HOW TO IMPROVE LAW FIRM TRAINING

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• Contracts from Michael Hunter Schwartz, Washburn University School of Law
• Family Law with Skills Andrew Schepard, Hofstra University School of Law
• Labor Relations Law Roberto L. Corrada, Sturm College of Law University of Denver
• Advanced Contracts Gillian K. Hadfield, Gould School of Law University of Southern California
• Discovery Practicum David Thomson, Sturm College of Law University of Denver

But these kinds of classes are few and far between.

Matthew Homann recently bemoaned that, when a major error happens, organizations skip alleviating the causes and instead focus on blame.

Matthew notes that typically:

• Employee makes error.
• Employee is punished.
• Employee has less trust in management.
• Employee is less forthcoming about problems.
• Employee wastes resources with elaborate, unnecessary safeguards.
• Management knows less about employee’s performance.
• Failure to communicate and fix systemic problems enhances chances of future errors.

Ultimately, Matthew advocates a “blameless post-mortem” discussion to fix the cause of the error in a constructive manner.

This concept informs the state of junior attorneys, who can sometimes be thrown in the deep end with insufficient training, then punished when things go wrong. Interestingly, the unique nature of law firm organization might encourage this error, because most firms have very little performance discipline across the organization. In a legal world where most equity partners are free to leave at any time and take their clients with them, there are only so many constraints that firm management can impose. So, if one equity partner wants to blame and punish the attorneys who support her clients, she usually is free to do so. The normal lack of a comprehensive, metrics-based training program at law firms also contributes to the challenge.

There’s a fascinating theory about this kind of problem called “The Theory of Practical Drift” pioneered by Scott Snook, a professor at the Naval War College. Snook argues that there are 4 key stages relevant to major errors:

Stage 1. Policies are developed and given to people practicing day to day.

Stage 2. Due to issues that arise which conflict with the policies, and an inability to adjust them, people on the ground make practical decisions to disregard these constraints.

Stage 3. Over time, the increased practical drift away from the policies causes a major meltdown (which could be an attorney doing poor legal work and losing a client).

Stage 4. The organization responds by blaming and punishing the individuals involved instead of looking at the systemic processes that contributed to the error. The organization then adopts even more detached policies which starts the 4 stage process all over again, increasing the likelihood of another major error in the future.

In the legal world, one might think the increasing use of “belt and suspenders” contracts clauses is a great example of Stage 4. These clauses ambiguously repeat the same obligations in different ways throughout a contract in the hopes of adding extra protection, but actually create more room for argument due to using different words capable of different interpretations to determine the parties’ rights and responsibilities for a particular issue. Use of elaborate contract language is often seen within a firm as a sign of experience and judgment, and young attorneys are encouraged to increasingly adopt this drafting approach after they miss an important issue as a part of their lawyer training. Unfortunately, this creates a situation where contracts are often so dense and complex that the young attorney will miss more important issues in the future, or conflate key concepts so that the contract can’t clearly explain what the parties should do and it leaves everyone reading it hopelessly confused.

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Ultimately, it would make more sense to train lawyers earlier in their careers, even during law school, so that they can perform more effectively. In addition, firms should adopt systematic processes for performing legal work so they can decrease the chances of young lawyers making major mistakes, while improving their level of consistency after law school.

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HOW TO ACE LAW SCHOOL/BAR EXAMS

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When I was in law school no one explained how to ace a law school exam to me. Now, I teach a course at the esteemed Seton Hall University School of Law on the federal health privacy law, HIPAA (we have one of the best health law programs in the country at Seton Hall and are justifiably proud of it), and I create and grade law exam answers.

I always try to be as fair as possible with my HIPAA students. As a result, one of the course topics I explain is how to tackle a law school essay exam, which tends to be a unique challenge. Strong undergraduate schooling and in-semester law class preparation often don’t necessarily result in excellent grades on these tests. You tend to need to know what to expect and how to dissect it to excel.

By the way, this approach also works well for the essay sections in bar exams.

Most law school essay exams start off with a complex fact pattern requiring you to sort through all the issues in order to answer the questions successfully. Students understandably tend to dive into reading the fact pattern immediately. Surprisingly, you should not do so. Instead, adopt this 4 pronged strategy: (1) Time, (2) Chart, (3) Outline and (4) Write.

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I. TIME. First off, you need to use a strategy focused on time. Wait on reading the fact pattern and first and foremost count the number of questions you need to answer.

Time Allocation. Let’s say that for your exam, there are 6 questions. Next, note how much time you have to finish. For our purposes, we’ll use a 2 hour limit. Now, you need to allocate your time based on these constraints. Set aside at least 30 minutes to read and chart the fact pattern. That leaves you with 90 minutes. 90 divided by 6 equals 15. That means you have 15 minutes to answer each question. You must follow this rule at all costs. If you reach the end of 15 minutes allotted for a question, then move on immediately. You’ll probably complete some of the later questions in less than 15 minutes so you’ll be able to go back and finish any incomplete answers. If you instead remain on one question, polishing your answer to meet your standards, you will probably burn up time you could have spent on easier questions and lose way too many points to score a strong final grade.

Routinely I see students make this error and not even have time to answer a question (or 2 or 3). This mistake, by the way, is also a classic way to fail a bar exam, and happened to a very bright friend of mine. It’s an easy trap to fall into. After all, law school often attracts perfectionists who enjoy the rigors of debate and argument. Along the way, you might find that a particular exam question makes you a bit obsessive.

Avoid this problem by sticking to your time line religiously.

Less Writing, More Thinking. Why should you set aside so much time for reading and charting the fact pattern? Believe it or not, you should spend most of your time preparing to write, instead of actually writing your answers. This is because a well-organized, thoughtful and cogent answer ensures your best chance of a good grade.

