Category: Contracts

Feuding Business Partners in Private Companies: Considering Arbitration to Resolve Partnership Disputes

It is common for private company co-owners to have disagreements while they operate their business, but they typically work through these disputes themselves.  In those rare instances where conflicts escalate and legal action is required, business partners have two options—filing a lawsuit or participating in an arbitration proceeding.  Arbitration is available, however, only if the parties agreed in advance to arbitrate their disputes.  Therefore, before business partners enter into a buy-sell contact or join other agreements with their co-owners, they will want to consider both the pros and the cons of arbitration.  This post offers input for private company owners and investors to help them decide whether litigation or arbitration provides them with the best forum in which to resolve future disputes with their business partners.

Arbitration is often touted as a faster and less expensive alternative to litigation with the additional benefit of resulting in a final award that is not subject to appeal.  These attributes may not be realized in arbitration, however, and there are other important factors involved, which also merit consideration.  At the outset, it is important to emphasize that arbitrations are created by contract, and parties can therefore custom design the arbitration to be conducted in a manner that meets their specific needs.  The critical factors to be considered are: (i) speed—how important is a quick resolution to the dispute, (ii) confidentiality—how desirable is privacy in resolving the claims, (iii) scope—how broad are the claims to be resolved, (iv) expense—how important is it to limit costs, and (v) finality—is securing a final result more desirable than preserving the right to appeal an adverse decision.

Speed—Prompt Resolution of Dispute

Arbitrations generally resolve claims more promptly than litigation, but that is not always the case as arbitration proceedings can drag on if the arbitration is not subject to any restriction on when the final hearing must take place.  One way to ensure that an arbitration will promptly resolve the dispute, however, is to require an end date in the arbitration agreement.  Specifically, the parties can state in their arbitration provision that the final arbitration hearing must take place within a set period of time, perhaps 60 or 90 days of the date the arbitration panel holds its first scheduling conference.  The arbitrators will then set a date for the final hearing that meets this contractual requirement.  Similarly, in the arbitration provision, the parties can also specify the length for the hearing (no more than 2-3 days), and they can also impose limits on the extent of discovery, including by restricting the number of depositions than can be taken.

If securing a prompt resolution of a dispute with a business partner is important, this result can be assured by requiring that all claims are arbitrated, particularly if the parties specify in the arbitration provision that the final hearing must take place on a fast track basis.

Confidentiality—Arbitration Conducted Privately

Litigation takes place in a public forum and, as a result, all pleadings the parties file, and with only rare exceptions, all testimony and other evidence presented at any hearings and at trial will be available to the public.  Therefore if a business partner wants to avoid having future partnership disputes subject to public scrutiny, arbitration provides this protection. But looking at this from another perspective, a minority investor may want to decline to arbitrate future claims against the majority owner if the owner is sensitive to adverse publicity.  The threat of claims being litigated in a public lawsuit may provide the investor with leverage in the negotiation and settlement of any future claims the investor has against the majority owner.

Scope of Dispute—How Much Discovery Required

Determining the scope of a future dispute with a business partner is difficult to do at the time that business partners enter into their contract when any future claims are unknown.  The downside arises in the arbitration context, because one of the parties may desire broad discovery of the type that is permitted in litigation, which may be necessary to defend against certain types of contentions, such as claims for fraud, personal injury and other types of business torts.  In an arbitration proceeding, discovery is typically more restricted, and it may further be limited by the arbitration provision, which caps the number of depositions and narrows the scope of document discovery.  Under these circumstances, the defending party (the respondent) may be hamstrung by these discovery limitations in defending against the claimant’s allegations in arbitration.

To avoid prejudice to the respondent from restrictions on discovery in arbitration, the parties may decide to agree that not all claims between them would be subject to arbitration.  For example, the parties could agree that all claims related in any way to the value and purchase of a departing partner’s interest in the business would be subject to arbitration, but that other claims of a personal nature (e.g., claims for discrimination, wrongful termination) would be litigated in court rather than arbitrated.  This splitting of claims in this manner may not be practical, but is something to be discussed by the parties when they enter into their agreement at the outset.

Expense of Dispute Resolution

As discussed above, business partners can limit the expense of resolving future claims between them by requiring a fast track arbitration hearing and also by limiting the scope and the extent of allowed discovery.  For example, if the parties require a final arbitration hearing to take place in 90 days after the initial scheduling conference, limit the hearing to two days and permit no more than three fact witness depositions per side.  They will have likely achieved a significant reduction of the cost of resolving their dispute.

The issue of cost requires additional analysis, however, because if the parties are not of equal bargaining power, the partner with more capital may not agree that arbitration is the best forum to resolve disputes with a less solvent partner.  The wealthier partner may believe that he or she would prevail over the less well-capitalized partner in a “war of attrition.” This factor may be so significant that it causes the wealthier partner to reject the arbitration of future disputes in favor of resolving of all future claims by or against the other partner through litigation.

Finality of Arbitration Awards

There is no right of an appeal in arbitration and the grounds for attacking an arbitration award in a court proceeding after the arbitration concludes are narrow and rarely successful.  This finality element may thus be an important factor in selecting arbitration as the forum for resolving partnership disputes with the goal of ending the dispute without having it linger on.

There is another concern here, however, that also bears considering.   The conventional wisdom among trial lawyers is that arbitrators are prone to “split the baby” by not providing a strict construction of the written contract or the controlling statute at issue.  Instead, the belief is that arbitrators are inclined to include something for both sides in the final award in an attempt to be as fair as possible, which results in mixed bag outcome.   That has not been my personal experience, but it is true that if the arbitration award is not fully consistent with the contract or a governing statute, there is no right to appeal the decision.  The bottom line is that, at the end of the arbitration, the parties will have to live with the result, and there is no available path to challenge an unfavorable/undesired outcome.

