Many drafters would repeat the title of the agreement in all-caps in the preamble, thusly: "THIS PURCHASE AND SALE AGREEMENT (this "Agreement") …."

The author prefers the shorter approach shown in the quoted example above. That’s because:

– It’s doubtful that anyone would be confused about what "This ‘Agreement"" refers to; and

– The shorter version reduces the risk that a future editor might (i) revise the title at the very top of the document but (ii) forget to change the title in the preamble. This is an example of the rule of thumb: Don’t Repeat Yourself, or D.R.Y., discussed at Section 8.8.

(In the second bullet point just above, notice how the first, long-ish sentence is broken up (i) with bullets, and (ii) with so-called "romanettes," that is, lower-case Roman numerals, to make the sentence easier for a contract reviewer to skim. This follows the maxim: Serve the Reader.)

In the example above, note how the preamble defines the terms Agreement, Buyer, and Seller: These defined terms are not only in bold-faced type: they’re also surrounded by quotation marks and parentheses. This helps to make the defined terms stand out to a reader who is skimming the document.

When drafting "in-line" defined terms like this, it’s a good idea to highlight them in this way; this makes it easier for a reader to spot a desired definition quickly when scanning the document to find it.

Imagine the reader running across a reference to some other defined term and starting to flip through the document, wondering to herself, "OK, what does 'Buyer' mean again?"

NOTE: If you also have a separate definitions section for defined terms, it’s a good idea for that definitions section to include cross-references to the in-line definitions as well, so that the definitions section serves as a master glossary of all defined terms in the agreement. See also § 4 for more discussion of defined terms.

This preamble uses the defined terms Buyer and Seller instead of the parties’ names, Betty and Sam, because:

• Doing this can make it easier on future readers … such as a judge … to keep track of who’s who.
• Doing this also makes it easier for the drafter to re-use the document for another deal by just changing the names at the beginning.

Sure, global search-and-replace can work, but it’s often over-inclusive. For example: Automatically changing all instances of Sam to Sally might result in the word samples being changed to sallyples.

Our preamble says that the contract is between the parties — not by and between the parties, and not among them.

True, many contracts say "by and between" instead of just "between." The former, though, sounds like legalese, and the latter works just as well.

For contracts with multiple parties, some drafters will write among instead of between; that’s fine, but between also works.

Our preamble provides certain details about the parties,such as where Betty's Used Computers, LLC is organized (Texas) and Sam's county of residence.

When a party to a contract is a corporation, LLC, or other organization, it’s an excellent idea for the preamble to state both:

• the type of organization, in this case "a limited liability company"; and
• the jurisdiction under whose laws the organization was formed, in this case "organized under the laws of the State of Texas."

Doing this has several benefits:

– It reduces the chance of confusion in case the same company name is used by different organizations in different jurisdictions … imagine how many "Acme Corporations" or "AAA Dry Cleaning" there must be in various states.

– It helps to nail down at least one jurisdiction where the named party is subject to personal jurisdiction and venue, saving future trial counsel the trouble of proving it up; and

– It helps to establish whether U.S. federal courts have diversity jurisdiction (a U.S. concept that might or might not be applicable).

A shorter version is also acceptable: "Betty’s Used Computers, LLC, a Texas limited liability company …."

Including the jurisdiction of organization can simplify a litigator’s task of "proving up" the necessary facts: If a contract signed by ABC Corporation recites that ABC is a Delaware corporation, for example, an opposing party generally won’t have to prove that fact, because ABC will usually be deemed to have "acknowledged" it, that is, conceded the point in advance.

This particular hypothetical agreement is set up to be between a limited liability company, or "LLC," and an individual; in that way, the signature blocks will illustrate how organizational signature blocks should be done.

Note how the preamble above states some geographical information about the parties:

– Principal place of business: Stating Betty’s principal place of business helps trial counsel avoid having to prove up the court’s personal jurisdiction. For example, a Delaware corporation whose principal place of business was in Houston would almost certainly be subject to suit in Houston.

– Residence: Likewise, if a party to a contract is an individual, then stating the individual’s residence helps to establish personal jurisdiction over him or her and the proper venue for a lawsuit against the individual.

– County: Stating the county of an individual’s residence might be important if the city of residence extends into multiple counties.

For example, Houston is the county seat of Harris County, but just because Sam lives in Houston doesn’t automatically mean that he can be sued in the county’s courts in downtown Houston. That’s because Houston’s city limits extend into Fort Bend County to the southwest and Montgomery County to the north. Sam might live in the City of Houston but in one of those other counties, and so he might have to be sued in his home county and not in Harris County.

– Addresses for notice: It’s convenient to put the parties’ initial addresses for notice in the preamble. That way, a later reader won’t need to go paging through the agreement looking for the notice provision. Doing this also makes it easy for contract reviewer(s) to verify that the information is correct.

The above preamble affirmatively states the effective date; that’s usually unnecessary (and it's not the author's preference) unless the contract is to be effective as of a specified date.

(Many drafters like to include the effective date anyway; it's normally not worth changing if someone else has drafted it this way.)

The author prefers the last-date-signed approach: "This Agreement is effective the last date written on the signature page."

Here’s a different version of that approach: "This 'Agreement' is made, effective the last date signed as written below, between …."

In reviewing others’ contract drafts, you’re likely to see some less-good possibilities, such as:

– "This Agreement is made December 31, 20XX, between …."

– "This Agreement is dated December 31, 20XX, between …."

Either of these can be problematic because the stated date might turn out to be inaccurate, depending on when the parties actually sign the contract.

Caution: Never backdate a contract for deceptive purposes, e.g., to be able to book a sale in an earlier period — as discussed at § 3.10, that practice has sent more than one corporate executive to prison, including at least one general counsel.

On the other hand, it might be just fine to state that a contract is effective as of a different date. EXAMPLE: Alice discloses confidential information to Bob after Bob first orally agrees to keep the information confidential; they agree to have the lawyers put together a written confidentiality agreement. That written agreement might state that it is effective as of the date of Alice’s oral disclosure.

The following might work if it’s for non-deceptive purposes: "This Agreement is entered into, effective December 31, 20XX, by …."

(Alice and Bob would not want to backdate their actual signatures, though.)

Some agreements, in identifying the parties to the agreement on the front page, state that the parties are, say, ABC Corporation and its Affiliates. That’s generally a bad idea unless each such affiliate actually signs the agreement as a party and therefore commits on its own to the contractual obligations.

The much-better practice is to state clearly the specific rights and obligations that (some or all) affiliates have under the contract. This is sometimes done in "master" agreements negotiated by a party on behalf of itself and its affiliates.

For example, consider a negotiated master purchase agreement between a customer and a provider. The master agreement might require the provider to accept purchase orders under the master agreement from the customer’s affiliates as well as from the customer itself, so that the customer’s affiliates can take advantage of the pre-negotiated pricing and terms.

Caution: An affiliate of a contracting party might be bound by the contract if (i) the contracting party — or the individual signing the contract on behalf of that party — happens to "control" the affiliate, and (ii) the contract states that the contract is to benefit the affiliate. That was the result in a Delaware case where:

• the contract stated that a strategic alliance was being created for the contracting party and its affiliates, and
• the contract was signed by the president of the contracting party, who was also the sole managing member of the affiliate.

The court held that the affiliate was bound by — and had violated — certain restrictions in the contract. See Medicalgorithmics S.A. v. AMI Monitoring, Inc., No. 10948-CB, slip op. at 3, 52-53, text accompanying n.219 (Del. Ch. Aug. 18, 2016); see also, e.g., Mark Anderson, Don’t Make Affiliates parties to the agreement (2014); Ken Adams, Having a Parent Company Enter Into a Contract "On Behalf" of an Affiliate (2008).

Some countries require contracts to include specific identifying information about the parties, e.g., the registered office and the company ID number. This is worth checking for contracts with parties or operations in such countries. See Ken Adams, When the Law Says What Party-Specific Information You Have to Include in the Introductory Clause (AdamsDrafting.com 2016); Ken Adams, Using Company Numbers in the Introductory Clause (AdamsDrafting.com 2007) — the comments discuss similar requirements in various countries.

Be sure you’re naming the correct party as "the other side" — or consider negotiating a guaranty from a solvent affiliate.

Failing to name the correct corporate entity could leave your client holding the bag. This seems to have happened in a Seventh Circuit case:

– The named party in the contract had essentially no assets (the assets were all owned by the named party’s parent company).

– The other named party sued the parent company for breach of the contract.

The appellate court affirmed summary judgment in favor of the parent company, saying: "It goes without saying that a contract cannot bind a nonparty. … If appellant is entitled to damages for breach of contract, [it cannot] recover them in a suit against appellee because appellee was not a party to the contract." Northbound Group, Inc. v. Norvax, Inc., 795 F.3d 647, 650-51 (7th Cir. 2015) (cleaned up and reformatted).

Depending on the law of the jurisdiction, an unincorporated association or trust might not be legally capable of entering into contracts. See generally, e.g., Ken Adams, Can a Trust Enter Into a Contract? (AdamsDrafting.com 2014).

If a contract is purportedly entered into by a party that doesn’t have the legal capacity to do so, then conceivably the individual who signed the contract on behalf of that party might be personally liable for the party’s obligations.

Note: Like all purely-style tips, this particular style tip isn't worth making a big deal about if you're reviewing a draft prepared by The Other Side, see Section 6.2. And if your supervising partner has a preference, then do it that way, see Section 6.1.

Modern contract drafters avoid using the archaic words "WITNESSETH" and "Whereas.” For an example of what not to do, see the the example below, from a routine commercial real-estate purchase agreement.

(Don't bother reading the text below, just get a sense of how it looks.)

THIS REAL ESTATE PURCHASE AND SALE AGREEMENT (this "Agreement") is made and entered into by and between WIRE WAY, LLC, a Texas limited liability company ("Seller"), and RCI HOLDINGS, INC., a Texas corporation ("Purchaser"), pursuant to the terms and conditions set forth herein.

W I T N E S S E T H:

WHEREAS, Seller is the owner of a certain real property consisting of approximately 4.637± acres of land, together with all rights, (excepting for mineral rights as set forth below) , title and interests of Seller in and to any and all improvements and appurtenances exclusively belonging or pertaining thereto (the "Property") located at 10557 Wire Way, Dallas (the "City"), Dallas County, Texas, which Property is more particularly described on Exhibit A attached hereto and incorporated herein by reference; and

WHEREAS, contemporaneously with the execution of this Agreement, North by East Entertainment, Ltd., a Texas limited partnership ("North by East"), is entering into an agreement with RCI Entertainment (Northwest Highway), Inc., a Texas corporation ("RCI Entertainment"), a wholly owned subsidiary of Rick's Cabaret International, Inc., a Texas corporation ("Rick's") for the sale and purchase of the assets of the business more commonly known as "Platinum Club II" that operates from and at the Property ("Asset Purchase Agreement"); and

WHEREAS, subject to and simultaneously with the closing of the Asset Purchase Agreement, Seller will enter into a lease with RCI Entertainment, as Tenant, for the Property, dated to be effective as of the closing date, as defined in the Asset Purchase Agreement (the "Lease") attached hereto as Exhibit B and incorporated herein by reference; and

WHEREAS, subject to the closing of the Asset Purchase Agreement, the execution and acceptance by Seller of the Lease, and pursuant to the terms and provisions contained herein, Seller desires to sell and convey to Purchaser and Purchaser desires to purchase the Property.

NOW, THEREFORE, for and in consideration of the premises and mutual covenants and conditions contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

This is pretty hard to read, no?

The above example has other problems, in addition to its use of archaic "Whereas" clauses: Because of the "as follows" language at the end of the last paragraph quoted above, it can be argued that the parties did not agree to the Whereas clauses. For more discussion of this point, see Section 3.6.3.

Instead of "Recitals" — or worse yet, W H E R E A S clauses — describe the background in a (numbered) "Background" section of the contract.

As a general proposition, the Background section should just tell the story: Explain to the future reader, in simple terms — with short sentences and paragraphs — just what the parties are doing, so as to help future readers get up to speed more quickly.

As a horror story, consider the WHEREAS example quoted in Section 3.6.1 above: Good luck trying to figure out what's really going on — there seems to be some kind of business roll-up going on, with a sale and leaseback of real estate and maybe other assets, but that's not at all clear. Now imagine that you're a judge or a judge's law clerk who's trying to puzzle out the story. Worse: Imagine that you're a juror trying to make sense of this transaction.

Somewhat better is the following excerpt is from a highly publicized stock purchase agreement in the tech industry, rewritten into background-section form below: See Stock Purchase Agreement by and among Yahoo! Inc. and Verizon Communications Inc. dated as of July 23, 2016, https://tinyurl.com/VerizonYahooAgreement%3C/cite%3E

Before:

WHEREAS, concurrently with the execution and delivery of this Agreement, Seller and Yahoo Holdings, Inc., a Delaware corporation (the “Company”), are entering into a Reorganization Agreement substantially in the form attached hereto as Exhibit A (the “Reorganization Agreement”), pursuant to which Seller and the Company will complete the Reorganization Transactions at or prior to the Closing;

After:

1.  Background

1.01 At the same time as this Agreement is being signed, Seller and Yahoo Holdings, Inc., a Delaware corporation (the “Company”), are entering into a Reorganization Agreement.

1.02 Under the Reorganization Agreement, Seller and the Company are to complete certain "Reorganization Transactions" at or prior to the Closing.

1.03 The Reorganization Agreement is in substantially the form attached to this Agreement as Exhibit A.

Notice the shorter, single-topic paragraphs, discussed in more detail at Section 7.5.

Different jurisdictions might treat background statements differently. For example:

• California Evidence Code § 622 provides: "The facts recited in a written instrument are conclusively presumed to be true as between the parties thereto, or their successors in interest; but this rule does not apply to the recital of a consideration." (Emphasis added.)
• But: "Contracts often contain recitals: provisions that do not make binding promises but merely recite background information about factual context or the parties' intentions. Maryland law recognizes the general principle that such recitals are not binding and, while they may aid the court in interpreting the contract's operative terms, cannot displace or supplement operative terms that are clear." Sprint Nextel Corp. v. Wireless Buybacks Holdings, LLC, 938 F.3d 113, 127 (4th Cir. 2019) (vacating and remanding partial summary judgment) (emphasis added).

A naked statement of one party's subjective intent in entering into the contract might not suffice to be binding on another party. That happened in a case involving Sprint, the cell-phone service provider:

• Sprint offered "upgraded" phones to its customers at steep discounts when customers renewed their contracts — the discounts were so steep that the customers paid less than what the phones would bring on the used-phone market.
• Another company, Wireless Buybacks, bought upgraded phones from Sprint customers and resold them at a profit.
• Sprint sued Wireless Buybacks for tortious interference with Sprint's contracts with its customers.
• Sprint claimed that its contract prohibited resale because it said in part: "Our rate plans, customer devices, services and features are not for resale and are intended for reasonable and non-continuous use by a person using a device on Sprint's networks." (Emphasis added.)

The trial court found that this language unambiguously barred resale; the court granted partial summary judgment for Sprint. On appeal, however, the Fourth Circuit held that the contract language "is a background statement of intent, not an enforceable promise not to resell Sprint phones." Sprint Nextel Corp. v. Wireless Buybacks Holdings, LLC, 938 F.3d 113, 127 (4th Cir. 2019) (vacating and remanding partial summary judgment; emphasis added).

