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Believe it or not, one of the most confusing things to figure out in any contract is the parties: the persons actually agreeing to the deal. If you remember nothing else about this post, then focus on these two key questions that you need to ask to know who the parties are:
1. Type of Person: Individual or corporate?
2. Name: Trademark, department, division or corporate name?
Let me tell you a story from my days as a practicing lawyer. I represented a client that was a Fortune 500 corporation (let’s call it “ABC Corporation“). One of their senior marketing executives called me up one day (let’s call him “Bob“). Bob asked me to draft a contract with a consulting company that he planned to use (let’s say Bob called the company “J. Strange“). He told me that J. Strange was going to help him plan out his entire marketing strategy for a killer new magic trick product they were about to launch in the magic marketplace (let’s call it the “Killer Product“), and, as a result, would have wide ranging access to ABC Corporation’s proprietary information. Bob said that the most important issue in the whole consulting deal was making sure that J. Strange did not use this information to build its own product and compete with Bob’s company.
You can put a variety of protections in a contract to prevent this kind of behavior, including a confidentiality clause. But what Bob really wanted was called a “covenant not to compete” which would say that J. Strange could not start selling any products that compete with the Killer Product (Doesn’t “Killer Product” sound funny? It makes me think of some weird malfunctioning giant robot out of Robocop 2!). Also, J. Strange couldn’t work with others to compete with Bob’s company.
So, upon receiving this kind of request from a client, what’s the first question a good attorney should ask? I hope you guessed it: “For this consulting contract, who are the parties? Who is going to sign this deal?” Easy, right? If this were a test, you’d confidently type into your computer: “ABC Corporation and J. Strange are the parties.” Problem solved! Hazzah! Gold star, 4.0, A+ action, baby! Sadly, no, not so fast. You’re definitely right about one of the parties, which is Bob’s employer, the ABC Corporation.
But what about the other? J. Strange? Well, let’s start with the first key question:
Type of Person: Individual or corporate?
In the legal world, we refer to the parties that sign contracts as persons. Now, you might have the quite reasonable idea that a person is . . . well . . . a person, right? An individual? You, me, and the lady down the street, no? Oddly enough, under the law there actually is another kind of person, a corporate person. An individual person is created by being born. How is a corporate person created? Well, a group of people get together, decide that they want to start an organization, and apply to a U.S. state to receive a charter, which is a document that says that the organization now exists as a separate, unique, fully able to sign contracts corporate person.
This organization, this corporate person, can take a wide variety of forms, including:
Not for profit corporation
Limited Liability Company
Most states require a corporate person to identify its existence as one of the particular types listed above by adding the following at the end of their name (if you don’t see this at the end of the name, then it’s a tipoff that you should ask the party what their actual corporate name is, as it appears on their corporate charter):
So, when Bob calls you up and tells you the name of the other party is “J. Strange”, the first thing you want to know is whether or not J. Strange is an individual or a corporate person, to which Bob responds, “What are you talking about? They’re a company, I guess, right?” At which point you would look them up online or via a corporate research service, and find out or not whether they have a charter and exist as a corporate person. Let’s say that we discover that there is a “J. Strange, Inc.” which is a Delaware corporation. Now we’ve hopefully answered the first key question! We’re dealing with a corporate person here, not an individual.
What’s the second question? Remember to ask:
Name: Trademark, department, division or corporate name?
“What’s in a name? That which we call a rose by any other name would smell as sweet.”
Now, a name may not have been a big deal to Bill Shakespeare, but it’s hugely important in the contracts world. If you don’t have the right name, you have know idea which corporate person you have a deal with. What if J. Strange, Inc. is one of a variety of companies? What if J. Strange, Inc. owns J. Strange, LLC (which handles its consulting business) and J. Strange Corp. (which sells software)? What if you put in the contract that J. Strange, Inc. will not compete with the ABC Corporation, but J. Strange, Inc. is not the name of the company that’s getting the proprietary information? What if J. Strange, Inc. is actually concrete manufacturer and has nothing to do with your consultant? What if your consultant, J. Strange, is actually a department or a division that is part of a corporate person called the Norrell Corporation? Or a trademark? What if I ask you seven straight questions? Ultimately, you now know you want to change the contract to say that it is between ABC Corporation and the consulting company, let’s say: J. Strange, LLC.
The bottom line is that if you don’t know who your deal is with, it’s really not of much value, especially if you end up in a big dispute and have to go to court to get a judge to rule in your favor. The whole point of a contract is to create trust between the parties so there can be a smooth working relationship, not open yourself up to a huge fight down the line. Good contracts prevent disputes from ever happening, bad contracts engender friction. And what can be more annoying than not even getting a party’s name right at the start (besides getting attacked by the Killer Product)?
Congratulations! Now, when you are drafting a contract, you know the two key questions you always want to ask so you can figure out who the parties are.
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