the irresistible forces of free market economics, rather than attempt to place continuing contractual obligations on each other.

In other words, commence doing business together, but make no commitments about the duration of your relationship or the level of business you will transact. Simply accept that for so long as the relationship remains mutually beneficial, you will continue to do business. If it ever ceases to be so, you will part company, but you will give a reasonable period of notice to enable an orderly transition.

This approach simply recognises the fact that economic forces are too powerful to be constrained by contracts.

 * * *

A Pathclearer contract is just a short letter agreement that our business colleagues can send out on their own letterhead. It sets out the key terms of the deal (goods/services, price and so on) and then states that the general law will be allowed to govern any other issues.

It contains an indemnity in favour of Scottish and Newcastle against third party claims arising from Scottish & Newcastle using the supplier’s goods or services, because this is something which the general law does not automatically provide, but which seems to be a fundamentally fair allocation of risk. It also states that English law applies, because we use this Pathclearer approach for international contracts.

Occasionally, other clauses may be added, depending on the deal. But the essence of Patchlearer is to avoid detailed contractual terms unless there is a clear need for them.

Steve Weatherley, Pathclearer: A more commercial approach to drafting commercial contracts, L. Dept. Qtrly, October-December 2005, at 41, 43.

1.4 Keep in mind the different players, and the different incentives to which they respond

It's worthwhile for contract drafters to remember that parties to a contract aren't monoliths. It has probably even been said that there's no such thing as a company, only people, because ultimately a corporation is nothing more than a group of people who enjoy special privileges under the law when they act together.

These individuals likely will have different incentives influencing their behavior. In a 1995 speech at Harvard, Warren Buffett’s longtime business partner Charlie Munger famously said: Always look for the incentives. In an on-line transcript of his speech, Munger is reported to have said, “I think I’ve been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I’ve underestimated it.”

Here are some of the different types of individual who might be involved in the negotiation and, later, in the performance, of a contract; think about what their personal incentives are:

  • Sales people (some of whom might be compensated largely on a commission basis)
  • Fulfillment workers
  • Shipping workers
  • Mailroom clerks
  • End users
  • Procurement / sourcing people
  • In-house legal
  • Law firms
  • Tax authorities
  • Regulators
  • Competitors
  • The bosses of all the people listed above.

2 Style guidelines

2.1 D.R.Y. – Don't Repeat Yourself

Including information more than once in a contract can cause severe problems if (i) the information is revised during negotiation, and (ii) the change is not made everywhere in the contract documents.

(Just this type of mistake once cost a bank $693,000. 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), discussed in this note.)

Here's an example:

  • WRONG: Alice will sell the house at 1234 Main Street to Bob. … Alice will not alter the house at 1234 Main Street before the Closing.
  • Better: Alice will sell the house at 1234 Main Street (the "House") to Bob. … Alice will not alter the House before the Closing.

Another example:

  • WRONG: Bob will pay Alice one hundred thousand dollars ($100,000.00).
  • Better: Bob will pay Alice $100,000. (Notice that ".00" is omitted.)
  • Better (sometimes): Ayeesha will pay Bernado USD $100,000. (The "USD" makes it clear that U.S. dollars are required.)

2.2 Numbers: Style guide

General guidelines

  1. Spell out one to ten: "There will be four students per negotiating team."
  2. Use numbers for 11, 12, 13, etc.: "There are 21 students in the class."
  3. Both in the same sentence? Consider using just numbers:
    • Awkward: "The quiz will contain ten to 12 questions."
    • Better: "The quiz will contain 10 to 12 questions."
  4. As a general rule, don't start a sentence with numerals; either spell out the numerals in words or (preferably) rewrite the sentence.
    • Awkward: "42 was Douglas Adams's answer to The Ultimate Question of Life, the Universe, and Everything." (Note also the apostraphe in "Adams's"; this is customary, except for Jesus, which would be "Jesus' life and message ….")
    • Better: "According to Douglas Adams's novel The Hitchhiker's Guide to the Galaxy, the answer to The Ultimate Question of Life, the Universe, and Everything was 42."
  5. Large numbers? Use million, billion, etc. (but not thousand).
    • Awkward: "More than 300,000,000 people live in the United States."
    • Awkward: "More than three hundred million people live in the United States."
    • Better: "More than 300 million people live in the United States."
  6. 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 D.R.Y. – Don't Repeat Yourself).
    • WRONG (twice): "More than three hundred million (300,000,000) people live in the United States."
    • Right: "More than 300 million people live in the United States."

Currency amounts

Some general guidelines:

  1. There's usually no need to say "in United States dollars" – put that in the Definitions & Usages section
  2. In international contracts, use the ISO 4217 currency abbreviations such as USD, as in, "Buyer will pay USD $30 million."
  3. It's OK to spell out dollar amounts, but it's customary to just use the numbers
    • Awkward: Twenty million dollars
    • Better: $20,000,000.00
    • Better still: $20 million
  4. Omit zero cents unless relevant
    • Awkward: "Alice will pay Bob $5,000.00."
    • Better: "Alice will pay Bob $5,000."
  5. WRONG: "Buyer will pay USD thirty million ($30 million)" — this kind of error once cost a bank $693,000, as discussed in D.R.Y. – Don't Repeat Yourself.

Percentages

  1. Spell out a percentage if it's at the beginning of a sentence. EXAMPLE: "Thirty percent of the proceeds will be used for …"
  2. Otherwise, just use the numbers — "Of the proceeds, 30% will be used for …."
  3. WRONG: "Thirty percent (30%) of the proceeds will be used for …" — this kind of error once cost a bank $693,000, as discussed in D.R.Y. – Don't Repeat Yourself.

3 Substantive suggestions

3.1 Use sunset clauses

For any right or obligation in a contract, consider whether the right or obligation should come to an end, i.e., "sunset," at some point. That can be especially true for, e.g., the following (which is far from a complete list):

  • pricing commitments;
  • confidentiality obligations;
  • an obligation to close a deal;
  • a right to approve or consent to something.

3.2 Consider "upon request" to shift the management burden

Suppose that a draft contract requires ABC Corporation to maintain X dollars in the bank. The other party to the contract, XYZ Inc., would be at least somewhat interested in checking to be sure that ABC is in fact complying with this requirement.

XYZ could draft the contract to require ABC to send the other party, XYZ Inc., a copy of each of ABC's monthly bank statements. But that might be a pain for ABC — and if ABC forgot, then XYZ might point to that as evidence that ABC was supposedly a scofflaw that ignored its contractual obligations.

So ABC could counter by asking for the requirement to say instead: upon request by XYZ from time to time, ABC will send XYZ a copy of its then-current bank statement. That would relieve ABC of the burden of managing compliance with the obligation.

3.3 Watch the burden of proof

FACTS:

  • Alice, the executor of her late parents' estates, is to sell her parents' house to Bob. Alice and her brother Alan grew up in the house; it sentimental value to them.
  • In the contract, Bob agrees to give Alice a few days so that she can ask Alan to sign off on the sale, but the deal will be off if Alan disapproves.
  • On December 1, Alice gets a better offer from Carol; she sells the house to Carol instead of to Bob.

QUESTION: If Bob wanted to sue Alice for breach of her contract with him, which of these contract provisions would be better for Bob, in terms of Bob's proving up his case in court?

  • Version 1: Alice need not sell the house to Bob unless, no later than December 1, Alice's brother Alan approves the sale in writing.
  • Version 2: Alice must sell the house to Bob unless, before December 1, Alice delivers to Bob a written statement, signed and notarized by Alan, disapproving of the sale.

3.4 Drafting for disputes: Keep individuals' personal interests in mind

Contracts should always be drafted with an eye toward sensibly managing disputes that might arise between the contracting parties. That means giving some thought to the personal interests of the parties' in­div­id­u­al employees, because any employee will be at least somewhat motivated to act in his own personal best interest, which might not be the same as the best interest of his employer. (This is known generically as agency cost.) That can lead to problems; here are some possible ways of managing a few of them contractually:

Problem:
Memories are often short and can sometimes be "creative"; moreover, a company's circumstances can change. By the time a contract dispute arises, the parties' key employees and executives could have a different view of what's important to them; they might well have forgotten — perhaps conveniently — what mattered to them during the con­tract nego­tiations.
Drafting suggestion:
Consider including explanatory parentheticals and/or footnotes in the contract to educate later readers about why the neg­o­ti­a­tors agreed to certain things.
Problem:
People can get defensive if they think their work might be criticized; that could hamper discussions aimed at resolving a contract dispute.
Drafting suggestion:
Consider including a dispute-escalation clause in the contract — such clauses typically require the parties to refer any unresolved dispute up the ladder to higher levels of man­age­ment, to people who might have less personal skin in the game and therefore might be able to assess the dispute more objectively.
Problem:
The lawyer handling the dispute for the company will naturally want the company's business people to see him as a protector who will battle to get the company the result that to which the business people feel they're entitled. The lawyer won't want to be perceived as a nay-sayer or, worse, a defeatist. Moreover, if the lawyer is an outside counsel, his personal compensation and prestige stand to benefit if he can oversee a lawsuit that keeps one or more lawyers running their meters for a few months or a few years.
Drafting suggestions:
(1) An early-neutral-evaluation provision can provide an inexpensive, non-binding sanity check from an outsider, before the parties' positions become set in stone and their legal bills start to mount up. (2) A micro-arbitration clause, re­quiring quick, streamlined arbitration of specific is­sues (for example, issues of rea­sonableness such as “rea­son­able efforts”), could let the parties cut to the chase before their legal fees get out of hand.

3.5 Consider spelling out exactly what must happen in case of breach

Contracts often contain generic statements that, in case of a breach, the breaching party will cure the breach within, say, 30 days. Some­times, however, it helps to spell out exactly what the other side must do to cure the breach. That way, the other side's lawyers will have less wiggle room to come up with ‘creative' arguments why the other side shouldn't have to do what you want them to do.

Here's an illustration: A client of mine, an enterprise software vendor, once came to me with a complaint about one of their big customers, which was ‘stealing' the software, that is, deliberately using the soft­ware far in excess of its paid-for licenses.

(The software vendor knew this because one of the customer's emp­loyees had quietly alerted the vendor's sales rep to what was going on.)

The client could have sued its customer for infringement of the copy­right in its software. In theory, the client could have sought to recover the customer's indirect profits arising from the infringement, which can be a remedy with real teeth. [FN]

But the customer had a big, capable legal staff and competent outside counsel. We knew those lawyers would look for arguments why the customer wasn't liable for infringement and didn't owe any money. If the vendor wanted to get money from the customer, it probably would have to file a lawsuit.

[FN] Consider the case of Frank Music Corp. v. Metro-Goldwyn-Mayer, Inc., 886 F.2d 1545 (9th Cir. 1989) (Frank Music II). The MGM Grand Hotel had a floor show called Hallelujah Hollywood!, which included ‘tributes' to various MGM movies. The floor show incorporated significant portions of the musical Kismet, which had been made into an MGM movie. The court found that this went beyond MGM's ‘movie rights' and therefore infringed the copyright in the musical. The resulting damage award included not just a portion of profits from the floor show itself, but 2% of the overall profits from the MGM Grand's hotel operations — including 2% of the casino profits — which, the court found, were indirectly attributable to the promotional value of the floor show.

Filling a lawsuit should never be done lightly, even when a lot of money is at stake. Litigation is expensive. It's a drain on management's time and focus. You seldom know what or when the final outcome will be. Not to mention that suing a big customer is hardly a great way for a vendor to get more business from that customer.

So the client wasn't interested in filing a lawsuit. It just wanted the cust­omer to pay for what it had ‘stolen' in unauthorized use.

Fortunately, the client's standard software license agreement had good language in it. (Yes, I had written the language.) The license agreement expressly said that, if the customer made unauthorized use of the soft­ware, it agreed to buy the necessary number of catch-up licenses — and if the customer did so, then the vendor waived its right to seek copy­right damages.

That contract language proved very useful. Instead of having to argue with the customer's lawyers about how a court would apply the law of copyright, we just pointed to the contract, which stated in black and white what the customer agreed to do. In due course, the customer paid up.

The lesson: For important breaches of contract —

  • Be careful about relying on a generic breach-and-cure provision that lawyers could argue over;
  • Instead, consider spelling out in the contract exactly what you want the other side to do.

3.6 Check to 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. (See these examples of signature-block formats.)

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. 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.)

3.7 Watch for contract language that could make your client's people personally liable

If your client is a company, check the contract to see whether client personnel are personally doing any of the following under the contract:

  • guaranteeing the client's performance of its obligations under the contract
  • certifying the truth of particular facts (for example, that the company is duly incorporated and in good standing legally) about which they have no personal knowledge

EXAMPLE: In a Washington-state case, one William Grover signed a document assigning a lease agreement as "Grover International, LLC by William Grover member." That wasn't good enough, though, because in five different places, the document referred to the new tenant as "William and Teresa Grover as individuals, dba Grover International, LLC." (Emphasis added.) Mr. Grove and his wife later sold their business and assigned the lease to another couple. a few months later, the other couple moved out and stopped paying rent. The landlord sued just about everyone in sight for breach of the lease agreement, including William Grover personally.

Mr. Grover tried to claim he was not personally liable because he had signed the lease assignment document as a representative of his LLC. The court had no difficulty rejecting Grover's claim of immunity from personal liability. Distinguishing the factual situations that had existed in some prior cases, the court said that:

If Grover did not want to be personally bound on the assignment, he should have insisted on the elimination of the language within the agreement that designated the assignee as "William and Teresa Glover as individuals." The trial court did not err in holding the Grovers personally liable.

Losh Family, LLC, v. Kertsman, 155 Wash. App. 458, 228 P.3d 793, 796 (2010) (affirming trial court's grant of summary judgment in favor of landlord against Grover).

EXAMPLE: In a Florida case, the defendant, a company called 688 Skate Park, was the tenant in a lease agreement. The signature block, properly, listed 688 Skate Park as the party agreeing to the lease agreement, which was signed by one Jay Turner "as its President." Unfortunately for Mr. Turner, the lease agreement also included another little goodie in its language, as follows:

… [T]he individual executing this Lease on behalf of said corporation, limited liability company or limited partnership, guarantees the obligations of Tenant hereunder.

The result: Mr. Turner was held personally liable on the lease agreement. See Coleman v. 688 Skate Park, Inc., 40 So.3d 867, 868 (Fla. App. 2010) (reversing district court holding).

4 Pro tips for contract negotiators

4.1 Letters of intent: their highest and best use is disavowing a binding contract

A letter of intent — aka an LOI, sometimes known as a memorandum of understanding or MOU — is the equivalent of comfort food; it's something you can show your boss to reassure her that the transaction you're supposed to make happen is moving forward.

The most useful function of a letter of intent, though – arguably its only proper function – is to make it clear that the parties do not intend to enter into a binding contract at that time — that they will do so only through a formal, signed, final written agreement. That makes it more difficult (although not impossible) for one party to claim later that the parties had reached an oral agreement.

4.2 A Golden Rule for contract drafting

The rule (OK, a guideline): Don't ask the other side to agree to something that you wouldn't accept if the roles were reversed.

I once helped a client negotiate changes to a prospective cus­tomer's standard nondisclosure agreement. The form included a statement that my client consented, in advance, to the entry of an in­junction if my client breached the NDA's confidentiality obligations; the form also waived any requirement that the customer post a bond as a prerequisite to obtaining an injunction against my client.

I asked that both provisions be deleted. The customer's lawyer (who was fairly junior but knew her stuff) and I went back and forth for a few minutes about those issues.

The customer's lawyer finally asked me: If I were representing her client, wouldn't I ask for a bond waiver too? I said no, I wouldn't; I explained that:

  • I un­der­stood why she wanted a bond waiver, but we can't know in ad­vance what the circumstances might be; a one-size-fits-all solu­tion would be too dangerous here;
  • That's why the law calls for judges to exercise discretion, taking all the circumstances into account, in deciding (A) whether or not to grant an injunction at all, and (B) if so, how much the bond should be.
  • So let's just allow the law to work, I argued.

Happily, the customer's lawyer agreed to delete the bond waiver.

Her question, about what I would do in her shoes, reminded me: As I've recounted before, when I was general counsel for a software com­pany, our standard software license agreement was quite cus­tomer-friendly, in ways that we knew we could sup­port. That paid off, not just in getting our deals closed more quickly, but also on a couple of occasions when we were acquiring soft­ware licenses from other companies. On each of those occasions, the other company agreed that, instead of negotiating their one-sided license agree­­ment form, we could just use our form, because with that form we were equally happy being on either side of the agreement. That worked for the other companies, and as a result, we were able to get to signa­ture much sooner.

4.3 Three reasons to educate the other side's negotiators what to ask for in the contract

“If the other side doesn't know what to ask for, it's not my job to educate them.” That's one reason a contract drafter might not want to use a short-form contract that references a “standard” form book, or to use a fill-in-the-blank form such as a PRECUT baseline contract form: the other side could see what other options were available, which would give them a good idea of what they might want to demand for in negotiations. But consider these points:

• Your notion that you're the one with superior knowledge might be wishful thinking. The other side could bring in an expert who knows exactly what changes to demand. You might be better off setting the tone with a demonstrably-reasonable contract, and then standing on principle to reject unreasonable change requests.

• Suppose you're right, and the other side doesn't really know what they're doing. Chances are you'll get them to signature faster — and you'll be laying a foundation for a trusting re­la­tion­ship — if the draft you're proposing seems fair and balanced.

• It can be dangerous to have a clueless contract reviewer on the other side. The reviewer might make un­rea­son­able demands, but being clueless, s/he won't know that, and can't be convinced otherwise. That could drive the negotiation right into the ditch.

4.4 How to convince a big customer to use your contract form – and get your sales people to support you in it

At my former company, our contract form was extremely customer-friendly.  Every time we made a concession in a contract negotiation, we asked ourselves whether we could incorporate the concession into our standard form, in the interest of reducing the time to signature. 

The result was rave reviews from our customers. One customer lawyer said to me, when I first read your contract, I wondered if someone had already negotiated it for us.

Another customer's lawyer said, I told our business people that if your software is as good as your contract, we're getting a great product.

We might have given away some theoretical legal advantages, but nothing worth worrying about, and the business people loved the speeded-up sales cycle.

A fringe benefit of having such a customer-friendly contract was that I could enforce a policy with our sales people: We would not negotiate a customer's contract form until the sales manager got me a five-minute phone call with the customer's contracting people.

In most cases, I was able to persuade the customer's contract reviewers that using our contract would get us to signature with less work for all of us.

In the cases where we did end up using the customer's form, that initial five-minute phone call helped establish a positive working relationship which, among other things, helped soften the blow if we had to do a serious markup of their paper.

4.5 How to kill a big-company deal in the cradle: Refuse to use the other side's contract form

If you're an entrepreneur and want to kill a deal with a big company in the cradle, then follow the advice of ‘Uncle Saul' in a post (otherwise full of good advice) on negotiating such contracts. See Kiss of Death – Contract Provisions Entrepreneurs Should Avoid at All Costs (hat tip: Hacker News). The author explains why he thinks an entrepreneur should "never agree to … allow the other side to draft the agreement …." That's unrealistic, if you ask me.

For reasons good and bad, big companies usually want to use their contract forms, not yours. Certainly it's important to offer to draft the contract. And if the big company reeaally wants to do a deal with you, then you might get away with insisting on controlling the typewriter.

But bad things can happen, though, if you simply fold your arms and refuse to negotiate the other side's contract paper. Even if the big company's negotiators grudgingly agree to work from your draft contract, they'll start the negotiation thinking your company is less than cooperative (which isn't good for the business relationship). Then later, when you ask for a substantive concession that's important to you, they may be less willing to go along. In any case, their agreement to use your contract form, in their minds, will be a concession on their part, meaning that you now owe them a concession.

For a vendor lawyer, there's another danger in insisting on using your own contract form: Your client's sales people will blame their lack of progress on you. Sales folks are always having to explain to their bosses why they haven't yet closed Deal X. Your insistence on using your contract form gives them a ready-made excuse: They can tell their boss that you're holding up the deal over (what they think is) some sort of petty legal bulls\_\t. Even if that's not the whole story, it's still not the kind of tale you want circulating among your client's business people.

4.6 Cut negotiation delays with a balanced contract form

In a prior life, I was vice president and general counsel of a medium-sized, publicly-traded software company. Whenever a customer asked us to agree to a change in our standard contract form, we treated it as a marketing opportunity.

Our thinking was this: Customer A thinks its life will be better if we can make this commitment. It's willing to give us money if we do. Hmm — maybe we can tailor our business processes so that we can comfortably make this commitment, not just for this customer, but for others too. That might give us yet another point of differentiation for our products.

*In many cases we changed our standard form, so that in the future, our basic offering would already include what Customer A had found it necessary to ask for.

This approach paid big dividends: As our contract form thus evolved, it began to get rave reviews from customers' lawyers. My sense was that this significantly sped up our sales-negotiation cycle.

I made notes of customers' favorable comments. I finally got smart and quoted the comments (anonymously) on a cover page of the contract form. This also turned out to be a good move, because it helped us “sell” customers' legal people on the idea of using our contract form. Here are a few of the comments, all made by in-house counsel:

When I first looked through this, I wondered ‘did someone already negotiate this for us?' It's a pretty nifty document you've got there; I liked it very much.

I told our business people that if your software is as good as your contract, we're getting a great product.

I giggled when I saw the ‘movie reviews' on your cover sheet. I'd never seen that before – customers saying this was the greatest contract they'd ever seen. But the comments turned out to be true.

Needless to say, our sales people were not unhappy about getting to signature faster.

The above information is not confidential, by the way: With my CEO's permission, I talked about our approach in continuing-legal-education seminars, and even included a copy of our standard contract form in the written materials.

You might wonder whether we ever experienced legal problems from having a customer-friendly contract form. I'll note only that my CEO let me talk about our approach in public, and that we were eventually acquired by one of the world's largest software companies.

4.7 Leading off with a “hardball” contract form document might be a bad idea

Some say it's best to start a contract negotiation by sending the other side your “hardball” or “killer” contract form that's extremely biased toward your side. By doing so (the theory goes), you set the other side's expectations, and increase the odds that you'll eventually get more of what you want. Doing so also gives you a batch of potential concessions that you can use for horse-trading.

Certainly there are transactions in which it makes at least some sense to do this. And of course it's always fun to play “the art of the deal”; it feels just plain good to come out on top when negotiating the legal fine points.

But don't underestimate the price you'll pay for these putative benefits. You'll spend more business-staff time. You'll spend more in legal expenses.

And you'll incur opportunity costs: As the ‘shot clock' runs down at the end of the fiscal quarter, you'll be spending time on legal T&Cs instead of on closing additional business.

So when negotiating a deal, you might want to ask yourself whether “hardball” legal negotiation is really what you want to be spending your time doing.

It might make sense instead to lead off with a balanced contract form that represents a fair, reasonable way of doing business — one that, in an ideal world, the parties could “just sign it” and get on with their business.

4.8 Cramming down a killer contract might give you a wounded tiger to deal with later on

Suppose a customer company has a lot of bargaining power. And suppose the customer uses that power to force a vendor to make some tough concessions in a contract negotiation.

The customer's negotiators might well regard those concessions as an entitlement: We're the big dog; of course we get what we want.

But they should recall that ultimately, all contracts have to be performed by people. And people will almost certainly be influenced, not just by the words of the contract, but by their employer's then-current interests — and by their own personal interests as well.

If the vendor's people feel they've been crushed by the customer, they're unlikely to harbor warm and fuzzy feelings for the customer. (This is at least doubly true if the contract later proves to be a train wreck for their company — most business people know that being associated with a train wreck is seldom good for anyone's professional reputation.)

The vendor's people are not likely to be motivated to go above and beyond for that customer. They may be tempted to “work to rule,” to use an expression from the labor-relations world — to do just what the contract requres, and no more. That does neither party any favors.

The reverse can be true when the shoe's on the other foot. Suppose the customer thinks that it's been taken advantage of by a vendor. When it comes time for renewals, or repeat business, or recommendations to other companies, that vendor probably won't have a lot of brownie points with the customer's people.

*The lesson for contract drafters and negotiators: Even if you've got the power to impose a killer contract on the other side, think twice before you do so. You could be setting up your client to have to deal later with a wounded tiger.

4.9 In praise of short, simple contract clauses

Inexperienced- or rushed contract drafters often write long, convoluted clauses. I've been as guilty as anyone on that score, and have to constantly watch myself about it. Other things being equal:

  • Short, simple clauses are less likely to be summarily rejected by a busy reviewer just because she can't afford the time to study them.
  • Short, simple clauses ideally can be snapped in and -out of a contract draft like Lego blocks without inadvertently messing up some other section of the contract.
  • Short, simple clauses are easier to edit.
  • Conversely, short, simple clauses offer less temptation for the other side's reviewer to tweak more language than necessary — 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.

4.10 Contract simplification – five techniques

I've developed a real thing about contracts with incredibly convoluted language. You've seen plenty of them — “if X and Y happens, then Z will occur, provided that A is true, and subject to the occurence of B, except that if C is also the case, then D will take place.” I confess to having been guilty of such crimes against language myself.

There is, however, a better way — several of them, actually.

Short Sentences, Plain English

Contracts don't have to be written in legalese. Short, plain statements of the parties' intent will do nicely. If a sentence starts running long, break it up.

Charts and Tables

Instead of long, complex narrative language, use charts and tables. Here's an example of the former:

If it rains less than 6 inches on Sunday, then Party A will pay $3.00 per share, provided that, if it it rains at least 6 inches on Sunday, then Party A will pay $4.00 per share, subject to said rainfall not exceeding 12 inches, [etc., etc.]

Here's the same provision, in table form (apologies for the extra blank space just below; I can't figure out how to make it go away):

AMT OF RAIN ON SUNDAY PAYMENT DUE
  FROM PARTY A
Less than 6 inches $3.00 per share
At least 6 inches $4.00 per share
but less than 12 inches  

Which one would you rather read?

Situation Tables

There's no reason that a contract can't provide for Plan A, Plan B, Plan C, etc., when particular things happen. This can often be spelled out in situation tables. Here's a trivial example:

EVENT PLAN A PLAN B PLAN C
Supplier experiences quality problems Supplier will give immediate written notice to Buyer and correct the problem within 24 hours. Buyer may obtain goods from alternative sources and bill Supplier for its expenses, less what Buyer would have paid Supplier under this Agreement. [Be creative!]

Illustrative Examples and Sample Calculations

Your contract may contain a complex formula or some other particularly tricky provision. If so, consider including a hypothetical example or sample calculation to “talk through” how the formula or provision is intended to work.

(UPDATED 2009-08-11: The drafters of $49 million of promissory notes would have been well served to include a sample calculation to illustrate one of their financial-term definitions — it would have saved them a lot of money in attorneys' fees. See this posting.)

Explanatory Footnotes

Suppose that, after intense negotiations, a particular contract clause ends up being written in a very specific way. Consider including a footnote at that point in the contract, explaining the same. Future readers — your successor, your lawyer, a judge — might thank you for it.

4.11 A "longer" contract document might actually get signed faster

I used to hold the view that it was a good idea to use a “compressed” format for contracts, with narrow margins, long paragraphs, and small print, so as to fit on fewer physical pages. It was my experience that readers tend to react negatively when they see a document with “many” pages.

I've since concluded, though, that if you expect to have to negotiate the contract terms, then larger print, shorter paragraphs, and more white space:

  • will make it easier for the other side to review and redline the draft — always a nice professional courtesy that might just help to earn a bit of trust; and
  • will make it easier for the parties to discuss the points of disagreement during their inevitable mark-up conference call.

A more-readable contract likely will likely get you to signature more quickly, and that of course, is the goal.

