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Contracts

A Summary of Essential Contract Terms – Part 2

Hopefully you have read our blog titled “A Summary of Essential Contract Terms – Part 1.” This blog is a continuation of the questions that should be asked while negotiating and drafting every contract:

How will notices be given?

It is important to require all notices to be given in writing and set forth how they should be delivered (personally, U.S. mail, certified mail, overnight delivery service, etc.). The contract should also specify the address where each party will be served with a notice. You should also identify when the notice shall be deemed to have been received, especially if a certain time period starts upon delivery of the notice.

What is the relationship of the parties?

Depending upon the type of contract, it is important to identify the relationship being established between the parties. For example, is one of the parties an independent contractor or an employee? Does the agreement establish a joint venture, partnership, agency or other association between the parties? Does the contract confer power or authority from one party to the other?

Is the contract severable?

If one portion of the contract is declared by a court to be unenforceable, does the remainder of the contract remain in full force and effect? This type of provision is particularly important in non-compete and non-solicitation agreements.

Can the contract be assigned?

Most contracts specify whether the agreement is binding on and inure to the benefit of the parties and their successors and assigns. As a general rule, however, a contract is only binding on the parties that signed it. However, if a company is sold, you want to ensure that the agreement is binding on the new owners.

Will certain contract clauses survive termination?

When a contract is terminated, it means that it is no longer effective or binding. However, there are certain provisions that you may want to continue to be effective such as confidentiality, indemnification, or limitation of liability clauses.

How can the contract be terminated?

Most contracts provide that they can be terminated “for cause” or “without cause.” This provision should set forth what constitutes cause and the notification requirements, as well as any time period in which the breaching party can cure. If a party is allowed to terminate the contract for convenience, notification requirements should be detailed in the contract.

Does failure to enforce constitute waiver?

Most contracts provide that the failure of either party to strictly enforce the terms or conditions of the contract do not constitute a waiver of such terms or conditions.

Are there any warranties being made?

If warranties are made, they should be clearly identified in the contract. Further, a provision should be included stating that unless expressly stated in the contract, the seller disclaims and makes no other implied or express warranties.

Can the contract be modified?

It is wise to include a clause that states the contract can only be amended or modified in a writing that is signed by both parties.

To learn more about essential contract terms or how we can assist you with other business-related matters, contact Leslie S. Marell today.

Contracts

A Summary of Essential Contract Terms – Part 1

Every industry and type of business requires its own unique contracts. However, there are certain essential terms that should be included in most every contract. Below is a simple summary of several questions you should ask in determining what types of clauses you need in your agreements.

Should the contract be assignable?

Most parties do not want the other party to have the right to assign or subcontract any part of its obligations under the contract without obtaining express consent. It is important to understand that unless expressly prohibited in the agreement, a contract is presumed to be assignable.

Who is liable to pay attorney’s fees?

Typically, a non-prevailing party is required to pay the lawyer’s fees and costs incurred by the prevailing party. In some states, there is a law that allows the prevailing party in a lawsuit to recover its attorney’s fees, but it is wise to have this type of provision in your agreement to ensure you are protected. Additionally, the law may limit your recover to the expenses associated with a lawsuit while the contract clause can allow recovery in a dispute.

What law will govern the contract?

You should select the law of a specified state to govern your contract. The state law you choose should have some relationship to the contract or the parties involved. Most parties select the state where their home office is located because they are familiar with them and already have attorneys representing their best interests in the state. You should also state your choice of venue for where lawsuits pertaining to the contract should be filed.

What happens if the agreement has conflicting terms?

Hopefully your primary document does not conflict with itself, but if it incorporates other contracts or documents, it is possible a conflict can occur. Thus, you should have a provision that sets forth how such a conflict will be handled. In other words, the contract will state which document will have priority over the other.

Are there exclusive or cumulative remedies?

If the contract outlines specific rights and remedies, it should state whether they are exclusive or cumulative with other rights and remedies.

What if breach is caused by events out of the party’s control?

Most contracts provide that neither party can be held liable for a delay or other failure in performance caused by fire, flood, war, or other similar causes beyond the party’s control. This clause should be fair in listing the catastrophic events that may be applicable to the business, the time frame for providing notice of the unforeseen event should be reasonable, and the time period giving rise to the right to terminate should be fair to both parties.

Is there are right to indemnification?

If one party agrees to indemnify or hold the other party harmless from all claims or actions arising out of the indemnifying party’s acts or omissions, it should be clearly stated in the contract. For more information, please read our blog titled “Indemnification Clauses.”

