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Change Orders & How They Impact Your Contract

When you are negotiating and drafting a contract with a supplier, it is imperative to include a well thought-out provision regarding how changes will be handled. The types of things you should address in the changes provision depends upon the product or service you are buying. Below are a few examples of the different issues you should consider addressing:
• When a change is necessary, the contract should require the supplier to provide a detailed estimate of the cost of the change.
• The contract should require that the supplier receive written approval from a designated department/ representative before proceeding with any change.
• The contract should provide that if the parties cannot agree on the cost of the change, the buyer can require the supplier to perform the work based upon a time and materials basis. Additionally, if a time and materials basis is implemented, the contract should set forth the rates that will be paid for the different categories of labor or processes.
• Language should be included that provides the basis for direct cost for any materials required as part of the change. It should also address what can be included as a direct expense and what must be provided for in their overhead rate.
• The changes provisions should detail the permitted percentages for contributions to the supplier’s overhead and profit, if allowed.
• The changes provision should outline the documentation that is necessary to substantiate the costs charged, including copies of invoices and timesheets, and the right to audit the documentation that is not required to be submitted.
• The contract should set forth the right to inspect the work in process to confirm any time, labor or material charges.
• The changes formula should address how deductions in the scope of work will be managed.

A buyer’s leverage in negotiating changes will vary throughout the business relationship. If you have conducted business with the supplier for a lengthy period of time, the supplier is more likely to treat you fairly in order to continue to receive your business. In contrast, if this is your first transaction, the supplier may require more oversight. The safest approach is to protect your interests regardless of the business relationship.

If you need assistance, providing for change orders in your contracts or you have questions regarding your company’s contractual needs, contact Leslie S. Marell for help. We serve as general counsel to clients who do not require, or choose not to employ, a full-time lawyer in-house. Call today to schedule your initial consultation.

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What Does “Affiliates” Really Mean?

It is common for many licensing agreements to grant a license to a particular entity and its “affiliates.” The contact may even define what the term “affiliates” means, but this doesn’t always mean that the definition includes all of the parties that were intended to be included.

For example, does a license that is granted to an entity and its affiliates include only those affiliates that existed on the effective date of the license agreement? Does it include affiliates that are established after the contract was formed? According to the Court of Appeals of the State of New York, the license is limited to affiliates that were in existence on the contract effective date, unless the agreement expressly states otherwise.

It is typically beneficial for the licensee if the contract broadly defines affiliates, but the New York case demonstrates that it may also be beneficial to the licensor under some circumstances. In the case of Ellington v. EMI Music, Inc., the parties’ dispute centered on the terms of a royalty provision of a 1961 copyright renewal agreement. The parties to the contract were the legendary musician Duke Ellington and a group of music publishers, including the predecessor to EMI Music. Ellington and his heirs were entitled to 50% of the net revenues resulting from the sales by EMI and its affiliates.

Subsequent to the 1961 agreement, EMI created new affiliated foreign entities that were granted sublicenses. EMI paid the heirs of Ellington half of the net revenue that EMI received from the new, affiliated foreign sub-licensees. However, Ellington’s heirs argued that because the foreign entities were affiliates of EMI, they were also entitled to 50% of the foreign affialites net revenues as sub-licensees as well.

The court rejected the heirs’ argument because the contract did not contain forward-looking language. Thus, without the written agreement showing the parties’ intent to bind newly created affiliates, the term affiliates only included those affiliates existing at the time the agreement was executed.

As the Ellington case demonstrates, it is possible that having a broad definition of “affiliates” could benefit the licensor, especially if it could bring more entities into a more lucrative royalty structure.

If you have questions regarding business law matters, contact us today to schedule an initial consultation. Leslie S. Marell has been practicing business and commercial law for over 25 years. She is established in private practice and has extensive legal experience counseling companies in the areas of business contracts and transactions, purchasing, sales, marketing, computer and technology law, employment law and day to day legal matters. Let us provide your company the advice and guidance you need.

