“If the other side doesn’t know what to ask for, it’s not my job to educate them.” That’s one reason a contract drafter might not want to use a PRECUT baseline contract form: the other side would be led to the Curator’s Notes for that form, which would give them a good idea of what to ask for in negotiations.

Sure, it’s hard to give up the advantage of superior knowledge. But:

1. Your notion that you’re the one with superior knowledge might be wishful thinking: The other side could bring in an expert who knows exactly what changes to demand. You might be better off setting the tone with a demonstrably-reasonable contract, and then standing on principle to reject unreasonable change requests.
2. Suppose that the other side’s expertise is indeed lacking. If they’re “good corporate citizens,” chances are you’ll get them to signature faster — and you’ll be laying a foundation for a trusting re­la­tion­ship — if the draft you’re proposing seems fair and balanced.
3. One danger of a clueless contract reviewer is this: The reviewer might make un­rea­son­able demands, but being clueless, s/he won’t know — and can’t be convinced — of their unreasonableness. That could drive the negotiation right into the ditch.

See also: (list is automatically generated)

• Leading off with a “killer” contract form document might be a bad idea
• PRECUT NDA: A free, balanced, multi-purpose, nondisclosure agreement
• How to convince a big customer to use your contract form – and get your sales people to support you in it

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[UPDATED 2010-09-02]

PRECUT ™ NDA Downloads

• NDA form (fillable PDF)
• Curator’s Notes (PDF)
• Word document containing all PRECUT NDA clauses, plus numerous other NDA provisions that can be copied to a custom addendum (RTF)
• Confidentiality provisions adddendum — just the confidentiality provisions from the PRECUT NDA, for possible use with other agreements

Commentary

The PRECUT ™ Nondisclosure Agreement is a free, balanced, multi-purpose, customizable NDA, in the form of a fill-in PDF.

While of course no contract form can be one-size-fits-all, for many purposes the PRECUT NDA should be pretty much ready to sign as-is.

The Curator’s Notes contain many additional clauses and extensive commentary.

Ask your lawyer whether you could save time and money by using the PRECUT NDA as the foundation for your next nondisclosure agreement.

This is the first of what I hope will be a series of ready-to-sign contract forms available under a Creative Commons license.

Comments and other feedback are welcome, especially suggestions for other types of contract that you’d like to see developed.

See also: (list is automatically generated)

• PRECUT free, balanced, curated technology contracts
• PRECUT confidentiality provisions addendum is up
• Confidentiality agreement (NDA) short-form starter draft and annotated long form

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If you’re an employee of a company, and you sign a company contract as just “John Doe,” you might end up being held personally liable for the company’s obligations. (If you’re the owner of the company as a sole proprietor, or the general partner of a partnership, you probably will be personally liable in any case.)

A better way to sign a company contract is to have the signature block:

• clearly indicate that it’s the company, not you personally, that is agreeing to the contract, and that you’re simply signing on its behalf; and
• stating your title.

The wrong way to sign a company contract

A better way

Further reading

• Protecting the Deal Professional from Personal Liability for Contract-Related Claims, by Glen D. West, of the Weil Gotshal firm.

See also: (list is automatically generated)

• Note-taking in meetings and phone calls: Three easy habits your lawyer will love you for
• Clients seem to like Webcam video conferences, with on-line document sharing, better than traditional on-site meetings
• An oral understanding might not get you off the hook for a written contractual obligation

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Chances are that at some point in your career, a lawyer — yours, or someone else’s — will want to review notes you took at a meeting or during a phone conversation. So thinking ahead to that possibility, whenever you take notes, you should routinely do as many of the fol­low­ing things as you can remember, especially the first three things, to increase the odds that a later reviewer will get an ac­cur­ate picture of the event. It will help you stay out of un­de­served trouble and save money on legal fees

