A confidentiality agreement (also known as a Non-Disclosure Agreement) is meant to protect a business from misappropriation of valuable proprietary information by employees.  Often it is a good idea to have one in place with your employees.

When drafting or reviewing such a confidentiality agreement, check the following points (and consult with your attorney):

1.    Use the proper form of Confidentiality Agreement

Make sure that the form of the confidentiality agreement that was used to draft your agreement is appropriate for the business-employee situation.  Confidentiality Agreements designed for a business to business transaction where both parties disclose confidential information won’t do.

2.    Define Confidential Information

There must be a definition of what constitutes confidential information.  Be specific, but also include a more general “catch-all” provision.  Do not make confidential information depended on whether it was expressly marked as such.  Exclude information that is public or already in the lawful possession of the employee.

3.    State the Confidentiality Obligations

No disclosure of confidential information, unless to authorized other employees or compelled by court order (but we will have right to defend against court order before disclosure);

No removing of confidential information from business’ premises;

No poking around in confidential information to learn more than we disclosed (i.e. reverse engineer any data, software and so forth);

No reproduction of confidential information from memory;

Use of confidential information only for job purposes;

Obligation to notify business immediately upon learning that confidential information was disclosed or used inappropriately;

Upon notice by business, return of any confidential information in employee’s possession.

4.    State your Remedies

Money damages are often not sufficient to make whole for a business’ loss caused by disclosure of its confidential information.  A business must also be able to stop an employee in his or her tracks when disclosure is imminent.  To make courts give those remedies, it is advisable to state that in the agreement. In legalese, these provisions might be called  “Equitable Relief” or “Injunctive Relief.”

5.    Make the employee pay for the consequences of his or her breaches of confidentiality

In legalese, these provisions might be called “Indemnity.”  Make sure the indemnification clause includes “including reasonable legal fees incurred by the businesss.”

6.    State the Term of the Agreement

Usually as long as the confidential information remains confidential.

7.    Remember the limits of a Confidentiality Agreement

Confidentiality Agreements only offer so much protection.  Don’t neglect very practical protective measures:

Limit access to “as needed”;

Clearly identify confidential information (if verbal, say so), but don’t make that a prerequisite for your definition of confidential information (see above);

Monitor dissemination of confidential information by any appropriate means;

Continuously remind employees of confidential nature, i.e. verbally, in work manuals and so forth);

Implement security measures.

Have I forgotten any important point?  Feel free to comment.

In a recent article on Legal Technology,  Justin Hectus writes that much of an attorney’s work consists of the "recycling of documents and information that has proven successful in the past."

So why, you ask, do attorneys get paid the big bucks for recycling work product?

Justin states:

"I believe that the value provided by the attorneys at my firm (and, for that matter, at any firm
of merit) comes in the nuanced interpretation and execution of the matter at hand. We’d be doing our clients a tremendous
disservice if we tried to reinvent the wheel each time we had to create a new agreement, instead of leveraging previously
successful work product and adding the artful interpretations and additions relevant to the current situation. By starting
with a foundation of proven work product and further, by learning as much as we can about our competition, we’re able to
focus our efforts on delivering real value to our clients."

Well put. 

Where can you find agreements drafted by other attorneys?  As the article reports, by using a new service offered by REalDealDocs.  Through their interface one can perform very targeted searches in SEC documents to reveal business agreements of almost any kind.  While all SEC documents are publicly available, it used to be very difficult to find what you were looking for.  RealDealDocs makes it possible for a relatively low fee.

Another source for SEC documents is a website called onecle.com.  Their offering is not as big as that of RealDealDocs; but it is free.

If your LLC or corporation is getting any kind of loan financing, it is very likely that the lenders will ask you and your fellow business owners for personal guarantees.   Even if your business offers decent collateral, lenders like to see that you put some of your own skin in the game.

Thus, even though you, as a busines owner, are not liable for the debt obligations of the LLC or corporation under the law (limited liability shield), you will become liable under the personal guaranty if the business defaults under the loan.   If the business goes under and can’t repay the loan, your assets are on the line.  What is even worse, if the other business owners can’t pay under their personal guarantees, you may be on the line for the entire amount of the loan, despite the fact that you may only own part of the business.