(At least that's the intermediate goal — ordinarily, the ultimate goal should be to successfully complete a transaction, or to establish a good business relationship, in which each party feels it received the benefit of its bargain and would be willing to do business with the other side again.)

4.12 Brevity in contracts isn't always the supreme virtue

Brevity in a contract is certainly an important virtue. But it's far from the only one. Sometimes a few words of explanation or clarification can be cheap insurance.

For starters: Every decision-maker who reads a contract has his or her own values, biases, intelligence, education, experience, etc. It's impossible to know in advance what those might be for a particular executive, judge, juror, etc. In persuading that individual to see things the way you want, a bit of extra language might make all the difference.

Plus, the future's often cloudy. It can be hard to know what difficulties the parties might encounter down the road. A less-terse contract might make it easier for the parties to collaborate effectively in dealing with unanticipated problems.

(Of course, many contracts are too long because their drafters didn't or couldn't take the time to be more concise, but there's usually a happy medium.)

4.13 Why you should draft contracts with long, run-on paragraphs

Forget all those self-anointed contract drafting gurus who claim that drafters should write short sentences and short paragraphs. You should do instead as the drafters did in the warranty provision reproduced below, which is excerpted from a Collaborative Research and License Agreement between Pfizer and Rigel Pharmaceuticals:

9.2.12 PATENTS AND TRADEMARKS. To the best of its knowledge (but without having conducted any special investigation), Rigel owns or possesses sufficient legal rights to all patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information, and proprietary rights and processes (including technology currently licensed from Stanford University) necessary for its business as now conducted and as proposed to be conducted without any conflict with, or infringement of the rights of, others. Rigel currently licenses certain technology from Stanford University (the “Licensed Technology”) on an “as is” basis, with no representation or warranty from Stanford University that such technology does not infringe the proprietary rights of others. To Rigel's knowledge, Rigel has not, as of the date hereof, received any claims from any third party alleging that the use of the Licensed Technology infringes the proprietary rights of such party. Except for agreements with its own employees or consultants and standard end-user license agreements, there are no outstanding options, licenses, or agreements of any kind relating to the foregoing, nor is Rigel bound by or a party to any options, licenses, or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information, and proprietary rights and processes of any other person or entity, other than the license agreements with Janssen Pharmaceutica N.V., Stanford University, SUNY, and BASF. Rigel has not received any communications alleging that Rigel has violated or, by conducting its business as proposed, would violate any of the patents, trademarks, service marks, trade names, copyrights, trade secrets, or other proprietary rights or processes of any other person or entity. Rigel is not aware that any of its employees is obligated under any contract (including licenses, covenants, or commitments of any nature) or other agreement, or subject to any judgment, decree, or order of any court or administrative agency, that would interfere with the use of such employee's best efforts to promote the interests of Rigel or that would conflict with Rigel's business as proposed to be conducted. Neither the execution nor delivery of this Agreement, nor the carrying on of Rigel's business by the employees of Rigel, nor the conduct of Rigel's business as proposed, will, to the best of Rigel's knowledge, conflict with or result in a breach of the terms, conditions, or provisions of, or constitute a default under, any contract, covenant, or instrument under which any of such employees is now obligated. Rigel is not aware of any violation by a third party of any of Rigel's patents, licenses, trademarks, service marks, tradenames, copyrights, trade secrets or other proprietary rights.

Think about all the advantages of having such a long provision:

• 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; in contrast, the cost savings you achieve by printing fewer pages 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.

In short, by no means should you ever consider breaking up a long paragraph like the above into shorter ones, such as the following:

9.2.12 PATENTS AND TRADEMARKS.

(a) To the best of its knowledge (but without having conducted any special investigation), Rigel owns or possesses sufficient legal rights to all patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information, and proprietary rights and processes (including technology currently licensed from Stanford University) necessary for its business as now conducted and as proposed to be conducted without any conflict with, or infringement of the rights of, others. [Non-satirical aside: This paragraph could still be broken up even further into two or even three sentences.]

(b) Rigel currently licenses certain technology from Stanford University (the “Licensed Technology”) on an “as is” basis, with no representation or warranty from Stanford University that such technology does not infringe the proprietary rights of others. [Non-satirical aside: I would have added the word "although" just before the phrase "on an 'as is' basis"; otherwise Rigel is warranting that it doesn't have any guarantees from Stanford, which is an odd thing to promise.]

(c) To Rigel's knowledge, Rigel has not, as of the date hereof, received any claims from any third party alleging that the use of the Licensed Technology infringes the proprietary rights of such party.

[etc., etc.]

For that matter, don't even consider merely adding subdivision lettering, and perhaps pilcrows a.k.a. paragraph marks (¶), to serve as visual guideposts, like this:

9.2.12 PATENTS AND TRADEMARKS. *¶* (a) To the best of its knowledge (but without having conducted any special investigation), Rigel owns or possesses sufficient legal rights to all patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information, and proprietary rights and processes (including technology currently licensed from Stanford University) necessary for its business as now conducted and as proposed to be conducted without any conflict with, or infringement of the rights of, others. *¶* (b) Rigel currently licenses certain technology from Stanford University (the “Licensed Technology”) on an “as is” basis, with no representation or warranty from Stanford University that such technology does not infringe the proprietary rights of others. *¶* (c) To Rigel's knowledge, Rigel has not, as of the date hereof, received any claims from any third party alleging that the use of the Licensed Technology infringes the proprietary rights of such party. [etc., etc.]

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

Bonus tip: Challenges to this or any other established practice can be easily 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 ….”

Lest there be any doubt, the foregoing is a satire.

4.14 Brevity in contract clauses: Lessons from writing legal briefs

A clause in a contract draft has much in common with a legal brief — the purpose of each is persuasion. In a contract negotiation, the first task of each clause is to persuade the other side's contract reviewer not to delete it or drastically mark up its language. Brevity is a cardinal virtue in legal briefs; it's no different with contract clauses:

  • Judges must read hundreds of legal briefs every year; likewise, contract reviewers must review hundreds of draft clauses.
  • Judges overwhelmingly prefer brevity in in the briefs they read; we have no reason to think contract reviewers feel any differently about draft clauses.

If we were to take a poll of contract reviewers, I suspect most would prefer to read a contract that, while somewhat longer, was composed mostly of short clauses.

4.15 Don't count on renegotiating the terms of a master supply agreement at renewal time

At the IACCM annual conference, someone made the comment that renego­ti­a­ting a master supply agreement with a customer at renewal time can be really tricky, because the vendor isn't likely to get as good a deal. This is probably one of those truths universally acknowledged (with apologies to Jane Austen). Here are a few possible reasons:

• People tend to resist change, sometimes “just because.” If a vendor proposes new pricing or new terms as part of a master-agreement renewal, the customer is likely to respond with, “why do we need to change things?”

• As a matter of negotiation strategy, the renewing customer might well invite other vendors to bid on the renewal. Each of these other vendors will have an incentive to beat the existing vendor's current pricing and terms. (Not least, a would-be replacement vendor will almost surely want to be able to mention to other prospective customers that “Customer X switched their business to us,” thus taking advantage of social proof as a powerful sales tool.) That will put pressure on the existing vendor, which could find that holding the line with its current pricing and terms is about the best it can hope for.

• The renewing customer will probably trot out a list of complaints, minor or major, about the existing vendor's past performance. These “disappointments,” according to the customer, warrant getting concessions from the vendor as a condition of renewal.

• Delusions can come into play: Just as some men leave their long-time wives to take up with trophy girlfriends, some customers might imagine that a dif­fer­ent vendor will magically give them the idyllic relationship they never seemed to achieve with the existing vendor.

4.16 When you can't just say no in a contract: Three creative compromises

Companies often don't have the bargaining power to get their way in contract negotiations. When that's the case, they have to think of other ways to help protect their business interests. Imagine, for example, that a customer is negotiating a master purchasing contract with a vendor.

  • The customer would love to flatly prohibit the vendor from raising prices without the customer's consent. But the vendor's negotiators won't go along with such a prohibition.
  • The vendor would love to have the unfettered discretion to raise the customer's prices whenever it wants. But the customer's negotiators insist on at least some protection on that score.

What to do? In no particular order, here are three possible approaches that the parties could consider trying.

Non-discrimination language

A non-discrimination requirement at least brings a bit of overall-market discipline into the picture.

EXAMPLE: Vendor will not increase the prices it charges to Customer except as part of a non-targeted, across-the-board pricing increase by Vendor, applicable to its customers generally, for the relevant goods or services.

COMMENT: Vendor might want to qualify this language, so as to limit how general a price increase must be before it can be applied to Customer.

Advance-warning requirement

An advance-warning requirement can buy time for its beneficiary to look around for alternatives (assuming of course that the contract doesn't lock in the beneficiary somehow, for example with a minimum-purchase requirement or a “requirements” provision).

EXAMPLE: Vendor will give Customer at least X [days | months] advance notice of any increase in the pricing it charges to Customer under this Agreement.

Transparency requirement

Requiring a party to provide information justifying its action, upon request, can force that party to think twice about doing something, even though it technically has the right to do it.

EXAMPLE [UPDATED]: If requested by Customer within X days after notice of a pricing increase, Vendor will seasonably provide Customer with documentation showing, with reasonable completeness and accuracy, a written explanation of the reason for the increase, including reasonable details about Vendor's relevant cost structures. relevant to the pricing increase.+Customer will maintain +all such documentation in confidence any nonpublic information in such explanation, will not disclose the nonpublic information to third parties, and will use it only for purposes of making decisions about potential purchases under this Agreement.

COMMENT: Note the if-requested language, which relieves Vendor from the burden of continually managing this requirement — although a smart vendor would plan ahead and have the required documentation ready to go.

The above examples are specific to price increases, but the concepts can be adapted to a variety of needs.


*See also: (list is automatically generated)

{ 5 comments }

[BROKEN LINK: comment-680] Simon April 13, 2010 at 8:32 pm

Good post. Language to allow compromise is always useful.

But – seasonably ? Is that a typo ?

[BROKEN LINK: comment-691] Anonymous April 14, 2010 at 4:28 pm

As a buyer, if those alternatives were the best I could do, I'd probably try to get a termination right for material changes.

The other alternative that's not listed here, which is weird because it has to be the most-common, is capping price increases at CPI.

  • [BROKEN LINK: comment-696] D. C. Toedt April 14, 2010 at 7:14 pm :: @Anonymous, these are intended to be generic possibilities; you're right that for price increases a CPI cap is very common.

    Also, if you're the buyer, unless you're locked into a purchase commitment, you can simply cease buying from that seller.

  • [BROKEN LINK: comment-697] D. C. Toedt April 14, 2010 at 7:16 pm :: @Simon, seasonably is defined in the [U.S.] Uniform Commercial Code — basically, it means at (or within) the specific time agreed, or if no time is agreed, at (or within) a reasonable time.
[BROKEN LINK: comment-700] Anonymous April 15, 2010 at 8:30 am

Yes, I could always stop buying, but I like to make the salesperson explain to his boss that an entire contract is being canceled. That's a little more unpalatable for a seller than a buyer that just disappears, so it gives me one more opportunity to get them to reconsider.

In addition to the CPI cap, another limiter is usually that there can be no more than one price increase every [insert period - typically a year].

4.17 Five potential responses to a bigger company's onerous contract

demands

July 20, 2009

in Contract Management Dept, Sales Dept

Here are a few different responses a small vendor can try when a large customer asks for a seemingly-onerous provision in a contract.

Find the pain

When a large customer makes tough contract demands, it could be because the customer has been burned before. Institutionally, it may still “feel the pain” of a past bad vendor experience. Its response is to roar at other vendors.

The small vendor being roared at can try to find out why the customer is roaring. If it can identify the source of the pain, it might be able to figure out another way to make it better, without undertaking burdensome obligations.

Cap the vendor's financial exposure for the onerous provision

The small vendor can ask the large customer to agree to a dollar cap on the amount of the vendor's financial exposure arising from the onerous provision. If the customer agrees, the onerous provision might look less dangerous than with the prospect of unlimited liability. (This is a variation on the old saying: When in doubt, make it about money.)

Impose time limits

The small vendor might try to make its business risk more manageable by imposing time limits on the onerous contract provisions. For example, if the customer demands an oppressive indemnity, the vendor might counter by asking for a time limit. Or if the customer demands a cap on pricing increases, or a most-favored-customer clause, the vendor could counter with time limits on those as well.

Explain why the onerous provision actually hurts the customer

The vendor can to try to explain to the customer's negotiators why, in the long run, the onerous provision would ultimately cause problems for customer.

Suppose, for example, that the customer demands that it receive post-sale services for free, or at a greatly-reduced price. The vendor could counter that its services-fee revenues are what pay the salaries of its services professionals. If the vendor were to give away its services, that could eventually lead to staff reductions, which would mean that the customer might have to wait longer for service. That, in turn, would hurt the customer's ability to utilize the vendor's products effectively. So in effect, the customer's demand for free services would be akin to its eating the seed corn.

Package the onerous provision as part of a premium offering

If the small vendor plans ahead, it can package the onerous provision as part of a higher-priced premium offering — with the relevant contract language being written in a way the vendor knows it can support. This approach has a huge advantage: The bargaining over whether to give the customer the premium offering is no longer about legal T&Cs: it becomes a negotiation about price. This means the vendor's legal people might not even have to get involved — which often can be crucial when sales people are working hard to close deals before the shot clock runs down on the fiscal quarter.

Another advantage: The vendor may well score points with the customer for anticipating the customer's needs and offering a solution for them. As one customer lawyer once said to me, I told our business people that if your software is as good as your contract, we're getting a great product. Needless to say, our sales people didn't at all mind getting that ‘assist' from inside the customer's own organization.

Maybe the onerous provision is worth the risk

The vendor and its lawyer should assess the actual business risk of agreeing to the customer's request — in the real world it might not be as big a problem as the vendor imagines.


*See also: (list is automatically generated)

{ 2 comments }

[BROKEN LINK: comment-90] randomjohn July 20, 2009 at 7:43 pm
can't say that I agree with your example on the indemnity… how is the big customer supposed to feel when the vendor won't accept the third-party risk for its own breaches? sure, as the customer, i can cap your exposure to my losses, but why should i insure you against third-party losses you cause? and if i can still be getting hit with losses from your breaches in perpetuity why shouldn't you stand behind your behavior in perpetuity? anyway, that's not your point, but i just wanted to comment on that particular example.
[BROKEN LINK: comment-92] DCT July 20, 2009 at 8:52 pm
@randomjohn, on the merits I don't disagree with your comment — and in fact said something similar myself at the Hacker News site.

4.18 When a contract negotiation gets tough, try to make it about money,

not about “legal stuff”

August 19, 2009

in Sales Dept

[[http://www.oncontracts.com/docs/BalanceScaleCoinsHeart_iStock_000009341924XSmall.jpg][[[http://www.dctoedt.com/docs/BalanceScaleCoinsHeart_iStock_000009341924XSmall-300x300.jpg]]]]The

problem: A hyper-conservative customer lawyer

When I was a software-company general counsel, a prospective customer's lawyer once sent me a markup of our standard software license agreement. His markup was practically bleeding red ink with all the changes he wanted us to make. This was odd, inasmuch as a number of other customers had said our contract was by far the best they'd ever seen.

After checking out the other lawyer's bio page, I concluded I had essentially zero chance of persuading him to back off on the changes he was demanding. Our customer was in Florida; the other lawyer worked for a law firm in that city, but in his firm's New York satellite office. The other lawyer seemed to be a specialist who had been called in because of his particular expertise. My hunch was that he had few if any other dealings with his firm's client, our customer, and probably not with his firm's account partner either.

Because of these factors, I guessed that this deal held essentially no personal career upside for the other lawyer — if anything, what it held was career downside, if later it turned out that he'd failed to catch something ‘bad' in our contract. So in hindsight it wasn't a huge surprise that the other lawyer had drastically marked up our contract, demanding the moon from us so as to cover his own flanks.

But knowing these things didn't help me. In the sales folks' minds, this deal was already closed, because they'd done their part, and “all” that was left was “legal stuff.” The shot clock was running down on the fiscal quarter. We had a lot of other deals to close, so there was only a limited amount of bandwidth we could devote to negotiating terms and conditions for this one particular deal.

What to do?

The solution: Turn a legal negotiation into one about pricing

After getting approval from our senior sales exec in charge of the account, the sales rep and I got on a conference call with the business customer and the other lawyer, with the senior sales exec listening in.

Me to the other lawyer: “We've had a lot of customers tell us they love our contract. But I've been in your shoes and know where you're coming from. Unfortunately, there's not really time for us to go point-by-point through your changes so I can try to talk you out of them, and I probably can't do that in any case.

“*So you win:* Aside from two points that are deal-killers for us, we'll agree to all your changes.

“*But the pricing we offered your client was predicated on their accepting our standard contract terms.* You're now asking us to accept greater legal risk. That means the pricing has to change. I'm the one who decides how much.”

And then I quoted him a 40% price increase.

The other lawyer, sputtering: “That's outrageous. I never heard of such a thing.” (Etc. etc.)

Me: “I'm not sure you understand what I'm saying: You win. We're agreeing to nearly all of the changes to the contract that you asked for.”

We continued in that vein for a few minutes. The sales rep and the senior sales exec were both grinning.

I suggested that we recess the call and let the business people talk. All agreed this was a good idea.

The next thing I heard, the customer had agreed to sign our contract pretty much as-is, with one or two minor changes.

*Lesson: When the going gets tough in negotiating contract terms and conditions, try to make it about money.

{ 1 comment }

[BROKEN LINK: comment-120] randomjohn August 20, 2009 at 8:36 am
This works both ways. On the customer side, I've asked vendors to tell me how much it would cost to get the deal terms I want (usually I phrase it as “how much would it cost me to get this product on standard commercial terms, because what you're offering on the contract is way below market”). That usually makes the sales team wonder what their lawyers are doing to them. Of course, this only works when price is a significant driver of the choice of vendors, in which case the sales team usually knows they're in a commoditized market and will lose the sale due to the lawyers.

4.19 Negotiating contractual limitations of liability: Do it risk by risk, not one-size-fits-all

A common complaint: Too much time spent negotiating liability limitations

Limitation-of-liability provisions usually rank at or near the top of the IACCM's annual surveys of the most-frequently-negotiated contract terms.

Ironically, the same surveys indicate that contract professionals fervently wish they could spend their time negotiating collaborative provisions (to try to keep trouble from happening) instead of liability provisions (in case trouble does come to pass).

I've been curious why this is such a recurring problem — why it's been talked about for several years but doesn't seem to have been solved, at least not that I've heard.

The root of the complaint:  Boilerplate.

I think I know why many companies have to spend too much time nego­tia­ting limitations of liability: A lot of the limitation provisions I've read over the years have been long, boilerplate state­ments; they might be fine for a simple, low-stakes contract, but their lack of speci­fi­ci­ty can give a reviewer pause, and complicate the discussion, when more is at risk:

  • Consequential-damages exclusions seldom spell out just what specific categories of damages can and cannot be recovered — it seems as though each party crosses its fingers and hope the courts will interpret the phrase ‘consequential damages' in its favor. That, of course, makes negotiators nervous, because they don't know wheth­er the particular type of damage they're concerned about will qualify;
  • Damages caps usually take the form of a single, one-size-fits-all number that applies to every conceivable form of liability. It's true that negotiators do sometimes debate whether particular types of damage (e.g., damages covered by an indemnity obligation) should be carved out entirely from the damages cap. But that's a false di­chot­o­my; it assumes, for no reason, that a given type of damages will be either subject to the ‘default' cap, or not subject to any cap at all.

Instead of resenting the time it takes to negotiate limitations of liability, perhaps we should try doing things a little differently — not necessarily in every negotiation, but definitely in those in which the liability limitations are likely to be closely scrutinized.

Systematically list risks of specific concern, then address liability limits for each

Contract drafters can speed up discussions of liability limitations, I've found, by breaking up general boilerplate language into more-concrete statements of risks that are of particular concern, which the parties can focus on more readily.

One technique that works well is to provide a table, such as in the example below, that (i) lists specific risks, and (ii) states, for each specified risk, what if any liability limits are agreed. Using that table, the parties can systematically work through the list of risks and, for each risk, negotiate the limitations they're willing to accept. If the parties decided to address additional risks in the contract, they could just add rows to the table. The parties could also add columns to the table: Instead of including a single column for “consequential damages, etc.,” they could add separate columns for consequential damages, incidental damages, punitive damages, lost profits, lost revenues, and so on.

To be sure, if the non-drafting party won't care much about the limitation of liability anyway, then including such detailed limitation language could actually hinder the overall negotiations. But remember, by hypothesis we're talking about contract negotiations in which the limitation language is indeed going to be carefully negotiated — in which case this kind of systematic approach will almost always make sense.

4.20 Limitations of liability: Try varying them with time, and/or with circumstances

Here's another possibility to consider: Exclusions of consequential damages and damage-cap amounts don't necessarily have to be carved in stone for all time. The parties could easily agree to vary them, either as time passed or as circumstances changed.

For example: Suppose that —

  • A software vendor is negotiating an enterprise license agreement with a new customer for a mature software package.
  • The customer has successfully completed a pilot project, but it hasn't rolled out the software for enterprise-wide production use.
  • Knowing how tricky a production roll-out can sometimes be, the customer is concerned about the vendor's insistence on excluding all ‘consequential' damages, whatever that really means.

The vendor might try offering to waive the consequential-damages exclusion during, say, the customer's first three months of production use of the software, subject to an agreed dollar cap on the vendor's aggregate liability for all damages — which might be a higher dollar amount than at other times, as discussed below. This approach could make the customer more comfortable that the vendor is ‘standing behind its software' during the roll-out phase.

In theory, certainly, the vendor would be exposed to additional liability risk during those first three months. But the business risk might be eminently worth taking. Remember, we're assuming that the software is mature, that is, most of its significant bugs have already been corrected. In that case, the vendor might be willing to take on that additional theoretical risk — which in any case would go away after three months — in order to help close the sale.

As another example, perhaps such a vendor could agree that the damages cap would be, say —

  • 4X for any damages that arise during, say, the first three months of the relationship, or possibly until a stated milestone has been achieved;
  • 3X during the nine months thereafter;
  • 2X thereafter.

In the 4X / 3X / 2X language, X could be defined —

  • as a stated fixed sum;
  • as the amount of the customer's aggregate spend under the contract in the past 12 months, 18 months, etc.;
  • in any other convenient way.

The details in the above example aren't important. The point is that sometimes ‘standard' limitation-of-liability language is too broad to allow the parties to specify what they really need. Negotiators might have more success if they drilled down into the language — perhaps using the table approach discussed in the previously-cited post.

4.21 Drafting your contract to immunize you from liability even for gross negligence

An opinion by the New York Court of Appeals reminds drafters that, under the law of that state, a contract can be structured to absolve a service provider from liability even for its own negligence or gross negligence. The trick, according to the court, is to draft the contract so that:

  1. the customer agrees to buy insurance to cover any damage or other loss that might result from the service provider's negligence; and
  2. the customer also waives the service provider's liability, agrees to look solely to its insurer for recovery, and waives subrogation, so that the customer's insurance company can't come after the service provider for reimbursement of whatever the insurance company has to pay out for the damage.

This drafting approach worked for Diebold, Inc., an alarm-system company. Diebold provided backup alarm service for a bank. The bank was burglarized, allegedly because of Diebold's gross negligence in ignoring problems with the alarm system. Diebold's contract with the bank, though, included provisions like those enumerated above: The contract required the bank to buy insurance, and included a waiver of Diebold's liability. As the court described the provision:

Diebold's contract contained a clause entitled “Property Insurance and Waiver of Subrogation” where Abacus agreed to obtain insurance coverage to cover its losses in the event of a theft. The agreement between Diebold and Abacus provided that Abacus “shall look solely to its insurer for recovery of its loss and hereby waives any and all claims for such loss against Diebold” and that Abacus' insurance policy would contain a clause providing that such waiver would not invalidate the coverage.

Abacus Federal Savings Bank v. ADT Security Services, Inc., No. 33 slip. op. at 4 (N.Y. Mar. 22, 2012) (affirming most grounds of dismissal of bank's claim against alarm-system companies after burglary, but reversing as to breach-of-contract claim against one defendant) (citations, alteration marks, and internal quotation marks omitted), available at http://goo.gl/8YFL4.

The burglarized bank claimed that Diebold's alleged gross negligence in maintaining the alarm system invalidated the limitation of liability. The court, however, held that while the exculpatory provision could not relieve Diebold for liability for gross negligence, the insurance provision and waiver of subrogation would be enforced: “A distinction must be drawn between contractual provisions which seek to exempt a party from liability and contractual provisions which in effect simply require one of the parties to the contract to provide insurance for all of the parties.” Id., slip op. at 6 (same parenthetical notes as above). The court went on to explain that “We have observed that gross negligence, when invoked to pierce an agreed-upon limitation of liability in a commercial contract must smack of intentional wrongdoing. It is conduct that evinces a reckless indifference to the rights of others.” Id., slip op. at 8 (same parenthetical notes as above).

Incidentally, Diebold's co-defendant did not have a mandatory insurance requirement in its contract, but merely left it up to the bank to decide whether to purchase insurance, nor did it include a waiver of liability and of subrogation. The court held that the co-defendant's limitation of liability provisions could not withstand a claim (if proved) of gross negligence. Id., slip op. at 4, 9. Comment: A contract drafter wanting to use the Diebold approach might also want to include a choice-of-law provision specifying New York law as the governing law for the contract. (Of course, other states' law might be to the same effect.)

Comment: The court's reasoning seems to imply that it didn't matter which party buys the insurance — as long as the amount of the insurance wasn't unreasonable, then it was OK to require the customer (or whoever) to look solely to the insurer for recovery of any loss that might occur.

Comment: In the real world of sales negotiations, a happy medium might be for the contract to provide:

  • that the service provider's liability is limited to X dollars, or to some formula such as X times the amount paid by the customer in the previous 12 months; and
  • that the customer must purchase insurance (or self-insure) against losses in excess of the agreed limited amount, with the customer also waiving the service provider's liability in excess of that amount.

4.22 Six contract clauses to help prevent lawsuits

1. Status-review conference calls upon request

Many business-contract disputes could be avoided if the participants would just talk with each other once in a while. (The G-PP-AA agenda template will always provide topics for fruitful discussion.) In particular, it's often extremely helpful to hold such a conference immediately after — or better yet, before — a missed deadline or other poten­tial breach. Sure, this is just Management 101, but it can't hurt for the contract to include a reminder. See the Common Draft Status-Review Conference Calls provision.

2. Consultation in lieu of consent

Sudden, unexpected moves by one party to a con­tract can make the other party nervous. For example, the business relationship between a service provider and a customer could be damaged if the serv­ice provider were to suddenly replace a key person assigned to the customer's work with­out notice.

The usual, sledge-hammer approach to dealing with this problem is to con­tract­ual­ly require the provider to obtain the customer's prior consent before taking such an action. The prov­id­er, though, will usually push back against such a consent re­quire­ment. The provider will be reluctant to give the customer a veto over how it runs its business. More­over, it could be a management burden for the provider to have to check every customer's contract to see what internal management decisions required prior customer approval.

As an alternative (and compromise), the provider might be willing to agree to consult with the customer before taking a specified action that couild cause heart­burn for the customer. That way, the customer would at least get notice, perhaps an explanation, and an opportu­ni­ty to be heard, which can make a big difference in the customer's reaction and to the parties' business relationship. See the Common Draft Consultation Procedure.

3. Escalation of disputes to higher management

Some lawyers believe that a dis­pute-escalation requirement can increase the chance of an amicable settlement. Getting dif­fer­ent, more-senior people involved in the dispute can sometimes bypass individual anim­os­it­ies, hidden personal agendas, and other foibles; this can help break an impasse. See the Common Draft Dispute Escalation provision.