Avoid Going Down the Blind Alley. Additionally, if you start writing as soon as you finish reading the fact pattern, you likely will find yourself following a particular line of argument that doesn’t stand up to logical scrutiny. You might not realize your error until you already burned up a good deal of time, forcing you to revise or delete your propositions and furiously attempt to think through a better alternative under tremendous time pressure.

II. CHART IT UP!

You need to make sure that you use your reading time to gain an initial understanding the key parties and the key issues raised by the fact pattern. You want to create a chart that lists in the left hand margin all of the parties identified in the reading. Along the top horizontal row, fill in each legal issue you spot along the way. Let’s chart an excerpt from a fact pattern in an old exam of mine:

FACT PATTERN

Lemp is the CEO of the Seton Brewing Company (“Seton Brewing”). Lemp is deathly afraid of flying, and accordingly travels the country to see Seton Brewing’s various brewing plants, distributors and customers via train. Lemp rides in style within his own private Pullman railroad train car containing his own bar and dining room. Helmut is a porter working in the car and is a member of the Seton International Brotherhood of Sleeping Car Porters (the “Seton Brotherhood”), a not-for-profit corporation. Over the years, Helmut has developed repetitive stress syndrome in his right wrist from constantly serving drinks from the bar to Lemp and his coterie of acquaintances and drinking companions. One night, as Helmut attempts to deliver a tray of beers, his wrist begins to shake terribly and Lemp notices a look of terrible pain flash across Helmut’s face as he drops the rattling tray on the dining table. Lemp demands that Helmut see the Seton Brewing internal health clinic (“Seton Clinic”) as soon as they arrive at Penn Station, near Seton Brewing’s world headquarters in Newark, New Jersey. The Seton Clinic is operated as a department within Seton Brewing and does NOT operate as its own corporate person with a separate corporate charter.

Helmut drives to see Dr. August, a doctor employed by Seton Clinic. Dr. August immediately diagnoses Helmut but is unsure as to the best treatment and wants to consult Dr. Helga, an orthopedic surgeon employed by a separate corporate entity known as Seton Medical Associates Inc. (“Seton Medical”). Unfortunately, New Jersey has just passed a state law stating that Dr. August must first create an electronic health record for Helmut, send the record to the new NJ Office of Health Care Services, and get prior approval of the diagnosis before talking to Dr. Helga. Approval normally takes 6 months. Dr. August thinks this is too much time to wait, and goes ahead and shares Helmut’s protected health information (“PHI”) with Dr. Helga. Dr. August also wants to use Helmut’s PHI to write an article about his case for a widely read medical journal.

Preemption: Issue and Elements. If you were a student in my course, you know that there is a legal issue in this fact pattern as to whether or not the New Jersey state law is preempted by the federal privacy law, HIPAA. You also know that there is a legal rule for analyzing preemption. That rule requires you to determine whether or not a state law is contrary to HIPAA, or more stringent than HIPAA. If contrary, the state law is preempted. If more stringent, the state law remains in force. “Contrary” means that the state law makes it impossible to comply with HIPAA, or creates an obstacle to compliance. “More Stringent” means that the state law expands on a HIPAA requirement, or adds a new, separate protection.

Using a chart, you can quickly fill in next to each party the key elements for each rule raised by each legal issue. So, for instance, an example might look like this:

A chart like this gives you a guidebook to the fact pattern so you don’t “lose the forest for the trees” and you can quickly and easily understand who all of the parties are and what the obvious legal issues and rules might be. You also create a clear explanation of the key elements for each legal rule which later guides your essay analysis. This will greatly speed up your outlining process, which we’ll cover next.

III. OUTLINE TIME.

Before you even begin writing a single word of your essay answer, you should first construct an outline of that answer. Whatever the question might be, you want to look at your chart, figure out all the relevant parties and legal issues, determine the associated legal rules and each of the elements for the rules, and then construct an outline to answer your question.

For instance, if, on an exam, you are asked, “Determine all the relevant issues” then you might prepare the following outline for the preemption issue:

I. PREEMPTION

I.A. Identification of Key Facts and Legal Issue.

I.B. Explanation of Preemption.

I.B.1. Contrary.

I.B.1.a. Impossible to Comply.

I.B.1.b. Obstacle to Compliance.

I.B.2. More Stringent.

I.B.2.a. Expands on a Federal HIPAA Requirement.

I.B.2.b. Provides an Additional, Separate Protection.

I.C. Preemption Analysis of NJ Law.

I.C.1. Contrary Elements Analysis.

I.C.2. More Stringent Elements Analysis.

I.C.3 Conclusion.

IV. WRITE YOUR ESSAY.

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Now that you have a comprehensive outline you know the exact line of argument you want to pursue. Use the outline as paragraph captions for your law exam answers. This way, your professor can quickly glance at your response and determine you know what you are talking about. Remember, many professors look to see whether or not you successfully identified the key rule elements and assign your grade accordingly. If you make it difficult to find these elements by burying them in dense, unstructured paragraphs, then you reduce your chances of successfully demonstrating your knowledge; use outline captions to make your level of knowledge obvious.

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Should Confidentiality Contracts Survive Forever?

With all the outsized press lately about zombies (even The Washington Post covered the “zombie apocalypse”), you’d think people are obsessed with survival. Similarly, in the contracts world attorneys also stridently debate survival, often with such single-minded focus that you might think of them as “zombie lawyers.”

Catch this great animated video of zombie lawyers from our friend and entertainment law expert Thomas Crowell:

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At the end of the day, though, lawyers are less interested in brains and instead lock horns over how long a particular obligation should survive the end of an agreement.

There are few better examples of this debate than the normal give and take over whether or not a confidentiality obligation should survive.