Inexperienced contract drafters will sometimes put specific rights and/or obligations in a Background section. That's a bad idea for the reasons discussed above.

Example 1: One of the author's students once wrote in the Background section: "For all purposes, the Data is owned by Client and is provided to Contractor for completion of services under this Agreement." DCT COMMENT: This shouldn't go into the Background section, but instead in a substantive section, for example in a section about ownership of intellectual property.

Example 2: Another student wrote: "Client will pay Contractor as stated in this Agreement." DCT COMMENT: This shouldn't be in the Background section, because the payment provisions would (or at least should) speak for themselves — moreover, readers would naturally assume that Client would pay Contractor, so there was no need to include that fact in the Background section.

Example 3: Still another student wrote: "The parties have agreed that Client will compensate Provider with a flat monthly fee of $20,000 for up to 200 staff hours of work per month, with additional work hours being billed at $150 per hour." DCT COMMENT: This would work if the Background section was the only place that the specific compensation details were discussed, so as not to violate the D.R.Y. (Don't Repeat Yourself) guideline discussed at Section 8.8.

Example 4: A student wrote: "Client and Service Provider enter into the Agreement for the term of one year from the effective date of the Agreement." DCT COMMENT: This is another item that would go into a substantive provision further down in the contract, not into the Background section.

Some conventional contracts, with the signature blocks at the end of the contract, precede the signature blocks with a concluding paragraph such as the following:

Such paragraphs are unnecessary; here's why:

• First, that kind of concluding paragraph is overkill. There are other ways of proving up that The Other Side in fact delivered a signed contract to you — for starters, the fact that you have a copy in your possession that bears (what at least purports to be) The Other Side’s signature.
• Second, at the instant of signature, a past-tense statement that each party "has delivered" the signed contract is technically inaccurate — and even more so at the moment when the first signer affixes his (or her) signature.

But if you see this kind of language in a draft prepared by the other side, don't change it (as discussed in § 6.2).

Author's note: I usually draft signature blocks with blanks for the signers to hand-write the date signed; see the example shown at Section 3.7.8.

It's usually better not to type in the expected date of signature. That's because one or more parties might sign on a different date; moreover, if signature is delayed, a pre-typed signature date could help an unscrupulous signer to passively — but still fraudulently — backdate the contract (see Section 3.10).

✓ "Signed on the dates indicated below"

✘ "Signed December 12, 20xx"

For similar reasons, it's better not to type a purported date in the preamble:

✓ "This Agreement is made effective the last date signed as written in the signature blocks …."

✘ "This Agreement is made December 31, 20XX, between …."

Relatedly: I also try to avoid leaving a blank space in the preamble for the effective date:

✘ "This Agreement is made December _    _, 20XX, between …."

That's because the parties might well neglect to fill in the date, meaning that the contract gets signed with the blank space still there. This is an example of the R.O.O.F. principle: Root Out Opportunities for [Foul]-ups!

The signature blocks shown at Section 3.7.8 (repeated below) are for different types of organization — on the left is a signature block for when the signer’s name and title are known; on the right, when not:

• Note that each of those signature blocks starts out with the word "AGREED:" in all-caps and followed by a colon — possibly including the abbreviation for the signing party, shown as "Licensor" and "Licensee" above.

• Each organization’s signature block lists the organization’s full legal name followed by the word "by" and a colon.

• Date signed: Each signer should hand-write the date signed, for reasons discussed at the commentary to Section 3.10.

• Printed name blank line: In signature blocks with blank lines, be sure to include a space for the printed name, because the signatures of some people are difficult to read.

• Title: In any signature block for an organization, be sure to include the signer’s title, to establish a basis for concluding that the signer has authority to sign on behalf of the organization; if the employee’s title includes the word "president," "vice president," "manager," or "director" in the relevant area of the business, that might be enough to establish the employee’s apparent authority. See § 3.11.4 (But apparent authority can save the day).

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

Example:

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

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

On the other hand, in some jurisdictions, a limited partnership might be able to act through its own officers; for example, Delaware’s limited-partnership statute gives general partners the power "to delegate to agents, officers and employees of the general partner or the limited partnership …." Del. Code § 17-403(c) (emphasis added).

In such cases, the signature block of a limited partnership might look like the signature block of a corporation or LLC, above.

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

Including company titles is highly advisable to help establish apparent authority, as discussed above. But there's another reason to do so: If your client is a company, then 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 that is signing the contract, not the individual human in his- or her personal capacity — with the attendant personal liability.

To be sure, 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; doing that can give the human signer a warm fuzzy feeling about you, which is no bad thing. *Caution:* A lawyer might find herself 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 deceptive backdating of a contract (discussed at Section 3.10). In circumstances such as those, the lawyer should consider whether she should affirmatively advise the employee, preferably in writing, that she’s not the employee’s lawyer — conceivably, the lawyer might even have an ethical obligation to do so.

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

In the example signature blocks immediately below, you'll see that the signature blocks are in a table at the front of the agreement, along with the parties' respective initial addresses for notice. This make the agreement more reader-friendly:

• You can see at a glance whether you're looking at the signed agreement; and
• To find a party's (initial) address for notice, you don't need to go rummaging through the document

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

FIRST: Signing a contract for a client could later raise questions whether, in the negotiations leading up to the contract, the lawyer was acting as a lawyer or as a business person. This could be an important distinction: in the latter case, the lawyer’s private communications with her client might not be protected by the attorney-client privilege and thus might be subject to discovery by third parties (which is never a good look, in terms of client relations).

SECOND: From a client-relations perspective, if the contract later "goes south," the lawyer won’t want her signature on the contract. The general counsel of pharmaceutical giant Novartis was painfully reminded of this after he signed a consulting contract with Michael Cohen, formerly the personal lawyer for Donald Trump; as a result, the GC lost his job when the contract attracted unwanted publicity to the company:

Novartis’s top lawyer is to retire from the company over payments made by the pharmaceutical giant to President Trump’s personal lawyer Michael D. Cohen, the Swiss drug maker said on Wednesday. * * * 

"Although the contract was legally in order, it was an error,” Mr. Ehrat said. "As a cosignatory with our former C.E.O., I take personal responsibility to bring the public debate on this matter to an end."

Prashant S. Rao and Katie Thomas, Novartis’s Top Lawyer is Out Amid Furor Over Payments to Michael Cohen (NYTimes.com May 16, 2018) (emphasis added).

It's common for each party to want its own, fully-signed "original" of a contract; the above language provides for that.

If hard copies are going to be manually signed, see Section 3.7 for suggestions on how to draft the signature blocks to avoid possible challenges later.

Nowadays it's quite common for the parties, in different locations, to sign separate copies of a contract and for each party to email the other party a PDF of its signed signature page only; the above language supports this practice.

It's very common for parties in separate locations to manually sign separate copies of a paper contracts and then to email a PDF image (or, old-school, to FAX) just their signed signature pages to each other.

Caution: If only the signed signature pages of a contract will be exchanged, the parties should make sure it's clear that everyone is signing the same version of the document, otherwise the contract might not be binding. Not doing this proved fatal to a party's case in Delaware, where the parties had exchanged signature pages, but the pages were from two different drafts, only one of which included the crucial provision (a noncompetition covenant). The chancery court held that there had been no meeting of the minds and thus there was not a valid contract. See Kotler v. Shipman Assoc., LLC, No. 2017-0457-JRS (Del. Ch. Aug. 27, 2019) (rendering judgment for company).

Pro tip: For that reason, a signature page should preferably be tied to a specific version of the Contract by including, on each page of the Contract, a running header or -footer that identifies the document and its version.

Example: In a draft confidentiality agreement between ABC Corporation and XYZ LLC, a running header could read "ABC-XYZ Confid. Agrmt. ver. 2019-03-01 15:00 CST" — where the date and time at the end are hand-typed, and not in an automatically-updating "field." (Including such a running header can also help avoid confusion when the parties are discussing a draft of the agreement, by allowing the parties to make sure that everyone is looking at the same draft.)

It's a good idea to combine • the PDF of the unsigned agreement, and • the PDFs of the signed signature pages, into a single "record copy" PDF.

Then: Email the combined, record-copy PDF to all concerned: The email will serve as a paper trail to help establish the authenticity of the record copy.

U.S. law explicitly law supports the use of electronic signatures, and American courts now routinely honor electronic "signatures" (which are now common in England and Wales as well). See generally the federal Electronic Signatures in Global and National Commerce Act ("E-SIGN Act"), 15 U.S.C. § 7001 et seq., which provides in part (subject to certain stated exceptions) that, for transactions "in or affecting interstate or foreign commerce," electronic contracts and electronic signatures may not be denied legal effect solely because they are in electronic form. • At the U.S. state level, 47 states, the District of Columbia, and Puerto Rico, and the U.S. Virgin Islands have adopted the Uniform Electronic Transactions Act ("UETA"). • The remaining three states — Illinois, New York, and Washington — have adopted their own statutes validating electronic signatures. See, e.g., Naldi v. Grundberg, 80 A.D.3d 1, 908 N.Y.S.2d 639 (N.Y. App. Div. 2010); [UK] Law Commission, Electronic Execution of Documents (2019), at https://perma.cc/UCQ7-U94M.

Section 5(b) of the UETA states that:

This [Act] applies only to transactions between parties each of which has agreed to conduct transactions by electronic means. Whether the parties agree to conduct a transaction by electronic means is determined from the context and surrounding circumstances, including the parties’ conduct.

(Square brackets in original, emphasis added.) This section is intended to "check the box" that the parties have indeed agreed to conduct transactions electronically.

The following language is part of the California version but not of the UETA:

(b) … Except for a separate and optional agreement the primary purpose of which is to authorize a transaction to be conducted by electronic means, an agreement to conduct a transaction by electronic means may not be contained in a standard form contract that is not an electronic record.

An agreement in such a standard form contract may not be conditioned upon an agreement to conduct transactions by electronic means.

An agreement to conduct a transaction by electronic means may not be inferred solely from the fact that a party has used electronic means to pay an account or register a purchase or warranty.

This subdivision may not be varied by agreement.

Cal. Civ. Code § 1633.5(b) (emphasis and extra paragraphing added).

And: Under California law, a car dealer apparently must still obtain a manual contract signature from a car buyer. See Cal. Civ. Code § 1633.3(c) (various carve-outs from authorization of electronic signatures) and Cal. Veh. Code § 11736(a) (requiring signed agreement with car-buying consumer).

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

The California court seems to have offered a road map for contract professionals about what would suffice to prove up an electronic signature in litigation:

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

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

Indeed, Main did not explain[:]

• that an electronic signature in the name of "Ernesto Zamora Ruiz" could only have been placed on the 2011 agreement (i.e., on the Employee Acknowledgement form) by a person using Ruiz's "unique login ID and password";

• that the date and time printed next to the electronic signature indicated the date and time the electronic signature was made;

• that all Moss Bros. employees were required to use their unique login ID and password when they logged into the HR system and signed electronic forms and agreements;

• and the electronic signature on the 2011 agreement was, therefore, apparently made by Ruiz on September 21, 2011, at 11:47 a.m.

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

Id., 232 Cal. App.4th at 844 (extra paragraphing and bullets added, citation omitted).

See also: • Section 3.7 for suggestions on how to draft signature blocks, with examples, as well as • Section 3.11.4 for cautions about whether an individual signer has authority to sign for a party that is a corporation or other organization, and • Section 3.9.1 concerning electronic signatures.

See generally: • the definitions of signed and writing in UCC §1-201(37) and 1-201(43); the definition of signature in the Texas Business Organizations Code § 1.002(87); "… a writing has been signed by a person when the writing includes, bears, or incorporates the person's signature. A transmission or reproduction of a writing signed by a person is considered signed by that person …." Id. § 1.007; and • the Model Business Corporation Act § 1.40 (rev. 2016).

Signing a contract that is "backdated" to be effective as of an earlier date might well be OK. (This is referred to in Latin legalese as nunc pro tunc, or "now for then.") The contract itself should make it clear that parties are doing this, to help forestall later accusations that one or both parties had an intent to deceive.

Example: Suppose that Alice discloses confidential information to Bob, a potential business partner, after Bob first orally agrees to keep the information confidential. Alice might well want to enter into a written nondisclosure agreement with Bob that states the agreement and its confidentiality obligations are effective as of the date of Alice’s oral disclosure.

Never backdate a contract for deceptive purposes, e.g., to be able to report a sale in an already expired financial period — that practice has sent more than one corporate executive to prison for securities fraud, including at least one general counsel.

• The former CEO of software giant Computer Associates, Sanjay Kumar, served nearly ten years in prison for securities fraud through, among other things, backdating sales contracts (NY Times). Kumar was also fined $8 million and agreed to settle civil suits by surrendering nearly $800 million (NY Times).

Kumar wasn't the only executive at Computer Associates (now known as just CA) to get in trouble for backdating. All of the following went to prison or home confinement: – the CFO: seven months in prison, seven months home detention (NY Times); the general counsel: two years in prison, and also disbarred (court opinion); the senior vice president for business development: ten months of home confinement (NY Times); the head of worldwide sales: seven years in prison (WSJ).

All of this mess came about because the Computer Associates executives orchestrated a huge accounting fraud: On occasions when the company realized that its quarterly financial numbers were going to miss projections, it "held the books open" by backdating contracts signed a few days after the close of the quarter. This practice was apparently referred to internally as the "35-day month." According to CA, all the sales in question were legitimate and the cash had been collected (according to CA's press release).

The only issue was one of the timing of "revenue recognition," to use the accounting term: The company had recorded the sales on its books ("booked the sale") a few days earlier than was proper under generally-accepted accounting principles, or "GAAP."

But that was enough to put the sales revenue into an earlier reporting period than it should have been — and that, in turn, was enough to send all those CA executives to prison. (CA press release).

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

Even if backdating a contract didn't land one in jail, it could can cause other problems. For example, a California court of appeals held that backdating automobile sales contracts violated the state's Automobile Sales Finance Act (although the state's supreme court later reversed). See Raceway Ford Cases, 2 Cal. 5th 161, 211 Cal. Rptr. 3d 244, 385 P.3d 397 (2016).

Suppose that Alice signs a contract on behalf of ABC Corporation. The contract is with XYZ Inc. Question: Is it reasonable for XYZ to assume that Alice's signature makes the contract binding on ABC? The answer will depend on whether Alice had authority to do so — either actual authority or apparent authority.

A party might not be able to enforce a contract if the person who signed on behalf of the other party did not have authority to do so. This happened, for example, in a federal-contracting case:

• An ammunition manufacturer signed several nondisclosure agreements (NDAs) with the U.S. Government and, under the NDAs, disclosed allegedly-trade-secret technology to the government.
• The manufacturer later sued the government for breaching the NDAs by disclosing and using the trade secrets without permission.
• Under the applicable regulations, the specific individuals who signed the NDAs on behalf of the government did not have authority to bind the government.

The court majority held that the government was not bound by some of the NDAs — and thus the government was not liable for its disclosure and use of the manufacturer's trade secrets. See Liberty Ammunition, Inc. v. United States, 835 F.3d 1388, 1401-02 (Fed. Cir. 2016). In dissent, Judge Newman argued that the senior Army officer who signed a particular NDA had at least apparent authority, and so (said the judge) the government should have been bound by the NDA. See id. at 1403-05; see also the discussion of apparent authority below.

