Archive for the ‘Contracts’ Category

Wisconsin Incorporation Documents

We figured it was about time at least one law firm did it: we are making available publicly sample Wisconsin incorporation documents for an emerging technology company startup:  The documents include Wisconsin Articles of Incorporation, Bylaws, Restricted Stock Agreement, initial consents, Invention Assignment Agreement, etc.

Like many of our clients, we have developed a way to use technology to increase efficiency while providing value.  We prepared the suite of sample incorporation documents by selecting from alternatives of a significant number of variables that are available for the automated systems that we have developed internally.  We programmed these variables into our incorporation documents to help us prepare the documents efficiently and accurately. We are making these documents available for informational and reference purposes.

In addition to automating incorporation documents, we have also automated bridge financing documents, employment and consulting documents, equity grant documents, and confidential disclosure agreements, among others.

Hopefully the sample documents will prove to be a good reference source for Wisconsin emerging company startups.

August 13th, 2012 by Matt Storms | Permalink | 1 Comment


Who Owns the Rights to Customer Feedback?

Suppose a customer proposes an idea to improve the software or SaaS offering of a company. The company likes the idea so much that it integrates the idea into its next upgrade. The question becomes, who owns the idea that is integrated into the software or SaaS offering?

As a general rule, the person who creates an idea, authored work, invention, or process, owns the related intellectual property.  There are exceptions to the general rule.  But, in the software and SaaS arena involving licensors and licensees, the general rule applies in most circumstances.

With ownership established by law, there are several ways to handle the intellectual property rights related to customer feedback through contracts and policies.  Here are some of the approaches companies take:

“We don’t want your ideas”

One approach is to not solicit or accept customer feedback.  This is the approach that McDonald’s has taken with regard to its Customer E-mail Center Terms and Conditions.  A rationale for this approach is to avoid confusion or conflict of ownership if a customer has the same idea as someone within the organization.  As is the case for other organizations that have adopted this approach, McDonald’s policy is that if a customer ignores McDonald’s request that they not send ideas or suggestions, the customer grants McDonald’s a license to use, copy, and display whatever the customer provides to McDonald’s.  For a variety of reasons, such as the negative public relations associated with not wanting customer suggestions or ideas, most SaaS and software companies do not choose this approach.

“We own your ideas”

At the other end of the spectrum, the recipient of the ideas, authored works, inventions, or processes can take the position that everything that is submitted to the recipient is owned by the recipient.  One sees this approach in a variety of contexts, especially where either contracts or terms of service are not heavily negotiated or where the relevant idea, authored work, invention, or process created will have little value to the creator.  Radiant Systems is an example of this approach.

“We can use your ideas”

Somewhere in between the above two alternatives is the concept that while the creator of the idea, authored work, invention, or process owns it, the recipient has a royalty-free right to use, copy, and display it.  This allows the company to use the customer feedback, but the customer retains ownership of it.  Adobe, Hewlett Packard, SAP, YouTube, and others take this approach with at least some of their offerings and general public feedback.

Ignoring the issue

Sometimes contracts and terms of service ignore the customer feedback issue.  Presumably, this is just an oversight or the companies are taking the position that they at least have an implied license to the feedback.

For many businesses, listening to and incorporating customer feedback into the product or service improvement process not only is good for sound customer relationships but it just makes good business sense.   Similarly, for software and SaaS companies, ensuring that the companies’ contracts adequately address intellectual property ownership and license rights to that customer feedback makes good legal sense.

July 6th, 2011 by Matt Storms | Permalink | No Comments


Bridge Financing Documents

One of the sets of documents that we automated at AlphaTech is the bridge financing documents for an emerging company.  Attached is a sample of the documents: Convertible Note and Subscription Agreement

Instead of just using form documents as most law firms do, robust automation allows us to deliver common document sets for emerging companies in a more efficient manner.  So what else does “robust automation” yield?  It improves document accuracy, provides a valuable knowledgebase from which to draw, and enables us to deliver common document sets to our clients quickly.  It also frees up time of our lawyers to enable them to spend less time on basic contract drafting and more time on activities that afford our clients higher value.

