Each party to this Agreement shall keep in force during the term of this Agreement a policy or policies of insurance providing the following coverages in commercially reasonable amounts from reputable underwriters:...comprehensive automobile liability, covering all owned, hired, and nonowned vehicles of a party or its affiliates.
Setting aside the questions of what are "commercially reasonable amounts" and how to identify a "reputable underwriter," I am still wondering why auto insurance is relevant to this deal. If memory serves, customer and vendor met twice - when customer drove to vendor's offices. That would not create an exposure for vendor. After the work was awarded, all communications were via telephone, Web conference and email. I struck the language (and vendor agreed) because I saw no raise questions as to whether customer was carrying insurance that would contribute nothing to the deal.To begin, the transaction must be legal in each nation. While that would seem obvious in theory, in practice it an yield many surprises. Years ago I ordered some rare earth magnets from a well known and well respected vendor of woodworking supplies located in Canada. Rare earth magnets are very powerful for their size, and woodworkers use them in all sorts of ways. I glue them to the wall of my workshop and hang tools from them. A few days later I received a call from a very nice, but rather embarrassed fellow at vendor, who advised that it was (then, at least) illegal to ship such magnets across the US/Canadian border. He apologized for the inconvenience, the rest of my order arrived in due course, and to this day I wonder why magnets, of all things, should receive such treatment from government. The moral however, is that government restrictions can pop up in the most unexpected locations. IT, of course, often receives special scrutiny from regulators. I sometimes think one could make a career simply dealing with US government controls on the export of technology.
Assuming the transaction is permitted in both nations, the next question is how to enforce the agreement. If I, as an American, hire a German company to build a factory in Mongolia, where do I file suit if something goes wrong? Despite all the progress of globalization, there is no “international commercial court” to hear such disputes. My choices would appear to be the US, Germany or Mongolia.
Although Mongolia has long fascinated me, I have no knowledge of their system of commercial law. Perhaps their courts would not even hear a case between two foreigners over a project that just happened to be located in Mongolia. Indeed, if the money is merely flowing between the US and Germany, the Mongolian courts may not have effective jurisdiction. Even if I were to win in the Mongolian courts, I would still have to locate the bank accounts (or other assets) of my German vendor and persuade a court there to enforce the Mongolian judgment.
If we presume the contract was signed in the US, I would have a good case for filing suit in that nation. Again, even if I were to win, I would have to find assets to satisfy the judgment. That could be difficult if my vendor only has a small sales force. In that case my US judgment would be useful only if I can enforce it in Germany.
There are, of course, treaties between most nations promising to respect the judgments of one another's courts. But that does not guarantee success. The German judge might discover some defect in the American proceedings and refuse to confirm the judgment. That would leave me with one option – filing suit in Germany.
In this case I have made at least three mistakes:
As a result, I condemned myself to play hide and seek across the world with my vendor.
A better course would have been to:
In the legal world, a breach is failure to fulfill an obligation set forth in a contract. A “material breach” is a failure so severe that it threatens the value of the entire contract. For example, if a customer orders one ton of steel, she will probably not want to terminate the contract if the vendor delivers only 1, 998 pounds, rather than the 2,000 expected. Vendor might issue a credit or refund or promise to deliver the missing material immediately. Or customer might overlook the missing two pounds as inconsequential. In contrast, if the vendor delivers one ton of brass rather than steel, customer may wish to cancel the order or terminate the supply contract. If we assume the customer needs the steel for an office tower, the brass simply will not suffice; it is simply not strong enough. Clearly a material breach.
Or is it?
Assume the contract says “metal,” rather than “steel.” Brass is a metal.
Assume customer wants to terminate the contract because she needs the steel immediately, and lacks the time to wait for vendor to deliver the correct product. Is timely and accurate delivery a condition of the contract? Is it a MATERIAL condition of the contract? Put another way, did vendor know that the contract required him to deliver the right product, at the right time?
What if the contract simply calls for “steel”? Does it matter whether vendor delivers the latest space-age alloy or a truckload of rusting auto parts?
Let's change industries. Customer orders a “computer.”
