Commercial Contract Drafting and Review, Schemes and Mind Maps of Remedies

Download Commercial Contract Drafting and Review and more Schemes and Mind Maps Remedies in PDF only on Docsity! Commercial Contract Drafting and Review Go to: Preamble | Recitals | Term; Termination | Confidentiality | Representations and Warranties | Indemnifications | Limitations on Liability | Attorneys’ Fees | Notices | Assignment | Force Majeure | Waiver | Severability | Survival | Relationship of the Parties | No Third-Party Beneficiaries | Headings | Further Assurances | Equitable Remedies | Cumulative Remedies | Counterparts | Governing Law | Entire Agreement; Modification | Related Content Reviewed on: 05/22/2019 This practice note addresses the issues to consider when drafting or reviewing a commercial contract. It includes a discussion of the standard provisions generally incorporated in a commercial agreement, including without limitation, a preamble, recitals, term and termination, confidentiality, representations and warranties, indemnifications, limitations on liability, and miscellaneous boilerplate provisions. For a checklist of issues and provisions to consider when drafting or reviewing a commercial contract, see Commercial Contract Drafting and Review Checklist. Preamble A contract’s preamble provides the name of the agreement, its effective date, and the full legal name of the parties. If the parties are business entities, the preamble will generally specify the entities and state of organization of each business. And the preamble generally includes a descriptive noun, such as “Service Provider” and “Client,” to refer to the parties throughout the document. All agreements include a preamble. The following is a sample preamble: This Creative Services Agreement (this “Agreement”) is entered into as of the 5th day of February, 2018 (the “Effective Date”) by and between XYZ Creative, Inc., an Arizona corporation (the “Service Provider”), and Jane Doe (the “Client”), in connection with Service Provider’s rendition of creative services on Client’s behalf. Service Provider and Client are each sometimes herein referred to as a “Party,” and collectively as the “Parties.” Recitals Recitals (also known as “whereas” clauses) are optional provisions sometimes incorporated in an agreement to provide the reader with background information regarding the deal. They set forth the parties’ basic understanding of the circumstances and purpose(s) of the transaction. Recitals assist in guiding the interpretation of the agreement, particularly when the transaction involves multiple parties or agreements, or is part of a larger transaction. The language generally does not create obligations on, or provide any rights to, some or all of the parties to the agreement and recitals are unenforceable in and of themselves (unless expressly stated otherwise in the agreement). Recitals immediately follow the agreement’s preamble, and generally begin with the words “WHEREAS” and end with the words “NOW, THEREFORE.” The following are sample recitals: WHEREAS, Service Provider is a professional photographer in the business of taking black and white photographic images of individuals and their pets; Commercial Contract Drafting and Review WHEREAS, Client is interested in engaging the services of Service Provider to take photograph images of her and her dog; NOW, THEREFORE, in consideration of the premises and mutual covenants set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto covenant and agree as follows: For additional information on recitals, see Term, Recitals, and Definitions. For additional recital language, see Recitals Clauses. Term; Termination An agreement’s term and termination provisions are inextricably linked. Term The term sets forth the contract’s duration (i.e., how long it remains in full force and effect). Terms can be set for a specific duration (i.e., one year) or for an indeterminate period as necessary to fulfill the agreement’s obligations (i.e., “the term of this Agreement shall continue until satisfactory completion of the services as contemplated for hereunder”). They can also be set for an automatically renewing period of time, commonly called an evergreen provision (e.g., “one year, automatically renewable for additional one-year period unless either party provides the other party with written notice of its intention not to renew on or before the end of the then current term.”). Evergreen clauses eliminate the administrative efforts required to extend an agreement’s term, and are most commonly included in service agreements where the services are provided on an ongoing basis (i.e., weekly or monthly gardening services). If an evergreen clause is included, counsel should ensure that his or her client knows applicable deadlines. Reminders should be set. For term provisions, see Term Clauses. Termination A contract’s termination clause sets forth each party’s respective right to terminate the agreement. Termination rights fall into two main categories: (1) with cause and (2) for convenience (i.e., without cause). Termination clauses can be made unilaterally (i.e., benefitting only one party) or mutual (i.e., benefitting both parties). Termination for Convenience Termination for convenience (i.e., without cause, or “at will”) provides a party with the right to terminate an agreement for any or no reason. A mutual provision allows either