I just updated the Legally Lean page with links to useful resources about Y Combinator’s “safes” (Simple Agreement for Future Equity) as a low-cost vehicle for startups to take very-early investment.
I just told a transactions-clinic student that a consumer-contract form he was editing for a clinic client wasn’t customer-friendly and wouldn’t help make sales. The contract form reads like the soliloquy of prison trustee Carr the Floor Walker in the classic Paul Newman film Cool Hand Luke:
Them clothes got laundry numbers on ‘em. You remember your number and always wear the ones that has your number. Any man forgets his number spends the night in the box.
These here spoons, you keep with ya. Any man loses his spoon spends a night in the box.
There’s no playin’ grab-ass or fightin’ in the buildin’. You got a grudge against another man, you fight him Saturday afternoon. Any man playin’ grab-ass or fightin’ in the buildin’ spends a night in the box.
[And so on and so forth]
I suggested to the student that he check to see what the client would commit to doing, and then say that in the contract; for example, the client would attempt to do X, but it couldn’t guarantee that Y would result.
I’ve done a significant reorganization of the Common Draft annotated clause collection. A screen shot is below — check it out.
Suppose that in a contract for services, the contract includes a requirement that the provider maintain insurance. The customer should seriously consider:
- requiring the provider to furnish a copy of the policy itself — or better yet, requiring the provider to get the insurance carrier to furnish a copy of the policy (along with a certificate of insurance, perhaps with additional-insured-status); and
- verifying that the policy doesn’t exclude the type of claim that the customer might bring.
Not doing so appears to have cost husband-and-wife homeowners hundreds of thousands of dollars in home-repair bills. In Crownover v. Mid-Continent Cas. Co., No. 11-10166 (5th Cir. June 27, 2014):
- The homeowners’ building contractor botched the construction of their home; the necessary repair work cost the homeowners hundreds of thousands of dollars.
- The homeowners brought an arbitration proceeding against the builder, and won.
- The builder subsequently filed for bankruptcy protection; the bankruptcy judge limited the homeowners’ claim to the amount covered by the builder’s insurance policy.
- The insurance carrier refused to pay the homeowners, on grounds that the policy excluded the type of claim brought by the homeowners (failure to repair). The homeowners sued the carrier.
- The courts held that the homeowners’ claim against the insurance carrier was barred by an exclusion in the insurance policy for contractually-assumed liabilities.
Another lesson: A customer should think twice before agreeing to exclusion of implied warranties, because that might disqualify the customer from getting paid by the insurance company. In the Crownover case:
- The builder’s insurance policy did cover liabilities to which the insured would have been subject anyway, even in the absence of a contract — such as implied warranties.
- But, under applicable state law, the express warranty contained in the construction contract superseded the corresponding implied warranty that otherwise would have applied by law.
- Therefore, the builder was not liable for breach of that implied warranty; consequently, the builder’s insurance policy did not cover the homeowners’ claim.
This past Friday, as expected, the state of Oregon filed a $3 billion lawsuit against Oracle Corporation and six Oracle employees personally, in the wake of the failed attempt to develop Oregon’s health-insurance exchange under the Affordable Care Act a.k.a. Obamacare. The six employees included the president/CFO; three vice presidents; one senior vice president; and one technical manager who was accused of having conducted a fraudulent demo of the new system’s capabilities. The state is seeking “only” some $45 million from the technical manager, as well as amounts ranging from $87 million to $267 million from various Oracle executives.
In high-dollar and high-profile cases like this, plaintiffs sometimes bring claims against company employees personally. My guess is that the reason often is to to try to rattle the employees and encourage them to cooperate as witnesses against their employers (sort of like the way criminal prosecutors bring charges against low-level employees).
Against that possibility, it’s not unheard-of for vendor companies to include, in their contract forms, language protecting employees from being sued in their personal capacities. See, for example, the model language to that effect in the Common Draft clause repository, along with the commentary following the language.
I don’t know whether the Oregon-Oracle contracts included such language. I wasn’t able readily to find the contracts in question, which according to news reports was Oracle’s standard license- and services agreement form, used as an umbrella agreement in conjunction with ordering through Dell. Oracle doesn’t appear to have posted that standard form (among others) on the Web. The closest thing I could find was a counterpart, apparently dating back to 2004, that seems to have been intended for use in Europe, the Middle East, and Africa (EMEA). I don’t recall seeing such language in any actual Oracle contracts.
High-profile lawsuits like this typically settle before trial, not least because the elected officials who bring them or authorize them would prefer to trumpet a “victory” instead of rolling the dice with the court.
But such cases don’t always settle; see, for example, the state of Indiana’s lawsuit against IBM for allegedly botching the building of a new system for administering the state’s welfare programs. IBM ended up winning a multi-million dollar judgment in the trial court. See Indiana v. IBM Corp., No. 49Dl0-1005-PL-021451 (Marion Cty Ind. Sup. Ct. July 18, 2012), affirmed in part, reversed in part, No. 49A02-1211-PL-875 (Ind. App.. Feb. 13, 2014) (holding that IBM had materially breached contract but was entitled to be paid, subject to offset).
Lesson: When embarking on a contract that could result in claims for big dollars being thrown around, a provider might want to think about including some protection for its employees. A court, especially a hometown court, might not give effect to such protection in cases of alleged fraud. But such protective language would be better than nothing.