Recently, we posted our video and article explaining the most common issues in a confidentiality agreement template. A number of attorneys contacted me and raised some interesting points regarding how long these confidentiality duties should survive.

Comment No. 1 – How Long Is Long Enough? Another issue is how long you need to maintain confidentiality and refrain from using the other side’s confidential materials.

• Should it just be for a specified period (e.g., 3-5 years is common)?
• Should that period start from the date of the disclosure or from the date of the end of the contract?
• Or should confidentiality last for an indefinite period until the information falls into one of the defined exceptions?

A great example for this category would be trade secrets, which might well be highly valuable after 3-5 years. The fear is that confidential materials might no longer qualify as trade secrets after the confidentiality survival period ends and you’ve given the other party the right to freely disclose this information sans restrictions.

My Response: I’m glad you raised this issue. In my experience, many organizations use a standard non disclosure agreement as insurance in case something ever goes wrong on the confidentiality front without thinking through exactly what that problem might be. Usually no one takes the time to look through all the disclosures ahead of time and determine the right time frame for confidentiality survival. Fearing this lack of foresight, lawyers try to combat the risk of disclosing confidential information without protection by making the definition of confidential information as broad as possible, then making that wide definition more acceptable to the other side with a short survival period. But, as you point out, for trade secrets this is completely inappropriate.

Big corporations usually sign a confidentiality and nondisclosure agreement without thinking through survival. Some companies are so blase about the issue that their employees use a self-service website for each non disclosure agreement template. Commonly, companies in one industry have tens of nondisclosure agreement contracts executed with other players in that industry, all with broad confidentiality definitions that overlap and make it often impossible to determine which confidential disclosure agreement applies to which disclosure. A much wiser move might be using one, master confidential disclosure agreement with each company, and take the time now wasted on negotiating each contract to finely tune the definition and survival periods for each disclosure.

Comment No. 2 – Do Clients Read? As I see things, a narrow information definition, short agreement term and a quick survival period increase the risks that the discloser might, at some point in the future, give away valuable materials without protection. Maybe this approach makes it obvious with disclosures can’t fit under this simple level of protection. In those situations, the parties can spend more time focusing on a longer survival period.

My Response: That depends on the degree that the business executives actually read the non disclosure agreement and consider the short survival period. In my experience, these people usually lack much awareness of or interest in reading their contracts and thinking through the impact. As a result, maybe the best move is for a standard non disclosure period to survive perpetually in a contract that uses broad exceptions for materials in the public domain, rightfully received by a third party, or independently developed without referenced to the standard non disclosure.

Comment No. 3 – Sure, Buddy, But What About the Receiving Party? Of course, that’s the position most disclosers desire. But if I am the receiving party, why should I take on this risk because the discloser doesn’t take the time to use best practices regularly?

By the way, here’s a great tip for negotiating: when you receive a one sided, unilateral non disclosure agreement, ask instead for their mutual non disclosure agreement. This gives you a good idea as to the protections the disclosing party will accept when the shoe is on the other foot and they are the receiving party.

My Response: Thanks for the tip! I’d probably have a different take as to whether or not perpetual survival is unfair to the receiving party. After all, should a receiving party ever use the disclosing party’s confidential information for its own purposes? Shouldn’t the receiving party instead use its own work, public domain materials and third party relationships to build its products and services? And, to what degree are there any case law examples of a party paying out significant damages for violating confidentiality many years after the non disclosure agreement expired? I rarely run into any of them in my research, mainly because most standard non disclosures lose value over time as business skills, goods and services improve and progress. Those materials that remain valuable tend to be more obvious or covered instead by the thicket of patent claims that oppress innovation (but that’s a story for another day!).

Read our articles and watch how-to videos!
How to draft an Employee Confidentiality Agreement here.
How to draft a Standstill Confidential Disclosure Agreement here.

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11 Ways to Nail Sales Contracts

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What Are You Selling? Believe it or not, people often gloss over this simple question. I’ve seen many contracts over the years that stated the vendor sells the customer a “Server” or a “Solution” – but a server can be hardware or software, and a solution could be anything. Routinely, people insert “To Be Decided” under the goods/services description, or use a cursory one sentence explanation that leaves tremendous room for later arguments as to what the customer actually wanted. Smart salespeople don’t create problems down the line that jeopardize ongoing revenue. They insert a comprehensive, clear description of exactly what will be provided to the customer. This allows you to set the customer’s expectations properly at the start of the negotiations so they don’t end up disappointed later. Additionally, sometimes purchasing agents like to change the “rules of the game” or “move the goalposts” constantly so you never nail down the scope of the deal. This approach stops that from happening nicely.

Vanquish the Vague. Litigators feast on vague contract provisions like “Server” or “Solution” because they leave a great deal of room to argue that the vendor failed to provide what was promised. You don’t want to end up in a dispute with a customer where they can make this kind of argument. When drafting your goods/services description, think of it like this: if a total stranger picks up this document 10 years from now, will they read your description and reach the same understanding I have of it? This method makes you think long and hard about how straightforward your language is and whether you’ve removed as much room for doubt as possible as to what the picture of the delivered and completed good/service looks like. Now that you know to include a great, crystal clear description of what you sell, here are 11 top issues for your sales agreement format:

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1. Slice and Dice – What’s the Price?  Consider all the possible scenarios for the payment structure:

• Set Amount.
• Charge by the Task.
• Charge Per Good.
• Charge Per Milestone Success Targets.
• Weekly/Daily/Billable Hours Incurred.
• Price Protection (ensure that the price won’t exceed a set amount, but you’ll charge less if the billable hours incurred total is smaller).

