Troublesome Contract Clauses
Arbitration, Mediation and Alternative Dispute Resolution
Attorneys Fees and Court Costs
Choice of Law or Venue
Disclaimer of Warranty
Incorporation by Reference
Insurance by Other Party
Insurance by University
Limitation of Liability for Non-Performance
Ownership of Intellectual Property
Restrictions on Publication
Warranty Regarding Intellectual Property Rights
An acceleration clause generally appears in a debt financing agreement and requires, if a payment is missed, that the principal, accrued interest and all other obligations become immediately due and payable. This type of clause implicates the State of Iowa's obligation to operate within a fixed budget and to make payments for which no money has been budgeted for a particular fiscal year. Therefore, it is very unwise to agree to an acceleration clause. If such a clause is accepted, it must include a clearly stated triggering mechanism that warrants such a severe action, and a period of time to cure the defect to reinstate the original schedule.
Arbitration: Some contracts have clauses calling for resolution by binding arbitration or non-binding arbitration other than in the court judicial system. In general, arbitration clauses are to be avoided. If the other party is insistent on such a clause, OUC must approve and review to avoid a process which disadvantages the University. By law, disputes between agencies of the state of Iowa are submitted to binding arbitration (Iowa Code §679A.19).
Mediation: Mediation is a facilitated negotiation. ISU could agree to language requiring mediation before a fairly selected mediator. The mediation process allows ISU to decide if a mediated proposal is beneficial to the University. However, if a mediation clause indicates it involves binding mediation, the Office of University Counsel must review and approve the language.
We recommend avoiding clauses that call for the University to pay attorneys fees and costs of the other party because these costs can be crippling. However, if agreed to, it only makes sense that the clause be symmetrical. The other party likewise should pay our fees and costs in case they breach the agreement.
An audit clause allows the parties to access the books of the other party. As a publicly accountable entity, we do not reject audit clauses. However, such clauses can be written to be intrusive and disruptive. The number and timing of audits should be reasonable. If the other party obligations (such as a per-unit payment) is based upon information not readily available to us, it is wise to include an audit clause so that we can assure proper payment or compliance with the contract.
Agreeing to be governed by another state’s or country’s law, or to resolve a dispute in another state’s or country’s courts (venue), creates problems for the Iowa Department of Justice, which by law represents the University. It implicates and possibly waives the sovereign immunity of the State of Iowa. The costs of defending the University increase dramatically if private attorneys must be retained in the other state or country. Such clauses should be changed to specify Iowa law and venue or they should be deleted and the agreement remain silent on the issues.
As a state entity subject to public records laws, confidentiality clauses must be reviewed centrally to assure consistency with state law and policy. Confidentiality clauses require proper oversight and administration, and should not be agreed to lightly.
Confidentiality of the Agreement: While the public records law has an exception for trade secrets, generally, financial terms of agreements may not be confidential. Clauses calling for the confidentiality of the Agreement should be reviewed centrally.
Confidentiality of Information Transferred under the Agreement: Sometimes an agreement may call for transfer of private or privileged information. So long as such information is exempted from the Public Records Act (such as trade secrets, personnel, medical, client or student information), it is permissible to agree to confidentiality. For trade secrets and proprietary information, it is typical to except information that:
- Is already in the public domain;
- Becomes public knowledge without breach of the agreement;
- Is already in the possession of the University or its employees at the time of disclosure and was not obtained from the disclosing party;
- Is received from a third party that did not receive the information under a confidential agreement;
- Is independently developed by the University or its employees.
Typically, ISU also includes a clause indicating that if the University receives an open records request or subpoena seeking confidential information, we would notify that entity that provided us with the confidential information so that entity could seek a protective order concerning the confidential information.
Some contracts for products or services contain disclaimers of warranty. Such clauses should be avoided and the question should be asked, “Why is the vendor not willing to stand behind its product or service?“ Where accepted we must understand such provisions may deprive the product or services of value. At the same time, in the research arena we understand that it may be commercially reasonable to agree to such terms for experimental materials, products or services as long as we understand the risks involved. A disclaimer of warranty must be conspicuous and usually is presented in all capital letters or bolded/colorful fonts.
Against University: Some agreements contain a clause that a breach by the university would cause irreparable harm and/or that money damages would be an inadequate legal remedy and, therefore, an equitable remedy such as an injunction is consented to by the university. Such clauses lead to an automatic entry of an injunction against the university and should be avoided. Although it may be true in certain situations that money damages are inadequate, such clauses should be reviewed centrally to assure that any injunctions are only issued after the university has the opportunity to appear in court on the request.
Against the Other Party: If monetary compensation is insufficient in case of breach of the contract, we should ensure that the contract calls for appropriate equitable remedies such as a requirement that the contractor perform as agreed (“specific performance”). If the other party’s breach could cause irreparable harm (such as improper disclosure of confidential records), we should ask for the right to obtain an injunction.
