You may occasionally see press releases about how machines are ready to decipher all your business agreements. How do you separate hype from reality? A recent article in the Association of Corporate Counsel Docket explains the control dials you need to know to assess whether these machines are truly helpful. See the article here.
A recent article by our General Counsel in the Association of Corporate Counsel Docket explains key behind-the-scenes steps required to develop top notch machine learning for understanding contracts. Read about it here.
Are attorneys going to be entirely replaced by Artificial Intelligence? Not likely soon, according to an article from the Association of Corporate Counsel you can read here.
A recent story covered by ContractsProf Blog discusses allegations that an assistant to famous glass blowing artist Dale Chihuly was to be "taken care of" and treated "fairly" in exchange for his work. The assistant claimed to have co-authored 285 pieces of art and sought to have his co-authorship recognized and compensated. The court found that the lack of a formal contract between the assistant and Chihuly meant that Chihuly did not intend to share authorship of the art. Moreover, the failure to specify the compensation to be paid to the assistant hindered the assistant's claims for compensation. See more details here.
The explosion of Everything as a Service is exploding the number of business relationships that the typical corporation has to manage and maximize on a day-to-day basis. Here is an excerpt of an article on the topic published by the Association of Corporate Counsel:
It is a sign of the times when we have a dog-walking company (Wag Labs) raising US$300 million in venture capitalto turn a household activity into a mobile phone-driven on-demand service. Meanwhile stalwart software licensors, ranging from Adobe to Microsoft, have switched their offerings to an ongoing subscription, rather than an upfront fee.
At the same time, core employee functions, ranging from human resources to sales documentation preparation are being replaced by outsourced or hosted services, while Amazon and Microsoft are now running your company’s servers.
What do all these trends have in common? More contracts — and another opportunity for you to improve your skills as a business partner.
Ronald Coase was one of the first economists to posit that a key reason for the existence of organizations is that it is too costly to arrange a contract for every single business transaction. Instead of having to negotiate, sign, monitor, and carry out contracts with multiple obligations for each and every business tasks, it was more cost-effective to simply hire employees with a general job description (a general type of contract in its own way) and daily oversight for certain business tasks.
Clearly the world has changed. We can use email to send documents immediately, scan an ink signature or apply an electronic signature to execute them faster, and use our Word processor’s Track Changes feature to instantly show changes in a new draft. And we can use internal messaging tools to seek approvals and build consensus.
All of these tools have the potential to remove friction in creating more contracts. But it is not just the technical ease of contracting that has changed the balance between employees and third-party service providers for key corporate functions.
What has influenced the dramatic increase in contracting is the expertise and focus brought to the table by these service providers. As a result, now every department of the corporation is being offered — and purchasing — from third parties a myriad of services that were previously handled by internal staff.
A 2017 study by venture capital firm Kleiner Perkins revealed that the average corporate marketing department uses 91 different cloud services, followed closely by the human resource department’s 90 cloud services. Meanwhile finance and accounting departments are typically using 60 cloud services, while sales teams use 43 more cloud services.
Among industries, the average retail sector (including hospitality and restaurants) company uses 1,206 cloud applications, while the average financial services firm uses 1,170 cloud applications. Lest you think this trend is limited to service industries, consider the manufacturing sector, where the average company uses 1,092 cloud applications.
Most of these cloud applications are delivered on a subscription basis. When these services were formerly conducted by employees, the definition of services and consequences for non-performance were settled between the employee and his or her manager. Payment terms were handled as part of salary and no limitations on liability or indemnifications were required between the employer and its own employees.
Written amendments and subsequent Statements of Work might be handed down in a quick hallway meeting. And the statute of frauds could not invalidate a work instruction simply because it was not written and signed.
By contrast, nowadays, so many activities are handled by an external service provider through a contract, which means companies now need help from their in-house lawyers to set up and actively manage the conduct of these activities.
As an attorney, you need to know your client’s goals, perceived risks, and metrics for success to guide them when contracting. And your clients need to be up-to-date on key contractual dates and milestones if they want to terminate or change the relationship with these service providers.
It's great to have a General Counsel who has been around the block. This week the Association of Corporate Counsel featured our own GC, Neil Peretz, in article (here) about where to begin when tackling your company's business agreements.