Here’s another example from the Illinois supreme court: A landlord sued its defaulting tenant, a union local. The landlord won a $2.3 million judgment against the union in the trial court, only to see the award thrown out in the state supreme court. Why? Because in signing the lease, the union official had not complied with the requirements of the state statute that authorized an unincorporated association to lease or purchase real estate in its own name. See 1550 MP Road LLC v. Teamsters Local No. 700, 2019 IL 123046, 131 N.E.3d 99.

The Restatement (Third) of Agency notes that just because a person holds the title of president or vice president of a company, that doesn't mean the person has authority to make commitments on behalf of the company. See Restatement (Third) of Agency § 3.03 cmt. e(4) (2006), quoted in Elaazami v. Lawler Foods, Ltd., No. 14-11-00120-CV, slip op. at n.6 (Tex. App—Houston [14th Dist.] Feb. 7, 2012) (reversing judgment notwithstanding verdict; company's vice president of operations had apparent authority to make oral promise of bonus payment to later-fired employee).

An individual who has "apparent authority" can bind a party to a contract, unless a hypothetical reasonable person would have reason to suspect otherwise. This is true even if the party had had an internal signature policy prohibiting the individual from signing the type of contract in question. Something like happened, for example, in a Tenth Circuit case in which a company claimed that it was not bound by a contract signed by one of its executive vice president ("EVP"). See Digital Ally, Inc., v. Z3 Tech., LLC, 754 F.3d 802, 812-14 (10th Cir. 2014); see generally https://en.wikipedia.org/wiki/Apparent_authority.

A Houston appeals court noted that:

Texas law recognizes that a company's placement of an officer or employee in a certain position will provide the agent with apparent authority to bind the company in usual, customary, or ordinary contracts that a reasonable person would view as being consistent with an agent's scope of authority in that position.

Elaazami v. Lawler Foods, Ltd., No. 14-11-00120-CV, slip op. at part III (Tex. App—Houston [14th Dist.] Feb. 7, 2012) (citing cases; emphasis added).

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 resolution 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 of a corporate board resolution and officer certificate (contracts.OneCLE.com).

But a large- or publicly-traded company won't want to bother its board approval to get approval for for routine contracts or other everyday business.

Suppose that "Alice" is designated to sign a contract on behalf of a party, and that the contract includes a personal representation by Alice that she has authority to sign on behalf of that party, such as the following:

But now suppose that Alice balks because she doesn't want to put herself on the hook in case she in fact doesn't have authority. That might be a sign that the other party should investigate whether Alice really does have authority to sign.

Caution: Even if a signer were to make a written representation that s/he had signature authority, that might not be enough — because legally the other side might be "on notice" that the signer does not have authority, as discussed in the following example.

The present author once represented a MathWhiz-like client that was negotiating an agreement with a Gigunda-like customer.

• Gigunda's attorney filled in a name and title for Gigunda's signer: It was a Gigunda individual contributor; let's call her "Sarah" (not her name).
• I raised the issue of apparent authority with the MathWhiz senior executive, who responded that he had been dealing exclusively with Sarah in negotiating the agreement, but that Sarah's boss (whom the MathWhiz executive knew well) had been copied on all of the emails going back and forth.
• The MathWhiz executive also said that MathWhiz had a longstanding good history with Gigunda.

After learning all of the above, my recommendation to MathWhiz was that we not try to change the signature block to reflect someone else's title — it might offend Sarah, and it would certainly delay getting to signature, with little or no real reduction in MathWhiz's business risk.

MathWhiz did as I recommended; the parties signed the contract and carried it out to everyone's satisfaction.

By statute, a contract with an LLC or other organization might not be enforceable, even if signed by an "officer" or by a "manager." That could be the case if the articles of organization (which are usually publicly available) expressly deprive the signer of such authority.

This happened in a Utah case where:

• One manager of a two-manager LLC signed an agreement granting, to a tenant, a 99-year lease on a recreational-vehicle pad and lot.
• But there was a problem: The LLC’s publicly filed articles of organization stated that neither of the two company’s managers had authority to act on behalf of the LLC without the other manager’s approval.

The court held that the tenant had been on notice of the one manager’s lack of authority to grant the lease on just his own signature alone — and so the lease was invalid. See Zions Gate RV Resort, LLC v. Oliphant, 2014 UT App 98, 326 P.3d 118, 121 ¶ 8, 122-23. The court remanded the case for trial as to whether the LLC had later ratified the lease.

Some drafters might want to be explicit about who does not have signature authority, to help preclude a party from claiming to have relied on the apparent authority of other would-be signers.

This approach can sometimes be seen in sales-contract forms used by car dealer, which can say, typically in all-caps, something along the lines of, "NO PERSON HAS AUTHORITY TO MODIFY THESE WARRANTIES ON BEHALF OF THE DEALER EXCEPT A VICE PRESIDENT OR HIGHER."

By statute, certain officials other than notaries public (note the plural form) are authorized to certify the authenticity of signatures in certain circumstances. For example, Texas law gives the power to certify signature acknowledgements to:

• district-court and county-court clerks; and
• in certain cases, to commissioned officers of the U.S. armed forces;

among others. See Tex. Civ. Prac. & Rem. Code § 121.001.

A notary public generally can't sign a certificate if the notary has a conflict of interest, e.g., notarizing something for an immediate-familly member. See generally, e.g., American Society of Notaries, Conflicts of Interest (2008).

But Texas law specifically allows a corporate employee (who is a notary public) to certify the acknowledgement of a signature on a document in which the corporation has an interest unless the employee is a shareholder who owns more than a specified percentage of the stock. See Tex. Civ. Prac. & Rem. Code § 121.002.

Parties will want to double-check that the notary "does the needful" (an archaic but useful expression) to comply with statutory requirements. In a New York case, a married couple's prenuptial agreement was voided because the notary certificate for the husband's signature didn't recite that the notary had confirmed his identity: It was undisputed that the couple's signatures were authentic, and there was no accusation of fraud or duress. Even so, said the state's highest court, the notarization requirement was important because it "necessarily imposes on the signer a measure of deliberation in the act of executing the document." See Galetta v. Galetta, 21 N.Y.3d 186, 189-90, 191-92, 991 N.E.2d 684, 969 N.Y.S.2d 826 (2013) (affirming summary judgment that prenup was invalid).

In many states it's easy to become a notary public. Some lawyers themselves become notaries so that they can certify the authenticity of clients' signatures on wills, deeds, and the like.

But if a lawyer notarizes a document, then the lawyer might be called someday to testify in a court proceeding about a signed document. For example, the lawyer-notary might have to explain how he or she confirmed the signer's identity if that information isn't stated in the lawyer's notary records. That in turn might disqualify the lawyer from being able to represent the client whose signature was certified. See, e.g., Tex. Civ. Prac. & Rem. Code § 121.001; Tex. Discipl. R. Prof. Conduct 3.08 ("Lawyer as Witness").

(As a practical matter, though, that might not be too much of an issue, because the lawyer might already have to testify by virtue of having participated in the events leading up to the signing of the document.)

Drafters needing a notary certificate should check whether applicable law requires a personal appearance before a notary (or other official). See generally National Notary Association, Remote Notarization: What You Need to Know (nationalnotary.org Jun. 23, 2020) (showing states with remote-notary laws).

Remote notarization was an issue during the 2019-20 COVID-19 pandemic, during which the Texas governor announced an emergency suspension of some laws and authorized notarization of certain wills and real-estate documents. See Texas Secretary of State, Notice of Suspension of Statutes (undated; refers to a governor's order of Apr. 8, 2020 concerning wills, etc.) (sos.state.tx.us); also this order (notarization of real-estate instruments).

Business people love plain language in contracts because:

• Plain language speeds up legal review, which is generally one of the biggest bottlenecks in getting a deal to signature.
• Plain language makes it more likely that potential problems will be spotted and fixed before signature — which reduces the opportunities for future disputes that could waste the parties' time, opportunities, and money.

In a 2018 article, the general counsel of a GE business unit reported that, when his group switched to plain-language contracts, the new contract forms "took a whopping 60% less time to negotiate than their previous legalese-laden versions did. … Customer feedback has been universally positive, and there hasn’t been a single customer dispute over the wording of a plain-language contract." Shawn Burton, The Case for Plain-Language Contracts, Harv. Bus. Rev. Jan.-Feb. 2018 at 134, archived at https://perma.cc/HW85-FGSA. When that article was published, Mr. Burton was the general counsel of GE Aviation’s Business & General Aviation and Integrated Systems businesses.

Trial counsel also prefer plain language in a contract, because:

• Plain language offers better "sound bites" for trial exhibits and witness cross-examination; and
• During jury deliberations, plain language can help refresh jurors' recollections as part of the "real" evidence in the record, not merely as trial counsel's demonstrative exhibits (summaries, PowerPoint slides, etc.) that the judge might or might not allow to be taken back into the jury room. See also the discussion of demonstrative exhibits at Section 12.5.

As a statutory example, this rewrite, by law professor Mark Cooney, was retweeted by legal-writing guru Bryan Garner:

Before:

A person who engages in conduct proscribed under section 530 and who in the course of engaging in that conduct, possesses a dangerous weapon or an article used or fashioned in a manner to lead any person present to reasonably believe the article is a dangerous weapon, or who represents orally or otherwise that he or she is in possession of a dangerous weapon, is guilty of a felony punishable by imprisonment for life or for any term of years. If an aggravated assault or serious injury is inflicted by any person while violating this section, the person shall be sentenced to a minimum term of imprisonment of not less than 2 years.

So what exactly is the bottom line of this statutory provision?

BLUF rewrite by Prof. Cooney:

A person is guilty of a felony if, while committing a crime under section 530, he or she:

(1) possesses a dangerous weapon;

(2) possesses an article used as a dangerous weapon; … [etc.]

(Emphasis added.)

Before: Here's a contract provision that was litigated in a state court: See Lynd v. Marshall County Pediatrics, P.C., 263 So. 3d 1041, 1044-45 (Ala. 2018).

If any shareholder of the corporation for any reason ceases to be duly licensed to practice medicine in the state of Alabama, accepts employment that, pursuant to law, places restrictions or limitations upon his continued rendering of professional services as a physician, or upon the death or adjudication of incompetency of a stockholder or upon the severance of a stockholder as an officer, agent, or employee of the corporation, or in the event any shareholder of the corporation, without first obtaining the written consent of all other shareholders of the corporation shall become a shareholder or an officer, director, agent or employee of another professional service corporation authorized to practice medicine in the State of Alabama, or if any shareholder makes an assignment for the benefit of creditors, or files a voluntary petition in bankruptcy or becomes the subject of an involuntary petition in bankruptcy, or attempts to sell, transfer, hypothecate, or pledge any shares of this corporation to any person or in any manner prohibited by law or by the By-Laws of the corporation or if any lien of any kind is imposed upon the shares of any shareholder and such lien is not removed within thirty days after its imposition, or upon the occurrence, with respect to a shareholder, of any other event hereafter provided for by amendment to the Certificates of Incorporation or these By-Laws, [here we finally get to the "bottom line":] then and in any such event, the shares of this [c]orporation of such shareholder shall then and thereafter have no voting rights of any kind, and shall not be entitled to any dividend or rights to purchase shares of any kind which may be declared thereafter by the corporation and shall be forthwith transferred, sold, and purchased or redeemed pursuant to the agreement of the stockholders in [e]ffect at the time of such occurrence. The initial agreement of the stockholders is attached hereto and incorporated herein by reference[;] however, said agreement may from time to time be changed or amended by the stockholders without amendment of these By-Laws. The method provided in said agreement for the valuation of the shares of a deceased, retired or bankrupt stockholder shall be in lieu of the provisions of Title 10, Chapter 4, Section 228 of the Code of Alabama of 1975.

(Emphasis added.)

After:

(a)     A shareholder's relationship with the corporation will be terminated, as specified in more detail in subdivision (b), if any of the following Shareholder Termination Events occurs:

      (1) The shareholder, for any reason, ceases to be duly licensed to practice medicine in the state of Alabama.

      (2) The shareholder accepts employment that, pursuant to law, places restrictions or limitations upon his continued rendering of professional services as a physician.

      [remaining subdivisions omitted]

(b)     Immediately upon the occurrence of any event described in subdivision (a), that shareholder's shares:

      (1) will have no voting rights of any kind,

      [Remaining subdivisions omitted]

It should be obvious which of these is more readable.

(Emphasis added.)

Courts often look to specific rules of interpretation such as the following: For additional, completely-optional background reading, see generally, e.g.: Vincent R. Martorana, A Guide to Contract Interpretation (ReedSmith.com 2014); James J. Sienicki and Mike Yates, Contract interpretation: how courts resolve ambiguities in contract documents (Lexology.com 2012: https://goo.gl/ZGkwJu).

• Specific terms normally take precedence over general terms.

• A term stated earlier in a contract is given priority over later terms.

• The rule of the last antecedent — for example: A federal criminal statute included a mandatory ten-year minimum sentence in cases where the defendant had previously been convicted of "aggravated sexual abuse, sexual abuse, or abusive sexual conduct involving a minor or ward." The Supreme Court held that the minor-or-ward qualifier applied only to abusive sexual conduct, not to sexual abuse; as a result, a defendant was subject to the ten-year mandatory minimum sentence for sexual abuse against an adult. Lockhart v. United States, 577 U.S. _, 136 S. Ct. 958, 962 (2016).

• BUT: The series-qualifier principle might weigh against the rule of last antecedent. Dissenting in the Lockhart case just cited, Justice Kagan argued: "Imagine a friend told you that she hoped to meet 'an actor, director, or producer involved with the new Star Wars movie.' You would know immediately that she wanted to meet an actor from the Star Wars cast—not an actor in, for example, the latest Zoolander." Id., 136 S. Ct. at 969 (Kagan, J., dissenting).

[Note to students: Be sure to learn how to spell proferentem!]

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

The (U.S.) Supreme Court explained the concept: "Respondents drafted an ambiguous document, and they cannot now claim the benefit of the doubt. The reason for this rule is to protect the party who did not choose the language from an unintended or unfair result." Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 62-63 (1995) (reversing 7th Circuit) (citations and footnotes omitted). Contra proferentem is roughly analogous to the baseball rule, tie goes to the runner. It gives drafters an incentive to draft clearly, because as between the drafter of ambiguous language, on the one hand, and the "innocent" other party, it's the drafter that must bear the consequences of the ambiguity. Additional, optional background reading: • the Wikipedia article Contra proferentem; • Michelle E. Boardman, Contra Proferentem: The Allure of Ambiguous Boilerplate, 104 Mich. L. Rev. 1105 (2006); • Tal Kastner & Ethan J. Leib, Contract Creep, 107 Geo. L. Rev. 1277, 1298-1302 (2019).

Contra proferentem/ is roughly analogous to the baseball rule, tie goes to the runner. It gives drafters an incentive to draft clearly, because as between the drafter of ambiguous language, on the one hand, and the "innocent" other party, it's the drafter that must bear the consequences of the ambiguity.

