Handshake

The Pesky Auto-Renewal Clause

We’re all familiar with the automatic renewal (evergreen) clause that appears in many supplier proposed agreements. The following is a typical example:

This Agreement shall be for a term of one year beginning on January 1, 2013 and expiring in December 31, 2013 and shall automatically renew for one year periods unless terminated by either party by giving the other written notice of termination at least sixty (60) days prior to the expiration of any one year period.

Under this clause, the customer must notify the supplier no later than November 1st if it doesn’t want the contract to automatically renew. If the customer fails to provide timely notice, the contract will automatically renew for another one year period.

Too often, our internal clients sign a supplier proposed document which contains an evergreen clause. Frequently, the window of opportunity to terminate the agreement passes, and the company finds itself on contract for another year.

In the context of commercial business-to-business contracts, courts often strictly construe these provisions where the contract language is clear and unambiguous. In those cases, if the contract language is not followed and notice is not given within the required time to terminate, the contract extends automatically for another term.

A NEW TWIST:  SELLER BEWARE

A few states have passed laws that may make it difficult for suppliers to enforce automatic renewal clauses. Most of these laws apply only to contracts between businesses and consumers.  However, two states, New York and Wisconsin, have enacted statutes applicable to business to business contracts.

BUSINESS-TO-BUSINESS CONTRACTS

New York General Obligation Law Section 5-903

In 2006, New York passed a statute which provides that automatic renewal provisions in contracts for service, maintenance or repair are unenforceable unless “the person furnishing the service, maintenance or repair, at least fifteen days and not more than thirty days previous to the time specified for serving such notice upon him, shall give to the person receiving the service, maintenance or repair written notice, served personally or by certified mail, calling the attention of that person to the existence of such provision in the contract.”

Wisconsin Statute Section 134.49

In 2011, Wisconsin passed a statute that affects the enforceability of automatic renewal clauses in certain business-to-business contracts. Generally, the law applies to business to business contracts for the lease of business equipment or for providing business services, with some exceptions.

Under the statute, an automatic renewal provision in a business contract is void unless the supplier (i.e., service provider/ lessor) gives the customer proper notice, and the customer has initialed the evergreen clause in a specific location in the contract, as described in the statute. A supplier who attempts to enforce an automatic renewal provision that violates Section 134.49 may be liable for damages.

BUSINESS-TO-CONSUMER CONTRACTS

If you’re selling services/ products to consumers, you should be aware of statutes in a number of states which create requirements applicable to automatic renewal in a wide range of contracts. Failure to abide by statutory requirements governing automatic renewal clauses may make these clauses unenforceable.

The following states have laws pertaining to automatic renewal clauses that generally fall into three categories:

  • Auto-renewal laws that apply to contracts with consumers, not businesses, that require only clear and conspicuous disclosure of auto-renewal terms. The following states have such laws:  California,  North Carolina, Louisiana, Oregon;
  • Auto-renewal laws that apply to contracts with consumers, not businesses, that require clear and conspicuous disclosure of auto-renewal terms and require a service provider to notify its customer of the auto-renewal within a certain period of time before the cancellation deadline. The following states have such laws: Connecticut, Florida, Illinois, Hawaii and Utah;
  • Auto-renewal laws that impose similar requirements as those described above, but only with respect to specific types of contracts, such as, contracts for health club memberships, home security services, leases of certain types of personal property, retail telecommunications service subscriptions. The following states have such laws: Arkansas, Maryland, South Carolina, South Dakota, Tennessee and Wisconsin.

TIPS FOR BUYERS AND SELLERS

BUYERS:

Many companies have been unpleasantly surprised by an auto-renewal clause and have paid the price by being economically obligated for a renewal term. As a result, many companies have internal policies against including evergreen clauses in their contracts.

However, If correctly written, these clauses can be beneficial to the buyer. This requires two additional considerations and clauses: i) A mechanism to cap any price increase in the renewal term; and ii) An additional clause giving the buyer the right to terminate the contract at any time on XX days advance notice to the seller.

SELLERS:

Check your state’s statute before inserting an auto-renewal clause in your contract. There may be requirements regarding conspicuous disclosure of the clause, notice to your customer and the types of contracts that must meet these requirements.

9017410_s

If It’s Not Part of the Contract It’s Not Part of the Deal!

