Demystifying Contracts: Key Things to Look for in Commercial Contracts

In-House Paralegal Institute June 18, 2015 Dave Goldberg, VP, Associate GC, OpenText

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Getting Oriented Alternate Titles: • How to Interpret Bad Contracts and Draft Good Ones • How I Learned to Stop Worrying and Love Contracts

Agenda: • • • •

Why contracts look the way they do Why use contracts? Parts of a contract Wrap Up/Summary 2

Contracts Are Sometimes Hard to Read

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Contracts Are Sometimes Hard to Read

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Why use contracts? • Reflect agreement between two (or more) parties • Avoid disputes - Reference tool if things don’t work out

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Parts of a Contract

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Parts of a Contract TITLE

PREAMBLE/INTRODUCTORY CLAUSE

RECITALS

AGREEMENTS/ TERMS AND CONDITIONS

SIGNATURE BLOCK

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Preamble/Introductory Clause • Identifies Parties – Why use legal names?

• Using Defined Terms • Contract Effective Date Example: This [AGREEMENT] is dated June 18, 2015, between Company X, a Delaware corporation (“X”), and Company Y, a New York corporation (“Y”).

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Recitals (aka “Whereas Clauses”) • • • •

“Recitals” = “Background” Is it needed? Is it part of the contract? What to Include

• Consideration Statement (“NOW THEREFORE,…) – What is consideration anyway?

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Agreements/Terms and Conditions • Business Terms – What’s the deal?

• Definitions: Do you need a separate section? • Term and Termination – Is there a commitment? – To renew or not to renew? – What about bankruptcy?

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Representations and Warranties • Basis for allocating risk Examples: Service Provider represents and warrants that: 1. It has the full power and authority to enter into this Agreement and to grant [Buyer/Customer] the rights and licenses set forth herein, and to perform its obligations hereunder; 2. The Services will be performed in professional and workmanlike manner, in accordance with industry standards; 3. For a period of thirty (30) days after delivery of custom deliverables, such deliverable will function, in all material respects, in accordance with the written specifications of the applicable Schedule. If Customer notifies Service Provider of a breach of this warranty within the period specified above, Service Provider will work diligently to correct and redeliver the affected deliverable at no additional charge to Customer. THE WARRANTIES AND REMEDIES STATED IN THIS ARTICLE XX ARE EXCLUSIVE. NO OTHER WARRANTIES, EXPRESS, IMPLIED, OR STATUTORY, INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, APPLY TO THE SERVICES. 11

Representations and Warranties • May be implied warranties • Defines standard of quality for what is being provided • May include limits on scope of warranty or agreed process for correcting defects

Warranties≠Covenants 12

Limitation of Liability • Importance of a limitation of liability • Direct damages vs Consequential damage • What should the limit be? Example: LIMITATION OF LIABILITY. IN NO EVENT WILL THE LIABILITY OF EITHER PARTY UNDER THIS AGREEMENT UNDER ANY LEGAL THEORY EXCEED $XXXX OR [FORMULA] IN THE AGGREGATE, OR WILL EITHER PARTY BE LIABLE FOR ANY CONSEQUENTIAL, INCIDENTAL, SPECIAL OR PUNITIVE DAMAGES.

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Indemnification • What is it? – Agreement to pay the cost of damages – Risk allocation tool Example: Indemnification. Vendor shall indemnify[, hold harmless and defend] Customer [and its officers, directors and employees] against any and all losses, damages, liabilities claims, actions, judgments and expenses[, including reasonable attorneys' fees,] [that are finally awarded] against Indemnified Party, [arising out of any third-party claim] resulting from (1) any [gross] negligence or willful misconduct of Vendor in connection with the performance of its obligations under this Agreement; or (2) any bodily injury, death of any person or damage to real or tangible personal property resulting from Vendor’s performance of of its obligations under this Agreement.

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Indemnification • Scope – – – –

Should it be limited to third party claims? Specific types of claims Who’s covered? What about attorney fees?

• What’s the difference between indemnification and contract damage claims? • How does the indemnity clause relate to the limitation of liability? • Is it really needed? 15

General Terms = Miscellaneous

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Force Majeure • • • •

Literally “most powerful force” Usually a laundry list of events, “acts of God” Performance excused Must be beyond reasonable control

Example: Force Majeure. Neither party shall be liable to the other by reason of any failure or delay in performance of this Agreement due to acts of God, acts of governmental authority, unavailability of third party communication facilities or energy sources, fires, transportation delays, or any cause beyond the reasonable control of that party. 17

Governing Law/Dispute Resolution • Does governing law matter? • Venue • Mediation or Arbitration? Example: Governing Law. This Agreement will be governed by the laws of the State of New York[, without regard to conflict of laws provisions.]

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Assignment clause (aka Non-Assignment) • Permission to assign may be assumed if you don’t restrict it • Assignment vs “transfer” • If a contract is assigned, are all obligations and rights transferred? Example: No Assignment. Neither party may assign this Agreement without the prior written consent of the other party, which consent will not be unreasonably withheld; provided that either party may assign this Agreement without consent to a successor in interest to substantially all of the business of that party to which the subject matter of this Agreement relates.

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Survival • Which terms should survive termination of a contract? • Does survival mean “forever”? Example: Survival. The provisions set forth in Section X (Payment), Y (Limitation of Liability), this Section, and any other right or obligation of the parties in this Agreement that, by its nature, should survive termination or expiration of this Agreement, will survive any expiration or termination of this Agreement.

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Signature “Block”

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Does it matter? Electronic signatures Are signatures required? Implied contracts

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Summary: • Contracts reflect the agreement of the parties, so: – Try to write clearly, but… – Don’t obsess over every detail/every hypothetical

• Contracts reflect the business deal: – you will be most effective at writing, reading or processing contracts if you understand your company’s business!

Contracts are not just for lawyers! 22

Questions? Other resources: – [email protected] – American Bar Association, A Manual of Style for Contract Drafting

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