party to end a relationship that no longer serves it for one or more reasons, including changing economic conditions or developing new business opportunities. Not all agreements provide for this right. In certain situations (including franchising and, to a lesser extent, business opportunity and dealership arrangements), termination without cause is prohibited. Most termination at will provisions require the terminating party to provide the other party with a certain number of days’ advance written notice of its intention so the nonterminating party can put alternative business plans into place and prepare to wind- down its operations with the terminating party. Most termination for convenience clauses are upheld by courts, although they can be held unenforceable if determined to be against public policy or unsupported by adequate consideration. Counsel should ensure that his or her client is protected if a termination occurs at will by the other party by requiring the following, if and as applicable given the nature of the agreement (1) advance written notification (90 days is common); (2) payment of all amounts due up through the effective date of termination (which may include expenses associated with early termination); (3) reasonable cooperation and assistance in transitioning work in progress to a third party; and (4) the potential payment of a reasonable termination charge, which may be a liquidated damages fee. Liquidated damages are often used to define recoverable damages when they would otherwise be difficult or impossible to calculate, such as a lost business opportunity. They minimize the risk of a dispute over the amount of damages that would be appropriate in certain situations, thus eliminated uncertainty. If the parties to an agreement desire the inclusion of liquidated damages, counsel should clarify that the damages are Commercial Contract Drafting and Review an obligation to comply with all applicable laws, rules, and regulations (this is an important catchall clause to ensure that the party’s performance is compliant, whether that be for data privacy, environmental, export, immigration, labor, securities, or any other legal requirement); (2) a covenant not to violate the intellectual property or other third- party rights of any person or entity at any time; and (3) a statement that each party can fulfill its obligations under the agreement without violating any other agreement to which it is a party. Additional representations and warranties are usually added as required by the parties and the applicable transaction type. For example, sale of goods agreements often include a representation by the seller regarding the clear title, quality, and/or functionality of the goods being sold. For more information on representations and warranties, see Commercial Agreement Representations, Warranties, Covenants, Rights, and Conditions and Representations and Warranties Drafting. For sample clauses, see Standard Clauses (Commercial Purchase and Sale Agreement). Indemnifications Indemnification clauses, also known as hold harmless provisions, allocate the risk and expense arising out of either party’s breach, negligence, or misconduct. The primary benefit of an indemnification clause is to protect the indemnified party from losses incurred from third-party claims made pursuant to an agreement. Indemnifications can be mutual or one-way. In a mutual indemnification, each party agrees to compensate the other party for costs or damages arising out of the indemnifying party’s breach, negligence, or misconduct. In a one-way indemnification, only one party provides this indemnity for the other party. Indemnification clauses are typically heavily negotiated, and often heavily litigated provisions. They are generally included in contracts where the risks associated with a party’s breach or nonperformance are great. For example, contracts that involve the license of intellectual property rights usually include an indemnification to protect against the potentially sizable liability associated with a third- party rights infringement lawsuit. Counsel should ensure that the indemnity is tailored to his or her client’s specific needs. For example, an indemnification can be restricted to particular third-party claims (such as breach of warranty) or limited to circumstances where a lawsuit has been filed or a final judgment has been rendered. Indemnifying parties generally control the defense of a claim since they are responsible for paying it. A notice requirement should be included to protect the indemnifying party from having to defend against a claim that the indemnified party has learned of. Without such notice, the indemnifying party may be materially prejudiced by any delay in receiving all requisite information about the claim’s existence and subject matter. Settlements most commonly require the approval of the indemnified party since its interests are directly at stake. The parties to an agreement must determine what types of liabilities will be covered by the indemnity, and which liabilities will be expressly excluded. Exclusions should always be stated in a clear and conspicuous manner. Generally, indemnifications are drafted to cover material, uncured breaches, as well as negligence and willful misconduct. An indemnification clause can also exclude certain liabilities, such as taxes or pending litigation, for example. They can