Tuesday, May 29, 2012

Must-have clauses in Contracts, website Terms of Use and Privacy Policies

Many Terms, Privacies and business contracts may look the same to an untrained eye, but a competently drafted document will prevent your business from being sued somewhere in Mexico or ending up with no legal recourse for wrongful acts of others. You should seriously considering the following clauses when drafting website Terms of Use, Privacy Policy, End User License Agreement, or a business contract.

Binding Arbitration Clause ensures any disputes are resolved quickly, inexpensively and confidentially in your hometown jurisdiction. Unlike the court proceedings, arbitration is confidential, informal and you do not necessarily need an attorney to represent you because arbitrators are not strictly bound by the legal procedures and the law. Many commercial arbitrators are pro-business, have significant business background and can relate to the issues you are facing. All of the above means that you will get to state your case in plain English, in private, to people that can relate to the issues you are dealing with. So, generally speaking, you have a better chance of winning at arbitration than at trial but even if you lose, at least you will not usually have to spend large sums of money on attorneys.

States have a strong policy favoring arbitration, Nevertheless, sometimes courts strike down arbitration clauses that are deemed unconscionable, especially when they are buried in pages of other legal mumbo jumbo and the party offering the clause is a dominant sophisticated party (business), offering a deal on a “take it or leave it” basis to an individual consumer. In California, we often see arbitration clauses invalidated in employment contracts, or contracts of adhesion such as clickwraps, shrinkwraps that nobody ever reads, even though, yes, they should. To prevent this from happening, it is important to make sure the arbitration clause is brought to the consumer’s attention and the consumer understands that both parties are signing away their constitutional right to a jury trial. A properly drafted arbitration clause is a good deal for both parties and will withstand the judicial scrutiny, considering the states’ strong policy in favor of arbitration. Without arbitration, many consumers simply wouldn’t know where to start filing a lawsuit, and the costs of trial are often more than the case is worth.

Important note to software companies and developers: European pro-consumer countries have gone the route of statutorily limiting the scope of arbitration and other presumptively unfair clauses in consumer contracts. As a result, in such pro-consumer countries, I cannot offer the end user a software license with the standard US happy-go-lucky arbitration clauses, disclaimers and limitations of warranties. Normally, it is best to include Indemnification Clause (see below) which makes the distributor in that country liable for making EULAs compliant with the local law. Read Software Licensing Issues for US Businesses in Europe and Japan to get an idea of potentially problematic software/mobile application licensing clauses in foreign jurisdictions.

Indemnification (or “Hold Harmless”) is an important Clause that acts as your insurance for another party's wrongdoing. Suppose, somebody hired you to develop a website or a mobile application and gave you the pictures to use. Pictures turned out to be from a copyrighted clipart, the owner of which now sues you for copyright infringement. Indemnification clause guarantees that your client will be responsible for your legal fees and other expenses incurred while defending against this.

Neutral Venue Clause is a great way to limit liability for websites that act as a platform for users to interact, make deals, aggregate or share information such as online reviews. Examples are websites which are platforms for people to offer services or products to each other or the public at large, websites that compile reviews regarding a certain industry or types of products, websites that contain interactive features such as forums and chat rooms, matchmaking/dating websites. Neutral venue clause states that you are a not a party to any deals users enter into (even if you collect a fee for your service), therefore, you cannot be held liable for any monetary, reputational damages, bodily injury or deaths arising out of the users’ activities, deals, contributions and interactions on your site. For example, if your website has a forum and user(s) posted links to copyrighted movies, books or any other third party intellectual property without your knowledge or approval.

Choice of Law/Governing Law and Jurisdiction Clause ensures you will not get sued in another state or a foreign country when a customer over there buys a product or service from your website. Under the current statutory and case law, such a customer may sue you because your website could be deemed as “reaching out” to his jurisdiction by virtue of being out there on the Internet. This is especially true with websites that have interactive features (as opposed to merely informative sites with just your contact info) encouraging users to submit forms and orders.

Limitations/Disclaimers of Warranties clauses are pretty standard but you need to know which ones to choose for your particular business model because not all liability can be disclaimed and you risk a lawsuit if you are too greedy.

Non-Solicitation, Non-Circumvention clauses are particularly useful if you are a middle man or woman that does not want to be cut out of the deal. For example, you are a real estate broker or you are running a website that matches buyers and sellers. So, you include non-solicitation and non-circumvention provisions which prevent parties from dealing directly with each other in order to avoid paying your fee.

Liquidated Damages is a lump sum payment for breach of contract. For example, you rent an apartment out to commercial or residential tenants. You have a duty to mitigate damages and try your best to re-rent in case of an early breach (and to provide accounting within 21 days of tenant moving out). However, some tenants breach during the high season, some during the slow times, you have “midnight movers,” and it’s always difficult to figure out exactly within the California-prescribed statutory 21-day period how much exactly will any particular tenant owe you before you re-rent the property. When the 21 days are up, you have to refund the unused portion of the deposit, even though the place is still not re-rented, and good luck suing ex tenant, especially if he or she moved out of state (if you even know the new address). So, instead of going through this trouble, you include a clause that the fee for early lease termination is two months worth of rent and the security deposit may be used for it. 

In order for a liquidated damages clause to be valid, two conditions must be met: 1) the amount of the damages identified must roughly approximate the damages likely to fall upon you, and 2) the damages must be sufficiently uncertain at the time the contract is made that such a clause will likely save both parties the future difficulty of estimating damages.

Cumulative Damages Clause ensures that you get to add up your fees and penalties, without any one of them being exclusive of another.

Severability Clause means that if any provision of your contract is held invalid, the rest of the contract still stands, even though the plaintiffs will often try to invalidate the whole contract.

Entire Contract Clause basically means that the contract represents the complete and final agreement. It prevents people from claiming there are some terms not listed in the contract that affect your deal.

Reporting to credit agencies gives you more leverage in debt collection because clients are less likely to default on their debt. Reserving your right to pursue debt via debt collection agencies gives you another advantage, even though the debt collection agencies are required by law to stop contacting the debtor if he or she tells them to cease communication.