Indemnity clauses are not always for the faint of heart.

In certain circumstances, indemnity clauses can be pretty frightening. An indemnity clause requires one party to bear responsibility for any loss or damage incurred by another party. These provisions are commonly found in contracts dealing with big companies and/or smaller companies with sophisticated legal counsel. You should always be careful when signing a contract requiring indemnification. Activation of an indemnity clause when loss or damage occurs could devastate your personal life and/or bankrupt your business.

With an indemnity clause, not only are you responsible for your own loss or damage in connection with a contract, you are responsible for another party’s loss or damage in connection with the same contract. Sometimes, indemnification makes sense, like when one party has little involvement with a business relationship involving a second or third party, or when a party provides one component in a complex mechanism. If fairness suggests that a party should not be responsible for loss or damage in connection with a contract, an indemnity clause protecting that party is proper. But if fairness suggests a party should be held responsible for loss or damage in connection with a contract, indemnification is improper.

Previous posts on contract, business and commercial law.

Here is a link to some of my previous posts on contract, business and commercial law. Some are on simple topics of general interest. Others are more esoteric.

If you breach a contract, it is unlikely that you can simply walk away.

You should not sign a contract unless you are prepared to complete it, even if you encounter unforeseen circumstances. Things happen; people lose their job, die, and get sick. But if you sign a contract, you consent to the possibility of a lawsuit or arbitration to enforce its terms. It is common for people to sign an agreement without reviewing it, or to think they can rescind their acceptance after signing.

If you sign a contract but do not complete it, you may be forced to perform (specific performance). You may be forced to pay the other party the money it spent in relying on your completion of the contract  (reliance damages). Or you may be required to pay the other party the amount it would have received if you completed the contract without breaching it (expectation damages).

Expecting people to read the entire terms and conditions of every contract they sign is probably impractical. But every time you sign your name in exchange for something of value, you should consider what the contract requires. If you breach the contract's terms, it is highly unlikely that you can simply walk away.

Proposing changes to contracts, if you are an individual or small business.

In arms' length transactions, red-lining is the process by which parties or their attorneys agree to a final contract. The first party sends a contract. The second party returns the contract with any proposed changes. The first party either accepts or rejects the changes, and the parties negotiate further modifications. It can take one exchange, or it can take a hundred before a final agreement is made.

If given a contract by a larger company, you can always propose changes to terms you do not like. The company is not obligated to accept those changes, but it might. Usually, the worst that can happen is that the proposed changes are rejected and you know you are dealing with an adhesion contract. If it is an adhesion contract, its enforceability is limited in court. It is unlikely that the company will rescind the contract simply because you proposed changes. If it does, you probably do not want to deal with that company anyway.

Just be aware that you can always propose changes to contracts that require your signature. You may or may not be successful.

A possible breach of contract action arising out of the dispute between the New York Yankees and Alex Rodriguez.

Recently, New York Yankees' third baseman Alex Rodriguez was suspended for 211 games by Major League Baseball (MLB) for performance-enhancing drug use. Rodriguez appealed, but the appeal is not likely to be decided until after the 2013 season. The suspension was not due to a failed drug test, but due to records and statements provided by a performance-enhancing drug distributor.

Rodriguez alleged that the Yankees worked with MLB to suspend him, because the team wanted a reason to void the remainder of Rodriguez's contract. Rodriguez recently returned from injury. He is aging and arguably not producing at the level the Yankees are obligated to pay him. Per Rodriguez,

"[W]hen . . . people are finding creative ways to cancel your contract, I think that's concerning for me. . . . "

The Yankees denied the allegations. I would not be surprised if this ends up in litigation, even if it is not the most likely scenario. If the 211-game suspension is upheld on appeal, the Yankees may be able to avoid full payment on Rodriguez's contract. If Rodriguez's allegations of collusion between the Yankees and MLB are true, he would have a breach of contract action against the Yankees.

The obligation of good faith and fair dealing is implicit in a contract. If a party enters into a contract and later engages in subterfuge to impede the contract's function, it is a breach of contract. In other words, if the Yankees contract with a player, they cannot secretly sabotage the player to avoid making payment on the contract.

Rodriguez's contract likely has a choice of law provision (preference for New York law). It may also have an agreement to arbitrate all disputes arising out of the contract. To prove a breach of contract, Rodriguez would have to show that he did what the contract required, and the Yankees breached the contract. If Rodriguez ends up suing, the Yankees would counterclaim for breach of contract. The Yankees would argue that Rodriguez's performance-enhancing drug use was a breach of the contract. As an affirmative defense to Rodriguez's claim, the Yankees would argue that Rodriguez's performance-enhancing drug use excused the team from having to fully perform the contract.

How do you know if an employee creates or invents something "within the scope of his or her employment"?

Yesterday, I discussed the suit involving EA Sports and an original designer of the Madden video game franchise. The video game was a work-made-for-hire, because it was created by the employee within the scope of his employment. If he was a volunteer or independent contractor, it may not have been a work-made-for-hire and would depend more on the language of the contract.