1. Indicate who said what you’re writing down.  Unless you want to risk having someone else’s statements mistakenly attributed to you, indicate in your notes just who has said what.  EXAMPLE:  Suppose that John Doe says in a meeting that your company’s off­shore oil-well drilling project can skip certain safety checks. Re­mem­ber­ing the BP drilling disaster in the Gulf of Mexico, you don’t want anyone to think you were the guy who sug­ges­ted this. So your notes might say, for example, "JD: Let’s skip safety checks,"; if you omitted John Doe’s initials, it wouldn’t be clear that you weren’t the one who made his suggestion.
2. On every page, write the meeting date and time, the subject, and the page number. The rea­son: Your lawyer will probably want to build a chronology of events; you can help her put the meeting in­to the proper context by “timestamping” your notes. This will also reduce the risk that an unfriendly party might try to quote your notes out of context.
3. If a lawyer is participating, indicate this.  That will help your lawyer sep­ar­ate out documents that might be protected by the attorney-client privilege. EXAMPLE:  “Partici­pants:  John Doe (CEO); Ron Roe (ABC Consulting, Inc.); Jane Joe (general counsel).”
4. Start with a clean sheet of paper.  When copies of documents are provided to opposing counsel, in a lawsuit or other investigation, it’s better if a given page of notes doesn’t have un­re­la­ted in­for­ma­tion on it.  This goes for people who take notes in bound paper note­books too: It’s best to start notes for each meeting or phone call on a new page, even though this means you’ll use up your note­books more quickly.
5. Write in pen for easier photocopying and/or scanning, and also because pencil notes might make a reviewer (for example, as an opposing counsel) wonder whether you might have erased anything, and perhaps falsely ac­cuse you of having done so.
6. Write “CONFIDENTIAL” at the top of each page of confidential notes. That will help preserve any applicable trade-secret rights; it will also help your lawyer segregate such notes for possible special handling in the lawsuit or other investigation.
7. List the participants. Listing the participants serves as a key to the initials you’ll be using, as discussed in item 1 above.  It can also refresh your recollection if you ever have to testify about the meet­ing. If some people are participating in an in-person meeting by phone, indicate that. Indicate each participant’s role if isn’t ob­vi­ous or well-known – remember, you might know who someone is, but a later reader likely won’t.  EXAMPLE:  “Partici­pants:  John Doe (CEO); Ron Roe (ABC Consulting, Inc.); Chris Coe (marketing).”
8. Indicate the time someone joins or leaves the meeting, es­pe­ci­al­ly if it’s you (so that you’re not later accused of having still been there if something bad happened after you left).
9. Write down the stop time of the meeting. This usually isn’t a big deal, but it’s nice to have for completeness.

See also: (list is automatically generated)

• How to sign a company contract without incurring personal liability
• Clients seem to like Webcam video conferences, with on-line document sharing, better than traditional on-site meetings
• Forget short contracts – focus instead on short clauses

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Smart Bear guest blogger Steve Hanov has posted a long essay, “Bending over: How to sell to large companies,” with advice for small software vendors. The essay is getting a lot of positive attention on Hacker News; the comments there from entrepreneurs are worth reading as well.

See also: (list is automatically generated)

• Subscribe
• Subscribe to department-specific blog feeds for R&D, HR, Sales, Finance, etc.
• Software pricing post – a must-read

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When drafting a contract, think about whether to include provisions re­qui­ring the other side, in certain circumstances, to provide copies of rel­e­vant documents and/or to make its employees available for in­ter­view. Under the Supreme Court’s recent Twombly and Iqbal decisions, this kind of contract provision might make the difference between your client being able to sue for breach of contract, and not. 

Contents:

Scenario:  A contractor in breach – but you can’t prove it

Consider this hypothetical scenario:  Your company hears rumors that one of your contractors has been using the com­pany’s con­fi­den­tial in­for­ma­tion in its work for other clients, including your competitors.  Entirely apart from the ethical im­pli­ca­tions, this would be a gross violation of the confidentiality pro­vi­sions in your contract. 

You can’t pin the rumors down, so you flat-out ask the contractor whe­ther they’re true.  The contractor responds that its operations are its own business, and refuses to discuss the matter.

Now you’re seriously concerned that the rumors might be true indeed. You’re not that big a client for the contractor, so you don’t have a lot of ec­on­om­ic leverage. You want to file a lawsuit for theft of trade secrets, but you don’t have any hard evidence.

What to do?  Must you suffer in silence as your contractor continues to betray your trust (or so you think) and give your competitors an unfair advantage?

“Notice pleading” used to be a way to get discovery

Until a couple of years ago, if you met the subject-matter jurisdiction requirements for a federal-court case, you might have been able to get by with filing suit under the notice-pleading stan­dard, articulated by the Supreme Court in Conley v. Gibson, 355 U.S. 41 (1957).

Under the Conley standard, in essence your complaint would (i) state the facts giving you reason to think there was a breach of contract, and (ii) aver that the discovery process would reveal evi­dence to support your claim.

The Conley standard would have prohibited the district court from dis­mis­sing your com­plaint for failure to state a claim “unless it appears be­yond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.” Conley, 355 U.S. at 45-46.

So filing a lawsuit against your contractor, while not a sure thing, certainly could have been a reasonable bet to give you the discovery you needed about whether the contractor was misusing your con­fi­den­tial information.