2. Timing: Give Me Some Money! Consider all the possible timing methods for receiving compensation from a customer. Some of these might work better than others in satisfying customer needs to close the deal:

• Divide by Key Dates: You might charge 25% to 33% on each key date that comes up over the course of the deal. For example, you might charge 25% upon signing the sales agreement, 25% upon shipment (or when the customer receives your goods), 25% once the customer tests and accepts the goods, and a final 25% once the customer installs the goods in the production environment.
• Pay By the Month: Usually you might charge for the tasks you perform by tracking the time and billing on a set, time-based rate.
• Acceptance/Receipt: Tough customers might push to hold back payment for a long time after receiving an invoice (some companies insist on 45 days!). You might want a stricter period, and insist that if the goods meet the specifications per an acceptance test, at that point you must receive full payment.
• Success Targets: If you successfully roll out a new product or service through a series of phases, such as creating the specification, building a prototype, successful testing, main production and installation, and final acceptance test passage, you might ask to be paid each time you successfully complete a phase. This approach works well for larger corporate customers facing tight budgetary restrictions and scrutiny who need more predictable cost projections.

3. Drop the Price. Sometimes salespeople increase immediate vendor cash flow by letting customers obtain a nice discount. That discount might be one percent off a very large fee if the customer pays the entire project fee up front or shortly after signing the sales agreement.

4. Out-of-Pocket. If your company must pay certain amounts up front to service the client (usually this involves paying subcontractors that you need to complete the project), and you did not build these costs into the fee, then you definitely want to make sure the sales contract requires the customer to reimburse you.

5. Scheduling. Drive your projects forward to conclusion and receive all payments owed by using tight deadlines in a sales contract. A good time line spells out exactly what will be done, which helps ensure that you have a happy customer because their expectations are properly set up front. Additionally, you end up with tremendous internal discipline for your operational team because they have clear targets that they need to meet to ensure successful completion of the deal.

6. Conditions Precedent. Think about anything you need the customer to do so that you can make a profit on your fee and hit the sales agreement internal deadlines. If the customer doesn’t timely sign off on a specification, provide proper loading dock space, ensure sufficient cabling, put in place proper power generation, or fails to perform any other condition you need met so that you can live up to your sales contract duties, then your deal can quickly become a money-losing, long-term quagmire. However, if you spell out these exact assumptions and state that the customer must meet them as a “condition precedent” to the pricing and timing requirements, then you protect yourself. It might even be wise to include a day-for-day slip in your deadlines for each day that the customer delays, and to include the right to charge for extra hours incurred.

7. Who Is Responsible?  At some point when you distribute goods to a customer, you release your responsibility for those goods and the customer must handle them. If anything goes wrong with the goods after that point, that’s the customer’s concern and they must sort out the relevant loss and insurance issues. What you don’t want is the customer to think you are still “on the hook” for these goods when you know you are not. So it’s best to specify the point at which loss risk passes, which usually happens after: (1) The goods pass an acceptance test at the customer’s premises, or (2) The customer just receives the goods on-site, or (3) When you place the goods in the hands of the shipping carrier.

8. Warranty Length. Figure out how long you ensure that the goods and services comply with the excellent description you drafted as part of the sales contract. You might provide a warranty that guarantees this compliance for a year or so, or a lesser amount of time, such as 180 days. Either way, spell out the exact nature and length of the warranty so the customer knows what to expect.

9. Cap It Up. It’s essential to figure out whether or not you face a large risk of paying huge damages to an unsatisfied customer who sues you. To prevent the damages from getting out of control, you can include a liability disclaimer that knocks out the biggest damages and sets a flat cap on the total amount you can possibly owe.

Read articles and watch videos on how to draft a liability disclaimer in this post, as well as this one and this one.

10. Hold Me Harmless. Sometimes customers want a hold harmless clause appearing in a sales contract that protects them if someone sues the customer because they bought the goods. For example, one of your unsavory competitors might sue your customers by arguing, right or wrong, that you stole the competitor’s technology to manufacture the goods. Most smart vendors try to convince customers this kind of clause isn’t necessary because they don’t want to handle this kind of litigation, but, if the customer insists on it to close the deal, you might accede. However, sometimes sellers actually want a hold harmless clause included in the sales agreement. The classic example is where the customer designs a new product and provides that specification to the seller to then manufacture the product. If the customer stole the design from someone else, the seller certainly doesn’t want to pay for damages due to this scofflaw and prefers the customer to hold it harmless.

Catch our articles and videos on hold harmless clauses in this post, this one, and this one.

11. Kill the Deal! A customer might ask you for a clause that says they can kill the deal and not continue to pay additional amounts due over the sales contract term. This might completely screw up your profitability expectations, especially if you provide low cost monthly payments to finance, over the life of the sales agreement, the customer’s use of an expensive product. You protect yourself from this kind of termination clause by insisting on a “Kill Fee” that the customer must pay you. This fee usually is quite large at the beginning of the sales agreement term but becomes minuscule towards the end when you’ve booked most of your promised revenues.

Master termination issues with our previous post here.

These are the key issues you care about for constructing your sales agreement format.

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Constantinople, Not Istanbul? How to Take on a Tough Limitation of Liability Negotiator

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You might be a huge fan of the famous song, “Istanbul Not Constantinople”. Believe it or not, the song inspired me to take “History of the Ottoman Empire” in college. During the course, my professor mentioned that another academic (who must have hated the song!) often criticized him for referring to the Turkish metropolis as “Istanbul” because he felt strongly that “Constantinople” is the correct term. This is odd and would be quite the surprise to the millions of Turks who live there (above is a picture of the Blue Mosque during my trip to Istanbul). After all, the city changed names in 1453. If over four centuries of name usage isn’t good enough for you, I’m not sure you’ll ever be convinced.

A similar phenomenon occurs when you try and convince someone who is undeniably wrong that the provision which they want to use in their contract is unenforceable and therefore not worth negotiating. This often occurs with the limitation of liability clause, especially because it’s the most negotiated clause across most contracts (catch our earlier posts on limit of liability consequential damages here and hard cap liability limits here). Let’s take a look at a typical liability disclaimer: SUBSCRIBE TO WHICHDRAFT NOW! Click Here!

