Making Effective Contracts: To Advance Organizational Success in a Changing Competitive Marketplace

APICS – Boston Chapter, Woburn, Massachusetts , April 13, 2010

What should I be looking for in my contracts?

What makes for a good and valid contract?

…And Other Questions to ask along with finally –

When is a good time to ask Rob Adelson’s help?

  1. What makes a contract enforceable? Do I need a signature? Can we use fax or e-mail?  Can we use click-though?
  2. Are there times when I don’t want the contract to be enforceable? What should I say or do so not to be bound?  Can an oral contract bind me?
  3. What makes a good contract?  What are you setting out to accomplish? Are you planning ahead?  Are you relying upon any special facts or circumstances to occur? Was there something said you rely on?
  4. Are you hiring a subcontractor? Is he or she 1099 or W2? Full-time or part-time?  Who controls the work?  Is risk of payment shared?  Is the project “work for hire”? Are you concerned about contractor “poaching” clients?
  5. Are you buying or selling equipment or products?  What warranties offered on quality, service or performance? Against IP infringement?  Remedies?
  6. What are your compensation terms? Are you paid by hourly/day or the job?  Do you get an advance/retainer?  Are you paid/reimbursed expenses?  Are non-cash considerations used? Do you get equity or debt?  On what terms?
  7. Are you hiring or offering services?  What warranties exist on experience, standards compliance?  Reports, deliverables? What restrictive covenants – confidentiality? nonsolicitation? Noncompete?  Scope and Considerations?
  8. Are you doing software development?  Who owns IP? What specifications what payment milestones, what protections against changes asked?
  9. Do you have a VAR/ Rep/ Distributor agreement? Is it exclusive? What territories, applications are covered? Royalties determination? What Quotas and what obligations, stocking, customer service? Rights on termination?

MAKING A VALID CONTRACT

►What makes them unenforceable?

  • Parties / Subject Matter
  • Consideration
  • Completion / Finality
  • Mutual Assent – normally signed assent
  • Electronic Agreement / Elements for valid E-contracts

►When to leave things unenforceable?

  • Due Diligence in process
  • Playing the field / Other offers in process
  • Need based on other factors – Hedge bets, see what happens
  • Financing and other contingencies

►Can Oral contracts be enforced too?

  • Enforceable elements (see above) need to be met orally
  • Party seeking enforcement acts in Reliance upon oral contract
  • Doctrine of Implied Contract despite absence of signed document
  • Party denying enforcement has received benefits from oral deal
  • Doctrine of Unjust Enrichment to force disgorgement of profits

MAKING A GOOD CONTRACT

►Mission – Define mission, Cover the scope of contract

  • What do you want to accomplish now? In next several years?
  • What else is effected by this service or product

►Conditions – State Variables, Contingencies to performance

  • What assumptions are made that would cause a back-out or change deal?
  • Hedging your bet on things turning out as you expect & need them to occur

►Reliance – State Warranties/representations made each side

  • Has there been “touting” some aspect or quality of product or service
  • Was there reliance so that if it did not occur you would not have agreed

Consideration – What each contributes regardless of form

  • What are the motives for this deal – How are you being paid
  • Cash – if so what payment terms?  Equity – recite all terms of equity
  • Non-cash considerations?  Technology Back-license? Contacts?  Experience?

Mutuality –  Requiring each party to contract to “ante up”

  • The considerations by both parties need to be recited
  • These need to be real considerations – new things each offers to other

Commitment  – Mutual vulnerability & Remedies to default

  • Bargaining positions dictate vulnerability in timing of contributions
  • Clarity in conditions, contingencies – penalties for breach /failure to close
  • Rights on termination of agreement including surviving covenants

SEEKING GOOD CONTRACT VALUE

►How to cut legal costs to enforce the contract
  • Greater the uncertainty – greater litigation risks
  • Legal $$ upfront for clear contract save $$$$ in dispute /litigation

►When should I seek Rob Adelson’s help?

