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Drafting Business Contracts: Principles, Techniques & Forms

This guide to modern drafting helps ensure that your contracts are complete, clear, and effective.

This guide to modern drafting helps ensure that your contracts are complete, clear, and effective.

  • Governing principles, preliminary considerations 
  • Recitals, representations, and warranties
  • Consideration, covenants, and conditions
  • Risk allocation
  • Legal opinions
  • Assignment, delegations, and third-party beneficiaries
  • Events of default, remedies, and ADR
  • Execution checklist and forms
  • Electronic contracting
  • Amendments and modifications
  • Special purpose agreements: letters of intent, promissory notes, guaranties, powers of attorney, and software license agreements
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This guide to modern drafting helps ensure that your contracts are complete, clear, and effective.

  • Governing principles, preliminary considerations 
  • Recitals, representations, and warranties
  • Consideration, covenants, and conditions
  • Risk allocation
  • Legal opinions
  • Assignment, delegations, and third-party beneficiaries
  • Events of default, remedies, and ADR
  • Execution checklist and forms
  • Electronic contracting
  • Amendments and modifications
  • Special purpose agreements: letters of intent, promissory notes, guaranties, powers of attorney, and software license agreements

1

Mechanics of Document Drafting

Thomas E. Tyner

  • I.  CHECKLIST: DRAFTING STEPS  1.1
  • II.  SUMMARY OF ESSENTIAL STEPS  1.2
  • III.  INVESTIGATE FACTUAL AND LEGAL SETTING  1.3
    • A.  Client Communications
      • 1.  Counsel’s Role  1.4
      • 2.  Timing of Counsel’s Involvement  1.5
      • 3.  Obtaining Information From Client  1.6
    • B.  Substantive Legal Analysis  1.7
  • IV.  PREPARE TIME AND RESPONSIBILITY CHART  1.8
  • V.  REVIEW CLIENT’S RELATED DOCUMENTS  1.9
  • VI.  REVIEW DOCUMENTS FROM SIMILAR TRANSACTIONS  1.10
  • VII.  PREPARE CHECKLIST OR OUTLINE  1.11
  • VIII.  DRAFTING THE AGREEMENT
    • A.  Tactical Advantage of Adopting the Drafting Role  1.12
    • B.  Approaching the Task of Drafting  1.13
    • C.  Reediting and Final Review  1.14
    • D.  Preparing the Drafts for Review by Other Parties  1.15
  • IX.  REVIEW AND NEGOTIATE THE DOCUMENT
    • A.  Review With Client  1.16
    • B.  Soliciting Comments From Other Parties  1.17
    • C.  Revising Another Attorney’s Agreement  1.18
      • 1.  Issues to Review  1.19
      • 2.  Manner of Suggesting Revisions  1.20
      • 3.  Deference to Format and Style  1.21
    • D.  Negotiation
      • 1.  Preparation for Session  1.22
      • 2.  Conduct During Session  1.23
    • E.  Incorporating Changes to One’s Own Documents  1.24
    • F.  Retaining Drafts  1.25
  • X.  CLOSING PREPARATIONS
    • A.  Preclosing
      • 1.  Preclosing Meeting or Review  1.26
      • 2.  Closing Checklist and Closing Memorandum  1.27
    • B.  Closing  1.28
  • XI.  FOLLOW-UP MATTERS
    • A.  Retaining Closing Documents  1.29
    • B.  Calendaring Key Dates  1.30

2

Drafting Principles: Strategy, Standards, and Ethics

Thomas E. Tyner

  • I.  CHECKLIST: DRAFTING PRINCIPLES  2.1
  • II.  DRAFTING STRATEGY
    • A.  Basic Principles  2.2
    • B.  Purposes of Written Agreement  2.3
    • C.  Costs of Drafting Imprecise Contracts  2.4
  • III.  DRAFTING STANDARDS
    • A.  Structuring the Agreement
      • 1.  Principles of Contract Construction  2.5
      • 2.  Organization of Provisions  2.6
      • 3.  Design  2.7
    • B.  Style and Word Usage
      • 1.  Level of Formality; Use of Plain English  2.8
        • a.  Form: Example of Legalistic Terminology in Noncompetition Agreement Recitals  2.9
        • b.  Form: Example of Plain English in Noncompetition Agreement Recitals  2.10
      • 2.  Avoid Ambiguity  2.11
      • 3.  Avoid Sexist Language  2.12
      • 4.  Use Consistent Terminology  2.13
      • 5.  Avoid Redundancy  2.14
  • IV.  ETHICS OF DRAFTING  2.15
    • A.  Competent Representation  2.16
    • B.  Representing More Than One Party
      • 1.  General Principles  2.17
      • 2.  Form: Provisions for Conflict of Interest Disclosure and Waiver Letter to New Client  2.18
    • C.  Fraudulent, Unfair, and Unconscionable Provisions  2.19
      • 1.  Unfair Provisions as Poor Negotiation Strategy
        • a.  Doctrine of Unconscionability  2.20
        • b.  Negative Effect on Business Relationship  2.21
      • 2.  Damage to Attorney’s Reputation  2.22
      • 3.  Attorney’s Course of Action  2.23
  • V.  CHARTS: LANGUAGE USAGE
    • A.  Plain English Alternatives to Legalese and Incorrect Usage  2.24
    • B.  Alternatives to Sexist Terms  2.25

3

Preliminary Considerations

Dr. Michael J. Ram

  • I.  CHECKLIST: PRELIMINARY CONSIDERATIONS  3.1
  • II.  CLIENT’S CAPACITY TO CONTRACT  3.2
    • A.  Minors  3.3
    • B.  Unsound Mind  3.4
    • C.  Prisoners  3.5
  • III.  CONTRACTS GOVERNED BY SPECIAL LAWS AND REGULATIONS  3.6
  • IV.  DECIDING ON FORM OF AGREEMENT  3.7
  • V.  CONTRACT DEFENSES  3.8
    • A.  Implied Terms, Illusory Contracts  3.9
    • B.  Duress  3.10
    • C.  Illegality  3.11
    • D.  Mistake or Fraud  3.12
    • E.  Contract of Adhesion  3.13
    • F.  Unconscionable Contracts
      • 1.  Not Enforceable  3.14
      • 2.  Test for Unconscionability  3.14A
      • 3.  Drafting Considerations  3.14B
    • G.  Impossibility and Impracticability  3.15
    • H.  Undue Influence  3.16
    • I.  Statute of Frauds  3.17
  • VI.  PRINCIPLES OF CONTRACT CONSTRUCTION  3.18

4

Client Interview

Steven L. Morgan

Brian J. Philpott

  • I.  CHECKLIST: CLIENT INTERVIEW  4.1
  • II.  PURPOSE OF INITIAL CLIENT INTERVIEW  4.2
  • III.  ETHICAL CONSIDERATIONS  4.3
  • IV.  ISSUES TO DISCUSS
    • A.  Parties to Transaction  4.4
    • B.  Negotiation of Terms  4.5
    • C.  Rights and Obligations of Each Party  4.6
    • D.  Significant Dates  4.7
    • E.  Existing Contracts  4.8
    • F.  Role of Other Advisers  4.9

5

Format of the Agreement: Appearance and Introductory Information

David C. Burgess

  • I.  CHECKLIST: FORMATTING THE AGREEMENT  5.1
  • II.  APPEARANCE OF THE AGREEMENT
    • A.  Title and Cover Page  5.2
    • B.  Table of Contents  5.3
    • C.  Section Headings
      • 1.  Use of Sections  5.4
      • 2.  Cross-Referencing  5.5
      • 3.  Legal Effect of Section Headings  5.6
        • a.  Form: Headings With Limited Legal Effect  5.7
        • b.  Form: Headings With No Legal Effect  5.8
  • III.  INTRODUCTORY INFORMATION
    • A.  Introductory Clause  5.9
      • 1.  Parties
        • a.  Who Are the Parties?  5.10
        • b.  Identifying the Parties  5.11
        • c.  Parties Not Bound by Entire Agreement  5.12
        • d.  Third Party Beneficiaries and Other Nonparties  5.13
        • e.  Form: Sample Provisions for Identification of Parties  5.14
      • 2.  Date  5.15
      • 3.  Form: Basic Introductory Clause  5.16
    • B.  Recitals  5.17
      • 1.  Providing Historical Background  5.18
      • 2.  Stating Purposes of Agreement  5.19
      • 3.  Serving as Tool of Advocacy  5.20
      • 4.  Legal Effect of Recitals  5.21
      • 5.  Recital of Consideration  5.21A
      • 6.  Form: Sample Recitals  5.22
  • IV.  USE OF DEFINED TERMS
    • A.  Function of Defined Terms  5.23
    • B.  Placement in Agreement  5.24
      • 1.  Proximity Method
        • a.  General Principles  5.25
        • b.  Form: Sample Provisions for Proximity Method of Defining Terms  5.26
      • 2.  Collection Method
        • a.  General Principles  5.27
        • b.  Form: Sample Provision for Collection Method of Defining Terms  5.28
        • c.  Form: Sample Provision for Proximity-Collection Hybrid Method of Defining Terms  5.29
      • 3.  Stand-Alone Document
        • a.  General Principles  5.30
        • b.  Form: Introduction to Glossary  5.31
        • c.  Form: Reference to Glossary in Agreement  5.32
    • C.  Formulas  5.33
    • D.  Importance of Defined Terms  5.34
    • E.  Mechanics  5.35

6

Duration of the Agreement

David C. Burgess

  • I.  CHECKLIST: DURATION OF AGREEMENT  6.1
  • II.  EFFECTIVE AND ENDING DATES OF CONTRACT
    • A.  General Principles  6.2
    • B.  Provisions Establishing Term of Contract
      • 1.  Form: Standard Duration Clause  6.3
      • 2.  Form: Conditional Effective Date  6.4
  • III.  EXTENSION OF TERM
    • A.  General Principles  6.5
    • B.  Provisions Extending Term
      • 1.  Form: Automatic Extension  6.6
      • 2.  Form: Mutually Agreeable Extension  6.7
      • 3.  Form: Either Party May Extend  6.8
  • IV.  EARLY TERMINATION
    • A.  Termination, Cancellation, and Rescission  6.9
    • B.  Procedure for Early Termination  6.10
    • C.  Consequences of Early Termination
      • 1.  Extinguished and Surviving Rights and Obligations  6.11
      • 2.  Parties’ Relationship After Termination  6.12
      • 3.  Financial Consequences of Early Termination  6.13
    • D.  Provisions Defining Obligations and Liabilities After Early Termination
      • 1.  Form: Return of Confidential Information  6.14
      • 2.  Form: Rights and Obligations Cease  6.15
      • 3.  Form: Survival of Certain Rights and Obligations  6.16
      • 4.  Form: Obligation to Negotiate  6.17
      • 5.  Form: Sample Provision for Consequences of Early Termination of Distributor Agreement Providing Exclusive Territory  6.18
    • E.  Events Triggering Early Termination  6.19
    • F.  Provisions Specifying Events Causing Early Termination
      • 1.  Corporate Dissolution, Merger, and Similar Events
        • a.  Form: Automatic Termination  6.20
        • b.  Form: Optional Termination  6.21
        • c.  Form: Binding on Successor Corporation  6.22
      • 2.  Form: Termination on Bankruptcy  6.23
      • 3.  Death of Individual
        • a.  Form: Termination on Death  6.24
        • b.  Form: No Termination on Death  6.25
      • 4.  Form: Termination on Breach of Agreement  6.26
      • 5.  Form: Termination on Breach of Law  6.27
      • 6.  Form: Termination on Loss of License  6.28
      • 7.  Form: Termination by Mutual Agreement  6.29
      • 8.  Form: Absolute Termination Right by Either Party  6.30
  • V.  TERM OF SPECIFIC TYPES OF AGREEMENTS
    • A.  Single Transaction Agreements  6.31
      • 1.  Form: Time of Closing  6.32
      • 2.  Form: Survival of Representations, Warranties, and Obligations  6.33
      • 3.  Form: Termination of Purchase and Sale Agreement Before Closing  6.34
      • 4.  Form: Term for Option  6.35
    • B.  Service and Employment Agreements  6.36
      • 1.  Form: Termination for Cause—Specifying All Causes for Termination  6.37
      • 2.  Form: Termination for Cause—Nonexhaustive Definition of Cause  6.38
      • 3.  Form: Termination on Disability  6.39
      • 4.  Form: Termination for Specified Period of Absences  6.40
      • 5.  Form: Termination at Will  6.41
      • 6.  Form: Payment Obligations After Termination  6.42
    • C.  Agreements for Use of Money or Property  6.43
      • 1.  Form: Termination Because of Sale or Destruction of Property  6.44
      • 2.  Form: Waiver of Statutory Rights of Termination  6.45
    • D.  Joint Venture, Partnership, and Limited Liability Company Agreements  6.46
    • E.  Agreements Creating or Restricting Rights  6.47
    • F.  Fiduciary Agreements  6.48
    • G.  Rule Against Perpetuities  6.48A
    • H.  Letters of Credit  6.49
    • I.  Gift Certificates  6.50

7

Factual Basis of the Agreement: Recitals, Representations, and Warranties

Dr. Michael J. Ram

Benjamin A. Ram

  • I.  CHECKLIST: FACTUAL BASIS  7.1
  • II.  GENERAL CONSIDERATIONS  7.2
  • III.  RECITALS
    • A.  Purpose  7.3
    • B.  Sample Recitals  7.4
  • IV.  REPRESENTATIONS AND WARRANTIES
    • A.  General Considerations  7.5
    • B.  Express Warranties  7.6
    • C.  Implied Warranties  7.7
    • D.  Warranties by Description or Sample  7.8
    • E.  Form: Sample Provisions for Other Typical Representations and Warranties  7.9
    • F.  Disclaiming Warranties  7.10
      • 1.  Form: Disclaimer of Warranties of Merchantability and Fitness for Particular Purpose  7.11
      • 2.  Form: Disclaimer of Warranty of Title  7.12
      • 3.  Form: Disclaimer of Warranty Against Infringement  7.13
  • V.  CONSEQUENCES OF INCONSISTENCIES OR FALSE STATEMENTS
    • A.  Inconsistencies  7.14
    • B.  False Statements  7.15