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The Scope of the License in Software Licensing Agreements

Licensor’s Perspective

If you are the owner of software and you want to allow other parties the right to use the software while maintaining ownership and control over it, you need a software licensing agreement. As a licensor, you can limit the scope of the license by defining how and for what purpose the licensee is allowed to use the software. A restricted license only allows the licensee to use the object code of the software, not the software’s source code. A licensor may also want to further restrict the license by limiting:

  • Fields of use (for example, for use only at the licensee’s internal business purposes)
  • Geographic use restrictions
  • The number of concurrent users allowed
  • The hardware upon which the licensed software may be used
  • The ability to transfer the software license

A licensor is more likely to seek additional revenue by enforcing the scope restrictions in an economic downturn. Thus, restrictions on the ability to transfer the license can allow the licensor the ability to extract additional fees if the licensee wants to assign the license.

Licensee’s Perspective

A licensee typically seeks to negotiate a broader license to help ensure it has adequate rights to use the software as needed. If a licensee does not sufficiently negotiate the ‘terms of use’ and later discovers it must exceed the restrictions, the licensee will have to renegotiate and likely pay additional fees. Thus, it is important for the licensee to carefully consider what its future needs of the software will be. If this is not a known factor, the licensee may consider including a means for increasing the limits imposed by the licensor in the contract, and specifying the amount to be paid for the changes. Finally, and particularly if the licensee is paying for development of all or a portion of the software, a licensee may wish to negotiate to have the exclusive right to use the licensed software in order to prevent other parties or competitors from being able to use the software.

When parties are negotiating a software licensing agreement, it is imperative that both the licensor and the licensee pay close attention to the provision regarding the scope of the license.

If you have questions regarding business law matters, contact us today to schedule an initial consultation. Leslie S. Marell has been practicing business and commercial law for over 25 years. She is established in private practice and has extensive legal experience counseling companies in the areas of business contracts and transactions, purchasing, sales, marketing, computer and technology law, employment law and day to day legal matters. Let us provide your company the advice and guidance you need.

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What You Can Learn from Apple & GT Advanced Technologies

Have you heard the story of how the supplier relationship between Apple and GT Advanced Technologies (GTAT) went south? GTAT was the company selected by Apple to supply sapphire for use in the iPhone 6 screens and there are some significant lessons to be learned from them.

Prior to Apple’s relationship with GTAT, the iPhone screens were made out of glass, which had many benefits with regard to the use of touch-screen technology. However, the primary disadvantage was that the glass tended to scratch and break easily. GTAT was going to provide sapphire as a replacement for the glass, which is one of the strongest materials available, it is transparent, and it can be industrially made.

If you own an iPhone, you know that your screen is still made of glass. So, what happened? According to GTAT’s bankruptcy filings, Apple used its muscle and forced GTAT to enter into a one-sided contract that heavily benefitted Apple while placing all of the business risks on GTAT.

While this may be true, there are additional lessons that can be learned from GTAT’s mistakes and the problems that arise when negotiating development and production agreements at the same time. In the supply chain context, the development contract is an agreement to develop a new product, which may also include updating/ revising an existing product by using new technology. There are a wide variety of problems that can arise in development contracts that cannot be foreseen at the outset. For example, the product may not work, it may cost more than predicted, or a competitor may release a similar product before yours.

As you might have guessed, linking a production-level supply chain contract to the success of a development project (like Apple and GTAT did), can be dangerous. Not only did the supply agreement between Apple and GTAT assume that the new product would be developed within a certain price structure and be a specified deadline, but they also bet more than $500M in production-level orders on it.

While there were several other issues that seemed to seal the ill-fated destiny of the agreement between Apple and GTAT, it is important to note that for a development contract to succeed, the risks and rewards must be carefully scrutinized. Before production terms and conditions are finalized, the parties should understand the technical parameters of the product, including what it costs to make it, the time it takes to make it, and what the market is expected to be.