Twombly and Iqbal now require pleading a plausible case, up front

In 2007 and 2009, however, the Supreme Court ruled that a federal-court plaintiff must meet a higher stan­dard than mere notice pleading under Conley.  The Court held that a com­plaint must plead sufficient facts to plausibly show that the plaintiff is entitled to relief.

Thus, if you were to file suit in federal court against your con­trac­tor based on nothing more than rumors, you would run a non-trivial risk of being thrown out of court.  Depending on the cir­cum­stances, you might even have to pay the contractor’s attorneys’ fees.

I can think of two ways in which a contract drafter might try to plan ahead to help the client meet the Twombly / Iqbal standard.

Periodic status reports might not be enough for a plausible case

One way to get the information you needed to file suit would be to contractually require the other side to provide written reports on a regular basis.  This is not a new concept; some common examples include the following:

• patent- and trademark-license agreements typically require the licensee to make periodic reports of its sales, to support calculation of the royalties due;
• reseller agreements sometimes require the reseller to provider quarterly sales-forecast reports (“pipeline reports”);
• partnership- and joint-venture agreements often require that detailed operations reports be provided to the partners.

A contract drafter would want to brainstorm (preferably with the client) the kinds of information that might be desired in such reports.

But it’s entirely possible that such reports might not be enough to allow the client to plead a case that met the Twombly/Iqbal standard. In our hypothetical scenario, for example, it hardly seems likely that the con­trac­tor’s reports would constitute sufficient evidence of mis­ap­pro­pri­a­tion of your company’s confidential information.

Consider this sample contract provision for extrajudicial discovery

Another approach would be to contractually require the parties to pro­vide “discovery” upon request.  It would surely be a tough sell in nego­ti­a­tions — frankly, I’d have to think hard before recommending that a client agree to it — but a drafter could try including con­tract pro­vi­sions along something like the following lines:

Sure, this contract language is rife with the potential for disputes about what’s “reasonable.”  But let’s return once more to our hypothetical situation above. Recall that the con­trac­tor responded to your concern about misappropriation of confidential information with, mind your own business.

With language like the foregoing in your contract, if the contractor still stonewalled you, you could try filing suit for failure to provide ex­tra­ju­di­ci­al discovery. (It’d be sort of like the way Al Capone was prosecuted for tax evasion.) With the contractor’s stonewalling as as your (initial) claim, you’d likely have a better shot at meeting the Twom­bly/Iqbal standard to avoid being tossed out of court, enabling you to get “regular” discovery.

And so, one way or another, you’d probably end up getting the in­for­ma­tion you needed to assess your potential trade-secret claim – which is what you really wanted all along.

See also: (list is automatically generated)

• Language tweak: Master services agreement customers aren’t obligated to provide X amount of work
• Drafting for disputes: Keep individuals’ personal interests in mind

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[Updated 2010-08-19] It’s been my impression that many business-contract disputes could be avoided if the participants would just talk with each other regularly about five things. This makes me think that in almost any business meeting concerning a project or re­la­tion­ship, it’s a good idea to ask about those five things, with the acronym G-PP-AA:

• Goals: What are we trying to achieve in this project or relationship, and why? [In some circumstances, Toyota's famous Five Whys drill-down analysis might be helpful.]
• Progress: What have we accomplished so far in achieving the goal(s)?
• Problems encountered or anticipated: What if anything has gone wrong,and why? What could go wrong in the future? [The Five Whys might be helpful here, too.]
• Action plans for the future: What is going to be done, by whom, when, to continue progress, and/or to address problems?
• Assumptions: What are we implicitly or explicitly assuming, that might not be true?

This is just Management-101 stuff, to be sure. But it’s often over­looked, especially when things get busy or stressed.

That’s why, when I’m helping to negotiate contracts for on-going projects or re­la­tion­ships, I like to ask for a provision for periodic status-review con­fer­en­ces, with a reminder that these five GPPPA factors should be part of the agenda.

Here’s one version of such a contract provision, with extra para­graph­ing added for readability:

Notes:

• Some of this language isn’t strictly required, but is included to re­assure the parties that the provision isn’t going to be expensive or burdensome.  For example, under this language, if neither party ever asks for a status-review conference, none is required.  As another example, under clause 1, all conferences are by phone unless the parties agree otherwise.
• Clause 2 intentionally doesn’t require the GPPPA factors to be dis­cussed; the reminder of those factors should be helpful.
• Clause 4 provides for written minutes if requested. Meeting minutes can be especially important in documenting specific to-do as­sign­ments. Meet­ing minutes can can also help litigation counsel re­con­struct "what hap­pened, when, and why," if things go wrong.
• In clause 4, the term seasonably is taken from section 1-204 of the Uniform Commercial Code, which defines the term thusly: An action is taken "seasonably" when it is taken at or within the time agreed or if no time is agreed at or within a reasonable time.