How will insurance be handled?

Depending on the type of transaction, it may be necessary to outline how insurance will be handled. Each party may agree to maintain insurance in commercially reasonable amounts to protect itself and the other party for damage to property or personal injury that may arise under the contract.

For more information on questions you should ask when negotiating and drafting a contract, be sure to read our next blog. If you have additional questions, 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.

Contracts

Don’t Make Assumptions In Your Outsourcing Contracts

It is a common mistake for users to enter into an outsourcing contract with the assumption that they will automatically be given new or updated technology during the life of the agreement. Unfortunately, unless this is specifically stated in the outsourcing contract, the supplier is not obligated to provide you with upgraded equipment. This can be problematic since advances in technology occur quite quickly.

If you are in a situation where your contract does not require the supplier to provide upgrades, there may still be hope. For example, if the supplier is failing to meet certain terms and conditions in the contract, there is likely a provision that works in your favor. Don’t give up hope without having an attorney review your outsourcing contract to determine if you have leverage for a renegotiation of the contract terms.

Advances in technology occurring at a fast rate also make it important for you to have exit rights in your contract. However, you must consider that an abrupt termination of the contract could be devastating to your business if you don’t have services during the transition period. Thus, you must create transfer agreements or ensure that alternative arrangements have been made.

The most effective thing you can do to protect yourself in outsourcing agreements is to obtain legal counsel early in the process. This is particularly important if the supplier is not being cooperative. A knowledgeable attorney will have subtle ways of negotiating your rights that the supplier will find agreeable. For example, the agreement may allow you the right to conduct an audit which could result in improvements by the supplier.

When negotiating and drafting an outsourcing contract, the value of obtaining professional advice is clear. The user has the most leverage during the negotiation process, so it is important to take advantage of it. Once the agreement has been signed and you are “locked in,” the power shifts to the supplier.

If you need assistance creating an outsourcing agreement 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.

Business, Contracts

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.

Contracts

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.

Contracts

Understanding Common Contractual Clauses

While every contract is unique, a typical business contract contains some basic or “boilerplate” provisions. These clauses usually follow a standard format and they are carefully worded to ensure they will hold-up in court. Because so many contracts contain similar boilerplate provisions, many people do not read them or do not understand what they are agreeing to.

Below are a few examples of legal terms and conditions that you should fully read and understand before signing the contract. The consequences of ignoring these clauses could lead to an unintentional breach of the contract and/or litigation.

Merger and Integration Clause

This clause is often referred to as the “entire agreement clause” because it provides that the entire agreement between the two parties is what is laid out in the written contract. This is a very important provision to understand because it makes it extremely difficult for the parties to enforce any promises that are not documented in the contract, even if they were sent in writing or via email prior to contract signing. The court will look only within the four corners of the contract to resolve a dispute. Thus, it is imperative that all prior agreements are fully recorded in the written contract, leaving no ambiguity.

Indemnification Clause

The indemnification clause is a tool designed to protect one party from certain actions or negligence of the other party. In other words, this provision can protect you from misconduct or wrongdoing that you are not involved with. This type of protection is extremely important when there are contractors and subcontractors involved with performing the work. To learn more about indemnification, please read our blog titled “Resolving the issue of Limitation of Liabilities between Buyer and Seller.”

Time is of the Essence Clause

If your contract deals with a time-sensitive matter, you must include a clause the dictates failure to meet a specific deadline is considered a breach of the contract. The clause can outline the consequences or damages available to the non-breaching party for failure to meet the deadline.

Severability Clause

A severability clause provides that if a portion of the contract is held to be void or unenforceable, the remainder of the agreement can still be valid. Without this provision, the entire contract could be unenforceable if any part of it is void.

Liquidated Damages Clause

A liquidated damages clause provides that if a party breaches certain terms of the agreement (often delivery or performance requirements), they will be required to pay the other party a certain amount of money as compensation for the damages. Liquidated damages can be helpful when it is hard to calculate the actual damage that will be incurred by the non-breaching party.

Acceleration Clause

The inclusion of an acceleration clause allows a party to demand performance in full if the other party breaches the contract. For example, if one party misses a payment, the other party can demand payment in full.

The Takeaway

The above are just a few examples of the boilerplate language that can be included in a contract. Failing to read these clauses and to fully understand what you are signing can put your business at significant risk and make it vulnerable to a lawsuit. Remember, every clause in a contract is negotiable, so don’t think you are “stuck” with the boilerplate clauses. If you don’t understand any part of an agreement, it is imperative that you have a competent business attorney review it.