A frequent source of contract disputes revolves around this simple statement. Business people often think that once they’ve discussed and agreed upon the deal, the written contract is mere formality. Many people tell me that the contract is for worst case scenarios and the relationship is key.

I don’t disagree with the importance of the relationship. In fact, my own experience demonstrates that a well written contract will not repair a bad relationship. And, more frequently, I have found that the converse is true. We’ve all experienced business relationships where the contract documents were either minimal or non-existent but all went well.

Before I address the issue of why you want to include all the deal points in your contract, I want to make mention of a typical boilerplate or “standard” clause that you find in many contracts.

It’s often entitled “Entire Agreement”, “Merger” or “Integration” and reads similar to the following:

This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior and contemporaneous agreements, negotiations, promises, representations and warranties, whether oral or written, of each party.

Let me tell you about a client of mine “Jim” and the importance of this clause.

A TRUE (AND SAD) STORY 

Jim, an independent sales representative, was approached by a manufacturer who asked Jim to represent its products on the west coast. The manufacturer had no presence in that region and had heard that Jim was very successful in pioneering new products into a territory.

The parties agreed that Jim would be paid a higher commission than other sales reps as a result of the effort and expense involved in pioneering a product. After their discussions, the manufacturer presented its standard contract to Jim which included the higher commission rate.

There was two clauses in the contract I’ll tell you about: One was a “Termination” clause that read:  “Either party has the right to terminate this agreement at any time on giving 30 days written notice to the other”.  The other was an Entire Agreement clause similar to the one above.

Jim read the contract, called the Executive Vice President and said he had a problem with the 30 day termination clause. Jim said: “Here’s my concern: It will take me much effort, time and money to introduce your products and get sales up and running. My concern is that after sales start coming in, you’ll terminate me and I won’t have the opportunity to reap the benefits of my work.”

EVP responded:  “You know, I agree with you. We won’t terminate you, Jim, so long as you meet your annual quotas”.

Jim – a very astute business person – asked the EVP to put that in writing.  The EVP did. He wrote Jim a letter saying that as long as Jim met his annual sales quota, the principal would not exercise its right to terminate the contract on 30 days’ notice.

So far….so good.

But, let me continue.

For discussion purposes, I’ll tell you that the EVP dated and signed the letter March 1st. About 10 days later, on March 11th, the parties signed the contract as originally written.

Five years went by. Jim was doing a fantastic job. He was consistently meeting and exceeding his quotas. He was awarded “Best Sales Rep of the Year” award several times…..when….

The Manufacturer’s CEO retired. A senior management shakeup ensued. EVP resigned and a new Sales VP was brought in. New VP reviewed Jim’s contract, saw that Jim was getting a much higher commission than all the other sales representatives and sent Jim a termination notice.

Jim tried unsuccessfully to negotiate a resolution with the Manufacturer before and after the notice of termination.

Jim brought suit claiming that the Manufacturer did not have the right to terminate the contract on 30 days’ notice. Jim argued that the EVP’s letter reflected the actual agreement between the parties relating to termination.

I’ll spare you the sad details but ultimately, the case was dismissed by the judge via a motion brought by the Manufacturer. Why?

The judge said that the termination clause was clear and unambiguous. The judge pointed to the entire agreement clause which clearly indicated that the parties intended the contract as the final statement of their agreement. As a result, the judge could not admit into evidence a document that came before (or even at the time!) the contract was signed.

MORAL OF THE STORY

What should Jim have done?

He should have ensured that the language in the signed contract corresponded to his agreement with the EVP.

(I should tell you that Jim became a client of mine during his trial, when he asked me to review several other proposed principal contracts!)

BOTTOM LINE:

  • All understandings should be included in the contract, and any term that is unacceptable or not consistent with the verbal and written agreements should be removed or changed. If any agreements have been reached in side letters or other writings, they should be specifically included in the language of the contract or attached to the contract as Exhibits.
  • The “Entire Agreement’ clause may look innocuous, but its impact is critical!  It signifies that it may not be possible to enforce any prior promises.
  • If it’s not in the contract, it’s not part of the deal!
Desert

Indemnity, Lions and Tigers….OH MY!: Has the Pendulum Swung Too Far?

I recently went on safari to the Serengeti in Tanzania. It was an amazing adventure and quite remarkable being 10 feet from giraffes, elephants, lions and wildebeests!  During our trip we stayed at lodges which were (truly) in the middle of the bush (actually, Africa).  In some places, Masai warrior guides armed with guns or a bow and arrows (!) would accompany us from our tents to the dinner tent …in order to stave off hungry lions or cheetahs looking for dinner. Fortunately, we all successfully avoided becoming appetizers and eluded dangerous skirmishes (except for a baboon who stole one of our lunch boxes).