See also: (list is automatically generated)

• A fifth question to ask at every business meeting you attend
• Six tips for negotiating best-efforts obligations

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Contracts often contain generic statements that, in case of a breach, the breaching party will cure the breach within, say, 30 days. Some­times, however, it helps to spell out exactly what the other side must do to cure the breach. That way, the other side’s lawyers will have less wiggle room to come up with ‘creative’ arguments why the other side shouldn’t have to do what you want them to do.

Here’s an illustration: A client of mine, an enterprise software vendor, once came to me with a complaint about one of their big customers, which was ‘stealing’ the software, that is, deliberately using the soft­ware far in excess of its paid-for licenses.

(The software vendor knew this because one of the customer’s emp­loyees had quietly alerted the vendor’s sales rep to what was going on.)

The vendor could have sued its customer for infringement of the copy­right in its software.* But the customer had a big, capable legal staff and competent outside counsel. We knew those lawyers would look for arguments why the customer wasn’t liable for infringement and didn’t owe any money. If the vendor wanted to get money from the customer, it probably would have to file a lawsuit.

Filling a lawsuit shouldn’t be done lightly, even when a lot of money is at stake. Litigation is expensive. It’s a drain on management’s time and focus. You seldom know what or when the final outcome will be. Not to mention that suing a big customer is hardly a great way for a vendor to get more business from that customer.

So my client wasn’t interested in filing a lawsuit. It just wanted the cust­omer to pay for what it had ‘stolen’ in unauthorized use.

Fortunately, the vendor’s standard software license agreement had good language in it. (Yes, I had written the language.) The vendor’s contract expressly said that, if the customer made unauthorized use of the soft­ware, it agreed to buy the necessary number of catch-up licenses — and if the customer did so, then the vendor waived its right to seek copy­right damages.

That contract language proved very useful. Instead of having to argue with the customer’s lawyers about how a court would apply the law of copyright, we just pointed to the contract, which stated in black and white what the customer agreed to do. In due course, the customer paid up.

The lesson: For important breaches of contract, be careful about relying on a generic breach-and-cure provision that lawyers could argue over. Instead, consider spelling out in the contract exactly what you want the other side to do.

* My client theoretically could have sought to recover the customer’s indirect profits arising from the infringement, which can be a remedy with real teeth. Consider the case of Frank Music Corp. v. Metro-Goldwyn-Mayer, Inc., 886 F.2d 1545 (9th Cir. 1989) (Frank Music II). The MGM Grand Hotel had a floor show called Hallelujah Hollywood!, which included ‘tributes’ to various MGM movies. The floor show incorporated significant portions of the musical Kismet, which had been made into an MGM movie. The court found that this went beyond MGM’s ‘movie rights’ and therefore infringed the copyright in the musical. The resulting damage award included not just a portion of profits from the floor show itself, but 2% of the overall profits from the MGM Grand’s hotel operations — including 2% of the casino profits — which, the court found, were indirectly attributable to the promotional value of the floor show.

See also: (list is automatically generated)

• Sales rep’s use of former employer’s copyrighted form book leads to $18 million verdict against new employer
• Minor warranty breaches can add up to a material breach, says UK court
• Vendors, consider a no-reliance clause for your sales contracts, to help forestall claims of fraudulent misrepresentation

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Last week I posted a call to negotiate limitations of liability, in complex contracts, on a risk-by-risk basis, and not as one-size-fits all.

Here’s another possibility to consider: Exclusions of consequential damages and damage-cap amounts don’t necessarily have to be carved in stone for all time. The parties could easily agree to vary them, either as time passed or as circumstances changed.

Consequential-damages example

Suppose that:

• A software vendor is negotiating an enterprise license agreement with a new customer for a mature software package.
• The customer has successfully completed a pilot project, but it hasn’t rolled out the software for enterprise-wide production use.
• Knowing how tricky a production roll-out can sometimes be, the customer is concerned about the vendor’s insistence on excluding all ‘consequential’ damages, whatever that really means.

The vendor might try offering to waive the consequential-damages exclusion during, say, the customer’s first three months of production use of the software, subject to an agreed dollar cap on the vendor’s aggregate liability for all damages — which might be a higher dollar amount than at other times, as discussed below. This approach could make the customer more comfortable that the vendor is ‘standing behind its software’ during the roll-out phase.