4. Early neutral evaluation

When a legal dispute ariese, the parties' lawyers can some­times tell their clients what they think the clients want to hear. (In part this may be because lawyers — especially male lawyers — tend to be overly optimistic about whether they're going to win their cases.) That can hamper getting disputes settled and the parties back to their business (if that's possible). Consequently, if a contract dispute starts to get serious, an early, non-binding “sanity check” from a knowledgeable neutral can help the parties and law­yers get back onto a more-productive track before positions harden and rela­tion­ships suffer — not to mention before the legal bills start to mount up. See the Common Draft ENE provision.

5. Mini-trial of disputes to parties' senior management

Mini-trials, in which the parties' lawyers put on a one- to two-hour “trial” to senior executives of the parties (and per­haps a neutral facilitator), are thought to enhance the prospect of settling disputes. Read the annotated provision.

6. Attorneys' fees if settlement offer rejected but then not matched at trial

OK, so all else has failed, and it looks like the parties are going to court over a dispute. A settlement-rejection provision can create a powerful financial incentive for the parties to settle the dispute on reasonable terms. Here's how it works:

  • Suppose that one party (“Offeror”) makes an offer to settle, but the other party (“Rejector”) rejects the offer.

Under this provision, then Rejector has to do at least 20% better at trial than Offeror's rejected settlement offer; otherwise, Rejector has to pay Offeror's attorneys' fees and expenses incurred after the settlement offer. The ration­ale is that by rejecting Offeror's settlement offer, Rejector forced Offeror to spend money needlessly on a trial that proved to be unnecessary, because Rejector could have had essentially the same results by accepting the offer; Rejector therefore should reimburse Offeror for those unnecessary post-offer expenses. Read the annotated provision.

4.23 Planning for success: Five useful aphorisms

Planning and execution seldom come naturally to teenaged year-old boys. When I help Boy Scouts from my parish's troop with their merit badge work, I like to bore them with five aphorisms from the business world (some of which I made up myself):

  1. To fail to plan is to plan to fail.
  2. Plan the work, then work the plan.
  3. How do you eat an elephant? One bite at a time.
  4. What do you call a plan that doesn't have milestones and target dates? A daydream.
  5. What do you call a plan that isn't in writing? Also a daydream.

4.24 Note-taking in meetings and phone calls: Three easy habits your lawyer

will love you for

May 27, 2010

in BusDev Dept, Contract Management Dept, Finance Dept, HR Dept, IT Dept, Legal Dept, Marketing Dept, Procurement Dept, Professsional Services Dept, R&D Dept, Risk Management Dept, Sales Dept

Chances are that at some point in your career, a lawyer — yours, or someone else's — will want to review notes you took at a meeting or during a phone conversation. So thinking ahead to that possibility, whenever you take notes, you should routinely do as many of the fol­low­ing things as you can remember, especially the first three things, to increase the odds that a later reviewer will get an ac­cur­ate picture of the event. It will help you stay out of un­de­served trouble and save money on legal fees

  1. *Indicate who said what you're writing down.*  Unless you want to risk having someone else's statements mistakenly attributed to you, indicate in your notes just who has said what.  EXAMPLE:  Suppose that John Doe says in a meeting that your company's off­shore oil-well drilling project can skip certain safety checks. Re­mem­ber­ing the BP drilling disaster in the Gulf of Mexico, you don't want anyone to think you were the guy who sug­ges­ted this. So your notes might say, for example, "JD: Let's skip safety checks,"; if you omitted John Doe's initials, it wouldn't be clear that you weren't the one who made his suggestion.
  2. *On every page, write the meeting date and time, the subject, and the page number.*The rea­son: Your lawyer will probably want to build a chronology of events; you can help her put the meeting in­to the proper context by “timestamping” your notes. This will also reduce the risk that an unfriendly party might try to quote your notes out of context.
  3. *If a lawyer is participating, indicate this. *That will help your lawyer sep­ar­ate out documents that might be protected by the attorney-client privilege. EXAMPLE:  “/Partici­pants:  John Doe (CEO); Ron Roe (ABC Consulting, Inc.); Jane Joe (general counsel).”/
  4. *Start with a clean sheet of paper. *When copies of documents are provided to opposing counsel, in a lawsuit or other investigation, it's better if a given page of notes doesn't have un­re­la­ted in­for­ma­tion on it.  This goes for people who take notes in bound paper note­books too: It's best to start notes for each meeting or phone call on a new page, even though this means you'll use up your note­books more quickly.
  5. Write in pen for easier photocopying and/or scanning, and also because pencil notes might make a reviewer (for example, as an opposing counsel) wonder whether you might have erased anything, and perhaps falsely ac­cuse you of having done so.
  6. Write “CONFIDENTIAL” at the top of each page of confidential notes. That will help preserve any applicable trade-secret rights; it will also help your lawyer segregate such notes for possible special handling in the lawsuit or other investigation.
  7. *List the participants.*Listing the participants serves as a key to the initials you'll be using, as discussed in item 1 above.  It can also refresh your recollection if you ever have to testify about the meet­ing. If some people are participating in an in-person meeting by phone, indicate that. *Indicate each participant's role*if isn't ob­vi­ous or well-known – remember, you might know who someone is, but a later reader likely won't.  EXAMPLE:  “/Partici­pants:  John Doe (CEO); Ron Roe (ABC Consulting, Inc.); Chris Coe (marketing).”/
  8. Indicate the time someone joins or leaves the meeting, es­pe­ci­al­ly if it's you (so that you're not later accused of having still been there if something bad happened after you left).
  9. Write down the stop time of the meeting. This usually isn't a big deal, but it's nice to have for completeness.

*See also: (list is automatically generated)

4.25 Sometimes it's better not to ask for what you want

You might remember that TV talk-show host Conan O'Brien's stewardship of The Tonight Show proved disappointing to NBC. The network decided to move Jay Leno back into that time slot and bump Conan back to 12:05 a.m. This led Conan to want to leave the show and start over on another network — but if he had, he would arguably have been in breach of his contract with NBC.

Conan's contract apparently did not state that The Tonight Show would always start at 11:35 p.m. Conan's lawyers were roundly criticized for that alleged mistake by ex-Wall Streeter Henry Blodget and some of his readers. See Conan's Lawyers Screwed Up, Forgot To Specify “Tonight Show” Time Slot (Jan. 11, 2010), especially the reader comments following the article.

But then wiser heads pointed out that Conan's lawyers might have intentionally not asked for a locked-in start time:

  • The Tonight Show had started at 11:35 p.m. for decades; it could have been plausibly argued that this start time was part of the essence of The Tonight Show, and thus was an implied part of the contract.
  • Suppose that Conan's lawyers had asked for the contract to lock in the 11:35 p.m. start time of The Tonight Show, but NBC had refused. In that case, a court might have interpreted the contract as providing that NBC had at least some freedom to move the show's start time.
  • And suppose that Conan had asked to lock in the 11:35 p.m. start time of The Tonight Show, but that NBC had responded by insisting on just the opposite, namely a clause affirmatively stating that NBC was free to choose the start time. Given that NBC had the bargaining power at that point, Conan might have had no choice but to agree, given that he wanted NBC to appoint him as the host of the show. In that case, there'd be no question that NBC had the right to push the start time of the show back to 12:05 p.m.

Ultimately, Conan and NBC settled their dispute, with the network buying out Conan's contract for a reported $32.5 million. This seems to suggest that NBC was concerned it might indeed be breaching the contract if it were to push back The Tonight Show to 12:05 a.m. as it wanted to do. As an article in The American Lawyer commented:

… If O'Brien had asked that the 11:35 p.m. time slot be spelled out in any agreement — and had NBC refused — the red pompadoured captain of “Team Coco” would be in a weaker position in the current negotiations.

“If you ask and are refused, or even worse, if you ask and the other side pushes for a 180, such as a time slot not being guaranteed, you can end up with something worse,” [attorney Jonathan] Handel adds. Without having their hands bound by language in the contract on when “The Tonight Show” would air, O'Brien's lawyers are in a better position to negotiate their client's departure from NBC.

Brian Baxter, Legal Angles Abound as Conan-NBC Standoff Nears Endgame (Jan. 20, 2010).

Judging by the outcome, it may well be that Conan's lawyers did an A-plus job of playing a comparatively-weak hand during the original contract negotiations with NBC.

The lesson: Be careful what you ask for in a contract negotiation — if the other side rejects your request but you do the deal anyway, that sequence of events might come back to haunt you later.

4.26 Back-and-forth negotiation emails can add up to a binding contract even without a signed final document, says UK court

The claim: Breach of contract. Damages sought: $54 million. The result: A UK court provisionally held that a binding contract suddenly material­ized when the last of a series of negotiation emails nailed down the parties' agreement to the final essential point — this, even though the parties apparently never signed the anticipated hard-copy contract document. See Golden Ocean Group Ltd v Salgaocar Mining Industries PVT Ltd, [2011] EWHC 56 Comm) (denying motion to set aside order permitting service of process on guarantor), especially paragraphs 12-22 (negotiations by email), 25 (no signed final document), and 63-64 (analysis). Hat tip: Raymond L. Sweigart & Steven P. Farmer at the Pillsbury law firm.

This result seems unremarkable as a matter of contract law. It might come as a surprise, however, to the many business people who think they can walk away from a negotiation at any time until they actually sign a document labeled “Agreement” (or some such).

Lesson learned: When negotiating a contract by email, consider including disclaimer language in your emails such as, for example: Non-binding communication; [PARTY NAME] will be bound only by a signed, formal written agreement that expressly states that it is binding.

4.27 When you can't just say no in a contract: Three creative compromises

April 13, 2010

in BusDev Dept, Contract Management Dept, Finance Dept, Legal Dept, Marketing Dept, Procurement Dept, R&D Dept, Risk Management Dept, Sales Dept

Companies often don't have the bargaining power to get their way in contract negotiations. When that's the case, they have to think of other ways to help protect their business interests. Imagine, for example, that a customer is negotiating a master purchasing contract with a vendor.

  • The customer would love to flatly prohibit the vendor from raising prices without the customer's consent. But the vendor's negotiators won't go along with such a prohibition.
  • The vendor would love to have the unfettered discretion to raise the customer's prices whenever it wants. But the customer's negotiators insist on at least some protection on that score.

What to do? In no particular order, here are three possible approaches that the parties could consider trying.

Non-discrimination language

A non-discrimination requirement at least brings a bit of overall-market discipline into the picture.

EXAMPLE: Vendor will not increase the prices it charges to Customer except as part of a non-targeted, across-the-board pricing increase by Vendor, applicable to its customers generally, for the relevant goods or services.

COMMENT: Vendor might want to qualify this language, so as to limit how general a price increase must be before it can be applied to Customer.

Advance-warning requirement

An advance-warning requirement can buy time for its beneficiary to look around for alternatives (assuming of course that the contract doesn't lock in the beneficiary somehow, for example with a minimum-purchase requirement or a “requirements” provision).

EXAMPLE: Vendor will give Customer at least X [days | months] advance notice of any increase in the pricing it charges to Customer under this Agreement.

Transparency requirement

Requiring a party to provide information justifying its action, upon request, can force that party to think twice about doing something, even though it technically has the right to do it.

EXAMPLE [UPDATED]: If requested by Customer within X days after notice of a pricing increase, Vendor will seasonably provide Customer with documentation showing, with reasonable completeness and accuracy, a written explanation of the reason for the increase, including reasonable details about Vendor's relevant cost structures. relevant to the pricing increase.+Customer will maintain +all such documentation in confidence any nonpublic information in such explanation, will not disclose the nonpublic information to third parties, and will use it only for purposes of making decisions about potential purchases under this Agreement.

COMMENT: Note the if-requested language, which relieves Vendor from the burden of continually managing this requirement — although a smart vendor would plan ahead and have the required documentation ready to go.

The above examples are specific to price increases, but the concepts can be adapted to a variety of needs.


*See also: (list is automatically generated)

{ 5 comments }

[BROKEN LINK: comment-680] Simon April 13, 2010 at 8:32 pm

Good post. Language to allow compromise is always useful.

But – seasonably ? Is that a typo ?

[BROKEN LINK: comment-691] Anonymous April 14, 2010 at 4:28 pm

As a buyer, if those alternatives were the best I could do, I'd probably try to get a termination right for material changes.

The other alternative that's not listed here, which is weird because it has to be the most-common, is capping price increases at CPI.

  • [BROKEN LINK: comment-696] D. C. Toedt April 14, 2010 at 7:14 pm :: @Anonymous, these are intended to be generic possibilities; you're right that for price increases a CPI cap is very common.

    Also, if you're the buyer, unless you're locked into a purchase commitment, you can simply cease buying from that seller.

  • [BROKEN LINK: comment-697] D. C. Toedt April 14, 2010 at 7:16 pm :: @Simon, seasonably is defined in the [U.S.] Uniform Commercial Code — basically, it means at (or within) the specific time agreed, or if no time is agreed, at (or within) a reasonable time.
[BROKEN LINK: comment-700] Anonymous April 15, 2010 at 8:30 am

Yes, I could always stop buying, but I like to make the salesperson explain to his boss that an entire contract is being canceled. That's a little more unpalatable for a seller than a buyer that just disappears, so it gives me one more opportunity to get them to reconsider.

In addition to the CPI cap, another limiter is usually that there can be no more than one price increase every [insert period - typically a year].

4.28 Five potential responses to a bigger company's onerous contract

demands

July 20, 2009

in Contract Management Dept, Sales Dept

Here are a few different responses a small vendor can try when a large customer asks for a seemingly-onerous provision in a contract.

[[http://www.oncontracts.com/docs/AndroclesLionHenryJusticeFord_67233.jpg][[[http://www.dctoedt.com/docs/AndroclesLionHenryJusticeFord_67233-187x300.jpg]]]]Find

the pain

When a large customer makes tough contract demands, it could be because the customer has been burned before. Institutionally, it may still “feel the pain” of a past bad vendor experience. Its response is to roar at other vendors.

The small vendor being roared at can try to find out why the customer is roaring. If it can identify the source of the pain, it might be able to figure out another way to make it better, without undertaking burdensome obligations.

Cap the vendor's financial exposure for the onerous provision

The small vendor can ask the large customer to agree to a dollar cap on the amount of the vendor's financial exposure arising from the onerous provision. If the customer agrees, the onerous provision might look less dangerous than with the prospect of unlimited liability. (This is a variation on the old saying: When in doubt, make it about money.)

Impose time limits

The small vendor might try to make its business risk more manageable by imposing time limits on the onerous contract provisions. For example, if the customer demands an oppressive indemnity, the vendor might counter by asking for a time limit. Or if the customer demands a cap on pricing increases, or a most-favored-customer clause, the vendor could counter with time limits on those as well.

Explain why the onerous provision actually hurts the customer

The vendor can to try to explain to the customer's negotiators why, in the long run, the onerous provision would ultimately cause problems for customer.

Suppose, for example, that the customer demands that it receive post-sale services for free, or at a greatly-reduced price. The vendor could counter that its services-fee revenues are what pay the salaries of its services professionals. If the vendor were to give away its services, that could eventually lead to staff reductions, which would mean that the customer might have to wait longer for service. That, in turn, would hurt the customer's ability to utilize the vendor's products effectively. So in effect, the customer's demand for free services would be akin to its eating the seed corn.

Package the onerous provision as part of a premium offering

If the small vendor plans ahead, it can package the onerous provision as part of a higher-priced premium offering — with the relevant contract language being written in a way the vendor knows it can support. This approach has a huge advantage: The bargaining over whether to give the customer the premium offering is no longer about legal T&Cs: it becomes a negotiation about price. This means the vendor's legal people might not even have to get involved — which often can be crucial when sales people are working hard to close deals before the shot clock runs down on the fiscal quarter.

Another advantage: The vendor may well score points with the customer for anticipating the customer's needs and offering a solution for them. As one customer lawyer once said to me, I told our business people that if your software is as good as your contract, we're getting a great product. Needless to say, our sales people didn't at all mind getting that ‘assist' from inside the customer's own organization.

Maybe the onerous provision is worth the risk

The vendor and its lawyer should assess the actual business risk of agreeing to the customer's request — in the real world it might not be as big a problem as the vendor imagines.


*See also: (list is automatically generated)

{ 2 comments }

[BROKEN LINK: comment-90] randomjohn July 20, 2009 at 7:43 pm
can't say that I agree with your example on the indemnity… how is the big customer supposed to feel when the vendor won't accept the third-party risk for its own breaches? sure, as the customer, i can cap your exposure to my losses, but why should i insure you against third-party losses you cause? and if i can still be getting hit with losses from your breaches in perpetuity why shouldn't you stand behind your behavior in perpetuity? anyway, that's not your point, but i just wanted to comment on that particular example.
[BROKEN LINK: comment-92] DCT July 20, 2009 at 8:52 pm
@randomjohn, on the merits I don't disagree with your comment — and in fact said something similar myself at the Hacker News site.

4.29 When a contract negotiation gets tough, try to make it about money,

not about “legal stuff”

August 19, 2009

in Sales Dept

[[http://www.oncontracts.com/docs/BalanceScaleCoinsHeart_iStock_000009341924XSmall.jpg][[[http://www.dctoedt.com/docs/BalanceScaleCoinsHeart_iStock_000009341924XSmall-300x300.jpg]]]]The

problem: A hyper-conservative customer lawyer

When I was a software-company general counsel, a prospective customer's lawyer once sent me a markup of our standard software license agreement. His markup was practically bleeding red ink with all the changes he wanted us to make. This was odd, inasmuch as a number of other customers had said our contract was by far the best they'd ever seen.

After checking out the other lawyer's bio page, I concluded I had essentially zero chance of persuading him to back off on the changes he was demanding. Our customer was in Florida; the other lawyer worked for a law firm in that city, but in his firm's New York satellite office. The other lawyer seemed to be a specialist who had been called in because of his particular expertise. My hunch was that he had few if any other dealings with his firm's client, our customer, and probably not with his firm's account partner either.

Because of these factors, I guessed that this deal held essentially no personal career upside for the other lawyer — if anything, what it held was career downside, if later it turned out that he'd failed to catch something ‘bad' in our contract. So in hindsight it wasn't a huge surprise that the other lawyer had drastically marked up our contract, demanding the moon from us so as to cover his own flanks.

But knowing these things didn't help me. In the sales folks' minds, this deal was already closed, because they'd done their part, and “all” that was left was “legal stuff.” The shot clock was running down on the fiscal quarter. We had a lot of other deals to close, so there was only a limited amount of bandwidth we could devote to negotiating terms and conditions for this one particular deal.

What to do?

The solution: Turn a legal negotiation into one about pricing

After getting approval from our senior sales exec in charge of the account, the sales rep and I got on a conference call with the business customer and the other lawyer, with the senior sales exec listening in.

Me to the other lawyer: “We've had a lot of customers tell us they love our contract. But I've been in your shoes and know where you're coming from. Unfortunately, there's not really time for us to go point-by-point through your changes so I can try to talk you out of them, and I probably can't do that in any case.

“*So you win:* Aside from two points that are deal-killers for us, we'll agree to all your changes.

“*But the pricing we offered your client was predicated on their accepting our standard contract terms.* You're now asking us to accept greater legal risk. That means the pricing has to change. I'm the one who decides how much.”

And then I quoted him a 40% price increase.

The other lawyer, sputtering: “That's outrageous. I never heard of such a thing.” (Etc. etc.)

Me: “I'm not sure you understand what I'm saying: You win. We're agreeing to nearly all of the changes to the contract that you asked for.”

We continued in that vein for a few minutes. The sales rep and the senior sales exec were both grinning.

I suggested that we recess the call and let the business people talk. All agreed this was a good idea.

The next thing I heard, the customer had agreed to sign our contract pretty much as-is, with one or two minor changes.

*Lesson: When the going gets tough in negotiating contract terms and conditions, try to make it about money.

{ 1 comment }

[BROKEN LINK: comment-120] randomjohn August 20, 2009 at 8:36 am
This works both ways. On the customer side, I've asked vendors to tell me how much it would cost to get the deal terms I want (usually I phrase it as “how much would it cost me to get this product on standard commercial terms, because what you're offering on the contract is way below market”). That usually makes the sales team wonder what their lawyers are doing to them. Of course, this only works when price is a significant driver of the choice of vendors, in which case the sales team usually knows they're in a commoditized market and will lose the sale due to the lawyers.

4.30 An oral understanding might not get you off the hook for a written

contractual obligation

April 1, 2008

in BusDev Dept, Finance Dept, HR Dept, IT Dept, Legal Dept, Marketing Dept, Procurement Dept, Professsional Services Dept, R&D Dept, Risk Management Dept, Sales Dept

You have to wonder whether to feel sorry for the loan broker in Wheeler vs. Blumling. This broker found a business loan for a customer, and then went along with the lender's insistence that the broker himself sign a guaranty. Unfortunately, things went badly awry (including the indictment of one of the borrower's business associates for wire fraud), and the lender sued the broker and others for repayment.

(Interestingly, the loan bore interest at what the appeals court described as the “breathtaking” rate of 1,000% per annum.)

The broker tried to escape liability on his guaranty by claiming he had an oral understanding with the lender. It didn't work; the court had no trouble holding that the broker was bound by his written obligation:

… [The broker's] evidence does not support a modification of the agreement, but rather consists of assertions of prior oral negotiations that contradict the written instrument he executed. …

[The broker] wants to contradict particular terms of a contract which has already been performed on [the lender's] side and of which [the broker] has already enjoyed the benefits (fleeting though they were). This is exactly what the parol evidence rule forecloses.

Wheeling v. Blumling, No. 07-1992, slip op. at 8-9 (1st Cir. Mar. 25, 2008).

What surprises me most about this case is that the court didn't hammer the loan broker and his lawyer for making the oral-modification argument in the first place. From the facts reported in the appeals-court opinion, it looks to me like the argument was … thin (at best), and that there was no good reason for the broker's lawyer to have made the lender spend extra time and money enforcing his rights. Maybe there's more to it than that; I sure hope so.


*See also: (list is automatically generated)

4.31 Responding to customer demands for extended payment terms

May 4, 2009

in Procurement Dept

Sometimes customer will insist on payment terms beyond the normal net 30 days — say, net 45 days plus a 90-day cure period before the vendor can terminate for nonpayment. If the vendor were to agree, the customer would get the benefit of several weeks' extra float on its money. Jason Anderman raises this issue at WhichDraft.com; here's an edited version of what I responded at his site:

The vendor may be seeing the effect of tag-team negotiation from different departments within the customer's organization. The customer's finance department may have issued an edict that the accounts-payable process will only make payments on the extended terms unless an exception is approved by Finance.

If that's the case, the actual buyers can go to the vendor and claim, possibly disingenuously, that “we'd be willing to agree to net 30 days, but we'd have to ask for approval from Finance. That would delay closing our deal, probably into next quarter. On the other hand, if you can live with the extended payment terms, we can get it done this quarter.”

The sales person might well need for the sale to close this quarter, to help him make his numbers and get the commission (after all, he has to pay for the vacation he promised his wife). So he naturally will urge the vendor's contract negotiator to simply agree to the customer's proposal for extended payment terms instead of delaying the deal.

There are a couple of possible come-backs that the vendor can try with the customer:

  1. “We'd be OK with letting you have the extra float, but we'd need you to agree to pay interest at prime + X after 45 days.” The buyer's response, of course, will be that this too would have to be approved by Finance, which by hypothesis is something to be avoided if possible.
  2. It might be possible to steer the conversation into a discussion about pricing. The vendor's negotiator could responsd along the following lines: “The pricing we offered was premised on payment net 30 days. We'd be willing to let you have the additional float, but we'd need to increase the purchase pricing — we have to take into account our increased financial risk and the time value of money.” The customer's actual buyers can then decide whether they'd rather spend the extra money or go to Finance for approval of net 30 days. (My experience is that buyers would often rather give up the extra float than pay more on the front end.)

The weakness in either of these responses, of course, is that when the shot clock is running down at the end of the quarter, some sales people can be so eager (read: desperate) to close business that they won't hold their ground — this kind of sales person wants everyone else in the vendor's organization to make concessions so they can get their commissions.


*See also: (list is automatically generated)

{ 1 comment }

[BROKEN LINK: comment-42] Jason Mark Anderman May 8, 2009 at 12:04 pm

Believe it or not, right after our discussion on payment terms, a story on this topic hit the press. Apparently Anheuser Busch InBev is now paying its bills 120 days after receiving an invoice. Reportedly, Belgian governmental authorities are investigating the practice to determine its legality.

http://online.wsj.com/article/SB124096182942565947.html

Since Emerson (Anheuser Busch InBev's main supplier for brewing appliances), has little bargaining power to resist this change, it has publicly issued an edict that it will no longer serve its huge customer's beers at any Emerson event. “We suggest you use Coors, Miller, Modelo (Corona, etc.) or Heineken products.” the memo apparently goes on to say.

http://www.upi.com/Business\_News/2009/04/16/Emerson-freezes-out-Anheuser-Busch-InBev/UPI-63401239901273/

What Anheuser Busch InBev is doing, essentially, is turning each of its purchases into a 4 month financing contract. I wonder how they would feel if their beer distributors tried to do the same?

4.32 Best-efforts obligations: Six negotiation tips

A former colleague asked whether it was common for companies to agree to a requirement that they use their “best efforts” to do X. I've never been wild about that kind of obligation, because they're inherently risky.

The obligated party might well think it has made its best efforts. But in litigation, 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 company supposedly could have done, and thus should have done. Therefore (so the lawyer argues), the obligated party clearly didn't use “best” efforts, QED.

But sometimes a company feels it has no choice but to agree to a best-efforts performance obligation. 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.

1. Try defining “best efforts” and “reasonable efforts”

conservatively

It might be possible to limit the scope of a best-efforts obligation with a couple of definitions along the following lines:

Best efforts refers to ‘leaving no stone unturned' in making reasonable efforts to achieve the stated objective. For the avoidance of doubt, unless expressly agreed otherwise as to one or more specific actions, a party required to make best efforts (i) need not take every conceivable action to achieve the stated objective, and (ii) need not take any action that would not qualify as a reasonable effort.

Comment: The “leaving no stone unturned” phrase above is from a Canadian court decision, Atmospheric Diving Systems Inc. v. International Hard Suits Inc., 89 B.C.L.R. (2d) 356 (1994), excerpted by Ken Adams at his AdamsDrafting blog. Chapter 7 of Ken's book A Manual of Style for Contract Drafting, 2d Ed., contains additional helpful research, although in my view his opinions about the meaning of best efforts are, how shall I put this, idiosyncratic. See also a useful 2007 Jones Day memo by Shawn C. Helms, David Harding, and John R. Phillips.

Reasonable efforts refers to one or more reasonable actions reasonably calculated to achieve the stated objective. Any determination of what constitutes reasonable efforts shall give due regard to the information about the circumstances that is available to the acting party at the relevant time, including for example (i) the likelihood of success of the specific action(s) taken or contemplated; (ii) the likely cost of other or additional actions; (iii) the parties' other legitimate business interests, (iv) the safety of individuals and property, and (v) where applicable, the public interest. For the avoidance of doubt, unless expressly agreed otherwise as to one or more specific actions, a party required to make reasonable efforts need not take (x) every conceivable action to achieve the stated objective, nor (y) any extreme- or extraordinary action, nor (z) any action that would subject the party to undue hardship.

Comment: The above definition of reasonable efforts is my own coinage, drawing ideas from various other definitions I've read, including one in Ken Adams's Manual cited above.

