In the past week, there’s been wild speculation on the technology news and blog sites about the claims made in a bombshell lawsuit filed against Facebook.

According to published reports, a New York man filed a lawsuit claiming that he owns a majority ownership interest in the $25 Billion company by virtue of a contract that he signed in 2003 with Facebook founder and CEO Mark Zuckerberg. An email from Facebook has asserted that “the claims are absurd and we strongly suspect that the contract is forged.”

The Facebook lawsuit raises five critical points that every company and entrepreneur should consider when formalizing its business relationship with a written contract.

FORMALITY COUNTS

In the Facebook case, the company has asserted that the contract is a forgery. There’s no doubt this issue will be addressed at the initial phase of the litigation. If the contract is in fact a forgery, the case will be summarily dismissed. If the contract is legitimate, the litigation will proceed on the merits to determine the rights and obligations of the parties to the contract.

Do you formalize each important business relationship with a written contract? If so, do you have a filing system for maintaining these important documents in a safe and secure place?

The appropriate degree of formality for a specific contract is dependent on the gravity of the business relationship. A relatively minor contract (i.e., a gentlemen’s wager on a sporting event with $1 is at stake) can be written on the back of a napkin or an envelope and signed by the parties. By contrast, a integrated written contract is needed when there’s a company-to-company relationship involving substantial performance obligations, the use of complex intellectual property rights, and substantial money is at stake.

If the parties to a deal ever had any reason to believe that the subject matter of their deal would someday be worth $25 Billion, then they probably would have insisted on a much more formalized written contract.

CLARITY IS CRUCIAL

The second lesson of the Facebook case is the compelling need for parties to a deal to strive for clarity in stating the rights and obligations of the contract. The rights and obligations of the parties constitute the bulk of the contractual terms.

In the context of the Facebook case, the parties should have addressed relevant rights and obligations including:

· The ownership rights related to the intellectual property, name of the venture/entity, interest in ancillary ventures/entities, and stock/shares of the venture/entity.

· Performance obligations such as who is obligated to do what, the payment of compensation, vesting of ownership rights, breach of contract, and termination of the contract.

· How to handle a dispute including alternate dispute resolution (mediation and arbitration), choice of law, choice of forum, attorney’s fees, and costs.

EXECUTION IS IMPORTANT

What are the appropriate formalities for execution of the contract? This question turns on who has authority to bind each party to the contract. If an individual will be signing the contract, then the individual has the authority to bind themselves to the contract (assuming that he/she has the requisite legal capacity).

If a party to the contract is a legal entity (i.e., a corporation, limited liability company, partnership, etc.), then the appropriate individual with authority to bind the legal entity should be executing the contract on behalf of the corporation. In short, you would want the President of a Fortune 500 company to execute an important contract, not a janitor who works at a remote branch of the corporation.

In order to make it easier to authenticate the contract in court at a later date, you should also consider whether to have multiple persons execute the contract (i.e., President and Secretary, whether there’s a need for witnesses to the execute of the contract, and whether the execution should be notarized.

ENFORCEMENT SHOULDN’T BE AN AFTERTHOUGHT

During the deal-making process, you should always contemplate what action should be taken in the event that the contract is breached. Depending upon the business relationship at issue, the parties should consider inclusion of:

· A non-compete provision that defines whether and how the parties can compete against each other in the event the relationship is terminated.

· A confidentiality provision that protects either or both parties against the unauthorized disclosure of business secrets.

· A liquidated damages provision that requires the party who violates the contract to pay a pre-established sum of money (liquidated damages).

· A provision that provides for injunctive relief so that the non-breaching party can effectively seek a court order that compels the breaching party to immediately stop violating the contract.

GET PREVENTATIVE LEGAL ADVICE

Based on the news reports of the Facebook case, it doesn’t appear that the parties to the alleged deal sought legal advice prior to striking their deal. I think its obvious that if the parties had obtained sound legal advice when the deal was allegedly negotiated, they could have avoided several glaring problems in this case:

· The degree of formality of the contract would have been commensurate with the scope of the deal.

· Whether the contract was legitimate or a forgery would likely not be at issue.

· There would be much more clarity about the rights and obligations of the parties.

· The appropriate means for enforcing the contract would be apparent.

Ultimately, the Facebook case will be resolved. Unfortunately, many of the issues raised at the initial phase of litigation could have been avoided altogether and without the necessity of time-consuming, expensive litigation. Don’t make the same mistakes in your business.

ABOUT THE AUTHOR

Fred Reilly became an attorney in 1986 and is a Member of the California Bar Association, District of Columbia Bar Association, and Florida Bar Association. Mr. Reilly is also a Solicitor and Member of The Law Society of the United Kingdom.

He is admitted to practice before the United States Supreme Court and United States Court of International Trade.

Mr. Reilly graduated from The London School of Economics and Political Science (Master’s degree in International Business Law), The Cumberland School of Law at Samford University (J.D.) and The Krannert School of Management at Purdue University (B.S. Management).

He practices international business and eCommerce law. Mr. Reilly frequently travels to Florida, California, London, and Moscow.

IMPORTANT NOTICE
This purpose of this blog is to inform and not to advise. The statements are general and individual facts in any given situation may alter their application or involve other laws not referred to here. You should always seek advice from a competent professional if any questions arise.

13 COSTLY MISTAKES WHEN NEGOTIATING CONTRACTS

By Fred Reilly, American Attorney and English Solicitor

The goal of the contract negotiation process is to produce a written document that addresses the relevant issues, terms, rights and obligations between two or more parties to the contract. Unfortunately, many negotiators make costly mistakes that ultimately come back to haunt them when a disagreement arises over how the contract should be interpreted or performed. This article will highlight thirteen common mistakes that could cost you a bundle.

