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The Exploding Tech Law Contract

Posted by Rick · October 5th, 2003 · 1 Comment

A friend, David Medinets of Codebits fame, writes to ask my thoughts about an article by Mark Grossman, one of the better-known technology lawyers in the United States. I assume David wants to know what I think about Grossman’s apparent degradation of “tech contracting.” On the surface, Grossman’s article is a little confusing and even appears somewhat self-contradictory.

But before I say anything else, I’m going to repeat something found at the bottom of the online version of the article I located:

Disclaimer: The advice given in the The Miami Herald Tech Law column should not be considered legal advice. This newsletter only provides general educational information. You must never rely upon the advice given here. Your individual situation may not fit the generalizations discussed. Only your attorney can evaluate your individual situation and give you advice.

And now…

…I’m going to repeat what was at the bottom of the email version David forwarded:

Disclaimer: The advice given in the TechLaw column should not be considered legal advice. This newsletter only provides general educational information. You must never rely upon the advice given here. Your individual situation may not fit the generalizations discussed. Only your attorney can evaluate your individual situation and give you advice.

Continuing this preamble, what is true of the TechLaw column is equally true here. For one thing, let me be crystal clear that I’m not an attorney; I’m a second-year law student (also known as “a 2L”). Second-year law students love to talk about things they know very little about, all the time believing themselves to be experts. On the plus side, I really am an expert. (Ha! Gotcha! That was a little second-year-law-student-who-spent-too-many-hours-in-the-sun-reading-Fundamentals-of-Federal-Income-Tax-Law-Fourth-Edition-by-William-D.-Popkin humor!)

There is a point to all this, by the way, so let me clarify with one last bit of “legalese” and then on to the explanation.

Disclaimer: The advice given on The Unspun Zone™ should not be considered legal advice. This website only provides general educational information. You must never rely upon the advice given here. Your individual situation may not fit the generalizations discussed. Only your attorney can evaluate your individual situation and give you advice.

Still with me? Good! (If you haven’t had enough, for some reason, please check out the Terms of Use page for this website, which contains even more “boilerplate.”)

As boring and dreary as all the legalese above may be, it serves to illustrate one of the implicit points of Grossman’s article. When attorneys write contracts — or just about anything for that matter — they usually do not start “from scratch.” (Unfortunately, Grossman explicitly contradicts this, even after giving reasons why it should be so.) Even the formation of corporations is often pro forma, “using standard forms for the articles of incorporation and the bylaws.” (Pinto and Branson, Understanding Corporate Law (1999) page 12.)

If you think about it, this makes a lot of sense. Law and legal issues are not always cut-and-dry. While lawyers often take the rap for this, they are simply (well-paid) pawns in the process. When Rick and Denise wish to exchange something in the marketplace — whether it’s money for services, services for money, services for services, or whatever else you can think of — they may approach the bargain full of good faith and each carrying the belief that they are about to make a mutually-beneficial arrangement. Although each is looking to obtain a personal benefit, each is also intending to provide a benefit to the other; neither is normally looking “to put one over” on the other. In some cases, the parties may even be friends, family, family of friends, or friends of family. (Look out when any of that happens in a contractual context!) Combine that with the fact that language — all language — is imprecise and you have a recipe for a disastrous contract.

The problem is that while most people are good people, while they’re out to earn a buck or two, and would not necessarily consider theft, robbery, or cheating the method by which they will do it, misunderstandings do occur. Even the best of intentions can end up in the toilet. (See also Water Resource Control v. Commissioner, T.C. Memo 1991-104 [squabble over tax consequences of “royalty” payments for development of the Meditator throne toilet].) A well-written contract can help avoid that by putting into a permanent document the agreement from all sides, in words that ensure “somebody who knows nothing about the specifics of your deal could read it and understand the deal.” (Grossman, One-size-fits-all approach to tech contracts will fail, The Miami Herald, September 11, 2000.)

Yet, as noted, language is imprecise. One of the problems inherent in language that can impact contracts is the “underdeterminacy” of speaker meaning and the need to know more than what a given collection of words or sentences might adumbrate in order to properly understand them. Kent Bach refers to this as the Contextualist Platitude. (Bach, Context ex Machina, in Semantics vs. Pragmatics (Szabo, ed., expected 2004); the article is currently available – Bach, supra, at pages 3-4 (following numbering convention of the linked PDF file).

Along similar lines, Donald Davidson noted that in making assertions,

the asserter must intend to make an assertion, and he must intend that this intention be recognized by his audience. Assertions are intended to be public performances where the clues are adequate to identify the character of the performance as assertoric. So it is natural to think that it would be useful if there were a convention, as a convenience in making our assertive intentions clear. – Davidson, Communications and Convention, Inquiries into Truth & Interpretation (1984) page 269.

The legal system handles this primarily through the development of case law. When dealing with the assertoric content of any given set of terms within a legal context, it is important to understand — as the term “context” implies — something of the legal landscape surrounding the terms.