Chief Financial Officers have moved from the specialized role of "bean counter" and "scorekeeper" to an integral executive decision-maker. Our General Counsel Neil Peretz, a former CFO himself, was asked by the Association of Corporate Counsel Docket to share lessons from this evolution for in-house attorneys. Read the article here.
A Lithuanian man's simple, yet successful scheme to bilk $99 million from Facebook and $23 million from Google serves as a cautionary tale for companies who don't make signed copies of their contracts and the key terms accessible to their Accounting team. Evaldas Rimasauskas submitted loads of fake invoices, accompanied by other fake documentation, to Facebook and Google and reaped over $100 million in payments in exchange. Had the accounting team been able to find the relevant contracts in their own database and compare the business details of the invoices against the contracts, this could have been easily prevented. See the Reuters story here and read the indictment here.
The Contract Wrangler team was honored to host Colin Rule, one of the founding fathers of modern legal tech last week at our Contracts and Crepe Happy Hour. First Colin wrote the book (which you can order here) on Online Dispute Resolution and then put it into practice at eBay, PayPal, and his own startup Modria Technologies, which was acquired by Tyler Technologies and rolled out to governments around the world. Colin spoke with us about Smart Contracts, creating a sustainable startup in a new field, and resolving corporate disputes.
Neil was delighted to be invited to speak last week to the Enterprise 2.0 Team at Plug and Play Tech Center in Sunnyvale about one of his favorite topics: Best Practices for partnerships between enterprise SaaS startups and large companies.
Our Founder Neil Peretz was recently features in the Association of Corporate Counsel (ACC) Docket discussing how lessons from the Mari Kondo tidying frenzy can help companies deal with the largest tidying challenge: their ever-growing mass of corporate contracts. See the article here.
The ACC is the largest organization of in-house attorneys in the world, with over 45,000 corporate counselors and 10,000 organizations represented across 85 countries.
A recent column by Matt Levine from Bloomberg details a costly saga of a multi-billion dollar merger blown apart by the failure to remember a Notice Date in a contract. See the story here, complete with a sidebar about the court's footnote discussion of euphemisms for the word "prejudiced."
Its opinion (located here), court noted that after two days of trial, involving eight live witnesses and over seven hundred exhibits and eighteen preceding depositions, we learned (once again) that corporation who know what's in their contracts achieve far better results. Here, "as the minutes ticked down to the passing of the End Date, Rent-A-Center’s principals watched Vintage closely. Rent-A-Center personnel acted entirely in the corporate interest, anticipating the stroke of midnight, when Rent-A-Center’s termination right would ripen and could be exercised." Meanwhile, "there was no gamesmanship in Vintage’s actions—it simply forgot to exercise its contractual right. "
The result: a billion dollar merger broken apart and a termination fee in excess of $100 million that may need to be paid. According to the court: "Adjectives are often misplaced in legal opinions; nonetheless, I am comfortable describing the size of the reverse breakup fee, in light of the entity to be acquired, as enormous."
It's great to have a regulatory expert (Neil Peretz) as one of our founders at Contract Wrangler. The Association of Corporate Counsel recently asked Neil to author a series of articles about how to set up and run a Compliance Team when you work at a regulated company. Meeting Compliance requirements is one of the key reasons we created Contract Wrangler. Contracts are the vehicle for companies to make legal and regulatory disclosures to their clients and communicate shared compliance responsibilities to partners and vendors. Not surprisingly, we have a rapidly growing roster of highly regulated companies, such as large financial services providers, relying on Contract Wrangler to stay on top of this.
You can find the full article here.
It was a pleasure to lead a guest lecture for the next generation of Indian legal leaders today at Tamil Nadu Dr. Ambedkar Law University, School of Excellence in Law about the role of technology, particularly artificial intelligence, in the legal profession. We discussed how in-house attorney perspectives differ from those of law firm attorneys and which activities are better-suited for assistance by a machine.
At Contract Wrangler we spend a lot of time with department leaders and their team members charged with keeping track of contracts, and more importantly, the terms in those contracts. Affected teams include Finance, Legal / Legal Ops, Procurement, Human Resources, Customer Success, and IT --and the solutions range from nascent to more-advanced depending on variables including company size, culture, regulatory environment and other perceived risks their industry faces.
