Tag Archives: contract

Business, Contracts

What You Can Learn from Apple & GT Advanced Technologies

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

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

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

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

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

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

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

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

Contracts

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Contracts

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

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

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

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

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

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

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

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

Business

How to Use Your Attorney More Effectively

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

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

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

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

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

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

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

Contracts

Defining “Material Breach” in Your Contract

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

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

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

Contracts

Contract Terms: What does “Prompt” Mean?

The term “prompt” is commonly used in contracts, but what does it mean? According to Judge James T. Vaughn Jr. of the Delaware Supreme Court, it depends.

Facts of the case

In Avaya, Inc. v. Charter Communications Holding Company, LLC, C.A. No. N14C-03-052, Plaintiff Avaya, Inc. (“Avaya”) moved for summary judgment. The parties entered a Master Purchase Service Agreement (“Agreement”) under which the defendants, Charter Communications Holding Company, LLC and Charter Communications, Inc. (together “Charter”), purchased equipment and software from Avaya. The Agreement included a provision requiring Avaya to “defend, or settle, at its own expense”, and “pay all damages and costs” relating to, any claims for infringement of patent, copyright or trade secret brought against Charter related to Charter’s use of Avaya products purchased under the Agreement. However, the Agreement also required, among other things, that “Avaya’s obligation is expressly conditioned upon the following: (1) [Charter] shall promptly notify [emphasis added] Avaya in writing of such claim or suit…”

In its summary judgment motion, Avaya argued that Charter failed to comply with the contractual indemnity requirement to “promptly notify” Avaya of a claim or lawsuit for which indemnity was being requested. The complaint was served on Charter on September 5, 2006, but Charter did not provide a copy of it to Avaya until July 2, 2007.

Ruling

Justice Vaughn denied the summary judgment motion filed by Avaya. He was not prepared to rule that giving notice of the claim ten months after the filing of a lawsuit was not prompt “as a matter of law.” He reasoned that Charter should be given the opportunity to conduct discovery to determine the applicable facts and circumstances that should be considered by the court.

Judge Vaughn stated that he agrees “with Charter that the phrase [prompt] is subject to some interpretation, and that the interpretation may be influenced by attendant facts and circumstances.”

Conclusion

While the use of “prompt” is common in contracts, the Avaya case is just one example of how it may not mean what you think it means. Terms such as “prompt” or “sufficient time” are vague enough that they are open to interpretation. As a result, if you want to avoid confusion, disputes, and even worse, litigation over what these terms mean, it is wise to define them in your contract. For example, language such as “prompt notice is required, but in no event later than 20 days after receipt of a claim.”

If 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

IBM’s Legal Department: A New Approach with Contracts

Assistant general counsel at IBM, Neil Abrams, believes that he can better serve clients and customers by simplifying matters. With this strategy in mind, Abrams has led a team in reducing complex and lengthy contracts for cloud services to a straightforward, two-page document.

Abrams explained to CorpCounsel.com that the contracts for a large number of cloud services were causing frustrating obstacles for customers. The contracts would be sent to the customer’s attorney who would begin negotiating the wording and the progress would come to a frustrating standstill.

Abrams’ team took a couple of months to reduce the crucial points of the contract into a two-page document. They even translated it into more than 20 languages, using concise and plain wording. The team did not use cross-referencing, hyperlinking or including other documents into the contract by reference.

Additionally, while many businesses also require a separate contract that outlines what actions the company is going to take or the “professional services” to be provided, the new IBM contract includes services. Abrams’ team even included intellectual property indemnification in the contract, which many cloud providers do not include.

The response to the new, shorter contract has been positive. It is less time-consuming for the customers and the attorneys are able to accomplish any necessary negotiations quicker. In fact, IBM has even been recognized as a finalist for the 2014 Innovation Award for Operational Improvement for “boldly and rapidly transforming its cloud computing contract process.”

As far as Abrams, his work on the cloud services contract has moved him from head attorney for software to serving as an assistant general counsel tasked with looking for ways to improve IBM’s overall client experience, including the simplification of more contracts. In fact, Abrams has already released a four-page contract that covers all of IBM’s products and formerly averaged approximately 30 pages.

Many large companies have template contracts that their internal clients use and over time they get longer and longer. As a result, the contracting process is taking longer. This can take a significant toll on both the buyer and the seller. As IBM is proving, simplifying and shortening contracts (with a focus on making them easier for internal clients to understand) can improve the process for all parties involved.

I have always been an advocate of making contracts clear and concise. I am encouraged by IBM’s advancement in this direction and it is my hope that many other large companies will follow in IBM’s path. It may be a challenge, but it will be worth it when the parties realize they truly understand what their contracts say and disputes are less likely to occur, which save everyone time and money.

