Tag Archives: agreement

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10 Basic Steps for Creating a Strong Commercial Contract

If you’re going to enter into a contract, you want to make sure it is a strong one. Every transaction is unique, but below are a few general tips for ensuring your agreements are solid:

Get it in writing

Although some verbal agreements can be binding, they can be extremely tough to enforce. You should never take the risk with your business – get your contracts in writing. It will lessen the likelihood of confusion and disputes. Additionally, keep the language simple. Legalese can often make matters unnecessarily complex.

Negotiate with the proper person

It is imperative that you negotiate with the person who has the authority to make binding decisions on behalf of the other party. Failure to do this can result in a significant waste of time.

Confirm the parties are correctly identified

This may seem obvious, but it is a common mistake for contracts to use names for parties that are not their legal names. For example, they use “XYZ” instead of “ABC, Inc. doing business as XYZ” or they include the names of the owners of the business.

Be detailed

The terms and conditions of the contract should be clearly spelled out in full detail. If it was verbally agreed upon, it should be included in the document too. If you discover a detail was forgotten, have a short amendment to the contract drafted as soon as possible. The agreement should also specifically state which state law governs the interpretation of the contract.

Cover contract termination

Although nobody wants to think about terminating the contract before it is even signed, it is essential to do so. Not only should the agreement contain a termination date, but it should also set forth what will happen if a party defaults under the contract. This may include clauses that outline how disputes will be resolved.

Keep it private

If the contract covers sensitive business information, the agreement should include mutual promises that it will be kept confidential.

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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Is our Letter of Intent Binding?

Buyers and sellers often use a letter of intent (LOI) to memorialize their agreement on the key terms of a transaction. Some of the material terms that are included in the LOI are the price, closing date, due diligence terms and other important deal points. Many parties find a sense of comfort once the LOI has been finalized and executed because it is a strong indication that most of the issues have been hammered out and a deal will occur. In fact, the LOI allows a supplier to start buying material in order to provide its customer with the product on time with the comfort of knowing that they will at least get reimbursed for this expenditure. The LOI serves as the approval to go ahead and spend the money.

Of course, the smaller issues and boilerplate language are not included in the LOI, so negotiations must still occur during the drafting of the contract. Although the LOI is not intended to be binding, certain contractual provisions such as confidentiality clauses and exclusivity terms are binding on the parties. As a result of this mix between binding and non-binding terms, it may leave you wondering when a non-binding LOI is binding?

It is common for the LOI to include a broad disclaimer that the parties are not bound by it unless or until a separate and binding contract has been executed by the parties. Yet, numerous courts have found that the LOI is evidence that the parties had a “meeting of the minds” sufficient to create an enforceable contract that is adequate for awarding damages if a breach occurs. In fact, the court applies an objective test to determine if a binding agreement exists. Thus, whether a party subjectively intended to be bound by the LOI does not matter. Rather, the court examines what a reasonable person in the same position as the parties to the LOI would’ve thought it meant.

Although there are no guarantees on what a court will decide regarding whether a LOI is binding or not, if you want to avoid it being binding on you, there are a few steps you can take, including:

  • Use clear an unequivocal language stating that the LOI is not binding on the parties
  • Include a provision stating that the LOI is an initial statement for consideration only and that additional information will be negotiated as part of a subsequent formal contract
  • Allow each party the right to terminate negotiations at any time and for any purpose
  • Comply with any exclusivity or confidentiality provisions contained within the LOI
  • Exclude the covenant to negotiate in good-faith or consider expressly disclaiming this obligation
  • Never refer to the LOI as a binding or final agreement in any correspondence or other communications with the other party

If you are interested in learning more about a LOI or you need assistance drafting one, contact Leslie S. Marell for an appointment.

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Mirror Image Rule vs. Last Shot Rule

Depending on the industry, a certain percentage of business is conducted vis-à-vis signed contracts. However, my observation is that much of commerce is conducted by the seller submitting its quotation (with its terms of sale), the buyer submitting its purchase order (with its terms of purchase) and neither signing the other’s form. This is an effective practice, but what happens when both parties have not signed the same document? How do you know what the terms of the agreement are? Unfortunately, it is difficult to answer these questions until after the fact.

Battle of the forms

During contract negotiations, each party typically exchanges its form which contains very different terms from the other’s form. In fact, it is common for numerous forms to be exchanged with competing terms and no final contract to which the parties have agreed to all the terms is ever signed.

General contract law

Traditional contract law requires that an offer and an acceptance to that offer be exchanged in order for a contract to be formed. In the real world, the issues are: What happens if the offer and acceptance contain different terms? Has a contract been formed? If so, whose terms control?