The continuum of solutions in place is broad, and generally breaks down into four main categories that we're sharing below and as summarized in this Infographic. There's also a risk and cost profile that accompanies each point on the continuum --sometimes understood by their stakeholders -- but often not!
Risks are related to the possibilities that a phenomenon such as the following occurs:
i) a vendor contract auto-renews, when you'd prefer to terminate it
ii) you lose a customer because you didn't enter into renewal discussions soon enough
iii) you fall out of compliance, or fail an audit, because you didn't have a handle on laws or regulations
The more sophisticated your approach to managing contracts and terms, the lower your risk.
Costs on the other hand are related to:
i) the inefficiencies of managing contracts and terms when you don't have a system in place; these costs are offset by:
ii) software licenses and labor costs of maintaining these systems, most of which are fairly unsophisticated themselves, and about which we’ll discuss more below.
Here's how we break it down by category.
Buried in Email:
Most common with smaller companies, but not unheard of in larger organizations. In this scenario there's no formalized program for managing contracts or terms. Contracts are stored in email, and business or department leaders are generally responsible for managing termination or renewal dates and other terms.
Risks are very high -- there's no reliable or scaleable means of knowing about key upcoming dates, requirements you may or may not have met, or other terms that need attention. In a world of winners and losers, companies tracking their contracts and terms in email folders are often on the losing side of the equation.
With respect to costs: software costs are minimal, but costs of keeping up with terms can be high due to the effort required to track a contract down across the organization which can require numerous emails, followed by manually intensive activities of flipping through contracts page by page to locate key terms.
Stored in a Drive:
Companies often adopt an electronic drive-based storage system for contracts once they get to a certain size and level of growth --typically in the 50-person range. Most common drive systems include Google Drive, Box, DropBox, or a proprietary in-house server-- some companies are using e-signing services such as Docusign as their contract repository. Often times a company will have an email alias where employees will send completed contracts, and personnel in Legal or Finance functions will file the documents. Access is usually limited to Legal and Finance personnel unless a request for a certain contract is made.
While unsophisticated, this approach is a big step forward in risk reduction, as the company mitigates its dependency on any individual employee's organizational practices. Risk levels remain high however as the approach still lacks the ability to easily identify terms before it's too late, or without heavy manual involvement.
With respect to costs, software costs of this approach are low, though day-to-day maintenance costs are moderate-to-high as there's significant effort required reviewing contracts for detailed terms such as when there's an audit, revenue recognition or compliance change, or a need to research particular contracts on a one-off basis.
Stored in CRM:
Many companies are storing customer contracts in CRMs such as Salesforce.com or Microsoft Dynamics, attaching the contract as a file to the account record. In some cases companies will track certain terms generated by their CRM's "quote-to-cash" module, which builds terms into the database during the deal process. In some instances companies will have staff members manually enter key terms such as renewal dates or pricing into the CRM, which allows them to create custom reports or alerts. Some companies use CRMs for storing and tracking terms related to vendor contracts, as well, requiring manual entry of terms.
Companies who use CRMs for contract storage, but aren't extracting or tracking terms, are still at high risk, as they're lacking a method for quickly surfacing key dates and other terms. While they can find their contracts, this lack of visibility into terms constrains their ability to proactively manage relationships, be they customer or vendor relationships. Those companies who are tracking terms in their CRMs have substantially lower risk of a contract disaster assuming they've developed reliable mechanisms for reviewing those terms such as through alerts or usable reports.
Costs, however become more of a factor for companies in this category. Software costs can include the CRM software and cost-per-quote software, as well as any manual costs of entering data into the CRM. Offsetting those cost increases, companies making these investments may gain efficiencies when it comes to navigating terms, assuming they've extracted and are tracking the terms that need navigating. This is difficult to do comprehensively and most often companies are just tracking a handful of terms in this manner.