CONSULTANT IS NOT LIABLE TO CLIENT OR ANY THIRD PARTY UNDER THIS AGREEMENT FOR ANY DIRECT, INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE, EXEMPLARY, OR CONSEQUENTIAL DAMAGES ARISING OUT OF OR RESULTING FROM THIS AGREEMENT. THIS PROVISION LIMIT’S CONSULTANT’S LIABILITY REGARDLESS OF THE THEORY OF LIABILITY, INCLUDING NEGLIGENCE, TORT, CONTRACT OR ANY OTHER CLAIM.

This clause suffers from overreach. Basically, it’s saying that the client can’t sue the consultant for anything. Under this concept, consider the following:

• What if the client pays the consultant a $10,000 up front fee, and the consultant absconds without doing any of the required work?
• What if the consultant, while visiting the client at her offices, covertly takes a photograph of a document containing the client’s prized trade secret, then sells that document to the client’s biggest competitor?
• What if during this visit, the consultant is having a terrible, awful, really bad day and kicks an expensive piece of machinery, damaging it and necessitating an expensive repair?
• What if the consultant argues with a client employee and, in anger, strikes the employee and sends him to the hospital with a severe injury?

Do you think that any limitation of liability clauses would be enforced by a judge in court to protect the consultant from liability? No judge would do so. The client could successfully pursue claims of unjust enrichment, misappropriation, fraud, gross negligence and willful misconduct against the consultant. Although the clause says that no third party can claim damages from the consultant, I think the government might not be deterred from seeking compensation for the client victim, and possibly even incarceration. Believe it or not, I’ve actually negotiated contracts where lawyers for the other side, who used a liability disclaimer just like the one appearing above, absolutely refused to concede the issue. Even after I offered up all of the above questions, and pointed the lawyers to cases where judges threw out these kinds of limitation of liability clauses, they still would not rein in this overreaching language. The most common response I received was, “We’ll let an actual judge decide whether or not my clause will be enforced!” After awhile, I realized that this intransigence presented me with an opportunity. You see, at the end of the day, if a vendor cares so much about the limitation of liability provision that they insist on an unreasonable clause like this one, it means that they use up a good deal of their bargaining power and are more likely to concede other issues. What are the other issues you might trade for in return for giving them their unenforceable language? Try the following: Mutuality. Insist that the clause must also limit your client’s liability. Indemnification. Require the vendor to indemnify your client (read all about how how to draft and negotiate indemnification clauses here, see an actual hold harmless clause here, or watch our indemnity video here for free). Payment Terms. Ask for more time to pay a bill, even press for 45 days from your client’s receipt of invoice. Termination for Convenience. Ask for the right to terminate the entire contract at any time so your client can quickly walk away from the deal. Hard Cap. Sometimes lawyers ask for additional liability limits, such as:

1. One Year - Limit all claims to those that arose in the previous year before filing a lawsuit.
2. Dollar Amount - Limit any liability to a small amount of money, such as $100.
3. Amounts Paid - Limit liability to the amounts paid under the contract.

There isn’t any reason why you can’t concede on the overreaching language and ask for these hard cap clauses to be excised from the contract. Ultimately, when faced with an unreasonable negotiator who insists on unenforceable limitation of liability language, check with your client first and foremost and see if the client still wants to do the deal regardless of whether or not this language resides in the contract. In my experience, they almost always still want to move forward. At that point, you provide your client with the most value by seeking other areas of the contract you can improve. Hopefully, if the contract ever ends up in litigation, your client receives the benefit of these additional concessions you obtained, as well as a judge who deletes the limitation of liability clause due to its over-broad drafting. Next time someone tells you “Istanbul is Constantinople“, you can say, “Why yes, it is, but let’s talk about the names of all the suburbs!”
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PART 2: HARD CAP – HOW TO NEGOTIATE CAPPED LIABILITY LIMITS (Read “Part 1: Consequential Damages Limitation of Liability Clause“)

Imagine yourself facing a significant lawsuit from a disgruntled former customer asking you to pay out damages well in excess of the compensation you rightfully received. Wouldn’t it be fantastic if you could point the judge to a clause in your contract limiting the damages to only the amount the customer paid you?

This concept is the “hard cap” provision of a limitation of liability clause (we previously covered how to handle the consequential damages of a liability disclaimer as well). Below, we offer up a terrific, free video that explains this clause in detail.

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Recently I traveled to Thailand, and our hotel offered private boat rides through the city’s extensive canal system. Little did I know, but Bangkok used to be a canal city like Venice, and still has an extensive network of water-borne transportation. We enjoyed the ride thoroughly (you can see the view from our boat to the left). But I wondered a bit about what happened when we booked the tour. The concierge at our hotel’s front desk made clear to us that the boat provider had no affiliation with the hotel, and asked us to sign a liability disclaimer absolving the hotel of any responsibility if things went wrong. Putting aside my fears of capsizing into Bangkok’s “River of Kings” (not an unreasonable concern given that we spotted giant lizards and crocodiles later on the Chao Phraya River), I signed the document.

But I didn’t think the limit of liability clause went far enough, as it only excluded consequential damages. The hotel should have also imposed a hard cap as well.

What’s a hard cap? Here are the key components and negotiating permutations that comprise a typical hard cap contract provision:

OPTION No. 1: One Year Limit.

You can limit the total payout for damages awarded against you in court to just those damages that the customer suffered in the previous year. Or the limit can cap damages to the 1 year period prior to the date that the customer’s cause of action arose. Here’s an example:

EACH PARTY’S LIABILITY SHALL NOT EXCEED THE AMOUNTS PAID UNDER THIS AGREEMENT IN THE ONE (1) YEAR PERIOD PRIOR TO THE DATE THE CLAIM AROSE.