8

Consideration

David C. Burgess

  • I.  CHECKLIST: CONSIDERATION  8.1
  • II.  PRINCIPLES OF CONSIDERATION
    • A.  Consideration Defined  8.2
    • B.  Identifying the Consideration  8.3
    • C.  Allocation of Consideration
      • 1.  General Principles  8.4
      • 2.  Form: Allocation of Purchase Price  8.5
  • III.  VARIABLE AND CONDITIONAL CONSIDERATION
    • A.  Variable Principal Amount  8.6
      • 1.  Form: Adjusting Rental Payments Based on Change in Consumer Price Index  8.7
      • 2.  Form of Variable Payment Obligation Under License Agreement Based on Net Sales
        • a.  Form: Amount of Royalty  8.8
        • b.  Form: Payment Terms  8.9
        • c.  Form: Review of Records to Verify Amount Due  8.10
      • 3.  Form: Adjusting Purchase Price Based on Fluctuating Assets  8.11
    • B.  Participating Loans  8.12
    • C.  Conditional Payment Obligations  8.13
    • D.  Commissions  8.13A
  • IV.  CASH AND CASH EQUIVALENT CONSIDERATION
    • A.  General Principles  8.14
    • B.  Cashier’s Checks, Certified Checks  8.15
    • C.  Wire Transfer of Funds  8.16
    • D.  Form: Payment by Cashier’s or Certified Check  8.17
    • E.  Form: Payment by Wire Transfer  8.18
  • V.  LETTERS OF CREDIT
    • A.  General Principles  8.19
    • B.  Form: Payment by Letter of Credit  8.20
  • VI.  DEFERRED PAYMENT
    • A.  General Principles  8.21
    • B.  Form: Note to be Delivered at Closing  8.22
    • C.  Payment Terms  8.23
      • 1.  Fixed Payment Obligations  8.24
      • 2.  Variable Interest Payments  8.25
    • D.  Protective Provisions  8.26
    • E.  Usury Law Considerations
      • 1.  General Rules  8.27
      • 2.  Exceptions to General Rules  8.28
      • 3.  Form: Provision for Usury Limitation  8.29
    • F.  Tax Law Considerations  8.30
      • 1.  Imputed Interest  8.31
      • 2.  Deductibility  8.32
      • 3.  Installment Sales  8.33
    • G.  Securities Law Considerations  8.34
  • VII.  NONMONETARY CONSIDERATION
    • A.  General Principles  8.35
    • B.  Form: Performance of Services  8.36
    • C.  Form: Transfer of Stock  8.37
    • D.  Form: Transfer of Assets  8.38
    • E.  Form: Assumption of Liabilities  8.39

9

Covenants

Christopher A. Delfino

Vincent W. Thorpe

Ingrid Rechtin

  • I.  CHECKLIST: COVENANTS  9.1
  • II.  COVENANTS DEFINED  9.2
    • A.  Covenants Distinguished From Conditions  9.3
    • B.  Covenants Distinguished From Representations  9.4
    • C.  Classification of Covenants  9.5
  • III.  DRAFTING COVENANTS FOR SPECIFIC TYPES OF AGREEMENTS
    • A.  Commercial Sales and Lease Agreements  9.6
    • B.  Distribution Agreements  9.7
    • C.  Loan and Financing Agreements  9.8
    • D.  Agreements for Sale of Shares or Assets; Merger Agreements  9.9
    • E.  Covenants Not to Compete
      • 1.  Limitations on Enforceability  9.10
      • 2.  Drafting Covenants Not to Compete  9.10A
      • 3.  Form: Covenant Not to Compete  9.11
    • F.  Employment Agreements  9.12
      • 1.  Form: At-Will Employment  9.13
      • 2.  Form: Nondisclosure Covenant  9.14
    • G.  Copyright License Agreements  9.14A
  • IV.  CHECKLIST FOR COMPONENTS OF COVENANTS  9.15
    • A.  Who Is to Perform?  9.16
    • B.  When Is Performance Due?  9.17
    • C.  What Is the Order of Performance?  9.18
    • D.  Where Will Performance Occur?  9.19
    • E.  Does Performance Need to be Defined?  9.19A
    • F.  Are All Cross-References Precise?  9.20
    • G.  Consequences of Breach  9.21
  • V.  IMPLIED COVENANTS  9.22
    • A.  Good Faith and Fair Dealing  9.23
    • B.  Construction Contracts  9.24
    • C.  Obligation to Remain in Business  9.25
    • D.  Continuing Employment  9.26
    • E.  To Perform With Skill, Care, Reasonable Expedience, and Faithfulness  9.27
    • F.  Work and Goods Must Be Fit and Proper  9.28
  • VI.  ISSUES OF STYLE
    • A.  A Promise Should Look Like a Promise  9.29
    • B.  Separation of Covenants and Conditions  9.30

10

Conditions

Ingrid Rechtin

Vincent W. Thorpe

  • I.  CHECKLIST: CONDITIONS  10.1
  • II.  SCOPE OF CHAPTER  10.2
  • III.  CONDITIONS DEFINED  10.3
    • A.  Conditions Precedent  10.4
    • B.  Conditions Subsequent  10.5
    • C.  Form: Condition Subsequent  10.6
    • D.  Concurrent Conditions  10.7
    • E.  Implied Conditions  10.8
  • IV.  DRAFTING CONSIDERATIONS
    • A.  Courts Require Clear Language to Enforce Conditions  10.9
    • B.  Consent or Satisfaction as a Condition  10.10
    • C.  Form: Satisfaction as a Condition  10.11
    • D.  Using Conditions to Cover Time Between Signing and Closing  10.12
    • E.  Representations, Warranties, and Covenants Restated as Conditions  10.13
    • F.  Form: Sample Provision for Closing Subject to Conditions  10.14
    • G.  Time Is Not Always a Condition  10.15
    • H.  Conditions to Performance  10.16
  • V.  BASIC CONDITIONS FOR BUSINESS AGREEMENTS
    • A.  Conditions to Performance  10.17
    • B.  Conditions Precedent to Buyer’s Performance
      • 1.  Form: Introductory Language for Conditions Precedent to Buyer’s Performance  10.18
      • 2.  Form: Accuracy of Seller’s Representations and Warranties  10.19
      • 3.  Form: Performance by Seller  10.20
      • 4.  Form: No Material Adverse Change  10.21
      • 5.  Form: Certification by Seller  10.22
      • 6.  Form: Opinion of Seller’s Counsel  10.23
      • 7.  Form: Absence of Litigation  10.24
      • 8.  Form: Letter Regarding Changes  10.25
      • 9.  Form: Corporate Approval  10.26
      • 10.  Form: Deeds and Title Policies  10.27
      • 11.  Form: Franchise Tax Board Clearance  10.28
      • 12.  Form: Employment Development Department’s Release  10.29
      • 13.  Form: Sales and Use Tax on Prior Sales  10.30
      • 14.  Form: FIRPTA Withholding  10.31
      • 15.  Form: Consents  10.32
      • 16.  Form: Employment Agreement  10.33
      • 17.  Form: Approval of Documentation  10.34
    • C.  Conditions Precedent to Seller’s Performance
      • 1.  Form: Introductory Language for Conditions Precedent to Seller’s Performance  10.35
      • 2.  Form: Accuracy of Buyer’s Representations and Warranties  10.36
      • 3.  Form: Buyer’s Performance  10.37
      • 4.  Form: Opinion of Buyer’s Counsel  10.38
      • 5.  Form: Buyer’s Corporate Approval  10.39
      • 6.  Form: Qualification With California Commissioner of Corporations  10.40
      • 7.  Form: Listing of Buyer’s Stock  10.41
      • 8.  Form: Absence of Litigation  10.42

11

Risk Allocation

Cynthia Caldeira

Victor Hsu

  • I.  CHECKLIST: RISK ALLOCATION DEVICES  11.1
  • II.  RISK ALLOCATION GENERALLY
    • A.  Assigning Risk  11.2
    • B.  Defining and Distinguishing Different Risk Allocation Devices  11.3
  • III.  CONTRACTUAL TRANSFER OF LIABILITY
    • A.  Transactions for Purchase and Sale of Assets
      • 1.  Who Has Risk of Loss?  11.4
      • 2.  Form: Transfer of Risk of Loss When Property Delivered  11.5
      • 3.  Form: No Assumption of Liabilities  11.6
    • B.  Transactions for Purchase and Sale of Securities
      • 1.  Who Is Liable?  11.7
      • 2.  Form: Exclusion of Assumption of Liabilities  11.8
    • C.  Transactions for Purchase and Sale of Real Property
      • 1.  Who Is Liable?  11.9
      • 2.  Form: Transfer of Risk  11.10
    • D.  Real Property Lease Transactions
      • 1.  Who Is Liable?  11.11
      • 2.  Form: Tenant Undertakes Maintenance and Repair (Pro-Landlord)  11.12
  • IV.  INDEMNIFICATION PROVISIONS
    • A.  Sources of Indemnification  11.13
      • 1.  Implied Indemnity  11.14
      • 2.  Express Indemnity  11.15
    • B.  Interpretation and Enforcement of Indemnification Agreements
      • 1.  Contract Principles  11.16
      • 2.  Scope of Agreement  11.17
    • C.  Indemnification Restrictions  11.18
    • D.  Indemnity Provisions
      • 1.  Scope of Coverage  11.19
      • 2.  Money Limits, Thresholds, Caps, and Other Limitations  11.20
      • 3.  Exclusive Remedy  11.21
      • 4.  Defense and Defense Costs  11.22
      • 5.  Third Party Claims  11.23
      • 6.  Indemnification for Misrepresentations and Breach of Warranties  11.24
      • 7.  Notice  11.25
    • E.  Indemnification Forms
      • 1.  Form: Indemnification for Specific Third Party Claims (Pro-Indemnitee)  11.26
      • 2.  Form: Indemnification for Specific Third Party Claims (Pro-Indemnitor)  11.27
      • 3.  Misrepresentation or Breach of Warranty
        • a.  Form: Indemnification for Misrepresentation or Breach of Warranty (Pro-Indemnitee)  11.28
        • b.  Form: Time Limitations on Survival of Representations, Warranties, and Agreements  11.29
        • c.  Form: No Time Limitations on Survival of Representations, Warranties, or Agreements  11.30
        • d.  Form: Limitation on Time to Bring Action  11.31
      • 4.  Form: Indemnification Provision in Agreement for Sale of Business  11.32
      • 5.  Form: Indemnification Provision in Lease Agreement for Hazardous Materials (Pro-Indemnitee)  11.33
      • 6.  Form: Indemnification Provision for Patent or Copyright Infringement (Pro-Indemnitor)  11.34
      • 7.  Form: Notice Provision  11.35
      • 8.  Limitations
        • a.  Form: Indemnification Threshold; Indemnitor Liable for All Losses After Threshold Reached  11.36
        • b.  Form: Indemnification Threshold; Indemnitee Liable for All Losses up to Threshold  11.37
        • c.  Form: Limited Indemnification Liability  11.38
      • 9.  Form: Right of Setoff  11.39
  • V.  EXCULPATORY PROVISIONS AND RELEASES
    • A.  Limited Liability for Warranties  11.40
    • B.  Limitation on Remedies  11.41
    • C.  Interpretation and Enforcement of Exculpatory Provisions and Releases
      • 1.  Contract Principles  11.42
      • 2.  Clear and Unambiguous Language  11.43
      • 3.  Consideration  11.44
      • 4.  Release for Negligence  11.45
      • 5.  Known and Unknown Claims  11.46
      • 6.  Effect of Release on Others  11.47
      • 7.  Option of Expanded Coverage  11.48
    • D.  Restrictions on Exculpatory Provisions and Releases  11.49
    • E.  Requirements for Valid Exculpatory Provision or Release  11.50
    • F.  Sample Provisions and Forms
      • 1.  Form: Sample Mutual General Release Provision in Termination Agreement  11.51
      • 2.  Form: Limited Warranty for Sale of Goods Provision  11.52
      • 3.  Form: Limitation of Remedies  11.53
      • 4.  Form: Exculpation of Landlord  11.54
      • 5.  Form: Option to Expand Liability  11.55
      • 6.  Form: Exculpation and Release Provision for Hazardous or Recreational Activity  11.56
  • VI.  WAIVERS
    • A.  Waivers Implied by Conduct  11.57
    • B.  Contractual Waivers
      • 1.  Requirements for Valid Waiver  11.58
      • 2.  Waiver of Statutory Rights  11.59
      • 3.  Form: Waiver  11.60

12

Legal Opinions

James F. Fotenos

  • I.  CHECKLIST: LEGAL OPINIONS  12.1
  • II.  SCOPE OF CHAPTER  12.2
  • III.  DEFINITION AND USE OF LEGAL OPINIONS
    • A.  Definition  12.3
    • B.  Use; Golden Rule  12.4
    • C.  Liability for Opinion; Misleading Opinions  12.5
    • D.  Form: Limitation on Use of Opinion  12.6
    • E.  Form and Content of Opinion  12.7
    • F.  Reasoned Opinions  12.8
    • G.  Form: Opinion Condition in Transaction Documents  12.9
  • IV.  SPECIFIC PROVISIONS
    • A.  Preliminary Issues
      • 1.  Factual Basis of Opinion  12.10
      • 2.  Form: Materials on Which Opinion Preparer Relied  12.11
      • 3.  Qualifications; Knowledge Limitations  12.12
      • 4.  Form: Role of Opinion Preparer as Special Counsel  12.13
      • 5.  Law Covered  12.14
      • 6.  Form: California Law  12.15
      • 7.  Date of Opinion  12.16
    • B.  Corporate Issues
      • 1.  Corporate Status  12.17
      • 2.  Form: Corporate Status—California Corporations  12.18
      • 3.  Good Standing in Other Jurisdictions  12.19
      • 4.  Form: Corporate Status—Qualification in Other States  12.20
      • 5.  Corporate Power and Corporate Authority  12.21
      • 6.  Form: Corporate Power and Corporate Authority  12.22
      • 7.  Due Authorization  12.23
      • 8.  Form: Due Authorization  12.24
      • 9.  Capital Shares  12.25
      • 10.  Form: Capital Shares  12.26
    • C.  General Transaction Issues
      • 1.  Remedies Opinion  12.27
      • 2.  Form: Remedies Opinion  12.28
      • 3.  No-Violation Opinion  12.29
      • 4.  Form: No-Violation Opinion  12.30
      • 5.  Negative Assurance on Litigation  12.31
      • 6.  Form: Negative Assurance on Litigation  12.32
      • 7.  Consent of Governmental Authority  12.33
      • 8.  Form: Consent of Governmental Authority  12.34
      • 9.  Title to Assets  12.35
      • 10.  Enforceability of Security Agreement  12.36
  • V.  BIBLIOGRAPHY  12.37

13

Rights of Nonparties: Assignment, Delegation, and Third Party Beneficiaries

Michael A. Grayson

Alexander Fried

Jonathan Golden

Dr. Michael J. Ram

  • I.  CHECKLIST: RIGHTS OF NONPARTIES  13.1
  • II.  GENERAL PRINCIPLES OF ASSIGNMENT AND DELEGATION
    • A.  Definitions  13.2
    • B.  Limits on Assignments  13.3
      • 1.  Assignable Rights  13.4
      • 2.  Nonassignable Rights  13.5
      • 3.  Special Consideration: Garn-St. Germain Depository Institutions Act of 1982  13.6
    • C.  Limits on Delegation  13.7
    • D.  Special Considerations: Rules for Specific Transactions
      • 1.  Commercial Sales Agreements  13.8
      • 2.  Bankruptcy Code §§365, 541  13.9
    • E.  Effect of Assignment or Delegation
      • 1.  Status of Parties  13.10
      • 2.  Remedies for Breach of Nonassignment or Nondelegation Provision  13.11
  • III.  PROVISIONS IN ORIGINAL AGREEMENT PERMITTING OR PROHIBITING ASSIGNMENT AND DELEGATION
    • A.  Preliminary Issues for Drafting Original Agreement  13.12
    • B.  General Assignment and Delegation Provisions
      • 1.  Form: Prohibition of Assignment and Delegation (Both Parties Prohibited From Assigning Rights or Delegating Duties)  13.13
      • 2.  Form: Prohibition of Assignment and Delegation (One Party Prohibited From Assigning Rights or Delegating Duties)  13.13A
      • 3.  Form: Due-on-Sale Provision  13.14
      • 4.  Form: Assignment and Delegation Expressly Permitted  13.15
    • C.  Assignment Provisions in Partnership Agreements  13.16
      • 1.  Form: Assignment Permitted  13.17
      • 2.  Form: Assignment Prohibited  13.18
      • 3.  Form: Assignment Permitted on Compliance With Conditions  13.19
    • D.  Assignments in Lease Agreements  13.20
      • 1.  Form: General Prohibition of Assignment  13.21
      • 2.  Form: Lessor to Receive Benefits of Assignment or Sublease  13.22
      • 3.  Form: Dissolution, Merger, or Similar Transfer Deemed Assignment When Lessee Is Corporation  13.23
  • IV.  PROVISIONS TO EFFECT ASSIGNMENT AND DELEGATION
    • A.  Preliminary Issues for Drafting Assignment or Delegation Agreement  13.24
      • 1.  Requirements for Validity  13.25
      • 2.  Implied Warranties in Assignments and Delegations  13.26
      • 3.  Notice; Consent  13.27
    • B.  Assignment and Delegation Agreement
      • 1.  Form: Introduction  13.28
      • 2.  Form: Recitals  13.29
      • 3.  Form: Granting Provision for Assignment  13.30
      • 4.  Form: Obligations of Assignee  13.31
      • 5.  Form: Purpose of Assignment  13.32
      • 6.  Form: Further Assurances  13.33
      • 7.  Form: Representations and Warranties  13.34
      • 8.  Form: Assignor’s Covenants  13.35
      • 9.  Form: Appointment of Attorney-in-Fact  13.36
      • 10.  Form: Indemnification  13.37
      • 11.  General Provisions  13.38
      • 12.  Ancillary Matters  13.39
    • C.  Form: Consent to Assignment  13.40
    • D.  Form: Notice of Assignment  13.41
  • V.  THIRD PARTY BENEFICIARIES
    • A.  Rights of Third Party Beneficiary  13.42
    • B.  Requirements for Third Party Beneficiary Status  13.43
    • C.  Form: No Third Party Beneficiary Intended  13.44