  • When you think you have a deal – that terms important to you covered
  • Do a businessman’s term sheet – what you think you agree on
  • State non-binding – Each side to review – Attorney draft binding contract

Production/ Supply Contracts /Purchase Orders

  1. Battle of Forms: Buyer PO, Seller Invoice, UCC
  2. Price: changes, adjustments
  3. Payment and Credit Terms
  4. Conditional sales, security interest
  5. Delivery, Orders, Risk of Loss
  6. Second Source v. Requirements contract: Notice of Delay; Right to cover; Ramp-Up; forecasts
  7. Inspection; Acceptance; Repair
  8. Warranties: Copyright/ IP infringement, legal compliance, express or implied product warranties, damages
  9. Liabilities, Remedies and Damages: Incidental (mitigation), Consequential loss, period of time to seek damages
  10. Term; termination; Return Buyer’s Property:Information, trade secrets
  11. Miscellaneous: Assignment, change orders, integration, arbitration, attorney fees, jurisdiction

Subcontractor / Service Provider Agreements

  1. Specific Duties: Ongoing Responsibilities,  Particular job, assignment, work excluded
  2. Independent contractor status
  3. Reports and Deliverables: reporting function
  4. Fees/ Compensation: periodic (hr. wk., mo.) Cost plus overhead, project milestone payments
  5. Personnel/ Staffing: qualifications, requirements
  6. Manner of Performance: legal reqs., standards
  7. Ownership of Proprietary Rights: copyrights, work for hire, inventions, new and existing trade sec.
  8. Insurance Coverage/ Independent Contractor
  9. Warranties etc.: Copyright/ IP infringement compliance with law; Express or implied product warranties; Incidental or consequential damages
  10. Term; Termination; short notice period; return of client information, plans, materials
  11. Confidentiality: proprietary info., exceptions
  12. Surviving Restrictive Covenants: No assignments for competitors, no solicitation of client’s customers, no hiring of service provider personnel

Software Development Agreements

  1. Design Specifications: Function, Response Time, Platform, system compatibility
  2. Deliverables: Code, documentation, components, reports/ tests
  3. Schedule and Performance Milestones
  4. Payment: periodic, cost +, milestone
  5. Ownership of IP Proprietary Rights
  6. Facilities and Cooperation
  7. Files Conversion: Training and Installation Support
  8. Acceptance and Testing
  9. Warranties etc.: no (known) copyright infringement, compliance with law, regulatory standards, no express or implied product warranties, no incidental or consequential damages
  10. Indemnity on infringement
  11. Maintenance after Initial Warranty
  12. Source Code Escrow
  13. Term; Termination; short notice period; return of client information, plans materials
  14. Confidentiality: proprietary info., exceptions
  15. Surviving Restrictive Covenants: No assignments for competitors, no hiring of service provider personnel
  16. Miscellaneous: assignment, subcontracting work, force majeure
  17. Other User Issues: Progress reports, response time warranties, staffing, most favored customer

Dealer and Distributor Agreements

  1. Territory: Customers, market, geographic division
  2. Exclusive or Non-Exclusive
  3. Relationship/ Statutory Requirements
  4. Sales levels: Minimum, inventory, staffing, best efforts, loss of exclusivity
  5. Pricing: Discounts, volume discounts
  6. Credit terms
  7. Product Availability and Allocation
  8. Parts, Supplies, Service
  9. Marketing and Promotional Arrangements
  10. Order Entry
  11. Sales Contract Terms (same issues PO p.5 above)
  12. Termination: Supplier Rights: Selling existing inventory , successor buy back
  13. Termination: Return Buyer’s Property: information, trade secrets, tools, equipment, materials, no use of trademarks
  14. Miscellaneous: Assignment, change orders, integration, arbitration, attorney fees, jurisdiction

Sales Representative Agreements

  1. Alternative to direct sales – customized svcs/products
  2. Installation, training and other services
  3. Paid on commission or discount basis (if stocking rep) Not Agent, no authority to act for supplier

Value Added Reseller Agreements

  1. Scope of License
  2. Pricing and Payment Terms
  3. Value Added contributions
  4. Exclusivity; multiple channel issues
  5. Product delivery; Source code
  6. Protections of Proprietary Rights
  7. Non-competition
  8. Termination, Warranties and Other standard Supplier/Distributor issue