also be limited to third-party claims (i.e., excluding direct claims between the parties). Counsel should carefully weigh the risks and benefits associated with any such exclusions. Before agreeing to an indemnity, counsel should review it carefully to ensure that his or her client’s obligations are limited to its own mistakes or misconduct. For example, the phrase “to the extent arising out of the indemnifying party’s negligence, breach, or misconduct” helps to provide this limitation. In contrast, the phrases “in any way arising out of” or “directly or indirectly related to” could expose a party to liability for the actions or inactions of the other party and/or a third party. The obligation to indemnify can also be limited by time (three or five years from the onset of a claim is most commonly seen in commercial contracts). Indemnities can also be limited by dollar amount, although counsel should take great care in ensuring that the ceiling will protect its client’s interests. If the parties want the indemnifying party to cover the indemnified parties’ legal fees as a reimbursable expense, counsel should ensure that this is stated in writing, as courts typically exclude their recoverability unless the agreement specifically provides otherwise. Commercial Contract Drafting and Review Indemnification provisions are most always enforced in court. However, there are exceptions to this general rule. For example, indemnities that require one party to indemnify the other party for any claim despite fault (also known as “no fault” or “broad form” indemnifications) are typically held unenforceable for public policy reasons. Additionally, not all states permit indemnities that include punitive damages and as such, counsel should understand and ensure compliance with all applicable state laws, paying close attention to the agreement’s governing law. Courts often deny recovery for damages that arise out of an improbable and unforeseeable result stemming from the other party’s actions, other than in situations where the indemnifying party knew of the circumstances. Indemnifications must always be drafted clearly, since ambiguity is most commonly resolved in the indemnifying party’s favor. They should also be sufficiently broad to address each party’s basic needs, yet equitable enough so their enforceability is not questioned. For more information on indemnities, see Indemnification Provision Checklist. Limitations on Liability A limitation on liability provision limits a party’s financial exposure when a claim is made or a lawsuit is filed. It's used to exclude one or both parties’ liability for specific types of damages, such as indirect (including punitive damages, an otherwise standard tort remedy), consequential, and incidental, among others. It can also include a liability cap. If such a provision is used, there should be language stating that the limitation will apply even if a party was advised of the possibility of such damages or such damages were reasonably foreseeable, regardless of whether such liability is based on breach of contract, tort, strict liability, or otherwise. Counsel should ensure that the clause is appropriately tailored to meet its client’s needs given the specifics of the applicable deal. For example, a limitation on liability clause can apply to the entire agreement or, alternatively, only to specific terms. Exceptions can be carved out, such as making the limitation not applicable to either party’s indemnification obligations. Additionally, limitations on liability can be mutual or one-way. Counsel should consider his or her client’s role in a transaction in determining whether a limitation on liability makes sense or not, and if so, what terms would be most appropriate. Additionally, counsel should ensure that the language in the limitation on liability is consistent with the agreement’s indemnification clause and other contractual provisions. Counsel should also add a statute of limitations for claims made pursuant to the limitation on liability clause (one year is typical). Limitation on liability clauses should always be clear and conspicuous—ALLCAPS will achieve this purpose. For more information on limitation on liability clauses, see Negligence, Gross Negligence, and Willful Misconduct Terms in Commercial Contracts. Attorneys’ Fees An attorneys’ fees clause provides that the prevailing party in any dispute arising out of an agreement may recover its reasonable attorneys’ fees and related costs from the non-prevailing party. Such a clause protects against frivolous lawsuits, as it is far less likely that a party will sue the other party unless it reasonably believes that it will prevail under the circumstances. The following is a sample attorneys’ fees clause: If either party incurs any legal fees associated with the enforcement of this Agreement or any of its rights hereunder, the prevailing party shall be entitled to recover, in addition to all other damages to which it may be entitled, its reasonable outside attorney’s fees and related costs and expenses from the other party. This clause restricts recovery to “outside” legal fees (i.e., a party cannot seek reimbursement for its in-house counsel costs). Absent an attorneys’ fees clause, the “American rule” generally applies, requiring litigation costs to be borne by the party incurring the expense. Counsel should note that, depending on the