Stored in a Database:
We've seen a trend particularly with larger companies (5,000+ employees) attempting to modernize their contract technology and workflow. Notably, they'll either develop a system in-house that allows them to enter data into a database for signed contracts, or, they'll use the databases that are frequently licensed with "Contract Management Systems" ("CMSs"). CMSs are often helpful for streamlining and formalizing negotiation and pre-contract-signing workflow, helping to ensure proper approvals, tracking of red lines, encouraging use of certain pre-approved. Tracking terms in those databases can help reduce risk as it gives you a method for quickly accessing terms. We often hear that the empty database solution often has no normalized data format which limits the usefulness of the reports.
Costs in this scenario are often high, however. Notably the CMS software itself can cost hundreds of thousands of dollars per year. The costs of maintaining a CMS database can also be high when factoring in the labor costs of paralegals, other staff members, or outsourced firms whose time is required to enter data into these databases. These manual labor costs have been prohibitive to project success as often times companies will forego entering historical contract data, giving them only partial visibility into their universe of contracts.
As we hope this analysis illustrates, there has not been perfect solution for managing risk without prohibitive costs. As such, companies have been excited to learn about new ways that machine learning technology specifically built for post-signing use cases can help them address this dilemma. If you're someone looking for an appropriate balance of risks and costs for your company, think of Contract Wrangler as a resource available to help guide your journey.
During the next twelve weeks, Contract Wrangler will attend exclusive events, meet with Plug and Play's corporate partner network, and collaborate with other companies in the Plug and Play ecosystem. Plug and Play is the leading accelerator at building bridges between startups and large corporations. Since its inception in 2006, Plug and Play has created the ultimate startup ecosystem in many industries, with 280 official corporate partners. Plug and Play provides active investments with 200 leading Silicon Valley VCs, and host more than 700 networking events per year. Companies in the Plug and Play community have raised over $7 billion in funding, with successful portfolio exits including Danger, Dropbox, Lending Club, and PayPal.
Contract Wrangler was handpicked to address the LexisNexis Global Senior Leadership Summit today, featuring the top 130 executives of LexisNexis in Menlo Park, California. We had excellent followup discussions with top Sales, Operations, IT, and Finance executives about the potential for transformative technology to build new bridges between legal documents and business deliverables.
And How the Donut King Prevented a Hole In Its Agreements
As a landlord you may make the occasional exception when your tenant fails to make its payments on time. But if tardy payments are endemic, you might start to wonder whether being a lenient landlord could hurt you later.
If you are allowing your tenant to make untimely payments, you will want to double check to see whether your lease agreement includes an Anti-Waiver provision. An Anti-Waiver provision ensures that you do not lose your ability to enforce your rights simply because you have waived those particular rights in the past. For example, you want to retain your right to evict the tenant if the tenant continues to miss rent payment deadlines in the future.
Dunkin’ Donuts, a leading donut franchisor found an Anti-Waiver clause to be invaluable when dealing with a difficult franchisee and tenant. The Anti-Waiver clause saved Dunkin’ Donuts from a significant financial loss when Dunkin’ Donuts finally decided to take action against the franchisee who consistently failed to make timely payments on rent and various fees. Even after Dunkin’ Donuts had sent numerous demand letters, the franchisee still owed thousands in past-due rent, franchise and advertising fees, and collection costs.
Without the Anti-Waiver provision in the contract, Dunkin’ Donuts’ past practice of overlooking defaults might have meant that the company waived its right to terminate the franchise agreement. Luckily, Dunkin’ Donuts had an anti waiver provision in its agreement:
“No failure of Dunkin’ Donuts to exercise any power reserved to it hereunder, or to insist upon strict compliance by the FRANCHISEE with any obligation or condition hereunder, and no custom or practice of the parties in variance with the terms hereof, shall constitute a waiver of Dunkin’ Donuts right to demand exact compliance with the terms hereof…”
The donut chain filed FOUR lawsuits against the franchisee for monetary damages and sought to terminate the agreement and the lease. The presence of the anti waiver protected Dunkin’ Donuts’ interests by giving it the right to cancel the agreement in the event there was a failure to pay.
So the next time you allow someone to skip a payment deadline you should check that your agreement isn’t missing an Anti-Waiver provision. This is not a clause to glaze over.
f you are an employer, you and an employee may have a dispute and decide to part ways. In exchange for some type of settlement, which could include cash or a non-disclosure or a positive recommendation, the employee will be asked to sign a Release, which absolves the employer of responsibility for allegations against it by the employee.