Conclusion

The takeaway is that arbitration is not a panacea.  It can be structured to take place faster and more cost-effectively than a lawsuit, and it will also be held in private and not be subject to public scrutiny.  But, business partners also need to consider other factors in arbitration, such as specific limits on discovery that may be problematic and the finality of the arbitrators’ decision, which may not be viewed as fully consistent with the partners’ contract or in strict accordance with the applicable law.   To the extent that business partners do opt for arbitration, they should craft the arbitration provision to make sure its terms closely align with their business goals.

© 2020 Winstead PC.

ARTICLE BY Ladd Hirsch at Winstead.
For more on business conflict resolution, see the National Law Review Corporate & Business Organizations law section.

Get Closer With Your Contracts During the COVID-19 Pandemic

Contracts with customers, vendors, or other parties are a normal part of doing business.  Most businesses are party to numerous contracts and although it may seem that contracts are fairly standard documents, the reality is that each individual document is its own legally binding arrangement.  The parties to contracts often customize the arrangements to suit the particular business conditions or economics of the relationship.

Most businesses neither fuss over nor spend a lot of time on the contract provisions that allocate risk between the parties (outside of the major issues of payment and performance).  During extraordinary times, such as the current COVID-19 pandemic, business owners may not realize that the “roadmap” to their relationships with their business partners is usually in the often unread details of their business contracts.

Just as the Federal Emergency Management Agency (FEMA) provides guidance to prepare individuals, families and their households for natural disasters or political unrest, a well-prepared business owner has created a plan of their own for how their business will respond to unforeseen situations.  Understanding how a business might be impacted by the contracts they are party to should be part of that planning.  Even now, as we continue to face uncertainty as to when businesses will fully reopen as the pandemic begins to recede, it is not too late to assess how this may impact your contractual relationships.

Here are ideas and important things to keep in mind while reviewing your contracts:

  • Take stock of your most important contracts. Where are they located?  Are they easily accessible?  When was the last time they were reviewed?  Are you readily familiar with the provisions in each?  Now is a perfect time to organize those contracts into a system that allows those in your organization to quickly refer to them as needed.
  • Pay special attention to contracts with customers or vendors which are or may be impacted the most heavily by the economic uncertainty surrounding the COVID-19 pandemic.
  • Several remedies are available to contracting parties to enable them to excuse performance or protect themselves in a situation such as an epidemic, civil unrest or natural disaster. The “force majeure” clause is a well-known provision included in many contracts that excuses performance during certain unforeseen and highly adverse situations.  Included in the definition of force majeure is often a laundry list of events where a party’s performance obligation is excused.  I am seeing more efforts by parties in recent draft contracts to specifically exclude pandemics such as COVID-19 from the scope of force majeure, just as contracts written after the September 11, 2001 terrorist attack often specifically excluded terrorist events.  However, most force majeure clauses have a specific exclusion regarding payment obligations, which require the paying party to make payment to the other party regardless of the occurrence of a force majeure event.  It is important to review your contract to determine which contain force majeure clauses and under what particular circumstance a party is excused from performance.  If you are currently negotiating a contract, pay particular attention to the force majeure clause and how that may affect future unforeseen circumstances.
  • Rights of termination and damages for breach are often clearly spelled out in contracts. Be familiar with those triggering events and any provisions providing for damages, including liquidated damages.  Keep in mind that the normal business of the state court system has also been affected by this pandemic, so your ability to obtain relief or damages will be limited or delayed for the foreseeable future.  In light of that, alternative dispute resolution (such as mediation or arbitration), if permitted under the contract or as the parties otherwise agree, may be your best bet to get a prompt resolution.
  • Be careful about entering into any course of business that deviates from the written terms of the contract. This comes into play in two areas in particular.  First, if the parties agree to or engage in a course of practice that deviates from the written terms of the contract, it may be difficult for a party moving forward to enforce terms of the contract as written following that deviation.  The second scenario includes one of the parties waiving their right(s) in the contract (usually for a reason that makes good business sense in the current state of affairs).  Businesses will want to make sure that any departure from the written contract during the current pandemic, or otherwise, does not become the “new normal” and undercut important legal rights within their contract.
  • If the contract is silent on a particular aspect, the answer can often be found in statutory law. The Uniform Commercial Code (the “UCC”) provides “standard” rules for purchases and sales, leases, and other transactions.

Keep in mind that there is no requirement that a contract that is not beneficial to either or all parties be rigidly adhered to if the parties are willing to amend the contract or enter into a new contract altogether.  The key to staying afloat or even thriving in business in general, but especially during extraordinary times such as these, is flexibility and willingness to adapt.  Remember that contracts which have been altered to account for an event such as the COVID-19 pandemic may not be as sound once the economy bounces back, so do some mental visioning about where your business needs to be when returning to “business as usual” so that your contracts put you where you want to be.

If you have any concerns with how your contracts are being interpreted or administered during the COVID-19 pandemic, an attorney can be an important resource to prevent loss and ensure the continuing health of your business.

© 2020 Davis|Kuelthau, s.c. All Rights Reserved

How to Write Gender-Neutral Contracts

“Men” is not synonymous to “person”, nor does “he” mean “she.”  It is important for contractual language to be not only precise but also accurate.  Many agreements govern multiple individuals, some of whose gender is unclear or variable.  This article will give you advice and guidance on how to adjust contract language to be gender-neutral.  As society moves towards treating all genders equally, legal contracts should too.

What is gender?