Such close encounters are rare (mostly due to the skill and training of the guides) but likely must happen since the purpose of the trip is to “commune” with (or at least get a good look at) wild animals over whom humans have no control because, after all, they are wild.

At one camp site in the midst of a vast expanse of land with no civilization in sight for miles, there was an informational sheet in our tent.  It contained the following paragraph:

Our camp offers guided nature walks, game drives, and similar activities. In order to participate in any of these activities, you must sign an indemnity form which indemnifies the camp from any injuries, damage or distress that may occur while participating in the activities. You will not be permitted to participate in any of the activities if you do not sign the form.

HOW DO YOU SAY INDEMNITY IN SWAHILI?

I couldn’t believe it!  Indemnity had come to the Serengeti!

Is it me or have our concerns about risk, its management, and its allocation gone a bit too far?

Does it say something about our society that an indemnity clause should appear on an informational sheet in the middle of the Serengeti?

Has the pendulum swung too far?

I think so.  At least that’s my conclusion based on my 25+ years business contracting experience as well as some recent data from the International Association for Contract and Commercial Management (IACCM).

WHAT THE DATA SUGGESTS

For the past 10 years, IACCM has conducted surveys relating to the most frequently negotiated contract terms.  Surveys since 2007 have consistently shown that the two most highly negotiated terms each year were…………..Limitations of Liabilities and Indemnity.

In the 2011 IACCM survey of 8,000 negotiators from 1,123 worldwide organizations, the Scope and Changes clauses appeared as numbers 16 and 18, respectively on the list of most frequently negotiated.

By contrast, when asked about the most frequent source of actual dispute during contract implementation, the same respondents listed the following areas:

Delivery/ Acceptance:   41%;

Price/ Price Changes:   38%;

Change Management:  32%.

It is important to note that actual disputes relating to Limitations of Liability and Indemnity came in at 16% and 14%, respectively.

This data confirms my experience:  Far too much time is being spent in negotiations dealing with the more theoretical “what if” issues at the expense of dealing with the real world issues. The origins of the contract disputes I have been involved with over the years most frequently revolve around the parties differing interpretation (or inadequate description) of the scope of work (service or product),  changes to the work, and the impact of changes on pricing. I think many contracting people share the same observation.

LET’S BE MORE CENTRIST

(I’M NOT TALKING POLITICS)

That’s not to undermine the significance of the risk management (“legal”) clauses. For years to come, lawyers will be analyzing and litigating the Limitation of Liabilities and Indemnity clauses in the BP Gulf of Mexico disaster and Toyota supplier/ customer contracts in light of the ultimate tragic loss of life and economic loss.  Worst case scenarios happen.

I’m just advocating that we do a better job of putting these issues into perspective and balancing them with those issues calculated to ensure greater contracting success. Let’s spend more time on crafting a more detailed and well thought out statement of work and method to manage changes.  Let’s be more mindful of when it makes sense to emphasize indemnity and when it makes less sense.

In other words, let’s get that pendulum back a bit more to the middle.

ANY SUGGESTIONS OR FEEDBACK?

It takes courage to “buck the trend” and many of us are concerned that our jobs would be in jeopardy if we don’t always insist upon the one sided risk management clauses many of our companies proffer.

My experience, however, demonstrates that engaging in this balancing exercise yields more respect and cooperation internally, from our client, and from the organization with whom we’re negotiating.

I welcome and am interested in your experiences, suggestions, and feedback.

17623457_ml

Part Two: Intellectual Property Copyright Ownership

As I discussed in a previous blog, under copyright law, the author who creates an “original work of authorship” owns the copyright to that work.  An “original work of authorship” includes designs, specifications, software, documentation, photographs, website development, artwork, or multimedia work.

This means that when your company outsources the design or development of any work, your company will not automatically own the copyright to the work created by the supplier/ independent contractor/ customer even when you’ve paid them for it. In order to acquire ownership, your company must obtain a written assignment (transfer) of copyright ownership signed by the author of the work.

The “Works for Hire” doctrine is an exception to the above general rule. However, those items considered “works for hire” are very limited and likely do not cover many of the projects companies typically outsource.