In feudal times, for example, land was the primary source of wealth and power; ownership of land was important in determining one’s position within society. It was possible to sell land in various ways. Without getting too bogged down in the history or technicalities, a variety of phrases sprang up in contracts for land. The law developed in such a way that phrases in contracts for the sale of land might specify that the sale was “to X and his heirs” or “to X and the heirs of his body.” Each of these phrases had a distinct legal purpose. In the first case, the land was sold essentially without any limitations. (The technical term for this is “fee simple absolute,” which is the most common way land is sold in the United States today.) The second phrase was intended to ensure that some foolish landowner did not permanently deprive future generations of his family. Someone who held land through a contract to him “and the heirs of his body” only owned the land for as long as he was alive; after that, his eldest son (if any) owned it. (This is known as “fee tail,” from the Old French taile, past participle of tailier, to cut; our word “tailor” also comes thence.) Consequently, the most he could sell the land for was the duration of his life and anyone buying it owned it only so long as the one from whom he had bought it lived. When John bought land from Richard and Richard owned it in fee tail, John lost it to Richard’s eldest son upon Richard’s death; the land reverted to Richard’s heir. (Richard’s heir could then sell his life estate, if he so wished, with similar consequences at his death.)

The benefit of this is that anyone who wanted to sell land could use certain phrases and everyone knew exactly what was happening. If there were any subsequent disagreements over the duration of the contract, one of the parties might try to say, “Well, I know the contract said this, but what I really meant was [some other thing].” This argument would go nowhere in a court of law. And while you could certainly try to use other words in your contracts, the history of the cases relating to land contracts from feudal times would inure to your benefit only if you utilized the phrases which had already been shown to have the results you wanted in a court of law. In countries such as the United States, which still pretend to follow the rule of law for the most part, this is an important consequence.

This is where Grossman’s article is perhaps confusing and, as I said, could appear self-contradictory. The title of his article is “One-size-fits-all approach to tech contracts will fail.” And he says near the end that “you should have your tech lawyer prepare the contract from scratch.” (Grossman, supra, emphasis mine.) Yet elsewhere in the same article, he said:

For starters, tech contracting is a relatively new legal specialty. Outside of a few places like Silicon Valley and Boston, you just can’t find many lawyers with legitimate experience doing these deals. – Grossman, supra, emphasis mine.

He also notes that many of these contracts have “never crossed a lawyer’s desk.”

The problem, then, is that the origin of the forms being circulated is unknown; they may or may not have been prepared by an attorney. If they were prepared by an attorney, you don’t know, when you copy them without appropriate legal advice, whether the preparing attorney was competent. Even when they were prepared by a competent attorney, Grossman appears to be saying, tech contracting is new enough to lack the strong contextual cues that would allow ordinary attorneys to draft solid tech contracts. Since the sale of tech services is new, the language of tech service contracts is necessarily new. How will the courts interpret the language of the tech contract?

If Grossman really means it when he says “you should have your tech lawyer prepare the contract from scratch,” then he is just flat out wrong. (I say this with all the pomposity a 2L can muster.) For all the reasons given above, preparing contracts “from scratch” is just what should not be done. If, on the other hand, Grossman is trying to say — and, by the way, this is another piece of scripted legalese with a history, which can be seen on any number of automotive ads on television — “Professional driver on closed course. Please do not attempt,” then I have to agree with Grossman.

Referring back to the start of my article, you’ll note that the only difference between the three iterations of the disclaimer is the name of the entity covered and the substitution of “website” for “newsletter” in the final iteration. Knowing which phrases to use and which kinds of contracts to use them in is a skill that even an ordinarily-trained lawyer may not fully exhibit. Yet even as a second-year law student, I’ve already learned more than I can count. Unless contract law becomes my specialty, I’ll probably forget some of them. Even if I don’t, the law in that area will change and, unless I am practicing in that area, I will not be able to keep up with it.

Too many small technology firms and consultants try to save money by taking and modifying someone else’s contract. As Grossman notes, it doesn’t matter if it is a contract written for someone else, or a contract written for the tech firm but for a different project, that tech firm, unless it is using in-house counsel skilled in tech contracts, doesn’t have what it needs to ensure that “and his heirs” doesn’t become “and the heirs of his body.”

Only an attorney who has been trained in and devoted time to learning the legal ins-and-outs of contracting in a tech environment has the requisite knowledge to keep you from losing both your fee and your tail.

