Avoid Contract Traps

e-Commerce veterans may think they know how to read a business contract, and for most contracts, they're right, because checking what has been typed onto a preprinted form ' the price, deliverables and delivery date ' is usually enough to know.

But the provisions of tech contracts that really affect success may not be so obvious. Contract boilerplates often hide traps for the uninitiated. Merely reading the language specifically added to a form may not reveal the actual risks lurking in the contract.

This is an important consideration for counsel who advise e-commerce ventures, because some contract risks are unique to e-commerce contracts ' such as whether a new technology will work at a commercially practicable price point, for example. But many other tech-sector risks ' and solutions ' will be familiar to those who work on paper files, or communicate exclusively by land-line phones.

For instance, you should always verify that the company named in the contract exists and is listed correctly. That part is easy, with an inexpensive call to the Secretary of State's office in the state at issue. But having the right name won't matter if that firm doesn't have any assets to perform the contract, or pay damages if its mistakes harm you or your customers. Instead, contract review must include counsel and other duly interested parties performing due diligence on the assets of the company whose principals will sign it. In your eagerness to sign and start work, don't skip the name to get to what you or your clients consider to be the contract's substance.

Without that background check, your killer contract may help you win a case and get a judgment in court, but still lose overall. A judgment by itself certainly won't get compensation for harm to your business. This is even more likely if your customers expect your firm to pay to fix the problems caused by your vendor's errors. Instead, the “rubber meets the road” when you go to collect on that judgment, or enforce a court order to comply with the contract. Getting a tech firm to obey the court can be particularly difficult.

e-Commerce Adds Some Dimensions

In the realm of this newsletters' subscribers, e-commerce firms with which your clients do business that don't carry inventory may not have any tangible assets that could be seized to collect on a judgment. The few assets they have may be worthless, such as “old” computers or office fixtures, or receivables from similar tech firms that are just as shaky financially or are thinly capitalized. In fact, even a court order to perform might not worry a virtual firm. A wrongdoer can, at little cost, ignore the court by shutting down and reopening, even in another location, with a new legal identity simply by getting a new IP address.

Of course, doing business with companies unburdened with assets didn't start with e-commerce. Shell corporations have long insulated profitable deals from the risks and losses of failing projects.

Similarly, guarantees, letters of credit, performance bonds and escrows have long provided “credit support” to make it more likely that a contract will be performed. If the contract isn't performed, these safeguards also can make compensation available when the defaulting party likely won't have any assets to pay damages.

But all of those traditional solutions are really just forms of third-party payment ' and insurance is never free.

Instead, doing business with e-commerce firms requires more practical protection. Most important, payments should be contingent on approval of performance “milestones.” Milestones let everyone involved assess contract performance, while it can still be corrected. Critical changes can be made before too much labor and money have been invested in approaches the customer may reject.

The vendor knows in advance that if the customer doesn't accept the product, it won't get paid the full contract price on time. Everyone wants to avoid fighting over change orders, and ' again ' over getting paid for them.

However, measuring performance presents another critical challenge for tech and “old economy” contracts alike. While it may be easy to list deliverables, contract review must ask, from the businessperson's perspective: Does the contract actually promise the same results as the sales rep did?

What To Do Diligence About

An e-commerce contract's promises should always be compared against what may have been touted in the marketing materials, and what the customer expects it will receive. Those promises are found in the express and implied warranties and, particularly, in the description of the goods and services to be provided.

Still, objective standards for performance may be difficult or impossible to state in technology applications, such as software design or systems development. Stated another way, is it possible to define, at the start of a contract, whether the vendor has done what it promised it would do?

Consider this, for example: Frequently, tech contracts are created from a “legal shell” of preprinted “terms and conditions.” Next, “specifications,” typically written by engineers or designers, rather than by marketers or lawyers, describe what will be done or delivered. But negotiators often do not stop to consider whether a court, ruling after the fact, can tell whether those specifications have been met. A customer-friendly contract could make customer satisfaction the standard of performance ' but only the most confident firms will take that risk.

Even worse, tech contracts often “disclaim” all warranties, particularly where performance is difficult to measure. This is simply a legal statement in which everyone agrees that no promises are being made about what will be accomplished under the contract. Both sides may well proceed in a good-faith effort to do what is intended. But, assuming no fraud, when a disclaimer is present, no one will be liable to anyone else if the project fails.

Have Integrity and Trust, But Do a Contract

The dilemma of writing a technology contract that actually means something reinforces many “old economy” values. Integrity, and a reputation for performance and customer satisfaction, still should matter when selecting a tech-contract partner.

Even in the best-written technology contracts, it may never be clear whether everyone has done what each party agreed ' or what the allegedly injured party thought had been agreed to. The bottom line: Carefully choosing your contract partner may be the best way to ensure, and to insure, that you get what you bargained for.

But even though our inclination as professionals might be to go with the flow of good feeling that establishing positive, and potentially profitable, business relationships brings, we must be pragmatic and recognize that in our litigious society, trust will never replace contracts. Creative e-commerce attorneys and their clients must, therefore, work together to create a contract that describes a successful outcome clearly enough for a non-technical judge or arbitrator to understand it.

It comes down to this: without planning for how an e-commerce contract will be used in practice, it may not be worth the paper ' or memory chip ' on which it's written. And conventional boilerplate may leave everyone unsatisfied ' except the trial attorneys sorting out the mess at an hourly billing rate.

Stanley P. Jaskiewicz, a business lawyer, helps clients solve e-commerce, corporate, contracts and technology law problems, and is a member of e-Commerce Law & Strategy's Board of Editors. He can be reached at the Philadelphia law firm of Spector Gadon & Rosen P.C., at [email protected], or at 215-241-8866. You can send him a fax at 215-241-8844.

e-Commerce veterans may think they know how to read a business contract, and for most contracts, they're right, because checking what has been typed onto a preprinted form ' the price, deliverables and delivery date ' is usually enough to know.