To learn more about simplifying your contracts or how we can assist you with other business-related matters, contact Leslie S. Marell today.

Business, Contracts

Key Terms to Include in a Partnership, Shareholder, or LLC Operating Agreement

If you are entering a partnership, shareholder or Limited Liability Company (LLC) Operating Agreement with another party, it is important to draft a solid contract. Although you may not think it is necessary because the other party is somebody you trust, having an agreement in writing can help avoid legal disputes in the future as well preserve your relationship.

In some jurisdictions (such as New York), it is not a breach of contract for a party to withdraw from a partnership that was created orally. See Gelman v. Buehler. In other words, a partnership may be dissolved unilaterally if there are no particular terms or undertakings specified in the underlying agreement. This, in addition to the important issue of joint liability, is why I typically dissuade people from using straight partnerships.

There are a variety of important terms to include in this type of written contract, but the buyout agreement terms require special attention. The Buy-Sell Agreement is an agreement among business owners to purchase or sell a business interest after a specific event, at a determinable price and on predetermined terms. The purchase or sale may be mandatory or optional and the agreement may give purchase or sale rights to one party, all of the parties, or to the company.

Below are three important purposes of a Buy-Sell Agreement:

  1. The owners of the business may want to place restrictions on who can become a new co-owner. For example, if a co-owner dies or gets divorced, his or her interests could transfer to a spouse or children if a buyout agreement is not in place. The agreement includes a general prohibition on the sale of transfer of ownership interests, except under the circumstances specified in the agreement.
  2. The owners of a business may wish to “create a market” for the sale or transfer of their ownership interests. Owners of a small business typically do not have a ready market to sell all or a portion of the business, so the Buy-Sell Agreement can provide a means for the purchase of it.
  3. The mechanism for determining the purchase price of an owner’s interests can be specified in the Buy-Sell Agreement. In fact, the agreement can set forth how the purchase price will be paid. This can prevent disputes that commonly arise between “selling” owners that typically have a different perspective of fair price or terms of payment than those of the remaining owners.

There are many other factors that should be considered in a Buy-Sell Agreement, which will be covered in future blogs, so please check back for more information. Or, to learn more about buy-sell agreements and how to protect yourself or how we can assist you with other business-related matters, contact Leslie S. Marell today.

Contracts

Shipping Terms in Your Commerce Contracts

Shipping terms used in domestic commerce in the United States are defined by the Uniform Commercial Code (UCC), as adopted by each individual state. However, the UCC terms (as they currently stand) are inadequate for international transactions because they do not deal with responsibility for exporting and importing as well as who loads and unloads the goods at the various points throughout delivery and who pays for which points of delivery. . If you are an importer, your shipping terms should be defined by referring to the “Incoterms,” which is a registered trademark of the International Chamber of Commerce (ICC). The ICC drafted the Incoterms and continues to update and revise them every 10 years, with the latest version having been published in 2010.

Incoterms are used by exporters and importers in nearly every trading country worldwide and they define the primary obligations of the exporter and importer in relation to the shipment of goods in international transactions. There are 11 very specific delivery terms in the Incoterms all of which precisely define who is responsible for transporting, loading and unloading from the seller’s facility, the port of export and the port of import, insuring, and complying with exporting and importing regulations..

There is no such detailed definition of the terms of delivery within the UCC  The “F.O.B. term deals with the issue of risk of loss and freight charges. People routinely modify the term to add language such as F.O.B, Origin, Freight Prepaid & Charged Back.” The additional language is not defined in the UCC; rather it is ‘defined” by industry usage.

The 11 Incoterms do not require additional statements. As soon as the seller quotes the buyer “EXW ABC Facility in Houston, TX, USA-Incoterms 2010”, both parties know that the seller is saying that any freight charges, forwarding fees and customs clearance are the Buyer’s responsibility.

It is important that you understand the distinctions between the 11 delivery terms of the Incoterms 2010. It is also important that you have similar discussions with your supplier as to which delivery term will apply and then ensure that this term I’m convinced that you need a “cheat sheet” listing all the responsibilities included as part of your purchase order. I’ve created a graph identifying the buyer’s and seller’s obligations within the 11 Incoterms and will be happy to email it to you if you send me an email to Leslie@marell-lawfirm.com.

Our next blog will provide you a brief summary of some of the Incoterms you will want to be familiar with. However, this can be a very complex area of the law and you should obtain legal counsel when participating in international trade. Contact Leslie S. Marell for assistance in understanding domestic shipment terms under the UCC and international shipment terms under the Incoterms.

Business, Contracts

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.