Common Contract Clauses: Part 3-Module 5 of 6
V. Common Clauses: Part 3
Integration and Amendment
Integration and Amendment. The discussion and negotiation of a contract between the parties can take place over a considerable period of time and involve multiple employees before the lawyers ever get involved. Therefore, by the time all is said and done, the parties want to be certain that the agreement involves nothing more than what actually is in it. So “integration” clauses are included to say that nothing outside the “four corners of the agreement” is included in the agreement. The law of “integration” has become well settled.
For example, in UAW-GM Human Resource Center v. KSL Recreation Corp., 579 N.W.2d 411 (Mich. App. 1998), the court stated: “If a written document, mutually assented to, declares in express terms that it contains the entire agreement of the parties...this declaration is conclusive as long as it has itself not been set aside by a court on grounds of fraud or mistake, or on some ground that is sufficient for setting aside other contracts.... It is just like a general release of all antecedent claims [citation omitted].”
Many times, the parties also want to indicate that the agreement cannot be amended except in a specific writing executed by the parties. Most courts, however, do not enforce that language when the parties have amended the contract by their behavior or where oral amendments are otherwise permitted by statutory or caselaw. Why, then, you might ask, do so many contracts contain “amendment only in writing” language? The answer, of course, is that the drafter hopes the other side is unaware of the law on this subject (in most jurisdictions).
In Southwinds Express Construction LLC v. D.H. Griffin of Texas, Inc., 513 S.W.3d 66, fn 3 (Ct. of App.—Houston 2016), the court stated: “Although the Subcontractor Agreement required modifications to the scope of work to be in writing, Texas courts have allowed parties to orally modify contracts with such provisions [citations omitted]. A written agreement not required by law to be in writing may be modified by a later oral agreement, even though it provides that it can be modified only in writing [citations omitted]. Courts have allowed parties to modify an agreement orally despite a no-oral-modification clause [citations omitted].”
Sample integration and amendment clause: This Agreement constitutes the entire agreement between the parties with respect to the matters set forth in this Agreement and supersedes and renders of no force and effect all prior oral or written agreements, commitments, and understandings between the parties with respect to the matters set forth in this Agreement. Except as otherwise expressly provided in this Agreement, no amendment, modification, or discharge of this Agreement shall be valid or binding unless set forth in writing and duly executed by the parties to this Agreement.
Intellectual Property Rights
Intellectual Property Rights. Intellectual property (“IP”) is an umbrella term covering, essentially, patents, trademarks, copyrights, and trade secrets. Other than to provide this umbrella, the term itself has no intrinsic legal meaning. IP rights come up in a myriad of ways in various types of contracts — far too many ways to allow discussion here. IP rights can involve the creation of IP, the licensing or conveyance of IP, and litigation concerning IP. Perhaps the most common example of contract IP clauses relates to employment contracts. These days, employers want to make sure that anything that even smacks of IP and that is created by an employee of the company is owned by the company and not by the employee under the principle that the employee’s salary or other compensation is payment in full for any employee creation. For an interesting twist on the more normal IP/employee issues, see Beane v. Beane, 856 F.Supp.2d 280 (D. N.H. 2012) where the principal issue concerned the obligation, if any, of a non-employee, part owner of a company to assign IP to the company.
Sample intellectual property rights clause: Employer shall own all rights to the results of Employee’s work, including inventions, trademarkable matter, copyrightable matter, trade secrets and any and all other intellectual property developed using Employer’s equipment, supplies, facilities or trade secret information. Employer also shall own all rights to the results of any other effort of Employee (outside of Employee’s performance of work for Employer) that relate directly to Employee’s work or to Employer’s business or actual or demonstrably anticipated research or development. Employer’s rights extend to anything that is authored, conceived, invented, written, reduced to practice, improved or made by Employee, alone or jointly with others, during the period of Employee’s employment by Employer. To the extent that the results of Employee’s work or other effort constitute a “work made for hire” as defined under U.S. copyright law, the copyright shall belong solely to Employer. Otherwise, to the extent that such results are legally protectable, Employee hereby irrevocably assigns all trademark rights, copyrights, patent rights, trade secret rights, and other proprietary rights therein to Employer, and no further action by Employee is required to grant ownership to Employer; provided, however, that Employee agrees to assist in preparing and executing documents, and will take any other steps requested by Employer to vest, confirm, or demonstrate its ownership rights, and Employee will not at any time contest the validity of such rights. Employee understands that the termination of Employee’s employment will not terminate or invalidate any of Employee’s obligations, or Employer’s rights, as described above.