See generally:

• the Wikipedia article Contra proferentem
• Michelle E. Boardman, Contra Proferentem: The Allure of Ambiguous Boilerplate, 104 Mich. L. Rev. 1105 (2006)
• Tal Kastner & Ethan J. Leib, Contract Creep, 107 Geo. L. Rev. 1277, 1298-1302 (2019)

Caution: Disclaiming contra proferentem can cause problems: Suppose that a court or arbitrator concluded that there was no way to resolve an ambiguity in a contract, other than by applying the contra proferentem principle — but the parties had agreed that contra proferentem was not to be used (such as in Tango Clause 22.37 - Contra Proferentem Disclaimer). The results in that situation might be unpredictable:

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

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

Pro tip: Some drafters might be tempted to prohibit the use of the contra proferentem principle in interpreting contract terms. That's not the best "look": Parties to a contract generally can't prohibit a court from applying a particular legal doctrine, they can only request that the court not do so.

Under the principle of ejusdem generis, "if a law refers to automobiles, trucks, tractors, motorcycles, and other motor-powered vehicles, a court might use ejusdem generis to hold that such vehicles would not include airplanes, because the list included only land-based transportation." Nolo’s Plain-English Law Dictionary (law.cornell.edu); see also the commentary about ejusdem generis ("eh-USE-dem GENerous").

Drafters can avoid application of ejusdem generis by using the term "including but not limited to" (emphasis added). As then-Judge Alito pointed out: "By using the phrase ‘including, but not limited to,' the parties unambiguously stated that the list was not exhaustive. … [S]ince the phrase ‘including, but not limited to' plainly expresses a contrary intent, the doctrine of ejusdem generis is inapplicable." Cooper Distributing Co. v. Amana Refrigeration, Inc., 63 F.3d 262, 280 (3d Cir. 1995) (citations omitted). To like effect is Eastern Air Lines, Inc. v. McDonnell Douglas Corp., 532 F.2d 957, 988-89 (5th Cir. 1976); see also Robert E. Scott and George G. Triantis, Anticipating Litigation in Contract Design, 115 Yale L.J. 814 (2006): "Contracting parties can avoid a restrictive interpretation under the ejusdem generis rule by providing that the general language includes but is not limited to the precise enumerated items that either precede or follow it." Id. at 850 & n.100, citing Cooper Distributing and Eastern Airlines.

In some jurisdictions, certain types of clauses might not be enforceable unless they are "conspicuous." For clauses in this category, courts typically want extra assurance that the signers knowingly and voluntarily assented to the relevant terms and conditions.

Example: Under the "express negligence" doctrine in Texas law, an indemnity provision that purports to protect a party from the consequences of its own negligence must not only be expressly stated, it must also be "conspicuous" in accordance with the Uniform Commercial Code standard. See Dresser Indus., Inc. v. Page Petroleum, Inc., 853 S.W.2d 505, 508-09 (Tex. 1993) (adopting UCC's standard of conspicuousness for express-negligence indemnification doctrine).

Contract drafters sometimes put entire paragraphs into all-capital letters in the hope of making them "conspicuous." The reader has probably seen examples of this particular disorder in warranty disclaimers and limitations of liability.

But keeping the all-caps going for line, after line, after line, can be self-defeating. A Georgia supreme court justice noted that the drafter of a contract in suit had made the justice's job more difficult — which is not a good look, to put it mildly:

No one should make the mistake of thinking, however, that capitalization always and necessarily renders the capitalized language conspicuous and prominent.

In this case, the entirety of the fine print appears in capital letters, all in a relatively small font, rendering it difficult for the author of this opinion, among others, to read it.

Moreover, the capitalized disclaimers are mixed with a hodgepodge of other seemingly unrelated, boilerplate contractual provisions — provisions about, for instance, a daily storage fee and a restocking charge for returned vehicles — all of which are capitalized and in the same small font.

Raysoni v. Payless Auto Deals, LLC, 296 Ga. 156, 766 S.E.2d 24, 27 n.5 (2014) (reversing and remanding judgment on the pleadings) (emphasis and extra paragraphing added).

In a similar vein, the Ninth Circuit's Judge Alex Kozinski noted acerbically:

Lawyers who think their caps lock keys are instant"'make conspicuous" buttons are deluded. … A sentence in capitals, buried deep within a long paragraph in capitals will probably not be deemed conspicuous.

Formatting does matter, but conspicuousness ultimately turns on the likelihood that a reasonable person would actually see a term in an agreement.

In re Bassett, 285 F.3d 882, 886 (9th Cir. 2002) (cleaned up, emphasis and extra paragraphing added).

Even worse, drafting a long block of text in all-caps might actually hurt the drafter's own client. Here's a tweet by Boston-area tech lawyer turned entrepreneur Luis Villa: "Love to see an ALL CAPS AND BOLD section of a contract that is so typographically painful to read that the company’s lawyers didn’t actually proof it, and made a substantive error in my favor as a result." (Emphasis added.)

The drafting tips here, of course, are:

1. Be judicious about what you put in all-caps.
2. Don't use too-small a font for language that you want to be conspicuous.

If you want an example of what NOT to do to make something conspicuous, just glance at (don't even try to read) the following abomination, which is near the very front of a real-estate purchase agreement for a Dallas-area "gentlemen's club":

Section 1.02. Disclaimer and Indemnity. THE PROPERTY SHALL BE CONVEYED AND TRANSFERRED TO PURCHASER “AS IS, WHERE IS AND WITH ALL FAULTS”. EXCEPT FOR THE REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLER SET FORTH IN ARTICLE V OF THIS AGREEMENT, SELLER DOES NOT WARRANT OR MAKE ANY REPRESENTATIONS, EXPRESS OR IMPLIED, AS TO FITNESS FOR A PARTICULAR PURPOSE, MERCHANTABILITY, DESIGN, QUANTITY, QUALITY, LAYOUT, FOOTAGE, PHYSICAL CONDITION, PERATION, COMPLIANCE WITH SPECIFICATIONS, ABSENCE OR LATENT DEFECTS OR COMPLIANCE WITH LAWS AND REGULATIONS (INCLUDING, WITHOUT LIMITATION, THOSE RELATING TO HEALTH, SAFETY AND THE ENVIRONMENT) OR ANY OTHER MATTER AFFECTING THE PROPERTY AND SELLER SHALL BE UNDER NO OBLIGATION WHATSOEVER TO UNDERTAKE ANY REPAIRS, ALTERATIONS OR OTHER WORK OF ANY KIND WITH RESPECT TO ANY PORTION OF THE PROPERTY. FURTHER, PURCHASER SHALL INDEMNIFY, DEFEND AND HOLD HARMLESS SELLER AND SELLER’S REPRESENTATIVES FROM AND AGAINST ANY CLAIMS OR CAUSES OF ACTION ARISING OUT OF THE CONDITION OF THE PROPERTY BROUGHT BY ANY OF PURCHASER’S SUCCESSORS OR ASSIGNS, OR ANY THIRD PARTY, AGAINST SELLER OR SELLER’S REPRESENTATIVES. INFORMATION PROVIDED OR TO BE PROVIDED BY SELLER IN RESPECT OF THE PROPERTY WAS OBTAINED FROM A VARIETY OF SOURCES. SELLER HAS NOT MADE AN INDEPENDENT INVESTIGATION OF SUCH INFORMATION AND MAKES NO REPRESENTATIONS AS TO THE ASSURACY OR COMPLETENESS THEREOF. PURCHASER HEREBY ASSUMES ALL RISK AND LIABILITY RESULTING FROM THE OWNERSHIP, USE, CONDITION, LOCATION, MAINTENANCE, REPAIR OR OPERATION OF THE PROPERTY, WHICH PURCHASER WILL INSPECT AND ACCEPT “AS IS”. IN THIS REGARD, PURCHASER ACKNOWLEDGES THAT (a) PURCHASER HAS NOT ENTERED INTO THIS AGREEMENT IN RELIANCE UPON ANY INFORMATION GIVEN TO PURCHAWSER PRIOR TO THE DATE OF THIS AGREEMENT, INCLUDING, BUT NOT LIMITED TO, PROMOTIONAL MATERIALS OR FINANCIAL DATA , (b) PURCHASER WILL MAKE ITS DECISION TO PURCHASE THE PROPERTY BASED UPON PURCHASER’S OWN DUE DILIGENCE AND INVESTIGATIONS, (c) PURCHASER HAS SUCH KNOWLEDGE AND EXPERIENCE IN REAL ESTATE INVESTIGATION TO EVALUATE THE MERITS AND RISKS OF THE TRANSACTIONS PROVIDED IN THIS AGREEMENT, AND (d) PURCHASER IS FINANCIALLY ABLE TO BEAR THE ECONOMIC RISK OF THE LOSS OF SUCH INVESTMENT AND THE COST OF THE DUE DILIGENCE AND INVESTIGATIONS UNDER THIS AGREEMENT. IT IS UNDERSTOOD AND AGREED THAT THE PURCHASE PRICE HAS BEEN ADJUSTED BY PRIOR NEGOTIATION TO REFLECT THAT THE PROPERTY IS SOLD BY SELLER AND PURCHASED BY PURCHASER SUBJECT TO THE FOREGOING. Disclaimers similar to the foregoing in form satisfactory to Seller as well as Seller’s reservation of the mineral estate shall be inserted in any and all documents to be delivered by Seller to Purchaser at Closing.

This example is from https://www.sec.gov/Archives/edgar/data/935419/000114036108012368/ex10_2.htm. If you're wondering who's responsible for this piece of [work], the names and addresses of the parties' counsel are included in the addresses for notice in section 10.03.

The [U.S.] Uniform Commercial Code doesn't apply to all types of transaction, nor in jurisdictions where it has not been enacted.

Still, the UCC's definition of "conspicuous," such as in section UCC § 1-201(10) (Texas version) nevertheless provides useful guidance:

"Conspicuous," with reference to a term, means so written, displayed, or presented that a reasonable person against which it is to operate ought to have noticed it.

Whether a term is "conspicuous" or not is a decision for the court.

Conspicuous terms include the following:

(A) a heading in capitals equal to or greater in size than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same or lesser size; and

(B) language in the body of a record or display in larger type than the surrounding text,

or in contrasting type, font, or color to the surrounding text of the same size,

or set off from surrounding text of the same size by symbols or other marks that call attention to the language.

Tex. Bus. & Com. Code § 1.201(10) (emphasis and extra paragraphing added).

Courts often adopt the UCC standard for conspicuousness, as explained in the next section.

In a non-UCC context, the Supreme Court of Texas held that — with a possibly-significant exception — an indemnity provision protecting the indemnitee from its own negligence must be sufficiently conspicuous to provide "fair notice." The supreme court adopted the conspicuousness test stated in the UCC, quoted above; the court explained:

This standard for conspicuousness in [Uniform Commercial] Code cases is familiar to the courts of this state and conforms to our objectives of commercial certainty and uniformity. We thus adopt the standard for conspicuousness contained in the Code for indemnity agreements and releases like those in this case that relieve a party in advance of responsibility for its own negligence.

When a reasonable person against whom a clause is to operate ought to have noticed it, the clause is conspicuous.

For example, language in capital headings, language in contrasting type or color, and language in an extremely short document, such as a telegram, is conspicuous.

Dresser Indus., Inc. v. Page Petroleum, Inc., 853 S.W.2d 505, 508-09 (Tex. 1993) (citations omitted, emphasis and extra paragraphing added).

The court also pointed out that the fair-notice requirement did not apply to settlement releases: "Today's opinion applies the fair notice requirements to indemnity agreements and releases only when such exculpatory agreements are utilized to relieve a party of liability for its own negligence in advance." Id., 853 S.W.2d at 508 n.1 (emphasis added).

What counts as "conspicuous" will sometimes depend on the circumstances. In still another express-negligence case, the Texas supreme court said that the indemnity provision in question did indeed provide fair notice because:

The entire contract between Enserch and Christie consists of one page; the indemnity language is on the front side of the contract and is not hidden under a separate heading.

The exculpatory language and the indemnity language, although contained in separate sentences, appear together in the same paragraph and the indemnity language is not surrounded by completely unrelated terms.

Consequently, the indemnity language is sufficiently conspicuous to afford "fair notice" of its existence.

Enserch Corp. v. Parker, 794 S.W.2d 2, 8-9 (Tex. 1990) (extra paragraphing added).

Texas's Dresser court noted an exception to the conspicuousness requirement: "The fair notice requirements are not applicable when the indemnitee establishes that the indemnitor possessed actual notice or knowledge of the indemnity agreement." Dresser, 853 S.W.2d at 508 n.2 (emphasis added, citation omitted).

Note especially the italicized portion of the quotation, which implies that the burden of proof of actual notice or knowledge is on the party claiming indemnification from its own negligence.

In contrast, a federal district judge in Houston granted Enron's motion to dismiss Hewitt Associates' claim for indemnity, on grounds that the contract in question did not comply with the conspicuousness requirement of the "express negligence" rule, namely that an agreement to indemnify a party for the consequences of the party's own negligence must be both express and conspicuous).The judge surveyed prior cases in which actual knowledge (of an indemnity clause) had been sufficiently established, including by ways such as:

• evidence of specific negotiation, such as prior drafts;
• through prior dealings of the parties, for example, evidence of similar contracts over a number of years with a similar provision;
• proof that the provision had been brought to the affected party's attention, e.g., by a prior claim. See Enron Corp. Sav. Plan v. Hewitt Associates, LLC, 611 F.Supp.2d 654, 673-75 (S.D. Tex. 2008).

(Author's note: This section was written before Donald Trump announced his successful 2016 presidential campaign.)

Trump Corporation ("Trump") has been a real-estate landlord, among other things. According to AmLaw Daily, years ago Trump's lawyers took one of the company's leases, changed the names, and used it for a deal in which Trump was the tenant and not the landlord.

Later, Trump-as-tenant found that its lease-agreement form gave Trump's landlord significant leverage:

"The funny part of it is what one of his internal lawyers must have done years ago," [the landlord's president] says. "Normally Trump is the landlord, not the tenant. So what they did is they took one of their leases and just changed the names. And so it's not a very favorable lease if you're the tenant."

See Nate Raymond, Trump Misses Rent Payments …, http://goo.gl/B72TIr (AmLawDaily.Typepad.com) (accessed Apr. 27, 2015).

Ouch ….

Tilly's, Inc. and World of Jeans & Tops, Inc. ("Tilly's") had an employee sign an employment agreement (the "2001 employment agreement") containing an arbitration provision. The 2001 employment agreement included a carve-out for statutory claims (which thus could be brought in court, not in arbitration). Importantly, the 2001 employment agreement also stated that any modifications to the agreement would need the signatures of three executives: The company's president; senior vice president; and director of human resources.

In 2005, the company had its employees sign an acknowledgement of receipt of an employee handbook containing a different arbitration provision, which didn't contain the carve-out for statutory claims. BUT: The signed acknowledgement didn't contain the three executive signatures needed to modify the 2001 employment agreement.

So: Because Tilly's set the so bar high for modifying the 2001 employment agreement — requiring three executive signatures — the company found itself facing high-stakes litigation by a class of plaintiffs, whereas it had thought it would be arbitrating low-stakes claims individually. See Rebolledo v. Tilly's, Inc., 228 Cal. App. 4th 900, 924, 175 Cal. Rptr. 3d 612 (Cal. App. 4th Div. 2014) (affirming denial of motion to compel arbitration).