jurisdiction, recovery may be limited by statute or otherwise in the judge’s discretion. Notices Commercial Contract Drafting and Review A notices clause provides the parties with a mechanism for communicating information to one another during the relationship. Requiring delivery to be made solely by one of a few approved methods ensures that the notices are received by the appropriate party. The clause should state when notices are effective (i.e., many clauses provide that notices are effective only upon receipt by the receiving party). The effective date could be important when deadlines, including statutes of limitations, apply to the communication. Counsel should be careful when including email as an acceptable delivery method, as it is difficult to confirm receipt of an email with certainty. Additionally, emails routinely arrive late (and sometimes not at all), commonly land in a junk file, and are often overlooked or inadvertently deleted by the intended recipient. They can also easily be intercepted and transmitted by unauthorized third parties. Best practices include not including email as an acceptable distribution method. For more information on notice provisions, see Notice Clause Drafting. Assignment An assignment clause addresses the permissibility of assigning an agreement, either in whole or in part, by either party. The following is a sample mutual assignment clause: Neither party may assign or otherwise transfer this Agreement, in whole or in part, without the prior written consent of the other party in each instance, such consent not to be unreasonably withheld, conditioned, or delayed. Notwithstanding the foregoing, either party shall be free to assign this Agreement in its entirety to any: (1) affiliate of such party; or (2) successor entity of such party that assumes all, or a majority of, such party’s assets in writing. [The assigning party shall remain secondarily liable to the non-assigning party hereunder despite any such permitted assignment.] Any assignment in violation of this clause shall be null and void. This clause that prevents either party from assigning the agreement (in whole or in part) to a third party without the other party’s prior written consent in each instance. This clause provides an exception for assignments of the agreement in its entirety to affiliates or successor entities. This mutual no-assignment provision can be amended to restrict only one party. Restrictions on assignment are commonly incorporated in agreements where each party’s decision to sign the agreement was based, on the other party’s reputation, relationships, and other specific abilities (e.g., personal service agreements, endorsement agreements, and sponsorship agreements). The non-assigning party should be entitled to approve any assignment in advance, particularly when the assigning party is handling highly sensitive data that requires protection from unauthorized use and disclosure. If one party approved the other party’s request to engage the services of a subcontractor, for instance, the non-assigning party’s counsel should require the approved subcontractor/assignee to execute requisite intellectual property licensing, non-solicitation, non-compete, and confidentiality agreements in the non-assigning party’s favor prior to its commencement of services. The bracketed language requiring the assignor to remain secondarily liable to the non-assigning party can be included to provide the non-assigning party with added security if a breach occurs or default by the assignee under the agreement. It also encourages the assignor to be judicious when selecting an assignee, as it remains liable for such party’s performance or nonperformance. The final sentence renders any assignment in violation of the clause ineffective. Without this sentence, the non- assigning party may have only a breach of contract claim if the assigning party assigns the agreement improperly. For more information on assignment, see Offers, Acceptance, Revocation, Assignment, and Delegation of Duties. Force Majeure Force majeure clauses excuse a party’s late performance or nonperformance to the extent not practically avoided for reasons outside of its reasonable control. They are an effective risk allocation tool, and permitted by both the UCC and the Restatement (Second) of Contracts. Force majeure clauses often require the affected party to (1) notify the other party in writing of the event of force majeure as soon as practically possible and (2) use reasonable efforts to limit its impact on performance. Force majeure events can be natural or man-made, and generally include: fire, earthquake, terrorist attacks, war, strikes, acts of God, and government orders. Commercial Contract Drafting and Review No Third-Party Beneficiaries A no third-party beneficiaries clause states that the agreement terms are solely to benefit the parties thereto and not any third party. Generally, parties to an agreement must expressly provide that the contract is being entered into to benefit one or more non-signatories for any such individuals or entities to maintain rights under the agreement. By including the clause, however, the parties are expressly disclaiming liability for any third party’s reliance on the agreement’s terms. If any exceptions to the clause are intended, they should be specifically referenced in the agreement. For example, indemnification provisions typically