Procedural Clauses Anticipating Litigation
Inurement. Sometimes, contracting parties (or at least one of them) desires that the contract (or at least certain parts of it) benefit “successors” or “assigns.” The word “inure” means to “come into operation or take effect.” So “inurement,” in the context of contract boilerplate language, means that the contract (or parts of it) takes effect with respect to the benefit of such successors or assigns. Usually, it refers to the idea that the party’s successors and assigns have the same rights as the party that originally entered the contract. Sometimes, there is a question of whether an inurement provision is in conflict with and trumps the idea of the contract, at the same time, having third-party beneficiaries. See Main Street Bank v. Carlyle Van Lines, Inc. (W.D. Mo. 2010).
Sample inurement clause: This Agreement inures to the benefit of the parties’ respective successors and assigns.
Jurisdiction/Venue. This is a very important boilerplate provision. Where the parties to the contract are located far apart, each one of them, of course, desires that any litigation concerning the contract be conducted “in their own backyard.” This can be one of the more hotly negotiated provisions. To resolve this major conflict, some contract negotiators now try the “converse” approach whereby the party bringing the litigation agrees to bring it in the “other party’s backyard.” Not only does this approach sometimes get past a seemingly intractable negotiation problem, it also may cut down on litigation as the party wanting to sue will be more amenable to settlement in lieu of having to file the lawsuit away from home. Where to file also has much to do with the law that would be applied and whether the case would end up in state court or federal court. Plaintiffs certainly can make the wrong decision by filing in a venue different than the one agreed to in the forum selection clause of the contract. See Huffington v. T.C. Group, LLC (Super. Ct. Del. 2012).
Sample jurisdiction/venue clause: The state or federal courts, as appropriate, located in ______ County, ______, shall have exclusive jurisdiction and venue with respect to any disputes arising out of or relating to this Agreement and without regard to its conflict of laws rules.
Jury Trial Waiver. Some contracting parties believe it is in their best interests to avoid jury trials — because it is less expensive and/or because they think they will get a better hearing from the trial judge as the trier of both the facts and the law. This is a very important decision as it amounts to a waiver of their U.S. Constitutional Seventh Amendment right to a jury trial. (When the parties agree to binding arbitration, they are, in effect, doing the same thing.) Sometimes, it is extremely clear that the parties meant to and did include in a negotiated contract a jury trial waiver. Other times, especially where the contract(s) between the parties is adhesive, as discussed earlier, the intentions of the parties (or at least one of the parties) may not be so clear. Clearly, because of the waiver of a constitutional right, the issue of jury trial waiver where the contract is adhesive is quite controversial.
In Kaye v. T.D. Banknorth, N.A. (Super. Ct. Conn. 2011), the court, after thoroughly vetting the constitutional issue, ruled: “[T]here is no evidence that there was an existing jury trial waiver when the plaintiff opened its account with Lafayette American Bank & Trust Company. Although a jury trial waiver was purportedly added to the business deposit account agreement when the defendant subsequently obtained control of the plaintiff’s account, there is no evidence before the court that the plaintiff was either sent or received any documentation informing it of the change or that the plaintiff affirmatively assented to a jury trial waiver. Accordingly, the court finds that the evidence does not show that the plaintiff knowingly and voluntarily waived a jury.”
Sample jury trial waiver clause: Each party to this Agreement hereby irrevocably waives its right to trial by jury in any litigation arising out of or relating to this Agreement.
Liability and Breach Clauses
Limitation on Liability and Damages. All contracts involve risk. All contracting parties want to minimize any risk they may have. When the parties are of equal bargaining strength, there may not be a limitations clause in the agreement, but where one party is in the superior bargaining position, a limitations clause may be included or the contract not entered into. Here’s an example. A warehouse fire rages out of control and destroys the entire building and all of its contents because the security company monitoring the alarm at the warehouse noted the alarm but, for whatever reason, failed to notify the fire department. When the warehouse owner sues the security company for damages, he discovers that the contract between them limits the liability of the security company to the total amount of money paid to date for the security company’s services, a sum hugely less than the customer’s damages. If such clauses meet certain requirements, they are enforceable.
