Category Archives: Buyer

Buyer, Contracts, Seller

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.

Buyer, Seller

Tips for Working with your Business Attorney

If your business is working with an attorney on an important transaction, there are a few important tips that can help ensure you obtain a successful outcome. Consider the following suggestions:

Choose the “Right” Attorney

Your business lawyer will play a very significant role in the success of your company. It is important to choose an attorney that is not only knowledgeable and experienced, but also one that you feel comfortable working with. The attorney that is the best fit for your friends, competitors or counterparts may not be the best one for you. Follow your gut instinct and retain an attorney that you trust and feel confident handling your business affairs.

Stay Involved

Don’t just hand the contract to your lawyer and consider it his or her job to negotiate and finalize it. It is an attorney’s primary goal to eliminate any risk or liability for their client. However, the nature of business involves taking risks. There is some truth to the old saying that “if there is no risk, there is no reward.” Therefore, you should inform your lawyer as to which risks your company is willing to take and which risks are deal-breakers. By understanding the risks involved, discussing them with your attorney and negotiating them accordingly, you will create a situation where the attorney is writing the language for you, NOT negotiating the deal for you.

Keep the Process Moving

Many contract negotiations get bogged down and can take days, weeks or months to finalize. Most attorneys work under different time constraints and have different goals than business people. If you give up control and let the lawyers determine the time constraints and goals, you will likely be frustrated with the result.

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.

Buyer, Contracts, Seller

The Pesky Auto-Renewal Clause

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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.

Buyer, Seller

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.

Buyer, Seller

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.

Buyer

Part One: Do you own the intellectual property to work created by your supplier?

When you retain a supplier to design software, customize its standard product to meet your needs, create engineering specifications, or develop documentation, do you have the right to use it over and over?  Can you re-use it in another application? Does your supplier have the right to re-sell it to another customer?
These questions have, at their heart, the basic principles of copyright, ownership and intellectual property.OWNERSHIP OF COPYRIGHTS Under copyright law, the author who creates an “original work of authorship” owns the copyright to that work.  Among other things, an original work of authorship includes designs, specifications, software, documentation, photographs, website development, artwork, or multimedia work.The author who owns the copyright automatically owns the exclusive rights to it and the rights to prevent others from copying, distributing, or preparing works based on the copyrighted materials.

As counter-intuitive as it may seem, even though your company pays your supplier to develop a work, or customize or modify the supplier’s product to your requirements, your company will not own the copyright to the work created unless it obtains a written assignment of copyright ownership signed by the author/ owner of the work. An assignment is simply a transfer of copyright ownership.

EXCEPTION:  WORKS FOR HIRE DOCTRINE
(Read this carefully:  It’s often misunderstood)

The “Works for Hire” doctrine is an exception to the above general rule.

Employee:
If a work was created by an employee as part of his or her job, the law considers the creation a work for hire, and the employer will own the copyright.

Independent Contractor (defined as any supplier you retain who is not an employee – whether sole proprietor or large company):
If the creator is an independent contractor, the works will be considered works for hire only if:
(1) the parties have signed a written agreement stating that the work will be a work for hire; and
(2) the work is commissioned as a contribution to a collective work, a supplementary work, an instructional text, answer material for a test, an atlas, motion picture, or an audiovisual work.

Note that the above list for independent contractors is very narrow and specific. Outsourcing the development of software, designs, photographs, catalogs and the like are not contained in this list and would not be considered “works for hire”.  

Merely including the “work-made-for-hire” language with your supplier is not enough to ensure that your company obtains ownership to the copyright in most cases.

BOTTOM LINEYou should obtain a written assignment before your supplier starts work. This language should specifically require that the supplier will assign (transfer) all intellectual property rights in the work to the company. Without a clear, written contract, your company may end up with only a limited license (right) to use the work.

A clause that simply says that your company owns the rights but does not specifically assign the rights does not legally transfer the ownership rights.

A simple NDA does not transfer the IP rights. You need an agreement with a specific assignment clause that transfers these rights.

EXAMPLE LANGUAGE

The following is an example of a very simple assignment clause to include in a contract with your independent contractor:

Independent Contractor hereby assigns and agrees to assign to Company, and shall require its subcontractors in writing to assign to Company, all right, title and interest in and to the (name of the work) and all intellectual property rights therein.

NEXT ISSUE 

These concepts are not terribly complicated. So, why all the back and forth negotiations between your company and the supplier?

Next month I’ll discuss the underlying problems by addressing the customer’s perspective of ownership vs. the supplier’s perspective and provide you with possible approaches to resolution.