[Postscript for Philosophers: I am aware that the Davidson quote is taken somewhat out of context. Davidson is discussing a highly technical, philosophy of language examination of “assertion” and is denying that as pertains to this highly technical discussion it would be possible to have a “convention” regarding assertion. As he quotes Frege, “There is no word or sign in languages whose function is simply to assert something.” Davidson then points out that Frege should have looked to history and asked why there was no such sign before bothering to create one. As Davidson noted in the example he gives of an actor on a stage pretending there is a fire, when a real fire then breaks out and he is subsequently unable to convince an audience he is no longer acting as he tries to warn them, any convention to indicate when an assertion was being made would have been exploited by an actor or writer wishing to pretend to make an assertion, hence canceling out its effect. Nevertheless, it is natural to think it would be useful if there were a convention whereby assertions could be made clear qua assertions. While the development of such conventions may fail in the context of highly technical discussions of “assertion” within the philosophy of language and while they would fail in the actor-and-fire scenario outlined by Davidson, the naturalness of thinking they are useful is at the very heart of the point I was making above. Hence it seemed appropriate to quote Davidson in this context.]

Categories: Law and Legal Issues


1 response so far ↓

  • 1 Bob // Oct 6, 2003 at 11:27 am

    My experience, for what it’s worth…

    1 – My company buys software, hires me to convert / install said software. On the record, I had nothing to do with the selection or purchase of this software.

    2 – My company signs the contract provided by the vendor with only minor changes. Many of the negoiated points are left to handshake and not mentioned on paper.

    3 – The vendor’s respresentitive has a heart attack followed by a stroke 72 hours after the contract is signed.

    4 – The Vendor refuses to believe / honor many of the unwritten, negotiated points.

    5 – The Company and Vendor go around for over a year with the benefits and features of the software not being realized by the Company.

    6 – In addition, the Vendor begins to withhold support because they consider the Company to be ‘high maintenance’. Communication breaks down at all levels.

    7 – Eventually, expensive service contract payments come due (as per the contract) for modules yet to be installed and functional. The Company refuses to pay until ‘canned’ software and customized software work as promised in unwritten agreements.

    8 – Vendor shuts down all development and support until such payment is made.

    9 – Company sues for breach of contract, despite the contract being written by the Vendor heavily favoring the Vendor. Company also sues for lost revenues, etc.

    10 – Vendor countersues for breach.

    11 – A VERY LONG discovery period discloses email and phone communications where additional features were discussed but nothing is commited to.

    1600 documents produced and indexed by the Company.

    Vendor returns 200. But in that 200, portions of emails between Vendor staff acknowledge that the software sold was only a release candidate. This unexpected event becomes cornerstone the Company’s attack strategy.

    12 – The process of preparing for trial is remarkably time consuming on both parties, but continue. Both businesses suffer.

    Key people deposed with little new discovery.

    Expert witnesses hired by both parties and word gets out in the software community that the Vendor is being sued.

    Company counsel contacts a select list of Vendor clients who have expressed exasperation at how the Vendor does business. No cooperation due to fear of support being revoked for cooperating.

    Things are getting exceptionally ugly. Key Vendor employees are made available for deposition but only on the East Coast and Canada.

    Vendor counsel repeatedly tries to intimidate Company counsel by making mention of the number of lawyers in their L.A. firm versus the two lawyers in Clovis.

    To their credit, the Clovis lawyers don’t bite. They continue to prepare for a trial.

    The Company hires an accountant to estimate the losses due from this software. Because part of this software was supposed to deal with internet commerce, the numbers inflate to a remarkably high level (over 2 million).

    13 – Mediation is attempted as a last ditch effort to avoid trial.

    In mediation briefs, the Vendor is portrayed as regarding the suffering of the Company as insignificant along with a very casual approach to installation and support. Vendor also continues to redefine the negotiated features to lesser and lesser features while charging the Company for programming time to bring these features to a useful level to the Company.

    The cost overruns equal the cost of the initial contract.

    The Company is portrayed by the Vendor as incompetent and not prepared for system conversion. Vendor also states that the Company doesn’t know what it wants and has wasted enormous support hours.

    14 – Mediation hosts the usual parties plus the Vendor’s insurance company. This is the first mention or appearance of the Vendor’s insurance company.

    The Company has dedicated an employee to manage the case and support the lawyer. Company’s counsel is well briefed and prepared for Mediation or trial.

    The owner of the Vendor company manages the case for the Vendor.

    15 – Mediator states at initial meeting that the Vendor’s brief is weak as compared to the Company and, if trial was today, would find itself with a difficult case to defend.

    16 – That’s all the insurance company needs to hear. The rest of the day is dedicated to managing the fistfight (literally) between the Vendor and the Insurance company. Eventually they have to be separated and the Mediator is travelling between their two offices. The Company sits and waits until almost close of business.

    End result is an offer to settle from the Insurance company in exchange for dropping all litigation and a gag order.

    The settlement amount is for the cost of the original contract and does not cover the overruns or the legal fees.

    17 – The Company still faces a loss of over $400,000, half of which is legal fees.

    18 – As a reward for eighteen months of supporting the lawyer, narrowly avoiding divorce, giving birth to a bouncing baby ulcer, and contiuing to manage my department, I get to pick the new Vendor and start all over again.

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