In theory, certainly, the vendor would be exposed to additional liability risk during those first three months. But the business risk might be eminently worth taking. Remember, we’re assuming that the software is mature, that is, most of its significant bugs have already been corrected. In that case, the vendor might be willing to take on that additional theoretical risk — which in any case would go away after three months — in order to help close the sale.

Damages-cap example

As another example, perhaps such a vendor could agree that the damages cap would be, say —

• 4X for any damages that arise during, say, the first three months of the relationship, or possibly until a stated milestone has been achieved;
• 3X during the nine months thereafter;
• 2X thereafter.

In the 4X / 3X / 2X language, X could be defined —

• as a stated fixed sum;
• as the amount of the customer’s aggregate spend under the contract in the past 12 months, 18 months, etc.;
• in any other convenient way.

* * *

The details in the above example aren’t important. The point is that sometimes ‘standard’ limitation-of-liability language is too broad to allow the parties to specify what they really need. Negotiators might have more success if they drilled down into the language — perhaps using the table approach discussed in the previously-cited post.

See also: (list is automatically generated)

• Negotiating contractual limitations of liability: Do it risk by risk, not one-size-fits-all
• Lawsuit-defense tip for software vendors: Clearly label demos and mock-ups as such
• Vendors, consider a no-reliance clause for your sales contracts, to help forestall claims of fraudulent misrepresentation

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A common complaint: Too much time spent negotiating liability limitations

Limitation-of-liability provisions usually rank at or near the top of the IACCM’s annual surveys of the most-frequently-negotiated contract terms.

Ironically, the same surveys indicate that contract professionals fervently wish they could spend their time negotiating collaborative provisions (to try to keep trouble from happening) instead of liability provisions (in case trouble does come to pass).

I’ve been curious why this is such a recurring problem — why it’s been talked about for several years but doesn’t seem to have been solved, at least not that I’ve heard.

The root of the complaint:  Boilerplate.

I think I know why many companies have to spend too much time nego­tia­ting limitations of liability: A lot of the limitation provisions I’ve read over the years have been long, boilerplate state­ments; they might be fine for a simple, low-stakes contract, but their lack of speci­fi­ci­ty can give a reviewer pause, and complicate the discussion, when more is at risk:

• Consequential-damages exclusions seldom spell out just what specific categories of damages can and cannot be recovered — it seems as though each party crosses its fingers and hope the courts will interpret the phrase ‘consequential damages’ in its favor. That, of course, makes negotiators nervous, because they don’t know wheth­er the particular type of damage they’re concerned about will qualify;
• Damages caps usually take the form of a single, one-size-fits-all number that applies to every conceivable form of liability. It’s true that negotiators do sometimes debate whether particular types of damage (e.g., damages covered by an indemnity obligation) should be carved out entirely from the damages cap. But that’s a false di­chot­o­my; it assumes, for no reason, that a given type of damages will be either subject to the ‘default’ cap, or not subject to any cap at all.

Instead of resenting the time it takes to negotiate limitations of liability, perhaps we should try doing things a little differently — not necessarily in every negotiation, but definitely in those in which the liability limitations are likely to be closely scrutinized.

Systematically list risks of specific concern, then address liability limits for each

Contract drafters can speed up discussions of liability limitations, I’ve found, by breaking up general boilerplate language into more-concrete statements of risks that are of particular concern, which the parties can focus on more readily.

One technique that works well is to provide a table, such as in the example below, that (i) lists specific risks, and (ii) states, for each specified risk, what if any liability limits are agreed.

Using that table, the parties can systematically work through the list of risks and, for each risk, negotiate the limitations they’re willing to accept.

The example below is adapted from a couple of different large-scale software license agreements I’ve helped negotiate in recent years; the specific entries have been generalized (because it’s a hypothetical example).

Using this kind of systematic approach, if the parties decided to address additional risks in the contract, they could just add rows to the table.

The parties could also add columns to the table: Instead of including a single column for “consequential damages, etc.,” they could add separate columns for consequential damages, incidental damages, punitive damages, lost profits, lost revenues, and so on.

To be sure, if the non-drafting party won’t care much about the limitation of liability anyway, then including such detailed limitation language could actually hinder the overall negotiations.

But remember, by hypothesis we’re talking about contract negotiations in which the limitation language is indeed going to be carefully negotiated — in which case this kind of systematic approach will almost always make sense.

See also: (list is automatically generated)

• Limitations of liability: Try varying them with time, and/or with circumstances
• Limitation of liability – see Remedy limitations
• Having the contractual right to exercise tight control over the other party’s business can make you vicariously liable for its misdeeds – article

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