What’s missing from your company’s form agreements?
Using form agreements allows companies to achieve efficiencies, consistency, and preferred contract language, but reliance on the standard terms that have become routine in form agreements can result in unintended risks and liabilities. To avoid those contractual landmines, regular re-examination of your form agreements is essential. Let’s look at three good examples.
Do You Have the Indemnification Protection You Think?
Maybe not. The indemnification provision in your agreement that requires your counter-party to indemnify your company probably also extends indemnification to a fairly standard list of related third parties, which may include your company’s directors, officers, employees, and agents. But check if your agreement has a “no third-party beneficiaries” provision, because the effect of many such provisions is that your directors, officers, employees, and agents may not benefit from or enforce the agreement, and that can directly contradict the indemnification you thought you provided to them as third-party indemnitees. In order to avoid this problem, you should consider adding an exception to any “no third-party beneficiaries” provision that allows third-party indemnitees to benefit from and enforce the indemnification provision in your agreement directly against your counter-party.
Does Your Limitation of Liability Provision Go Too Far and Actually Hurt You?
Many agreements include a limitation of liability provision stating that neither party shall be liable for consequential, incidental, indirect, punitive, or similar damages, and imposing a dollar amount cap on each party’s liability under the agreement. Such a broad limitation of liability without any qualification though may unintentionally curtail some of the financial recourse and protections you have negotiated elsewhere in the agreement. For example, such a provision could cap your counter-party’s obligations to indemnify your company. And it could eliminate your counter-party’s liability for consequential damages resulting from its breach of confidentiality provisions in the agreement, which could be an unfortunate outcome because consequential damages can be a substantial portion of the damages awarded for breach of confidentiality claims. Accordingly, you should consider adding an exception to your limitation of liability provision that states that the provision does not limit amounts payable in respect of a party’s indemnification obligations under the agreement or to damages arising from a breach of the confidentiality provisions in the agreement. Note, however, that there are certain agreements where you might choose not to include this exception language, such as agreements where your company is a service provider or vendor and it would be to your company’s advantage to limit its monetary exposure on its indemnification and confidentiality obligations.
Does Your Confidentiality Provision Call Out Extended Protection for Your Trade Secrets?
Trade secrets are a form of your company’s intellectual property that are accorded confidentiality protection under federal and state laws, such as the Defend Trade Secrets Act. Confidentiality provisions in agreements, including non-disclosure agreements, commonly specify a time period during which each party must protect the confidentiality of the other party’s confidential information. With that time period expressly set out in the confidentiality provision, your counter-party may assume that its obligations with respect to all of your confidential information sunset after that period. Your company’s trade secrets, however, may be entitled to protection for as long as they continue to qualify as trade secrets under applicable law, which may be longer than the time period stated in your confidentiality provision. Therefore, to ensure that your company’s counter-parties are aware of their potentially longer confidentiality obligations with respect to your trade secrets, you should consider adding language to your confidentiality provision stating that the confidentiality obligation for trade secrets continues for as long as the information remains a legally-protectable trade secret.
Steve Kabler is a Partner in the Corporate, Intellectual Property, Technology, Entertainment, and Restaurant practices. He regularly represents clients in negotiating a broad range of commercial agreements.
