Drafting and Interpreting

Contracts
Wendy Sharpe Alan Fishel Nicholas Lawson
Paralegal Partner Associate
Cobham Advanced Electronic Solutions Arent Fox LLP Arent Fox LLP
703.414.5334 202.857.6450 202.350.3706
Wendy.sharpe@cobham.com alan.fishel@arentfox.com nicholas.lawson@arentfox.com
 DISCLAIMER

The information provided in this presentation reflects the personal views of the
participants and does not reflect the opinions or positions of Arent Fox LLP or its
clients. None of the presenters nor their clients may be held responsible for the use
which may be made of the information contained in this presentation. Because of
the generality of this presentation, the information provided herein is not legal
advice, may not be applicable in all situations and should not be used or acted upon
without obtaining specific legal advice based on a particular situation.

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Presentation Overview
• Anatomy of an Agreement
Introductory Section
Body of the Agreement
Signatures
Ancillary Documents

• Spot the Problems in the Provisions

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Agreements – What are they?
They’re ubiquitous, occurring in almost every context, including well known areas
• Goods – Purchase Agreements
• Employment – Employment Agreements, Non-Competes
• Professional Services – Services Agreements, Statements of Work
• Software – Software License Agreements (e.g., Shrink-wrap/click-wrap)
• Hardware – Purchase Agreements and/or Services Agreements
• Real Estate – Leases, Purchase Agreements, Mortgages
• Finance – Swaps, Letters of Credit
And areas where agreements may take a less traditional form
• Websites, Mobile Apps – Terms of Use/Service, EULAs, Privacy Policies
• Smart Contracts - Blockchain/Digital Currency (e.g., Bitcoin) (Self Executing, Self Enforcing, Self
Verifying, Self Constraining)

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 Anatomy of an Agreement

Objective: Provide understanding of how the

parts of conventionally formatted agreements
fit together, and the purposes motivating the
format and common provisions

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Anatomy of an Agreement
Conventionally formatted agreements can be divided into four parts
• An introductory section
Preamble
Recitals
Words of Agreement
• The body of the agreement, containing the key business and legal terms, which may include,
by way of example
Definitions Indemnity
Term & Termination Liability Limitations
Payment Miscellaneous Provisions
Reps & Warranties
• Signature Pages
• Ancillary Documents
• Exhibits, Schedules, Statements of Work, and the like

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Introductory Section

Preamble
Recitals
Words of Agreement

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Anatomy of an Agreement - Preamble
• Purpose
• Names/identifies the agreement
• Identifies the parties
• Sets forth the date the parties are entering into the agreement
• Pitfalls
• Failing to accurately and adequately identify the parties to the agreement
(name, entity type, address, state of incorporation)
• If you have misidentified a party (e.g., the preamble identifies ACME Manufacturing Co. when your
agreement is actually with ACMR Manufacturing Inc.) you may find that the promises aren’t worth
the paper that they’re written on
• Less worrisome where a party is a natural person
• It’s often worth checking the records of the secretary of state (or the like) in the jurisdiction
where the entity is incorporated to ensure you’ve got the right entity

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Anatomy of an Agreement - Recitals
• Purpose
• Factual background for the agreement
• Purpose for entering into the agreement
• E.g., ACME Manufacturing Inc. desires to sell and Customer desires to buy ACME’s
widgets
• Pitfalls
• Believing that statements made in the recitals constitute binding obligations
on the parties (there’s an exception, and courts vary)
• If not carefully drafted, may be harmful to arguments you’d like to make
during litigation, and may create ambiguity in otherwise carefully drafted
clauses

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Anatomy of an Agreement – Words of Agreement
• Purpose
• Signal the start of the binding part of the agreement
• E.g., “NOW THEREFORE, in consideration of the premises and mutual covenants set forth
herein and for other good and valuable consideration, the receipt and sufficient of which
are hereby acknowledged, the parties hereto covenant and agree as follows
• This is ordinarily not necessary
• “Now therefore, the parties agree as follows, ” or “AGREEMENT” usually works just fine