Gender is the socially constructed characteristics of “male” and “female” and includes norms, roles, and relationships of and between groups of men and women.

What is gender-neutral?

Merriam-Webster defines gender-neutral as “not referring to either sex but only to people in general.”

Why it matters:

Conversations around gender and gender-neutrality are becoming more and more mainstream.  Thomson Reuters reported that in the past year (2018), there has been an increase in the number of clients requesting gender-neutral documents.  Startups are at the forefront of change and industry disruption, so it is logical that they stay ahead of the trend.

As you operate business, there are a number of form contracts that you will use regularly.  These form contracts are agreements your attorney drafts with brackets and spaces for you to update depending on each use.  For example, common form contracts include (1) Employee Offer Letters, (2) Confidentiality, Nondisclosure, and Assignment of Inventions Agreements, (3) Equity Incentive Plan, (4) Stock Option Grants, and (5) Restricted Stock Purchase Agreement.

Traditionally, these form contracts used masculine pronouns.  It used to be that progressive contracts simply did not use “he” but rather “she” or “he or she.”  As Thomson Reuters reported:

“In the old days it was almost certain that your senior employees would be men; a contract would be drafted accordingly, and then the ladies would be given a metaphorical pat on the head by including in the boilerplate the reassurance that references to the male gender should be interpreted to include the female.”

Now, the shift towards non-gendered pronouns and away from binary choices of “he” or “she” means attorneys need to adopt new drafting techniques.  As entrepreneurs and leaders of your own business, you can encourage this shift.

What to do:

Replace the masculine pronoun with an article, for example using “the position” in place of “his position”

  1.  Use a neutral word or phrase such as “person” or “individual”

  2. Define the term and repeat that noun

  3. Rewrite the sentence in order to eliminate the pronoun completely

What to be wary of (for now):

  1. Using the singular “they” and its other grammatical forms to refer to indefinite pronouns and singular nouns, for example using “they” in place of “she” and “them,” “themselves,” and “their” in place of “her,” “herself,” and “hers.”

    1. Part of drafting a contract is using precise language.  While there is rising social acceptance of the use of singular “they,” a court has not ruled on its interpretation in contracts.  Likely, it will take legal precedent in Delaware interpreting such use to accept the use of the singular “they.”

    2. This same logic applies to the use of the singular “ze.”

  2. Using the plural “they.”

    1. Similarly, the use of the plural can be misleading.  For an employment offer letter, for instance, the offer is not to a number of people but rather to one individual.

  3. A catch-all clause like “Unless the context otherwise requires, a reference to one gender shall include reference to the other genders”

    1. It was offensive when the use of male pronouns were supposed to encompass women and men. Such use effectively reinforced gender stereotypes.  It is equally offensive when it is used to refer to all genders.

Gender neutrality facilitates accurate, precise contracts.  It is important that an individual who is subject to a contract feel as though the contract applies to that individual.  In addition, that individual should also feel respected.

©1994-2019 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.

ARTICLE BY Kati I. Pajak of Mintz.

Agents Beware: Representation Agreement May Not Be Enforceable If It Violates State Sports Agent Laws

A North Carolina law designed to protect student-athletes may determine the enforceability of Prime Sports Marketing’s contract with former Duke University star Zion Williamson. While Williamson is preparing to become a member of the New Orleans Pelicans after his name is announced as the No. 1 selection in the 2019 NBA Draft, he is also preparing for a legal battle in a different court…the U.S. District Court for the Middle District of North Carolina.

Williamson has filed suit against the Florida-based company and its president, Gina Ford, to have the marketing contract he signed with Prime Sports declared null and void. After signing a five-year agreement with Prime Sports and an accompanying letter of authorization reaffirming his desire to have Gina Ford begin representing him as his Global Marketing Agent, Williamson changed his mind.

Williamson alleges the agreement was entered into in violation of North Carolina’s Uniform Athlete Agent Act (UAAA) and should be declared void.

In his complaint, Williamson alleges that Prime Sports and Gina Ford violated the specific provisions of the North Carolina law that forbids a person from acting as an agent in the state unless that person has previously registered with the North Carolina Secretary of State’s office. The law applies to any agency contract, including employment agreements and marketing agreements.

In addition, the law mandates any agent to follow a series of procedural requirements to protect student-athletes from unknowingly forfeiting their remaining NCAA eligibility. Any contract between a registered agent and a student-athlete must contain a specific, capitalized notice in boldface print cautioning the athlete of the rights he will be giving up by entering into the contract. Among the many required notices, the contract must state the following:

WARNING TO THE STUDENT-ATHLETE IF YOU SIGN THIS CONTRACT

  • YOU SHALL LOSE YOUR ELIGIBILITY TO COMPETE AS A STUDENT-ATHLETE IN YOUR SPORT;
  • YOU MAY CANCEL THIS CONTRACT WITHIN 14 DAYS AFTER SIGNING IT. CANCELLATION OF THIS CONTRACT SHALL NOT REINSTATE YOUR ELIGIBILITY.

The agreement Williamson signed with Prime Sports did not contain any of these required notices mandated by the North Carolina law.

Of particular significance will be a judicial determination as to whether Williamson remained a student-athlete when he signed the agreement with Prime Sports and still protected by the North Carolina law. Williamson declared himself eligible to be drafted by an NBA team on April 15, arguably ending his status as an NCAA-eligible athlete. He signed the agreement with Prime Sports on April 20, when he had arguably given up his amateur status and was no longer protected by the state law. While a student-athlete’s declaration for the draft was irreversible at one time, current NCAA bylaws allow a student-athlete to “test the waters” regarding potentially becoming draft-eligible and withdraw his name from consideration as late as May 29 without risking the loss of any remaining eligibility. Here, Williamson lost the option to exercise his rights pursuant to NCAA bylaws and return to Duke University when he signed the contract with Prime Sports.

