In class yesterday we discussed a clause in a hypothetical escrow agreement that reads as follows:

The Escrow Agent is not liable for any loss arising [from its doing of certain things] if it relied in good faith upon its counsel’s advice. [Emphasis added.]

The “relied in good faith” language has such a nice, ethical ring to it, no?

But that phrase might well commit the escrow agent to a good deal of extra burden and expense in litigation.

Suppose that, in a lawsuit, the escrow agent invokes the contract clause, asserting that it relied in good faith on its counsel’s advice.

That would give the other side an excuse to go digging through the escrow agent’s documents, looking for any evidence that the decision might not have been taken in good faith.

The other side might insist that the escrow agent search for and produce copies of (among other things) all documents referring or relating to:

• the advice itself;
• the escrow agent’s consideration of the advice; and
• the escrow agent’s decision to act on the advice.

And of course, the other side might demand to depose — that is, interrogate at length, under oath and on the record — anyone who had anything to do with giving, considering, or acting on the advice of counsel — quite possibly including the counsel him- or herself.

(In class we also discussed briefly the consequences of the waiver of attorney-client privilege that likely would result as well, but that’s a topic for another day.)

That’s what can happen when a contract drafter casually drops in the “good faith” language, without thinking about the possible consequences.

A better approach might be to omit the good-faith-reliance language. For example:

The Escrow Agent is not liable for any loss arising [from its doing of certain things] if, before taking the action, it received advice of counsel that the action was lawful. [Emphasis added.]

That way, both reliance and good faith would (technically) be irrelevant.

Omitting the good-faith-reliance language probably wouldn’t deter the other side from demanding documents and depositions.

But the omission might give the escrow agent a shot at convincing a judge that the other side’s demands should be dismissed.

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• An aggregation of non-secret information can itself be a trade secret, says Tennessee court | EBG Trade Secrets and Noncompete Blog
  A Tennessee appellate court ruled that "[e]ven if [the defendant and former employee] Keymon could have obtained 'the individual pieces of information' by other means, the integration and aggregation of it may be deemed confidential or a trade secret."

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• Lack of reasonable protective measures costs trade secret status : EBG Trade Secrets and Noncompete Blog
  … the parties' trade secret dispute centered on the alleged misappropriation of confidential and sensitive documents that were left in an unmarked cardboard box for at least a week in the backseat of a company-owned car to which various company employees had access. The documents were not marked "confidential," and the keys to the vehicle were either kept "on a peg" or in the front of an office where they were widely accessible. Even though there was no evidence that anyone other than the defendant accessed the vehicle or the documents without authorization, "[t]he documents were left vulnerable to whomever chose to enter or to drive the vehicle."
• When a purchaser uses "killer" terms in a purchase order – Adams Drafting
  Ken Adams posts a query from a reader whose company's legal department wants to adopt ball-buster general terms for its standalone purchase orders – which could well delay the company's purchases if vendors object to them.

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I just read that in 2005, Oklahoma amended its version of the Uniform Commercial Code:

• to provide that the term “goods” does not include information, and
• to exclude “license[s] of information” from the definition of “contract for sale.”

I’ve updated the choice-of-law cheat sheet with this information; I’ll have to think about what it might mean for software license agreements where Oklahoma law applies.

[Hat tip: UNLV law professor Keith Rowley at the ContractsProf Blog.]

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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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• Delaware Chancery Court hangs out a shingle as arbitrator for high-end business disputes | Jones Day
  Now this is interesting – if you want Delaware's specialized business judges to arbitrate your case for you, they'll get you to "trial" within 90 days for a $12,000 upfront fee and $6,000 per hearing day. But your case has to be worth at least $1 million, it can't involve consumers, and at least one of the parties has to be incorporated in Delaware or have its principal place of business there.

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I’ve been very impressed with the ease of use of my new iPhone 3GS. A related comment by CNet columnist Matt Assay made me think that contracts should likewise be so easy for non-lawyers to use:

… Apple product [are] made for normal people who generally don’t obsess about technology. For all the beauty of its designs, the real reason Apple succeeds is simplicity. Apple takes complex technologies and makes them easy to use.

Normal people can use Apple technologies without ever opening a manual.

What’s amazing is that Apple manages to do this from the heart of Silicon Valley, a place that lives and breathes technology and, hence, conveniently forgets that approximately no other human beings on the planet share this character trait.

Similarly, we contract lawyers live and breathe contract language, but for clients’ benefit we should “take complex [contract concepts] and make them easy to use.” It’s more work, but Apple has shown that this extra work can pay off.

In an ideal world, we’d write contracts so that “normal people can use [them] without ever opening the manual.”

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Remember the cliché about a picture being worth a thousand words? Nowhere is that more true than the courtroom. That’s why in litigation, lawyers and expert witnesses often use so-called demonstrative exhibits — diagrams, time lines, charts, tables, sketches, etc., on posters or PowerPoint slides — as teaching aids to help them get their points across to the jury during testimony and argument.

Are jurors allowed to refer to the parties’ demonstrative aids while they’re deliberating? That depends. Jurors normally take “real” exhibits — like a copy of the contract in suit — into the jury room with them and refer to them during deliberations. Judges, however, sometimes won’t allow the jury to take demonstrative exhibits with them, on the theory that the jurors are supposed to decide the case on the basis of the “real” evidence and not on documents created solely for litigation by the lawyers.

True, in U.S. federal-court cases, Rule 1006 of the Federal Rules of Evidence allows summaries and the like to be admitted into evidence. Trial judges, however, have significant discretion over evidentiary matters; if a judge decides that a particular demonstrative aid should not be given to the jury for use in its deliberations, it’s usually the end of that discussion.

If you plan ahead when drafting a contract, your client’s trial counsel might later be able to sneak a demonstrative aid or two into the jury room through the back door — no, through the front door, but at the back of the contract — as “real” evidence, not just as a demonstrative exhibit, to help the jurors understand what the parties agreed to.

Ask yourself: Is there anything I’d want the jurors to have tacked up on the wall in the jury room — for example, a time line of a complex set of obligations? If so, think about creating that time line now, and including it as an exhibit to the contract. The exhibit will ordinarily count as part of the “real” evidence; it should normally be allowed back into the jury room without a fuss.

Of course, before the contract is signed the parties would have to agree to include your stealth demonstrative exhibit in the contract document. But their reviewing your exhibit for correctness could be a worthwhile exercise — and if their review makes them realize they don’t agree about something, it’s usually better if they find that out before they sign.

There’s always the risk of unintended consequences: The demonstrative exhibit you create today might not create the impression you want to create in a jury room years from now. But that risk is there when you write the contract itself.

Your time line, chart, summary, diagram, etc., doesn’t necessarily have to be a separate exhibit: modern word processors make it simple to include such things as insets within the body of the contract.

Postscript: Writing this posting brought to mind a piece that a friend and colleague, Hank Jones of Austin, published a few years ago: See Envisioning visual contracting: why non-textual tools will improve your contracting.

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• Athletes’ Scandals Spark Interest in Endorsement Insurance – NYTimes.com
  "[T]he stock prices of the seven publicly held companies that have or had sponsorship deals with [Tiger Woods] lost $12 billion in market value in the month after Woods’s statement in December that he was taking a leave from golf …." Companies are increasingly seeking to buy insurance to cover potential lost sales when this happens; the insurance gets more expensive as the morals clause gets more specific.  (HT:  Contract Alchemy http://bit.ly/bulDjb)

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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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