Lawyer-blogger Jay Parkhurst has some good comments about the problems that can arise when a customer tries to make a SaaS / Web services vendor use the customer’s standard master services agreement form.

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I’ve sometimes written into contracts that multiple non-material breaches of a contract, even if cured, can add up to a material breach. A UK court held that this was the case in a lawsuit by British Gas against global consulting-firm Accenture (formerly Andersen Consulting) over alleged defects in a customer-billing system. See this article by Stuart McGinn of the respected London law firm Bird & Bird.

Evidently the contract defined Fundamental Defect using and/or language that allowed for aggregating multiple breaches in this way:

a fundamental breach of Clauses 15.2.1 and/or 15.2.2 and/or 15.1.1(i) [the warranties] … which causes a severe adverse effect on the British Gas Business; [Emphasis added.]

In hindsight, it would have been better for Accenture to use just “or” instead of and/or.

Also of interest was the court’s holding that money paid by British Gas’s parent company to its own customers to resolve billing problems were not ‘consequential damages’ – see these comments on that subject.

For more information on this case, see:

• British Gas sues Accenture over billing ‘shambles’ – The Sunday Times, May 11, 2008
• Aggregating Fundamentals – Society for Computers and Law, Nov. 13, 2009
• GB Gas Holdings v Accenture – Jones Day, Jan. 2010

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Something else we discussed in class yesterday: Suppose a customer company has a lot of bargaining power. And suppose the customer uses that power to force a vendor to make some tough concessions in a contract negotiation.

The customer’s negotiators might well regard those concessions as an entitlement: We’re the big dog; of course we get what we want.

But they should recall that ultimately, all contracts have to be performed by people. And people will almost certainly be influenced, not just by the words of the contract, but by their employer’s then-current interests — and by their own personal interests as well.

If the vendor’s people feel they’ve been crushed by the customer, they’re unlikely to harbor warm and fuzzy feelings for the customer. (This is at least doubly true if the contract later proves to be a train wreck for their company — most business people know that being associated with a train wreck is seldom good for anyone’s professional reputation.)

The vendor’s people are not likely to be motivated to go above and beyond for that customer. They may be tempted to “work to rule,” to use an expression from the labor-relations world — to do just what the contract requres, and no more. That does neither party any favors.

The reverse can be true when the shoe’s on the other foot. Suppose the customer thinks that it’s been taken advantage of by a vendor. When it comes time for renewals, or repeat business, or recommendations to other companies, that vendor probably won’t have a lot of brownie points with the customer’s people.

The lesson for contract drafters and negotiators: Even if you’ve got the power to impose a killer contract on the other side, think twice before you do so. You could be setting up your client to have to deal later with a wounded tiger.

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During a discussion yesterday in my contract-drafting class, I pointed out that —

• Contracts are not computer programs that will be carried out, exactly as written, by mindless, disinterested robots. Quite the opposite: contracts try to encourage human beings. We generally aren’t mindless, and often we’re anything but disinterested;
• Legal obligations are just one type of human motivator in the toolkit. Steven Weatherley gets it right in his groundbreaking Pathclearer article: Legal obligations are a blunt instrument: They can be difficult, expensive, uncertain, and time-consuming to enforce.

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I plan on spending some time in my contract-drafting class talking about this case:

• British Sky Broadcasting contracted with EDS to develop a customer relationship management (CRM) software system, and eventually filed suit when things didn’t go as planned.
• The judge concluded that EDS made fraudulent misrepresentations when one of its senior UK executives lied to Sky about EDS’s analysis of the amount of elapsed time needed to complete the initial delivery and go-live of the system (see ¶ 2331 and ¶¶ 194-196.)
• The judge also concluded that during subsequent talks to modify the contract, EDS made misstatements that didn’t rise to the level of fraud, but still qualified as negligent misrepresentations (see ¶ 2336).
• One clause in the contract capped the potential damage award at £30 million — but by its terms, that limitation did not apply to fraudulent misrepresentations, and the judge held that the limitation didn’t apply to negligent misrepresentations either (see ¶¶ 372-389).

After the decision was handed down, Sky announced that it expected the damage award to be at least £200 million. Had it not been for the misrepresentation claims, the pure-contract damages presumably would have been capped at £30 million. The difference works out to about US$270 million.

One of the most interesting aspect of the judge’s opinion, it seems to me, is its detailed exposition of the facts, which illustrate the ’sausage factory’ by which technology deals sometimes get made — and how even just one vendor representative can make a deal go terribly wrong for his employer.

Hat tip: ContractsProf blog.

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I’ve added a minor-league version of a so-called Himalaya clause to the TATE Compendium. It’s intended to protect only individuals, not corporate subcontractors or other entities like regular such clauses, as explained below.

x.x A Himalaya clause applies in favor of the protected individuals, defined as any and all employees, servants, agents, or other individuals of <each party> (the protected party) whose services are utilized in the protected party’s performance of its obligations or exercise of its rights under this Agreement.

(a) No protected individual will be liable to another party, nor to any individual or organization claiming under or through the other party, for any loss, damage or delay arising or resulting (directly or indirectly) from such services.