CCH offers this really good summary of personal guarantees in the loan context, including possible avenues of negotiation in order to minimize or avoid personal guarantees when executing loan documents.  Remember:  Everything is negotiable!


Related Post:  Limited Liability Protection of LLC not absolute

Gone are the times when small businesses had only local dealings.  Many small businesses sell or purchase goods internationally.

When drafting an agreement for an international sale of goods, you must be aware of the potential applicability of the United Nations Convention on Contracts for the International Sale of Goods (CISG)

The CISG applies to:

international transactions, i.e. the buyer and the seller are from different countries and such countries are a party to the CISG.  For example, a seller in the United States and a buyer in Germany would make a transaction an international transaction;

regarding commercial goods, i.e. not goods for personal, family, or household use, not partially to be manufactured goods, not goods sold by auction, not securities or other financial instruments, and so forth (See Article 2 and Article 3 CISG);

where the agreement expressly states that CISG applies to the transaction or,

(and this is what many people, including attorneys,  overlook)

where the agreement has a gap with respect to a particular issue or there is a conflict between the UCC and the CISG,  the CISG may act as the default law, even if the contracting parties had no intention of applying the CISG or didn’t even know of its existence.

To avoid the default application of the CISG, parties can choose to waive its applicability (see Article 6 CISG) by including language into the sales agreement similar to this:

This agreement is governed by the Uniform Commercial Code as in effect in the State of New York, and is not governed by the United Nations Convention for the International Sale of Goods.

Should you opt out of the CISG?  It depends.  The CISG differs in numerous aspects from the UCC.

At minimum, your counsel should be aware of the CISG, compare its rules to the UCC and make a decision based on such differences and the particular circumstances of your transaction.  One benefit of the UCC:  people are more familiar with it. 

Here is a little known secret about limited liability company (LLC) operating agreements:  They are often more complex than necessary.  Pick up any "standard" operating agreement from the internet or elsewhere and you will see a lot of provisions incomprehensible to a mere mortal.  Most of these provisions deal with so called "special allocations" among members of the LLC.   "Special allocations" describes a scenario where members of an LLC share profits and losses of the LLC in percentages different from the percentage of ownership in the LLC.  When members of an LLC opt for special allocations, the corresponding operating agreement has to incorporate certain tax rules in order to pass muster with the IRS.

Example:  A and B each contribute $500 to the LLC and agree to share profits and losses of the LLC equally.  Result:  No special allocations.

A and B each contribute $500 to the LLC and agree that for the first two years A is to receive 70% of the profits and losses of the LLC and B only 30% of the LLC's profits and losses.  Result:  Special Allocations.

If you and your fellow members  share profits and losses of the LLC in proportion to your membership interests (i.e no special allocations), you don't need any complicated provisions dealing with  special allocations. 


 Related Posts:

**This post is for informational purposes only.  For actual legal advice contact a business lawyer, business attorney or business law firm**


Buy-sell agreements are like prenuptial agreements for people in business together; Buy-sell agreements set forth what is going to happen when things go wrong and business partners want to, or have to, separate.  As with prenuptial agreements, people tend to overlook their importance or simply don’t want to deal with the subject; after all, they are in love!

But as Iowa business attorney Rush Nigut points out in his most recent post:

"The time to enter into a buy-sell agreement is at the beginning of
the business relationship when everyone is excited and getting along.
It is often very difficult to negotiate a deal when something has gone
wrong.  Without a buy-sell agreement, owners may end up in court and
the business may suffer." 

A buy-sell agreement can stand on its own or be a set of provisions in another agreement, such as a shareholder agreement, operating agreement or partnership agreement. 

A buy-sell agreement usually covers the following issues:

Right of First Refusal
If an owner wants to leave, does he have to sell his interest to the remaining owners before selling to an outside party?

How to Value the Business
If there is a sale of an owner’s interest, how is the value of the interest to be determined?

Payment in case of a sale of an interest
If there is a sale of an owner’s interest, is the purchase price to be paid in installments? with interest? or in a lump sum?