THE BUYER’S POSITION

Buyers assume that if they pay for the development of the work, design, software, services they should own the intellectual property rights to such development. At first blush, that position seems logical:  The Buyer pays for it, the Buyer should own it. The Buyer may also want the ability to be able to incorporate the work into other products, or modify the original work.  Additionally, the Buyer is concerned that the Supplier might sell or license the work to the Buyer’s competitors.

THE SUPPLIER’S POSITION

 Most frequently, the Supplier’s pre-existing intellectual property will be used in the development of the deliverable. The Supplier has likely spent many years and significant money developing its IP. If the Supplier transfers ownership to the Buyer of the entire work, the Supplier will end up giving up far more than it actually realized or intended:  The Supplier may lose its rights to its pre-existing/ background technology and, therefore, the assets to its business.

ISSUES TO CONSIDER

Many Buyer proposed IP assignment clauses are very broadly written to say that the Supplier will assign to the Buyer ownership to all IP contained in the entire deliverable/ work product. The problem with these clauses is that the Buyer is requesting ownership to IP not only for which it paid but for the Supplier’s pre-existing IP as well.

  • CARVE OUT SUPPLIER’S PRE-EXISTING TECHNOLOGY

A key step to resolution is to take the Supplier’s pre-existing technology “off the table” in terms of ownership. The Supplier will want to retain all ownership rights to its background IP and that’s certainly not unreasonable since the Buyer typically has not paid for the development of that background IP.

Supplier should prepare a separate exhibit to the contract that identifies in as much detail as possible the pre-existing technology to be included as part of the deliverable. It often is not possible to identify all the items of the Supplier’s background technology that will be used, so the contract should allow for additional items to be added later.

  • DETERMINE YOUR GOAL

If the Buyer is having the Supplier semi-customize a standard product or software, the Buyer often insists on ownership rights to the customized portion without giving thought to the underlying reasons. Generally speaking, the ownership of the code or design applicable to the customization will not be of much value.

Perhaps the Buyer is concerned that the Supplier will use the customized portion (paid for the Buyer) in product the Supplier sells to the Buyer’s competitors. If that were the case, a narrowly written restriction against performing the same sort of customization for Buyer’s direct competitors would be more to the point. (CAVEAT: Work with your lawyer in writing these “restrictive covenant” clauses because they must be carefully worded.)

Perhaps the Buyer wishes to include the technology in other products. In this case, the Buyer will want to discuss the possibility of acquiring a nonexclusive license to use the pre-existing technology with an exclusive license for the IP developed.

SEVERAL APPROACHES TO RESOLUTION

ALTERNATIVE 1:   Ownership by Supplier with Exclusive License to Buyer

One option is for the Supplier to retain ownership of the work (defined to exclude pre-existing technology) but give the Buyer the exclusive license to use it. If an exclusive license gives the Buyer the right to use the work in every possible context at every possible location, it would be the functional equivalent of ownership. In practice, however, the parties usually agree to limit the Buyer’s use rights. For example, the Buyer’s right to use the work may be limited as to duration, area (worldwide or domestic), or market. The Supplier has the exclusive right to modify the work and may sell or license it to others outside the Buyer’s area of exclusivity.

This arrangement often benefits both the Buyer and Supplier. The Buyer is assured that the Supplier will not sell or license the work to competitors during the term of the exclusive license. At the same time, the Supplier retains control over the work and will have the opportunity to earn income by licensing/ selling to others outside the area of the Buyer’s exclusivity and/ or after the exclusive license expires.

ALTERNATIVE 2:   Ownership by Supplier with Non-Exclusive License to Buyer

The most favorable ownership arrangement for the Supplier may be for the Buyer to be given only a nonexclusive license to use the work (defined to exclude pre-existing technology). This means that the Supplier is free to license/ sell the work to anyone else; including the Buyer’s competitors. This type of ownership arrangement should result in the lowest possible price to the Buyer, because the Supplier may earn additional income by licensing the work to others.

In nonexclusive license arrangements, it is not uncommon for the Supplier to agree to pay the Buyer a royalty for each license it sells to third parties. This often seems fair because the Buyer paid to have the work created in the first place. The total cumulative royalty is usually limited to the total price the Buyer paid the Supplier for the work. The royalty can be a percentage of the total price paid for each license or a set dollar amount. While this is a common solution, there are no industry guidelines for the amount of such royalties.