2. Help keep disputes from arising: Make the parties talk regularly

Contract disputes have a way of cropping up when the parties haven't stayed in touch with each other. A useful discipline, that of holding periodic status-review conference calls, might help nip at least some disputes in the bud, including best-efforts performance disputes. Here's a provision requiring this:

Status review conferences: The parties will hold status-review conferences, by phone or in person, at either party's reasonable request. The parties anticipate that agendas will typically include, as appropriate and without limitation: (1) progress made; (2) problems encountered or anticipated; (3) plans for future action; and (4) assumptions being made. Conference details will be arranged by the requesting party unless otherwise agreed. The requesting party will seasonably circulate draft minutes upon request; any party may object to the contents of draft minutes by seasonably so advising all other parties in writing.

3. Require early neutral evaluation (ENE) of best-efforts disputes

If a dispute about a party's best-efforts performance did arise, an early sanity check from a knowledgeable neutral could help resolve the dispute inexpensively before it got out of hand. Here's a sample provision requiring early neutral evaluation (about which I previously posted at greater length). This ENE provision could be edited so that it applied only to disputes about whether the obligated party has used best efforts:

Early neutral evaluation: At the request of either party, the parties will submit any dispute between them, arising out of or relating to this Agreement or any transaction or relationship arising from it, to (nonbinding) early neutral evaluation, in accordance with the Early Neutral Evaluation procedures of the American Arbitration Association if not otherwise agreed.

4. Create a financial incentive to settle

The parties could provide in the contract that, if a party rejected a settlement offer, but then did not finally do better than the offer (either at trial or in arbitration), then the rejecting party must reimburse the offering party for its attorneys' fees and other expenses incurred after making the offer. (See this posting from last year for more on that subject.)

Here's a clause that would require this for any rejected settlement offer, but it could be tailored so that it applied more narrowly to best-efforts disputes only:

Settlement offer rejection: (1) If, in a covered dispute, a party does not timely accept a covered settlement offer, each as defined below, but then finally fails to obtain a more favorable result in the dispute than the offer, then that party must pay or reimburse the offeror's costs and expenses, including for example reasonable attorneys' fees, incurred in the dispute by the offeror after making the offer. (2) A covered dispute is any action or proceeding before any tribunal, where the action or proceeding arises out of or relates to (x) this Agreement or (y) any transaction or relationship arising from this Agreement. (3) A covered settlement offer is an offer that (i) is expressly identified as being subject to this section, and (ii) offers to settle a covered dispute. (4) Matters of timing and other procedural issues concerning the offer will be governed in the general manner provided for an offer of judgment under Rule 68 of the [U.S.] Federal Rules of Civil Procedure, any necessary change being made, to the extent the parties do not agree otherwise. (5) Absent consent of the other party, each party shall preserve in strict confidence the existence and details of any offer made by the other party pursuant to this section and any subsequent communications between the parties regarding the offer.

5. Require micro-arbitration of best-efforts disputes

Nowhere is it written that arbitration is an all-or-nothing proposition. Parties to a contract could agree to arbitration of selected issues only — such as a party's best-efforts performance — while leaving other matters to be tried in court. That could greatly streamline and simplify the courtroom litigation, and might even eliminate the need for it.

6. Agree to refer best-efforts disputes to a special master

One or both parties might be reluctant to agree to micro-arbitration of a best-efforts dispute, because in many cases an arbitration award is often essentially unappealable except on extremely narrow grounds. Atlanta lawyer Cary Ichter suggests an alternative: Agree to refer the dispute to a special master.

If a best-efforts performance obligation can't be avoided, these six tips could help reduce the risk of having the obligation backfire into protracted legal warfare.

4.33 Three reasons to educate the other side's negotiators what to ask for in the contract

“If the other side doesn't know what to ask for, it's not my job to educate them.” That's one reason a contract drafter might not want to use a short-form contract that references a “standard” form book, or to use a fill-in-the-blank form such as a PRECUT baseline contract form: the other side could see what other options were available, which would give them a good idea of what they might want to demand for in negotiations. But consider these points:

• Your notion that you're the one with superior knowledge might be wishful thinking. The other side could bring in an expert who knows exactly what changes to demand. You might be better off setting the tone with a demonstrably-reasonable contract, and then standing on principle to reject unreasonable change requests.

• Suppose you're right, and the other side doesn't really know what they're doing. Chances are you'll get them to signature faster — and you'll be laying a foundation for a trusting re­la­tion­ship — if the draft you're proposing seems fair and balanced.

• It can be dangerous to have a clueless contract reviewer on the other side. The reviewer might make unreasonable demands, but being clueless, s/he won't know that, and probably can't be convinced otherwise (because s/he might think that would cause a loss of face in front of his or her client). That could drive the negotiation into the ditch.

4.34 What to do when you get a wall-of-text contract draft

You're asked to review a contract that's a dense wall of text. What do you do?

For the reasons discussed below:

(a) Reformat the Word document as follows:

  • single column;
  • double space;
  • a readable font size (e.g., 12 points); and
  • fairly-wide left- and right margins, e.g., 1.5 inches.

(b) Break up the long paragraphs and sentences — see, e.g., the following documents for examples:

Sheryl Sandberg employment agreement

Rick's Cabaret real-estate purchase agreement

Doing this will benefit your client in the following ways:

(1) Instead of passively scanning the provisions' text, you will be actively reading the text, looking for long sentences and paragraphs and for logical places to break them up. This will help you to do a better job of spotting potential problems.

(2) The reformatting in subdivision (a) will:

  • make the document easier for your client to read — which of course the client should do before signing the document; and
  • make negotiation and revision easier.

(c) At the front of the document, insert a redlined comment explaining that you've reformatted the document to make it easier for your client to read.

4.35 Confirm the other signer's authority to sign

Rules of thumb: The person signing the Agreement 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.

Secretary's certificate of 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.

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.

5 Red flags

5.1 Watch out for 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.

5.2 Check for 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 10 years in prison for concealing side letters, as well as for backdating contracts [link].
  • 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 [link].
  • 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, 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. [link]

For additional information, see What to Do When You Find the Side Letter: Guidelines for CEOs, CFOs, and Audit Committee Members in Investigating Accounting Fraud [link], by Boris Feldman, a leading securities litigator at Wilson Sonsini, regarded by many as the preeminent Silicon Valley law firm.

5.3 Check for possible 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. [link] [link]

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 [link].

For more information about unlawful collusive practices, the Department of Justice has a useful antitrust primer that explains many of the relevant concepts.

5.4 Don't "bribe" 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 for lay people. [link]

The Steptoe & Johnson firm published a "year in review 2010" paper on how the FCPA has been enforced by the Justice Department and the FTC; the firm notes that the Act has come under some criticism in Congress and that courts have expressed skepticism about some of the Justice Department's aggressive interpretations of the statutory language. [link]

5.5 Don't "export" without a license or license exception

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).

5.6 Exercise: Assignment of port operating agreement

FACTS:

  1. You represent Port Operations, Inc., which operates the Port of Bayou City under a contract with Harris County.
  2. The contract states that the contract may not be assigned without the County's prior written consent.
  3. Port Operations receives a buy-out offer from a Saudi shipping magnate who wants to do a "roll-up" of port-operating companies throughout the world.
  4. The County demands a $10 million fee in return for its consent to assignment of the contract.

QUESTIONS:

1. If the contract didn't have an assignment-consent requirement, would the County's consent be required?

A: That might be a litigatable question — the County might take the position that the contracted-for services were sufficiently unique that consent was required for any assignment by Port Operations.

Also, a given state might have a statute like that of New York, which/ prohibits /contracts with state agencies from being assigned.

2. How much does it matter whether the "roll-up" would take the form of (i) an asset purchase, or (ii) a merger?

A: That might depend on the applicable state law — in many jurisdictions, a merger is deemed to cause a transfer of assets to the surviving company, which would trigger the consent requirement.

3. Name at least two ways in which, during the contract negotiation with the County, Port Operations could have protected its ability to agree to the Saudi buy-out.

A:

In negotiating the contract, Port Operations might have asked:

  • for the assignment-consent provision to be deleted;
  • for an exception in the case of an all-asset transfer;
  • for a requirement that the County's consent not be unreasonably withheld, together with a fast-track arbitration provision.

Suggested reading: Common Draft assignment-consent commentary

5.7 Exercise: Most-favored-customer pricing

Takeaways

Most-favored-customer clauses (and other "most-favored" provisions) can:

  • be a bear to manage;
  • lead to (very) unpleasant surprises.

Facts

Your client, Seller, has asked you to review a purchase order from Buyer. The PO includes two pricing clauses that appear to have been copied essentially verbatim from sections 12 and 13 of the Honeywell terms of purchase.

Questions

  1. How might Seller respond to Buyer about the most-favored-customer clause?
  2. What happened to Oracle when it breached its most-favored-customer clause with the U.S. Government (in its GSA contract)?
  3. What specifically did Oracle do that brought down the government's wrath on it?
  4. How much money did the whistleblower get for his trouble?

Resources

Other resources (read later)

5.8 Exercise: Confidential information

Will a two-way NDA be safe?

FACTS:

  1. Your client, Alpha LLC, is being asked by Bravo Corporation to sign a nondisclosure agreement (NDA) drafted by Bravo. The intent is for Bravo to disclose its confidential information to your client Alpha.
  2. The NDA is drafted to protect each party's confidential information.

TRUE OR FALSE: It likely would be dangerous for your client to sign the NDA "as is."

A: It might indeed be dangerous — just because a contract applies equally to both sides, the drafter might well have biased the contract to favor his side, taking his chances that the roles won't be reversed.

5.9 Exercise: 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?

5.10 Exercise: 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.

5.11 Exercise: Contra 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.

5.12 Stay out of jail: Check for backdating

Backdating a contract can lead to prison time

Backdating a contract for purposes of deception, for example, to book revenue as of an earlier date, might well be a felony. At this writing, the former CEO of software giant Computer Associates is serving a 12-year sentence for backdating sales contracts. (NY Times) Sanjay Kumar was also fined $8 million and agreed to settle civil suits by surrendering $800 million. (NY Times)

Kumar wasn't the only executive at Computer Associates (now known as just CA) to get in trouble for back-dating. All of the following went to prison or home confinement:

  • the CFO — seven months in prison, seven months home detention (NY Times)
  • the general counsel — two years in prison, and also disbarred (court opinion)
  • the senior vice president for business development — 10 months of home confinement (NY Times)
  • the head of worldwide sales — seven years in prison (WSJ)

All of this mess came about because the Computer Associates executives orchestrated a huge accounting fraud: On occasions when the company realized that its quarterly financial numbers were going to miss projections, it "held the books open" by backdating contracts signed a few days after the close of the quarter. (This practice was apparently referred to internally as the "35-day month.")

Note that all the sales in question were legitimate and the cash had been collected (according to CA's press release). The only issue was one of the timing of revenue recognition. The company had booked the sales a few days earlier than was proper. But that was enough to put the sales revenue into an earlier reporting period than it should have been. That, in turn, was enough to send all those CA executives to prison. (CA press release)

Likewise, the former CFO of Media Vision Tech­nology was sentenced to three and a half years in federal prison because his company had inflated its reported revenues, in part by backdating sales contracts. Because of the inflated revenue reports, the company's stock price went up — at least until the truth came out, which eventually drove the company into bankruptcy. (The Recorder)

Backdating can lead to civil liability

Even if backdating a contract doesn't land one in jail, it can can cause other problems. For example, a California court of appeals held that backdating automobile sales contracts violated the state's Automobile Sales Finance Act. See Raceway Ford Cases, Nos. E054517, E056595, part IV-B, slip op. at 15-20, 28 (Cal. App. 4th Dist. 2014) (reversing and remanding trial court judgment).

Backdating for non-deceptive purposes might be OK

Signing a contract to be effective as of an earlier date might well be OK, but the fact that you're doing so should be made clear in the contract itself, to help forestall later accusations that you had an intent to deceive.

EXAMPLE: Suppose you disclosed your company's confi­dential information to a potential business partner, after she first orally agrees to keep it confidential. You might well want to enter into a written nondisclosure agreement that states the agreement is effective as of the date of your oral disclosure. (Check with your lawyer.)

You still would not want to backdate your actual signature, though.

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 (2013).

5.13 Filing the signed contracts

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

See In re Serodio & Perkins, No. 2013-199, slip op. at 5-6 (N.H. Aug. 22, 2014) (citation omitted).

Are signatures needed?

6 Exercises: Substantive

6.1 Warranties: CBS v. Ziff-Davis, Inc. (email to me)

Read: CBS, Inc. v. Ziff-Davis Publishing Co., 75 N.Y.2d 496, 553 N.E.2d 997 (1990)

  1. T/F: The warranty that Ziff-Davis supposedly violated, according to CBS, was that Ziff-Davis's financial statements concerning certain consumer magazines had been prepared in accordance with generally-accepted accounting principles (GAAP).
  2. T/F: CBS concluded that Ziff-Davis wasn't in compliance with the warranty after the deal was closed.
  3. T/F: CBS concluded that Ziff-Davis wasn't in compliance with the warranty during pre-closing "due diligence."
  4. T/F: IF: CBS had concluded that Ziff-Davis wasn't in compliance with the wararanty in question before closing; THEN: CBS could have walked away from the deal.
  5. T/F: The NY Court of Appeals held that CBS's election to close the deal was fatal to CBS's warranty claim.
  6. T/F: The NY Court of Appeals held that CBS's lack of reliance on Ziff-Davis's warranty was fatal to CBS's warranty claim.
  7. T/F: The NY Court of Appeals held that CBS, in effect, purchased Ziff-Davis's promise to indemnify CBS if Ziff-Davis's warranty proved to be unfounded.

6.2 Exercise: This diamond ring doesn't shine for him anymore

Facts

Your client TexBling is a Houston company that sells jewelry on-line, but only to Texas customers. One particular customer is Nick, an individual living in Houston.

On January 17, Nick clicks on "I agree" to buy a $20,000 diamond engagement ring. He wants to pop the question to his girlfriend, Nora, at a Houston Rockets game on January 26. He has arranged with the Rockets to show his proposal on the Jumbotron at the Toyota Center.

The price of the ring would bust out Nick's credit-card limit, so he checks the box to pay C.O.D. instead and borrows the cash from his parents.

TexBling's Web site says that with ground shipping, the ring should arrive in 7 to 10 days, that is, some time between January 24 and January 26. Nick figures that's good enough, so he doesn't pay extra for second-day air.

January 26 arrives, but the ring doesn't. Nick goes ahead anyway with proposing to Nora at the Rockets game.

To Nick's horror, though, Nora turns him down, bursts into tears, and storms out of the arena to get a cab home — live on the Jumbotron and, as it happens, on national TV. (Here's a real-life example — supposedly.)

The next day, the delivery van arrives with the engagement ring from TexBling. The grief-stricken Nick no longer wants it, though. He refuses to take delivery, and he also refuses to pay for it. (Cue Gary Lewis and the Playboys' 1965 hit This Diamond Ring Doesn't Shine for Me Anymore.)

TexBling, the jewelry vendor — heedless of the potential bad publicity — tells you it wants you to sue Nick for breach of contract in failing to pay for the ring.

Question: Statute of frauds defense?

Could Nick assert a statute-of-frauds defense, on grounds that he never signed a contract? Briefly explain your answer.

Question: Hard copy signature needed?

Could Nick assert that TexBling failed to obtain his handwritten, hard-copy signature, agreeing that it was OK to use electronic signatures? Briefly explain your answer.

Suggested reading

6.3 Exercise: Diet Supplements

SUGGESTED READING: The following excerpts from the NY Times piece, New York Attorney General Targets Supplements at Major Retailers (Feb. 3, 2015)

The New York State attorney general’s office accused four major retailers on Monday of selling fraudulent and potentially dangerous herbal supplements and demanded that they remove the products from their shelves.

The authorities said they had conducted tests on top-selling store brands of herbal supplements at four national retailers — GNC, Target, Walgreens and Walmart — and found that four out of five of the products did not contain any of the herbs on their labels.

The tests showed that pills labeled medicinal herbs often contained little more than cheap fillers like powdered rice, asparagus and houseplants, and in some cases substances that could be dangerous to those with allergies.

 *  *  *

Among the attorney general’s findings was a popular store brand of ginseng pills at Walgreens, promoted for “physical endurance and vitality,” that contained only powdered garlic and rice.

At Walmart, the authorities found that its ginkgo biloba, a Chinese plant promoted as a memory enhancer, contained little more than powdered radish, houseplants and wheat — despite a claim on the label that the product was wheat- and gluten-free.

Three out of six herbal products at Target — ginkgo biloba, St. John’s wort and valerian root, a sleep aid — tested negative for the herbs on their labels. But they did contain powdered rice, beans, peas and wild carrots.

And at GNC, the agency said, it found pills with unlisted ingredients used as fillers, like powdered legumes, the class of plants that includes peanuts and soybeans, a hazard for people with allergies.

The attorney general sent the four retailers cease-and-desist letters on Monday and demanded that they explain what procedures they use to verify the ingredients in their supplements.

(Emphasis and extra paragraphing added.)

SCAN: The Common Draft clause headings to get ideas for tools to use in the exercise below.

FACTS:

  • You represent NileRiver.com, Inc., a new client. NileRiver is a growing Internet retailer that is competing with, and consciously patterning itself on, Amazon.com.
  • The company sells house-brand diet supplements; it uses some of the same (unidentified) supplement suppliers as do GNC, Target, Walgreens, and Walmart (the retailers mentioned in the New York Times piece).
  • The company's executives have called your office to ask for an urgent meeting to discuss the New York Times piece.
  • You know

QUESTIONS: In your groups, brainstorm and write group answers to the following:

  1. What players, that is, participants in the business- and legal worlds, might "take an interest" in NileRiver's supplements? (Hint: Consider who might stand to benefit, and how, from discovering deficiences in those supplements.)
  2. In what general ways might those "interests" of such other participants affect NileRiver.com?
  3. In general terms, what business practices could NileRiver.com adopt — and require its suppliers to adopt — to protect NileRiver's customers (and itself)? Hint: In this article, search for the term "old nuclear phrase."
  4. All business practices cost money. What are some sources of money that might be tapped to pay for the business practices that you come up with?
  5. What are some sources of leverage that NileRiver might use to encourage its existing suppliers agree to adopt such business practices? (Hint: Don't limit your thinking to contract provisions alone.)
  6. What are some actions that NileRiver could take to increase the company's confidence that its suppliers are in fact conforming to those practices that they agreed to adopt? (Note the use of the term increase the company's confidence, as opposed to ensure, in the previous sentence.)
  7. What are some actions NileRiver could take if it discovered that one of its suppliers was not conforming to the agreed business practices?
  8. What might NileRiver want its suppliers(s) to do in the event of a legal investigation like the one referred to in the New York Times piece?

6.4 Exercise: Selling a used computer (part 1)

SETTING UP: Each group of four students is to divide into two teams. One team will represent Sarah Seller, the other will represent Billy Buyer. (No need to change seats.)

FACTS:

  • Sarah Seller owns a three-year-old laptop computer. She wants to sell it so that she can buy the latest and greatest model.
  • Billy Buyer is interested in buying Sarah's computer. Billy is wealthy, so he wants the actual purchase to be made by his family office, Buyer Investments L.P.

ASSIGNMENT:

  1. In your two-person teams, brainstorm a list of provisions that you would want to see in a "minimum viable contract," that is, a contract that you think would:
    • survive a motion to dismiss for failure to state a claim;
    • cover the likely risks for your client; and
    • get signed reasonably quickly so that Sarah and Billy can go on their way and get on with their lives.
  2. Compare notes with the other two-person team in your four-person group and see what if any consensus you can reach.

6.5 Exercise: Preamble of Rick's Cabaret – redraft

You're to redraft the "Whereas" clauses below (from an actual contract). First, some background about the transaction and the contract:

  • Wire Way LLC owned land and a building, in Dallas, that was home to an "adult entertainment club" (that is to say, a strip club) known as "Platinum Club II."
  • The club was apparently operated by another company, North by East Entertainment, Ltd.; it's not clear what relationship existed between North by East and Wire Way LLC, the owner of the land and building.
  • Rick's Cabaret wanted to buy out the club; under the agreement, it would do so with a semi-complicated transaction:
    • In a related transaction, North by East (the operator of the club) would sell the assets of the club business to RCI Entertainment (Northwest Highway) Inc. ("RCI Entertainment"), which was [and is] a subsidiary of Rick's Cabaret International ("Rick's") [now named RCI Hospitality Holdings Inc.];
    • In another related transaction, Wire Way LLC would lease the land and building to RCI Entertainment; and
    • In the agreement we're studying now, Wire Way LLC would sell the land and building to RCI Holdings, Inc., which also was [and is] a subsidiary of Rick's.

ASSIGNMENT: Rewrite the "Whereas" provisions below as a "Background" section in plain English. Tell the story — not too informally, but not in a stilted, legalesey manner either.

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:

DCT REDRAFT:

1. BACKGROUND

1.1 The Property: Wire Way LLC ("Seller") owns the following:

(1) approximately 4.637± acres of land (without mineral rights) known as 10557 Wire Way, Dallas (the "City"), Dallas County, Texas; and

(2) certain improvements and other property on the land.

Together, items (1) and (2) above are referred to as the "Property," described more fully in Exhibit A, which is attached to this Agreement and incorporated into it by reference.

1.2 Related transaction: Sale of business assets to RCI Entertainment:

(a) A business, known as "Platinum Club II," is operated at the Property by North by East Entertainment, Ltd., a Texas limited partnership ("North by East").

(b) At substantially the same time as this Agreement is being signed, North by East is entering into an "Asset Purchase Agreement" with RCI Entertainment (Northwest Highway), Inc., a Texas corporation ("RCI Entertainment"), which is a wholly owned subsidiary of Rick's Cabaret International, Inc., a Texas corporation ("Rick's"), for the sale and purchase of the assets of that business.

1.3 Related transaction: Lease of the Property to RCI Entertainment: The parties anticipate that:

(i) subject to and simultaneously with the closing of the Asset Purchase Agreement, Seller, as Landlord, will enter into a "Lease Agreement" for the Property with RCI Entertainment as Tenant; and

(ii) the Lease Agreement will be in substantially the form attached to this Agreement as Exhibit B [NOT "incorporated herein by reference"] and will be dated to be effective as of the date of that closing.

1.4 This Agreement: Sale of the Property to RCI Holdings: Under this Agreement, Seller will sell the Property to RCI Holdings, Inc., a Texas corporation ("Purchaser," which is also a subsidary of Rick's), and Purchaser will buy the Property.

The parties agree as follows:

6.6 Exercise: Preamble questions about the computer sale

1. FACTS: Billy Buyer wants the computer-sale contract to recite, not his name, but his business name, "Bravo Builders" (just that – no Inc. or LLC or anything like that).

QUESTION: Any problem with that?

2. FACTS: It turns out that Billy Buyer is 15 years old.

QUESTION: Any issues there?

3. ALTERNATE FACTS: Billy is 28 years old, a successful Internet entrepreneur who is worth $300 million. Billy wants the contract with Sarah Seller to be in the name of his new business venture, Beta-Beta Research LLC. BBR will be renting from Sarah (not buying) a custom-built supercomputer for one year, for an annual rent of $1 million.

QUESTION: Any financial issues here? How might those issues be addressed?

6.7 Exercise: Termination vs. expiration

FACTS:

  • Devin Hamlen operated an auto body shop as a franchisee of Total Car Franchising ("TCF").
  • The franchise agreement, which was a standard form contract of TCF, had a 15-year term.
  • The franchise agreement incorporated by reference a "non-compete" provision stating that, for two years following termination of the franchise agreement [sic], Hamlen may not operate a body shop in a stated geographical area.
  • The franchise agreement eventually expired, but no one noticed right away.
  • Several months later, TCF, the franchisor, approached Hamlen about renewing the franchise agreement.
  • Hamlen decided not to renew, but to keep operating on his own.
  • TCF says Hamlen is in violation of the non-compete provision; Hamlen files a suit for declaratory judgment.
  • Hamlen says that the non-compete clause applies only upon termination of the franchise agreement, not upon expiration.

POSSIBLE READING: The Fourth Circuit's opinion

QUESTIONS:

  1. QUESTION: In the U.S. federal-court system (and most state-court systems), how much authority does an appellate court have to review a trial court's interpretation of an unambiguous contract provision?
    (A) None — the trial court's interpretation is binding;
    (B) Substantial-evidence review — the trial court's interpretation is binding if supported by substantial evidence;
    (C) De novo review — the appeals court has full power to substitute its own interpretation for that of the trial court.
    Suggested reading: Id., slip op. at 6-7.
  2. TRUE OR FALSE: If the parties to a contract disagree as to the proper interpretation of a particular contract provision, it follows that the provision is ambiguous.
    Suggested reading: Id., slip op. at 6-7; id. at 9 n.5.
  3. TRUE OR FALSE: In common parlance, the expiration of a time period is a type of termination, even though no one had to commit any affirmative act of termination.
    Suggested reading: Id., slip op. at 9-10.
  4. TRUE OR FALSE: Depending on the context, the expiration of a time period might not be a "termination" because no one had to commit any affirmative act of termination.
    Suggested reading: Id., slip op. at 10-13.
  5. QUESTION: How does a nonsolicitation provision differ from a noncompetition provision?
    Suggested reading: Id., slip op. at 4, 5.
  6. REVIEW: On the facts here, what effect would the principle of contra proferentem have?
    Suggested reading: Id., slip op. at 17 n.8.
  7. QUESTION: Under Texas law, what two basic requirements must a post-employment noncompetition provision meet?
    Suggested reading: This article.
  8. EXERCISE: As attorney for the franchisor TCF, describe two ways you could revise the franchise agreement to (try to) prevent this issue from arising again.
  9. QUESTION: Legally, what makes a contract a "franchise agreement"? [For in-class discussion only; no need to include in homework]

6.8 Exercise: Who can sue on a warranty?

FACTS:

  • You represent ABC Corporation, which is negotiating a master purchase agreement under which ABC and its various affiliates can issue purchase orders to buy widgets from XYZ Inc. You've been asked to review a draft of the master agreement, prepared by XYZ's lawyers.
  • One provision of the draft states that "XYZ warrants to ABC that the widgets, as delivered, will be free from defects in materials and workmanship."

HYPOTHETICAL: Suppose that one of ABC's affiliate corporations were to order widgets under this master agreement, and it turned out that those widgets did have defects.

QUESTION 1: Would the affiliated corporation be able to sue XYZ for breach of warranty?

QUESTION 2: As ABC's lawyer, how could you improve the warranty provision on this point?

6.9 Review questions: A Somewhat-Barebones Contract

Reading: A Somewhat-Barebones Contract

1. Title: Why not just have the title be “Agreement”?

A: If the title were just "Agreement," then* the title wouldn't be as informative when the title is listed in an index or other referring document.

*  Notice how I used the word "then" as a separator — this helps the reader see more quickly where the "if" clause ends and the "then" clause begins.

2. First paragraph: What is a one-word name by which this first, unnumbered paragraph is typically called?

A: That paragraph is referred to as the preamble.

3. First paragraph: The words “Agreement,” “Buyer,” and “Seller” are in bold-faced type and surrounded by quotation marks and parentheses. Why?

A: This flags the definitions of those defined terms; when the first instance of a defined term is eye-catching in this way, it helps the reader to find the term's definition more quickly.

4. First paragraph: Why does this paragraph state (i) the type of organization of Betty's Used Computers, LLC ("BUCL") and (ii) the state in which BUCL is organized?

A:

  1. If Seller were ever to have to sue Buyer, it would be important for the complaint (in federal court and some state courts) or original petition (in Texas state courts) and subsequent documents to identify Buyer precisely.
  2. One reason to state the type of entity is to inform future trial counsel, because that could affect whether a federal court can exercise diversity jurisdiction. That's because for diversity-jurisdiction purposes, courts generally treat LLCs as having the citizenships of its members, in contrast to a corporation having its own citizenship. See, e.g., Sevan Ogulluk and Jason Lissy, How to Determine the Citizenship of LLCs (Hint: Keep Digging!) (BNA.com 2014).