Sometimes a contract will require that our services or product be available only to the other party, or that we only acquire specific goods or services from the other party. Such clauses can be troublesome because they bind the whole university for the benefit of one unit. It may be difficult for the University to meet the requirements of such contracts. It is therefore imperative for contracts with exclusivity clauses to be approved centrally.
Contracts may excuse performance or delay performance for various reasons. Some of the typical and fair reasons for excused performance are disaster, labor strife and other events outside of the control of the other party. Excusing performance for events within the control of the other party is generally unwise.
A contract can refer to a separate document and indicate the terms of the separate document are part of the current agreement. All the documents that are referenced are then legally recognized as part of the contractual agreement. A construction contract, for example, is likely to incorporate laws that set forth specific construction standards. Additionally, a subcontract might incorporate by reference the terms of the agreement between the general contractor and the customer.
Incorporation by reference can help make a contract more concise. Rather than repeating every last detail, the contract refers the reader to the original source of information. This requires a party, however, to carefully review the contract to ensure one understands the full extent of the agreement. A contract that appears simple and straight forward on its face can actually incorporate complex concepts that require additional research and consideration. If the contract refers to a certain law for definitions, a set of industry standards, a particular type of formula for calculations, etc., be sure you understand the referenced material. In many cases it is helpful to attach the document referenced as an exhibit to the contract.
A clause requiring one party to be responsible for the liabilities imposed on the other party is an indemnification clause or a “hold harmless” clause. Such clauses may be a way to assure parties are not subject to liabilities for the other’s actions (generally a fair request) to clauses that protect one party from all liability, even if the party seeking protection is at fault (generally an unfair request). Generally such clauses should be symmetrical in protecting each party from the other party's action giving rise to liability or loss.
When the clause requires ISU to indemnify: In Iowa, as in most states, its constitution forbids the state from becoming responsible for another's conduct. To assist working through this common issue, we have supplied alternative language to propose when the other party requests indemnification. In general, we have no problem accepting liability for the negligence of the University or our employees and agents as provided by the Iowa Tort Claims Act, Iowa Code Chapter 669. Any indemnification must be limited to the extent permitted by that law.
When the clause requires the other party to indemnify us: It is beneficial to us to have the other party indemnify us for their work on the contract. Such a clause is especially important when the contract may expose our students or employees to unusual hazards.
In many contractual situations the University requires that the party we are contracting with obtain and maintain comprehensive liability, automobile liability, worker’s compensation insurance. Such a clause must also require the third party to provide a Certificate of Insurance containing all of the appropriate information and is approved by the Office of Risk Management. The Office of Risk Management can provide third parties the university insurance requirements.
Often contracts contain clauses that require procurement of liability insurance by the University. The University is self-insured under state law. Requiring the purchase of insurance because of a single contract is not practical. Insurance clauses often require production of a certificate of insurance. Since we are self insured, we cannot provide one. However, the Office of Risk Management does provide a form certificate of self insurance that satisfies the concerns of most contractors.
Written contracts often have an integration clause that specifies that the contract represents the whole understanding of the parties, and that no changes are binding unless executed in writing. Such clauses are acceptable as long as we manage the contract in that manner, and those carrying out the work adhere to the requirement for documenting by amendment any changes.
Interest to be paid by state agencies for failure to pay in a timely manner is set by law. Under Iowa Code, Section 8A.514(3), the University must be provided sixty (60) days to pay following the receipt of a claim or the satisfactory performance or delivery of goods and services. Once the sixty days has passed and the University has not paid, interest may be charged at the statutory rate of one percent (1%) per month on the unpaid amount.
Contracts may exclude liability for certain types of loss (for example, consequential damages including loss of ability to provide services to others), or to certain amounts (for example, the liability may be limited to the amount paid for the product or service). Such clauses significantly reduce the value of the contract, because they effectively become a means to excuse the other party from responsibility. Additionally, Iowa law prohibits state agencies from agreeing to clauses that limit a vendor's or provider's liability for criminal acts, fraudulent conduct and other intentional misconduct. For these reasons, any clause limiting liability should be accepted only after seeking advice from the Office of University Counsel. In general, it is unwise to agree to such terms without knowledge of the track record of the firm to deliver the product or services requested.
Contracts may set a pre-determined amount of damages for breach of the contract. These are called liquidated damages and are not favored by the courts if they are seen as a “penalty.” Most courts will not find a “penalty” if the amount of actual damages caused by a breach is difficult to compute and the liquidated damage amount stated in the agreement is a good faith attempt to estimate what actual damage that would occur if the agreement was breached. Such clauses should be reviewed centrally to assure fairness and reasonableness. Note that a liquidated damages clause can become a form of unfair limitation on liability, if the damage is set so low as not to protect one of the parties.