As the federal court considers Williamson’s complaint and the anticipated defenses and potential counterclaims to be asserted by Prime Sports (which has alleged the potential for $100 million in damages in a pre-complaint letter to Williamson’s attorney), the significance of Gina Ford’s failure to register as an agent with the State of North Carolina before her initial meeting with Williamson could be of crucial importance in determining the enforceability of the agreement between Williamson and Prime Sports.

Jackson Lewis P.C. © 2019
This post was written by Gregg E. Clifton at Jackson Lewis P.C.
Read more on Sports Law on the National Law Review Entertainment, Art & Sports page.

Browsewrap Agreement Held Unenforceable – Website Designers Take Note!

browsewrap agreementIn Nghiem v Dick’s Sporting Goods, Inc., No. 16-00097 (C.D. Cal. July 5, 2016), the Central District of California held browsewrap terms to be unenforceable because the hyperlink to the terms was “sandwiched” between two links near the bottom of the third column of links in a website footer.  Website developers – and their lawyers – should take note of this case, part of an emerging trend of judicial scrutiny over how browsewrap terms are presented. Courts have, in many instances, refused to enforce browsewraps due to a finding of a lack of user notice and assent. In this case, the most recent example of a court’s specific analysis of website design, a court suggests that what has become a fairly standard approach to browsewrap presentment fails to achieve the intended purpose.

In Nghiem, the plaintiff brought claims under the Telephone Consumer Protection Act (TCPA) seeking statutory damages and an order certifying a class action.  The defendant Dick’s Sporting Goods (DSG) moved to compel arbitration based upon the DSG’s website terms of use.  The court denied the defendant’s motion, ruling that the plaintiff had no knowledge of the website terms and was not bound by the arbitration clause contained in DSG’s browewrap agreement.

The terms of use on DSG’s website were not presented in the typical clickthrough arrangement, where users are expressly presented with and required to assent to the terms before completing a purchase or registration.  Rather, DSG’s terms were presented as a browsewrap agreement, where a website’s terms and conditions are posted on the website via a hyperlink at the bottom of the screen and users are presumed to manifest assent to the terms by use of the website.

The district court noted that browsewrap agreements are enforced with “reluctance,” and only when a consumer has “actual or constructive knowledge of a website’s terms and conditions.”  Interestingly, DSG argued that because the plaintiff was an attorney whose former firm handled TCPA cases (including litigation against DSG), he should be charged with knowledge of the terms and arbitration clause.  The court rejected the argument that the plaintiff should be deemed to have actual knowledge of its terms based upon his vocation:

“[A]ctual knowledge is not something to be ‘safely assumed,’ as Defendants would have it, based on a plaintiff’s occupation. Instead, Defendants were required to put forth ‘evidence’ that Plaintiff had ‘actual knowledge of the agreement’ at issue. Defendants’ speculation regarding whether Nghiem reviewed, at some point in the past, DSG’s website Terms of Use is insufficient to meet this standard.” [citations omitted].

The court performed a detailed review of the website design to determine whether the plaintiff gained constructive knowledge of the website terms based upon, among other considerations, the placement of the link to the terms.  The court noted that DSG’s terms appeared at the bottom in the website footer of the home page (and on the page about its mobile alerts), and within a grouping of 27 other hyperlinks arranged in four columns that covered a variety of diverse topics (e.g., careers, gift cards, find a store, etc.).  The court noted that the hyperlink to the terms was “sandwiched between ‘Only at DICK’s’ and ‘California Disclosures’, near the bottom of the third column of links.”  As such, the court ruled that the placement was not conspicuous enough alone to put consumers on inquiry notice of the terms.

The ruling was not necessarily surprising in light of other recent decisions examining browsewrap agreements. For example, a recent California appellate court decision affirmed a ruling denying a motion to compel arbitration based upon website terms that were only viewable at the bottom of each page via a capitalized and underlined hyperlink (“TERMS OF USE”).  The hyperlink was displayed in a light green typeface on the site’s lime green background, and was among 14 other hyperlinks of the same color, font and size. (See Long v. Provide Commerce, Inc., 200 Cal. Rptr. 3d 117 (Cal. App. 2016)). The appellate court followed well-known precedent in reaching its holding.  See e.g., Nguyen v. Barnes & Noble, Inc., 763 F.3d 1171, 1178-79 (9th Cir. 2014) (“[W]here a website makes its terms of use available via a conspicuous hyperlink on every page of the website but otherwise provides no notice to users nor prompts them to take any affirmative action to demonstrate assent, even close proximity of the hyperlink to relevant buttons users must click on—without more—is insufficient to give rise to constructive notice”); Specht v. Netscape Communications Corp., 306 F.3d 17 (2d Cir. 2002) (declining to enforce an arbitration provision contained in a software licensing browsewrap agreement where the hyperlink to the agreement appeared on “a submerged screen” below the “Download” button that the plaintiffs clicked to initiate the download).

These recent cases should prompt companies to reexamine electronic contracting practices to ensure that consumers are offered notice sufficient to understand that use of a website will constitute agreement to the terms. One solution is the use of clickthrough agreements, which are generally upheld based upon now fairly-standard procedures for gaining notice and assent during user registration or purchase confirmation.  Ultimately, however, in designing a site, companies must balance concerns for user flow with the protections that come with an enforceable terms of use (though, it should be noted that in May 2016 the CFPB proposed a rule that would prohibit mandatory arbitration clauses that prevent class actions).

