This post is based on a question I answered on Quora.
Q. Why do technology contracts often carve breach of confidentiality out of the limitation of liability?
A. I’m going to start by broadening the discussion, a bit.
Last week Y Combinator announced The Handshake Deal Protocol. A “handshake deal” is an oral commitment to a funding transaction between a startup’s founders and an investor. Handshake deals are necessary in Silicon Valley because, in the world of startups, one must move quickly.
As Y Combinator notes, however, handshake deals can create problems:
Unfortunately, things don’t work as smoothly in Silicon Valley as among diamond dealers. This is not a closed community of pros who deal with one another day after day. Many participants in the funding market are noobs, and some are dishonest.
Contracts sometimes require that a party use its “best efforts” (in contrast to, for example, “commercially reasonable efforts”) to carry out its obligations. Last month, in California Pines Property Owners Assn. v. Pedotti, the California Court of Appeal for the Third District provided a definition of “best efforts”.
The case involved water diversion rights, specifically, Pedotti’s obligation to use “best efforts” to maintain a full reservoir. The court held [emphasis added]:
Intellectual property license agreements often include a provision by which the licensor is paid a royalty that is calculated as a percentage of the revenue received by the licensee from licensed products. Given that licensees have a financial incentive to reduce the amount of revenue that is reported*, the prudent licensor includes an audit provision in the license agreement.
The audit provision typically:
This post is based on a question that I answered on OnStartups. Q. I’m in the process of closing a deal with a new client, and the only sticking point is the choice of applicable law. I am located in state A, the client in state B. My contract says it will be governed by the law of state A. The client wants to change this to New York. Why? Would doing so open my company up to any unintended side effects/liabilities (e.g., taxes)?
With this post I am inaugurating a new feature that I expect will appear from time to time: Ridiculous contract provisions that I have run across. Today’s post is based on an agreement that I recently reviewed for a client.
The agreement provides standard terms and conditions by which a large utility in the Eastern United States works with its suppliers of products and services. The sentence in question says:
No change, amendment or modification of any of the provisions of this Contract will be binding unless in writing that identifies itself as an amendment to this Contract and that is issued by Company.
In other words, the Company apparently believes that the only requirement for an amendment should be that the Company issued it – irrespective of whether the supplier agrees to the change! Enough said….
Photo credit: iStockphoto
Dana H. Shultz, Attorney at Law +1 510 547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.
Today I answered a Quora question about what a letter of intent is and what it should contain. The question and my answer (each edited slightly) are reproduced below.
Q. What is a letter of intent? What are the legal implications of a letter of intent? What is the purpose? Which elements minimally comprise a letter of intent?
I’m not a big fan of mandatory arbitration clauses in contracts: Although arbitration is likely to proceed more quickly than litigation (other than small-claims cases), it is not necessarily less expensive. However, I recently saw an arbitration clause that I like quite a bit.
Linden Research, Inc., developer of the Second Life multi-user online service, includes the following in its Terms of Service (emphasis added):
A client had been using a form of independent contractor agreement for years and was concerned that the existing agreement did not fully meet the client’s legal needs. I said that I could adapt my form of agreement more cost-effectively than I could fix the client’s agreement. When I did so, I realized that the agreement I provided was much easier to read (aside from being legally tighter and more complete).
What makes the new agreement easier to read? First, it has about 20% fewer words, because I try to make each point once, avoiding the needlessly repetitive words and phrases that lawyers traditionally have delivered.
Many people (indeed, too many lawyers) are not aware of the difference between termination of an agreement and expiration of an agreement. This post explains that difference and discusses why it matters.
Expiration is the ending of an agreement pursuant to its terms without any action by a party to the agreement. Expiration commonly occurs at the end of a defined period of time – for example, a lease may expire at the end of one year. Expiration may be linked to other events, however. For example, a patent license agreement may expire when the underlying patent expires.
Termination is the ending of an agreement as the result of an action taken by a party to the agreement. For example, an agreement may provide that either party may terminate it upon ten days’ written notice if the other party breaches the agreement and does not cure the breach during the ten-day notice period.
Why the difference matters: A carefully-drafted agreement may specify that a party’s rights after expiration differ from its rights after termination. For example, one of my clients has a license agreement under which the client incorporates pieces from a popular board game into jewelry. If the agreement expires, the client may sell off any remaining inventory during the 60-day period following expiration. In contrast, if the agreement is terminated by the licensor for breach by the licensee, there is no sell-off period.
Photo credit: Lars Sundstrom via stock.xchng
Dana H. Shultz, Attorney at Law +1 510 547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.
Dana Shultz is a business-savvy lawyer located in Northern California's San Francisco Bay Area (in the East Bay, near Oakland) who has in-depth knowledge of law, business, technology, and the needs of startup and early-stage companies.
For more information about Dana and his services, please go to the About Dana Shultz page and the Services page.
+1 510 547-0545
dana [at] danashultz [dot] com
Skype: dana.h.shultz
This blog does not constitute legal advice and does not establish an attorney-client relationship. If you need legal advice, please contact a lawyer directly.