14

Defining Events of Default

Michael A. Grayson

Alexander Fried

Jonathan Golden

Victor Hsu

  • I.  CHECKLIST: EVENTS OF DEFAULT  14.1
  • II.  USE OF EVENT OF DEFAULT PROVISIONS
    • A.  Events Triggering Default Provisions  14.2
    • B.  Form: Definitions of Event of Default and Default  14.2A
    • C.  Notice and Grace Periods  14.3
    • D.  Form: Notice of Default  14.3A
    • E.  Form: Nondefaulting Party’s Right to Cure and Be Reimbursed  14.4
    • F.  Form: Introduction to Events of Default Provision  14.5
  • III.  FAILURE TO PERFORM COVENANTS
    • A.  General Principles  14.6
    • B.  Excuse of Performance  14.7
    • C.  Form Default Provisions for Failure to Perform
      • 1.  Form: Failure to Pay Amount Due  14.8
      • 2.  Form: Failure to Perform Other Covenants  14.9
      • 3.  Form: Anticipatory Breach  14.10
    • D.  Impossibility, Impracticability, and Force Majeure  14.11
      • 1.  Form: Force Majeure Events Resulting in Excuse or Suspension of Performance  14.12
      • 2.  Form: Force Majeure Events Resulting in Apportionment Costs  14.13
  • IV.  BREACH OF REPRESENTATION OR WARRANTY, OR OTHER FACTUAL INFORMATION FOUND UNTRUE
    • A.  General Principles  14.14
    • B.  Form: Representation and Warranty Bring-Down Certificate  14.14A
    • C.  Form: Breach of Representation or Warranty or of Other “Factual” Information Found Untrue  14.15
  • V.  INSOLVENCY
    • A.  Function of Insolvency Clauses  14.16
    • B.  Effect of Federal Bankruptcy Code
      • 1.  Insolvency Clauses in Executory Contracts Generally Invalid  14.17
      • 2.  Insolvency Provision Not Invalidated  14.18
    • C.  Effect of California Fraudulent Transfer Law  14.19
    • D.  Form: Insolvency Provisions  14.20
  • VI.  CROSS-DEFAULT
    • A.  General Principles  14.21
    • B.  Form: Cross-Default Clause  14.22
    • C.  Form: Cross-Default and Cross-Acceleration Clauses  14.23
    • D.  Guaranty; Letter of Credit  14.23A
      • 1.  Form: Revocation of Guaranty  14.23B
      • 2.  Form: Replacement Letter of Credit  14.23C
  • VII.  PARTY DEEMS ITSELF INSECURE
    • A.  General Principles  14.24
    • B.  Form: Party Deems Itself Insecure  14.25
  • VIII.  MISCELLANEOUS DEFAULT PROVISIONS  14.26
    • A.  Form: Judgments Rendered Against Party  14.27
    • B.  Form: Validity of Agreement Challenged  14.28
    • C.  Form: Lien Not Perfected  14.29

15

Remedies

Barry A. Graynor

Victor Hsu

David J. Cook

  • I.  CHECKLIST: REMEDIES  15.1
  • II.  PRELIMINARY DRAFTING CONSIDERATIONS  15.2
  • III.  ETHICAL CONSIDERATIONS  15.3
  • IV.  REMEDIES PROVISIONS
    • A.  Damages
      • 1.  Liquidated Damages  15.4
      • 2.  Form: Sample Liquidated Damages Provision  15.5
      • 3.  Consequential and Incidental Damages  15.6
      • 4.  Form: Exclusion of Consequential and Incidental Damages  15.7
      • 5.  Mitigation of Damages  15.8
      • 6.  Form: Mitigation of Damages  15.9
    • B.  Interest and Penalties
      • 1.  Postdefault and Compound Interest  15.10
      • 2.  Form: Postdefault Interest  15.11
      • 3.  Form: Late Charge  15.11A
      • 4.  Prepayment Penalties  15.12
      • 5.  Form: Prepayment Penalty  15.13
      • 6.  Interest as Element of Damages
        • a.  Interest on Damages  15.14
        • b.  Form: Interest on Recoverable Damages  15.15
        • c.  Interest as Separate Item of Damages  15.16
        • d.  Form: Interest as Separate Item of Damages  15.17
    • C.  Attorney Fees and Costs
      • 1.  Availability  15.18
      • 2.  Attorney Fees Generally  15.19
      • 3.  Form: Limiting Attorney Fees  15.20
    • D.  Statutes of Limitation
      • 1.  Waiver and Modification  15.21
      • 2.  Form: Limitation on Bringing Action  15.22
    • E.  Provisions Limiting Liability
      • 1.  Use  15.23
      • 2.  Form: Sample Limitation of Liability Provision  15.24
    • F.  Specific Performance
      • 1.  Availability  15.25
      • 2.  Form: Sample Specific Performance Provision  15.26
      • 3.  Form: Specific Performance Provision in Confidentiality Agreement  15.26A
    • G.  Cumulative Rights and Remedies
      • 1.  General Principles  15.27
      • 2.  Form: Cumulative Rights and Remedies  15.28
  • V.  SALE AGREEMENTS
    • A.  UCC Remedies; Division 2  15.29
    • B.  Form: Applicability of Commercial Code Remedies  15.30
    • C.  Warranties
      • 1.  Express or Implied  15.31
      • 2.  Warranty Disclaimers  15.32
      • 3.  Form: Disclaimer of Sales Warranties  15.33
      • 4.  Limiting Remedies for Breach of Warranty  15.34
      • 5.  Form: Limitation of Remedies for Breach of Warranty  15.35
      • 6.  Unconscionability Remedies  15.36
  • VI.  PERSONAL PROPERTY LEASES
    • A.  UCC Remedies
      • 1.  Applicability of Commercial Code Division 10  15.37
      • 2.  Finance Leases  15.38
      • 3.  Remedies Available  15.39
      • 4.  Present Value  15.40
      • 5.  Form: Remedies in Equipment Lease Agreement  15.41
    • B.  Warranties
      • 1.  Comparison With Division 2 Warranties  15.42
      • 2.  Form: Disclaimer of Leasing Warranties  15.43
      • 3.  Form: Assignment of Warranty Rights in Equipment Lease Agreement  15.44
  • VII.  LOAN AND SECURITY AGREEMENTS
    • A.  General Remedies, Including Acceleration  15.45
    • B.  Form: Acceleration  15.46
    • C.  Attornment  15.47
    • D.  Form: Attornment  15.48
    • E.  Setoff  15.49
    • F.  Form: Setoff  15.50
    • G.  Secured Transactions  15.51
    • H.  Form: Secured Party’s Remedies on Default  15.52
    • I.  Form: Secured Party’s Remedy on Default When Collateral Is Privately Held Stock  15.52A
    • J.  Form: Nonrecourse Provision  15.53
  • VIII.  MISCELLANEOUS PROVISIONS
    • A.  Insurance
      • 1.  General Principles  15.54
      • 2.  Form: Commercial General Liability Insurance  15.55
    • B.  Indemnity  15.56

16

Dispute Resolution Procedures

Palmer Brown Madden

Justene M. Adamec

  • I.  CHECKLIST: MECHANICS FOR RESOLVING DISPUTES  16.1
  • II.  LITIGATION OR ALTERNATIVE DISPUTE RESOLUTION?
    • A.  Methods of Alternative Dispute Resolution   16.2
    • B.  Advantages and Disadvantages of Alternative Dispute Resolution   16.3
  • III.  EFFECT OF DISPUTE RESOLUTION PROCEDURES
    • A.  Who Is Bound by Dispute Resolution Procedures?  16.4
      • 1.  Persons Related to Signatories  16.5
      • 2.  Including Third Parties  16.6
      • 3.  Drafting Approaches to Bind Parties Foreign to Agreement  16.7
      • 4.  Provisions to Bind Parties Foreign to Agreement
        • a.  Form: Parties Bound  16.8
        • b.  Form: Binding Third Parties to Dispute Resolution Mechanism  16.9
        • c.  Form: Providing for Consolidation  16.10
    • B.  What Disputes Are Covered by Alternative Dispute Resolution Procedure?  16.11
  • IV.  SPECIFIC METHODS OF ALTERNATIVE DISPUTE RESOLUTION
    • A.  Contractually Required Negotiation
      • 1.  General Principles  16.12
      • 2.  Form: Formal Negotiation Process  16.13
    • B.  Mediation
      • 1.  Description of Mediation  16.14
      • 2.  When Is Mediation Appropriate?  16.15
      • 3.  Mediation Discussions Protected From Disclosure  16.16
      • 4.  Optimizing the Mediation  16.17
      • 5.  Contract Provisions for Mediation  16.18
      • 6.  Form: Mediation Required  16.19
      • 7.  Form: Mechanics of Mediation  16.20
    • C.  Arbitration  16.21
      • 1.  Advantages of Arbitration  16.22
      • 2.  Disadvantages of Arbitration  16.23
      • 3.  Which Disputes Can Be Arbitrated?  16.24
      • 4.  Special Issues With Arbitrability  16.25
      • 5.  Special Issues With Employment Contracts and PAGA Claims  16.26
      • 6.  Unconscionability Defense to Enforcement of Arbitration Provisions  16.27
      • 7.  Contract Provisions for Arbitration  16.28
        • a.  Commencing Arbitration  16.29
        • b.  Effect of Arbitration  16.30
        • c.  Selection of Arbitrator and Arbitration Rules  16.31
        • d.  Discovery in Arbitration  16.32
        • e.  Other Mechanics of Arbitration  16.33
      • 8.  Forms for Starting Arbitration
        • a.  Form: Arbitration Required  16.34
        • b.  Form: Class or Representative Arbitration   16.35
        • c.  Form: Beginning Arbitration—Self-Executing Arbitration Procedure; No Arbitrator Previously Selected  16.36
        • d.  Form: Applicable Rules  16.37
      • 9.  Form Provisions for Selecting Arbitrator
        • a.  Form: Predispute Selection of Arbitrator  16.38
        • b.  Form: Postdispute Selection of Arbitrator by Parties  16.39
        • c.  Form: Qualifications  16.40
        • d.  Form: List of Possible Arbitrators  16.41
        • e.  Form: Disclosure and Approval of Prior Relationship  16.42
        • f.  Form: Two-Party Arbitrators and Neutral Arbitrator  16.43
      • 10.  Forms for Mechanics of Arbitration
        • a.  Form: Timeline for Arbitration  16.44
        • b.  Form: Requiring Arbitrator to Provide Written Decision  16.45
        • c.  Form: Payment of Arbitration Costs (Short Form)  16.46
        • d.  Form: Payment of Arbitration Costs (Long Form)  16.47
        • e.  Form: Limited Discovery in Arbitration  16.48
        • f.  Form: Arbitrator’s Powers  16.49
        • g.  Form: “Baseball” Arbitration  16.50
        • h.  Form: Judicial Review of Award  16.51
    • D.  Reference
      • 1.  Description of Procedure  16.52
      • 2.  Advantages of Reference  16.53
      • 3.  Disadvantages of Reference  16.54
      • 4.  Costs of Reference  16.55
      • 5.  Form: Reference  16.56
  • V.  LITIGATION  16.57
    • A.  Waiver of Rights
      • 1.  Principles of Jury Trial Waiver  16.58
      • 2.  Shortening Statute of Limitations  16.59
      • 3.  Form: Private Statute of Limitations  16.60
      • 4.  Miscellaneous Waivers  16.61
    • B.  Choice of Forum
      • 1.  General Principles  16.62
      • 2.  Form: Choice of Forum  16.63
    • C.  Choice of Law
      • 1.  General Principles  16.64
      • 2.  Form: Choice of Law  16.65
    • D.  Attorney Fees Provision
      • 1.  General Principles  16.66
      • 2.  Considerations for Attorney Fees Provision  16.67
      • 3.  Drafting Attorney Fees Provisions  16.68
      • 4.  Form: Attorney Fees Provision  16.69
      • 5.  Form: Definition of “Prevailing Party”  16.70
      • 6.  Form: Forfeiture of Attorney Fees for Failure to Mediate  16.71

17

General Provisions

George S. Cabot

Brian J. Philpott

Sevag Demirjian

  • I.  CHECKLIST: GENERAL PROVISIONS  17.1
  • II.  SCOPE OF CHAPTER  17.2
  • III.  EFFECT OF GENERAL PROVISIONS AND FORMS
    • A.  Notice  17.3
    • B.  Form: Long Form of Notice Provision  17.4
    • C.  Form: Short Form of Notice Provision  17.4A
    • D.  Modification  17.5
    • E.  Form: Modification of Agreement  17.6
    • F.  Word Usage  17.7
    • G.  Form: Word Usage  17.8
    • H.  Printed Versus Written Words  17.9
    • I.  Form: Printed Versus Written Words  17.10
    • J.  Entire Agreement  17.11
    • K.  Form: Entire Agreement  17.12
    • L.  Severability  17.13
    • M.  Form: Severability of Agreement  17.14
    • N.  Separate Writings and Exhibits  17.15
    • O.  Form: Separate Writings and Exhibits  17.16
    • P.  Time of the Essence  17.17
    • Q.  Form: Time of the Essence  17.18
    • R.  Counting Days  17.19
    • S.  Form: Counting Days  17.20
    • T.  Survival  17.21
    • U.  Form: Survival  17.22
    • V.  Ambiguities  17.23
    • W.  Form: Ambiguities  17.24
    • X.  Joint and Several Liability  17.25
    • Y.  Form: Joint and Several Liability  17.26
    • Z.  Waiver  17.27
    • AA.  Form: Waiver  17.28
    • AB.  Section Headings  17.29
    • AC.  Form: Headings  17.30
    • AD.  Further Assurances  17.31
    • AE.  Form: Further Assurances  17.32

