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In previous posts we’ve dealt with “boilerplate” clauses such as waiver, jurisdiction and venue, and integration. Today we will talk about two related clauses: the “assignment” clause and the “binding effect” clause. Both of these clauses relate to the question of who may enforce a contract at a later date.

Let’s start with binding effect. The binding effect clause typically reads something like this:

Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of the heirs, personal representatives, successors, and assigns of the parties.

It almost seems redundant. Why would you need a paragraph saying that the contract is binding? After all it’s a contract right? Well not so fast. Judge Richard Posner, a noted federal judge and scholar on the topic of contracts recently decided a case in which he explained why not every document which expresses a mutual understanding is or should be enforceable as a contract, especially when that document includes language that specifically disclaims the intent to form a contract. Judge Posner is known for his clear and direct writing and you can read that case here. 

It’s worth noting that the converse is not necessarily true. Just because you say something is a contract, does not make it a contract if it is missing the essential elements such as offer, acceptance, mutuality, consideration (meaning exchange of value) and a legal purpose. Those are all topics for entire first-year Law school contracts course, but it is sufficient for this topic to note that it is easier to disclaim the existence of a contract than to create one. However, if you include a “binding effect clause” you certainly have reinforced the idea that you intend the document to be binding to some extent.

So what does the “binding effect” clause really do? It simply defines the parties to whom the benefits and burdens of the contract apply. Under common law, with some exceptions, a contract is an intangible right that can be freely transferred. One of those exceptions, however, is for personal service contracts. When you contract with someone for their personal services, they may not simply sell that contract and transfer their obligation to another party with whom you have had no prior contact. In the same way, if you are performing an obligation under a contract for a specific person, you may not want to continue to have that obligation if the original party substitutes a new one for any reason. But the most likely application of the binding effect language is when an individual party dies, or becomes disabled, or when a business is sold. In those cases it is critical for the other party to know whether it can expect a contract to survive.

Which brings us to the assignment clause. An assignment clause might read something like this:

Assignment. Neither party shall assign any rights or obligations under this Agreement, which are personal to the parties, without the prior written consent of the other party, which consent shall not be unreasonably withheld. No assignment of this Agreement by the Company shall operate to release the Company from any of its obligations hereunder.

This clause sets limits on either party’s ability to transfer its rights and obligations. Some assignment clauses are very permissive, and some are very restrictive. Just as the binding effect clause deals with transfers caused by unexpected events, such as death, or sale of a business, the assignability clause is more focused on voluntary transfers of rights and obligations. In the assignment clause, either party may restrict the right of the other party to transfer its obligations and benefits. This is very important. For example, what if you enter into a contract with a business, and the contract requires you to provide confidential information about your business to the other party? If that party were then allowed to simply sell that contract to your competitor, your information would be compromised. That’s just one of many examples. Another is where you contract for the services of a specific person because of their expertise, connections, reputation or your pre-existing relationship. If that person could then simply sell the contract to a 3rd party with whom you had no prior dealings, you may not receive the benefit of your bargain.

So as I hope you can see, both the binding effect clause and the assignability clause can have critical implications for your business. However, the circumstances in which they matter are usually not presented immediately. If you sign a contract and everything goes well, the job is completed and payments made, then they really never come into play. It’s only after you are in contract with someone, and the unexpected happens that they become relevant, and often critical.

If you are tempted to try crafting your own contracts, beware of the pitfalls of removing or neglecting these boilerplate terms. How happy will you be with the apparent cost saving when you later have trouble keeping the other party to the agreement true to its requirements? If you have questions or comments, just note them below and one of our Virginia business lawyers will get back to you.

Related articles

• When Acceptance Is Not (thecontractanalyst.wordpress.com)

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In the last post we talked about boilerplate clauses, specifically, the “integration clause.”

There are lots of other boilerplate sections that might seem to just be boring and unnecessary text, something you might drop if you didn’t know why they exist. Let’s look at two more.