But the provisions of tech contracts that really affect success may not be so obvious. Contract boilerplates often hide traps for the uninitiated. Merely reading the language specifically added to a form may not reveal the actual risks lurking in the contract.

This is an important consideration for counsel who advise e-commerce ventures, because some contract risks are unique to e-commerce contracts ' such as whether a new technology will work at a commercially practicable price point, for example. But many other tech-sector risks ' and solutions ' will be familiar to those who work on paper files, or communicate exclusively by land-line phones.

For instance, you should always verify that the company named in the contract exists and is listed correctly. That part is easy, with an inexpensive call to the Secretary of State's office in the state at issue. But having the right name won't matter if that firm doesn't have any assets to perform the contract, or pay damages if its mistakes harm you or your customers. Instead, contract review must include counsel and other duly interested parties performing due diligence on the assets of the company whose principals will sign it. In your eagerness to sign and start work, don't skip the name to get to what you or your clients consider to be the contract's substance.

Without that background check, your killer contract may help you win a case and get a judgment in court, but still lose overall. A judgment by itself certainly won't get compensation for harm to your business. This is even more likely if your customers expect your firm to pay to fix the problems caused by your vendor's errors. Instead, the “rubber meets the road” when you go to collect on that judgment, or enforce a court order to comply with the contract. Getting a tech firm to obey the court can be particularly difficult.

e-Commerce Adds Some Dimensions

In the realm of this newsletters' subscribers, e-commerce firms with which your clients do business that don't carry inventory may not have any tangible assets that could be seized to collect on a judgment. The few assets they have may be worthless, such as “old” computers or office fixtures, or receivables from similar tech firms that are just as shaky financially or are thinly capitalized. In fact, even a court order to perform might not worry a virtual firm. A wrongdoer can, at little cost, ignore the court by shutting down and reopening, even in another location, with a new legal identity simply by getting a new IP address.

Of course, doing business with companies unburdened with assets didn't start with e-commerce. Shell corporations have long insulated profitable deals from the risks and losses of failing projects.

Similarly, guarantees, letters of credit, performance bonds and escrows have long provided “credit support” to make it more likely that a contract will be performed. If the contract isn't performed, these safeguards also can make compensation available when the defaulting party likely won't have any assets to pay damages.

But all of those traditional solutions are really just forms of third-party payment ' and insurance is never free.

Instead, doing business with e-commerce firms requires more practical protection. Most important, payments should be contingent on approval of performance “milestones.” Milestones let everyone involved assess contract performance, while it can still be corrected. Critical changes can be made before too much labor and money have been invested in approaches the customer may reject.

The vendor knows in advance that if the customer doesn't accept the product, it won't get paid the full contract price on time. Everyone wants to avoid fighting over change orders, and ' again ' over getting paid for them.

However, measuring performance presents another critical challenge for tech and “old economy” contracts alike. While it may be easy to list deliverables, contract review must ask, from the businessperson's perspective: Does the contract actually promise the same results as the sales rep did?

What To Do Diligence About

An e-commerce contract's promises should always be compared against what may have been touted in the marketing materials, and what the customer expects it will receive. Those promises are found in the express and implied warranties and, particularly, in the description of the goods and services to be provided.

Still, objective standards for performance may be difficult or impossible to state in technology applications, such as software design or systems development. Stated another way, is it possible to define, at the start of a contract, whether the vendor has done what it promised it would do?

Consider this, for example: Frequently, tech contracts are created from a “legal shell” of preprinted “terms and conditions.” Next, “specifications,” typically written by engineers or designers, rather than by marketers or lawyers, describe what will be done or delivered. But negotiators often do not stop to consider whether a court, ruling after the fact, can tell whether those specifications have been met. A customer-friendly contract could make customer satisfaction the standard of performance ' but only the most confident firms will take that risk.

Even worse, tech contracts often “disclaim” all warranties, particularly where performance is difficult to measure. This is simply a legal statement in which everyone agrees that no promises are being made about what will be accomplished under the contract. Both sides may well proceed in a good-faith effort to do what is intended. But, assuming no fraud, when a disclaimer is present, no one will be liable to anyone else if the project fails.

Have Integrity and Trust, But Do a Contract

The dilemma of writing a technology contract that actually means something reinforces many “old economy” values. Integrity, and a reputation for performance and customer satisfaction, still should matter when selecting a tech-contract partner.

Even in the best-written technology contracts, it may never be clear whether everyone has done what each party agreed ' or what the allegedly injured party thought had been agreed to. The bottom line: Carefully choosing your contract partner may be the best way to ensure, and to insure, that you get what you bargained for.

But even though our inclination as professionals might be to go with the flow of good feeling that establishing positive, and potentially profitable, business relationships brings, we must be pragmatic and recognize that in our litigious society, trust will never replace contracts. Creative e-commerce attorneys and their clients must, therefore, work together to create a contract that describes a successful outcome clearly enough for a non-technical judge or arbitrator to understand it.

It comes down to this: without planning for how an e-commerce contract will be used in practice, it may not be worth the paper ' or memory chip ' on which it's written. And conventional boilerplate may leave everyone unsatisfied ' except the trial attorneys sorting out the mess at an hourly billing rate.

Stanley P. Jaskiewicz, a business lawyer, helps clients solve e-commerce, corporate, contracts and technology law problems, and is a member of e-Commerce Law & Strategy's Board of Editors. He can be reached at the Philadelphia law firm of Spector Gadon & Rosen P.C., at [email protected], or at 215-241-8866. You can send him a fax at 215-241-8844.