• Pitfalls
• Failing to clearly signal where the binding part of the agreement begins
• Without the division, you could end up liable for statements made in the recitals that
were drafted to serve as background, but were not meant to be binding

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Body of the Agreement

Definitions Indemnity
Term & Termination Liability Limitations
Payment Provisions Dispute Resolution
Reps & Warranties Miscellaneous

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Body of the Agreement – Definitions
• Purpose
• Terms of art/technical terms where the parties need to be specific and where
the public meaning of the term is insufficient (e.g., “Provider Software
Platform”)
• Terms with specific legal import (e.g., “Claims,” “Damages,” “Actions”)
• Efficiency
• Clarity
• Common mistakes
• Over-defining/under defining – obstacles to getting the deal done
• Imprecise definitions
• Packaging obligations into definitions

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Body of the Agreement – Term & Termination
• Purpose
• Specify the agreement’s duration (e.g., initial term, renewal terms)
• Specify when a party can terminate early (e.g., only on breach?)
• Common mistakes
• Perpetual agreements or agreements with no way out beyond breach
(sometimes)
• Provisions that let the other party exit too easily
• Failure to specify consequences of termination and/or post-termination
obligations
• Agreements with multiple terms that are not handled properly

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Body of the Agreement – Payment
• Purpose
• What is the price for the product or service?
• Is it a fixed price, determined by a formula, by a project fee, or some other manner?
• Who pays any tax?
• When is payment due?
• Will there be installment payments?
• Will interest be charged?
• Is there a penalty for late payment?

• Common mistakes
• Failure to have clarity as to the fees owed (sometimes unclear formulas or language is used)
• Failure to address hidden fees
• Failure to address disputed amounts
• Failure to address the parties’ respective rights in the context of nonpayment (e.g., suspension)

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Body of the Agreement – Representations
• Representations are statements of past or present (i.e., as of the effective
date) fact made by party that are part of the inducement for the other party
to enter into the agreement
• E.g., ACME hereby represents that it is in good financial condition

• If a party makes a representation it knows is false to induce the other party to

enter into the agreement, the other party may sue based on fraudulent
misrepresentation and can (i) rescind the agreement and obtain restitution or
(ii) affirm the agreement and sue for damages

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Body of the Agreement – Warranties
• Warranties
• Warranties are promises that a particular fact is true (will remain true, will be true at a
certain point, etc…)
• E.g., ACME warrants that it will have all permits necessary to begin construction by July 1
• Purpose is to relieve a promisee from the obligation of determining a fact's truthfulness
• So even if you know the factual statement in a warranty is false, the recipient of the warranty
can still sue for breach of warranty
• Important distinction from representations – can win a warranty claim where your
company would have lost the fraud claim
• Recovery for a breach of warranty may be greater than recovery for fraud
• Breach of warranty is a contract breach and its measure of damages is the benefit of the
bargain. In some states, the measure of damages for fraud is out-of-pocket damages,
which may be less

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Body of the Agreement – Warranties
• It’s important to think through and understand the remedies available for breach
of reps vs. warranties. In some instances, a rep is sufficient, but in many cases,
your company will want a warranty
• Many agreements include a warranty provision that is designed to protect
customers from receiving services, software and/or deliverables that are
defective or not in conformance with what the parties agreed to in the applicable
agreements and/or the documentation
• Where a warranty is appropriate, a provider generally wants to provide a
warranty that is limited in duration and scope, and under which customers have a
limited remedy where the provider fails to comply

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Body of the Agreement – Warranties
• Limits on the Warranty
• Duration
• Providers ordinarily want the warranty period to begin when the agreement is executed, or, at the very latest,
when the technology or services are delivered, and to last for a short period of time (usually a few months at
most)
• Providers often are unwilling to provide a longer warranty period in part because they want to incentivize
customers to identify problems quickly
• Longer warranty periods may increase the likelihood of disputes
• Scope
• Extent of Compliance: Rather than warranting that their offerings will be “in accordance with the
documentation,” providers often prefer language to the effect that their offerings will be “substantially in
accordance with the documentation”
• Third-Party Materials/Technology: Providers will generally seek to limit their warranties so that they are not
responsible for any third-party materials, third-party technology integrated into their services, software, and/or
deliverables, or any open-source software
• Knowledge Qualifiers: Providers also sometimes seek to include knowledge qualifiers on their warranty
obligations