Take for example the attached bridge financing documents.  With a click of a few buttons and filling in of a few blanks, we can change the attached bridge financing document set from a $1,000,000 bridge financing with a single lead investor but with multiple closings and a 20% discount on the next round’s security to a set of documents that includes a $750,000 bridge financing from five investors in a single closing with 30% warrant coverage and a $5 million pre-money cap on the next round’s valuation for conversion purposes.  To quote a client, “that’s neat.”

November 6th, 2010 by Matt Storms | Permalink | 1 Comment


LLC Choice of Entity for Emerging Technology Companies

The recent $1 Billion Qualifying Therapeutic Discovery Project Credit program will be a real benefit to many area small life science and medical device companies. A surprise to many though when reading the requirements of the program is that limited liability companies (LLCs) that have as an owner a tax-exempt organization are not eligible for a grant under the program. Having a tax-exempt organization as an owner is more common than one might think. Many university technology transfer offices, such as the Wisconsin Alumni Research Foundation (WARF), are tax-exempt organizations and frequently hold an equity interest in the startups to which they license patents. As a result, those LLC biotech licensees are not eligible for a grant under the program. As the CEO of an LLC with which I work (but did not set up) said earlier this week about being excluded from eligibility, “Ouch! That stings! Another painful learning experience.”

LLCs are Typically Not the Best Choice of Entity for Emerging Technology Companies

The “LLC issue” for emerging companies extends well beyond this grant issue for therapeutic companies. I say this even though many attorneys recommend LLCs for virtually all contexts. Sure, LLCs have their place. I frequently advocate using them as holding companies, investment vehicles, and joint venture entities. Among other situations, it also can be appropriate to use them when there is a limited, small group of owners actively participating in the business or when the owners want to have a certain allocation of profits and losses that cannot be accomplished when using an S or C corporation. But for many emerging companies that have or plan to have outside investors, the LLC is often not the best choice of entity.

Most people have a general understanding of the potential benefits of LLCs: pass-through tax treatment, flexibility, few formalities, ease of setup, etc. I will leave it to others to summarize in detail the benefits of LLCs, as there are many.

The “I didn’t know” LLC Issues for Emerging Technology Companies

What I often encounter is that an “issue” arises after the founders either worked with a drumbeating LLC advocate when they were initially organized or the founders organized the entity themselves through an easy-to-use website. In either case, frequently, the founders do not have a good understanding of the common issues that arise through the life cycle of the entity. These “I didn’t know” issues come up often after the company has been operating as an LLC for a while. Below is a list of some of the LLC issues that I have witnessed:

  • A 10% owner of an LLC becoming a less than 1% owner of a corporation after conversion to a corporation because his capital account in the LLC was propotionately less than that of the other owners.
  • A venture capital firm refusing to look past the heading of an executive summary after it discovers the entity is set up as an LLC.
  • Spending tens of thousands of dollars (not to mention management and investor time) implementing and maintaining “blocker corporations” to limit unrelated business taxable income (UBTI) to the VC firms’ limited partners, while trying to maintain economic parity between investors, through several rounds of venture capital financings.
  • “What do you mean I can’t take advantage of the losses because I don’t actively participate in the business?!?”
  • A small, dissident group of members refusing to consent to a conversion, which in many states requires a unanimous vote of LLC members.
  • Inability to take advantage of the special tax benefits of incentive stock options available to corporations.
  • Spending several dozens of hours more than it would take to administer a stock option or restricted stock program to administer a profits interest program.
  • Two members of an LLC (with negative capital accounts) owing taxes as a result of converting to a corporation.
  • Significantly higher investment transaction costs as law firms generally do not have “standard” LLC investment documents for sophisticated transactions.
  • When a company started to make money, requiring the owners to choose between receiving “phantom income” or making distributions to members to cover individual taxes at high marginal rates, despite a desire to reinvest that cash and grow the company.
  • Inability to do a tax-free reorganization as an exit strategy.
  • An LLC taking 5 months to obtain the required residency certifications and tax information authorization forms from each of its 78 members in order to limit the international tax withholding requirements in connection with a transaction.
  • An LLC obtaining the required written authorizations and powers of attorney of 90+ nonresident members in order to file consolidated state tax composite returns in 8 states (and the corresponding K-1′s from each state sent to each member).
  • Spending tens of thousands of dollars (attorney and accountant fees) converting to a corporation

I could go on and perhaps dedicate a post to each of these situations. And, of course, there are expensive and complicated solutions to some of these issues. But as some of my former colleagues at Michael Best said in a recent article, choosing an LLC can be a mistake for many companies and the decision should not be made without a full understanding of the ramifications.