ARTICLE BY Jeffrey D Neuburger of Proskauer Rose LLP

© 2016 Proskauer Rose LLP.

Contract Corner: Key Considerations in Understanding and Negotiating IT Agreements

When entering into IT agreements with vendors, it is important to understand the type of agreement being negotiated, the services being provided, and who will be using the services within your organization. The category of “IT agreements” generally includes cloud application agreements, service agreements, installed applications, and online presence management. When negotiating IT agreements, the legal team should work closely with the business and IT teams to ensure that the correct level of importance is placed on the agreement and that provisions are added or revised in a way that clarifies the parties’ responsibilities in connection with the services being provided and also addresses the potential unwinding of the relationship. To provide maximum clarity and flexibility in connection with purchased IT services, consider the following key provisions when negotiating IT agreements:

  • Performance Standards (or “teeth”)

    Performance standards are critically important, but it is difficult to know where standards should be set and what services are most critical without consulting with your IT group. The IT group can help determine how critical the services are and build appropriate performance standards around the applicable services. Types of performance standards include quality assurance, service levels and credits (which often include measurement and monitoring and notice of performance issues), and customer satisfaction surveys.

  • Term

    Consider the benefits versus the risks of including a long multiyear initial term and automatic renewal terms. Vendors love a long term and often offer pricing concessions to lock in long terms, but a long term can significantly increase risk to the customer if the relationship goes south. Some companies prefer automatic renewal because there is less paperwork, but others view automatic renewal as another milestone that needs to be managed and a potential risk if the relationship with the vendor is strained.

  • Termination and Termination Assistance

    Consider including a termination for convenience clause. Termination for convenience provides an easier mechanism for unwinding a deal when a vendor is not knocking it out of the park, especially if the vendor’s obligations are not clear. Customers should also strongly consider negotiating for termination assistance services to further mitigate the risks associated with unwinding an unsatisfactory deal. If the IT services include storage or processing of customer data, termination assistance provisions should include return and migration of customer data and require the current vendor to cooperate with the new vendor. Specific disengagement plans can be negotiated up front if necessary.

  • Data Protection

    Language should be added to protect all data provided in connection with the use of the services. This language can include security obligations (remember, this is not insurance), obligations to mitigate or cover the costs associated with data breaches, a duty to notify, and rights to audit and review security representations.

  • Proprietary Rights

    If proprietary rights are important to the agreement—for instance, if a vendor is developing new technology or using important customer technology—make sure that the contractual language around proprietary rights clearly states who owns the core technology and any improvements, interfacing elements, and data.

  • Cyber-Liability Insurance

    Add provisions that require the vendor to maintain adequate cyber-liability insurance, especially if the vendor is storing or processing customer data.

  • Representations and Warranties

    Consider adding situational representations and warranties (e.g., PCI compliance or EU Data Privacy compliance) applicable to particular services being provided, in addition to standard representations and warranties for IT agreements, such as conformance with specifications. For each representation and warranty, consider the remedy that should apply in the event that it is breached.

  • Indemnification

    The vendor should agree, at minimum, to indemnify the customer for third-party claims related to the services being provided.

  • Limitation of Liability

    If the vendor negotiates for a limitation of liability provision, make sure appropriate exclusions for confidentiality, data breach, and indemnification are negotiated. It is also important for these exclusions to be carved out of standard limitations on indirect, special, and consequential damages, because many of the losses associated with confidentiality, data breaches, and indemnification claims might otherwise be barred by such provisions.

ARTICLE BY Emily R. Lowe & Glen W. Rectenwald of Morgan, Lewis & Bockius LLP

Copyright © 2015 by Morgan, Lewis & Bockius LLP. All Rights Reserved.

Meeting of the Minds at the Inbox: Some Pitfalls of Contracting via Email

This issue comes up regularly when informality creeps into negotiations conducted electronically, bringing up the age-old problem that has likely been argued before judges for centuries: one party thinks “we have a deal,” the other thinks “we’re still negotiating.”  While email can be useful in many contract negotiations, care should be taken to avoid having to run to court to ask a judge to interpret an agreement or enforce a so-called “done deal.”

With limited exceptions, under the federal electronic signature law, 15 U.S.C. § 7001, and, as adopted by the vast majority of states, the Uniform Electronic Transactions Act (UETA), most signatures, contracts and other record relating to any transaction may not be denied legal effect solely because they arein electronic form.  Still, a signed email message does not necessarily evidence intent to electronically sign the document attached to the email. Whether a party has electronically signed an attached document depends on the circumstances, including whether the attached document was intended to be a draft or final version.

There have been a number of recent cases on this issue,  but the bottom-line, practical takeaways are as follows:

  • Consider an express statement in the agreement that performance is not a means of acceptance and that the agreement must be signed by both parties to be effective.

  • If you do not believe the agreement is final and accepted, do not begin to perform under the agreement unless there is an express written (email is ok) agreement by the parties that performance has begun but the contract is still being negotiated.

  • When exchanging emails relating to an agreement, be prudent when using certain loaded terms such as “offer,” “accept,” “amendment,” “promise,” or “signed” or  phrases of assent (e.g., “I’m ok with that”, “Agreed”) without limitations or a clear explanation of intent.

  • Terms of proposed agreements communicated via email should explicitly state that they are subject to any relevant conditions, as well as to the further review and comment of the sender’s clients and/or colleagues. To avoid ambiguity, to the extent finalizing an agreement is subject to a contingency (e.g., upper management or outside approval, or a separate side document signed by both parties), be clear about that in any email exchange that contains near-final versions of the agreement.