Two approaches have evolved over the years to address these issues:

1.      Mirror image rule

The mirror image rule requires the offer to be accepted “as is” for a contract to be formed. Once an offer is accepted, the parties have a legal agreement. If the party accepts the offer but changes one term, a contract does not exist under the mirror image rule. Rather, the acceptance with the changed term becomes a counteroffer to be accepted or rejected by the other party.

In the context of commerce, if the buyer submits a purchase order with its standard terms and conditions, and the seller accepts it but submits its own standard terms and conditions that are significantly different, there is not a contract under the mirror image rule.

In that common scenario, the contract is formed when the parties begin performance.

2.      The last shot rule

Under the last shot rule, however, the acceptance does not necessarily have to match the offer word for word. In the example above, if the buyer submitted its purchase order with full payment and the seller accepted by sending its own terms and conditions, then the seller’s “acceptance” becomes a counteroffer with its terms and conditions applied. The buyer’s payment constitutes acceptance by performance and, since the seller’s form was the last document to be sent, it constitutes the contract under the “last shot rule.” In other words, the last shot rule provides that the last document sent before performance is the governing document.

The Uniform Commercial Code (UCC) overrules both the mirror image rule and the last shot rule, which will be discussed further in our next blog.

If you need assistance understanding if a contract has been formed 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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Will the SEC Target Your Company’s Confidentiality Agreement?

The Securities Exchange Commission (SEC) has been ramping up its review of confidentiality provisions that affect its enforcement efforts and on the rights of whistleblowers. In fact, the agency has even requested copies of several companies’ employment contracts, non-disclosure agreements, and other documents that have been signed by employees over the past several years. The SEC is looking for any agreements that have a “chilling effect” on an employee’s ability to bring allegations of wrongdoing to its attention.

On April 1, 2015, the SEC filed an enforcement action against KBR, Inc. and directed at the contractual provisions it believes discourages whistleblowing activity. KBR used a form confidentiality statement in internal investigations pursuant to the company’s Code of Business Conduct Investigation Procedures Manual. The confidentiality statement, which witnesses were required to sign at the beginning of an interview, contained the following language:

I understand that in order to protect the integrity of this review, I am prohibited from discussing any particulars regarding this interview and the subject matter discussed during the interview, without the prior authorization of the Law Department. I understand that the unauthorized disclosure of information may be grounds for disciplinary action up to and including termination of employment.

The SEC alleged this language violated SEC Rule 21F-17(a) which provides that “[n]o person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement.” The goal of Rule 21F-17(a) is to promote the reporting of potential unlawful conduct to the SEC.

This action was resolved by an Order whereby KBR consented to revise the language and to pay $130,000. It is important to note that there was no evidence that the language at issue had ever deterred or prevented an employee from making a report to the SEC or others. The SEC merely reasoned that the language had a chilling effect on whistleblowing efforts.

KBR consented to settling this matter without admitting or denying the charges. It also agreed to amend its confidentiality agreement by using the following language approved in this case by the SEC:

Nothing in this Confidentiality Statement prohibits me from reporting possible violations of federal law or regulation to any governmental agency or entity, including but not limited to the Department of Justice, the Securities and Exchange Commission, the Congress, and any agency Inspector General, or making other disclosures that are protected under the whistleblower provisions of federal law or regulation. I do not need the prior authorization of the Law Department to make any such reports or disclosures and I am not required to notify the company that I have made such reports or disclosures.

Takeaway Points

The SEC is focused on taking enforcement action against company contracts that contain language that have a chilling effect on whistleblowing. Your company should take immediate action to review your employment contracts, confidentiality agreements and other types of agreements to determine if they contain language that the SEC may find has the effect of impeding an employee’s ability to report possible violations to government agencies.

This case gives businesses some insight as to what the SEC considers as acceptable language in confidentiality agreements. Of course, this language may not be applicable in every situation and where the language is placed may prove to be important at some point, but for now the KBR Order is the only example we have of language that the SEC deems acceptable.

If you have questions or concerns regarding the language used in your employment contracts, 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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How Does the CISG Differ from the UCC?