OPTION No. 2: Amounts Paid Under the Contract.

You can also reel in the damages award to just the amount the customer paid you under your contract. Here’s an example:

EACH PARTY’S LIABILITY SHALL NOT EXCEED THE AMOUNTS PAID UNDER THIS AGREEMENT PRIOR TO THE DATE THE CLAIM AROSE.

OPTION No. 3: Total Contract Value.

Savvy negotiating customers push back on these kinds of limitation of liability clauses, and instead insist higher liability limits, equaling the amount paid, due and payable under the agreement. This means that anything the customer paid in the past, any amount currently due but not yet paid, and all amounts required in the future (such as required monthly minimum purchase commitments) add up together to create the numerical amount that equals the actual limit of liability. Here’s an example:

EACH PARTY’S LIABILITY SHALL NOT EXCEED THE AMOUNTS PAID, DUE AND PAYABLE UNDER THIS AGREEMENT.

OPTION No. 4: Multiple of the Contract Value.

Tough customers also insist, whatever the limit of liability amount may be, on raising that limit even higher by requiring it to be a multiple. A typical example might be to say that the vendor’s liability under the contract shall not exceed 3 times the amounts paid, due and payable during the term of the agreement. Here’s an example:

EACH PARTY’S LIABILITY SHALL NOT EXCEED THREE (3) TIMES THE AMOUNTS PAID, DUE AND PAYABLE UNDER THIS AGREEMENT.

MUTUALITY: Mutually Speaking, Of Course.

Per our previous limitation of liability clause post, if you are the customer, be sure to consider the issue of mutuality during these kinds of negotiations. As we said:

If you are a vendor, though, be aware that most savvy negotiating customers push back and insist that if contract includes a limit of liability, then that provision must protect the customer as well when the vendor sues the customer for any reason. This is called “Mutuality” or a “Mutual Limitation of Liability” clause.

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What freelancers (and their clients) need to know

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So, what does this consulting agreement need to say? Here’s what your consulting contract absolutely must contain:

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What work the consultant will perform. Both the consultant and the client need to come to an agreement on what work the consultant will actually do. This should include not only a written description of the services that the consultant will provide but also a written description of any tangible work product, or deliverables, that the consultant will provide. An example of such a deliverable might be a written report or assessment or a functioning website. The description of the work to be performed is often contained in an attachment to the consulting agreement (typically referred to as a “Statement of Work”) but can also be contained in the consulting agreement itself.

The timeline for commencement and completion of the work. Your consulting agreement should specify when work on the project should commence and also include a list of milestones or due dates when portions of the project should be completed. For example, a consulting contract for website development may require that the consultant provide an assessment of the client’s existing website in one week, a wireframe and functional spec of a new website in three weeks, and a functional website in 60 days.

Whether the consultant needs anything from the client before work can commence. Often a consultant will need the client to do something before the consultant can begin work on the project – provide client data, grant access to existing website code, etc. Why is it important to include this in the consulting agreement? Here’s one reason why: it ensures that the consultant is not penalized for failing to meet a deadline because the client dragged his feet and did not get something to the consultant that he or she needed in order to start the project.

Fees and payment terms. You will want to clearly set out how much the consultant will be paid for the engagement and at what point any payments are due to the consultant. Fees and payment terms can come in all forms and fashions – it’s not uncommon to charge a flat fee for the project, a per hour fee based on the number of hours the consultant works to complete the project, or provide for some other arrangement entirely.

It often makes sense to tie payment terms to any milestones you set. Returning to our website development example above, you may require that a third of the fees due the consultant might be paid when the initial website assessment is completed, a third be paid when the wireframe and spec for the new website are complete, and the final third be paid when the new website is up and running. If you’re a business owner, it’s obviously wise to be skeptical if a consultant requests payment in full up front before they have provided you any of the services or work product for which you are engaging them.

Reimbursement of expenses. You will want to specify whether the client will reimburse any expenses incurred by the consultant during the course of the engagement. It’s often wise to include a provision that provides that the client will reimburse any reasonable expenses up to a certain amount (or any one reasonable expense up to a certain amount) but that any expenses incurred by the consultant above that amount require prior written permission from the client.

Effective date of the contract. Make sure to include the effective date of the agreement in your consulting services contract! If the contract is not dated but provides that the client must pay the consultant 60 days after the effective date of the contract, when should the client pay the consultant?

Signatures. While you’re dating your consulting services agreement, you might as well sign it too. So many people neglect to actually sign contracts – all that does is create uncertainty in the law’s eyes around whether a binding contract was ever actually created in the first place. And who likes uncertainty?

Not that you know what every consulting agreement needs to contain – try using WhichDraft’s Consulting Services Agreement. It covers everything we’ve discussed here, was prepared by leading attorneys, and you can put one together in five minutes or less.

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PART 1: CONSEQUENTIAL DAMAGES – HOW TO NEGOTIATE LIABILITY LIMITS (Read “Part 2: Hard Cap Limitation of Liability Clauses“)

A limitation of liability clause is one of the most commonly negotiated clauses in the world of contracts. Basically, people fear the possibility of a future dispute, so they spend most of their time negotiating potential liability for that dispute. If a customer worries about the possibility of a dispute with a third, unrelated party, and the vendor caused that claim, then the customer negotiates strongly to include an elaborate indemnification clause in the contract (watch our indemnification video, or read more about the indemnify definition and see a sample hold harmless clause).

Vendors generally don’t worry about third party disputes caused by customers, because customers usually perform few obligations under a contract so there are less opportunities to violate someone else’s rights.

RULE No. 1: So customers want indemnification, while vendors do not.