  • Parties wishing to close the deal with an attachment should mutually confirm their intent and verify assent when the terms of a final agreement come together.

  • While it is good practice to include standard email disclaimers that say that the terms of an email are not an offer capable of acceptance and do not evidence an intention to enter into any contract, do not rely on this disclaimer to prevent an email exchange – which otherwise has all the indicia of a final agreement – from being considered binding.

  • Exercise extreme caution when using text messaging for contract negotiations – the increased informality, as well as the inability to attach a final document to a text, is likely to lead to disputes down the road.

While courts have clearly become more comfortable with today’s more informal, electronic methods of contracting, judges still examine the parties’ communications closely to see if an enforceable agreement has been reached.

Now, for those who are really interested in this subject and want more, here comes the case discussion….

Last month, a Washington D.C. district court jury found in favor of MSNBC host Ed Schultz in a lawsuit filed by a former business partner who had claimed that the parties had formed a partnership to develop a television show and share in the profits based, in part, upon a series of emails that purported to form a binding agreement.  See Queen v. Schultz, 2014 WL 1328338 (D.C. Cir. Apr. 4, 2014), on remand, No. 11-00871 (D. D.C. Jury Verdict May 18, 2015).  And, earlier last month, a New York appellate court ruled that emails between a decedent and a co-owner of real property did not evince an intent of the co-owner to transfer the parcel to the decedent’s sole ownership because, even though the parties discussed the future intention to do so, the material term of consideration for such a transfer was fatally absent.  See Matter of Wyman, 2015 NY Slip Op 03908 (N.Y. App. Div., 3rd Dept. May 7, 2015).  Another recent example includes Tindall Corp. v. Mondelēz Int’l, Inc., No. 14-05196 (N.D. Ill. Mar. 3, 2015), where a court, on a motion to dismiss, had to decide whether a series of ambiguous emails that contained detailed proposals and were a follow-up to multiple communications and meetings over the course of a year created a binding contract or rather, whether this was an example of fizzled negotiations, indefinite promises and unreasonable reliance.  The court rejected the defendant’s argument that the parties anticipated execution of a memorialized contract in the future and that it “strains belief that these two companies would contract in such a cavalier manner,” particularly since the speed of the project may have required that formalities be overlooked.

Enforceability of Electronic Signatures

A Minnesota appellate court decision from last year highlights that, unless circumstances indicate otherwise, parties cannot assume that an agreement attached to an email memorializing discussions is final, absent a signature by both parties.  See SN4, LLC v. Anchor Bank, fsb, 848 N.W.2d 559 (Minn. App. 2014) (unpublished). The court found although the bank representatives intended to electronically sign their e-mail messages, the evidence was insufficient to establish that they intended to electronically sign the attached agreement or that the attached document was intended to be a final version (“Can you confirm that the agreements with [the bank] are satisfactory[?] If so, can you have your client sign and I will have my client sign.”).

A California decision brings up similar contracting issues. In JBB Investment Partners, Ltd. v. Fair, 182 Cal. Rptr. 974 (Cal. App. 2014), the appellate court reversed a trial court’s finding that a party that entered his name at the end of an email agreeing to settlement terms electronic “signed” off on the deal under California law. The facts in JBB Investmentoffered a close case – with the defendant sending multiple emails and text messages with replies such as “We clearly have an agreement” and that he “agree[d] with [plaintiff’s counsel’s] terms” – yet, the court found it wasn’t clear as to whether that agreement was merely a rough proposal or an enforceable final settlement.  It was clear that the emailed offer was conditioned on a formal writing (“[t]he Settlement paperwork would be drafted . . .”).

Performance as Acceptance

Another pitfall of contracting via email occurs when parties begin performance prior to executing the governing agreement – under the assumption that a formal deal “will get done.”  If the draft agreement contains terms that are unfavorable to a party and that party performs, but the agreement is never executed, that party may have to live with those unfavorable terms. In DC Media Capital, LLC v. Imagine Fulfillment Services, LLC, 2013 WL 46652 (Cal. App. Aug. 30, 2013) (unpublished), a California appellate court held that a contract electronically sent by a customer to a vendor and not signed by either party was nevertheless enforceable where there was performance by the offeree.  The court held that the defendant’s performance was acceptance of the contract, particularly because the agreement did not specifically preclude acceptance by performance and expressly require a signature to be effective.

ARTICLE BY Jeffrey D Neuburger of Proskauer Rose LLP
© 2015 Proskauer Rose LLP.

Contract Corner: Cybersecurity (Part 3)

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Over the last two weeks, we discussed contract provisions designed to address the implementation of preventive security measures, as well as responding to security incidents. Our third and final blog post in this series focuses on contractual provisions that address the allocation of liability for breaches that result in security incidents.

Because of the potential for large-scale damages from a security incident, customers and service providers are generally very focused on the allocation of liability in indemnification and liability provisions. Below we list some key issues to consider when drafting these contract provisions.

  • Rather than relying on general negligence or contract breach standards, consider adding security incidents resulting from a contractual breach as separate grounds for indemnification coverage.

  • Determine whether indemnification is limited to third-party claims or includes other direct and/or indirect damages and liabilities caused by a security incident.

  • Coordinate indemnification defense with incident response provisions and consider the effect on the customer’s client relationships where the vendor assumes such defense.

  • Assess whether all potential damages from a security incident are covered by the damages provisions, including any damages that may be considered indirect or consequential.

  • To determine the allocation of liability, consider the contract value, industry norms, type of data at issue, potential business exposure, cost of preventative measures, and cause of the security incident.

  • Consider calling out specific damages related to a security breach that are not subject to any cap or exclusion to provide clarity and protection—such damages can include the costs of reconstructing data, notifying clients, and providing them with identity protection services.