Hopefully you have read our previous blog titled “Contracts for the Sale of Goods & the CISG.” This blog will focus on some of the key differences between the United Nations Convention on the International Sale of Goods (CISG) and the Uniform Commercial Code (UCC). When the CISG is applied, the parties often make inaccurate assumptions regarding the existence of a contract between them. For example:

  • The contract may be declared invalid due to its indefiniteness if neither the price nor a formula for calculating the price is set forth. This can be fatal to the contract under the CISG but not under the UCC. If the court must determine the price under the CISG, it will declare the price to be the price charged at the time of conclusion, not the reasonable price standard at the time of delivery that is applied under the UCC.
  • Under the CISG, a revocable offer becomes irrevocable when the offeree mails its acceptance or if the offeree relies on the offer. This gives rise to a potential claim for full contractual damages rather than simply a reliance interest or other quasi-contractual or equitable remedy.
  • If the offer sets a deadline by which it must be accepted, under the CISG the offer is irrevocable until that date. In contrast, the UCC provides that an offer is revocable until it is accepted, with certain strict exceptions.
  • The CISG, in contrast to the UCC, doesn’t require the contract to be in writing or meet any other requirements as to form. In fact, the CISG allows a contract to be proved by any means, including witness testimony.
  • Under the CISG, if the offer and acceptance do not match perfectly (which often occurs when each party uses their own standard forms), the acceptance will be treated as a counter-offer which is often deemed accepted by performance of the contract. This can result in the seller’s terms being applied to the purchase and sale under the CISG, which should be motivation for buyers to opt-out of the CISG. Under the UCC, only the terms that both parties have agreed to will be included in the contract.

Finally, U.S. businesses have a better understanding of what to expect under the UCC because there is extensive case law interpreting it. To ensure that the UCC applies to your international contracts for the sale of goods, make sure your contracts specifically and explicitly exclude the CISG.

To ensure that your contract provides you with the most protection 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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How to Effectively Manage Your Contracts

If your entity has a wide variety of contracts, it can be a difficult task to manage them all. There are a variety of comprehensive contract management programs that can make the process easier for you. Consider the following tips:

Identify the Contracts

Before you can decide what type of contract management program will work best for your entity, you should first identify the types of contracts your organization enters into. For example, purchase orders, sales contracts, master agreements, service contracts, mortgages, real estate leases, equipment rentals, software and other intellectual property licenses, assignments and all other types of written agreement that legally bind your entity is a contract.

Once you have identified the types of contracts you will need to manage, you should also identify all of the parties your entity is working with. This includes vendors, suppliers, independent contractors, finance companies and banks, landlords, distributors, independent sales representatives, and companies with whom you have alliances. This will help you get a better overall picture of your contractual obligations.

Proactive Problem-Solving

Serious consequences can result from the mismanagement of contracts, so it is important to anticipate the problems you hope to solve by establishing a contract management system. Create some “best practices” to follow to help ensure you avoid problems. For example, if your contracts have automatic renewals, create a system for tracking which agreements will be automatically renewed and docket the deadlines for providing notice of termination if needed. You should also be tracking deadlines, payment dates and other important dates to ensure you are meeting your contractual obligations.

You should also establish a procedure for the review and approval of contracts. This includes having your legal counsel routinely review the required standard contract terms.

Contract Management Programs

A contract management program will provide organization and rules for how your entity’s contracts should be handled. For example, your contract management program should:

  • Categorize the types of contracts covered
  • Detail the personnel with authority to enter into binding contracts for the entity
  • Link contracts with appropriate budgets
  • Establish the standards for when required review of a contract must occur (such as when a minimum dollar amount is involved) – this includes setting standards for when the entity’s attorney should conduct the review
  • Identify the contractual forms or templates that may be used without prior approval
  • Outline any standard contract terms that must be met such as insurance requirements
  • Specify where the originals of the contracts must be filed and maintained

Contract Management Software

The days of using an excel spreadsheet to manage your contracts are over. There are a wide variety of affordable contract management software programs available that will save you time and meet your needs. These prepackaged programs are often more effective and functional than user-developed programs. Additionally, it is always helpful to have customer support and updates available if needed.

Work now to Make Life Easier Going Forward

You may feel overwhelmed by the thought of managing your contracts, but with diligent effort now, you will reap your reward going forward. Once all of the contracts are in the system and your agreements are organized, you will save time, money and be able to monitor the quality of the products and services provided to your entity.

If you need assistance with contractual or other business-related matters, contact Leslie S. Marell to schedule an initial consultation.

 

 

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Do You Need to Escape a Contract?

If you are bound by a contract that is no longer working for you, it is important to review the term and termination clauses in the agreement. The term of a contract is the amount of time it remains effective. The termination clauses outline the various ways the contract can end.

Term of the Contract

Most contracts set forth the “effective date” or the start date of the contract and a “termination date” which is the date the contract expires. It is common for an agreement to provide ways the contract can be renewed, which means that a new term for the contract is established for a set period of time. It is important to note that if your contract contains an automatic renewal clause, the agreement will be automatically renewed unless one of the parties provides notice of its intent to terminate the contract.