With a one-way nondisclosure agreement, only the originally-intended disclosing party's information is protected. This means that any disclosures by the receiving party might be completely unprotected — resulting in the receiving party's losing its trade-secret rights in its information.

That's just what happened to the plaintiff in a Seventh Circuit case: The plaintiff signed a confidentiality agreement with the defendant, but that agreement protected only the defendant's information. Consequently, the plaintiff's later disclosures of its own confidential information were unprotected. See Fail-Safe, LLC v. A.O. Smith Corp. 674 F.3d 889, 893-94 (7th Cir. 2012) (affirming summary judgment for defendant).

(It's not hard to imagine the thought process that the plaintiff's business people's went through: "We need to disclose our information to you, but hey, we've already got an NDA in place, so sure, let's do it." But the NDA didn't do what the plaintiff needed.)

The scene:

• You're in a contract negotiation, representing The Good Guys Company.
• The other side, Nasty Business Partner Inc., insists on requiring The Good Guys to get NBP's consent before assigning the agreement.
• Nasty Business Partner has all the bargaining power; the Good Guys decide they have no choice but to go along.

Trying to salvage the situation, you ask Nasty Business Partner for some additional language: "Consent to assignment may not be unreasonably withheld, delayed, or conditioned." But Nasty Business Partner refuses. Have you just screwed your client?

In some jurisdictions, The Good Guys might otherwise have benefited from a default rule that Nasty Business Partner Inc. had an implied obligation not to unreasonably withhold consent to an assignment of the contract. See, e.g., Shoney's LLC v. MAC East, LLC, 27 So.3d 1216, 1220-21 (Ala. 2009); Pacific First Bank v. New Morgan Park Corp., 876 P.2d 761 (Or. 1994).

But you asked for an express obligation — only to have Nasty Business Partner reject the request — and The Good Guys signed the contract anyway.

A court might therefore conclude that the parties had agreed that Nasty Business Partner would not be under an obligation not to unreasonably withhold its consent to assignment — that NBP could grant or withhold its consent in its sole discretion.

This is pretty much what happened, on somewhat-different facts, in both the Shoney's LLC and Pacific First Bank cases cited above.

The Team Coco example: 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 (BusinessInsider.com 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; Conan's lawyers could have 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 that NBC had refused. A court might then have interpreted the contract as providing that NBC had at least some freedom to move the show's start time.
• Indeed, NBC might have 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 more bargaining power than Conan at that point, Conan might then have had no choice but to agree, given that he wanted NBC to appoint him as the host of the show.
  • And 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; the network bought 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 (AmLaw Daily Jan. 19, 2010) (extra paragraphing added).

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.

When drafting a contract, it can pay to include a clause that you know the other side will insist on getting, even if you'd really prefer to omit the clause.

EXAMPLE: Suppose that you're drafting a contract under which your client is obligated to pay the other side a percentage of its (your client's) sales. The contract might be an intellectual-property license agreement, or perhaps a real-estate lease.

It might be tempting to omit an audit clause from your draft. Your reasoning could be that the other side's contract reviewers might not think to ask for such a clause, and it's not your job to remind them.

But consider these points:

• In imagining that the other side's reviewer won't notice the absence of an audit clause omission, you might be indulging in wishful thinking — the other side's reviewer might be an expert who knows exactly what to look for and what to demand.

•  If the other side's contract reviewer were to see an audit clause in your draft, he or she might well mentally check the box — yup, they've got an audit clause — and move on to other matters, without making significant changes to your wording. That's a win, not least because it's one less thing to negotiate.

• You might be better off setting the tone with an audit clause that you know your client can live with, and then standing on principle to reject unreasonable change requests.

• Suppose the other side doesn't really know what they're doing. Chances are you'll get the other side to signature faster — and you'll be laying a foundation for a trusting relationship — if the draft you're proposing seems to address the other side's needs as well as your client's needs.

Berkshire Hathaway's vice-chairman Charles Munger has said that "Never a year passes but I get some surprise that pushes a little further my appreciation of incentive superpower. * * * Never, ever, think about something else when you should be thinking about the power of incentives." Charles T. Munger, The Psychology of Human Misjudgment (fs.blog), archived at https://perma.cc/LNG7-JG6Y.%3C/cite%3E

When drafting a contract, it can pay dividends to give some thought to how to manage the so-called "agency costs" that can arise from these personal interests and incentives of individual players. That's because when disputes arise, the involved individuals will naturally want to protect their own interests, such as: • not having fingers pointed at them; • being thought of by their side as a committed team player who's willing to fight to win, not a defeatist who throws in the towel; • protecting their bonus, their commission, their pay raise, their promotion, etc. See generally Agency cost (Wikipedia.org); a somewhat more-readable presentation is at Agency Costs (Investopedia.com).

These desires can manifest themselves in a variety of ways; some of the Tango Terms can help to channel these incentives and manage individuals' expectations.

Your client might not have the bargaining power to get its way in contract negotiations. When that's the case, you have to try to come up with other ways to help protect the client's legal- and business interests.

Imagine, for example, that your client is a customer that is negotiating a master purchasing contract with a vendor.

• Your customer client 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 your customer client's prices whenever the vendor wants. But your client's business people are insisting on having at least some protection on that score.

What to do? In no particular order, here are some approaches that you could try.

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 or -consultation? An advance-warning or advance-consultation 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: 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 non-public information in such explanation, will not disclose the non-public 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 the vendor from the burden of continually managing this requirement — although a smart vendor would plan ahead and have the required documentation ready to go.

Draw the thorn from the lion's paw? When a party makes tough contract demands, it could be because the party has been burned before. Institutionally, it may still "feel the pain" of a bad experience; its response is to roar at other counterparties.

The counterparty being roared at can try to find out why the lion 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. The allusion here, of course, is to the ancient folk tale about Androcles and the lion.

Cap the financial exposure for the onerous provision? A party with bargaining power will often demand that its counterparty agree to an onerous provision. In response, the counterparty could ask the first party to agree to a dollar cap on the amount of the counterparty's resulting financial exposure, e.g., capping the amount of money that the counterparty would be required to spend or the liability that it might someday face.

If the first party agrees, the onerous provision might look less dangerous to the counterparty than it would with the prospect of unlimited expense and/or liability.

(This is a variation on the old saying: When in doubt, make it about money.)

Impose time limits? When a party asks its counterparty to agree to an onerous contract provision, the counterparty might try to make its business risk more manageable by imposing time limits on the onerous provision.

For example, if a party demands an oppressive indemnity, the counterparty might counter by asking for a time limit on claims covered by the indemnity.

Or if a party demands a cap on pricing increases, or a most-favored-customer clause, the counterparty could counter with time limits on those as well.

Explain why the provision hurts the demanding party? A counterparty can to try to explain to a demanding party why, in the long run, the onerous provision being demanded would ultimately cause problems for the demanding party.

Package as part of a premium offering? Suppose that a smallish supplier is regularly asked by its customers to agree to an onerous contract provision (e.g., an extended warranty). If the supplier 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 supplier knows it can support.

This approach has a huge advantage: The bargaining over whether to give a customer the premium offering is no longer about legal T&Cs: it becomes a negotiation about price. This means the supplier'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 supplier might well score points with customers for anticipating their needs and offering a solution for them.

A third advantage: Some customers are far less price-sensitive than they are service-sensitive: They're willing to pay more if they feel they're getting premium treatment.

Maybe it's is worth the risk? The supplier 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 supplier imagines.

(It's the client's call, of course.)

A cautious drafting approach is to use the term reduce in lieu of minimize, against the chance that an adversary might later claim that "minimization" didn't actually occur, i.e., that the reduction that was actually achieved was not the greatest amount of reduction possible.

(Ditto for using the term increase, or enhance, in lieu of maximize.)

You might see contract language such as (hypothetically): "ABC certifies that each statement in its request for expense reimbursement is true and correct." What does that mean, exactly?

The present author doesn't like stating that a report, etc., must be "true and correct" because:

• The phrase is arguably redundant — is there a difference between true and correct? If so, what is that difference? (To paraphrase a former student of the present author: That's a conversation we don't want to have.)
• The phrase arguably doesn't go far enough: Let's assume that the statement: Jane was in the room is accurate, in that Jane was indeed in the meeting. Does that make the statement "true" or "correct" if others were also in the room?

In the present author's view, the phrase complete and accurate does the job better.

Take a look at section 2.15 of the contract by which Verizon took over Yahoo: It makes you want to cry out, "My kingdom for a period!"

(a) (i) Each material lease or sublease (a “Lease”) pursuant to which Seller (to the extent related to the Business) or any of the Business Subsidiaries leases or subleases real property (excluding all leases or subleases for data centers) (the “Leased Real Property”) is in full force and effect and Seller or the applicable Business Subsidiary has good and valid leasehold title in each parcel of the Leased Real Property pursuant to such Lease, free and clear of all Encumbrances other than Permitted Encumbrances, except in each case where such failure would not, individually or in the aggregate, reasonably be expected to have a Business Material Adverse Effect and (ii) there are no defaults by Seller or a Business Subsidiary (or any conditions or events that, after notice or the lapse of time or both, would constitute a default by Seller or a Business Subsidiary) and to the Knowledge of Seller, there are no defaults by any other party to such Lease (or any conditions or events that, after notice or the lapse of time or both, would constitute a default by such other party) under such Lease, except where such defaults would not, individually or in the aggregate, reasonably be expected to have a Business Material Adverse Effect.

Stock Purchase Agreement by and among Yahoo! Inc. and Verizon Communications Inc. dated as of July 23, 2016, § 2.15.

It's reminiscent of early English translations of some of the Christian gospels, which literally translated the Greek conjunction καί (kai, "and") instead of using it as a separator, almost a punctuation mark, as the authors did — which led to some interesting run-on translations. See, e.g., Multifunctionality of δέ, τε, and καί (chs.harvard.edu; undated).

See, for example, the Gospel of Mark, chapter 10, verses 33-34, in an almost-literal, word-for-word translation from the Greek "original":

Lo, we go up to Jerusalem and the Son of Man shall be delivered to the chief priests and to the scribes and they shall condemn him to death and shall deliver him to the nations and they shall mock him and scourge him and spit on him and kill him and the third day he shall rise again.

(Emphasis added.) The King James Version's translation of that passage, published in 1611, didn't change much:

Saying, Behold, we go up to Jerusalem; and the Son of man shall be delivered unto the chief priests, and unto the scribes; and they shall condemn him to death, and shall deliver him to the Gentiles:

And they shall mock him, and shall scourge him, and shall spit upon him, and shall kill him: and the third day he shall rise again.

Contrast the above translations with the modern New International Version (NIV) translation of the same passage:

"We are going up to Jerusalem," he said, "and the Son of Man will be delivered over to the chief priests and the teachers of the law. They will condemn him to death and will hand him over to the Gentiles, who will mock him and spit on him, flog him and kill him. Three days later he will rise."

The modern translation seems much more readable, right?

Go ye and do likewise ….

Caution: Be careful about using terms such as "consummated" sales — that led to what must have been an expensive lawsuit over a finder's fee: the court ruled that a finder's-fee agreement did not require the resulting federal contract to be "performed" in order for the transaction to be "consummated"; the finder's fee was therefore due and owing. See Fed Cetera, LLC v. Nat'l Credit Servs., Inc., 938 F.3d 466 (3d Cir. 2019).

In the U.S., article 2 of the Uniform Commercial Code (adopted in all states except Louisiana) provides a number of implied warranties that sellers are deemed to make when they sell "goods," namely the following:

• an implied warranty of clean title, "free from any security interest or other lien or encumbrance of which the buyer at the time of contracting has no knowledge," under § 2-312(1);
• an implied warranty of noninfringement of third-party rights, under § 2-312(3) —
  • but only if the seller is "a merchant regularly dealing in goods of the kind";
  • and with an exception if the buyer furnishes specifications and the infringement;
• an implied warranty of merchantability, under § 2-314, with a definition that could be paraphrased as, in essence, goods that a reputable merchant would be willing to offer to the public under the contract description; and
• an implied warranty of fitness for the buyer's particular purpose, under § 2-315, but only if "the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller's skill or judgment to select or furnish suitable goods …."; whether this prerequisite was met, of course, could be a disputed fact issue, resulting in expensive litigation.

UCC implied warranties can be disclaimed, as discussed in § 13.4.4.

This is discussed in the commentary to [NONE] (performance standards for services).

In the (U.S.) Uniform Commercial Code, section 2-316 (governing sales of goods) specifically allows sellers to disclaim warranties that are not expressly stated in the contract, with some limits:

(2) Subject to subsection (3), to exclude or modify the implied warranty of merchantability or any part of it the language must mention merchantability

and in case of a writing must be conspicuous,

and to exclude or modify any implied warranty of fitness the exclusion must be by a writing and conspicuous.

Language to exclude all implied warranties of fitness is sufficient if it states, for example, that "There are no warranties which extend beyond the description on the face hereof."

(3) Notwithstanding subsection (2)

(a) unless the circumstances indicate otherwise, all implied warranties are excluded by expressions like "as is", "with all faults" or other language which in common understanding calls the buyer's attention to the exclusion of warranties and makes plain that there is no implied warranty; and

(b) when the buyer before entering into the contract has examined the goods or the sample or model as fully as he desired or has refused to examine the goods there is no implied warranty with regard to defects which an examination ought in the circumstances to have revealed to him; and

(c) an implied warranty can also be excluded or modified by course of dealing or course of performance or usage of trade.

(Emphasis and extra paragraphing added.)

Caution: A special case is the warranty of title: UCC § 2-312, which requires that any disclaimer of the automatic warranty of title must be expressly stated. From a business perspective this makes sense, of course; as an example, even if Alice were to sell Bob a car "as is," Bob should still be entitled to assume that Alice isn't trying to sell him stolen property.

A vendor doing a sales transaction under UK law (England, Wales, Northern Ireland) will want to be sure to disclaim not only implied warranties but also implied conditions and implied terms of quality. An oil seller failed to do so and learned that its disclaimer of implied warranties didn't shield it from liability. See KG Bominflot Bunkergesellschaft Für Mineralöle mbh & Co KG v. Petroplus Marketing AG, [2009] EWHC 1088, ¶ 49 (Comm).

Suppose that in a contract for the sale of goods in the U.S., the seller only represents that Fact X is true, without using the word warranty: That representation can itself be a warranty, because under UCC § 2-313(1):

(a) Any affirmation of fact or promise made by the seller to the buyer

• which relates to the goods
• and becomes part of the basis of the bargain

creates an express warranty that the goods shall conform to the affirmation or promise.

(b) Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description.

(c) Any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model.

(Emphasis and extra paragraphing added.)

Of course, it might be hotly disputed whether "the basis of the bargain" included a particular affirmation of fact, description of the goods, or sample or model.

Because the representation is (putatively) an express warranty, it likely can't be "disclaimed" as such (but see the next section about waiver of reliance on representations).

Contract drafters shouldn't use the term represents to indicate that a party will take or abstain from action — commitments to future action should instead be written as promises (covenants).