Example one is the jurisdiction and choice of law clause. The fundamental purpose of a contract is to be able to enforce your rights if there is a dispute. You might assume that you can sue on your contract in the city and state where you made the deal, but that might not be the case. If the other party is in another city or state, they may have asked their attorney to specify that all disputes be resolved in the courts of that city in that state. If they did, it’s also likely that they specified that their local state law would apply.

The contract that requires you to cross several time zones just to make your case is a lot less useful. If your contract requires you to sue in Nevada applying Nevada law and you’re in New Hampshire, it’s going to be a very expensive lawsuit. You’ll probably be hiring a new attorney in another state, who doesn’t know you or your business or anything about the deal. That’s not a good way to start a lawsuit. But the other side will certainly take that all into account in any settlement offer. They will know that your settlement calculations will be more favorable to them because your legal costs will be higher than if you sue in your home court. See how the boilerplate works?

The law of the other state may not be favorable to your case. Although the Uniform Commercial Code (UCC) has been enacted in all 50 states, the case law can vary significantly in the rules of interpretation of the Code. What’s more, there are large areas of law, like employment, that are not covered by the UCC. Some states are “employment at will”, others give employees greater rights to maintain their jobs. If you are preparing an employment agreement, you would certainly want to control whether a California court would interpret a noncompete clause or whether a Virginia court would. I bet the interpretations would be different.

Example two is the “assignment” clause, another boilerplate clause that can dramatically affect your rights. This is not about homework. The assignment clause determines whether or not you or the other party can assign the benefits and obligations of your contract to a third party. Many contracts are designed to be assignable, and for commercial reasons, they have to be. Bank loans are a good example. On the other hand, if you contract with a company because of its specific expertise you may be disappointed to learn that they have assigned it to another company, whose standards are not as high. Sometimes it’s appropriate for one party to be allowed to assign its rights, while the other is restricted. The main point is that there is no single rule, and it’s always better to be clear in advance by using the proper boilerplate.

How will you be sure your contract protects your interests? Well, that’s what a good Virginia business lawyer is for. And all that boilerplate that some might think just increases your cost may eventually save your business, wouldn’t it?

So what is boilerplate anyway? The term originally meant exactly what it said. Boilerplate was standard, high-strength steel plate used to make boilers. Nothing fancy – just flat and strong to keep the boiler from exploding. Later, the term took on a meaning in the printing industry when blocks of text that were reused frequently were sometimes cast in steel as opposed to lead to make them more durable. Over the years, the word acquired a more general meaning, connoting anything highly standardized and commonplace. Lawyers adopted the term to refer to the language at the end of the contract that doesn’t seem to change very much from deal to deal.

It’s true that contract boilerplate language doesn’t change much, but the changes, while subtle, can be important. Boilerplate language is just as much part of the contract as the price, the delivery date or the description of the goods or services. What’s different about boilerplate is that it mostly matters when there’s a dispute. Of course, that’s when you really want the contract to be clear, unambiguous and, ideally, drafted in your favor.

Let’s look at one typical boilerplate term that most business people gloss over. It’s called the “integration clause.” The integration clause says that the written contract embodies all agreements of the parties with respect to the subject matter.

At first glance this seems obvious, and superfluous. Trust me, it’s not. The reason for this language is that, if it is not present, either side may be able to introduce evidence of subsequent agreements, side agreements, understandings, interpretations or other factors that could dramatically change the meaning of the agreement. If the language is present, then the person trying to prove something other than exactly what the agreement says has a high burden of proof. The only surefire way to prove that the terms of the agreement as written are not binding would be to have another written document amending the agreement and referring to it specifically. So the real purpose of this boilerplate clause is to enhance the certainty for both parties.

In this way, the language performs its boilerplate function exactly, holding the contract together despite pressures that might blow it apart. What common terms are you skipping over in your DIY contracts?

It seems that internet and social media titans Google and Facebook have once again, to no one’s surprise, gotten themselves in some hot water with the FTC and some privacy watchdogs again. They just can’t seem to get the hang of this “privacy” thing. Hence the start of this post.