In determining whether conduct is within the "scope of employment," courts use general principles of agency. If a work is designed to serve one's boss, it is likely within the scope of employment. For instance, if you are a software developer and write code as part of your job, it is within the scope of your employment. If you are a software developer and you write an unrelated fictional novel on your lunch break, it is most definitely not within the scope of your employment. It largely depends on the facts of each case.

Madden NFL video game's breach of contract suit with an original designer of the franchise.

An original designer of the John Madden football video game franchise sued Electronic Arts (EA) for breach of contract for unpaid royalties in connection with the development of the game. The designer purports to have compelling evidence that EA used his code and design elements as a basis for past and present Madden NFL video games. If true, it might mean that EA violated the designer's right to prepare derivative works. It also might mean that the designer's work was made-for-hire, in which case EA would own the copyright.

A "derivative work" is based on one or more preexisting works that can be from a number of different forms in which a work is recast, transformed or adapted. Editorial revisions, annotations or elaborations constituting works of authorship are examples of derivative works. A "work-made-for-hire" includes work prepared by an employee within the scope of his or her employment.

Here, the designer almost certainly developed the game within the scope of his employment, but the suit survived a motion to dismiss in April 2013. So there must be some merit to the designer's claim. Time -- and the contract -- will tell on this one.

The importance of "notice" in so many areas of the law.

In the law, and particularly contract law, whether a person had actual or implied notice of a given event, contract term or otherwise is often dispositive of an issue. In some cases, notice will clearly not apply, but these are usually self-evident. When notice is relevant, it is perhaps the most important factor in deciding cases, because it applies in so many different areas. For instance, the enforceability of click-wrap or browse-wrap agreements in web surfing depends on notice of the website's terms. The enforceability of form contracts between a business and consumer also depends on notice, and whether the terms are within the reasonable expectations of the consumer.

Statutes of limitation for bringing a lawsuit often do not begin to run until a person has notice of his or her legal claim. There are a number of other examples as well. So, if you are in a legal dispute, you may want to ask yourself whether notice of a given fact or event is important. It may not be, which you can probably decide for yourself. But if it is, it may end up being the deciding factor on whether you have a winning or losing case.

International and domestic sales of goods.

It is increasingly common to make transactions with businesses in other countries. If you are purchasing goods not for personal or household use, Article 2 of the Uniform Commercial Code ("UCC art. 2") or the United Nations Convention on Contracts for the Sale of Goods ("CISG") apply.

All 50 states have enacted the UCC. As of December 2012, 78 nations ratified the CISG. Wikipedia, United Nations Convention on Contracts for the Sale of Goods, http://en.wikipedia.org/wiki/United_Nations_Convention_on_Contracts_for_the_International_Sale_of_Goods (last visited February 21, 2013). Parties can generally contract around UCC art. 2 or the CISG, as long as other requirements for a valid contract exist. There are some things that cannot be varied by agreement, such as good faith, diligence, reasonableness and care. (If a party enters a contract in bad faith with the intention to take advantage of the other party, the other party would likely have a cause of action for fraud.)

In many cases, the parties do contract around the provisions of the UCC or CISG. In international transactions, when the parties are both contracting states and the contract is silent regarding choice of law, the CISG applies.

There are minor differences between the two. CISG art. 18 provides that acceptance of an offer is valid when it reaches the offeror. In American law, acceptance is valid when dispatched, when that is the method by which acceptance is to be effectuated. CISG art. 19 provides that a reply to an offer that appears to be an acceptance but adds additional terms or limitations operates as a rejection and counteroffer. UCC art. 2 provides that such a reply operates as an acceptance, unless the acceptance is expressly conditioned on the adoption of those terms or limitations in the contract. CISG art. 11 does not require contracts for goods over $500 to be in writing. In American law, the Statute of Frauds and the UCC require such a contract to be in writing, electronically or otherwise.

There are no likely changes in the foreseeable future to either the UCC or CISG, so any practical differences between the two are likely to remain minimal. But there are situations when the two differ, as noted above, in which case legal consequences can vary quite widely.

Integration clauses in form contracts.

In earlier posts, I discussed things to look for in a basic contract, and tips for when you contract with larger companies. Those are all good, but there are a few other items that you should know about when contracting. This post will introduce integration clauses, which are found in most contracts. An integration clause is "boilerplate," which means that it is found in almost all form contracts without negotiation.

Sometimes, an integration clause is prominently noted in a contract. Sometimes it is not. It typically states that any oral or other agreement between the parties is ineffective, unless it is contained in the signed contract. Modifications to a contract after it is signed may still be effective, depending on the facts and the law of the jurisdiction in which you are located. An integration clause is only effective for agreements leading up to and at the time of the contract's signing.

Some things to look for in a basic contract.

I previously discussed contracting with larger companies. That information applies here, but there some additional things to note when signing a contract.

1. Companies generally disclaim implied and express warranties.

If a company has a written warranty, they will probably disclaim any implied and express warranties to the extent permitted by law. The company will not be able to do this all the time, because implied warranties cannot always be disclaimed. Also, express warranties sometimes override a written disclaimer, if the disclaimer is not conspicuous enough for the customer to reasonably notice it.