In Embotelladora Electropura S.A. de C.V. v. Accutek Packaging Equipment Co., Inc. (S.D. Ca. 2017), the court upheld the limitation on liability clause, stating: “Under California law, parties may agree by their contract to the limitation of their liability in the event of a breach [citation omitted]. Such limitation clauses ‘have long been recognized as valid in California [citation omitted]. Any contract of release from negligence must be clear and explicit, free of ambiguity or obscurity, and tell the prospective releasor he or she is releasing the other from liability, including negligence. The language must be comprehensible [citation omitted]. Contractual clauses seeking to limit liability will be strictly construed and any ambiguities resolved against the party seeking to limit its liability [citation omitted].’ However, if a court finds the ‘wording to be unambiguous and its meaning to be clear,’ the limitation on liability clause can be enforced [citation omitted].”
“The limitation on liability clause at issue in this dispute reads as follows: ‘In no event shall Accutek be liable for any indirect, incidental, punitive, special consequential damages, or damages for loss of profits, product, production, revenue, or loss incurred by customer or any third party, weather [sic] in an action, in contract, or tort, or otherwise even if advised of the possibility of such damages. Accutek’s liability for damages arising out of or in connection with this agreement shall in no event exceed the purchase price of the defective equipment. The provisions of this agreement allocate the risks between company and customer. Accutek’s pricing reflects this allocation of risk and but for this allocation and limitation of liability, Accutek would not have entered into this agreement.’”
Sample limitation on liability and damages clause: To the fullest extent permitted by law, the total liability, in the aggregate, of Company to Customer, and anyone claiming by, through, or under Customer for any claims, losses, costs, or damages whatsoever arising out of, resulting from, or in any way related to this Agreement from any cause or causes, including but not limited to negligence, professional errors and omissions, strict liability, breach of contract, and breach of warranty, shall not exceed the total amount paid by Customer to Company under this Agreement.
Material Breach. There are breaches of contract and then there are breaches of contract, meaning that not all breaches have the same effect or consequences, at least depending on how the boilerplate provision on this subject might read. In this sense, a “material” breach is worse than a “non-material” breach and refers to a failure of performance under the contract by the breaching party significant enough to cause the aggrieved party to be relieved of the duty of further performance in addition to allowing the aggrieved party a lawsuit for damages. A material breach destroys the value of the contract while a non-material breach allows a lawsuit for damages but does not relieve the aggrieved party of continuing performance under the contract. Of course, defining the difference between the two is critical; most commonly, the agreement will contain a paragraph stating which provisions of the agreement are “material” for these purposes. Importantly, lawsuit allegations of material breach must meet the requirements in that jurisdiction for constituting a material breach.
In MDS (Canada) Inc. v. Rad Source Technologies, Inc., 720 F.3d 833 (11th Cir. 2013), the court stated: “To constitute a vital or material breach, a party’s nonperformance must ‘go to the essence of the contract [citation omitted].’ A party’s ‘failure to perform some minor part of his contractual duty cannot be classified as a material or vital breach [citation omitted].’”
Sample material breach clause: If either party believes the other party has materially breached one or more of its obligations under this Agreement, the non-breaching party, without prejudice to any other remedies available to it at law or in equity, may deliver notice of such material breach to the allegedly breaching party specifying the nature of the alleged breach in reasonable detail. Thereafter, the non-breaching party shall have the right to terminate this Agreement if the breach asserted has not been cured within 60 (sixty) days of notice. Notwithstanding the foregoing, if such material breach is cured or remedied or shown to be non-existent within the aforesaid 60-day period, the notice shall be automatically withdrawn and of no effect.
Nondisclosure, Noncompetition, Non-disparagement and Similar Clauses
Nondisclosure, Noncompetition, and Non-disparagement. In the information age, knowledge is power. As employees move from company to company and as companies contract with one another, there is the high potential for proprietary information to fall into the wrong hands. As a result, nondisclosure provisions in all kinds of contracts are the norm. Where the disclosure of information may not be preventable in some circumstance, companies try to prevent former employees and others they have done business with from competing against them. And, of course, no company wants to be publicly disparaged when it can be prevented. Some of these provisions, especially those involving noncompetition that have the effect of causing a person not to be able to earn a living, have enforceability problems, but all these clauses are standard fare in many types of contracts today, certainly to include employment agreements. The enforceability of these provisions can differ greatly among jurisdictions.
In Uncle B’s Bakery, Inc. v. O’Rourke, 920 F.Supp. 1405 (N.D. Iowa 1996), the principal issue was whether the defendant ex-employee ever had signed the nondisclosure/ noncompetition agreement that the employer insisted all new employees had to sign (the court having previously found that the form document itself contained enforceable terms). The problem was that the employer could not locate the executed document and the ex-employee insisted he never signed such a document. In a seemingly unusual result, the court ruled that the employer likely would prevail on the issue, notwithstanding that it could produce no such agreement, because of its clear policy and clear evidence that every employee save the defendant (and one other employee) had executed such a document upon becoming employed by the company.
