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6 Contract Templates Every Company Should Have at the Ready

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One of my favorite sayings is “opportunity is equal parts luck and preparation.” In other words, being proactively prepared for an opportunity puts you in a better position to take advantage of one when it comes along. When a business opportunity arises that requires a contract or other legal document, being prepared includes having a well-written template ready to go. It can help avoid missing critical terms and points when rushing to draft a document for the opportunity, minimize the time and effort required to respond, and turn a “fire drill” into a routine but urgent request. Conducting business on a handshake agreement, or on a hastily drawn-up set of terms, to save time can backfire if the opportunity turns into a dispute. Having a well-drafted, legally binding agreement in place ensures the parties both understand their rights and obligations in connection with a business opportunity, and gives your company the protection it needs if and when the need arises.

Here are six contract templates every company should have drafted and ready for use when the opportunity arises. If your company does not have in-house counsel, consider whether having outside counsel prepare some or all of these templates for you is a worthwhile investment. If you have (or are) in-house counsel, check to ensure that you have up-to-date versions of these agreements in place. Consider whether to take this opportunity to freshen them up.

1) Mutual and unilateral NDA templates

Companies use non-disclosure agreements (aka “confidentiality agreements” or “NDAs”) for protective, contractual, and strategic purposes. NDAs ensure there are adequate (and binding) protections for your confidential information before you share it with another party. If your company has trade secrets, failing to put confidentiality obligations in place with third parties who have access to your trade secrets can cost you your trade secret protection. NDAs may also satisfy a contractual obligation to a third party (e.g., not to disclose a company’s confidential information unless the recipient is also subject to written confidentiality obligations). They can help ensure that a third party is truly interested and serious about discussions with your company. (I discussed the why, when and how of NDAs in depth in a previous LinkedIn article.) If your company and a prospective business partner want to “pull back the curtain” to share confidential information as part of discussions about a proposed relationship, you’ll want to have an NDA template ready for use.

Companies should have a minimum of two NDA template “flavors” at the ready – mutual (where both parties are providing confidential information to the other) and unilateral (where only your company is sharing confidential information). Use the template that best matches the actual disclosures occurring, and avoid putting a mutual NDA in place where you don’t expect (and don’t want) confidential information from the other party. For example, if you want to share financials and future business plans with a candidate for employment, a unilateral NDA is likely your best bet. Some companies use other flavors of NDAs as well (e.g., a specific version for M&A opportunities, one for interview candidates, etc.)

NDAs should also be drafted as fairly as possible – the last place you want to get bogged down in negotiation is over the NDA (tripping up your business discussions before they even start). Consider avoiding contentious language such as residuals clauses and first-party indemnities in your NDA templates. Also consider having your NDA template as a PDF with fillable form fields to minimize negotiation and simplify the process of completing the NDA.

2) Professional Services/Independent Contractor Agreement template

Every company, big and small, uses subcontractors, vendors and service providers (collectively, “contractors”). Contractors are often brought in where a company needs additional support or services its employees cannot provide (or want to outsource), where it needs subject matter expertise it does not have, or where it needs to temporarily augment its existing personnel or other resources. There are many benefits to using contractors, from avoiding the need to pay payroll-related costs to having the ability to “target” spend on subject matter expertise when needed. Having a written agreement in place with your contractors, and a template Independent Contractor Agreement (also called an “ICA” or “Professional Services Agreement”) ready for use, is critical to protect your company’s rights.

Most ICAs are a master set of terms governing each work engagement, and use “statements of work,” “work orders,” or “project assignments” for each discrete project (collectively, “SOWs”). Among other things, ICAs typically cover the scope of work performed; the independent contractor relationship between the parties (misclassification of independent contractors by companies is a current “hot button” issue for the IRS); testing, acceptance and ownership of deliverables; payment terms, expenses and taxes; representations, warranties and remedies around the work and/or deliverables; and insurance. SOWs generally include sections on the scope of services, in-scope and out-of-scope items, deliverables, timeline and milestones, fees (e.g., time and materials, not to exceed amount) and payment schedule, and change order procedure.

Companies may also want to consider using the core provisions of their ICA to create a set of “Vendor Terms & Conditions” that exist on a URL on the company’s domain. Companies can incorporate Vendor Terms & Conditions by reference into a vendor’s purchase order or invoice, with language ensuring a term in the Vendor Terms & Conditions governs over any conflicting terms in the vendor’s own terms, to avoid the need to negotiate every services order or contract. This can be a simple and cost-effective way to ensure a base set of standard risk allocation and other terms apply to each vendor even where the vendor spend or vendor size does not warrant the use of significant Legal or Procurement resources.