If a party insists on negotiating the production terms before the development is finished, it is wise to reserve the right to renegotiate certain key terms such as price, deadlines, warranties and indemnification terms.

To learn more about non-disclosure agreements or how we can assist you with other business-related matters, contact Leslie S. Marell today.

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Are Verbal Agreements Valid? Part One: Do you have to pay the Plumber if you don’t sign a Contract?

It is a common misconception that oral contracts are not enforceable. When you think about it, individually and on behalf of our business, we frequently engage in transactions where both parties don’t negotiate all the terms, sign the same document or even exchange forms.

This morning, the pipe under my bathroom sink burst and flooded the entire bathroom floor.

So what did I do? What anyone else would do: I called the plumber, got a general idea of their hourly charges and booked the next available appointment.

Do you think I took the time to negotiate and sign a contract with the plumber before he came to my house? Of course not! I was running out of dry towels, trying to get everything out of the cabinet under the sink, and worried that the water would spill over to our bedroom where we had installed hardwood floors a couple of years ago.

Does that mean we didn’t have a contract with the plumber? Of course we did. He performed the work to fix the pipe and having done so, we were “obligated” to pay for work performed.

And, that’s my point. Contracts can exist in several ways: Verbally, by conduct and in writing.

It is true that certain agreements must be in writing and signed to be enforceable. The statute of frauds requires the following types of agreements be in writing: Transference of real property; Performance which cannot be completed within one year (example a consulting agreement for 2 years); a contract for marriage (you can tell how old this rule of law is!); and the sale of goods of $500 or more..

Importantly, the statute of frauds section of Article 2 of the Uniform Commercial Code (UCC) – which applies to contracts for the purchase/ sale of goods – -provides some exceptions. A contract that might otherwise be unenforceable because it is not in a writing signed by both parties may be enforced IF :

  • One merchant sends a writing to the other merchant memoralizing the verbal deal, and if the recipient does not object in writing within 10 days of receipt, it will be binding on the recipient. This can take the form of an email or a purchase order from the buyer to the seller (NOTE: that this is a frequently used method of doing business); and
  • There is not writing but one merchant has begun work. Note that this frequently happens before purchasing, contracts or legal finds out about it!

So, if the parties have entered an oral agreement, or if negotiations have started but the contract has not been finalized, and in either case, work has begun and a dispute arises, what legal rights and obligations does your company have?

In other words, if there is no signed, written contract, is the performing party totally without any legal recourse in the event of a dispute?

The answer is most frequently “NO” for one of two reasons:

  1. A signed, written contract can be found based on the exchange of emails and other written communications between the parties and even internally. The contract does not have to take the form of one document containing both parties’ signatures. In these frequent situations, the question is not “Is there a contract”? The question becomes “What are the terms of the contract”? i.e., What have the parties agreed upon in those exchanges? Where the parties have not expressly agreed to the terms, the UCC and general contract law will “fill in the gaps”.
  1. If a court determines that the parties did not have a contract, most, if not all states, recognize the legal doctrine of quantum meruit – -also called unjust enrichment or quasi-contract. Quantum meruit allows a court to award money to a party who has provided goods or services to someone else even though those parties never had a contract. In fact, a court can use quantum meruit to provide relief only when no legal contract is found to exist between the parties.

The bottom line is this: Once the supplier has performed work/ delivered goods – even if directed to do so by an unauthorized agent of the purchasing company – courts will often find a way to compensate the supplier for work performed or goods delivered.

We all know that the justifications our internal customers use for proceeding this way is that they want to get the deal done quickly and don’t have the time to get us involved.

I believe the basic issues within our organizations are how we, in purchasing, contracts and legal, can become involved earlier in the contracting process and how to get our internal customers thinking of global company issues and not only those affecting their department.

In the next blog, I’ll discuss the most typical reasons our companies are involved in these situations. I’ll also provide some suggestions on encouraging your internal customer to seek your involvement and input in the early stages.