Converting an LLC to a Corporation

A frequent comment I hear from executives of companies that are set up as LLCs is that they can convert to a corporation at any time. This is generally true. With the exception of some of the issues I described above, it often just involves an analysis of the benefits of being a corporation versus the time and expense involved to convert to one. I have handled a number of conversions and co-authored a brief post on the topic: Changing Your Choice of Entity: Cross-Species Mergers and Conversions. The difficulty is that the longer a company waits and the more complex the company’s capitalization structure, the more expensive it is and the longer it takes to do.

As with most important decisions, it is wise to talk with your trusted advisors about choice of entity issues. Take the time to understand the potential (and likelihood) of the benefits and costs long term, especially if you are considering using an LLC as the entity for your emerging growth company. Sometimes an LLC is the best entity choice, but more often for emerging technology companies, it is not.

June 29th, 2010 by Matt Storms | Permalink | No Comments


Wide Adoption of Electronic Signatures and Electronic Contracts Overdue

While almost a decade has passed since the federal Electronic Signatures in Global and National Commerce Act (ESIGN Act) became law, most companies have yet to take advantage of the opportunities that the act affords. Other than online click-wrap license agreements and Internet sales terms and conditions, most companies are still entering into most of their agreements on paper.  Having moved beyond faxing in most cases, the norm these days for most businesses is to print, sign, scan, and email the contract. In large or important agreements, companies typically also exchange multiple sets of originals, so that each side (and their legal counsel) have original copies. In most situations, this elaborate process is unnecessary.  For a variety of reasons, we often encourage clients to go paperless with their contracts when appropriate. 

Software and Internet Services that Assist with Electronic Contracts

There is some encouraging news that going paperless in the contracting process may become more prevalent.  Adobe recently released a free beta version of its online eSignatures software-as-a-service (SaaS).  The SaaS offering is easy to use and may spur more adoption of e-signature technology.  Low cost competitive products from DocuSign, Arx, and AlphaTrust are also worthy of consideration.  These and other e-signature vendor products offer the following benefits:

  • E-signatures speed up the contracting process.   The extra steps of printing for signature, scanning, preparing a cover letter/fax, and mailing/faxing are removed. 
  • E-signature service can be accessed virtually anywhere.  All that the parties need is a computer with an Internet connection.  No need for the traveling executive to find a printer and scanner/fax or have the hotel staff print the document, prepare a coversheet and fax the signed document back. 
  • Electronic contracting saves paper.  There is no need to print the agreement, so it supports the virtually paperless office, such as ours.

In addition, traditional concerns over security have mostly been allayed.  The e-signature vendors typically offer one or more security measures to authenticate the sender and verify that the document has not changed since it was signed.  Many e-signature vendor offerings are SAS 70 Type II compliant and upload and download over an SSL encrypted channel.  Audit trails show when and by whom documents were sent, viewed, and signed.  After signing and downloading, with most of the products, the party sending the contract typically has the ability to delete the electronic contract from the cloud.

Laws Related to Electronic Contracts

Numerous laws in the United States and abroad recognize the legitimacy of electronic signatures.  The federal ESIGN Act and Uniform Electronic Transactions Act (UETA) serve to establish generally the legal equivalence of electronic records and signatures with paper writings and manually-signed signatures, removing barriers to electronic commerce.  Forty-seven states have adopted the UETA, a model law for states to enact to cover contracts governed by state law; the remaining states, New York, Illinois, and Washington, have each adopted their own statutes governing electronic transactions.  Under the UETA, an electronic signature is attributable to a person if it was the act of the person, which can be shown by the effectiveness of the security procedures for signature authentication and the context and surrounding circumstances at the time of the document’s creation.  No one can be required to use a digital signature or to accept a digital signature.  Besides the United States, the European Union has adopted the Electronic Signature Directive (1999/93/EC) and numerous countries have adopted electronic signature laws.   