With cyber attacks growing in number and sophistication on a daily basis and the increased amount and value of data that is at risk to such attacks, cybersecurity concerns are top of mind for senior management.

This post is part of our recurring “Contract Corner” series, which provides analysis of specific contract terms and clauses that may raise particular issues or problems. Check out our prior Contract Corner posts for more on contracts, and be on the lookout for future posts in the series.

Click here for Part 1.

Click here for Part 2.

ARTICLE BY

Peter M. Watt-Morse
A. Benjamin Klaber
OF
Morgan, Lewis & Bockius LLP

Recent Changes to the Law of Private Construction Contracts – Your Government is Here to Help You Again – Massachusetts

As part of the end-of-session rush at the Massachusetts General Court this summer, significant changes were made to Massachusetts law governing private construction contracts at the urging of general contractor and subcontractor industry groups. Members of the development and lending community were largely taken unaware as the bill moved forward, and unsuccessfully attempted in the later stages of the process to modify or defeat the legislation. Consequently, developers, lenders, contractors, sub-contractors, design professionals and attorneys need to be aware of substantial changes (and many unanswered questions) created by the new statute in the areas of withholding and release of retainage, defining substantial completion, and preparation of punchlists.

Key highlights of Chapter 276 of the Acts of 2014, to be codified at M.G.L. c. 149, sec. 29F:

  • Applicability: All contracts on projects on which the prime contract (a) is entered into after November 6, 2014, and (b) has a contract price of $3 million or more, except projects of 1 to 4 dwelling units.

  • Withholding of Retainage:  Caps retainage to be withheld from progress payments at 5% (long-standing practice has been to retain 10% of each progress payment, with reduced (or no) withholding of further retainage after the project achieves some level (typically 50%) of completion).

  • New Definition of “substantial completion”: “The stage in the progress of the project when the work… is sufficiently complete in accordance with the contract for construction so that the project owner may occupy or utilize the work for its intended use…”  Parties may divide a project into phases and apply the statutory scheme applicable to “substantial completion” separately to each designated project phase.

Process for determining substantial completion:

  • Within 14 days after achieving substantial completion, the prime contractor submits a notice of substantial completion to the owner (form provided in the statute) with contractor’s determination of the date of substantial completion.

  • Within 14 days after receiving this notice, the owner must accept or reject it and return it to the contractor.  If the owner does neither, the notice is deemed accepted and the date of substantial completion determined by the contractor is binding.

  • If the owner rejects the notice, it must notify the prime contractor within this 14-day period, including the “factual and contractual basis for the rejection”, which must be certified as made in good faith.  The dispute is then governed by the contractual dispute resolution provisions, which the contractor must commence within 7 days of its receipt of the owner’s rejection notice.

Punchlist:

  • Within 14 days after the date of substantial completion is established (either through the notice process described above or the applicable dispute resolution proceeding), the owner must submit to the prime contractor a list (certified as made in good faith) of (a) all defective or incomplete work and (b) all outstanding deliverables required under the prime contract.

  • Within 7 days after the prime contractor’s receipt of that list, it must submit a similar list (certified as made in good faith) of all defective or incomplete work and outstanding required deliverables to each sub from whom it is withholding retainage.

Release of Retainage:

  • Applications for release of retainage can be submitted starting 60 days after the date of substantial completion (unless the contract provides for earlier submission), and each application must be accompanied by a list (certified as made in good faith) identifying the defective or incomplete work and deliverables on that party’s punchlist which have been completed, repaired and delivered.

  • Contract must permit applications for release of retainage at least monthly.

  • Retainage (other than that withheld in accordance with the new statute) must be released within 30 days of submission of the application for release, with an additional 7 days added for each tier of subcontractor.

Withholding Release of Retainage:

  • Only the following amounts can be withheld from retainage in response to an application for its release:

    • For incomplete, incorrect or missing deliverables, either (a) the value of the deliverables as mutually agreed to by the contracting parties, or (b) if no value has been agreed to, the reasonable value of the deliverables (not to exceed 2.5% of the total adjusted contract price of the party seeking release of retainage);

    • 150% of the reasonable cost to complete or correct incomplete or defective work; and

    • Reasonable value of any claims, costs, expenses and, where permitted under the contract of the party seeking release of retainage, attorneys’ fees.

  • No retainage can be withheld unless the withholding party provides to the party seeking the retainage, before the date payment is due, a notice (certified as made in good faith) (i) identifying the defective or incomplete work and the incomplete, incorrect or missing deliverables, (ii) the “factual and contractual basis” for any claims, and (iii) the value attributable to each item of incomplete or defective work, deliverable, and claim.

  • Multiple sequential applications for release of retainage are permitted as work is completed or corrected/deliverables are delivered/claims are resolved.

  • Unless the owner has declared the prime contractor in default under its contract, the owner cannot withhold retainage owed by the contractor to a subcontractor except for withholding based on a default by that sub.

  • Rejection of an application for release of retainage is subject to contractual dispute resolution procedures.  Contract provisions requiring a party to wait more than 30 days after rejection of an application for release of retainage before being permitted to commence dispute resolution procedures are void and unenforceable.

Additional Provisions:

  • All communications provided for in the new statute may be made electronically.

  • Section 29F(l) provides that any provision in a contract “which purports to waive, limit or subvert this section or redefine or expand the conditions for achievement of substantial completion for payment of retainage, shall be void and unenforceable.”