3) Employee Confidentiality and Inventions (and Non-Solicit and Non-Compete) Agreement and Employee Offer Letters

As a condition of employment, most companies require their employees (1) to maintain the confidentiality of the company’s confidential and proprietary information, and any similar information of the company’s clients, vendors and service providers, that the employee may receive or have access to during the term of his/her employment, and (2) to agree that the company owns any inventions or other “work product” created by the employee in connection with his/her employment. Some companies also require employees to agree, during the term of employment and for a period of time afterwards, not to solicit the company’s clients or employees, and/or to not compete with the company on behalf of another company (these are known collectively as “restrictive covenants”). To ensure these obligations are in place and legally enforceable, every company must have a well-drafted Employee Confidentiality and Inventions Agreement (or “ECIA”).

The ECIA is the type of agreement that is worth a little of outside employment counsel’s time to ensure it is both well-written and legally enforceable. If your company has offices or employees in multiple states, the laws around the enforceability of these types of agreements, especially restrictive covenants, differs widely. For example, in California, restrictive covenants are generally void, but in other states such as Minnesota, restrictive covenants can be enforceable if they are reasonable in time and scope and satisfy other legal requirements such as supported by consideration and supporting a legitimate employer interest. Consideration itself is an important consideration that varies from state to state — you may not be able to enforce a new (or updated) ECIA against existing employees unless it is supported by additional non-token consideration provided to the employee. Also, NDAs and partner agreements often require that a company only disclose the other party’s information to employees who have a need to know the information and are bound by written obligations of confidentiality to protect it, and a properly worded ECIA can satisfy this requirement.

Companies should also have well-drafted employee offer letters. The offer letter is signed by the company and agreed and acknowledged by the new employee, and contains both a summary of the employment terms and important protections for the company. A well-drafted and properly worded offer letter can help avoid later issues if there is dispute over terms such as the details of the employment offer or the employee’s conduct. Companies should have separate offer letter templates for exempt and non-exempt employees. Consider including, among other provisions, the start date; the title of the position and name/title of the supervising employee; the base salary and payment cycle; probation period language; information on vacation & holidays, benefits, and equity grants (if applicable); pre-employment screening requirements; and continuing obligations (e.g., there are no existing restrictive covenants that would prevent the candidate from working for the company; the candidate will not bring any confidential or proprietary data from a former employer onto company systems; etc.). Ensure the offer of employment is labeled “contingent” so that in the event of an issue, the applicant was not truthful on the employment application, you have the right to revoke it where allowed by law. Offer letters should also be reviewed by outside employment counsel to ensure they comply with the state laws applicable to your business.

4) Business Referral Agreement

Companies looking to grow their business may happen upon a person or company willing to refer potential clients to them (e.g., a company in a complimentary business whose clients may also be interested in your company’s products or services, or a person with deep connections in the industry who can facilitate introductions with executives at some of your company’s top sales targets), typically in return for a bounty per referral or a percentage of the fees earned by the company from the referred client. When a referral opportunity arises, have a business referral agreement template ready for use.

A business referral agreement typically covers the process of submitting a lead and any rights of the company receiving the lead (the “recipient”) to reject it; the time frame for the recipient to close a business transaction with the referred lead; the fees payable for referring the lead, and the payment frequency and terms; what assistance the referring company will provide to the recipient in closing the business (if any); and audit rights to ensure the referral fees paid are accurate.

As with NDAs, consider having both a mutual referral template (where both parties are referring leads to the other) and a unilateral template (where a party is referring leads to your company only).

5) Letter of Intent/Term Sheet/Memorandum of Understanding

When negotiating a new business opportunity, there is often pressure to get something on paper as quickly as possible, even before the deal is fully negotiated. One way to do this is through a letter of intent (also called an “LOI” or “term sheet”) or memorandum of understanding (“MOU”). A LOI or MOU can act as a “snapshot in time” of the anticipated terms of the definitive agreement as of that date, highlighting both where the parties have already come to agreement and where further negotiation is needed. If done incorrectly, a LOI thought to be non-binding by one party could be held to be a legally enforceable agreement. Having a properly worded LOI or MOU template at the ready can help evidence the parties’ intent to move forward with negotiations and ensure they keep the focus on finalizing the terms for, and negotiations on, a definitive agreement, while protecting your company’s rights to walk away if a definitive agreement cannot be reached.