The major exception to this rule of thumb is the transaction where the customer designs a new product and asks the vendor to create it. In that case, if the customer violated a third party’s proprietary rights in the design, then the vendor faces potential liability for infringing those rights during the build phase of the deal. As a result, vendors within this context often ask for indemnification. Otherwise, vendors mainly fear that the customer will sue them because the vendor’s performance was disappointing. Chiefly, a customer often expects a newly purchased product to increase business, such as new software designed to manage sales issues. If sales decrease, or if the software suffers an outage and the customer loses sales during that time frame, the customer might want to sue the vendor for those lost profits. Vendors are not in this position, as the customer doesn’t normally provide the vendor with anything that could impact the vendor’s sales.

RULE No. 2: So vendors want limitation of liability, while customers do  not.

If you are a vendor, though, be aware that most savvy negotiating customers push back and insist that if contract includes a limit of liability, then that provision must protect the customer as well when the vendor sues the customer for any reason. This is called “Mutuality” or a “Mutual Limitation of Liability” clause. By the way, the same concept applies to indemnification negotiations. Savvy vendors often insist on mutuality when a customer introduces an indemnification clause into a contract.

Bullet Point Issues. Today we are going to cover how to draft the first part of a contract clause known as the limitation of liability clause, which a vendor might want to include in a contract to provide liability limits if the customer sues that vendor. In a future video, we’ll explain the “hard cap” provision (the second half of the limitation of liability clause).

This video explains these common issues for a limit of liability:

• Aggregate vs. Per Claim Limits
• Claims in Tort, Negligence, Contract or Other Theory of Liability
• Customer Advised of the Possibility of or Foresaw the Damages
• Failure of Essential Purpose of a Limited Remedy
• Exclusions: Gross Negligence, Confidentiality Breaches, Indemnification Obligations and Intentional Misconduct
• List of Limited Consequential Damages: Indirect, Special, Incidental, Punitive, Exemplary, Consequential Damages

Click play below to learn these key points now.

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As noted in the video, you really want to be sure that you consider the following key issues:

• List of Consequential Damages: Indirect, Special, Incidental, Punitive, Exemplary, Consequential Damages. As a vendor, this is the list of damages that scare you because they are often enormous. If a customer pays you only $10,000, but then sues you for two million dollars for punitive damages, you might be quite afraid to ever transact business again. Punitive, or exemplary, damages concern outrageously bad conduct on the part of the vendor, such as when a vendor knowingly dumps toxic chemicals into a residential area, or knowingly rejects valid insurance claims causing ongoing suffering. However, any customer can sue you for punitive damages regardless of whether or not you think that your conduct is wholly appropriate. As a result, a limitation of liability clause that excludes these kinds of damages (as well as lost profits) at the start can head off a customer claim via a summary judgment motion before you face actual liability at a trial.
• Exclusions: Gross Negligence, Confidentiality Breaches, Indemnification Obligations and Intentional Misconduct. Customers experienced at negotiating might allow a vendor to include a limitation of liability clause in the contract, but usually ask for certain exclusions to the limitation. If any damages fall under these exclusions, then the customer can sue the vendor for compensation without any limitation. Typically, these exclusions concern particularly bad conduct by the vendor, such as:
• Gross Negligence. Engaging in gross negligence by not supervising rogue employees properly.
• Confidentiality Breach. Violating the customer’s confidentiality by sharing their trade secrets with a competitor.
• Not Indemnifying a Valid Claim. Failing to live up to indemnification duties in the contract, such as paying off a copyright infringement claim stemming from the vendor wrongfully using a third party’s software code.
• Intentional Misconduct. Intentionally destroying customer property. Amazingly, vendors often fight this exclusion, even though a court will not apply a limitation of liability clause in this context. If a vendor, for instance, decides to delete a customer’s key marketing database to help win business from the customer’s competitor, a judge won’t allow the vendor to shield itself from full liability with a contract provision. During negotiations over this issue, vendor attorneys might say something like, “Well, I’d like a court to decide that issue.” Don’t be persuaded by this statement. If you absolutely insist on this exclusion, a vendor almost always concedes the issue and includes this exclusion to the limitation of liability clause.

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I recently traveled to Bankgok, Thailand, and saw this funny sign at one of the main tourist sites (Wat Po, in front of the famous giant reclining Buddha).

I think it’s safe to assume that the Thai authorities do not want anyone to suffer at the hands of pickpockets, so clearly this sign comes off as highly amusing by suggesting that you only should be pickpocketed by an
official Thai thief!

That said, the sign illustrates one of the core issues people often need to reflect on more when negotiating contracts between parties in different countries speaking different languages, namely, what are the key concerns to consider to avoid a similarly humorous but also financially painful debacle?

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English Contract Langauge

First off, if you are negotiating an English contract, and you yourself are most comfortable writing, speaking, and, most important of all, interpreting text in English, than you should include a clause in the contract stating that no matter what language anyone translates the agreement into, the only enforceable version is the English one. The same analysis applies if you are a native Mandarin, Japanese, Spanish, Portuguese or Russian speaker. Use the language that best allows you to understand the language of the contract clauses and all of their nuances, flavors and permutations.

Here’s an example of a clause that makes sense in this context, especially if you are representing a client or customer:

ENGLISH LANGUAGE. This Agreement, as well as all reports, documents and notices required under this Agreement, referred to in this Agreement or requested by Client must be written in the English language. Except as otherwise required by applicable Law, the binding version of all of the foregoing is the English version. “Government Authority” means any governmental authority or court, tribunal, agency, department, commission, arbitrator, board, bureau, or instrumentality of the United States of America or any other country or territory, or domestic or foreign state, prefecture, province, commonwealth, city, county, municipality, territory, protectorate or possession. “Law” means all laws, statutes, ordinances, codes, regulations and other pronouncements having the effect of law of any Government Authority.