5. First paragraph: Why does this paragraph state Buyer’s principal place of business?

A: To establish at least one permissible location for (i) personal jurisdiction, and (ii) venue — which are two different things (albeit related).

6. First paragraph: Why does this paragraph state Buyer’s initial address for notice? Why not just put that information in the Notices provision (if there is one)?

A: It's convenient to have that information on the front page, so that future readers don't have to go paging through the document looking for it.

7. First paragraph: Why state Sam’s place of residence (which is not necessarily the same as his initial address for notice)?

A: To establish one permissible location in which Sam could be sued if necessary.

8. First paragraph, comment [B]: What's a romanette?

A: A romanette is a lower-case Roman numeral in parentheses.

9. Section 1: What advantages might there be in including so much information about "the deal” in this paragraph?

A: To give future readers — e.g., company exectives, trial counsel, judges — a quick introduction, to help get them up to speed.

10. Section 1: This contract does not include recitals, a.k.a. "whereas" clauses, nor "words of agreement," e.g., "The parties agree as follows." Why might that be?

A: At least in U.S. jurisdictions, a contract doesn't need any of these things to be enforceable.

11. Section 1: “Seller will sell” and “Buyer will buy”: Why includes both of these?

A: Otherwise, the contract might bind only Seller or only Buyer (in which case the contract would be a call option or a put option).

12. Section 1: “Seller will sell”: Why not “Seller shall sell”?

A:

  1. "Seller shall sell" is certainly acceptable for the U.S., because here the word shall is generally understood as mandatory. That might not be the case, though, in other English-speaking countries; see the Common Draft definition of "shall" and its commentary (scroll down to the New Zealand and Australia mentions).
  2. When drafting a contract for a seller, I prefer to use, for example, "Customer will do X" instead of "Customer shall do X" because the former is arguably more respectful in tone — because after all the customer doesn't have to do the deal ….

13. Section 1: In the term "USD $800," what does the prefix "USD" mean?

A: "USD" is a standard abbreviation for U.S. dollars. Note how the usage is "USD $800."

14. Section 1.3: What’s the point of this section – as a matter of law, aren't the parties free, if they so agree, to change the Closing Time and Closing Location?

A: Yes, of course parties are free to change the Closing Time and Closing — but sometimes it doesn't hurt to throw in things like this anyway, to give some reassurance to non-lawyer readers on the other side of the deal.

15. Section 1.4: What is a "safe harbor" clause in the context of a contract (as opposed to a statute or regulation)?

A: A "safe harbor" clause says, in essence (for example), you don't have to do things this way, but if you do, you can't be attacked for having failed to do it properly. (Safe harbors are often seen in securities law and tax law.)

16. Section 1.4: What’s the significance of “for the avoidance of doubt”?

A: "For the avoidance of doubt" is a signal to a judge that what follows is a guide to interpretation; see the Common Draft definition and its commentary.

17. Section 1.4: Any danger in using “for example”?

A: Unless the term is defined, a court might treat the term as being subject to the doctrine of ejusdem generis.

18. Section 2: What types of agreement are likely to include this kind of clause?

A: Any clause for the sale of one or more assets is likely to include a clause like this, which could be referred to as a "lockdown" clause.

We see similar provisions in merger- and acquisition agreements, in wnich the seller is required to continue running the business "in the ordinary course," and thus requiring the seller to get the buyer's approval for extraordinary transactions.

19. Section 2: Note the phrasing, “Seller will not use the Computer ….” How else could that be phrased? Is there any significance to the “will not” phrasing?

A: Try "Seller may not use the Computer …" or "Seller must not use the Computer …."

20. Section 2.1: In the real world, would this sort of exception normally be included in a draft agreement prepared by Buyer? Contrariwise, if Seller had drafted the agreement, then would Seller have included section 2 at all?

A: No and no — but Seller might have included section 2 as a way of increasing the "curb appeal" of the total offering.

21. Section 3: “Seller will cause” a clean install of Mac OS X: Why phrase the obligation this way — why not just say that Seller will perform a clean install?

A: Seller might not be the one to actually perform the clean install (e.g., Seller might take the computer to the Apple Genius bar).

22. Section 3: What type of covenant is this?

A: An affirmative covenant (as contrasted with a "thou shalt not" negative covenant).

23. Section 4: What term might traditional contract drafters use here instead of “prerequisite”?

A: "condition."

24. Section 4: Why include this section?

A: Because Buyer wants the right to walk away from the deal — and not be in breach of contract for doing so — if the stated prerequisites aren't met.

25. Section 4: Why cross-reference to “the obligation stated in section 3,” instead of just saying, “Seller’s obligation to do a clean install is a prerequisite ….”?

A: "D.R.Y. — don't repeat yourself." Repetition is dangerous: You might change one instance but forget to change the other. (A bank lost $693,000 that way.)

26. Section 5: If Seller fails to remove the Grateful Dead decals: Would Seller be in breach? Would Buyer be able to walk away?

A: Seller has no obligation to remove the Grateful Dead decals, and thus won't be in breach of contract if the decals aren't removed. BUT: Buyer can walk away from the deal if the decals are left on the computer.

27. Section 6: (i) Why use the phrase, “so far as he knows, without any particular investigation”? (ii) Why not simply say "to Seller's knowledge"? [Note how in this paragraph the question marks are outside the quotation marks because the question marks aren't part of the text that's being quoted.]

A: "To Seller's knowledge" is ambiguous: It could mean:

  • Seller knows for a fact; or
  • Seller doesn't have any knowledge one way or another.

Under contra proferentem, if Seller drafted the agreement (which will usually be the case for a small transaction like this), other things being equal, the ambiguity would be construed against Seller.

28. Section 7: What options does Buyer have if Seller doesn’t allow Buyer to inspect the Computer before Closing?

A: Buyer can walk away from the deal, without being in breach of contract.

29. Section 7: Why use the term “commercially reasonable” in this section?

A: To "kick the can down the road" in lieu of drafting a more-specific standard of performance. (Note how "more-specific" is hyphenated.)

30. Section 8.1: Why not use active voice here?

A: Because we care more about whether the action gets done (Seller gets paid) than about who, exactly, is performing the action.

(In some circumstances, though, we might care greatly about just who is performing the action.)

31. Section 8.1: This provision uses “must be paid” for emphasis — what are some other possibilities for phrasing this term?

A: "Is to be paid" could work.

32. Section 8.1: Any dangers in payment by cashier’s check? What are some possible alternative forms of payment?

A: A cashier's check could be counterfeit, in which case the bank would have no obligation to honor the check.

33. Section 9: This section uses the term "notarized." Does that likely refer to an acknowledgement, or to a jurat?

A: An acknowledgement.

34. Signature blocks: Is there any danger in having the signature blocks on a separate page for easier signing and FAXing of just the signature pages instead of the whole agreement?

A:

  1. The other side might add text to the bottom of the page just before the signature page. QUESTION: How could this concern be addressed?
  2. A question might arise as to whether the individual who signed the signature page was using the signature page from (let's say Draft #10 of the contract or Draft #11. QUESTION: How could this concern be addressed?

35. Signature blocks: Why does the date line say "Date signed" instead of just "Date"?

A: To make it clear when the contract is actually being signed — this is important in transactions involving public companies, which must report their earnings quarterly, because the date of actual signature is important for determining when earnings (or expenses) are permitted to be "recognized" under generally-accepted accounting principles. See generally the Common Draft discussion of backdating.

6.10 Exercise: Signature blocks: The Addams family in Hawai'i

FACTS:

  • Your client is Addams Investments, L.P., a "family" limited partnership of the very-wealthy Addams clan in Galveston. The sole general partner of the limited partnership is Addams Operations, Inc.
  • It's 12:00 noon Houston time on March 31. The president of Addams Operations, Ms. Wednesday Addams, is on the phone. It's a bad connection, but she wants to talk about a contract that you and she have been negotiating for Addams Investments, L.P.
  • Under the contract, will buy a large quantity of widgets from Widgets, Inc., a Houston company that recently went public. (Family patriarch Gomez Addams is convinced the family will make a killing in the widget market.)
  • Wednesday Addams says that she has talked by phone with her opposite number at Widgets, Inc.; she reports that Widgets, Inc., has agreed to the last contract draft that you sent over, and that everyone is ready to sign.
  • The Widgets, Inc. people really, really want to get the contract signed and delivered today, March 31. They've told Wednesday Addams that they're willing to make significant pricing concessions to make that happen.
  • There's a problem, though: As you learn from Wednesday Addams over the bad phone connection, she and the rest of the Addams family are at the end of a rugged backpacking vacation on a small, primitive island in Hawai'i. The island has no Internet service and barely has cell phone service.
  • The family has just emerged from the back country. The plan is for everyone, smelly as they are, to take a private plane from a dirt landing strip on the island to the Honolulu airport. A shuttle bus will take them to a nearby hotel for a quick shower and change of clothes. The family will then board a United Airlines "redeye" overnight flight that will land in Houston on the morning of April 1.
  • One more thing, she says: In the interest of traveling as light as possible, no one in the group brought a laptop.

QUESTION: How should the contract signature block for Adams Investments, L.P., be written? INSTRUCTIONS: Develop a consensus, then send a representative to write your sig block on the whiteboard.

QUESTION: Why might the Widgets sales rep be so eager to get the contract signed on March 31? (Hint: It has to do with the fact that Widgets, Inc. is a newly-public company.)

QUESTION: What about just signing it on April 1 when the family gets back to Houston?

QUESTION: Is it physically possible for you to "make it happen" for the contract to be signed and delivered to Widgets, Inc. today, March 31? If so, how might you go about it?

QUESTION: If Wednesday Addams asks you to sign it as the company's lawyer, how should you respond?

6.11 Exercise: The Magnuson-Moss Act

Question 11.1: "Limited" warranties

Why do so many consumer-product warranty clauses say "Limited Warranty"?

Question 11.2: Warranty statements

Under federal law, what are the three minimum requirements for a warranty statement for a consumer product?

Question 11.3: Implied warranty disclaimers

Does it make sense for a seller of a consumer product to offer a written warranty?

Resources

6.12 Exercise: Warranty comparison: Honeywell vs. Honeywell (1)

In a Word document with a table (this is to practice using Word's table feature), very briefly answer the following questions about the warranty- and remedy provisions that Honeywell sets out in the following provisions:

on the following subjects:

  1. To whom does the seller make the warranty — and, thus, who might arguable be entitled to enforce the warranty in court?
  2. How long does the Warranty Period last?
  3. Are the stated warranties the exclusive ones?
  4. How restricted are the remedies for breach of warranty?

6.13 Exercise: Warranty comparison: Honeywell vs. Honeywell (2)

Same instructions as for Part 1:

  1. For goods: To what extent is the intended use of the goods relevant to the contract terms?
  2. For services: To what quality standards will services conform?
  3. With what laws will the seller comply?

6.14 Exercise: Honeywell purchase-order warranties

BASIC (hypothetical) FACTS:

• Alice is an "account executive" (translation: sales rep) for ABC Corporation of Houston, which makes specialty chemicals. Alice is excited to have landed a purchase order from the local office of UOP LLC, a wholly-owned subsidiary of Honeywell (both are real companies); this is the first order that ABC has received from UOP, which Alice hopes will turn into a steady customer.

• The P.O. says that the terms and conditions are set out in Honeywell's Standard Purchase Order Terms and Conditions for Goods and Services (see the text and the online PDF).

• Without consulting you or any other lawyer, Alice countersigns UOP's P.O. and FAXes it back to UOP together with an order confirmation form that, by sheer conincidence, contains language substantially identical to section 1 of Honeywell's standard terms of sale.

• Alice then turns in the P.O. for processing. In due course, ABC's fulfillment department ships the order to UOP.

• Unbeknowst to Alice, UOP uses ABC's specialty chemicals as a component of a specialized catalyst assembly for a petrochemical refinery in Pasadena.

• The refinery experiences problems with the UOP catalyst assembly. This causes the refinery to be shut down for an extended period. The refinery loses significant revenue that it otherwise would have earned from selling the refined products that the refinery was unable to manufacture because of the shutdown.

QUESTION 1: Which of ABC and UOP are "merchants" with regard to ABC's specialty chemicals? (See the Common Draft commentary on merchant status.)

A: Both ABC and UOP are likely to be deemed "merchants" under the UCC, but that might depend on facts not specified in our hypothetical situation.

QUESTION 2: On these facts, are the P.O. terms binding? (See section 1 of the Honeywell P.O. terms and conditions and UCC § 2-207.)

A: Under UCC § 2-207, the P.O. terms are likely binding to the extent that they match the terms in the order and any additional terms otherwise agreed to by the parties.

QUESTION 3: Suppose that Alice had not FAXed back ABC's order acknowledgement form. On those facts would the UOP P.O. terms be binding?

A: Quite possibly – section 1 provides that

  • Alice's title as "account executive" might create a fact issue — requiring a trial — as to whether someone holding that title has "apparent authority" to bind ABC.
  • Even if Alice hadn't signed the P.O., ABC's shipment of goods might well qualify as acceptance of an offer for a unilateral contract.

QUESTION 4: Would UOP's refinery customer be able to sue ABC for breach of warranty?

A: Yes – by its terms, the purchase-order warranty runs to "Honeywell's" customers and end users. And under [BROKEN LINK: HoneywellPOAcceptance], the term "Honeywell" refers to "the member of the Honeywell International Inc. group of companies identified on the face of this document …."

This doesn't mean that the refinery would necessarily win — but ABC might have to spend a lot of money defending itself; quaere whether it has sufficient insurance.

QUESTION 5: If the refinery were to sue UOP for breach of warranty, would UOP be able to cross-claim against ABC for the attorney fees that UOP spent in defending against the refinery's claim?

A: UOP likely would try to sue ABC under the general indemnity provision. Again, UOP might not win, but the case might cost ABC a lot of money.

QUESTION 6: Of the various warranties in the Honeywell purchase order, which one(s) would UOP and/or the refinery likely claim were breached?

A: Possibly the "fit for intended purpose" warranty — but is that warranty language sufficiently clear UOP likely would try to sue ABC under the general indemnity provision. Again, UOP might not win, but the case might cost ABC a lot of money.

QUESTION 7: Under the Honeywell purchase order, would ABC's damages be limited in any way?

A: Not under the purchase order (see the Remedies section), but definitely under the limitations of liability in the terms of sale.

6.15 Exercise: Backdating a contract at the end of the quarter

FACTS:

  • It's the last week of March. Your client Big Public Software Company ("BPSC") has a calendar-year fiscal year, and its shares are traded on Nasdaq. That means it must file financial reports with the SEC within a certain number of days after each March 31, June 30, September 30, and December 31 (commonly referred to as Q1 through Q4 respectively, or sometimes 1Q through 4Q).
  • BPSC's sales people are working on a huge deal. If the deal closes, BPSC will "make the number," that is, its earnings will match analysts' expectations; if not, BPSC will "miss," and the price of its stock likely will nosedive.
  • The BPSC sales people stay late at the office on March 31, hoping to iron out the last negotiation points. But the parties don't actually come to agreement until April 3.

QUESTION 1. On April 3, BPSC's vice president of sales calls you with an urgent question: Can the parties backdate their signatures to March 31, so that BPSC can book the sale in Q1 so that it won't "miss"?

QUESTION 2: What personal motives might the VP of sales have for backdating the contract signatures? Consider, for example:

  • financial motivations
  • non-financial motivations

6.16 Exercise: Contra 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?

6.17 Exercise: Reps and warranties strategy

FACTS: You are selling a car to a stranger. You don't know of any mechanical problems.

QUESTION: If the stranger asks you to represent and warrant that the car has no problems, how might you respond?

6.18 Exercises: Reps and warranties

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.

6.19 Exercise: Limitations of liability

SUGGESTED READING:

FACTS:

  • Your client, Buyer, ordered a large quantity of widgets from Seller, which uses a standard terms-of-sale form copied essentially verbatim from the Honeywell terms of sale.
  • Seller, however, was unable to deliver the widgets on time. Your client, Buyer, had to "cover" the purchase by ordering rush delivery from another manufacturer.
  • To find the substitute widgets, Buyer had to spend a fair amount of time and money on, for example:
    • travel expenses to visit the other manufacturer's factory, and
    • testing of the other manufacturer's widgets to make sure they would meet Buyer's requirements.

QUESTIONS:

  1. Under § 13 of the Honeywell terms of sale and UCC 2-715(1), can Buyer recover the expenses mentioned in the Facts from Seller as part of its "cover" damages?
  2. In § 13 of the Honeywell terms of sale, why does the last sentence carve out personal injury or death?

6.20 Exercise: Indemnities

Exercise: Indemnity (1)

1. What is the difference between an indemnity and a warranty?

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.)

3. IF FALSE, EXPLAIN WHY: An indemnity obligation allocates at least some of the financial risk of Event X.

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.

Exercise: Indemnities – outside-counsel fees

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 spends some money on outside-counsel fees investigating the claim.
  • The general contractor and the subcontractor employee reach a settlement agreement, with the general contractor paying the employee a nominal sum — but the fees and expenses billed by the general contractor's outside counsel for investigating the claim are not insignificant.

QUESTIONS:

  1. Must the subcontractor reimburse the general contractor for its outside-counsel fees and expenses?
  2. Would your answer be different if all of this were taking place in Los Angeles instead of Houston? Cite the relevant authority.

Exercise: Indemnities — knock-for-knock

You represent General Contractor ("GC"), which has won a bid to build a skyscraper in the middle of Memorial Park in Houston.

As is customary, GC will hire a number of subcontractors. GC wants your firm to draft a template contract for use with the subcontractors.

The supervising partner at your firm asks you to draft a "knock for knock" indemnity agreement.

QUESTIONS:

  1. Under Texas law, could a knock-for-knock indemnity agreement even be enforceable on these facts?
  2. Under Louisiana law, would a knock-for-knock indemnity agreement even be enforceable on these facts?
  3. Assume arguendo that Texas law permits knock-for-knock indemnities in these circumstances. Are there any particular requirements that the contract language would have to meet to be enforceable?
  4. Under Texas law, how could you make an indemnity obligation "conspicuous"?
  5. Assume arguendo that a knock-for-knock agreement would not be per se unenforceable under Texas law. Draft a basic clause to that effect. Feel free to adapt whatever language you encounter in your research.

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 need not 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.

Exercise: Defense against indemnified claims

FACTS:


  1. (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 — who hires Skadden Arps (a top NYC firm) to defend him against Carol's claim.
    (C) 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:
    (D) Alice's contract with Bob also requires her to indemnify Bob against any monetary awards resulting from such third-party claims.
    (E) 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:
    (F) Alice's contract with Bob requires her to provide Bob with a defense, as opposed to reimbursing Bob for his defense expenses.
    (G) Alice engages her regular lawyer, Andy, to conduct Bob's defense against Carol's claim.
    (H) 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:
    (I) 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?

Reading

Texas indemnification law:

Anti-indemnity statutes:

Knock-for-knock indemnities:

6.21 Exercise: 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.

(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.

(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.

(4) QUESTION: Could Seller's disclaimer language be improved? How?

SUGGESTED READING:

6.22 Exercise: Confidential information

Will a two-way NDA be safe?

FACTS:

  1. Your client, Alpha LLC, is being asked by Bravo Corporation to sign a nondisclosure agreement (NDA) drafted by Bravo. The intent is for Bravo to disclose its confidential information to your client Alpha.
  2. The NDA is drafted to protect each party's confidential information.

TRUE OR FALSE: It likely would be dangerous for your client to sign the NDA "as is."

6.23 Exercise: Sales quotation for keychain split rings

Facts

Your client is Seller L.P., a Houston-based Texas limited partnership that manufactures novelty items. You're on the phone with one of Buyer's managers, Betty Boop, with whom you've dealt before. Betty says:

  • Buyer has a short-notice opportunity to make 10,000 custom-branded novelty keychains for a buyer that wants to use them as giveaways at a Hong Kong trade show.
  • This wouldn't be a new product line for Buyer, which often manufactures customized keychains.
  • Buyer's keychains typically include the usual metal split rings that can tear your fingernail when you try to add or remove a key.
  • Buyer recently used up all of its inventory of split rings; Betty has been tasked with procuring 10,000 of them as soon as possible.
  • Betty has found a supplier, Seller Corporation of Galveston, that has enough of the split rings in stock.
  • Sam Seaborn, one of Seller's sales representatives, has sent Betty an email that includes a Word document as an attachment. He wants Betty to print, sign, and date the attachment and FAX it back to him.
  • Betty has forwarded Sam's email and its attachment to you.
  • The text of the Word document attached to Sam's email, in its entirety, is the following:

SALES QUOTATION – SELLER CORPORATION

Buyer: Betty Boop

Product: One-inch metal split rings

Quantity: 10,000.

Price: $1.00 each plus shipping.

Terms: Half up front, balance net 30 days after delivery.

ACCEPTED:

___________
Betty Boop

____________
Date


Question 1: "Merchant"?

For purposes of the Uniform Commercial Code (UCC), would a court likely hold that Buyer L.P. is a "merchant" with respect to metal split rings? Explain briefly.

SUGGESTED READING:

Question 2: Sufficient detail?

ASSUME ARGUENDO:

  • One of the parties later wants to challenge the enforceability of the sales quotation as a contract on grounds of "indefiniteness," because the sales quotation supposedly didn't contain enough detail.
  • The sales quotation is otherwise enforceable as a contract.

Would such a challenge be likely to succeed? Explain briefly.

SUGGESTED READING:

Question 3: Formation of a contract?

ASSUME ARGUENDO:

  • The sales quotation contains enough detail to be enforceable as a contract if duly signed and delivered.
  • Betty prints out the sales quotation; manually signs it with pen and ink; FAXes the signed document back to Sam Seaborn as he requested; and shreds the signed original.

On these assumed facts, would a court likely hold that a contract was thereby formed? Explain briefly.

SUGGESTED READING:

Question 4: Federal E-SIGN Act applicability?

Question 5: Delivery location

ADDITIONAL FACTS: Sam Seaborn, having received Buyer's 50% down payment, sends Betty Boop an email saying that the split rings are ready to be picked up at Seller's warehouse in Galveston.

Would Seller likely be found in breach of contract if it did not deliver the split rings to Buyer's Houston offices? Explain briefly.

RESOURCES:

Question 6: Payment terms

(a) In the "Terms" line, what does "net 30 days" mean?

(b) If the sales quotation hadn't specified payment terms, when would have payment have been due?

RESOURCES:

Question 7: Form of signature

Given that your client is Buyer L.P. and not Betty Boop personally, would you advise Betty to sign the sales quotation in its present form? Explain briefly.

Question 8: Liability for payment

SUPPOSE: Betty sends Sam a check, drawn on a Buyer L.P. account, for the 50% deposit, and takes delivery of the metal split rings. But then Buyer L.P. goes out of business before paying Seller's invoice for the remaining balance. Seller then sues Betty, personally, for the balance.

Betty moves for summary judgment that she is not personally liable because (she says) the contract was with Buyer L.P. Seller cross-moves for summary judgment that Betty is indeed personally liable.

(a) If you were the trial judge, how would you rule? Explain briefly.

(b) What advice would you have given Betty if she had consulted you before signing and

RESOURCES:

Question 9: Enforcement

ASSUME ARGUENDO: Sam Seaborn tells Betty that Seller Corporation is going to file suit for the 50% balance due.

Will Seller Corp. necessarily have to hire an attorney? Explain briefly.

RESOURCES:

Question 10: Merchandise quality

SUPPOSE:

  • When Buyer L.P.'s people unpack the 10,000 metal split rings, they find that one of them is so defective as to be unusable. The other 9,999 of them are fine.
  • Betty Boop contacts Sam Seaborn and asks for the defective split ring to be replaced; Sam refuses, saying that Buyer L.P.'s workers must have broken the defective ring.
  • Enraged by Sam's obstreperousness, the CEO of Buyer L.P. decides to sue Seller Corp. for breach of warranty because of the defective split ring.

Given the absence of any warranty language in the sales quotation, is Buyer L.P. likely to recover damages for breach of warranty? Explain briefly.

RESOURCES:

Question 11: Stolen property

SUPPOSE:

  • Split Rings, Inc., one of Seller Corp.'s competitors, successfully sues Buyer L.P. for recovery of the 10,000 split rings, on grounds that Seller Corp. stole the rings from Split Rings, Inc.
  • The sales quotation also contains the following language: All goods are provided "as is, with all faults."

Does Buyer L.P. have any recourse against Seller Corp.?

RESOURCES:

6.24 Exercise: Stanford-Tesla lease agreement worksheet 1

Reference: Stanford-Tesla real-estate lease agreement

  1. Lines 16-18 (Basic Lease Terms in Article I are subordinate to other provisions): What could go wrong? How could this be fixed?
  2. Lines 19-21 (Glossary) – DCT comments
  3. Line 26 (addresses for notice): What could go wrong? How could this be fixed?
  4. Lines 30-40 (premises): Is there any ambiguity in line 38? Is the ambiguity worth taking time to fix?
  5. Lines 47-49 (Tenant inspection): Does it matter that this doesn't say "Tenant represents [or /represents and warrants/] that it has made a thorough inspection …."? Why might a drafter choose to leave out those particular terms?
  6. Line 57 (disclaimer of Landlord warranties about structural components): Given the Premises' location (very near the San Andreas Fault), might the Landlord's drafter want to say any more as "cheap insurance"? Why or why not?
  7. Lines 83-85: Why attach a specific Acceptance Form? Could anything go wrong here? How else could this be approached?
  8. Line 89 (Term): Note what this is the "term" of.
  9. Lines 103-11 (Landlord can't deliver premises): Does this clause cause any problems for enforceability of the lease agreement? Would you recommend any changes?
  10. Lines 116-17 (no further rights): Would you advise either side to sign this? Would you recommend any changes?
  11. Line 119: Why is this called an "extension" option and not a "renewal" option?
  12. Lines 164-77 (relating to early termination): Can you think of a better way to present the information? Why might that be useful someday? (Hint: Consider who the future readers might be.)

6.25 Exercise: Stanford-Tesla lease agreement worksheet 2

Reference: Stanford-Tesla real-estate lease agreement

  1. Lines 183-85 (alteration requirements): Any thoughts about the drafting "style" of this provision?
  2. [WE'RE GOING TO SKIP THIS – NO NEED TO EMAIL TO ME] Lines 186-92 (conditions): Redraft this in plain(er) English.
  3. Lines 204 et seq. (right of first offer):

    • If you were representing Stanford, would you rather give Tesla a right of first offer, or a right of first refusal (sometimes called "last look")?
    • What if you were representing Tesla?

    Hint: See this article (the link in the contract PDF is munged).

  4. Lines 263-81 (interest; administrative late fee): What if any differences are there in the legal implications of charging interest versus an administrative late fee?
  5. Lines 274-77 (reasonable estimate): What does this language sound like?
  6. Lines 294-96 (prohibited uses): Any issue with prohibiting use of the Premises for immoral purposes?
  7. Lines 311-13 (no loudspeakers, etc.): Redraft this using the virtual whiteboard. (Hint: Might passive voice actually be better in this context?)
  8. Percentage rent: List the pros and cons and how the "cons" could be addressed. Hint: Consider how relevant facts are to be determined.
  9. Section 7 (net lease): Would this provision in the agreement be characterized as single net, double net, or triple net? (Hint: Read section 7.3 carefully; check Wikipedia for definitions.)
  10. Lines 429-30 (tax increases as determined by Landlord): Would you agree to this if you were representing Tesla? What alternative(s) might you propose?
  11. T/F: The reasonableness of a contractually-stipulated liquidated-damages amount is to be determined from the perspective of the parties as of the time they sign the contract, not with 20-20 hindsight in an actual case. (Hint: Check the Common Draft annotation on liquidated damages, and also this post.)