How Electronic Signatures Work

These are the basic steps to send a document for signature using an electronic signature solution.  The initiator sets up a password-protected account, uploads a document, types the email addresses of the recipients, composes a short cover note (if desired), clicks to sign (or chooses to sign last), and sends.  Recipients receive an email with the customized message and a link to a document to sign.  Recipients are not required to pay to use the electronic signature service, but they may need to set up an account.  After completing any required authentication checks, they click on the link, review the document, and click to sign and send.  After the document is fully signed, all parties receive an email with a link to the document with digital signature stamps from each signing party.  In the case of Adobe’s eSignatures SaaS offering, Adobe will apply a certifying signature, appearing as a blue ribbon, indicating that the document has not changed since it was signed. 

Additional E-Signature-Based Offerings that Facilitate the Electronic Contracting Process

E-signature vendors with low-cost software or services offer many of the following additional features (some of which Adobe may incorporate into later versions):

  • Signatures in multiple places and on specific lines (whereas Adobe’s eSignatures SaaS offering just appends a signature page to the end with all the electronic signatures)
  • Fill-in-the-blank forms and agreements, guiding receiving parties through the document with signature flags, initial flags, and instructions, and preventing a party from signing a document with an incomplete blank
  • Ability to compare the signed document to the encrypted hash captured at document signing to confirm that the signature is valid and the document has not been modified (whereas Adobe’s blue ribbon indication is immediate)
  • Signing parties other than the sender do not need to subscribe to the service (free)
  • Folders to deliver multiple documents in logical groups
  • Workflow processes for internal approvals
  • Access via mobile devices
  • Optional multi-layered authentication, such as passwords, ID checks administered by third parties with questions from public and private databases, security fobs, etc.
  • Integration with business enterprise software 
  • Server-based as well as hosted solutions
  • Custom branding and instructions 
  • Optional behind-the-scenes digital signature cryptology

Using Digital Signatures for Additional Security

A subset of electronic signatures, digital signatures provide more checks to ensure security, but more time and cost can be involved in administering them.  Digital signature technology can also be used to control who has access to a document or who can sign or certify it.  Digital signature technology is the gold standard of security in terms of validating the authenticity of the signature and preserving the integrity of the document.  This is due to the secure method of locking and unlocking the signatures on the document.  A digital signature, also known as a digital ID, requires a private key of the signer and a public key for the receiving party to validate the signature.  Many large organizations implement a public key infrastructure to issue, authenticate, and revoke digital IDs used for digitally signing documents.  Most receiving parties require that a certificate authority, such as VeriSign or GlobalSign, validate the authenticity of the public key.  There are fees in the hundreds to thousands associated with using a Certificate Authority.  David Youd explains digital signature cryptology in simple terms and pictures (   While it is not difficult to establish a digital ID or validate another party’s digital IDs, some education and administration is involved. 

When to Use Handwritten Signatures vs. Electronic Signatures on Contracts

Although electronic signatures are in most cases recognized as being equally valid as handwritten signatures, there are occasions when handwritten signatures may be more appropriate.  When doing a substantial deal with a party in a more formalistic country, such as Japan, China, Spain, and Italy, a personal signing ceremony can be a culturally sensitive choice.  Parties might also prefer to sign in person or exchange wet ink signatures when stakes are high or emotions run deep, as with the sale of a business.  In addition, under law, there are certain types of agreements that cannot validly be signed electronically.  For example, in many places, wills, testamentary trusts, family law documents, and U.C.C. documents must be signed by hand.  If in doubt as to whether a contract may validly be signed electronically, check with your attorney first.  Also, government regulators in some highly regulated industries such as pharmaceutical and financial services regard the use of digital signature technology favorably for regulatory and legal compliance. 

Just as signing and emailing documents became prevalent with widespread adoption of PDF files and improvements in scanners, so, too, are electronic signatures likely to become more mainstream as people discover the increasing efficiency and security of e-signature technology.

