Tag Archives: Contracts

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If you don’t Understand your Contract, It can be Costly!

You have probably heard that is it important to thoroughly read a contract before you sign it. However, reading it is only half of it – you must also make sure you understand your rights and obligations under it. Whether this means you confer with an attorney or read the contract five times over, it is essential.

Joe Wickline, a coach for the University of Texas football team, may have learned this lesson the hard way. Texas University hired Wickline in 2014 as its offensive line coach and offensive coordinator. When Wickline was hired, he was still under contract with Oklahoma State University (OSU). The OSU agreement permitted Wickline to leave without penalty, but only if certain requirements had been met. OSU believed that Wickline had not met the required conditions for leaving and filed a breach of contract lawsuit against Wickline seeking $600,000 in damages. Wickline filed a countersuit against OSU in a Texas court.

Wickline’s countersuit was dismissed by the Texas judge due to a provision in the contract that required all litigation to be filed in Payne County, Oklahoma. The lawsuit filed by OSU for breach of contract was filed in Payne County and is still pending. In short, OSU seeks to prove that Wickline is not controlling the play calls for the Longhorns. If this can be established, OSU will recover the damages it seeks because Wickline will have made a lateral move to Texas and failed to take a promotion with “play-calling duties,” as required to avoid penalty in his contract with OSU. Thus far, the University of Texas has not been named as a defendant in the lawsuit.

It remains to be seen whether Wickline met the requirements for terminating his OSU contract, but his case demonstrates how costly it can be if you do not understand your rights and duties under a contract.

If you are entering a contract and you are not sure you fully understand all of its terms and conditions, let Leslie S. Marell assist you. 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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“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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5 Important Tips for Your New Business Venture

When you are starting a new business, it is easy to feel overwhelmed by all of the decisions you have to make. The decisions you make now can have lasting consequences, so it is important to get them right. Below are five important tips to help ensure that your new business gets off to a successful start:

Legal Structure

There are several different types of business entities to choose from, each with its advantages and disadvantages. To learn more, please read our blog titled “Which Legal Structure is Best for Your Start-Up?” It is important for you to confer with a business attorney to ensure you select the legal structure that is most beneficial for your business.

Written Contracts

New business owners often fall prey to relying on oral promises that aren’t fulfilled. Getting your agreements in writing is the best way to protect your interests. This includes creating a written agreement between the founders of the business which outlines each owner’s percentage of ownership and how the daily business decisions will be made.

Intellectual Property

Intellectual property can include anything from your company name, to its logo, to the type of products you sell. All business owners should take the initiative to legally protect their intellectual property. If your entity fails to obtain the proper patent, trademark or copyright, it could result in you have no legal recourse if another party infringes on your rights. One important step in protecting your private information is to require all employees to execute a non-disclosure agreement.

Employees

There are a wide variety of laws governing an employer’s relationship with its employees. It is imperative that you educate yourself regarding the laws, rules and regulations that apply to your industry and your specific business.

Get help

When your business is first starting out, you will likely be tempted to try to save money and handle things on your own. Unfortunately, this approach can end up costing you significantly more than the cost of retaining a professional. One mistake could be the end of your business before it even gets off the ground. Don’t let that happen – get the legal assistance you need.

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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Part One: Understanding the Indemnity Clause

Most business people assume that the Indemnity clause is a legal issue to be resolved only by their lawyer.

Black’s Law Dictionary (the Webster’s dictionary for lawyers) defines Indemnify – in part- as follows:  “To make good; to compensate; to make reimbursement to one of a loss already incurred by him.”

Read that carefully. Doesn’t that say to indemnify means to pay money?

And if indemnify means to pay…….can you really characterize the indemnity clause only as a “legal” issue?

Since many indemnity clauses contain unfamiliar legal jargon (not to mention long run-on sentences!), even business people experienced in contracting throw up their hands in frustration. They often turn the clause over to their lawyer without reading it. If the lawyer is unable to obtain the desired outcome, he/ she usually throws the ultimate decision back to the business person by saying “It’s a business decision….it’s up to you!” And the parties remain in a stalemate.

If this situation sounds all too familiar and you want to “break the mold”, I’d like to provide you insight into the meaning of the indemnity clause.