6.26 Exercise: Stanford-Tesla lease agreement worksheet 3

Reference: Stanford-Tesla real-estate lease agreement

  1. Lines 450-60 (disclaimer of landlord obligation to repair): DCT comment re statutory provisions
  2. Section 8.4 (Tenant's failure to repair): Discuss how Tesla's attorneys might try to negotiate this clause. (Would they try to negotiate it?)
  3. Section 9.1 (Landlord unreasonable withholding of consent to alterations):
    • Does the ten-day response requirement actually do Tesla any good? What if Stanford doesn't respond?
    • How might the parties plan to resolve a dispute on this point quickly and efficiently?
    • Given lines 505-13, should the possibility of a dispute be a genuine business concern for Tesla?
  4. Line 520 (additional Rent): DCT comment re inconsistent capitalization
  5. Lines 530-37 (Landlord approval not to be unreasonably withheld): Could timing be a problem with this clause?
  6. Lines 613-20 (Tenant covenants and agrees to do X):
    • Do the obligations imposed on Tesla actually "work" for Stanford? What might work better?
    • HOMEWORK: Draft a revision.
  7. Lines 621-22 (Tenant shall take all necessary safety precautions):
    • Any danger of 20-20 hindsight here?
    • How could this be reworded to protect both parties?
  8. Lines 892-93 (Tenant to continue to keep list of Hazardous Materials current):
    • What might be some of the practical reasons for Stanford to want such a list?
    • Is it realistic to impose this requirement with this wording? What might work better?
  9. Lines 902-05 ("total conformity" to environmental laws): Is this realistic? What might work better?
  10. Lines 920-22 (Landlord has right to "reasonably approve" haz-mat remediation contractors selected by Tenant): What does "reasonably approve" mean? REWRITE.
  11. Lines 920-22 (Landlord has right to "reasonably approve" haz-mat remediation contractors selected by Tenant): How could Tenant practically manage the risk that Landlord might dawdle with the approval? REWRITE. Hint: Lines 970-72 offer one possibility, but there's a still-better way.
  12. Lines 923-25 (Tenant to proceed "continuously and diligently" with haz-mat remediation work): What does "continuously" mean? REWRITE.
  13. Lines 927-28 (Haz-mat remediation "shall be performed in a good, safe and workmanlike manner"): This is a false imperative — REWRITE.
  14. Lines 927-28 (Haz-mat remediation "shall be performed in a good, safe and workmanlike manner"): What does workmanlike mean? Hint: See the Common Draft definition and its commentary.
  15. Line 1013 et seq. (Landlord's right to remediate haz-mat conditions): Note how this is a simple, two-part, expressly-authorized self-help remedy. QUESTION: What are the two parts of the remedy? Hint: "When in doubt, make it about money."
  16. Line 1013 et seq. (Landlord's right to remediate haz-mat conditions): Why does this say that Landlord has the right, but not the obligation, to remediate haz-mat conditions?
  17. Line 1022 et seq.: Note how Tenant must immediately notify Landlord of certain events.
  18. Line 1027 et seq.: Note how Landlord has complete control over actions taken to appeal certain governmental actions concerning haz-mat.
  19. Lines 1043-45 What if any difference is there between indemnify and hold harmless? Hint: See the Common Draft definition and its commentary.
  20. Lines 1043 et seq.: Is Tenant's indemnity obligation limited to third-party claims?
  21. Lines 1043 et seq.: What if any practical difference exists between (i) Tenant's liability to indemnify Landlord against the consequences of Tenant's breach of the lease agreement, versus (ii) straight-up breach-of-contract liability?
  22. Lines 1064-72 (Landlord is entitled to hire its own counsel to defend against indemnified claims, at Tenant's expense): What are the economic incentives for counsel that Landlord hires?
  23. Lines 1075-80 (Landlord is not entitled to indemnity for its gross negligence or willful misconduct): If this agreement were governed by Texas law, would Landlord be entitled to indemnity for its own simple negligence? Hint: Look up the express-negligence doctrine.
  24. Lines 1081-82: "Tenant shall procure at its sole cost and expense and keep in effect during the Term [certain insurance coverage]." (Emphasis added.) QUESTION: Stylistically, what's wrong with the "cost and expense" term? Hint: In the accounting world there's a difference between cost and expense — but is that difference relevant in this context?
  25. Lines 1107-08: "The Full Insurable Replacement Value [for which Tenant must maintain insurance] shall be determined by Landlord." QUESTION: Any process-type red flags here for Tenant? How could they be addressed?
  26. Lines 1109-10: "Tenant shall maintain coverage at the current Full Insurable Replacement Value throughout the Term …." QUESTION: Any ambiguity here? REWRITE.
  27. Lines 1119-20: What is the difference between "occurrence" insurance and "claims made" insurance? Hint: See this IRMI glossary entry.
  28. Lines 1139-41: Tenant must add, as additional insureds, "Landlord and any other party designated by Landlord …." QUESTION: Any red flags here for Tenant?
  29. Lines 1154-56: Tenant's insurance policies must "provide that Landlord will receive thirty (30) days' written notice from the insurer prior to any cancellation or material change in coverage[.]" QUESTION: What's the one stylistic error here? (I'll be greatly disappointed if anyone gets that part wrong. Hint: it's not that the "will receive" is passive voice.) QUESTION: Any substantive red flags for Tenant?
  30. Lines 1193-94: Policies must "include as additional insureds Landlord, and such other persons or entities as Landlord specifies from time to time." QUESTION: Any red flags here for Tenant?
  31. Lines 1233 et seq.: What is a waiver of subrogation? EXPLAIN in the virtual whiteboard.
  32. Lines 1247-49: "Either party shall notify the other party if the policy of insurance carried by it does not permit the foregoing waiver [of subrogation]."
    • STYLE QUESTION: Is there a better way of phrasing the "Either party shall notify the other party" term?
    • STYLE QUESTION: Is there a better way of phrasing the "policy of insurance carried by it" term?
    • PROCESS QUESTION: How likely is it that either party actually checked its insurance? If Tenant's insurance didn't include such a waiver, what could (and likely would) be the legal consequence if Landlord tried but failed to make a claim against Tenant's insurance?
  33. Lines 1307 et seq.: Note how the right of first refusal is drafted.
  34. Lines 1347 et seq.: How (if at all) can the lease agreement bind a Transferee that isn't a party to the lease agreement?
  35. Lines 1394-97 and 1411-16 (filing for bankruptcy protection, etc., is an Event of Default): Any red flags here for either party?
  36. Lines 1432 et seq.: Concerning Landlord's entitlement to a damages payment from Tenant in case of default, the "worth of …" language closely tracks the language of Cal. Civ. Code § 1951.2. QUESTION: Business people would probably use the term "net present value" (NPV) or "discounted cash flow" (DCF), so why didn't the drafter?
  37. Lines 1460 et seq.: Note how Landlord's drafter explicitly included a fairly-long list of monetary amounts to be factored into computing Landlord's
  38. Lines 1565 et seq.: Here's another example of what in the IP world might be called "march-in rights," expressly authorizing Landlord to take self-help action to cure Tenant's default and then bill Tenant for it.
  39. Lines 1628 et seq.: Still more Landlord self-help provisions, authorizing Landlord, e.g., to show the premises to a prospective purchaser or (during the last year of the lease) a prospective new tenant.
  40. Lines 1677 et seq. (Tenant's subordination obligation): Landlord's drafter was thinking ahead, requiring Tenant to subordinate Tenant's interests to that of a successor to Landlord. (This is pretty standard in a lease.)
  41. Lines 1709 et seq.: Tenant's drafter was likewise thinking ahead: Landlord is required to get certain potential successors to commit to allowing Tenant to stay in the place — but what if Landlord doesn't do so?
  42. Lines 1733 et seq. (rent must be paid no matter what): This is a form of hell-or-high-water clause. STYLE QUESTION: Would you expect to see "the rent must be paid no matter what" in a section entitled "17. Limitation of Landlord's Liability"?
  43. Lines 1738-39:
    • What exactly is "gross neglience"? (In the linked reading, be sure to read the annotations, especially concerning Texas and California law.)
    • How about "willful misconduct"?
    • How safe is it for a drafter to include such terms without defining them?
  44. Lines 1770-78 (no personal liability): Note how Landlord's drafter forecloses Tenant's right to sue anyone except Landlord; in maritime law this concept is sometimes referred to as a "Himalaya clause."
  45. Lines 1770-78 (limited recourse): If Tenant successfully sues Landlord for default, Tenant can't look to recover damages from Landlord's non-Premises assets. This is akin to a non-recourse loan.
  46. Lines 1779 et seq. (destruction of Premises): This is a standard issue to address in a lease agreement.
  47. Lines 1831 (arbitration): The subheading refers to arbitration, but the lease agreement doesn't include an arbitration provision.
  48. Lines 1879 et seq. (eminent domain): This is a standard issue to address in a lease agreement.
  49. Lines 2458-2462 (acceptance form – personal rep and warranty of due authorization): Would you sign a document with this language? Why or why not?

6.27 Exercises: Employment agreements (in progress)

Basic employment agreements

References: See the Common Draft:

  • Model Employment Agreement Form
  • Model Employment Agreement Provisions (yellow-highlighted & footnoted)
    • Non-compete provisions (review)
    • Entire agreement notes:
      • "Final, complete, exclusive, and binding"
      • "No other representations" — but that likely won't preclude a misrepresentation claim
      • "No reliance on external representations" — TX. S. Ct. has said this can defeat a misrepresentation claim
    • Arbitration
      • Democrats in Congress are making ugly noises about one-sided arbitration agreements
    • Equitable relief
      • Waiving the bond requirement is dangerous
    • Governing law
    • Forum selection
    • Signature – waive signature by the company?

Executive employment agreements

Reference: Sheryl Sandberg employment agreement (annotated)

6.28 Q&A: Sheryl Sandberg employment agreement

Reference: Sheryl Sandberg employment agreement

For purposes of the following questions, assume that you represent Facebook in negotiating this agreement (unless stated otherwise below).

  1. When might a drafter want to do an amended and restated agreement instead of just amending the agreement?
  2. What are some other ways of amending an agreement?
  3. Sandberg's lawyer asks that you change all the instances of the second person ("you") to third person ("the Executive"). How do you advise Facebook about the pros and cons of her request?
  4. Lines 30-40: The letter goes into great detail about Sandberg's duties. Facebook's HR vice president wants to know if you can eliminate all that, because from the title "Chief Operating Officer" it should be obvious what Sandberg's duties will be. QUESTION: What do you advise the HR VP about the possible concerns here — for Sandberg and FB? (Hint: See lines 174-80 (vesting acceleration) and lines 273-75 (definition of Involuntary Termination — material adverse change in responsibilities).)
  5. Lines 72-73 ("your Employment will not infringe the rights of any other person"): From a drafting-technique perspective, what's wrong with this provision?
  6. Lines 74-78 (return of prior employers' confidential information): Facebooks' HR VP wants to know why this provision has Sandberg both representing and warranting these things. What do you say?
  7. Lines 81-82 (salary): The provision refers to Sandberg's salary as the "gross annual rate" of $300K per year (emphasis added). Sandberg's lawyer wants Facebook to change the provision to "an annual salary of $300,000 per year." What do advise Facebook, and why?
  8. Lines 83-84 (salary per company's standard payroll procedures): If Sandberg wanted to lock in her pay periods at, say, weekly, how would you advise Facebook to respond? [MW1600 stopped here]
  9. Lines 130-35 (no other rights upon termination): Sandberg's lawyer would like to delete this provision. What is your recommendation, and why?
  10. Lines 141-43 (general release): Facebook's HR VP wonders why you're drafting a form of general release to include as an exhibit — it seems like an unnecessary expenditure of legal fees when a release might never be necessary. How do you advise the HR VP?
  11. Lines 141-43 (general release): Is there any way you could recommend to the HR VP to defer having to draft a general release at this juncture?
  12. The FB HR VP wants to know why Sandberg's employment agreement specifies that she'll work out of Facebook's Menlo Park office. What do you tell her? (Hint: See lines 174-80 (vesting acceleration) and 261-62 (definition of Involuntary Termination) of the agreement.)
  13. Lines 294-98 (confidentiality agreement): The FB HR VP wonders why this provision doesn't incorporate the confidentiality agreement of Exhibit B by reference. How do you respond? (Hint: See lines 494-95.)
  14. Lines 100-01 (vacation time, etc.): This provision states that Sandberg will get vacation time and PTO "at the rate equal to other similarly situated executives." Sandberg's lawyer would like to lock in that she will get at least 20 business days per year. How do you advise the HR VP?
  15. Lines 110-16 (expense reimbursement): This provision requires Sandberg to provide supporting documentation for any requested expense reimbursements. Her lawyer says this would be too burdensome. How do you advise the HR VP?

6.29 Worksheet: Verizon-Yahoo

How do schedules work?

6.30 Amendments and waivers in writing

Facts

  • Seller, a vendor of widgets, and Buyer have a contract under which Seller will deliver widgets to Buyer whenever Buyer submits and Seller accepts a written purchase order.
  • The contract states the pricing of the widgets, and also states that shipping charges are extra.
  • The contract contains a clause requiring amendments to the contract and to any purchase order to be in writing.
  • The contract contains a similar clause requiring waivers to be in writing.
  • During their business together, employees of the parties exchange a lot of emails, instant messages, and cell-phone text messages.
  • Buyer submits its purchase order #7833; Seller accepts the PO.
  • In a subsequent text-message exchange with a Buyer employee, a Seller employee says "whoops - can't deliver PO # 7833 on Tues – how about Fri?" The Buyer employee responds "np" Seller's employee responds "thx"
  • Later, the same employees talk to each other via Skype video about the same purchase order. The Seller employee tells the Buyer employee that Seller's costs have gone up, and that Seller is going to have to charge Buyer a total price that is 3% higher than the (previously-agreed) pricing stated in the P.O. The Buyer employee says "we can live with that if you can throw in free shipping."

Instructions

For this problem set, half of the teams in the class are attorneys for Buyer; the other half are attorneys for Seller.

Questions

  1. Apropos of the the text-message exchange:
    (a) What if any additional facts might you want to find out?
    (b) Given only the stated facts, how would you initially advise your client about whether the text-message exchange constitutes a binding amendment? Explain.
    (c) What might you say to the other side to try to get past this situation? Explain.
  2. Apropos of the Skype video conversation:

    (a) What if any additional facts might you want to find out?

    (b) Given only the stated facts, how would you initially advise your client about whether the Skype video conversation constitutes a binding amendment? Explain.

    (c) What might you say to the other side to try to get past this situation? Explain.

  3. 18.3 Buyer's CFO claims that Buyer is now entitled to free shipping on future orders. Advise the client and deal with the other side.
  4. 18.4 How, if at all, could the contract drafter have taken advantage of New York state's General Obligations Law § 15-301? (Careful — it's a two-part answer.)

Suggested reading

6.31 Amendments - unilateral

Facts

  • Your client is Videos Now!, a start-up video streaming service that wants to compete with NetFlix.
  • VN! has asked you to draft a set of terms of service for its Web site — the idea is that VN!'s users will be required to agree to the terms of service by clicking on an "I agree" button when they register to use the VN! service.
  • VN! wants the terms of service to include, among other things:
    • A mandatory arbitration clause that, among other things, prohibits class-action arbitration; and
    • A unilateral-amendment clause stating that VN! can modify the terms of service at any time.

Questions

  1. On the facts given, would the terms of service be enforceable? Explain.
  2. How would you advise Videos Now! about its request for these two particular clauses? Explain. Consider (perhaps among other things):
    • whether any enforceability problems might arise
    • what if anything could be done to modify the clause(s) to give them a better shot at enforceability.

6.32 Attorneys' fees

  1. FACTS: You represent Buyer, which uses a standard purchase order form with lots of fine print on the back. The attorneys' fees clause in Buyer's PO form says that if Buyer ever successfully sues Seller, then Seller will reimburse Buyer for its reasonable attorneys' fees incurred in the action. QUESTIONS:
    1. On these facts, if Seller sues Buyer for non-payment and wins, will Buyer have to reimburse Seller for its attorneys' fees for the collection action? (Careful – do you know enough facts to make this determination?)
    2. Same question, with California law applying.
    3. Same question, with Texas law applying.
    4. Same facts, but this time Seller sues Buyer and loses, and Texas law applies.
  2. FACTS: A contract provision states as follows: "Alice warrants to Bob that she will pay Bob's attorneys' fees if Bob sues her and wins."

Suggested reading

  • Notes to the Common Draft attorneys' fees clause (scroll down to Texas and California rules)

6.33 Preamble of Agreement: Flashcards

Exercises: Q&A

QUESTION 1: What do you think is the absolute minimum information needed for the introductory paragraph of a contract?

In the U.S. legal system, arguably no introductory paragraph is needed at all: as long as the contract is clear about the identity of the parties, e.g., from the signature block(s)), that probably satisfies any legal requirements.

QUESTION 2: How might a preamble bind the wrong party?

A premable might bind the "wrong" party if the stated party name was not the intended party, e.g., if the stated party was an affiliate of the intended party.

QUESTION 3: When might it be a really bad idea to use an "as of" date?

If trying to backdate the contract for deceptive purposes.

QUESTION 4: Why specify the state in which a corporate party is incorporated?

Because there might be corporations in other states with the same name.

QUESTION 5: Why recite the locations of the parties' principal places of business? (Hint: Think litigation.)

To help establish:

  • where that party might be subject to personal jurisdiction, and
  • a proper venue for litigation.

6.34 Exercise: Release (in development)

6.35 Exercise: Generally accepted accounting principles (GAAP) (in development)

Question 7.1: Form 10-K

What is a Form 10-K? What kinds of companies care about it, and why?

SUGGESTED READING: The beginning of the SEC's How to Read a 10-K

Question 7.2: Form 10-Q

How does a Form 10-Q differ from a Form 10-K?

SUGGESTED READING:

Question 7.3: GAAP and the earnings process

Buyer sends a purchase order for 50,000 widgets to Widget Supplier, Inc. (WSI) at the list price of $1.00 each. WSI has the required number of widgets in inventory.

As previously requested by WSI's sales representative, Buyer wire-transfers a 50% deposit to WSI.

QUESTION: If WMI does its accounting in conformance with GAAP, what percentage of the $50K order can WSI immediately book as revenue?

RESOURCES: Wikipedia

Question 7.4: Significance of GAAP

Why do publicly-traded companies care about GAAP?

SUGGESTED READING: The SEC's How to Read a 10-K (read the beginning, then scroll down to Item 8)

Question 7.5: GAAP in Europe

What if any significance does "GAAP" have in Europe?

RESOURCES:

6.36 Exercise: Most-favored-customer pricing

Takeaways

Most-favored-customer clauses (and other "most-favored" provisions) can:

  • be a bear to manage;
  • lead to (very) unpleasant surprises.

Facts

Your client, Seller, has asked you to review a purchase order from Buyer. The PO includes two pricing clauses that appear to have been copied essentially verbatim from sections 12 and 13 of the Honeywell terms of purchase.

Questions

  1. How might Seller respond to Buyer about the most-favored-customer clause?
  2. What happened to Oracle when it breached its most-favored-customer clause with the U.S. Government (in its GSA contract)?
  3. What specifically did Oracle do that brought down the government's wrath on it?
  4. How much money did the whistleblower get for his trouble?

Resources

Other resources (read later)

6.37 Exercise: Insurance

Facts

  • You represent ChemCo, which owns and operates a chemical refinery in Pasadena.
  • ChemCo has a periodic maintenance shutdown scheduled for some of its equipment scheduled for July. ChemCo is interested in engaging Provider to do some of the maintenance work. Provider's workers would be coming onto ChemCo's site for this purpose.
  • Provider has not only commercial general liability ("CGL") insurance coverage, but also professional-liability coverage, also knownn as errors-and-omissions ("E&O") coverage.
  • The ChemCo manager with whom you are working wants Provider to designate ChemCo as an "additional insured" on Provider's E&O policy. The manager reasons that this will give ChemCo an independent bucket of money against which it can make claims.

Questions

  1. What types of insurance coverage should ChemCo ask Provider to carry for this purpose?
  2. Should ChemCo ask for Provider's policy to be an "occurrence" policy or a "claims-made" policy?
  3. Should ChemCo ask to be named as an additional insured on Provider's policy? Why?
  4. Would you expect Provider to push back in response to the additional-insured requirement? Why or why not?
  5. Would ChemCo actually be able to make claims against Provider's E&O policy?
  6. How would you advise the ChemCo manager about whether, and how, to proceed with his idea about making ChemCo an additional insured? [Discuss with your partner(s).]

Negotiation strategies

If you represent a seller, should your "standard" T&Cs include an insurance provision? Why or why not? (Discuss)

Certificate

FACTS:

  • The contract draft requires Provider to maintain certain levels of insurance.
  • Before signing the contract, ChemCo asks Provider for a copy of its insurance certificate.
  • Provider's sales manager, Sam, notices that Provider's CGL and E&O insurance have expired. Sam is fairly sure that the Provider finance people are in the process of negotiating new policies with a new carrier. So Sam electronically changes the expiration date on the old certificate of insurance and emails it to his contact at ChemCo.
  • After the contract is signed, Provider's finance people put in place new CGL and E&O coverage with a new carrier.
  • Subsequently, Provider's workers accidentally injure a visitor to the ChemCo premises.

QUESTION: What are the parties' legal and practical positions?

6.38 Exercise: Assignment of employment agreement

Suggested reading

Facts

A friend of yours is about to start a new job. Her new employer has asked her to sign an employment-agreement form. She has asked you to take a look at it.

  • The employment agreement says that the employee may not assign the agreement.
  • The employment agreement is silent as to whether the employer may assign the agreement.

Questions

  1. Can your friend assign the employment agreement, that is, hire someone to do her job for her?
  2. If instead the agreement were silent on the employee's right to assign, could your friend assign the agreement?
  3. Can the employer assign the employment agreement, e.g., if the employer decides to sell off, to another company, the division in which the employee works?
  4. What if any changes to the employment agreement assignment language might you suggest that the employee request? (Hint: Put yourself in the shoes of the employer.)
  5. Could your friend sue you or your law firm for malpractice if she didn't like the way things turned out with her employer? What if any steps could you take to reduce that risk to your career and your personal net worth?

6.39 Exercise: Assignment of port operating agreement

FACTS:

  1. You represent Port Operations, Inc., which operates the Port of Bayou City under a contract with Harris County.
  2. The contract states that the contract may not be assigned without the County's prior written consent.
  3. Port Ops receives a buy-out offer from a Saudi shipping magnate who wants to do a "roll-up" of port-operating companies throughout the world.
  4. The County demands a $10 million fee in return for its consent to assignment of the contract.

QUESTIONS:

  1. If the contract didn't have an assignment-consent requirement, would the County's consent be required?
  2. How much does it matter whether the "roll-up" would take the form of (i) an asset purchase, or (ii) a merger?
  3. Name at least two ways in which, during the contract negotiation with the County, Port Ops have protected its ability to do the roll-up.
  4. Using the Workflowy virtual whiteboard, draft language that would effect the ideas of #3.

Suggested reading: Common Draft assignment-consent commentary

6.40 Exercise: Assignment of Mickey-Dee franchise agreement

Facts

  • You represent Smith, LLC, a family business that operates three Mickey-Dee franchised restaurants in Houston.
  • Smith, LLC owns the land and buildings of the restaurants, which are built to specifications developed by the global franchising firm Mickey-Dee Incorporated.
  • The restaurants all use trademarks owned by Mickey-Dee Incorporated, including the signage, logos, the name "Mickey-Dee," uniform styles etc.
  • The franchise agreement is silent about assignability of the agreement.
  • Smith, LLC wants to sell its three franchised restaurants to Jones, Inc., another family business.

Questions

  • What if anything could Mickey-Dee Incorporated do if Smith, LLC were to assign the franchise agreement to Jones, Inc.?

6.41 Exercise: Signed originals of Agreement

Facts

  • You represent Seller, a software licensor.
  • Seller wants your help in suing a renegade customer that is using the software far beyond the scope of its paid-for license.
  • The license agreement was signed five years ago, when Seller's administrative systems weren't as good as they are now.
  • Seller can't find the signed original of the license agreement.

Questions

  • In a U.S. federal court, would the absence of the signed original license agreement be a problem?
  • What might the license-agreement drafter have done to (maybe) avert this problem?

6.42 Exercise: Counsel representation

FACTS:

  • A partner gives you an assignment to draft a contract, and suggests that you start with a particular prior agreement, which she gives you. You change the parties' names and the business terms in the prior agreement to reflect the current deal.
  • The parties sign the agreement, but the relationship quickly goes south. Your client claims that the other party has breached a particular clause in the contract.
  • The other party claims that the clause in question is too hard to understand — a sentiment with which you privately agree — and that your client had told him that the clause meant something entirely different from what your client is claiming now.
  • The contract does not include an entire-agreement ("integration") clause.
  • The General Provisions section says, among other things, that "Each party has been represented by counsel in negotiating this transaction."
  • Your client confirms, though, that the other side actually wasn't represented by counsel.

QUESTION: How might a court analyze this situation?

6.43 Exercise: Competitive statements

Facts

  • You represent Big Box Retailer, Inc., which has a contract with Crabapple Computers, Inc. Under the contract, Big Box carries Crabapple's laptop computers, but it is not an exclusive relationship; Big Box also carries laptops made by Crabapple's competitors.
  • The contract says that neither party will disparage the other party or the other party's products or services.
  • Crabapple falls on hard times and has to cut its R&D budget. Its competitors start to bring out fancy new ultra-light, ultra-powerful laptops, while Crabapple's laptops begin to seem clunky by comparison.
  • You get a call from Big Box. A reporter from Laptops Monthly is doing a story on the laptop model. She wants a quote from a Big Box store manager about how Crabapple's products are "clunky."
  • The Big Box people would like to stay on this reporter's good side. They want to know what you think about giving her the quote she wants.

Question

  • 27.1 How might this situation play out? Consider:
    • Whether the requested "clunky products" statement would be literally true or literally false
    • Whether such a statement might be misleading to the public or otherwise deceptive even if literally true
    • Whether such a statement might be "disparaging" in violation of the contract's non-disparagement clause.
  • 27.2 If you had been involved in negotiating the non-disparagement clause, how (if at all) might you have tried to change it?
  • 27.3 Suppose that during the contract negotiation you had asked to revise the non-disparagement clause, which caused Crabapple's then-CEO (now dead) to throw a fit, and in the end the clause was left unchanged. How might that affect your thinking today?
  • 27.4 [NEW] Can you think of any situations where this omerta clause might cause significant problems for Big Box Retailer?
  • 27.5 [NEW] Suppose that you're negotiating the same clause again in a different deal. From a business perspective, what if any other provisions might you want to ask for to give Big Box Retailer more flexibility and/or business protection?