18

Execution and Signatures

Carolyn Owens Vogt

Brian J. Philpott

  • I.  CHECKLIST: INFORMATION NECESSARY TO PREPARE FOR EXECUTION  18.1
  • II.  METHOD OF EXECUTION  18.2
    • A.  Corporate Parties
      • 1.  Effect of Signature Block Form on Personal and Corporate Liability  18.3
      • 2.  Formalities for Corporate Parties
        • a.  Seals as Ineffective  18.4
        • b.  Attestations  18.5
        • c.  Officer’s Certificate  18.6
          • (1)  Form: Certificate of Incumbency  18.7
          • (2)  Form: Certified Corporate Records  18.8
      • 3.  Form: Execution by Corporation  18.9
    • B.  Limited Liability Company Parties
      • 1.  Effect of Signature Block Form  18.10
      • 2.  Form: Members’ Certificate for Member-Managed Limited Liability Company  18.11
      • 3.  Form: Managers’ Certificate for Manager-Managed Limited Liability Company  18.12
      • 4.  Form: Execution by Limited Liability Company  18.13
    • C.  General Partnership Parties
      • 1.  Effect of Signature Block Form on Personal and General Partnership Liability  18.14
      • 2.  Form: Certificate of Managing Partner  18.15
      • 3.  Form: Execution by General Partnership With Corporate Partner Authorized to Sign  18.16
      • 4.  Form: Execution by General Partnership With Individual Partner Authorized to Sign  18.17
    • D.  Limited Partnership Parties
      • 1.  Effect of Signature Block Form on Personal and Limited Partnership Liability  18.18
      • 2.  Form: Execution by Limited Partnership With Corporate General Partner Authorized to Sign  18.19
      • 3.  Form: Execution by Limited Partnership With Individual Partner Authorized to Sign  18.20
    • E.  Limited Liability Partnership
      • 1.  Effect of Signature Block Form  18.21
      • 2.  Form: Certificate of Managing Partner  18.22
      • 3.  Form: Execution by Limited Liability Partnership  18.23
    • F.  Individual Parties
      • 1.  Signature Block  18.24
      • 2.  Form: Execution by Individual  18.25
      • 3.  Need for Spouse or Domestic Partner to Sign or Consent  18.26
      • 4.  Signing Versus Consenting to Agreement  18.27
      • 5.  Form: Consent When Spouse or Registered Domestic Partner Represented by Counsel  18.28
      • 6.  Form: Consent When Spouse or Registered Domestic Partner Not Represented by Counsel  18.29
      • 7.  Form: Long Form of Consent of Spouse or Domestic Partner to Limited Liability Company Operating Agreement  18.29A
    • G.  Attorney-in-Fact
      • 1.  When Used  18.30
      • 2.  Form: Execution by Attorney-in-Fact Authorized to Sign on Behalf of Individual  18.31
    • H.  Guarantors and Sureties  18.32
    • I.  Form: Example of Signature Block for Agreement Including All Forms of Entities  18.33
  • III.  ACKNOWLEDGMENTS (NOTARIZATION)
    • A.  When Required  18.34
    • B.  Acknowledgment Signed in California  18.35
    • C.  Form: Civil Code §1189 Certificate of Acknowledgment  18.36
    • D.  Acknowledgment Signed Outside California  18.37
  • IV.  CERTIFICATIONS AND DECLARATIONS UNDER PENALTY OF PERJURY  18.38
    • A.  Form: Certification or Declaration Under Penalty of Perjury Executed in California  18.39
    • B.  Form: Certification or Declaration Under Penalty of Perjury Executed Within or Outside California  18.40
  • V.  PRACTICAL CONSIDERATIONS AND FORMALITIES
    • A.  Signature by Thumbprint, Mark, or Other Means  18.41
    • B.  Facsimiles of Signatures; Electronic Signatures
      • 1.  Use of Facsimiles  18.42
      • 2.  Form: Facsimile Signature  18.43
      • 3.  Electronic Signatures  18.44
      • 4.  Form: Electronic Signatures  18.45
    • C.  Location of Signature  18.46
    • D.  Counterparts
      • 1.  Purpose and Use  18.47
      • 2.  Form: Execution in Counterparts  18.48
    • E.  Execution Copy and Duplicate Originals  18.49
    • F.  Who Should Sign First?
      • 1.  General Rules  18.50
      • 2.  Form: Effective After All Parties Sign  18.51
    • G.  Alterations
      • 1.  Methods of Including Changes  18.52
      • 2.  Form: Sample Alteration of Agreement Provision  18.53

18A

Electronic Contracting

  • I.  INTRODUCTION  18A.1
  • II.  ENFORCEABILITY OF SHRINK-WRAP, CLICK-WRAP, AND BROWSE-WRAP AGREEMENTS
    • A.  Shrink-Wrap Software Licenses  18A.2
    • B.  Click-Wrap Agreements  18A.3
    • C.  Browse-Wrap Agreements  18A.4
    • D.  Embedded Links  18A.4A
  • III.  E-SIGN
    • A.  Introduction  18A.5
    • B.  Electronic Signatures  18A.6
    • C.  Consumer Protection Features  18A.7
    • D.  Electronic Record Retention  18A.8
  • IV.  UNIFORM ELECTRONIC TRANSACTIONS ACT (UETA)
    • A.  Overview; Federal Preemption Issue  18A.9
    • B.  Consent to Conduct Transactions Electronically Required  18A.10
    • C.  Authentication of Electronic Signatures  18A.10A
  • V.  UNIFORM COMPUTER INFORMATION TRANSACTIONS ACT (UCITA)  18A.11
  • VI.  ALI SOFTWARE CONTRACT PRINCIPLES  18A.12
  • VII.  EUROPEAN UNION DIRECTIVES  18A.13
  • VIII.  CREATING ENFORCEABLE ELECTRONIC AGREEMENTS
    • A.  Six Basic Principles  18A.14
    • B.  Additional Practical Considerations  18A.15
    • C.  Amendments  18A.16

19

Amendments and Modifications to Executory Contracts

Corey A. Donaldson

  • I.  CHECKLIST: INFORMATION NECESSARY FOR AMENDMENTS  19.1
  • II.  DISTINCTIONS BETWEEN TYPES OF CHANGES TO AGREEMENTS  19.2
    • A.  Amendments and Modifications  19.3
    • B.  Supplemental Agreements  19.4
    • C.  Rescissions  19.5
    • D.  Novation  19.6
  • III.  BUSINESS CONSIDERATIONS  19.7
    • A.  Circumstances Causing Amendment  19.8
    • B.  Effect of Amendment or Modification on Rights of Parties and Others  19.9
    • C.  Other Changes Required by Amendment  19.10
    • D.  Requirement for New Representations, Warranties, Guaranties, or Third Party Consents or Approvals  19.11
    • E.  Use of Amendment to Clarify Uncertainties  19.12
  • IV.  LEGAL CONSIDERATIONS  19.13
    • A.  Consent of Parties  19.14
    • B.  Consideration  19.15
  • V.  PREPARING TO DRAFT AMENDMENT  19.16
    • A.  Obtain and Review Copy of Original Agreement  19.17
    • B.  Determine Format of Amendment  19.18
    • C.  Scope and Effect of Amendment  19.19
    • D.  Consents and Approvals
      • 1.  Determine What Consents and Approvals Are Required  19.20
      • 2.  Procedure for Soliciting Consents  19.21
    • E.  Finalize Amendment  19.22
    • F.  Postamendment Considerations  19.23
  • VI.  DRAFTING AMENDMENT AGREEMENT
    • A.  Identification of Original Agreement and Amendment  19.24
      • 1.  Form: Caption and Identification of Parties  19.25
      • 2.  Form: Recitals  19.26
    • B.  Effective Date; Conditions  19.27
      • 1.  Form: Effectiveness as of Specific Date  19.28
      • 2.  Form: Effective Without Execution By All Parties to Original Agreement  19.29
    • C.  Recital of Consideration for Amendment
      • 1.  General Principles  19.30
      • 2.  Form: Consideration for Amendment  19.31
    • D.  Defined Terms  19.32
      • 1.  Form: Newly Defined Words and Phrases Used in Amendment  19.33
      • 2.  Form: No New Words or Phrases Used in Amendment  19.34
    • E.  Amending Operative Contract Provisions  19.35
      • 1.  Form: Addition of New Provision  19.36
      • 2.  Form: Deleting Provision of Original Agreement  19.37
      • 3.  Form: Modifying Provision of Original Agreement  19.38
      • 4.  Form: Amending and Restating Original Agreement in Its Entirety  19.39
    • F.  Changing Exhibits and Ancillary Agreements  19.40
      • 1.  Form: Modifying References to Exhibits in Original Agreement  19.41
      • 2.  Form: Modifying References to Ancillary Agreements in Original Agreement  19.42
    • G.  Representations and Warranties
      • 1.  General Principles  19.43
      • 2.  Form: Representations and Warranties  19.44
    • H.  Incorporation of Unmodified Terms of Original Agreement
      • 1.  General Principles  19.45
      • 2.  Form: Effect of Original Agreement and Amendment  19.46
    • I.  Miscellaneous Matters and Formalities  19.47
      • 1.  Form: Postexecution Filing or Recording Required  19.48
      • 2.  Form: Postexecution Notices Required  19.49
      • 3.  Form: Other General Provisions  19.50
    • J.  Form: Notice of Unilateral Amendment  19.51
  • VII.  SPECIFIC AMENDMENTS
    • A.  Compensation  19.52
    • B.  Evidences of Indebtedness  19.53
    • C.  Stock Restrictions  19.54
    • D.  Lease Arrangements
      • 1.  Specific Provisions to Consider  19.55
      • 2.  Form: Sample Provisions for Occupation of Additional Leased Space  19.56
    • E.  Addition or Substitution of New Parties
      • 1.  Specific Provisions to Consider  19.57
      • 2.  Form: Sample Addendum to Stock Purchase Agreement Adding Additional Investors  19.58
    • F.  Prior Financing Arrangements  19.59
    • G.  Mergers and Acquisitions  19.60

20

Letters of Intent

Ronald H. Star

Christopher E. Nordquist

Dr. Michael J. Ram

  • I.  CHECKLIST: LETTERS OF INTENT  20.1
  • II.  WHAT IS A LETTER OF INTENT?  20.2
  • III.  WHEN TO USE A LETTER OF INTENT: STRATEGIC AND COST CONCERNS  20.3
    • A.  Cost, Timing, and Efficiency Considerations  20.4
    • B.  Communication and Control During Negotiation Process  20.5
    • C.  Need to Demonstrate Commitment: The Chicken and Egg Problem  20.6
    • D.  Narrowing Alternatives  20.7
    • E.  Establishing Common Ground and Identifying Deal-Breaking Issues  20.8
    • F.  Obtaining Legally Binding Agreement on Certain Matters  20.9
    • G.  Negotiating With Bigger Players  20.10
    • H.  Preserving Rights  20.11
  • IV.  THE NEGOTIATING AND DRAFTING PROCESS
    • A.  Who Should Negotiate?  20.12
    • B.  Who Should Draft?  20.13
    • C.  Timing; Degree of Specificity  20.14
    • D.  Format of Letter of Intent  20.15
  • V.  ENFORCEABILITY OF LETTERS OF INTENT
    • A.  Early Consultation Between Counsel and Client  20.16
    • B.  Parties’ Intent Controls Enforceability  20.17
    • C.  Determining Parties’ Intent  20.18
      • 1.  Case Law Trends  20.19
      • 2.  Specificity  20.20
      • 3.  Execution of Formal Documents Expressly Contemplated  20.21
      • 4.  Conditional Third Party Approvals  20.22
      • 5.  Language Choice and Verb Tense  20.23
      • 6.  Subsequent Conduct  20.24
      • 7.  Complexity and Size of Transaction  20.25
    • D.  Duty to Negotiate in Good Faith  20.26
    • E.  Promissory Estoppel  20.27
  • VI.  DRAFTING LETTERS OF INTENT TO EXPRESS LEVEL OF ENFORCEABILITY  20.28
    • A.  Preparing Legally Binding Letters of Intent  20.29
      • 1.  Form: Introductory Provision Stating Binding Effect of Letter of Intent  20.30
      • 2.  Form: Method for Supplying Missing Terms if Definitive Agreement Not Signed  20.31
      • 3.  Form: Concluding Provision Stating Binding Effect of Letter of Intent  20.32
    • B.  Preparing Provisionally Binding Letters of Intent  20.32A
      • 1.  Form: Introductory Provision Stating Letter Binding Until Terminated or Until Definitive Agreement Executed  20.32B
      • 2.  Form: Termination Clause  20.32C
    • C.  Preparing Nonbinding Letters of Intent  20.33
      • 1.  Form: Introductory Provision Stating Intent Not to be Legally Bound  20.34
      • 2.  Form: Concluding Provision Reiterating Intent Not to be Legally Bound  20.35
    • D.  Preparing Partially Binding Letters of Intent  20.36
      • 1.  Form: Introductory Provision Stating Partially Binding Effect of Letter of Intent  20.37
      • 2.  Form: Concluding Provision Reiterating Intent to be Bound as to Specified Provisions Only  20.38
    • E.  Preparing Letters of Intent Binding Parties Only to Negotiate in Good Faith  20.39
      • 1.  Form: Introductory Provision Binding Parties to Negotiate  20.40
      • 2.  Form: Concluding Provision Reiterating Intent to Negotiate in Good Faith Only  20.41
      • 3.  Form: Termination of Negotiations  20.42
  • VII.  LETTERS OF INTENT FOR SPECIFIC SITUATIONS  20.43
    • A.  Acquisition Transactions  20.44
      • 1.  Form: “No-Shop” Provision  20.45
      • 2.  Form: Expense Reimbursement and “Break-Up Fee” Provision  20.46
      • 3.  Form: “Topping Fees” Provision  20.47
      • 4.  Form: Confidentiality Provision  20.48
      • 5.  Form: “Fiduciary-Out” Provision  20.49
    • B.  Financing Commitment Letters
      • 1.  General Principles  20.50
      • 2.  Form: Letter of Intent to Lend  20.51
    • C.  Venture Capital Transactions; Term Sheets  20.52
      • 1.  Form: Introduction to Nonbinding Venture Capital Term Sheet  20.53
      • 2.  Form: Rights, Preferences, Privileges, and Restrictions of Preferred Stock  20.54
      • 3.  Form: Information Rights  20.55
      • 4.  Form: Registration Rights  20.56
      • 5.  Form: Board Representation  20.57
      • 6.  Form: Reserved Employee Shares  20.58
      • 7.  Form: Stock Purchase Agreement  20.59
      • 8.  Form: Expenses  20.60
      • 9.  Form: Finder’s Fee  20.61
  • VIII.  SPECIFIC LEGAL IMPLICATIONS OF LETTERS OF INTENT
    • A.  Discoverability  20.62
    • B.  Public Disclosure Obligations  20.63
    • C.  Premerger Notification  20.64
    • D.  Other Antitrust Implications  20.65