The Buyer may object to licensing of custom modifications for which it has paid to competing companies. One solution is hybrid:  the Supplier agrees to a one or two year exclusive license to the Buyer for the particular modifications before those modifications are made available to other users.

ALTERNATIVE 3:   Joint Ownership

Yet another option is for the Buyer and Supplier to jointly own the work. Under a joint ownership arrangement, each party is free to use the work or grant nonexclusive licenses to third parties without the other’s consent (unless they agree to restrict this right). Normally, joint owners must account for and share with each other any monies they earn from granting such licenses. However, in most circumstances, it is not practical or desirable in the Buyer/ Supplier situation.

Paperwork1

Easy Tips for Reading Contracts When You’re Not a Lawyer

Reading business contracts when you’re not a lawyer can be daunting.  It is often tempting to pass the heavy lifting off to the corporate legal department, and take what your in house counsel says at face value without actually reading the contracts.  However, anyone involved in business contracting, including salespeople, corporate purchasing agents, contract managers, or department heads, should have a basic understanding of how to read business contracts.  Here are a few tips for reading contracts when you’re not a lawyer:

  1. Just read the darn thing. Roman numerals with subsections and terms like ‘force majeure’ can be intimidating at first, but once you start reading, you might be surprised by how much a lay person can read and understand in a standard business contract.  The biggest hurdle is actually convincing yourself that you can tackle the contract.  Additionally, the more you actually read the contracts, the more familiarity you will gain, and the better your understanding will be, which is incredibly useful when negotiating future deals.  Once you become familiar with warranty language, for example, you’ll see variations on the same language from contract to contract.
  2. Ask when you don’t understand. It is perfectly acceptable to ask your attorney what terms mean, or why specific phrases are included in a given contract. Your corporate counsel should be more than happy to explain the basics, if it means that they have less contract review work in the long-run.
    • You’d be surprised. Sometimes, the other side may not even understand him/herself!
  3. Get to know your company’s boilerplate. When you are negotiating contracts, it is very helpful to know what is in your company’s standard form agreement, commonly known “boilerplate” language.  These include things like termination provisions, indemnity clauses and the like.  Again, ask your corporate counsel if you have specific questions or what to know why something is included.
  4. When you get a standard form contract from the other party, mark it up. One of the best ways to read and understand a contract is to pick it apart.  When the other party you are negotiating with drafts the agreement, print a copy out and take a red pen to it, or tab the document with comments in Microsoft Word.  Circle terms or provisions you do not understand, or things that seem more favorable to the other side (and less favorable to your company).  Ask your attorney about why things are written the way they are and how you might revise to bring parity into the contract.

If you are involved in corporate purchasing or sales, or have questions about contracts for your business, attorney Leslie S. Marell can help.  Leslie has more than 25 years of experience as in-house counsel and as a legal adviser working with businesses, business people, and business contracts, in the technology, manufacturing, software, and medical device industries.  She understands the real-world practicalities of what it takes to draft, review, and negotiate corporate contracts, and has presented her dynamic seminars to Fortune 500 companies and small to mid-sized businesses across the country.  Leslie specializes in helping contract analysts, project managers, and department leaders work better with their own internal legal departments and outside counsel.  To learn more about Leslie’s seminars, or get expert advice on contracting matters, contact Leslie at (310) 372-8663, or visit her online.

Pointing fingers

Resurrecting a Contract After You Reach an Impasse

Negotiating business contracts is as much an art as it is a science.  It requires thinking strategically, figuratively putting yourself into the shoes of the other party, and even keeping your human emotions in check.  But what happens when you hit a brick wall with the other side and the deal goes sideways?  Here are a few suggestions for getting your deal back on track when you reach an impasse:

  1. Ask questions instead of drawing hard lines. If you reach an impasse on any issue, ask lots of questions. It’s amazing how much you learn when you ask questions.  Think about this from a personal perspective:  How often have you assumed that your partner/ spouse/ friend undoubtedly was thinking one thing when…..much to your surprise you find….. they were thinking something completely different?   . . If the other side says “No” or “We don’t agree”, always ask them why.  Questions such as “Why is this a problem?”, “Would you give me an example of your concern?” and the like often have the effect of bringing to the forefront,  the frequently under discussed concerns of the other side
  2. Consider your style.  Some negotiators have success with the ‘just folks’ act asking the other party to explain everything, by mentioning how they graduated with an English major, or can barely add numbers above three figures.  Be cautious however, this type of act can be transparent.  My advice is to be yourself during negotiations. If you’re not a forceful personality, don’t pretend to be so.  If you need to take your time responding to a question, take that time.  Negotiating means obtaining information about the other side’s wants and concerns. And voicing your needs and concerns. Every one of us has our own unique style of eliciting this information and negotiating a deal with the other side.
  3. Change it up. If you have been negotiating over the phone, consider meeting via video conference or in person.  If you have been meeting in a conference room setting, consider meeting over lunch, or taking a walk outside while you talk.  Changing the venue, especially moving to neutral territory, can often completely shift the dynamics of the negotiation, and break up the log jam.
  4. Don’t take ‘best and final’ at face value. If you have the time, and can hold out, it is often strategic to reject even what the other side calls their ‘best and final offer’—if this were truly the case, they would not still be at the negotiation table.
  5. Consider walking away. Letting a deal go is never easy, especially if your job is to negotiate contracts on behalf of your company.  You might be under pressure to meet sales goals, have other departments relying on you getting the deal done, or be under specific orders from supervisors or company owners to ink the deal.  However, sometimes walking away can be the most strategic thing you do.  A break in the negotiations can often be the best thing to happen to both parties.  Many a contract has died and come back after a break, change in personnel or shift in management direction with either party.  It is also important to keep in mind that ultimately if a potential vendor, supplier or customer cannot deliver the goods and services at the right price, or is unreasonable during negotiations, perhaps the contract with this particular company is not worth the time, money, and hassles.

If you have questions about negotiating agreements for your business, attorney Leslie S. Marell can help.  Leslie has more than 25 years of experience as in-house counsel and as a legal adviser working with businesses, business people, and business contracts, in the technology, manufacturing, software, and medical device industries.  She understands the real-world practicalities of what it takes to draft, review, and negotiate corporate contracts, and has presented her dynamic seminars to Fortune 500 companies and small to mid-sized businesses across the country.  Leslie specializes in helping contract analysts, project managers, and department leaders work better with their own internal legal departments and outside counsel.  To learn more about Leslie’s seminars, or get expert advice on contracting matters, contact Leslie at (310) 372-8663, or visit her online.

Lega lDocument

Contract Negotiation Tips from a Professional Negotiator

Whether you have been negotiating contracts for years, or this is your first go around, it is helpful from time to time to go back to the basics.  As a professional negotiator and trainer, here are a few of my basic contract negotiation tips:

  1. Prioritize what is most important to you. Not all parts of the contract are equally important, so one of the best ways to begin contract negotiations is to prioritize what is most critical to your company, and determine your bottom line.  Write these down so that you can keep your eye on the prize.
  2. Address the “what can go wrong” issues.  When lawyers discuss the “legal” clauses such as limitation of liabilities and indemnity, we’re really talking about what might go wrong and who will be responsible if it does.  Address these issues with your counterpart in a real world fashion.
    • For example, once you agree upon lead times, tell the supplier about the negative consequences to your company should they be late. Ask them how they intend to handle that potential (advance notice?) and what work around alternatives would be available, If you do an up-front real world risk assessment of the “what could go wrong issues” , you will gain the confidence of your lawyer.  Plus, your future legal reviews will be greatly expedited.
  3. Understand the other party. As is often said, knowledge is power.  Do your research on the other party.  If you can track down information on the other company’s suppliers, vendors, prior large orders, determine what their needs are, or otherwise research the backgrounds of the principals and the person you are negotiating with, it may provide a competitive advantage in negotiations.  If nothing else, you can build bridges with the other party over the difficulties in working with Russian distributors, or your shared love of the San Francisco Giants.
  4. Find some mutually agreeable points to start. With all negotiations, find common ground at the start, however small that common ground might be.  If you can frame each one of these ‘agreed upon’ points at the beginning of negotiations on other provisions, it might benefit the negotiations as a whole. Look for any excuse to say things like, “it’s great that we agree on the delivery date” or “now that we’ve got agreeable terms for the production specifications, let’s talk about price per unit.”
  5. Avoid emotions, instead focus on the facts. Successful negotiators don’t take the negotiation personally.  Instead they are motivated to ‘win’ the chess match that is a successful contract negotiation.  Many negotiators refer to their company or the other side using impersonal contract language—even during the verbal negotiations.  For example, instead of saying things like, “I think you and I can agree to a termination clause we both like,” say, “If both parties can agree to a termination clause, it will benefit everyone.”