Suggested reading

6.44 Exercise: The end-of-quarter purchase order

Facts

  • It is September 27. You are a junior in-house counsel for Pet Rocks, Inc., a publicly-traded manufacturer of (wait for it) pet rocks for use as gifts.
  • Pet Rocks, Inc. is on a calendar-year fiscal year, which means that its third fiscal quarter ("3Q") will end in three days.
  • You've just gotten a call from Sam, one of the company's mid-level sales managers. Sam has just received a very large purchase order from Zall-Mart, a global retailer, in anticipation of an expected Christmas rush for pet rocks. Sam is excited because this order would put Sam's group over the top for its annual sales quota. That would mean that Sam (in addition to the sales rep) would get a big commission check in November — which wouild come in handy for him, because Sam and his wife Sue have been wanting to do some much-needed home remodeling. Moreover, under the Pet Rocks, Inc. sales-compensation plan, a.k.a. "comp plan," any additional sales that Same's group might make in the remainder of the year would have an extra commission "kicker" added — plus, Sam and Sue would get to go on the annual "club trip," which this year will be to Hawai'i. (The term club trip refers to the 100% Club, i.e., those sales personnel who achieve 100% of their annual sales quotas.)
  • The general counsel has told all in-house lawyers, in confidence, that Pet Rocks, Inc. is teetering on the brink of "missing" its 3Q number, that is, not meeting the published expectations of the stock-market analysts who follow the company. If that were to happen, Pet Rocks's stock price would almost surely drop significantly, which could trigger a shareholder lawsuit against the company.
  • Sam is not the reckless type, and you and he have worked well together on one past deal. To be on the safe side, Sam has asked you to look over the "fine print" on the Zall-Mart purchase order.
  • Sam tells you that he previously sent Zall-Mart the standard Pet Rocks sales quotation, which contained a link to the standard Pet Rocks terms of sale. He asked the Zall-Mart purchasing agent ("buyer") to sign and return the sales quotation. Zall-Mart's buyer, however, told Sam that as a matter of policy Zall-Mart does not sign vendor sales quotations, and that all purchases must be on Zall-Mart's purchase-order form alone.
  • The Pet Rocks terms of sale are essentially identical to the Honeywell terms of sale.
  • Likewise, the Zall-Mart purchase order terms are essentially identical to the Honeywell purchase order terms.
  • Both Pet Rocks and the Zall-Mart division placing the order are in Houston.

Questions

Taking into account only sections 1, 18.1, and 33 of the Zall-Mart purchase order terms and sections 1, 11.11, 11.12, and 13 of the Pet Rocks terms of sale:

  • 30.1 Suppose that Pet Rocks ships the order to Zall-Mart without any kind of sales-confirmation document. How long would Zall-Mart have to claim that the pet rocks were defective, in breach of the warranty? (Hint: Consider both the applicable warranty period and the applicable statute of limitations.)
  • 30.2 Same question as 30.1, except that Pet Rocks ships the order, accompanied by an invoice stating that the Pet Rocks terms of sale applied.
  • 30.3 Should you advise anyone else in the company about Sam's situation?
  • 30.4 What if any input might you want to get from others in the company?
  • 30.5 What action would you recommend to Sam?

Suggested reading

6.45 Exercise: Early neutral evaluation

Reading assignment

Questions

32.1 What do you think the principal benefit of ENE would be?

32.2 Why might a party not want to commit to ENE?

32.3 Name three reasons that a lawyer might not want her client to have to go to ENE. (Cynical thinking is OK here.)

32.4 What is the most important way in which ENE differs from arbitration?

32.5 Is ENE automatic, or must it be triggered by some action?

32.6 In ENE, is it a concern that the trial judge might be influenced by the neutral evaluator's views? Why or why not?

6.46 Exercise: Escalation of disputes

Suggested reading

Questions

  1. Under the sample clause language, must the parties' CEOs get involved in escalating a dispute if lower-level managers can't resolve it? Explain.
  2. When might it not be reasonable to expect the parties' CEOs to get involved? Explain.
  3. Does the Common Draft clause adequately cover the subject raised in Question 2? Explain.
  4. Is escalation automatic, or must there be some triggering event? Explain.
  5. Under the sample clause language, what happens if a lower-level manager for one party simply folds her arms and says "No, we're not taking this to upper management; I'm the decider here." Explain.

6.47 Exercise: Internal clause numbering can be a good thing (substantive issue:  implied covenant of good faith)

Facts (based on an actual case)

  • A hospital and a catering company enter a contract for the catering company to provide various food services, including stocking selected hospital refrigerators with specific food items.
  • As a performance incentive, the contract sets up what amounts to a system of fines, under which the company's payment can be reduced for mistakes.
  • The hospital reduces the catering company's payment by more than $128,000 when the hospital finds, in one of its refrigerators, a chocolate mousse whose expiration date was the previous day.
  • The catering company claims that the hospital has violated its duty of good faith and fair dealing in imposing the payment reduction.

The specific contract language concerning "good faith" is as follows:

3.5 The Hospital and the Contractor will co-operate with each other in good faith and will take all reasonable action as is necessary for the efficient transmission of information and instructions and to enable the Hospital to derive the full benefit of the Contract.

Questions

  1. Under this contract language (and without regard to what the law might say), does the Hospital have: (A) a general duty to cooperate in good faith with the Contractor, or (B) only a limited, specific duty to cooperate in good faith with the Contractor "as is necessary for the efficient transmission of information and instructions and to enable the Hospital to derive the full benefit of the Contract" ?
  2. What would the answer be if Texas law applied?
  3. What would the answer be if the UCC applied?
  4. What would the answer be if the Restatement (Second) applied?
  5. What would the answer be if English law applied?
  6. How might you add internal clause numbering, e.g., (a), (1), (i), etc., to the contract language (but make no other significant changes) to make it clear that the Hospital did have a duty of good faith and fair dealing?
  7. How might you add such internal clause numbering to the contract language (but make no other significant changes) to make it clear that the Hospital did not have a duty of good faith and fair dealing?

6.48 [x]. Introductory paragraphs of a contract

[IN PROGRESS]

Question: Minimum information needed?

What do you think is the minimum information needed for the introductory paragraph of a contract? Compare, for example:

Question: Benefit to including information?

Is there any actual benefit to including the information you typically see in the introductory paragraph of a contract? Consider, for example, the usual recitations of:

  • the state(s) in which the parties are incorporated
  • the parties' principal places of business

SUGGESTED READING:

6.49 Exercise: Jury trial waiver

Facts

  • You are a lawyer at a law firm in Houston.
  • A law school classmate, who moved to Atlanta after graduation, has referred one of her Atlanta corporate clients to you. (That's a good reason to get to know, and be on good terms with, the people you meet in school ….)
  • Your classmate's Atlanta client is hiring a Houston company to perform certain services. The client has agreed to your classmate's advice that a Texas lawyer should be involved in the negotiation.
  • The Houston service provider's contract form says that:
    • both sides waive the right to a jury trial
    • Texas law applies
    • litigation will be Houston
    • any action to enforce the contract must be brought within one year after the cause of action accrues.
  • Your classmate says that your mutual client would like to preserve its right to a jury trial and to get a longer limitation period.

Questions

40.1 Your classmate asks if the jury-trial waiver would be enforceable in a Texas court. What do you tell her?

40.2 You ask your classmate whether the jury-trial waiver would be enforceable in a Georgia court. What will her answer be?

40.3 Your classmate asks whether the one-year limitation period is enforceable in Texas. What do you tell her?

40.4 Would your answer on the limitation period be any different if the contract were for the sale of goods?

40.5 You ask your classmate whether the one-year limitation period is enforceable in Georgia. What will her answer be?

40.6 As a practical matter, who is more likely to file a breach-of-contract suit in the future — the Houston services company, or the Atlanta customer? What does that suggest about which of the contract provisions in question is, or are, likely to be most important to the Atlanta customer?

40.7 Name up to three changes that you could ask for in the contract to preserve the Atlanta company's right to a jury trial. (Hint: See the suggested reading — and consider what trade-offs you might be making. Also, one possible change could be to delete existing language.)

40.8 If any new language is necessary to implement your proposed changes, draft it.

40.9 Could you use a two-step strategy to try to get at least some of what your client wants? That is, propose Change A, and if you can't get the Houston services company to agree, then propose Change B as a fallback position? What might those two changes be?

(If time permits, we will do a mock negotiation).

Suggested reading

6.50 Exercise: Confidentiality agreement

Facts

  • You represent Seller, Inc., which is considering signing a confidentiality agreement ("NDA," or nondisclosure agreement) with a potential customer, Buyer, Inc.

Everything is confidential?

The NDA says:

The Receiving Party acknowledges that the Confidential Information is proprietary to the Disclosing Party, has been developed and obtained through great efforts by the Disclosing Party and that Disclosing Party regards all of its Confidential Information as trade secrets.

QUESTION: Are you OK with this?

Whose information should be protected?

The NDA contains blanks to be filled in for who will be the "Disclosing Party" and who will be the "Recipient." QUESTION: What should be filled in?

Time limit on protected disclosures?

QUESTION: Should the NDA include a time limit for when disclosure can be made in confidence? Why or why not?

Subpoenas, etc.

The NDA includes a number of exclusions from the definition of Confidential Information. One of those exclusions is that information subject to a third-party subpoena is not considered Confidential Information.

QUESTIONS:

  1. Would you object to this? Why?
  2. What would be a better alternative?

Remedies

The NDA states: "The Receiving Party acknowledges that any breach or threatened breach of this Agreement by the Receiving Party would result in irreparable harm to the Disclosing Party, entitling the Disclosing Party to temporary and permanent injunctive relief against the breach; the Receiving Party waives any requirement that the Disclosing Party post a bond." You remember seeing this sort of clause in a lot of NDAs.

QUESTION: From Seller's perspective, do you see any problem with this clause?

6.51 Exercise: Termination provisions (in Honeywell purchase order)

References (suggestion: open in separate tabs):

QUESTIONS:

  1. FACTS: Honeywell claims that its supplier has failed to cure a material breach of the P.O.'s terms by Supplier. But Supplier also claims that Honeywell is in material breach of the P.O. terms. QUESTION: What could happen if Honeywell were to give notice of termination of the P.O. on grounds of Supplier's alleged breach?
  2. FACTS: Section 20.1 specifies a single cure period of 10 calendar days in cases of material breach. (This is true.) QUESTION: What are the pros and cons of having just one cure period, as opposed to having separate cure periods for different types of breach?
  3. FACTS: Section 20.1 says in part that "A material breach includes, but is not limited to, late delivery or delivery of nonconforming Goods." QUESTION: What are some pros and cons of enumerating specific material breaches?
  4. QUESTION: Can Honeywell terminate a purchase order other than for breach by Supplier?
  5. FACTS: (A) Aardvark, Inc., issues a P.O. to your client, Supplier, for $10 million worth of goods, for delivery in four weeks. The P.O. contains the termination provisions of § 20 that we've just been looking at. (B) Supplier orders $4 million worth of the raw materials needed to make the goods and hires temporary help for a second shift. (C) Two weeks after Aardvark issues the P.O., Supplier hears that one of its competitors — whose sales manager is friends with an Aardvark executive — has approached Aardvark with a bid that's 2% lower than the price Supplier quoted. QUESTION: What are Supplier's options? What would you recommend?

6.52 Exercise: Agreements to agree or to negotiate in good faith

FACTS: Alice and Bob are negotiating a contract for Alice to provide services for Bob, but they can't agree on just what services Alice will be obligated to provide. QUESTION: What are some of the pros and cons of having the contract say simply that they'll agree to agree later on that issue?

A: In U.S. jurisdictions (and likely others as well), an agreement to agree ("A2A") is generally unenforceable. If a material term of a contract is the subject of an A2A, it's possible that the contract might not be valid.

FACTS: Same facts as above. QUESTION: What are some of the pros and cons of having the contract state that Alice and Bob will negotiate the scope of Alice's services in good faith?

A: An agreement to negotiate in good faith can be enforceable, but it can open up a can of worms if one party later accuses another of refusing to negotiate in good faith, or of negotiating in bad faith.

6.53 Exercise: Payment Terms Worksheet 1

INSTRUCTIONS: Mentally try to answer each of the following questions, then hold your mouse cursor over the grayed-out area below the question.

1. PROVISION: "Alice represents that she will pay Bob net 30 days."

QUESTION: What does "net 30 days" mean?

Full payment is due in 30 days (but 30 days from when?).

QUESTION: Is anything wrong with the "net 30 days" part?

It doesn't specify when the 30 days starts.

QUESTION: Is anything else wrong with this provision?

Yes — this isn't a representation, it's a covenant.

2. FACTS: (A) Bob wants Alice to agree to the following provision: Alice will notify Bob of any dispute about a payment obligation no later than the due date of the payment. (B) Alice's lawyer objects to this provision.

QUESTION: Should Bob push hard for this provision?

Presumably so.

QUESTION: Should Bob read anything into the fact that Alice's lawyer objected to this provision?

Alice's lawyer's objection might be a clue that the lawyer, or Alice, or both, might be difficult to deal with.

3. FACTS: A contract payment provision states that past-due payments will bear interest at 8% per month beginning on the due date. Texas law applies.

QUESTION: Any problem with this provision?

Yes:

(a) 8% per month is 96% per year — that should trigger worries about usury statutes.

(b) Under Texas usury law, a safe harbor for interest rates is to have the interest start to accrue 30 days after the due date of the payment.

QUESTION: How should you respond if you see this while reviewing a contract drafted by another party — that is, if it were your client that putatively would have to pay interest on past-due amounts?

A: One possibility would be not to do anything to this provision, because under the Texas usury statute, the interest provision might very well be void as usurious. (But you'd want to make sure that the usury statute actually applied, i.e., that the late-payment charge would be properly characterized as "interest" under the statute.)

7 Exercises: Ambiguity

7.1 Ambiguity in "if applicable" parentheticals

TEXT: Except as provided in sections 5 and 6 (if applicable) …

QUESTION: Does that imply that neither of sections 5 and 6 might be applicable – that is, that both of them might be not-applicable?

EXERCISE: Rewrite so that it's clear that only section 6 might not be applicable.

7.2 Ambiguity and the New York City nuns

From Matt A.V. Chaban, Down to One Resident in 15,600 Square Feet, a Missionary Sisterhood’s Home Is for Sale (NYTimes.com June 2016):

The Missionary Sisters of the Immaculate Heart of Mary was established in New York almost by accident. It was founded in 1897 by Mother Marie Louise De Meester, who was visiting during World War I [???] following a missionary trip to St. Croix. During her stay, she realized a residence in the city might not only ease the order’s work in the Western Hemisphere, but also improve recruitment.

EXERCISE: Rewrite the second and third sentences so as not to suggest that World War I was going on in 1897.

7.3 Ambiguity and Jewish grandmothers

From Joshua Rothman in The New Yorker: "My grandmother is ninety-three and, to my knowledge, has never kept kosher."

QUESTION: What are two plausible intepretations of the bold-faced phrase?

EXERCISE: Rewrite to clarify.

7.4 Ambiguity exercise: Iron fish

From Philippa Roxby, Why an iron fish can make you stronger (BBC.com 2015): "… participants started using water from wells after a few months, because of drought, which was contaminated by arsenic."

QUESTION: What exactly was contaminated by arsenic?

EXERCISE: Rewrite to clarify.

7.5 Ambiguity exercise: Litigation threats

TEXT: No litigation against Borrower is pending or threatened to Borrower's knowledge.

QUESTION 1: What are two possible meanings?

QUESTION 2: How might a court resolve the ambiguity? (Hint: Consider the contra proferentem principle.)

EXERCISE: Rewrite to clarify.

7.6 Ambiguity exercise: Restricted trust funds

TEXT: The Trust may donate funds only to charitable and educational institutions.

QUESTION: May the Trust donate funds to an institution that is charitable but not educational? How about vice versa?

EXERCISE: Rewrite to clarify.

7.7 Ambiguity examples: Prostitutes and the Pope

  • Prostitutes appeal to Pope
  • I can't tell you how much I enjoyed meeting your husband.

7.8 Ambiguity exercise: A gift to a married couple

TEXT: I will give you and your husband $1 million.

QUESTION: How much total will the couple get — $1 million, or $2 million?

EXERCISE: Rewrite to clarify.

7.9 Ambiguity exercise: The electric chair

TEXT: The judge sentenced the killer to die in the electric chair for the second time.

EXERCISE: Rewrite to clarify.

7.10 Ambiguity exercise: Bid deadline

TEXT: Bids may be submitted until March 1.

EXERCISE: Rewrite to clarify

7.11 Ambiguity and the Midnight Hour

TEXT: "Tenant will vacate the Premises no later than 12 midnight on December 15, 2020; Tenant's failure to do so will be a material breach of this Agreement."

FACTS: At 10:00 a.m. on December 15, Tenant is still occupying the Premises.

QUESTION: Is Tenant in material breach?

EXERCISE: Rewrite.

7.12 Ambiguity and Early Retirement

TEXT: From this headline: "Houston Technology Center CEO To Retire Early Next Year" (He'll retire Feb. 1, 2017 after serving for ten years.)

QUESTION: Will the CEO retire, and the retirement will take place early next year? Or will he retire next year, which will be earlier than had been expected?

EXERCISE: Rewrite to clarify

7.13 Ambiguity and Olivia Pope

TEXT: "Wait for me to do what I do best." (Spoken by Kerry Washington as Olivia Pope in an episode of Scandal aired April 7, 2016.)

QUESTION: What are the two possible meanings of this sentence?

EXERCISE: Rewrite the line of dialogue to be clear which version you think Olivia meant — and try to make it sound "natural" and not lawyer-like.

7.14 Ambiguity and IRS Form 1099

TEXT: "As we tend to receive the most questions related to Form 1099-MISC, we would like to provide you with some general guidelines and resources in order to assist you with the accurate and timely filing of Form 1099-MISC." (From Christie A. Gricius, CPA, Client Alert: 1099-MISC Reporting Guidelines (Jan. 2016) (emphasis added).)

QUESTION: What are the two possible meanings of the italicized text?

EXERCISE: Rewrite the italicized portion twice, once for each meaning.

7.15 Ambiguity: Report of Rubio's concession speech

TEXT: A tweet by Vox.com's Ezra Klein: If the upshot of this speech is "and I'll support the guy who did all these terrible things I'm talking about in the general [election]"…

QUESTION: When "the guy" did "all the terrible things": (i) in the general election, or (ii) in some other context?

EXERCISE: Rewrite.

7.16 Ambiguity: Arenas awash in pleasure

TEXT: From a Maureen Dowd column in the NY Times, March 5, 2016: "Like Bill Clinton, Trump talks and talks to crowds. They feed his narcissism, and in turn, he creates an intimacy even in an arena that leaves both sides awash in pleasure." (Emphasis added.)

DISCUSSION: The italicized part of this quotation arguably has two meanings: Both sides are left awash in pleasure by —

  1. An arena.
  2. The intimacy that Trump creates even in an arena.

EXERCISE: Rewrite the italicized portion of the Dowd quote to be clear that she intended the second meaning.

7.17 Ambiguity and Obama's veto

TEXT: From the Washington Post: "The House GOP effort to override Obama's veto of a bill to repeal Obamacare and defund Planned Parenthood failed to get two-thirds, as expected."

ASSIGNMENT: Rewrite this to eliminate the ambiguity in the "as expected" part.

7.18 Ambiguity: Inept phonies in politics

TEXT: From a Maureen Dowd column in the NY Times, March 5, 2016: "Trump was right about Romney. When you lose a race that you should have won by being an inept phony, you can’t call this year’s front-runner an inept phony." (Emphasis added.)

COMMENT: The italicized part of this quotation arguably has two meanings:

  1. Romney could have won the 2012 presidential race by being an inept phony (says Dowd).
  2. Romney lost the 2012 presidential race because he was an inept phony (ditto).

EXERCISE: Rewrite the italicized portion of the Dowd quote to be clear that she intended the second meaning. Extra points:* Keep something of the same rhythm or structure to the sentence.

7.19 Ambiguity: Overseas trips

TEXT — from a parent's letter of recommendation for a prospective Eagle Scout: "We've taken a number of family trips, including trips to China, the Netherlands, and Italy this past year."

  1. Rewrite to be clear that only the trip to Italy was in the previous year.
  2. Rewrite to be clear that all trips were taken in the previous year.

7.20 Ambiguity at the rodeo

From Joey Guerra, Chris Young in fine voice at RodeoHouston, Houston Chronicle, Mar. 3, 2016, p. A8: "Nothing was ever too brash or too loud."

QUESTION: Did the writer think that Chris Young was, or wasn't, brash and loud?

7.21 Ambiguity in the (White Sox) Clubhouse

From Ken Hoffman's column in the Houston Chronicle, March 22, 2016, p. D2, col. 1:

White Sox management announced this week that the LaRoche matter was closed — and the right decision was made by all parties involved.

QUESTION: Was Hoffman —

  • reporting that the right decision was made, or
  • opining that the right decision was made?

7.22 Ambiguity: Less and less people

From Mark Kleiman, The Current Crime Debate Isn't Doing Hillary Justice (WashingtonMonthly.com Feb. 2016):

When the prison population is small, it consists mostly of serious, high-rate offenders, because prosecutors and judges try to single them out. Therefore, when the population grows, it grows mostly by adding less and less dangerous people.

(Emphasis added.)

QUESTIONS:

  1. Is the bold-faced portion ambiguous? If so, what are the two (or more) possible meanings?
  2. Would "fewer and fewer dangerous people" be a better fit here?
  3. Might hyphens be useful here? (See the Grammarist notes on phrasal adjectives.)
  4. Could the bold-faced portion be improved? If so, revise it.

7.23 Ambiguity: Book of Common Prayer (in class only)

From the Book of Common Prayer (1979) of the Episcopal Church, pp. 361, 377 (Eucharistic Prayer A with the Proper Preface for Lent):

It is right, and a good and joyful thing, always and everywhere to give thanks to you, Father Almighty, Creator of heaven and earth. Through Jesus Christ our Lord; who was tempted in every way as we are, yet did not sin ….

QUESTION: Ignoring the theology and christology, to what does the phrase "Through Jesus Christ our Lord" refer to:
(A) The people giving thanks through Jesus; or
(B) the Father Almighty creating heaven and earth through Jesus?

ASSIGNMENT: In the chat room, Revise the second sentence so that the passage refers clearly to choice A above. (Hint: Adding three words to the beginning would be one way to do it.)

7.24 Ambiguity: Medical report

"The young man had involuntary seminal fluid emission when he engaged in foreplay for several weeks." From an example given by Steven Pinker, The Sense of Style: The Thinking Person's Guide to Writing in the 21st Century (2014).

7.25 Ambiguity and the want ads

"Wanted: Man to take care of cow that does not smoke or drink." From an example given by Steven Pinker, The Sense of Style: The Thinking Person's Guide to Writing in the 21st Century (2014).

7.26 Ambiguity exercise: The job recommendation

TEXT: "I enthusiastically recommend this candidate with no qualifications whatsoever." From an example given by Steven Pinker, The Sense of Style: The Thinking Person's Guide to Writing in the 21st Century (2014).

7.27 Ambiguity exercise: Superman and Wonder Woman

From a tweet by SCOTX justice Don Willett: "My heroes are my parents, Superman and Wonder Woman."

EXERCISE: Rewrite twice – once for each meaning.

7.28 Ambiguity exercise: Merle Haggard in Same-Sex Marriage?

Rewrite to eliminate the ambiguity:

Among those interviewed were his two ex-wives, Kris Kristofferson and Robert Duvall.

(In http://nielsenhayden.com/makinglight/archives/012652.html and quoted in https://en.wikipedia.org/wiki/Serial_comma#Unresolved_ambiguity)

7.29 Ambiguity exercise: Sex and the Supreme Pontiff

Rewrite this headline to eliminate the ambiguity:

Prostitutes Appeal to Pope

(Adapted from http://grammar.about.com/od/terms/g/ambiguity.htm)

7.30 Ambiguity exercise: What to bring?

State the three possibilities for what the writer below will bring to a party:

I'll bring wine or beer and dessert.

(Adapted from http://www.literarydevices.com/ambiguity)

7.31 Ambiguity exercise: Quack quack?

Rewrite to eliminate the ambiguity:

I saw her duck.

(Adapted from http://literarydevices.net/ambiguity/)

7.32 Ambiguity exercise: Dog bite

Use one character to eliminate the ambiguity:

Passerby helps dog bite victim.

(Adapted from http://literarydevices.net/ambiguity)

7.33 Ambiguity exercise: Umbrella strikes

Rewrite this headline to eliminate the ambiguity:

She hit the man with an umbrella.

(Adapted from http://literarydevices.net/ambiguity)

7.34 Ambiguity exercise: Going to Oregon

Consider the following sentence:

The family went to Oregon with Betty, a maid, and a cook.

Rewrite the sentence (consider using parentheses and dashes, too) to be clear that the family went to Oregon with:

  • one person
  • two persons
  • three persons

(Adapted from https://en.wikipedia.org/wiki/Serial_comma#Unresolved_ambiguity)

7.35 Ambiguity exercise: The Affordable Care Act

TEXT: (Adapted from a comment by a guest on the first hour of the Diane Rehm Show, Apr. 12, 2016): Before the Affordable Care Act, "if you had a pre-existing condition such as breast cancer, you could not be covered."

QUESTION: Does this mean that before the ACA, if you had a pre-existing condition insurance carriers: (A) were not permitted to offer coverage, or (B) might choose to deny coverage?

EXERCISE: Rewrite to make it clear that the intended meaning was (B).

7.36 Ambiguity exercise: Meow

Rewrite to eliminate the ambiguity: "He gave her cat food."

(Adapted from http://literarydevices.net/ambiguity)

7.37 Ambiguity exercise: Texas Democrats

TEXT: "[In the 1930s, some] of Texas's wealthiest families could not abide the new breed of Texas Democrats who found hope in the New Deal and wanted the federal government to do even more." (Adapted from Mary Beth Rogers, Turning Texas Blue – What It Will Take to Break the GOP Grip on America's Reddest State, at 49 (New York: St. Martin's Press 2016))

QUESTION: Who wanted the federal government to do more — (A) the new breed of Texas Democrats, or (B) some of Texas's wealthiest families?

EXERCISE: Rewrite to make it clear that the intended meaning was (A).

NOTE: This sentence correctly uses "Texas's" as the possessive, with the s-apostrophe-s and not merely s-apostrophe. (A generally-recognized exception to this rule is the possessive of Jesus of Nazareth, e.g., the centurions divided Jesus' robe among them.)

7.38 Ambiguity exercise: NCAA Finals

REWRITE: "They reached the tournament finals for the seventh time this year."

7.39 Ambiguity exercise: Louis C.K.

This example is from a NY Times piece about how streaming-TV episodes are getting too long, but noting how exceptions exist, such as Louis C.K.'s Horace and Pete:

Its third episode — essentially a long dramatic monologue about infidelity by Laurie Metcalf — is 43 minutes of regret and catharsis, the camera holding tight to Ms. Metcalf’s face. I did not look at my watch once.

The italicized portion has two possible meanings:

​1. ​​a long dramatic ​​monologue about Laurie Metcalf's infidelity; and

  1. a long dramatic monologue, about infidelity, by Laurie Metcalf.​ [Note the commas.]​

In case #2, it'd be simpler just to rearrange the sentence, thusly: "a long dramatic monologue by Laurie Metcalf about infidelity."

7.40 Ambiguity and Hillary Clinton's blue collar

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From Politico: "She’s dressed in a blue-collared shirt and wearing bold silver earrings."

QUESTIONS:

1. In the phrase "blue-collared shirt," is this use of the hyphen correct, given the shirt shown in the picture?

2. If yes, is such use optimal?

(Hint: See Purdue's style guide, although this is a subject about which opinions vary.)

7.41 Ambiguity exercise: The daughter of Poseidon

Heard on The Ezra Klein Show, a podcast on Vox.com, when he interviewed his Vox co-founder Melissa Bell: she said, "I was raised by the ocean in San Diego." Klein immediately responded: "I had a privileged upbringing: Poseidon was my father … I control the waves."

EXERCISE: Rewrite to eliminate the ambiguity.

7.42 Ambiguity exercise: Hillary's email server

SOURCE: A Politico piece titled FBI could leak Clinton email investigation, Grassley warns.