1. Failure to define your negotiation strategy in advance. How can you effectively negotiate when you haven’t yet defined the purpose of your negotiation? Prior to entering negotiations, establish your objectives, identify possible points of contention, consider the impact of any time constraints and determine potential deal breakers. It’s also highly advisable to review your knowledge of the other party, their negotiator (your adversary’s style, tendencies and hot buttons) and the context in which the negotiation will take place (i.e., market conditions that impact the deal).
2. Failure to narrow the issues. After you’ve defined your negotiation strategy, address the issues that are crucial to your deal. During the negotiation, focus on resolving the key issues to your advantage or in a manner that you can live with after the deal has been struck. Be wary whenever your adversary focuses on minor or irrelevant points to the exclusion of the material issues. If it’s difficult to ever get to the substantive points, you’re in for a lengthy negotiation with an unacceptable outcome.
3. Failure to walk away. Some negotiators are afraid to say “No.” One of the soundest negotiation strategies is to reach the conclusion that no deal is better than a bad deal. If your adversary realizes that you are willing to break off negotiations and walk away, he is far more likely to negotiate in good faith and work towards an acceptable deal.
4. Failure to get a written document. Under most business circumstances, an oral contract will be enforceable. A notable exception is an oral real estate contract that violates the Statute of Frauds (which requires that certain contracts must be written). Although an oral contract may be enforceable, there’s always the evidentiary problem of how to prove the terms of the contract at a later date. One of the goals of your negotiation should be to generate a comprehensive written document that accurately describes the terms, rights and obligations of the parties in a manner that provides clarity about how the agreement will be interpreted and performed.
5. Blind reliance on a “standard contract.” When it comes to legal contracts, do not place blind reliance on a “standard contract.” Although standard contracts can be very useful, they simply do not fit every situation. People frequently want to use a “standard contract” because they don’t want to pay an attorney to draft a contract. This often results in a “penny wise and pound-foolish” scenario. Many of the standard contracts that you can purchase at an office supply store for a nominal amount are simply so vague that little protection is afforded and clarity is non-existent. Depending on your specific situation and the issues at stake in your contract, hiring an attorney to draft the contract may be the most cost-effective choice possible. As an alternative strategy, consider modifying a standard contract with specific provisions that closely fit your situation.
6. Failure to Properly Define the Parties. This mistake may seem elementary, but negotiators consistently get this one wrong. It is crucial to properly define the parties to a contract to ensure who will be liable for performing the obligations of the contract and liable in the event the contract is breached. You also need to ensure that the individual executing the contract has the appropriate authority to do so. For example, the President of a corporation will typically have authority to bind the corporation. Don’t be so certain that another officer within the corporation has the same authority to bind the corporation.
7. Using Inconsistent Terms. Once you’ve defined the parties, refer to them in a consistent manner throughout the contract. Do not refer to a “Buyer” in one provision and later refer to a “Purchaser.” Although seldom fatal, this mistake creates confusion and undermines the credibility of the contract. In some cases, this mistake may negatively impact how the contract will be interpreted.
8. The contract is not integrated. Whenever you cut and paste provisions from several model documents, there’s a danger that the new document will not be integrated. For example, references to subsequent provisions may be incorrect or the referenced provision may not even be present in the new document. No one wants a written contract with gaping holes.
9. Failure to get clarity on key issues. Clarity is extremely important when negotiating and drafting contracts. For example, a contract that requires one party to make payments to another party should clearly set forth the conditions that must be met to trigger the payment obligation. If the triggers (conditions) in the written contract are drafted in an ambiguous or vague manner, the payor could assert that the payment obligation has not yet arisen. Thus, this situation could ultimately leave the payee with no choice but to initiate a lawsuit to enforce the terms of the contract.
10. Failure to define those events that constitute breach of the contract. Like the triggers (conditions) mentioned above, it is important to define the specific events that constitute breach. Both parties need to establish the bright line between acceptable performance and unacceptable performance.
11. Failure to include safety-valve provisions. Since the parties have recognized the possibility that a breach may occur, it is highly advisable to contemplate a contractual provision that provides for a “cooling off” period during which they can attempt to resolve the conflict. This type of provision tempers a hothead’s tendency to dig in their heels and immediately initiate legal proceedings.
12. Failure to include a dispute resolution procedure. For many business transactions, mediation and arbitration represent viable dispute resolution procedures and should be considered when drafting the contract. It is imperative to define the procedure to be followed and especially how the mediator(s)/arbitrator(s) will be selected.
13. Failure to designate the applicable law and choice of forum. This common mistake is often simply overlooked. The applicable law governing the contract should be clearly stated. The choice of forum provision establishes the location where disputes will be adjudicated. Obviously, hostile and inconvenient forums should be avoided.

Avoiding these common mistakes will not eliminate all potential problems associated with a contract, but will substantially diminish the likelihood of a later dispute over interpretation or performance.

DISCLAIMER: This article and its content are intended to provide general information on legal topics and shall not serve as a solicitation for services in any jurisdiction where prohibited by law. This article is not, nor is it intended to be used as a substitute for legal advice. You should consult an attorney for individual advice concerning your own situation. Sending an email to the owner of this website, and receiving any response thereto, does not, in and of itself, create an attorney-client relationship.

© Copyright 2007 by Fred Reilly. All rights reserved.