Why? Consider the “Before” example above: If Alice failed to pay Bob, she might try to claim that she should not be liable for nonpayment because when she made the representation, she had no reason to believe that she would not make the payment. A court might treat such a “representation” as a simple promise, but the drafter would do all concerned a disservice by not making the obligation explicit and unconditional. See Lyon Fin. Serv., Inc. v. Illinois Paper & Copier Co., 848 N.W.2d 539 (Minn. 2014) (on certification from 7th Circuit) (holding that "a claim for breach of a contractual representation of future legal compliance is actionable under Minnesota law without proof of reliance").

[NONE] explicitly states that a party making a representation is also certifying that the party has a reasonable basis for the representation. This is to try to forestall parties from recklessly making representations about things of which they know not.

This could end up being important; for example, in 2019 a natural-gas provider was hit with a judgment for some $9 million for fraudulent inducement and negligent misrepresentation, because (the court found) the provider had recklessly represented to a customer that the provider had certain capabilities, when the provider "did not do any investigation as to whether [it] could satisfy this obligation …." Rainbow Energy Marketing Corp. v. American Midstream (Alabama Intrastate) LLC, No. 17-24591 slip op. ¶ 54 (Harris Cty. Dist. Ct. Jul. 29, 2019) (findings of fact and conclusions of law).

Here's a hypothetical example: Suppose that Alice is selling Bob a used car that she has been keeping in a garage in another city; she wants to represent, but not warrant, that the car is in good working order. She could phrase her representation in one of two basic ways:

• Phrasing 1: Alice says, "I represent that the car is in good working order." Under [NONE], Alice is implicitly making an ancillary representation, namely that she has a reasonable basis for her main representation that the car is in good working order, perhaps because she recently drove it or had it checked out by a mechanic.

• Phrasing 2: "So far as I know, the car is in good working order." By using the phrase so far as I know, Alice should be held to have implicitly disclaimed any such ancillary representation.

(Alice could make the disclaimer of Phrasing 2 even strongly by saying, for example: "So far as I know, the car is in good working order, but it's been sitting in the garage for years and I have no idea what kind of shape it's in.")

Pro tip: Some representations use phrasing such as "to Representing Party's knowledge, X is true" — this is unwise, in the author's view, because it could be argued to mean that Representing Party is implicitly representing that it does indeed have knowledge that X is true. That argument should not prevail, but (to paraphrase a former student) that's a conversation we don't want to have.

Drafters of representations and warranties should be careful to be clear just what is being represented warranted: Is it a present fact, or is it a future fact? The distinction can be important because in many jurisdictions:

• The "clock" for the statute of limitations will not start to tick for a warranty of future performance (for example, a warranty that a car will not have any mechanical problems for X years or Y miles) until the warranty failure is discovered;
• In contrast, for a warranty of present fact — for example, that goods as delivered are free from defects — the clock starts ticking at delivery.

This is illustrated in an Indiana case in which the state's supreme court noted that:

Under the UCC, a party's cause of action accrues (thus triggering the limitations period) upon delivery of goods.

However, if a warranty explicitly guarantees the quality or performance standards of the goods for a specific future time period, the cause of action accrues when the aggrieved party discovers (or should have discovered) the breach. This is known as the future-performance exception.

Kenworth of Indianapolis, Inc., v. Seventy-Seven Ltd., 134 N.E.3d 370, 374 (Ind. 2019).

In that particular case, said the supreme court, a truck manufacturer's warranty for its vehicles was worded in such a way as to constitute a warranty of future performance; the court said that:

Courts and commentators generally agree that, in order to constitute a warranty of future performance under UCC section 725(2), the terms of the warranty must unambiguously indicate that the seller is warranting the future performance of the goods for a specific period of time.

Id. at 378 (cleaned up).

The court also said:

[W]e reject the premise that Sellers' duty to repair and replace defective goods alone constitutes a future-performance warranty under the UCC. The promise must explicitly extend to the goods' performance, not the sellers' performance, for a specific future time period.

Id. at 379 (emphasis added).

Recall that a warranty is in effect an insurance policy against the occurrence of a future event — even if the future event is someone else's fault. In a British Columbia case:

• A supplier sold water pipes to a customer for use in a construction project designed by the customer. The pipes conformed to the customer's specifications — in other words, the supplier delivered what the customer ordered. But flaws in the customer's design led to problems.
• The contract's warranty language stated that the supplier warranted that the pipes were "free from all defects arising at any time from faulty design" (emphasis added).

The trial court ruled in favor of the supplier because the design problem was the customer's fault — but the appeals court reversed, holding that the supplier was liable because of its warranty. See Greater Vancouver Water Dist. v. North American Pipe & Steel Ltd., 2012 BCCA 337 (CanLII).

The appeals court said:

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

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

The warranty and guarantee provisions reflect a distribution of risk.

* * * 

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

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

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

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

Colloquially the terms "warranty" and "guarantee" are alike, but technically there are some differences; see the commentary accompanying [PH].

Let's return to our Alice-and-Bob hypothetical to examine the differences between a representation and a warranty.

Here's a rule of thumb:

• A party that is asked to represent or warrant something (such as a seller) will always want to consider whether to warrant the thing or to represent it; this might well vary depending on the party's actual knowledge and the potential financial exposure if the represented- or warranted thing turns out not to be true.

• In contrast, any party asking for a representation or warranty (such as a buyer) will always want to push for both a representation and a warranty, so as to give that party more flexibility in litigation — see the two sides of the Hill of Proof in § 13.3 — in case the represented- or warranted thing turns out to be false.

This suggests the following strategy for drafting with a future trial in mind:

– If your client is being asked to represent and warrant some fact — say, if your client is a supplier being asked for a commitment about its products or services — then consider whether the client should only represent the fact, or whether the client should only warrant the fact. As a matter of negotiation strategy the client might eventualy end up agreeing to do both, but as a drafter it’s worth giving some thought to the question.

– On the other hand, if your client is asking someone else to represent and warrant a fact — say, if you're a customer asking for a commitment from a supplier — then you’ll want to ask for the contract language to include both a representation and a warranty. Your client might not have the bargaining power to insist on getting both, but if it does, then having both will give the client more flexibility if litigation should ever come to pass.

Why would a customer ask for both a representation and a warranty? Because "they lied!" is a stinging charge — and when a big contract fails, trial counsel will pretty much always try hard to find opportunities to accuse the other side of having misrepresented facts. Doing so can work, sometimes spectacularly well: Jurors and even judges might not understand the nuances of the dispute, but they will definitely undertand the accusation that "they lied!"

Bryan Garner points this out in his famed dictionary of legal usage:

representations and warranties. … Some have asked this: if the warranty gives so much more protection than a representation, why not simply use warranty alone—without representation? It’s a fair point, perhaps, but here’s the reason for sticking to both: some parties to a contract don’t want merely a guarantee that so-and-so will be so in the future; they also want an eye-to-eye statement (representation) that the thing is so now. If it later turns out not to have been so when the representation was made, the the party claiming breach can complain of a lie. …

If only a warranty were in place, the breaching party could simply say, “I’ll make good on your losses—as I always said I would—but I never told you that such-and such was the case.” Hence representations and warranties. Bryan A. Garner, Representations and warranties, Garner’s Dictionary of Legal Usage (3d ed. 2011) (emphasis edited, extra paragraphing added), quoted in Ken Adams, Revisiting “Represents and Warrants”: Bryan Garner’s View (AdamsDrafting.com 2011).

Example: Oregon v. Oracle. We see the above in the civil suit filed by the state of Oregon against Oracle, in which the second paragraph of the complaint said, in its entirety (with extra paragraphing added for readability):

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

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

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

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

The state named various Oracle managers and executives, personally, as co-defendants in a multi-million lawsuit over a failed software development project, with the state suing one Oracle technical manager for $45 million (!). Here's a wild speculation, based on zero evidence: It seems possible that the state sued the individuals personally to try to motivate them to cooperate with the state, akin to when criminal prosecutors bring indictments against all kinds of people to encourage them to cooperate in return for dismissal or a lighter sentence.

The lawsuit was later settled — Oracle agreed to pay Oregon $25 million in cash and provide the state with another $75 million in technology.

Example: British Sky Broadcasting v. EDS. British Sky Broadcasting ("Sky") contracted with EDS to develop a customer relationship management (CRM) software system. The project didn't go as planned, and Sky eventually filed suit. See BSkyB Ltd. v. HP Enterprise Services UK Ltd., [2010] EWHC 86 (TCC).

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

Arguably one of the most interesting aspect of the judge's opinion is its detailed exposition of the facts, which illustrate how even just one vendor representative can make a deal go terribly wrong for his employer.

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

If you're being asked — or asking another party — to make representations and warranties, you might want to investigate whether insurance coverage is available for those reps and warranties. (It appears that such insurance might be available primarily for merger- and acquisition ("M&A") deals.) See generally, e.g.: • Joseph Verdesca, Paul Ferrillo, and Gabriel Gershowitz, Representations and Warranties Insurance: What Every Buyer and Seller Needs to Know (Weil.com 2016), archived at https://perma.cc/RSU3-66V3; • Eric Jesse, Reps & Warranties Insurance: Five Myths Dispelled (JDSupra.com 2020), archived at https://perma.cc/9FWX-3HSH.%3C/cite%3E

FACTS: Your elderly, childless Uncle Ed is selling his car to a stranger. He says he doesn't know of any mechanical problems.

QUESTION: If the stranger asks Uncle Ed to represent and warrant in writing that the car has no problems, how might he respond as to —

• the requested representation?
• the requested warranty?

See Section 13.9 for a brief overview of how asset purchases typically work.

FACTS: Your elderly, childless Uncle Ed now wants to buy a car, namely a 1962 Ferrari 250 GTO, for which he'll pay $50 million. The same car sold for $48.4 million [note how this number is written] at a 2018 Sotheby's auction (link).

EXERCISE: As Uncle Ed's attorney, make a simple list — don't worry about legalese — of the following:

• the representations and/or warranties that you might want — think about things such as:
  • who actually owns the car;
  • whether anyone else has any claims to the car, whether of partial- or outright ownership or of security interests (liens) in the car;
  • what kind of shape the car is in;
  • has the car been in any accidents;
• what if any "due diligence" you might want the seller to allow Uncle Ed to conduct after the contract is signed but before the closing;
• what obligations Uncle Ed would want the seller to comply with between signing and closing — not just "thou shalt" obligations but also "thou shalt not" obligations as well;
• how the closing will work mechanically, such as:
  • how will money hands;
  • how will Uncle Ed get the keys;
  • how will Uncle Ed get any additional deliverables that he needs to establish or confirm his ownership;
  • what must be done at the closing to satisfy Uncle Ed that "we're done here" (the deal is complete, there's nothing left to do).

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 do what's called "anchoring" the other side's expectations, thus increasing the odds that you'll eventually get more of what you want; and
• you create a batch of potential concessions that you don't really care about (sometimes known as "the sleeves from my vest") that you can use for horse-trading.

Certainly there are transactions in which it makes at least some sense to do this.

CAUTION: Some people like to play "the art of the deal"; for those folks, it feels just plain good to come out "on top" when negotiating the legal fine points. But don't underestimate the immediate price you'll pay for these putative benefits:

• You'll spend more business-staff time.
• You'll spend more in legal expenses.
• 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 ideally the parties could "just sign it" and get on with their business.

Moreover, hardball contract drafts send the wrong message: Everyone wants reliable business associates, but how does someone know the other side is friendly and trustworthy? On that score, offering a fair and balanced contract can help.

Even if your client has a lot of bargaining power, you might well be better off not trying to use it to overreach against the other party. Research indicates that hardball negotiation often lead to worse overall outcomes:

If people start with a high anchor and concede slowly, use aggressive tactics, express some anger, they end up achieving favorable negotiated deal terms.

But what we’re finding — and this is our central thesis — is that sometimes by being more assertive, by being more aggressive, you might end up with a better negotiated outcome …

but ultimately, through that process, create conflict that causes you to end up with worse value overall.

The above quote is from the transcript (wharton.upenn.edu) of an interview with Wharton professor Maurice Schweitzer and postdoctoral researcher Einav Hart (emphasis, extra paragraphing, and bullets added. See also Einav Hart and Maurice E. Schweitzer, Getting Less: When Negotiating Harms Post-Agreement Performance (2017), available at SSRN: https://ssrn.com/abstract=3039256. For some other perspectives on this article, see the Hacker News discussion, at https://news.ycombinator.com/item?id=22209072.)

For example, suppose that you represent a customer company that has a lot of bargaining power. And suppose that your client wants to use that power to force a vendor to make some tough concessions in a contract negotiation. • Your client's negotiators might well regard those concessions as an entitlement: We're the customer, we're the big dog; of course we get what we want. • But the customer's negotiators should also 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 the vendor — most business people know that being associated with a train wreck is seldom good for anyone's professional reputation.)

In this situation, the vendor's people are not likely to be motivated to go out of their way for that customer. They might well be tempted to "work to rule," to use an expression from the labor-relations world — to do just what the contract requires, and no more. That does neither party any favors.

And the reverse can be true when the shoe's on the other foot. Suppose that 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.

Example: In a Sixth Circuit case, a software customer did a corporate reorganization by, in relevant part, a series of mergers. As a result of the mergers, the named licensee technically became part of a different corporation that was owned by the same parent company; nothing else had change. The software vendor demanded that the customer re-buy the license; when the customer refused, the vendor took the customer to court — and won. After treating its customer that way, what are the odds that the software vendor would ever be able to sell anything again to that customer — let alone convince the customer to be a reference for the vendor's future sales efforts? Talk about pennywise and pound-foolish …. See Cincom Sys., Inc. v. Novelis Corp., 581 F.3d 431 (6th Cir. 2009) (affirming summary judgment in favor of software vendor).

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.

If an incorporation by reference of external terms is not clear and unmistakable, a court might hold that the external terms are not part of the contract. For example: The Oklahoma supreme court ruled that a form contract for the sale of hardwood flooring, which referenced "Terms of Sale" but gave no indication where to find them, did not incorporate the external terms. The court held that: "a contract must make clear reference to the extrinsic document to be incorporated, describe it in such terms that its identity and location may be ascertained beyond doubt, and the parties to the agreement had knowledge of and assented to the incorporated provisions. … BuildDirect's attempt at incorporation was nothing more than a vague allusion." Walker v. BuildDirect.com Technologies, Inc., 2015 OK 30, 349 P.3d 549, 551, 554 (2015) (on certification from 10th Circuit).

Pro tip: At the very least, provide a Web link — preferably a short, memorable one — where the additional incorporated terms can be found.

A Nebraska case reinforces the lesson that incorporation-by-reference language must be clear: An architectural-services contract stated that "[t]he Architect’s Response to the District’s Request for Proposal is attached to this Agreement for general reference purposes including overviews of projects and services." But the architect firm's response to the RFP wasn't attached to the contract — for that matter, the title wasn't even as stated in the contract provision.

Agreeing with the trial court, the state's supreme court held that "[t]he expression 'for general reference purposes,' interesting though it may be, contrasts with a provision, common in contract law, which incorporates another document by reference. … [The contract language] simply does not incorporate [the architect firm's] responses into the contract." Facilities Cost Mgmt. Group v. Otoe Cty. Sch. Dist., 291 Neb. 642, 653-54, 868 N.W.2d 67, 71, 75 (2015) (affirming partial summary judgment but reversing and remanding on other issue); after retrial, 298 Neb. 777, 906 N.W.2d 1 (2018).