Sample nondisclosure, noncompetition and non-disparagement clause:
Nondisclosure. For purposes of this Agreement, “Confidential Information” shall include all information or material that has or could have commercial value or other utility in the business in which Disclosing Party is engaged. If Confidential Information is in written form, the Disclosing Party shall label or stamp the materials with the word “Confidential” or some similar warning. If Confidential Information is transmitted orally, the Disclosing Party shall promptly provide a writing indicating that such oral communication constituted Confidential Information. Receiving Party’s obligations under this Agreement do not extend to information that is: (a) publicly known at the time of disclosure or subsequently becomes publicly known through no fault of Receiving Party; (b) discovered or created by Receiving Party before disclosure by Disclosing Party; (c) learned by Receiving Party through legitimate means other than from the Disclosing Party or Disclosing Party’s representatives; or (d) is disclosed by Receiving Party with Disclosing Party’s prior written approval. Receiving Party shall hold and maintain the Confidential Information in strictest confidence for the sole and exclusive benefit of Disclosing Party. Receiving Party shall restrict access to Confidential Information to employees, contractors, and third parties, except as is reasonably required under the circumstances, and shall require such receiving persons to sign nondisclosure restrictions at least as protective as those in this Agreement. Receiving Party shall not, without prior written approval of Disclosing Party, use for Receiving Party’s own benefit, publish, copy, or otherwise disclose to others, or permit the use by others for their benefit or to the detriment of Disclosing Party, any Confidential Information. Receiving Party shall return to Disclosing Party any and all records, notes, and other written, printed, or tangible materials in its possession pertaining to Confidential Information immediately if Disclosing Party requests it in writing. The nondisclosure provisions of this Agreement shall survive the termination of this Agreement and Receiving Party’s duty to hold Confidential Information in confidence shall remain in effect until the Confidential Information no longer qualifies as Confidential Information or until Disclosing Party sends Receiving Party written notice releasing Receiving Party from this provision of this Agreement, whichever occurs first.
Noncompetition. Employee agrees that, during the term of her employment with Company and for twelve (12) months after the termination thereof, regardless of the reason for the employment termination, she will not, directly or indirectly, anywhere in the territory and on behalf of any competitive business perform the same or similar duties. Employee also covenants and agrees that during the term of her employment with Company and for twelve (12) months after the termination thereof, regardless of the reason for employment termination, Employee will not, directly or indirectly, solicit or attempt to solicit any business from any of Company’s customers, customer prospects, or vendors with whom Employee had material contact during the last two (2) years of her employment with Company.
Non-disparagement. During the term of this Agreement and for a reasonable time thereafter, the parties agree that they will not disparage or denigrate the other party or the other party’s representatives; provided, however, that either party may make truthful statements about the other party or its representatives if compelled by court order, legal proceeding, or otherwise as required by law without violating the non-disparagement requirements of this Agreement.
Non-solicitation and Hiring Prohibition. Contracting companies often must, in effect, disclose their business model to the other party, and they do not want the other party to compete with them by hiring away their employees. They also do not want their own employees to do the same thing. As seen above, sometimes this idea is lumped into noncompetition language.
In Everett Financial Inc. v. Primary Residential Mortgage, Inc. (N.D. Tex. 2016), several former employees were sued for soliciting employees from their previous employer after having signed a non-solicitation agreement. In the case of one of them, however, he had crossed out, initialed and returned the non-solicitation provision in the document he was asked to sign when he began his employment there. Several months later, he was asked to sign a new non-solicitation agreement, but he refused. He worked at the company another year or so and then resigned. In the suit, the former employer asserted that the former employee should be held to the non-solicitation agreement notwithstanding his initial actions, which the employer argued were concealed. The court, however, ruled that the former employee’s actions were not concealed and that his refusal to sign the later-presented agreement was ample evidence that he was not bound as to non-solicitation.
Sample non-solicitation and hiring prohibition clause: Employee covenants and agrees that during the term of her employment with Company and for twelve (12) months after the termination thereof, regardless of the reason for employment termination, Employee will not, directly or indirectly, on her own behalf or on behalf of or in conjunction with any person or legal entity, hire, recruit, solicit, or induce, or attempt to hire, recruit, solicit, or induce, any non-clerical employee of Company with whom Employee had personal contact or supervised while employed by Company.