21

Promissory Notes

Peter S. Muñoz

Brenda T. Dieck

Edith R. Warkentine

  • I.  CHECKLIST: PROMISSORY NOTES  21.1
  • II.  WHAT IS A PROMISSORY NOTE?  21.2
  • III.  STANDARD NOTE PROVISIONS
    • A.  Title; Definitions  21.3
    • B.  Parties  21.4
    • C.  Single or Multiple Draw Notes
      • 1.  Form: Promise to Pay Principal Under Single Draw  21.5
      • 2.  Form: Promise to Pay Principal Under Multiple Draw or Revolving Note  21.6
    • D.  Form: Maturity Date  21.7
    • E.  Interest Rate
      • 1.  Form: Fixed Interest Rate  21.8
      • 2.  Variable Interest Rate  21.9
      • 3.  Form: Variable Interest Rate  21.10
      • 4.  Form: Interest Calculation  21.11
    • F.  Payment Terms  21.12
      • 1.  Form: General Terms of Payment  21.13
      • 2.  Form: Interest Only  21.14
      • 3.  Form: Installments of Principal  21.15
      • 4.  Form: Payment-in-Kind Interest  21.16
      • 5.  Form: Postdefault Interest Rate  21.17
      • 6.  Form: Maximum Interest Rate Provisions  21.18
    • G.  Voluntary Prepayments  21.19
      • 1.  Form: Prepayment Permitted Without Premium  21.20
      • 2.  Form: Prepayment Premium Required  21.21
      • 3.  Form: Prepayment Prohibited  21.22
    • H.  Form: Events of Default; Holder’s Waivers; Remedies Cumulative  21.23
    • I.  Acceleration Issues  21.24
    • J.  Form: Acceleration Clause  21.24A
    • K.  Late Payment Fees  21.25
    • L.  Form: Late Payment Fee  21.26
    • M.  Form: Security for Note  21.27
    • N.  Form: Nonrecourse Agreement  21.28
    • O.  Form: Maker’s Waivers  21.29
    • P.  Form: Purpose of Loan  21.30
    • Q.  Form: Time of the Essence  21.31
    • R.  Attorney Fees  21.31A
    • S.  Form: Attorney Fees  21.31B
    • T.  General Provisions for Notes  21.32
    • U.  Physical Handling of Note  21.33
    • V.  Loss or Destruction of Note  21.33A
    • W.  Form: Loss or Destruction of Note  21.33B
  • IV.  DEFINITIONS AND APPLICABLE LAW
    • A.  Negotiability
      • 1.  Definition  21.34
      • 2.  Requirements for Negotiability  21.35
      • 3.  When Nonnegotiability Desired  21.36
      • 4.  Governing Law  21.37
    • B.  Conditional or Unconditional  21.38
    • C.  Usury Laws
      • 1.  Overview  21.39
      • 2.  Credit Sales Not Subject to Usury Laws  21.40
      • 3.  Lenders Exempt From Usury Laws  21.41
      • 4.  Loans Exempt From Usury Laws  21.42
      • 5.  Remedies  21.43
      • 6.  Form: Compliance With Usury Laws  21.44
      • 7.  Assignments and Loan Services  21.44A
      • 8.  Form: Allonge  21.44B

22

Guaranties

Edith R. Warkentine

Pauline M. Stevens

  • I.  CHECKLIST: GUARANTIES  22.1
  • II.  DEFINITIONS AND APPLICABLE LAW  22.2
    • A.  Extent of Liability  22.3
    • B.  Rights of Guarantor and Obligations of Creditor  22.4
    • C.  Termination of Liability  22.5
  • III.  REQUISITES AND VALIDITY OF GUARANTY
    • A.  Signed Writing  22.6
    • B.  Consideration  22.7
    • C.  Interpretation  22.8
  • IV.  SAMPLE GUARANTY AGREEMENT
    • A.  Format and Title  22.9
    • B.  Introductory Clause  22.10
      • 1.  Form: Introduction for Use Without Recitals  22.11
      • 2.  Form: Introduction for Use With Recitals  22.12
    • C.  Recitals
      • 1.  Form: Recitals for Guaranty of Debt to Bank  22.13
      • 2.  Form: Recitals for Guaranty of Lease  22.14
    • D.  Form: Guaranty of Payment  22.15
    • E.  Form: Guaranty of Performance  22.16
    • F.  Liability of Guarantor
      • 1.  Form: Unlimited Liability  22.17
      • 2.  Form: Limited Liability  22.18
      • 3.  Form: Security  22.19
    • G.  Form: Rights of Setoff  22.20
    • H.  Form: Subordination  22.21
    • I.  Form: Guarantor’s Representations and Warranties  22.22
    • J.  Waivers
      • 1.  Drafting Waivers to Conform to CC §2856  22.23
      • 2.  Issues in Drafting Effective Waivers  22.23A
      • 3.  Bankruptcy Preferences; Deprizio Waivers  22.23B
      • 4.  Form: Authorizations and Waivers Relating to Actions of Creditor  22.24
      • 5.  Waiver of Defense From Nonjudicial Foreclosure Sale (Gradsky Waiver)  22.25
      • 6.  Form: Waiver Language from CC §2856  22.25A
      • 7.  Form: Gradsky Waiver  22.26
      • 8.  Form: Deprizio Waiver  22.27
      • 9.  Form: No Subrogation  22.28
      • 10.  Form: Joint and Several Obligation  22.29
    • K.  Form: Authority of Signatory  22.30
    • L.  Form: Construction  22.31
    • M.  General Provisions  22.32
  • V.  FORM: SAMPLE CONTINUING GUARANTY  22.33

23

Powers of Attorney

Edith R. Warkentine

David D. Little

  • I.  CHECKLIST: POWERS OF ATTORNEY  23.1
  • II.  INTRODUCTION  23.1A
  • III.  DEFINITION AND APPLICABLE LAW  23.2
  • IV.  FEATURES OF POWERS OF ATTORNEY
    • A.  General Power of Attorney versus Special Power of Attorney  23.3
    • B.  Effective Dates of Powers of Attorney
      • 1.  Durable Power of Attorney  23.4
      • 2.  Springing Power of Attorney  23.5
    • C.  Statutory Power of Attorney  23.6
    • D.  Power of Attorney Coupled With an Interest  23.7
    • E.  Form: Sample Power of Attorney Coupled With an Interest  23.8
  • V.  REQUISITES AND VALIDITY  23.9
  • VI.  ATTORNEYS-IN-FACT
    • A.  Qualifications  23.10
    • B.  Authority and Duties  23.11
    • C.  Standard of Care  23.12
    • D.  Compensation  23.13
    • E.  Multiple and Successor Attorneys-in-Fact  23.14
    • F.  Reliance on Power of Attorney by Third Parties  23.15
  • VII.  MODIFICATION AND REVOCATION  23.16
  • VIII.  TERMINATION  23.17
  • IX.  POWER OF ATTORNEY INSTRUMENT
    • A.  Statutory Short Form Power of Attorney  23.18
    • B.  Form: Statutory Short Form Power of Attorney  23.19
    • C.  Form: Special Power of Attorney (Sale of Real Property)  23.20
    • D.  Signature by Attorney-in-Fact  23.21
    • E.  Form: Signature by Attorney-in-Fact  23.22
    • F.  Acknowledgment  23.23
    • G.  Form: Revocation of Power of Attorney  23.24
    • H.  Form: Notice of Revocation of Power of Attorney  23.25

24

Drafting Intellectual Property Licenses

Jeffrey G. Sheldon

  • I.  INTRODUCTION  24.1
    • A.  License Versus Assignment  24.2
    • B.  Types of Intellectual Property for Licensing  24.3
  • II.  COMMON PROVISIONS OF LICENSE AGREEMENTS  24.4
    • A.  Introductory Provisions
      • 1.  Introductory Clause  24.5
      • 2.  Form: Sample Introductory Clause  24.6
      • 3.  Recitals  24.7
      • 4.  Form: Sample Recitals  24.8
    • B.  Definitions  24.9
      • 1.  Definition of Licensed Intellectual Property  24.10
      • 2.  Form: Sample Intellectual Property Definitions  24.11
      • 3.  Territory  24.12
      • 4.  Form: Sample Definition of Territory  24.13
      • 5.  Field of Use  24.14
      • 6.  Form: Sample Definition of Field of Use  24.15
      • 7.  Affiliates; Subsidiaries  24.16
      • 8.  Form: Sample Definition of Affiliate  24.17
      • 9.  Sales; Net Selling Price  24.18
      • 10.  Form: Sample Definition of Net Selling Price  24.19
      • 11.  Licensed Product  24.20
      • 12.  Form: Sample Definitions of Licensed Products  24.21
    • C.  Grant of Rights
      • 1.  Grant of Rights  24.22
      • 2.  Form: Sample Granting Clauses  24.23
      • 3.  Limitations on Grant  24.24
    • D.  Royalty  24.25
      • 1.  Lump-Sum Versus Ongoing Royalty  24.26
      • 2.  Up-Front Payments  24.27
      • 3.  Form: Sample Up-Front Payment Clause  24.28
      • 4.  Minimum Performance Requirements  24.29
      • 5.  Form: Sample Minimum Royalty Clauses  24.30
      • 6.  Royalty Base  24.31
      • 7.  Royalty Rates
        • a.  Guidelines for Determining Royalty Rates  24.32
        • b.  Form: Sample Royalty Rate Provisions  24.33
      • 8.  Royalty Term  24.34
      • 9.  Payment Date  24.35
      • 10.  Place of Payment  24.36
      • 11.  Currency  24.37
      • 12.  Form: Sample Provision for Payment in U.S. Dollars  24.38
      • 13.  Taxes  24.39
      • 14.  Form: Sample Provision for Payment of Taxes  24.40
      • 15.  Effect of Licensing Rights of Third Parties  24.41
      • 16.  Form: Sample Royalty Rate Reduction  24.42
      • 17.  Royalties for Mixed Rights  24.42A
    • E.  Important Business Provisions  24.43
      • 1.  Enforcement of Intellectual Property Rights  24.44
        • a.  Notice Provision  24.45
        • b.  Form: Sample Notice Provisions  24.46
        • c.  Who Enforces Intellectual Property Rights  24.47
        • d.  Who Pays  24.48
        • e.  How Recovery Is Divided  24.49
        • f.  Form: Sample Enforcement Provisions  24.50
      • 2.  Duty to Exploit  24.51
      • 3.  Warranties  24.52
        • a.  Warranty of Title  24.53
        • b.  Form: Sample Warranty of Title and Authority  24.54
        • c.  Warranty (or Disclaimer of Warranty) of Noninfringement  24.55
        • d.  Form: Sample Disclaimers of Warranty  24.56
        • e.  Form: Sample Warranty of Noninfringement  24.57
      • 4.  Indemnification  24.58
      • 5.  Form: Sample Indemnification Provisions  24.59
      • 6.  Marking
        • a.  Importance of Marking  24.60
        • b.  Form: Sample Marking Provisions  24.61
      • 7.  Reporting and Audits  24.62
        • a.  Frequency of Audits  24.63
        • b.  Who Conducts Audit  24.64
        • c.  Who Pays for Audit  24.65
        • d.  Form: Sample Recordkeeping and Audit Provisions  24.66
      • 8.  Assignability
        • a.  Right to Assign  24.67
        • b.  Form: Sample Nonassignment Clauses  24.68
      • 9.  Sublicensing
        • a.  Right to Grant Sublicenses  24.69
        • b.  Form: Sample Sublicensing Provisions  24.70
      • 10.  Prohibition on Challenges to Validity and Enforceability of Licensed Rights
        • a.  Agreements Not to Challenge  24.71
        • b.  Form: Sample Prohibitions on Challenges  24.72
      • 11.  “Most Favored Nation” Clauses
        • a.  Drafting Issues  24.73
        • b.  Form: Sample “Most Favored Nation” Provisions  24.74
      • 12.  Term and Termination
        • a.  Term  24.75
        • b.  Voluntary or Involuntary Termination  24.76
        • c.  Form: Sample Termination Provisions  24.77
      • 13.  Recordation of License Agreement  24.78
      • 14.  Invalidity of Rights Licensed  24.79
      • 15.  Form: Termination of Royalty on Invalidity  24.80
      • 16.  Defense of Infringement Suits  24.81
    • F.  Standard Provisions (“Boilerplate”)  24.82
  • III.  SPECIAL PROVISIONS  24.83
    • A.  Invention Licenses (for Patents and Patent Applications)
      • 1.  Prosecution and Maintenance Fees  24.84
      • 2.  Form: Sample Provisions for Maintenance  24.85
      • 3.  Improvements  24.86
        • a.  Ownership  24.87
        • b.  Form: Sample Provisions Regarding Improvements  24.88
        • c.  Inclusion of Improvements in License Grant  24.89
        • d.  Effect on Term, Royalty Base, and Royalty Rate  24.90
        • e.  Maintenance Fees for Improvements  24.91
      • 4.  Warranties of Validity, Enforceability, and Utility  24.92
    • B.  Trade Secrets
      • 1.  Steps to Control Secrecy  24.93
      • 2.  Form: Sample Confidentiality Clause  24.94
      • 3.  Transfer of Trade Secrets  24.95
      • 4.  Form: Sample Provision for Licensor’s Disclosure of Information to Licensee  24.96
    • C.  Trademarks
      • 1.  Quality Control  24.97
      • 2.  Form: Sample Quality Control Provisions  24.98
      • 3.  Benefit of Use Accrues to Trademark Owner  24.99
      • 4.  Form: Sample Acknowledgement of Licensor’s Rights  24.100
      • 5.  Franchise Avoidance  24.101
    • D.  Copyrights
      • 1.  Rights Granted  24.102
      • 2.  Is It a License or a Sale?  24.102A
      • 3.  Software Licenses  24.103
        • a.  Source Code Escrow  24.104
        • b.  Form: Sample Source Code Escrow Provision  24.105
        • c.  Restrictions on License  24.106
        • d.  Maintenance; Modifications, Enhancements, and Updates  24.107
        • e.  Installation and Training  24.108
        • f.  Warranties  24.109
        • g.  ALI Software Contract Principles  24.110

DRAFTING BUSINESS CONTRACTS: PRINCIPLES, TECHNIQUES & FORMS

(1st Edition)

March 2018

TABLE OF CONTENTS

 

File Name

Book Section

Title

CH01

Chapter 1

Mechanics of Document Drafting

01-001

§1.1

CHECKLIST: DRAFTING STEPS

CH02

Chapter 2

Drafting Principles: Strategy, Standards, and Ethics

02-001

§2.1

CHECKLIST: DRAFTING PRINCIPLES

02-009

§2.9

Example of Legalistic Terminology in Noncompetition Agreement Recitals

02-010

§2.10

Example of Plain English in Noncompetition Agreement Recitals

02-018

§2.18

Provisions for Conflict of Interest Disclosure and Waiver Letter to New Client

CH03

Chapter 3

Preliminary Considerations

03-001

§3.1

CHECKLIST: PRELIMINARY CONSIDERATIONS

CH04

Chapter 4

Client Interview

04-001

§4.1

CHECKLIST: CLIENT INTERVIEW

CH05

Chapter 5

Format of the Agreement: Appearance and Introductory Information

05-001

§5.1

CHECKLIST: FORMATTING THE AGREEMENT

05-007

§5.7

Headings With Limited Legal Effect

05-008

§5.8

Headings With No Legal Effect

05-014

§5.14

Sample Provisions for Identification of Parties

05-016

§5.16

Basic Introductory Clause

05-022

§5.22

Sample Recitals

05-026

§5.26

Sample Provisions for Proximity Method of Defining Terms

05-028

§5.28

Sample Provision for Collection Method of Defining Terms

05-029

§5.29

Sample Provision for Proximity-Collection Hybrid Method of Defining Terms

05-031

§5.31

Introduction to Glossary

05-032

§5.32

Reference to Glossary in Agreement

05-035

§5.35

Mechanics

CH06

Chapter 6

Duration of the Agreement

06-001

§6.1

CHECKLIST: DURATION OF AGREEMENT

06-003

§6.3

Standard Duration Clause

06-004

§6.4

Conditional Effective Date

06-006

§6.6

Automatic Extension

06-007

§6.7

Mutually Agreeable Extension

06-008

§6.8

Either Party May Extend

06-014

§6.14

Return of Confidential Information

06-015

§6.15

Rights and Obligations Cease

06-016

§6.16

Survival of Certain Rights and Obligations

06-017

§6.17

Obligation to Negotiate

06-018

§6.18

Sample Provision for Consequences of Early Termination of Distributor Agreement Providing Exclusive Territory