Caution: It's not hard to see how another court might have held that the contract did incorporate the architecture firm's guaranteed-maximum-price response. Still, the contract's drafters, who presumably worked for the school district, might have been more clear about their client's intent.

In a 2014 case, the Fifth Circuit held that a supplier's price quotation sufficiently incorporated by reference a standard-terms-and-conditions document published by the European Engineering Industries Association (the "ORGALIME"), which contained an arbitration provision. The supplier's price quotation didn't expressly incorporate the ORGALIME by reference; instead it stated, "Terms and conditions are based on the general conditions stated in the enclosed ORGALIME S2000." (Emphasis added.)

The Fifth Circuit reviewed Texas law on the point, summarizing that "when the reference to the other document is clear and the circumstances indicate that the intent of the parties was incorporation, courts have held that a document may be incorporated, even in the absence of specific language of incorporation." The appeals court concluded that "the district court erred in holding there was no agreement to arbitrate." Al Rushaid v. National Oilwell Varco, Inc., 757 F.3d 416, 420-21 (5th Cir. 2014) (reversing denial of motion to compel arbitration) (cleaned up, citations omitted, emphasis added).

In a California case, a prime contractor issued a purchase order to a subcontractor. The purchase order mentioned, but did not expressly incorporate by reference, a sales quotation that the subcontractor had previously sent to the prime contractor. Further down in the purchase order, though, the P.O. language referred to "the contract documents described above or otherwise incorporated herein …." (Emphasis added.)

Applying the contra proferentem rule of contract interpretation (without using that Latin phrase) — and therefore construing the quoted term against the prime contractor — the court held that the "described above or otherwise incorporated" term had the effect of incorporating the subcontractor's sales quotation by reference into the purchase order. See Watson Bowman Acme Corp. v. RGW Construction, Inc., No. F070067, slip op. at 18, 21-22 (Cal. App. Aug. 9, 2016) (affirming, in pertinent part, judgment on jury verdict awarding damages to subcontractor). Oddly, that portion of the court's opinion was not certified for publication; the published version, which omits the discussion summarized above, is at 2 Cal. App. 5th 279, 206 Cal. Rptr. 3d 281, 283 n.* (2016) .

Drafters should pay attention to just what portion or portions of another document are being incorporated by reference. That issue made a difference in a Second Circuit case, where:

… Addendum 5 [to the contract in question] refers only to a single specific provision in [another agreement] – the non-compete clause. Where, as here, the parties to an agreement choose to cite in the operative contract only a specific portion of another agreement, we apply the well-established rule that a reference by the contracting parties to an extraneous writing for a particular purpose makes it part of their agreement only for the purpose specified.

VRG Linhas Aereas S/A v. MatlinPatterson Global Opportunities Partners II L.P., No. 14-3906-cv (2d. Cir. July 1, 2015) (nonprecedential summary order affirming denial of petition to confirm arbitration award) (cleaned up).

In one Eighth Circuit case, a buyer's purchase-order form referred to an external document with additional terms and conditions, and said the document would be provided on request. In a subsequent lawsuit, however, the seller denied having ever received the additional document. That led to (what had to have been) an expensive court fight over whether an arbitration provision and an indemnification provision were part of the contract. The case presents a nice illustration of the Battle of the Forms; the Eighth Circuit ruled that the district court should have conducted a bench trial (there having been no jury demand) to make findings of fact about just who had received what contract documents, and therefore just what terms were or were not part of the parties' contract under UCC § 2-207. See Nebraska Machinery Co. v. Cargotec Solutions, LLC, 762 F.3d 737 (8th Cir. 2014).

Lesson: It's understandable that the buyer didn't want the hassle and expense of having to provide a hard copy of its additional terms and conditions form with every purchase order. Merely offering to provide a copy of the form, though, might well have been insufficient to bind the seller to its terms. The buyer could have put itself in a stronger position in court if it had posted the form on its Web site and then included a link to the form in its printed purchase order.

In a Kentucky case, a for-profit school used a one-page contract. The basic terms and signature blocks were on the front of the page; additional terms and conditions — including an arbitration provision — were on the back of the page, as part of what the state supreme court described as "a sea of plain-type provisions dealing with tuition refunds, curriculum changes, … and arbitration." (Emphasis in original.) Citing a state statute requiring signatures to be at the end of an agreement, the supreme court said that the arbitration clause was not part of the school's agreement. Dixon v. Daymar Colleges Group, LLC, 483 S.W.3d 332, 345-46 (Ky. 2015) (affirming denial of motion to compel arbitration).

The Seventh Circuit rejected an argument that incorporation by reference negated a contract's entire-agreement clause. See Druckzentrum Harry Jung GmbH & Co. v. Motorola Mobility LLC, 774 F.3d 410, 416 (7th Cir. 2014) (affirming take-nothing summary judgment in favor of Motorola on Druckzentrum's claims for breach of contract and fraud).

Is the right to charge interest even worth seeking? If you expect to get paid, it's understandable that you might want to include an interest-charges clause in your draft contract.

But whether you'll actually charge and try to collect interest is a real question. For example:

• If you're a supplier that gets repeat business from a customer, you might hesitate to to charge interest on late payments because you don't want to annoy the customer and jeopardize the repeat business.
• Some large customers have been known to announce, imperiously: We don't pay interest, period, and if you want our business, that's the way it is.
• But on the other hand, some customers can be notoriously slow payers, insisting on as high as 120-day terms from their suppliers.

In the end, it's a business decision whether, on balance, a contract should include an interest-charges provision.

Drafters might want to consider the following::

1. What interest rate may be charged? In many contracts, the rate is 1.5% per month on past-due amounts, but be sure to check local usury law.
2. When will interest begin to accrue — immediately upon an amount becoming past due, or does local law require a grace period?
3. Will the interest rate be compounded? If so, will the compounding be quarterly? monthly? daily?

Even invoicing for unlawfully-excessive interest, or charging interest too early, can trigger civil- and even criminal usury penalties. And in some jurisdictions, if you charge interest that violates applicable law, you could end up forfeiting your claim to the entire amount owed to you, not just to that portion of the interest that exceeds the maximum amount. See generally Ross Spence, Usury and How to Avoid It: Impact of New Legislation on Collection Practices at part VI-B, pp.24-25, (SnowSpenceLaw.com; undated), which includes extensive citations to Texas case law.

But in some jurisdictions — not all — the law allows parties to reduce the chances of usury problems by agreeing in advance to take certain actions in case of unlawful interest charges. Tango Clause 22.160 - Usury Savings seeks to do so.

One could even think of a liquidated damages clause as a partial settlement, as in cases in which damages are stipulated and trial confined to liability issues. And of course settlements are favored. —Judge Richard Posner, in XCO Int'l, Inc. v. Pacific Scientific Co., 369 F.3d 998, 1001 (7th Cir. 2004).

Relying on freedom-of-contract principles, courts in the U.S. will enforce a liquidated-damages clause if the clause genuinely represents a reasonable estimate of agreement — but not if the clause is actually a penalty (in contract law, penalties are unenforceable), disguised as an agreement to settle uncertain damages claims. See, e.g., American Consulting, Inc. v. Hannum Wagle & Cline Engineering, Inc., 136 N.E.3d 208 (Ind. 2019) (affirming, in pertinent part, summary judgment that liquidated-damages clause was unenforceable; remanding for trial of claim for actual damages).

(In theory, a liquidated-damages clause spares the parties from having to engage in expensive battles of expert witnesses about the amount of damages owed. In practice, however, parties in a contract dispute will often litigate whether a liquidated-damages clause is enforceable; that battle might eat up any savings from not having to try a damages case.)

The Supreme Court of Ohio court explained the difference between liquidated damages and penalties:

[A penalty is] a sum inserted in a contract, not as the measure of compensation for its breach, but rather as a punishment for default, or by way of security for actual damages which may be sustained by reason of nonperformance, and it involves the idea of punishment.

A penalty is an agreement to pay a stipulated sum on breach of contract, irrespective of the damage sustained. Its essence is a payment of money stipulated as in terrorem of the offending party,

• while the essence of liquidated damages is a genuine covenanted pre-estimate of damages.

The amount is fixed and is not subject to change;

• however, if the stipulated sum is deemed to be a penalty, it is not enforceable
• and the nondefaulting party is left to the recovery of such actual damages as he can prove.

Boone Coleman Constr., Inc. v. Village of Piketon, 2016 Ohio 628 (Ohio), ¶ 17 (reversing holding that liquidated-damages clause in a public road construction contract was an unenforceable penalty; edited), on remand, 2016 Ohio 1557 (Ohio App.).

Some liquidated-damages provisions say that the breaching party will pay, as liquidated damages and not as a penalty, a stated (or computable) amount. Many courts tend to ignore such self-serving exculpatory language. See, e.g., Purcell v. Schweitzer, 224 Cal. App. 4th 969, 974 169 Cal. Rptr. 3d 90 (2014).

The New York Court of Appeals (that state's highest court) affirmed the unenforceability of a liquidated-damages provision:

Under our well-established rules of contract, the Surrender Agreement’s liquidated damages provision does not fairly compensate plaintiff for defendant’s delayed installment payments. The provision calls for a sum more than sevenfold the amount due if defendant had complied fully with the Surrender Agreement. We cannot enforce such an obviously and grossly disproportionate award without offending our State’s public policy against the imposition of penalties or forfeitures for which there is no statutory authority.

Trustees of Columbia Univ. v. D'Agostino Supermarkets, Inc., 2020 NY Slip Op 06937 (N.Y. Nov. 24, 2020) (cleaned up, emphasis added).

As an example of what not to do, in an Indiana case, the state supreme court affirmed striking down the liquidated-damages clauses in question for breach of an employment agreement's post-employment covenant in which the employee agreed not to solicit the employer's customers or recruit the employer's employees; the court summarized those clauses:

He agreed that if he breached this agreement and such a breach resulted in termination, withdrawal or reduction of a client's business with ASI, he would pay liquidated damages in an amount equal to 45% of all fees and other amounts that ASI billed to the customer during the twelve months prior to the breach.

The contract further precluded Knowles from causing an employee to end their employment with ASI, and if he breached this provision, he agreed to pay liquidated damages equal to 50% of the employee's pay from ASI during the twelve months prior to the breach.

Day and Lancet, who were both resident project representatives at ASI, also executed agreements that precluded them from hiring or employing ASI employees. They agreed that if they breached their agreements, they would pay liquidated damages in an amount equal to 100% of that employee's pay from ASI during the twelve months prior to breach.

See, American Consulting, Inc. v. Hannum Wagle & Cline Eng'g, Inc., 136 N.E.3d 208, 209-10 (Ind. 2019) (affirming, in pertinent part, summary judgment that liquidated-damages clause was unenforceable; remanding for trial of claim for actual damages) (quotation altered). The court did not see much correlation between the liquidated damages and the actual damages that the non-breaching party was likely to have suffered; see id. at 212.

Continuing the theme explored above: It can be dangerous to set a liquidated-damages amount that — in hindsight — ends up being ridiculously disproportionate to the "real" damages. In 2014 the Supreme Court of Texas held that:

• actual damages must be difficult to estimate, and the agreed liquidated damages must be a reasonable forecast of the actual damage; but also:
• if in practice the actual damages and the agreed liquidated damages end up being too far apart, then the liquidated-damages provision will be struck down as a penalty.

In that case, the supreme court noted that the highest actual damages supported by the evidence was $6 million, but the liquidated-damages amount assessed by the court below was $29 million. The court said that this was an unacceptable disparity: "When the liquidated damages provisions operate with no rational relationship to actual damages, thus rendering the provisions unreasonable in light of actual damages, they are unenforceable." FPL Energy, LLC, v. TXU Portfolio Management Company, L.P., 426 S.W.3d 59,69-70, 72 (Tex. 2014) (reversing court of appeals and holding that liquidated-damages provision was unenforceable) (emphasis added, citations omitted).

To like effect, the Seventh Circuit rejected a claim for liquidated damages for breach of a confidentiality provision in a settlement agreement. • The liquidated-damages provision required a payment of $10,000 for each unauthorized disclosure of the terms of the settlement agreement. • The party accused of breaching the confidentiality provision had included detailed information about the settlement in a franchise disclosure document that was distributed to about 2,000 people, not all of whom were required by law to be given a copy. • The plaintiff sued for liquidated damages of 2,000 times $10,000, or $20 million.

Applying Texas law, the trial court held that this was unreasonable, because the plaintiff had not proven that she had suffered any harm at all, let alone $20 million worth. The Seventh Circuit affirmed; Judge Posner said that, "when there is an unbridgeable discrepancy between liquidated damages provisions as written and the unfortunate reality in application, we cannot enforce such provisions." Caudill v. Keller Williams Realty, Inc., 828 F.3d 575, 577 (7th Cir. 2016) (internal quotation marks and citation omitted), quoting FPL Energy, supra; see also Atrium Medical Center, LP v. Houston Red C LLP, 595 S.W.3d 188, 198 (Tex. 2020) (affirming court of appeals).

Notice the "hill of proof" here:

• The plaintiff first must "get up the hill" (discussed at Section 13.3) by showing what things looked like to the parties at the time the agreement was made;
• If the plaintiff is successful, the defendant can still try to "force the plaintiff off the hill" by showing that as things turned out, there was an "unbridgeable discrepancy."

In contrast to the holdings discussed above, some courts discourage the use of hindsight in assessing liquidated-damages provisions in public-works contract. For example, the Ohio supreme court explained:

{¶ 35} We reaffirm that Ohio law requires a court, when considering a liquidated-damages provision, to examine it in light of what the parties knew at the time the contract was formed.

If the provision was reasonable at the time of formation and it bears a reasonable (not necessarily exact) relation to actual damages, the provision will be enforced.

{¶ 36} This prospective or "front end" analysis of a liquidated-damages provision focuses on the reasonableness of the clause at the time the contract was executed rather than looking at the provision retrospectively, i.e., ascertaining the reasonableness of the damages with the benefit of hindsight after a breach.

The prospective approach properly focuses on whether[:]

(1) the parties evaluated, at the time of contract formation, the probable loss resulting from delay in completing the construction,

(2) the parties clearly intended to use liquidated damages in case of a delay because actual damages would be difficult to ascertain, and

(3) [in per-diem cases,] the parties reached an agreement as to a per diem amount for delays.

[P]rospective analysis resolves disputes efficiently by making it unnecessary to wait until actual damages from a breach are proved and eliminates uncertainty and tends to prevent costly future litigation.

The reasonableness of the forecast or estimate in a liquidated-damages provision is usually determined in view of the facts known at the time of contracting, and not at the time of the breach or delayed completion.

Boone Coleman Constr., Inc. v. Village of Piketon, 2016 Ohio 628 (Ohio), ¶ 35-36 (reversing holding that liquidated-damages clause in a public road construction contract was an unenforceable penalty; quotation altered, extensive citations omitted), on remand, 2016 Ohio 1557 (Ohio App.).

In the same case where he talked about liquidated damages as "a partial settlement," legendary Seventh Circuit judge Richard Posner mused:

Indeed, even if damages wouldn't be difficult to determine after the fact, it is hard to see why the parties shouldn't be allowed to substitute their own ex ante determination for the ex post determination of a court. Damages would be just another contract provision that parties would be permitted to negotiate under the general rubric of freedom of contract.