June 4th, 2010 by Matt Storms and Macy Shubak | Permalink | 2 Comments


The NDA, CDA, PIA, and Other Confidentiality Agreements

Because of the frequency of which they are used, one of the first forms that we automated at AlphaTech was the Confidentiality Agreement.  Sometimes they are called Nondisclosure Agreements (NDAs), Confidential Disclosure Agreements (CDAs), Proprietary Information Agreements (PIAs) or Secrecy Agreements, but for the most part, they each are the same thing trying to accomplish virtually the same objective: limit the disclosure and use of one’s confidential information. 

So, if they are all trying to do the same thing, why are there so many forms out there?  The answer is that it often comes down to legal limitations, the one-way versus two-way (or mutual) nature of the agreement, and exceptions or limitations to the disclosure and use limitations.  For example, many states consider when employees sign a Confidentiality Agreement it is a restrictive covenant (or noncompete).  As such, to be enforceable in most states, the agreement must have “reasonable” limitations on variables such as duration.  These legal restrictions are not typically the same for two businesses entering into an NDA.

The balance of this post examines the details of an NDA.

Definition of Confidential Information

Most NDAs define “Confidential Information” very broadly.  There are commonly carve-outs for things like information that ends up in the public domain, information already in the possession of the recipient, and information conveyed to the recipient from someone else who was not under an obligation to keep it confidential.  It is also common to see trade secrets carved out of the confidential information definition if the NDA imposes more strict obligations on use and disclosure of trade secrets.  Sometimes one sees a carve-out for information that is “independently developed” by the recipient without the use or benefit of the confidential information provided by the discloser.  This last carve-out is appropriate in some contexts, but not in others.  Regardless, if the “independently developed” provision is incorporated, be sure that it does not permit “reverse engineering” of confidential information.

A controversial provision that one sometimes sees in NDAs is a requirement that in order to be considered within the definition of confidential information, the information must be marked “confidential” or confirmed in writing as confidential if communicated orally.  This limitation is fine for arrangements that are very limited in scope and have a specific set of documents that are considered confidential.  However, companies should be wary of such a limitation for continuing relationships or arrangements in which many people are exchanging a lot of confidential information.  The process of marking and communicating what is confidential (consistently) can get unwieldy very quickly.  A failure to follow just once this “simple” procedure of marking something confidential, can lead to disastrous results.

Use and Disclosure of Confidential Information

An important but sometimes overlooked provision is the scope of the permitted use of confidential information.  The scope of use should be broad enough to accomplish the intended purpose of the disclosure (e.g., to enable the consultant to perform under a consulting agreement or explore the possibility of entering into a strategic partnership with another company), but not overly broad to enable shenanigans.  The use provision should be tailored to the specific context of the intended use.  Also, it is common to see a provision that enables disclosure if the recipient is legally compelled to do so (e.g., under a court order or subpoena). 

No License or Warranty

It is common to have a provision in an NDA that disclaims any license or warranty being conveyed when delivering the confidential information.  Sometimes, when something is delivered, there can be an implied warranty or license associated with the item being delivered (that the information is accurate, that it works, that it doesn’t infringe on the rights of others, that the recipient can use it, etc.).  This type of provision typically disclaims those.

Duration of the NDA

NDAs typically have two elements of duration.  The first element is the period during which disclosures can be made that are covered under the NDA.  For example, for employees or consultants, this is typically the period during which the employee or consultant is engaged by the company.  The second element is the period during which confidentiality and use restrictions apply after the agreement comes to an end.  A common restriction one sees for employees is that the duration lasts for a period of two years following the end of the employment. 

Governing Law, Jurisdiction, Forum/Venue

Most NDAs address which state’s (or country’s) law applies when interpreting the NDA.  Many NDAs also address where a dispute will be resolved.  The provision is less important when the two parties are located in the same area.  It becomes more important (and often negotiated) when the parties are not located near one another or are located in different countries.  Common compromises are to (i) choose one party’s state’s law (or country’s law) to govern the contract and the other party’s location as the forum/venue, (ii) delete the provision altogether, making it unclear which state’s law applies and where disputes are to be settled, or (iii) in a two-way NDA, choose a neutral but relevant state’s law to govern the agreement (e.g., Delaware, if both companies are incorporated there) and require the discloser (the company enforcing) to use the recipient’s location in the event the discloser would like to sue the recipient.