To avoid the uncertainty of an oral agreement and assist in expediting the contracting process, let Leslie S. Marell help you. Our office is located in Torrance, California, but we proudly serve businesses of all sizes from all over the country.

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“Notwithstanding” = Exceptions to What I Just Said (Can’t we just say what we mean?)

If you have read a contract that is filled with fanciful legal jargon, you were probably left wondering what it all meant. One of the favorite terms used by many attorneys when drafting contracts is “notwithstanding.” This one word can create significant confusion because it is used to create exceptions to the rules set forth in the contract.

Typically, the contract contains a provision that sets forth the requirements to be met in order to comply with the agreement. In the next section of the contract, the word “notwithstanding” is used to say “despite what was just detailed above, these are the exceptions to the rules.”

Below are a few of the cons related to using “notwithstanding” in your agreements:

  • Confusion. Many people do not realize that the provisions following the word “notwithstanding” are actually exceptions. It can be confusing and create misunderstandings that result in breaches of contract and disputes between the parties.
  • Subordination of the rules. By using “notwithstanding” and outlining exceptions to the rules, it subordinates the rules. In other words, because the exceptions trump the rules, it tends to place more importance on the exceptions.
  • The foregoing. “Notwithstanding” is often paired with “the foregoing” two state “notwithstanding the foregoing…..” which means despite “x” and “y,” “z” can still occur. This can create significant confusion because these items can overlap and it is not clear how far-reaching or how far back the “foregoing” reaches. The result is that it can impact unintended provisions in the contract.

While the concept behind using “notwithstanding” may be valid, there are simpler and clearer ways of saying it. It is important to avoid ambiguity in your contracts in order to prevent disputes and litigation.

If you have questions regarding business law matters, contact us today to schedule an initial consultation. Leslie S. Marell has been practicing business and commercial law for over 25 years. She is established in private practice and has extensive legal experience counseling companies in the areas of business contracts and transactions, purchasing, sales, marketing, computer and technology law, employment law and day to day legal matters. Let us provide your company the advice and guidance you need.

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Limitations of Liability: Guide to Understanding the Gross Negligence & Willful Misconduct Exceptions

It is common practice for parties entering outsourcing contracts to limit their liability to each other. However, one of the most common exclusions of the limitation on liability are damages caused by gross negligence or willful misconduct.

What constitutes gross negligence and willful misconduct? The definitions vary from state to state. Many times the determination of whether the conduct rises to these levels is based upon the specific facts of the case.

,The limitation of liability provision typically prevents one or both parties from being held liable for a variety of damages. It is also common for a cap to be placed on the total amount of damages either party can be held responsible for under the contract. Allocating risk in normal breach of contract matters is usually acceptable, but when a party acts with gross negligence or willful misconduct, it doesn’t make sense to limit recovery. In fact, there should be incentives for preventing such types of behavior.

You should confer with a business attorney regarding the law governing your contract and how gross negligence and willful misconduct are defined. Typically, gross negligence includes conduct that demonstrates “reckless indifference” or a “complete disregard” for the rights or safety of others. In other words, you must show a serious deviation from reasonable care. Willful misconduct usually involves a party acting or not acting in a situation where the act or inaction is clearly required. You should be able to show an intentional act of unreasonable character that resulted in foreseeable harm. As you can see, the standards for proving gross negligence and willful misconduct are very strict.

Most contracts provide that if gross negligence or willful misconduct occurs, the non-breaching party has the right to damages which can exceed any liability cap. A few examples of exclusions from limitations of liability include:

  • breach of confidentiality
  • refusal to provide required services
  • bodily injury or death
  • damage to property
  • violation of the law
  • gross negligence or willful misconduct

Several of the above exceptions can be easy to prove, but establishing that the actions of the party rise to the standard of gross negligence or willful misconduct can be difficult. If you believe another party has materially breached your contract through gross negligence or willful misconduct, contact Leslie MarellHYPERLINK “http://www.marell-lawfirm.com/” to schedule an appointment.