TEXT: "A hypothetical leak could occur, he said, if officials believed Clinton was not being prosecuted for political reasons." (Emphasis added.)

EXERCISE: There are two possible meanings of the italicized portion of the above sentence. Rewrite the sentence twice, once for each meaning, to make that meaning clear.

7.43 Ambiguity exercise: The burglars and the bystander

From the Houston Chronicle, Aug. 22, 2016 "Police apprehended two men accused of burglarizing two homes on the North Side with the help of a civilian who chased them Monday afternoon."

QUESTION: Did the citizen help the police, or the burglars?

QUESTION: Did the citizen chase the burglars, or the police?

EXERCISE: Rewrite to clarify.

7.44 Ambiguity exercise: Making babies

From a spring-2016 student: Mice Breeding Chinese Scientists Say Making Babies in Space Is Possible (Inverse.com). The student's comment: "TL;DR: Hyphens are important, yo."

7.45 Ambiguity exercise: SCOTUS and a sexual-crimes statute

FACTS:

  1. A federal criminal statute requires a 10-year mandatory sentence enhancement in certain cases where the defendant had previously been convicted of crimes "relating to aggravated sexual abuse, sexual abuse, or abusive sexual conduct involving a minor or ward.”
  2. A convicted defendant argues that the qualifier, "involving a minor or ward," applies not just to the third-listed item (abusive sexual conduct), but also to the first two (aggrevated sexual abuse and (plain?) sexual abuse).
  3. The Supreme Court disagrees. See Lockhart v. United States, No. 14-8358 (U.S. March 1, 2016) (affirming Second Circuit and rejecting Eighth Circuit's contrary view).

EXERCISE: Tweak the italicized statutory language to reduce the chances of a circuit split. [Notice that I didn't say "eliminate" the ambiguity – one doesn't want to overpromise ….]

7.46 Ambiguity exercise: Milk, eggs, and computer programmers

Check out this Facebook picture. The salient sentence is: "Honey, please go to the market and buy 1 [sic] bottle of milk. If they have eggs, bring 6 [sic]."

EXERCISE: Rewrite thes second sentence to clarify the intended meaning.

7.47 Ambiguity exercise: LaGuardia airport

From this NY Times article: "Under any circumstances, turning the La Guardia that Mr. Biden derided in 2014 into the 'globally renowned, 21st-century airport' that Gov. Andrew M. Cuomo of New York has promised would be an impressive feat."

QUESTION: What did Gov. Cuomo do:

  1. promise that LaGuardia would be an impressive feat? or
  2. promise to turn LaGuardia into a globally-renowned, 21st-century airport? or
  3. promise that turning LaGuardia into a globally-renowned, 21st-century airport woud be an impressive feat?

EXERCISE: Rewrite to make this more clear. (Hint: Consider breaking it into mutiple sentences.)

7.48 Ambiguity in the obituaries

From an obituary (paraphrased): "Doris is survived by her loving husband Mark of 15 years."

QUESTION: Were Doris and Mark married for 20 years? Or is Mark 15 years old? How could this be clarified?

COMMA QUESTION: Is it possible that Doris had more than one husband? How could this be clarified?

7.49 Ambiguities and vagueness 1

  • St. Arnold's will ship 1,000 cases of Lawnmower to Labatt's in Ontario for $5 per case.
  • St. Arnold's will ship 1,000 cases of beer to Labatt's in Ontario for $5 per case.
  • I can't tell you how much I enjoyed meeting your husband.

7.50 Ambiguities and vagueness 2

  • Prostitutes appeal to Pope
  • No litigation against Borrower is pending or threatened to Borrower's knowledge.
  • The Trust may donate funds only to charitable and educational institutions.

7.51 Ambiguities and vagueness 3

  • I will give you and your husband $1 million.
  • The judge sentenced the killer to die in the electric chair for the second time.

7.52 Ambiguity in deadlines

EXERCISE: Rewrite the following to eliminate the ambiguities:

  1. Bids may be submitted until March 1.
  2. The lease expires at 12:00 a.m. on March 1.

7.53 Ambiguity and lawyer spin

TEXT: From this comment (by a brilliant lawyer) in an on-line forum: "A classic lawyering tactic is to use the most favorable (to your side) characterization of something you can justify."

EXERCISE: Rewrite this to make it clear that the term "you can justify" applies to characterization and not to something.

7.54 Ambiguity and Memorial Day

TEXT: From Hillary Clinton's foreign-policy speech, June 2, 2016: "We honor the sacrifice of those who died for our country in many ways – by living our values, by making this a stronger and fairer nation, and by carrying out a smart and principled foreign policy.

EXERCISE: Rewrite.

8 Exercises: Grammar

8.1 Grammar fail: Email attachments

TEXT (from an email to DCT): "Attached are three files, the event surveys, the CLE sheet for DC and the mailing list sign up form."

QUESTION: What's wrong with this sentence? (Hint: It's the internal punctuation and spelling.)

A: The sentence should be written as: "Attached are three files: The event surveys; the CLE sheet for DC; and the mailing list sign up form."

8.2 Grammar fail: Hillary Clinton clinches the nomination

On Monday, June 6, 2016, the Associated Press announced that by its count, Hillary Clinton had clinched the Democratic presidential nomination. The next day she won the California primary, beating Bernie Sanders by a significantly-greater margin than polls had predicted. Asked whether the AP announcement might have changed the outcome, one observer responded: "'I doubt it will effect it very much,' Blum said." Philip Bump, Why did Hillary Clinton do so much better in California than polls suggested? (WashingtonPost.com June 2016).

QUESTION: How could the bold-faced sentence be improved?

8.3 Grammar fail: A commercial on The Weeds

From a commercial on the Vox.com podcast The Weeds — in the commercial, the announcer says, "I love learning and I'll bet you are too."

QUESTION: What's wrong with this (grammatically)?

QUESTION: Any speculation about how this happened, and why is that significant for contract drafters?

8.4 Grammar awkwardness: Safes

From this Web page about "safes," an increasingly-used legal instrument for early-stage investment: "At the company’s discretion, you will either receive $5,000 in cash or stock." (Emphasis added.)

QUESTION: What's wrong with this? (Hint: To get an idea, try breaking up the sentence by adding romanettes.)

EXERCISE: Rewrite.

8.5 Grammar fail: Homosexuality and the Texas GOP's 2016 platform

From the Texas GOP platform of 2016: "Homosexuality is a chosen behavior that is contrary to the fundamental unchanging truths that has been ordained by God in the Bible, recognized by our nations founders, and shared by the majority of Texans." See, e.g., the NPR story.

9 Exercises: Clarity

9.1 Clarity exercise: President Obama and gun control

TEXT: In an E.J. Dionne column after the Orlando gay-nightclub shooting: "He [President Obama] gave his critics who despise his views on guns nothing …"

EXERCISE: Move one word of this sentence to a different place in the sentence, and add another word, so that the sentence is more-immediately clear.

9.2 Clarity exercise: The judge's daughter

From a sentence I typed (before editing it) in a Facebook conversation — a federal judge made his daughter give back a bracelet that her boyfriend had given him because the value of the bracelet exceeded the $50 maximum allowed by judicial ethics rules. (I said I thought that was a bit much, because the judge would have to recuse himself in any case involving the boyfriend anyway.)

Anyway, what I said originally was: "I didn't know the judge, but as the father of a daughter, another possibility comes to mind: Maybe the judge just didn't like the boyfriend?"

QUESTION: What's wrong with the italicized part? QUESTION: How can it be fixed?

9.3 Clarity exercise: The Iranian navy

From CNN: "The Iranian vessels moved at high speed toward the [USS] Nitze, which was operating in accordance with international law in international waters and ignored maritime "rules of the road" as set out in the 1972 Convention on the International Regulations for Preventing Collisions at Sea. "

QUESTION: What's wrong with the italicized part? QUESTION: How can it be fixed?

9.4 Clarity example: Life isn't fair

FROM Matthew Hutson, Life Isn't Fair (TheAtlantic.com 2016): "In one experiment, people at a job fair who were led to think that the job-search process was beyond their control offered to donate more money to an unrelated charity than did those who were led to believe the opposite."

BETTER: "In one experiment, people at a job fair were led to think that the job-search process was beyond their control, while others were led to believe the opposite. Each group was then asked to donate money to an unrelated charity. The people in the first group offered to donate more money than did those in the second group."

9.5 Clarity example: What will Bernie Sanders do?

FROM Matthew Yglesias, Why I think Bernie Sanders will drop out and endorse Hillary Clinton soon (Vox.com 2016), concerning Bernie Sanders: "If Democrats win the Senate in November, he'll either chair that committee or the Health, Education, Labor, and Pensions Committee."

BETTER: "… he'll chair either that committee or the Health, Education, Labor, and Pensions Committee."

9.6 Clarity exercise: Closing obligations left unclear

CLAUSE: From Gingras v. Avery, 90 Conn. App. 585, 591, 878 A.2d 404, 408 (2005):

The closing shall take place on or before sixty (60) days after subdivision approval; but in no event later than March 15, 2003.

QUESTION: The phrase "The closing shall take place" is an example of what?

QUESTION – TRUE OR FALSE: This clause properly states the number of days after subdivision approval.

FACTS:

  • To be entitled to close the purchase, the buyer was required to meet certain prerequisites.
  • The buyer failed to do so before the stated date.
  • In court, the buyer claimed that it was still implicitly entitled to close the purchase, in part because in real-estate agreements, time (allegedly) is not of the essence.

ASSIGNMENT: In the chat room, rewrite this to be clear that the buyer's right to purchase turns into a pumpkin "on" (?) the stated date. (WAIT TO SEND IT until I give the word.)

(Hat tip: Ken Adams.)

9.7 Clarity exercise: When does a release becomes effective?

FACTS:

  • In a contract between Ford Motor Company and one of its dealers, the termination provisions required Ford, among other things, to buy back the dealer's unsold inventory of cars if the dealer so requested (the "Termination Benefits").
  • The contract also included the following language (revised for use in this exercise), with defined terms whose definitions aren't otherwise relevant here:

(a) Upon the Dealer's demand of one or more Termination Benefits, Ford shall be released from any and all other liability to the Dealer with respect to all relationships and actions between the Dealer and Ford, however claimed to arise, except for the Stated Exceptions. (b) Simultaneously with the receipt of any Termination Benefits so elected or demanded, the Dealer shall execute and deliver to Ford a general release with the Stated Exceptions, satisfactory to Ford. …

  • For reasons not important here, the dealer terminated the contract and demanded that Ford buy back the dealer's unsold inventory, but it didn't execute and deliver the general release required by subdivision (b).
  • After settlement negotiations broke down, the dealer sued Ford, asserting a variety of claims. Ford moved for summary judgment that the release language of subdivision (a) automatically became effective as soon as the dealer requested that Ford buy back the unsold inventory. The dealer responded that the release was not effective because it (the dealer) didn't sign the general release; the dealer asserted that the language was ambiguous and that Ford's proposed interpretation:
    • would improperly render subdivision (b) superfluous; and
    • would violate the principle of contra proferentem (Ford had drafted the contract).
  • As it happens, the district court granted Ford's motion for summary judgment, and the Seventh Circuit affirmed — but it took years for the case to wend its way through the legal system and presumably cost each side a lot of money in legal fees and expenses. See DeValk Lincoln Mercury, Inc. v. Ford Motor Co., 811 F.2d 326 (7th Cir. 1987).

EXERCISE: As counsel for Ford, to (try to) block the dealers' argument, add (i) a maximum of two words to subdivision (a) and (ii) exactly two words to subdivision (b).

EXERCISE: As counsel for the dealer, make as few changes as possible to the contract language to support the dealer's desired interpretation.

9.8 Clarity exercise: A painting contractor's employee steals stuff

Suppose that a painting contractor enters into an agreement to paint the interior of the offices of a large company ("customer"). The agreement requires the painting contractor to cause background checks to be performed on any individual engaging in any of the following "Restricted Activities":

  1. working on-site at any premises of the customer;
  2. having access (including for example remote access) to the customer's equipment or computer network;
  3. having access to the customer's confidential information;
  4. interacting with the customer's employees, suppliers, or customers; or
  5. the following other activities: [None specified].

Now suppose that:

  • A particular employee of the painting contractor engages in more than one of the Restricted Activities.
  • The painting contractor's HR people slipped up and neglected to have a background check performed for that employee.
  • A background check would have revealed that the employee had been arrested several times for burglary and had served time in prison after one of those arrests.
  • The employee steals thousands of dollars' worth of stuff from desks and purses in the customer's offices.
  • The customer sues the painting contractor in Texas state court for breach of the agreement's requirement to perform background checks.
  • The "Plaintiff's Original Petition" includes a verbatim quotation of the background-check requirement in the contract.
  • The painting contractor's trial counsel moves to dismiss the case on the pleadings.
  • The motion to discuss argues that, under the literal language of the agreement, a background check wasn't required for that particular employee, because the employee performed more than one of the Restricted Activities.

QUESTIONS:

  1. Is there any way the italicized parts of the contract language could be revised to negate such an argument?
  2. Name two other types of contract provision that could offer at least some remedy to the customer for theft by the painting contractor's employees? (Hint: Both start with the letters "in.") Why might the customer insist on including both provisions in the agreement?
  3. Why did the painting contractor's trial counsel move for dismissal on the pleadings and not for summary judgment? Would the answer have been different if the plaintiff's original petition hadn't included a verbatim quotation? (Don't spend a lot of time on this question; it's for your general edification.)
  4. Could the criminal-past restriction in the contract cause either the painting contractor or the customer to be challenged by third parties? (Hint: See the discussion in the Common Draft notes.)

9.9 Clarity exercise: Anthony Weiner's latest

From a tweet: "Huma [Abedin] needs good counsel from thrice-married, lifetime philanderer and accused [noun deleted] Trump on this front."

QUESTION: How can this sentence be slightly rearrrannged so that it's more clear what "on this front" relates to?

9.10 Clarity exercise: Donald Trump and Nigel Farange

From a tweet: "You can’t have observed Nigel Farage in recent years and not think Trump may win in November, writes @NYTimesCohen nyti.ms/2bMhUUj" (emphasis added)

QUESTION: How could this be improved?

9.11 Clarity exercise: Gerrymandering and the wrong choice of words

EXCERPT: From a Vox.com article: "… gerrymandering forces the losing party to "waste" votes by placing all its voters into a small number of districts where the party gets a landslide, rather than spreading those voters out so they can have more impact."

QUESTIONS: Is it the losing party that's "placing all of its voters into a small number of districts"? Or is it gerrymandering that does so?

9.12 Clarity exercise: United Airlines & Continental Airlines (1)

Rewrite the following provision from the Continental-United Airlines merger agreement:

  • to make the provision more readable; and
  • to get rid of the false imperatives:

    • in the first sentence, and
    • at the beginning of the final sentence

    (See this article, scan down for the term "false imperative.")

1.3 Effective Time. Subject to the provisions of this Agreement, as soon as practicable on the Closing Date, [UNITED] shall file with the Secretary of State of the State of Delaware the Certificate of Merger and the Restated Charter, in each case in such form as required by, and executed and acknowledged in accordance with, the relevant provisions of the Delaware Law, and, as soon as practicable on or after the Closing Date, shall make all other filings required under the Delaware Law or by the Secretary of State of the State of Delaware in connection with the Merger. The Merger shall become effective at the time that the certificate of merger relating to the Merger (the Certificate of Merger) has been duly filed with the Secretary of State of the State of Delaware, or at such later time as United and Continental shall agree and specify in the Certificate of Merger (the time the Merger becomes effective being the Effective Time). The Restated Charter shall be filed with the Secretary of State of the State of Delaware immediately prior to the filing of the Certificate of Merger and shall become effective at the Effective Time.

[DCT NOTE: Show students the revised version in Emacs]

9.13 Clarity exercise: United Airlines & Continental Airlines (2)

Rewrite the following:

1.2 Closing. The closing (the Closing) of the Merger shall take place at the offices of Cravath, Swaine & Moore LLP, Worldwide Plaza, 825 Eighth Avenue, New York, New York 10019 at 10:00 a.m., Eastern time, on a date to be specified by United and Continental, which shall be no later than the second Business Day following the satisfaction or (to the extent permitted by Law) waiver by the party or parties entitled to the benefits thereof of the conditions set forth in Article VII (other than those conditions that by their nature are to be satisfied at the Closing, but subject to the satisfaction or (to the extent permitted by Law) waiver of those conditions), or at such other place, time and date as shall be agreed in writing between United and Continental; provided, however, that, if any of the conditions set forth in Article VII is not satisfied or (to the extent permitted by Law) waived on such second Business Day, then the Closing shall take place on the first Business Day on which all such conditions shall have been satisfied or (to the extent permitted by Law) waived. The date on which the Closing occurs is referred to in this Agreement as the Closing Date.

9.14 Clarity exercise: A family of persecutors

FACTS: This is from an Easter Sunday service booklet at my church (with the family's name changed):

Easter flowers and decorations are given
To the glory of God and in memory of Jane Doe
In honor of all Christians,
Especially those persecuted
By the Doe Family

EXERCISE: Rewrite.

9.15 Clarity exercise: Stanford-Tesla lease — redraft § 4.3

FACTS:

(1) You have traveled back in time and are clerking at the law firm that represented Tesla Motors in negotiating a real-estate lease agreement in which Stanford University is the landlord and Tesla is the tenant.

(We will later review an annotated version of the lease agreement.)

(2) The draft lease agreement contains the following provision (which is in the actual final agreement):

4.3 Extension Option. In the event that Landlord determines in its sole discretion that Landlord does not intend to redevelop the Premises or to use it for Landlord’s own purposes after the Termination Date, and that therefore the Premises will be available for lease, Landlord shall provide Tenant with written notice of such determination, setting forth the period of time that Landlord has determined the Premises will remain available for lease by Tenant (the “Extension Period”). Tenant shall have the option (the “Extension Option”) to extend the Term for the Extension Period by delivering written notice to Landlord within thirty (30) days after receipt of Landlord’s notice. The Extension Option shall be void if an Event of Default by Tenant exists, either at the time of exercise of the Extension Option or the time of commencement of the Extension Term. The terms of this Lease during the Extension Period shall be the same terms and conditions as during the original Term, except that the Base Rent applicable to the Extension Period shall be equal to the Prevailing Market Rent as of the commencement of the Extension Period, as determined pursuant to Exhibit D. The Extension Option is personal to Tenant and shall be inapplicable and null and void if Tenant assigns its interest under this Lease, or if either party exercises its termination right under Section 4.4. The Extension Option (if not previously exercised) shall expire as of the Termination Date.

(3) The partner for whom you are working is concerned that Stanford might forget entirely about the property and therefore might not provide Tenant with the notice mentioned in section 4.3.

ASSIGNMENT: Redraft the above § 4.3 to do the following:

  1. give Tesla the ability to "nudge" Stanford and get a final yes-or-no decision about Stanford's intentions for redevelopment;
  2. give Tesla at least some voice in Stanford's decision about redevelopment — but don't change the "sole discretion" part (hint: consider a consultation requirement);
  3. create a "default" or "gap-filling" provision, in Tesla's favor, that will govern if Stanford drops the ball about giving Tesla notice concerning Stanford's redevelopment intentions; and
  4. redraft the section to:

Substantively, though, don't revise the terms of the section (apart from #1 through #3 above).

Feel free to use — or incorporate by reference — any Common Draft provision that you want.

9.16 Clarity exercise: Release language as a wall of text

FACTS: You are asked to review a release agreement that includes the following:

Each of Provider and Customer, for itself and on behalf of their respective parent, subsidiaries, related companies, affiliates, licensees, distributors, agents, present and former employees, directors, members, officers, associated individuals, shareholders, partners, administrators, attorneys, domestic or legal representatives, successors and assigns (all of the foregoing being collectively referred to as the “Releasors”), hereby, with full and final effect, irrevocably and unconditionally, remise, release, acquit, satisfy and discharge the other Party and its respective parents, subsidiaries, related companies, affiliates, licensees, distributors, agents, present and former employees, directors, members, officers, associated individuals, shareholders, partners, attorneys, domestic or legal representatives, successors and assigns (all of the foregoing being collectively referred to as the “Releasees”) of and from any and all past, present or future claims, manner of action and actions, cause and causes of action, suits, debts, dues, sums of money, attorneys’ fees and costs, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, executions, claims, and demands or liabilities whatsoever, regardless of whether at law or in equity or under foreign, state or federal law, whether known or unknown, whether asserted or unasserted, which each Party’s Releasors ever had, or now has, or may have against the other Parties’ Releasees for, arising from, relating to, and/or resulting from the Consulting Agreement, Provider’s work delivered to or performed for Customer under the Consulting Agreement (the “Work”), the Invoices and any claims and demands alleged in the Correspondence on or prior to the Effective Date of this Agreement. Without limiting the foregoing, (A) Company A acknowledges that this release extends (without limitation by the principle of ejusdem generis or otherwise) to any warranty and other claims arising out of or relating to the Work and/or any alleged inadequacy in the Work, and regardless of whether any such claim is currently known, unknown or unknowable by any of Customer’s Releasees, and (B) Customer acknowledges that that this release extends (without limitation by the principal of ejusdem generis or otherwise) to any liens, payment obligations (including without limitation the Invoices), and other claims arising out of or relating to the Work and/or any alleged non-payment therefor by Customer, and regardless of whether any such claim is currently known, unknown or unknowable by any of Provider's Releasees. Nothing in the foregoing release shall release the Parties from obligations set forth in this Agreement.

EXERCISE: Rewrite. Hints:

  • Consider these suggestions.
  • Consider also splitting off the various "laundry lists" into separate "definitions" paragraphs and coining appropriate defined terms, as illustrated in the Common Draft release language.
  • Don't just copy the Common Draft language — as a matter of negotiation etiqutte, you want to stick with the drafter's language to the extent possible.

9.17 Clarity exercise: Replacing a wall of text with a table

FACTS: As of February 16, 2016, the Enterprise Products Partners limited-partnership agreement lists the agreement's antecedents as follows:

2.1 Formation. The Partnership has been previously formed as a limited partnership pursuant to the provisions of the Delaware Act. The General Partner and the Limited Partners hereby amend and restate in its entirety the Agreement of Limited Partnership of Enterprise Products Partners LP., dated April 9, 1998, as amended by that certain First Amendment to Agreement of Limited Partnership of Enterprise Products Partners LP., dated as of June 1, 1998, as amended by that certain Amended and Restated Agreement of Limited Partnership of Enterprise Products Partners LP., dated as of July 31, 1998, as amended by that certain Second Amended and Restated Agreement of Limited Partnership of Enterprise Products Partners LP., dated September 17, 1999, as amended by Amendment No. 1, dated as of June 9, 2000, to the Second Amended and Restated Agreement of Limited Partnership of Enterprise Products Partners L.P. , as amended by that certain Third Amended and Restated Agreement of Limited Partnership of Enterprise Products Partners LP., dated as of May 15, 2002, as amended by Amendment No. 1, dated August 7, 2002, Amendment No. 2, dated December 17, 2002, Amendment No. 3, dated December 10, 2003, and Amendment No. 4, dated December 17, 2003, to the Third Amended and Restated Agreement of Limited Partnership of Enterprise Products Partners L.P., as amended by that certain Fifth Amended and Restated Agreement of Limited Partnership of Enterprise Products Partners L.P., dated as of August 8, 2005, as amended by Amendment No. 1, dated as of December 27, 2007, Amendment No. 2, dated as of April 14, 2008, Amendment No. 3, dated as of November 6, 2008, and Amendment No. 4, dated as of October 26, 2009, and Amendment No. 5, dated as of November 22, 2010, to the Fifth Amended and Restated Agreement of Limited Partnership of Enterprise Products Partners LP. [The section continues, addressing other topics.]

EXERCISE: In Microsoft Word, create a table to express this information more clearly; fill in two rows as an illustration.

10 Exercises: Other

10.1 Exercise: Microsoft Word basics

1. QUESTION: In Microsoft Word, how do you adjust the spacing between paragraphs? (Pro tip: Don’t use a blank line to separate paragraphs – adjust the spacing instead.)

2. QUESTION: In Microsoft Word, what's the proper way of creating a heading? Hint: It involves “styles.”

3. QUESTION: In Microsoft Word, how do you keep one paragraph with the next one? Hint: Look up paragraph formatting.

4. QUESTION: In Microsoft Word, how do you adjust the line spacing within a paragraph?

5. QUESTION: In Microsoft Word, how do you create a table without borders? (Tables can sometimes be useful in contracts.)

6. QUESTION: In Microsoft Word, how do you create a table of contents? (A table of contents can be useful in a long contract.)

7. FACTS: You want to copy and paste a short snippet from a Web page into a Microsoft Word document without messing up the formatting of the paragraph into which you’re pasting the snippet. To do this, you will use the Paste Special menu item.

QUESTION: Which of the following Paste Special options would you use?
(a) Unformatted text
(b) HTML text
(c) Formatted text

10.2 Exercise: Course information & policies

Reference: Here .

  1. QUESTION: How many points on your final grade can you earn for turning in all homework? ANSWER: 100 points
  1. QUESTION: According to the syllabus, what could happen if you didn’t turn in any homework?
    (a) You could still pass the course, but you'd have to make up the missing points.
    (b) Your grade will be dropped by one letter, e.g., A- to B- etc.
    (c) No adverse consequences, other than not getting the benefit of the work.
    (d) You will not be able to accumulate enough points to pass the course. ANSWER: A.
  2. QUESTION: According to the syllabus,to what extent are you allowed to collaborate with classmates in doing homework, and what are you supposed to do if you do collaborate? ANSWER: Collaboration is encouraged [except for the take-home quizzes and final exam], but on your homework, indicate with whom you collaborated.
  3. QUESTION: Which is worth more to your grade: The final exam, or the two mid-term quizzes? ANSWER: The final exam.

10.3 Exercise: Contract-review mechanics

SUGGESTED READING: Common Draft, Redlining Representation, including the commentary.

QUESTION: List all the ways you can think of to revise a draft contract in a way that properly alerts the other side to the specific changes you made.

10.4 Exercise: Switched-out pages?

FACTS:

  • Your client manually signs two originals of a contract. You mail both originals to the other side with a cover letter asking for one of the fully-executed originals to be returned to you.
  • A couple of days later, you receive a fully-executed original; per the client's request, you put it in your file.
  • Months later, a question comes up about the contract. You look at your file copy.
  • A significant point in the contract isn't drafted the way you remember; it's different from the earlier drafts.
  • You contact the other lawyer, who says he doesn't know what you're talking about.

QUESTION: How could you have prevented this from arising?

10.5 Example: Don't count on the spell checker

  • [Public] company
  • [Disk] surgery (in a court filing!)
  • Recall of frozen ground-beef panties

10.6 Exercise: Signing on the wrong line: The Japanese Surrender

10.7 Contract-reviewer etiquette (1): The Whereas clause

FACTS: The other side sends over a draft contract. After the preamble, it includes a "WITNESSETH" heading and a bunch of "WHEREAS" recitals.

QuESTION: Do you change these things to a simple "1. Background" section?

10.8 Contract-reviewer etiquette (2): Formatting

FACTS: Your client, ABC Corporation, is trying to sell widgets to XYZ Inc. XYZ's people send over a Word document containing XYZ's standard terms of purchase — which are formatted in two columns per page with very-long sentences and paragraphs.

QuESTION: How do you respond?

11 Reference materials

11.1 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 ex tent 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:

(a) patent, copyright, or trademark infringement;

(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

11.2 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

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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.

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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.

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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.

Please contact ACC to obtain wire transfer instructions and the remittance address to which payments to Honeywell must be directed.

Remittance Advice:

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.

Please contact ACC to obtain further remittance and wire transfer instructions.

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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.

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