Right to Equitable Remedy

Many NDAs will include a provision that states if the recipient breaches the agreement, the discloser will be entitled to equitable or injunctive relief.  In the NDA context, equitable or injunctive relief refers to getting a court order to stop the recipient from using or disclosing the confidential information.  Sometimes, this type of relief can be more difficult to obtain than monetary damages.  However, in most contexts involving an NDA dispute, the discloser’s top priority is to prevent the recipient from continuing to use or disclose the confidential information.  As a result, the purpose of the provision is to attempt to stipulate that the requirements to get an equitable or injunctive remedy have been met.

Entitlement to Attorneys Fees in the NDA

Many NDAs contain a provision covering attorneys’ fees.  Sometimes they are structured as a prevailing party obligation—the winner gets the loser to pay the winner’s attorneys’ fees.  Other times, especially in one-way NDAs, the attorneys’ fees provision requires the recipient to pay the discloser’s attorneys’ fees in enforcing the terms of the NDA. 

Return of Confidential Information and Materials

Most NDAs address the situation of what happens at the end of the term of the NDA with regard to materials that contain confidential information.  Most NDAs require that materials containing confidential information either be returned or destroyed.  Some NDAs require that if the recipient destroys the materials, the recipient is required to certify that the materials have been destroyed. 

Sometimes NDAs contain a provision that entitle the recipient to retain a copy of all confidential information for record keeping purposes.  Query whether maintaining a single copy for recordkeeping purposes on a server that everyone has access to is consistent with the expectations of most companies disclosing confidential information.  If retaining a copy for recordkeeping purposes is included, be sure that type of issue is addressed.  Similarly, sometimes the NDA will contain a provision that enables people within the recipient organization to retain the “residual” information in their memory.  Of course, regardless of the presence of this particular provision, people cannot readily “delete or destroy” information in their mind without collateral grave implications.  However, be sure to understand what people can do with that residual confidential information under the terms of the agreement.

Other Provisions in the NDA

Depending on the industry or substance of the disclosure, there can be additional provisions included within the NDA.  For example, there can be some export limitations for certain types of information.  The NDA can address those limitations.  The NDA can also cover certain disclosures and limitations that are applicable to insider trading restrictions under federal securities laws.  These and other issues should be considered when developing an organization’s NDA forms and when reviewing those received from another company.

May 24th, 2010 by Matt Storms | Permalink | 3 Comments


Understanding the United Nations Convention on Contracts for the International Sale of Goods

Background on the CISG

The United Nations Convention on Contracts for the International Sale of Goods (“CISG”) is an international treaty that governs most sales of goods between a buyer and seller that reside in different countries, if those countries have adopted the CISG. It has been adopted in the US and more than 70 other countries. In fact, signatory countries account for more than two-thirds of all goods moving in international trade and encompass a majority of the world’s population. Significant trading partners that have adopted the treaty include Mexico, China, Japan, South Korea, Singapore, most of Western Europe (excluding Great Britain) and Canada.

In the United States, the sale of goods between businesses is generally governed by state-adopted versions of Article 2 of the Uniform Commercial Code (“UCC”). When contracting parties in the U.S. agree to terms, the UCC serves as a backdrop, filling certain gaps that the parties may have failed to address, establishing certain standards on warranties and disclaimers, etc. The CISG performs a similar role in an international transaction, but differs from the UCC in important ways. Set forth below is a brief summary of some of the key aspects of the CISG, as well as differences between the UCC and the CISG.

When the CISG Applies

As noted above, the CISG applies to the sale of goods between parties residing in different jurisdictions that have adopted the CISG. The CISG, however, does not apply to sales (1) of consumer goods; (2) by auction; (3) of securities or negotiable instruments; (4) of ships, vessels, or aircraft; or (5) electricity. The CISG is also not applicable to so-called “assembly contracts” where the party that orders goods to be manufactured supplies a substantial part of the materials necessary for such manufacture or production of the goods.