But will a Severance and Release prevent all future lawsuits from the employee? Not if the Release is worded too narrowly. This is exactly what happened to retailer Target after it executed a workers’ compensation settlement agreement with a former cashier who alleged he was harassed on the job. The employee filed a claim for workers’ compensation benefits saying he suffered from head and neck injuries and digestive and psychological problems as a result of the hostile working conditions. Eventually Target paid the employee $12,000 as part of a Severance and Release Agreement.
Five months after settling the workers’ compensation case, the employee filed a cause of action for discrimination against Target. Target believed that the Release portion of its Severance and Release Agreement with the employee was broad enough to cover such discrimination.
However, when the court analyzed the Severance and Release agreement, it determined that the Agreement did not release Target from potential civil claims that fell outside workers’ compensation system. Target had failed to use “clear and nontechnical language” to indicate that the settlement was a general release of all claims. In addition, the formatting and structure of the release did not emphasize Target’s intent to include non-workers compensation claims. The one reference to a more general release was in fine print that was “not underlined, bolded, or capitalized like other substantive portions of the document that are highlighted through formatting” to suggest it was of any particular significance.
Had the Release been worded more broadly, it would likely have shutdown the ex-employee’s direct civil lawsuit against Target. (However, no Severance and Release Agreement can forbid an employee from filing a discrimination charge with the Equal Employment Opportunity Commission or other agency). The lesson: when you are drafting a Release and parting ways with an employee: Think Big and Broad.
You’ve entered into what seems to be a lucrative deal to distribute a new product. As a distributor you are the middleman between manufacturers and retailers. Your role is essential to getting the product from the factory line into consumers’ hands. However, when customers get a faulty item, the retailers may blame you (the distributor) for lost revenue rather than going directly to the manufacturer.
This was the concern of a New Mexico distributor of “Mini Dumps”, a machine that transforms pickup trucks into dump trucks, when they were delivered damaged goods. The Mini Dumps distributor purchased a number of these machines, but found them to be in faulty condition upon arrival. Accordingly, the distributor rejected the goods and sought to cancel the agreement as they were “no longer interested in selling Mini dumps.” However, the manufacturer refused to pick up the defective goods.
So how can a distributor protect itself when a manufacturer sends damaged goods?
Distributors should take care to inspect shipment delivered from the factory to see if the shipped goods are fit for their intended use. If the goods do not conform with the expectations set out in the distribution agreement, the distributor can seek to recover incidental damages if these are not limited by the supply contract: so check your Limitation of Liability section. Incidental damages might cover costs related to inspection, transportation, and care for the non-conforming goods. These expenses can be substantial in some situations.
Fortunately in the case of the Mini Dumps, the distributor had not agreed to limit its ability to recover incidental damages in the distribution agreement. The court found that the distributor was entitled to recover thousands of dollars in incidental damages for unloading costs, employee expenses, long distance calls, storage fees, and more.
Before a shipment arrives in damaged condition, check your contract’s Limitation of Liability section to make sure it does not restrict your ability to claim incidental damages. Or use Contract Wrangler, and we can warn you automatically if your distribution contracts are waiving this important right for you to recover expenses if your manufacturer fails to deliver as promised.
The dream: Let’s have the blockchain and “Smart Contracts” solve all my corporate contract issues.
The reality: Don’t hold your breath.
So what is a “Smart Contract”? It is essentially like a computer program that triggers one or more events or actions based on the occurrence of a condition. In many high dollar transactions today, such as the purchase of real estate, we have middlemen such as escrow agents who cause payments to be made upon the occurrence of a condition: such as filing a change of title on a property once full payment has been received. A “Smart Contract” could theoretically eliminate the need for the escrow agent: upon receiving a certain dollar amount in a particular account, papers are sent to the county government to record the new property deed.
Forms of Smart Contracts already exist today in the financial world: you can place a Stop-Loss order with one’s stockbroker and the stockbroker’s system will automatically trigger the sale of a stock when it hits a certain price. And when a certain amount of a debt is paid, a billing system can lower the interest rate on the remaining balance automatically.