If you have questions about negotiating agreements for your business, attorney Leslie S. Marell can help.  Leslie has more than 25 years of experience as in-house counsel and as a legal adviser working with businesses, business people, and business contracts, in the technology, manufacturing, software, and medical device industries.  She understands the real-world practicalities of what it takes to draft, review, and negotiate corporate contracts, and has presented her dynamic seminars to Fortune 500 companies and small to mid-sized businesses across the country.  Leslie specializes in helping contract analysts, project managers, and department leaders work better with their own internal legal departments and outside counsel.  To learn more about Leslie’s seminars, or get expert advice on contracting matters, contact Leslie at (310) 372-8663, or visit her online.

wine bottles

Verbal Agreements to Buy/Sell Goods – Are They Enforceable?

Are verbal agreements to buy/sell goods real agreements?  In other words, are they enforceable?

If your company is involved with buying goods from suppliers or vendors, or selling goods to customers, you no doubt have many standard forms and agreements prepared by your corporate attorney, or at least standard operating procedures for contracting.  However, occasionally a customer or supplier will ask for something verbally—a last minute rush order, a missing part, a ‘handshake’ deal, and you might verbally agree to it on behalf of your company.  The question is whether or not this “agreement” is legally binding.

Generally speaking, any promise to buy goods (meaning anything tangible, including material, equipment, product and even off the shelf software) from a supplier, or sell goods to a customer in an amount over $500 is NOT legally finding.  The Uniform Commercial Code (U.C.C.) requires all contracts for the sale of goods (not services) must be in writing if they are over $500.  However, there are some notable exceptions to this rule:

  1. Merchant exception: This is the most significant exception applicable to businesses. If the verbal agreement is between merchants (two businesses), and one of the merchants confirms the deal in writing, that writing will be binding on the recipient merchant even if the recipient merchant does not countersign their acceptance….unless the recipient objects to that writing within ten days of receipt. In other words: if you confirm your agreement via email to your supplier (or customer) that document will fit within this exception.
  2. Where the supplier has already started performance, and the goods are being manufactured specifically for the purchaser.
  3. Where the supplier has partially or fully completed performance.
  4. Where the buyer admits in court testimony or legal pleadings that he or she made a verbal contract.
  5. Where the supplier had relied on the verbal promise to his or her own detriment.

Of course, it is always best to get things in writing! Where the supplier can demonstrate one of the exceptions, it has an argument that the verbal agreement is a binding contract.

If your company needs assistance with developing vendor or customer contracts, or has other contracting questions, attorney Leslie S. Marell can help.  Leslie has more than 25 years of experience as in-house counsel and as a legal adviser working with businesses, business people, and business contracts, in the technology, manufacturing, software, and medical device industries.  She understands the real-world practicalities of what it takes to draft, review, and negotiate corporate contracts, and has presented her dynamic seminars to Fortune 500 companies and small to mid-sized businesses across the country.  Leslie specializes in helping contract analysts, project managers, and department leaders work better with their own internal legal departments and outside counsel.  To learn more about Leslie’s seminars, or get expert advice on contracting matters, contact Leslie at (310) 372-8663, or visit her online.

Pallets

Master Agreements with Your Vendors or Suppliers

If your company buys goods from suppliers or vendors with any regularity, you may be familiar with Master Agreements for the sale of goods.  The Master Agreement is the contract between the parties that is negotiated—how many units, what price, and other terms and conditions.  However, you may be less aware of what is known as the ‘Battle of the Forms.’  The ‘Battle of the Forms’ is a situation where both companies have their own standard forms in addition to that Master Agreement—your company has a standard form purchase order, while your supplier has its own standard acknowledgement form, invoice, and so on.  There will be plenty of forms that are in conflict with one another, and the Master Agreement, even where the buyer and the seller have already agreed upon a price and conditions for the sale in the Master Agreement.

A typical situation is where your company, the purchaser, sends your standard Purchase Order to the vendor, the seller, and the vendor sends back an acknowledgement and the invoice.  That acknowledgement form might have terms and conditions on the back of it or referenced on the company’s website.  If you started reading those acknowledgment/ sales/ invoice terms, you might be shocked at what you would find.  For example, you might learn that the acknowledgement form cites a 25% restocking fee for returned goods!  Wait, a minute—the Master Agreement says nothing about a restocking fee—and your contact at the vendor never even mentioned it, or assured you that there was no restocking fee.