Google has settled with the FTC over a little faux pas concerning its fabulously fizzled BUZZ service. Trying to combine the best of Facebook and Twitter, they announced BUZZ with typical Google style and fanfare, and just to be hip, they phrased their sign up options thusly:

“Sweet! Check out Buzz”

Or

“Nah, go to my inbox”

Minor problem: The “Sweet!” option gave less than a full and transparent statement of the degree to which users’ information would become public. In essence, Buzz capitalizes on all those emails you never deleted, scanning them for connections that you have or might want to make, or something like that. In other words, they use your private information to build a public social network. I’m sure they studied the 2009 Facebook Privacy policy fiasco in detail, but apparently concluded that Google and BUZZ were somehow “different” as in not subject to the same rules and regulations as their competitors. When folks started to realize that their private information was being shared far more than the casual “Sweet – Check out Buzz” message indicated, they were less than amused, but then, as they dug further they discovered that checking the “Nah” box did not have the effect one might have expected either. Notwithstanding a clearly checked “Nah” box, Google dutifully went right ahead and collected all sorts of information about the non-subscribers, perhaps with the thought that they would be pleased to see all that information stored and ready to go once they finally decided to join the flood of ecstatic BUZZ users, now measuring in the hundreds, or even thousands.

For its thoughtful and condescending violation of its users’ privacy expectations, Google was invited to discuss their philosophy of privacy with the FTC in court, leading to a proposed consent order that requires Google to submit to rigorous FTC audits for the next 20 years.

Facebook’s latest gaffe was to introduce its facial recognition capability as an “Opt Out” feature in June. Described by PC Magazine as “Creepy” and “terrifying,” Facebook’s tool works in the background scanning and analyzing the 200 million or more pictures uploaded every day by its 600 million users. By comparing faces in the pictures in its database with pictures in which your friends have “tagged” you, or you have tagged yourself, Facebook develops an incredibly powerful capability to analyze your movements, your activities, and your associations. Of course, by participating in Facebook in the first place, you already give them a lot of raw material, but this new tool goes one step farther. And it’s a big step.

Even if you opt out, how can you know whether Mr. Zuckerman’s elves won’t continue to analyze your photos with this capability. Or, having opted out, what if being tagged in one photo with one “suspect” and in another with a different “suspect” might provide a link that law enforcement officials would just about do anything to know. Did I say ‘suspect”? Sorry – I meant “subject.” Facebook is not a government agency of course. But then, what, if any, new surveillance capability has not eventually been commandeered by law enforcement, with or without a warrant? I’m not sure I would want to count on Facebook not to give up the goods if the FBI or Homeland Security brought enough pressure to bear. In fact, their privacy policy pretty much makes it a foregone conclusion:

6. How We Share Information

 

 Facebook is about sharing information with others — friends and people in your communities — while providing you with privacy settings that you can use to restrict other users from accessing some of your information. We share your information with third parties when we believe the sharing is permitted by you, reasonably necessary to offer our services, or when legally required to do so. For example:

……..

To respond to legal requests and prevent harm. We may disclose information pursuant to subpoenas, court orders, or other requests (including criminal and civil matters) if we have a good faith belief that the response is required by law. This may include respecting requests from jurisdictions outside of the United States where we have a good faith belief that the response is required by law under the local laws in that jurisdiction, apply to users from that jurisdiction, and are consistent with generally accepted international standards. We may also share information when we have a good faith belief it is necessary to prevent fraud or other illegal activity, to prevent imminent bodily harm, or to protect ourselves and you from people violating our Statement of Rights and Responsibilities. This may include sharing information with other companies, lawyers, courts or other government entities.

Time will tell whether Facebook and Google use these powerful capabilities for good or evil, but they are here to stay, and growing everyday. Even if there is little you can do to block their intrusive reach, you owe it to yourself to actually read the privacy policies of Facebook and any other site to which you submit personal information.

How carefully are you reading the Terms of Service and Privacy Policies of the online sites you frequent?

Related articles

• The FTC’s Proposed Settlement With Google Over Buzz Privacy Breaches (ericgoldman.org)

Seriously. I know it sounds like a pitch, but I am sincere. Of course we hope that you will hire North Carolina corporate attorneys and Virginia business lawyers from Sands Anderson, but even if you don’t, make sure that you find an attorney who has experience in these matters. I can give you several good reasons.