(b) Each protected individual is to benefit from every protective provision in this Agreement that favors the protected party, as though that provision were expressly for the protected individual’s benefit. To that extent (only), in entering into this Agreement the protected party is deemed acting as agent or trustee on behalf of, and for the benefit of, each protected individual.

(e) Protective provisions include, for example, provisions (if any) concerning limitation of liability; forum selection; choice of law; attorneys’ fees; and arbitration and other dispute-resolution procedures.

Actual Himalaya clauses are typically found in bills of lading that establish contract terms for the carriage of goods. They take their name from an English case about a vessel named The Himalaya. They’re intended to prevent not only a carrier’s employees, etc., but also its subcontractors, from being sued, possibly in some far-off jurisdiction, and to give them the benefits of forum-selection clauses and the like. See generally the U.S. Supreme Court opinion in Norfolk Southern Railway Co. v. James N Kirby Pty Ltd, 542 U.S. 935 (2004) (reversing appellate court decision: Himalaya-clause protections applied to railroad carrying goods on final leg of voyage as well as to ocean carrier); see also the Wikipedia article on Himalaya clauses.

In some jurisdictions, for non-maritime contracts, the enforceability of the clause above might be open to question (e.g., on privity-of-contract grounds). In many non-maritime contracts it might well be overkill.

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This afternoon I posted version BAILEY, an easier-to-edit revision of the TATE Compendium community library of annotated technology contract clauses — a great framework for creating a starter draft of an actual contract — along with a Drafter’s Guide.

• I re-edited the commentary into Microsoft Word comments. The user feedback I was getting indicated that: 1) many users (but not all) preferred Word comments over in-line commentary. In large part, this was because, when using the Compendium as a starter draft, it’s easier to mass-delete all the Word comments with a couple of mouse clicks than to individually delete each in-line annotation.
• To make it easier to scan the document, I moved a number of subclauses into their own separate clauses for greater visibility.
• This version contains a number of new clauses, while others have been edited.
• Each clause now has a unique identifier in fine print — later on this should help with automating part of initial contract review.

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Introduction

This post is based in part on comments made by the panelists during a one-hour Negotiations Community of Interest “ask the expert” conference call this past Tuesday, October 20, presented by the International Association for Contract and Commercial Management (IACCM).

During the call, we talked about a few selected excerpts from the TATE Compendium, with my co-panelists role-playing as counsel for a vendor, a reseller, and a customer, respectively, and with me as moderator and commentator.

(As planned, we ran out of time before running out of discussion material in the excerpts.)

Territory and term

Some of the most important business points typically negotiated in a reseller agreement are the territory, the exclusivity, and the term.

A vendor might be willing to grant a comparatively-long term to give the reseller time to do sales- and marketing activities to build up the territory.

On the other hand, the vendor may want a short term and a comparatively-small exclusive territory (if any exclusivity at all), so as to preserve its flexibility —

• to make sales itself in the territory (which of course may cause the reseller to be concerned about being undercut by the vendor)
• to “hire” other resellers in the territory if the first reseller doesn’t work out
• to grant exclusivity in other territories to other resellers (the larger the reseller’s territory, the harder that is)

A reseller, in contrast, will normally want a longer term, a bigger territory, and exclusivity —

• in the hope of making more money during the time available in the term
• so that it doesn’t make a significant investment in training, salaries, etc., to sell the vendor’s product or service, only to have the vendor yank the territory at the end of a short term. (That may be a particular concern for the reseller if the product or service is a new one that has yet to be proven in the marketplace and doesn’t “sell itself.”)

Customers often don’t especially like exclusive-reseller arrangements, because they want alternative sources of supply — not least so they can play the alternative sources off against one another).

Training

Some reseller agreements require the reseller to send people to be trained in the provider’s products and services.

It’s usually uncontroversial for the reseller to pay its personnel’s travel and lodging expenses.

Whether the reseller should pay a training fee to the provider, to help cover the provider’s internal training costs, will likely be influenced by who brings what value to the table:

• A reseller with an established track record could argue that the provider should bear its own internal costs of providing training to reseller personnel as an investment in potential future sales.
• For a less-experienced reseller, on the other hand, the provider could argue that it has no guarantees whether the reseller will actually be able to sell anything, therefore it’s the reseller that should make the investment in training its people.
• The arguments can be reversed, of course, if the provider does not yet have much of a track record but the reseller does.

Sales targets

The bigger the territory the longer the initial term, and the more-proved the product or service, the higher the vendor will want the minimum sales targets to be.

The vendor may also want to have the targets be increased by X percent year-over-year.

If the reseller fails to hit its targets, the vendor may want to be able to “fire” the reseller so that it can bring in someone else.

The reseller, however, may take the view that its sales problems were due to problems with the product or service.

One possible compromise is “progressive discipline” — IF: The reseller fails to make its targets (or to pay the vendor an equivalent amount in cash); THEN: Not necessarily in the following order:

• the reseller’s discount(s) get reduced
• its exclusivity goes away
• the product line available for resale is cut back

How often should sales be measured against targets — annually? Quarterly? Monthly? That may depend largely on the length of the sales cycle for the product or service — for a product with a six- to nine-month sales cycle, it might not make sense to measure the reseller’s progress every month, at least not initially.