It is imperative that you understand the term of your contracts and your termination and renewal options. You should schedule the termination date and any deadlines for giving notice of your intent to terminate to avoid automatic renewal. You don’t want to miss your opportunity to escape a burdensome contract by missing this deadline!

Contract Termination

It is important to understand the termination provisions of your contract. The simplest way to end a contract is “without cause,” which means the terminating party does not provide a reason for the termination. You must typically provide written notice of termination to the other party.

Particularly from the Buyer perspective, it is extremely important that you negotiate such a termination without cause provision into your contract. If you no longer require the goods or services and therefore, wish to terminate the contract, this clause is one of the few mechanism that permits you to do so. Even if you have a legitimate business reason to terminate, contract law does not permit you to do so without an express provision in your contract giving you that right.

Your contract may also outline how to terminate the contract “with cause,” which means either party can end the contract if certain specified events occur. Depending on the event, the contract may allow the other party an opportunity to “cure” the event and avoid termination. Otherwise, the termination for cause can be immediately effective upon notice to the other party. It is common for termination with cause to result in a dispute over whether or not cause actually existed or if it was properly cured. Thus, if you intend to terminate a contract for cause, it is imperative that you carefully document the reasons for cause and record all events that provide you with cause to terminate. Finally, you should note that there may be certain obligations that extend past the termination of the contract, such as confidentiality provisions.

If you are considering terminating an existing contract, call Leslie Marell for help in reviewing the requirements of the term and termination clauses.

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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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Getting Sales Commission Agreements in Writing Avoids Disputes (and in some states, it’s the law!)

Whether you are an employer or an employee, it is important to have your sales commission agreements in writing. In fact, several states (including California) require any employer that pays commissions to employees providing services in the state to have a written agreement with the employee. The contract must outline how the commissions are computed and how they will be paid.

A sales commission agreement should clearly explain how the commissions are calculated and when they will be paid. The employee should be provided a signed copy of the contract and the employer should retain a signed acknowledgement of receipt of the contract by the employee.

In setting forth the calculation of commissions, the terms “sales” and “profits” must be defined. If returns, refunds, cancelled orders or other such occurrences impact the calculation, this must be clearly stated in the contract. It should also set forth when a commission is earned. Is it earned when an order is placed, when the goods are shipped or when the customer pays?

What about bonuses? You must look at the applicable state law, but in California short-term productivity bonuses are excluded from the definition of “commissions.” This can be a tricky area, however. For example, if the California employer has agreed to pay a fixed percentage of sales or profits as compensation for work, that can be considered a commission. It is common for bonuses to be based on a percentage of sales or profits, so this can create some ambiguity in what constitutes a commission. As a result, the best strategy is to have a clear and concise written agreement that sets forth the bonus plan and/or commission plan in order to avoid any disputes with the employee.

It is important to note that most employers do not have contracts with their at-will employees, so the sales commission agreement should contain a provision stating that the employee’s at-will status is not changed by the existence of the written commission’s agreement.

There are numerous other factors that must be considered when drafting a sales commission agreement. If you need assistance creating this type of contract 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 to Include in a Licensing Agreement: The Licensor’s Perspective

If you are the owner of intellectual property (IP), it is imperative that you protect your rights by properly registering it and using a licensing agreement that safeguards your rights. For more general information, please read our blog titled “Understanding Licensing Agreements.”

When creating a licensing agreement, you first need to determine the scope of the license. You will want to keep ultimate ownership of the IP, but you can assign limited use rights. The license scope should be broad enough that others will want to use your IP. Generally speaking, unless the IP is custom-made, the license is usually nonexclusive, so you can sell or license the use of it to other parties.

In most circumstances, you will want to make it clear that the license does not allow the licensee to reproduce or pirate the IP in order to sell it to third-parties. However, if you allow the licensee to reproduce the IP, you will want to be paid royalties or ongoing maintenance charges in exchange for the resale license.

Other topics your license agreement should cover include:

  • How long the license will last
  • Outline any rights of the licensee to modify or combine the IP with other products
  • Set forth any prohibited uses of the IP
  • Establish whether there are rights to transfer or sublicense
  • Detail the warranties; Disclaimer of the UCC warranties
  • List the limitations on the licensor’s liability
  • Include a provision covering nondisclosure of protected information
  • Outline indemnity for infringement
  • Set forth available remedies
  • Establish the conditions for terminating the contract

There a numerous factors that must be considered and negotiated when creating a license agreement. The laws governing intellectual property can be complicated, so having a seasoned attorney assist you is invaluable. Contact Leslie S. Marell today to schedule your appointment.