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Body of the Agreement – Warranties
• Limits on the Warranty
• Remedies – Repair, Replace, Refund
• Providers generally seek to limit a customer’s remedy for breach of warranty to repair, replacement, or partial
refunds
• E.g., “Upon a breach of warranty, Provider shall, at its option, (1) repair the technology, (2) replace the
technology, or (3) accept the return of the technology and upon such return refund to Customer any fees
prepaid by Customer for the period of the term that has not yet occurred”

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Body of the Agreement – Warranties
• Not surprisingly, customers generally want a warranty with a longer duration and
a broader scope. For example, a customer will often want the following:
• A longer warranty period (e.g., 12-18 months)
• Starting the warranty period on the date that the customer begins using the services,
software, or deliverables
• Customer’s fallback position is often to start the warranty period on the date that the customer received the
services or technology
• Whereas a provider will often prefer to warrant that it will provide its offerings “substantially
in accordance with the documentation,” the customer will prefer language to the effect that
“the offerings will be in accordance with the documentation and Exhibit X (which exhibit
provides a full description of the services offered),” or at the very least that “the offerings will
in all material respects be in accordance with the documentation and Exhibit X”
• Making it clear that, at the customer’s option, the provider shall promptly refund all fees if
the provider breaches any of its warranties

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Body of the Agreement– Indemnity
• Customers generally want providers to indemnify for, at the very least, the
following:
• Any allegations that the products or services infringe on or violate the IP or other proprietary
rights of any third party.
• Where applicable, a breach of any of provider’s data security or data privacy obligations or
other data-related obligations.
• Some customers also try to get a provider to indemnify for the following:
• Any claims brought by a provider’s contractor or agents.
• Any breach of the agreement or any warranty by a provider.
• Any violation of law by a provider.
• Any acts or omissions of a provider.

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Body of the Agreement– Indemnity
• Providers may seek to have their indemnity obligations limited as follows:
• IP (limitations). Providers may seek to limit their IP infringement obligations to (i) only certain
IP claims (e.g., copyright and trademark but not patent), (ii) only IP rights existing as of the
effective date of the agreement, and/or (iii) only IP rights in certain territories (e.g., the U.S.
and Canada).
• IP (exclusions). Providers may also seek the following exclusions from the IP indemnity:
• No indemnity obligation if the customer fails to stop using the services or technology after receiving notice of
the infringement.
• No indemnity obligation if the customer is not using the provider’s most current version of the services or
technology (e.g., the most current version of the applicable software).
• No indemnity obligation with respect to so-called “combination” or “misuse” claims (e.g., a claim that would
not have occurred but for the combination of the provider’s services or technology with third-party services or
technology).
• No indemnity obligation if the applicable claim was caused by or arose out of any materials (including
information) provided by customer to provider (e.g., to complete a deliverable).

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Body of the Agreement– Indemnity
• Many providers seek to have their customers indemnify them for some or all of
the following:
• IP infringement of third-party rights arising from the customer data or customer technology;
• Violation of any restrictions set forth in the agreement (including in any terms of use or
similar documents);
• Violations of applicable law; and
• Any acts or omissions of a customer’s users.

• Customers will often push back on most, if not all, of the foregoing. When
customers agree to indemnify, it is often in connection with IP infringement.