Product Licensing

  1. Types: Use Manufacture, Distribution, Trademarks, Licenses, OEM, VAR Agreements
  2. License Terms
    1. Grant, Field of Use, Exclusivity
    2. Improvement, Back Licenses
    3. Royalties and Audit Reports
    4. Intellectual Property Protection
    5. Warranties, Liabilities, Expert Controls
  3. Software Licensing Issues
    1. Source Code, Object Code, Escrows
    2. Manufacture limitations, Modifications
    3. Shrinkwrap, Clickwrap licenses, Enhancements

ABOUT THE SPEAKER AND PRESENTATION

These materials were prepared by Robert A. Adelson, Esq., Partner at Engel & Schultz, LLP, 265 Franklin Street, Suite 1801, Boston, MA 02110, (617) 951-9980, fax: (617) 951-0048, e-mail: radelson@engelschultz.com

Mr. Adelson is a graduate of Boston University, Phi Beta Kappa, and Northwestern University Law School in Chicago where he was a member of Law Review. He has an LL.M. degree in Taxation from New York University, and is a member of the Massachusetts, New York and U.S. Tax Court Bars.  He began his legal career in 1977 as an associate at major New York City law firms, first Dewey Ballantine and later Weil Gotshal & Manges, before returning home to Massachusetts in 1985, where he has been a partner at several Boston firms before joining his present firm as senior business law partner in 2004.

Mr. Adelson is specialized in corporate, taxation, business and technology transactions.  In those areas, he frequently represents (1) small companies with their various business needs, including shareholder and employee issues, financing, commercial contracts, intellectual property, joint ventures, mergers and acquisitions, succession planning (2) senior executives, in negotiations over severance, employment, relocation, stock options, compensation and stockholder arrangements, and  (3) consultants – in liability protection, intellectual property protection, trade identification, vendor, client and subcontractor arrangements.

Mr. Adelson’s firm, Engel & Schultz, LLP, is a small but broad service law firm of 6 attorneys in Boston’s Financial District.  The firm complements Mr. Adelson’s work in business and tax law with seasoned attorneys in family, probate, real estate and litigation matters.

Mr. Adelson is a frequent speaker at business forums and Chairman of IEEE Boston Entrepreneurs Network www.boston-enet.org .  Further information on Mr. Adelson’s background and his past published articles is available at his law firm website.  To view many of Mr. Adelson’s past articles, see http://www.engelschultz.com/index.php/category/publications/ or https://robadelson.wordpress.com/

The speaker thanks Kenneth Glasser for the invitation to speak for APICS – The Educational Society for Resource Management, North Shore Chapter on the topic of Making Good Contracts: To Advance Organizational Success in a Changing and Competitive Marketplace” at the Bickford’s Grille, Woburn, Massachusetts on April 13, 2010.

The example on page 1 of these Materials are hypothetical and fictitious although the questions on page 2 are drawn from actual client questions.  The purpose of the example is solely to illustrate contracts issues, strategy and planning concepts and stimulate meeting discussion.  The remainder of these materials are to offer rough outlines of broad areas of major contracting situations for technology based business. It is hoped that these materials will inform discussion and be useful reminder of topics covered for the attendees.  These materials are not legal advice and not intended as any substitute for professional advice or counsel in a particular case.

Copyright (c) 2010 Robert A. Adelson.  All rights reserved.

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Author: radelson

Robert Adelson has been a corporate and tax attorney since 1977. He began as an associate at nationally prominent New York City “mega” law firms, first at the Wall Street firm Dewey Ballantine Bushby Palmer & Wood and later at the Park Avenue firm Weil Gotshal & Manges. In 1985, Adelson returned home, where he has since established himself as a respected Boston business attorney. He has attained partner at several small and midsize Boston law firms, most recently at Lawson & Weitzen LLP and then Zimble Brettler LLP, where he was a partner from 1994 to 2004 before becoming a partner at Engel & Schultz LLP.

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