It is important to note that when applicable, the CISG is likely to apply unless expressly disclaimed in the contract. Case law suggests, for example, that if you are selling equipment to a Canadian buyer and your contract says something to the effect of, “the parties agree that the laws of Wisconsin will govern this transaction, except the conflict of law provisions therein,” the CISG will still likely trump Wisconsin law unless the contract goes on to state expressly that the CISG does not apply.

Differences between the CISG and the UCC

Should you care if the CISG applies? It depends. But you should know what you are agreeing to so you can make a reasonable choice.

CISG Applies to Oral Contracts

One significant difference between the CISG and the UCC is that the UCC limits the enforceability of oral contracts. The CISG states that a contract of sale need not be evidenced by writing and is not subject to any other requirement as to form. A contract may be proven by any means, including witnesses. Furthermore, in the absence of a specific clause to the contrary, the CISG generally permits oral amendments or modifications to contracts.

Battle of the Forms

The CISG and UCC also differ in their approaches to the “battle of the forms.” Under the UCC, a final form that is not intended specifically as a counteroffer will act as an acceptance, even though it contains different or additional terms to those contained in the prior form. The additional terms are considered as proposals for additions to the contract and, as between merchants, become part of the contract, unless (1) the offer expressly limits acceptance to the terms of the offer; (2) the terms materially alter the offer; or (3) notification of objection to the terms already has been given or is given within a reasonable time after notice has been received.

The CISG departs from the UCC approach and, instead, says a reply to an offer that purports to be an acceptance but contains material additions, limitations or other modifications is a rejection of the offer and constitutes a counteroffer. Thus, at least prior to performance, either party may be able to claim successfully that no enforceable contract exists under the CISG. After delivery and acceptance, a contract will undoubtedly be deemed to have existed. Although the terms of the contract may be subject to dispute, the CISG generally favors the last party to submit materially different terms.

Disclaimer of Warranties Less Formal Under the CISG

The UCC and the CISG have similar provisions for warranties, but the requirements to disclaim warranties differ. The CISG contains no provisions comparable to the disclaimer procedures that sellers may use under the UCC. For example, under the UCC, an effective disclaimer of the implied warranty of merchantability generally must mention “merchantability” and must be in conspicuous writing. Similarly, an effective disclaimer of an implied warranty of fitness must be in writing and conspicuous. The CISG is less formalistic and appears to permit disclaimers of warranties as long as the “parties have agreed” in writing or orally.

UCC Follows the “Perfect Tender” Rule

Under the UCC, a buyer is generally entitled to reject goods that fail in any respect to conform to the contract. This is known as the “perfect tender” rule. Under the rule, generally speaking, a buyer may in good faith reject goods and cancel the contract, even if a defect in tendered goods is not serious and the buyer would have received substantially the goods for which it bargained. The CISG departs from the perfect tender rule and makes rejection or cancellation more difficult. The buyer may void a contract only if the failure by the seller to deliver goods constitutes a fundamental breach. Under the UCC, the buyer has a reasonable opportunity to inspect the goods. However, under the CISG, the buyer must inspect the goods within as short a period as is practicable under the circumstances.

CISG Has a ”Self-Help” Remedy

The CISG allows for many of the same damage remedies as those available under the UCC. Generally, a buyer may claim damages if the seller fails to perform. Under the CISG, damages typically equal the loss suffered as a consequence of the breach, including the loss of profit. These types of damages are similar to the direct, incidental, and consequential damages available under the UCC. However, the CISG includes a novel unilateral price reduction remedy: if the goods do not conform with the contract, the buyer may reduce the price. This self-help remedy is not available if the seller is able to cure non-conformity without causing unreasonable delay or inconvenience to the buyer.


Whether you will be helped or hurt by the CISG depends on the circumstance. In the ever-increasing world of global trade, however, buyers and sellers should be aware that it will likely apply unless expressly disclaimed and it will impact how their contract for the sale of goods is enforced. Detailed information about the CISG can be found at the website of the Institute of International Commercial Law at Pace University School of Law:

March 11th, 2010 by AlphaTech | Permalink | No Comments