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Body of the Agreement– Liability Limitations
Each party will seek to limit its liability to the other party, but to the extent that any limitations on liability are
mutual, each party will need to weigh the risk versus the benefit of agreeing to a higher versus lower dollar
amount of liability (e.g., of the two parties, who is more likely to breach the agreement and cause damages, and
who is more likely to bring a legal action)
• The parties will often agree to a mutual disclaimer and waiver of liability for indirect, consequential,
exemplary, punitive, special and incidental damages, although each party will frequently want certain
exceptions to this exclusion
• One or both parties will want to make sure that the agreement contains an exclusion/clarification so that the
disclaimer and waiver of such damages does not apply to the other party’s indemnity obligations under the
agreement
• In addition, the customer will often want a provider’s liability for breach of data privacy and security
obligations or any other data-related obligations, if applicable, as well as any other confidentiality obligations,
to be excluded from such limitation on consequential or other damages

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Body of the Agreement– Liability Limitations
• The provider will often want a customer’s liability for IP violations, violations of
restrictions on the use of the technology or services, and violations of
confidentiality excluded from the limitation on consequential or other damages
• Each party must also decide if it wants the agreement to contain per claim, annual,
or aggregate caps on liability, or whether there should be no caps
• Often, the agreement is ambiguous with respect to whether the cap is a per claim
or aggregate cap; such ambiguity ordinarily is not in the best interest of either
party
• In the context of professional services agreements, the limitation of liability is
often limited to the amount payable under the applicable statement of work

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Body of the Agreement– Liability Limitations
• Frequent Exclusions from Caps on Liability
• Indemnity obligations
• Damages caused by gross negligence or willful misconduct
• Liability for personal injury or death caused by the negligence of a party
• Violation of IP rights
• As to a provider of technology services, breaches of its data-related obligations
• As to a customer, violations of the “restrictions” provision
• Breaches of confidentiality
• Payment of fees for the services and products

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Body of the Agreement– Dispute Resolution
• Purpose
• Decide up front what happens if the parties end up in a dispute, including
• How the dispute will be handled
• If arbitration, what rules will govern (JAMS/Endispute or the American Arbitration
Association)
• If arbitration, how many arbitrators and how will they be picked?
• If arbitration, will there be procedures for discovery and what the arbitrator can and
can't do?
• If litigation, where can or must the litigation be brought and what law will govern?
• Common mistakes
• Overly-complex/burdensome procedures
• Overbroad waiver language (e.g., must bring a dispute within 3 days)
• Failing to specify governing law

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Body of the Agreement– Miscellaneous
• Attorneys’ fees • Waiver
• Modifications to agreement • Headings
• Notice • Execution
• Entire agreement • Representation on authority
• Severability • Force majeure
• Survival • Assignment
• Ambiguities

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Body of the Agreement– Miscellaneous
• Common mistakes
• Insufficient analysis/treating these terms as purely “boilerplate”
• Failing to find important language parties sometimes hide in the
miscellaneous sections
• Omitting crucial miscellaneous terms
• Survival
• Severability

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Signature Pages

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Signature Pages
• Purpose
• Bind the parties
• Satisfy the legal requirement that certain types of agreements be “signed”

• Common mistakes
• Failing to indicate that the agreement is made by the company
• Entity name at top of signature block
• Failing to indicate that the signer is signing for the company
• Use of “By”
• Signer lacks requisite authority to bind the company

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Ancillary Documents

Exhibits
Service Schedules
Statements of Work

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Ancillary Documents
• Generally, ancillary documents contain terms that the parties for
various reasons don’t want to include in the body of the main
agreement

• No single “right” way to decide or use any type of ancillary document

• Little consistency
• Many people have strong opinions

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Ancillary Documents
• Exhibits/Addendum/Appendices
• Often stand-alone documents currently in effect
• A privacy policy or terms of service
• Certificate of incorporation
• Form of a document which will be effective sometime after signing

• Schedules
• Terms and conditions which might have been in the body of the agreement, but which
have been moved to the back for a variety of reasons
• E.g., Service Schedules for particular services in the context of an MSA

• Statements of Work
• Hybrid project management document often containing legal terms

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Ancillary Documents
• Common mistakes
• Precedence issues
• Incorporation
• Failing to review with the same detail as the main agreement
• Unintentionally undermining terms in the body of the main agreement

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Spot the Problems in the Provisions

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 Limitation of Liability
1. WITH RESPECT TO THE HARDWARE AND PROFESSIONAL SERVICES PROVIDED UNDER THIS AGREEMENT,
NEITHER PARTY MAY BE LIABLE TO THE OTHER PARTY FOR ANY CONSEQUENTIAL DAMAGES, INCLUDING ANY
DAMAGES FOR LOSS OF DATA, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES OR IF SUCH POSSIBILITY
WAS REASONABLY FORESEEABLE.