The vast majority of contracts are not susceptible to having machines verify the satisfaction of a key conditions. For example, a machine is unlikely to know when the painter has satisfactorily completed work on your house. And many contractual provisions are not related to a quid pro quo of payment that can be automatically withheld or granted by a machine. Contracts contain many clauses that explain how future issues will be dealt with by the parties, ranging from service outages to where disputes will be resolved - and we are a long way from being able to have machines setup to assess the occurrence of those future condition and trigger the subsequent events.
Even though we don’t have Smart Contracts, the advent of artificial intelligence can help bring your existing contracts closer to a Smart Contract by reading your contracts and automatically deciphering the key triggers. With Contract Wrangler, for example, you can now have machines help you quickly figure out your options when a supplier fails to deliver or an option deadline is imminent.
One of the highest ranked accelerators in the world, ranked in the Platinum Tier by the Seed Accelerator Ranking Project's review of over 150 accelerators, has selected Contract Wrangler to join its ranks. StartX alumni represent many of Stanford's best entrepreneurs, in fields from clean tech and bio tech to consumer internet and enterprise software. StartXfounders’ companies have been acquired by the likes of Twitter, Dropbox, Intuit, Apple, LinkedIn, Yahoo, Palantir, Salesforce and Instagram. They have raised funding from top firms like Andreessen Horowitz, Benchmark, and Google Ventures. Business Insider reports about StartX: "It's also hard to get into, with about the same acceptance rate as Stanford."
CEO Neil Peretz Is an Invited Speaker at 11th Annual International Legal Alliance Summit & Awards in NYC
The International Legal Alliance Summit & Awards gathered more than 500 senior law firm partners and general counsels from more than 40 countries to discuss, network, debate and reward the key players of the sector. Our CEO, Neil Peretz, was an invited speaker about how artificial intelligence technology is changing corporate law departments and the scope of attorney work. Neil spoke about the industrialization of law brought about by the digital and Internet age and how we need new technology to help us cope with the ever-increasing load of contracts.
Did you know that a failure to exercise your contractual rights could result in you losing them?
Your big danger is a little known legal doctrine called Estoppel. A party to a contract can invoke the doctrine of a estoppel to justify why it failed to perform -- and if you are the other party to that contract, this could cost you dearly. Estoppel is triggered when the action or inaction of one party to a contract induces the other party to rely on it to their detriment or harm.
Let’s set the big legal words aside and give you a real life example of Estoppel that resulted in a freight forwarding company suffering financial costs and losing a significant portion of its business because it failed to enforce its contractual rights.
The freight forwarding company entered into an agreement to provide transportation and consolidation services to a Chicago shipper association. Because railroads charged a flat fee for each 80,000-pound shipment, the forwarding company would combine freight from its various customers to hit the maximum volume and then apportion the total shipping price across the multiple shippers. In its contract with the freight forwarder, the shipper association promised to hit certain shipping volumes.
In practice, the shipper association allegedly breached the contract with the freight forwarder by diverting some of its freight to other service providers. However, the association still sent some of its freight to the forwarding company and took advantage of the low rates in the contract. The court found that the freight forwarder “failed to enforce his rights under the contract and allowed defendants to continue to ship freight in lesser volumes than in the past.”
It’s not uncommon to have many discussions before a contract is signed with a supplier or vendor, with promises about the future. Yet when the written contract arrives, it lacks detail about what one of the people will do or how their product or service will perform.
Can you rely on all the promises of the other side prior to signing the contract? Don’t count on it if the contract has something called an Integration Clause. Essentially, an Integration Clause means that anything not written directly into the contract doesn’t count, even if it was discussed at length beforehand.
Imagine that you hired a general contractor to build a new office for you. Toward the end of the negotiations, you asked for a picket fence around the edge of the lot and the contractor replied, “No Problem! We can take care of the fence.” The picket fence doesn’t require a permit, so you don’t bother to show it on the plans submitted to the Planning Department.
Months later, your contractor declares the work complete. You show up on the site and it looks nice -- except the picket fence is missing and the contractor is demanding payment in full. The contractor says the fence is outside the scope of the contract and his earlier email just meant that he “could” do the work, not that he committed to doing so.