06-020

§6.20

Automatic Termination

06-021

§6.21

Optional Termination

06-022

§6.22

Binding on Successor Corporation

06-023

§6.23

Termination on Bankruptcy

06-024

§6.24

Termination on Death

06-025

§6.25

No Termination on Death

06-026

§6.26

Termination on Breach of Agreement

06-027

§6.27

Termination on Breach of Law

06-028

§6.28

Termination on Loss of License

06-029

§6.29

Termination by Mutual Agreement

06-030

§6.30

Absolute Termination Right by Either Party

06-032

§6.32

Time of Closing

06-033

§6.33

Survival of Representations, Warranties, and Obligations

06-034

§6.34

Termination of Purchase and Sale Agreement Before Closing

06-035

§6.35

Term for Option

06-037

§6.37

Termination for Cause—Specifying All Causes for Termination

06-038

§6.38

Termination for Cause—Nonexhaustive Definition of Cause

06-039

§6.39

Termination on Disability

06-040

§6.40

Termination for Specified Period of Absences

06-041

§6.41

Termination at Will

06-042

§6.42

Payment Obligations After Termination

06-044

§6.44

Termination Because of Sale or Destruction of Property

06-045

§6.45

Waiver of Statutory Rights of Termination

CH07

Chapter 7

Factual Basis of the Agreement: Recitals, Representations, and Warranties

07-001

§7.1

CHECKLIST: FACTUAL BASIS

07-009

§7.9

Sample Provisions for Other Typical Representations and Warranties

07-011

§7.11

Disclaimer of Warranties of Merchantability and Fitness for Particular Purpose

07-012

§7.12

Disclaimer of Warranty of Title

07-013

§7.13

Disclaimer of Warranty Against Infringement

CH08

Chapter 8

Consideration

08-001

§8.1

CHECKLIST: CONSIDERATION

08-005

§8.5

Allocation of Purchase Price

08-007

§8.7

Adjusting Rental Payments Based on Change in Consumer Price Index

08-008

§8.8

Amount of Royalty

08-009

§8.9

Payment Terms

08-010

§8.10

Review of Records to Verify Amount Due

08-011

§8.11

Adjusting Purchase Price Based on Fluctuating Assets

08-017

§8.17

Payment by Cashier’s or Certified Check

08-018

§8.18

Payment by Wire Transfer

08-020

§8.20

Payment by Letter of Credit

08-022

§8.22

Note to be Delivered at Closing

08-029

§8.29

Provision for Usury Limitation

08-036

§8.36

Performance of Services

08-037

§8.37

Transfer of Stock

08-038

§8.38

Transfer of Assets

08-039

§8.39

Assumption of Liabilities

CH09

Chapter 9

Covenants

09-001

§9.1

CHECKLIST: COVENANTS

09-011

§9.11

Covenant Not to Compete

09-013

§9.13

At-Will Employment

09-014

§9.14

Nondisclosure Covenant

09-015

§9.15

CHECKLIST FOR COMPONENTS OF COVENANTS

CH10

Chapter 10

Conditions

10-001

§10.1

CHECKLIST: CONDITIONS

10-006

§10.6

Condition Subsequent

10-011

§10.11

Satisfaction as a Condition

10-014

§10.14

Sample Provision for Closing Subject to Conditions

10-018

§10.18

Introductory Language for Conditions Precedent to Buyer’s Performance

10-019

§10.19

Accuracy of Seller’s Representations and Warranties

10-020

§10.20

Performance by Seller

10-021

§10.21

No Material Adverse Change

10-022

§10.22

Certification by Seller

10-023

§10.23

Opinion of Seller’s Counsel

10-024

§10.24

Absence of Litigation

10-025

§10.25

Letter Regarding Changes

10-026

§10.26

Corporate Approval

10-027

§10.27

Deeds and Title Policies

10-028

§10.28

Franchise Tax Board Clearance

10-029

§10.29

Employment Development Department’s Release

10-030

§10.30

Sales and Use Tax on Prior Sales

10-031

§10.31

FIRPTA Withholding

10-032

§10.32

Consents

10-033

§10.33

Employment Agreement

10-034

§10.34

Approval of Documentation

10-035

§10.35

Introductory Language for Conditions Precedent to Seller’s Performance

10-036

§10.36

Accuracy of Buyer’s Representations and Warranties

10-037

§10.37

Buyer’s Performance

10-038

§10.38

Opinion of Buyer’s Counsel

10-039

§10.39

Buyer’s Corporate Approval

10-040

§10.40

Qualification With California Commissioner of Corporations

10-041

§10.41

Listing of Buyer’s Stock

10-042

§10.42

Absence of Litigation

CH11

Chapter 11

Risk Allocation

11-001

§11.1

CHECKLIST: RISK ALLOCATION DEVICES

11-005

§11.5

Transfer of Risk of Loss When Property Delivered

11-006

§11.6

No Assumption of Liabilities

11-008

§11.8

Exclusion of Assumption of Liabilities

11-010

§11.10

Transfer of Risk

11-012

§11.12

Tenant Undertakes Maintenance and Repair (Pro-Landlord)

11-026

§11.26

Indemnification for Specific Third Party Claims (Pro-Indemnitee)

11-027

§11.27

Indemnification for Specific Third Party Claims (Pro-Indemnitor)

11-028

§11.28

Indemnification for Misrepresentation or Breach of Warranty (Pro-Indemnitee)

11-029

§11.29

Time Limitations on Survival of Representations, Warranties, and Agreements

11-030

§11.30

No Time Limitations on Survival of Representations, Warranties, or Agreements

11-031

§11.31

Limitation on Time to Bring Action

11-032

§11.32

Indemnification Provision in Agreement for Sale of Business

11-033

§11.33

Indemnification Provision in Lease Agreement for Hazardous Materials (Pro-Indemnitee)

11-034

§11.34

Indemnification Provision for Patent or Copyright Infringement (Pro-Indemnitor)

11-035

§11.35

Notice Provision

11-036

§11.36

Indemnification Threshold; Indemnitor Liable for All Losses After Threshold Reached

11-037

§11.37

Indemnification Threshold; Indemnitee Liable for All Losses up to Threshold

11-038

§11.38

Limited Indemnification Liability

11-039

§11.39

Right of Setoff

11-051

§11.51

Sample Mutual General Release Provision in Termination Agreement

11-052

§11.52

Limited Warranty for Sale of Goods Provision

11-053

§11.53

Limitation of Remedies

11-054

§11.54

Exculpation of Landlord

11-055

§11.55

Option to Expand Liability

11-056

§11.56

Exculpation and Release Provision for Hazardous or Recreational Activity

11-060

§11.60

Waiver

CH12

Chapter 12

Legal Opinions

12-001

§12.1

CHECKLIST: LEGAL OPINIONS

12-006

§12.6

Limitation on Use of Opinion

12-009

§12.9

Opinion Condition in Transaction Documents

12-011

§12.11

Materials on Which Opinion Preparer Relied

12-013

§12.13

Role of Opinion Preparer as Special Counsel

12-015

§12.15

California Law

12-018

§12.18

Corporate Status—California Corporations

12-020

§12.20

Corporate Status—Qualification in Other States

12-022

§12.22

Corporate Power and Corporate Authority

12-024

§12.24

Due Authorization

12-026

§12.26

Capital Shares

12-028

§12.28

Remedies Opinion

12-030

§12.30

No-Violation Opinion

12-032

§12.32

Negative Assurance on Litigation

12-034

§12.34

Consent of Governmental Authority

CH13

Chapter 13

Rights of Nonparties: Assignment, Delegation, and Third Party Beneficiaries

13-001

§13.1

CHECKLIST: RIGHTS OF NONPARTIES

13-013

§13.13

Prohibition of Assignment and Delegation (Both Parties Prohibited From Assigning Rights or Delegating Duties)

13-013A

§13.13A

Prohibition of Assignment and Delegation (One Party Prohibited From Assigning Rights or Delegating Duties)

13-014

§13.14

Due-on-Sale Provision

13-015

§13.15

Assignment and Delegation Expressly Permitted

13-017

§13.17

Assignment Permitted

13-018

§13.18

Assignment Prohibited

13-019

§13.19

Assignment Permitted on Compliance With Conditions

13-021

§13.21

General Prohibition of Assignment

13-022

§13.22

Lessor to Receive Benefits of Assignment or Sublease

13-023

§13.23

Dissolution, Merger, or Similar Transfer Deemed Assignment When Lessee Is Corporation

13-028

§13.28

Introduction

13-029

§13.29

Recitals

13-030

§13.30

Granting Provision for Assignment

13-031

§13.31

Obligations of Assignee

13-032

§13.32

Purpose of Assignment

13-033

§13.33

Further Assurances

13-034

§13.34

Representations and Warranties

13-035

§13.35

Assignor’s Covenants

13-036

§13.36

Appointment of Attorney-in-Fact

13-037

§13.37

Indemnification

13-040

§13.40

Consent to Assignment

13-041

§13.41

Notice of Assignment

13-044

§13.44

No Third Party Beneficiary Intended

CH14

Chapter 14

Defining Events of Default

14-001

§14.1

CHECKLIST: EVENTS OF DEFAULT

14-002A

§14.2A

Definitions of Event of Default and Default

14-003A

§14.3A

Notice of Default

14-004

§14.4

Nondefaulting Party’s Right to Cure and Be Reimbursed

14-005

§14.5

Introduction to Events of Default Provision

14-008

§14.8

Failure to Pay Amount Due

14-009

§14.9

Failure to Perform Other Covenants

14-010

§14.10

Anticipatory Breach

14-012

§14.12

Force Majeure Events Resulting in Excuse or Suspension of Performance

14-013

§14.13

Force Majeure Events Resulting in Apportionment Costs

14-014A

§14.14A

Representation and Warranty Bring-Down Certificate

14-015

§14.15

Breach of Representation or Warranty or of Other “Factual” Information Found Untrue

14-020

§14.20

Insolvency Provisions

14-022

§14.22

Cross-Default Clause

14-023

§14.23

Cross-Default and Cross-Acceleration Clauses

14-023B

§14.23B

Revocation of Guaranty

14-023C

§14.23C

Replacement Letter of Credit

14-025

§14.25

Party Deems Itself Insecure

14-027

§14.27

Judgments Rendered Against Party

14-028

§14.28

Validity of Agreement Challenged

14-029

§14.29

Lien Not Perfected

CH15

Chapter 15

Remedies

15-001

§15.1

CHECKLIST: REMEDIES

15-005

§15.5

Sample Liquidated Damages Provision

15-007

§15.7

Exclusion of Consequential and Incidental Damages

15-009

§15.9

Mitigation of Damages

15-011

§15.11

Postdefault Interest

15-011A

§15.11A

Late Charge

15-013

§15.13

Prepayment Penalty

15-015

§15.15

Interest on Recoverable Damages

15-017

§15.17

Interest as Separate Item of Damages

15-020

§15.20

Limiting Attorney Fees

15-022

§15.22

Limitation on Bringing Action

15-024

§15.24

Sample Limitation of Liability Provision

15-026

§15.26

Sample Specific Performance Provision

15-026A

§15.26A

Specific Performance Provision in Confidentiality Agreement

15-028

§15.28

Cumulative Rights and Remedies

15-030

§15.30

Applicability of Commercial Code Remedies

15-033

§15.33

Disclaimer of Sales Warranties

15-035

§15.35

Limitation of Remedies for Breach of Warranty

15-041

§15.41

Remedies in Equipment Lease Agreement

15-043

§15.43

Disclaimer of Leasing Warranties

15-044

§15.44

Assignment of Warranty Rights in Equipment Lease Agreement

15-046

§15.46

Acceleration

15-048

§15.48

Attornment

15-050

§15.50

Setoff

15-052

§15.52

Secured Party’s Remedies on Default

15-052A

§15.52A

Secured Party’s Remedy on Default When Collateral Is Privately Held Stock

15-053

§15.53

Nonrecourse Provision

15-055

§15.55

Commercial General Liability Insurance

CH16

Chapter 16

Dispute Resolution Procedures

16-001

§16.1

CHECKLIST: MECHANICS FOR RESOLVING DISPUTES

16-008

§16.8

Parties Bound

16-009

§16.9

Binding Third Parties to Dispute Resolution Mechanism

16-010

§16.10

Providing for Consolidation

16-013

§16.13

Formal Negotiation Process

16-019

§16.19

Mediation Required

16-020

§16.20

Mechanics of Mediation

16-034

§16.34

Arbitration Required

16-035

§16.35

Class or Representative Arbitration

16-036

§16.36

Beginning Arbitration—Self-Executing Arbitration Procedure; No Arbitrator Previously Selected

16-037

§16.37

Applicable Rules

16-038

§16.38

Predispute Selection of Arbitrator

16-039

§16.39

Postdispute Selection of Arbitrator by Parties

16-040

§16.40

Qualifications

16-041

§16.41

List of Possible Arbitrators

16-042

§16.42

Disclosure and Approval of Prior Relationship

16-043

§16.43

Two-Party Arbitrators and Neutral Arbitrator

16-044

§16.44

Timeline for Arbitration

16-045

§16.45

Requiring Arbitrator to Provide Written Decision

16-046

§16.46

Payment of Arbitration Costs (Short Form)

16-047

§16.47

Payment of Arbitration Costs (Long Form)

16-048

§16.48

Limited Discovery in Arbitration

16-049

§16.49

Arbitrator’s Powers

16-050

§16.50

“Baseball” Arbitration

16-051

§16.51

Judicial Review of Award

16-056

§16.56

Reference

16-060

§16.60

Private Statute of Limitations

16-063

§16.63

Choice of Forum

16-065

§16.65

Choice of Law

16-069

§16.69

Attorney Fees Provision

16-070

§16.70

Definition of “Prevailing Party”

16-071

§16.71

Forfeiture of Attorney Fees for Failure to Mediate

CH17

Chapter 17

General Provisions

17-001

§17.1

CHECKLIST: GENERAL PROVISIONS

17-004

§17.4

Long Form of Notice Provision

17-004A

§17.4A

Short Form of Notice Provision

17-006

§17.6

Modification of Agreement

17-008

§17.8

Word Usage

17-010

§17.10

Printed Versus Written Words

17-012

§17.12

Entire Agreement

17-014

§17.14

Severability of Agreement

17-016

§17.16

Separate Writings and Exhibits

17-018

§17.18

Time of the Essence

17-020

§17.20

Counting Days

17-022

§17.22

Survival

17-024

§17.24

Ambiguities

17-026

§17.26

Joint and Several Liability

17-028

§17.28

Waiver

17-030

§17.30

Headings

17-032

§17.32

Further Assurances

CH18

Chapter 18

Execution and Signatures

18-001

§18.1

CHECKLIST: INFORMATION NECESSARY TO PREPARE FOR EXECUTION

18-007

§18.7

Certificate of Incumbency

18-008

§18.8

Certified Corporate Records

18-009

§18.9

Execution by Corporation

18-011

§18.11

Members’ Certificate for Member-Managed Limited Liability Company

18-012

§18.12

Managers’ Certificate for Manager-Managed Limited Liability Company

18-013

§18.13

Execution by Limited Liability Company

18-015

§18.15

Certificate of Managing Partner

18-016

§18.16

Execution by General Partnership With Corporate Partner Authorized to Sign

18-017

§18.17

Execution by General Partnership With Individual Partner Authorized to Sign

18-019

§18.19

Execution by Limited Partnership With Corporate General Partner Authorized to Sign