XCO Int'l, Inc. v. Pacific Scientific Co., 369 F.3d 998, 1001 (7th Cir. 2004) (Posner, J.)

Judge Posner's view was quoted in a dissent by an Indiana supreme court justice, who argued that:

Rather than condemning such [liquidated] damages when judges conclude they are facially problematic, courts should get out of the business of deciding whether the parties' estimate of the harm underlying liquidated damages is reasonable. … This approach to liquidated damages here would have the virtue of honoring the parties' freedom of contract, including their settlement of a disputed issue it has taken our Court more than a year to resolve.

American Consulting, Inc. v. Hannum Wagle & Cline Engineering, Inc., 136 N.E.3d 208, 220 (Ind. 2019) (Slaughter, J., dissenting in part). (quotation altered).

Drafters might want to consider setting up an alternative-performance structure instead of liquidated damages. For example:

•  What amounts to an early-termination fee was upheld in a First Circuit case where the court of appeals affirmed a summary judgment that Alasko, a Canadian food distributor, owed Foodmark, a U.S. marketing firm, a fee for electing not to renew the parties' "evergreen" agreement. See Foodmark, Inc. v. Alasko Foods, Inc., 768 F.3d 42 (1st Cir. 2014).

•  A California appeals court reversed and remanded a summary adjudication that certain payment provisions in a contract were an unenforceable penalty; the court held that "the trial court erred because More-Gas's motion for summary adjudication failed to eliminate the possibility that the contractual provisions in question were instead valid provisions for alternative performance." See McGuire v. More-Gas Investments, LLC, 220 Cal. App. 4th 512, 163 Cal. Rptr. 3d 225.

•  Washington state's supreme court ruled that an early termination fee in a cell-phone service agreement was "an alternative performance provision and not a liquidated damages clause." Minnick v. Clearwire US LLC, 275 P.3d 1127, 1129 (Wash. 2012).

•  But a California court ruled that Sprint that "Plaintiffs introduced contemporaneous Sprint internal documents referring to the ETF as a '$150 contract penalty fee,' and as a 'Penalty or Contract Cancellation Fee.'" See Cellphone Fee Termination Cases, 193 Cal. App.4th 298, 306, 122 Cal. Rptr.3d 726 (2011).

For language setting forth liquidated damages calculated per day of delay, see Federal Acquisition Regulations § 52.211.11.

Liquidated damages based on revenue, not profit, might be enforceable; see the Eighth Circuit's discussion in RSA 1 L.P. v. Paramount Software Assoc., Inc., 793 F.3d 903 (8th Cir. 2015) (affirming summary judgment awarding liquidated damages; applying Texas law).

People sometimes get all worked up about the fact that a patent describes X or Y or Z that can be found in prior art.

What matters for infringement purposes, however, is not so much what the patent describes, as what it claims. The exact wording of the patent claims will be crucial.

You can also think of each individual claim in a patent as being a separate infringement checklist: At trial, the patent owner’s lawyers and expert witness(es) will methodically talk the jury through that claim (and probably others as well), putting on evidence to show that every claim element is present in what the defendant is doing.

Here are a couple of canonical hypothetical examples (simplified — they do not address the doctrine of equivalents):

Claim 1: A seating structure comprising:

• (a) a substantially-horizontal seating platform, and
• (b) at least three legs extending generally downward from the seating platform.

Claim 5: A chair comprising:

• (a) a substantially-horizontal seating platform; and
• (b) four legs extending generally downward from the seating platform.

In these examples:

• A three-legged stool with a back support would infringe our hypothetical claim 1 above, because all of the checklist elements in that claim are present in the three-legged stool. Importantly, the additional presence of the of the stool's back support is irrelevant.
• In contrast, a three-legged stool would not infringe hypothetical claim 5 above, because that claim requires an infringing chair to have four legs.

Very often, patent owners and accused infringers engage in expensive legal battles over "claim construction," that is, the proper interpretation of different words and phrases in a patent claim. In the examples above, such a battle might break out over whether the term "seating platform" encompasses a camp chair with a soft, foldable cloth seat.

As a general rule, a given word or phrase in a claim will be interpreted in light of considerations such as the following:

• the ordinary meaning of the term in the relevant art(s);
• any special meaning stated by the inventor in the patent’s written description — the inventor is free to be his- or her own lexicographer;
• how the term was used in the back-and-forth correspondence between the inventor and the patent examiner, referred to as the ‘prosecution history’ of the patent application;
• whether a particular meaning is required — other things being equal, a narrower interpretation that will preserve the patentability of the claim will be preferred over a broader interpretation that would result in the claim being invalidated by prior art. (If this issue comes up during the prosecution of the patent application, the patent examiner is supposed to require the applicant to amend the claim to eliminate the ambiguity.)

As long as the patent owner proves that at least one claim is infringed, and the defendant doesn’t prove that the infringed claim(s) are invalid, then the defendant is liable for infringement.

Suppose hypothetically that the example claims above were actually in an unexpired patent, and that they were not proved to be invalid.

In that case, anyone who made, used, sold, offered for sale, or imported a three-legged stool would be liable for infringement, even though the stool infringed only claim 5 and not claim 1.

Here's an analogy: Imagine that the claims of a patent are like arrows in a quiver, and that a hostile archer (a patent owner) were to shoot several arrows in your direction:

• Some arrows might clearly be going to miss you; those are analogous to patent claims that you clearly don't infringe. (This assumes a judge and/or jury agrees that these arrows have missed you, which isn't always a given.)
• But suppose that some of the arrows in flight appear on their way to hitting you somewhere on your body. It's up to you to try to knock down all of those arrows before they hit you.

This section states that Supplier hasn't necessarily made any particular investigation into possible infringement claims of the type covered. Supplier might want to consider commissioning a "freedom to operate" investigation and opinion of counsel to provide both Supplier and Beneficiary with at least some comfort.

Such investigations can be costly, but if there's a lot at stake, that cost might be worthwhile. See generally: • Linda J. Thayer, When Is a "Freedom to Operate" Opinion Cost-Effective?, Today's General Counsel (2013), archived at https://perma.cc/R7BB-9VVT (the author is a partner in the Finnegan Henderson firm, perhaps the leading intellectual-property law firm in the United States); • World Intellectual Property Organization, IP and Business: Launching a New Product: freedom to operate (wipo.int 2005).

Again, the FTC:

Reasonable price, territory, and customer restrictions on dealers are legal. Manufacturer-imposed requirements can benefit consumers by increasing competition among different brands (interbrand competition) even while reducing competition among dealers in the same brand (intrabrand competition).

• For instance, an agreement between a manufacturer and dealer to set maximum (or "ceiling") prices prevents dealers from charging a non-competitive price.
• Or an agreement to set minimum (or "floor") prices or to limit territories may encourage dealers to provide a level of service that the manufacturer wants to offer to consumers when they buy the product.

These benefits must be weighed against any reduction in competition from the restrictions.

Until recently, courts treated minimum resale price policies differently from those setting maximum resale prices. But in 2007, the Supreme Court determined that all manufacturer-imposed vertical price programs should be evaluated using a rule of reason approach.

According to the Court, "Absent vertical price restraints, the retail services that enhance interbrand competition might be underprovided. This is because discounting retailers can free ride on retailers who furnish services and then capture some of the increased demand those services generate."

Note that this change is in federal standards; some state antitrust laws and international authorities view minimum price rules as illegal, per se.

United States Federal Trade Commission, Manufacturer-imposed Requirements (accessed June 21, 2020) (extra paragraphing and bullets added). See generally Meytal McCoy, DOJ Test Drives New Vertical Merger Guidelines In Closure Of LSEG/Refinitiv Deal (MayerBrown.com 2020).

In the United States, "horizontal" price-fixing among competitors is per se illegal under section 1 of the Sherman Act and can call down the wrath of government prosecutors and plaintiffs' lawyers.

Corporate executives have gone to prison for price-fixing. EXAMPLE: The former chief executive officer of Bumble Bee Foods was sentenced to more than four years in prison and a $100,000 criminal fine for his leadership role in a three-year antitrust conspiracy to fix prices of canned tuna; the company pleaded guilty and was sentenced to a $25 million fine — and co-conspirator StarKist was sentenced to the statutory maximum $100 million fine. See Press Release, United States Department of Justice, Former Bumble Bee CEO Sentenced To Prison For Fixing Prices Of Canned Tuna (June 16, 2020).

According to the New York Times, the tuna price-fixing scheme came to light when a food wholesaler in New York noticed that prices for canned tuna were staying the same even though the price of raw tuna were dropping; this led to lawsuits by the wholesaler and by grocers such as Walmart, Target, and Kroger. See Sandra E. Garcia, Former Bumble Bee C.E.O. Is Sentenced in Tuna Price-Fixing Scheme, New York Times, June 16, 2020.

Another example:

What kinds of inter-company dealings can be deemed "price fixing"? The U.S. Federal Trade Commission explains:

Price fixing is an agreement (written, verbal, or inferred from conduct) among competitors that raises, lowers, or stabilizes prices or competitive terms.

Generally, the antitrust laws require that each company establish prices and other terms on its own, without agreeing with a competitor. When consumers make choices about what products and services to buy, they expect that the price has been determined freely on the basis of supply and demand, not by an agreement among competitors.

When competitors agree to restrict competition, the result is often higher prices. Accordingly, price fixing is a major concern of government antitrust enforcement.

A plain agreement among competitors to fix prices is almost always illegal, whether prices are fixed at a minimum, maximum, or within some range.

Illegal price fixing occurs whenever two or more competitors agree to take actions that have the effect of raising, lowering or stabilizing the price of any product or service without any legitimate justification.

Price-fixing schemes are often worked out in secret and can be hard to uncover, but an agreement can be discovered from "circumstantial" evidence.

• For example, if direct competitors have a pattern of unexplained identical contract terms or price behavior together with other factors (such as the lack of legitimate business explanation), unlawful price fixing may be the reason.
• Invitations to coordinate prices also can raise concerns, as when one competitor announces publicly that it is willing to end a price war if its rival is willing to do the same, and the terms are so specific that competitors may view this as an offer to set prices jointly.

Not all price similarities, or price changes that occur at the same time, are the result of price fixing. On the contrary, they often result from normal market conditions.

• For example, prices of commodities such as wheat are often identical because the products are virtually identical, and the prices that farmers charge all rise and fall together without any agreement among them.
• If a drought causes the supply of wheat to decline, the price to all affected farmers will increase.
• An increase in consumer demand can also cause uniformly high prices for a product in limited supply.

Price fixing relates not only to prices, but also to other terms that affect prices to consumers, such as shipping fees, warranties, discount programs, or financing rates. …

United States Federal Trade Commission, Price Fixing (accessed June 21, 2020) (emphasis, extra paragraphing, and bullets added).

See https://www.adamsdrafting.com/sole-and-exclusive/

Accountants apparently distinguish between cost and expense:

A cost might be an expense or it might be an asset. An expense is a cost that has expired or was necessary in order to earn revenues. We hope the following three examples will illustrate the difference between a cost and an expense. …

What is the difference between cost and expense?, AccountingCoach.com

And:

An expense is a cost that occurs as part of a company's operating activities during a specified accounting period. A retailer will likely incur the following expenses: the cost of goods sold, commissions earned by the sales staff, rent for the retail space, the cost of the electricity used, advertising that took place, wages and salaries that were incurred, etc.

What is an expense?, AccountingCoach.com

Let's illustrate the subcontractor concept with a simple example. Suppose that a would-be homeowner buys an old house (a "tear-down") in a desirable neighborhood and wants to put up a new house on the site. After obtaining architectural plans:

• The owner will typically hire a prime contractor, which is commonly referred to as the general contractor, or "GC," to actually get the house built.
• The general contractor will in turn engage various other companies such as: • a demo company to demolish the old house and clear the site; • a foundation company to pour a new foundation; • a framing company to erect the frame of the house; • a roofing company; etc.
• Each of these other companies is referred to as a subcontractor or "sub"; the subs will normally deal only with the general contractor and not with the owner.

That will depend on the parties and the situation. Sometimes one party might want —

• to prohibit the other party from using subcontractors at all, or
• to require the other party:
  • to obtain the first party's prior written consent to any use of subcontractors, or
  • to get the first party's approval of the specific subcontractor(s) to be used, or
  • to notify the first party before using subcontractors, or
  • to impose specific obligations (e.g., confidentiality obligations) on any subcontractor(s), e.g., in the form of specific terms in a written subcontract;
  • to provide the first party with a copy of each written subcontract (possibly redacted to black out confidential information).

Wage theft, where companies fail to pay their low-wage employees what they're owed, is by no means unheard of. "A study by the University of Texas and Workers Defense Project, an advocacy group, found that 1 in 5 construction workers are the victims of wage theft, the practice of denying workers pay or benefits rightfully owed them." Rebecca Carballo, Construction workers claim wage theft at Sheldon ISD project, Houston Chronicle, Jan. 10, 2021, at B1, col. 1. ("ISD" stands for Independent School District, which is how public schools are organized in Texas.)

A partner in a prominent employment-law firm observes:

Recently, states have started creating statutory liability for general contractors for certain actions and inactions of their subcontractors. Virginia is an example. The state passed a series of employment laws this summer that includes statutes on nonpayment of wages, worker misclassification, and wage theft that contain new penalties, damages, and causes of action. * * * 

With state statutes like these becoming more commonplace, contractors will want to act now to limit this type of liability. Start by closely reviewing contracts with subcontractors. Consider including indemnification provisions and coverage of attorneys’ fees and costs in the event of a claim. Consider enhanced payroll requirements on contracts or use of certified payrolls. Review lien release language for wage and hour and misclassification claim liability. Moreover, consider requiring insurance verification and being named as an additional insured. Finally, ask subcontractors to attest to compliance with state and federal employment law requirements.

Kristina Vaquera, General Contractors Can Face Increased Liability For Employment Actions Of Their Subcontractors (JDSupra 2020).

A customer that engages a contractor should keep in mind that the law might make the customer responsible for the contractor's or subcontractor's failure to pay employee wages. For example:

•  California Labor Code § 2810.3 makes certain business customers liable, as a matter of law, for unpaid wages and worker's compensation coverage of their contractors' non-exempt employees. See generally Todd Lebowitz, New California Law Imposes Joint Liability on Businesses and Contract Vendors … (EmploymentLawSpotlight.com Nov. 10, 2014).

•  California Labor Code § 2810 prohibits both business- and personal customers from entering into labor- or service contracts "with a construction, farm labor, garment, janitorial, security guard, or warehouse contractor, where the person or entity knows or should know that the contract or agreement does not include funds sufficient to allow the contractor to comply with all applicable local, state, and federal laws or regulations governing the labor or services to be provided." Under subdivision (g) of that section, a customer that violates this prohibition is liable to any contractor employees who are injured by a violation of law or regulation. (Other subdivisions contain certain exceptions, including for residential construction work, as well as certain rebuttable presumptions if the contract documentation conforms to particular standards.)

Customers might therefore want their contractors and subcontractors, at all levels, to put payment-security arrangements in place; see Tango Clause 22.119 - Payment Security and its commentary.