Does it matter that the new device processes 16 million instructions per section, when the industry standard is 25 MIPS?
Does it matter if customer paid a discount price?
Does it matter if customer paid a premium price?
Does it matter if the product is delivered “a little” late?
That is “slightly” over budget? What is “slightly”?
That it “doesn't quite” work? What is “doesn't quite”?
That it runs fine as a stand alone, but won't interface with customer's systems?
That it won't run customer's software?
Does it matter whether that software is incidental or critical to customer's operations?
Lawyers have a method for finding answers to questions such as these. They call it “discovery.” It is one of the more expensive and time consuming parts of a lawsuit. If there is enough money at stake, vendor's lawyers will leave no file untouched, and no employee not-interviewed, in an effort to show that the alleged breach is not material – that the failure (assuming there was one) did not cause real and substantive harm to customer. Alternatively, vendor's lawyers will argue that the product or service complained about meets the standards set forth in the contract, or that customer never disclosed that requirement X would be central to the deal. Vendor's lawyers will suggest that, at best, customer is mistaken or confused; at worst they will suggest that customer is making a dishonest attempt to escape the contract, for whatever reason.
Which delivers us to a quandary: What is a drafter to do if the officially sanctioned term “material breach” is simply an invitation to dispute and litigation?
Change the definition.
The problem is not the term itself, but the meaning given that term by the law. But, in commercial contracts, laws, regulations, and legal definitions are generally DEFAULT provisions – they apply only if the parties do not set their own rules or definitions. (Within limits. A contract to commit a crime is still a crime, and unenforceable.)
Which of these provisions would you prefer to administer and enforce?
“Either party may terminate this agreement if the other commits a material breach of any term hereof, and fails to cure such breach within thirty days of receiving written notice of the existence thereof.”
OR
“Either party may terminate this agreement if the other commits a material breach of any term hereof, and fails to cure such breach within thirty days of receiving written notice of the existence thereof.
“For the purposes of this provision, 'material breach' shall mean....”
Admittedly, the latter is more difficult to complete. Each party must ask itself “What would cause me to want to call off this deal?” Then they must persuade the other party to include those provisions in the agreement. Both steps run counter to the common understanding of the deal process - “Get it done” and “Be positive.” A more realistic rule is probably “Be thorough.” The more time spent up-front spelling out the details of a deal – and identifying the key parts of the deal – the less time will be spent arguing about perceived failings.
Or, as our parents always taught us: “Get it right the first time.”
Copyright 2006, Thomas J. Hall. All rights reserved.
"Colossus was the world's first electronic programmable computer, located at Bletchley Park in Buckinghamshire. Bletchley Park was the British forces' intelligence centre during WWII, and is where cryptographers deciphered top-secret military communiques between Hitler and his armed forces. The communiques were encrypted in the Lorenz code which the Germans considered unbreakable, but the codebreakers at Bletchley cracked the code with the help of Colossus, and so aided the Allies' victory."
Sources
The citation above comes from:
http://www.scienceandsociety.co.uk/results.asp?image=10307385&wwwflag=3&imagepos=3
For a more detailed discussion of WWII code breakers, see The Code Book, by Simon Singh.
A few days later Jim called and said “We need to change the ABC agreement.”
“Why?” I asked. “I thought they had signed off.”
Jim explained that there had been a mix-up. Our company wanted to front the money to develop ABC’s new flagship product. In return, we would receive a no-charge license and free support ad infinitum. “They want a new agreement that says they own the work product,” Jim said.
I was in a bit of a quandary. ABC’s lawyers had blessed the contract. More, I had been a business lawyer too long to simply give away an asset. I replied “What’s it worth to them?”
Jim laughed and said he’d follow up with management. Later that day our CIO called. He complimented my mercenary instincts, but directed me to make the necessary changes. I did, but I also “extorted” a coffee mug from ABC’s sales rep. I wanted something to commemorate the occasion.
I like this story because it illustrates several things, including the need to involve lawyers in the transaction process. Had I known more about the deal, I could have got the contract right the first time. I would not have an amusing story, but the companies would have saved time and money.