A LOI and MOU differ primarily in form: a LOI is typically in the form of a letter, where a MOU is typically in the form of a legal agreement. LOIs and MOUs typically include terms that can be grouped into two sections:

  • Non-binding terms. These are a summary of the terms that the parties intend, as of the date of the LOI or MOU, to include in the definitive agreement. When putting non-binding terms into a LOI or MOU, consider using non-binding terms such as “would,” “should,” and “may” instead of “will” and “shall.” Also consider a catch-all provision stating that all obligations in the non-binding section are prospective only and will not apply to the parties unless and until embodied in a definitive agreement to be negotiated and signed by both parties.
  • Binding terms. Many people believe that a LOI or MOU is completely non-binding, but that’s almost always not the case. The most common binding term is a commitment by both parties to continue negotiating in good faith toward a definitive agreement, and a statement that either party may cease negotiations at any time. Other binding terms to consider for your LOI or MOU include exclusivity or standstill obligations (e.g., the parties will negotiate exclusively with the other for a period of X months); confidentiality obligations or a reference to the existing NDA in place between the parties; non-solicitation obligations; and general legal boilerplate such as choice of law and an integration clause. Also include a statement that except for any binding terms, the LOI or MOU does not create (and is not intended to create) any binding or enforceable agreement or offer. Ensure the binding and non-binding terms are in separated sections.

I prefer to use a letter of intent when it’s non-binding (e.g., as a term sheet), with our without a commitment by the parties to continue negotiating in good faith. I use a memorandum of understanding when summarizing non-binding deal terms coupled with binding obligations. Whether you use a LOI or MOU, ensure it is signed by both negotiating parties.

6) Settlement and Release Agreement

Sooner or later, your company will have a dispute with a client, customer or vendor over fees, performance of obligations, use of deliverables, etc. Most often, business disputes are resolved by the parties without the need for formal dispute resolution such as mediation, arbitration, or litigation. When a dispute is resolved, it can be important to have a settlement template ready to memorialize the parties’ full and final resolution of the dispute, and to state any obligations the parties have to each other in connection with the resolution of the dispute. Without a well-written and legally enforceable settlement and release agreement, the parties may find that the settlement of a dispute is not as full or final as originally thought if one of them seeks to enforce the settlement terms.

Settlement templates generally include a description of the dispute being settled; the consideration to resolve the dispute (e.g., waiving certain accounts receivables, payment of an amount by one party to another) and any contingencies (e.g., payment must be received within 10 days); a release by both parties of any claims related to the dispute (ensuring this is properly worded is one of the most critical parts of the settlement agreement); confidentiality language; a non-disparagement clause if appropriate; and other appropriate legal boilerplate. There are state-specific requirements for settlement and release agreements, so consider having local counsel review your template to ensure it will be enforceable.

The easiest settlement agreement template to have at the ready can be used for the resolution of run-of-the-mill business disputes such a billing dispute. For significant or complex disputes or settlements to resolve pending or threatened litigation/arbitration and releases in cases of employee terminations, consult an attorney to ensure your template fully and completely covers the complexities or nuances of the specific case.

Eric Lambert is Assistant General Counsel and Privacy Officer at CommerceHub, a leading cloud services provider helping retailers and brands increase sales and delight shoppers through supply solutions to expand product assortment, demand solutions to promote and sell products on the channels that perform, and delivery solutions to enable rapid, on-time customer delivery. Any opinions in this post are his own. This post does not constitute, nor should it be construed as, legal advice. Eric works primarily from his home office outside of Minneapolis, Minnesota. He is a technophile and Internet evangelist/enthusiast. In his spare time Eric dabbles in voice-over work and implementing and integrating connected home technologies.

The Why, When and How of Confidentiality Agreements (Part 2)

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Nondisclosure Agreements (NDAs), a/k/a Nondisclosure Agreements (NAs), Confidentiality Agreements (CAs), Confidential Disclosure Agreements (CDAs), and Proprietary Information Agreements (PIAs), are something most business leaders and lawyers deal with from time to time.  However, few companies have implemented policies stating why, when and how NDAs should be used.  In Part 1 of this article, I talked about the “why” and the “when.”  Part 2 covers the “how.”

HOW to use an NDA.  Once you’ve figured out the why and the when, use the following tips and tricks as you work with NDAs:

  • Keep them fair and balanced. While you always want to try to avoid getting bogged down in contract negotiations, this is especially true for NDAs typically entered into at the outset of a relationship or where disclosure of specialized information is needed to further a business purpose.  Counsel should work with business leaders to ensure the NDA template is fair and balanced. If a potential partner or vendor insists on their NDA, consider whether it is fair and balanced – if it is, it may not be the best time for a battle over whose form to use.
  • Make sure “purpose” is defined. NDAs should include a description of why the parties are sharing information (a potential business relationship between them, a potential business combination, to allow your company to participate in an activity, etc.)  This is usually defined as the “Purpose.” Defining the Purpose, and restricting the recipient’s use of your CI to the Purpose, can help ensure contractually that information you disclose is not misused.
  • Avoid sharing customer records or personally identifiable information under an NDA. Be very careful if you want to share customer or employee records or other personally identifiable information under an NDA. You generally need other security protections that aren’t in a standard NDA; your privacy policy might not allow it; you may not have the necessary permissions from the data subjects to share it; there may be specialized laws (e.g., HIPAA) that could be impacted; etc.  If you need to share data to evaluate a new product or service, use dummy data.
  • Ensure “Confidential Information” covers what you want to share. Make sure the definition of “Confidential Information” is broad enough to cover all of the information that you’re planning to share.  Whether you are disclosing financial projections, business plans, network credentials, samples of new products, or other information, if it’s not covered by the definition the recipient has no obligation to protect it.
  • Watch out for “residuals” clauses. One dangerous clause to watch out for (and avoid) in NDAs is the “Residuals” clause.  “Residuals” are what you retain in memory after you look at something (provided you don’t intentionally try to memorize it).  Residuals clauses let you use any residuals from the other party’s CI retained in your unaided memory.  However, it’s next to impossible to prove that something was in someone’s “unaided memory.”  Residuals clauses are a very large back door to NDA requirements.
  • Understand the “marking requirements.” NDAs generally require identification of confidential information so that the recipient knows that it should be kept confidential.  For example, you generally have to mark any information in written disclosures as “confidential” using a stamp, watermark, or statement in the header/footer (don’t forget to mark all pages of a document and its exhibits/attachments in case pages get separated).  Some NDAs require that confidential information disclosed orally has to be summarized in a written memo within a certain period of time in order to fall under the NDA – don’t lose sight of this obligation, and consider steps to mitigate the risk if you have this requirement (e.g., a reminder in your lead management system to summarize when a note of a sales call is included).  Other NDAs include a “catch-all” to keep confidential any information where, from the circumstances of disclosure, the disclosing party clearly intended (or the recipient can determine) that it should be kept confidential.  This last clause is a double-edged sword – it ensures the broadest possible protection for you, but also for the other party
  • Look at the “nondisclosure period.” Most NDAs have a defined period of time during which confidentiality obligations will apply to CI.  Once the period ends, your CI is no longer considered confidential by the other party.  If you are disclosing trade secrets, it’s important that they are kept confidential forever, or until the information enters the public domain through someone else’s acts or omissions. Also, consider language that requires the other party to securely dispose of your CI when there is no longer a business or legal need for them to possess it.
  • Control onward transfer. Ensure you’re controlling the onward transfer of your CI.  Generally, a recipient’s onward transfer of your CI should only be permitted when (a) the receiving party is a business partner of the recipient (a contractor, subsidiary, supplier, etc.); (b) the receiving party needs to know the CI in furtherance of the Purpose; and (c) the receiving party is bound by written confidentiality obligations at least as strong as those in the NDA between you and the recipient.  Make sure the NDA holds the recipient liable for any improper disclosure of CI by the third party so you don’t have to go after the third party, and requires that data be transferred securely.
  • Watch out for overlapping confidentiality obligations. As I noted in Part 1, it’s important to look out for duplicate confidentiality obligations governing the same confidential information.  In some cases, a party may suggest that each party sign the other’s NDA.  In other cases, a party might try to keep an NDA alive after a services or other agreement has been finalized and signed.  You should avoid having different confidentiality obligations govern the same agreement, as it can easily lead to a big fight over what contractual obligations and provisions apply in the event of a disclosure, distracting you from dealing with the actual breach of your CI.
  • Be mindful of your return or destruction obligations. In most NDAs there is a requirement for a recipient to return or destroy the discloser’s CI, either upon request and/or upon termination.  Sometimes the discloser gets to pick between return and destruction, sometimes the recipient.  In order to ensure compliance, make sure you limit disclosure of third party CI internally, and keep track of who has access to/copies of it.  Without tracking that information, it’s very difficult to ensure return or deletion when the time comes.
  • Be careful sharing access credentials. If you’re sharing any network or other computer access credentials as part of the Purpose, ensure the NDA contains additional security obligations to maintain appropriate safeguards to protect access credentials, to limit use of them (no onward transfer), notification in the event the credentials are (or are suspected to have been) compromised, and an indemnity if the security obligations are breached.  Remember, the Target breach began with the compromise of a subcontractor’s network credentials.
  • Consider using electronic signatures. As I described in my earlier blog post, using an electronic signature system for NDAs can make the nondisclosure process even more quick and efficient, letting your business team get to sharing information sooner.