First, if your business is worth investing in, then you probably have your hands full – or you are excess baggage. You should either be closing your next sale, getting your next-generation prototype to work, or hiring a replacement for the engineer who left suddenly, leaving a critical project is completed. You need to delegate.

If you’re capable of getting a venture capitalist interested enough to give you a term sheet, you’re probably bright enough to learn all the ins and outs of VC financing structure. But that doesn’t mean that you should. As we discussed in Point Number 8, the VC capital structure model, while elaborate, really doesn’t change much from deal to deal. The parameters may change, e.g. the pricing, compensation levels, vesting schedules, liquidation preference factor, etc., but the essential structure of the deal follows a tried and true path. If you really want to reinvent the venture capital business model, you’ll have a lot more luck after you have successfully IPO’d your company. Until then, you will be wasting your time trying to reinvent a wheel that’s already round enough.

Another reason you should hire a good lawyer, is that no right-thinking VC will invest in the company that is not represented by competent counsel. It raises too many questions. It also puts an extra due diligence burden on the VCs and their lawyers. They need to know that everything is where it needs to be, the corporate records are up to date, patents have been filed, and all of the outstanding stock has been properly authorized and issued. In answering these questions, they get lots of comfort from having a law firm on the other side of the deal issue a legal opinion. Even if you could give such a legal opinion, it wouldn’t be worth much unless you have a legal malpractice policy of your own.

Good venture capital lawyers, with many of these transactions under their belt, are more likely to pick up on subtle cues or wrinkles in the deal. They may be able to anticipate where a venture capital firm will give way on one point, and use that to your advantage to protect you on another point. If you or your attorney haven’t done these deals before, you won’t know where the trade-offs are. You could easily give away too much to obtain something that the venture capital firm didn’t really care that much about. In other words, there’s no substitute for experience. Related to that is that a good venture capital lawyer will stay up to date on “market” deal terms. If the VC is asking too much, your lawyer should know that. If they haven’t done enough deals, they would have nothing to compare to. Depending on the state of the economy, the scarcity of capital, the state of the market for IPOs or strategic acquisitions, venture capital deal terms will change, just like the price of the stock fluctuates in the public market. The difference is that with private companies, it’s not a simple as a quoted price. Take a look again at the term sheet referred to in Point Number 8. There are many knobs to turn and switches to flip.

Finally – you will need good counsel. Issues may arise that you cannot or should not discuss with your employees. You may question why the VCs are asking for a specific term or a piece of information, and your partners or employees will not know the answer. You will want to know if the VC is being too aggressive, or if their body language suggest that you can get better terms. Here again, experience is the key. Good venture lawyers have a “sense of the deal” that develops only with time and deal flow. They can also come up with creative solutions that you would not think of. Almost every deal threatens to run aground over some issue in the process between term sheet and funding – but there is almost always a solution. In negotiating deals, as in navigating rivers – It’s good to have an experienced pilot who knows the shoals, the rocks and the currents.

The new address is 150 Peppers Ferry Rd NE , Christiansburg, and the phone numbers are (540) 260-9011 (main); (540) 260-0022 (fax); and (800) 881-8803 (toll free).

“We have a strategic plan in place directing our growth in the coming years and an excellent working relationship with First Bank & Trust, making their building the most prudent choice for our new home,” explains James E. Cornwell, Jr., the managing shareholder.

In addition to Cornwell, the office includes N. Reid Broughton, Michael R. Bedsaul and Stephen V. Durbin among the attorneys. Their law practices focus on business operations and growth, municipal law, municipal finance, delinquent real estate tax collection, real estate, zoning and land use, corporate law, employment law and creditors’ rights. Clients include many local governments, departments of social services, municipal and development authorities, privately owned companies, corporate executives and individuals. The firm has had a local office serving clients in the southwest part of the state since 1995. One of the office’s bankruptcy and creditors’ rights attorneys, Peter M. Pearl, is located in downtown Roanoke and will remain in that office location.