Death, Disability, Divorce, Retirement of an Owner
What is going to happen in case of death, disability, divorce or retirement of an owner? 
Related Post:  Going into Business Together – Don’t Rely on a Handshake

If you need help in preparing a buy-sell agreement, you should contact a licensed attorney in your area.

You may have read it in the New York Times, the Legal Reader or on AboveTheLaw, a single comma in a 14- page Canadian contract may decide whether the contract was rightfully cancelled by Atlantic Canada, a telephone company.  This decision supposedly is worth 1 million Canadian dollars.

The contractual language at issue is as follows:

“This agreement shall be effective from the date it is made and shall
continue in force for a period of five (5) years from the date it is
made, and thereafter for successive five (5) year terms, unless and
until terminated by one year prior notice in writing by either party.”

At first I thought I agreed with the Canadian regulator that had to decide the issue.  It held that the contract could have been cancelled as early as one year after its execution and not only after the expiration of the first five year term.  However, the longer you stare at the language, the less certain it becomes. 

According to the New York Times, Ken Adams, the leading expert on contract drafting, has been  commissioned by the opposing party, Rogers Communications, to write a a 69-page affidavit to address the issue in Roger’s favor.

Another interesting aspect of the case is that Rogers claims that in its French version (which has equal status under Canadian law), the contract has a different statement clarifying the point. 

What is the lesson to take away from this media spectacle?  Grammar and clarity in contract drafting are important. 

In addition, whenever two languages are at play, consider including language in the agreement setting forth which language is to govern in case of a dispute over the meaning of the contract.

Styles_1A lot has been said about first impressions in the business of law.  Does your letterhead look fancy, are your business cards engraved, is your correspondence well written and free of typographical errors? 

While all that is still important, I feel one aspect of professional appearance is rarely mentioned.  Does your lawyer (or other professional service firm) produce perfectly formatted electronic documents?  I think any agreement of more than a couple of pages drafted by a lawyer should be formatted using proper styles, outline numbering and so forth (or the equivalent in another program).  Anything else just looks like "tippex on the screen" to me.

In the end, it’s not just cosmetics; proper electronic documents benefit the client.  Making changes to a poorly formatted agreement takes much longer than making changes to a properly formatted document.  While secretaries can do the typing and rearranging of the sections, attorneys still have to check the end product.  I wonder how many associate hours are being wasted every day by manually checking cross references and section numbering in poorly formatted agreements? 

If you are a lawyer reading this and don’t have a good template to use for your agreements, check out Ken Adam’s agreement templates here (which I assume are free for the taking) and learn (or have your secretary learn) how to use styles.  The templates are excellent.

Just my humble opinion.

A recent case by a federal court in New York illustrates the importance of choice of law and forum selection clauses in each and every contract or guaranty.

Forum_selection_clauseIn Quebecor v. Harsha Associates (Quebecor World (USA), Inc. v. Harsha Associates, L.L.C., et al (2006 WL 2918797 (W.D.N.Y.)), the court held that a guarantor was not bound by a forum selection clause
contained in the guaranteed contract. Only if the guaranty and the contract were closely
related, one could hold the guarantor to a forum selection clause in the
underlying contract.  The court listed the following factors as important when deciding whether a close relationship existed:

  • whether the two documents were executed contemporaneously;
  • whether the guaranty stated to have been an inducement or consideration for the
    contract or whether it incorporated the contract by reference; and
  • whether the two
    documents covered the identical subject matter.

In Quebecor v. Harsha Associates, the court denied such a close relationship.

The court further stated that absent a close connection between a guaranty and the underlying
contract, courts in New York were reluctant to
bind a guarantor under a contract’s forum selection clause,
particularly where the guaranty contains a choice of law (but not a
choice of forum) clause (which was the case in Quebecor v. Harsha Associates).

See below the fold for facts and the court’s reasoning.

Related Post:  How to choose New York law and New York courts in your business contracts when you have no connection to New York.

Read more

Great line by Lema Korshid on Mindpetals:

"The only thing that the form contract comes with besides an “idiot tag” is no guarantees."

Read the full article "Form Contracts – Use them at your Own Risk".

By the way, I think I called her a non-lawyer the other day.  From this article it seems that she (or he) actually is a lawyer.   Apologies.

If you need help with form contracts, contact a licensed small business attorney in your area.