2. Consequential damages are likely excluded.

When you contract for product A, consequential damages are unforeseeable damages that result to products B, C, and D. They are damages beyond the items or services for which the parties contracted. From a merchant company's perspective, these damages are variable for each customer, because not all customers have the same items in their home or business that are susceptible to damage. For that reason, it is prudent for businesses to exclude consequential damages.

3. Severability.

Severability is the concept that if a court of law determines one part of the contract to be void or unenforceable, the remainder of the contract will remain in effect. Companies usually put this provision in a contract.

4. If you have much less bargaining power than the company with whom you are contracting, the contract terms must be within your reasonable expectations to be enforceable.

This is called an adhesion contract. Whether a contract provision is within your reasonable expectations is objectively determined. In other words, it does not matter if you were actually aware of a given contract provision; it matters whether a reasonable person -- as determined by a court -- would expect the provision to be part of the contract.

Liens versus breach of contract.

The last few days I wrote about about liens. If you hold a mechanic's lien, agricultural lien or harvester's lien, there are likely other methods of obtaining payment from someone who is wrongfully withholding it. You may be able to file a claim for breach of contract or quantum meruit. To file a breach of contract claim, there must be an express or implied contract. In cases where you perform work that entitles you file a lien, you may also be able to file a claim for breach of contract. If you do not have a written contract, it would be more difficult to prove the existence of an implied contract and its breach, as opposed to the value of the services you provided.

Quantum meruit is a legal term simply meaning that if you do not have a contract but provided a benefit to another, you can recover the reasonable value of the services provided. You are able to recover the same amount as with a lien -- the reasonable value of the services provided -- but the recovery does not attach to property like a lien.

These rights are not mutually exclusive. It may be prudent to file a lien, breach of contract claim, and for quantum meruit. Generally, the legal procedure of bringing all three claims can be a bit complicated. First, you have to file the lien, perfect it, and file a petition to foreclose it. Depending on the jurisdiction in which you live, you may not be able to bring any claims along with the petition to foreclose the lien. Second, you would file a petition for breach of contract and quantum meruit. Third, you would file a motion to consolidate the cases, which would likely be granted. If your jurisdiction allows you to include other claims in a petition to foreclose a lien, then you could include all three claims in one petition.

Sometimes it may not be prudent to assert all three rights of action. If you have a contract worth $50K but reasonably performed only $20K worth of work, you could stand to make more money by claiming breach of contract. If you have a contract worth $50K, but the reasonable value of the services you provided was $75K, you could make more money by filing a lien.

If you clearly have a contract, you would not likely have a strong case for quantum meruit. That remedy is available when there is no contract. In the last example, the opposing party would likely assert a counterclaim for breach of contract, so the opposing party would attempt to limit your recovery to $50K. It would be a fairly difficult case requiring a lot of evidence and testimony regarding the amount you should recover: $50K, $75K, or nothing. But those are just some considerations you should make if you performed work but did not get paid.

Contracting with larger companies.

When making online transactions, hardly anyone reads terms and conditions in their entirety. Some people gloss over them. Some people do not read them at all. But they do have legal consequences, and in most cases those legal consequences are enforceable.

To a mathematical certainty, those terms and conditions will include choice of law provisions. They will probably include choice of venue provisions and an agreement to arbitrate. Choice of law provisions provide that any dispute over the terms and conditions will be decided by the law of a given jurisdiction, often the jurisdiction in which the company is headquartered. Choice of venue provisions provide that any dispute over the terms and conditions needs to be brought in a particular jurisdiction.
 

Agreements to arbitrate provide that a dispute needs to be submitted to an impartial arbitrator of the company's choosing before the dispute can be submitted to any court's jurisdiction. Agreements to arbitrate sometimes foreclose any opportunity to resort to the legal process. People regularly run afoul of these common provisions. They will be adversely affected by a product or service they purchased, and will bring suit in their home jurisdiction. They are then surprised to find out that the case is dismissed, because one or more of those provisions are enforced by the court.

Unless a contractual term is particularly egregious or unexpected, courts tend to enforce these agreements so long as the consumer had actual or constructive notice. Actual notice is knowledge in fact of a particular provision. Constructive notice does not require actual knowledge. It simply requires that you had the opportunity to read the terms and conditions and should have known that a particular provision was included.

Large companies often try to bully smaller companies and individuals. They have large legal departments whose job it is to do everything they can to prevent the company from any liability. It is just their job. They are not bad people, but they may end up drafting term provisions that adversely affect other peoples' daily lives.

It is likely impracticable to ask anyone to read -- in depth -- the terms and conditions of every online transaction they make. But it is good to be aware of the provisions you almost always agree to -- choice of law and venue, and agreements to arbitrate any disputes. Even though terms and conditions are onerous, it is prudent to give them at least a cursory reading, because when you check the box that says, "I Accept," you are legally assenting to the given company's terms and conditions.