Governing Law

Second, you want to be sure that the governing law of the contract is written in the same language that you drafted the contract. So, for instance, let’s say:

• You are negotiating a contract between a Brazilian company and a Russian corporation
• The main focus of the business activities under the deal occur in Brazil
• The contract specifically states that Chinese law governs the contract

In this case, it would be a bad idea to rely on a Russian version of the contact during negotiations or later arguments as to how a clause applies in certain circumstances, let alone during any litigation, because you have a fundamental language gap that could rear its head when comparing a Russian provision with a Brazilian applicable law which damages your ability to persuade an adversary or adjudicator of the rightness of your beliefs.

So, for example, if you already included a language clause like the one above (except that it mandates that the governing language will be Portuguese), then you also want to include the following governing law clause:

GOVERNING LAW. All claims regarding this Agreement are governed by and construed in accordance with the Laws of Brazil, applicable to contracts wholly made and performed in Brazil, except for any choice or conflict of Law principles. “Government Authority” means any governmental authority or court, tribunal, agency, department, commission, arbitrator, board, bureau, or instrumentality of Brazil or any other country or territory, or domestic or foreign state, prefecture, province, commonwealth, city, county, municipality, territory, protectorate or possession. “Law” means all laws, statutes, ordinances, codes, regulations and other pronouncements having the effect of law of any Government Authority.

Of course, you should draft the above clause in Portuguese!

Governing Forum

Finally, if you took the time to mandate a certain language, and require a certain governing law, it would usually be a bad idea for you to then go ahead and allow disputes under the contract to be litigated in a country that uses a different language and legal system. Sometimes this is inevitable, many countries have enormously complex “conflicts of laws” jurisprudence that can plunge the parties into an unexpected foreign court with serious translation challenges, but you should at least make an effort to avoid this possibility in the express text of the contract.

Here’s an example of a clause you might want to try and use:

GOVERNING FORUM. All claims regarding this Agreement must be litigated in the State of [________] regardless of the inconvenience of the forum, except that either party may seek temporary injunctive relief in any venue of its choosing. The parties acknowledge and agree that the United Nations Convention on Contracts for the International Sale of Goods is specifically excluded from application to this Agreement.

You’ll notice above a reference to giving the parties room to apply for an injunction anywhere. You may or may not want to include this language if your client feels like it might need this level of flexibility, which can be particularly useful in pursuing intellectual property claims.

The reference to the United Nations Convention on Contracts for the International Sale of Goods (which is often referred to as the “CISG” or the “Vienna Convention”) makes sure that you opt out of default rules under that treaty which applies in all CISG contracting states when parties to an international agreement fail to to do so. The CISG default rules provide a uniform international sales law corpus that you may or may not be familiar with or agree with for your own needs (the United States of America is a contracting state). As a result, if you are not familiar with the CISG, it is a good idea to expressly exclude it to avoid later surprises.

Conclusion

Use of harmonious contracting clauses in this manner allows you to provide excellent client service. This way, you ensure that your governing language, laws, and forum are all operating in the same linguistic parlance, and you decrease the likelihood of ambiguities that could later spell unexpected trouble for your client. At the end of the day, removing ambiguity and increasing the chances that everyone involved on both sides will all interpret the contract the same way is your essential goal as a transactional attorney, so be sure to pursue this worthy aim vigorously.

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Recently a contract negotiation expert asked me, how do you convince the person you are negotiating with why you should be able to limit the scope of the indemnify definition?

We previously explained indemnification (where the parties are worried about who will be responsible for third party lawsuits) in detail in our indemnification video. We also provided a blow by blow breakdown of an actual indemnity sample hold harmless clause. Check them out and let us know what you think!

Today we are going to explain why you want to limit the scope of a hold harmless clause, whether you are negotiating a hold harmless agreement sample or a contract of indemnity.

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Salespeople Love Indemnities! In particular, salespeople often push hard to include any kind of indemnification clause that a customer asks for, because the salesperson often is unaware of what the clause means and, even if she knows, she has trouble placing much importance on a provision that is unlikely to cause any problems in the future, especially in light of the immediate opportunity to close a deal and earn a commission.

Short Term vs. Long Term Business Planning. I like to tell a business development person that this is a classic short term vs. long term business planning issue. Sometimes a company makes short term decisions, such as to offer a substantial discount on an older product line to quickly clear out inventory. This decision is likely to achieve its goal right away. Other times, the company makes a long term decision, like buying another company in order to acquire their talented employees and products. This decision is unlikely to achieve its goal (increased profits through better executing employees and products that offer greater value to your customers) right away, particularly because improved financial performance from the acquisition has to pay back the actual acquisition cost.

Limiting the scope of an indemnify definition is a long term business planning decision. As a company negotiates many, many contracts over time, if it offers unlimited indemnities in each one, then at some point in the future the company has greatly increased the chances it will have to pay out for an indemnification claim. That payment could be substantially more than the value realized from any particular contract deal that contains just one of these indemnities. As a result, it is good business practice to limit the scope of your indemnities.

Save Time and Game Plan! That said, I think that sales executives should not be leaving indemnification decisions to contract managers and attorneys. To me, this is not a legal issue, but a risk exposure issue, and, as a result, every company should convene a meeting of its chief sales, procurement, financial and legal executives (and anyone else who has budget authority over a budget that will be impacted by an indemnity claim) and determine a uniform negotiating strategy with all opening and back-up positions for all of the common negotiating permutations that are expected to arise. Through this knowledge management strategy, they will be able to greatly improve negotiation results and radically increase the speed of indemnification negotiations.

This long term focus should be effective in convincing your negotiating counterparts of the importance of limiting the scope of an indemnify definition.

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