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How to Use Your Attorney More Effectively

Contrary to the reputation lawyers have, we really do want to help you in a manner that is effective and efficient. Unfortunately, many people get frustrated with the time it takes to get the answer they need. What they fail to realize is that if their attorney had been informed earlier and kept in the loop as things developed, he or she could have acted much quicker. Consider the following scenario that you may be able to relate to:

As a lawyer or purchasing person, your internal customer (pick one: calls you/   drops into your office/   sends you an email) telling you he/she needs a Purchase Order or Contract issued within the next XX minutes/ hours/ days. After questioning, you find out he/ she has been talking (hopefully, negotiating) with the supplier for months. Unfortunately, this is the first you’ve ever heard about the deal. Of course, they don’t tell you any specifics….just the basics they think you need to know to issue the PO/ Contract. They tell you not to spend a lot of time on it and just do the “standard” PO/ Contract. (IMPORTANT NOTE: All names have been deleted to protect the guilty!)

Without having the specifics of the interaction between your internal customer and the supplier, it inhibits your ability to do your job effectively. If you had been involved sooner in the process, couldn’t you have issued a more meaningful purchase order or contract? This is similar to the interaction many clients have with their attorney.

What can an internal customer do to get better advice and quicker responses from your legal department? Give us the information and the time we need early on in the process. This doesn’t mean you have to have a lengthy meeting with me, but sending a quick email or making a short telephone call to give me notice of the deal being negotiated can prove to be quite helpful.

The internal customer should stay involved in the process. If the supplier is asking for changes to a clause, it is important that you understand the issues behind the requested change before sending it to your attorney. This allows you to discuss the negotiation or the rewrite of the provision with your attorney so that the issue is addressed and it avoids the unnecessary back and forth.

Lastly, you should think about whether or not your lawyer really needs to approve certain changes. If the change is a business issue that is within your domain to decide, handle it yourself. However, if your supplier wants to change the indemnity, insurance, governing law, warranty, confidentiality, non-disclosure or the intellectual property clauses, you should confer with your attorney.

To ensure that your contract provides you with the most protection from liability available, contact Leslie S. Marell to schedule an appointment. Our office is located in Torrance, California, but we proudly serve businesses of all sizes from all over the country.

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Defining “Material Breach” in Your Contract

Hopefully you have read our blog titled “State of Indiana v. IBM: Test for Determining the Materiality of a Breach of Contract.” Below are a few tips for how to define what constitutes a material breach in your contract and help ensure the court will support your termination when a material breach occurs:

  • Clearly identify the specific events that constitute a material breach and that the parties agree will allow termination of the contract without the payment of termination charges. This will not only help ensure the court enforces these provisions, but the negotiated terms will also provide the court guidance in assessing if an unlisted breach is material.
  • The contract should set forth a notice requirement prior to terminating the contract for a material breach event. The breaching party should be given the opportunity to cure the defect. By giving this notice, you will likely learn any arguments the breaching party has that its conduct does not meet the material breach standard.
  • In addition to the specific material breach provision, the contract should also contain general breach of contract terms. You will want to include operational standards that must be met in measuring performance.
  • When defining the standards of performance, avoid using ambiguous terms. Common examples of terms to avoid include “industry standard,” “appropriate,” or “best practice.”
  • To ensure that the service levels are important, you must have meaningful service level credits. If the service level credits are minimal, it minimizes the significance of missed service levels. You should also avoid using service level credits as liquidated damages. You don’t want the other party or the court to view payment of these “liquidated damages” as a valid alternative to performing.
  • Set forth service levels that allow you the ability to terminate the contract if performance falls below a defined standard.

If you need assistance defining a material breach in your agreements or you have questions regarding your company’s contractual needs, contact Leslie S. Marell for help. We serve as general counsel to clients who do not require, or choose not to employ, a full-time lawyer in-house. Call today to schedule your initial consultation.