There are other NDA issues as well, such as ensuring injunctive relief language is not too limiting or broad for your company’s needs.  As always, consult an attorney with expertise in NDAs (and a business-savvy approach) to ensure your company, its confidential and proprietary information and its trade secrets are properly protected.

The Why, When and How of Confidentiality Agreements (Part 1)

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Nondisclosure Agreements (NDAs), a/k/a Nondisclosure Agreements (NAs), Confidentiality Agreements (CAs), Confidential Disclosure Agreements (CDAs), and Proprietary Information Agreements (PIAs), are something most business leaders and lawyers deal with from time to time.  However, few companies have implemented policies stating why, when and how NDAs should be used.  Quite often different people at the same organization take very different approaches to using NDAs, resulting in inconsistent protection of a company’s confidential or proprietary information (“CI”) — or worse, jeopardizing company trade secrets.  This two-part article provides a summary of the why, when and how of NDAs.  In Part 1, I talk about the “why” and the “when.”

WHY to use an NDA.  There are three primary, and sometimes overlapping, reasons why to use an NDA – for protective purposes, for strategic purposes, and for contractual purposes.

  • The most common reason for entering into an NDA is to ensure there are adequate (and binding) protections for your CI before you share sensitive information with another party.  If your company has trade secrets, failing to put confidentiality obligations in place with third parties who have access to your trade secrets can cost you your trade secret protection.
  • An NDA can also be used as a litmus test to gauge whether a party is truly interested and serious about discussions with your company.  If you’re asked to sign an NDA well before confidential information will be exchanged, this might be the reason.  An example is a requirement for potential vendors to sign an NDA before the RFP is provided to them, even if there’s nothing confidential in the RFP.  Requiring an NDA up front can also ensure that you don’t get down the road with a potential vendor or partner only to find that they are resistant to signing an NDA.
  • An existing confidential obligation to a third party may require you to put confidentiality obligations in place with any subcontractor or business partner with whom you need to share the third party’s CI for business purposes (more on this in Part 2).  If an existing agreement with your subcontractor or business partner doesn’t satisfy contractual requirements, a separate NDA may be needed.

If a third party questions why an NDA is needed, consider whether that should be a red flag in and of itself.  They may not view confidentiality as a significant concern or priority, may not be sophisticated about the importance of strong confidentiality practices, or may be trying to get you to reveal confidential information without an NDA in place.

WHEN to use an NDA.  Once you’ve determined that you need an NDA for one or more of the above purposes, you then need to determine when to use one.  Keep these questions in mind:

  • What is confidential information? In order to know when to use an NDA, you need to first know what needs to be protected.  This is often the MOST IMPORTANT question a company can ask.  What information is considered confidential or proprietary information, and what information is a trade secret?  Everything else should be considered non-confidential.  Look at your IT policies to see how data is classified at your company (many classify CI into levels) and use those classifications to determine what categories of information should be protected.  If it’s information you include in your marketing brochures or on your corporate website, it’s not confidential or proprietary information.  Use this test – if you would have a problem with the information showing up on the front page of your local paper or elsewhere for the world to see, or if it ended up in the hands of your competitors, you may want to treat it as confidential if it’s disclosed.  Educate your sales and other internal business teams as to what’s considered CI, and when an NDA is required — make sure to remind them that part of their job to protect your company’s confidential information.
  • Who is disclosing what? Not every discussion about a potential business relationship requires an NDA.  Look at what information may be disclosed and by whom.  If your company isn’t disclosing confidential information as part of the discussion, the onus should be on the other party to ask for an NDA.
  • Are there existing confidentiality terms? Sometimes an existing business partner or vendor will ask for an NDA before sharing information about a new product or service.  Before signing, check your existing agreement to see whether its confidentiality language is broad enough to cover the new information.  If it is, push back on the need for a separate NDA.  You should always try to avoid having multiple confidentiality terms governing the same confidential information (for more on this, see Part 2.)  If they insist, make sure the new NDA is limited in its purpose and does not overlap with the existing agreement.
  • When will sharing begin? Determine when in the in the sales cycle/vendor selection process you need to start sharing CI – that’s your “NDA point.”  Once you’ve determined your NDA point, make sure it’s build it into your SOPs and other business process documentation to minimize the chance that CI is shared without a valid NDA in place.
  • What is the right effective date? In business, the cart sometimes gets ahead of the horse when it comes to getting an NDA in place.  If your company gets out over its ski tips by disclosing CI without having the NDA in place first, ensure that the NDA applies retroactively to by setting the effective date as the date on which confidential information was first disclosed, not the date on which it was signed.