The new statute creates major areas of uncertainty for all parties on private construction projects, including:

  • How far an owner can go in adding requirements for deliverables, issuance of permanent C of Os, completion of commissioning, etc. as conditions to achieving “substantial completion”, in light of the new statutory definition of that term and the limitations imposed by Section 29F(l);

  • How an owner can mobilize its design professionals, its lender’s construction inspector, and its own construction team to respond to the prime contractor’s notice of substantial completion in the detailed manner required by the statute within the very short (but required) 14-day period;

  • How disputes over whether substantial completion has been achieved can be resolved through contractual dispute resolution procedures without jeopardizing project delivery deadlines;

  • What constitutes the “factual and contractual basis” required for various actions by the owner; and

  • How lenders will respond to the mandatory reduction in retainage to 5% (some are already saying that they will require an additional 5% in equity from the owner to make up the 10% retainage traditionally withheld by owners).

Although the consequences (intended or otherwise) of this new statute for the real estate lending, development and construction industries in Massachusetts remain to be seen over the coming months and years, they are likely to include:

  • Owners requiring retainage to be withheld on components of the contract price that previously may not have been subject to retainage (e.g., contractor’s fee, general conditions); exercising much greater control over a contractor’s use of contingency funds; requiring bonds from prime contractors and subs more regularly; and policing variations from the project schedule and/or the contract documents more strictly earlier in the project; and

  • Owners being much more selective in the choice of prime contractors and subs, tending towards repeat relationships, leading to greater consolidation within the industry and raising the barriers to entry by new companies.

There is already discussion underway about efforts to amend, limit or repeal this statute, so this will be something to watch for in 2015.

© 2014 SHERIN AND LODGEN LLP
ARTICLE BY

Peter Friedenberg
OF
Sherin and Lodgen LLP

Sender Beware: How Your Emails or Letters may be Ruled a Binding Contract

Heyl Royster Law firm

Often when we think of a contract, we think of the multi-page document that is plagued with legal jargon and minuscule print, followed by signature lines, and then sometimes followed by even more documents nicknamed “schedules” or “annexes” that in some way modify or supplement everything in the previous pages. But courts do not necessarily require contracts to take on this formal appearance in order to be enforceable.

In order to create a binding contract, courts require the following four elements: (1) an offer, (2) acceptance of that offer, (3) consideration (meaning payment or other benefit to one party or a detriment to another party), and (4) definite certain terms. If there is no formal, written contract, then courts will require a fifth element: demonstration of an intent by the parties to be bound by a contract. This fifth element is an objective standard, so it has nothing to do with what you actually intended, and everything to do with the language actually used by the parties and how a reasonable person (really, a judge) would interpret it. See Alyasmen Group, LLC v. MS Rialto Raintree Village IL, LLC, 2011 IL App (1st) 102875-U. As a result, courts in Illinois and other states have on more than one occasion found all of these required elements to be present in emails or letters sent by unsuspecting business people.

In one somewhat surprising case, business partners exchanged emails about how to close a joint real estate business venture and distribute earnings from completed real estate transactions. Less than one month after the partners reached an agreement by email as to how earnings would be distributed, the partners signed a written contract with terms different than what was agreed to in the emails. One of those business partners later sued to enforce the agreement set forth in the emails. Upon review of the case, the court determined that the business partners expressed the intent to be bound by the emails where one of them stated in his email, “this is final and agreed to,” and even offered to print out and sign a copy of the emails. Furthermore, the terms of the agreement were sufficiently definite and consideration existed such that the judge ruled the emails could constitute a binding contract aside from the actual signed, written contract. Bryant v. Way, C.A. No. 11C-01-164 RRC, 2011 WL 2163606 (Del. Sup. Ct. May 25, 2011).

Courts seem most eager to rule emails are binding contracts when the emails relate to the settlement of an ongoing dispute. An employer was able to enforce an agreement reached through email with an employee regarding settlement of that employees’ employment discrimination claim in Todd v. Kohl’s Department Store, No. 08-CV-3827, 2010 WL 3720265 (N.D. Ill. Sept. 15, 2010). Similarly, in Protherapy Associates, LLC v. AFS of Bastian, Inc., No. 6:10CV0017, 2010 WL 2696638 (W.D. Va. July 7, 2010), a judge ruled an email setting forth payment terms in settlement of a dispute between a provider of physical therapy services and nursing homes was enforceable against the nursing homes.

Emails are not the only correspondence exposed to potentially being ruled an enforceable contract. Letters of intent generally are used to express the intent of two parties to enter into a written agreement in the future, but these too could be construed as an enforceable contract. The Illinois Supreme Court found that one letter of intent between a general contractor and subcontractor was ambiguous as to whether the parties intended it to be a binding contract and as a result ruled that the trial court must hold an evidentiary hearing to determine whether the letter of intent would in fact be binding. Quake Const., Inc. v. American Airlines, Inc., 141 Ill. 2d 281 (1990). Regardless of the outcome, the parties most certainly incurred legal fees and expenses for a court to rule on whether a letter was an enforceable contract.

So how can you prevent your emails and letters from becoming your next contractual obligation? If you are negotiating or making an offer to someone via email, include a disclaimer in your email that makes it clear the negotiations or offer are contingent on the parties signing a written contract. Don’t bury this disclaimer at the bottom of the email in fine print; intentionally include it in the body of the email so there is no denying your intent. If you are negotiating by a letter of intent or sending some other correspondence such as an offer of employment, use language to make it clear that the letter is not intended to create a binding contract. And as always, if there is any uncertainty, have an attorney do a quick review of before you sign or hit send – your legal fees will be far less for a precursory review than later if you are sued for breach of contract.

Article By:

Stacy Crabtree
Of:
Heyl, Royster, Voelker & Allen, P.C.