It’s not all that complicated. But, be forewarned:  You’ll need to devote 5-10 minutes of uninterrupted time to understand this. If you do, I promise you’ll have new insight into indemnity clauses.

THE PURPOSE OF THE INDEMNITY CLAUSE

In an indemnity clause, one party agrees to defend the other and pay for all costs of the lawsuit if it is sued by a third party for specified reasons and to pay any damages and judgment resulting from the lawsuit. The indemnity clause shifts “third party” risks from one contracting party to the other. In effect, the indemnifying party is acting as an insurer.

Examples give insight into a concept…so let me provide you with one:

Assume that you retain a contractor to perform construction work on your premises, and in the course of that work, the contractor injures the UPS driver and damages his vehicle. The UPS driver (third party) will likely bring a lawsuit against not only the contractor, but against your company on whose premises the injury occurred. Further assume that the case goes to trial and your company is found not to be liable and the contractor is found to be 100% responsible. Your company will have spent a significant amount of money defending itself in the lawsuit.

Your company would be entitled to reimbursement from the contractor of all moneys it incurred in defending itself only if the contract between your company and the contractor contained an indemnity clause.

In other words, each party to the contract is on their own when a third party claims injuries or damages unless the contract contains an INDEMNITY clause which shifts “third party” claims from one contracting party to the other.

THE (UNFORTUNATELY) TYPICAL PROBLEM

Before talking further about indemnity clauses, I’d like you to assume the following situation:

Seller sells a valve to its customer, a tractor company. Customer integrates the valve into the tractor. The tractor is sold to an end-user. The tractor malfunctions and causes injury to end-user. Injured user sues both the customer company and the seller (valve company).

The matter goes to court. The jury concludes that the malfunction was caused by the combined negligence of tractor company and valve seller: 25% of the malfunction was attributable to the seller’s minor manufacturing defects in the valve and 75% of the malfunction was due to faulty installation by the customer.

Assume further that the following indemnity clause is in the contract between tractor company customer and seller. You’ll note that I’ve underlined the key words to help you understand the “essence” of the clause. (This is a technique a very experienced lawyer shared with me many years ago and I found extremely useful):

Seller shall defend, indemnify and hold harmless Customer, its officers, directors, agents and representatives from and against any and all claims, suits, losses, penalties, damages (whether actual, punitive, consequential or otherwise) and associated costs and expenses (including attorney’s fees, expert’s fees, and costs of investigation) and all liabilities that are caused in whole or in part by: (a) any breach by Seller of this Agreement or (b) any negligent, or intentional act, or omission by Seller, its employees, officers, or agents in the performance of this Agreement.

Looking only to the underlined words,  what is the seller’s responsibility in the hypothetical situation?

HINT:  Look at the underlined words on lines 4 and 5 which read: “caused in whole or in part by…”

MAJOR PROBLEM:

SHIFTING ALL RISK TO SELLER

The above clause says that if the seller breaches or is found to be negligent in any percent, the seller will be 100% financially responsible for all damages caused by both the seller’s and customer’s negligence.

Going back to the hypothetical situation, even though the jury determined that the tractor customer is 75% negligent, as long as the seller is negligent in part, the seller’s financial responsibility will be 100%.

IMPORTANT NOTE:  The indemnity clause does not relieve the customer tractor company (in legalese the “indemnitee”) from responsibility to pay damages to the injured end-user. Tractor company will be liable to pay the end user for bodily injuries and property damage.

But, the indemnity clause gives the tractor company a legal right to go back to the valve seller (the “indemnitor”) to collect for all the damages paid to the end-user. Additionally, the tractor company has the right to be reimbursed for all costs and attorney’s fees incurred in its trial with the end-user.

Even if the clause doesn’t seem fair, generally speaking (of course there are always exceptions!) the courts will enforce it.

Fairness is rarely relevant in the B2B (business to business) contracting world. Of course, there are exceptions, but courts typically say that the parties to the contract are free to allocate (legalese for shift) the risks whichever way they determine. That means that if the seller is willing to assume responsibility for not only what the seller does but also for the actions – or negligence – of the buyer or a third party, the courts will enforce the seller’s decision to accept that risk.