Resale restrictions

Vendors will prefer not to see a secondary market develop (a so-called gray market), which could happen if Reseller sells Vendor’s products, not to end-customers, but to other resellers or distributors. Vendors may be concerned about, for example:

• list-price undercutting
• product quality
• customer support obligations
• warranty obligations
• brand reputation
• legal liability, especially where regulated products are involved such as pharmaceuticals and medical supplies

Depending on the jurisdiction, though, Vendor may find it challenging or even impossible to stop certain secondary markets from developing.

For example, in the European Union, parallel imports between EU member states are generally legal — see this 2004 European Commission press release explaining Commission policy on parallel imports. On the other hand, imports into the U.S. of trademarked goods that are materially different than the trademarked goods offered in the U.S. market, without the trademark owner’s permission, are illegal under 19 USC § 337 — see this October 2009 Steptoe & Johnson memo.

Concerning antitrust implications of resale restrictions, see the Robert James memo cited above (scroll down to “Legal Principles”).

Franchise-law liabilities

[Added 2009-10-24] Providers entering into reseller- or distribution agreements should be careful not to become an “accidental franchisor,” for example by charging any kind of “fee” (a term that can encompass a lot of economic arrangements). Doing so can give rise to enormous complications and potential civil and/or criminal liability — see this useful overview by attorney John Tang.

Acknowledgements

Many thanks to the other panelists (listed in reverse alphabetical order, so as to strike a blow against end-of-the-alphabet discrimination):

• Tiffany Kemp of Devant Ltd.
• Bill Bosworth of Think! Inc.
• Jason Mark Anderman of WhichDraft.com

and to Katherine Kawamoto and Mark Heminway of IACCM.

The other panelists brought up a number of the above points during our discussion, but they don’t necessarily endorse or agree with the write-up in this blog posting, the responsibility for which is entirely mine.

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I stumbled upon a request for proposal (“RFP”) containing provisions that pretty much always increase the time, cost, and difficulty of getting a contract to signature, for both buyer and seller. Here are a few examples (all emphasis is mine).

RFP language: The basic Contract is attached to this RFP as Exhibit A. The boilerplate contract provisions/terms and conditions are not negotiable.

DCT comment: It would speed things up if the RFP were to indicate which specific provisions were not negotiable, instead of leaving the supplier’s lawyer guessing.

RFP language: Please note the attached basic contract is representative only.

DCT comment: It’s not clear what that’s supposed to mean.

RFP language: A response to this RFP is an offer to contract with [Customer] based upon the terms, conditions and specifications contained in this RFP. * * *

Respondent’s Response to this RFP, including any attachments thereto, will be incorporated as part of the executed contract to the extent the response does not conflict with this RFP. * * *

This RFP will become part of the terms and conditions of all responses and any contract awarded as a result of this RFP. … Any exceptions must be expressly agreed to by [Customer] in writing ….

DCT comment: Taken together, this language arguably means that, if a supplier submits a response to the RFP, the customer has the right to deem that the supplier has submitted an offer containing no exceptions, proposed modifications, etc. — and, by accepting that “offer,” to force the supplier do business on the original terms of the RFP.

Would a court enforce such an interpretation? I don’t think any of my clients would be interested in finding out.

A responding supplier might therefore do well to respond, “we are NOT responding to this RFP, and we do NOT offer to contract with [Customer] on its terms and conditions, because it contains unworkable requirements and terms and conditions — however, we would be willing to discuss doing business with [Customer] along generally the following lines ….”

RFP language: Respondents guarantee and warrant that their RFP responses will meet or exceed all specifications of this RFP.

DCT comment: Leaving aside the redundancy of “guarantee and warrant,” a more-workable approach would be to include the following yes-or-no question in the RFP: “Does your response meet or exceed all specifications of this RFP?” and then have the respondent certify the accuracy of that particular response.

RFP language: Notwithstanding any disclaimers in any RFP response or other Respondent document and notwithstanding any other provision of this RFP or the contract to the contrary, Respondent warrants and guarantees that all services shall meet all specifications of the executed contract and Work Orders, if any, including but not limited to this RFP.

DCT comment: It’s understandable that a customer would want to ensure that its RFP specifications found their way into the reps and warranties of any resulting contract. But these provisions violate the basic DRY (Don’t Repeat Yourself) principle of contract drafting.

A better approach would be to include the following yes-or-no question in the RFP, with the response to be certified as true by the supplier: “Does your response to this RFP indicate your willingness to warrant compliance with the specifications set forth in Schedule X, as stated there without modification?”

RFP language: Respondent may not assign this RFP and any resulting contract, in whole or in part, and may not assign any right or duty required under the RFP or awarded contract without the prior written consent of DOI.

DCT comment: A non-assignment clause like this is often a deal-killer if it doesn’t include a carve-out for strategic transactions such as sale of business assets. See this note as well as these sample clauses for more information.

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