Categorized as: Contracts

Frequently Asked Questions About the Battle of the Forms for Buyers & Sellers

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?

  • 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 language should be on our form that takes exception to the terms in the seller’s (or other company’s) forms?

  • This is an example of important “knock out” language which mirrors the battle of the forms section in Uniform Commercial Code:
    • Buyer proposed language:
      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.
    • Seller proposed language:
      This Quotation is limited to the terms and conditions contained on the face and the reverse. Any additional or different terms proposed by Buyer in any request for proposal, purchase order, 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.

QUESTION #3:

We have a Master Agreement with a supplier. After we issue our P.O. release, our supplier provides its acknowledgment form (with its terms). Are the seller’s terms binding and do they supersede the negotiated terms of the Master Agreement?

  • 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.  For instance, assume that 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 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.

 

 

“Notwithstanding” = Exceptions to What I Just Said (Can’t we just say what we mean?)

Business - meeting in an office, the businesspeople are discussi

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.

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 “http://www.marell-lawfirm.com/” to schedule an appointment.

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.

State of Indiana v. IBM: Test for Determining the Materiality of a Breach of Contract

There is not a significant amount of case law on the topic of how to determine whether a party’s breach of a contract rises to the level of a “material breach.” However, an Indiana court recently provided some direction with its decision in State of Indiana v. IBM.

Facts of the case

The State of Indiana entered into a 10-year, $1.3 billion outsourcing contract with IBM. The contract provided that IBM would overhaul and update the state’s welfare system, including providing the ability for residents of Indiana to apply for welfare benefits online or by calling a call center. However, once the new system was implemented, it caused an increase in error rates and slowed the rate of eligibility determinations. The State of Indiana terminated the contract, claiming that IBM had materially breached the timing and quality requirements under the agreement.

Court decision

The State sued IBM for $1.3 billion for breach of contract and IBM filed a counterclaim to recover the value of the equipment left with the state under the terms of the contract. The trial court determined that both parties were at fault and that neither should prevail. The court used portions of the test set forth in Williston on Contracts in ruling that the evidence presented by the State did not prove a material breach by IBM. The two factors the court focused on were:

  • the extent to which the injured party will be deprived of the benefit which it reasonably expected
  • the likelihood that the party failing to perform or to offer to perform will cure his failure

The court concluded that because the state obtained an improved welfare system from IBM, it was not denied the benefits it reasonably expected. The court also found that just prior to the termination of the contract, IBM was in the process of curing the timeliness problems. Finally, the court discussed whether the breach went “to the heart of the contract” and found that because IBM substantially performed, there wasnt a material breach.

The Aftermath

The court’s decision is troublesome because IBM avoided the material breach claim by only meeting between 50% and 80% of the required service levels. The court did not give much credence to serious breaches in the service levels and instead focused on the disclaimed warranty of “uninterrupted or error-free operation” when analyzing the performance issues.

If you are negotiating an outsourcing agreement, it is important to negotiate and clearly identify the performance standards in the contract. For tips on how to accomplish this in your contracts, please read our next blog titled “Defining ‘Material Breach’ in Your Contract.”

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

Online Contract Formation: Are your “Terms of Use” binding?

Many companies have their “terms of use” posted on their websites, but are they binding? The Ninth Circuit Court of Appeals recently decided a case addressing this specific issue and providing guidance to businesses that use websites and/or mobile applications in transacting with customers.

Facts of the case

In Nguyen v. Barnes & Noble Inc., the plaintiff alleged, among other things, that the operator of the website engaged in deceptive business practices when it cancelled an order he placed and was confirmed by Barnes & Noble, Inc. In response, the website operator filed a motion to compel arbitration as required under the terms of use (TOU) posted on its website. The plaintiff argued that he should not be bound by the arbitration requirement because he did not have notice of, nor did he agree to, the TOU.

The TOU on the website were accessible through underlined, green hyperlinks located in the bottom corner of each page of the website. The hyperlinks were located beside other legal notices and near buttons a user had to click on to complete an online purchase. The website operator claimed this gave the user constructive notice of the TOU and the plaintiff continued to use the website after such notice.

Holding

The Court of Appeals for the Ninth Circuit sided with the plaintiff. The court reasoned that although the hyperlinks to the TOU were conspicuous on every page of the website, the user was never prompted to agree to them. Even having the hyperlinks located close to other buttons the user must click on, without more, is insufficient to give constructive notice. As a result, the plaintiff did not accept the TOU, did not enter into a binding agreement with the website operator, and therefore arbitration was not required to address plaintiff’s claims.

Conclusion

This decision demonstrates that the rules of contract formation still apply to website agreements and terms of use. It also highlights the importance of requiring the user to take an affirmative action to accept the TOU. As Nguyen indicates, you should require the user to click on an “I Agree” box before allowing the user to complete a transaction.

Courts are reluctant to bind individual consumers to agreements or terms of use contained in browsewrap contracts. In fact, the Ninth Circuit commented in a footnote that the standard may be higher where agreements are being enforced against consumers than against business entities. Regardless, this decision should serve as notice to all website operators that browsewrap terms of use have serious limitations.

Remember, you can have the most solid and protective TOU possible, but if they are not enforceable, they do you no good.

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.

 

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.

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.

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.

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.