18-020

§18.20

Execution by Limited Partnership With Individual Partner Authorized to Sign

18-022

§18.22

Certificate of Managing Partner

18-023

§18.23

Execution by Limited Liability Partnership

18-025

§18.25

Execution by Individual

18-028

§18.28

Consent When Spouse or Registered Domestic Partner Represented by Counsel

18-029

§18.29

Consent When Spouse or Registered Domestic Partner Not Represented by Counsel

18-029A

§18.29A

Long Form of Consent of Spouse or Domestic Partner to Limited Liability Company Operating Agreement

18-031

§18.31

Execution by Attorney-in-Fact Authorized to Sign on Behalf of Individual

18-033

§18.33

Example of Signature Block for Agreement Including All Forms of Entities

18-036

§18.36

Civil Code §1189 Certificate of Acknowledgment

18-039

§18.39

Certification or Declaration Under Penalty of Perjury Executed in California

18-040

§18.40

Certification or Declaration Under Penalty of Perjury Executed Within or Outside California

18-043

§18.43

Facsimile Signature

18-045

§18.45

Electronic Signatures

18-048

§18.48

Execution in Counterparts

18-051

§18.51

Effective After All Parties Sign

18-053

§18.53

Sample Alteration of Agreement Provision

CH19

Chapter 19

Amendments and Modifications to Executory Contracts

19-001

§19.1

CHECKLIST: INFORMATION NECESSARY FOR AMENDMENTS

19-025

§19.25

Caption and Identification of Parties

19-026

§19.26

Recitals

19-028

§19.28

Effectiveness as of Specific Date

19-029

§19.29

Effective Without Execution By All Parties to Original Agreement

19-031

§19.31

Consideration for Amendment

19-033

§19.33

Newly Defined Words and Phrases Used in Amendment

19-034

§19.34

No New Words or Phrases Used in Amendment

19-036

§19.36

Addition of New Provision

19-037

§19.37

Deleting Provision of Original Agreement

19-038

§19.38

Modifying Provision of Original Agreement

19-039

§19.39

Amending and Restating Original Agreement in Its Entirety

19-041

§19.41

Modifying References to Exhibits in Original Agreement

19-042

§19.42

Modifying References to Ancillary Agreements in Original Agreement

19-044

§19.44

Representations and Warranties

19-046

§19.46

Effect of Original Agreement and Amendment

19-048

§19.48

Postexecution Filing or Recording Required

19-049

§19.49

Postexecution Notices Required

19-050

§19.50

Other General Provisions

19-051

§19.51

Notice of Unilateral Amendment

19-056

§19.56

Sample Provisions for Occupation of Additional Leased Space

19-058

§19.58

Sample Addendum to Stock Purchase Agreement Adding Additional Investors

CH20

Chapter 20

Letters of Intent

20-001

§20.1

CHECKLIST: LETTERS OF INTENT

20-030

§20.30

Introductory Provision Stating Binding Effect of Letter of Intent

20-031

§20.31

Method for Supplying Missing Terms if Definitive Agreement Not Signed

20-032

§20.32

Concluding Provision Stating Binding Effect of Letter of Intent

20-032B

§20.32B

Introductory Provision Stating Letter Binding Until Terminated or Until Definitive Agreement Executed

20-032C

§20.32C

Termination Clause

20-034

§20.34

Introductory Provision Stating Intent Not to be Legally Bound

20-035

§20.35

Concluding Provision Reiterating Intent Not to be Legally Bound

20-037

§20.37

Introductory Provision Stating Partially Binding Effect of Letter of Intent

20-038

§20.38

Concluding Provision Reiterating Intent to be Bound as to Specified Provisions Only

20-040

§20.40

Introductory Provision Binding Parties to Negotiate

20-041

§20.41

Concluding Provision Reiterating Intent to Negotiate in Good Faith Only

20-042

§20.42

Termination of Negotiations

20-045

§20.45

“No-Shop” Provision

20-046

§20.46

Expense Reimbursement and “Break-Up Fee” Provision

20-047

§20.47

“Topping Fees” Provision

20-048

§20.48

Confidentiality Provision

20-049

§20.49

“Fiduciary-Out” Provision

20-051

§20.51

Letter of Intent to Lend

20-053

§20.53

Introduction to Nonbinding Venture Capital Term Sheet

20-054

§20.54

Rights, Preferences, Privileges, and Restrictions of Preferred Stock

20-055

§20.55

Information Rights

20-056

§20.56

Registration Rights

20-057

§20.57

Board Representation

20-058

§20.58

Reserved Employee Shares

20-059

§20.59

Stock Purchase Agreement

20-060

§20.60

Expenses

20-061

§20.61

Finder’s Fee

CH21

Chapter 21

Promissory Notes

21-001

§21.1

CHECKLIST: PROMISSORY NOTES

21-005

§21.5

Promise to Pay Principal Under Single Draw

21-006

§21.6

Promise to Pay Principal Under Multiple Draw or Revolving Note

21-007

§21.7

Maturity Date

21-008

§21.8

Fixed Interest Rate

21-010

§21.10

Variable Interest Rate

21-011

§21.11

Interest Calculation

21-013

§21.13

General Terms of Payment

21-014

§21.14

Interest Only

21-015

§21.15

Installments of Principal

21-016

§21.16

Payment-in-Kind Interest

21-017

§21.17

Postdefault Interest Rate

21-018

§21.18

Maximum Interest Rate Provisions

21-020

§21.20

Prepayment Permitted Without Premium

21-021

§21.21

Prepayment Premium Required

21-022

§21.22

Prepayment Prohibited

21-023

§21.23

Events of Default; Holder’s Waivers; Remedies Cumulative

21-024A

§21.24A

Acceleration Clause

21-026

§21.26

Late Payment Fee

21-027

§21.27

Security for Note

21-028

§21.28

Nonrecourse Agreement

21-029

§21.29

Maker’s Waivers

21-030

§21.30

Purpose of Loan

21-031

§21.31

Time of the Essence

21-031B

§21.31B

Attorney Fees

21-033B

§21.33B

Loss or Destruction of Note

21-044

§21.44

Compliance With Usury Laws

21-044B

§21.44B

Allonge

CH22

Chapter 22

Guaranties

22-001

§22.1

CHECKLIST: GUARANTIES

22-011

§22.11

Introduction for Use Without Recitals

22-012

§22.12

Introduction for Use With Recitals

22-013

§22.13

Recitals for Guaranty of Debt to Bank

22-014

§22.14

Recitals for Guaranty of Lease

22-015

§22.15

Guaranty of Payment

22-016

§22.16

Guaranty of Performance

22-017

§22.17

Unlimited Liability

22-018

§22.18

Limited Liability

22-019

§22.19

Security

22-020

§22.20

Rights of Setoff

22-021

§22.21

Subordination

22-022

§22.22

Guarantor’s Representations and Warranties

22-024

§22.24

Authorizations and Waivers Relating to Actions of Creditor

22-025A

§22.25A

Waiver Language from CC §2856

22-026

§22.26

Gradsky Waiver

22-027

§22.27

Deprizio Waiver

22-028

§22.28

No Subrogation

22-029

§22.29

Joint and Several Obligation

22-030

§22.30

Authority of Signatory

22-031

§22.31

Construction

22-033

§22.33

FORM: SAMPLE CONTINUING GUARANTY

CH23

Chapter 23

Powers of Attorney

23-001

§23.1

CHECKLIST: POWERS OF ATTORNEY

23-008

§23.8

Sample Power of Attorney Coupled With an Interest

23-019

§23.19

Statutory Short Form Power of Attorney

23-020

§23.20

Special Power of Attorney (Sale of Real Property)

23-022

§23.22

Signature by Attorney-in-Fact

23-024

§23.24

Revocation of Power of Attorney

23-025

§23.25

Notice of Revocation of Power of Attorney

CH24

Chapter 24

Drafting Intellectual Property Licenses

24-006

§24.6

Sample Introductory Clause

24-008

§24.8

Sample Recitals

24-011

§24.11

Sample Intellectual Property Definitions

24-013

§24.13

Sample Definition of Territory

24-015

§24.15

Sample Definition of Field of Use

24-017

§24.17

Sample Definition of Affiliate

24-019

§24.19

Sample Definition of Net Selling Price

24-021

§24.21

Sample Definitions of Licensed Products

24-023

§24.23

Sample Granting Clauses

24-028

§24.28

Sample Up-Front Payment Clause

24-030

§24.30

Sample Minimum Royalty Clauses

24-033

§24.33

Sample Royalty Rate Provisions

24-038

§24.38

Sample Provision for Payment in U.S. Dollars

24-040

§24.40

Sample Provision for Payment of Taxes

24-042

§24.42

Sample Royalty Rate Reduction

24-046

§24.46

Sample Notice Provisions

24-050

§24.50

Sample Enforcement Provisions

24-054

§24.54

Sample Warranty of Title and Authority

24-056

§24.56

Sample Disclaimers of Warranty

24-057

§24.57

Sample Warranty of Noninfringement

24-059

§24.59

Sample Indemnification Provisions

24-061

§24.61

Sample Marking Provisions

24-066

§24.66

Sample Recordkeeping and Audit Provisions

24-068

§24.68

Sample Nonassignment Clauses

24-070

§24.70

Sample Sublicensing Provisions

24-072

§24.72

Sample Prohibitions on Challenges

24-074

§24.74

Sample “Most Favored Nation” Provisions

24-077

§24.77

Sample Termination Provisions

24-080

§24.80

Termination of Royalty on Invalidity

24-085

§24.85

Sample Provisions for Maintenance

24-088

§24.88

Sample Provisions Regarding Improvements

24-094

§24.94

Sample Confidentiality Clause

24-096

§24.96

Sample Provision for Licensor’s Disclosure of Information to Licensee

24-098

§24.98

Sample Quality Control Provisions

24-100

§24.100

Sample Acknowledgement of Licensor’s Rights

24-105

§24.105

Sample Source Code Escrow Provision

 

Selected Developments

March 2018 Update

An attorney drafting an agreement has an obligation to represent the client zealously and to prepare a contract that maximizes the client’s legal and business advantages consistent with the agreement of the parties. But does this mean that an attorney may include provisions that are extremely onerous to the opposing party, or must the attorney try to prepare a contract that is fair and balanced on both sides? The inclusion of a patently illegal or unconstitutional provision is improper (Cal Rules of Prof Cond 3–210), but most one-sided or “hard ball” provisions that a client may want to include fall into a gray area that does not equate to unethical conduct on the part of the client’s attorney. For a discussion of the analyses employed by California courts to determine whether contract terms are unconscionable, see Baltazar v Forever 21, Inc. (2016) 62 C4th 1237, 1243; Sanchez v Valencia Holding Co., LLC (2015) 61 C4th 899, 910. See §2.19.

It is possible for an entire agreement to be held unenforceable based on unconscionability. A court will first try to sever unconscionable provisions. See, e.g., Farrar v Direct Commerce, Inc. (2017) 9 CA5th 1257 (unconscionable clause in arbitration agreement severable); Serafin v Balco Props. Ltd., LLC (2015) 235 CA4th 165, 184 (unconscionable attorney fee provision in arbitration agreement severed; balance of agreement enforced). However, an agreement may contain so many unconscionable provisions that it cannot be made enforceable by severing them. In that situation, the entire agreement is unenforceable. See, e.g., Carbajal v CWPSC, Inc. (2016) 245 CA4th 227, 254 (three substantively unconscionable terms in arbitration clause supported denying severance); Carlson v Home Team Pest Defense, Inc. (2015) 239 CA4th 619, 635 (multiple substantively unconscionable terms not severable). See §§2.20, 3.14.

A contract of adhesion is a standardized form contract entered into by parties of unequal bargaining power, with the weaker party given no opportunity to negotiate terms; that is, the weaker party has only the choice of accepting or rejecting the contract. Penilla v Westmont Corp. (2016) 3 CA5th 205, 214; Pinela v Neiman Marcus Group, Inc. (2015) 238 CA4th 227, 242. See §3.13.

To be unenforceable by reason of unconscionability, the clause or clauses at issue must have been both procedurally unconscionable and substantively unconscionable at the time the contract was made. A contract is substantively unconscionable if the terms of the contract are, without justification, too harsh or one-sided or reallocate the risks of the bargain in an objectively unreasonable or unexpected manner. See Baltazar v Forever 21, Inc. (2016) 62 C4th 1237, 1243. See §3.14A.

Having multiple obligors can benefit a creditor in a bankruptcy context. The debt of a contractual co-obligor is not extinguished by another co-obligor’s prebankruptcy payment to a creditor that is later determined to be a bankruptcy preference. Coles v Glaser (2016) 2 CA5th 384. See §5.10.

In Western Surety Co. v La Cumbre Office Partners, LLC (2017) 8 CA5th 125, the court ruled that the fact that an individual signing an agreement was mistakenly designated as the managing member of an LLC, rather than as the sole manager of the LLC’s sole manager, did not invalidate the agreement for lack of authority. Nevertheless, it is important to correctly identify the capacity in which an individual signs an agreement, because a mistake in designating capacity could result in invalidity of the agreement or other unintended consequences under some circumstances. See §5.11.

In general, retroactive dates should be avoided. If certain results hinge on the date an agreement is entered into (e.g., tax consequences), incorporating a date earlier than the date of signing could be unethical, fraudulent, or even illegal. The backdating of stock option grants, although once a common practice, can entail violations of tax and securities laws and has erupted into major public scandals in recent years. See Eth, White & Call, Taking Stock: Backdated Options and What You Need to Know, 22 CEB Cal Bus L Prac 29 (Spring 2007). However, in Raceway Ford Cases (2016) 2 C5th 161, the California Supreme Court held that backdating the second and subsequent contracts that renegotiated the terms of the sale and financing of a vehicle to the original date of sale did not violate the Automobile Sales Finance Act (ASFA) (CC §§2981–2984.6), Raceway should be viewed in the specific context of the ASFA and the facts of that case, rather than as validating a general practice of backdating. See §5.15.

Termination of an agreement also can limit statutory rights and obligations otherwise applicable to the parties. An employer was held not liable for disparate treatment discrimination under the Fair Employment and Housing Act (FEHA) (Govt C §§12900–12996) when the employer declined to grant an employee’s request for reinstatement after a voluntary, uncoerced resignation. The employee claimed she had resigned due to an altered mental state caused by an adverse drug reaction. Featherstone v Southern Cal. Permanente Med. Group (2017) 10 CA5th 1150. See §6.11.

Ambiguities are generally construed against the contract drafter. CC §1654; Sandquist v Lebo Automotive, Inc. (2016) 1 C5th 233, 248. See §7.2.

In Robinson v U-Haul Co. of Cal. (2016) 4 CA5th 304, the court held that the inclusion, and attempted enforcement, of an unenforceable noncompete covenant in an agreement subject to California law was a violation of the Unfair Competition Law (UCL) (Bus & P C §17200), even though the covenant also included a statement that it was “void where prohibited.” See §§9.10–9.10A.