The best thing you can do as a purchaser (or seller) to prevent the inadvertent addition of your seller’s (or customer’s) terms, would be to include  language in the Master Agreement that negates any such additional terms appearing on the seller’s (or buyer’s) form, such as “This Master Agreement shall apply to all purchase orders and other documents issued by either party in connection with the purchase and sale of Products (referred to as “releases”).  No inconsistent or additional terms or conditions in any releases shall be applicable to a transaction within the scope of this Master Agreement.”  

An ounce of prevention in purchase and sale agreements is often worth a pound of cure.  If your company needs assistance with developing vendor contracts, or has other contracting questions, attorney Leslie S. Marell can help.

Leslie has more than 25 years of experience as in-house counsel and as a legal adviser working with businesses, business people, and business contracts, in the technology, manufacturing, software, and medical device industries.  She understands the real-world practicalities of what it takes to draft, review, and negotiate corporate contracts, and has presented her dynamic seminars to Fortune 500 companies and small to mid-sized businesses across the country.  Leslie specializes in helping contract analysts, project managers, and department leaders work better with their own internal legal departments and outside counsel.  To learn more about Leslie’s seminars, or get expert advice on contracting matters, contact Leslie at (310) 372-8663, or visit her online.

Tug of War2

Battle of the Forms

If you work for a company and have any involvement in contracting for goods, you are familiar with the dreaded ‘Battle of the Forms.’  Both your company and the company you are contracting with have their own standard contracts, RFP terms, purchase orders, or conditions of sale.  Perhaps the advice you’ve received from your own in-house legal department is to ‘use our standard contract/form.’  The problem is, your customer or supplier is getting the same advice from his or her own corporate attorney.  So what are you to do? Can you still do the deal? And which terms and conditions prevail?  Here are a few general tips:

  1. Neither document prevails. So long as the parties each had good sets of terms and conditions on their respective forms and the forms generally comply with Uniform Commercial Code (U.C.C.) requirements of taking exception to the other’s terms, where the forms are in conflict, neither document supersedes the other.
    • Professional Tip: Your purchase order forms should include standard language that meets the U.C.C.’s requirement of taking exception to the seller’s terms along the lines of Section 2-207 of the U.C.C. “This purchase order is limited to terms and conditions contained on the face and the reverse. Any additional or different terms proposed by Seller in any quotation, acknowledgement, or other document are hereby deemed to be material alternations and notice of objection to them is hereby given.  Any such proposed terms shall be void.”  Of course, the Seller’s documents should include the same sort of language which objects to the Buyer’s additional and different terms.
  2. The U.C.C. will fill in the gaps. In situations where your company issues a purchase order/quotation without negotiating terms other than the most important terms (such as product, price, delivery), and without requiring the other party’s signature, if there was a dispute, the court would look to the U.C.C. (for the sale of goods) to fill in the gaps of the terms that have not been agreed to. For service type contracts, general contract law says that when the forms do not agree, no contract has been formed. Of course, the parties rarely read those forms and proceed with business. The contract is formed when the parties proceed with the work.
  3. Agreed upon terms prevail. Where the buyer’s and seller’s terms are in agreement, those terms apply.
  4. Focus on the front of the forms. Frequently, a dispute originates because the parties have not agreed to an essential deal term. For example, how many times have you seen the Seller’s quote with 30 day Net payment terms, but the Buyer’s P.O payment terms are 60 days? Make sure that the face of both the Buyer’s and Seller’s forms are consistent with respect to description of product/ service, delivery terms, price/payment terms, service levels and other key deal points.

If you are involved in corporate purchasing or sales, or have questions about standard form agreements for your business, attorney Leslie S. Marell can help.  Leslie has more than 25 years of experience as in-house counsel and as a legal adviser working with businesses, business people, and business contracts, in the technology, manufacturing, software, and medical device industries.  She understands the real-world practicalities of what it takes to draft, review, and negotiate corporate contracts, and has presented her dynamic seminars to Fortune 500 companies and small to mid-sized businesses across the country.  Leslie specializes in helping contract analysts, project managers, and department leaders work better with their own internal legal departments and outside counsel.  To learn more about Leslie’s seminars, or get expert advice on contracting matters, contact Leslie at (310) 372-8663, or visit her online.