2. THE MAXIMUM LIABILITY FOR DIRECT DAMAGES THAT EITHER PARTY SHALL HAVE TO THE OTHER PARTY
AT ANY AND ALL TIMES SHALL EQUAL THE AMOUNT THAT SUPPLIER HAS RECEIVED FROM CUSTOMER UNDER
THIS AGREEMENT DURING THE 12 MONTH PERIOD IMMEDIATELY PRECEDING THE CLAIM. NOTWITHSTANDING
THE FOREGOING, SUPPLIER’S LIABILITY FOR ANY CLAIM IN CONNECTION WITH ITS PROVISION OF PROFESSIONAL
SERVICES TO CUSTOMER SHALL NOT EXCEED THE AMOUNT PAID FOR THE PROFESSIONAL SERVICES.

3. CUSTOMER MAY PERMIT ITS AFFILIATES TO USE THE HARDWARE AND RECEIVE THE PROFESSIONAL
SERVICES AND ANY OTHER SERVICES PROVIDED HEREUNDER, AND SUPPLIER SHALL BE LIABLE TO ANY CUSTOMER
AFFILIATES IF SUPPLIER’S BREACH OF THIS AGREEMENT HARMS SUCH AFFILIATES.

4. NEITHER PARTY SHALL BE LIABLE FOR THE ACTS OR OMISSIONS OF ANY PERSON THAT IS NOT A PARTY
TO THIS AGREEMENT

Problematic Provisions
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 Payment & Audits
1. Customer shall pay in full all Supplier invoices by the due date on such invoice, except that
Customer shall not be required to pay any disputed invoices until the dispute is resolved. Customer
shall not dispute an invoice unless it has a good faith basis for doing so and may only dispute an
invoice prior to the invoice due date.

2. Supplier shall not have the right to raise fees during the initial term, or during any renewal
term, unless Customer purchases additional services, there is a change in law, or Supplier’s costs have
materially increased as determined by Supplier in its reasonable discretion. Notwithstanding the
foregoing, Supplier may raise fees that will go into effect at the commencement of any renewal term
so long as Supplier provides advance notice to Customer that an increase will occur.

3. If Customer fails to comply with Section 1, Supplier may suspend services or terminate this
Agreement and recover any and all damages incurred by Provider.

4. Customer shall have the right to audit Supplier’s books and records at any time upon notice
to Supplier. If such audit states that Supplier has overcharged Customer, Supplier shall refund
Customer for such overcharge and pay for the costs of such audit.

Problematic Provisions
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 Indemnity
1. Provider will defend and indemnify Customer and its affiliates against (a) any damages finally
awarded in connection with any lawsuit alleging that the Services, or Customer’s use of the Services,
infringe a U.S. patent that was in effect prior to the commencement of this Agreement; and (b) any
claims relating to data privacy or data security with respect to the Services unless such claims arise
from Customer’s breach of this Agreement, negligence or willful misconduct. Provider’s obligation to
indemnify is contingent upon the indemnitees timely notifying Provider of any claim that could give
rise to Provider’s indemnification obligations under this Agreement.

2. Provider will have no liability for any claim under Section 1(a) if such claim arises out of or
relates to (a) Customer’s impermissible use or combination of the Services, (b) any user’s use of the
Services that is not in accordance with the Documentation, or (c) Customer’s actions, and in all such
instances Customer shall indemnify Provider.

3. An indemnifying party shall generally pay all costs and expenses incurred by the indemnified
party in connection with any claim. Neither party, however, may settle any claims subject to
indemnification without the other party’s written permission, which consent shall not be
unreasonably withheld.

Problematic Provisions
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If you have any questions, please contact:

Alan Fishel Nicholas Lawson

Partner Associate
Arent Fox LLP Arent Fox LLP
202.857.6450 202.350.3706
alan.fishel@arentfox.com nicholas.lawson@arentfox.com

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