provide that each party’s employees, agents, affiliates, and representatives may bring a claim to enforce the agreement’s indemnity as third-party beneficiaries thereto. The following is a sample clause: This Agreement is being entered into solely to benefit the parties, and nothing herein, express or implied, is intended to or shall confer upon any other person or entity any legal or equitable right, benefit, or remedy of any nature. See Third Party Beneficiaries Clauses. Headings Section headings (i.e., captions), provide parties with an easy method of finding certain information in an agreement. A headings clause provides that the headings/captions used are for convenience and reference purposes only and have no substantive meaning or interpretative value in and of themselves. The following is a sample headings clause: The headings of the sections hereof are for reference purposes only and shall not affect the interpretation of any of the terms and conditions set forth herein. Headings clauses eliminate ambiguity arising from the captions used in an agreement, especially where a caption inaccurately identifies a clearly drafted section on a specific topic. If a caption creates confusion, a party cannot use this as justification to invalidate the clause’s terms, and limit their scope or applicability. Headings clauses are generally included in long-form contracts, although they are unnecessary as their absence typically has no effect. For more headings language, see Headings Clause. Further Assurances A further assurances clause requires each party to cooperate respect to the other party’s fulfillment of obligations and exercise of rights under the Agreement. The clause covers contractual omissions that may have to effectuate the parties’ intention later. For example, a rights transfer provision may require the transferee to execute an assignment agreement, and this obligation may have been inadvertently left out of the agreement. Further assurances clauses should indicate which party is financially responsible to provide such cooperation. The following is a sample clause: Each party, along with its respective employees, agents, directors, officers, and affiliates, shall, at its own cost and expense, execute any additional documents and take such further actions as may be reasonably required to carry out the provisions of this Agreement and give effect to the transactions contemplated hereby. See Further Assurances Clause. Equitable Remedies Commercial Contract Drafting and Review If parties wish to establish their right to equitable relief, an agreement should incorporate a clause setting forth its availability. Such provisions can be made mutual or one-way, and can be made to the agreement or simply to certain types of breaches and/or forms of relief. Counsel should note, however, that despite inclusion of such a provision, courts and arbitration tribunals can nonetheless deny equitable relief in their discretion, as they generally favor the exclusive award of monetary damages unless such an award is insufficient, incalculable, or inadequate. But the language encourages the awarding of equitable relief, as it provides a court with information respecting the parties’ intent and the level of harm anticipated if equitable relief were not provided to the aggrieved party. Additionally, courts are most likely to enforce equitable remedies clauses that are specific and applicable to breaches where equitable relief is commonly awarded. Standard clauses granting equitable relief generally include: • An acknowledgment by the parties that a material breach would cause irreparable harm to the nonbreaching party • An acknowledgment by the parties that there is no adequate remedy at law (i.e., monetary damages would be insufficient) • A statement that the nonbreaching party may have equitable relief An equitable remedies clause may also provide: • That the nonbreaching party does not have to post a bond or other form of security in his or her claim for equitable relief (as courts often require a plaintiff to post a security bond while litigation is pending to cover any loss or damage that may be incurred by a defendant because of being wrongfully restrained, unless waived by the parties in the agreement) • That the nonbreaching party need not prove damages to obtain relief • That the breaching party waive its right to contest a final equitable relief court order • That the nonbreaching party be entitled to seek equitable relief. Inclusion of the word “seek” acknowledges the discretionary nature of an equitable relief grant (i.e., that it is not available to a plaintiff as a matter of right). A plaintiff must always prove to the court that a breach occurred and that legal remedies would not make the plaintiff whole. Omitting the word seek sends a message to the court; however, respecting the importance of the equitable relief language, while use of the word dilutes the operative language of the provision Equitable relief clauses are most commonly seen in confidentiality agreements, agreements that contain non- competes and/or non-solicitations (such as employment and other personal service contracts), and agreements for the sale or license of unique goods. For equitable remedies clauses, see Equitable Remedies Clauses. In certain transactions, equitable relief can be devastating to the breaching party. Counsel may wish to exclude its