Jim and I took a cue from this transaction and revised our procedures. We created a standard contract request template requiring internal clients to fully describe the transaction. When in doubt, we asked for more information. The CIO also endorsed a requirement that Jim sit in on all negotiations over a certain dollar amount. I also sat in on these from time to time, with the informed consent of the vendor.
An attorney can only draft from what he/she knows. If that knowledge is flawed or incomplete, the contract will be flawed, resulting in unnecessary delay. In addition, regarding the lawyer as merely a scribe, to be involved only at the last minute, can deprive the parties of the lawyer’s experience and insight. No one will be pleased if the lawyer is asked to provide a contract “tomorrow,” and he/she replies “But you have overlooked this, and this, and this and this.”
“Make him an offer he can’t refuse,” is a brilliant example of leverage in negotiations, although it has two small flaws:
Violence is generally bad for business; and, on the other hand,
Most businesses are not willing to pay any price for a deal.
Rather, Vendor wants to make the most money possible, and Customer wants to spend the least. The final deal will reflect the skill, tenacity and leverage possessed by each party. In addition, successful performance of a contract may be directly influenced by the leverage retained by Customer.
During negotiations, leverage is directly proportionate to Customer’s options. The more options – the easier it is to say “No” to any one Vendor – the more leverage Customer has. I can recall when, many years ago, “negotiating” with IBM for data services meant haggling over volume discounts and service hours. There were competitors in the market, but none of them rivaled IBM’s reputation for service and cutting edge technology. With little competition, IBM had no incentive to change its standard terms and conditions.
Today there is vigorous competition in most sections of the IT market. Few companies dominate their fields, giving Customers room to negotiate. But it is all too easy for Customer to surrender that advantage to Vendor. Once Customer has said “You’ve got the deal,” Vendor has no incentive to make concessions. Better to award the contract only after the competing vendors have made their best offer on price and terms and standards and service levels and warranties, etc. Also, consider requiring vendors to comment on your standard contract terms as part of RFP. Vendors who request unreasonable changes, or an unreasonable number of changes, may be weeded out early in the process. Time spent on needless negotiation will only delay project completion and a difficult negotiation may portend a difficult relationship.
For a Customer, at least, leverage should not end when the contract is signed. If the agreement calls for Customer to pay in full up front, or at specified interval (e.g. at 30, 60 and 90 days), Customer will lose a major lever – withholding payment if work is late or not up to the agreed standards. This approach requires care if it is to be successful. Timetables and standards must be reasonable and mutually agreed. Standards must be subject to objective measurement. That was Customer will be protected against a delay of “a few days,” that turns into a few weeks, while Vendor is protected against a Customer’s decision that they don’t like (or can’t afford) the product.
Legend has it Archimedes said “Give me a lever and I will move the world.” The business lawyer might well say “Give me more leverage and I’ll get you a better deal.”
Lawyers have a reputation for being poor writers. We are regarded as wordy, repetitive, wordy, given to overly complex sentences and wordy.
Some complexity in legal drafting cannot be avoided. After all, many contracts record complicated transactions.
But that does not mean lawyers should stop trying to draft contracts that are as clear and brief as possible
To that end we offer some suggestions from George Orwell. His essay, "Politics and the English Language," was first published in May, 1945.
A scrupulous writer, in every sentence that he writes, will ask himself at least four questions, thus:
What am I trying to say?
What words will express it?
What image or idiom will make it clearer?
Is this image fresh enough to have an effect?
And he will probably ask himself two more:
Could I put it more shortly?
Have I said anything that is avoidably ugly?
I think the following rules will cover most cases:
Never use a metaphor, simile, or other figure of speech which you are used to seeing in print.
Never us a long word where a short one will do.
If it is possible to cut a word out, always cut it out.
Never use the passive where you can use the active.
Never use a foreign phrase, a scientific word, or a jargon word if you can think of an everyday English equivalent.
Break any of these rules sooner than say anything outright barbarous.
These rules sound elementary, and so they are, but they demand a deep change of attitude in anyone who has grown used to writing in the style now fashionable.