Indemnity is a broad financial obligation. If a seller is required to provide indemnity, the prudent seller will want to limit that indemnity to behavior over which it has control.

The above example of overly broad language is the # 1 problem sellers have with buyer indemnity clauses.

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Guidelines in “Fighting” the Battle of the Forms

I consistently receive questions from my clients and seminar attendees relating to the Battle of the Forms. In this age of e-contracting, one might assume that this issue is no longer relevant.

However, unless both the buyer and seller sign (or click their assent to) a single agreement under which they agree to do business, the parties will be operating in the uncertain realm of the Battle of the Forms.

Below are some basic guidelines to keep in mind in “fighting” the battle and answers to often asked questions.

BASIC GUIDELINES

  1. If you don’t provide the other side with your terms and conditions (of either purchase or sale), you are not engaging in the Battle of the Forms…..and you will lose. That is to say, you may have inadvertently agreed to the other side’s terms even if you never signed their form.
  1. If you sign the other side’s form, you will have lost the battle….even if you provide the other side with your terms – previously or after the fact.
  1. One of the most important clauses to include in your terms is a clause which objects to those terms in the other side’s form that differ from or are in addition to your terms.  (See example language in answer to Question 2 below)
  1. Bad news for Sellers:  Sellers will almost always lose the battle regarding limitations of liabilities if the customer provides the seller with its terms of purchase. The only effective way to limit your liabilities with your customer is to negotiate and sign a master agreement.
  1. While every business person involved with the exchange of RFP’s, proposals, POs, acknowledgement forms, and the like should be familiar with the Battle of the Forms, the most efficient use of time and productive approach is to focus on the major issues and ensure agreement in those areas.

BATTLE OF THE FORMS QUESTIONS

QUESTION #1:    We include in our Bid package our terms and conditions of purchase and we state that any terms and conditions contained in the supplier’s proposal will not apply. In those cases where the supplier includes its terms of sale, whose Ts and Cs have superiority?

A:         This is a classic example of the “Battle of the Forms”. If you have included a set of terms and conditions of purchase in your RFP and the supplier responds with their terms and conditions of sale, neither document would supersede the other. The outcome would be as follows: In those areas where your terms are in agreement with the seller’s, those terms would apply. However, most terms will be in conflict with one another, in which case, neither clause would apply. In the event of a dispute regarding a clause with which there has been no agreement, the courts would look to the Uniform Commercial Code (if the contract involved the sale of goods) or General Contract Law (for service and other contracts) for resolution.

QUESTION #2:    What is a good example of language that should be on the buyer’s form that takes exception to the terms in the seller’s forms?

A:         The following language mirrors section 2-207 of the Uniform Commercial Code which addresses the battle of the forms issue:

“This purchase order is limited to the terms and conditions contained on the face and the reverse. Any additional or different terms proposed by Seller in any quotation, acknowledgment or other document are hereby deemed to be material alterations and notice of objection to them is hereby given. Any such proposed terms shall be void”.

          (NOTE TO SELLERS:  Change “purchase order” on line 1 to “proposal”. Change “Seller” on line 2 to “Buyer”. Change “quotation, acknowledgment” on line 2 to “request for proposal, purchase order”.)

QUESTION #3:    We have a Master Agreement with a supplier. After we issue our P.O. release document, our supplier provides its acknowledgment form (with terms on the back) and it also submits an invoice with terms on the back. Are these binding and do they supersede the negotiated terms of the Master Agreement?

A:         While terms on the back of the supplier’s form will not supersede a provision of the Master Agreement, they might ADD TO the Master Agreement. Let’s say, for instance, your Master Agreement did not address the right to cancel an order. If your supplier’s acknowledgment form has a clause that assesses a 25% restocking fee if you do cancel, that term might be considered part of the overall agreement between the companies.

The way to avoid this from occurring is to include language in your Master Agreement similar to the following:

“This Master Agreement shall apply to all proposals, 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 term or condition in any release shall be applicable to a transaction within the scope of this Master Agreement”.

NOTE TO SELLERS: The above clause also protects the seller from additional terms contained in a buyer’s P.O. or other document.

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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.

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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!