Express indemnity is a contract by which one party engages to save another from a legal consequence of the conduct of another party, or some other person. CC §2772. If the parties have expressly contracted to indemnify, the extent of the duty to so indemnify is established by the contract, not by relying on the doctrine of equitable indemnity. Oltmans Constr. Co. v Bayside Interiors, Inc. (2017) 10 CA5th 355, 361. See §11.15.

A general indemnity agreement does not provide indemnification for the indemnitee’s active negligence, unless the circumstances of the case and the language of the agreement evince a different intent by the parties. Oltmans Constr. Co. v Bayside Interiors, Inc. (2017) 10 CA5th 355, 362. See §11.17.

Exculpatory provisions, including those limiting liabilities or warranties, and releases are not favored by the courts. As with indemnity agreements, terms are strictly construed against the released party, especially if the released party drafted the provision. See Hardwick v Wilcox (2017) 11 CA5th 975 (borrower’s execution of general release in forbearance agreement did not constitute waiver of usury claims). See §11.42.

The primary source of information—and essential starting point—for California lawyers regarding preparation of third party closing opinions on behalf of California limited liability companies or partnerships is the following publication: State Bar of California, Business Law Section, Partnerships and Limited Liability Companies Committee and Opinions Committee, Third-Party Closing Opinions: Limited Liability Companies and Partnerships (Dec. 2016), available from the Business Law Section on the State Bar website at http://www.calbar.ca.gov/Attorneys/Sections/Business-Law/Publications/Opinion-Resources/Third-Party-Closing-Opinions-California-Limited-Liability-Companies-and-Partnerships. The report includes a sample third party legal opinion to be rendered on behalf of a limited liability company See §12.2.

In Robinson v U-Haul Co. of Cal. (2016) 4 CA5th 304, the court of appeal affirmed U-Haul’s $800,000 liability for attorney fees, for having intentionally included an unenforceable noncompetition clause in its dealer agreements. See §15.3.

The Commercial Code does not define “unconscionability.” The doctrine can be used to invalidate a contract provision or even an entire contract. Carbajal v CWPSC, Inc. (2016) 245 CA4th 227, 242; Abramson v Juniper Networks, Inc. (2004) 115 CA4th 638, 655. It is a common law doctrine that has been codified in California in CC §1670.5. Unconscionability is often described as “an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.” Baltazar v Forever 21, Inc. (2016) 62 C4th 1237, 1243 (citations omitted). A finding of unconscionability involves a two-step analysis. To be unenforceable by reason of unconscionability, the clause at issue must have been both procedurally unconscionable and substantively unconscionable at the time the contract was made. Baltazar, 62 C4th at 1243; Sanchez v Valencia Holding Co., LLC (2015) 61 C4th 899, 910. Although both procedural and substantive unconscionability must be present for a court to find a provision unconscionable, they need not be present in the same degree. “[T]he more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.” Sanchez, 61 C4th at 910. The procedural element may be established if there was an inequality of bargaining power that resulted in no real negotiation and an absence of meaningful choice, or if the party seeking to enforce the contract used a long, wordy printed form in which the disputed provisions were buried; the substantive element may be met by inclusion of objectively unreasonable or unexpected provisions. See §15.36.

Historically, courts would not enforce arbitration provisions if to do so would invalidate a statutory scheme such as the Consumers Legal Remedies Act (CLRA) (CC §§1750–1756) or the Unfair Competition Law (UCL) (Bus & P C §§17200–17209). California state courts continue to so hold. See McGill v Citibank, N.A. (2017) 2 C5th 945, 956 (“[a]greements to arbitrate claims for public injunctive relief under the CLRA, the UCL, or the false advertising law are not enforceable in California.”). See §16.24.

Labor Code §925 provides that employers cannot require, as a condition of employment, employees who primarily reside and work in California to agree to provisions that would require the employees to adjudicate claims arising in California outside of California, or more generally, that would deprive the employees of the substantive protection of California law with respect to controversies arising in California. See §16.26, 16.62.

In federal court, federal law determines whether the right to a jury trial may be waived by an advance agreement. In County of Orange v United States District Court (9th Cir 2015) 784 F3d 520, 524, the Ninth Circuit held that principles of federalism require federal courts sitting in diversity to import, as the federal rule, state law governing jury trial waivers in cases where state law is even more protective than federal law of the jury trial right. The court held that the parties’ contractual jury trial waiver was unenforceable. See §16.58.

It may be advantageous to specify the location where disputes may be resolved, and the modern trend favors the enforceability of forum selection clauses. Tompkins v 23andMe, Inc. (9th Cir 2016) 840 F3d 1016, 1027. See §16.62.

A buyer is not normally bound by statements on an invoice that are not a part of the original agreement. Hebberd-Kulow Enters., Inc. v Kelomar, Inc. (2013) 218 CA4th 272 (standard interest provision on invoice not part of parties’ contract). Even if the seller expressly conditions acceptance of an order on the buyer’s assent to new terms introduced by those statements, the buyer is not bound if the buyer does not assent to them. Conexant Sys., Inc. v Zykronix, Inc. (CD Cal, July 11, 2016, No. 8:16-CV-00560-CAS(AGRx)) 2016 US Dist Lexis 93203 (buyer not bound by arbitration clause on seller’s Order Acknowledgment form). See §17.5.

A long form of Consent of Spouse or Domestic Partner to Limited Liability Company Operating Agreement has been added in §18.29A.

In Mikhak v University of Phoenix (ND Cal, June 21, 2016, No. C16-00901 CRB) 2016 US Dist Lexis 80705, the court held that clicking “Accept” on a web page demonstrated an intent to conduct the transaction by electronic means and constituted a valid expression of assent to an arbitration agreement. See §18.44.

In Nghiem v Dick’s Sporting Goods, Inc. (CD Cal, July 5, 2016, No. 16-00097) 2016 US Dist Lexis 89429, the court held that, for terms that appeared at the bottom in a website footer within a grouping of 27 other hyperlinks arranged in four columns, placement of the hyperlink to those terms was not conspicuous enough alone to put consumers on inquiry notice. See also Long v Provide Commerce, Inc. (2016) 245 CA4th 855 (hyperlink was displayed in light green font on website’s lime green background, and was among 14 other hyperlinks of same color, font, and size). See §18A.4.

In Tompkins v 23andMe, Inc. (9th Cir 2016) 840 F3d 1016, the court upheld the enforceability of browse-wrap terms because, during the account creation and registration processes, users were required to click a box near the hyperlink to the terms of service to indicate their acceptance of those terms. See §18A.4.

A guaranty can be considered a “sham” guaranty if the guarantor is otherwise liable on the guaranteed obligations by reason of a “unity of interest” or based on a “single enterprise” theory. See LSREF2 Clover Prop. 4, LLC v Festival Retail Fund I, LP (2016) 3 CA5th 1067,1081. See §22.2.

A new Chapter 24 has been added, which presents the basics of drafting licensing agreements for intellectual property and includes many sample clauses for licensing agreements. The chapter discusses the terms that are found in most license agreements for intellectual property and the terms used for license agreements that are specific to the type of property being licensed. See chap 24.

About the Authors

David C. Burgess, B.A. 1978, Hamilton College; J.D. 1981, Stanford University. Mr. Burgess, of the Business Law Group, practices in San Jose; he is the author of chapters 5, 6, and 8.

George S. Cabot, B.A. 1975, Michigan State University; J.D. 1982, Wayne State University; L.L.M. in Taxation, 1987, University of San Diego. Mr. Cabot, of the law firm of Morgan, Miller & Blair, practices in Walnut Creek; he is the author of chapter 17.

Cynthia Caldeira, B.A. 1977, University of California (Irvine); J.D. 1981, University of California (Berkeley). Ms. Caldeira, of the firm of Sinsheimer, Schiebelhut & Baggett, practices in San Luis Obispo; she is the author of chapter 11.

James F. Fotenos, A.B. 1968, Stanford University; J.D. 1971, Stanford School of Law; M.B.A. 1971, Stanford Business School. Mr. Fotenos, of Greene Radovsky Maloney Share & Hennigh LLP, practices in San Francisco; he is the author of chapter 12.

Alexander Fried, A.B. 1977, University of California (Los Angeles); J.D. 1980, Harvard University. Mr. Fried practices in Encino; he is coauthor of chapters 13 and 14.

Jonathan Golden, B.A. 1980, Colgate University; J.D. 1984, Pepperdine University. Mr. Golden, formerly of the law firm Grayson, Givner, Booke, Silver & Wolfe, is now located in Marlton, New Jersey, and is coauthor of chapters 13 and 14.

Barry A. Graynor, B.A. summa cum laude 1975, University of California (Los Angeles); J.D. cum laude, 1979, Harvard University. Mr. Graynor is special counsel at Cooley Godward LLP in San Francisco, and practices in the areas of credit finance, secured transactions, and equipment leasing; he is the author of chapter 15.

Michael A. Grayson, B.S. 1964 and J.D. 1967, University of California (Los Angeles). Mr. Grayson, of the law firm of Lewitt, Hackman, Hoefflin, Shapiro, Marshall, Harlan & Grayson, practices in Encino; he is coauthor of chapters 13 and 14.

Alan S. Gutterman, A.B. 1977 and J.D. 1981, University of California (Berkeley). Mr. Gutterman practices in Oakland; he is the author of chapter 19.

Victor Hsu, A.B. 1981, Princeton University; J.D. 1987, Yale University. Mr. Hsu, of Fulbright & Jaworski LLP, practices in Los Angeles; he is coauthor of chapters 11, 14, and 15.

Palmer Brown Madden, B. A. 1985, University of California, (Berkeley); J.D. 1989, University of Michigan Law School. Mr. Madden is a mediator based in the East Bay; he is coauthor of chapter 16.

Clara Ruyan Martin, B.A. 1968, Stanford University; J.D. 1973, University of California (Berkeley). Ms. Martin practices in Los Angeles, specializing in the structuring, drafting, negotiation, and implementation of complex corporate and technology transactions; she is the author of chapters 18A and 24.

Steven L. Morgan, B.S. 1982, University of Colorado (Boulder); J.D. 1986, Pepperdine University. Mr. Morgan, of the law firm of Miller, Ewald, Monson, Hoshaw & Schechter, practices in San Diego; he is the author of chapter 16.

Peter S. Muñoz, B.A. 1968 and M.A. 1970, University of California (Berkeley); J.D. 1975, University of California, Berkeley, Boalt Hall School of Law. Mr. Muñoz, of the law firm ReedSmith, practices in San Francisco; he is coauthor of chapter 21.

Christopher E. Nordquist, B.A. 1987, St. Olaf College; J.D. 1990, University of California (Berkeley). Mr. Nordquist, of Barclays Global Investors, N.A., practices in San Francisco; he is coauthor of chapter 20.

Brian J. Philpott, B.S. 2002, Oklahoma State University; J.D. 2005, Pepperdine School of Law. Mr. Philpott, of Koppel, Patrick, Heybl & Philpott, PLC, is coauthor of chapters 2, 17, and 18.

Benjamin A. Ram, B.S. 1969, Cornell University; J.D. 1993, Whittier Law School. Mr. Ram is a project manager for Microsoft, Inc.; he is coauthor of chapter 7.

Dr. Michael J. Ram, B.S. 1962, Lafayette College; M.S. 1963, and D.Sc. 1966, New Jersey Institute of Technology; J.D. 1972, Seton Hall University Law School. Dr. Ram, of the firm of Koppel, Patrick, Heybl & Dawson, practices in Thousand Oaks; he is coauthor of chapter 7.

Ingrid Rechtin, B.A. 2000, Stanford University; J.D. 2003, Harvard Law School. Ms. Rechtin, of Covington & Burling LLP, practices in San Francisco; she is coauthor of chapter 10.

Jeffrey G. Sheldon, J.D., summa cum laude, Loyola Law School, Los Angeles; B.S., chemical engineering, Carnegie Institute of Technology; and M.S., biomedical engineering, University of Strathclyde, Glasgow, Scotland. His studies in Scotland followed his receipt of a Marshall Scholarship. Mr. Sheldon is a partner in Cislo & Thomas LLP, Los Angeles, and was the founding partner of Sheldon Mak & Anderson PC, Pasadena. Mr. Sheldon is the author of chapter 24.

Ronald H. Star, B.A. 1976, Harvard College; J.D. 1980, Harvard Law School; M.B.A. 1980, Harvard Business School. Mr. Star, of the firm of Howard, Rice, Nemerovski, Canady, Robertson, Falk & Rabkin, practices in San Francisco; he is coauthor of chapter 20.

Pauline M. Stevens, B.A. 1969, Vassar College; J.D. 1972, University of Pennsylvania Law School. Ms. Stevens, of Allen Matkins, practices in Los Angeles. She is coauthor of chapter 22.

Vincent W. Thorpe, B.S. 1955 and J.D. 1959, Loyola Marymount University. Mr. Thorpe, of Thorpe & Thorpe, practices in Los Angeles; he is the author of chapters 9 and 10.

Daniel E. Titelbaum, A.B. 1968, University of California (Berkeley); J.D. 1973, Harvard University. Mr. Titelbaum, of the firm of Heller, Ehrman, White & McAuliffe, practices in San Francisco; he assisted Thomas E. Tyner in preparation of chapters 1 and 2.

Thomas E. Tyner, B.A. 1977, University of Southern California; J.D. 1980, University of Southern California Law Center. Mr. Tyner, former Senior Counsel of Bank of America NT & SA, Legal Department, is Regional Counsel for The Trust for Public Land in Seattle, Washington; he is the author of chapters 1 and 2.

Carolyn Owens Vogt, B.A. 1966, University of California (Berkeley); J.D. 1979, Hastings College of the Law. Ms. Vogt, Senior Vice President and General Counsel of North American Mortgage Company, practices in Santa Rosa; she is the author of chapter 18.

Edith R. Warkentine, A.B. 1971, University of California (Berkeley); J.D. 1975, University of California (Davis). Ms. Warkentine is a professor at Western State University College of Law in Fullerton; she is the author of chapters 21, 22, and 23, and also assisted in preparation of chapter 13.

Keith T. Zimmet, B.A. California State University (Northridge); J.D., University of Southern California Law School. Mr. Zimmet of Lewitt, Hackman, Hoefflin, Shapiro, Marshall, Harlan & Grayson, practices in Encino; he assisted in preparation of chapter 14.

About the 2018 Update Authors

David C. Burgess is the 2018 update author for chapters 5, 6, and 8. See his biography in the About the Authors section.

Corey A. Donaldson, B.S. 2008, Arizona State University; J.D. 2011, University of California (Los Angeles) School of Law. Mr. Donaldson, of Koppel, Patrick, Heybl & Philpott, PLC, practices in Westlake Village, where he represents clients in patent matters and trademark issues such as international appellate litigation and infringing product takedown procedures. He is the 2018 update author for chapter 19.

Victor Hsu is the 2018 update author for chapters 11 and 14. See his biography in the About the Authors section.

Brian J. Philpott is the 2018 update author for chapters 2, 17, and 18. See his biography in the About the Authors section.

Ingrid Rechtin is the 2018 update author for chapters 9 and 10. See her biography in the About the Authors section.

Pauline M. Stevens is the 2018 update author for chapter 22. See her biography in the About the Authors section.

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PRACTICE AREA Business Law
PRODUCT GROUP Publication
Products specifications
PRACTICE AREA Business Law
PRODUCT GROUP Publication