To learn more about boilerplate language in a contract or how we can assist you with other business-related matters, contact Leslie S. Marell today.

Contracts

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.

Contracts

Contracts for the Sale of Goods & the CISG

If you have not heard of the United Nations Convention on the International Sale of Goods (CISG) and you conduct business in different countries, you need to read this blog! Many American businesses are shocked when they learn that the CISG and not the UCC may be the applicable law to their contracts when dealing with out of country suppliers/ customers. The CISG has been ratified by the United States, making it qualify as American federal law (and therefore pre-empting state law). Thus, unless the CISG is specifically excluded from a contract that falls within its scope, it (and not the UCC) is the applicable law.

What type of contract falls within the CISG’s scope? In short, any agreement for the sale of goods between parties who have their place of business in different countries that are parties to the CISG (CISG Parties). Determining a parties “place of business” is not always easy. For instance, a US buyer that enters a contract for goods manufactured overseas with a distributor incorporated and with offices in the US may be within the CISG’s scope. Additionally, the CISG can apply in the domestic sale of goods if the parties’ places of business are not in the same country. This would occur in the case of an agreement between a US buyer and a foreign seller for goods to be delivered from the seller’s US store or warehouse.

In determining if a contract is for the sale of goods, it does not have to be solely for the sale of goods. The agreement must concern “predominantly” the sale of goods and not services. This means that an agreement for the sale of goods to be manufactured can fall within the CISG’s scope. An exception can occur if the buyer supplies a “substantial” portion of the materials necessary to manufacture the goods. Additionally, the sale of stocks, investment securities, negotiable instruments and money do not fall within the scope of the CISG.

If the parties want to ensure that the CISG does not apply to their contract, they must include an express statement excluding its application. The statement must be more than saying the contract will be governed by a specific state’s law because the CISG is considered state law. Thus, the contract should specifically declare that the CISG does not apply to the contract.

If the parties wish to opt-out of certain provisions of the CISG but not others, the contract must specifically outline the partial opt-out terms. Also, if the parties to a contract for services or for a mix of goods and services wish to opt-in for the CISG to be applied, they are generally allowed to do so by specifically stating so in the contract.

For more information regarding how the CISG differs from the UCC, please read our next blog or contact Leslie S. Marell to schedule your initial consultation.

Contracts

Contracts: Reading, Understanding & Breach

You have often heard that you should read a contract before you sign it. While this is true, the better advice is to make sure you understand the contract before you sign it. Many attorneys love to use fanciful legal jargon that can make it difficult to fully understand the terms and conditions in the contract. As a result, a breach of contract action is often the result of inadvertent failures because the party either failed to read or understand its obligations.

Breach of Contract

The most common type of breach of contract disputes is one that looks back at past actions or inactions. For example, a party failed to perform a duty required by the contract or the party took an action that is prohibited by the agreement. It is important to note that either action or inaction may be the basis of a breach of the contract lawsuit.

It is also possible for a breach to be forward-looking. This is often referred to as an “anticipatory breach” and it occurs when one of the parties either states its intention not to perform, or more frequently, does something to indicate that it will not perform its contractual obligations in the future. Although the time for performance has not arrived, the expression of the party’s intent not to perform can be sufficient to constitute a present breach of contract.

Responding to a Breach

If you are the non-breaching party, you should immediately consider how to minimize your damages. This is crucial because all parties to a contract have the duty to mitigate damages. In other words, you can’t sit back and let your damages mount if there are steps you can reasonably take to lessen them.

Before you suspend your own performance under the contract in response to the other party’s breach, you should have a knowledgeable business attorney review the agreement. It is important to determine whether the other party’s breach is a material or non-material breach. You should also gather and maintain all documentation and other evidence that the breach of contract occurred and your damages suffered as a result.

Litigating Breach of Contract Claims

Lawsuits can often be avoided with open communication. When a breach first occurs, having a clear discussion with the other party will often lead to you finding a way to cure the breach and move forward – saving everyone time and money.

If the dispute cannot be resolved, you will want to review the contract to determine if it has a dispute resolution clause which determines how the dispute will be resolved. You will also want to confer with your attorney regarding any clauses that govern what damages are recoverable in the event of a breach.

If you are entering into a contract and you need assistance understanding what the terms and conditions of the agreement actually mean, call Leslie S. Marell to schedule an initial consultation. She has been practicing business and commercial law for over 25 years. Leslie 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.

Contracts

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.