By policy, Iowa State University retains intellectual property developed by its faculty and staff when the work is a result of sponsored funding, is created for university administrative purposes or the work involves the use of substantial university resources. Both tax law and patent law create restrictions on granting third-party ownership of university-developed patents. In addition, the University typically does not claim rights in traditional scholarly publications. An agreement calling for the other party to own IP must be reviewed and approved centrally to assure compliance with law, proper compensation of the University and to protect student, faculty or staff interests. Such clauses can result in improper publication restrictions, and problems with export control laws. If an exception is made special care must be taken to properly administer such contracts and to make sure employees working on projects are aware of and agree to IP commitments.
If we are requesting another party to create intellectual property for our use, we need to be sure that we receive the appropriate rights for our use. This is especially important in the case of works used for administrative purposes. For example, if we request a web page design, we should require an assignment of copyrights so that we have the freedom to use and amend in the future.
Clauses that impose penalties on the University such as payment of late fees (except for interest) should not be included in a contract. The danger of entering into a contract containing liquidated damages has been addressed under that topic.
A prepayment clause requires the University to make a payment such as a security deposit or down payment prior to receiving any goods or services. Prepayment clauses should not be accepted except when the best interests of the University and the State of Iowa are served.
Remedy clauses that create an ability to enforce the other side's performance of a contract by creating a contractual right to specific remedies in the event of non-performance can vary greatly. Remedy clauses should be reviewed carefully as some go beyond what is fair or permitted by Iowa law. See liquidated damages, indemnification, equitable remedies, acceleration and termination. The specific details of what might trigger the remedy and whether a party has a right to cure before the remedy may be imposed are critical.
As an institution founded upon transmission of knowledge, agreements calling for the University not to publish the results of research and other scholarly endeavors are to be avoided. It is generally permissible to allow the other party to delay publication to review a proposed publication for their proprietary information, to ensure the publication does not infringe others' rights or as necessary to protect patent rights. However, granting the other party the right to determine whether research or scholarly publication occurs must be approved by the Vice President for Research. Publication restrictions may cause loss of exemptions from export control laws, and thus result in the need to implement and enforce an export controls management plan.
Sometimes a party will seek a form of collateral to assure payment or performance. To secure payment of a home loan, for example, a lender accepts a security interest in the borrower's home in the form of a mortgage. If the borrower defaults on the loan, the lender can foreclose on the mortgage and sell the property in an effort to recover the debt. In addition to real property, a lender can acquire a security interest in personal property such as equipment, inventory, and intellectual property.
In general, the University will not agree to security interests, and special approval is needed. No mortgage on university property may be granted without Regental approval. No security interest in equipment, property or accounts may be granted without the approval of the Director of Business Services.
A termination clause is a common clause in agreements and, once invoked, results in neither party being required to continue performance under the agreement. Sometimes it will permit a party to terminate certain obligations without terminating the entire agreement. A termination clause should be reviewed carefully to be certain that it is fair to both parties, reasonable, has a clearly stated triggering mechanism and, whenever possible, contains an opportunity for the defaulting party to cure the problem that may lead to termination. If an agreement involves the prepayment for services by the University, the termination clause must provide for pro rata adjustments in payments to make sure the other party does not gain a windfall by terminating. Also, consideration must be given to impact of termination, such as interference with University obligations to students or sponsors of research. It may be necessary to include provisions to allow completion of some obligations to avoid those impacts.
The Trademark Licensing Office has policies on use of the University’s name that generally prevent using it for purposes of endorsement, advertising and promotion. Any clause giving a third party rights to use the University’s name or marks must indicate that written approval is required from the Trademark Licensing Office.
Sometimes the other party will request the university to guarantee its work or to promise its “best efforts,” diligent efforts,” or “ensure” that something will get accomplished. Warranties of the quality of work by the University should be scrutinized closely. Unlike commercial for-profit entities which produce products, many of our services are experimental in nature and not tested in the way products or services are in the commercial world. Warranties should not be made in these circumstances.
Clauses requiring “best efforts” leave the University open to non-payment or claims of reimbursement for dissatisfied clients. “Best efforts” is a vague concept best avoided. If it cannot be negotiated out of the contract completely, it should at least be changed to “reasonable efforts” or “good faith efforts.”
By University: A contract will often require a promise or warranty that the University owns or has rights to any intellectual property which the University promises or provides for carrying out the contract. Such warranties must be taken seriously, but especially when we provide IP to an outside party, because they must rely upon our statement that we have the ability to transfer rights to them. Breaking such a warranty can have severe consequences to our contracting partner who will turn to the University to make amends if the warranty is breached.
By other party: If the other party's ability to convey rights to use intellectual property is central to the agreement, we should require a warranty of ownership of the IP.