applicability by expressly disclaiming one or both parties’ right to obtain equitable relief from a court if a breach or misconduct occurs. This exclusion can be made to the agreement or simply to certain types of breaches and/or forms of relief. For example, agreements that contemplate licensing intellectual property often incorporate a “no equitable relief” provision so that a licensee in breach of the agreement can only be sued for monetary damages (i.e., the licensor cannot enjoin the licensee’s distribution of final deliverables). For no equitable remedies clauses, see No Equitable Relief Clauses. Cumulative Remedies A cumulative remedies clause provides that the rights and remedies in an agreement are cumulative (i.e., that they can be obtained besides whatever implied rights or remedies are available at law or in equity). Including such a clause is not always necessary, however, as common law generally provides that cumulative remedies are available unless an agreement expressly disclaims their availability (with exceptions depending on the jurisdiction). When a cumulative remedies clause is included in an agreement, it should incorporate carve-outs for any sections subject to exclusive remedies, such as limitations on liability, limited product warranties, and liquidated damages Commercial Contract Drafting and Review provisions. Alternatively, an agreement can simply include an exclusive remedies clause (and potentially carve-out those provisions for which cumulative remedies still apply). Agreements can contain both a cumulative remedies clause and an exclusive remedies clause, each addressing different contractual provisions. For cumulative remedies clauses, see Cumulative Remedies Clauses. For more information on cumulative and exclusive remedies, see Remedies. Counterparts A counterparts clause is useful when there are multiple parties to an agreement in varying locations. While generally not required, they are commonly included in commercial contracts. The following is a sample clause: This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. An executed copy of this Agreement delivered by facsimile [, email or other means of electronic transmission] shall be deemed to be as effective as an original signed copy. Regarding the bracketed language, please refer to the section on Notices for a brief discussion of emailed correspondence. Governing Law An agreement should always set forth the governing law and forum state. A governing law provision sets forth which state’s laws would apply if a dispute occurs under the contract. Counsel should consider the agreement's governing law at the beginning of the negotiations because the law selected provides the context in which the agreement is to be drafted. The outcome is generally based upon the relative bargaining power of the parties, the location of their respective headquarters, the relative advantages gained from the applicable state’s specific laws, and location(s) where each party’s obligations are being fulfilled. The chosen state need not be the same state where either or both of the parties reside. Often, each party’s counsel would be well advised to push for its own client’s state laws to apply, as selecting a foreign state’s laws could cause having to rely upon unfamiliar substantive law and procedures. Counsel should note that an agreement need not specify the laws of only one state. It could require certain disputes be governed by one state’s laws, while other matters be governed by a different state’s laws. Submission to jurisdiction language provides the parties with some certainty regarding where and how conflicts will get resolved. The forum state and the governing law state need not be the same. An important factor to consider when selecting the forum is convenience (i.e., for the individuals involved in making appearances). For more on governing law and dispute forum provisions, see Choice of Law and Choice of Forum Clauses. Additionally, if either party is a foreign entity and/or if the subject matter of an agreement is international, best practices include incorporation of language stating that the United Nations Convention on Contracts for the International Sale of Goods (CISG) does not apply. When an agreement incorporates international elements, the contract may be subject to CISG. As a ratified international treaty, the CISG preempts state Uniform Commercial Code (UCC) law unless its applicability is expressly excluded. U.S. counsel would be well advised to exclude CISG, as its language is interpreted in different ways by the courts of different countries, including regarding enforcing foreign judgments, and as such, the outcome of its application to any particular dispute remains difficult to predict. This problem is compounded by an extreme lack of guidance from past court rulings, which go largely unrecorded. Therefore, as compared with Article 2 of the UCC, the CISG offers much less settled law, precedence, and consistency (and therefore, more risk). Additionally, tremendous research is required to understand how the CISG applies to a specific transaction. A dispute under a CISG governed contract is often heard on foreign ground. Counsel may also wish to add language expressly excluding the right to a trial by jury. If included, the language should be clear and conspicuous to protect its enforceability. Such clauses are often included to save time and